10-K 1 a10ktasr123114.htm 10-K 10K.TASR.12.31.14
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-16391
TASER International, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
86-0741227
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
17800 North 85th Street
Scottsdale, Arizona
 
85255
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(480) 991-0797
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of exchange on which registered
Common Stock, $0.00001 par value per share
 
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
The aggregate market value of the common stock held by non-affiliates of the registrant, based on the last sales price of the issuer’s common stock on June 30, 2014, which was the last business day of the registrant’s most recently completed second fiscal quarter, as reported by NASDAQ, was $681.7 million.
The number of shares of the registrant’s common stock outstanding as of February 27, 2015 was 53,086,538
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the registrant’s definitive proxy statement for its 2015 annual meeting of stockholders to be prepared and filed with the Securities and Exchange Commission not later than 120 days after December 31, 2014 are incorporated by reference into Part III of this Form 10-K.




TASER INTERNATIONAL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2014
 
 
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
Item 15.


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PART I
Statements contained in this report that are not historical are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions and strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things:
 
our intentions about future development efforts and activities, including our intentions to invest in research and development as well as the development of new product and service lines and enhanced features for our existing product and service lines;
our need and the willingness of customers to upgrade and replace existing conducted electrical weapons (“CEW”) units;
that we may have more sales denominated in foreign currencies in 2015;
our intention to increase our investment in the development of sales in the international, military and law enforcement market;
our plans to expand our sales force;
that cloud and mobile technologies are fundamentally changing the police environment;
our plan to invest in web activities and law enforcement trade shows in 2015;
our intention to not pay dividends;
that increases in marketing and sales activities will lead to an increase in sales;
our belief that the video evidence capture and management market will grow significantly in the near future and the reasons thereto;
our intentions to continue to pursue the personal security market;
our intention to grow direct sales;
the sufficiency of our facilities and our strategy to expand manufacturing capacity if needed;
that we may lease facilities from parties that specialize in handling and manufacturing of firearm materials;
the benefits of our on-officer camera product compared to an in-car camera;
that we expect to continue to depend on sales of our X2 and X26P CEW devices;
our strategy and plans, and the expected benefits relating thereto, to expand our international sales;
that we expect further increases in our trial AXON programs and that these programs will lead to additional sales;
our intention to apply for and prosecute our patents;
that fixed costs as a percentage of net sales in the AXON segment (formerly known as the "EVIDENCE.com & Video" segment) will decline;
that gross margins in the AXON segment will be lower in the near-term;
that selling, general and administrative expense will increase in 2015;
that research and development expenses will increase in 2015;
the timing of the resolution of uncertain tax positions;
our intention to hold investments to maturity;
the effect of interest rate changes on our annual interest income;
that we may engage in currency hedging activities;
our intentions concerning, and the effectiveness of, our ongoing marketing efforts through web activities, trial programs, tech summits and law enforcement trade shows;
the benefits of our CEW products compared to other lethal and less-lethal alternatives;
the benefits of our AXON products compared to our competitors'

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our belief that customers will honor multi-year contracts despite the existence of appropriations (or similar) clauses;
our belief that customers will renew their EVIDENCE.com service subscriptions at the end of the contractual term;
our insulation from competition and our competitive advantage in the weapons business;
estimates regarding the size of our target markets and our competitive position in existing markets;
the availability of alternative materials and components suppliers;
the benefits of the continued automation of our production process;
the sufficiency and availability of our liquid assets and capital resources;
our financing and growth strategies, including: our decision not to pay dividends, potential joint ventures, mergers and acquisitions, stock repurchases and hedging activities;
the safety of our products;
our litigation strategy; including the outcome of legal proceedings in which we are currently involved;
our ability to maintain secure and consistent customer data access and storage, including the use of third party data storage providers, and the impact of a loss of customer data, a breach of security or an extended outage;
our ability to attract and retain the qualified professional services necessary to implement and maintain our business, both through employment and through other partnership arrangements;
the effect of current and future tax strategies;
the impact of recently adopted and future accounting standards; and
the ultimate resolution of financial statement items requiring critical accounting estimates.
These statements are qualified by important factors that could cause our actual results to differ materially from those reflected by the forward-looking statements. Such factors include, but are not limited to, those factors detailed in ITEM 1A of this annual report entitled “Risk Factors.” The risks included in the foregoing list are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. New risk factors emerge from time to time, and it is not possible for management to predict all such factors, nor can it assess the impact of all such risk factors or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to expectations over time.
TASER International, Inc. owns the following trademarks: ADVANCED TASER, CHECKLOK, TASER, XREP, C2, X2, X3, the bolt on West Hemisphere logo, the bolt on ball logo, the bolt on circle logo, and the bolt within circle logo, all registered in the United States. All other trademarks and service marks including M18, M26, X26, X26C, X26P, AXON, AXON flex, AXON body, AXON Signal, Shockwave, TASER CAM and designs belong to TASER International, Inc., except as expressly indicated as belonging to another.


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Item 1. Business
Overview
TASER International, Inc.’s (the “Company” or “TASER” or “we” or “our”) core mission is to protect life and to protect truth through technologies that make communities safer. We are the market leader in the development, manufacture and sale of conducted electrical weapons (“CEWs”) designed for use by law enforcement, military, corrections, and private security personnel and by private individuals for personal defense. Since our inception in 1993, we have remained committed to providing solutions to violent confrontation by developing devices with proprietary technology to incapacitate dangerous, combative, or high-risk subjects who pose a risk to law enforcement officers, innocent citizens, or themselves in a manner that is generally recognized as a safer alternative to other uses of force. 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.
TASER weapon solutions deliver significant benefits to our customers and to communities in which they are deployed. Numerous studies show a significant reduction in both officer and suspect injuries with TASER CEW usage. Further, most reporting agencies demonstrate overall decreases in use of force, and decreases in suspect and officer injuries resulting from conflict. Reducing uses of force and gaining compliance of the suspect by use of a TASER CEW has provided significant reductions in worker’s compensation expenses and excessive use of force claims for law enforcement agencies, and ultimately taxpayers.
Our mission to protect life has also been extended to protect truth. Bringing a subject into custody is not the end of the challenge for law enforcement. A significant number of incidents that start as a physical conflict then transition into a legal conflict. Prosecuting and convicting the individual arrested, and responding to excessive use of force allegations, are examples of significant post-incident challenges law enforcement faces on a continual basis, often requiring years and millions of dollars of litigation expense to resolve in the courtroom. Instead, the optimum situation is to prevent the conflict from ever escalating. TASER CEWs and AXON on-officer video have a measured and positive effect on better suspect and officer behavior as well as achieving compliance without escalation of force.
Central to our strategy, we conduct research and develop advanced technologies for both the creation of new, and the enhancement of existing hardware and software products and services. We believe that delivering high-value solutions through our various product platforms is the key to delivering compelling value propositions to meet our customers’ needs and to drive our future growth. We place the highest level of importance on the safety and appropriate use of our products and have established industry leading training services to provide our users a comprehensive overview of the legal, policy, medical and risk mitigation issues relating to our CEWs and the use of force.
Our products are sold directly to law enforcement agencies and through a network of distribution channels we developed for selling and marketing our products and services to law enforcement agencies, primarily in North America, with continuing focus and effort placed on expanding these programs in international, military and other markets. To facilitate sales and provide customer service to our European customers, we established TASER International Europe SE, a wholly owned subsidiary, in 2009. To further strengthen our international presence, during 2014, the Company established TASER International, B.V. located in Amsterdam, Netherlands, that will serve as a permanent international headquarters to facilitate transactions with existing customers as well as allow for continued expansion into other foreign markets.
Segments
The Company’s operations are comprised of two reportable segments; the sale of CEWs, accessories and other products and services (the “TASER Weapons” segment); and the AXON business, focused on wearables, cloud and mobile products, including AXON video products, TASER Cam and EVIDENCE.com (the "AXON" segment formerly known as the “EVIDENCE.com & Video” segment). Within the AXON segment, the Company includes only revenues and costs directly attributable to that segment which include: costs of sales for both products and services, direct labor, selling expense for the segment sales team, segment product management expenses, segment trade shows and related expenses, segment finance and accounting expenses, and research and development for products included in the AXON segment. All other costs are included in the TASER Weapons segment. Further information about our reportable segments and sales by geographic region is included in Notes 1(p) and 15 of the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
CEW Products
We make CEWs that use our proprietary Neuro Muscular Incapacitation (“NMI”) effects for two main types of market segments: (i) the law enforcement, military, corrections and professional security markets; and (ii) the consumer market. Our products use a replaceable cartridge containing compressed nitrogen to deploy and propel two small probes that are attached to the CEW by insulated conductive wires with lengths ranging from 15 to 35 feet. Our CEWs transmit electrical pulses along the

5


wires and into the body affecting the sensory and motor functions of the peripheral nervous system. The electric current can penetrate up to two cumulative inches of clothing or approximately one inch per probe. The basic design is to provide incapacitating effects that last in cycles of five seconds for our law enforcement, military, corrections and private security products and up to thirty seconds for our consumer market models. This effect can be extended, if necessary, by the operator.
The benefits of using CEWs in the field have been undeniable and powerful. By some studies, TASER CEWs have prevented death or serious injury more than 135,000 times from the first deployment in 2000 to the end of 2014. In addition to protecting life, the use of these devices instead of other force options has significantly reduced injuries for suspects and officers with substantial liability and workers’ compensation savings to government agencies around the world.
Law Enforcement, Military, Corrections and Professional Security Products
For the law enforcement, military, corrections and professional security markets, we primarily manufacture three hand-held CEW product lines and have also incorporated our technology into several other product line extensions. Certain of these products are also sold into the consumer market. Consumer sales are not included in the table below.
 
 
Year
Introduced
 
Sales (in millions)
 
% of Net Sales
CEW Product
 
 
2014
 
2013
 
2012
 
2014
 
2013
 
2012
TASER X26P
 
2013
 
$
43.5

 
$
21.9

 
$

 
26.4
%
 
15.9
%
 
%
TASER X2
 
2011
 
28.8

 
26.5

 
25.8

 
17.5

 
19.2

 
22.5

TASER X26
 
2003
 
18.7

 
30.3

 
35.2

 
11.4

 
22.4

 
31.3


TASER X26P - Simple to use one-shot CEW, featuring enhanced data port logs; Integrates with EVIDENCE.com.
TASER X2 - Simple to use CEW, featuring a second shot for instant miss recovery, dual lasers for high accuracy, a power magazine with more than 500 firings, enhanced data port logs and the ability to display a warning arc; Integrates with EVIDENCE.com.
TASER X26 - Simple to use one-shot CEW (discontinued sales to North American law enforcement as of December 31, 2014).
Consumer Products
Our primary consumer product for the personal defense market is the TASER C2 CEW which provides the same proven NMI effectiveness as our market leading law enforcement CEWs but in a less intimidating, more compact form at a price point more attractive to private citizens. While the C2 CEW is our primary product for the consumer market, we have developed consumer versions of the X2, M26 and X26 CEWs. Our total consumer products accounted for $3.7 million, $4.0 million and $4.6 million in the years ended December 31, 2014, 2013, and 2012, respectively, which translates to 2.3%, 2.9%, and 4.0% of net sales, respectively.
Cartridges
We manufacture multiple cartridge types for varying ranges and purposes. Types of cartridges include, among others, standard cartridges, smart cartridges and training cartridges. Smart cartridges communicate with the fire control system within the TASER X2 and X3 indicating the type of cartridge loaded in each bay and its deployment status. Standard cartridges are designed for use within the M26, X26 and X26P CEW systems with unique variations for warm and cold climates, training scenarios, and tactical situations. Training cartridges contain non-conductive wiring, which allows law enforcement, military, and corrections trainers to use the cartridge during training role-playing scenarios. In addition, cartridges may have varying probe sizes, which affect the penetration of clothing.
All of our cartridges, with the exception of the training cartridge, contain numerous colored, confetti-like tags bearing the cartridge’s serial number. These tags, referred to as Anti-Felon Identification tags (“AFIDs”) are scattered when one of our cartridges is deployed. Sellers of our products participate in the AFID program by registering buyers of our cartridges. In many cases, we can use AFIDs to identify the registered owner of cartridges deployed. AFIDs provide an additional level of accountability when using TASER CEW devices.
Individual cartridge sales accounted for approximately $38.5 million, $35.7 million and $32.8 million, or approximately 23.4%, 25.9% and 28.6%, of our net sales for the years ended December 31, 2014, 2013 and 2012, respectively.


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Other Accessories
Other accessories include, among other items:
standard replacement batteries for the CEW devices;
a modified battery that shuts down the high voltage output of the CEW after five seconds and contains a built-in speaker alerting the user to the impending shut down; and
a modified battery source that features a disabling safety key and wrist strap lanyard designed to secure the device to the officer and is intended to disable the CEW should it be separated from the officer or other peacekeeper.
AXON Solutions
We believe that the video evidence capture and management market will continue to expand due to several factors including increasing recognition of the benefits of video evidence. The International Association of Chiefs of Police and other law enforcement organizations have endorsed the benefits of video evidence. In addition, a Rialto Police Department study through the University of Cambridge found implementation of TASER video products not only reduced citizen complaints against law enforcement but also significantly reduced the use of force by law enforcement. Additionally, video evidence in law enforcement has the potential to reduce the cost to United States taxpayers for payment of law enforcement litigation and claims, which is currently estimated at greater than $2.0 billion per year.
Given our existing long-term relationships with law enforcement agencies as well as our industry-leading video products, we believe we are well positioned to benefit from this growth. Our products can significantly reduce liability risk for individual police officers and for law enforcement agencies by capturing the ‘truth’ of what actually happened in an incident, saving law enforcement agencies significant resources. In addition, our video products work on a stand-alone basis, or seamlessly integrated together, to automate key workflows, including the ingestion of videos recorded into our system and integration with other systems, and thus improves officer efficiency by enabling a reduction in report documentation workload while increasing accuracy and accountability.
AXON Cameras
The AXON camera system was introduced in May 2012 and utilizes advanced audio-video record and capture devices worn by first responders to record video and audio of critical incidents from the visual perspective of the officer. AXON cameras provide the option for officers to use Android or iOS devices to review and tag video evidence, streamlining the evidence transfer process. AXON flex provides complete flexibility in how an officer chooses to wear the device, including an option to deploy as an attachment to Oakley Flak Jacket eyewear. Thousands of law enforcement officers assisted in the development of AXON flex, making it, we believe, the most customer-driven officer worn camera solution ever produced.
Responding to market feedback, we introduced the AXON body camera in 2013. AXON body is a simple, low-priced body worn camera for law enforcement, designed for customers seeking easy deployment at a lower price-point. The AXON body eliminates the need for the camera to be mounted above the shoulder of the individual and rather hooks into the shirt of the officer at mid-chest level. This camera also eliminates all wires from the wearer’s body.
Both cameras are designed to integrate seamlessly with the Company’s video evidence management system, EVIDENCE.com.
In 2014, the Company announced the AXON Signal camera technology. This technology will enable cameras to automatically start recording when an officer's light bar is turned on or when a TASER smart weapon is powered on. All enabled AXON Signal cameras within range will receive signals from the light bar or smart weapon and start recording. This feature will offer multiple angles to be captured from different perspectives if more than one AXON flex camera is on scene. AXON Signal technology became available during the first quarter of 2015.

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EVIDENCE.com
EVIDENCE.com is a cloud-based digital evidence management system and warehouse, offering digital evidence management, sharing, analysis and storage in a highly secure, easily accessible environment. The service is designed to allow an agency to manage all of its digital evidence in one place, and accommodates digital evidence from many sources, including TASER products, digital pictures, fixed cameras, interview rooms, and more. EVIDENCE.com automates key workflows from evidence collection to review, eliminating expensive and manual steps in the production and movement of evidence among law enforcement and legal professionals. Evidence is generally transferred to EVIDENCE.com from AXON products using an E-Dock, also sold by TASER. Interviews and other digital evidence from the field can be quickly and securely uploaded using EVIDENCE Mobile, built for iOS and Android, which was introduced in 2013. Enabling digital evidence collection from EVIDENCE Mobile saves agencies time and money by streamlining the process to manage, ingest and physically process storage media. We believe that cloud and mobile technologies are fundamentally changing the way in which officers connect with each other, the agency and other partners in the law enforcement community. Technology is developing at such a quick rate that it is often not practical or efficient for agencies to keep pace. Utilizing our cloud-based solution allows agencies to rapidly adopt new technology without the cost and complexity of managing the hardware or software in-house, and without the risk of large investments in equipment that could be obsolete in a matter of months or years.
Together, our AXON camera systems and EVIDENCE.com, along with EVIDENCE Mobile, are an end-to-end video capture and digital evidence management solution. With the launch of the AXON flex camera system in 2012 and the AXON body camera in 2013, growth accelerated for AXON and EVIDENCE.com. Bookings by quarter for 2014, 2013, and 2012 were as follows (dollars in thousands):
 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
 
2014
 
2013
 
 
Q1
$
5,919

 
$
1,387

 
$
4,532

 
327
%
Q2
11,346

 
2,046

 
9,300

 
455

Q3
15,267

 
5,847

 
9,420

 
161

Q4
24,554

 
5,206

 
19,348

 
372

Total
$
57,086

 
$
14,486

 
$
42,600

 
294

 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
 
2013
 
2012
 
 
Q1
$
1,387

 
$
352

 
$
1,035

 
294
%
Q2
2,046

 
451

 
1,595

 
354

Q3
5,847

 
1,318

 
4,529

 
344

Q4
5,206

 
1,671

 
3,535

 
212

Total
$
14,486

 
$
3,792

 
$
10,694

 
282

AXON flex, AXON body and EVIDENCE.com bookings is a statistical measure defined as the sales price of orders placed in the relevant fiscal period, net of cancellations. Bookings are an indication of the activity the Company is seeing relative to AXON flex, AXON body and EVIDENCE.com.
The Company has deliverables to meet prior to recognizing revenue related to many of the orders. These statistics represent orders and not invoiced sales. Once invoiced, the revenue related to EVIDENCE.com is recognized over the requisite service period of one to five years. Due to municipal government funding rules, certain of the future year amounts included in bookings are subject to budget appropriation or other contract cancellation clauses. Although TASER has entered into contracts for the delivery of products and services in the future and anticipates the contracts will be completed, if agencies do not appropriate money in future year budgets, or enact a cancellation clause, revenue associated with these bookings will not ultimately be recognized, resulting in a future reduction to bookings.

TASER Cam HD
The TASER Cam HD is a video recording device that captures both video and audio of potential and actual TASER use incidents as an accessory to a TASER CEW. The device can capture video and audio before, during and after a TASER deployment, which provides law enforcement with a greater level of accountability to support their use of TASER devices against a resistant subject. The TASER Cam HD is capable of recording in low light conditions, has a wide field of view, high resolution and color video. A non-audio version of the device is also available for agencies operating in states where legislation prohibits the use of

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audio recordings. Revenue related to the TASER Cam HD was $4.7 million, $4.7 million and $3.1 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Product Warranties
We generally warranty CEWs, AXON cameras and E-Docks 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 which covers the handling and repair costs and includes a profit. We believe this policy is attractive to customers.
The Company also offers customers the right to purchase extended warranties, which provide additional coverage beyond the limited warranty, ranging from one to five years, offered at specified fees. The sales of extended warranties give customers a level of cost certainty that they would not have without an extended warranty. At December 31, 2014 and 2013, the balance of deferred revenue was $22.0 million and $15.9 million under this program, respectively. The revenue associated with the extended warranties will be recognized ratably over the extended warranty period. Warranty revenue recorded by the Company for the years ended December 31, 2014, 2013 and 2012 were $6.1 million, $4.6 million and $3.6 million, respectively.
Markets
Law Enforcement and Corrections
Our primary target market for both our weapon and video products is federal, state and local law enforcement agencies in the U.S. and throughout the world. In the law enforcement market, more than 17,000 law enforcement agencies in nearly 150 countries have made initial purchases of our TASER brand devices for testing or deployment. Our belief is that in the U.S., approximately two-thirds of all law enforcement patrol officers carry a TASER CEW and internationally, approximately one out of every fifty eligible law enforcement officers carries a TASER CEW.
We continue to educate correctional facility personnel, as well as parole and probation field officers, regarding the benefits of using TASER brand products and we have developed training programs and command staff demonstrations specific to the corrections market. Our TASER devices are deployed in multiple county and state correctional facilities in the U.S.
Military Forces, U.S. and Foreign Allies
TASER CEW devices continue to be deployed in support of key strategic military operations in locations around the world. We continue our focus initiative on supporting our military customers. The former head of the U.S. Military Joint Non-Lethal Weapons Directorate is our Vice President of Government and Military Programs, and we meet periodically with our Senior Executive Advisory Board, comprised of a team of professionals with extensive military, homeland defense and law enforcement experience, with the purpose of advising on business models in support of federal law enforcement and military users.
Private Security
We continue to pursue opportunities for sales of TASER CEW devices in private security markets; however, we have made limited sales to date. Private security officers represent a broad range of individuals, including contract security patrol, healthcare, gaming, retail security employees and many others. Similar to our other emerging markets, we have developed training programs and demonstrations specific to the industry by meeting with several large corporate and private patrol security companies to discover their unique needs. We also attend several private security tradeshows, conferences and industry association meetings to generate a presence in this market space.

Private Citizen / Personal Protection
Our primary consumer product for personal defense is the TASER C2 personal protection device, a CEW specifically designed for the private citizen market. We have also developed consumer versions of the X2, M26, and X26 CEWs. We continue to explore alternatives to generate more consumer sales.
Sales and Marketing
Law enforcement and correction agencies, military forces, private security personnel and private citizens represent our target markets both domestically and internationally. In each of these markets, the decision to purchase TASER CEWs, AXON video products or EVIDENCE.com is normally made by a group of people, including the agency head, municipal information technology departments, the agency’s training staff and agency weapons experts. Depending on the size and cost of the device deployment

9


and local procurement rules and customs, the decision may involve political decision-makers such as city council members or the federal government. The decision-making process can take as little as a few weeks or as long as several years. Although we have focused on these markets, we have been able to expand our customer base to hundreds of thousands of end users within these markets. We currently have a presence in more than 17,000 law enforcement agencies domestically.
We have used multiple types of media to communicate the benefits of acquiring and deploying our products. Our marketing campaigns have included the development of on-line educational campaigns geared toward law enforcement leaders in the community, web and print advertisements in law enforcement publications, the use of training classes conducted around the world, and more recently, in the case of the TASER X2 and X26P, an integrated online media launch including trade-in programs on used TASER devices. Throughout 2014, we hosted technology summits at our Scottsdale headquarters and across the nation during which our employees, customers and potential customers conducted forums to discuss, educate and promote the benefits of cloud computing and wearable technology. Looking to 2015, we plan on expanding these programs to certain international markets. We also target key regional and national law enforcement trade shows where we can demonstrate our products to leading departments. In 2014, we attended and exhibited at many of the major regional, national and international law enforcement trade shows. We also held our annual TASER Conference as part of our certified master instructor school, the continued focus of which was to train the participants in the use of all of the latest CEWs and other new products.
TASER maintains a corporate website for TASER.com and a website for EVIDENCE.com designed to deliver benefit-driven messages and to drive follow-up by TASER or one of our distribution partners. We also maintain foreign-language sites for non-English speakers around the world, including French, Portuguese, German, Dutch and Spanish, with the same goals to provide information and education on our products and services in a local language. We plan to continue investment in web activities, tech summits and law enforcement trade shows and conferences in 2015, as it provides us the ability to market our products to our target audience. We believe these types of activities accelerate penetration of our TASER product lines in each market, which should lead to increased visibility in both the private security and private citizen markets and reinforce the value of these devices for self-defense.
U.S. Distribution
The Company sells directly to law enforcement agencies in the U.S. as well as through a distribution network. In addition, we have one U.S. military and federal government contracting distributor. Distributors are selected based upon their reputation within their respective industries, their contacts and their distribution network. Our regional sales managers work closely with the distributors in their territory to inform and educate the law enforcement communities. We continue to monitor our law enforcement distributors closely to help ensure that our service standards are achieved. Where appropriate, we intend to grow our direct sales over time. Distributors often allow us to penetrate regions at lower fixed costs; however, direct sales allow us greater control over the customer relationship.
Sales in the private citizen market are primarily made through our commercial distributors, dealers and our website. We have implemented a variety of marketing initiatives to support sales of our consumer products, with a focus on web, public relations and consumer trade shows. We have consulted with professional digital media and public relations professionals to assist us in media and press events, and editorial placements along with attending numerous tradeshows specifically to target the consumer market.
International Distribution
We currently market and distribute our CEW products to foreign markets primarily through a network of distributors. For geographical and cultural reasons, our distributors usually have a territory defined by their country’s borders. These distributors market both our law enforcement, military, and corrections products, and our consumer products where allowed by law. Our distributors work with local law enforcement, military and corrections agencies in the same manner as our domestic market distributors. For example, they may perform demonstrations, attend industry tradeshows, maintain country specific websites, engage in print advertising and arrange training classes.
In order to more effectively engage customers internationally, we have also implemented sales teams strategically located throughout each major geographic region of the world. Having dedicated sales personnel stationed full time in these regions will allow us to better serve existing customers as well as execute our sales and marketing strategies more efficiently in order to continue to grow our customer base in new markets.

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Training Programs
Most law enforcement, military, security and corrections agencies will not purchase new weapons until a training program is in place to instruct and certify personnel in their proper use. TASER maintains a robust training program and conducts a variety of classes valuable to the users of our products. Attendance at our courses generally requires a fee which varies depending upon course content. For the years ended December 31, 2014, 2013 and 2012, training revenue was $2.2 million, $1.9 million and $2.2 million, respectively.
To coordinate the growing demands of our training programs, we created a Training Advisory Board. This board annually reviews the qualifications of the master instructors, and provides retraining or certification as required. In addition, the Training Advisory Board oversees the trainers and curriculum to ensure that new information is properly communicated and implemented. We also created the designation of Senior Master Instructor whose primary duties are to perform quality control checks on Master Instructors during instructor courses and to help instruct at the Master Instructor School. As of December 31, 2014, 24 experienced individuals hold the designation of Senior Master Instructors based on their exemplary performance as Master Instructors.
CEW Courses Offered:
Instructor Training: An approximately 20 hour class that certifies law enforcement, military, corrections and security agency trainers as Instructors in the use of TASER CEWs.
Master Instructor School: Attendees that successfully complete this course become certified as Master Instructors. Master Instructors are independent professional trainers, serve as local area TASER experts, and assist in conducting TASER demonstrations at other police departments within their regions. As of December 31, 2014, 747 individuals hold current certifications as Master Instructors.
CEW User Training: An on-line course is available to law enforcement, military and security personnel that satisfies the classroom and knowledge assessment portions of the user certification course. Agency instructors must still put students through a series of drills and hands-on exercises.
TASER Technical Solutions and Investigations Course: The purpose of this course is to train agencies on the proper care and preventative maintenance of TASER devices and to train those who are responsible for investigating crime scenes and use of force events.
TASER Use of Force, Risk Management and Legal Strategies Seminar: The purpose of this course is to educate law enforcement executives, risk managers, and legal and medical advisors on topics relevant to TASER CEWs.
Private Citizen Training: This course focuses on non-law enforcement private self-defense training schools that have expressed a desire to include TASER consumer products in their courses.

Video Systems Courses Offered:
With the release of the AXON flex on-officer audio and video recording systems, we developed new courses and incorporated the AXON cameras as an integral part of all Instructor and Master Instructor courses.
 
AXON User and Instructor training: This training is provided to agencies that purchase AXON units either for deployment or for a test and evaluation.
Digital Evidence Management Course: Designed to educate information technology personnel and those who will be administrators of EVIDENCE.com accounts. This course covers cloud computing, data security, best practices in on-officer video, legal issues, and set-up and management of EVIDENCE.com.
Manufacturing
We perform light manufacturing, final assembly, and final test operations at our headquarters in Scottsdale, Arizona, and own substantially all of the equipment required to develop, prototype, manufacture and assemble our finished products. This includes critical injection molds, schematics, automation equipment, test equipment and prototypes utilized by our supply chain for the conversion of raw materials into sub-assemblies. We have implemented lean/six sigma methodologies to optimize most direct and indirect resources within the organization, which has helped boost capacity for existing products, as well as provide flexibility to accommodate production of new TASER product introductions. We are currently operating two production shifts; however, other capacity options, including the use of additional shifts, will be considered should we experience higher demand resulting from large orders of legacy or new product releases. We continue to maintain our ISO 9001 certification.
Our XREP product is considered a firearm due to the propellant used to launch the projectile from the device. We have a Class 7 Federal Firearms license to manufacture, store and sell XREP and related products. We have previously, and may again

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in the future, leased facilities from a local third party who specializes in defense products and provides facilities, ensuring compliance with required firearm and dangerous good standards.
We constantly seek opportunities to invest in automated equipment for the continuous improvement of product quality and reduction of manufacturing costs. As a result, we have implemented a number of equipment initiatives including the purchase and integration of robotic equipment, computerized laboratory and medical testing equipment, machining and tooling equipment, as well as sophisticated modeling equipment for our research and development. We have a highly automated cartridge assembly line which improves both our production capacity and yields while significantly improving efficiency over what was previously a very labor-intensive manufacturing process.
Supply chain management has been, and will continue to be, a focus of ours. We presently purchase completed printed circuit board assemblies and components primarily from suppliers located in the U.S., along with selective strategic relationships internationally. Although we currently obtain plastic components from an outside supplier base, we own all the designs and tooling. We believe there are readily available qualified alternative suppliers in most cases who can consistently meet our needs for these components. We continue to develop and implement policies to mitigate supply chain risk and ensure continuity of supply, while maintaining efficiencies at all levels within the organization.

Competition
Law Enforcement, Corrections and Private Security Markets
Law enforcement customers partner with TASER for the long-term. The primary competitive factors in the law enforcement and corrections market include a weapon’s accuracy, effectiveness, safety, cost, ease of use and an exceptional customer experience. Stinger Systems introduced an electronic device in 2007 to compete with the TASER X26; however, they had limited success before going out of business in 2010. Stinger Systems subsequently sold its assets to Karbon Arms. We are not aware of any significant sales to date by Karbon Arms. We were granted summary judgment in a patent infringement claim against Stinger Systems and an injunction was issued against Stinger Systems in August 2010. In July of 2011, we filed a complaint against Karbon Arms, LLC for infringement of U.S. patent numbers 7,800,855 and 7,782,592 in U.S. District Court for the District of Delaware seeking damages, injunctive relief and an award of attorney’s fees. Karbon Arms filed a counter suit on July 18, 2011, alleging invalidity and non-infringement of four of TASER’s patents, tortuous interference with prospective contractual relations and for false advertising under the Lanham Act. In January 2014, TASER and Karbon Arms agreed to a permanent injunction against Karbon Arms after it was decreed that Karbon Arms infringed on the aforementioned patents. The permanent injunction restrains and enjoins Karbon Arms and its current and former officers, agents, directors, employees, and affiliates and those persons in participation with them who received actual notice of the injunction from making, using, offering to sell or selling the Karbon Arms MPID and MPID-C or supplying a substantial portion of the components that are used in the Karbon Arms devices. We believe that our strong relationship with our customers, our large installed base of products, the significant amount of medical and safety testing already performed on our products, our world-class customer service and other support we provide to customers provides us with a strong competitive advantage. In some international markets, our CEWs face local competition.
We also believe our CEWs compete indirectly with a variety of other less-lethal alternatives. These alternatives include, but are not limited to, pepper spray, batons and impact weapons sold by companies such as Defense Technology. We believe our TASER brand devices’ advanced technology, versatility, portability, effectiveness, built-in accountability systems, and low injury rate enable us to compete effectively against these other less-lethal alternatives.
Military Market
In the military markets, both in the U.S. and abroad, a wide variety of weapon systems are utilized to accomplish the mission at hand. CEWs have gained increased acceptance as a result of the policing role of military personnel across many regions of the world. There has also been an increased awareness of the use of non-lethal weapons as a way to preserve human intelligence. TASER CEWs give armed forces a means to capture or immobilize targets without using lethal force. There is indirect competition from pepper spray, batons and impact weapons sold by companies such as Defense Technology.

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Private Citizen Market
CEWs have gained limited acceptance in the private citizen market. These devices primarily compete with guns, but also with other less lethal weapons such as pepper spray. The primary competitive factors in the private citizen market include a weapon’s cost, effectiveness, safety and ease of use.
Video Evidence Market
The video evidence capture and management market segment is a highly fragmented and competitive market. In the video evidence capture market segment, there are existing companies with an established presence. Continued evolution in the industry and technology shifts are creating opportunities for both established and new competitors. Key competitive factors include: product performance; product features; product quality and warranty; total cost of ownership; data security; data and information work flows; company reputation and financial strength; and relationship with customers. We believe our AXON products, which place the camera directly on-officer at a much lower total cost of ownership than a traditional in-car camera, overcome some of the inherent limitations of an in-car system. We believe that placing the camera on the officer has created a paradigm shift that will ultimately overtake the majority of the in-car camera market.
Our digital evidence management system, EVIDENCE.com, is a cloud-based platform. Cloud computing fundamentally changes the way local, state and federal government agencies will develop and deploy software applications. Applications used by these agencies have historically required the agency to deploy their own infrastructure of servers, storage, network devices and operating systems. With a cloud-based system, the entire infrastructure is managed by third parties who specialize in infrastructure management. Agencies use the internet to access the application. Our cloud-based EVIDENCE.com service enables agencies to store, manage and analyze video evidence. We believe our end-to-end solution of AXON and EVIDENCE.com is a compelling value proposition for law enforcement agencies to implement.

Regulation
U.S. Regulation
The majority of TASER weapons, as well as the cartridges used by these devices, are subject to regulations; however, most are not considered to be a “firearm” by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives. The TASER XREP does use a propellant system which falls under the definition of a “firearm” and is, therefore, subject to federal firearms-related regulations. Many states have regulations restricting the sale and use of stun guns, hand-held shock devices and electronic weapons. We believe existing stun gun laws and regulations apply to our devices.
In many cases, the law enforcement and corrections market is subject to different regulations than the private citizen market. Where different regulations exist, we assume the regulations affecting the private citizen market also apply to the private security markets, except as the applicable regulations otherwise specifically provide.
As of December 31, 2014, the possession of stun guns by the general public, including TASER CEWs, is prohibited in six states: District of Columbia, Hawaii, Massachusetts, New Jersey, New York, and Rhode Island. Some cities and municipalities also prohibit private citizen possession or use of our products.
We are also subject to environmental laws and regulations, including restrictions on the presence of certain substances in electronic products. Reference is made to Section 1A, Risk Factors under the heading “Environmental laws and regulations subject us to a number of risks and could result in significant liabilities and costs.”
EVIDENCE.com is subject to government regulation of the Internet in many areas, including telecommunications, data protection, user privacy and online content.
U.S. Export Regulation
CEWs are considered a crime control product by the U.S. government. Accordingly, the export of our devices is regulated under export administration regulations. As a result, we must obtain export licenses from the Department of Commerce for all shipments to foreign countries other than Canada. Most of our requests for export licenses have been granted, and the need to obtain these licenses has not caused a material delay in our shipments. Export regulations also prohibit the further shipment of our products from foreign markets in which we hold a valid export license to foreign markets in which we do not hold an export license for our products.

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The Department of Commerce restricts the export of technology used in our CEWs. These regulations apply to both the technology incorporated in our CEW systems and to the processes used to produce them. The technology export regulations do not apply to production that takes place within the U.S. but is applicable to some sub-assemblies and controlled items manufactured outside the U.S.
Foreign Regulation
Foreign regulations, which may affect our devices, are numerous and often unclear. We prefer to work with a distributor who is familiar with the applicable import regulations in each of our foreign markets. Experience with foreign distributors in the past indicates that restrictions may prohibit certain sales of our products in a number of countries. The vast majority of countries permit TASER devices to be sold and used by law enforcement. We rely on our distributors to inform us of those countries where the TASER device is prohibited or restricted.
Intellectual Property
We protect our intellectual property with U.S. and foreign patents and trademarks. Our patents and pending patent applications relate to technology used by us in connection with our products. We also rely on international treaties, organizations and foreign laws to protect our intellectual property. As of December 31, 2014, we hold 83 U.S. patents and 102 foreign patents and also have numerous patents and trademarks pending. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as the commercial significance of our operations and our competitors’ operations in particular countries and regions, our strategic technology or product directions in different countries and the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions.
Confidentiality agreements are used with employees, consultants and key suppliers to help ensure the confidentiality of our trade secrets.
TASER has the exclusive rights to many Internet domain names primarily including ‘TASER.com’ and ‘EVIDENCE.com.’

Research and Development
Our research and development initiatives focus on next generation technology. Internally funded research has been primarily focused on improvements to existing TASER products and digital evidence management systems, or the development of new applications for TASER technology that we believe generally will have broad market appeal. Our investment in internally funded research and development totaled $14.9 million, $9.9 million and $8.1 million in 2014, 2013, and 2012, respectively.
The Company's team of application developers conduct research and development initiatives for cloud applications and mobile technologies in law enforcement, focused specifically on new revenue opportunities that align with our AXON product solutions. The Company plans to continue to invest in additional research and development within the AXON segment with a focus on continuous improvement, additional functionality for existing products and next generation products and services.
Within the TASER Weapons segment, current research and development initiatives include bio-medical research and electrical, mechanical and software engineering. We expect that future CEW development projects will focus on extending the range, improving the functionality and developing new delivery options for our products.
Our return on investment is intended to be realized over the long term, although new systems and technologies often can have a more immediate impact on our business.
Employees
As of December 31, 2014, we had 426 full-time employees and 141 temporary employees. The breakdown of our full-time employees by department is as follows: 150 direct manufacturing employees and 276 administrative and manufacturing support employees. Of the 276 administrative and manufacturing support employees, 97 were involved in sales, marketing, communications and training. Of the 141 temporary employees, more than 92% worked in direct manufacturing roles. Our employees are not covered by any collective bargaining agreement, and we have never experienced a work stoppage. We believe that our relations with our employees are good.
Available Information
We were incorporated in Arizona in September 1993 as ICER Corporation. We changed our name to AIR TASER, Inc. in December 1993 and to TASER International, Incorporated in April 1998. In January 2001, we reincorporated in Delaware as TASER International, Inc.

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Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our website at http://www.TASER.com as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
Item 1A. Risk Factors
Because of the following factors, as well as other variables affecting our operating results, our past financial performance may not be a reliable indicator of our future performance and historical trends should not be used to anticipate our results or trends in future periods.
We are materially dependent on acceptance of our products by law enforcement markets, both domestic and international. If law enforcement agencies do not continue to purchase our products, our revenues will be adversely affected.
A substantial number of law enforcement and corrections agencies may not continue to purchase our CEWs or video products. Law enforcement and corrections agencies may be influenced by claims or perceptions that CEWs, such as our products, are unsafe or may be used in an abusive manner. Sales of our products to these agencies may be delayed or limited by these claims or perceptions.
We substantially depend on sales of our TASER X26P and X2 CEWs, and if these products do not continue to be widely accepted, our growth prospects will be diminished.
In the years ended December 31, 2014, 2013 and 2012, we derived our revenues predominantly from sales of TASER CEW brand devices and related cartridges, and expect to depend on sales of these products for the foreseeable future. We are seeing a large number of customers upgrade their devices to the X2 or the new X26P device, which we introduced in 2011 and 2013, respectively. This is a trend we expect to continue. A decrease in the prices of, or demand for these products, or their failure to maintain broad market acceptance, would significantly harm our growth prospects, operating results and financial condition.
The success of our EVIDENCE.com Software-as-a-Service (“SaaS”) delivery model is materially dependent on acceptance of this business model by our law enforcement customers. Delayed or lengthy time to adoption by law enforcement agencies will negatively impact our sales and profitability.
A substantial number of law enforcement agencies may be slow to adopt our EVIDENCE.com digital data evidence management and storage solution, requiring extended periods of trial and evaluation. The hosted service delivery business model is not presently widely adopted by our law enforcement customer base. As such, the sales cycle has additional complexity with the need to educate our customers and address issues regarding agency bandwidth requirements, data retention policies, data security and chain of evidence custody. Delays in successfully securing widespread adoption of EVIDENCE.com services could adversely affect our revenues, profitability and financial condition.
If we are unable to design, introduce and sell new products or new product features successfully, our business and financial results could be adversely affected.
Our future success will depend on our ability to develop new products or new product features that achieve market acceptance in a timely and cost-effective manner. The development of new products and new product features is complex, time consuming and expensive, and we may experience delays in completing the development and introduction of new products. We cannot provide any assurance that products that we may develop in the future will achieve market acceptance. If we fail to develop new products or new product features on a timely basis that achieve market acceptance, our business, financial results and competitive position could be adversely affected.
Delays in product development schedules may adversely affect our revenues and cash flows.
The development of CEWs, cameras and software products such as EVIDENCE.com is a complex and time-consuming process. New products and enhancements to existing products can require long development and testing periods. Our increasing focus on our SaaS platform also presents new and complex development issues. Significant delays in new product or service releases or significant problems in creating new products or services could adversely affect our revenue.

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We face risks associated with rapid technological change and new competing products.
The technology associated with law enforcement devices is receiving significant attention and is rapidly evolving. While we have some patent protection in certain key areas of our CEW, AXON and SaaS technology, it is possible that new technology may result in competing products that operate outside our patents and could present significant competition for our products which could adversely affect our revenue.

Defects in our products could reduce demand for our products and result in a loss of sales, delay in market acceptance and damage to our reputation.
Complex components and assemblies used in our products may contain undetected defects that are subsequently discovered at any point in the life of the product. Defects in our products may result in a loss of sales, delay in market acceptance and damage to our reputation and increased warranty costs, which could have a material adverse effect on profitability and financial condition.
If our security measures are breached and unauthorized access is obtained to customers’ data or our data, our network, data centers and service may be perceived as not being secure, customers may curtail or stop using our service and we may incur significant legal and financial exposure and liabilities.
Our service involves the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. We devote significant resources to engineer secure products and ensure security vulnerabilities are mitigated. Despite these efforts, security measures may be breached as a result of third-party action, employee error, and malfeasance or otherwise. Breaches could occur during transfer of data to data centers or at any time, and result in unauthorized access to our data or our customers’ data. Third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our data or our customers’ data. Additionally, hackers may develop and deploy viruses, worms, and other malicious software programs that attack or gain access to our networks and data centers. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any security breach could result in a loss of confidence in the security of our service, damage our reputation, lead to legal liability and negatively impact our future sales.
Interruptions or delays in service from our third-party cloud storage providers for our EVIDENCE.com service, or the loss or corruption of digitally stored evidence, would impair the delivery of our service and harm our business.
We currently serve our EVIDENCE.com customers from third-party cloud storage providers based in the U.S. and other countries. Interruptions in our service, or loss or corruption of digital evidence, may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.
Most of our end-user customers are subject to budgetary and political constraints that may delay or prevent sales.
Most of our end-user customers are government agencies. These agencies often do not set their own budgets and therefore, have limited control over the amount of money they can spend. In addition, these agencies experience political pressure that may dictate the manner in which they spend money. As a result, even if an agency wants to acquire our products, it may be unable to purchase them due to budgetary or political constraints, particularly in challenging economic environments. There can be no assurance that the economic and budgeting issues will not worsen and adversely impact sales of our products. Some government agency orders may also be canceled or substantially delayed due to budgetary, political or other scheduling delays which frequently occur in connection with the acquisition of products by such agencies and such cancellations may accelerate or be more severe than we have experienced historically.
Due to municipal government funding rules, certain of our contracts are subject to appropriation (or similar) cancellation clauses, which could allow our customers to cancel contracts in the future.
Although TASER has entered into contracts for the delivery of products and services in the future and anticipates the contracts will be completed, if agencies do not appropriate money in future year budgets, or if other cancellation clauses are invoked, revenue associated with these bookings will not ultimately be recognized, and result in a reduction to bookings.

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We expend significant resources in anticipation of a sale due to our lengthy sales cycle and may receive no revenue in return.
Generally, law enforcement and corrections agencies consider a wide range of issues before committing to purchase our products, including product benefits, training costs, the cost to use our products in addition to, or in place of, other products, budget constraints and product reliability, safety and efficacy. The length of our sales cycle may range from a few weeks to as long as several years. Adverse publicity surrounding our products or the safety of such products has in the past, and could in the future, lengthen our sales cycle with customers. In the past, we believe that the Company’s sales were adversely impacted by negative publicity surrounding our products or the use of our products. We may incur substantial selling costs and expend significant effort in connection with the evaluation of our products by potential customers before they place an order. If these potential customers do not purchase our products, we will have expended significant resources and received no revenue in return.
SaaS revenue for EVIDENCE.com is recognized over the terms of the contracts, which may be several years, and, as such, trends in new business are not be immediately reflected in our operating results.
Our SaaS product revenue is generally recognized ratably over the terms of the contracts, which generally range from one to five years. As a result, most of the SaaS revenue we report each quarter is the result of agreements entered into during previous quarters. Consequently, current positive or negative trends in this portion of our business are not fully reflected in our revenue results for several periods.
We may face personal injury, wrongful death and other liability claims that harm our reputation and adversely affect our sales and financial condition.
Our CEW products are often used in aggressive confrontations that may result in serious, permanent bodily injury or death to those involved. Our CEW products may be associated with these injuries. A person, or the family members of a person, injured in a confrontation or otherwise in connection with the use of our products may bring legal action against us to recover damages on the basis of theories including wrongful death, personal injury, negligent design, defective product or inadequate warning. We are currently subject to a number of such lawsuits and we have recently been subject to significant adverse judgments and settlements. We may also be subject to lawsuits involving allegations of misuse of our products. If successful, wrongful death, personal injury, misuse and other claims could have a material adverse effect on our operating results and financial condition and could result in negative publicity about our products. Although we carry product liability insurance, we do incur significant legal expenses within our self-insured retention in defending these lawsuits and significant litigation could also result in a diversion of management’s attention and resources, negative publicity and a potential award of monetary damages in excess of our insurance coverage. The outcome of any litigation is inherently uncertain and there can be no assurance that our existing or any future litigation will not have a material adverse effect on our revenues, our financial condition or financial results.
Other litigation may subject us to significant litigation costs and judgments and divert management attention from our business.
We have been or could be in the future involved in numerous other litigation matters relating to our products, contracts and business relationships, including litigation against persons who we believe have infringed on our intellectual property, infringement litigation filed against the Company, litigation against a competitor and litigation filed by a former distributor against the Company. Such matters have resulted, and are expected to continue to result in, substantial costs to us, judgments, settlements and some diversion of our management’s attention, which could adversely affect our business, financial condition or operating results. There is also a risk of adverse judgments, as the outcome of litigation is inherently uncertain.
If we are unable to protect our intellectual property, we may lose our competitive advantage or incur substantial litigation costs to protect our rights. We may be subject to intellectual property infringement claims, which could cause us to incur litigation costs and divert management attention from our business.
Our future success depends upon our proprietary technology. Our protective measures, including patents, trademarks, copyrights, trade secret protection, and internet identity registrations, may prove inadequate to protect our proprietary rights and market advantage. The right to stop others from misusing our trademarks and service marks in commerce depends, to some extent, on our ability to show evidence of enforcement of our rights against such misuse in commerce. Our efforts to stop improper use, if insufficient, may lead to loss of trademark and service mark rights, brand loyalty and notoriety among our customers and prospective customers. The scope of any patent to which we have or may obtain rights to may not prevent others from developing and selling competing products. The validity and breadth of claims covered in technology patents involve complex legal and factual questions, and the resolution of such claims may be highly uncertain, lengthy and expensive. In addition, our patents may be held invalid upon challenge, or others may claim rights in or ownership of our patents. Moreover, we are subject to litigation

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with parties that claim, among other matters, that we infringed their patents or other intellectual property rights. The defense and prosecution of patent and other intellectual property claims are both costly and time consuming and could result in a material adverse effect on our business and financial position.
Also, any intellectual property infringement claims against us, with or without merit, could be costly and time-consuming to defend and divert our management’s attention from our business. If our products were found to infringe a third party’s proprietary rights, we could be forced to enter into costly royalty or licensing agreements in order to be able to sell our products or discontinue use of the protected technology. Such royalty and licensing agreements may not be available on terms acceptable to us or at all. There is no guarantee that our use of conventional technology searching and brand clearance searching will identify all potential rights holders. Rights holders may demand payment for past infringements and/or force us to accept costly license terms or discontinue use of protected technology and/or works of authorship that may include, for example, photos, videos, and software. Our current research and development focus on developing software-based products increases this risk.
In foreign countries we can enforce patent rights only in the jurisdictions in which our patent applications have been granted.
Our U.S. patents protect us from imported infringing products coming into the U.S. from abroad. We have made applications for patents in a few foreign countries; however, these may be inadequate to protect markets for our products in other foreign countries. Each foreign patent is examined and granted according to the law of the country where it was filed independent of whether a U.S. patent on similar technology was granted. A patent in a foreign country may be subject to cancellation if the claimed invention has not been sold in that country. Meeting the requirements of working invention differs by country and ranges from sales in the country to manufacturing in the country. U.S. export law, or the laws of some foreign countries, may prohibit us from satisfying the requirements for working the invention, creating a risk that some of our foreign patents may become unenforceable.
Government regulations applied to our CEW products may affect our markets for and sales of these products.
We rely on the opinions of the Bureau of Alcohol, Tobacco and Firearms, including the determination that a device that has projectiles propelled by the release of compressed gas in place of the expanding gases from ignited gunpowder, are not classified as firearms. Changes in statutes, regulations, and interpretation outside of our control may result in our products being classified or reclassified as firearms. Our private citizen market could be substantially reduced if consumers are required to obtain a registration to own a firearm prior to purchasing our products.
Federal regulation of sales in the U.S.: With the exceptions of the TASER XREP, our CEWs are not firearms regulated by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, but our consumer products are regulated by the U.S. Consumer Product Safety Commission. Although there are currently no Federal laws restricting sales of our core CEW products in the U.S., future Federal regulation could adversely affect sales of our products.
Federal regulation of international sales: Our CEW devices are considered a “crime control” product by the U.S. Department of Commerce (“DOC”) for export directly from the U.S. Consequently, we must obtain an export license from the DOC for the export of our CEW devices from the U.S. other than to Canada. In addition, certain of our camera and software products require classifications from the DOC before they may be shipped internationally. Our inability to obtain DOC export licenses or classifications on a timely basis for sales of our products to our international customers could significantly and adversely affect our international sales.
State and local regulation: Our devices are controlled, restricted or their use prohibited by a number of state and local governments. Our devices are banned from private citizen sale or use by statute in six states: District of Columbia, Hawaii, Massachusetts, New Jersey, New York, and Rhode Island. Some cities and municipalities also prohibit private citizen possession or use of our products. Other jurisdictions may ban or restrict the sale of our products and our product sales may be significantly affected by additional state, county and city governmental regulation.
Foreign regulation: Certain foreign jurisdictions prohibit the importation, sale, possession or use of CEWs, including in some countries by law enforcement agencies, limiting our international sales opportunities.

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We face unique regulatory and political challenges presented by international markets.
Our international business, including any expansion in new international markets, may be adversely affected by local laws and customs and U.S. laws applicable to foreign operations, including the Foreign Corrupt Practices Act.
Risks inherent in international operations also include, among others:
 
Foreign countries could change laws and regulations, change tax structures, or impose currency restrictions and other restraints;
Risks associated with the Foreign Corrupt Practices Act and local anti-bribery law compliance;
Political changes and economic crises may lead to changes in the business environment in which we operate;
Local distributors of our products may not comply with existing laws and regulations;
Some countries impose burdensome tariffs and quotas; and
Economic sanctions may be imposed by the U.S. on some countries, which could disrupt the markets for products we sell, even if we do not sell in the target country.
Environmental laws and regulations subject us to a number of risks and could result in significant liabilities and costs.
We are subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in our products and making producers for those products financially responsible for the collection, treatment, recycling and disposal. Environmental legislation within the European Union (“EU”) may increase our cost of doing business internationally and impact our revenues from EU countries as we comply with and implement these requirements.
The EU has published Directives on the restriction of certain hazardous substances in electronic and electrical equipment (the “RoHS Directive”) and on electronic and electrical waste management (the “WEEE Directive”). The RoHS Directive restricts the use of a number of substances, including lead. The WEEE Directive directs members of the EU to enact laws, regulations, and administrative provisions to ensure that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the EU. In addition, similar environmental legislation has been or may be enacted in other jurisdictions, including the U.S. (under federal and state laws) and other countries, the cumulative impact of which could be significant.
We continue to monitor the impact of specific registration and compliance activities required by the RoHS and WEEE Directives. We endeavor to comply with applicable environmental laws, yet compliance with such laws could increase our operations and product costs, increase the complexities of product design, procurement, and manufacturing, limit our ability to manage excess and obsolete non-compliant inventory, limit our sales activities, and impact our future financial results. Any violation of these laws can subject us to significant liability, including fines, penalties, and prohibiting sales of our products into one or more states or countries, and result in a material adverse effect on our financial condition.
New regulations related to conflict minerals may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.
In August 2012, the SEC adopted new disclosure requirements for companies that use certain minerals and metals, known as “conflict minerals,” in their products, whether or not these products are manufactured by third parties. These requirements require companies to perform due diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. We have incurred and will likely continue to incur costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. In addition, these new requirements could adversely affect the sourcing, availability and pricing of minerals used in our products. Because our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such an event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict-free.
Our dependence on third-party suppliers for key components of our devices could delay shipment of our products and reduce our sales.
We depend on certain domestic and foreign suppliers for the delivery of components used in the assembly of our products. Our reliance on third-party suppliers creates risks related to our potential inability to obtain an adequate supply of components or sub-assemblies and reduced control over pricing and timing of delivery of components and sub-assemblies. Specifically, we depend on suppliers of sub-assemblies, machined parts, injection molded plastic parts, printed circuit boards, custom wire fabrications and other miscellaneous customer parts for our products. We do not have long-term agreements with any of our suppliers and

19


there is no guarantee that supply will not be interrupted. Due to changes imposed for imports of foreign products into the U.S., as well as potential port closures and delays created by terrorist attacks or threats, public health issues, national disasters or work stoppages, we are exposed to risk of delays caused by freight carriers or customs clearance issues for our imported parts. Any interruption of supply for any material components of our products could significantly delay the shipment of our products and have a material adverse effect on our revenues, profitability and financial condition.

Component shortages could result in our inability to produce at a volume to adequately meet customer demand, which could result in a loss of sales, delay in deliveries and injury to our reputation.
Single or sole-source components used in the manufacture of our products may become unavailable or discontinued. Delays caused by industry allocations or obsolescence may take weeks or months to resolve. In some cases, parts obsolescence may require a product re-design to ensure quality replacement components. These delays could cause significant delays in manufacturing and loss of sales, leading to adverse effects significantly impacting our financial condition or results of operations and injure our reputation.
We may experience a decline in gross margins due to rising raw material and transportation costs associated with a future increase in petroleum prices.
A significant number of our raw materials are comprised of petroleum-based products, or incur some form of landed cost associated with transporting the raw materials or components to our facility. A significant rise in oil prices could adversely impact our ability to sustain current gross margins by increasing component pricing.
We may experience a decline in gross margins due to a shift in product sales from CEWs to AXON devices which may continue to carry a lower gross margin.
We continue to invest in the growth of the AXON segment, and this expected growth may result in a higher percentage of total revenues being comprised of AXON products and services. Gross margin as a percentage of net sales for the AXON segment is currently lower than that of the TASER Weapons segment, and may continue to be lower in the future.
To the extent demand for our products increases, our future success will be dependent upon our ability to manage our growth and to increase manufacturing production capacity, which may be accomplished by the implementation of customized manufacturing automation equipment.
To the extent demand for our products increases significantly in future periods, one of our key challenges will be to increase our production capacity to meet sales demand while maintaining product quality. Our primary strategies to accomplish this include introducing additional shifts, increasing the physical size of our assembly facilities, the hiring of additional production staff, and the implementation of additional customized automation equipment. The investments we make in this equipment may not yield the anticipated labor and material efficiencies. Our inability to meet any future increase in sales demand or effectively manage our expansion could have a material adverse effect on our revenues, financial results and financial condition.
Our future success is dependent on our ability to expand sales through distributors and direct sales and our inability to recruit new distributors or increase direct sales would negatively affect our sales.
Our distribution strategy is to pursue sales through multiple channels with an emphasis on independent distributors and direct sales. Our inability to establish relationships with and retain law enforcement equipment distributors, who we believe can successfully sell our products, would adversely affect our sales. In addition, our arrangements with our distributors are generally short-term. We are also focusing on direct sales to larger agencies through our regional sales managers and our inability to grow sales to these agencies in this manner could adversely affect our sales. If we do not competitively price our products, meet the requirements of our distributors or end-users, provide adequate marketing support, or comply with the terms of our distribution arrangements, our distributors may fail to aggressively market our products or may terminate their relationships with us. These developments would likely have a material adverse effect on our sales. Our reliance on the sales of our products by others also makes it more difficult to predict our revenues, cash flow and operating results.
The increased focus on direct sales compared to sales through distribution is dependent on our ability to sell into the states that have established distributor relationships.
In certain states we have decided to pursue sales directly with law enforcement customers, rather than working through established distribution channels. Our customers may have strong working relationships with distributors and we may face

20


resistance to this change. If we do not overcome this resistance and effectively build a direct relationship with our customers, sales may be adversely affected.
Acquisitions and joint ventures may have an adverse effect on our business.
We may consider additional acquisitions or joint ventures as part of our long-term business strategy. These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, that we don’t realize a satisfactory return on our investment, or that we experience difficulty in the integration or coordination of new employees, business systems, and technology, or there is a diversion of management’s attention from our other businesses. These events could harm our operating results or financial condition.
Catastrophic events may disrupt our business.
A disruption or failure of our systems or operations in the event of a major earthquake, weather event, fire, cyber-attack, terrorist attack, or other catastrophic event could cause delays in completing sales, providing services, or performing other mission-critical functions. A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and our operating results.
Our revenues and operating results may fluctuate unexpectedly from quarter-to-quarter, which may cause our stock price to decline.
Our revenues and operating results have varied significantly in the past and may vary significantly in the future due to various factors, including, but not limited to:
 
budgetary cycles of municipal, state and federal law enforcement and corrections agencies;
market acceptance of our products and services;
the timing of large domestic and international orders;
the outcome of any existing or future litigation;
adverse publicity surrounding our products, the safety of our products, or the use of our products;
changes in our sales mix;
new product introduction costs;
increased raw material expenses;
changes in our operating expenses; and
regulatory changes that may affect the marketability of our products.

As a result of these and other factors, we believe that period-to-period comparisons of our operating results may not be meaningful in the short term, and our performance in a particular period may not be indicative of our performance in any future period.
The Company’s financial performance is subject to risks associated with changes in the value of the U.S. dollar versus local currencies.
For current and potential foreign customers whose contracts are denominated in U.S. dollars, the relative change in currency values creates fluctuations in our product pricing. These changes in foreign end-user costs may result in lost orders and reduce the competitiveness of our products in certain foreign markets.
For non-U.S. dollar denominated sales, weakening of foreign currencies relative to the U.S. dollar generally leads us to raise international pricing, potentially reducing demand for our products. Should we decide not to raise local prices to fully offset the dollar’s strengthening, or at all, the U.S. dollar value of our foreign currency denominated sales and earnings would be adversely affected. We do not currently engage in hedging activities. Fluctuations in foreign currency could result in a change in the U.S. dollar value of our foreign denominated assets and liabilities including accounts receivable. Therefore, the U.S. dollar equivalent collected on a given sale could be less than the amount invoiced causing the sale to be less profitable than contemplated.
We also import selected components which are used in the manufacturing of some of our products. Although our purchase orders are generally in U.S. dollars, weakness in the U.S. dollar could lead to price increases for the components.

21


We maintain most of our cash balances, some of which are not insured, at three depository institutions.
We maintain most of our cash accounts at three depository institutions. As of December 31, 2014, our aggregate balances in such accounts were $48.4 million. The Company’s balances with these institutions regularly exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits.
We could suffer losses with respect to the uninsured balances if the depositary institutions failed and the institution’s assets were insufficient to cover its deposits and/or the Federal government did not take actions to support deposits in excess of existing FDIC insurance limits. Any such losses could have a material adverse effect on our liquidity, financial condition and results of operations.

We have established our international headquarters in Amsterdam, the Netherlands, and as such will have significant Euro denominated expenses.
We will be establishing bank accounts in Amsterdam which will denominated in Euros
We depend on our ability to attract and retain our key management and technical personnel.
Our success depends upon the continued service of our key management personnel. Our success also depends on our ability to continue to attract, retain and motivate qualified technical personnel. Although we have employment agreements with certain of our officers, the employment of such persons is “at-will” and either we or the employee can terminate the employment relationship at any time, subject to the applicable terms of the employment agreements. The competition for our key employees is intense. The loss of the service of one or more of our key personnel could harm our business.

Item 1B. Unresolved Staff Comments
None.
 
Item 2. Properties
Our corporate headquarters and manufacturing facilities are based in a 100,000 square foot facility in Scottsdale, Arizona, which we own. We also lease premises in Scottsdale, Arizona; Seattle, Washington; Topsfield, Massachusetts; Rio de Janeiro, Brazil; Sao Paulo, Brazil; Amsterdam, Netherlands; and Frankfurt, Germany. We believe our existing facilities are well maintained and in good operating condition. We also believe we have adequate manufacturing capacity for our existing product lines for the foreseeable future. To the extent that we introduce new products in the future, we will likely need to acquire additional facilities to locate the associated production lines. However, we believe we can acquire or lease such facilities on reasonable terms. The Company continues to make investments in capital equipment as needed to meet anticipated demand for its products.
 
Item 3. Legal Proceedings
See discussion of litigation in Note 9(c) to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, which discussion is incorporated by reference herein.
 
Item 4. Mine Safety Disclosures
None.


22


PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is quoted under the symbol “TASR” on The NASDAQ Global Select Market. The following table sets forth the high and low sales prices per share for our common stock as reported by NASDAQ for each quarter of the last two fiscal years.
 
High
 
Low
Year Ended December 31, 2014:
 
 
 
First quarter
$
20.83

 
$
14.89

Second quarter
19.17

 
12.55

Third quarter
18.76

 
10.46

Fourth quarter
27.65

 
13.40

 
High
 
Low
Year Ended December 31, 2013:
 
 
 
First quarter
$
9.80

 
$
6.70

Second quarter
9.79

 
7.24

Third quarter
15.30

 
8.43

Fourth quarter
18.52

 
13.45

Holders
As of December 31, 2014, there were 294 holders of record of our common stock.
Dividends
To date, we have not declared or paid cash dividends on our common stock. We do not intend to pay cash dividends in the foreseeable future and our revolving line of credit prohibits the payment of cash dividends.
Issuer Purchases of Equity Securities

In May 2014, the Company's Board of Directors authorized a stock repurchase program to acquire up to $30.0 million of the Company’s outstanding common stock subject to stock market conditions and corporate considerations. During the year ended December 31, 2014, the Company repurchased approximately 1.7 million common shares under this program for a total cost of approximately $22.4 million, or a weighted average cost of $12.99 per share. The weighted average cost includes the average price paid per share of $12.96, plus any applicable administrative costs for the transaction. The Company has approximately $7.6 million remaining on the repurchase authorization as of December 31, 2014. Repurchases may be made from time to time on the open market. There were no repurchases of our common stock by the Company or on its behalf during the three months ended December 31, 2014.


23


Stock Performance Graph
The following stock performance graph compares the performance of our common stock to the NASDAQ Stock Market (U.S.) and the Russell 3000 Index. The graph covers the period from December 31, 2009 to December 31, 2014. The graph assumes that the value of the investment in our stock and in each index was $100 at December 31, 2009, and that all dividends were reinvested. We do not pay dividends on our common stock.
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
TASER International, Inc.
$
100.00

 
$
107.31

 
$
116.89

 
$
204.11

 
$
362.56

 
$
604.57

NASDAQ Composite
100.00

 
117.61

 
118.70

 
139.00

 
196.83

 
223.74

Russell 3000
100.00

 
116.93

 
118.13

 
137.52

 
183.66

 
206.72



24



Item 6.    Selected Financial Data
The following selected financial data should be read in conjunction with our consolidated financial statements and the notes thereto, and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The statement of operations data for the years ended December 31, 2014, 2013 and 2012, and the balance sheet data as of December 31, 2014 and 2013, have been derived from, and should be read in conjunction with, our audited consolidated financial statements and the notes thereto included herein. The statement of operations data for the years ended December 31, 2011 and 2010, and the balance sheet data as of December 31, 2012, 2011 and 2010, is derived from our audited consolidated financial statements and the notes thereto which are not included in this Annual Report on Form 10-K. Dollars are in thousands, except per share amounts.

 
For the Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
164,525

 
$
137,831

 
$
114,753

 
$
90,028

 
$
86,930

Cost of products sold and services delivered
62,977

 
51,988

 
47,038

 
41,753

 
41,563

Excess inventory charges

 

 

 
3,746

 

Gross margin
101,548

 
85,843

 
67,715

 
44,529

 
45,367

Sales, general and administrative expenses
54,158

 
46,557

 
39,247

 
40,801

 
39,095

Research and development expenses
14,885

 
9,888

 
8,139

 
9,989

 
11,412

Litigation judgments (recoveries)

 
1,450

 
(2,200
)
 
3,301

 

Loss on impairment

 

 

 
1,354

 

Income (loss) from operations
32,505

 
27,948

 
22,529

 
(10,916
)
 
(5,140
)
Interest and other (expense) income, net
(194
)
 
86

 
83

 
1,287

 
26

Income (loss) before provision (benefit) for income taxes
32,311

 
28,034

 
22,612

 
(9,629
)
 
(5,114
)
Provision (benefit) for income taxes
12,393

 
9,790

 
7,874

 
(2,589
)
 
(730
)
Net income (loss)
$
19,918

 
$
18,244

 
$
14,738

 
$
(7,040
)
 
$
(4,384
)
Net income (loss) per common and common equivalent shares:
 
 
 
 
 
 
 
 
 
Basic
$
0.38

 
$
0.35

 
$
0.27

 
$
(0.12
)
 
$
(0.07
)
Diluted
$
0.37

 
$
0.34

 
$
0.27

 
$
(0.12
)
 
$
(0.07
)
Weighted average number of common and common equivalent shares outstanding:

 
 
 
 
 
 
 
 
Basic
52,948

 
51,880

 
53,827

 
59,436

 
62,524

Diluted
54,500

 
54,152

 
54,723

 
59,436

 
62,524

 
As of December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Working capital
$
107,855

 
$
74,338

 
$
60,944

 
$
45,845

 
$
70,378

Total assets
185,368

 
148,382

 
116,236

 
104,963

 
136,187

Total current liabilities
31,973

 
23,129

 
18,109

 
15,888

 
11,948

Total long-term debt and capital leases, net of current portion
29

 
67

 
103

 

 

Total stockholders’ equity
129,106

 
108,347

 
87,285

 
82,456

 
117,564


25



Item 7.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with the other sections of this annual report on Form 10-K, including Part I, Item 1A: “Risk Factors”; Part II, Item 6: “Selected Financial Data”; and Part II, Item 8: “Financial Statements and Supplementary Data.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing. The tables in the MD&A sections below are derived from exact numbers and may have immaterial rounding differences.

Executive Overview and Key Strategic Initiatives
Our core mission is to protect life and to protect truth through technologies that make communities safer. We are a market leader in the development and manufacture of advanced conducted electrical weapons (“CEWs”) designed for use by law enforcement, military, corrections, and private security personnel and by private individuals for personal defense. More recently, to address challenges faced by law enforcement officers post-incident, we have developed a fully integrated hardware and software solution to provide our law enforcement customers the capabilities to capture, store, manage, share and analyze video and other digital evidence.
Technological innovation is the foundation for our long-term growth and we intend to maintain our commitment to the research and development of our technology for both new and existing products that further our mission. At the same time we have established industry leading training services to provide our users a comprehensive overview of legal, policy, medical and risk mitigation issues relating to our products and the use of force. We have built a network of distribution channels for selling and marketing our products and services to law enforcement agencies, primarily in North America, with ongoing focus and effort placed on expanding these programs in international, military and other markets. Over 17,000 law enforcement agencies in nearly 150 countries have made initial purchases of our TASER brand devices for testing or deployment. To date, we do not know of any significant sales of any competing CEW products, but acknowledge the continued emergence of competition within the on-officer camera, digital evidence management and related technology market.
Our key strategic initiatives include:
 
Continue investment in development of innovative new products, which both compliment and add to our existing platforms. Our research and development efforts in 2014 were primarily focused on refining our EVIDENCE.com services and exploring next generation hardware for our TASER Weapons and AXON segments.
We believe that the video evidence capture and management market will continue to grow significantly due to several factors, including increasing recognition of the benefits and value of video evidence and other mobile technologies. In 2015, we expect to devote significant resources towards both the development of the next revenue generating product for our AXON segment, and additional functionality for our existing SaaS. We aim to work closely with our customers to develop new value added features to our existing platform that are necessary to optimize their workflows, as well as develop adjacent technologies in wearables, cloud, and mobile devices.
 
Increase market penetration in both international and U.S. law enforcement markets:
Internationally, there is a very significant portion of the market where officers do not carry CEWs or wear on-officer cameras. We believe there is substantial opportunity for more widespread adoption of CEWs and AXON products in foreign countries. In recent years, we have seen international markets become increasingly attractive and we seek to maintain that trend as we demonstrate the benefits of large-scale adoptions of our CEWs and AXON products, using countries such as the United Kingdom and Australia as benchmarks of successful programs. We have also decided to make focused investments in targeted countries such as France, Brazil, the United Kingdom, Canada and Australia as we see considerable opportunity for increased sales in those regions. Because the sales cycle to sell into a new international market can be as long or longer than 18 to 24 months, it is important that we continue to develop our pipeline in terms of both the number and size of opportunities.
In the U.S., our focus is on driving deeper penetration into law enforcement agencies that do not have a CEW or on-officer camera on every officer. Our strategy is to create a dominant market position in domestic law enforcement and internationally over time.


26


Focus on increasing bookings and brand awareness for EVIDENCE.com and AXON cameras. We have expanded our AXON sales team from 14 at the end of 2013 to 16 full-time salespeople at the end of 2014. We expect the additional salesforce to generate increased bookings in 2015. In addition, during 2015, we expect to continue our concerted efforts to promote the awareness of the benefits of digital evidence management in general, and EVIDENCE.com specifically, throughout the law enforcement community. We expect additional efforts will encompass tech summits, sponsorships, tradeshows, interaction with trade associations (such as the International Association of Chiefs of Police), and other promotional activities.
Included in our strategy to demonstrate the benefits of EVIDENCE.com, we have optional test and evaluation periods of the product on-site with customers. We experienced increasing volumes of trial programs in 2014 and believe these trial programs are the best way for our customers to see the powerful capabilities, benefits and compelling value proposition of our technology. We anticipate further increases in these trial programs in 2015, ultimately leading to increased sales. As market acceptance grows, we anticipate fewer and/or shorter trial programs will be necessary to capture sales.
 
Focus on maintaining incremental sales channels by continuing to develop purchasing programs that position the Company to own municipality budget lines and become the ongoing technology provider for our customers in order to drive sales growth.
Focus on minimizing attrition rates by providing world class products and services that provide the value necessary to ensure customers continue to renew their contracts.
Further develop our presence in federal government and military markets. We intend to continue to place emphasis on supporting our military customers through our team of professionals with extensive military, homeland defense and law enforcement experience. The primary focus of this team is to support military use for our existing hardware as well as increase technology development through contracted support.
Continued application for patents and intellectual property rights, both in the U.S. and internationally, to protect key technology in our products and further attempt to protect and maintain our competitive position.
Continued aggressive litigation defense to protect our brand equity. We maintain a team of world class medical experts and internal legal resources to provide an efficient means of defending the Company against product liability claims.

Results of Operations
The following table presents data from our statements of operations as well as the percentage relationship to total net sales of items included in our statements of operations (dollars in thousands):
 
Year Ended December 31,
 
2014
 
2013
 
2012
Net sales
$
164,525

 
100.0
 %
 
$
137,831

 
100.0
%
 
$
114,753

 
100.0
 %
Cost of products sold and services delivered
62,977

 
38.3

 
51,988

 
37.7

 
47,038

 
41.0

Gross margin
101,548

 
61.7

 
85,843

 
62.3

 
67,715

 
59.0

Operating expenses:

 
 
 
 
 
 
 
 
 
 
Sales, general and administrative
54,158

 
32.9

 
46,557

 
33.8

 
39,247

 
34.2

Research and development
14,885

 
9.0

 
9,888

 
7.2

 
8,139

 
7.1

Litigation judgments (recoveries)

 

 
1,450

 
1.1

 
(2,200
)
 
(1.9
)
Total operating expenses
69,043

 
42.0

 
57,895

 
42.0

 
45,186

 
39.4

Income from operations
32,505

 
19.8

 
27,948

 
20.3

 
22,529

 
19.6

Interest and other (expense) income, net
(194
)
 
(0.1
)
 
86

 
0.1

 
83

 
0.1

Income before provision for income taxes
32,311

 
19.6

 
28,034

 
20.3

 
22,612

 
19.7

Provision for income taxes
12,393

 
7.5

 
9,790

 
7.1

 
7,874

 
6.9

Net income
$
19,918

 
12.1
 %
 
$
18,244

 
13.2
%
 
$
14,738

 
12.8
 %

27


Net sales to the U.S. and other countries are summarized as follows (dollars in thousands):
 
Year Ended December 31,
 
2014
 
2013
 
2012
United States
$
132,205

 
80.4
%
 
$
115,674

 
83.9
%
 
$
93,427

 
81.4
%
Other Countries
32,320

 
19.6

 
22,157

 
16.1

 
21,326

 
18.6

Total
$
164,525

 
100.0
%
 
$
137,831

 
100.0
%
 
$
114,753

 
100.0
%
The Company’s operations are comprised of two reportable segments; the sale of CEWs, accessories and other products and services (the “TASER Weapons” segment) and the AXON video business, focused on wearables, cloud and mobile products, including AXON video products, TASER Cam and EVIDENCE.com (the "AXON" segment formerly known as the “EVIDENCE.com & Video” segment).  The Company includes only revenues and costs directly attributable to the AXON segment in that segment. Included in AXON segment costs are: costs of sales for both products and services, selling expense for the video sales team, video product management expenses, video trade shows and related expenses, and research and development for products included in the AXON segment. All other costs are included in the TASER Weapons segment. The Company does not regularly review assets by segment; therefore we do not allocate assets by segment as part of our financial information presented.

Net Sales
Net sales by product line were as follows for the years ended December 31, 2014 and 2013 (dollars in thousands):
 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
 
2014
 
2013
 
 
TASER Weapons segment:
 
 
 
 
 
 
 
 
 
 
 
TASER X26P
$
43,512

 
26.4
%
 
$
21,860

 
15.9
%
 
$
21,652

 
99.0
 %
TASER X2
28,774

 
17.5

 
26,471

 
19.2

 
2,303

 
8.7

TASER X26
18,712

 
11.4

 
30,883

 
22.4

 
(12,171
)
 
(39.4
)
TASER C2
2,084

 
1.3

 
2,468

 
1.8

 
(384
)
 
(15.6
)
TASER M26
693

 
0.4

 
681

 
0.5

 
12

 
1.8

TASER XREP
2,617

 
1.6

 

 

 
2,617

 
*

Single cartridges
38,539

 
23.4

 
35,660

 
25.9

 
2,879

 
8.1

Extended warranties including TAP
6,024

 
3.7

 
4,617

 
3.3

 
1,407

 
30.5

Other
4,658

 
2.8

 
4,834

 
3.5

 
(176
)
 
(3.6
)
TASER Weapons segment
145,613

 
88.5

 
127,474

 
92.5

 
18,139

 
14.2

AXON segment:

 


 

 


 

 


AXON solutions
9,029

 
5.5

 
3,454

 
2.5

 
5,575

 
161.4

EVIDENCE.com
4,039

 
2.5

 
1,719

 
1.2

 
2,320

 
135.0

TASER Cam
4,674

 
2.8

 
4,688

 
3.4

 
(14
)
 
(0.3
)
Other
1,170

 
0.7

 
496

 
0.4

 
674

 
135.9

AXON segment
18,912

 
11.5

 
10,357

 
7.5

 
8,555

 
82.6

Total net sales
$
164,525

 
100.0
%
 
$
137,831

 
100.0
%
 
$
26,694

 
19.4

 *    not meaningful

28


Net unit sales for the TASER Weapons handles and other products and AXON segment products are as follows:
 
Year Ended December 31,
 
 
 
 
 
2014
 
2013
 
Unit
Change
 
Percent
Change
TASER X26P
51,283

 
28,107

 
23,176

 
82.5
 %
TASER X2
26,901

 
28,164

 
(1,263
)
 
(4.5
)
TASER X26
17,770

 
33,769

 
(15,999
)
 
(47.4
)
TASER M26
1,994

 
2,091

 
(97
)
 
(4.6
)
TASER C2
7,249

 
8,116

 
(867
)
 
(10.7
)
StrikeLight
2,767

 
3,141

 
(374
)
 
(11.9
)
Cartridges
1,618,117

 
1,552,028

 
66,089

 
4.3

AXON flex
10,034

 
4,903

 
5,131

 
104.7

AXON body
13,219

 
1,888

 
11,331

 
600.2

TASER Cam
9,303

 
10,686

 
(1,383
)
 
(12.9
)
Net sales were $164.5 million and $137.8 million for the years ended December 31, 2014 and 2013, respectively, an increase of $26.7 million or 19.4%. Net sales for the TASER Weapons segment were $145.6 million and $127.5 million for the years ended December 31, 2014 and 2013, respectively, an increase of $18.1 million or 14.2%. Net sales for the AXON segment were $18.9 million and $10.4 million for the years ended December 31, 2014 and 2013, respectively, an increase of $8.6 million or 82.6%.
The increase in net sales for 2014 compared to 2013 in the TASER Weapons segment was primarily driven by the introduction of the TASER X26P smart weapon. Growing demand is seen in the TASER Weapons segment as customers are upgrading their legacy CEWs to the new TASER X2 and X26P smart weapons. In the AXON segment, the increase in net sales was driven by the continued adoption of the AXON on-officer cameras and EVIDENCE.com application in the law enforcement markets. International customers continued to be a steady contributor to the results with $32.3 million in 2014 versus $22.2 million in 2013. To further strengthen our international presence, during 2014, the Company established TASER International, B.V. located in Amsterdam, Netherlands, that will serve as a permanent international headquarters to facilitate transactions with existing customers as well as allow for continued expansion into other foreign markets. This location will have full-time personnel functioning in sales and marketing, training, finance and other administrative roles.

To gain more immediate feedback regarding activity for AXON products and EVIDENCE.com services, we also review bookings for these products. We consider bookings to be a statistical measure defined as the sales price of orders (not invoiced sales), net of cancellations, placed in the relevant fiscal period, regardless of when the products or services ultimately will be provided. Some bookings will be invoiced in subsequent years. Due to municipal government funding rules, certain of the future year amounts included in bookings are subject to budget appropriation or other contract cancellation clauses. Although TASER has entered into contracts for the delivery of products and services in the future and anticipates the contracts will be completed, if agencies do not appropriate money in future year budgets or enact a cancellation clause, revenue associated with these bookings will not ultimately be recognized, resulting in a future reduction to bookings. Bookings related to EVIDENCE.com and the AXON product line increased to $57.1 million during 2014, compared to $14.5 million in 2013.

29


Net sales by product line were as follows for the years ended December 31, 2013 and 2012 (dollars in thousands):
 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
 
2013
 
2012
 
 
TASER Weapons segment:
 
 
 
 
 
 
 
 
 
 
 
TASER X26P
$
21,860

 
15.9
%
 
$

 
%
 
$
21,860

 
*

TASER X2
26,471

 
19.2

 
25,841

 
22.5

 
630

 
2.4
 %
TASER X26
30,883

 
22.4

 
35,950

 
31.3

 
(5,067
)
 
(14.1
)
TASER C2
2,468

 
1.8

 
3,095

 
2.7

 
(627
)
 
(20.3
)
TASER M26
681

 
0.5

 
1,233

 
1.1

 
(552
)
 
(44.8
)
Single cartridges
35,660

 
25.9

 
32,811

 
28.6

 
2,849

 
8.7

Extended warranties including TAP
4,617

 
3.3

 
3,589

 
3.1

 
1,028

 
28.6

Other
4,834

 
3.5

 
6,536

 
5.7

 
(1,702
)
 
(26.0
)
TASER Weapons segment
127,474

 
92.5

 
109,055

 
95.0

 
18,419

 
16.9

AXON segment:
 
 
 
 
 
 
 
 
 
 
 
AXON solutions
3,454

 
2.5

 
2,055

 
1.8

 
1,399

 
68.1

EVIDENCE.com
1,719

 
1.2

 
398

 
0.3

 
1,321

 
331.9

TASER Cam
4,688

 
3.4

 
3,055

 
2.7

 
1,633

 
53.5

Other
496

 
0.4

 
190

 
0.2

 
306

 
161.1

AXON segment
10,357

 
7.5

 
5,698

 
5.0

 
4,659

 
81.8

Total net sales
$
137,831

 
100.0
%
 
$
114,753

 
100.0
%
 
$
23,078

 
20.1

 *    not meaningful
Net unit sales for the TASER Weapons handles and other products and AXON segment products are as follows:
 
Year Ended December 31,
 
 
 
 
 
2013
 
2012
 
Unit
Change
 
Percent
Change
TASER X26P
28,107

 

 
28,107

 
*

TASER X2
28,164

 
30,665

 
(2,501
)
 
(8.2
)%
TASER X26
33,769

 
42,340

 
(8,571
)
 
(20.2
)
TASER M26
2,091

 
3,771

 
(1,680
)
 
(44.6
)
TASER C2
8,116

 
11,803

 
(3,687
)
 
(31.2
)
StrikeLight
3,141

 

 
3,141

 
*

Cartridges
1,552,028

 
1,540,838

 
11,190

 
0.7

AXON flex
4,903

 
2,772

 
2,131

 
76.9

AXON body
1,888

 

 
1,888

 
*

TASER Cam
10,686

 
7,859

 
2,827

 
36.0

 *    not meaningful

Net sales were $137.8 million and $114.8 million for the years ended December 31, 2013 and 2012, respectively, an increase of $23.1 million or 20.1%. Net sales for the TASER Weapons segment were $127.5 million and $109.1 million for the years ended December 31, 2013 and 2012, respectively, an increase of $18.4 million or 16.9%. Net sales for the AXON segment were $10.4 million and $5.7 million for the years ended December 31, 2013 and 2012, respectively, an increase of $4.7 million or 81.8%.
The increase in net sales for 2013 compared to 2012 in the TASER Weapons segment was primarily driven by the introduction of the TASER X26P smart weapon. Growing demand was seen in the TASER Weapons segment as customers upgraded their legacy CEWs to the new TASER X2 and X26P smart weapons. In the AXON segment, the increase in net sales was driven by the continued adoption of the AXON on-officer cameras and EVIDENCE.com application in the law enforcement markets. International customers continued to be a steady contributor to the results with $22.2 million in 2013 versus $21.3 million in 2012. International sales grew slightly in 2013, although decreasing as a percentage of total revenue.

30


Cost of Products Sold and Services Delivered
(dollars in thousands)
 
Year Ended December 31,
 
Year Ended December 31,
 
 
 
Dollar
Change
 
Percent
Change
 
 
 
Dollar
Change
 
Percent
Change
 
2014
 
2013
 
 
 
2013
 
2012
 
 
TASER Weapons segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold
$47,680
 
$44,025
 
$
3,655

 
8.3
%
 
$44,025
 
$39,350
 
$
4,675

 
11.9
 %
Cost as % of sales
32.7
%
 
34.5
%
 
 
 
 
 
34.5
%
 
36.1
%
 
 
 
 
AXON segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold
13,233

 
6,074

 
7,159

 
117.9

 
6,074

 
3,773

 
2,301

 
61.0

Cost of services delivered
2,064

 
1,889

 
175

 
9.3

 
1,889

 
3,915

 
(2,026)

 
(51.7
)
Total cost of products sold and services delivered
15,297

 
7,963

 
7,334

 
92.1

 
7,963

 
7,688

 
275

 
3.6

Cost as % of sales
80.9
%
 
76.9
%
 
 
 
 
 
76.9
%
 
134.9
%
 
 
 
 
Total cost of products sold and services delivered
$62,977
 
$51,988
 
$
10,989

 
21.1

 
$51,988
 
$47,038
 
$
4,950

 
10.5

Cost as % of sales
38.3
%
 
37.7
%
 
 
 
 
 
37.7
%
 
41.0
%
 
 
 
 
Cost of products sold and services delivered was $63.0 million and $52.0 million for the years ended December 31, 2014 and 2013, respectively, an increase of $11.0 million or 21.1%. As a percentage of net sales, cost of products sold and services delivered remained relatively consistent at 38.3% in 2014 compared to 37.7% in 2013. Within the TASER Weapons segment, cost of products sold increased $3.7 million, or 8.3%, to $47.7 million in 2014, compared to $44.0 million in 2013, but decreased as a percent of sales to 32.7% from 34.5%. The net decrease in cost of products sold as a percent of sales primarily reflects increased leverage due to higher sales and a higher average selling prices.
Within the AXON segment, cost of products sold and services delivered were $15.3 million, an increase of $7.3 million, or 92.1% from 2013. The increase was driven by growing sales in this segment, increased data storage costs as more agencies utilize EVIDENCE.com, as well as the introduction of a professional services team. These increases were partially offset by the full depreciation of the capitalized EVIDENCE.com software development costs as of June 30, 2013. The slight decrease in overall cost of products sold and services delivered as a percentage of sales was driven by higher sales and by improvements to our EVIDENCE.com SaaS margins. There are a number of fixed costs for the AXON segment which, as we generate additional traction in the business, we expect to remain relatively stable and should allow for lower cost of services delivered as a percentage of service revenue. As a percentage of net sales, cost of products sold and services delivered increased slightly to 80.9% in 2014 from 76.9% in 2013.

Cost of products sold and services delivered, was $52.0 million and $47.0 million for the years ended December 31, 2013 and 2012, respectively, an increase of $5.0 million or 10.5%. As a percentage of net sales, cost of products sold and services delivered decreased to 37.7% in 2013 from 41.0% in 2012. Within the TASER Weapons segment, cost of products sold increased $4.7 million, or 11.9%, to $44.0 million in 2013, compared to $39.4 million in 2012, but decreased as a percent of sales to 34.5% from 36.1%. The net decrease in cost of products sold as a percent of sales primarily reflects increased leverage due to higher sales and a higher average selling prices.

Within the AXON segment, cost of products sold and services delivered were $8.0 million, an increase of $0.3 million, or 3.6% from 2012. Increased product costs related to the AXON segment due to growing sales in this segment were partially offset by decreased service costs, resulting in a slight overall increase for 2013 as compared to the prior year. The decrease in service costs is comprised of cost savings due to efficiencies gained by moving to a third party cloud storage from our data center, as well as the full depreciation of the capitalized EVIDENCE.com software development costs as of June 30, 2013. The decrease in overall cost of products sold and services delivered as a percentage of sales was driven by higher sales and by improvements to our EVIDENCE.com SaaS margins. There are a number of fixed costs for the AXON segment which, as we generate traction in the business, we expect to remain relatively stable and should allow for lower cost of services delivered as a percentage of service revenue. As a percentage of net sales, cost of products sold and services delivered decreased to 76.9% in 2013 from 134.9% in 2012.

31


Gross Margin
(dollars in thousands)
 
Year Ended December 31,
 
Year Ended December 31,
 
 
 
Dollar
Change
 
Percent
Change
 
 
 
Dollar
Change
 
Percent
Change
 
2014
 
2013
 
 
 
2013
 
2012
 
 
TASER Weapons segment
$
97,933

 
$
83,449

 
$
14,484

 
17.4
%
 
$
83,449

 
$
69,705

 
$
13,744

 
19.7
%
AXON segment
3,615

 
2,394

 
1,221

 
51.0

 
2,394

 
(1,990
)
 
4,384

 
*

Total gross margin
$
101,548

 
$
85,843

 
$
15,705

 
18.3

 
$
85,843

 
$
67,715

 
$
18,128

 
26.8

Gross margin as % of sales
61.7
%
 
62.3
%
 
 
 
 
 
62.3
%
 
59.0
%
 
 
 
 
*    not meaningful
Gross margin increased $15.7 million to $101.5 million for 2014 compared to $85.8 million for 2013. As a percentage of net sales, gross margin decreased slightly to 61.7% for 2014 compared to 62.3% for 2013. The decrease is primarily attributable to sales mix and continued growth in the AXON segment. As a percentage of net sales, gross margin for the TASER Weapons segment was 67.3% and 65.5% for 2014 and 2013, respectively, while the same measure for these years for the AXON segment were 19.1% and 23.1%, respectively. Although the Company experienced improvements in margins for the Weapons and AXON segments individually, due primarily to higher average selling prices, as the AXON segment continues to become a greater percentage of total sales, the Company expects to see a slight decrease in overall margins as a percentage of sales. The overall increase in margins was negatively impacted by higher inventory reserves taken towards the end of 2014 as compared to 2013 related primarily to the reserve for the X26 CEW that was discontinued as of December 31, 2014. The Company also accrued approximately $1.1 million of inventory losses related to products it may not be able to use in production of certain AXON camera products.
Gross margin increased $18.1 million to $85.8 million in 2013 compared to $67.7 million in 2012. As a percentage of net sales, gross margin increased to 62.3% for 2013 compared to 59.0% for 2012. The increase in gross margin as a percentage of net sales for 2014 was primarily attributable to the move of the EVIDENCE.com data center to a third party provider, the full depreciation of the capitalized EVIDENCE.com software development costs, increased sales of higher margin products and operational efficiencies.

Sales, General and Administrative Expenses
Sales, general and administrative (“SG&A”) expenses were comprised as follows for 2014 and 2013 (dollars in thousands):
 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
 
2014
 
2013
 
 
Salaries, benefits and bonus
$
18,179

 
$
14,723

 
$
3,456

 
23.5
 %
Stock-based compensation
3,558

 
3,158

 
400

 
12.7

Legal, professional and accounting
4,711

 
7,323

 
(2,612
)
 
(35.7
)
Sales and marketing
8,124

 
6,025

 
2,099

 
34.8

Consulting and lobbying services
3,417

 
2,097

 
1,320

 
62.9

Travel and meals
4,778

 
3,305

 
1,473

 
44.6

Building
2,956

 
3,160

 
(204
)
 
(6.5
)
Supplies
1,898

 
1,462

 
436

 
29.8

Depreciation and amortization
1,246

 
1,230

 
16

 
1.3

Liability insurance
1,303

 
2,012

 
(709
)
 
(35.2
)
Other
3,988

 
2,062

 
1,926

 
93.4

Total sales, general and administrative expenses
$
54,158

 
$
46,557

 
$
7,601

 
16.3

Sales, general, and administrative as a percentage of net sales
32.9
%
 
33.8
%
 
 
 
 

32


Of the increase in SG&A above, there was increased expense associated with customer-facing positions, including: salaries, benefits, bonus and stock-based compensation, as well as sales commissions, which are included in the sales and marketing line item in the table above. Positions were added throughout the year, with the following customer-facing headcount as of the end of each year:
 
As of December 31,
 
2014
 
2013
 
2012
TASER Weapons sales representatives
12

 
8

 
8

AXON sales representatives
16

 
14

 
7

International sales representatives
5

 
5

 
3

Support sales staff
8

 
8

 
5

Telesales
17

 
11

 
8

Other customer-facing roles
20

 
14

 
12

Total customer-facing roles
78

 
60

 
43

Sales, general and administrative expenses were $54.2 million and $46.6 million for the years ended December 31, 2014 and 2013, respectively, an increase of $7.6 million or 16.3%. As a percentage of total net sales, SG&A expenses decreased to 32.9% for 2014 compared to 33.8% for 2013.
Within the TASER Weapons segment, SG&A increased $2.8 million, or 7.0%, to $43.0 million from $40.2 million in 2013. Salaries, benefits, bonus and stock-based compensation in the TASER Weapons increased approximately $2.0 million in 2014 compared to 2013 partially due to increased international, telesales, and support sales staff. Incremental administrative functions were also added in 2014 in order to support the growing business. Travel expenses also increased approximately $0.5 million compared to the prior year as increased international travel occurred to set up the new international offices in Amsterdam. Offsetting these increases, efficiencies were realized in liability insurance costs and sales and marketing expenses.
Within the AXON segment, SG&A increased $4.8 million, or 75.0%, to $11.2 million in 2014 in comparison to the prior year. Salaries, benefits, bonus and stock-based compensation in the AXON segment increased $1.9 million. Sales and marketing expenses in the AXON segment also increased approximately $1.4 million in comparison to 2013 as a result of a large presence and a hosted booth at the International Association of Chiefs of Police. We believe these increases in marketing activities will increase customer awareness of the benefits of EVIDENCE.com and ultimately lead to sales growth in future periods. Sales and marketing expenses also include increases of approximately $0.9 million in commissions. Increases were also seen in lobbying and consulting fees of approximately $0.8 million and travel expenses of approximately $0.8 million.
The Company expects to see increases in SG&A in 2015 compared to 2014 as it plans to make additional investments in customer-facing positions both domestically and internationally along with increased investments in sales and marketing.

33


Sales, general and administrative expenses were comprised as follows for 2013 and 2012 (dollars in thousands):
 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
 
2013
 
2012
 
 
Salaries, benefits and bonus
$
14,723

 
$
11,385

 
$
3,338

 
29.3
 %
Stock-based compensation
3,158

 
2,629

 
529

 
20.1

Legal, professional and accounting
7,323

 
6,427

 
896

 
13.9

Sales and marketing
6,025

 
4,284

 
1,741

 
40.6

Consulting and lobbying services
2,097

 
2,542

 
(445
)
 
(17.5
)
Travel and meals
3,305

 
3,020

 
285

 
9.4

Building
3,160

 
2,979

 
181

 
6.1

Supplies
1,462

 
1,340

 
122

 
9.1

Depreciation and amortization
1,230

 
1,492

 
(262
)
 
(17.6
)
Liability insurance
2,012

 
1,821

 
191

 
10.5

Other
2,062

 
1,328

 
734

 
55.3

Total sales, general and administrative expenses
$
46,557

 
$
39,247

 
$
7,310

 
18.6

Sales, general, and administrative as a percentage of net sales
33.8
%
 
34.2
%
 
 
 
 
Sales, general and administrative expenses were $46.6 million and $39.2 million for the years ended December 31, 2013 and 2012, respectively, an increase of $7.3 million or 18.6%. As a percentage of total net sales, SG&A expenses decreased to 33.8% for 2013 compared to 34.2% for 2012.
Within the TASER Weapons segment, SG&A increased $4.4 million, or 12.4%, to $40.2 million from $35.7 million in 2012. Salaries, benefits, bonus and stock-based compensation in the TASER Weapons increased approximately $2.6 million in 2013 compared to 2012 partially due to increased international, telesales, and support sales staff. Incremental administrative functions were also added in 2013 in order to support the growing business. Sales and marketing expenses, many of which are variable, also increased approximately $0.9 million within the TASER Weapons segment compared to the prior year, due to higher commissions of $0.8 million on higher overall sales. Legal fees increased within the TASER Weapons segment compared to 2012 by approximately $0.3 million as the Company worked through its pre-2009 litigation. This was partially offset by a benefit of $0.5 million from the reimbursement of legal expenses due to insurance coverage after the Turner reversal. Financial advisory fees within the TASER Weapons segment are also up year over year by approximately $0.4 million. Included in “Other” are higher expenses related to litigation activities and credit card processing fees. Reductions were seen in depreciation expense and consulting costs.
Within the AXON segment, SG&A increased $2.9 million, or 81.9%, to $6.4 million in 2013 in comparison to the prior year. Salaries, benefits, bonus and stock-based compensation in the AXON segment increased $1.2 million primarily as a result of the Company doubling its video salesforce and hiring incremental functions such as customer service and account management and other customer-facing roles. Sales and marketing expenses in the AXON segment also increased approximately $0.8 million in comparison to 2012 as a result of EVIDENCE.com promotions and advertising efforts during the year, including a large presence and a hosted booth at the International Association of Chiefs of Police annual conference. Sales and marketing expenses also include increases of approximately $0.3 million in commissions.
Research and Development Expenses
Research and development (“R&D”) expenses were $14.9 million and $9.9 million for the years ended December 31, 2014 and 2013, respectively, an increase of $5.0 million, or 50.5%. As a percentage of net sales, R&D increased to 9.0% in 2014 in comparison to 7.2% in 2013.
Within the TASER Weapons segment, R&D expenses decreased $0.4 million, or 10.2%, to $3.9 million in 2014, which was primarily driven by a shift in personnel resources to the AXON segment and reduced testing materials expense. Reductions were partially offset by increases in professional and consulting fees.
Within the AXON segment, R&D expenses increased $5.4 million, or 97.5%, to $11.0 million in 2014 from the prior year. The increase for 2014 compared to 2013 is primarily driven by additional headcount and higher consulting fees.

34


Research and development expenses were $9.9 million and $8.1 million for the years ended December 31, 2013 and 2012, respectively, an increase of $1.7 million, or 21.5%. As a percentage of net sales, R&D increased to 7.2% from 2013 in comparison to 7.1% in 2012.
Within the TASER Weapons segment, R&D expenses increased $0.4 million, or 9.5%, to $4.3 million in 2013, which is primarily driven by increased headcount, professional fees and indirect materials. These increases were partially offset by lower depreciation expense.
Within the AXON segment, R&D expenses increased $1.4 million, or 32.8%, to $5.6 million in 2013 from 2012. The increase for 2013 compared to 2012 was driven by additional headcount, partially related to the Familiar acquisition that occurred in the fourth quarter of 2013. These individuals joined the Company to research and develop the next products for TASER in the AXON segment. Offsetting these increases was a one-time benefit in 2013 for an Arizona sales and use tax refund of approximately $0.3 million.
Litigation Judgments and Recoveries

In February 2012, the Company was served with a complaint in the matter of AA & Saba Consultants, Inc. v. TASER International, Inc. that was filed in the Superior Court for the County of Maricopa, Arizona, which alleged that the Company breached a contract by unilaterally terminating a distributor agreement between the Company and plaintiff without good cause. The complaint sought an award for damages, costs, expenses and attorneys’ fees. TASER filed a counterclaim for breach of contract and fraud. During 2012, the Company made a settlement offer of $0.8 million to plaintiff, which was recorded as an expense in SG&A in that year. The offer was not accepted by the plaintiff and thereafter was withdrawn. On February 28, 2014, the jury returned a verdict of $3.3 million against the Company. The Company recorded an additional $2.6 million of expense in the fourth quarter of 2013 as Litigation judgments (recoveries) on the consolidated statements of operations.

On May 6, 2014 the court issued a Minute Entry Order awarding Plaintiff approximately $1.2 million in attorneys’ fees, which was recorded as a litigation settlement in the second quarter of 2014. In May 2014 the matter was resolved and dismissed.

Interest and Other (Expense) Income, Net
Interest and other expense was $0.2 million for the year ended December 31, 2014 compared to income of $0.1 million for each of the years ended December 31, 2013 and 2012. Other income amounts for 2014, 2013 and 2012 consisted primarily of investment interest income. In 2014, the other income was more than offset by loss on foreign currency transaction adjustments.
Provision (Benefit) for Income Taxes
The provision for income taxes was $12.4 million for the year ended December 31, 2014. The effective income tax rate for 2014 was 38.4%. The effect of state income tax of $1.4 million was largely offset by a benefit of $0.6 million from incentive stock option deductions as well as $0.5 million of research and development credits in the current year. When an employee exercises ISOs and sells the related stock prior to the end of the mandatory holding period, the associated expense becomes a reduction to the Company’s taxable income.
The provision for income taxes was $9.8 million for the year ended December 31, 2013. The effective income tax rate for 2013 was 34.9%. The effect of state income tax of $1.3 million was largely offset by a benefit of $0.5 million from incentive stock option deductions as well as $0.4 million of research and development credits and a $0.4 million favorable return to provision adjustment in the current year. When an employee exercises ISOs and sells the related stock prior to the mandatory holding period, the associated expense becomes a reduction to the Company’s taxable income. The 2013 return to provision adjustment was driven by the domestic production activities deduction which decreased taxable income, and therefore, reduced the effective tax rate.
The provision for income taxes was $7.9 million for the year ended December 31, 2012. The effective income tax rate for 2012 was 34.8%. During 2012, the Company reversed a $1.4 million valuation allowance originally established in 2011. The valuation allowance related to a portion of the Arizona R&D tax credit that was expected to expire unused. Due to the Company’s return to profitability in 2012, among other things, management believes it is more likely than not the tax credit will be realized. The reversal of the $1.4 million valuation allowance resulted in a reduction to the Company’s effective tax rate. However, this favorable result was more than offset by the effects of state income tax and the change in the liability for unrecognized tax benefits of $1.0 million and $0.9 million, respectively. Other items combined for a net favorable impact in the Company’s effective tax rate. Excluding the effect of the reversal of the valuation allowance, the Company’s effective tax rate would have been 41.1%.


35


Net Income
Our net income improved by $1.7 million to $19.9 million for 2014 compared to $18.2 million for 2013. Net income per basic share was $0.38 and $0.37 per diluted share, respectively, for 2014 compared to $0.35 and $0.34 per basic and diluted share, respectively for 2013.
Our net income improved by $3.5 million to $18.2 million of 2013 compared to $14.7 million for 2012. Net income per basic and diluted share was $0.35 and $0.34 for 2013, respectively, compared to $0.27 per basic and diluted share for 2012.

Liquidity and Capital Resources
Summary
As of December 31, 2014, we had $48.4 million of cash and cash equivalents, an increase of $6.1 million from the end of 2013.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities for each of the past three years (in thousands):
 
Year Ended December 31,
 
2014
 
2013
 
2012
Operating activities
$
35,432

 
$
32,426

 
$
26,517

Investing activities
(24,581
)
 
(23,062
)
 
1,681

Financing activities
(4,840
)
 
(3,189
)
 
(13,363
)
Effect of exchange rate changes on cash and cash equivalents
85

 
(31
)
 
(9
)
Net increase in cash and cash equivalents
$
6,096

 
$
6,144

 
$
14,826

Operating activities
Net cash provided by operating activities in 2014 of $35.4 million consists of $19.9 million in net income, the net add-back of non-cash income statement items totaling $9.6 million and a positive $5.9 million net change in operating assets and liabilities. Included in the non-cash items are $4.3 million in depreciation and amortization expense and $5.6 million in stock-based compensation expense. These additions were partially offset by an $8.0 million reduction related to excess tax benefit from stock-based compensation that is treated as a financing activity for cash flow purposes. The most significant increase to the portion of cash from operating activities related to the changes in operating assets and liabilities is a $15.5 million increase to deferred revenue. Of the increase in deferred revenue, $6.1 million resulted from additional extended warranty sales, $3.9 million resulted from increased hardware deferred revenue from TASER Assurance Program ("TAP") sales, and $5.3 million related to prepayments for AXON SaaS services. In addition, the $9.5 million increase to cash from operating activities related to increases in accounts payable, accrued and other liabilities that was primarily caused by current income tax expense, which would have resulted in an increase to income tax payable, if it had not been reduced by the excess tax benefit from stock-based compensation discussed above. These increases to operating cash flow were partially offset by an increase in accounts and notes receivable of $8.4 million due to higher sales in the fourth quarter of 2014 compared to the same quarter in 2013, and an increase in inventory of $9.4 million in anticipation of higher sales in 2015.
Net cash provided by operating activities in 2013 of $32.4 million consists of $18.2 million in net income, the net add-back of non-cash income statement items totaling $5.6 million and a positive $8.6 million net change in operating assets (net of operating liabilities). Included in the non-cash items are $5.1 million in depreciation and amortization expense and $4.3 million in stock-based compensation expense. These additions were partially offset by a $6.8 million reduction related to excess tax benefit from stock-based compensation that is treated as a financing activity for cash flow purposes. The most significant increase to cash from operating activities related to the changes in operating assets and liabilities was an $8.1 million increase to deferred revenue. Of the increase in deferred revenue, $5.1 million results from additional extended warranty sales and the remainder is primarily a result of prepayments for our EVIDENCE.com SaaS. In addition, the $5.6 million increase to cash from operating activities related to increases in accounts payable and accrued liabilities was primarily caused by current income tax expense, which would have resulted in an increase to income tax payable, if it had not been reduced by the excess tax benefit from stock-based compensation discussed above. These increases to operating cash flow were partially offset by an increase in accounts and notes receivable of $4.4 million. The fluctuation in accounts and notes receivable was primarily driven by sales, which increased 20.1% during 2013

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as compared to 2012, and 24.6% in the three months ended December 31, 2013, as compared to the same three-month period in the 2012.
Net cash provided by operating activities in 2012 of $26.5 million consists of $14.7 million in net income, the net add-back of non-cash income statement items totaling $9.1 million and a $2.7 million net change in operating assets (net of operating liabilities). Included in the non-cash items are $6.5 million in depreciation and amortization expense and $3.4 million in stock-based compensation expense. These additions were partially offset by a reduction to operating cash flows of $4.7 million related to excess tax benefit from stock-based compensation that is included in financing activities. The most significant changes in operating assets and liabilities was an increase of $4.2 million related to a change in deferred revenue. Deferred revenue increased $4.2 million due to increased sales of extended warranties as well as sales of EVIDENCE.com service and maintenance. In addition, the $4.4 million increase to cash from operating activities related to increases in accounts payable and accrued liabilities was primarily caused by current income tax expense, which would have resulted in an increase to income tax payable, if it had not been reduced by the excess tax benefit from stock-based compensation discussed above. These changes were partially offset by an increase in accounts and notes receivable of $6.1 million. The fluctuation in accounts and notes receivable was primarily driven by sales, which increased 27.5% during 2012 as compared to 2011, and 50.6% in the three months ended December 31, 2012, as compared to the same three-month period in 2011. The net $0.5 million positive change in accounts payable and other accrued liabilities resulted from increases in accrued liabilities including a $1.6 million increase due to supply purchases to support higher sales activity, as well as $1.0 million in accrued legal settlements during 2012, and a $0.9 million increase in accrued payroll, offset by the $2.2 million reversal of the Turner legal judgment.

Investing activities
Primarily as a result of investing cash generated from operating activities, we used $24.6 million for investing activities in 2014. Purchases of investments, net of calls and maturities, were $21.9 million. The Company also invested $2.7 million in the purchase of property and equipment and intangibles.
Primarily as a result of investing cash generated from operating activities, we used $23.1 million from investing activities in 2013. Purchases of investments, net of calls and maturities, were $19.7 million. The Company also invested $2.1 million in the purchase of property and equipment and intangibles, as well as $1.3 million, net, to purchase Familiar, Inc.
We generated $1.7 million from investing activities in 2012, comprised principally of $3.4 million of net proceeds from call/maturity of short-term investments, offset by $1.7 million for the acquisition of various production and computer equipment and intangible assets, net of proceeds from asset disposals.
Financing activities
Net cash used by financing activities was $4.8 million for the year ended December 31, 2014. The repurchase of $22.4 million of the Company’s common stock, which was purchased for a weighted average cost of $12.99 per share per share, was partially offset by $11.0 million of proceeds from the exercise of stock options, and $8.0 million of excess tax benefit from stock proceeds. The purchase of common stock was made under a stock repurchase program authorized by TASER’s Board of Directors. The Company has approximately $7.6 million remaining on the repurchase authorization as of December 31, 2014. Repurchases may be made from time to time on the open market.
Net cash used by financing activities was $3.2 million for the year ended December 31, 2013. The repurchase of $25.0 million of the Company’s common stock, which was purchased for a weighted average cost of $8.20 per share, was offset by $15.4 million of proceeds from the exercise of stock options, and $6.8 million of excess tax benefit from stock proceeds. The purchase of common stock was made under a stock repurchase program authorized by TASER’s Board of Directors. We completed the authorized repurchases as of June 2013.
During 2013, the Company recorded $6.8 million for excess tax benefits related to stock-based compensation. The tax benefit relates to exercises occurring from the years 2004 through 2013.
During 2012, net cash used by financing activities was $13.4 million, primarily attributable to the repurchase of $20.0 million of the Company’s common stock, which was purchased for an average of $5.22 per share, offset by $1.9 million of proceeds from the exercise of stock options. The purchase of common stock was made under a stock repurchase program authorized by TASER’s Board of Directors.
During 2012, the Company recorded $4.7 million for excess tax benefit related to stock-based compensation. The tax benefit relates to exercises occurring from the years 2006 through 2012 which gave rise to tax attribute carry forwards such as net operating

37


losses and tax credits. The Company was able to recognize this benefit in 2012 due to its positive taxable income during the period that allowed for the utilization of those tax attributes for which no benefit had previously been recorded.
Liquidity and Capital Resources
Our most significant sources of liquidity continue to be funds generated by operating activities and available cash and cash equivalents. In addition, our $10.0 million revolving credit facility is available for additional working capital needs or investment opportunities. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. The line is secured by substantially all of the assets of the Company, and bears interest at varying rates currently LIBOR plus 1.5% or Prime less 0.75%. As of December 31, 2014, we had letters of credit outstanding of $0.4 million, leaving the net amount available for borrowing of $9.6 million. The facility matures on July 31, 2016. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our revolving credit facility. At December 31, 2014 and 2013, there were no borrowings under the line.
Our agreement with the bank requires us to comply with certain financial and other covenants including maintenance of a minimum leverage ratio and fixed charge coverage ratio. The leverage ratio (ratio of total liabilities to tangible net worth) can be no greater than 1:1, and the fixed charge coverage ratio can be no less than 1.25:1, based upon a trailing twelve-month period. At December 31, 2014, the Company’s tangible net worth ratio was 0.45:1 and its fixed charge coverage ratio was 2.82:1. Accordingly, the Company was in compliance with these covenants.
Based on our strong balance sheet and the fact that we had just $0.1 million in total long-term debt and capital lease obligations at December 31, 2014, we believe financing will be available, both through our existing credit line and possible additional financing. However, there is no assurance that such funding will be available on terms acceptable to us, or at all.
We believe funds generated from our expected results of operations, as well as available cash and investments, will be sufficient to finance our operations and strategic initiatives for 2015 and the foreseeable future. From time to time, our board of directors considers repurchases of our common stock. Further repurchases of our common stock will take place on the open market, will be financed with available cash and are subject to authorization as well as market and business conditions.

Contractual Obligations
The following table outlines our future contractual financial obligations by period in which payment is expected, as of December 31, 2014 (dollars in thousands):
 
 
Total
 
Less than
1 Year
 
1 - 3 Years
 
4 - 5 Years
 
More than
5 Years
Non-cancelable operating leases
 
$
4,022

 
$
560

 
$
1,174

 
$
1,039

 
$
1,249

Capital leases including interest
 
71

 
41

 
30

 

 

Open purchase orders
 
19,113

 
19,113

 

 

 

Total contractual obligations
 
$
23,206

 
$
19,714

 
$
1,204

 
$
1,039

 
$
1,249

Open purchase orders in the above table primarily represent non-cancelable purchase orders with key vendors, which are included in this table due to the Company’s strategic relationships with these vendors.
We are subject to U.S. Federal income tax as well as income taxes imposed by several states and foreign jurisdictions. As of December 31, 2014, we had $1.5 million of unrecognized tax benefits related to uncertain tax positions. The settlement period for our long-term income tax liabilities cannot be determined; however, the liabilities are not expected to significantly increase or decrease within the next 12 months.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements as of December 31, 2014.

Critical Accounting Estimates
We have identified the following accounting estimates as critical to our business operations and the understanding of our results of operations. The preparation of this Annual Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated

38


financial statements, and the reported amounts of revenue and expenses during the reporting period. While we don’t believe that a change in these estimates is reasonably likely, there can be no assurance that our actual results will not differ from these estimates. The effect of these estimates on our business operations is discussed below.
Product Warranties
The Company warranties its CEWs, AXON cameras and E-Docks 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. Estimated costs for our standard warranty are charged to cost of products sold and services delivered when revenue is recorded for the related product. We estimate future warranty costs based on historical data related to returns and warranty costs on a quarterly basis and apply this rate to current product anticipated returns from our customers. We have also historically increased our reserve amount if we become aware of a component failure that could result in larger than anticipated returns from our customers. The accrued warranty liability is reviewed quarterly to evaluate whether it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. As of December 31, 2014 and 2013, our reserve for warranty returns was approximately $0.7 million and $1.0 million, respectively. Warranty expense in the years ended December 31, 2014, 2013 and 2012 was $0.4 million, $1.0 million and $0.5 million, respectively.
Revenue related to separately-priced extended warranties is recorded as deferred revenue at its contractual amount and subsequently recognized in net sales on a straight-line basis over the delivery period. Costs related to extended warranties are charged to cost of products sold and services delivered when incurred.
Inventory
Inventories are stated at the lower of cost or market, with cost determined using the weighted average cost of raw materials, which approximates the first-in, first-out (“FIFO”) method, and an allocation of manufacturing labor and overhead costs. The allocation of manufacturing labor and overhead costs includes management’s judgments of what constitutes normal capacity of our production facilities and a determination of what costs are considered to be abnormal fixed production costs, which are expensed as current period charges. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories to their net realizable value. These provisions are based on our best estimates after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions and other factors. Our reserve for excess and obsolete inventory increased to $1.4 million at December 31, 2014, compared to $1.0 million at December 31, 2013. This increase is attributable primarily to a reserve taken for X26 CEW inventory which ended production during the year ended December 31, 2014. The Company also accrued approximately $1.1 million of inventory losses related to products it may not be able to use in production of certain AXON camera products. In the event that actual excess, obsolete or slow-moving inventories differ from these estimates, changes to inventory reserves may be necessary.
Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable
We derive our revenue from two primary sources: (1) the sale of physical products, including our CEWs, AXON cameras, E-Docks, corresponding hardware extended warranties, and related accessories such as cartridges and batteries, and (2) subscription to our EVIDENCE.com digital evidence management SaaS (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, we also recognize training and other revenue. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, title has transferred, the price is fixed and collectability is reasonably assured. Extended warranty revenue, SaaS revenue and related data storage revenue are recognized ratably over the term of the contract beginning on the commencement date of each contract.
Revenue arrangements with multiple deliverables are divided into separate units and revenue is allocated using the relative selling price method based upon vendor-specific objective evidence of selling price or third-party evidence of the selling prices if vendor-specific objective evidence of selling prices does not exist. If neither vendor-specific objective evidence nor third-party evidence exists, management uses its best estimate of selling price.
EVIDENCE.com, AXON cameras and E-docks are sometimes sold separately, but in most instances are sold together. In these instances, customers typically purchase and pay for the equipment and one year of EVIDENCE.com in advance. Additional years of service are generally billed annually over a specified service term, which has typically rang