Copsync (COYN) 10-Q 2012 Q3 Quarterly report

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 

FORM 10-Q

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

For the quarterly period ended September 30, 2012
 

OR

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

Commission File No.: 000-53705

COPSYNC, INC.

(Exact name of registrant as specified in its charter)

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

 2010 FM 2673

Canyon Lake, Texas  78133

 (Address of principal executive offices)

 (972) 865-6192

 (Registrant’s telephone number, including area code)

Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.x Yes  o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§323.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit and post such files). x Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

The number of shares outstanding of each of the issuer's classes of common stock, as of November 07, 2012, was 166,659,977 shares of Common Stock, $0.0001 par value.  

COPSYNC, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2012

TABLE OF CONTENTS

		Page
PART I.  FINANCIAL INFORMATION
ITEM 1.	Financial Statements	3
	Condensed Balance Sheets at September 30, 2012 (unaudited) and December 31, 2011	3
	Condensed Statements of Operations (unaudited) for the three months and nine months ended September 30, 2012 and 2011	5
	Condensed Statements of Cash Flows (unaudited) for the nine months ended September 30, 2012 and 2011	6
	Notes to Condensed Financial Statements	8
ITEM 2.	Management’s Discussion And Analysis Of Financial Condition and Results of Operations	19
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risks	23
ITEM 4.	Controls and Procedures	24
PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	25
ITEM 1A.	Risk Factors	25
ITEM 2.	Unregistered Sales of Equity Securities	25
ITEM 3.	Defaults Upon Senior Securities	25
ITEM 4.	(Removed and Reserved)	25
ITEM 5.	Other Information	25
ITEM 6.	Exhibits	26
SIGNATURES		27

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements (unaudited)

COPSYNC, INC.

Condensed Balance Sheets

ASSETS
	September 30,			December 31,
	2012			2011
	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	364,681		$	1,074,317
Accounts receivable, net of allowance of $11,425    at September 30, 2012 and $0 at December 31, 2011		209,083			106,919
Prepaid expenses and other current assets		33,315			60,425
Total Current Assets		607,079			1,241,661
PROPERTY AND EQUIPMENT
Computer hardware		57,561			57,561
Computer software		20,713			20,713
Fleet vehicles		172,163			108,384
Furniture and fixtures		7,872			7,872
Total Property and Equipment		258,309			194,530
Less: Accumulated Depreciation		(96,532	)		(83,269	)
Net Property and Equipment		161,777			111,261
OTHER ASSETS
Software development costs, net		982,056			1,309,416
Total Other Assets		982,056			1,309,416
TOTAL ASSETS	$	1,750,912		$	2,662,338

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

3

COPSYNC, INC.

Condensed Balance Sheets (Continued)

LIABILITIES AND STOCKHOLDERS' DEFICIT
	September 30,			December 31,
	2012			2011
	(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	887,686		$	528,951
Deferred revenues		790,560			1,033,833
Notes payable, current portion		33,305			84,145
Total Current Liabilities		1,711,551			1,646,929
LONG-TERM LIABILITIES
Deferred revenues		656,665			553,615
Convertible notes payable		572,731			612,731
Notes payable, non-current portion		80,248			35,844
Total Long-Term Liabilities		1,309,644			1,202,190
Total Liabilities		3,021,195			2,849,119
COMMITMENTS AND CONTINGENCIES		-			-
STOCKHOLDERS' DEFICIT
Series A Preferred stock, par value $0.0001 per share, 100,000 shares authorized; 100,000 shares issued and outstanding, respectively		10			10
Series B Preferred stock, par value $0.0001 per share, 400,000 shares authorized; 375,000 shares issued and outstanding, respectively		37			37
Common stock, par value $0.0001 per share, 500,000,000 shares authorized; 165,152,977 and 148,251,688 issued and outstanding, respectively		16,514			14,826
Common stock to be issued, 3,985,909, and 2,459,061 shares, respectively		437,000			284,315
Common stock warrants to be issued		131,961			131,961
Additional paid-in-capital		11,862,314			9,886,601
Accumulated deficit		(13,718,119	)		(10,504,531	)
Total Stockholders' Deficit		(1,270,283	)		(186,781	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	1,750,912		$	2,662,338

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

4

COPSYNC, INC.

Condensed Statements of Operations

(unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
REVENUES
Hardware, installation and other revenues	$	268,005		$	426,791		$	1,017,112		$	1,029,881
Software license/subscription revenues		373,172			292,525			1,074,640			666,199
Total Revenues		641,177			719,316			2,091,752			1,696,080
COST OF REVENUES
Hardware and other costs		234,647			518,961			983,328			1,159,848
Software license/subscription revenues		152,657			51,153			531,902			165,562
Total Cost of Revenues		387,304			570,114			1,515,230			1,325,410
GROSS PROFIT		253,873			149,202			576,522			370,670
OPERATING EXPENSES
Research and development		656,337			149,311			1,603,280			474,396
Sales and marketing		330,337			242,437			1,076,017			656,059
General and administrative		407,486			323,486			1,027,787			1,031,225
Total Operating Expenses		1,394,160			715,234			3,707,084			2,161,680
LOSS FROM OPERATIONS		(1,140,287	)		(566,032	)		(3,130,562	)		(1,791,010	)
OTHER INCOME (EXPENSE)
Interest income		8			25			22			491
Gain on lawsuit settlement		-			85,000			-			85,000
Gain/(Loss) on asset disposals		(5,024	)		266			(3,234	)		1,685
Interest expense		(6,579	)		(4,499	)		(19,970	)		(33,590	)
Total Other Income (Expense)		(11,595	)		80,792			(23,182	)		53,586
NET LOSS BEFORE INCOME TAXES		(1,151,882	)		(485,240	)		(3,153,744	)		(1,737,424	)
INCOME TAXES		-			-			-			-
NET LOSS	$	(1,151,882	)	$	(485,240	)	$	(3,153,744	)	$	(1,737,424	)
Series B preferred stock dividend		(20,128	)		(26,466	)		(60,026	)		(78,534	)
Cost of Series B warrants extension		-			-			-			(76,994	)
Accretion of beneficial conversion feature on preferred shares   dividends issued in kind		(6,338	)	$	0.00			(18,796	)		-
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	(1,178,348	)	$	(511,706	)	$	(3,232,566	)	$	(1,892,952	)
LOSS PER COMMON SHARE - BASIC & DILUTED	$	(0.01	)	$	0.00		$	(0.02	)	$	(0.01	)
WEIGHTED AVERAGE NUMBER OF   COMMON SHARES OUTSTANDING - BASIC & DILUTED		160,567,933			136,384,788			153,787,329			133,874,704

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

5

COPSYNC, INC.

Condensed Statements of Cash Flows

(Unaudited)

	For the Nine Months Ended
	September 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(3,153,744	)	$	(1,737,424	)
Adjustments to reconcile net loss to net cash used   in operating activities:
Depreciation and amortization		355,123			133,521
Amortization of note discount		-			16,836
Employee and non-employee stock compensation		125,011			120,084
Common stock issued for services rendered		2,489			63,750
Amortization of restricted stock grants		45,000			45,000
Capital contributed/co-founders' forfeiture of contractual compensation		59,250			59,250
Stock issued for cash received in prior year		15,000			-
Loss/(Gain) on asset disposals		3,234			(1,685	)
Gain on lawsuit settlement		-			(85,000	)
Change in operating assets and liabilities:
Accounts receivable		(102,164	)		(26,299	)
Debt issuance costs		-			4,208
Lease security deposit		-			(11,795	)
Prepaid expenses and other current assets		27,110			20,265
Deferred revenues		(140,223	)		280,513
Accounts payable and accrued expenses		305,173			(150,123	)
Net Cash Used in Operating Activities		(2,458,741	)		(1,268,899	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from asset disposals		-			10,387
Purchases of property and equipment		(10,171	)		(18,165	)
Net Cash Used in Investing Activities		(10,171	)		(7,778	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable		66,341			-
Payments on notes payable		(92,750	)		(103,672	)
Proceeds received on convertible notes		-			612,731
Proceeds from common stock to be issued		212,685			145,000
Proceeds from issuance of common stock for cash		1,573,000			537,311
Net Cash Provided by Financing Activities		1,759,276			1,191,370
NET DECREASE IN CASH AND CASH EQUIVALENTS		(709,636	)		(85,307	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		1,074,317			240,154
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	364,681		$	154,847

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

6

COPSYNC, INC.

Condensed Statements of Cash Flows (Continued)

(Unaudited)

	For the Nine Months Ended
	September 30,
	2012		2011
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	26,039	$	3,735
Cash paid for income tax	$	5,945	$	4,978
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchased fleet vehicles involving trade-ins and collateral swap on existing notes payable	$	92,337	$	-
Conversion of convertible notes, plus accrued interest into 401,134 shares of common stock	$	40,113	$	-
Accretion of beneficial conversion feature on preferred shares dividends issued in kind	$	18,796	$	-
Series B Preferred stock dividends	$	60,026	$	78,534
Common stock issued for services rendered by third party service provider	$	2,489	$	-
Common stock issued in conversion of notes payable and accrued interest	$	-	$	52,247
Common stock issued per debt settlement agreement	$	-	$	60,000
Capital contribution by a co-founder involving 1,000,000 shares of common stock returned to    treasury stock and subsequently issued pursuant to a legal settlement at $0.06 per share	$	-	$	75,000

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

7

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

NOTE 1 – BASIS OF FINANCIAL STATEMENT PRESENTATION

These interim condensed financial statements of COPsync, Inc. ("COPsync," the "Company," "we," "our," "us") are unaudited but reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the financial position of the Company as of September 30, 2012, and its results of operations and cash flows for the three month and nine month periods ended September 30, 2012.  Certain information and footnote disclosures normally included in the audited financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Because all the disclosures required by accounting principles generally accepted in the United States are not included, these interim condensed financial statements should be read in conjunction with the audited financial statements and notes thereto in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2011. The results for the three month and nine month periods ended September 30, 2012 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2012, or any other period. The year-end condensed balance sheet data as of December 31, 2011, was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

At September 30, 2012, the Company had cash and cash equivalents of $364,681, a working capital deficit of $1,104,472 and an accumulated deficit of $13,718,119.  Due to these circumstances, the Company’s management monitors and attempts to minimize, to the extent possible, all cash expenditures.  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, bank financings or a combination of both.  

The Company’s Board of Directors has authorized the Company to raise $2.2 million in new capital, inclusive of approximately $1,725,000 that the Company had received as of September 30, 2012.  The total cash received consisted of $1,573,000 for shares of common stock that had been issued as of September 30, 2012 and $152,000 for shares of common stock to be issued after September 30, 2012.  The Company’s management believes that the Company will raise at least an additional $475,000 either in the form of debt or equity prior to December 31, 2012.  Thereafter, the Company’s Board of Directors may authorize the Company to seek additional capital, either in the form of debt or equity, as circumstances require or funding opportunities become available.

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 – NATURE OF ORGANIZATION

COPsync, Inc. operates the largest law enforcement real-time, in-car information sharing, communication and data interoperability network in the U.S. The COPsync network enables officers to report and share critical data and collect for outstanding Texas Class C misdemeanor warrants in real-time at the point of incident. Officers are also able to obtain instant access to local, state and federal law enforcement databases.  The COPsync system also eliminates manual processes and increases officer productivity by enabling officers to electronically write tickets, accident reports, DUI forms, arrest forms and incident and offense reports. The Company believes that use of its information sharing network saves lives, reduces unsolved crimes and assists in apprehending criminals and interdicting criminal behavior -- 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.  The Company has designed its information sharing network to be “vendor neutral,” meaning it can be used with products and services offered by other law enforcement technology vendors. COPsync also sells VidTac,™ an in-vehicle, software-driven video system for law enforcement. The first customer installations of the VidTac system are occurring in the fourth quarter of this year.

8

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICES

a.             Basis of Presentation

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

b.             Reclassifications

Certain prior year items have been reclassified to conform to the current year presentation. These reclassifications had no impact on the Company’s financial statements.

c.             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. The Company deposits cash and cash equivalents 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 in financial institutions may exceed federally insured limits.  At September 30, 2012, the Company had approximately $5,000 in excess of FDIC insured limits at the two financial institutions. The Company has not experienced any losses in such accounts.

To date, the Company’s 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. The Company writes off delinquent receivables based on individual credit evaluation and the specific circumstances of the customer.  As of September 30, 2012, the Company had recorded an allowance for doubtful accounts of $11,425.  At September 30, 2011, the Company had not recorded an allowance for doubtful accounts.

d.             Use of Estimates

The preparation of accompanying financial statements in conformity with accounting principles generally accepted in the United States requires the Company’s 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.

9

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

e.             Software Development Costs

The Company capitalizes and amortizes certain software development costs incurred subsequent to the establishment of technological feasibility over the estimated lives of the related products.  In these circumstances, 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, the Company amortizes development costs for that product, historically over fifteen years, based upon management’s then estimated economic life of the product.  See Note 3 to the Company’s financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2011 for a discussion involving an impairment of software development costs recorded by the Company for the year ended December 31, 2011, which reduced the estimated economic life of the Company’s product to approximately seven years, as well as an impairment recorded by the Company on the product at December 31, 2010, and the respective financial impact therein.

f.              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 Company’s agency customers 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’s customers from time-to-time request that the Company 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 (in which 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 Company reports sales of the hardware and related services for hardware installation and agency and officer set-up and training 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 Company reports subscription fees and software integration services as “software license/subscriptions 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.

10

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

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 upon specific services and products to be delivered pursuant to 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 its 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 upon relative selling price. The selling price for a deliverable is based upon 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 2011 contained grants (or discounts) provided to the contracting agency.  These grants or discounts have been allocated across all of the different elements of an arrangement based upon the respective, relative selling price.

The Company determines VSOE for subscription fees for the initial contract period based upon 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 relevant service agreement or contract. 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 that its hardware products include the related services for hardware installation and agency and officer set-up and training, as well as integration services for enhanced service offerings that are sold separately, and the Company has established 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 (when 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.

11

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

  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.

g.             Share-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.   The Company expenses these amounts 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 restricted 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.

NOTE 4 – RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS

We have implemented all new accounting pronouncements that are in effect and that may impact our unaudited consolidated financial statements.  We do not believe that there are any new accounting pronouncements that have been issued that might have a material impact on our consolidated financial position or results of operations.

NOTE 5 – NOTES PAYABLE

The Company’s total notes payable at September 30, 2012 was $113,553, representing a net decrease of $6,436 for the nine month period ended September 30, 2012.  The following table shows the components of notes payable at September 30, 2012 and December 31, 2011:

	September 30,			December 31,
Loan Type	2012			2011
Bank	$	108,669		$	65,978
Insurance		4,884			24,011
Settlement	$	-		$	30,000
Total notes payable	$	113,553		$	119,989
Less: Current portion	$	(33,305	)	$	(84,145	)
Long-term portion	$	80,248		$	35,844

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 with $10,000 to be paid each succeeding calendar month until fully paid.  The unpaid balance of the settlement at December 31, 2011 totaled $30,000, which was paid in full during the first quarter of 2012.  The settlement amount bore no interest.

The notes payable balance for bank loans, all of which involved the purchase of automobiles, increased by $42,691 during the nine months period ended September 30, 2012, which increase consisted of new notes payable totaling $87,688, partially offset by payments of $44,997.  These bank loans are collateralized by the associated automobiles.  The new bank loans were incurred by the Company in the first and third quarters of 2012, each with terms of five years and an interest rate of six percent per annum.

12

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

During the nine months period ended September 30, 2012, the Company also made monthly payments totaling $19,127 on a single note payable involving the short-term financing of certain of the Company’s business insurance policies.

NOTE 6 – CONVERTIBLE NOTES PAYABLE

During the nine months period ended September 30, 2012, the holders of two convertible notes elected to convert their respective notes into shares of the Company’s common stock.  The total amount of the converted notes on the date of conversion was $40,113, consisting of $40,000 in principal and $113 in accrued interest.  The Company issued a total of 401,134 shares of common stock at the conversion price of $0.10 per share of stock stated in the notes.

NOTE 7 – PREFERRED STOCK

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 the Company’s common stock, but votes with the common stock 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 and the first quarter of 2010, the Company issued a total of 375,000 shares of its Series B Preferred Stock in a private placement in which the Company raised $1,500,000 in gross proceeds.  The 375,000 shares of the Company’s Series B Convertible Preferred Stock are convertible into a total of 15,000,000 shares of the Company’s common stock.

The shares of the Company’s Series B Preferred Stock i) accrue dividends at a rate of 7.0% per annum, payable in preference to the common stock or any other capital stock of the Company, ii) have a preference in liquidation, or deemed liquidation, to receive the initial investment in the Series B Preferred Stock, plus accrued and unpaid dividends, prior to the common stock, iii) is convertible into 40 shares of common stock, subject to adjustment for issuances by the Company of common stock at less than $0.10 per share, and iv) have the right to elect one member of the Company’s Board of Directors.  The Company has recorded accrued dividends on the Series B Preferred Stock for the nine-month periods ended September 30, 2012 and 2011, of $60,026 and $78,534, respectively.  The Company booked an $18,796 accretion amount for the beneficial conversion feature on the Series B Preferred Stock for the nine months period ended September 30, 2012.  The Company booked zero accretion for the beneficial conversion feature for the nine months period ended September 30, 2011.

NOTE 8 – COMMON STOCK

During the nine months period ended September 30, 2012, the Company issued a total of 15,730,000 shares of common stock, along with associated warrants valued at $1,573,000 or $0.10 per share.  These shares consisted of 11,350,000 shares issued during the second quarter of 2012 valued at $1,135,000 and 4,380,000 shares issued during the third quarter of 2012 valued at $438,000.  The Company issued an additional 150,000 shares of common stock during the second quarter of 2012, valued at $15,000 or $0.10 per share resulting from a prior year investment.

During the third quarter of 2012, the Company issued 20,155 shares of common stock valued at $ 2,489 to a third-party service provider for services rendered during the period.

NOTE 9 – COMMON STOCK TO BE ISSUED

During 2009, the Company entered into a twelve-month agreement with an advisory firm to assist the Company in corporate planning, structure and capital resources.  The agreement with the advisory firm called for the advisory firm to receive 75,000 restricted shares of the Company’s common stock, valued at $45,000, or $0.60 per share.  The Company has not issued these shares to the advisory firm as of September 30, 2012, as the Company disputes that the shares were earned under the agreement.

13

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

During 2011, the Company received a $60,000 deposit from two individual investors for the purchase of 600,000 shares of common stock and associated warrants, which were issued in third quarter of 2012.  The Company received a $10,000 deposit in the second quarter of 2012 from a single individual investor for the purchase of 100,000 shares of common stock and associated warrants, which were issued in the third quarter of 2012.  During the third quarter of 2012, the Company received $152,000 in deposits from two individual investors for the purchase of 1,520,000 shares of common stock and associated warrants, which the Company anticipates issuing in the fourth quarter of 2012.  All of these issuances were part of private placements pursuant to subscription agreements between the Company and the investors.  Pursuant to the terms of the subscription agreements, the Company agreed to sell shares of the Company’s common stock and detachable four-year warrants to the investors.  For each of these 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, or $0.50 per Equity Unit.

The Company has distributor agreements with two original equipment manufacturer (“OEM”) distributors under which the Company is obligated to issue common stock to the OEMs with an aggregate value equal to the first $250,000 of licensing fees generated by the OEMs.  During the first nine months of 2012, the Company received cash totaling $60,685 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.  An obligation to issue a total of 606,848 shares of common stock resulted from these cash receipts, which when combined with the 1,640,909 shares of common stock earned by the OEM distributors during 2011 under these distributor agreements, equals 2,247,757 shares of common stock to be issued.  Total cash receipts relative to the 2,247,757 shares of common stock is $225,685.  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 for $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 OEM distributors has been included in revenues and the value of shares to be issued has 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 shares of common stock to be issued as of September 30, 2012 and December 31, 2011.

	At September 30, 2012				At December 31, 2011
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
Two resellers agreements for paid license fees as provided by the agreements		2,247,757		225,685		1,640,909		165,000
A single reseller for provided services		143,152		14,315		143,152		14,315
Two subscriptions for cash at $0.10 per share		1,520,000		152,000		-		-
Total number of shares and value		3,985,909	$	437,000		2,459,061	$	284,315

NOTE 10 – BASIC AND FULLY DILUTED LOSS PER SHARE

The computations of basic and fully diluted loss per share of common stock are based upon the weighted average number of shares of common stock outstanding during the period covered by the financial statements, plus the common stock equivalents which would arise from issuance of shares of common stock to be issued under subscriptions and other obligations of the Company, the exercise of stock options and warrants, conversion of convertible preferred stock and dividends on those shares of preferred stock or the conversion of convertible promissory notes outstanding during the period.

14

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

The Company's common stock equivalents, at September 30, 2012 consisted of the following and have not been included in the calculation because they are anti-dilutive:

	2012		2011
Convertible promissory notes outstanding		5,770,620		-
Warrants outstanding		9,996,582		5,299,622
Stock options outstanding		8,002,500		7,447,500
Preferred stock outstanding		15,100,000		15,100,000
Common stock to be issued		3,985,909		1,515,909
Dividends on preferred stock outstanding		3,108,797		2,190,414
Total Common Stock Equivalents		45,964,408		31,553,445

NOTE 11 – OUTSTANDING WARRANTS

A summary of the status of the Company’s outstanding warrants and the changes during the nine-month period ended September 30, 2012 and the twelve month period ended December 31, 2011 are as follows:

2012
Description	Warrants			Weighted Average Exercise Price
Outstanding, January 1, 2012		7,130,582		$	0.20
Issued		3,266,000		$	0.20
Cancelled		-		$	-
Expired		(400,000	)		0.20
Outstanding, September 30, 2012		9,996,582		$	0.20
Exercisable, September 30, 2012		9,996,582		$	0.20

The total number of warrants issued during the nine months ended September 30, 2012 consisted of 2,270,000 warrants associated with 11,350,000 shares of common stock issued during the second quarter of 2012, resulting from new capital investments of $1,135,000, 876,000 warrants associated with 4,380,000 shares of common stock issued during the third quarter of 2012 resulting from new capital investments of 438,000, and 120,000 warrants associated with 600,000 shares of common stock issued during the third quarter of 2012, resulting from $60,000 of new capital investments received in 2011.

2011
Description	Warrants			Weighted Average Exercise Price
Outstanding, January 1, 2011		4,125,000		$	0.20
Issued		3,255,582		$	0.20
Cancelled		-		$	-
Expired		(250,000	)		0.20
Outstanding, December 31, 2011		7,130,582		$	0.20
Exercisable, December 31, 2011		7,130,582		$	0.20

The total number of warrants issued during the twelve months period ended December 31, 2011, consisted of 1,005,582 warrants associated with 5,027,910 shares of common stock issued during the first and second quarters of 2011, resulting from new capital investments of $502,791 and 2,250,000 warrants associated with 11,250,000 shares of common stock issued during the fourth quarter of 2011, resulting from new capital investments of $1,125,000.

15

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

The following is a summary of the Company’s outstanding and exercisable warrants at September 30, 2012:

		Outstanding						Exercisable
Exercise Prices		Weighted Average Number Outstanding at 9/30/12		Remaining Life (in yrs.)		Weighted Average Exercise Price		Number Exercisable at 9/30/12		Weighted Average Exercise Price
	0.10		50,000		1.93		0.10		50,000		0.10
	0.20		9,946,582		2.52		0.20		9,946,582		0.20
$	0.10 - 0.20		9,996,582		2.63	$	0.20		9,996,582	$	0.20

NOTE 12 – EMPLOYEE OPTIONS

As of September 30, 2012, the Company has a stock-based compensation plan, the 2009 Long Term Incentive Plan.

The 2009 Long Term Incentive Plan was adopted by the Board of Directors on September 2, 2009.  Under the 2009 Long Term Incentive Plan, the Company can grant nonqualified options to employees, officers, outside directors and consultants of the Company or incentive stock options to employees of the Company. There are 10,000,000 shares of common stock authorized for issuance under the 2009 Long Term Incentive Plan. The outstanding 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 September 30, 2012, 8,002,500 options were outstanding under the plan, of which 3,697,910 options were exercisable, with a weighted average exercise price of $0.09 per share.

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

For the nine-month periods ended September 30, 2012 and 2011, the Company recorded share-based compensation expense of $125,011 and $120,084, respectively.

For the nine months ended September 30, 2012, the Company granted options to purchase 1,400,000 shares of common stock with an exercise price of $0.10 per share.  Each of the Company’s two outside directors received options to purchase 25,000 shares of common stock as part of their annual compensation for serving on the Company’s Board of Directors and options to purchase 1,350,000 shares of common stock were awarded to three new employees.  The total value of the stock options granted during the nine month period, utilizing the Black Scholes valuation method, was $118,964.  The term of the stock options was ten years and vesting of the stock options was for a three-year period, with 33% vesting on one-year anniversary of the grant date, and the remainder vesting ratably over the next eight quarters.

16

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

The summary activity for the nine months ended September 30, 2012 under the Company’s 2009 Long Term Incentive Plan is as follows:

	September 30, 2012
	Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value			Weighted Average Remaining Value
Outstanding at beginning of period		7,445,833		$	0.09	$	$223,375
Granted		1,400,000		$	0.10	$	28,000
Exercised		–		$	0.00	$	–
Forfeited/ Cancelled		(843,333	)	$	0.09	$	(25,300	)
Outstanding at period end		8,002,500		$	0.09	$	226,075			1.86
Options vested and exercisable at period end		3,697,910		$	0.09	$	110,937
Weighted average grant-date fair value of options granted during the period				$	0.10

The following table summarizes significant ranges of the Company’s outstanding and exercisable options as of September 30, 2012

		Options Outstanding						Options Exercisable
Range of Exercise Prices		Options Outstanding		Weighted Average Remaining Life (in years)		Weighted Average Exercise Price		Number Outstanding		Weighted Average Exercise Price
$	0.00 – $0.08		2,727,500		2.05	$	0.08		1,560,836	$	0.08
$	0.09 – $0.10		5,275,000		1.52	$	0.10		2,137,074	$	0.10
			8,002,500						3,697,910

A summary of the status of the Company’s non-vested shares as of September 30, 2012 is as follows:

Non-vested Shares	Shares			Weighted Average Grant-Date Fair Value
Non-vested at January 1, 2012		5,135,833		$	0.09
Granted		1,400,000		$	0.10
Forfeited		(843,333	)	$	0.09
Vested		(1,387,910	)	$	0.08
Non-vested		4,304,590		$	0.08

As of September 30, 2012, there was approximately $356,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements.  The Company expects to recognize the unrecognized compensation cost over a weighted average period of 1.86 years.

17

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

NOTE 13 – COMMITMENTS AND CONTINGENCIES

A summary of the Company’s fixed contractual obligations and commitments at September 30, 2012, is as follows:

	Payments Due by Period
	Total		Remainder of 2012		Year 2013		Beyond Year 2013
Operating leases	$	53,943	$	26,966	$	26,977	$	-
Purchase Obligations	$	700,000	$	258,000	$	442,000	$	-
Total	$	753,943	$	284,966	$	468,977	$	-

During the third quarter of 2012, the Company entered into a non-cancelable commitment to purchase from a manufacturer its new VidTac product, which was first released in November 2012.  The purchase commitment was entered into as part of the Company’s procurement processes to support normal inventory and sales activities as the new product neared the end of its development cycle, as well as to hold the purchase price of the product.  The commitment involved 475 finished good units with a total value of $700,000.  The finished good units are to be delivered as follows:  175 units in November 2012; 100 units on December 1, 2012; and 200 units on January 1, 2013.  Payment terms for the units are net 45 days from the invoice date.  The Company has sold 136 of the 200 units to be delivered in November 2012.  As of September 30, 2012, the balance of the finished goods was approximately $6,000 included in prepaid expenses and other current assets on the balance sheet.

Contingent Liability

None

Compensation

See ITEM 11, “Executive Compensation”, “Employment Contracts, Termination of Employment and Change in Control”, contained the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, which discusses the employment agreements involving Mr. Russell Chaney and Mr. Shane Rapp, co-founders of the Company.  One element contained in those discussions involves the voluntary elections by Mr. Chaney and Mr. Rapp to forego certain specified salary increases until the Company becomes profitable or the Company secures sufficient funding to sustain operations.  The value of each person’s foregone salary for each of the nine months period ended September 30, 2012 and 2011 totaled $30,000 for Mr. Chaney and $29,750 for Mr. Rapp and was recorded as contributed capital in Additional Paid-in Capital on the Company’s Balance Sheet.

See Note 7, “Stock Transactions”, “Common Stock to be Issued”, to the Financial Statements contained the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, which discusses the 2,000,000 shares of restricted common stock the Company granted to Ronald A. Woessner, the Company’s Chief Executive Officer, valued at $180,000.  The Company is amortizing the $180,000 value ratably over a thirty-six month period, which began in December 2010.  During each of the nine-month periods ended June 30, 2012 and 2011, amortization of the restricted stock grant was $45,000.

Litigation

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

NOTE 14 – SUBSEQUENT EVENTS

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

18

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

Statements in this report which are not purely historical facts or which necessarily depend upon future events, including statements about trends, uncertainties, hopes, beliefs, anticipations, expectations, plans, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements, including risks and uncertainties described in our annual report on Form 10-K for the year ended December 31, 2011. Any of these risk factors could have a material adverse effect on our business, financial condition or financial results and reduce the value of an investment in our securities. We may not succeed in addressing these and other risks associated with an investment in our securities, with our business and with our achieving any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements. All forward-looking statements are based upon information available to us on the date the statements are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We sell 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.  We believe that 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.  The first customer installations of our new VidTac system are occurring in the fourth quarter of 2012.

To date, our COPsync service has successfully submitted, processed and relayed over 3,824,000 officer initiated information requests.  On average, our service is returning responses to our customers in less than five seconds, well within the 32 second average NCIC 2000 standard for mobile clients.

As of November 11, 2012, over 300 law enforcement agencies, primarily in the State of Texas, had contractually subscribed to use our real-time data collection and data sharing service.

We offer our information sharing network software as a service (SaaS) on a subscription basis to our customers who subscribe to use the service for a specified term.  Service fees are typically paid annually at the inception of each year of service.  Our business model is to obtain subscribers to use our service, achieve a high subscription renewal rate from those subscribers and then grow our revenue via a combination of new subscribers and renewals of existing subscribers.  Pertinent attributes of our business model include the following:

- We incur start-up costs and recurring fixed costs to establish and maintain the service.

- We acquire subscribers and bring them onto our service, which requires variable acquisition costs related to sales, installation and deployment.

- Subscribers are recruited with the goal of reaching a level of aggregate subscriber payments that exceeds the fixed (and variable) recurring service costs.

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

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

19

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

Basis of Presentation, Critical Accounting Policies and Estimates

Critical Accounting Policies and Estimates

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

We describe our significant accounting policies in Note 2, Summary of Significant Accounting Policies, of the Notes to Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2011.  We discuss our Critical Accounting Policies and Estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the year ended December 31, 2011.

Results of Operations

Revenues.

Total revenues for the three-month and nine-month periods ended September 30, 2012 were $641,177 and $2,091,752, respectively, compared to $719,316 and $1,696,080, respectively, for the comparable periods in 2011.  Total revenues are comprised of software license/subscriptions revenue and hardware, installation and other revenue.  Software license/subscriptions revenue is a key performance indicator of revenue performance in future years, since this revenue represents that portion of our revenue that is anticipated to recur as our service contracts renew from year-to-year.  Hardware, installation and other revenue is a one-time revenue event, and is thus not a key performance indicator of future performance.  Software license/subscriptions revenues totaled $373,172 and $1,074,640 for the three-month and nine-month periods ended September 30, 2012, respectively, compared to $292,525 and $666,199, respectively, for the comparable periods in 2011, an increase of $80,647 and $408,441, respectively.  Software license/subscriptions revenue comprised 58% and 51% of our total revenues for the respective three-month and nine-month periods ended September 30, 2012.  The increase in software license/subscriptions revenue was due to an increase in the number of contracted law enforcement agencies between periods, plus revenue attributable to contract renewals.  Hardware, installation and other revenues totaled $268,005 and $1,017,112 for the three-month and nine-month periods ended September 30, 2012, respectively, compared to $426,791 and $1,029,861, respectively, for the comparable periods of 2011.  The decrease in revenues for hardware, installation and other in the three-month and nine-month periods in 2012 reflects a lower percentage of contracts requiring equipment when compared to the same periods in 2011.  We currently have a backlog of contracted service agreements with equipment needs, many of which will be completed in the fourth quarter of 2012.

Many of our new contracts are multiple-year contracts that typically include hardware, installation and training (and integration in some cases) and one year of software license/subscriptions revenue during the first year of the contract, followed by software license/subscriptions revenue during the remaining years of the contract.  Normally, we receive full payment up front upon inception of the contract.  We initially record this up-front payment as deferred revenues, which are subsequently recognized as revenue during the service period.  We do not believe the increase in deferred revenues as contracts are initiated has a material effect on our future working capital for the later years of the contract service periods because our customer support costs are incrementally fixed in nature.  Beginning in the third quarter of 2011 many of our contracts contained price discounts.  We allocated these discount amounts, in accordance with applicable accounting guidelines, to the separate, contract elements, such as hardware, installation and officer setup and training, certain integration services and service fees.  As a result, we experienced a lower gross profit on hardware, installation and other revenues.  We expect to continue discounting our products and services for the remainder of 2012.

20

Cost of Revenues and Gross Profit (Loss)

The following is a summary of the cost of revenues and gross profit or loss performances for the respective revenue types for the respective three-month and nine-month periods ended September 30, 2012 and 2011:

	For the three months ended September 30,											For the nine months ended September 30,
	2012					2011						2012					2011
	$		%			$			%			$		%			$			%
Hardware, installation and other revenues
Revenues	$	268,005		100	%	$	426,791			100	%	$	1,017,112		100	%	$	1,029,881			100	%
Cost of Revenues-hardware & other external costs		196,730		74	%		484,845			114	%		869,758		86	%		1,058,732			103	%
Cost of Revenues-internal costs		37,917		14	%		34,116			8	%		113,570		11	%		101,116			10	%
Total Gross Profit/(Loss)	$	33,358		12	%	$	(92,170	)		(22	%)	$	33,784		3	%	$	(129,967	)		(13	%)
Software license/subscription revenues
Revenues	$	373,172		100	%	$	292,525			100	%	$	1,074,640		100	%	$	666,199			100	%
Cost of Revenues-internal costs		43,537		12	%		16,235			6	%		143,857		13	%		60,808			9	%
Cost of Revenues-OEM distributor fees		0		0	%		0			0	%		60,685		6	%		0			0	%
Amortization of capitalized software development costs		109,120		29	%		34,918			12	%		327,360		30	%		104,754			16	%
Total Gross Profit	$	220,515		59	%	$	241,372			83	%	$	542,738		51	%	$	500,637			75	%
Total Company
Revenues	$	641,177		100	%	$	719,316			100	%	$	2,091,752		100	%	$	1,696,080			100	%
Cost of Revenues		387,304		60	%		570,114			79	%		1,515,230		72	%		1,325,410			78	%
Total Gross Profit	$	253,873		40	%	$	149,202			21	%	$	576,522		28	%	$	370,670			22	%

For the respective three-month and nine-month periods ended September 30, 2012, our total cost of revenues were $387,304 and $1,515,230, respectively, compared to $570,114 and $1,325,410, respectively, for the comparable periods in fiscal 2011.  As a result, we realized gross profits of $253,873 and $576,522, respectively, for the three-month and nine-month periods ended September 30, 2012, compared to $149,202 and $370,670, respectively, for the comparable periods in 2011.

Cost of revenues for hardware, installation and other revenues for the three-month and nine-month periods ended September 30, 2012 totaled $234,647 and $983,328, respectively, compared to $518,961 and $1,159,848, respectively, for the comparable periods in fiscal 2011.  The decrease of approximately $177,000 for the nine-month period comparison was due to lower hardware sales in fiscal 2012.  Included in these cost of revenues are internal costs, which totaled $113,570 and $101,116 for the nine-month periods ended September 30, 2012 and 2011, respectively.  These internal costs represent salaries and travel expenses for our in-house installation and training staff.  The total gross profit from hardware, installation and other revenue totaled $33,784 for the nine-month period ended September 30, 2012, compared to a gross loss of $129,967 for the comparable period in 2011.

Cost of revenues for software license/subscription revenues for the three-month and nine-month periods ended September 30, 2012 totaled $152,657 and $51,153, respectively, compared to $531,902 and $165,562, respectively, for the comparable periods in fiscal 2011.  The increase of approximately $103,000 for the three-month period comparison consisted of approximately $74,000 in increased amortization expense for capitalized software and $27,000 for increased internal costs.  These internal costs represent costs associated with our customer support team and web-hosting facilities.  The increase of approximately $366,000 for the nine-month period comparison consisted of approximately $223,000 in increased amortization expense for capitalized software, $61,000 for OEM distributor fees and development costs and $82,000 for increased internal costs.  We anticipate our internal costs to remain relatively flat for the remainder of 2012.  The resulting gross profit from software license/subscription revenues for the three-month and nine-month periods in 2012 was $220,515 and $542,738, respectively, compared to $241,372 and $500,637, respectively, for the comparable periods in fiscal 2011.

 Our total cost of revenues has the potential to fluctuate with revenues because of the variable cost nature of hardware, installation and other revenues contained in future contracts, as discussed above.  Conversely, our internal costs associated with installation, training, customer support and web-site hosting are relatively flat.

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Operating Expenses.

Research and Development

Total research and development expenses for the three-month and nine-month periods ended September 30, 2012 and 2011 were $656,337 and $1,603,280, respectively, compared to $149,311 and $474,396, respectively, for the comparable periods in 2011.  The $507,000 increase in expense for the three-month comparison, as well as, the $1,129,000 expense increase for the nine-month comparison, is due to the development and introduction of two new product/service offerings announced in 2012, as well as continued enhancement of our existing product/service offerings.  As a result, for the three-month and nine-month periods ended September 30, 2012, compensation-related expenses associated with increased headcount, including contract labor for IT/software development services, increased from the previous year by approximately $273,000 and $635,000, respectively, and non-recurring expenses for product development activities increased by approximately $234,000 and $475,000, respectively, from the previous year.  We believe these higher levels of research and development expense will continue through the remainder of 2012, but we expect the expense to be significantly reduced in fiscal 2013.

Sales and Marketing

Total sales and marketing expenses for the three-month and nine-month periods ended September 30, 2012, were $330,337 and $1,076017, respectively, compared to $242,437 and $656,059, respectively, for the comparable periods in fiscal 2011.  The $87,900 increase in these expenses for the three-month comparison, as well as the $419,958 expense increase for the nine-month comparison, is being driven principally by the introduction of the two new product/service offerings we are announcing in 2012, which has resulted in increased headcount in sales and sales support as we ramped-up our pre-introduction sales efforts, as well as related travel expenses.  We believe our current staffing levels are sufficient to adequately support our new product introductions in 2012, and we anticipate a continued relatively high level of travel expenses, principally due to fuel costs resulting from our sales team’s use of our fleet automobiles.

Our new product/service offerings are WARRANTsyc, which was released in May 2012, and VidTac, which was released in November 2012.  WARRANTsync is a service that provides the subscribing municipal courts with a real-time warrant servicing program when dealing with law enforcement agencies subscribing to the COPsync service offering.  With this service, we believe that the clearing of outstanding warrants can be greatly expedited.  VidTac is a software-driven video product offering.  It provides high resolution imaging at a lower cost, when compared to existing video product offerings.

General and Administrative

Total general and administrative expenses for the three-month and nine-month periods ended September 30, 2012, were $407,486 and $1,027,787, respectively, compared to $323,486 and $1,031,225, respectively, for the comparable periods in fiscal 2011.  The $84,000 increase in these expenses for the three-month comparison is due principally to headcount increases and other, non-personnel costs.  We believe that our general and administrative expenses for the remainder of fiscal 2012 may increase approximately five percent over current levels because of an additional headcount in finance and other sundry expenses.

Other Expense

Other expense for the three-month and nine-month periods ended September 30, 2012, totaled $11,595 and $23,182, respectively, which consisted principally of interest expense and losses on asset disposals.  For the three month period ended September 30, 2011, other income totaled $80,792, which included a gain of $85,000 involving a lawsuit settlement, partially offset by interest expense of $4,499.  Other income for the nine-month period ended September 30, 2011 totaling $53,586, consisted of the $85,000 gain involving a lawsuit settlement, partially offset by interest expense of $33,590.  

Net Loss Before Income Taxes

The net loss before income taxes for the three-month and nine-month periods ended September 30, 2012, were $1,151,882 and $3,153,744, respectively, compared to $485,240 and $1,737,424, respectively, for the comparable periods in fiscal 2011.

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Liquidity and Capital Resources

We have funded our operations since inception through the sale of equity and debt securities and from cash generated by operating activities.  As of September 30, 2012, we had $364,681 in cash and cash equivalents, compared to $1,074,317 as of December 31, 2011.  The decrease was due primarily to $2,458,741 net cash used in operating activities and $10,171 in net cash used by investing activities, partially offset by $1,759,276 in net cash provided by financing activities.  The net cash provided by financing activities represents cash proceeds of $1,573,000 from the issuance of common stock for cash, as well as $212,685 in cash received for shares of our common stock to be issued involving: 1) $60,685 from two of our original equipment manufacturer (“OEM”) distributors, and 2) $152,000 from two private investors, as well as $66,341 in proceeds from notes payable involving automobile loans.  These inflows were partially offset by $92,750 in payments on certain outstanding notes payable.  We had a working capital deficiency of $1,104,472 on September 30, 2012, compared to a deficiency of $405,268 on December 31, 2011.  However, on September 30, 2012, our current liabilities include $790,560 in net deferred revenues attributable to future performance periods under prepaid customer contracts, which we believe will not have a material effect on our future working capital in the later years of the prepaid contracts because our customer support costs are incrementally fixed in nature.

Plan of Operation for the Next Twelve Months

At September 30, 2012, we had cash and cash equivalents on hand of $364,681 and had a working capital deficiency of $1,104,472.  Our net deferred revenues totaling $1,447,225, for which we believe the future service costs will be relatively low and incrementally fixed in nature, exceeds the working capital deficiency.  

We have increased our expense levels over fiscal 2011 levels to invest in our direct sales efforts and to invest in new product/service offerings. We have invested heavily in research and development expenses in year 2012 for two new product innovations: WARRANTsync, our statewide class C misdemeanor warrant clearing system launched earlier this year, and VidTac, our software driven law enforcement video system, deliveries of which commenced in November of this year.  These increased expense levels have resulted in negative cash flow throughout fiscal 2012, which we expect to continue through the end of the year.  We expect to support this negative cash flow by raising additional capital.

Our Board of Directors authorized us to raise approximately $2.2 million in new capital, inclusive of approximately $1,725,000 we had received as of September 30, 2012.  The total cash received consisted of $1,573,000 for shares of common stock that had been issued as of September 30, 2012, and $152,000 for shares of common stock to be issued after September 30, 2012.  We believe that we will raise at least an additional $475,000 either in the form of debt or equity prior to the end of 2012.  Our Board of Directors may authorize us to seek additional capital, either in the form of debt or equity, as circumstances require or funding opportunities become available.

With cash we receive from our current capital raising efforts, and the collections of cash subscriptions and other foreseeable funding sources, we believe we will have adequate cash resources for the next twelve months.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

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Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the date of this quarterly report on Form 10-Q, we conducted, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e)) under the Exchange Act as of the end of the period covered by this report.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective in recording, processing, summarizing and reporting information required to be disclosed within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Control Over Financial Reporting

During the three months ended September 30, 2012, there were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Limitations on the Effectiveness of Internal Controls

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

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PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 1A.  Risk Factors

Not Applicable

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

We issued additional equity securities in connection with the capital raise referenced above under “Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Plan of Operation for the Next 12 Months.”  In connection with this capital raise, during the three months ended September 30, 2012, we issued 4,280,000 shares of our common stock and associated warrants (with an exercise price of $0.10 per share) to purchase 856,000 shares of our common stock in exchange for an aggregate $428,000 in cash.

The shares of common stock and warrants were offered primarily to individuals that we reasonably believed to be “accredited investors,” as such term is defined in Rule 501 under the Securities Act.  The offer and sale was made without registration under the Securities Act, or the securities laws of certain states, in reliance on the exemptions provided by Section 4(2) of the Securities Act and Regulation D under the Securities Act and in reliance on similar exemptions under applicable state laws.  No general solicitation or general advertising was used in connection with the offering of the common stock and warrants.  We disclosed to the investors that the shares of common stock and the warrants, and the common stock underlying the warrants, could not be sold unless they are registered under the Securities Act or unless an exemption from registration is available, and the certificates representing the shares and the warrants included, and the certificates representing the common stock to be issued upon exercise of the warrants (if applicable), will include a legend to that effect.

During the three months ended September 30, 2012, we issued 20,155 shares of our common stock to a third party service provider for services rendered during the period.  The offer and sale was made without registration under the Securities Act, or the securities laws of certain states, in reliance on the exemptions provided by Section 4(2) of the Securities Act and reliance on similar exemptions under applicable state laws.  No general solicitation or general advertising was used in connection with the offering of the common stock.  We disclosed to the service provider that the shares of common stock could not be sold unless they are registered under the Securities Act or unless an exemption from registration is available, and the certificates representing the shares included a legend to that effect.

Item 3.  Defaults Upon Senior Securities

None

Item 4.  (Removed and Reserved)

Item 5.  Other Information

None.

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Item 6.  Exhibits

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

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

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SIGNATURES

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

	COPSYNC, INC.
Date: November 14, 2012	By:	/s/ Ronald A. Woessner
		Ronald A. Woessner
		Chief Executive Officer

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