The Company and Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2012

The Company and Summary of Significant Accounting Policies [Abstract]

Basis of presentation, preparation and use of estimates

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 (“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, 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 nine months ended September 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 unaudited 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.

Segment and geographic information and major customers

b. Segment and geographic 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 nine months ended September 30, 2012 and 2011, net sales by geographic area were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
United States		81	%		81	%		83	%		78	%
Other Countries		19			19			17			22
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 shipping address of the distributor or customer. For the three and nine months ended September 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 September 30, 2012, one distributor represented approximately 10.6% of total net sales. In the three months ended September 30, 2011, two distributors represented approximately 15.0% and 10.0% of total net sales, respectively. For the nine months ended September 30, 2012, one distributor represented approximately 14.3% of total net sales. For the nine months ended September 30, 2011, one distributor represented approximately 13% of total net sales. At September 30, 2012, the Company had receivables from one customer comprising approximately 18% of its aggregate accounts receivable balance. At December 31, 2011, the Company had accounts receivable from two customers each comprising approximately 13.0% of its aggregate accounts receivable balance. These customers are unaffiliated distributors of the Company’s products.

Income (loss) per common share

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 September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Numerator for basic and diluted income per share
Net income (loss)	$	3,676,872	$	1,136,285	$	10,922,936	$	(1,138,815	)
Denominator for basic income per share - weighted average shares outstanding		52,509,068		58,787,274		57,997,341		60,617,787
Dilutive effect of restricted stock units		84,241		—		33,380		—
Dilutive effect of shares issuable under stock options outstanding		513,016		1,250,054		452,112		—
Denominator for diluted income per share - adjusted weighted average shares outstanding		53,106,325		60,037,328		58,482,833		60,617,787
Net income (loss) per common share:
Basic	$	0.07	$	0.02	$	0.19	$	(0.02	)
Diluted	$	0.07	$	0.02	$	0.19	$	(0.02	)

Diluted earnings per share for the three months ended September 30, 2012 and 2011 excludes the impact of approximately 4,732,366 and 7,119,854 common stock equivalents, respectively, since the effect of including these securities would be anti-dilutive. Diluted earnings per share for the nine months ended September 30, 2012 and 2011 excludes the impact of approximately 5,261,887 and 8,389,298 common stock equivalents, respectively, since the effect of including these securities would be anti-dilutive.

Revenue recognition

d. Revenue recognition

The Company recognizes revenue 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 sells 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 representing a deliverable 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 September 30, 2012 and December 31, 2011, approximately $0.9 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 September 30, 2012 and December 31, 2011, revenues of approximately $9.2 million and $7.3 million were 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.

Warranty costs

e. Warranty costs

The Company warrants its ECDs and AXON Flex 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 intended to cover the costs incurred by the Company. Until September 1, 2012, the TASER C2 product was warranted for a period of 90 days after purchase. As of September 1, 2012, the TASER C2 product is warranted for a period of one year after purchase. Estimated costs for the standard warranty are charged to cost of products sold and services delivered when revenue is recorded for the related product. The Company estimates future warranty costs based on historical data related to returns and warranty costs on a quarterly basis and applies this rate to current product sales. The Company has also historically increased its reserve amount if it becomes aware of a component failure that could result in larger than anticipated returns from customers. The accrued warranty expense liability is reviewed quarterly to verify that it sufficiently reflects remaining warranty obligations based on the anticipated expenditures over the balance of the 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 condensed consolidated balance sheet. For the nine months ended September 30, 2012, the warranty expense increased compared to the same period in the prior year due to increased sales. The utilization of the warranty accrual has decreased in the nine months ended September 30, 2012 when compared to the nine months ended September 30, 2011, due to quality improvements in the products driving lower return rates in our products. Changes in the Company’s estimated product warranty liabilities are as follows:

	Nine Months Ended September 30,
	2012			2011
Balance, January 1	$	427,459		$	646,113
Utilization of accrual		(312,570	)		(456,823	)
Warranty expense		265,140			249,652
Balance, September 30	$	380,029		$	438,942

Fair value of financial instruments

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 September 30, 2012 and December 31, 2011, were comprised of money market mutual funds. At September 30, 2012 and December 31, 2011, the Company also held short-term investments consisting of commercial paper. All investments have been valued using Level 1 valuation techniques. There have been no changes in the methodologies used at December 31, 2011. Based on management’s ability and intent to hold its short term 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.

Valuation of Long-lived Assets

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 nine months ended September 30, 2012, the Company recognized no impairment charges. In the three months ended September 30, 2011, the Company recognized $3,353 in impairment charges related with its Protector product line. In the nine months ended September 30, 2011, the Company recognized $1,353,857 in impairment charges associated with its Protector product line following the Company’s decision to abandon ongoing operations relating to this line.

In the nine months ended September 30, 2012, the Company incurred approximately $305,000 in loss on write down/disposal. Approximately $62,000 related to loss on write down/disposal of intangibles associated with abandoned patents as well as approximately $106,000 as a loss on write down/disposal related to fixed assets associated with the closing of a data center. In the nine months ended September 30, 2011, the Company incurred a loss on write down/disposal of property and equipment of $757,000, following a decision to dispose of surplus equipment for EVIDENCE.com operations. There were no gains or losses on write down/disposal of assets in the three months ended for the periods ended September 30, 2012 and 2011.

Recently adopted accounting guidance

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 FASB issued guidance to require presentation of total 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 the amendment resulted in a change to our presentation of comprehensive income, but did not otherwise have an impact on the Company’s consolidated financial statements.

In July 2012, the FASB issued guidance to simplify the impairment testing for indefinite-lived intangibles by allowing an entity to first assess qualitative factors, considering the totality of events and circumstances, to determine that it is more likely than not that the carrying amount of a reporting unit is less than its fair value. If it is not, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test. The new guidance is effective for annual and interim impairment tests for fiscal years beginning after September 15, 2012. The Company does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.