Item 1. Financial Statements

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

CODA OCTOPUS GROUP, INC.

Consolidated Balance Sheets (Continued)

July 31, 2020 and October 31, 2019

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

CODA OCTOPUS GROUP, INC. Unaudited Consolidated Statements of Income and Comprehensive Income For the Periods Indicated

Consolidated Statements of Income and Comprehensive Income

(Unaudited)

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

CODA OCTOPUS GROUP, INC.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

For the Three, Six and Nine Months Ended July 31, 2020 and 2019

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

CODA OCTOPUS GROUP, INC. Unaudited Consolidated Statements of Cash Flows For the Periods Indicated Unaudited

Consolidated Statements of Cash Flows

(Unaudited)

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

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

JulyJanuary 31, 20202021 and 20192020

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements have been prepared based upon U.S. Securities and Exchange Commission rules that permit reduced disclosure for interim periods. Therefore, they do not include all information and footnote disclosures necessary for a complete presentation of Coda Octopus Group, Inc.’s financial position, results of operations and cash flows, in conformity with generally accepted accounting principles. Coda Octopus Group, Inc. (the “Company”, “Coda Octopus”, “we” or “us”) filed audited consolidated financial statements as of and for the fiscal years ended October 31, 20192020 and 20182019 which included all information and notes necessary for such complete presentation as part of its annual report on Form 10-K filed on January 28, 2020,2021, (“the “FormForm 10-K”). The results of operations for the interim period ended JulyJanuary 31, 20202021 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended October 31, 2019,2020, which are contained in the Form 10-K. The accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of normal recurring items) which are, in the opinion of management, necessary for a fair presentationstatement of the Company’s financial position as of JulyJanuary 31, 20202021 and the results of operations, comprehensive income and cash flows for the interim periods ended JulyJanuary 31, 20202021 and 2019.2020. The unaudited interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company uses the US dollar as the reporting currency for financial reporting. The financial position and results of operations of the Company’s UK-based operations are measured using the British Pound Sterling, Australian based operations are measured using Australian Dollars and Danish based operations are measured using Danish Kroner as the functional currencies. Foreign currency translation gains and losses are recorded as a change in other comprehensive income. Transaction gains and losses generated from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of our foreign operations are also included in other comprehensive income.

NOTE 2 – REVENUE RECOGNITION

Beginning on November 1, 2018, theThe Company adopted therecognizes revenue in accordance with Financial Accounting Standards Board’s Topic 606, Revenue from Contracts with Customers (“Topic 606”). Previously, we had recognized revenue in accordance with FASB Topic 605, Revenue Recognition. After carefully comparing the old and the new revenue standards, we believe that our previous revenue recognition policy is substantially consistent with our new revenue recognition policy and that revenues are consistently stated between periods and no cumulative effect adjustment was required.

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

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

JulyJanuary 31, 20202021 and 20192020

NOTE 2 – REVENUE RECOGNITION (Continued)

Our revenues are earned under formal contracts with our customers and are derived from both sales and rental of underwater technologies and equipment for real time 3D imaging, mapping, defense and survey applications and from the engineering services which we provide primarily to prime defense contractors. Our contracts do not include the possibility for additional contingent consideration so that our determination of the contract price does not involve having to consider potential additional variable consideration. Our sales do not include a right of return by the customer.

With regard to our Marine Technology Business (“Products Segment”Business”), all of our products are sold on a stand-alone basis and those market prices are evidence of the value of the products. To the extent that we also provide services (e.g., installation, training, post-sales technical support etc.), those services are either included as part of the product or are subject to written contracts based on the stand-alone value of those services. Revenue from the sale of services is recognized when those services have been provided to the customer and evidence of the provision of those services exist.

Revenue derived from either our subscription package offering,offerings or rental of our equipment is recognized when performance obligations are met, in particular, on a daily basis during the subscription or rental period.

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

Our contracts sometimes require customer payments in advance of revenue recognition andrecognition. In such instances these are recognized as revenue when the Company has fulfilled its obligations under the respective contracts. Until such time, we recognize this prepayment as deferred revenue.

For software license sales for which any services rendered are not considered distinct to the functionality of the software, we recognize revenue upon delivery of the software. Delivery is deemed when we issue the software activation code.

With respect to revenues related to our Services Segment,Business, there are contracts in place that specify the fixed hourly rate and other reimbursable costs to be billed based on material and direct labor hours incurred and revenueincurred. Revenue is recognized on these contracts based on material and the direct labor hours incurred. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred (materials and direct labor hours) to date to estimated total services (materials and direct labor hours) for each contract. This method is used as we consider expenditures for direct materials and labor hours to be the best available measure of progress on these contracts.

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

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

January 31, 2021 and 2020

NOTE 2 – REVENUE RECOGNITION (Continued)

Recoverability of Deferred Costs

In accordance with Topic 606, we defer costs on projects for service revenue. Deferred costs consist primarily of incremental direct costs to customize and install systems, as defined in individual customer contracts, including costs to acquire hardware and software from third parties and payroll costs for our employees and other third parties. The pricing of these service contracts is intended to provide for the recovery of these types of deferred costs over the life of the contract.

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

July 31, 2020 and 2019

NOTE 2 – REVENUE RECOGNITION (Continued)

We recognize such costs in accordance with our revenue recognition policy by contract. 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 over time, costs are recognized ratably over the term of the contract, commencing on the date of revenue recognition. At each quarterly 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.

Deferred Commissions

Our incremental direct costs of obtaining a contract, which consists of sales commissions are deferred and amortized over the period of the contract performance. We classify deferred commissions as current or noncurrent based on the timing of when we expect to recognize the expense. The current and noncurrent portions of deferred commissions are included in prepaid expenses and other current assets, and other assets, net, respectively, in our consolidated balance sheets. As of JulyJanuary 31, 20202021 and October 31, 2019,2020, we had deferred commissions of $30,466$0 and $0,$3,884, respectively. Amortization expense related to deferred commissions was $98,702$3,884 and $0$42,816 in the ninethree months ended JulyJanuary 31, 20202021 and 2019,2020, respectively.

Other Revenue Disclosures

See Note 14 – (“Segment AnalysisAnalysis”) for a breakdown of revenues from external customers and cost of those revenues between our two reporting segments: Product Segment and Services Segment including information on the split of revenues by geography.geography and type.

NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s short term financial instruments consist ofinclude cash, receivables,accounts receivable, accounts payable, accrued expenses and a revolving linenotes payable. The carrying amounts of credit. The Company adjusts the carrying value of financial assets and liabilities denominated in other currencies such as cash, receivables,accounts receivable, accounts payable and accrued expenses approximate fair values because of the linesshort-term nature of credit usingthese instruments. The aggregate carrying amount of the appropriate exchange ratesnotes payable approximates fair value as they bear interest at a market interest rate based on their term and maturity.

The fair value of the balance sheet date. TheCompany’s long-term debt approximates its carrying amount based on the fact that the Company believes that the carrying values of these short-term financial instruments approximate their estimated fair values.it could obtain similar terms and conditions for similar debt.

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

JulyJanuary 31, 20202021 and 20192020

NOTE 4 – FOREIGN CURRENCY TRANSLATION

The financial position and results of operations of the Company’s foreign subsidiaries are measured using the local currency in the jurisdiction in which the subsidiary operates as the functional currency. Assets and liabilities of operations denominated in foreign currencies are translated into US dollars at the prevailing exchange rates in effect at the balance sheet date, whiledates. Related revenues and expenses are translated at the weighted average exchange rates in effect during the reporting period. The resulting translation gains and/or losses onStockholders’ equity, fixed assets and liabilitieslong-term investments are recorded at historical exchange rates. Resulting translation adjustments are recorded as a separate component in stockholders’ equity as part of accumulated other comprehensive income or (loss), as may be appropriate. Foreign currency transaction gains and losses are excluded from netincluded in the consolidated statements of income (loss) until realized through a sale or liquidation of the investment.and comprehensive income.

NOTE 5 -– INVENTORY

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

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

July 31, 2020 and 2019

NOTE 6 – FIXED ASSETS

Fixed assets consistProperty and equipment, net consisted of the following components:as of:

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

January 31, 2021 and 2020

NOTE 7 – OTHER CURRENT ASSETS

Other current assets consisted of the following components:at:

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

July 31, 2020 and 2019

NOTE 8 – ESTIMATES

The preparation of consolidated financial statements in conformity with US Generally Accepted Accounting Principles (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues including unbilled and deferred revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include costs and estimated earnings in excess of billings, billings in excess of costs and estimated earnings, and valuation of accounts receivable, valuation of fixed assets, valuation of inventory,stock compensation, valuation of deferred tax assets, evaluation of uncertain tax positions, and the valuation of goodwill and other intangibles.

NOTE 9 – CONTRACTS IN PROGRESS

Costs and estimated earnings in excess of billings on uncompleted contracts represent accumulated project expenses and fees which have not been invoiced to customers as of the date of the consolidated balance sheets.sheet. These amounts are stated on the consolidated balance sheets as unbilled receivablesUnbilled Receivables of $1,181,423$1,311,480 and $2,279,362$861,300 as of JulyJanuary 31, 20202021 and October 31, 2019,2020, respectively.

Our deferred revenuecurrent Deferred Revenue of $992,679$1,314,467 and $973,735$1,006,454 as of JulyJanuary 31, 20202021 and October 31, 2019,2020, respectively, consists of billings in excess of costs and estimated earnings and revenues received as part of our subscription package offering, warranty or Through Life Support (“TLS”) obligations upon completing a sale.sale, as elaborated further in the last paragraph of this note.

Revenue received as part of sales of products via our Products Segmentequipment includes a provision for subscription package offering, warranty or TLS. Subscription package offering is essentially a rental agreement for a fixed period of twelve months under which we supply full equipment suite including hardware, software and technical support during the subscription period. TLS offers the customer extended post-sales technical support along with software and hardware assurances. These post-sales obligations (subscription package offering, warranty and TLS) areis treated as deferred revenue, along with extended warranty sales and through life support (TLS), which may be purchased by customers. These amounts are amortized over the relevant warranty period when the contractual obligations exist, which for subscription package offering and(12 months is our standard warranty is 12 months and TLS varies betweenor 24, 36 andor 60 months depending onfor extended warranty) from the package purchased by the customer.date of sale. These amounts are stated on the consolidated balance sheets as a component of deferred revenue in the amount of $519,588non-current Deferred Revenue and $497,819were $203,648 and $195,022 as of JulyJanuary 31, 20202021 and October 31, 2019,2020, respectively.

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

JulyJanuary 31, 20202021 and 20192020

NOTE 10 -– CONCENTRATIONS

Significant Customers

During the three months ended JulyJanuary 31, 2021, the Company had two customers from whom it generated sales greater than 10% of net revenues. Revenues from these customers was $1,303,807, or 26% of net revenues during the year. Total accounts receivable from these customers at January 31, 2021 was $862,850 or 46% of accounts receivable.

During the three months ended January 31, 2020, the Company had two customers from whom it generated sales greater than 10% of net revenues. Revenues from these customers was $2,064,274,$2,710,008, or 38%41% of net revenues during the period.

During the three months ended July 31, 2019, the Company had one customeryear. Total accounts receivable from whom it generated sales greater than 10% of net revenues. Revenue from this customer was $2,136,570, or 32% of net revenues during the period.

During the nine months ended Julythese customers at January 31, 2020 the Company had one customer from whom it generated sales greater than 10%was $1,817,725 or 44% of net revenues. Revenues from this customer was $3,735,550, or 24% of net revenues during the period.

During the nine months ended July 31, 2019, the Company had one customer from whom it generated sales greater than 10% of net revenues. Revenue from this customer was $5,345,790, or 28% of net revenues during the period.accounts receivable.

NOTE 11 – NOTES PAYABLE

The HSBC loan is secured by a blanket lien on all of the Company’s US subsidiaries. The foreign subsidiaries are each guarantors of the obligations undertaken in the loan agreement.

During the three months ended January 31, 2021, the Company received $526,545 under the Payroll Protection Program, which was initially recorded as long-term debt. As the Company makes qualifying expenditures (as defined), the Company reduces long-term debt and records Other Income. During the three months ended January 31, 2021, the Company recorded $89,971 as Other Income related to the Payroll Protection Program. The remaining amount of Payroll Protection Program funds that had not yet been spent as of January 31, 2021 is $436,574. The Company anticipates using the full $526,545 for qualifying expenditures.

The Company entered into a $4,000,000 revolving line of credit facility with HSBC NA on November 27, 2019, with the interest rate established as the applicable prime rate. The outstanding balance on the line of credit was $0 as of JulyOctober 31, 2020. TheThis revolving credit line which is subject to renewal expireswill expire on November 26, 2020.

The Company availed itself to2021 unless renewed by the Paycheck Protection Program scheme (“PPP”) in the second and third quarter of this fiscal year. All the PPP amounts received have been utilized in accordance with the purpose and objective of the program. Where these conditions are met, i.e. utilization of the amounts for the designated purpose of the scheme the borrower is eligible for the forgiveness of these amounts. We believe we have met these qualifying conditions and would anticipate the forgiveness of these amounts in due course. We have submitted our application for the forgiveness.bank.

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

July 31, 2020 and 2019

NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS

On February 24, 2016, the FASB issued ASU No. 2016-02, Leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the balance sheet. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU No. 2016-02 effective November 1, 2019. We own substantially all of our facilities. Accordingly, the adoption of ASU No. 2016-02 did not have a material impact on our interim consolidated financial statements.

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

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

January 31, 2021 and 2020

NOTE 13 – EARNINGS PER COMMON SHARE

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

JulyJanuary 31, 20202021 and 20192020

NOTE 14 – SEGMENT-SEGMENT ANALYSIS

Based on the fundamental differences indifference between the types of offerings (servicesour offering, products versus products sale/rental),services, we operate two distinct reportable segments which are managed separately. Coda Octopus Products (“Marine Technology Business” or “Products Segment”) operations are comprised primarily of sale of underwater technology sonar solutions, products for underwater operations including hardware and software; and rental of solutions and products to the underwater market. Coda Octopus Martech and Coda Octopus Colmek (“Services Segment” or “MarineMarine Engineering Business” or “Services Segment”) are providingprovides engineering services primarily as sub-contractors mainly to prime defense contractors and Coda Octopus Products operations are comprised primarily of product sales, technology solutions sales, rental of equipment and/or software and associated services (“Products Segment” or “Marine Technology Business”).contractors.

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

The Company evaluates performance and allocates resources based upon segment operating income. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies reported in our Form 10-K - Consolidated Financial Statements of October 31, 2019 which was filed with the Securities Exchange Commission on January 28, 2020.policies.

There are inter-segment sales disclosed in the tables below for informational purposes, but which have been eliminated in our financial statements but are disclosed in the tables below for information purposes.statements.

The following table summarizes segment asset and operating balances by reportable segment as of and for the three and nine months ended JulyJanuary 31, 20202021 and 2019,2020, respectively.

The Company’s reportable business segments sell their goods and services in four geographic locations:

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

JulyJanuary 31, 20202021 and 20192020

NOTE 14 – SEGMENT-SEGMENT ANALYSIS (continued)(Continued)

Information concerning principal geographic areas is presented below according to the area where the activity has taken place for the three and nine months ended July 31, 2020 and 2019 respectively: