SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM S-1/A
Amendment No. 2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
STINGER SYSTEMS, INC. (Exact name of registrant as specified in its charter)
Nevada (State or other jurisdiction of incorporation or organization)
5099 (Primary Standard Industrial Classification Code Number)
30-0296398 (I.R.S. Employer Identification Number)
1901 Roxborough Road, Suite 118
Charlotte, North Carolina 28211
(866)788-6746 (Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Gary R. Henrie, Esq.
8275 S. Eastern, Suite 200
Las Vegas, Nevada 89123
(702)616-3093 (Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of Communications to:
Gary R. Henrie, Esq.
8275 S. Eastern, Suite 200
Las Vegas, Nevada 89123
Tel: (702)616-3093 Fax: (435)753-1775
Approximate date of commencement of proposed sale to public:
From time to time after the effective date of this registration statement.
1
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule?415 under the Securities Act, check the
following box.
If this Form is filed to register additional securities for an offering
pursuant to Rule462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. XX
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities To Be Registered
Common stock, par value $.001 per share
Amount to be Registered(1)
9,613,500 shares
Proposed Maximum Offering Price Per Share
$10.00
Proposed Maximum Aggregate Offering Price
$96,135,000
Amount of Registration Fee(2)
$11,315.09
(1) Number of shares to be registered includes shares of common stock
underlying warrants, grants, options and convertible notes and stock to be
issued pursuant to the Stinger Systems, Inc. Employee Stock Option & Stock
Bonus Plan. Pursuant to Rule?416 under the Securities Act, this registration
statement also covers such additional shares as may hereafter be offered or
issued to prevent dilution resulting from stock splits, stock dividends,
recapitalizations or certain other capital adjustments. Our shares issuable
upon options, warrants, grants and convertible notes are 1,845,000.
(2) Previously paid.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and the selling
stockholders are not soliciting offers to buy these securities in any state
where such offers are not permitted.
Subject to completion,
May 24, 2005
2
PROSPECTUS
9,613,500 Shares
STINGER SYSTEMS, INC.
Common Stock
We are registering 9,613,500 shares of common stock. Of those shares, 7,613,500
are issued or issuable upon the exercise of the warrants, options, grants or
the conversion of convertible notes of Stinger Systems, Inc., a Nevada
corporation (Stinger Systems), held by the selling stockholders. The remaining
2,000,000 shares may be issued pursuant to the Stinger Systems, Inc. Employee
Stock Option & Stock Bonus Plan (or sometimes the "Plan"). The selling
stockholders or the Employees receiving stock pursuant to the operation of the
Plan will receive all of the proceeds from the sale of the shares. We will pay
all expenses incident to the registration of the shares under the Securities
Act of 1933, as amended.
Our common stock is currently trading in the "Pink Sheets" under the symbol
"STIY.PK" On May 23, 2005, the last reported sale price of our common stock was
$4.75 per share.
Investing in our common stock involves risks, which are described in the "Risk
Factors" section beginning on page 7 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The date of this prospectus is May 24, 2005.
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TABLE OF CONTENTS
You should rely only on the information contained in this prospectus. We have
not authorized any person to provide you with any information or represent
anything not contained in this prospectus, and, if given or made, any such
other information or representation should not be relied upon as having been
authorized by us. The selling stockholders are not offering to sell, or seeking
offers to buy, our common stock in any jurisdiction where the offer or sale is
not permitted. You should not assume that the information provided in this
prospectus is accurate as of any date other than the date on the front cover
of this prospectus.
Page
----
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 5
PROSPECTUS SUMMARY
6
SELECTED FINANCIAL DATA 7
RISK FACTORS 7
USE OF PROCEEDS 12
DETERMINATION OF OFFERING PRICE 12
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 13
BUSINESS 18
MANAGEMENT 25
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 26
VOTING SECURITIES AND PRINCIPAL HOLDERS 27
SELLING STOCKHOLDERS 28
PLAN OF DISTRIBUTION 31
DESCRIPTION OF CAPITAL STOCK 33
LEGAL MATTERS 34
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES 34
EXPERTS 34
WHERE YOU CAN FIND MORE INFORMATION 35
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
4
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this prospectus contains forward-looking
statements. The words "forecast", "eliminate", "project", "intend", "expect",
"should", "believe" and similar expressions are intended to identify
forward-looking statements. These forward-looking statements involve known and
unknown risks, uncertainties, assumptions and other factors, including those
discussed in "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. These risks and uncertainties include, but are not
limited to, the following:
*Our ability to achieve our business of producing and selling products;
*Our ability to attract, retain and motivate qualified employees and management.
The impact of federal, state or local government regulations;
*Competition in the electronic defense technology industry;
*Availability and cost of additional capital;
*Litigation in connection with our business, including potential wrongful death
claims;
*Our ability to protect our trademarks, patents and other proprietary rights;
*Other risks described from time to time in our periodic reports filed with the
Securities and Exchange Commission
This list of factors that may affect future performance and the accuracy of
forward-looking statements is illustrative but not exhaustive. Accordingly, all
forward-looking statements should be evaluated with an understanding of their
inherent uncertainty.
Except as required by law, we assume no obligation to publicly update or revise
these forward-looking statements for any reason, or to update the reasons
actual results could differ materially from those anticipated in these
forward-looking statements, even if new information becomes available in the
future.
5
PROSPECTUS SUMMARY
The following summary highlights information contained elsewhere in this
prospectus. It is not complete and does not contain all of the information that
you should consider before investing in our common stock. You should read the
entire prospectus carefully, especially the risks of investing in our common
stock discussed under "Risk Factors" and our consolidated financial statements
and accompanying notes. Any references to "Stinger Systems", "we", "us" or
"our" refer to Stinger Systems, Inc. and our subsidiary, Electronic Defense
Technology, LLC, an Ohio limited liability company.
Our Business
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. Stinger Systems' products include
the Ultron II handheld contact stun gun, the Ice-Shield electronic
immobilization riot shield, and the Bandit/REACT system, an electronic
immobilizing restraint. Stinger Systems' primary focus is the "Stinger"
projectile stun gun. Stinger's success is largely dependent upon the
development and commercialization of its Stinger projectile stun gun.
Our Offices
Stinger Systems, Inc. is a Nevada corporation organized on July 2, 1996. Our
principal executive offices are located at 1901 Roxborough Road, Suite 118,
Charlotte, North Carolina 28211. The telephone number of our principal
executive offices is (866)788-6746.
Our Website
Our Internet address is www.stingersystems.com. Information contained on our
website is not part of this prospectus.
The Offering
Shares of common stock offered by us:
None.
Shares of common stock that may be sold by the selling stockholders:
7,613,500.
Shares of common stock that may be sold by the employees of Stinger Systems
received pursuant to the operation of the Stinger Systems, Inc. Employee Stock
Option & Stock Bonus Plan:
2,000,000.
Use of proceeds:
We will not receive any proceeds from the resale of the shares offered hereby,
all of which proceeds will be paid to the selling stockholders or to the
employees of Stinger Systems.
Risk factors:
The purchase of our common stock involves a high degree of risk. You should
carefully review and consider "Risk Factors" beginning on page 7.
Pink Sheet Trading Symbol:
STIY.PK
We will pay all expenses incident to the registration of the shares under the
Securities Act.
6
SELECTED 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
prospectus. 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
prospectus.
Predecessor Operations The Company Predecessor The Company
---------------------- ----------- ----------- -----------
Year ended December 31, January 1 to September 24 to Three Months Ended March 31,
2002 2003 September 24, to December 31, 2004 2005
2004 2004 (Unaudited) (Unaudited)
--------- ----------- ------------- ------------ ----------- -----------1
Statement of Operations Data
Sales $ 361,913 $ 264,471 $ 198,981 $ 63,306 $ 78,210 $ 124,095
Gross Margin 149,098 108,647 54,859 11,620 38,174 67,096
Loss from Operations (208,259) (237,363) (192,470) (8,500,199) (60,229) (3,588,997)
Net Loss (219,272) (273,922) (230,932) (8,510,467) (70,779) (3,588,873)
Net Loss Per Share Basic and
Diluted - - - $ (0.67) - $ (0.24)
Basic and Diluted Weighted
Average Number of Common
Shares Outstanding - - - 12,640,900 - 15,003,500
Pro Forma Net Loss Per Share
Basic and Diluted
Net Loss Per Share $ (0.02) $ (0.03) $ (0.02) - $ (0.01) -
Weighted Average Number of
Common Shares Outstanding 10,750,000 10,750,000 10,750,000 - 10,750,000 -
Balance Sheet Data:
Current Assets $ 67,680 $ 69,695 $ 13,232 $ 9,654,233 $ 68,757 $ 8,126,734
Equipment and Furnishings 118,454 93,724 73,204 105,764 87,639 161,238
Total Assets 186,134 163,419 86,436 12,863,911 156,396 11,296,351
Current Liabilities 68,119 97,441 43,746 556,970 102,697 1,017,648
Long Term Debt 363,000 584,885 792,529 - 643,385
Stockholders Equity (Deficit) (244,985) (518,907) (749,839) 12,306,941 (589,686) 10,278,703
</TABLE
RISK FACTORS
This offering 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 prospectus before deciding whether to invest in shares of our
common stock. 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 you 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.
7
We have a history of operating losses and anticipate future operating losses
until such time as we can generate additional sales.
Since beginning operations, we have sustained substantial operating losses. At
the present time we do not generate sufficient revenues to pay our operating
expenses. In addition, we expect to accelerate our losses in the near future as
we increase our expenses to develop and introduce our new Stinger projectile
stun gun.
If we do not obtain additional funding as needed, we may be unable to fund our
research and development activities and to adequately pursue our business plan.
In November and December, 2004, we closed on private placements of 2,100,000
shares of our common stock for net proceeds of $9,864,965. However, our
business plan requires significant ongoing expenditures for product research
and development and for the marketing of our products. It is possible that we
will need additional outside funding sources in the future to continue the
development 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.
Stinger Systems will be devoting its capital and research and development
activities to the design, production and marketing of the Stinger projectile
stun gun. There is no assurance that our current design will meet our targeted
specifications and tolerances, or that we will be able to manufacture it on a
timely basis at a competitive price. The failure to effectively design and to
market these products at competitive prices would have a material adverse
effect on our potential profitability and could cause investors to loose 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, Stinger Systems may not be successful.
Stinger Systems engages the services of third parties to do much of its
manufacturing. The ability of Stinger Systems to provide the market with
quality products in volume will depend upon whether these third party
manufacturers can produce our technical products in volume, and at a
competitive price, to our specifications. In the event these third party
manufacturers are unable to meet our needs, it is not likely Stinger Systems
will be successful and our investors could lose their investments.
Our primary competitor, Taser International Inc., has an established name in
the marketplace with both distributors and the end-users of stun products.
8
Taser International 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.
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 Stinger Systems. 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.
Stinger Systems is a defendant in a lawsuit brought by Taser International
pending in the United States District Court for the Western District of North
Carolina. In the suit, Taser principally asserts a claim for false advertising
and seeks injunctive relief, monetary damages in an unspecified amount,
trebling of damages, attorney?s fees and destruction of certain advertising
material. A judgment in the suit adverse to our 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 the Company significant expenses to defend and if our patents
are not upheld, the Company may not be able to continue operations and the
investors may lose their entire investment.
9
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 other than Canada. To the extent that
states, local governments or other countries impose restrictions or
prohibitions on the sale and use of our products or to the extent we are unable
to obtain export licenses for the sales of our weapons to international
customers, our sales could be materially adversely impacted.
If we cannot retain or hire qualified personnel, our programs could be delayed.
Our business is a technical and highly specialized area of the firearms
industry. We are dependent on the principal members of the management and
technical staff. The loss of key employees could disrupt our research and
development and product promotion activities. We believe that our future
success will depend in large part upon our ability to attract and retain highly
skilled, scientific and managerial personnel. We face intense competition for
these kinds of personnel from other companies and organizations. We might not
be successful in hiring or retaining the personnel needed for our company to be
successful.
Because our common stock is traded only on 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 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.
10
Our stock price has been volatile and your investment in our common stock could
suffer a decline in value.
Our common stock is traded on 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;
*announcements of technological innovations or new products by us or our
competitors;
*government regulatory action affecting our products or our competitors'
products;
*developments or disputes concerning patent or proprietary rights;
*actual or anticipated fluctuations in our operating results;
* changes in our financial estimates by securities analysts;
* broad market fluctuations; and
* economic conditions in the United States.
From November 12, 2004 through May 11, 2005, the closing sales price of our
stock has ranged from $1.25 to $48.55. Our stock closed on May 23, 2005 at
$4.75.
Sales of a substantial number of shares of our common stock in the public
market, including the shares offered under this prospectus, could lower our
stock price and impair our ability to raise funds in new stock offerings.
Future sales of a substantial number of shares of our common stock in the
public market, including the shares offered under this prospectus, or the
perception that such sales could occur, could aversely 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.
Purchasers in this offering will experience immediate and substantial dilution
of their investment.
We expect that the offering price per share of the shares being sold by the
Selling Stockholders will significantly exceed the net tangible book value per
share of the outstanding common stock. Accordingly, purchasers of common stock
in this offering would pay a price per share that substantially exceeds the
value of our assets after subtracting our liabilities.
Exercise of outstanding options, warrants and convertible securities will
dilute existing shareholders and could decrease the market price of our common
stock.
As of May 23, 2005 we had 15,003,500 shares issued and outstanding, 1,845,000
shares of common stock that could be issued upon the exercise of options,
warrants, grants and convertible securities, and 2,000,000 shares that could be
issued pursuant to the operation of the Stinger Systems, Inc. Employee Stock
Option & Stock Bonus Plan. There can be no guaranty 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 in this offering. There are 8.195 million
shares not being registered that are subject to Rule 144. 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.
11
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.
We do not intend to pay any cash dividends on 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.
USE OF PROCEEDS
Shares totaling 7,613,500 offered by this prospectus are being offered solely
for the account of the selling stockholders. Shares totaling 2,000,000 being
registered may be offered by employees of Stinger Systems if received pursuant
to the operation of the Stinger Systems, Inc. Employee Stock Option & Stock
Bonus Plan. We will not receive any proceeds from the sale of the shares by the
selling stockholders or by the employees. Some of the common shares registered
hereby totaling 1,845,000 in the aggregate underlie certain warrants, options,
grants and convertible notes. We would receive over $7.5?million upon payment
of the exercise price of those warrants and options and would lower our debt
upon the conversion of notes. Some warrants allow for cashless exercise and we
will not receive any proceeds from a warrant exercised under the cashless
exercise provisions or from any warrants that are not exercised. However, a
cashless exercise is available only if after one year from the date of issuance
of the warrants there is no effective registration statement registering the
resale of the warrant shares by the holder. We intend to use proceeds from the
exercise of warrants, if any, for general working capital.
DETERMINATION OF OFFERING PRICE
The $10.00 per share offering price of our common stock was arbitrarily
determined. There is no relationship between this price and our assets,
earnings, book value or any other objective criteria of value.
We have applied for a listing of our common stock on the NASDAQ small cap or
national market system. There is no assurance that our application will be
approved. We intend to file a registration statement under the Securities
Exchange Act of 1934 (the "Exchange Act") in order that we become a reporting
company under the Exchange Act concurrently with the effectiveness of the
registration statement of which this prospectus forms a part. If a market for
our stock develops as a result of becoming listed on the NASDAQ market, we
anticipate the actual price of sale will vary according to the market for our
stock at the time of resale.
12
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no established trading market for our common stock. On November 12,
2004, our stock began trading on the Pink Sheets. Our stock trades on the Pink
Sheets under the symbol STIY.PK. Beginning on November 12, 2004 through May 23,
2005, our stock has traded at between $1.25 and $48.55 per share. As mentioned
above, the trading of our shares on an unsolicited basis as traded on the Pink
Sheets does not constitute an established trading market.
On May 23, 2005, our stock closed at $4.75. You are advised to obtain current
market quotations for our common stock. No assurance can be given as to the
market prices of our common stock at any time after the date of this
prospectus.
As of May 13, 2005, there were approximately 1,319 holders of record of our
common stock. This number does not include individual stockholders who own
common stock registered in the name of a nominee under nominee security
listings.
We have not declared or paid any cash dividends on our common stock since our
inception. We do not intend to pay any cash dividends in the foreseeable
future.
We have a total of 1,845,000 common shares that may be issued upon the exercise
of options, warrants, grants and convertible securities. We have a total of up
to 1,000,000 common shares that may be sold pursuant to Rule 144. We have a
total of 2,000,000 common shares that are subject to a registration rights
agreement. Those shares are being registered as a part of this offering.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Executive Summary
Stinger Systems, Inc. (the "Company") purchased Electronic Defense
Technologies, LLC ("EDT") in September of 2004 for the purpose of accelerating
the development of a projectile stun gun for sale to the law enforcement,
corrections and military sectors. The purchase was based on the anticipated
value of the EDT patents, prototype projectile stun gun, existing product lines
and track record in serving the law enforcement community. The Company's
primary focus since the acquisition of EDT has been on the development and
manufacturing of the Stinger projectile stun gun. In order to finance the
Company through the commercial introduction of the Stinger, the Company sold
2,100,000 shares of non-registered stock in a private transaction for net
proceeds of $9,864,965 in November and December of 2004 and entered into a
warrant agreement to sell an additional $7.5 million of common stock at a $7.50
per share exercise price. This filing includes the registration of these
investment shares as required in the placement agreement as well as other
shares owned by various parties including, management and board members.
Since the acquisition of EDT, the Company has extensively redesigned its
projectile stun gun, now referred to as the Stinger, with the goal of providing
a weapon with the feel and size of a traditional firearm, but offering a unique
look that would not readily be confused with a traditional firearm. After the
design was essentially completed, mold design and redesign of the electronics
began. The electronics needed to be reduced to incorporate an overall smaller
electronics package than existed in the predecessor gun, and to incorporate a
number of additional features including data capture and display of the time
and date of use, ambient temperature, duration of use and number of cycles
fired.
13
After producing numerous versions of the Stinger projectile stun gun, the
Company began limited production on March 20, 2005. Inefficiencies discovered
in the design hampered production and required correction before volume
commercial production could commence. These inefficiencies included the mold
design, electronics design, camera mount, design of the ammunition cartridges,
internal packaging and numerous assembly issues. Working with outside
engineering firms, the Company is addressing each of these issues and currently
believes, based on preliminary internal product tests, that it may begin volume
commercial production and shipment of the Stinger late in the second quarter or
third quarter of 2005.
While the Company is encouraged with results of numerous internal tests
conducted on the Stinger to date, final testing of the product can only be
conducted once production commences. It may be the case that further
modifications of the Stinger will be required before commercial shipments of
the Stinger are possible. As a result, the Company can give no definitive
assurances that it will begin commercial production at the end of the second
quarter or third quarter of 2005.
Management believes that the Company has enough cash on hand to continue
development and testing of the Stinger for one year. When the product becomes
available for sale, the Company does not anticipate generating revenues for a
period of sixty days after release while customers test and evaluate the gun.
The Company anticipates spending an additional $100,000 on development and
$300,000 on medical testing of the Stinger projectile stun weapon.
The Company is currently using and plans to continue to use third parties to
manufacture components for its products and to assemble its products. The
Company is under no contractual obligation to any of these parties. While it is
the Company?s intention to initially manufacture the gun and its components in
the United States, the Company can give no assurances that it will continue to
do so. Electronics are easily sourced throughout the world and the Company will
continually seek best pricing and highest quality components for its products.
Product shipments will be handled by the Company. The Stinger projectile stun
weapon is classified as a firearm and therefore subject to various regulations
of the U.S. Bureau of Alcohol, Tobacco, and Firearms (ATF). To comply with
these regulations Company employees are located on site with the assembler of
the Stinger in order to maintain proper records and oversee production.
Background
In September, 2004, agreements were reached between Stinger Systems, Inc.
(formerly United Consulting Corporation) (the "Company"), Electronic Defense
Technology, LLC ("EDT"), EDT Acquisition, LLC ("EDTA"), Mr. Richard Bass (owner
of 100% of the member interest in EDT) ("Bass"), and Mssrs. Robert F. Gruder
and T. Yates Exley (owners of 100% of the member interest in EDTA). These
agreements enabled EDTA to acquire a 95% ownership interest in EDT in exchange
for a combination of notes payable and cash of $450,000. Subsequent to this
purchase the Company exchanged 9,750,000 shares of its $0.001 par value common
stock for 100% of the ownership interest in EDT.
These transactions were entered into to allow the Company to acquire various
licenses related to electronic stun devices. The Company subsequently negotiated
agreements to purchase the patents applicable to these licenses in exchange for
the issuance of 75,000 shares of the Company?s common stock. Also, the Company
issued 25,000 shares of its common stock for the acquisition of miniature
camera technology.
14
Due to the small sales volume of its existing products, EDT had reported
operating losses of approximately $724,126 from January 1, 2002 to September,
2004. While the research and development had basically been completed on a
handheld projectile stun gun prior to September 24, 2004, no stun guns had been
sold. The new management of the Company has made the manufacture, commercial
design, distribution and sale of the handheld projectile stun gun its main
sales objective.
The Company after it's acquisition of EDT required funds to support current
operations and to provide future working capital. In September, 2004, the
Company sold 1,122,000 shares of common stock for $400,000 to two individuals
who were accredited investors, one of which is the father of T. Yates Exley, a
member of the Board of the Company.
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 offering circular.
This discussion contains forward-looking statements that 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
offering circular.
Predecessor Operations The Company Predecessor The Company
---------------------- ----------- ----------- -----------
Year ended December 31, January 1 to September 24 to Combined Three Months Ended March 31,
2002 2003 September 24, to December 31, Total 2004 2005
2004 2004 2004 (Unaudited) (Unaudited)
--------- ---------- ------------- ----------- ---------- ----------- -----------
<c>
Sales $ 361,913 $ 264,471 $ 198,981 $ 63,306 $ 262,287 $ 78,210 $ 124,095
Cost of Production
and Sales (212,815) (155,824) (144,122) (51,686) (195,808) (40,036) (56,999)
--------- ---------- ------------- ----------- ---------- ----------- -----------
Gross Margin 149,098 108,647 54,859 11,620 66,479 38,174 67,096
Selling Expenses - - - 45,348 45,348 - 50,700
General and Administrative Expenses
Employee Cost 87,841 87,022 57,011 78,829 135,840 19,202 195,905
Employee Acquisition Cost - - - 7,520,000 7,520,000 - 1,550,000
Other 208,629 206,995 165,136 811,303 976,439 72,282 1,710,185
Depreciation 56,817 47,430 20,520 404 20,924 6,840 96,415
Research and Development 4,070 4,563 4,662 55,935 60,597 79 52,888
--------- ---------- ------------- ----------- ---------- ----------- -----------
Loss from Operations (208,259) (237,363) (192,470) (8,500,199) (8,692,669) (60,229) (3,588,997)
Interest (Expense) Income Net (11,013) (36,559) (38,462) (10,268) (48,730) (10,550) 124
--------- ---------- ------------- ----------- ---------- ----------- -----------
Net Loss $(219,272) $(273,922) $(230,932) $ (8,510,467) $ (8,741,399) $ (70,779) $ (3,588,873)
========= ========== ============= =========== ========== =========== ===========
Comparison of the Years Ended December 31, 2003 and 2002
Sales decreased by $97,442 or 27% from $361,913 to $264,471. This decline in
sales was attributable to the Company's limited marketing effort in 2003. The
net loss increased $54,650 or 25% due to less gross margin earned on sales and
increased interest expense partially offset by a $9,387 reduction in
depreciation expense.
15
Comparison of the Years ended December 31, 2004 (combined) and 2003
The operating results for the period January 1, 2004 to September 24, 2004, if
annualized would approximate the results of operations for the year ended
December 31, 2003. As of September 24, 2004, the Company was acquired by new
owners and, as a result, the business objectives of the Company were
significantly altered.
After September 24, 2004, the management of the Company placed its major
emphasis during this time period on the employment of qualified individuals to
assume executive management and selling positions with the Company. In
December, 2004, the Company entered into an employment agreement with Roy C.
Cuny, former president and chief executive officer of Smith & Wesson Holding
Corporation. The employment agreement included among other provisions, a stock
option to purchase 500,000 shares of the Company?s common stock for $1.00. The
fair value of the option shares was $7,520,000 and has been reflected as
employee acquisition cost at December 31, 2004, since the options vested
immediately.
The other general and administrative expenses primarily consist of consulting
fees ($315,000), director fees ($93,000), legal fees ($160,000), research and
development cost ($56,000) and a one time payment to Smith & Wesson Holding
Corporation of ($152,000) associated with the employment of Mr. Roy C. Cuny.
Approximately $419,000, of these costs and expenses, represents non-cash
charges due to the fact that the Company exchanged shares of its common stock
for services rendered.
Comparison of the three months Ended March 31, 2004 and 2005 (Unaudited)
Upon the acquisition of the Company on September 24, 2004, the direction of the
Company's business changed under a new management team which focused on
development of the Stinger projectile stun gun. No sales of the new Stinger
projectile stun gun are included in either three month period. Sales of the
carryover products in the three months ended March 31, 2005 increased $45,885
or 59%. This increase resulted from higher visibility of the Company in the
marketplace which was the result of promotions of its new Stinger projectile
stun gun at seminars, conferences and sales conventions. Employee costs'
increased by $176,703 due to an increase in the number of employees. The
Company incurred a non-cash charge of $1,550,000 as the cost of a stock option
granted to a new employee, which became fully vested upon his leaving the
Company in April of 2005. Other operating costs for the three months ended
March 31, 2005 include the write-off of defective circuit boards in the amount
of $268,375 and employee severance cost associated with the leaving of two
employees in the amount of $711,131. Research and development costs incurred in
connection with the Stinger projectile stun gun were $52,888.
Liquidity and Capital Resources
At December 31, 2004, the financial statement of the Company reflected a cash
balance of $9,093,634. These funds will be used to meet the Company?s liquidity
needs in 2005.
Cash Flow Operating Activities
The Company reported a use of funds of $412,056 from operating activities at
December 31, 2004. The operating loss of $8,510,467 was offset by non-cash
charges of $7,938,700 which represented the value of stock issuances and stock
options exchanged for services rendered. The Company paid deposits on certain
inventory purchases ($139,190) and had unpaid commitments for inventory
purchases of $1,497,140 at December 31, 2004. The Company has no current
commitments for inventory purchases.
16
Cash Flow for Investing Activities
The Company used $128,218 to purchase equipment, fixtures and patents. The
Company has no outstanding commitments to purchase equipment, fixtures or
patents.
Cash Flow from Financial Activities
The Company sold 3,222,000 shares of its common stock and netted $10,234,965.
These funds were used to pay a $600,000 note that was assumed by the Company in
September, 2004.
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 March 31, 2005, we have had no 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 in the Pink Sheets as
the amount of the recorded asset or expenditure.
17
Off-Balance Sheet Arrangements and Commitments
The following table summarizes our contractual obligations at December 31, 2004:
Description Amount
----------- ------
Office and Warehouse Rental $ 24,700
Inventory Purchases 1,497,140
-----------
$ 1,521,840
All obligations were due and payable in 2005.
BUSINESS
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 as a shell corporation for the purpose of providing
consulting services and changed its name to Stinger Systems, Inc. on September
27, 2004. Stinger Systems has never been in bankruptcy, receivership or any
similar proceeding.
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. 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
developing the Stinger projectile stun gun. 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 Chief Executive Officer and
Chairman of the Board of Directors. Mr. Exley is a member of the Board of
Directors. The ownership of EDT Acquisition, LLC has now been changed as
reflected elsewhere in this registration statement. 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.
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. In early 2003, EDT began
development of a projectile stun gun and developed models of the gun for study
and testing.
18
Our Business
Stinger Systems is engaged in the manufacture of electronic stun devices for
the control of, and to provide temporary incapacitation of, potentially
dangerous persons. Stinger Systems, through its wholly owned subsidiary EDT,
produces a variety of control products including Ice Shield, an electrified
riot shield, Bandit, a remote controlled or movement controlled electrified
wrap used for controlling potentially dangerous detainees in public situations
or during transport, and Ultron, a handheld contact stun device used to
temporarily incapacitate potentially dangerous individuals. The products of
Stinger Systems are classified under the SIC code 5099. Following is a list of
entities that use to some extent one or more of Stinger Systems? products:
1/1/04 - 9/30/04
Sales %
----------------
State Departments of Corrections 56%
Federal Bureau of Prisons 4%
US Marshals 3%
County Law Enforcement Agencies 34%
Various Police Departments and Misc 3%
Substantially all of the sales of our Predecessor Company and now wholly owned
subsidiary EDT were made to the law enforcement and correctional sectors. While
Stinger Systems plans to market its projectile stun weapon broadly to the
police, correctional, professional security and military sectors, our success
will be heavily dependent on a positive reception by the law enforcement
community.
The Company began extensive design modifications of its Stinger projectile stun
weapon in October of 2004. The modifications began with an exterior redesign to
change the size and look of the gun. The goal was to give Stinger the feel and
size of a traditional firearm, and have a unique look so that the Stinger would
not be confused with a traditional firearm. After the design was essentially
completed, mold design and redesign of the electronics began. The electronics
needed to be reduced to incorporate an overall smaller electronics package than
the predecessor gun and to implement additional features. These features were,
data capture of the date, time, ambient temperature, how long the gun was
fired, and how many cycles it was fired, plus the Company wanted to offer an
automatic shut-off after five seconds and a visual LED or LCD display.
On March 20th, 2005 the Company began limited production of the Stinger
projectile stun weapon. The Company quickly realized inefficiencies in the
design and production process which required correction. Inefficiencies
included: the mold design; electronics design, the camera mount, ammunition
cartridges, and assembly process. Working with outside engineers, we have begun
to address each of these issues. The Company currently believes it will have
the Stinger in production by the end of the second quarter or in the third
quarter. It may be the case that further modifications of the Stinger
projectile stun gun will be required before commercial shipments of the Stinger
are possible. As a result, the Company can give no definitive assurances that
it will begin commercial production at the end of the second quarter or third
quarter of 2005.
The Company will market the Stinger projectile stun gun primarily to the law
enforcement community, correctional officers, and to the military. While the
Company will continue to sell its Band-It, Ultron, and Ice Shield products, the
success of the Company rests solely on the success of the Stinger. As of May
2005, the Company has had over 1,400 individual evaluation requests for the
Stinger from police departments and correctional facilities of various sizes.
To meet this demand, the Company plans to manufacture up to 1,000 evaluation
Stingers and distribute these for thirty day tests. After thirty days the unit
must either be returned, or purchased. The Company cannot forecast how many of
these units will result in actual orders or forecast the size of these orders.
Because the Stinger utilizes primers to propel its darts, the Stinger is
classified as a firearm under the Gun Control Act of 1968 (GCA), 18 U.S.C.
Section 921(a) (3). Therefore, only companies that carry Federal Firearms
Licenses can sell the Stinger.
19
The Company's success will be dependent upon its ability to attract high
quality distributors and manufacturer?s representatives 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. While the
initial responses from the Company?s distributors and manufacturer's
representatives has been favorable, the Company is unable to provide forecasts
as to the number of Stingers it anticipates selling.
The Company also intends to sell the Stinger internationally. The Company has
hired outside counsel to obtain all necessary export licenses. The Company
cannot anticipate when Stingers will be able to be sold internationally and can
give no assurances that international sales will be successful. Additional
costs associated with international sales are negligible and are mainly
attributable to attorney?s fees for licensing.
The Company does not anticipate recording revenues until approximately sixty
days after full scale production commences. Given our current expectation that
full scale commercial production will commence in second quarter or third
quarter, revenues from the Stinger may not occur until October or November of
2005. Given our current rate of expenditure, the Company has enough cash on
hand to fund operations for the next twelve months with its existing level of
revenues.
Our Products
"Stinger" Handheld Projectile Stun Guns
The Stinger is a four-dart projectile stun gun that utilizes two cartridges to
shoot darts at targets up to 31 feet away. The user loads one or two cartridges
into the gun, aims the laser guide at the intended target and pulls the
trigger. The primers propel darts connected to the gun by thin insulated wires
and, upon contact, a pulsed electrical current is passed through the subject.
The electrical charge temporarily impairs the subject?s ability to control
muscles, dropping the subject to the ground and rendering him/her harmless to
the user, surrounding people, and themselves. We are currently in the final
stages of reengineering the product for commercial production and to begin
delivery of this product in the second quarter or third quarter of 2005. The
product is currently priced at $599.
TruVu Gun Camera
Stinger Systems' offers the option of video and voice capture through Stinger
Systems' patent-pending TruVu camera that provides an impartial fact witness of
the situation and manner in which a weapon has been used. We are currently
working on tooling for housing of the product and plan to begin commercial
shipments of the product in the third or fourth quarter of 2005. The TruVu
camera is currently priced below $200.
Ultron II, a Hand-held Contact Stun Gun
The ULTRON II is a handheld contact stun gun. The unit operates on a lithium
battery power source and has a patented break-away wrist strap that disables
the device in the event that it is removed from the user. This product is
currently in production and is priced at $195.
20
Ice-Shield Electronic Immobilization Riot Shield
The Ice Shield is an electrified riot shield designed to provide added
protection for police and military personnel in hazardous crowd control
situations. The shields are constructed of polycarbonate Lexan and feature
spark display points on its exterior surface providing a visible deterrent. The
shock shields may be used as traditional riot shields or activated to provide
an immobilizing or repelling contact shock. Applications to date have centered
on hazardous crowd control, civil disturbances, prison uprisings and forced
prison cell entries. This product is currently in production and priced at $575
and $595.
Bandit / The R-E-A-C-T System, an Immobilizing Electronic Restraint
The Bandit/The Remote Electronically Activated Control Technology (REACT)
addresses safety issues associated with the transportation of potentially
violent prisoners and the handling of potentially dangerous defendants in
courtroom situations. The product consists of a system of bands that are put on
the subject. The bands deliver an incapacitating or disruptive electric shock
if the subject attempts to flee or attack. The shock may be set to activate
automatically on movement or may be delivered by an operator up to 150 feet
away through a wireless remote. This product is currently in production and is
priced at $875.
During the first 9 months of 2004 Stinger Systems produced and sold three main
products, a hand held stun gun - the ULTRON II, an electric riot shield - the
Ice Shield, and an electric control wrap used to control potentially dangerous
persons / prisoners during transport or in court rooms - the Bandit. The
current base list prices for the ULTRON II, Ice Shield and Bandit are $195,
$595 and $875 respectively. The Ultron, Ice Shield and Bandit represented 5.1%,
6.5% and 19.2 %, respectively of Stinger's 2004 nine month revenues of
$199,000. The majority of Stinger Systems 2004 sales, approximately 61.4%, came
from training courses and manuals in support of the existing customer base from
prior year?s sales of the Ultron, Band-It and Shields.
Stinger Systems' primary focus since September of 2004 has been the development
and commercialization of the Stinger projectile stun gun, a four dart
projectile stun gun and the TruVu audio/video recorder option for the Stinger
projectile stun gun. Limited production began during the last week of March,
2005 for this product. The Company analyzed the production process and product
design and identified several areas of improvement. Stinger Systems is in the
process of implementing these improvements. Large scale commercial production
is anticipated at the end of the second quarter or third quarter of 2005.
Stinger has spent in excess of $320,000 on the development of these products to
date.
21
Patents and Patient Applications Owned by Stinger
TruVu TM video/audio capture
Title: Weapon And Input Device To Record Information
Serial No.: 10/975,563
Filing Date: 27 October 2004
Status: Patent Pending (Official Filing Receipt Received)
Subject: The system includes a weapon, an input device to record
information, a memory device to store recorded information,
and a security device to inhibit unauthorized tampering of
the recorded information.
Title: Weapon With Illuminator And Camera
Serial No.: 11/012,541
Filing Date: 14 December 2004
Status: Patent Pending (Official Filing Receipt Received)
Subject: The system includes a weapon, an illuminator, a camera to
record information, a memory device to store recorded
information, and a security device to inhibit
unauthorized tampering of the recorded information.
QuadrashockTM dart arrangement
Title: Stun Gun
Serial No.: 10/957,301
Filing Date: 30 September 2004
Status: Patent Pending (Official Filing Receipt Received)
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.
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 while the representative groups working with those distributors will
receive a 7% commission. While commission rates are subject to change, the
Company anticipates incurring a minimum 25% selling cost on a majority of its
sales transactions. Stinger Systems will also employ a small number of inside
sales associates to coordinate sales activates with the distributors and
representative groups as well as present directly to our end customers when
necessary. Presently, we anticipate having four to six of these inside sales
personnel.
22
Stinger Systems is not aware of any companies with meaningful market share
offering products that compete with its Ice Shield or Band-IT products. There
are several manufacturers that compete with its Ultron Product. The Company has
no reliable data on market share for any of these products.
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. Stinger Systems also expects to
compete with Law Enforcement Associates which has announced its own plans to
introduce a projectile stun gun.
The Company has been in development of its Stinger projectile stun gun and has
had no independent testing of its capabilities. The Company believes it has
several competitive advantages over its competitors but can make no assurance
of their validity.
The Company believes the Stinger projectile stun gun will offer the following
advantages over the X-26 and M-26 projectile stun guns produced by Taser
International, Inc.:
Price: the Stinger projectile stun gun?s targeted retail price of $599 is below
the current listed price of $799 for the Taser's X-26. Stinger does not charge
for data capture software that Taser offers at additional costs.
Target Attainment: Both a positive and negative probe must hit the target in
order to create a circuit. The Stinger projectile stun gun?s four dart system
offers four possible dart combinations that may complete a circuit versus the
two dart products offered by Taser that allow only one possibility of circuit
completion. Stinger Systems holds a patent on its Quadrashock? (four-dart)
technology. With the Stinger, two darts shoot forward in a straight toward the
target while two other darts are projected at a slight downward angle. Stinger
Systems believes that this dart configuration offers a higher probability of
target attainment and circuit completion at long range than may be provided by
competing products which rely on one dart shooting in a straight line directly
at the target and a second dart shooting at an approximately 8.0? downward
angle toward the target. Competing systems require that both darts make
effective contact in order to succeed in creating a circuit.
Dart Range: Should probes hit a subject too closely together, very little
muscle tissue will tetanize (become spastic and incapable of working properly),
and will not significantly impact mobility of the subject. Because the Stinger
projectile stun gun fires four darts, two straight and two angled downward, a
more effective spread is provided that yields a 31 foot range.
TruVu: Stinger Systems offers an audio/video capture device. The camera is
expected to attach to a mil-spec gun rail on the Stinger projectile stun gun.
The TruVu Camera has the capability to record up to four hours of video and
record at a near DVD quality 30 frames per second. The camera is activated
manually or automatically when the safety switch on the Stinger projectile stun
gun is turned on. Stinger Systems hopes to begin delivery of this product in
the third or fourth quarter of 2005.
The primary raw materials in the company's products are electrical components
and various plastic resins. There are multiple suppliers of such materials and
management believes that it could readily replace all current vendors if
necessary. Current vendors include Hitachi, Samsung, Texas Instruments, General
Electric and DuPont.
23
Government Regulation
The Stinger projectile stun gun uses primer charges to propel the dart wire
system to the target. The use of primer as a propellant classifies the Stinger
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 System's
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 and documented
appropriately and shipped in accordance with all applicable regulations.
Stinger Systems employs a full time individual at the site of the assembler of
the Stinger projectile stun gun to meet ATF requirements and coordinate
production and shipment functions. We anticipate the added production costs
associated with meeting ATF regulations to be less than five dollars per gun as
our assembler already has an ATF license and necessary ATF manufacturing
environment requirements are known and maintained by them.
Management believes that due to the nature of our product offering and the
outsourcing of a majority of its manufacturing, there is minimal cost to
complying with current environmental regulations.
Research and Development
Stinger Systems both directly and through its wholly owned subsidiary EDT has
spent $55,935 in research and development since September 24, 2004 through
December 31, 2004. During the first quarter of 2005 we spent an additional
$52,887 on research and development. Several studies have been undertaken to
determine the optimum electronics for the Stinger projectile stun gun as well
as maximizing the effectiveness of the contact arc. We anticipate ongoing
studies of electrical designs for the existing weapon as well as future
releases. In addition, we plan to engage independent researchers to conduct
medical studies of the impact of electrical stun gun technology. Research,
testing and development spending is anticipated to be $400,000 in 2005.
Properties
Stinger Systems' corporate office located at 1901 Roxborough Rd., Suite 118,
Charlotte NC 28211 includes 1,100 sq ft. It pays $1,000 per month for this
space on a lease running through July of 2005. These facilities are adequate
for the scope of Stinger Systems? current operations. It should be noted that
Stinger Systems is currently making arrangements to move its corporate offices
and Ohio facility to Tampa, Florida. Stinger Systems has offices and a
manufacturing site at 23050 Miles Rd, Bedford Heights OH 44128 which is
approximately 3,000 sq. ft. The current lease rate for this space is $1,820
per month and is on a lease that runs to October of 2005.
24
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, it is
Stinger Systems management?s opinion that Taser?s claims center on the
allegation that the Stinger projectile stun gun does not exist and therefore
Stinger System?s statements about its existence and capabilities are false and
misleading. Inasmuch as Stinger Systems has demonstrated its Stinger projectile
stun gun on several occasions, most recently in a news story on a local North
Carolina television station, it is Stinger System?s counsel?s opinion that
Stinger System will prevail in the lawsuit. Stinger Systems has moved to
dismiss Taser's claims responded to the allegations and countersued Taser for
defamation. It is seeking monetary damages, punitive damages and attorney fees.
MANAGEMENT
Executive Officers and Directors
Set forth below is certain information with respect to our executive officers
and directors:
Name Age Position
---- --- --------
Robert F. Gruder 46 CEO and Chairman
J. Wayne Thomas 52 CFO and Secretary
T. Yates Exley 44 Director
Denise Medved 44 Director
Michael Racaniello 52 Director
Andrew P. Helene 44 Director
Robert F. Gruder - Chairman and CEO 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.
J. Wayne Thomas - CFO and Corporate Secretary of Stinger Systems, Inc. Mr.
Thomas brings an extensive background of implementing financial controls and
processes as well as designing management reporting systems. Prior to joining
the Company in 2005, Mr. Thomas was and independent financial consultant for
two years. Prior to his consulting practice, Mr. Thomas was CFO of Information
Architects a publicly traded company from 1999 through 2003. Prior to
Information Architects, Mr. Thomas was with Electronic Data Systems (EDS). He
implemented and managed the financial systems and processes at EDS which
contributed to EDS` growth from revenues of $750 million to $16 billion. In his
position as Director of Global Compliance, Mr. Thomas was charged with the
review of worldwide financial processes and the charter to ensure "best
practice" controls and compliance. As Controller for several EDS divisions, as
well as his Corporate Accounting Manager positions, Mr. Thomas has managed all
facets of finance and accounting.
T. Yates Exley is a member of our board of directors. Mr. Exley is co-founder
of Stinger Systems, Inc. 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.
25
Denise Medved is a member of our board of directors. She is General Manager of
National Trade Productions, Inc. Ms. Medved has worked in various capacities
for National Trade Productions, Inc. for the past three years where she started
the firms focus on the security and law enforcement sector. She is a recognized
authority on marketing to the law enforcement and security organization. For
the two years prior to National Trade Productions, Inc. Ms. Medved worked for
CMGI a venture capital firm. She serves on the board of the Congressional Youth
Leadership Counsel in Washington, DC.
Michael Racaniello is a member of our board of directors. He is a self employed
CPA, Tax Consultant. Mr. Racaniello has been in private practice focusing
primarily on tax accounting for the past five years. Prior to that Mr.
Racaniello served as Corporate Controller for Information Architects
Corporation based in Charlotte, North Carolina. Mr. Racaniello has no other
outside board affiliations.
Andrew P. Helene is a member of our board of directors. 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.
Director Compensation
Denise Medved, Michael Racaniello and Andrew P. Helene were each given 10,000
shares of common stock for joining the board of directors. These individuals
were given an additional 10,000 share five-year options on April 15, 2005 for
Board service for 2005. The options vested immediately and are priced at market
of $8.05. Directors serve on an annual basis based on shareholder approval.
Because the company was purchased in September of 2004, the initial Directors
terms will be extended until the shareholders meeting in 2006.
Executive Compensation
Salary Option Grants
------ ------ ------
Robert F. Gruder $250,000 0 0
J. Wayne Thomas $175,000 0 175,000
During 2004, no executive officers of the Company received any compensation.
The Company hired Mr. Roy Cuny on December 30, 2004, as President and Mr. Chris
Killoy in January of 2005, as Vice President of Sales. Mr. Cuny resigned on
February 28, 2005 and Mr. Killoy resigned on March 10, 2005. Mr. Killoy was
paid at an annual rate of $175,000. Upon termination, Mr. Killoy received
50,000 options priced at $1.00 and $175,000 severance. Mr. Cuny was paid at an
annual rate of $300,000. Upon termination, Mr. Cuny received $225,000 in
severance compensation related to a prior employment agreement and an
additional $300,000 severance from the company. Mr. Cuny forfeited his 500,000
employment options. Mr. T. Yates Exley resigned his position as CFO and
Secretary on March 31, 2005 and will remain as a Director. J. Wayne Thomas
assumed duties as Secretary and CFO. Mr. Thomas received a 175,000 common
shares grant. No other officers have received stock grants.
26
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 24, 2004, EDT Acquisition LLC, a Michigan limited liability
company 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 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 now holds 9,250,000 common shares of Stinger Systems. Mr.
Gruder serves as Chief Executive Officer and Chairman of the Board of
Directors. Mr. Exley is a member of the Board. The ownership of EDT
Acquisition, LLC has now been changed as reflected elsewhere in this
registration statement. 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.
VOTING SECURITIES AND PRINCIPAL HOLDERS
As of May 23, 2005, we had 15,003,500 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 May 23, 2005, 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
Beneficial Owner Amount and Nature of Percentage
Beneficial Ownership
---------------- -------------------- ----------
Bonanza Master Fund Ltd.
300 Crescent Court, Suite 1740
Dallas, TX 75201 900,000
(1) 5.9 %
Tonga Partners, L.P.
150 California Street, 5th Floor
San Francisco, CA 94111 877,562(2) 5.7 %
Robert F. Gruder
1901 Roxborough Road, Suite 118
Charlotte, NC 28211 4,600,000 30.6 %
T. Yates Exley
1901 Roxborough Road, Suite 118
Charlotte, NC 28211 4,595,000
(3) 30.6 %
Andrew Helene
4849 Connecticut Ave NW # 624
Washington DC 20008 20,000
(4) *
Denise Medved
5115 Ravensworth Road
Ananndale, VA 22003 20,000
(4) *
Michael Racaniello
1101 Tyvola Road
Charlotte, NC 28217 20,000
(4) *
J. Wayne Thomas
1901 Roxborough Road, Suite 118
Charlotte, NC 28211 150,000 1.0 %
All directors and executive
officers as a group (6 persons) 9,405,000 62.6 %
<FN>
*Less than one percent (1%).
<FN1>
(1) Includes 300,000 shares of common stock that may be purchased upon the
exercise of warrants. Such warrants are not exercisable to the extent that their
exercise would cause the holder to be the beneficial owner of more than 4.99%
of the Company?s common stock.
<FN2>
(2) Includes 292,521 shares of common stock that may be purchased upon the
exercise of warrants. Such warrants are not exercisable to the extent that
their exercise would cause the holder to be the beneficial owner of more than
4.99% of the Company?s common stock.
<FN3>
(3) Mr. Exley also has a potential minority beneficial interest in 561,000
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.
<FN4>
(4) Includes 10,000 shares of common stock that may be purchased upon the
exercise of options with an exercise price of $8.05.
</FN>
SELLING STOCKHOLDERS
This prospectus relates in part to the offer and sale from time to time by the
selling stockholders of 7,613,500 shares of common stock that have been issued
or will be issued upon the exercise of certain warrants, options and
convertible notes. There can be no assurance that the selling stockholders will
sell any or all of their common stock offered by this prospectus. We do not
know if, when, or in what amounts, the selling stockholders may offer the
common stock for sale.
Selling Stockholders
The following table sets forth:
..the names of the selling stockholders;
..the number of shares of common stock owned by each of the selling
stockholders;
..the percentage of the class of common stock owned by each of the selling
stockholders; and
..the number of shares of common stock being offered by the selling stockholders
in this prospectus.
..the controlling person if not an individual
..the way in which the stock was acquired
This table is based on information furnished to us by or on behalf of the
selling stockholders. As of May 23, 2005, there were 15,003,500 shares of
common stock outstanding.
Shares Shares Beneficially
Beneficially Shares Owned After the
Selling Owned Before Being Offering Controlling How
Stockholder the Offering Registered Number Percentage Person Acquired
- --------------------------- ------------ ---------- ------ ---------- ----------- --------
BONANZA MASTER FUND LTD. 900,000 (1) 900,000 0 0 Investment Fund Financing Transaction
TONGA PARTNERS, L.P. 877,562 (2) 877,562 0 0 Investment Fund Financing Transaction
THE CUTTYHUNK FUND LIMITED 620,275 (3) 620,275 0 0 Investment Fund Financing Transaction
ANEGADA MASTER FUND, LTD. 602,163 (4) 602,163 0 0 Investment Fund Financing Transaction
ROBERT F. GRUDER 4,600,000 500,000 4,100,000 27% Acquisition of EDT
OLIVIA K. GRUDER 42,500 (5) 42,500 0 0 Gift
MAXIMILAN M. GRUDER 42,500 (6) 42,500 0 0 Gift
YATES EXLEY 4,595,000 500,000 4,095,000 27% T Yates Exley Acquisition of EDT
EXLEY GRANDCHILDREN'S TRUST
UAD 12/20/96 85,000 (7) 85,000 0 0 T Yates Exley Gift
RICHARD BASS 200,000 200,000 0 0 Acquisition of EDT
RICHARD M. BASS, TRUSTEE FBO
IRREVOCABLE TRUST AGREEMENT
FOR STEPHANIE BASS 50,000 50,000 0 0 Richard M Bass Gift
RICHARD M. BASS FAMILY LLC 248,000 248,000 0 0 Richard M Bass Gift
ENID S. GURNEY 2,000 2,000 0 0 Gift
3831 LLC 250,000 (8) 250,000 0 0 Frances J RiemerPrivate Purchase
CHRIS KILLOY 50,000 (9) 50,000 0 0 Employment Bonus
EXLEY MANAGEMENT SERVICES LLC 561,000 (10) 561,000 0 0 Charles E Exley Financing Transaction
SCOTT D GOODSPEED 10,000 10,000 0 0 Consulting Services
E GARY HANCE 5,000 5,000 0 0 Consulting Services
ANDREW HELENE 10,000 (11) 10,000 0 0 Board Services
TOM DUDCHIK 400,000 400,000 0 0 Consulting Services
CYNTHIA W JONES 5,000 5,000 0 0 Employment Bonus
CARLETON KRUSHINSKI 5,000 5,000 0 0 Consulting Services
JAMES MCNULTY 75,000 75,000 0 0 Acquisition of Patent
DENISE MEDVED 10,000 (12) 10,000 0 0 Board Services
GLEN M MOWREY 5,000 5,000 0 0 Consulting Services
DOUG MURRELL 220,000 220,000 0 0 Consulting Services
MICHAEL RACANIELLO 10,000 (13) 10,000 0 0 Board Services
RODNEY R SCHOEMANN 280,500 280,500 0 0 Financing Transaction
29
FLORENCE M SCHOEMANN, TRUSTEE
FBO RODNEY RYAN SCHOEMANN, JR
INTERVIVOS TRUST OF 1998 Florence M
UA/DTD 12/10/97 140,250 140,250 0 0 Schoemann Gift
FLORENCE M SCHOEMANN, TRUSTEE
FBO KRISTINA MARIE SCHOEMANN, JR
INTERVIVOS TRUST OF 1998 Florence M
UA/DTD 12/10/97 140,250 140,250 0 0 Schoemann Gift
DENISE SHAFFER 5,000 5,000 0 0 Consulting Services
JAMES A THIBEAULT 5,000 5,000 0 0 Consulting Services
WAYNE THOMAS 100,000 (16) 100,000 0 0 Consulting Services
J WAYNE THOMAS 50,000 (16) 50,000 0 0 Consulting Services
JOE VALENCIC 55,000 55,000 0 0 Acquisition of
Product Rights
YUNG U RYU 100,000 100,000 0 0 Financing Transaction
JESSE SHELMIRE 100,000 (14) 100,000 0 0 Financing Placement Fee
SCOTT GRIFFITH 100,000 (15) 100,000 0 0 Financing Placement Fee
SCHOX PLC 20,000 20,000 0 0 Jeffrey Schox Legal Services
TRIMECH 500 500 0 0 Mike Ayers Consulting Services
JEANETTE OUSLEY 1,000 1,000 0 0 Employment Bonus
J WAYNE THOMAS 175,000 (16) 175,000 0 0 Employment Bonus
BERKELEY PREP SCHOOL 25,000 25,000 0 0 Berkeley Prep
School Gift
THE LAWRENCEVILLE SCHOOL 5,000 5,000 0 0 The Lawrenceville
School Gift
CHARLOTTE COUNTRY DAY SCHOOL 5,000 5,000 0 0 Charlotte Country
Day Gift
POMONA COLLEGE 5,000 5,000 0 0 Pomona College Gift
CHRIST EPISCOPAL CHURCH 5,000 5,000 0 0 Christ Episcopal
Church Gift
CASTILLEJA SCHOOL FOUNDATION 5,000 5,000 0 0 CAastilleja School
Foundation Gift
ADELPHIC LITERARY SOCIETY Adelphic Literary
OF WELSYAN Society of Welsyan
UNIVERSITY 5,000 5,000 0 0 University Gift
<FN>
<FN1>
(1) Includes 300,000 shares of common stock that may be purchased upon exercise
of presently exercisable warrants. Such warrants are not exercisable to the
extent that their exercise would cause the holder to be the beneficial owner of
more than 4.99% of the Company's common stock.
<FN2>
(2) Includes 292,519 shares of common stock that may be purchased upon exercise
of presently exercisable warrants. Such warrants are not exercisable to the
extent that their exercise would cause the holder to be the beneficial owner of
more than 4.99% of the Company's common stock.
<FN3>
(3) Includes 206,758 shares of common stock that may be purchased upon exercise
of presently exercisable warrants. Such warrants are not exercisable to the
extent that their exercise would cause the holder to be the beneficial owner of
more than 4.99% of the Company's common stock.
<FN4>
(4) Includes 200,721 shares of common stock that may be purchased upon exercise
of presently exercisable warrants. Such warrants are not exercisable to the
extent that their exercise would cause the holder to be the beneficial owner of
more than 4.99% of the Company's common stock.
<FN5>
(5) Includes 42,500 shares of common stock that may be obtained upon conversion
of a promissory note.
<FN6>
(6) Includes 42,500 shares of common stock that may be obtained upon conversion
of a promissory note.
<FN7>
(7) The 85,000 shares of common stock listed are shares that may be obtained
upon conversion of a promissory note.
<FN8>
(8) The 250,000 shares of common stock listed are shares that may be purchased
upon the exercise of warrants. Fifty percent of the warrants are presently
exercisable and 50% become exercisable in November, 2005.
<FN9>
(9) The 50,000 shares of common stock listed are shares that may be purchased
upon exercise of options.
<FN10>
(10) Exley Management Services LLC is principally owned and controlled by the
father of T. Yates Exley, a director of Stinger Systems. Even though T. Yates
Exley is potentially a beneficiary of the assets of this LLC, at the present
time he cannot control the voting of or the disposition of the shares of
Stinger Systems held by this LLC and accordingly is not considered the
beneficial owner of such shares.
<FN11>
(11) Andrew Helene is a director of Stinger Systems.
<FN12>
(12) Denise Medved is a director of Stinger Systems.
<FN13>
(13) Michael Racaniello is a director of Stinger Systems.
<FN14>
(14) The 100,000 shares of common stock listed are shares that may be purchased
upon exercise of presently exercisable warrants.
<FN15>
(15) The 100,000 shares of common stock listed are shares that may be purchased
upon exercise of presently exercisable warrants.
<FN16>
(16) J Wayne Thomas became an executive officer of Stinger Systems on March
31, 2005.
</FN>
30
PLAN OF DISTRIBUTION
The Selling Stockholders and the Employees of Stinger Systems who acquire
shares pursuant to the operation of the Stinger Systems, Inc. Employee Stock
Option and Stock Bonus Plan (the "Selling Stockholders") of the common stock
("Common Stock") of the Company and any of their pledges, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
..ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
..block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
..purchases by a broker-dealer as principal and resale by the broker-dealer for
its account;
..an exchange distribution in accordance with the rules of the applicable
exchange;
..privately negotiated transactions;
..settlement of short sales entered into after the date of this prospectus;
..broker-dealers may agree with the Selling Stockholders to sell a specified
number of such shares at a stipulated price per share;
..a combination of any such methods of sale;
..through the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise; or
..any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), if available,
rather than under this prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the Selling Stockholders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated, but, except as set forth in a supplement to this
Prospectus, in the case of an agency transaction not in excess of a customary
brokerage commission in compliance with NASDR Rule 2440; and in the case of a
principal transaction a markup or markdown in compliance with NASDR IM-2440.
In connection with the sale of the Common Stock or interests therein, the
Selling Stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
Common Stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of the Common Stock short and deliver these
securities to close out their short positions, or loan or pledge the Common
Stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
31
The Selling Stockholders and any broker dealers or agents that are involved in
selling the shares may be deemed to be ?underwriters? within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each Selling Stockholder has informed the
Company that it does not have any written or oral agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock. In no
event shall any broker-dealer receive fees, commissions and markups which, in
the aggregate, would exceed eight percent (8%).
The Company is required to pay certain fees and expenses incurred by the
Company incident to the registration of the shares. The Company has agreed to
indemnify the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. In addition, any securities covered by this
prospectus which qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than under this prospectus. Each Selling
Stockholder has advised us that they have not entered into any written or oral
agreements, understandings or arrangements with any underwriter or broker-dealer
regarding the sale of the resale shares. There is no underwriter or
coordinating broker acting in connection with the proposed sale of the resale
shares by the Selling Stockholders.
We agreed to keep this prospectus effective until the earlier of (i) the date
on which the shares may be resold by the Selling Stockholders without
registration and without regard to any volume limitations by reason of Rule
144(e) under the Securities Act or any other rule of similar effect or (ii) all
of the shares have been sold pursuant to the prospectus or Rule 144 under the
Securities Act or any other rule of similar effect. The resale shares will be
sold only through registered or licensed brokers or dealers if required under
applicable state securities laws. In addition, in certain states, the resale
shares may not be sold unless they have been registered or qualified for sale
in the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to the Common Stock for a period of
two business days prior to the commencement of the distribution. In addition,
the Selling Stockholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including Regulation M,
which may limit the timing of purchases and sales of shares of the Common Stock
by the Selling Stockholders or any other person. We will make copies of this
prospectus available to the Selling Stockholders and have informed them of the
need to deliver a copy of this prospectus to each purchaser at or prior to the
time of the sale.
The sales price of our stock will be $10.00 per share until the shares of our
common stock become listed on the NASDAQ small cap, national market or other
exchange. Although we intend to apply for listing of our common stock on the
NASDAQ small cap or national market system, public trading of our common stock
may never materialize. If trading of our common stock does develop, the actual
selling price will be determined by the market for our stock at the time of
resale.
32
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock,
$0.001 par value. As of May 23, 2005, 15,003,500 shares of common stock were
issued and outstanding. The outstanding shares of common stock have been duly
authorized and are fully paid and non-assessable.
Common Stock
The holders of common stock are entitled to one vote per share on all matters
to be voted on by stockholders and are entitled to receive such dividends, if
any, as may be declared from time to time by our board of directors from funds
legally available therefore, subject to the dividend preferences of the
preferred stock, if any. Upon our liquidation or dissolution, the holders of
common stock are entitled to share ratably in all assets available for
distribution after payment of liabilities and liquidation preferences of the
preferred stock, if any. Holders of common stock have no preemptive rights, no
cumulative voting rights and no rights to convert their common stock into any
other securities. Any action taken by holders of common stock must be taken at
an annual or special meeting or by written consent of the holders of over 50%
of our capital stock entitled to vote on such action.
Warrants
As of May 23, 2005, Singer has warrants and derivative securities issued and
outstanding as follows:
*3831 LLC, an entity owned by Richard Bass, has an option to purchase 250,000
shares of common stock at the exercise price of $0.001 per share. Fifty
percent of those options may be exercised at the present time and the
remaining fifty percent may be exercised after November 24, 2005.
*Olivia K. Gruder and Maximilan M. Gruder each own a note payable by Stinger
Systems for $15,625.?Each $15,625 note carries the right to be converted to
common stock at the rate of $.40 per share.
*The Exley Grandchildren's Trust UAD 12/20/96 owns a note payable by Stinger
Systems for $31,250. The note carries the right to be converted to common
stock at the rate of $.40 per share.
*J. Wayne Thomas received a 175,000 share stock grant as an employment bonus
with a restricted issue date of October 1, 2005.
*Bonanza Master Fund Ltd. holds warrants, presently exercisable, for the
purchase of 300,000 shares at the exercise price of $7.50 per share. Such
warrants are not exercisable to the extent that their exercise would cause the
holder to be the beneficial owner of more than 4.99% of the Company?s common
stock.
*Tonga Partners, L.P. holds warrants, presently exercisable, for the purchase
of 292,521 shares at the exercise price of $7.50 per share. Such warrants are
not exercisable to the extent that their exercise would cause the holder to be
the beneficial owner of more than 4.99% of the Company's common stock.
33
*The Cuttyhunk Fund Limited holds warrants, presently exercisable, for the
purchase of 206,758 shares at the exercise price of $7.50 per share. Such
warrants are not exercisable to the extent that their exercise would cause the
holder to be the beneficial owner of more than 4.99% of the Company's common
stock.
*Anegada Master Fund, Ltd. holds warrants, presently exercisable, for the
purchase of 200,721 shares at the exercise price of $7.50 per share. Such
warrants are not exercisable to the extent that their exercise would cause the
holder to be the beneficial owner of more than 4.99% of the Company's common
stock.
*Chris Killoy holds options for the purchase of 50,000 shares of common stock.
*Jesse Shelmire holds warrants for the purchase of 100,000 shares of common
stock.
*Scott Griffith holds warrants for the purchase of 100,000 shares of common
stock.
*Andrew Helene holds options for the purchase of 10,000 shares of common stock.
*Denise Medved holds options for the purchase of 10,000 shares of common stock.
*Michael Racaniello holds options for the purchase of 10,000 shares of common
stock.
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed upon for
us by Gary R. Henrie, Attorney at Law, Las Vegas, Nevada. These legal matters
include that shares of common stock to be sold by the selling shareholders is
validly issued, fully paid and non-assessable. Mr. Henrie's address is 8275 S.
Eastern, Suite 200, Las Vegas, Nevada 89123.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
EXPERTS
Our consolidated financial statements as of December?31, 2004, included in this
prospectus have been audited by Killman, Murrell & Company, P.C., independent
registered public accounting firm, as stated in their report appearing
elsewhere herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
34
The audited financial statements of our subsidiary Electronic Defense
Technology, LLC as of September 24, 2004, December?31, 2003, and December 31,
2002 included in this prospectus have been audited by Jaspers + Hall, PC,
independent registered public accounting firm, as stated in their report
appearing elsewhere herein, and are included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 under the Securities Act
with the Securities and Exchange Commission with respect to the shares of our
common stock offered by this prospectus. This prospectus was filed as a part
of that registration statement but does not contain all of the information
contained in the registration statement and exhibits. Reference is thus made
to the omitted information. Statements made in this prospectus are summaries of
the material terms of contracts, agreements and documents and are not
necessarily complete; however, all information we considered material has been
disclosed. Reference is made to each exhibit for a more complete description of
the matters involved and these statements are qualified in their entirety by
the reference. You may inspect the registration statement, exhibits and
schedules filed with the Securities and Exchange Commission at the Securities
and Exchange Commission's principle office in Washington, D.C. Copies of all or
any part of the registration statement may be obtained from the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. The Securities and Exchange Commission also
maintains a web site (http://www.sec.gov) that contains this filed
registration statement, reports, proxy statements and information regarding us
that we have filed electronically with the Commission. For more information
pertaining to our company and the common stock offered in this prospectus,
reference is made to the registration statement.
Upon the effective date of this registration statement and thereafter, we will
file with the Securities and Exchange Commission annual and quarterly periodic
reports on forms 10-KSB and 10-QSB respectively and current reports on form 8-K
as needed. We are not required to deliver annual reports to our shareholders
and at this time we do not intend to do so. We encourage our shareholders,
however, to access and review all materials that we will file with the
Securities and Exchange Commission at http://www.sec.gov. Our SEC file number
is 333-122583.
Until ______, all dealers that effect transactions in these securities whether
or not participating in this offering may be required to deliver a prospectus.
This is in addition to the dealer's obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
35
STINGER SYSTEMS, INC
(FORMERLY UNITED CONSULTING CORPORATION)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
Report of Independent Registered Public Accounting Firm
Killman, Murrell & Co., P.C. F-2
Financial Statements
Consolidated Balance Sheets as of December 31, 2004 and
March 31, 2005 (Unaudited) F-3
Consolidated Statements of Operations for the Period
September 24, 2004 to December 31, 2004 and the Three Months
Ended March 31, 2005 (Unaudited) F-5
Consolidated Statement of Stockholders' Equity for the Period
September 24, 2004 to December 31, 2004 and for the Three Months
Ended March 31, 2005 (Unaudited) F-6
Consolidated Statements of Cash Flows for the Period September 24,
2004 to December 31, 2004 and the Three Months Ended March 31,
2005 (Unaudited) F-7
Notes to Consolidated Financial Statements F-9
Pro Forma Combined Statement of Operation F-22
Report of Independent Registered Public Accounting Firm
Jaspers + Hall, PC F-23
Financial Statements
Statements of Assets, Liabilities & Member's Equity as of
September 24, 2004 F-24
Statement of Revenue, Expenses & Member's Equity for the
Period January 1, 2004 to September 24, 2004 F-25
Statement of Cash Flows for the Period January 1, 2004 to
September 24, 2004 F-26
Notes to Financial Statements F-27
Report of Independent Registered Public Accounting Firm
Jaspers + Hall, PC F-31
Financial Statements
Statement of Assets, Liabilities and Member's Equity for the Years
Ended December 31, 2003 and 2002 F-32
Statement of Revenue, Expenses and Member's Equity for the Years
Ended December 2003, and 2002 F-33
Statement of Cash Flows for the Years Ended December 31, 2003
and 2002 F-34
Notes to Financial Statements F-35
F-1
Killman, Murrell & Company P.C.
Certified Public Accountants
3300 N. A Street, Bldg. 4, Suite 200 1931 E. 37th Street, Suite 7 3051 West Commerce 2626 Royal Circle
Midland, Texas 79705 Odessa, Texas 79762 Dallas, Texas 75212 Kingwood, Texas 77339
(432) 686-9381 (432) 363-0067 (972) 238-7776 (281) 359-7224
Fax (432) 684-6722 Fax (432) 363-0376 Fax (972) 889-0109 Fax (281) 359-7112
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Stinger Systems, Inc. (Formerly United Consulting Corporation)
We have audited the accompanying consolidated balance sheet of Stinger Systems,
Inc. as of December 31, 2004 and the related consolidated statements of
operations, stockholders' equity, and cash flows for the period September 24,
2004 to December 31, 2004. 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 audit.
We conducted our audit 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides 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, 2004 and the consolidated results of
their operations and their cash flows for the period September 24, 2004 to
December 31, 2004 in conformity with United States generally accepted
accounting principles.
/s/ Killman, Murrell & Company, P.C.
KILLMAN, MURRELL & COMPANY, P.C.
Dallas, Texas
January 29, 2005
F-2
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, 2004 March 31, 2005
----------------- --------------
(Unaudited)
CURRENT ASSETS
Cash $ 9,093,634 $ 7,358,665
Accounts Receivable, net of $1,800 Allowance for
Uncollectible Accounts in 2004 and 2005 20,773 67,100
Inventories, at Cost 78,162 199,248
Inventory Purchase Deposits 139,190 -
Prepaid Expenses and Other Current Assets 322,474 501,721
----------------- ---------------
TOTAL CURRENT ASSETS 9,654,233 8,126,734
EQUIPMENT AND FURNITURE, net of Accumulated
Depreciation of $404 and $1,368 in 2004 and 2005, respectively 105,764 161,238
OTHER ASSETS
Intangible Assets, net of $95,451 Accumulated Amortization in 2005 3,102,620 3,007,169
Other 1,294 1,210
----------------- --------------
TOTAL ASSETS $ 12,863,911 $ 11,296,351
================= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
(Continued)
F-3
CONSOLIDATED BALANCE SHEETS
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, 2004 March 31, 2005
----------------- --------------
(Unaudited)
CURRENT LIABILITIES
Notes Payable to Related Parties $ 62,500 $ 62,500
Accounts Payable 2,552 87,609
Accrued Liabilities 491,918 867,539
----------------- --------------
TOTAL CURRENT LIABILITIES 556,970 1,017,648
----------------- --------------
COMMITMENTS AND CONTINGENCIES - -
================= ==============
STOCKHOLDER'S EQUITY
Common Stock, $0.001 Par Value; 50,000,000 Shares
Authorized, 15,003,500 Shares Issued and Outstanding 15,004 15,004
Additional Paid-In-Capital 20,802,404 24,277,404
Accumulated Deficit (8,510,467) (12,099,340)
Deferred Compensation - (1,914,365)
----------------- -------------
TOTAL STOCKHOLDER'S EQUITY 12,306,941 10,278,703
----------------- -------------
$ 12,863,911 $ 11,296,351
================= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period Three Months
September 24, 2004 Ended
to December 31, 2004 March 31, 2005
-------------------- --------------
(Unaudited)
SALES $ 63,306 $ 124,095
COST OF PRODUCT SOLD 51,686 56,999
-------------------- --------------
GROSS MARGIN 11,620 67,096
SELLING EXPENSES 45,348 50,700
GENERAL AND ADMINISTRATIVE EXPENSES
Employee Salaries and Benefits 78,829 195,905
Employee Acquisition Cost 7,520,000 1,550,000
Employee Severance Cost - 730,679
Other 811,303 711,131
Depreciation and Amortization 404 96,415
Research and Development Costs 55,935 52,888
Write off Defective Parts - 268,375
-------------------- --------------
LOSS FROM OPERATIONS (8,500,199) (3,588,997)
INTEREST INCOME - 757
INTEREST EXPENSE (10,268) (633)
-------------------- --------------
LOSS BEFORE INCOME TAXES $ (8,510,467) $ (3,588,873)
PROVISIONS FOR INCOME TAXES - -
-------------------- --------------
NET LOSS $ (8,510,467) $ (3,588,873)
==================== ==============
NET LOSS PER SHARE
Basic $ (0.67) $ (0.24)
==================== ==============
Diluted $ (0.67) $ (0.24)
==================== ==============
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING
Basic 12,640,900 15,003,500
==================== ==============
Diluted 12,640,900 15,003,500
==================== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD SEPTEMBER 24, 2004 TO DECEMBER 31, 2004 AND
THE THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED)
Common Stock Deficit Accumulated
--------------------------- Additional During
Number of Paid-In Development Retained Deferred
Shares Par Value Capital Stage (Deficit) Compensation Total
------------ ----------- ---------- ----------- --------- ------------ ----------
Balance, September 24, 2004 11,000,000 $ 11,000 $ 1,960 $ (12,960) $ - $ - $ -
Acquisition of Subsidiary
Cancellation of Common Shares (10,000,000) (10,000) 10,000 - - - -
Reclassification of
Accumulated Deficit - - (12,960) 12,960 - - -
Acquisition Shares Issued 9,750,000 9,750 464,550 - - - 474,300
------------ ----------- ---------- ----------- --------- ------------ ----------
Balance, September 24, 2004 10,750,000 10,750 463,550 - - - 474,300
Sale of Common Stock, Net of
$665,035 of Offering Costs 3,222,000 3,222 10,231,743 - - - 10,234,965
Common Stock Issued for
Patents 100,000 100 1,742,400 - - - 1,742,500
Common stock Issued for
Services 921,500 922 725,278 - - - 726,200
Common Stock Issued in payment
of Debt and Interest 10,000 10 106,933 - - - 106,943
Stock Option Issued to
Executive Officer - - 7,520,000 - - - 7,520,000
Stock Option Issued for
Services - - 12,500 - - - 12,500
Net Loss, December 31, 2004 - - - - (8,510,467) - (8,510,467)
------------ ----------- ---------- ----------- ----------- ------------- -----------
Balance, December 31, 2004 15,003,500 15,004 20,802,404 - (8,510,467) - 12,306,941
Deferred Compensation
Recognized for Stock Granted - - 1,925,000 - - (1,925,000) -
Deferred Compensation
Amortization - - - - - 10,635 10,635
Stock Option Issued To
Employee - - 1,550,000 - - - 1,550,000
Net Loss - - - - (3,588,873) - (3,588,873)
------------ ----------- ---------- ------------ ----------- ------------- -----------
Balance, March 31, 2005
(Unaudited) 15,003,500 $ 15,004 $ 24,277,404 $ - $ (12,099,340) $ (1,914,365) $ 10,278,703
============ =========== ========== ============ =========== ============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period September 24, Three Months Ended
2004 to December 31, 2004 March 31, 2005
--------------------------- ------------------
(Unaudited)
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss $ (8,510,467) $ (3,588,873)
Adjustments to Reconcile Net Loss to
Net Cash Used by Operating Activities:
Employee Acquisition Costs 7,520,000 1,550,000
Common Stock Issued for Services 418,700 -
Deferred Compensation Amortization - 10,635
Depreciation and Amortization 404 96,415
Bad Debt Expense 1,800 -
Changes in Operating Assets and Liabilities
Accounts Receivable (11,313) (46,327)
Inventories 16,617 (121,086)
Inventory Deposits (139,190) 139,190
Prepaid Expenses 1,946 (179,247)
Other Assets 1,756 84
Accounts Payable (24,335) 85,057
Accrued Liabilities 312,026 375,621
-------------- ------------
NET CASH USED BY OPERATING ACTIVITIES (412,056) (1,678,531)
-------------- ------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of Equipment and Furniture (28,218) (56,438)
Purchase of Patent (100,000) -
-------------- ------------
NET CASH USED BY INVESTING ACTIVITIES (128,218) (56,438)
-------------- ------------
CASH FLOW PROVIDED BY FINANCING ACTIVITIES
Common Stock Sales 10,234,965 -
Payment of Note Payable (601,057) -
-------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,633,908 -
-------------- ------------
INCREASE (DECREASE) IN CASH 9,093,634 (1,734,969)
CASH BALANCE BEGINNING OF PERIOD - 9,093,634
-------------- ------------
CASH BALANCE END OF PERIOD $ 9,093,634 $ 7,358,665
The accompanying notes are an integral part of these consolidated financial
statements.
(Continued)
F-7
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Period September 24, Three Months Ended
2004 to December 31, 2004 March 31, 2005
---------------------------- ------------------
(Unaudited)
NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of Subsidiary
Assets Acquired $ (1,376,579) $ -
Liabilities Assumes 902,279 -
Par Value of Stock Issued 9,750 -
Additional Paid-In Capital 464,550 -
Prepaid Legal Expense (320,000) -
Common Stock Issued for Prepaid Legal Expense 20 -
Additional Paid-In Capital for Prepaid Legal Expense 319,980 -
Investment in Intangible Patents (1,817,500) -
Common Stock Issued for Intangible Patents 100 -
Additional Paid-In Capital for Intangible Patents 1,742,400 -
Accrued Liabilities Assumed for Intangible Patents 75,000 -
Note Payable Canceled for Stock (106,943) -
Common Stock Issued in Satisfaction of Debt 10 -
Additional Paid-In Capital Issued in Satisfaction of Debt 106,933 -
Common Stock Canceled on September 24, 2004 (10,000) -
Additional Paid-In Capital from Stock Cancellation 10,000 -
Retained Deficit Eliminated Against Paid-In Capital
On September 24, 2004 12,960 -
Reduction in Paid-In Capital from Elimination of Retained
Deficit (12,960) -
Additional Paid-In Capital from Deferred Compensation - 1,925,000
Deferred Compensation from Stock Issued to an Employee - (1,925,000)
------------ ---------------
$ - $ -
============ ===============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash Paid During the Year For:
Interest $ 9,626 $ -
============ ===============
Income Taxes $ - $ -
============ ===============
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIOD)
DECEMBER 31, 2004
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 was returned to the Company for
cancellation. Prior to September 24, 2004, the Company had no operations. The
above transaction has been accounted for as an acquisition by the Company on
September 24, 2004, and as such, the operations of EDT subsequent to September
24, 2004, are included in the accompanying financial statements.
The Company is engaged in the manufacture 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 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIOD)
DECEMBER 31, 2004
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, 2004 and March 31, 2005:
December 31, 2004 March 31, 2005
----------------- --------------
(Unaudited)
Raw Materials and Work-in Progress $ 41,300 $ 152,144
Ammunition 18,968 17,547
Finished Goods 17,894 29,557
----------------- --------------
$ 78,162 $ 199,248
================= ==============
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, 2004 and March 31, 2005, furniture and equipment consisted of
the following:
useful Life December 31, 2004 March 31, 2005
----------- ----------------- --------------
(Unaudited)
Furniture 5 Years $ 5,813 $ 6,263
Computers and Equipment 3 Years 4,774 30,261
----------------- --------------
10,587 36,524
Accumulated Depreciation (404) (1,368)
Mold for Stun Gun (Not Yet Being Used) 2.5 Years 95,581 126,082
----------------- --------------
$ 105,764 $ 161,238
================= ==============
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 not recognized any impairment charges.
(Continued)
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIOD)
DECEMBER 31, 2004
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.
Advertising
Advertising and marketing costs are expensed as incurred. During the period
from September 24, 2004 to December 31, 2004 and the three months ended March
31, 2005, advertising costs were $36,543 and $30,157, respectively.
Research and Development Costs
The Company expenses research and development costs as incurred. During the
period from September 24, 2004 to December 31, 2004 and the three months ended
March 31, 2005, research and development costs were $55,935 and $52,888,
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. At December
31, 2004 and March 31, 2005, the Company had cash balances in excess of the
FDIC limit of $10,017,663 and $7,232,925, respectively.
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. The weighted
average diluted shares would have been 13,089,031 and 16,315,671 at December
31, 2004 and March 31, 2005, respectively, had they not been anti-dilutive.
(Continued)
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIOD)
DECEMBER 31, 2004
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.
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 March 31, 2005, 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, 2004 or March 31, 2005, as it is
management?s opinion that such liability is immaterial as of December 31, 2004
and March 31, 2005. Once sales of the new stun guns commence, the Company
expects to make an accrual for warranty claims based on sales.
Recent Accounting Pronouncements
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
("SFAS 148"). SFAS 148 provides alternative methods of transition to SFAS 123's
fair value method of accounting for stock-based employee compensation. It also
amends the disclosure provisions of Statement 123 and APB Opinion No. 28,
Interim Financial Reporting, to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting with
respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. SFAS 148's
amendment of the transition and annual disclosure requirements of SFAS 123 are
effective for fiscal years ending after December 15, 2002.
(Continued)
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIOD)
DECEMBER 31, 2004
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, and Interpretation of ARB No.51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning on or after June 15, 2003.
On April 30, 2003 the FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. The amendments set forth in Statement 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. In particular, this Statement clarifies under what
circumstances a contract with an initial net investment meets the
characteristic of a derivative as discussed in Statement 133. In addition, it
clarifies when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. This Statement is effective
for contracts entered into or modified after June 30, 2003.
On May 15, 2003 the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". The
Statement improves the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. The new Statement
requires that those instruments be classified as liabilities in statements of
financial position. In addition to its requirements for the classification and
measurement of financial instruments in its scope, Statement 150 also requires
disclosures about alternative ways of settling the instruments and the capital
structure of entities, all of whose shares are mandatorily redeemable. Most of
the guidance in Statement 150 is effective for all financial instruments
entered into or modified after May 31, 2003.
The Company believes that none of the recently issued accounting standards will
have a material impact on the financial statements.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIOD)
DECEMBER 31, 2004
NOTE 3: INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 2004 and March 31,
2005:
December 31, 2004 March 31, 2005
----------------- --------------
Unaudited
License and Patent for Stun Gun $ 2,672,620 $ 2,672,620
Patent for Camera 430,000 430,000
----------------- --------------
3,102,620 3,102,620
Accumulated Amortization - (95,451)
----------------- --------------
$ 3,102,620 $ 3,007,169
================= ==============
The intangibles will be amortized over the estimated life of seven years,
beginning the first quarter of 2005. No amortization has been recorded as of
December 31, 2004 because no products for which these licenses and patents
pertain had been produced for sale as of December 31, 2004.
Estimated amortization for intangible assets is as follows:
2005 $ 369,360
2006 443,231
2007 443,231
2008 443,231
2009 443,231
Thereafter 960,336
---------
$ 3,102,620
NOTE 4: OPERATING LEASES
The Company has entered into operating leases for office and warehouse space,
which runs through October of 2005. Rent expense under the terms of the lease
was $8,460 and $11,515 during the period September 24, 2004 to December 31,
2004 and the three months ended March 31, 2005, respectively.
Future minimum lease payments under operating leases as of December 31, 2004
are $24,700 in 2005.
NOTE 5: COMMITMENTS
At 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 of 2004,
leaving a commitment of $1,165,700. During the first quarter, 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 of
2005, the Company wrote off the $268,375 cost incurred and is no longer
obligated for the balance of the commitment.
(Continued)
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIOD)
DECEMBER 31, 2004
The Company also has commitments to purchase manufacturing supplies in the
amount of $331,440 as of December 31, 2004. These commitments are expected to
be paid in the first quarter of 2005.
On December 30, 2004, the Company entered into a two year employment agreement
("Agreement") with Roy C. Cuny to become president of the Company, effective
January 5, 2005. The agreement calls for guaranteed payments to Mr. Cuny of
$300,000 per year and is automatically extended for one year unless terminated
by either party at least sixty (60) days prior to the expiration date. 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 $730,679 as termination
costs for the two employment contracts. Upon the expiration of 30 days from
Mr. Cuny?s resignation, his stock options expired.
NOTE 6: CAPITAL STOCK TRANSACTIONS
The authorized capital common stock is 50,000,000 shares of common stock at
$.001 par value of which 11,000,000 shares of stock had been issued from the
period July 2, 1996 until December 31, 2003 for various services rendered and
stock sales.
On September 24, 2004, the Company issued 9,750,000 shares of the Company's
common stock for 100% of Electronic Defense Technologies (?EDT?). In connection
with the acquisition, 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.
(Continued)
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIOD)
DECEMBER 31, 2004
During November and December of 2004, the Company issued a total of 100,000
shares of common stock for patents pertaining to the stun guns and a camera.
These shares were recorded at the market value quoted in the Pink Sheets as of
the date of issuance ($1,742,500).
Between September 24, 2004 and December 31, 2004, the Company issued 921,500
shares of common stock for various services received by the Company. Shares
issued before November 12, 2004 were valued at $0.36 to $0.40 per share (the
same price for which stock was sold for cash on September 24, 2004). Shares
issued after November 11, 2004 (the date the Company?s common stock began to be
listed on the Pink Sheets) were valued at the closing price quoted in the Pink
Sheets. These shares were valued at $726,200 as of the date of issuance.
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. This stock was valued
at the balance of the note plus accrued interest.
On December 30, 2004, the Company granted the prospective chief executive
officer of the company an option to acquire 500,000 shares of the Company's
common stock at $1.00 per share. The option vested immediately and is
exercisable at any time before December 30, 2007. Since the individual was not
an employee at the time of grant the fair value of such stock option,
$7,520,000, (calculated using the Black Scholes model) has been charged to
expense with a corresponding credit to additional paid-in-capital. The
following assumptions were used in the Black Scholes model: Estimated fair
value $15.04, expected life 1 year; Risk free interest rate of 4.5%, expected
volatility 95% and 0% dividend yield.
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 is 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.
(Continued)
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIOD)
DECEMBER 31, 2004
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.
In connection with the capital raised in December of 2004, the Company issued
the underwriters warrants, exercisable within five years, to acquire 200,000
shares of the Company?s common stock at $7.50 per share.
NOTE 7: 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:
Period From September 24,
2004 to Three Months Ended
December 31, 2004 March 31, 2005
------------------------- ------------------
(Unaudited)
Benefit for Income Taxes Computed Using the Statutory Rate of 34% $ (2,893,559) $ (1,220,217)
Difference Between Book Expense and Tax Expense of Charges for Stock
Issued for Services 813,145 1,943,100
Other 261 283
Change in Valuation Allowance 2,080,153 (723,166)
-------------- --------------
Income Tax Benefit $ - $ -
(Continued)
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIOD)
DECEMBER 31, 2004
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, 2004
March 31, 2005
----------------- ---------------
(Unaudited)
Deferred Tax Assets:
Net Operating Loss Carryforward $ 2,080,153 $ 1,356,986
Valuation Allowance (2,080,153) (1,356,986)
----------------- ---------------
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, 2004,
the Company had net operating loss carry-forwards of approximately $6,100,000
for federal and state income tax purposes. These carry-forwards, 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.
NOTE 8: NOTES PAYABLE TO RELATED PARTIES
Notes payable at December 31, 2004, consisted of two notes of $31,250 each to
the two major shareholders. The notes bear interest at 4% per annum and are due
on demand. The two shareholders have 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, 2004, if the shareholders demand payment in
stock, the Company would be obligated to issue 157,852 shares of common stock
to the two major shareholders.
(Continued)
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIOD)
DECEMBER 31, 2004
NOTE 9: ACCRUED LIABILITIES
Accrued liabilities at December 31, 2004 and March 31, 2005 are as follows:
December 31, 2004 March 31, 2005
----------------- --------------
(Unaudited)
Accrued Professional Fees $ 138,158 $ 287, 978
Accrued Payroll Liabilities 172,793 31,785
Accrued Invoices 75,326 53,151
Accrued Liabilities for Camera Patent 75,000 -
Accrued Financing Fees 30,000 -
Accrued Interest 641 1,275
Accrued Severance Cost - 493,350
----------------- --------------
$ 491,918 $ 867,539
NOTE 10: LITIGATION
Stinger 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, it is Stinger?s management?s opinion that
Taser's claims center on the allegation that the Stinger projectile stun gun
does not exist and therefore Stinger?s statements about its existence and
capabilities are false and misleading. Inasmuch as Stinger has demonstrated
its Stinger projectile stun gun on several occasions, most recently in a news
story on a local North Carolina television station, 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.
NOTE 11: ACQUISITIONS
On September 24, 2004, agreements were reached between Stinger Systems, Inc.
(formerly United Consulting Corporation) (?Stinger?), Electronic Defense
Technology, LLC (?EDT?), EDT Acquisition, LLC (?EDTA?), Mr. Richard Bass
(owner of 100% of the member interest in EDT) (?Bass?), and Mr. Robert F.
Gruder and Mr. T. Yates Exley (owners of 100% of the member interest in EDTA).
The agreements enabled EDTA to acquire a 95% ownership interest in EDT in
exchange for a combination of notes payable and cash of $450,000. Subsequent to
the purchase by EDTA, EDTA and Bass exchanged their 100% ownership interest in
EDT for 9,750,000 share of Stinger?s $0.001 par value common stock.
(Continued)
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIOD)
DECEMBER 31, 2004
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 handheld projectile stun
gun.
The acquisition of EDT by Stinger was accounted for as a reverse merger whereby
the subsidiary was actually the acquirer; therefore, the carrying value of the
assets and liabilities of EDT remained unchanged after the reverse merger. The
5% ownership interest in EDT not owned by EDTA was assigned a value of $24,300
and this value is included in the cost of the intangible assets.
The following summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition.
AT SEPTEMBER 24, 2004
CURRENT ASSETS $ 110,460
EQUIPMENT AND FURNITURE 77,950
OTHER ASSETS 3,050
---------
TOTAL ASSETS ACQUIRED 191,460
---------
CURRENT LIABILITIES 194,280
LONG TERM DEBT 708,000
---------
TOTAL LIABILITIES ASSUMED 902,280
---------
EXCESS OF LIABILITIES ASSUMED
OVER TANGIBLE ASSETS ACQUIRED 710,820
PURCHASE PRICE
Cash 250,000
Note Payable 200,000
Common Stock Issuance 24,300
---------
TOTAL INTANGIBLE ASSET ACQUIRED $ 1,185,120
The entire value of the intangible asset acquired has been assigned to the
projectile stun gun technology. The Company has elected to amortize the entire
balance over seven (7) years beginning January 1, 2005. The entire value of
the intangible asset is expected to be deductible for tax purposes.
F-20
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
On September 24, 2004, agreements were reached between Stinger Systems, Inc.
(formerly United Consulting Corporation) ("Stinger"), Electronic Defense
Technology, LLC (?EDT?), EDT Acquisition, LLC (?EDTA?), Mr. Richard Bass (owner
of 100% of the member interest in EDT) (?Bass?), and Mr. Robert F. Gruder and
Mr. T. Yates Exley (owners of 100% of the member interest in EDTA). The
agreements enabled EDTA to acquire a 95% ownership interest in EDT in exchange
for a combination of notes payable and cash of $450,000. Subsequent to the
purchase by EDTA, EDTA and Bass exchanged their 100% ownership interest in EDT
for 9,750,000 share of Stinger?s $0.001 par value common stock.
The pro forma combined statement of operations for the year ended December 31,
2004 represents the results of operations of Electronic Defense Technology,
LLC (the "Predecessor") from January 1, 2004 to September 24, 2004, the date of
acquisition and the result of operations of Stinger Systems, Inc. for September
24, 2004 to December 31, 20004. There are no eliminating entries as each of the
two companies was operating independently of one another prior to acquisition.
The combined results of operations for the year ended December 31, 2004 are not
necessarily indicative of the results that may be expected in future years.
F-21
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
Electronic Defense
Technology, LLC The Company
January 1, 2004 to September 24, 2004 to
September 24, 2004 December 31, 2004 Total
------------------ ------------------ ----------
SALES $ 198,981 $ 63,306 $ 262,287
COST OF PRODUCT SOLD 144,122 51,686 195,808
------------------ ------------------ ----------
GROSS MARGIN 54,859 11,620 66,479
SELLING EXPENSES - 45,348 45,348
------------------ ------------------ ----------
GENERAL AND ADMINISTRATIVE EXPENSES
Employee Salaries and Benefits 57,011 78,829 135,840
Employee Acquisition Cost - 7,520,000 7,520,000
Other 165,136 811,303 976,439
Depreciation and Amortization 20,520 404 20,924
Research and Development Costs 4,662 55,935 60,597
------------------ ------------------ ----------
247,329 8,466,471 8,713,800
LOSS FROM OPERATIONS (192,470) (8,500,199) (8,692,669)
INTEREST EXPENSE 38,462 10,268 48,730
------------------ ------------------ ----------
LOSS BEFORE INCOME TAXES (230,932) (8,510,467) (8,741,399)
PROVISIONS FOR INCOME TAXES - - -
------------------ ------------------ ----------
NET LOSS $ (230,932) $ (8,510,467) $ (8,741,399)
================== ================== ===========
NET LOSS PER SHARE
Basic $ (0.69)
===========
Diluted $ (0.69)
===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Basic 12,640,900
===========
Diluted 12,640,900
===========
F-22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members of
Electronic Defense Technology, LLC
We have audited the accompanying statement of assets, liabilities, and member's
equity of Electronic Defense Technology, LLC as of September 24, 2004, and the
related statements of revenue, expenses, and member?s equity and cash flows for
the period from January 1, 2004 to September 24, 2004. These financial
statements are the responsibility of the Organization?s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of Electronic
Defense Technology, LLC, as of September 24, 2004, and the results of
operations and its cash flows for the period from January 1, 2004 to September
24, 2004 in conformity with accounting principles generally accepted in the
United States of America.
Jaspers + Hall, PC
Denver, Colorado
April 19, 2005
F-23
ELECTRONIC DEFENSE TECHNOLOGY, LLC
STATEMENT OF ASSETS, LIABILITIES, AND MEMBER'S EQUITY
AS OF SEPTEMBER 24, 2004
- ------------------------------------------------------
ASSETS
CURRENT
Cash $ -
Accounts receivable - net 8,762
Prepaid expenses 4,470
---------
Total Current Assets 13,232
---------
FIXED - AT COST
Powertron molds 183,000
Machinery and equipment 20,000
Computer equipment 3,387
---------
Total 206,387
Less: Accumulated depreciation (133,183)
---------
Net Fixed Assets 73,204
---------
TOTAL ASSETS $ 86,436
LIABILITIES AND MEMBER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 34,327
Current portion - long term debt 9,419
---------
Total Current Liabilities 43,746
---------
LONG-TERM LIABILITIES
Loan payable 124,977
Loan payable - Member 676,971
---------
Total 801,948
Less: Current portion (9,419)
---------
Total Long-Term Debt 792,529
---------
Total Liabilities 836,275
---------
MEMBER'S EQUITY (DEFICIT) (749,839)
---------
TOTAL LIABILITIES AND MEMBER'S EQUITY
(DEFICIT) $ 86,436
---------
F-24
ELECTRONIC DEFENSE TECHNOLOGY, LLC
STATEMENT OF REVENUE, EXPENSES, AND MEMBER'S EQUITY
FOR THE PERIOD FROM JANUARY 1, 2004 TO SEPTEMBER 24, 2004
- ---------------------------------------------------------
REVENUE
SALES $ 198,981
LESS COST OF SALES (144,122)
----------
GROSS PROFIT 54,859
----------
OPERATING EXPENSES
Demonstration costs 4,548
Depreciation 20,520
General and administrative 38,673
Professional fees 50,921
Research and development 4,662
Salaries and benefits 57,011
Trade show costs 3,927
Training costs 62,310
Travel and promotion 4,757
----------
Total Operating Expenses 247,329
----------
OPERATING LOSS (192,470)
Interest and finance costs (38,462)
----------
NET LOSS (230,932)
----------
MEMBER'S EQUITY (DEFICIT)
BEGINNING OF YEAR (518,907)
MEMBER'S EQUITY CONTRIBUTIONS -
----------
MEMBER'S EQUITY (DEFICIT)
END OF YEAR $(749,839)
----------
F-25
ELECTRONIC DEFENSE TECHNOLOGY, LLC
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 2004 TO SEPTEMBER 24, 2004
- ------------------------------------------------------------
Cash Flow From Operating Activities
Net loss for the year $(230,932)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 20,520
Changes in assets and liabilities
(Increase) decrease in accounts receivable 16,967
(Increase) decrease in prepaid expenses 24,520
Increase(decrease) in accounts payable (56,999)
----------
Cash Used In Operating Activities (225,924)
----------
Cash Flow From Financing Activities
Payment of note payable (3,023)
Advances by member - interest bearing 213,971
----------
Cash Provided by Financing Activities 210,948
----------
Decrease In Cash (14,976)
Cash and Cash Equivalents - Beginning of Year 14,976
----------
Cash and Cash Equivalents - End of Year $ -
----------
Supplementary Information
Interest paid $ 36,452
Taxes paid $ -
F-26
ELECTRONIC DEFENSE TECHNOLOGY, LLC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 24, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Electronic Defense Technology, LLC. ("EDT") was formed as a limited liability
company under the laws of State of Ohio on January 20th 2000. The Company
supplies products to law enforcement agencies for the purpose of protection
from and apprehension of criminals, for crowd control, and other related
activities involving these agencies.
Use of Estimates
The financial statements are prepared in accordance with generally accepted
accounting principles in the United States of America. This preparation
requires management to include amounts based on management's prudent judgments
and estimates that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from these estimates.
Significant estimates made for the years ended December 31, 2003 and 2002
include the valuation of property and equipment.
Cash and Cash Equivalents
Cash and equivalents include cash on hand and highly liquid debt instruments
purchased with a maturity of three months or less.
Long-Lived Assets
The Company reviews long-lived assets and certain identifiable assets related
to those assets for impairment whenever circumstances and situations change
such that there is an indication that the carrying amounts may not be
recoverable. If the non-discounted future cash flows of the enterprise are less
than their carrying amount, their carrying amounts are reduced to fair value
and an impairment loss is recognized.
Inventory
Inventory costs were written off to cost of goods sold as of September 24, 2004.
Property and Equipment
Property and equipment are stated at cost. Depreciation has been calculated
using the double declining balance method used for tax purposes over the
estimated lives of the assets as follows:
Powertron molds 7 years
Machinery and equipment 7 years
Computer equipment 5 years
F-27
ELECTRONIC DEFENSE TECHNOLOGY, LLC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 24, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Income Taxes
The Company being a limited liability corporation pays no income taxes as any
income or losses are attributed to the members of the LLC.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosures of information about the
fair value of certain financial instruments for which it is practicable to
estimate that value. For purposes of this disclosure, the fair value of a
financial instrument is the amount at which the instrument could be exchanged
in a current transaction between willing parties, other than in a forced sale
or liquidation.
The carrying amounts of the Company's short-term financial instruments,
including accounts receivable, inventory, prepaid expenses, accounts payable,
and accrued expenses approximate fair value due to the relatively short period
to maturity for these instruments.
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.
Segment Information
The Company operates primarily in a single operating segment, supplying
products to law enforcement agencies for the purpose of protection from and
apprehension of criminals, for crowd control, and other related activities
involving these agencies.
F-28
ELECTRONIC DEFENSE TECHNOLOGY, LLC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 24, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Recent Accounting Pronouncements Issued, Not Adopted
On April 30, 2003 the FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. The amendments set forth in Statement 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. In particular, this Statement clarifies under what
circumstances a contract with an initial net investment meets the
characteristic of a derivative as discussed in Statement 133. In addition, it
clarifies when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. This Statement is effective
for contracts entered into or modified after June 30, 2003. The adoption of
SFAS No.149 is not expected to have a material impact on the Company's
financial position and results of operations.
In February 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No.150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity" ("SFAS No.150"). The provisions of SFAS No.150 are
effective for financial instruments entered into or modified after May 31,
2003, and otherwise are effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of non-public entities. The Company has not issued any financial
instruments with such characteristics.
In December 2003, the FASB issued FASB Interpretation No.46 (revised December
2003), "Consolidation of Variable Interest Entities" ("FIN No. 46R"), which
addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN No.46R replaces FASB
Interpretation No.46, "Consolidation of Variable Interest Entities", which was
issued in January 2003. Companies are required to apply FIN No. 46R to variable
interests in variable interest entities ("VIEs") created after December 31,
2003. For variable interests in VIEs created before January 1, 2004, the
Interpretation is applied beginning on January 1, 2005. For any VIEs that must
be consolidated under FIN No. 46R that were created before January 1, 2004, the
assets, liabilities and non-controlling interests of the VIE initially are
measured at their carrying amounts with any difference between the net amount
added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN No. 46R first
applies may be used to measure the assets, liabilities and non-controlling
interest of the VIE. The Company does not have any interest in any VIE.
F-29
ELECTRONIC DEFENSE TECHNOLOGY, LLC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 24, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
In December 2004, the FASB issued SFAS No. 123(R) (revised 2004), "Share-Based
Payment", which amends FASB Statement No.123 and will be effective for public
companies for interim or annual periods beginning after June 15,2005. The new
standard will require entities to expense employee stock options and other
share-based payments. The new standard may be adopted in one of three ways -
the modified prospective transition method, a variation of the modified
prospective transition method or the modified retrospective transition method.
The Company does not believe that the adoption of SFAS 123(R) will have on our
financial position and results of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment
of ARB No. 43, Chapter 4. This statement amends the guidance in ARB No.43,
Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material (spoilage).
Paragraph 5 of ARB No.43, Chapter 4, previously stated that "...under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require treatment as
current period charges..." SF AS No.151 requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The provisions of SFAS 151 shall be applied
prospectively and are effective for inventory costs incurred during fiscal
years beginning after June 15, 2005, with earlier application permitted for
inventory costs incurred during fiscal years beginning after the date this
Statement was issued. The adoption of SF AS No.151 is not expected to have a
material impact on the Company's financial position and results of operations.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets, an amendment of APB Opinion No.29. The guidance in APE Opinion No.29,
Accounting for Transactions, is based on the principle that exchanges of
non-monetary assets should be measured based on the fair value of assets
exchanged. The guidance in that Opinion, however, included certain exceptions
to that principle. This Statement amends Opinion 29 to eliminate the exception
for non-monetary exchanges of similar productive assets that do not have
commercial substance. A non-monetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 153 is effective for non-monetary exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS
No.153 is not expected to have a material impact on the Company's financial
position and results of operations.
The Company believes that none of the recently issued accounting standards will
have a material impact on the financial statements.
F-30
ELECTRONIC DEFENSE TECHNOLOGY, LLC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 24, 2004
NOTE 2 - LOAN PAYABLE
The loan payable to James McNulty of $128,000 for the purchase of the Powertron
molds bears interest at the rate of 4.5 percent per annum and is repayable in
monthly payments of $979 including both principal and interest over 15 years
which commenced January 2004. This loan is secured by a general security
agreement.
Annual principal payments over the next five years are as follows:
2004 $ 3,023
2005 6,396
2006 6,690
2007 6,998
2008 7,319
Thereafter 94,482
NOTE 3- LOAN PAYABLE - MEMBER
Advances by a member are unsecured, due on demand and bear simple interest at
8% per annum.
NOTE 4 - OFFICE SPACE LEASE
The Company has leased its office and assembly space from an unrelated party
under the terms of a lease which requires monthly payments of $1,700 for the
period from October 1, 1998 through October 31, 2005. Future minimum payments
under the lease are; 2004 - $5,100, 2005 - $17,000.
NOTE 5 - SUBSEQUENT EVENT
In September 2004, the membership interests in the Company were sold and the
Company was ultimately reorganized as a wholly owned subsidiary of Stinger
Systems, Inc. Stinger has operated EDT as a wholly owned subsidiary since the
acquisition and has assumed all liabilities, debts, and obligations of EDT.
Stinger has raised equity funding for its expansion that is being be used to
fund ongoing operations of EDT. The financial statements do not include any
adjustments for these events.
F-31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members of
Electronic Defense Technology, LLC
We have audited the accompanying statement of assets, liabilities, and member's
equity of Electronic Defense Technology, LLC as of December 31, 2003 and 2002,
and the related statements of revenue, expenses, and member?s equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Organization?s management. Our responsibility is to
express an opinion on these financial statements based on our audit.
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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes 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 financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of Electronic
Defense Technology, LLC, and the results of operations and its cash flows for
the years then ended in conformity with accounting principles generally
accepted in the United States of America.
In our previous report dated December 8, 2004, we issued a qualified opinion on
the financial statements. Our qualification of the opinion was a due to a lack
of observing the taking of the physical inventories as of December 31, 2003 and
2002. However, as disclosed in Note 5 to the financial statements, the Company
has restated its 2003 and 2002 financial statements to expense the value of
these inventories. Our reissued opinion on Electronic Defense Technology, LLC
financial statement differs from the previous opinion as it is no longer
qualified.
Our previous report dated December 8, 2004 included an explanatory paragraph
describing conditions that raised substantial doubt about the Company's
ability to continue as a going concern. As described in Note 6 to the financial
statements, events subsequent to the date of that report have occurred that
have mitigated those conditions, therefore we have removed our comments related
to the going concern issues.
Jaspers + Hall, PC
Denver, Colorado
December 8, 2004
(Except for Note 5, as to Inventory write down and Note 6 for which the date is
April 19, 2005)
F-32
ELECTRONIC DEFENSE TECHNOLOGY, LLC
STATEMENT OF ASSETS, LIABILITIES, AND MEMBER'S EQUITY
AS OF DECEMBER 31,
2003 2002
--------- --------
ASSETS
CURRENT $ 14,976 $ -
Accounts receivable 25,729 41,084
Prepaid expenses and deposits 28,990 26,596
Total Current Assets 69,695 67,680
FIXED - AT COST
Powertron molds 183,000 160,000
Machinery and equipment 20,000 20,000
Computer equipment 3,387 3,687
Total 206,387 183,687
Less: Accumulated depreciation (112,663) (65,233)
Net Fixed Assets 93,724 118,454
TOTAL ASSETS $163,419 $186,134
LIABILITIES AND MEMBER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank overdraft $ - $2,685
Accounts payable 91,326 65,434
Current portion - long term debt 6,115 -
Total Current Liabilities 97,441 68,119
LONG-TERM
Loan payable 128,000 128,000
Loan payable - member 463,000 235,000
591,000 363,000
Less: Current portion (6,115) -
Total Long-Term Debt 584,885 363,000
Total Liabilities 682,326 431,119
MEMBER'S EQUITY (DEFICIT) (518,907) (244,985)
TOTAL LIABILITIES AND MEMBER'S EQUITY $163,419 $186,134
F-33
ELECTRONIC DEFENSE TECHNOLOGY, LLC
STATEMENT OF REVENUE, EXPENSES, AND MEMBER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31,
2003 2002
---------- ---------
SALES $ 264,471 $ 361,913
COST OF SALES (155,824) (212,815)
---------- ---------
GROSS PROFIT 108,647 149,098
---------- ---------
OPERATING EXPENSES
Demonstration costs 2,100 1,723
Depreciation 47,430 56,817
General and administrative 85,350 87,174
Professional fees 31,172 51,130
Research and development 4,563 4,070
Salaries and benefits 87,022 87,841
Trade show costs 31,541 19,726
Training costs 25,125 33,678
Travel and promotion 31,707 15,198
---------- ---------
Total Operating Expenses 346,010 357,357
---------- ---------
OPERATING LOSS (237,363) (208,259)
Interest and finance costs 36,559 11,013
---------- ---------
NET LOSS (273,922) (219,272)
---------- ---------
MEMBER'S EQUITY (DEFICIT) - BEGINNING OF YEAR (244,985) (25,713)
CONTRIBUTIONS - -
---------- ---------
MEMBER'S EQUITY (DEFICIT) - END OF YEAR $(518,907) $(244,985)
---------- ---------
F-34
ELECTRONIC DEFENSE TECHNOLOGY, LLC
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
2003 2002
---------- -----------
Cash Flow From Operating Activities
Net loss for the year $(273,922) $(219,272)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 47,430 56,817
Changes in assets and liabilities
(Increase) decrease in accounts receivable 15,355 (18,386)
(Increase) decrease in inventory - 50,928
(Increase) in prepaid expenses (2,394) (26,596)
Increase(decrease) in bank overdraft (2,685) 2,685
Increase(decrease) in accounts payable 25,892 17,224
---------- -----------
Cash Used In Operating Activities (190,324) (136,600)
Cash Flow From Financing Activities
Loan payable - purchase of molds - 128,000
Advances by member - interest bearing 228,000 170,000
Cash Provided by Financing Activities 228,000 170,000
Cash Flow From Investing Activities
Purchase of fixed assets - Net (22,700) (163,687)
Cash Used In Investing Activities (22,700) (163,687)
Increase (Decrease) In Cash 14,976 (2,287)
Cash and Cash Equivalents - Beginning of Period - 2,287
Cash and Cash Equivalents - End of Period $14,976 $ -
Supplementary Information
Interest paid $32,753 $7,774
Taxes paid $ - $ -
F-35
ELECTRONIC DEFENSE TECHNOLOGY, LLC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 and 2002
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Electronic Defense Technology, LLC. ("EDT") was formed as a limited liability
company under the laws of State of Ohio on January 20th 2000. The Company
supplies products to law enforcement agencies for the purpose of protection
from and apprehension of criminals, for crowd control, and other related
activities involving these agencies.
Use of Estimates
The financial statements are prepared in accordance with generally accepted
accounting principles in the United States of America. This preparation
requires management to include amounts based on management's prudent judgments
and estimates that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from these estimates. Significant
estimates made for the years ended December 31, 2003 and 2002 include the
valuation of property and equipment.
Cash and Cash Equivalents
Cash and equivalents include cash on hand and highly liquid debt instruments
purchased with a maturity of three months or less.
Long-Lived Assets
The Company reviews long-lived assets and certain identifiable assets related to
those assets for impairment whenever circumstances and situations change such
that there is an indication that the carrying amounts may not be recoverable.
If the non-discounted future cash flows of the enterprise are less than their
carrying amount, their carrying amounts are reduced to fair value and an
impairment loss is recognized.
Inventory
Inventory costs were expensed to cost of goods sold as of December 31, 2003 and
2002.
Property and Equipment
Property and equipment are stated at cost. Depreciation has been calculated
using the double declining balance method used for tax purposes over the
estimated lives of the assets as follows:
Powertron molds 7 years
Machinery and equipment 7 years
Computer equipment 5 years
F-36
ELECTRONIC DEFENSE TECHNOLOGY, LLC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 and 2002
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Income Taxes
The Company being a limited liability corporation pays no income taxes as any
income or losses are attributed to the members of the LLC.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosures of information about the
fair value of certain financial instruments for which it is practicable to
estimate that value. For purposes of this disclosure, the fair value of a
financial instrument is the amount at which the instrument could be exchanged
in a current transaction between willing parties, other than in a forced sale
or liquidation.
The carrying amounts of the Company's short-term financial instruments,
including accounts receivable, inventory, prepaid expenses, accounts payable,
and accrued expenses approximate fair value due to the relatively short period
to maturity for these instruments.
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.
Segment Information
The Company operates primarily in a single operating segment, supplying
products to law enforcement agencies for the purpose of protection from and
apprehension of criminals, for crowd control, and other related activities
involving these agencies.
Recent Accounting Pronouncements
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
("SFAS 148"). SFAS 148 provides alternative methods of transition to SFAS 123's
fair value method of accounting for stock-based employee compensation. It also
amends the disclosure provisions of Statement 123 and APB Opinion No. 28,
Interim Financial Reporting, to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting with
respect to stock-based employee compensation on reported net income and earnings
per share in annual and interim financial statements. SFAS 148's amendment of
the transition and annual disclosure requirements of SFAS 123 are effective for
fiscal years ending after December 15, 2002.
F-37
ELECTRONIC DEFENSE TECHNOLOGY, LLC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 and 2002
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, and Interpretation of ARB No.51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficial of the entity if the equity investors in the entity do not
have characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning on or after June 15, 2003.
On April 30, 2003 the FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. The amendments set forth in Statement 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. In particular, this Statement clarifies under what
circumstances a contract with an initial net investment meets the
characteristic of a derivative as discussed in Statement 133. In addition, it
clarifies when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. This Statement is effective
for contracts entered into or modified after June 30, 2003.
On May 15, 2003 the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". The
Statement improves the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. The new Statement
requires that those instruments be classified as liabilities in statements of
financial position. In addition to its requirements for the classification and
measurement of financial instruments in its scope, Statement 150 also requires
disclosures about alternative ways of settling the instruments and the capital
structure of entities, all of whose shares are mandatorily redeemable. Most of
the guidance in Statement 150 is effective for all financial instruments
entered into or modified after May 31, 2003.
The Company believes that none of the recently issued accounting standards will
have a material impact on the financial statements.
F-38
ELECTRONIC DEFENSE TECHNOLOGY, LLC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 and 2002
NOTE 2 - LOAN PAYABLE
The loan payable to James McNulty of $128,000 for the purchase of the Powertron
molds bears interest at the rate of 4.5 percent per annum and is repayable in
monthly payments of $979 including both principal and interest over 15 years
commencing January 2004. This loan is secured by a general security agreement.
Annual principal payments over the next five years are as follows:
2004 $ 6,115
2005 6,396
2006 6,690
2007 6,998
2008 7,319
Thereafter 94,482
NOTE 3 - LOAN PAYABLE - MEMBER
Advances by a member are unsecured, due on demand and bear simple interest at
8% per annum.
NOTE 4 - OFFICE SPACE LEASE
The Company has leased its office and assembly space from an unrelated party
under the terms of a lease which requires monthly payments of $1,700 for the
period from October 1, 1998 through October 31, 2005. Future minimum payments
under the lease are; 2004 - $20,400, 2005 - $17,000.
NOTE 5 - INVENTORY ADJUSTMENT
Year end inventory costs were expensed to cost of goods sold for 2003 and 2002.
This resulted in an increase of cost of goods sold of $26,551 for 2003 and
$26,551 for 2002, with corresponding increases in net loss and reduction of
retained earnings.
NOTE 6 - SUBSEQUENT EVENT
In September 2004, the membership interests in the Company were sold and the
Company was ultimately reorganized as a wholly owned subsidiary of Stinger
Systems, Inc. Stinger has operated EDT as a wholly owned subsidiary since the
acquisition and has assumed all liabilities, debts, and obligations of EDT.
Stinger has raised equity funding for its expansion that is being be used to
fund ongoing operations of EDT. The financial statements do not include any
adjustments for these events.
F-39
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of common stock registered
hereby, all of which expenses, except for the Securities and Exchange
Commission registration fee, are estimated.
Securities and Exchange Commission registration fee $ 32,559.20
Printing fees and expenses 500.00
Legal and Blue Sky fees and expenses 15,000.00
Accounting fees and expenses 10,000.00
Miscellaneous expenses 5,000.00
Total $ 63,059.20
------------
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the three years preceding the filing of this registration statement,
Registrant has not sold securities without registration under the Securities
Act of 1933, except as described below.
Securities issued in each of such transaction were offered and sold in
reliance upon the exemption from registration under Section?4(2) of the
Securities Act, relating to sales by an issuer not involving a public offering.
The recipients of the securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and restrictive legends
were affixed to the share certificates and other instruments issued in such
transactions. All recipients either received adequate information about
Registrant or had access, through relationships with Registrant, to information
about Registrant.
On or about September 24, 2004, the Company issued 220,000 shares of common
stock of the Company to Doug Murrell in exchange for consulting services. The
shares were issued in an isolated transaction not in connection with any other
offering of Company shares and were exempt from the registration requirements
of Section 5 of the Securities Act of 1933 (the ?Act?) as set forth above. The
securities were valued at $79,800.
On or about September 24, 2004, the Company issued 9,750,000 shares of common
stock of the Company in exchange for 100% of the membership interests of
Electronic Defense Technologies, LLC, an Ohio limited liability company. Of the
shares issued, 9,250,000 were issued to EDT Acquisition LLC, a Michigan limited
liability company, and 500,000 were issued to Mr. Richard Bass. The shares were
issued in an isolated transaction not in connection with any other offering of
Company shares and were exempt from the registration requirements of Section 5
of the Act as set forth above. The securities were valued at $474,300.
36
On or about October 1, 2004, the Company issued 1,122,000 shares of common
stock of the Company in exchange for cash payment to the Company of
$400,000.00. Of the shares issued, 561,000 were issued to Mr. Rodney Schoemann
and 561,000 were issued to Exley Management Services LLC. The shares were
issued in an isolated transaction not in connection with any other offering of
Company shares and were exempt from the registration requirements of Section 5
of the Act as set forth above.
On November 18, 2004, the Company issued 100,000 shares of common stock of the
Company in exchange for cash payment to the Company of $500,000.00. The shares
were issued to Mr. Yung U. Ryu. The shares were issued in an isolated
transaction not in connection with any other offering of Company shares and
were exempt from the registration requirements of Section 5 of the Act as set
forth above.
On or about December 28, 2004, the Company issued 2,000,000 shares of common
stock and warrants for the purchase of 1,000,000 shares of common stock in
exchange for cash payment to the Company of $10,000,000.00. Of the shares and
warrants issued, 600,000 shares and 300,000 warrants were issued to Bonanza
Master Fund Ltd., 585,041 shares and 292,620 warrants were issued to Tonga
Partners, L.P., 413,517 shares and 206,758 warrants were issued to The
Cuttyhunk Fund Limited, and 401,442 shares and 200,721 warrants were issued to
Anegada Master Fund, Ltd. The transaction was exempt from the registration
requirements of Section 5 of the Act pursuant to Section?4(2) of the Act and
Rule 506 promulgated thereunder. The warrants are exercisable for five years at
the exercise price of $7.50 per share.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Exhibits
The following exhibits are filed with this registration statement:
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)
5.1 Opinion of Gary R. Henrie, Attorney at Law regarding the legality of the common stock being registered (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)
21.1 List of Subsidiaries (1)
23.1
Consent of Jaspers + Hall, PC
23.2 Consent of Killman PC
23.3
Consent of Gary R. Henrie (included in Exhibit 5.1) (1)
24.1 Powers of attorney (included in signature page)
<FN>
<FN1>
(1) Previously filed as an exhibit to Form S-1/A on February 8, 2005.
</FN>
(b)
Financial Statement Schedules
37
See the Index to Consolidated Financial Statements included on page F-1 for a
list of the financial statements included in this prospectus.
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our officers and directors are indemnified as provided by the Nevada Revised
Statutes and our bylaws. Under the NRS, director immunity from liability to a
company or its shareholders for monetary liabilities applies automatically
unless it is specifically limited by a company's articles of incorporation that
is not the case with our articles of incorporation. Excepted from that immunity
are:
(1) a willful failure to deal fairly with the company or its shareholders in
connection with a matter in which the director has a material conflict of
interest;
(2) a violation of criminal law (unless the director had reasonable cause to
believe that his or her conduct was lawful or no reasonable cause to believe
that his or her conduct was unlawful);
(3) a transaction from which the director derived an improper personal profit;
and
(4) willful misconduct.
Our bylaws provide that we will indemnify our directors and officers to the
fullest extent not prohibited by Nevada law; provided, however, that we may
modify the extent of such indemnification by individual contracts with our
directors and officers; and, provided, further, that we shall not be required
to indemnify any director or officer in connection with any proceeding (or part
thereof) initiated by such person unless:
(1) such indemnification is expressly required to be made by law;
(2) the proceeding was authorized by our Board of Directors;
(3) such indemnification is provided by us, in our sole discretion, pursuant to
the powers vested us under Nevada law; or
(4) such indemnification is required to be made pursuant to the bylaws.
Our bylaws provide that we will advance all expenses incurred to any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was our
director or officer, or is or was serving at our request as a director or
executive officer of another company, partnership, joint venture, trust or
other enterprise, prior to the final disposition of the proceeding, promptly
following request. This advanced of expenses is to be made upon receipt of an
undertaking by or on behalf of such person to repay said amounts should it be
ultimately determined that the person was not entitled to be indemnified under
our bylaws or otherwise.
Our bylaws also provide that no advance shall be made by us to any officer in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative, if a determination is reasonably and promptly made: (a) by
the board of directors by a majority vote of a quorum consisting of directors
who were not parties to the proceeding; or (b) if such quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, that the facts
known to the decision-making party at the time such determination is made
demonstrate clearly and convincingly that such person acted in bad faith or
in a manner that such person did not believe to be in or not opposed to our
best interests.
38
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(b) To reflect in the prospectus any facts or events arising after the
effective date of this registration statement, or most recent post-effective
amendment, which, individually or in the aggregate, represent a fundamental
change in the information set forth in this registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(c) To include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or any
material change to such information in the registration statement.
2. That, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
3. To remove from registration by means of a post-effective amendment any of
the securities being registered hereby, which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers and controlling persons
pursuant to the provisions above, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933, and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities, other
than the payment by us of expenses incurred or paid by one of our directors,
officers, or controlling persons in the successful defense of any action, suit
or proceeding, is asserted by one of our directors, officers, or controlling
persons in connection with the securities being registered, we will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification is against public policy as expressed in the Securities
Act of 1933, and we will be governed by the final adjudication of such issue.
39
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Charlotte, State of
North Carolina, on May 25, 2005.
STINGER SYSTEMS, INC
By:/s/Robert F. Gruder
- ----------------------
Robert F. Gruder
Chief Executive Officer
(Principal Executive Officer)
40
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Robert F. Gruder his or her true and lawful attorney-in-fact and agent with
full power of substitution and re-substitution, for him or her and in his or
her name, place, and stead, in any and all capacities, to sign any and all
(1)amendments (including post-effective amendments) and additions to this
Registration Statement and (2)Registration Statements, and any and all
amendments thereto (including post-effective amendments), relating to the
offering contemplated pursuant to Rule?462(b) under the Securities Act of 1933,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, and hereby
grants to such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents or
his or her substitute or substitutes may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
/s/Robert R. Gruder Chief Executive Officer
and Director
(Principal Executive Officer) 5-25-2005
/s/J. Wayne Thomas Chief Financial Officer
(Principal Financial
and Accounting Officer) 5-25-2005
/s/T. Yates Exley Director 5-25-2005
/s/Michael Racaniello Director 5-25-2005
/s/Andrew P. Helene Director 5-25-2005
/s/Denise Medved Director 5-25-2005
41
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
May 20, 2005
We hereby consent to the use in Form S-1/A Amendment No. 2 of our audit report
dated December 8, 2004, relating to the financial statements of Electronic
Defense Technology, LLC for its fiscal years ended December 31, 2003 and 2002
and our audit report dated April 19, 2005, relating to the financial statements
of Electronic Defense Technology, LLC, as of September 24, 2004 and for the
period from January 1, 2004 to September 24, 2004.
Jaspers + Hall, PC
Denver, CO
42
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the use of our report dated
January 29, 2005, on Stinger Systems, Inc. consolidated financial statements
for the period ended December 31, 2004 included in the Registration Statement
(Form S-1 No. 333-122583) and related Prospectus of Stinger Systems, Inc. dated
May 24, 2005.
/s/ Killman Murrell & Company, P.C.
Dallas, Texas
May 25, 2005
43