Edgar Filing: ICOP DIGITAL, INC

Form 10-QSB

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-QSB

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

¨	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-32560

ICOP Digital, Inc.

(Exact name of small business issuer as specified in its charter)

Colorado

84-1493152

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

16801 W. 116^th Street, Lenexa, Kansas 66219

(Address of principal executive offices)

(913) 338-5550

(Issuer’s telephone number)

N.A.

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 registration is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Transitional Small Business Disclosure Format: Yes ¨ No x

The issuer had 7,229,481 shares of its common stock issued and outstanding as of November 9, 2006, the latest practicable date before the filing of this report.

QUEPASA CORPORATION AND SUBSIDIARIES

INDEX


		Page
PART I. FINANCIAL INFORMATION

	Forward Looking Statement	2

Item 1	Financial Statements

	Balance Sheet as of September 30, 2006 (unaudited)	3

	Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2006 and 2005	4

	Statement of Changes in Stockholders’ Equity (Unaudited)	5

	Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2006 and 2005	6

	Notes to Financial Statements (Unaudited)	7

Item 2	Management’s Discussion and Analysis or Plan of Operation	11

Item 3	Controls and Procedures	12

PART II. OTHER INFORMATION

Item 1	Legal Proceedings	12

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	12

Item 3	Defaults upon Senior Securities	12

Item 4	Submissions of Matters to a Vote of Security Holders	12

Item 5	Other Information	12

Item 6	Exhibits	12

SIGNATURES		13

ICOP DIGITAL, INC.

PART I - FINANCIAL INFORMATION

Forward-Looking Statements

We make forward-looking statements in this report that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future 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. You should not place undue reliance on these forward-looking statements. The forward-looking statements are qualified by their terms and/or important factors, many of which are outside our control, involve a number of risks, uncertainties and other factors, that could cause actual results and events to differ materially from the statements made. Such factors include, among other things, those described elsewhere in this report and the following:

the ICOP Model 20/20 not being accepted by the law enforcement industry;

difficulty meeting demand for in-car video technologies at a cost that results in a profit;

our ability to improve our products and to develop other products necessary to compete in the industry;

our ability to bring future products to market;

the ICOP Model 20/20 being replaced by more advanced technologies and thereby becoming obsolete;

the limited number of product offerings;

budget cuts in the law enforcement industry affecting purchasing levels;

our lack of profitability and operating history;

our limited ability to control interruptions in production by the outside manufacturer of the ICOP Model 20/20;

10.

successful infringement claims and our ability to protect proprietary rights;

11.

a highly competitive and fragmented market;

12.

loss of key management personnel;

13.

our ability to manage rapid growth;

14.

criminal procedure court rulings regarding right to privacy;

15.

general economic and business conditions in the United States;

16.

defects in products could result in litigation and other significant costs; and

17.

other factors detailed in our filings with the Securities and Exchange Commission.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, including those events and factors detailed in our filings with the Securities and Exchange Commission, not all of which are known to us. Neither we nor any other person assumes responsibility for the accuracy or completeness of these statements. We will update this report only to the extent required under applicable securities laws. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements.

Item 1.

Financial Statements

ICOP DIGITAL, INC.

Balance Sheet (Unaudited)


	September 30, 2006
Assets
Current Assets
Cash	$	1,959,360
Accounts receivable, net		1,088,139
Finished goods inventory, at cost		4,524,275
Prepaid expenses		268,769

Total current assets		7,840,543
Property and equipment, at cost, net of accumulated depreciation of $303,387		753,735
Other assets:
Deferred offering costs		72,113
Deferred patent costs		64,750
Deposits		15,000

	$	8,746,141

Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable	$	153,022
Accrued liabilities		403,944
Unearned revenue		128,147
Current maturities of long-term debt		43,147

Total current liabilities		728,260
Long-term debt, net of current maturities		100,309

Total liabilities		828,569

Shareholders’ equity:
Preferred stock, no par value; 5,000,000 shares authorized, no shares issued and outstanding		—
Common stock, no par value; 50,000,000 shares authorized, 6,079,481 shares issued and outstanding		20,793,313
Accumulated other comprehensive income, net of tax		—
Deficit accumulated		(12,875,741	)

Total shareholders’ equity		7,917,572

	$	8,746,141

See accompanying notes to financial statements.

ICOP DIGITAL, INC.

Statements of Operations (Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2006			2005			2005
Sales, net of returns	$	1,564,240		$	902,297		$	3,731,999		$	1,229,691
Cost of sales		878,029			523,911			2,141,279			762,814

Gross profit		686,211			378,386			1,590,720			466,877

Operating expenses:
Selling, general and administrative		1,349,200			750,674			3,898,717			1,617,240
Research and development		245,730			137,337			465,660			399,065

Total operating expenses		1,594,930			888,011			4,364,377			2,016,305

Loss from operations		(908,719	)		(509,625	)		(2,773,657	)		(1,549,428	)
Other income (expenses):
Foreign currency translation		2,823			1,283			29,982			(55,023	)
Interest income		18,645			30,190			61,795			30,190
Interest expense		(8,339	)		(21,325	)		(22,893	)		(106,128	)

Loss before income taxes		(895,590	)		(499,477	)		(2,704,773	)		(1,680,389	)
Income tax provision		—			—			—			—

Net loss	$	(895,590	)	$	(499,477	)	$	(2,704,773	)	$	(1,680,389	)

Basic and diluted loss per share	$	(0.15	)	$	(0.11	)	$	(0.47	)	$	(0.66	)

Basic and diluted weighted average common shares outstanding		5,905,784			4,390,059			5,715,785			2,557,435

See accompanying notes to financial statements.

ICOP DIGITAL, INC.

Statement of Changes in Shareholders’ Equity (Unaudited)


	Preferred Stock			Common Stock				Accumulated Other Comprehensive Loss			Retained Deficit			Total
	Shares	Amount		Shares	Amount			Accumulated Other Comprehensive Loss			Retained Deficit			Total
Balance at December 31, 2005	—	$	—	5,478,182	$	19,303,683		$	71,695		$	(10,170,968	)	$	9,204,410
March 2006, exercise of warrants to purchase common stock	—		—	22,798		155,254			—			—			155,254
Stock options issued in exchange for services provided	—		—	—		1,000			—			—			1,000
May 2006, restricted common stock issued in exchange for services	—		—	400,000		2,340,000			—			—			2,340,000
Deferred compensation expense related to restricted common stock	—		—	—		(2,091,000	)		—			—			(2,091,000	)
Stock options re-issued in exchange for services provided	—		—	—		360,000			—			—			360,000
Stock issued under employee stock purchase plan	—		—	1,300		6,904			—			—			6,904
September 2006, exercise of warrants to purchase common stock	—		—	177,201		717,472			—			—			717,472
Unrealized effect of the change in foreign currency exchange rates	—		—	—		—			(71,695	)		—			(71,695	)
Net loss for the period ended September 30, 2006	—		—	—		—			—			(2,704,773	)		(2,704,773	)

Balance at September 30, 2006	—	$	—	6,079,481	$	20,793,313		$	—		$	(12,875,741	)	$	7,917,572

See accompanying notes to financial statements

ICOP DIGITAL, INC.

Statements of Cash Flows (Unaudited)


	Nine Months Ended September 30,
	2006			2005
Cash flows from operating activities:
Net loss	$	(2,704,773	)	$	(1,680,389	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation		180,108			61,779
Stock based compensation		249,000			—
Stock options issued		361,000			—
Changes in operating liabilities:
Decrease (Increase) in accounts receivable, inventory and prepaid expenses		(1,756,465	)		(2,822,888	)
Decrease in accounts payable, accrued liabilities and unearned revenue		(60,153	)		(1,477,603	)

Net cash used in operating activities		(3,731,283	)		(5,919,101	)

Cash flows from investing activities:
Purchases of property and equipment		(331,736	)		(406,017	)
Deferred patent costs		(3,270	)		—
Deposits		—			(14,750	)

Net cash used in investing activities		(335,006	)		(420,767	)

Cash flows from financing activities:
Proceeds from issuance of notes payable		68,000			3,157,000
Principal payments on notes payable		(29,457	)		(3,465,617	)
Proceeds from the sale of common stock		879,630			11,148,638
Payment of offering costs		(72,113	)		(667,471	)

Net cash provided by financing activities		846,060			10,172,550

Effect of currency exchange rate changes on cash		(49,454	)		—

Net change in cash		(3,269,683	)		3,832,682
Cash, beginning of period		5,229,043			4,242

Cash, end of period	$	1,959,360		$	3,836,924

Supplemental disclosure of cash flow information:
Income taxes	$	—		$	—
Interest		22,893			115,887

Non-cash financing transactions:
Preferred stock converted to common	$	—		$	(1,499,998	)
Foreign currency translation		29,982			75,581
Equipment purchases financed		68,000			38,000

See accompanying notes to financial statements.

ICOP DIGITAL, INC.

Notes to Financial Statements (Unaudited)

Note 1: Basis of Presentation

The financial statements presented herein have been prepared by the Company in accordance with the accounting policies in its audited financial statements for the period ended December 31, 2005, included in its annual report on Form 10-KSB as filed March 28, 2006, and should be read in conjunction with the notes thereto. The Company entered the development stage in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 7 on May 24, 2002 and left the development stage in June 2005 when significant sales of production equipment were recorded. It is engaged in the design, development and marketing of an in-car video recorder system for use in the law enforcement industry.

In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary to provide a fair presentation of operating results for the interim period presented have been made. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the year.

Interim financial data presented herein are unaudited. The unaudited interim financial information presented herein has been prepared by the Company in accordance with the policies in its audited financial statements for the period ended December 31, 2005 and should be read in conjunction with the notes thereto.

The accompanying statements of operations and cash flows reflect the nine-month period ended September 30, 2006. The comparative figures for the nine-month period ended September 30, 2005 have been included in the accompanying statements of operations and cash flows for comparison on an unaudited basis.

Note 2: Nature of Operations, Merger, and Summary of Significant Accounting Policies

Operations and Merger

ICOP Digital, Inc. was incorporated in May 2002 in Nevada and merged into a wholly owned subsidiary of the Company (a Colorado corporation) as of December 31, 2003 and was merged out of existence in June 2005. The Company, formerly named Vista Exploration Corporation, subsequently changed its name to ICOP Digital, Inc. The Company is engaged in the design, development and marketing of in-car video recorder systems for use in the law enforcement industry. The Company’s offices are located in Lenexa, Kansas.

On February 28, 2005, the Company’s shareholders approved a reverse stock split that exchanged one new share of stock for ten existing shares effective March 10, 2005. All share and per share amounts in this document have been changed to reflect the effect of this change.

Note 3: Notes Payable

In January 2006, the Company executed installment notes to finance equipment purchases in the total amount of $56,000, payable monthly including interest at 7.75% per annum through January 2010. In July 2006, the Company executed an installment note to finance an equipment purchase in the amount of $12,000. All installment notes were repaid in full in October 2006.

Note 4: Shareholders’ Equity

Sale of common stock

In March 2006, a shareholder exercised warrants to purchase 22,798 shares of the Company’s no par common stock at a total net proceeds of $155,254. In September 2006, additional shareholders exercised warrants to purchase 177,201 shares of the Company’s no par common stock at a total net proceeds of $717,472.

In August 2006, the Company sold 1,300 shares of its no par common stock to employees under its Employee Stock Purchase Plan at a total net proceeds of $6,904.

Award of restricted common stock for services

In May 2006, the board of directors granted a total of 400,000 shares of restricted common stock to two executive officers in recognition of their importance to the achievement of certain milestones and to the future of the company. The shares have been issued to the officers but are restricted from sale by the officers. Restrictions on 50% of the shares lapse when the company reaches a total of $15 million gross revenue from inception and restrictions on the remaining 50% of the shares lapse when the company reaches positive earnings before interest, taxes, depreciation and amortization for three consecutive months. The grant further provides that the officers will receive a supplemental bonus in an amount equal to the income tax liability incurred by the officers at the time the restrictions lapse. The company valued these restricted shares at the market value on May 4, 2006 of $5.85 per share for a total of $2,340,000. Progress toward the gross revenue target is measurable, but progress toward the positive earnings target is uncertain. Accordingly, the value of the shares related to the gross revenue target will be reported as compensation expense and added to paid in capital ratably as revenue accumulates to the $15 million target. A total of $249,000 has been recognized as compensation expense at September 30, 2006. Any portion of the value that has not been recognized at the time the target is achieved will be recognized at that time. The value of the shares related to the positive earnings target will be recognized when that target is achieved.

Stock options and warrants

In March 2006, the Company granted an employee an option to purchase an aggregate of 10,000 shares of the Company’s common stock at an exercise price of $10.00 per share. The option vests in five increments of 2,000 shares each through December 31, 2009 and expires on January 31, 2010. The quoted market price of the stock was $5.32 per share. The Company valued the option at $0.50 per share, or $5,000, in accordance with SFAS 123(R). The vested portion of $1,000 was recorded as stock-based compensation in the accompanying financial statements.