SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended April 30, 2010
 
OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934
 
For the transition period from ______________ to ______________
 
Commission File Number 000-52815

CODA OCTOPUS GROUP, INC.
(Exact name of registrant as specified in its charter)

Delaware
  
34-200-8348
(State or other jurisdiction of Incorporation or organization)
  
(I.R.S. Employer Identification Number)
     
Newport Office Center 1, 111 Town Square Place, Jersey City,
Suite 1201, New Jersey 07301
  
07301
(Address of principal executive offices)
  
(Zip Code)
     
Registrant's telephone number, including area code:
  
(201) 420 9100
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act (Check one):  ¨

Large accelerated filer  ¨
Accelerated filer  ¨ Non-accelerated filer ¨
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨ No x

The number of shares outstanding of issuer's common stock, $0.001 par value as of June 14, 2010 is 49,075,244.
 
 
 
 

INDEX

 
Page
PART I - Financial Information
1
   
Item 1: Financial Statements
1
   
Six Months Ended  April 30, 2010 and  2009
  
   
Condensed Consolidated Balance Sheet as of  April 30, 2010 (Unaudited) and October 31, 2009
1
   
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Six Months Ended April 30, 2010  and  2009 (Unaudited)
2
   
Condensed Consolidated Statement of  Stockholders’ Deficiency for the   Six Months Ended  April 30, 2010 (Unaudited)
3
   
Condensed Consolidated Statements of Cash Flows for the Six months ended April 30, 2010 and 2009 (Unaudited)
4
   
Notes to Condensed Consolidated Financial Statements (Unaudited)
5
   
Item 2: Management's Discussion and Analysis or Plan of Operation
18
   
Item 4T:   Controls and Procedures
29
   
PART II - Other Information
30
   
Item 1: Legal Proceedings
30
   
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
30
   
Item 3: Defaults Upon Senior Securities
30
   
Item 4: Submission of Matters to a Vote of Security Holders
30
   
Item 5: Other Information
30
   
Item 6: Exhibits
30
   
Signatures
31
 
 
i
 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CODA OCTOPUS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
April 30, 2010 (UNAUDITED) and OCTOBER 31, 2009

     
April 30,
    
October 31,
  
 
 
2010
    
2009
  
ASSETS 
           
             
Current assets:
            
Cash and cash equivalents
   $ 84,322     $ 275,885  
Restricted cash, Note 2
     551,480       994,081  
Short-Term Investments, Note 4
     38,250       51,000  
Accounts receivable, net of allowance for doubtful accounts
     1,715,829       2,033,879  
Inventory
     1,824,788       2,798,425  
Unbilled receivables, Note 3
     2,465,067       690,344  
Other current assets, Note 5
     202,240       285,691  
Prepaid expenses
     260,626       247,134  
                 
Total current assets
     7,142,602       7,376,439  
                 
Property and equipment, net, Note 6
     161,166       267,964  
Deferred financing costs, net of accumulated amortization of $544,787 in 2010 and $423,723 in 2009, Note 13
     1,150,106       1,271,170  
Goodwill and other intangible assets, net, Note 7
     4,150,359       4,221,807  
                 
Total assets
   $ 12,604,233     $ 13,137,380  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
                 
Current liabilities:
                
Accounts payable, trade
   $ 2,081,759     $ 2,390,039  
Accrued expenses and other current liabilities
     4,543,225       4,626,164  
Warrant liability, Note 10
     5,987,321       -  
Deferred revenues, Note 3
     1,168,419       398,482  
Deferred payment related to acquisitions
     383,022       404,274  
                 
Total current liabilities
     14,163,746       7,818,959  
                 
Loans and notes payable, long term, Note 13
     13,733,065       13,233,523  
                 
Total liabilities
     27,896,811       21,052,482  
                 
Contingencies and Commitments, Note 12
                
                 
Stockholders' deficiency:
                
Preferred stock, $.001 par value; 5,000,000 shares authorized, 6,287 Series A issued and outstanding, as of April 30, 2010 and October 31, 2009, respectively
     6       6  
Nil shares Series B issued and outstanding as of April 30, 2010 and October 31, 2009, respectively
     -       -  
Common stock, $.001 par value; 150,000,000 shares authorized, 49,075,244 and 49,000,244 shares issued and outstanding as of April 30, 2010 and October 31, 2009, respectively
     49,075       49,000  
Common Stock subscribed
     96,350       96,350  
Additional paid-in capital
     46,860,154       51,766,495  
Accumulated other comprehensive loss
     (903,823 )     (696,617 )
Accumulated deficit
     (61,394,340 )     (59,130,336 )
                 
Total stockholders' deficiency
     (15,292,578 )     (7,915,102 )
                 
Total liabilities and stockholders' deficit
   $ 12,604,233     $ 13,137,380  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
1
 

CODA OCTOPUS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED April 30, 2010 and 2009
(UNAUDITED)

   
For the three months
    
For the three months
    
For the six months
    
For the six months
  
   
ended April 30,
    
ended April 30,
    
ended April 30,
    
ended April 30,
  
   
2010
    
2009
    
2010
    
2009
  
                         
Net revenue
   $ 3,713,585     $ 4,307,447     $ 6,781,795     $ 7,506,553  
                                 
Cost of revenue
     1,422,884       1,575,788       2,728,863       3,017,935  
                                 
Gross profit
     2,290,701       2,731,659       4,052,932       4,488,618  
                                 
Research and development
     455,173       456,477       932,186       1,060,158  
Selling, general and administrative expenses
     1,848,938       2,386,460       3,484,364       5,289,179  
                                 
Operating income (loss)
     (13,410 )     (111,278 )     (363,618 )     (1,860,719 )
                                 
Other income (expense)
                                
                                 
Other income
     27,962       3,547       37,945       31,187  
Interest expense
     (454,802 )     (426,814 )     (896,384 )     (824,238 )
Loss on change in fair value of derivative liability
     (5,188,334 )             (3,633,426 )        
Gain on sale of investment in marketable securities
     15,750               15,750          
Impairment of investment in marketable securities
     -       (782,000 )     -       (782,000 )
                                 
Total other income (expense)
     (5,599,424 )     (1,205,267 )     (4,476,115 )     (1,575,051 )
                                 
Loss before income taxes
     (5,612,834 )     (1,316,545 )     (4,839,733 )     (3,435,770 )
                                 
Provision for income taxes
     -       -       -       -  
                                 
Net loss
     (5,612,834 )     (1,316,545 )     (4,839,733 )     (3,435,770 )
                                 
Preferred Stock Dividends:
                                
Series A
     -       (439 )     -       (31,588 )
                                 
Net Loss Applicable to Common Shares
   $ (5,612,834 )   $ (1,316,984 )   $ (4,839,733 )   $ (3,467,358 )
                                 
Loss per share, basic and diluted
     (0.11 )     (0.03 )     (0.10 )     (0.07 )
                                 
Weighted average shares outstanding
     49,050,244       49,000,244       49,029,133       48,950,494  
                                 
Comprehensive loss:
                                
                                 
Net loss
   $ (5,612,834 )   $ (1,316,545 )   $ (4,839,733 )   $ (3,435,770 )
                                 
Foreign currency translation adjustment
     (145,925 )     (18,531 )     (204,206 )     (408,131 )
Unrealized gain (loss) on investment
     38,250       -       12,750       -  
                                 
Comprehensive loss
   $ (5,720,509 )   $ (1,335,076 )   $ (5,031,189 )   $ (3,843,901 )

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
2
 

CODA OCTOPUS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE SIX MONTS ENDED APRIL 30, 2010
(UNAUDITED)

                           
Additional
    
Accumulated
              
   
Preferred Stock Series A
    
Preferred Stock Series B
    
Common Stock
    
Stock
    
Paid-in
    
Other
    
Accumulated
        
   
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Subscribed
    
Capital
    
Comprehensive loss
    
Deficit
    
Total
  
                                                                   
Balance, October 31, 2009
     6,287     $ 6       -     $ -       49,000,244     $ 49,000     $ 96,350     $ 51,766,495     $ (696,617 )   $ (59,130,336 )   $ (7,915,102 )
                                                                                         
Shares issued for compensation
                                     75,000       75       -       4,425                       4,500  
                                                                                         
Fair value of options issued as compensation
                                                             18,856                       18,856  
                                                                                         
Cumulative effect of warrant liability
                                                             (4,929,622 )             2,575,729       (2,353,893 )
                                                                                         
Foreign currency translation adjustment
                                                                     (204,206 )             (204,206 )
                                                                                         
Unrealized gain (loss) on marketable securities
                                                                     12,750               12,750  
                                                                                         
Realized gain reclassed on sale of marketable securities
                                                                     (15,750 )             (15,750 )
                                                                                         
Net loss
                                                                             (4,839,733 )     (4,839,733 )
                                                                                         
Balance, April 30, 2010
     6,287       6       -       -       49,075,244       49,075       96,350       46,860,154       (903,823 )     (61,394,340 )     (15,292,578 )

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
3
 

CODA OCTOPUS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2010 and 2009
(UNAUDITED)

   
April 30,
    
April 30,
  
   
2010
    
2009
  
             
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net loss
   $ (4,839,733 )   $ (3,435,770 )
Adjustments to reconcile net loss to net cash used in operating activities:
                
Depreciation and amortization
     275,988       291,953  
Stock based compensation
     23,356       298,726  
Change in fair value of warrant liability
     3,633,426       -  
Financing costs
     512,134       767,143  
Impairment of investment in marketable securities
     -       782,000  
Gain on sale of investment in marketable securities
     (15,750 )     -  
Changes in operating assets and liabilities:
                
(Increase) decrease in current assets:
                
Accounts receivable
     318,050       106,836  
Inventory
     973,637       (658,302 )
Prepaid expenses
     (13,492 )     37,880  
Unbilled receivables and other current assets
     (1,657,271 )     (197,986 )
Increase (decrease) in current liabilities:
                
Accounts payable and other current liabilities
     357,448       741,698  
Due to related parties
     -       (41,904 )
                 
Net cash used in operating activities
     (432,207 )     (1,307,726 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Sale (purchase) of property and equipment
     16,102       (52,814 )
Purchases of intangible assets
     (7,690 )     -  
Cash subject to restriction
     442,601       (488,830 )
Acquisitions
     -       (214,317 )
Cash acquired from acquisitions
     -       877  
                 
Net cash provided by (used in) investing activities
     451,013       (755,084 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Proceeds from/(repayment of) loans
     -       (1,019,124 )
Preferred stock dividend
     -       (47,354 )
                 
Net cash used in financing activities
     -       (1,066,478 )
                 
Effect of exchange rate changes on cash
     (210,369 )     (587,478 )
                 
Net decrease in cash
     (191,563 )     (3,716,766 )
                 
Cash and cash equivalents, beginning of period
     275,885       3,896,149  
                 
Cash and cash equivalents, end of period
   $ 84,322     $ 179,383  
                 
Cash paid for:
                
Interest
   $ 384,250     $ 1,077,095  
Income taxes
     -       -  
                 
Supplemental Disclosures:
                
                 
Acquisition of Dragon:
                
Current assets acquired
   $ -     $ 147,039  
Cash acquired
     -       877  
Equipment acquired
     -       51,336  
Goodwill and other intangible assets
     -       342,013  
Liabilities assumed
     -       (201,166 )
Deferred payments
     -       (250,782 )
                 
Cash Paid for Acquisition
     -       89,317  
                 
Net cash invested
     -       88,440  
                 
Acquisition of Tactical:
                
Current assets acquired
     -       -  
Cash acquired
     -       -  
Equipment acquired
     -       5,000  
Goodwill and other intangible assets
     -       245,000  
Liabilities assumed
     -       -  
Deferred note payable
     -       (125,000 )
                 
Cash Paid for Acquisition
   $ -     $ 125,000  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
4
 

CODA OCTOPUS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
 
A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows.
 
General

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with instructions to SEC form 10Q and Regulation S-X of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Accordingly, the results from operations for the six month period ended April 30, 2010, are not necessarily indicative of the results that may be expected for the year ended October 31, 2010. The unaudited condensed financial statements should be read in conjunction with the consolidated October 31, 2009 financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities Exchange Commission (SEC) on January 29, 2010.

Business and Basis of Presentation
 
Coda Octopus Group, Inc. ( ”we ”, “us”, “ our company ” or “Coda” ), a corporation formed under the laws of the State of Florida in 1992 (since re-domiciled to Delaware in 2004), is a developer of underwater technologies and equipment for imaging, mapping, defense and survey applications. We are based in New Jersey, with research and development, sales and manufacturing facilities located in the Utah, the United Kingdom and Norway.
 
The unaudited condensed 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 statements.
 
Accounts Receivable
 
We periodically review our trade receivables in determining our allowance for doubtful accounts. Allowance for doubtful accounts was $62,896 for the period ended April 30, 2010 and $255,789 for the year ended October 31, 2009.
 
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 April 30, 2010 and October 31, 2009:
 
   
2010
    
2009
  
Raw materials
  
$
714,949
    
$
1,384,043
  
Work in process
    
61,648
      
48,389
  
Finished goods
    
1,048,191
      
1,365,993
  
                 
Total inventory
  
$
1,824,788
    
$
2,798,425
  
 
 
5
 

CODA OCTOPUS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 

Liquidity
 
As of April 30, 2010, we have cash and cash equivalents of $ 84,322 and restricted cash of $551,480 a working capital deficit of $7,021,144 and a deficiency in stockholders’ equity of $15,292,578.  For the period ended April 30, 2010, we had a net loss of $4,839,733 and negative cash flow from operations of $432,207. We also have an accumulated deficit of $61,394,340 at April 30, 2010. The Company is dependent upon its 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 (See Note 2).
 
NOTE 2 – RESTRICTED CASH

Under terms of the Company’s secured convertible debenture dated February 21, 2008, we maintained a $1,000,000 interest-bearing deposit in a restricted bank account until such time as advances under an accounts receivable factoring agreement were repaid in full and the agreement and related liens were terminated. As of October 31, 2008, the Company had $1,017,007 in the restricted cash account, which was released to the Company in December 2008 after the factoring agreement was terminated and settled in full in October 2008 and the debenture holders perfected their security in December 2008.
 
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, 2011. We have also received a waiver letter from the Noteholder dated January 18, 2010, under which it has waived its right to demand repayment of the loan as a result of the failure to observe certain specified loan covenants. The waiver will expire on the first anniversary of the waiver letter. We believe that the terms of this agreement may provide us with sufficient liquidity to operate for fiscal 2011. We have been formally advised by the Noteholder’s agent that the waiver will be extended through June 30, 2011 on the same terms and conditions.
 
At April 30, 2010 we have received net advances from this facility of $1,598,520.

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 $2,465,067 and $690,344 as of April 30, 2010 and October 31, 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 $944,908 and $111,463 as of April 30, 2010 and October 31, 2009 respectively.

 
6
 

CODA OCTOPUS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Revenue received as part of sales of equipment includes a provision for warranty and is treated as deferred revenue, along with extended warranty sales, with these amounts amortized over 12 months from the date of sale. These amounts are stated on the balance sheet as Deferred Revenue of $223,511 and $287,018 as of April 30, 2010 and October 31, 2009 respectively.

 NOTE 4 - INVESTMENTS

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 nonperformance. 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.
 
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 financial statements consisted of the following items as of April 30, 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
   $ 551,480     $ 551,480     $ -     $ -  
Short term Investment
   $ 38,250     $ 38,250     $ -     $ -  
Total
   $ 589,730     $ 589,730     $ -       -  
Liabilities:
                                
Warrant liability
     5,987,320       -       5,987,320       -  
Loans and Notes Payable
   $ 13,733,065     $ -     $ 13,733,065     $ -  
Totals
   $ 19,720,385     $ -     $ 19,720,385     $ -  
 
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 restricted cash and short term investments of $551,480 and $38,250 respectively, at April 30, 2010 was grouped as Level 1 valuation as the market price was readily available, compared to a fair value of $51,000 and $994,081for short term investments and restricted cash respectively at October 31, 2009.

Loans and notes payable are recorded at their face amounts which approximates fair value. Warrant liability is recorded at fair value as is determined by observable market price and based on the Black-Scholes model.

 
7
 

CODA OCTOPUS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

During the year ended October 31, 2007, the Company received marketable securities in settlement of $533,147 loan and $316,853 of accounts receivable. As of October 31, 2008, the Company had an investment of $153,000 that was considered available-for-sale for financial reporting purposes which included an unrealized loss of $697,000 included in the determination of comprehensive loss. As of April 30, 2009, this investment had a value of $68,000, with an unrealized loss of $782,000. This unrealized loss had, until now been included in the determination of comprehensive loss, but during the year ended October 31, 2009, we have determined that this investment in marketable securities is impaired because we believe that the fair market value of the investment has permanently declined. Accordingly, we have written off the $782,000 during the year ended October 31, 2009.  In April 2010, the company sold half of its investment for $49,750, resulting in a realized gain (on the written down value) of $15,750.  The remaining fair value of this investment is $38,250 as of April 30, 2010.
 
NOTE 5 - OTHER CURRENT ASSETS
 
Other current assets on the balance sheet total $202,240 and $285,691 at April 30,2010  and October 31, 2009 respectively. These totals comprise the following:

   
2010
    
2009
  
Deposits
  
$
99,836
    
$
96,277
  
Value added tax (VAT)
    
17,526
      
113,636
  
Other receivable
    
84,878
      
75,778
  
                 
Total
  
$
202,240
    
$
285,691
  
  
NOTE 6 - FIXED ASSETS

Property and equipment at April 30, 2010 and October 31, 2009 is summarized as follows: 
   
2010
    
2009
  
Machinery and equipment
  
$
856,210
    
$
1,001,385
  
Accumulated depreciation
    
(695,044
)
    
(733,420
)
                 
Net property and equipment assets
  
$
161,166
    
$
267,964
  
 
Depreciation expense recorded in the statement of operations for the period ended April 30, 2010 and year ended October 31, 2009 is $77,507 and $238,632, respectively.

NOTE 7 - INTANGIBLE ASSETS AND GOODWILL
 
The Company accounts for intangible assets and goodwill in accordance with ASC 350. Goodwill and Other Intangible Assets, are evaluated on  an annual basis, and when there is reason to believe that their values have been diminished or impaired write-downs will be included in results from operations.
 
The identifiable intangible assets acquired and their carrying value at April 30, 2010 and October 31, 2009 is:
  
   
2010
    
2009
  
Customer relationships (weighted average life of 10 years)
  
$
784,243
    
$
784,243
  
Non-compete agreements (weighted average life of 3 years)
    
278,651
      
278,651
  
Patents (weighted average life of 10 years)
    
73,805
      
67,837
  
Licenses (weighted average life of 2 years)
    
100,000
      
100,000
  
                 
Total amortized identifiable intangible assets - gross carrying value
    
1,236,699
      
1,230,731
  
Less accumulated amortization
    
(610,879
)
    
(533,462
)
                 
Net
    
625,820
      
697,269
  
                 
Residual value
  
$
625,820
    
$
697,269
  
 
 
8
 

CODA OCTOPUS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Estimated annual amortization expense as of April 30, 2010 is as follows:

2011
  
$
65,838
  
2012
    
131,676
  
2013
    
76,835
  
2014
    
75,183
  
 2015 and thereafter
    
276,288 
  
Total
  
$
625,820
  
 
Amortization of patents, customer relationships, non-compete agreements and licenses included as a charge to income amounted to $ 77,417  and $231,321  for the period ended April 30, 2010 and year ended October 31, 2009, respectively. Goodwill is not being amortized.

 
9
 

CODA OCTOPUS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 8 - CAPITAL STOCK

During the period ended April 30, 2010, we issued 75,000 shares of our common stock, proportionately to three (3) employees as part of their bonus plans.

In April 2010, we undertook to issue 100,000 of common stock as part of directors’ compensation. These shares will only be issued if the director serves one year on the Board.

During the year ended 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 ended October 31, 2008, leaving a charge for compensation in the period  ended October 31, 2009 of $18,520.

Other Equity Transactions
 
During the period ended January 31, 2010, we did not issue any common share purchase options. However, options issued in earlier periods vested resulting in a charge of $18,856 for the six months ended April 30, 2010.
 
During the year ended October 31, 2009, we issued 50,000 common share purchase options in relation to the Tactical acquisition. However, options issued in earlier periods vested, resulting in a charge of $295,853 in this period. There were also 210,000 options cancelled connected with staff departures, of which 95,000 were exercisable.

In April 2010, we undertook to grant 50,000 options to purchase our common stock as part of directors’ compensation. 25,000  of these vests on June 1, 2010 and the remainder after one year.

 
10
 

CODA OCTOPUS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - WARRANTS AND STOCK OPTIONS
 
Transactions involving stock options and warrants issued are summarized as follows:

Warrants
  
Six months ended
April 30, 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
     -       -       -       -  
                                 
Outstanding at the end of the period
     32,583,418     $ 1.42       32,583,418     $ 1.42  
                                 
Exercisable at the end of the period
     32,583,418     $ 1.42       32,583,418     $ 1.42  

 The number and weighted average exercise prices of warrants outstanding as of April 30, 2010 are as follows:

Range of
Exercise Prices
  
Number
Outstanding
    
Weighted Average
Contractual Life
 (Yrs)
    
Total Exercisable
  
0.50
    
750,000
      
1.00
      
750,000
  
0.58
    
400,000
      
0.92
      
400,000
  
1.00
    
2,750,000
      
1.86
      
2,750,000
  
1.30
    
14,341,709
      
1.68
      
14,341,709
  
1.50
    
-
      
-
      
-
  
1.70
    
14,341,709
      
1.68
      
14,341,709
  
1.80
    
-
      
-
      
-
  
Totals
    
32,583,418
      
1.73
      
32,583,418
  
 
 Stock Options
  
Six months ended
April 30, 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
      
1.30
  
Terminated during the period
    
(2,095,000
)
    
1.29
      
(210,000
)
    
1.32
  
                                 
Outstanding at the end of the period
    
3,500,900
    
$
1.13
      
5,595,900
    
$
1.18
  
                                 
Exercisable at the end of the period
    
3,246,299
    
$
1.12
      
5,214,149
    
$
1.17
  
 
 
11
 

The number and weighted average exercise prices of stock purchase options outstanding as of April 30, 2010 are as follows:  
  
Range of
Exercise Prices
  
Number
Outstanding
    
Weighted Average
Contractual Life
(Yrs)
    
Total Exercisable
  
0.50
    
-
      
-
      
-
  
0.58
    
-
      
-
      
-
  
1.00
    
2,400,900
      
0.35
      
2,400,900
  
1.30
    
700,000
      
3.30
      
445,400
  
1.50
    
140,000
      
1.97
      
140,000
  
1.70
    
260,000
      
2.17
      
260,000
  
1.80
    
-
      
-
      
-
  
Totals
    
3,500,900
      
1.14
      
3,246,299
  

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 $2,353,893. Fair value at November 1, 2009 was determined using the Black-Scholes method based on the following assumptions:  (1) risk free interest rate of 1.06%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 302.22%; (4) an average expected life of the warrants of 2.22 years and (5) estimated fair value of common stock of $0.08 per share. 
 
At April 30, 2010 we recalculated the fair value of the conversion feature subject to derivative accounting and have determined that the fair value at April 30, 2010 is $5,987,320. 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 0.74%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 303.75%; (4) an average expected life of the conversion feature of 1.97 years and (5) estimated fair value of common stock of $0.21 per share.
 
We have recorded a charge of $3,633,426 during the six months ended April 30, 2010 related to the change in fair value during the quarter.

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 approximate $45,400,000 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 approximately $15,436,000. 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 approximate $4,368,141, with no expiration. The deferred tax asset related to the carry-forward is approximately $2,670,000. 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.

 
12
 

CODA OCTOPUS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Income tax expense for 2009 and 2010 represents income taxes on our Norwegian subsidiary.
 
Components of deferred tax assets as o April 30, 2010 and October 31, 2009 are as follows:
  
Non-Current
  
2010
    
2009
  
             
Net Operating Loss Carry Forward
  
$
18,106,000
    
$
17,736,000
  
Valuation Allowance
    
(18,106,000
) 
    
(17,736,000
)
                 
Net Deferred Tax Asset
  
$
-
    
$
-
  
 
NOTE 12 - CONTINGENCIES AND COMMITMENTS
 
Litigation
 
We are currently engaged in three lawsuits.
 
The first one involves the former Chief Executive Officer of our subsidiary, Coda Octopus Colmek, Inc. (Scott DeBo v Miller & Hilton, Inc. d/b/a Colmek Systems Engineering and Coda Octopus Group, Inc. (File No. 080923661)).  Mr DeBo claims breach of his employment contract, tortuous interference with his contract, termination in violation of public policy and failure to pay wages when due. He filed a complaint and an amended complaint on November 10, 2008 and December 10, 2008, respectively. We answered the amended complaint denying Mr. DeBo’s allegations, raising affirmative defenses on December 22, 2008 and intend to defend ourselves vigorously.  The Parties have now completed the discovery process and we expect the hearing to be scheduled. We filed a motion on June 8, 2011 for Partial Summary Judgment.
 
The second one involves Federal Engineering & Marketing Associates Inc (FEMA) a Colorado corporation.  FEMA is a former sales representative of Coda Octopus Colmek, FEMA claims breach of contract and seeks various relief in the District Court, Routt County, Colorado (Case Number 2009CV278).  We have answered the complaint which included a counter-claim. We intend to defend ourselves vigorously in these proceedings.

On April 28, 2010 we instituted legal action in the Supreme Court of the State of New York against our ex- Chief Executive Officer, ex-Chief Financial Officer and two other ex-officers of the Company for, among other things, breach of contract.  The defendants’ answer is due by June 15, 2010.

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 $1,132,298, with the minimum future rentals due under these leases as of April 30, 2010 as follows:

2011
  
 $
218,517
  
2012
    
363,259
  
2013
    
219,027
  
2014
    
176,568
  
 2015 and thereafter
    
154,927 
  
Total
  
$
1,132,298
  

Concentrations
 
We had no concentrations of purchases of over 5% during the period ended April 30, 2010. We had sales concentrations of over 5% during the period ended April 30, 2010 due to sales to a total of four separate customers for $ 2,178,952.

 
13
 

CODA OCTOPUS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 13 - NOTES AND LOANS PAYABLE
 
A summary of notes payable at April 30, 2010  and October 31, 2009 is as follows:

   
April 30,
2010
    
October 31,
 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.
  
$
13,835,072
    
$
13,067,929
  
                 
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.
    
152,993
      
165,594
  
                 
Total
  
$
13,733,065
    
$
13,233,523
  
 
In connection with the secured convertible debenture noted above and the Cash Control Framework Agreement (see below), we carry $1,150,106 deferred financing costs as an asset on the consolidated balance sheet to April 30, 2010, which represents $1,694,893 in financing closing costs we incurred, net of $ 544,787 in amortization expense at April 30, 2010 and $423,723 in amortization expense at October 31, 2009. We amortize deferred financing costs over the life of the financing facility using the straight line method.
 
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. We believe that the terms of this agreement may provide us with sufficient liquidity to operate for fiscal 2010.
 
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.
 
Subsequent to the year ended October 31, 2009, the Cash Control Framework Agreement was extended to March 16, 2011. We have been formally advised by the Noteholder’s agent that the waiver will be extended through June 30, 2011 on the same terms and conditions.

 
14
 

CODA OCTOPUS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 14 - SEGMENT INFORMATION
 
The Company's two reportable segments are managed separately based on fundamental differences in their operations.   Coda Octopus Colmek and Coda Octopus Martech make up the contracting part of the business, and Coda Octopus Products Limited and Coda Octopus Products Inc. make up the product sales.
 
As a result of the Company’s internal reorganization the Company has restated previously reported segment information.
 
The contracting segment deals mainly with Government agencies and defense prime contractors and have expertise in designing and producing specific devices and components for such customers, with an emphasis on sub-sea technology.  This segment also manufactures the Group’s products (for Coda Octopus Products).
 
The products segment designs and produces, through its arrangements with the contracting segment, sub-sea software and hardware products aimed at the Oil and Gas, Underwater Construction, and Port and Harbor Security markets.
 
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 segment asset and operating balances by reportable segment. 
   
Six months ended
  
   
April 30,2010
    
April 30, 2009
  
Net Sales to External Customers:
            
Contracting
  
$
3,026,557
    
$
4,899,495
  
Products
    
3,755,238
      
2,607,058
  
                 
Total Sales to External Customers
  
$
6,781,795
    
$
7,506,553
  
                 
Depreciation and Amortization:
                
Contracting
  
$
120,288
    
$
151,837
  
Products
    
11,053
      
31,006
  
Corporate
    
144,647
      
109,109
  
Total Depreciation and Amortization
  
$
275,988
    
$
291,953
  
   
 
           
General and Administrative Expense:
                
Contracting
  
$
1,439,262
    
$
1,569,180
  
Products
    
1,159,809
      
986,180
  
Corporate
    
885,293
      
2,733,819
  
Total General and Administrative Expense
  
$
3,484,364
    
$
5,289,179
  
                 
Capital Expenditures:
                
Contracting
  
$
-
    
$
9,250
  
Products
    
-
      
10,237
  
Corporate
    
7,690
      
33,327
  
Total Capital Expenditures
  
$
7,690
    
$
52,814
  
                 
Operating Income (Losses):
                
Contracting
  
$
(1,216,105
)
  
$
1,191,605
  
Products
    
1,737,780
 
   
1,029,483
  
Corporate
    
(885,293
)
    
(4,081,808
)
Total Segment Operating Losses
  
$
(363,618
)
  
$
(1,860,720
)
 
 
15
 

   
For the period ended
  
   
April 30, 2010
    
October 31, 2009
  
Segment Assets:
            
Contracting
   $ 7,370,611     $ 7,235,301  
Products
     2,874,785       2,867,693  
Corporate
     2,358,837       3,034,386  
Total Segment Assets
   $ 12,604,233     $ 13,137,380  
 
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 period ended April 30, 2010 and the year ended October 31, 2009:
 
   
Six months ended
  
   
April 30, 2010
    
April 30,
 2009
  
NET SALES TO EXTERNAL CUSTOMERS:
            
United States
   $ 3,325,751     $ 3,382,695  
Europe
     3,456,044       4,123,858  
TOTAL NET SALES TO EXTERNAL CUSTOMERS
   $ 6,781,795     $ 7,506,553  
                 
   
For the period ended
  
   
April 30, 2010
    
October 31,
2009
  
ASSETS:
                
United States
   $ 8,372,318     $ 7,919,830  
Europe
     4,231,915       5,217,550  
TOTAL ASSETS
   $ 12,604,233     $ 13,137,380  

 
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CODA OCTOPUS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 15 – SUBSEQUENT EVENTS 
 
As part of our continued restructuring program, we have filled three vacancies on our Board of Director and have entered into service agreements with each of these directors. The Company has agreed to pay each of the new directors $1,875 per board meeting plus expense reimbursement. With immediate effect, each will be granted options to purchase 50,000 shares of Company common stock at $1.05 per share annually or such other price as the Board or Compensation Committee shall deem fit. In addition, each will be granted 100,000 shares of common stock upon the completion of the first year of his board membership. One of the new directors will also be granted 50,000 options for acting as Chairman of the Company’s Audit Committee and paid an additional fee of $10,000 per annum.
 
The Company has also entered into a new service agreement with Taktos Limited for the services of Geoff Turner, our Chief Executive Officer on June 1, 2010.
 
In addition, on June 1, 2010, we entered into an employment agreement with Judith Wallace our Chief Financial Officer. She will be paid an annual base salary of $200,000. In addition, she will be paid a monthly car allowance of $850.
 
 
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OPERATIONS
 
Forward-Looking Statements
 
The information herein contains forward-looking statements. All statements other than statements of historical fact made herein are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.
 
The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
 
General Overview
 
Coda Octopus develops, manufactures, sells and services real-time 3D sonar and other products, as well as engineering design and manufacturing services on a worldwide basis. Headquartered in Jersey City, New Jersey, with research and development, sales and manufacturing facilities located in the United Kingdom, United States and Norway, the Company is engaged in software development, defense contracting and engineering services through subsidiaries located in the United States and the United Kingdom.
 
Founded in 1994, Coda operated for ten years as a private company based in the UK. By the late 1990s, the Company had developed a strong reputation as a developer and marketer of high quality software-based products used for underwater mapping, geophysical survey and other related marine applications.
 
Shortly after September 11, 2001, management was introduced to, and in December 2002 completed the acquisition of OmniTech AS, a Norwegian Company that had developed and patented a prototype system called the Echoscope® . The Echoscope® permits accurate three-dimensional visualization, measurement, data recording and mapping of underwater objects – in effect, the ability to “see” an object underwater in real time.
 
Management believed that real-time 3D sonar could represent a truly disruptive technology with the potential to change industry standard practices and procedures. It envisioned significant applications for this technology in defense, oil and gas exploration and security, underwater port security, bridge repair, and large-scale underwater construction projects. Given these beliefs, the Company decided that the best way to gain access to the capital and the visibility needed to commercialize real time 3D sonar, and to successfully enter multiple worldwide markets in the post 9/11 environment would be to move its headquarters to the USA, and to become a publicly traded company in the United States.
 
On July 13, 2004 Coda Octopus became a public company through a reverse merger with The Panda Project, Inc., a publicly traded Florida corporation. As a result of the transaction, Coda and its shareholders, including its then controlling shareholder, Fairwater Technology Group Ltd, were issued 20,050,000 common shares comprising approximately 90.9% of the then issued and outstanding shares of Panda. Subsequently, Panda was reincorporated in Delaware, and changed its name to Coda Octopus Group, Inc. By mid 2005, the Company had completed the move of its headquarters from the UK to the United States.
 
Since moving to the USA, the Company has accomplished a series of objectives:
 
 
1.
It raised approximately $33 million in funds, through three private placements primarily with institutional investors. The Company raised approximately $8 million in 2006, approximately $13 million in April/May 2007, and approximately $12 million in a convertible debt transaction that was completed in February 2008.

 
2.
It completed the commercialization of the Echoscope® and successfully deployed its real-time 3D technology and products on three continents with major corporations, governments, ports, law enforcement agencies and security organizations.

 
3.
It significantly broadened both its revenue base and its base of expertise in engineering, defense electronics, military and security training, and software development primarily through the acquisition of four privately held companies. Management believes that broadening the base of the Company in these specific areas was necessary to position Coda Octopus as a reliable and experienced contractor, subcontractor and supplier of 3D sonar products and systems on a worldwide basis.
 
 
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4.
Beginning in July 2007, the US Department of Defense (DoD) Technical Support Working Group (TSWG) funded Coda Octopus to build and deliver next-generation Underwater Inspection Systems™ (UIS) for the US Coast Guard and other potential users. The program has included money to build and deliver current systems, as well as a roadmap for their future development. During the year ended October 31, 2007, the Company delivered three UIS systems to the US Coast Guard against a purchase order totaling $2.59 million. In FY 2008 the Company was funded for an additional $1.53 million to develop certain mutually agreed technical enhancements to the system. The Company’s latest contract with TSWG covers the funding of an additional $1.4 million for additional enhancements and the delivery of additional systems. The Company believes it has successfully completed the key second-stage enhancements sought by the DoD and the Coast Guard. As a result, management believes that the Company is positioned to build and deploy fully integrated systems that meet the highest standards in the world.
 
These will enable users to “see” objects that are smaller than a baseball from a distance of more than 100 meters, and to do so in all kinds of ocean or water conditions at virtually any depth. In addition, the Company through its Colmek subsidiary, has more than 20 years of successful experience as contractor with the Department of Defense, and as a subcontractor with various large prime contractors including defense contractors.
 
 
5.
The Company has also taken advantage of its first mover status in real-time 3D sonar to start to open up several potentially significant vertical markets in the private sector. Thus far, the three areas of focus have been Dredging, Underwater Construction, and Security. In each of these areas, the Company has selected a lead customer and has worked with that customer to develop and deploy a system that management believes will have wide application throughout the segment. In the case of Rotterdam-based Van Oord, Coda Octopus was funded to develop a particular application, and in other cases the Company has financed the development internally.
 
The Company believes that the largest potential markets for real-time 3D sonar is with government authorities both in the US and throughout the world. In the US, the Company has deployed systems with Jacksonville Sheriff, FL, and in Contra Costa County, CA, with further immediate interest in at least six additional locations. Overseas the Company has deployed systems in Korea, Japan, the United Kingdom and the Middle East, and has significant opportunities in Germany, Singapore, Malaysia and the Netherlands. Our main challenges are the long lead times in purchasing cycles, the current economic environment, and the initial adoption of new technology, which can take several years to effect.
 
The consolidated financial statements include the accounts of Coda Octopus and our domestic and foreign subsidiaries that are more than 50% owned and controlled, which includes Dragon Design Limited (now fully integrated into Coda Octopus Martech Limited., which was fully acquired on December 15th 2008 and is based in Weymouth, Dorset, United Kingdom.
 
All significant intercompany transactions and balances have been eliminated in the consolidated financial statements.
 
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.
 
Products and Services
 
We are engaged in 3D subsea technology and are the developer and patent holder of real-time 3D sonar products, which we expect to play a critical role in the next generation of underwater port security and oil, gas and construction. We produce hardware, software and fully integrated systems, which are sold and supported on a worldwide basis, with wide applications in a number of distinct markets:
 
 
¨
Marine geophysical survey (commercial), which focuses on oil and gas, and oceanographic research and exploration, where we market to survey companies, research institutions and salvage companies. This was our original focus, with current products spanning geophysical data collection and analysis, through to printers to output geophysical data collected by sonar.
 
 
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