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The Company and Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 2011
The Company and Summary of Significant Accounting Policies [Abstract] 
The Company and Summary of Significant Accounting Policies
1. The Company and Summary of Significant Accounting Policies
TASER International, Inc. (“TASER” or the “Company”) is a developer and manufacturer of advanced electronic control devices (“ECDs”) designed for use in law enforcement, military, corrections, private security and personal defense. In addition, the Company has developed full technology solutions for the capture, storage and management of video/audio evidence as well as other tactical capabilities for use in law enforcement. The Company sells its products worldwide through its direct sales force, distribution partners, online store and third party resellers. The Company was incorporated in Arizona in September 1993 and reincorporated in Delaware in January 2001. The Company’s corporate headquarters and manufacturing facilities are located in Scottsdale, Arizona. The Company’s internet services and software development division facilities are located in Carpenteria, California.
The accompanying consolidated financial statements include the accounts of the Company, and its wholly owned subsidiary, TASER International Europe SE (“TASER Europe”). TASER Europe was established in 2010 to facilitate sales and provide customer service to our customers in the European region. All material intercompany accounts, transactions, and profits have been eliminated.
a. Basis of presentation, preparation and use of estimates
The accompanying unaudited consolidated financial statements of TASER include all adjustments (consisting only of normal recurring accruals) that in the opinion of management are necessary for the fair presentation of the Company’s operating results, financial position and cash flows as of September 30, 2011, and for the three and nine months ended September 30, 2011 and 2010. The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been omitted from these unaudited consolidated financial statements in accordance with applicable rules. The results of operations for the three and nine months ended September 30, 2011 and 2010, are not necessarily indicative of the results to be expected for the full year (or any other period) and all results of operations included herein should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
b. Segment information and major customers
Management has determined that its operations presently are comprised of one reportable segment, the sale of ECDs, accessories and other products and services. Based on the introduction of new product offerings in 2010, management is evaluating how the operating results of the Company will be reviewed internally on a go forward basis in order to improve the level of resource decision making and assessment of segment performance. Based on this evaluation, management will make the necessary changes to its internal management reporting system and subsequently, will perform a review to determine if the Company will redefine its reportable operating segments in accordance with U.S. GAAP. For the three and nine months ended September 30, 2011 and 2010, sales by geographic area were as follows:
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2011     2010     2011     2010  
United States
    81 %     89 %     78 %     82 %
Other Countries
    19 %     11 %     22 %     18 %
 
                       
 
                               
Total
    100 %     100 %     100 %     100 %
 
                       
Sales to customers outside of the United States are typically denominated in U.S. dollars and are attributed to each country based on the billing address of the distributor or customer. For the three and nine months ended September 30, 2011 and 2010, no individual country outside of the U.S. represented a material amount of total net sales.
In the three months ended September 30, 2011, two distributors represented approximately 15% and 10% of total net sales. In the three months ended September 30, 2010, three distributors represented approximately 18%, 14%, and 11% of total net sales. In the nine months ended September 30, 2011, one distributor represented approximately 13% of total net sales. In the nine months ended September 30, 2010, one distributor represented approximately 10% of total net sales. At September 30, 2011, the Company had receivables from three distributors comprising 17%, 15%, and 13% of its aggregate accounts receivable balance. At December 31, 2010, the Company had receivables from three customers comprising 19%, 11%, and 10% of its aggregate accounts receivable balance. These customers are unaffiliated distributors of the Company’s products.
c. Income (loss) per common share
Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the periods presented. Diluted income per share reflects the potential dilution that could occur if outstanding stock options were exercised using the treasury stock method. The calculation of the weighted average number of shares outstanding and income (loss) per share are as follows:
                                 
    For the Three Months Ended September 30     For the Nine Months Ended September 30,  
    2011     2010     2011     2010  
Numerator for basic and diluted income (loss) per share
                               
Net income (loss)
  $ 1,136,285     $ (2,335,478 )   $ (1,138,815 )   $ (4,187,472 )
 
                       
 
                               
Denominator for basic income (loss) per share — weighted average shares outstanding
    58,787,274       62,342,775       60,617,787       62,495,957  
Dilutive effect of shares issuable under stock options outstanding
    1,250,054       —       —       —  
 
                       
 
                               
Denominator for diluted income (loss) per share — adjusted weighted average shares outstanding
    60,037,328       62,342,775       60,617,787       62,495,957  
 
                       
 
                               
Net Income (loss) per common share
                               
Basic
  $ 0.02     $ (0.04 )   $ (0.02 )   $ (0.07 )
Diluted
  $ 0.02     $ (0.04 )   $ (0.02 )   $ (0.07 )
For the three months ended September 30, 2011, the effects of 7,119,854 stock options were excluded from the calculation of diluted net income per share as their exercise prices were greater than the closing price of our common stock on September 30, 2011. As a result of the net loss per share for the nine months ended September 30, 2011, the effects of 8,389,298 stock options were excluded from the calculation as their effect would have been to reduce net loss per share. As a result of the net loss for the three and nine months ended September 30, 2010, the effects of 7,440,030 and 5,662,678 stock options, respectively, were excluded from the calculation as their effect would have been to reduce the net loss per share.
d. Warranty costs
The Company warrants its X2 ECDs, X3 ECDs, X26 ECDs, M26 ECDs, XREP, TASER CAM, Shockwave, AXON Tactical Computer, Com Hub user interface, Synapse Evidence Transfer Manager (ETM), and HeadCam products from manufacturing defects on a limited basis for a period of one year after purchase, and thereafter will replace any defective unit for a fee. The TASER C2 product is warranted for a period of 90 days after purchase. The Company also sells extended warranties for periods of up to four years after the expiration of the limited one year warranty. After the one year standard warranty expires, if the device fails to operate properly for any reason, the Company will replace the TASER X26 for a prorated discounted price depending on when the product was placed into service. These fees are intended to cover the handling and repair costs and include a profit. Management tracks historical data related to returns and warranty costs on a quarterly basis, and estimates future warranty claims by applying the estimated weighted average return rate to the product sales for the period. If management becomes aware of a component failure that could result in larger than anticipated returns from its customers, the reserve would be increased. The reserve for warranty returns is included in accrued liabilities on the consolidated balance sheet. The following table summarizes the changes in the estimated product warranty liabilities for the nine months ended September 30, 2011 and 2010.
                 
    2011     2010  
Balance at January 1,
  $ 646,113     $ 369,311  
Utilization of accrual
    (456,823 )     (328,135 )
Warranty expense
    249,652       594,196  
 
           
 
               
Balance at September 30,
  $ 438,942     $ 635,372  
 
           
e. Capitalized software development costs
For development costs related to EVIDENCE.com, the Company’s Software as a Service (SaaS) product, the Company capitalized qualifying computer software costs that were incurred during the application development stage, which was completed in the second quarter of 2010. Costs related to preliminary project planning activities and post-implementation activities were expensed as incurred. The Company did not capitalize any such costs in the three months ended September 30, 2011. For the nine months ended September 30, 2010, the Company capitalized $1,320,000 of qualifying software development costs.
f. Fair value of financial instruments
The Company uses the fair value framework for measuring financial assets and liabilities measured on a recurring basis and for non-financial assets and liabilities when these items are remeasured. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The Company categorizes each of its fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
  •  
Level 1 — Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.
 
  •  
Level 2 — Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.
 
  •  
Level 3 — Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company has cash equivalents, which at September 30, 2011 and December 31, 2010, were comprised of money market mutual funds, valued using Level 1 valuation techniques. At September 30, 2011, the Company also held short-term investments consisting of commercial paper. Based on management’s ability and intent to hold these investments to maturity, they are recorded at amortized cost on the balance sheet. Refer to note 2 for additional fair value disclosures for these short-term investments. The Company’s financial instruments also include accounts receivable, accounts payable and accrued liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the balance sheet.
g. Valuation of Long-lived Assets
We review long-lived assets, such as property and equipment and intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We utilize a two-step approach to testing long-lived assets for impairment. The first step tests for possible impairment indicators. If an impairment indicator is present, the second step measures whether the asset is recoverable based on a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Our review requires the use of judgment and estimates.
In the nine months ended September 30, 2011, the Company recognized $1,353,857 in impairment charges associated with its Protector product line following the Company’s decision to abandon ongoing operations relating to this line. No impairment charges were recorded in the three months ended September 30, 2011 or the three or nine months ended September 30, 2010.
In addition, in the nine months ended September 30, 2011, the Company recognized a loss of $0.8 million from the write down / disposal of property and equipment, following the decision to dispose of surplus equipment for EVIDENCE.com operations.
h. Recently adopted accounting guidance
In October 2009, the FASB issued authoritative guidance on revenue recognition that became effective for the Company beginning January 1, 2011. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.
In December 2010, the FASB issued authoritative guidance on business combinations concerning the disclosure of supplementary pro forma information which will be effective for the Company prospectively for business combinations for which the acquisition date is on or after January 1, 2011. The new guidance clarifies the acquisition date that should be used for reporting the pro forma financial information disclosures when comparative financial statements are presented. The amendments are also designed to improve the usefulness of the pro forma revenue and earnings disclosures by requiring a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination. Management does not expect adoption of this new guidance to have a material impact on the Company’s consolidated financial statements.
In December 2010, the FASB issued guidance to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. The guidance became effective for the Company effective January 1, 2011 and its adoption did not have a material impact on the Company’s consolidated financial statements.
In June 2011, the FASB issued guidance to require presentation of the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This guidance will be effective for the Company on January 1, 2012, and management does not believe its adoption will have a material impact on the Company’s consolidated financial statements.