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UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 

 

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FORM 10-Q

 

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☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the quarterly period ended June 30, 2016

 

OR

 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 Commission File No.: 001-37613

(Exact name of registrant as specified in its charter)

 

 

 

Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 ☐ 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 (§323.405 of this chapter) during the preceding 12 months (or 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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐Yes ☒ No

 

The number of shares outstanding of each of the issuer's classes of common stock, as of August 9, 2016, was 8,888,975 shares of Common Stock, $0.0001 par value.  

COPSYNC, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2016

 

TABLE OF CONTENTS

 

 

 

PART I - FINANCIAL INFORMATION

 

 

COPSYNC, INC.

Condensed Balance Sheets

 

		June 30,				December 31,
		2016				2015
		(Unaudited)				(Audited)
ASSETS
Current Assets
Cash and cash equivalents		$	2,220,950			$	8,295,310
Accounts receivable, net			386,827				426,265
Inventories			581,979				484,695
Prepaid expenses and other current assets			686,580				543,949
Total Current Assets			3,876,336				9,750,219
PROPERTY AND EQUIPMENT, net			383,159				124,188
CAPITALIZED SOFTWARE, net			224,804				-
INVESTMENT			50,000				-
TOTAL ASSETS		$	4,534,299			$	9,874,407
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses		$	1,487,191			$	2,486,529
Deferred revenues			1,855,462				2,028,120
Obligation under capital lease, current portion			43,825				9,010
Three Year, 50% notes payable			40,500				40,500
Notes payable, current portion			307,893				126,260
Total Current Liabilities			3,734,871				4,690,419
LONG-TERM LIABILITIES
Deferred revenues			1,241,542				1,091,838
Obligation under capital lease			140,431				19,118
Convertible notes payable			30,000				30,000
Three Year, 50% notes payable, net of $7,668 discount, non-current portion			32,832				66,000
Notes payable, non-current portion			45,444				219,963
Total Liabilities			5,225,120				6,117,338
COMMITMENTS AND CONTINGENCIES			-				-
STOCKHOLDERS' EQUITY (DEFICIT)
Series A Preferred stock, par value $0.0001 per share, 1,000,000 shares authorized; 100,000 shares issued and outstanding, respectively			10				10
Common stock, par value $0.0001 per share, 50,000,000 shares authorized; 8,888,975 and 8,362,903 issued and outstanding, respectively			886				837
Common stock to be issued, 159,170 and 260,206 shares, respectively			204,806				700,121
Additional paid-in-capital			34,404,671				33,043,232
Accumulated deficit			(35,301,194	)			(29,987,131	)
Total Stockholders' Equity (Deficit)			(690,821	)			3,757,069
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$	4,534,299			$	9,874,407

The accompanying notes are an integral part of these financial statements.

COPSYNC, INC.

Condensed Statements of Operations

(Unaudited)

 

 

The accompanying notes are an integral part of these financial statements. 

COPSYNC, INC.

Condensed Statements of Cash Flows

(Unaudited)

 

 

The accompanying notes are an integral part of these financial statements.

COPSYNC, INC.

Condensed Statements of Cash Flows (Continued)

(Unaudited)

 

 

The accompanying notes are an integral part of these financial statements.

 

COPsync, Inc.

Notes To Condensed Financial Statements

(Unaudited)

NOTE 1 – BASIS OF FINANCIAL STATEMENT PRESENTATION

These interim condensed financial statements of COPsync, Inc. (the "Company") are unaudited, but reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the financial position of the Company as of June 30, 2016, and its results of operations and cash flows for the three and six months ended June 30, 2016.  Certain information and footnote disclosures normally included in the audited financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Because all the disclosures required by accounting principles generally accepted in the United States are not included, these interim condensed financial statements should be read in conjunction with the audited financial statements and notes thereto in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2015. The results for the three and six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2016, or any other period. The year-end condensed balance sheet data as of December 31, 2015, was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

NOTE 2 – NATURE OF ORGANIZATION AND LIQUIDITY AND MANAGEMENT PLANS

The Company sells the COPsync Network service, which is a real-time, in-car information sharing, communication and data interoperability network for law enforcement agencies.  The COPsync Network service enables patrol officers to collect, report and share critical data in real-time at the point of incident and obtain instant access to various local, state and federal law enforcement databases.  The COPsync Network service also eliminates manual processes and increases officer productivity by enabling officers to electronically write tickets, process DUI and other arrests and document accidents and other incidents.  The Company has designed the COPsync Network to be “vendor neutral,” meaning it can be used with products and services offered by other law enforcement technology vendors.  Additionally, the COPsync Network system architecture is designed to scale nationwide.

The COURTsync system is designed to enable judges and court personnel to instantly send emergency alerts directly to the closest law enforcement officers in their patrol vehicles and to the local 911dispatch center, from any computer within the facility. Court personnel are also able to query federal law enforcement databases and databases pertaining to officer safety and dangerous persons. Additionally, COURTsync utilizes our WARRANTsync system to give patrol officers utilizing our COPsync Network access to Class C warrant information from the court, enabling them to collect warrant fees for the court.

The WARRANTsync system, which is a feature set of the COURTsync system is designed to be a Texas statewide misdemeanor warrant-clearing database. It enables law enforcement officers in the field to receive notice of outstanding warrants in real-time at the point of a traffic stop.  The WARRANTsync system enables the offender to pay the outstanding warrant fees and costs using a credit card.  Following payment, the offender is given a receipt and the transaction is complete.  This product could be viewed as an enhancement feature to the core COPsync Network service since all COPsync Network users receive the outstanding warrant notice.

In addition to Texas, the Company sells its products in twelve other states.

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICES

Basis of Presentation

The accompanying condensed financial statements include the accounts of the Company, are prepared in accordance with accounting principles generally accepted in the United States and are prepared on the accrual method of accounting.

 

There have been no significant changes to the summary of significant accounting policies disclosed in Note 2 to the financial statements as of December 31, 2015 included in the Form 10-K filed on March 30, 2016. 

Capitalized Software

The Company began capitalizing its software development costs during the second quarter of 2016. See Note 10 – Capitalized Software for further information.

NOTE 4 – RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS

 

The Company has implemented all new accounting pronouncements that are in effect and that may impact our audited financial statements. 

 

Revenue Recognition

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes most current revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgement and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.

The standard is effective for us beginning in 2018, and requires using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our financial statements and have not yet determined the method by which we will adopt the standard in 2018.

Going Concern

On August 27, 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which is intended to define management’s responsibility to evaluate whether there is substantial doubt about the Company’s ability to continue as a going concern and to provide related footnote disclosures. This standard will be effective for the Company for the year ending on December 31, 2016. Early application is permitted. The Company is currently evaluating the impact of ASU No. 2014-15.

Recently Issued Accounting Pronouncement

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02 Leases (Topic). This ASU requires a lessee to recognize a right-of-use asset and a lease liability under most operating leases in its balance sheet. For public companies, the ASU is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the effects that the adoption of ASU 2016-02 will have on the financial position, results of operations or cash flows.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”).  The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2015-03 is effective for us on January 1, 2016.  The Company does not believe this new pronouncement has any application to its financial statements at this time.

 

NOTE 5 – CASH AND CASH EQUIVALENTS

The Company's cash and cash equivalents, at June 30, 2016 and December 31, 2015, respectively, consisted of the following:

  

During the second quarter of 2016, the Company was requested to pay-off the balance of a lease agreement involving an equipment financing company owned by one of the Company’s outside directors (See Notes 12 and 21).  The total balance of the agreement was $241,238, inclusive of principal totaling $219,262, $21,976 for interest on future lease payments called for under the agreement and miscellaneous processing fees. To facilitate this request, the Company secured a bank loan to fund the pay-off.  The new loan is a one-year interest only note that requires a restricted balance for principal plus interest of $249,496.

NOTE 6 – ACCOUNTS RECEIVABLE

The Company's accounts receivable, net, at June 30, 2016 and December 31, 2015, respectively, consisted of the following:

  

 

Accounts receivable is derived principally by revenue earned from end-users, which are local and state governmental agencies.  The Company performs periodic credit evaluations of its customers, and does not require collateral. 

 

Our trade receivables increased by approximately $113,000 principally due to one reseller’s increased sales volume. At June 30, 2016, the Company considers it has a concentration of credit risk involving a single customer who owes the Company an account balance equivalent to 43% of the Company’s Accounts Receivable, net. The Company is discussing various payment plans with the customer and believes this matter will be successfully resolved by the end of 2016.

 

The Company’s other receivables generally consist of miscellaneous receivable activities.

 

The elimination of the unpaid deferred revenue represents those invoices issued for products and/or services not yet paid by the customer or services completed by the Company.  The elimination is made to prevent the “gross-up” effect on the Company’s balance sheet between accounts receivable and deferred revenues.

 

The Company’s allowance for doubtful accounts is based upon a review of outstanding receivables.  Delinquent receivables are written-off based on individual credit evaluations and specific circumstances of the customer. 

 

At June 30, 2016, the $88,000 allowance consisted of a $78,000 specific reserve following a customer specific review of total receivables, and a $10,000 general, or non-specific, allowance, compared to a $90,000 specific and $10,000 general allowances at December 31, 2015.  The decrease in the specific allowance relates to certain accounts where their previous outstanding receivable balances were written-off to the allowance for doubtful accounts in the second quarter of 2016. As of December 31, 2015, the Company established a $10,000 general allowance, which is directed towards receivables that are over sixty days of age and may be at risk of collection.

NOTE 7 – INVENTORY

The Company's inventory, at June 30, 2016 and December 31, 2015, respectively, consisted of the following:

  

The approximate $97,000 increase in inventory in the first six months of 2016 is due to an increase in on-hand general equipment and supplies, partially offset by a reduction in the Company’s VidTac finished goods inventory.   

Total inventory at June 30, 2016 and December 31, 2015 included hardware consisting of computer laptops, printers and ancillary parts, such as electronic components, connectors, adapters and cables, as well as the Company’s proprietary VidTac product and its related components.  The Company attempts to procure hardware as a result of receiving a customer order.  Accordingly, the hardware is procured, delivered to the Company, prepared for installation and then transported by the Company to the customer site for installation.  Beginning in 2016, the Company has begun to procure certain inventory items on a stock basis so the Company can quickly install the equipment for a new contract.  Additionally, the various components of hardware are all considered finished goods because the individual items may be, and are, sold in a package, or on an individual basis, normally at the same pricing structure.

With respect to the Company’s VidTac product, a manufacturing agreement was executed in 2012 with a single contract manufacturer and calls for the Company to periodically place a demand purchase order for a fixed number of finished units to be manufactured and delivered as finished goods.  The Company’s purchase orders placed with the contract manufacturer are non-cancellable; however, there are some relief provisions: (1) the Company may change the original requested delivery dates if the Company gives sufficient advance notice to the contract manufacturer; and (2) should the Company elect to cancel a purchase order in total or in part, it would be financially responsible for any materials that could not be returned by the contract manufacturer to its source suppliers.

 

When the VidTac product is recorded into finished goods, it consists of a kit consisting of four basic components.  It is inventoried as a single unit of inventory.  If a single component fails or needs to be replaced, the Company will replace with a new unit and inventory the components, which would still be considered finished goods.  Should a component need to be repaired, it is returned to the contracted manufacturer for analysis and repair. The repaired component is then shipped to the Company and inventoried as a finished goods component.

NOTE 8 – PREPAID EXPENSES AND OTHER ASSETS

The Company's prepaid expenses and other assets consisted of the following at June 30, 2016 and December 31, 2015, respectively:

 

Prepaid insurance pertains to various business insurance policies, the fees of which have been financed by a third-party service provider and are being paid over an eleven-month period.  This prepayment is amortized ratably over the twelve-month insurance coverage period.

 

Subscriptions principally pertain to prepaid software support and web-hosting services provided by third-party service providers.  The balance can fluctuate period-over-period based upon the timing between payment and amortization activities.  The prepayments are amortized into expense over the life of the specific service period.

 

Vendor prepayments principally consist of a personnel search firm and a consultant for advisory services.  These prepayments will be charged to operating expenses in fiscal year 2016 as the services are performed and as production of VidTac commences.

Deferred valuation expense relates to an endorsement agreement the Company entered into in January 2016 with an endorser who agreed to assist the Company with its brand recognition and sales efforts for COPsync products in pre-designated geographical areas. The agreement requires six quarterly payments of $250,000 and the grant of 100,000 shares of the Company’s common stock which was granted at signing and an additional 100,000 shares to be granted six months after signing.  The non-cash value of the endorsement agreement totaled $206,000 and was determined by using the stock price on the date of the agreement. This amount is being amortized to non-cash consulting expense over the service period or six months.

Deferred charges pertain to off-the-shelf computer aided dispatch systems (“CAD”), purchased from an outside software services company and yet to-be delivered to one contracted customer.  The Company expects to complete and deliver these services in fiscal year 2016, at which time these deferred charges will be matched against the applicable revenues.

NOTE 9 – PROPERTY AND EQUIPMENT

 

The Company’s property and equipment at June 30, 2016 and December 31, 2015 was:

The increase of approximately $251,000 relates to the acquisition of ten vehicles and computer equipment and office furniture.  Offsetting this increase was a loss of $2,396 resulting from the disposition of five vehicles. Depreciation expense for quarters ended June 30, 2016 and 2015 was $26,637 and $13,280, respectively, and for the six months ended June 30, 2016 and 2015, $42,160 and $26,907, respectively.

NOTE 10 – CAPITALIZED SOFTWARE

In the second quarter of 2016, the Company capitalized developmental software in accordance with ASC 730 – Research & Development and ASC 985 –Software.

Within that accounting guidance, companies may elect to capitalize certain portions of their R&D expenses relating to the development of new products or services.  R&D expenses are capitalized as follows: 1) All R&D costs incurred in developing a new product or service must be expensed as incurred until “technological feasibility” has been achieved; that is, until R&D efforts substantiate the new product or service can, in fact, be made; 2) Upon achieving “technological feasibility”, the Company capitalizes all incurred costs until the product is ready for production and or for sale; 3) Once the product/service is ready for production or for sale, then all future costs, (maintenance & support) are expensed as incurred; and 4) The capitalized costs are then amortized over the future beneficial life cycle of the product/service.

All costs incurred to establish the technological feasibility of a computer software product to be sold, leased, or otherwise marketed are research and development costs. Those costs are charged to expense when incurred as required by Subtopic 730-10.

The technological feasibility of a computer software product is established when the Company has completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements.

Based upon the accounting guidance, the Company has concluded that at different points in time during the second quarter of 2016, three projects now meet the requirements for achieving “technological feasibility” per “ACS 985-25-2-a-1-3” and has elected to begin capitalizing the R&D expenses incurred for the time-period between that date of achieving “technological feasibility” and the anticipated date when the respective projects conclude with the product or service being ready for production or for sale.

The incurred costs for each of these projects are derived from both in-house and outside work efforts.  The outside work efforts are represented by third-party programming service providers, one of which has been a long-time Company vendor.  For purposes of this procedure and for the second quarter of 2016, the Company has elected to capture and capitalize the applicable costs paid to third-party service providers.  The Company elected this treatment because it could not cost-effectively capture in-house costs during the second quarter of 2016. In the future, and if the Company is in a position to cost-effectively capture the related in-house expenses, the Company may capture these in-house costs as well.

Management believes a three-year period, representing the future beneficial life cycle of the product/service, is a reasonable period of time upon which to amortize the capitalized costs, commencing when the respective project arrives at a point where the product/service is ready for production/sale.

For the three-month and six-month periods ended June 30, 2016, the Company capitalized $224,804 in developmental software costs. Total estimated cost for the project is $1,186,000.

NOTE 11 – INVESTMENTS

The Company loaned $50,000 to GTX Corp pursuant to a convertible promissory note on February 8, 2016. Both principal and interest are due on February 8, 2017 and bears interest at 8% per annum.  The note has an optional conversion feature that converts the note into 5,000,000 shares of GTX Corp’s common stock at $0.01 per share at the Company’s option.  The Company’s intent is to hold the instrument until maturity.  The convertible note is accounted for under the cost method of accounting.

NOTE 12 – NOTES PAYABLE

 

The following table summarizes notes payable at June 30, 2016 and December 31, 2015, respectively, including the three-year, 50% notes payable:

 

 

During the six months ended June 30, 2016, the Company had increases in notes payable for financing of general liability insurance of $32,000 and car loans of $213,017 related to the purchase of eight vehicles.

During the six months ended June 30, 2016, the Company paid a bank loan for $219,264 with the proceeds from a new bank loan.  The new loan in the amount of $241,238 is a one-year interest only note and under applicable accounting standards requires a restricted balance for principal and interest.

 

During the first six months of 2016, the Company made total principal payments of $111,965. 

NOTE 13 - CONVERTIBLE NOTES PAYABLE

The Company’s total convertible notes payable at June 30, 2016 was $30,000.  The following table shows the components of convertible notes payable at June 30, 2016 and December 31, 2015, respectively: 

 

  

The outstanding convertible note is convertible into shares of Company common stock at the option of the Payee at $11.00 per share. Unless earlier converted, the note is due on April 1, 2018.

NOTE 14– PREFERRED STOCK

The Company issued a total of 100,000 shares of its Series A Preferred Stock in April 2008 as partial consideration for its acquisition of a 100% ownership interest in PostInk Technology, LP (“PostInk”).  Each share of Series A Preferred Stock is convertible into one share of common stock, but has voting rights on a basis of 15 votes per share, after adjusting for the Company’s reverse stock split in October 2015.  These shares are held by the former general partner of PostInk, which is owned by the co-founders of the Company.

Upon the occurrence of certain events, each share of the Company’s Series A Preferred Stock shall automatically be converted into fully-paid non-assessable shares of common stock at the then effective conversion rate for such share.  The events that may trigger this automatic conversion event are as follows:  1) immediately prior to the closing of firm commitment initial public offering, or 2) upon the receipt of the Company of a written request for such conversion from the holders of at least a majority of the Series A Preferred stock then outstanding, or if later, the effective date for conversion specified in such requests.

 

During 2009 and 2010, the Company completed a private placement of its Series B Convertible Preferred Stock and warrants to purchase its common stock in which the Company raised $1,500,000 in gross proceeds. As a result, the Company issued 375,000 shares of the Company’s Series B Preferred Stock and granted warrants to purchase an aggregate of 60,000 shares of its common stock.

For the quarters ended June 30, 2016 and 2015, gross dividends on the Series B Preferred Stock were $0 and $26,178, respectively. For the six months ended June 30, 2016 and 2015, gross dividends on the Series B Preferred Stock were $0 and $52,068.  

 

Effective October 28, 2015, the Company entered into an agreement with the Series B stockholders (the “Conversion Agreement”) whereby they agreed to convert their shares of Series B Preferred Stock into shares of the Company’s common stock pursuant to the terms of the Series B Preferred Stock, exercise their warrants at an exercise price reduced from $10.00 per share to $6.25 per share in full for cash, terminate the Investors’ Rights Agreement and waive any rights they may have under such agreement.  In return, the Company agreed to amend their warrants to reduce the exercise price from $10.00 per share to $6.25 per share, issue the Series B stockholders an additional aggregate 60,000 shares of the Company’s common stock, pay aggregate accrued dividends of up to approximately $680,000 in cash within 30 days of the Company’s listing on The NASDAQ Capital Market and grant the Series B stockholders certain board and board observer rights.

On November 13, 2015 we issued 225,000 shares of our common stock, in the aggregate, upon the conversion of the Series B Preferred Stock and the exercise of Series B Warrants held by ten persons. Additionally, we issued an additional 60,000 shares of our common stock, in the aggregate, to the same ten persons upon such conversion. 50,000 shares of common stock, attributable to the conversion of Series B Preferred Stock, remain to be issued as of the date of this report, pending receipt of certain Series B certificates.

NOTE 15 – COMMON STOCK

During the six months ended June 30, 2016, the Company issued 526,072 shares of common stock as described below:

 

 

NOTE 16 – COMMON STOCK TO BE ISSUED

The following table provides a reconciliation of the transactions, number of shares and associated values for the common stock to be issued at June 30, 2016 and December 31, 2015, respectively.

 

NOTE 17– BASIC AND FULLY DILUTED LOSS PER SHARE

The computations of basic loss per share of common stock are based upon the weighted average number of shares of common stock outstanding during the period covered by the financial statements.  Common stock equivalents that would arise from issuance of shares of common stock to be issued under subscriptions and other obligations of the Company, the exercise of stock options and warrants, conversion of convertible preferred stock and dividends on those shares of preferred stock or the conversion of convertible promissory notes were excluded from the loss per share attributable to common stockholders as their value is anti-dilutive.

 

The Company's common stock equivalents, at June 30, 2016 and December 31, 2015, respectively, which are not included in the calculation of fully diluted loss per share because they are anti-dilutive, consisted of the following:

 

 

NOTE 18 – OUTSTANDING WARRANTS

 

A summary of the status of the Company’s outstanding warrants at June 30, 2016, is as follows:

  

 

NOTE 19 – EMPLOYEE OPTIONS

 

The Company provides a stock-based compensation plan, the 2009 Long Term Incentive Plan (the “Plan”) that was adopted by the Board of Directors on September 2, 2009 and approved by stockholders on July 27, 2009. Under the Plan, the Company can grant nonqualified options to employees, officers, outside directors and consultants of the Company or incentive stock options to employees of the Company. At June 30, 2016, there were 400,000 shares of common stock authorized for issuance under the Plan, which was increased at the Company’s annual meeting of stockholders on July 28, 2016. See Note 22 – Subsequent Events, for further information.  The outstanding options have a term of ten years and vest primarily over periods ranging from three to five years. As of June 30, 2016, options to purchase 292,100 shares of the Company’s common stock were outstanding under the plan, of which options to purchase 176,553 shares were exercisable.

Share-based compensation expense is based upon the estimated grant date fair value of the portion of share-based payment awards that are ultimately expected to vest during the period. The grant date fair value of stock-based awards to employees and directors is calculated using the Black-Scholes option pricing model. Forfeitures of share-based payment awards are reported when actual forfeiture occurs.

For the quarter ending June 30, 2016, the Company estimated the fair value of the stock options based on the following weighted average assumptions:

 

 

For the six months ended June 30, 2016 and 2015, the Company recorded share-based compensation expense of $82,495 and $95,832, respectively.  

For the six months ended June 30, 2016, the Company granted options to purchase 60,000 shares of its common stock with a weighted average exercise price of $1.68 per share to the Company’s five outside directors, who each receive options as part of their annual compensation for serving on the Company’s Board of Directors.  The total value of these 60,000 stock options in the aggregate, utilizing the Black Scholes valuation method, was $97,648.  The term of the stock options was ten years and vesting of the stock options was for a three-year period, with 33% vesting on the one-year anniversary of the grant date, and the remainder vesting ratably over the next eight quarters. 

The summary activity for the three months ended June 30, 2016 under the Company’s 2009 Long Term Incentive Plan, as amended is as follows: 

 

The following table summarizes significant ranges of outstanding and exercisable options as of June 30, 2016:

 

A summary of the status of the Company’s non-vested option shares as of June 30, 2016 is as follows:

 

 

The Company’s stockholders approved a repricing of the exercise price of certain of the Company’s outstanding options at the Company’s annual meeting of stockholder on July 28, 2016. See Note 22 – Subsequent Events, for further information.

As of June 30, 2016, there was approximately $380,750 of total unrecognized compensation cost related to non-vested share-based compensation arrangements.  The Company expects to recognize the unrecognized compensation cost over a weighted average period of 2.5 years.

NOTE 20 – COMMITMENTS AND CONTINGENCIES

  

The following table summarizes the Company’s obligations to make future payments pursuant to certain contracts or arrangements as of June 30, 2016, as well as an estimate of the timing in which these obligations are expected to be satisfied:

 

 

See Item 11, “Employment Contracts, Termination of Employment and Change in Control,” contained in the Company’s Form 10-K/A for the year ended December 31, 2015 and filed on April 29, 2016, which discusses the employment agreements involving Mr. Russell Chaney and Mr. Shane Rapp, co-founders of the Company.  One element contained in those discussions involves the voluntary elections by Mr. Chaney and Mr. Rapp to forego certain specified salary increases until the Company be profitable or the Company secures sufficient funding to sustain operations.  The value of each person’s foregone salary for the six months ended June 30, 2016 and 2015 totaled $20,000 for Mr. Chaney and $5,000 for Mr. Rapp and was recorded as contributed capital in Additional Paid-in Capital on the Company’s Balance Sheet.

 

 

The Company is not currently involved in any material legal proceedings.  From time-to-time the Company anticipates it will be involved in legal proceedings, claims, and litigation arising in the ordinary course of business and otherwise.  The ultimate costs to resolve any such matters could have a material adverse effect on the Company’s financial statements.  The Company could be forced to incur material expenses with respect to these legal proceedings, and in the event there is an outcome in any that is adverse to it, the Company’s financial position and prospects could be harmed.

  

NOTE 21 – RELATED PARTY TRANSACTIONS

On December 22, 2014, the Company executed a forty-eight-month capital lease agreement with a third-party service provider owned by one of the Company’s outside directors for the lease of two vehicles.  The agreement requires monthly payments of $873 totaling $35,098 over the life of the lease and has a minimal buy-out option at the end of the lease.  Accordingly, both a lease property asset and obligation in the amount of $35,098 was reported as of December 31, 2014, with lease payments beginning in January 2015. At June 30, 2016, the lease property asset and obligation values were $17,548 and $23,385, respectively.

In November 2013, the Company executed two short-term notes payable totaling $313,477 with an equipment financing company owned by one of the Company’s outside directors for the specific purpose of financing the purchase of certain third-party equipment to be sold to contracted customers.  Both notes were to mature in May 2014, bore interest at 16% annually, were payable upon maturity, and were collateralized by the third-party equipment being procured.  The maturity dates for both notes were formally extended until June 25, 2015.  On September 1, 2015, a new agreement was executed between the parties that restructured the arrangement into a rental agreement, consisting of: a total value of $322,305, inclusive of principal and interest; a term of 48 months, monthly payments of $5,465; a buy-out amount of $65,576; and a $60,000 cash payment upon signing. During the second quarter of 2016, the Company paid off this note through the execution of a $241,238 note payable to Provident Bank.

In June 2016, the Company executed a four-year capitalized lease with a third party service provider (owned by one of the Company’s outside directors) for four vehicles.  The principal value of the lease is $164,320, plus interest at a rate of 9.74% per annum.  The monthly lease payments are $4,125. (See Note 12 – Notes Payable)

NOTE 22 – SUBSEQUENT EVENTS

During the third quarter of 2016, the Company began serving as a sales agent for Smart Beacon—a LifeWatch, Inc. technology—a wearable alert device which allows the user to contact emergency services in case of an emergency.

On July 28, 2016, the Company’s stockholders approved the following:

 

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including:  any projections of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.  Forward-looking statements can be identified by such words and phrases as “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “plan,” “current outlook,” “we look forward to,” “would equate to,” “projects,” “projections,” “projected to be,” “could be” or “anticipate” and other similar words and phrases.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed.  Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed below and in greater detail in our annual report on Form 10-K for the year ended December 31, 2015.  We do not intend, and undertake no obligation, to update any forward-looking statement, except as required by law.

Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

 

Overview

COPsync, Inc. (“COPsync,” the “Company,” “we,” “us” or “our”) operates what we believe to be the only real-time, law enforcement mobile data information system in the United States.  We refer to this real-time, in-car information sharing, communication and data interoperability network as the “COPsync Network.” The COPsync Network, delivered via software as a service, is designed to solve the so-called “interoperability” problem that exists among the approximate 18,000 state and local law enforcement agencies today.  Put simply, these 18,000 state and local law enforcement agencies operate in information “silos’ and are not able to readily share real-time mission critical information or communicate crimes in progress from one agency to the next. The COPsync Network is designed to:

 

 

We also offer the COPsync911 threat alert service for use in schools, hospitals, day care facilities, government office buildings, energy infrastructure and other facilities with a high level of concern about security.  When used in schools, the COPsync911 service enables school personnel to instantly and silently send emergency alerts directly to the closest law enforcement officers in their patrol vehicles, and to the local 911 dispatch center. The alert is activated with the mere click of an icon, from any computer within the facility and/or from any cell phones and other mobile devices associated with the facility.  A notification that an alert has been issued is also sent to the cell phones of all law enforcement officers in the area and to all teachers, administrators, and other staff at the school, alerting them of imminent danger.  We expect our COPsync911 service to reduce emergency law enforcement response times in those circumstances when seconds and minutes count.

Once the alert is sent, a “crisis communication portal” is established among the person(s) sending the alert, the responding patrol vehicles and the local law enforcement 911 dispatch center.  This allows the person(s) initiating the alert to silently communicate with responding officers and the 911 dispatch center about the nature of the threat, whether it is an active gunman, fire, suspicious person or other emergency.  The crisis communication portal also provides a link to a diagram of the school or other facility and a map to its location.

We also augment our other services with our own law enforcement in-car video system, named VidTac and COURTsync, a court security and efficiency application.

  

Basis of Presentation, Critical Accounting Policies and Estimates

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements and related disclosures in accordance with accounting principles generally accepted in the United States requires our management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes.  Actual results could differ from these estimates and assumptions.  Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require management's most subjective judgments.

We describe our significant accounting policies in Note 2, Summary of Significant Accounting Policies, of the Notes to Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2015.  We discuss our Critical Accounting Policies and Estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the year ended December 31, 2015. 

The Company began capitalizing its software development costs during the second quarter of 2016. See Note 10 – Capitalized Software for further information.

Results of Operations

Revenues

 

Total revenues for the three-month and six-month periods ended June 30, 2016 were $1,290,670 and $2,572,766, respectively, compared to $1,246,591 and $2,417,477 respectively, for comparable periods in 2015.  Total revenues are comprised of software license/subscriptions revenue and hardware, installation and other revenue.  Software license/subscriptions revenue is a key indicator of revenue performance in future years, since this revenue represents that portion of our revenue that is anticipated to recur as our service contracts renew from year-to-year.  Hardware, installation and other revenue is a one-time revenue event, and is not a key indicator of future performance.  Software license/subscriptions for the three-month and six-month periods ended June 30, 2016 were $841,834 and $1,229,467, respectively, compared to $747,313 and $1,415,542, respectively, for comparable periods in 2015.  The increase in software license/subscriptions revenue was due to an increase in the number of law enforcement agency contracts executed between periods, increased revenue attributable to contract renewals, and revenues attributable to our product, COPsync911.  Hardware, installation and other revenues for the three-month and six-month periods ended June 30, 2016 were $448,836 and $890,038, respectively, compared to $499,278 and $1,001,935, respectively, for comparable periods in 2015.  

 

Some of our new contracts are multiple-year contracts that typically include hardware, installation and training (and integration in some cases) and software license/subscriptions revenue during the first year of the contract, followed by software license/subscriptions revenue during the remaining years of the contract.  Normally, we receive full payment up front upon inception of the contract.  This up-front payment is initially recorded as deferred revenue and subsequently recognized as revenue ratably during the service period.  As of June 30, 2016, we had $3,097,004 in deferred revenues, compared to $3,119,958 at December 31, 2015.  We do not believe that the deferred revenues resulting from these payments will have a material effect on our future working capital for the later years of the contract service periods because a large portion of our continuing customer support costs are incrementally fixed in nature.

Cost of Revenues and Gross Profit

 

The following is a summary of our cost of revenues and gross profit or loss for the two revenue types for the respective three-month periods ended June 30, 2016 and 2015: 

 

		For the three months ended June 30,																For the six months ended June 30,
		2016								2015								2016								2015
		$				%				$				%				$				%				$				%
Hardware, installation and other revenues
Revenues		$	448,836				100	%		$	499,278				100	%		$	890,038				100	%		$	1,001,935				100	%
Cost of Revenues-hardware & other external costs			595,100				133	%			323,585				65	%			1,037,948				117	%			717,132				75	%
Cost of Revenues-internal costs			169,744				37	%			43,118				8	%			303,367				33	%			102,913				6	%
Total Gross Profit (Loss)		$	(316,008	)			(70	)%		$	132,495				27	%		$	(451,277	)			(50	)%		$	181,890				19	%
Software license/subscription revenues
Revenues		$	841,834				100	%		$	747,313				100	%		$	1,682,728				100	%		$	1,415,542				100	%
Cost of Revenues-internal costs			354,393				42	%			321,494				43	%			721,062				42	%			625,186				44	%
Total Gross Profit		$	487,441				58	%		$	425,819				57	%		$	961,666				58	%		$	790,356				56	%
Total Company
Revenues		$	1,290,670				100	%		$	1,246,591				100	%		$	2,572,766				100	%		$	2,417,477				100	%
Cost of Revenues			1,119,237				87	%			688,197				55	%			2,062,377				80	%			1,445,231				66	%
Total Gross Profit		$	171,433				13	%		$	558,394				45	%		$	510,389				20	%		$	972,246				34	%

 

Total cost of revenues for the three-month and six-month periods ended June 30, 2016, were $1,119,237 and $2,062,377, respectively, compared $688,197 and $1,445,231 for the respective comparable periods in 2015.  As a result, we realized gross profits for the three-month and six-month periods ended June 30, 2016 of $171,433 and $510,389, respectively, compared to $558,394 and $972,246, respectively, for the comparable periods in 2015.

 

Cost of revenues for hardware, installation and other revenues for the three-month and six-month periods ended June 30, 2016 were $764,844 and $1,341,315, respectively, compared to $366,703 and $820,045, respectively, for comparable periods in 2015.   Included in the cost of these revenues are internal costs, which represent salaries and travel expenses for our in-house installation and training staff.  The decrease in gross profit performance was due principally to slightly fewer hardware units installed during the quarter, price discounting and increased internal costs between periods.  We believe some price discounting will continue through 2016 as we attempt to accelerate our growth in sales bookings, and ultimately increased overall revenues.

Cost of revenues for software license/subscription revenues for the three-month and six-month periods ended June 30, 2016 were $354,393 and $721,062, respectively, compared to $321,494 and $625,186, respectively, for the comparable periods in 2015.  These represent internal costs associated with our customer support team and web-hosting facilities in 2015.  The resulting gross profit from software license/subscription revenues for the three-month and six-month periods ended June 30, 2016 were $487,441 and $961,666, respectively, compared to $425,819 and $790,356, respectively, for comparable periods in 2015.  

Our total cost of revenues has the potential to fluctuate with revenues because of the variable cost nature of hardware, installation and other revenues contained in future contracts.  

Research and Development

Total research and development expenses for the three-month and six-month periods ended June 30, 2016 were $517,754 and $902,860, respectively, compared to $459,547 and $945,167, respectively for the comparable periods in 2016.  Total expenses increased during the three-month period due to increased headcount and utilization of third-party software service providers; however, the increase was partially offset by capitalization of certain software development expenses totaling approximately $224,000 during the period. Total research and development expenses for the six-month period decreased due to the capitalization of certain software development expenses described above.

We plan to continue our increased research and development spending in fiscal year 2016, unless it is necessary for us to reduce expenses to maintain adequate liquidity. 

Sales and Marketing

Total sales and marketing expenses for the three-month and six month periods ended June 30, 2016 were $1,511,004 and $2,769,408, respectively, compared to $450,822 and $815,189, respectively for the comparable periods in fiscal 2015.  This increase in expenses was partially due to the Company entering into certain endorser agreements; the purpose of which was to assist in our planned sales growth.  More specifically, the Company in November 2015 entered into certain agreements with a number of individuals or entities who the Company believes will enhance the Company’s brand recognition and assist its sales efforts in certain geographical areas, principally outside the State of Texas.  The term of these agreements are twelve months.  As compensation for their services, these persons were issued certain shares of the Company’s common stock.  Additionally, certain of these persons will also receive cash retainers for their services.

The increase in sales and marketing expenses was also attributable to the addition of new sales personnel in eight states outside of the State of Texas who were hired during the second quarter of 2016 as the initial step in expanding our sales footprint.  We anticipate this ramp-up period to take us through fiscal year 2016.

 

We expect our future quarterly sales and marketing expenses to continue at the expense level incurred in the second quarter of 2016.

 

General and Administrative

 

Total general and administrative expenses for the three-month and six month periods ended June 30, 2016 were $1,190,715 and $2,104,975, respectively, compared to $589,214 and $1,004,418, respectively for the comparable periods in fiscal 2015.  The increase in expenses between the respective periods is due to increased professional fees for general financial advisory, government relations, investor relations, legal, payroll, and travel expenses.   Included in these expenses for fiscal year 2016 are non-cash expenses of approximately $99,000 and $378,000 for the three month and six month periods ended June 30, 2016, relating to the value of various stock and warrant grants awarded to 3^rd party service providers during the respective periods.

We believe our general and administrative expenses for the remainder of 2016 will remain relatively consistent with expense levels in the second quarter of 2016.

Other Expense

 

Other expense, consisting of interest expense, totaled $35,930 and $47,210 for the three-month and six-month periods ended June 30, 2016, respectively, compared to $170,177 and $238,910, respectively, for same periods in fiscal 2015.  The decrease between periods of $134,247 and $191,700 are principally due to the conversion of debt to equity taking place in fiscal year 2015.

 

Net Loss Before Income Taxes

The net loss before income taxes for the three-month and six-month periods ended June 30, 2016 was $3,083,970 and $5,314,063, respectively, compared to $1,111,366 and $2,031,438, respectively, for the same periods in fiscal 2015.

Liquidity and Capital Resources

 

We have funded our operations since inception through the sale of equity and debt securities and from cash generated by operating activities.  As of June 30, 2016, we had $2,220,950 in cash and cash equivalents, compared to $8,295,310 as of December 31, 2015.  The $6,074,359 decrease in cash was due to net cash used by operating activities of $5,811,906, investing activities of $150,489 and financing activities of $111,965.

The net cash used by financing activities represents monthly payments on outstanding notes for automobile and business insurance loans and capitalized lease obligations.

We had a working capital of $141,465 on June 30, 2016, compared to $5,059,799 on December 31, 2015.  However, on June 30, 2016, our current liabilities included $1,855,462 in net deferred revenues attributable to future performance obligations under prepaid customer contracts, the actual future costs of which, we believe will not represent a majority of this amount.

Plan of Operation for the Next Twelve Months

At June 30, 2016, we had cash and cash equivalents of $2,220,950, working capital of $141,465 and an accumulated deficit of $35,273,363.  The following factors are helping us manage our liquidity and enabling us to progress our business towards cash-flow break-even, and ultimately profitability:

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have accumulated significant losses as we have been developing our service and product offerings. We have had recurring losses and expect to report losses for fiscal 2016. We believe our current available cash, along with anticipated revenues, and capital raise will be sufficient to meet our cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to us, if at all.  There can be no assurance that the source of additional contracts will be achieved.

Not applicable.

 

Evaluation of Disclosure Controls and Procedures

As of June 30, 2016, we conducted, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e)) under the Exchange Act as of the end of the period covered by this report.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in recording, processing, summarizing and reporting information required to be disclosed within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Control Over Financial Reporting

During the six months ended June 30, 2016, there were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Limitations on the Effectiveness of Internal Controls

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

PART II - OTHER INFORMATION

 

We are not currently involved in any material legal proceedings.  From time-to-time we anticipate we will be involved in legal proceedings, claims, and litigation arising in the ordinary course of our business and otherwise. The ultimate costs to resolve any such matters could have a material adverse effect on our financial statements.  We could be forced to incur material expenses with respect to these legal proceedings, and in the event there is an outcome in any that is adverse to us, our financial position and prospects could be harmed.

 

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, which outlines factors that could materially affect our business, financial condition or future results, and the additional risk factor below.  The risks described below and in our Annual Report on Form 10-K for the year ended December 31, 2015 are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial conditions or operating results.

During the six months ended June 30, 2016, we issued a total of 526,072 shares of our common stock as described below:

 

 

The offers and sales of common stock for services described above were made without registration under the Securities Act, or the securities laws of certain states, in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act and in reliance on similar exemptions under applicable state laws.  No general solicitation or general advertising was used in connection with the offering of the common stock and the Company had a pre-existing relationship with each person to whom common stock was sold.  We disclosed to the purchasers that the shares of common stock could not be sold unless they are registered under the Securities Act or unless an exemption from registration is available, and the certificates representing the shares include a legend to that effect.

 

The shares of common stock issued upon conversion of the promissory note were sold without registration in reliance of the exemption provided by Section 3(a)(9) of the Securities Act. 

None.

None.

 

None.

 

*	Filed herewith.

 

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.