Patents and Patent Applications Owned by Stinger Systems
(Refer to Intangible Assets section for additional information)
Stun Gun Cartridge with Electrical Primer
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| Title: | | Cartridge for a Projectile Stun Gun |
| Serial No.: | | 11/690,072 |
| Filing Date: | | 03-22-2007 |
| Status: | | Patent Pending |
| Subject: | | The cartridge includes a housing defining an exterior surface; a dart assembly including a barb adapted to temporarily attach to a target, a wire having a first end fastened to the barb and a second end coupled to the exterior surface of the housing, and a propellant adapted to propel the barb; and an electrical primer adapted to ignite the propellant. The removable cartridge has been specifically designed for a projectile stun gun and, even more specifically, to be easily attached to and removed from a projectile stun gun. |
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| Manual Trigger with Indicating and Disabling features |
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| Title: | | Stun gun with low battery indicator and shutoff timer |
| Patent No.: | | 5,193,048 |
| Issue Date: | | March 9, 1993 |
| Serial No.: | | 07/516,120 |
| Filing Date: | | April 27, 1990 |
| Status: | | Issued (12th year maintenance fee paid) |
| Subject: | | In one embodiment, the electrical shock device includes a housing containing a power supply and an electronic circuit, a trigger means on the housing for selectively connecting the power supply to the electric circuit when in a first position, and a low power source indicating means for indicating the trigger means operated in the first position for a first predetermined time period. In another embodiment, the electrical shock device includes a housing containing a power supply and an electronic circuit, a trigger means on the housing for selectively connecting the power supply to the electronic circuit when in a first position, a means for disabling the electronic circuit when the trigger means is continuously operated in said first position for a first predetermined time period. |
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| QuadrashockTM dart arrangement |
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| Title: | | Stun Gun |
| Serial No.: | | 10/957,301 |
| Filing Date: | | 30 September 2004 |
| Status: | | Patent Pending (Response to Non Final Office Action Mailed) |
| Subject: | | The stun gun of one embodiment includes: a first dart coupled to a tether and positioned to |
| | | be propelled along a first trajectory, a second dart coupled to a tether and positioned to be propelled along a second trajectory divergent to the first trajectory, and a third dart coupled to a tether and positioned to be propelled along a third trajectory substantially parallel to the first trajectory. The stun gun also includes a power source having opposing charges and an activation circuit. The activation circuit is adapted to selectively connect one of the opposing charges to the first dart and connect the other of the opposing charges to the second and third darts. |
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| Ultron® II hand held contact stun device |
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| Title: | | Electronic Restraint Weapon |
| Patent No.: | | Design 323,870 |
| Issue Date: | | February 11, 1992 |
| Serial No.: | | 07/367,500 |
| Filing Date: | | June 16, 1989 |
| Status: | | Issued |
| Subject: | | The ornamental design for the Ultron® II hand held stun device. |
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Patents and Patent Applications Licensed by Stinger Systems
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| QuadrashockTM dart arrangement |
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| Title: | | Method and apparatus for implementing a two projectile electrical discharge weapon |
| Patent No.: | | 6,575,073 |
| Issue Date: | | June 10, 2003 |
| Serial No.: | | 09/569,431 |
| Filing Date: | | May 12, 2000 |
| Status: | | Issued (4th year maintenance fee due by 06/11/2007) |
| Subject: | | An electrical discharge weapon that selectively propels wire-tethered electrode darts toward a live target for imparting an electrical shock. The weapon includes a receiver and two ammunition chambers spaced apart. Each chamber has electrodes for activating propulsion of a tethered dart. The ammunition chambers being formed in a portion detachable from the receiver. |
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| Band-ItTM restraint |
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| Title: | | Remotely activated electrical discharge restraint device using biceps’ flexion of the leg to restrain |
| Patent No.: | | 5,841,622 |
| Issue Date: | | November 24, 1998 |
| Serial No.: | | 09/018,268 |
| Filing Date: | | February 4, 1998 |
| Status: | | Patent Expired Due to Non-payment of Maintenance Fees — Revival of the patent is being considered |
| Subject: | | A remotely activated electrical discharge restraint device configured for attachment to a human body. The device includes: an electrical circuit for generating a selected high voltage signal; a housing for containing the circuit and attaching the circuit to a human body; a first contact connected to the circuit and available exterior of the housing for contacting a first location on a human body; and a second contact connected to the circuit and available exterior of the housing for contacting a second location on a human body. The respective positions of and spacing between the first and second locations being selected to induce involuntary flexing contractions of the biceps of both legs upon transfer of the signal to the human body. |
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Description of the Patent Process
The patent process is commenced by filing a patent application with the U.S. Patent and Trademark Office (“USPTO”). If the USPTO determines that the patent application has included the required parts (such as a government filing fee), the USPTO mails an Official Filing Receipt and places the patent application in their examination queue (sometimes more than two years long).
At the top of the queue, the USPTO examines the patent application, searches for disclosures on similar inventions, and issues either a rejection or an allowance. Most patent applications are initially rejected. The applicant is given time to amend and argue the scope of the protection on the invention with the USPTO. This period can often take more than one year.
If and when the USPTO and the applicant reach an agreement on the claim scope, the USPTO issues a patent. Before the issuance of a patent, the applicant has no patent rights in the claimed invention. After the issuance of a patent, the applicant has the right to exclude others from making, using, selling, and importing the claimed invention in the United States for a period of twenty years from the filing of the patent application.
Utility patents must be maintained by filing maintenance fees with the USPTO at certain intervals. A utility patent will expire for failure to pay such maintenance fees, but may be revived within a certain period by filing a petition and fee.
Marketing and Competition
Stinger Systems markets its products primarily to the law enforcement, correctional, professional security and military sectors. Orders are received from both end-users and from authorized representatives and distributors. Stinger Systems’ marketing strategy is to engage the services of manufacturing representatives and distributors that specialize in Stinger Systems’ industry. The Company has contracted with distributors and representative groups across the United States as well as several foreign countries. Typically, the distributors that stock Stinger Systems’ products will receive an 18% commission. Stinger Systems employs a number of inside sales associates to coordinate sales activates with the distributors as well as present directly to our end customers when necessary.
Stinger Systems is not aware of any companies with meaningful market share offering products that compete with its Ice Shield or Band-IT products. The Company has no reliable data on market share for any of these products. Therefore, the Company has no significant marketing plans for this product and only provides it as an additional offering for our customers.
Stinger System’s primary competitor in the projectile stun gun market is Taser International, Inc., a publicly held corporation that is substantially larger and has a history of successfully accessing capital markets. Taser is the dominant firm in Stinger Systems’ industry.
The Company believes the Stinger product line projectile stun guns offer many advantages over the X-26 and M-26 projectile stun guns produced by Taser International, Inc., but can make no assurance of their validity. See the product overview for a more detailed description of the Company’s products.
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Government Regulation
The Stinger product line projectile stun guns uses primer charges to propel the dart wire system to the target. The use of primer as a propellant classifies the Stinger product line as a hand gun and as such, the manufacture, distribution and sale of the gun, is regulated by the Bureau of Alcohol, Tobacco and Firearms (ATF). Some states, cities, and municipalities have outlawed the use of stun guns either entirely or in part. It is not clear which regulations will affect Stinger Systems’ product as it will be treated as a hand gun. Since the Stinger projectile stun gun is considered a hand gun by the ATF, it must be manufactured in a secure environment at an ATF approved site, serial numbered, documented appropriately, and shipped in accordance with all applicable regulations.
Stinger Systems employs a designated individual for the Stinger product line projectile stun gun to meet ATF requirements by coordinating production reviews and maintaining shipping and tracking logs. We anticipate the added production costs associated with meeting ATF regulations to be negligible per gun. We do not expect any material costs to be burdened by the Company associated with regulatory compliance for product shipping.
Research and Development
Stinger Systems spent approximately $350,000 in research and development during the twelve months ended December 31, 2007. Several studies have been undertaken to determine the optimum electronics for the Stinger product line projectile stun gun as well as maximizing the effectiveness of the contact arc. We anticipate ongoing studies of electrical designs for the existing weapons, as well as future generation releases.
In addition, in 2007 Stinger Systems announced the results of an extensive study performed on the Stinger S-200, which concluded that the application of the Stinger S-200 electrodes at various orientations around the heart of the test subjects did not result in any abnormal cardiac rhythms. The study was funded by a grant from the Company to evaluate the effect of the Stinger on the cardiovascular system.
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History
Stinger Systems was organized under the laws of the State of Nevada under the name United Consulting Corporation on July 2, 1996. United Consulting Corporation was formed for the purpose of developing business after developing a business plan, United Consulting Corporation intended to provide business consulting services to the management of the company for the purpose of executing the business plan. The business plan development and subsequent business management consulting services were not limited to any particular industry. United Consulting Corporation attempted to establish its own business plan but ultimately failed and never succeeded in conducting viable business operations. Accordingly, not long after its formation, United Consulting Corporation existed only as a dormant corporation. At the time of its acquisition of Electronic Defense Technologies, LLC, it was dormant and was engaged in the business of seeking out a business combination with an operating company. It changed its name to Stinger Systems, Inc. on September 27, 2004. Stinger Systems has never been in bankruptcy, receivership or any similar proceeding. Prior to the acquisition of Electronic Defense Technology, LLC by Stinger Systems, there was no relationship between the officers and directors of Stinger Systems, EDT Acquisition, LLC and Electronic Defense Technology, LLC.
On September 24, 2004, EDT Acquisition LLC, a Michigan limited liability company owned and formed by Robert Gruder and T. Yates Exley, for the sole purpose of acquiring a controlling interest in Electronic Defense Technology, LLC, (“EDT”), acquired a 95% interest in EDT, an Ohio limited liability company. EDT was formed in January of 2000 as a single member LLC for the purpose of manufacturing and marketing electronic restraint products to the law enforcement and correctional sectors. EDT developed several products to serve these sectors. EDT Sales included Powertron (now called Stinger), Band-It, Shield, Ultron II and training manuals. However, it continued to incur operating losses through the date it was acquired by EDT Acquisition, LLC in September of 2004. The business purpose for the acquisition of EDT was to accelerate the Company’s entrance into the electronic restraint market and acquire technology and patents necessary for the Stinger projectile stun gun business. The interest was acquired in exchange for $250,000 in cash and a $200,000 note payable on or before March 24, 2006 from EDT Acquisition, LLC. The 95% interest in Electronic Defense Technologies, LLC together with the remaining 5% interest in the same company was then transferred on the same day to Stinger Systems in exchange for the issuance by Stinger Systems of 9,750,000 shares of Stinger Systems’ common stock. In connection with the transaction, 10,000,000 shares of Stinger Systems that had been issued and outstanding previously was returned to Stinger Systems for cancellation. This transaction transferred control of Stinger Systems to Robert Gruder and T. Yates Exley. Mr. Gruder is Chairman of the Board of Directors and President of Stinger Systems. Mr. Exley is a member of the Board of Directors. Mr. Gruder’s portion of the shares of Stinger Systems formerly held in EDT Acquisition, LLC have been distributed by EDT Acquisition, LLC and are held by him directly.
EDT was formed in January 2000 to manufacture and market non-lethal electronic restraint products to the law enforcement, correction and professional security sectors. Its principal products included a hand held stun weapon, an electric riot shield and an electric wrap used to control potentially dangerous persons/prisoners during transport or in court rooms. From January 2000 to the acquisition, EDT did final assembly of these products and sold them to the law enforcement, corrections and professional security sectors. In early 2003, EDT began development of a projectile stun gun and developed models of the gun for study and testing. The first sales of the projectile stun gun occurred in 2004.
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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 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 Company’s products, including significant research and development, engineering, testing, significant marketing and sales efforts, and manufacturing capabilities. These activities, together with the Company’s 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 rollout 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 entirely 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 manufacturer’s 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-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-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-lethal weapons has become a matter of some controversy and continued negative publicity about the use of less-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.
The Company is a defendant in a lawsuit brought by Taser International, 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. The case is also seeking punitive damages. Absent modification or other unexpected event, the Company will incur limited legal fees for its defense in this case as the Company’s attorney has agreed upon entry of appearance to act as its attorney in the case without fee. A judgment in the suit adverse to the Company’s interests could jeopardize our business operations and exhaust our cash reserve and investors may lose their entire investment.
We have received a “Wells Notice” from the SEC.
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 intended to recommend that the SEC institute an action against the Company. On January 28, 2008, the SEC filed a Complaint against the Company and Robert F. Gruder in United States District Court for the Northern District of Georgia alleging that the Company and Mr. Gruder violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Among other things, the Complaint alleges that the Company made material misrepresentations about one of the Company’s products regarding when the Company would be shipping the product, the product’s status with the Bureau of Alcohol, Tobacco, and Firearms, the performance of the product, and where the Company’s stock was trading. A judgment in this action adverse to the Company’s interests could jeopardize our business operations and exhaust the Company’s cash reserve and investors may lose 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.
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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.
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-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-lethal weapon systems. Additional negative publicity with respect to less-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-lethal weapon systems. Further, the export of our less-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.
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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 American Stock Exchange.
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:
| | • | | 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. |
During 2007, the closing sales price of our stock has ranged from $0.14 to $3.25. Our stock closed on December 31, 2007 at $1.08 per share.
Trading of our stock may be restricted by the SEC’s penny stock regulations, which may limit a stockholder’s 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 monthly account statements showing the market value of each penny stock held in the customer’s 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 customer’s 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 purchaser’s 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.
NASD sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.
In addition to the penny stock rules described above, the NASD (National Association of Securities Dealers Inc.) 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 customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD 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.
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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.
As of December 31, 2007, we had 17,587,171 shares issued and outstanding, 10,342,635 shares of common stock that could be issued upon the exercise of options, warrants, grants and convertible securities, of which 827,500 shares could be issued pursuant to the exercise of options outstanding under the Stinger Systems, Inc. Employee Stock Option & Stock Bonus Plan. In addition, we completed a private placement transaction with an institutional investor pursuant to which we issued and sold to the investor a senior secured convertible note (the “Note”) in the aggregate principal amount of $3,000,000 and a warrant to purchase 5,912,961 shares of our common stock (the “Warrant”). The Note is convertible into 4,730,369 shares of the Company’s common stock at a price of $0.6342 per share. The conversion price of The Note is subject to adjustment if we fail to achieve certain milestone events pertaining to our performance. Subject to the terms of the Note, we, at our option, may pay any portion of the interest then due on the Note in cash or may elect to issue the investor shares of our common stock. The Warrant is exercisable immediately at a price of $0.6342 per share. 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 stock’s 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.
ITEM 1.B UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
Stinger Systems’ corporate office is located at 2701 N. Rocky Point Drive, Suite 1130, Tampa, Florida 33607 and includes 4,454 square feet. Stinger Systems pays $6,951 per month for this space on a sub-lease running through November 2008. We believe this facility is adequate for the current scope of Stingers’ corporate offices.
Stinger Systems’ production and manufacturing facility is located in Largo, Florida and includes approximately 9,200 square
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feet of warehouse, manufacturing, office, and storage space. The Company pays $5,332 to $5,491 per month for this space for a three year lease term. The initial lease term ends March 31, 2009, in which the Company has an option to renew for two additional consecutive two year terms.
ITEM 3. LEGAL PROCEEDINGS
On December 17, 2004, Taser International filed a case against Stinger Systems, Inc. and its CEO, Robert Gruder. Stinger Systems is a party in Case Number 3:04CV620K styled Taser International, Inc. v. Stinger Systems, Inc. and Robert F. Gruder, pending in the United States District Court for the Western District of North Carolina. In the suit, Taser asserts a claim for false advertising under 15 U.S.C. Section 1125(a) and seeks injunctive relief, monetary damages in an unspecified amount, trebling of damages, attorneys fees and destruction of certain advertising material. Based upon a review of the pleading. Taser alleges that the Stinger projectile stun gun does not exist and therefore Stinger System’s statements about its existence and capabilities are false and misleading. Stinger Systems moved to dismiss Taser’s claims, responded to the allegations and countersued Taser for defamation. Stinger Systems is seeking monetary damages, punitive damages and attorney fees.
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 intended to recommend that the SEC institute an action against the Company. On January 28, 2008, the SEC filed a Complaint against the Company and Robert F. Gruder in United States District Court for the Northern District of Georgia alleging that the Company and Mr. Gruder violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Among other things, the Complaint alleges that the Company made material misrepresentations about one of the Company’s products regarding when the Company would be shipping the product, the product’s status with the Bureau of Alcohol, Tobacco, and Firearms, the performance of the product, and where the Company’s stock was trading. The complaint seeks injunctive relief against the Company and Mr. Gruder, including a bar against Mr. Gruder from serving as an officer or director of a public company and civil penalties. A judgment in this action adverse to the Company’s interests could jeopardize our business operations and exhaust the Company’s cash reserve and investors may lose their entire investment.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended December 31, 2007.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER’S MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES
Our common stock has been quoted on the OTC Bulletin Board under the symbol STIY.OB since February 23, 2006. The following table reflects the high and low sales information as reported on the OTCBB. The information reflects inter-dealer prices, which may or may not reflect retail mark-ups, mark-downs, or commissions and may not represent actual transactions. Also, these transactions may not be representative of all transactions during the indicated periods or the actual fair market value of our common stock at the time of such transactions due to the infrequency of trades and the limited market for our common stock. The following table presents the quarterly high and low bid information on the OTC Bulletin Board and on the electronic Pink Sheets. From November 12, 2004, until February 23, 2006, trades of common stock were reported from time to time on the electronic Pink Sheets.
| | | | | | | | | |
| 2006 | | High | | Low |
| | | | | |
| First Quarter | | $ | 5.75 | | | $ | 1.00 | |
| Second Quarter | | $ | 2.95 | | | $ | 1.20 | |
| Third Quarter | | $ | 2.00 | | | $ | 1.06 | |
| Fourth Quarter | | $ | 1.10 | | | $ | 0.55 | |
| | | | | | | | | |
| 2007 | | High | | Low |
| | | | | |
| First Quarter | | $ | 3.20 | | | $ | 0.57 | |
| Second Quarter | | $ | 3.25 | | | $ | 0.75 | |
| Third Quarter | | $ | 1.10 | | | $ | 0.53 | |
| Fourth Quarter | | $ | 1.19 | | | $ | 0.14 | |
As of March 14, 2008, there were approximately 34 holders of record of our common stock. We have never declared or paid any cash dividends. We do not anticipate declaring or paying cash dividends for the foreseeable future. Instead, we will retain our earnings, if any, for the future operation and expansion of our business.
Stock Performance Graph
The graph below compares the cumulative total stockholder return on the Company from November 11, 2004 (the date our Common Stock was first traded) through December 31, 2007, with the cumulative total returns of the NASDAQ Composite Index, and the Russell 3000 Index. The graph assumes that the value of the investment in our Common Stock, and in each index was $100 on November 11, 2004 and tracks it through December 31, 2007. We have not paid any dividends on our Common Stock.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of operations and balance sheet data are derived from our audited consolidated financial statements. The consolidated financial statements and their notes and the report of the independent registered accounting firm are included elsewhere in this annual report. This selected consolidated financial data should be read in conjunction with the consolidated financial statements and their notes, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and other financial information included elsewhere in this annual report.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Predecessor Operations | | The Company | | The Company |
| | | | | | | January 1, | | September 24, | | |
| | | Years ended | | 2004 to | | 2004 | | Pro Forma |
| | | December 31, | | September 24, | | to December 31, | | Year Ended December 31, |
| | | 2003 | | 2004 | | 2004 | | 2004 | | 2005 | | 2006 | | 2007 |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales | | $ | 264,471 | | | $ | 198,981 | | | $ | 63,306 | | | $ | 262,287 | | | $ | 469,997 | | | $ | 454,454 | | | $ | 372,211 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Margin (Loss) | | | 108,647 | | | | 54,859 | | | | 11,620 | | | | 66,479 | | | | (139,282 | ) | | | (207,338 | ) | | | (161,643 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loss from Operations | | | (237,363 | ) | | | (192,470 | ) | | | (8,820,199 | ) | | | (9,012,669 | ) | | | (10,171,758 | ) | | | (6,300,966 | ) | | | (4,682,912 | ) |
| Net Loss | | | (273,922 | ) | | | (230,932 | ) | | | (8,830,467 | ) | | | (9,061,399 | ) | | | (10,085,529 | ) | | | (6,306,345 | ) | | | (8,348,285 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Loss Per Share (Basic and Diluted) | | $ | (0.03 | ) | | $ | (0.02 | ) | | $ | (0.70 | ) | | $ | (0.70 | ) | | $ | (0.67 | ) | | $ | (0.42 | ) | | $ | (0.50 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted Average Number of Common Shares Outstanding (Basic and Diluted) | | | 10,750,000 | | | | 10,750,000 | | | | 12,640,900 | | | | 12,640,900 | | | | 14,997,346 | | | | 15,038,500 | | | | 16,658,390 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current Assets | | $ | 69,695 | | | $ | 13,232 | | | $ | 9,334,233 | | | $ | 9,334,233 | | | $ | 3,294,044 | | | $ | 502,198 | | | $ | 590,484 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equipment and Furnishings | | | 93,724 | | | | 73,204 | | | | 105,764 | | | | 105,764 | | | | 353,388 | | | | 303,295 | | | | 276,590 | |
| Total Assets | | | 163,419 | | | | 86,436 | | | | 12,543,911 | | | | 12,543,911 | | | | 6,374,950 | | | | 3,155,993 | | | | 2,405,771 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current Liabilities | | | 97,441 | | | | 43,746 | | | | 556,970 | | | | 556,970 | | | | 1,048,538 | | | | 2,417,435 | | | | 571,383 | |
| Long Term Debt | | | 584,885 | | | | 792,529 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stockholders Equity (Deficit) | | | (518,907 | ) | | | (749,839 | ) | | | 10,599,441 | | | | 10,599,441 | | | | 5,326,412 | | | | 738,558 | | | | (3,243,114 | ) |
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Summary
Stinger Systems is in the business of producing and marketing less-lethal electronic restraint products to law enforcement, correctional facilities, professional security and military sectors. The Company’s products include the Ice-Shield electronic immobilization riot shield and the Bandit / REACT system, an electronic immobilizing restraint. The Company’s primary focus is the Stinger S-200 EID gun and its success is largely dependent upon the commercialization of this product.
The Company launched a mass marketing campaign during the fourth quarter of 2007. The Company’s ability to generate future revenues is dependent upon the overall market reception of the Stinger product line and the volume of production and sales that the Company is able to generate. It may be the case that further modifications of the Stinger product line projectile stun gun will be required.
The Company plans to use third parties to manufacture some components for its products. Except for ongoing purchase orders, the Company is under no contractual obligation with these parties. Because the Stinger projectile stun gun is classified as a firearm and subject to various regulations of the U.S. Bureau of Alcohol, Tobacco, and Firearms (ATF), the Company ships all products from its production and manufacturing facility and maintains proper records. While the Company hopes to manufacture the Stinger and its components in the United States, there can be no assurances that it will continue to do so. The Company believes that electronics are easily sourced throughout the world and the Company will continually seek best pricing and highest quality components for its products. The Company expects to continue handling the shipment of its products.
The Company’s success will be dependent upon its ability to attract high quality distributors to market its products. To date, the Company has been able to attract distributors and manufacturer’s representative groups with a solid track record selling firearms to the law enforcement, correctional, and/or military community. The Company is unable to provide forecasts as to the number of Stingers it anticipates selling.
Due to the limited sales volume of its existing products, the Company reported a net loss of $8,348,285 for the year ending December 31, 2007 (net loss of $0.50 per share), a net loss of $6,306,345 for the year ending December 31, 2006 (net loss of $0.42 per share) and a net loss of $10,085,529 for the year ending December 31, 2005 (net loss of $0.67 per share).
At the present time, the Company does not generate sufficient revenues from its operations to pay its operating costs. Management believes that the Company will need additional outside sources of funding in the future to continue the production and promotion of its products.
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Background
The Company, after the acquisition of EDT, required funds to support current operations and to provide future working capital. The Company has met its financial needs through its operations and through the sales of its securities. Since September, 2004, the Company has undertaken sales of non-registered securities in a series of private transactions, including the following:
| | • | | On September 24, 2004, the Company issued 9,750,000 shares of its common stock for 100% of EDT. The Company received 10,000,000 of its previously issued and outstanding shares for cancellation. The 9,750,000 shares were valued at $474,300, consisting of the cash and note payable to the former owners of EDT for the initial purchase of 95% of EDT in the amount of $450,000 plus the value of 500,000 shares of common stock issued for the remaining 5% of EDT valued at $24,300. |
| |
| | • | | Between September 24, 2004 and December 31, 2004, the Company sold 3,222,000 shares of common stock for $10,900,000, less expense of $665,035. Specifically, the Company sold 1,122,000 shares of common stock for net proceeds of $400,000 in September 2004, and sold 2,100,000 shares of common stock for net proceeds of $9,834,965 in December 2004. As part of the sale in December 2004, the Company also issued warrants to the investors to purchase 1,000,000 shares of the Company’s common stock at $7.50 per share. The warrants are exercisable through September 24, 2009. The investors were also granted registration rights. The Company also issued warrants to the underwriters to acquire 200,000 shares at $7.50 per share. |
| |
| | • | | Between September 24, 2004 and December 31, 2004, the Company issued 921,500 shares of common stock for various services received by the Company. |
| |
| | • | | In December 2004, the Company issued 10,000 shares of its common stock as settlement of a note payable plus accrued interest in the amount of $106,943. |
| |
| | • | | During November and December of 2004, the Company issued a total of 100,000 shares of its common stock for patents that were complimentary to its product lines. The recipient of 75,000 of the 100,000 shares issued had the right to rescind the transaction if a registration statement was not effective by the Company as of a specific date. As a result of this redeemable feature, these shares were classified as “Redeemable Common Stock” with a liquidation value of $1,387,500 (the value assigned to the stock on issuance at December 31, 2004). The Company filed a registration statement that was declared effective by the Securities and Exchange Commission on November 14, 2005 and the individual no longer had the right to rescind the transaction, so the 75,000 shares were taken out of Redeemable Common stock and shown as issued common stock. |
| |
| | • | | On January 25, 2007, the Company and certain existing warrant entered into an amendment and exercise agreement pursuant to which (i) the Company reduced the exercise price of the warrants then held by the warrant holders to $0.60 per share; (ii) the warrant holders exercised all of the existing warrants at an exercise price of $0.60 per share and acquired 999,999 shares of the Company’s common stock; and (iii) the Company issued to the warrant holders new warrants to purchase up to an aggregate of 1,500,000 shares of the Company’s common stock at an exercise price of $2.00 per share. The Company granted the warrant holders certain registration rights with respect to the resale of the shares issued upon exercise of the existing warrants and the shares to be issued upon exercise of the new warrants. |
| |
| | • | | On August 3, 2007, the Company closed a private placement transaction with an institutional investor pursuant to which the Company issued and sold a senior secured convertible note in the aggregate principal amount of $3,000,000 and a warrant to purchase 5,912,961 shares of the Company’s common stock. The note is convertible into 4,730,270 shares of the Company’s common stock at a price of $0.6342 per share. Under the terms of the note, the Company, at its option, may pay any portion of the interest then due on the Note in cash or may elect to issue the Investor shares of the Company’s common stock. The Warrant is exercisable immediately at a price of $0.6342 per share. |
| |
| | • | | On February 29, 2008, the Company closed a private placement transaction with an institutional investor pursuant to which the Company issued and sold a senior secured convertible note in an aggregate principal amount of $2,150,000, a warrant to purchase 3,000,000 shares of the Company’s common stock, and 1,250,000 shares of the Company’s Common Stock . The note is convertible into 1,720,000 shares of the Company’s common stock at a price of $1.25 per share. Under the terms of the note, the Company, at its option, may pay any portion of the interest then due on the note in cash or may elect to issue shares of the Company’s common stock. The warrant is exercisable immediately at a price of $0.7054 per share. |
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Results of Operations
The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this document. This discussion contains forward-looking statements that are based on our current expectations and involve risks and uncertainties. Stinger Systems’ actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this Annual Report on Form 10-K.
Comparison of the Years Ended December 31, 2007 and 2006
Revenues. Revenue decreased $82,242 or 18% to $372,212 for 2007 compared to $454,454 for 2006. The decrease from 2006 to 2007 was due to the limited sales volume of our existing products during 2007.
Cost of Goods Sold. Cost of Goods Sold decreased $127,937 or 19% to 533,855 for 2007 compared to $661,792 for 2006. The decrease from 2006 to 2007 was due to an inventory write-off in 2006 for obsolete raw materials in our inventory. The cost of production for 2006 and 2007 includes manufacturing costs such as materials, labor and identifiable overhead related to finished goods and components.
Gross Margin. Gross margin decreased $45,695 or 22% to $(161,643) for 2007 compared to $(207,338) for 2006. The decrease in gross margin for 2006 was principally due to an increase in the costs of goods sold related to an inventory write-off for obsolete raw materials in 2006.
Selling Expenses. Selling Expenses decreased $8,054 or 3% to $235,531 for 2007 compared to $243,585 for 2006. The decrease was based primarily on decreased expenses related to our efforts to promote current products and the branding of the Stinger name.
General and Administrative Expenses. General and Administrative (G&A) expenses decreased $1,564,305 or 27% to $4,285,738 for 2007 compared to $5,850,043 for 2006. Employee acquisition costs for 2007 decreased by $4,805 to $5,881 during 2007 compared to $10,686 for 2006. The decrease from 2006 to 2007 was primarily due to employee acquisition costs and employee severance costs during 2006. We did, however, incur stock based compensation expense of $284,382 for 2007 and $1,551,616 for 2006 related to the grant of stock options to our employees and directors as further explained in the Notes to Financial Statements. Additionally, other operating expenses for the year ended December 31, 2007, include legal and professional fees of $467,788, insurance expense of 14,265, value of warrants issued for service of 553,542 and other costs in the amount of $453,313 compared to legal and professional fees of $825,251, insurance expense in the amount of $765,824, and other costs in the amount of $420,539 for the year ended December 31, 2006.
Research and Development Expenses. Research and Development (R&D) expenses decreased $306,601 or 47% to $350,810 for the year ended December 31, 2007, compared to $657,411 for the year ended December 31, 2006. The Company’s decrease in R&D expense is attributable to the advanced stages of product development, and the accumulated engineering knowledge associated with improving the design of the Stinger projectile stun gun product line. The Company expects to have ongoing research and development costs associated with future generations of the projectile stun gun product line.
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Interest Income. Interest income decreased $4,414 to $21,517 for the year ended December 31, 2007, compared to $25,931 for the year ended December 31, 2006. The decrease from 2006 to 2007 was due to a reduction in working capital.
Net Loss. Net loss increased by $2,041,940 or 32% to $(8,348,285) or $(0.50) per common share for the year ended December 31, 2007 compared to a net loss of $(6,306,345) or $(0.42) per common share for the year ended December 31, 2006. The increase in net loss was due primarily to the valuation of our financing during the 2007 year as an embedded derivative.
Comparison of the Years Ended December 31, 2006 and 2005
Revenues. Revenue decreased $15,543 or 3% to $454,454 for 2006 compared to $469,997 for 2005. The decrease from 2005 to 2006 was due to the limited sales volume of our existing products during 2006.
Cost of Goods Sold. Cost of Goods Sold increased $52,513 or 9% to $661,792 for 2006 compared to $609,279 for 2005. The increase from 2005 to 2006 was due to an inventory write-off in 2006 for obsolete raw materials in our inventory. The cost of production for 2006 includes manufacturing costs such as materials, labor and identifiable overhead related to finished goods and components.
Gross Margin. Gross margin decreased $68,056 or 49% to $(207,338) for 2006 compared to $(139,282) for 2005. The decrease in gross margin for 2006 was principally due to an increase in the costs of goods sold related to an inventory write-off for obsolete raw materials in 2006.
Selling Expenses. Selling Expenses decreased $100,518 or 29% to $243,585 for 2006 compared to $344,103 for 2005. The decrease was based primarily on decreased expenses related to our efforts to promote current products and the branding of the Stinger name.
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General and Administrative Expenses. General and Administrative (G&A) expenses decreased $3,838,330 or 40% to $5,850,043 for 2006 compared to $9,688,373 for 2005. Employee acquisition costs for 2006 decreased by $3,464,314 to $10,686 compared to $3,475,000 for 2005. The decrease from 2005 to 2006 was primarily due to employee acquisition costs and employee severance costs during 2005. We did, however, incur stock based compensation expense of $1,551,616 for 2006 related to the grant of stock options to our employees and directors as further explained in the Notes to Financial Statements. Additionally, other operating expenses for the year ended December 31, 2006, include legal and professional fees of $825,251, insurance expense in the amount of $765,824 and other costs in the amount of $622,482 compared to legal and professional fees of $594,357, insurance expense in the amount of $573,117, liquidated damages to investors in the amount of $964,343 and other costs in the amount of $820,452 for the year ended December 31, 2005.
Research and Development Expenses. Research and Development (R&D) expenses decreased $705,648 or 52% to $657,411 for the year ended December 31, 2006, compared to $1,363,059 for the year ended December 31, 2005. The Company’s decrease in R&D expense is attributable to the advanced stages of product development, and the accumulated engineering knowledge associated with improving the design of the Stinger projectile stun gun product line. The Company expects to have ongoing research and development costs associated with future generations of the projectile stun gun product line.
Interest Income. Interest income decreased $72,674 to $25,931 for the year ended December 31, 2006, compared to $98,905 for the year ended December 31, 2005. The decrease from 2005 to 2006 was due to a reduction in working capital.
Net Loss. Net loss decreased by $3,779,184 or 37% to $(6,306,345) or $(0.42) per common share for the year ended December 31, 2006 compared to a net loss of $(10,085,529) or $(0.67) per common share for the year ended December 31, 2005. The improvement in the net loss was due primarily to a decrease in cost of goods sold, as well as a decrease in employee acquisition expenses and employee severance costs related to 2005. These expenses were offset by an increase in stock option expense due to our adoption of SFAS 123(R) in 2006, increased research and development expenses, legal and professional fees, and insurance expense.
Liquidity and Capital Resources
The Company has experienced significant operating losses since its inception in 2004. The process of developing and commercializing the Company’s products requires significant research and development, engineering, testing, significant marketing and sales efforts, and manufacturing capabilities. These activities, together with the Company’s 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. 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 2008 at its planned levels of research, development, sales, and marketing activities. Thus, execution of its current strategies will require it to raise additional capital through debt or equity transactions in order to finance its operations through 2008. 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.
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At December 31, 2007, we had positive working capital of approximately $(19,101), including a cash balance of $345,293. This represents a increase in working capital of $1,934,338 from working capital of $(1,915,237) at December 31, 2006 and a cash balance of $121,047. This increase in working capital is principally due to the financing agreement that was finalized on August 2, 2007. Operating activities used cash of $3,273,714 and $2,546,395 during 2007 and 2006, respectively. The decrease in the negative cash flow from operating activities for 2007, as compared to 2006, was primarily due to the derivative liability associated with convertible notes and warrants and the decrease of payables. The Company had a decrease of 9% in general and administrative expenses (excluding depreciation, amortization, and stock option expense).
At December 31, 2006, we had negative working capital of approximately $(1,915,237), including a cash balance of $121,047. This represents a decrease in working capital of $4,160,743 from working capital of $2,245,506 at December 31, 2005 and a cash balance of $2,408,556. This decrease in working capital is principally due to research and development efforts and engineering activities to improve the Stinger projectile stun gun product line and future generation projectile stun guns, and an increase in insurance expense, as well as increased legal and professional fees and employee related expenses. Operating activities used cash of $2,546,395 and $5,758,451 during 2006 and 2005, respectively. The decrease in the negative cash flow from operating activities for 2006, as compared to 2005, was primarily due to liquidated damages paid to investors, employee severance costs, and higher research and development expenses in 2005. The Company had a decrease of 59% in general and administrative expenses (excluding depreciation, amortization, and stock option expense).
At December 31, 2005 the Company had working capital of $2,245,506, including a cash balance of $2,408,556. These funds and working capital will be used to meet the Company’s operational and liquidity needs for the next twelve months. This represents a decrease in working capital of approximately $6,531,757 from working capital of $8,777,263 at December 31, 2004. This decrease is principally due to the research and development efforts and engineering activities to improve the Stinger projectile stun gun. Operating activities used cash of $5,758,451 and $412,056 during 2005 and 2004, respectively. The decrease in cash flow from operating activities in 2005, as compared to 2004, was primarily due to a 15% increase in the cost of product sold, an increase of 15% in the general and administrative expenses (excluding depreciation and amortization).
The Company reported negative operating cash flows from operations of $5,758,451 for the twelve months ended December 31, 2005. The net loss of $10,085,529 was offset by non-cash charges of $3,475,000 which represented the value of stock issuances and stock options exchanged for services rendered and $396,094 in depreciation and amortization expenses. During the twelve month period ended December 31, 2005, the Company paid $168,375 of an inventory purchase commitment. The Company had committed to the purchase of 10,000 circuit boards from a vendor, however, when the first delivery of circuit boards was received, they were found to be defective. The entire $1,165,700 inventory purchase commitment was cancelled. At December 31, 2005, the Company has no inventory purchase commitments. The Company used $261,905 during the twelve months ended December 31, 2005 to purchase equipment, fixtures and patents. The Company has no outstanding commitments to purchase equipment, fixtures or patents. In May of 2005, the Company repurchased 10,000 shares of its stock for $50,000 cash to rescind and cancel certain provisions in a previous agreement.
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The long-term continuation of the Company’s 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 Company’s current operations and its ability to achieve its intended long-term business objectives.
Off-Balance Sheet Arrangements
The Company does not have any material off-balance sheet arrangements.
Contractual Obligations
The Company has entered into operating leases for office and warehouse space, which runs through November 2008 and March 2009, respectively. Future minimum lease payments under operating leases are $163,477 in 2008, $40,045 in 2009, $25,718 in 2010, $18,534 in 2011, and $8,041 in 2012.
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, and the initial lease term ends December 2010. The lease agreement contains a bargain purchase option after the initial term of the lease or when the obligation has been completely performed, 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, and the initial lease term ends August 2011. The lease agreement contains a bargain purchase option after the initial term of the lease or when the obligation has been completely performed, 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, and the initial lease term ends August 2012. The lease agreement contains a bargain purchase option after the initial term of the lease or when the obligation has been completely performed, at which time the Company may purchase the leased equipment for $101.
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Intangible Assets
The Company’s intangible assets consist of two pending patents and four patents for stun gun technology with a carrying value of $1,527,201 at December 31, 2007. Generally a patent has a life of 17 to 20 years. The two projectile stun gun patents were granted in 1998.
The acquisition of EDT by EDTA was accounted for under the purchase method of accounting. Under this method, the assets acquired and the liabilities assumed were recorded at their fair values at September 24, 2004. The acquisition cost exceeded the values assigned to assets and liabilities acquired by $1,160,820. This amount was recorded as an intangible asset. Management has determined that the intangible asset value is related solely to the stun gun technology. The acquisition of the remaining 5% of EDT added another $24,300 to the stun gun intangible asset. The stun gun technology patents; #D323,870 — “The Ornamental Design for an Electronic Restraint Weapon” and #5,193,048 — “Stun Gun with Low Battery Indicator and Shutoff Timer” were acquired in the EDT Acquisition from Mr. Richard Bass and have a carrying value of $1,185,120.
On November 26, 2004, the Company acquired certain patents related to the product license: patent #5,841,622 — “Remotely Activated Electrical Discharge Restraint Device Using Biceps Flexion of the Leg to Restrain” granted November 24, 1998, and patent #6,573,073 — “Method and Apparatus For Implementing A Two Projectile Electrical Discharge Weapon” granted June 10, 2003 from James F. McNulty, Jr., a non-related party in exchange for $100,000 cash and 75,000 shares of the Company’s redeemable common stock. The 75,000 shares of common stock were valued at $18.50 per share (the quoted pink sheet price on November 26, 2004). The value of the intangible asset assigned to the stun gun from this transaction was $1,487,500. There was no carrying value or purchase price assigned to the Band-IT design patent. The patents related to the Band-IT technology are intertwined in the stun gun technology, and is the sole purpose for which the Company purchased the original patents from the inventor. Upon acquiring the patents, the related license agreement was canceled.
On December 4, 2004, the Company acquired 100% of the ownership interest in Questek, a California Sole Proprietorship, from Joseph Valencic, a non-related party, in exchange for $75,000 cash (which was not paid until January 6, 2005 but was included in accrued liabilities at December 31, 2004) and the issuance of 25,000 shares of the Company’s common stock. Questek’s only assets were intellectual property rights including a pending patent, trademarks and copyrights. The major asset of Questek was a pending patent on a miniature camera. Questek had no liabilities. The 25,000 shares of common stock issued were valued at $14.20 per share (the quoted pink sheet price on December 4, 2004). Total value of the camera pending patent serial no. 11/012,541 — “Weapon with Illuminator and Camera” at December 31, 2007 is $430,000.
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Stinger Systems filed pending patents; serial no. 10/975,563 — “Weapon and Input Device to Record Information” on October 27, 2004 and serial no. 10/957,301 — “Stun Gun” on September 30, 2004. These pending patents were initiated by Stinger Systems on existing Stinger technology and carry no value at December 31, 2006.
The Company performed an impairment test in accordance with the guidance provided in SFAS 142, “Goodwill and Other Intangible Assets”, and has determined that an impairment loss of $523,342 exists for 2007 and $201,943 for 2006, based on the present value of future cash flows generated from Company assets. The majority of the assets, other than cash, reported on the balance sheet at December 31, 2007 are related to intangible assets.
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 collectibility 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 December 31, 2007, we have had no significant warranty claims on products sold. Once sales of our new 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 Company’s common stock began to be traded in 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, 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.
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Embedded Derivatives. Certain features of the convertible note payable and warrants issued in connection with the convertible note payable was 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 December 31, 2007, the Company’s derivative valuation liability totaled $3,660,000.
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. The Company evaluates 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. The Company valued its 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 the patent or technology, comparable transactions of like-kind patents or technology, and discounted cash flows of future incremental profits that may be generated. The Company valued its intangible assets, including its stun gun technology, utilizing the aforementioned techniques. The Company valued its stun gun technology by comparing current competitor’s 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 the Company believed was achievable. The Company’s policy is to expense in-process research and development costs at acquisition.
Stock Options. We have a stock option plan under which options to purchase shares of our common stock may be granted to employees, consultants and directors at a price no less than the fair market value on the date of grant.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)) which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors, including stock option grants, based on estimated fair values. SFAS 123(R) supersedes previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), for periods beginning in fiscal year 2006.
SFAS 123(R) requires companies to estimate the fair value of stock-based awards on the date of grant using an option-pricing model. 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. The Company adopted SFAS 123(R) using the modified prospective transition method that requires the application of the accounting standard starting on January 1, 2006, without restatement of prior years. Stock options were granted at an exercise price equal to the Company’s stock price at the date of grant.
Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). Under the intrinsic value based method, stock-based compensation expense for employee stock options was recognized in the Company’s Consolidated Financial Statements as the difference in the exercise price of the option and the Company’s stock price at the date of grant.
Limited Trading Market. Until February 22, 2006, the Company’s common stock was only traded on the Pink Sheets. An investment in a security quoted on the Pink Sheets is speculative and involves a high degree of risk. Many Pink Sheet 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 Pink Sheet security may not be possible within a reasonable period of time. Reliable information regarding issuers of Pink Sheet securities, their prospects, or the risks associated with the business of any particular issuer or an investment in the issuer’s securities may not be available. As a result, it may be difficult to properly value an investment in a Pink Sheet security. Pink Sheets is not a securities exchange or a broker-dealer. Pink Sheets is an electronic quotation and information service provided to registered broker-dealers to facilitate efficient transactions in Pink Sheet securities. Investors must contact an SEC registered broker-dealer that is a member of the National Association of Securities Dealers (NASD) to invest in a security quoted on the Pink Sheets. The Company used the Pink Sheet price to determine fair market value at the date of the respective transactions in order to value the transactions to best reflect the financial valuation of those parties involved in the transactions. Since February 23, 2006, our stock has been quoted on the OTC Bulletin Board.
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ITEM 7A. 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 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth on pages F-1 through F-26.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
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 of December 31, 2007. 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) are designed to provide reasonable assurance that the information required to be disclosed in this annual report on Form 10-K have been appropriately recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including its principal executive and principal financial officers, to allow timely decisions regarding disclosure. 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.
Management’s Annual Report on Internal Control over Financial Reporting.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles and includes those policies and procedures that:
| | • | | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of its assets; |
| |
| | • | | provide reasonable assurance that transactions are recorded as necessary to permit preparation of its financial statements in accordance with generally accepted accounting principles, and that its receipts and expenditures are being made only in accordance with authorizations of its management and directors; and |
| |
| | • | | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on its financial statements. |
Internal control over financial reporting may not prevent or detect misstatements due to its inherent limitations. Management’s projections of any evaluation of the effectiveness of internal control over financial reporting as to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007 and in making this assessment used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework in accordance with the standards of the Public Company Accounting Oversight Board (United States).
The Company’s management determined that as of December 31, 2007, the Company’s internal control over financial reporting was effective.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
Changes in Internal Control
Our management, including our principal executive and principal financial officers, has evaluated any changes in our internal control over financial reporting that occurred during the year ended December 31, 2007 and has concluded that there was no change that occurred during the year ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to our executive officers and directors as of March 15, 2008:
| | | | | |
| Name | | Age | | Position |
| Ronald T. Bellistri | | 61 | | Chief Executive Officer |
| Robert F. Gruder | | 49 | | President and Chairman of the Board |
| Brian S. Gannon | | 34 | | Financial Controller |
| T. Yates Exley | | 46 | | Director |
| Andrew P. Helene | | 46 | | Director |
| Wells Van Pelt | | 60 | | Director |
| Richard “Bo” Dietl | | 57 | | Director |
Ronald T. Bellistri—CEO of Stinger Systems, Inc. Since January 8, 2008, Mr. Bellistri has served as the Company’s Executive Vice President and National Sales Director. Before joining the Company, Mr. Bellistri was a member of the NYPD Organized Crime Control Bureau — Narcotics Division. In 1985, Mr. Bellistri founded Copstat Security, Inc., a security and investigation firm, which he sold in 2004. Mr. Bellistri also founded Patriot Associates, LLC, an explosive detection unit which he also sold in 2004. Mr. Bellistri retired after the sale of his businesses in 2004.
Robert F. Gruder— Chairman and President of Stinger Systems, Inc. Mr. Gruder is co-founder of Stinger Systems, Inc. Prior to founding Stinger Systems, Mr. Gruder was an independent investor since September, 2002, managing his personal portfolio. For the three years prior thereto, he was Chairman and Chief Executive Officer of Information Architects Corporation a public company traded on NADASQ. Mr. Gruder has over 15 years of experience in the technology industry. Mr. Gruder holds no outside board affiliations.
Brian S. Gannon— Financial Controller of Stinger Systems, Inc. Mr. Gannon is the controller for the Company and has been controller since August 2007. Mr. Gannon serves as the Company’s principal financial and principal accounting officer. He has been employed in the Company’s finance group since April 2006. From 2005 to 2006, Mr. Gannon was a staff accountant at Granite Services, Inc., a subsidiary General Electric. From 2003 to 2005, Mr. Gannon served as an accountant for Outback Steakhouse, Inc. While at Outback, Mr. Gannon had complete accounting responsibility for multiple restaurants within the United States. Mr. Gannon is a Certified Public Accountant (CPA) and he holds a Bachelor’s degree in Accounting from the University of South Florida.
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T. Yates Exley— is a member of our board of directors. Mr. Exley is co-founder of Stinger Systems, Inc. and served as our Chief Financial Officer until April 2005. Before Stinger Systems, Mr. Exley worked as an independent financial consultant for the prior two years. Before that, he worked for Wachovia Securities for three years. Mr. Exley obtained a Masters in Business Administration from the Wharton School of Business at the University of Pennsylvania. He has over 15 years of experience in investment and commercial banking. Mr. Exley holds no outside board affiliations.
Andrew P. Helene— is a member of our board of directors and the audit committee. He is an independent director. He is currently Vice President, TD Banknorth, N.A. Mr. Helene has over 15 years experience in commercial and investment banking. Mr. Helene graduated from Williams College and holds a Masters degree in Business Administration from Columbia University and a Masters degree in International Studies from Johns Hopkins University. Mr. Helene has no outside board affiliations.
Wells Van Pelt— is a member of our board of directors and serves as the chairman and financial expert of the audit committee. Mr. Van Pelt is also chairman of the compensation committee. He is an independent director. Mr. Van Pelt graduated from Saint Andrews Presbyterian College in Laurinburg, North Carolina. Mr. Van Pelt has 35 years of experience in the investment business while also serving on numerous boards. He has served on non-profit, for profit and governmental boards including vice-chairman of the civil service board for Charlotte, North Carolina.
Richard “Bo” Dietl— is a member of our board of directors. He is an independent director. Mr. Dietl served as a New York City Police Officer from June 1969 until he retired in 1985. Mr. Dietl is Founder and Chairman of Beau Dietl & Associates, an investigative and security firm. Mr. Dietl is also Chairman of Security Solutions, a professional computer network security company and Bo Dietl’s One Tough ComputerCop, a company that has developed a software tool designed to increase a parent’s ability to protect their children from online predators. Mr. Dietl is also a principal of the Voyant Corporation which is an online vision care portal that provides online vision tests and allows visitors to purchase corrective lens through the website.
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Section 16(a) Beneficial Ownership Reporting Compliance
The Securities Exchange Act of 1934 requires our directors, executive officers and beneficial owners of more than 10% of any class of our equity securities to file reports of ownership of our equity securities and to furnish these reports to us. Based solely on a review of such reports, the Company believes that these persons and entities filed all the reports required by the Securities Exchange Act of 1934 on a timely basis.
Code of Ethics
The Company intends to adopt a Code of Ethics for all its directors, officers and employees in the near future, but has not adopted a Code as of the date hereof. When adopted, the Code will be available electronically on the Company’s website at “Investor Relations” at www.stingersystems.com or you may request a copy from the Company by writing to us at 2701 N. Rocky Point Drive, Suite 1130, Tampa, Florida 33607.
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ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Compensation Committee
The Compensation Committee of the Board of Directors consists of one non-employee director. The Compensation Committee is responsible for setting and administering the policies that govern annual executive compensation. The Compensation Committee is also responsible for making compensation decisions regarding the Chief Executive Officer, the President and our non-employee directors. The Compensation Committee also administers our 2005 Stock Option/Stock Bonus Plan.
Our compensation policy was designed to develop and foster the continued growth of the management team best suited to our operations, and to ensure that their compensation was appropriately linked to the long-term creation of value for our stockholders. We typically grant equity compensation with relatively long vesting thresholds in order to keep an emphasis on long-term growth. We also provide annual compensation that rewards our NEOs for success over a shorter period.
Our NEO Compensation Reflects our Core Values
The ultimate objective of our NEO compensation program is to increase stockholder value by fostering the management environment that will best develop our business. As a result, we structure our executive compensation programs to serve two principal objectives:
| • | | Attract, motivate, and retain executives of outstanding ability and potential. We believe that our success depends on our ability to attract and retain the management team that will cultivate the highest levels of performance, service and integrity. |
| |
| • | | Maintain an appropriate relationship between executive compensation and the creation of stockholder value. We strive to provide compensation packages that will reward exceptional service to our Company. We include components of both annual and long-term compensation to reflect our determination to keep management invested in our short-term success and our long-term growth. |
Annual Compensation
Base Salary
We do not have employment agreements with any executive officer. All NEO salaries are set by the Compensation Committee based on their skills, experience, level of responsibility, and individual accomplishments. The Compensation Committee also considers typical compensation levels paid by other companies in our industry to individuals with similar credentials. The Compensation Committee confers with our chief executive officer when setting base salaries for the other NEOs.
Incentive Bonus
The NEOs are eligible to receive discretionary cash bonuses based on their performance during the prior fiscal year. These bonuses are set by the Board of Directors or in consultation with our chief executive officer. All of these bonuses are designed to reward superior corporate performance, exceptional personal contributions, or a combination of both factors. Typically, bonuses are awarded by reference to our overall financial performance.
The Board of Directors and/or chief executive officer elected not to grant any bonus to any of the NEOs due to our financial performance during 2007.
Benefits
We provide additional benefits to our NEOs in order to remain competitive with compensation packages available in our industry generally and foster an attractive working environment. In many cases, these benefits are identical or substantially identical to those provided to all employees at the same location.
Long-Term Compensation
We believe that a significant portion of our NEO compensation should be contingent on increases in the market price of our common stock, in order to ensure that our management team remains focused on growth in stockholder value. As a result, we emphasize longer-term equity compensation as a complement to our annual compensation arrangements. Our Stock Option/Stock Bonus Plan permits the grant of stock options, stock appreciation rights, restricted stock, deferred stock, and performance shares. To date, we have only granted stock options and restricted stock to our NEOs under this Plan. We grant options and restricted stock awards with various vesting periods depending on the nature of the award and in order to create a strong incentive for our NEOs to remain part of our management team.
Post-Termination Payments
There are no post-termination payments provided to NEO’s.
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SUMMARY COMPENSATION TABLE
The table below summarizes the total compensation paid or earned by each of the named executive officers for the fiscal years ended December 31, 2006 and 2007. The Company has not entered into any employment agreements with any of the named executive officers. When setting total compensation for each of the named executive officers, the Board of Directors reviews tally sheets which show the executive’s current compensation, including equity and non-equity based compensation.
The named executive officers were not entitled to receive payments which would be characterized as Bonus, Stock Awards, Non-Equity Incentive Plan Compensation, Change in Pension Value and Nonqualified Deferred Compensation Earnings, or All Other Compensation payments for the fiscal year ended December 31, 2007.
The table below may reflect less than the full fiscal year salary for individuals who were not employed by the Company for the full fiscal year, and because the value of certain equity awards included below is based on the FAS 123(R) value rather than the fair value, these percentages may or may not be derived using the amounts reflected in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Change in | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Value | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | and | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Non-Equity | | Nonqualified | | | | |
| Name and | | | | | | | | | | | | | | Stock | | Option | | Incentive Plan | | Deferred | | All Other | | |
| Principal | | | | | | Salary | | Bonus | | Awards | | Awards | | Compensation | | Compensation | | Compensation | | |
| Position | | Year | | ($) | | ($) | | ($) | | ($) (1) | | ($) | | Earnings ($) | | ($) | | Total ($) |
| Robert F. Gruder | | | 2007 | | | | 250,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 250,000 | |
| Chief Executive | | | 2006 | | | | 250,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 250,000 | |
| Officer & Chairman | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| David J. Meador (2) | | | 2007 | | | | 110,721 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 110,721 | |
| Chief Financial | | | 2006 | | | | 175,000 | | | | | | | | | | | | 667,150 | | | | | | | | | | | | | | | | 842,150 | |
| Officer & Corporate Secretary | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| (1) | | The amounts in the Option Awards column reflects the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2006, in accordance with FAS 123(R) of awards pursuant to the 2005 Stock Option/Stock Bonus Plan and thus include amounts from awards granted in and prior to 2006. Assumptions used in the calculation of this amount for fiscal years ended December 31, 2004, 2005 and 2006 are included in the footnotes to the Company’s audited financial statements for the fiscal year ended December 31, 2006, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. |
| |
| (2) | | David Meador’s employment with the Company and stock options were terminated on August 17, 2007. |
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth certain information with respect to the value of all unexercised options previously awarded to our named executive officers as of December 31, 2007:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Stock Awards |
| | | Option Awards | | | | | | | | | | Equity | | Equity Incentive |
| | | | | | | | | | | Equity Incentive | | | | | | | | | | | | | | | | | | Incentive Plan | | Plan Awards: |
| | | | | | | | | | | Plan Awards: | | | | | | | | | | | | | | | | | | Awards: | | Market or |
| | | Number of | | Number of | | Number of | | | | | | | | | | Number of | | Market Value | | Number of | | Payout Value of |
| | | Securities | | Securities | | Securities | | | | | | | | | | Shares or | | of Shares or | | Unearned | | Unearned |
| | | Underlying | | Underlying | | Underlying | | | | | | | | | | Units of | | Units of | | Shares, Units or | | Shares, Units or |
| | | Unexercised | | Unexercised | | Unexercised | | Option | | Option | | Stock That | | Stock That | | Other Rights | | Other Rights |
| | | Options (#) | | Options (#) | | Unearned Options | | Exercise | | Expiration | | Have Not | | Have Not | | That Have Not | | That Have Not |
| Name | | Exercisable | | Unexercisable | | (#) | | Price ($) | | Date | | Vested (#) | | Vested ($) | | Vested (#) | | Vested |
| |
| Robert F. Gruder | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| David J. Meador(1) | | | 250,000 | | | | | | | | | | | | 3.98 | | | | 01/25/11 | | | | | | | | | | | | | | | | | |
| | | | 50,000 | | | | | | | | | | | | 0.55 | | | | 12/20/11 | | | | | | | | | | | | | | | | | |
(1) David Meador’s employment with the Company and stock options were terminated on August 17, 2007.
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DIRECTOR COMPENSATION
The following table sets forth information concerning the compensation earned during the last fiscal year by each individual who served as a director at any time during the fiscal year:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Change in Pension | | | | | | | |
| | | | | | | | | | | | | | | | | | | Value and | | | | | | | |
| | | Fees | | | | | | | Option | | | Non-Equity | | | Nonqualified | | | | | | | |
| | | Earned or | | | Stock | | | Awards | | | Incentive Plan | | | Deferred | | | All Other | | | | |
| | | Paid in | | | Awards | | | ($) | | | Compensation | | | Compensation | | | Compensation | | | | |
| Name | | Cash ($) | | | ($) | | | (1)(2) | | | ($) | | | Earnings ($) | | | ($) | | | Total ($) | |
| T. Yates Exley | | | | | | | | | | | | | | | | | | | | | | | | | | | — | |
| Michael Racaniello(3) | | | | | | | | | | | | | | | | | | | | | | | | | | | — | |
| Andrew P. Helene | | | | | | | | | | | | | | | | | | | | | | | | | | | — | |
| Wells Van Pelt(4) | | | | | | | | | | | | | | | | | | | | | | | | | | | — | |
| | |
| (1) | | The amounts in the Option Awards column reflects the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2007, in accordance with FAS 123(R) of awards pursuant to the 2005 Stock Option/Stock Bonus Plan and thus include amounts from awards granted in and prior to 2007. Assumptions used in the calculation of this amount for fiscal years ended December 31, 2005, 2006 and 2007 are included in the footnotes to the Company’s audited financial statements for the fiscal year ended December 31, 2007, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. |
| |
| (2) | | |
| |
| (3) | | Michael Racaniello resigned from the Board of Directors in June 2007. |
| |
| (4) | | Wells Van Pelt was appointed to the Board of Directors on November 16, 2007. |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
As of March 14, 2008, we had 19,889,230 shares of common stock outstanding (excluding certain options, grants and warrants), which are our only outstanding voting securities. The following table sets forth information regarding the beneficial ownership of our common stock as of March 31, 2008 by:
| • | | each person (or group of affiliated persons) who is known by us to own beneficially more than 5% of our common stock; |
| |
| • | | each of our executive officers; |
| |
| • | | each of our current directors; and |
| | | | | | | | | |
| | | Amount and Nature of | | |
| Beneficial Owner | | Beneficial Ownership | | Percentage |
Castlerigg Master Investments Ltd.
c/o Citco Fund Services (Curacao) N.V.
Kaya Flamboyan 9, PO Box 812
| | | 2,033,723 | (1) | | | 10.2 | % |
| Curaco, Netherlands, Antilles | | | | | | | | |
| | | | | | | | | |
Ronald T. Bellistri
2701 N Rocky Point Drive, Suite 1130
| | | 1,000,000 | | | | 5.0 | % |
| Tampa, FL 33607 | | | | | | | | |
| | | | | | | | | |
Robert F. Gruder
2701 N Rocky Point Drive, Suite 1130
| | | 5,327,949 | (4) | | | 26.8 | % |
| Tampa, FL 33607 | | | | | | | | |
| | | | | | | | | |
T. Yates Exley
2239 Forrest Drive
| | | 4,675,000 | (2) | | | 23.5 | % |
| Charlotte, NC 28211 | | | | | | | | |
| | | | | | | | | |
Andrew Helene
307 Main Street
| | | 130,000 | (3) | | | * | |
| Hyannis, MA 02653 | | | | | | | | |
(Continued)
- 35 -
| | | | | | | | | |
| | | Amount and Nature of | | |
| Beneficial Owner | | Beneficial Ownership | | Percentage |
Wells Van Pelt
| | | 62,650 | (5) | | | * | |
6100 Fairview Road, Suite 700
Charlotte, NC 28210 | | | | | | | | |
| | | | | | | | | |
Richard “Bo” Dietl
| | | 1,000,000 | | | | 5.0 | % |
One Pennsylvania Plaza, 50th Floor
New York, NY 10119 | | | | | | | | |
| | | | | | | | | |
| All directors and executive officers as a group (5 persons) | | | 12,195,599 | | | | 61.3 | % |
| | |
| * | | Less than one percent (1%). |
| |
| (1) | | As reported on a Schedule 13G filed on March 10, 2008 Castlerigg Master Investments Ltd., Sandell Asset Management Corp., Castlerigg International Limited, Castlerigg International Holdings Limited and Thomas E. Sandell. Includes 468,365 shares of Common Stock into which the convertible notes and/or the warrants held by Castlerigg Master Investments are convertible or exercisable, as applicable. In addition, Castlerigg Master Investments holds (x) a senior secured convertible note convertible into an aggregate of 1,720,000 shares of Common Stock, (y) a convertible note convertible into an aggregate of 4,225,796 shares of Common Stock, and (z) warrants held by Castlerigg Master Investments exercisable for an aggregate of 8,912,961 shares of Common Stock. Such securities are not convertible or exercisable to the extent that their exercise would cause the holder to be the beneficial owner of more than 9.99% of the Company’s common stock. |
| |
| (2) | | Mr. Exley also has a potential minority beneficial interest in 536,000 shares held by Exley Management Services LLC, a company principally owned and controlled by his father. Because Mr. T. Yates Exley cannot control the disposition or the voting of the shares held in this company, they have not been allocated to him as part of his beneficial holdings. Includes approximately 85,000 shares of common stock issuable upon conversion of a convertible promissory note held in trust for the benefit of Mr. Exley’s children. |
| |
| (3) | | Includes 120,000 shares of common stock that may be purchased upon the exercise of options. |
| |
| (4) | | Includes approximately 85,000 shares of common stock issuable upon conversion of a convertible promissory note held by Mr. Gruder’s children. |
| |
| (5) | | Includes 60,000 shares of common stock that may be purchased upon the exercise of options. |
- 36 -
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information regarding the Company’s equity compensation plans as of December 31, 2007.
| | | | | | | | | | | | �� | |
| | | Number of securities | | | Weighted | | | Number of securities | |
| | | to be issued upon | | | average | | | remaining available for | |
| | | exercise of | | | exercise price | | | future issuance under | |
| | | outstanding | | | of outstanding | | | equity compensation plans | |
| | | options, warrants | | | options, | | | (excluding securities | |
| | | and | | | warrants and | | | reflected in the first | |
| Plan Category | | rights (1) | | rights | | column) | |
| Equity compensation plans approved by security holders | | | 827,500 | | | $ | 1.94 | | | | 1,172,500 | |
| Equity compensation plan not approved by security holders | | | — | | | | | | | | — | |
| | | | | | | | | | | | | |
| Total | | | 827,500 | | | | 1.94 | | | | 1,172,500 | |
| | |
| (1) | | Represents shares of the Company’s Common Stock issuable in connection with such equity compensation plans. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
On September 24, 2004, EDT Acquisition LLC, a Michigan limited liability company then owned by Robert Gruder and T. Yates Exley, acquired a 95% interest in Electronic Defense Technologies, LLC, an Ohio limited liability company. The interest was acquired in exchange for $250,000 in cash and a $200,000 note payable at 4% interest due on or before March 24, 2006 from EDT Acquisition, LLC. The 95% interest in Electronic Defense Technologies, LLC together with the remaining 5% interest in the same company was then transferred on the same day to Stinger Systems in exchange for the issuance by Stinger Systems of 9,750,000 shares of Stinger Systems’ common stock. This transaction transferred control of Stinger Systems to Robert Gruder and T. Yates Exley by virtue of their ownership of EDT Acquisition LLC which held 9,250,000 common shares of Stinger Systems. Mr. Gruder serves as President and Chairman of the Board of Directors. Mr. Exley is a member of the Board. Mr. Gruder’s portion of the shares of Stinger Systems formerly held in EDT Acquisition, LLC have been paid out of EDT Acquisition, LLC and are held by him directly. It is the responsibility of the Company’s Audit Committee to review all transactions or arrangements between our company and any of its directors, officers, principal shareholders or any of their respective affiliates, associates or related parties.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
The fees billed by Killman, Murrell & Company, P.C. for professional services rendered in connection with the audit of the Company’s annual consolidated financial statements for 2007 and 2006, the review of the consolidated financial statements included in the Company’s quarterly reports on Form 10-Q, as well as the review and consent for the Company’s other filings for 2007 and 2006 were $36,768 and $40,000, respectively.
Audit-Related Fees
The fees billed by Killman, Murrell & Company, P.C. for professional services rendered for assurance and related services that are reasonably related to the audit of the Company’s annual consolidated financial statements for 2007 and 2006 were $0.
Tax Fees
The fees billed by Killman, Murrell & Company, P.C. for professional services rendered for tax compliance, tax advice and tax planning for 2007 and 2006 were $3,082 and $0, respectively.
All Other Fees
In 2007 and 2006, Killman, Murrell & Company, P.C. did not bill the Company for any services other than those described above.
- 37 -
Pre-Approval of Non-Audit Services
Management may use Killman, Murrell & Company, P.C. for non-audit services that are permitted under SEC rules and regulations, provided that management obtain the Audit Committee’s approval before such services are rendered.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report:
(1) Index to Consolidated Financial Statements
| | | |
| | | Page |
| | | Number |
| Report of Independent Registered Public Accounting Firm Killman, Murrell & Company, P.C. Financial Statements | | F-2 |
| Consolidated Balance Sheets as of December 31, 2005 and 2004 | | F-3 |
| Consolidated Statements of Operations for the year ended December 31, 2005 and for the Period September 24, 2004 to December 31, 2004 | | F-5 |
| Consolidated Statements of Stockholders’ Equity (Deficit) for the year ended December 31, 2005 and for the Period September 24, 2004 to December 31, 2004 | | F-6 |
| Consolidated Statements of Cash Flows for the year ended December 31, 2005 and for the Period September 24, 2004 to December 31, 2004 | | F-7 |
| Notes to Consolidated Financial Statements | | F-9 |
| Pro Forma Combined Statement of Operations | | |
(2) Financial Statement Schedules
Financial statement schedules are omitted because they are not required.
(3) Exhibits
The following exhibits are filed with this Annual Report:
| | | |
| Exhibit No. | | Description |
| 3.1 | | Articles of Incorporation (1) |
| |
| 3.2 | | Amendment to Articles of Incorporation (1) |
| |
| 3.3 | | By-laws (1) |
| |
| 4.1 | | Specimen Common Stock Certificate of Registrant (1) |
| |
| 10.1 | | Form of Securities Purchase Agreement used in the December 2004 506 offering (1) |
| |
| 10.2 | | Form of warrant used in the December 2004 506 offering (1) |
| |
| 10.3 | | Form of Registration Rights Agreement used in the December 2004 506 offering (1) |
| |
| 10.4 | | Employment Agreement with Mr. Cuny (2) |
| |
| 10.5 | | Employment Agreement with Mr. Killoy (2) |
| |
| 10.6 | | Severance Agreement with Mr. Cuny (2) |
| |
| 10.7 | | Research Agreement — Wayne State University (2) |
| |
| 10.8 | | Independent Manufacturer’s Representative Agreement (2) |
| |
| 10.9 | | Stinger Systems Distributor Agreement (2) |
| |
| 10.10 | | Settlement Agreement, Release and Covenant Not to Sue with Mr. Killoy (3) |
| |
| 10.11 | | Purchase Agreement (3) |
| |
| 10.12 | | Cancellation Agreement (3) |
| |
| 10.13 | | Agreement between Mr. McNulty and CM Partners (3) |
| |
| 10.14 | | Assignment of Inventions (3) |
| |
| 10.15 | | Patent Assignment (3) |
| |
| 10.16 | | Modification Letter Agreement with Mr. McNulty (4) |
| |
| 10.17 | | Amendment and Exercise Agreement (5) |
- 38 -
| | | |
| Exhibit No. | | Description |
| 10.18 | | Form of New Warrant (5) |
| |
| 10.19 | | Registration Rights Agreement used in the January 2007 offering (5) |
| |
| 10.20 | | Securities Purchase Agreement dated August 2, 2007 among Stinger Systems, Inc. and the investor party thereto(6) |
| |
| 10.21 | | Senior Secured Convertible Note dated August 3, 2007(6) |
| |
| 10.22 | | Warrant dated August 3, 2007(6) |
| |
| 10.23 | | Registration Rights Agreement dated August 3, 2007 among Stinger Systems, Inc. and the investor party thereto(6) |
| |
| 10.24 | | Security Agreement dated August 3, 2007(6) |
| |
| 10.25 | | Securities Purchase Agreement dated February 29, 2008 among Stinger Systems, Inc. and the investor party thereto(7) |
| |
| 10.26 | | Senior Secured Convertible Note dated February 29, 2008(7) |
| |
| 10.27 | | Warrant(7) |
| |
| 10.28 | | Amended and Restated Security Agreement, dated February 29, 2008(7) |
| |
| 10.29 | | Amended and Restated Senior Secured Convertible Note dated February 29, 2008(7) |
| |
| 21.1 | | List of Subsidiaries (1) |
| |
| 31.1 | | Section 302 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
| |
| 31.2 | | Section 302 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
| |
| 32.1 | | Section 906 Certification of the Chief Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
| 32.2 | | Section 906 Certification of the Chief Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| (1) | | Previously filed as an exhibit to Form S-1/A on February 8, 2005. |
| |
| (2) | | Previously filed as an exhibit to Form S-1/A on July 20, 2005. |
| |
| (3) | | Previously filed as an exhibit to Form S-1/A on September 20, 2005. |
| |
| (4) | | Previously filed as an exhibit to Form S-1/A on November 10, 2005. |
| |
| (5) | | Previously filed as an exhibit to Current Report on Form 8-K on January 26, 2007 |
| |
| (6) | | Previously filed as an exhibit to Current Report on Form 8-K on August 3, 2007 |
| |
| (7) | | Previously filed as an exhibit to Current Report on Form 8-K on March 3, 2008 |
- 39 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | |
| | STINGER SYSTEMS, INC.
| |
| | By: | /s/ Ronald T. Bellistri | |
| | | Ronald T. Bellistri | |
| | | Chief Executive Officer | |
| |
| Dated March 31, 2008 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and the dates indicated:
| | | | | |
| Signature | | Title | | Date |
| | | |
/s/ Ronald T. Bellistri
Ronald T. Bellistri | | Chief Executive Officer
(Principal Executive Officer) | | March 31, 2008 |
| | | | | |
/s/ Robert F. Gruder
Robert F. Gruder | | President and Chairman of the Board | | March 31, 2008 |
| | | | | |
/s/ Brian S. Gannon
Brian S. Gannon | | Financial Controller
(Principal Financial and Accounting Officer) | | March 31, 2008 |
| | | | | |
/s/ T. Yates Exley
T. Yates Exley | | Director | | March 31, 2008 |
| | | | | |
/s/ Andrew P. Helene
Andrew P. Helene | | Director | | March 31, 2008 |
| | | | | |
/s/ Wells Van Pelt
Wells Van Pelt | | Director | | March 31, 2008 |
| | | | | |
/s/ Richard “Bo” Dietl
Richard “Bo” Dietl | | Director | | March 31, 2008 |
- 40 -
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | |
| | | Page | |
| | | F-2 | |
| Financial Statements | | | | |
| | | F-3 | |
| | | F-5 | |
| | | F-6 | |
| | | F-7 | |
| | | F-9 | |
F-1
Killman, Murrell & Company, P.C.
Certified Public Accountants
| | | | | |
| 3300 N. A Street, Bldg. 4, Suite 200 | | 1931 E. 37th Street, Suite 7 | | 2626 Royal Circle |
| Midland, Texas 79705 | | Odessa, Texas 79762 | | Kingwood, Texas 77339 |
| (432) 686-9381 | | (432) 363-0067 | | (281) 359-7224 |
| Fax (432) 684-6722 | | Fax (432) 363-0376 | | Fax (281) 359-7112 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Stinger Systems, Inc.
Tampa, Florida
We have audited the accompanying consolidated balance sheets of Stinger Systems, Inc. as of December 31, 2007 and 2006 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the three year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stinger Systems, Inc. as of December 31, 2007 and 2006 and the consolidated results of its operations and its cash flows for each of the years in the three year period ended December 31, 2007 in conformity with United States generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 17 to the consolidated financial statements, the Company has suffered recurring losses from operations and its limited capital resources raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 17. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| | | | | |
| | | /s/ Killman, Murrell & Company, P.C. | | |
| | | | | |
| | | KILLMAN, MURRELL & COMPANY, P.C. | | |
| | | | | |
| Odessa, Texas | | | | |
| March 28, 2008 | | | | |
F-2
STINGER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
| | | | | | | | | |
| | | December 31, | |
| | | 2007 | | | 2006 | |
CURRENT ASSETS | | | | | | | | |
| Cash | | $ | 345,293 | | | $ | 121,047 | |
| Accounts Receivable, net of $1,800 Allowance for Uncollectible Accounts in 2007 and 2006 | | | 81,201 | | | | 46,978 | |
| Inventories, at cost | | | 128,841 | | | | 292,426 | |
| Prepaid Expenses and Other Current Assets | | | 35,149 | | | | 41,747 | |
| | | | | | | |
| TOTAL CURRENT ASSETS | | | 590,484 | | | | 502,198 | |
EQUIPMENT AND FURNITURE | | | | | | | | |
| Equipment and Furniture, net of accumulate depreciation of $126,414 and $52,982 in 2007 and 2006 | | | 276,590 | | | | 303,295 | |
| | | | | | | |
OTHER ASSETS, net of Accumulated | | | | | | | | |
| Intangible Assets, net of accumulated amortization of $1,145,419 and $763,616 in 2007 and 2006 | | | 1,527,201 | | | | 2,339,004 | |
| Other Assets | | | 11,496 | | | | 11,496 | |
| | | | | | | |
| TOTAL OTHER ASSETS | | | 1,538,697 | | | | 2,350,500 | |
| | | | | | | |
| TOTAL ASSETS | | $ | 2,405,771 | | | $ | 3,155,993 | |
| | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
(Continued)
F-3
STINGER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
| | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2007 | | | 2006 | |
CURRENT LIABILITIES | | | | | | | | |
| Accounts Payable | | $ | 393,842 | | | $ | 1,375,594 | |
| Accrued Liabilities | | | 124,846 | | | | 79,341 | |
| Capital Lease Obligation, current portion | | | 21,445 | | | | — | |
| Note Payable-Related Parties | | | 31,250 | | | | 962,500 | |
| | | | | | | |
| TOTAL CURRENT LIABILITIES | | | 571,383 | | | | 2,417,435 | |
| | | | | | | |
| Capital Lease Obligation, long-term portion | | | 77,739 | | | | — | |
| Note Payable-Convertible, net of debt discount of $1,660,237 | | | 1,339,763 | | | | — | |
| Derivative Liability Associated with Convertible Note and Warrants | | | 3,660,000 | | | | — | |
| | | | | | | |
| TOTAL LIABILITIES | | | 5,648,885 | | | | 2,417,435 | |
| | | | | | | |
COMMITMENTS AND CONTINGENCIES | | | — | | | | — | |
| |
STOCKHOLDERS’ EQUITY (DEFICIT) | | | | | | | | |
| Common Stock, $0.001 Par Value, 50,000,000 Shares Authorized, 17,527,171 and 15,068,500 Shares Issued and Outstanding at December 31, 2007 and December 31, 2006, respectively | | | 17,527 | | | | 15,069 | |
| Additional Paid-In Capital | | | 30,309,985 | | | | 25,945,830 | |
| Retained Deficit | | | (33,570,626 | ) | | | (25,222,341 | ) |
| | | | | | | |
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) | | | (3,243,114 | ) | | | 738,558 | |
| | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | $ | 2,405,771 | | | $ | 3,155,993 | |
| | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
STINGER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 2007
| | | | | | | | | | | | | |
| | | December 31, 2007 | | | December 31, 2006 | | | December 31, 2005 | |
SALES | | $ | 372,212 | | | $ | 454,454 | | | $ | 469,997 | |
COST OF PRODUCT SOLD | | | 533,855 | | | | 661,792 | | | | 609,279 | |
| | | | | | | | | | |
| GROSS (LOSS) MARGIN | | | (161,643 | ) | | | (207,338 | ) | | | (139,282 | ) |
SELLING EXPENSES | | | 235,531 | | | | 243,585 | | | | 344,103 | |
GENERAL AND ADMINISTRATIVE EXPENSES | | | | | | | | | | | | |
| Employee Salaries | | | 1,102,479 | | | | 953,119 | | | | 782,605 | |
| Employee Acquisition Cost | | | 5,881 | | | | 10,686 | | | | 3,475,000 | |
| Employee Severance Cost | | | 18,697 | | | | 895 | | | | 719,346 | |
| Other | | | 1,773,290 | | | | 3,563,230 | | | | 2,952,269 | |
| Depreciation and Amortization | | | 511,239 | | | | 462,759 | | | | 396,094 | |
| Impairment Loss | | | 523,342 | | | | 201,943 | | | | | |
| Research and Development | | | 350,810 | | | | 657,411 | | | | 1,363,059 | |
| | | | | | | | | | |
| LOSS FROM OPERATIONS | | | (4,682,912 | ) | | | (6,300,966 | ) | | | (10,171,758 | ) |
INTEREST INCOME | | | 21,517 | | | | 25,931 | | | | 98,605 | |
INTEREST EXPENSE | | | (437,832 | ) | | | (31,310 | ) | | | (12,376 | ) |
VENDOR LIABILITY SETTLEMENT | | | 410,942 | | | | — | | | | | |
DERIVATIVE LIABILITY EXPENSE | | | (3,660,000 | ) | | | — | | | | — | |
| | | | | | | | | | |
| LOSS BEFORE INCOME TAXES | | | (8,348,285 | ) | | | (6,306,345 | ) | | | (10,085,529 | ) |
PROVISIONS FOR INCOME TAXES | | | — | | | | — | | | | — | |
| | | | | | | | | | |
| NET LOSS | | $ | (8,348,285 | ) | | $ | (6,306,345 | ) | | $ | (10,085,529 | ) |
| | | | | | | | | | |
NET LOSS PER SHARE | | | | | | | | | | | | |
| Basic | | $ | (0.50 | ) | | $ | (0.42 | ) | | $ | (0.67 | ) |
| | | | | | | | | | |
| Diluted | | $ | (0.50 | ) | | $ | (0.42 | ) | | $ | (0.67 | ) |
| | | | | | | | | | |
WEIGHTED AVERAGE NUMBER OF COMMON STOCK AND COMMON STOCK EQUIVALENT SHARES OUTSTANDING | | | | | | | | | | | | |
| Basic | | | 16,658,390 | | | | 15,038,500 | | | | 14,997,346 | |
| | | | | | | | | | |
| Diluted | | | 16,658,390 | | | | 15,038,500 | | | | 14,997,346 | |
| | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
STINGER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 2007
| | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | | Additional | | | | | | | |
| | | Number of | | | | | | | Paid-In | | | Retained | | | | |
| | | Shares | | | Par Value | | | Capital | | | Deficit | | | Total | |
Balance, December 31, 2004 | | | 14,928,500 | | | $ | 14,929 | | | $ | 19,414,979 | | | $ | (8,830,467 | ) | | $ | 10,599,441 | |
| | | | | | | | | | | | | | | | | | | | | |
| Compensation Recognized for Stock Grant | | | — | | | | — | | | | 1,925,000 | | | | — | | | | 1,925,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| Common Stock Issued for Patent | | | 75,000 | | | | 75 | | | | 1,387,425 | | | | — | | | | 1,387,500 | |
| | | | | | | | | | | | | | | | | | | | | |
| Stock Options Issued To Employees | | | — | | | | — | | | | 1,550,000 | | | | — | | | | 1,550,000 | |
| Repurchase of Common Stock | | | (10,000 | ) | | | (10 | ) | | | (49,990 | ) | | | — | | | | (50,000 | ) |
| Net Loss | | | — | | | | — | | | | — | | | | (10,085,529 | ) | | | (10,085,529 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2005 | | | 14,993,500 | | | | 14,994 | | | | 24,227,414 | | | | (18,915,996 | ) | | | 5,326,412 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Common Stock Issued for Services | | | 75,000 | | | | 75 | | | | 166,800 | | | | | | | | 166,875 | |
| | | | | | | | | | | | | | | | | | | | | |
| Stock Options Issued To Employees | | | — | | | | — | | | | 1,551,616 | | | | — | | | | 1,551,616 | |
| Net Loss | | | — | | | | — | | | | — | | | | (6,306,345 | ) | | | (6,306,345 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2006 | | | 15,068,500 | | | | 15,069 | | | | 25,945,830 | | | | (25,222,341 | ) | | | 738,558 | |
| | | | | | | | | | | | | | | | | | | | | |
| Stock Options and Warrants Issued To Employees | | | — | | | | — | | | | 837,923 | | | | — | | | | 837,923 | |
| | | | | | | | | | | | | | | | | | | | | |
| Stock Sold to Accredited Investors | | | 1,483,644 | | | | 1,483 | | | | 950,616 | | | | — | | | | 952,099 | |
| | | | | | | | | | | | | | | | | | | | | |
| Common Stock Issued for Note Payable and Accrued Interest | | | 972,027 | | | | 972 | | | | 971,055 | | | | — | | | | 972,027 | |
| | | | | | | | | | | | | | | | | | | | | |
| Stock Issued To Employees | | | 3,000 | | | | 3 | | | | 1,707 | | | | — | | | | 1,710 | |
| | | | | | | | | | | | | | | | | | | | | |
| Beneficial Conversion Feature of Convertible Debt | | | — | | | | — | | | | 1,602,854 | | | | | | | | 1,602,854 | |
| Net Loss | | | — | | | | — | | | | — | | | | (8,348,285 | ) | | | (8,348,285 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2007 | | | 17,527,171 | | | $ | 17,527 | | | $ | 30,309,985 | | | $ | (33,570,626 | ) | | $ | (3,243,114 | ) |
| | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
]
STINGER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 2007
| | | | | | | | | | | | | |
| | | For the Year | | | For the Year | | | For the Year | |
| | | Ended | | | Ended | | | Ended | |
| | | December 31, 2007 | | | December 31, 2006 | | | December 31, 2005 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | |
| Net Loss | | $ | (8,348,285 | ) | | $ | (6,306,345 | ) | | $ | (10,085,529 | ) |
| Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | | | | | | | | | | | | |
| Depreciation and Amortization | | | 511,239 | | | | 462,759 | | | | 396,094 | |
| Stock Option Warrant Expense | | | 837,923 | | | | 1,551,616 | | | | — | |
| Stock Issued for Services | | | 1,710 | | | | 166,875 | | | | — | |
| Employee Acquisition Cost | | | — | | | | — | | | | 3,475,000 | |
| Loss on Sale of Assets | | | — | | | | 3,381 | | | | — | |
| Asset Impairment | | | 523,342 | | | | 201,943 | | | | — | |
| Derivative Liability Associated with Convertible Notes and Warrants | | | 3,660,000 | | | | — | | | | — | |
| Amortization of Discount on Notes Payable — Convertible | | | 268,617 | | | | — | | | | — | |
| Changes in Operating Assets and Liabilities | | | | | | | | | | | | |
| Accounts Receivable | | | (34,223 | ) | | | (14,387 | ) | | | (11,818 | ) |
| Inventory | | | 163,585 | | | | (92,661 | ) | | | (121,603 | ) |
| Inventory Deposits | | | — | | | | — | | | | 139,190 | |
| Prepaid Expenses | | | 6,598 | | | | 748,677 | | | | 231,699 | |
| Other Assets | | | — | | | | (4,785 | ) | | | (5,417 | ) |
| Accounts Payable | | | (981,752 | ) | | | 833,188 | | | | 539,854 | |
| Accrued Liabilities | | | 117,532 | | | | (96,656 | ) | | | (315,026 | ) |
| | | | | | | | | | |
| NET CASH USED IN OPERATING ACTIVITIES | | | (3,273,714 | ) | | | (2,546,395 | ) | | | (5,758,451 | ) |
| | | | | | | | | | |
CASH FLOWSFROM INVESTING ACTIVITIES | | | | | | | | | | | | |
| Purchase of Equipment | | | (89,167 | ) | | | (91,065 | ) | | | (261,905 | ) |
| Purchase of Patent | | | — | | | | — | | | | — | |
| Proceeds from Sale of Assets | | | — | | | | 1,157 | | | | — | |
| | | | | | | | | | |
| NET CASH USED IN INVESTING ACTIVITIES | | | (89,167 | ) | | | (89,908 | ) | | | (261,905 | ) |
| | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | |
| Common Stock Sales | | | 952,099 | | | | — | | | | — | |
| Proceeds from issuance of Notes Payable, net of issue costs | | | 2,878,000 | | | | 753,721 | | | | — | |
| Payment on Insurance Notes Payable | | | (235,250 | ) | | | (404,927 | ) | | | (614,722 | ) |
| Payment on Capital Leases | | | (7,722 | ) | | | — | | | | — | |
| Repurchase of Common Stock | | | — | | | | — | | | | (50,000 | ) |
| | | | | | | | | | |
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | | | 3,587,127 | | | | 348,794 | | | | (664,722 | ) |
| | | | | | | | | | |
NET INCREASE (DECREASE) IN CASH | | | 224,246 | | | | (2,287,509 | ) | | | (6,685,078 | ) |
CASH BALANCE, BEGINNING OF PERIOD | | | 121,047 | | | | 2,408,556 | | | | 9,093,634 | |
| | | | | | | | | | |
CASH BALANCE, END OF PERIOD | | $ | 345,293 | | | $ | 121,047 | | | $ | 2,408,556 | |
| | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
(Continued)
F-7
STINGER SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 2007
(Continued)
| | | | | | | | | | | | | |
| | | For the Year Ended | | | For the Year Ended | | | For the Year Ended | |
| | | December 31, 2007 | | | December 31, 2006 | | | December 31, 2005 | |
NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | | | | | | | | | |
| Common Stock Issued From Conversion of Redeemable Common Stock | | | — | | | | — | | | | 75 | |
| Additional Paid-In Capital From Conversion of Redeemable Common Stock | | | — | | | | — | | | | 1,387,425 | |
| Conversion of Redeemable Common Stock to Common Stock | | | — | | | | — | | | | (1,387,500 | ) |
| Prepaid Insurance | | | — | | | | (268,797 | ) | | | (882,357 | ) |
| Insurance Note Payable | | | — | | | | 268,797 | | | | 882,357 | |
| Purchase of Equipment | | | — | | | | (146,279 | ) | | | — | |
| Notes Payable-Related Parties | | | — | | | | 146,279 | | | | — | |
| Equipment | | | (106,906 | ) | | | — | | | | — | |
| Capital Lease Obligations | | | 106,906 | | | | — | | | | — | |
| Note Payable | | | (900,000 | ) | | | — | | | | — | |
| Accrued Interest | | | (72,027 | ) | | | — | | | | — | |
| Common Stock | | | 972 | | | | — | | | | — | |
| Additional Paid in Capital | | | 971,055 | | | | — | | | | — | |
| Debt Discount on Notes Payable | | | (1,602,854 | ) | | | — | | | | — | |
| Additional Paid in Capital | | | 1,602,854 | | | | — | | | | — | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | |
SUPPLEMENTAL CASH FLOW DISCLOSURES | | | | | | | | | | | | |
| Cash Paid During the Year For: | | | | | | | | | | | | |
| Interest | | $ | 53,845 | | | $ | 9,066 | | | $ | 9,767 | |
| Income Taxes | | $ | — | | | $ | — | | | $ | — | |
| | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-8
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 1: GENERAL
Nature of Business
Stinger Systems, Inc. (the “Company”) was incorporated on July 2, 1996, under the laws of the State of Nevada as United Consulting Corporation. The Company changed its name to Stinger Systems, Inc., on September 24, 2004, in connection with the following transactions. On September 24, 2004, EDT Acquisition LLC owned by two individuals acquired a 95% interest in Electronic Defense Technologies, LLC (“EDT”). This 95% interest in EDT together with the remaining 5% interest in EDT was then transferred on the same day to the Company in exchange for the issuance by the Company of 9,750,000 shares of the Company’s common stock. In connection with the transaction 10,000,000 shares of the Company’s issued and outstanding common stock were returned to the Company for cancellation. Prior to September 24, 2004, the Company had no operations.
The Company is engaged in the production and sale of electronic stun devices for the control of, and to provide temporary incapacitation of, potentially dangerous persons.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, EDT, and have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States. All intercompany transactions and account balances have been eliminated in consolidation.
Management of the Company has determined that the Company’s operations are comprised of one reportable segment as that term is defined by SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information.” Therefore, no separate segment disclosures have been included in the accompanying notes to the financial statements.
Estimates
The preparation of financial statements in conformity with accounting principles accepted in the United States requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
(Continued)
F-9
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all cash and other highly liquid investments with initial maturities of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of average cost or market. Inventories consisted of the following at December 31, 2007 and 2006:
| | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2007 | | | 2006 | |
| Raw Materials and Work-in Progress | | $ | 99,853 | | | $ | 216,865 | |
| Finished Goods | | | 28,988 | | | | 75,561 | |
| | | | | | | |
| | | $ | 128,841 | | | $ | 292,426 | |
| | | | | | | |
Furniture and Equipment
Furniture and equipment are stated at cost net of accumulated depreciation. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets ranging from two and one half to five years. Items acquired in connection with the acquisition of EDT were recorded at estimated fair values. At December 31, 2007 and 2006, furniture and equipment consisted of the following:
| | | | | | | | | | | | | |
| | | | | | | December 31, | | | December 31, | |
| | | Useful Life | | | 2007 | | | 2006 | |
| Furniture | | 5 Years | | $ | 21,825 | | | $ | 21,825 | |
| Machinery | | 3 Years | | | 286,856 | | | | 143,495 | |
| Mold For Stun Gun | | 2.5 Years | | | 59,556 | | | | 160,841 | |
| Computers and Equipment | | 3 Years | | | 34,767 | | | | 30,116 | |
| | | | | | | | | | | |
| | | | | | | | 403,004 | | | | 356,277 | |
| Accumulated Depreciation | | | | | | | (126,414 | ) | | | (52,982 | ) |
| | | | | | | | | | | |
| | | | | | | $ | 276,590 | | | $ | 303,295 | |
| | | | | | | | | | | |
(Continued)
F-10
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-Lived Assets
The Company routinely evaluates the carrying value of its long-lived assets. The Company would record an impairment loss when events or circumstances indicate that a long-lived asset’s carrying value may not be recovered. The Company has recognized impairment charges of $523,342 and $201,943 in 2007 and 2006, respectively.
Deferred Compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)) which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors, including stock option grants, based on estimated fair values. SFAS 123(R) supersedes previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), for periods beginning in fiscal year 2006.
SFAS 123(R) requires companies to estimate the fair value of stock-based awards on the date of grant using an option-pricing model. 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. The Company adopted SFAS 123(R) using the modified prospective transition method that requires the application of the accounting standard starting on January 1, 2006, without restatement of prior years. Stock options were granted at an exercise price equal to the Company’s stock price at the date of grant.
Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). Under the intrinsic value based method, stock-based compensation expense for employee stock options was recognized in the Company’s Consolidated Financial Statements as the difference in the exercise price of the option and the Company’s stock price at the date of grant.
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 collectibility is reasonably assured. Sales of goods are final, with no right of return.
Cost of Goods Sold
Costs of goods sold include manufacturing costs, including materials, labor and identifiable overhead related to finished goods and components.
(Continued)
F-11
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising
Advertising and marketing costs are expensed as incurred. During the years ended December 31, 2007, 2006 and 2005, advertising costs were $52,989, $11,459, and $170,661, respectively.
Research and Development Costs
The Company expenses research and development costs as incurred. During the years ended December 31, 2007, 2006 and 2005, research and development costs were $350,810, $657,411, and $1,363,059, respectively.
Concentrations of Credit Risk and Fair Value of Financial Instruments
The Company has financial instruments that are exposed to concentrations of credit risk and consist of cash. The Company routinely maintains cash at certain financial institutions in amounts substantially in excess of FDIC insurance limits; however, management believes that these financial institutions are of high quality and the risk of loss is minimal.
Net (Loss) Per Share
Basic and diluted net loss per share information is presented under the requirements of SFAS No. 128, Earnings Per Share. Basic net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding for the period. Diluted net loss per share reflects the potential dilution of securities by adding other common stock equivalents, including stock options, shares subject to repurchase, warrants and convertible preferred stock, in the weighted-average number of common shares outstanding for a period, if dilutive. All potentially dilutive securities have been excluded from the computation, as their effect is anti-dilutive.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, which requires the asset and liability approach to accounting for income taxes. Under this method, deferred tax assets and liabilities are measured based on differences between financial reporting and tax bases of assets and liabilities measured using enacted tax rates and laws that are expected to be in effect when differences are expected to reverse.
(Continued)
F-12
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other Comprehensive Income
The Company has no material components of other income (loss) and accordingly, net loss is equal to comprehensive loss in all periods.
Warranty Costs
The Company warrants its products against manufacturing defects for a period of one year. The Company assumed warranty coverage for products sold by EDT from September 24, 2003 thru September 24, 2004. For the period September 24, 2004 through December 31, 2007, the Company has had no warranty claims. The Company has no history of material warranty claim expenses and has not provided a liability for future warranty expense as of December 31, 2007, as it is management’s opinion that such liability is immaterial as of December 31, 2007. Once significant sales of the new stun guns commence, the Company expects to make an accrual for warranty claims based on sales.
Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” including an amendment of FASB Statement No. 115. This statement provides companies with an option to report selected financial assets and liabilities at fair value. This statement is effective for fiscal years beginning after November 15, 2007 with early adoption permitted. The Company is currently assessing the impact of SFAS No. 159 on its consolidated financial position and results of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires additional disclosures about fair value measurements. This statement does not require any new fair value measurements, but the application of this statement could change current practices in determining fair value. The Company plans to adopt this guidance effective January 1, 2008. The Company is currently assessing the impact of SFAS No. 157 on the Company’s consolidated financial position and results of operations.
In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109. This interpretation prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company expects to adopt FIN No. 48 on January 1, 2007. The Company’s adoption of this guidance will not have a material effect on the Company’s consolidated financial position or results of operations.
(Continued)
F-13
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Based Compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)) which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors, including stock option grants, based on estimated fair values. SFAS 123(R) supersedes previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), for periods beginning in fiscal year 2006.
SFAS 123(R) requires companies to estimate the fair value of stock-based awards on the date of grant using an option-pricing model. 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. The Company adopted SFAS 123(R) using the modified prospective transition method that requires the application of the accounting standard starting on January 1, 2006, without restatement of prior years. Stock options were granted at an exercise price equal to the Company’s stock price at the date of grant.
Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). Under the intrinsic value based method, stock-based compensation expense for employee stock options was recognized in the Company’s Consolidated Financial Statements as the difference in the exercise price of the option and the Company’s stock price at the date of grant.
The Company has selected the Black-Scholes option-pricing model as the most appropriate method for determining the estimated fair value for stock-based awards.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123(R) in 2005:
| | | | | |
| | | Year Ended | |
| | | December 31, 2005 | |
| Net income as reported | | $ | (10,085,529 | ) |
| Add: stock based compensation costs included in reported net income | | | 1,550,000 | |
| Deduct: stock based compensation costs, under SFAS 123 | | | (2,028,100 | ) |
| | | | |
| Pro forma net income | | $ | (10,563,629 | ) |
| | | | |
(Continued)
F-14
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
| | | | | |
| | | Year Ended |
| | | December 31, 2005 |
| Per share information Basic, as reported | | $ | (0.67 | ) |
| Basic, pro forma | | $ | (0.70 | ) |
| Diluted, as reported | | $ | (0.67 | ) |
| Diluted, pro forma | | $ | (0.70 | ) |
The fair value of stock based awards was estimated using the Black-Scholes model with the following weighted average assumptions for the years ended December 31, 2007 and 2006.
| | | | | | | | | | | | | |
| | | Year Ended | | Year Ended | | Year Ended |
| | | December 31 | | December 31, | | December 31, |
| | | 2007, | | 2006 | | 2005 |
| Estimated fair value | | $ | 0.24 | | | $ | 2.29 | | | $ | 14.47 | |
| Expected life (years) | | | 3.60 | | | | 5.00 | | | | 4.64 | |
| Risk free interest rate | | | 3.37 | % | | | 4.57 | % | | | 4.21 | % |
| Volatility | | | 176 | % | | | 135 | % | | | 139 | % |
| Dividend yield | | | — | | | | — | | | | — | |
Fair Value of Financial Instruments
The carrying amount for cash, accounts receivable, accounts payable and accrued liabilities approximate fair value because of their immediate or short-term maturities. The fair value of notes payable approximates fair value because of the market rate of interest on the debt.
Embedded Derivatives
The conversion feature of the convertible note payable and warrants issued in connection with the convertible note payable was 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 December 31, 2007, the Company’s derivative valuation liability totaled $3,660,000.
Reclassification
Certain reclassifications have been made to previous reported amounts, so that the prior year’s presentation is comparative with the current presentation.
F-15
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 3: INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 2007 and 2006:
| | | | | | | | | |
| | | December 31, 2007 | | | December 31, 2006 | |
| Patent for Stun Gun | | $ | 2,672,620 | | | $ | 2,672,620 | |
| Patent for Camera | | | — | | | | 430,000 | |
| | | | | | | |
| | | | 2,672,620 | | | | 3,102,620 | |
| Accumulated Amortization | | | (1,145,419 | ) | | | (763,616 | ) |
| | | | | | | |
| | | $ | 1,527,201 | | | $ | 2,339,004 | |
| | | | | | | |
The intangibles are amortized over the estimated life of seven years, beginning the first quarter of 2005.
Estimated amortization for intangible assets is as follows:
| | | | | |
| Year | | Amount | |
| 2008 | | $ | 381,803 | |
| 2009 | | | 381,803 | |
| 2010 | | | 381,803 | |
| 2011 | | | 381,792 | |
| | | | — | |
| | | | |
| | | $ | 1,527,201 | |
| | | | |
F-16
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 4: OPERATING LEASES
The Company has entered into operating leases for office and warehouse space, which runs through November of 2008 and March of 2009, respectively. Rent expense was $ 147,390, $135,854 and $80,745 during the years ended December 31, 2007, 2006 and December 31, 2005, respectively.
The Company’s corporate office includes 4,454 square feet, in which the Company pays $6,951 per month for this space on a sub-lease running through November 2008.
The Company’s production and manufacturing facility includes approximately 9,200 square feet of warehouse, manufacturing, office, and storage space. The Company pays $5,332 to $5,491 per month for this space for a three year lease term. The initial lease term ends March 31, 2009, in which the Company has an option to renew for two additional consecutive two year terms.
Future minimum lease payments under operating leases as of December 31, 2007 are $141,873 in 2008 and $16,474 in 2009.
NOTE 5: COMMITMENTS
As of December 31, 2004, the Company had committed to purchase 10,000 stun guns for a total of $1,265,700, of which $100,000 was paid in late December 2004, leaving a commitment of $1,165,700. During the first quarter of 2005, the Company paid an additional $168,375 of the commitment. Upon delivery of a partial order of stun gun parts, the parts were determined to be defective. During March 2005, the Company wrote off the $268,375 of the cost incurred and terminated its commitment, and accordingly, is no longer obligated for the balance of the commitment.
NOTE 6: EMPLOYMENT AGREEMENTS
On December 30, 2004, the Company entered into a two year employment agreement (“Agreement”) with Roy C. Cuny to become president and chief executive officer of the Company, effective January 5, 2005. As a sign on bonus, Mr. Cuny received an option which immediately vested on December 30, 2004, to acquire 500,000 shares of common stock of the Company valued at $7,520,000 which was charged to operations, as of December 30, 2004, as employee acquisition expense.
On January 19, 2005, the Company entered into an employment agreement with Christopher Killoy to become the vice president of sales and marketing. The agreement provides for a salary of $175,000 per year. The Company also granted Mr. Killoy an option to purchase 50,000 shares of the Company’s common stock at $1.00, which options vest 25,000 shares on July 19, 2006 and 25,000 shares on July 19, 2007. The fair value of the 50,000 share option was estimated to be $1,550,000 using the Black-Scholes method with the following assumptions: expected life of one and one half (1.5) years, risk free interest rate of four and one half percent (4.5%), volatility ninety-five percent (95%) and dividend yield zero percent (0%).
During February and March of 2005, the employment agreements with Mr. Cuny and Mr. Killoy were terminated. The Company agreed to pay $719,346 as termination costs for the two employment contracts. Upon the expiration of 30 days after Mr. Cuny’s and Mr. Killoy’s termination, their stock options expired.
F-17
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 7: CAPITAL STOCK TRANSACTIONS
On September 24, 2004, the Company granted a stock option to an individual to acquire 250,000 shares of the Company’s common stock at par value ($0.001). The option vested immediately and was exercisable at any time before September 23, 2007. The fair value of such stock option, $12,500, (calculated using the Black Scholes model) has been credited to additional paid-in-capital with a corresponding charge to operations. The following assumptions were used in the Black Scholes model: estimated fair value $0.0486, expected life 2 years; risk free interest rate 4.5%, expected volatility 95% and 0% dividend yield.
On January 19, 2005, the Company granted an employee an option to purchase 50,000 shares of the Company’s stock at $1.00 per share. The option was fully vested upon termination of the employee in March of 2005. The fair value of the 50,000 share option ($1,550,000) (calculated using the Black-Scholes method) has been charged to expense, with a corresponding credit to additional paid-in-capital during March of 2005. The following assumptions were used in the Black-Scholes model; estimated fair value $31, expected life 1.5 years, risk free interest rate of 4.5%, expected volatility 95% and 0% dividend yield. Upon the passing of 30 days after the employee left the Company in March of 2005, the options expired.
In connection with the sale of 2,000,000 shares of the Company’s common stock, the Company issued to the investors, warrants to purchase 1,000,000 shares of the Company’s common stock at $7.50 per share. The warrants are exercisable through September 24, 2009. The number of warrants is subject to adjustment upon certain events, including stock splits, stock dividends or subsequent equity sales. The holder of the warrants shall not have the right to exercise any portion of the warrant to the extent that after giving effort to such issuance after exercise, the holder would beneficially own in excess of 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to such issuance. The investors were also granted registration rights, and the Company was required to file a registration statement. Per the terms of the Registration Rights Agreement (“Agreement”), if the Company did not have an effective registration statement by May 27, 2005, and the Company was required to pay the investors an amount in cash, as partial liquidated damages of $964,343.
Effective March 31, 2005, the Company granted to its new Chief Financial Officer (“CFO”) 175,000 shares of the Company’s common stock. The shares are issuable after October 1, 2005 at the option of the CFO. The shares were valued at $1,925,000 ($11 per share, the price quoted in the pink sheets) on March 31, 2005. The cost of the shares was amortized over a period of 6 months since the shares were issuable only after October 1, 2005, at the CFO’s election. The grant was mutually cancelled after the vesting date, and the grant is no longer effective.
In April 2006, the Company granted 75,000 shares of the Company’s common stock as part of the contracted compensation for investment relations services. The shares were valued at $166,875 ($2.225 per share, the price quoted on the OTC Bulletin Board on April 19, 2006) related to this compensation.
On January 25, 2007, the Company and certain existing warrant holders (the “Warrant Holders”) entered into an amendment and exercise agreement (the “Agreement”) pursuant to which (i) the Company reduced the exercise price of the warrants then held by the Warrant Holders (the “Existing Warrants”) to $0.60 per share; (ii) the Warrant Holders exercised all of the Existing Warrants at an exercise price of $0.60 per share and acquired 999,999 shares of the Company’s common stock; and (iii) the Company issued to the Warrant Holders new warrants (the “New Warrants”) to purchase up to an aggregate of 1,500,000 shares of the Company’s common stock at an exercise price of $2.00 per share. The Company granted the Warrant Holders certain registration rights with respect to the resale of the shares issued upon exercise of the Existing Warrants and the shares to be issued upon exercise of the New Warrants. Neither the shares issued upon exercise of the Existing Warrants or the shares issuable upon exercise of the New Warrants have been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements.
(Continued)
F-18
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 7: CAPITAL STOCK TRANSACTIONS (CONTINUED)
On March 19, 2007, the Company and a certain investor entered into a Securities Purchase Agreement for the investor to subscribe and acquire 140,187 shares of the Company’s common stock at a purchase price of $1.07 per share, pursuant to the agreement. The Company granted the investor certain registration rights with respect to the resale of the shares issued. The shares issued have not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements. The shares were offered and sold only to “accredited investors” (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 March 28, 2007, the Company and a certain investor entered into a Securities Purchase Agreement for the investor to subscribe and acquire 93,458 shares of the Company’s common stock at a purchase price of $1.07 per share, pursuant to the agreement. The Company granted the investor certain registration rights with respect to the resale of the shares issued. The shares issued have not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements. The shares were offered and sold only to “accredited investors” (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 April 23, 2007, the Company and a certain investor entered into a Securities Purchase Agreement for the investor to subscribe and acquire 170,000 shares of the Company’s common stock at a purchase price of $0.60 per share, pursuant to the agreement. The Company granted the investor certain registration rights with respect to the resale of the shares issued. The shares issued have not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements. The shares were offered and sold only to “accredited investors” (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.
As a result of the August 2, 2007 financing, $931,250 of related party notes payable and related accrued interest of $72,027 were converted into 972,027 shares of common stock and was issued to the related party.
At December 31, 2007, the Company has 9,514,865 warrants outstanding to acquire shares of the Company’s common stock at prices ranging from $.01 to $7.50 per share.
F-19
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 8: INCOME TAXES
There has been no provision for U.S. federal, state, or foreign income taxes for any period because the Company has incurred losses in all periods and for all jurisdictions. The Company has not recorded an income tax benefit for the losses incurred because it is not more likely than not that any deferred tax asset is realizable. A reconciliation of the provisions (benefit) for income taxes, which amounts are determined by applying the statutory federal income tax rate to loss before income taxes, is as follows:
| | | | | | | | | | | | | | | | | |
| | | For the year Ended | | | For the year Ended | | | For the year Ended | | | For the year Ended | |
| | | December 31, 2007 | | | December 31, 2006 | | | December 31, 2005 | | | December 31, 2004 | |
| Benefit for Income Taxes Computed Using the Statutory Rate of 34% | | $ | (2,838,417 | ) | | $ | (2,144,157 | ) | | $ | (3,429,080 | ) | | $ | (3,002,359 | ) |
| Difference Between Book Expense and Tax Expense of Charges for Stock Issued for Services | | | 284,892 | | | | 527,549 | | | | 1,071,372 | | | | 2,650,747 | |
| Other | | | 63,339 | | | | 23,683 | | | | 1,548 | | | | 275 | |
| Derivative Expense | | | 1,244,400 | | | | — | | | | — | | | | — | |
| Change in Valuation Allowance | | | 1,245,786 | | | | 1,592,925 | | | | 2,356,160 | | | | 351,337 | |
| | | | | | | | | | | | | |
| Income Tax Benefit | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets are as follows:
| | | | | | | | | | | | | |
| | | December 31, 2007 | | | December 31, 2006 | | | December 31, 2005 | |
| Deferred Tax Assets | | | | | | | | | | | | |
| Net Operating Loss Carryforward | | $ | 5,447,332 | | | | 4,214,528 | | | | 2,707,497 | |
| Depreciation and Amortization | | | 199,632 | | | | 85,894 | | | | — | |
| Loan Fee | | | (100,756 | ) | | | — | | | | — | |
| Valuation Allowance | | | (5,546,208 | ) | | | (4,300,422 | ) | | | (2,707,497 | ) |
| | | | | | | | | | |
| Net Deferred Tax Asset | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | |
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. As of December 31, 2007, the Company had net operating loss carryforwards of approximately $16,022,000 for federal and state income tax purposes. These carryforwards, if not utilized to offset taxable income begin to expire in 2019. Utilization of the net operating loss may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. The annual limitation could result in the expiration of the net operating loss before utilization.
F-20
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 9: GENERAL AND ADMINISTRATIVE EXPENSES, OTHER
General and administrative expenses, other includes the following:
| | | | | | | | | | | | | |
| | | For the Year Ended | | | For the Year Ended | | | For the Year Ended | |
| | | December 31, 2007 | | | December 31, 2006 | | | December 31, 2005 | |
| Legal and Professional Fees | | $ | 467,788 | | | $ | 825,251 | | | $ | 594,356 | |
| Stock Option Expense | | | 284,382 | | | | 1,551,616 | | | | — | |
| Value of Warrants Issued for Services | | | 553,542 | | | | — | | | | — | |
| Liquidated Damages to Investors | | | — | | | | — | | | | 964,343 | |
| Insurance Expense | | | 14,265 | | | | 765,824 | | | | 573,117 | |
| Other | | | 453,313 | | | | 420,539 | | | | 820,453 | |
| | | | | | | | | | |
| | | $ | 1,773,290 | | | $ | 3,563,230 | | | $ | 2,952,269 | |
| | | | | | | | | | |
NOTE 10: NOTE PAYABLE—CONVERTIBLE
On May 15, 2007, the Company and certain investors entered into a Convertible Senior Promissory Note (“Note”) to loan the Company $204,000 at a rate of 10% per annum. The Note is due and payable on the earlier of May 31, 2009 or when the Company achieves revenues of $8,000,000 annually beginning June 1, 2007. The Company has the right to convert the Note into the Company’s common stock upon achieving $8,000,000 in revenues annually beginning June 1, 2007 at a rate of $0.60 per share, pursuant to the agreement. The investor reserves the right to convert the Note into the Company’s common stock at any time at the discretion of the investor. The $0.60 conversion price was less than the fair value of the common stock on May 15, 2007, therefore the beneficial conversion cost of $102,000 was recognized as debt discount and amortized over the life of the note as interest expense. This note was satisfied on August 6, 2007 and is no longer outstanding.
On August 3, 2007, the Company completed a private placement transaction with an institutional investor pursuant to which the Company issued and sold to the investor a senior secured convertible note (the “Note”) in the aggregate principal amount of $3,000,000 and a warrant to purchase 5,912,961 shares of the Company’s common stock (the “Warrant”). The Note is convertible into 4,730,270 shares of the Company’s common stock at a price of $0.6342 per share. Under the terms of the Note, the Company, at its option, may pay any portion of the interest then due on the Note in cash or may elect to issue the investor shares of the Company’s common stock. The Warrant is exercisable immediately at a price of $0.6342 per share. Pursuant to the purchase agreement, the Company granted the investor certain registration rights with respect to the shares to be issued upon conversion of the Note and upon exercise of the Warrant. Neither the shares to be issued upon conversion of the Note nor upon exercise of the Warrant have been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements. The Note and the 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 Partners & Co., LLC (“Midtown”), acted as placement agent for the offering. The Company paid Midtown a cash fee of $270,000 and issued a warrant to Midtown to purchase 851,466 shares of the Company’s common stock at an exercise price of $0.6342 per share.
The following summarizes the debt discount related to this convertible note:
| | | | | |
| Beneficial conversion | | $ | 1,257,332 | |
| Cash Fees Paid: | | | | |
| Midtown | | | 270,000 | |
| Investor | | | 56,000 | |
| Fair Value of Midtown Warrants | | | 243,522 | |
| | | | |
| | | | 1,826,854 | |
| | | | | |
| Less: Amortization recognized As interest expense | | | (166,617 | ) |
| | | | |
| | | $ | 1,660,237 | |
| | | | |
The unamortized debt discount is netted against the note balance in the accompanying financial statements.
F-21
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 10: NOTE PAYABLE—CONVERTIBLE (CONTINUED)
The issuable warrants and the registration rights features of the Note issued on August 3, 2007 were reviewed for possible embedded derivatives. The warrants and registration rights of the Note were deemed to have embedded derivative features and were accounted for as such. At the end of each quarterly and yearly reporting dates, the value of the derivatives are evaluated and adjusted to current fair value. At December 31, 2007, the Company’s derivative valuation liability totaled $3,660,000.
NOTE 11: NOTES PAYABLE TO RELATED PARTIES
Notes payable at December 31, 2007 consisted of one note of $31,250 to one of the major shareholders. The note bears interest at 4% per annum and is due on demand. The shareholder has the right to receive payment of the note and accrued interest in common stock of the Company at a conversion rate of $0.40 per share. As of December 31, 2007, if the shareholder demanded payment in stock, the Company would be obligated to issue 88,358 shares of common stock to one of the major shareholders.
NOTE 12: ACCRUED LIABILITIES
Accrued liabilities at December 31, 2007, and 2006 are as follows:
| | | | | | | | | |
| | | 2007 | | | 2006 | |
| Accrued Payroll Liabilities | | $ | 14,434 | | | $ | 12,578 | |
| Accrued Interest | | | 68,827 | | | | 25,494 | |
| Other Accruals | | | 41,585 | | | | 41,269 | |
| | | | | | | |
| | | $ | 124,846 | | | $ | 79,341 | |
| | | | | | | |
NOTE 13: STOCK OPTION/STOCK BONUS PLAN
On April 14, 2005, the Company adopted the 2005 Stock Option/Bonus Plan (“Plan”). The Plan provides for options and other stock-based awards that may be granted to eligible employees, officers, consultants, and non-employee directors of the Company. The Company has reserved 2,000,000 shares of common stock for future issuance under the Plan. As of December 31, 2006 there remains 1,193,000 shares which may be issued under the plan.
The purpose of the Plan generally is to retain and attract persons of training, experience, and ability to serve as employees of the company and its subsidiaries and to serve as non-employee directors of the Company, to encourage the sense of proprietorship of such persons and to stimulate the active interest of such persons in the development and financial success of the Company and its subsidiaries.
The Plan is administered by the Compensation Committee of the board of directors (the “Committee”). The Committee has the power to determine which eligible employees will receive awards, the timing and the manner of the grant of such awards, the exercise price of stock options (which may not be less than market value on the grant date), the number of shares, and all of the terms of the awards. The Company may at any time amend or terminate the Plan. However, no amendment that would impair the rights of any participant, with respect to outstanding grants, can be made without the participant’s prior consent. Stockholder approval of an amendment to the Plan is necessary only when required by applicable law or stock exchange rules.
(Continued)
F-22
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 13: STOCK OPTION/STOCK BONUS PLAN (CONTINUED)
The following summarizes stock option activity under the Plan and related information as of December 31, 2007:
| | | | | | | | | |
| | | | | | | Weighted Average |
| | | Shares | | Exercise Price |
| Outstanding beginning of year | | | 807,000 | | | | 3.33 | |
| Granted | | | 462,500 | | | | 0.46 | |
| Exercised | | | — | | | | — | |
| Cancelled | | | (442,000 | ) | | | 2.93 | |
| | | | | | | | | |
| Outstanding end of year | | | 827,500 | | | | 1.94 | |
| | | | | | | | | |
| Exercisable end of year | | | 505,000 | | | | 2.98 | |
| | | | | | | | | |
The following summarizes stock option activity under the Plan and related information as of December 31, 2006:
| | | | | | | | | |
| | | | | | | Weighted Average |
| | | Shares | | Exercise Price |
| Outstanding beginning of year | | | 75,000 | | | | 5.65 | |
| Granted | | | 737,000 | | | | 3.10 | |
| Exercised | | | — | | | | — | |
| Cancelled | | | (5,000 | ) | | | 3.92 | |
| | | | | | | | | |
| Outstanding end of year | | | 807,000 | | | | 3.33 | |
| | | | | | | | | |
| Exercisable end of year | | | 58,000 | | | | 3.95 | |
| | | | | | | | | |
NOTE 14: LITIGATION
Stinger is a party in Case Number 3:04CV620K styledTaser International, Inc. v. Stinger Systems, Inc. and Robert F. Gruder, pending in the United States District Court for the Western District of North Carolina. In the suit, Taser asserts a claim for false advertising under 15 U.S.C. Section 1125(a) and seeks injunctive relief, monetary damages in an unspecified amount, trebling of damages, attorneys fees and destruction of certain advertising material. Based upon a review of the pleading, it is Stinger’s management’s opinion that Taser’s claims center around the allegation that the Stinger stun gun does not exist and therefore Stinger’s statements about its existence and
capabilities are false and misleading and inasmuch as Stinger has demonstrated its Stinger stun gun on several occasions. It is Stinger’s management’s opinion that Stinger will prevail in the lawsuit. Stinger has moved to dismiss Taser’s claims, responded to the allegations and counter sued Taser for defamation. It is seeking monetary damages, punitive damages and attorney fees.
(Continued)
F-23
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 14: LITIGATION (CONTINUED)
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 intended to recommend that the SEC institute an action against the Company. On January 28, 2008, the SEC filed a Complaint against the Company and Robert F. Gruder in United States District Court for the Northern District of Georgia alleging that the Company and Mr. Gruder violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Among other things, the Complaint alleges that the Company made material misrepresentations about one of the Company’s products regarding when the Company would be shipping the product, the product’s status with the Bureau of Alcohol, Tobacco, and Firearms, the performance of the product, and where the Company’s stock was trading. The complaint seeks injunctive relief against the Company and Mr. Gruder, including a bar against Mr. Gruder from serving as an officer or director of a public company and civil penalties. A judgment in this action adverse to the Company’s interests could jeopardize our business operations and exhaust the Company’s cash reserve and investors may lose their entire investment.
The Company is involved in litigation with its insurer, USF Insurance Company (USF), in which USF filed a case against Stinger Systems (Case No. 3:06-Civ-302-K) in the United States District Court for the Western District of North Carolina, Charlotte Division. In the suit, USF seeks to recover a payment paid by USF on our behalf in connection with the settlement of a prior litigation, together with interest and attorneys fees and costs. Stinger has brought a counterclaim against USF to recover amounts expended in defending the prior litigation, as well as attorney’s fees and costs with respect to the USF action. In October 2007, the Company reached a settlement with USF. The Company incurred no financial liability to USF in connection with the settlement.
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. The case is also seeking punitive damages. Absent modification or other unexpected event, the Company will incur no legal fees for its defense in this case as the Company’s attorney has agreed upon entry of appearance to act as its attorney in the case without fee. An adverse outcome in this action may have a material adverse effect on our business and results of operations.
F-24
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 15: SUMMARIZED QUARTERLY DATA (UNAUDITED)
The following information reflects all normal recurring adjustments that are in the opinion of management, necessary for a fair statement of the results of the interim periods.
The table below presents quarterly data for the year ended December 31, 2007:
| | | | | | | | | | | | | | | | | |
| | | Three months ended |
| | | March 31 | | June 30 | | September 30 | | December 31 |
| Revenues | | $ | 96,169 | | | $ | 102,170 | | | $ | 47,556 | | | $ | 126,317 | |
| Loss from operations | | | (899,892 | ) | | | (771,877 | ) | | | (1,305,623 | ) | | | (1,705,520 | ) |
| Net Loss | | | (921,633 | ) | | | (803,233 | ) | | | (4,547,695 | ) | | | (2,075,724 | ) |
| Basic net loss per share | | | (0.06 | ) | | | (0.05 | ) | | | (0.27 | ) | | | (0.12 | ) |
| Diluted loss per share | | $ | (0.06 | ) | | $ | (0.05 | ) | | $ | (0.27 | ) | | $ | (0.12 | ) |
The table below presents quarterly data for the year ended December 31, 2006:
| | | | | | | | | | | | | | | | | |
| | | Three months ended |
| | | March 31 | | June 30 | | September 30 | | December 31 |
| Revenues | | $ | 118,138 | | | $ | 110,751 | | | $ | 109,843 | | | $ | 115,722 | |
| Loss from operations | | | (2,375,726 | ) | | | (1,832,115 | ) | | | (1,074,170 | ) | | | (1,018,955 | ) |
| Net Loss | | | (2,366,203 | ) | | | (1,828,648 | ) | | | (1,075,679 | ) | | | (1,035,815 | ) |
| Basic net loss per share | | | (0.16 | ) | | | (0.12 | ) | | | (0.07 | ) | | | (0.10 | ) |
| Diluted loss per share | | $ | (0.16 | ) | | $ | (0.12 | ) | | $ | (0.07 | ) | | $ | (0.10 | ) |
NOTE 16: SUBSEQUENT EVENTS
On February 29, 2008, Stinger Systems, Inc. (the “Company”) closed a private placement transaction (the “Offering”) with an institutional investor (the “Investor”) pursuant to which the Company issued and sold to the Investor a senior secured convertible note (the “Note”) in an aggregate principal amount of $2,150,000, a warrant to purchase 3,000,000 shares of the Company’s common stock (the “Warrant”), and 1,250,000 shares of the Company’s Common Stock (the “Shares”). The Note is convertible into 1,720,000 shares of the Company’s common stock at a price of $1.25 per share. Under the terms of the Note, the Company, at its option, may pay any portion of the interest then due on the Note in cash or may elect to issue the Investor shares of the Company’s common stock. The Warrant is exercisable immediately at a price of $0.7054 per share.
The Offering was completed pursuant to a Securities Purchase Agreement dated February 29, 2008 (the “Purchase Agreement”) by and between the Company and the Investor. In connection with the Offering, the Company amended a security agreement entered into with the Investor in August 2007 (as so amended, the “Amended Security Agreement”) in connection with a prior offering and amended and restated the senior secured convertible note issued in such offering (as so amended, the “Amended Note”).
Pursuant to the Purchase Agreement, the Company granted the Investor certain registration rights with respect to the shares to be issued upon conversion of the Note and upon exercise of the Warrant and the Shares. Neither the shares to be issued upon conversion of the Note nor upon exercise of the Warrant nor the Shares have been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States 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 Offering. The Company paid Midtown a cash fee equal to $67,500 and issued to Midtown 100,000 shares of Common Stock and a warrant to purchase 477,600 shares of the Company’s common stock.
(Continued)
F-25
STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 16: SUBSEQUENT EVENTS (CONTINUED)
The Note, the 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. All exhibits attached hereto are incorporated herein by reference.
NOTE 17: LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced significant operating losses since its inception in 2004. The process of developing and commercializing the Company’s products requires significant research and development, engineering, testing, significant marketing and sales efforts, and manufacturing capabilities. These activities, together with the Company’s 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. 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 2008 at its planned levels of research, development, sales, and marketing activities. Thus, execution of its current strategies will require it to raise additional capital through debt or equity transactions in order to finance its operations through 2008. 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.
F-26
