ICOP Update: Eleven Quarters of No Growth and Cash Losses - Reducing Rating to Sell

11/12/2009

MDB issued a research update today on ICOP Digital, Inc. (ICOP) reiterating its SELL recommendation and $N/A Price Target.

ICOP Digital once again reported disappointing financial results for the second quarter of 2009 with revenues of just $1.9 million – significantly below our estimate of $3.5 million and down 29% year-over-year. Again, management attributed the decline to the general economic climate and delays in the availability of federal stimulus funds to law enforcement agencies. In addition, even though revenues improved 21% sequentially, gross margins declined to 40%, down 310 basis points compared to the year ago quarter and down 1360 basis points from the 2nd quarter of 2009. Management attributed the decline to a promotional program which ended September 30, 2009. Total operating expenses of approximately $2.1 million were lower by 24% versus Q3 2008, which management attributed to lower compensation expense, lower professional services and reduced R&D expense. The GAAP net loss for the quarter came in at $1.4 million ($0.09 per share), almost $0.3 million better than Q3 2008. The cash loss was roughly $1.2 million ($0.07 per share). Other developments include:

• the announcement that Raytheon’s road show is attracting dealers’ attention;
• the company received its largest order so far for the new 20/20 Vision product from the Billings Police Department in Montana;
• reorders for ICOP’s products are coming from more than 60% of existing customers; and
• the announcement that ICOP customers are starting to receive Stimulus Funds which is impacting the company’s orders.

Despite recent efforts to reduce costs, the continuing lack of growth in the revenue line is almost comical – how many consecutive negative surprises can one company deliver. Though management continues to be surprisingly optimistic citing the potential for orders out of Saudi Arabia, Mexico, and now the Raytheon sales channel, we remain extremely skeptical of management’s visibility into the realization of actual orders. Follow-on orders from Saudi Arabia and Mexico have yet to materialize and are likely to be too small to move the company into profitable operations for the year as a whole. Though it is possible that the Raytheon agreement could provide meaningful sales, this is not likely to occur until well into calendar 2010. With this quarter’s results and weak outlook, we are lowering our investment rating to Sell and suspending our outlook for a target price.