United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2010
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¨
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number: 001-32560
ICOP Digital,
Inc.
(Exact name of registrant as specified in its charter)
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Colorado
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84-1493152
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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16801 W. 116
th
Street, Lenexa, Kansas 66219
(Address of principal executive offices)
(913) 338-5550
(Registrant’s telephone number, including area code)
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such
files).
¨
Yes
¨
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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¨
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Accelerated filer
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¨
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Non-accelerated filer
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¨
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Smaller reporting company
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x
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Indicate by check mark whether the registration is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
The issuer
had 2,722,795 shares of its common stock issued and outstanding as of November 5, 2010, the latest practicable date before the filing of this report.
ICOP DIGITAL, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2010
TABLE OF CONTENTS
2
ICOP DIGITAL, INC.
Part I – FINANCIAL INFORMATION
Condensed Balance Sheets (Unaudited)
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September 30,
2010
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December 31,
2009
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Assets
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Current assets:
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Cash and cash equivalents
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$
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191,778
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$
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1,171,943
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Accounts receivable, net of allowances of $100,457 at September 30, 2010 and December 31, 2009
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2,210,761
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2,009,591
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Inventory, at lower of cost or market
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2,502,183
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2,094,168
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Prepaid Expenses
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112,086
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98,351
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Other Assets
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297,820
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1,759,004
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Total current assets
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5,314,628
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7,133,057
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Property and equipment, net of accumulated depreciation $1,614,010 and $1,411,988 at September 30, 2010 and
December 31, 2009, respectively
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1,242,093
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1,463,765
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Other assets:
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Deferred patent costs
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102,362
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95,906
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Investment, at cost
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25,000
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25,000
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Security deposit
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17,500
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18,258
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|
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|
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Total other assets
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144,862
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139,164
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Total assets
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$
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6,701,583
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$
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8,735,986
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Liabilities and Shareholders’ Equity
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Current liabilities:
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Accounts payable
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$
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400,311
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$
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370,998
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Accrued liabilities
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524,396
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476,761
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Notes payable
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479,985
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629,985
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Due to factor
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1,269,588
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686,965
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Unearned revenue - current portion
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256,807
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233,175
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|
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|
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Total current liabilities
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2,931,087
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2,397,884
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Other liabilities:
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Unearned revenue - long term portion
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382,420
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420,009
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Contingency (Note10)
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1,038,000
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—
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Shareholders’ equity:
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Preferred stock, no par value; 5,000,000 shares authorized, no shares issued and outstanding at September 30, 2010 and
December 31, 2009
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—
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—
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Common stock, no par value; 50,000,000 shares authorized, 2,722,795 and 2,360,294 issued and outstanding at September 30,
2010 and December 31, 2009, respectively
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37,755,171
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36,469,313
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Accumulated other comprehensive income
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3,465
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3,465
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Retained deficit
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(35,408,560
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)
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(30,554,685
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)
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Total shareholders’ equity
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2,350,076
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5,918,093
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Total liabilities and shareholders’ equity
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$
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6,701,583
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$
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8,735,986
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|
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See accompanying notes to condensed financial statements.
3
ICOP DIGITAL, INC.
Part I – FINANCIAL INFORMATION
Condensed Statements of Operations (Unaudited)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2010
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2009
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2010
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2009
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Sales, net of returns and allowances
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$
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2,555,114
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$
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1,945,231
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$
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6,291,336
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$
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5,795,227
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Cost of sales
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1,475,112
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1,173,137
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3,644,259
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3,084,130
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Gross profit
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1,080,002
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772,094
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2,647,077
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2,711,097
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Operating expenses:
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Selling, general and administrative
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1,724,032
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1,950,190
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5,729,731
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5,776,993
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Research and development
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203,714
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196,641
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553,443
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597,539
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Total operating expenses
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1,927,746
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|
2,146,831
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6,283,174
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6,374,532
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Operating loss
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(847,744
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)
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|
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(1,374,737
|
)
|
|
|
(3,636,097
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)
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|
|
(3,663,435
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)
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Other income (expense):
|
|
|
|
|
|
|
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|
|
|
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|
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Contingency settlement
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(1,038,000
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)
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—
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(1,038,000
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)
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—
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Gain on derecognition of liabilities
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—
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—
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—
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52,765
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Gain/(Loss) on disposal of property and equipment
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(2,875
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)
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4,537
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(2,472
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)
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(2,109
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)
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Interest income
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18
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25
|
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65
|
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|
61
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Loss on extended warranties
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|
—
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|
|
(599
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)
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—
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|
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(1,944
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)
|
|
Interest expense
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|
(70,666
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)
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|
(43,555
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)
|
|
|
(184,300
|
)
|
|
|
(140,908
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)
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Other income
|
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|
1,400
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|
|
|
13,878
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|
|
|
6,929
|
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|
|
22,574
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|
|
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|
|
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|
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|
|
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|
Loss before income taxes
|
|
|
(1,957,867
|
)
|
|
|
(1,400,451
|
)
|
|
|
(4,853,875
|
)
|
|
|
(3,732,996
|
)
|
|
Income tax provision
|
|
|
—
|
|
|
|
—
|
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|
|
—
|
|
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|
—
|
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|
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Net Loss
|
|
$
|
(1,957,867
|
)
|
|
$
|
(1,400,451
|
)
|
|
$
|
(4,853,875
|
)
|
|
$
|
(3,732,996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.83
|
)
|
|
$
|
(0.85
|
)
|
|
$
|
(1.81
|
)
|
|
$
|
(3.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic and diluted weighted average common shares outstanding
|
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|
2,362,180
|
|
|
|
1,641,430
|
|
|
|
2,674,941
|
|
|
|
1,114,656
|
|
See accompanying notes
to condensed financial statements.
4
ICOP DIGITAL, INC.
Part I – FINANCIAL INFORMATION
Condensed Statement of Changes in Shareholders’ Equity (Unaudited)
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|
|
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|
|
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Accumulated
Other
Comprehensive
(Loss) Income
|
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|
Retained
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
|
|
|
|
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Shares
|
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Amount
|
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|
Shares
|
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|
Amount
|
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|
Balance at December 31, 2009
|
|
|
—
|
|
|
$
|
—
|
|
|
|
2,360,294
|
|
|
$
|
36,469,313
|
|
|
$
|
3,465
|
|
|
$
|
(30,554,685
|
)
|
|
$
|
5,918,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
Stock issued under employee stock purchase plan
|
|
|
—
|
|
|
|
—
|
|
|
|
6,268
|
|
|
|
16,891
|
|
|
|
|
|
|
|
|
|
|
|
16,891
|
|
|
Stock issued in exchange for services
|
|
|
—
|
|
|
|
—
|
|
|
|
6,000
|
|
|
|
25,200
|
|
|
|
|
|
|
|
|
|
|
|
25,200
|
|
|
Stock options issued in exchange for services
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
110,653
|
|
|
|
|
|
|
|
|
|
|
|
110,653
|
|
|
Registered Direct Offering - net of offering costs $282,503
|
|
|
|
|
|
|
|
|
|
|
350,233
|
|
|
|
1,133,114
|
|
|
|
|
|
|
|
|
|
|
|
1,133,114
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Unrealized effect of the change in foreign currency exchange rates
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|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,853,875
|
)
|
|
|
(4,853,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,853,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
|
—
|
|
|
$
|
—
|
|
|
|
2,722,795
|
|
|
$
|
37,755,171
|
|
|
$
|
3,465
|
|
|
$
|
(35,408,560
|
)
|
|
$
|
2,350,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed financial statements
5
ICOP DIGITAL, INC.
Part I – FINANCIAL INFORMATION
Condensed Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,853,875
|
)
|
|
$
|
(3,732,996
|
)
|
|
Adjustments to reconcile net loss to net cash used by operating activities:
|
|
|
|
|
|
|
|
|
|
Contingency settlement
|
|
|
1,038,000
|
|
|
|
—
|
|
|
Depreciation
|
|
|
216,676
|
|
|
|
410,305
|
|
|
Stock-based compensation expense
|
|
|
135,853
|
|
|
|
341,044
|
|
|
Gain on derecognition of liabilities
|
|
|
—
|
|
|
|
(52,765
|
)
|
|
Loss on disposal of property and equipment
|
|
|
2,472
|
|
|
|
4,380
|
|
|
Changes in operating assets/liabilities:
|
|
|
—
|
|
|
|
—
|
|
|
Accounts Receivable
|
|
|
(201,170
|
)
|
|
|
240,292
|
|
|
Inventory
|
|
|
(408,015
|
)
|
|
|
1,422,964
|
|
|
Prepaids and other
|
|
|
1,447,449
|
|
|
|
(1,087,504
|
)
|
|
Accounts payable
|
|
|
29,313
|
|
|
|
(330,854
|
)
|
|
Accrued liabilities
|
|
|
204,818
|
|
|
|
(113,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) in operating activities
|
|
|
(2,388,479
|
)
|
|
|
(2,899,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(4,898
|
)
|
|
|
(43,234
|
)
|
|
Proceed from the sale of property and equipment
|
|
|
7,624
|
|
|
|
34,195
|
|
|
Deferred patent costs
|
|
|
(6,658
|
)
|
|
|
—
|
|
|
Deposits
|
|
|
758
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(3,174
|
)
|
|
|
(9,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from factoring agreement
|
|
|
6,594,500
|
|
|
|
5,191,306
|
|
|
Payments on factoring agreement
|
|
|
(6,183,017
|
)
|
|
|
(5,222,597
|
)
|
|
Payments on note payable
|
|
|
(150,000
|
)
|
|
|
(150,000
|
)
|
|
Proceeds from the issuance of common stock
|
|
|
1,358,441
|
|
|
|
3,974,875
|
|
|
Payment of offering costs
|
|
|
(208,436
|
)
|
|
|
(815,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided in financing activities
|
|
|
1,411,488
|
|
|
|
2,977,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of currency exchange rate changes on cash
|
|
|
—
|
|
|
|
3,193
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(980,165
|
)
|
|
|
72,808
|
|
|
Cash, beginning of period
|
|
|
1,171,943
|
|
|
|
99,192
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
191,778
|
|
|
$
|
172,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
184,300
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing transactions
|
|
|
|
|
|
|
|
|
|
Transfer of inventory for internal use
|
|
$
|
—
|
|
|
$
|
34,864
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering costs from Placement Agent warrants
|
|
$
|
91,090
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed financial statements.
6
ICOP DIGITAL, INC.
PART I – FINANCIAL INFORMATION
Note 1: Basis of Presentation
The condensed balance sheet at December 31, 2009 has been derived from financial statements audited by Cordovano and Honeck, LLP, independent public accountants, as indicated by its report included
in the Form 10-K. The accompanying unaudited financial statements at September 30, 2010 have been prepared from the records of the Company, in conformity with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have
been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 2010, the results of operations for the three and nine months ended September 30, 2010
and 2009, and cash flows for the nine months ended September 30, 2010 and 2009. These financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s annual report on
Form 10-K for the year ended December 31, 2009.
There is no provision for dividends for the quarter to which this quarterly report
relates.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. The results of operations for the three- and nine- month period ended September 30, 2010 are not necessarily indicative of the results to be expected for the full
year ending December 31, 2010.
Going Concern
The Company has incurred significant losses, negative cash flow from operations since inception, and has no history of operating at profitable levels. During the nine months ended September 30, 2010,
the Company incurred net losses of $4,853,875 and negative cash flow of $980,165 and could continue to incur losses and negative cash flow from operations in the future until product sales are sufficient to sustain profitability. These matters,
among others, raise substantial doubt about its ability to continue as a going concern.
Until the Company can achieve consistent
profitability and positive cash flow from operations, its ability to sustain operations and continue as a going concern are dependent upon obtaining additional financing. The Company will likely require such financing in the near term. The
Company has primarily relied on financing through the sale of common stock. There can be no assurance that additional equity or debt financing will be available. These consolidated financial statements do not give effect to any adjustments that
would be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in
the accompanying condensed financial statements.
Reverse Stock Split
On June 22, 2010, the Company effected a one-for-ten reverse stock split of the Company’s common stock. As a result, the Company’s shareholders received one new share of common stock in
exchange for every ten shares that they held immediately prior to the effective date. The Company did not issue any fractional shares as a result of the reverse split. Instead, Company shareholders who would otherwise have been entitled to a
fraction of a share received a full share of common stock. The purpose of the reverse stock split was to enable the Company to regain compliance with the minimum $1.00 per share bid price requirement for continued listing of the Company’s
common stock on the NASDAQ Capital Market. All share or per share information included in these unaudited Condensed Financial Statements and Notes to Condensed Financial Statements have been retroactively restated to effect the reverse stock split.
7
ICOP DIGITAL, INC.
PART I – FINANCIAL INFORMATION
Note 2: Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
ICOP Digital, Inc.
(the “Company”) was incorporated in April 1998 in Colorado as Bail Corporation. The Company changed its name to Vista Exploration Corporation in August 2001, and to its current name, ICOP Digital, Inc. in November 2004. The Company is
engaged in the design, development and marketing of surveillance equipment and systems for use in the public safety, military, and homeland security markets. The Company’s office is located in Lenexa, Kansas.
Note 3: Inventory
Inventories
are valued at the lower of cost or market. We take physical counts of inventories quarterly, and review the provision for potential losses from obsolete, excess or slow-moving inventories. The components of inventory as of September 30, 2010
and December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2010
|
|
|
December 31,
2009
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Raw materials
|
|
$
|
345,515
|
|
|
$
|
126,064
|
|
|
Work in process
|
|
|
106,073
|
|
|
|
101,548
|
|
|
Finished goods
|
|
|
2,050,595
|
|
|
|
1,866,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,502,183
|
|
|
$
|
2,094,168
|
|
|
|
|
|
|
|
|
|
|
|
Note 4: Other Current Assets
The components of other current assets as of September 30, 2010 and December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2010
|
|
|
December 31,
2009
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Deposits on inventory purchases
|
|
$
|
132,866
|
|
|
$
|
1,585,495
|
|
|
Inventory for parts
|
|
|
164,700
|
|
|
|
172,127
|
|
|
Other
|
|
|
254
|
|
|
|
1,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
297,820
|
|
|
$
|
1,759,004
|
|
|
|
|
|
|
|
|
|
|
|
8
ICOP DIGITAL, INC.
PART I – FINANCIAL INFORMATION
Note 5: Property and Equipment, net
The components of property and equipment, net of accumulated depreciation as of September 30, 2010 and December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2010
|
|
|
December 31,
2009
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Land
|
|
$
|
1,000,259
|
|
|
$
|
1,000,259
|
|
|
Equipment
|
|
|
1,166,052
|
|
|
|
1,162,991
|
|
|
Vehicles
|
|
|
214,341
|
|
|
|
235,976
|
|
|
Furniture
|
|
|
284,662
|
|
|
|
285,737
|
|
|
Leasehold improvements
|
|
|
190,789
|
|
|
|
190,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,856,103
|
|
|
|
2,875,753
|
|
|
Less: accumulated depreciation
|
|
|
(1,614,010
|
)
|
|
|
(1,411,988
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,242,093
|
|
|
$
|
1,463,765
|
|
|
|
|
|
|
|
|
|
|
|
Note 6: Debt Obligations
On November 10, 2008, we entered into a purchasing agreement (the “Purchasing Agreement”) with a financing company (the “Purchaser”) for a term of 18 months under which we agreed
to sell all of our accounts receivable at a discount of 0.75% (“Purchasing Fee”) from the face value of each invoice for every 30 days the invoice is outstanding. We are obligated to sell all of our receivables to the Purchaser, but the
Purchaser is not obligated to purchase any receivables or to advance against them. The Purchaser may, in its sole discretion, advance up to 85% of the eligible accounts receivable outstanding for a maximum borrowing of $5,000,000. The interest rate
on any outstanding advances to us will be 2.5% plus the greater of LIBOR plus 2.75% or the prime rate as published by
The Wall Street Journal
. In no event shall LIBOR be less than 3%. We are required to sell the Purchaser $2,400,000 in
invoices each calendar quarter or pay the minimum Purchasing Fee for any shortfall. We are required to maintain a $2,500,000 tangible net worth at all times during the term of the Purchasing Agreement (the “Net Worth Covenant”). The
Purchasing Agreement may be renewed annually after the initial 18-month term unless either party elects not to renew, or it may be terminated by the Purchaser at any time without cause on 60 days’ notice to us. The Purchasing Agreement was
renewed for twelve months on April 30, 2010. On September 30, 2010, the balance outstanding under the Purchasing Agreement was $1,269,588 and we were in compliance with the Net Worth Covenant.
Under the Purchasing Agreement, the Purchaser may, in its sole discretion, advance us up to 50% of eligible inventory, not to exceed the lesser of
(i) 40% of the outstanding advances under the accounts receivable financing or (ii) $750,000. The interest rate on any outstanding advances on inventory to us will be 3.5% plus the greater of LIBOR plus 2.75% or the prime rate as published
by
The Wall Street Journal
. In no event shall LIBOR be less than 3%. The financing facility is secured by a security interest in essentially all of our assets.
On March 3, 2010, we renewed our $780,000 loan agreement with the Bank of Blue Valley by paying the principal down by $150,000 and entering into a one-year note for $479,985 in principal amount. The
principal bears interest at 8%, payable monthly. The Company executed the loan agreement in order to purchase land which the Company may use to construct a new corporate headquarters after its current lease expires. The loan is principally secured
by the purchased land.
9
ICOP DIGITAL, INC.
PART I – FINANCIAL INFORMATION
Note 7: Unearned Revenue
Deferred Warranty Revenue
The Company provides extended warranties to protect against
defects in equipment for periods ranging from one to four years. The revenues related to extended warranties are recognized over the life of the extended warranty, which begins upon the expiration of the manufacturer’s warranty, while the
product warranty costs are expensed as incurred. The Company records estimated warranty costs that may be incurred above those associated with the deferred warranty revenues as an unfulfilled warranty liability. A summary of changes in deferred
warranty revenue, which is included in both current liabilities and other liabilities, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Unearned revenue, beginning balance
|
|
$
|
653,184
|
|
|
$
|
466,983
|
|
|
Revenue deferred for new extended warranties sold
|
|
|
255,213
|
|
|
|
382,533
|
|
|
Revenue recognized
|
|
|
(269,170
|
)
|
|
|
(196,228
|
)
|
|
Unfulfilled warranty liability
|
|
|
—
|
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Unearned revenue at the end of period
|
|
$
|
639,227
|
|
|
$
|
653,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
256,807
|
|
|
$
|
233,175
|
|
|
Non-current portion
|
|
|
382,420
|
|
|
|
420,009
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned revenue at the end of period
|
|
$
|
639,227
|
|
|
$
|
653,184
|
|
|
|
|
|
|
|
|
|
|
|
Note 8: Shareholders’ Equity
Registered Direct Offering
On February 3, 2010, the Company completed a registered
direct offering (the “Financing Transaction”) to two institutional investors (the “Financing Transaction Investors”) an aggregate of 350,000 shares of our common stock, Series 1 warrants to purchase up to an aggregate of 350,000
shares of common stock (the “Series 1 Warrants”) and Series 2 warrants to purchase up to an aggregate of 123,258 shares of common stock (the “Series 2 Warrants”). The net proceeds to the Company from the Financing Transaction,
after deducting transaction costs and Placement Agent fees, were approximately $1,182,000. The exercise price of the Series 1 Warrants is $4.20 per share, and they are currently exercisable until February 3, 2015. The initial exercise price of
the Series 2 Warrants was $3.833 per share, and they expired on May 4, 2010. The Series 1 Warrants and Series 2 Warrants are collectively referred to as the “Warrants.” Subject to certain customary exceptions, in the event of an
issuance or deemed issuance by us of common stock (or securities convertible into common stock) at a per share price less than the then applicable Series 1 Warrant exercise price (a “Dilutive Event”), then the Series 1 Warrant exercise
price will be reduced to that new issuance price, and the number of shares of common stock issuable upon exercise of the Series 1 Warrants will be correspondingly increased (the “Dilution Provision”). On June 3, 2010, our shareholders
approved the Dilution Provision in accordance with NASDAQ Marketplace 5635. The Company paid Chardan Capital Markets, LLC (the “Placement Agent”) an aggregate fee of 7.0% of the gross proceeds from the Financing Transaction. The Placement
Agent also received a five-year warrant (the “Placement Agent Warrant”) to purchase (i) a number of shares equal to 3.0% of the shares sold to the Financing Transaction Investors and (ii) warrants (substantially similar to a
Series 1 Warrant) to purchase a number of shares equal to 3.0% of the number of shares underlying the Warrants sold to the Financing Transaction Investors (subject to reduction in number as necessary to comply with the compensation guidelines of the
Financial Industry Regulatory Authority). The placement agent agreement requires us to indemnify the Placement Agent and certain of its affiliates against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the
Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or to contribute to payments the Placement Agent may be required to make because of any of those liabilities.
10
ICOP DIGITAL, INC.
PART I – FINANCIAL INFORMATION
Sale of Common Stock
During the first and third quarters 2010, the Company received proceeds of $10,665 and $3,693 in connection with employee purchases of 3,391 and 2,877 shares, respectively, of its common stock under the
Company’s Employee Stock Purchase Plan.
Awards of Restricted Common Stock and Stock Options
The Company has granted to employees, consultants and directors shares of restricted common stock and options to purchase shares of the Company’s
common stock which vest in 2007 and future years. Stock-based compensation expense related to these awards of $42,672 and $93,206 has been recorded in the three months ended September 30, 2010 and 2009, respectively, and $135,852 and $341,044
has been recorded in the nine month period ended September 30, 2010 and 2009, respectively. The reduction in expense for the nine month period year over year was due to the Company’s expectation that it will not meet the performance
requirement condition of certain options granted. As a result, the Company has determined that no compensation expense related to the performance condition stock options granted is necessary until that performance condition becomes probable. As of
September 30, 2010, the Company has determined it will not meet the performance requirement condition.
Note 9: Income Taxes
The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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 recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The Company records a valuation allowance, if necessary, to reduce deferred tax assets to an amount it believes is more likely than not to be realized.
The Company incurred net operating losses during the periods shown on the condensed financial statements resulting in a deferred tax asset, all of which was fully reserved; therefore, the net benefit and
expense resulted in $0 income taxes. The recognition of these net operating loss carry-forwards depends on the ability of the Company to generate taxable income in the future.
Certain U.S. Federal returns from inception and following are not closed by relevant statutes of limitation due to unused net operating losses reported on those returns.
The Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes as income tax expense in the
statements of operations. There has been no interest or penalties recognized in the condensed financial statements.
Note 10:
Contingencies
On June 22, 2010, the Company effected a one-for-ten reverse stock split of its common stock (the “Reverse
Stock Split”). The purpose of the Reverse Stock Split was to enable the Company to regain compliance with the minimum $1.00 per share bid price requirement for continued listing on the NASDAQ Capital Market. On June 3, 2010, our
shareholders approved, by a majority of 80.3% of the shares voting, an amendment to our Articles of Incorporation, as amended, and a reverse stock split of our common stock, and voted to grant our Board of Directors the authority to set the ratio of
the reverse stock split within the range of one-for-two to one-for-ten, or not to complete any reverse stock split, at their discretion. We believe that if our common stock had been delisted, it would have been more difficult to buy or sell our
common stock and to obtain accurate quotations, and that the price of our stock could therefore have suffered a material decline. We also believe that delisting would have impaired our ability to raise capital, and would also have impaired the value
of our outstanding warrants, including the Warrants issued to the Financing Transaction Investors. We further believe that if our common stock had been delisted, a market maker would have had to sponsor quotation of our common stock on the OTC
Bulletin Board, and our common stock could have become subject to the SEC’s penny stock regulations. We believe the regulations affecting penny stocks could have severely affected the market liquidity for our common stock and limited our
shareholders’ ability to sell our common stock in the secondary market. We believe that this loss of liquidity would have severely adversely affected not only our shareholders and warrant holders, but also the value of the Warrants held by the
Financing Transaction Investors.
11
ICOP DIGITAL, INC.
PART I – FINANCIAL INFORMATION
Pursuant to authority granted by our shareholders, our Board of Directors determined that the Reverse
Stock Split was the only means reasonably assured to retain our NASDAQ listing and that the Reverse Stock Split was therefore in the best interests of our shareholders, warrant holders and the Financing Transaction Investors alike.
The Securities Purchase Agreement, (the “SPA”), entered into in connection with the Financing Transaction contains a provision that required us
to obtain the written consent of the Financing Transaction Investors prior to effecting the Reverse Stock Split. We requested, but did not obtain, such written consent from the Financing Transaction Investors prior to the June 3, 2010
shareholders meeting, and also prior to effecting the Reverse Stock Split.
We requested a waiver from the Financing Transaction Investors of
the written consent requirement in the SPA with respect to the Reverse Stock Split. We held discussions with the Financing Transaction Investors with the objective of arriving at a mutually acceptable waiver agreement. During the course of these
discussions, however, the Financing Transaction Investors filed a lawsuit against us (the “Financing Transaction Litigation”). The Financing Transaction Litigation was filed in the United States District Court for the Southern District of
New York and is titled Alpha Capital Anstalt and Iroquois Master Fund, Ltd., Plaintiffs, v. ICOP Digital, Inc., Defendant, Case No. 10 CV 5924. The plaintiffs have demanded injunctive relief and an unspecified amount of damages, interest and
attorneys’ fees alleging breach of the SPA, fraud and breach of representation arising from the implementation of the Reverse Stock Split without the plaintiffs’ written consent.
We filed an answer and counterclaim in the Financing Transaction Litigation demanding injunctive relief and an unspecified amount of damages and attorneys’ fees alleging breach of contract, fraud and
breach of representation.
On November 1, 2010, pursuant to the authority of our Board of Directors, we entered into a Settlement and
Release Agreement (the “Settlement Agreement”) with the Financing Transaction Investors, pursuant to which we agreed to issue an aggregate of 600,000 unregistered shares of common stock (the “New Shares”) to the Financing
Transaction Investors in exchange for cancellation of the Series 1 Warrants and a mutual release of all claims connected with the Financing Transaction, the Warrants, the Reverse Stock Split and the Financing Transaction Litigation. The New Shares
were valued at $1.73 per share, the closing price of our common stock on the NASDAQ Capital Market on the date of execution of the Settlement Agreement. We agreed to issue the New Shares to the Financing Transaction Investors in reliance upon the
exemption from registration in Section 3(a)(10) of the Securities Act. In order to rely upon the 3(a)(10) exemption, the Court presiding over the Financing Transaction Litigation must issue an order, following a hearing in which the Financing
Transaction Investors have a right to participate, finding that the terms and conditions of the exchange of the New Shares for the Series 1 Warrants and the release of the Financing Transaction Investors’ claims is fair to the Financing
Transaction Investors. The Financing Transaction Investors will stipulate to the fairness of such exchange. Although we anticipate the Court will issue the appropriate order permitting us to rely on the 3(a)(10) exemption the Settlement Agreement
will be void if such order is not granted.
In accordance with the 3(a)(10) exemption, the New Shares will be freely tradable upon issuance.
Although the Financing Transaction Investors did not claim a specified amount of damages and we believe our counterclaims in the Financing Transaction Litigation were meritorious, had we not prevailed in the Financing Transactions Litigation, we
would not have been exposed to substantial damages and reimbursement of the Financing Transaction Investors’ attorney’s fees. Defending the litigation also required us to incur substantial defense costs, including the fees and expenses of
defense counsel. Moreover, we were advised by potential investors and lenders that it would be difficult for us to obtain the equity or debt financing required by us to purchase inventory and support operations so long as the Dilution Provision was
in effect and the Financing Transaction Litigation was pending. We believe the Settlement Agreement will put us in a better position to obtain needed financing, although there can be no assurance such financing will be available to us. Accordingly,
our Board of Directors determined that the Settlement Agreement and its terms and conditions are in the best interest of the Company and our shareholders.
12
ICOP DIGITAL, INC.
PART I – FINANCIAL INFORMATION
Note 11: Subsequent Events
On November 1, 2010, as described previously in Note 10: “Contingencies”, we entered into a Settlement Agreement with the Financing Transaction Investors, pursuant to which (i) the
Series 1 Warrants will be surrendered for cancellation, (ii) we will issue an aggregate of 600,000 New Shares to the Financing Transaction Investors, and (iii) the parties to the Financing Transaction Litigation will release one another
from liability. The Settlement Agreement is subject to court approval pursuant to the exemption from registration in Section 3(a)(10) of the Securities Act. We recorded a contingency liability of $1,038,000 for potential non-cash settlement of
the Financing Transaction Litigation.
Forward Looking Statements
This report contains forward-looking statements, as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are subject to material known
and unknown risks, uncertainties and contingencies. These forward-looking statements include information about possible or assumed financial results of our business, financial condition, liquidity, results of operations, plans and objectives. In
some cases, you may identify forward-looking statements by words such as “may,” “should,” “plan,” “intend,” “potential,” “continue,” “believe,” “expect,”
“predict,” “anticipate,” and “estimate,” the negative of these words or other comparable words. These statements are only predictions and expressions of belief. You should not place undue reliance on these
forward-looking statements. These forward-looking statements are qualified by their terms and/or important factors, many of which are outside our control, and involve a number of risks, uncertainties and contingencies that could cause actual results
and events to differ materially from the statements made. Such factors include, among other things, the risks and uncertainties described in “Forward-Looking Statements” in our annual report on Form 10-K for the year ended
December 31, 2009, which is on file with the U.S. Securities and Exchange Commission (“SEC”) and the risks and uncertainties listed below. Readers are strongly encouraged to consider these factors when evaluating forward-looking
statements.
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•
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Our ability to continue as a going concern, as discussed in Note 1: “Basis of Presentation” to the Condensed Financial Statements
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•
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If the Court does not approve the Settlement Agreement with the Financing Transaction Investors, the Settlement Agreement will be void, and we will
continue to be exposed to the risks involving the Dilution Provision and Financing Transaction Litigation, as discussed in Note 10: “Contingencies” to the Condensed Financial Statements.
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•
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The New Shares issuable to the Financing Transaction Investors under the Settlement Agreement will be freely tradable. Any significant resale of New
Shares or any short sales of our common stock, by the Financing Transaction Investors could adversely affect the market price of our common stock.
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•
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Our need for additional capital in the near future to acquire inventory, support operations and capitalize on new opportunities and our ability to
obtain such capital on acceptable terms, even if the Settlement Agreement is approved by the Court
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•
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Our ability to maintain our listing on the NASDAQ Capital Market
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•
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Our history of losses and our expectation of continued losses unless our sales and revenues significantly increase
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•
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Our history of negative cash flow from operations and our continued reliance on outside capital to support operations
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•
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Our ability to achieve profitable operations and positive cash flow in the future
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•
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The current recession and budgetary pressures on state and local law enforcement agencies, which comprise a material segment of our customer base
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We may not be able to sell new securities under our shelf registration statement until February 4, 2011
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•
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The effect of our continuing losses and negative cash flow on our competitiveness
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13
ICOP DIGITAL, INC.
PART I – FINANCIAL INFORMATION
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•
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Our ability to penetrate new markets in the United States and abroad, including homeland security and foreign security services
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•
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Unfavorable foreign exchange ratios between the U.S. Dollar and the Japanese Yen have increased our inventory costs
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A number of companies engaged in our industry have gone out of business, and we are beginning to attract competition from much larger companies that
are entering our industry
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•
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Risks and uncertainties of marketing our products in foreign countries
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Our compliance with U.S. and foreign laws and regulations that apply to conducting business in other countries, including compliance with the U.S.
Foreign Corrupt Practices Act
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•
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Our need to continually improve our products and develop new products in order to remain competitive
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•
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Potential competition from new developments in surveillance technology
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•
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Any failure to acquire inventory or fill orders on a timely basis may cause us to lose potential sales
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We are not in compliance with NASDAQ Listing Standards 5605(b)(1) and 5605(c)(2) because independent directors do not comprise a majority of our Board,
and our audit committee consists of only two independent directors. We must regain compliance by appointing an additional independent director not later than our 2011 annual shareholder meeting. If we do not regain compliance by that date, our
common stock may be delisted by NASDAQ. It may be difficult to recruit an additional independent director because of our financial condition and the current financial and regulatory environment.
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Our continued ability to comply with the Net Worth Covenant in the Purchasing Agreement
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Our ability to renew the Purchasing Agreement or obtain substitute receivables financing on April 30, 2011
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Our dependence on foreign companies to manufacture our products
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Our dependence on our management to operate and grow the Company
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Our ability to manage growth
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The effectiveness of our internal financial controls and disclosure controls and procedures
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Our potential exposure to product warranty claims and claims for defective products
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Our operating results may fluctuate, which may make it difficult to predict future results
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Neither we nor any other person assumes responsibility for the accuracy or completeness of these forward-looking statements. We undertake no obligation
to revise, or publicly release the results of any revisions to, these forward-looking statements.
As used herein, references to
“ICOP,” “we,” “us”, “our” or “the Company” mean ICOP Digital, Inc.
14
ICOP DIGITAL, INC.
PART I – FINANCIAL INFORMATION
|
Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Overview
We have experienced net losses and negative cash flow from operations since
inception, and could continue to experience net losses and negative cash flow from operations in the future unless our product sales and profitability improve significantly. These and other conditions raise substantial doubt about our ability to
continue as a going concern.
We have developed what we believe are favorable product marketing and sales opportunities in the U.S. and
abroad. Our ability to capitalize on those opportunities, purchase inventory, and support operations will depend upon our access to third party equity or debt financing in the near future. Our ability to raise new capital has been constrained by the
Dilution Provision and Financing Transaction Litigation. We believe that Court approval of the Settlement Agreement with the Financing Transaction Investors will improve our outlook for raising capital and enable us to capitalize on these
opportunities and grow the Company, but there can be no assurance the Settlement Agreement will be approved by the Court or that adequate financing will become available to us on a timely basis.
For the Three Months Ended September 30, 2010 and 2009
Results of Operations
Sales
Sales for the three months ended September 30, 2010 and 2009 were $2,555,114 and $1,945,231, respectively, an increase of $609,883 (31.4%) due
to continued market penetration and customer re-orders.
Cost of Sales
Cost of sales for the three months ended September 30, 2010 and 2009 were $1,475,112 and $1,173,137, respectively, an increase of $301,975 (25.7%). Cost of sales as a percentage of sales was 57.7%
for the third quarter of 2010 compared to 60.3% for the third quarter of 2009. The increase in the amount was due to an increase in units shipped for the three month period in 2010 as compared to 2009 and the cost of inventory being higher in 2010
as a result of unfavorable foreign currency movements in the U.S. Dollar compared to the Japanese Yen.
Gross Margin
Gross margin was 42.3% for the three months ended September 30, 2010 compared to 39.7% for the three months ended September 30, 2009. The
decrease in gross margin for 2009 is primarily due to higher cost of goods sold due to our summer special which offered promotional items that were expensed to cost of goods sold.
Operating Expenses
Operating expenses were $1,927,746 and $2,146,831 for the three months
ended September 30, 2010 and 2009, respectively, a decrease of $219,085 (10.2%). The decrease is mainly due to the decline in depreciation, stock based compensation and promotional expenses. Overall operating expenses as a percentage of sales
decreased from 110.4% in 2009 to 75.4% for the three months ended September 30, 2010.
Selling, General and Administrative
Selling, general and administrative expenses for the three months ended September 30, 2010 and 2009, were $1,724,032 and $1,950,190,
respectively, a decrease of $226,158 (11.6%). The decrease is mainly due to the decline in depreciation, compensation and promotional expenses. The decline in promotional expenses is due to cost saving measures.
Research and Development
Research and
development expenses for the three months ended September 30, 2010 and 2009 were $203,714 and $196,641, respectively. The increase is the result of product development for certain products for the third quarter of 2010 as compared to the third
quarter 2009.
15
ICOP DIGITAL, INC.
PART I – FINANCIAL INFORMATION
Stock-based Compensation Expense
Stock-based compensation expense for the three months ended September 30, 2010 and 2009 was $42,672 and $93,206 respectively, a decrease of $50,534 (54.2%). The decrease is due to more options being
granted in the third quarter of 2009 compared to the third quarter 2010.
Other Income (Expenses)
Contingency Settlement
As discussed in
“
Other Sources of Capital
”, we recorded a contingency liability of $1,038,000 for potential non-cash settlement in the Financing Transaction Litigation.
Interest Expense
Interest expense was $70,666 and $43,555 for the three months ended
September 30, 2010 and 2009, respectively, an increase of $27,111 (62.2%). The increase is due to the interest and factoring fees for advances under the Purchasing Agreement.
For the Nine Months Ended September 30, 2010 and 2009
Results of Operations
Sales
Sales for the nine
months ended September 30, 2010 and 2009 were $6,291,336 and $5,795,227, respectively, an increase of $496,109 (8.6%) due to increased market penetration and customer re-orders.
Cost of Sales
Cost of sales for the nine months ended September 30, 2010 and 2009
were $3,644,259 and $3,084,130, respectively, an increase of $560,129 (18.2%). Cost of sales as a percentage of sales was 57.9% for the nine month period in 2010 as compared to 53.2 % for the same period in 2009. The increase in amount and
percentage of cost of sales was due to the increase in units shipped and cost of inventory being higher in 2010 as a result of unfavorable foreign currency movements in the U.S. Dollar compared to the Japanese Yen.
Gross Margin
Gross margin was 42.1% for
the nine months ended September 30, 2010 compared to 46.8% for the nine months ended September 30, 2009. The decline is due to higher margins in 2009 for certain markets along with the result of the cost of inventory being higher in 2010
as a result of unfavorable foreign currency movements in the U.S. Dollar compared to the Japanese Yen. The decline in gross margin for 2010 is also attributable to increased sales of certain products having a lower margin.
Operating Expenses
Operating expenses
were $6,283,174 and $6,374,532 for the nine months ended September 30, 2010 and 2009, respectively, a decrease of $91,358 (1.4%). Overall operating expenses as a percentage of sales decreased from 110.0% in 2009 to 99.9% for the nine months
ended September 30, 2010. This decrease is mainly due to lower stock based compensation, research and development, and depreciation expense offset by increased travel costs. The increase in travel costs is attributed to trade events, activities
relating to a recently formed client services team and greater focus on direct sales.
Selling, General and Administrative
Selling, general and administrative expenses for the nine months ended September 30, 2010 and 2009, were $5,729,731 and $5,776,993, respectively, a
decrease of $47,262 (0.8%). The decrease is mainly due to lower stock based compensation and depreciation expense offset by increased travel costs. The increase in travel costs is attributed to an increase in trade show event participation,
activities relating to an elevated focus on client services and direct sales.
16
ICOP DIGITAL, INC.
PART I – FINANCIAL INFORMATION
Research and Development
Research and development expenses for the nine months ended September 30, 2010 and 2009 were $553,443 and $597,539, respectively, a decrease of $44,096 (7.4%). The decrease is the result of the
completion of product development for certain products.
Stock-based Compensation Expense
Stock-based compensation expense for the nine months ended September 30, 2010 and 2009 was $135,852 and $341,044 respectively, a decrease of $205,192
(60.2%). The decrease is due to fewer options granted in the first nine months of 2010 compared to 2009. The reduction in expense for the nine month period year over year was also due to the Company’s expectation that it will not meet the
performance requirement condition of certain options granted. As a result, the Company has determined that no compensation expense related to the performance condition stock options granted is necessary until that performance condition becomes
probable.
Other Income (Expenses)
Contingency Settlement
As discussed in “
Other Sources of Capital
”, we
recorded a contingency liability of $1,038,000 for potential non-cash settlement in the Financing Transaction Litigation.
Interest Expense
Interest expense was $184,300 and $140,908 for the nine months ended September 30, 2010 and 2009, respectively, an increase of
$43,392 (30.8%). The increase is due to the interest and factoring fees for advances under the Purchasing Agreement.
Liquidity and Capital
Resources
Working Capital
On September 30, 2010, we had $191,778 in cash, $2,210,761 in accounts receivable, $2,502,183 in inventory, $409,906 in prepaid expenses and other
current assets and $2,931,087 in current liabilities, for a net working capital of $2,383,541.
Operating Cash Flows
Net cash used in operating activities for the nine months ended September 30, 2010 was $2,388,479 compared to $2,899,119 for the nine months ended
September 30, 2009. The increase in net cash used in operations in 2009 is mainly due to decreases in inventory and accounts receivable.
Investing Activity Cash Flows
Net cash
used in investing activities for the nine months ended September 30, 2010 was $3,174, primarily for deferred patent and deposit expenses, compared to $9,039 for the nine months ended September 30, 2009, for the sales and purchases of
equipment.
Financing Activity Cash Flows
Net cash provided by financing activities was $1,411,488 for the nine months ended September 30, 2010, primarily from the closing of the Financing Transaction along with proceeds and collections from
the Purchasing Agreement, compared to $2,977,773 for the nine months ended September 30, 2009, substantially the closing of a public offering along with proceeds and collections from the Purchasing Agreement.
17
ICOP DIGITAL, INC.
PART I – FINANCIAL INFORMATION
Other Sources of Capital
On November 10, 2008, we entered into a purchasing agreement (the “Purchasing Agreement”) with a financing company (the “Purchaser”) for a term of 18 months under which we agreed
to sell all of our accounts receivable at a discount of 0.75% (“Purchasing Fee”) from the face value of each invoice for every 30 days the invoice is outstanding. We are obligated to sell all of our receivables to the Purchaser, but the
Purchaser is not obligated to purchase any receivables or to advance against them. The Purchaser may, in its sole discretion, advance up to 85% of the eligible accounts receivable outstanding for a maximum borrowing of $5,000,000. The interest rate
on any outstanding advances to us will be 2.5% plus the greater of LIBOR plus 2.75% or the prime rate as published by
The Wall Street Journal
. In no event shall LIBOR be less than 3%. We are required to sell the Purchaser $2,400,000 in
invoices each calendar quarter or pay the minimum Purchasing Fee for any shortfall. We are required to maintain a $2,500,000 tangible net worth at all times during the term of the Purchasing Agreement (the “Net Worth Covenant”). The
Purchasing Agreement may be renewed annually after the initial 18-month term unless either party elects not to renew, or it may be terminated by the Purchaser at any time without cause on 60 days’ notice to us. The Purchasing Agreement was
renewed for twelve months on April 30, 2010. On September 30, 2010, the balance outstanding under the Purchasing Agreement was $1,269,588 and we were in compliance with the Net Worth Covenant.
Under the Purchasing Agreement, the Purchaser may, in its sole discretion, advance us up to 50% of eligible inventory, not to exceed the lesser of
(i) 40% of the outstanding advances under the accounts receivable financing or (ii) $750,000. The interest rate on any outstanding advances on inventory to us will be 3.5% plus the greater of LIBOR plus 2.75% or the prime rate as published
by
The Wall Street Journal
. In no event shall LIBOR be less than 3%. The financing facility is secured by a security interest in essentially all of our assets.
On February 3, 2010, we completed a registered direct offering (the “Financing Transaction”) of 350,000 shares of our common stock, Series 1 warrants to purchase up to 350,000 shares of
common stock (the “Series 1 Warrants”) and Series 2 warrants to purchase up to 123,258 shares of common stock (the “Series 2 Warrants”), all on a post-Reverse Stock Split basis, pursuant to the SPA. The exercise price of the
Series 1 Warrants is $4.20 per share, and they are currently exercisable until February 3, 2015. The initial exercise price of the Series 2 Warrants was $3.833 per share, and they expired on May 4, 2010. The Series 1 Warrants and Series 2
Warrants are referred to collectively as the “Warrants.” Subject to certain customary exceptions, in the event of an issuance or deemed issuance by us of common stock (or securities convertible into common stock) at a per share price less
than the then applicable Warrant exercise price (a “Dilutive Event”), then the Series 1 Warrant exercise price will be reduced to that new issuance price. The SPA and Series 1 Warrants are also subject to a number of other provisions which
give the Financing Transaction Investors consent rights, drag-along rights, preemptive rights, participation rights and rights of first refusal in the event we engage in certain transactions or take certain corporate action. We paid Chardan Capital
Markets, LLC (the “Placement Agent”) an aggregate fee of 7.0% of the gross proceeds from the Financing Transaction. The Placement Agent also received a five-year warrant (the “Placement Agent Warrant”) to purchase (i) a
number of shares equal to 3.0% of the shares sold to the Financing Transaction Investors and (ii) warrants (substantially similar to a Series 1 Warrant) to purchase a number of shares equal to 3.0% of the number of shares underlying the
Warrants sold to the Financing Transaction Investors (subject to reduction in number as necessary to comply with the compensation limit pursuant to applicable guidelines of the Financial Industry Regulatory Authority). The placement agent agreement
requires us to indemnify the Placement Agent and certain of its affiliates against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”) and the Exchange Act, or to contribute to
payments the Placement Agent may be required to make because of any of those liabilities.
The net proceeds to us from the Financing
Transaction were approximately $1,182,000.
As described in Note 10: “Contingencies” to the Condensed Financial Statements, we
entered into a Settlement Agreement with the Financing Transaction Investors, pursuant to which (i) the Series 1 Warrants will be surrendered for cancellation, (ii) we will issue an aggregate of 600,000 New Shares to the Financing
Transaction Investors, and (iii) the parties to the Financing Transaction Litigation will release one another from liability. The Settlement Agreement is subject to court approval pursuant to the exemption from registration in
Section 3(a)(10) of the Securities Act. We recorded a contingency liability of $1,038,000 for potential non-cash settlement in the Financing Transaction Litigation.
18
ICOP DIGITAL, INC.
PART I – FINANCIAL INFORMATION
Our Capital Requirements and Financing Outlook
Our primary uses of capital are to support sales, marketing and operations, product research and development, and purchasing inventory to fill customer
orders.
Our primary sources of capital have been cash from operations, supplemented by proceeds from the Purchasing Agreement, other debt
financings, and periodic sales of equity securities such as the Financing Transaction.
We have incurred significant operating losses and
negative cash flow from operations since inception. We have relied upon equity and debt financing arrangements to supplement cash flow from operations and support our operations, and require additional financing to acquire inventory and sustain
operations in the near term. We intend to continue utilizing equity and debt financing arrangements to supplement operating cash flow, acquire inventory and fund operations in the foreseeable future. Our ability to obtain
sufficient advances under the Purchasing Agreement is dependent upon our ability to generate increased accounts receivable through higher sales volumes, which cannot be assured. We may need to obtain replacement receivables
financing if the Purchasing Agreement is not renewed on April 30, 2011. Debt and equity markets remain challenging in the current economic environment. We also believe our ability to obtain needed financing has been constrained by the Dilution
Provision and Financing Transaction Litigation, and that the Settlement Agreement will improve our outlook for new financing. We believe conditions in capital markets, our financial condition and performance, and the substantial doubt about our
ability to continue as a going concern have made the terms of any new equity or debt financing we may obtain potentially less favorable for us. We will need to become profitable and generate positive cash flow in the near future through generating
higher revenues or lowering operating costs, or a combination of the two, to reduce our reliance on third party financing and/or obtain better financing terms.
In February 2010, we completed a registered direct offering of our equity securities in the Financing Transaction and generated approximately $1,182,000 in net proceeds for inventory purchases and general
corporate purposes. The securities were sold pursuant to a shelf registration statement that was declared effective by the SEC on October 28, 2009. Due to limitations on the use of shelf registration statements by smaller reporting
companies, we may not be able to use the shelf registration statement to sell additional securities until February 4, 2011 at the earliest.
There can be no assurance we will have access to future capital to sustain operations, or that the terms of any such financing will be advantageous to us.
Our history of losses and negative cash flow may also adversely affect our stock price and our ability to market our products. Even if we are able to
attract new capital on acceptable terms, we must achieve higher sales, profitability and positive cash flow in the near future or the availability of future financing may decrease and the terms on which we are able to obtain financing may continue
to become less favorable.
We have developed what we believe are promising opportunities to market products in the U.S. and abroad, both
directly and through arrangements with third parties, but there can be no assurance these efforts will be successful or that we will be able to obtain the capital necessary to exploit them.
Please refer to “
Going Concern
” in Note 1 and “Contingencies” in Note 10 to the Condensed Financial Statements for additional disclosure about these matters.
Employees
We had 50 full-time employees
at September 30, 2010, a slight decline from December 31, 2009.
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
Not required for smaller reporting companies.
19
ICOP DIGITAL, INC.
PART I – FINANCIAL INFORMATION
|
Item 4.
|
Controls and Procedures
|
Evaluation of
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in reports that it files under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms, and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. There are inherent
limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control objectives, and management necessarily is required to use its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
In connection with the preparation of this Quarterly Report on Form 10-Q, the Company carried out an evaluation under the supervision and with the
participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as of September 30, 2010 of the effectiveness of the design and operation of the Company’s disclosure controls and
procedures. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2010, the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
20
ICOP DIGITAL, INC.
PART II – OTHER INFORMATION
|
Item 1.
|
Legal Proceedings
|
As previously reported
in our quarterly report on Form 10-Q for the quarter ended June 30, 2010, a lawsuit (the “Financing Transaction Litigation”) was filed against us on August 6, 2010, by the Financing Transaction Investors in the United States
District Court for the Southern District of New York entitled Alpha Capital Anstalt and Iroquois Master Fund, Ltd., Plaintiffs, v. ICOP Digital, Inc., Defendant, Case No. 10 CV 5924.
On November 1, 2010, we entered into a Settlement Agreement with the Financing Transaction Investors that will result in dismissal of the Financing Transaction Litigation and the mutual release of
all claims. For additional information, see Note 10: “Contingencies” to the Condensed Financial Statements, and “Our Capital Requirements and Financing Outlook,” in Part I, Item 3, Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
Not required for smaller
reporting companies.
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
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Not applicable.
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Item 3.
|
Defaults Upon Senior Securities
|
Not
applicable.
|
Item 4.
|
[Removed and Reserved]
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|
Item 5.
|
Other Information
|
Not applicable.
An index of exhibits begins on
page 23 of this Quarterly Report.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
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ICOP DIGITAL, INC.
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Date: November 12, 2010
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By: /s/ David C. Owen
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David C. Owen
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Chief Executive Officer
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Date: November 12, 2010
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By: /s/ Mickie R. Koslofsky
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Mickie R. Koslofsky
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Chief Financial Officer
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22
Exhibit Index
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Exhibit No.
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|
Description
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Exhibit 3.1
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Articles of Incorporation (incorporated by reference to Exhibit 2.1 of the Registration Statement on Form 10 filed with the Commission on September 13, 1999).
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Exhibit 3.2
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First Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Form 8-K filed August 16, 2001).
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Exhibit 3.3
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Second Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Form 8-K filed August 26, 2002).
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Exhibit 3.4
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Third Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.4 of the Form SB-2 registration statement filed April 4,
2005).
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Exhibit 3.5
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Fourth Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.5 of the
Form 10-KSB filed March 22, 2007).
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Exhibit 3.6
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Fifth Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Form 8-K filed June 22, 2010).
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Exhibit 3.7
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Third Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of the Form 8-K filed December 4, 2007).
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Exhibit 10.1
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Form of Settlement and Release Agreement dated November 1, 2010 (incorporated by reference to Exhibit 10.1 of the Form 8-K filed November 4, 2010).
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Exhibit 31.1
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Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
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Exhibit 31.2
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Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
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Exhibit 32.1
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Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
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Exhibit 32.2
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Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
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23
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iShares Copper and Metal... (NASDAQ:ICOP)
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