Looking at Accounting Fundamentals for a Company Called CopSync

Introduction.

There is an Addison-based company called CopSync (NASDAQ: COYN) that has had my attention for the last couple of years. I first got interested because of their connection to AG Ken Paxton. While his world was falling to pieces over securities violations related to a company called Servergy, which appears to finally be going to trial, I got interested in CopSync. Paxton owns or at least owned a sufficient number of shares in CopSync for him to be one of the handful of stockholders disclosed in financial filings. My curiosity was whether AG Paxton was the recipient of shares of CopSync for the same reason he was for Servergy, and that was to be compensated for promoting the firm.

I’m still curious about the Paxton connection, but my attention has drifted to other aspects of CopSync. One has to do with service. However, I cannot find anything derogatory in the public domain regarding their product or services. And I’m glad. That would be my concern if so since CopSync serves local governments, which I do consider to be my bailiwick. CopSync serves a number of local governments, almost all very small.

For instance, a recent press release for CopSync states that the City of Helotes has joined their network of customers. The number of customers appears to be quite large, 530 agencies in fact. That would include thousands of police officers in 15 states across the US. I believe I have seen numbers in previous press releases of approximately 670, so I’ve got some questions about the customer base. However, 530 agencies would be an impressive number.

Yellow Flags.

I have seen some caution signs. The public relations firm for CopSync must be very effective in that I receive a Google Alert multiple times each week. One example states CopSync’s network “is the nation’s only system connecting law enforcement officers and agencies nationwide, and provides access to a national database of non-adjudicated law enforcement information and real-time communication capability to connected agencies, even those thousands of miles apart.” That just seems strange to be the ”only” system in the nation, but I could let that pass my filter. I always watch for words like “best,” but I guess that would be redundant if you are the only one out there.

My curiosity expanded when the news alerts for CopSync included highlights like “The Company is conducting pilot programs with the San Antonio PD and with the Sheriff’s Office for Bexar County.” Whoa, Baby! In my 42 years of working with local governments, the one thing I have grown to appreciate is that tricky little thing called scale. It’s the garden hose vs fire hydrant kind of scale. Nevertheless, I wish CopSync well and hope it all works out.

Although advertising hype is absorbed and discounted in most of our daily lives, that’s not the case when it comes to publicly traded companies. So then came another announcement from CopSync that caught my eye and caused me more worry. The headline in caps said “FIRST MAJOR TEXAS METROPOLITIAN AREA POLICE DEPARTMENT JOINS COPSYNC NETWORK.” Dang! Who might that be?

The subheading said “CITY OF LANCASTER, SCHOOL DISTRICT POLICE DEPARTMENT BEGAN USING COPSYNC THIS SCHOOL YEAR.”

So, which one is it? The City of Lancaster? The Lancaster ISD? Both? It would appear to be both. Until you read deeper where after a confusing “The City of Lancaster Independent School District,” paragraph (an animal that does not exist) speaks only about LISD. I contacted the City of Lancaster Police Chief to confirm it is LISD but not the City. Honest mistake? Maybe. But strange for a company born in Texas and is being raised in Texas by Texans.

Red Flag.

Being a numbers person is both a blessing and a curse. When a stock price gets too high for some investors, it is not unusual to have a 2:1 or 3:1 split. The reverse is also true. You have to be a certain size stock price to be traded on the primary exchanges or be eligible for the big institutional buyers. However, on October 13, 2015, CopSync announced a 1-for-50 reverse stock split. Wow! Now, that will get your attention.

However, all did not go well apparently. This penny-stock only reached a high of $9.55 between when the CopSync shareholders approved the reverse split and when it became effective. But what happened after the peak of $9.55? As you can see from the chart below, the CopSync stock has steadily declined to a low or $0.70 on October 6, 2016. Since then it closed at $0.7780 last Friday. That doesn’t look very promising.

copsync

Bigger Red Flag.

What do the stockholders know that most people do not know, including the purchaser of CopSync’s goods and services? I was also puzzled by the CopSync news alerts that appeared to be nothing but good news. I saw a headline that said CopSync’s Gross Profit Margin was 29.00%. That’s when I started doing some digging. In fact, I went back to the beginning and started comparing financial statements and SEC filings for the last ten years. I was more than a little shocked. It is not at all unusual for a start-up company to have a few years of losses.

To be sustainable (a “going concern” in accounting vernacular), a business must eventually make a profit unless two things happen: 1) somebody loans them money from a bottomless well and/or 2) stockholders keep putting money in the company in hopes that they will not only get their money back but make a profit.

Since 2008, CopSync has had revenues of $28,989,455 and Cost of Revenues (mostly hardware and software costs) of $21,256,922 for a Gross Profit of $7,732,533. But that is just the first line of value on the Income Statement. Yep, if you are going to choose one number to highlight, there you go.

But wait, as the late night Veggie-Matic commercial goes, there’s more. There are three big other expenses for General & Administrative, Research & Development and Sales & Marketing. These three big guys have totaled $36,292,758 since 2008.

That means the Loss From Operations totaled $28,560,225 since 2008! Another deduction for Other Expenses such as Interest Expense totals $4,139,400 for a total loss since 2008 of $32,699,525.

How does a company that has a Net Loss of $32,699,525 since 2008 stay in business? Especially when the losses from 2012 through 2015 are -$4,287,930; -$3,839,856; -$4,328,467; and -$6,505,422. And then it gets worse as the first six months of 2016 show a loss of -$5,314,063.

The answer to that question is a variety of loans from vendors, owners and spouses of owners. There is even a footnote about a big loan from the Pharr, TX EDC that was later hoped to be turned into a grant. Vendors have apparently been paid in stock.  There is a much larger part of cash that has come from additional stock issues and the stock Uplist, presumably from the reverse split.

Conclusion.

My concern is not about CopSync. I hope they make it, but I personally don’t see how the financial arithmetic is going to work out. If their plan is to sell their base of customers to an outside firm, it would seem to me that income from the sale of equipment and services is going to have to double to break even.

If CopSync is hoping to land the big one – as their PR suggests – then two questions come to mind. Are they planning to price their incremental services to subsidize the current base of small guys? Also, there are absolutely tons of stories in the business world of companies that are doing well (making a profit) at a certain level that then collapse when they jump to a higher scale of business. Are they geared to make that happen? If it happens?

My concern is for the 530 (or whatever the number is) of agencies, mostly in Texas if CopSync can’t continue to get funding. If fact, I can’t imagine what group of knowledgeable stockholders would put $30+ million into a company that is losing money big time – and with losses that are growing.

I actually don’t understand how CopSync has withstood the eye of the SEC and even the NASDAQ? And even the securities’ analysts that supposedly rate CopSync. Are they independent? I read the transcript of a recent earnings conference call and the questions seemed like softballs considering a company that is losing so much money.

In any case, for any of my readers considering CopSync products, kick the tires on their products and services to be satisfied there is a good fit. But also ask about how they are going to turn around multi-million dollar losses year after year. LFM

 

 

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