Copsync (COYN) 10-Q 2011 Q2 Quarterly report

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2011

OR

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

Commission File No.: 000-53705

COPSYNC, INC.

(Exact name of registrant as specified in its charter)

Delaware	98-0513637
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2010 FM 2673

Canyon Lake, Texas  78133

(Address of principal executive offices)

(830) 964-3838

(Registrant’s telephone number, including area code)

__________________________________

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.x 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). x Yes  o 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.

Large accelerated filer	o		Accelerated filer	o
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company	x

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

The number of shares outstanding of each of the issuer's classes of common stock, as of August 11, 2011, was 136,356,488 shares of Common Stock, $0.0001 par value.

COPSYNC, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2011

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements	3
ITEM 2.	Management’s Discussion And Analysis Of Financial Condition and Results of Operations	13
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risks	16
ITEM 4.	Controls and Procedures	16
PART II.OTHER INFORMATION
ITEM 1.	Legal Proceedings	17
ITEM 1A.	Risk Factors	17
ITEM 2.	Unregistered Sales of Equity Securities	17
ITEM 3.	Defaults Upon Senior Securities	17
ITEM 4.	(Removed and Reserved)	17
ITEM 5.	Other Information	18
ITEM 6.	Exhibits	18
SIGNATURES		19

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

COPSYNC, INC.

Balance Sheets

	June 30,			December 31,
	2011			2010
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	255,245		$	240,154
Accounts receivable, net		123,114			148,939
Prepaid expenses		28,276			46,021
Total Current Assets		406,635			435,114
PROPERTY AND EQUIPMENT
Computer hardware		56,122			52,363
Computer software		18,259			18,259
Fleet vehicles		115,783			156,183
Furniture and fixtures		50,832			50,832
Total Property and Equipment		240,996			277,637
Less: Accumulated Depreciation		(121,938	)		(128,056	)
Net Property and Equipment		119,058			149,581
OTHER ASSETS
Software development costs, net		1,676,060			1,745,896
Deposits		11,795			-
Debt issuance costs, net		-			4,208
Total Other Assets		1,687,855			1,750,104
TOTAL ASSETS	$	2,213,548		$	2,334,799

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

3

 

COPSYNC, INC.

Balance Sheets (Continued)

	June 30,			December 31,
	2011			2010
	(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	401,752		$	590,465
Accrued settlement costs		220,000			220,000
Preferred stock dividends payable		178,644			126,576
Deferred revenues on hardware, installation, and licensing contracts, current portion, net of deferred costs		717,552			746,513
Convertible notes payable, current portion, net of note discount of $-0- and $-0-, respectively		-			6,249
Notes payable, current portion		128,000			149,621
Total Current Liabilities		1,645,948			1,839,424
LONG-TERM LIABILITIES
Deferred revenues on hardware, installation, and licensing contracts		384,348			373,951
Convertible notes payable, net of note discount of $-0- and $14,589, respectively		580,728			29,162
Notes payable		52,038			104,984
Total Long-Term Liabilities		1,017,114			508,097
Total Liabilities		2,663,062			2,347,521
COMMITMENTS AND CONTINGENCIES		-			-
STOCKHOLDERS' DEFICIT
Series A Preferred stock, par value $0.0001 per share, 100,000 shares authorized;   100,000 shares issued and outstanding, respectively		10			10
Series B Preferred stock, par value $0.0001 per share, 400,000 shares authorized;   375,000 shares issued and outstanding, respectively		37			37
Common stock, par value $0.0001 per share, 500,000,000 shares authorized;   136,106,488 and 130,106,113 shares issued and outstanding, respectively		13,611			13,011
Common stock to be issued, 1,215,909 and 2,175,000 shares, respectively		160,000			284,000
Common stock warrants to be issued, 1,500,000 and zero stock warrants, respectively		131,961			131,961
Deferred stock compensation		(135,000	)		(165,000	)
Additional paid-in-capital		8,546,378			7,508,524
Accumulated deficit		(9,166,511	)		(7,785,265	)
Total Stockholders' Deficit		(449,514	)		(12,722	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	2,213,548		$	2,334,799

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

4

COPSYNC, INC.

Statements of Operations

(Unaudited)

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
REVENUES
Hardware, installation and other revenues	$	394,746		$	549,800		$	603,090		$	812,189
License fee revenues		194,152			74,156			373,674			122,891
Total Revenues		588,898			623,956			976,764			935,080
COST OF REVENUES
Hardware and other costs		378,511			317,361			573,887			569,254
Amortization of capitalized licensing costs		34,918			44,052			69,836			86,818
Total Cost of Revenues		413,429			361,413			643,723			656,072
GROSS PROFIT (LOSS)		175,469			262,543			333,041			279,008
OPERATING EXPENSES
Depreciation and amortization		11,126			9,037			23,607			17,919
Professional fees		74,475			175,310			291,076			356,178
Salaries and wages		519,005			289,624			1,027,761			586,882
Rent		24,036			8,250			28,536			15,450
Other general and administrative		90,669			65,759			187,039			175,727
Total Operating Expenses		719,311			547,980			1,558,019			1,152,156
LOSS BEFORE OTHER INCOME (EXPENSE)		(543,842	)		(285,437	)		(1,224,978	)		(873,148	)
OTHER INCOME (EXPENSE)
Interest income		396			1,856			466			4,745
Cost of Series B warrants extension		-			-			(76,994	)		-
Induced conversion expense		-			-			-			(4,346	)
Gain on lawsuit settlement		-			332,914			-			332,914
Gain on asset disposals		1,419			-			1,419			-
Interest expense		(15,708	)		(18,166	)		(29,091	)		(46,164	)
Total Other Income (Expense)		(13,893	)		316,604			(104,200	)		287,149
NET INCOME (LOSS) BEFORE INCOME TAXES		(557,735	)		31,167			(1,329,178	)		(585,999	)
INCOME TAXES		-			-			-			-
NET INCOME (LOSS)	$	(557,735	)	$	31,167		$	(1,329,178	)	$	(585,999	)
Series B preferred stock dividend		(26,178	)		(26,178	)		(52,068	)		(51,954	)
Beneficial conversion feature on Series B preferred		-			-			-			(87,759	)
NET INCOME (LOSS) APPLICABLE TO COMMONSHAREHOLDERS	$	(583,913	)	$	4,989		$	(1,381,246	)	$	(725,712	)
INCOME (LOSS) PER COMMON SHARE - BASIC	$	0.00		$	0.00		$	(0.01	)	$	(0.01	)
INCOME (LOSS) PER COMMON SHARE - FULLY DILUTED	$	0.00		$	0.00		$	(0.01	)	$	0.00
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC		135,408,831			127,347,782			132,920,468			127,177,486
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - FULLY DILUTED		163,146,913			149,972,782			160,658,550			150,052,486

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

5

COPSYNC, INC.

Statements of Cash Flows

(Unaudited)

	For the Six Months Ended
	June 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,329,178	)	$	(585,999	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		93,444			104,737
Amortization of note discount		16,836			18,954
Induced conversion expense		-			4,346
Additional expense for granting of warrants and options		156,166			40,759
Common stock issued for services rendered		63,750			-
Deferred stock compensation		30,000			-
Capital contributed through services rendered		39,500			42,750
Gain on asset disposals		(1,419	)		-
Gain on lawsuit settlement		-			(332,914	)
Change in operating assets and liabilities:
Accounts receivable		25,825			(135,900	)
Debt issuance costs		4,208			6,250
Lease security deposit		(11,795	)		-
Prepaid expenses		17,745			(8,652	)
Deferred revenues		(18,564	)		126,908
Accounts payable and accrued expenses		(188,714	)		79,558
Net Cash Used in Operating Activities		(1,102,196	)		(639,203	)
CASH FLOWS FROM INVESTING ACTIVITIES
Software development costs		-			(158,142	)
Proceeds from asset disposals		13,500			-
Purchases of property and equipment		(18,165	)		(3,100	)
Net Cash Used in Investing Activities		(4,665	)		(161,242	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable		(61,567	)		(5,771	)
Proceeds received on convertible notes		580,728			-
Proceeds from common stock to be issued		115,000			100,000
Proceeds from issuance of common stock for cash		487,791			-
Proceeds from issuance of series B preferred shares for cash		-			50,000
Net Cash Provided by Financing Activities		1,121,952			144,229
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		15,091			(656,216	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		240,154			1,141,534
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	255,245		$	485,318

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

6

COPSYNC, INC.

Statements of Cash Flows

(Unaudited)

	For the Six Months Ended
	June 30,
	2011		2010
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	2,174	$	1,657
Cash paid for taxes	$	-	$	-
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued in lieu of accrued expenses	$	-	$	116,665
Common stock issued in conversion of notes payable and accrued interest	$	52,247	$	10,866
Series B Preferred stock dividends declared / accrued	$	52,068	$	139,713

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

7

COPsync, Inc.

Notes To Financial Statements

(unaudited)

NOTE 1 -        BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations.  The information furnished in the interim condensed financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements.  Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim financial statements be read in conjunction with the Company’s audited financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2010.  Operating results for the three months and six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011.

NOTE 2 -        NATURE OF ORGANIZATION

COPsync, Inc. (“the Company”), markets a real-time information sharing and data interoperability solution for law enforcement agencies.  The COPsync™ service enables patrol officers to 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 service also eliminates manual processes and increases officer productivity by enabling officers to electronically write tickets, process DUI and other arrests and incidents, and document accidents.  The service saves lives, reduces unsolved crimes and assists in apprehending criminals through such features as a nationwide officer safety alert system, GPS/auto vehicle location and distance-based alerts for crimes in progress, such as child abductions, bank robberies and police pursuits.  We have designed our system to be “vendor neutral,” meaning it can be used with products and services offered by other law enforcement technology vendors.  Our interoperability network can be added to an agency’s technology system without the agency needing to change technologies, eliminating downtime necessary to re-train their officers on a new technology.  Additionally, our system architecture is designed to allow us to scale nationwide and globally.

NOTE 3 -       CONVERTIBLE NOTES PAYABLE

During the first six months of 2011, the Company received a total of $581,000 in proceeds from unrelated individuals pursuant to the issuance of convertible notes payable.  The notes bear simple interest at 3% per annum, payable quarterly, and are due on the third anniversary of the date of issuance.  The notes may be converted into shares of the Company’s common stock at the holder’s option at a conversion rate of $0.10 per share.

In June 2011, the remaining $50,000 convertible note issued in 2009, plus accrued interest of $2,247 was converted into 522,465 shares of common stock at the stated conversion price of $0.10 per share of common stock.

NOTE 4 -        PREFERRED STOCK

During 2009, the Company completed a private placement of its equity securities in which the Company raised an additional $1,450,000 in gross proceeds.  During the three months ended March 31, 2010, an additional $50,000 was raised.  Pursuant to these private placements, the Company issued 375,000 shares of the Company’s newly designated Series B Convertible Preferred Stock, which Series B Preferred Stock is convertible into a total of 15,000,000 shares of the Company’s common stock.  In addition, as part of the private placement, the Company granted warrants to purchase an aggregate of 3,000,000 shares of common stock.

The Series B Preferred Stock issued in this private placement  i) accrue dividends at a rate of 7.0% per annum, payable in preference to the common stock or any other capital stock of the Company, ii) have a preference in liquidation, or deemed liquidation, to receive the initial investment in the Series B Preferred Stock, plus accrued and unpaid dividends, iii) is convertible into 40 shares of common stock, subject to adjustments for issuances by the Company of common stock less than $0.10 per share, and iv) has the right to elect one member of the Company’s Board of Directors.  The Company has recorded accrued dividends as of June 30, 2011 and December 31, 2010 of $178,644 and $126,576, respectively, on the Series B Preferred Stock.

8

COPsync, Inc.

Notes To Financial Statements

(unaudited)

NOTE 5 -       COMMON STOCK

During the three-months ended June 30, 2011, the Company issued a total of 8,750,375 shares of its common stock and accepted into treasury the transfer of 2,750,000 shares of common stock as discussed below:

·   The Company issued 5,377,910 shares to individual investors who purchase equity units from the Company in exchange for a total of $537,791 in cash.  The equity units consisted of five shares of the Company’s common stock and a warrant to purchase one share of common stock for the purchase price of $0.50 per unit ($0.10 per share of common stock).  

·   The Company issued 100,000 shares of its common stock valued at $9,000, or $0.09 per share, pursuant to an agreement entered into with a former employee regarding the former employee’s separation from employment with the Company in 2010.  The former employee had claimed the right to receive 913,685 shares of the Company’s common stock, valued at $87,500, or approximately $0.10 per share, and an additional 180,000 shares of common stock valued at $23,400, or approximately $0.13 per share.

·   The Company issued 522,465 shares of its common stock valued at $52,247, in connection with the conversion of $50,000 in principal, plus accrued interest, of a convertible note originally issued in 2009.

·   The Company issued 2,000,000 shares of its common stock to Mr. Ronald A. Woessner, who was elected as its Chief Executive Officer effective October 1, 2010.  Along with Mr. Woessner’s base compensation and options to acquire 2,000,000 shares of the Company’s common stock, he was also granted 2,000,000 restricted shares of common stock valued at $180,000, or $0.09 per share. One of the Company’s founding shareholders transferred 2,000,000 shares of common stock from his personal holdings to the Company to use for the grant of these shares to Mr. Woessner. The restricted shares generally vest in equal quarterly installments over three years, commencing on December 10, 2010, with the vesting accelerating upon the occurrence of certain events specified in the grant agreement.  Since the shares do not vest immediately, this transaction is being recorded by the Company as a return of shares by the founding shareholder as the shares vest. The corresponding value of the issued shares, or $180,000, will be expensed on a quarterly basis, as the shares vest.  Accordingly, for the six months ended June 30, 2011, the Company recorded an expense of $30,000 related to this transaction, with the remaining $135,000 being recorded as deferred compensation.  This deferred compensation will be amortized on a quarterly basis over the remainder of the vesting term at $15,000 per quarter.  The actual transfer of the 2,000,000 shares of common stock to the Company and then to Mr. Woessner took place during the second quarter of 2011.  

·   The Company also issued 750,000 shares of its common stock to an outside consultant for past services rendered at a price per share of $0.085, or a total value of $63,750.  On March 30, 2011, one of the Company’s founding shareholders transferred 750,000 shares of common stock from his personal holdings to the Company to use for the grant of the shares to the outside consultant.  The total value of the shares has been expensed as professional consulting expense in the first quarter of 2011, when the services relating to the grant were performed.

The Company also recorded contributed capital related to the forfeiture of contractual payroll by certain corporate officers of $39,500 and $42,750, respectively, during the six months ended June 30, 2011 and the corresponding period in 2010.

NOTE 6 -        COMMON STOCK TO BE ISSUED

In 2009, the Company entered into a twelve-month agreement with an advisory firm to assist the Company in corporate planning, structure and capital resources.  The agreement called for the firm to receive 75,000 restricted shares of the Company’s common stock valued at $45,000, or $0.60 per share.  These shares have not yet been issued to the advisory firm as of June 30, 2011, in as much as the Company disputes that the shares are owed.  Therefore, these shares have been disclosed separately in the stockholders’ equity section of the balance sheet at June 30, 2011.

9

COPsync, Inc.

Notes To Financial Statements

(unaudited)

As of June 30, 2011, the Company had received cash totaling $115,000 in licensing fees from two existing OEM distributors.  Pursuant to the distributor agreements for these two OEM distributors only, the Company will issue to the distributors a combined total of 1,140,909 shares of common stock for their respective payments, valued at the time each payment is made at the higher value of $0.10 per share or the average daily closing price of the stock for a period of ten business days immediately preceding the Company’s receipt of such payment.  The total potential cash receipts from the distributor agreements is $340,000.  The Company anticipates payment of the $235,000 balance extending into 2012.  These shares of common stock are subject to transfer restrictions, and may not be sold, licensed, hypothecated or otherwise transferred by the distributor until the tenth anniversary of the issuance date, provided that these transfer restrictions lapse in equal quarterly installments over ten years and the share transfer restrictions lapse entirely if the distributor achieves certain sale milestones.  These shares have not been issued, and as a result, have been disclosed separately in the stockholders’ equity section of the balance sheet as of June 30, 2011.

NOTE 7 -       OUTSTANDING WARRANTS

During the first six months ended June 30, 2011, the Company granted warrants to purchase a total of 1,075,582 shares of common stock to individual investors purchasing equity units as part of the Company’s efforts to raise new capital.  Total cash received at June 30, 2011 was $537,791.  The equity units consisted of five shares of the Company’s common stock and a warrant to purchase one share of common stock for the total purchase price of $0.50 per unit ($0.10 per share of common stock).  The exercise price of the warrants is $0.20 per share of common stock and the warrants will expire March 31, 2015.  Under the provisions of ASC 718, no value was assigned to the warrants; thus, no additional expense was recorded under the Black-Scholes option pricing model because the warrants were issued as a unit with the shares of common stock.

A summary of the status of the Company’s outstanding warrants as of June 30, 2011, and the changes during the six months then ended is presented below:

			Weighted Average
	Shares		Exercise Price
Outstanding, January 1, 2011		4,375,000	$	0.20
Granted		1,075,582		0.20
Exercised/Expired/Cancelled		250,000		-
Outstanding, June 30, 2011		5,200,582	$	0.20
Outstanding, June 30, 2011		5,200,582	$	0.20

The following is a summary of outstanding and exercisable warrants at June 30, 2011:

		Outstanding						Exercisable
		Weighted
		Average
		Number
Exercise		Outstanding		Contractual		Exercise		Exercisable		Exercise
Prices		at 06/30/11		Life (in yrs.)		Price		at 06/30/11		Price
	0.20		3,000,000		0.29		0.20		3,000,000		0.20
	0.20		425,000		2.67		0.20		425,000		0.20
	0.20		400,000		0.97		0.20		400,000		0.20
	0.10		50,000		2.93		0.10		50,000		0.10
	0.20		1,075,582		3.75		0.20		-		0.20
	0.20		250,000		0.27		0.20		250,000		0.20
$	0.10 - 0.20		5,200,582		1.28	$	0.20		4,125,000	$	0.20

10

COPsync, Inc.

Notes To Financial Statements

(unaudited)

NOTE 8 -       EMPLOYEE OPTIONS

The Company’s Board of Directors grant employees, at the recommendation of management, options to purchase shares of common stock, exercisable at a stated price per share, which is the market value of the Company’s common stock on the date the options are granted, and with a ten year term life.  

Under the provisions of ASC 718, a fair value per option share is assigned to the options granted and a total value of the grant is determined.  Pursuant to the Black-Scholes option pricing model, the total value is recognized as share base expense over the grant’s vesting period.

The Company estimates the fair value of each stock option award at the grant date by using the Black-Scholes option pricing model pursuant to ASC 718, which model requires the use of exercise behavior data and the use of a number

of assumptions including volatility of the Company’s stock price, the weighted average risk-free interest rate, and the weighted average expected life of the warrants. Because the Company does not pay dividends, the dividend rate variable in the Black-Scholes model is zero.

The following is a summary of outstanding stock options and the associated share base expense recognized during the first six months ended June 30, 2011:

											Share Base
			No. of		No. of				Share Base		Expense
	Issue	Vesting	Options		Options		Exercise		Expense		To Be
Year	Date	Period	Granted		Outstanding		Price		Recognized		Recognized
2009	08/27/10	5 yrs		3,150,000		1,200,000	$	0.09	$	11,230	$	75,467
									$	11,230	$	75,467
2010	08/27/10	3 yrs		2,000,000		2,000,000	$	0.10	$	28,768	$	129,459
	9/01/2010	3 yrs		1,250,000		1,250,000	$	0.08	$	14,248	$	64,119
	9/29/2010	5 yrs		1,900,000		1,900,000	$	0.08	$	14,250	$	121,130
	10/9/2010	5 yrs		450,000		337,500	$	0.09	$	3,358	$	21,822
									$	60,624	$	336,530
2011
	1/17/2011	3 yrs		125,000		125,000	$	0.10	$	1,389	$	8,611
	2/10/2011	3 yrs		600,000		600,000	$	0.10	$	5,929	$	47,433
	6/21/2011	3 yrs		25,000		25,000	$	0.10	$	-	$	1,478
Total Share Base Expense									$	79,172	$	469,519

The options shown in the above table for years 2009 and 2010 vest ratably over the respective three or five year vesting period. The options for year 2011 vest over a three year period and as follows:  33% vests on the one year anniversary of the date of grant; and the remaining 67% in eight equal quarterly installments over the following two years.  

11

COPsync, Inc.

Notes To Financial Statements

(unaudited)

The following is a summary of outstanding and exercisable options at June 30, 2011:

		Outstanding						Exercisable
		Weighted
		Average				Weighted				Weighted
		Number		Remaining		Average		Number		Average
Exercise		Outstanding		Contractual		Exercise		Exercisable		Exercise
Prices		at 06/30/11		Life (in yrs.)		Price		at 06/30/11		Price
	0.09		1,200,000		3.46		0.09		350,000		0.09
	0.10		2,000,000		2.08		0.10		333,334		0.10
	0.08		1,250,000		2.18		0.08		208,334		0.08
	0.09		337,500		4.28		0.09		45,000		0.09
	0.08		1,900,000		4.25		0.08		190,000		0.08
	0.10		125,000		2.55		0.10		-		0.10
	0.10		600,000		2.62		0.10		-		0.10
	0.10		25,000		2.98		0.10		-		0.10
$	0.08 - 0.10		7,437,500		3.03	$	0.09		1,126,668	$	0.09

NOTE 9 -      COMMITMENTS AND CONTINGENCIES

Contingent Liability

None

Office Leases

On March 15, 2011, the Company executed a sub-lease agreement for office space in Dallas, Texas, with occupancy effective April 1, 2011.  The new facility will become the Company’s headquarters location, and the Company’s Canyon Lake location will transition into providing principally research and development, customer support and other operational activities.  The sublease agreement entailed a twenty-three month lease arrangement with monthly payments of $7,489 per month, and with rent for the first three months having been waived.  Ratable rent expense of $6,512 per month is being reported during the term of the sub-lease.

Litigation

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.

NOTE 10 -      SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date that the financial statements were available to be issued and found no significant subsequent events that required additional disclosure.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains “forward-looking statements” within the meaning of the Private Securities 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 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 Item 1A, “Risk Factors” and other risks detailed in our Annual Report on Form 10-K for our fiscal year ending December 31, 2010, and our other reports filed with the Securities and Exchange Commission.

Overview

We sell the COPsync service, which is a real-time information sharing and interoperability solution for law enforcement agencies.  The COPsync service enables patrol officers to 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 service also eliminates manual processes and increases officer productivity by enabling officers to electronically write tickets, process DUI and other arrests and incidents, and document accidents.  The service saves lives, reduces unsolved crimes and assists in apprehending criminals through such features as a nationwide officer safety alert system, GPS/auto vehicle location and distance-based alerts for crimes in progress, such as child abductions, bank robberies and police pursuits.  We have designed our system to be “vendor neutral,” meaning it can be used with products and services offered by other law enforcement technology vendors. Our interoperability network can be added to an agency’s technology system without the agency needing to change technologies, eliminating downtime necessary to re-train their officers on a new technology.  Additionally, our system architecture is designed to allow us to scale nationwide and globally.

To date, our COPsync service has successfully submitted, processed and relayed over 1,444,000 officer 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.

As of June 30, 2011, over 176 law enforcement agencies, primarily in the State of Texas, have contractually subscribed to use our real-time data collection and data sharing service

We offer our software as a service (SaaS) on a subscription basis to our customers who subscribe to use the service for a specified term.  Service 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 business 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.  

· Adding new subscribers at a high rate and having a high renewal rate among existing subscribers is essential to attaining positive cash flow from operations in the near term.

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Assuming we are successful in obtaining new users of our service, as well as retaining high renewal rates of existing users, we anticipate that the recurring nature of the COPsync network subscription model will result in annually recurring, sustainable and predictable cash and revenue growth, year-over-year.

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” and other risks detailed in our Annual Report on Form 10-K for our fiscal year ending December 31, 2010.  In addition to those risks, risks and uncertainties not presently known to us or that we currently consider immaterial might also impair our business operations.

In the Homeland Security Act of 2002, Congress mandated that all U.S. law enforcement agencies, federal, state and local, implement information sharing solutions, referred to as “interoperability.”  The COPsync service provides this interoperability.  Prior to the introduction of our service, significant information sharing among law enforcement agencies, regardless of the vendor used, did not exist in the United States.  We believe that this lack of interoperability exists because law enforcement software vendors maintain proprietary systems, which do not interoperate with systems of other vendors. Our business model is to connect the proprietary systems of these various vendors, thus enabling the sharing of information between the agency customers of those vendors.  Our service can act as an overlay for those vendors who do not offer an in-vehicle mobile technology or an underlay that operates in the background for those vendors that do offer an in-vehicle mobile technology.

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, 2011, 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, 2010.

Results of Operations

For the three months ended June 30, 2011 and 2010

Revenues.  For the three months ended June 30, 2011, our total revenues were $588,898, comprised of $394,746 in hardware, installation and other revenues and $194,152 in service fee revenues, compared to $623,956 for the three month period ended June 30, 2010, comprised of $549,800 in hardware, installation and other revenues, and $74,156 in service fee revenues.  The increase in service fee revenues was primarily due to the increase in contracted law enforcement agencies between periods.  The number of contracted agencies totaled 176 and 95 at June 30, 2011 and 2010, respectively.  The decrease in revenues for hardware, installation and other revenues was due to a concentrated number of agencies being installed in a short period of time in 2010.  Our focus during the first six months of 2011 was on addressing our backlog of new contacts.  At June 30, 2011, our backlog of executed, not performed contracts was approximately $395,000.

Many of our new contracts are multiple-year contracts calling for initial hardware sales, installation and training followed by multiple-year service fees.  For most of these contracts, we receive full payment up front upon completion of the hardware installation and training, which is initially recorded as deferred revenues and subsequently recognized as revenue during the service period.  We do not believe the resulting increase in deferred revenues has a material effect on our future working capital for the later years of the contract service  periods because our customer support costs are incrementally fixed in nature.

Cost of Revenues.  For the three months ended June 30, 2011, our cost of revenues was $413,429, resulting in a gross profit of $175,469, compared to cost of revenues of $361,413 for the three months ended June 30, 2010, resulting in a gross profit of $262,543.  We experienced lower gross profit performance in hardware, installation and other revenues, as mentioned above, which was offset by an increase in service fees resulting from the increase between periods of contracted agencies using the COPsync service.

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.  Our cost of revenues consists of a variable component, which is typically the cost of the hardware being sold and installation services (most of which have been outsourced to third party service providers).  Our customer support group performs selling, customer support, procurement and other administrative duties.  Currently, the costs of the customer support group are reported in operating expenses.

Operating Expenses.  For the three months ended June 30, 2011 and 2010, our total operating expenses were $719,311 and $547,980, respectively.  This $171,331 increase was primarily due to a $229,381 increase in salaries and wages resulting from staff increases, as well as non-cash expenses for warrant and stock grant activity between periods, partially offset by a $100,835 decrease in professional fees.  The increase in salaries and wages was due to staff increases in research and development, general and administration and sales, as well as research and development salaries that were incurred in the second quarter of 2010 and capitalized as software development costs, but were expensed over the second quarter of 2011.  Non-cash expenses totaled $134,652 and $42,875 for the three months ended June 30, 2011 and 2010, respectively.

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Other Expense.  For the three months ended June 30, 2011 other expense totaled $13,893 consisting principally of interest expense.  For the same period in 2010 other income was $316,604, which consisted 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 interest expense of $18,166.  

For the six months ended June 30, 2011 and 2010

Revenues.  For the six months ended June 30, 2011, our total revenues were $976,764, comprised of $603,090 in hardware, installation and other revenues and $373,674 in service fee revenues, compared to $935,080 for the six months ended June 30, 2010, comprised of $812,189 in hardware, installation and other revenues, and $122,891 in service fee revenues.  The increase in service fee revenues was due to the increase in contracted law enforcement agencies between periods, as previously mentioned.  The decrease in revenues for hardware, installation and other revenues is due to a higher percentage of contracts not requiring equipment between periods.

Cost of Revenues.  For the six months ended June 30, 2011, our cost of revenues was $643,723, resulting in a gross profit of $333,041, compared to cost of revenues of $656,072 for the six months ended June 30, 2010, resulting in a gross profit of $279,008.  We experienced lower gross profit performance in hardware, installation and other revenues, as mentioned above, which was offset by an increase in service fees resulting from the increase between periods of contracted agencies using the COPsync service.

Hardware and installation costs are normally a significant portion of the first year’s contract value.  As a result, you could see our cost of revenues vary significantly in period-to-period comparisons depending on the percentage of the contract value component of hardware and installation costs.

Operating Expenses.  For the six months ended June 30, 2011 and 2010, our total operating expenses were $1,558,019 and $1,152,156, respectively.  This $405,863 increase was primarily due to a $440,879 increase in salaries and wages due to staff increases between periods, the expensing of previously capitalized costs, as previously discussed, as well as non-cash expenses for warrant and stock grant activity. The increase in salaries and wages was due to staff increases in research and development, general and administration and sales, as well as, by research and development salaries incurred in the first six months of 2010 and capitalized as software development costs, but expensed in the first six months of 2011.  Non-cash expenses totaled $212,422 and $83,509 for the six months ended June 30, 2011 and 2010, respectively.

Other Expense.  For the six months ended June 30, 2011 other expense totaled $104,200, consisting principally of interest expense of $29,091 and a $76,994 one-time, non-cash charge involving management’s election to extend the term of currently outstanding warrants to purchase 3,000,000 shares of our common stock for the holders of our Series B Preferred Stock.  For the same period in 2010 other income was $287,149, which consisted primarily of $332,914 in gain on settlement debt.  Other income for 2010 also included interest income on cash and cash equivalents of $4,745, and an interest expense of $46,164.  

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, 2011, we had $255,245 in cash and cash equivalents, compared to $240,154 as of December 31, 2010.  The slight increase during the six months ended June 30, 2011, was due primarily to a $1,121,952 net cash increase from financing activities, partially offset by $1,101,196 in net cash used in operating activities and $4,665 in net cash used in investing activities.  The net cash increase from financing activities represents proceeds totaling $580,728 from convertible notes payable issued during the quarter and $602,791 from common stock issued or issuable for cash.  The latter total consists of $487,791 for shares issued in connection with a capital raise earlier this year and $115,000 for shares to be issued for periodic cash payments received from our two OEM distributors as of June 30, 2011, partially offset by $61,567 in payments on notes payable.  We had a working capital deficiency of $1,239,313 on June 30, 2011, compared to a deficiency of $1,404,310 on December 31, 2010.  

Plan of Operation for the Next Twelve Months

At June 30, 2011, we had cash and cash equivalents on hand of $255,245 and had a working capital deficiency of $1,239,313.  Approximately $220,000 of the deficiency represents liabilities that are expected to be resolved through non-cash means, (accrued settlement costs of $220,000), as well as, $717,552 in net deferred revenues, for which the future service costs are relatively low and incrementally fixed in nature.

For the twelve months ending June 30, 2012, we anticipate approximately $4,000,000 in cash receipts from operations.  Those anticipated receipts are higher than our estimated $3,500,000 of cash outflows for the same time period and, therefore, we expect to end the twelve month period with a positive cash position.  As of July 31, 2011, we had approximately $99,000 in cash and cash equivalents, $611,000 in gross accounts receivable and commitments from investors to invest approximately $152,000 in our equity securities.

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Our management initiated a plan in early 2011 to ensure that we have adequate cash and liquidity, as described below:

·   Backlog – executed, not performed contracts:  We are rebuilding the sales backlog and securing customers orders.  As of June 30, 2011, we have a backlog of new, executed, not-performed contracts totaling approximately $394,000.

·   Customer Quote Log:  We have a quote log of formal quotes submitted to prospective customers after substantive discussions that totals approximately $8,354,000.  We cannot predict when, or if, these quotes will become executed contracts.  Our management and the sales staff focuses on them weekly with emphasis on working with the prospective customers to identify and resolve roadblocks that would prevent the deal from closing.

·   Capital Funding:  As of June 30, 2011, we had obtained written subscriptions for new capital (consisting of equity units and convertible notes) approximating $1,271,000, of which we had collected $1,119,000 as of June 30, 2011.  The investment alternatives in this capital raise are described below:

o   An equity unit, which consists of five shares of our common stock and a warrant to acquire one share of our common stock for a unit purchase price of $0.50 per unit ($0.10 per share of common stock).  The exercise price of the warrants is $0.20 per share of common stock and the warrants expire on March 31, 2015.

o   Convertible notes due and payable on March 31, 2014.  The notes bear annual simple interest of three percent per annum.  The first interest payment is due on January 2, 2012 with accrued interest paid quarterly thereafter.  The notes may be converted at the holder’s option into shares of our common stock at a conversation rate of $0.10 per share.

·   Other initiatives:  During the twelve months ending June 30, 2012, we anticipate receiving cash totaling $175,000 in licensing fees from two OEM distributors.  These agreements relate to our efforts to create a network of OEM distributors in furtherance of our corporate strategy to expand our geographical footprint throughout the United States.  For the two particular OEM distributors, we will issue to the distributor shares of our common stock valued at the time the payment is made, but in no event will the value be less than $0.10 per share.  These shares of common stock are subject to transfer restrictions, and may not be sold, licensed, hypothecated or otherwise transferred by the distributor until the tenth anniversary of the issuance date, provided that these transfer restrictions lapse pro-rata and quarterly over ten years and the share transfer restrictions lapse entirely if the distributor achieves certain sale milestones.

We believe that the initiatives outlined above provide us with the means of having adequate cash for operations and growth for the twelve months ending June 30, 2012.  If we fail to perform for whatever reason on any one of the initiatives discussed above, our management will review our options for creating new sources of cash or reducing expenses.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the date of this quarterly report on Form 10-Q, 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 three months ended June 30, 2011, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect 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.

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PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

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.

Item 1A.  Risk Factors

Not applicable

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

We issued additional equity securities in connection with the capital funding referenced above under “Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Plan of Operation for the Next 12 Months” and originally disclosed on our Form 8-K filing, dated March 31, 2011.  In connection with this capital funding, during Q2 2011 we actually issued 5,377,910 shares of our common stock and associated warrants (with an exercise price of $.20 per share) to purchase 1,075,582 shares of our common stock in exchange for an aggregate $537,791 in cash, and convertible notes in the aggregate original principal amount of $176,000.  Also in connection with this capital funding, we issued convertible notes in the aggregate original principal amount of $405,000 in Q1 2011. The convertible notes are convertible at the option of the holder into our common stock shares at a conversion price of $.10 per share.

The shares of common stock, warrants and convertible notes were offered primarily to individuals that we reasonably believe to be 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 advertising was used in connection with the offering of the common stock, warrants and convertible notes.  We disclosed to the investors that the shares of common stock, the warrants, the convertible notes and the common stock underlying the warrants and the convertible notes 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 warrants or conversion of the notes (if applicable), will include a legend to that effect.

We also issued, 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 law, 100,000 shares of our common stock to a former employee in connection with that employee’s separation from service for services previously performed, valued at $9,000.  The common stock shares cannot be sold unless they are registered under the Securities Act or unless an exemption from registration is available, and the certificates representing the shares included a legend to that effect.

Item 3.  Defaults Upon Senior Securities

None

Item 4.  (Removed and Reserved)

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Item 5.  Other Information

None.

Item 6.  Exhibits

Exhibit Number	Description
31.1*	Rule 13a-14(a)/15d-14(a)  Certification of Chief Executive Officer.
31.2*	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1*	Section 1350 Certifications.
101.1**	101.INS (XBRL Instance Document)
	101.SCH (XBRL Taxonomy Extension Schema Document)
	101.CAL (XBRL Calculation Linkbase Documents)
	101.LAB (XBRL Taxonomy Label Linkbase Document)
	101.DEF (XBRL Taxonomy Linkbased Document)
	101.PRE (XBRL Taxonomy  Linkbased Document)

* Filed herewith.

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

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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.

	COPSYNC, INC.
Date: August 15, 2011	By:	/s/ Ronald A. Woessner
		Ronald A. Woessner
		Chief Executive Officer

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