TMCnet News
COPSYNC, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Statements in this report which are not purely historical facts or which necessarily depend upon future events, including statements about trends, uncertainties, hopes, beliefs, anticipations, expectations, plans, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements, including risks and uncertainties described in our annual report on Form 10-K for the year ended December 31, 2011. Any of these risk factors could have a material adverse effect on our business, financial condition or financial results and reduce the value of an investment in our securities. We may not succeed in addressing these and other risks associated with an investment in our securities, with our business and with our achieving any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements. All forward-looking statements are based upon information available to us on the date the statements are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Overview We sell the COPsync service, which is a real-time, in-car information sharing, communication and data interoperability network for law enforcement agencies. The COPsync service enables patrol officers to collect, report and share critical data in real-time at the point of incident and obtain instant access to various local, state and federal law enforcement databases. The COPsync service also eliminates manual processes and increases officer productivity by enabling officers to electronically write tickets, process DUI and other arrests and document accidents and other incidents. We believe that the service saves lives, reduces unsolved crimes and assists in apprehending criminals through such features as a nationwide officer safety alert system, GPS/auto vehicle location and distance-based alerts for crimes in progress, such as child abductions, bank robberies and police pursuits. The first customer installations of our new VidTac system are occurring in the fourth quarter of 2012. To date, our COPsync service has successfully submitted, processed and relayed over 3,824,000 officer initiated information requests. On average, our service is returning responses to our customers in less than five seconds, well within the 32 second average NCIC 2000 standard for mobile clients. As of November 11, 2012, over 300 law enforcement agencies, primarily in the State of Texas, had contractually subscribed to use our real-time data collection and data sharing service. We offer our information sharing network software as a service (SaaS) on a subscription basis to our customers who subscribe to use the service for a specified term. Service fees are typically paid annually at the inception of each year of service. Our business model is to obtain subscribers to use our service, achieve a high subscription renewal rate from those subscribers and then grow our revenue via a combination of new subscribers and renewals of existing subscribers. Pertinent attributes of our business model include the following: - We incur start-up costs and recurring fixed costs to establish and maintain the service. - We acquire subscribers and bring them onto our service, which requires variable acquisition costs related to sales, installation and deployment. - Subscribers are recruited with the goal of reaching a level of aggregate subscriber payments that exceeds the fixed (and variable) recurring service costs. - Adding new subscribers at a high rate and having a high renewal rate among existing subscribers is essential to attaining positive cash flow from operations in the near term. Assuming we are successful in obtaining new users of our service, as well as retaining high renewal rates of existing users, we anticipate that the recurring nature of the COPsync network subscription model will result in annually recurring, sustainable and predictable cash and revenue growth, year-over-year. 19-------------------------------------------------------------------------------- Table of Contents In the Homeland Security Act of 2002, Congress mandated that all U.S. law enforcement agencies, federal, state and local, implement information sharing solutions, referred to as "interoperability." The COPsync service provides this interoperability. Prior to the introduction of our service, significant real-time, in-field, information sharing among law enforcement agencies, regardless of the vendor used, did not exist in the United States. We believe that this lack of interoperability exists because law enforcement software vendors maintain and operate proprietary systems, which do not interoperate with systems of other vendors. Our business model is to connect the proprietary systems of these various vendors, thus enabling the sharing of real-time, in-field, information between the agency customers of those vendors. Our service can act as an overlay for those vendors who do not offer an in-vehicle mobile technology or an underlay that operates in the background for those vendors that do offer an in-vehicle mobile technology. Basis of Presentation, Critical Accounting Policies and Estimates Critical Accounting Policies and Estimates The preparation of financial statements and related disclosures in accordance with accounting principles generally accepted in the United States requires our management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ from these estimates and assumptions. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require management's most subjective judgments. We describe our significant accounting policies in Note 2, Summary of Significant Accounting Policies, of the Notes to Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2011. We discuss our Critical Accounting Policies and Estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the year ended December 31, 2011. Results of Operations Revenues. Total revenues for the three-month and nine-month periods ended September 30, 2012 were $641,177 and $2,091,752, respectively, compared to $719,316 and $1,696,080, respectively, for the comparable periods in 2011. Total revenues are comprised of software license/subscriptions revenue and hardware, installation and other revenue. Software license/subscriptions revenue is a key performance indicator of revenue performance in future years, since this revenue represents that portion of our revenue that is anticipated to recur as our service contracts renew from year-to-year. Hardware, installation and other revenue is a one-time revenue event, and is thus not a key performance indicator of future performance. Software license/subscriptions revenues totaled $373,172 and $1,074,640 for the three-month and nine-month periods ended September 30, 2012, respectively, compared to $292,525 and $666,199, respectively, for the comparable periods in 2011, an increase of $80,647 and $408,441, respectively. Software license/subscriptions revenue comprised 58% and 51% of our total revenues for the respective three-month and nine-month periods ended September 30, 2012. The increase in software license/subscriptions revenue was due to an increase in the number of contracted law enforcement agencies between periods, plus revenue attributable to contract renewals. Hardware, installation and other revenues totaled $268,005 and $1,017,112 for the three-month and nine-month periods ended September 30, 2012, respectively, compared to $426,791 and $1,029,861, respectively, for the comparable periods of 2011. The decrease in revenues for hardware, installation and other in the three-month and nine-month periods in 2012 reflects a lower percentage of contracts requiring equipment when compared to the same periods in 2011. We currently have a backlog of contracted service agreements with equipment needs, many of which will be completed in the fourth quarter of 2012. Many of our new contracts are multiple-year contracts that typically include hardware, installation and training (and integration in some cases) and one year of software license/subscriptions revenue during the first year of the contract, followed by software license/subscriptions revenue during the remaining years of the contract. Normally, we receive full payment up front upon inception of the contract. We initially record this up-front payment as deferred revenues, which are subsequently recognized as revenue during the service period. We do not believe the increase in deferred revenues as contracts are initiated has a material effect on our future working capital for the later years of the contract service periods because our customer support costs are incrementally fixed in nature. Beginning in the third quarter of 2011 many of our contracts contained price discounts. We allocated these discount amounts, in accordance with applicable accounting guidelines, to the separate, contract elements, such as hardware, installation and officer setup and training, certain integration services and service fees. As a result, we experienced a lower gross profit on hardware, installation and other revenues. We expect to continue discounting our products and services for the remainder of 2012. 20-------------------------------------------------------------------------------- Table of Contents Cost of Revenues and Gross Profit (Loss) The following is a summary of the cost of revenues and gross profit or loss performances for the respective revenue types for the respective three-month and nine-month periods ended September 30, 2012 and 2011: For the three months ended September 30, For the nine months ended September 30, 2012 2011 2012 2011 $ % $ % $ % $ % Hardware, installation and other revenues Revenues $ 268,005 100 % $ 426,791 100 % $ 1,017,112 100 % $ 1,029,881 100 % Cost of Revenues-hardware & other external costs 196,730 74 % 484,845 114 % 869,758 86 % 1,058,732 103 % Cost of Revenues-internal costs 37,917 14 % 34,116 8 % 113,570 11 % 101,116 10 % Total Gross Profit/(Loss) $ 33,358 12 % $ (92,170 ) (22 %) $ 33,784 3 % $ (129,967 ) (13 %) Software license/subscription revenues Revenues $ 373,172 100 % $ 292,525 100 % $ 1,074,640 100 % $ 666,199 100 % Cost of Revenues-internal costs 43,537 12 % 16,235 6 % 143,857 13 % 60,808 9 % Cost of Revenues-OEM distributor fees 0 0 % 0 0 % 60,685 6 % 0 0 % Amortization of capitalized software development costs 109,120 29 % 34,918 12 % 327,360 30 % 104,754 16 % Total Gross Profit $ 220,515 59 % $ 241,372 83 % $ 542,738 51 % $ 500,637 75 % Total Company Revenues $ 641,177 100 % $ 719,316 100 % $ 2,091,752 100 % $ 1,696,080 100 % Cost of Revenues 387,304 60 % 570,114 79 % 1,515,230 72 % 1,325,410 78 % Total Gross Profit $ 253,873 40 % $ 149,202 21 % $ 576,522 28 % $ 370,670 22 % For the respective three-month and nine-month periods ended September 30, 2012, our total cost of revenues were $387,304 and $1,515,230, respectively, compared to $570,114 and $1,325,410, respectively, for the comparable periods in fiscal 2011. As a result, we realized gross profits of $253,873 and $576,522, respectively, for the three-month and nine-month periods ended September 30, 2012, compared to $149,202 and $370,670, respectively, for the comparable periods in 2011. Cost of revenues for hardware, installation and other revenues for the three-month and nine-month periods ended September 30, 2012 totaled $234,647 and $983,328, respectively, compared to $518,961 and $1,159,848, respectively, for the comparable periods in fiscal 2011. The decrease of approximately $177,000 for the nine-month period comparison was due to lower hardware sales in fiscal 2012. Included in these cost of revenues are internal costs, which totaled $113,570 and $101,116 for the nine-month periods ended September 30, 2012 and 2011, respectively. These internal costs represent salaries and travel expenses for our in-house installation and training staff. The total gross profit from hardware, installation and other revenue totaled $33,784 for the nine-month period ended September 30, 2012, compared to a gross loss of $129,967 for the comparable period in 2011. Cost of revenues for software license/subscription revenues for the three-month and nine-month periods ended September 30, 2012 totaled $152,657 and $51,153, respectively, compared to $531,902 and $165,562, respectively, for the comparable periods in fiscal 2011. The increase of approximately $103,000 for the three-month period comparison consisted of approximately $74,000 in increased amortization expense for capitalized software and $27,000 for increased internal costs. These internal costs represent costs associated with our customer support team and web-hosting facilities. The increase of approximately $366,000 for the nine-month period comparison consisted of approximately $223,000 in increased amortization expense for capitalized software, $61,000 for OEM distributor fees and development costs and $82,000 for increased internal costs. We anticipate our internal costs to remain relatively flat for the remainder of 2012. The resulting gross profit from software license/subscription revenues for the three-month and nine-month periods in 2012 was $220,515 and $542,738, respectively, compared to $241,372 and $500,637, respectively, for the comparable periods in fiscal 2011. Our total cost of revenues has the potential to fluctuate with revenues because of the variable cost nature of hardware, installation and other revenues contained in future contracts, as discussed above. Conversely, our internal costs associated with installation, training, customer support and web-site hosting are relatively flat. 21-------------------------------------------------------------------------------- Table of Contents Operating Expenses. Research and Development Total research and development expenses for the three-month and nine-month periods ended September 30, 2012 and 2011 were $656,337 and $1,603,280, respectively, compared to $149,311 and $474,396, respectively, for the comparable periods in 2011. The $507,000 increase in expense for the three-month comparison, as well as, the $1,129,000 expense increase for the nine-month comparison, is due to the development and introduction of two new product/service offerings announced in 2012, as well as continued enhancement of our existing product/service offerings. As a result, for the three-month and nine-month periods ended September 30, 2012, compensation-related expenses associated with increased headcount, including contract labor for IT/software development services, increased from the previous year by approximately $273,000 and $635,000, respectively, and non-recurring expenses for product development activities increased by approximately $234,000 and $475,000, respectively, from the previous year. We believe these higher levels of research and development expense will continue through the remainder of 2012, but we expect the expense to be significantly reduced in fiscal 2013. Sales and Marketing Total sales and marketing expenses for the three-month and nine-month periods ended September 30, 2012, were $330,337 and $1,076017, respectively, compared to $242,437 and $656,059, respectively, for the comparable periods in fiscal 2011. The $87,900 increase in these expenses for the three-month comparison, as well as the $419,958 expense increase for the nine-month comparison, is being driven principally by the introduction of the two new product/service offerings we are announcing in 2012, which has resulted in increased headcount in sales and sales support as we ramped-up our pre-introduction sales efforts, as well as related travel expenses. We believe our current staffing levels are sufficient to adequately support our new product introductions in 2012, and we anticipate a continued relatively high level of travel expenses, principally due to fuel costs resulting from our sales team's use of our fleet automobiles. Our new product/service offerings are WARRANTsyc, which was released in May 2012, and VidTac, which was released in November 2012. WARRANTsync is a service that provides the subscribing municipal courts with a real-time warrant servicing program when dealing with law enforcement agencies subscribing to the COPsync service offering. With this service, we believe that the clearing of outstanding warrants can be greatly expedited. VidTac is a software-driven video product offering. It provides high resolution imaging at a lower cost, when compared to existing video product offerings. General and Administrative Total general and administrative expenses for the three-month and nine-month periods ended September 30, 2012, were $407,486 and $1,027,787, respectively, compared to $323,486 and $1,031,225, respectively, for the comparable periods in fiscal 2011. The $84,000 increase in these expenses for the three-month comparison is due principally to headcount increases and other, non-personnel costs. We believe that our general and administrative expenses for the remainder of fiscal 2012 may increase approximately five percent over current levels because of an additional headcount in finance and other sundry expenses. Other Expense Other expense for the three-month and nine-month periods ended September 30, 2012, totaled $11,595 and $23,182, respectively, which consisted principally of interest expense and losses on asset disposals. For the three month period ended September 30, 2011, other income totaled $80,792, which included a gain of $85,000 involving a lawsuit settlement, partially offset by interest expense of $4,499. Other income for the nine-month period ended September 30, 2011 totaling $53,586, consisted of the $85,000 gain involving a lawsuit settlement, partially offset by interest expense of $33,590. Net Loss Before Income Taxes The net loss before income taxes for the three-month and nine-month periods ended September 30, 2012, were $1,151,882 and $3,153,744, respectively, compared to $485,240 and $1,737,424, respectively, for the comparable periods in fiscal 2011. 22-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources We have funded our operations since inception through the sale of equity and debt securities and from cash generated by operating activities. As of September 30, 2012, we had $364,681 in cash and cash equivalents, compared to $1,074,317 as of December 31, 2011. The decrease was due primarily to $2,458,741 net cash used in operating activities and $10,171 in net cash used by investing activities, partially offset by $1,759,276 in net cash provided by financing activities. The net cash provided by financing activities represents cash proceeds of $1,573,000 from the issuance of common stock for cash, as well as $212,685 in cash received for shares of our common stock to be issued involving: 1) $60,685 from two of our original equipment manufacturer ("OEM") distributors, and 2) $152,000 from two private investors, as well as $66,341 in proceeds from notes payable involving automobile loans. These inflows were partially offset by $92,750 in payments on certain outstanding notes payable. We had a working capital deficiency of $1,104,472 on September 30, 2012, compared to a deficiency of $405,268 on December 31, 2011. However, on September 30, 2012, our current liabilities include $790,560 in net deferred revenues attributable to future performance periods under prepaid customer contracts, which we believe will not have a material effect on our future working capital in the later years of the prepaid contracts because our customer support costs are incrementally fixed in nature. Plan of Operation for the Next Twelve Months At September 30, 2012, we had cash and cash equivalents on hand of $364,681 and had a working capital deficiency of $1,104,472. Our net deferred revenues totaling $1,447,225, for which we believe the future service costs will be relatively low and incrementally fixed in nature, exceeds the working capital deficiency. We have increased our expense levels over fiscal 2011 levels to invest in our direct sales efforts and to invest in new product/service offerings. We have invested heavily in research and development expenses in year 2012 for two new product innovations: WARRANTsync, our statewide class C misdemeanor warrant clearing system launched earlier this year, and VidTac, our software driven law enforcement video system, deliveries of which commenced in November of this year. These increased expense levels have resulted in negative cash flow throughout fiscal 2012, which we expect to continue through the end of the year. We expect to support this negative cash flow by raising additional capital. Our Board of Directors authorized us to raise approximately $2.2 million in new capital, inclusive of approximately $1,725,000 we had received as of September 30, 2012. The total cash received consisted of $1,573,000 for shares of common stock that had been issued as of September 30, 2012, and $152,000 for shares of common stock to be issued after September 30, 2012. We believe that we will raise at least an additional $475,000 either in the form of debt or equity prior to the end of 2012. Our Board of Directors may authorize us to seek additional capital, either in the form of debt or equity, as circumstances require or funding opportunities become available. With cash we receive from our current capital raising efforts, and the collections of cash subscriptions and other foreseeable funding sources, we believe we will have adequate cash resources for the next twelve months. |