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United States Securities and Exchange Commission
 Washington, D.C. 20549
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the quarterly period ended September 30, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For
the transition period fromto
 Commission File Number 000-51822
 STINGER SYSTEMS, INC.
  NEVADA
    
    30-0296398(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification Number)2701 N. Rocky Point Drive, Suite 1130Tampa, Florida
    
    33607(Address of principal executive offices)
    
    (Zip Code)
 (813) 281-1061
 þ o
  o o þ
 o þ




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##### 



STINGER SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
TABLE OF CONTENTS
  
 PagePART I FINANCIAL INFORMATION
    
    
    3ITEM 1. Financial Statements (unaudited)
    
    
    3Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005 (audited)
    
    
    3Consolidated Statements of Operations for the three and nine months ended September 30, 2006
(unaudited) and September 30, 2005 (unaudited)
    
    
    5Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 (unaudited)
and September 30, 2005 (unaudited)
    
    
    6Notes to Consolidated Financial Statements (unaudited)
    
    
    7ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    13ITEM 4. Controls and Procedures
    
    
    13PART II  OTHER INFORMATION
    
    
    14ITEM 1. Legal Proceedings
    
    
    14ITEM 1A. Risk Factors
    
    
    14ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19ITEM 3. Defaults Upon Senior Securities
    
    
    19ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    19ITEM 5. Other Information
    
    
    19ITEM 6. Exhibits
    
    
     20SIGNATURES
    
    
    21INDEX TO EXHIBITSEX-31.1 Section 302 Certification of the CEOEX-31.2 Section 302 Certification of the CFOEX-32.1 Section 906 Certification of the CEOEX-32.2 Section 906 Certification of the CFO
  2




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PART I  FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 
 STINGER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)CURRENT ASSETSCash
    
    $
    70,357
    
    
    $
    2,408,556Accounts Receivable, net of $1,800 allowance for uncollectible accounts in 2006 and 2005
    
    
    50,884
    
    
    
    32,591Inventories, at cost
    
    
    406,708
    
    
    
    199,765Prepaid Expenses and Other Current Assets
    
    
    152,706
    
    
    
    653,132TOTAL CURRENT ASSETS
    
    
    680,655
    
    
    
    3,294,044EQUIPMENT AND FURNITUREEquipment and Furniture, net of accumulated depreciation of $62,205 and $14,685 in 2006 and
2005
    
    
    516,747
    
    
    
    353,388OTHER ASSETSIntangible Assets, net of accumulated amortization of $668,165 and $381,813 in 2006 and 2005
    
    
    2,434,454
    
    
    
    2,720,807Other Assets
    
    
    11,496
    
    
    
    6,711TOTAL OTHER ASSETS
    
    
    2,445,950
    
    
    
    2,727,518TOTAL ASSETS
    
    $
    3,643,352
    
    
    $
    6,374,950
 
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STINGER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS EQUITY
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)CURRENT LIABILITIESAccounts Payable
    
    $
    1,327,535
    
    
    $
    542,406Accrued Liabilities
    
    
    64,032
    
    
    
    175,997Insurance Note Payable
    
    
    
    
    
    
    267,635Notes Payable-Related Parties
    
    
    562,500
    
    
    
    62,500TOTAL CURRENT LIABILITIES
    
    
    1,954,067
    
    
    
    1,048,538COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    STOCKHOLDERS EQUITYCommon Stock, $0.001 Par Value, 50,000,000
Shares Authorized, 15,068,500 and 14,993,500
Shares Issued and Outstanding at September
30, 2006 and December 31, 2005, respectively
    
    
    15,069
    
    
    
    14,994Additional Paid-In Capital
    
    
    25,860,744
    
    
    
    24,227,414Retained Deficit
    
    
    (24,186,528
    )
    
    
    (18,915,996
    )TOTAL STOCKHOLDERS EQUITY
    
    
    1,689,285
    
    
    
    5,326,412TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    3,643,352
    
    
    $
    6,374,950
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STINGER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005REVENUESSales
    
    $
    109,843
    
    
    $
    126,601
    
    
    $
    338,733
    
    
    $
    396,207Cost of Product Sold
    
    
    80,607
    
    
    
    157,296
    
    
    
    215,980
    
    
    
    577,198GROSS MARGIN (LOSS)
    
    
    29,236
    
    
    
    (30,695
    )
    
    
    122,753
    
    
    
    (180,991
    )SELLING EXPENSES
    
    
    28,087
    
    
    
    105,583
    
    
    
    166,563
    
    
    
    263,641GENERAL AND ADMINISTRATIVE EXPENSESEmployee Salaries
    
    
    250,167
    
    
    
    218,159
    
    
    
    702,317
    
    
    
    596,902Employee Acquisition Cost
    
    
    
    
    
    
    957,182
    
    
    
    10,686
    
    
    
    3,475,000Employee Severance Cost
    
    
    
    
    
    
    
    
    
    
    895
    
    
    
    719,346Other
    
    
    558,520
    
    
    
    1,032,230
    
    
    
    3,656,644
    
    
    
    2,152,580Depreciation and Amortization
    
    
    126,550
    
    
    
    102,171
    
    
    
    336,141
    
    
    
    299,476Research and Development
    
    
    140,082
    
    
    
    571,659
    
    
    
    531,519
    
    
    
    1,039,344TOTAL GENERAL AND
ADMINISTRATIVE EXPENSES
    
    
    1,075,319
    
    
    
    2,881,401
    
    
    
    5,238,202
    
    
    
    8,282,648LOSS FROM OPERATIONS
    
    
    (1,074,170
    )
    
    
    (3,017,679
    )
    
    
    (5,282,012
    )
    
    
    (8,727,280
    )INTEREST INCOME
    
    
    1,401
    
    
    
    35,164
    
    
    
    24,790
    
    
    
    71,791INTEREST EXPENSE
    
    
    (2,910
    )
    
    
    (3,759
    )
    
    
    (13,309
    )
    
    
    (5,302
    )LOSS BEFORE INCOME TAXES
    
    
    (1,075,679
    )
    
    
    (2,986,274
    )
    
    
    (5,270,531
    )
    
    
    (8,660,791
    )PROVISION FOR INCOME TAXES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET LOSS
    
    $
    (1,075,679
    )
    
    $
    (2,986,274
    )
    
    $
    (5,270,531
    )
    
    $
    (8,660,791
    )BASIC AND DILUTED LOSS PER COMMON
SHARE
    
    $
    (0.07
    )
    
    $
    (0.20
    )
    
    $
    (0.35
    )
    
    $
    (0.58
    )WEIGHTED AVERAGE NUMBER OF COMMON
SHARESBasic and Diluted
    
    
    15,068,500
    
    
    
    14,993,500
    
    
    
    15,031,000
    
    
    
    14,998,500
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STINGER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Nine Months Ended September 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIESNet Loss
    
    $
    (5,270,531
    )
    
    $
    (8,660,791
    )Adjustments to Reconcile Net Loss to
Net Cash Used in Operating Activities:Depreciation and Amortization
    
    
    336,141
    
    
    
    299,476Stock Option Expense
    
    
    1,466,530
    
    
    
    Stock Issued for Services
    
    
    166,875
    
    
    
    1,550,000Deferred Compensation Amortization
    
    
    
    
    
    
    1,925,000Loss on Sale of Assets
    
    
    3,381
    
    
    
    Changes in Operating Assets and LiabilitiesAccounts Receivable
    
    
    (18,293
    )
    
    
    (12,633
    )Inventory
    
    
    (206,943
    )
    
    
    (100,621
    )Inventory Deposits
    
    
    
    
    
    
    139,190Prepaid Expenses
    
    
    736,804
    
    
    
    (60,476
    )Other Assets
    
    
    (4,785
    )
    
    
    (5,578
    )Accounts Payable
    
    
    931,408
    
    
    
    281,296Accrued Liabilities
    
    
    (111,965
    )
    
    
    361,289NET CASH USED IN OPERATING ACTIVITIES
    
    
    (1,971,378
    )
    
    
    (4,283,848
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchase of Equipment
    
    
    (217,685
    )
    
    
    (208,983
    )Purchase of Patent
    
    
    
    
    
    
    (75,000
    )Proceeds from Sale of Assets
    
    
    1,157
    
    
    
    NET CASH USED IN INVESTING ACTIVITIES
    
    
    (216,528
    )
    
    
    (283,983
    )CASH FLOWS FROM FINANCING ACTIVITIESRepurchase of Common Stock
    
    
    
    
    
    
    (50,000
    )Proceeds from issuance of Notes Payable
    
    
    353,721
    
    
    
    Payments on Insurance Notes Payable
    
    
    (504,014
    )
    
    
    (351,070
    )NET CASH USED IN FINANCING ACTIVITIES
    
    
    (150,293
    )
    
    
    (401,070
    )NET DECREASE IN CASH
    
    
    (2,338,199
    )
    
    
    (4,968,901
    )CASH BALANCE, BEGINNING OF PERIOD
    
    
    2,408,556
    
    
    
    9,093,634CASH BALANCE, END OF PERIOD
    
    $
    70,357
    
    
    $
    4,124,733NON-CASH INVESTING AND FINANCING ACTIVITIESAdditional Paid-In Capital from Deferred Compensation
    
    
    
    
    
    
    1,925,000Deferred Compensation from Stock Issued to an Employee
    
    
    
    
    
    
    (1,925,000
    )Prepaid Insurance
    
    
    (268,797
    )
    
    
    (882,357
    )Insurance Note Payable
    
    
    268,797
    
    
    
    882,357Accounts Payable
    
    
    (146,279
    )
    
    
    Notes Payable-Related Parties
    
    
    146,279
    
    
    
    $
    
    
    
    $
    SUPPLEMENTAL CASH FLOW DISCLOSURESCash Paid During the Year For:Interest
    
    $
    9,066
    
    
    $
    3,360Taxes
    
    $
    
    
    
    $
    
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STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE 1: BASIS OF PRESENTATION
 ACCOUNTING POLICIES
  Disclosures About Enterprise and
Related Information
 Reclassifications
  Loss per Share
  NOTE 2: USE OF ESTIMATES
  NOTE 3: REVENUE RECOGNITION
  NOTE 4: INVENTORIES
  September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)Raw Materials and Work-In Progress
    
    $
    332,952
    
    
    $
    175,882Finished Goods
    
    
    73,756
    
    
    
    23,883$
    406,708
    
    
    $
    199,765
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NOTE 5: STOCK BASED COMPENSATION
      Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net loss as reported
    
    $
    (2,986,274
    )
    
    $
    (8,660,791
    )Deduct: stock based compensation costs, Net of taxes under SFAS 123
    
    
    (90,255
    )
    
    
    (181,533
    )Pro forma net income loss
    
    $
    (3,076,529
    )
    
    $
    (8,842,324
    )
 Three Months Ended
    
    Nine Months EndedSeptember 30, 2005
    
    September 30, 2005Per share information:Basic, as reported
    
    $
    (0.20
    )
    
    $
    (0.58
    )Basic, pro forma
    
    $
    (0.21
    )
    
    $
    (0.59
    )Diluted, as reported
    
    $
    (0.20
    )
    
    $
    (0.58
    )Diluted, pro forma
    
    $
    (0.21
    )
    
    $
    (0.59
    )
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2006
    
    2005
    
    2006
    
    2005Estimated fair value
    
    $
    2.74
    
    
    $
    2.74
    
    
    $
    2.74
    
    
    $
    3.44Expected life (years)
    
    
    4.64
    
    
    
    2.50
    
    
    
    4.64
    
    
    
    2.50Risk free interest rate
    
    
    4.65
    %
    
    
    4.25
    %
    
    
    4.65
    %
    
    
    4.34
    %Volatility
    
    
    136.4
    %
    
    
    93.0
    %
    
    
    136.4
    %
    
    
    95.0
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
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NOTE 6: GENERAL AND ADMINISTRATIVE EXPENSES, OTHER
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Legal and Professional Fees
    
    $
    204,374
    
    
    $
    139,959
    
    
    $
    870,777
    
    
    $
    369,852Stock Option Expense
    
    
    158,646
    
    
    
    
    
    
    
    1,466,530
    
    
    
    Liquidated Damages to Investors
    
    
    
    
    
    
    542,640
    
    
    
    
    
    
    
    833,114Insurance Expense
    
    
    116,387
    
    
    
    150,645
    
    
    
    759,569
    
    
    
    281,291Other
    
    
    79,113
    
    
    
    198,986
    
    
    
    559,768
    
    
    
    668,323$
    558,520
    
    
    $
    1,032,230
    
    
    $
    3,656,644
    
    
    $
    2,152,580
 NOTE 7: NOTES PAYABLE-RELATED PARTIES
   
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward-Looking Statements
  9




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Executive Summary
 ®
       Results of Operations
 Revenues.
 10




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Cost of Goods Sold.
 Gross Margin
 Selling
Expenses.
 General and Administrative Expenses.
 Research and Development Expenses.
 Interest Income.
 Net Loss.
 11




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Liquidity and Capital Resources
    Critical Accounting Policies
  Revenue Recognition
 Warranty Costs
 Intangible Assets
 Purchase Accounting
 12




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Stock Options Accounting for Stock Issued to Employees Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services
 Limited Trading Market
 
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
   
 ITEM 4. Controls and Procedures
 (a) Evaluation of Disclosure Controls and Procedures
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(b) Changes in Internal Controls Over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
 Taser
International, Inc. v. Stinger Systems, Inc. and Robert F. Gruder
   
 ITEM 1A. Risk Factors.
 You should carefully consider the risks and uncertainties described below in addition to the
other information contained in this annual report. If any of the following risks actually occur,
our business, financial condition or operating results could be harmed. In that case, the trading
price of our common stock could decline and investors may lose part or all of your investment. In
the opinion of management, the risks discussed below represent the material risks known to the
company. Additional risks and uncertainties not currently known to us or that we currently deem
immaterial may also impair our business operations and adversely affect the market price of our
common stock.
 We have a history of operating losses and anticipate future operating losses until such time as we
can generate additional sales.
  If we do not obtain additional funding as needed, we may be unable to fund our re-engineering and
production activities and to adequately pursue our business plan.
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Our failure to properly design the Stinger projectile stun gun would have a material adverse effect
on our operations.
  If we fail to convince the market place that we have competitive products, we will not be
commercially successful.
  If third party manufacturers do not perform in a commercially reasonable manner, we may not be
successful.
   Our primary competitor, Taser International Inc., has an established name in the marketplace with
both distributors and the end-users of stun products.
  Negative publicity about less-lethal stun weapons may negatively impact sales of our products.
  The sale and use of our products may result in claims against us.
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We have been sued by Taser International, Inc. which could result in a judgment against us that
could negatively impact our operations.
  We have received a Wells Notice from the SEC .
  Claims by others that our products infringed their patents or other intellectual property rights
could adversely affect our financial condition.
  We may not be able to protect our patent rights, trademarks, and other proprietary rights.
  Law enforcement, correction and military operations are government agencies which are subject to
budgetary constraints, which may inhibit sales.
  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.
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If we cannot retain or hire qualified personnel, our programs could be delayed.
  Because our common stock is quoted only on the OTC Bulletin Board and the Pink Sheets, your ability
to sell your shares in the secondary trading market may be limited.
  Our stock price has been volatile and your investment in our common stock could suffer a decline in
value.
  
    
    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.
  Trading of our stock may be restricted by the SECs penny stock regulations, which may limit a
stockholders ability to buy and sell our stock.
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NASD sales practice requirements may also limit a stockholders ability to buy and sell our stock.
  Sales of a substantial number of shares of our common stock in the public market could lower our
stock price and impair our ability to raise funds in stock offerings and impair the ability of
stockholders to receive a return on their investment in Stinger Systems.
  Exercise of outstanding options, warrants and convertible securities will dilute existing
shareholders and could decrease the market price of our common stock.
  We likely will issue additional equity securities which will dilute your share ownership.
  Any short selling of our stock could depress the stocks price and have a negative impact on the
investments in us by our stockholders.
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We do not intend to pay any cash dividends on our common stock in the foreseeable future and,
therefore, any return on your investment in our common stock must come from increases in the fair
market value and trading price of our common stock.
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds. Not applicable.
 
 ITEM 3. Defaults Upon Senior Securities. Not applicable.
 
 ITEM 4. Submission of Matters to a Vote of Security Holders. Not applicable.
 
 ITEM 5. Other Information. Not applicable.
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ITEM 6. EXHIBITS
 Exhibit No.
    
    Description31.1
    
    Section 302 Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.31.2
    
    Section 302 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.32.1
    
    Section 906 Certification of the Chief Executive Officer pursuant to U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.32.2
    
    Section 906 Certification of the Chief Financial Officer pursuant to U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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SIGNATURES
  STINGER SYSTEMS, INC.
(Registrant)Date: November 14, 2006
    /s/ Robert F. GruderRobert F. GruderChief Executive Officer
(Principal Executive Officer) Date: November 14, 2006
    /s/ David J. MeadorDavid J. MeadorChief Financial Officer
(Principal Financial and Accounting Officer) 21




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Index to Exhibits
 Exhibit No.
    
    Description31.1
    
    Section 302 Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.31.2
    
    Section 302 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.32.1
    
    Section 906 Certification of the Chief Executive Officer pursuant to U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.32.2
    
    Section 906 Certification of the Chief Financial Officer pursuant to U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.