The Company and Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2012

The Company and Summary of Significant Accounting Policies [Abstract]

The Company and Summary of Significant Accounting Policies

1. The Company and Summary of Significant Accounting Policies

TASER International, Inc. (“TASER” or the “Company”) is a developer and manufacturer of advanced electronic control devices (“ECDs”) designed for use in law enforcement, military, corrections, private security and personal defense. In addition, the Company has developed full technology solutions for the capture, storage and management of video/audio evidence as well as other tactical capabilities for use in law enforcement. The Company sells its products worldwide through its direct sales force, distribution partners, online store and third-party resellers. The Company was incorporated in Arizona in September 1993, and reincorporated in Delaware in January 2001. The Company’s corporate headquarters and manufacturing facilities are located in Scottsdale, Arizona. The Company’s internet services and software development division facilities are located in Carpenteria, California.

The accompanying condensed consolidated financial statements include the accounts of the Company, and its wholly owned subsidiary, TASER International Europe SE (“TASER Europe”). TASER Europe was established in 2010 to facilitate sales and provide customer service to our customers in the European region. All material intercompany accounts, transactions and profits have been eliminated.

a. Basis of presentation, preparation and use of estimates

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 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, 2011, 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 our 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, 2011. The results of operations for the three and six months ended June 30, 2012 and 2011 are not necessarily indicative of the results to be expected for the full year (or any other period).

The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these consolidated financial statements include allowances for doubtful accounts receivable, inventory valuation reserves, product warranty reserves, valuations of long-lived assets, deferred income taxes, stock-based compensation, contingencies, accrued litigation expenses, manufacturing overhead allocations and uncertain tax positions.

b. Segment information and major customers

In the fourth quarter of 2011, management of the Company determined its reportable segments are the ECD segment and the Video segment. Reportable segments are determined based on discrete financial information reviewed by the Company’s Chief Operating Decision Maker (“CODM”), which in our case is the Chief Executive Officer. 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 relative to the Company’s business segments is included in Note 12.

For the three and six months ended June 30, 2012 and 2011, net sales by geographic area were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
United States		83	%		77	%		84	%		77	%
Other Countries		17	%		23	%		16	%		23	%
Total		100	%		100	%		100	%		100	%

Sales to customers outside of the United States are typically denominated in U.S. dollars and are attributed to each country based on the billing address of the distributor or customer. For the three and six months ended June 30, 2012 and 2011, no individual country outside of the United States represented greater than 10% of total net sales.

For the three months ended June 30, 2012, one distributor represented approximately 24% of total net sales. For the three months ended June 30, 2011, two distributors represented approximately 15% and 11% of total net sales. For the six months ended June 30, 2012, one distributor represented approximately 19% of total net sales. For the six months ended June 30, 2011, one distributor represented approximately 12% of total net sales. At June 30, 2012, the Company had receivables from one customer comprising approximately 30% of its aggregate accounts receivable balance. At December 31, 2011, the Company had accounts receivable from two customers comprising approximately 13% and 13% of the aggregate accounts receivable balance. These customers are unaffiliated distributors of the Company’s products.

c. Income (loss) per common share

Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the periods presented. Diluted income (loss) per share is calculated based on the weighted average number of common shares outstanding for the period plus the dilutive effect of stock options and restricted stock units using the treasury stock method. Contingently issuable shares are included in the calculation of basic income per share when all contingencies surrounding the issuance of the shares are met and the shares are issued or issuable. Contingently issuable shares are included in the calculation of dilutive earnings per share as of the beginning of the reporting period if, at the end of the reporting period, all contingencies surrounding the issuance of the shares are satisfied or would be satisfied if the end of the reporting period were the end of the contingency period. The calculation of the weighted average number of shares outstanding and income (loss) per share are as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2012		2011			2012		2011
Numerator for basic and diluted income per share
Net income (loss)	$	3,442,247	$	(2,294,832	)	$	7,246,065	$	(2,275,100	)
Denominator for basic income per share—weighted average shares outstanding		54,520,889		60,605,140			58,849,010		61,515,979
Dilutive effect of restricted stock units		29,041		—			8,143		—
Dilutive effect of shares issuable under stock options outstanding		616,714		—			625,521		—
Denominator for diluted income per share—adjusted weighted average shares outstanding		55,166,644		60,605,140			59,482,674		61,515,979
Net income (loss) per common share:
Basic	$	0.06	$	(0.04	)	$	0.12	$	(0.04	)
Diluted	$	0.06	$	(0.04	)	$	0.12	$	(0.04	)

For the three months ended June 30, 2012 and 2011, the effects of 5,255,267 and 7,031,017 stock options, respectively, were excluded from the calculation of diluted net income per share as their exercise prices were greater than the average price of our common stock during that period. For the three months ended June 30, 2012 and 2011, the effects of 91,100 and nil restricted stock units, respectively, were excluded from the calculation of diluted net income per share as they were anti-dilutive under the treasury stock method. For the six months ended June 30, 2012 and 2011, the effects of 6,215,722 and 7,015,738 stock options, respectively, were excluded from the calculation of the diluted net income per share as their exercise prices were greater than the average price of our common stock during that period. For the six months ended June 30, 2012 and 2011, the effects of 318,750 and nil restricted units respectively, were excluded from the calculation of diluted net income per share as they were anti-dilutive under the treasury stock method.

d. Revenue recognition

The Company recognizes revenues 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. 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 Company has sold its Video segment products separately, but in most instances the Company’s AXON equipment and EVIDENCE.com software as a service are sold together. In these instances, customers typically purchase and pay for the AXON equipment and EVIDENCE.com services in advance, with the AXON equipment representing a deliverable that is provided to the customer at the time of sale, and EVIDENCE.com services provided over a specified service term, which has typically ranged from one to five years. 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 service is deferred at the time of the sale and recognized over the service period. At June 30, 2012 and December 31, 2011 approximately $0.5 million and $0.3 million of EVIDENCE.com revenue was deferred, respectively, and is being recognized over the applicable service terms.

The Company offers customers the right to purchase extended warranties that include additional services and coverage beyond the limited warranty on the TASER X26, ADVANCED TASER, X2, X3, AXON and C2 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 four years. At June 30, 2012 and December 31, 2011, approximately $8.5 million and $7.5 million was deferred under this program, respectively.

Certain of the Company’s customers are charged shipping fees, which are recorded as a component of net sales. Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis. Training revenue is recorded as the service is provided.

e. Warranty costs

The Company warrants its X2 ECDs, X3 ECDs, X26 ECDs, M26 ECDs, XREP, TASER Cam, TASER Cam, Shockwave, AXON Tactical Computer, Com Hub user interface, Synapse Evidence Transfer Manager (ETM), and Headcam products from manufacturing defects on a limited basis for a period of one year after purchase, and thereafter, will replace any defective unit for a fee. The TASER C2 product is warranted for a period of 90 days after purchase. The Company also sells extended warranties for periods of up to four years after the expiration of the limited one year warranty. After the one year standard warranty expires, if the device fails to operate properly for any reason, the Company will replace the TASER X26 for a prorated discounted price depending on when the product was placed into service. These fees are intended to cover the handling and repair costs and include a profit. Management tracks historical data related to returns and warranty costs on a quarterly basis, and estimates future warranty claims by applying the estimated weighted average return rate to the product sales for the period. If management becomes aware of a component failure that could result in larger than anticipated returns from its customers, the reserve would be increased. The reserve for warranty returns is included in accrued liabilities on the consolidated balance sheet. Changes in the Company’s estimated product warranty liabilities are as follows:

	Six Months Ended June 30,
	2012			2011
Balance, January 1	$	427,459		$	646,113
Utilization of accrual		(164,578	)		(395,911	)
Warranty expense		97,226			79,886
Balance, June 30	$	360,107		$	330,088

f. Fair value of financial instruments

The Company uses the fair value framework for measuring financial assets and liabilities measured on a recurring basis and for non-financial assets and liabilities when these items are remeasured. Under fair value measurement GAAP accounting standards, 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 – Unadjusted quoted market prices in active markets for identical assets or liabilities.

• Level 2 – 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.

• Level 3 – Unobservable inputs that are not corroborated by market data.

The Company has cash equivalents, which at June 30, 2012 and December 31, 2011, were comprised of money market mutual funds. At June 30, 2012, the Company also held short-term investments consisting of commercial paper. All investments have been valued using level one valuation on techniques. There have been no changes in the methodologies used at December 31, 2011. Based on management’s ability and intent to hold these investments to maturity, they are recorded at amortized cost on the balance sheet. Refer to Note 2 for additional fair value disclosures for these short-term investments. The Company’s financial instruments also include accounts receivable, accounts payable and accrued liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the balance sheet.

g. Valuation of long-lived assets

We review long-lived assets, such as property and equipment and intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We utilize a two-step approach to testing long-lived assets for impairment. The first step tests for possible impairment indicators. If one or more impairment indicators are present, the second step measures whether the asset is recoverable based on a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. We primarily employ two methodologies for determining the fair value of a long-lived asset: (i) the amount at which the asset could be sold in a current transaction between willing parties; or (ii) the present value of expected future cash flows grouped at the lowest level for which there are identifiable independent cash flows. Our review requires the use of judgment and estimates.

In the three and six months ended June 30, 2012, the Company did not recognize any impairment changes. In the three and six months ended June 30, 2011, the Company recognized $1,350,504 in impairment charges associated with its Protector product line following the Company’s decision to abandon ongoing operations relating to this line.

In the three and six months ended June 30, 2011, the Company incurred a loss on write down/disposal of property and equipment of $747,000 and $757,000, respectively, following a decision to dispose of surplus equipment for EVIDENCE.com operations.

h. Recently issued accounting guidance

In May 2011, the Financial Accounting Standards Board (FASB) issued amended standards to achieve a consistent definition of fair value and common requirements for measurement of, and disclosure about fair value between U.S. generally accepted accounting principles and International Financial Reporting Standards. For assets and liabilities categorized as Level 3 and recognized at fair value, these amended standards require disclosure of quantitative information about unobservable inputs, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements. In addition, these amended standards require that we disclose the level in the fair value hierarchy for financial instruments disclosed at fair value but not recorded at fair value. These new standards are effective for fiscal years beginning after December 15, 2011. The adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.

In June 2011, the Financial Accounting Standards Board (FASB) issued guidance to require presentation of the total of comprehensive income, the components of net income and the components of other comprehensive income (“OCI”) either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. Regardless of which format is chosen, the amendments establish a requirement for entities to present on the face of the financial statements reclassification adjustments for items that are reclassified from OCI to net income in the statement(s) where the components of net income and the components of OCI are presented. This guidance was effective for the Company on January 1, 2012; however, during December 2011 the FASB issued guidance, which defers those changes in guidance that relate to the presentation of reclassification adjustments. The adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.