Attached files
file | filename |
---|---|
EX-32 - EXHIBIT 32 - AXON ENTERPRISE, INC. | c00375exv32.htm |
EX-31.1 - EXHIBIT 31.1 - AXON ENTERPRISE, INC. | c00375exv31w1.htm |
EX-10.1 - EXHIBIT 10.1 - AXON ENTERPRISE, INC. | c00375exv10w1.htm |
EX-31.2 - EXHIBIT 31.2 - AXON ENTERPRISE, INC. | c00375exv31w2.htm |
Table of Contents
United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
or
o | 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 (State or other jurisdiction of incorporation or organization) |
86-0741227 (I.R.S. Employer Identification Number) |
|
17800 N. 85th St., SCOTTSDALE, ARIZONA (Address of principal executive offices) |
85255 (Zip Code) |
(480) 991-0797
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
(Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, 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 o No o
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 o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a 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 o No þ
There were 62,576,262 shares of the issuers common stock, par value $0.00001 per share,
outstanding as of May 4, 2010.
TASER INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2010
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2010
TABLE OF CONTENTS
Page | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
19 | ||||||||
27 | ||||||||
27 | ||||||||
28 | ||||||||
28 | ||||||||
28 | ||||||||
28 | ||||||||
29 | ||||||||
30 | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
Items
2, 3 and 4 are not applicable.
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS |
TASER INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, 2010 | December 31, 2009 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 37,425,947 | $ | 45,505,049 | ||||
Accounts receivable, net of allowance of $200,000 at March 31, 2010 and December 31, 2009, respectively |
15,811,319 | 15,384,993 | ||||||
Inventory |
17,687,918 | 15,085,750 | ||||||
Prepaids and other assets |
3,095,368 | 1,461,539 | ||||||
Deferred income tax assets, net |
8,483,898 | 8,447,915 | ||||||
Total current assets |
82,504,450 | 85,885,246 | ||||||
Property and equipment, net |
39,522,372 | 38,673,065 | ||||||
Deferred income tax assets, net |
10,997,093 | 10,997,093 | ||||||
Intangible assets, net |
2,801,583 | 2,765,701 | ||||||
Other long-term assets |
97,320 | 104,812 | ||||||
Total assets |
$ | 135,922,818 | $ | 138,425,917 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 2,437,903 | $ | 6,357,195 | ||||
Accrued liabilities |
4,332,895 | 4,252,577 | ||||||
Current portion of deferred revenue |
2,889,682 | 2,819,155 | ||||||
Customer deposits |
334,888 | 355,926 | ||||||
Total current liabilities |
9,995,368 | 13,784,853 | ||||||
Deferred revenue, net of current portion |
4,519,355 | 4,675,089 | ||||||
Liability for unrecorded tax benefits |
2,255,912 | 2,264,779 | ||||||
Total liabilities |
16,770,635 | 20,724,721 | ||||||
Commitments and Contingencies |
||||||||
Stockholders Equity |
||||||||
Preferred stock, $0.00001 par value per share; 25 million shares authorized; no shares issued and
outstanding at March 31, 2010 and December 31, 2009, respectively |
| | ||||||
Common stock, $0.00001 par value per share; 200 million shares authorized; 62,576,262 and 62,119,063
shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively |
646 | 642 | ||||||
Additional paid-in capital |
94,806,591 | 92,839,165 | ||||||
Treasury stock, 2,091,600 shares at March 31, 2010 and December 31, 2009, respectively |
(14,708,237 | ) | (14,708,237 | ) | ||||
Retained earnings |
39,077,021 | 39,569,626 | ||||||
Accumulated other comprehensive income/(loss) |
(23,838 | ) | | |||||
Total stockholders equity |
119,152,183 | 117,701,196 | ||||||
Total liabilities and stockholders equity |
$ | 135,922,818 | $ | 138,425,917 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
TASER INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Net sales |
$ | 23,843,901 | $ | 24,604,780 | ||||
Cost of products sold: |
||||||||
Direct manufacturing expense |
7,260,048 | 6,904,667 | ||||||
Indirect manufacturing expense |
3,093,432 | 3,070,862 | ||||||
Total cost of products sold |
10,353,480 | 9,975,529 | ||||||
Gross margin |
13,490,421 | 14,629,251 | ||||||
Sales, general and administrative expenses |
10,299,154 | 11,448,923 | ||||||
Research and development expenses |
4,139,916 | 4,197,969 | ||||||
Loss from operations |
(948,649 | ) | (1,017,641 | ) | ||||
Interest and other income, net |
7,899 | 94,675 | ||||||
Loss before benefit for income taxes |
(940,750 | ) | (922,966 | ) | ||||
Benefit for income taxes |
(448,145 | ) | (455,207 | ) | ||||
Net loss |
$ | (492,605 | ) | $ | (467,759 | ) | ||
Loss per common and common equivalent shares |
||||||||
Basic |
$ | (0.01 | ) | $ | (0.01 | ) | ||
Diluted |
$ | (0.01 | ) | $ | (0.01 | ) | ||
Weighted average number of common and common equivalent shares outstanding |
||||||||
Basic |
62,332,170 | 61,832,808 | ||||||
Diluted |
62,332,170 | 61,832,808 |
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
TASER INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net loss |
$ | (492,605 | ) | $ | (467,759 | ) | ||
Adjustments to reconcile net loss to net cash (used) provided by operating activities: |
||||||||
Depreciation and amortization |
1,540,157 | 714,806 | ||||||
Loss on disposal of fixed assets |
11,932 | 34,437 | ||||||
Provision for excess and obsolete inventory |
281,022 | 34,608 | ||||||
Provision for warranty |
84,224 | 142,070 | ||||||
Stock-based compensation expense |
1,009,594 | 1,375,036 | ||||||
Deferred income taxes |
(35,983 | ) | (150,161 | ) | ||||
Liability
for unrecorded tax benefits |
(8,867 | ) | (24,030 | ) | ||||
Change in assets and liabilities: |
||||||||
Accounts receivable |
(449,412 | ) | 4,486,431 | |||||
Inventory |
(2,883,190 | ) | 3,105,410 | |||||
Prepaids and other assets |
(1,626,337 | ) | 589,104 | |||||
Accounts payable and accrued liabilities |
(3,990,217 | ) | 136,095 | |||||
Deferred revenue |
(85,207 | ) | 518,998 | |||||
Customer deposits |
(21,038 | ) | 31,661 | |||||
Net cash (used) provided by operating activities |
(6,665,927 | ) | 10,526,706 | |||||
Cash Flows from Investing Activities: |
||||||||
Proceeds from maturity of investments |
| 2,500,000 | ||||||
Purchases of property and equipment |
(2,310,766 | ) | (1,588,854 | ) | ||||
Purchases of intangible assets |
(59,493 | ) | (104,094 | ) | ||||
Net cash (used) provided by investing activities |
(2,370,259 | ) | 807,052 | |||||
Cash Flows from Financing Activities: |
||||||||
Proceeds from options exercised |
957,836 | 50,269 | ||||||
Net cash provided by financing activities |
957,836 | 50,269 | ||||||
Effect of exchange rate change on cash and cash equivalents |
(752 | ) | | |||||
Net decrease in cash and cash equivalents |
(8,078,350 | ) | 11,384,027 | |||||
Cash and cash equivalents, beginning of period |
45,505,049 | 46,880,435 | ||||||
Cash and cash equivalents, end of period |
$ | 37,425,947 | $ | 58,264,462 | ||||
Supplemental Disclosure: |
||||||||
Cash paid for income taxes net |
$ | 425,511 | $ | 440,685 |
The accompanying notes are an integral part of these consolidated financial statements.
5
Table of Contents
TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 is developing 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 Companys corporate headquarters and manufacturing facilities are located in Scottsdale,
Arizona. The Companys internet services and software development division facilities are located
in Carpenteria, California.
The accompanying consolidated financial statements include the accounts of the Company, and
its wholly owned subsidiary, TASER International Europe SE (TASER Europe). TASER Europe was
established in 2009 to facilitate sales and provide customer service to our customers in the
European region. All material intercompany accounts, transactions, and profits have been
eliminated.
a. Basis of presentation, preparation and use of estimates
The accompanying unaudited consolidated financial statements of TASER include all adjustments
(consisting only of normal recurring accruals) which in the opinion of management are necessary for
the fair presentation of the Companys operating results, financial position and cash flows as of
March 31, 2010 and for the three months ended March 31, 2010 and 2009. The preparation of these
consolidated financial statements in conformity with accounting principles generally accepted in
the United States of America (U.S. GAAP) requires management to make estimates and assumptions
that affect the amounts reported in these consolidated financial statements and accompanying notes.
Actual results could differ materially from those estimates.
Certain information and note disclosures normally included in consolidated financial
statements prepared in accordance with U.S. GAAP have been omitted from these unaudited
consolidated financial statements in accordance with applicable rules. The results of operations
for the three month periods ended March 31, 2010 and 2009 are not necessarily indicative of the
results to be expected for the full year (or any other period) and all results of operations
included herein should be read in conjunction with the financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
b. Segment information and major customers
Management has determined that its operations are comprised of one reportable segment. For the
three months ended March 31, 2010 and 2009, sales by geographic area were as follows:
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
United States |
75 | % | 60 | % | ||||
Other Countries |
25 | % | 40 | % | ||||
Total |
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 months ended March 31, 2010, no individual country outside of the U.S.
represented a material amount of total net sales. For the three months ended March 31, 2009, sales
to the UK and Brazil represented approximately 20% and 10% of the Companys total net sales,
respectively. Substantially all assets of the Company are located in the United States.
In the three months ended March 31, 2010, one distributor represented approximately 10% of
total net sales. In the three months ended March 31, 2009, two distributors represented
approximately 20% and 10% of total net sales, respectively. At March 31, 2010, the Company had
receivables from one customer comprising 18% of its aggregate accounts receivable balance. At
December 31, 2009, the Company had receivables from one customer comprising 13% of its aggregate
accounts receivable balance. These customers are unaffiliated distributors of the Companys
products.
6
Table of Contents
TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
c. Loss per common share
Basic loss per share is computed by dividing net loss by the weighted average number of common
shares outstanding during the periods presented. Diluted loss per share reflects the potential
dilution that could occur if outstanding stock options were exercised. The calculation of the
weighted average number of shares outstanding and earnings per share are as follows:
For the Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Numerator for basic and diluted loss per share |
||||||||
Net loss |
$ | (492,605 | ) | $ | (467,759 | ) | ||
Denominator for basic loss per share weighted average shares outstanding |
62,332,170 | 61,832,808 | ||||||
Dilutive effect of shares issuable under stock options outstanding |
| | ||||||
Denominator for diluted loss per share adjusted weighted average shares outstanding |
62,332,170 | 61,832,808 | ||||||
Net loss per common share |
||||||||
Basic |
$ | (0.01 | ) | $ | (0.01 | ) | ||
Diluted |
$ | (0.01 | ) | $ | (0.01 | ) |
Net loss per share includes the dilutive effect of potential stock option exercises,
calculated using the treasury stock method. As a result of the net loss for the three months ended
March 31, 2010 and 2009, we excluded 4,607,780 and 6,829,545, respectively, from the calculation as
their effect would have been to reduce the net loss per share.
d. Warranty costs
The Company warrants its X26, Advanced, TASER Cam, XREP and Shockwave products from
manufacturing defects on a limited basis for a period of one year after purchase. The C2 product is
warranted for a period of 90 days after purchase. After the one year warranty expires, if the
device fails to operate properly for any reason, the Company will replace the X26 for a prorated
price depending on when the product was placed into service and replace the ADVANCED TASER device
for a fee of $75. These fees are intended to cover the handling and repair costs and provide a
profit for the Company. The Company also sells extended warranties, primarily for the X26, for
periods of up to four years after the expiration of the limited one year warranty. Management
tracks historical data related to returns and warranty costs on a quarterly basis, and estimates
future warranty claims based upon historical experience. If management becomes aware of a component
failure that could result in larger than anticipated returns from its customers, the reserve would
be increased. The reserve for warranty returns is included in accrued liabilities on the
consolidated balance sheet. The following table summarizes the changes in the estimated product
warranty liabilities for the three months ended March 31, 2010 and 2009.
2010 | 2009 | |||||||
Balance at January 1, |
$ | 369,311 | $ | 615,031 | ||||
Utilization of accrual |
(84,224 | ) | (142,070 | ) | ||||
Warranty true up expense (benefit) |
89,627 | 51,036 | ||||||
Balance at March 31, |
$ | 374,714 | $ | 523,997 | ||||
7
Table of Contents
TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
f. Capitalized software development costs
For development costs related to EVIDENCE.com, the Companys Software as a Service (SaaS)
product, the Company capitalizes qualifying computer software costs that are incurred during the
application development stage. Costs related to preliminary project planning activities and
post-implementation activities are expensed as incurred. For the three months ended March 31, 2010,
the Company capitalized $793,000 of qualifying software development costs. The Company will begin
amortizing capitalized software development costs once all final product testing is substantially
complete, which is expected to be during the second quarter of 2010.
For development costs related to the TASER Protector Platform (See Note 12), the Company
capitalized development costs paid to RouteCloud LLC for development of the Protector Platform
technology under the terms of the joint venture agreement. For the three months ended March 31,
2010, the Company capitalized approximately $569,000 of qualifying development costs. The Company
will begin amortizing capitalized development once the final product has launched, which is
expected to occur midway through 2010.
g. Fair value of financial instruments
The Company accounts for certain assets and liabilities at fair value. The hierarchy below
lists three levels of fair value based on the extent to which inputs used in measuring fair value
are observable in the market. The Company categorizes each of its fair value measurements in one of
these three levels based on the lowest level input that is significant to the fair value
measurement in its entirety. These levels are:
| Level 1 Valuation techniques in which all significant
inputs are unadjusted quoted prices from active markets
for assets or liabilities that are identical to the
assets or liabilities being measured. |
|
| Level 2 Valuation techniques in which significant
inputs include quoted prices from active markets for
assets or liabilities that are similar to the assets or
liabilities being measured and/or quoted prices for
assets or liabilities that are identical or similar to
the assets or liabilities being measured from markets
that are not active. Also, model-derived valuations in
which all significant inputs and significant value
drivers are observable in active markets are Level 2
valuation techniques. |
|
| Level 3 Valuation techniques in which one or more
significant inputs or significant value drivers are
unobservable. Unobservable inputs are valuation technique
inputs that reflect our own assumptions about the
assumptions that market participants would use in pricing
an asset or liability. |
h. Recently adopted accounting guidance
In October 2009, the FASB issued authoritative guidance on revenue recognition that the
Company has adopted early, effective January 1, 2010. Under the new guidance on arrangements that
include software elements, tangible products that have software components that are essential to
the functionality of the tangible product will no longer be within the scope of the software
revenue recognition guidance, and software-enabled products will now be subject to other relevant
revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue
arrangements with multiple deliverables that are outside the scope of the software revenue
recognition guidance. Under the new guidance, when vendor specific objective evidence or third
party evidence for deliverables in an arrangement cannot be determined, a best estimate of the
selling price is required to separate deliverables and allocate arrangement consideration using the
relative selling price method. The new guidance includes new disclosure requirements on how the
application of the relative selling price method affects the timing and amount of revenue
recognition. Adoption of this new guidance did not have a material impact on the Companys
consolidated financial statements.
In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest
entities, which the Company adopted, effective January 1, 2010. The new guidance requires revised
evaluations of whether entities represent variable interest entities, ongoing assessments of
control over such entities, and additional disclosures for variable interests. Adoption of this new
guidance did not have a material impact on the Companys consolidated financial statements.
8
Table of Contents
TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
2. Cash, cash equivalents and investments
Cash and cash equivalents include funds on hand and short-term investments with original
maturities of three months or less. Short-term investments include securities generally having
maturities of 90 days to one year. At March 31, 2010, the entire $37.4 million of the Companys
cash and cash equivalents was comprised of cash and money market funds.
The Company valued its cash equivalents in money market accounts using observable inputs that
reflect quoted prices for securities with identical characteristics, and accordingly, management
classified the valuation techniques that use these inputs as Level 1.
3. Inventory
Inventory is 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 an
allocation of manufacturing labor and overhead. Provisions are made to reduce excess, obsolete or
slow-moving inventories to their net realizable value. Inventories as of March 31, 2010 and
December 31, 2009 consisted of the following:
March 31, 2010 | December 31, 2009 | |||||||
Raw materials and work-in-process |
$ | 12,554,821 | $ | 10,387,229 | ||||
Finished goods |
5,417,969 | 5,172,595 | ||||||
Reserve for excess and obsolete inventory |
(284,872 | ) | (474,074 | ) | ||||
$ | 17,687,918 | $ | 15,085,750 | |||||
4. Intangible assets
Intangible assets consisted of the following at March 31, 2010 and December 31, 2009:
March 31, 2010 | December 31, 2009 | |||||||||||||||||||||||||||
Gross | Net | Gross | Net | |||||||||||||||||||||||||
Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | |||||||||||||||||||||||
Useful Life | Amount | Amortization | Amount | Amount | Amortization | Amount | ||||||||||||||||||||||
Amortized intangible assets: |
||||||||||||||||||||||||||||
Domain names |
5 Years | $ | 230,991 | $ | 60,000 | $ | 170,991 | $ | 230,991 | $ | 60,000 | $ | 170,991 | |||||||||||||||
Issued patents |
4 to 15 Years | 914,166 | 219,986 | 694,180 | 869,309 | 206,907 | 662,402 | |||||||||||||||||||||
Issued trademarks |
9 to 11 Years | 144,726 | 22,929 | 121,797 | 131,058 | 19,183 | 111,875 | |||||||||||||||||||||
Non compete agreements |
5 to 7 Years | 150,000 | 113,215 | 36,785 | 150,000 | 106,429 | 43,571 | |||||||||||||||||||||
1,439,883 | 416,130 | 1,023,753 | 1,381,358 | 392,519 | 988,839 | |||||||||||||||||||||||
Unamortized intangible assets: |
||||||||||||||||||||||||||||
TASER Trademark |
900,000 | 900,000 | 900,000 | 900,000 | ||||||||||||||||||||||||
Patents and trademarks pending |
877,830 | 877,830 | 876,862 | 876,862 | ||||||||||||||||||||||||
1,777,830 | 1,777,830 | 1,776,862 | 1,776,862 | |||||||||||||||||||||||||
$ | 3,217,713 | $ | 416,130 | $ | 2,801,583 | $ | 3,158,220 | $ | 392,519 | $ | 2,765,701 | |||||||||||||||||
Amortization expense for the three months ended March 31, 2010 and 2009 was approximately
$24,000 and $20,000, respectively. Estimated amortization expense of intangible assets for the
remaining nine months of 2010, the next five years ended December 31, and thereafter is as follows:
2010 (remainder of year) |
$ | 70,596 | ||
2011 |
85,261 | |||
2012 |
65,262 | |||
2013 |
65,262 | |||
2014 |
66,031 | |||
2015 |
62,710 | |||
Thereafter |
608,631 | |||
$ | 1,023,753 | |||
9
Table of Contents
TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
5. Accrued liabilities
Accrued liabilities consisted of the following at March 31, 2010 and December 31, 2009:
March 31, 2010 | December 31, 2009 | |||||||
Accrued salaries and benefits |
$ | 1,563,589 | $ | 1,691,303 | ||||
Accrued expenses |
2,394,592 | 2,191,963 | ||||||
Accrued warranty expense |
374,714 | 369,311 | ||||||
$ | 4,332,895 | $ | 4,252,577 | |||||
6. Income taxes
The deferred income tax assets at March 31, 2010 are comprised of capitalized research and
development costs, research and development tax credits, non-qualified stock-based compensation
expense, deferred warranty revenue, warranty and inventory reserves and accrued vacation. The
Companys total current and long term deferred tax assets balance at March 31, 2010 is $19.5
million.
In preparing the Companys consolidated financial statements, management assesses the
likelihood that its deferred tax assets will be realized from future taxable income. In evaluating
the Companys ability to recover its deferred income tax 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 judgment that could become subject to audit by tax authorities
in the ordinary course of business, as well as the generation of sufficient future taxable income.
Management believes that, as of March 31, 2010, based on an evaluation and projections of future
sales and profitability for fiscal 2010, no valuation allowance is necessary. However, such
deferred tax assets could be reduced in the future if projections of future taxable income during
the carryforward period are reduced.
The Company has completed research and development tax credit studies which identified
approximately $5.9 million in tax credits for Federal and Arizona income tax purposes related to
the 2003 through 2009 tax years, net of the federal benefit on the Arizona research and development
tax credits. Management has made the determination that it is more likely than not that the full
benefit of the research and development tax credit will not be sustained on examination and
accordingly has established a cumulative liability for unrecognized tax benefits of $2.2 million as
of March 31, 2010. In addition, management accrued approximately $106,000 for estimated uncertain
tax positions related to certain state income tax liabilities. As of March 31, 2010, management
does not expect the amount of the unrecognized tax benefit liability to increase or decrease
significantly within the next 12 months. Should the unrecognized tax benefit of $2.3 million be
recognized, the Companys effective tax rate would be favorably impacted.
The following presents a rollforward of our liability for unrecognized tax benefits as of
March 31, 2010:
Unrecognized | ||||
Tax Benefits | ||||
Balance at January 1, 2010 |
$ | 2,264,779 | ||
Decrease in prior year tax positions |
(8,867 | ) | ||
Decrease in current year tax positions |
| |||
Decrease related to adjustment of previous estimates of activity |
| |||
Decrease related to settlements with taxing authorities |
| |||
Decrease related to lapse in statute of limitations |
| |||
Balance at March 31, 2010 |
$ | 2,255,912 | ||
10
Table of Contents
TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
7. Stockholders equity
Stock Option Activity
At March 31, 2010, the Company had four stock-based compensation plans, three of which are
described more fully in Note 10 to the consolidated financial statements included in the Companys
Annual Report on Form 10-K.
The following table summarizes the stock options available and outstanding as of March 31,
2010, as well as activity during the three months then ended:
Outstanding Options | ||||||||||||
Options Available | Weighted Average | |||||||||||
for Grant | Number of options | Exercise Price | ||||||||||
Balance at December 31, 2009 |
1,708,192 | 8,780,067 | $ | 5.94 | ||||||||
Granted |
(600,050 | ) | 600,050 | $ | 5.67 | |||||||
Exercised |
| (457,199 | ) | $ | 2.10 | |||||||
Expired/terminated |
562,124 | (562,124 | ) | $ | 5.74 | |||||||
Balance at March 31, 2010 |
1,670,266 | 8,360,794 | $ | 6.15 | ||||||||
The options outstanding as of March 31, 2010 have been segregated into five ranges for
additional disclosure as follows:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||
Average | Weighted Average | Average | ||||||||||||||||||
Number | Exercise | Remaining | Number | Exercise | ||||||||||||||||
Range of Exercise Price | Outstanding | Price | Contractual Life | Exercisable | Price | |||||||||||||||
$0.28 - $0.99 |
514,452 | $ | 0.36 | 2.9 | 514,452 | $ | 0.36 | |||||||||||||
$1.03 - $2.41 |
651,547 | $ | 1.62 | 2.5 | 651,547 | $ | 1.62 | |||||||||||||
$3.53 - $9.93 |
6,325,301 | $ | 6.15 | 7.4 | 3,741,259 | $ | 6.05 | |||||||||||||
$10.07 - $19.76 |
816,094 | $ | 12.17 | 5.6 | 768,762 | $ | 12.22 | |||||||||||||
$20.12 - $29.98 |
53,400 | $ | 24.22 | 4.3 | 53,400 | $ | 24.22 | |||||||||||||
8,360,794 | $ | 6.15 | 6.5 | 5,729,420 | $ | 6.51 | ||||||||||||||
The total fair value of options exercisable at March 31, 2010 and 2009 was $19.4 million
and $16.4 million, respectively. The aggregate intrinsic value of options outstanding and options
exercisable was $8.9 million and $6.6 million, respectively, at March 31, 2010. Aggregate intrinsic
value represents the difference between the Companys closing stock price on the last trading day
of the fiscal period, which was $5.87 per share, and the exercise price multiplied by the number of
options outstanding. Total intrinsic value of options exercised for the three month periods ended
March 31, 2010 and 2009 was approximately $2,089,000 and $430,000, respectively.
At March 31, 2010, the Company had 2,631,374 unvested options outstanding with a weighted
average exercise price of $5.34 per share, weighted average grant date fair value of $2.83 per
share and a weighted average remaining contractual life of 8.8 years. Of these unvested options
outstanding, management estimates that approximately 2,522,435 options will ultimately vest based
on its historical experience.
As of March 31, 2010, total unrecognized stock-based compensation expense related to unvested
stock options was approximately $7.2 million, which is expected to be recognized over a remaining
weighted average period of approximately 11 months.
11
Table of Contents
TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
Stock-Based Compensation Expense
The Company calculates the fair value of stock-based awards using the Black-Scholes-Merton
option valuation model, which incorporates various assumptions including volatility, expected life,
and interest rates. The assumptions used for the three month periods ended March 31, 2010 and 2009,
and the resulting estimates of weighted-average fair value per share of options granted during
those periods, are as follows:
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Expected life of options |
4.5 years | 4.5 years | ||||||
Weighted average volatility |
61.2 | % | 72.1 | % | ||||
Weighted average risk-free interest rate |
2.1 | % | 1.6 | % | ||||
Dividend rate |
0.0 | % | 0.0 | % | ||||
Weighted average fair value of options granted |
$ | 2.88 | $ | 4.87 |
The expected life of options represents the estimated period of time until exercise and is
based on the Companys historical experience of similar awards, giving consideration to the
contractual terms, vesting schedules and expectations of employee exercise patterns. Expected stock
price volatility is based on a combination of historical volatility of the Companys stock and the
one-year implied volatility of its traded options for the related vesting periods. The risk-free
interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an
equivalent remaining term. The Company has not paid dividends in the past and does not plan to pay
any dividends in the foreseeable future. As stock-based compensation expense is recognized on
awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures are
required to be estimated at the time of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. The Companys forfeiture rate was calculated based
on its historical experience of awards which ultimately vested.
Reported share-based compensation was classified as follows for the three months ended March
31, 2010 and 2009:
For the Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Cost of Products Sold |
$ | 71,509 | $ | 99,388 | ||||
Sales, general and administrative expenses |
798,126 | 814,074 | ||||||
Research and development expenses |
139,959 | 461,574 | ||||||
$ | 1,009,594 | $ | 1,375,036 | |||||
Total share-based compensation expense recognized in the income statement for the three
months ended March 31, 2010 and 2009 includes $515,000 and $830,000, respectively, related to
Incentive Stock Options (ISOs) for which no tax benefit is recognized. The Company did not tax
effect the share-based compensation expense for tax purposes related to the non-qualified
disposition of ISOs exercised and sold as the benefit will be recorded when the Company is in a
position to realize the benefit with an offset to taxes payable in future periods. The total
unrecognized tax benefit related to the non-qualified disposition of stock options in the three
months ended March 31, 2010 and 2009, was approximately $2.1 million and $430,000, respectively.
The Company has granted a cumulative total of 926,000 performance-based stock options in 2008,
2009 and the first quarter of 2010, the vesting of which is contingent upon the achievement of
certain performance criteria related to the successful and timely development and market acceptance
of future product introductions, as well as the future sales and operating performance of the
Company. Compensation expense is recognized over the implicit service period (the date the
performance condition is expected to be achieved) based on managements estimate of the probability
of the performance criteria being satisfied, adjusted at each balance sheet date. At March 31,
2010, 265,995 performance options with a fair value of approximately $672,000 remain outstanding.
During the first quarter, 200,000 of these options were forfeited, resulting in the reversal of
approximately $294,000 of previously recognized compensation expense.
12
Table of Contents
TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
8. Line of credit
The Company has a line of credit agreement with a bank which provides for a total availability
of $10.0 million. The line is secured by the Companys accounts receivable and inventory and bears
interest at varying rates of interest, ranging from LIBOR plus 1.5% to prime (3.25% at March 31,
2010). The availability under this line is computed on a monthly borrowing base, which is based on
the Companys eligible accounts receivable and inventory. The line of credit matures on June 30,
2010 and requires monthly payments of interest only. The Company expects to renew the line on
similar terms upon its maturity. At March 31, 2010, there was no amount outstanding under the line
of credit and the available borrowing was $10.0 million. There have been no borrowings under the
line of credit to date.
The Companys agreement with the bank requires compliance with certain financial and other
covenants including maintenance of minimum tangible net worth and fixed charge coverage ratios. The
ratio of total liabilities to tangible net worth can be no greater than 1:1, and the fixed coverage
charge ratio can be no less than 1.25:1, based upon a trailing twelve month period. At March 31,
2010, the Companys tangible net worth ratio was 0.14:1 and its fixed charge coverage ratio was
4.16:1. Accordingly, the Company was in compliance with those covenants.
9. Commitments and Contingencies
Legal proceedings
Product Litigation
The Company is currently named
as a defendant in 44 lawsuits in which the plaintiffs allege
either wrongful death or personal injury in situations in which the TASER device was used (or
present) by law enforcement officers in connection with arrests or during training exercises.
Companion cases arising from the same incident have been combined into one for reporting purposes.
In
addition, 108 other lawsuits have been dismissed or judgment entered in favor of the
Company which are not included in this number. An appeal was filed by the plaintiff in the Mann
(GA) litigation, Thompson (MI) litigation, Neal-Lomax (NV) and Rosa (CA) cases where judgment was
entered in favor of the Company. These cases are not included in this number.
Also not included in the number of pending
lawsuits is the Heston lawsuit in which a jury
verdict was entered against the Company on June 6, 2008, and judgment was entered against the
Company on January 30, 2009 in the amount of $153,150 as compensatory damages, $1,423,127 as
attorney fees, and $182,000 as costs. These damages, fees and costs are covered by the Companys
insurance policies. The jury found that Mr. Hestons own actions were 85 percent responsible for
his death. The jury assigned 15 percent of the responsibility to TASER for a negligent failure to
warn that extended or multiple TASER ECD applications could cause muscle contractions that could
potentially contribute to acidosis to a degree that could cause cardiac arrest. The jury
inappropriately awarded $5,200,000 in punitive damages against TASER, which were subsequently
disallowed by the Court on October 24, 2008. The Court denied the balance of the Companys motion
for judgment as a matter of law on all other grounds. The Company has filed a notice of appeal with
respect to the judgment and plaintiffs have filed a notice of cross appeal.
With respect to each of the
pending 44 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. 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.
This table also lists those cases that were dismissed or judgment entered during the most recent
fiscal quarter. Cases that were dismissed or judgment entered in prior fiscal quarters are not
included in this table. In each of the pending lawsuits, the plaintiff is seeking monetary damages
from the Company. The claims and in some instances, the defense of each of these lawsuits has been
submitted to our insurance carriers that maintained insurance coverage during these applicable
periods and we continue to maintain product liability insurance coverage with varying limits and
deductibles. Our product liability insurance coverage during these periods ranged from $5,000,000
to $10,000,000 in coverage limits and from $10,000 to $1,000,000 in per incident deductibles. We
are defending each of these lawsuits vigorously and do not expect these to individually and in the
aggregate, materially affect our business, results of operations or financial condition.
13
Table of Contents
TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
Month | ||||||||
Plaintiff | Served | Jurisdiction | Claim Type | Status | ||||
Glowczenski
|
Oct-04 | US District Court, ED NY | Wrongful Death | Trial rescheduled, date to be determined | ||||
Washington
|
May-05 | US District Court, ED CA | Wrongful Death | Discovery Phase | ||||
Sanders
|
May-05 | US District Court, ED CA | Wrongful Death | Dismissed | ||||
Graff
|
Sep-05 | Maricopa Superior Court, AZ | Wrongful Death | Discovery Phase-trial scheduled June 2010 | ||||
Heston
|
Nov-05 | US District Court, ND CA | Wrongful Death | Plaintiff Jury Verdict, punitive damages thrown out, judgment entered against TASER for $153,150 compensatory damages, $1,423,127 attorney fees and $182,000 costs, appeal filed | ||||
Rosa
|
Nov-05 | US District Court, ND CA | Wrongful Death | Dismissed, Summary Judgment Granted, Appeal Pending | ||||
Yeagley
|
Nov-05 | Hillsborough County Circuit County, FL | Wrongful Death | Dismissed | ||||
Neal-Lomax
|
Dec-05 | US District Court, NV | Wrongful Death | Dismissed, Appeal Won | ||||
Mann
|
Dec-05 | US District Court, ND GA, Rome Div | Wrongful Death | Dismissed, Appeal Won, EnBanc Review Pending | ||||
Bagnell
|
Jul-06 | Supreme Court for British Columbia, Canada | Wrongful Death | Discovery Phase | ||||
Hollman
|
Aug-06 | US District Court, ED NY | Wrongful Death | Discovery Phase | ||||
Oliver
|
Sep-06 | US District Court, MD FL, Orlando Division | Wrongful Death | Motion Phase | ||||
Teran/LiSaola
|
Oct-06 | US District Court, ND CA | Wrongful Death | Dismissed | ||||
Augustine
|
Jan-07 | 11th Judicial Circuit Court, Miami-Dade, FL | Wrongful Death | Discovery Phase | ||||
Wendy Wilson, Estate of Ryan Wilson
|
Aug-07 | District Court Boulder County, CO | Wrongful Death | Motion Phase | ||||
Jack Wilson, Estate of Ryan Wilson (Companion to Wendy Wilson) |
Nov-07 | District Court Boulder County, CO | Wrongful Death | Motion Phase | ||||
Marquez
|
Jun-08 | US District Court, AZ | Wrongful Death | Motion Phase | ||||
Salinas
|
Aug-08 | US District Court, Northern District CA | Wrongful Death | Discovery Phase, Trial Scheduled February 2011 | ||||
Thomas (Pike)
|
Oct-08 | US District Court, WD Louisiana, Alexandria | Wrongful Death | Discovery Phase | ||||
Dwyer
|
Nov-08 | US District Court, ED TX, Marshall Division | Wrongful Death | Dismissed | ||||
Carroll
|
Mar-09 | US District Court, Southern District TX | Wrongful Death | Discovery Phase | ||||
Shrum
|
May-09 | Allen County District Court, Iola, KS | Wrongful Death | Trial Scheduled February 2011 | ||||
Athetis
|
May-09 | US District Court, AZ | Wrongful Death | Discovery Phase | ||||
Hagans
|
May-09 | US District Court, SD OH | Wrongful Death | Discovery Phase-trial scheduled August 2011 | ||||
Bartley
|
Jun-09 | US District Court, ED LA | Wrongful Death | Dismissed | ||||
Abrahams
|
Jul-09 | CA Superior Court, Yolo County | Wrongful Death | Discovery Phase-trial scheduled May 2011 | ||||
Humphreys
|
Oct-09 | CA Superior Court, San Joaquin County | Wrongful Death | Case Stayed | ||||
Forbes
|
Dec-09 | US District Court, MS | Wrongful Death | Discovery Phase, Trial Scheduled October 2010 | ||||
Terriquez
|
Feb-10 | Superior Court of CA, Orange County | Wrongful Death | Discovery Phase | ||||
Rich
|
Feb-10 | US District Court, Nevada | Wrongful Death | Pleading Phase | ||||
McKenzie
|
Feb-10 | US Disctrict Court, ED CA | Wrongful Death | Pleading Phase | ||||
Turner
|
Feb-10 | General Court of Justice, Superior Court Div, Mecklenburg County, NC | Wrongful Death | Discovery Phase | ||||
Dang
|
Mar-10 | CA Superior Court, Orange County | Wrongful Death | Pleading Phase | ||||
Doan
|
Apr-10 | Queens Bench Alberta, Red Deer Judicial Dist. | Wrongful Death | Pleading Phase | ||||
Stewart
|
Oct-05 | Circuit Court for Broward County, FL | Training Injury | Discovery Phase | ||||
Lewandowski
|
Jan-06 | US District Court, NV | Training Injury | Trial Scheduled Sept 2010 | ||||
Peterson
|
Jan-06 | US District Court, NV | Training Injury | Dismissed | ||||
Husband
|
Mar-06 | British Columbia Supreme Court, Canada | Training Injury | Discovery Phase | ||||
Grable
|
Aug-08 | FL 6th Judicial Circuit Court, Pinellas County | Training Injury | Discovery Phase | ||||
Koon
|
Dec-08 | 17th Judicial Circuit Court, Broward County, FL | Training Injury | Discovery Phase | ||||
Bickle
|
Mar-09 | 18th Judicial District Court, Gallatin County, MT | Training Injury | Discovery Phase | ||||
Foley
|
Mar-09 | US District Court, MA | Training Injury | Discovery Phase | ||||
Peppler
|
Apr-09 | Circuit Court 5th Judicial Dist., Sumter City, FL | Training Injury | Discovery Phase | ||||
Kandt
|
Jun-09 | US District Court, ND NY | Training Injury | Discovery Phase | ||||
Ginger
|
Apr-10 | Iowa District Court, Marion County | Training Injury | Pleading Phase | ||||
Wieffenbach
|
Jun-06 | Circuit Court of 12th Judicial District, Will County, Il | Injury During Arrest | Dismissed | ||||
Butler
|
Sep-08 | CA Superior Court, Santa Cruz County | Injury During Arrest | Motion Phase, trial scheduled Aug 2010 | ||||
Reston
|
Apr-09 | Circuit Court 4th Judicial Dist., Duval Cty, FL | Injury During Arrest | Discovery Phase, trial scheduled Sept-2010 | ||||
Lucas
|
Jun-09 | US District Court, ED CA | Injury During Arrest | Discovery Phase | ||||
Spence
|
Jul-09 | CA Superior Court, Marin County | Injury During Arrest | Discovery Phase | ||||
Wheat
|
Jul-09 | CA Superior Court, Los Angeles County | Injury During Arrest | Discovery Phase, trial scheduled Mar-2011 | ||||
Derbyshire
|
Nov-09 | Ontario Superior Court of Justice | Officer Injury | Discovery Phase | ||||
Fahy
|
Dec-09 | Circuit Court of City of St. Louis | Injury During Arrest | Discovery Phase | ||||
Tylecki
|
Jan-10 | US District Court, DE | Injury During Arrest | Pleading Phase | ||||
Thompson
|
Mar-10 | 11th Judicial Circuit Court Miami-Dade County, FL | Injury During Arrest | Pleading Phase | ||||
Wilson
|
Apr-10 | US District Court, ND IL, ED | Injury During Arrest | Pleading Phase |
14
Table of Contents
TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
Other Litigation
In January 2007, we filed a lawsuit in the U.S. District Court for Arizona against Stinger
Systems, Inc. alleging patent infringement, patent false marking, and false advertising. Defendant
filed an answer and counterclaim for false advertising and punitive damages. More specifically, the
counterclaim seeks judgment; invalidating U.S. Patent 7,145,762; holding patent 7,145,762 not
infringed; granting permanent injunction to prohibit false advertising and labeling; granting
unspecified punitive damages for false advertising and/or unfair competition and injuries
proximately caused; and to pay defendants reasonable attorneys fees. On February 2, 2009, the
court issued an order based on a Markman hearing (patent claims construction hearing) held on May
7, 2008 in which the Court adopted TASERs claim construction on the disputed patent claim term in
TASERs U.S. patent number 7,102,870 and all of TASERs claim construction on all of the disputed
patent claim terms in TASERs U.S. patent number 7,234,262. In addition, the Court adopted TASERs
claim construction on one of the disputed patent claim terms in TASERs U.S. patent number
6,999,295 (295 Patent) and rejected both parties claim construction in the other disputed claim
term in this patent. Discovery is ongoing and no trial date has been sent. Both parties filed
motions for summary judgment and on March 31, 2010, the Court entered an order granting TASERs
motion for summary judgment against Stinger for literal patent infringement of TASERs U.S. 295
Patent. The Court also granted Stinger summary judgment on its motion that claim 3 of TASERs U.S.
Patent 7,102,870 is invalid as obvious but denied summary judgment on the rest of grounds for
relief in Stingers motion. No trial date has been set.
In October 2007, we filed a lawsuit in Arizona Superior Court for Maricopa County against
Steve Ward and Mark Johnson, both former TASER employees and VIEVU LLC, et. al. for breach of duty
of loyalty, breach of contract, breach of fiduciary duty, and conversion. This lawsuit does not
involve our electronic control device business and we do not expect this litigation to have a
material impact on our financial results. Defendants Ward and VIEVU LLC filed an answer and
counterclaim for declaration of non-infringement, tortious interference with contractual relations,
tortious interference with business expectancy, and abuse of process. The lawsuit seeks
compensatory damages, constructive trust, exemplary damages, injunctive relief attorneys fees,
costs and disbursements. Cross motions for summary judgment were filed and on March 4, 2009, the
Court denied Defendants motion for summary judgment on the trade secret claim and on April 9,
2009, the Court granted TASERs motion for summary judgment against Ward on the breach of fiduciary
duty and the breach of duty of loyalty claims. We filed a Motion to Extend Discovery Period by and
to reconvene the Deposition of Steve Ward, and Defendants have filed Defendants Response in
Opposition to this motion. In addition, Defendants Steve Ward and VIEVU LLC have filed a Motion for
Reconsideration or in the alternative to make the Courts Ruling a Final Judgment and Stay
Proceeding Pending Outcome of Appeal. The Court denied the Motion for Reconsideration, but granted
the motion to make the Courts Ruling a Final Judgment and Stayed the Proceeding Pending Outcome of
Appeal. An appeal has been filed by Defendants Ward and VIEVU LLC to the Arizona State Court of
Appeals. No trial date has been set.
15
Table of Contents
TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
In June 2008, we filed an amended complaint in the State Court of Fulton County, Georgia
joining as a plaintiff in an existing lawsuit previously filed by certain current and former
stockholders of the Company against Morgan Stanley & Co., Inc., and ten other brokerage firms
alleging a conspiracy to unlawfully, deceptively, and fraudulently manipulate the price of the
Companys common stock in the context of illegal naked shorting. Specifically, the amended
complaint alleges that the defendants committed conspiracy and endeavored to violate the Georgia
Racketeer Influenced and Corrupt Organization Act; Securities Fraud; Theft By Taking; Theft By
Deception; Violation of The Georgia Computer Systems Protection Act; Violation of the Georgia
Securities Act; Violation of the Georgia Computer Systems Protection Act; and Conversion. The
lawsuit seeks compensatory and punitive damages as well as expenses of litigation including
attorneys fees and costs. Defendants have filed motions to dismiss or alternatively a motion for a
more definite statement and, on July 29, 2009, the Court entered an order denying Defendants
motion to dismiss and alternatively a motion for a more definite statement. Discovery has begun in
this litigation and no trial date has been set.
In July 2008, we were served with a summons and complaint in the lawsuit entitled Proformance
Vend USA vs. TASER International, Inc. which was filed in Arizona Superior Court for Maricopa
County alleging breach of contract of a vending machine contract and seeking money damages,
including tort damages, attorneys fees and costs. In March 2010, the Company settled this claim in
mediation for an immaterial amount.
In February 2009, we filed a complaint in the United States District Court for the District of
Nevada against James F. McNulty, Jr., Robert Gruder, and Stinger Systems, Inc. alleging securities
fraud under 15 U.S.C. § 78j, trade libel, unfair competition under the Lanham Act, 15 U.S.C. §
1125, abuse of process, and deceptive trade practices. Our complaint seeks compensatory damages,
punitive damages, injunctive relief, attorneys fees and costs. Defendants filed motions to
dismiss and on March 25, 2010 the Court denied Defendants motion on all claims except the
securities fraud claim.
In December 2009, we filed a complaint in Maricopa County Superior Court, Arizona against
Interwoven Inc. et. al. alleging breach of contract, misrepresentation and fraud for failure to
comply with a settlement agreement regarding an e-discovery services dispute. Our complaint seeks
compensatory damages, attorneys fees and costs. Defendant has filed a motion to compel arbitration
which is pending. Defendant filed a motion to compel arbitration and on April 7, 2010 the Court
entered an order compelling arbitration and staying the litigation. On April 26, 2010, we filed a
motion to certify this order as a final order in order to file an appeal from the Courts ruling.
This motion is pending.
In February 2010, we were served with a summons and complaint in the lawsuit entitled General
Employment vs. TASER International, Inc. which was filed in Arizona Superior Court for Maricopa
County alleging breach of contract of a recruiting contract and seeking money damages, including
attorneys fees and costs. We have filed an answer to this complaint. Discovery has begun and no
trial date has been set.
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 Companys 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 we determine that we are not at fault, we vigorously
defend and pursue any lawsuit filed against or by the Company. Although we do not expect the
outcome in any pending individual case to be material, 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 our insurance or will not be in
excess of amounts provided by insurance coverage and will not have a material adverse effect on our
business, operating results or financial condition. In addition, the Company has seven lawsuits
where the costs of legal defense incurred are in excess of its liability insurance deductibles. As
of March 31, 2010, the Company has been fully reimbursed by its insurance company for these legal
costs. The Company may settle a lawsuit in situations where a settlement can be obtained for
nuisance value and for an amount that is expected to be less than the cost of defending a lawsuit.
The number of product liability lawsuits dismissed includes a small number of police officer
training injury lawsuits that were settled by the Company and dismissed in cases where the
settlement economics to the Company were significantly less than the cost of litigation. Due to the
confidentiality of our litigation strategy and the confidentiality agreements that are executed in
the event of a settlement, the Company does not identify or comment on which specific lawsuits have
been settled or the amount of any settlement.
16
Table of Contents
TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
10. Related Party Transactions
Aircraft charter
The Company reimburses Thomas P. Smith, Chairman of the Companys Board of Directors, and
Patrick W. Smith, the Companys Chief Executive Officer, for business use of their personal
aircraft. For the three months ended March 31, 2010 and 2009, the Company incurred expenses of
approximately $79,000 and $49,000, respectively, to Thomas P. Smith. For the three months ended
March 31, 2009, the Company incurred expenses of approximately $10,000 to Patrick W. Smith. No
expense was incurred for the three months ended March 31, 2010. At March 31, 2010 and December 31,
2009, the Company had outstanding payables of approximately $23,000 and $15,000, respectively, due
to Thomas P. Smith. At March 31, 2010 and December 31, 2009, the Company had no outstanding
payables due to Patrick W. Smith. Management and the Audit Committee believes that the rates
charged by Thomas P. Smith and Patrick W. Smith are equal to or below commercial rates the Company
would pay to charter similar aircraft from independent charter companies.
In the first quarter of 2007, the Company also entered into a charter agreement for future use
of an aircraft for business travel from Thundervolt, LLC, a company owned by Patrick W. Smith. For
the three months ended March 31, 2010 and 2009, the Company did not incur any direct charter
expenses pursuant to its relationship with Thundervolt, LLC. Management and the Audit Committee
believes that the rates charged by Thundervolt, LLC are equal to or below commercial rates the
Company would pay to charter similar aircraft from independent charter companies.
The Company performed a review of the above relationship with Thundervolt, LLC in accordance
with recently adopted guidance on consolidation of variable interest entities (VIEs), and
determined that the relationship did not meet the definition of a VIE as Thundervolt, LLC is
adequately capitalized, its owners possess all of the essential characteristics of a controlling
financial interest, the Company does not have any voting rights in the entity and the Company
doesnt have any obligation or right to absorb losses of or receive benefits from the entity.
Therefore, the entity is not required to be consolidated into the Companys results.
TASER Foundation
In November 2004, the Company established the TASER Foundation. The TASER Foundation is a
501(c)(3) non-profit corporation and has been granted tax exempt status by the IRS. The TASER
Foundations mission is to honor the service and sacrifice of local and federal law enforcement
officers in the United States and Canada lost in the line of duty by providing financial support to
their families. Over half of the initial $1 million endowment was contributed directly by TASER
International, Inc. employees. The Company bears all administrative costs of the TASER Foundation
in order to ensure 100% of all donations are distributed to the families of fallen officers. For
the three months ended March 31, 2010, the Company incurred approximately $47,000 in such
administrative costs. For the three months ended March 31, 2009 the Company incurred approximately
$62,000 in such administrative costs. The Company is authorized by its Board of Directors to make a
discretionary contribution up to a maximum of $200,000 per quarter. For the three months ended
March 31 2010 and 2009, the Company did not make a discretionary contribution to the TASER
Foundation.
Consulting services
Beginning in August 2005, the Company agreed to pay Mark Kroll, a member of the Board of
Directors of the Company (Board), for consultancy services. Consulting expenses to Mr. Kroll for
the three months ended March 31, 2010 and 2009 were approximately $30,000 and $85,000,
respectively. At March 31, 2010 and December 31, 2009, the Company had approximately $14,000,
recorded as a payable for these services.
17
Table of Contents
TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(unaudited)
Settlement agreement
On May 15, 2009, Bruce and Donna Culver, husband and wife (the Culvers), and the Company,
entered into a settlement and release agreement (the Agreement), the background and material
terms of which are described below. Mr. Culver has served as a director of the Company from
January 1994 until his retirement on April 9, 2010.
In July 2000, the Culvers provided a loan to the Company in exchange for a promissory note and
warrants to purchase 136,364 shares of the Companys common stock for $0.55 per share. In October
2004, the Culvers exercised the warrants, and the Company issued them a Form 1099, which included
the in-the-money value of the warrants as stock compensation based upon the advice of the Companys
then-current outside tax advisors. In 2007, the Culvers informed the Company that their personal
tax advisors had determined that the 2004 Form 1099 was not the proper tax treatment for the
transaction, and that the value of the warrants should not have been included as compensation
because the warrants were issued in connection with the loan rather than services. The Company
responded by issuing an amended Form 1099 excluding the value of the warrants, and the Culvers
filed an amended 2004 federal tax return seeking a refund. The Culvers are also seeking a refund
with respect to their 2004 California tax return.
The parties entered into the Agreement to settle any disputes that the Culvers might have with
the Company in connection with the original Form 1099 that was issued in October 2004 and the
Culvers resulting tax liability. Pursuant to the Agreement, the Company agreed to pay the Culvers
$350,000 upon execution in exchange for a full release. The Agreement also contains a claw-back
provision, pursuant to which the Culvers agreed to pay to the Company the amount of any refund they
receive from the federal government and/or the State of California, up to the $350,000 amount of
the settlement payment. The Culvers will be entitled to keep 100% of any refund(s) they receive in
excess of $350,000. The Culvers received a refund from the Internal Revenue Service in February
2010 and they continue to seek a refund with respect to the State of California. The Company is
working with the Culvers regarding the timing and the form of this payment. The Company expects to
record the $350,000 under the claw-back provision as a credit to sales, general and administrative
expense once the cash has been received.
11. Employee Benefit Plan
The Company has a defined contribution profit sharing 401(k) plan (the 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, but not exceeding $16,500. The Company currently
matches 100% of the first 3% of eligible compensation contributed to the Plan by each participant
and 50% of the next 2% of eligible compensation contributed to the plan by each participant.
Beginning January 1, 2008, the Companys matching contributions are immediately vested. The
Companys matching contributions to the Plan for the three months ended March 31, 2010 and 2009
were approximately $137,000 and $112,000, respectively. Future matching or profit sharing
contributions to the Plan are at the Companys sole discretion.
12. Joint Venture Agreement
During the first quarter of 2010, the Company entered into a joint venture agreement with
RouteCloud, LLC and certain other parties to establish the TASER Protector Group to exclusively
develop, market, sell and support a new suite of products that give parents the ability to manage
their childrens mobile phone usage and driving behaviors though a simple to use interface on a
mobile phone, computer or TV. Under the agreement the Company will provide RouteCloud development
funding up to $1.725 million, $0.3 million of which was funded in the fourth quarter of 2009 under
a letter of understanding between the parties, and an additional $0.8 million of which was funded
during the first quarter of 2010. Refer to Note 1(f) for treatment of the development funding. In
addition, the Company will provide various marketing and administrative support functions upon
launch of the products. RouteCloud is responsible for development of all products as well as
various administrative, finance and billing functions. Upon the launch of the first Protector
Product, the Company will also receive the right to acquire warrants to purchase non-voting
membership interests constituting 20% (subject to anti-dilution provisions) of RouteClouds equity
for an aggregate exercise price of $1.0 million. If unexercised, the warrants terminate one year
after the first protector product launch. Should the Company exercise the warrants, the Company is
entitled to one board seat on RouteClouds Board of Directors.
At March 31, 2010 management has determined that the joint venture agreement is a
collaborative arrangement. Accordingly, while the arrangement
remains in the development stage, income statement classification of milestone based payments
made by the Company to RouteCloud have been categorized as research and development expenses,
to the extent they are not within the scope of other accounting literature. For the three
months ended March 31, 2010 the Company funded RouteCloud a total of $0.8 million, $0.57
million of which was capitalized as internal use software costs related to the development
of the software platform technology for the Protector products (see note 1f). The remaining
$0.23 million was expensed as research and development costs. Once the products have
been launched, the Company will record revenue and expenses either
gross as a principal or net as an agent based on an evaluation of
the relevant factors.
18
Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following is a discussion of the Companys financial condition as of March 31, 2010, and
results of operations for the three months ended March 31, 2010 and 2009. The following discussion
may be understood more fully by reference to the consolidated financial statements, notes to the
consolidated financial statements, and Managements Discussion and Analysis of Financial Condition
and Results of Operations section contained in the Companys Annual Report on Form 10-K for the
year ended December 31, 2009.
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: estimates regarding the size of our target markets;
successful penetration of the law enforcement market; expansion of product sales to the private
security, military and consumer self-defense markets; expansion of production capability; new
product introductions; the timing of the implementation of new equipment and payments relating
thereto; estimates regarding the commencement of amortization of software development costs
relating to our EVIDENCE.com and Protector products; the impact of recently adopted accounting
guidance; our dividend policy; our expectations about unrecognized tax benefits, and deferred
income taxes; assumptions about the future vesting of outstanding stock options and the
amortization of costs relating thereto; our litigation strategy; the outcome of pending litigation
including that judgments against us may be reversed or reduced; trends about our working capital
and the sufficiency of our capital resources and the availability of financing to the Company. 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; establishment and expansion of
our direct and indirect distribution channels; attracting and retaining the endorsement of key
opinion-leaders in the law enforcement community; the level of product technology and price
competition for our products; the degree and rate of growth of the markets in which we compete and
the accompanying demand for our products; potential delays in international and domestic orders;
implementation risks of manufacturing automation; risks associated with rapid technological change;
execution and implementation risks of new technology; new product introduction risks; ramping
manufacturing production to meet demand; litigation resulting from alleged product-related
injuries; risks related to government inquiries; media publicity concerning allegations of deaths
occurring after use of the TASER device and the negative impact this publicity could have on sales;
product quality risks; potential fluctuations in quarterly operating results; competition;
financial and budgetary constraints of prospects and customers; dependence upon sole and limited
source suppliers; fluctuations in component pricing; risks of governmental regulations; dependence
on a single product; dependence upon key employees; employee retention risks; and other factors
detailed in the Companys filings with the Securities and Exchange Commission. We assume no
obligation to update, and do not intend to update, our forward-looking statements.
Overview
Our mission is to protect life by providing less dangerous, more effective use of force
options and technologies. We are a market leader in the development and manufacture of advanced
electronic control devices (ECDs) designed for use in the law enforcement, military, corrections,
private security and personal defense markets.
Our mission to protect life has also been extended to protect truth. We have learned that
bringing a subject into custody is not the end of the challenge for law enforcement. In fact, it is
typically just the beginning since a significant number of incidents that start as a physical
conflict, transition into a legal conflict. Whether its prosecuting and convicting the individual
arrested, or responding to excessive use of force allegations, the post incident legal process is a
considerable part of the challenge law enforcement faces on a continual basis and can often take
years and millions of litigation dollars to resolve in the courtroom. To help law enforcement
address these challenges, in AXON and EVIDENCE.Com, we have developed a fully integrated hardware
and software solution that will provide our law enforcement customers the capabilities to capture,
store, manage and analyze video and other digital evidence. This provides the Company entry into a
potentially significant new market space and the opportunity to diversify its sources of revenue.
Technological innovation is the foundation for our long term growth and we intend to maintain
our commitment to the research and development of our technology for both new and existing products
that further our mission. At the same time we have established industry leading training services
to provide our users a comprehensive overview of legal and policy issues, medical information and
risk mitigation relating to our ECDs and the use of force. We have built a network of distribution
channels for selling and marketing our products and services to law enforcement agencies, primarily
in North America, with ongoing focus and effort placed on expanding these programs in
international, military and other markets. Over 15,000 law enforcement agencies in over 50
countries have made initial purchases of our TASER brand devices for testing or deployment. To
date, we do not know of any significant sales of any competing ECD products.
19
Table of Contents
Results of Operations
Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009
The following table sets forth, for the periods indicated, our consolidated statements of
operations as well as the percentage relationship to total net sales of items included in our
consolidated statements of operations (dollars in thousands):
Three Months Ended March 31, | Increase / (Decrease) | |||||||||||||||||||||||
2010 | 2009 | $ | % | |||||||||||||||||||||
Net sales |
$ | 23,844 | 100.0 | % | $ | 24,605 | 100.0 | % | $ | (761 | ) | -3.1 | % | |||||||||||
Cost of products sold |
10,354 | 43.4 | % | 9,976 | 40.5 | % | 378 | 3.8 | % | |||||||||||||||
Gross margin |
13,490 | 56.6 | % | 14,629 | 59.5 | % | (1,139 | ) | -7.8 | % | ||||||||||||||
Sales, general and administrative expenses |
10,299 | 43.2 | % | 11,449 | 46.5 | % | (1,150 | ) | -10.0 | % | ||||||||||||||
Research and development expenses |
4,140 | 17.4 | % | 4,198 | 17.1 | % | (58 | ) | -1.4 | % | ||||||||||||||
Loss from operations |
(949 | ) | -4.0 | % | (1,018 | ) | -4.1 | % | 69 | -6.8 | % | |||||||||||||
Interest and other income, net |
8 | 0.0 | % | 95 | 0.4 | % | (87 | ) | -91.7 | % | ||||||||||||||
Loss before benefit for income taxes |
(941 | ) | -3.9 | % | (923 | ) | -3.8 | % | (18 | ) | 1.9 | % | ||||||||||||
Benefit for income taxes |
(448 | ) | -1.9 | % | (455 | ) | -1.9 | % | 7 | -1.6 | % | |||||||||||||
Net loss |
(493 | ) | -2.1 | % | (468 | ) | -1.9 | % | $ | (25 | ) | 5.3 | % | |||||||||||
Net Sales
For the three months ended March 31, 2010 and 2009, sales by product line and by geography
were as follows (dollars in thousands):
Three Months Ended March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Sales by Product Line |
||||||||||||||||
TASER X26 |
$ | 10,671 | 44.8 | % | $ | 10,838 | 44.0 | % | ||||||||
TASER C2 |
1,226 | 5.1 | % | 1,404 | 5.7 | % | ||||||||||
TASER Cam |
2,263 | 9.5 | % | 508 | 2.1 | % | ||||||||||
ADVANCED TASER |
259 | 1.1 | % | 1,720 | 7.0 | % | ||||||||||
Single Cartridges |
5,618 | 23.6 | % | 7,982 | 32.4 | % | ||||||||||
XREP |
812 | 3.4 | % | | | |||||||||||
X3 |
450 | 1.9 | % | | | |||||||||||
Shockwave |
6 | * | | | ||||||||||||
Other |
2,539 | 10.6 | % | 2,153 | 8.8 | % | ||||||||||
Total |
$ | 23,844 | 100.0 | % | $ | 24,605 | 100.0 | % | ||||||||
* | Less than 1% |
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
United States |
75 | % | 60 | % | ||||
Other Countries |
25 | % | 40 | % | ||||
Total |
100 | % | 100 | % | ||||
Net sales decreased $0.8 million, or 3%, to $23.8 million for the first quarter of 2010
compared to $24.6 million for the first quarter of 2009. The decrease in sales versus the prior
year quarter was primarily driven by fewer individually significant international orders as sales
in the first quarter of 2009 included a $5.0 million sale to the U.K. The reduction in
international business was partially offset by an improvement in domestic sales, which we believe
reflects an increase in municipal spending in the U.S., partially attributable to the impact of
Federal stimulus funding. Sales of our X26 ECDs, decreased $0.2 million, or 2%, while sales of
single cartridges decreased $2.4 million, or 30%, compared to the prior year. Sales of the ADVANCED
TASER M26 and M18 decreased by $1.5 million, or 85%, primarily due to a large international
shipment to Brazil in the first quarter of 2009. Offsetting these decreases, Taser Cam sales
increased $1.8 million due to a large international order in the first quarter of 2010. Sales of
new products, XREP, X3 and Shockwave, also contributed $1.3 million in sales in the first quarter
of 2010. Other sales include extended warranty revenue, out of warranty repairs,
government grants, training and shipping revenues.
20
Table of Contents
International sales for the first quarter of 2010 and 2009 represented approximately $6.0
million, or 25%, and $9.8 million, or 40%, of total net sales, respectively.
Cost of Products Sold
Cost of products sold increased by $0.4 million, or 4%, to $10.4 million for the first quarter
of 2010 compared to $10.0 million for the first quarter of 2009. As a percentage of net sales, cost
of products sold increased to 43.4% in the first quarter of 2009 compared to 40.5% in the first
quarter of 2009. The increase in costs is driven by a combination of factors including a change in
product mix with lower margins and initial yields on new XREP and X3 product lines, an increase in
rework related costs and increases in freight and packaging material costs. Direct labor also
increased as a percentage of sales due to the higher cost of using temporary labor for the initial
part of the first quarter of 2010, while leverage was reduced on indirect manufacturing expenses as
a relatively fixed pool of indirect manufacturing costs remained flat while sales decreased. This
pool of indirect manufacturing expenses increased in the first quarter of 2010 due to a full
quarter of depreciation expense being recognized on our cartridge automation production equipment.
Gross Margin
Gross margin decreased $1.1 million, or 8%, to $13.5 million for the first quarter of 2010
compared to $14.6 million for the first quarter of 2009. As a percentage of net sales, gross margin
decreased to 56.6% for the first quarter of 2010 compared to 59.5% for the first quarter of 2009, a
result of the factors discussed above under cost of products sold.
Sales, General and Administrative Expenses
For the three months ended March 31, 2010 and 2009, sales, general and administrative (SG&A)
expenses were comprised of the following (dollars in thousands):
Three Months Ended March 31, | ||||||||||||||||
$ | % | |||||||||||||||
2010 | 2009 | Change | Change | |||||||||||||
Salaries, benefits and bonus |
$ | 2,925 | $ | 2,915 | $ | 10 | 0.3 | % | ||||||||
Legal, professional and accounting fees |
1,377 | 2,059 | (682 | ) | -33.1 | % | ||||||||||
Sales and Marketing |
1,601 | 1,396 | 205 | 14.7 | % | |||||||||||
Consulting and lobbying services |
598 | 1,217 | (619 | ) | -50.9 | % | ||||||||||
Stock-based compensation |
798 | 814 | (16 | ) | -2.0 | % | ||||||||||
Travel and meals |
770 | 792 | (22 | ) | -2.8 | % | ||||||||||
D&O and liability insurance |
420 | 484 | (64 | ) | -13.2 | % | ||||||||||
Depreciation and amortization |
524 | 486 | 38 | 7.8 | % | |||||||||||
Other |
1,286 | 1,286 | 0 | 0.0 | % | |||||||||||
Total |
$ | 10,299 | $ | 11,449 | $ | (1,150 | ) | -10.0 | % | |||||||
Sales, general and administrative as % of net sales |
43.2 | % | 46.5 | % |
Sales, general and administrative expenses were $10.3 million and $11.4 million in the first
quarter of 2010 and 2009, respectively, a decrease of $1.1 million, or 10%. As a percentage of
total net sales, SG&A expenses decreased to 43.2% for the first quarter of 2010 compared to 46.5%
for the first quarter of 2009. The dollar decrease for the first quarter of 2010 compared to the
same period in 2009 is attributable to a $682,000 reduction in legal, professional and accounting
fees driven by a drop in the volume of legal case activity and a $619,000 decrease in consulting
and lobbying services, specifically due to reductions in marketing and IT related projects, as the
Company implemented measures to reduce costs and source work internally when practicable. These
decreases in SG&A expense were partially offset by an increase in sales and marketing costs,
substantially driven by an increase in commission expense on eligible commissionable sales.
21
Table of Contents
Research and Development Expenses
Research and development expenses were $4.1 million and $4.2 million for the first quarter of
2010 and 2009, respectively, a decrease of $0.1 million compared to the prior period. The net
decrease is a combination of a $0.5 million reduction in indirect supplies and tooling attributable
to the intensive hardware development for X3, XREP and Shockwave conducted in the first quarter of
2009; and $0.8 million of capitalized internal salary and external consulting costs specifically
related to the development of EVIDENCE.com in the first quarter of 2010. These reductions in
expense were partially offset by a combined $1.0 million increase in equipment leasing and
facilities costs for the EVIDENCE.com data center; consulting fees related to EVIDENCE.com
development; and salaries, benefits, and stock options expenses attributable to our software
development team headquartered in Carpenteria, California; as well as $0.2 million in scrapped
materials related to AXON hardware development.
Interest and Other Income, Net
Interest and other income decreased by $0.1 million, or 91.7%, to $8,000 for the first quarter
of 2010 compared to $95,000 for the first quarter of 2009. The decrease is attributable to a
significantly lower average yield on our cash and investments.
Benefit from Income Taxes
The benefit from income taxes decreased by less than 2% to a benefit of $448,000 for the first
quarter of 2010 compared to a benefit of $455,000 for the first quarter of 2009. The effective
income tax rate for the first quarter of 2010 was 47.6% compared to 49.3% for the first quarter of
2009. The effective tax rate for the three months ended March 31, 2010 and 2009 is above the
statutory tax rate due to the impact of non-deductible expenses for items such as ISO stock option
expense, meals and entertainment and lobbying fees which make the income for tax purposes
significantly higher than book pre-tax income. The reduction in the effective rate between the
first quarter of 2009 and the first quarter of 2010 is due to the lower impact these non-deductible
items are expected to have on 2010s pre-tax income.
Net Loss
Our net loss remained flat at $0.5 million for both the first quarters of 2010 and 2009,
respectively. Net loss per basic and diluted share was $0.01 for both the first quarters of 2010
and 2009.
Liquidity and Capital Resources
Summary
As of March 31, 2010, we had $37.4 million in cash and cash equivalents; a decrease of $8.1
million from the end of 2009, which is a function of cash used in operations, investments in
property and equipment and capitalized software development, partially offset by funds received
from stock option exercise activity. While our net cash balance decreased, our overall net working
capital increased by $0.4 million to $72.5 million at March 31, 2010 from $72.1 million at December
31, 2009.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing
activities for three months ended March 31, 2010 and 2009 ($ in thousands):
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Net cash (used) provided by operating activities |
$ | (6,666 | ) | $ | 10,527 | |||
Net cash (used) provided by investing activities |
(2,370 | ) | 807 | |||||
Net cash provided by financing activities |
$ | 958 | $ | 50 |
22
Table of Contents
Operating activities
Net cash used by operating activities for the three months ended March 31, 2010 was $6.7
million in 2010, compared with net cash provided by operations of $10.5 million for the three
months ended March 31, 2009.
Net cash used by operating activities in the first three months of 2010 of $6.7 million was
primarily driven by changes in working capital including a $4.0 million reduction in accounts
payable and accrued liabilities due to timing of period end check runs and a payment of $1.0
million to ATS for the final installment on the cartridge automation equipment; a $2.9 million
increase in inventory attributable to raw materials acquired for production of new and legacy
products and a $1.6 million increase in prepaid and other assets from the funding of our annual
liability insurance premiums and an increase in our income taxes receivable position at March 31,
2010. These net uses of cash were partially offset by the net loss for the period adjusted for the
add-back of non-cash expenses including stock-based compensation expense of $1.0 million and
depreciation and amortization expense of $1.5 million.
Net cash provided by operating activities for the first three months of 2009 of $10.5 million
was driven by non-cash adjustments to the net loss including stock-based compensation expense of
$1.4 million, depreciation and amortization expense of $715,000 and provision for warranty expense
of $142,000. Changes in working capital include a $4.5 million decrease in accounts receivable and
a $3.1 million reduction in inventory as discussed above. In addition, prepaid and other assets
decreased $590,000 due to amortization of prepaid liability and D&O insurance premiums and deferred
revenue also increased $519,000 driven by extended warranty sales.
Investing activities
We used $2.4 million for investing activities in the first three months of 2010, comprised of
$1.4 million for capitalized software development costs related to EVIDENCE.COM and our Protector
platform and $1.0 million in various production and computer equipment.
Net cash provided by investing activities was $0.8 million during the three months ended March
31, 2009, which was comprised of $2.5 million in net proceeds from called investments partially
offset by the use of $1.6 million to purchase property and equipment mainly related to new
automation, production equipment and computer storage solutions. In addition, we invested $104,000
in intangible assets, primarily consisting of patent and trademark costs.
Financing activities
During the first three months of 2010 and 2009, net cash provided by financing activities was
$958,000 and $50,000, respectively, attributable to proceeds from stock options exercised during
the period.
Liquidity
Our most significant sources of liquidity continue to be funds generated by operating
activities and available cash and cash equivalents. We believe funds generated from our expected
results of operation as well as available cash and cash equivalents will be sufficient to finance
our operations and strategic initiatives for 2010. In addition, our revolving credit facility,
which we expect to renew on similar terms upon it maturity on June30, 2010, is available for
additional working capital needs or investment opportunities. There can be no assurance, however,
that we will continue to generate cash flows at or above current levels or that we will be able to
maintain our ability to borrow under our revolving credit facility.
Capital Resources
We have a revolving line of credit with a domestic bank with a total availability of $10.0
million. The line is secured by substantially all of our assets, other than intellectual property,
and bears interest at varying rates, ranging from LIBOR plus 1.5% to prime. The line of credit
matures on June 30, 2010, and requires monthly payments of interest only. We expect to renew the
line of credit on similar terms upon its maturity. At March 31, 2010, there were no borrowings
under the line and the entire $10.0 million line was available based on the defined borrowing base,
which is calculated based on our eligible accounts receivable and inventory. Our agreement with the
bank requires us to comply with certain financial and other covenants including maintenance of
minimum tangible net worth and fixed charge coverage ratios. The ratio of total liabilities to
tangible net worth can be no greater than 1:1, and the fixed coverage charge ratio can be no less
than 1.25:1, based upon a trailing twelve month period. At March 31, 2010, the Companys tangible
net worth ratio was 0.14:1 and its fixed charge coverage ratio was 4.16:1, and we were in
compliance with all covenants.
23
Table of Contents
Based on our strong balance sheet and the fact that we had no outstanding debt at March 31,
2010, we believe financing will be available, both through our existing credit line and possible
additional financing. However, there is no assurance that such funding will be available on terms
acceptable to us, or at all. Capital markets in the United States and throughout the world, while
showing signs of recovery, continue to be under stress. This stress is evidenced by a lack of
liquidity in the debt capital markets, the re-pricing of credit risk in the syndicated credit
market, and the failure of certain major financial institutions, further compounded by the ongoing
impact of the worldwide recession. Reflecting this situation, many lenders and capital providers
have reduced, and in some cases ceased to provide, debt funding to borrowers. The resulting lack of
available credit, lack of confidence in the financial sector, increased volatility in the financial
markets and reduced business activity could materially and adversely affect our ability to obtain
additional or alternative financing should the need arise for us to access the debt markets.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements as of March 31, 2010.
Critical Accounting Estimates
We have identified the following accounting estimates as critical to our business operations
and the understanding of our results of operations. The preparation of this Quarterly Report on
Form 10-Q requires us to make estimates and assumptions that affect the reported amount of assets
and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated
financial statements, and the reported amounts of revenue and expenses during the reporting period.
There can be no assurance that actual results will not differ from those estimates. The effect of
these policies on our business operations is discussed below.
Standard Product Warranty Reserves
We warrant our law enforcement ECDs from manufacturing defects on a limited basis for a
period of one year after purchase and thereafter, will replace any defective TASER unit for a fee.
We warrant our TASER C2 product for 90 days. We track historical data related to returns and
warranty costs on a quarterly basis, and estimate future warranty claims based upon our historical
experience. We have also historically increased our reserve amount if we become aware of a
component failure that could result in larger than anticipated returns from our customers. As of
March 31, 2010, our reserve for warranty returns was $375,000 compared to a $369,000 reserve at
December 31, 2009. In the event that product returns under warranty differ from our estimates,
changes to warranty reserves might become necessary.
Inventory
Inventories are stated at the lower of cost or market, with cost determined using the weighted
average cost of raw materials, which approximates the first-in, first-out (FIFO) method, and an
allocation of manufacturing labor and overhead costs. The allocation of manufacturing labor and
overhead costs includes managements judgments of what constitutes normal capacity of our
production facilities, and a determination of what costs are considered to be abnormal fixed
production costs which are expensed as current period charges. Provisions are made to reduce
potentially excess, obsolete or slow-moving inventories to their net realizable value. These
provisions are based on our best estimates after considering historical demand, projected future
demand, inventory purchase commitments, industry and market trends and conditions and other
factors. Our reserve for excess and obsolete inventory decreased to $285,000 at March 31, 2010,
compared to $474,000 at December 31, 2009. In the event that actual excess, obsolete or slow-moving
inventories differ from these estimates, changes to inventory reserves might become necessary.
Accounts Receivable
Sales are typically made on credit and we generally do not require collateral. We perform
ongoing credit evaluations of our customers financial condition and maintain an allowance for
estimated potential losses. Uncollectible accounts are written off when deemed uncollectible, and
accounts receivable are presented net of an allowance for doubtful accounts. This allowance
represents our best estimate and is based on our judgment after considering a number of factors
including third-party credit reports, actual payment history, customer-specific financial
information and broader market and economic trends and conditions. Our allowance for doubtful
accounts was $200,000 at March 31, 2010 and December 31, 2009. In the event that actual
uncollectible amounts differ from these estimates, changes in allowances for doubtful accounts
might become necessary.
24
Table of Contents
Valuation of Long-lived Assets
We review long-lived assets, such as property and equipment and intangible assets subject to
amortization, whenever events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. We utilize a two-step approach to testing long-lived assets for
impairment. The first step tests for possible impairment indicators. If an impairment indicator is
present, the second step measures whether the asset is recoverable based on a comparison of the
carrying amount of the asset to the estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows,
an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. Our review requires the use of judgment and estimates. Management
believes that no such impairments have occurred to date. However, future events or circumstances
may result in a charge to earnings if we determine that the carrying value of a long-lived asset is
not recoverable.
Income Taxes
We recognize federal, state and foreign current tax liabilities or assets based on our
estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also
recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our
estimate of future tax effects attributable to temporary differences and carryforwards.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not
that the tax position will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in the consolidated financial
statements from such a position are measured based on the largest benefit that has a greater than
fifty percent likelihood of being realized upon ultimate resolution. Management must also assess
whether uncertain tax positions as filed could result in the recognition of a liability for
possible interest and penalties if any. We have completed research and development tax credit
studies which identified approximately $5.9 million in tax credits for Federal and Arizona income
tax purposes related to the 2003 through 2009 tax years, net of the federal benefit on the Arizona
research and development tax credits. Management made the determination that it was more likely
than not that the full benefit of the research and development tax credit would not be sustained on
examination and accordingly has established a cumulative liability for unrecognized tax benefits of
$2.2 million as of March 31, 2010. Also included as part of the $2.3 million liability for
unrecognized tax benefits is a management estimate of $106,000 related to uncertain tax positions
for certain state income tax liabilities. As of March 31, 2010, management does not expect the
amount of the unrecognized tax benefit liability to increase or decrease significantly within the
next 12 months. Should the unrecognized tax benefit of $2.3 million be recognized, the Companys
effective tax rate would be favorably impacted. Our estimates are based on the information
available to us at the time we prepare the income tax provisions. Our income tax returns are
subject to audit by federal, state, and local governments, generally years after the returns are
filed. These returns could be subject to material adjustments or differing interpretations of the
tax laws.
Our calculation of current and deferred tax assets and liabilities is based on certain
estimates and judgments and involves dealing with uncertainties in the application of complex tax
laws. Our estimates of current and deferred tax assets and liabilities may change based, in part,
on added certainty or finality to an anticipated outcome, changes in accounting or tax laws in the
United States, or changes in other facts or circumstances. In addition, we recognize liabilities
for potential United States tax contingencies based on our estimate of whether, and the extent to
which, additional taxes may be due. If we determine that payment of these amounts is unnecessary or
if the recorded tax liability is less than our current assessment, we may be required to recognize
an income tax benefit or additional income tax expense in our consolidated financial statements.
In preparing the Companys consolidated financial statements, management assesses the
likelihood that its deferred tax assets will be realized from future taxable income. In evaluating
the Companys ability to recover its deferred income tax 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. Management believes that as of March 31, 2010, based on an evaluation and projections
of future sales and profitability, no valuation allowance was deemed necessary. However, such
deferred tax assets could be reduced in the future if projections of future taxable income during
the carryforward period are reduced.
25
Table of Contents
Stock Based Compensation
We estimate the fair value of our stock-based compensation by using the Black-Scholes-Merton
option pricing model which requires the input of highly subjective assumptions. These assumptions
include estimating the length of time employees will retain their stock options before exercising
them (expected term), the estimated volatility of our common stock price over the expected term
and the number of options that will ultimately not vest (forfeitures). We have granted a combined
total of 926,000 performance-based stock options in 2008, 2009 and the first quarter of 2010, the
exercise of which is contingent upon the achievement of certain performance criteria including the
successful development and market acceptance of future product introductions as well as our future
operating performance. These options will vest and compensation expense will be recognized based on
managements best estimate of the probability of the performance criteria being satisfied using the
most currently available projections of future product adoption and operating performance, adjusted
at each balance sheet date. Changes in the subjective and probability-based assumptions can
materially affect the estimate of fair value of stock-based compensation and consequently, the
related amount recognized on our statements of operations. Refer to Note 7 to our consolidated
financial statements for further discussion of how we determined our valuation assumptions and
performance-based stock options.
Contingencies
We are subject to the possibility of various loss contingencies including product-related
litigation, arising in the ordinary course of business. We consider the likelihood of loss or
impairment of an asset or the incurrence of a liability, as well as our ability to reasonably
estimate the amount of loss in determining loss contingencies. An estimated loss contingency is
accrued when it is probable that an asset has been impaired or a liability has been incurred and
the amount of loss can be reasonably estimated. We regularly evaluate current information available
to us to determine whether such accruals should be adjusted and whether new accruals are required.
26
Table of Contents
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Risk
We invest in a limited number of financial instruments, which at March 31, 2010 consisted
entirely of investments in money market accounts, denominated in United States dollars. At March
31, 2010, we did not hold any investments in fixed rate interest earning investments which would be
subject to market value adjustments resulting from fluctuations in interest rates.
Additionally, we have access to a line of credit borrowing facility which bears interest at
varying rates, ranging from LIBOR plus 1.5% to prime. At March 31, 2010, there was no amount
outstanding under the line of credit and the available borrowing under the line of credit was $10.0
million. We have not borrowed any funds under the line of credit since its inception, however,
should we need to do so in the future, such borrowings could be subject to adverse or favorable
changes in the underlying interest rate.
Exchange Rate Risk
We consider our direct exposure to foreign exchange rate fluctuations to be minimal.
Currently, the majority of our sales to customers provide for pricing and payment in United States
dollars and therefore, are not subject to exchange rate fluctuations. However, the cost to our
customers increases when the U.S. dollar strengthens against their local currency. In this
difficult economy this risk of loss becomes a credit-risk for non-payment. To date, we have not
engaged in any currency hedging activities, although we may do so in the future. Fluctuations in
currency exchange rates could harm our business in the future.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of disclosure controls and procedures
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were effective as of March 31,
2010, to ensure that information we are required to disclose in reports that we file or submit
under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms and (ii) is accumulated and
communicated to our management, including our Chief Executive Officer and our Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure
controls and procedures are designed to provide reasonable assurance that such information is
accumulated and communicated to our management. Our disclosure controls and procedures include
components of our internal control over financial reporting. Managements assessment of the
effectiveness of our internal control over financial reporting is expressed at the level of
reasonable assurance because a control system, no matter how well designed and operated, can
provide only reasonable, but not absolute, assurance that the control systems objectives will be
met.
Changes in internal control over financial reporting
There was no change in internal control over financial reporting during the fiscal quarter
ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
27
Table of Contents
PART II OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
See discussion of legal proceedings in Note 9 to the consolidated financial statements
included in PART I, ITEM 1 of this Form 10-Q.
ITEM 1A. | RISK FACTORS |
There have been no material changes to the factors disclosed in ITEM 1A RISK FACTORS of our
Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM 5. | OTHER INFORMATION |
Pursuant to guidance provided by the SEC Division of Corporation
Finance, the following information is provided pursuant to the
following Item of Form 8-K: Item 1.01 Entry into a Material
Definitive Agreement.
On May 10, 2010, the Company entered into an Addendum to Joint
Venture Agreement (the Addendum) relating to that certain
Joint Venture Agreement effective as of January 13, 2010,
between TASER International, Inc., William Kennedy, WDK Enterprises,
LLC and RouteCloud, LLC. The Addendum clarifies that the warrants to
be issued to the Company will be issued upon the date of the
commercial launch of the TASER RouteCloud product. All other
provisions of the Joint Venture Agreement remain the same. The
Addendum is filed as Exhibit 10.1 to this Form 10-Q.
ITEM 6. | EXHIBITS |
10.1 |
Addendum to Joint Venture Agreement with RouteCloud LLC, William D.
Kennedy and WDK Enterprises, LLC, dated January 13, 2010.
|
|||
31.1 | Principal Executive Officer Certification pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934. |
|||
31.2 | Principal Financial Officer Certification pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934. |
|||
*32 | Principal Executive Officer and Principal Financial Officer
Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Furnished |
28
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TASER INTERNATIONAL, INC. |
||||
Date: May 10, 2010 | /s/ Patrick W. Smith | |||
Patrick W. Smith | ||||
Chief Executive Officer (Principal Executive Officer) |
||||
Date: May 10, 2010 | /s/ Daniel M. Behrendt | |||
Daniel M. Behrendt | ||||
Chief Financial Officer (Principal Financial and Accounting Officer) |
29
Table of Contents
Index to Exhibits
Exhibits: | ||||
10.1 |
Addendum to Joint Venture Agreement with RouteCloud LLC, William D.
Kennedy and WDK Enterprises, LLC, dated January 13, 2010.
|
|||
31.1 | Principal Executive Officer Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
|||
31.2 | Principal Financial Officer Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
|||
*32 | Principal Executive Officer and Principal Financial Officer Certifications pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Furnished |