UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 

FORM 10-Q

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

 For the quarterly period ended March 31, 2014

OR

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

 Commission File No.: 000-53705

COPSYNC, INC.

(Exact name of registrant as specified in its charter)

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

 2010 FM 2673

Canyon Lake, Texas  78133

 (Address of principal executive offices)

 (972) 865-6192

 (Registrant’s telephone number, including area code)

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

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

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

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

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

The number of shares outstanding of each of the issuer's classes of common stock, as of May 7, 2014, was 175,514,501 shares of Common Stock, $0.0001 par value.  

COPSYNC, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2014

TABLE OF CONTENTS

		Page
PART I.  FINANCIAL INFORMATION
ITEM 1.	Financial Statements	3
	Condensed Balance Sheets at March 31, 2014 (unaudited) and December 31, 2013	3
	Condensed Statements of Operations (unaudited) for the three months ended March 31, 2014 and 2013	5
	Condensed Statements of Cash Flows (unaudited) for the three months ended March 31, 2014 and 2013	6
	Notes to Condensed Financial Statements	8
ITEM 2.	Management’s Discussion And Analysis of Financial Condition and Results of Operations	17
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risks	22
ITEM 4.	Controls and Procedures	22
PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	23
ITEM 1A.	Risk Factors	23
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
ITEM 3.	Defaults Upon Senior Securities	23
ITEM 4.	Mine Safety Disclosures	23
ITEM 5.	Other Information	23
ITEM 6.	Exhibits	24
SIGNATURES		25

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements (unaudited)

COPSYNC, INC.

Condensed Balance Sheets

ASSETS
	March 31,			December 31,
	2014			2013
	(Unaudited)			(Audited)
CURRENT ASSETS
Cash and cash equivalents	$	261,354		$	414,051
Accounts receivable, net		78,754			101,807
Inventories		222,454			357,933
Prepaid expenses and other current assets		141,780			116,573
Total Current Assets		704,342			990,364
PROPERTY AND EQUIPMENT
Computer hardware		68,847			68,847
Computer software		36,936			36,936
Fleet vehicles		167,296			134,987
Furniture and fixtures		7,872			7,872
Total Property and Equipment		280,951			248,642
Less: Accumulated Depreciation		(122,074	)		(113,489	)
Net Property and Equipment		158,877			135,153
OTHER ASSETS
Software development costs, net		327,354			436,471
Total Other Assets		327,354			436,471
TOTAL ASSETS	$	1,190,573		$	1,561,988

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

3

COPSYNC, INC.

Condensed Balance Sheets (Continued)

LIABILITIES AND STOCKHOLDERS' DEFICIT
	March 31,			December 31,
	2014			2013
	(Unaudited)			(Audited)
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	1,354,734		$	1,419,170
Deferred revenues		2,636,870			2,878,264
Convertible notes payable, current portion		-			20,000
Notes payable, current portion		452,209			412,405
Total Current Liabilities		4,443,813			4,729,839
LONG-TERM LIABILITIES
Deferred revenues		1,120,391			1,052,749
Convertible notes payable		594,163			594,163
Notes payable, non-current portion		603,140			107,329
Total Long-Term Liabilities		2,317,694			1,754,241
Total Liabilities		6,761,507			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; 175,514,501 and 175,014,501 issued and outstanding, respectively		17,551			17,501
Common stock to be issued, 15,000 shares, respectively		1,500			1,500
Additional paid-in-capital		13,833,744			13,709,972
Accumulated deficit		(19,423,776	)		(18,651,112	)
Total Stockholders' Deficit		(5,570,934	)		(4,922,092	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	1,190,573		$	1,561,988

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

4

COPSYNC, INC.

Condensed Statements of Operations

(unaudited)

	For the Three Months Ended
	March 31,
	2014			2013
REVENUES
Hardware, installation and other revenues	$	904,931		$	753,862
Software license/subscription revenues		582,889			397,267
Total Revenues		1,487,820			1,151,129
COST OF REVENUES
Hardware and other costs		697,907			519,629
Software license/subscriptions		222,506			222,597
Total Cost of Revenues		920,413			742,226
GROSS PROFIT		567,407			408,903
OPERATING EXPENSES
Research and development		553,004			449,597
Sales and marketing		316,957			320,720
General and administrative		433,173			363,140
Total Operating Expenses		1,303,134			1,133,457
LOSS FROM OPERATIONS		(735,727	)		(724,554	)
OTHER INCOME (EXPENSE)
Interest expense		(10,702	)		(4,729	)
Gain/(Loss) on asset disposals		(345	)		-
Total Other Income (Expense)		(11,047	)		(4,729	)
NET LOSS BEFORE INCOME TAXES		(746,774	)		(729,283	)
INCOME TAXES		-			-
NET LOSS	$	(746,774	)	$	(729,283	)
Series B preferred stock dividend		(25,890	)		(25,890	)
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	(772,664	)	$	(755,173	)
LOSS PER COMMON SHARE - BASIC & DILUTED	$	0.00		$	0.00
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC & DILUTED		175,181,168			171,815,723

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

5

COPSYNC, INC.

Condensed Statements of Cash Flows

(Unaudited)

	For the Years Ended
	March 31,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(746,774	)	$	(729,283	)
Adjustments to reconcile net loss to net cash used  in operating activities:
Depreciation and amortization		119,369			119,507
Employee and non-employee stock compensation		28,182			50,700
Amortization of restricted stock grants		-			15,000
Capital contributed/co-founders' forfeiture of contractual compensation		19,750			19,750
Loss on asset disposals		345			-
Change in operating assets and liabilities:
Accounts receivable		23,053			(123,107	)
Inventories		135,479			(35,341	)
Prepaid expenses and other current assets		2,756			4,066
Deferred revenues		(173,752	)		664,227
Accounts payable and accrued expenses		(64,436	)		(13,245	)
Net Cash Used in Operating Activities	$	(656,028	)	$	(27,726	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from asset disposals		2,500			-
Purchases of property and equipment		(6,118	)		-
Net Cash Used by Investing Activities	$	(3,618	)	$	-
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable		500,000			(136,288	)
Payments on notes payable		(23,051	)		120,000
Proceeds from stock deposit for common stock to be issued		-			31,930
Proceeds from issuance of common stock for cash		30,000			70,000
Net Cash Provided by Financing Activities	$	506,949		$	85,642
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		(152,697	)		57,916
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		414,051			174,444
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	261,354		$	232,360

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

6

COPSYNC, INC.

Condensed Statements of Cash Flows (Continued)

(Unaudited)

	For the Years Ended
	March 31,
	2014		2013
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	6,650	$	6,716
Cash paid for income tax	$	1,953	$	1,800
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Partial financing associated with the purchase of two fleet vehicles	$	30,703	$	-
Conversion of convertible notes, plus accrued interest into 200,000 and 191,000 shares of   common stock, respectively	$	20,000	$	19,100
Issuance of common stock for prior year stock subscriptions	$	-	$	7,000
Financing of prepaid insurance policy	$	27,963	$	-
Series B Preferred stock dividends	$	25,890	$	25,890

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

7

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

NOTE 1 – BASIS OF FINANCIAL STATEMENT PRESENTATION

These interim condensed financial statements of COPsync, Inc. (the "Company") are unaudited, but reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the financial position of the Company as of March 31, 2014, and its results of operations and cash flows for the three month periods ended March 31, 2014.  Certain information and footnote disclosures normally included in the audited financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Because all the disclosures required by accounting principles generally accepted in the United States are not included, these interim condensed financial statements should be read in conjunction with the audited financial statements and notes thereto in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2013. The results for the three month period ended March 31, 2014 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2014, or any other period. The year-end condensed balance sheet data as of December 31, 2013, was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

NOTE 2 – NATURE OF ORGANIZATION AND LIQUIDITY AND MANAGEMENT PLANS

The Company sells the COPsync service, which is a real-time, in-car information sharing, communication and data interoperability network for law enforcement agencies.  The COPsync service enables patrol officers to collect, report and share critical data in real-time at the point of incident and obtain instant access to various local, state and federal law enforcement databases.  The COPsync service also eliminates manual processes and increases officer productivity by enabling officers to electronically write tickets, process DUI and other arrests and document accidents and other incidents.  The Company believes that the service saves lives, reduces unsolved crimes and assists in apprehending criminals through such features as a nationwide officer safety alert system, GPS/auto vehicle location and distance-based alerts for crimes in progress, such as child abductions, bank robberies and police pursuits.  The Company has designed its system to be “vendor neutral,” meaning it can be used with products and services offered by other law enforcement technology vendors.  Additionally, the Company’s system architecture is designed to scale nationwide.

In addition to the Company’s core COPsync information sharing, data interoperability and communication network service, in 2012 it released two complementary service/product offerings.  These new product offerings were WARRANTsync, a statewide misdemeanor warrant clearing database, and VidTac, an in-vehicle video camera system for law enforcement.

WARRANTsync is designed to be a statewide misdemeanor warrant clearing database. It enables law enforcement officers in the field to receive notice of outstanding warrants in real-time at the point of a traffic stop.  The WARRANTsync system enables the offender to pay the outstanding warrant fees and costs using a credit card or debit card.  Following payment, the offender is given a receipt and the transaction is complete.  This product represents a very small portion of our revenues and could be viewed as an enhancement feature to our core COPsync service.

VidTac is a software-driven video system for law enforcement. Traditional in-vehicle video systems are “hardware centric” DVR-based systems. The video capture, compression and encryption of the video stream is performed by the DVR.  The estimated price of these high-end, digital DVR-based systems range from $5,100 to $11,000 per system.  These DVR-based systems are typically replaced, at the same expensive price point, every three to four years as new patrol vehicles are placed into service.

The VidTac system is price advantageous vis-a-vis other high-end video systems. The Company is offering it for sale at a much lower price than the average price of DVR-based video systems.  Furthermore, for those agencies that already have in-vehicle computers, the VidTac system eliminates the need for the agency to purchase a second computer, i.e., the DVR, and eliminates the need to replace this second (DVR) computer every three to four years.  The Company believes that the VidTac system will accelerate the Company’s revenue growth and help it achieve profitability.

The Company also offers the COPsync911 threat alert, first introduced in the second quarter of 2013, for use in schools, hospitals, day care facilities, governmental 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 located on every computer within 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.  The Company expects its COPsync911 service to reduce emergency law enforcement response times by five to seven minutes.

8

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

At March 31, 2014, the Company had cash and cash equivalents of $261,354, a working capital deficit of $3,739,471 and an accumulated deficit of $19,423,776.  In the first quarter of 2014, the Company continued the efforts it began in fiscal year 2013 to manage its liquidity, to avoid default on any third-party obligations and to continue growing its business towards cash-flow break-even, and ultimately profitability, including the following:

1)  The Company anticipates that the number of orders for its products and services will increase in 2014 over 2013 as a result of changes it has made in its sales organization, including hiring a new sales executive and the hiring of new, more seasoned, sales representatives.   

2)  In 2013, the Company introduced the COPsync911 real-time threat alert service, which the Company believes is the only threat alertservice of its kind in the United States.  The service enables a person (such as a schoolteacher in a school) to instantaneously and silently send emergency alerts directly to local law enforcement officers in their patrol vehicles and the local emergency dispatch center with just the click of a computer mouse or screen icon.  The Company is primarily offering the COPsync911 service in the State of Texas and other selected regions of the United States.  The Company expects the pace of COPsync911 sales to accelerate as its sales team and resellersbecomes familiar with the service and the strategies for selling it.  

3)  The Company’s procurement processes for third party hardware employs “just in time” principles, meaning that the Company attempts to schedule delivery to the customer of the third party hardware it sells immediately after it receives the hardware.  The Company also continues its attempts to collect customer prepayments for the third party hardware it sells at or about the time it orders the hardware.  This change in the processing of third party hardware has helped the Company significantly in managing its working capital.

 4)  The Company’s key vendors continue to accommodate the Company through extended payment terms or practices for its outstanding payables balances, but the Company is uncertain how long these accommodations will continue.

5)  In the first quarter of 2014, the Company received a $475,000 loan from the City of Pharr, Texas, and it expects to receive an additional loan of $375,000 from that city in May or June of 2014.

6)  In April 2014, the Company’s Board of Directors authorized management to raise up to $1,000,000 in new capital in 2014, of which 80,000 has been raised as of the date of this report.  Additionally, the Company has borrowed $400,000 (see Note 15) and is currently in discussions with potential investors to raise at least $500,000 of the target capital amount.  The Company is also seekingaworking capital line of credit to fund third party and proprietary equipment purchases from the manufacturers.

7)  The Company is attempting to secure up to $1.5 million in funding pursuant to an EB-5 program, which the Company hopes to close in 2014.  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.”  The Company currently has a letter of intent with a financier for the EB-5 program.  The financier has already completed the required economic impact analysis for the project, which will be located in Pharr, Texas.  The Company will use a portion of any proceeds from this EB-5 program to repay the bridge loans from the City of Pharr.  Any remaining funds will be used for general working capital purposes, including the Company’s anticipated hiring of at least 30 employees in the Pharr area over the 24 month period after receiving the proceeds, who will office in a recently refurbished leased facility owned by the City of Pharr.

8)  The Company plans to reduce its research and development expenses in 2014 by approximately $650,000 from the amount it spent in 2013, even though those expenses increased from 2013 in the first quarter. The Company believes that it has the capability to reduce further operating expenses, should circumstances warrant.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has accumulated significant losses as it has been developing its current and recently added offerings. The Company has had recurring losses and expects to report losses for fiscal 2014. The Company believes that cash flow from operations, together with the potential sources of debtand equity and revenue-based financing outlined above will be sufficient to fund the Company’s anticipated operations for the next twelve months.

9

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICES

a.             Basis of Presentation

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

There have been no significant changes to the summary of significant accounting policies disclosed in Note 2 to the financial statements as of December 31, 2013 included in the Form 10-K filed on March 31, 2014. 

NOTE 4 – RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS

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

NOTE 5 – INVENTORY

Inventory consisted of the following at March 31, 2014, and December 31, 2013, respectively:

Category	March 31, 2014		December 31, 2013
Raw materials	$	28,055	$	-
Work-in-process		-		-
Finished goods		194,399		357,933
Total Inventory	$	222,454	$	357,933

The Company’s inventory includes third-party hardware which consists of computer laptops, printers and ancillary parts, such as electronic components, connectors, adapters and cables, as well as, our propriety product, VidTac.  The third-party hardware is purchased from a few select vendors, whereas, the VidTac product is manufactured by a contract manufacturer.

During the three months period ended March 31, 2014, the Company’s inventories decreased significantly, particularly in finished goods inventory.  The decrease resulted from the installation in the first quarter of previously procured and inventoried third-party hardware.  The various components of third-party hardware are all considered finished goods because the individual items may be, and are, sold in a package arrangement, or on an individual basis, normally at the same pricing structure. 

See Note 3 to the Company’s financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion involving the Company’s inventory investment recorded in the years ended December 31, 2013 and 2012.

Relative to the VidTac propriety product, the Company, in 2012, selected and entered into a manufacturing agreement with a contract manufacturer to build the new VidTac unit at a contracted price and to the Company’s specifications.   The manufacturing agreement calls for the Company to periodically place a demand purchase order for finished units to be manufactured and delivered as finished goods.  Recently, the Company has been placing small quantity purchase orders with the contract manufacturer and with payment terms consisting of a prepayment arrangement or “pay as you go” basis, requiring approximately 50% in prepayments.

The Company’s purchase orders placed with the contract manufacturer are non-cancellable.  However, (1) the Company may change the original requested delivery dates if the Company gives sufficient advance notice to the contract manufacturer,  and (2) should the Company elect to cancel the purchase order in total or in part, it would be financially responsible only for any materials that could not be returned by the contract manufacturer to its source suppliers.

At December 31, 2013, the Company reported no raw materials inventory, pertaining to the propriety VidTac product and representing certain completed, top-level component assemblies not yet incorporated into finished VidTac units.  At March 31, 2014, the Company inventoried $28,055 of these top-level component assemblies.  These items will continue to be used in future manufactured VidTac units; thus, there is no risk of obsolescence.  The reclassification of these assemblies from finished goods to raw materials at March 31, 2014, is viewed by management as immaterial to the Company’s reported financial results.

10

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

NOTE 6 – NOTES PAYABLE

The Company’s total notes payable at March 31, 2014 was $1,055,349, representing a net increase of $535,615 for the three month period ended March 31, 2014.  The following table shows the components of notes payable at March 31, 2014 and December 31, 2013:

	March 31,			December 31,
Loan Type	2014			2013
Bank	$	100,285		$	73,542
Insurance		44,272			34,069
Demand Note		910,792			412,123
Total notes payable		1,055,349			519,734
Less: Current portion		(452,209	)		(412,405	)
Long-term portion	$	603,140		$	107,329

During the three month period ended March 31, 2014, the Company incurred the following increases in notes payable:

1)   A five-year bank note in the principal amount of $30,703, with an interest rate of 4.0% per annum, for two automobiles to be used by the Company’s sales organization.

2)   The Company received a $475,000 loan from the City of Pharr, Texas, and it expects to receive an additional $375,000 loan from the City in May or June of 2014, for an aggregate amount of $850,000. The loan documents are still being finalized at the date of this report; the note is expected to bear interest at 8.0% per annum.  Theloan principal amount is expected to be due in full on the earlier to occur of the 18th month anniversary of the loan or the receipt by the Company of an expected $1.5 million in proceeds from an EB-5 funding arrangement the Company is pursuing.  The loanis expected to be secured by a first priority security interest in the Company’s accounts receivable.  The city will also receive a modest revenue share, payable quarterly, with respect to contracts for the Company’s products and services with customers located in a specified territory in the southern portion ofTexas for a specified period of time.  

3)   The Company executed a $27,963, eleven-month note payable pertaining to the Company’s business insurance coverage for inland marine, general and product liability risk exposures.  The note calls for monthly payments of principal and has an interest rate of 7.5% per annum.

4)   On February 28, 2014, the Company executed a $25,000, sixty-day promissory note payable to its Chief Executive Officer.  Interest at 3.0% per annum is due upon maturity of the promissory note.  The Company’s Chief Executive Officer has elected to extend the maturity date of this note to June 30, 2014.

During the first quarter of 2014, the Company made total principal payments of $23,051, principally through scheduled monthly payments, on notes payable financing the Company’s business insurance policies and bank notes for automobile loans.

NOTE 7 - CONVERTIBLE NOTES PAYABLE

During the first quarter of 2014, fifteen of the eighteen holders of the Company’s convertible promissory notes, representing $554,163 in aggregate principal amount, elected to execute either a one-year or two-year extension of their original notes.  As a result of these elections, and the fact that they took place prior to the Company reporting its financial results for twelve month period ended December 31, 2013, the Company classified the aggregate principal value of $554,163 as Noncurrent Liabilities on the Company’s Balance Sheet at December 31, 2013.

During the first quarter of 2014, the holder of one convertible note elected to convert the note into shares of the Company’s common stock.  The total principal amount of the converted note on the date of conversion was $20,000.  The Company issued a total of 200,000 shares of its common stock at the conversion price of $0.10 per share pursuant to the terms of the note. 

11

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

Convertible notes payable at March 31, 2014 and December 31, 2013 are summarized as follows:

	March 31,		December 31,
	2014		2013
Total convertible notes payable	$	873,263	$	873,263
Less:  note conversions	$	279,100	$	259,100
Convertible notes payable, net	$	594,163	$	614,163
Less: current portion	$	-	$	20,000
Convertible notes payable, net, long-term portion	$	594,163	$	594,163

NOTE 8 – PREFERRED STOCK

Preferred Stock Series A

The Company issued a total of 100,000 shares of its Series A Preferred Stock in April 2008 as partial consideration for its acquisition of a 100% ownership interest in PostInk Technology, LP (“PostInk”).  Each share of Series A Preferred Stock is convertible into one share of common stock, but has voting rights on a basis of 750 votes per share.  These shares are held by the former general partner of PostInk, which is owned by the co-founders of the Company.

Each share of Series A Preferred Stock shall automatically be converted into fully-paid non-assessable shares of common stock at the then effective conversion rate for such share.  The events that may trigger this automatic conversion event are as follows:  1) immediately prior to the closing of firm commitment involving an initial public offering, or 2) upon the receipt of the Company of a written request for such conversion from the holders of at least a majority of the Series A Preferred stock then outstanding, or if later, the effective date for conversion specified in such requests.

Preferred Stock Series B

During 2009 and the first quarter of 2010, the Company issued a total of 375,000 shares of its Series B Preferred Stock in a private placement in which the Company raised $1,500,000 in gross proceeds.  The 375,000 shares of the Company’s Series B Convertible Preferred Stock are convertible into a total of 15,000,000 shares of the Company’s common stock.

The shares of the Company’s Series B Preferred Stock i) accrue dividends at a rate of 7.0% per annum, payable in preference to the common stock or any other capital stock of the Company, ii) have a preference in liquidation, or deemed liquidation, to receive the initial investment in the Series B Preferred Stock, plus accrued and unpaid dividends, prior to the common stock, iii) are convertible into 40 shares of common stock per share, subject to adjustment for issuances by the Company of common stock at less than $0.10 per share, and iv) have the right to elect one member of the Company’s Board of Directors.  The Company has recorded $25,890 in accrued dividends on the Series B Preferred Stock for the three-month periods ended March 31, 2014 and 2013, respectively.

NOTE 9 – COMMON STOCK

During the three month period ended March 31, 2014, the Company issued a total of 300,000 shares of common stock, along with associated warrants, valued at $30,000, or $0.10 per share, pursuant to two individual cash investments made in the first quarter of 2014.

The Company also issued 200,000 shares of its common stock upon the conversion of $20,000 in principal amount of an outstanding convertible note during the period (Note 7).

NOTE 10 – COMMON STOCK TO BE ISSUED

During 2013, the Company received a series of small deposits from a single investor totaling $1,500 for the purchase of shares of common stock and associated warrants, which the Company anticipates will be issued later in 2014.

12

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

The following table provides a reconciliation of the transactions, number of shares and associated common stock values for the common stock to be issued at March 31, 2014 and December 31, 2013.

	At March 31, 2014				At December 31, 2013
Common stock to be issued per:	# of Shares		$ Value		# of Shares		$ Value
A stock deposit received for common stock to be issued at $0.10 per share		15,000		1,500		15,000		1,500
Total number of shares and value		15,000	$	1,500		15,000	$	1,500

NOTE 11 – BASIC AND FULLY DILUTED LOSS PER SHARE

The computations of basic loss per share of common stock are based upon the weighted average number of shares of common stock outstanding during the period covered by the financial statements.  Common stock equivalents that would arise from issuance of shares of common stock to be issued under subscriptions and other obligations of the Company, the exercise of stock options and warrants, conversion of convertible preferred stock and dividends on those shares of preferred stock or the conversion of convertible promissory notes were excluded from the loss per share attributable to common stockholders as their value is anti-dilutive.

The Company's common stock equivalents, at March 31, 2014 and 2013, which are not included in the calculation of fully diluted loss per share because they are anti-dilutive, consisted of the following:

	2014		2013
Convertible promissory notes outstanding		6,033,631		4,774,351
Warrants outstanding		10,684,842		10,495,982
Stock options outstanding		8,450,000		8,748,333
Preferred stock outstanding		15,100,000		15,100,000
Common stock to be issued		15,000		319,300
Dividends on preferred stock outstanding		5,447,043		4,076,243
Total Common Stock Equivalents		45,730,516		43,514,209

NOTE 12 – OUTSTANDING WARRANTS

A summary of the status of the Company’s outstanding warrants, and the changes during the three-month period ended March 31, 2014, is as follows:

2014
				Weighted
				Average
Description	Shares			Exercise Price
Outstanding, January 1, 2014		11,049,842		$	0.16
Granted		60,000			0.10
Cancelled		-			-
Expired		(425,000	)		0.20
Outstanding, March 31, 2014		10,684,842		$	0.16
Exercisable, March 31, 2014		10,684,842		$	0.16

The total number of warrants issued during the three month period ended March 31, 2014 consisted of 60,000 warrants associated with the issuance of 300,000 shares of the Company’s common stock pursuant to new capital investments of $30,000 during the period.

13

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

A summary of the status of the Company’s outstanding warrants, and the changes during the twelve month period ended December 31, 2013, is as follows:

Year 2013
			Weighted
			Average
Description	Shares		Exercise Price
Outstanding, January 1, 2013		10,341,982	$	0.17
Granted		707,860	$	0.10
Cancelled		-		-
Expired		-		-
Outstanding, December 31, 2013		11,049,842	$	0.16
Exercisable, December 31, 2013		11,049,842	$	0.16

The following is a summary of the Company’s outstanding and exercisable warrants at March 31, 2014:

				Outstanding						Exercisable
Exercise Prices				Weighted Average Number Outstanding at 3/31/14		Remaining Life (in yrs.)		Weighted Average Exercise Price		Number Exercisable at 3/31/14		Weighted Average Exercise Price
$	0.10				4,309,260		2.27	$	0.10		4,309,260	$	0.10
	0.20				6,375,582		2.40		0.20		6,375,582		0.20
$	0.10	-	0.20		10,684,842		2.39	$	0.16		10,684,842	$	0.16

NOTE 13 – EMPLOYEE OPTIONS

As of March 31, 2014, the Company has a stock-based compensation plan, the 2009 Long Term Incentive Plan.

The 2009 Long Term Incentive Plan was adopted by the Board of Directors on September 2, 2009.  Under the 2009 Long Term Incentive Plan, the Company can grant nonqualified options to employees, officers, outside directors and consultants of the Company or incentive stock options to employees of the Company. There are 10,000,000 shares of common stock authorized for issuance under the 2009 Long Term Incentive Plan. The outstanding options have a term of ten years and vest monthly over five years, quarterly over five years, quarterly over three years or over three years with 33.3% vesting on the one year anniversary date, and the remaining 66.7% vesting quarterly over the remaining two years.  As of March 31, 2014, options to purchase 8,450,000 shares of the Company’s common stock were outstanding under the plan, of which options to purchase 6,415,825 shares were exercisable, with a weighted average exercise price of $0.09 per share.

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

For the three months ended March 31, 2014 and 2013, the Company recorded share-based compensation expense of $28,182 and $50,700, respectively. 

For the three months ended March 31, 2014, the Company granted options to purchase 75,000 shares of its common stock with an exercise price of $0.10 per share.  These options consisted of grants issued to three outside directors who received options as part of their annual compensation for serving on the Company’s Board of Directors.  The total value of these stock options, utilizing the Black Scholes valuation method, was $5,520.  The term of the stock options was ten years and vesting of the stock options was for a three-year period, with 33% vesting on the one-year anniversary of the grant date, and the remainder vesting ratably over the next eight quarters.

14

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

The summary activity for the three months ended March 31, 2014 under the Company’s 2009 Long Term Incentive Plan is as follows: 

	March 31, 2014
	Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life
Outstanding at beginning of period		8,375,000	$	0.09	$	–
Granted		75,000	$	0.10	$	–
Exercised		–	$	0.00	$	–
Forfeited/ Cancelled		–	$	0.00	$	–
Outstanding at period end		8,450,000	$	0.09	$	–		7.22
Options vested and exercisable at period end		6,415,825	$	0.09	$	–		6.94
Weighted average grant-date fair value of options granted during the period			$	0.10

The following table summarizes significant ranges of the Company’s outstanding and exercisable options as of March 31, 2014:

						Options Outstanding							Options Exercisable
Range of Exercise Prices						Options Outstanding		Weighted Average Remaining Life (in years)		Weighted Average Exercise Price			Number Outstanding		Weighted Average Exercise Price
	$	0.00	–	$	0.08		2,500,000		0.75		$	0.08		2,125,000		$	0.08
	$	0.09	–	$	0.10		5,950,000		0.76		$	0.10		4,290,825		$	0.10
							8,450,000							6,415,825

A summary of the status of the Company’s non-vested option shares as of March 31, 2014 is as follows:

Non-vested Shares	Shares			Weighted Average Grant-Date Fair Value
Non-vested at January 1, 2014		2,317,506		$	0.09
Granted		75,000		$	0.10
Forfeited		-		$	0.09
Vested		(358,331	)	$	0.08
Non-vested		2,034,175		$	0.09

As of March 31, 2014, there was approximately $178,611 of total unrecognized compensation cost related to non-vested share-based compensation arrangements.  The Company expects to recognize the unrecognized compensation cost over a weighted average period of 0.79 years.

NOTE 14 – COMMITMENTS AND CONTINGENCIES

The following table summarizes the Company’s obligations to make future payments pursuant to certain contracts or arrangements as of March 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		2014			2015-2016		2017-2018	After 2018
Long-Term Debt Obligations	$	1,649,512	$	452,209	$	1,197,303	$	-	$	-
Operating Lease Obligations	$	135,032	$	75,017	$	60,015	$	-	$	-
Total Contractual Obligations	$	1,784,544	$	527,226	$	1,257,318	$	-	$	-

15

COPsync, Inc.

Notes To Condensed Financial Statements

(unaudited)

Contingent Liability

None

Compensation

See ITEM 11, “Executive Compensation”, “Employment Contracts, Termination of Employment and Change in Control”, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, which discusses the employment agreements involving Mr. Russell Chaney and Mr. Shane Rapp, co-founders of the Company.  One element contained in those discussions involves the voluntary elections by Mr. Chaney and Mr. Rapp to forego certain specified salary increases until the Company becomes profitable or the Company secures sufficient funding to sustain operations.  The value of each person’s foregone salary for each of the three month periods ended March 31, 2014 and 2013 totaled $10,000 for Mr. Chaney and $9,750 for Mr. Rapp and was recorded as contributed capital in Additional Paid-in Capital on the Company’s Balance Sheet.

Litigation

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

NOTE 15 – SUBSEQUENT EVENTS

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

During the second quarter of 2014, as of May 9, 2014, the Company had raised an additional $50,000 in new capital investments from a single individual investor.

In November 2013, the Company executed two short-term notes payable in the aggregate amount of $313,477 with an equipment financing company to finance the purchase of certain third-party equipment to be sold by the Company to its contracted customers.  Both notes were scheduled to mature in May 2014, bear interest at 16% per annum, are payable upon maturity, and are collateralized by the third-party equipment being procured.  The equipment financing company is owned by one of the Company’s outside directors.  During the second quarter of 2014, the equipment financing company extended the maturity date of the note by six months, making the notes due in November 2014.  The equipment financing company required the Company to pay the accumulated interest for the original six-month period as a condition to the extension of the maturity date.

In August 2013, two individuals loaned the Company $50,000 each to procure third-party hardware for a specific contract pursuant to two promissory notes bearing interest at a rate of 9.9% per annum.  Both of the notes matured in March 2014.  One of the notes called for the Company to make monthly principal payments beginning in the fourth quarter of 2013 and continuing until the note matured.  The outstanding balance for that note was fully paid in April 2014.  The other note required payment of principal and interest upon maturity.  In April 2014, the holder of the other note extended the maturity of his note to April 2015, and increased the principal amount of the note to a total of $250,000 by providing the Company with an additional $200,000 loan.  Payment of the total principal is due on the maturity date, and the interest rate continues to be 9.9% per annum.  Additionally, the Company paid the note holder the accumulated interest for the original note through March 31, 2014.

In May 2014, the Company borrowed $200,000 pursuant to a three-year promissory note.  The repayment amount is 150% of the amount borrowed, which is to be paid over three years.  The note calls for payments of $15,000, $60,000, $135,000 and $90,000 in years 2014, 2015, 2016 and 2017, respectively.

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

Statements in this report which are not purely historical facts or which necessarily depend upon future events, including statements about trends, uncertainties, hopes, beliefs, anticipations, expectations, plans, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements, including risks and uncertainties described in our annual report on Form 10-K for the year ended December 31, 2013. Any of these risk factors could have a material adverse effect on our business, financial condition or financial results and reduce the value of an investment in our securities. We may not succeed in addressing these and other risks associated with an investment in our securities, with our business and with our achieving any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements. All forward-looking statements are based upon information available to us on the date the statements are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We sell the COPsync Network service, which is a real-time, in-car information sharing, communication and data interoperability network for law enforcement agencies.  The COPsync Network service enables patrol officers to collect, report and share critical data in real-time at the point of incident and obtain instant access to various local, state and federal law enforcement databases.  The COPsync Network service also eliminates manual processes and increases officer productivity by enabling officers to electronically write tickets, process DUI and other arrests and document accidents and other incidents.  We believe that our service saves lives, reduces unsolved crimes and assists in apprehending criminals through such features as a nationwide officer safety alert system, GPS/auto vehicle location and distance-based alerts for crimes in progress, such as child abductions, bank robberies and police pursuits.  We have designed our COPsync Network to be “vendor neutral,” meaning it can be used with products and services offered by other law enforcement technology vendors.  Additionally, our system architecture is designed to scale nationwide.

We also sell VidTac, an in-vehicle video camera system for law enforcement.  The VidTac system is a software-driven video system for law enforcement.  Traditional in-vehicle video systems are typically “hardware centric” DVR-based systems.  The capture, compression and encryption of the video stream for these systems typically is performed by the DVR.  We estimate that the price of these high-end, digital DVR-based systems range between $5,100 and $11,000 per system.  These DVR-based 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.   We are offering our system for sale at a much lower price than the average price of DVR-based video systems.  Furthermore, for those agencies that already have in-vehicle computers, our VidTac system eliminates the need to purchase a second computer, i.e., the DVR, and eliminates the need to replace this second (DVR) computer every three to four years.  We believe that our VidTac system will accelerate our revenue growth and help us achieve profitability. 

To date, our COPsync Network service has successfully submitted, processed and relayed over 8,063,000 officer initiated information requests.  On average, our service is returning responses to our customers in less than five seconds, well within the 32 second average NCIC 2000 standard for mobile clients.

As of March 31, 2014, 527 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.  We currently have at least one customer using the COPsync Network in 68% of the 254 Texas counties.

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

Pertinent attributes of our COPsync Network business model include the following:

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

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

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

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

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

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

Basis of Presentation, Critical Accounting Policies and Estimates

Critical Accounting Policies and Estimates

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

We describe our significant accounting policies in Note 2, Summary of Significant Accounting Policies, of the Notes to Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2013.  We discuss our Critical Accounting Policies and Estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the year ended December 31, 2013.

Results of Operations

Revenues

Total revenues for the three month periods ended March 31, 2014 and 2013 were $1,487,820 and $1,151,129, respectively.  Total revenues are comprised of software license/subscriptions 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 revenues totaled $582,889 and $397,267 for the three month periods ended March 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, increased revenue attributable to contract renewals, and approximately $78,000 in revenues from our new product, COPsync911, which we introduced in 2013.  Hardware, installation and other revenues for the three month periods ended March 31, 2014 and 2013 totaled $904,931 and $753,862, respectively.  The increase in these revenues was due to a significant increase in large, hardware intensive contracts involving both new customers and existing customers electing to replace or update their computer equipment.

Some 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 ratably during the service period.  As of March 31, 2014, we had $3,757,261 in deferred revenues, compared to $3,931,013 as of December 31, 2013.  We do not believe that the deferred revenues resulting from these payments 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.

18

Cost of Revenues and Gross Profit

The following is a summary of our cost of revenues and gross profit or loss for the two revenue types for the respective three-month periods ended March 31, 2014 and 2013: 

	For the three months ended March 31,
	2014					2013
	$		%			$		%
Hardware, installation and other revenues
Revenues	$	904,931		100	%	$	753,862		100	%
Cost of Revenues-hardware & other external costs		643,076		71	%		487,283		65	%
Cost of Revenues-internal costs		54,831		6	%		32,346		4	%
Total Gross Profit	$	207,024		23	%	$	234,233		31	%
Software license/subscription revenues
Revenues	$	582,889		100	%	$	397,267		100	%
Cost of Revenues-internal costs		113,388		19	%		113,485		29	%
Amortization of capitalized software development costs		109,118		19	%		109,112		27	%
Total Gross Profit	$	360,383		62	%	$	174,670		44	%
Total Company
Revenues	$	1,487,820		100	%	$	1,151,129		100	%
Cost of Revenues		920,413		62	%		742,226		64	%
Total Gross Profit	$	567,407		38	%	$	408,903		36	%

For the three month periods ended March 31, 2014 and 2013, our total cost of revenues was $920,413 and $742,226, respectively.  As a result, we realized gross profits of $567,407 and $408,903 for the three month periods ended March 31, 2014 and 2013, respectively.

Cost of revenues for hardware, installation and other revenues for the three month periods ended March 31, 2014 and 2013 totaled $697,907 and $519,629, respectively.  The increase in cost of these revenues between the periods was due to higher hardware sales in 2014.  Included in the cost of these revenues are internal costs, which totaled $54,831 and $32,346 for the three month periods ended March 31, 2014 and 2013, respectively.  These internal costs represent salaries and travel expenses for our in-house installation and training staff.  The increase in internal costs between periods is due principally to an increase in headcount and travel expenses.  The total gross profit from hardware, installation and other revenue totaled $207,024 and $234,233 for the three months period ended March 31, 2014 and 2013, respectively.  This decrease in gross profit performance was due to the increased internal costs mentioned above, as well as a lower gross margin contribution from the sale of our VidTac units resulting from a higher variable cost due to our relatively small procurement lot size.  We do not believe the gross margin decrease on sales of the VidTac units will continue as we begin procuring product in larger quantities, which will lower the variable costs of procurement.

Cost of revenues for software license/subscription revenues for the three month periods ended March 31, 2014 and 2013 were $222,506 and $222,597, respectively.  These costs represent internal costs associated with our customer support team and web-hosting facilities.  The resulting gross profit from software license/subscription revenues for the three month periods ended March 31, 2013 and 2012 was $360,383 and $174,670, respectively.  The increase in gross profit from these sales was due to the higher level revenues compared to a relatively constant level of costs of these revenues.

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 were relatively flat throughout year 2014.  

19

Operating Expenses

Research and Development

Total research and development expenses for the three-month period ended March 31, 2014 were $553,004, compared to $449,597 for the comparable period in 2013.  The $103,407 increase in these expenses includes approximately $52,000 in contract labor for IT/software development services, approximately $25,000 in personnel-related costs and approximately $26,000 in non-personnel-related costs.  The increase in contract labor for IT/software development services was principally due to development activities between the reported periods associated with our new COPsync911 product.  The personnel-related expenses increased slightly due to salary adjustments.  The non-personnel-related expenses relate primarily to services provided by outside service organizations in support of our research and development efforts.

We have taken steps, beginning in the second quarter of 2014, to reduce our research and development expenses for 2014 by approximately $650,000 from the $2,157,597 that we spent on those expenses in 2013.

Sales and Marketing

Total sales and marketing expenses for the three-month period ended March 31, 2014 were $316,957, compared to $320,720 for the comparable period in fiscal 2013.  We expect that our sales and marketing expenses in the remainder of fiscal 2014 will continue to increase when compared to 2013 as we have added headcount within our sales team, including a senior sales executive.  We believe these increased expenses will produce greater sales growth for us, particularly with respect to our COPsync911 service.

General and Administrative

Total general and administrative expenses for the three-month periods ended March 31, 2014 were $433,173, compared to $363,140 for the comparable period in fiscal 2013.  The $70,033 increase in expenses between periods is due to an increase in professional services fees for legal and accounting services totaling $43,000, and a one-time $60,000 fee paid to the financier who is assisting us with our application for an E-B5 financing.  These increases were partially offset by a $32,000 reduction in personnel-related expenses.  We believe that our general and administrative expenses for the remainder of fiscal 2014 will remain relatively flat.

Other Expense

Other expense, consisting principally of interest expense, totaled $11,047 and $4,729 for the three-month periods ended March 31, 2014 and 2013, respectively.

Net Loss Before Income Taxes

The net loss before income taxes for the three-month periods ended March 31, 2014, and 2013 were $746,774 and $729,283, respectively.

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 March 31, 2014, we had $261,354 in cash and cash equivalents, compared to $414,051 as of December 31, 2013.  The $152,697 decrease in cash was due to net cash used by operating activities of $656,028 and investing activities of $3,618, partially offset by net cash provided by financing activities of $506,949.

The net cash provided by financing activities represents cash proceeds of $30,000 from investments in our common stock for cash, and $500,000 in proceeds from the issuance of two promissory notes.  These inflows were partially offset by $23,051 in outflows representing payments on outstanding notes for automobile and business insurance loans.

We had a working capital deficiency of $3,739,471 on March 31, 2014, compared to a deficiency of $3,739,475 on December 31, 2013.  However, on March 31, 2014, our current liabilities included $2,636,870 in net deferred revenues attributable to future performance obligations under prepaid customer contracts, the actual future costs of which we believe will not represent a majority of this amount.

20

Plan of Operation for the Next Twelve Months

We expect our liquidity position to improve as we proceed through fiscal 2014, thus enabling us to support our planned operating expenses.  In the first quarter of 2014, we continued our efforts we began in 2013 to manage our liquidity, to avoid default on any third-party obligations and to continue growing our business towards cash-flow break-even, and ultimately profitability, including the following:

1)  We anticipate the number of orders for our products and services will increase in 2014 over 2013 as a result of changes we have made in our sales organization, including hiring a new sales executive and the hiring of new, more seasoned, sales representatives.  We also expect to collect cash from renewing customers of approximately $1.9 million in 2014, an estimated $800,000 increase over the approximately $1.1 million in cash from renewing customers collected in 2013.

2)  In 2013, we introduced our COPsync911 real-time threat alert service, which we believe is the only threat alertservice of its kind in the United States.  The service enables a person (such as a schoolteacher in a school) to instantaneously and silently send emergency alerts directly to local law enforcement officers in their patrol vehicles and the local emergency dispatch center with just the click of a computer mouse or screen icon.  We are primarily offering the COPsync911 service in the State of Texas and other selected regions of the United States. We expect the pace of COPsync911 sales to accelerate as our sales team and resellersbecomes familiar with the service and the strategies for selling it.  We expect COPsync911 bookings from our direct and channel sales efforts to range between $1.2 million and $2.0 million for fiscal year 2014.

3)  Our procurement processes for third party hardware employs “just in time” principles, meaning that we attempt to schedule delivery to the customer of the third party hardware we sell immediately after we receive the hardware.  We also continue in our attempts to collect customer prepayments for the third party hardware we sell at or about the time we order the hardware.  This change in the processing of third party hardware has helped us significantly in managing our working capital.

4)  Our key vendors continue to accommodate us through extended payment terms or practices for our outstanding payables balances, but we are uncertain how long these accommodations will continue.

5)  In the first quarter of 2014, we received a $475,000 loan from the City of Pharr, Texas, and we expect to receive an additional loan of $375,000 from that city in May or June of 2014.

6)  In April 2014, the Company’s Board of Directors authorized management to raise up to $1,000,000 in new capital in 2014, of which 80,000 has been raised as of the date of this report.  Additionally, the Company has borrowed $400,000 (see Note 15 to the Condensed Financial Statements) and is currently in discussions with potential investors to raise at least $500,000 of the target capital amount.  The Company is also seekingaworking capital line of credit to fund third party and proprietary equipment purchases from the manufacturers.

7)  We are attempting to secure up to $1.5 million in funding pursuant to an EB-5 program, which we hope to close in 2014.  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 currently have a letter of intent with a financier for the EB-5 project.  The financier has already completed the required economic impact analysis for the project, which will be located in Pharr, Texas.  We will use a portion of any proceeds from this EB-5 program to repay the bridge loans from the City of Pharr, Texas.  Any remaining funds will be used for general working capital purposes, including our anticipated hiring of at least 30 employees in the Pharr area over the 24 month period after receiving the proceeds, who will office in a recently refurbished leased facility owned by the City of Pharr.

8)  We plan to reduce our research and development expenses in 2014 by approximately $650,000 from the amount we spent in 2013, even though those expenses increased from 2013 in the first quarter.  We believe that we have the capability to reduce further operating expenses, should circumstances warrant.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has accumulated significant losses as it has been developing its current and recently added offerings. The Company has had recurring losses and expects to report losses for fiscal 2014. The Company believes that cash flow from operations, together with the potential sources of debtand equity and revenue-based financing outlined above will be sufficient to fund the Company’s anticipated operations for the next twelve months.

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

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the date of this quarterly report on Form 10-Q, we conducted, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e)) under the Exchange Act as of the end of the period covered by this report.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in recording, processing, summarizing and reporting information required to be disclosed within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Control Over Financial Reporting

During the three months ended March 31, 2014, there were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Limitations on the Effectiveness of Internal Controls

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

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PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 1A.  Risk Factors

None

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

During the three months ended March 31, 2014, we issued 300,000 shares of our common stock, and associated warrants (with an exercise price of $0.10 per share) to purchase 60,000 shares of our common stock, in exchange for an aggregate $30,000 in cash.  

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

Item 3.  Defaults Upon Senior Securities

None

Item 4.  Mine Safety Disclosures

None

Item 5.  Other Information

None.

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Item 6.  Exhibits

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

* Filed herewith.

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SIGNATURES

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

	COPSYNC, INC.
Date: May 15, 2014	By:	/s/ Barry W. Wilson
		Barry W. Wilson
		Chief Financial Officer

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