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ACQUISITION OF PRECISION ACOUSTICS LIMITED | 12 Months Ended
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Oct. 31, 2024
Business Combination, Asset Acquisition, and Joint Venture Formation [Abstract] |
ACQUISITION OF PRECISION ACOUSTICS LIMITED | NOTE 7 – ACQUISITION OF PRECISION ACOUSTICS LIMITED On October 29, 2024, the Company acquired all the issued and outstanding shares of PAL for $6,538,569 in cash. At the acquisition date, the Company had immediate access to PAL’s cash balance of $1,933,284, which resulted in a net cash outlay at the acquisition date of $4,605,285. The Company agreed to pay the sellers for all cash in PAL’s bank account on the date of its acquisition, which was in excess of the agreed working capital amount of $595,869 and, as part of the transaction, the Company paid the sellers $1,337,415 for the excess cash balance. The Company acquired PAL to gain access to its expertise in acoustic and medical imaging technologies which we believe can be leveraged through development for use in the subsea market, the primary sector for the Marine Technology Business and more broadly to expand the Group’s collective capabilities in order to qualify to compete for larger Defense-related contracts. Prior to the acquisition, PAL was a non-key supplier to our Marine Technology Business, which purchased on average approximately $80,000 of acoustic materials from PAL. It expects to continue to purchase these materials, at a similar dollar level, from PAL in the future. In addition to the cash paid at closing, the share purchase agreement provides for certain earn-out payments over a three-year period and which are conditional upon PAL meeting the defined targets (revenue and pre-tax) in each of the earn-out year. The potential earnout provision amounts are shown in the table below applying an exchange rate (from British Pound to USD) of $1.278973: SCHEDULE OF POTENTIAL EARNOUT PROVISION AMOUNTS
Earn Out |  | 2025 FY |  | 2026 FY |  | 2027 FY
Revenue Target |  | $ | 5,334,584 |  |  | $ | 5,867,914 |  |  | $ | 6,454,962 |
Pre-Tax Profit Target |  | $ | 1,046,476 |  |  | $ | 1,295,597 |  |  | $ | 1,573,133 |
Earn Out Amount Payable based on Targets |  | $ | 208,472 |  |  | $ | 418,223 |  |  | $ | 652,275 |
Based on the projections the Company used, there would be no earnouts payable and, subsequently, no contingent liability for earnout payments has been recorded in the Company’s accounts. To the extent that the Company does not record a contingent liability for these payments, any amount actually earned under the earn out provisions would be expensed in the year the qualifying condition is met. PAL had no material Income Statement activity in the two days from the acquisition to the Company’s fiscal year end. Therefore, the Company’s Income Statement in this Form 10-K for the year ended October 31, 2024, does not include any revenue or expenses relating to PAL. In the event that the business combination between the Company and PAL had occurred at the beginning of the Company’s comparable annual reporting period, the unaudited supplemental pro-forma information concerning revenue and expenses for PAL (which have been translated from British Pound to USD using the exchange rate used by the Company for those reporting periods) is shown below: SCHEDULE OF PROFORMA INFORMATION
|  | October 31, |  |  | October 31, |
|  | 2024 |  |  | 2023 |
Net Revenue |  |  |  |  |  |
Coda Octopus Group |  | $ | 20,316,161 |  |  | $ | 19,352,088 |
Precision Acoustics |  |  | 4,942,389 |  |  |  | 3,777,057 |
Combined Net Revenue |  |  | 25,258,550 |  |  |  | 23,129,145 |
Net Revenue |  |  | 25,258,550 |  |  |  | 23,129,145 |
Net Income |  |  |  |  |  |  |  |
Amortization of acquired intangible assets, pro forma |  | $ | (477,181) |  |  | $ | (477,181)
Coda Octopus Group |  |  | 3,645,996 |  |  |  | 3,124,149
Precision Acoustics |  |  | 483,776 |  |  |  | 113,793
Combined Net Income |  | $ | 3,652,591 |  |  | $ | 2,760,761
Net Income |  | $ | 3,652,591 |  |  | $ | 2,760,761
Purchase Price Allocation In accordance with the requirements of FASB ASU 805, Business Combinations, the acquisition of PAL was accounted for using the acquisition method of accounting. The Company determined the fair value of the PAL balance sheet as of October 29, 2024, the date of acquisition. The Company has up to one-year from October 29, 2024, to make any measurement period adjustments to the fair value of the opening balance sheet. The table below shows the fair value of the assets acquired and liabilities assumed in connection with the PAL acquisition. SCHEDULE OF ASSETS ACQUIRED AND LIABILITIES ASSUMED IN ACQUISITION
Description |  | Amount |
Tangible assets and liabilities acquired |  |  |  |
Cash (including excess cash amount purchased of $1,337,415) |  | $ | 1,933,284 |
Accounts receivable |  |  | 698,595 |
Inventory |  |  | 980,594 |
Property, plant and equipment |  |  | 509,337 |
Right of Use Asset (Lease) |  |  | 417,881 |
Accounts payable |  |  | (362,305 | )
Lease liability |  |  | (417,881 | )
Deferred revenues |  |  | (498,422 | )
Accruals and other liabilities |  |  | (151,532 | )
Intangible assets and liabilities at fair value |  |  |  |
Fair value of noncompete agreement |  |  | 224,637 |
Value of technology |  |  | 2,947,155 |
Expected value of earn out provision |  |  | - |
Goodwill |  |  | 257,226 |
Total purchase price |  | $ | 6,538,569 |
Acquisition, net of acquired cash |  | $ | 4,605,285 |
PAL’s technology was valued using the multi-period excess earnings method related to the income approach since this is the main identifiable intangible asset. Significant inputs used to measure the fair value included estimates of projected revenue and costs associated with generating those revenues and a discount rate of 12.36%. The discount rate is a level 2 fair value measurement, and the other assumptions used in the determination of the opening value of the PAL balance sheet at fair value are level 3 inputs. The fair value of the non-compete agreement was developed using the with and without income approach method. Estimates of the potential loss of business resulting from certain employees leaving the business were made and compared to the value of the business assuming the employee did not leave during the four-year non-compete period. Revenue projections and related projected costs of revenue were made and discounted at a 12.36% discount rate. The discount rate is a level 2 fair value measurement, and the other assumptions used in the determination of the opening value of the PAL balance sheet at fair value are level 3 inputs. CODA OCTOPUS GROUP, INC. Notes to the Consolidated Financial Statements October 31, 2024 and 2023 The Company did not record a liability related to the earn-out liability provision contained in the share purchase agreement because the forecast that the Company developed and used to determine the fair value of the intangible assets related to this acquisition indicated that no earn-out would be paid. In addition, historical PAL financial information indicated that PAL has never produced historical financial results that would lead the Company to believe that an earn-out payment would occur. Goodwill represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including an experienced workforce that will help accelerate product development and our go to market strategy, as well as expected future synergies generated by integrating PAL’s products with those in our existing platform. None of the goodwill is expected to be deductible for tax purposes. We recorded as part of our SG&A expenses transaction related costs of $41,531, in the twelve-months ended October 31, 2024.

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