UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2022
☐ 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)
Delaware
(State or other jurisdiction of
incorporation or organization)
34-2008348
(I.R.S. Employer
Identification Number)
3300 S Hiawassee Rd, Suite 104-105, Orlando, Florida, 32835
(Address, Including Zip Code of Principal Executive Offices)
407 735 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
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company.
Large accelerated filer ☐
Non-accelerated filer ☐
Accelerated filer ☐
Smaller reporting company ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
State issuer’s revenues for its most recent fiscal year: $22,225,803.
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of April 30, 2022 representing the last business day of the registrant’s most recently completed
second fiscal quarter: approximately $27,144,477
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 10,942,353 as of January 19, 2023.
TABLE OF CONTENTS
PART I
ITEM 1.
BUSINESS
ITEM 1A.
RISK FACTORS
ITEM 1B.
UNRESOLVED STAFF COMMENTS
ITEM 2.
PROPERTIES
ITEM 3.
LEGAL PROCEEDINGS
ITEM 4.
MINE SAFETY DISCLOSURES
PART II
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ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
ITEM 6.
SELECTED FINANCIAL DATA
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A
CONTROLS AND PROCEDURES
ITEM 9B
OTHER INFORMATION
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11.
EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES
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FORWARD-LOOKING STATEMENTS
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This Form 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.
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PART I
ITEM 1. BUSINESS
Overview
Coda Octopus Group, Inc. (“Coda” “the Company” or “we”), through its wholly owned subsidiaries, operates two distinct businesses:
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the Marine Technology Business (also referred to in this Form 10-K as “Products Business”, “Products Operations” or “Products Segment”); and
the Marine Engineering Business (also referred to in this Form 10-K as “Engineering Business”, “Engineering Operations”, or “Services Segment”).
Our Marine Technology Business is a technology solution provider to the subsea and 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 innovation, 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, navigation of
underwater hazard, 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. It has the potential to radically change how diving
operations are performed globally because it delivers real time information simultaneously to the divers underwater and their surface-based dive supervisors. It also allows
diving operations to be performed in zero visibility water conditions which is a safety challenge for diving operations.
The Marine Technology Business operates thorough our wholly owned subsidiaries Coda Octopus Products Ltd (UK), Coda Octopus Products A/S (Denmark, Coda Octopus
Products, Inc (Orlando) and Coda Octopus Products (India) Private Limited (India).
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 Close-In-Weapons System (CIWS). The Services Segment established its business in 1977 and has been supporting a number of 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 prototypes 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 these parts, typically for the life of the program, which can span decades. Coda Octopus Colmek, Inc. and Coda Octopus Martech Ltd, qualify as a small
business. This opens opportunity under state requirements to collaborate with Prime Defense Contractors on these programs. A significant part of the revenues generated by the
Marine Engineering Business is usually highly concentrated and are 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 either alone 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 offered by our Marine Technology Business.
This also ensures more tight control over our intellectual property rights which are important for our market position in the space in which 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.
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Our real time 3D/4D/5D/6D Imaging sonars are the only underwater imaging sonars which are capable of providing complex seabed mapping and real time inspection and
monitoring and providing 3D/4D/5D/6D data of moving underwater objects irrespective of water conditions including in zero visibility water conditions (which is a common
and costly 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/6D acoustic images
using different acoustic parameters such as frequency, field of view, pulse length, and 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 defense diving operations are performed globally by providing real time data to
both diver and surface supervisor simultaneously, 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.
The DAVD can be used in combination with any of our imaging sonars and can also be used without our imaging sonars. Increasingly, opportunities which we identify are for
combined use.
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).
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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 closure of Australian borders because of the Coronavirus Pandemic and, more recently,
challenges in restoring our activities effectively on the ground.
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…”).
In November 2021 Coda Octopus Products Limited established a subsidiary Coda Octopus Products (India) Private Limited intended to gain access to this market and to recruit
critical resources for software development for our Company.
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.
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Marine Technology Business (“Products Segment”)
Our Marine Technology Business develops proprietary solutions for both the commercial and defense subsea market. The range of our solutions are complementary and include:
Type of Systems
Geophysical Systems
GNSS-Aided Navigation Systems (Attitude and Positioning Systems)
Real Time Volumetric Imaging Sonar
Diver Augmented Vision Display System
Description
Comprising Hardware and Software;
Comprising Hardware and Software
Comprising Hardware and Software
Comprising Hardware and Software
These products are sold, leased or rented into various marine sectors and include:
● Marine geophysical survey
● Offshore Renewables (“Wind Energy”)
● Underwater construction, inspection and monitoring
● Diving Companies
● Commercial and Defense Diving
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Salvage and decommissioning
● Oil and Gas (“O&G”)
● Commercial fisheries
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● Underwater Defense Applications
● Marine vehicles and robotics
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Environmental, mammal and habitat monitoring
Port and Harbor Security, law enforcement and first responders
● Research and education
1. Geophysical Range of Products
Our geophysical systems (“GEO”) range of products include geophysical data acquisition systems, processing and analysis software that are used primarily by survey
companies, offshore renewable companies, research institutions, salvage companies. The Company’s GEO range of products are used in conjunction with sidescan sonars to
survey large areas and create images of the seabed, identify seabed boulders and objects, mark seabed type boundaries and identify existing subsurface structural features,
geological layers, and/or buried debris. The Company started its first innovation with this range of products and in fact was the first company to digitalize sidescan sonar data.
The Company’s 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 and real time 3D navigation in zero visibility conditions.
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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 Company. We have several patent applications 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 and US 10,816,652 which concerns a method of
compressing sonar data) and 10,718,865 which concerns a method of compressing beamformed sonar data.
6D Sonars (Echoscope PIPE®)
The Company’s 6D Sonars process and utilize much more of the data acquired by the sonar. 6D Sonars 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 PIPE 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.
A summary of some of the differences between our standard Echoscope® sonar series and our newly launched Echoscope PIPE® series of sonars are set out below:
Description
Real Time Capability
Angular Cover Dual Frequency
Adaptive Frequency Capability
Ping Rate
Multiple Real Time 4D Images
Number of Data Points per Single Ping
Number of Beams and Values per Beam
Current Echoscope®
Yes, 4D Images
50ox50o and 24ox24o
No
Up to 20Hz
No, one single Real Time Image
Up to 16,386
128x128x1 Value
Multiple Sequential Configuration Files to capture data
using different parameters
Full Time Series Raw Data Capture
Full Time Series Raw Data Offline Processing
Multiple Parallel Beamformed Data Output
Smart Ping Manager using Frequency, Field of View,
Filtering in Real-Time
Adaptative Real Time Beamforming
No Capability
No Capability
No Capability
No Capability
No Capability
No Capability
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PIPE® Sonars
Yes, 4D, 5D and 6D
54ox54o - 47ox47o and 32ox32o - 28ox28o
Yes
Up to 40Hz
Capable of Multiple Real Time Images
Up to 40 million
Up to 180 x 180 with up to 2,500 values (depending on
viewing range)
Up to 10 Configuration sets for real time capture and
display
Capture of Raw Data
Capable of Raw Data Offline Processing
Capable of Multiple Parallel Beamformed Data Outputs
Capable
Offers various methods of Beamforming the sonar data
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, that is to generate a
3D image underwater of moving objects. The competing 3D technology, the multibeam, which is the current standard bearer in the market is a sonar for mapping of the seabed.
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 3D all types of underwater operations
and is 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 since it removed a number of barriers to market adoption. Since its introduction
we have 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 underwater 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,
thus opening potentially new market opportunities for the Company’s technology.
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 to build on our 4G innovations with a 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 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 from the
defense space.
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 poor 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 costs. The subsea market is experiencing high 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 “AGA”, OTS Guardian and the Divator and Dräger Panorama Nova Dive full-face masks. The DAVD HUD and system technology is not however limited to these
products and applications.
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Problem In Context
Navy and Commercial diving share common issues and challenges with location, visibility, communication, safety, accessing 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 data (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 flow up from the diver to the dive 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 to render real time information for underwater applications is protected by patent and Coda Octopus has an
exclusive license 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 been finalized. The DAVD solution is now compatible with
most helmets and face masks in the market.
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 new generation of top-end software for our now much more advanced sonars. We have now
launched our fourth-generation multi-sensor software platform which is marketed under the name “4G USE®”. We have also filed several provisional patents around our 4G
USE® which 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.
10
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.
11
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® for accurate position, heading, pitch, roll and yaw at sea. 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 F280 Series® 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.
Sales and Marketing
We market our products primarily through our internal sales team, website, industry events such as trade shows, webinars, industry relationships and agents in foreign countries
such as Japan, China and Korea. In addition, we have a network of non-exclusive independent global sales agents. In 2023, 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.
12
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 designed for integration into 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 subassemblies for
these customers and after going through various acceptance tests, including first article inspection approvals, we are given the manufacturing contracts. Many of these
manufacturing 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.
In order to grow, the Marine Engineering 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, which is UK-based, 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.
13
Coda Octopus Colmek, Inc. (“Colmek”)
Colmek, which is USA-based, 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 (AQS-24). 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.
Competition
In our Marine Technology Business (Products Business), 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.
14
GNSS Aided Inertial Positioning and Attitude Measurement Systems (“Motion Products”)
In the field of GNSS-aided inertial positioning and attitude sensing equipment, where our product addresses a small segment of the overall market, we believe that we have four
principal competitors: Teledyne Marine (part of US based Teledyne Technologies Inc.) which is focused on the mid-performance segments with an estimated 25% of the
market; iXblue, a French company which covers all segments, with an estimated 20% of the market; Kongsberg Seatex AS, a Norwegian company (part of Kongsberg Gruppen)
which has products across all segments, with an estimated 15% of the market; and Applanix, a Canadian company (part of Trimble) which has one major product focused on
the high end of the market, with an estimated 20% of the market. We believe that our market share in this market segment of motion sensing equipment is about 5%. This
market is fiercely competitive and with the advancement of technology coupled with the development of autonomous land and marine platforms there are additional vendors in
the market such as SBG Systems S.A.S (a French based manufacturer of motion sensors). We sell our MOTION range as part of our equipment suite to complement our 3D
sonar range as well as supplying it individually. The development and introduction of our F280 Series® of GNSS Aided Inertial Positioning and Attitude Measurement System®
constitutes our new generation of Motion Products and gives us the opportunity to increase our market share.
Real Time 3D/4D/5D and 6D Volumetric Sonar
In the field of Real Time 3D/4D/5D imaging, we are unaware of other companies offering a similar product. In this context it is important to understand some of the capabilities
we bring to this field include:
-
-
-
-
-
-
-
-
-
-
Acoustic Projector/Transmitter design, manufacturing, and testing
Acoustic Receiver Array design, manufacturing, and testing
Acoustic encapsulation and sensitivity measurement
Acoustic Projector/Transmitter beam pattern and sensitivity measurement
Pressure housing Design and Manufacture (sonar systems)
3D/5D/6D Real-Time digital beamforming (on-device)
1D and 2D Digital Beamforming
Broadband Beamforming
Signal Processing
Active High Frequency Sonar Systems
-
-
-
Passive Mid Frequency Sonar Systems
Data acquisition and recording hardware and software
Real-time 2D and 3D sonar visualization rendering and processing software
The entry into this market is dependent upon specialized marine electronics, acoustic and software development skills. The learning curve, which has resulted in the
advancement of our real time 3D sonar device, is the culmination of two decades of research and development into this field. Companies such as Kongsberg Gruppen, R2Sonic,
LLC, Tritech International Ltd., United Kingdom, BlueView Technologies Inc., USA (now a part of Teledyne Technologies Incorporated), and Norbit Group AS Norway are
examples, but none of these sonar offerings are directly comparable or competitors to our real time volumetric 3D/4D/5D and 6D sonar solutions as their scanning sonar, single
beam or multibeam sonars are not real time 3D imaging sonars and therefore cannot image moving targets underwater. Specifically, we believe that they do not have the same
capabilities as our Echoscope® technology in terms of real time inspection and monitoring by generating 3D, 4D, 5D and 6D images of moving objects underwater including in
environments in low or zero visibility conditions. Nor do they have the ability to use a single sonar for multiple real time 3D/4D images simultaneously. Notwithstanding it
should be noted that Teledyne has acquired a significant number of substantial subsea companies (examples are Reson and BlueView). Teledyne has much greater resources,
liquidity and market reach than our Company and has many operating verticals. We therefore can give no assurance that companies such as these will not enter this market.
Furthermore, companies such as Kongsberg Gruppen and Teledyne can expend significantly more in any one fiscal year on R&D and Business Development, key pillars for
increasing market share of underwater imaging sonars, than Coda Octopus. Notwithstanding, we believe that our recent development and introduction of 5D/6D - Echoscope
PIPE®) sonar capability in conjunction with our software (4G USE® a multi-sensor platform) further distinguishes our volumetric sonars and significantly extends our lead over
competitors in the subsea imaging market. We are not aware of any other imaging sonars in the market capable of generating real time 5D and 6D imagery underwater, which
are Coda Octopus inventions. The innovations around Echoscope PIPE® are the subject of numerous patent applications.
We seek to compete on the basis of producing high quality products employing cutting edge technology that is easy to use by operators without specialized skills in sonar
technology. We intend to continue our research and development activities to continually improve our products, seek new applications for our existing products, 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 3 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. In the 2022 Financial Year we added two new patents to our portfolio. We also incentivize our staff by having in place a
Patent Reward Scheme.
15
Our patent portfolio consists of the following:
Patent No.
US 7,466,628
US 7,489,592
Description
Concerns a method of constructing mathematical representations of objects from reflected
Expiration Date
January 1, 2027
sonar signals
Concerns a method of automatically performing a patch test for a sonar system, where data
from a plurality of overlapping three-dimensional (3D) sonar scans of a surface, as the
platform is moved, are used to compensate for biases in mounting the sonar system on the
platform
March 5, 2027
US 7,898,902
Concerns a method of representation of sonar images allowing 3D sonar data to be
June 13, 2028
represented by a two-dimensional image
US 8,059,486
Japan 5565964
Japan 5565957
US 8,854,920
US 9,019,795
Concerns a method of rendering volume representation of sonar images.
Concerns a method for drilling/levelling by an underwater drilling/levelling construction
April 16, 2028
January 13, 2031
device
Concerns a method of construction management for a 3D sonar device
Concerns a method of volumetric rendering of 3D sonar data sets
Concerns a method of object tracking using sonar imaging through point matching between
October 13, 2030
June 22, 2033
November 30, 2033
3D data sets
US 10,088,566
Concerns a method of object tracking using sonar imaging using a bounding sphere for
November 25, 2036
object tracking
*US 10,718,865
US 10,816,652
US 11,061,136
**US 11,204,108**
*US 11,448,755*
*US15/953423*
Concerns a method of compressing beamformed sonar data
Concerns a method of compressing sonar data
Concerns a method of tracking unknown possible objects with sonar
Concerns a method of predicting and adjusting the laying of cable using sonar imaging.
Concerns a method of correcting beamformed data through split aperture beamforming
Concerns a method of pseudo random frequency sonar ping generation for the purposes of
March 1, 2039
October 28, 2038
March 28, 2039
March 22, 2039
June 3, 2041
*** Provisional Allowance Received
*JP2019-34056*
Concerns a method of compressing sonar data
***Provisional Allowance Received
data and hardware cost reduction
* 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® technology 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.
***These will be granted once we have paid the necessary fees and completed certain applications.
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®, Echoscope Sequencer®, Survey Engine®, Dimension®, DAseries®, GeoSurvey® CodaOctopus® Air, CodaOctopus ® Vantage; CodaOctopus ® UIS;
CodaOctopus® USE, Sentiris® and Thermite®.
In addition, we have
www.martechsystems.co.uk.
registered
several
internet domain names
including www.codaoctopus.com; www.codaoctopusgroup.com; www.colmek.com and
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 2022 and
2021, we spent $2,237,920 and $2,982,676, respectively, on R&D, representing a 25.0% reduction. With the crystallization of several significant hardware development projects
by the Company, research and development has fallen.
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 realized 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.
16
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 900 accreditation, cyber security certifications including Cyber Essentials and NIST, 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. In addition, the costs of complying with some of the regulations including DFARS
may be prohibitive.
Employees
As of the date hereof, we employ approximately 83 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
17
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 and continues unless 6 months’ notice is given in advance.
Annual rent is DKK 142,893 plus Value Added Tax (being an equivalent of $20,472) 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. Martech is paying Coda Octopus Products Limited rent amounting to the
equivalent of $53,803 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.
18
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Our common stock has been traded on the Nasdaq Capital Market under the symbol “CODA” since July 19, 2017. Prior thereto, it had been quoted on the OTCQX since
February 8, 2017, under the symbol COGI, and prior thereto, on the OTC Pink Sheets under the symbol CDOC. The following table sets forth the range of high and low bid
prices of our common stock as reported and summarized on the Nasdaq, for the periods indicated. These prices are based on inter-dealer bid and asked prices, without markup,
markdown, commissions, or adjustments and may not represent actual transactions.
Year Ended October 31, 2022
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended October 31, 2021
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
$
$
$
$
$
$
HIGH
LOW
HIGH
8.95
7.37
5.75
6.44
6.67
9.50
9.90
9.50
$
$
$
$
$
$
$
$
LOW
6.49
5.60
4.77
4.85
5.21
6.95
7.70
8.31
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.
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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 operations. These are:
●
the Marine Technology Business (also referred to in this Form 10-K as “Products Business”, “Products Operations” or “Products Segment”); and
●
the Marine Engineering Business (also referred to in this Form 10-K as “Engineering Business”, “Engineering Operations”, or “Services Segment”).
Our Marine Technology Business is a technology solution provider to the subsea and underwater market. It has a long-established pedigree in this market, and it innovates,
designs, develops and manufactures proprietary solutions for this market (both for commercial and defense applications) including our range of flagship volumetric real time
sonar solutions and our diving technology.
These solutions and 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 offshore renewable companies, oil and gas (“O&G”) companies, law
enforcement agencies, ports, mining companies, underwater vehicle manufacturers, Prime Defense Contractors as OEM integrators, defense bodies, fisheries and research
institutes.
Our Marine Engineering Business is a supplier of engineering services and embedded solutions (such as mission computers) to prime defense contractors such as Raytheon,
Northrop Grumman, Thales Underwater, Atlas Electronik UK and 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) through obsolescence management programs. These services provide recurring
stream of revenues for our Services segment.
20
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
Our business is affected by a number of factors including those set out below:
A. United Kingdom’s withdrawal from the European Union (“Brexit”)
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 all rights which the UK previously enjoyed as a member.
As part of the withdrawal, the UK Government and EU reached an agreement on December 30, 2020, on trade in certain areas.
The change in the UK EU membership status adversely impacts our business in several important areas:
● Our shipments into the European Union are subject to customs process. This results in increased costs and time for the processing of shipments. This operates as
a deterrent for EU customers to work with us. We endeavor to mitigate this by shipping to our subsidiary in Denmark which ships to our customer. This means
increased costs which we are unable to recover and significant delays which may risks the project.
● Our technology requires training to support its effective implementation. Typically for sales and rentals we would mobilize our engineers to train and assist
these customers in set up of the equipment. Under the new trade agreement, we will need to obtain the necessary work permits from the EU member state to
which we intend to send our engineer. This will be time consuming and costly and the rules for granting such permit will vary from member state to member
state. Furthermore, we have no precedent to know if these permits will be granted.
●
EU Member State customers are reluctant to engage UK companies, due to the hassle factor associated with importing into the EU. This risks reduction in our
opportunities emanating from the EU countries.
● We are not able to recruit from EU Member states without getting work permits. As a result, we are subject to skills shortages and significant increase in the
costs of salaries as many technology companies are competing for the same skills. The UK is generally facing a critical skills shortage, resulting in shortage of
skills in key areas such as engineering and software development.
The Company established 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.
21
B. Currency Risks:
The Company’s operations are split between the United States, United Kingdom, Denmark, India and Australia. A large proportion of our consolidated revenues (53.9%
in the 2022 FY) are generated outside of the United States by our foreign subsidiaries in the United Kingdom (“UK”) and Denmark. In addition, a significant part of our
assets and liabilities (both current and fixed) is held in British Pounds and Danish Kroner by these foreign subsidiaries. Foreign Currency Translations as they pertain to
our assets and liabilities are translated at the prevailing exchange rate at the balance sheet date and related revenue and expenses are translated at weighted average
exchange rates in effect during the period (see paragraph n (Foreign Currency Translation) of Note 2 – Summary of Accounting Policies of our audited Consolidated
Financial Statements as of October 31, 2022). Significant currency fluctuations (particularly the British Pound and/or the Danish Kroner, Euros, versus the US Dollar)
may affect our financial results and the value of our assets. We are therefore subject to currency fluctuation risks. In the Current 2022 FY, due to the sharp depreciation
of the Pound, Danish Kroner and Euros against the USD, our revenues were impacted by $1,192,833 when applying the same exchange rate in the 2021 FY.
C.
Inflation
Inflation measured as the Consumer Price Index is significant in the countries in which we operate. In the twelve months to October 31, 2022, these were:
-
-
-
Denmark 10.1% - source: Statistics Denmark,
UK 11.1% - source: Office of National Statistics (ONS); and
USA 7.7% - source: U.S. Bureau of Labor Statistics.
In the 2022 FY the impact of Inflation has not been material since we were holding significant inventory and also had our salaries and professional fees in place at the
beginning of the 2022 FY. However, we believe global inflation will pose a significant risk to our business in the 2023 FY. Inflation affects our business in several areas
and therefore our overall financial results. For further discussions on Inflation see the relevant section of Item 7 MD&A which concerns “Inflation and Foreign
Currency”.
D. Political Landscape/Exporting to China
We sell our products globally and increasingly to Asia. The recent change in both the US and UK Governments’ attitude (and to a lesser extent the European Union
member states) towards trade with China, directly affects the sale of our products to customers based in China. Our real time 3D sonars which are depth 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 and
therefore requires an export license. We also are not allowed to promote our DAVD technology in China.
On 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 has refused to grant export licenses for several of the Company’s 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 depth 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 consigned for China.
In 2022 FY we realized much less in sales to China, and we believe this is a result of the political environment.
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.
22
E. Supply Chain and Supply Chain Disruption
We rely on the availability of raw materials including electronic assemblies and semiconductor to manufacture our products and solutions and offer our engineering
services.
Due to the exceptionally high demand in the semi-conductor market with limited supplies available, we are experiencing extreme lead times for components which are
necessary for the manufacture and service of our products and providing engineering design services by our Engineering Business. 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 or engineering service uncompetitive. The Products Business may reasonably
endeavor to reduce the impact of the extended lead times we are experiencing by priming well in advance our 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 components are required until their
customers place an order for bespoke engineering work packages. We therefore have a high risk that our Engineering Business’ may be severely impacted by the
shortages that we are currently experiencing. The increased inventory evidences our mitigation strategy to increase inventory where we can and, in this regard, a
significant part of our cash resources in the 2023 FY is geared towards supporting our supply chain requirements.
Our technology is based on electronics that are designed and manufactured to our specification exclusively for us. These electronic components are costly. Advancement
in technology may make these specialized components or circuits obsolete. Reengineering these key components could result in significant capital expenditure and also
may cripple the production of our products since quick replacements cannot be found and would require new engineering work. Furthermore, there is no broader market
for these components.
F. Significant Increase in the Price of Raw Materials
In addition to the disruption in the Supply Chain, we are also experiencing very significant increase in price of raw materials which we are unlikely to be able to pass on
to our customers. These increases may make the cost of making our products prohibitive and uncompetitive and could affect our margins and also the viability of our
business.
G. Shortage of Key Skills/Resourcing Levels and significant increase in cost of operations due to inflation
We are experiencing extreme shortage of personnel with key skills which are critical to our business, such as electronic engineers, software development skills, technical
support engineers, field support engineers and sales and business development skills. This situation is further compounded by significant increases in wages and salaries.
In addition, with the UK withdrawing from EU membership, this exacerbates an already critical situation for businesses. In the UK where we have a significant part of
our activities including Manufacturing and Research & Development, there is acute shortage of skills and many industries demanding pay increases in excess of current
inflation rate of 11.1%. The UK is seeing extensive strike actions across the country, and this will put further pressure on businesses to meet and exceed inflation-proof
salary increases. This is likely to increase the cost of operations, in particular, our SG&A expenditures in the 2023 FY.
As 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 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.
H. Government Spending for Defense:
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.
23
I. Technological Advancement:
A significant part of our growth strategy is predicated on our flagship real time volumetric imaging sonar technology and our Diver Augmented Vision Display (DAVD)
solution. The technology space is inherently uncertain due to the fast pace of innovations and therefore we can give no assurance that we can maintain our leading
position in these areas or that innovations in other areas may not surpass our solutions that we currently supply to the subsea market. An example of new technology
entering the subsea market is LIDAR technology. However, unlike our sonar technology, LIDAR technology cannot be employed in zero visibility conditions and
cannot generate a volume pulse or image moving objects required for real time inspection and monitoring underwater.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements that have been prepared in 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
All 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, diving technology and from the engineering services that we provide. Our contracts do not include the possibility for additional
contingent consideration so that our determination of the contract price does not involve having to consider potential variable additional consideration. Our product sales do not
include a right of return by the customer.
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 those services have been provided to the customer and evidence of the provision of those services exist.
For further discussion of our revenue recognition accounting policies, refer to paragraph h of Note 2 “Revenue Recognition” in our Consolidated Financial Statements.
24
Stock based Compensation
We recognize the expense related to the fair value of stock based compensation awards within the consolidated statements of income and comprehensive income. The fair value
of stock based 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 8 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.
25
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
Goodwill and intangible assets consist principally of the excess of cost over the fair value of net assets acquired (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 intangible assets using the straight-line method over their estimated period of benefit. We
annually evaluate the recoverability of goodwill and intangible assets and carefully consider events or circumstances that warrant revised estimates of useful lives or that
indicate that impairment exists.
Step 1 of the goodwill impairment test used to identify potential impairment compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair
value, which is based on future discounted cash flows, exceeds the carrying amount, goodwill is not considered impaired. The Company has adopted Accounting Standards
Codification 2017 – 04, Simplifying the Test for Goodwill Impairment, which permits the Company to impair the difference between the carrying amount in excess of the fair
value of the reporting unit as the reduction in goodwill.
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 reporting unit compared to the fair value of the reporting unit. To date, the Company has not
had any goodwill impairments.
Fiscal Year 2022 Consolidated Results of Operations
In this Form 10-K, the following meanings are ascribed to the terminologies set out immediately below:
FY
2022 FY
2021 FY
Current FY
Previous FY
Means Fiscal Year
Means the Fiscal Year ended October 31, 2022
Means the Fiscal Year ended October 31, 2021
Means the Fiscal Year ended October 31, 2022
Means the Fiscal Year ended October 31, 2021
In the Current FY revenues increased by 4.2% over the Previous FY, Gross Profit Margins fell by 0.9%, total operating expenses fell by 6.8% and operating income increased
by 30.4%. Net income before taxes fell by 2.3% and after taxes by 13.1%. The main factor is that in the Previous FY we recorded in “Other Income” exceptional items totaling
$1,350,440 (comprising Paycheck Protection Program (“PPP”) and Employment Retention Credits (“ERC”)) contributions whereas in the 2022 FY we recorded $88,917
comprising ERC. Without these exceptional items in both the Current FY and Previous FY, net income before taxes would have been $5,043,418 and $3,902,804, respectively,
thus representing a 29.2% increase in net income before taxes in the 2022 FY.
Our revenues in the Current FY have been materially affected by the sharp depreciation of the Pound, Danish Kroner and Euro against the USD our reporting currency. A
significant part of our consolidated revenues is translated from Pounds and Danish Kroners to USD. The overall impact of this currency fluctuation is $1,192,833, when using
the exchange rate of the Previous FY.
In the Current FY the Products Business generated revenues of $14,724,688 compared to $15,804,222 during the Previous FY. The part of the Products Business revenues
generated by the Company’s foreign subsidiaries in the UK and Denmark, has been impacted by the significant fall in the Pound and the Danish Kroner against the USD, our
reporting currency. This means that when comparing the same exchange rate of the Previous FY, the Products Business revenues in the Current FY after translating from Pound
to USD fell by $913,899. Therefore, without the significant depreciation of the Pound and the Danish Kroner against the USD in the Current FY, the Products Business revenue
would have been $15,638,587 and in line with the Previous FY.
In the Current FY the Engineering Business generated revenues of $7,501,115 compared to $5,527,305, an increase of 35.7%. However, the UK part of our Engineering
Business was also impacted by the significant depreciation of the Pound against the USD and, as a direct result, revenues were adversely impacted by $278,934.
We are increasingly reducing the impact of currency fluctuations on our foreign subsidiaries revenues by transacting our sales in USD. In the Current FY, 46.1% of our revenue
was transacted in USD compared to 26.4% in the Previous FY.
Comparison of fiscal year ended October 31, 2022, to fiscal year ended October 31, 2021
The information provided below pertains to the Company’s consolidated financial results. For information on the performance of each Segment including the disaggregation of
revenues and geographical split, see Note 13 (“Segment Analysis”) of our audited Consolidated Financial Statements as of October 31, 2022, and 2021.
26
Revenue:
$
Year Ended October 31, 2022
Year Ended October 31, 2021
22,225,803
$
21,331,527
Percentage Change
Increase of 4.2%
We realized an increase in revenues of 4.2% in the 2022 FY compared to the 2021 FY. However, as discussed above, the sharp depreciation of the Pound against the USD in the
Current FY has impacted our revenues generated by our foreign subsidiaries by $1,192,833 and thus our overall consolidated revenue in the 2022 FY.
Products Business Revenues 2022 FY
Products Business Revenues 2021 FY
Services Business Revenues 2022 FY
Services Business Revenues 2021 FY
$
$
$
$
14,724,688
15,804,222
7,501,115
5,527,305
The Products Business revenues declined by 6.8% in the Current FY. This is largely due to the sharp depreciation of the Pound, Euro and Danish Kroner against the USD. A
significant part of our revenues is derived from our foreign subsidiaries in the UK and Denmark and therefore for the purpose of reporting, the functional currencies of these
subsidiaries are translated into USD. Applying the same exchange rate as the Previous FY, revenue of the Products Business was negatively impacted by $913,899. Without this
sharp depreciation, the Products Business revenue would have been largely in line with the 2021 FY.
The Engineering Business revenues increased by 35.7%. However, similarly, the foreign subsidiary part of Engineering Business based in the UK was also impacted by the
sharp decline of the Pound against the USD. Assuming the same exchange rate as the Previous FY (which our Business Plan is geared to), revenue of the Engineering Business
was negatively impacted by $278,934.
Gross Margin:
Year Ended October 31, 2022
68.3%
(Gross profit of $15,190,688)
Year Ended October 31, 2021
69.2%
(Gross profit of $14,769,718)
Percentage Change
Decrease of 0.9%
Gross Profit Margins reported in our financial results may vary according to several factors. These include:
●
●
●
●
●
The percentage of consolidated sales attributed to the Products Business. The Gross Profit Margin yielded by the Products Business is generally higher than that of the
Engineering Business.
The percentage of consolidated sales attributed to the Engineering Business. The Engineering Business yields a lower gross profit margin on generated sales which are
largely based on time and materials contracts.
The mix of sales generated by the Products Business:
●
●
●
●
Outright sales versus rentals.
Hardware related sales versus Software related sales.
Extent of Offshore Engineering Support Services provided in the period.
Extent of paid customer engineering work relating to customizing our technology for these customers’ requirements.
Level of commissions on sales (both the Engineering and Products businesses work with a global network of sales agents). Most sales by the Products Business from
Asia attract commission as those are typically sales via our agents/distributors network. See Notes 13 (Segment Analysis) and 14 (Disaggregation of Revenue) to our
audited Consolidated Financial Statements as of October 31, 2022, for more information covering Segment reporting and the disaggregation of our revenues by type and
geography.
Level of assets in the rental pool and cost of sales associated with these rental assets (and which are subject to depreciation – see Note 2 paragraph d to our audited
Consolidated Financial Statements as of October 31, 2022).
In the 2022 FY Gross Profit Margins for the Marine Technology Business were 80.0% compared to 79.9% in the 2021 FY. For the Engineering Business, these were 45.4% in
the 2022 FY compared to 38.6% in the 2021 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 2022 FY compared to the 2021 FY is set out below:
Equipment Sales
Equipment Rentals
Software Sales
Services
Total Net Sales
2022 FY
Products
2021 FY
Products
Percentage Change
$
$
$
8,771,050
1,844,775
1,014,867
3,093,996
10,914,124
2,324,773
669,968
1,895,357
14,724,688
$
15,804,222
(19.6)%
(20.6)%
51.5%
63.2%
(6.8)%
In the 2022 FY the Products Business paid $596,426 in commission compared to $605,620 in the 2021 FY as there were less sales via our Agents/Distribution network.
In the Current FY the Products Business generated revenues of $14,724,688 compared to $15,804,222. The part of the Products Business revenues generated by the Company’s
foreign subsidiaries in the UK and Denmark, has been impacted by the significant fall in the Pound and the Danish Kroner against the USD, our reporting currency. Therefore,
assuming the same exchange rate of the Previous FY, the Products Business revenues in the Current FY after translating from Pound to USD fell by $913,899. Without the
significant depreciation of the Pound and Kroner against the USD in the Current FY, the Products Business revenue would have been $15,638,587 and largely in line with the
Previous FY.
For more detailed information on the composition and disaggregation of our revenues, please refer to Note 14 (“Disaggregation of Revenue”) of our audited Consolidated
Financial Statements of October 31, 2022, and 2021.
27
Research and Development (R&D):
Year Ended October 31, 2022
Year Ended October 31, 2021
$
2,237,920
$
2,982,676
Percentage Change
Decrease of 25.0%
Research and Development costs are, in general, an inherent ongoing cost for the Marine Technology Business operations since it will need to either maintain the products it has
in the market or continue to advance these products and its core technology to keep them competitive (both in price and performance) and to expand the product offerings which
we have in the market.
Accordingly, we continue to invest in research and development to further our business goals including maintaining our lead in the real time volumetric imaging sonar sector
(Marine Technology Business) and our new-to-market diving technology (DAVD).
In the 2022 FY this category of expenditure decreased by 25.0%. The decrease is largely due to reduced spending in this area in the Engineering Business, where expenditures
fell by 93.6% and was $30,420 in the 2022 FY compared to $473,569 in FY2021. This reflects our strategy to reduce expenditures on the Thermite® Octal development until we
can gage both market and customer requirements through the demonstrations of the capability of the Thermite®.
In 2022 FY the Products Business research and development expenditures fell by 12.0%. This is largely a reflection that we have completed the capital-intensive development
phase associated with onward development of the hardware phase our real time 3D/4D/5D/6D sonar technology and our F280 Series®. Our developments are now focused on
feature enhancements and the like and are largely firmware and software enhancements.
Changes in this category by Segment are set out immediately below:
Description
Marine Technology Business (Products Segment) 2022FY
Marine Technology Business (Products Segment) 2021FY
Engineering Business (Services Segment) 2022 FY
Engineering Business (Services Segment) 2021 FY
Selling, General and Administrative Expenses (SG&A):
Amount
% increase / (decrease)
$
$
$
$
2,207,500
2,509,107
30,420
473,569
Decrease 12.0%
Decrease 93.6%
Year Ended October 31, 2022
Year Ended October 31, 2021
$
7,948,704
$
7,949,525
Percentage Change
Decrease of 0.0%
SG&A in the 2022 FY was largely in line with 2021 FY expenditures.
Notable factors in our SG&A 2022 FY are:
Within the category of SG&A we have transactions which are cash charges and non-cash charges. The non-cash charges comprise Depreciation, Amortization and Stock-based
compensation charges. In 2022 FY and 2021 FY, respectively non-cash items as a percentage of SGA expenses were 20.5% and 20.6%, respectively.
Stock Based Compensation Expenses (Non-Cash Item). In the 2022 FY we expensed $1,130,917 for stock-based compensation as compared to $1,050,821 in the corresponding
2021 FY, representing an increase of 7.6%.
In the 2021 FY, the Company had $135,000 as contribution under the UK Government Coronavirus Job Retention Scheme (CJRS), thus reducing SG&A in 2021 FY. There
were no contributions under the CJRS in the 2022 FY.
Further discussions on SG&A are set out immediately below.
28
Key Areas of SG&A Expenditure across the Group for the year ended October 31, 2022, compared to the year ended October 31, 2021
Wages and Salaries
Legal and Professional Fees (including accounting, audit and investment banking services)
Rent for our various locations
Marketing
Expenditure
October 31, 2022
3,752,524
$
1,419,013
$
64,637
$
197,258
$
October 31, 2021
3,361,494
$
1,284,591
$
51,443
$
48,214
$
Percentage
Change
Increase of 11.6%
Increase of 10.5%
Increase of 25.6%
Increase of 309.1%
Although in FY2022 expenditures relating to Wages and Salaries increased by 11.6%, it should be noted that in the 2021 FY we had had contributions under the UK
Coronavirus Job Retention Scheme (CJRS) of $135,000 which reduced this category of expenditures. In the 2022 FY there were no such contributions. In addition, 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 2023 Financial Year.
In 2022 FY regarding Legal and Professional Fees we recorded $125,000 as a refund from our UK auditors. This means that in real terms, without this refund, Legal and
Professional fees have increased by 20.2% which is a reflection of additional financial resources that we have taken on and an increase in our overall audit fees.
In the 2022 FY expenditures relating to the category of “Rent” increased by 25.6% compared to FY 2021. Rent is not a material expenditure in the Group as most of our
premises are owned by the Company, except for premises used in Denmark.
In 2022 FY expenditures relating to the category of “Marketing” increased by 309.1%. In 2021 FY this area of expenditure was depressed due to continued restrictions caused
by the Coronavirus Pandemic. In 2022 FY we have been able to participate in more industry-related trade events and anticipate that this category of expenditures will continue
to increase in the 2023 Financial Year as we focus our business strategy on business development and sales and marketing.
29
Operating Income:
Year Ended October 31, 2022
Year Ended October 31, 2021
$
5,004,064
$
3,837,517
Percentage Change
Increase of 30.4%
In the 2022 FY Operating Income increased by 30.4%. The increase in Operating Income is largely due to the increase in Revenue by 4.2% over the 2021 FY coupled with a fall
in Total Operating Expenses by 6.8%.
Other Income:
Year Ended October 31, 2022
Year Ended October 31, 2021
$
137,975
$
1,435,382
Percentage Change
Decrease of 90.4 %
In the 2021 FY Other Income included $648,872 representing amounts received under the PPP and $701,568 in ERC which the US Administration made available as part of the
Pandemic response package for US companies. In the 2022 FY we did not receive any contributions under the PPP but recorded $88,917 for ERC. Outside of these exceptional
amounts, this category of income is not material for the Company.
Interest Expense:
Year Ended October 31, 2022
Year Ended October 31, 2021
$
9,704
$
19,655
Percentage Change
Decrease of 50.6%
This is not a material category of expenses for the Company since in December 2021 we have repaid all indebtedness under our Senior Secured Debenture with HSBC NA. We
therefore do not anticipate Interest Expense to be a material item of expenses in our financial statements.
30
Net Income before Income taxes for the year ended October 31, 2022, compared to the year ended October 31, 2021
Year Ended October 31, 2022
Year Ended October 31, 2021
$
5,132,335
$
5,253,244
Percentage Change
Decrease of 2.3%
In the 2022 FY, Net Income before taxes fell by 2.3% despite an increase in revenues (by 4.2% over the previous 2021 FY), a reduction in Total Operating Expenses by 6.8%
and a reduction in the category of Interest Expenses. A factor in this is that in the 2021 FY, Net income before taxes was positively impacted by exceptional items of “Other
Income” comprising (PPP and ERC) totaling $1,350,440. In the 2022 FY Net income before taxes was marginally impacted by exceptional items of “Other Income” comprising
ERC and totaling $88,917. Without these exceptional items in “Other Income” in both the 2022 FY and 2021 FY, Net Income before taxes would have been $5,043,418 and
$3,902,804, respectively, and representing a 29.2% increase in Net Income before taxes in the 2022 FY.
Net Income after Income taxes for the year ended October 31, 2022, compared to the year ended October 31, 2021
Year Ended October 31, 2022
Year Ended October 31, 2021
$
4,301,221
$
4,947,765
Percentage Change
Decrease of 13.1%
In the 2022 FY, Net Income after Income taxes fell by 13.1%. This is due to a number of factors. In the 2021 FY, Net income before taxes was positively impacted by
exceptional items of “Other Income” comprising (PPP and ERC) totaling $1,350,440. In the 2022 FY Net income before taxes was marginally impacted by exceptional items of
“Other Income” comprising ERC and totaling $88,917. Without these exceptional items in “Other Income” in both the 2022 FY and 2021 FY, Net Income before taxes would
have been $5,043,418 and $3,902,804, representing a 29.2% increase in Net Income before taxes in the 2022FY. Additionally, in the 2022 FY we recorded tax expense of
$831,114 compared to $305,479 in the 2021 FY, representing an increase in the 2022 FY of 172.1%.
Comprehensive Income for the year ended October 31, 2022, compared to the year ended October 31, 2021
Year Ended October 31, 2022
Year Ended October 31, 2021
$
1,231,156
$
5,601,984
Percentage Change
Decrease of 78.0%
In the 2022 FY, Comprehensive Income was $1,231,156 compared to $5,601,984 for the 2021 FY reflecting the adverse effects of currency fluctuations. Comprehensive
Income is affected by fluctuations in translating foreign currency transactions of our foreign subsidiaries into USD relating to both our profit and loss expenses and valuation of
our assets and liabilities comprised within our balance sheet. A significant part of the Company’s reported financial results emanates from its foreign subsidiaries including in
the UK and Denmark, resulting in translation from these foreign subsidiaries functional currencies to USD. In the Current FY the USD strengthened significantly against most
major currencies including the Pound, Euro and Danish Kroner. The Company therefore realized significant adjustments relating to foreign currency transactions in the Current
Year. In the 2021 FY we realized a gain on foreign currency translation adjustments relating to these transactions of $654,219 compared to a loss on these transactions in the
2022 FY of $3,070,065. In the 2022 FY the USD has strengthened against major currencies including the British Pound, Euro, Danish Kroner and Indian Rupees (the functional
currencies of our foreign operations). A substantial part of these losses are paper losses associated with re-valuation of our foreign subsidiaries balance sheet. A significant part
of the Company’s operations is based in the UK, and therefore a significant part of our financial transactions is performed in Pounds which are translated into USD for reporting
purposes. In the 2022 FY, the Pound has fallen significantly against the USD (approximately by 8%). This is a key factor in the loss relating to foreign currency translations
transactions in the 2022 FY. See Table 1 under the section which concerns “Inflation & Foreign Currency” which shows the impact of the currency adjustments.
31
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, 2022, and 2021,
respectively.
Year Ended October 31, 2022
Net Revenues
Cost of Revenues
Gross Profit
Research & Development
Selling, General & Administrative
Total Operating Expenses
Income (Loss) from Operations
Other Income (Expense)
Other Income
Interest Expense
Total Other Income (Expense)
Marine Technology
Business (Products)
Marine
Engineering
Business (Services)
Overhead
Total
$
14,724,688
$
7,501,115
$
-
$
22,225,803
2,941,569
4,093,546
11,783,119
2,207,500
2,563,554
4,771,054
7,012,065
55,715
(9,233)
46,482
3,407,569
30,420
2,654,565
-
-
-
2,730,585
7,035,115
15,190,688
2,237,920
7,948,704
2,684,985
2,730,585
10,186,624
722,584
(2,730,585 )
5,004,064
79,204
(71)
79,133
3,056
(400)
2,656
137,975
(9,704)
128,271
Income (Loss) before Income Taxes
7,058,547
801,717
(2,727,929)
5,132,335
Income Tax (Expense) Benefit
Current Tax (Expense) Benefit
Deferred Tax Benefit (Expense)
Total Income Tax (Expense) Benefit
Net Income (Loss)
Supplemental Disclosures
Total Assets
Total Liabilities
Revenues from Intercompany Sales- eliminated from sales above
Depreciation and Amortization
Purchases of Long-lived Assets
(868,162)
31,907
(836,255)
6,222,292
33,348,805
2,432,750
2,406,717
602,583
1,123,475
32
$
$
$
$
$
$
$
$
$
$
$
$
39,422
(41,657)
(2,235)
(176,400)
183,776
(1,005,140)
174,026
7,376
(831,114)
799,482
$
(2,720,553)
$
4,301,221
12,662,109
526,195
396,015
96,776
36,862
$
$
$
$
$
916,544
585,704
2,720,000
39,370
90,887
$
$
$
$
$
46,927,458
3,544,649
5,522,732
738,729
1,251,224
Marine Technology
Business (Products)
Marine
Engineering
Business (Services)
Overhead
Total
Year Ended October 31, 2021
Net Revenues
Cost of Revenues
Gross Profit
Research & Development
Selling, General & Administrative
Total Operating Expenses
Income (Loss) from Operations
Other Income (Expense)
Other Income
Interest Expense
Total Other Income (Expense)
$
15,804,222
$
5,527,305
$
-
$
21,331,527
3,169,835
3,391,974
12,634,387
2,509,107
3,231,733
5,740,840
6,893,547
2,135,331
473,569
2,304,300
-
-
-
2,413,492
6,561,809
14,769,718
2,982,676
7,949,525
2,777,869
2,413,492
10,932,201
(642,538)
(2,413,492)
3,837,517
354,373
(1,738)
1,079,374
(365)
352,635
1,079,009
1,635
(17,552)
(15,917)
1,435,382
(19,655)
1,415,727
Income (Loss) before Income Taxes
7,246,182
436,471
(2,429,409)
5,253,244
Income Tax (Expense) Benefit
Current Tax Benefit (Expense)
Deferred Tax (Expense) Benefit
Total Income Tax (Expense) Benefit
Net Income (Loss)
Supplemental Disclosures
Total Assets
Total Liabilities
Revenues from Intercompany Sales- eliminated from sales above
Depreciation and Amortization
Purchases of Long-lived Assets
35,032
(418,338)
(383,306)
6,862,876
30,631,442
3,166,999
2,075,387
780,434
793,995
$
$
$
$
$
$
$
$
$
$
$
$
(51,624)
409,205
357,581
-
(279,754)
(279,754)
(16,592)
(288,887)
(305,479)
794,052
$
(2,709,163)
$
4,947,765
14,117,747
849,306
355,608
114,022
51,907
$
$
$
$
$
716,230
400,041
3,470,000
29,617
118,302
$
$
$
$
$
45,465,419
4,416,346
5,900,995
924,073
964,204
Coda Octopus Martech and Coda Octopus Colmek (“Services Segment” or “Marine Engineering Business”) are providing engineering services as sub-contractors mainly to
prime defense contractors and Coda Octopus Products operations are comprised primarily of product sales, technology solutions sales, rental of equipment and/or software and
associated services (“Products Segment” or “Marine Technology Business”).
The Company’s reportable business segments sell their goods and services in four geographic locations:
● Americas
●
Europe
● Australia/Asia
● Middle East/Africa
Liquidity and Capital Resources
33
As of October 31, 2022, the Company had an accumulated deficit of $14,176,636, working capital of $33,542,200 and stockholders’ equity of $43,382,809. For the year then
ended, the Company generated cash flow from operations of $6,726,967.
We believe that our current level of cash and cash generation will be sufficient to meet our short and medium-term liquidity needs. As of October 31, 2022, we had cash on
hand of $22,927,371 and both billed and unbilled receivables of approximately $3,472,715. Our current cash balance represents approximately 35 months of Selling, General
and Administrative Expenses. The Company continues to critically evaluate the level of expenses that we incur and reduce those expenses as appropriate.
We also have access to a revolving line of credit of $4 million from HSBC NA. This line of credit is available to the Company for short-term working capital purpose. All
amounts under the Revolving Line of Credit are payable at the end of each financial year. The facility was renewed for another year until November 2023. To date, the
Company has not had reason to borrow any funds for its operations under this credit line.
Our main liquidity issues are forward buying components and inventory for our products which encompass specialized electronics for which there is no after-market except for
the products to which they are designed for, funding our research and development program (“R&D”) which requires significant expenditures in attracting engineering skills
and incurring non-recoverable costs for researching, developing and prototyping products and managing our currency exposure and business development and marketing costs
required for the success of our business.
Operating Activities
Net cash generated from operating activities for the year ended October 31, 2022, was $6,726,967. We recorded net income for the period of $4,301,221. Other items in uses
and sources of funds from operations included non-cash charges related to depreciation and amortization, deferred tax asset and stock-based compensation, which collectively
totaled $1,676,563. Changes in operating assets increased net cash from operating activities by $1,205,916 and changes in current liabilities decreased net cash from operating
activities by $456,733.
34
Investing Activities
Net cash used in investing activities for the year ended October 31, 2022, was $556,560
Financing Activities
Net cash used in financing activities for the year ended October 31, 2022, was $91,896.
Secured Promissory Note
On April 28, 2017, the Company together with its wholly owned US subsidiaries, Coda Octopus Products, Inc. and Coda Octopus Colmek, Inc., entered into a loan agreement
with HSBC Bank NA for a loan in the principal amount of $8,000,000. The annual interest rate was fixed at 4.56%. The loan was secured by all assets of the Company and its
U.S. subsidiaries and of three of the Company’s overseas subsidiaries. The entire remaining balance of $63,559 was repaid by the end of the 2021 calendar year.
Foreign Currency
The Company maintains its books in local currency: US Dollars for its US operations, British Pounds for its United Kingdom operations, Danish Kroner for its Danish
operations, Australian Dollars for its Australian operations and Indian Rupees for its Indian Operations.
For the 2022 FY, 46% of the Company’s revenue were conducted inside the United States and 54% outside the United States through its wholly owned subsidiaries in the
United Kingdom and Denmark. As a result, currency fluctuations may significantly affect the Company’s sales, profitability, balance sheet valuations and financial position
when the foreign currencies of its international operations are translated into U.S. dollars for financial reporting purposes. In addition, we are also subject to currency fluctuation
risks with respect to certain foreign currency denominated receivables and payables. Although the Company cannot predict the extent to which currency fluctuations may affect
the Company’s business and financial position, there is a risk that such fluctuations will have an adverse impact on the Company’s sales, profits, balance sheet valuations and
financial position. Because differing portions of our revenues and costs are denominated in foreign currency, movements in those currencies could impact our margins by, for
example, decreasing our foreign revenues when the dollar strengthens and not correspondingly decreasing our expenses. The Company does not currently hedge its currency
exposure. In the future, we may engage in hedging transactions to mitigate foreign exchange risk. However, as a strategy the Company is endeavoring to transact its sales by its
foreign subsidiaries in USD. In the Current FY 46% of our revenue was in USD compared to 27% in the Previous FY.
35
The translation of the Company’s denominated balance sheets and results of operations into US dollars (USD) are affected by changes in the average value of USD against the
currencies of our foreign subsidiaries operating in GBP, DKK and AUD (our limited operations in INR are not considered material for this purpose) included in our
consolidated results.
British Operations 2022 FY and 2021 FY
British Pound against USD
Average exchange rate was $ 1.2552 to
A decrease in the value of the GBP
the GBP against $1.3758 USD
against the USD by 8.8%
Australian Dollar (“AUD”) against USD Average exchange rate was $0.7001
A decrease in the value of the AUD
Australian Operations 2022 FY and 2021
FY
Danish Operations 2022 FY and 2021 FY Danish Kroner (DKK) against USD
against $0.7531 USD
against the USD by 7.0%
Average exchange rate was $0.1433
against $0.1603 USD to the DKK
A decrease in the value of the DKK
against the USD by 10.6%
These are the values we have used in the calculations below which show the impact of these currency fluctuations on our operations in the 2022 FY:
British Pounds
Australian Dollar
Danish Kroner
Revenues
Costs
Net profit (losses)
Assets
Liabilities
Net assets
Actual
Results
10,039,273
8,666,591
1,372,682
20,236,412
Constant
Rates
11,004,589
9,499,918
1,504,671
24,059,112
(1,140,131)
(1,355,504)
19,096,281
22,703,608
Actual
Results
Constant
Rates
-
24,037
(24,037)
26,825
-
26,825
-
25,857
(25,857)
31,570
-
31,570
Actual
Results
1,917,373
241,451
1,675,922
3,040,207
Constant
Rates
2,144,890
270,102
1,874,788
3,559,146
Actual
Results
11,956,646
9,000,932
2,955,714
23,305,960
(72,230)
(84,559)
(1,211,331)
(1,438,925)
2,967,977
3,474,587
22,094,629
26,213,682
USD
Constant
Rates
13,149,479
9,868,067
3,281,412
27,652,607
Total
Effect
(1,192,833)
(867,135)
(325,698)
(4,346,647)
227,594
(4,119,053)
This table shows that the effect of constant exchange rates, versus the actual exchange rate fluctuations, decreased net income for the year by $325,698 and decreased net assets
by $4,119,053. These amounts are material to our overall financial results.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Inflation
Inflation affects our Business in several ways including:
Ø Cost of Operations (including wages and salaries)
Ø Bill of Material Costs of our Products
The effect of inflation on the Company’s 2022 FY results has been benign due to a number of factors. Wages and Salaries for our Current FY were in place prior to the upturn in
inflation and also our Products Business had significant inventory which had been sourced prior to the upturn in inflation.
We therefore expect that inflation will be more impactful in the 2023 financial year.
While in the past few years we have seen fairly benign rates of inflation in labor and materials in the countries in which we operate and those countries from which we source
raw materials and components from and those that we sell to, since the middle of 2022 FY we have been seeing worrying signs of inflation in almost all countries. In the US,
UK and Denmark, countries in which we have operations, inflation has moved to 7.7%, 11.1%, and 10.1% as of October 31, 2022, respectively.
Specifically, we are seeing inflation affecting staff costs, both in significantly increased demands from potential new recruits and existing staff members whose living wages
have been eroded by inflation.
We also see inflation in our sourcing of components, both run of the mill such as metalwork and also more particularly specialist components, including electronics. We are hit
in two ways, the first being the “normal” increase in prices due to the basic effects of inflation, and the second being an extra premium (combined with longer lead tines) being
sought for scarcity. Some of this scarcity being brought about by the effects of COVID in far eastern suppliers.
Longer lead times, some of which have now extended to a year or more also bring an additional inflation risk to the Company as we are unable to place purchase orders on our
suppliers until we have a customer contract, and our suppliers are unwilling or unable to provide a fixed cost to us as they in turn are unable to get fixed prices for their
components.
The levels of our margins are therefore at risk and preservation of our margins is dependent upon our ability to pass on these increases to our customers which is improbable,
particularly since our customer base is global (in the Far East inflation profiles are very different). We are also at risk of high staff turnover if we cannot offer inflation-proof
wages in a market that is ultra-competitive due to demand outstripping supply.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index of Financial statements following Part III of this Report for a listing of the Company’s Consolidated Financial Statements and Notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission’s (the “SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal
executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial (and principal accounting)
Officer, performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-
15(e) of the Exchange Act) as of October 31, 2022. Based upon that evaluation the Chief Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were ineffective as a result of the material weakness identified below.
A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
In light of the conclusion that our internal disclosure controls are ineffective as of October 31, 2022, we have applied procedures and processes as necessary to ensure the
reliability of our financial reporting in regard to this annual report. Accordingly, the Company believes, based on its knowledge, that: (i) this annual report does not contain any
untrue statement of a material fact or omit a material fact; and (ii) the financial statements, and other financial information included in this annual report, fairly presented in all
material respects our financial condition, results of operations and cash flows as of and for the periods presented in this annual report.
Management’s Report on Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed by, or under the supervision of, a public company’s principal executive and principal financial
officers, or persons performing similar functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US generally accepted accounting principles (“US GAAP”)
including those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
the assets of the company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US
GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the company, and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial
statements.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as of October 31, 2022. In making this assessment, our
management used the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO 2013 Framework). Based on its assessment, our management believes that, as of October 31, 2022, our internal control over financial reporting was ineffective based
on those criteria.
We have identified a material weakness concerning a lack of adequate processes and procedures regarding the review of the elimination entries pertaining to the consolidation
process.
We are in the process of implementing new controls and procedures that we believe will address the material weakness described above and will carefully monitor the
effectiveness of these controls and procedures over the next several quarterly consolidations to determine their effectiveness in addressing the material weakness.
We will implement both additional qualitative and quantitative controls over eliminations including implementing metrics that will be compared to each quarter’s results and
deviations from those metrics will be investigated before the consolidation is considered complete. We have also expanded the review of the quarterly and annual consolidation
process.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to
provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
During the year ended October 31, 2022, except as disclosed above, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-
15(f) and 15d–15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. Other Information
Not Applicable
37
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Directors and Executive Officers
The following persons are the executive officers and directors as of the date hereof:
Name
Annmarie Gayle
Nathan Parker
Kevin Kane
Blair Cunningham
Michael Hamilton
Captain Charlie Plumb
Mary Losty
Tyler G. Runnels
Age
58
45
58
53
75
80
62
66
Position
Chief Executive Officer and Chairman
Chief Financial Officer
Chief Executive Officer (Coda Octopus Colmek)
President of Technology
Director
Director
Director
Director
Annmarie Gayle has been our Chief Executive Officer and a member of the Board of Directors since 2011 and our Chairman since March 2017. She is also our Chief
Executive Officer for our flagship products business, Coda Octopus Products, Limited (UK) since 2013. Prior thereto, she spent two years assisting with the restructuring of
our Company. She previously served with the Company as Senior Vice President of Legal Affairs between 2006 and 2007. Earlier in her career she worked for a leading City-
London law firm specializing in Intellectual Property Rights, the United Nations and the European Union. Ms. Gayle has a strong background in restructuring and has spent
more than 12 years in a number of countries where she has been the lead adviser to a number of transitional administrations on privatizing banks and reforming state-owned
assets in the Central Eastern European countries including banking, infrastructure, mining and telecommunications assets. Ms. Gayle has also managed a number of large
European Union funded projects providing transitional support and capacity. Ms. Gayle holds a Law degree gained at the University of London and a Master of Law degree in
International Commercial Law from Cambridge University and has completed her professional law exams to practice law in England & Wales. Because of her wealth of
experience in corporate governance, large scale project management, restructuring, strategy, structuring and managing corporate transactions, we believe that she is highly
qualified to act as our Chief Executive Officer.
Nathan Parker joined the Company in the capacity as our Chief Financial Officer in June 2022. From 2021 to 2022, Mr. Parker earned a Master of Business Administration
from Michigan State University and a Bachelor of Science, Financial Services, from Brigham Young University. Because of Mr. Parker’s background and financial experience,
the Company believes that he is highly qualified to serve as the Chief Financial Officer.
Blair Cunningham joined the Company in July 2004 and has had a number of roles in the Company including Chief Technology Officer between July 2004 and July 2005. He
is currently our President of Technology. Mr. Cunningham received an HND in Computer Science in 1989 from Moray College of Further Education, Elgin, Scotland. Because
of Mr. Cunningham’s expertise in technology, systems software development and project management, the Company believes that he is highly qualified to serve in his current
roles.
Kevin Kane joined the Company in July 2021. He is the Chief Executive Officer of Coda Octopus Colmek, Inc. (“Colmek”). Mr. Kane holds a Bachelor of Science Degree in
Computer Engineering from the Rochester Institute of Technology, and a Master of Business Administration degree from Saint John Fisher College (USA). Because of Mr.
Kane’s background and experience working with Prime Defense Contractors in the area of business development, the Company believes that he is highly qualified to serve as
the Divisional Chief Executive Officer of Colmek.
Michael Hamilton was our Chairman of the Board between June 2010 and March 2017. He is currently serving as an independent director of our Board. He has been a member
of the board of directors and a member of the audit committee of Tian Ruixiang Holdings Ltd. a Nasdaq traded public company, since 2020. Since 2014, Mr. Hamilton has
provided accounting and valuation services for a varied list of clients. He was Senior Vice President of Powerlink Transmission Company from 2011 through 2014. From 1988
to 2003, he was an audit partner at PricewaterhouseCoopers. He holds a Bachelor of Science in Accounting from St. Frances College and is a certified public accountant and is
accredited in business valuation. Because of Mr. Hamilton’s background in auditing, strategic corporate finance solutions, financial management and financial reporting, we
believe that he is highly qualified to be a member of our Board of Directors.
G. Tyler Runnels was elected as a director at the 2018 annual meeting. Mr. Runnels has nearly 30 years of investment banking experience including debt and equity financings,
private placements, mergers and acquisitions, initial public offerings, bridge financings, and financial restructurings. Since 2003 Mr. Runnels has been the Chairman and Chief
Executive Officer of T.R. Winston & Company, LLC, an investment bank and member of FINRA, where he began working in 1990. Mr. Runnels was an early-stage investor in
our company and T.R. Winston & Company, LLC has served as our exclusive placement agent in one of our private placements raising early rounds of capital for our company.
Mr. Runnels has successfully completed and advised on numerous transactions for clients in a variety of industries, including healthcare, oil and gas, business services,
manufacturing, and technology. Mr. Runnels is also responsible for working with high-net-worth clients seeking to diversify their portfolios to include real estate products
through established relationships with real estate brokers, accountants, attorneys, qualified intermediaries and financial advisors. Prior to joining T.R. Winston & Co., LLC, Mr.
Runnels held the position of Senior Vice President of Corporate Finance for H.J. Meyers & Company, a regional investment bank. Mr. Runnels received a B.S. and MBA from
Pepperdine University. Mr. Runnels holds FINRA Series 7, 24, 55, 63 and 79 licenses.
38
Captain J. Charles Plumb has been a member of Coda’s Board of Directors since September 2019. Captain Plumb is a retired U.S. Navy fighter pilot. On his 75th combat
mission, just five days before the end of his tour in Vietnam, he was shot down over Hanoi, taken prisoner and tortured. During his nearly six years as a prisoner of war, he
distinguished himself as a pro in underground communications. He was a great inspiration to all the other POWs and served as chaplain for two years. Following his repatriation,
Captain Plumb continued his Navy flying career in Reserve Squadrons where he flew A-4 Sky Hawks, A-7 Corsairs and FA-18 Hornets. His last two commands as a Naval
Reservist were on the Aircraft Carrier Corral Sea and at Fighter Air Wing in California. He retired from the United States Navy after 28 years of service. His military honors
include two Purple Hearts, the Legion of Merit, the Silver Star, the Bronze Star and the P.O.W. Medal. He has been a motivational speaker, consultant and executive coach
since 1973. His clients include General Motors, FedEx, Hilton, Aflac, the U.S. Navy, BMW and NASA. Since 2010, he has been member of the Board of Directors of the
Lightspeed Aviation Foundation. Captain Plumb earned a B.S. in electrical engineering from the U.S. Naval Academy at Annapolis. We selected Captain Plumb to be a
member of the Board of Directors because of his close ties to the U.S. Defense establishment.
Mary Losty has been a director since July 2017. She is a private investor in both US equities and real estate. She currently serves as Commissioner on both Dorchester County
and the City of Cambridge, Maryland’s Planning and Zoning Commissions. She also serves as a Committeeman for the Eastern Shore Land Conservancy as well as the Pine
Street Committee of Cambridge, MD. She served as a member of the Board of Procera Networks, Inc. from March 2007 until that company was successfully sold in June 2015
to a private equity firm. She was a member of that company’s Audit Committee and the former Chairman of the Nominating and Governance Committee. Ms. Losty was a
director of Blue Earth, Inc. (formerly Genesis Fluid Solutions Holdings, Inc.) from 2009 to 2011. Ms. Losty retired in 2010 as the General Partner at Cornwall Asset
Management, LLC, a portfolio management firm located in Baltimore, Maryland, where she was responsible for the firm’s investment in numerous companies since 1998. Ms.
Losty’s prior experience includes working as a portfolio manager at Duggan & Associates from 1992 to 1998 and as an equity research analyst at M. Kimelman & Company
from 1990 to 1992. Prior to that, she worked as an investment banker at Morgan Stanley and Co., and for several years prior to that she was the top aide to James R.
Schlesinger, a five-time U.S. cabinet secretary. Ms. Losty received both her BS and JD from Georgetown University, the latter with magna cum laude distinction. We believe
that Ms. Losty’s extensive dealings with the investment community makes her highly qualified to be a member of our Board of Directors.
Family Relationships
Other than Tyler Runnels and Charlie Plumb who are brothers in law, none of our Directors are related by blood, marriage, or adoption to any other Director, executive officer,
or other key employees.
39
Board Leadership Structure
The Board of Directors is currently chaired by the Chief Executive Officer of the Company, Annmarie Gayle. The Company believes that combining the positions of Chief
Executive Officer and Chairman of the Board of Directors helps to ensure that the Board of Directors and management act with a common purpose. Integrating the positions of
Chief Executive Officer and Chairman can provide a clear chain of command to execute the Company’s strategic initiatives. The Company also believes that it is advantageous
to have a Chairman with an extensive history with, and knowledge of, the Company. Notwithstanding the combined role of Chief Executive Officer and Chairman, key strategic
initiatives and decisions involving the Company are discussed and approved by the entire Board of Directors. The Company believes that the current leadership structure and
processes maintains an effective oversight of management and independence of the Board of Directors as a whole without separate designation of a lead independent director.
However, the Board of Directors will continue to monitor its functioning and will consider appropriate changes to ensure the effective independent function of the Board of
Directors in its oversight responsibilities.
Independence of the Board of Directors and its Committees
After review of all relevant transactions or relationships between each director, or any of his or her family members, and the Company, its senior management and its
Independent Registered Public Accounting Firm, the Board of Directors has determined that all the Company’s directors are independent within the meaning of the applicable
NASDAQ listing standards, except Ms. Gayle, the Company’s Chairman and Chief Executive Officer. The Board of Directors met 4 times and acted by unanimous written
consent 4 times during the fiscal year ended October 31, 2022. Each member of the Board of Directors attended all meetings of the Board of Directors held in the last fiscal year
during the period for which he or she was a director and of the meetings of the committees on which he or she served in the last fiscal year during the period for which he or she
was a committee member.
The Board of Directors has three committees: the Audit Committee, the Compensation Committee and the Nominating Committee. Below is a description of each committee of
the Board of Directors. The Board of Directors has determined that each member of each committee meets the applicable rules and regulations regarding “independence” and
that each member is free of any relationship that would interfere with his or her individual exercise of independent judgment with regard to the Company.
Audit Committee
The Audit Committee of the Board of Directors oversees the Company’s corporate accounting and financial reporting process. For this purpose, the Audit Committee performs
several functions. The Audit Committee, among other things: evaluates the performance, and assesses the qualifications, of the Independent Registered Public Accounting Firm;
determines and pre-approves the engagement of the Independent Registered Public Accounting Firm to perform all proposed audit, review and attest services; reviews and pre-
approves the retention of the Independent Registered Public Accounting Firm to perform any proposed, permissible non-audit services; determines whether to retain or terminate
the existing Independent Registered Public Accounting Firm or to appoint and engage a new independent registered Public Accounting Firm for the ensuing year; confers with
management and the Independent Registered Public Accounting Firm regarding the effectiveness of internal control over financial reporting; establishes procedures as required
under applicable law, for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters and
the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters; reviews the financial statements to be included in
the Company’s Annual Report on Form 10-K and the Company’s periodic quarterly filings on Form 10-Q, recommends whether or not such financial statements should be so
included; and discusses with management and the Independent Registered Public Accounting Firm the results of the annual audit and review of the Company’s quarterly
financial statements.
The Audit Committee is currently composed of three outside directors: Michael Hamilton (Chairman), Mary Losty and Captain J. Charles Plumb. The Audit Committee met
four times during the fiscal year ended October 31, 2022. The Audit Committee Charter is available on the Company’s website, www.codaoctopusgroup.com.
40
The Board of Directors periodically reviews the NASDAQ listing standards’ definition of independence for Audit Committee members and has determined that all members of
the Company’s Audit Committee are independent (as independence is currently defined in Rule 5605(c)(2)(A) of the NASDAQ listing standards and Rule 10A-3(b)(1) of the
Securities Exchange Act, as amended). The Board of Directors has determined that Michael Hamilton qualifies as an “audit committee financial expert,” as defined in
applicable SEC rules. The Board of Directors made a qualitative assessment of Mr. Hamilton’s level of knowledge and experience based on a number of factors, including his
formal education and his service in executive capacities having financial oversight responsibilities.
Compensation Committee
The Compensation Committee of the Board of Directors reviews, modifies and approves the overall compensation strategy and policies for the Company. The Compensation
Committee, among other things, reviews and approves corporate performance goals and objectives relevant to the compensation of the Company’s officers; determines and
approves the compensation and other terms of employment of the Company’s Chief Executive Officer; determines and approves the compensation and other terms of
employment of the other officers of the Company; and administers the Company’s stock option and purchase plans, pension and profit sharing plans and other similar programs.
The Compensation Committee is composed of three outside directors: Michael Hamilton (Chairman), Mary Losty and G. Tyler Runnels. All members of the Compensation
Committee are independent (as independence is currently defined in Rule 5605(a)(2) of the NASDAQ listing standards). The Compensation Committee met two times during
the fiscal year ended October 31, 2022. The Compensation Committee Charter is available on the Company’s website at: www.codaoctopusgroup.com.
Compensation Committee Interlocks and Insider Participation
No member of our compensation committee has at any time been an employee of ours. None of our executive officers serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee.
Nominating Committee
The Nominating Committee of the Board of Directors is responsible for, among other things, identifying, reviewing and evaluating candidates to serve as directors of the
Company; reviewing, evaluating and considering incumbent directors; recommending to the Board of Directors candidates for election to the Board of Directors; making
recommendations to the Board of Directors regarding the membership of the committees of the Board of Directors, and assessing the performance of the Board of Directors.
The Nominating and Governance Committee is currently composed of three outside directors: Mary Losty (Chair), G. Tyler Runnels and Captain J. Charles Plumb. All
members of the Nominating Committee are independent (as independence is currently defined in Rule 5605(a)(2) of the NASDAQ listing standards). The Nominating
Committee met one time during the fiscal year ended October 31, 2022. The Nominating Committee Charter is available on the Company’s website at
www.codaoctopusgroup.com.
The Nominating Committee has not established any specific minimum qualifications that must be met for recommendation for a position on the Board of Directors. Instead, in
considering candidates for director the Nominating Committee will generally consider all relevant factors, including among others the candidate’s applicable education,
expertise and demonstrated excellence in his or her field, the usefulness of the expertise to the Company, the availability of the candidate to devote sufficient time and attention
to the affairs of the Company, the candidate’s reputation for personal integrity and ethics and the candidate’s ability to exercise sound business judgment. Other relevant factors,
including diversity, experience and skills, will also be considered. Candidates for director are reviewed in the context of the existing membership of the Board of Directors
(including the qualities and skills of the existing directors), the operating requirements of the Company and the long-term interests of its stockholders.
41
The Nominating Committee considers each director’s executive experience and his or her familiarity and experience with the various operational, scientific and/or financial
aspects of managing companies in our industry.
With respect to diversity, the Nominating Committee seeks a diverse group of individuals who have executive leadership experience and a complementary mix of backgrounds
and skills necessary to provide meaningful oversight of the Company’s activities. The Company meets the NASDAQ standards for diversity on the board of directors. The
Nominating Committee annually reviews the Board’s composition in light of the Company’s changing requirements. The Nominating Committee uses the Board of Director’s
network of contacts when compiling a list of potential director candidates and may also engage outside consultants. Pursuant to its charter, the Nominating Committee will
consider, but not necessarily recommend to the Board of Directors, potential director candidates recommended by stockholders. All potential director candidates are evaluated
based on the factors set forth above, and the Nominating Committee has established no special procedure for the consideration of director candidates recommended by
stockholders.
Employment Agreements
Annmarie Gayle
Pursuant to the terms of an employment agreement dated March 16, 2017, the Company employs Ms. Gayle as its Chief Executive Officer on a full-time basis and a member of
its Board of Directors. Effective July 1, 2019, Ms. Gayle’s annual salary was revised from $230,000 to $305,000. She is also entitled to an annual performance bonus of up to
$100,000, upon achieving certain targets that are to be defined on an annual basis. The agreement provides for 30 days of paid vacation in addition to public holidays observed
in Denmark where she is resident.
The agreement has no definitive term and may be terminated upon twelve months’ prior written notice by Ms. Gayle. In the event that the Company terminates her at any time
without cause, she is entitled to a payment equal to her annual salary as well as a separation bonus of $150,000. The Company may terminate the agreement for cause,
immediately and without notice. Among others, “for cause” includes gross misconduct, a serious or repeated breach of the agreement and negligence and incompetence as
reasonably determined by the Company’s Board. The agreement includes a 12-month non-compete and non-solicitation provision.
Blair Cunningham
Under the terms of an employment contract dated January 1, 2013, our wholly owned subsidiary Coda Octopus Products, Inc. employs Blair Cunningham as its Chief Executive
Officer and President of Technology. He is being paid an annual base salary of $200,000 with effect from January 1, 2020, subject to review by the Company’s Chief Executive
Officer. Since January 2022, Mr. Cunningham’s annual base salary was revised to $225,000 per annum. Mr. Cunningham is entitled to 25 vacation days in addition to any
public holiday.
The agreement may be terminated only upon twelve-month prior written notice without cause. The Company may terminate the agreement for cause, immediately and without
notice. Among others, “for cause” includes gross misconduct, a serious or repeated breach of the agreement and negligence and incompetence as reasonably determined by the
Company’s Board. The agreement includes an 18-month non-compete and non-solicitation provision.
Nathan Parker
Pursuant to the terms of an Employment Agreement dated May 24, 2022, Nathan Parker was appointed the Chief Financial Officer of the Company commencing July 6, 2021.
The Employment Agreement provides for an annual base salary of $230,000. As a further inducement, he was paid $20,000 signing on bonus which is subject to a claw back in
the event that he leaves his position within 12 months of inception. He was also granted restricted stock units having a value of $50,000 out of the Company’s 2017 Stock
Incentive Plan that vest in three equal annual instalments commencing on the first anniversary of grant.
The agreement may be terminated by the Company at any time. In the event that the Company terminates the employment agreement for whatever reason, the following
severance payments apply:
Year 1 of employment
Year 2 of employment
Year 3 of employment
1 Month Base Salary
2 Month Base Salary
6 Months Base Salary
The agreement includes an 18-month non-compete and non-solicitation provision.
Kevin Kane
Pursuant to the terms of an Employment Agreement dated May 7, 2021, as amended and modified, Kevin Kane was appointed the Chief Executive Officer of Colmek
commencing July 6, 2021. The Employment Agreement provides for an annual base salary of $200,000. He will also be eligible for an annual performance bonus based on the
Company’s financial performance. Assuming that the Company meets its targets during the current fiscal year, Mr. Kane will be paid a performance bonus of $12,000. As a
further inducement, he was granted 15,000 restricted stock units out of the Company’s 2017 Stock Incentive Plan that vest in three equal annual instalments commencing on the
first anniversary of grant.
The agreement may be terminated by the Company at any time. In the event that the Company terminates the employment agreement for whatever reason, the following
severance payments apply:
Year 1 of employment
Year 2 of employment
Year 3 of employment
One Month
Three Months
Six Months
The agreement includes a 12-month non-compete and non-solicitation provision.
Code of Ethics
We have adopted a code of ethics for all our employees, including our chief executive officer, principal financial officer and principal accounting officer or controller, and/or
persons performing similar functions, which is available on our website, under the link entitled “Code of Ethics”.
42
ITEM 11. EXECUTIVE COMPENSATION
The Summary Compensation Table shows certain compensation information for services rendered for the fiscal years ended October 31, 2022 and 2021, by our executive
officers. The following information includes the dollar value of base salaries, bonus awards, stock options grants and certain other compensation, if any, whether paid or
deferred.
Name and Principal Position
Year
Annmarie Gayle
Chief Executive Officer
Michael Midgley**
Chief Financial Officer
Kevin Kane
Divisional Chief Executive Officer
Blair Cunningham
President of Technology
Nathan Parker***
Chief Financial Officer
Salary
($)
305,000
305,000
Bonus
($)
100,000
100,000
Restricted
Stock
Awards
($)
Option
Awards
($)
* All Other
Compensation
($)
-0-
-0-
-0-
-0-
Total
($)
405,000
405,000
2022
2021
2022
2021
89,852
193,846
2022
2021
200,000
86,615
-0-
-0-
-0-
-0-
2022
2021
219,231
213,160
6,000
-0-
2022
2021
79,615
-0-
20,000
-0-
-0-
26,400
-0-
132,000
-0-
26,400
50,000
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
10,447
16,633
100,299
236,879
19,601
431
219,601
219,046
22,541
20,857
247,772
260,417
2,532
-0-
152,147
-0-
*The amounts described in the category of “All Other Compensation” comprise Health, Dental, Vision, Short Term Disability, Long Term Disability and Accidental Death and
Dismemberment insurance premiums which the Company contributed to the officers’ identified plan.
** Mike Midgley retired from his position as Chief Financial Officer in June 30,2022.
*** Mr. Nathan Parker took over as Chief Financial Officer of the Company in June 2022.
Grants of restricted stock awards as of October 31, 2022
Name
Kevin Kane
Blair Cunningham
Nathan Parker
Grant Date
6/9/2021
6/9/2021
6/1/2022
Outstanding option awards at October 31, 2022
All other
restricted
awards;
number of
securities
underlying
restricted stock
awards
Exercise
or base
price of
restricted stock
awards
Grant date
fair value
of restricted stock
awards
10,000
3,000
9,506
8.80
8.80
5.26
88,000
26,400
50,000
Option Awards
Number of securities
underlying unexercised
options exercisable
Number of securities
underlying unexercised
options unexercisable
66,667
50,000
43
Exercise or base price of
option swards
-
-
4.62
4.62
Option
expiration date
3/23/2023
3/23/2023
Name
Annmarie Gayle
Blair Cunningham
Option exercises for October 31, 2022
Annmarie Gayle
Michael Midgley
Name
Option Awards
Number of
shares
acquired on
exercise
Value
realized on
exercise
-
4,818
-
26,065
Blair Cunningham
-
-
The following table sets forth the compensation paid to each of our directors (who are not also officers of the Company) for the fiscal year ended October 31, 2022, in
connection with their services to the company. In accordance with the SEC’s rules, the table omits columns showing items that are not applicable. Except as set forth in the
table, no other persons were paid any compensation for director services.
DIRECTOR COMPENSATION
Name
Michael Hamilton
Captain J Charles Plumb
Mary Losty
Tyler G Runnels
Stock Incentive Plans
Fees Earned
or Paid in
Cash ($)
40,000
40,000
40,000
40,000
Stock Awards
($)
Total
($)
-
-
-
40,000
40,000
40,000
40,000
The Company has two active Stock Incentive Plans - 2017 Stock Incentive Plan and 2021 Stock Incentive Plan.
2017 Stock Incentive Plan
On December 6, 2017, the Board of Directors adopted the 2017 Stock Incentive Plan (the “2017 Plan”). The purpose of the Plan is to advance the interests of the Company and
its stockholders by enabling the Company and its subsidiaries to attract and retain qualified individuals through opportunities for equity participation in the Company, and to
reward those individuals who contribute to the Company’s achievement of its economic objectives. The Plan was adopted subject to stockholders’ approval. This Plan was
approved by Stockholders at its meeting held on July 24, 2018.
The maximum number of shares of Common Stock that will be available for issuance under the Plan is 913,612. The shares available for issuance under the Plan may, at the
election of the Committee, be either treasury shares or shares authorized but unissued, and, if treasury shares are used, all references in the Plan to the issuance of shares will, for
corporate law purposes, be deemed to mean the transfer of shares from treasury.
The Plan is administered by the Compensation Committee of the Board of Directors which has the authority to determine all provisions of Incentive Awards as the Committee
may deem necessary or desirable and as consistent with the terms of the Plan, including, without limitation, the following: (i) eligible recipients; (ii) the nature and extent of the
Incentive Awards to be made to each Participant; (iii) the time or times when Incentive Awards will be granted; (iv) the duration of each Incentive Award; and (v) the
restrictions and other conditions to which the payment or vesting of Incentive Awards may be subject.
During the fiscal year ended October 31, 2022, the Company granted 64,687 restricted stock awards to purchase an aggregate of 64,687 shares of common stock pursuant to the
terms of the 2017 Plan to various eligible individuals. During the said period 16,981 restricted stock awards were forfeited, and 5,467 units were converted into Treasury Stock
and a further 53,733 vested and were issued to the holders of these by the Company. During the fiscal year ended October 31, 2022, there were 39,834 Options forfeited. As a
result, as of October 31, 2022, there were 230,741 shares available for future issue under the 2017 Plan.
2021 Stock Incentive Plan
On July 12, 2021, the Board of Directors adopted the 2021 Stock Incentive Plan (the “2021 Plan”). The 2021 Plan was approved by the Company’s stockholders at its meeting
held on August 2, 2021. The 2021 Plan is identical to the 2017 in all material respects, except that the number of shares available for issuance thereunder is 1,000,000.
During the fiscal year ended October 31, 2021, no grants were made under the 2021 Plan and there were 1,000,000 shares available for future issue under the 2021 Plan.
Section 16(a) Beneficial Ownership Reporting Compliance
Under the Exchange Act, our directors, our executive officers, and any persons holding more than 10% of our common stock are required to report their ownership of the
common stock and any changes in that ownership to the SEC. To our knowledge, based solely on our review of the copies of such reports received or written representations
from certain reporting persons that no other reports were required, except as set forth below, we believe that during our fiscal year ended October 31, 2022, no reports relating
to our securities required to be filed by current reporting persons were filed late.
We will continue monitoring Section 16 compliance by each of our directors and executive officers and will assist them where possible in their filing obligations.
44
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information as of January 16, 2023, regarding the beneficial ownership of our Common Stock, based on information provided by (i) each of our
executive officers and directors; (ii) all executive officers and directors as a group; and (iii) each person who is known by us to beneficially own more than 5% of the
outstanding shares of our Common Stock. The percentage ownership in this table is based on 10,942,353 shares issued and outstanding as of January 16, 2023.
Unless otherwise indicated, we believe that all persons named in the following table have sole voting and investment power with respect to all shares of Common Stock that
they beneficially own.
Name and Address of Beneficial Owner (1)
Michael Hamilton
Annmarie Gayle (2)
Nathan Parker (3)
Blair Cunningham (4)
Kevin Kane (5)
J. Charles Plumb
Mary Losty
Amount and
Nature
of Beneficial
Ownership of
Common Stock
Percent of
Common Stock
1,143
2,304,581
-0-
52,298
5,000
11,434
57,143
*
21.1%
n/a
*
*
*
*
Niels Sondergaard
Carit Etlars Vej 17A
8700 Horsens
Denmark
G. Tyler Runnels (6)
2049 Century Park East, Suite 320
Los Angeles, CA 90067
J. Steven Emerson (7)
1522 Ensley Avenue
Los Angeles, CA 90024
Bryan Ezralow (8)
23622 Calabasas Rd. Suite 200
Calabasas, CA 91302
Tocqueville Asset Management LP
40 West 57th Street, 19th Floor
New York, NY 10019
All Directors and Executive Officers as a Group (Eight persons):
*) Less than 1%.
2,241,581
1,125,685
1,168,232
1,073,120
544,003
3,557,284
20.5%
10.3%
10.7%
9.8%
5.0%
32.5%
1) Unless otherwise indicated, the address of all individuals and entities listed below is c/o Coda Octopus Group, Inc. 3300 S Hiawassee Rd, Suite 104-105, Orlando, Florida,
32835.
2) Consists of 29,667 shares held by Ms. Gayle and 2,241,581 shares beneficially owned by Ms. Gayle’s spouse, Niels Sondergaard. Ms. Gayle disclaims any beneficial
ownership in those shares. Also includes 33,333 shares issuable upon exercise of options that will become exercisable within 60 days of the date hereof.
Includes 25,000 shares issuable upon exercise of currently exercisable options.
3) Does not include 9,506 restricted stock units that vest in three equal annual installments commencing on June 13, 2023.
4)
5) Does not include 10,000 shares issuable upon excise of restricted stock award units that vest in two equal annual installments commencing on July 6, 2023.
6)
Includes 859,331 shares held by the G. Tyler Runnels and Jasmine Niklas Runnels TTEES of The Runnels Family Trust DTD 1-11-2000 of which Mr. Runnels is a trustee;
227,700 shares held by T.R. Winston; 24,368 shares held by TRW Capital Growth Fund, Ltd.; and 14,286 shares held by Pangaea Partners. The Company has been advised
that Mr. Runnels has voting and dispositive power with respect to all of these shares.
Includes the following: 167,081 held by J. Steven Emerson IRA R/O II; 300,000 shares held by J. Steven Emerson Roth IRA; 49,328 shares held by the Brian Emerson IRA;
310,928 shares held by Emerson Partners; 180,250 shares held by 1993 Emerson Family Trust; 8,286 shares held by the Alleghany Meadows IRA; 8,286 shares held by the
Jill Meadows IRA; and 144,073 shares held by the Emerson family Foundation. The Company has been advised that Mr. Emerson has voting and dispositive power with
respect to all of these shares.
7)
8) Consists of 896,079 shares held by the Bryan Ezralow 1994 Trust u/t/d 12/22/1994; and 177,041 shares held by EZ MM&B Holdings, LLC. According to filings made with
the SEC, Mr. Ezralow has voting and dispositive power with respect to these shares.
45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
None that are required to be reported herein.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees. The aggregate fees billed by Frazier & Deeter, LLC, our principal accountants, for professional services rendered for the audit and audit related services of the
Company’s annual financial statements for the last two fiscal years and for the reviews of the financial statements included in the Company’s Quarterly reports on Form 10-Q
during the last two fiscal years 2022 and 2021 were $390,100 and $247,118 respectively.
Tax Fees. The Company did not engage its principal accountants to render any tax services to the Company during the last two fiscal years.
All Other Fees. The Company did not engage its principal accountants to render services to the Company during the last two fiscal years, other than as reported above.
Prior to the Company’s engagement of its independent auditor, such engagement is approved by the Company’s Audit Committee. The services provided under this engagement
may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the
particular service or category of services and is generally subject to a specific budget. Pursuant to the Company’s Audit Committee Charter, the independent auditors and
management are required to report to the Company’s audit committee at least quarterly regarding the extent of services provided by the independent auditors in accordance with
this pre-approval, and the fees for the services performed to date. The audit committee may also pre-approve particular services on a case-by-case basis. All audit-related fees,
tax fees and other fees incurred by the Company for the year ended October 31, 2022, were approved by the Company’s audit committee.
46
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibit
Number
2.1
3.1
3.1.1.
3.2
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
Description
Plan and Agreement of Merger dated July 12, 2004 by and between Panda and Coda Octopus *
Restated Certificate of Incorporation**
Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock******
By-Laws *
Deed of Amendment to Loan Note Transaction Documents dated October 31, 2015 by and between the Company and CCM Holdings LLC***
[Reserved]
Employment Contract between Coda Octopus Colmek, Inc. and Mike Midgley****
[Reserved]
Employment Contract dated January 1, 2013 between Coda Octopus Products, Inc. and Blair Cunningham****
Deed of Amendment to Loan Note Transaction Documents dated October 17, 2016 by and between the Company and CCM Holdings LLC**
Deed of Amendment to Loan Note Transaction Documents dated November 1, 2016 by and between the Company and CCM Holdings LLC*****
Employment Contract dated March 16, 2017 between the Company and Annmarie Gayle*****
Loan Agreement, dated as of April 28, 2017, by and between Coda Octopus Group, Inc., Coda Octopus Products, Inc., Coda Octopus Colmek, Inc. and HSBC
Bank USA, N.A.******
10.34
Form of Security Agreement, dated April 28, 2017******
10.35
10.36
10.37
10.38
14
23.1
31.1
32
Promissory Note dated April 28, 2017******
2017 Stock Incentive Plan*******
Employment Agreement dated May 7, 2021 between Coda Octopus Colme, Inc and Kevin Kane *********
2021 Stock Incentive Plan*******
Code of Ethics*******
Consent of Frazier & Deeter, LLC (filed herewith)
Chief Executive Office and Chief Financial Officer Certification
Certificate Pursuant to 18 U.S.C Section 1350
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
Inline XBRL Instance Document
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*
**
***
****
*****
******
*******
********
*********
Incorporated by reference to the Company’s Registration Statement on Form SB-2 (SEC File No.143144)
Incorporated by reference to the Company’s Registration Statement on Form 10.
Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year ended October 31, 2007
Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year ended October 31, 2010
Incorporated by reference to the Company’s Registration Statement on Form 10/A filed March 29,2017
Incorporated by reference to the Company’s Current Report on Form 8-K filed May 2, 2017
Incorporated by reference to the Company’s Annual Report on Form 10 for the year ended October 31, 2017
Incorporated by reference to the Company’s Definitive Statement filed August 2, 2021
Incorporated by reference to the Company’s Form 10-K for the year ended October 31, 2021 filed February 14, 2022
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
DATE: January 30, 2023
CODA OCTOPUS GROUP, INC.
/s/ Annmarie Gayle
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Annmarie Gayle, his or her true and lawful attorney-in-fact and agent, with full power of substitution and
re-substitution, severally, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-K,
and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney may be executed in counterparts.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature
Title
Date
/s/ Annmarie Gayle
Annmarie Gayle
/s/ Nathan Parker
Nathan Parker
/s/ Michael Hamilton
Michael Hamilton
/s/ Captain Charlie Plumb
Charlie Plumb
/s/ Mary Losty
Mary Losty
Chief Executive Officer and Chairman
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
/s/ G. Tyler Runnels
Director
48
January 30, 2023
January 30, 2023
January 30, 2023
January 30, 2023
January 30, 2023
January 30, 2023
CODA OCTOPUS GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
PAGE
F-1
CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 2022 AND 2021
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED OCTOBER 31, 2022 AND 2021
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED OCTOBER 31, 2022 AND 2021
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED OCTOBER 31, 2022 AND 2021
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-2
F-4
F-5
F-6
F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Coda Octopus Group, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Coda Octopus Group, Inc. and subsidiaries (the “Company”) as of October 31, 2022 and 2021, and the
related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for the years ended October 31, 2022 and 2021, and the
related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of October 31, 2022 and 2021, and the results of their operations and cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the
audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective,
or complex judgments. We determined that there are no critical audit matters.
/s/ Frazier & Deeter, LLC
We have served as the Company’s auditor since 2014.
Tampa, Florida
January 30, 2023
PCAOB ID 215
F-1
CODA OCTOPUS GROUP, INC.
Consolidated Balance Sheets
October 31, 2022 and 2021
ASSETS
2022
2021
CURRENT ASSETS
Cash
Accounts Receivable
Inventory
Unbilled Receivables
Prepaid Expenses
Other Current Assets
Total Current Assets
FIXED ASSETS
Property and Equipment, net
OTHER ASSETS
Goodwill and Other Intangibles, net
$
$
22,927,371
2,870,600
10,027,111
602,115
240,464
343,061
37,010,722
17,747,656
4,207,996
10,691,177
1,080,384
1,202,327
627,619
35,557,159
5,832,532
6,037,101
3,824,394
3,794,383
Deferred Tax Asset
Total Other Assets
Total Assets
259,810
4,084,204
76,776
3,871,159
$
46,927,458
$
45,465,419
The accompanying notes are an integral part of these consolidated financial statements
F-2
CODA OCTOPUS GROUP, INC.
Consolidated Balance Sheets (Continued)
October 31, 2022 and 2021
CURRENT LIABILITIES
LIABILITIES AND STOCKHOLDERS’ EQUITY
2022
2021
Accounts Payable
Accrued Expenses and Other Current Liabilities
Note Payable
Deferred Revenue
Total Current Liabilities
LONG TERM LIABILITIES
Deferred Revenue, less current portion
Total Long-Term Liabilities
Total Liabilities
STOCKHOLDERS’ EQUITY
Common Stock, $.001 par value; 150,000,000 shares authorized, 10,916,853 issued and outstanding as
of October 31, 2022, and 10,857,195 shares issued and outstanding as of October 31, 2021
Treasury Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Loss
Accumulated Deficit
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
$
$
793,247
1,731,706
-
943,569
3,468,522
76,127
76,127
3,544,649
10,918
(28,337)
62,313,988
(4,737,124)
(14,176,636 )
43,382,809
$
46,927,458
$
The accompanying notes are an integral part of these consolidated financial statements
F-3
CODA OCTOPUS GROUP, INC.
Consolidated Statements of Income and Comprehensive Income
Net Revenues
Cost of Revenues
Gross Profit
OPERATING EXPENSES
Research & Development
Selling, General & Administrative
Total Operating Expenses
INCOME FROM OPERATIONS
OTHER INCOME (EXPENSE)
Other Income
Interest Expense
Total Other Income
INCOME BEFORE INCOME TAX EXPENSE
Year Ended October 31,
2022
2021
$
22,225,803
7,035,115
$
15,190,688
2,237,920
7,948,704
10,186,624
5,004,064
137,975
(9,704)
128,271
5,132,335
1,454,611
740,449
63,559
1,999,841
4,258,460
157,886
157,886
4,416,346
10,858
-
61,183,131
(1,667,059)
(18,477,857)
41,049,073
45,465,419
21,331,527
6,561,809
14,769,718
2,982,676
7,949,525
10,932,201
3,837,517
1,435,382
(19,655)
1,415,727
5,253,244
INCOME TAX (EXPENSE) BENEFIT
Current Tax Expense
Deferred Tax Benefit (Expense)
Total Income Tax Expense
NET INCOME
NET INCOME PER SHARE:
Basic
Diluted
WEIGHTED AVERAGE SHARES:
Basic
Diluted
NET INCOME
Foreign Currency Translation Adjustment
Total Other Comprehensive (Loss) Income
COMPREHENSIVE INCOME
(1,005,140 )
174,026
(831,114)
(16,592)
(288,887)
(305,479)
4,301,221
$
4,947,765
0.40
0.38
$
$
10,863,674
11,281,347
0.46
0.44
10,804,074
11,309,740
4,301,221
$
4,947,765
(3,070,065)
(3,070,065)
1,231,156
$
$
654,219
654,219
5,601,984
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements
F-4
CODA OCTOPUS GROUP, INC.
Consolidated Statements of Changes in Stockholders’ Equity
For the Year’s Ended October 31, 2022 and 2021
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Treasury
Stock
Total
Balance, October 31, 2020
10,751,881 $ 10,753 $ 60,132,415 $
(2,321,278) $ (23,425,622) $
- $ 34,396,268
Employee stock based compensation
Stock issued for options exercised
Consultant stock based compensation
Foreign currency translation adjustment
Net Income
Balance, October 31, 2021
Employee stock based compensation
Stock issued for options exercised
Foreign currency translation adjustment
Treasury Stock
Net Income
Balance, October 31, 2022
-
80,314
25,000
-
-
-
80
25
-
-
830,071
(80)
220,725
-
-
-
-
-
654,219
-
-
-
-
-
4,947,765
10,857,195 $ 10,858 $ 61,183,131 $
(1,667,059) $ (18,477,857) $
830,071
-
220,750
654,219
4,947,765
- $ 41,049,073
-
59,658
-
-
-
-
60
-
-
-
1,130,917
(60)
-
-
-
10,916,853 $ 10,918 $ 62,313,988 $
-
-
(3,070,065)
-
-
1,130,917
-
(3,070,065)
(28,337)
4,301,221
(4,737,124) $ (14,176,636) $ (28,337) $ 43,382,809
-
-
-
-
4,301,221
-
-
-
(28,337)
-
The accompanying notes are an integral part of these consolidated financial statements
F-5
CODA OCTOPUS GROUP, INC.
Consolidated Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Stock based compensation
Deferred income taxes
Funding from Paycheck Protection Program recognized as income
(Increase) decrease in operating assets:
Accounts receivable
Inventory
Unbilled receivables
Prepaid expenses
Other current assets
Increase (decrease) in operating liabilities:
Year Ended October 31,
2022
2021
$
4,301,221
$
738,729
1,130,917
(193,083 )
-
992,948
(675,878)
447,927
165,010
275,909
4,947,765
924,073
1,050,821
485,126
(648,872)
(2,193,336)
(1,063,163)
(219,084)
(913,123)
(383,449)
Accounts payable and other current liabilities
Deferred revenue
Net Cash Provided by Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment
Purchases of other intangible assets
Net Cash Used in Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes
Proceeds from Paycheck Protection Program
Purchase of treasury stock
Net Cash (Used in) Provided by Financing Activities
EFFECT OF CURRENCY TRANSLATION ON CHANGES IN CASH
NET INCREASE IN CASH
CASH AT THE BEGINNING OF THE YEAR
CASH AT THE END OF THE YEAR
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest
Cash paid for taxes
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
Purchase of property and equipment previously held in escrow, included in prepaid expenses as of
October 31, 2021
533,996
(990,729 )
6,726,967
(466,471 )
(90,089)
(556,560 )
(63,559)
-
(28,337)
(91,896)
(898,796)
5,179,715
17,747,656
22,927,371
9,704
74,432
$
$
$
326,761
956,251
3,269,770
(850,894)
(113,310)
(964,204)
(509,549)
648,872
-
139,323
168,478
2,613,367
15,134,289
17,747,656
19,655
-
694,664
$
-
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements
F-6
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Coda Octopus Group, Inc. (“Coda,” “the Company,” or “we”) operates two distinct operating business units. These are the Marine Technology Business (“Products Business”,
“Products Operations” or “Products Segment”) and the Marine Engineering Business (“Services Business”, “Engineering Business” or “Engineering Operations”).
The Marine Technology Business sells technology solutions to the subsea and underwater markets. These are designed, developed, manufactured and supported by the
Business. Among the solutions it designs and develops, and which currently is its main revenue generating product, is its real time 3D volumetric imaging sonar which is a
patented unique and leading product in the subsea/underwater market and marketed under the name Echoscope®. It also recently launched a new diver management system
(Diver Augmented Vision Display (DAVD)) system addressing the global defense and commercial diving market and which it believes is a significant part of its growth pillars.
The Marine Engineering Business supplies sub-assemblies that it designs primarily as sub-contractors to Prime Defense Contractors for incorporation into broader mission
critical defense systems. These design contracts typically progress to manufacturing contracts for these sub-assemblies and are typically supplied for the life of the program to
which they pertain.
The consolidated financial statements include the accounts of Coda Octopus Group, Inc. and its domestic and foreign subsidiaries. All significant intercompany transactions
and balances have been eliminated in the consolidated financial statements.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
a. Basis of Presentation
The Company has adopted the Financial Accounting Standards Board (FASB) Codification (Codification). The Codification is the single official source of authoritative
accounting principles generally accepted in the United States of America (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities, and all the
Codification’s content carries the same level of authority.
b. Cash
The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. At times such investments may be in
excess of federal deposit insurance limits.
c. Trade Accounts Receivable
Trade accounts receivable are recorded net of the allowance for doubtful accounts. The Company provides for an allowance for doubtful collections that is based upon a review
of outstanding receivables, historical collection information, and existing economic conditions. Balances still outstanding after the Company has used reasonable collection
efforts are written off though a charge to the valuation allowance and a credit to trade accounts receivable. The allowance for doubtful accounts was $0 for both October 31,
2022, and 2021, respectively.
F-7
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 2 – SUMMARY OF ACCOUNTING POLICIES (Continued)
d. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Expenditures for minor replacements, maintenance and repairs which do not increase the useful lives
of the property and equipment are charged to operations as incurred. Major additions and improvements are capitalized. Depreciation and amortization are computed using the
straight-line method over their estimated useful lives which is typically three to five years for equipment and 50 years for buildings. Our accounting policy regarding our rental
assets allocated for rentals by our Products Business is to allocate 70% of depreciation in the period to Cost of Goods Sold.
We own substantially all our facilities and believe that the effect of adopting Accounting Standards Codification 842, “Leases”, has been immaterial.
e. Advertising
Coda follows the policy of charging the costs of advertising to expense as incurred, which aggregated $0 and $5,042 for the years ended October 31, 2022 and 2021,
respectively.
f. Inventory
Inventory is stated at the lower of cost (First In, First Out method) or net realizable value. Inventory consisted of the following components:
Raw materials and parts
Work in progress
Finished goods
Total Inventory
g. Estimates
October 31,
2022
October 31,
2021
$
$
7,219,344
383,427
2,424,340
10,027,111
$
$
7,525,419
919,619
2,246,139
10,691,177
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues including unbilled and
deferred revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates related to the percentage of
completion method used to account for contracts including costs and earnings in excess of billings, billings in excess of costs and estimated earnings, the valuation of the
deferred tax asset, and the valuation of goodwill.
h. Revenue Recognition
The Company recognizes revenue under the Financial Accounting Standards Board’s Topic 606, Revenue from Contracts with Customers (“Topic 606”).
F-8
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 2 – SUMMARY OF ACCOUNTING POLICIES (Continued)
h. Revenue Recognition (Continued)
Topic 606 has established a five-step process to determine the amount of revenue to record from contracts with customers. The five steps are:
● Determine if we have a contract with a customer;
● Determine the performance obligations in that contract;
● Determine the transaction price;
● Allocate the transaction price to the performance obligations; and
● Determine when to recognize revenue.
Our 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 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 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 and 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.
F-9
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 2 – SUMMARY OF ACCOUNTING POLICIES (Continued)
h. Revenue Recognition (Continued)
With respect to revenues related to our Services 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, 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 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.
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.
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 October 31, 2022 and 2021, we had
deferred commissions of $0 for each year. Amortization expense related to deferred commissions was $0 and $3,884 in the years ended October 31, 2022 and 2021,
respectively.
F-10
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 2 – SUMMARY OF ACCOUNTING POLICIES (Continued)
h. Revenue Recognition (Continued)
Other Revenue Disclosures
See Note 13 – Disaggregation of Revenue for a breakdown of revenues from external customers and cost of those revenues between our Product Segment and Services
Segment including information on the split of revenues by geography.
i. Concentrations of Risk
Credit losses, if any, have been provided for in the consolidated financial statements and are based on management’s expectations. The Company’s accounts receivables are
subject to potential concentrations of credit risk, since a significant part of the Company’s sales are to a small number of companies and, even though these are generally
established businesses, market fluctuations such as the price of oil may affect our customers’ ability to meet their obligations to us. Furthermore, Trade disputes may result in
impairment or delays in receivables.
The Company’s bank deposits are held with financial institutions both in and outside the USA. At times, such amounts may be in excess of applicable government mandated
insurance limits. The Company has not experienced any losses in such accounts or lack of access to its cash, and believes it is not exposed to significant risk of loss with respect
to cash.
j. Contracts in Progress (Unbilled Receivables and Deferred Revenue)
Costs and estimated earnings in excess of billings on uncompleted contracts represent accumulated project expenses and fees which have not been invoiced to customers as of
the date of the balance sheet. These amounts are stated on the consolidated balance sheets as Unbilled Receivables of $602,115 and $1,080,384 as of October 31, 2022 and
2021, respectively.
Our Deferred Revenue of $790,458 and $1,879,790 as of October 31, 2022 and 2021, respectively, consists of billings in excess of costs and revenues received as part of our
warranty obligations upon completing a sale, as elaborated further in the last paragraph of this note.
Revenue received as part of sales of equipment includes a provision for warranty or through life support (TLS) and is treated as deferred revenue, along with extended warranty
sales or TLS, which may be purchased by customers. These amounts are amortized over the relevant warranty or TLS period (12 months is our standard warranty or 24, 36 or 60
months for TLS) from the date of sale. These amounts are stated on the consolidated balance sheets as a component of Deferred Revenue and were $229,238 and $277,937 as of
October 31, 2022 and 2021, respectively.
F-11
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
k. Income Taxes
The Company accounts for income taxes in accordance with Accounting Standards Codification 740, Income Taxes (ASC 740). Under ASC 740, deferred income tax assets and
liabilities are recorded for the income tax effects of differences between the bases of assets and liabilities for financial reporting purposes and their bases for income tax
reporting. The Company’s differences arise principally from the use of various accelerated and modified accelerated cost recovery systems for income tax purposes versus
straight line depreciation used for book purposes and from the utilization of net operating loss carry-forwards.
Deferred tax assets and liabilities are the amounts by which the Company’s future income taxes are expected to be impacted by these differences as they reverse. Deferred tax
assets are based on differences that are expected to decrease future income taxes as they reverse. Correspondingly, deferred tax liabilities are based on differences that are
expected to increase future income taxes as they reverse. Note 7 below discusses the amounts of deferred tax assets and liabilities, and also presents the impact of significant
differences between financial reporting income and taxable income.
For income tax purposes, the Company uses the percentage of completion method of recognizing revenues on long-term contracts which is consistent with the Company’s
financial reporting under U.S. GAAP.
l. Goodwill and Intangible Assets
Goodwill and Intangible assets consist principally of the excess of cost over the fair value of net assets acquired (or goodwill), customer relationships, non-compete agreements
and licenses. Goodwill was allocated to our reporting units based on the original purchase price allocation. Goodwill is not amortized and is evaluated for impairment annually
or more often if circumstances indicate impairment may exist. Customer relationships, non-compete agreements, patents and licenses are being amortized on a straight-line basis
over periods of 2 to 15 years. The Company amortizes its intangible assets using the straight-line method over their estimated period of benefit. We periodically evaluate the
recoverability of goodwill and intangible assets and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment
exists.
Step 1 of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the
fair value, which is based on future cash flows, exceeds the carrying amount, goodwill is not considered impaired. The Company has adopted Accounting Standards
Codification 2017 – 04, simplifying the Test for Goodwill Impairment, which permits the Company to impair the difference between carrying amounts in excess of the fair
value of the reporting unit as the reduction in goodwill.
F-12
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (Continued)
l. Goodwill and Intangible Assets (Continued)
At the end of each year, we evaluate goodwill on a separate reporting unit basis to assess recoverability, and impairments, if any, are recognized in earnings. An impairment loss
would be recognized in an amount equal to the excess of the carrying amount of the reporting unit over the fair value of the reporting unit.
There were no impairment charges recognized during the years ended October 31, 2022 and 2021.
m. Fair Value of Financial Instruments
The Company’s financial instruments include cash, accounts receivable, accounts payable, accrued expenses and notes payable. The carrying amounts of cash, accounts
receivable, accounts payable and accrued expenses approximate fair values because of the short-term nature of these instruments. The aggregate carrying amount of the notes
payable approximates fair value as they bear interest at a market interest rate based on their term and maturity.
The fair value of the Company’s long-term debt approximates its carrying amount based on the fact that the Company believes it could obtain similar terms and conditions for
similar debt.
n. Foreign Currency Translation
Assets and liabilities are translated at the prevailing exchange rates at the balance sheet dates. Related revenues and expenses are translated at weighted average exchange rates
in effect during the period. Stockholders’ equity, fixed assets and long-term investments are recorded at historical exchange rates. Resulting translation adjustments are recorded
as a separate component in stockholders’ equity as part of accumulated other comprehensive income or (loss) as may be appropriate. Foreign currency transaction gains and
losses are included in the consolidated statements of income and comprehensive income.
For the years ended October 31, 2022 and 2021, the Company recorded an aggregate transaction gain (loss) of $431,314 and ($195,341), respectively. The aggregate transaction
losses were recorded in SG&A.
o. Long-Lived Assets
Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. The carrying amount of a long-lived asset is not recoverable if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposal of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. No impairment loss was
recognized during the years ended October 31, 2022 and 2021, respectively.
p. Research and Development
Research and development costs consist of expenditures for the development of present and future patents and technology, which are not capitalizable. Under current legislation,
we are eligible for UK tax credits related to our qualified research and development expenditures.
F-13
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (Continued)
q. Stock Based Compensation
In accordance with the accounting rules for stock compensation, for time-based awards, the Company is accruing a stock compensation expense and increase to additional paid
in capital based on the market value of the common stock as of the grant date throughout the vesting period. The vesting period for the options is 36 months and is based on the
employee’s continuous service to the Company. In addition, the Company has issued Restricted Stock Awards (RSA) The vesting period is between 6 and 36 months and is
based on the employee’s/consultant’s continued service for the vesting period. Prior to vesting, the awards are subject to forfeiture in the whole or in part under certain
circumstances. We use the Black-Scholes option pricing model to determine the fair value for equity instruments granted to employees.
r. Comprehensive Income
Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Comprehensive income
includes gains and losses on foreign currency translation adjustments and is included as a component of stockholders’ equity.
s. Earnings per Share
We compute basic earnings per share by dividing the income attributable to common shareholders by the weighted average number of common shares outstanding in the
reporting period.
Following is a reconciliation of earnings from continuing operations and weighted average common shares outstanding for purposes of calculating basic and diluted earnings
per share:
Fiscal Period
Numerator:
Net Income
Denominator:
Year
Ended
October 31
2022
Year
Ended
October 31
2021
$
4,301,221 $
4,947,765
Basic weighted average common shares outstanding
Unused portion of options and restricted stock awards
Diluted outstanding shares
10,863,674
417,673
11,281,347
10,804,074
505,666
11,309,740
Net income per share
Basic
Diluted
$
$
0.40 $
0.38 $
0.46
0.44
F-14
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (Continued)
t. Recent Accounting Pronouncements
There have been no new accounting pronouncements not yet effective that have significance, or potential significance, to our Consolidated Financial Statements.
u. Treasury Stock
Repurchases of Restricted Stock Awards or common stock are classified as treasury stock on our Consolidated Balance Sheet.
We account for treasury stock under the cost method. When treasury stock is re-issued at a price higher than its cost, the difference is recorded as a component of additional
paid-in-capital in our Consolidated Balance Sheet. When treasury stock is re-issued at a price lower than its cost, the difference is recorded as a reduction of retained earnings in
our Consolidated Balance Sheet.
NOTE 3 – OTHER INCOME
Other Income consisted of the following components:
PPP Loans
Employee Retention Credits payroll tax credits
Other Income
Total Other Income, net
NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS
Other intangibles consisted of the following as of:
October 31,
2022
October 31,
2021
$
-
88,917
49,058
648,872
701,568
84,942
137,975
$
1,435,382
$
$
Customer relationships (weighted average life of 10 years)
Non-compete agreements (weighted average life of 3 years)
Patents and other (weighted average life of 10 years)
Total identifiable intangible assets - gross carrying value
Less: accumulated amortization
Total intangible assets, net
October 31,
2022
October 31,
2021
$
$
$
720,592
198,911
675,572
1,595,075
(1,152,789)
442,286
$
720,592
198,911
585,483
1,504,986
(1,092,711)
412,275
F-15
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
Amortization of patents, customer relationships, non-compete agreements and licenses included as a charge to income amounted to $60,077 and $50,379 for the years ended
October 31, 2022 and 2021.
Future estimated annual amortization expenses as of October 31, 2022 is as follows:
Years Ending October 31,
2023
2024
2025
2026
Thereafter
Totals
Goodwill consisted of the following as of:
Coda Octopus Colmek, Inc.
Coda Octopus Products, Ltd
Coda Octopus Martech, Ltd
Total Goodwill
Amount
52,089
42,877
27,533
24,442
295,345
442,286
$
October 31,
2022
October 31,
2021
$
2,038,669
62,315
1,281,124
3,382,108
$
2,038,669
62,315
1,281,124
3,382,108
$
$
Considerable management judgment is necessary to estimate the fair value of goodwill. Based on various market factors and projections used by management, actual results
could vary significantly from management’s estimates.
The Company’s policy is to test its goodwill balances for impairment on an annual basis, as of October 31, or more frequently if events or changes in circumstances indicate that
the asset might be impaired.
Based on these evaluations, the fair value of reporting unit exceeds its carrying value. As such no impairment was recorded by management.
F-16
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
Buildings
Land
Office machinery and equipment
Rental assets
Furniture, fixtures and improvements
Totals
Less: accumulated depreciation
Total Property and Equipment, net
Depreciation expense for the years ended October 31, 2022 and 2021 was $678,652 and $873,694 respectively.
October 31,
2022
October 31,
2021
$
$
$
5,419,946
200,000
1,556,030
2,252,292
1,108,787
10,537,055
(4,704,523)
5,832,532
$
5,298,028
200,000
1,622,871
2,326,486
1,218,217
10,665,602
(4,628,501)
6,037,101
NOTE 6 - OTHER CURRENT ASSETS
Other current assets consisted of the following at:
Deposits
Other Tax Receivables
Employee Retention Credit Receivables
Total Other Current Assets
NOTE 7 – CAPITAL STOCK
Common Stock
October 31,
2022
October 31,
2021
$
$
18,631
151,217
173,213
343,061
$
$
63,992
-
563,627
627,619
F-17
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
During the fiscal year ended October 31, 2021, the Company issued 80,314 shares of common stock for the exercise of 169,332 Options which were issued under the
Company’s 2017 Plan.
On July 20, 2021, the Company issued 25,000 shares of common stock to consultants for services rendered. These shares had a fair value of $220,750.
During the fiscal year ended October 31, 2021, the Company granted under its 2017 Plan restricted stock awards to purchase an aggregate of 127,500 shares of common stock
pursuant to the terms of the Plan to various eligible individuals. As a result, as of October 31, 2021, there were 238,612 shares available under the 2017 Plan. There were
forfeitures of 8,000 and 3,000 options during the years ended October 31, 2021 and 2020, respectively.
During the fiscal year ended October 31, 2022, pursuant to the terms of the 2017 Plan, the Company granted restricted stock awards of 64,687 shares of common stock to
various eligible individuals and also issued 53,733 shares of common stock for awards that had vested in the said fiscal year. 16,981 restricted stock grant awards were forfeited,
and 5,467 units were converted into Treasury Stock. Further, 5,925 shares of common stock were issued in respect of the exercise of 36,667 Options. As a result, as of October
31, 2022, there were 230,741 shares available under the 2017 Plan.
At the year ended October 31, 2022, there were 1,000,000 shares available under the 2021 Plan.
The following tables presents Options and Restricted Stock Award activities for the years ended October 31, 2022, and 2021 and shows the Company’s outstanding obligations
for Options and Restricted Stock Awards for the said years.
The intrinsic value of the outstanding options as of October 31, 2022 was $544,175 and $1,446,835 for October 31, 2021.
F-18
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
Stock Options
Weighted
Average
Exercise
Price
Exercisable
Weighted
Average
Exercise
Price
Non-Vested
Weighted
Average
Exercise
Price
4.65
-
$
-
561,000
$
4.65
4.65
4.65
4.65
4.65
4.65
4.65
4.65
4.65
-
185,667
(169,332)
-
16,335
-
183,668
(36,667)
(4,333)
159,003
$
$
$
$
$
-
4.65
4.65
-
-
(185,667)
-
(8,000)
-
367,333
-
4.65
4.65
-
4.65
-
(183,668)
-
(35,501)
148,164
$
$
$
$
$
$
$
$
4.65
4.65
4.65
4.65
4.65
4.65
4.65
4.65
Total
561,000
-
-
(169,332)
(8,000)
383,668
-
-
(36,667)
(39,834)
307,167
$
$
$
$
$
$
$
$
$
$ 1,446,835
$
544,175
$
$
61,746
281,689
$ 1,385,089
$
262,486
NOTE 7 – CAPITAL STOCK (Continued)
Outstanding at October 31, 2020
Granted
Vested
Exercised
Forfeited or cancelled
Outstanding at October 31, 2021
Granted
Vested
Exercised
Forfeited or cancelled
Outstanding at October 31, 2022
Aggregate Intrinsic Value October 31, 2021
Aggregate Intrinsic Value October 31, 2022
The total expense recognized by the Company relating to stock options during the years ended October 31, 2022 and 2021, respectively, was $211,284 and $482,595.
Unamortized compensation expense in future years is $90,831.
NOTE 7 – CAPITAL STOCK (Continued)
Outstanding at October 31, 2020
Granted
Vested
Exercised
Treasury Stock
Forfeited or cancelled
Outstanding at October 31, 2021
Granted
Vested
Exercised
Treasury Stock
Forfeited or cancelled
Outstanding at October 31, 2022
F-19
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
Restricted Stock Awards (“RSA”)
Weighted
Average
Exercise
Price
Exercisable
Weighted
Average
Exercise
Price
Non-Vested
Weighted
Average
Exercise
Price
-
8.80
8.80
8.80
8.80
8.80
8.80
7.15
5.05
-
5.18
8.43
8.10
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
$
$
$
$
$
$
$
-
8.80
8.80
8.80
8.80
8.80
-
127,500
-
-
-
(5,500)
8.80
122,000
7.15
5.05
-
5.18
8.43
-
8.10
64,687
(53,733)
-
(5,467)
(16,981)
110,506
$
$
$
$
$
$
$
$
$
$
$
$
$
-
8.80
8.80
8.80
8.80
8.80
8.80
7.15
5.05
-
5.18
8.43
8.10
Total
-
127,500
-
-
-
(5,500)
122,000
64,687
(53,733)
-
(5,467)
(16,981)
110,506
$
$
$
$
$
$
$
$
$
$
$
$
$
The total expense recognized by the Company relating to restricted stock awards during the year ended October 31, 2022 and 2021 was $919,633 and $347,476, respectively.
The expense in future years is $122,306.
All Stock Options and Restricted Stock Awards have been made pursuant to the 2017 Plan.
Total stock compensation expense from issued shares, stock options and restricted stock awards is $1,130,917.
Preferred Stock
Series A and Series C Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock with a par value of $0.001 per share. We had previously designated 50,000 preferred shares as Series A
preferred stock and 50,000 preferred shares as Series C preferred stock. Both series have since been eliminated and as of October 31, 2022, there were no shares of Preferred
Stock issued or outstanding.
F-20
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 8 - INCOME TAXES
The Company provides for income taxes and the related accounts under the asset and liability method. Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to be in effect during the year in which the basis differences reverse.
Valuation allowances are established when management determines it is more likely than not that some portion, or all, of the deferred tax assets will not be realized.
The provision (benefit) for income taxes comprises:
Current federal expense
Current state income tax expense
Foreign tax (benefit) expense
Total current tax expense
Deferred federal (benefit) expense
Deferred Tax (Benefit) Expense
Total Income Tax Expense
October 31,
2022
October 31,
2021
$
$
$
849,580
159,900
(4,340)
1,005,140
(174,026)
(174,026)
831,114
$
(25,429)
-
42,021
16,592
288,887
288,887
305,479
F-21
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2021 and 2020
NOTE 8 - INCOME TAXES (Continued)
The expense for income taxes differed from the U.S. statutory rate due to the following:
Statutory tax rate
R&D Relief
Change in valuation allowance
Foreign tax (benefit) expense
State Income Tax
Total
October 31,
2022
October 31,
2021
21.0%
(10.6)%
3.7 %
(0.9)%
3.0 %
16.2 %
21.0%
(18.4)%
0.0%
3.2%
0.0%
5.8%
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes.
Significant components of the Company’s deferred tax assets and liabilities are as follows:
Noncurrent deferred tax assets
Temporary differences
U.S. NOL carryforwards
Deferred Revenue
Restricted Stock Awards
Book/Tax Depreciation
Foreign fixed assets
Foreign NOL carryforwards
Total
Valuation allowance
Total Deferred Asset
October 31,
2022
October 31,
2021
$
$
-
4,830
$
272,841
(17,861 )
(84,381 )
409,100
584,529
(324,719 )
259,810
$
15,930
-
72,970
(12,124)
18,168
148,650
243,594
(166,818)
76,776
As of October 31, 2022, we had no remaining U.S. federal net operating loss (NOL) carryforwards.
The Company has filed tax returns for federal, state, and foreign jurisdictions. The Company’s evaluation of uncertain tax matters was performed for the tax years ended
October 31, 2022, and 2021. The Company has elected to retain its existing accounting policy with respect to the treatment of interest and penalties attributable to income taxes
and continues to reflect interest and penalties attributable to income taxes, to extent they arise, as a component of its income tax provision or benefit as well as its outstanding
income tax assets and liabilities. The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments to
result in a material change to its financial position.
The Company’s UK Operations, under the applicable UK tax rules, have certain trading losses (referred to in this disclosure as “NOL carryforwards”). Under the applicable UK
tax rules, any trading tax losses incurred from 2017 up to and including the current fiscal year can be surrendered for group relief to offset or reduce current year profits and tax
liability in any of our UK Operations. Any tax losses before 2017 in a UK entity can only be used in the entity to which it pertains. The tax losses are available indefinitely
unless the nature of the business with the trading loss benefit changes substantially. Under UK tax rules, the UK entities are also eligible for R&D Tax Credit. The UK Products
Business in any one FY performs significant R&D work due to the nature of its business (researching and developing products and solutions). In the 2022 FY, we were eligible
to deduct £2,246,251 (an equivalent of USD $2,819,389,) as R&D tax expenses from our taxable income, thus negating any tax liability of the UK Operations in the Current
FY. Our UK Operations have $ 1.3m in NOL carryforwards, $0.48m of which can be used by the UK entity in which the trading loss was created and $0.82M can be used by
any or all UK entities. This applies indefinitely unless the business activities undertaken change substantially.
A valuation allowance is required for deferred tax assets, if based on available evidence, it is more likely than not that that all or some portion of the asset will not be realized
due to the inability to generate sufficient taxable income in the future. The deferred tax losses refer to timing of asset allowance in the UK. As we are generally able to offset
most taxes with brought forward trading losses, R&D tax credit to offset profits expected to be ongoing and ability to utilize such reliefs within between entities then we do not
foresee being able to utilize those deferred tax assets in the near future.
F-22
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 9 - NOTE PAYABLE
Note payable consisted of the following at:
October 31,
2022
October 31,
2021
Secured note payable to HSBC NA with interest payable on the 28 th day of each month at 4.56% per
annum. Monthly repayment obligation under this loan was $43,777 (comprising both principal and
interest repayment). The Loan reached maturity and was repaid in full in December 2021.
Total
Less: current portion
Total Long Term Note Payable
The HSBC Loan was repaid in full in December 2021.
$
$
-
$
-
-
-
$
63,559
.
63,559
(63,559)
-
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.
This revolving line of credit facility is subject to annual renewal and has been extended to November 2023. We have not utilized this line of credit and the outstanding balance
on the line of credit was $0 as of October 31, 2022 and 2021.
F-23
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 10 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) consists of foreign currency translation adjustments. Total other comprehensive income (loss) was ($3,070,065) and $654,219 for the years
ended October 31, 2022 and 2021, respectively.
A reconciliation of the other comprehensive income (loss) in the stockholders’ equity section of the consolidated balance sheets is as follows:
October 31,
2022
October 31,
2021
Balance, beginning of year
Total other comprehensive income (loss) for the year - foreign currency translation adjustment
Balance, end of year
$
$
(1,667,059)
(3,070,065)
(4,737,124)
$
$
(2,321,278)
654,219
(1,667,059)
NOTE 11 – CONCENTRATIONS
Significant Customers
During the year ended October 31, 2022, the Company had no customers from whom it generated sales greater than 10% of net revenues.
During the 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
$2,484,173, or 12% of net revenues during the period. Total accounts receivable from this customer as of October 31, 2021 was $468,149 or 11% of accounts receivable.
NOTE 12 - EMPLOYEE BENEFIT PLANS
The Company’s U.S. subsidiaries maintain a 401(k)-retirement plan. The plan allows the Company to make matching contributions of 4% of employee compensation, subject to
IRS contribution limits. U.S. employees who have at least six months of service with the Company are eligible. In addition, the Company’s UK subsidiaries operate statutory
pension schemes which provide for the payment of certain contribution by the Company and the Employee. These schemes in the UK operate on a defined contribution money
purchase basis and the contributions are charged to operations as they arise. Finally, the Company is obligated to provide pension funding according to the laws in which it
operates including in both Denmark and Australia. The Company has an arrangement that fulfills this requirement. Employee benefit costs for the years ended October 31, 2022
and 2021 were $138,260 and $123,215, respectively.
F-24
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 13 -SEGMENT ANALYSIS
Based on the fundamental difference in the types of offering products versus 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 (“Marine
Engineering Business” or “Services Segment”) provides engineering services primarily as sub-contractors to prime defense contractors.
Segment operating income is total segment revenue reduced by operating expenses identifiable with the business segment. Corporate includes general corporate administrative
costs (“overhead”).
The Company evaluates performance and allocates resources based upon segment operating income.
There are inter-segment sales which have been eliminated in our financial statements but are disclosed in the tables below for information purposes.
The following table summarizes segment asset and operating balances by reportable segment as of and for the years ended October 31, 2022 and 2021, respectively.
The Company’s reportable business segments sell their goods and services in four geographic locations:
● Americas
●
Europe
● Australia/Asia
● Middle East/Africa
NOTE 13 -SEGMENT ANALYSIS (Continued)
F-25
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
Year Ended October 31, 2022
Net Revenues
Cost of Revenues
Gross Profit
Research & Development
Selling, General & Administrative
Total Operating Expenses
Income (Loss) from Operations
Other Income (Expense)
Other Income
Interest Expense
Total Other Income
Marine Technology
Business (Products)
Marine Engineering
Business (Services)
Overhead
Total
$
14,724,688
$
7,501,115
$
-
$
22,225,803
2,941,569
11,783,119
2,207,500
2,563,554
4,771,054
7,012,065
55,715
(9,233)
46,482
4,093,546
3,407,569
30,420
2,654,565
-
-
-
2,730,585
7,035,115
15,190,688
2,237,920
7,948,704
2,684,985
2,730,585
10,186,624
722,584
(2,730,585)
5,004,064
79,204
(71)
79,133
3,056
(400)
2,656
137,975
(9,704)
128,271
Income (Loss) before Income Taxes
7,058,547
801,717
(2,727,929)
5,132,335
Income Tax (Expense) Benefit
Current Tax (Expense) Benefit
Deferred Tax Benefit (Expense)
Total Income Tax (Expense) Benefit
Net Income (Loss)
Supplemental Disclosures
Total Assets
Total Liabilities
Revenues from Intercompany Sales - eliminated from sales
above
Depreciation and Amortization
Purchases of Long-lived Assets
(868,162)
31,907
(836,255 )
6,222,292
33,348,805
2,432,750
2,406,717
602,583
1,123,475
F-26
$
$
$
$
$
$
$
$
$
$
$
$
39,422
(41,657)
(2,235)
(176,400 )
183,776
(1,005,140 )
174,026
7,376
(831,114 )
799,482
$
(2,720,553 )
$
4,301,221
12,662,109
526,195
396,015
96,776
36,862
$
$
$
$
$
916,544
585,704
2,720,000
39,370
90,887
$
$
$
$
$
46,927,458
3,544,649
5,522,732
738,729
1,251,224
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 13 -SEGMENT ANALYSIS (Continued)
Year Ended October 31, 2021
Net Revenues
Cost of Revenues
Gross Profit
Research & Development
Marine Technology
Business (Products)
Marine Engineering
Business (Services)
Overhead
Total
$
15,804,222
$
5,527,305
$
-
$
21,331,527
3,169,835
12,634,387
2,509,107
3,391,974
2,135,331
473,569
-
-
-
6,561,809
14,769,718
2,982,676
Income (Loss) before Income Taxes
7,246,182
436,471
(2,429,409)
Selling, General & Administrative
Total Operating Expenses
Income (Loss) from Operations
Other Income (Expense)
Other Income
Interest Expense
Total Other Income (Expense)
3,231,733
5,740,840
6,893,547
354,373
(1,738)
352,635
Income Tax (Expense) Benefit
Current Tax Benefit (Expense)
Deferred Tax (Expense) Benefit
Total Income Tax (Expense) Benefit
Net Income (Loss)
Supplemental Disclosures
Total Assets
Total Liabilities
Revenues from Intercompany Sales - eliminated from sales
above
Depreciation and Amortization
Purchases of Long-lived Assets
35,032
(418,338)
(383,306)
6,862,876
30,631,442
3,166,999
2,075,387
780,434
793,995
F-27
$
$
$
$
$
$
$
$
$
$
$
$
2,304,300
2,413,492
7,949,525
2,777,869
2,413,492
10,932,201
(642,538)
(2,413,492)
3,837,517
1,079,374
(365)
1,079,009
1,635
(17,552)
(15,917)
(51,624)
409,205
357,581
-
(279,754)
(279,754)
1,435,382
(19,655)
1,415,727
5,253,244
(16,592)
(288,887)
(305,479)
794,052
$
(2,709,163)
$
4,947,765
14,117,747
849,306
355,608
114,022
51,907
$
$
$
$
$
716,230
400,041
3,470,000
29,617
118,302
$
$
$
$
$
45,465,419
4,416,346
5,900,995
924,073
964,204
NOTE 14 - DISAGGREGATION OF REVENUE
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
Disaggregation of Total Net Sales
Revenues
Primary Geographical Markets
Americas
Europe
Australia/Asia
Middle East/Africa
Total Revenues
Major Goods/Service Lines
Equipment Sales
Equipment Rentals
Software Sales
Engineering Parts
Services
Total Revenues
Goods transferred at a point in time
Services transferred over time
Total Revenues
Marine
Technology
Business
For the Year Ended October 31, 2022
Marine
Engineering
Business
Grand
Total
$
$
$
$
$
$
5,668,948
1,559,778
5,723,970
1,771,992
14,724,688
8,771,050
1,844,775
1,014,867
-
3,093,996
14,724,688
9,785,917
4,938,771
14,724,688
$
$
$
$
$
$
4,566,349
2,900,906
-
33,860
7,501,115
1,544,002
-
-
3,530,407
2,426,706
7,501,115
1,562,799
5,938,316
$
$
$
$
$
10,235,297
4,460,684
5,723,970
1,805,852
22,225,803
10,315,052
1,844,775
1,014,867
3,530,407
5,520,702
22,225,803
11,348,716
10,877,087
7,501,115
$
22,225,803
F-28
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 14 - DISAGGREGATION OF REVENUE (Continued)
Disaggregation of Total Net Sales
Revenues
Primary Geographical Markets
Americas
Europe
Australia/Asia
Middle East/Africa
Total Revenues
Major Goods/Service Lines
Equipment Sales
Equipment Rentals
Software Sales
Engineering Parts
Services
Total Revenues
Goods transferred at a point in time
Services transferred over time
Total Revenues
Marine
Technology
Business
For the Year Ended October 31, 2021
Marine
Engineering
Business
Grand
Total
$
$
$
$
$
$
3,434,552
5,623,227
5,867,710
878,733
15,804,222
10,914,124
2,324,773
669,968
-
1,895,357
15,804,222
11,588,099
4,216,123
15,804,222
$
$
$
$
$
$
2,188,812
3,338,493
-
-
5,527,305
1,421,614
-
-
3,239,866
865,825
5,527,305
1,421,614
4,105,691
$
$
$
$
$
5,623,364
8,961,720
5,867,710
878,733
21,331,527
12,335,738
2,324,773
669,968
3,239,866
2,761,182
21,331,527
13,009,713
8,321,814
5,527,305
$
21,331,527
F-29
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 15 – COMMITMENTS AND CONTINGENCIES
Employment Agreements
Annmarie Gayle
Pursuant to the terms of an employment agreement dated March 16, 2017, the Company employs Ms. Gayle as its Chief Executive Officer on a full-time basis and a member of
its Board of Directors. With effect from July 1, 2019, Ms. Gayle’s annual salary was increased from $ 230,000 to $305,000 payable on a monthly basis. Ms. Gayle is also
entitled to an annual performance bonus of up to $100,000, upon achieving certain targets that are to be defined on an annual basis. The agreement provides for 30 days of paid
holidays in addition to public holidays observed in Scotland.
The agreement has no definitive term and may be terminated only upon twelve months’ prior written notice by Ms. Gayle. In the event that the Company terminates her at any
time without cause, she is entitled to a payment equal to her annual salary as well as a separation bonus of $150,000. The Company may terminate the agreement for cause,
immediately and without notice. Among others, “for cause” includes gross misconduct, a serious or repeated breach of the agreement and negligence and incompetence as
reasonably determined by the Company’s Board. The agreement includes a 12-month non-compete and non-solicitation provision.
F-30
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 15 – COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements (Continued)
Blair Cunningham
Under the terms of an employment contract dated January 1, 2013, our wholly owned subsidiary Coda Octopus Products, Inc. employs Blair Cunningham as its Chief Executive
Officer and President of Technology. He is being paid an annual base salary of $ 200,000 with effect from January 1, 2020, subject to review by the Company’s Chief Executive
Officer. Mr. Cunningham’s annual based salary was revised and is currently $225,000. He is entitled to 25 vacation days in addition to any public holiday.
The agreement may be terminated only upon twelve-month prior written notice without cause. The Company may terminate the agreement for cause, immediately and without
notice. Among others, “for cause” includes gross misconduct, a serious or repeated breach of the agreement and negligence and incompetence as reasonably determined by the
Company’s Board. The agreement includes an 18-month non-compete and non-solicitation provision.
Kevin Kane
Pursuant to the terms of an Employment Agreement dated May 7, 2021, as amended and modified, Kevin Kane was appointed the Chief Executive Officer of Colmek
commencing July 6, 2021. The Employment Agreement provides for an annual base salary of $ 200,000. He will also be eligible for an annual performance bonus based on the
Company’s financial performance. Subject to certain performance milestone during the current fiscal year, Mr. Kane will be paid a performance bonus of $ 12,000. As a further
inducement, he was granted 15,000 restricted stock units out of the Company’s 2017 Stock Incentive Plan that vest in three equal annual instalments commencing on the first
anniversary of grant.
The agreement may be terminated by the Company at any time. In the event that the Company terminates the employment agreement for whatever reason, the following
severance payments apply:
Year 1 of employment
Year 2 of employment
Year 3 of employment
The agreement includes a 12-month non-compete and non-solicitation provision.
2 Weeks
1 Month
4 Months
F-31
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2021 and 2020
NOTE 15 – COMMITMENTS AND CONTINGENCIES (Continued)
Michael Midgley (retired in June 2022)
Pursuant to the terms of an employment agreement dated June 1, 2011, Mike Midgley was appointed the Chief Executive Officer of our wholly owned subsidiary Coda Octopus
Colmek, Inc. and our Chief Financial Officer. He is being paid an annual salary of $210,000 subject to an annual review by Colmek’s Board of Directors and the Company’s
Chief Executive Officer. Mr. Midgley is entitled to 20 vacation days in addition to any public holiday.
Amendment to Michael Midgley’s Employment Agreement
The Company and Mr. Midgely entered into an agreement for the Amendment of his Employment Agreement on February 15, 2021.
The following amendments were made:
Role
Reduction in hours
Paid Time Off
Benefits
Chief Financial Officer of the Company. Removing the position of Divisional CEO of Coda Octopus Colmek.
Working hours reduced to approximately 60% and his compensation reduced proportionally to $126,000.
Reduced proportionately and is now 12 days
Reduced proportionately
The agreement may be terminated at any time upon 4 months prior written notice. The Company may terminate the agreement for cause, immediately and without notice.
Among others, “for cause” includes gross misconduct, a serious or repeated breach of the agreement and negligence and incompetence as reasonably determined by the
Company’s Board. The agreement includes a 12-month non-compete and non-solicitation provision.
Mr. Midgley retired from the company effective June 30, 2022.
Nathan Parker
Pursuant to the terms of an Employment Agreement dated May 10, 2022, Nathan Parker was appointed our Chief Financial Officer commencing June 6, 2022. The Employment
Agreement provides for an annual base salary of $230,000. As a further inducement, he was granted 9,506 restricted stock units out of the Company’s 2017 Stock Incentive
Plan that vest in three equal annual instalments commencing on the first anniversary of grant. Mr. Parker also received a signing bonus of $20,000. Mr. Parker is entitled to 20
vacation days in addition to any public holiday.
The Company may terminate the agreement at any time. In the event that the Company terminates the employment agreement for whatever reason, the following severance
payments apply:
Year 1 of employment
Year 2 of employment
Year 3 of employment
1 Month Base Salary
3 Months Base Salary
6 Months Base Salary
The agreement includes a 12-month non-compete and non-solicitation provision.
Litigation
From time to time, we may be a party to or be involved with legal proceedings, governmental investigations or inquires, claims or litigation that are related to our business. We
are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business or its financial condition.
NOTE 16 – PAYROLL PROTECTION PROGRAM
In the year ended October 31, 2021, two of our US companies, received $648,872 under the second round of the US Government Payroll Protection Program (“Second Round
PPP”) for payroll assistance during the Pandemic. The proceeds from the Second Round PPP have been used to pay US employees’ salaries during this period. In the year ended
October 31, 2021, the Company utilized all the $648,872 of the Second Round PPP to retain employees. These loans were forgiven on June 14 and 22, 2021. This amount is
recorded in our 2021 FY accounts as “Other Income”. No amounts were received in the 2022 FY under the PPP.
F-32
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
October 31, 2022 and 2021
NOTE 17 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events occurring through the date that the financial statements were issued, for events requiring, recording or disclosure in the October
31, 2022, consolidated financial statements and there were no subsequent events to report.
F-33
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-224408; No. 333-233524; and No. 333-236029) and Form S-8 (No.
333-227704 and No. 333-260244) of Coda Octopus Group, Inc. of our report dated January 30, 2023, with respect to the consolidated financial statements as of and for the
years ended October 31, 2022 and 2021, of Coda Octopus Group, Inc. which are part of this Annual Report on Form 10-K.
Exhibit 23.1
/s/ Frazier & Deeter, LLC
Frazier & Deeter, LLC
Tampa, Florida
January 30, 2023
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER CERTIFICATION
Exhibit 31.1
I, Annmarie Gayle and Nathan Parker, certify that:
1. We have reviewed this annual report on Form 10-K of Coda Octopus Group, Inc.:
2. Based on our knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on our knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and we are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer(s) and we have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: January 30, 2023
Date: January 30, 2023
/s/ Annmarie Gayle
/s/ Nathan Parker
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
In connection with the annual report of Coda Octopus Group, Inc. (the “Company”) on Form 10-K for the year ended October 31, 2022 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Annmarie Gayle, Chief Executive Officer, and I, Nathan Parker, Chief Financial Officer, certify pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:
(1) This report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Annmarie Gayle
Chief Executive Officer
Date: January 30, 2023
/s/ Nathan Parker
Chief Financial Officer
Date: January 30, 2023