Connor Haley connorhaley@gmail.com Thevariantview.com Coda Octopus Group, Inc.

(CDOC)
Introduction How would you like to buy a technology company that has strong double digit revenue growth, 25%+ EBITDA margins, market-leading technology, and is virtually undiscovered with no professional analysts covering it or write-ups on VIC, SZ, or MCC? Interested? What if I told you that this company was trading for less than 4X earnings and has minimal reinvestment requirements? Let me introduce you to Coda Octopus Group. Coda Octopus Group (CDOC) is a microcap, sub-sea marine technology/engineering company that has developed a highly-advanced product, the Echoscope. For most of its history, it spent excessive amounts of money on R&D and SG&A in order to develop their market-leading technology, but this led to a history of losses and equity dilution. However, over the past few years, the company has changed management teams, had a successful restructuring, moved their headquarters from NY to Florida, and cut SG&A by over 60% while growing revenue and margins. This turnaround is so far undiscovered by the market allowing microcap investors an excellent opportunity to buy into this growth story at 4X EBITDA- Capex (with no current taxes due to NOLs). At 7.5X 2015E EBITDA -Capex, I value shares in my base case at $0.97, over 400% higher than the current $0.17 stock price. Put another way, to believe that CDOC is worth the current stock price, one has to believe the companys revenue growth will immediately stall and be 0% for the next two years, the company will continue to receive a 4X EBITDA multiple (50% below most recent transaction comp), and that there will be 50% equity dilution due to the upcoming debt restructuring and pending lawsuit. I believe all of these assumptions are extremely pessimistic and that shares are an incredible bargain at the current price. Why the Opportunity Exists 1. Microcap: CDOC is virtually unheard of with little to no research resulting in an under -theradar company with large potential upside. 2. History of Losses: Coda underwent a restructuring in 2009 and reduced its SG&A expenses by 60.7% from 2008 to 2013 by moving headquarters and replacing senior-management positions. This has resulted in a dramatically more profitable company under new management, but this has yet to be discovered. 3. Growing End Markets: CDOCs products are essentially applicable to any situation in which one needs to see a very clear image underwater under real-time. The demand has increased in recent years due to both energy companies increasing underwater drilling and exploration and also for anti-terrorism reasons.

4. Exceptional Product: Coda offers the most advanced product in its field with the Echoscope. Codas competitors offer either 2D sonar in real-time or 3D sonar that requires the user to upload the data to a computer before viewing, while the Echoscope allows users to view a 3D image in real time of the desired underwater surface. This expertise has allowed this small company to have big customers, such as Lockheed Martin. Business Overview Coda Octopus Group, Inc. has two branches of its company, the Marine Technology Business and the Marine Engineering Business, each consisting of a UK and US subsidiary. CDOC holds the patent for real time subsea 3D technology otherwise known as the Echoscope, an advanced technology that is considered the future of the industry. This technology side of the business has been driving growth over the past two years. The engineering business is more stable revenue, but is not a growth segment. Marine Technology Overview There are many reasons for people to want to image an underwater area from terrain exploration and mapping to various constructions tasks to harbor and ship maintenance. Currently the industry standard for these types of jobs is the multi-beam sonar. This device transmits a broad fan-shaped pulse comprised of many acoustic beams which will rebound off of the ocean floor or other desired surface. The receiver can then take this data and produce an image (with an accuracy of up to 1 inch for BlueView Technologies) of the surface by applying the various properties of the water and ships movement. This complex process can be thought of like a bat using echolocation, however due to the potentially large area and detailed math, this imaging can take some time for the sonar to produce.

Example of a multi-beam sonar in use Coda has developed a more advanced form of sub-sea visualization with the Echoscope. The Echoscope performs the same function as the multi-beam sonar with up to 12 updates per second and higher beam density, allowing the user to view the high resolution imaging in real time video streaming with an accuracy of up to 2 cm (0.787 inches, 21.3% more accurate than BlueView s product). Because of the

frequency at which the Echoscope collects images users are able to more quickly and effectively observe the site in question by seeing it from all angles in real time.

Image produced from an Echoscope Also the Echoscope is able to not only identify, but discard noise or random short term objects that are not what the viewer is looking for such as fish swimming by the site. Pictured above is a snapshot of the Echoscope surveying an underwater pipe and pillar. According to Codas 2013 Annual Report, many users in complex situat ions such as underwater construction are reporting significant time savings, and health and safety benefits, which allow them to out-perform their competitors. For example, a company does not need to pay divers to swim down to inspect a ships hull after a storm, but instead can use an integrated Echoscope system to safely and more cheaply identify any potential damages. Codas Marine Technology business also produces an Underwater Inspection System (UIS) containing the Echoscope and a positioning device (Octopus F180) which combined with other components create a complete integrated system for the consumers use. This device is mainly aimed at the port security market (the defense and counterterrorism activities of a nations harbors and ports). According to their 2012 Annual Report, CDOC is reportedly seeing repeat customers for their product causing them to believe that their product is getting more market acceptance and penetration and that these customers are getting significant returns on investments in deploying this device leading to their repeat orders. It is very easy to see how this number of repeat customers and level of customer satisfaction would continue to grow in the coming years as their initial investment in a Coda product continues to result in increased profits for the consumer.

Similarly, Coda has introduced their Technology Access Program (TAP) with a global equipment rental company serving the oil and gas and other markets allowing potential customers to hire out their product for a period of time without having the financial commitment of fully purchasing the system. This makes future potential growth even more promising with renters becoming customers as they begin to appreciate the long-term financial efficiency of the product. With a technologically advanced product such as the Echoscope it is easy to see how potential customers might be turned away by the initial price, however by allowing companies to rent their product allows them to better market their product for initially hesitant customers. Coda has multiple patents securing their intellectual property and preventing other companies from capitalizing on their many years of research. These include their Method for Producing a 3 -D image, Subsea Positioning System and Apparatus, Method of constructing mathematical representations of objects from reflected sonar signals, their method of patching together the various images, method of representation of sonar images (allowing 3-D data to be presented by a 2-D image), and a method of rendering volume representation of sonar images. Management has indicated that it would take many tens of millions to recreate the Echoscope and that many competitors have tried and failed. Marine Engineering Overview CDOCs marine engineering subsidiaries provide engineering services to mostly prime and second level defense contractors as well as selling to other smaller subsea markets. This branch of the company is much more stable than the Technologies branch as the prototype production for defense contractors leads to long term manufacturing contracts for Coda. This provides an excellent source of financial stability for the company as customers often give CDOC preferred supplier status for long term manufacturing and after-service care. This allows us to focus our attention on the Technologies branch as we search for reasons for the companys changing financials. Corporate History 1994: Coda Technologies Limited began as a start-up United Kingdom corporation June 2002: Coda Technologies Limited became Coda Octopus Limited when it merged with Octopus Marine Systems Limited (UK). December 2002: Omnitech AS (Norway) became Coda Octopus R&D AS upon being acquired by Coda. Omnitech AS had been developing revolutionary sonar imaging technology to produce 3D, real-time images for the undersea construction industry for over 10 years prior to the acquisition. July 2004: Coda underwent a reverse merger with The Panda Project Inc. (a shell company) to become publically traded. Coda then established its headquarters in New York. June 2006: Coda acquired Martech Systems (Weymouth) Limited (UK) which became Coda Octopus Martech Limited. Martech provides high quality custom engineering solutions in the fields of data acquisition, transmission and recording, instrumentation and special test equipment. Martech now manufactures and supports some of Codas marine products.

April 2007: Aquired Colmek Systems Engineering, now Coda Octopus Colmek, Inc., a custom engineering service provider with links to the US defense industry. April - May 2007*: Coda entered into a series of securities purchase agreements with a group of accredited individuals and institutional investors. (See Risks) February 2008: Borrowed $12 million under convertible secured promissory note with interest of 8.5% annually. This is set to mature in February 2015. March 2009: Cash Control Framework Agreement for $2.15m for Coda to finance ongoing operations in the ordinary course of business. September 2009: Coda underwent a large scale restructuring in which it replaced senior management and board including the CEO, CFO, and Chairman. Goeff Turner was appointed as interim CEO. December 2009: A number of senior VPs were replaced. March 2010: Michael Hamilton was appointed Chairman of the Board of Directors. September 2011: Annmarie Gayle is appointed CEO and Turner steps down to serve as an executive Director. Following this large scale restructuring Coda closed its offices in New York and moved administration to its subsidiaries in Florida and Salt Lake City, Utah. The Big Picture CDOC was initially a small research company with a good idea and it expanded through various acquisitions to kindle their idea into something more complete that had very high potential market value. Coda then had to borrow a lot of money to stay afloat while they continued to polish their research and products. They were consistently losing money and the company decided it was time for a major overhaul so it replaced its execs and cut the fat off of their SG&A costs resulting in large scale earnings growth due to a rise in revenue upon the completion of the restructuring.

Effects of Restructuring
30

Completion of Restructuring
25 20

USD in Millions ($)

15

SG&A Revenue EBITDA

10 5
0 2007 -5 -10

2008

2009

2010

2011

2012

2013

2014

Valuation No matter what metric you use, CDOC is extremely cheap. Best Comp: Teledyne recently acquired BlueView, an underwater mapping technology company with many similar end markets (but a lower-priced, less differentiated product) for $17 mm based on $7 mm in ttm sales. If we assume BlueView had CDOC-like EBITDA margins of ~30%, the transaction was for approximately 7.5X EBITDA, a large premium to CDOCs current 4X multiple. Since the restructuring Coda has grown significantly and are coming off their strongest year to date (FY2012) with a y/y growth rate of 34.4% and an EBIT margin of 26.3%. Using 9 month growth rate from 2012 and Q1-Q3 of 2013 we are able to predict a mid-teen growth rate (14.8%) for 2013. Using this data and Bear, Base, Bull, assumptions of 0%, 10%, and 20% we can project the companys financials through 2015 and compare these IV/share to current share price.

Earnings Projections
40

35 30
25

USD in Millions ($)

Revenue 20 15 10 EBITDA Bull Case Base Case Bear Case

5 0 2007 -5
-10

2008

2009

2010

2011

2012

2013

2014

2015

2016

Bear 2014-15 rev growth 2015 EBITDA Multiple EV Debt 2015 Cash Equity Value Shares Oustanding IV/Share Premium 2-year IRR 0% 7.81 4 31.2 15.86 23.09 38.46 93.78 0.41 117.0% 50.9%

Base 10% 10.81 7.5 81.1 15.86 25.86 91.09 93.78 0.97 413.9% 132.3%

Bull 20% 14.10 10 141.0 15.86 28.78 153.94 93.78 1.64 768.5% 202.0%

Using the data from above, in the just the Base case, I project the value of the stock to have a 413.9% upside. Even if one assumes maximum dilution of shares (+97,618,439 *see below), shares outstanding would increase to 191.38 million, which in the base case would result in a value of $0.48 for IV/Share which is still ~2.5x what it is today (See Below).
Shares Outstanding IV/Share Premium 2-year IRR 191.38 0.20 6.3% 5.7% 191.38 0.48 151.8% 62.6% 191.38 0.80 325.6% 111.4%

Risks: 1. (* from Corporate History) Perhaps the most relevant risk involved with CDOC is the recently filed (1/7/14) lawsuit involving investors who believe their anti-dilution provisions in a private placement were violated. The lawsuit states that Coda did not follow the rules of the contract when issuing shares between October and December 2010 which could result in a dilution of equity by issuing up to an additional 97,618,439 shares. There are several reasons to believe this lawsuit will not result in material dilution, such as the investors filing it several years after the alleged wrongdoing and the investors only knowing about it because of a former insider (probably fired) tipping them off. However, dilution is a possibility and it should be accounted for in the bear case.

2. Coda must pay the redemption of their convertible debt in February 2015. The company has only ~$7 mm in net debt and produced almost $6 mm in FCF last year. They should be able to easily refinance this debt. 3. Due to the high-value-low-quantity nature of their product, a small quantity loss in sales would result in large losses in earnings. This is an inherent risk with any expensive technology product, however it is very unlikely that a consumer who bought the product would downgrade to a less advanced version of a similar product. Also a sonar system is not something that one would need to frequently replace. 4. Another inherent risk of a technology company is that someone could invent something better in the same field. This would be very difficult in the case of Coda because they have a super-high resolution, real-time, 3D, underwater sonar is at the top of its class and Coda has multiple patents protecting this technology. Furthermore, the fact that large and sophisticated companies such as Lockheed Martin are customers of CDOC is yet another sign that this technology is not easily replicable. Conclusion CDOCs turnaround is well under way. SG&A has been slashed by over 60%, the company now has 25%+ EBITDA margins, and revenue is growing at a very healthy rate. One has to assume extremely draconian assumptions to justify the current stock price. I believe that as the company continues to deliver strong growth and restructures their debt, the equity value will be more apparent to investors and the company will receive a more reasonable multiple. I believe that shares could reach $0.97 by 2015, a 4bagger from the current price.