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)

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

TABLE OF CONTENTS

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.

PART I

ITEM 1. BUSINESS

Overview

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

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).

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.

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:

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

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:

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

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’.

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.

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.

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.

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.

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

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.

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:

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.

Our patent portfolio consists of the following:

* 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.

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.

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.

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.

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.

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:

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.

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 Echoscope^4G®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:

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:

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.

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.

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.

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:

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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:

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.

Revenue:

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.

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:

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

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:

* 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.

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.

Research and Development (R&D):

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.

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.

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):

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:

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.

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

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.

Operating Income:

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:

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:

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.

Other Income:

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

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

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

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.

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.