In October 2009, Rocket City Enterprises, Inc. (“RCTY”) filed a demand against the Company in the American Arbitration Association in San Antonio, Texas. The demand alleges breach of contract and seeks repayment of a purported loan in the amount of $200,000 plus interest at 9% per annum. RCTY has remitted the filing fee of $1,000, and the arbitration is proceeding. On February 12, 2010, RCTY filed an amended demand to include a claim for unjust enrichment. On February 26, 2010, the Company filed an Answering Statement generally denying the allegations and asserting various affirmative defenses, including fraudulent inducement. The arbitration hearing in this matter is scheduled to begin on November 2, 2010. The Company intends to defend itself vigorously. Sp ecifically, the Company intends to deny that RCTY has alleged a valid debt of the Company based on RCTY’s representations to the Company that the $200,000 was only to be repaid upon the fulfillment of certain conditions that never occurred. The Company intends to assert affirmative defenses for, inter alia, fraudulent inducement.
At December 31, 2008, pursuant to the Company’s belief that the amount was not intended to be repaid, the Company recorded the $200,000 as additional equity. However, in order to be conservative at June 30, 2010 and December 31, 2009, the Company has reclassified this $200,000 as a liability, pending the outcome of this proceeding.
Effective April 29, 2009, the Company entered into an amended and restated employment agreement with an employee of the Company to be its Chief Executive Officer (CEO) through December 15, 2015, replacing the employment agreement the employee previously had with PostInk, at a base salary of not less than $160,000 per annum.
The employee has agreed to forego the salary increase as noted above, until such time that the Company is profitable or sufficient funding is raised to sustain the Company as a viable ongoing concern. Accordingly, the Company recorded contributed capital of $20,000 during the six months ended June 30, 2010 related to the foregone salary increase.
Effective April 29, 2009, the Company entered into an amended and restated employment agreement with an employee of the Company to be its President, through December 31, 2015, replacing the employment agreement the employee previously had with PostInk, at a base salary of not less than $115,000 per annum through March 31, 2010, increasing to $130,000 per annum after April 1, 2010.
The employee has agreed to forego the salary increase as noted above, until such time that the Company is profitable or sufficient funding is raised to sustain the Company as a viable ongoing concern. Accordingly, the Company recorded contributed capital of $22,750 during the six months ended June 30, 2010 related to the foregone salary increase.
Effective September 15, 2009, the Company entered into an employment agreement with an employee of the Company to be its Executive Vice-President of Sales and Marketing, continuing until October 12, 2014, at a base salary of not less than $220,000 per annum, payable in cash of $150,000 and $70,000 per year in shares of restricted common stock. The shares will accumulate monthly, based upon the average trading price of the Company’s common stock during such month, and will be payable to the employee on the earlier to occur of i) September 15, 2010, or ii) the date on which the Company has reported net income in accordance with Generally Accepted Accounting Principles, for two consecutive quarters. The Company has accrued a total of $55,417 as of June 30, 2010 related to the amount of shares that have vested through June 30, 2010, pursuant to the $70,000 worth of shares to eventually be issued during 2010.
In addition, on or about October 12, 2009, the Company was obligated to grant to the employee a total of 750,000 shares of restricted common stock under the Company’s Long-Term Incentive Plan, which shares will vest in twenty (20) equal quarterly installments of 37,500 shares each, beginning January 12, 2010. As no shares have vested through December 31, 2009, no accrual has been recorded as of December 31, 2009 pursuant to these shares. However, an accrual of $9,750 was recorded as of June 30, 2010 for the installment that vested during the six months ended June 30, 2010.
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements (Continued)
Executive Vice-President of Sales and Marketing(Continued)
Finally, under the employment agreement, on or about October 12, 2009, the Company was obligated to pay the employee $20,000 in cash and 551,270 fully-vested shares of restricted common stock under the Company’s Long-Term Incentive Plan. Such payments were for full compensation for services provided by the employee from April 15, 2009 through September 15, 2009. These shares were issued during the six months ended June 30, 2010.
Other Agreements
Effective May 28, 2010, the Company entered into a “Referral Compensation Agreement” with an investment firm. Pursuant to this agreement, the investment firm has or will facilitate meetings and introductions on behalf of the Company with certain potential investors in return for the Company’s agreement to pay the investment firm compensation for these introductory services if an investment, either directly or indirectly, results as a consequence of these services. The investment firm is entitled to a 5% finder’s fee of the proceeds or value invested in the Company within one-year after the date of the agreement. However, the investment firm will not be entitled to any compensation under this agreement for any investment in the Company that is used by the Company to pay the inves tment firm the monthly retainer required in the “Professional Services Agreement” noted below.
Effective June 2, 2010, the Company entered into a one-year “Professional Services Agreement” with this same investment firm. Pursuant to this separate agreement, the investment firm is to provide government relations and consulting services, sales services and tech support. As consideration for these services, the investment firm is entitled to a monthly retainer payment of $30,000. Such payments are contingent upon receipt by the Company of investments that the Company is able to secure, with the assistance of the investment firm, for that purpose, up to an amount of $360,000 for the initial term of the agreement. In addition to the monthly retainer payment, the investment firm will be entitled to a commission equal to amounts actually received by the Company in excess of $49.9 5 per user, per month generated from any contract secured as a result of the investment firm’s efforts.
Office Leases
The Company currently has two separate operating leases for its office space. Both leases currently are on a month-to-month basis. Each lease requires a monthly payment of $1,200 per month, and can be terminated by either party at any time. One of the leases is with the Company’s Chief Executive Officer (see Note 10).
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation
On December 4, 2009, the Company filed a lawsuit against an individual and various entities that the Company believes are affiliated with and controlled by this individual who held convertible notes payable by the Company in the amount of $472,000 (see Note 3), in the United States District Court for the Western District of Texas, Austin Division, captioned COPsync, Inc., Russell Chaney, individually, Jason S. Rapp, individually, v. Timothy T. Page, et. al. In the lawsuit, the Company and the other individual plaintiffs (Russell Chaney and Jason Rapp) were seeking damages for federal securities law violations, breach of fiduciary duty, fraud, conversion, breach of contract and other common law violations arising from the defendants’ wrongful acts in connection with trading the Company’s securities and promoting and raising capital for the Company in relation to the share exchange transaction with the Company’s predecessor. Management of the Company believes that Mr. Page, through the other defendant entities, controlled a large majority of the outstanding shares of the Company’s common stock prior to that transaction, and acted as the Company’s promoter and fiduciary in that and related transactions.
On December 30, 2009, Mr. Page and several of the other defendants answered the lawsuit, asserting various affirmative defenses and filing counterclaims against the Company and the other plaintiffs for business disparagement, based upon alleged communications between the Company and a broker-dealer, and fraudulent inducement, in connection with alleged loans made to the Company by Testre LP. On January 22, 2010, the plaintiffs filed a Motion to Dismiss the Counterclaims, which is now awaiting court decision. Management of the Company believes that the counterclaims are without merit and intend to defend them vigorously.
Also on December 30, 2009, Testre issued a letter demanding payment in thirty (30) days of alleged loans made to the Company in the amount of $1,182,000. Of that amount, a $750,000 purported loan was allegedly due to be converted into warrants to purchase 15,000,000 shares of the Company’s common stock upon the closing of the April 2008 share exchange. The Company has always believed that the $750,000 loan was never a legitimate obligation, and has disputed that it owed any monies on these supposed loans, in part because Testre and its affiliates, including Mr. Page, have caused damages to the Company substantially in excess of these amounts. On March 20, 2010, Testre filed a lawsuit against the Company in the Superior Court of the State of California for the County of Los Angeles, captioned Testre, LP vs. COPsync, Inc., alleging breach of contract and seeking $1,389,656 in principal and interest allegedly due on the above-referenced loans. The Company had recorded, however, total convertible notes payable to this individual and Testre LP, totaling $472,000 (see Note 3) as of December 31, 2009, in order to be conservative, pending the outcome of this litigation, but believed that the $472,000 amount was the worst-case scenario based upon the loan documents.
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
Effective June 6, 2010, the Company and Mr. Page (personally and on behalf of Testre and its affiliates) entered into a “Deal Points Settlement Agreement” (“DPSA”) which according to the agreement is intended to be enforceable as a binding settlement agreement in and of itself as necessary, although a final settlement agreement has not been finalized as of the date of this report. Pursuant to this DPSA, both parties agreed to the following: (1) the $750,000 purported loan noted in the preceding paragraph is null, void, and unenforceable and the Company is not subject to any repayment or guaranty obligations arising therefrom, and (2) any alleged obligation under the convertible notes payable, totaling $472,000, plus accrued interest totaling $80,914 (see Note 3), shall be discharged, and shall not be recognized as indebtedness against the Company. However, the Company agrees to pay a settlement sum to Page and Testre in the amount of $472,000, plus accrued interest, if and when the following conditions are satisfied: (a) to the extent that new capital is introduced to the Company by Mr. Page or a certain other individual on terms acceptable to the Company and that comply with all applicable state and federal security laws, the Company shall pay 45% of such funds to Mr. Page or any other person or entity designated by Mr. Page, (b) the Company will not refuse to issue its equity securities to any investors introduced by Mr. Page or a certain other individual provided that the investors shall be accredited investors and willing to purchase the Company’s equity securities on terms no less favorable to the Company that those of its most recent offering of similar securities, and provided further that the Company shall advise Mr. Page immediately if it offers equity securities on any more fa vorable terms to any prospective investor and shall not refuse any investors introduced by Mr. Page who are willing to purchase shares on such more favorable terms, and (c) the total and maximum amount to be paid to Mr. Page under all provisions is $472,000, plus accrued interest, from the dates stated and at the rates stated in the underlying notes.
In satisfaction of the discharge of these convertible notes payable, the Company will deliver 1,000,000 restricted shares to Mr. Page upon the signing of the final settlement agreement. In addition, the Company will convey to Testre 1,000,000 shares of unrestricted common stock in exchange for Testre’s warrants to purchase 15,000,000 shares of the Company’s common stock. At the time a full settlement agreement is finalized, the Company will convey the shares to Testre. Following the execution of a full settlement agreement, the Company will not interfere with the sale of the Company’s stock by the defendants either through requesting action or inaction by their transfer agent or by contacting any brokerage firms at which the Page defendants have an account. In addition, all parties will dismiss all claims and counterclaims with prejudice in the two pending lawsuits referenced above promptly after a final settlement agreement is signed. The DFSA stipulated that all parties were to finalize and sign a full and final settlement agreement with mutual releases and ordinary and customary terms by June 15, 2010, although a final settlement agreement has yet to be signed as of the date of this report. If there is any dispute about any point in the final settlement agreement on which the parties cannot agree, the parties will ask a disinterested attorney to decide the issue on the basis of what is ordinary and customary under Texas and federal practice, but the points in this DPSA will not be altered or otherwise affected.
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
As of the date of this report, a final settlement agreement as referred to in the previous paragraph has yet to be finalized. However, according to the language included in the DPSA, the agreement is intended to be enforceable as a binding settlement agreement in and of itself, as of June 6, 2010. Accordingly, the Company has recorded accrued settlement costs of $220,000 as of June 30, 2010, which represents the market value of the 2,000,000 shares of common stock to be issued pursuant to the DPSA on June 6, 2010 ($0.11 per share), since no shares have been issued pursuant to this agreement as of June 30, 2010. The difference between this accrual and the discharge of the convertible notes payable and related accrued interest through June 6, 2010 (see Note 3) has been recorded as a lawsuit settleme nt gain, totaling $332,914, during the six-month period ended June 30, 2010. This gain has been recorded since management of the Company believes that the eventual payment of the $472,000, plus accrued interest, settlement amount as discussed previously, is considered to be remote pending the unlikely occurrence of the required stipulations as previously discussed.
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company leases its corporate office space on a month-to-month basis from the Company’s Chief Executive Officer. The monthly payment on the lease agreement is $1,200 per month and the agreement can be terminated by either party at any time.
NOTE 11 - SUBSEQUENT EVENTS
Effective July 16, 2010, pursuant to an addendum to a consulting agreement (see Note 6, paragraphs 3 and 4, for details of the original consulting agreement), both the Company and the advisory firm agreed to terminate the clause regarding the granting of 1,250,000 warrants. However, effective the same day, pursuant to an additional addendum to the same consulting agreement, both parties agreed to add an additional clause to the original agreement, whereby the advisory firm is to receive warrants to purchase 1,500,000 shares of common stock at $0.10 per share for a seven-year period, with a cashless exercise feature, subject to the terms of the consulting agreement. as amended. These warrants have not yet been issued.
The Company has evaluated subsequent events through the date that the financial statements were available to be issued and found no other significant subsequent events that required additional disclosure.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains “forward-looking statements.” 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 may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect ,” “plan” or “anticipate” and other similar words.
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 in this report. We do not intend, and undertake no obligation, to update any forward-looking statement.
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements, including the notes to those financial statements, included elsewhere in this report.
The information contained below is subject to the “Risk Factors” and other risks detailed in our Annual Report on Form 10-K for our fiscal year ending December 31, 2009 and our other reports filed with the Securities and Exchange Commission.
Overview; Business Model; Risks and Uncertainties
Since January 2005, we have primarily been a vendor of the COPsync™ service, which is a real-time data collection and data sharing solution. Our solution provides in-car, real-time, law enforcement information to law enforcement officers at the point of incident via a laptop computer, notebook or a handheld device. Our service also provides electronic forms capability to enable officers in the field to electronically document incident and offense reports, including arrests, citations, field contacts, DWI reporting, and crash reporting; it also provides a means to electronically transmit missing child (Amber) and BOLO (Be on the lookout) alerts to other users of the service and electronic alerts to aid in the identification and apprehension of persons of interest to law enforcement.
Our founders, Russell Chaney and Jason Shane Rapp, both certified police officers in the State of Texas and former software company executives, began developing the COPsync service in early 2004. Their motivation for developing the service was the death of a fellow police officer in their community, which they believed was the direct result of law enforcement agencies not sharing relevant information. Mr. Chaney and Mr. Rapp aspired to create and deploy a technology that would have avoided the death of a fellow officer and that provides in-vehicle, electronic technology tools to assist officers in fulfilling their law enforcement responsibilities.
We believe that use of our system saves lives, saves time and saves money. It increases officer safety by providing real-time access to critical information officers need to protect themselves and the public. Also, our systems’ electronic technology tools increase officer productivity, which enables them to spend more time on patrol and less time behind a desk completing incident, offense and activity paperwork. Our system architecture is designed to scale nationwide and globally. We have also designed our system to be “vendor neutral,” meaning it can be used with products and services offered by other law enforcement technology vendors.
Our service became available for release in the second half of 2008, and we began generating license fee revenue in the fourth quarter of 2008. Currently, 126 law enforcement agencies have contractually subscribed to use our real-time data collection and data sharing solution.
We offer our software as a service (“SaaS”) on a subscription basis to our customers who subscribe to use the services for a specified term. The fees are typically paid annually at the inception of each year of service. Our business model is to obtain subscribers to use our service, achieve a high subscription renewal rate from those subscribers and then grow our revenue via a combination of new subscribers and renewals of existing subscribers. Pertinent attributes of our model include the following:
| · | We incur start-up costs and recurring fixed costs to establish and maintain the service. |
| · | We acquire subscribers and bring them onto the service, which requires variable acquisition costs related to sales, installation and deployment. |
| · | Subscribers are recruited with the goal of reaching a level of aggregate subscriber payments that exceeds the fixed (and variable) recurring service costs. |
| · | The rate at which new subscribers are added is essential to attaining positive cash flow from operations in the near term. |
Assuming we are successful in obtaining users of our service, we anticipate that the recurring nature of our subscription model will result in cash receipts rising in a predictable manner, assuming adequate subscription renewal and continued new additions to the subscription base.
There is no assurance that we will be successful in implementing our business model. There are numerous risks affecting our business, some of which are beyond our control. An investment in our common stock involves a high degree of risk and may not be appropriate for investors who cannot afford to lose their entire investment. Potential risks and uncertainties that could affect our operating results and financial condition include, without limitation, those described in “ITEM 1A. RISK FACTORS” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and as described below under “Item 1A. Risk Factors.” In addition to the risks outlined in the Form 10-K and below, risks and uncertainties not presently known to us or that we currently consider immaterial might also impair our business operations.
As of June 30, 2010, our COPsync solution had successfully submitted, processed and relayed over 354,311officer initiated information requests. On average, our service is returning results to mobile users in less than five seconds, well within the 32 second average NCIC 2000 standard for mobile clients.
Effective April 25, 2008, we completed a share exchange with PostInk Technology, LP. In the share exchange, the owners of PostInk acquired beneficial ownership of approximately 86% of our outstanding common stock. In addition, in connection with the share exchange, we changed our name from Global Advance Corp. to COPsync, Inc. As a result of the share exchange, for financial accounting purposes, we treated the share exchange as a purchase of our company by PostInk.
Basis of Presentation, Critical Accounting Policies and Estimates
We prepare our financial statements in conformity with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates and assumptions are routinely evaluated. Actual results may differ from these estimates.
Our management believes that there has been no significant changes during the quarter ended June 30, 2010 to the items we disclosed as 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, 2009.
Results of Operations
For the three month periods ended June 30, 2010 and 2009
Revenue. For the three month period ended June 30, 2010, our total revenues were $623,956, including $549,800 in hardware, installation and other revenue and $74,156 in license fee revenues, compared to $22,123 for the three month period ended June 30, 2009, $2,922 of which was hardware, installation and other revenue and $19,201 of which was license revenue. The increase in revenue in both categories was due to increasing sales after the release of our product for licensing in the fourth quarter of 2008 and our recognition of deferred revenue in the second quarter of 2010 from previously executed license agreements. We only began selling and installing hardware required to run our software in the first quarter of 2009.
Cost of Revenue. For the three month period ended June 30, 2010, our cost of revenues was $361,413, resulting in a gross profit of $262,543, compared to cost of revenues of $54,603for the three months ended June 30, 2009, resulting in a gross loss of $32,480. The increase in costs of revenues in 2010 was primarily due to an increase in hardware and other costs of $301,144. The gross loss in 2009 was primarily due to $38,386 in amortization of capitalized licensing costs with only $19,201 in offsetting license fee revenues, and $16,217 in hardware and other costs with only $2,922 in hardware, installation and other revenues.
Operating Expenses. For the three month periods ended June 30, 2010 and 2009, our total operating expenses were $547,980 and $539,292, respectively. This $8,688 increase was due primarily to an $180,370 increase in salaries and wages, primarily as the result of hiring additional sales staff, which was largely offset by a $167,093 decrease in professional fees, due to the value of warrants to purchase 400,000 shares of our common stock issued to a consultant included in 2009.
Other Income (Expense). For the three month periods ended June 30, 2010 other income was $316,604, as compared to other expense of $26,334 in the same period in 2009. Other income for 2010 consists primarily of $332,914 in gain on settlement debt, which was recognized in connection with an agreed discharge of $472,000 in principal amount of convertible debt in connection with a settlement agreement relating to pending litigation, offset by accrued settlement costs of $220,000 for 2,000,000 shares of common stock to be issued in connection with that settlement. Other income for 2010 also included interest income on cash and cash equivalents of $1,856, and an interest expense of $18,166. Other expense for 2009 consists of interest income on cash and cash equivalents of $146, offset by an interest expense of $26,334.
For the six month periods ended June 30, 2010 and 2009
Revenue. For the six month period ended June 30, 2010, our total revenues were $935,080, including $812,189 in hardware, installation and other revenue and $122,891 in license fee revenues, compared to $26,292 for the six month period ended June 30, 2009, $2,922 of which was hardware, installation and other revenue and $23,370 of which was license revenue. The increase in revenue in both categories was due to increasing sales after the release of our product for licensing in the fourth quarter of 2008 and our recognition of deferred revenue in the second quarter of 2010 from previously executed license agreements. We only began selling and installing hardware required to run our software in the first quarter of 2009.
Cost of Revenue. For the six month period ended June 30, 2010, our cost of revenues was $656,072, resulting in a gross profit of $279,008, compared to cost of revenues of $94,244for the six months ended June 30, 2009, resulting in a gross loss of $67,952. The increase in costs of revenues in 2010 was primarily due to an increase in hardware and other costs of $549,918. The gross loss in 2009 was primarily due to $74,908 in amortization of capitalized licensing costs with only $23,370 in offsetting license fee revenues, and $19,336 in hardware and other costs with only $2,922 in hardware, installation and other revenues.
Operating Expenses. For the six month periods ended June 30, 2010 and 2009, our total operating expenses were $1,152,156 and $734,186, respectively. This $417,970 increase was due primarily to a $382,627 increase in salaries and wages, primarily as the result of hiring additional sales staff, and smaller increases in depreciation and amortization and other general and administrative expenses, which was offset by a $15,890 decrease in professional fees.
Other Income (Expense). For the six month periods ended June 30, 2010 other income was $387,149, as compared to other expense of $36,345 in the same period in 2009. Other income for 2010 consists primarily of $332,914 in gain on settlement debt, which was recognized in connection with an agreed discharge of $472,000 in principal amount of convertible debt in connection with a settlement agreement relating to pending litigation, offset by accrued settlement costs of $220,000 for 2,000,000 shares of common stock to be issued in connection with that settlement. Other income for 2010 also included interest income on cash and cash equivalents of $4,745, an induced conversion expense of $4,346, which we recorded upon the conversion of a convertible note at a conversion price less than that stated in the note, and an interest expense of $46,164. Other expense for 2009 consists of interest income on cash and cash equivalents of $613, offset by an interest expense of $36,958.
Liquidity and Capital Resources
Since our formation, we have funded our operations primarily through the sale of equity and debt securities. As of June 30, 2010, we had $485,318 in cash and cash equivalents, compared to $1,141,534 as of December 31, 2009. The decrease during the six months ended June 30, 2010 was due primarily to $639,203 in cash used in operating activities, primarily as the result of our net loss during that period, and $161,242 used in investing activities, primarily due to $158,142 software development costs, which was partially offset by $144,229 provided by financing activities, including $50,000 in proceeds received from the issuance of shares of our Series B preferred stock and $100,000 in proceeds from the issuance of our common stock and warrants. On June 30, 2010, we had a working capital deficiency of $199,60 2, compared to a surplus of $12,412 on December 31, 2009. The working capital deficiency was due primarily to a decrease of $656,216 in cash and cash equivalents, an increase of $220,000 in accrued settlement costs and an increase of $206,466 in deferred revenues, accounts payable and accrued expenses, which was partially offset by a $472,000 decrease in convertible notes payable and a $144,552 increase in accounts receivable and prepaid expenses.
Plan of Operation .
At June 30, 2010, we had cash and cash equivalents on hand of $485,318 and had a working capital deficiency of $199,602. We consumed cash of $407,112 during the second quarter of 2010. Although we anticipate that the rate of our cash consumption will decrease somewhat during the third quarter of 2010, we plan to seek additional financing in the near term in order to support our anticipated operations. If we are unable to obtain additional financing on satisfactory terms, our results of operations will be negatively affected.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We do not use derivative financial instruments to hedge interest rate and foreign currency exposure. We do not believe that we have any material exposure to interest rate risk. We did not experience a material impact from interest rate risk during fiscal 2009.
Currently, we do not have any significant investments in financial instruments for trading or other speculative purposes, or to manage our interest rate exposure.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. To address the material weaknesses, we performed additional analysis and other post-closing procedures in an effort to ensure our consolidated financial statements included in this report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting occurred during the quarter ended June 30, 2010 that materially affected, or was 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
Item 1. Legal Proceedings
On December 4, 2009, we filed a lawsuit against Timothy T. Page and various entities that we believe are affiliated with and controlled by Mr. Page in the United States District Court for the Western District of Texas, Austin Division, captioned COPsync, Inc., et al. v. Timothy T. Page, et al. On December 30, 2009, Mr. Page and several of the other defendants answered the lawsuit, asserting various affirmative defenses and filing counterclaims against us and the other plaintiffs. Also on December 30, 2009, Testre, LP, a defendant in the lawsuit, issued a letter demanding payment within thirty (30) days of alleged loans made to us in the amount of $1,182,000, including a $750,000 purported loan by Testre that we claim was repaid by the issuance of warrants to pu rchase 15,000,000 shares of our common stock upon the closing of the April 2008 share exchange. On March 22, 2010, Testre filed a lawsuit against us in the Superior Court of the State of California for the County of Los Angeles, captioned Testre, LP vs. COPsync, Inc., alleging breach of contract and seeking $1,389,656 in principal and interest allegedly due on the above-referenced loans.
Effective June 6, 2010, we entered into a “deal points” settlement agreement with Mr. Page, on behalf of himself and his admitted affiliates, including Testre. The agreement is an enforceable contract, but contemplates that a full settlement agreement, with mutual releases, will be executed. The parties are still negotiating the terms of the full settlement agreement. The deal points settlement agreement provides that: (i) the $750,000 loan is null, void and unenforceable, (ii) if we complete financing with a party introduced to us by Mr. Page or other identified individuals, we will pay 45% of the funds raised pursuant to such financing toward the principal and accrued interest allegedly owed under purported loans totaling $472,000; otherwise, these purported loans are discharged; ( iii) we will issue one million unrestricted shares of our common stock in exchange for warrants to purchase 15 million shares held by Testre; (iv) we will issue to Mr. Page one million additional restricted shares of our common stock; and (v) all parties will release all claims and counterclaims with prejudice.
As discussed above in Note 9 in the notes to the financial statements, we are defendants in an arbitration proceeding filed by Rocket City Enterprises.
We may be involved in other legal proceedings that arise in the ordinary course of business.
Item 1A. Risk Factors
See Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. The risk factor set forth below and those included in our Form 10-K should be read in conjunction with the considerations set forth above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
In addition to the risk factors previously identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, we replace the risk factor entitled “ We are likely to require additional financing to support our operations. Such financing may only be available on disadvantageous terms, or may not be available at all. Any new financing could have a substantial dilutive effect on our existing stockholders.” with the following:
We are likely to require additional financing to support our operations. Such financing may only be available on disadvantageous terms, or may not be available at all. Any new financing could have a substantial dilutive effect on our existing stockholders.
At June 30, 2010, we had cash and cash equivalents on hand of $485,318 and had a working capital deficiency of $199,602. We consumed cash of $407,112 during the second quarter of 2010. Although we anticipate our cash consumption will decrease somewhat during the third quarter of 2010, we plan to seek additional financing in the near term in order to support our anticipated operations. If we are unable to obtain additional financing on satisfactory terms, our results of operations will be negatively affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On or about May 6, 2010, we completed a private placement of 1,000,000 shares of our common stock, and a warrant to purchase 250,000 shares of our common stock for $0.20 per share, in exchange for $100,000 in cash, or one share of common stock for each $0.10 of cash. The shares of common stock were offered and sold to one private individual that we reasonably believe is an “accredited investor,” as such term is defined in Rule 501 under the Securities Act. The offer and sale was made without registration under the Securities Act, or the securities laws of certain states, in reliance on the exemptions provided by Section 4(2) of the Securities Act and Regulation D under the Securities Act and in reliance on similar exemptions under applicable state laws. No general solicitation or general advert ising was used in connection with the offering of the note. We disclosed to the investor that the shares of common stock, the warrant and the common stock underlying the warrant 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 and the warrant included, and the certificates representing the common stock to be issued upon exercise of the note will include, a legend to that effect.
Item 3. Defaults Upon Senior Securities
As discussed under Legal Proceedings above, on December 30, 2009, Testre, LP issued a letter demanding payment in thirty (30) days of alleged loans made to us in the amount of $1,182,000. On March 22, 2010, Testre filed a lawsuit against us in the Superior Court of the State of California for the County of Los Angeles, captioned Testre, LP vs. COPsync, Inc., alleging breach of contract and seeking $1,389,656 in principal and interest allegedly due on the above-referenced loans. Of this amount, we do not believe that a purported loan of $750,000 included in the amount sought was a legitimate obligation and, if it was legitimate, it was repaid by the issuance of warrants. With respect to the remaining loans subject to this lawsuit, which total $507,427 of principal and accrued interest as of the date of this report, we dispute that we owe any monies on those supposed loans, in part because Testre and its affiliates, including Mr. Page, defrauded and caused damages to us substantially in excess of the amounts owed. We are seeking to recover those damages in the lawsuit we filed against Mr. Page, Testre and others, as described under “Item 1. Legal Proceedings” above.
Effective June 6, 2010, we entered into a deal points settlement agreement with Mr. Page, on behalf of himself and his admitted affiliates, including Testre. The agreement is an enforceable contract but contemplates that a full settlement agreement, with mutual releases, will be executed. The parties are still negotiating the terms of that full settlement agreement. The deal points settlement agreement provides, among other things, that the loans that are the subject of the suit are either null, void and unenforceable or will be discharged in exchange for a contingency settlement payment, as described under “Item 1. Legal Proceedings” above.
Item 4. (Removed and Reserved)
Item 5. Other Information
None.
| Exhibit No. | INDEX TO EXHIBITS |
| | |
| 31.1 | Certification of COPsync, Inc. Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of COPsync, Inc. Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements 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.
| | COPsync, Inc. | |
| | | | |
| Date: August 16, 2010 | By: | /s/ Russell D. Chaney | |
| | | Russell D. Chaney | |
| | | Chief Executive Officer | |
| | | (Principal Executive Officer) | |
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