United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2009
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File Number 000-51822
STINGER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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NEVADA
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30-0296398
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification Number)
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5505 Johns Road, Suite 702
Tampa, Florida
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33634
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(Address of principal executive offices)
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(Zip Code)
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(813) 281-1061
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
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 (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o
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 definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
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Non-accelerated filer
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Do not check if a smaller reporting company
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Smaller reporting Company
þ
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
All amounts set forth in this Quarterly Report Form 10-Q have been adjusted to reflect a 1-for 5
reverse stock split completed on January 17, 2009. There were 4,697,945 shares outstanding of the
issuers common stock, par value $0.001 per share, as of November 12, 2009.
STINGER SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
STINGER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
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September 30,
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December 31,
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2009
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2008
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(Unaudited)
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CURRENT ASSETS
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Cash
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$
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19,545
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$
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699,934
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Accounts Receivable, net of $1,800 allowance for uncollectible accounts in 2009 and 2008
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68,511
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75,200
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Inventories, at cost
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183,030
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238,757
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Prepaid Expenses and Other Current Assets
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213,925
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254,898
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TOTAL CURRENT ASSETS
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485,011
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1,268,789
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EQUIPMENT AND FURNITURE
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Equipment and Furniture, net of accumulated depreciation of $329,040 and $229,767 in
2009 and 2008, respectively
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234,037
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231,706
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OTHER ASSETS
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Prepaid Interest, Long Term Asset
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119,501
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257,373
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Intangible Assets, net of accumulated amortization of $1,813,574 and $1,527,222 in 2009
and 2008, respectively
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859,046
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1,145,398
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Other Assets
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24,402
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35,898
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TOTAL OTHER ASSETS
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1,002,949
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1,438,669
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TOTAL ASSETS
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$
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1,721,997
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$
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2,939,164
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See accompanying notes.
(Continued)
3
STINGER
SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY
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September 30,
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December 31,
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2009
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2008
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(Unaudited)
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CURRENT LIABILITIES
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Accounts Payable
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$
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830,034
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$
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417,425
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Accrued Liabilities
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366,736
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254,638
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Capital Lease Obligation, current portion
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25,164
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23,571
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Note Payable-Related Parties
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31,250
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31,250
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TOTAL CURRENT LIABILITIES
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1,253,184
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726,884
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Capital Lease Obligation, long-term portion
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33,216
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52,293
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Note Payable-Convertible, net of debt discount of $5,032,955 and
$5,340,001 for 2009 and 2008, respectively
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2,907,605
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2,551,199
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Derivative Liability Associated with Convertible Note and Warrants
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6,200,000
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7,377,771
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TOTAL LIABILITIES
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10,394,005
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10,708,147
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COMMITMENTS AND CONTINGENCIES
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STOCKHOLDERS (DEFICIT) EQUITY
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Preferred Stock, $0.001 Par Value, 1,000,000 Shares Authorized, None Issued
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Common Stock, $0.001 Par Value, 50,000,000 Shares Authorized, 4,697,945
and 4,001,832 Shares Issued and Outstanding at September 30, 2009 and
December 31, 2008, respectively
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4,698
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4,002
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Additional Paid-In Capital
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49,505,793
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47,259,019
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Retained Deficit
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(58,182,499
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(55,032,004
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TOTAL STOCKHOLDERS (DEFICIT) EQUITY
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(8,672,008
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(7,768,983
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TOTAL LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY
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$
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1,721,997
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$
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2,939,164
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See accompanying notes.
4
STINGER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2009
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2008
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2009
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2008
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REVENUES
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Sales
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$
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254,219
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$
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118,401
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$
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720,084
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$
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516,362
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Cost of Product Sold
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223,036
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118,931
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707,271
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548,393
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GROSS MARGIN(LOSS)
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31,183
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(530
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12,813
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(32,031
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SELLING EXPENSES
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60,829
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57,165
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184,899
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347,620
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GENERAL AND ADMINISTRATIVE EXPENSES
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Employee Salaries
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151,075
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215,096
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542,546
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789,870
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Other
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1,701,719
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914,485
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2,202,889
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3,901,882
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Depreciation and Amortization
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126,400
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120,510
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385,625
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362,939
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Research and Development
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48,432
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25,082
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178,733
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156,316
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TOTAL GENERAL AND ADMINISTRATIVE EXPENSES
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2,027,626
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1,275,173
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3,309,793
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5,211,007
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LOSS FROM OPERATIONS
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(2,057,272
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(1,332,868
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(3,481,879
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(5,590,658
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INTEREST INCOME
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17,060
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5,401
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20,992
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INTEREST EXPENSE
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(285,451
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(244,881
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(851,788
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(639,652
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CHANGE IN DERIVATIVE LIABILITY
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(1,640,000
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(11,558,974
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1,177,771
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(15,612,974
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LOSS BEFORE INCOME TAXES
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(3,987,723
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(13,119,663
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(3,150,495
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(21,822,292
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PROVISION FOR INCOME TAXES
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NET (LOSS) GAIN
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$
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(3,982,723
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$
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(13,119,663
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$
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(3,150,495
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$
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(21,822,292
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BASIC AND DILUTED (LOSS) PER COMMON SHARE
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$
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(
0.85
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$
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(3.28
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$
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(
0.71
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$
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(5.59
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES
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Basic and Diluted
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4,697,945
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4,001,596
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4,419,500
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3,906,791
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See accompanying notes.
5
STINGER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Nine Months Ended September 30,
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2009
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2008
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net Income(Loss)
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$
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(3,150,495
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$
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(21,822,292
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)
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Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
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Depreciation and Amortization
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385,625
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362,939
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Stock Option Expense
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1,260,220
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2,642,356
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Stock Issued
for Services
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204,000
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Amortization of Discount on Notes Payable-Convertible
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410,094
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377,092
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Derivative Liability Associated with Convertible Note
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(1,177,771
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)
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15,612,974
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Changes in Operating Assets and Liabilities
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Accounts Receivable
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6,689
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50,408
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Inventory
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55,727
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(104,000
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Prepaid Expenses
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323,591
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47,040
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Accounts Payable
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412,609
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108,685
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Accrued Liabilities
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112,098
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89,965
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NET CASH USED IN OPERATING ACTIVITIES
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(1,157,613
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(2,634,833
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CASH FLOWS FROM INVESTING ACTIVITIES
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Purchase of Equipment
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(101,604
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(12,230
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)
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NET CASH USED IN INVESTING ACTIVITIES
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(101,604
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)
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(12,230
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CASH FLOWS FROM FINANCING ACTIVITIES
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Proceeds from the Sale of Common Stock
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1,200
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Proceeds from the Sale of Common Stock
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Payments on Capital Lease Obligation
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(17,484
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)
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(17,741
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)
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Proceeds from the Issuance of Convertible Notes Payable, Net of
Issuance Costs and Prepaid Interest
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596,312
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4,380,995
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NET CASH PROVIDED BY FINANCING ACTIVITIES
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578,828
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4,364,454
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NET DECREASE IN CASH
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(680,389
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)
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1,717,391
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CASH BALANCE, BEGINNING OF PERIOD
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699,934
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345,293
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CASH BALANCE, END OF PERIOD
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$
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19,545
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$
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2,062,684
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NON-CASH INVESTING AND FINANCING ACTIVITIES
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Conversion of Notes Payable to Common Stock
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(320,000
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)
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Common Stock Issued for Notes Payable Conversion
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|
1,052
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Additional Paid in Capital from Conversion of Notes Payable
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318,948
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Derivative Liability
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(3,130,000
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)
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Deferred Debt Discount
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(650,000
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)
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(2,032,500
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)
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Common stock
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1,350
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Paid-in-capital
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650,000
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5,161,150
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|
$
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$
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SUPPLEMENTAL CASH FLOW DISCLOSURES
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Cash Paid During the Year For:
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Interest
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|
$
|
3,586
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$
|
184,895
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|
|
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Taxes
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|
$
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|
|
$
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|
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|
See accompanying notes.
6
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements for Stinger Systems, Inc. (the
Company) have been prepared in accordance with United States generally accepted accounting
principles for interim financial information and with the instructions to Form 10-Q and Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by United
States generally accepted accounting principles for complete consolidated financial statements. In
the opinion of management, all adjustments considered necessary for a fair presentation have been
included. All such adjustments are of a normal and recurring nature. These financial statements
should be read in conjunction with the audited financial statements as of December 31, 2008.
Operating results as of September 30, 2009 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2009.
Management of the Company has determined that the Companys operations are comprised of one
reportable segment, and therefore, no separate segment disclosures have been included in the
accompanying notes to the financial statements. This is referred to as the management approach.
The management approach facilitates consistent descriptions of a public entity in its annual report
and various other published information. It focuses on financial information that a public entitys
decision makers use to make decisions about the public entitys operating matters.
All amounts set forth in this Quarterly Report on Form 10-Q have been adjusted to reflect a 1-for 5
reverse stock split completed on January 17, 2009.
Embedded Derivatives
The conversion feature of the convertible note payable and warrants issued in connection with the
convertible note payable issued by the Company in August 2007, February 2008, September 2008 and
July 2009 was accounted for as an embedded derivative and was valued on the transaction date using
the Black-Scholes pricing model. At the end of each quarterly reporting date, the value of the
derivatives are evaluated and adjusted to current fair value. At September 30, 2009, the Companys
derivative valuation liability totaled $6,200,000.
Reclassifications
Certain reclassifications have been made to the 2008 consolidated financial statements in order to
conform to the 2009 presentation.
Loss per Share
Basic loss per share is determined based on the weighted average number of common shares
outstanding during each period. Diluted loss per share is the same as basic loss per share because
all common share equivalents are excluded from the calculation, because their effect is
anti-dilutive. The weighted average number of shares of common stock outstanding for the three
month period ended September 30, 2009 and September 30, 2008 was 4,697,945 and 4,001,596,
respectively. The weighted average number of shares of common stock outstanding for the nine month
period ended September 30, 2009 and September 30, 2008 was 4,419,500 and 3,906,791, respectively.
Options and warrants to purchase 22,490,986 and 9,864,059 shares of common stock were outstanding
at September 30, 2009 and September 30, 2008, respectively, and were excluded from the computation
of diluted earnings per share as the effect of these options and warrants would have been
anti-dilutive.
NOTE 2: USE OF ESTIMATES
The preparation of the financial statements in conformity with United States generally accepted
accounting principles requires management to make estimates and assumptions that affect reported
amounts in the consolidated financial statements. Therefore, actual results could differ materially
from those estimates used in the preparation of these financial statements.
7
NOTE 3: REVENUE RECOGNITION
The Company recognizes revenue when delivery of the product has occurred or services have been
rendered, title has been transferred, the price is fixed and collectability is reasonably assured.
We warrant our products against manufacturing defects for a period of one year. As of September
30, 2009, we had no significant warranty claims on products sold. Once significant amounts of sales
of the new model our new stun gun commence, we expect to make an accrual for warranty claims based
on our sales.
NOTE 4: INVENTORIES
Inventories are stated at the lower of average cost or market. Inventories consisted of the
following at September 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Raw Materials and Work-In Progress
|
|
$
|
148,520
|
|
|
$
|
203,595
|
|
Finished Goods
|
|
|
34,510
|
|
|
|
35,161
|
|
|
|
|
|
|
|
|
|
|
$
|
183,030
|
|
|
$
|
238,757
|
|
|
|
|
|
|
|
|
NOTE 5: PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets include the following:
|
|
|
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
Interest
|
|
$
|
205,763
|
|
Legal Deposits
|
|
|
7,500
|
|
Other Deposits
|
|
|
662
|
|
|
|
|
|
|
|
$
|
213,925
|
|
|
|
|
|
NOTE 5: STOCK BASED COMPENSATION
Effective January 1, 2006, the Company measures and recognizes compensation expense for all
stock-based awards made to employees and directors, including stock option grants, based on
estimated fair values.
Stock-based compensation is calculated according to FASB ASC Topic 718,
Compensation Stock
Compensation
, which requires a fair-value-based measurement method to account for stock-based
compensation. The Company uses the Black-Scholes-Merton valuation formula, which is a closed-form
model that uses an equation to determine the estimated fair value of stock options. The value of
the portion of the award that is ultimately expected to vest is recognized as expense over the
requisite service periods in our Consolidated Statements of Operations. Stock options were granted
at an exercise price equal to the Companys stock price at the date of grant.
We maintain the 2005 Stock Option/Stock Bonus Plan (the Plan) for employees, outside directors
and consultants. At September 30, 2009, 7,811,900 options were outstanding under the Plan with
exercise prices ranging from $0.35 to $40.25 per share. The requisite service periods for the
options to vest vary from one month to two years and the options expire five years from the date of
grant. At September 30, 2009, 2,739,100 shares remained available for grant, including
forfeitures.
The fair value of the stock-based awards was estimated using the Black-Scholes model with the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Estimated fair value
|
|
$
|
0.33
|
|
|
$
|
0.20
|
|
|
$
|
0.33
|
|
|
$
|
0.64
|
|
Expected life (years)
|
|
|
4.60
|
|
|
|
3.33
|
|
|
|
4.60
|
|
|
|
2.33
|
|
Risk free interest rate
|
|
|
2.09
|
%
|
|
|
2.08
|
%
|
|
|
2.09
|
%
|
|
|
2.38
|
%
|
Volatility
|
|
|
185.68
|
%
|
|
|
137.83
|
%
|
|
|
185.68
|
%
|
|
|
136.9
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
NOTE 6: GENERAL AND ADMINISTRATIVE EXPENSES, OTHER
General and Administrative Expenses Other includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Legal and Professional Fees
|
|
$
|
337,667
|
|
|
$
|
238,087
|
|
|
$
|
541,382
|
|
|
$
|
459,838
|
|
Stock Option Expense
|
|
|
1,260,220
|
|
|
|
333,765
|
|
|
|
1,260,220
|
|
|
|
2,642,356
|
|
Insurance Expense
|
|
|
5,186
|
|
|
|
7,435
|
|
|
|
12,546
|
|
|
|
12,797
|
|
Other
|
|
|
98,646
|
|
|
|
335,198
|
|
|
|
388,741
|
|
|
|
786,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,701,719
|
|
|
$
|
914,485
|
|
|
$
|
2,202,889
|
|
|
$
|
3,901,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7: CAPITAL LEASE OBLIGATIONS
In January 2007, the Company entered into a capital lease for a tool room mill machine in which the
Company pays $631 per month for a term of four years, with the initial lease term ending on
December 2010. The lease agreement contains a bargain purchase option after the initial term of the
lease, at which time the Company may purchase the leased equipment for $101.
In September 2007, the Company entered into a capital lease for a tool room mill machine in which
the Company pays $824 per month for a term of four years, with the initial lease term ending on
August 2011. The lease agreement contains a bargain purchase option after the initial term of the
lease, at which time the Company may purchase the leased equipment for $101.
In September 2007, the Company entered into a capital lease for a tool room mill machine in which
the Company pays $1,111 per month for a term of five years, with the initial lease term ending
August 2012. The lease agreement contains a bargain purchase option after the initial term of the
lease, at which time the Company may purchase the leased equipment for $101.
NOTE 8: NOTES PAYABLE CONVERTIBLE
On July 14, 2009, the Company closed two private placement transactions (the July 2009 Offerings)
with two institutional investors pursuant to which the Company issued and sold to the institutional
investors two senior secured convertible notes (the July 2009 Notes) in an aggregate principal
amount of $650,000 and warrants to purchase 4,062,500 shares of the Companys common stock (the
July 2009 Warrants). The July 2009 Notes are convertible into 3,250,000 shares of the Companys
common stock at a price of $0.20 per share. Under the terms of the July 2009 Notes, the Company, at
its option, may pay any portion of the interest then due in cash or may elect to issue shares of
the Companys common stock. The July 2009 Warrants are exercisable immediately at a price of $0.20
per share. As a result of the issuance of the July 2009 Notes, the August 2007 Note, the September
2008 Note and February 2009 have all had their conversion price along with the conversion price of
the warrants associated with these Notes, reset to $0.20 per share.
Neither the shares to be issued upon conversion of the July 2009 Note nor upon exercise of the July
2009 Warrant have been registered under the Securities Act of 1933 (the Securities Act), as
amended, and may not be offered or sold in the absence of an effective
registration statement or exemption from the registration requirements. Midtown Partners & Co.,
LLC (Midtown) acted as placement agent for the July 2009 Offering. The Company paid Midtown a cash
fee equal to $20,000 and issued to Midtown a warrant to purchase 750,000 shares of the Companys
common stock at a price of $0.20 per share. The July 2009 Note and the July 2009 Warrant were
offered and sold to an accredited investor (as defined in section 501(a) of Regulation D)
pursuant to an exemption from the registration requirements under Section 4(2) of the Securities
Act.
On September 12, 2008, the Company closed a private placement transaction (the September 2008
Offering) with an institutional investor pursuant to which the Company issued and sold to the
institutional investor a senior secured convertible note (the September 2008 Note) in an
aggregate principal amount of $3,075,000 and a warrant to purchase 2,586,207 shares of the
Companys common stock (the September 2008 Warrant). At September 30, 2009, the September 2008
Note was convertible into 5,882,353 shares of the Companys common stock at a price of $0.20 per
share. Under the terms of the September 2008 Note, the Company, at its option, may
9
pay any portion of the interest then due in cash or may elect to issue shares of the Companys
common stock. The September 2008 Warrant is exercisable immediately at a price of $0.20 per share.
Neither the shares to be issued upon conversion of the September 2008 Note nor upon exercise of the
September 2008 Warrant have been registered under the Securities Act, and may not be offered or sold in the absence of an effective
registration statement or exemption from the registration requirements. Midtown acted as placement agent for the September 2008 Offering. The Company paid Midtown a
cash fee equal to $67,500 and issued to Midtown a warrant to purchase 372,414 shares of the
Companys common stock at a price of $0.20 per share. The September 2008 Note and the September
2008 Warrant were offered and sold to an accredited investor (as defined in section 501(a) of
Regulation D) pursuant to an exemption from the registration requirements under Section 4(2) of the
Securities Act.
On February 29, 2008, the Company closed a private placement transaction (the February 2008
Offering) with an institutional investor pursuant to which the Company issued and sold to that
institutional investor a senior secured convertible note (the February 2008 Note) in the
aggregate principal amount of $2,150,000 and a warrant to purchase 3,296,377 shares of the
Companys common stock at $0.20 per share (the February 2008 Warrant). The Company also issued
to that institutional investor 250,000 shares of the Companys common stock valued at $981,250. The
conversion rate of the February 2008 Note, the number of shares under the February 2008 Warrant and
the February 2008 Warrant exercise price have been reset due to the anti-dilution provisions of the
February 2008 Note. At September 30, 2009, the February 2008 Note was convertible into 4,215,686
shares of the Companys common stock at a price of $0.20 per share. Under the terms of the February
2008 Note, the Company, may pay any portion of the interest then due in cash or may elect to issue
shares of the Companys common stock. The February 2008 Warrant, consisting of 3,296,377 shares of
stock at September 30, 2009, is exercisable immediately at a price of $0.20 per share. In
connection with the February 2008 Offering, the Company amended a security agreement entered into
in August 2007 in connection with a prior offering and amended and restated the senior secured
convertible note issued in such offering. Neither the shares to be issued upon conversion of the
February 2008 Note nor upon exercise of the February 2008 Warrant nor the shares issued in
connection therewith have been registered under the Securities Act and may not be offered or sold in the absence of an effective registration statement or exemption from the
registration requirements. Midtown acted as placement agent for the February 2008 Offering. The
Company paid Midtown a cash fee equal to $67,500 and issued to Midtown 20,000 shares of common
stock and a warrant to purchase 95,520 shares of the Companys common stock. The February 2008
Note, the February 2008 Warrant and the Shares were offered and sold to an accredited investor
(as defined in section 501(a) of Regulation D) pursuant to an exemption from the registration
requirements under Section 4(2) of the Securities Act.
On August 3, 2007, the Company completed a private placement transaction with an institutional
investor pursuant to which the Company issued and sold to that institutional investor a senior
secured convertible note (the August 2007 Note) in the aggregate principal amount of $3,000,000
and a warrant to purchase 2,586,207 shares of the Companys common stock at $0.20 per share (the
August 2007 Warrant). During 2008, $320,000 of the August 2007 Note was converted into 210,412
shares of common stock, and $61,200 of interest was capitalized leaving a balance at September 30,
2009 of $2,799,450. The conversion rate of the August 2007 Note, the number of shares under the
August 2007 Warrant and the August 2007 Warrant price have been reset due to anti-dilution
provisions of the notes. At September 30, 2009 the August 2007 Note was convertible into 5,374,902
shares of the Companys common stock at a price of $0.20 per share. Under the terms of the August
2007 Note, the Company, at its option, may pay any portion of the interest then due in cash or may
elect to issue the investor shares of the Companys common stock. The August 2007 Warrant,
consisting of 2,586,207 shares at September 30, 2009, is exercisable immediately at a price of
$0.20 per share. The Company granted the investor certain registration rights with respect to the
shares to be issued upon conversion of the August 2007 Note and upon exercise of the August 2007
Warrant. Neither the shares to be issued upon conversion of the August 2007 Note nor upon exercise
of the August 2007 Warrant have been registered under the Securities Act and may not be
offered or sold in the absence of an effective registration statement or
exemption from the registration requirements. The August 2007 Note and the August 2007 Warrant were
offered and sold to an accredited investor (as defined in section 501(a) of Regulation D)
pursuant to an exemption from the registration requirements under Section 4(2) of the Securities
Act. Midtown acted as placement agent for the offering. The Company paid Midtown a cash fee of
$270,000 and issued Midtown a warrant to purchase 170,293 shares of the Companys common stock at
an exercise price of $0.20 per share.
All of the Companys assets have been pledged as collateral for all of the notes described above.
The warrants and the conversion features of the August 2007 Note, the September 2008 Note and
February 2009 Note were reviewed for possible embedded derivatives. The conversion features of the
August 2007 Note, the September 2008 Note and February 2009 Notes were deemed to have embedded
derivative features and were accounted for as such. At the end of each quarterly reporting date,
10
the value of the derivatives are evaluated and adjusted to current fair value. At September 30,
2009, the Companys derivative valuation liability totaled $6,200,000.
NOTE 9: LIQUIDITY AND CAPITAL RESOURCES
The process of developing and commercializing the Companys products requires significant research
and development, engineering, testing, marketing and sales efforts, and manufacturing capabilities.
These activities, together with the Companys general and administrative expenses, require
significant investments and are expected to continue to result in operating losses for the
foreseeable future while the Company continues to introduce its Stinger product line to the
marketplace. To date, revenues recognized from its current products have not been sufficient for
the Company to achieve or sustain profitability. The Company believes it is unlikely that its
existing cash resources will be sufficient to fund its operations at its planned levels of
research, development and sales and marketing activities. Execution of the Companys current
strategies will require it to raise additional capital through debt or equity transactions in order
to finance its operations in the future. The Company believes that additional financing may be
available to it, but there can be no guarantee that financing will be available on acceptable terms
or at all. If adequate funds are not available, the Company may be required to delay, reduce the
scope of or eliminate its research and development programs, reduce its commercialization efforts,
or effect changes to its facilities or personnel, and its ability to operate as a going concern may
be adversely impacted.
NOTE 10: NEW ACCOUNTING PRONOUNCEMENT
In June 2009, the FASB issued FASB ASC 105,
Generally Accepted Accounting Principles,
which
establishes the FASB Accounting Standards Codification as the sole source of authoritative
generally accepted accounting principles (GAAP). The codification did not change GAAP but
reorganizes the literature. Pursuant to the provisions of FASB ASC 105, we have updated references
to GAAP in our financial statements issued for the period ended September 30, 2009. The adoption
of FASB ASC 105 did not impact our financial position or results of operations.
11
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Companys financial condition and results of
operations should be read together with the financial statements and related notes appearing in
Item 1 of this Part I and the financial statements and notes thereto and the Managements
Discussion and Analysis of Financial Condition and Results of Operations contained in the Companys
Annual Report on Form 10-K filed with the Securities and Exchange Commission (the SEC).
Forward-Looking Statements
The following discussion and analysis of the financial condition and results of operations
should be read in conjunction with the consolidated financial statements, related notes, and other
detailed information included elsewhere in this Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009 (this Form 10-Q). This Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements are statements other than
historical information or statements of current condition. We generally identify forward-looking
statements by the use of terms such as believe, intend, expect, may, should, plan,
project, contemplate, anticipate
or other similar statements. Examples of forward-looking
statements in this Form 10-Q include, but are not limited to statements
concerning: (a) the timely development and acceptance of new products, (b) sources of supply and
concentration of customers, (c) acceptance in the marketplace, establishment and expansion of our
distribution channels, (d) endorsement of opinion leaders in the law enforcement community, (e)
implementation risks of manufacturing automation, (f) risks associated with rapid technology
change, (g) impact of media publicity, (h) dependence upon sole or limited source suppliers, (i)
existing or potential lawsuits, (j) risks of governmental regulations and (k) dependence upon key
employees and other factors detailed in the Companys filings with the SEC. These factors should
not be considered exhaustive. We undertake no obligation to release publicly the results of any
future revisions we may make to forward-looking statements to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events. We caution you not to put
undue reliance on these forward-looking statements. These forward-looking statements relate to our
plans, objectives and expectations for future operations. In light of the risks and uncertainties
inherent in all such projected operational matters, the inclusion of forward-looking statements in
this Form 10-Q should not be regarded as a representation by us or any other person that our
objectives or plans will be
achieved or that any of our operating expectations will be realized. Our actual financial
results realized could differ materially from the statements made herein, depending in particular
upon the risks and uncertainties described in our filings with the SEC.
Executive Summary
Stinger Systems is in the business of producing and marketing less-lethal products to the law
enforcement, correctional, professional security and military markets. The Companys products
include the Ice-Shield which is an electro-stun crowd control/prisoner extraction shield, the
Band-It which is a remotely activated electro-stun prisoner restraint system, and the Stinger S-200
AT electronic immobilization device (EID). The Companys success is largely dependent upon the
commercialization of the S-200 AT.
The companys ability to generate future revenues is dependent upon the overall reception of the
Stinger product line. The Company has refined features of the Stinger S-200 AT EID based on
market feedback from early Stinger EID models such as the S-200 and the S-400. The EID market is
relatively new with only one significant competitor in the marketplace. Therefore, market
demographics and feedback significantly impact the design of the Stinger EID product. The Company
believes that it developed a state-of-the-art product that is very competitive. However, like many
advanced technologies, further modifications of the S-200 AT may be required to remain competitive.
The Company uses some third party manufacturers to assist in creating manufacturing efficiencies
and reduce cost of goods sold. However, the Company is under no long term contractual obligations
with these third parties. Because the Stinger S-200 AT is classified as a firearm by the U.S.
Bureau of Alcohol, Tobacco, and Firearms (ATF), the Company serializes all S-200 ATs, maintains
records, and ships all S-200 ATs from its production and manufacturing facilities. The majority of
the S-200 AT utilizes off the shelf electronic components and believes that manufacturing of the
circuit boards and sourcing of the components can be easily sourced. The Company will continually
seek best pricing for its products.
The Company sells its products directly and via distributors. While the Companys focus in the
United States currently is to rely on its internal sales force, international sales are solely
reliant on the Companys distributors.
At the present time, the company does not generate sufficient revenues from its operations to pay
its operating costs. Management believes the Company will need additional outside sources of
funding in the future to continue the production and promotion of its products.
Results of Operations
Revenues.
Revenue increased $135,818 or 115% to $254,219 for the three months ended September
30, 2009 compared to $118,401 for the three months ended September 30, 2008, and increased
$203,722 or 39% to $720,084 for the nine months ended September 30, 2009 compared to $516,362 for
the nine months ended September 30, 2008. The increase for the nine and three months ended
September 30, 2009 compared to 2008 was due to the Companys ability to fill orders for the nine
and three months ended September 30, 2009.
Cost of Goods Sold.
Cost of Goods Sold increased $104,105 or 88% to $223,036 for the three
months ended September 30, 2009 compared to $118,931 for the three months ended September 30, 2008,
and increased $158,878 or 29% to $707,271 for the nine months ended September 30, 2009 compared to
$548,393 for the nine months ended September 30, 2008. The increase for the three and nine months
ended September 30, 2009 was due to the increase in sales and production. The cost of production
for the periods ended September 30, 2009 and September 30, 2008, includes manufacturing costs such
as materials, labor and identifiable overhead related to finished goods and components.
Gross Margin
. Gross margin increased $31,713 to $31,183 for the three months ended September
30, 2009 compared to $(530) for the three months ended September 30, 2008 and increased $44,845 to
$12,813 for the nine months ended September 30, 2009 compared to $(32,032) for the nine months
ended September 30, 2008. The increase in gross margin was principally due to reduced costs to
produce our product.
Selling Expenses.
Selling expenses increased $3,664 to $60,829 for the three months ended
September 30, 2009 compared to $57,165 for the three months ended September 30, 2008 and decreased
$162,721 to $184,899 for the nine months ended September
12
30, 2009 compared to $347,621 for the nine months ended September 30, 2008. The decrease for
the nine months ended September 30, 2009 was due to the restructuring of our sales department.
General and Administrative Expenses.
General and Administrative (G&A) expenses increased
$752,453 or 59% to $2,027,626 for the three months ended September 30, 2009 compared to $1,275,173
for the three months ended September 30, 2008 and decreased
$1,901,214 to $3,309,793 for the nine
months ended September 30, 2009 compared to $5,211,007 for the nine months ended September 30,
2008. The decrease in G&A expenses for the three and nine months ended September 30, 2009 as
compared to the three and nine months ended September 30, 2008 is primarily due to the decrease of
stock option expense and insurance expense. Additionally, other operating expenses for the three
months ended September 30, 2009, include legal and professional
fees of $337,667, stock option
expense in the amount of $1,260,220, insurance expense of $5,186 and other costs in the amount of
$98,646, compared to legal and professional fees of $238,087, stock option expense in the amount of
$333,765, insurance expense of $7,435 and other costs in the amount of $335,198 for the three
months ended September 30, 2008. Other operating expenses for the nine months ended September 30,
2009, include legal and professional fees of $541,382, stock option expense of $1,260,220,
insurance expense of $12,546, and other costs in the amount of $388,741, compared to legal and
professional fees of $459,838, stock option expense in the amount of $2,642,356, insurance expense
of $12,797, and other costs in the amount of $786,891 for the nine months ended September 30, 2008.
Research and Development Expenses.
Research and Development (R&D) expenses increased $23,350
or 39% to $48,432 for the three months ended September 30, 2009, compared to $25,082 for the three
months ended September 30, 2008 and increased $22,417 or 14% to $178,733 for the nine months ended
September 30, 2009 compared to $156,316 for the nine months ended September 30, 2008. The
Companys increase in R&D expense is attributable to costs associated with future generations of
the projectile stun gun and the advanced stage of development in comparison to last year.
Interest Income.
Interest income decreased $17,060 to $0 for the three months ended September
30, 2009, compared to $17,060 for the three months ended September 30, 2008 and decreased $15,590
to $5,401 for the nine months ended September 30, 2009 compared to $20,992. The decrease for the
three and nine months ended September 30, 2008 to 2009 was due to an decrease in working capital
and decrease in cash balances.
Interest Expense.
Interest expense increased $40,570 to $285,451 for the three months ended
September 30, 2009, compared to $244,881 for the three months ended September 30, 2008 and
increased $212,136 to $851,788 for the nine months ended September 30, 2009 compared to $639,652
for the nine months ended September 30, 2008. The increase for the three and nine months ended
September 30, 2008 to 2009 was due to financing received on July 14, 2009.
Net
Loss.
Net loss decreased by $9,136,940 to $(3,982,723) or $(0.85) per common share for the
three months ended September 30, 2009 compared to a net loss of $(13,119,663) or $(3.28) per common
share for the three months ended September 30, 2008 and
decreased $18,691,797 to $(3,150,495) or
$(0.71) per common share for the nine months ended September 30, 2009 compared to a net loss of
$(21,822,292) or $(5.59) per common share for the nine months ended September 30, 2008. The
decrease in the net loss was due primarily to the change in derivative liability associated with
accounting for financing received during the third quarter of 2007 and the first quarter of 2008
and the third quarter of 2009.
Liquidity and Capital Resources
The process of developing and commercializing the Companys products requires significant
research and development, engineering, testing, marketing and sales efforts, and manufacturing
capabilities. These activities, together with the Companys general and administrative expenses,
require significant investments and are expected to continue to result in operating losses for the
foreseeable future while the Company continues to introduce its Stinger product line to the
marketplace. To date, revenues recognized from its current products have not been sufficient for
the Company to achieve or sustain profitability. The Company believes it is unlikely that its
existing cash resources will be sufficient to fund its operations for 2009 at its planned levels of
research, development and sales and marketing activities. Thus, execution of our current strategies
will require us to raise additional capital through debt or equity transactions in order to finance
its operations through 2009. The Company is not certain that additional financing will be available
to it, or that financing will be available on acceptable terms. If adequate funds are not
available, the Company may be required to delay, reduce the scope of or eliminate its research and
development programs, reduce its commercialization efforts, or effect changes to its facilities or
personnel, and its ability to operate as a going concern may be adversely impacted.
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At September 30, 2009, we had working capital of $(768,183), including a cash balance of
$19,545. This represents a decrease in working capital of $1,310,088 from working capital of
$541,905 at September 30, 2008 and a cash balance of $699,934. This decrease in working capital is
principally due to a decrease in cash and an increase in payables. Operating activities for the
nine months ended September 30, 2009 and the nine months ended September 30, 2008 used cash of
$1,157,613 and $2,634,833, respectively. The decrease in the negative cash flow from operating
activities during the nine months ended September 30, 2009, as compared to 2008 was primarily due
to the decrease in our derivative liability and the stock option expense as computed for the nine
months ended September 30, 2009.
The long-term continuation of the Companys business plans is dependent upon generation of
sufficient revenues from its products to offset expenses. In the event that the Company does not
generate sufficient revenues, it will be required to obtain additional funding through public or
private financing, if available, and/or reduce certain discretionary spending. Management believes
certain operating costs could be reduced if working capital decreases significantly and additional
funding is not available. Failure to generate sufficient revenues, raise additional capital and/or
reduce certain discretionary spending could have a material adverse effect on the Companys current
operations and its ability to achieve its intended long-term business objectives.
Critical Accounting Policies
We have identified the following policies as critical to our business operations and the
understanding of our results of operations. The preparation of these financial statements require
us to make estimates and assumptions that effect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of our financial statements, and the
reported amounts of revenue and expenses during the reporting period. There can be no assurance
that actual results will not differ from those estimates. The effect of these policies on our
business operations is discussed below where such policies affect our reported and expected
financial results.
Revenue Recognition. Our revenue recognition policy is significant because our revenue is a
key component of our results of operations. We recognize revenue when delivery of the product has
occurred or services have been rendered, title has been transferred, the price is fixed and
collectability is reasonably assured. Sales of goods are final, with no right of return.
Warranty Costs. We warrant our products against manufacturing defects for a period of one
year. As of September 30, 2009, we have had no significant warranty claims on products sold. Once
significant sales of our new model stun gun commence, we expect to make an accrual for warranty
claims based on our sales.
Intangible Assets. We have substantial intangible assets. Our estimate of the remaining useful
life of these assets and the amortization of these assets will affect our gain from operations.
Since we do not have a method of quantifying the estimated number of units that may be sold, we
have elected to amortize these intangibles over a seven year period beginning in the first quarter
of 2005.
Common Stock Issued for Goods and Services. We have issued our common stock for intangible
assets and services received or to be received. The values assigned to such stock issuances effects
the amount of recorded assets and the amount of recorded expenses. For stock issued before November
12, 2004 (the Companys common stock began trading on the Pink Sheets on November 12, 2004), we
assigned a value of $0.36 to $0.40 per share, which approximates the cash received per share for
shares sold on September 24, 2004. For shares issued after November 12, 2004, we assigned the
closing value quoted on the OTC Bulletin Board or on the Pink Sheets as the amount of the recorded
asset or expenditure. From May 2005 until November 2005, we incurred $145,000 per month of
liquidated damages as part of the registration rights agreement from the December 2004 financing.
Purchase Accounting. Our purchase accounting policy is to record any acquisitions in
accordance with current accounting pronouncements and allocate the purchase price to the net
assets. We evaluate the fair market values of tangible and intangible assets based on current
market conditions, and financial and economic factors. Intangible assets are valued using several
cash flow projection models and financial models to establish a baseline for their respective
valuations. We valued our acquisition of the stun gun technology based on the competitive advantage
the technology provides. These competitive advantages are analyzed in relation to the current
market and may include valuation techniques, such as the cost to develop the technology, the cost
of designing around the claims of an existing patent held by a third party or technology,
comparable transactions of like-kind patents or technology, and discounted cash flows of future
incremental profits that may be generated. We valued our intangible assets, including our stun gun
technology, utilizing the aforementioned techniques. We valued our stun gun technology by comparing
current competitors revenue and assumed a 10% market penetration of this revenue. We also assumed
a factor for the increase in the general use of this stun gun technology, the estimated economic
life of this current technology of approximately seven years, and the anticipated profit margins
that we believed was achievable. Our policy is to expense in-process research and development costs
at acquisition.
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Stock Options. The Company has one incentive stock plan, the 2005 Stock Option Plan (the
Plan). The Plan is intended to attract and retain directors, officers and employees of the Company
and to motivate these persons to achieve performance objectives related to the Companys overall
goal of increasing stockholder value. The principal reason for adopting the Plan is to ensure that
the Company has a mechanism for long-term, equity-based incentive compensation to directors,
officers and employees. Awards granted under the Plan may be in the form of qualified or
non-qualified stock options, restricted stock, stock appreciation rights, long-term incentive
compensation units consisting of a combination of cash and shares of the Companys common stock, or
any combination thereof within the limitations set forth in the Plan.
The Plan is administered by the compensation committee of the board of directors, which
selects eligible employees and non-employee directors to participate in the Plan and determines the
type, amount and duration of individual awards. Stock-based compensation is calculated according
to FASB ASC Topic 718,
Compensation Stock Compensation
, which requires a fair-value-based
measurement method to account for stock-based compensation. The Company uses the
Black-Scholes-Merton valuation formula, which is a closed-form model that uses an equation to
determine the estimated fair value of stock options.
Embedded Derivatives. Certain features of the convertible notes payable were accounted for as
embedded derivatives and were valued on the transaction date using the Black-Scholes pricing model.
At the end of each quarterly reporting date, the value of the derivatives are evaluated and
adjusted to current fair value. At September 30, 2009, the Companys derivative valuation liability
totaled $6,200,000.
Limited Trading Market. On February 22, 2006, our common stock began trading on the OTC
Bulletin Board. An investment in a security quoted on the OTC Bulletin Board is speculative and
involves a high degree of risk. Many OTC Bulletin Board securities are relatively illiquid, or
thinly traded, which tends to increase price volatility. Illiquid securities are often difficult
for investors to buy or sell without dramatically affecting the quoted price. In some cases, the
liquidation of a position in a OTC Bulletin Board security may not be possible within a reasonable
period of time. Reliable information regarding issuers of OTC Bulletin Board securities, their
prospects, or the risks associated with the business of any particular issuer or an investment in
the issuers securities may not be available. As a result, it may be difficult to properly value an
investment in a OTC Bulletin Board security. Prior to February 23, 2006, our stock has been quoted
on the Pink Sheets which presented similar risks related to the liquidity of the market for our
shares.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Our exposure to market risk is currently confined to our cash and cash equivalents and
restricted cash. We currently do not hedge interest rate exposure. We have not used derivative
financial instruments for speculation or trading purposes. Because of the short-term maturities of
our cash, cash equivalents and marketable securities, we do not believe that an increase in market
rates would have any significant impact on the realized value of our investments, but may increase
the interest expense associated with any future debt.
Our most liquid assets are cash and cash equivalents. Because of their liquidity, these assets
are not directly affected by inflation. We also believe that we have intangible assets in the value
of our intellectual property. In accordance with United States generally accepted accounting
principles, we have not capitalized the value of this intellectual property on our balance sheet.
Due to the nature of this intellectual property, we believe that these intangible assets are not
affected by inflation. Because we intend to retain and continue to use our equipment, furniture and
fixtures and leasehold improvements, we believe that the incremental inflation related to
replacement costs of such items will not materially affect our operations. However, the rate of
inflation affects our expenses, such as those for employee compensation and contract services,
which could increase our level of expenses and the rate at which we use our resources.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, including our principal executive and principal financial officers, has
evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)
or 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of September 30, 2009. Our
disclosure controls and procedures are designed to provide reasonable assurance that the
information required to be disclosed in this report on Form 10-Q has been appropriately recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms, and that such information is accumulated and communicated to our
management, including our principal executive and principal financial officers, to allow timely
decisions
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regarding disclosures. Based on that evaluation, our principal executive and principal
financial officers have concluded that our disclosure controls and procedures are effective at the
reasonable assurance level.
Changes in Internal Controls Over Financial Reporting
Our management, including our principal executive and principal financial officer, has
evaluated any changes in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) that occurred during the period covered by this report and have
concluded that there was no change that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
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PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
On August 4, 2008, John Ward filed an eight-count complaint against Dennis Kaufman, Frances J.
Reimer, the Company, John Doe 1 and John Doe 2 based, essentially, on a loan agreement entered into
in 1992, whereby Mr. Ward loaned $30,000 to Stun Tech, Inc. Mr. Ward seeks payment of a promissory
note which was the security for the loan, from all the defendants, and punitive damages against
Dennis Kaufman and Frances Reimer. The Company is a defendant to the breach of contract, unjust
enrichment and constructive trust counts of the complaint. Mr. Ward alleges liability against the
Company based on a successor liability theory, claiming that the Company is the successor entity of
Electronic Defense Technology LLC and, ultimately, of Stun Tech, Inc., the obligor of the
promissory note. Mr. Ward alleges damages in the amount of $232,630 from the Company, comprising
the principal of the note and interest from 1992. On September 18, 2008, the Company filed its
answer and affirmative defenses. Discovery is on-going. The deposition of the Companys corporate
representative was held on April 23, 2009, after which, the Company filed for summary judgment
based on its affirmative defenses. This trial for this case has not yet been reset.
On January 9, 2007, Taser International, Inc. filed a complaint against Stinger Systems, Inc. that
alleges patent infringement, false advertising, and patent false marking in its case, Taser
International, Inc. v. Stinger Systems, Inc., in United States District Court for the District of
Arizona, Case CV-07-0042-PHX-DGC. Discovery in this case is closed. Expert depositions are
completed. The Courts full Rule 16 Scheduling Order dated May 2, 2007 is available on line at
PACER, the official web site of the U.S. Courts. All dates are subject to modification. The case is
also seeking an unspecified amount of punitive damages. Absent modification or other unexpected
event, the Company will incur no legal fees for its defense in this case as the Companys attorney
has agreed upon entry of appearance to act as its attorney in the case without fee. However, out of
state attorneys fees will occur for representing in the state of Arizona where the case was filed.
An adverse outcome in this action may have a material adverse effect on our business and results of
operations. The company has filed for summary judgment.
The Company has been responding to an investigation by the Securities and Exchange Commission
(SEC), which commenced in December 2004. In connection with the investigation, the Company received a Wells Notice from the
SEC indicating that the staff intends to recommend that the SEC institute an action against the
Company, alleging that the Company violated Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 thereunder and Sections 5(a), 5(c), and 17(a) of the securities Act of 1933. The
proposed allegations relate to purported representations that the Company made about one of the
Companys products regarding when the Company would be shipping the product, the products status
with the Bureau of Alcohol, Tobacco, and Firearms, the performance of the product, and where the
Companys stock was trading. The allegations further related to the lack of registration for sales
of stock in late 2004, made by three individuals who were not officers, directors, or employees of
the Company. Under the Wells process established by the SEC, the Company has been provided an
opportunity to respond in writing before the staff makes a formal recommendation to the SEC
regarding any action. On May 1, 2008, the SEC announced that the Honorable Willis B. Hunt, United
States District Judge for the Northern District of Georgia, entered a Final Judgment as to
Defendant Stinger Systems, Inc. The Company was enjoined from future violations of Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Company consented to the entry
of the final judgment without admitting or denying any of the allegations of the Commissions
Complaint. The Complaint, filed on January 28, 2008, alleged that from October 2004 through March
2005, the Company and its president, Robert F. Gruder, made a series of fraudulent material
misrepresentations and omissions regarding the Companys flagship stun gun product. According to
the Complaint, the misrepresentations consisted of press releases and direct mailings
to thousands of law enforcement officers and agencies, suggesting that Stinger was manufacturing,
selling and shipping its stun gun. In fact, the product was still in the development phase. The
Complaint further alleged that the misrepresentations consisted of statements on the Companys
website and/or in industry publications that indicated the Companys stock was trading on NASDAQ,
when in fact it was not. The Complaint also alleged that the Company and Mr. Gruder misrepresented
that the Bureau of Alcohol, Tobacco and Firearms (ATF) certified the Companys stun gun, even
though the ATF offered no such certification. According to the Complaint, these misrepresentations
caused a spike in the trading volume and price for the Companys shares once it began publicly
trading in November 2004. The charges in the Complaint against Mr. Gruder have not been settled and
a judgment adverse to Mr. Gruder could jeopardize our business operations and exhaust the Companys
cash reserve, which may result in investors losing their entire investment.
ITEM 1.A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider
the risks and uncertainties described below in addition to the other information contained in this
annual report. If any of the following risks actually occur, our business, financial condition or
operating results could be harmed. In that case, the trading price of our common stock could
decline and investors may lose part or all of your
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investment. In the opinion of management, the risks discussed below represent the material
risks known to the company. Additional risks and uncertainties not currently known to us or that we
currently deem immaterial may also impair our business operations and adversely affect the market
price of our common stock.
We have a history of operating losses and anticipate future operating losses until such time as we
can generate additional sales.
Since beginning operations in September 2004, we have sustained substantial operating losses.
At the present time, we do not generate sufficient revenues to support our operating expenses. We
expect to have ongoing costs associated with the process of developing and commercializing the
Companys products, including significant research and development, engineering, testing, marketing
and sales efforts, and manufacturing capabilities. These activities, together with the Companys
general and administrative expenses, require significant investments and are expected to continue
to result in operating losses for the foreseeable future while the Company introduces its Stinger
product line to the marketplace. If adequate funds are not available to fund these activities, the
Company may be required to delay, reduce the scope of or eliminate its research and development
programs, reduce its commercialization efforts, or effect changes to its facilities or personnel,
and its ability to operate as a going concern may be adversely impacted.
If we do not obtain additional funding as needed, we may be unable to fund our engineering,
marketing and production activities and to adequately pursue our business plan.
Our business plan requires significant ongoing expenditures for product engineering, testing
and marketing of our products. It is likely that we will need additional outside funding sources in
the future to continue the production and the promotion of our products. If we are not successful
in obtaining additional funding for operations, if and when needed, we may have to discontinue some
or all of our business activities and our stockholders might lose all of their investment.
Our failure to properly design the Stinger projectile stun gun would have a material adverse effect
on our operations.
We will be devoting our capital and management efforts to the design, production and marketing
of the Stinger S-200 EID. There is no assurance that our current design will meet our targeted
specifications and tolerances, or that we will be able to manufacture the Stinger EID on a timely
basis at a competitive price. Additionally, both the original mold for the Stinger stun gun and the
mold for the ammunition needed to be redesigned to provide better fit and allow for mass production
on an economical basis. Any failure to timely resolve these issues will delay the production of the
Stinger EID. Failure to introduce the Stinger EID on a timely basis would have a material adverse
effect on us and investors could lose their entire investment.
If we fail to convince the market place that we have competitive products, we will not be
commercially successful.
Even if we are successful in designing products competitive to those of our competitors, it
will be necessary for us to educate and convince the market place of that competitiveness. If we
are unable to do so, we will not be able to achieve the market penetration necessary to become
commercially successful and our investors may lose their investments.
If third party manufacturers do not perform in a commercially reasonable manner, we may not be
successful.
We rely primarily on third parties to manufacture our products. We do not have long-term
supply contracts with these third party manufacturers and instead work on an order-by-order basis.
By not having long-term supply contracts, we run the risk that our current suppliers will opt to
discontinue their relationship with us thereby interrupting the flow of products and significantly
limiting our ability to operate our business. If alternative third party manufacturers could not be
located in a timely manner, we would go out of business and investors would lose their entire
investment. We own all of the rights, drawings, and intellectual property regarding schematics of
the electronics of our products. Circuit board manufacturing and transformer winding companies are
a common business throughout the world. We continually are examining alternative sourcing and may
have multiple suppliers providing transformers and circuit boards when economies of scale merit
such sourcing. We do not anticipate any business interruption if any of our suppliers could no
longer supply or work with us on our terms.
Our primary competitor, Taser International Inc., has an established name in the marketplace with
both distributors and the end-users of stun products.
Taser International, Inc. is the dominant player in our industry. Taser has been able to
successfully launch its products, and penetrate the marketplace. While we hope to design a product
that is competitive with those offered by Taser, there is no assurance that we will be able to do
so or that we will be able to successfully market such products if we are successful in designing
them. Unless we are able to persuade distributors or manufacturers representatives and end-users
of the competitiveness of our products, we will be unable to generate sufficient sales of our
products to become viable. Further, Taser already has contracts with a number of distributors and
end-users, who may be unwilling or unable to distribute or purchase our products, respectively.
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Negative publicity about less-than-lethal stun weapons may negatively impact sales of our products.
There have been a number of negative articles about the use and abuse of less-than-lethal
weapons by law enforcement and correctional officers. There have also been accusations that stun
guns have caused the deaths of subjects who have been stunned. The safety of such less-than-lethal
weapons has become a matter of some controversy and continued negative publicity about the use of
less-than-lethal stun devices may negatively impact the sale of our products.
The sale and use of our products may result in claims against us.
As noted above, the use of stun weapons has been associated with injuries, some serious and
permanent, including death. While we are attempting to design the Stinger projectile stun gun to
diminish the risk of injury, there can be no assurance that injuries will not occur from the use of
the product. Such injuries could result in claims against us. Although we intend to maintain
liability insurance for our products, there can be no assurance that the coverage limits of our
insurance policies will be adequate. Claims brought against us, whether fully covered by insurance
or not, will likely have a material adverse effect upon us.
We have been sued by Taser International, Inc. which could result in a judgment against us that
could negatively impact our operations.
On January 9, 2007, Taser International, Inc. filed a complaint against Stinger Systems,
Inc. that alleges patent infringement, false advertising, and patent false marking in its case,
Taser International, Inc. v. Stinger Systems, Inc., in United States District Court for the
District of Arizona, Case CV-07-0042-PHX-DGC. Discovery in this case is closed. Expert depositions
are completed. The Courts full Rule 16 Scheduling Order dated May 2, 2007 is available on line at
PACER, the official web site of the U.S. Courts. All dates are subject to modification. The case is
also seeking an unspecified amount of punitive damages. Absent modification or other unexpected
event, the Company will incur no legal fees for its defense in this case as the Companys attorney
has agreed upon entry of appearance to act as its attorney in the case without fee. However, out of
state attorneys fees will occur for representing in the state of Arizona where the case was filed.
An adverse outcome in this action may have a material adverse effect on our business and results of
operations. The company has filed for summary judgment.
We have been the subject of SEC Enforcement action
On May 1, 2008, the SEC announced that the Honorable Willis B. Hunt, United States District
Judge for the Northern District of Georgia, entered a Final Judgment as to Defendant Stinger
Systems, Inc. The Company was enjoined from future violations of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder. The Company consented to the entry of the final
judgment without admitting or denying any of the allegations of the Commissions Complaint.
The Complaint, filed on January 28, 2008, alleged that from October 2004 through March 2005,
the Company and its president, Robert F. Gruder, made a series of fraudulent material
misrepresentations and omissions regarding the Companys flagship stun gun product. According to
the Complaint, the misrepresentations consisted of press releases and direct mailings to thousands
of law enforcement officers and agencies, suggesting that Stinger was manufacturing, selling and
shipping its stun gun. In fact, the product was still in the development phase. The Complaint
further alleged that the misrepresentations consisted of statements on the Companys website and/or
in industry publications that indicated the Companys stock was trading on NASDAQ, when in fact it
was not. The Complaint also alleged that the Company and Mr. Gruder misrepresented that the Bureau
of Alcohol, Tobacco and Firearms (ATF) certified the Companys stun gun, even though the ATF
offered no such certification. According to the Complaint, these misrepresentations caused a spike
in the trading volume and price for the Companys shares once it began publicly trading in November
2004.
The charges in the Complaint against Mr. Gruder have not been settled and a judgment adverse
to Mr. Gruder could jeopardize our business operations and exhaust the Companys cash reserve,
which may result in investors losing their entire investment.
Claims by others that our products infringed their patents or other intellectual property rights
could adversely affect our financial condition.
Any claim of patent or other proprietary right infringement brought against us would be time
consuming to defend and would likely result in costly litigation, diverting the time and attention
of our management. Moreover, an adverse determination in a judicial or administrative proceeding
could prevent us from developing, manufacturing and/or selling some of our products, which could
harm our business, financial condition and operating results. Claims against our patents may cost
us significant expenses to defend and if our patents are not upheld, we may not be able to continue
operations and investors may lose their entire investment.
We may not be able to protect our patent rights, trademarks, and other proprietary rights.
We believe that our patent rights, trademarks, and other proprietary rights are important to
our success and our competitive position. While we have patents and licenses with respect to
certain of our products, there is no assurance that they are adequate to protect our proprietary
rights. Accordingly, we plan to devote substantial resources to the establishment and maintenance
of these rights. However, the actions taken by us may be inadequate to prevent others from
infringing upon our rights which could compromise any competitive position we may develop in the
marketplace.
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Law enforcement, correction and military operations are government agencies which are subject to
budgetary constraints, which may inhibit sales.
Government agencies are generally subject to budgets which limit the amount of money that they
can spend on weapons procurement. It may be that although a government agency is interested in
acquiring our products, it will be unable to purchase our products because of budgetary
constraints. Further, the lead time for an agency acquiring new weapons and receiving approval to
acquire them may delay sales to such agencies. Any such delay will have an adverse effect upon our
revenues.
There exist some state, local and international regulations and/or prohibitions on less-than-lethal
weapon systems which will make it more difficult or impossible to market our products in those
jurisdictions thereby limiting potential revenues.
Some states prohibit the sale of less-than-lethal weapon systems. Additional negative
publicity with respect to less-than-lethal weapon systems may cause other jurisdictions to ban or
restrict the sale of our products. Internationally, there are some countries which restrict and/or
prohibit the sale of less-than-lethal weapon systems. Further, the export of our less-than-lethal
weapon systems is regulated. Export licenses must be obtained from the Department of Commerce for
all shipments to foreign countries. To the extent that states, local governments or other countries
impose restrictions or prohibitions on the sale and use of our products or to the extent we are
unable to obtain export licenses for the sales of our weapons to international customers, our sales
could be materially adversely impacted.
If we cannot retain or hire qualified personnel, our programs could be delayed.
Our business is a technical and highly specialized area of the firearms industry. We are
dependent on the principal members of the management and technical staff. The loss of key employees
could disrupt our research and development and product promotion activities. We believe that our
future success will depend in large part upon our ability to attract and retain highly skilled,
scientific and managerial personnel. We face intense competition for these kinds of personnel from
other companies and organizations. We might not be successful in hiring or retaining the personnel
needed for our company to be successful.
Because our common stock is quoted only on the OTC Bulletin Board and the Pink Sheets, your ability
to sell your shares in the secondary trading market may be limited.
Our common stock is traded only on the OTC Bulletin Board and the Pink Sheets. Consequently,
the liquidity of our common stock is impaired, not only in the number of shares that are bought and
sold, but also through delays in the timing of transactions, and coverage by security analysts and
the news media, if any, of our company. As a result, prices for shares of our common stock may be
different than might otherwise prevail if our common stock was quoted or traded on a national
securities exchange such as the New York Stock Exchange, NASDAQ or the NYSE Amex Equities.
Our stock price has been volatile and your investment in our common stock could suffer a decline in
value.
Our common stock is quoted for trading only on the OTC Bulletin Board and the Pink Sheets. The
market price of our common stock may fluctuate significantly in response to a number of factors,
some of which are beyond our control. These factors include:
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sales of the Stinger projectile stun gun;
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announcements of technological innovations or new products by us or our competitors;
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government regulatory action affecting our products or our competitors products;
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developments or disputes concerning patent or proprietary rights;
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actual or anticipated fluctuations in our operating results;
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changes in our financial estimates by securities analysts;
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broad market fluctuations; and
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economic conditions in the United States.
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During 2008, the split-adjusted closing sales price of our stock ranged from $0.55 to $7.60.
Our stock closed on September 30, 2009 at $0.45 per share. All amounts set forth in this Form 10-Q
have been adjusted to reflect a 1-for 5 reverse stock split affected on January 17, 2009.
Trading of our stock may be restricted by the SECs penny stock regulations, which may limit a
stockholders ability to buy and sell our stock.
The SEC has adopted regulations which generally define penny stock to be any equity security
that has a market price (as defined) less than $5.00 per share or an exercise price of less than
$5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock
rules, which impose additional sales practice requirements on broker-dealers who sell to persons
other than established customers and accredited investors. The term accredited investor refers
generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The
penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the
SEC which provides information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the
transaction and
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monthly account statements showing the market value of each penny stock held in the customers
account. The bid and offer quotations, and the broker-dealer and salesperson compensation
information, must be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customers confirmation. In
addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise
exempt from these rules, the broker-dealer must make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchasers written agreement to
the transaction. These disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for the stock that is subject to these penny stock rules.
Consequently, these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest in and limit the
marketability of our common stock.
FINRA sales practice requirements may also limit a stockholders ability to buy and sell our stock.
In addition to the penny stock rules described above, FINRA (Financial Industry Regulatory
Authority) has adopted rules that require that in recommending an investment to a customer, a
broker-dealer must have reasonable grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative, low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information about the customers
financial status, tax status, investment objectives and other information. Under interpretations
of these rules, FINRA believes that there is a high probability that speculative, low priced
securities will not be suitable for at least some customers. FINRA requirements make it more
difficult for broker-dealers to recommend that their customers buy our common stock, which may
limit your ability to buy and sell our stock and have an adverse effect on the market for its
shares.
Sales of a substantial number of shares of our common stock in the public market could lower our
stock price and impair our ability to raise funds in stock offerings and impair the ability of
stockholders to receive a return on their investment in Stinger Systems.
Future sales of a substantial number of shares of our common stock in the public market, or
the perception that such sales could occur, could adversely affect the prevailing market price of
our common stock and could make it more difficult for us to raise additional capital through the
sale of equity securities and reduce the chances of persons who have invested in us of receiving a
return on their investment. In addition, substantially all of the outstanding shares of our common
stock are freely tradable or eligible for sale under Rule 144, subject to certain conditions of
that rule.
Exercise of outstanding options, warrants and convertible securities will dilute existing
shareholders and could decrease the market price of our common stock.
All amounts set forth in this Quarterly Report Form 10-Q have been adjusted to reflect a 1-for
5 reverse stock split affected on January 17, 2009. As of September 30, 2009, we had 4,697,945
shares issued and outstanding, 65,863,239 shares of common stock that could be issued upon the
exercise of options, warrants, grants and convertible securities, of which 7,260,900 shares could
be issued pursuant to the exercise of options outstanding under the Stinger Systems, Inc. Employee
Stock Option & Stock Bonus Plan. There can be no guarantee that any or all of the warrants,
grants, options or convertible securities will be exercised or converted. To the extent these
underlying shares are ultimately issued, there will be further dilution to investors. The existence
or exercise of the outstanding options, grants, warrants or convertible notes may adversely affect
the market price of our common stock and the terms under which we could obtain additional equity
capital.
We likely will issue additional equity securities which will dilute your share ownership.
We likely will issue additional equity securities through the exercise of options, grants,
convertible notes, or warrants that are outstanding or may be outstanding, and possibly to raise
capital. These additional issuances will dilute your share ownership.
Any short selling of our stock could depress the stocks price and have a negative impact on the
investments in us by our stockholders.
Downward pressure on our stock price could result from the occurrence of any of the risk
factors set forth herein as well as from other factors that relate generally to stocks that trade
in the securities markets. Downward pressure on our stock could result in short sales of stock that
could further depress the price. The further depression of the stock price could then encourage
additional short selling with the end result being a downward spiral of our stock price. If short
selling of our stock should commence in the market, the net effect could be an overall drop in
share price thereby having a negative effect on any person owning shares of our stock.
We do not intend to pay any cash dividends on our common stock in the foreseeable future and,
therefore, any return on your investment in our common stock must come from increases in the fair
market value and trading price of our common stock.
We have never paid a cash dividend on our common stock. We do not intend to pay cash dividends
on our common stock in the foreseeable future and, therefore, any return on your investment in our
common stock must come from increases in the fair market value and trading price of our common
stock.
21
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds. Not applicable.
ITEM 3. Defaults Upon Senior Securities. Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders. Not applicable.
ITEM 5. Other Information. Not applicable.
22
ITEM 6. EXHIBITS
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Exhibit No.
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Description
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10.1
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Securities Purchase Agreement dated July 14, 2009 among Stinger Systems, Inc. and the investors
party thereto (1)
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10.2
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Senior Secured Convertible Note issued by Stinger Systems, Inc. to Castlerigg Master Investments
Ltd. dated July 14, 2009 (1)
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10.3
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Senior Secured Convertible Note issued by Stinger Systems, Inc. to Debt Opportunity Fund, LLLP dated
July 14, 2009 (1)
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10.4
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Warrant issued by Stinger Systems, Inc. to Castlerigg Master Investments Ltd. dated July 14, 2009 (1)
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10.5
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Warrant issued by Stinger Systems, Inc. to Debt Opportunity Fund, LLLP dated July 14, 2009 (1)
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10.6
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First Amended and Restated Security Agreement dated July 14, 2009 (1)
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10.7
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Second Amended and Restated Security Agreement, dated July 14, 2009 (1)
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10.8
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Amended and Restated Senior Secured Note dated July 14, 2009 (1)
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10.9
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Second Amended and Restated Senior Secured Note dated July 14, 2009 (1)
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10.10
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Third Amended and Restated Senior Secured Convertible Note dated July 14, 2009 (1)
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31.1
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Section 302 Certification of the Principal Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
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31.2
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Section 302 Certification of the Principal Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
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32.1
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Section 906 Certification of the Principal Executive Officer pursuant to U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
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Section 906 Certification of the Principal Financial Officer pursuant to U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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(1)
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Previously filed as an exhibit to Current Report on Form 8-K on July 17, 2009
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23
SIGNATURES
Pursuant to the requirements 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.
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STINGER SYSTEMS, INC.
(Registrant)
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Date: November 13, 2009
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/s/ Robert F. Gruder
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Robert F. Gruder
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President
(Principal Executive Officer)
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Date: November 13, 2009
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/s/ Brian S. Gannon
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Brian S. Gannon
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Financial Controller
(Principal Financial Officer)
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24
Index to Exhibits
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|
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Exhibit No.
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|
Description
|
10.1
|
|
Securities Purchase Agreement dated July 14, 2009 among Stinger Systems, Inc. and the investors
party thereto (1)
|
|
|
|
10.2
|
|
Senior Secured Convertible Note issued by Stinger Systems, Inc. to Castlerigg Master Investments
Ltd. dated July 14, 2009 (1)
|
|
|
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10.3
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|
Senior Secured Convertible Note issued by Stinger Systems, Inc. to Debt Opportunity Fund, LLLP dated
July 14, 2009 (1)
|
|
|
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10.4
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Warrant issued by Stinger Systems, Inc. to Castlerigg Master Investments Ltd. dated July 14, 2009 (1)
|
|
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10.5
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Warrant issued by Stinger Systems, Inc. to Debt Opportunity Fund, LLLP dated July 14, 2009 (1)
|
|
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10.6
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First Amended and Restated Security Agreement dated July 14, 2009 (1)
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10.7
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Second Amended and Restated Security Agreement, dated July 14, 2009 (1)
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10.8
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Amended and Restated Senior Secured Note dated July 14, 2009 (1)
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|
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10.9
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Second Amended and Restated Senior Secured Note dated July 14, 2009 (1)
|
|
|
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10.10
|
|
Third Amended and Restated Senior Secured Convertible Note dated July 14, 2009 (1)
|
|
|
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31.1
|
|
Section 302 Certification of the Principal Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
|
|
|
|
31.2
|
|
Section 302 Certification of the Principal Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
|
|
|
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32.1
|
|
Section 906 Certification of the Principal Executive Officer pursuant to U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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|
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32.2
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Section 906 Certification of the Principal Financial Officer pursuant to U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
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(1)
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Previously filed as an exhibit to Current Report on Form 8-K on July 17, 2009
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25
Stinger Systems (CE) (USOTC:STYS)
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부터 11월(11) 2024 으로 12월(12) 2024
Stinger Systems (CE) (USOTC:STYS)
과거 데이터 주식 차트
부터 12월(12) 2023 으로 12월(12) 2024