10-Q 1 q32015-10xqdocument.htm 10-Q 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
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)

(480) 991-0797
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
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 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 Exchange Act).    Yes  ¨    No  ý
The number of shares of the registrant’s common stock outstanding as of October 30, 2015 was 53,642,562.



TASER INTERNATIONAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TASER INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
September 30, 2015
 
December 31, 2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
45,887

 
$
48,367

Short-term investments
49,526

 
32,774

Accounts and notes receivable, net of allowance of $225 and $251 as of September 30, 2015 and December 31, 2014, respectively
24,328

 
30,735

Inventory, net
18,892

 
18,323

Prepaid expenses and other current assets
6,336

 
4,443

Deferred income tax assets, net
5,186

 
5,186

Total current assets
150,155

 
139,828

Property and equipment, net of accumulated depreciation of $35,431 and $33,906 as of September 30, 2015 and December 31, 2014, respectively
19,855

 
17,523

Deferred income tax assets, net
11,147

 
10,877

Intangible assets, net
7,812

 
3,115

Goodwill
9,313

 
2,206

Long-term investments
9,171

 
9,296

Other assets
6,024

 
2,523

Total assets
$
213,477

 
$
185,368

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
6,040

 
$
7,682

Accrued liabilities
6,668

 
9,245

Current portion of deferred revenue
19,628

 
14,020

Customer deposits
572

 
988

Current portion of notes payable and capital lease payable
98

 
38

Total current liabilities
33,006

 
31,973

Deferred revenue, net of current portion
26,880

 
21,668

Liability for unrecognized tax benefits
1,198

 
1,471

Long-term deferred compensation
1,857

 
1,121

Long-term business acquisition contingent consideration
952

 

Long-term portion of notes payable and capital lease payable
98

 
29

Total liabilities
63,991

 
56,262

Commitments and contingencies (Note 10)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of September 30, 2015 and December 31, 2014

 

Common stock, $0.00001 par value; 200,000,000 shares authorized; 53,604,818 and 53,000,867 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively
1

 
1

Additional paid-in capital
175,766

 
162,641

Treasury stock at cost, 18,432,158 and 18,139,958 shares as of September 30, 2015 and December 31, 2014, respectively
(122,201
)
 
(114,645
)
Retained earnings
95,874

 
81,045

Accumulated other comprehensive income
46

 
64

Total stockholders’ equity
149,486

 
129,106

Total liabilities and stockholders’ equity
$
213,477

 
$
185,368

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


TASER INTERNATIONAL, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net sales
$
50,376

 
$
44,349

 
$
141,851

 
$
117,709

Cost of products sold and services delivered
19,308

 
15,636

 
50,192

 
43,574

Gross margin
31,068

 
28,713

 
91,659

 
74,135

Operating expenses:
 
 
 
 
 
 
 
Sales, general and administrative
17,834

 
12,441

 
47,842

 
39,734

Research and development
6,528

 
3,759

 
16,992

 
10,820

Total operating expenses
24,362

 
16,200

 
64,834

 
50,554

Income from operations
6,706

 
12,513

 
26,825

 
23,581

Interest income and other (expense) income, net
(22
)
 
(160
)
 
12

 
(88
)
Income before provision for income taxes
6,684

 
12,353

 
26,837

 
23,493

Provision for income taxes
5,163

 
4,795

 
12,008

 
8,661

Net income
$
1,521

 
$
7,558

 
$
14,829

 
$
14,832

Net income per common and common equivalent shares:
 
 
 
 
 
 
 
Basic
$
0.03

 
$
0.14

 
$
0.28

 
$
0.28

Diluted
$
0.03

 
$
0.14

 
$
0.27

 
$
0.27

Weighted average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic
53,709

 
52,475

 
53,509

 
53,013

Diluted
54,691

 
53,821

 
54,671

 
54,550

 
 
 
 
 
 
 
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
$
1,521

 
$
7,558

 
$
14,829

 
$
14,832

Foreign currency translation adjustments
(115
)
 
(15
)
 
(18
)
 

Comprehensive income
$
1,406

 
$
7,543

 
$
14,811

 
$
14,832


The accompanying notes are an integral part of these condensed consolidated financial statements.


4


TASER INTERNATIONAL, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
14,829

 
$
14,832

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
2,310

 
3,368

(Gain) loss on write-down / disposal of property and equipment, net
(13
)
 
17

Loss on disposal of intangibles
216

 
211

Bond premium amortization
1,252

 
675

Stock-based compensation
5,086

 
4,121

Deferred income taxes
(888
)
 
9,862

Unrecognized tax benefits
(273
)
 
(1,713
)
Excess tax benefit from stock-based compensation
(6,314
)
 
(5,849
)
Change in assets and liabilities:
 
 
 
Accounts and notes receivable
7,718

 
(4,611
)
Inventory
(37
)
 
(5,019
)
Prepaid expenses and other assets
(5,520
)
 
(1,063
)
Accounts payable, accrued and other liabilities
1,697

 
(1,188
)
Deferred revenue
10,667

 
9,780

Customer deposits
(416
)
 
(785
)
Net cash provided by operating activities
30,314

 
22,638

Cash flows from investing activities:
 
 
 
Purchases of investments
(50,598
)
 
(23,613
)
Proceeds from call / maturity of investments
32,719

 
8,668

Purchases of property and equipment
(3,839
)
 
(2,066
)
Proceeds from disposal of fixed assets
13

 
10

Purchases of intangible assets
(402
)
 
(125
)
Business acquisitions, net of cash acquired
(11,186
)
 

Net cash used in investing activities
(33,293
)
 
(17,126
)
Cash flows from financing activities:
 
 
 
Repurchase of common stock
(7,556
)
 
(22,442
)
Proceeds from options exercised
2,573

 
8,597

Payroll tax payments for net-settled stock awards
(848
)
 
(1,262
)
Payments on capital lease obligation
(28
)
 
(26
)
Payments on notes payable
(26
)
 

Excess tax benefit from stock-based compensation
6,314

 
5,849

Net cash provided by (used in) financing activities
429

 
(9,284
)
Effect of exchange rate changes on cash and cash equivalents
70

 
116

Net decrease in cash and cash equivalents
(2,480
)
 
(3,656
)
Cash and cash equivalents, beginning of period
48,367

 
42,271

Cash and cash equivalents, end of period
$
45,887

 
$
38,615

 
 
 
 
Supplemental disclosure:
 
 
 
Cash paid for income taxes, net of refunds
$
5,830

 
$
403

Non-cash transactions
 
 
 
Property and equipment purchases in accounts payable and accrued liabilities
$
195

 
$
158

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1. Organization and Summary of Significant Accounting Policies
TASER International, Inc. (“TASER” or the “Company”) is a developer and manufacturer 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. In addition, the Company has developed full technology solutions for the capture, storage and management of video/audio evidence as well as other tactical capabilities for use in law enforcement. The Company sells its products worldwide through its direct sales force, distribution partners, online store and third-party resellers. The Company was incorporated in Arizona in September 1993, and reincorporated in Delaware in January 2001. The Company’s corporate headquarters and manufacturing facilities are located in Scottsdale, Arizona. The Company’s software development unit facility is located in Seattle, Washington.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, including TASER International Europe SE (“TASER Europe”), TASER International B.V., and MediaSolv Solutions Corporation ("MediaSolv"). All material intercompany accounts, transactions, and profits have been eliminated.
a. Basis of Presentation and Use of Estimates
These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information related to the Company’s organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) has been condensed or omitted. The accounting policies followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed in the Company’s annual consolidated financial statements for the year ended December 31, 2014, as filed on Form 10-K. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state the Company’s financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with the Company’s Form 10-K for the year ended December 31, 2014. The results of operations for the three and nine months ended September 30, 2015 and 2014 are not necessarily indicative of the results to be expected for the full year (or any other period). Significant estimates and assumptions in these unaudited condensed consolidated financial statements include:
 
product warranty reserves,
inventory valuation reserves,
accounts receivable reserves,
revenue recognition allocated in multiple-deliverable contracts or arrangements,
valuation of goodwill, intangibles and long-lived assets,
recognition, measurement and valuation of current and deferred income taxes,
projection of future taxable income in both United States and foreign jurisdictions for estimating consolidated income tax expense,
fair value of stock awards issued, the estimated vesting period for performance-based stock awards and forfeiture rates, and
recognition and measurement of contingencies and accrued litigation expense.
Actual results could differ materially from those estimates.
b. Segment Information
The Company is comprised of two reportable segments: the manufacture and sale of CEWs, accessories and other products and services (the “TASER Weapons” segment); and the video business which includes the TASER Cam, Axon cameras and related accessories, Evidence.com and MediaSolv (the “Axon” segment). Reportable segments are determined based on discrete financial information reviewed by the Company’s Chief Executive Officer who is the Chief Operating Decision Maker (the “CODM”) for the Company. The Company organizes and reviews operations based on products and services, and currently there are no operating segments that are aggregated. The Company performs an annual analysis of its reportable segments. Additional information related to the Company’s business segments is summarized in Note 13.

6

TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


c. Geographic Information and Major Customers

For the three and nine months ended September 30, 2015 and 2014, net sales by geographic area were as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
United States
$
43,689

 
86.7
%
 
$
37,605

 
84.8
%
 
$
117,885

 
83.1
%
 
$
95,336

 
81.0
%
Other Countries
6,687

 
13.3

 
6,744

 
15.2

 
23,966

 
16.9

 
22,373

 
19.0

Total
$
50,376

 
100.0
%
 
$
44,349

 
100.0
%
 
$
141,851

 
100.0
%
 
$
117,709

 
100.0
%

Sales to customers outside of the U.S. are typically denominated in U.S. dollars, and are attributed to each country based on the shipping address of the distributor or customer. For the three and nine months ended September 30, 2015 and 2014, no individual country outside the U.S. represented more than 10% of net sales. Sales in the international market are generally larger and occur more intermittently than in the domestic market due to the profile of the Company's customers.
For the three and nine months ended September 30, 2015 and 2014, no customer represented more than 10% of total net sales. At September 30, 2015 there were two outstanding customer balances from unaffiliated customers that together comprised 24.0% of the aggregate accounts receivable balance. At December 31, 2014, the Company had a trade receivable from one unaffiliated customer comprising 13.4% of the aggregate accounts receivable balance.
d. Income per Common Share
Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. Diluted income per share reflects the potential dilution that would occur if outstanding stock options were exercised utilizing the treasury stock method. The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Numerator for basic and diluted earnings per share:
 
 
 
 
 
 
 
Net income
$
1,521

 
$
7,558

 
$
14,829

 
$
14,832

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
53,709

 
52,475

 
53,509

 
53,013

Dilutive effect of stock-based awards
982

 
1,346

 
1,162

 
1,537

Diluted weighted average shares outstanding
54,691

 
53,821

 
54,671

 
54,550

Anti-dilutive stock-based awards excluded
160

 
336

 
160

 
328

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.03

 
$
0.14

 
$
0.28

 
$
0.28

Diluted
$
0.03

 
$
0.14

 
$
0.27

 
$
0.27

e. Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable
The Company derives revenue from two primary sources: (1) the sale of physical products, including CEWs, Axon cameras, corresponding extended warranties, and related accessories such as E-docks, cartridges and batteries, among others, and (2) subscription to the Company's Evidence.com software as a service ("SaaS") (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, the Company also recognizes training and other professional services 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. Contractual arrangements may contain explicit customer acceptance provisions, and under such arrangements, the Company defers recognition of revenue until formal customer acceptance is received. 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.



7

TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


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. The majority of the Company’s allocations of arrangement consideration under multiple element arrangements are performed using vendor-specific objective evidence by utilizing prices charged to customers for deliverables when sold separately. The Company’s multiple element arrangements may include future CEWs and/or Axon devices to be delivered at defined points within a multi-year contract, and in those arrangements, the Company allocates total arrangement consideration over the life of the multi-year contract to future deliverables using management’s best estimate of selling price. The Company has not utilized third party evidence of selling price.
The Company offers the right to purchase extended warranties that include additional services and coverage beyond the standard limited warranty for certain products. Revenue for extended warranty purchases is deferred at the time of sale and recognized over the warranty period commencing on the date of sale. Extended warranties range from one to five years.
Evidence.com and Axon cameras and related accessories have stand-alone value to the customer and 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 ranged from one to five years. Generally, the Company recognizes revenue for the Axon equipment at the time of the sale consistent with the discussion of multiple deliverable arrangements above. Revenue for Evidence.com is deferred at the time of the sale and recognized over the service period. At times the Company subsidizes the cost of Axon devices provided to customers to secure long-term Evidence.com service contracts. In such circumstances, revenue related to the Axon devices recognized at the time of delivery is limited to the amount collected from the customer that is not contingent upon the delivery of future Evidence.com services. The Company recognizes the remaining allocated revenue related to subsidized Axon devices over the remaining period it provides the contracted Evidence.com services.
In 2012, the Company introduced a program, the TASER Assurance Program (“TAP”) whereby a customer purchasing a product and joining the program will have the right to trade-in the original product for a new product of the same or like model in the future. Upon joining TAP, customers also receive an extended warranty for the initial products purchased and spare inventory. Under this program the customer generally pays additional annual installments over the contract period, generally three to five years. The Company records consideration received related to the future product purchase as deferred revenue until all revenue recognition criteria are met, which is generally at the end of the contract period. Consideration related to future product purchases is determined at the inception of the arrangement using management’s best estimate of selling price. Management’s estimate is principally based on the current selling price for such products, with due evaluation of the impact of any expected product and pricing changes, which have historically had an immaterial influence on management’s best estimate of selling price.

In 2015, The Company introduced the Officer Safety Plan (“OSP”) whereby a customer enters into a five year Evidence.com subscription that includes all of its standard advanced features along with unlimited storage. The OSP also includes a service plan that includes upgrades of (i) the Axon devices every 2.5 years and (ii) a TASER CEW at any point within the contract period. Upon entering into the OSP, customers also receive extended warranties on the Axon and CEW devices over the five-year contract periods as well as spare inventory units. Under this program the customer generally makes an initial purchase of Axon cameras and related accessories, and CEW at inception along with annual installments for services and future hardware deliverables over the contract period. The Company records consideration received related to the future purchase as deferred revenue until all revenue recognition criteria are met, which is generally when the products or services are delivered.
Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis. Training and professional service revenues are recorded as the services are provided.
Deferred revenue consists of payments received in advance related to products and services for which the criteria for revenue recognition have not yet been met. Deferred revenue that will be recognized during the succeeding twelve month period is recorded as current deferred revenue and the remaining portion is recorded as long-term. Deferred revenue does not include future revenue from multi-year contracts for which no invoice has yet been created. Generally, customers are billed in annual installments. See Note 5 for further disclosures about the Company’s deferred revenue.
Sales are typically made on credit, and the Company generally does not require collateral. Management performs ongoing credit evaluations of its customers’ financial condition, and maintains an allowance for estimated potential losses. Uncollectible accounts are charged to expense when deemed uncollectible, and accounts and notes receivable are presented net of an allowance

8

TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


for doubtful accounts. This allowance represents management’s best use of estimates, and is based on judgment after considering a number of factors, including third-party credit reports, actual payment history, cash discounts, customer-specific financial information and broader market and economic trends and conditions.
 
 The Company may, from time to time, enter into agreements with its customers to finance their purchases with a note receivable that may range in terms up to five years. Sales are recorded at the fair value of the note, which is generally sold and assigned to a third-party financing company. The terms of the assignments are such that the Company expects to receive payment within 30 days of the original sale. The assignments are non-recourse and the Company has no obligations or continuing involvement with the notes receivable. Prior to entering into an assignment, the Company evaluates the credit quality and financial condition of the third-party financing company. The Company does not generally record interest income on notes receivable due to minimal holding periods, nor has the Company recognized significant gains or losses upon the assignment of the notes. As of September 30, 2015 and December 31, 2014 the Company had no outstanding balances under such arrangements.
f. Standard Warranties
The Company warranties its CEWs, Axon cameras and certain related accessories 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 the standard warranty are charged to cost of products sold and services delivered when revenue is recorded for the related product. Future warranty costs are estimated based on historical data related to returns and warranty costs on a quarterly basis and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure that could result in larger than anticipated returns from customers. The accrued warranty liability expense is reviewed quarterly to verify that 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. Costs related to extended warranties are charged to cost of products sold and services delivered when incurred. The reserve for warranty returns is included in accrued liabilities on the accompanying condensed consolidated balance sheets. 
Changes in the Company’s estimated product warranty liabilities are as follows (in thousands):
 
Nine Months Ended September 30,
 
2015
 
2014
Balance, beginning of period
$
675

 
$
955

Utilization of accrual
(293
)
 
(646
)
Warranty expense
19

 
517

Balance, end of period
$
401

 
$
826

g. Fair Value of Financial Instruments
The Company uses the fair value framework that prioritizes the inputs to valuation techniques for measuring financial assets and liabilities measured on a recurring basis and for non-financial assets and liabilities when these items are re-measured. Fair value is considered to be the exchange price in an orderly transaction between market participants, to sell an asset or transfer a liability at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The Company categorizes each of its fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
 
Level 1 – Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.
Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.
Level 3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect the Company's own assumptions about inputs that market participants would use in pricing an asset or liability.

9

TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The Company has cash equivalents and investments, which at September 30, 2015 and December 31, 2014 were comprised of money market funds, state and municipal obligations, corporate bonds, and certificates of deposits. See additional disclosure regarding the fair value of the Company’s cash equivalents and investments in Note 2. Included in the balance of other assets as of September 30, 2015 and December 31, 2014 was $1.8 million and $1.1 million, respectively, related to corporate-owned life insurance policies which are used to fund the Company’s deferred compensation plan. The Company determines the fair value of its insurance contracts by obtaining the cash surrender value of the contracts from the issuer, a Level 2 valuation technique.
The Company’s financial instruments also include accounts and notes receivable, accounts payable and accrued liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the accompanying condensed consolidated balance sheets.
h. Valuation of Goodwill, Intangibles and Long-lived Assets

Management evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and identifiable intangible assets may warrant revision or that the remaining balance of these assets may not be recoverable. Such circumstances could include, but are not limited to, a change in the product mix, a change in the way products are created, produced or delivered, or a significant change in the way products are branded and marketed. In performing the review for recoverability, management estimates the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair value computed using discounted cash flows. The Company recorded losses on disposal of intangible assets of $0.2 million during each of the nine months ended September 30, 2015 and 2014.
i. Recently Issued Accounting Guidance

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The core principle of ASU 2014-09 provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.  The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company has not yet determined the impact the adoption of this guidance will have on its financial position, results of operations or cash flows, if any.

In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU 2014-12”). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC Topic No. 718, “Compensation—Stock Compensation” (“ASC 718”) as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company does not expect the adoption of this guidance to have any impact on its financial position, results of operations or cash flows.

In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330)" ("ASU 2015-11"). The amendments require that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company does not expect the adoption of this guidance to have any impact on its financial position, results of operations or cash flows.

In September 2015, the FASB issued ASU No. 2015-16, "Business Combinations (Topic 805)" ("ASU 2015-16"). The amendments require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition

10

TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


date. The amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company does not expect the adoption of this guidance to have any impact on its financial position, results of operations or cash flows.
j. Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
2. Cash, Cash Equivalents and Investments
The following tables summarize the Company's cash, cash equivalents, and held-to-maturity investments at September 30, 2015 and December 31, 2014 (in thousands):
 
As of September 30, 2015
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Short-Term Investments
 
Long-Term Investments
Cash
$
45,065

 
$

 
$

 
$
45,065

 
$
45,065

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
762

 

 

 
762

 
762

 

 

Corporate bonds
36,216

 
4

 
(30
)
 
36,190

 

 
34,035

 
2,181

Subtotal
36,978

 
4

 
(30
)
 
36,952

 
762

 
34,035

 
2,181

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
State and municipal obligations
18,683

 
29

 
(3
)
 
18,709

 
60

 
12,675

 
5,948

Certificates of deposit
3,858

 

 

 
3,858

 

 
2,816

 
1,042

Subtotal
22,541

 
29

 
(3
)
 
22,567

 
60

 
15,491

 
6,990

Total
$
104,584

 
$
33

 
$
(33
)
 
$
104,584

 
$
45,887

 
$
49,526

 
$
9,171


 
As of December 31, 2014
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Short-Term Investments
 
Long-Term Investments
Cash
$
44,260

 
$

 
$

 
$
44,260

 
$
44,260

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
3,932

 

 

 
3,932

 
3,932

 

 

Corporate bonds
20,388

 

 
(34
)
 
20,354

 

 
15,656

 
4,732

Subtotal
24,320

 

 
(34
)
 
24,286

 
3,932

 
15,656

 
4,732

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
State and municipal obligations
19,145

 
18

 

 
19,163

 
175

 
15,891

 
3,079

Certificates of deposit
2,712

 

 

 
2,712

 

 
1,227

 
1,485

Subtotal
21,857

 
18

 

 
21,875

 
175

 
17,118

 
4,564

Total
$
90,437

 
$
18

 
$
(34
)
 
$
90,421

 
$
48,367

 
$
32,774

 
$
9,296

The Company believes the unrealized losses on the Company’s investments are due to interest rate fluctuations. As these investments are either short-term in nature, are expected to be redeemed at par value, and/or because the Company has the ability

11

TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


and intent to hold these investments to maturity, the Company does not consider these investments to be other than temporarily impaired at September 30, 2015.
The following table summarizes the amortized cost and fair value of the short-term and long-term investments held by the Company at September 30, 2015 by contractual maturity (in thousands):
 
Amortized Cost
 
Fair Value
Due in less than one year
$
49,526

 
$
49,512

Due after one year, through two years
9,171

 
9,185

Due after two years

 

Total short-term and long-term investments
$
58,697

 
$
58,697

3. Inventory
Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost of raw materials which approximates the first-in, first-out (“FIFO”) method and includes allocations of manufacturing labor and overhead. Provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value. Inventories consisted of the following at September 30, 2015 and December 31, 2014 (in thousands):
 
2015
 
2014
Raw materials
$
11,761

 
$
12,229

Work-in-process
59

 
111

Finished goods
9,155

 
7,337

Reserve for excess and obsolete inventory
(2,083
)
 
(1,354
)
Total inventory
$
18,892

 
$
18,323


 
4. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2015 were as follows (in thousands):
Balance, beginning of period
$
2,206

Goodwill acquired
7,141

Foreign currency translation adjustment
(34
)
Balance, end of period
$
9,313



12

TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Intangible assets (other than goodwill) consisted of the following (in thousands):
 
 
 
September 30, 2015
 
December 31, 2014
 
Useful
Life
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortized:
 
 
 
 
 
 
 
 
 
 
 
 
 
Domain names
5 years
 
$
125

 
$
(120
)
 
$
5

 
$
125

 
$
(114
)
 
$
11

Issued patents
4-15 years
 
1,841

 
(629
)
 
1,212

 
1,759

 
(549
)
 
1,210

Issued trademarks
3-11 years
 
594

 
(238
)
 
356

 
566

 
(205
)
 
361

Customer relationships
4-8 years
 
1,053

 
(100
)
 
953

 

 

 

Non-compete agreements
3-4 years
 
467

 
(36
)
 
431

 

 

 

Developed technology
7 years
 
3,470

 
(201
)
 
3,269

 

 

 

Total amortized
 
 
7,550

 
(1,324
)
 
6,226

 
2,450

 
(868
)
 
1,582

Not amortized:
 
 
 
 
 
 
 
 
 
 
 
 
 
TASER trademark
 
 
900

 
 
 
900

 
900

 
 
 
900

Patents and trademarks pending
 
 
686

 
 
 
686

 
633

 
 
 
633

Total not amortized
 
 
1,586

 
 
 
1,586

 
1,533

 
 
 
1,533

Total intangible assets
 
 
$
9,136

 
$
(1,324
)
 
$
7,812

 
$
3,983

 
$
(868
)
 
$
3,115

Amortization expense relative to intangible assets for the three months ended September 30, 2015 and 2014 was approximately $284,000 and $71,000, respectively. Amortization expense relative to intangible assets for the nine months ended September 30, 2015 and 2014 was approximately $495,000 and $153,000, respectively. Estimated amortization for intangible assets with definitive lives for the remaining three months of 2015, the next five years ended December 31, and thereafter, is as follows (in thousands):
2015 (remaining three months)
$
295

2016
939

2017
935

2018
922

2019
802

2020
737

Thereafter
1,596

Total
$
6,226


13

TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


5. Deferred Revenue
Deferred revenue consisted of the following (in thousands):
 
September 30, 2015
 
December 31, 2014
 
Current
 
Long-Term
 
Total
 
Current
 
Long-Term
 
Total
Warranty:
 
 
 
 
 
 
 
 
 
 
 
TASER Weapons
$
7,244

 
$
13,373

 
$
20,617

 
$
6,591

 
$
13,809

 
$
20,400

Axon
1,679

 
1,966

 
3,645

 
679

 
894

 
1,573

 
8,923

 
15,339

 
24,262

 
7,270

 
14,703

 
21,973

Hardware:
 
 
 
 
 
 
 
 
 
 
 
TASER Weapons
951

 
1,447

 
2,398

 
365

 
753

 
1,118

Axon
825

 
6,093

 
6,918

 
491

 
2,643

 
3,134

 
1,776

 
7,540

 
9,316

 
856

 
3,396

 
4,252

Axon Services
8,569

 
4,001

 
12,570

 
5,717

 
3,569

 
9,286

Other
360

 

 
360

 
177

 

 
177

Total
$
19,628

 
$
26,880

 
$
46,508

 
$
14,020

 
$
21,668

 
$
35,688


 
September 30, 2015
 
December 31, 2014
 
Current
 
Long-Term
 
Total
 
Current
 
Long-Term
 
Total
TASER Weapons
$
8,555

 
$
14,820

 
$
23,375

 
$
7,133

 
$
14,562

 
$
21,695

Axon
11,073

 
12,060

 
23,133

 
6,887

 
7,106

 
13,993

Total
$
19,628

 
$
26,880

 
$
46,508

 
$
14,020

 
$
21,668

 
$
35,688


6. Accrued Liabilities
Accrued liabilities consisted of the following at September 30, 2015 and December 31, 2014 (in thousands):
 
2015
 
2014
Accrued salaries and benefits
$
2,957

 
$
3,699

Accrued judgments and settlements
65

 
108

Accrued professional fees
330

 
257

Accrued warranty expense
401

 
675

Accrued income and other taxes
712

 
539

Other accrued expenses
2,203

 
3,967

Accrued liabilities
$
6,668

 
$
9,245


 
7. Income Taxes

Deferred Tax Assets
Net deferred income tax assets at September 30, 2015, include capitalized research and development costs, research and development tax credits, non-qualified stock-based compensation expense, deferred warranty revenue, warranty and inventory reserves, accrued vacation, and other items, partially offset by accelerated depreciation expense and intangible amortization that is not tax deductible. The Company’s total current and long-term net deferred tax assets at September 30, 2015 were $16.3 million.

In preparing the Company’s condensed consolidated financial statements, management assesses the likelihood that its deferred tax assets will be realized from future taxable income. In evaluating the Company’s ability to recover its deferred income tax

14

TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


assets, management considers all available positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Management exercises significant judgment in determining its provisions for income taxes, its deferred tax assets and liabilities, and its future taxable income for purposes of assessing its ability to utilize any future tax benefit from its deferred tax assets.
Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of each reporting date, management considers new evidence, both positive and negative, that could impact management’s view with regards to future realization of deferred tax assets. As of September 30, 2015, the Company continues to demonstrate three-year cumulative pre-tax income in the U.S. federal and Arizona tax jurisdictions; however, the Arizona R&D Tax Credits start to expire in 2018 with a significant tranche with a gross value of $1.2 million expiring if not used by the end of 2019. Under the Company’s new tax structure, it appears that long term investments which impact short term profits will likely result in some of the R&D credits expiring before they are utilized. Therefore, management has concluded that it is more likely than not that a portion of the Company’s deferred tax assets will not be realized.
The Company has completed research and development (“R&D”) tax credit studies which identified approximately $11.1 million in tax credits for federal, Arizona and California income tax purposes related to the 2003 through 2015 tax years. Management has made the determination that it is more likely than not that the full benefit of the R&D tax credit will not be sustained on examination and recorded a liability for unrecognized tax benefits of $2.3 million as of September 30, 2015. In addition, management accrued approximately $0.1 million for estimated uncertain tax positions related to certain state income tax liabilities as of September 30, 2015. The Company recently completed an IRS audit for the tax year 2012, and as of September 30, 2015, the amount of unrecognized tax benefits decreased by $0.4 million.  The Company does not expect a significant increase or decrease in the total amount of unrecognized tax benefits within 12 months. Should the total unrecognized tax benefit of $2.4 million be recognized, the Company’s effective tax rate would be favorably impacted. Approximately $1.2 million of the unrecognized tax benefit associated with research and development credits has been netted against the research and development credit deferred tax asset.

Effective Tax Rate
The Company’s overall effective tax rate for the nine months ended September 30, 2015, after discrete period adjustments, was 44.0%. Before discrete adjustments the tax rate was 45.5%, which is above the statutory rate primarily due to the impact of the relative amounts of income or loss projected in certain foreign jurisdictions, state taxes and non-deductible expenses for items such as ISO stock option expense, meals and entertainment, and lobbying fees, partially offset by the impact of the domestic production activities deduction. The Company has nearly completed the full implementation of its new international structure, which is new for 2015.  In accounting for the income tax effects of this new structure, the Company has recognized income tax expense in the current quarter based on the results it expects for the full year.  Actual results could be different, impacting the Company’s income tax expense in future quarters. 
8. Stockholders’ Equity

In May 2013, the Company’s stockholders approved a new stock incentive plan authorizing an additional 1.6 million shares, plus remaining available shares under a prior plan for issuance under the new plan. Combined with the legacy stock incentive plans, there are approximately 1.3 million shares available for grant as of September 30, 2015.
Performance-based stock awards
The Company has issued performance-based stock options and performance-based restricted stock units ("RSUs"), the vesting of which is contingent upon the achievement of certain performance criteria related to the operating performance of the Company, as well as successful and timely development and market acceptance of future product introductions. In addition, certain of the performance RSUs have additional service requirements subsequent to the achievement of the performance criteria. Compensation expense is recognized over the implicit service period (the longer of the period the performance condition is expected to be achieved or the required service period) based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date.

15

TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Restricted Stock Units
The following table summarizes RSU activity for the nine months ended September 30, 2015 (number of units and aggregate intrinsic value in thousands):
 
Number
of
Units
 
Weighted
Average
Grant-Date
Fair Value
 
Aggregate
Intrinsic Value
Units outstanding, beginning of year
1,226

 
$
13.23

 
 
Granted
400

 
27.24

 
 
Released
(399
)
 
11.23

 
 
Forfeited
(101
)
 
16.45

 
 
Units outstanding, end of period
1,126

 
18.59

 
$
24,801

Aggregate intrinsic value represents the Company’s closing stock price on the last trading day of the period, which was $22.03 per share, multiplied by the number of RSUs outstanding. As of September 30, 2015, there was $15.8 million in unrecognized compensation costs related to RSUs under the Company's stock plans. The Company expects to recognize the cost related to the RSUs over a weighted average period of 2.73 years. RSUs are released when vesting requirements are met.
During the nine months ended September 30, 2015, the Company granted approximately 36,101 performance-based RSUs, which are included in the table above. As of September 30, 2015, the performance criteria had not been met for any of the 0.1 million performance-based RSUs outstanding. Certain of the performance-based RSUs granted in 2015 and 2014 contain provisions whereby the amount of RSUs that ultimately vest is dependent upon the level of achievement of performance metrics. The amount of RSUs included in the table above related to such grants is the target level, which is the Company's best estimate of the amount of RSUs that will vest. The maximum additional number of performance-based RSUs that could be earned is 0.1 million, which are not included in the table above.
Certain RSUs that vested in the nine months ended September 30, 2015 were net-share settled such that the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld were approximately 33,000 and had a value of approximately $0.8 million on their respective vesting dates as determined by the Company’s closing stock price. Payments for the employees’ tax obligations are reflected as a financing activity within the statement of cash flows. These net-share settlements had the effect of share repurchases by the Company as they reduced the amount of shares that would have otherwise been issued as a result of the vesting.
 
Stock Option Activity
The following table summarizes stock option activity for the nine months ended September 30, 2015 (number of units and aggregate intrinsic value in thousands):
 
Number
of
Options
 
Weighted
Average
Exercise
Price
 
Weighted Average Remaining Contractual Life (years)
 
Aggregate
Intrinsic Value
Options outstanding, beginning of year
1,641

 
$
5.26

 
 
 
 
Granted

 

 
 
 
 
Exercised
(504
)
 
4.96

 
 
 
 
Expired / terminated
(8
)
 
8.71

 
 
 
 
Options outstanding, end of period
1,129

 
5.36

 
3.60
 
$
18,823

Options exercisable, end of period
1,098

 
5.37

 
3.61
 
18,299

Options expected to vest, end of period
25

 
4.75

 
3.25
 
434

Aggregate intrinsic value represents the difference between the exercise price of the underlying stock option awards and the closing market price of the Company's common stock of $22.03 on September 30, 2015. The intrinsic value of options exercised for the nine months ended September 30, 2015 and 2014 was $13.3 million and $14.4 million, respectively. Options expected to

16

TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


vest are presented net of forfeitures. As of September 30, 2015, total options outstanding includes approximately 0.2 million performance-based stock options, of which approximately 30,600 were unvested and 25,000 expected to vest.

Stock-based Compensation Expense
The estimated fair value of stock-based awards is amortized to expense on a straight-line basis over the service periods. As stock-based compensation expense recognized is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company’s forfeiture rate was calculated based on its historical experience of awards which ultimately vested. The following table summarizes the composition of stock stock-based compensation for the three and nine months ended September 30, 2015 and 2014 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Cost of products sold and services delivered
$
118

 
$
61

 
$
276

 
$
149

Sales, general and administrative expenses
1,123

 
940

 
2,982

 
2,598

Research and development expenses
622

 
436

 
1,828

 
1,374

Total stock-based compensation
$
1,863

 
$
1,437

 
$
5,086

 
$
4,121

Stock Repurchase Plan
In May 2014, the Company announced that TASER’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 three months ended September 30, 2015, the Company purchased approximately 0.3 million common shares under the program for a total cost of approximately $7.6 million, or a weighted average cost of $25.86 per share. The weighted average cost includes the average price paid per share of $25.83, plus any applicable administrative costs for the transaction. As of September 30, 2015, no amounts remain available under the plan for future purchases.

9. Line of Credit
The Company has a $10.0 million revolving line of credit with a domestic bank. At both September 30, 2015 and December 31, 2014, there were no borrowings under the line. As of September 30, 2015, the Company had letters of credit outstanding of approximately $3.0 million under the facility and available borrowing of approximately $7.0 million. 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%). The line of credit matures on July 31, 2017, and requires monthly payments of interest only. The Company’s agreement with the bank requires it to comply with certain financial and other covenants including maintenance of a maximum leverage ratio and minimum 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 September 30, 2015, the Company’s tangible net worth ratio was 0.48:1 and its fixed charge coverage ratio was 2.53:1. Accordingly, the Company was in compliance with these covenants.
10. Commitments and Contingencies
Product Litigation
The Company is currently named as a defendant in 15 lawsuits in which the plaintiffs allege either wrongful death or personal injury in situations in which a TASER CEW was used (or present) by law enforcement officers in connection with arrests or during training exercises. In addition, one other product litigation matter in which the Company is involved is currently on appeal. While the facts vary from case to case, the product liability claims are typically based on an alleged product defect resulting in injury or death, usually involving a failure to warn, and the plaintiffs are seeking monetary damages. Three recent lawsuits allege fraud and misrepresentation and are seeking punitive damages in addition to compensatory damages. The information throughout this note is current through the filing date of this Quarterly Report on Form 10-Q.

As a general rule, it is the Company’s policy not to settle suspect injury or death cases. Exceptions are sometimes made where the settlement is strategically beneficial to the Company. Also, on occasion, the Company’s insurance company has settled such lawsuits over the Company’s objection where the risk is over the Company’s liability insurance deductibles. Due to the

17

TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


confidentiality of the Company's litigation strategy and the confidentiality agreements that are executed in the event of a settlement, it does not identify or comment on which specific lawsuits have been settled or the amount of any settlement.

In 2009, the Company implemented new risk management strategies, including revisions to product warnings and training to better protect both the Company and its customers from litigation based on ‘failure to warn’ theories - which comprise the vast majority of the cases against the Company. These risk management strategies have been highly effective in reducing the rate and exposure from litigation post-2009. From the third quarter of 2011 to the third quarter of 2015, product liability cases have been reduced from 55 active to 16 active cases, including cases currently on appeal.
 
Management believes that pre-2009 cases have a different risk profile than cases which have occurred since the risk management procedures were introduced in 2009. Therefore, the Company necessarily treats certain pre-2009 cases as exceptions to the Company’s general no settlement policy in order to reduce caseload, legal costs and liability exposure. The Company intends to continue its successful practice of aggressively defending and generally not settling litigation except in very limited and unusual circumstances as described above.
 
With respect to each of the pending lawsuits, the following table lists the name of plaintiff, the date the Company was served with process, the jurisdiction in which the case is pending, the type of claim and the status of the matter.
Plaintiff
  
Month
Served
  
Jurisdiction
  
Claim Type
  
Status
Koon
  
Dec-08
  
17th Judicial Circuit Court, Broward County, FL
  
Training Injury
  
Discovery Phase
Derbyshire
  
Nov-09
  
Ontario, Canada Superior Court of Justice
  
Officer Injury
  
Discovery Phase
Thompson
  
Mar-10
  
11th Judicial Circuit Court, Miami-Dade County, FL
  
Wrongful Death
  
Discovery Phase
Doan
  
Apr-10
  
The Queen's Bench Alberta, Red Deer Judicial Dist.
  
Wrongful Death
  
Discovery Phase
Shymko
  
Dec-10
  
The Queen's Bench, Winnipeg Centre, Manitoba
  
Wrongful Death
  
Pleading Phase
Ramsey
  
Jan-12
  
17th Judicial Circuit Court, Broward County, FL
  
Wrongful Death
  
Discovery Phase
Firman
  
Apr-12
  
Ontario, Canada Superior Court of Justice
  
Wrongful Death
  
Pleading Phase
Schrock
  
Sep-14
  
San Bernardino County Superior Court, CA
  
Wrongful Death
  
Discovery Phase - Trial scheduled July 2016
Moore
  
Nov-14
  
St. Louis County Circuit Court, MO
  
Wrongful Death
  
Discovery Phase
Jones
  
Jan-15
  
Los Angeles County Superior Court, CA
  
Suspect Injury
  
Discovery Phase - Trial scheduled April 2016
McKelvey
 
Apr-15
 
US District Court, OR
 
Wrongful Death
 
Pleading Phase - Trial scheduled for October 2016
Price
 
Jul-15
 
US District Court, OR
 
Wrongful Death
 
Pleading Phase
Demery
 
Aug-15
 
US District Court, LA
 
Wrongful Death
 
Pleading Phase
Llach
 
Sep-15
 
11th Judicial Circuit Court, Miami-Dade County, FL
 
Wrongful Death
 
Pleading Phase
Bennett
 
Sep-15
 
11th Judicial Circuit Court, Miami-Dade County, FL
 
Wrongful Death
 
Pleading Phase
In addition, other product litigation matters in which the Company is involved that are currently on appeal are listed below:
Plaintiff
  
Month
Served
  
Jurisdiction
  
Claim Type
  
Status
Mitchell
  
Apr-12
  
US District Court, ED MI
  
Wrongful Death
  
Company won appeal with three judge panel, petition filed by Plaintiff for full Court of Appeals review

There were no cases that were dismissed or judgment entered during the third quarter of 2015 and through the filing date of this Quarterly Report on Form 10-Q. Cases that were dismissed or judgment entered in prior fiscal quarters are not included in this table.


18

TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The claims, and in some instances the defense, of each of these lawsuits have been submitted to the Company’s insurance carriers that maintained insurance coverage during the applicable periods. The Company continues to maintain product liability insurance coverage with varying limits and deductibles. The following table provides information regarding the Company’s product liability insurance. Remaining insurance coverage is based on information received from the Company’s insurance provider (in millions).
Policy Year
 
Policy
Start
Date
 
Policy
End
Date
 
Insurance
Coverage
 
Deductible
Amount
 
Defense
Costs
Covered
 
Remaining
Insurance
Coverage
 
Active Cases and Cases on
Appeal
2004
 
12/1/2003
 
12/1/2004
 
$
2.0

 
$
0.1

 
N
 
$
2.0

 
n/a
2005
 
12/1/2004
 
12/1/2005
 
10.0

 
0.3

 
Y
 
7.0

 
n/a
2006
 
12/1/2005
 
12/1/2006
 
10.0

 
0.3

 
Y
 
3.7

 
n/a
2007
 
12/1/2006
 
12/1/2007
 
10.0

 
0.3

 
Y
 
8.0

 
n/a
2008
 
12/1/2007
 
12/15/2008
 
10.0

 
0.5

 
Y
 

 
Koon
2009
 
12/15/2008
 
12/15/2009
 
10.0

 
1.0

 
N
 
10.0

 
Derbyshire
2010
 
12/15/2009
 
12/15/2010
 
10.0

 
1.0

 
N
 
10.0

 
Thompson, Shymko, Doan
2011
 
12/15/2010
 
12/15/2011
 
10.0

 
1.0

 
N
 
10.0

 
n/a
Jan-Jun 2012
 
12/15/2011
 
6/25/2012
 
7.0

 
1.0

 
N
 
7.0

 
Ramsey, Mitchell, Firman
Jul-Dec 2012
 
6/25/2012
 
12/15/2012
 
12.0

 
1.0

 
N
 
12.0

 
n/a
2013
 
12/15/2012
 
12/15/2013
 
12.0

 
1.0

 
N
 
12.0

 
n/a
2014
 
12/15/2013
 
12/15/2014
 
11.0

 
4.0

 
N
 
11.0

 
Schrock, Moore
2015
 
12/15/2014
 
12/15/2015
 
10.0

 
5.0

 
N
 
10.0

 
Jones, McKelvey, Price, Demery, Llach, Bennett
General
From time to time, the Company is notified that it may be a party to a lawsuit or that a claim is being made against it. It is the Company’s policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on the Company. After carefully assessing the claim, and assuming the Company determines that it is not at fault or it disagrees with the damages or relief demanded, the Company vigorously defend any lawsuit filed against the Company. In certain legal matters, the Company records a liability when losses are deemed probable and reasonably estimable. In evaluating matters for accrual and disclosure purposes, the Company takes into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, and the severity of any potential loss. the Company reevaluates and updates our accruals as matters progress over time.

Based on the Company's assessment of outstanding litigation and claims as of September 30, 2015, the Company has determined that it is not reasonably possible that these lawsuits will individually, or in the aggregate, materially affect its results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by its insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on our operating results, financial condition or cash flows.

Off-Balance Sheet Arrangements
Under certain circumstances, the Company uses letters of credit and surety bonds to guarantee its performance under various contracts, principally in connection with the installation and integration of its Axon cameras and related technologies. Certain of the Company's letters of credit contracts and surety bonds have stated expiration dates with others being released as the contractual performance terms are completed. At September 30, 2015, the Company had outstanding letters of credit of approximately $3.0 million. Of that amount, $2.7 million is expected to expire in May 2017 and $0.3 million is expected to expire in January 2017. Additionally, the Company had approximately $2.4 million of outstanding surety bonds at September 30, 2015, with $2.2 million expiring in July 2018 and the remaining $0.2 million expected to be released in the near term.


19

TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


11. Related Party Transactions

The Company engages Dr. Mark Kroll, a member of the Board of Directors, to provide consulting services. The expenses related to these services were approximately $44,000 and $50,000 for the three months ended September 30, 2015 and 2014, respectively, and $156,000 and $121,000 for the nine months ended September 30, 2015 and 2014, respectively. At September 30, 2015 and December 31, 2014, the Company had accrued liabilities of approximately $19,000 and $8,000, respectively, related to these services.
The Company subscribes to a mobile collaboration software suite co-founded and managed by Bret Taylor, a member of the Board of Directors. The Company licenses the software for approximately $20,000 per quarter, and as of September 30, 2015 had prepaid costs related to an annual subscription of approximately $57,000. No such deferred costs were recorded at December 31, 2014.
In connection with the acquisition of Tactical Safety Responses Limited (Note 14), the Company assumed two long-term non-cancellable operating leases for business premises with the former owners who are now employees of the Company. The leases have an average remaining contractual term 15 years and require aggregate annual rental payments of approximately $45,000. Prepaid rental payments as of September 30, 2015 were negligible.
12. Employee Benefit Plans
The Company has a defined contribution profit sharing 401(k) plan for eligible employees, which is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. Employees are entitled to make tax-deferred contributions of up to the maximum allowed by law of their eligible compensation.
The Company also has a non-qualified deferred compensation plan for certain executives, key employees and non-employee directors through which participants may elect to postpone the receipt and taxation of a portion of their compensation, including stock-based compensation, received from the Company. The non-qualified deferred compensation plan allows eligible participants to defer up to 80% of their base salary and up to 100% of other types of compensation. The plan also allows for (i) matching and discretionary employer contributions and (ii) the deferral of vested RSU awards. Employee deferrals are deemed 100% vested upon contribution. Distributions from the plan are made upon retirement, death, separation of service, specified date or upon the occurrence of an unforeseeable emergency. Distributions can be paid in a variety of forms from lump sum to installments over a period of years. Participants in the plan are entitled to select from a wide variety of investments available under the plan and are allocated gains or losses based upon the performance of the investments selected by the participant. All gains or losses are allocated fully to plan participants and the Company does not guarantee a rate of return on deferred balances. Assets related to this plan consist of corporate-owned life insurance contracts and are included in other assets in the condensed consolidated balance sheets. Participants have no rights or claims with respect to any plan assets and any such assets are subject to the claims of the Company’s general creditors.
Contributions to the plans are made by both the employee and the Company. Company contributions are based on the level of employee contributions and are immediately vested. The Company’s matching contributions to the 401(k) plan for the three months ended September 30, 2015 and 2014, were approximately $0.3 million and $0.2 million, respectively. The Company’s matching contributions to the 401(k) plan for the nine months ended September 30, 2015 and 2014, were approximately $0.9 million and $0.6 million, respectively. The Company expects to make contributions to the non-qualified deferred compensation plan related to the three and nine months ended September 30, 2015, of approximately $8,000 and $31,000, respectively. Future matching or profit sharing contributions to the plans are at the Company’s sole discretion.

 

20

TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


13. Segment Data
The Company’s operations are comprised of two reportable segments: the manufacture and sale of CEWs, accessories and other products and services (the “TASER Weapons” segment); and the video business, which includes the TASER Cam, Axon products, Evidence.com, and MediaSolv (the “Axon” 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, overhead allocation based on direct labor, selling expense for the Axon sales team, Axon product management expenses, 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 CODM does not review assets by segment as part of the financial information provided; therefore, only limited asset information is provided in the following tables.
Information relative to the Company’s reportable segments is as follows (in thousands):
 
Three Months Ended September 30, 2015
 
Three Months Ended September 30, 2014
 
TASER
Weapons
 
Axon
 
Total
 
TASER
Weapons
 
Axon
 
Total
Product sales
$
39,520

 
$
7,745

 
$
47,265

 
$
40,010

 
$
3,181

 
$
43,191

Service revenue

 
3,111

 
3,111

 

 
1,158

 
1,158

Net sales
39,520

 
10,856

 
50,376

 
40,010

 
4,339

 
44,349

Cost of products sold
12,445

 
5,829

 
18,274

 
12,443

 
2,695

 
15,138

Cost of services delivered

 
1,034

 
1,034

 

 
498

 
498

Gross margin
27,075

 
3,993

 
31,068

 
27,567

 
1,146

 
28,713

Sales, general and administrative
11,941

 
5,893

 
17,834

 
10,028

 
2,413

 
12,441

Research and development
1,151

 
5,377

 
6,528

 
1,050

 
2,709

 
3,759

Income (loss) from operations
$
13,983

 
$
(7,277
)
 
$
6,706

 
$
16,489

 
$
(3,976
)
 
$
12,513

Purchase of property and equipment
$
1,900

 
$
169

 
$
2,069

 
$
803

 
$
41

 
$
844

Purchase of intangible assets
114

 
87

 
201

 
14

 
2

 
16

Purchase of property and equipment and intangible assets in connection with business acquisitions
1,503

 
1,502

 
3,005

 

 

 

Depreciation and amortization
603

 
345

 
948

 
1,010

 
91

 
1,101


 
Nine Months Ended September 30, 2015
 
Nine Months Ended September 30, 2014
 
TASER
Weapons
 
Axon
 
Total
 
TASER
Weapons
 
Axon
 
Total
Product sales
$
115,686

 
$
18,177

 
$
133,863

 
$
105,160

 
$
9,812

 
$
114,972

Service revenue

 
7,988

 
7,988

 

 
2,737

 
2,737

Net sales
115,686

 
26,165

 
141,851

 
105,160

 
12,549

 
117,709

Cost of products sold
34,805

 
12,692

 
47,497

 
34,024

 
8,111

 
42,135

Cost of services delivered

 
2,695

 
2,695

 

 
1,439

 
1,439

Gross margin
80,881

 
10,778

 
91,659

 
71,136

 
2,999

 
74,135

Sales, general and administrative
33,469

 
14,373

 
47,842

 
32,218

 
7,516

 
39,734

Research and development
3,418

 
13,574

 
16,992

 
2,660

 
8,160

 
10,820

Income (loss) from operations
$
43,994

 
$
(17,169
)
 
$
26,825

 
$
36,258

 
$
(12,677
)
 
$
23,581

Purchase of property and equipment
$
2,435

 
$
1,404

 
$
3,839

 
$
1,836

 
$
230

 
$
2,066

Purchase of intangible assets
195

 
207

 
402

 
123

 
2

 
125

Purchase of property and equipment and intangible assets in connection with business acquisitions
1,503

 
11,301

 
12,804

 

 

 

Depreciation and amortization
1,689

 
621

 
2,310

 
3,078

 
290

 
3,368



21

TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


14. Business Acquisitions
MediaSolv Solutions Corporation
On May 5, 2015, the Company acquired all of the outstanding capital stock of MediaSolv Solutions Corporation, a Delaware corporation for a total purchase price of $8.8 million, net of $0.1 million of cash acquired. MediaSolv primarily provides solutions for interview room video, closed-circuit television ("CCTV") and on-premise digital evidence management. These products will connect with the Company's Axon on-officer cameras and, in some cases, its Evidence.com cloud platform, further enabling law enforcement to unify existing silos of digital media and evidence into a seamless workflow from capture to the courtroom. The Company believes the acquisition will also allow the Company to leverage MediaSolv’s existing network and relationships to further strengthen its position in the market.
The purchase price consisted primarily of cash, net of cash acquired and working capital adjustments, of $7.8 million and contingent consideration of $1.0 million representing potential earn-outs to former stockholders based on predetermined future financial metrics. The Company also agreed to additional earn-out provisions and compensation adjustments totaling approximately $4.0 million based, in part, on predefined future financial metrics. The earn-outs are not included as part of the purchase price and will be expensed as compensation in the period earned. The fair value of the contingent consideration liability was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820, Fair Value Measurements and Disclosures. The significant inputs in the Level 3 measurement not supported by market activity included primarily probability assessments related to the attainment of new customers during the earn-out period, appropriately discounted considering the uncertainties associated with the obligation. Subsequent to the date of acquisition, there was no significant change in the estimated fair value of the liability.
The Company's purchase price allocation is preliminary and subject to revision as more detailed analyses are completed and additional information about fair value of assets and liabilities become available, including additional information relating to tax matters and finalization of the valuation of identifiable intangible assets.
The major classes of assets and liabilities to which the Company has allocated the purchase price, on a preliminary basis, are as follows (in thousands):
Accounts receivable and other current assets
$
590

Inventory
35

Property and equipment
53

Intangible assets
4,145

Goodwill
5,600

Accounts payable and accrued liabilities
(403
)
Deferred revenue
(153
)
Deferred income tax liabilities, net
(1,044
)
Total purchase price
$
8,823

The Company has assigned the goodwill to the Axon segment. Other identifiable definite lived intangible assets were assigned a total weighted average amortization period of 6.5 years. MediaSolv has been included in the Company's consolidated results of operations subsequent to the acquisition date. Pro forma results of operations for MediaSolv have not been presented because they are not material to the consolidated results of operations. In connection with the acquisition, the Company incurred and expensed costs of approximately $0.2 million, which included legal, accounting and other third-party expenses related to the transaction.

22

TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Tactical Safety Responses Limited
On July 16, 2015, TASER International B.V., a wholly owned subsidiary of the Company, acquired all of the outstanding capital stock of Tactical Safety Responses Limited ("TSR"), a United Kingdom ("UK") corporation. TSR is the Company's licensed distributor of TASER CEWs and Axon cameras and related accessories in the UK. The acquisition is intended to help expand the Company's growth across the UK by growing its in-country sales and support team. The total purchase was $3.3 million consisting of $4.0 million cash at close, net of $0.7 million of cash acquired. The Company also agreed to additional amounts in the form of earn-outs, subject to the achievement of predefined performance metrics. The earn-outs are not included as part of the purchase price and will be expensed as compensation in the period earned. The acquired entity will operate under the name Axon Public Safety UK.
The Company's purchase price allocation is preliminary and subject to revision as more detailed analyses are completed and additional information about fair value of assets and liabilities become available, including additional information relating to tax matters and finalization of the valuation of identifiable intangible assets.
The major classes of assets and liabilities to which the Company has allocated the purchase price, on a preliminary basis, are as follows (in thousands):
Accounts receivable
$
726

Inventory
497

Property and equipment
583

Other Assets
20

Intangible assets
881

Goodwill
1,541

Accounts payable and accrued liabilities
(207
)
Notes payable
(169
)
Income tax liabilities
(538
)
Total purchase price
$
3,334

The Company has assigned the goodwill to the consolidated entity. Other identifiable definite lived intangible assets were assigned a total weighted average amortization period of 7.0 years. TSR has been included in the Company's consolidated results of operations subsequent to the acquisition date. Pro forma results of operations for TSR have not been presented because they are not material to the consolidated results of operations. In connection with the acquisition, the Company incurred and expensed costs of approximately $0.1 million, which included legal, accounting and other third-party expenses related to the transaction.


23



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of the Company’s financial condition as of September 30, 2015, and results of operations for the three and nine months ended September 30, 2015 and 2014. The following discussion may be understood more fully by reference to the consolidated financial statements, notes to the consolidated financial statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations section contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
 
Certain statements contained in this report may be deemed to be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, and the Company intends that such forward-looking statements be subject to the safe-harbor created thereby. Such forward-looking statements may relate to, among other things: our strategy to grow the Axon segment; our belief that customers will honor multi-year contracts despite the existence of appropriations (or similar) clauses; the sufficiency and availability of our liquid assets and capital resources; our litigation strategy, including the outcome of legal proceedings in which we are currently involved; our intentions about future development efforts and activities, including our intentions to invest in research and development; that selling, general and administrative expense will increase in the remainder of 2015; that fixed costs in the Axon segment will stabilize and result in lower cost of services as a percentage of revenue; that we may experience a decrease in overall margins; trends in stock-based compensation for the remainder of 2015; our plans for our Netherlands international headquarters facility; that we may have more sales and expenses denominated in foreign currencies in 2015; that we may engage in currency hedging activities; and the impact of recently adopted and future accounting standards. We caution that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward looking statements herein. Such factors include, but are not limited to: market acceptance of our products; our ability to design, introduce and sell new products; delays in development schedules; rapid technological change and competition; our ability to manage our growth and increase manufacturing production to meet demand; establishment and expansion of our direct and indirect distribution channels; our ability to pursue sales directly with customers; our dependence on sales of our TASER X26P and X2 CEWs; the acceptance of our Evidence.com software model; the long-term revenue recognition cycle for our SaaS Evidence.com product; the length of our sales cycle and our ability to realize benefits from our marketing and selling efforts; breach of our security measures resulting in unauthorized access to customer data; outages and disruptions relating to our Evidence.com service; our dependence on third party suppliers for key components of our products; component shortages; rising costs of raw materials and transportation relating to petroleum prices; that we may experience declines in gross margins due to a shift in product sales from CEW to Axon devices; product defects; our anticipation that certain orders will be completed; risks relating to acquisitions and joint ventures; catastrophic events; fluctuations in quarterly operating results; increases in non-U.S. denominated expenses; employee retention risks; budgetary and political constraints of prospects and customers; our exposure to cancellations of government contracts due to appropriation clauses; our compliance with regulations governing the environment, including but not limited to, regulations within the European Union; new regulations relating to conflict minerals; risks of governmental regulations, including regulations of our products by the United States Consumer Product Safety Commission, regulation of our products as a "crime control" product by the Federal government, state and local government regulation and foreign regulation and the adverse effects that could result from our products being classified as firearms by the United States Bureau of Alcohol and Firearms; Federal, state or local agency investigations could adversely impact the Company's ability to secure sales contracts; regulatory and political challenges presented by international markets; fluctuations in our effective tax rate; foreign currency fluctuations; counter-party risks relating to cash balances held in excess of FDIC insurance limits; litigation risks resulting from alleged product-related injuries and media publicity concerning allegations of deaths occurring after use of the TASER device and the negative impact this publicity could have on sales; the outcome of pending or future litigation; our ability to protect our intellectual property; intellectual property infringement claims and relating litigation costs; competition in foreign countries relating to foreign patents; our successful identification of existing intellectual property rights that might infringe on our developments and other factors identified in documents filed by us with the Securities and Exchange Commission, including those set forth in our Form 10-K for the year ended December 31, 2014.

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”) and other electronic weapons designed for use in law enforcement, military, corrections, private security and personal defense. To address challenges faced by law enforcement officers subsequent to 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.


24


Results of Operations

Three Months Ended September 30, 2015 Compared to the Three Months Ended September 30, 2014
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):
 
Three Months Ended September 30,
 
2015
 
2014
Net sales
$
50,376

 
100.0
 %
 
$
44,349

 
100.0
 %
Cost of products sold and services delivered
19,308

 
38.3

 
15,636

 
35.3

Gross margin
31,068

 
61.7

 
28,713

 
64.7

Operating expenses:
 
 
 
 
 
 
 
Sales, general and administrative
17,834

 
35.4

 
12,441

 
28.1

Research and development
6,528

 
13.0

 
3,759

 
8.5

Total operating expenses
24,362

 
48.4

 
16,200

 
36.5

Income from operations
6,706

 
13.3

 
12,513

 
28.2

Interest income and other (expense) income, net
(22
)
 

 
(160
)
 
(0.4
)
Income before provision for income taxes
6,684

 
13.3

 
12,353

 
27.9

Provision for income taxes
5,163

 
10.2

 
4,795

 
10.8

Net income
$
1,521

 
3.0
 %
 
$
7,558

 
17.0