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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, 2014
 
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.)
 
 
16415 Addison Road, Suite 300
 
 
 Addison, Texas 75001
 
 
 (Address of principal executive offices)
 
     
 
 (972) 865-6192
 
 
 (Registrant’s telephone number, including area code)
 
     
 
 Securities registered pursuant to Section 12(b) of the Act:  None
 
     
 
 Securities registered pursuant to Section 12(g) of the Act:
 
 
 Common Stock, $0.0001 par value
 
 
 (Title of Class)
 
 
Indicate by check whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ¨ Yes  x No
 
Indicate by check whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ¨ Yes  x No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit and post such files).   xYes  o No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
 Large accelerated filer
 o
 
 Accelerated filer
 o
 
             
 
 Non-accelerated filer
 o
 (Do not check if a smaller reporting company)
 Smaller reporting company
 x
 
 
Indicate by check whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ¨ Yes  x No
 
The aggregate market value of the registrant’s common equity held by non-affiliates of the registrant at June 30, 2014, based on the $0.17 per share closing price for the registrant’s common stock on the Markets Group Inc.’s OTCQB Link, was $18,320,449.
 
The number of shares of the registrant’s common stock outstanding as of March 25, 2015 was 202,572,444.

DOCUMENTS INCORPORATED BY REFERENCE
 
Certain information from the definitive Information Statement for the registrant, filed with the Securities and Exchange Commission pursuant to Regulation 14C on March 2, 2015, is incorporated by reference into Part III of this Form 10-K.
 
 
Table of Contents
     
 Page
 PART I
 
3
 
ITEM 1.
3
 
ITEM 1A.
7
 
ITEM 1B.
13
 
ITEM 2.
13
 
ITEM 3.
13
 
ITEM 4.
13
       
 PART II
 
14
 
ITEM 5.
14
 
ITEM 6.
15
 
ITEM 7.
 15
 
ITEM 7A.
23
 
ITEM 8.
23
 
ITEM 9.
23
 
ITEM 9A.
23
 
ITEM 9B.
24
       
 PART III
 
25
 
ITEM 10.
25
 
ITEM 11.
25
 
ITEM 12.
25
 
ITEM 13.
25
 
ITEM 14.
25
       
 PART IV
 
26
 
ITEM 15.
26
   
27
   
28
       
 
 F-1
 
 F-2
 
 F-3
 
 
PART I 
 
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
 
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation 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.
 
ITEM 1.  BUSINESS
 
Overview

COPsync, Inc. operates what we believe to be the largest real-time, law enforcement mobile data information system in the United States.  We refer to this real-time, in-car information sharing, communication and data interoperability network as the “COPsync Network.” The COPsync Network, delivered via software as a service, is designed for the purpose of:

·  
Allowing law enforcement officers to compile and share information, in real-time, via a common database accessible by all such officers on the COPsync Network, regardless of agency jurisdiction;

·  
Allowing officers to query, in real time, various local, state and federal law enforcement databases, including (i) the FBI Criminal Justice Information Service (CJIS) database, (ii) the law enforcement telecommunications system databases for the States of Texas, Mississippi and Massachusetts, (iii) the historical databases of our agency subscribers who have provided us with such access, (iv) the Department of Homeland Security’s El Paso Intelligence Center (EPIC) database, which collects information relating to persons crossing the United States – Mexico border, and (v) our COPsync Network database, and, as we expand the scope of our operations to states others than noted above, we anticipate that we will provide access to the law enforcement telecommunications databases in those states as well, subject to approvals from the applicable governing state agencies;

·  
Allowing dispatchers and officers to send, in real-time, BOLO (be on the lookout) and other alerts of child kidnappings, robberies, car thefts, police pursuits, and other crimes in progress to all officers on the COPsync Network, regardless of agency jurisdiction;

·  
Allowing officers to write tickets, offense reports, crash reports and other reports and electronically and seamlessly send, in real-time or near real-time, the information in those reports to the COPsync database and local court and agency databases;

·  
Informing officers of outstanding Texas Class C misdemeanor warrants, in real-time, at the point of a traffic stop and allowing the officers to collect payment for those warrants using a credit card, through a specific feature enhancement to the COPsync Network that we sometimes referred to as the WARRANTsync system.

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.”  Our COPsync Network provides this interoperability.  Prior to the introduction of the COPsync Network, significant information sharing among law enforcement agencies, regardless of agency jurisdiction, did not exist in the United States.  We believe that this lack of interoperability existed because law enforcement software vendors maintain proprietary systems that are not intended to interface with systems of other vendors.  Our business model is to bring real-time information sharing, communication and data interoperability to as many law enforcement agencies as possible.
 

We also offer the COPsync911 threat alert service for use in schools, hospitals, day care facilities, government office buildings, energy infrastructure and other facilities with a high level of concern about security.  When used in schools, the COPsync911 service enables school personnel to instantly and silently send emergency alerts directly to the closest law enforcement officers in their patrol vehicles, and to the local 911 dispatch center, with the mere click of an icon, from any computer within the facility and from any cell phones and other mobile devices associated with the facility.  The alert is also sent to the cell phones of all law enforcement officers in the area and to all teachers, administrators, and other staff at the school, alerting them of imminent danger.  We expect our COPsync911 service to reduce emergency law enforcement response times in those circumstances when seconds and minutes count.
 
Once the alert is sent, a “crisis communication portal” is established among the person(s) sending the alert, the responding patrol vehicles and the local law enforcement 911 dispatch center.  This allows the person(s) initiating the alert to silently communicate with responding officers and the 911 dispatch center about the nature of the threat, whether it is an active gunman, fire, suspicious person or other emergency.  The crisis communication portal also provides a link to a diagram of the school or other facility and a map to its location. 

We also augment our other services with our own law enforcement in-car video system, named VidTac, described below.

Number of Users and Corporate History

As of December 31, 2014, 629 law enforcement agencies, courts and school districts, primarily in the State of Texas, had contractually subscribed to use our COPsync Network real-time data collection, data sharing, and warrant collection service, and 127 subscribers to COPsync911.  We currently have at least one subscriber using the COPsync Network in 79% of the 254 Texas counties.  
 
To date, our COPsync Network service has successfully submitted, processed and relayed over 11,069,000 officer initiated information requests.  On average, our service is returning responses to our customers in less than five seconds, well within the 32 second average NCIC 2000 standard for mobile clients. 
 
We were incorporated in Delaware in October 2006, and operated with nominal or no assets or operations until 2008.  We acquired the predecessor-in-interest to our business, PostInk Technology, LP, a Texas limited partnership, in April 2008 and began realizing revenues from operations in the fourth quarter of 2008.
 
Business Model
 
We offer the COPsync Network and the COPsync911 threat alert service via a “software as a service” (SaaS) business model, under which our customers subscribe to use the COPsync Network and the COPsync911 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 through a combination of acquiring new subscribers and obtaining renewals from existing subscribers.  Pertinent attributes of our business model include the following:
 
 ●
We have incurred and will continue to incur material research and development costs to continue to build out our infrastructure and add new features and functionality to our offerings.
   
We incurred start-up cost to establish our services and continue to incur recurring fixed costs to maintain our services.
   
We acquire subscribers and bring them onto our services, which requires variable acquisition costs related to sales, installation and deployment.
   
We recruit subscribers with the goal of reaching a level of aggregate subscriber payments that exceeds our fixed (and variable) recurring service costs.
   
We seek to maintain a high renewal rate among existing subscribers.
   
We augment these recurring revenues with product revenues from sales of our VidTac law enforcement in-car video system.

Assuming that we are successful in obtaining new users of our services, as well as retaining high renewal rates of existing subscribers, we anticipate that the recurring nature of our subscription model will result in annually recurring, sustainable and predictable cash flow and revenue growth, year-over-year.  However, there is no assurance that we will be successful in implementing our business model and achieving our operational and financial objectives.
 

Our Products

COPsync Network

As described above, the COPsync Network is a real-time mobile data information system.

Information Sharing Replaces Agency “Information Silos”
 
State and local law enforcement agencies traditionally operate in information “silos.”  Information about criminals and criminal activity known to one law enforcement agency is typically contained only in the database of that agency and is not shared or made known to other agencies, even those that are geographically proximate.  The only exceptions to these information silos are the FBI National Crime Information Center (NCIC) and each state’s law enforcement telecommunications system (LETS).  However, we believe that these available databases have limited value because they only provide adjudicated information, such as certain warrant issuances, convictions or prison sentences.  These databases do not provide non-adjudicated information, such as whether the person has made a threat against law enforcement, is a known gang member, has been questioned for suspicious activity, or is known to carry a weapon.  Moreover, the NCIC and the LETS information is typically provided only by radio from the local dispatch office for those agencies that do not have in-vehicle computers.
 
With our COPsync Network, patrol officers have in-car, real-time, access to the adjudicated NCIC and LETS data, the EPIC data, and also have access to non-adjudicated data from other agencies and officers using the COPsync Network, regardless of the type of computer infrastructure used by the other agencies.  We believe that we are the only provider in the United States whose primary business objective is to connect law enforcement agencies for this purpose.
 
Real-Time Communication Replacing Virtually No Communication Between Agencies
 
Today, patrol officers typically cannot communicate in real-time with officers from other agencies because their radios are not interoperable.  Thus, officers have no ability to advise other agencies in real-time of “officer needs assistance” situations, “be on the lookout” notifications (BOLOs), child abductions, robberies or other crimes in progress.
 
Using our COPsync Network, agencies and officers can communicate with each other in real time through instant messaging (computer to computer) or SMS (computer to cell phone).  This ability enables virtually instantaneous communication of information to an individual officer, an agency, a county, a state or even the entire country – assuming the recipient is using the COPsync Network.
 
Electronic Tools Replacing Pen and Paper
 
Much of the work (e.g., traffic citations, arrests, suspicious activity reports, crash reports and DUIs) of a typical patrol officer has historically been done with pen and paper.  Our COPsync Network provides 21st century electronic tools designed to replace pen and paper.  These electronic tools are designed to enable patrol officers to be more efficient.  For example, the average DUI arrest in the State of Texas takes between 3.5 and 4.0 hours to process, in part because of the many required handwritten forms involved.  Using the COPsync Network, an officer can complete the paperwork for a DUI arrest in a fraction of the time.  Routine traffic stops can also be completed much quicker, and the tickets can be seamlessly and electronically sent to the court records management system for processing using the COPsync Network.

COPsync911 Threat Alert Service

As described above, the COPsync911 threat alert service enables persons to instantly and silently send emergency alerts directly to the closest law enforcement officers in their patrol vehicles and the local 911 dispatch center with the mere click of an icon.  Features of the COPsync911 threat alert service include:

·  
Persons can send emergency alerts directly to the closest law enforcement officers’ computers and cell phones while simultaneously alerting the 911 law enforcement dispatch center.
 
·  
Text alerts are simultaneously sent to others within the targeted location and all officers in the area that subscribe to the COPsync Network.
 
·  
Once triggered, a crisis communication portal is established among the person sending the alert, the local 911 dispatch center and the responding officers – all in about two seconds.
 
·  
This crisis communication portal enables all parties to communicate directly, in real-time, as the officers are in route to the scene.
 
·  
Subsequent alerts sent from the scene by others are automatically added to the initial crisis communication portal, thus providing law enforcement responders real-time situational awareness information.
 
·  
Responding officers are able to view a diagram of the school or other facility and a map of its physical location through the crisis communication portal.
 

VidTac In-Vehicle Video System

Software Driven, Digital In-car Video System

We believe that our VidTac in-vehicle video system is the world’s only 100% digital, high performance, software-driven video system designed for law enforcement.  Typical in-vehicle video systems are “hardware centric” DVR-based systems.  The video capture, compression and encryption of the video stream is all performed by the DVR.  High-end digital DVR-based systems are expensive, with an estimated price in excess of $5,000 per system.  These DVR-based video systems are typically replaced, at the same expensive price point every three to four years as new patrol vehicles are placed into service.

We believe that our VidTac system is price advantageous vis-a-vis other high-end video systems, since we are offering the VidTac system at a much lower price than the average price of the DVR-based video systems.   Moreover, since our system is software based, most maintenance fixes and updates can be automatically and seamlessly “pushed” to the users, thus avoiding the need for an on-site maintenance visit in many cases.
 
Sales and Marketing

We sell our products and services through direct sales efforts and indirectly through distributors and resellers.  Virtually all of our sales to-date have been derived from our direct sales efforts.  However, we continue our efforts to establish a network of indirect sales channels.  We have several distributors and resellers for the COPsync Network and COPsync911 threat alert service and a number of resellers for the VidTac system.  We are working with these indirect sales channels to establish processes and systems and otherwise enable them to become a more effective sales channel for our product offerings.

Research and Development
 
We have devoted a substantial amount of our resources to software and hardware development activities in recent years.  Total research and development expenses for the years ended December 31, 2014 and 2013 were $1,952,786 and $2,157,597, respectively.  The expenses incurred in 2014 were principally devoted to the continued development and refinement of our COPsync911 threat alert service and our VidTac system, and development efforts to enhance the scalability of our COPsync Network and COPsync911 service offerings.  The expenses incurred in 2013 were principally driven by the development of our COPsync911 threat alert service, which was launched in the second quarter of 2013.

Our cumulative gross capitalized software development costs at December 31, 2014 were $2,724,082.  The cumulative capitalized software development costs, net of amortization costs, at December 31, 2014 and December 31, 2013 were zero and $436,471, respectively.  We incurred no capitalized software development costs in the years ended December 31, 2014 and 2013.
 
Competition

We believe that there is no direct competition to our COPsync Network.  We believe that we provide the only law enforcement network that provides real-time access to both adjudicated and non-adjudicated law enforcement databases, plus real-time data sharing and communication across agency jurisdictional boundaries, directly to the patrol car and to all subscribing agencies at the point of incident.  We have designed our system to be “vendor neutral,” meaning it is designed to be used in conjunction with systems of other law enforcement technology vendors.  

We estimate that there are 2,100 vendors providing records management, jail management, court management, and computer aided dispatch technology systems to law enforcement agencies.  We do not view these vendors as our competitors, since our objective is not to interfere with their relationship with their customers or replace them.  Our objective and business model is to provide their customers with the connectivity to connect to other law enforcement agencies.  We aspire to be the one vendor connecting all law enforcement agencies, regardless of vendor.

There are a number of competitors to our COPsync911 threat alert service, including merely calling “911,” panic buttons, and alarm monitoring services.  We do not believe any of these competitors offer the features and functionality provided by the COPsync911 service.

There are many in-vehicle law enforcement video system vendors, including Coban, Digital Ally, MobileVision, Motorola, and Watchguard Video, whose products compete with our VidTac product offering.  We believe that we will be able to capture a reasonable share of the law enforcement in-vehicle video market with our VidTac product due to the following attributes, among others:

·  
Our VidTac system possesses features and functionality that other existing video systems do not possess.  
 
 
·  
We are offering our VidTac system at a much lower price than the average price of the competing DVR-based video systems.  
 
·  
Since our system is software based, most maintenance fixes and updates can be automatically and seamlessly “pushed” to the users, thus avoiding the need for the delay and inconvenience of on-site maintenance or the return of the system for repair.

Intellectual Property
 
We rely, and intend to continue to rely, on a combination of trademark, trade secret, copyright law and contractual restrictions to protect the proprietary aspects of our services and products.  We have filed applications for certain trademarks relating to our business.  We have filed several patent applications covering certain aspects of our COPsync Network service, our VidTac product, and the COPsync911 threat alert service.
 
Employees
 
We had 34 full-time employees as of March 15, 2015, a substantial majority of whom are non-management personnel.  None of our employees are represented by a labor union.  We have not experienced any work stoppages and 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 Federal Trade Commission, the Department of Justice (CJIS Division), 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.  With regards to the compliance of environmental regulations, our cost of such compliance is minimal.  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. 
 
ITEM 1A.  RISK FACTORS

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.

Our predecessor, which began our business, was formed in January 2005.  We began realizing revenues from operations in the fourth quarter of 2008.  Given our limited operating history, it may be difficult for you to evaluate our performance or prospects.  You should consider the uncertainties that we may encounter as a company that should still be considered an early stage company.  These uncertainties include:
 
 
our ability to market and sell our COPsync Network and other products 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.
 
 
If we are unable to develop and generate additional demand for our services or products, we will likely suffer serious harm to our business.
 
We have invested significant resources in developing and marketing our services and products.  The demand for, and market acceptance of, our services and products is subject to a high level of uncertainty.  Adoption of new software and hardware solutions, particularly by law enforcement agencies, which have historically relied upon more traditional means of communication, requires a broad acceptance of substantially different methods of conducting business and collecting and sharing information.  Our services and products are 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 services and products in order to generate additional demand.  The market for our services and products 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 available to purchase our software service and products could be negatively affected by several factors, including events we cannot foresee, local government budget shortfalls, federal and state government budget limitations resulting in the curtailment of grant programs that would otherwise cover the purchase of our services, 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.
 
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 services and products, and the environments in which they operate, are complex, our software and products may contain errors that can be detected at any point in its lifecycle.  While we continually test our services and products for errors, errors may be found at any time in the future.  Detection of any significant errors may result in, among other things, loss of, or delay in, market acceptance and sales of our services and products, diversion of development resources, injury to our reputation, increased service and warranty costs, license terminations or renegotiations or costly litigation.  Additionally, because our services and products supports or relies on other systems and applications, any software or hardware errors or bugs in these systems or applications may result in errors in the performance of our service or products, 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 current 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 that are competitive with our products and service, 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.
 
  
Sales to most of our target customers involves long sales and implementation cycles, which may cause revenues and operating results to vary significantly.
 
We sell our services and products primarily to local government agencies and school districts.  A prospective customer’s decision to purchase our services or products may often involve 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 services and products.  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 services or products.  As a result, we expect that the sales cycle for our services and products will typically exceed 180 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 services or products, which could materially and adversely affect our business.
 
Additionally, many of our services and products are designed for the law enforcement community, which requires us to maintain a sales force that understands the needs of this profession, engages in extensive negotiations and provides high level support to complete sales.  If we do not successfully market our services and products 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 reported net loss of $4,223,467 for our fiscal year ended December 31, 2014.  In fiscal 2014 we used $2,900,870 of cash in our operating activities.  We expect to continue to incur operating losses through at least fiscal 2015.  As of December 31, 2014, we had an accumulated deficit of $22,908,272, cash and cash equivalents of $587,459, a working capital deficit of $3,484,825 and a stockholders’ deficit of $5,215,787.  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, and cash generated from operations.  We will need to generate significant revenues to achieve profitability, and we cannot assure you that we will ever realize revenues at such levels.  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 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.

As of December 31, 2014, we had cash and cash equivalents of $587,459 and a working capital deficiency of $3,484,825.  Our cash position may decline in the future, and we may not be successful in maintaining an adequate level of cash resources.  Our key vendors have accommodated us by extending payment terms for our outstanding accounts payables, but we cannot assure you that these accommodations will continue.  If our key vendors begin demanding standard payment terms, we may not be able to pay our accounts payable in a timely fashion, and we may lose our relationships with our key vendors.
 
We are likely to be required to seek additional debt or equity 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 equity 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.

Our products, offerings and website may be subject to intentional disruption that could adversely impact our reputation and future sales.

We collect and retain large volumes of criminal justice information, including law enforcement telemetry data, non-adjudicated criminal justice information and other personally identifiable information that our various products and systems collect, process, summarize and report.  The integrity and protection of our data is critical to our business and our customers have the expectation that we will adequately protect this information.  The federal Criminal Justice Information Security (CJIS) Policy and additional requirements imposed on us by the law enforcement industry pertaining to information security and privacy are increasingly demanding and continue to evolve.  Maintaining compliance with these may increase our operating costs and adversely impact our ability to release new products and services to our customers.  Furthermore, a penetrated or compromised data system or the intentional, inadvertent or negligent release or disclosure of data could result in theft, loss, fraudulent or unlawful use of our data, which could harm our reputation or result in remedial and other costs, fines or lawsuits.   Our business could be subject to significant disruption, and we could suffer monetary and other losses and reputational harm, in the event of such incidents and claims.
 

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 Messrs. Woessner, Chaney or Rapp, or any other key members of our management team, leave our employment, our business could suffer and the share price of our common stock would likely decline.  Although we have entered into an employment agreement with each of Messrs. Chaney and Rapp, either of them may voluntarily terminate his services at any time.  We do not currently have an employment agreement with Mr. Woessner.
 
Furthermore, our sales success is dependent on our sales leadership and our sales representatives.  We continue to experience turnover in our sales organization, including at the executive level.  Our current senior sales executive is relatively new to the company.  In 2014, we hired new sales personnel to fill various vacancies and increased the size of our sales team.  Our current sales team is less experienced in the law enforcement space than our previous sales team.  Consequently, our sales volumes could suffer until our new sales personnel become fully integrated.

If we do not protect our proprietary information and prevent third parties from making unauthorized use of our products and technology, our financial results could be harmed.
 
Most of our software and underlying technology is proprietary.  We seek to protect our proprietary rights through a combination of confidentiality agreements and procedures and through copyright, patent, trademark, and trade secret laws.  However, all of these measures afford only limited protection and may be challenged, invalidated, or circumvented by third parties.  Third parties may copy all or portions of our software and products or otherwise obtain, use, distribute, and sell our proprietary information without authorization.
 
Third parties claiming that we infringe their proprietary rights could cause us to incur significant legal expenses and prevent us from selling our products and services.

From time to time, we might receive claims that we have infringed the intellectual property rights of others, including claims regarding patents, copyrights, and trademarks.  Because of constant technological change in the segments in which we compete, the extensive patent coverage of existing technologies, and the rapid rate of issuance of new patents, it is possible that the number of these claims may grow.  In addition, former employers of our former, current, or future employees may assert claims that such employees have improperly disclosed to us the confidential or proprietary information of these former employers.  Any such claim, with or without merit, could result in costly litigation and distract management from day-to-day operations.  If we are not successful in defending such claims, we could be required to stop selling, delay shipments of, or redesign our products, pay monetary amounts as damages, enter into royalty or licensing arrangements, or satisfy indemnification obligations that we have with some of our customers.  We cannot assure you that any royalty or licensing arrangements that we may seek in such circumstances will be available to us on commercially reasonable terms or at all.  We may incur making significant expenditures to investigate, defend and settle claims related to the use of technology and intellectual property rights as part of our strategy to manage this risk.
 
In addition, we license and use software from third parties in our business.  These third party software licenses may not continue to be available to us on acceptable terms, or at all, and may expose us to additional liability.  This liability, or our inability to use any of this third party software, could result in shipment delays or other disruptions in our business that could materially and adversely affect our operating results.
 
Periods of sustained economic adversity and uncertainty could negatively affect our business, results of operations and financial condition.
 
Demand for our services and products depend in large part upon the level of capital and maintenance expenditures by many of our customers.  Economic downturns result in lower tax receipts for municipalities, counties and school districts, hence, lower budgets for our customers and potential customers.  Lower budgets could have a material adverse effect on the demand for our services and products, and our business, results of operations, cash flow and overall financial condition would suffer.
 
  
Disruptions in the financial markets, such as what occurred in 2008, may adversely impact the availability and cost of credit for our potential customers, which could result in the delay or cancellation of customer purchases.  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 availability and cost of capital for us and our customers.  These conditions may reduce the willingness or ability of our customers and prospective customers to commit funds to purchase our services or products, or their ability to pay for our services after purchase.  These conditions could result in bankruptcy or insolvency for some 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 and our ability to access capital to fund our operations.

Because we do not have an audit or compensation committee, stockholders must rely on the entire board of directors, only three members of which are 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 three of our six directors are 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.
 
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 a similarly situated private company would not incur.  We also anticipate that we could incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as related rules implemented by the Securities and Exchange Commission.  These rules and regulations could increase legal and financial compliance costs and make some activities more time-consuming and costly.  These rules and regulations could 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.  Consequently, 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 1,375,000 shares of preferred stock authorized for issuance.  As of December 31, 2014, we had 230,214,091 shares of common stock and 900,000 shares of preferred stock available for issuance.  We have reserved 32,096,794 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, 6,145,374 shares of our common stock upon the conversion of accrued dividends on our outstanding shares of preferred stock, 4,106,296 shares of our common stock upon conversion of outstanding convertible notes, 300,000 shares of our common stock to be issued for investment monies received in 2014 and 10,185,001 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.  In addition, to the extent we issue shares of our common stock, or the exercise price or conversion price of warrants or securities convertible into shares of our common stock, at a price below $0.10 per share, the conversion price of our Series B Preferred Stock would be adjusted downward, based upon a weighted average formula, which would result in addition shares of our common stock being issuable upon exercise of our Series B Preferred Stock.
 
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 December 31, 2014, co-founders Russell Chaney, our chairman of the board, and Shane Rapp, our president, and their affiliates, and other members of management beneficially owned a controlling percentage of the voting power of our outstanding shares of common stock.  This 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, our management 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.
 
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 Inc.’s OTC Link quotation platform, which is viewed by most investors as a less desirable, and less liquid, marketplace than the NASDAQ, NYSE and NYSE-AMEX stock exchanges.  Trading in our common stock has been 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.   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.
 
These 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 or company management;
 
 
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 start-up and emerging technology companies, such as us
 
 
We may not pay dividends on our common stock in the foreseeable future.
 
We have not paid any dividends on our common stock.  We might pay dividends in the future at the discretion of our board of directors.  Under the terms of our amended and restated certificate of incorporation, as amended, we are prohibited from paying dividends on our common stock unless and until all accrued and unpaid dividends are paid on our Series B Preferred Stock.  We are also restricted from paying dividends on our common stock unless a dividend is paid on our Series A Preferred Stock in an amount equal to the amount of the dividends for all shares of our common stock into which each such share of Series A Preferred Stock could then be converted.  We are unlikely to pay dividends at any time in the foreseeable future; rather, we are likely to retain earnings, if any, to fund our operations and to develop and expand our business.
  
ITEM 1B.  UNRESOLVED STAFF COMMENTS
 
Not Applicable.
 
ITEM 2.  PROPERTIES
 
At December 31, 2014, our principal properties consisted of a leased facility in the Dallas area (approximately 7,000 square feet), where our research and development, sales and marketing, finance and administrative functions are located and a leased facility in New Braunfels, Texas (approximately 2,500 square feet), where our customer support and operational activities are located.  The Dallas area location is subject to a thirty-month sublease expiring on August 31, 2015.  The New Braunfels facility is subject to a fifty-one month lease expiring on August 31, 2018.  We terminated our previous month-to-month lease for office space located in Canyon Lake, Texas, in June 2014, and moved that office to New Braunfels.  We believe our present facilities are adequate for our foreseeable needs, and are currently reviewing lease renewal options for the Dallas facility.
 
ITEM 3.  LEGAL PROCEEDINGS
 
We are not currently involved in any material legal proceedings.  From time-to-time we anticipate we will be involved in legal proceedings, claims, and litigation arising in the ordinary course of our business and otherwise.  The ultimate costs to resolve any such matters could have a material adverse effect on our financial statements.  We could be forced to incur material expenses with respect to these legal proceedings, and in the event there is an outcome in any that is adverse to us, our financial position and prospects could be harmed.
 
ITEM 4.  MINE SAFETY DISCLOSURES

Not Applicable. 
 
  
PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES 
 
Our common stock is quoted on the OTC Market Group Inc.’s OTC Link quotation platform under the trading symbol “COYN”.  We have one class of common stock and two classes of preferred stock.
 
The following table shows the high and low sales price of our common stock on the OTCQB Link for each quarterly period during our fiscal years ended December 31, 2014 and 2013.
 
   
Price Range
 
Quarter Ending
 
High
   
Low
 
March 31, 2013
   
0.10
     
0.07
 
June 30, 2013
   
0.12
     
0.07
 
September 30, 2013
   
0.12
     
0.09
 
December 31, 2013
   
0.11
     
0.09
 
March 31, 2014
   
0.10
     
0.08
 
June 30, 2014
   
0.20
     
0.09
 
September 30, 2014
   
0.48
     
0.16
 
December 31, 2014
   
0.45
     
0.35
 

As of March 25, 2014, there were 202 holders of record of our common stock, and the closing price of our common stock on the OTCQB Link was $0.26 per share.

Dividend Policy
 
We have never declared or paid any dividends on our capital stock.  Our outstanding Series A Preferred Stock does not accrue dividends.  Our outstanding shares of Series B Preferred Stock accrue cumulative dividends at a rate of 7% of the original issue price of those shares per annum.  The dividends for the Series B Preferred Stock are accrued and added to the liquidation preference of the Series B Preferred Stock annually.

The payment of dividends on our common stock in the future will depend on our earnings, capital requirements, operating and financial condition and such other factors as our board of directors may consider appropriate.  Under the terms of our amended and restated certificate of incorporation, as amended, we are prohibited from paying dividends on our Series A Preferred Stock or our common stock unless and until all accrued and unpaid dividends are paid on our Series B Preferred Stock.  We are also restricted from paying dividends on our common stock unless a dividend is paid on our Series A Preferred Stock in an amount equal to the amount of the dividends for all shares of our common stock into which each such share of Series A Preferred Stock could then be converted.  We currently expect to use all available funds to finance the future development and expansion of our business and do not anticipate paying dividends on our common stock in the foreseeable future.
 
Recent Sales of Unregistered Securities

During the three months ended December 31, 2014, we issued 6,690,000 shares of our common stock, consisting of:  1) an aggregate of 2,500,000 shares issued to two third party service providers for advisory services, with a fair value of $1,050,000; 2) 200,000 shares issued for cash at $0.10 per share, or $20,000 in the aggregate, from warrant exercises; 3) an aggregate of 750,000 shares issued upon the conversion of three convertible promissory notes at a conversion price of $0.10 per share; 4) 2,050,000 shares issued in exchange for $205,000 in cash at a price of $0.10 per share received in a prior reporting period; and 5) 1,190,000 shares issued at a price of $0.10 per share and associated warrants to purchase 158,000 shares of common stock (with exercise prices ranging from $0.39 to $0.45 per share) in exchange for an aggregate $119,000 in cash.

Additionally, we issued warrants to purchase 400,000 shares of common stock at a price of $0.10 per share to two third party service providers for advisory services, with a fair value of $167,346.
 
The offer and sale was made without registration under the Securities Act, or the securities laws of certain states, in reliance on the exemptions provided by Section 4(2) of the Securities Act and Regulation D under the Securities Act and in reliance on similar exemptions under applicable state laws.  The offer and sale of the shares of common stock upon the conversion of convertible notes or the exercise of warrants without registration under the Securities Act, or the securities laws of certain states, was in reliance on the exemptions provided by Section 3(a)(9) of the Securities Act and in reliance on similar exemptions under applicable state laws.  No general solicitation or general advertising was used in connection with the offering of the common stock and warrants.  We disclosed to the investors that the shares of common stock and the warrants, and the common stock underlying the warrants, could not be sold unless they are registered under the Securities Act or unless an exemption from registration is available and the certificates representing the shares and the warrants included, and the certificates representing the common stock to be issued upon exercise of the warrants (if applicable) will include a legend to that effect. 
 
ITEM 6.  SELECTED FINANCIAL DATA
 
Not Applicable
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with 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.

We sell the services and products discussed above under “ITEM 1.  BUSINESS.” As noted above, most of our services are sold on a subscription basis to our customers who subscribe to use the service for a specified term. Our customers renew at a high-renewal rate, which produces recurring cash and recurring revenue, year-after-year.
 
Pertinent attributes of our subscription-based business model include the following:

 ●
We have incurred and will continue to incur material research and development costs to continue to build out our infrastructure and add new features and functionality to our offerings.
   
We have incurred start-up costs to establish our services and continue to incur recurring fixed costs to maintain our services.
   
As we acquire subscribers and bring them onto our services, we experience variable acquisition costs related to sales, installation and deployment.
   
We recruit subscribers with the goal of reaching a level of aggregate subscriber payments that exceeds our fixed (and variable) recurring service costs.
   
  ● We seek to maintain a high renewal rate among existing subscribers.
   
The two important key performance metrics of the subscription-based aspect of our business are (1) the subscription related new, first-year orders we obtain from customers in any given year and (2) the dollar volume of renewing orders we receive from renewing customers in any given year. We use the acronym “SNFYOs” to refer to these Subscription-related New-First Year Orders and the acronym “SROs” to refer to these Subscription-related Renewing Orders.  Hence, SNFYOs in “year 1,” assuming renewal, become SROs in “years 2 – N.”  The dollar volume of SNFYOs and SROs in any given year affects the pace of our future revenue and cash growth and slope of the anticipated future revenue and cash growth.
 
Since we are selling into the innovator and early adopter customer spectrum of a particular market segment comprised of millions of potential subscribers (law enforcement officers, schools, day-cares, energy facilities, etc.), we anticipate that the dollar volume of SNFYOs may fluctuate up or down in any given year, although over time as we move into the early majority customer spectrum of a particular market segment, we expect the dollar volume of SNFYOs to steadily increase year-over-year. For example, we signed SNFYOs of approximately $1,212,000 for the twelve month period ended December 31, 2014, compared to approximately $1,583,000 in new orders for the comparable period in 2013, a decrease of approximately 23%.  We expect this will negatively impact our reported revenues in the short-term.
 
In contrast to the potential variability in the order intake of the SNFYOs, since we have solid and predictable renewal rates we expect the SROs to steadily increase year-after-year. We realized a 17% increase in SROs of $1,531,000 in 2014 up from $1,303,000 in 2013.  This partially offset the decrease in SNFYOs.
 

Assuming we are successful in obtaining new users of our services, as well as retaining high renewal rates of existing subscribers, we anticipate that the recurring nature of our subscription model will result in annually recurring, sustainable and predictable cash flow and revenue growth, year-over-year.  However, there is no assurance that we will be successful in implementing our business model and achieving our operational and financial objectives.
 
We also augment our SNFOs and NFOs with product revenues from sales of party hardware (computer in-vehicle laptops, portable printers, GPS devices, etc.) and sales of our proprietary in-vehicle video system (“VidTac”).
 
At December 31, 2014, we had cash and cash equivalents of $587,459, a working capital deficit of $3,484,825 and an accumulated deficit of $22,908,272.  We took the following steps in fiscal year 2014 and in the first quarter of 2015 to manage our liquidity, to avoid default on any material third-party obligations and to continue progressing our business towards cash-flow break-even, and ultimately profitability: 
 
1)  We continue to employ “just in time” principles in our procurement processes for third party hardware, meaning that we attempt to schedule delivery to the customer of the third party hardware that we sell immediately after we receive the hardware.  We also continue our attempts to collect customer prepayments for the third party hardware we sell at or about the time we order the hardware, which has helped us manage our working capital needs.

2)   Our key vendors are currently offering us extended payment terms for our outstanding payables balances, which has also helped us manage our working capital needs.

3)   In October 2014, our Board of Directors approved a funding initiative for $750,000 to fund a software development effort for feature and function enhancements to enable the COPsync Network and COPsync911 threat alert system more readily to scale nationwide.  As of the date of this report, $450,000 has been raised, all in the first quarter of 2015.  The investment security is a three-year convertible promissory note, which bears interest at the rate of two percent simple interest per year, paid in cash.  The principal amount of the note is convertible into shares of our common stock at the rate of $0.22 per share.  The promissory note may be prepaid by us under certain conditions.

4)  As of December 31, 2014, we had outstanding warrants to purchase an aggregate of 3,155,582 shares of our common stock at a price of $0.20 per share, an aggregate exercise price of $631,116, that expire in 2015.  We believe that the bulk of these warrants will be exercised in calendar year 2015.  As of the date of this report date, warrants to purchase 360,000 shares of our common stock have been exercised, for a total exercise price of $64,000, all in the first quarter of 2015.

5)  Our balance sheet as of December 31, 2014 reflects a notes payable-current portion balance of $669,789, which is due in 2015.  Of that total, notes representing $570,977 in principal amount are held by three note-holders who have previously extended the original due date of their respective notes.  We believe these note holders will agree to extend the due dates of these notes again, if required. 

6)  We are attempting to secure up to $2.0 million in additional funding pursuant to an EB-5 program, which we originally expected to close in 2014.  We remain optimistic that we can successfully close this funding in 2015.  The EB-5 program is a program under which foreign nationals loan money to U.S. companies who are creating U.S. jobs.  Following the job creation, the foreign lenders receive U.S. “green cards.”  We will use a portion of any proceeds from this EB-5 program to repay a bridge loan from the City of Pharr, Texas, if required.  Any remaining funds will be used for general working capital purposes, including our anticipated hiring of a number of employees in the City of Pharr.

7)  We believe that we have the capability to further reduce operating expenses, should circumstances warrant.
 

There are no assurances that these steps will generate sufficient cash flow from operations or that we will be able to obtain sufficient financing necessary to support our working capital requirements.  We can also give no assurance that additional capital financing will be available, or if available, will be on terms acceptable to us.  If adequate working capital is not available, we may not be able to continue our operations or execute our business plan.

Critical Accounting Policies and Estimates
 
In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on revenue, income (loss) from operations and net income (loss), as well as the value of certain assets and liabilities on our balance sheet. The application of our critical accounting policies requires an evaluation of a number of complex criteria and significant accounting judgments by us.  Our management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.  We evaluate our estimates on a regular basis and make changes accordingly.  Senior management has discussed the development, selection and disclosure of these estimates.  Actual results may materially differ from these estimates under different assumptions or conditions.  If actual results were to materially differ from these estimates, the resulting changes could have a material adverse effect on our financial condition.

Our critical accounting polices include the following:

a.  
Revenue Recognition

Our business focus is to sell subscriptions to the COPsync software as a service, which is a real-time, in-car information sharing, communication and data interoperability network for law enforcement agencies.  We refer to this service as The COPsync Network.  The agencies subscribe to the service for a specified period of time (usually for twelve to forty-eight months), for a specified number of officers per agency, and at a fixed subscription fee per officer.

In the process of selling the subscription service, we also sell computers and computer-related hardware (“hardware”) used to provide the in-vehicle service should the customer not already have the hardware, or wants to upgrade their existing hardware, as well as hardware installation services, the initial agency and officer set-up and training services and, sometimes, software integration services for enhanced service offerings.

Our most common sales are:

1) for new customers – a multiple-element arrangement involving (a) the subscription fee, (b) integration of the COPsync software and a hardware appliance (where the hardware and software work together to deliver the essential functionality of the service) to include related services for hardware installation and agency and officer set-up and training and (c) if applicable, software integration services for enhanced service offerings; and
 
2) for existing customers – the subscription fees for the annual renewal of an agency’s COPsync subscription service, upon the completion of the agency’s previous subscription period.

We recognize revenue when all of the following have occurred: (1) we have entered into a legally binding arrangement with a customer resulting in the existence of persuasive evidence of an arrangement; (2) delivery has occurred, evidenced when product title transfers to the customer; (3) customer payment is deemed fixed or determinable and free of contingencies and significant uncertainties; and (4) collection is probable.

The sale of the hardware and related services for hardware installation and agency and officer set-up and training are reported as “Hardware, installation and other revenues” in our Statement of Operations.  The sale of the VidTac product offering is considered a hardware sale and is reported in this revenue classification.  
 
The subscription fees and software integration services are reported as “software license/subscriptions revenues” in our Statement of Operations.  The subscription fees include termed licenses for the contracted officers to have access to the service and the right to receive telephonic customer and technical support, as well as software updates, during the subscription period.  Support for the hardware is normally provided by the hardware manufacturer.

The sale of our WARRANTsync and COPsync911 product offerings are reported in “software license/subscriptions revenues.”  The service for each of these products consist of two elements:  (1) an integration element, and (2) a subscription element, both of which are recognized ratably over the service period upon customer acceptance.  WARRANTsync represents a very small portion of our revenues and could be viewed as an enhancement feature to our COPsync Network.
 

The receipt and acceptance of an executed customer’s service agreement, which outlines all of the particulars of the sale event, is the primary method of determining that persuasive evidence of an arrangement exists.

Delivery generally occurs for the different elements of revenue as follows:

(1) For multiple-element arrangements involving new customers – contractually the lesser period of time of sixty days from contract date or the date officer training services are completed.  We request the agency to complete a written customer acceptance at the time training is completed, which will override the contracted criteria discussed immediately above.

(2) The subscription fee – the date the officer training is completed and written customer acceptance is received.

(3) Software integration services for enhanced service offerings – upon the completion of the integration efforts and verification that the enhanced service offering is available for use by the agency.
  
Fees are typically considered to be fixed or determinable at the inception of an arrangement, generally based on specific services and products to be delivered pursuant to the executed service agreement.  Substantially all of our service agreements do not include rights of return or acceptance provisions.  To the extent that agreements contain such terms, we recognize revenue once the acceptance provisions or right of return lapses.  Payment terms to customers generally range from net “upon receipt of invoice” to “net 30 days from invoice date”.  Beginning in 2013, we adopted a policy of requesting customers purchasing a significant amount of hardware to prepay for the hardware at the time the equipment was ordered from our suppliers.  These prepayments are recorded on our Balance Sheet as Current Deferred Revenues.
  
We assess the ability to collect from our customers based on a number of factors, including credit worthiness of the customer and the past transaction history with the customer.  If the customer is not deemed credit worthy, we defer all revenue from the arrangement until payment is received and all other revenue recognition criteria have been met. With the exception of sales to resellers, all of our customers are local or state governmental agencies.

As indicated above, some customer orders contain multiple elements.  We allocate revenue to each element in an arrangement based on relative selling price.  The selling price for a deliverable is based on its vendor specific objective evidence, or VSOE, if available, third party evidence, or TPE, if VSOE is not available, or our best estimate of selling price, or ESP, if neither VSOE nor TPE is available.  The maximum revenue we recognize on a delivered element is limited to the amount that is not contingent upon the delivery of additional items.  Many of our service agreements contain grants (or discounts) provided to the contracting agency.  These grants or discounts have been allocated across all of the different elements based upon the respective, relative selling price.

We determine VSOE for subscription fees for the initial contract period based upon the rate charged to customers on a stand-alone subscription service.  VSOE for renewal pricing is based upon the stated rate for the renewed subscription service, which is stated in the service agreement or contract entered into.  The renewal rate can be equal to or slightly higher than the stated rate in the original contract and is administered on a customer-by customer-basis.  Subscription fee revenue is recognized ratably over the life of the service agreement.   

We have determined that the selling price of hardware products include the related services for hardware installation and agency and officer set-up and training, as well as integration services for enhanced service offerings, which are sold separately and, as a result, we have VSOE for these products.
 
For almost all of our new service agreements, as well as renewal agreements, billing and payment terms are agreed to up front or in advance of performance milestones.  These payments are initially recorded as deferred revenue and subsequently recognized as revenue as follows:
 
(1) Integration of the COPsync software and a hardware appliance (where the hardware and software work together to deliver the essential functionality of the service) to include related services for hardware installation and agency and officer set-up and training – immediately upon delivery.
 
(2) The subscription fee – ratably over the contracted subscription period, commencing on the delivery date.

(3) Software integration services for enhanced service offerings – immediately upon our completion of the integration and verification that the enhanced service is available for the agency’s use.
 
(4) Renewals – ratably over the renewed subscription or service period commencing on the completion of the previous subscription or service period.
 
 
b.  
Software Development Costs

Certain software development costs incurred subsequent to the establishment of technological feasibility may be capitalized and amortized over the estimated lives of the related products.  Through mid-year 2010, we capitalized certain software development costs accordingly.

We determined technological feasibility to be established upon completion of (1) product design, (2) detail program design, (3) consistency between product and program design and (4) review of detail program design to ensure that high risk development issues have been resolved.  Upon the general release of the COPsync service offering to customers, development costs for that product were amortized over fifteen years based on management’s then estimated economic life of the product.  

We have not capitalized any of the software development efforts associated with our new product offerings, WARRANTsync, VidTac and COPsync911, because the time period between achieving technological feasibility and product release for these product offerings was very short.  As a result, the incurred costs have been recorded as research and development costs in years 2014 and 2013.
 
Results of Continuing Operations for the Years Ended December 31, 2014 and 2013
 
Revenues.

Total revenues for the years ended December 31, 2014 and 2013 were $5,910,328 and $4,725,617, respectively.  Total revenues are comprised of software license/subscription revenue and hardware, installation and other revenue.  Software license/subscriptions revenue is a key indicator of revenue performance in future years, since this revenue represents that portion of our revenue that is anticipated to recur as our service contracts renew from year-to-year.  Hardware, installation and other revenue is a one-time revenue event, and is not a key indicator of future performance.  Software license/subscriptions revenue totaled $2,662,237 and $1,780,790 for the years ended December 31, 2014 and 2013, respectively.  The increase in software license/subscriptions revenue was due to an increase in the number of law enforcement agency contracts executed between periods, revenues from our COPsync911 service which was introduced in the second quarter of 2013 and increased revenue attributable to contract renewals.  Hardware, installation and other revenue totaled $3,248,091 and $2,944,827 for the years ended December 31, 2014 and 2013, respectively.  These revenues involved a certain number of large, hardware intensive contracts involving both new customers and existing customers electing to replace or update their computer equipment, plus sales of our VidTac product offering.  A portion of these revenues stemmed from the 2013 year-end backlog of uncompleted service agreements.  VidTac revenues were approximately $652,000 and $1,195,000 for the years ended December 31, 2014 and 2013, respectively.  We believe the year-over-year decrease in sales of VidTac units resulted principally from our relatively new and inexperienced sales team.  We believe that in fiscal year 2015 we will experience increased customer orders for our VidTac product as the sales team matures and as certain feature sets and enhancements are incorporated into the product later in the year.

Many of our new contracts are multiple-year contracts that typically include hardware, installation and training (and integration in some cases) and one year of software license/subscriptions revenue during the first year of the contract, followed by software license/subscriptions revenue during the remaining years of the contract.  Normally, we receive full payment up front upon inception of the contract.  This up-front payment is initially recorded as deferred revenues and subsequently recognized as revenue during the service period.  As of December 31, 2014, we had $3,669,427 in deferred revenues, compared to $3,931,013 for 2013.  We do not believe our deferred revenues will have a material effect on our future working capital for the later years of the contract service periods because a large portion of our continuing customer support costs are incrementally fixed in nature.
 
We executed approximately 347 new service agreements (or contracts) in 2014, compared to approximately 285 new service agreements in 2013.  We expect to sign more new service agreements in 2015 than we did in 2014, primarily due to anticipated improvements in our sales staff.
 

Cost of Revenues and Gross Profit
 
The following is a summary of the cost of revenues and gross profit performances for the respective revenue types for the twelve month periods ended December 31, 2014 and 2013:
 
   
For the twelve months ended December 31,
 
   
2014
   
2013
 
   
$
   
%
   
$
   
%
 
                             
  Hardware, installation and other revenues
                           
      Revenues
 
$
3,248,091
     
100
%
 
$
2,944,827
     
100
%
      Cost of Revenues-hardware & other external costs
   
2,332,922
     
72
%
   
2,345,691
     
80
%
      Cost of Revenues-internal costs
   
238,437
     
7
%
   
163,381
     
6
%
  Total Gross Profit
 
$
676,732
     
21
%
 
$
435,755
     
15
%
                                 
  Software license/subscription revenues
                               
      Revenues
 
$
2,662,237
     
100
%
 
$
1,780,790
     
100
%
      Cost of Revenues-internal costs
   
636,665
     
24
%
   
523,303
     
29
%
      Amortization of capitalized software development costs
   
436,471
     
16
%
   
436,465
     
25
%
  Total Gross Profit
 
$
1,589,101
     
60
%
 
$
821,022
     
46
%
                                 
  Total Company
                               
      Revenues
 
$
5,910,328
     
100
%
 
$
4,725,617
     
100
%
      Cost of Revenues
   
3,644,495
     
62
%
   
3,468,840
     
73
%
  Total Gross Profit
 
$
2,265,833
     
38
%
 
$
1,256,777
     
27
%
 
For the years ended December 31, 2014 and 2013, our total cost of revenues was $3,644,495 and $3,468,840, respectively.  As a result, we realized gross profits of $2,340,833 and $1,256,777, respectively, for the years ended December 31, 2014 and 2013.

Cost of revenues for hardware, installation and other revenues for the years ended December 31, 2014 and 2013 totaled $2,571,359 and $2,509,072, respectively.  Included in these cost of revenues are internal costs, which totaled $238,437 and $163,381 for the years ended December 31, 2014 and 2013, respectively.  The increase in internal costs between periods was due principally to a reallocation of certain costs from general and administrative expenses.  These reallocated expenses included salary for a senior executive, partially offset by a decrease in hosting and support services performed by outside service providers, which was reallocated to our customer support costs.  The total gross profit from hardware, installation and other revenue totaled $676,732 for the year ended December 31, 2014, compared to a gross profit of $435,755 for the comparable period in 2013.  This improvement in gross profit performance was due in part to increased equipment sales and more aggressive pricing on selected hardware items, as well as installation and integration related services.  

Cost of revenues for software license/subscription revenues for the years ended December 31, 2014 and 2013 were $1,073,136 and $959,768, respectively.  The increase of approximately $113,000 was due to increased internal costs representing our customer support team and web-hosting facilities.  The increased costs were driven by increased headcount and the cost of outside service providers needed to address the increased number of customers and services offered to our customers.  The resulting gross profit from software license/subscription revenues for years ended December 31, 2014 and 2013 was $1,589,101 and $821,022, respectively.

Our total cost of revenues has the potential to fluctuate with revenues because of the variable cost nature of hardware, installation and other revenues contained in future contracts.  Conversely, our internal costs associated with installation, training, customer support and web-site hosting are relatively flat.  In both 2014 and 2013, these internal costs increased because we added headcount and increased services to be provided by outside service providers to support the increased number of customers and new products.
 
Operating Expenses.
 
Research and Development

Total research and development expenses for years ended December 31, 2014 and 2013, were $1,952,786 and $2,157,597, respectively.  The $204,811 decrease in these expenses between years is due principally to a decrease in the development costs for new products, more specifically decreased contract labor for IT/software development services and decreased expendable supplies, partially offset by increases in payroll expenses and share-based compensation expense.  The expenses incurred in 2014 were principally driven by the continued development and refinement of our COPsync911 threat alert service and our VidTac system and development efforts to enhance the scalability of our COPsync Network and COPsync911 service offerings.  The expenses incurred in 2013 were principally driven by the development of our COPsync911 threat alert service, which was launched in the second quarter of 2013.  We believe our research and development expense will increase in 2015, assuming it is not necessary to reduce expense to maintain adequate liquidity.
 

Sales and Marketing

Total sales and marketing expenses for the years ended December 31, 2014 and 2013 were $1,408,659 and $1,289,892, respectively.  The $118,767 increase in these expenses consists principally of increases in personnel, travel expenses resulting from headcount additions and increased insurance and trade show expenses, partially offset by a decrease in share-based compensation expense.  

We expect our sales and marketing expenses will increase in 2015, as we will be increasing our current staffing levels.

 General and Administrative

Total general and administrative expenses for the years ended December 31, 2014 and 2013 were $2,960,262 and $1,395,118, respectively.  The approximate $1,565,000 increase in expenses was due principally to an aggregate of $1,050,000 for stock issued to two third party service providers for general financial advisory and investment banker services, $209,576 for performance-based warrants issued to two third party service providers for business and corporate advisory services, $180,000 in professional services for new corporate, business, promotion, general financial advisory-related, and investment banker services, as well as various legal services, $156,000 for bad-debts expenses, $31,000 for business insurance premiums resulting from expanded coverages, $16,000 for certain personnel costs in the areas of benefits and contract labor, and $29,000 for travel expense, partially offset by a $115,000 reduction in share-based compensation expense.  Share-based compensation expense decreased in 2014 because certain stock option grants awarded to members of executive management became fully vested in 2013.

We believe our general and administrative expenses for 2015 will remain relatively consistent with expense levels of 2014.
 
Other Income and Expense.
 
For the year ended December 31, 2014, other expense totaled $167,593, consisting of $177,293 in interest expense, partially offset by $9,700 in interest income.  For the year ended December 31, 2013, other expense totaled $29,026, consisting principally of interest expense.  The increase in interest expense relates to the various new debt instruments we executed in late 2013 and during 2014.
 
Liquidity and Capital Resources

We have funded our operations since inception through the sale of equity and debt securities and from cash generated by operating activities.  As of December 31, 2014, we had $587,459 in cash and cash equivalents, compared to $414,051 as of December 31, 2013.  The increase was due primarily to $3,123,011 net cash provided by financing activities, partially offset by $2,900,870 in net cash used in operating activities and $48,733 in net cash used in investing activities.  The net cash increase attributable to financing activities represents proceeds of $2,124,615 from the sale of common stock in 2014, $405,000 from the issuance of long-term notes payable, $285,000 from the issuance of short-term notes payable, $44,000 from the exercise of warrants for shares of our common stock, $40,500 in deposits for shares of common stock to be issued in 2015, and a $475,000 note advance from the City of Pharr, partially offset by payments on notes payable of $210,604.  

We had a working capital deficit of $3,484,825 on December 31, 2014, compared to a deficit of $3,739,475 on December 31, 2013.  Included in the working capital deficit on December 31, 2014 are current liabilities of $2,526,990 in net deferred revenues attributable to future performance obligations under prepaid customer contracts, the future costs of which we believe will not represent a majority of these current liabilities.
  
Plan of Operation for the Next Twelve Months
 
At December 31, 2014, we had cash and cash equivalents of $587,459, a working capital deficit of $3,484,825 and an accumulated deficit of $22,908,272.  We took the following steps in fiscal year 2014 and in the first quarter of 2015 to manage our liquidity, to avoid default on any material third-party obligations and to continue progressing our business towards cash-flow break-even, and ultimately profitability: 
 

1)  We signed service agreements for approximately $4,500,000 in new orders for the twelve month period ended December 31, 2014, compared to approximately $5,852,000 in new orders for the comparable period in 2013, a decrease of approximately 23%.  We expect this will negatively impact our liquidity in the short-term.  We believe this decrease resulted from experiencing high turnover within our sales organization. We are continually evaluating the performance of our sales team and replacing those who are not meeting our expectations.  As we continue to add to the number and quality of our sales team, we expect our new orders to begin growing again.  This decrease in our new orders was partially offset by an increase in customer subscription renewals in 2014 of $1,531,000, up from $1,303,000 in 2013 for an increase of 17%.

2)  We continue to employ “just in time” principles in our procurement processes for third party hardware, meaning that we attempt to schedule delivery to the customer of the third party hardware that we sell immediately after we receive the hardware.  We also continue our attempts to collect customer prepayments for the third party hardware we sell at or about the time we order the hardware, which has helped us manage our working capital needs.

3)   Our key vendors are currently offering us extended payment terms for our outstanding payables balances, which has also helped us manage our working capital needs.

4)   In October 2014, our Board of Directors approved a funding initiative for $750,000 to fund a software development effort for feature and function enhancements to enable the COPsync Network and COPsync911 threat alert system more readily to scale nationwide.  As of the date of this report, $450,000 has been raised, all in the first quarter of 2015.  The investment security is a three-year convertible promissory note, which bears interest at the rate of two percent simple interest per year, paid in cash.  The principal amount of the note is convertible into shares of our common stock at the rate of $0.22 per share.  The promissory note may be prepaid by us under certain conditions.

5)  As of December 31, 2014, we had outstanding warrants to purchase an aggregate of 3,155,582 shares of our common stock at a price of $0.20 per share, an aggregate exercise price of $631,116, that expire in 2015.  We believe that the bulk of these warrants will be exercised in calendar year 2015.  As of the date of this report, warrants to purchase 360,000 shares of our common stock have been exercised, for a total exercise price of $64,000, all in the first quarter of 2015.

6)  Our balance sheet as of December 31, 2014, shows a notes payable-current portion balance of $669,789, which is due in 2015.  Of that total, notes representing $570,977 in principal amount are held by three note-holders who have previously extended the original due date of their respective notes. We believe these note holders will agree to extend the due dates of these notes again, if required. 

7)  We are attempting to secure up to $2.0 million in additional funding pursuant to an EB-5 program, which we originally expected to close in 2014.  We remain optimistic that we can successfully close this funding in 2015.  The EB-5 program is a program under which foreign nationals loan money to U.S. companies who are creating U.S. jobs.  Following the job creation, the foreign lenders receive U.S. “green cards”.  We will use a portion of any proceeds from this EB-5 program to repay a loan from the City of Pharr, Texas, if required.  Any remaining funds will be used for general working capital purposes, including our anticipated hiring of a number of employees in the City of Pharr.

8)  We believe that we have the capability to further reduce operating expenses, should circumstances warrant.

Based upon the above-listed factors, we believe we will have adequate cash resources for the next twelve months.
   
Off-Balance Sheet Arrangements
 
As of December 31, 2014, we had no off-balance sheet arrangements.
 
Contractual Obligations
 
The following table summarizes our obligations to make future payments pursuant to certain contracts or arrangements as of December 31, 2014, as well as an estimate of the timing in which these obligations are expected to be satisfied:

   
Payments Due by Period
 
Contractual Obligations
 
Total
   
2015
     
2016-2017
     
2018-2019
   
After 2019
 
                                   
    Long-Term Debt Obligations
 
$
1,537,831
   
$
800,896
   
$
732,246
   
$
4,689
   
$
-
 
    Capital Lease Obligations
 
$
35,098
   
$
7,632
   
$
17,479
   
$
9,987
   
$
-
 
    Operating Lease Obligations
 
$
192,868
   
$
95,927
   
$
79,297
   
$
17,644
   
$
-
 
    Purchase Obligations
 
$
545,738
   
$
545,738
   
$
-
   
$
-
   
$
-
 
    Other Long-Term Liabilities
 
$
475,000
   
$
-
   
$
475,000
   
$
-
   
$
-
 
Total Contractual Obligations
 
$
2,786,535
   
$
1,450,193
   
$
1,304,022
   
$
32,320
   
$
-
 
 

Recently Issued Accounting Standards

For information regarding the impact of recently issued accounting standards, see Note 2 to our financial statements included in this report.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not Applicable.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The financial statements and supplementary data required by this item are set forth in Item 15 of Part IV, beginning at page F-1 of this report, which are incorporated by reference to this Item 8 by reference.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
ITEM 9A.  CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
 
Our management, under the supervision and with the participation of our chief executive officer and chief financial (and principal accounting) officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2014.  Based upon that evaluation our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
 
Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2014 based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2014, our internal control over financial reporting is effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
 
Limitations on Effectiveness of Controls and Procedures
 
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors or fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.  These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
 
Changes in Internal Control over Financial Reporting
 
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 9B.  OTHER INFORMATION
 
None.
 
 
 
 
PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
Incorporated herein by reference to our Information Statement on Schedule 14C, filed with the Securities and Exchange Commission on March 2, 2015, under “ITEM 1 – ELECTION OF DIRECTORS” and “ITEM 2 – APPROVAL OF AMENDMENTS TO 2009 LONG-TERM INCENTIVE PLAN”.
 
ITEM 11. EXECUTIVE COMPENSATION
 
Incorporated herein by reference to our Information Statement on Schedule 14C, filed with the Securities and Exchange Commission on March 2, 2015, under “ITEM 1 – ELECTION OF DIRECTORS” and “ITEM 2 – APPROVAL OF AMENDMENTS TO 2009 LONG-TERM INCENTIVE PLAN”.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
Incorporated herein by reference to our Information Statement on Schedule 14C, filed with the Securities and Exchange Commission on March 2, 2015, under “ITEM 1 – ELECTION OF DIRECTORS” and “ITEM 2 – APPROVAL OF AMENDMENTS TO 2009 LONG-TERM INCENTIVE PLAN”.
 
Incorporated herein by reference to our Information Statement on Schedule 14C, filed with the Securities and Exchange Commission on March 2, 2015, under “ITEM 1 – ELECTION OF DIRECTORS” and “ITEM 2 – APPROVAL OF AMENDMENTS TO 2009 LONG-TERM INCENTIVE PLAN”.
 
ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES
 
We engaged PMB Helin Donovan LLP, Certified Public Accountants, as our independent registered public accounting firm, and requested that they perform an audit of our financial statements beginning with the year ended December 31, 2011.  
 
Audit Fees
 
Fees for respective audit services total approximately $40,000 for the year ended December 31, 2014, and $37,440 paid for the year ended December 31, 2013.  There were other fees paid to our principal accountants for reviews of our quarterly reports on Form 10-Q totaling $23,400 and $21,840 for the years ended December 31, 2014 and 2013, respectively.  There were other fees paid to our principal accountants for tax-related fees totaling $2,355 and $1,460 for the years ended December 31, 2014 and 2013, respectively.  All fees and services provided by our independent registered public accounting firm have been approved by our board of directors.
 
 
PART IV
 
ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
(a)           The following documents are filed as part of this Report:
 
(1)           Financial Statements:
 
 
 (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 10.7 through 10.12.
 
(b)           Exhibits:
 
See Index to Exhibits.
 
(c)           Schedules:
 
See financial statements and the accompanying notes.
 
 
 
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: March 31, 2015
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 and Director
 March 31, 2015
 
 
 Ronald A. Woessner
 
 (Principal Executive Officer)
   
           
 
/s/ BARRY W. WILSON
 
 Chief Financial Officer
 March 31, 2015
 
 
 Barry W. Wilson
 
 (Principal Financial Officer)
   
           
 
/s/ RUSSELL CHANEY
 
 Chairman and Director
 March 31, 2015
 
 
 Russell Chaney
       
           
 
/s/ SHANE RAPP
 
 President and Director
 March 31, 2015
 
 
 Shane Rapp
       
           
 
 
 
 Director
 March 31, 2015
 
 
 Joel Hochberg
       
           
 
 /s/ JOSEPH R. ALOSA
 
 Director
 March 31, 2015
 
 
 Joseph R. Alosa
       
           
 
 
 
 Director
 March 31, 2015
 
 
 Robert Harris
       
 
 
INDEX TO EXHIBITS
 
Exhibit Number
 
Description
     
3.1
 
Amended and Restated Certificate of Incorporation filed on September 2, 2009 (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 20, 2009).
     
3.2
 
Certificate of Designations of Series B Convertible Preferred Stock filed on October 14, 2009 (Incorporated by reference to 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)).
     
10.1
 
Form of Three-Year COPsync, Inc. Promissory Note, originally issued in 2014 (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed with Commission on November 11, 2014).
     
10.2
 
Form of Warrant to Purchase Common Stock (Cash Payment Exercise) (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed with Commission on November 11, 2014).
     
10.3
 
Form of Warrant to Purchase Common Stock (Cashless Exercise) (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed with Commission on November 11, 2014).
     
10.4*
 
     
10.5
 
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).
     
10.6
 
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).
     
10.7
 
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)
     
10.8
 
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)
     
10.9
 
Stock Restriction Agreement, dated as of August 27, 2010, by and between Ronald A. Woessner and registrant.  (Incorporated by reference to the registrant’s Annual Report on Form 10-K filed with the Commission on April 15, 2011).
     
10.10
 
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).
     
10.11
 
Registrant’s 2009 Long-Term Incentive Plan (Incorporated by reference to registrant’s Registration Statement on Form S-8 (Registration No. 333-161882)).
     
10.12
 
Amendment No. 1 to Registrant’s 2009 Long-Term Incentive Plan (Incorporated by reference to Registrant’s Information Statement in Schedule 14C, filed on March 2, 2015).
     
10.13
 
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).
     
10.14
 
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).
     
10.15*   Commercial Sublease Agreement with Addison Tower Investment Company LLC (entered into as of January 28, 2013).
     
10.16*   Commercial Lease Agreement with 1000 Walnut Limited, as amended on June 17, 2014 (originally executed on March 28, 2014).
     
10.17*   Advisory Agreement with Maxim Group LLC (entered into as of October 6, 2014).
 
 
 23.1*
 
     
31.1*
 
     
31.2*
 
     
32*
 
     
101.1
 
101.INS (XBRL Instance Document)
     
101
 
101.SCH (XBRL Taxonomy Extension Schema Document)
     
101
 
101.CAL (XBRL Calculation Linkbase Documents)
     
101
  101.DEF (XBRL Taxonomy Linkbase Document)
     
101
 
101.LAB XBRL Taxonomy Label Linkbase Document)
     
101
 
101.PRE (XBRL Taxonomy  Presentation Linkbase Document)
 
*
Filed herewith.
 
 
INDEX TO FINANCIAL STATEMENTS
 
 
 
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

To The Board of Directors and Stockholders of
COPsync, Inc.:
 

We have audited the accompanying balance sheets of COPsync, Inc. (the “Company”) as of December 31, 2014 and 2013, and the related statements of operations, stockholders’ equity (deficit), 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 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. An audit also includes 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, 2014 and 2013, and the related statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

PMB Helin Donovan, LLP
 
 
/s/ PMB Helin Donovan, LLP
 
March 31, 2015
Dallas, Texas

 
COPSYNC, INC.
Balance Sheets
 
ASSETS
 
   
December 31,
2014
   
December 31,
2013
 
             
CURRENT ASSETS
           
             
Cash and cash equivalents
  $
587,459
    $ 414,051  
Accounts receivable, net
    223,622       101,807  
Inventories
    246,077       357,933  
Prepaid expenses and other current assets
    270,148       116,573  
Deferred loan costs
    50,000       -  
                 
Total Current Assets
    1,377,306       990,364  
                 
PROPERTY AND EQUIPMENT
               
                 
Leased property under capital lease
    35,098       -  
Computer hardware
    72,070       68,847  
Computer software
    36,936       36,936  
Fleet vehicles
    174,094       134,987  
Furniture and fixtures
    10,467       7,872  
                 
Total Property and Equipment
    328,665       248,642  
Less: Accumulated Depreciation
    (152,789 )     (113,489 )
                 
Net Property and Equipment
    175,876       135,153  
                 
OTHER ASSETS
               
                 
Software development costs, net
    -       436,471  
                 
Total Other Assets
    -       436,471  
                 
TOTAL ASSETS
  $ 1,553,182     $ 1,561,988  
 
The accompanying notes are an integral part of these financial statements.
 
 
COPSYNC, INC.
Balance Sheets (Continued)
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
   
December 31,
2014
   
December 31,
2013
 
             
CURRENT LIABILITIES
           
             
Accounts payable and accrued expenses
  $ 1,526,612     $ 1,419,170  
Deferred revenues
    2,526,990       2,878,264  
Obligation under capital lease
    7,632       -  
Convertible notes payable, current portion
    9,608       20,000  
Three Year, 50% notes payable, net of $0 discount, current portion
    121,500       -  
Notes payable, current portion
    669,789       412,405  
                 
Total Current Liabilities
    4,862,131       4,729,839  
                 
LONG-TERM LIABILITIES
               
                 
Deferred revenues
    1,142,437       1,052,749  
Obligation under capital lease
    27,466       -  
Convertible notes payable
    389,178       594,163  
Three Year, 50% notes payable, net of $181,385 discount, non-current portion
    291,118       -  
Notes payable, non-current portion
    56,639       107,329  
                 
Total Long-Term Liabilities
    1,906,838       1,754,241  
                 
Total Liabilities
    6,768,969       6,484,080  
                 
COMMITMENTS AND CONTINGENCIES
    -       -  
                 
STOCKHOLDERS' DEFICIT
               
                 
Series A Preferred stock, par value $0.0001 per share,
1,000,000 shares authorized; 100,000 shares issued
and outstanding, respectively
    10       10  
Series B Preferred stock, par value $0.0001 per share,
375,000 shares authorized; issued; and outstanding, respectively
    37       37  
Common stock, par value $0.0001 per share, 500,000,000
shares authorized; 201,852,444 and 175,014,501 issued and
outstanding, respectively
    20,184       17,501  
Common stock to be issued, 300,000 and 15,000 shares, respectively
    42,000       1,500  
Additional paid-in-capital
    17,630,254       13,709,972  
Accumulated deficit
    (22,908,272 )     (18,651,112 )
                 
Total Stockholders' Deficit
    (5,215,787 )     (4,922,092 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 1,553,182     $ 1,561,988  
 
The accompanying notes are an integral part of these financial statements.
 
 
 COPSYNC, INC.
Statements of Operations
 
   
For the Twelve Months Ended
 
   
December 31,
 
   
2014
   
2013
 
             
REVENUES
           
             
Hardware, installation and other revenues
 
$
3,248,091
   
$
2,944,827
 
Software license/subscription revenues
   
2,662,237
     
1,780,790
 
                 
Total Revenues
   
5,910,328
     
4,725,617
 
                 
COST OF REVENUES
               
                 
Hardware and other costs
   
2,571,359
     
2,509,072
 
Software license/subscriptions
   
1,073,136
     
959,768
 
                 
Total Cost of Revenues
   
3,644,495
     
3,468,840
 
                 
GROSS PROFIT
   
2,265,833
     
1,256,777
 
                 
OPERATING EXPENSES
               
                 
Research and development
   
1,952,786
     
2,157,597
 
Sales and marketing
   
1,408,659
     
1,289,892
 
General and administrative
   
2,960,262
     
1,395,118
 
                 
Total Operating Expenses
   
6,321,707
     
4,842,607
 
                 
LOSS FROM OPERATIONS
   
(4,055,874
)
   
(3,585,830
)
                 
OTHER INCOME (EXPENSE)
               
                 
Interest income
   
9,700
     
7
 
Interest expense
   
(177,293
)
   
(29,033
)
                 
Total Other Income (Expense)
   
(167,593
)
   
(29,026
)
                 
NET LOSS BEFORE INCOME TAXES
   
(4,223,467
)
   
(3,614,856
)
                 
INCOME TAXES
   
-
     
-
 
                 
NET LOSS
 
$
(4,223,467
)
 
$
(3,614,856
)
                 
Series B preferred stock dividend
   
(33,693
)
   
(105,000
)
Accretion of beneficial conversion feature on preferred shares dividends issued in kind
   
(71,307
)
   
-
 
Cost of Series B warrants extension
   
-
     
(120,000
)
                 
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
 
$
(4,328,467
)
 
$
(3,839,856
)
                 
LOSS PER COMMON SHARE - BASIC & DILUTED
 
$
(0.02
)
 
$
(0.02
)
                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC & DILUTED
   
182,986,709
     
173,799,481
 
 
The accompanying notes are an integral part of these financial statements. 
 
 
COPSYNC, INC
Statements of Stockholders' Equity (Deficit) 
For the year ended December 31, 2014 and 2013
 
                                             
Common
                         
                                       
Common
   
Stock
                     
Total
 
                                       
Stock
   
Warrants
         
Additional
         
Shareholder
 
   
Preferred Stock A
   
Preferred Stock B
   
Common Stock
   
To Be
   
To Be
   
Treasury
    Paid-in    
Accumulated
    Equity  
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Issued
   
Issued
   
Stock
   
Capital
   
Deficit
   
(Deficit)
 
                                                                         
Balance, January 1, 2013
    100,000     $ 10       375,000     $ 37       171,284,201     $ 17,129     $ 7,000     $ -     $ -     $ 12,803,341     $ (14,811,256 )   $ (1,983,739 )
                                                                                                 
Valuation of the vested portion of employee and non-employee stock options
    -       -       -       -       -       -       -       -       -       184,973       -     $ 184,973  
                                                                                                 
Common stock issued for previous deposits at $0.10 per share
    -       -       -       -       70,000       7       (7,000 )     -       -       6,993       -     $ -  
                                                                                                 
Capital contributed/co-founders' forfeiture of contractual compensation
    -       -       -       -       -       -       -       -       -       79,000       -     $ 79,000  
                                                                                                 
Amortization of restricted stock grant
    -       -       -       -       -       -       -       -       -       45,000       -     $ 45,000  
                                                                                                 
Common stock issued for cash at $0.10 per share
    -       -       -       -       3,469,300       347       -       -       -       346,583       -     $ 346,930  
                                                                                                 
Common stock issued in conversion of notes payable and accrued interest at $0.10 per share
    -       -       -       -       191,000       18       -       -       -       19,082       -     $ 19,100  
                                                                                                 
Common stock to be issued for cash at $0.10 per share
    -       -       -       -       -       -       1,500       -       -       -       -     $ 1,500  
                                                                                                 
Cost of Series B warrant extension
    -       -       -       -       -       -       -       -       -       120,000       (120,000 )   $ -  
                                                                                                 
Series B Preferred stock- cumulative dividends
    -       -       -       -       -       -       -       -       -       105,000       (105,000 )   $ -  
                                                                                                 
Net loss for the year ended December 31, 2013
    -       -       -       -       -       -       -       -       -       -       (3,614,856 )   $ (3,614,856 )
                                                                                                 
Balance, December 31, 2013
    100,000     $ 10       375,000     $ 37       175,014,501     $ 17,501     $ 1,500     $ -     $ -     $ 13,709,972     $ (18,651,112 )   $ (4,922,092 )
  
The accompanying notes are an integral part of these financial statements.
 
 
COPSYNC, INC
Statements of Stockholders' Equity (Deficit) (Continued) 
For the year ended December 31, 2014 and 2013
 
                                             
Common
                         
                                       
Common
   
Stock
                     
Total
 
                                       
Stock
   
Warrants
         
Additional
         
Shareholder
 
   
Preferred Stock A
   
Preferred Stock B
   
Common Stock
   
To Be
   
To Be
   
Treasury
   
Paid-in
   
Accumulated
   
Equity
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Issued
   
Issued
   
Stock
   
Capital
   
Deficit
   
(Deficit)
 
                                                                         
Balance, January 1, 2014
    100,000     $ 10       375,000     $ 37       175,014,501     $ 17,501     $ 1,500     $ -     $ -     $ 13,709,972     $ (18,651,112 )   $ (4,922,092 )
                                                                                                 
Valuation of the vested portion of employee and non-employee stock options
    -       -       -       -       -       -       -       -       -       147,096       -     $ 147,096  
                                                                                                 
Valuation of the vested portion of non-employee warrants
    -       -       -       -       -       -       -       -       -      
209,576
      -     $ 209,576