SecProbe.io

CORRESP
1
filename1.htm

    Unassociated Document

    Louis
A. Brilleman, P.C.

    110 Wall
Street, 11th
Floor

    New York,
NY 10005-3817

    Phone:
212-709-8210

    Fax:
212-943-2300

                April
      30, 2010

    VIA
EDGAR

    Mr. David
R. Humphrey

    Branch
Chief

    United
States Securities and Exchange Commission

    Washington,
D.C. 20549

              Re:

              Coda
      Octopus Group, Inc. (the “Company”)

    Form 10-K
for the year ended October 31, 2009 (the “Form 10-K”)

    File No.
000-52815

    Dear Mr.
Humphrey:

    This
letter is in response to the letter dated March 8, 2010 by the accounting staff
of the Securities and Exchange Commission (the “Staff”) with comments on the
responses of the Company dated February 12, 2010.  Please note that
the Company will file an amended Form 10-K to incorporate the changes requested
by the Staff as soon as the Staff clears the Company’s proposed
revisions.

    Form 10-K for the Year Ended
October 31, 2009

    Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operation

    Comparison of fiscal year
ended October 31, 2009, compared to fiscal year ended October 31, 2008, page
25

              1.

              The
      Company proposes to revise
      and amend the disclosure to read as
      follows:

    Selling, General and Administrative
Expenses (SG&A). SG&A expenses for the 2009 Period decreased to
$11,238,961 from $13,204,254 in 2008, a reduction of 14.9% which reflects
activity under the cost reduction plan that has been executed during 2009 and
hitherto in 2010. SG &A expenses for 2009 include termination payments to
former directors and
management  of  $1,039,892.

      Mr. David
R. Humphrey

      Securities and Exchange
Commission

      April 30,
2010

    2.    The
Company proposes to revise and
amend the disclosure to read as follows (please note that the Company does not
intend to disclose S G & A by business segment since the information is not
required)

    Comparison
of fiscal year ended October 31, 2009, compared to fiscal year ended October 31,
2008.

    Introduction

    Coda
Octopus Martech acquired Dragon Design in December 2008. Therefore, financial
information for Martech for the 2009 Period includes activity in Dragon. This
should be taken into account when comparing the 2009 Period with the 2008
Period.

    Revenue: Total revenues for
the 2009 Period and the 2008 Period were $13,224,435 and $16,968,992
respectively, representing a decrease of 22.1%. Contributing factors to the
decrease were the global economic downturn, a particular slowdown in the oil and
gas market globally, and the hiatus in Government business brought about by the
Presidential elections, and the particular focus on Government procurement, and
where we saw only one of our planned minimum of four sales of our
Echoscope®.

    Gross
Margins:  Margins
were weaker in the 2009 Period at 52.2% (gross profit of $6,908,474) compared to
59.1% ($10,027,635) in the 2008 Period, reflecting a different mix of sales in
our businesses (products versus project work). In particular the slowdown in the
oil and gas and Government procurement markets had a direct impact on the sales
of our Echoscope® and we realized only one of our budgeted minimum of four sales
for 2009.  These factors caused a drop in product
income.

    Whilst  our
skills businesses also to, a lesser degree, suffered from the
slowdown because the profile of these businesses is of project work running
over a period of months and years the effect of any change of growth rate is
spread over time rather than the small number of weeks between order and
delivery typical of products businesses.

    Research and Development
(R&D). R&D spending decreased from $3,525,023 in the 2008 Period
to $2,652,713 in 2009 in line with our commitment to the holder of our secured
convertible notes. However, this level of spending still allows us to devote
considerable R&D resources to bring forward product variants of our core
technology that we plan to introduce to the market over the next
months.

    Selling, General and Administrative
Expenses (SG&A). SG&A expenses for the 2009 Period decreased to
$11,238,961 from $13,204,254 in 2008, a reduction of 14.9% which reflects
activity under the cost reduction plan that has been executed during 2009 and
hitherto in 2010.  SG&A expenses for 2009 include termination
payments to former directors and management of $1,039,892.

        2

    Mr. David
R. Humphrey

    Securities and Exchange
Commission

    April 30,
2010

    Key areas
of 2009 Period expenditure include wages and salaries, where we spent $6,835,266
or 49.2% during the 2009 Period against $8,202,854 or 49.0% of our SG&A cost
during the 2008 Period; legal and professional fees, including accounting, audit
and investment banking services, where we spent $3,293,878 or 23.71% in 2009
against $1,357,114 or 8.1% of our SG&A costs in 2008 - this increase is due
to legal fees, and provisions associated with defending the two legal cases
described in Item 4 above and accounting; travel costs reduced to $476,677 or
3.3% in 2009 from $782,615 or 5.63% of SG&A in the 2008 Period, rent for our
various locations increased in 2009 to $715,910 or 5% against $701,528 or 4.2%
of SG&A in 2008; marketing reduced in the 2009 Period to $522,576 or 3.6% of
SG&A against $1,240,508 or 7.4% of SG&A in 2008, as we reduced the
number of consultants engaged in the Business.

    Operating Loss. We incurred a
loss from operations of $6,983,200  in the 2009 Period against
$6,701,642 in the 2008 Period.  This increased loss is attributable to
falling revenues, particularly in sales of products during the downturn in the
oil and gas industry and the hiatus in Government sales brought about by the
2009 Presidential election.

    Interest Expense . Interest
expense increased in the 2009 Period to $1,846,883 from the 2008 Period interest
costs which were $1,538,724. In both years we have included amortization of the
30% redemption premium for our convertible note, at a cost of $514,285 for 2009
against $348,493 for 2008.  We have accrued interest on the
convertible bond of $195,150, ahead of payment of this latter amount in
February 2010.

    Dividends and Other Stock
Charges. In the 2009 Period, dividends were due only on outstanding
Series A Preferred stock, and totaled $47,382 for the year, versus $129,568
in 2008.

    Business
Segments

    The
Company operates in two business segments, Contracting and
Products.

    The table
below summarizes sales by business segment for each of the periods
indicated:

              For
      the Year Ended October 31,

              2009

              2008

              Contracting

            $
            8,355,041

            $
            7,699,801

              Product

            4,869,394

            9,269,121

              Total

            $
            13,224,435

            $
            16,968,922

    Contracting
Segment

    The
Company’s contracting segment operates mostly in the defense sector selling to
government agencies and government prime contractors various services that
assist them in the design and manufacture of a range of devices and components.
The segment consists of Coda Octopus Colmek and Coda Octopus Martech (including
the acquired Dragon Design) and Coda Octopus Tactical Intelligence

        3

      Mr. David
R. Humphrey

      Securities and Exchange
Commission

      April 30,
2010

    Contracting
segment Selected Financial Data

              For
      the Year Ended October 31,

              2009

              2008

              Sales

            $
            8,355,041

            $
            7,699,801

              Operating
      Profit (loss)

            $
            (2,084,664
            )

            $
            (1,700,411
            )

              Depreciation
      and amortization

            $
            311,246

            $
            272,966

              Operating
      profit (loss) as a % of sales

            (25.0
            )%

            (22.1
            )%

    2009 compared to
2008

    The
year-over-year increase in sales during 2009 is principally attributed to
improvements in both businesses and the acquisition of Dragon Design part way
through the year.

    The
operating loss in the Company’s Contracting segment was $2,084,664 in 2009
versus an operating loss of $1,700,411 in 2008. The increase in the loss from
operations was due to a number of factors including the lower profitability of
the business acquired from Dragon Design.

    Products
Segment

    The
Company’s Products segment manufactures and distributes a range of devices aimed
at assisting surveyors to understand the sub-sea environment to customers in the
oil and gas industry and others. The segment consists of Coda Octopus Products
Limited and Coda Octopus Products Inc.

    Product
Segment Selected Financial Data

              For
      the Year Ended October 31,

              2009

              2008

              Sales

            $
            4,869,394

            $
            9,269,121

              Operating
      Profit (loss)

            $
            1,676,804

            $
            2,266,490

              Depreciation
      and amortization

            $
            98,677

            $
            76,216

              Operating
      profit (loss) as a % of sales

            34.4
            %

            24.5
            %

    2009 compared to
2008

    The year-
over -year drop in sales during 2009 is principally attributed to the general
market slowdown and the slowdown in the oil and gas market in particular where
the unprecedented drop in the oil price made a significant number of off-shore
oil wells commercially unviable, and that in turn produced a slowdown in
exploration and exploitation

    The
operating profit in the Company’s Products segment was $1,676,804 in 2009 versus
an operating profit of $ 2,266,490 in 2008. The decrease in the profit from
operations was due to the reduction in demand described above.

        4

      Mr. David
R. Humphrey

      Securities and Exchange
Commission

      April 30,
2010

              3.

                See
      the Company’s response
      to comment
2.

    Note 7-Intangible Assets and
Goodwill, page F-17

              4.

              Comparisons of
      forecasted assumptions to actual results for
  2008

    (a) The
Company advises the Staff that the following significant assumptions were used
in connection with testing goodwill for impairment as of October 31,
2008:

    The
goodwill impairment testing was performed at the reporting unit level. The
Company compared the fair value of the reporting units with the carrying
value to determine whether there was any impairment in goodwill.

    The fair
value of the reporting unit was based on the average of the future cash
flows and the industry multiple valuation. For the
purpose of determining cash flows, the Company extracted projected revenues,
cost of sales, operating expenses, capital expenditure and depreciation numbers
from the internal management budget for the next five years. The internal
management budget for the first of the five years relevant to the goodwill
impairment testing was developed by individual company managers based on known
firm commitments, estimated sales for existing customers as driven by historical
trends and economic factors.  The Company also produces an estimate
for unexpected new business based on trends of similar types in previous years
and as dictated by economic trends. There is an overlay on these projected sales
for new products being produced. These numbers are rolled up at the group level
and validated by group management for items such as economic performance and
business factors.  With respect to costs, the Company conducts a
review to determine the organizational and resource requirements needed to
sustain sales projections. Numbers at the granular level are rolled up for the
overall company and validated based on economic performance and business
factors. The values for the ensuing four years relevant to the goodwill
impairment testing are projected as dictated by historical trends in regard to
business performance and projections in regard to the economic
forecast.

    For
Colmek, the 2009 projections were; revenues of $5 million, gross profit of $2
million and net income of $212,000. Net income is projected to increase by 9%
year on year in each of the succeeding 4 years.

    For
Martech, the 2009 projections were; revenues of $3 million, gross profit of $1.4
million and gross profit of $370k. Net income is projected to increase by 7.5%
in 2010 and then by 9% year on year in each of the succeeding 3
years.

    Operating
results were adjusted for taxation at the effective tax rate of 25%. The cash
flows were adjusted for depreciation, capital expenditure and increase in
working capital. Cash flows were discounted at a rate of 28%. The residual value
calculation which was a factor in the determination of future cash flows was
calculated based on net income in the final year of the five year period
considered in the calculation and projected to the following year at a long term
growth rate of 5%. The long term growth rate represents the growth rate in the
last year of the five year period relevant to the calculation. The residual cash
flows were also adjusted for depreciation, capital expenditure and increases in
working capital.

        5

      Mr. David
R. Humphrey

      Securities and Exchange
Commission

      April 30,
2010

    (b) The
Company engaged the services of an independent consultant to perform the
goodwill impairment testing. The following significant assumptions were used in
connection with testing goodwill for impairment as of October 31,
2009:

    The
goodwill impairment testing was performed at the reporting unit level. The
Company compared the fair value of the reporting units with the carrying value
to determine whether there was any impairment in goodwill. The fair value of the
reporting unit was based on the average of the future cash flows and the
industry multiple valuation. For the
purpose of determining cash flows, the Company  extracted projected
revenues, cost of sales, operating expenses, capital expenditure and
depreciation numbers from the internal management budget for the next five
years. The internal management budget for the first of the five years relevant
to the goodwill impairment testing was developed by individual company managers
based on known firm commitments, estimated sales for existing customers as
driven by historical trends and economic factors. The Company also produces an
estimate for unexpected new business based on trends of similar types in
previous years and as dictated by economic trends. There is an overlay on these
projected sales for new products being produced. These numbers are rolled up at
the group level and validated by group management for items such as economic
performance and business factors. With respect to costs, the Company conducts
a  review to determine the organizational and resource requirements
needed to sustain sales projections. Numbers at the granular level are rolled up
for the overall company and validated based on economic performance and business
factors. The values for the ensuing four years relevant to the goodwill
impairment testing are projected as dictated by historical trends in regard to
business performance and projections in regard to the economic
forecast.

    For
Colmek, the 2010 projections are; revenues of $7.2 million, gross profit of $3.7
million and net income of $1.6 million. Net income is projected to increase by
8.3% year on year in each of the succeeding 4 years.

    For
Martech the 2010 projections are; revenues of $3.6 million, gross profit of $1.3
million an