PART
I
ITEM
1. BUSINESS
Overview
Coda
Octopus Group, Inc. (“Coda,” “the Company,” or “we”) designs and manufactures patented real
time 3D sonar solutions and other leading products for sale to the subsea, defense, mining and marine sciences markets, among
others. In addition, we supply marine engineering business services to prime defense contractors.
We
operate through two operating business segments: Marine Technology Business (“Products” segment) and Marine Engineering
Business (“Services” or “Contracting” segment). Our products are used primarily in the underwater construction
market, offshore oil and gas and wind energy industry, and in the complex dredging, port security, mining and marine sciences
sectors. Our customers include service providers to major oil and gas companies, law enforcement agencies, ports, mining companies,
defense companies, universities and research and development institutions.
We
supply our marine engineering business services mainly to prime defense contractors. We have been supporting some significant
defense programs for over 20 years, including the Close In Weapon Support program that enables us to supply, upgrade and maintain
proprietary parts to these programs on an ongoing basis.
Our
subsea marine technology products sold through our three wholly owned subsidiaries, Coda Octopus Products, Inc. (USA.), Coda Octopus
Products Limited (United Kingdom), and Coda Octopus Products Pty Limited (Australia) and through our appointed agents globally.
Our marine engineering business services are provided through our wholly owned subsidiaries, Coda Octopus Colmek, Inc. (“Colmek”)
based in Salt Lake City, Utah, and Coda Octopus Martech Limited (“Martech”) based in the United Kingdom.
Our
corporate structure is as follows:
Corporate
History
The
Company began as Coda Technologies Ltd (now operating under the name of Coda Octopus Products Limited), a UK corporation which
was formed in 1994 as a start-up company with its origins as a research group at Herriot-Watt University, Edinburgh, Scotland.
Initially, its operations consisted primarily of developing software for subsea mapping and visualization using sidescan sonar,
a technology widely used in commercial offshore geophysical survey and naval mine-hunting to detect objects on, and textures of,
the surface of the seabed.
In
June 2002, we acquired by way of a merger Octopus Marine Systems Ltd, a UK corporation, and changed our name from Coda Technologies
Ltd to Coda Octopus Ltd. 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. It was also finalizing
the development of a new motion sensing device (the “F180”), which was to be employed aboard vessels conducting underwater
surveys to correct sonar measurement by providing precise positioning and compensation for vessel motion.
In
December 2002, Coda Octopus Ltd acquired OmniTech AS, a Norwegian company, which became a wholly-owned subsidiary of the Company
and now operates under the name Coda Octopus R&D AS. Before we acquired OmniTech, it had been engaged for over ten years in
developing revolutionary sonar imaging and visualization technology to produce three-dimensional underwater images for use in
the subsea construction industry. Now marketed by ourselves under the product name “Echoscope®”, this technology
is unique in that it generates real time 3D images in low or zero visibility conditions. This technology has been patented in
a number of jurisdictions, including the USA. This technology, which continues to be developed by our Research and Development
team in the UK and Norway, allowed the Company to start to expand the original focus on hydrographic and geophysical survey to
include the high end sonar market. At the inception of the Marine Technology Business our revenues were generated solely from
our geophysical software product. Thereafter, we added the F180 series in 2002 and our revenues were split over these two products.
With the addition of our real time 3D products, our revenues are now mainly generated from this suite of products and associated
services.
On
July 13, 2004, pursuant to the terms of a share exchange agreement between The Panda Project, Inc., 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 wholly-owned subsidiary of Coda Parent, in consideration for the issuance of a total of 20,050,000
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 a design and engineering company, Martech Systems (Weymouth) Ltd (“Martech”), which provides
bespoke engineering solutions in the fields of electronic data acquisition, transmission and recording, and which has links into
our existing markets. Martech are suppliers to prime defense engineering companies. Martech has changed its name to Coda Octopus
Martech Limited in December 2008.
In
April 2007, we acquired Colmek (then Miller & Hilton d/b/a Colmek), a custom engineering service provider of defense engineering
to prime contractors. Colmek has been supporting a number of defense programs since the early 1990’s. Specifically, it supplies
proprietary parts into these programs including providing upgrades to such parts to address either obsolescence issues or advancement
in technology. This Company changed its name to Coda Octopus Colmek Inc. in December 2008.
Marine
Technology Business (“Products Segment”)
Our
Marine Technology Business sells proprietary marine products in a number of worldwide market segments:
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Commercial
marine geophysical survey;
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Oil
& gas;
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Energy
& renewables;
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Underwater
security, law enforcement and naval operations;
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Underwater
construction (asset placements, block placements, mattress placement, cable and pipe lay inspection and the like);
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Environmental
Applications (example mammal research; natural gas seeps; habitat assessment; fisheries); and
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Salvage
and decommissioning.
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In
the commercial marine geophysical survey sector, our products include geophysical data acquisition systems, analysis software
and motion detection equipment that are used primarily by survey companies, research institutions and salvage companies.
We
believe we possess an important and unique sonar technology, which is patented, and which gives us a significant advantage over
our competitors in the market sectors where real time visualization is key and/or low or zero visibility conditions prevail.
Our
product range includes products based on our patented Echoscope
®
in combination with our proprietary software which
also includes patented techniques for rendering and tracking. We believe that our products are revolutionizing the sonar market,
particularly in real time data acquisition, and subsea visualization in low or zero visibility conditions. This patented technology
is the result of more than 20 years of research and development by our subsidiary, Coda Octopus R&D AS (CORDAS), Norway, which
we acquired in 2002, and our software development team based in the UK. Our R&D Team in Norway is focused on the hardware
component of our technology whereas our R&D Team in Edinburgh is focused on the accompanying software for this technology.
Since
the acquisition of CORDAS, we have significantly advanced our research and development with respect to both hardware and software
components, filed further patents and brought to market our third generation of the Echoscope
®
and the CodaOctopus
Underwater Inspection System (UIS) as well as new derivative products, such as our forward looking sonar, Dimension
®
and our Echoscope C500 (a smaller and lighter variant of the Echoscope
®
).
We
are focusing our research and development resources and budget on developing our 4
th
generation of real time 3D solutions
for various market applications and varying price points. We believe this strategy will help to standardize real time 3D solutions
in the subsea market and expand the applications for which the technology is used.
We
have also introduced to the market the capabilities of real time 3D sonars. This technology is being adopted for many oil &
gas, energy, subsea asset placements (blocks, mattresses and other installations), decommissioning and leak identification projects.
Most of these projects require real time volumetric visualization.
A
series of trials by independent experts and operators in the marine / subsea market have validated our longstanding position that
the Echoscope
®
performance exceeds that of the current standard industry tools (such as the multi-beam sonar) in
a number of key applications and provides unparalleled image resolution and beam density. We believe that these capabilities combined
with our unique real time visualization advantage, our volumetric data acquisition capability and ability to measure things in
real time combined with the further technological advances currently being developed, place the Echoscope
®
in a
position to become the sonar of choice for many underwater applications in the future
.
Moreover,
many users in complex operations such as underwater construction are reporting significant time savings, and health and safety
benefits, which allow them to out-perform their competitors. We believe that our real time 3D solutions including the Echoscope
®
,
which is being referred to by one of our significant customers as “[their] underwater eyes”, are making progress in
shifting the conservative approach of the sonar market. Our technology is also used for bespoke and complex underwater construction
that requires real time visualization. We believe that our real time 3D solutions are now being viewed as the products of choice
in many complex operations. We further believe that our next generation of the real time 3D solutions will become the tools of
choice for a much greater number of underwater applications through improved efficiency in work flow process presented by real
time visualization capabilities.
We
believe that our patented technology is the only commercially available sonar that can provide true real-time 3D volumetric imaging
data underwater even in the most challenging zero visibility conditions. This unique capability provides unparalleled underwater
scene awareness in similarly high frame rates as cameras and without the reliance of complex and costly positioning and motion
reference units or the need for costly post processing of the underwater data acquired. The resultant scene data can be used for
multiple tasks simultaneously including object detection and avoidance in true 3D, complex scene mapping and augmented reality
3D workspace imaging combining the real-time 3D data with 3D models, together providing real-time decision making and assessment.
The
Echoscope
®
has a wide range of applications including:
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inspection
of harbor walls;
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inspection
of ship hulls;
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inspection
of bridge pilings;
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block
placements (in the context of breakwater construction)
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subsea
asset placements including landings
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deep
sea mining
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cable
laying, cable pull in operations
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inspection
of offshore installations such as gas and oil rigs and wind turbines;
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Remotely
Operated Vehicle (ROV) navigation (obstacle avoidance);
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Autonomous
Underwater Vehicle (AUV) navigation and target recognition (obstacle avoidance);
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construction
- pipeline touchdown placement and inspection;
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obstacle
avoidance navigation;
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bathymetry
(measurement of water depth to create 3D terrain models);
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managing
underwater construction tasks;
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underwater
intruder detection;
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dredging
and rock dumping;
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contraband
detection;
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locating
and identifying objects undersea, including mines;
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detection
and study of individual species in real time 3D (fish, whales etc.);
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oil
and gas leak detection;
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fish
school detection and analysis;
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diver
tracking and guidance;
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underwater
archaeological and salvage site mapping;
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decommissioning;
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offshore
renewable energy – cable laying and burial and pull-in;
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marine
salvage operations;
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harbor
construction – concrete armoring; and
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unexploded
ordinances survey and intervention.
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Within
these applications, the technology can essentially provide real time 3D visualization of static scenes or moving objects from
either a static location or a dynamically moving platform (vessel, Autonomous Underwater Vehicle (“AUV”) or Remotely
Operated Vehicle (“ROV”)). Conventional sonars are capable of producing maps of static scenes only.
The
Echoscope
®
technology is protected by patents, including a number of complementary patents such as a patent which
covers our visualization methodology and our rendering of our real time 3D images. For example, one of our recently awarded patents
provides for a new method of using multiple sonar images to produce in real-time 3D a very detailed image with sharply defined
edges while intelligently discarding “noise” in the image produced by (for example) passing fish or floating debris.
We
market the Echoscope
®
both as a stand-alone sonar device and as a fully integrated system, marketed under the name
“CodaOctopus UIS (Underwater Inspection System)”. The latter is specifically aimed at the port security market and
has been adopted by a significant number of ports in the United States. Until recently, we have not had any success with foreign
ports for this product. In 2015 we have had success in introducing the system in one East Asian port where it is now on a program
of adoption and where it will be used for amongst other applications, salvage and port and harbor inspection.
Due
to the price point for our real time 3D solutions, we offer these for rent. The equipment is typically supplied with Echoscope
®
engineering (operator) services. This rental offering is an increasing and important market for the business and also provides
access to the technology to a broader range of users.
Products
Our
products are marketed under the “CodaOctopus” brand and consist of three main product lines:
Real
Time 3D Sonar
includes
our unique and patented real time 3D sonars and cutting edge software (including
patented techniques for rendering and tracking algorithms) that we believe is shaping the future of subsea operations.
Data
Acquisition Products
includes integrated hardware acquisition devices that feature rich post-processing software for all
levels of geophysical survey work
Motion
Sensing Products
consists of a range of GPS-aided precision attitude and positioning systems and post-processing software
for all types of marine survey and positioning work.
Real
Time 3D Sonar
We
offer four products within the real time 3D sonar: the Echoscope
®
, the Echoscope® C500 (launched in 2014),
the Dimension
®
and the CodaOctopus Underwater Inspections System.
Echoscope
®
We
believe that our real-time 3D imaging sonar technology represents the Company’s most promising area for growth in the medium
term. Echoscope
®
, developed over a period of more than 20 years, is a unique, patented technology generating high
resolution 3D images of the underwater environment in low or zero visibility conditions in real time. For each sonar ping that
is emitted by the Echoscope
®
, it receives 16,384 pieces of information back. The competition’s multibeam
sonar system receives back approximately 256 pieces of information for each sonar ping. This means in real time the probability
of finding an underwater target/object is substantially greater with the Echoscope
®
than the conventional sonar
equipment (such as multibeam or other imaging sonars).
Our
current Echoscope
®
is approximately 15x11.8x6.3 inches and connects to a laptop with gaming specifications or similar
hardware configuration which is required to handle the volume of data generated by our sonar.
We
are unaware of any other product with the capabilities of the Echoscope
®
. The heightened awareness of terrorist
attacks over the last two decades has resulted in a demand for practical, effective and rapid methods of detecting potential threats
(such as explosives in harbors or on ship hulls). We believe that our real time 3D solutions including the Echoscope
®
are ideally suited for this task, as it provides highly detailed 3D images in real time including in difficult sea conditions
where there is low or zero visibility.
The
Echoscope
®
systems will sometimes require additional equipment to form a complete solution allowing us to leverage
existing products and services, such as motion sensors and imaging processing software, into a wider market, and this in turn
offers further opportunity for other products from the portfolio, such as our F180
®
positioning systems (Motion
Sensing Product), discussed below.
Our
Software development capability is an important part of the success we have achieved to date with our real time 3D solutions and
our strategy to maintain our lead in designing, manufacturing and selling real time 3D solutions. Our real time 3D solutions are
sold with Coda Octopus proprietary top end software, Underwater Survey Explorer” (“USE”), and Vantage or Construction
Monitoring System (“CMS). Our Software Package is feature rich and includes significant capabilities that are designed to
address subsea challenges by application particularly in the context of a dynamic subsea setting (as opposed to a static mapping
of the seabed as is typical for conventional sonar technology). Some of our unique features include:
Feature
Description
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Functionality
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Real
Time Measurements
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important
for many types of subsea operations such as block or asset placements or aiding diving operations;
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Models
+ Software Module
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allows
the user to import existing models and engineering drawings into the real time subsea environment
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Edge
Detection Algorithm
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allows
the user to superimpose an edge to easily identify a subsea target
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Rendering
a Noise Free Image
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allows
for a crisp, clear and high resolution photo-like image without any processing (which would be required for conventional sonars)
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Tracking
Algorithm
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Algorithm
is used to track known objects within the real time 3D Data. This is currently utilized in our Construction Monitoring Software
Package (see below)
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The
Echoscope
®
and CodaOctopus Construction Monitoring Software (CMS) Software have important applications for breakwater
construction. Our CMS package has been recently updated to include patented algorithms for tracking and placement of the single
layer armor blocks used in a breakwater construction.
The
CodaOctopus solution is one of two preferred solutions for breakwater construction and increasingly the CodaOctopus’ solution
is becoming the preferred solution for subsea block placements in breakwater solutions because of the capabilities that allow
the crane operator to visualize the blocks while they are being placed in real-time. The CodaOctopus solution has significantly
simplified and made safer this area of the workflow process in breakwater construction.
We
do not believe that this important capability along with real-time visualization and monitoring of the construction site including
previously laid blocks is possible with competing solutions. In addition, the feature rich software package (CMS) which allows
the complete workflow for breakwater construction to be planned within the software, greatly reduces risks and time to the project
and improves the quality of project deliverables and progress throughout. The patented tracking algorithms that have recently
been enhanced and strengthened allow onward opportunity for similar applications involving placing known objects or structures
underwater for other applications as well.
Dimension
®
Designed
for the remotely operated underwater vehicle (“ROV”) market, the Dimension
®
real time 3D forward looking
sonar with CodaOctopus Vantage software (“Vantage”) offers a step-change view to ROV pilots. With a user-selectable
quad-view of the scene in front of the ROV, the pilot can maneuver, navigate and monitor with confidence during zero visibility
conditions.
Based
on our patented Echoscope
®
technology and our Vantage software, Dimension
®
provides unparalleled
real-time visualization for subsea vehicle applications. Designed for a wide range of ROVs, Dimension
®
is a unique,
true real-time 3D sonar that transforms ROV underwater operations.
Using
the Vantage software suite and advanced beam forming techniques, the Dimension
®
sonar provides the ROV pilot with
a unique quad-view for safe navigation and obstacle avoidance purposes. The Vantage quad-view features a conventional plan-view,
commonly provided by scanning sonars, along with three additional and separate real-time perspectives of the subsea environment.
Echoscope®
C500 (“C500”)
The
C500 was launched in 2014 and is based on our patented Echoscope
®
technology and delivers real-time 3D sonar capability
in a smaller, lighter, ruggedized form factor with reduced power requirements. It is suitable for ROV and autonomous underwater
vehicle (“AUV”) based applications as well as vessel deployments.
Fully
integrated with our powerful Underwater Survey Explorer software, the C500 can be used with the full range of functionality available
including the latest Models+ software module allowing dynamic control of sonar with augmented 3D models in the 3D Workspace. The
C500 allows the acquisition of full real-time 3D data in a time efficient manner.
As
a result of the reduced form factor, reduced power consumption requirements and price point, this new product opens new markets
for our real time 3D solutions.
Software
Products
All
our sonars are sold with one of three proprietary software applications, Underwater Survey Explorer, Vantage or our Construction
Monitoring System (CMS). Our Software packages are critical to the usability of our real time 3D sonar solutions. Our software
applications are feature rich and are uniquely driven to provide complete functionality in the live environment without the need
to perform post processing and analysis of the data to produce results. There are a number of unique capabilities (some of which
are described above).
Data
Acquisition
We
started our business in 1994 designing and developing the CodaOctopus GeoSurvey software package. For over a decade our GeoSurvey™
has been an industry leading software package on 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 side-scan and
sub-bottom data acquisition, CodaOctopus GeoSurvey has been purchased by numerous leading survey companies throughout the world.
This product range includes:
CodaOctopus
GeoSurvey Acquisition Products
These
consist of a range of hardware and software solutions for field acquisition of sidescan sonar and sub-bottom profiler, which includes
analogue and digital interfaces compatible with all geophysical survey systems. This is our original product range that includes
the following products:
DA4G
- 500, Sidescan sonar and sub-bottom profiler simultaneously
DA4G
- 1000, Sidescan sonar and sub-bottom profiler separately
DA4G
- 2000, Sidescan sonar or sub-bottom profiler
CodaOctopus
GeoSurvey Productivity Suite
This
consists of an integrated suite of software that automates the tasks of analyzing, annotating and mosaicing complex data sets,
thus ensuring faster and more precise results.
CodaOctopus
Instruments
These
consist of simple, solid and robust solutions for sidescan sonar and sub-bottom profilers. Used throughout the world by leading
survey companies, navies and academic organizations, CodaOctopus instruments are ideal where minimal training and simple installation
and set-up is paramount. Coupled with intuitive but powerful post processing software, the Octopus range meets the requirements
of survey applications from the smallest inshore survey, rapid deployment naval reconnaissance to large scale site investigations.
This product range includes the following:
The
DA4G™ series of acquisition systems which provide high quality, robust and reliable data acquisition from the latest digital
and analogue sidescan sonar and sub-bottom profiler sensors.
DA4G™
is the 4th 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
DA4G
TM
range consists of a number of options and is backed up (like all our products) with global service and support.
Motion
Sensing Products
The
CodaOctopus F180
®
and the more recently introduced CodaOctopus F170
TM
families have been developed for
the marine environment based on technology originally developed for the extreme world of motor racing. Modifications and enhancements
have resulted in a simple-to-use, off-the-shelf product that brings accurate positioning and motion data into extreme offshore
conditions for precision marine survey applications worldwide. Variants within the F180
®
series include the F190™,
exclusively configured for use ‘inland’, e.g. within ports and harbors, and the F185™, with enhanced precision
positioning to 2 cm accuracy (<1”). Octopus iHeave, an intelligent software product for dealing with long period ocean
swell compensation, is fully integrated within the F180
®
series.
The
F170™ family is designed with ease of use in mind. They are compact, simple to install and produce accurate position and
motion data for the marine industry. Two product variants are available: the F170™ and the F175™. The F175™
allows integration of third-party GNSS systems thus enhancing the accuracy of the outputs and improving the robustness of the
solution.
This
product is sold alone and in conjunction with our real time 3D sonars. We are currently expending a significant amount of our
resources in developing the new generation of our motion sensors. Our newly developed suite of products will focus on expanding
the market into which we sell these devices to include the AUV market which is an expanding market for our products in general.
Coda
Octopus Products Limited has the requisite accreditation for its business including LRQ accredited to ISO 9001:2008.
Marine
Engineering Businesses (“Service Segment”)
Our
Marine Engineering Businesses (Coda Octopus Martech Limited (based in Portland, Dorset, England) and Coda Octopus Colmek, Inc.
(based in Salt Lake City, Utah)) operate in the defense space.
We
provide engineering services to a wide variety of clients in the defense markets. A significant part of these services are provided
to defense contractors and are often intended for prototype productions which typically lead to long term manufacturing contracts.
These arrangements often give us preferred/sole supplier status for long term manufacturing contracts, tech refresh and the obsolescence
management for such customers. Our engineering capabilities are increasingly being combined with our product offerings, bringing
opportunities to provide complete systems, installation and support.
Coda
Octopus Martech Limited (“Martech”)
Martech
operates in the specialized niche of bespoke 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.
Martech has the requisite accreditation for its business including LRQ accredited to ISO 9001:2008.
An
example of Martech’s design and engineering services is the development of a ruggedized display unit in military vehicles
capable of displaying variables such as wind speed, air temperature and humidity independent of the vehicle’s computer.
In
late 2010 Martech was awarded a significant contract to design and build two pre-production decontamination units the successors
of which have been designated as part of the ground equipment for a major international military aircraft program.
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.
Martech
is a key supplier of various parts of our marine products business and has been assisting in the further development of a number
of those products.
On
or around October 18, 2010 our subsidiary, Coda Octopus Martech, entered into an arrangement (Company Voluntary Arrangement or
(“CVA”)) under which it was agreed to re-schedule £503,335 an equivalent of $807,000 (using an exchange rate
of 1.6035) amounts to trade creditors. Under the CVA this amount was scheduled to be repaid over 4 years.
During
the fiscal year 2015 Martech moved into new modern facilities comprising both office, manufacturing and research and development
units. These premises are leased from its sister company, Coda Octopus Products Limited. Martech also supplies the latter business
with manufacturing capacity for some of its products.
Coda
Octopus Colmek, Inc. (“Colmek”)
Colmek
is a service provider of defense engineering solutions, particularly in the fields of data acquisition, storage, transmission
and display.
It
has grown and diversified since beginning its operations in 1977 and now provides services and products to a wide range of defense,
research and exploration organizations in the United States.
Colmek
designs, manufactures and supports systems that are reliable and effective in multiple military and commercial applications where
ruggedness and reliability under extreme operational conditions are paramount and where lives depend on accurate and precise information.
Colmek
has the requisite accreditation for its business including LRQ accredited to ISO 9001:2008.
Colmek
has long standing relationships with a number of prime defense contractors and has been supporting a number of defense programs
for over 15 years including the (CIW) Close In Weapons Support Program (Phalanx) for which it supplies proprietary parts and services
and technical refresh programs for these parts. As a result, Colmek has repeat revenues from these long standing programs.
Colmek
continues to expand the number of established programs it supplies proprietary parts to. In June 2014 Colmek completed the acquisition
of the Thermite® Rugged Visual computer line and the Sentiris AV1 XMC video card from Quantum 3D for a cash consideration
of $1,100,000. Colmek also acquired hardware and other intellectual property rights (such as, software code and trademarks pertaining
to these products).
The
Thermite® Product fits within established programs with Department of Defense (“DoD”) prime contractors and benefits
from being a single source product under this program. Customers for this item include US Army, Benchmark, and iRobot’s
Defense and Security Division and since acquiring this product in 2014 it has yielded revenues of approximately $1,500,000. The
Sentiris product has recently completed its first article inspection and is being developed for a DoD prime contractor.
Thermite®
Rugged Visual Computers
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Rugged,
graphics-based PCs designed to perform in the most brutal environmental conditions
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Focus
on graphics-based high-performance computing with integrated accelerated video capture capability
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Lightweight,
power efficient, conduction-cooled
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Three
models, optimized for man-wearable, vehicle, and airborne platforms
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Programs
include dismounted soldier training, mission rehearsal, real-time imaging, robotic control, weapon system control, C4ISR,
sensor processing and display
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Sentiris
AV1 XMC
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FPGA-based
PCI Express Mezzanine Card designed for video and graphics processing applications
|
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Targeted
platforms include MH-47G helicopters, MH-60M Blackhawk helicopters, MC-130H Combat Talon II and CV-22 Tilt-Rotor aircraft
|
Stinger™
family of Rugged Small-Form-Factor PCs
The
Stinger 1000 is a unique rugged computer that provides a cost effective solution for harsh mobile computing environments. Utilizing
PC-104 architecture and employing creative ruggedization, Colmek has engineered a stable platform which is easily tailored to
any application.
The
Stinger 1000 rugged mobile computer is highly customizable, presenting an inspiring assortment of selectable attributes. The stinger
mobile computer is engineered to meet military requirements. Colmek has successfully deployed Stinger products on Unmanned Aerial
Systems (UAS), and shipboard for satellite-based tracking systems.
RhinoTuff™
family of Rugged Touch Screen Computers
The
robust RhinoTuff™ rugged touch screen computer is built exclusively for reliable operation in the world’s harshest
environments. It is modular and user-definable affording maximum flexibility. This all-weather, all terrain, all-in-one PC thrives
in a field where the average “tough” computer is simply not tough enough, including, mining and construction sites,
oil fields, marine environments, and military battlefields.
Rugged
Chassis/Enclosures
The
chassis and enclosures offered by Coda Octopus Colmek are fully customizable to military/industrial needs. Colmek is a key supplier
on high profile programs including Raytheon’s Phalanx Close-In Weapons System (CIWS) and Northrop Grumman’s airborne
mine hunting sonar AN/AQS-24. We also offer a variety of enclosures technologies.
Other
products offered by Colmek include subsea telemetry & data acquisition systems, rugged workstations, analog-to-digital converters
and rugged LCD displays.
Sales
and Marketing
We
conduct worldwide sales and marketing through each company individually, with our synergies, national and international exposure
sought under the management of the heads of each operation. This structure provides dedicated sales effort in each of the Group
companies, and encourages cross-selling and marketing of other Group companies’ products and services. Generally, our focus
is on widening our market reach and on selling broader services, systems and solutions within our existing customer base.
Our
marketing effort is dedicated to enhancing, reinforcing, and protecting the value of our lead in this emerging market, broadening
our current product and systems-based offerings to be able to offer complete solutions. However, within that we have the following
supporting marketing sub-strategies:
Product
:
Build on the significant lead that we have in the market for cutting edge real time 3D solutions by designing and developing the
next generation of real time underwater 3D solutions in a superior form to our existing products and thereby open new markets
for these solutions by having superior price, performance and customer utility at the forefront of our strategies.
Place
:
The use of strategic partnerships, at the higher value end of the market, particularly to provide solutions rather than product
(e.g. the provision, through partnership, of a complete port security solution to a major port), and the use of existing and new
sales agents to provide sales leads for lower value but very important “pure” product sales. We also work with carefully
selected agents who through their local relationships or capabilities are able to market and promote our products and assist us
in opening new markets for our real time 3D solutions.
Promotion
:
The attendance and illustration of our capabilities at trade shows, use of customer mailing, advertising and trade public relations.
Competition
Data
Acquisition Products
The
sonar equipment industry 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 of 25% each of world sales, while we believe that we control approximately 10% of world-wide sales.
Motion
Sensing Products
In
the field of motion sensing equipment, where our product addresses a small part of the overall market, we believe that we have
four principal competitors: TSS (International) Ltd in Watford, England which is focused on the mid-performance segments with
about 25% of the world market; Ixsea, a French company which covers all segments, with about 20% of the market; Kongsberg Seatex,
a Norwegian company (part of Kongsberg Gruppen) which has products across all segments, with about 15% of the market; and Applanix,
a Canadian company, now part of Trimble which has one major product focused on the high end of the market, with about 20% of the
market. We believe that our market share in the field of motion sensing equipment is only about 10%.
Real
Time 3D Sonar
In
the field of Real Time 3D imaging, we are unaware of other companies offering a similar product. The entry into this market is
dependent upon specialized marine electronics and acoustic 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. We are also aware
of a number of high profile and substantial competitors’ real time 3D projects that have failed. Over the last several years
there have been lower grade sonars entering the market of 3D imaging. Companies such as Tritech International Ltd., United Kingdom,
and BlueView Technologies Inc., USA (now a part of Teledyne), are examples, but none of these sonar offerings are direct comparisons
or competitors in respect of our real time 3D solutions as we believe that they do not have the same capabilities as our patented
Echoscope
®
technology in terms of generating real time 3D images of submerged objects and environments in low or
zero visibility conditions.
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 and to develop new innovative products.
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 competes 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 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.
We have a number of fundamental patents including a patent covering the stitching together of acoustic imagery. This covers the
real time acoustic image generation element of what we do, and we believe it provides us with a competitive advantage.
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.
Our
patent portfolio consists of the following:
Patent
Number
|
|
Description
|
US
Patent No. 6,438,071
|
|
Concerns
the “Method for Producing a 3-D Image” and is also recorded in the European Patents Register #EP 1097393 B1; Australia
#55375/99 and Norway #307014. This patent relates to the method for producing a 3D image of a submerged object, e.g. a shipwreck
or the sea bottom.
|
|
|
|
US
Patent No. 6,532,192
|
|
Concerns
“Subsea Positioning System and Apparatus”
|
|
|
|
US
Patent No. 7,466,628
|
|
Concerns
a “Method of constructing mathematical representations of objects from reflected sonar signals.”
|
|
|
|
US
Patent No. 7,489, 592
|
|
Concerns
a “Method of automatically performing a patch test for a sonar system, where data from a plurality of overlapping 3D
sonar scans of a surface, as the platform is moved, are used to compensate for biases in mounting the sonar system on the
platform”.
|
|
|
|
US
Patent No. 7,898,902
|
|
Concerns
a “method of representation of sonar images” allowing sonar three dimensional data to be represented by a two
dimensional image.
|
|
|
|
US
Patent No. 8,059,486
|
|
Concerns
a method of rendering volume representation of sonar images.
|
|
|
|
US
Patent No. 8,854,920
|
|
Concerns
a method of volumetric rendering of three dimensional sonar data sets
|
|
|
|
US
Patent No. 9,019,795
|
|
Method
of object tracking using sonar imaging
|
Trademarks
We
own the following registered trademarks: Coda®, Octopus
®
, CodaOctopus
®
, Octopus & Design
®
,
F180
®
, Echoscope
®
, Survey Engine
®
, Dimension
®
, DAseries
®
,
Sentiris
®
and Thermite
®
; CodaOctopus
®
Vantage; CodaOctopus
®
UIS; and
CodaOctopus
®
USE.
We
also use the following trademarks: F170™, F175™, F190™, UIS™ TEAM™ and TEAM+™. In addition,
we have registered a number of internet domain names.
Government
Regulation
Because
of the nature of some of our products, they may be subject to United States and other jurisdictions’ export control regimes
and may be exported outside these jurisdictions only with the required level of export license or through an export license exception
or general export authorization / license.
In
addition, as a provider for the US Government, we may be subject to numerous laws and regulations relating to the award, administration
and performance of US Government contracts, including the False Claims Act. Non-compliance found by any one agency could result
in fines, penalties, debarment, or suspension from receiving additional contracts with all US Government agencies. Given our dependence
on US Government business, suspension or debarment could have a material adverse effect on our business and results of operations.
Employees
As
of the date hereof, we employ worldwide 87 people, of which 11 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 members of any union, and we have not experienced 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
Lakeland,
Florida
Our
corporate offices, which co-locate with our wholly owned subsidiary, Coda Octopus Products, Inc., are located in Lakeland Florida.
In 2012, the Company acquired this property consisting of 3 unified condominium units with office space and warehouse/storage
and testing facilities totaling 4,154 square feet.
Orlando,
Florida
Our
US subsidiary Coda Octopus Products, Inc., purchased a property in Florida on or around February 2016 for around $730,000. This
property will be used by staff who are assigned or seconded from other parts of our Organization to our Florida Office to assist
with R&D projects and/or who attend offices in Lakeland from time to time to provide training or demonstration of our products.
Salt
Lake City, Utah
On
March 21, 2015 Coda Octopus Colmek completed the purchase of new office, production and R&D Facilities comprising 16,000 square
feet in Salt Lake City, Utah for $1,200,000 in cash. These premises were further customized for Colmek’s use at a cost of
approximately $300,000.
Edinburgh,
Scotland
Offices
Our
wholly owned United Kingdom subsidiary, Coda Octopus Products Ltd, leases office space comprising 4,099 square feet in Edinburgh,
United Kingdom. These premises are used as offices. The building is located close to the Port of Leith and the Firth of Forth,
which is convenient for conducting trials and demonstrations of our products. The lease for these premises expires February 28,
2019. The annual rent is fixed for the duration of the lease at the British Pounds equivalent of $54,130 (the rent is stated in
British Pounds and is therefore subject to exchange rate fluctuations).
R
& D Test Facilities
The
Company owns a R&D test facility in Edinburgh, Scotland. These premises comprise 917 square feet and are located immediately
adjacent to this business’ principal place of business. The premises were acquired on February 6, 2015 for a purchase price
of £130,000 (equivalent to $199,318) and have been equipped with an acoustic test tank for the development and testing of
our products and are also utilized for our training activities.
Production
and Repair Services Facilities
In
keeping with its strategy to develop its own core patented flagship technology (its Real Time 3D Sonar Technology), Coda Octopus
Products Ltd is leasing manufacturing and service facilities in Edinburgh comprising 2,450 square feet and located a few hundred
yards from the Company’s corporate offices at Anderson House. These new facilities have been equipped with a test tank and
will be used to manufacture and service our Echoscope
®
products. Our flagship product is produced at this newly
leased facility. The lease expires September 1, 2018. The annual rent is the British Pounds equivalent of $26,950 (the rent is
stated in British Pounds and is therefore subject to exchange rate fluctuations). The rent is fixed for the duration of the lease.
Portland,
Dorset, England
Martech
leases 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 that were acquired by Coda Octopus Products Limited in September 2013. The building comprises
both office space and manufacturing and testing facilities. The lease, which is for a period of 5 years, provides for an annual
rent of the equivalent of $51,000 (the rent is stated in British Pounds and is therefore subject to exchange rate fluctuations).
These premises give easy access to marine facilities such as testing vessels etc.
Bergen,
Norway
Our
wholly owned Norwegian subsidiary, Coda Octopus R&D AS, leases 2,370 square feet of office space in a refurbished maritime
business center directly on the waterway connected to Bergen harbor. After the move of the production and servicing of the Echoscope®
to Edinburgh, UK, the facility now serves as a research and development center for hardware development of our flagship product
utilizing our purpose-built laboratories. We have served notice to surrender the lease for this facility, effective November 2016.
The
lease provides for a rental of the equivalent of $33,959 (the rent is stated in Norwegian Kroners and is therefore subject to
exchange rate fluctuations) per annum and expires on May 31, 2018. The lease has been terminated in accordance with its terms
with effect from December 1, 2016 and we are seeking to find more appropriately sized facilities in Bergen, Norway, where we still
carry on part of our Research and Development works for our core technology.
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.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010 and 2009
NOTE
1 - SUMMARY OF ACCOUNTING POLICIES
A
summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements
follows.
Business
and Basis of Presentation
Coda
Octopus Group, Inc. (
“we
”
, “us”,
“
our company
” or
“Coda”
)
was formed under the laws of the State of Florida in 1992. We are a developer of underwater technologies and equipment for imaging,
mapping, defense and survey applications. Our headquarters are in Lakeland, Florida. Our subsidiaries are based in Florida, Utah,
United Kingdom, Australia and Norway.
The
consolidated financial statements include the accounts of Coda and our domestic and foreign subsidiaries that are more than 50%
owned and controlled. All significant intercompany transactions and balances have been eliminated in the consolidated financial
statement.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. Although
these estimates are based on management’s best knowledge of current events and actions that we may undertake in the future,
actual results may differ from those estimates. Included in these estimates are assumptions about collection of accounts receivable,
impairment of intangible assets, useful life of property and equipment, assumptions used to calculate fair value of stocks and
warrants granted, stock based compensation, deferred income tax asset valuation allowances, and valuation of derivative liabilities.
Revenue
Recognition
We
record revenue in accordance with ASC Topic 605 - Revenue Recognition. Our revenue is derived from sales of underwater technologies
and equipment for imaging, mapping, defense and survey applications. Revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the contract price is fixed or determinable, and collectability
is reasonably assured. No right of return privileges are granted to customers after shipment.
For
arrangements with multiple deliverables, we recognize product revenue by allocating the revenue to each deliverable based on the
fair value of each deliverable in accordance with ASC 605-25-05 and ASC 605-10-599, and recognize revenue for equipment upon delivery
and for installation and other services as performed. ASC 605-25-05 was effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003.
Our
contracts sometimes require customer payments in advance of revenue recognition. These deposit amounts are reflected as liabilities
and recognized as revenue when the Company has fulfilled its obligations under the respective contracts.
Revenues
derived from our software license sales are recognized in accordance with FASB ASC Topic 985 - Software. For software license
sales for which any services rendered are not considered essential to the functionality of the software, we recognize revenue
upon delivery of the software, provided (1) there is evidence of an arrangement, (2) collection of our fee is considered probable
and (3) the fee is fixed and determinable.
Some
of the subsidiaries report earnings from job contracts on the percentage of completion measured by the proportion of job costs
incurred to date to estimate total job costs for each contract. Costs and estimated earnings in excess of billings and vice versa
on uncompleted contracts have been recorded as current assets and current liabilities, respectively. At the time a loss becomes
known, the entire amount of the estimated ultimate loss is recognized. The earnings or losses, the Company ultimately will realize
on uncompleted contracts could differ materially in the next year from the amounts estimated.
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010 and 2009
Foreign
Currency Translation
The
Company translates the foreign currency financial statements of its foreign subsidiaries in accordance with the requirements of
ASC 830 - Foreign Currency Matters. Assets and liabilities are translated at exchange rates existing at the balance sheet dates,
related revenue and expenses are translated at average exchange rates in effect during the period and 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 (loss). Foreign currency transaction gains and losses are included in
the statement of income.
Income
Taxes
Deferred
income taxes are provided using the asset and liability method for financial reporting purposes in accordance with the provisions
of ASC 740 - Income Taxes. Under this method, deferred tax assets and liabilities are recognized for temporary differences between
the tax bases of assets and liabilities and their carrying values for financial reporting purposes, and for operating loss and
tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be removed or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes
the enactment date. A valuation allowance is recorded when it is “more likely-than-not” that a deferred tax asset
will not be realized.
Cash
and Cash Equivalents
Cash
equivalents are comprised of highly liquid investments with maturity of three months or less when purchased. We maintain our cash
in bank deposit accounts, which at times, may exceed insured limits. We have not experienced any losses in such accounts.
Concentrations
of Credit Risk
Financial
instruments and related items, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash
equivalents and accounts receivable. We place our cash and temporary cash investments with credit quality institutions. At times,
such investments may be in excess of applicable government mandated insurance limits.
Accounts
Receivable
Accounts
receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of
outstanding invoices and management’s evaluation of collectability. Accounts are written off after all reasonable collection
efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied
against the allowance for doubtful accounts. We periodically review our trade receivables in determining our allowance for doubtful
accounts. Allowance for doubtful accounts was $9,325 and $255,789 for the years ended October 31, 2010 and 2009 respectively.
Fair
Value of Financial Instruments
FASB
ASC 825-10-50 - Financial Investments requires disclosure of the fair value of certain financial instruments. The carrying value
of cash and cash equivalents, accounts receivable, other receivables, accounts payable and short-term borrowings, as reflected
in the balance sheets, approximate fair value because of the short-term maturity of these instruments. Our long term debt has
interest rates that approximate market and therefore the carrying amounts approximate their fair values.
Fair
Values
In
the first quarter of fiscal year 2008, the Company adopted FASB ASC Topic -820, “Fair Value Measurements and Disclosures”
(ASC 820) as amended by ASC Topic 820-10-55. ASC 820 defines fair value, establishes a framework for measuring fair value, and
enhances fair value measurement disclosure. ASC Topic 820-10-55 delays, until the first quarter of fiscal year 2009, the effective
date for ASC 820 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually). The adoption of ASC 820 did not have a material
impact on the Company’s financial position or operations. Refer to Note 4 and 10 for further discussion regarding fair value.
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010 and 2009
Debt
and Equity Securities
The
Company follows the provisions of FASB ASC Topic 320, Accounting for Certain Investments in Debt and Equity Securities (ASC 320).
The Company classifies debt and equity securities into one of three categories: held-to-maturity, available-for-sale or trading.
These security classifications may be modified after acquisition only under certain specified conditions. Securities may be classified
as held-to-maturity only if the Company has the positive intent and ability to hold them to maturity. Trading securities are defined
as those bought and held principally for the purpose of selling them in the near term. All other securities must be classified
as available-for-sale.
Held-to-maturity
securities are measured at amortized cost in the consolidated balance sheets. Unrealized holding gains and losses are not included
in earnings or in a separate component of capital. They are merely disclosed in the notes to the consolidated financial statements.
Available-for-sale
securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses are not included
in earnings but are reported as a net amount (less expected tax) in a separate component of equity until realized.
Trading
securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses for trading securities
are included in earnings.
Declines
in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary
are reflected in earnings as realized losses.
Inventory
Inventory
is stated at the lower of cost or market using the first-in first-out method. Inventory is comprised of the following components
at October 31, 2010 and 2009:
|
|
2010
|
|
|
2009
|
|
Raw materials
|
|
$
|
887,061
|
|
|
$
|
1,384,043
|
|
Work in process
|
|
|
98,630
|
|
|
|
48,389
|
|
Demo goods
|
|
|
307,792
|
|
|
|
-
|
|
Finished goods
|
|
|
486,631
|
|
|
|
1,365,993
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
1,780,114
|
|
|
$
|
2,798,425
|
|
We
regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on
our estimated forecast of product demand, production availability and/or our ability to sell the product(s) concerned. Demand
for our products can fluctuate significantly. Factors that could affect demand for our products include unanticipated changes
in consumer preferences, general market and economic conditions or other factors that may result in cancellations of advance orders
or reductions in the rate of reorders placed by customers and/or continued weakening of economic conditions. Additionally, management’s
estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for
excess and obsolete inventory. There was no reserve for inventory allowance as of October 31, 2010 and 2009.
Property
and Equipment
We
record our equipment at historical cost. We expense maintenance and repairs as incurred. Depreciation is provided for by the straight-line
method over three to four years, the estimated useful lives of the property and equipment. When assets are retired or disposed
of, the cost and accumulated depreciation are removed, and any resulting gains or losses are included in the consolidated statement
of operations.
Long-Lived
Assets
We
follow FASB ASC Topic 360, “Accounting for Impairment of Disposal of Long-Lived Assets”, (ASC 360) which established
a “primary asset” approach to determine the cash flow estimation period for a group of assets and liabilities that
represents the unit of accounting for a long-lived asset to be held and used. 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 it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition 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, 2010 and 2009.
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010 and 2009
Research
and Development
Research
and development costs consist of expenditures for the present and future patents and technology, which were expensed and not capitalized.
We are eligible for United Kingdom tax credits related to our qualified research and development expenditures. Tax credits are
classified as a reduction of research and development expense. During the year ended October 31, 2010, we recorded tax credits
totaling $201,716 and $358,346 during the year ended October 31, 2009.
Advertising
(Marketing)
We
charge the costs of marketing to expense as incurred. For the years ended October 31, 2010 and 2009, advertising costs were $207,876
and $522,576, respectively.
Other
Operating Expenses
We
incurred costs of $55,140 and nil as non-recurring fees and expenses in connection with our financings and acquisitions for October
31, 2010 and 2009, respectively.
Intangible
Assets
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 10 years. The Company amortizes its amortizable intangible assets using the straight-line method over their estimated
period of benefit. We periodically evaluate the recoverability of intangible assets and take into account events or circumstances
that warrant revised estimates of useful lives or that indicate that impairment exists.
We
test for impairment at the reporting unit level as defined in FASB ASC Topic 350, “Goodwill and Other Intangible Assets”
(ASC 350). This test is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment,
compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value, which is based
on future cash flows, exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair
value, the second step must be performed to measure the amount of the impairment loss, if any. The second step compares the implied
fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. In the fourth quarter of each year,
we evaluate goodwill on a separate reporting unit basis to assess recoverability, and impairments, if any, are recognized in earnings.
An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied
fair value of the goodwill. ASC 350 also requires that intangible assets with determinable useful lives be amortized over their
respective estimated useful lives and reviewed annually for impairment in accordance with ASC 360.
Stock
Based Compensation
Effective
January 1, 2006, the Company adopted FASB ASC Topic 718 - Compensation - Stock Compensation, (ASC 718) which requires the recognition
of the expense related to the fair value of stock-based compensation awards within the statement of income. The Company elected
the modified prospective transition method as permitted by (ASC 718). Under this transition method, stock-based compensation expense
for the years ended October 31, 2010 and 2009 includes compensation expense for unvested stock-based compensation awards that
were outstanding as of January 1, 2006, respectively, for which the requisite service was rendered during the year. The stock-based
compensation costs for these awards granted prior to January 1, 2006 were based on the grant date fair value estimated in accordance
with the original provisions of ASC 718. Compensation expense for all stock-based compensation awards granted subsequent to January
1, 2006 is based on the grant date fair value estimated in accordance with the provisions of ASC 718 recorded over the requisite
service period.
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010 and 2009
We
use the fair value method for equity instruments granted to non-employees and use the Black Scholes model for measuring the fair
value. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance
of the services is completed (measurement date) and is recognized over the periods in which the related services are rendered.
Comprehensive
Income
FASB
ASC Topic 220 - Comprehensive Income, (ASC 220) establishes standards for reporting and displaying of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, ASC 220 requires that all items that are required
to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements. Comprehensive income includes gains and losses on foreign
currency translation adjustments and unrealized gains and losses on available for sale investments and is included as a component
of stockholders’ equity.
Deferred
Financing Costs
Deferred
financing costs primarily include debt issuance costs incurred by the Company in connection with the issuance of convertible debt
in February 2008 (see Note 13). Amortization is provided on a straight-line basis over the terms of the respective debt instruments
to which the costs relate and is included in interest expense. Deferred financing cost expense was $1,271,170 and $242,128 in
2010 and 2009, respectively.
Earnings
Per Share
We
use FASB ASC Topic 260, “Earnings per Share” (ASC 260) for calculating the basic and diluted earnings per share. We
compute basic earnings per share by dividing the income attributable to common shareholders by the weighted average number of
common shares outstanding. Diluted earnings per share include the dilutive effect, if any, from the potential exercise of stock
options and warrants using the treasury stock method, as well as the dilutive effect from outstanding restricted Common Stock.
Potential common shares not included in the calculation of net income per share, since their effect would be anti-dilutive.
Per
share basic and diluted net loss amounted to $0.04 and $0.19 for the years ended October 31, 2010 and 2009, respectively. For
the years ended October 31, 2010 and 2009, 39,979,858 and 50,999,756 potential shares, respectively, were excluded from the shares
used to calculate diluted earnings per share as their inclusion would reduce net loss per share.
Warrant
Derivative Liabilities
ASC
815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments
and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a)
the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic
characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument
and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with
changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative
instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception
to this rule when the host instrument is deemed to be conventional, as described.
A
Black-Scholes-Merton option-pricing model, with dilution effects, was utilized to estimate the fair value of the warrant derivative
liabilities.
Related
Parties
Parties
are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal if one party controls or can significantly influence the management or operating policies of the other
to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The All transactions
with related parties shall be recorded at fair value of the goods or services exchanged. Property purchased from a related party
is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected
as a distribution to the related party.
Contingencies
Certain
conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will
only be resolved when one or more future events occur or fail to occur. The Company’s management assesses such contingent
liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal
proceedings that are pending against and by the Company or un-asserted claims that may result in such proceedings, the Company’s
management evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment
indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be
estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable
and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they
involve guarantees, in which case the guarantee would be disclosed.
Reclassifications
Certain
reclassifications have been made to conform the prior period data to the current presentation. These reclassifications had no
effect on reported net loss.
New
Accounting Pronouncements
In
June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance now codified under Accounting Standards
Codification (“ASC”) Topic 105-10, which establishes the FASB Accounting Standards Codification (the “Codification”)
as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements
in conformity with GAAP. ASC Topic 105-10 explicitly recognizes rules and interpretive releases of the Securities and Exchange
Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC registrants. Upon adoption of this
guidance under ASC Topic 105-10, the Codification superseded all then-existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative. The guidance
under ASC Topic 105-10 became effective for the Company as of September 30, 2009. References made to authoritative FASB guidance
throughout this document have been updated to the applicable Codification section.
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010 and 2009
In
February 2007, the FASB issued FASB ASC Topic 825, “The Fair Value Option for Financial Assets and Financial Liabilities
– Including an Amendment of ASC 320” (ASC 825) which permits entities to choose to measure many financial instruments
and certain other items at fair value. Most of the provisions of (ASC 825) apply only to entities that elect the fair value option.
However, the amendment to ASC 320 “Accounting for Certain Investments in Debt and Equity Securities” applies to all
entities with available-for-sale and trading securities. ASC 825 is effective as of the beginning of an entity’s first fiscal
year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before
November 15, 2007, provided the entity also elects to apply the provision of ASC 820, “Fair Value Measurements”. The
adoption of ASC 825 is not expected to have a material impact on the Company’s consolidated financial position, results
of operations or cash flows.
In
December 2007, the FASB issued FASB ASC Topic 805, “Business Combinations” (ASC 805), which establishes principles
and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in an acquiree, including the recognition and measurement of goodwill acquired
in a business combination. ASC 805 is effective as of the beginning of the first fiscal year beginning on or after December 15,
2008. Earlier adoption is prohibited and the Company is currently evaluating the effect, if any that the adoption will have on
its consolidated financial position, results of operations or cash flows.
In
December 2007, the FASB ASC Topic 810, “Non-controlling Interest in Consolidated Financial Statements, an amendment of ASC
810-12-15” (ASC 810), which will change the accounting and reporting for minority interests, which will be re-characterized
as non-controlling interests and classified as a component of equity within the consolidated balance sheets. ASC 810 is effective
as of the beginning of the first fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited and the Company
is currently evaluating the effect, if any that the adoption will have on its consolidated financial position, results of operations
or cash flows.
In
June 2007, the FASB issued FASB ASC Topic 730-20, “Accounting for Non-refundable Advance Payments for Goods or Services
to be Used in Future Research and Development Activities” ASC 730-20, which requires that non-refundable advance payments
for goods or services that will be used or rendered for future research and development (R&D) activities be deferred and amortized
over the period that the goods are delivered or the related services are performed, subject to an assessment of recoverability.
ASC 730-20 will be effective for fiscal years beginning after December 15, 2007. The Company does not expect that the adoption
of ASC 730-20 will have a material impact on its consolidated financial position, results of operations or cash flows.
In
December 2007, the FASB issued FASB ASC Topic 808-10-15, “Accounting for Collaborative Arrangements” (ASC 808-10-15)
which defines collaborative arrangements and requires collaborators to present the result of activities for which they act as
the principal on a gross basis and report any payments received from (made to) the other collaborators based on other applicable
authoritative accounting literature, and in the absence of other applicable authoritative literature, on a reasonable, rational
and consistent accounting policy is to be elected. ASC 808-10-15 also provides for disclosures regarding the nature and purpose
of the arrangement, the entity’s rights and obligations, the accounting policy for the arrangement and the income statement
classification and amounts arising from the agreement. ASC 808-10-15 will be effective for fiscal years beginning after December
15, 2008, which will be the Company’s fiscal year 2009, and will be applied as a change in accounting principle retrospectively
for all collaborative arrangements existing as of the effective date. The Company has not yet evaluated the potential impact of
adopting ASC 808-10-15 on its consolidated financial position, results of operations or cash flows.
In
March 2008, the FASB” issued FASB ASC Topic 815-10-65, “Disclosures about Derivative Instruments and Hedging Activities
– an amendment to 815-10-05 (ASC 815-10-65) which is intended to improve financial standards for derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s
financial position, financial performance, and cash flows. Entities are required to provide enhanced disclosures about: (a) how
and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under
815-10-05 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years beginning
after November 15, 2008, with early adoption encouraged. The Company is currently evaluating the impact of ASC 815-10-65, if any,
will have on its consolidated financial position, results of operations or cash flows.
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010 and 2009
In
April 2008, the FASB issued FASB ASC Topic 350-30, “Determination of the Useful Life of Intangible Assets”. (ASC 350-30)
which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. The Company is required
to adopt ASC 350-30 on September 1, 2009, earlier adoption is prohibited. The guidance in ASC 350-30 for determining the useful
life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after adoption, and the disclosure
requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, adoption. The Company
is currently evaluating the impact of ASC 350-30 on its consolidated financial position, results of operations or cash flows.
In
2008, the FASB issued FASB ASC 815-40 (Previously known as: EITF 07-05, Determining whether an Instrument (or Embedded Feature)
Is Indexed to an Entity’s Own Stock). FASB ASC 815-40 provides guidance on determining what types of instruments or embedded
features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating
the first criteria of the scope exception in FASB ASC 810-10-15 (Prior authoritative literature: paragraph 11(a) of SFAS 133).
The Company is currently evaluating the impact of FASB ASC 815-40 on the Company’s financial statements.
In
May 2008, the FASB ASC Topic 470-20-15, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (ASC 470-20-15) which requires the issuer of certain convertible debt instruments that
may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option)
components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. ASC 470-20-15 is
effective for fiscal years beginning after December 15, 2008 on a retroactive basis. The Company is currently evaluating the potential
impact, if any, of the adoption of ASC 470-20-15 on its consolidated financial position, results of operations or cash flows.
In
June 2008, the FASB issued FASB ASC Topic 260-10-45, “Determining Whether Instruments Granted in Share-Based Payment Transactions
Are Participating Securities.” FASB ASC Topic 260-10-45, unvested share-based payment awards that contain rights to receive
non-forfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method
of computing EPS. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years.
The Company does not expect the adoption of ASC 260-10-45 to have a material effect on its consolidated financial position, results
of operations or cash flows.
In
May 2009, the FASB issued FASB ASC 855-10 (Previously known as: SFAS No. 165, “Subsequent Events”) FASB ASC 855-10
establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial
statements are available to be issued (“subsequent events”). More specifically, FASB ASC 855-10 sets forth the period
after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur
for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events
or transactions occurring after the balance sheet date in its financial statements and the disclosures that should be made about
events or transactions that occur after the balance sheet date. FASB ASC 855-10 provides largely the same guidance on subsequent
events which previously existed only in auditing literature. The guidance under ASC Topic 855-10 became effective for the Company
as of June 30, 2009.
Liquidity
The
Company’s consolidated financial statements have been prepared assuming it will continue as a going concern. For the fiscal
year ended October 31, 2010, the Company has an accumulated deficit of $59,285,833, negative working capital of $16,912,615, a
stockholders’ deficit of $13,036,649 and generated a deficit in cash flow from operations of $256,415 in 2010 against $1,665,070
in 2009. The Company has been dependent upon the ability to generate revenue from the sale of its products and services and the
discretion of the note holder to release cash to cover operations.
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010 and 2009
NOTE
2 - RESTRICTED CASH
On
March 16, 2009, the Company and the holder of the secured convertible debenture (“The Noteholder”) entered into a
Cash Control Framework Agreement, pursuant to which it is assumed that, subject to the Company being fully compliant with the
terms of this agreement and those set out in the Transaction Documents entered into between the Company and the Noteholder on
February 21, 2008, no adverse actions will be taken by the Noteholder. The agreement provides, among other things, for the placement
of approximately $2.15 million into a segregated cash account. Under the terms of the agreement, we may request the release of
funds from the account from time to time for working capital purposes, subject to the Noteholder’s consent and agreed upon
terms and conditions. Under the terms of the agreement, we must also adhere to a strict cost cutting program which involves reducing
our SG&A, R&D and capital expenditure by an annualized $3.35 million.
This
agreement was extended for a further period of one year, expiring on March 16, 2009. On January 18, 2010, the noteholder notified
us in writing that it had waived its right to demand repayment of the loan as a result of our failure to observe certain specified
loan covenants. The agreement was extended for a further period of 12 months. We believe that the terms of this agreement may
provide us with sufficient liquidity to operate for fiscal 2011.
At
October 31, 2010 we have received net advances from this facility of $827,266.
See
Note 16 of the Consolidated Financial Statement for current information on the Cash Control Framework Agreement.
NOTE
3 - CONTRACTS IN PROGRESS
Costs
and estimated earnings in excess of billings on uncompleted contracts represent accumulated project expenses and fees which have
not been invoiced to customers as of the date of the balance sheet. These amounts are stated on the balance sheet as Unbilled
Receivables of $587,015 and $690,344 as of October 31, 2010 and 2009, respectively.
Billings
in excess of cost and estimated earnings on uncompleted contracts represent project invoices billed to customers that have not
been earned as of the date of the balance sheet. These amounts are stated on the balance sheet as Deferred Revenue of $443,853
and $111,463 as of October 31, 2010 and 2009, respectively.
Revenue
received for the sale of equipment includes a provision for warranty and is treated as deferred revenue, along with extended warranty
sales. These amounts are amortized over the 12-month warranty term starting from the date of sale. These amounts are stated on
the balance sheet as Deferred Revenue of $770,330 and $287,018 as of October 31, 2010 and 2009, respectively.
NOTE
4 - FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB
ASC Topic 820 - Fair Value Measurements and Disclosures (“ASC 820”) defines fair value as the price that would be
received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value,
the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market
participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance.
ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair
value:
Level
1 - Quoted prices in active markets for identical assets or liabilities.
Level
2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets
with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant
inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full
term of the assets or liabilities.
Level
3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010 and 2009
To
the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination
of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of
the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair
value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.
Items
recorded or measured at fair value on a recurring basis in the accompanying consolidated financial statements consisted of the
following items as of October 31, 2010:
|
|
|
|
|
Quoted Prices
in
Active
Markets for
Identical
Instruments
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
827,266
|
|
|
$
|
827,266
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Short term investment
|
|
$
|
14,875
|
|
|
$
|
14,875
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
842,141
|
|
|
$
|
842,141
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
473,384
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
473,384
|
|
Loans and notes
payable
|
|
$
|
14,583,866
|
|
|
$
|
-
|
|
|
$
|
14,583,866
|
|
|
$
|
-
|
|
Totals
|
|
$
|
15,057,250
|
|
|
$
|
-
|
|
|
$
|
14,583,866
|
|
|
$
|
473,384
|
|
With
the exception of assets and liabilities included within the scope of ASC 820-10-15, the Company adopted the provisions of ASC
820 prospectively effective as of the beginning of the year ended October 31, 2008. For financial assets and liabilities included
within the scope of ASC 820-10-15, the Company will be required to adopt the provisions of ASC 820 prospectively as of the year
beginning October 31, 2009. The adoption of ASC 820 did not have a material impact on our financial position or results of operations,
and the Company do not believe that the adoption of ASC 820-10-15 will have a material impact on our financial position or results
of operations.
The
fair value of the assets, short term investments, at October 31, 2010 was grouped as Level 1 valuation as the market price was
readily available.
As
of October 31, 2009, this investment had a value of $51,000, with a realized loss of $782,000, and an unrealized loss of $17,000
included in the determination of comprehensive loss.
Loans
and notes payable is recorded at face amount, which approximates fair value.
See
Note 16 of the Consolidated Financial Statement on current information on the matters set out in this Note 4.
NOTE
5 - OTHER CURRENT ASSETS
Other
current assets on the balance sheet total $180,597 and $285,690 at October 31, 2010 and 2009 respectively. These totals comprise
the following:
|
|
2010
|
|
|
2009
|
|
Deposits
|
|
$
|
-
|
|
|
$
|
96,277
|
|
Value added tax (VAT) receivable
|
|
|
1,993
|
|
|
|
113,636
|
|
Other receivables
|
|
|
178,604
|
|
|
|
75,777
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
180,597
|
|
|
$
|
285,690
|
|
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010 and 2009
NOTE
6 - FIXED ASSETS
Property
and equipment at October 31, 2010 and 2009 is summarized as follows:
|
|
2010
|
|
|
2009
|
|
Machinery and equipment
|
|
$
|
674,751
|
|
|
$
|
1,001,384
|
|
Accumulated depreciation
|
|
|
(560,282
|
)
|
|
|
(733,420
|
)
|
|
|
|
|
|
|
|
|
|
Net property
and equipment assets
|
|
$
|
114,469
|
|
|
$
|
267,964
|
|
Depreciation
expense recorded in the statements of operations for the years ended October 31, 2010 and 2009 is $95,854 and $238,632, respectively.
During,
the current year, the Company sold assets for $46,271, which has been netted against the purchase of new assets in the table above.
NOTE
7 - INTANGIBLE ASSETS AND GOODWILL
The
Company accounts for intangible assets and goodwill in accordance with ASC 350. Goodwill and Other Intangible Assets, whereby
the Company periodically tests its intangible assets for impairment. On an annual basis, and when there is reason to believe that
their values have been diminished or impaired, these assets are tested for impairment, and write-downs will be included in results
from operations.
The
identifiable intangible assets acquired and their carrying value at October 31, 2010 and 2009 is:
|
|
2010
|
|
|
2009
|
|
Customer relationships (weighted average life
of 10 years)
|
|
$
|
723,127
|
|
|
$
|
784,243
|
|
Non-compete agreements (weighted average life of 3 years)
|
|
|
230,981
|
|
|
|
278,651
|
|
Patents (weighted average life of 10 years)
|
|
|
86,539
|
|
|
|
67,837
|
|
Licenses (weighted average life
of 2 years)
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Total amortized identifiable intangible
assets - gross carrying value
|
|
|
1,140,647
|
|
|
|
1,230,731
|
|
Less accumulated
amortization and impairment
|
|
|
(600,908
|
)
|
|
|
(533,462
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
539,739
|
|
|
|
697,269
|
|
|
|
|
|
|
|
|
|
|
Residual value
|
|
$
|
539,739
|
|
|
$
|
697,269
|
|
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010 and 2009
Our
acquisition of Dragon Design Ltd (“Dragon”) in December 2008 resulted in the valuation of Dragon’s customer
relationships and covenants not to compete as intangible assets (see Note 14), which have an estimated useful life of 3 years
each, and as such are being amortized on a straight-line basis over that period. In addition, we recognized goodwill of $282,533
that represents the excess of the purchase price we paid over the fair value of Dragon’s net tangible and intangible assets
we acquired.
Our
acquisition of the assets of Tactical Intelligence, LLC (“Tactical”) in November 2008 resulted in the valuation of
Tactical’s customer relationships and covenants not to compete as intangible assets (see Note 14), which have an estimated
useful life of 3 years each, and as such are being amortized monthly over that period. In addition, we recognized goodwill of
$142,430 that represents the excess of the purchase price we paid over the fair value of Tactical’s net tangible and intangible
assets acquired.
Estimated
annual future amortization expense as of October 31, 2010 is as follows:
2011
|
|
$
|
92,427
|
|
2012
|
|
|
83,375
|
|
2013
|
|
|
80,766
|
|
2014
|
|
|
80,766
|
|
2015 and thereafter
|
|
|
202,406
|
|
|
|
|
|
|
Total
|
|
$
|
539,739
|
|
Amortization
of patents, customer relationships, non-compete agreements and licenses included as a charge to income amounted to $178,165 and
$231,321 for the years ended October 31, 2010 and 2009, respectively. Goodwill is not being amortized.
As
a result of the acquisitions of Martech, Colmek, Dragon and Tactical, the Company has goodwill in the amount of $3,382,108 as
of October 31, 2010 and $3,524,538 as of October 31, 2009. The changes in the carrying amount of goodwill for the period ended
October 31, 2010 and year ended October 31, 2009 are recorded below.
|
|
2010
|
|
|
2009
|
|
Beginning goodwill balance at November
1:
|
|
|
|
|
|
|
|
|
Coda Octopus Colmek, Inc.
|
|
$
|
2,038,669
|
|
|
$
|
2,038,669
|
|
Coda Octopus Martech Ltd
|
|
|
998,591
|
|
|
|
998,591
|
|
Coda Octopus Products Ltd
|
|
|
62,315
|
|
|
|
62,315
|
|
Goodwill recorded upon acquisition:
|
|
|
|
|
|
|
|
|
Coda Octopus Tactical Intelligence,
Inc.
|
|
|
-
|
|
|
|
142,430
|
|
Dragon Design
Ltd
|
|
|
282,533
|
|
|
|
282,533
|
|
|
|
|
|
|
|
|
|
|
Balance at October
31, 2010 and 2009
|
|
$
|
3,382,108
|
|
|
$
|
3,524,538
|
|
Considerable
management judgment is necessary to estimate fair value. We enlisted the assistance of an independent valuation consultant to
determine the values of our intangible assets and goodwill, both at the dates of acquisition and at dates thereafter. Based on
various market factors and projections used by management, actual results could vary significantly from management’s estimates.
The
Company’s policy is to test its goodwill balances for impairment on an annual basis, in the fourth quarter of each year,
or more frequently if events or changes in circumstances indicate that the asset might be impaired.
As
disclosed in the Company’s prior filings, the historic goodwill assets arose chiefly from the acquisition of two wholly
owned subsidiaries that comprise the Company’s professional services reporting units- Martech and Colmek.
The
Company performed its regular impairment test according to the pronouncements in ASC 350 “ Intangibles – goodwill
and other” for the years ended October 31, 2010 and 2009 by an experienced consultant.
During
the year ended October 31, 2010, the Company impaired $142,430 goodwill related to Coda Octopus Tactical Intelligence, Inc.
There
has been no change in the regulatory or legal environment that would have a negative impact on the Martech or Colmek’ operations.
Based
on these evaluations, the fair value of goodwill exceeds its Carrying book value. As such no impairment was recorded by management.
See
Note 16 of the Consolidated Financial Statement for current information on the operations of Dragon Design Limited and Coda Octopus
Tactical Intelligence, Inc.
NOTE
8 - STOCKHOLDERS’ EQUITY
The
Company is authorized to issue 150,000,000 shares of common stock with a par value of $0.001 per share. As of October 31, 2010
and 2009, the Company has issued and outstanding 60,614,958 shares and 49,000,244 shares of common stock respectively. The Company
is also authorized to issue 5,000,000 shares of preferred stock with a par value of $0.001 per share. We have designated 50,000
preferred shares as Series A preferred stock and have designated 50,000 preferred shares as Series B preferred stock. The remaining
4,900,000 shares of preferred stock is undesignated. There were 6,287 Series A preferred shares outstanding at October 31, 2010
and 2009 respectively, and nil Series B preferred shares outstanding at the same dates.
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010 and 2009
Series
A Preferred Stock
We
designated 50,000 shares of our preferred stock, par value $0.001, as Series A Preferred Stock. The Series A Preferred Stock ranks
senior to all classes of common and preferred stock and has no liquidation preference above par. The Series A Preferred Stock
is sold as units of $100 (or £100 where stock has been sold to investors in British Pounds) and has a dividend rate of 12%
per year, i.e. $12 per $100 unit, paid every six months, in May and November each year. The Series A Preferred Stock and accrued
dividends is convertible at the option of the holder into shares of our common stock at a conversion price of $1.00 per share,
and at the option of the Company when the stock price reaches or exceeds $3.00.
During
the year ended October 31, 2008, we issued 200 shares of Series A Preferred Stock, which were subscribed for in March 2007 and
converted 320 shares of Series A Preferred Stock into 32,000 shares of common stock. The original transaction was concluded in
GBP at a price of £32,000. The fixed exchange rate at which the Preferred Stock was issued is $1.77 to GPB 1.00. This is
equivalent to 320 Series A Preferred Stock (GBP 100 each). 320 units of Series A Preferred Stock were issued in exchange for consultancy
services provided by a consultant to the Company. The total of Series A preferred stock outstanding is 6,287 shares at October
31, 2010 and 2009, convertible into 1,013,670 shares of common stock.
The
Company has not paid any dividends on the Series A preferred stock as the Board of Directors have concluded that Delaware law
states that dividends can only de declared when there is funds available in the Company to pay such dividends. The Company’s
financial state does not allow such payments to take place.
See
Note 16 of the Consolidated Financial Statement for current information relating to Series A Preferred Stock.
Series
B Preferred Stock
We
designated 50,000 shares of our preferred stock, par value $0.001, as Series B Preferred Stock. The Series B Preferred Stock ranks
junior to our issued and outstanding Series A preferred Stock and senior to all classes of common stock. The Series B Preferred
Stock has a dividend rate of 8% per year. The Series B Preferred Stock and accrued dividends are convertible at the option of
the holder into shares of our common stock at a conversion price of $1.00 per share. As of October 31, 2010 and 2009 respectively,
we have no shares of Series B Preferred Stock outstanding.
See
Note 16 of the Consolidated Financial Statement for current information relating to Series B Preferred Stock.
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010 and 2009
Common
Stock
During
the year ended October 31, 2010 we issued 375,000 shares of common stock valued at $27,000 to employees, consultants for services.
During
the year ended October 31, 2010 we issued 11,239,714 shares of common stock valued at $275,877 to 8 purchasers of the securities
in April and May 2007 in exchange for cancellation of their warrants and cancellation of the securities purchase agreements as
they pertain to the said purchasers.
During
the period ending October 31, 2009 we issued 146,580 shares of common stock, valued at $30,310, to employees, directors and consultants
for services, of which $11,790 was subscribed for during the year ending October 31, 2008, leaving a charge for compensation in
the period ending October 31, 2009 of $18,520.
See
Note 16 of the Consolidated Financial Statement for current information on Common Stock in issue as of the date of this annual
report.
Other
Equity Transactions
During
the year ended October 31, 2009, we issued 50,000 common share purchase options in relation to the Tactical acquisition. During
the year ended October 31, 2009, there were also 210,000 options cancelled connected with staff departures, of which 95,000 were
exercisable. However, options issued in earlier periods vested, resulting in a charge of $24,771 and $295,853 during the years
ended October 31, 2010 and 2009, respectively.
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010 and 2009
NOTE
9 - WARRANTS AND STOCK OPTIONS
Transactions
involving stock options and warrants issued are summarized as follows:
Warrants
|
|
Year
ended
October 31, 2010
|
|
|
Year
ended
October 31, 2009
|
|
|
|
Number
|
|
|
Weighted
Average Exercise
Price
|
|
|
Number
|
|
|
Weighted
Average Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning
of the period
|
|
|
32,583,418
|
|
|
$
|
1.42
|
|
|
|
32,583,418
|
|
|
$
|
1.42
|
|
Granted during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Terminated during
the period
|
|
|
(8,464,000
|
)
|
|
|
1.28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
the end of the period
|
|
|
24,119,418
|
|
|
$
|
1.47
|
|
|
|
32,583,418
|
|
|
$
|
1.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
the end of the period
|
|
|
24,119,418
|
|
|
$
|
1.47
|
|
|
|
32,583,418
|
|
|
$
|
1.42
|
|
The
number and weighted average exercise prices of warrants outstanding as of October 31, 2010 are as follows:
Range
of
Exercise Prices
|
|
Number
Outstanding
|
|
|
Weighted
Average
Contractual Life
(Yrs)
|
|
|
Total
Exercisable
|
|
$0.50
|
|
|
250,000
|
|
|
|
0.50
|
|
|
|
250,000
|
|
0.58
|
|
|
400,000
|
|
|
|
0.41
|
|
|
|
400,000
|
|
1.00
|
|
|
350,000
|
|
|
|
0.82
|
|
|
|
350,000
|
|
1.30
|
|
|
11,559,709
|
|
|
|
1.14
|
|
|
|
11,559,709
|
|
$1.70
|
|
|
11,559,709
|
|
|
|
1.14
|
|
|
|
11,559,709
|
|
Totals
|
|
|
24,119,418
|
|
|
|
1.17
|
|
|
|
24,119,418
|
|
Stock Options
|
|
Year
ended
October 31, 2010
|
|
|
Year
ended
October 31, 2009
|
|
|
|
Number
|
|
|
Weighted
Average Exercise
Price
|
|
|
Number
|
|
|
Weighted
Average Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning
of the period
|
|
|
5,595,900
|
|
|
$
|
1.18
|
|
|
|
5,755,900
|
|
|
$
|
1.18
|
|
Granted during the period
|
|
|
50,000
|
|
|
|
1.05
|
|
|
|
50,000
|
|
|
|
1.30
|
|
Terminated during
the period
|
|
|
(4,106,000
|
)
|
|
|
1.16
|
|
|
|
(210,000
|
)
|
|
|
1.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
the end of the period
|
|
|
1,539,900
|
|
|
$
|
1.19
|
|
|
|
5,595,900
|
|
|
$
|
1.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
the end of the period
|
|
|
1,539,900
|
|
|
$
|
1.19
|
|
|
|
5,214,149
|
|
|
$
|
1.17
|
|
The
number and weighted average exercise prices of stock purchase options outstanding as of October 31, 2010 are as follows:
Range
of
Exercise Prices
|
|
Number
Outstanding
|
|
|
Weighted
Average
Contractual Life
(Yrs)
|
|
|
Total
Exercisable
|
|
$1.00
|
|
|
839,900
|
|
|
|
0.38
|
|
|
|
839,900
|
|
1.05
|
|
|
50,000
|
|
|
|
4.60
|
|
|
|
50,000
|
|
1.30
|
|
|
375,000
|
|
|
|
2.76
|
|
|
|
375,000
|
|
1.50
|
|
|
65,000
|
|
|
|
1.42
|
|
|
|
65,000
|
|
$1.70
|
|
|
210,000
|
|
|
|
1.66
|
|
|
|
210,000
|
|
Totals
|
|
|
1,539,900
|
|
|
|
1.32
|
|
|
|
1,539,900
|
|
There
is no intrinsic value to the option exercisable as of October 31, 2010.
See
Note 16 of the Consolidated Financial Statement for current information on the status of Warrants and Stock Options.
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010 and 2009
NOTE
10 - DERIVATIVE LIABILITY
In
June 2008, the FASB issued new accounting guidance (FASB ASC 815-40) which requires entities to evaluate whether an equity-linked
financial instrument (or embedded feature) is indexed to its own stock by assessing the instrument’s contingent exercise
provisions and settlement provisions. Instruments not indexed to their own stock fail to meet the scope exception of ASC 815 and
should be classified as a liability and marked-to-market. The statement is effective for fiscal years beginning after December
15, 2008 and is to be applied to outstanding instruments upon adoption with the cumulative effect of the change in accounting
principle recognized as an adjustment to the opening balance of retained earnings. The Company has assessed its outstanding equity-linked
financial instruments and has concluded that, effective November 1, 2009, the value of our warrants will need to be recorded as
a derivative liability due to the fact that the conversion price is subject to adjustment based on subsequent sales of securities.
The cumulative effect of the change in accounting principle on November 1, 2009 includes an increase in our derivative liability
related to the fair value of the conversion feature of $3,306,805. Fair value at November 1, 2009 was determined using the Black-Scholes
method based on the following assumptions: (1) risk free interest rate of 0.36%-1.44%; (2) dividend yield of 0%; (3) volatility
factor of the expected market price of our common stock of 302.22%; (4) an expected life of the warrants of 1.41-3.32 years and
(5) estimated fair value of common stock of $0.08 per share.
At
October 31, 2010 we recalculated the fair value of the conversion feature subject to derivative accounting and have determined
that the fair value is $473,384. The fair value of the conversion features was determined using the Black-Scholes method based
on the following assumptions: (1) risk free interest rate of 0.22-0.51%; (2) dividend yield of 0%; (3) volatility factor of the
expected market price of our common stock of 304.22%; (4) an expected life of the conversion feature of 0.41-2.32 years and (5)
estimated fair value of common stock of $0.0036 per share.
During
the years ended October 31, 2010, the Company recorded income of $2,557,546, related to the change in the fair value of the derivative
|
|
October
31, 2010
|
|
Balance, beginning of year
|
|
$
|
-
|
|
Additions
|
|
|
3,306,807
|
|
Extinguished derivative liability
|
|
|
(275,877
|
)
|
Change in fair
value of derivative liabilities
|
|
|
(2,557,546
|
)
|
Balance,
end of year
|
|
$
|
473,384
|
|
See
Note 16 of the Consolidated Financial Statement for current information on Warrants.
NOTE
11 - INCOME TAXES
The
Company has adopted FASB ASC Topic 740 Income Taxes which requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences
between taxable income reported for financial reporting purposes and income tax purposes are insignificant.
For
income tax reporting purposes, the Company’s aggregate U.S. unused net operating losses $28,256,404 which expire through
2029, subject to limitations of Section 382 of the Internal Revenue Code, as amended. The deferred tax asset related to the carry
forward is $9,607,177. The Company has provided a valuation reserve against the full amount of the net operating loss benefit,
because in the opinion of management based upon the earning history of the Company, it is more likely than not that the benefits
will not be realized.
For
income tax reporting purposes, the Company’s aggregate UK unused net operating losses $4,364,843, with no expiration. The
deferred tax asset related to the carry-forward is approximately $1,823,000. The Company has provided a valuation reserve against
the full amount of the benefits, because in the opinion of management based upon the earning history of the Company, it is more
likely than not that the benefits will not be realized.
Income
tax expense for 2009 represents income taxes on our Norwegian subsidiary.
Components
of deferred tax assets as of October 31, 2010 and 2009 are as follows:
Non-Current
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Net operating losses carried
forward
|
|
$
|
9,607,177
|
|
|
$
|
17,736,000
|
|
Valuation allowance
|
|
|
(9,607,177
|
)
|
|
|
(17,736,000
|
)
|
Net deferred
tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company follows FASB ASC 740-10-25 (Previously known as: Financial Accounting Standards Board interpretation No. 48 Accounting
for Uncertainty in Income Taxes). As a result of the implementation of FASB ASC 740-10-25, the Company recognized no adjustment
for unrecognized tax provisions.
The
Company recognizes interest and penalties related to uncertain tax positions in general and administrative expense. As of October
31, 2010 and 2009, the Company has not recorded any provisions for accrued interest and penalties related to uncertain tax positions.
By
statute, tax years 2008 through 2010 remain open to examination by the major taxing jurisdictions to which the Company is subject.
NOTE
12 - CONTINGENCIES AND COMMITMENTS
Litigation
For
the purpose of this disclosure, the 2010 period means November 1, 2009 through to and including October 31, 2010.
In
the 2010 period we were engaged in three lawsuits.
The
first one involves the former Chief Executive Officer (as the Plaintiff) of our wholly owned subsidiary Coda Octopus Colmek, Inc
(“Colmek”) and Colmek as the Defendant. The Plaintiff alleged breach of his employment agreement with the Defendant.
This litigation was settled in full by the parties on or around September 29, 2010 and all actions filed in court were dismissed
by consent.
The
second action involved Federal Engineering and Marketing Associates Inc. (FEMA) a Colorado corporation (Plaintiff) who acted as
sales representative of our wholly owned subsidiary, Coda Octopus Colmek Inc (“Colmek”) and the said Colmek as Defendant.
The Plaintiff claimed breach of contract. This litigation was fully settled by the parties on or around January 14, 2011 and all
actions filed in court were dismissed by consent.
On
April 28, 2010 we instituted legal action in the Supreme Court of the State of New York against 4 former employees. These actions
were settled in full between November 2010 and January 2011 and all actions filed in court were dismissed by consent.
During
2009, the Company made provision for certain liabilities for claims against the Company. During 2010, those amounts were written
down to the actual amounts as they became known. This write down resulted in a gain recorded in Other Income of $694,510 during
the year ended October 31, 2010.
See
Note 16 of the Consolidated Financial Statement for current information on litigation.
We
may become subject to other legal proceedings and claims, which arise in the ordinary course of our business. Although occasional
adverse decisions or settlements may occur, we believe that the final disposition of any matters should not have a material adverse
effect on our financial position or results of operations.
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010 and 2009
Factoring
Agreement
On
March 16, 2009, the Company and the holder of the secured convertible debenture (“The Noteholder”) entered into a
Cash Control Framework Agreement, pursuant to which it is assumed that, subject to the Company being fully compliant with the
terms of this agreement and those set out in the Transaction Documents entered into between the Company and the Noteholder on
February 21, 2008, no adverse actions will be taken by the Noteholder. The agreement provides, among other things, for the placement
of approximately $2.15 million into a segregated cash account. Under the terms of the agreement, we may request the release of
funds from the account from time to time for working capital purposes, subject to the Noteholder’s consent and agreed upon
terms and conditions. Under the terms of the agreement, we must also adhere to a strict cost cutting program which involves reducing
our SG&A, R&D and capital expenditure by an annualized $3.35 million.
This
agreement was extended for a further period of one year, expiring on March 16, 2009. On January 18, 2010, the noteholder notified
us in writing that it had waived its right to demand repayment of the loan as a result of our failure to observe certain specified
loan covenants. The agreement was extended for a further period of 12 months and now expires on March 16, 2011. We believe that
the terms of this agreement may provide us with sufficient liquidity to operate for fiscal 2011.
On
or around August 23, 2010, the Company failed to make a scheduled interest payment under the senior convertible debentures. This
constituted an event of default under the Loan Note Instrument and the Cash Control Framework Agreement resulting in the Noteholder
making a demand for the special purpose amount of $6,000,000 which was advanced to the Company for an approved acquisition under
the original Loan Note Instrument and for which it had failed to make.
See
Note 16 of the Consolidated Financial Statement for current information on the Cash Control Framework Agreement.
Company
Voluntary Arrangement (CVA)
On
or around October 18, 2010 our subsidiary, Coda Octopus Martech, entered into an arrangement under which it was agreed to re-schedule
£503,335 an equivalent of $807,000 (using an exchange rate of 1.6035) amounts to trade creditors. Under the CVA this amount
was scheduled to be repaid over 4 years.
See
Note 16 of the Consolidated Financial Statement for current information on the CVA.
Operating
Leases
We
occupy our various office and warehouse facilities pursuant to both term and month-to-month leases. Our term leases expire at
various times through September 2015. Future minimum lease obligations are approximately $1,331,228, with the minimum future rentals
due under these leases as of October 31, 2010 as follows:
2011
|
|
$
|
313,587
|
|
2012
|
|
|
306,360
|
|
2013
|
|
|
296,527
|
|
2014
|
|
|
250,084
|
|
2015 and thereafter
|
|
|
164,670
|
|
|
|
|
|
|
Total
|
|
$
|
1,331,228
|
|
Concentrations
During
the year ended October 31, 2010, the company had one customer generate sales greater than 10% of total revenue. Sales to this
customer were $2,434,524, or 21% of total revenues during the year. We had no sales concentrations of over 5% during the year
ended 2009.
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010 and 2009
NOTE
13 - NOTES AND LOANS PAYABLE
A
summary of notes and loans payable at October 31, 2010 and 2009 is as follows:
|
|
2010
|
|
|
2009
|
|
The
Company has a secured convertible debenture for $12M with a life of 7 years from February 26, 2008, maturing at 130% of face
value, and with interest payable every six months, starting in February 2009, at a rate of 8.5%; During the term, the debentures
are convertible into our common stock at the option of the Noteholders at a conversion price of $1.05. We may also force the
conversion of these Notes into our common stock after two years in the event that we obtain a listing on a national exchange
and our stock price closes on 40 consecutive trading days at or above $2.50 between the second and third anniversaries of
this agreement; $2.90 between the third and fourth anniversaries of this agreement; and $3.50 after the fourth anniversary
of this agreement or where the daily volume weighted average price of our stock as quoted on OTCBB or any other US National
Exchange on which our securities are then listed has, for at least 40 consecutive trading days closed at the agreed price.
The Company has failed to comply with certain covenants contained in the debenture agreement but the Noteholder has agreed
to waive the consequences
|
|
$
|
13,972,214
|
|
|
$
|
13,067,929
|
|
Pursuant
to the terms of an invoice financing agreement with an Affiliate the Company received
advances against certain invoices and contracts in exchange for the payment of 20% of
the invoice or contract value.
|
|
|
451,302
|
|
|
|
-
|
|
The
Company, through its UK subsidiary Coda Octopus Products Ltd has a 7 year unsecured loan note for £100,000; interest
rate of 12% annually; repayable at borrower’s instigation or convertible into common stock when the share price reaches
$3.
|
|
|
160,350
|
|
|
|
165,594
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,583,866
|
|
|
$
|
13,233,523
|
|
|
|
|
|
|
|
|
|
|
Less:
current portion
|
|
|
(14,423,516)
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
long-term portion
|
|
$
|
160,350
|
|
|
$
|
13,233,523
|
|
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010 and 2009
In
connection with the secured convertible debenture noted above and the Cash Control Framework Agreement (see below), we carried
$1,271,170 deferred financing costs as an asset on the consolidated balance sheet at October 31, 2009, which represents $1,694,893
in financing closing costs we incurred, net of $423,723 in amortization expense at October 31, 2009. During the year ended October
31, 2010 and 2009, deferred financing cost of $1,271,170 and $242,128, respectively was written off to expense.
On
March 16, 2009, the Company and the holder of the secured convertible debenture (“the Noteholder”) entered into a
Cash Control Framework Agreement, pursuant to which it is assumed that, subject to the Company being fully compliant with the
terms of this agreement and those set out in the Transaction Documents entered into between the Company and the Noteholder on
February 21, 2008, no adverse actions will be taken by the Noteholder. The agreement provides, among other things, for the placement
of approximately $2.15 million into a segregated cash account. Under the terms of the agreement, we may request the release of
funds from the account from time to time for working capital purposes, subject to the Noteholder’s consent and agreed upon
terms and conditions. Under the terms of the agreement, we must also adhere to a strict cost cutting program which involves reducing
our SG&A, R&D and capital expenditure by an annualized $3.35 million.
On
January 18, 2011, the noteholder notified us in writing that it had waived its right to demand repayment of the loan as a result
of our failure to observe certain specified loan covenants. The agreement was extended for a further period of 12 months and now
expires on March 16, 2012. During the extension period, parties closed the facility in March 2011. We believe that the terms of
this agreement may provide us with sufficient liquidity to operate for fiscal 2011.
On
or around July 2010 the Company entered into a Financing Agreement with an affiliate of CCM Holdings, Fort Advisors LLC under
which Fort Advisors agreed to make advances of up to $500,000 against certain invoices and contracts for which the Company paid
20% against each invoice that was financed.
See
Note 16 of the Consolidated Financial Statement for current information on the Cash Control Framework Agreement and the breaches
of covenants disclosed in the paragraph immediately above.
NOTE
14 - ACQUISITIONS
Acquisition
of Tactical Intelligence
In
November 2008, the Company formed a new subsidiary called Coda Octopus Tactical Intelligence, Inc. (“Tactical”) to
facilitate our entry into the counter-terrorism and anti-piracy training markets, which we believe are integral to our efforts
to help major customers deploy real time 3D sonar systems in hot spots around the world. On November 10, 2008, Tactical acquired
the assets of Tactical Intelligence International, LLC and Tactical Executive Services, LLC, which consisted of some plant and
machinery, valued at $5,000, customer relationships, valued at $60,000, non-compete agreements, valued at $50,000, and goodwill,
valued at $142,430.The purchase price consisted of an initial cash outlay of $125,000, a convertible promissory note in the amount
of $125,000 due on November 10, 2009, and 50,000 options to acquire common shares of Coda Octopus Group, Inc., which were due
to be issued in June 2009. As part of the transaction we acquired the services of two specialists in the field of real world security
training for domestic and international military units and government agencies to spearhead this drive. These individuals have
designed or led more than 50 such training programs throughout the world since September 11, 2001, using up to 100 freelance specialists
on a contract basis. The expertise of this part of the Group will be used to leverage our Echoscope and UIS capabilities in sales
and training.
The
acquisition of Tactical was accounted for using the purchase method in accordance with ASC 805. The results of operations for
Tactical have been included in the Consolidated Statements of Operations since the date of acquisition. In accordance with ASC
805, the total purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed. The estimate
of fair value of the assets acquired was based on management’s estimates. The total purchase price was allocated to the
assets and liabilities acquired as follows:
Equipment, net
|
|
$
|
5,000
|
|
Customer relationships acquired
|
|
|
60,000
|
|
Non-compete agreements acquired
|
|
|
50,000
|
|
Goodwill
|
|
|
142,430
|
|
Total purchase price
|
|
$
|
257,430
|
|
The
intangible assets acquired consisted of customer relationships and non-compete agreements, which have an estimated useful life
of 3 years each and as such will be amortized monthly over those periods. Goodwill of $142,430 represented the excess of the purchase
price over the fair value of the net tangible and intangible assets acquired. During the year ended October 31, 2010, the Company
fully impaired goodwill.
See
Note 16 of the Consolidated Financial Statement for current information on the status of Tactical Intelligence LLC.
Acquisition
of Dragon Design Ltd
In
December 2008, the Company acquired all of the issued and outstanding shares of Dragon Design Ltd (“Dragon”), an electronics
manufacturing and design business based in Weymouth, UK, and situated next to our Martech subsidiary. Management believes the
companies have complementary skills and capabilities that can enhance revenues and opportunities for both companies. The purchase
price for the assets consisted of an initial cash outlay of £56,250 ($83,000) and a further £56,250 in deferred consideration,
payable on the first anniversary of closing. The terms of the acquisition also included a potential earn out payment of £112,500,
which is dependent on Dragon meeting future agreed performance criteria, that has also been accrued on the acquisition date.
The
acquisition of Dragon was accounted for using the purchase method in accordance with ASC 805. The results of operations for Dragon
have been included in the Consolidated Statements of Operations since the date of acquisition. In accordance with ASC 805, the
total purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed. The estimate of fair
value of the assets acquired was based on management’s estimates. The total purchase price was allocated to the assets and
liabilities acquired as follows:
Current assets acquired
|
|
$
|
147,039
|
|
Equipment, net
|
|
|
51,336
|
|
Current liabilities assumed
|
|
|
(201,166
|
)
|
Customer relationships acquired
|
|
|
29,740
|
|
Non-compete agreements acquired
|
|
|
29,740
|
|
Goodwill
|
|
|
282,533
|
|
Cash acquired
|
|
|
877
|
|
Total purchase price
|
|
$
|
340,099
|
|
See
Note 16 of the Consolidated Financial Statement for current information on the status of Dragon Design Limited.
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER
31, 2010 AND 2009
The
intangible assets acquired, comprising customer relationships and non-compete agreements, have an estimated useful life of 3 years
each and as such will be amortized monthly over those periods. Goodwill of $282,533 represented the excess of the purchase price
over the fair value of the net tangible and intangible assets acquired.
NOTE
15 - SEGMENT INFORMATION
Due
to the nature of our businesses, we are operating in two reportable segments, which are managed separately based upon fundamental
differences in their operations. Martech, Dragon, Colmek, Tactical and Innalogic operate as contractors, and the balance of our
operations is comprised of product sales.
Segment
operating income is total segment revenue reduced by operating expenses identifiable with the business segment. Corporate 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 between our engineering contracting businesses and our products businesses, which have been removed from
the information shown below.
The
following table summarizes asset and operating balances by reportable segment.
|
|
October
31, 2010
|
|
|
October
31, 2009
|
|
|
|
Contracting
|
|
|
Products
|
|
|
Corporate
|
|
|
Contracting
|
|
|
Products
|
|
|
Corporate
|
|
Current assets, excl. interco.
|
|
$
|
2,365,546
|
|
|
$
|
1,996,444
|
|
|
$
|
1,324,982
|
|
|
$
|
3,033,658
|
|
|
$
|
2,706,461
|
|
|
$
|
1,636,319
|
|
Property and equipment, net
|
|
|
18,131
|
|
|
|
62,221
|
|
|
|
34,117
|
|
|
|
98,277
|
|
|
|
99,131
|
|
|
|
70,556
|
|
Deferred financing costs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,271,170
|
|
Goodwill
|
|
|
3,037,260
|
|
|
|
369,945
|
|
|
|
-
|
|
|
|
3,462,224
|
|
|
|
62,315
|
|
|
|
-
|
|
Other intangible
assets
|
|
|
445,644
|
|
|
|
-
|
|
|
|
68,998
|
|
|
|
640,928
|
|
|
|
-
|
|
|
|
56,341
|
|
Total assets
|
|
|
5,866,581
|
|
|
|
2,428,610
|
|
|
|
1,428,097
|
|
|
|
7,235,301
|
|
|
|
2,867,907
|
|
|
|
3,034,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities, excl. interco.
|
|
|
2,791,350
|
|
|
|
2,953,940
|
|
|
|
16,854,297
|
|
|
|
3,062,818
|
|
|
|
1,253,173
|
|
|
|
3,502,967
|
|
Long term liabilities
|
|
|
-
|
|
|
|
160,350
|
|
|
|
-
|
|
|
|
-
|
|
|
|
165,594
|
|
|
|
13,067,929
|
|
Total liabilities
|
|
|
2,791,350
|
|
|
|
3,114,290
|
|
|
|
16,854,297
|
|
|
|
3,062,818
|
|
|
|
1,418,767
|
|
|
|
16,570,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditure
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,825
|
|
|
|
32,747
|
|
|
|
7,186
|
|
|
|
Year
ended October 31, 2010
|
|
|
Year
ended October 31, 2009
|
|
Revenues
|
|
$
|
7,152,989
|
|
|
$
|
4,352,223
|
|
|
$
|
4,721
|
|
|
$
|
8,355,041
|
|
|
$
|
4,869,393
|
|
|
$
|
-
|
|
Gross profit (loss)
|
|
|
2,859,903
|
|
|
|
2,469,676
|
|
|
|
4,721
|
|
|
|
3,033,337
|
|
|
|
3,875,137
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
-
|
|
|
|
1,762,035
|
|
|
|
-
|
|
|
|
2,240,189
|
|
|
|
412,524
|
|
|
|
-
|
|
Selling, general & administrative
|
|
|
2,918,173
|
|
|
|
2,931,157
|
|
|
|
533,268
|
|
|
|
2,493,261
|
|
|
|
1,679,450
|
|
|
|
6,824,122
|
|
Stock based compensation
|
|
|
-
|
|
|
|
*51,771
|
|
|
|
-
|
|
|
|
73,305
|
|
|
|
-
|
|
|
|
217,417
|
|
Depreciation & amortization
|
|
|
*316,472
|
|
|
|
*66,795
|
|
|
|
*33,182
|
|
|
|
311,246
|
|
|
|
98,677
|
|
|
|
279,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses
|
|
|
2,918,173
|
|
|
|
4,693,192
|
|
|
|
533,268
|
|
|
|
4,733,450
|
|
|
|
2,091,974
|
|
|
|
6,824,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(58,270
|
)
|
|
|
(2,223,516
|
)
|
|
|
(528,547
|
)
|
|
|
(1,700,113
|
)
|
|
|
1,783,163
|
|
|
|
(6,824,122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
1,636
|
|
|
|
916,363
|
|
|
|
833,478
|
|
|
|
343,834
|
|
|
|
(153,494
|
)
|
|
|
11,408
|
|
Interest expense
|
|
|
(130,307
|
)
|
|
|
(91,562
|
)
|
|
|
(1,783,967
|
)
|
|
|
(184,396
|
)
|
|
|
(27,722
|
)
|
|
|
(1,634,765
|
)
|
Amortization of deferred financing costs
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,271,170
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(242,128
|
)
|
Impairment of investment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(782,595
|
)
|
Gain on change in fair value of derivative
liability
|
|
|
-
|
|
|
|
-
|
|
|
|
2,557,546
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income (loss)
before income taxes
|
|
$
|
(186,941
|
)
|
|
$
|
(1,398,715
|
)
|
|
$
|
(192,660
|
)
|
|
$
|
(1,540,675
|
)
|
|
$
|
1,601,947
|
|
|
$
|
(9,472,202
|
)
|
*
)
These amounts are included in the amounts stated for Selling, general and administrative
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER
31, 2009 AND 2008
The
Company’s reportable business segments operate in two geographic locations. Those geographic locations are:
*
United States
*
Europe
The
Company evaluates performance and allocates resources based upon operating income. The accounting policies of the reportable segments
are the same as those described in the summary of accounting policies. There are inter-segment sales which have been removed upon
consolidation and for the purposes of the information shown below.
Information
concerning principal geographic areas is presented below according to the area where the activity is taking place for the years
ended October 31, 2010 and 2009 respectively:
|
|
2010
|
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
5,791,411
|
|
|
$
|
5,939,535
|
|
Europe
|
|
|
5,718,522
|
|
|
|
7,284,899
|
|
Corporate and
other
|
|
|
-
|
|
|
|
-
|
|
Total Revenues
|
|
$
|
11,509,933
|
|
|
$
|
13,224,435
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
4,029,742
|
|
|
$
|
5,882,644
|
|
Europe
|
|
|
5,006,304
|
|
|
|
4,220,350
|
|
Corporate and
other
|
|
|
687,242
|
|
|
|
3,034,386
|
|
Total Assets
|
|
$
|
9,723,288
|
|
|
$
|
13,137,380
|
|
NOTE
16 - SUBSEQUENT EVENTS
The
significant events that have occurred from November 1, 2010 through to and including the date of this report are set out below:
The
Cash Control Framework Agreement referred to in Note 2, 12 and 13 of the Consolidated Financial Statement and elsewhere in this
annual report was terminated on or around March 2011. As a consequence we no longer hold any Restricted cash and to this extent
Note 4 is nil as of the date of this report for Restricted Cash.
Short
Term Investment referred to in Note 4 of the Consolidated Financial Statement was written down to nil in fiscal year 2014.
The
business operations of Dragon Design Limited referred to in Note 7 and 14 of the Consolidated Financial Statement and elsewhere
in the annual report were transferred to Coda Octopus Martech Limited in the fiscal year 2011 and this trading entity was dissolved
in the said fiscal year.
The
business operations of Tactical Intelligence LLC referred to in Note 7 and 14 of the Consolidated Financial Statement and elsewhere
in the annual report ceased in the fiscal year 2011 and the trading name Tactical Intelligence LLC was transferred to the original
seller on or around the said fiscal year.
The
business operations of Innalogic referred to in Note 14 of the Consolidated Financial Statement and elsewhere in this annual report
ceased operations in the fiscal year of 2011.
The
Series A Preferred Stock referred to in Note 8 of the Consolidated Financial Statement and elsewhere in the annual report were,
on exchanged for Series C pursuant to the terms of an Exchange Agreement entered into between the Company and the Holder of the
Series A on or around June 30, 2015. Under the terms of the Exchange Agreement it was agreed to exchange 6,087 units of Series
A Preferred Stock issued and outstanding (and which under the Certificate of Designation provided for dividends and voting rights)
for 1,100 units of Series C Preferred Stock, a newly created class of Series C. These shares of Series C Preferred Stock each
have a nominal value of $0.001 and a stated value of $1,000. The Certificate of Designation for the Series C Preferred Stock does
not provide for dividends or voting rights. The 6,087 units of Series A Preferred Stock were surrendered and cancelled by the
Company. The Series A Preferred Stock was eliminated as a class on or around January 5, 2016.
On
December 15, 2015 the Company repurchased the remaining issued and outstanding 200 shares of Series A Preferred Stock and these
have been surrendered and retired. The Series A Preferred Stock was subsequently eliminated.
Series
B Preferred Stock referred to in Note 8 of the Consolidated Financial Statement and elsewhere in the annual report was also eliminated
as a class in August 2016.
All
Warrants and Stock Options referred to in Note 9 of the Consolidated Financial Statement or elsewhere in this annual report have
either been exchanged for Common Stock or expired by their terms. At the date hereof the Company has no warrants or options outstanding
as a consequence for Warrant Liability in Note 4 of Consolidated Financial Statement and elsewhere in the annual report this should
be read as nil at the date of this report. .
All
litigation referred to in Note 12 of the Consolidated Financial Statement or elsewhere in the annual report has been settled in
full and all court actions dismissed by consent.
The
CVA mentioned in Note 12 of the Consolidated Financial Statement and elsewhere in this annual report was discharged in full on
March 26, 2014
With
the exception of the amounts due in respect of the senior convertible debentures referred to in Note 13 of the Consolidated Financial
Statement and elsewhere in this annual report, the amounts referred to in Note 13 under Loans Payable ($451,302 and $160,350)
have been repaid in full.
The
secured convertible debentures referred to in Note 13 (Notes and Loans Payable) and elsewhere in this annual report (are freely
transferrable by their terms) are currently held by CCM Holdings, LLC, a company organized under the laws of New Jersey. CCM Holdings
is the registered holder of 22.5% of the Company’s issued and outstanding shares of common stock.
Pursuant
to an agreement between the Company and debenture holder, the debentures were restructured as follows:
|
●
|
The maturity date
of the Notes was extended to November 1, 2017;
|
|
|
|
|
●
|
The Company has
agreed to reduce the principal amount outstanding under the Notes by $2,000,000 payable in 10 equal monthly payments commencing
March 31, 2016. The Company is current in this obligation.
|
|
|
|
|
●
|
On March 1, 2016,
the Company issued 32,346,682 shares of its common stock in extinguishment of $3,558,136 (the redemption premium which
accrued under the said debentures) due under the Notes at an effective price per share of $0.11; and
|
|
|
|
|
●
|
The Company has
agreed to return to filing reports under the Securities Exchange Act of 1934 before March 1, 2017.
|
As
of October 31, 2015, the principal balance plus accrued interest and accrued conversion premium under the Notes was $14,940,258.
As
a result of the restructuring, as of April 30, 2016, the total balance outstanding under the Notes had been reduced to $11,180,706.
This amount includes both principal and interest.
As
of the date of this annual report the Company is current with its obligations under the senior convertible debentures and no event
of default exists.
Share
Issuances
During
the period ending January 31, 2011, we issued 16,826,715 shares of common stock valued at $279,963 (“Issuance”). Of
this issuance, 750,000 shares of common stock were issued to a consultant for services rendered and the remainder was issued to
a number of investors who had purchased certain securities pursuant to the terms of a series of Securities Purchase Agreement
entered into between April and May 2007 in exchange for (i) surrender of their existing warrants and (ii) termination of the rights
and obligations under the Securities Purchase Agreement.
On
or around November 2010, we cancelled 3,428,571 shares of the Company’s common stock which were issued erroneously in the
period ending October 31, 2010.
In
the fiscal year 2011 we retired 207 shares of common stock. These were repurchased by the Company.
On
January 25, 2011, the Company issued a total of 26,765 shares of common stock to three members of staff.
On
May 4, 2011, the Company issued 300,000 shares of common stock to an advisor for services rendered.
On
February 21, 2012, the Company issued 100,000 shares of common stock to one of its directors as compensation for director services
performed.
On
July 26, 2012, the Company issued 15,315,316 shares of common stock to Solidor Investments Limited (the, then debenture holder
(now transferred to CCM Holdings LLC) in consideration for the restructuring of the obligations under the Senior Debentures (postponing
coupon and forgiving default interest obligations) and in exchange for the settlement of outstanding interest on the Debentures
of $1,020,000.
On
March 5, 2013, the Company issued 4,021,380 shares of common stock to CCM LLC in full and final satisfaction of an amount of $571,036
(which formed part of a series of small loans which CCM had made available as working capital to the business in March 2011) and
in consideration for postponing a portion of the interest payments due.
On
July 24, 2014 the Company issued 142,857 shares of common stock to Core Fund LLP in return for the surrender of warrants to purchase
shares of common stock of the Company. These warrants were issued to Core Fund in a financing transaction completed in May 2007.
The warrants should have been exchanged for shares in October 2010 as part of the Company’s restructuring efforts. As a
result of administrative oversight, these shares were not issued until July 2014.
On
October 26, 2015 the Company issued 100,000 shares of common stock to one of its directors, Robert Ethrington, in accordance with
the terms of his election which provided for these shares of common stock to be issued subject to serving at least one year on
the Company’s board.
On
March 1, 2016, the Company issued 32,346,682 shares of its common stock to CCM Holdings, LLC in extinguishment of $3,558,136 (the
redemption premium which accrued under the senior secured debentures).
During
May through to August 2016, the Company issued 100,000 to each of six members of the Board of Directors for their services performed
as directors.
In
June 2016, the Company issued an aggregate of 112,500 shares valued at $0.093 per share to two individuals for services rendered.
As
of the date of this annual report, the Company has 127,078,395 shares of common stock issued and outstanding.