UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 2011
000-53705
(Commission File Number)
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) | ||
| (972) 865-6192 | ||
| (Registrant’s telephone number, including area code) | ||
Securities registered pursuant to Section 12(b) of the Act: None | ||
| Securities registered pursuant to Section 12(g) of the Act: | ||
| Common Stock, $0.0001 par value | ||
| (Title of Class) |
Indicate by check whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
Indicate by check whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit and post such files). xYes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 Act). ¨ Yes x No
The aggregate market value of the registrant’s common equity held by non-affiliates of the registrant at June 30, 2011, based on the $0.07 per share closing price for the registrant’s common stock on the OTC Bulletin Board, was $4,770,688.
The number of shares of the registrant’s common stock outstanding as of May 11, 2012 was 148,401,688.
DOCUMENTS INCORPORATED BY REFERENCE: None.
EXPLANATORY NOTE
This amendment to the Annual Report on Form 10-K of COPsync, Inc., for the fiscal year ended December 31, 2011, as filed on May 15, 2012 (the “Form 10-K”), is being filed for the purpose of including the report of our auditors for the year ended December 31, 2010 in our financial statements. This amendment also includes (i) currently dated consents of our auditors to the use of their reports in the Form 10-K and to the incorporation by reference in our previously filed Registration Statement on Form S-8 of their reports appearing in the Form 10-K and (ii) currently dated certifications from each of our Chief Executive Officer and our Chief Financial Officer, as required by Rule 12b-15 of the Securities Exchange Act of 1934, as amended, for amendments to an Annual Report on Form 10-K. The remainder of our Form 10-K is not reproduced in this amendment, and except as specifically stated in this amendment does not modify or update the original Form 10-K or reflect events occurring after the filing of the original Form 10-K other than to reflect the revisions described above.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Report:
(1) Financial Statements:
(b) Exhibits:
See Index to Exhibits.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 on Form 10-K/A to the registrant’s annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| COPSYNC, INC. | |||
| Date: October 11, 2012 | By: | /s/ Ronald A. Woessner | |
| Ronald A. Woessner | |||
| Chief Executive Officer | |||
INDEX TO EXHIBITS
| Exhibit Number | Description | |
| 3.1 | Amended and Restated Certificate of Incorporation filed on September 2, 2009 (Incorporated by reference to registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 20, 2009). | |
| 3.2 | Certificate of Designations of Series B Convertible Preferred Stock filed on October 14, 2009 (Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the Commission on October 20, 2009). | |
| 3.3 | Bylaws (Incorporated by reference to registrants Registration Statement on Form SB-2 (Registration No. 333-140320)). | |
| 4.1 | Form of Common Stock Certificate (Incorporated by reference to registrant’s Registration Statement on Form SB-2 (Registration No. 333-140320)). | |
| 10.2 | Form of Warrant, dated as of October 14, 2009, issued by registrant to the investors in its Series B Preferred Stock (Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the Commission on October 20, 2009). | |
| 10.3 | Investors’ Rights Agreement, dated as of October 14, 2009, by and among registrant and the investors in its Series B Preferred Stock (excluding exhibits) (Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the Commission on October 20, 2009). | |
| 10.4 | Amended and Restated Executive Employment Agreement, dated April 29, 2009, by and between Russell D. Chaney and registrant (Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 20, 2009) | |
| 10.5 | Amended and Restated Executive Employment Agreement, dated April 29, 2009, by and between J. Shane Rapp and registrant (Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 20, 2009) | |
| 10.6 | Stock Restriction Agreement, dated as of August 27, 2010, by and between Ronald A. Woessner and registrant. (Incorporated by reference to the registrant’s Annual Report on Form 10-K filed with the Commission on April 15, 2011). | |
| 10.7 | Form of Indemnification Agreement, dated as of October 14, 2009, by and between registrant and its officers and directors (Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the Commission on October 20, 2009). | |
| 10.8 | Registrant’s 2009 Long-Term Incentive Plan (Incorporated by reference to registrant’s Registration Statement on Form S-8 (Registration No. 333-161882)). | |
| 10.9 | Form of Warrant, issued by the registrant to certain investors (Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the Commission on April 6, 2011). | |
| 10.10 | Form of Convertible Note, issued by the registrant to certain investors (Incorporated by reference to the registrant’s Current Report on Form 8-k filed with the Commission on April 6, 2011). |
| 23.1* | ||
| 23.2* | ||
| 23.3* | ||
31.1* | ||
| 31.2* | ||
| 32* |
| * | Filed herewith. |
INDEX TO FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of COPsync, Inc.
We have audited the accompanying balance sheet of COPsync, Inc. as of December 31, 2011, and the related statement of operations, stockholders’ equity, and cash flows for year ended December 31, 2011. COPsync, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of COPsync, Inc. as of and for the year ended December 31, 2010 were audited by other auditors whose report dated April 15, 2011 expressed an unqualified opinion on those financial statements.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of COPsync, Inc. as of December 31, 2011, and the results of its operations and its cash flows for the year ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
/s/ PMB Helin Donovan, LLP
Dallas, TX
May 15, 2012
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
COPsync, Inc.
Canyon Lake, TX
We have audited the accompanying balance sheet of COPsync, Inc. as of December 31, 2010 and the related statement of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of COPsync, Inc. as of December 31, 2010 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Morrill & Associates
Morrill & Associates, LLC
Clinton, Utah
April 15, 2011
F-3
COPSYNC, INC.
Balance Sheets
| ASSETS | ||||||||
| December 31, | December 31, | |||||||
| 2011 | 2010 | |||||||
| CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 1,074,317 | $ | 240,154 | ||||
Accounts receivable, net | 106,919 | 148,939 | ||||||
Prepaid expenses | 60,425 | 46,021 | ||||||
Total Current Assets | 1,241,661 | 435,114 | ||||||
PROPERTY AND EQUIPMENT | ||||||||
Computer hardware | 57,561 | 52,363 | ||||||
Computer software | 20,713 | 18,259 | ||||||
Fleet vehicles | 108,384 | 156,183 | ||||||
Furniture and fixtures | 7,872 | 50,832 | ||||||
Total Property and Equipment | 194,530 | 277,637 | ||||||
Less: Accumulated Depreciation | (83,269 | ) | (128,056 | ) | ||||
Net Property and Equipment | 111,261 | 149,581 | ||||||
OTHER ASSETS | ||||||||
Software development costs, net | 1,309,416 | 1,745,896 | ||||||
Debt issuance costs, net | - | 4,208 | ||||||
Total Other Assets | 1,309,416 | 1,750,104 | ||||||
TOTAL ASSETS | $ | 2,662,338 | $ | 2,334,799 | ||||
The accompanying notes are an integral part of these financial statements.
F-4
COPSYNC, INC.
Balance Sheets (Continued)
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| December 31, | December 31, | |||||||
| 2011 | 2010 | |||||||
| CURRENT LIABILITIES | ||||||||
Accounts payable and accrued expenses | $ | 528,951 | $ | 590,465 | ||||
Accrued settlement costs | - | 220,000 | ||||||
Deferred revenues | 1,033,833 | 746,513 | ||||||
Convertible notes payable | - | 6,249 | ||||||
Notes payable, current portion | 84,145 | 149,621 | ||||||
Total Current Liabilities | 1,646,929 | 1,712,848 | ||||||
LONG-TERM LIABILITIES | ||||||||
Deferred revenues | 553,615 | 373,951 | ||||||
Convertible notes payable | 612,731 | 29,162 | ||||||
Notes payable, non-current portion | 35,844 | 104,984 | ||||||
Total Long-Term Liabilities | 1,202,190 | 508,097 | ||||||
Total Liabilities | 2,849,119 | 2,220,945 | ||||||
COMMITMENTS AND CONTINGENCIES | - | - | ||||||
STOCKHOLDERS' EQUITY (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; 148,251,688 and 130,106,113 shares issued and outstanding, respectively | 14,826 | 13,011 | ||||||
Common stock to be issued, 2,459,061 and 2,175,000 shares, respectively | 284,315 | 104,000 | ||||||
Common stock warrants to be issued | 131,961 | 131,961 | ||||||
Additional paid-in-capital | 9,886,601 | 7,650,100 | ||||||
Accumulated deficit | (10,504,531 | ) | (7,785,265 | ) | ||||
Total Stockholders' Equity (Deficit) | (186,781 | ) | 113,854 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $ | 2,662,338 | $ | 2,334,799 | ||||
The accompanying notes are an integral part of these financial statements.
F-5
COPSYNC, INC.
Statements of Operations
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2011 | 2010 | |||||||
| REVENUES | ||||||||
Hardware, installation and other revenues | $ | 1,344,786 | $ | 2,029,973 | ||||
Software license/subscriptions revenues | 1,204,530 | 379,314 | ||||||
Total Revenues | 2,549,316 | 2,409,287 | ||||||
COST OF REVENUES | ||||||||
Hardware and other costs | 1,431,073 | 1,971,676 | ||||||
Software license/subscriptions | 165,000 | - | ||||||
Amortization of capitalized licensing costs | 139,672 | 177,621 | ||||||
Impairment on capitalized licensing costs (Note 3) | 296,808 | 580,000 | ||||||
Total Cost of Revenues | 2,032,553 | 2,729,297 | ||||||
GROSS PROFIT (LOSS) | 516,763 | (320,010 | ) | |||||
OPERATING EXPENSES | ||||||||
Depreciation and amortization | 42,131 | 39,084 | ||||||
Professional fees | 337,228 | 1,020,157 | ||||||
Salaries and wages | 2,289,419 | 1,377,334 | ||||||
Rent | 77,675 | 28,280 | ||||||
Other general and administrative | 454,994 | 382,837 | ||||||
Total Operating Expenses | 3,201,447 | 2,847,692 | ||||||
LOSS FROM OPERATIONS | (2,684,684 | ) | (3,167,702 | ) | ||||
OTHER INCOME (EXPENSE) | ||||||||
Interest income | 500 | 5,773 | ||||||
Gain on settlement of debt | 100,000 | 392,914 | ||||||
Gain on asset disposals | 9,426 | 648 | ||||||
Interest expense | (39,509 | ) | (68,060 | ) | ||||
Induced conversion expense | - | (4,346 | ) | |||||
Impairment on investment | - | (50,000 | ) | |||||
Total Other Income (Expense) | 70,417 | 276,929 | ||||||
NET LOSS BEFORE INCOME TAXES | (2,614,267 | ) | (2,890,773 | ) | ||||
INCOME TAXES | - | - | ||||||
NET LOSS | $ | (2,614,267 | ) | $ | (2,890,773 | ) | ||
Series B preferred stock dividend | (104,999 | ) | (192,645 | ) | ||||
Cost of Series B warrants extension | (113,984 | ) | - | |||||
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS | $ | (2,833,250 | ) | $ | (3,083,418 | ) | ||
LOSS PER COMMON SHARE - BASIC & DILUTED | $ | (0.02 | ) | $ | (0.02 | ) | ||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC & DILUTED | 135,765,341 | 127,911,302 | ||||||
The accompanying notes are an integral part of these financial statements.
F-6
COPSYNC, INC
Statements of Stockholders' Equity (Deficit)
For the year ended December 31, 2011 and 2010
| Preferred Stock A | Preferred Stock B | Common Stock | Common Stock To Be | Common Stock Warrants To Be | Treasury | Additional Paid-in | Accumulated | Total Shareholder Equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Issued | Issued | Stock | Capital | Deficit | (Deficit) | |||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2010 | 100,000 | $ | 10 | 362,500 | $ | 36 | 126,086,967 | $ | 12,609 | $ | 19,633 | $ | - | $ | - | $ | 6,800,120 | $ | (4,701,847 | ) | $ | 2,130,561 | ||||||||||||||||||||||||||
Series B Preferred shares and warrants issued for cash at $4.00 per unit | - | - | 12,500 | 1 | - | - | - | - | 68,032 | - | $ | 68,033 | ||||||||||||||||||||||||||||||||||||
Common stock issued to employees for services rendered at prices ranging from $0.08 to $0.14 per share | - | - | - | - | 1,179,601 | 118 | - | - | 129,214 | - | $ | 129,332 | ||||||||||||||||||||||||||||||||||||
Common stock issued for cash at $0.10 per share | - | - | - | - | 2,500,000 | 250 | - | - | 249,750 | - | $ | 250,000 | ||||||||||||||||||||||||||||||||||||
Common stock issued for cash received during 2009 at $0.15 per share | - | - | - | - | 130,885 | 13 | (19,633 | ) | - | 19,620 | - | $ | - | |||||||||||||||||||||||||||||||||||
Common stock issued in conversion of notes payable and accrued interest at $0.10 per share, including induced conversion expense | - | - | - | - | 108,660 | 11 | - | - | 15,201 | - | $ | 15,212 | ||||||||||||||||||||||||||||||||||||
Common stock issued persuant to a settlement agreement at $0.10 per share | - | - | - | - | 100,000 | 10 | - | - | 9,990 | - | $ | 10,000 | ||||||||||||||||||||||||||||||||||||
Capital contributed/co-founders' forfeiture of contractual compensation | - | - | - | - | - | - | - | - | 82,250 | - | $ | 82,250 | ||||||||||||||||||||||||||||||||||||
Common stock to be issued per an agreement with an advisory firm at $0.60 per share | - | - | - | - | - | - | 45,000 | - | - | - | $ | 45,000 | ||||||||||||||||||||||||||||||||||||
| Amortization of restricted stock grant | - | - | - | - | - | - | - | - | 15,000 | - | $ | 15,000 | ||||||||||||||||||||||||||||||||||||
Common stock to be issued to a former employee at $0.09 per share | - | - | - | - | - | - | 9,000 | - | - | - | $ | 9,000 | ||||||||||||||||||||||||||||||||||||
Stock deposit received for common stock to be issued | - | - | - | - | - | - | 50,000 | - | - | - | $ | 50,000 | ||||||||||||||||||||||||||||||||||||
Valuation of common stock warrants to be issued | - | - | - | - | - | - | - | 131,961 | - | - | $ | 131,961 | ||||||||||||||||||||||||||||||||||||
Valuation of the vested portion of employee stock options granted during December 2009 | - | - | - | - | - | - | - | - | 73,854 | - | $ | 73,854 | ||||||||||||||||||||||||||||||||||||
Series B Preferred stock - deemed dividends from accretion of Preferred discounts | - | - | - | - | - | - | - | 69,726 | (87,759 | ) | $ | (18,033 | ) | |||||||||||||||||||||||||||||||||||
Valuation of warrants granted to a consulting firm during 2010 | - | - | - | - | - | - | - | - | 12,457 | - | $ | 12,457 | ||||||||||||||||||||||||||||||||||||
| Series B Preferred stock - cumulative dividends | - | - | - | - | - | - | - | - | 104,886 | (104,886 | ) | $ | - | |||||||||||||||||||||||||||||||||||
Net loss for the year ended December 31, 2010 | - | - | - | - | - | - | - | - | - | - | (2,890,773 | ) | $ | (2,890,773 | ) | |||||||||||||||||||||||||||||||||
| Balance, December 31, 2010 | 100,000 | $ | 10 | 375,000 | $ | 37 | 130,106,113 | $ | 13,011 | $ | 104,000 | $ | 131,961 | $ | - | $ | 7,650,100 | $ | (7,785,265 | ) | $ | 113,854 | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
F-7
COPSYNC, INC
Statements of Stockholders' Equity (Deficit) (Continued)
For the year ended December 31, 2011 and 2010
| Preferred Stock A | Preferred Stock B | Common Stock | Common Stock To Be | Common Stock Warrants To Be | Treasury | Additional Paid-in | Accumulated | Total Shareholder Equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Issued | Issued | Stock | Capital | Deficit | (Deficit) | |||||||||||||||||||||||||||||||||||||
Capital contributed/co-founders' forfeiture of contractual compensation | - | - | - | - | - | - | - | - | 79,000 | - | $ | 79,000 | ||||||||||||||||||||||||||||||||||||
Valuation of the vested portion of employee and non-employee stock options | - | - | - | - | - | - | - | - | 160,759 | - | $ | 160,759 | ||||||||||||||||||||||||||||||||||||
Common stock shares issued to former employee at $0.09 per share | - | - | - | - | 100,000 | 10 | (9,000 | ) | - | 8,990 | - | $ | - | |||||||||||||||||||||||||||||||||||
Common stock issued for conversion of a convertible note at $0.10 per share | - | - | - | - | 522,465 | 52 | - | - | 52,194 | - | $ | 52,246 | ||||||||||||||||||||||||||||||||||||
Two million common stock shares returned to treasury stock at $0.09 per share | - | - | - | - | (2,000,000 | ) | - | - | - | (180,000 | ) | 180,000 | - | $ | - | |||||||||||||||||||||||||||||||||
Two million common stock shares issued at $0.09 per share to CEO | - | - | - | - | 2,000,000 | - | - | - | 180,000 | (180,000 | ) | - | $ | - | ||||||||||||||||||||||||||||||||||
| Amortization of restricted stock grants | 60,000 | $ | 60,000 | |||||||||||||||||||||||||||||||||||||||||||||
One million common stock shares returned to treasury stock at $0.06 per share | - | - | - | - | (1,000,000 | ) | - | - | - | (60,000 | ) | 60,000 | - | $ | - | |||||||||||||||||||||||||||||||||
One million common stock shares issued pursuant to a legal settlement at $0.06 per share | - | - | - | - | 1,000,000 | 100 | - | - | - | 59,900 | - | $ | 60,000 | |||||||||||||||||||||||||||||||||||
One million common stock shares issued from treasury stock pursuant to a legal settlement at | - | - | - | - | 1,000,000 | - | - | - | 60,000 | - | - | $ | 60,000 | |||||||||||||||||||||||||||||||||||
| Issuance of common stock subscribed | 500,000 | 50 | (50,000 | ) | 49,950 | $ | - | |||||||||||||||||||||||||||||||||||||||||
Common stock shares issued for cash at $0.10 per share | - | - | - | - | 16,023,110 | 1,603 | - | - | 1,600,709 | - | $ | 1,602,312 | ||||||||||||||||||||||||||||||||||||
| Stock deposit for common stock shares to be issued | - | - | - | - | - | - | 60,000 | - | - | - | $ | 60,000 | ||||||||||||||||||||||||||||||||||||
Common stock shares to be issued to two resellers for cash payments at $0.10 per share | - | - | - | - | - | - | 165,000 | - | - | - | $ | 165,000 | ||||||||||||||||||||||||||||||||||||
Common stock shares to be issued for services provided by reseller | 14,315 | $ | 14,315 | |||||||||||||||||||||||||||||||||||||||||||||
| Series B preferred stock - cumulative dividends | - | - | - | - | - | - | - | - | 104,999 | (104,999 | ) | $ | - | |||||||||||||||||||||||||||||||||||
Net loss for the year ended December 31, 2011 | - | - | - | - | - | - | - | - | - | - | (2,614,267 | ) | $ | (2,614,267 | ) | |||||||||||||||||||||||||||||||||
| Balance, December 31, 2011 | 100,000 | $ | 10 | 375,000 | $ | 37 | 148,251,688 | $ | 14,826 | $ | 284,315 | $ | 131,961 | $ | - | $ | 9,886,601 | $ | (10,504,531 | ) | $ | (186,781 | ) | |||||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
F-8
COPSYNC, INC.
Statements of Cash Flows
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2011 | 2010 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (2,614,267 | ) | $ | (2,890,773 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 181,803 | 216,705 | ||||||
Amortization of note discount | 14,589 | 31,452 | ||||||
Induced conversion expense | - | 4,346 | ||||||
Employee and non-employee stock compensation | 160,759 | 218,272 | ||||||
Common stock issued for services rendered | - | 69,000 | ||||||
Issuance of common stock for services rendered | - | 12,666 | ||||||
Amortization of restricted stock grants | 60,000 | - | ||||||
Capital contributed/co-founders' forfeiture of contractual compensation | 79,000 | 82,250 | ||||||
Gain on asset disposals | (9,426 | ) | (648 | ) | ||||
Gain from settlement of debt | (100,000 | ) | (392,914 | ) | ||||
Impairment of capitalized software | 296,808 | 580,000 | ||||||
Impairment of investment | - | 50,000 | ||||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | 42,020 | (108,568 | ) | |||||
Debt issuance costs | 4,208 | 12,500 | ||||||
Prepaid expenses | 12,061 | (7,179 | ) | |||||
Deferred revenues | 481,299 | 587,171 | ||||||
Accounts payable and accrued expenses | (83,596 | ) | 480,138 | |||||
Net Cash Used in Operating Activities | (1,474,742 | ) | (1,055,582 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Software development costs | - | (158,142 | ) | |||||
Proceeds from asset disposals | 60,000 | - | ||||||
Purchases of property and equipment | (30,057 | ) | (19,172 | ) | ||||
Net Cash Provided/(Used) by in Investing Activities | 29,943 | (177,314 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Payments on notes payable | (161,081 | ) | (18,485 | ) | ||||
Proceeds received on convertible notes | 612,731 | - | ||||||
Proceeds from common stock to be issued | 165,000 | - | ||||||
Proceeds from stock deposit for common stock to be issued | 60,000 | 50,000 | ||||||
Proceeds from issuance of common stock for cash | 1,602,312 | 50,000 | ||||||
Proceeds from issuance of series B preferred shares for cash | - | 250,001 | ||||||
Net Cash Provided by Financing Activities | 2,278,962 | 331,516 | ||||||
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS | 834,163 | (901,380 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 240,154 | 1,141,534 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 1,074,317 | $ | 240,154 | ||||
The accompanying notes are an integral part of these financial statements.
F-9
COPSYNC, INC.
Statements of Cash Flows (Continued)
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2011 | 2010 | |||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
Cash paid for interest | $ | 3,735 | $ | 4,181 | ||||
Cash paid for taxes | $ | 4,978 | $ | - | ||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Purchase of fleet vehicles financed by notes payable | $ | - | $ | 73,687 | ||||
Common stock issued in lieu of accrued expenses | $ | - | $ | 126,665 | ||||
| Common stock issued in conversion of notes payable and accrued interest | $ | 52,246 | $ | 10,866 | ||||
Series B Preferred stock dividends | $ | 104,999 | $ | 192,645 | ||||
Financing of Insurance Policy | $ | 26,465 | $ | 23,120 | ||||
The accompanying notes are an integral part of these financial statements.
F-10
COPSYNC, INC.
Notes to Financial Statements
NOTE 1 - NATURE OF ORGANIZATION AND LIQUIDITY AND MANAGEMENT PLANS
COPsync, Inc. (“the Company”), sells the COPsync service, which is a real-time, in-car information sharing, communication and data interoperability network for law enforcement agencies. The COPsync service enables patrol officers to collect, report and share critical data in real-time at the point of incident and obtain instant access to various local, state and federal law enforcement databases. The COPsync service also eliminates manual processes and increases officer productivity by enabling officers to electronically write tickets, process DUI and other arrests and document accidents and other incidents. The 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. Additionally, our system architecture is designed to scale nationwide.
The Company was incorporated on October 23, 2006, in Delaware.
At December 31, 2011, the Company had cash and cash equivalents of approximately $1,075,000, a working capital deficit of approximately $635,000 and an accumulated deficit of $10,680,000. Due to these circumstances, the Company’s management monitors and attempts to minimize, to the extent possible, all cash expenditures. The Company’s management believes it will generate sufficient revenues to meet its working capital needs in future periods. Because of these conditions, the Company will require additional working capital to continue operations and develop its business in the current fiscal year. The Company intends to raise additional working capital to support its operations, either through private placements and/or bank financing. |
| There are no assurances that the Company will be able to achieve a level of revenues adequate to generate sufficient cash flow from operations or obtain additional financing through private placements and/or bank financing necessary to support the Company’s working capital requirements. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not available, the Company may not be able to continue its operations or execute its business plan. |
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation
The accompanying financial statements include the accounts of COPsync, Inc., and are prepared in accordance with accounting principles generally accepted in the United States of America and are prepared on the accrual method of accounting.
b. Reclassifications
Certain prior year items have been reclassified to conform to the current year presentation. These reclassifications had no impact on our financial statements.
c. Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities at the date of purchase of three months or less to be cash equivalents.
The Company's cash and cash equivalents, at December 31, consisted of the following:
| 2011 | 2010 | |||||||
Cash in bank | $ | 1,056,156 | $ | 167,967 | ||||
Money market funds | 18,161 | 72,187 | ||||||
Cash and cash equivalents | $ | 1,074,317 | $ | 240,154 | ||||
d. Concentrations of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. Cash and cash equivalents are deposited in demand and money market accounts in two financial institutions in the United States. Accounts at financial institutions in the United States are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to certain limits. At times, the Company’s deposits or investments may exceed federally insured limits. At December 31, 2011, the Company had approximately $18,000 at the two financial institutions in excess of FDIC insured limits. The Company has not experienced any losses in such accounts.
To date, accounts receivable have been derived principally from revenue earned from end users, which are local and state government agencies. The Company performs periodic credit evaluations of its customers, and does not require collateral.
Accounts receivable are recorded net of the allowance for doubtful accounts. The Company provides an allowance for doubtful accounts that is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer. As of December 31, 2011 and 2010, the Company had not recorded an allowance for doubtful accounts.
e. Use of Estimates
The preparation of accompanying financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. The Company’s significant estimates include primarily those required in the valuation or impairment analysis of capitalization of labor under software development costs, property and equipment, revenue recognition, allowances for doubtful accounts, stock-based compensation, warrants, litigation accruals and valuation allowances for deferred tax assets. Although the Company believes that adequate accruals have been made for unsettled issues, additional gains or losses could occur in future years from resolutions of outstanding matters. Actual results could differ materially from original estimates.
f. Property and Equipment
Property and equipment is recorded at cost. Major additions and improvements are capitalized, while ordinary maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation of equipment retired or sold are removed from the accounts and any differences between the non-depreciated amount and the proceeds from the sale are recorded as gain or loss on asset disposals. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, ranging as follows:
| Computer hardware/software | 3 years |
| Fleet vehicles | 5 years |
| Furniture and fixtures | 5 to 7 years |
Depreciation expense on property and equipment was $42,131 and $39,084 for the years ended December 31, 2011 and 2010, respectively.
g. Long-lived Assets
The Company reviews its long-lived assets including property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Examples of such events could include a significant disposal of a portion of such assets, an adverse change in the market involving the business employing the related asset, a significant decrease in the benefits realized from an acquired business, difficulties or delays in integrating the business or a significant change in the operations of an acquired business.
F-12
An impairment test involves a comparison of undiscounted cash flows from the use of the asset to the carrying value of the asset. Measurement of an impairment loss is based on the amount that the carrying value of the asset exceeds its fair value. No impairment losses were incurred in the periods presented.
h. Software Development Costs
The Company capitalizes certain software development costs incurred subsequent to the establishment of technological feasibility may be capitalized and amortized over the estimated lives of the related products.
The Company determines technological feasibility to be established upon completion of (1) product design, (2) detail program design, (3) consistency between product and program design and (4) review of detail program design to ensure that high risk development issues have been resolved. Upon the general release of the product to customers, development costs for that product have been amortized, historically, over fifteen years, based on management’s then estimated economic life of the product. See Note 3 for a discussion involving an impairment recorded at December 31, 2011, which reduced the estimated economic life of the product to approximately seven years, as well as, an impairment recorded on the product at December 31, 2010, and the respective financial impact therein.
i. Research and development
Research and development costs are charged to expense as incurred.
j. Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximate fair value due to their relatively short maturities.
The fair value framework requires a categorization of assets and liabilities, which are required at fair value, into three levels based upon the assumptions (inputs) used to price the assets and liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or
quoted prices for identical assets or liabilities in inactive markets.
Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
At December 31, 2011 and 2010, the Company had no such assets or liabilities that were reported at fair value.
k. Revenue Recognition
The Company’s business is to sell subscriptions to the COPsync service, which is a real-time, in-car information sharing, communication and data interoperability network for law enforcement agencies. The agencies subscribe to the service for a specified period of time (usually for twelve to forty-eight months), for a specified number of officers per agency, and at a fixed subscription fee per officer.
In the process of selling the subscription service, the Company is requested from time-to-time to also sell computers and computer-related hardware (“hardware”) used to provide the in-car service should the customer not already have the hardware, as well as hardware installation services, the initial agency and officer set-up and training services and, sometimes, software integration services for enhanced service offerings.
The Company’s most common sales are:
| 1) for new customers – a multiple-element arrangement involving a) the subscription fee, b) integration of the COPsync software and a hardware appliance (where the hardware and software work together to deliver the essential functionality of the service) to include related services for hardware installation and agency and officer set-up and training and c) if applicable, software integration services for enhanced service offerings; and |
| 2) for existing customers – the subscription fees for the annual renewal of an agency’s COPsync subscription service, upon the completion of the agency’s initial subscription period. |
The Company recognizes revenue when all of the following have occurred: (1) the Company has entered into a legally binding arrangement with a customer resulting in the existence of persuasive evidence of an arrangement; (2) delivery has occurred, evidenced when product title transfers to the customer; (3) customer payment is deemed fixed or determinable and free of contingencies and significant uncertainties; and (4) collection is probable.
The sales of the hardware and related services for hardware installation and agency and officer set-up and training are reported as “Hardware, installation and other revenues” in the Company’s Statement of Operations. Shipping charges are billed to customers and are included in operating expenses as an offset to the related shipping costs.
The subscription fees and software integration services are reported as “software license/subscriptons revenues” in the Company’s Statement of Operations. The subscription fees include termed licenses for the contracted officers to have access to the service and the right to receive telephonic customer and technical support, as well as software updates, during the subscription period. Support for the hardware is normally provided by the hardware manufacturer.
The receipt and acceptance of an executed customer’s service agreement, which outlines all of the particulars of the sale event, is the primary method of determining that persuasive evidence of an arrangement exists.
Delivery generally occurs for the different elements of revenue as follows:
| 1) For multiple-element arrangements involving new customers – contractually the lesser period of time of sixty days from contract date or the date officer training services are completed. Additionally, the Company requests the agency to complete a written customer acceptance at the time training is completed, which will override the contracted criteria discussed immediately above. |
| 2) The subscription fee – the date the officer training is completed and written customer acceptance is received. |
| 3) Software integration services for enhanced service offerings – upon the Company’s completion of the integration efforts and verification that the enhanced service offering is available for use by the agency. |
Fees are typically considered to be fixed or determinable at the inception of an arrangement, generally based on specific services and products to be delivered per the executed service agreement. Substantially all of the Company’s service agreements do not include rights of return or acceptance provisions. To the extent that agreements contain such terms, the Company recognizes revenue once the acceptance provisions or right of return lapses. Payment terms to customers generally range from net “upon receipt of invoice” to “net 30 days from invoice date”.
The Company assesses the ability to collect from its customers based on a number of factors, including credit worthiness of the customer and past transaction history of the customer. If the customer is not deemed credit worthy, the Company defers all revenue from the arrangement until payment is received and all other revenue recognition criteria have been met.
As indicated above, some customer orders contain multiple elements. The Company allocates revenue to each element in an arrangement based on relative selling price. The selling price for a deliverable is based on its vendor specific objective evidence (“VSOE”) if available, third party evidence ("TPE"), if VSOE is not available, or the Company’s best estimate of selling price ("ESP"), if neither VSOE nor TPE is available. The maximum revenue recognized on a delivered element is limited to the amount that is not contingent upon the delivery of additional items. Additionally, many of the Company’s service agreements executed in year 2011 contained grants (or discounts) provided to the contracting agency. These grants or discounts have been allocated across all of the different elements based upon the respective, relative selling price.
The Company determines VSOE for subscription fees for the initial contract period based on the rate charged to customers based upon a stand-alone sale price for the subscription service. VSOE for renewal pricing is based upon the stated rate for the renewed subscription service, which is stated in the service agreement or contract entered into. The renewal rate is generally equal to the stated rate in the original contract. The Company has a history of such renewals, the vast majority of which are at the stated renewal rate on a customer by customer basis. Subscription fee revenue is recognized ratably over the life of the service agreement.
The Company has determined the hardware products to include the related services for hardware installation and agency and officer set-up and training, as well as integration services for enhanced service offerings are sold separately, and as a result, the Company has VSOE for these products.
For almost all of the Company’s new service agreements, as well as renewal agreements, billing and payment terms are agreed to upfront or in advance of performance milestones. These payments are initially recorded as deferred revenue and subsequently recognized as revenue as follows:
| 1) Integration of the COPsync software and a hardware appliance (where the hardware and software work together to deliver the essential functionality of the service) to include related services for hardware installation and agency and officer set-up and training – immediately upon delivery. |
| 2) The subscription fee – ratably over the contracted subscription period commencing on the delivery date. |
| 3) Software integration services for enhanced service offerings – immediately upon the Company’s completion of the integration and verification that the enhanced service is available for the agency’s use. |
| 4) Renewals – ratably over the renewed subscription or service period commencing on the completion of the previous subscription or service period. |
l. Income Taxes
The Company accounts for income taxes under an asset and liability approach. This process involves calculating the temporary and permanent differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The temporary differences result in deferred tax assets and liabilities, which are recorded on the Company’s balance sheets. The Company must assess the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent the Company believes that recovery is not likely, the Company must establish a valuation allowance. Changes in the Company’s valuation allowance in a period are recorded through the income tax provision on the statements of operations. The impact of an uncertain income tax position on the income tax return is recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
The Company periodically assesses uncertain tax positions that the Company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). The impact of an uncertain income tax position on the income tax return is recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company evaluated its tax positions and determined that there were no uncertain tax positions for the years ended December 31, 2011 and 2010.
m. Basic and Fully Diluted Loss Per Share
The computations of basic and fully diluted loss per share of common stock are based on the weighted average number of common shares outstanding during the period of the financial statements, plus the common stock equivalents which would arise from the exercise of stock options and warrants outstanding during the period, convertible preferred stock and dividends or the exercise of convertible debentures.
The Company's common stock equivalents, at December 31, consisted of the following and have not been included in the calculation because they are anti-dilutive:
| 2011 | 2010 | |||||||
Convertible Debentures Outstanding | 6,257,700 | 500,000 | ||||||
Warrants Outstanding | 7,130,582 | 4,125,000 | ||||||
Stock Options Outstanding | 7,445,833 | 7,100,000 | ||||||
Preferred Stock Outstanding | 15,100,000 | 15,100,000 | ||||||
Dividends on Preferred Stock Outstanding | 2,491,246 | 1,318,607 | ||||||
Total Common Stock Equivalents | 38,425,361 | 28,143,607 | ||||||
n. Stock Based Compensation
The Company accounts for all share-based payment transactions using a fair-value based measurement method. The Company calculates stock option-based compensation by estimating the fair value of each option as of its date of grant using the Black-Scholes option pricing model. These amounts are expensed over the respective vesting periods of each award using the straight-line attribution method. The Company has historically issued stock options and vested and non-vested stock grants to employees and, beginning in 2011, to outside directors whose only condition for vesting has been continued employment or service during the related vesting or restriction period.
o. Newly Adopted Pronouncements
Testing for Goodwill Impairment
In September 2011, the Financial Accounting Standards Board (“FASB”) amended guidance on testing goodwill for impairment. Under the new guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment before calculating the fair value of a reporting unit in step 1 of the goodwill impairment test. If entities determine, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than not less than the carrying value amount, the two-step impairment test would be required. Otherwise, further testing would not be needed. The new guidance does not change how goodwill is calculated, nor does it revise the requirement to test goodwill annually for impairment or between tests if events or circumstances warrant. The amended guidance is effective for the Company for fiscal year 2012, with earlier adoption permitted. The Company does not anticipate that this new guidance will have a material impact on its financial statements.
Presentation of Other Comprehensive Income
In June 2011, the FASB issued guidance that requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. The guidance removes the option to present the components of other comprehensive income (“OCI”) as part of the statement of equity. This guidance is effective for the Company for fiscal year 2012, and must be applied retrospectively for all periods presented in the financial statements. The new guidance does not apply to entities that have no items of OCI in any period presented. The Company does not anticipate that this new guidance will have a material impact on our financial statements.
p. Preferred Stock Issuances with Beneficial Conversion Features
The Company uses the effective conversion price of preferred shares issued based on the proceeds received to compute the intrinsic value of the embedded conversion feature on preferred stock issuances with detachable warrants. The Company calculates an effective conversion price and used that price to measure the intrinsic value of the embedded conversion option.
q. Treasury Stock
Shares of common stock repurchased by the Company are recorded at cost and are included as a separate component of stockholders’ equity. The Company repurchased 3,000,000 shares of our common stock, having a fair value under the cost method of $240,000 during year ended December 31 2011, and re-issued the stock as follows: 2,000,000 shares of restricted shares of common stock granted to Ron A. Woessner upon his appointment as CEO; and 1,000,000 shares of common stock issued to a third party in a litigation matter involving the Company. At December 31, 2011 and December 31, 2010, the total value of the Company’s treasury stock was zero.
Under the cost method, the gross cost of the shares reacquired is charged to a contra equity account entitled treasury stock. The equity accounts that were credited for the original share issuance (common stock, paid-in capital in excess of par, etc.) remain intact. When the treasury shares are reissued, proceeds in excess of cost are credited to a paid-in capital account. Any deficiency is charged to retained earnings (unless paid-in capital from previous treasury share transactions exists, in which case the deficiency is charged to that account, with any excess charged to retained earnings).
NOTE 3 - SOFTWARE DEVELOPMENT COSTS
Software development costs as of December 31, 2011 and 2010, respectively, are as follows:
| December 31, | ||||||||
| 2011 | 2010 | |||||||
Capitalized software development costs | $ | 2,724,082 | $ | 2,724,082 | ||||
Accumulated amortization | (537,858 | ) | (398,186 | ) | ||||
Sub-total | 2,186,224 | $ | 2,325,896 | |||||
Cumulative Impairment charge | (876,808 | ) | (580,000) | |||||
Total | $ | 1,309,416 | $ | 1,745,896 | ||||
Future amortization expense is as follows:
| Year Ended December 31, | Expense | |||
2012 | $ | 436,480 | ||
2013 | $ | 436,480 | ||
2014 | $ | 436,456 | ||
Amortization expense related to these costs was $139,672 and $177,621 for the years ended December 31, 2011 and 2010, respectively. At December 31, 2011, the Company recorded a $296,808 impairment following the Company’s review of the capitalized software for impairment. This impairment reflects a shortening of the original life of the capitalized software from fifteen years to approximately seven years. Further, the Company has elected to update the software code supporting the COPsync service to take advantage of the latest technological capabilities and to migrate to a more efficient platform by the end of 2014.
As of December 31, 2010, the Company recorded impairment on the capitalized software development costs totaling $580,000, or approximately 25% of its then net value at December 31, 2010. At that time, management determined that a portion of the software code supporting the COPsync service needed to be rewritten to enhance its scalability with respect to providing the COPsync service outside the State of Texas, and to provide a more rapid integration capability with vendors and agencies as well as to reduce support costs. The extent of the task was estimated to be between 25% to slightly over 50% of the software code needed to be rewritten. Management chose the low end of the estimated range in recording the impairment. The then balance of the unamortized capitalized software development costs was to be amortized over the remainder of its original fifteen year life, which has now changed as discussed above.
F-17
NOTE 4 - INCOME TAXES
As of December 31, 2011, the Company had federal net operating loss carry-forwards available to reduce taxable income of approximately $6,180,000. The net operating loss carry-forwards expire between 2028 and 2031.
Deferred tax assets and liabilities at December 31, consist of the following:
| 2011 | 2010 | |||||||
| Deferred tax assets: | ||||||||
Net operating loss carry-forwards | $ | 2,101,200 | $ | 1,485,800 | ||||
| - | - | |||||||
Total deferred tax assets | 2,101,200 | 1,485,800 | ||||||
Valuation allowance | (2,101,200 | ) | (1,485,800 | ) | ||||
Net deferred tax assets | $ | - | $ | - | ||||
Income tax benefit differs from the expected statutory rate as follows:
| 2011 | 2010 | |||||||
Expected federal income tax benefit | $ | (888,900 | ) | $ | (982,900 | ) | ||
Stock expense | 20,400 | 68,400 | ||||||
Stock option and warrant expense | 54,700 | 74,200 | ||||||
Other | 31,800 | 40,100 | ||||||
Adjustment – NOL prior year | 166,600 | – | ||||||
Change in valuation allowance | 615,400 | 800,200 | ||||||
Income tax benefit | $ | – | $ | – | ||||
A full valuation allowance has been established for the Company's net deferred tax assets since the realization of such assets through the generation of future taxable income is uncertain.
Under the Tax Reform Act of 1986, the amounts of, and the benefit from, net operating losses and tax credit carry-forwards may be impaired or limited in certain circumstances. These circumstances include, but are not limited to, a cumulative stock ownership change of greater than 50%, as defined, over a three-year period.
F-18
NOTE 5 - NOTES PAYABLE
Notes payable as of December 31, 2011 and 2010 consisted of the following:
| Collateral | Interest | Monthly | December 31, | ||||||||||||||||||
| Type | (If any) | Rate | Payments | Maturity | 2011 | 2010 | |||||||||||||||
Bank | Autos | 6.75 | % | $ | 482 | Apr. 2014 | $ | 12,404 | $ | 17,231 | |||||||||||
Bank | Autos | 8.25 | % | $ | 811 | Nov. 2012 | 7,615 | 17,176 | |||||||||||||
Bank | Autos | 6.75 | % | $ | 308 | Sep. 2013 | 6,062 | 9,239 | |||||||||||||
Bank | Autos | 6.75 | % | $ | 562 | Oct. 2015 | 14,831 | 27,699 | |||||||||||||
Bank | Autos | 7.00 | % | $ | 799 | Nov. 2014 | 25,066 | 32,708 | |||||||||||||
Insurance | - | 5.30 | % | $ | 2,626 | Nov. 2012 | 24,011 | 20,552 | |||||||||||||
Settlement | - | ** 0 | % | $ | 10,000 | Mar. 2012 | 30,000 | 130,000 | |||||||||||||
Total notes payable | $ | 119,989 | $ | 254,605 | |||||||||||||||||
Less: Current portion | $ | (84,145 | ) | $ | (149,621 | ) | |||||||||||||||
Long-term portion | $ | 35,844 | $ | 104,984 | |||||||||||||||||
Future principal payments on long-term debt is as follows:
2012 | $ | 84,145 | ||
2013 | 23,141 | |||
2014 | 12,703 | |||
2015 & thereafter | - | |||
Total | $ | 119,989 | ||
** Imputed interest was immaterial in 2011 and 2010 |
NOTE 6 - CONVERTIBLE NOTES PAYABLE
In July 2009, the Company issued a convertible note payable with a face value of $50,000. The two-year note accrued interest at three percent per annum and contained a beneficial conversion feature in the amount equal to its face, which was recorded as a discount to the note. In May 2011, the principal amount of the note plus $2,246 in accrued interest were converted into 522,465 shares of common stock at the stated conversion price of $0.10 per share of common stock. The Company recorded amortization of discount in the amount of $14,589 and $35,411 for years ended December 31, 2011 and 2010, respectively.
F-19
Throughout the first three quarters of 2011, the Company received a total of $612,731 in proceeds from unrelated individuals from the issuance of new convertible notes payable. The notes bear simple interest at 3% per annum, payable quarterly, commencing in January 2012, 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. Of the convertible notes issued, notes with an aggregate principal amount totaling $581,085 mature in March 2014 and a single convertible note with a principal amount totaling $31,646 matures in June 2014.
The Company accrued interest in the amount of $13,039 for the year ended December 31, 2011.
Convertible notes payable at December 31, 2011 and December 31, 2010 are summarized as follows:
| December 31, | ||||||||
| 2011 | 2010 | |||||||
Total convertible notes payable | $ | 612,731 | $ | 50,000 | ||||
Less; unamortized note discount | $ | -- | $ | (14,589 | ) | |||
Convertible notes payable, net | $ | 612,731 | $ | 35,411 | ||||
Less: current portion | $ | -- | $ | (6,249 | ) | |||
Convertible notes payable, net, long-term portion | $ | 612,731 | $ | 29,162 | ||||
NOTE 7 - STOCK TRANSACTIONS
Preferred Stock Series A
The Company issued a total of 100,000 shares of its Series A Preferred Stock in April 2008 as partial consideration for its acquisition of a 100% ownership interest in PostInk Technology, LP (“PostInk”). Each share of Series A Preferred Stock is convertible into one share of common stock, but has voting rights on a basis of 750 votes per share. These shares are held by the former general partner of PostInk, which is owned by the co-founders of the Company.
Preferred Stock Series B
During 2009, the Company completed a private placement of its equity securities in which the Company raised $1,450,000 in gross proceeds. During 2010, an additional $50,000 was raised in the private placement consisting of 12,500 shares of Series B Convertible Preferred Stock with detachable warrants and valued at $68,033.
The Series B preferred stock and the warrants were sold as a unit, with each investor receiving eight warrants to purchase one share of common stock for every share of Series B stock purchased. The purchase price for each unit was $4.00 per share of Series B stock purchased.
As a result of this private placement, the Company issued 375,000 shares of the Company’s newly designated Series B Convertible Preferred Stock. The 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 Company used the effective conversion price of preferred shares issued based on the proceeds received to compute the intrinsic value of the embedded conversion feature on preferred stock issuances with detachable warrants. The Company allocated the proceeds received from the Series B Preferred stock issuance and the detachable warrants included in the exchange on a relative fair value basis. The Company then calculated an effective conversion price and used that price to measure the intrinsic value of the embedded conversion option. With regards to the 12,500 shares issued in during 2010, the Company recorded a discount totaling $18,033 based on the beneficial conversion feature and the valuation of the 100,000 warrants granted. This discount was amortized over the earliest conversion period, which was 90 days.
The 3,000,000 warrants granted have an exercise price of $0.20 per share and expire on October 14, 2013. The exercise price and the number of shares of common stock purchasable upon exercise of the warrants are subject to adjustment upon the occurrence of certain events, including, but not limited to: i) stock dividends, stock splits or reverse stock splits; ii) the payment of dividends on the common stock payable in shares of common stock or securities convertible into common stock; iii) a recapitalization, reorganization or reclassification involving the common stock, or a consolidation or merger of the Company; or iv) a liquidation or dissolution of the Company.
Also in connection with this private placement, the Company agreed to use its best efforts to effect a registration statement with the Securities and Exchange Commission registering the resale of the shares of common stock issuable upon conversion of the Series B Preferred Stock and upon exercise of the warrants, upon the request of the holders of a majority of those shares after the second anniversary of the date of the private placement closing. It also provides for the investors to have “piggyback” registration rights to include their shares in future registrations with the Securities and Exchange Commission by the Company of the issuance or sale of its securities. The investor’s right to request a registration or inclusion of shares in a registration terminates on the date that such investor may immediately sell all of the shares of common stock issuable upon conversion of the Series B Preferred Stock and upon exercise of the warrants under Rule 144 or Rule 145 promulgated under the Securities Act. The agreement also grants to the investors a right of first refusal to purchase all, but not less than all, of certain new securities the Company may, from time to time, propose to sell after the date of the private placement agreement, and also contains certain covenants relating to the Company’s Board of Directors and requiring the Company to retain patent counsel. As of year ended December 31, 2011, the Company has not received a request of the holders of a majority of those shares to effect a registration statement with the Securities and Exchange Commission.
The Series B Preferred Stock i) accrues 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) has 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 the Company’s common stock, subject to adjustments for issuances by the Company of common stock at 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 accumulated dividends as of December 31, 2011 and 2010 of $231,575 and $126,576, respectively, on the Series B Preferred Stock.
Common Stock
During the year ended December 31, 2010, the Company issued a total of 1,021,270 shares of common stock to two separate employees for services rendered during 2009, valued at $116,665, which was previously accrued at December 31, 2009. During the fourth quarter of 2010, the Company issued 158,331 shares of common stock to a former employee for services rendered in 2010, valued at $12,667. An additional 2,500,000 shares of common stock were issued to three investors for cash proceeds received during 2010 totaling $250,000, or $0.10 per share. One of the investors was also issued a total of 250,000 warrants to purchase common stock as part of the subscription, exercisable at $0.20 per share until July 7, 2011.
During 2010, the Company issued a total of 130,885 shares of common stock for cash proceeds of $19,633 received in 2009.
During 2010, the Company issued 108,660 shares of common stock to an individual in connection with the conversion of convertible note payable and accrued interest totaling $10,866, convertible at $0.10 per share. This convertible note payable was originally convertible at $0.20 per share, rather than $0.10 per share. Accordingly, on the date of conversion, the Company recorded an additional expense of $4,346 during 2010 as an induced conversion expense.
As discussed in Note 10 below, the Company was involved in an arbitration proceeding before the American Arbitration Association regarding a purported $200,000 loan from Rocket City Enterprises, Inc. During late 2010, the parties settled the proceeding. As part of this settlement, the Company agreed to issue 100,000 shares of the Company’s common stock, subject to a nine-month sale restriction, valued at $10,000, or $0.10 per share, the value of the shares of the date of the settlement.
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During 2011, the Company received gross proceeds and commitments totaling $1,602,312 from twenty-three individual investors. The private placements were completed pursuant to a series of subscription agreements between the Company and the investors. Pursuant to the terms of the subscription agreements, the Company agreed to sell to the investors an aggregate of 16,023,110 shares of the Company’s common stock and detachable four-year warrants, at a 20% coverage level, to purchase an aggregate of 3,255,582 shares of common stock. Also related to the 2011 private placements, the Company received a $60,000 deposit in 2011 for shares of common stock and associated warrants to be issued in 2012.
For the private placements, the common stock and the warrants were sold as an equity unit (“Equity Unit”), with each investor who purchased the common stock receiving a warrant to purchase one share of common stock for every five shares of common stock purchased by such investor. The purchase price for each Equity Unit was $0.10 per share of common stock purchased.
In August 2011, the Company successfully negotiated terms of a definitive settlement agreement involving a litigation matter originating in 2009. The various performance requirements of the definitive settlement agreement were executed by all parties. Relative to 2,000,000 common stock shares to be conveyed to two outside parties, the shares were valued on the date of the settlement agreement, August 28, 2011, at $0.06 per share or $120,000. The original accrual recorded by the Company in June 2010 at the time the “deal points” agreement was executed was $220,000. The specifics of the transaction involved the Company issuing 1,000,000 shares of common stock with a total value of $60,000 to one outside party. Separately, one of the Company’s co-founders conveyed 1,000,000 shares of common stock from his personal holdings back to the Company. The returned shares were recorded in treasury stock at a value of $60,000 or $0.06 per share. Upon issuance of the 1,000,000 shares of common stock to the second outside party, the Company recorded the total value of $60,000 in paid-in capital. The $100,000 difference between the value of these two issuances and the original $220,000 accrual was recorded as a gain on settlement of debt in the Statement of Operations.
The Company also recorded contributed capital of $79,000 and $82,250, respectively, during the years ended December 31, 2011 and 2010, related to the forfeiture of contractual compensation involving the two co-founders.
Common Stock to be Issued
During 2009, the Company entered into a twelve-month agreement with a separate advisory firm to assist the Company in corporate planning, structure and capital resources. The agreement with the advisory firm called for it 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 at December 31, 2011, in as much as the Company disputes that the shares are owed.
Pursuant to an agreement reached in 2010 the Company and a former employee involving the former employee’s separation from service with the Company, it was agreed the Company would issue 100,000 shares of common stock to be issued as part of the separation agreement, valued at $9,000, or $0.09 per share. The shares were issued in 2011.
Ronald A. Woessner was elected as the Company’s 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 founders transferred 2,000,000 shares of common stock from his personal holdings to the Company to fund the grant of these shares to Mr. Woessner. The returned shares were recorded in treasury stock at a value of $180,000 or $0.09 per share. Upon issuance of the 2,000,000 shares of common stock to Mr. Woessner in the second quarter of 2011, the Company recorded the total value of $180,000 in paid-in capital. The restricted shares generally vest pro-rata and quarterly over three years, and the vesting will accelerate upon the occurrence of certain events specified in the grant agreement. The $180,000 value is being expensed on a quarterly basis, as the shares vest. Accordingly, for the years ended December 31, 2011 and 2010, the Company recorded amortization of restricted stock grants of $60,000 and $15,000, respectively, with the remaining $105,000 to be amortized on a quarterly basis over the remainder of the vesting term at $15,000 per quarter.
On December 31, 2010, the Company received a $50,000 deposit from a Company executive. These funds were to be invested pursuant to the Company’s first 2011 privte placement, which took place in the first and second quarters of 2011. As a result, the Company issued 500,000 shares of common stock at $0.10 per share in the second quarter of 2011.
As previously discussed in Note 7 above, the Company also granted in 2010 warrants to purchase an additional 100,000 shares of its common stock pursuant to the Series B Preferred Stock private placement. These warrants have an exercise price of $0.20 per share and expire on October 14, 2013.
Related to the Company’s second 2011 private placements discussed above, the Company received a $60,000 deposit in 2011 for 600,000 shares of common stock and associated warrants to be issued in year 2012.
The Company has distributor agreements with two original equipment manufacturer (“OEM”) distributors whereby common stock will be issued to the OEMs in an amount equal to the first $250,000 of licensing fees generated by the OEMs. During 2011, the Company received cash totaling $165,000 in licensing fees under these agreements. The amount of stock to be issued was determined each time a payment was 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 receipt of payment. As a result, a total of 1,640,909 shares of common stock have been earned by the OEM distributors during 2011 under these distributor agreements. The Company has also agreed to issue 143,152 shares of common stock valued at $0.10 per share to one of the OEM distributors relating to $14,315 in credits issued by the Company for services rendered on behalf of the Company by the OEM distributor. All of these shares of common stock issued under the distributor agreements 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. The licensing fee revenue paid by the OEMs has been included in revenues and the value of shares to be issued have been included in cost of sales in the statement of operations.
The following table provides a reconciliation of the transactions, number of shares and associated common stock values for the common stock to be issued at December 31, 2011 and December 31, 2010.
| At December 31, 2011 | At December 31, 2010 | |||||||||||||||
| Common stock to be issued per: | # of Shares | $ Value | # of Shares | $ Value | ||||||||||||
| An agreement with an advisory firm at $0.60 per share | 75,000 | $ | 45,000 | 75,000 | $ | 45,000 | ||||||||||
| Common stock to be issued to former employee at $0.09 per share | - | - | 100,000 | 9,000 | ||||||||||||
| A stock deposit received for common stock to be issued at $0.10 per share | - | - | 500,000 | 50,000 | ||||||||||||
| Two private placements for cash at $0.10 per share | 600,000 | 60,000 | - | - | ||||||||||||
| Two reseller agreements for paid license fees as provided by the agreements | 1,640,909 | 165,000 | - | - | ||||||||||||
| A single reseller for provided services | 143,152 | 14,315 | - | - | ||||||||||||
| Total number of shares and value | 2,459,061 | $ | 284,315 | 675,000 | $ | 104,000 | ||||||||||
NOTE 8- OUTSTANDING WARRANTS
During 2009, pursuant to certain advisory agreements, the Company granted warrants to purchase a total of 875,000 shares of common stock to two separate advisory firms, exercisable at either $0.10 or $0.20 per share, which expire between June 17, 2012 and June 5, 2014. Fair market values between $0.30 and $0.60 per warrant share were assigned to the warrants granted, with an additional expense of $12,457 being recorded under the Black-Scholes option pricing model during the first six months of 2010.
Also during 2009, the Company entered into a twelve-month agreement with a separate advisory firm to assist the Company in corporate planning, structure and capital resources. The agreement with the advisory firm called for it to receive 75,000 restricted shares of the Company’s common stock, valued at $45,000, or $0.60 per share, which amount was expensed over the twelve-month contract at $3,750 per month. The agreement also called for the advisory firm is to receive seven year, cashless exercise to purchase 1,500,000 shares of common stock at $0.10 per share valued at $131,961. In as much as the Company disputes that the warrants are owed, the 1,500,000 warrants had not yet been granted to the advisory firm as of December 31, 2011. Therefore, the warrants are recorded in common stock warrants to be issued in the stockholders’ equity section of the balance sheet.
During 2010, the Company issued warrants to purchase a total of 250,000 shares of common stock to an individual in conjunction with a subscription agreement. These warrants were exercisable at $0.20 per share and expired on June 7, 2011.
The warrants for private placements in 2011 have an exercise price of $0.20 per share of common stock, and expire four years from the date of issuance. The exercise price and the number of shares of common stock purchasable upon exercise of the warrants are subject to adjustment (under formula set forth in the warrants) upon the occurrence of certain events, including, but not limited to: (i) stock dividends, stock splits or reverse stock splits; (ii) the payment of dividends on the common stock payable in shares of common stock or securities convertible into common stock; (iii) a recapitalization, reorganization or reclassification involving the common stock, or a consolidation or merger of the; or (iv) a liquidation or dissolution of the Company.
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With regards to the expiration or cancellation of outstanding warrants, an additional 2,500,000 shares of common stock were issued to three investors for cash proceeds received during 2010 totaling $250,000, or $0.10 per share, as discussed in Note 7 above. One of the investors was also issued a total of 250,000 warrants to purchase common stock as part of the subscription, exercisable at $0.20 per share. These warrants expired on July 7, 2011.
The Company purportedly issued warrants to purchase 15,000,000 shares of its common stock to an individual in conjunction with the April 2008 acquisition agreement with PostInk, which warrants were exercisable at $0.05 per share, and would have expired on April 1, 2012. Pursuant to a litigation settlement discussed in Note 10 below, in 2010 these 15,000,000 warrants were cancelled in lieu of the Company’s obligation to issue the warrant holder 1,000,000 shares of common stock in exchange for the warrants. During 2009, and pursuant to certain private placements at $0.40 per share, the Company also granted warrants to purchase a total of 264,800 shares of common stock to the investors, exercisable at $0.60 per share, which expired on March 1, 2010.
During 2010, the Company estimated the fair value of the stock warrants based on the following weighted average assumptions:
Risk-free interest rate | 1.76% - 2.85 | % | ||
Expected life | 36 months - 60 months | |||
Expected volatility | 232% - 244 | % | ||
Dividend yield | 0.0 | % | ||
A summary of the status of the Company’s outstanding warrants and the changes during 2010 and 2011 is as follows:
| Weighted Average | ||||||||
| Shares | Exercise Price | |||||||
Outstanding, January 1, 2010 | 19,039,800 | $ | 0.06 | |||||
Granted | 350,000 | $ | 0.20 | |||||
Cancelled | (15,000,000) | $ | 0.05 | |||||
Expired | (264,800) | $ | 0.60 | |||||
Outstanding, December 31, 2010 | 4,125,000 | $ | 0.10 | |||||
Exercisable, December 31, 2010 | 4,125,000 | $ | 0.10 | |||||
Granted | 3,255,582 | $ | 0.20 | |||||
Expired | (250,000) | $ | 0.20 | |||||
Outstanding, December 31, 2011 | 7,130,582 | $ | 0.20 | |||||
Exercisable, December 31, 2011 | 7,130,582 | $ | 0.20 | |||||
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The following is a summary of outstanding and exercisable warrants at December 31, 2011:
| Outstanding | Exercisable | |||||||||||||||||||||
Range of Exercise Prices | Weighted Average Number Outstanding at 12/31/11 | Outstanding Remaining Contractual Life (in yrs.) | Weighted Average Exercise Price | Number Exercisable at 12/31/11 | Weighted Average Exercise Price | |||||||||||||||||
0.10 | 50,000 | 2.43 | 0.10 | 50,000 | 0.10 | |||||||||||||||||
0.20 | 7,080,582 | 2.60 | 0.20 | 7,080,582 | 0.20 | |||||||||||||||||
$ | 0.10 - 0.20 | 7,130,582 | 2.59 | $ | 0.20 | 7,130,582 | $ | 0.20 | ||||||||||||||
NOTE 9 - Common Stock Options and Share-Based Compensation
At December 31, 2011, the Company has a stock-based compensation plan, the 2009 Long Term Incentive Plan.
The 2009 Long Term Incentive Plan was adopted by the Company’s Board of Directors on September 2, 2009. Non-qualified options under the 2009 Stock Long Term Incentive Plan can be granted to employees, officers, outside directors, and consultants of the Company. There were 10,000,000 shares of Common Stock authorized for issuance under the 2009 Long Term Incentive Plan. The options have a term of ten years and vest monthly over five years, quarterly over five years, quarterly over three years or over three years with 33.3% vesting on the one year anniversary date, and the remaining 66.7% vesting quarterly over the remaining two years. As of December 31, 2011, 7,445,833 plan options were outstanding, and 2,310,000 plan options were exercisable with a weighted average exercise price of $0.09 per share.
Share-based compensation expense is based on the estimated grant date fair value of the portion of share-based payment awards that are ultimately expected to vest during the period. The grant date fair value of stock-based awards to employees and directors is calculated using the Black-Scholes option pricing model. Forfeitures of share-based payment awards are reported when actual forfeitures occur.
As of December 31, 2011 and 2010, the Company recorded $160,459 and $73,854 in share-based compensation expenses, respectively.
The cash flows from tax benefits for deductions in excess of the compensation costs recognized for share-based payment awards would be classified as financing cash flows. Due to the Company’s loss position, there was no such tax benefits during the year ended December 31, 2011.
F-25
The summary activity under the Company’s 2009 Long Term Incentive Plan is as follows:
| December 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||
Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value | Weighted Average Remaining Contractual Life | Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value | Weighted Average Remaining Contractual Life | |||||||||||||||||||
Outstanding at beginning of period | 7,100,000 | $ | 0.09 | 3,150,000 | $ | 0.09 | ||||||||||||||||||||
Granted | 1,075,000 | $ | 0.10 | 5,600,000 | $ | 0.09 | ||||||||||||||||||||
Exercised | – | $ | 0.00 | ─ | $ | 0.00 | ||||||||||||||||||||
Forfeited/ Cancelled | (729,167 | ) | $ | 0.09 | (1,650,000 | ) | 0.00 | |||||||||||||||||||
Outstanding at period end | 7,445,833 | $ | 0.09 | 2.51 | 7,100,000 | $ | 0.09 | 3.55 | ||||||||||||||||||
Options vested and exercisable at period end | 2,310,000 | $ | 0.09 | ─ | 665,834 | $ | 0.09 | ─ | ||||||||||||||||||
Weighted average grant-date fair value of options granted during the period | $ | 0.10 | $ | 0.09 | ||||||||||||||||||||||
The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 2011:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
Range of Exercise Prices | Options Outstanding | Weighted Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | Number Outstanding | Weighted Average Exercise Price | |||||||||||||||||
$ | 0.00 – $0.08 | 3,150,000 | 2.92 | $ | 0.08 | 995,834 | $ | 0.08 | ||||||||||||||
$ | 0.09 – $0.10 | 4,295,833 | 2.21 | $ | 0.10 | 1,314,166 | $ | 0.10 | ||||||||||||||
7,445,833 | 2,310,000 | |||||||||||||||||||||
F-26
A summary of the status of the Company’s non-vested shares as of December 31, 2011 is as follows:
Non-vested Shares | Shares | Weighted Average Grant-Date Fair Value | ||||||
Non-vested at January 1, 2010 | 6,434,166 | $ | 0.09 | |||||
Granted | 1,075,000 | $ | 0.08 | |||||
Forfeited | (729,167 | ) | $ | 0.09 | ||||
Vested | (1,644,166 | ) | $ | 0.08 | ||||
Non-vested | 5,135,833 | $ | 0.08 | |||||
As of December 31, 2011, there was approximately $425,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements. The unrecognized compensation cost is expected to be recognized over a weighted average period of 3.55 years. The intrinsic value of options vesting in year 2011 was $134,541.
During 2011, the Company estimated the fair value of the stock options based on the following weighted average assumptions:
Risk-free interest rate | 2.03% - 2.44 | % | ||
Expected life | 3 years | |||
Expected volatility | 143% - 156 | % | ||
Dividend yield | 0.0 | % | ||
During 2010, the Company estimated the fair value of the stock options based on the following weighted average assumptions:
Risk-free interest rate | 1.85% - 2.85 | % | ||
Expected life | 3 years - 5 years | |||
Expected volatility | 164% - 170 | % | ||
Dividend yield | 0.0 | % | ||
F-27
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Consulting Agreements
Effective May 28, 2010, the Company entered into a one year “referral compensation agreement” with a third party consulting firm. Pursuant to this agreement, the firm would facilitate meetings and introductions on behalf of the Company with certain potential investors in return for the Company’s agreement to pay the consulting firm compensation for these introductory services if an investment, either directly or indirectly, results as a consequence of these services. The consulting firm was entitled to a 5% finder’s fee on the proceeds or value invested in the Company during the term of the agreement. However, the consulting firm would not be entitled to any compensation under this agreement for any investment in the Company that would be used by the Company to pay the consulting firm the monthly retainer required in the “professional services agreement” described below. No finder’s fees were paid to this consulting firm in the years ending 2011 and 2010.
Effective June 2, 2010, the Company entered into a one-year “professional services agreement” with this same firm. Pursuant to this separate agreement, the firm provided government relations and consulting services,sales services and tech support. As consideration for these services, the consulting firm was entitled to a monthly retainer payment of $30,000. Such payments were contingent upon receipt by the Company of investments that the Company was able to secure, with the assistance of the consulting firm, for that purpose, up to an amount of $360,000 for the term of the agreement. In addition to the monthly retainer payment, the consulting firm would be entitled to a commission equal to amounts actually received by the Company in excess of $49.95 per user per month generated from any contract secured as a result of the firm’s efforts. The consulting firm assisted the Company in receiving $250,000 of new investments during year ended 2010. As a result, the Company paid the investment firm $190,000 and $60,000 in 2010 and 2011, respectively. The professional services agreement expired in June 2011.
Office Leases
Through mid-August 2010, the Company had two separate operating leases for its office space. Both leases were on a month-to-month basis. Each lease required a monthly payment of $1,200 per month and could be terminated by either party at any time. Both of these leases were terminated and the respective office space vacated in mid-August 2010. One of the leases was with the Company’s previous chief executive officer, which has since expired (see Note 12). During August 2010, the Company consolidated its office space by moving to a new location in Canyon Lake, Texas, and in so doing, entered into a new one-year lease agreement with monthly rental payments of $1,500. The rent agreement provides for renewal options consisting of two, one-year renewals at the same rental rate of $1,500 per month; after which, the lease becomes a month-to-month lease. The Company’s Canyon Lake location contains the Company’s research and development, customer support and other operational activities.
On March 15, 2011, the Company executed a sub-lease agreement for office space in Dallas, Texas, with occupancy effective April 1, 2011. Located in this new facility are the Company’s sales and marketing, finance and administrative functions. 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.
Future annual lease payments as of December 31, 2011 are as follows:
| 2012 | 2013 | |||||||
Dallas Office | $ | 89,865 | $ | 14,978 | ||||
Canyon Lake Office | $ | 12,000 | - | |||||
Total Lease Payments | $ | 101,865 | $ | 14,978 | ||||
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.
F-28
The following litigation matters commencing during 2009 were resolved during the two years ends December 31, 2010 and December 31, 2011, as described below:
1) In October 2009, Rocket City Enterprises, Inc. (“RCTY”) filed an arbitration demand against the Company. The demand alleged breach of contract and sought repayment of a purported loan in the amount of $200,000 plus interest at 9% per annum. In November 2010, the two parties settled the matter. Pursuant to the settlement, the Company agreed to pay RCTY an aggregate amount of $130,000, $20,000 of which was paid in early April, 2011 and $10,000 is to be paid each succeeding calendar month until fully paid. These payments did not bear interest. As additional consideration in the settlement of the arbitration proceeding, COPsync delivered 100,000 shares of its common stock to RCTY valued at $10,000.
2) In 2009, the Company filed a lawsuit against an individual who held convertible notes payable of the Company in the principal amount of $472,000 and various entities we believed to be affiliated with that individual, as described in our previous filings with the SEC. In June 2010, we entered into a “deal points” settlement with the opposing parties. The agreement was an enforceable contract, and contemplated a full settlement agreement, with mutual releases, to be executed. In August 2011, the parties negotiated the terms of the definitive settlement agreement. In pertinent part, the deal points settlement agreement provides that : (i) if we complete financing with a party introduced to us by the principal defendant or another identified individual, we will pay 45% of the funds raised pursuant to such financing toward the principal and accrued interest allegedly owed under the purported $472,000 principal amount loans described above; otherwise, these purported loans are discharged; (ii) we would issue to one of the defendants one million unrestricted shares of our common stock in exchange for purported warrants to purchase 15 million shares of our common stock; (iv) we would issue an additional one million restricted shares of our common stock to another defendant; and (v) all parties will release all claims and counterclaims with prejudice.
The “deal points” settlement agreement was intended to be enforceable as a binding settlement agreement, and as a result, the Company recorded accrued settlement costs of $220,000 as of September 30, 2010, which represented the market value of the 2,000,000 shares of common stock to be issued pursuant to the agreement on June 6, 2010 ($0.11 per share). The difference between this accrual and the discharge of the convertible notes payable and related accrued interest through June 6, 2010 was recorded as a lawsuit settlement gain, totaling $392,914, during year ended December 31, 2010. This gain was 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.
In August 2011 the Company successfully negotiated terms of a definitive settlement agreement involving a litigation matter originating in 2009. The various performance requirements of the definitive settlement agreement were executed by all parties. Relative to 2,000,000 common stock shares to be conveyed to two outside parties, they were valued on the date of the settlement agreement, August 28, 2011, at $0.06 per share or $120,000. The original accrual recorded by the Company in June 2010 at the time the deal points agreement was executed was $220,000. The specifics of the transaction involved the Company issuing 1,000,000 shares of common stock with a total value of $60,000 to one outside party. Separately, one of the Company’s co-founders conveyed 1,000,000 shares of common stock from his personal holdings back to the Company. The returned shares were recorded in Treasury stock at a value of $60,000 or $0.06 per share. Upon issuance of the 1,000,000 shares of its common stock to the second outside party, the total value of $60,000 was recorded in Paid-in capital. The $100,000 difference between the value of these two issuances and the original $220,000 accrual was recorded as a gain on settlement of debt in the Statement of operations.
If there is any dispute about any point in the final settlement agreement on which the parties cannot agree, the deals point agreement provides that the matter is to be submitted to a disinterested arbitrator to decide the issue.
NOTE 11 - RELATED PARTY TRANSACTIONS
Through mid-August 2010, the Company leased its corporate office space on a month-to-month basis from the Company’s previous chief executive officer. The monthly payment on the lease agreement was $1,200 per month and the agreement could be terminated by either party at any time. This lease was terminated and the office space vacated in mid-August (see Note 10).
Please note the Company has disclosed other related party transactions throughout the financial disclosures where deemed appropriate.
NOTE 12 - SUBSEQUENT EVENTS
As of May 15, 2012, the Company had obtained written subscriptions for new capital approximating $1,710,000. The subscriptions were for a unit consisting of five shares of our common stock and one warrant to purchase another share of our common stock, at a purchase price of $0.50 per unit. We had collected cash proceeds from these subscriptions of approximately $800,000 as of May 15, 2012. The exercise price of the warrants is $0.10 per share of common stock and the warrants will expire four years from the issuance date.
F-29