Coda Octopus Group Inc

NOTE 1 –ORGANIZATION AND DESCRIPTION OF BUSINESS

Coda Octopus Group, Inc. (“Coda,” “the Company,” or “we”) operates two discrete operating business units. These are the Marine Technology Business (“Products Business,” or “Products Segment”) and the Marine Engineering Business (“Services Business,” “Engineering Business” or “Services Segment”).

The Marine Technology Business is an established supplier of underwater technologies and solutions to the underwater and diving markets. Its products and solutions include both hardware and software for which it is the patent holder, innovator, developer, manufacturer and distributor. It has key proprietary 4D/5D/6D imaging sonar technology marketed under the name of Echoscope® and Echoscope PIPE® and diving technology marketed under the name of CodaOctopus® DAVD (Diver Augmented Vision Display). The Echoscope®sonar series is the only sonar that can generate multiple real time 3D images of moving objects underwater in zero visibility conditions and is used for activities such as real time inspection and monitoring. In 2021, the Marine Technology Business started marketing the DAVD tethered system. The requirements for the DAVD solution emanated from the Office of Naval Research as part of its Future Naval Requirements Program. The DAVD embeds inside of the diver head-up Display (HUD) a pair of transparent glasses which is used as the data hub for displaying real time data to the diver. Amongst other things, it allows both the diver underwater and the dive supervisor on the surface to share the same data or visualize the underwater scene. In addition, by combining the DAVD solution with the Echoscope®, dive operations can be performed in zero visibility conditions. These conditions are a common barrier which impinges on the ability to perform these activities and therefore the DAVD solution combined with the Echoscope® is a real requirement for these operations. In addition, in fiscal year 2023 we were contracted by the US Navy and an allied foreign navy to develop the untethered version of the DAVD technology, for the target market of special forces (referred to as “DAVD Hardening Program”). Under the DAVD Hardening Program, we supplied in fiscal year 2023 eight (8) untethered systems to these customers for ongoing evaluation and have since been working on further hardening features for the DAVD untethered system which arise from the ongoing field evaluation by our customers under the DAVD Hardening Program.

The Engineering Business is an established sub-contractor to the prime defense contractors and generally supplies proprietary sub-assemblies for incorporation into broader mission critical defense systems. These sub-assemblies are typically supplied for the life of the program. The Marine Engineering Business’ scope of services for these defense programs typically covers in relation to the subassembly which it provides: “concept, design, prototype, manufacture, and post-sale support”. The manufacturing contracts for these sub-assemblies can run over many years.

The consolidated financial statements include the accounts of Coda Octopus Group, Inc. and its wholly owned domestic and foreign subsidiaries. All of its subsidiaries are wholly owned by the Company. All significant intercompany transactions and balances have been eliminated in the consolidated financial statements.

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

NOTE 2 –REVENUE RECOGNITION

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

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

Our revenues are earned under written contracts with our customers. The Marine Technology Business model includes both rentals and outright sales of underwater technologies which are utilized for a wide range of subsea applications. The Engineering Business supplies engineering services to mainly the prime defense contractors which may include concept, design, prototyping, and contract manufacturing. 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. Where there are contractual failures giving rise to post-sale obligations these are addressed under our warranty or through life support provisions.

NOTE 2 – REVENUE RECOGNITION (Continued)

Regarding our Marine Technology Business, all 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, customization of our technology for bespoke application, 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 performed.

Revenue derived by the Marine Technology Business from subscription package offerings or equipment rental 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 a relative standalone selling price basis and recognize revenue when performance obligations are met including when equipment is delivered, and for rental of equipment, when installation, training and other services prescribed by the contract are performed.

Our contracts sometimes require customer payments in advance of revenue recognition. These are recognized as revenue when the Company has fulfilled its obligations under the respective contracts. Until such time, we recognize these prepayments 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 by the provision of the software installers and activation codes to the software.

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 cost (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 certain 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.

NOTE 2 – REVENUE RECOGNITION (Continued)

We recognize such costs in accordance with our revenue recognition policy by contract. For revenue recognized under the percentage of completion method, costs are recognized as contract deliverables 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.

Other Revenue Disclosures

See Notes 12 and 13 – Segment Analysis and Disaggregation of Revenue. These Notes provide disclosure of our revenue by segment (Products Business versus Services Business); revenues from external customers and cost of those revenues; and split of revenue by geography including within and outside the USA.

NOTE 3 –COST OF GOODS SOLD

Our cost of goods sold includes the cost of materials and related direct costs. With respect to sales made through the operating segments’ sales agents distribution network, we include in our costs of goods sold commissions paid to agents for the specific sales they make. Without using agents, we would not be eligible to participate in the Request for Proposals (“RFP”) for these sales on which we incur commission costs. All other sales-related expenses, including those related to unsuccessful bids, are included in selling, general and administrative (SG&A) costs. As a component of Cost of Goods Sold, sales commission costs in the three month period ended April 30, 2024, and 2023 were $132,222 and $102,452, respectively. Commission costs in the six month period ended April 30, 2024, and 2023 were $425,406 and $607,828 respectively.

NOTE 4 –FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments include cash, cash equivalents, accounts receivable, accounts payable, and accrued expenses. The carrying amounts of cash, cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair values because of the short-term nature of these instruments.

NOTE 5 –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 average exchange rates in effect during the reporting period. Stockholders’ equity is 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.

NOTE 6 –COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Certified Deposit Interest Bearing Accounts as of April 30, 2024 and October 31, 2023.

The Company has certified deposit interest-bearing accounts with its current bankers HSBC NA and HSBC UK. These interest-bearing accounts are for rolling fixed short-term periods not exceeding three (3) months and are classified in our financial statements as “cash equivalent”. In addition, we have an interest-bearing deposit account with HSBC UK that tracks the Bank of England base rate, and which has no access restrictions and has a current rate of 5.0%.

Inventory consisted of the following as of:

Other current assets consisted of the following as of:

Property and equipment consisted of the following as of:

Depreciation expense for the three months ended April 30, 2024, and 2023 was $177,490 and $178,763 respectively and for the six months ended April 30, 2024, and 2023 was $350,782 and $327,328 respectively.

NOTE 6 – COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (Continued)

Property and equipment, net, by geographic areas were as follows:

Accrued Expenses and Other Current Liabilities consisted of the following as of:

Total Other Income, net consisted of the following:

NOTE 7 –CONTRACTS IN PROGESS

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 balance sheet date. These amounts are stated on the consolidated balance sheets as Unbilled Receivables of $1,580,546 and $894,251 as of April 30, 2024, and October 31, 2023, respectively.

Deferred Revenue of $823,531 and $1,108,919 as of April 30, 2024, and October 31, 2023, respectively, consist of billings in excess of costs and revenues received as part of our warranty or Through Life Support (TLS) obligations upon completing a sale.

Sales of equipment include a separate performance obligation for warranty or TLS, the latter may be optionally purchased by the customer. This is treated as deferred revenue which is amortized over the relevant obligation period (12 months is our standard warranty or 36 or 60-months from the date of delivery for our TLS product). These amounts are stated on the consolidated balance sheets as a component of Deferred Revenue and were $366,773 and $457,600 as of April 30, 2024, and October 31, 2023, respectively.

NOTE 8 –CONCENTRATIONS

Significant Customers

During the three months ended April 30, 2024, the Company had two customers from whom it generated sales greater than 10% of net revenues. Revenue from these customers was $1,530,335, or 28.7% of net revenues during the three months ended April 30, 2024. Receivables from these customers were $1,429,713, or 32.5% of net receivables as of April 30, 2024.

During the three months ended April 30, 2023, the Company had one customer from whom it generated sales greater than 10% of net revenues. Revenue from this customer was $1,270,138, or 24.0% of net revenues during the three months ended April 30, 2023. Receivables from this customer were $1,365,300, or 35.1% of net receivables as of April 30, 2023.

During the six months ended April 30, 2024, the Company had two customers from whom it generated sales greater than 10% of net revenues. Revenue from these customers was $2,199,560, or 22.5% of net revenues during the six months ended April 30, 2024. Receivables from these customers were $1,429,713, or 32.5% of net receivables as of April 30, 2024.

During the six months ended April 30, 2023, the Company had two customers from whom it generated sales greater than 10% of net revenues. Revenue from these customers was $2,517,093, or 23.1% of net revenues during the six months ended April 30, 2023. Receivables from these customers were $1,483,542, or 38.1% of net receivables as of April 30, 2023.

NOTE 9 –RECENT ACCOUNTING PRONOUNCEMENTS

On October 27, 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. ASU 2023-07 will affect how we report segment information, starting with our Form 10-K for the year ended October 31, 2025, and our quarterly reports on Form 10-Q starting with our quarterly report for the quarter ended January 31, 2026. The ASU requires that we provide disclosures of significant segment expenses and other segment items that are regularly provided to our CODM and included in each reported measure of segment profit or loss. We will also have to disclose other segment items by reportable segment (i.e., the difference between reported segment revenues less the significant segment expenses (which are disclosed) less reported segment profit or loss). The information needed for these disclosures is available, but we are determining the best way to provide that information for these required segment disclosures.

On December 14, 2023, the FASB issued Accounting Standards Update 2023-09 entitled Improvements to Income Tax Disclosures (ASU 2023-09), which is primarily applicable to public companies and requires a significant expansion of the granularity of the income tax rate reconciliation as well as an expansion of other income tax disclosures. The majority of the disclosures will only be made on an annual basis, although there is a modest expansion of required quarterly income tax disclosures. The amendments in ASU 2023-09 require disclosure of specific income tax categories in the rate and reconciliation and provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income (or loss) by the applicable statutory income tax rate. There are also additional disclosures related to taxes paid to local jurisdictions, and to income taxes paid. This information is currently available to the Company but was not a required disclosure. The Company expects to adopt ASU 2023-09 on November 1, 2025.

NOTE 10 –EARNINGS PER SHARE

NOTE 11 –2017 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 and was approved by Stockholders at the Company’s Annual General Meeting held on July 24, 2018.

The maximum number of shares of Common Stock allocated for issuance under the 2017 Plan is 913,612. The shares allocated for issuance under the 2017 Plan may, at the election of the Compensation Committee, be either treasury shares or shares authorized but unissued, and, if treasury shares are used, all references in the 2017 Plan to the issuance of shares will, for corporate law purposes, be deemed to mean the transfer of shares from treasury.

During the three month period ended April 30, 2024, no new restricted stock awards were made pursuant to the terms of the 2017 Plan. During this period,8,200 restricted stock awards matured and were issued,5,000 restricted stock awards were forfeited, and 6,500 units that were provisioned for did not qualify for issuance since the stipulated performance-related pre-conditions for award were not met. As of April 30, 2024, there were 387,694 shares available for future issuance under the 2017 Plan. The total stock compensation expense during the three month period ended April 30, 2024 and 2023 was ($60,862) and $196,261, respectively. During the six month period ended April 30, 2024 and 2023, these were $16,214 and $378,414, respectively.

NOTE 11 – 2017 STOCK INCENTIVE PLAN (Continued)

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 Annual General Meeting held on September 14, 2021. The 2021 Plan is identical to the 2017 Plan in all material respects, except that the number of shares allocated for issuance thereunder is 1,000,000.

The total number of shares available for issuance under the 2017 and 2021 Plans is 1,387,694.

NOTE 12 –SEGMENT ANALYSIS

We operate in two reportable segments, “Products Business” and “Service Business” which are managed separately based upon fundamental differences in their operations. Segment operating income is total segment revenue reduced by cost of revenues and operating expenses, Research and Development (“R&D”), and Selling, General & Administrative (“SG&A”) identifiable with the reporting business segment. Overheads include general corporate administrative costs.

The Company evaluates performance and resources based upon operating income.

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 only included in the table below.

Coda Octopus Products (with entities operating in the UK, USA and Denmark) constitute the Marine Technology Business (“Products Segment”) is a supplier to the underwater/subsea market and selling both hardware and software solutions which include imaging sonar technology solutions, diving and diving communications technology, geophysical products, rental equipment, customization, and field operations services. Coda Octopus Colmek, Inc. (a Utah corporation) and Coda Octopus Martech Ltd (a UK corporation) constitute the Marine Engineering Business (“Services Segment”) and are subcontractors mainly to the prime defense contractors where they provide engineering services.

The following tables summarize segment asset and operating balances by reportable segment for the three months and six months ended April 30, 2024, and April 30, 2023, respectively.

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

NOTE 13 –DISAGGREGATION OF REVENUE

NOTE 14 –INCOME TAXES

The Company’s tax rate may vary depending on the composition of its revenue in the reporting period (percentage of consolidated revenue attributable to the Company and its US-owned subsidiaries and percentage attributable to its foreign-owned subsidiaries). The Company’s effective tax rate for the three months ended April 30, 2024, and 2023, was 13.8% and 1.9% respectively and for the six months ended April 30, 2024, and 2023 this was 15.6% and(0.7)%, respectively. In the Current Quarter the Company nor its US-owned subsidiaries did not generate any taxable income. This resulted in the decrease of the Company’s statutory income tax rate of 25.0% to an effective rate of 13.8%. In addition, in the Current Quarter we recorded Deferred Tax Expense of $34,904 as a result of the vesting of restricted stock awards. We have been recording the UK tax rate at 0.0% as we believe our R&D tax credits will offset any tax liability which may be incurred. In the Current Quarter we made a provision of 22.0% for our Danish Subsidiary and $130,500 for Global Intangible Low-Taxed Income (“GILTI”). For the six month period ended April 30, 2024 we provisioned $173,000 for GILTI.