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EX-10.6 - STOCK RESTRICTION AGREEMENT - COPsync, Inc.csi2010k10_6.htm
EX-23.1 - CONSENT OF MORRILL & ASSOCIATES, LLC. - COPsync, Inc.csi2010k23_1.htm
EX-31.1 - CERTIFICATION ? CEO - COPsync, Inc.csi2010k31_1.htm
EX-32.1 - SECTION 1350 CERTIFICATIONS - COPsync, Inc.csi2010k32_1.htm
EX-31.2 - CERTIFICATION ? CFO - COPsync, Inc.csi2010k31_2.htm
 
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C. 20549
__________________________________
 
FORM 10-K
 
 
 x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year ended December 31, 2010
 
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)  
     
   (830) 964-3838  
   (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).   Yes   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 voting and non-voting common equity held by non-affiliates of the registrant at June 30, 2010, based on the $0.10 per share closing price for the registrant’s common stock on the OTC Bulletin Board, was $6,617,187.
 
The number of shares of the registrant’s common stock outstanding as of March 24, 2011 was 130,106,113.
 
DOCUMENTS INCORPORATED BY REFERENCE: None.
 
 
 
 

 
 
 

 
 
  Table of Contents
       Page
 PART I      1
   ITEM 1.  BUSINESS  1
   ITEM 1A.  RISK FACTORS  4
   ITEM 1B.  UNRESOLVED STAFF COMMENTS  11
   ITEM 2.  PROPERTIES  11
   ITEM 3.  LEGAL PROCEEDINGS  11
   ITEM 4.  (REMOVED AND RESERVED)  11
       
 PART II      12
   ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES  12
   ITEM 6.  SELECTED FINANCIAL DATA  13
   ITEM 7A.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  13
   ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  17
   ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  17
   ITEM 9A.  CONTROLS AND PROCEDURES  17
   ITEM 9B.  OTHER INFORMATION  17
       18
 PART III      
   ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE  19
   ITEM 11.  EXECUTIVE COMPENSATION  19
   ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS  19
   ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE  19
   ITEM 14.  PRINCIPAL ACCOUNT FEES AND SERVICES  19
       
 PART IV      19
   ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES  19
     SIGNATURES  21
     INDEX TO EXHIBITS  22
       
   INDEX TO FINANCIAL STATEMENTS  F-1
   REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  F-2
  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  F-3
       
 
 
 
i

 

 
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
 
This report is an annual report required by the U.S. Securities and Exchange Commission (SEC) and is intended to provide information about our company.  As required by the SEC rules, this report contains certain "risk factors".  These risk factors are intended to describe to shareholders and prospective shareholders certain risks that could potentially affect the company, its business, financial condition, operating results, prospects or the value of an investment in the company's publicly-traded securities.
 
This report also contains “forward-looking statements” within the meaning of the Private Securities Reform Act of 1995.  All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including:  any projections of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.  Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “plan” or “anticipate” and other similar words.  Such forward-looking statements may be contained in the sections “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” among other places in this report.
 
Although we believe that the expectations reflected in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed.  Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed in this report.  We do not intend, and undertake no obligation, to update any forward-looking statement.
 
BUSINESS
 
Overview
 
We sell the COPsync™ service, which is a real-time data collection and information sharing solution 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 other arrests and incidents and document accidents.  The service saves lives, reduces unsolved crimes and assists in apprehending criminals through such features as a nationwide officer safety alert system, GPS/auto vehicle location and distance-based alerts for crimes in progress, such as child abductions, bank robberies and police pursuits.  We have designed our system to be “vendor neutral,” meaning it can be used with products and services offered by other law enforcement technology vendors. Our interoperability network can be added to an agency’s technology system without the agency needing to change technologies, eliminating downtime necessary to re-train their officers on a new technology.  Additionally, our system architecture is designed to allow us to scale nationwide and globally.

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

Our founders, Russell Chaney and Jason Shane Rapp, both certified police officers in the State of Texas and former software company executives began developing the COPsync service in early 2004.  Their motivation for developing the service was the death of a fellow police officer in their community, which they believed was the direct result of law enforcement agencies not sharing dangerous criminal information electronically in real-time.  Messrs. Chaney and Rapp aspired to create and deploy a technology that would have avoided the death of a police officer and that provides in-vehicle, real-time electronic technology tools to assist officers in fulfilling their law enforcement responsibilities.
 
 
 
1

 

Our service was commercially released in the latter part of 2008, and we began generating revenue in the fourth quarter of 2008.  Currently, over 150 law enforcement agencies, primarily in the State of Texas, have contractually subscribed to use our real-time data collection and data sharing service

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

· 
We incur start-up costs and recurring fixed costs to establish and maintain the service.
 
· 
We acquire subscribers and bring them onto the service, which requires variable acquisition costs related to sales, installation and deployment.
 
· 
Subscribers are recruited with the goal of reaching a level of aggregate subscriber payments that exceeds the fixed (and variable) recurring service costs.
 
· 
Adding new subscribers at a high rate and having a high renewal rate among existing subscribers is essential to attaining positive cash flow from operations in the near term.
 
Assuming we are successful in obtaining new users of our service, as well as retaining high renewal rates of existing users, we anticipate that the recurring nature of the COPsync network subscription model will result in annually recurring, sustainable and predictable cash and revenue growth, year-over-year.
 
There is no assurance that we will be successful in implementing our business model.  There are numerous risks affecting our business, some of which are beyond our control.  An investment in our common stock involves a high degree of risk and may not be appropriate for investors who cannot afford to lose their entire investment.  Potential risks and uncertainties that could affect our operating results and financial condition include, without limitation, those described in Item 1. “Risk Factors” below.  In addition to the risks outlined below, risks and uncertainties not presently known to us or that we currently consider immaterial might also impair our business operations.

In the Homeland Security Act of 2002, Congress mandated that all U.S. law enforcement agencies, federal, state and local, implement information sharing solutions, referred to as “interoperability.”  The COPsync service provides this interoperability.  Prior to the introduction of our service, significant information sharing among law enforcement agencies, regardless of the vendor used, did not exist in the United States.  We believe that this lack of interoperability exists because law enforcement software vendors maintain proprietary systems, which do not interoperate with systems of other vendors. Our business model is to connect the proprietary systems of these various vendors, thus enabling the sharing of information between the agency customers of those vendors.  Our service can act as an overlay for those vendors who do not offer an in-vehicle mobile technology or an underlay that operates in the background for those vendors that do offer an in-vehicle mobile technology.
 
Our corporate entity was incorporated in Delaware in October 2006 as Global Advance Corporation, which operated as a public shell company, with no or nominal assets or operations, until 2008.  The predecessor-in-interest to the COPsync business, PostInk Technology, LP, a Texas limited partnership, merged with the public shell company in April 2008 and was subsequently dissolved.
 

 
2

 

Our Products

The COPsync service is a real-time data collection and information sharing service that enables patrol officers (and administrative officers as well) to access federal, state and local law enforcement databases real-time, in-vehicle, at the point of incident.  In particular, we currently provide access to the FBI CJIS database, the Texas law enforcement telecommunications system (TLETS) database, the historical databases of our agency subscribers who have provided us historical access, and the Department of Homeland Security’s El Paso Intelligence Center (EPIC) database, which collects information relating to persons crossing the U.S. – Mexico border.  As we expand the scope of our operations to states other than the State of Texas, we will provide access to the law enforcement telecommunications systems in those states as well.

The COPsync service also eliminates the need for manual processes and increases officer productivity by enabling officers to electronically write tickets, process DUI and other arrests and incidents and document accidents.  The COPsync service also enables officers to send to other officers in real-time “officer needs assistance” alerts and BOLO (“be on the lookout”) alerts regarding crimes or criminal activity in progress.

Sales and Marketing

We sell the COPsync service through direct sales efforts and through OEM distributors and resellers. Virtually all of our sales to date have been derived from our direct sales efforts.  Beginning in the fourth quarter 2010, we began establishing contractual relationships with OEM distributors and resellers.  These distribution arrangements are in the early stages of development and we are working with these distributors and resellers to establish processes and systems and otherwise equip them to be effective sales channels for the COPsync service.

Research and Development
 
We have devoted a large amount of our resources to developing the software that is included in our product.  Our cumulative capitalized software development costs were approximately $2,191,000 through the year ended December 31, 2008.  Additional costs of $375,000 and $158,000 were capitalized in the years ended December 31, 2009 and 2010, respectively At December 31, 2010, the Company recorded an impairment charge of $580,000 against its cumulative capitalized software development cost (see Note 2 to our financial statements).
 
Competition
 
We believe that we have developed the first integrated real-time data collection and interoperability software network that provides real-time in-car information sharing for all law enforcement officers using our network.   We have also designed our product to be “vendor neutral,” or able to be used with products produced by the other law enforcement technology vendors.  We believe that we are the only law enforcement software network provider to have full data collection and real-time data sharing, directly in the patrol car, and available to all subscribing agencies at the point of incident via a laptop computer, notebook, or handheld devices.  Our network is not designed or intended to replace existing technology being used by our potential agency customers, but is intended to enhance that technology.
 
There are an estimated 2,100 vendors providing records management, jail management, court management, and computer aided dispatch technology systems.  These vendors are not our competitors inasmuch as our objective is not to disintermediate them from their customers – rather our objective and business model is to provide the connectivity that connects their law enforcement agency customers to other law enforcement agencies.  Nevertheless, we have to convince these vendors that the COPsync network is not designed to compete with their products and we have no intention of doing so.
 
 
 
3

 
 
Intellectual Property
 
We rely, and intend to rely, on a combination of trademark, trade secret, copyright law and contractual restrictions to protect the proprietary aspects of our product.  We have filed applications for certain trademarks relating to our business.  We are involved in a dispute with another company over the ownership of the “COPsync” trademark. The dispute has not resulted in any legal proceedings between the companies. We have filed one patent application covering certain aspects of the COPsync service.
 
Employees
 
We had 21 full-time employees as of March 15, 2011, a substantial majority of whom are non-management personnel.  We had one part time employee.  None of our employees are represented by a labor union.  We have not experienced any work stoppages, and we believe that we have satisfactory employee relations.

Government Regulation
 
Our business is subject to regulation by various federal and state governmental agencies.  Such regulation includes the anti-trust regulatory activities of the U.S. Federal Trade Commission and Department of Justice, the consumer protection laws of the Federal Trade Commission, the product safety regulatory activities of the U.S. Consumer Products Safety Commission and environmental regulation by a variety of regulatory authorities in each of the areas in which we conduct business.  In addition, our customers and potential customers are all governmental entities.  As a result, their ability to purchase our product could be subject to governmental regulation at the federal state and local levels.
 
 
There are numerous risks affecting our business, some of which are beyond our control.  An investment in our common stock involves a high degree of risk and may not be appropriate for investors who cannot afford to lose their entire investment.  If any of the following risks actually occur, our business, financial condition or operating results could be materially harmed. This could cause the trading price of our common stock to decline, and you may lose all or part of your investment.  In addition to the risks outlined below, risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations.  Potential risks and uncertainties that could affect our operating results and financial condition include, without limitation, the following:
 
RISK FACTORS RELATING TO OUR OPERATIONS
 
We cannot predict our future results because we have a limited operating history.
We were incorporated in October 2006.  Our predecessor was formed in January 2005.  We only began realizing revenues from operations in the fourth quarter of 2008.  Given our limited operating history, it will be difficult for you to evaluate our performance or prospects.  You should consider the uncertainties that we may encounter as an early stage company. These uncertainties include:
 
 
our ability to market and sell our COPsync service for a profit;
 
 
our ability to recruit and retain skilled personnel; and
 
 
our evolving business model
 
If we are not able to address successfully some or all of these uncertainties, we may not be able to expand our business, compete effectively or achieve profitability.
 
 
 
4

 
 
If we are unable to develop and generate additional demand for our service, we will likely suffer serious harm to our business.
 
We have invested significant resources in developing and marketing our service.  The demand for, and market acceptance of, service is subject to a high level of uncertainty.  Adoption of new software solutions, particularly by those individuals and enterprises, such as law enforcement agencies, which have historically relied upon traditional means of communication, requires a broad acceptance of substantially different methods of conducting business and collecting and sharing information.  Our service is often considered complex and often involve a new approach to the conduct of business by our customers.  As a result, intensive marketing and sales efforts may be necessary to educate prospective customers regarding the uses and benefits of our service in order to generate additional demand.  The market for our service may weaken, competitors may develop superior offerings or we may fail to develop acceptable solutions to address new market conditions.  Any one of these events could have a material adverse effect on our business, results of operations, cash flow and financial condition.

We rely predominantly on sales to governmental entities, and the loss of a significant number of our contracts would have a material adverse effect on our business, results of operations and cash flows.
 
Our sales are predominantly derived from contracts with agencies of local governments.  Our sales, and results of operations, may be adversely affected by the curtailment of these governmental agencies’ use of technology, including curtailment due to governmental budget reductions.  Governmental budgets could be negatively affected by several factors, including events we cannot foresee, local budget deficits, U.S. government budget deficits resulting in the curtailment of federal grant programs that would cover the purchase of our offerings, current or future economic conditions, a change in spending priorities, and other related exigencies and contingencies.  A significant decline in or redirection of local law enforcement expenditures in the future could result in a decrease to our sales, earnings and cash flows. The loss or significant reduction in U.S. government funding of a large grant program from which we benefit could also result in a decrease in our future sales, earnings and cash flows.

Undetected errors or failures in our software could result in loss or delay in the market acceptance for our products or lost sales.
 
Because our software service and the environments in which it operates are complex, our software may contain errors that can be detected at any point in its lifecycle.  While we continually test our products for errors, errors in our products may be found in the future even after our service has been commercially introduced.  Detection of any significant errors may result in, among other things, loss of, or delay in, market acceptance and sales of our service, diversion of development resources, injury to our reputation, increased service and warranty costs, license terminations or renegotiations or costly litigation. Additionally, because our service supports or relies on other systems and applications, any software errors or bugs in these systems or applications may result in errors in the performance of our service, and it may be difficult or impossible to determine where the error resides.
 
We may not be competitive, and increased competition could seriously harm our business.
 
Relative to us, some of our perceived competitors or potential competitors may have one or more of the following advantages:

 
 
longer operating histories;
 
 
greater financial, technical, marketing, sales and other resources;
 
 
positive cash flows from operations;
 
 
greater name recognition;
 
 
a broader range of products to offer; and
 
 
a larger installed base of customers
 
Current and potential competitors may establish cooperative relationships among themselves or with third parties to enhance their offerings, which may result in increased competition.  As a result of these and other factors, we may be unable to compete successfully with our existing or new competitors.
 
 
5

 
 
Marketing to most of our target customers involves long sales and implementation cycles, which may cause revenues and operating results to vary significantly.
 
We market our service primarily to local government agencies.  A prospective customer’s decision to purchase our service will often involve a significant commitment of its resources and a lengthy evaluation and product qualification process.  Throughout the sales cycle, we anticipate often spending considerable time educating and providing information to prospective customers regarding the use and benefits of our service.  Budget constraints and the need for multiple approvals within these organizations may also delay the purchase decision.  Failure to obtain the timely required approval for a particular project or purchase decision may delay the purchase of our service.  As a result, we expect that the sales cycle for our service typically will be 180 to 365 days, depending on the availability of funding to the prospective customer.  These long cycles may cause delays in any potential sale, and we may spend a large amount of time and resources on prospective customers who decide not to purchase our service, which could materially and adversely affect our business.
 
Additionally, our service is designed for the law enforcement community, which requires us to maintain a sales force that understands the needs of this profession, engage in extensive negotiations and provide high level support to complete sales.  We have limited experience selling into this market.  If we do not successfully market our service to these targeted customers, our operating results will be below our expectations and the expectations of investors and market analysts, which would likely cause the price of our common stock to decline.

We have experienced losses since our founding.  A failure to obtain profitability and achieve consistent positive cash flows would have a significant adverse effect on our business.

We have incurred operating losses since our inception, including a net loss of $2,890,773 for our fiscal year ended December 31, 2010, and we expect to continue to incur losses for the foreseeable future.  As of December 31, 2010, we had an accumulated deficit of $7,785,265, cash and cash equivalents of $240,000, a working capital deficit of $1,404,310 and a stockholders’ equity deficit of $12,722.  To date, we have funded our operations principally through the sale of our capital stock and debt instruments, as well as contributions of capital to our predecessor.  We anticipate that our operating expenses will increase substantially in the foreseeable future as we increase our sales and marketing activities and continue to develop our technology and service.  We will need to generate significant revenues to achieve profitability, and we cannot assure you that we will ever realize revenues at such levels.  We also expect to incur product development, sales and marketing and administrative expenses significantly in excess of our revenues after costs and, as a result, we expect to continue to incur losses for the foreseeable future.  If we do achieve profitability in any period, we may not be able to sustain or increase our profitability on a quarterly or annual basis.

We may continue to require additional capital to fully implement our business plan.  If we do not obtain sufficient capital, our independent accountants could have doubt about our ability to continue as a going concern, and could include such an explanatory going concern qualification in future reports.  Such a going concern qualification could adversely impact our future financing activities and our ability to sell our products, and there are no assurances that we will have sufficient funds to execute our intended business plan or generate positive operational results.
 
 
 
6

 
 
We are likely to require additional financing to support our operations. Such financing may only be available on disadvantageous terms, or may not be available at all.  Any new financing could have a substantial dilutive effect on our existing stockholders.

At December 31, 2010, we had cash and cash equivalents of $240,000 and a working capital deficiency of $1,404,310.  Our cash position may decline in the future, and we may not be successful in maintaining an adequate level of cash resources.
 
We are likely to be required to seek additional financing in order to support our anticipated operations.  We may not be able to obtain additional financing on satisfactory terms, or at all, and any new financing could have a substantial dilutive effect on our existing stockholders.  If we cannot obtain additional financing, we will not be able to achieve the sales growth that we need to cover our costs, and our results of operations would be negatively affected.

We will not be able to develop or continue our business if we fail to attract and retain key personnel.
 
Our future success depends on our ability to attract, hire, train and retain a number of highly skilled employees and on the service and performance of our senior management and other key personnel.  The loss of the services of our executive officers or other key employees could adversely affect our business.  Competition for qualified personnel possessing the skills necessary to implement our strategy is intense, and we may fail to attract or retain the employees necessary to execute our business model successfully.  Because our common stock is not traded on a recognized national market, we may have a more difficult time in using equity incentives to attract and retain the employees we need.  We do not have “key person” life insurance policies covering any of our employees.
 
Our success will depend to a significant degree upon the continued contributions of our key management, engineering and other personnel, many of whom would be difficult to replace.  In particular, we believe that our future success is highly dependent on Ronald A. Woessner, our chief executive officer, Russell Chaney, our founder and chairman of the board, and Shane Rapp, our founder and president.  If Mr. Woessner, Mr. Chaney, Mr. Rapp or other key members of our management team leaves our employment, our business could fail, and the share price of our common stock would likely decline.  Although we have entered into an employment agreement with each of Mr. Chaney and Mr. Rapp, either of them may voluntarily terminate his services at any time.  We do not currently have an employment agreement with Mr. Woessner.
 
Periods of sustained economic adversity and uncertainty could negatively affect our business, results of operations and financial condition.
 
Demand for our service depends in large part upon the level of capital and maintenance expenditures by many of our customers.  Economic downturns, such as the one beginning in 2008, could cause many of our customers to reduce their levels of capital and maintenance expenditures.  Decreased capital and maintenance spending could have a material adverse effect on the demand for our service and our business, results of operations, cash flow and overall financial condition.
 
 
 
7

 
 
The recent unprecedented disruptions in the financial markets may adversely impact the availability of credit already arranged and the availability and cost of credit in the future, which could result in the delay or cancellation of projects or capital programs on which our business depends.  In addition, the disruptions in the financial markets may have an adverse impact on regional and world economies and credit markets, which could negatively impact the capital and maintenance expenditures of our customers.  These conditions may reduce the willingness or ability of our customers and prospective customers to commit funds to purchase our service, or their ability to pay for our service after purchase.  These conditions could result in bankruptcy or insolvency for customers, which would impact our revenue and cash collections.  These conditions could also result in pricing pressure and less favorable financial terms in our contracts.  We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions in the U.S. and other countries.

Our management has determined that there was a material weakness in our internal control over financial reporting as of December 31, 2009 and, therefore, there is a reasonable possibility that a material misstatement of our annual or interim financial statements were not  prevented or detected on a timely basis.
 
Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act.  As of December 31, 2010, our internal control over financial reporting was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with United State’s generally accepted accounting principles (GAAP), including those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
 
Based upon its evaluation, our management concluded that there was a material weakness in our internal control over financial reporting as of December 31, 2009.  A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the issuer’s annual or interim financial statements will not be prevented or detected on a timely basis.  The material weakness related to the lack of monitoring or review of work performed by our management and lack of segregation of duties.  As of December 31, 2009, in the preparation of audited financial statements, footnotes and financial data all of our financial reporting was carried out by a small group of individuals and we did not have an audit committee to monitor and review the work performed.  The lack of segregation of duties resulted from lack of accounting staff with accounting technical expertise necessary for an effective system of internal control.  As a result, there is a reasonable possibility that a material misstatement of our previous annual or interim financial statements were not prevented or detected on a timely basis.
 
Because we do not have an audit or compensation committee, stockholders must rely on the entire board of directors, only one member of which is independent, to perform these functions.
 
We do not have an audit or compensation committee comprised of independent directors.  All of the functions of the audit committee and the compensation committee are currently performed by the board of directors as a whole.  Only one of our three directors is considered independent.  Thus, there is a potential conflict in that board members who are part of management will participate in discussions concerning management compensation and audit issues that may affect management decisions.
 
 
 
8

 
 
We will incur increased costs and may have difficulty attracting and retaining qualified directors and executive officers as a result of being a public company.
 
As a public company, we will incur significant legal, accounting, reporting and other expenses that our predecessor did not incur as a private company.  We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as related rules implemented by the Securities and Exchange Commission.  We expect these rules and regulations to increase legal and financial compliance costs and to make some activities more time-consuming and costly.  We also expect these new rules and regulations may make it more difficult and more expensive for us to retain our director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs than desired to retain that coverage.  As a result, we may experience difficulty attracting and retaining qualified individuals to serve on our board of directors or as our executive officers.  We cannot predict or estimate the amount of additional costs that we may incur as a result of these requirements or the timing of such costs.

RISK FACTORS RELATING TO OUR COMMON STOCK
 
We have a substantial number of authorized common and preferred shares available for future issuance that could cause dilution of our stockholders’ interest and adversely impact the rights of holders of our common stock.
 
We have a total of 500,000,000 shares of common stock and 1,000,000 shares of preferred stock authorized for issuance.  As of March 24, 2011, we had 334,093,887 shares of common stock and 525,000 shares of preferred stock available for issuance.  We have reserved 16,200,000 shares of our common stock for issuance upon the exercise of outstanding options and warrants, 15,100,000 shares of our common stock for issuance upon conversion of outstanding shares of our preferred stock, 2,500,000 shares of our common stock upon conversion of outstanding convertible notes, 2,000,000 shares of our common stock relating to an outstanding debt settlement agreement and 2,300,000 additional shares available for future grants under our stock incentive plan.  We may seek financing that could result in the issuance of additional shares of our capital stock and/or rights to acquire additional shares of our capital stock.  We may also make acquisitions that result in issuances of additional shares of our capital stock.  Those additional issuances of capital stock would result in a significant reduction of your percentage interest in us.  Furthermore, the book value per share of our common stock may be reduced.  This reduction would occur if the exercise price of any issued warrants, the conversion price of any convertible notes or the conversion ratio of any issued preferred stock is lower than the book value per share of our common stock at the time of such exercise or conversion.
 
The addition of a substantial number of shares of our common stock into the market or by the registration of any of our other securities under the Securities Act may significantly and negatively affect the prevailing market price for our common stock.  The future sales of shares of our common stock issuable upon the exercise of outstanding warrants and options may have a depressive effect on the market price of our common stock, as such warrants and options would be more likely to be exercised at a time when the price of our common stock is greater than the exercise price.
 
We are controlled by our management and other related parties, which effectively inhibits a non-negotiated merger or business combination.
 
As of March 24, 2011, the founders of our predecessor, including Russell Chaney, our chairman of the board, and Shane Rapp, our president, and their affiliates, beneficially owned approximately 49% of the outstanding shares of our common stock.  In addition, RSIV, LLC, an entity controlled by Mr. Chaney and Mr. Rapp, also owns all of the 100,000 outstanding shares of our Series A Preferred Stock, each of which are entitled to 750 votes, a total of 75,000,000 votes (or approximately 34%) on matters on which our stockholders are entitled to vote.  As a result, members of our management controls approximately 63% of the available votes on matters coming before our stockholders, which could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders.  As a result, our management will effectively control the outcome of matters on which our stockholders are entitled to vote, including the election of directors and other significant corporate actions.  Because of their stock ownership and other relationships with us, Mr. Chaney and Mr. Rapp will be in a position to greatly influence the election of our board of directors, and thus control our affairs.  This concentration of voting power in the hands of our management will also effectively inhibit a non-negotiated merger or other business combination.
 
 
 
9

 
 
There may not be an active market for shares of our common stock, which may cause our shares to trade at a discount and may make it difficult for you to sell your shares.
 
Our common stock is quoted on the OTC Markets Group’s OTC Link ™ quotation platform, which is viewed by most investors as a less desirable, and less liquid, marketplace than the NASDAQ automated quotation system and the NYSE and AMEX stock exchanges.  There was no active public market for our common stock prior to July 1, 2008.  Since that date, trading in our common stock has been somewhat limited.  There can be no assurance that an active trading market for our common stock will develop and continue.  As a result, you may find it more difficult to purchase, dispose of and obtain accurate quotations as to the value of our common stock.
 
In addition, since the trading price of our common stock is less than $5.00 per share, trading in our common stock is also subject to the requirements of Rule 15g-9 of the Exchange Act.  Our common stock is also considered a penny stock under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, which defines a penny stock, generally, as any equity security not traded on an exchange or quoted on the Nasdaq SmallCap Market that has a market price of less than $5.00 per share.  Under Rule 15g-9, brokers who recommend our common stock to persons who are not established customers and accredited investors, as defined in the Exchange Act, must satisfy special sales practice requirements, including requirements that they:
 
·  
make an individualized written suitability determination for the purchaser; and
 
·  
receive the purchaser’s written consent prior to the transaction.
 
The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosures in connection with any trades involving a penny stock, including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated with that market.  Such requirements may severely limit the market liquidity of our common stock and the ability of purchasers of our equity securities to sell their securities in the secondary market.  For all of these reasons, an investment in our equity securities may not be attractive to potential investors.
 
Our stock could be subject to volatility.
 
The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including:
 
 
actual or anticipated fluctuations in our quarterly and annual results;
 
 
changes in market valuations of companies in our industry;
 
 
announcements by us or our competitors of new strategies, significant contracts, acquisitions, strategic relationships, joint ventures, capital commitments or other material developments that may affect our prospects;
 
 
shortfalls in our operating results from levels forecasted by securities analysts;
 
 
additions or departures of our key personnel;
 
 
sales of our capital stock in the future;
 
 
liquidity or cash flow constraints; and
 
 
fluctuations in stock market prices and volume, which are particularly common for the securities of highly volatile companies pursuing untested strategies
 
 
 
10

 
 
We may not pay dividends on our common stock in the foreseeable future.
 
We have not paid any dividends on our common stock.  We will pay dividends in the future at the discretion of our board of directors.  We are likely to retain earnings, if any, to fund our operations and to develop and expand our business.
 
 
Not applicable.
 
 
Our principal properties consist of a facility in Canyon Lake, Texas (approximately 3,000 square feet) and a facility in Dallas, Texas (approximately 6,000 square feet).  The Dallas facility will serve as our headquarters location, and our Canyon Lake location will provide principally research and development, customer support and other operational activities.  Both facilities are subject to short-term leases, and we believe our present facilities are adequate for our current needs.
 
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.
 
 
 
 
11

 
 
 
 
Our common stock began being quoted on the Over-the-Counter Bulletin Board under the symbol “COYN” on July 1, 2008.  Beginning in the first quarter of 2011, our common stock began being quoted on the OTC Market Group’s OTC Link quotation platform under the trading symbol “COYN”.
 
Prior to July 1, 2008, our common stock did not trade.  The following table shows the high and low daily closing sale prices per share of our common stock on the Over the Counter Bulletin Board for each quarterly period since our common stock began trading on July 1, 2008 through December 31, 2010.
 
   
Price Range
 
Quarter Ending
 
High
   
Low
 
September 30, 2008
  $ 1.35     $ 1.00  
December 31, 2008
    1.20       0.25  
March 31, 2009
    0.60       0.06  
June 30, 2009
    0.76       0.18  
September 30, 2009
    0.51       0.10  
December 31, 2009
    0.14       0.07  
March 31, 2010
    0.10       0.07  
June 30, 2010
    0.14       0.08  
September 30, 2010
    0.10       0.07  
December 31, 2010
    0.12       0.07  

As of March 24, 2011, there were approximately 92 holders of record of our common stock, and the closing price on the OTC Link as of March 24, 2011 was $0.08 per share.
 
We have never declared or paid a dividend on our common stock.  The declaration of all dividends is within the discretion of our board of directors, which will review our dividend policy from time-to-time.  Our board may determine to retain earnings to finance the growth and development of our business.
 
Recent Sales of Unregistered Securities
 
During October 2010, we issued 158,331 shares of our common stock to a former employee for services previously performed, valued at $12,668, or $0.08 per share.  Also in October, 2010, 1,000,000 shares of our common stock were issued to an existing stockholder for cash proceeds received totaling $100,000, or $0.10 per share.  Also in December 2010, 500,000 shares of common stock were issued to a single investor for cash proceeds received totaling $50,000, or $0.10 per share.  In December 2010, in connection with the November 3, 2010, settlement of arbitration proceedings with Rocket City Enterprises, Inc., we issued Rocket City 100,000 shares of our common stock, which are subject to a nine-month sale restriction.
 
These foregoing issuances of the shares of common stock were offered and issued 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 shares of common stock.  We disclosed to the recipients of the stock 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.
 
 
 
12

 
 
 
 
Not Applicable
 
 
The following discussion and analysis should be read in conjunction with the section “Selected Financial Data” and the financial statements and related notes included elsewhere in this report.
 
The information contained below may be subject to risk factors.  We urge you to review carefully the section “Risk Factors” above under Item 1A for a more complete discussion of the risks associated with an investment in our securities.  See “Special Note on Forward-Looking Statements and Risk Factors” above under Item 1.
 
Executive Overview
 
We sell the COPsync service, which is a real-time data collection and information sharing 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 incidents and document accidents.  The service saves lives, reduces unsolved crimes and assists in apprehending criminals through such features as a nationwide officer safety alert system, GPS/auto vehicle location and distance-based alerts for crimes in progress, such as child abductions, bank robberies and police pursuits.  We have designed our system to be “vendor neutral,” meaning it can be used with products and services offered by other law enforcement technology vendors. Additionally, our system architecture is designed to scale nationwide and globally.
 
Critical Accounting Policies and Estimates
 
For information regarding our critical accounting policies and estimates, see Note 2 to our financial statements.
 
Results of Continuing Operations for the Years Ended December 31, 2010 and 2009
 
Revenues
 
Revenues for year ended December 31, 2010 were $2,409,287, including $2,029,973 in hardware, installation and other revenues and $379,314 in service fee revenues, compared to $278,018 for year ended December 31, 2009, $181,695 of which was hardware, installation and other revenues and $96,323 of which was service fee revenues.  The increase in revenue in both categories was due to increasing sales after the release of our service in the fourth quarter of 2008.  We began selling and installing computer hardware in conjunction with the COPsync service in the first quarter of 2009 as a result of customer demand.
 
 
 
13

 
 
Our total revenues may fluctuate up or down when compared to other reporting periods depending upon the presence or absence of hardware, installation and other revenues contained in new contracts. During 2010, we have enjoyed continued revenue increases because revenue from both hardware, installation and other revenues as well as service fees increased.  We expect our service fee revenues to continue to grow in future periods because of the nature of our subscription-based service, which results in increasing revenues as we add new officers to the COPsync network, while maintaining a high renewal rate of existing officers.  We began experiencing revenues from customer renewals in the fourth quarter of 2010.
 
With regards to future hardware, installation and other revenues, we expect to experience a decrease in these revenues in the first half of 2011 because our backlog of uninstalled contracts at December 31, 2010 was low.  We are focused on rebuilding our backlog of new customer contracts.
 
Cost of Revenue  
 
For the year ended December 31, 2010, our cost of revenues was $2,149,297, resulting in a gross profit of $259,990, compared to cost of revenues of $695,757 for the year ended December 31, 2009, resulting in a gross loss of $417,739.  The increase in cost of revenues in 2010 was primarily due to an increase in hardware and other costs of $1,432,481.  
 
As stated above, our total cost of revenues have the potential to fluctuate with sales because of the variable cost nature of hardware, installation and other revenues contained in future contracts.  Inasmuch as we expect our revenues in early 2011 to decrease, we expect our total cost of revenues to decrease accordingly.  Our cost of revenues consists of a variable component which is typically the cost of the hardware being sold and installation services (most of which have been outsourced to third party service providers).  Our customer support group performs selling, customer support, procurement and other administrative duties.   Currently, the costs for the customer support group are reported in operating expenses.
 
Operating Expenses  
 
For the years ended December 31, 2010 and 2009, our total operating expenses were $2,847,692 and $1,778,216, respectively.  This $1,069,476 increase was due primarily to the following: increased salaries and wages of $563,000, increased professional fees of $375,000 and other general and administrative expenses totaling $127,000.  Salaries and wages increased primarily due to the hiring of additional sales and executive staff and a difference in the amount of software development costs we capitalized between periods.  Increases in professional fees included accounting services, legal fees, fees to an advisory firm and consulting fees, as well as a one-time, non-cash grant to another advisory firm of warrants to purchase 1,500,000 shares of our common stock, valued at approximately $131,000.  Looking forward, we anticipate expenses for accounting services, legal fees and fees to advisory firms to decrease significantly - partly as a result of bringing more of these capabilities in house.  Other general and administrative expenses increased primarily due to insurance for $55,000, travel and entertainment expenses for $44,000 and utilities and telephones of $14,000.
 
Other Income (Expense)
 
For the year ended December 31, 2010, other expense was $303,071, as compared to other expense of $388,162 in the same period in 2009.  Other expense for 2010 consists primarily of a $580,000 impairment charge for capitalized development software (see Note 2 to our financial statements), partially offset by a gain of $392,914 on a debt settlement, which was recognized in connection with an agreed discharge of $472,000 in principal and $80,914 in accrued interest for a convertible debt in connection with a settlement agreement relating to then pending litigation, offset by accrued settlement costs of $220,000 for 2,000,000 shares of common stock to be issued in connection with that settlement, and a second gain on debt settlement in the amount of $60,000 and relating to the Rocket City arbitration (see Note 9 to our financial statements).  Other income and expense items for 2010 included interest income on cash and cash equivalents of $5,773, an induced conversion expense of $4,346, which we recorded upon the conversion of a convertible note at a conversion price less than that stated in the note, interest expense of $68,060 and a $50,000 impairment loss on a previous $50,000 investment.  Other expense for 2009 consisted primarily of interest expense of $284,281 and an induced conversion expense relating to the agreed conversion of several convertible promissory notes at a price per share below their stated conversion price totaling $106,692, which was offset by a slight increase in interest income.
 
 
 
14

 
 
Liquidity and Capital Resources
 
Since our formation, we have funded our operations primarily through the sale of equity and debt securities.  As of December 31, 2010, we had $204,154 in cash and cash equivalents, compared to $1,141,534 as of December 31, 2009.  The decrease during the twelve months ended December 31, 2010 was due primarily to $1,055,582 in cash used in operating activities, primarily as the result of our net loss during that period, and $177,314  used in investing activities, primarily due to $158,142  in software development costs and purchases of equipment, which was offset by $331,516  provided by financing activities, including $50,000 in proceeds received from the issuance of shares of our Series B Preferred Stock, $250,001 in proceeds from the issuance of our common stock and warrants, and a $50,000 deposit for a future investment in equity securities, partially offset by $18,485 in payments on notes payable.  On December 31, 2010, we had a working capital deficiency of $1,404,310  compared to a surplus of $12,411 on December 31, 2009.  The working capital deficiency was due primarily to a decrease of $901,380 in cash and cash equivalents, and increases of $220,000 in accrued settlement costs, of $878,753 in deferred revenues, accounts payable and accrued expenses, which was partially offset by a $328,681 decrease in notes payable and convertible notes payable and a $139,617 increase in accounts receivable and prepaid expenses.
 
Plan of Operation
 
At December 31, 2010, we had cash and cash equivalents on hand of $240,154 and had a working capital deficiency of $1,404,310.  Approximately $347,000 of the deficiency represents increases in liabilities which we believe will be resolved through non-cash means, such as accrued settlement costs of $220,000 and preferred stock dividends payable of $127,000.
 
We received approximately $552,000 in cash receipts from operations in the first three months of 2011.  For the last nine months of 2011, we anticipate approximately $3.2 million in cash receipts from operations.  Those anticipated receipts approximate our estimated cash outflows for the same time period and, therefore, we expect to end 2011 with a positive cash position.  Additionally, we expect a period of negative cash flow activity beginning in late first quarter of 2011 and extending through the middle of the third quarter of 2011, totaling approximately $900,000.  These expected negative cash flows are primarily a result of our backlog having been diminished as of December 31, 2010.  As of April 13, 2011, we had  approximate cash-related resources of  $352,000 in cash and cash equivalents, $387,000 in accounts receivable and commitments from investors to invest approximately an additional $405,000 in our equity securities.
 
Our management initiated a plan in early 2011 to ensure that we have adequate cash and liquidity in 2011 and thereafter, as described below:
 
·  
Rebuilding Backlog:  We have revamped our sales team and instituted sales management processes to rebuild the sales backlog and secure customers orders.  Our progress to date can be summarized as follows at March 23, 2011:
 
o  
We had generated a backlog of new, executed, not-performed contracts totaling approximately $600,000, and
 
 
 
15

 
 
o  
We had generated a quote log of formal quotes submitted to prospective customers after substantive discussions with the prospective customer and the Company.  The revenue related value of these business opportunities is approximately $9,167,000.  We do not know with certainty when these quotes will become executed contracts, or if they ever will; however, our management and the sales staff focuses on them weekly with emphasis on working with the prospective customers to identify and resolve roadblocks that would prevent the deal from closing.  We believe, based on previous experience, that the quote log will yield executed contracts that will generate approximately $2,000,000 in cash receipts by December 31, 2011.
 
o  
Capital Funding.  As of April 13, 2011, we had obtained written subscriptions for new capital approximating $1,220,000.  The investment options were an equity transaction, or a convertible note, in each case as described below.  The split between those investors subscribing for the equity transaction and a convertible note is $618,000 and $602,000, respectively.  Cash proceeds from both investment options of approximately $815,000 had been collected as of April 13, 2011.
 
o  
The terms of the equity transaction are as follows:  An equity unit shall consist of five shares of our common stock and a warrant to acquire one share of our common stock for a purchase price of $0.50 per unit, ($0.10 per share of common stock). The exercise price of the warrants is $0.20 per share of common stock and the warrants expire March 31, 2015.
 
o  
The terms of the convertible notes are as follows:  The notes are due and payable on March 31, 2014.  The notes bear annual simple interest of three percent.  The first interest payment shall be due on January 2, 2012 and interest shall be paid quarterly thereafter.  The notes may be converted at the holder’s option into share of our common stock at a conversation rate of $0.10 per share.
 
·  
Other initiatives:
 
o  
In 2011, we anticipate receiving cash totaling $165,000 in licensing fees from two existing OEM distributors.  These agreements relate to our efforts to create a network of OEM distributors to the law enforcement industry. This effort is part of our corporate strategy to expand our geographical footprint throughout the United States.  For the two particular OEM distributors, we will issue to the distributor shares of our common stock valued at the time the payment is made.  These shares of common stock are subject to transfer restrictions, and may not be sold, licensed, hypothecated or otherwise transferred by the distributor until the tenth anniversary of the issuance date, provided that these transfer restrictions lapse pro-rata and quarterly over ten years and the share transfer restrictions lapse entirely if the distributor achieves certain sale milestones.
 
We believe that the initiatives outlined above provide us with the means of having adequate cash for operations and growth throughout at least the end of 2011.  If we fail to perform for whatever reason on any one of the initiatives discussed above, our management will review our options for creating new sources of cash or reducing expenses.
 
Off-Balance Sheet Arrangements
 
As of December 31, 2010, we had no off-balance sheet arrangements.
 
 
16

 
 
Contractual Obligations
 
The following table summarizes our obligations to make future payments pursuant to certain contracts or arrangements as of December 31, 2010, as well as an estimate of the timing in which these obligations are expected to be satisfied:
 
 
    Payments Due by Period  
    Total     2011       2012-2013       2014-2015     After 2015  
 Contractual Obligations                                  
 Long-Term Debt Obligations   $ 114,045     $ 49,620     $ 42,439     $ 21,986     $ -  
 Capital Lease Obligations   $ -     $ -     $ -     $ -     $ -  
 Operating Lease Obligations   $ 161,025     $ 56,183     $ 104,842     $ -     $ -  
 Purchase Obligations   $ -     $ -     $ -     $ -     $ -  
 Other Long-Term Liabilities   $ 130,000     $ 100,000     $ 30,000     $ -     $ -  
        Total Contractual   $ 405,070     $ 205,803     $ 177,281     $ 21,986     $ -  
 

Recently Issued Accounting Standards

For information regarding our critical accounting policies and estimates, see Note 2 to our financial statements.
 
 
We do not use derivative financial instruments to hedge interest rate and foreign currency exposure.  We do not believe that we have any material exposure to interest rate risk.  We did not experience a material impact from interest rate risk during fiscal 2010.
 
Currently, we do not have any significant investments in financial instruments for trading or other speculative purposes, or to manage our interest rate exposure.
 
 
The financial statements and supplementary data required by this item are set forth in Item 15(a) and begin at page F-1 of this report.
 
 
None.
 
Effectiveness of Disclosure Controls and Procedure
 
 In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K, management evaluated, with the participation of our principal executive officer and principal accounting officer, the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on their evaluation of these disclosure controls and procedures, they have concluded that our disclosure controls and procedures were effective as of the date of such evaluation.
 
 
 
17

 
 
Certifications of our principal executive officer and our principal accounting officer, which are required in accordance with Rule 13a-14 of the Exchange Act, are attached as exhibits to this Annual Report. This "Controls and Procedures" section includes the information concerning controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.
 
Management's Annual Report on Internal Control Over Financial Reporting
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in "Internal Control—Integrated Framework".  Based on this assessment, our management concluded that, as of December 31, 2010, our internal control over financial reporting was effective based on those criteria.
 
Changes in Internal Controls over Financial Reporting
 
During the three months ended December 31, 2010, there were several changes in our internal control over financial reporting that materially affected, or was reasonably likely to materially affect, our internal control over financial reporting.  Those changes included our hiring a chief financial officer, who possesses the financial background necessary to improve our internal controls and work with our new chief executive officer, who also has experience as the chief legal officer of a publicly-traded reporting company.  Additionally, we made some initial process changes to facilitate segregation of duties and secondary reviews for certain business transactions.  Previously, virtually all of our financial reporting was carried out internally solely by our chief executive officer, who was also serving as our chief financial officer, who did not have a financial background.

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.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Our management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.

 
None.
 
 
 
18

 
 
To be included in an amendment to this annual report on Form 10-K filed not later than 120 days after the end of the registrant’s fiscal year.
 
To be included in an amendment to this annual report on Form 10-K filed not later than 120 days after the end of the registrant’s fiscal year.
 
 
To be included in an amendment to this annual report on Form 10-K filed not later than 120 days after the end of the registrant’s fiscal year.
 
To be included in an amendment to this annual report on Form 10-K filed not later than 120 days after the end of the registrant’s fiscal year.
 
 
To be included in an amendment to this annual report on Form 10-K filed not later than 120 days after the end of the registrant’s fiscal year.
 
 
 
 
(a)           The following documents are filed as part of this Report:
 
(1)           Financial Statements:
 
Page
   
Report of Independent Registered Public Accounting Firm                                                                                                             
F–2
   
F-3
   
F-5
   
F-6
   
F-9
   
F-11
   
 
 
 
19

 
(2)            Management Contract or Compensatory Plan:
 
See Index to Exhibits.  Each of the following Exhibits described on the Index to Exhibits is a management contract or compensatory plan: Exhibits 10.4 through 10.8.
 
(b)           Exhibits:
 
See Index to Exhibits.
 
(c)           Schedules:
 
See financial statements and the accompanying notes.
 

 
20

 

 
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: April 15, 2011
By:
/s/ Ronald A. Woessner  
    Ronald A. Woessner  
    Chief Executive Officer  
       
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
 
         
         
 /s/  RONALD A. WOESSNER  Chief Executive Officer  April 15, 2011  
   Ronald A. Woessner  (Principal Executive Officer)    
         
 /s/  BARRY W. WILSON  Chief Financial Officer  April 15, 2011  
   Barry W. Wilson  (Principal Financial Officer)    
         
 /s/  RUSSELL CHANEY  Chairman and Director  April 15, 2011  
   Russell Chaney      
         
 /s/  SHANE RAPP  President and Director  April 15, 2011  
   Shane Rapp      
         
 
 
 
 
 
 

 

 
21

 

 
Exhibit Number
 
Description
     
2.1
 
Share Exchange Agreement dated April 25, 2008 by and between Global Advance Corp. and PostInk Technology LP. (Incorporated herein by reference to registrant’s Current Report on Form 8-K filed with the Commission on May 1, 2008).
     
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.
     
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*
 
Consent of Morrill & Associates, LLC
 
 
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
 
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
 
 
Section 1350 Certifications.
___________________
 
*
Filed herewith.
 

 
22

 
 
 

 
   C O N T E N T S  
     
 Report of Independent Registered Public Accounting Firm    F-2
     
 Balance Sheets     F-3
     
 Statements of Operations     F-5
     
 Statements of Stockholders’ Equity    F-6
     
 Statements of Cash Flows     F-9
     
 Notes to the Financial Statements    F-11
 
 
 
 

 
 
 
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 sheets of COPsync, Inc. as of December 31, 2010 and 2009 and the related statement of operations, stockholders' equity and cash flows for the years 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 audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits 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 audits 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 audits provide 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 2009 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.


/s/ Morrill & Associates

Morrill & Associates, LLC
Bountiful, Utah
April 15, 2011
 
 
F-2

 

COPSYNC, INC.
 
 
             
ASSETS
 
             
   
December 31,
 
   
2010
   
2009
 
CURRENT ASSETS
           
             
Cash and cash equivalents (Note 2)
  $ 240,154     $ 1,141,534  
Accounts receivable, net (Note 2)
    148,939       40,371  
Prepaid expenses and other
    46,021       14,972  
                 
Total Current Assets
    435,114       1,196,877  
                 
PROPERTY AND EQUIPMENT (Note 2)
               
                 
Computer hardware
    52,363       52,363  
Computer software
    18,259       18,259  
Fleet vehicles
    156,183       77,209  
Furniture and fixtures
    50,832       45,832  
                 
Total Property and Equipment
    277,637       193,663  
Less: Accumulated Depreciation
    (128,056 )     (98,505 )
                 
Net Property and Equipment
    149,581       95,158  
                 
OTHER ASSETS
               
                 
Software development costs, net (Note 2)
    1,745,896       2,345,375  
Debt issuance costs, net
    4,208       16,708  
Investments (Note 2)
    -       50,000  
Lease security deposit
    -       750  
                 
Total Other Assets
    1,750,104       2,412,833  
                 
TOTAL ASSETS
  $ 2,334,799     $ 3,704,868  
                 

The accompanying notes are an integral part of these financial statements.
 
F-3

 

COPSYNC, INC.
 
Balance Sheets (Continued)
 
             
LIABILITIES AND STOCKHOLDERS' EQUITY
 
             
             
   
December 31,
 
   
2010
   
2009
 
CURRENT LIABILITIES
           
             
Accounts payable and accrued expenses
  $ 590,465     $ 508,772  
Accrued settlement costs (Note 9)
    220,000       -  
Preferred stock dividends payable (Note 5)
    126,576       21,690  
Deferred revenues on hardware, installation, and licensing contracts, current portion, net of deferred costs (Note 2)
    746,513       169,453  
Convertible notes payable, current portion, net of note discount of $-0-, respectively (Note 4)
    6,249       472,000  
Notes payable, current portion (Note 3)
    149,621       12,551  
                 
Total Current Liabilities
    1,839,424       1,184,466  
                 
LONG-TERM LIABILITIES
               
                 
Deferred revenues on hardware, installation, and licensing contracts (Note 2)
    373,951       363,840  
Convertible notes payable,net of note discount of $14,589 and $46,041, respectively (Note 4)
    29,162       13,959  
Notes payable (Note 3)
    104,984       33,732  
                 
Total Long-Term Liabilities
    508,097       411,531  
                 
Total Liabilities
    2,347,521       1,595,997  
                 
COMMITMENTS AND CONTINGENCIES (Note 9)
               
                 
STOCKHOLDERS' EQUITY
               
                 
Series A Preferred stock, par value $0.0001 per share, 100,000 shares authorized; 100,000 shares issued and outstanding, respectively (Note 5)
    10       10  
Series B Preferred stock, par value $0.0001 per share, 400,000 shares authorized; 375,000 and 362,500 shares issued and outstanding, respectively (Note 5)
    37       36  
Common stock, par value $0.0001 per share, 500,000,000 shares authorized; 130,106,113 and 126,086,967 shares issued and outstanding, respectively (Note 5)
    13,011       12,609  
Common stock to be issued, 2,175,000 and 130,885 shares, respectively (Note 5)
    284,000       19,633  
Common stock warrants to be issued, 1,500,000 and zero stock warrants, respectively (Note 5)
    131,961       -  
Deferred stock compensation (Note 5)
    (165,000 )     -  
Additional paid-in-capital
    7,508,524       6,778,430  
Accumulated deficit
    (7,785,265 )     (4,701,847 )
                 
Total Stockholders' Equity
    (12,722 )     2,108,871  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 2,334,799     $ 3,704,868  
 
 
The accompanying notes are an integral part of these financial statements.
 
F-4

 

COPSYNC, INC.
 
 
             
   
For the Years Ended
 
   
December 31,
 
   
2010
   
2009
 
             
REVENUES
           
             
Hardware, installation and other revenues
  $ 2,029,973     $ 181,695  
License fee revenues
    379,314       96,323  
                 
Total Revenues
    2,409,287       278,018  
                 
COST OF REVENUES
               
                 
Hardware and other costs
    1,971,676       539,195  
Amortization of capitalized licensing costs (Note 2)
    177,621       156,562  
                 
Total Cost of Revenues
    2,149,297       695,757  
                 
GROSS PROFIT (LOSS)
    259,990       (417,739 )
                 
OPERATING EXPENSES
               
                 
Depreciation and amortization
    39,084       31,103  
Professional fees
    1,020,157       645,495  
Salaries and wages
    1,377,334       814,169  
Rent (Note 10)
    28,280       31,475  
Other general and administrative
    382,837       255,974  
                 
Total Operating Expenses
    2,847,692       1,778,216  
                 
LOSS BEFORE OTHER INCOME (EXPENSE)
    (2,587,702 )     (2,195,955 )
                 
OTHER INCOME (EXPENSE)
               
                 
Interest income
    5,773       2,811  
Induced conversion expense (Note 5)
    (4,346 )     (106,692 )
Gain on asset disposals
    648       -  
Gain on settlement of debt
    392,914       -  
Impairment on capitalized software
    (580,000 )     -  
Impairment on investment
    (50,000 )     -  
Interest expense
    (68,060 )     (284,281 )
                 
Total Other Income (Expense)
    (303,071 )     (388,162 )
                 
NET LOSS BEFORE INCOME TAXES
    (2,890,773 )     (2,584,117 )
                 
INCOME TAXES (Note 2)
    -       -  
                 
NET LOSS
  $ (2,890,773 )   $ (2,584,117 )
                 
Series B preferred stock dividend
    (104,886 )     (21,690 )
Beneficial conversion feature on Series B preferred
    (87,759 )     (453,224 )
                 
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS
  $ (3,083,418 )   $ (3,059,031 )
                 
LOSS PER COMMON SHARE - BASIC & DILUTED
  $ (0.02 )   $ (0.03 )
                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
    127,911,302       121,494,343  

The accompanying notes are an integral part of these financial statements.
 
F-5

 
COPSYNC, INC
 
 
For the Period January 1, 2009 through December 31, 2010
 
                                                                   
                                             
Common
                   
                                       
Common
   
Stock
                   
                                       
Stock
   
Warrants
   
Deferred
    Additional        
   
Preferred Stock A
   
Preferred Stock B
   
CommonStock
   
To Be
   
To Be
   
Stock
   
Paid-in
   
Accumulated
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Issued
   
Issued
   
Compensation
   
Capital
   
Deficit
 
                                                                   
Balance, January 1, 2009
    100,000     $ 10       -     $ -       120,273,001     $ 12,027     $ -     $ -     $ -     $ 3,527,549     $ (1,642,816 )
                                                                                         
Reclassification for contingent liability (Note 9)
    -       -       -       -       -       -       -       -       -       (200,000 )     -  
                                                                                         
Beneficial conversion feature on convertible notes payable (Note 4)
    -       -       -       -       -       -       -       -       -       260,000       -  
                                                                                         
Valuation of 875,000 warrants granted to two separate advisory firms (Note 6)
    -       -       -       -       -       -       -       -       -       295,858       -  
                                                                                         
Common stock issued for services at $0.58 per share
    -       -       -       -       50,000       5       -       -       -       28,995       -  
                                                                                         
Common stock issued for cash at prices ranging from $0.10 to $0.20 per share
    -       -       -       -       3,963,334       397       19,633       -       -       464,598       -  
                                                                                         
Series B Preferred shares and warrants issued for cash at $4.00 per unit, along with the valuation of warrants granted and beneficial conversion feater on preferred shares issued
    -       -       362,500       36       -       -       -       -       -       1,972,914       -  
                                                                                         
Accretion of beneficial conversion feature on Series B preferred shares to be recognized in a future
    -       -       -       -       -       -       -       -       -       (69,726 )     -  
                                                                                         
Common stock issued in conversion of notes payable at $0.10 per share, including induced conversion expense
    -       -       -       -       2,667,300       267       -       -       -       373,155       -  
                                                                                         
Common stock cancelled
    -       -       -       -       (1,000,000 )     (100 )     -       -       -       100       -  
                                                                                         
Common stock issued in lieu of accrued expenses at $0.30 per share
    -       -       -       -       133,332       13       -       -       -       39,987       -  
                                                                                         
Additional capital contributed through services rendered
    -       -       -       -       -       -       -       -       -       85,000       -  
                                                                                         
Series B Preferred stock  - cumulative dividends
    -       -       -       -       -       -       -       -       -       -       (21,690 )
                                                                                         
Series B Preferred stock - deemed dividends from accretion of Preferred discounts
    -       -       -       -       -       -       -       -       -       -       (453,224 )
                                                                                         
Net loss for the year ended December 31, 2009
    -       -       -       -       -       -       -       -       -       -       (2,584,117 )
                                                                                         
Balance, December 31, 2009
    100,000     $ 10       362,500     $ 36       126,086,967     $ 12,609     $ 19,633     $ -     $ -     $ 6,778,430     $ (4,701,847 )

The accompanying notes are an integral part of these financial statements.
 
F-6

 
COPSYNC, INC
 
Statements of Stockholders' Equity (Continued)
 
For the Period January 1, 2009 through December 31, 2010
 
   
                                             
Common
                   
                                       
Common
   
Stock
                   
                                       
Stock
   
Warrants
   
Deferred
    Additional        
   
Preferred Stock A
   
Preferred Stock B
   
Common Stock
 
To Be
   
To Be
   
Stock
   
Paid-in
   
Accumulated
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Issued
   
Issued
   
Compensation
   
Capital
   
Deficit
 
                                                                   
Balance, December 31, 2009
    100,000     $ 10       362,500     $ 36       126,086,967     $ 12,609     $ 19,633     $ -     $ -     $ 6,778,430     $ (4,701,847 )
                                                                                         
Series B Preferred shares and warrants issued for cash at $4.00 per unit, along with the valuation of warrants granted and beneficial conversion feature on preferred shares issued
    -       -       12,500       1       -       -       -       -       -       68,032       -  
                                                                                         
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       -  
                                                                                         
Common stock issued for cash at $0.10 per share
    -       -       -       -       2,500,000       250       -       -       -       249,750       -  
                                                                                         
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       -  
                                                                                         
Common stock issued pursuant to a settlement agreement at $0.10 per share (Note 9)
    -       -       -       -       100,000       10       -       -       -       9,990       -  
                                                                                         
Additional capital contributed through services rendered
    -       -       -       -       -       -       -       -       -       82,250       -  
                                                                                         
Common stock to be issued per an agreement with an advisory firm at $0.60 per share (Note 9)
    -       -       -       -       -       -       45,000       -       -       -       -  
                                                                                         
Common stock to be issued to the Company's CEO from shares of common stock transferred back to the Company from one of the Company's founders at $0.09 per share (Note 5)
    -       -       -       -       -       -       180,000       -       (165,000 )     -       -  
                                                                                         
Common stock to be issued to a former employee at $0.09 per share (Note 5)
    -       -       -       -       -       -       9,000       -       -       -       -  
                                                                                         
Stock deposits received for common stock to be issued (Note 5)
    -       -       -       -       -       -       50,000       -       -       -       -  
                                                                                         
Valuation of common stock warrants to be issued (Note 9)
    -       -       -       -       -       -       -       131,961       -       -       -  
                                                                                         
Valuation of the vested portion of employee stock options granted during December 2009
    -       -       -       -       -       -       -       -       -       73,854       -  
                                                                                         
Subtotal
    100,000     $ 10       375,000     $ 37       130,106,113     $ 13,011     $ 284,000     $ 131,961     $ (165,000 )   $ 7,426,341     $ (4,701,847 )
                                                                                         

The accompanying notes are an integral part of these financial statements.
 
F-7

 
COPSYNC, INC
 
Statements of Stockholders' Equity (Continued)
 
For the Period January 1, 2009 through December 31, 2010