UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A10-K

Amendment No. 1

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended October 31 2018, 2021

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-38154

CODA OCTOPUS GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware34-200-834834-2008348
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification Number)

9100 Conroy Windermere Road, 3300 S Hiawassee Rd, Suite 200, Windermere, 104-105, Orlando, Florida 34786, 32835

(Address, Including Zip Code of Principal Executive Offices)

(801) 456-8684407 735 2406

(Issuer’s telephone number)

Securities registered under Section 12(b) of the Exchange Act:

COMMON STOCK, $0.001 PAR VALUE PER SHARE

Securities registered under Section 12(g) of the Exchange Act:

NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company.

Large accelerated filer [  ]Accelerated filer [  ]
Non-accelerated filer [  ]Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]
State issuer’s revenues for its most recent fiscal year: $18,019,429$21,331,527
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of April 30, 2018,2021 representing the last business day of the registrant’s most recently completed second fiscal quarter:year: approximately $12,973,000.$46,355,000
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 10,664,381 10,857,195 as of February 1, 2019.11, 2022.

 

 
 

TABLE OF CONTENTS

PART I
ITEM 1.BUSINESS4
ITEM 1A.RISK FACTORS16
ITEM 1B.UNRESOLVED STAFF COMMENTS16
ITEM 2.PROPERTIES17
ITEM 3.LEGAL PROCEEDINGS17
ITEM 4.MINE SAFETY DISCLOSURES17
PART II
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES18
ITEM 6.SELECTED FINANCIAL DATA18
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS19
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA40
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE40
ITEM 9ACONTROLS AND PROCEDURES40
ITEM 9BOTHER INFORMATION40
PART III
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE41
ITEM 11.EXECUTIVE COMPENSATION47
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS49
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE50
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES50
ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES51
SIGNATURES52

2

EXPLANATORY NOTE

FORWARD-LOOKING STATEMENTS

This Amendment No. 1Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to in this annual report as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to in this annual report as the Exchange Act. Forward-looking statements are not statements of historical fact but rather reflect our current expectations, estimates and predictions about future results and events. These statements may use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “project” and similar expressions as they relate to us or our management. When we make forward-looking statements, we are basing them on our management’s beliefs and assumptions, using information currently available to us. These forward-looking statements are subject to risks, uncertainties and assumptions, including but not limited to, risks, uncertainties and assumptions discussed in this annual report. Factors that can cause or contribute to these differences include those described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statement you read in this annual report reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us, or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. You should specifically consider the factors identified in this annual report, which would cause actual results to differ before making an investment decision. We are under no duty to update any of the forward-looking statements after the date of this annual report or to conform these statements to actual results.

3

PART I

ITEM 1. BUSINESS

Overview

Coda Octopus Group, Inc. (“Coda” “the Company” or “we”), through its wholly owned subsidiaries, operates two distinct businesses:

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 Annual Report on Form 10-Ksubsea 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 year ended October 31, 2018 (the “Form 10-K”), is filed fordive area.

Our Marine Engineering Businesses are suppliers of embedded solutions and sub-assemblies which they design and manufacture and sell into mission critical integrated defense systems such as the sole purpose of correctingClose-In-Weapons System (CIWS). The Services Segment established its business in 1977 and has been supporting a number of typographical errors,significant defense programs for over 40 years, including Raytheon’s CIWS and Northrop Grumman’s Mine Hunting Systems Program. The Services Segment’s business model entails designing sub-assembly prototypes which are utilized in broader defense programs. These prototype contracts typically lead to contracts for the manufacture, repair and upgrade of these sub-assemblies. We are the sole source for the parts that we design and supply into these programs. This business model ensures recurring and long tail revenues since we continue to supply parts, typically for the life of the program, which can span decades. Coda Octopus Colmek, Inc. and Coda Octopus Martech Ltd, each qualifies as follows:a small business. This opens opportunity under state requirements to collaborate with Prime Defense Contractors on these programs.

Due to the above, a significant part of the revenues generated by the Marine Engineering Business is highly concentrated and is derived from a small number of prime defense contractors such as Raytheon or Northrop. In any one year, between 20% to 30% of our consolidated revenues may be derived from these customers individually or collectively.

The Services Segment operates through our wholly owned subsidiaries, Coda Octopus Colmek, Inc (“Colmek”) based in Salt Lake City, Utah, and Coda Octopus Martech Limited (“Martech”) based in Dorset, United Kingdom.

 

Cross-Group Synergies

Our Marine Technology Business and Marine Engineering Services Business have established synergies in terms of customers and specialized engineering skills for robust, rugged and repeated engineering solutions relating to data acquisition, data computation and display of the data. Increasingly drawing on each part of the business strengths, the Marine Technology Business and Marine Engineering Business work jointly on projects including responding jointly for tenders. We believe the Services Business is important to our overall growth strategy as it brings significant engineering depth for the onward development of our technology solutions. This also ensures more tight control over our intellectual property rights which are important for our market position in the space we operate.

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 which are 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 also 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, filters.

Our customers include service providers to major oil and gas (“O&G”) companies, renewable companies, underwater construction companies, law enforcement agencies, navies, ports, mining companies, defense bodies, diving companies, research institutes and universities. 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.

Our corporate structure is as follows:

 

Corporate History

The Company began as Coda Technologies Limited. This company now operates under the name Coda Octopus Products Limited, a United Kingdom corporation formed in 1994 as a start-up company with its origins as a research group at Herriot-Watt University, Edinburgh, Scotland. Initially, its operations consisted primarily of developing software for subsea mapping and visualization using sidescan sonar (a technology widely used in commercial offshore geophysical survey and naval mine-hunting to detect objects on, and textures of, the surface of the seabed).

4

In June 2002, we acquired Octopus Marine Systems Ltd, a UK corporation, and changed our name to Coda Octopus Limited. At the time of its acquisition, Octopus Marine Systems was producing geophysical products broadly similar to those of Coda, but targeted at the less sophisticated, easy-to-use, “work-horse” market. The Octopus Marine Systems acquisition led to the introduction of the Motion product (F180® series) into the Products Segment.

In December 2002, Coda Octopus Ltd acquired OmniTech AS, a Norwegian company, which became a wholly owned subsidiary of the Company, and which subsequently changed its name to Coda Octopus R&D AS. OmniTech owned the patents to a “method for producing a 3-D Image” (which has now expired). At the time of acquisition, this company had been engaged for over ten years in developing a revolutionary imaging sonar technology capable of producing real time three-dimensional (“3D”) underwater images for use in subsea activities. Coda Octopus Products Limited (Edinburgh based) then developed the visualization software to control and display the images from the real time 3D sonar device. This patented technology is now marketed by us under the brand name “Echoscope®” and Echoscope PIPE®. All activities of this now-defunct Norwegian subsidiary, Coda Octopus R&D AS, have been transferred to Coda Octopus Products Limited (Edinburgh).

On July 13, 2004, the Company effected a reverse merger pursuant to the terms of a share exchange agreement between The Panda Project, Inc. (“Panda”), a Florida corporation, and a now defunct entity affiliated with Coda Octopus Ltd. (“Coda Parent”). Panda acquired the shares of Coda Octopus Limited, a UK corporation and a wholly-owned subsidiary of Coda Parent, in consideration for the issuance of a total of 1,432,143 shares of common stock to Coda Parent and other shareholders of Coda Octopus Limited. The shares issued represented approximately 90.9% of the issued and outstanding shares of Panda. The share exchange was accounted for as a reverse acquisition of Panda by Coda. Subsequently, Panda was reincorporated in Delaware and changed its name to Coda Octopus Group, Inc.

In June 2006, we acquired Coda Octopus Martech Limited which is part of our Services Segment or Marine Engineering Business. This is an English corporation.

In April 2007, we acquired Coda Octopus Colmek, Inc. which is part of our Services Segment or Marine Engineering Business. This is a Utah corporation.

Both Martech and Colmek largely have the same business model, provide similar engineering services and sell to a similar customer base (one is UK focused and the other is US focused).

In December 2013 Coda Octopus Products Limited established Coda Octopus Products Pty Ltd (Australia) to grow our presence in Australia and New Zealand. However, since 2020 we have not been able to do meaningful business development due to the Australian borders being closed because of the Coronavirus Pandemic.

In 2017 Coda Octopus Products Limited established a subsidiary Coda Octopus Products A/S in Denmark as part of the mitigation strategy relating to the UK withdrawal from the European Union (See Item 7 Management’s Discussion and Analysis…”).

Coda Octopus Group, Inc., is organized under the laws of the State of Delaware as a holding company that conducts its business through subsidiaries, several of which are organized under the laws of foreign jurisdictions, including England, Scotland, Denmark, Australia and recently India. This may have an adverse impact on the ability of U.S. investors to enforce a judgment obtained in U.S. courts against these entities, or to effect service of process on the officers and directors managing the foreign subsidiaries. These companies’ operations must comply with the laws of the countries under which they are incorporated and are likely to be different from the equivalent laws of the United States.

5

Marine Technology Business (“Products Segment”)

Our Marine Technology Business develops proprietary solutions for both the commercial and defense subsea market. The range of our solutions are complementary and include:

Type of SystemsDescription
Geophysical SystemsComprising Hardware and Software;
GNSS-Aided Navigation Systems (Attitude and Positioning Systems)Comprising Hardware and Software
Real Time Volumetric Imaging SonarComprising Hardware and Software
Diver Augmented Vision Display SystemComprising Hardware and Software

These products are sold, leased or rented into various marine sectors and include:

Marine geophysical survey

Item 7. Management’s DiscussionOffshore Renewables (“Wind Energy”)
Underwater construction, inspection and Analysis of Financial Condition and Results Operations included in the Form 10-K. Specifically, the subsection entitled “Operating Activities” under “Liquidity and Financial Resources,” showed three errors in the figures representing net cash generated from operating activities, and net income.monitoring
 Diving Companies
Commercial and Defense Diving
Salvage and decommissioning
Oil and Gas (“O&G”)
Commercial fisheries
Environmental, mammal and habitat monitoring
Underwater Defense Applications
Marine vehicles and robotics
Port and Harbor Security, law enforcement and first responders
Research and education

1. Geophysical Range of Products

Our geophysical systems (“GEO”) range of products include geophysical data acquisition systems, processing and analysis software that are used primarily by survey companies, offshore renewable companies, research institutions, salvage companies. The Company’s GEO range of products are used in conjunction with sidescan sonars to survey large areas and create images of the seabed, identify seabed boulders and objects, mark seabed type boundaries and identify existing subsurface structural features, geological layers, and/or buried debris. The Company started its first innovation with this range of products and in fact was the first company to digitalize sidescan sonar data. The Company GEO range is a strong brand in the geophysical market space.

2. GPS aided Inertial Positioning Systems

These are referred to as our MOTION range of products and offer high accuracy GPS aided inertial positioning and attitude data, essential for all marine survey applications. The products are commonly bundled with our GEO and real time sonar solutions offering our customers a seamless integration and support experience.

3. Real Time Volumetric Imaging Sonars (ranging from 3D/4D, 5D and 6D)

We design, develop and supply what we believe is the world’s most advanced series of real time volumetric imaging sonar. This is the culmination of over 25 years of research and development. This technology is protected by multiple patents. Furthermore, we continue to file patents relating to our new and revolutionary sonars, our 5-Dimensional (5D) and 6-Dimensional (6D) real time volumetric imaging sonars (marketed under the name Echoscope PIPE® (Parallel Intelligent Processing Engine). Our sonar innovations are multi-tiered and extend to hardware, firmware and software, all of which co-exist and are co-dependent on each other. In other words, hardware, firmware and software operate as sub-systems to each other. We believe that the highly complex nature of this new technology will make it extremely difficult to reverse engineer our products. Pioneering this unique technology gives us a significant advantage over our competitors in the subsea real time 3D imaging sonar market sectors. We also believe that our three-tier product development capability of hardware, software and solution delivery adds to our competitive lead.

We believe that this technology is superior to the other imaging sonars in the market as it generates real time 3D, 4D, 5D and 6D images of the underwater environment irrespective of low or zero visibility conditions and, unlike conventional sonars, can image a volume (as opposed to a slice of data) and provide real time 3D inspection and monitoring capability underwater. The capability of our volumetric imaging sonars covers a broad breadth of activities underwater particularly for any form of underwater construction, salvaging, placements, decommissioning, obstacle avoidance and complex underwater mapping.

About the Company’s 5D and 6D Sonars Innovations

5D and 6D sonars are new to the subsea market and constitute an innovation by the Marine Technology Business of the Company. We have several patents pending for these innovations.

5D Sonars (Echoscope PIPE®)

The advancement that the Company has made with its 5D Sonars is the ability to process and utilize much more of the data that is acquired by our volumetric imaging sonars. In the previous generation of our sonars, due to the state of the art of processing generally, there was an upper limit to the quantity of the acquired data that could be processed and displayed by the sonar system. This meant that in the previous generation of sonars when a signal was emitted, it returned a single range and intensity value per beam. In the 5D Sonars we return multiple range and intensity values (Full Time Series (“FTS”)) per beam. This new capability provides more information about the underwater environment. For example, it will give the user the ability to see multiple layers of soft target areas underwater such as gas leaks and suspended sediment above the seabed all concurrently (not one or the other) or concurrent imagery of marine life, sea growth on installations and the installations themselves. FTS will deliver all range values per beam as opposed to either the First (First Above Threshold (“FAT”) or the strongest return (MAX) provided by the previous generation of Echoscope technology. Our 5D capability is protected by a recently granted patent (US 10,718,865 – which concerns a method of compressing beamforming sonar data).

6D Sonars (Echoscope PIPE®)

The Company’s 6D Sonars processes and utilizes much more of the data acquired by the sonar. 6D Sonars are sonars which generate multiple real time 3D Full Time Series Images. In the previous generation of sonars, we could image and display one 3D Image in real time. Our technology generates multiple 3D Images simultaneously in real time using different sonar/acoustic parameters (such as frequency, range, field of view, pulse length and other acoustic filters or shading). Our new technology enables one sensor to provide different 3D/4D/5D/6D data sets (through multiple parallel processing capability) to different parts of the survey team operations in real time per their different operational requirements (thus consolidating the sensors and the associated costs and effectiveness of the solution). 6D Sonars can also record raw data that can be subject to PIPE Offline processing to generate unlimited data outputs. We are not aware of any sonars that can offer either 5D or 6D Capability.

In summary, our previous generation of real time 3D sonar was capable of providing only single acoustic images of underwater objects in real time 3D whereas the PIPE family of sonars is capable of providing multiple acoustic images of underwater objects in real time 3D/4D.

Sonar Hardware

During fiscal 2019, we completed critical innovation and advancement milestones around our core volumetric real time sonar technology. We have now introduced the world’s first 5D and 6D series of volumetric imaging sonar technology. This new series of sonars are marketed under the brand name Echoscope PIPE® (an acronym for Parallel Intelligent Processing Engine). We believe our 5D and 6D series of sonars herald a significant leap forward in real time subsea imaging as this inventive capability allows a single sonar to provide different parts of the survey operations with multiple real time data sets (as opposed to one 3D dataset) for each part of the survey teams’ requirements.

The Differences between our standard Echoscope® sonar series and our newly launched Echoscope PIPE® series of sonars is set out below:

DescriptionCurrent Echoscope®PIPE® Sonars
Real Time CapabilityYes, 4D ImagesYes, 4D, 5D and 6D
Angular Cover Dual Frequency50ox50o and 24ox24o54ox54o - 47ox47o and 32ox32o - 28ox28o
Adaptive Frequency CapabilityNoYes
Ping RateUp to 20HzUp to 40Hz
Multiple Real Time 4D ImagesNo, one single Real Time ImageCapable of Multiple Real Time Images
Number of Data Points per Single PingUp to 16,386Up to 40 million
Number of Beams and Values per Beam128x128x1 ValueUp to 180 x 180 with up to 2,500 values (depending on viewing range)
Multiple Sequential Configuration Files to capture data using different parametersNo CapabilityUp to 10 Configuration sets for real time capture and display
Full Time Series Raw Data CaptureNo CapabilityCapture of Raw Data
Full Time Series Raw Data Offline ProcessingNo CapabilityCapable of Raw Data Offline Processing
Multiple Parallel Beamformed Data OutputNo CapabilityCapable of Multiple Parallel Beamformed Data Outputs
Smart Ping Manager using Frequency, Field of View, Filtering in Real-TimeNo CapabilityCapable
Adaptative Real Time BeamformingNo Capability

Item 8. Financial Statements and Supplementary Data. The Consolidated Statements of Cash Flows for the Years Ended October 31, 2018 and 2017, under the line item “unbilled receivables” should have shown a negative figure of (289,944).

FFT Beamforming

Dynamic Co-efficient Beamforming

Split Aperture Beamformer

Except as specifically amended herewith, the Form 10-K remains unchanged.

6
 

We believe that our Echoscope® technology will shepherd in the new generation of underwater real time 3D imaging sonar which will evolve into a real time information platform and gain market share through the increased adoption of real time 3D volumetric imaging sonar technology. Current competing imaging technologies such as the single beam, multibeam and scanning sonars are either 2D real time imaging sonars or 3D imaging sonars which are not capable of real time 3D imaging. The competing 3D technology, the multibeam, which is the current standard bearer in the market is a sonar for mapping only. The Echoscope® technology can not only map the seabed (and is superior to the multibeam for complex mapping and inspection of complex underwater structures) but can image in real time 3D moving objects underwater and therefore is the primary tool of choice for inspecting and monitoring in real time all types of underwater operations and the only choice in poor visibility conditions. In addition, the Echoscope® can also in many instances enable the user to monitor underwater operations from a surface vessel and in this way replace Remotely Operated Vehicles (ROVs) thus bringing considerable cost savings to our customers.

Prior to January 2018, we were selling our third generation (3G) sonar series. In January 2018 we launched the first product within our fourth generation series of sonars (“4G sonar series”). The 4G sonar series was an important development milestone for the Company and since its introduction has seen increased number of units being sold or rented. Due to the form factor of our previous generation of 3G sonar series this limited the types of subsea vessels/vehicles this generation of sonar could be integrated on (and therefore be used for) due to (i) size; (ii) weight and (iii) power requirements (“form factor barriers”). With the launch of the 4G sonar series we have removed these form factor barriers and can now integrate on the majority of underwater vehicles in the market including the new and fast emerging smaller underwater vehicles such as autonomous surface vehicles (ASVs) and unmanned underwater vehicles (UUVs) which are propelling growth in the underwater market.

The 4G sonar series developments were largely form factor driven as opposed to being based on performance and capability advancements. In fiscal years 2019 and 2020 we continued our innovation of our sonar technology to focus on performance and capability advancements, particularly on the beamforming and the data processing capability of our sonar series. In the previous generation of our sonars, due to limitations in processing capability technology there were restrictions on how much of the captured Echoscope® sonar data could be processed by us. Our previous generations of sonars processed 16,384 pieces of data per sonar ping (compared to around 256 pieces of data per sonar ping for competing technology such as the multibeam). Under our new Echoscope PIPE® sonar series for each signal that is generated by the sonar we receive back up to 40 million pieces of information which we can now process. In this context, we have two recent patents concerning a method of compressing beamforming sonar data and a method of compressing sonar data. We believe that this allows us to deliver to the market the first 5-Dimensional (5D) sonar and 6-Dimensional (6D) sonar capabilities and significantly builds on our 4G sonar series which radically changed the form factor and power requirements which were previously barriers to increased adoption. The advantages offered by our 5D and 6D Sonar Series have been discussed above under the heading (About the Company’s 5D and 6D Sonars Innovations). We started selling Echoscope PIPE® in the market in March 2020. We are also seeing increased interest in Echoscope PIPE® technology in the market especially with OEM underwater vehicle manufacturers.

The release of the Echoscope PIPE® hardware, is a significant milestone. We are now focused on the value add to the technology via firmware and software capability. The finalization of this development now gives the Company a real opportunity to pursue its strategy to standardize this technology in the underwater imaging sonar market. We believe that in order to make the subsea and underwater market more efficient, it is mandatory that the standard moves to a real time 3D information platform. Many underwater operations are stalled due to low visibility water conditions, preventing the remotely operated vehicles (ROVs) from flying and also the lack of ability to utilize the sonar data immediately because it requires post processing, which represents a significant challenge and higher costs. The subsea market is experiencing structural and technology transitional changes including the introduction of the new generation of smaller and lighter vessels (both surface and underwater). This creates a demand for new sensors and solutions for real time 3D imaging. We believe that our lead in this area gives us a real opportunity to increase our market share.

Diver Augmented Vision Display (DAVD) System

Funded by the Office of Naval Research (“ONR”) through its Future Naval Capabilities (FNC) program, and in close collaboration with NAVSEA 00C3 and Naval Surface Warfare Center, Panama City Division (“NSWC PCD”) we have developed a diver see-through integrated information display system (DAVD).

DAVD is a complete end-to-end diver management solution incorporating as a key element a high-resolution, fully transparent glass head-up display (HUD) integrated directly inside the diving helmet (for hard hat surface air supply diving) or full-facemask (for tethered and untethered defense, commercial and recreational diving applications). The DAVD HUD is currently deployed in the world leading and most widely used Kirby Morgan® range of dive helmets and is currently being released in the industry standard Interspiro and OTS full-face masks. The DAVD HUD and system technology is not however limited to these products and applications. We continue to work with NASA who has used the DAVD system at its 6.2 million gallons Neutral Buoyancy Laboratory (NBL) located near the Johnson Space Center in Texas, US. It is now exploring its ‘potential use in NASA’s planned return to the moon’.

7
 

Problem In Context

Navy and Commercial diving share common issues and challenges with location, visibility, communication, safety and data and information sharing. Divers work mainly in murky or disorientating water conditions and rely heavily on their sense of touch to navigate and function. They work in the water column, around complex structure and on the cluttered sea bottoms which is neither safe nor efficient. They, and the diver support team, require dark spatial awareness memory as they work, arms outstretched in deep, dark, frigid waters to remember hazardous underwater debris, targets and terrain. Complexity of the task and this challenging environment directly increases risk, stress, and inefficiency for the entire team.

How does DAVD Change this?

The DAVD system addresses all the challenges described above. The DAVD technology benefits not only the diver and direct supervisor on the surface, but also engineers, end-clients, rescue workers and support personnel whom all have vested interest in a successful and safe mission. DAVD provides the location of the diver, the dive support vessel, work site assets and any hazards that are known or discovered in real-time. Real-time compass and depth are also displayed to the diver to reduce disorientation. visibility for Diver and team is dramatically enhanced with both real-time camera and 3D sonar (providing underwater night-vision) and also high-resolution maps and models of the entire work site and surroundings. Communication is transformed from low quality audio speech to high quality digital audio and video, text messaging, visual alerts and automated navigation guidance. The safety of the diver and team is paramount. DAVD ensures the Diver and Supervisor are visually synchronized and can safely coordinate movement, tasks and instructions with full health monitoring and logging of the entire mission. Data and information sharing traditionally ends when the diver leaves the surface. DAVD provides a seamless and effective way to share any type of data, image, video, process or procedure instantly in real-time through the DAVD fully transparent HUD display (equivalent of >100” HD TV in-front of the diver). Data and information also flows up from the Diver to the Supervisor where the diver can look at an asset, make measurements or recordings and the entire task is captured and documented on the DAVD system.

The concept of using a pair of transparent glasses in the HUD for underwater applications is protected by patent and Coda Octopus has an exclusive licence from United States Department of the Navy at NSWC PCD to exploit this patent for all underwater diving activities. The DAVD is a significant technology for both defense and commercial underwater diving applications and we believe that Coda Octopus has the opportunity to standardize this technology globally. The DAVD comprises both hardware comprising the HUD, Diver Processing Pack (DPP) (which is a Thermite® variant), Cables and Topside Control Unit along with 4G USE® DAVD Edition real time visualization software. All these development and products have been designed and developed by the Company.

The DAVD is currently in early-stage adoption with the US Navy and enjoys the benefit of an Approved Navy Use (ANU) product. We have also started marketing (through live demonstrations) this technology to friendly Navies globally and also to the commercial diving market. We have significant interest from a number of reputable global commercial offshore service providers and are working with them for early adoption of the technology and also a number of European friendly Navies including the UK Ministry of Defense (MOD).

GEN 3 of the DAVD which opens the market further by extending support to Full Face Masks (FFM), has now also been released to the Navy for trials.

Sonar Software

Our software development capability is an important part of our strategy to maintain our lead in designing, manufacturing, and selling state-of-the-art real time volumetric imaging sonars and our DAVD System.

Our existing third generation (3G) Underwater Survey Explorer software used in conjunction with our real time volumetric sonars, is a product which we have been developing for over 15 years. Because of technological advancements, including access to off the shelf components for more advanced processing of data (speed and size being factors), in 2016, the Company started the process of re-conceiving and developing its top-end software for our now much more advanced sonars. We have now launched our fourth-generation multi-sensor platform which is marketed under the name “4G USE®”. We have also filed several provisional patents around our 4G USE®. 4G USE® is a multi-sensor platform allowing users to bring in and utilize a variety of sensor data including sonar, positioning, camera, lidar, video processing and other sources of point cloud data and seamlessly merging above and below the water data captured from the sonar and camera. It is also the platform for our DAVD software, and this is marketed under the brand 4G USE® DAVD Edition.

8

Geophysical Products and Solutions

The Geophysical range of products are important for both Offshore Renewables and O&G. We therefore believe that with the expansion of the markets into Offshore Renewables, we will see an increase in the take up of this product suite, particularly in the global rental market. Our GeoSurvey® and DA4G ranges are strong brands in these markets.

We started our business in 1994 designing and developing the GeoSurvey® software and hardware package for acquisition and processing of sidescan sonar and sub-bottom profiler data. For over two decades, our GeoSurvey has been an industry leading software package in the market for data acquisition and interpretation and provides feature rich solutions and productivity enhancing tools for the most exacting survey requirements. Designed specifically for sidescan and sub-bottom data acquisition, GeoSurvey has been purchased by numerous leading survey companies throughout the world.

The Products Business generates around 2% of its revenues from this range of products. With the launch of the new products based on Artificial Intelligence technology for which we believe there is increased demand we would anticipate our revenues from this product line to increase over time.

Geophysical Hardware

These consist of a range of hardware solutions for field acquisition of sidescan sonar and sub-bottom profiler, which includes analog and digital interfaces compatible with all geophysical survey systems.

In 2018, we introduced our DA4G-USB product. This allows customers to integrate the DA4G hardware into their own PC configuration. Based on the CodaOctopus® DA4G system, it offers the same functionality, robustness and ease of use. CodaOctopus® DA4G is the fourth generation of our successful DA series and is built on twenty years of knowledge, experience and innovation in supplying unparalleled products and service to the worldwide geophysical survey sector. These purpose-built, turn-key, systems incorporate the very latest hardware specifications and are designed and delivered to meet the demanding nature of offshore survey work.

The CodaOctopus® DA4G range consists of a number of options and is backed (like all our products) with global service and support.

This consists of an integrated suite of software that automates the tasks of analyzing, annotating and mosaicking complex data sets, thus ensuring faster and more precise results.

Geophysical Software

Our GeoSurvey® software is supplied to complement our DA4G hardware, offering field acquisition of sidescan sonar and sub-bottom profiler data.

Our Survey Engine software product offers a more advanced post-processing solution for sidescan sonar and sub-bottom profiler data. Designed to streamline processing of very large data sets – many 100GBs – it offers comprehensive processing, interpretation, visualization, reporting and exporting functionality.

We continue to advance this range of products and in 2018 we launched our first product based on Artificial Intelligence techniques which allows us to automatically identify boulders on the seabed – SEADP – “Survey Engine Automatic Object Detection”. This new product presents a real opportunity to radically change workflow process for post-processing and analyzing side scan sonar data to assess, among other things, the suitability of an area for exploration and construction activities (O&G installations, pipeline and cable laying activities). This is in its early stage of roll out and has sparked significant interest. This is an area where we are investing our research and development efforts. We are also seeing good results from SEADP and some good quality early adopters of this new technology in the market.

9

Additionally, in 2019 we introduced our Seabed Classification module (again based on Artificial Intelligence techniques). This automatically classifies sidescan sonar imagery into different seabed types, computes and exports polygonal boundaries for these areas, and thereby simplifies sidescan processing.

Inertial Positioning and Attitude Measurement Systems (“Motion Products”)

Our Motion Products are Global Navigational Satellite System (referred to in the industry as “GNSS” Aided Inertial Measurement Units) provide measurement data on the position and attitude of a vessel. This device provides real-time data on these measurements which are applied to compensate for vessel movement in order to align sonar data and remove motion blur.

We have had our F180® series in the market for over 15 years and due to advancement of technology and the increasing demand for more precise GNSS Aided instruments, we have now developed our new generation of Motion Products, our F280 Series®.

New Generation of Motion Products

We have now completed the ground up development of our new generation of Motion Products F280 Series® The new F280 Series® is based on more advanced technology and is more accurate than our F180® series. The new technology is much more scalable towards future development of new product variants. The F280Series® is highly complementary to our real time volumetric sonar series and they are packaged together to provide a more comprehensive solution to our customers. The F280® is sold with and without our sonar series. We have now started to market the F280 Series®

Sales and Marketing

We market our products primarily through our website, industry events such as trade shows, webinars and industry relationships. We also have a small internal sales and marketing team which is engaged in marketing and selling our products. In addition, we have a network of non-exclusive independent global sales agents. In 2022, a significant part of our business plan budget is allocated to business development, sales and marketing which will include recruiting new staff for more direct sales and business development.

Coda Octopus Products Limited has the requisite accreditations for its business including being Lloyds Register accredited to ISO 9001:2015 and Cyber Essentials certification.

10

Marine Engineering Businesses (“Services Segment”)

Our Marine Engineering Businesses comprise Coda Octopus Colmek, Inc. based in Salt Lake City and Coda Octopus Martech Limited based in the United Kingdom.

These two operating entities supply engineered sub-assembly solutions which form part of mission critical integrated defense systems, test equipment, instrumentation, and the like. They operate as sub-contractors to prime defense contractors, and their engineering solutions are typically within broader defense programs where high levels of reliability and quality are essential pre-requisites for securing and maintaining these agreements with their customers. Typically, we prototype products for these customers and after going through various acceptance tests, including first article inspection approvals, we are given the production contracts. Many of these production contracts have a repeat orders profile which typically follows the life cycle of the defense program that is using the production part.

These arrangements often give us long term preferred/sole supplier status for the parts we supply, technology refresh and obsolescence management business opportunities with these customers and we generally use these long-standing relationships to win more contracts with these customers.

This business relies on increasing the number of new programs it attracts annually.

In addition, we are increasingly combining our engineering capabilities with our product offerings. This enables us to offer systems which are complete with installation and support to maximize the utilization of our collective expertise to advance our real time volumetric sonar technology.

Coda Octopus Martech Limited (“Martech”)

Martech operates in the specialized niche of bespoke design and manufacturing services mainly to the United Kingdom defense and subsea industries. Its services are provided on a custom sub-contract basis where high quality and high integrity devices are required in small quantities.

The Company enjoys pre-approvals to allow it to be short-listed for certain types of government contracts. Much of the more significant business secured by Martech is through the formal government or government contractor tendering process.

11

Coda Octopus Colmek, Inc. (“Colmek”)

Colmek are suppliers of embedded solutions and sub-assemblies which they design and manufacture and sell into mission critical integrated defense systems such as the Close-In-Weapons System (CIWS). This business was established 1977 and has been supporting several significant US defense programs for over 40 years, including Raytheon’s CIWS and Northrop Grumman’s Mine Hunting Systems Program. Colmek’s business model entails designing sub-assembly prototypes for defense programs which typically lead to contracts for the manufacture, repair and upgrade of these sub-assemblies. We are the sole source for the parts that we supply into these programs. This business model ensures recurring and long tail revenues since we continue to supply parts, typically for the life of the program, which can span decades.

In order to diversify its business opportunity, in June 2014 Colmek completed the acquisition of the Thermite® which is a rugged visual mission computer line and the Sentiris® AV1 XMC video card for $1,100,000 in cash. Colmek also acquired hardware, Thermite inventory and other intellectual property rights (such as software code and trademarks pertaining to these products). Thermite® was acquired with the goal of updating the technology and expanding the market for this rugged mission computer.

Thermite® Rugged Visual Computers

Rugged, graphics-based PCs designed to perform in the most brutal environmental conditions;
Focus on graphics-based high-performance computing with integrated accelerated video capture capability;
Lightweight, power efficient and conduction-cooled;
Three models optimized for man-wearable, vehicle, and airborne platforms; and
Programs include dismounted soldier training, mission rehearsal, real time imaging, robotic control, weapon system control, sensor processing and display.

12

We consider Thermite® to be an important part of our growth strategy. We have now designed and developed our next generation of the Thermite® Octal.

Within the Diver Augmented Vision Display (DAVD), Colmek supplies the “Diver Processing Pack” which is worn on the diver, and this is a variant of Thermite®.

Other products offered by Colmek include subsea telemetry and data acquisition systems, rugged workstations, analog-to-digital converters and rugged LCD displays.

Competition

In our Products Segment, we are exposed to the following competitive challenges:

Data Acquisition Products (GEO Products)

The industry for data acquisition and processing systems for sidescan and sub-bottom profiler data is fragmented with several companies occupying niche areas, and we face competition from different companies with respect to our different products.

In the field of geophysical products, Triton Imaging Inc., a US-based company, now part of the ECA Group (Toulon, France), Chesapeake, a US-based company, and Oceanic Imaging Consultants, Hawaii, USA, dominate the market with an estimated 25% each of world sales, while we believe that we control approximately 5% of world-wide sales.

13

GNSS Aided Inertial Positioning and Attitude Measurement Systems (“Motion Products”)

In the field of GNSS-aided inertial positioning and attitude sensing equipment, where our product addresses a small segment of the overall market, we believe that we have four principal competitors: Teledyne Marine (part of US based Teledyne Technologies Inc.) which is focused on the mid-performance segments with an estimated 25% of the market; iXblue, a French company which covers all segments, with an estimated 20% of the market; Kongsberg Seatex AS, a Norwegian company (part of Kongsberg Gruppen) which has products across all segments, with an estimated 15% of the market; and Applanix, a Canadian company (part of Trimble) which has one major product focused on the high end of the market, with an estimated 20% of the market. We believe that our market share in this market segment of motion sensing equipment is about 5%. This market is fiercely competitive and with the advancement of technology coupled with the development of autonomous land and marine platforms there are additional vendors in the market such as SBG Systems S.A.S (a French based manufacturer of motion sensors). We sell our MOTION range as part of our equipment suite to complement our 3D sonar range as well as supplying it individually. The development and introduction of our F280 Series® of GNSS Aided Inertial Positioning and Attitude Measurement System® constitutes our new generation of Motion Products and gives us the opportunity to increase our market share.

Real Time 3D/4D/5D and 6D Volumetric Sonar

In the field of Real Time 3D/4D/5D imaging, we are unaware of other companies offering a similar product. In this context it is important to understand some of the capabilities we bring to this field include:

-Acoustic Projector/Transmitter design, manufacturing, and testing
-Acoustic Receiver Array design, manufacturing, and testing
-Acoustic encapsulation and sensitivity measurement
-Acoustic Projector/Transmitter beam pattern and sensitivity measurement
-Pressure housing Design and Manufacture (sonar systems)
-3D/5D/6D Real-Time digital beamforming (on-device)
-1D and 2D Digital Beamforming
-Broadband Beamforming
-Signal Processing
-Active High Frequency Sonar Systems
-Passive Mid Frequency Sonar Systems
-Data acquisition and recording hardware and software
-Real-time 2D and 3D sonar visualization rendering and processing software

The entry into this market is dependent upon specialized marine electronics, acoustic and software development skills. The learning curve, which has resulted in the advancement of our real time 3D sonar device, is the culmination of two decades of research and development into this field. Companies such as Kongsberg Gruppen, R2Sonic, LLC, Tritech International Ltd., United Kingdom, BlueView Technologies Inc., USA (now a part of Teledyne Technologies Incorporated), and Norbit Group AS Norway are examples, but none of these sonar offerings are directly comparable or competitors to our real time volumetric 3D/4D/5D and 6D sonar solutions as their scanning sonar, single beam or multibeam sonars are not real time 3D imaging sonars and therefore cannot image moving targets underwater. Specifically, we believe that they do not have the same capabilities as our Echoscope® technology in terms of real time inspection and monitoring by generating 3D, 4D, 5D and 6D images of moving objects underwater including in environments in low or zero visibility conditions. Nor do they have the ability to use a single sonar for multiple real time 3D/4D images simultaneously. Notwithstanding it should be noted that Teledyne has acquired a significant number of substantial subsea companies (examples are Reson and BlueView). Teledyne has much greater resources, liquidity and market reach than our Company and has many operating verticals. We therefore can give no assurance that companies such as these will not enter this market. Furthermore, companies such as Kongsberg Gruppen and Teledyne can expend significantly more in any one fiscal year on R&D and Business Development, key pillars for increasing market share of underwater imaging sonars, than Coda Octopus. Notwithstanding, we believe that our recent development and introduction of 5D/6D - Echoscope PIPE®) sonar capability in conjunction with our software (4G USE® a multi-sensor platform) further distinguishes our volumetric sonars and significantly extends our lead over competitors in the subsea imaging market. We are not aware of any other imaging sonars in the market capable of generating real time 5D and 6D imagery underwater, which are Coda Octopus inventions. The innovations around Echoscope PIPE® are the subject of numerous patent applications.

We seek to compete on the basis of producing high quality products employing cutting edge technology that is easy to use by operators without specialized skills in sonar technology. We intend to continue our research and development activities to continually improve our products, seek new applications for our existing products, to develop new innovative products and grow the market for our products and expertise.

In our Services Segment, we are exposed to the following competitive challenges:

Marine Engineering Businesses

Through our marine engineering operations, Coda Octopus Colmek, Inc. and Coda Octopus Martech Limited, we are involved in custom engineering for the defense industry in the United States and in the United Kingdom. Martech and Colmek compete with larger contractors in the defense industry. Typical among these are Ultra Electronics, BAE Systems, and Thales, all of whom are also partners on various projects. In addition, the strongest competitors are often the clients themselves. Because of their size, they often have the option to proceed with a project under their Prime Defense Contract in-house instead of outsourcing to a sub-contractor like Martech or Colmek.

Intellectual Property

Our product portfolio and technologies are protected by intellectual property rights including trademarks, copyrights and patents. In the last 2 years we have advanced our existing sonar technology and have filed a number of significant patents applications pertaining to these inventions including covering our newly innovated 5D and 6D sonars. Furthermore, we have recently been awarded a patent which concerns a method of predicting and adjusting the laying of cable using sonar imaging. This is a significant patent for Offshore Renewables Market (Wind Energy), which is a rapidly increasing market sector and an important one for our growth. Our Echoscope® and Echoscope PIPE® technology is used for real time monitoring of cable installations for offshore wind projects. This Method which we have patented is used in conjunction with our Echoscope and automates the tracking of the cable (thus removing the need for an Echoscope® operator who previously would be manually clicking on the cable touchdown point). This method covered by our recently awarded patent also projects the cable touchdown point.

Patents

Our patented inventions along with our strategy to enhance these inventions are at the heart of the Company’s strategy for growth and development. We expend a material part of our cash resources in building our Patent Portfolio. We also incentivize our staff by having in place a Patent Reward Scheme.

14

Our patent portfolio consists of the following:

Patent No.DescriptionExpiration Date
US 7,466,628Concerns a “Method of constructing mathematical representations of objects from reflected sonar signals.”January 1, 2027
US 7,489,592Concerns a “Method of automatically performing a patch test for a sonar system, where data from a plurality of overlapping 3D sonar scans of a surface, as the platform is moved, are used to compensate for biases in mounting the sonar system on the platform”.July 8, 2027
US 7,898,902Concerns a “method of representation of sonar images” allowing sonar three-dimensional (3D) data to be represented by a two-dimensional image.July 13, 2028
US 8,059,486Concerns a method of rendering volume representation of sonar images.April 16, 2028
US 8,854,920Concerns a method of volumetric rendering of three-dimensional sonar data setsJune 22, 2033
US 9,019,795Concerns a method of object tracking using sonar imagingNovember 30, 2033
US 10,088,566Concerns a method of object tracking using sonar imagingNovember 26, 2036
US 10,718,865Concerns a method of compressing beamforming sonar dataMarch 1, 2039
US 10,816,652Concerns a method of compressing sonar dataOctober 28, 2038
Japan 5565964To provide a method for drilling/levelling thereof by an Underwater drilling/levelling work machine construction deviceJanuary 31, 2031
Japan 5565957To Provide a construction management method by a three- dimensional Sonar by a construction management deviceOctober 31, 2031
US 11,061,136Concerns a method of tracking unknown possible objects with sonarMarch 28, 2039
US 11204108**Concerns a method of predicting and adjusting the laying of cable using sonar imaging.March 22, 2039

 

* This is a significant patent as it covers our new innovation relating to our 5D Real Time Imaging Sonar (a real time sonar providing full time series 3D data) – See above where we discuss more about 5D Sonars under section “About the Company’s 5D and 6D Sonars Innovations”

** This is a significant patent for Offshore Renewables Market. Our Echoscope® technology is used for real time monitoring of cable installations for offshore wind projects. This Method which we have patented is used in conjunction with our Echoscope and automates the tracking of the cable (thus removing the need for an Echoscope® operator who previously would be manually clicking on the cable touchdown point. This method also projects the cable touchdown point.

Trademarks

We own the registered trademarks listed below and they are used in conjunction with the products that we market and sell:

Coda®, Octopus®, CodaOctopus®, CodaOctopus & Design®, Octopus & Design®, F180®, F280®, F280 Series®, Echoscope®, Echoscope 4G®, Echoscope 5D®, 5D Echoscope®, Echoscope 6D®, 6D Echoscope®, Echoscope PIPE® Ping-Pong Echoscope Sonar®, Ping-Pong Echoscope®, Ping-Pong Sonar®, 4G Underwater Survey Explorer®, 4G USE®, Survey Engine®, Dimension®, DAseries®, GeoSurvey® CodaOctopus® Air, CodaOctopus® Vantage; CodaOctopus® UIS; CodaOctopus® USE, Sentiris® and Thermite®.

In addition, we have registered several internet domain names including www.codaoctopus.com; www.codaoctopusgroup.com; www.colmek.com and www.martechsystems.co.uk.

Research and Development (“R&D”)

Research and Development is foundational to our business strategy to ensure our growth strategy and maintain our competitiveness. During the fiscal years ended 2021 and 2020, we spent $2,982,676 and $3,188,389, respectively, on R&D, which in 2021 FY represented a reduction in this area of expenditures by 6.5%. With the crystallization of several significant hardware development projects by the Company, we would expect R&D expenditures to remain materially unchanged in 2022 financial year.

Our products are complex and therefore we can give no assurance that even with spending a significant part of our resources on R&D, we will be successful in our development goals or realize significant monetization of these developments. Furthermore, even following launch of any product we may not succeed. Moreover, we may incur significant research and development expenditures without realizing viable products.

15

Government Regulation

Because of the nature of some of our products, they may be subject to export control regimes including in the United States, United Kingdom, Denmark and Australia where we conduct business operations. Where our products are subject to such export control requirements, they may only be exported to our customers if there is a valid export license granted by the relevant government body. Moreover, these regulations may change from time to time in these jurisdictions, including the United States, depending on the existing relationship with the country to which the goods are exported. See Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operation) for further discussion on this topic.

We are also required to maintain certain accreditations such as ISO accreditation, cyber security certifications, approvals to hold government items or materials and/or certain personnel or facility clearances.

In addition, as a provider for the US Government, we may be subject to numerous laws and regulations relating to the award, administration, Defense Federal Acquisition Regulations (“DFARs”) and performance of US Government contracts, including the False Claims Act. Non-compliance found by any one agency could result in fines, penalties, debarment, or suspension from receiving additional contracts with all US Government agencies. Given our dependence on US Government business, suspension or debarment could have a material adverse effect on our business and results of operations.

Employees

As of the date hereof, we employ approximately 95 employees worldwide, of which 12 hold management positions. A large majority of our employees have a background in science, technology and engineering, with a substantial part being educated to degree and PhD level. None of our employees are employed under a collective agreement and we have not experienced any organized labor difficulties in the past.

ITEM 1A. RISK FACTORS

Not required for smaller reporting companies.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

16

ITEM 2. PROPERTIES

Orlando, Florida

Our corporate offices are co-located with our subsidiary Coda Octopus Products, Inc. in Orlando. We own these business premises comprising 3,000 square feet that includes office space and R&D facilities.

Salt Lake City, Utah, USA

Coda Octopus Colmek operates from its premises which comprises 16,000 square feet and includes manufacturing, R&D Facilities and office space. These premises are owned by Coda Octopus Colmek.

Edinburgh, Scotland, UK

Coda Octopus Products Limited (Edinburgh based) operates from its premises comprising 12,070 square feet of internal space and includes manufacturing, R&D Facilities and office space. These premises are owned by Coda Octopus Products Limited.

Copenhagen, Denmark

As a mitigation strategy in relation to the UK leaving the European Union membership, thus limiting trade relations with EU member states, we have established a Danish subsidiary, Coda Octopus Products A/S and leased business premises in Copenhagen, Denmark. The lease is a fixed term lease for the period September 1, 2019 to September 1, 2023.

Annual rent is DKK 131,625 plus Value Added Tax (being an equivalent of $19,660 per annum) with an annual increase of 3%.

Portland, Dorset, UK

Martech uses premises owned by Coda Octopus Products Limited. These premises are located in the Marine Center in Portland, Dorset, United Kingdom, and comprise 9,890 square feet. The building comprises both office space and manufacturing and testing facilities. The lease was on a rent-free basis for a period of 2 years expiring December 31, 2020. Martech resumed paying Coda Octopus Products Limited rent in January 2021, amounting to the equivalent of $56,457 per annum.

All non-US Dollar denominated rents are stated according to prevailing exchange rates as of the date of each respective lease agreement.

ITEM 3. LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

ITEM 4. MINE SAFETY DISCLOSURES.

Not Applicable.

17

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock has been traded on the Nasdaq Capital Market under the symbol “CODA” since July 19, 2017. Prior thereto, it had been quoted on the OTCQX since February 8, 2017, under the symbol COGI, and prior thereto, on the OTC Pink Sheets under the symbol CDOC. The following table sets forth the range of high and low bid prices of our common stock as reported and summarized on the Nasdaq, for the periods indicated. These prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions.

Year Ended October 31, 2021 HIGH  LOW 
First Quarter $6.67  $5.21 
Second Quarter $9.50  $6.95 
Third Quarter $9.90  $7.70 
Fourth Quarter $9.50  $8.31 

Year Ended October 31, 2020 HIGH  LOW 
First Quarter $9.26  $6.29 
Second Quarter $7.04  $4.63 
Third Quarter $6.17  $4.41 
Fourth Quarter $6.73  $5.42 

We have not declared or paid any cash dividends on our common stock, and we currently intend to retain future earnings, if any, to finance the expansion of our business, and we do not expect to pay any cash dividends in the foreseeable future. The decision whether to pay cash dividends on our common stock will be made by our board of directors, in their discretion, and will depend on our financial condition, operating results, capital requirements and other factors that the board of directors considers significant.

ITEM 6. SELECTED FINANCIAL DATA

Not applicable.

18

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OPERATIONS

Forward-Looking Statements

The information herein contains forward-looking statements. All statements other than statements of historical fact made herein are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.

The following discussion and analysis should be read in conjunction with our financial statements, included herewith. 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 segments: Products Segmentoperations. 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 Services Segment

Our Products Segmentunderwater market. It has a long-established pedigree in this market, and it innovates, designs, develops and manufactures productsproprietary solutions for the subseathis market (both for commercial and defense applications) including our range of flagship patentedvolumetric real time 3D sonar solutions.

These solutions (“Products Segment”). Theseand 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 Oiloffshore renewable companies, oil and Gasgas (“O&G”) companies, law enforcement agencies, ports, mining companies, underwater vehicle manufacturers, Prime Defense Contractors as OEM integrators, defense bodies, fisheries and research institutes and universities.institutes.

 

Our Services Segment suppliesMarine Engineering Business is a supplier of engineering services and embedded solutions (such as mission computers) to prime defense contractors (“Services Segment”) such as Raytheon, Northrop Grumman, Thales Underwater, Atlas Electronik UK and Northrop Grumman. 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 of)suppliers) through obsolescence management programs. These services provide recurring stream of revenues for our Services segment.

19

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

 

In recent years, the Products and Services Segment have each generated 50% of our revenues. As a general rule, however, the Product Segment yields a higher Gross Profit Margin than the Services Segment. In both 2017 and 2018 fiscal years the Services Segment revenues and Net Income were substantially down and off plan due to the failure of new US Administration to pass a defense budget. This impact continued in 2018 on the Services Segment. In 2018 fiscal year therefore, Products Segment generated 64% of the Company’s consolidated revenues and the Services Segment generated 36%. We consider this to be atypical and would anticipate in 2019 fiscal year Services Segment revenues will be more in line with 50% of our overall revenues.

The Services Segment has now started to receive the backlog orders that were due in both fiscal years 2017 and 2018 and have now contracted a backlog of $2,504,380 (for the 2017/2018 orders) and we expect the further outstanding backlog to be contracted in the first half of 2019. Our biggest risks for the 2019 fiscal year for this Segment is that of timely execution of its mounting backlog of orders. The current level of this Segment’s order book is approximately $7.2m.

Although our Products Segment continues to be affected by the contraction in expenditures in Offshore O&G activities, we have continued to find new markets for our subsea products, mainly our real time 3D sonar series and the launch of our Echoscope4G®Surface saw an increase in the number of units sold. We also continue to become a key sensor in Offshore Wind Energy where our technology is used for real time 3D visualization of the cable pull in points and cable touch down point. Our increased efforts including expenditures in research and development is designed to capture new markets in the subsea defense space where new technologies such as underwater drones present new challenges for governments. We continue to believe that our real time 3D sonar technology is significant for the subsea defense market which is worth billions annually. Our unique and patented real time 3D solutions are a significant advancement on the current technology available in the subsea sonar imaging market due to its real time capability providing real time volumetric data of underwater targets – both static and moving - in low or zero visibility conditions.

Since introducing this product, we have made progress in getting our core real time 3D technology, the Echoscope®, adopted by a significant number of ports in the USA (the CodaOctopus® Underwater Inspection System where it is used for port and harbor security. In 2015 we secured the first sale of our Underwater Inspection System to a foreign government body in East Asia and in 2016 we sold two additional full system to this body.

We have also made progress in expanding the markets (and applications) for our real time 3D sonars. Recently, we have sold a number of systems to mining companies. Increasingly, our customers involved in offshore wind energy and renewables are adopting the technology as the primary tool for scour management, subsea cable installation and associated cable protection tasks.

In addition, in recent years we have started to rent our real time 3D solutions with engineering services. Given the contraction in capital expenditures budget in the O&G market, rentals are increasingly becoming an important part of the composition of the Company’s revenues and these O&G operators are more prepared to utilize operational budgets. Furthermore, our rental offering generally yields a higher gross margin for the Company.

Our business is affected by a number of factors including those set out below:

A.

United Kingdom’s withdrawal from the European Union (“Brexit”) including the possibility that such withdrawal will take place without a deal on their future relationship (“No Deal Brexit Issue”)

We derive a significant portion of our net operating revenues from our UK operations (both Coda Octopus Products Limited and Coda Octopus Martech).

Following a national referendum, the United Kingdom Government has served notice

The UK was a member of the European 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. The UK withdrew from its membership of the EU on December 31, 2020. This withdrawal removed these rights.

As part of the withdrawal, the UK Government and EU reached an agreement on December 30, 2020, on trade in certain areas.

The change in the UK EU membership status adversely impacts our business in several important areas:

Our shipments into the European Union under Article 50 of the Lisbon Treaty. The date of the UK leaving the European Unionare subject to customs process. This results in increased costs and the deadline for concluding a deal is currently March 29, 2019. Failing to conclude a deal could result in a No Deal Brexit or the UK Parliament intervening and seeking an extension on the March 29, 2019 date.

A No Deal Brexit could affect our UK operations which represents a significant part of our earnings (Coda Octopus Products Limited (Edinburgh-based) and Coda Octopus Martech Limited (Portland, England-based).

The ongoing uncertainty also impacts the British Pound (which is the trading currency of our UK operations). This has adverse impact on revenues reported (due to depreciation of the British Pound against other major currencies including the US Dollar) and devaluation of our consolidated balance sheet assets.

Because there is no precedent for a European Union member state leaving the Union, the full implicationstime for the Company are not clear. The outcome is dependent on the typeprocessing of future relationship that is struck between the United Kingdom and the European Union. Inshipments. This operates as a worst-case scenario, where no deal on the future of the UK relationshipdeterrent for EU customers to work with European Union is struck, it is widely believed that the World Trade Organization (WTO) rules will apply. Operating on this basis would have far-reaching implications for our Company particularly in the area of costs associated with import/export arrangements for our products including custom duties on purchases and sales and delays and increased compliance costs in the supply chain (both purchasing and selling).us. We currently benefit from mutual recognition rules in a number of areas including export control requirements and quality standards which allow us to distribute our products freely in European Union. If these are removed it is likely to involve new qualifications requirements that we would need to meet with the attendant costs and delays involved. Furthermore, if free movement is restricted this will also limit our ability to utilize our trained engineers and experts on customer projects in the European Union.

Furthermore, if the UK were to have an unplanned withdrawal this would compound the issues for our Company further as it is commonly believed that there would be resulting chaos and uncertainty, which would adversely affect the Company.

It is also widely believed that in a worst-case scenario, the British Pound will be exposed to extreme exchange rate fluctuations between the major currencies including US Dollar and Euro.

Many companies are seeking to mitigate the impact by seeking certain trading licenses in European Union member state countries.

In anticipation of a No Deal Brexit, we are taking stepsendeavor to mitigate this and have established a company, Coda Octopus Products A/S,by shipping to our subsidiary in Denmark which ships to maintainour 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 time consuming 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.
We are not able to recruit from EU Member states without getting work permits. As a presenceresult, 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 Company established a company, Coda Octopus Products A/S, in Denmark to maintain a presence in the European Union and to address some of the foreseeable issues. This subsidiary is crucial for our continued relationship with EU customers.

20

B.Currency Risks:

The Company’s operations are split between the United States, United Kingdom, Denmark and Australia. A large proportion of our revenues (approximately 73%) and costs are incurred outside of the USA with a significant part (68.3% of our total revenues) of that in the United Kingdom (“UK”). In addition, a significant part of our assets (both current and fixed) is held in British Pounds by our foreign subsidiaries. Significant currency fluctuations (particularly the British Pound or Danish Kroner versus the US Dollar) may affect our financial results and the value of our assets. With the conclusion of the trade agreement between the UK and EU which removed a lot of the ongoing uncertainty associated with the UK’s withdrawal from the European Union we anticipate the British Pound will be less volatile against other major currencies including the US Dollar.

C.Impact of Coronavirus Outbreak (referred to address the foreseeable issues. However, we can give no assurance thatin this in itself would be sufficient to address the impact of both a No Deal Brexit and an unplanned No Deal Brexit (i.e. crashing outForm 10-K as “Coronavirus”, “Pandemic” or “COVID-19”)

General Impact

The global outbreak of the Coronavirus has resulted in governments throughout the world, implementing measures restricting the freedom of movement of people and other curtailment of business activities including business closure to curb the spread of the Coronavirus.

The Company’s operations started to be impacted from the Pandemic early in the second quarter of 2020 FY. During the 2020 FY this resulted in a steep decline in our business activities and therefore demand for our goods and services. This caused a fall in revenue with operating expenses remaining relatively fixed. This affected our overall financial performance in the 2020 FY.

Throughout the 2021 FY, we have been impacted less by the Pandemic when compared to the 2020 FY. However, we continue to be affected in that the Marine Technology Business heavily relies on trade shows and in-person visits to various countries such as Japan, South Korea, China and EU-Bloc to meet potential customers and conduct on-water demonstrations. Since March 2020, we have not been able to conduct business development through in-person trips. This has affected the pace of adoption and uptake of our products including both the Echoscope PIPE® and the DAVD systems, which require on-water demonstrations.

Furthermore, we sell our products and solutions globally. We are dependent on these countries allowing foreigners to enter the country. In 2021 FY Japan, China, Singapore, South Korea, Australia and New Zealand did not allow in-person visits. These limitations have severely hampered our ability to increase significant demand for our goods and services.

Finally, the Marine Technology offerings are used at sea. The Pandemic has resulted in an overall reduction of offshore activities. Only high priority projects are going ahead. This directly impacts on the demand for both the sale or rental of our products.

Impact on Revenues and Earnings

Until the business environment normalizes, we are uncertain as to the extent of the impact the coronavirus outbreak will have on our future financial results. The inability to have unrestricted travel and movement which is crucial for in-person customer engagements, severely limits our ability to engage with our potential customers and therefore the opportunity to increase demand for our goods and services.

On the Products Business side, a significant part of our revenues is generated from field customer support work (training, assistance in mobilization of equipment or operating the equipment on behalf of our customers). Coronavirus has caused many of these field projects to be postponed indefinitely – which in turn negatively affects our revenues and financial results.

21

On the Services Business side, travel is also an important element as many of its engineering projects require customers to come to our facilities to conduct Critical Design Reviews (“CDRs”). Also, in-person customer engagement is important to increase demand for our services. The Pandemic has severely curtailed our ability to proactively engage our customers thereby adversely affecting the pipeline of opportunities we are pursuing. In addition, with Government employees working from home, the opportunity to have in-person engagements is significantly reduced. This directly reduces demand for our services.

Furthermore, the requirements for social distancing measures mean that we are significantly under-utilizing our capacity, particularly production capacity and thus increasing our overall costs of operations.

Government Policies on Coronavirus

Our operations are based in a number of countries, with each country establishing different rules related to Coronavirus including rules on restricting business operations, limiting staff travel work and quarantining rules. This has generally resulted in a much less predictable working environment for planning and delivering customer projects and project cost management. Several implications flow from this including:

Impairment of the European Union).

business’ productivity
B.

Currency Risks:

The Company’s operations are split between the United States, United Kingdom, Australia, and Denmark. A large proportion ofProject over runs

Increased operation costs resulting from our revenues (approximately 58%) andPandemic response
Increase project costs are incurred outside of the USA with a significant part (56% of our total revenues) of that in the United Kingdom (“UK”). In addition, a significant part of our assets (both current and fixed) are held in British Pounds by our foreign subsidiaries. The depreciation of the British Pound against major currencies adversely impacts our revenues as a whole which are reported in U.S. Dollars. Furthermore, a large part of our assets is held in British Pounds while the majority of our liabilities (which comprise our senior secured debentures – see Note 8 of the audited Consolidated Financial Statements) are maintained in U.S. Dollars. In the 2018 period as compared to the same 2017 period, we realized a consolidated balance sheet loss on our assets due to the weakening of the British Pound against the US Dollar prevailing at October 31, 2018. In fiscal year 2018 compareddelay caused by self-isolation rules or business closure or restriction on travel to work
Higher staff costs due to increased sick pay allowance which varies according to the 2017 period, we incurred a loss on our exchange rate translations in respect of our comprehensive income and loss account. See Note 2, paragraph n, ofcountry where the audited Consolidated Financial Statements October 31, 2018 and 2017 regarding our Foreign Currency Translation policy.

This currency risk is further exacerbated by the uncertainty around Brexit.

C.

Trade Disputes:

The costs of our raw materials could become a serious concern due to inter-country trade disputes. Our US Services Segment has suffered increased cost of raw materials sourced within the United States due to ongoing trade dispute between the USA, China and Canada.

D.

Price of Commodities:

The price of commodities, in particular O&G. The decline in O&G prices since 2014business operations are located, combined with a partial recovery since 2016 has resulted in large scale reductions in capital and operational expenditures, which directly impact on the Products Segment by reducing the quantity of sales and rentals into O&G and related markets. O&G has remained very competitive and customers are increasingly seeking significant discounts to place orders.

lower overall productivity.

Impact on Liquidity, Balance Sheet and Assets

Failure to curb the coronavirus Pandemic in the near future, coupled with a downturn in the global economic outlook, may adversely impact on our availability of our free cashflow, working capital and business prospects. As of October 31, 2021, we had cash and cash equivalents of $17,747,656 and for the year then ended we generated $3,269,770 of cash from operations. Based on our outstanding obligations including loans and notes payable, their terms and our cash balances we believe we have sufficient working capital to effectively continue our business operations for the foreseeable future.

Products Business Outlook

In the 2020 and 2021 FY we were impacted by varying degrees of limitation caused by the Pandemic.

In the 2020 FY the Products Business revenues were severely impacted by the Coronavirus Pandemic (“Pandemic”). In the Second Quarter of the 2020 FY, the business activities were severely curtained for this reason. Later in 2020 FY, the business climate started to improve with increased moderation of the global lockdown which facilitated more business activities. Notwithstanding, in the 2020 FY our business activities were severely limited by the Pandemic resulting in a steep decline in our financial performance for that period and a sharp reduction in our backlog. This also caused our pipeline of opportunities to shrink as business development, marketing and customer engagements were extremely limited.

In the 2021 FY, we saw an improvement in the business conditions with less restrictions. Nevertheless, have not returned to pre-Pandemic levels. In the 2021 FY we had limited opportunities to participate in trade shows and in-person customer engagements, which are key pillars for increasing the demand for our goods and services. In addition, we sell our products globally with most of our sales from Asia. A key pillar of the promotion and selling of our products is the ability to have in-person visits and engagements with our customers in their home countries and perform on-water demonstration. Also Industry Trade Shows are pivotal for our business development activities. An important trade show in the Asian calendar was the Japanese Offshore Renewable Wind Energy Trade Show which took place in October 2021. Due to the rules in place in Japan, foreign companies were not allowed to attend. The ongoing restrictions have meant that since March 2020, we have had very limited opportunities to travel to visit our customers in-person or perform on-water demonstration of our underwater products. This impacts the Company’s ability to effectively promote its products and solution and therefore increase demands at a viable pace and hinders the building of meaningful pipeline of opportunities.

A significant part of the Products Business human capital and resources are based in the UK. In the 2021 FY period The UK Government introduced a tiered system to manage the Coronavirus outbreak in various regions of the UK. In January 2021, the Scottish Government moved to the highest levels of restrictions which introduced a national lockdown during January. This restriction hampers our ability to have meaningful interaction with our customers and therefore limit the amount of business development activities which we can pursue.

22
 

A substantial part of our revenues is generated by our UK operations. With the UK leaving the European Union, we believe that we may realize less sales from the EU member states countries unless we are able to effectively staff the Danish subsidiary, Coda Octopus Products A/S. With the ongoing Pandemic it has remained difficult to effectively recruit and train staff for our Danish operations.

We rely on specialist software development skills. There is an acute shortage of these skills which has resulted in reduced resourcing of these skills in our business and at the same time significantly increased costs associated with securing these skills. This impacts our ability to service and develop our products and/or serve to increase our overall costs, and therefore may impact on our financial results.

We rely on sophisticated electronics for our products, and we anticipate delay in the supply chain and increases in prices. This may affect, among other things, our gross margins and ability to fulfill customer orders in a timely manner along with a resulting decline in revenues.

In the 2021 FY the Products Business revenues were $15,804,222 compared to $11,278,181 in the 2020 FY, representing an increase of 40.1%.

Services Business Outlook

In the 2021 FY the Services Business revenues were $5,527,305 compared to $8,765,629 in the 2020 FY, representing a fall of 36.9%.

In 2020 FY the Services Business mainly executed backlog orders and therefore although it was affected by the Pandemic, it could use its resources on the backlog work. In 2021 FY due to the Pandemic, the Services Business had difficulties in performing business development and thereby increase the demand for its services. This was further compounded by the delays in receiving anticipated orders from Prime Defense Contractors.

The ongoing Pandemic combined with the protractedness of Defense Contracting has affected the performance of the Services Business.

The Services Segment business opportunities are concentrated around a few US Prime Defense Contractors and is very dependent on securing sub-contracts from these primes. This also means that the Services Segment revenues are from a highly concentrated source. Furthermore, a change in Administration always has the effect of delaying spending including on new defense projects and this is typical for the first year of the new Administration.

E.

D.

Political Landscape/Exporting to China

We sell our products globally and increasingly to Asia. The recent change in both the US and UK Governments attitude towards trade with China and to a lesser extent the European Union member states, directly affects the sale of our products to customers based in China. Our real time 3D sonars which are rated above 300 meters along with our inertial navigation and attitude measurement sensors (F280® series) are subject to export control for certain countries, including China. We also are not allowed to promote our DAVD technology in China.

In December 22, 2020 the US 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 of the 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 dated November 4, 2021, the US Government has expanded the list significantly which is an indication that the US Government policy and disposition towards China is hardening and companies in the technology space will increasingly find it difficult to sell to China due to government restrictions.

The UK Government is generally in lock step with the US Government’s position and recently, refused to grant export licenses for several applications for end users in China for the first time in 25 years of our dealing with the UK Export Control Organization. The curtailment of access to this market due to refusal to issue export licenses is likely to significantly impact our revenues from Asia.

Furthermore, even though our sonars which are rated at 250m or less do not require export licenses for China, and our other products such as our geophysical products and Pan & Tilt devices, the UK Customs are now indiscriminately seizing all our shipments which are destined for China.

In 2020 FY we were unable to meet demand for $1,300,000 of sales order for China, due to refusal by the UK Government to issue export licenses. In the 2021 FY we had much less sales/opportunities enquiries from China than previous years.

The removal of China 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 in China. After significant business development in China, 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. It is estimated that around 50-75 multibeam sonars are sold to China Commercial Market each year (approximately $10 million). It is this market we had started to make significant inroads in to increase our global market share. Unless the Government’s current policy/stance changes and becomes favorable to resumption of trade with China, we are unlikely to realize this potential.

23

E.Supply Chain Disruption

Due to the exceptionally high demand in the semi-conductor market, we are experiencing extreme lead times for components which are necessary for the manufacture and service of our products. 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 uncompetitive. The Products Business may reasonably endeavor to reduce the impact of the extended lead times we are experiencing by priming 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 parts or components are required until their customers place an order for bespoke engineering work package. We therefore have a high risk that our Engineering Business’ may be severely impacted by the shortages that we are currently experiencing. The increase in inventory in our financial statements evidence our mitigation strategy to increase inventory where we can.

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.Defense Federal Acquisition Regulation Supplement (“DFARS”)

As a sub-contractor to Prime Defense Contractors in general we are subject to flow-down from their contract with the Government. Some of these flow downs may be onerous. Recently we have been receiving DFARS for mandatory vaccination against COVID-19 of all our staff members who work in the Services Business in the US under Executive Order 14042. Executive order 14042 also establishes Safety Protocols for Federal Contractors/Subcontractors to safeguard against the spread of COVID-19. As a small business with limited resources and inability to attract key skills central to the business activities (engineering, software development etc), if we are unable to implement the DFAR due to personnel not willing to have the vaccination, we could lose vital skills which could impact our ability to provide the services we do, particularly in this competitive climate which currently prevails. The impact of losing staff is greater for a small business where it has limited surplus resources and necessarily suffers from a high degree of concentration of skills.

H.Shortage of Key Skills/Resourcing Levels

We are experiencing an extreme shortage of personnel with key skills which are critical to our business, such as electronic. software development skills, technical support engineers, field support engineers and business development skills. Recently, it was widely reported in both the UK and US media that there were over 1,000,000 unfilled vacancies.

This situation is further compounded by significant global increases in salaries. In addition, with the UK withdrawing from EU membership, this exacerbates an already critical situation for businesses.

Since we are 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 in India, where potentially 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.

I.Supplying Products without Training

The underwater imaging products which we supply are complex. Customers benefit from our on-site training program as part of the adoption of the technology. The customers for our products are globally based. Since February 2020, we have not been able to provide hands-on field support to our customers. Pre-pandemic we would typically supply equipment with engineering support for training and mobilization assistance and would also provide a number of customer training events. The Pandemic has rendered this impossible due to the various and varying restrictions applicable in the places where our customers reside. Our products are complex and without support, there is substantially increased risks for customers’ dissatisfaction, thus jeopardizing the long- term customer relationship and the reputation of the products.

J.Government Spending for Defense:

The allocation of funds to defense procurement by governments in the United States and the United Kingdom

F.

Political Landscape:

Global-political uncertainties affecting the markets into which we sell our goods and services.

Global trends which make certain geographical regions more competitive in providing engineering solutions because of lower labor costs (e.g. India and China) are likely to affect our Services Segments (which provides engineering services).

G.

Resourcing Levels

Being a small technology company, we are unable to compete for certain specialized electronic engineering skills as our remuneration package is not as competitive as those offered by bigger companies.

We are dependent on the timely allocation of funds to defense procurement by governments in the United States and the United 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 the New Administration being able to secure approval in Congress for the defense budget. The slim majority on which the current Administration operates is likely to hinder future spending on new defense projects.

24
 

H.

Investments:

We lack the financial resources to advance our flagship technology at the commercially appropriate pace required to capture new markets and increase our sales which could facilitate new entrants to the market. For example, Teledyne Technologies Incorporated, a multi-billion company, has recently acquired a number of subsea companies that may speed up their entry into our market.

The Company has limited external sources of capital available, and as such is reliant upon its ability to sell its products and services to provide sufficient working capital for its operations and obligations.

K.
I.

Technological Advancement:

A significant part of our growth strategy is predicated on our patented real time 3D sonar technology. 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 the real time 3D imaging sonar market or that innovations in other areas may not surpass our unique capability that we currently supply to subsea market.

Investments:

We lack the financial resources to advance our flagship technology at the commercially appropriate pace required to capture new markets and increase our sales which could facilitate new entrants to the market. For example, Teledyne Technologies Incorporated, a multi-billion company, has in recent years acquired a number of subsea companies that may speed up their entry into our market.

In relative terms, the Company has limited external sources of capital available, and as such is reliant upon its ability to sell its products and services to provide sufficient working capital for its operations and obligations. Notwithstanding, on or around November 27, 2019 the Company secured a $4 million Revolving Credit Line from HSBC NA, its current bankers, which can be used for working capital purposes, including expansion activities as required. This line of credit is subject to annual renewals by HSBC.

L.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 underin accordance with accounting principles generally accepted in the 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

Our revenue isAll 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 and from the engineering services whichthat 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 evidence of a contractual arrangement exists, delivery has occurred orthose services have been rendered, the contract price is fixed or determinable, and collectability is reasonably assured. No right of return privileges are granted to customers after delivery.

For arrangements with multiple deliverables, we recognize revenue by allocating the total consideration to each deliverable based on the relative fair value of each deliverable. Revenue from equipment and software sales are recognized when delivered, and revenue for installation and other services are recognized as they are performed.

Our contracts sometimes require customer payments in advance of revenue recognition. These amounts are reflected as liabilities and recognized as revenue when the Company has fulfilled its obligations under the respective contracts.

For software license sales for which any services rendered are not considered essentialprovided to the functionalitycustomer and evidence of the software, we recognize revenue upon deliveryprovision of the software, provided (1) there is evidencethose services exist.

For further discussion of a contractual arrangement for this, (2) collection of our fee is considered probable and (3) the fee is fixed and determinable.

For arrangements that are generated from time and material contracts where there is a signed agreement and approved purchase order in place that specifies the fixed hourly rate and other reimbursable costs to be billed based on material and direct labor hours incurred, revenue is recognized on these contracts based on material and direct labor hours incurred. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred (materials and direct labor hours) to date to estimated total services (materials and direct labor hours) for each contract. This method is used as expenditures for direct materials and labor hours are considered to be the best available measure of progress on these contracts. Losses on fixed-price contracts are recognized during the period in which the loss first becomes apparent based upon costs incurred to date and the estimated costs to complete as determined by experience from similar contracts. Variations from estimated contract performance could result in adjustments to operating results.

Rental revenue is recognized monthly over the term of the rental period.

On November 1, 2018 the Company will adopt Accounting Standards Codification ASC 606, Revenue From Contracts with Customers (ASC 606). While terminology and requirements change in ASC 606, we believe that our existing revenue accounting is compliant with ASC 606 and that our accounting for revenue will not change. Accordingly, our disclosures about our revenue in accordance with ASC 606 will expand to comply with the new requirements, including expansion of quarterly revenue reporting requirements.

We defer costs on projects for service revenue. Deferred costs consist primarily of direct and incremental costs to customize and install systems, as defined in individual customer contracts, including costs to acquire hardware and software from third parties and payroll costs for our employees and other third parties.

We recognize such costs in accordance with our revenue recognition policy by contract. For revenue recognized underaccounting policies, refer to Note 2, paragraph h – “Revenue Recognition” in the completed contract method, costs are deferred until the products are delivered, or upon completion of services or, where applicable, customer acceptance. For revenue recognized under the percentage of completion method, costs are recognized as products are delivered or services are provided in accordance with the percentage of completion calculation. For revenue recognized ratably over the term of the contract, costs are recognized ratably over the term of the contract, commencing on the date of revenue recognition. At each balance sheet date, we review deferred costs, to ensure they are ultimately recoverable. Any anticipated losses on uncompleted contracts are recognized when evidence indicates the estimated total cost of a contract exceeds its estimated total revenue.financial statements.

25

Stock Basedbased Compensation

We recognize the expense related to the fair value of stock based compensation awards within the consolidated statements of income and comprehensive income. We use the fair value method for equity instruments granted to non-employees and use the Black-Scholes model for measuring the fair value. The stock based fair value 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 7 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.

26

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. GAAP.

Goodwill and Intangible Assets

IntangibleGoodwill and intangible assets consist principally of the excess of cost over the fair value of net assets acquired (or(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 limited lived intangible assets using the straight-line method over their estimated period of benefit. We periodically evaluate the recoverability of goodwill and intangible assets and take into accountcarefully consider events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.

The first stepStep 1 of the goodwill impairment test used to identify potential impairment compares the fair value of the reporting unit with its’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. If the carrying amount exceeds the fair value, the second step must be performed to measure the amount of the impairment loss, if any. The Company will early adopthas adopted Accounting Standards Codification 2017 – 04, Simplifying the Test for Goodwill Impairment, which permits the Company to impair the difference between carrying amount in excess of the fair value of the reporting unit as the reduction in goodwill. ASC 2017-04 eliminates the requirement in previous GAAP to perform Step 2 of the goodwill impairment test.

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 overreporting unit compared to the fair value of the reporting unit.To date, the Company has not had any goodwill impairments.

Fiscal Year 20182021 Consolidated Results of Operations

We operate two distinctIn this Form 10-K, the following meanings are ascribed to the terminologies set out immediately below:

FYFinancial Year
2020 FYMeans the Fiscal Year ended October 31, 2020
2021 FYMeans the Fiscal Year ended October 31, 2021

Although in the 2021 FY our financial results have improved over the 2020 FY, this should be contextualized by the fact that starting in the second quarter of the 2020 FY, our business segments. Ourwas severely curtailed by the Pandemic resulting in a steep decline in our financial performance in 2020 FY.

Even though in the 2021 FY our financial results have improved over the 2020 FY, we are still not back to pre-Pandemic conditions, and we continue to be affected by constraints associated with the ongoing Pandemic. This in turn affects our business opportunities including limiting the sales and marketing effort that we can perform since our markets are global with a significant emphasis on Asia for our Marine Technology Business designs, manufactures, sells and rents patented real time 3D sonar solutions and other leading products to the subsea market (“Products Segment”). Our Marine Engineering Business supplies engineering services (from design, prototyping to manufacturing) to mainly prime defense contractors (“Services Segment”).

OurBusiness. It also reduces demand for our products and associated services and impacts on the pipeline we can build for future business.

However, the Business is still impacted by the constraints placed upon the global business environment from the ongoing Pandemic and the various measures taken by respective governments such as limitations on opening of business, quarantining rules or restrictions on travel (both domestic and abroad) and excluding foreigners from entering into the country (Japan, Singapore, China and South Korea, which are sold and/or rentedimportant markets for us). In addition, the Services Business financial performance in the 2021 FY was significantly below our business plan goals and this was largely due to delays in securing defense orders and to conduct meaningful business development activities, all of which impacted on the offshore wind energy, dredgingperformance of the Services Business, and marine construction, marinethus, the overall performance of the Group. Because of the slim congressional majority that the US Administration is operating with in a very divided political climate this has hindered the pace of defense spending and port security, mining including deep sea mining, marine sciences sector and O&G sector. Duringanticipated awards of projects.

In the fiscal years ended October 31, 2018 and 2017, respectively,2021 FY, the Product SegmentProducts Business generated 64% and 61%74.1% of our total revenues.

Our Services Segment designsconsolidated revenues and supplies engineering services largely for prime and sub-prime defense contractors.

During the fiscal years ended October 31, 2018 and 2017, respectively, theour Services Segment generated 36% and 39%25.9% of our totalconsolidated revenues. In the 2020 FY the Products Business generated 56.3% of our consolidated revenues and our Services Segment generated 43.7% of our consolidated revenues.

In the 2021 FY we received $648,872 under the Paycheck Protection Program (PPP) from the US Government. This amount was utilized in accordance with the purpose and objective of the program and has now been forgiven. The amount was recorded in our financial statements as “Other Income”. We also received $135,000 from the UK Government under its Coronavirus Job Retention Scheme (“CJRS”), this reduced our Selling General & Administrative Expenses. In 2021FY we also received a benefit of $701,568 in Employee Retention Credits which resulted in the reduction of our tax obligations.

 

Comparison of fiscal year ended October 31, 2018 (“2018 period”)2021 to fiscal year ended October 31, 2017 (“2017 period”)2020

See Segment information below for a full breakout of the financial performance of each Segment for the 2018 and 2017 periods, respectively.

The information provided below pertains to the Company’s consolidated analysisfinancial results. For information on the performance of both segments (Productseach Segment including the disaggregation of revenues and Services) operating ingeographical split, see Note 12 (“Segment Analysis”) of our Group.audited Consolidated Financial Statements of October 31, 2021 and 2020.

27

Revenue:

Year Ended October 31, 2018  Year Ended October 31, 2017  Percentage Change
Year Ended October 31, 2021Year Ended October 31, 2021  Year Ended October 31, 2020  Percentage Change
$18,019,429  $18,025,173  Decrease of 0.03%21,331,527  $20,043,810  Increase of 6.4%

We suffered a small decreaserealized an increase in revenues in the 2018 period2021 FY compared to the 2017 period. 2020 FY.

This is largely due to an increase in the Services Segment not achieving its revenue plan for fiscal year 2018 becauserevenues of the delay in securing anticipated annual defense contracts resulting from the delayProducts Business.

Products Business Revenues 2021 FY $15,804,222 
Products Business Revenues 2020 FY $11,278,181 
Services Business Revenues 2021 FY $5,527,305 
Services Business Revenues 2020 FY $8,765,629 

The Products Business revenues increased by 40.1% in the US Administration approving its defense budget. During the fiscal year ended 2018, the Products Segment generated revenues of $11,499,416 and Services Segment $6,570,013. During the 2018 period the Products Segment revenues grew by 4.2%2021 FY over the 2017 period2020 FY and the Services SegmentBusiness revenues declined by 6.7%36.9% over that same period. Notably, equipment sales and rental revenues generated by the Products Business increased significantly over the said period.2020 FY.

The Services Segment has now contracted backlog orders in the amount of $2,504,380 in respect of 2017 and 2018 and we expect the further outstanding backlog to be contracted in the first half of 2019. This Segment currently has an order book of $7.2m.

During the 2018 period,year ended October 31, 2021, the Company had one customer from whom it generated sales greater than 10% of net revenues. Revenue from this customer was $2,882,761$2,484,173, or 16%12% of net revenues during the period. Total accounts receivable from this customer atas of October 31, 20182021 was $24,993$468,149 or 1%11% of accounts receivable.

Gross Margin:

Year Ended October 31, 2021 Year Ended October 31, 2020 Percentage Change
69.2% 63.5% Increase of 5.7 percentage points
(gross profit of $14,769,718) (gross profit of $12,729,448)  

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

The percentage of consolidated sales attributed to our 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 by the Services Business. The Services Business yields a lower gross profit margin on generated sales which are largely based on time and materials contracts (except for its Thermite® products);
The mix of sales within the Marine Technology Business including:
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 applicable commissions earned by Third Party Sales Agents or Distributors on sales of our Products.
Level of Depreciation associated with rental assets used by the Marine Technology Business for servicing the rental market.

In the 2021 FY Gross Profit Margins for the Marine Technology Business were 79.9% compared to 80.0% in the 2020 FY. For the Services Operation these were 38.6% in the 2021 FY compared to 42.3% in the 2020 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 2021 FY compared to the 2020 FY is set out below:

  2021 FY
Products
  2020 FY
Products
  Percentage Change 
Equipment Sales $10,914,124  $7,183,580   51.9%
Equipment Rentals  2,324,773   1,361,151   70.8%
Software Sales  669,968   453,638   47.7%
Engineering Parts  -   -   N/A 
*Services  1,895,357   2,279,812   (16.9)%
             
Total Net Sales $15,804,222  $11,278,181   40.1%

* Due to the restriction on global travel, the Marine Technology Business is often unable to attend customers sites to assist with engineering services such as set up of equipment and training. Since 2020 we have largely been supporting customers remotely and, in principle, we are less able to recover fees for virtual/on-line support. The reduction in revenue for this category reflects this shift.

 

Year Ended October 31, 2018  Year Ended October 31, 2017  Percentage Change
$70.3% $66.4% Increase of 3.9 percentage points
 (gross profit of $12,662,362)   (gross profit of $11,967,725)   

The increaseIn the 2021 FY we paid $605,620 in gross margin reflectscommission compared to $610,088 in the different mix2020 FY. Although equipment sales increased significantly, there was a higher percentage of consolidateddirect sales in the 2018 period. In particular,2021 FY compared to the Products Segment, which generally yields2020 FY where a significantly higher gross profit margin generatedpercentage emanated from Asia thus attracting more commission.

For more detailed information on the composition and disaggregation of our revenues, than the Services Segment. Furthermore, the Products Segment’s gross profit margin is affected by the mixplease refer to Note 13 (“Disaggregation of outrights sales versus rentals. Rentals also yield a greater gross profit margin than outright sales. Within the mixRevenue”) of sales for the Products Segments there is an increase percentage relating to rentalsour audited Consolidated Financial Statements of October 31, 2021 and sale of newly launched 4G Products.2020.

28

Research and Development (R&D):

Year Ended October 31, 2018  Year Ended October 31, 2017  Percentage Change
Year Ended October 31, 2021Year Ended October 31, 2021  Year Ended October 31, 2020  Percentage Change
$2,571,714  $1,380,381  Increase of 86.3%2,982,676  $3,188,389  Decrease of 6.5%

The increaseResearch and Development costs are, in our R&D expendituregeneral, an ongoing cost for the Marine Technology Business operations since it will need to either maintain the products it has in the 2018 period mainly reflects an increasemarket or continue to advance these products to keep them competitive (both in our R&D expenditureprice and performance) and to expand the product offerings which we have in the Products Segment.market.

 

R&D expendituresIn this connection, we continue to invest in research and development to further our business goals including maintaining our lead in the Products Segment increasedreal time volumetric imaging sonar sector (Marine Technology Business) and becoming an embedded supplier of mission computers through re-engineering our Thermite® (now Thermite® Octal) via our Services Business and launching derivatives of the newly designed Thermite® Octal. The key unique selling point for the Thermite® range that is a rugged COTS system that we can customize these for specific customer requirements. Competing companies sell standard COTS mission computers and, in general, do not offer customize solutions. This is the business opportunity for our Thermite technology.

In the 2021 FY this category of expenditure decreased by 122.7% from $919,8636.5%. The decrease is largely due to reduced spending in this area in the 2017 period to $2,048,285Marine Engineering Business (expenditures fell by 54.6% and was $473,569 in the 2018 period. This increase is in line with our budgetary plans and is a reflection of the increased activities in developing our 4G/5G of products.

Our goal will be to bring more competitively priced and technologically advanced products to the market under a 12-18 months roll out plan. The first of our series of products in our 4G of products was launched in January, 2018, and we expect to launch further products within our 4G/5G series of sonar throughout 2019.

R&D expenditures in the Services Segment were $523,429 in the 2018 period2021 FY compared to $460,518 in the 2017 period, an increase of 13.7%$1,042,243). TheseThis reflects our strategy to reduce expenditures are in line with our budgetary plans as we are investing significantly in the refreshingon the Thermite® Octal development until we can gage customer requirements through the demonstrations and other engagements that we were performing pre-Pandemic.

In 2021 FY the Products Business continued to develop the range of products which is a significant partits product offerings including its volumetric real time imaging sonar series, the new inertial navigation and positioning system (its new F280® series), its new sonar software platform and 4G USE® Software Development. The Products Business has now crystallized many of our growth strategy (Services Segment). The Thermite®is a product which we acquired from Quantum 3D in 2014 and it has a prestigious customer base. We believe that the technically refreshed Thermite presents a substantial opportunity to grow this part of our businessthese developments and we do not expect this area of expenditures to materially increase in the 2022 FY.

29

In the 2020 FY, we had $190,000 of R&D expenditures attributable to the Diver Augmented Vision Display (DAVD) System which was during that period funded by the Group. The subsequent generations of the DAVD (GEN 2, GEN 3 (and now GEN 4) are funded by the Office of Naval Research.

In the 2021 FY we have now completedincurred exceptional expenses of $363,900 for sub-contracting costs for an ASIC device for our sonar series. The overall anticipated expenditure for the firstnew ASIC device is approximately $1 million. The current ASIC device being used is obsolete and this has necessitated the development. We anticipate that we will complete the development of the new Thermite® Octal and have received the first orders from 2 significant customers for trial versions. Thermite® enjoys a prestigious existing customer base which we intend to re-engage withASIC Device in FY 2022.

Changes in this new Thermite®Octal.category by Segment are set out immediately below:

In general, we expect R&D expenditures to continue to increase in the 2019 period for the reasons explained above. Notwithstanding this increase, it is the Company’s current belief that it can fund these activities from its operating income.

Description Amount  

% increase /

(decrease)

 
Marine Technology Business (Products Segment) 2021FY $2,509,107   28.3%
Marine Technology Business (Products Segment) 2020FY $1,955,364     
Marine Engineering Business (Services Segment) 2021 FY $473,569   (54.6)%
Marine Engineering Business (Services Segment) 2020 FY $1,042,243     
Coda Octopus Group, Inc. 2021 FY (representing the Head Up Display Costs) $-   (100.0)%
Coda Octopus Group, Inc. 2020 FY $190,782     

Our products are complex and, despite the increase in our R&D expenditures, we can give no assurance that we will realize our stated goals. We may incur significant R&D expenditures without realizing any commercially viable products or there may be glitches with our product launch.

Selling, General and Administrative Expenses (SG&A):

Year Ended October 31, 2018  Year Ended October 31, 2017  Percentage Change
Year Ended October 31, 2021Year Ended October 31, 2021  Year Ended October 31, 2020  Percentage Change
$6,779,881  $6,769,327  Increase of 0.2%7,915,575  $6,737,294  Increase of 17.5%

The increase in our SG&A expenditures in the 2018 period is broadly attributed to2021 FY increased by 17.5% over the increased costs associated with legal and transaction costs pertaining to a private placement consummated in January 2018. In fiscal year 2019, we do not anticipate2020 FY period. There are several factors which account for this category of expenditure to increase as in fiscal year 2018 we incurred non-recurring one-off costs associated with re-organization of our Company to finance our R&D efforts. Approximately $586,436increase. Some of the increased amountmaterial factors are:

Pandemic Relief Contributions: In the 2020 FY we had certain contributions relating to Pandemic-relief under the UK Government’s Coronavirus Job Retention Scheme (“CJRS”). Although in the 2021 FY we had some contributions under the CJRS, these amounts were reduced by 91%. This affects the area of Wages and Salaries.
Increase in Legal and Professional Fees. In the 2020 FY due to the uncertainties of the impact of the Pandemic on the Business, we had certain waivers of fees by our CEO and Board members which, in the 2020 FY reduced expenditures relating to this category. In the 2021 FY we also incurred bonus costs of $100,000 to our CEO. We also paid bonus of $55,034 to a key member of staff.
Stock Based Compensation Expenses (Non-Cash Item). In the 2021 FY we expensed $1,050,821 for stock based compensation as compared to $610,780 in the corresponding 2020 FY, representing an increase of 72%

Further discussions on SG&A expenditures constitutes non-recurring costs attributed to employees’ separation payments and a further $90,000 associated with surrendering leased business property in Edinburgh.are set out immediately below.

30

Key Areas of SG&A Expenditure across the Group for the year ended October 31, 20182021 compared to the year ended October 31, 20172020

Expenditure October 31, 2018  October 31, 2017  Percentage Change October 31, 2021  October 31, 2020  Percentage Change
Wages and Salaries $3,070,548  $4,010,778  Decrease of 23.4% $3,361,494  $3,194,061  Increase of 5.2%
Legal and Professional Fees (including accounting, audit and investment banking services) $1,054,379  $934,937  Increase of 12.8% $1,284,590  $1,004,340  Increase of 27.9%
Rent for our various locations $84,462  $101,728  Decrease of 17% $51,443  $55,581  Decrease of 7.4%
Marketing $125,411  $222,589  Decrease of 43.7 $48,214  $92,296  Decrease of 47.8%

Although there isWe incurred a modest decrease in Wages and Salaries category of expenditures, we would expect that in the 2019 fiscal year this category will increase to reflect the investments we are making in our business including in the area of sales and marketing and quality control.

Thematerial increase in our Legal and Professional Fees in the 2018 period is attributed to the increased costs associated with becoming a SEC reporting company and our listing on the NASDAQ.

Upon surrender of our leased properties in Edinburgh in February 2019, we anticipate that the category of expenditures constitutingrelating to Wages and Salaries. In the 2020 FY we had contributions under the CJRS of $257,844 compared to $135,000 in the 2021 FY. Without this contribution, the real cost of Wages and Salaries in the 2021 FY would be $3,496,494 and $3,451,905 in the 2020 FY. Due to the scarcity of skills, we require for our business we are experiencing a significant pressure in the costs of Wages and Salaries. 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 2022 Financial Year.

In the 2021 FY expenditures relating to the category of “Rent” will decrease significantly.reduced by 7.4% compared to FY 2020. Rent is not a material expenditure in the Group as most premises which we now use for our business operations are owned by the Company except for premises used in Denmark and other small storage facilities that we use in other parts of the Group.

We also expectIn 2021 FY expenditures relating to the category of “Marketing” was reduced by 47.8% due to decreases in travel and trade show costs as a result of the Pandemic which restricted movement of people. In the event that the category MarketingPandemic should recede allowing for unrestricted global travel this is an area of expenditures which we project will increase significantly. We are also investing in building a global brand for our products and this will require significant investment in the fiscal2022 through to 2024 Financial Years – subject to the Pandemic-related barriers discussed throughout being removed. We are budgeting approximately $400,000 per year 2019for marketing within our business plan. These amounts will increase to reflect increasedinclude personnel costs, marketing efforts onequipment and material costs, website development etc. and a products channel, but this will be intended for our new generation of products bothand brands in the Products and Services Segment.market.

In the 2021 FY we had expenses of $1,050,821 for stock based compensation (a non-cash item) as compared to $610,780 in the corresponding 2020 FY.

1031
 

Operating Income:

Year Ended October 31, 2018  Year Ended October 31, 2017  Percentage Change
Year Ended October 31, 2021Year Ended October 31, 2021  Year Ended October 31, 2021  Percentage Change
$3,310,767  $3,818,017  Decrease of 13.3%3,871,467  $2,803,765  Increase of 38.1%

In the 2021 FY Operating Income increased by 40.0%, although Total Operating Expenses increased by 9.2%. The decreaseincrease in Operating Income in the 2018 period compared to the 2017 period is attributedlargely due to the increase in Revenue by 6.4% over the 2020FY coupled with an increase in our Gross Profit Margins.

Other Income:

Year Ended October 31, 2021  Year Ended October 31, 2020  Percentage Change
$1,435,382  $668,245  Increase of 114.8%

In the Financial Year Other Income increased by 114.8%.

The makeup of Other Income is as follows:

In both Financial Years 2021 and 2020 we received in $648,872 and $648,871, respectively, under the Paycheck Protection Program scheme (“PPP”) which the US Administration made available as part of the Pandemic response package for US companies. All the PPP amounts received have been utilized in accordance with the purpose and objective of the program and these amounts have now been forgiven under the Program.

In addition, in Financial Year 2021 we received $701,568 in Employee Retention Credits (ERC), as part of the Pandemic response package for US companies. These are payroll tax refunds for maintaining our R&D expenditures by 86.3% ($2,571,714employees throughout the Pandemic

In addition to the amounts received pursuant to the PPP and ERC schemes described above, we have in the 2018 period compared to $1,380,381)2021 FY recorded an amount of $84,942 for the reasons discussed earlierOther Income in conjunction with revenues remaining flat.our Financial Statements.

Interest Expense:

Year Ended October 31, 2018  Year Ended October 31, 2017  Percentage Change
Year Ended October 31, 2021Year Ended October 31, 2021  Year Ended October 31, 2020  Percentage Change
$249,090  $597,011  Decrease of 58.3%53,605  $70,203  Decrease of 23.6%

This category of expenditures includes interest on the various loans described below.

In the 2017 period, we had a Senior Secured Convertible Debenture which attracted 8.5% in interest. In2021 FY Interest Expenses reduced by 23.6%. This is due to the 2017 period we repaid this Senior Debenture in full andreduction in the said period paid approximately six months interest payments.

In the 2018 period, interest is attributed to the HSBC Loan and a loan made byprincipal amount outstanding under our CEO to one of our subsidiaries.

On or around April 28, 2017, we entered into a new Senior Secured Debenture with HSBC NA where we borrowed $8,000,000,NA. This loan will mature in December 2021 – see Note 16 Subsequent Events of Notes to the proceeds of which were used to repay the Senior Secured Convertible described above. This new HSBC Debenture attracts a more favorable interest rate of 4.56% per annum. In addition, on March 28, 2018 the Company repaid a portion of the new HSBC Debenture thus reducing the principal outstanding amount under this agreement to $1,917,602 at that date. As at October 31, 2018, the amount outstanding under the HSBC Debenture is $1,524,239. The amortization schedule for this loan is set out in Note 8 of the audited Consolidated Financial Statements of October 31, 2018 and 2017.

Our Interest Expense Category also includes interest payablefor further information on a loan by our Group CEO to one of our subsidiaries, Coda Octopus Colmek, Inc.

On a going forward basis, we expect the category ofHSBC Debentures. We therefore do not anticipate Interest Expense to decrease as on December 2018 we repaidbe a material item of expenses in full the loan to our CEO and the principal amount outstanding on the HSBC Debenture is reducing.financial statements.

32

Other Income:

Year Ended October 31, 2018  Year Ended October 31, 2017  Percentage Change
$41,222  $121,278  Decrease of 66.0%

The make-up of this category is UK Value Added Tax rebates from purchases made outside of the European Union by our UK operations and is subject to fluctuations as it usually reflects Value Added Tax rebates (equivalent of the US Sales Tax) from purchases made outside of the European Union by our UK operations and changes according to the level of purchases we make outside of the European Union in the period.

Net Income before Income taxes for the year ended October 31, 20182021, compared to the year ended October 31, 20172020

Year Ended October 31, 2018  Year Ended October 31, 2017  Percentage Change
Year Ended October 31, 2021Year Ended October 31, 2021  Year Ended October 31, 2020  Percentage Change
$3,102,899  $3,342,284  Decrease of 7.2%5,253,244  $3,401,807  Increase of 54.4%

In the 2021 FY, Net Income before taxes increased by 54.4% due to an increase in revenues (by 6.4% or $1,287,717 over the previous 2020 FY), an increase in Other Income taxes fell largely because revenues remained flat (due to the delaysand a reduction in the Services Segment contracting certain defense contracts) and our increased expenditures in research and development, which increased by 86.3% (from $1,380,381 in the 2017 period to $2,571,714 in the 2018 period).category of Interest Expenses.

Net Income after Income taxes for the year ended October 31, 20182021 compared to the year ended October 31, 20172020

Year Ended October 31, 2018  Year Ended October 31, 2017  Percentage Change
Year Ended October 31, 2021Year Ended October 31, 2021  Year Ended October 31, 2020  Percentage Change
$4,988,531  $3,339,663  Increase of 49.4%4,947,765  $3,343,585  Increase of 48.0%

In the 2021 FY Net Income after taxes increased by 48.0%. This is due to the increase in Net Income before Income taxes increased becausecoupled with the Company has recognized and recordedrecording in the 2018 period2021 FY of $701,568 in Employee Retention Credits which we received as part of the full deferred tax asset of $1,754,169 dueUS Government’s response to management judgement that based on the Company’s performance the likelihood of utilizing the Company’s Net operating loss (“NOLs”) carry forwards has materially increased and therefore the NOLs are realizablePandemic compared to $0 in the future.2020 FY.

Comprehensive Income for the year ended October 31, 20182021 compared to the year ended October 31, 20172020

Year Ended October 31, 2018  Year Ended October 31, 2017  Percentage Change
Year Ended October 31, 2021Year Ended October 31, 2021  Year Ended October 31, 2020  Percentage Change
$4,798,299  $3,638,669  Increase of 31.9%5,601,984  $3,157,715  Increase of 77.4%

In the 2021 FY Comprehensive Income increased in the 2018 period compared to the 2017 period due to the recognition of deferred tax asset (NOLs) in the amount of $1,754,169. Without this inclusion Comprehensive Income fell by 16.3% in the 2018 period compared to the 2017 period.

There are a number of reasons for the decline77.4%. A large part of our Comprehensive Income. In additionIncome changes relates to loss of $190,232 in foreign currency translation (asadjustments relating to fluctuations during the reporting period.

We conduct a large part of our business in various foreign currencies, for example, the British pound, Danish Kroner, Euros and Australian Dollars.

This category is affected by foreign currency adjustments during the reporting period. In the 2021 FY we had a gain of $654,219 compared to a gainloss of $299,006$185,870 in the 2017 period), Net Income fell by 32% in2020 FY. There are generally significant foreign currency fluctuations, particularly between the 2018 period largely because revenues remained flat while ResearchUS dollar (our reporting currency) and Development expenditures increased significantly in the 2018 period.

British Pound. Since the UK decided to leave the European Union, the British poundPound has been falling significantly against the US dollar (see Note 2, paragraph n of Notes to the audited Consolidated Financial Statements for October 31, 20182021 and 20172020 for fuller information regarding our Foreign Currency Translation policy).

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.

33

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 ending October 31, 20182021 and 2017,2020, respectively.

Year Ended October 31, 2018 Marine
Technology
Business
(Products)
  Marine
Engineering
Business
(Services)
  Overhead  Total 
             
Revenues from External Customers $11,449,416  $6,570,013  $-  $18,019,429 
                 
Cost of Revenues  1,894,808   3,462,259   -   5,357,067 
                 
Gross Profit  9,554,608   3,107,754   -   12,662,362 
                 
Research & Development  2,048,285   523,429   -   2,571,714 
Selling, General & Administrative  2,882,049   2,366,226   1,531,606   6,779,881 
                 
Total Operating Expenses  4,930,334   2,889,655   1,531,606   9,351,595 
                 
Income (Loss) from Operations  4,624,274   218,099   (1,531,606)  3,310,767 
                 
Other Income (Expense)                
                 
Other Income  39,122   2,100   -   41,222 
Interest (Expense) Income  (12,154)  (59,599)  (177,337)  (249,090)
                 
Total Other Income (Expense)  26,968   (57,499)  (177,337)  (207,868)
                 
Net Income (Loss) before income taxes  4,651,242   160,600   (1,708,943)  3,102,899 
                 
Income refund (expense)  133,419   -   (1,956)  131,463 
Deferred tax benefit  -   -   1,754,169   1,754,169 
                 
Income benefit (expense)  133,419   -   1,752,213   1,885,632 
                 
Net Income (Loss) $4,784,661  $160,600  $43,270  $4,988,531 
                 
Supplemental Disclosures                
                 
Total Assets $15,061,693  $11,674,640  $2,000,278  $28,736,611 
                 
Total Liabilities $1,142,661  $1,498,828  $1,708,172  $4,349,661 
                 
Revenues from Intercompany Sales - eliminated from sales above $1,176,438  $437,387  $3,100,000  $4,713,825 
                 
Depreciation and Amortization $461,429  $282,836  $14,143  $758,408 
                 
Purchases of Long-lived Assets $499,262  $61,329  $76,561  $637,152 
  Marine
Technology
Business
(Products)
  Marine
Engineering
Business
(Services)
  Overhead  Total 
             
Fiscal Year Ended October 31, 2017                
                 
Revenues from External Customers $10,986,268  $7,038,905  $-  $18,025,173 
                 
Cost of Revenues  2,246,881   3,810,567   -   6,057,448 
                 
Gross Profit  8,739,387   3,228,338   -   11,967,725 
                 
Research & Development  919,863   460,518   -   1,380,381 
Selling, General & Administrative  3,220,635   2,714,054   834,638   6,769,327 
                 
Total Operating Expenses  4,140,498   3,174,572   834,638   8,149,708 
                 
Operating Income (Loss)  4,598,889   53,766   (834,638)  3,818,017 
                 
Other Income (Expense)                
                 
Other Income  117,106   4,172   -   121,278 
Interest (Expense) Income  (709,763)  (56,697)  169,449   (597,011)
                 
Total other income (expense)  (592,657)  (52,525)  169,449   (475,733)
                 
Income (Loss) before income taxes  4,006,232   1,241   (665,189)  3,342,284 
                 
Income tax benefit (expense)  22,578   -   (25,199)  (2,621)
                 
Net Income $4,028,810  $1,241  $(690,388) $3,339,663 
                 
Supplemental Disclosures                
                 
Total Assets $12,374,214  $11,479,953  $205,906  $24,060,073 
                 
Total Liabilities  1,109,003   1,475,442   7,648,208   10,232,653 
                 
Revenues from Intercompany Sales - eliminated from sales above  1,895,015   387,142   1,797,775   4,079,932 
                 
Depreciation and Amortization  528,667   412,220   12,739   953,626 
                 
Purchases of Long-lived Assets  2,419,092   129,989   12,470   2,561,551 

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 operatesell their goods and services in threefour geographic locations: the United States, Europe and Australia.

Americas
Europe
Australia/Asia
Middle East/Africa

34

Information concerning principal geographic areas is presented below according to the area where the activity is taking place for the years ended October 31, 2018 and 2017 respectively:

External Revenues by Geographic Locations USA  Europe  Australia  Total 
Year ended October 31, 2018 $7,617,891  $10,029,806  $371,732  $18,019,429 
Year ended October 31, 2017 $7,499,900  $9,056,589  $1,468,684  $18,025,173 
  Marine Technology Business (Products)  Marine Engineering Business (Services)  Overhead  Total 
             
Year Ended October 31, 2021                
                 
Revenues from External Customers $15,804,222  $5,527,305  $-  $21,331,527 
                 
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  3,220,883   2,284,997   2,409,695   7,915,575 
                 
Total Operating Expenses  5,729,990   2,758,566   2,409,695   10,898,251 
                 
Income (Loss) from Operations  6,904,397   (623,235)  (2,409,695)  3,871,467 
                 
Other Income (Expense)                
Other Income  354,373   1,079,374   1,635   1,435,382 
Interest Expense  (12,588)  (19,668)  (21,349)  (53,605)
                 
Total Other Income (Expense)  341,785   1,059,706   (19,714)  1,381,777 
                 
Income (Loss) before Income Taxes  7,246,182   436,471  (2,429,409)  5,253,244 
                 
Income Tax Benefit (Expense)                
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 Benefit (Expense)  (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  $716,230  $45,465,419 
                 
Total Liabilities $3,166,999  $849,306  $400,041  $4,416,346 
                 
Revenues from Intercompany Sales - eliminated from sales above $2,075,387  $355,608  $3,470,000  $5,900,995 
                 
Depreciation and Amortization $780,434  $114,022  $29,617  $924,073 
                 
Purchases of Long-lived Assets $793,995  $51,907  $118,302  $964,204 

The reason for the decline in our Australia revenues is because we restructured our Australian operations in January 2018, whereby most of the sales in this territory are now done by our UK Edinburgh operations. This was done to reduce our overheads associated with sales.

35

  Marine Technology Business (Products)  Marine Engineering Business (Services)  Overhead  Total 
             
Year Ended October 31, 2020                
                 
Revenues from External Customers $11,278,181  $8,765,629  $-  $20,043,810 
                 
Cost of Revenues  2,254,008   5,060,354   -   7,314,362 
                 
Gross Profit  9,024,173   3,705,275   -   12,729,448 
                 
Research & Development  1,955,364   1,042,243   190,782   3,188,389 
Selling, General & Administrative  2,779,662   2,260,849   1,696,783   6,737,294 
                 
Total Operating Expenses  4,735,026   3,303,092   1,887,565   9,925,683 
                 
Income (Loss) from Operations  4,289,147   402,183   (1,887,565)  2,803,765 
                 
Other Income (Expense)                
Other Income  141,511   526,734   -   668,245 
Interest (Expense)  (10,612)  (15,672)  (43,919)  (70,203)
                 
Total Other Income (Expense)  130,899   511,062   (43,919)  598,042 
                 
Income (Loss) before Income Taxes  4,420,046   913,245   (1,931,484)  3,401,807 
                 
Income Tax (Expense) Benefit                
Current Tax Benefit (Expense)  63,590   -   (12,927)  50,663 
Deferred Tax (Expense) Benefit  (196,664)  273,666   (185,887)  (108,885)
                 
Total Income Tax (Expense) Benefit  (133,074)  273,666   (198,814)  (58,222)
                 
Net Income (Loss) $4,286,972  $1,186,911  $(2,130,298) $3,343,585 
                 
Supplemental Disclosures                
                 
Total Assets $22,200,123  $14,347,827  $1,491,201  $38,039,151 
                 
Total Liabilities $1,572,314  $1,321,011  $749,558  $3,642,883 
                 
Revenues from Intercompany Sales - eliminated from sales above $997,150  $354,373  $2,700,000  $4,051,523 
                 
Depreciation and Amortization $678,449  $105,775  $22,462  $806,686 
                 
Purchases of Long-lived Assets $811,352  $19,660  $167,323  $998,335 

36

Liquidity and Capital Resources

At

As of October 31, 2018,2021, the Company had an accumulated deficit of $33,748,575,$18,477,857, working capital of $14,881,096$31,310,563 and stockholders’ equity of $22,632,781.$41,049,073. For the periodyear then ended, the Company generated cash flow from operations of $2,430,649.$3,269,770.

 

We believe that our current level of cash and cash generation will be sufficient to meet our short-short and medium-term liquidity needs. AtAs of October 31, 2018,2021, we had cash on hand of approximately $7.5$17.75 million and both billed and unbilled receivables of approximately $6.3$5.29 million. Our current cash balance represents approximately one-year27 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 from HSBC 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 and extends to November 2022. To date, the Company has not borrowed any funds under this credit line.

Our main liquidity issues are:are forward buying components and inventory for our products which encompass specialized electronics for which there is no after-market except for the products which they are designed to for, funding our research and development program (“R&D”) which requires significant expenditures in attracting engineering skills and incurring non-recoverable and non-recurring costs for researching, developing and prototyping products;products and managing our currency exposure;exposure and servicing our senior secured debentures.

Our Colmek subsidiary received on or around October 24, 2016 a $1 million loan frombusiness development and marketing costs required for the CEO of Coda to fund the purchase of long lead-time inventory (which are typically subject to a lead time of 12-32 weeks) in order to be able to comply with delivery dates for contracts when they are secured. Subsequent to the year end, this loan and associated interest were repaid in full and all obligations under this loan have now been extinguished.

Substantially all our properties are owned by the Company and there are no mortgage obligations on those properties.

We have a significant concern about adverse currency fluctuations and the effect that those currency fluctuations have on our operations and profitability. As mentioned previously, Brexit has had a significant negative effect on the value of the British pound versus the U. S. dollar. A significant portionsuccess of our business is in the United Kingdom and the substantial decrease in the value of the British pound is reflected in lower revenues for our product sales. In addition, all our loans are denominated in U. S. dollars, which means that the dollar value of those loans has effectively gone up since these are partially serviced with British Pounds. While we have chosen not to hedge any of our currency exposure, we continue to evaluate the need to do so and will consider a hedging strategy if and when appropriate.business.

Operating Activities

Net cash generated from operating activities for the year ended October 31, 20182021 was $2,430,649.$3,269,770. We recorded net income for the period of $4,988,531.$4,947,765. 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 $1,206,907.$2,460,020. Funding from the Paycheck Protection Program was recognized as income and reduced cash from operating activities by $648,872. Changes in operating assets decreased net cash from operating activities by $4,136,911$4,772,155 and changes in current liabilities increased net cash from operating activities by $372,122.$1,283,012.

37

Investing Activities

Net cash used byin investing activities for the year ended October 31, 20182021 was $637,152 due to the sale and purchase of fixed assets.$964,204.

Financing Activities

Net cash usedprovided in financing activities for the year ended October 31, 20182021 was $942,382 as a result of$139,233 and resulted in paying down the debt of the Company and issuing stock for cash.receiving funding from the Paycheck Protection Program.

Secured Promissory Note

On April 28, 2017, Coda Octopus Group, Inc. (the “Company”) together with its wholly owned US subsidiaries, Coda Octopus Products, Inc. and Coda Octopus Colmek, Inc. (together, the “Subsidiaries”), entered into a loan agreement with HSBC Bank NA (the “Lender”) for a loan in the principal amount of $8,000,000 (the “Loan”). The annual interest rate is fixed at 4.56%. Commencing on May 28, 2017 and continuing on the 28th day of each month thereafter, the Company was required to make monthly principal and interest payments of $149,350 until April 28, 2022 (making our annual payments under this Note $1,792,200). In addition, within 30 days after the delivery to the Lender of the Company’s annual audited consolidated financial statements, the Company was required to make an annual principal payment of $700,000 during the term of the Loan. Such annual payments will reduce the balance of the principal outstanding. As a result, it was expected that the Loan will be repaid within a period of approximately 45 months. The Loan may be prepaid in whole or in part at any time subject to a break funding charge as detailed in the promissory note evidencing the Loan.

The obligations in connection with the repayment of the Loan are secured by all assets of the Company and its Subsidiaries. In addition, the repayment of the Loan is guaranteed by three of the Company’s overseas subsidiaries.

On or aroundIn March 28, 2018, with the consentCompany repaid a significant portion of the lender,outstanding HSBC NA, we reduced our indebtedness under the loan to HSBC significantly (including the annual amounts of $700,000 which was required under the loan) and asDebenture. As of October 31, 2018,2021, we had $63,559 outstanding under this loan.

The remaining balance of $63,559 was repaid by the Company is indebtedend of the calendar year of 2021 - see Note 16 Subsequent Events of Notes to this lender in the amount of $1,524,239. We did not incur any penalty or costs for the early pre-payments of these amounts. See Note 8 to the audited Consolidated Financial Statements Forfor further information on the Years Ended October 31, 2018 and 2017. We now anticipate thatHSBC Debentures.

All security interests held by HSBC NA is expected to be released pursuant to the remaining balance (principal and interest)terms of the Loan Documents (Security Agreement). There will then be repaid within 41 months from date of loan.

Private Placement

On January 29, 2018 (“Transaction Date”),no encumbrances relating to debentures recorded against the Company consummated the sale and issuance of 1,125,950 shares ofand/or its common stock in a private placement of shares of common stock at $4.40 per share (the “Offering”). Total gross proceeds from the Offering were $4,954,180. The purchase price per share was based on a 10% discount of the volume weighted average price of the common stock on the Nasdaq Capital Market for the 30-consecutive trading-day period ending on January 22, 2018. For a period of 36 months from the Transaction Date, the investors also have the right to purchase, based on their pro-rata ownership of common stock, shares (or securities convertible into shares) offered in subsequent offerings, subject to certain limited exceptions.assets.

Foreign Currency

The Company maintains its books in local currency: US Dollars for its US operations, British Pounds Sterling for its United Kingdom operations, Norwegian and Danish Kroner for its Norwegian and Danish operations respectively and Australian Dollars for its Australian operations.

For the fiscal year ended 2018, 42%2021 FY, 27% of the Company’s operations were conducted inside the United States and 58%73% outside the United States through its wholly owned subsidiaries. As a result, fluctuations in currency exchange ratesfluctuations may significantly affect the Company’s sales, profitability, balance sheet valuations and financial position when the foreign currencies of its international operations are translated into U.S. dollars for financial reporting.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.

38

The translation of the Company’s UK operations’ British Pound denominated balance sheets and results of operations into US dollars was(USD) are affected by changes in the average value of the US dollarUSD against the British Pound. The average exchange rate during the 2018 period was $1.3420 USD to the GBP against $1.2829 during the 2017 period – an appreciationcurrencies of the value of the GBP against the USD of 4.6%.our foreign subsidiaries (British, Danish and Australian) included in our consolidated results.

 

The translation of the Company’s Australian operations’ Australian Dollar denominated balance sheets and results of operations into US dollars was affected by changes in the average value of the US dollar against the Australian Dollar. The average exchange rate during the 2018 period was $0.7534 USD to the AUD against $0.7626 during the 2017 period – a depreciation of the value of the AUD against the USD of 1.2%.

The translation of the Company’s Danish operation’s Danish Kroner (DKK) denominated balance sheets and results of operations into US dollars has been affected by the currency fluctuations of the US dollar against the DKK from an average rate of $0.1535 during the period from March to October 2017, to $0.1590 during the 2018 period - an appreciation of the value of the DKK against the USD of 3.6%.

The Company’s Norwegian subsidiary is now dormant and the limited activities in that subsidiary is not material for the understanding of the impact of exchange rate fluctuations on Company’s results. The Norwegian operations are therefore not included in the below table.

British Operations 2021 FY and 2020 FY

 

British Pound against USDAverage exchange rate was $1.3758 USD to the GBP against $1.2897 USDAn increase in the value of the GBP against the USD by 6.7%
Australian Operations 2021 FY and 2020 FYAustralian Dollar (“AUD”) against USDAverage exchange rate was $0.7531 against $0.6830 USDAn increase in the value of the AUD against the USD by 10.3%
Danish Operations 2021 FY and 2020 FYDanish Kroner (DKK) against USDAverage exchange rate was $0.1603 against $0.1517 USD to the DKKAn increase in the value of the DKK against the USD by 5.7%

These are the values thatwe have been used in the calculations below.

Thebelow which show the impact of these currency fluctuations on our operations in the 2018 period is shown below:2021 FY:

  British Pounds  Australian Dollar  Danish Kroner  US Dollar 
  Actual  Constant  Actual  Constant  Actual  Constant  Total 
  Results  Rates  Results  Rates  Results  Rates  Effect 
Revenues  10,071,499   9,627,844   369,878   374,421   0   0   439,112 
Costs  (7,317,789)  (6,995,437)  (251,606)  (254,696)  (6,268)  (6,052)  (319,478)
Net profit (losses)  2,753,710   2,632,407   118,272   119,725   (6,268)  (6,052)  119,634 
Assets  14,343,504   14,886,646   229,085   247,541   13,225   13,631   (562,004)
Liabilities  (1,266,940)  (1,314,915)  (771)  (833)  437   450   48,024 
Net assets  13,076,564   13,571,731   228,314   246,708   13,662   14,081   (513,980)

  British Pounds  Australian Dollar  Danish Kroner  US Dollars 
  Actual Rates  Constant Rates  Actual Rates  Constant Rates  Actual Rates  Constant Rates  Actual Rates  Constant Rates  Total
Effect
 
Revenues  14,587,423   13,674,591   -   -   1,024,206   969,592   15,611,629   14,644,183   967,446 
Costs  10,429,820   9,777,157   (34,449)  (31,243)  37,767   35,753   10,433,138   9,781,667   651,471 
Net profit (losses)  4,157,603   3,897,434   34,449   31,243   986,439   933,839   5,178,491   4,862,516   315,975 
Assets  23,537,209   22,265,882   34,735   32,446   1,785,049   1,796,581   25,356,993   24,094,910   1,262,083 
Liabilities  (2,548,701)  (2,411,037)  (2,574)  (2,404)  (30,623)  (30,821)  (2,581,898)  (2,444,262)  (137,636)
Net assets  20,988,508   19,854,846   32,161   30,042   1,754,426   1,765,760   22,775,095   21,650,648   1,124,447 

This table shows that the effect of constant exchange rates, versus the actual exchange rate fluctuations, increased net income for the year by $119,634$315,975 and decreasedincreased net assets by $513,980. All of these$1,124,447. These amounts are material to our overall financial results.

As a resultSince the UK voted to leave the European Union membership in 2016 until recently, the UK’s future trade relationship with the European Union was uncertain. This uncertainty gave rise to significant volatility of Brexit, we expect economic uncertaintythe UK Pound against major currencies including the US Dollar causing us to increase until the negotiations for the British exit have been completed andsuffer losses due to currency fluctuations. With the future relationship betweennow determined, it is anticipated that the UK and the EU is fully clarified. This uncertainty will most likely continue to have a profound effect on the value of the British Pound. Since approximately 56% of our revenues are transacted and generated in that British Pound, we expect our revenues to continue to be impacted by the adverse movement offluctuations between the British Pound againstand other major currencies including the US Dollar. We also expect our direct costs of sales for components sourced outside of the UK for our UK operationsDollar will not be as extreme and we anticipate that losses suffered due to increase. Furthermore, our balance sheet will be affected since a significant part of our assets (fixed and current) are held in British Pounds by our UK subsidiaries.this is likely to reduce.

Off-Balance Sheet Arrangements

We do not have any off balanceoff-balance sheet arrangements.

Inflation

 

Inflation

The effect of inflation on the Company’s operating results in the 2021 FY was not significant.

Notwithstanding, while the past few years have seen fairly benign rates of inflation in labour and materials both in the countries in which we operate, those that we source from and those that we sell to, since the end of the 2021 FY,we are now seeing worrying signs of inflation in almost all countries. In the US, UK and Denmark, countries in which we have operations, inflation has moved from 1.2%, 0.9%, and 0.3% in 2020 to 7.0%, 5.4%, and 1.6% today respectively.

This is combined with shortages of supply both in components and availability of skills and labour. As examples, we have seen labour rates for new hires in the US, UK and Denmark rise by approximately 10%, which leads to knock-on demands for increased pay across all our existing staff. We have also seen some key component availability go from 4-week lead time to 78 weeks combined with significant during the 2018 period.

Seasonality

Resultsprice increases of operationson some components for our Products Segmentproducts. The levels of our margins are impacted bytherefore 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 offshore drilling season. During the winter months, when less offshore drilling takes place, demand for our oil and gas related technology is typically at its lowest.Far East inflation profiles are very different).

39

ItemITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Index of Financial statements following Part III of this Report for a listing of the Company’s Consolidated Financial Statements and Supplementary Data.Notes thereto.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

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 (the “SEC”) 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, performed 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 October 31, 2021. 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.

Management’s Report on Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed by, or under the supervision of, a public company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US generally accepted accounting principles (“US GAAP”) including those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as of October 31, 2021. In making this assessment, our management used the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013 Framework). Based on its assessment, our management believes that, as of October 31, 2021, our internal control over financial reporting was effective based on those criteria.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

During the year ended October 31, 2021, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d–15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. Other Information

Not Applicable

40

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Directors and Executive Officers

The following persons are the executive officers and directors as of the date hereof:

NameAgePosition
Annmarie Gayle57Chief Executive Officer and Chairman
Michael Midgley69Chief Financial Officer,
Kevin Kane57Chief Executive Officer (Coda Octopus Colmek)
Blair Cunningham52President of Technology
Michael Hamilton74Director
Captain Charlie Plumb79Director
Mary Losty61Director
Tyler G. Runnels65Director

Annmarie Gayle has been our Chief Executive Officer and a member of the Board of Directors since 2011 and our Chairman since March 2017. She is also our Chief Executive Officer for our flagship products business, Coda Octopus Products, Limited (UK) since 2013. Prior thereto, she spent two years assisting with the restructuring of our Company. She previously served with the Company as Senior Vice President of Legal Affairs between 2006 and 2007. Earlier in her career she worked for a leading City-London law firm specializing in Intellectual Property Rights, the United Nations and the European Union. Ms. Gayle has a strong background in restructuring and has spent more than 12 years in a number of countries where she has been the lead adviser to a number of transitional administrations on privatizing banks and reforming state-owned assets in the Central Eastern European countries including banking, infrastructure, mining and telecommunications assets. Ms. Gayle has also managed a number of large European Union funded projects providing transitional support and capacity. Ms. Gayle holds a Law degree gained at the University of London and a Master of Law degree in International Commercial Law from Cambridge University and has completed her professional law exams to practice law in England & Wales. Because of her wealth of experience in corporate governance, large scale project management, restructuring, strategy, structuring and managing corporate transactions, we believe that she is highly qualified to act as our Chief Executive Officer.

Michael Midgley joined the Company in the capacity as Financial Controller in 2008. He was appointed as our Chief Financial Officer in December 2017 and has been our acting Chief Financial Officer since 2013. He also served as Chief Executive Officer of Colmek from 2010 to July 2021. He is a qualified CPA and has had his own practice as well as working for regional accounting firms, specializing in SEC and Tax practice areas. Mr. Midgley attended the University of Utah where he obtained a BA in Accounting. Due to Mr. Midgley’s expertise in financial reporting, we believe that he is highly qualified to serve as the Company’s Chief Financial Officer.

Blair Cunningham joined the Company in July 2004 and has had a number of roles in the Company including Chief Technology Officer between July 2004 and July 2005. He is currently our President of Technology. Mr. Cunningham received an HND in Computer Science in 1989 from Moray College of Further Education, Elgin, Scotland. Because of Mr. Cunningham’s expertise in technology, systems software development and project management, the Company believes that he is highly qualified to serve in his current roles.

Kevin Kane joined the Company in July 2021. He is the Chief Executive Officer of Coda Octopus Colmek, Inc. (“Colmek”). Mr. Kane holds a Bachelor of Science Degree in Computer Engineering from the Rochester Institute of Technology, and a Master of Business Administration degree from Saint John Fisher College (USA). Because of Kane’s background and experience working with Prime Defense Contractors in the area of business development, the Company believes that he is highly qualified to serve as the Divisional Chief Executive Officer of Colmek.

Michael Hamilton was our Chairman of the Board between June 2010 and March 2017. He is currently serving as an independent director of our Board. Since 2014, Mr. Hamilton has provided accounting and valuation services for a varied list of clients. He was Senior Vice President of Powerlink Transmission Company from 2011 through 2014. From 1988 to 2003, he was an audit partner at PricewaterhouseCoopers. He holds a Bachelor of Science in Accounting from St. Frances College and is a certified public accountant and is accredited in business valuation. Because of Mr. Hamilton’s background in auditing, strategic corporate finance solutions, financial management and financial reporting, we believe that he is highly qualified to be a member of our Board of Directors.

G. Tyler Runnels was elected as a director at the 2018 annual meeting. Mr. Runnels has nearly 30 years of investment banking experience including debt and equity financings, private placements, mergers and acquisitions, initial public offerings, bridge financings, and financial restructurings. Since 2003 Mr. Runnels has been the Chairman and Chief Executive Officer of T.R. Winston & Company, LLC, an investment bank and member of FINRA, where he began working in 1990. Mr. Runnels was an early-stage investor in our company and T.R. Winston & Company, LLC has served as our exclusive placement agent in one of our private placements raising early rounds of capital for our company. Mr. Runnels has successfully completed and advised on numerous transactions for clients in a variety of industries, including healthcare, oil and gas, business services, manufacturing, and technology. Mr. Runnels is also responsible for working with high-net-worth clients seeking to diversify their portfolios to include real estate products through established relationships with real estate brokers, accountants, attorneys, qualified intermediaries and financial advisors. Prior to joining T.R. Winston & Co., LLC, Mr. Runnels held the position of Senior Vice President of Corporate Finance for H.J. Meyers & Company, a regional investment bank. Mr. Runnels received a B.S. and MBA from Pepperdine University. Mr. Runnels holds FINRA Series 7, 24, 55, 63 and 79 licenses.

41

Captain J. Charles Plumb has been a member of Coda’s Board of Directors since September 2019. Captain Plumb is a retired U.S. Navy fighter pilot. On his 75th combat mission, just five days before the end of his tour in Vietnam, he was shot down over Hanoi, taken prisoner and tortured. During his nearly six years as a prisoner of war, he distinguished himself as a pro in underground communications. He was a great inspiration to all the other POWs and served as chaplain for two years. Following his repatriation, Captain Plumb continued his Navy flying career in Reserve Squadrons where he flew A-4 Sky Hawks, A-7 Corsairs and FA-18 Hornets. His last two commands as a Naval Reservist were on the Aircraft Carrier Corral Sea and at Fighter Air Wing in California. He retired from the United States Navy after 28 years of service. His military honors include two Purple Hearts, the Legion of Merit, the Silver Star, the Bronze Star and the P.O.W. Medal. He has been a motivational speaker, consultant and executive coach since 1973. His clients include General Motors, FedEx, Hilton, Aflac, the U.S. Navy, BMW and NASA. Since 2010, he has been member of the Board of Directors of the Lightspeed Aviation Foundation. Captain Plumb earned a B.S. in electrical engineering from the U.S. Naval Academy at Annapolis. We selected Captain Plumb to be a member of the Board of Directors because of his close ties to the U.S. Defense establishment.

Mary Losty has been a director since July 2017. She is a private investor in both US equities and real estate. She currently serves as Commissioner on both Dorchester County and the City of Cambridge, Maryland’s Planning and Zoning Commissions. She also serves as a Committeeman for the Eastern Shore Land Conservancy as well as the Pine Street Committee of Cambridge, MD. She served as a member of the Board of Procera Networks, Inc. from March 2007 until that company was successfully sold in June 2015 to a private equity firm. She was a member of that company’s Audit Committee and the former Chairman of the Nominating and Governance Committee. Ms. Losty was a director of Blue Earth, Inc. (formerly Genesis Fluid Solutions Holdings, Inc.) from 2009 to 2011. Ms. Losty retired in 2010 as the General Partner at Cornwall Asset Management, LLC, a portfolio management firm located in Baltimore, Maryland, where she was responsible for the firm’s investment in numerous companies since 1998. Ms. Losty’s prior experience includes working as a portfolio manager at Duggan & Associates from 1992 to 1998 and as an equity research analyst at M. Kimelman & Company from 1990 to 1992. Prior to that, she worked as an investment banker at Morgan Stanley and Co., and for several years prior to that she was the top aide to James R. Schlesinger, a five-time U.S. cabinet secretary. Ms. Losty received both her BS and JD from Georgetown University, the latter with magna cum laude distinction. We believe that Ms. Losty’s extensive dealings with the investment community makes her highly qualified to be a member of our Board of Directors.

Family Relationships

Other than Tyler Runnels and Charlie Plumb who are brothers in law, none of our Directors are related by blood, marriage, or adoption to any other Director, executive officer, or other key employees.

42

Board Leadership Structure

The Board of Directors is currently chaired by the Chief Executive Officer of the Company, Annmarie Gayle. The Company believes that combining the positions of Chief Executive Officer and Chairman of the Board of Directors helps to ensure that the Board of Directors and management act with a common purpose. Integrating the positions of Chief Executive Officer and Chairman can provide a clear chain of command to execute the Company’s strategic initiatives. The Company also believes that it is advantageous to have a Chairman with an extensive history with, and knowledge of, the Company. Notwithstanding the combined role of Chief Executive Officer and Chairman, key strategic initiatives and decisions involving the Company are discussed and approved by the entire Board of Directors. The Company believes that the current leadership structure and processes maintains an effective oversight of management and independence of the Board of Directors as a whole without separate designation of a lead independent director. However, the Board of Directors will continue to monitor its functioning and will consider appropriate changes to ensure the effective independent function of the Board of Directors in its oversight responsibilities.

Independence of the Board of Directors and its Committees

After review of all relevant transactions or relationships between each director, or any of his or her family members, and the Company, its senior management and its Independent Registered Public Accounting Firm, the Board of Directors has determined that all of the Company’s directors are independent within the meaning of the applicable NASDAQ listing standards, except Ms. Gayle, the Company’s Chairman and Chief Executive Officer. The Board of Directors met 4 times and acted by unanimous written consent 4 times during the fiscal year ended October 31, 2021. Each member of the Board of Directors attended all meetings of the Board of Directors held in the last fiscal year during the period for which he or she was a director and of the meetings of the committees on which he or she served in the last fiscal year during the period for which he or she was a committee member.

The Board of Directors has three committees: the Audit Committee, the Compensation Committee and the Nominating Committee. Below is a description of each committee of the Board of Directors. The Board of Directors has determined that each member of each committee meets the applicable rules and regulations regarding “independence” and that each member is free of any relationship that would interfere with his or her individual exercise of independent judgment with regard to the Company.

Audit Committee

The Audit Committee of the Board of Directors oversees the Company’s corporate accounting and financial reporting process. For this purpose, the Audit Committee performs several functions. The Audit Committee, among other things: evaluates the performance, and assesses the qualifications, of the Independent Registered Public Accounting Firm; determines and pre-approves the engagement of the Independent Registered Public Accounting Firm to perform all proposed audit, review and attest services; reviews and pre-approves the retention of the Independent Registered Public Accounting Firm to perform any proposed, permissible non-audit services; determines whether to retain or terminate the existing Independent Registered Public Accounting Firm or to appoint and engage a new independent registered Public Accounting Firm for the ensuing year; confers with management and the Independent Registered Public Accounting Firm regarding the effectiveness of internal control over financial reporting; establishes procedures as required under applicable law, for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters and the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters; reviews the financial statements to be included in the Company’s Annual Report on Form 10-K and the Company’s periodic quarterly filings on Form 10-Q, recommends whether or not such financial statements should be so included; and discusses with management and the Independent Registered Public Accounting Firm the results of the annual audit and review of the Company’s quarterly financial statements.

The Audit Committee is currently composed of three outside directors: Michael Hamilton (Chairman), Mary Losty and Captain J. Charles Plumb. The Audit Committee met four times during the fiscal year ended October 31, 2021. The Audit Committee Charter is available on the Company’s website, www.codaoctopusgroup.com.

43

The Board of Directors periodically reviews the NASDAQ listing standards’ definition of independence for Audit Committee members and has determined that all members of the Company’s Audit Committee are independent (as independence is currently defined in Rule 5605(c)(2)(A) of the NASDAQ listing standards and Rule 10A-3(b)(1) of the Securities Exchange Act, as amended). The Board of Directors has determined that Michael Hamilton qualifies as an “audit committee financial expert,” as defined in applicable SEC rules. The Board of Directors made a qualitative assessment of Mr. Hamilton’s level of knowledge and experience based on a number of factors, including his formal education and his service in executive capacities having financial oversight responsibilities.

Compensation Committee

The Compensation Committee of the Board of Directors reviews, modifies and approves the overall compensation strategy and policies for the Company. The Compensation Committee, among other things, reviews and approves corporate performance goals and objectives relevant to the compensation of the Company’s officers; determines and approves the compensation and other terms of employment of the Company’s Chief Executive Officer; determines and approves the compensation and other terms of employment of the other officers of the Company; and administers the Company’s stock option and purchase plans, pension and profit sharing plans and other similar programs.

The Compensation Committee is composed of three outside directors: Michael Hamilton (Chairman), Mary Losty and G. Tyler Runnels. All members of the Compensation Committee are independent (as independence is currently defined in Rule 5605(a)(2) of the NASDAQ listing standards). The Compensation Committee met three times during the fiscal year ended October 31, 2021. The Compensation Committee Charter is available on the Company’s website at: www.codaoctopusgroup.com.

Compensation Committee Interlocks and Insider Participation

No member of our compensation committee has at any time been an employee of ours. None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

Nominating Committee

The Nominating Committee of the Board of Directors is responsible for, among other things, identifying, reviewing and evaluating candidates to serve as directors of the Company; reviewing, evaluating and considering incumbent directors; recommending to the Board of Directors candidates for election to the Board of Directors; making recommendations to the Board of Directors regarding the membership of the committees of the Board of Directors, and assessing the performance of the Board of Directors.

The Nominating and Governance Committee is currently composed of three outside directors: Mary Losty (Chair), G. Tyler Runnels and Captain J. Charles Plumb. All members of the Nominating Committee are independent (as independence is currently defined in Rule 5605(a)(2) of the NASDAQ listing standards). The Nominating Committee met one time during the fiscal year ended October 31, 2021. The Nominating Committee Charter is available on the Company’s website at www.codaoctopusgroup.com.

The Nominating Committee has not established any specific minimum qualifications that must be met for recommendation for a position on the Board of Directors. Instead, in considering candidates for director the Nominating Committee will generally consider all relevant factors, including among others the candidate’s applicable education, expertise and demonstrated excellence in his or her field, the usefulness of the expertise to the Company, the availability of the candidate to devote sufficient time and attention to the affairs of the Company, the candidate’s reputation for personal integrity and ethics and the candidate’s ability to exercise sound business judgment. Other relevant factors, including diversity, experience and skills, will also be considered. Candidates for director are reviewed in the context of the existing membership of the Board of Directors (including the qualities and skills of the existing directors), the operating requirements of the Company and the long-term interests of its stockholders.

44

The Nominating Committee considers each director’s executive experience and his or her familiarity and experience with the various operational, scientific and/or financial aspects of managing companies in our industry.

With respect to diversity, the Nominating Committee seeks a diverse group of individuals who have executive leadership experience and a complementary mix of backgrounds and skills necessary to provide meaningful oversight of the Company’s activities. The Company meets the NASDAQ standards for diversity on the board of directors. The Nominating Committee annually reviews the Board’s composition in light of the Company’s changing requirements. The Nominating Committee uses the Board of Director’s network of contacts when compiling a list of potential director candidates and may also engage outside consultants. Pursuant to its charter, the Nominating Committee will consider, but not necessarily recommend to the Board of Directors, potential director candidates recommended by stockholders. All potential director candidates are evaluated based on the factors set forth above, and the Nominating Committee has established no special procedure for the consideration of director candidates recommended by stockholders.

Employment Agreements

Annmarie Gayle

Pursuant to the terms of an employment agreement dated March 16, 2017, the Company employs Ms. Gayle as its Chief Executive Officer on a full-time basis and a member of its Board of Directors. Effective July 1, 2019, Ms. Gayle’s annual salary was revised from $230,000 to $305,000. She is also entitled to an annual performance bonus of up to $100,000, upon achieving certain targets that are to be defined on an annual basis. The agreement provides for 30 days of paid vacation in addition to public holidays observed in Denmark where she is resident.

The agreement has no definitive term and may be terminated upon twelve months’ prior written notice by Ms. Gayle. In the event that the Company terminates her at any time without cause, she is entitled to a payment equal to her annual salary as well as a separation bonus of $150,000. The Company may terminate the agreement for cause, immediately and without notice. Among others, “for cause” includes gross misconduct, a serious or repeated breach of the agreement and negligence and incompetence as reasonably determined by the Company’s Board. The agreement includes a 12-month non-compete and non-solicitation provision.

Blair Cunningham

Under the terms of an employment contract dated January 1, 2013, our wholly owned subsidiary Coda Octopus Products, Inc. employs Blair Cunningham as its Chief Executive Officer and President of Technology. He is being paid an annual base salary of $200,000 with effect from January 1, 2020, subject to review by the Company’s Chief Executive Officer. Mr. Cunningham is entitled to 25 vacation days in addition to any public holiday.

The agreement may be terminated only upon twelve-month prior written notice without cause. The Company may terminate the agreement for cause, immediately and without notice. Among others, “for cause” includes gross misconduct, a serious or repeated breach of the agreement and negligence and incompetence as reasonably determined by the Company’s Board. The agreement includes an 18-month non-compete and non-solicitation provision.

Michael Midgley

Pursuant to the terms of an employment agreement dated June 1, 2011, Mike Midgley was appointed the Chief Executive Officer of our wholly owned subsidiary Coda Octopus Colmek, Inc and our Chief Financial Officer. He is being paid an annual salary of $210,000 with effect from January 1, 2020, subject to an annual review by Colmek’s Board of Directors and the Company’s Chief Executive Officer. Mr. Midgley is entitled to 20 vacation days in addition to any public holiday.

45

Change in Role

On December 6, 2017, the board of directors of the Company appointed Mr. Midgley to be the Company’s Chief Financial Officer. In connection with this appointment, all rights and obligations under Mr. Midgley’s employment agreement with Colmek were transferred to and have been assumed by the Company.

Amendment to Michael Midgley’s Employment Agreement

The Company and Mr. Midgley entered into an agreement for the Amendment of his Employment Agreement on February 15, 2021.

The following amendments were made:

RoleNow Chief Financial Officer of the Company. Removing the position of CEO of Coda Octopus Colmek.
Reduction in hoursWorking hours reduced to approximately 60% and his compensation reduced proportionally to $126,000.
Paid Time OffReduced proportionately and is now 12 days
BenefitsReduced proportionately

The agreement may be terminated at any time upon 4 months prior written notice. The Company may terminate the agreement for cause, immediately and without notice. Among others, “for cause” includes gross misconduct, a serious or repeated breach of the agreement and negligence and incompetence as reasonably determined by the Company’s Board. The agreement includes a 12-month non-compete and non-solicitation provision.

Kevin Kane

Pursuant to the terms of an Employment Agreement dated May 7, 2021, as amended and modified, Kevin Kane was appointed the Chief Executive Officer of Colmek commencing July 6, 2021. The Employment Agreement provides for an annual base salary of $200,000. He will also be eligible for an annual performance bonus based on the Company’s financial performance. Assuming that the Company meets its targets during the current fiscal year, Mr. Kane will be paid a performance bonus of $12,000. As a further inducement, he was granted 15,000 restricted stock units out of the Company’s 2017 Stock Incentive Plan that vest in three equal annual instalments commencing on the first anniversary of grant.

The agreement may be terminated by the Company at any time. In the event that the Company terminates the employment agreement for whatever reason, the following severance payments apply:

Year 1 of employment2 Weeks
Year 2 of employment1 Month
Year 3 of employment4 Months

The agreement includes a 12-month non-compete and non-solicitation provision.

Code of Ethics

We have adopted a code of ethics for all our employees, including our chief executive officer, principal financial officer and principal accounting officer or controller, and/or persons performing similar functions, which is available on our website, under the link entitled “Code of Ethics”.

46

ITEM 11. EXECUTIVE COMPENSATION

The Summary Compensation Table shows certain compensation information for services rendered for the fiscal years ended October 31, 2021 and 2020 by our executive officers. The following information includes the dollar value of base salaries, bonus awards, stock options grants and certain other compensation, if any, whether paid or deferred.

Name and Principal Position Year Salary  Bonus  Restricted Stock Awards  Option Awards  * All Other Compensation  Total 
    ($)  ($)  ($)  ($)  ($)  ($) 
Annmarie Gayle* 2021  305,000   100,000   -0-   -0-   -0-   405,000 
Chief Executive Officer 2020  271,115   -0-       221,000   -0-   491,115 
                           
Michael Midgley 2021  193,846   -0-   26,400-   

-0-

   16,633   236,879 
Chief Financial Officer 2020  208,077   -0-   -0-   221,000   15,998   445,075 
                           
Kevin Kane** 2021  86,615   -0-   132,000   -0-   

431

   

219,046

 
Divisional Chief Executive Officer 2020  -0-   -0-   -0-   -0-   -0-   -0- 
                           
Blair Cunningham 2021  213,160   -0-   26,400   -   20,857   260,417 
President of Technology 2020  195,192   -0-   -0-   165,750   19,257   380,199 

*The amounts described in the category of “All Other Compensation” comprise Health, Dental, Vision, Short Term Disability, Long Term Disability and Accidental Death and Dismemberment insurance premiums which the Company contributed to the officers’ identified plan.

* Ms. Gayle’s annual salary is $305,000. During the Pandemic she waived certain amounts of her salary as is disclosed on Form 8-K filed with the SEC in 2020.

** Mr. Kevin Kane took over as Divisional Chief Executive Officer of Coda Octopus Colmek in July 2021. Previously, this role had been discharged by Mr. Michael Midgley.

Grants of restricted stock awards at October 31, 2021

Name Grant Date All other
restricted
awards;
number of
securities
underlying
restricted stock
awards
  Exercise
or base
price of
restricted stock
awards
  Grant date
fair value
of restricted stock
awards
 
Kevin Kane 6/9/2021  15,000   8.80   132,000 
Michael Midgley 6/9/2021  3,000   8.80   26,400 
Blair Cunningham 6/9/2021  3,000   8.80   26,400 

Outstanding option awards at October 31, 2021

  Option Awards
Name Number of
securities
underlying
unexercised
options
exercisable
  Number of
securities
underlying unexercised
options
unexercisable
  Exercise
or base
price of
option
swards
  Option
expiration
date
Annmarie Gayle  66,667         -   4.62  3/23/2023
Michael Midgley  66,667   -   4.62  3/23/2023
Blair Cunningham  50,000   -   4.62  3/23/2023

47

Option exercises for October 31, 2021

  Option Awards 
Name Number of
shares
acquired on
exercise
  Value
realized on
exercise
 
Annmarie Gayle  16,630   76,831 
Michael Midgley  16,107   74,415 
Blair Cunningham  11,456   52,927 

DIRECTOR COMPENSATION

The following table sets forth the compensation paid to each of our directors (who are not also officers of the Company) for the fiscal year ended October 31, 2021, in connection with their services to the company. In accordance with the SEC’s rules, the table omits columns showing items that are not applicable. Except as set forth in the table, no other persons were paid any compensation for director services.

Name Fees Earned
or Paid in
Cash ($)
  Stock Awards
($)
  Total
($)
 
Michael Hamilton  40,000   -   40,000 
Captain J Charles Plumb  40,000   -   40,000 
Mary Losty  40,000   -   40,000 
Tyler G Runnels  40,000       40,000 

Stock Incentive Plans

 

The Company has two active Stock Incentive Plan. 2017 Stock Incentive Plan and 2021 Stock Incentive Plan.

2017 Stock Incentive Plan

On December 6, 2017, the Board of Directors adopted the 2017 Stock Incentive Plan (the “2017 Plan”). The purpose of the Plan is to advance the interests of the Company and its stockholders by enabling the Company and its subsidiaries to attract and retain qualified individuals through opportunities for equity participation in the Company, and to reward those individuals who contribute to the Company’s achievement of its economic objectives. The Plan was adopted subject to stockholders’ approval. This Plan was approved by Stockholders at its meeting held on July 24, 2018.

The maximum number of shares of Common Stock that will be available for issuance under the Plan is 913,612. The shares available for issuance under the Plan may, at the election of the Committee, be either treasury shares or shares authorized but unissued, and, if treasury shares are used, all references in the Plan to the issuance of shares will, for corporate law purposes, be deemed to mean the transfer of shares from treasury.

The Plan is administered by the Compensation Committee of the Board of Directors which has the authority to determine all provisions of Incentive Awards as the Committee may deem necessary or desirable and as consistent with the terms of the Plan, including, without limitation, the following: (i) eligible recipients; (ii) the nature and extent of the Incentive Awards to be made to each Participant; (iii) the time or times when Incentive Awards will be granted; (iv) the duration of each Incentive Award; and (v) the restrictions and other conditions to which the payment or vesting of Incentive Awards may be subject.

During the fiscal year ended October 31, 2021, the Company granted 127,500 restricted stock awards to purchase an aggregate of 127,500 shares of common stock pursuant to the terms of the 2017 Plan to various eligible individuals. During the year 8,000 options were forfeited. As a result, as of October 31, 2021, there were 238,112 shares available for future issue under the 2017 Plan.

2021 Stock Incentive Plan

On July 12, 2021, the Board of Directors adopted the 2021 Stock Incentive Plan (the “2021 Plan”). The 2021 Plan was approved by the Company’s stockholders at its meeting held on August 2, 2021.  The 2021 Plan is identical to the 2017 in all material respects, except that the number of shares available for issuance thereunder is 1,000,000.

During the fiscal year ended October 31, 2021, no grants were made under the 2021 Plan and there were 1,000,000 shares available for future issue under the 2021 Plan.

Section 16(a) Beneficial Ownership Reporting Compliance

Under the Exchange Act, our directors, our executive officers, and any persons holding more than 10% of our common stock are required to report their ownership of the common stock and any changes in that ownership to the SEC. To our knowledge, based solely on our review of the copies of such reports received or written representations from certain reporting persons that no other reports were required, except as set forth below, we believe that during our fiscal year ended October 31, 2020, no reports relating to our securities required to be filed by current reporting persons were filed late.

We will continue monitoring Section 16 compliance by each of our directors and executive officers and will assist them where possible in their filing obligations.

48

ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of January 31, 2022, regarding the beneficial ownership of our Common Stock, based on information provided by (i) each of our executive officers and directors; (ii) all executive officers and directors as a group; and (iii) each person who is known by us to beneficially own more than 5% of the outstanding shares of our Common Stock. The percentage ownership in this table is based on 10,857,195 shares issued and outstanding as of January 31, 2022.

Unless otherwise indicated, we believe that all persons named in the following table have sole voting and investment power with respect to all shares of Common Stock that they beneficially own.

Name and Address of Beneficial Owner (1)   Amount and
Nature
of Beneficial
Ownership of
Common Stock
  Percent of
Common Stock
 
Michael Hamilton  1,143     * 
Annmarie Gayle (2)    2,304,581   21.2%
Michael Midgley (3)    33,333     * 
Blair Cunningham (4)    52,298     * 
Kevin Kane (5)    -0-   n/a   
J. Charles Plumb  11,434     * 
Mary Losty  57,143     * 

Niels Sondergaard

Carit Etlars Vej 17A
8700 Horsens
Denmark

  2,241,581   20.6%

G. Tyler Runnels (6)

2049 Century Park East, Suite 320

Los Angeles, CA 90067  

  1,125,685   10.4%

J. Steven Emerson (7)

1522 Ensley Avenue

Los Angeles, CA 90024  

  1,168,232   10.8%

Bryan Ezralow (8)

23622 Calabasas Rd. Suite 200

Calabasas, CA 91302  

  1,073,120   9.9%

Tocqueville Asset Management LP

40 West 57th Street, 19th Floor
New York, NY 10019

  544,003   5.0%
All Directors and Executive Officers as a Group (Eight persons):  3,585,617   33.0%

*) Less than 1%.

1)Unless otherwise indicated, the address of all individuals and entities listed below is c/o Coda Octopus Group, Inc. 3300 S Hiawassee Rd, Suite 104-105, Orlando, Florida, 32835.
2)Consists of 29,667 shares held by Ms. Gayle and 2,241,581 shares beneficially owned by Ms. Gayle’s spouse, Niels Sondergaard. Ms. Gayle disclaims any beneficial ownership in those shares. Also includes 33,333 shares issuable upon exercise of options that will become exercisable within 60 days of the date hereof.
3)Consist of shares issuable upon exercise of options that will become exercisable within 60 days of the date hereof.
4)Includes 25,000 shares issuable upon exercise of options that will become exercisable within 60 days of the date hereof.
5)Does not include 15,000 shares issuable upon excise of restricted stock award units that vest in three equal annual installments commencing on July 6, 2022.
6)Includes 859,331 shares held by the G. Tyler Runnels and Jasmine Niklas Runnels TTEES of The Runnels Family Trust DTD 1-11-2000 of which Mr. Runnels is a trustee; 227,700 shares held by T.R. Winston; 24,368 shares held by TRW Capital Growth Fund, Ltd.; and 14,286 shares held by Pangaea Partners. The Company has been advised that Mr. Runnels has voting and dispositive power with respect to all of these shares.
7)Includes the following: 167,081 held by J. Steven Emerson IRA R/O II; 300,000 shares held by J. Steven Emerson Roth IRA; 49,328 shares held by the Brian Emerson IRA; 310,928 shares held by Emerson Partners; 180,250 shares held by 1993 Emerson Family Trust; 8,286 shares held by the Alleghany Meadows IRA; 8,286 shares held by the Jill Meadows IRA; and 144,073 shares held by the Emerson family Foundation. The Company has been advised that Mr. Emerson has voting and dispositive power with respect to all of these shares.
8)Consists of 896,079 shares held by the Bryan Ezralow 1994 Trust u/t/d 12/22/1994; and 177,041 shares held by EZ MM&B Holdings, LLC. According to filings made with the SEC, Mr. Ezralow has voting and dispositive power with respect to these shares.

49

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

None that are required to be reported herein.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees. The aggregate fees billed by Frazier & Deeter, LLC, our principal accountants, for professional services rendered for the audit and audit related services of the Company’s annual financial statements for the last two fiscal years and for the reviews of the financial statements included in the Company’s Quarterly reports on Form 10-Q during the last two fiscal years 2021 and 2020 were $247,118 and $212,369 respectively.

Tax Fees. The Company did not engage its principal accountants to render any tax services to the Company during the last two fiscal years.

All Other Fees. The Company did not engage its principal accountants to render services to the Company during the last two fiscal years, other than as reported above.

Prior to the Company’s engagement of its independent auditor, such engagement is approved by the Company’s Audit Committee. The services provided under this engagement may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. Pursuant to the Company’s Audit Committee Charter, the independent auditors and management are required to report to the Company’s audit committee at least quarterly regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The audit committee may also pre-approve particular services on a case-by-case basis. All audit-related fees, tax fees and other fees incurred by the Company for the year ended October 31, 2021, were approved by the Company’s audit committee.

50

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

Exhibit NumberDescription
2.1Plan and Agreement of Merger dated July 12, 2004 by and between Panda and Coda Octopus *
3.1Restated Certificate of Incorporation**
3.1.1.Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock******
3.2By-Laws *
10.25Deed of Amendment to Loan Note Transaction Documents dated October 31, 2015 by and between the Company and CCM Holdings LLC***
10.26[Reserved]
10.27Employment Contract between Coda Octopus Colmek, Inc. and Mike Midgley****
10.28[Reserved]
10.29Employment Contract dated January 1, 2013 between Coda Octopus Products, Inc. and Blair Cunningham****
10.30Deed of Amendment to Loan Note Transaction Documents dated October 17, 2016 by and between the Company and CCM Holdings LLC**
10.31Deed of Amendment to Loan Note Transaction Documents dated November 1, 2016 by and between the Company and CCM Holdings LLC*****
10.32Employment Contract dated March 16, 2017 between the Company and Annmarie Gayle*****
10.33Loan Agreement, dated as of April 28, 2017, by and between Coda Octopus Group, Inc., Coda Octopus Products, Inc., Coda Octopus Colmek, Inc. and HSBC Bank USA, N.A.******
10.34Form of Security Agreement, dated April 28, 2017******
10.35Promissory Note dated April 28, 2017******
10.362017 Stock Incentive Plan*******
10.37Employment Agreement dated May 7, 2021 between Coda Octopus Colmek, Inc and Kevin Kane (filed herewith)
10.382021 Stock Incentive Plan*******
14Code of Ethics*******
23.1Consent of Frazier & Deeter, LLC (filed herewith)
31.1Chief Executive Office and Chief Financial Officer Certification
32Certificate Pursuant to 18 U.S.C Section 1350
101.INSInline XBRL Instance Document
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (embedded within the Inline XBRL document)

*Incorporated by reference to the Company’s Registration Statement on Form SB-2 (SEC File No.143144)
**Incorporated by reference to the Company’s Registration Statement on Form 10.
***Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year ended October 31, 2007
****Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year ended October 31, 2010
*****Incorporated by reference to the Company’s Registration Statement on Form 10/A filed March 29,2017
******Incorporated by reference to the Company’s Current Report on Form 8-K filed May 2, 2017
*******Incorporated by reference to the Company’s Annual Report on Form 10 for the year ended October 31, 2017
********Incorporated by reference to the Company’s Definitive Proxy Statement filed August 2, 2021

51

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATE: February 14, 2022CODA OCTOPUS GROUP, INC.
/s/ Annmarie Gayle
Chief Executive Officer

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints Annmarie Gayle, his or her true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, severally, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney may be executed in counterparts.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SignatureTitleDate
/s/ Annmarie GayleChief Executive Officer and ChairmanFebruary 14, 2022
Annmarie Gayle(Principal Executive Officer)
/s/ Michael MidgleyChief Financial OfficerFebruary 14, 2022
Michael Midgley(Principal Financial and Accounting Officer)
/s/ Michael HamiltonDirectorFebruary 14, 2022
Michael Hamilton
/s/ Captain Charlie PlumbDirectorFebruary 14, 2022
Charlie Plumb
/s/ Mary LostyDirectorFebruary 14, 2022
Mary Losty
/s/ G. Tyler RunnelsDirectorFebruary 14, 2022

52

CODA OCTOPUS GROUP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRMF-1
CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 20182021 AND 20172020F-2
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED OCTOBER 31, 20182021 AND 20172020F-4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED OCTOBER 31, 20182021 AND 20172020F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED OCTOBER 31, 20182021 AND 20172020F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSF-7

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Coda Octopus Group, Inc.

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Coda Octopus Group, Inc. and subsidiaries (the “Company”) as of October 31, 20182021 and 2017,2020, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for the years ended October 31, 20182021 and 2017,2020, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 20182021 and 2017,2020, and the results of their operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

We have served as the Company’s auditor since 2014.Critical Audit Matters

 

Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

Tampa, Florida

/s/ Frazier & Deeter, LLC
We have served as the Company’s auditor since 2014.
Tampa, Florida
February 14, 2022

January 31, 2019

F-1

CODA OCTOPUS GROUP, INC.

Consolidated Balance Sheets

October 31, 20182021 and 20172020

 2018  2017  2021  2020 
ASSETS             
        
CURRENT ASSETS                
                
Cash and Cash Equivalents $7,512,422  $6,851,539 
Accounts Receivable, Net  3,326,623   1,418,114 
Cash $17,747,656  $15,134,289 
Accounts Receivable, net  4,207,996   2,014,660 
Inventory  3,823,243   3,652,249   10,691,177   9,142,273 
Unbilled Receivables  3,013,116   2,723,172   1,080,384   861,300 
Prepaid Expenses  1,202,327   289,204 
Other Current Assets  

219,424

   320,814   627,619   244,171 
Prepaid Expenses  227,479   291,623 
                
Total Current Assets  18,122,307   15,257,511   35,557,159   27,685,897 
                
FIXED ASSETS                
Property and Equipment, net  5,246,183   5,213,281   6,037,101   6,059,900 
                
OTHER ASSETS                
Goodwill and Other Intangibles, net  3,613,952   3,589,281   3,794,383   3,731,452 
Deferred Tax Asset  

1,754,169

   -   76,776   561,902 
                
Total other assets  

5,368,121

   

3,589,281

 
Total Other Assets  3,871,159   4,293,354 
                
Total Assets $28,736,611  $24,060,073  $45,465,419  $38,039,151 

The accompanying notes are an integral part of these consolidated financial statements

F-2

CODA OCTOPUS GROUP, INC.

Consolidated Balance Sheets (Continued)

October 31, 20182021 and 20172020

 2018  2017  2021  2020 
LIABILITIES AND STOCKHOLDERS’ EQUITY             
        
CURRENT LIABILITIES                
                
Accounts Payable $988,148  $981,994  $1,454,611  $1,284,097 
Accrued Expenses and Other Current Liabilities  685,454   519,208   740,449   584,202 
Loans and Note Payable, current  964,695   2,212,951 
Deferred Revenue, Current  602,914   402,955 
Note Payable  63,559   509,769 
Deferred Revenue  1,999,841   1,006,454 
                
Total Current Liabilities  3,241,211   4,117,108   4,258,460   3,384,522 
                
LONG TERM LIABILITIES                
                
Deferred Revenue, long term  48,906   49,143 
Loans and Note Payable, long term  1,059,544   6,066,402 
Deferred Revenue, less current portion  157,886   195,022 
Note Payable, less current portion  -   63,339 
                
Total Long Term Liabilities  1,108,450   6,115,545   157,886   258,361 
                
Total Liabilities  4,349,661   10,232,653   4,416,346   3,642,883 
                
STOCKHOLDERS’ EQUITY                
                
Preferred stock, Series C, $.001 par value; 5,000,000 shares authorized 0 and 1,000 shares issued and outstanding as of October 31, 2018 and 2017, respectively  -   1 
Common stock, $.001 par value; 150,000,000 shares authorized, 10,640,416 and 9,136,121 shares issued and outstanding as of October 31, 2018 and 2017, respectively  10,641   9,136 
Additional paid-in capital  58,599,378   52,839,651 
Accumulated other comprehensive loss  (2,228,663)  (2,038,431)
Accumulated deficit  (31,994,406)  (36,982,937)
Common Stock, $.001 par value; 150,000,000 shares authorized, 10,857,195 shares issued and outstanding as of October 31, 2021, and 10,751,881 shares issued and outstanding as of October 31, 2020, respectively  10,858   10,753 
Additional Paid-in Capital  61,183,131   60,132,415 
Accumulated Other Comprehensive Loss  (1,667,059)  (2,321,278)
Accumulated Deficit  (18,477,857)  (23,425,622)
                
Total Stockholders’ Equity  24,386,950   13,827,420   41,049,073   34,396,268 
                
Total Liabilities and Stockholders’ Equity $28,736,611  $24,060,073  $45,465,419  $38,039,151 

The accompanying notes are an integral part of these consolidated financial statements

F-3

CODA OCTOPUS GROUP, INC.

Consolidated Statements of Income and Comprehensive Income

For the Years Ended October 31, 2018 and 2017Periods Indicated

        
 Year Ended  Year Ended October 31, 
 October 31, 2018  October 31, 2017  2021  2020 
          
Net Revenues $18,019,429  $18,025,173  $21,331,527  $20,043,810 
        
Cost of Revenues  5,357,067   6,057,448   6,561,809   7,314,362 
                
Gross Profit  12,662,362   11,967,725   14,769,718   12,729,448 
                
OPERATING EXPENSES                
        
Research & Development  2,571,714   1,380,381   2,982,676   3,188,389 
Selling, General & Administrative  6,779,881   6,769,327   7,915,575   6,737,294 
                
Total Operating Expenses  9,351,595   8,149,708   10,898,251   9,925,683 
                
INCOME FROM OPERATIONS  3,310,767   3,818,017   3,871,467   2,803,765 
                
OTHER INCOME (EXPENSE)        
OTHER INCOME        
Other Income  41,222   121,278   

1,435,382

   

668,245

 
Interest Expense  (249,090)  (597,011)  (53,605)  (70,203)
                
Total Other Income (Expense)  (207,868)  (475,733)
Total Other Income  1,381,777   598,042 
                
NET INCOME BEFORE INCOME TAXES  3,102,899   3,342,284 
INCOME BEFORE INCOME TAX EXPENSE  5,253,244   3,401,807 
                
INCOME TAX BENEFIT (EXPENSE)  

          
Current tax benefit (expense)  

131,463

   

(2,621

)
Deferred tax benefit  

1,754,169

   - 
Current Tax (Expense) Benefit  (16,592)  50,663 
Deferred Tax Expense  (288,887)  (108,885)
                

Total Income Tax Benefit (Expense)

  

1,885,632

   

(2,621

)
Total Income Tax Expense  (305,479)  (58,222)
                
NET INCOME $

4,988,531

  $3,339,663  $4,947,765  $3,343,585 
                
NET INCOME PER SHARE:                
Basic $0.49  $0.37  $0.46  $0.31 
Diluted $0.49  $0.36  $0.44  $0.30 
                
WEIGHTED AVERAGE SHARES:                
Basic  10,093,538   9,111,356   10,804,074   10,733,799 
Diluted  10,093,538   9,311,356   11,309,740   11,294,799 
                
NET INCOME $4,988,531  $3,339,663  $4,947,765  $3,343,585 
Other Comprehensive Income        
                
Foreign currency translation adjustment  (190,232)  299,006 
Foreign Currency Translation Adjustment  654,219   (185,870)
                
Total Other Comprehensive (Loss) Income  (190,232)  299,006 
Total Other Comprehensive Income (Loss) $654,219  $(185,870)
                
COMPREHENSIVE INCOME $

4,798,299

  $3,638,669  $5,601,984  $3,157,715 

The accompanying notes are an integral part of these consolidated financial statements

F-4

CODA OCTOPUS GROUP, INC.

Consolidated Statements of Changes in Stockholders’ Equity

For the YearsYear’s Ended October 31, 20182021 and 20172020

                         
           Accumulated       
        Additional  Other       
  Common Stock  Paid-in  Comprehensive  Accumulated    
  Shares  Amount  Capital  Income (Loss)  Deficit  Total 
                   
Balance, October 31, 2019  10,721,881  $10,723  $59,521,665  $(2,135,408) $(26,769,207) $30,627,773 
                         
Employee stock based compensation  -   -   441,280   -   -   441,280 
Stock issued for options exercised                        
Stock issued for options exercised, shares                        
Consultant stock based compensation  30,000   30   169,470   -   -   169,500 
Foreign currency translation adjustment  -   -   -   (185,870)  -   (185,870)
Net Income  -   -   -   -   3,343,585   3,343,585 
Balance, October 31, 2020  10,751,881  $10,753  $60,132,415  $(2,321,278) $(23,425,622) $34,396,268 
                         
Employee stock based compensation          830,071           830,071 
Stock issued for options exercised  80,314   80   (80)          - 
Consultant stock based compensation  25,000   25   220,725           220,750 
Foreign currency translation adjustment              654,219       654,219 
Net Income                  4,947,765   4,947,765 
Balance, October 31, 2021  10,857,195  $10,858  $61,183,131  $(1,667,059) $(18,477,857) $41,049,073 

                 Accumulated       
  Preferred Stock Series C  Common Stock  

Additional

Paid-in

  

Other

Comprehensive

  Accumulated    
  Shares  Amount  Shares  Amount  Capital  Income (Loss)  Deficit  Total 
                         
Balance, October 31, 2016        1,100  $1   9,094,156  $9,094  $52,805,455  $(2,337,437) $(40,322,600) $10,154,513 
                                 
Stock Issued to Board of Directors  -   -   21,429   21   93,717   -   -   93,738 
Stock Issued to Consultants  -   -   20,536   21   40,479   -   -   40,500 
Redemption of Series C Preferred Stock  (1,100)  (1)  -   -   (1,099,999)          (1,100,000)
Issuance of Series C Preferred Stock in lieu of interest obligations  1,000   1   -   -   999,999           1,000,000 
Foreign currency translation adjustment  -   -   -   -   -   299,006   -   299,006 
Net Income  -   -   -   -   -   -   3,339,663   3,339,663 
Balance, October 31, 2017  1,000  $1   9,136,121  $9,136  $52,839,651  $(2,038,431) $(36,982,937) $13,827,420 
                                 
Stock Issued to Investors  -   -   1,203,727   1,204   5,311,528   -   -   5,312,732 
Stock Issued to Consultants  -   -   37,500   38   170,962   -   -   171,000 
Stock Issued to Former Officer  -   -   63,068   63   277,436           277,499 
Redemption of the Series C Preferred Stock  (1,000)  (1)  -   -   (999,999)          (1,000,000)
Issuance of Stock to Redeem Series C Preferred Stock  -   -   200,000   200   999,800           1,000,000 
Foreign currency translation adjustment  -   -   -   -   -   (190,232)  -   (190,232)
Net Income  -   -   -   -   -   -   4,988,531   4,988,531 
Balance, October 31, 2018  -  $-   10,640,416  $10,641  $58,599,378  $(2,228,663) $(31,994,406) $24,386,950 

The accompanying notes are an integral part of these consolidated financial statements

F-5

CODA OCTOPUS GROUP, INC.

Consolidated Statements of Cash Flows

For the Years Ended October 31, 2018 and 2017

         
  Year Ended October 31, 
  2021  2020 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net income $4,947,765  $3,343,585 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  924,073   806,686 
Stock based compensation  1,050,821   610,780 
Deferred income taxes  485,126   69,782 
Funding from Paycheck Protection Program recognized as income  (648,872)  (648,871)
(Increase) decrease in operating assets:        
Accounts receivable  (2,193,336)  2,417,311 
Inventory  (1,063,163)  (3,791,759)
Unbilled receivables  (219,084)  1,418,062 
Other current assets  (383,449)  54,016 
Prepaid expenses  (913,123)  (91,064)
Increase (decrease) in operating liabilities:        
Accounts payable and other current liabilities  326,761   18,137 
Deferred revenue  956,251   227,741 
Net Cash Provided by Operating Activities  3,269,770   4,434,406 
CASH FLOWS FROM INVESTING ACTIVITIES        
Purchases of property and equipment  (850,894)  (835,132)
Purchases of other intangible assets  (113,310)  (163,203)
Net Cash Used in Investing Activities  (964,204)  (998,335)
CASH FLOWS FROM FINANCING ACTIVITIES        
Repayment of note payable  (509,549)  (486,466)
Proceeds from Paycheck Protection Program  648,872   648,871 
Net Cash Provided by Financing Activities  139,323   162,405 
EFFECT OF CURRENCY TRANSLATION ON CHANGES IN CASH  168,478   (185,870)
         
NET INCREASE IN CASH  2,613,367   3,412,606 
         
CASH AT THE BEGINNING OF THE PERIOD  15,134,289   11,721,683 
         
CASH AT THE END OF THE PERIOD $17,747,656  $15,134,289 
SUPPLEMENTAL CASH FLOW INFORMATION        
Cash paid for interest $53,605  $70,202 
Cash paid for taxes $-  $- 

  Year Ended 
  October 31, 2018  October 31, 2017 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net income $

4,988,531

  $3,339,663 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  758,408   953,626 
Stock compensation  448,499   134,238 
Realized gain on the sale of fixed assets  -   (109,413)
(Increase) decrease in operating assets:        
Accounts receivable  (1,908,509)  1,856,090 
Inventory  (349,823)  (1,053,324)
Unbilled receivables  (289,944)  683,521 
Other current assets  

101,390

   (179,860)
Prepaid expenses  64,144   (178,739)
Deferred tax assets  (1,754,169  96,374 
Increase (decrease) in operating liabilities:        
Accounts payable and other current liabilities  172,400   (689,341)
Deferred revenues  199,722   (12,443)
Net Cash provided by Operating Activities  2,430,649   4,840,392 
CASH FLOWS FROM INVESTING ACTIVITIES        
Purchases of property and equipment  (637,152)  (2,561,551)
Proceeds from the sale of fixed assets  -   504,802 
Restricted cash  -   13,694 
Net Cash used in Investing Activities  (637,152)  (2,043,055)
CASH FLOWS FROM FINANCING ACTIVITIES        
Repayments - loans and notes payable  (6,255,114)  (746,571)
Issuance of stock for cash  5,312,732   - 
Redemption of Series C preferred stock  -   (1,100,000)
Net Cash used in Financing Activities  (942,382)  (1,846,571)
EFFECT OF CURRENCY EXCHANGE RATE ON CHANGES        
IN CASH  (190,232)  299,006 
         
NET INCREASE IN CASH  660,883   1,249,772 
         
CASH AT THE BEGINNING OF THE PERIOD  6,851,539   5,601,767 
         
CASH AT THE END OF THE PERIOD $7,512,422  $6,851,539 
SUPPLEMENTAL CASH FLOW INFORMATION        
Cash paid for interest $291,802  $697,877 
Cash paid for taxes $

27,192

  $64,993 
Non-cash transactions        
Preferred stock issued for accrued interest $-  $1,000,000 
Transfer of Demo assets from inventory to property and equipment $178,829  $- 
Common stock issued for Series C preferred stock $1,000,000  $0 
Payment of secured debt directly with proceeds of note payable $-  $8,000,000 

The accompanying notes are an integral part of these consolidated financial statements

F-6

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 20182021 and 20172020

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

Coda Octopus Group, Inc. (“Coda,” “the Company,” or “we”) operates two distinct operating business segments: units. These are the Marine Technology Business (“Products SegmentBusiness”, “Products Operations” or “Products Segment”) and the Marine Engineering Business (“Services Segment.Business”, “Engineering Business” or “Engineering Operations”). The Product SegmentMarine Technology Business sells technology solutions to the subsea and underwater markets. These are designed, developed, manufactured and supported by the Business. Among the solutions it designs and develops, manufactures and distributes subsea products includingwhich currently is its flagship patentedmain revenue generating product, is its real time 3D volumetric imaging sonar technology (referred to as “Product Segment”which is a patented unique and leading product in the subsea/underwater market and marketed under the name Echoscope®. It also recently launched a new diver management system (Diver Augmented Vision Display (DAVD)) system addressing the global defense and commercial diving market and which it supplies to companies operating in the subsea/marine sector.believes is a significant part of its growth pillars. The Services segmentMarine Engineering Business supplies proprietary engineeringsub-assemblies for incorporation into broader mission critical defense systems. These parts typically are supplied for the life of the program to defense and subsea companies.which they pertain.

The consolidated financial statements include the accounts of Coda Octopus Group, Inc. and ourits domestic and foreign subsidiaries. All significant intercompany transactions and balances have been eliminated in the consolidated financial statements.

NOTE 2 - SUMMARY OF ACCOUNTING POLICIES

a. Basis of Presentation

The Company has adopted the Financial Accounting Standards Board (FASB) Codification (Codification). The Codification is the single official source of authoritative accounting principles generally accepted in the United States of America (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities, and all of the Codification’s content carries the same level of authority.

b. Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. At times such investments may be in excess of federal deposit insurance limits.

c. Trade Accounts Receivable

Trade accounts receivable are recorded net of the allowance for doubtful accounts. The Company provides for an allowance for doubtful collections that is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Balances still outstanding after the Company has used reasonable collection efforts are written off throughthough a charge to the valuation allowance and a credit to trade accounts receivable. The allowance for doubtful accounts was $47,807 $0 and $36,553 $47,807 as of October 31, 20182021 and 20172020, respectively.

F-7

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 2021 and 2020

NOTE 2 – SUMMARY OF ACCOUNTING POLICIES (Continued)

d. Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Expenditures for minor replacements, maintenance and repairs which do not increase the useful lives of the property and equipment are charged to operations as incurred. Major additions and improvements are capitalized. Depreciation and amortization are computed using the straight-line method over their estimated useful lives which is typically three to five years for equipment and 30 50 years for buildings. In the year ended October 31, 2021, we have made an accounting policy change to allocation 70% of the Products depreciation to Cost of Goods Sold that is related to the rental assets.

We own substantially all of our facilities and believe that the effect of adopting Accounting Standards Codification 842, “Leases”, has been immaterial.

e. Advertising

Coda follows the policy of charging the costs of advertising to expense as incurred, which aggregated $0 $5,042 and $4,884 for the years ended October, 31 20182021 and 2017.2020, respectively.

F-7

CODA OCTOPUS GROUP, INC.f. Inventory

Notes to the Consolidated Financial Statements

October 31, 2018 and 2017

NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (Continued)

f. Inventory

Inventory is stated at the lower of cost (weighted average(First In, First Out method) or net realizable value. Inventory consisted of the following components:

SCHEDULE OF COMPONENTS OF INVENTORY

 October 31, October 31, 
 October 31, 2018  October 31, 2017  2021 2020 
          
Raw materials and parts $2,887,505  $2,651,511  $7,525,419  $7,322,688 
Work in progress  472,204   501,692   919,619   698,756 
Demo goods  -   349,480 
Finished goods  463,534   149,566   2,246,139   1,120,829 
Total Inventory $3,823,243  $3,652,249  $10,691,177  $9,142,273 

g. Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues including unbilled and deferred revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates related to the percentage of completion method used to account for contracts including costs and earnings in excess of billings, billings in excess of costs and estimated earnings and the valuation of goodwill.

h. Revenue Recognition

The Company recognizes revenue under the Financial Accounting Standards Board’s Topic 606, Revenue from Contracts with Customers (“Topic 606”).

F-8

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 2021 and 2020

NOTE 2 – SUMMARY OF ACCOUNTING POLICIES (Continued)

h. Revenue Recognition (Continued)

Topic 606 has established a five-step process to determine the amount of revenue to record from contracts with customers. The five steps are:

Determine if we have a contract with a customer;
Determine the performance obligations in that contract;
Determine the transaction price;
Allocate the transaction price to the performance obligations; and
Determine when to recognize revenue.

Our revenue isrevenues are earned under formal contracts with our customers and are derived from both sales and rental of underwater technologies and equipment for real time 3D imaging, mapping, defense and survey applications and from the engineering services which we provide.provide primarily to prime defense contractors. 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 additional variable consideration. Our sales do not include a right of return by the customer.

With regard to our Marine Technology Business (“Products Business”), 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, post-sales technical support 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 evidence of a contractual arrangement exists, delivery has occurred orthose services have been rendered,provided to the contract pricecustomer and evidence of the provision of those services exist.

Revenue derived from either our subscription package offerings or rental of our equipment is fixedrecognized when performance obligations are met, in particular, on a daily basis during the subscription or determinable, and collectability is reasonably assured. No rights of return privileges are granted to customers after delivery.rental period.

For arrangements with multiple deliverables,performance obligations, we recognize product revenue by allocating the transaction revenue to each deliverableperformance obligation based on the relative fair value of each deliverable and recognize revenue when performance obligations are met including when equipment is delivered, and for rental of equipment, when installation and other services as they are performed.

Our contracts sometimes require customer payments in advance of revenue recognition. These amountsrecognition and are reflected as liabilities and recognized as revenue when the Company has fulfilled its obligations under the respective contracts. Until such time, we recognize this prepayment as deferred revenue.

F-8

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 2018 and 2017

NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (Continued)

h. Revenue Recognition (continued)

For software license sales for which any services rendered are not considered essentialdistinct to the functionality of the software, we recognize revenue upon delivery of the software, provided (1)software.

F-9

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 2021 and 2020

NOTE 2 – SUMMARY OF ACCOUNTING POLICIES (Continued)

h. Revenue Recognition (Continued)

With respect to revenues related to our Services Business, there is evidence of a contractual arrangement for this, (2) collection of our fee is considered probable and (3) the fee is fixed and determinable.

For arrangements that are generated from time and material contracts where there is a signed agreement and approved purchase order in place that specifiesspecify the fixed hourly rate and other reimbursable costs to be billed based on material and direct labor hours incurred and, revenue is recognized on these contracts based on material and the direct labor hours incurred. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred (materials and direct labor hours) to date to estimated total services (materials and direct labor hours) for each contract. This method is used as we consider expenditures for direct materials and labor hours are considered to be the best available measure of progress on these contracts. Losses on

On a quarterly basis, we examine all of our fixed-price contracts to determine if there are any losses to be recognized during the periodperiod. Any such loss is recorded in the quarter in which the loss first becomes apparent based upon costs incurred to date and the estimated costs to complete as determined by experience from similar contracts. Variations from estimated contract performance could result in adjustments to operating results.

RentalRecoverability of Deferred Costs

In accordance with Topic 606, we defer costs on projects for service revenue. Deferred costs consist primarily of incremental direct 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. The pricing of these service contracts is intended to provide for the recovery of these types of deferred costs over the life of the contract.

We recognize such costs in accordance with our revenue isrecognition policy by contract. For revenue recognized monthlyunder 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 over time, costs are recognized ratably over the term of the rental period.contract, commencing on the date of revenue recognition. At each quarterly balance sheet date, we review deferred costs, to ensure they are ultimately recoverable.

On November 1, 2018Any anticipated losses on uncompleted contracts are recognized when evidence indicates the Company adopted Accounting Standards Codification ASC 606, entitled Revenue From Contracts with Customers. While terminologyestimated total cost of a contract exceeds its estimated total revenue.

Deferred Commissions

Our incremental direct costs of obtaining a contract, which consists of sales commissions are deferred and requirements changeamortized over the period of the contract performance. We classify deferred commissions as current or noncurrent based on the timing of when we expect to recognize the expense. The current and noncurrent portions of deferred commissions are included in ASC 606,prepaid expenses and other current assets, and other assets, net, respectively, in our consolidated balance sheets. As of October 31, 2021 and 2020, we believe that our existing revenue accounting is compliant with ASC 606 had deferred commissions of $0 and that our accounting for revenue will not change. Accordingly, our disclosures about our revenue $3,884, respectively. Amortization expense related to deferred commissions was $3,884 and $125,284 in accordance with ASC 606 will expand to comply with the new requirements, including expansion of quarterly revenue reporting requirements.years ended October 31, 2021 and 2020, respectively.

F-10

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 2021 and 2020

NOTE 2 – SUMMARY OF ACCOUNTING POLICIES (Continued)

h. Revenue Recognition (Continued)

Other Revenue Disclosures

See Note 13 – Disaggregation of Revenue for a breakdown of revenues from external customers and cost of those revenues between our Product Segment and Services Segment including information on the split of revenues by geography.

i. Concentrations of Risk

Credit losses, if any, have been provided for in the consolidated financial statements and are based on management’s expectations. The Company’s accounts receivablereceivables are subject to potential concentrations of credit risk, since a significant part of the Company’s sales are to a small number of companies and, even though these are generally established businesses, market fluctuations such as the price of oil may affect our customers’ ability to meet their obligations to us. Furthermore, Trade disputes may result in impairment or delays in receivables.

The Company’s bank deposits are held with financial institutions both in and out ofoutside the USA. At times, such amounts may be in excess of applicable government mandated insurance limits. The Company has not experienced any losses in such accounts or lack of access to its cash, and believes it is not exposed to significant risk of loss with respect to cash.

j. Contracts in Progress (Unbilled Receivables and Deferred Revenue)

Costs and estimated earnings in excess of billings on uncompleted contracts represent accumulated project expenses and fees which have not been invoiced to customers as of the date of the balance sheet. These amounts are stated on the consolidated balance sheets as Unbilled Receivables of $3,013,116 $1,080,384and $2,723,172 $861,300as of October 31, 20182021 and 2017,2020, respectively.

Our Deferred Revenue of $602,914 $1,879,790and $402,955 $989,588as of October 31, 20182021 and 2017,2020, respectively, consists of billings in excess of costs and revenues received as part of our warranty obligations upon completing a sale, as elaborated further in the last paragraph of this note.

F-9

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 2018 and 2017

NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (Continued)

j. Contracts in Progress (Unbilled Receivables and Deferred Revenue) (Continued)

Revenue received as part of sales of equipment includes a provision for warranty or through life support (TLS) and is treated as deferred revenue, along with extended warranty sales with theseor TLS, which may be purchased by customers. These amounts are amortized over 12the relevant warranty or TLS period (12 months is our statedstandard warranty period,or 24, 36 or 60 months for TLS) from the date of sale. These amounts are stated on the consolidated balance sheets as a component of Deferred Revenue of $335,646 and $452,098 were $277,937 and $211,888 as of October 31, 20182021 and 2017,2020, respectively.

F-11

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 2021 and 2020

NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

k. 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 systems 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 7 below discusses the amounts of deferred tax assets and liabilities, and also presents the impact of significant differences between financial reporting income and taxable income.

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.GAAP.

l.Goodwill and Intangible Assets

Goodwill and 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. We periodically evaluate the recoverability of goodwill and intangible assets and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.

F-10

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 2018 and 2017

NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (Continued)

l. Intangible Assets (Continued)

The first stepStep 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 cash flows, exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, the second step must be performed to measure the amount of the impairment loss, if any. The Company will early adopthas adopted Accounting Standards Codification 2017 – 04, Simplifyingsimplifying the Test for Goodwill Impairment, which permits the Company to impair the difference between carrying amountamounts in excess of the fair value of the reporting unit as the reduction in goodwill. ASC 2017-04 eliminates

F-12

CODA OCTOPUS GROUP, INC.

Notes to the requirement in previous US GAAP to perform StepConsolidated Financial Statements

October 31, 2021 and 2020

NOTE 2 of the goodwill impairment test.- SUMMARY OF ACCOUNTING POLICIES (Continued)

l. Goodwill and Intangible Assets (Continued)

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 goodwillreporting unit over the fair value of the reporting unit.

There were no 0impairment charges recognized during the years ended October 31, 20182021 and 2017.2020.

m. Fair Value of Financial Instruments

The Company’s financial instruments include cash, and cash equivalents, accounts receivable, accounts payable, accrued expenses and notes payable. The carrying amounts of cash, and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair values because of the short-term nature of these instruments. The aggregate carrying amount of the notes payable approximates fair value as they bear interest at a market interest rate based on their term and maturity.

The fair value of the Company’s long-term debt approximates its carrying amount based on the fact that the Company believes it could obtain similar terms and conditions for similar debt.

n. Foreign Currency Translation

Assets and liabilities are translated at the prevailing exchange rates at the balance sheet dates, related revenuedates. Related revenues and expenses are translated at weighted average exchange rates in effect during the period and stockholders’period. Stockholders’ equity, fixed assets and long-term investments are recorded at historical exchange rates. Resulting translation adjustments are recorded as a separate component in stockholders’ equity as part of accumulated other comprehensive income or (loss) as may be appropriate. Foreign currency transaction gains and losses are included in the consolidated statements of income and comprehensive income.

o. Long-Lived Assets

Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if itits carrying amount exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposal of the asset. Long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. No NaNimpairment loss was recognized during the years ended October 31, 20182021 and 2017,2020, respectively.

p. Research and Development

Research and development costs consist of expenditures for the development of present and future patents and technology, which are not capitalizable. Under current legislation, we are eligible for UK tax credits related to our qualified research and development expenditures.

F-11F-13

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 20182021 and 20172020

NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (Continued)

p. Research and Development (Continued)

Tax credits are classified as a reduction of research and development expense. During the years ended October 31, 20182021 and 2017,2020, we had $140,015 $0 and $416,624$0, tax credits, respectively.

q. Stock Based Compensation

We recognizeIn accordance with the accounting rules for stock compensation, for time based awards, the Company is accruing a stock compensation expense relatedand increase to additional paid in capital based on the market value of the common stock as of the grant date throughout the vesting period. The vesting period for the options is between 5 and 17 months and is based on the employee’s continuous service to the fair value of stockCompany. In addition, the Company has issued Restricted Stock Awards (RSA) The vesting period is 11 months and is based compensationon the employee’s/consultant’s continued service for the vesting period. Prior to vesting, the awards withinare subject to forfeiture in the consolidated statements of income and comprehensive income.whole or in part under certain circumstances. We use the Black-Scholes option pricing model to determine the fair value method for equity instruments granted to non-employees and use the Black Scholes model for measuring the fair value. The stock based fair value 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.employees.

r. Comprehensive Income

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Comprehensive income includes gains and losses on foreign currency translation adjustments and is included as a component of stockholders’ equity.

s. Earnings per Share

We compute basic earnings per share by dividing the income attributable to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share includeoutstanding in the dilutive effect, if any, from the potential exercise of stock options and warrants.reporting period.

Following is a reconciliation of earnings from continuing operations and weighted average common shares outstanding for purposes of calculating basic and diluted earnings per share:

  Year Ended  Year Ended 
Fiscal Period October 31, 2018  October 31, 2017 
Numerator:        
Net Income $

4,988,531

  $3,339,663 
         
Denominator:        
Basic weighted average common shares outstanding  10,093,538   9,111,356 
Conversion of Series C Preferred Stock  -   200,000 
Diluted outstanding shares  10,093,538   9,311,356 
Earnings from continuing operations        
         
Basic $0.49  $0.37 
Diluted $0.49  $0.36 

SCHEDULE OF EARNINGS PER SHARE BASIC AND DILUTED

         
  Year  Year 
  Ended  Ended 
  October 31,  October 31, 
Fiscal Period 2021  2020 
Numerator:        
Net Income $4,947,765  $3,343,585 
         
Denominator:        
Basic weighted average common shares outstanding  10,804,074   10,733,799 
Unused portion of options and restricted stock awards  505,666   561,000 
Diluted outstanding shares  11,309,740   11,294,799 
         
Net income per share        
         
Basic $0.46  $0.31 
Diluted $0.44  $0.30 

F-12F-14

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 20182021 and 20172020

NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (Continued)

t. Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. An adjustment has been made to the disclosures of the composition of property and equipment.

u. Recent Accounting Pronouncements

There have been no new accounting pronouncements made effective during fiscal 2018 that have significance, or potential significance, to our Consolidated Financial Statements.

Recent Accounting Pronouncements Not Yet Effective

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of the new revenue standard for periods beginning after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective date. We have evaluated the effects of this updated standard and determined that it will not have a significant impact on our consolidated financial statements but will expand the related disclosures, particularly for quarterly reporting purposes.

On February 24, 2016, the FASB issued ASU No. 2016-02, Leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the balance sheet. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. We own substantially all of our facilities and rental asset and the effect of adopting this standard was immaterial.

On March 30, 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies various aspects related to the accounting and presentation of share-based payments. The amendments require entities to record all tax effects related to share-based payments at settlement or expiration through the income statement and the windfall tax benefit to be recorded when it arises, subject to normal valuation allowance considerations. All tax-related cash flows resulting from share-based payments are required to be reported as operating activities in the statement of cash flows. The updates relating to the income tax effects of the share-based payments including the cash flow presentation must be adopted either prospectively or retrospectively. Further, the amendments allow the entities to make an accounting policy election to either estimate forfeitures or recognize forfeitures as they occur. If an election is made, the change to recognize forfeitures as they occur must be adopted using a modified retrospective approach with a cumulative effect adjustment recorded to opening retained earnings. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. We have evaluated this standard and determined that it did not have a significant impact on our consolidated financial statements and related disclosures.

With the exception of the updated standards discussed above, there have been no new accounting pronouncements not yet effective that have significance, or potential significance, to our Consolidated Financial Statements.

 

u. Liquidityv. Other Income

 

At October 31, 2018, we had cash on handOther Income consisted of approximately $7.5 millionthe following components:

SCHEDULE OF OTHER INCOME

  October 31,  October 31, 
  2021  2020 
       
PPP Loans $648,872  $648,871 
Employee Retention Credits payroll tax credits  701,568   - 
Other income  84,942   

19,374

 
         
Total Other Income, net $1,435,382  $668,245 

NOTE 3 – GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and both billed and unbilled receivablesother intangibles consisted of approximately $6.3 million. Our current cash balance represents approximately one-year of Selling, General and Administrative Expenses. The Company continues to critically evaluate the level of expenses that we incur and reduce those expensesfollowing as appropriate.of:

SCHEDULE OF CARRYING VALUE OF IDENTIFIABLE INTANGIBLE ASSETS

  October 31,  October 31, 
  2021  2020 
       
Customer relationships (weighted average life of 10 years) $720,592  $720,592 
Non-compete agreements (weighted average life of 3 years)  198,911   198,911 
Patents and other (weighted average life of 10 years)  585,483   472,173 
         
Total identifiable intangible assets - gross carrying value  1,504,986   1,391,676 
         
Less: accumulated amortization  (1,092,711)  (1,042,332)
         
Total intangible assets, net $412,275  $349,344 

F-13F-15

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 20182021 and 20172020

NOTE 3 -– GOODWILL AND OTHER INTANGIBLE ASSETS AND GOODWILL(Continued)

Goodwill and Other Intangible Assets are evaluated on an annual basis. If there is reason to believe that their values have been diminished or impaired, write-downs will be included in results from operations.

The identifiable intangible assets acquired and their carrying value as of October 31, 2018 and 2017, are as follows:

Amortization of patents, customer relationships, non-compete agreements and licenses included as a charge to income amounted to $47,190 $50,379 and $163,519 $44,642 for the years ended October 31, 20182021 and 2017, respectively. Goodwill is not being amortized.2020.

  October 31, 2018  October 31, 2017 
       
Customer relationships (weighted average life of 10 years) $

896,624

  $896,624 
Non-compete agreements (weighted average life of 3 years)  198,911   198,911 
Patents and other (weighted average life of 10 years)  

366,036

   294,175 
         
Total identifiable intangible assets - gross carrying value  1,461,571   1,389,710 
         
Less: accumulated amortization  (1,229,727)  (1,182,537)
         
Total intangible assets, net $231,844  $207,173 

Future estimated annual amortization expenses as of October 31, 20182021 is as follows:

SCHEDULE OF ESTIMATED FUTURE AMORTIZATION EXPENSES

     
Years Ending October 31, Amount 
2022  54,429 
2023  52,089 
2024  42,877 
2025  27,533 
2026  24,442 
Thereafter  210,905 
     
Totals $412,275 

Years Ending October 31, Amount 
2019  46,318 
2020  39,121 
2021  34,620 
2022  34,297 
2023  30,831 
Thereafter  46,657 
     
Totals $231,844 

F-14

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 2018 and 2017

NOTE 3 - INTANGIBLE ASSETS AND GOODWILL (Continued)

As a resultGoodwill consisted of the acquisitions of Coda Octopus Martech, Ltd., Coda Octopus Colmek, Inc. and Coda Octopus Products, Ltd. the Company has goodwill in the amount of $3,382,108following as of October 31, 2018 and 2017, respectively. The carrying amount of goodwill as of October 31, 2018 and 2017, respectively, are recorded below:of:

SCHEDULE OF GOODWILL

  October 31,  October 31, 
  2021  2020 
Coda Octopus Colmek, Inc. $2,038,669  $2,038,669 
Coda Octopus Products Ltd  62,315   62,315 
Coda Octopus Martech Ltd  1,281,124   1,281,124 
         
Total Goodwill $3,382,108  $3,382,108 

  October 31, 2018  October 31, 2017 
Breakout of Goodwill:        
         
Coda Octopus Colmek, Inc. $2,038,669  $2,038,669 
Coda Octopus Products, Ltd  62,315   62,315 
Coda Octopus Martech, Ltd  1,281,124   1,281,124 
         
Total Goodwill $3,382,108  $3,382,108 

Considerable management judgment is necessary to estimate the fair value of goodwill. We enlisted the assistance of an independent valuation consultant to determine the values of our intangible assets and goodwill at the dates of acquisition and by management for the dates thereafter.

Based on various market factors and projections used by management, actual results could vary significantly from management’s estimates.

The Company’s policy is to test its goodwill balances for impairment on an annual basis, in the fourth quarteras of each year,October 31st, or more frequently if events or changes in circumstances indicate that the asset might be impaired.

The goodwill assets of the Company arise chiefly from the acquisition of two wholly owned subsidiaries that comprise the Company’s Services Segment – Coda Octopus Colmek and Coda Octopus Martech. The goodwill impairment evaluation was conducted at the end of the financial year 2018 and management’s opinion is that the carrying values are reasonable.

Based on these evaluations, the fair value of goodwillreporting unit exceeds its carrying value. As such no impairment was recorded by management.

F-15F-16

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 20182021 and 20172020

NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of:

SCHEDULE OF PROPERTY AND EQUIPMENT

 October 31, October 31, 
 October 31, 2018  October 31, 2017  2021 2020 
          
Buildings $3,996,860  $4,082,346  $5,298,028  $5,103,324 
Land  200,000   200,000   200,000   200,000 
Office machinery and equipment  2,875,443   2,064,449   1,622,871   2,044,405 
Rental assets  2,326,486   1,531,351 
Furniture, fixtures and improvements  1,109,225   1,165,897   1,218,217   1,187,927 
Totals  8,181,528   7,512,692   10,665,602   10,067,007 
Less: accumulated depreciation  (2,935,345)  (2,299,411)  (4,628,501)  (4,007,107)
                

Property and Equipment – Net

 $5,246,183  $5,213,281 
Total Property and Equipment, net $6,037,101  $6,059,900 

Depreciation expense for the years ended October 31, 20182021 and 20172020 was $711,218 $873,694 and $790,107, $758,297 respectively.

NOTE 5 - OTHER CURRENT ASSETS

Other current assets consisted of the following at:

SUMMARY OF OTHER CURRENT ASSETS

 October 31, October 31, 
 October 31, 2018  October 31,2017  2021 2020 
          
Deposits $

21,007

  $11,255  $63,992  $112,984 
Other receivables  

141,294

   73,600 
Prepaid Tax  57,123   235,959 
        
Tax Receivables  -   

131,187

 
Employee Retention Credit receivables  563,627   - 
Total Other Current Assets $

219,424

  $320,814  $627,619  $244,171 

NOTE 6 – CAPITAL STOCK

Common Stock

On or around January 11, 2017, the Company effected a one for fourteen (1 for 14) reverse stock split of our issued and outstanding common stock. All historical share numbers in this document have been adjusted retroactively to account for the reverse stock split. Effecting the reverse stock split reduced the number of issued and outstanding shares of common stock as of January 11, 2017 to 9,102,192.

F-16

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 20182021 and 20172020

NOTE 6 – CAPITAL STOCK (Continued)

Common Stock (Continued)

The Company is authorized to issue 150,000,000 shares of common stock with a par value of $0.001 per share.

On November 8, 2016,June 9, 2020, the Company issued 8,036 shares to two individuals for services rendered. These were valued at $10,500 which was charged to operations.

On June 23, 2017, the Company issued 6,250 shares to two individuals for services rendered. These were valued at $15,000 which was charged to operations.

In June and August 2017, the Company issued 21,429 shares to three of our newly appointed directors for services rendered at a value of $93,738 which was charged to operations.

On October 13, 2017, the Company issued 6,250 shares to two individuals for services rendered. These were valued at $15,000 which was charged to operations.

On January 29, 2018, the Company issued 1,125,950 shares to two investors pursuant to the terms of a private placement for a total purchase price of $4,954,180.

On February 5, 2018, the Company issued to one of its directors pursuant to the terms of the private placement 75,000 shares for a purchase price of $345,750.

On February 12, 2018, the Company issued 2,777 shares to one investor pursuant to their pre-emption rights under the terms of the private placement effected on or around January 29, 2018 for a purchase price of $12,802.

On February 22, 2018 and March 6, 2018, the Company issued a total of 12,500 shares to two individuals for services rendered. These were valued at $57,250, which was charged to operations.

On April 19, 2018 the Company issued 63,068 shares of common stock to a former officer pursuant to the terms of a settlement entered into on or around January 14, 2011. These were valued at $277,499, which was charged to operations.

On August 12, 2018, the Company issued 25,000 30,000 shares of common stock to consultants for services rendered. These were valued $113,750, which was charged to operations.shares had an aggregate fair value of $169,500.

OnDuring the fiscal year ended October 31, 2018,2020, the Company granted options to purchase an aggregate of 564,000 shares of common stock pursuant to the terms of the 2017 Stock Incentive Plan (“2017 Plan”) to various eligible individuals. As a result, as of October 31, 2020, there were 352,612 shares available under the Plan.

During the fiscal year ended October 31, 2021, the Company issued 200,000 80,314 shares of common stock for the exercise of 169,332 Options which were issued under the Company’s 2017 Plan.

On July 20, 2021, the Company issued 25,000 shares of common stock to the holders of the Series C Preferred Stockconsultants for services rendered. These shares had a fair value of $1,000,000$220,750.

During the fiscal year ended October 31, 2021, the Company granted under its 2017 Plan restricted stock awards to purchase an aggregate of 127,500 shares of common stock pursuant to the terms of Certificate of Designation for the Series C Preferred Stock issued and outstanding which provided forPlan to various eligible individuals. As a conversion price of $5.00 per share.

Asresult, as of October 31, 2018,2021, there were 238,612 shares available under the 2017 Plan. There were forfeitures of 8,000 and 3,000 options during the years ended October 31, 2021 and 2020, respectively.

The following table presents stock option activity for the years ended October 31, 2021 and 2020.

The intrinsic value of the outstanding options as of October 31, 2021 was $1,446,835 and $491,280 for October 31, 2020.

SCHEDULE OF STOCK OPTION ACTIVITY

Stock Options
  Total  Weighted Average Exercise Price  Exercisable  Weighted Average Exercise Price  Non-Vested  Weighted Average Exercise Price 
                   
Outstanding at October 31, 2019  -  $-   -  $-   -  $- 
Granted  564,000   4.65   -   -   564,000   4.65 
Vested  -   -   -   -   -   - 
Exercises  -   -   -   -   -   - 
Forfeited or cancelled  (3,000)  4.65   -   -   (3,000)  4.65 
                         
Outstanding at October 31, 2020  561,000   4.65   -  -   561,000   4.65 
                         
Granted  -       -   -   -     
Vested  -   4.65   185,667  4.65   (185,667)  4.65 
Exercises  (169,332)  4.65   (169,332) 4.65   -   4.65 
Forfeited or cancelled  (8,000)  4.65   -   -   (8,000)  4.65 
                         
Outstanding at October 31, 2021  383,668  $4.65  16,335  $4.65   367,333  $4.65 
                         
Aggregate Intrinsic Value                        
October 31, 2020 $491,280      $-      $491,280     
                         
Aggregate Intrinsic Value                        
October 31, 2021 $1,446,835      $61,746      $1,385,089     

The total expense recognized by the Company had 10,640,416 shares of commonrelating to stock options during the years ended October 31, 2021 and 2020, respectively, was $482,595 and $441,280. Unamortized compensation expense in future years is $311,228.

SCHEDULE OF RESTRICTED STOCK AWARDS

Restricted Stock Awards
  Total  Weighted Average Exercise Price  Exercisable  Weighted Average Exercise Price  Non-Vested  Weighted Average Exercise Price 
                   
Outstanding at October 31, 2020  -  $   $ -  $-   $-  $- 
                         
Granted  127,500   8.80   -  $-   127,500  $8.80 
Vested  -   8.80      $-   -  $- 
Exercises  -   8.80      $-   -  $- 
Forfeited or cancelled  (5,500)  8.80   -   -   (5,500) $8.80 
                         
Outstanding at October 31, 2021  122,000  $8.80   -   -   122,000  $8.80 

The total expense recognized by the Company relating to restricted stock awards during the year ended October 31, 2021 was $347,476. The expense in future years is $726,124.

All Stock Options and grants have been issued and outstanding.

F-17

CODA OCTOPUS GROUP, INC.

Notespursuant to the Consolidated Financial Statements

October 31, 2018 and 2017 Plan.

 

NOTE 6 – CAPITAL STOCK (Continued)Total stock compensation expense from issued shares, stock options and restricted stock awards is $1,050,821.

 

Preferred Stock

Series A and Series C Preferred Stock

The Company is also authorized to issue 5,000,000shares of preferred stock with a par value of $0.001 $0.001 per share. We havehad previously designated 50,000 preferred shares as Series A preferred stock and 50,000 preferred shares as Series C preferred stock. The remaining 4,900,000 shares of preferred stock are not designated.

On or around April 28, 2017, pursuant to the terms of an Exchange Agreement between the CompanyBoth series have since been eliminated and the Holder, the Company issued 1,000 units of Series C Preferred Stock, each unit having a stated value equal to $1,000. Series C Preferred Stock is convertible by the Holder or the Company subject to the Conversion Conditions being met at a Conversion Price of $5.00 per share and, if not converted, are redeemable at a fixed price of $1,000,000. The Holder is entitled to receive value prior to holders of common stock in case of liquidating the Company. There are no Series C Preferred currently outstanding.

On or around October 31, 2018 the holders of the Series C Preferred Stock referred to in the preceding paragraph, elected to convert all 1,000 units of Series C Preferred Stock into the Company’s Common Stock.

Asas of October 31, 2018,2021 there arewere no Series A or Series Cshares Preferred Stock issued or outstanding.

F-18

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 2021 and 2020

NOTE 7 - INCOME TAXES

The Company files federalprovides for income tax returns intaxes and the U.S. and state income tax returns inrelated accounts under the applicable states on a consolidated basis. The Company’s subsidiaries also file in the appropriate foreign jurisdictions as applicable, most notably the United Kingdom.

The Company is required to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. The Company has no significant unrecognized tax benefit during the year ended October 31, 2018.

There are no material tax positions included in the accompanying consolidated financial statements at October 31, 2018 and 2017 for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

The Company uses an asset and liability approach to financial accountingmethod. Deferred tax assets and reporting for income taxes. Theliabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities is determined annually. Deferred income tax assets and liabilities are computed for those differences that have future tax consequences using the currently enacted tax laws and rates that applyexpected to be in effect during the periodsyear in which they are expected to affect taxable income.the basis differences reverse. Valuation allowances are established if necessary, to reduce the deferred tax asset to the amount that will more likely than not be realized. Income tax expense is the current income tax payable or refundable for the period plus or minus the net change in the deferred tax assets and liabilities.

F-18

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 2018 and 2017

NOTE 7 - INCOME TAXES (Continued)

For income tax reporting purposes, the Company’s aggregate U.S. unused net operating losses approximate $8,353,000 and $10,698,000 as of October 31, 2018 and 2017 respectively, which expire beginning in 2028 through 2029, subject to limitations of Section 382 of the Internal Revenue Code, as amended.

The Company has had sustained taxable income in recent years supporting the Company’s judgement that the benefit of the U.S. Net operating loss carry forwards is more likely than not to be realizable in the future periods. As a result the Company has recorded the full deferred tax asset in fiscal year 2018.

The deferred tax asset related to the U.S. tax carry-forward is $1,754,169 and $4,172,200 as October 31, 2018 and 2017 respectively. The Company has recognized a deferred tax asset and deferred tax benefit of $1,754,169 for the year ended October 31, 2018 and provided a valuation reserve against the full amount of the net operating loss benefit of $4,172,200 for the year ended October 31, 2017. For the years ended October 31, 2018 and 2017, the Company had an Alternative Minimum Tax of $7,840 and $27,192 due.

For income tax reporting purposes, the Company’s UK unused net operating losses approximate $525,308 with no expiration. The deferred tax asset related to the UK and Norway tax carry-forwards is approximately $110,314. The Company has provided a valuation reserve against a portion of the net operating loss benefit, because in the opinion ofwhen management which is based upon the earning history of the Company,determines it is more likely than not that some portion, or all, of the benefits alloweddeferred tax assets will not be fully realized. Those remaining and not allowed are recorded byAs part of the Company and are expectedUS government’s response to be used in the near future.

Components of deferred tax assets as of October 31, 2018 and 2017 are as follows:

  October 31, 2018  October 31, 2017 
       
Net operating loss carry-forward benefit $

1,754,169

  $4,172,200 
Valuation allowance    (4,172,200)
         
Net deferred tax (liability) asset $1,754,169  $- 

The Company did not incur any regular income tax but did incur an Alternative Minimum Tax expense in the US. For financial purposes in its U.S. entities and other foreign entities not included above, asPandemic, we have received $701,568 in Employee Retention Credits, which provided funding to keep our employees. This has been able to use net operating loss carry-forwards andrecorded as other timing differences during the current and prior year to offset any tax liabilities in the various tax jurisdictions. The use of these income tax benefits in the current and prior year have been adjusted for and offset by a valuation allowance as noted above. The Company believes the future use and benefit of these tax assets is still uncertain and may not be realized.

The Company’s income tax returns are subject to audit by taxing authorities for the years beginning November 1, 2015.

On December 22, 2017, the US Congress passed the Tax Cuts and Jobs Act, which reduced the corporate tax rate from 35% to 21%. This change would reduce the deferred tax asset described in Note 7, from $4,172,200 to $2,246,718. The Company had provided full valuation allowance against the deferred tax asset for the year ended October 31, 2017. There was not an impact on the October 31, 2017 consolidated financial statements because of this tax law change.2021.

A reconciliation between the amounts ofThe provision (benefit) for income tax benefit determined by applying applicable U.S. statutory tax rate to pre-tax income is as follows:taxes comprises:

  October 31, 2018  October 31, 2017 
Federal statutory rate of 21% as of October 31, 2018 and 35% as of October 31, 2017 $651,609  $1,169,799 
         
Alternative Minimum Tax  7,840   27,192 
         
Foreign tax expense (benefit)  (139,303)  (24,571)
         
Recognition of deferred tax benefit  (1,754,169)  - 
         
Use of NOL losses on consolidated tax returns  (651,609)  (1,169,799)
         
Total income tax expense (benefit) $

(1,885,632

) $2,621 

SCHEDULE OF PROVISION (BENEFIT) FOR INCOME TAXES 

  October 31,  October 31, 
  2021  2020 
Current federal benefit $(25,429) $(12,502)
Foreign tax expense (benefit)  42,021  (38,161)
         
Total current tax expense (benefit)  16,592  (50,663)
         
Deferred federal expense  288,887   305,125 
Deferred foreign benefit  -   (196,240)
         
Deferred Tax Expense  288,887   108,885 
         
Total Income Tax Expense $305,479  $58,222 

F-19

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 20182021 and 20172020

NOTE 7 - INCOME TAXES (Continued)

The expense for income taxes differed from the U.S. statutory rate due to the following:

SCHEDULE OF RECONCILIATION OF INCOME TAX BENEFIT

  October 31,  October 31, 
  2021  2020 
Statutory tax rate  21.0%   21.0%
Change in deferred taxes  (18.4)%  (17.1)%
Alternative Minimum Tax (refund)  0.0%  (1.1)%
Foreign tax (benefit) expense  3.2%  (1.1)%
         
Total  5.8%  1.7%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company’s deferred tax assets and liabilities are as follows:

SCHEDULE OF COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES

  October 31,  October 31, 
  2021  2020 
Noncurrent deferred tax assets        
Temporary differences        
U.S. NOL carryforwards $15,930  $272,993 
Stock option compensation  -   92,669 
Restricted Stock Awards  72,970  $- 
Book/Tax Depreciation  (12,124)  - 
Foreign fixed assets  18,168   - 
Foreign deferreds  -   

196,240

 
Foreign NOL carryforwards  

148,650

   

143,563

 
         
Total 243,594  705,465 
         
Valuation allowance  (166,818)  (143,563)
         
Total Deferred Asset $

76,776

  $

561,902

 

As of October 31, 2021, we had U.S. federal net operating loss (NOL) carryforwards of $75,857, which expire in 2029.

F-20

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 2021 and 2020

NOTE 8 - LOANS AND NOTESNOTE PAYABLE

Loans and notesNote payable consisted of the following at:

SCHEDULE OF NOTES PAYABLE

  October 31, 2018  October 31, 2017 
       
Secured note payable to HSBC NA with interest payable on the 28th day of each month at 4.56% per annum. On March 28, 2018 the Company prepaid a portion of the principal and thereby reducing the principal outstanding under this loan to $1,917,602 resulting in the repayment obligations (principal and interest payments) being reduced to $43,777 per month. There was no prepayment penalty associated with the reduction of the principal. It is now expected that the Loan will be repaid within 41 months.
 $1,524,239  $7,279,353 

One of the subsidiaries has an unsecured working capital loan from the CEO of the Company. The note is due on November 30, 2018 and carries an interest rate of 4.5%. The loan was paid in full on December 24, 2018 and all obligations under this agreement have now been extinguished.

  500,000   1,000,000 
         
Total  2,024,239   8,279,353 
Less: current portion  (964,695)  (2,212,951)
Total Long-Term Loans and Notes Payable $1,059,544  $6,066,402 
  October 31,  October 31, 
  2021  2020 
       
Secured note payable to HSBC NA with interest payable on the 28th day of each month at 4.56% per annum. Our monthly repayment obligation under this loan is $43,777 (comprising both principal and interest repayment). The maturity of this Loan is December 28, 2021 $63,559  $573,108 
         
Total  63,559   573,108 
Less: current portion  (63,559)  (509,769)
Total Long Term Note Payable $-  $63,339 

The HSBC loan is secured by a blanket lien on all of the Company’s US subsidiaries. The foreign subsidiaries are guarantoreach guarantors of the obligations undertaken in the loan agreement. The HSBC Loan is due to be repaid in full by December 2021. After this payment is satisfied the blanket lien and guarantees will be released against the Business and its assets.

We have an unusedThe Company entered into a $4,000,000 revolving line of credit for up to $455,000facility with HSBC UKNA on November 27, 2019, with the interest rate established as the applicable prime rate. This revolving line of credit facility is subject to use specifically for performance bondsannual renewal and bank guarantees. As of October 31, 2018, thehas been extended to November 2022. The outstanding balance is $0.

This table shows the principal maturities on the HSBC NA Senior Note line of credit was $0as of October 31, 2018:2021 and 2020.

Years Ending October 31, Amount 
2019 $464,695 
2020  486,624 
2021  509,588 
2022  63,332 
     
Totals $1,524,239 

F-20F-21

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 20182021 and 20172020

NOTE 9 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) consists of foreign currency translation adjustments. Total other comprehensive income (loss) income was $(190,232)$654,219 and $299,006($185,870) for the years ended October 31, 20182021 and 2017,2020, respectively.

A reconciliation of the other comprehensive income (loss) in the stockholders’ equity section of the consolidated balance sheets is as follows:

  October 31, 2018  October 31, 2017 
       
Balance, beginning of year $(2,038,431) $(2,337,437)
Total other comprehensive income for the year - foreign currency translation adjustment  (190,232)  299,006 
Balance, end of period $(2,228,663) $(2,038,431)

SCHEDULE OF OTHER COMPREHENSIVE INCOME (LOSS)

  October 31,  October 31, 
  2021  2020 
       
Balance, beginning of year $(2,321,278) $(2,135,408)
Total other comprehensive income (loss) for the year - foreign currency translation adjustment  654,219   (185,870)
Balance, end of period $(1,667,059) $(2,321,278)

NOTE 10 - CONCENTRATIONS

Significant Customers

During the year ended October 31, 2018,2021, the Company had one customer from whom it generated sales greater than 10% of net revenues. Revenue from this customer was $2,882,761,$2,484,173, or 16% 12% of net revenues during the period. Total accounts receivable from this customer at October 31, 20182021 was $24,993 $468,149 or 1% 11% of accounts receivable.

During the year ended October 31, 2017,2020, the Company had one customer from whom it generated sales greater than 10% of net revenues. RevenuesRevenue from this customer was $4,036,591,$4,273,702, or 22% 21% of net revenues during the year. Total accounts receivable from this customer atas of October 31, 20172020 was $289,571 $214,747 or 21% 11% of accounts receivable.

NOTE 11 - EMPLOYEE BENEFIT PLANS

The Company’s U.S. subsidiaries maintain a matching 401(k) retirement plan. The plan allows the Company to make matching contributions of 10 cents per dollar 4% of employee contributions, upcompensation, subject to a maximum of $1,850.IRS contribution limits. U.S. employees who have at least ninesix months of service with the Company are eligible. In addition, the Company’s UK subsidiaries operate statutory pension schemes which provide for the payment of the fullcertain contribution by the Company.Company and the Employee. These schemes in the UK operate on a defined contribution money purchase basis and the contributions are charged to operations as they arise. Finally, the Company is obligated to provide pension funding according to Norwegian legislation for its subsidiary locatedthe laws in Norway.which it operates including in both Denmark and Australia. The Company has an arrangement that fulfills this requirement. Employee benefit costs for the above-noted plans for the years ended October 31, 20182021 and 20172020 were $51,693 $123,215and $53,498,$140,271, respectively.

F-21F-22

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 20182021 and 20172020

NOTE 12 - OPERATING LEASES

The Company occupies various office and warehouse facilities pursuant to both term and month-to-month leases. The leases expire at various times through February 28, 2019. The following schedule summarized the future minimum lease payments on the term operating leases:

Years Ending October 31, Amount 
    
2019 

35,373

 
     
Totals $

35,373

 

Rent expense for the years ended October 31, 2018 and 2017, was $93,773 and $93,797, respectively.

NOTE 12 -SEGMENT ANALYSIS

NOTE 13 -SEGMENT ANALYSIS

We are operatingBased on the fundamental difference in twothe types of offering products versus services, we operate 2distinct reportable segments which are managed separately based upon fundamental differences in their operations.separately. Coda Octopus Products (“Marine Technology Business” or “Products Segment”) operations are comprised primarily of sale of underwater technology sonar solutions, products for underwater operations including hardware and software, and rental of solutions and products to the underwater market. Coda Octopus Martech and Coda Octopus Colmek operate(“Marine Engineering Business” or “Services Segment”) provides engineering services primarily as contractors (“Services Segment), and the balance of our operations are comprised of product sales (“Products Segment”).sub-contractors to prime defense contractors.

Segment operating income is total segment revenue reduced by operating expenses identifiable with the business segment. Corporate includes general corporate administrative costs.costs (“overhead”).

The Company evaluates performance and allocates resources based upon segment 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 which have been eliminated in our financial statements but are disclosed in the tables below for information purposes.

The following table summarizes segment asset and operating balances by reportable segment as of and for the years ended October 31, 20182021 and 20172020, respectively.

The Company’s reportable business segments operatesell their goods and services in threefour geographic locations. Those geographic locations are:locations:

* United States

* Europe

* Australia

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 which have been removed upon consolidation and for the purposes of the information shown below.

F-22Americas
Europe
Australia/Asia
Middle East/Africa

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 20182021 and 20172020

Information concerning principal geographic areas is presented below according to the area where the activity has taken place for the years ended October 31, 2018 and 2017 respectively:

NOTE 1312 -SEGMENT ANALYSIS (Continued)

SCHEDULE OF SEGMENT REPORTING INFORMATION

 Marine Technology Business (Products) Marine Engineering Business (Services) Overhead Total  Marine Technology Business (Products) Marine Engineering Business (Services) Overhead Total 
                  
Year Ended October 31, 2018         
Year Ended October 31, 2021                
                         
Revenues from External Customers $11,449,416  $6,570,013  $-  $18,019,429  $15,804,222  $5,527,305  $-  $21,331,527 
                         
Cost of Revenues  1,894,808  3,462,259  -  5,357,067   3,169,835   3,391,974   -   6,561,809 
                         
Gross Profit 9,554,608 3,107,754 - 12,662,362   12,634,387   2,135,331   -   14,769,718 
                         
Research & Development 2,048,285 523,429 - 2,571,714   2,509,107   473,569   -   2,982,676 
Selling, General & Administrative  2,882,049  2,366,226  1,531,606  6,779,881   3,220,883   2,284,997   2,409,695   7,915,575 
                         
Total Operating Expenses 4,930,334 2,889,655 1,531,606 9,351,595   5,729,990   2,758,566   2,409,695   10,898,251 
                         
Income (Loss) from Operations 4,624,274 218,099 (1,531,606) 3,310,767   6,904,397   (623,235)  (2,409,695)  3,871,467 
                         
Other Income (Expense)                         
         
Other Income 39,122 2,100 - 41,222   354,373   1,079,374   1,635   1,435,382 
Interest (Expense) Income  (12,154)  (59,599)  (177,337)  (249,090)
Interest Expense  (12,588)  (19,668)  (21,349)  (53,605)
                         
Total Other Income (Expense)  26,968  (57,499)  (177,337)  (207,868)  341,785   1,059,706   (19,714)  1,381,777 
                         
Net Income (Loss) before income taxes 4,651,242 160,600 (1,708,943) 3,102,899 
Income (Loss) before Income Taxes  7,246,182   436,471  (2,429,409)  5,253,244 
                         
Current income benefit (expense) 133,419 - (1,956) (131,463)
Deferred tax benefit  -  -  1,754,169  1,754,169 
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)
                         
Income benefit (expense)  133,419    1,752,213   1,885,632  
Total Income Tax (Expense) Benefit  (383,306)  357,581   (279,754)  (305,479)
                         
Net Income (Loss) $4,784,661 $160,600 $43,270 $4,988,531  $6,862,876  $794,052  $(2,709,163) $4,947,765 
                         
Supplemental Disclosures                         
                         
Total Assets $15,061,693 $11,674,640 $2,000,278 $28,736,611  $30,631,442  $14,117,747  $716,230  $45,465,419 
                         
Total Liabilities $1,142,661 $1,498,828 $1,708,172 $4,349,661  $3,166,999  $849,306  $400,041  $4,416,346 
                         
Revenues from Intercompany Sales - eliminated from sales above $1,176,438 $437,387 $3,100,000 $4,713,825  $2,075,387  $355,608  $3,470,000  $5,900,995 
                         
Depreciation and Amortization $461,429 $282,836 $14,143 $758,408  $780,434  $114,022  $29,617  $924,073 
                         
Purchases of Long-lived Assets $499,262 $61,329 $76,561 $637,152  $793,995  $51,907  $118,302  $964,204 

F-23F-24

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 20182021 and 20172020

NOTE 1312 -SEGMENT ANALYSIS (Continued)

  Marine Technology Business (Products)  Marine Engineering Business (Services)  Overhead  Total 
             
Year Ended October 31, 2020                
                 
Revenues from External Customers $11,278,181  $8,765,629  $-  $20,043,810 
                 
Cost of Revenues  2,254,008   5,060,354   -   7,314,362 
                 
Gross Profit  9,024,173   3,705,275   -   12,729,448 
                 
Research & Development  1,955,364   1,042,243   190,782   3,188,389 
Selling, General & Administrative  2,779,662   2,260,849   1,696,783   6,737,294 
                 
Total Operating Expenses  4,735,026   3,303,092   1,887,565   9,925,683 
                 
Income (Loss) from Operations  4,289,147   402,183   (1,887,565)  2,803,765 
                 
Other Income (Expense)                
Other Income  141,511   526,734   -   668,245 
Interest (Expense)  (10,612)  (15,672)  (43,919)  (70,203)
                 
Total Other Income (Expense)  130,899   511,062   (43,919)  598,042 
                 
Income (Loss) before Income Taxes  4,420,046   913,245   (1,931,484)  3,401,807 
                 
Income Tax (Expense) Benefit                
Current Tax Benefit (Expense)  63,590   -   (12,927)  50,663 
Deferred Tax (Expense) Benefit  (196,664)  273,666   (185,887)  (108,885)
                 
Total Income Tax (Expense) Benefit  (133,074)  273,666   (198,814)  (58,222)
                 
Net Income (Loss) $4,286,972  $1,186,911  $(2,130,298) $3,343,585 
                 
Supplemental Disclosures                
                 
Total Assets $22,200,123  $14,347,827  $1,491,201  $38,039,151 
                 
Total Liabilities $1,572,314  $1,321,011  $749,558  $3,642,883 
                 
Revenues from Intercompany Sales - eliminated from sales above $997,150  $354,373  $2,700,000  $4,051,523 
                 
Depreciation and Amortization $678,449  $105,775  $22,462  $806,686 
                 
Purchases of Long-lived Assets $811,352  $19,660  $167,323  $998,335 

  Marine Technology Business (Products)  Marine Engineering Business (Services)  Overhead  Total 
             
Year Ended October 31, 2017                
                 
Revenues from External Customers $10,986,268  $7,038,905  $-  $18,025,173 
                 
Cost of Revenues  2,246,881   3,810,567   -   6,057,448 
                 
Gross Profit  8,739,387   3,228,338   -   11,967,725 
                 
Research & Development  919,863   460,518   -   1,380,381 
Selling, General & Administrative  3,220,635   2,714,054   834,638   6,769,327 
                 
Total Operating Expenses  4,140,498   3,174,572   834,638   8,149,708 
                 
Income (Loss) from Operations  4,598,889   53,766   (834,638)  3,818,017 
                 
Other Income (Expense)                
                 
Other Income  117,106   4,172   -   121,278 
Interest Expense  (709,763)  (56,697)  169,449   (597,011)
                 
Total Other Income (Expense)  (592,657)  (52,525)  169,449   (475,733)
                 
Net Income (Loss) before income taxes  4,006,233   1,241   (665,189)  3,342,284 
                 
Income refund (expense)  22,578   -   (25,199)  (2,621)
                 
Net Income $4,028,810  $1,241  $(690,388) $3,339,663 
                 
Supplemental Disclosures                
                 
Total Assets $12,374,214  $11,479,953  $205,906  $24,060,073 
                 
Total Liabilities $1,109,003  $1,475,442  $7,648,208  $10,232,653 
                 
Revenues from Intercompany Sales - eliminated from sales above $1,895,015  $387,142  $1,797,775  $4,079,932 
                 
Depreciation and Amortization $528,667  $412,220  $12,739  $953,626 
                 
Purchases of Long-lived Assets $2,419,092  $129,989  $12,470  $2,561,551 

F-24F-25

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 20182021 and 20172020

NOTE 13 -SEGMENT ANALYSIS (Continued)DISAGGREGATION OF REVENUE

  USA  Europe  Australia  Total 
             
External Revenues by Geographic Locations                
                 
Year Ended October 31, 2018 $7,617,891  $10,029,806  $371,732  $18,019,429 
                 
Year Ended October 31, 2017 $7,499,900  $9,056,589  $1,468,684  $18,025,173 

NOTE 14 – COMMITMENTSSCHEDULE OF DISAGGREGATE OF REVENUE FROM CONTRACTS FOR SALE WITH CUSTOMERS BY GEOGRAPHIC LOCATION

  For the Year Ended October 31, 2021 
  Marine  Marine    
  Technology  Engineering  Grand 
  Business  Business  Total 
Disaggregation of Total Net Sales            
Revenues            
Primary Geographical Markets            
Americas $3,434,552  $2,188,812   5,623,364 
Europe  5,623,227   3,338,493   8,961,720 
Australia/Asia  5,867,710   -   5,867,710 
Middle East/Africa  878,733   -   878,733 
             
Total Revenues  15,804,222   5,527,305   21,331,527 
             
Major Goods/Service Lines            
Equipment Sales $10,914,124  $1,421,614   12,335,738 
Equipment Rentals  2,324,773   -   2,324,773 
Software Sales  669,968   -   669,968 
Engineering Parts  -   3,239,866   3,239,866 
Services  1,895,357   865,825   2,761,182 
             
Total Revenues  15,804,222   5,527,305   21,331,527 
             
Goods transferred at a point in time $11,588,099  $1,421,614   13,009,713 
Services transferred over time  4,216,123   4,105,691   8,321,814 
             
Total Revenues  15,804,222   5,527,305   21,331,527 

Leases

Orlando, Florida

Our corporate offices are co-located with our subsidiary Coda Octopus Products, Inc. in Orlando where we lease premises on a month to month basis at $5,176 per month.

Edinburgh, Scotland (Lease will come to an end on February 28, 2019)

Our wholly owned United Kingdom subsidiary, Coda Octopus Products Ltd, leases office space comprising 4,099 square feet in Edinburgh, United Kingdom. The annual rent is fixed for the duration of the lease at the British Pounds equivalent of $54,130 (the rent is stated in British Pounds and is therefore subject to exchange rate fluctuations). We have now agreed the schedule of works to reinstate the premises to is original conditions (ordinary wear and tear excluded) with the landlord and these premises will be surrendered on February 28, 2019. Following surrender the Company will have no further obligations (either for rent or rates) for these premises.

F-25

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 20182021 and 20172020

NOTE 13 - DISAGGREGATION OF REVENUE (Continued)

  For the Year Ended October 31, 2020 
  Marine  Marine    
  Technology  Engineering  Grand 
  Business  Business  Total 
Disaggregation of Total Net Sales            
Revenues            
Primary Geographical Markets            
Americas $3,001,860  $5,776,674  $8,778,534 
Europe  1,880,458   2,988,955   4,869,413 
Australia/Asia  6,255,510   -   6,255,510 
Middle East/Africa  140,353   -   140,353 
             
Total Revenues $11,278,181  $8,765,629  $20,043,810 
             
Major Goods/Service Lines            
Equipment Sales $7,183,580  $230,060  $7,413,640 
Equipment Rentals  1,361,151   -   1,361,151 
Software Sales  453,638   -   453,638 
Engineering Parts  -   7,299,879   7,299,879 
Services  2,279,812   1,235,690   3,515,502 
             
Total Revenues $11,278,181  $8,765,629  $20,043,810 
             
Goods transferred at a point in time $7,484,414  $160,537  $7,644,951 
Services transferred over time  3,793,767   8,605,092   12,398,859 
             
Total Revenues $11,278,181  $8,765,629  $20,043,810 

NOTE 14 – COMMITMENTS (Continued)AND CONTINGENCIES

Employment Agreements

Annmarie Gayle

Pursuant to the terms of an employment agreement dated March 16, 2017, the Company employs Ms. Gayle as its Chief Executive Officer on a full-time basis and a member of its Board of Directors. TheWith effect from July 1, 2019, Ms. Gayle’s annual salary is $230,000 was increased from $230,000 to $305,000 payable on a monthly basis. Ms. Gayle is also entitled to an annual performance bonus of up to $100,000,$100,000, upon achieving certain targets that are to be defined on an annual basis. The agreement provides for 30 days of paid holidays in addition to public holidays observed in Scotland.

The agreement has no definitive term and may be terminated only upon twelve months’ prior written notice by Ms. Gayle. In the event that the Company terminates her at any time without cause, she is entitled to a payment equal to her annual salary as well as a separation bonus of $150,000.$150,000. The Company may terminate the agreement for cause, immediately and without notice. Among others, “for cause” includes gross misconduct, a serious or repeated breach of the agreement and negligence and incompetence as reasonably determined by the Company’s Board. The agreement includes a 12-month non-compete and non-solicitation provision.

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 2021 and 2020

NOTE 14 – COMMITMENTS AND CONTINGENCIES (Continued)

Employment Agreements (Continued)

Blair Cunningham

Under the terms of an employment contract dated January 1, 2013, our wholly owned subsidiary Coda Octopus Products, Inc. employs Blair Cunningham as its Chief Executive Officer and President of Technology. He is being paid an annual base salary of $175,000 $200,000 with effect from January 1, 2018,2020, subject to review by the Company’s Chief Executive Officer. Mr. Cunningham is entitled to 25 vacation days in addition to any public holiday.

The agreement may be terminated only upon twelve-month prior written notice without cause. The Company may terminate the agreement for cause, immediately and without notice. Among others, “for cause” includes gross misconduct, a serious or repeated breach of the agreement and negligence and incompetence as reasonably determined by the Company’s Board. The agreement includes aan 18-month non-compete and non-solicitation provision.

Kevin Kane

Pursuant to the terms of an Employment Agreement dated May 7, 2021, as amended and modified, Kevin Kane was appointed the Chief Executive Officer of Colmek commencing July 6, 2021. The Employment Agreement provides for an annual base salary of $200,000. He will also be eligible for an annual performance bonus based on the Company’s financial performance. Subject to certain performance milestone during the current fiscal year, Mr. Kane will be paid a performance bonus of $12,000. As a further inducement, he was granted 15,000 restricted stock units out of the Company’s 2017 Stock Incentive Plan that vest in three equal annual instalments commencing on the first anniversary of grant.

The agreement may be terminated by the Company at any time. In the event that the Company terminates the employment agreement for whatever reason, the following severance payments apply:

Year 1 of employment2 Weeks
Year 2 of employment1 Month
Year 3 of employment4 Months

The agreement includes a 12-month non-compete and non-solicitation provision.

F-28

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 2021 and 2020

NOTE 14 – COMMITMENTS AND CONTINGENCIES (Continued)

Michael Midgley

Pursuant to the terms of an employment agreement dated June 1, 2011, Mike Midgley was appointed the Chief Executive Officer of our wholly owned subsidiary Coda Octopus Colmek, Inc. and our Chief Financial Officer. He is being paid an annual salary of $200,000 $210,000 subject to an annual review by Colmek’s Board of Directors and the Company’s Chief Executive Officer. Mr. Midgley is entitled to 20 vacation days in addition to any public holiday.

The agreement may be terminated at any time upon 4-month prior written notice. The Company may terminate the agreement for cause, immediately and without notice. Among others, “for cause” includes gross misconduct, a serious or repeated breach of the agreement and negligence and incompetence as reasonably determined by the Company’s Board. The agreement includes a 12-month non-compete and non-solicitation provision. On December 6, 2017, the board of directors of the Company appointed Mr. Midgley to be the Company’s Chief Financial Officer. In connection with this appointment, all rights and obligations under Mr. Midgley’s employment agreement with Colmek were transferred to and have been assumed by Coda Octopus Group, Inc.

Amendment to Michael Midgley’s Employment Agreement

The Company and Mr. Midgely entered into an agreement for the Company.Amendment of his Employment Agreement on February 15, 2021.

The following amendments were made:

RoleNow Chief Financial Officer of the Company. Removing the position of Divisional CEO of Coda Octopus Colmek.
Reduction in hoursWorking hours reduced to approximately 60% and his compensation reduced proportionally to $126,000.
Paid Time OffReduced proportionately and is now 12 days
BenefitsReduced proportionately

The agreement may be terminated at any time upon 4 months prior written notice. The Company may terminate the agreement for cause, immediately and without notice. Among others, “for cause” includes gross misconduct, a serious or repeated breach of the agreement and negligence and incompetence as reasonably determined by the Company’s Board. The agreement includes a 12-month non-compete and non-solicitation provision.

Litigation

From time to time we may be a party to or be involved with legal proceedings, governmental investigations or inquires, claims or litigation that are related to our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business or its financial condition.

NOTE 15 – PAYROLL PROTECTION PROGRAM

In the year ended October 31, 2021, two of our US companies, received $648,872 under the second round of the US Government Payroll Protection Program (“Second Round PPP”) for payroll assistance during the Pandemic. The proceeds from the Second Round PPP have been used to pay US employees’ salaries during this period. In the year ended October 31, 2021 the Company utilized all of the $648,872 of the Second Round PPP to retain employees. These loans were forgiven on June 14 and 22, 2021. This amount is recorded in our accounts as “Other Income”.

In the 2020 FY our US companies received $648,872 under the US Government Payroll Protection Program (“First Round PPP”). The proceeds from the First Round PPP were used to retain employees. The companies received their First Round PPP loans in April and May of 2020. The amount received under the First Round PPP has now been forgiven under the Program. This amount is recorded in our financial statements of 2020FY as “Other Income.”

F-26F-29

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

October 31, 20182021 and 20172020

NOTE 15 -SUBSEQUENT16 – COVID-19

The Company faces various risks related to the global outbreak of coronavirus disease 2019 (“COVID-19”).

The Engineering Services Business is dependent on its workforce to deliver its products and services primarily to the U.S. and U.K. Governments. If significant portions of the Engineering Services Business’s workforce are unable to work effectively, or if the U.S. or UK. Government and/or other customers’ operations are curtailed due to illness, quarantines, government actions, facility closures, or other restrictions in connection with the COVID-19 Pandemic, the Engineering Services Business’s operations is likely be severely impacted. The Engineering Services Business may be unable to perform fully on its contracts and costs may increase as a result of the COVID-19 outbreak. These cost increases may not be fully recoverable either from our customers or under existing insurance policies. At this time, the Company’s management cannot predict with any precision the full extent of the impact which COVID-19 Pandemic will have on the Company, but management continues to mitigate where it can and monitor the situation, to assess further possible implications to operations, the supply chain, and customers, and to take actions in an effort to mitigate adverse consequences.

Additionally, the Company is subject to flow downs from prime defense contractors under Defense Federal Acquisition Regulation Supplement (“DFARS”). Recent flow-down entailed Executive Order 14042 which mandates the vaccination of all staff. We may not be able to enforce mandatory vaccination resulting in losing key staff members, thus impacting on our ability to provide contractual engineering services.

Further, the Pandemic may continue to affect the Company’s results of operation, financial position, and liquidity.

The Marine Technology Business is dependent on its workforce and/or distributors/resellers to sell and deliver its products and services. Developments such as social distancing, shelter -in- place directives and travel restrictions introduced by governments have impacted the Marine Products Business’s ability to deploy its workforce effectively. These same developments may affect the operations of the Company’s suppliers, Customers and distributors/resellers, as their own workforces and operations are disrupted by efforts to curtail the spread of this virus. The Company, being a manufacturing company, in large part is unable to work remotely. The Company’s activities are performed in certain international locations that are also impacted by the COVID-19 outbreak. Furthermore, it is critical for the Marine Technology Business to have in-person engagement with customers for the demonstration of its products from a vessel at sea. The restriction on global travel has resulted in significantly less customer engagement which affects the demand for its goods and services. These disruptions have negatively impacted the Marine Technology Business’s sales, its ongoing development projects, ability to build meaningful pipeline of opportunities and its results of operations in the 2021 FY.

A new variant of the coronavirus, Omicron, is emerging and governments are considering various forms of restriction including both on domestic and international travel. If there are further curtailments on our business including restriction on travel and potentially work from home policy (we are a manufacturing business), this will severely impact on our business and is likely to reduce significantly demand for our goods and services.

NOTE 17 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events occurring through the date that the financial statements were issued, for events requiring, recording or disclosure in the October 31, 2021 consolidated financial statements.

On or around December 1, 2021 COPAS purchased property in Denmark for Danish Kroner 5,200,000 which is equivalent to US$ 808,116 at the Balance Sheet Date. This property was purchased to support the business activities of COPAS which was established as a mitigation strategy for the impact of the UK withdrawing as a member of the European Union. COPAS is pivotal for our business if we are to continue to do business in the EU member state countries. The property will be used by staff who are seconded to COPAS to provide operational capacity to the COPAS operations.

In November 16, 2018,2021 we established a subsidiary in India Coda Octopus Products (India) Private Limited (UK) purchased propertyto address some of the skills shortage we are experiencing in key areas and also to serve as a regional center for itssupport and business requirementsdevelopment activities for a purchase price of £521,400 (an equivalent of $669,350 at the exchange rate of $1.2837).South Asia.

 

On or around November 16, 2018,In December 2021 the Company issued 23,965 shares of common stock for a purchase price of $105,446 to one investorpaid off all Principal and Interest due on the HSBC Debentures. All Collateral and Liens over the Company’s assets are, pursuant to the terms of a private placement which was effected January 31 2018, under which certain pro-rata rights were triggered upon the conversion of the Series C Preferred Stock by the holders, on or around October 31, 2018.Debenture, expected to be removed in due course.

On December 24, 2018, the Company repaid $500,000 plus interest to our CEO representing loan outstanding (for full details see Note 8 of our Consolidated Financial Statements for year ended October 31, 2018 and 2017). The loan was paid in full and no further amounts are payable to our CEO for this loan. All obligations under this loan agreement are now extinguished.

F-27F-30

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATE: February 7, 2019CODA OCTOPUS GROUP, INC.
/s/ Annmarie Gayle
Chief Executive Officer

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints Annmarie Gayle, his or her true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, severally, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney may be executed in counterparts.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SignatureTitleDate
/s/ Annmarie GayleChief Executive Officer and ChairmanFebruary 7, 2019
Annmarie Gayle(Principal Executive Officer)
/s/ Michael MidgleyChief Financial OfficerFebruary 7, 2019
Michael Midgley(Principal Financial and Accounting Officer)
/s/ Michael HamiltonDirectorFebruary 7, 2019
Michael Hamilton
/s/ Per WimmerDirectorFebruary 7, 2019
Per Wimmer
/s/ Mary LostyDirectorFebruary 7, 2019
Mary Losty
/s/ G. Tyler RunnelsDirectorFebruary 7, 2019