Coda Octopus Group, Inc. - Quarter Report: 2010 April (Form 10-Q)

Unassociated Document

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

¨	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

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.

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.

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.

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.

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

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.

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.

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

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.

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.

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

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.

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.

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.

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.

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	)

	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

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.

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:

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.

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.

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.

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.

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.

Underwater defense/security, where we market to ports and harbors, state, local and federal government agencies, law enforcement agencies and defense contractors. We have recently completed developing and commenced marketing our Underwater Inspection System (UIS™), the first real-time, high resolution, three-dimensional underwater sonar imaging system, which we believe has particularly important applications in the fields of port security, defense and undersea oil and gas development.

Underwater construction, where our products are used for real-time monitoring of sub-sea construction, a particularly challenging environment. We have also developed for one of our customers a tailored software application to allow the laying of concrete Accropodes™ (large concrete blocks) used for constructing breakwaters. The advantage of our real-time system is in giving visibility where previously divers were used to help with the construction, a dangerous and inefficient process.

Dredging, where our products are used for pre-dredge survey and in a real-time mode where they monitor the quality and precision of the dredge. The advantage we give is in improving the dredge quality and drastically reducing the time involved – for example, if a re-dredge is required, this can be done immediately from the information our products provide, instead of days or weeks later, when a new vessel may even have to be used, incurring much greater cost.

Other applications, such as shallow water hydrography underwater logging, debris survey and treasure hunting.

In addition, through our two engineering services subsidiaries, Coda Octopus Martech Ltd, based in Weymouth, England, UK, and Coda Octopus Colmek, based in Salt Lake City, Utah, USA, we provide engineering services to a wide variety of clients in the subsea, defense, nuclear, government and pharmaceutical industries. These engineering capabilities are increasingly being combined with our product offerings, bringing opportunities to provide complete systems, installation and support.

For the foreseeable future, we intend to continue our focus on port security. We believe that in the post 9/11 era there are significant growth opportunities available in that particular market segment because of increased government expenditures aimed at enhancing security. Specifically, we believe that we have the ability to capitalize on this opportunity as a result of:

First mover advantage in 3D sonar markets based on our patented technology, our research and development efforts and extensive and successful testing in this area that date back almost two decades as well as broad customer acceptance.

Early recognition of the need for 3D real-time sonar in defense/security applications.

Expansion into new geographies like North America and Western Europe.

Expansion into new commercial markets like commercial marine survey with innovative products.

Recent sole source classification for one of our products and its derivatives by certain government procurement agencies.

Further, we believe the Echoscope® will transform certain segments of the sonar products market. In addition, 3D sonar, currently in the early stages of adoption, has disruptive technology qualities as it has the ability to change industry standard practice in respect of the method for visualization and imaging of underwater objects and environment. Therefore, it will likely change who supplies into this market as well as our market position and that of our competitors. We believe the market opportunity in underwater security and defense could grow at a rapid pace over the next several years.

Critical Accounting Policies

This discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements that have been prepared under accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with US GAAP requires our management to make estimates and assumptions that affect the reported values of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported levels of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.

Below is a discussion of accounting policies that we consider critical to an understanding of our financial condition and operating results and that may require complex judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 1, "Summary of Significant Accounting Policies" of our Annual Consolidated Financial Statements on Form 10-K.

Revenue Recognition

We record revenue in accordance with FASB ASC Topic 605 - Revenue Recognition.

Revenue is derived from our products sold by our subsidiaries, Coda Octopus Products Inc. and Ltd., from sales of underwater technologies and equipment for imaging, mapping, defense and survey applications. Revenue is also derived through service contracts gained by our Martech, Colmek Tactical and Innalogic businesses.

Revenue is recognized when conclusive evidence of firm 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, and recognize revenue for equipment upon delivery and for installation and other services as performed. ASC 605 was effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003.

Our contracts typically 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.

Recoverability of Deferred Costs

We defer costs on projects for service revenue. Deferred costs consist primarily of direct and incremental costs to customize and install systems, as defined in individual customer contracts, including costs to acquire hardware and software from third parties and payroll costs for our employees and other third parties.

We recognize such costs in accordance with our revenue recognition policy by contract. For revenue recognized under the completed contract method, costs are deferred until the products are delivered, or upon completion of services or, where applicable, customer acceptance. For revenue recognized under the percentage of completion method, costs are recognized as products are delivered or services are provided in accordance with the percentage of completion calculation. For revenue recognized ratably over the term of the contract, costs are recognized ratably over the term of the contract, commencing on the date of revenue recognition. At each balance sheet date, we review deferred costs, to ensure they are ultimately recoverable. Any anticipated losses on uncompleted contracts are recognized when evidence indicates the estimated total cost of a contract exceeds its estimated total revenue.

Stock Based Compensation

The Company accounts for stock-based compensation in accordance with FASB ASC Topic 718 “Compensation - Stock Compensation” (“ASC 718”). Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award. This value is expensed ratably over the vesting period for time-based awards and when the achievement of performance goals is probable in our opinion for performance-based awards. Determining the fair value of share-based awards at the grant date requires judgment; including volatility, terms, and estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock based compensation expense and the Company’s results of operations could be materially impacted.

Income Taxes

Deferred income taxes are provided using the asset and liability method for financial reporting purposes in accordance with the provisions of FASB 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.

Purchase price allocation and impairment of intangible and long-lived assets

Intangible and long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset, and its eventual disposition. Measurement of an impairment loss for intangible and long-lived assets that management expects to hold and use is based on the fair value of the asset as estimated using a discounted cash flow model.

We measure the carrying value of goodwill recorded in connection with the acquisitions for potential impairment in accordance with ASC 350 - Intangibles - Goodwill and Other. To apply ASC 350, a company is divided into separate “reporting units”, each representing groups of products that are separately managed. For this purpose, we have two reporting units. To determine whether or not goodwill may be impaired, a test is required at least annually, and more often when there is a change in circumstances that could result in an impairment of goodwill. If the market capitalization of our common stock is below book carrying value for a sustained period, or if other negative trends occur in our results of operations, a goodwill impairment test will be performed by comparing book value to estimated market value. To the extent goodwill is determined to be impaired an impairment charge is recorded in accordance with ASC 350.

Results of Operations

Recent Developments

Cash Framework Agreement

On March 16, 2009 the Company entered into a “Cash Control Framework Agreement” with the Royal Bank of Scotland (the debenture holder) pursuant to which it is assumed that, subject to the Company being compliant with the terms of the transaction documents entered into on February 21, 2008, no adverse actions will be taken by the debt holder. This Agreement has been extended until March 16, 2011 and it creates debtor book financing package to allow the Company to obtain up to $2.15M in working capital in exchange for receivables or project financing. As part of the terms of that agreement, the Company committed to a cost reduction program (including management pay cuts) to reduce significantly our SG&A, R&D and Capital Expenditure costs.

In addition, on January 18, 2010, the debenture holder waived for one year the right to demand repayment of the loan as a result of our failure to observe certain specified loan covenants. The waiver will expire on the first anniversary of the waiver letter. 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.

Cost Cutting Program

In February 2009, we embarked on a cost reduction program. This resulted in annualized savings of at least $3.35 million for theyear ended October 31, 2009. Actual savings for the year ended October 31, 2009 amounted to $2.1 million against budget. These cost savings against budget were achieved in the following areas:

Description	Amount
Reduction in Research and Development:	$	321,837
Reductions in other SG&A costs	$	3,061,991

Total SG& A Cost Savings	$	3,383,828

Reductions in Capital Expenditure	$	179,725

The following table shows actual quarterly savings against budget for the year ended October 31, 2009:

Period	Amount
Quarter Ended January 31, 2009	$	237,000
Quarter Ended April 30, 2009	$	419,000
Quarter Ended July 31, 2009	$	750,000
Quarter Ended October 31, 2009	$	707,000

Total cost saving against budget for the 2009 Period	$	2,113,000

Between September 2009 and December 2009, we accelerated our program of reducing the levels of management in the Group. We have eliminated the “Senior Vice President” level of management and now have a total of three full time staff members (reduced from twelve) who are not employed in any of our subsidiaries. We have also eliminated a large number of arrangements with consultants and Government lobbyists.

The Group’s management now consists of a Group CEO (with overall responsibility for Group performance), Chief Financial Officer, CTO (who also manages the Group’s R&D), and the CEOs of the various Group Companies.

We believe that the cost cutting program has achieved its objectives and we expect to maintain our SG&A at around $8.5 million during the current fiscal year (down from approximately $11.238 million for the 2009 Period). We intend to reinvest some of the savings in additional sales and marketing staff to ensure that we are gaining the maximum advantage from our leading technology and skills. We also anticipate hiring one more senior executive to operate at Group level during the current fiscal year.

Reorganization

The Company commenced a reorganization program in which the R&D unit has become a more horizontal unit working to make advances in our core technology (3D sonar) while helping to spread these advances across the Group, as well as promoting technology advances from other parts of the Group.

Within our products company in Edinburgh, we formed a dedicated unit which is focused entirely on the Echoscope® rollout plan for the various markets the Company has identified. The function of this unit is to oversee production, development, documenting and delivering the core product to the defined markets. Manufacturing of the Echoscope® will move to Salt Lake City (Colmek), to comply with the Defense Department’s preference to have technology products manufactured domestically, and to Weymouth, UK, (Martech).

Although the economic environment has been challenging, the markets that the Company addresses – engineering, defense, oil and gas, and security – are less affected than many others. We intend to continue to exploit our lead in 3D real-time sonar, while tactically streamlining the business to be profitable at a much lower revenue rate.

On or around September 2009, we also reorganized our executive and management structure by eliminating the Senior Vice President (SVP) tier which comprised eight SVPs and replacing the Group CEO who had been the founder and Group CEO since inception. Our management structure now consists of a Group CEO (with overall responsibility for Group performance), Chief Financial Officer, CTO (who also manages the Group’s R&D), and the CEOs of the various Group Companies.

Since the beginning of the current financial year, a number of vacancies on the Board of Directors have been filled and the Board now consists of two executive directors and three non-executive directors.

Comparison of three months ended April 30, 2010, compared to three months ended April 30, 2009.

Revenue: Total revenues for the quarter ended April 30, 2010 (the “2010 Period”) and the quarter ended April 30, 2009 (the “2009 Period”) were $3,713,585 and $4,307,447 respectively, representing a decrease of 13.8%. Contributing factors to this lack of growth were adverse exchange rate movements combined with the global economic downturn which still affected the business in this quarter.

Gross Margins: Margins were slightly weaker in the 2010 Period at 61.7% (gross profit of $2,290,701) compared to 63.4% ($2,731,659 in the 2009 Period, reflecting a slightly different mix of sales in our businesses (products versus project work) combined with lower revenues.

Research and Development (R&D). R&D spending decreased very marginally from $456,477 in the 2009 Period to $455,173 in the 2010 Period In line with our cost cutting plan . This level of spending still allows us to devote considerable R&D resources to introduce product variants of our core technology to the market over the next months.

Selling, General and Administrative Expenses (SG&A). SG&A expenses for the 2010 Period decreased to $1,848,938 from $2,386,460 in 2009, a reduction of 22.5% which reflects activity under the cost reduction plan that was executed during the fiscal year ended October 31, 2009 and in quarter one of 2010.

Across the Group, key areas of 2010 Period expenditure include wages and salaries, where we spent $1,211,940 or 66.1% during the 2010 Period against $1,775,417 or 62.4% of our SG&A cost during the 2009 Period; legal and professional fees, including accounting, audit and investment banking services, where we spent $175,706 or 9.6% in 2010 against $371,777 or 13.1% of our SG&A costs in 2009; travel costs increased to $121,334 or 6.6% in 2010 from $54,368 or 1.9% of SG&A in the 2009 Period, rent for our various locations increased in 2010 to $156,260 or 8.5% against $153,523 or 5.4% of SG&A in 2009; marketing reduced in the 2010 Period to $130,834 or 7.1% of SG&A against $186,647 or 6.6% of SG&A in 2009, as we reduced the number of consultants engaged in the Business.

Operating Income/Loss. We had an operating loss of $13,410 in the 2010 Period against an operating loss of $111,278 in the 2009 Period.

Derivative Liability

Fair value at November 1 2009 was determined using the Black-Scholes method based and produced an 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. Accordingly, we have recorded a charge of $5,188,334 during the three months ended April 30, 2010 related to the change in fair value during the quarter.

Interest Expense . Interest expense increased in the 2010 Period to $454,802 from the 2009 Period interest costs which were $426,814. In both periods we have included amortization of the 30% redemption premium for our convertible note, at a cost of $128,571. We have accrued interests on the convertible note of $450,150.

Dividends and Other Stock Charges. In the 2010 Period, no dividends were due to be paid on the Series A Preferred stock, versus $439 in 2009, This was due to the fact that we had no surplus or net profits from which to declare and pay such dividends.

Segment Analysis

This section should be read in conjunction with Note 14 to the Condensed Consolidated Financial Statements.

Examining HQ SG&A, which is where we have concentrated our cost cutting exercise, we find that overall HQ SG&A (defined as Group Headquarters, and the UK and US Holding Companies) was reduced from $1,906,411 in the 2009 Period to $358,110 in the 2010 Period. Components of this reduction are Rent and Utilities reduced from $54,016 to $27,202, Office Expenses reduced from $56,106 in 2009 to $16,882 in Q2 2010, Payroll reduced from $437,976 to $ 63,294, Insurances decreased from $78,226 to $3,668, Professional Services reduced from $356,696 to $176,420, Forex reduced from $971 to $92, Marketing reduced from $107,425 to $11,390, and Travel from $32,218 to $63,821. Moving forward we are planning to increase the HQ SG&A, in line with increasing revenues, in a couple of key areas where we may need to add additional staff. We have begun this process and have added a Chief Financial Officer and with expected increasing revenues anticipate additional financial staff to address material weakness identified.

We operate in two business segments, Contracting Sales, and Product Sales. Our contracting business consists of Coda Octopus Colmek, Coda Octopus Martech (including the acquired Dragon Design) and Coda Octopus Tactical Intelligence. Our Products business consists of Coda Octopus Products Limited and Coda Octopus Products Inc.

Revenues from Contracting in during the quarter ended April 30, 2010 were $1,577,392 or 42% of the Group revenues versus $2,592,596 in the quarter ended April 30, 2009, whereas revenues from Products were $2,136,193 and were 58% of the Group revenues, versus $1,714,841 in 2009.

SG&A costs incurred in our contracting businesses were $573,605 in the quarter ended April 30, 2010 versus $674,726 in the quarter ended April 30, 2009. SG&A costs in our Products business in the quarter ended April 30, 2010 were $739,134 versus $481,781 in the quarter ended April 30, 2009.

Operating loss in our contracting business was $442,641 in the quarter ended April 30, 2010 versus an operating profit of $814,819 in the quarter ended April 30, 2009. In the quarter ended April 30, 2010 we made an operating profit of $891,474 in our Products business versus an operating profit of $1,190,222 in the quarter ended April 30, 2009.

Comparison of six month period ended April 30, 2010, compared to six month period ended April 30, 2009.

Revenue: Total revenues for the six month period ended April 30, 2010 (the “2010 Period”) and the quarter ended April 30, 2009 (the “2009 Period”) were $6,781,795 and $7,506,553 respectively, representing a decrease of 9.6%. Contributing factors to this lack of growth were adverse exchange rate movements combined with the global economic downturn and particularly in the oil and gas industry at the start of the year, which still affected the business in this period.

Gross Margins: Margins for the 2010 Period were 59.8% (gross profit of $4,052,932) compared to 59.8% ($4,488,618 in the 2009 Period, reflecting a slightly different mix of sales in our businesses (products versus project work) combined with lower revenues.

Research and Development (R&D). R&D spending decreased from $1,060,158 in the 2009 Period to $932,186 in the 2010 Period in line with our cost cutting plan. This level of spending still allows us to devote considerable R&D resources to introduce product variants of our core technology to the market over the next months.

Selling, General and Administrative Expenses (SG&A). SG&A expenses for the 2010 Period decreased to $3,484,364 from $5,289,179 in 2009, a reduction of 34.1% which reflects activity under the cost reduction plan that was executed during the fiscal year ended October 31, 2009 and in quarter one of 2010.

Across the Group, key areas of 2010 Period expenditure include wages and salaries, where we spent $2,446,107 or 55.6% during the 2010 Period against $3,675,378 or 50.0% of our SG&A cost during the 2009 Period; legal and professional fees, including accounting, audit and investment banking services, where we spent $322,741 or 7.3% in 2010 against $643,964 or 8.8% of our SG&A costs in 2009; travel costs increased to $220,476 or 5.0%in 2010 from $182,119 or 2.5% of SG&A in the 2009 Period; rent for our various locations decreased in 2010 to $297,924 or 6.8% against $308,662 or 4.2% of SG&A in 2009; marketing reduced in the 2010 Period to $163,918 or 3.7% of SG&A against $460,779 or 6.3% of SG&A in 2009.,

Operating Loss. We made a loss from operations of $363,618 in the 2010 Period against an operating loss of $1,860,719 in the 2009 Period. This reduction in operating loss is due to the significant cost reductions at the HQ level.

Derivative Liability

Fair value at November 1, 2009 was determined using the Black-Scholes method based and produced an 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. Accordingly, 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.

Interest Expense . Interest expense increased in the 2010 Period to $896,384 from the 2009 Period interest costs which were $824,238. In both periods we have included amortization of the 30% redemption premium for our convertible note, at a cost of $128,571. We have accrued interests on the convertible note of $450,150.

Dividends and Other Stock Charges. In the 2010 Period, no dividends were due to be paid on the Series A Preferred stock, versus $31,588 in 2009. This was due to the fact that we had no surplus or net profits in 2010 from which to declare and pay such dividends.

Segment Analysis

This section should be read in conjunction with Note 14 to the Condensed Consolidated Financial Statements.

Examining HQ SG&A, which is where we have concentrated our cost cutting exercise, we find that overall HQ SG&A (defined as Group Headquarters, and the UK and US Holding Companies) has reduced from $3,147,503 in the 2009 period to $701,538 in the same period of 2010. Components of this reduction are Rent and Utilities where we have reduced from $115,320 to $52,296, Office Expenses reduced from $116,193 in 2009 to $33,523 in 2010, Payroll reduced from $953,973 to $146,867, Insurances from $122,696 to $64,525, Professional Services reduced from $662,598 to $310,867, Forex reduced from $37,711 to $447, Marketing reduced from $280,040 to 2,962, whilst Travel increased from $76,195 to $94,324. Moving forward we are increasing the HQ SG&A in line with increasing revenues, in a couple of key areas where we need to add additional staff.

Revenues from Contracting during the period ended April 30, 2010 were $3,026,557 or 45% of the Group revenues versus $4,899,495 in the period ended April 30, 2009, whereas revenues from Products were $3,755,238 and were 55% of the Group revenues, versus $2,607,058 in 2009.

SG&A costs incurred in our contracting businesses were $1,439,262 in the period ended April 30, 2010 versus $1,569,180 in the period ended April 30, 2009. SG&A costs in our Products business in the period ended April 30, 2010 were $1,159,809 versus $986,180 in the period ended April 30, 2009.

Operating loss in our contracting business was $1,216,105 in the period ended April 30, 2010 versus an operating profit of $1,191,605 in the period ended April 30, 2009. In the period ended April 30, 2010 we made an operating profit of $1,737,780 in our Products business versus an operating profit of $1,029,483 in the period ended April 30, 2009.

Liquidity and Capital Resources

For the period ended April 30, 2010, the Company has an accumulated deficit of $61,394,340, negative working capital of $7,021,144, a capital deficit of $15,292,578 and generated a negative cash flow from operations of $432,207 in 2010 Period against a deficit of $1,307,726 in the 2009 Period. 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. Management believes that based upon its commitment to maintain SG&A at around the $8.5 million level until the business is profitable and based upon our reorganization of our business, prospects have been enhanced and this is evidenced by our being in receipt of approximately $11.8 million dollars of additional contracts and purchase orders received in this financial year and up to the date of this filing; based upon the Company’s cash flow projections for it business operations through January 2011; collectability of its receivables in the ordinary course of business; based on the Noteholder’s 12 month extension of the cash control framework agreement as discussed in Note 13 and the Noteholder’s agreement to waive its right to demand repayment of the loan until March 16, 2011, the Company will be able to continue its operations through October 31, 2010. 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. The Company’s ability to continue as a going concern is dependent upon achieving profitable operations and generating sufficient cash flows from operations to meet future obligations.

Financing Activities

For the most part, we have financed our operations through the issuance of shares of our common stock and preferred stock and warrants.

Secured Convertible Debentures

On February 21, 2008 we entered into and completed the transactions contemplated under a series of agreements providing for the issuance to a London based institutional investor, The Royal Bank of Scotland plc of senior secured convertible notes in the principal amount of $12,000,000 (the “Notes”). The Notes are secured by all of the assets of the Company and its subsidiaries and mature 84 months after the date of issuance at which time they are redeemable at 130% of the face amount of the Notes. The Notes accrue interest at the annual rate of 8.5% which is payable in semi-annually in arrears. The Notes also stipulate additional interest payments of 2% per annum above the base rate quoted by The Royal Bank of Scotland plc from time to time, in the event that the semi-annual interest payments are not paid by us on the due dates. All of these amounts are payable by us in cash. Of the proceeds, $6,000,000 constituted a specific purpose loan and in the event that we failed to use the proceeds as agreed within 12 months from the closing, then, unless alternative investments were approved by the holders of the Notes, this $6,000,000 was repayable in February 2009. In such case there will be a partial redemption of 60 of the notes (having an aggregate nominal value of $6 million). During the term, the Notes 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.

In August 2008, we notified the Noteholder that we believed that we would be unable to use the $6,000,000 in the manner agreed to under the terms of the Notes. In response, the Noteholder orally consented to the use of an additional $2,000,000 of the $6,000,000 for general working capital purposes. It should be noted that the transaction documents provides that all amendment shall be in writing signed by the parties and this was not obtained by the Company and therefore not valid.

In January 2009, we notified the Noteholder that the balance of the $6,000,000 had fallen below $4 million.

On March 16, 2009, the Company and 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 have had to adhere to a strict cost cutting program which has involved reducing our SG&A, R&D and capital expenditure by an annualized $3.35 million and in this financial year, whilst we have achieved the required costs cut, we expect to maintain our SG&A at around $8.5 million level. The cash framework agreement was extended for a further period of 12 months and now expires on March 16, 2011.

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 waiver will expire on the first anniversary of the waiver letter. We have been advised by the noteholder agent, that the waiver will be extended until June 30, 2011 on the same terms and conditions.

Our ability to survive current financial difficulties resulting from our cash flow deficit is dependent on our capacity to generate revenues from the sale of our products and services. In addition, we are highly dependent on the discretion of the Noteholder to release cash to us to cover our operating expenses.

Nevertheless, as a result of the cost cutting program discussed above and by further adjusting our operations if and to the extent needed, we believe that we will have sufficient capital resources to meet projected cash flow deficits. However, if during fiscal 2010 we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations liquidity and financial condition. In order to fund our operations during the current fiscal year, we estimate that we need to generate additional cash beyond that which is available to us Cash Control Framework Agreement to be able to continue our operations at their current levels. However, there can be no assurance that we will be successful in generating sufficient revenues from operations.

Other than disclosed herein, we presently do not have any available credit, bank financing or other external sources of liquidity. Due to our brief history and historical operating losses, our operations have not generated sufficient liquidity. We will need to continue to raise additional capital in order to expand operations and become profitable. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. There can be no assurance that we will be successful in obtaining additional funding.

Our current financing options are limited due to onerous anti-dilution provisions contained in the Purchase Agreements entered into in April and May 2007. Under the terms of the Purchase Agreements, the investors who purchased stock in the Company thereunder are entitled to receive shares of common stock without additional consideration any time we sell equity securities at a price per share of less than $1.00. We have entered into negotiations to amend these restrictions contained in the Purchase Agreements. Without such amendments, we may be unable to raise additional equity financing on terms that are commercially acceptable to us. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and the downturn in the U.S. stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. In addition, our stock was recently stricken from the OTC Bulletin Board for failure to make our periodic filings on a timely basis. This may further impact on the liquidity of our stock putting further downward pressure on its price and making it less likely that we will be able to raise equity financing on acceptable terms.

We have also entered into preliminary discussions with the holder of the convertible note to prevent it from taking actions adverse to us and to have the debt be reclassified on our books from a short term obligation to a long term obligation. These discussions have been successful and on January 18, 2010 the note holder notified us in writing that it had 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 can give no assurance that we will be successful in any of these efforts. If we are unable to raise additional capital in the near future, the Company may have to curtail its business operations significantly.

Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.

Inflation and Foreign Currency

The Company maintains its books in local currency: US Dollars, Pounds Sterling and Norwegian Kroner for its United States, United Kingdom and Norwegian operations, respectively.

The Company’s operations are conducted in the United States, and through its wholly-owned subsidiaries, in the United Kingdom. As a result, fluctuations in currency exchange rates do significantly affect the Company's sales, profitability and financial position when the foreign currencies of its international operations are translated into U.S. dollars for financial reporting. In addition, we are also subject to currency fluctuation risk with respect to certain foreign currency denominated receivables and payables. The Company cannot predict the extent to which currency fluctuations mayor will affect the Company's business and financial position, and there is a risk that such fluctuations will have an adverse impact on the Company's sales, profits and financial position. Also because differing portions of our revenues and costs are denominated in foreign currency, movements can impact our margins by, for example, decreasing our foreign revenues when the dollar strengthens without correspondingly decreasing our expenses. The Company does not currently hedge its currency exposure.

The translation of the Company’s UK operations’ pound Sterling denominated balance sheets into US dollars has been affected by the weakening of the average value of the US dollar against the British pound sterling in the relevant time periods from $1.47 in 2009, to $1.58 in 2010, an approximate 7.5% depreciation in value. These are the values that have been used in the calculations below.

The translation of the Company’s Norwegian operation’s Kroner denominated balance sheets into US dollars, as of October 31, 2009, has also been affected by the currency fluctuations of the US dollar against the Kroner from and average rate of $0.146 during 2009, to $0.172 during 2010, an approximate 17% change in value. These are the values that have been used in the calculations below.

The impact of these currency fluctuations on the 2010 Period is shown below:

	Pound Sterling						Norwegian Kroner
	Actual Results			Constant Rates			Actual Results			Constant Rates			Total Effect

Revenues	$	3,456,044		$	3,198,514		$			$			$	(257,530	)
Costs		3,619,622			3,349,903			318,294			269,490			(318,524	)
Net Income/(Losses)		(163,578	)		(151,389	)		(318,294	)		(269,490	)		60,994
Assets		17,121,788			16,727,146			737,173			663,171			(468,644	)
Liabilities		13,999,717			12,549,821			796,755			714,238			(1,532,413	)
Net Assets		3,122,071			4,177,326			(59,582	)		(51,067	)		1,063,769

This table shows that the effect of constant exchange rates, versus the actual exchange rate fluctuations, increased profits for the year by $60,994 and increased net assets by $1,063,769. In addition, the Company booked transactional exchange rate gains of $50,454 during 2010. All of these amounts are material to our overall financial results.

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.

Item 4T. Controls and Procedures

a) Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

The Company’s management, under the supervision and with the participation of the Company's Chief Executive Officer and the Chief Financial (and principal accounting) Officer, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of April 30, 2010. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this report. During the period ended April 30, 2010 Management commissioned an independent evaluation designed to provide recommendations to address control and procedure issues identified in the prior report and the current evaluation. Management has commenced the process of implementing these recommendations designed to remediate the material weakness previously identified. As part of these actions, the Company appointed a Chief Financial Officer. This appointment is expected to improve approval procedures, enhance segregation of duties and the quality of financial reporting.

The Company continues to investigate ways to improve its disclosure controls and procedures.

(b) Changes in Internal Controls.

There was no change in our internal controls over financial reporting that has materially affected, or is reasonable likely to materially affect, our internal control over financial reporting during the quarter covered by this Report.

PART II - OTHER INFORMATION

Item 1. 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. Except as described below, we are currently not aware of any such legal proceedings that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.

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 for the second quarter of this financial year. We filed a motion on June 8, 2011 for Partial Summary Judgment.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

10.28	Consultancy Agreement between the Company and Taktos Limited dated June 1, 2010

10.29	Employment Agreement between the Company and Judith Wallace dated June 1, 2010

10.30	Letter of Appointment issued by the Company in respect of Rear Admiral Christopher Parry dated June 1, 2010

31	Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a)

32	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Coda Octopus Group, Inc. (Registrant)

Date: June 14, 2010		/s/ Geoff Turner
		Geoff Turner
		Chief Executive Officer

Date: June 14, 2010		/s/Judith Wallace, CA, CPA, Msc, FCCA
		Judith Wallace
		Chief Financial Officer