Attached files
| file | filename |
|---|---|
| EX-32 - EXHIBIT 32 - AXON ENTERPRISE, INC. | ex32-93016.htm |
| EX-31.2 - EXHIBIT 31.2 - AXON ENTERPRISE, INC. | ex312-93016.htm |
| EX-31.1 - EXHIBIT 31.1 - AXON ENTERPRISE, INC. | ex311-93016.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q |
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2016
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-16391
TASER International, Inc. (Exact name of registrant as specified in its charter) |
Delaware | 86-0741227 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
17800 North 85th Street Scottsdale, Arizona | 85255 | |
(Address of principal executive offices) | (Zip Code) | |
(480) 991-0797
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ý | Accelerated filer | ¨ | ||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | ||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The number of shares of the registrant’s common stock outstanding as of October 31, 2016 was 52,281,856.
TASER INTERNATIONAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016
Page | |||
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TASER INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, 2016 | December 31, 2015 | ||||||
(Unaudited) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 50,600 | $ | 59,526 | |||
Short-term investments | 45,620 | 50,254 | |||||
Accounts and notes receivable, net of allowance of $431 and $322 as of September 30, 2016 and December 31, 2015, respectively | 32,858 | 27,701 | |||||
Inventory, net | 25,503 | 15,763 | |||||
Prepaid expenses and other current assets | 13,867 | 8,165 | |||||
Total current assets | 168,448 | 161,409 | |||||
Property and equipment, net of accumulated depreciation of $37,653 and $36,020 as of September 30, 2016 and December 31, 2015, respectively | 22,976 | 21,848 | |||||
Deferred income tax assets, net | 16,753 | 13,719 | |||||
Intangible assets, net | 7,116 | 7,588 | |||||
Goodwill | 8,885 | 9,596 | |||||
Long-term investments | 6,260 | 8,525 | |||||
Other assets | 21,762 | 7,196 | |||||
Total assets | $ | 252,200 | $ | 229,881 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 8,982 | $ | 7,333 | |||
Accrued liabilities | 16,086 | 8,643 | |||||
Current portion of deferred revenue | 41,284 | 20,851 | |||||
Customer deposits | 1,367 | 1,226 | |||||
Current portion of notes payable and capital lease payable | 51 | 87 | |||||
Total current liabilities | 67,770 | 38,140 | |||||
Deferred revenue, net of current portion | 35,968 | 30,190 | |||||
Liability for unrecognized tax benefits | 1,332 | 1,315 | |||||
Long-term deferred compensation | 3,111 | 2,199 | |||||
Long-term business acquisition contingent consideration | — | 952 | |||||
Other long-term liabilities | 2,691 | 81 | |||||
Total liabilities | 110,872 | 72,877 | |||||
Commitments and contingencies (Note 11) | |||||||
Stockholders’ equity: | |||||||
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of September 30, 2016 and December 31, 2015 | — | — | |||||
Common stock, $0.00001 par value; 200,000,000 shares authorized; 52,245,605 and 53,692,192 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively | 1 | 1 | |||||
Additional paid-in capital | 184,937 | 178,143 | |||||
Treasury stock at cost, 20,220,227 and 18,432,158 shares as of September 30, 2016 and December 31, 2015, respectively | (155,947 | ) | (122,201 | ) | |||
Retained earnings | 111,934 | 100,978 | |||||
Accumulated other comprehensive income | 403 | 83 | |||||
Total stockholders’ equity | 141,328 | 157,004 | |||||
Total liabilities and stockholders’ equity | $ | 252,200 | $ | 229,881 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
TASER INTERNATIONAL, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Net sales | $ | 71,882 | $ | 50,376 | $ | 186,168 | $ | 141,851 | |||||||
Cost of products sold and services delivered | 25,317 | 19,308 | 65,402 | 50,192 | |||||||||||
Gross margin | 46,565 | 31,068 | 120,766 | 91,659 | |||||||||||
Operating expenses: | |||||||||||||||
Sales, general and administrative | 28,121 | 17,834 | 77,333 | 47,842 | |||||||||||
Research and development | 7,358 | 6,528 | 20,995 | 16,992 | |||||||||||
Total operating expenses | 35,479 | 24,362 | 98,328 | 64,834 | |||||||||||
Income from operations | 11,086 | 6,706 | 22,438 | 26,825 | |||||||||||
Interest income and other (expense) income, net | (455 | ) | (22 | ) | (460 | ) | 12 | ||||||||
Income before provision for income taxes | 10,631 | 6,684 | 21,978 | 26,837 | |||||||||||
Provision for income taxes | 6,788 | 5,163 | 11,022 | 12,008 | |||||||||||
Net income | $ | 3,843 | $ | 1,521 | $ | 10,956 | $ | 14,829 | |||||||
Net income per common and common equivalent shares: | |||||||||||||||
Basic | $ | 0.07 | $ | 0.03 | $ | 0.21 | $ | 0.28 | |||||||
Diluted | $ | 0.07 | $ | 0.03 | $ | 0.20 | $ | 0.27 | |||||||
Weighted average number of common and common equivalent shares outstanding: | |||||||||||||||
Basic | 52,206 | 53,709 | 52,791 | 53,509 | |||||||||||
Diluted | 53,141 | 54,691 | 53,656 | 54,671 | |||||||||||
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |||||||||||||||
Net income | $ | 3,843 | $ | 1,521 | $ | 10,956 | $ | 14,829 | |||||||
Foreign currency translation adjustments | 61 | (115 | ) | 320 | (18 | ) | |||||||||
Comprehensive income | $ | 3,904 | $ | 1,406 | $ | 11,276 | $ | 14,811 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
TASER INTERNATIONAL, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30, | |||||||
2016 | 2015 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 10,956 | $ | 14,829 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 2,744 | 2,310 | |||||
Purchase accounting adjustments to goodwill | 520 | — | |||||
Loss on inventory nonmonetary exchanges | 147 | — | |||||
Loss (gain) on disposal of property and equipment, net | 40 | (13 | ) | ||||
Loss on disposal of intangible assets | 21 | 216 | |||||
Bond premium amortization | 980 | 1,252 | |||||
Stock-based compensation | 6,742 | 5,086 | |||||
Deferred income taxes | (2,672 | ) | (888 | ) | |||
Unrecognized tax benefits | 17 | (273 | ) | ||||
Tax benefit from stock-based compensation | (919 | ) | (6,314 | ) | |||
Change in assets and liabilities: | |||||||
Accounts and notes receivable | (5,277 | ) | 7,718 | ||||
Inventory | (10,804 | ) | (37 | ) | |||
Prepaid expenses and other assets | (19,573 | ) | (5,520 | ) | |||
Accounts payable, accrued and other liabilities | 12,566 | 1,697 | |||||
Deferred revenue | 26,331 | 10,667 | |||||
Customer deposits | 140 | (416 | ) | ||||
Net cash provided by operating activities | 21,959 | 30,314 | |||||
Cash flows from investing activities: | |||||||
Purchases of investments | (49,316 | ) | (50,598 | ) | |||
Proceeds from call / maturity of investments | 55,235 | 32,719 | |||||
Purchases of property and equipment | (3,335 | ) | (3,839 | ) | |||
Proceeds from disposal of property and equipment | 40 | 13 | |||||
Purchases of intangible assets | (339 | ) | (402 | ) | |||
Business acquisitions, net of cash acquired | — | (11,186 | ) | ||||
Net cash provided by (used in) investing activities | 2,285 | (33,293 | ) | ||||
Cash flows from financing activities: | |||||||
Repurchase of common stock | (33,746 | ) | (7,556 | ) | |||
Proceeds from options exercised | 431 | 2,573 | |||||
Payroll tax payments for net-settled stock awards | (1,299 | ) | (848 | ) | |||
Payments on capital lease obligation | (29 | ) | (28 | ) | |||
Payments on notes payable | (77 | ) | (26 | ) | |||
Tax benefit from stock-based compensation | 919 | 6,314 | |||||
Net cash (used in) provided by financing activities | (33,801 | ) | 429 | ||||
Effect of exchange rate changes on cash and cash equivalents | 631 | 70 | |||||
Net decrease in cash and cash equivalents | (8,926 | ) | (2,480 | ) | |||
Cash and cash equivalents, beginning of period | 59,526 | 48,367 | |||||
Cash and cash equivalents, end of period | $ | 50,600 | $ | 45,887 | |||
Supplemental disclosure: | |||||||
Cash paid for income taxes, net of refunds | $ | 11,308 | $ | 5,830 | |||
Non-cash transactions | |||||||
Property and equipment purchases in accounts payable and accrued liabilities | $ | 145 | $ | 195 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
TASER International, Inc. (“TASER” or the “Company”) is a developer and manufacturer of advanced conducted electrical weapons (“CEWs”) designed for use by law enforcement, military, corrections, and private security personnel, and by private individuals for personal defense. In addition, the Company has developed full technology solutions for the capture, storage and management of video/audio evidence as well as other tactical capabilities for use in law enforcement. The Company sells its products worldwide through its direct sales force, distribution partners, online store and third-party resellers. The Company was incorporated in Arizona in September 1993, and reincorporated in Delaware in January 2001. The Company’s corporate headquarters and manufacturing facilities are located in Scottsdale, Arizona. The Company’s software development unit facility is located in Seattle, Washington. TASER International BV, a wholly owned subsidiary of the Company, serves as the Company's international headquarters, and is located in Amsterdam, Netherlands. TASER International BV wholly owns two subsidiaries, Axon Public Safety U.K. LTD and Axon Public Safety AU, that serve as direct sales operations in the United Kingdom and Australia, respectively. In 2015, the Company formed Axon Public Safety Canada, Inc., a wholly owned subsidiary, to facilitate transactions for its products and services with new and existing customers located in Canada.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company. All material intercompany accounts, transactions, and profits have been eliminated.
a. Basis of Presentation and Use of Estimates
These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information related to the Company’s organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) has been condensed or omitted. The accounting policies followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed in the Company’s annual consolidated financial statements for the year ended December 31, 2015, as filed on Form 10-K. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state the Company’s financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with the Company’s Form 10-K for the year ended December 31, 2015. The results of operations for the three and nine months ended September 30, 2016 and 2015 are not necessarily indicative of the results to be expected for the full year (or any other period). Significant estimates and assumptions in these unaudited condensed consolidated financial statements include:
• | product warranty reserves, |
• | inventory valuation, |
• | revenue recognition allocated in multiple-deliverable contracts or arrangements, |
• | valuation of goodwill, intangibles and long-lived assets, |
• | recognition, measurement and valuation of current and deferred income taxes, |
• | fair value of stock awards issued, the estimated vesting period for performance-based stock awards and forfeiture rates, and |
• | recognition and measurement of contingencies and accrued litigation expense. |
Actual results could differ materially from those estimates.
b. Segment Information
The Company is comprised of two reportable segments: the manufacture and sale of CEWs, accessories and other products and services (the “TASER Weapons” segment); and the video business which includes the TASER Cam, Axon cameras and related accessories, Evidence.com and MediaSolv (the “Axon” segment). Reportable segments are determined based on discrete financial information reviewed by the Company’s Chief Executive Officer who is the Chief Operating Decision Maker (the “CODM”) for the Company. The Company organizes and reviews operations based on products and services, and currently there are no operating segments that are aggregated. The Company performs an annual analysis of its reportable segments. Additional information related to the Company’s business segments is summarized in Note 14.
6
TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
c. Geographic Information and Major Customers
For the three and nine months ended September 30, 2016 and 2015, net sales by geographic area were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||||||||||||||
United States | $ | 60,558 | 84.2 | % | $ | 43,689 | 86.7 | % | $ | 155,245 | 83.4 | % | $ | 117,885 | 83.1 | % | |||||||||||
Other Countries | 11,324 | 15.8 | 6,687 | 13.3 | 30,923 | 16.6 | 23,966 | 16.9 | |||||||||||||||||||
Total | $ | 71,882 | 100.0 | % | $ | 50,376 | 100.0 | % | $ | 186,168 | 100.0 | % | $ | 141,851 | 100.0 | % | |||||||||||
Sales to customers outside of the U.S. are typically denominated in U.S. dollars, and are attributed to each country based on the shipping address of the distributor or customer. For the three and nine months ended September 30, 2016 and 2015, no individual country outside the U.S. represented more than 10% of net sales. Individual sales transactions in the international market are generally larger and occur more intermittently than in the domestic market due to the profile of the Company's customers.
For the three and nine months ended September 30, 2016 and 2015, no customer represented more than 10% of total net sales. At September 30, 2016 there was one outstanding customer balance from one unaffiliated customer that comprised 18.6% of the aggregate accounts receivable balance. At December 31, 2015, the Company had a trade receivable from one unaffiliated customer comprising 12.5% of the aggregate accounts receivable balance.
d. Income per Common Share
Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. Potentially dilutive securities include outstanding stock options and unvested restricted stock units. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities.
The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Numerator for basic and diluted earnings per share: | |||||||||||||||
Net income | $ | 3,843 | $ | 1,521 | $ | 10,956 | $ | 14,829 | |||||||
Denominator: | |||||||||||||||
Weighted average shares outstanding - basic | 52,206 | 53,709 | 52,791 | 53,509 | |||||||||||
Dilutive effect of stock-based awards | 935 | 982 | 865 | 1,162 | |||||||||||
Diluted weighted average shares outstanding | 53,141 | 54,691 | 53,656 | 54,671 | |||||||||||
Anti-dilutive stock-based awards excluded | 227 | 160 | 304 | 160 | |||||||||||
Net income per common share: | |||||||||||||||
Basic | $ | 0.07 | $ | 0.03 | $ | 0.21 | $ | 0.28 | |||||||
Diluted | $ | 0.07 | $ | 0.03 | $ | 0.20 | $ | 0.27 | |||||||
7
TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
e. Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable
The Company derives revenue from two primary sources: (1) the sale of physical products, including CEWs, Axon cameras, corresponding extended warranties, and related accessories such as E-docks, cartridges and batteries, among others, and (2) subscription to the Company's Evidence.com software as a service ("SaaS") (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, the Company also recognizes training and other professional services revenue. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, title has transferred, the price is fixed and collectability is reasonably assured. Contractual arrangements may contain explicit customer acceptance provisions, and under such arrangements, the Company defers recognition of revenue until formal customer acceptance is received. Extended warranty revenue, SaaS revenue and related data storage revenue are recognized ratably over the term of the contract beginning on the commencement date of each contract.
Revenue arrangements with multiple deliverables are divided into separate units and revenue is allocated using the relative selling price method based upon vendor-specific objective evidence of selling price or third-party evidence of the selling prices if vendor-specific objective evidence of selling prices does not exist. If neither vendor-specific objective evidence nor third-party evidence exists, management uses its best estimate of selling price. The majority of the Company’s allocations of arrangement consideration under multiple element arrangements are performed using vendor-specific objective evidence by utilizing prices charged to customers for deliverables when sold separately. The Company’s multiple element arrangements may include future CEWs and/or Axon devices to be delivered at defined points within a multi-year contract, and in those arrangements, the Company allocates total arrangement consideration over the life of the multi-year contract to future deliverables using management’s best estimate of selling price. The Company has not utilized third party evidence of selling price.
The Company offers the right to purchase extended warranties that include additional services and coverage beyond the standard limited warranty for certain products. Revenue for extended warranty purchases is deferred at the time of sale and recognized over the warranty period commencing on the date of sale. Extended warranties range from one to five years.
Evidence.com and Axon cameras and related accessories have stand-alone value to the customer and are sometimes sold separately, but in most instances are sold together. In these instances, customers typically purchase and pay for the equipment and one year of Evidence.com in advance. Additional years of service are generally billed annually over a specified service term, which has typically ranged from one to five years. Generally, the Company recognizes revenue for the Axon equipment at the time of the sale consistent with the discussion of multiple deliverable arrangements above. Revenue for Evidence.com is deferred at the time of the sale and recognized over the service period. At times the Company subsidizes the cost of Axon devices provided to customers to secure long-term Evidence.com service contracts. In such circumstances, revenue related to the Axon devices recognized at the time of delivery is limited to the amount collected from the customer that is not contingent upon the delivery of future Evidence.com services. The Company recognizes the remaining allocated revenue related to subsidized Axon devices over the remaining period it provides the contracted Evidence.com services.
In 2012, the Company introduced a program, the TASER Assurance Program (“TAP”) whereby a customer purchasing a product and joining the program will have the right to trade-in the original product for a new product of the same or like model in the future. Upon joining TAP, customers also receive an extended warranty for the initial products purchased and spare inventory. Under this program the customer generally pays additional annual installments over the contract period, generally three to five years. The Company records consideration received related to the future product purchase as deferred revenue until all revenue recognition criteria are met, which is generally when the new product is delivered. Consideration related to future product purchases is determined at the inception of the arrangement using management’s best estimate of selling price. Management’s estimate is principally based on the current selling price for such products, with due evaluation of the impact of any expected product and pricing changes, which have historically had an immaterial influence on management’s best estimate of selling price.
In 2015, The Company introduced the Officer Safety Plan (“OSP”) whereby a customer enters into a five year Evidence.com subscription that includes all of its standard advanced features along with unlimited storage. The OSP also includes a service plan that includes upgrades of (i) the Axon devices every 2.5 years and (ii) a TASER CEW at any point within the contract period. Upon entering into the OSP, customers also receive extended warranties on the Axon and CEW devices upon delivery to cover the contract periods as well as spare inventory units. Under this program the customer generally makes an initial purchase of Axon cameras and related accessories, and CEWs at inception along with annual installments for services and future hardware deliverables over the contract period. The Company records consideration received related to the future purchase as deferred revenue until all revenue recognition criteria are met, which is generally when the products or services are delivered.
8
TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In 2016, the Company introduced the TASER 60 Plan ("TASER 60") whereby a customer typically enters into a five year CEW installment purchase arrangement. The TASER 60 plan also includes extended warranties on the CEW devices upon delivery covering the contract periods as well as on-site spares, holsters and cartridges. Generally, the Company recognizes revenue for the amount allocated to the CEW at the time of sale for the amount of the customer receivable, net of imputed interest, and the amount allocated to the extended warranty is recognized over five years.
Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis. Training and professional service revenues are recorded as the services are provided.
Deferred revenue consists of payments received in advance related to products and services for which the criteria for revenue recognition have not yet been met. Deferred revenue that will be recognized during the succeeding twelve month period is recorded as current deferred revenue and the remaining portion is recorded as long-term. Deferred revenue does not include future revenue from multi-year contracts for which no invoice has yet been created. Generally, customers are billed in annual installments. See Note 6 for further disclosures about the Company’s deferred revenue.
Sales are typically made on credit, and the Company generally does not require collateral. Management performs ongoing credit evaluations of its customers’ financial condition, and maintains an allowance for estimated potential losses. Uncollectible accounts are charged to expense when deemed uncollectible, and accounts and notes receivable are presented net of an allowance for doubtful accounts. This allowance represents management’s best use of estimates, and is based on judgment after considering a number of factors, including third-party credit reports, actual payment history, cash discounts, customer-specific financial information and broader market and economic trends and conditions.
f. Standard Warranties
The Company warranties its CEWs, Axon cameras and certain related accessories from manufacturing defects on a limited basis for a period of one year after purchase and, thereafter, will replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold and services delivered when revenue is recorded for the related product. Future warranty costs are estimated based on historical data related to returns and warranty costs on a quarterly basis and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure or other issue that could result in larger than anticipated returns from customers. The accrued warranty liability expense is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. Costs related to extended warranties are charged to cost of products sold and services delivered when incurred. The reserve for warranty returns is included in accrued liabilities on the accompanying condensed consolidated balance sheets.
Changes in the Company’s estimated product warranty liabilities are as follows (in thousands):
Nine Months Ended September 30, | |||||||
2016 | 2015 | ||||||
Balance, beginning of period | $ | 314 | $ | 675 | |||
Utilization of accrual | (97 | ) | (293 | ) | |||
Warranty expense | 531 | 19 | |||||
Balance, end of period | $ | 748 | $ | 401 | |||
g. Fair Value of Financial Instruments
The Company uses the fair value framework that prioritizes the inputs to valuation techniques for measuring financial assets and liabilities measured on a recurring basis and for non-financial assets and liabilities when these items are re-measured. Fair value is considered to be the exchange price in an orderly transaction between market participants, to sell an asset or transfer a liability at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The Company categorizes each of its fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
• | Level 1 – Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured. |
9
TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
• | Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques. |
• | Level 3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect the Company's own assumptions about inputs that market participants would use in pricing an asset or liability. |
The Company has cash equivalents and investments, which at September 30, 2016 and December 31, 2015 were comprised of money market funds, state and municipal obligations, corporate bonds, and certificates of deposits. See additional disclosure regarding the fair value of the Company’s cash equivalents and investments in Note 2. Included in the balance of Other assets as of September 30, 2016 and December 31, 2015 was $3.0 million and $2.2 million, respectively, related to corporate-owned life insurance policies which are used to fund the Company’s deferred compensation plan. The Company determines the fair value of its insurance contracts by obtaining the cash surrender value of the contracts from the issuer, a Level 2 valuation technique.
The Company’s financial instruments also include accounts and notes receivable, accounts payable, notes payable and accrued liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the accompanying condensed consolidated balance sheets.
h. Valuation of Goodwill, Intangibles and Long-lived Assets
Management evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and identifiable intangible assets may warrant revision or that the remaining balance of these assets may not be recoverable. Such circumstances could include, but are not limited to, a change in the product mix, a change in the way products are created, produced or delivered, or a significant change in the way products are branded and marketed. In performing the review for recoverability, management estimates the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair value computed using discounted cash flows. The Company recorded losses on disposal of intangible assets of $21,000 and $0.2 million during the nine months ended September 30, 2016 and 2015, respectively.
i. Recently Issued Accounting Guidance
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations. Subsequently, the FASB issued the following accounting standard updates related to Topic 606, Revenue Contracts with Customers:
• | ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) in March 2016. ASU 2016-08 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on principal versus agent considerations. |
• | ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing in April 2016. ASU 2016-10 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on identifying performance obligations and the licensing |
• | ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients in May 2016. ASU 2016-12 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on a few narrow areas and adds some practical expedients to the guidance. |
The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company has established an internal implementation team and has engaged a third party advisory firm to assist in the implementation of the new standard. The Company is performing ongoing assessment activities to evaluate the proper method of adoption as well as the impact the adoption of the guidance will have on its consolidated financial statements.
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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330). The amendments require that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments are effective for the fiscal year beginning after December 15, 2016, including interim periods within that fiscal year. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company does not expect the adoption of this guidance to have any impact on its financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for the fiscal year beginning after December 15, 2018 (including interim periods within that year) using a modified retrospective approach and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-02 on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification (Topic 718), Compensation – Stock Compensation. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within that fiscal year and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses ("ASU 2016-13"), which amends ASC 326. The new guidance differs from existing GAAP wherein previous objectives generally delayed recognition of credit losses until the loss was probable. ASU 2016-13 eliminates the probable initial recognition threshold and, instead, reflect an entity’s current estimate of all expected credit losses. The use of forecasted information is intended to incorporate more timely information in the estimate of expected credit loss. ASU 2016-13 is effective for the fiscal year beginning after December 15, 2019, and interim periods within that fiscal year and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-13 on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be prospectively as of the earliest date practicable. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.
j. Out-of-Period Adjustments
During the preparation of the condensed consolidated financial statements for the quarter ended March 31, 2016, the Company identified certain transactions that were recorded in the first quarter of fiscal 2016 that should have been recorded in the fourth quarter of 2015. The transactions would have resulted in a reduction in income from operations for the year and quarter ended December 31, 2015 of $0.8 million. Of the $0.8 million, $0.4 million was for variable selling costs related to certain international sales contracts that were recorded and incurred during the fourth quarter, $0.2 million related to a correction of the calculation related to bonus expense that should have been recorded during fiscal 2015, and the remainder was primarily attributable to operating expenses that were incurred but not accrued for as of December 31, 2015.
The Company performed various quantitative and qualitative analyses and determined that these errors were not material to the results reported for the year and quarter ended December 31, 2015. The Company also determined that recording these entries as an out-of-period adjustment during the first quarter of 2016 is not expected to be material to the projected results for the full year ended December 31, 2016.
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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
k. Reclassification of Prior Year Information
Certain prior year amounts have been reclassified with the current year presentation. These reclassifications had no effect on the reported results of operations.
2. Cash, Cash Equivalents and Investments
The following tables summarize the Company's cash, cash equivalents, and held-to-maturity investments at September 30, 2016 and December 31, 2015 (in thousands):
As of September 30, 2016 | |||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Cash and Cash Equivalents | Short-Term Investments | Long-Term Investments | |||||||||||||||||||||
Cash | $ | 45,792 | $ | — | $ | — | $ | 45,792 | $ | 45,792 | $ | — | $ | — | |||||||||||||
Level 1: | |||||||||||||||||||||||||||
Money market funds | 4,163 | — | — | 4,163 | 4,163 | — | — | ||||||||||||||||||||
Corporate bonds | 36,331 | 3 | (35 | ) | 36,299 | 645 | 29,911 | 5,775 | |||||||||||||||||||
Subtotal | 40,494 | 3 | (35 | ) | 40,462 | 4,808 | 29,911 | 5,775 | |||||||||||||||||||
Level 2: | |||||||||||||||||||||||||||
State and municipal obligations | 15,152 | 1 | (8 | ) | 15,145 | — | 14,667 | 485 | |||||||||||||||||||
Certificates of deposit | 1,042 | — | — | 1,042 | — | 1,042 | |||||||||||||||||||||
Subtotal | 16,194 | 1 | (8 | ) | 16,187 | — | 15,709 | 485 | |||||||||||||||||||
Total | $ | 102,480 | $ | 4 | $ | (43 | ) | $ | 102,441 | $ | 50,600 | $ | 45,620 | $ | 6,260 | ||||||||||||
As of December 31, 2015 | |||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Cash and Cash Equivalents | Short-Term Investments | Long-Term Investments | |||||||||||||||||||||
Cash | $ | 57,137 | $ | — | $ | — | $ | 57,137 | $ | 57,137 | $ | — | $ | — | |||||||||||||
Level 1: | |||||||||||||||||||||||||||
Money market funds | 2,389 | — | — | 2,389 | 2,389 | — | — | ||||||||||||||||||||
Corporate bonds | 36,406 | — | (70 | ) | 36,336 | — | 35,677 | 729 | |||||||||||||||||||
Subtotal | 38,795 | — | (70 | ) | 38,725 | 2,389 | 35,677 | 729 | |||||||||||||||||||
Level 2: | |||||||||||||||||||||||||||
State and municipal obligations | 19,002 | 11 | (9 | ) | 19,004 | — | 12,000 | 7,002 | |||||||||||||||||||
Certificates of deposit | 3,371 | — | — | 3,371 | — | 2,577 | 794 | ||||||||||||||||||||
Subtotal | 22,373 | 11 | (9 | ) | 22,375 | — | 14,577 | 7,796 | |||||||||||||||||||
Total | $ | 118,305 | $ | 11 | $ | (79 | ) | $ | 118,237 | $ | 59,526 | $ | 50,254 | $ | 8,525 | ||||||||||||
The Company believes the unrealized losses on the Company’s investments are due to interest rate fluctuations. As these investments are either short-term in nature, are expected to be redeemed at par value, and/or because the Company has the ability and intent to hold these investments to maturity, the Company does not consider these investments to be other than temporarily impaired at September 30, 2016.
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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes the amortized cost and fair value of the short-term and long-term investments held by the Company at September 30, 2016 by contractual maturity (in thousands):
Amortized Cost | Fair Value | ||||||
Due in less than one year | $ | 45,620 | $ | 45,581 | |||
Due after one year, through two years | 6,260 | 6,260 | |||||
Due after two years | — | — | |||||
Total short-term and long-term investments | $ | 51,880 | $ | 51,841 | |||
3. Inventory
Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost of raw materials which approximates the first-in, first-out (“FIFO”) method and includes allocations of manufacturing labor and overhead. Provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value. Inventories consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
2016 | 2015 | ||||||
Raw materials | $ | 12,908 | $ | 8,748 | |||
Work-in-process | 6 | 105 | |||||
Finished goods | 12,589 | 6,910 | |||||
Total inventory | $ | 25,503 | $ | 15,763 | |||
4. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the nine months ended September 30, 2016 were as follows (in thousands):
Balance, beginning of period | $ | 9,596 | |
Purchase accounting adjustments (a) | (520 | ) | |
Foreign currency translation adjustment | (191 | ) | |
Balance, end of period | $ | 8,885 | |
(a) Purchase accounting adjustments related to deferred tax liabilities for MediaSolv and Axon Public Safety U.K. LTD. There was no impact to the condensed consolidated statements of operations for these adjustments as a result of the adoption of ASU 2015-16, which was effective for the Company on January 1, 2016.
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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Intangible assets (other than goodwill) consisted of the following (in thousands):
September 30, 2016 | December 31, 2015 | ||||||||||||||||||||||||
Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
Amortized: | |||||||||||||||||||||||||
Domain names | 5 years | $ | 125 | $ | (125 | ) | $ | — | $ | 125 | $ | (120 | ) | $ | 5 | ||||||||||
Issued patents | 4-15 years | 1,926 | (749 | ) | 1,177 | 1,866 | (659 | ) | 1,207 | ||||||||||||||||
Issued trademarks | 3-11 years | 628 | (301 | ) | 327 | 603 | (255 | ) | 348 | ||||||||||||||||
Customer relationships | 4-8 years | 945 | (206 | ) | 739 | 1,035 | (93 | ) | 942 | ||||||||||||||||
Non-compete agreements | 3-4 years | 450 | (218 | ) | 232 | 464 | (164 | ) | 300 | ||||||||||||||||
Developed technology | 7 years | 3,470 | (699 | ) | 2,771 | 3,470 | (326 | ) | 3,144 | ||||||||||||||||
Total amortized | 7,544 | (2,298 | ) | 5,246 | 7,563 | (1,617 | ) | 5,946 | |||||||||||||||||
Not amortized: | |||||||||||||||||||||||||
TASER trademark | 900 | 900 | 900 | 900 | |||||||||||||||||||||
Patents and trademarks pending | 970 | 970 | 742 | 742 | |||||||||||||||||||||
Total not amortized | 1,870 | 1,870 | 1,642 | 1,642 | |||||||||||||||||||||
Total intangible assets | $ | 9,414 | $ | (2,298 | ) | $ | 7,116 | $ | 9,205 | $ | (1,617 | ) | $ | 7,588 | |||||||||||
Amortization expense relative to intangible assets for the three months ended September 30, 2016 and 2015 was approximately $0.2 million and $0.3 million, respectively, and for the nine months ended September 30, 2016 and 2015 was approximately $0.7 million and $0.5 million, respectively. Estimated amortization for intangible assets with definitive lives for the remaining three months of 2016, the next five years ended December 31, and thereafter, is as follows (in thousands):
2016 (remaining three months) | $ | 235 | |
2017 | 935 | ||
2018 | 922 | ||
2019 | 801 | ||
2020 | 738 | ||
2021 | 731 | ||
Thereafter | 884 | ||
Total | $ | 5,246 | |
5. Other Long-Term Assets
Other long-term assets consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
2016 | 2015 | ||||||
Cash surrender value of corporate-owned life insurance policies (Note 1) | $ | 3,014 | $ | 2,180 | |||
Prepaid commissions (i) | 4,927 | 3,543 | |||||
Accounts receivable (ii) | 10,359 | 1,227 | |||||
Restricted cash (iii) | 3,095 | — | |||||
Prepaid expenses, deposits and other | 367 | 246 | |||||
Total other long-term assets | $ | 21,762 | $ | 7,196 | |||
(i) Prepaid commissions represent customer acquisition costs to secure long-term contracts. The Company capitalizes incremental and direct costs related to a specific contract and recognizes expense over the term of the contract.
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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(ii) Long-term accounts receivable as of September 30, 2016 and December 31, 2015 consist of balances related to sales made under the Officer Safety and TASER 60 Programs (Note 1e). These balances are collectible over the stated contract period, which is typically five years, and are actively monitored for collectability.
(iii) Restricted cash represents sales proceeds related to a long-term contract with a specific customer. These proceeds are held in escrow until certain billing milestones are achieved, and then specified amounts are transferred to the Company's operating accounts.
6. Deferred Revenue
Deferred revenue consisted of the following (in thousands):
September 30, 2016 | December 31, 2015 | ||||||||||||||||||||||
Current | Long-Term | Total | Current | Long-Term | Total | ||||||||||||||||||
Warranty: | |||||||||||||||||||||||
TASER Weapons | $ | 10,304 | $ | 16,286 | $ | 26,590 | $ | 7,278 | $ | 13,982 | $ | 21,260 | |||||||||||
Axon | 3,299 | 2,398 | 5,697 | 2,332 | 2,344 | 4,676 | |||||||||||||||||
13,603 | 18,684 | 32,287 | 9,610 | 16,326 | 25,936 | ||||||||||||||||||
Hardware: | |||||||||||||||||||||||
TASER Weapons | 1,240 | 2,441 | 3,681 | 952 | 2,459 | 3,411 | |||||||||||||||||
Axon | 10,257 | 10,441 | 20,698 | 786 | 7,382 | 8,168 | |||||||||||||||||
11,497 | 12,882 | 24,379 | 1,738 | 9,841 | 11,579 | ||||||||||||||||||
Axon Services | 15,818 | 4,402 | 20,220 | 9,303 | 4,023 | 13,326 | |||||||||||||||||
Other | 366 | — | 366 | 200 | — | 200 | |||||||||||||||||
Total | $ | 41,284 | $ | 35,968 | $ | 77,252 | $ | 20,851 | $ | 30,190 | $ | 51,041 | |||||||||||
September 30, 2016 | December 31, 2015 | ||||||||||||||||||||||
Current | Long-Term | Total | Current | Long-Term | Total | ||||||||||||||||||
TASER Weapons | $ | 11,910 | $ | 18,727 | $ | 30,637 | $ | 8,430 | $ | 16,441 | $ | 24,871 | |||||||||||
Axon | 29,374 | 17,241 | 46,615 | 12,421 | 13,749 | 26,170 | |||||||||||||||||
Total | $ | 41,284 | $ | 35,968 | $ | 77,252 | $ | 20,851 | $ | 30,190 | $ | 51,041 | |||||||||||
7. Accrued Liabilities
Accrued liabilities consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
2016 | 2015 | ||||||
Accrued salaries, benefits and bonus | $ | 5,286 | $ | 3,637 | |||
Accrued professional, consulting and lobbying | 1,807 | 1,098 | |||||
Accrued warranty expense | 748 | 314 | |||||
Accrued income and other taxes | 2,169 | 1,215 | |||||
Other accrued liabilities | 6,076 | 2,379 | |||||
Accrued liabilities | $ | 16,086 | $ | 8,643 | |||
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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
8. Income Taxes
Deferred Tax Assets
Net deferred income tax assets at September 30, 2016, include capitalized research and development costs, research and development tax credits, non-qualified stock-based compensation expense, deferred warranty revenue, warranty and inventory reserves, accrued vacation, and other items, partially offset by accelerated depreciation expense and intangible amortization that is not tax deductible. The Company’s total net deferred tax assets at September 30, 2016 were $16.8 million.
In preparing the Company’s condensed consolidated financial statements, management assesses the likelihood that its deferred tax assets will be realized from future taxable income. In evaluating the Company’s ability to recover its deferred income tax assets, management considers all available positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Management exercises significant judgment in determining its provisions for income taxes, its deferred tax assets and liabilities, and its future taxable income for purposes of assessing its ability to utilize any future tax benefit from its deferred tax assets.
Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of each reporting date, management considers new evidence, both positive and negative, that could impact management’s view with regards to future realization of deferred tax assets. As of September 30, 2016, the Company continues to demonstrate three-year cumulative pre-tax income in the U.S. federal and Arizona tax jurisdictions; however, the Company's Arizona R&D Tax Credits start to expire in 2018 with a significant tranche with a gross value of $1.2 million expiring if not used by the end of 2019. Under the Company’s new tax structure, it appears that long term investments, which impact short term profits, will likely result in some of the R&D credits expiring before they are utilized. Therefore, management has concluded that it is more likely than not that a portion of the Company’s deferred tax assets will not be realized and has established a valuation allowance.
The Company has completed research and development (“R&D”) tax credit studies which identified approximately $12.9 million in tax credits for federal, Arizona and California income tax purposes related to the 2003 through 2016 tax years. Management has made the determination that it is more likely than not that the full benefit of the R&D tax credit will not be sustained on examination and recorded a liability for unrecognized tax benefits of $3.5 million as of September 30, 2016. In addition, management accrued approximately $0.1 million for estimated uncertain tax positions related to certain state income tax liabilities as of September 30, 2016. The Company does not expect a significant increase or decrease in the total amount of unrecognized tax benefits within 12 months. Should the total unrecognized tax benefit of $3.6 million be recognized, the Company’s effective tax rate would be favorably impacted. Approximately $1.4 million of the unrecognized tax benefit associated with research and development credits has been netted against the research and development credit deferred tax asset.
Effective Tax Rate
The Company’s overall effective tax rate for the nine months ended September 30, 2016, after discrete period adjustments, was 50.1%. Before discrete adjustments the tax rate was 48.3%, which is more than the statutory rate primarily due to the impact of non-deductible losses in certain foreign jurisdictions, state taxes and non-deductible expenses for items such as incentive stock option expense, meals and entertainment and lobbying fees, partially offset by the domestic production activities and research and development tax credit deductions. The effective tax rate was most impacted by the adverse impact from foreign losses for which the Company is not expected to receive a tax benefit. Additionally, the Company's effective tax rate was impacted by an unfavorable $0.4 million return-to-provision adjustment recorded in connection with the finalization of its annual tax return. The Company has completed the full implementation of its new international structure, which began in 2015. In accounting for the income tax effects of this new structure, the Company has recognized income tax expense in the current quarter based on the results it expects for the full year. Actual results could be different, impacting the Company’s income tax expense in future quarters.
9. Stockholders’ Equity
In May 2016, the Company’s stockholders approved a new stock incentive plan authorizing an additional 2.0 million shares, plus remaining available shares under a prior plan for issuance under the new plan. Combined with the legacy stock incentive plans, there are approximately 2.9 million shares available for grant as of September 30, 2016.
16
TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Performance-based stock awards
The Company has issued performance-based stock options and performance-based restricted stock units ("RSUs"), the vesting of which is contingent upon the achievement of certain performance criteria related to the operating performance of the Company, as well as successful and timely development and market acceptance of future product introductions. In addition, certain of the performance RSUs have additional service-based vesting requirements subsequent to the achievement of the performance criteria. Compensation expense is recognized over the implicit service period (the longer of the period the performance condition is expected to be achieved or the required service period) based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date.
Restricted Stock Units
The following table summarizes RSU activity for the nine months ended September 30, 2016 (number of units and aggregate intrinsic value in thousands):
Number of Units | Weighted Average Grant-Date Fair Value | Aggregate Intrinsic Value | ||||||||
Units outstanding, beginning of year | 1,139 | $ | 19.30 | |||||||
Granted | 501 | 17.84 | ||||||||
Released | (321 | ) | 15.72 | |||||||
Forfeited | (106 | ) | 21.61 | |||||||
Units outstanding, end of period | 1,213 | 19.45 | $ | 34,704 | ||||||
Aggregate intrinsic value represents the Company’s closing stock price on the last trading day of the period, which was $28.61 per share, multiplied by the number of RSUs outstanding. As of September 30, 2016, there was $18.0 million in unrecognized compensation costs related to RSUs under the Company's stock plans. The Company expects to recognize the cost related to the RSUs over a weighted average period of 2.52 years. RSUs are released when vesting requirements are met.
During the nine months ended September 30, 2016, the Company granted approximately 0.1 million performance-based RSUs, which are included in the table above. As of September 30, 2016, the performance criteria had not been met for any the 0.2 million performance-based RSUs outstanding. Certain of the performance-based RSUs granted in 2016 , 2015 and 2014 contain provisions whereby the amount of RSUs that ultimately vest is dependent upon the level of achievement of performance metrics. The amount of RSUs included in the table above related to such grants is the target level, which is the Company's best estimate of the amount of RSUs that will vest. The maximum additional number of performance-based RSUs that could be earned is 0.2 million, which are not included in the table above.
Certain RSUs that vested in the nine months ended September 30, 2016 were net-share settled such that the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld were approximately 67,400 and had a value of approximately $1.3 million on their respective vesting dates as determined by the Company’s closing stock price. Payments for the employees’ tax obligations are reflected as a financing activity within the statement of cash flows. These net-share settlements had the effect of share repurchases by the Company as they reduced the amount of shares that would have otherwise been issued as a result of the vesting.
17
TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Stock Option Activity
The following table summarizes stock option activity for the nine months ended September 30, 2016 (number of units and aggregate intrinsic value in thousands):
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | |||||||||
Options outstanding, beginning of year | 1,103 | $ | 5.37 | |||||||||
Granted | — | — | ||||||||||
Exercised | (88 | ) | 4.92 | |||||||||
Expired / terminated | — | — | ||||||||||
Options outstanding, end of period | 1,015 | 5.41 | 2.50 | $ | 23,555 | |||||||
Options exercisable, end of period | 985 | 5.43 | 2.51 | 22,823 | ||||||||
Options expected to vest, end of period | 25 | 4.75 | 2.23 | 597 | ||||||||
Aggregate intrinsic value represents the difference between the exercise price of the underlying stock option awards and the closing market price of the Company's common stock of $28.61 on September 30, 2016. The intrinsic value of options exercised for the nine months ended September 30, 2016 and 2015 was $1.8 million and $13.3 million, respectively. Options expected to vest are presented net of forfeitures. As of September 30, 2016, total options outstanding includes approximately 0.2 million performance-based stock options, of which approximately 30,600 were unvested and 25,000 expected to vest.
Stock-based Compensation Expense
The estimated fair value of stock-based awards is amortized to expense on a straight-line basis over the service periods. As stock-based compensation expense recognized is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company’s forfeiture rate was calculated based on its historical experience of awards which ultimately vested. The following table summarizes the composition of stock stock-based compensation for the three and nine months ended September 30, 2016 and 2015 (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Cost of products sold and services delivered | $ | 77 | $ | 118 | $ | 247 | $ | 276 | |||||||
Sales, general and administrative expenses | 1,348 | 1,123 | 4,197 | 2,982 | |||||||||||
Research and development expenses | 791 | 622 | 2,298 | 1,828 | |||||||||||
Total stock-based compensation | $ | 2,216 | $ | 1,863 | $ | 6,742 | $ | 5,086 | |||||||
Stock Repurchase Plan
In February 2016, the Company announced that TASER’s Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of the Company’s outstanding common stock subject to stock market conditions and corporate considerations. During the three months ended September 30, 2016, no common shares were purchased under the program. During the nine months ended September 30, 2016, the Company purchased, under a Rule 10b5-1 plan, approximately 1.8 million common shares for a total cost of approximately $33.8 million, or a weighted average cost of $18.90 per share. The weighted average cost includes the average price paid per share of $18.87, plus applicable administrative costs for the transaction. During the nine months ended September 30, 2015, the Company purchased approximately 0.3 million common shares for a total cost of approximately $7.6 million, or a weighted average cost of $25.86 per share. As of September 30, 2016, $16.2 million remains available under the plan for future purchases. The Company suspended its 10b-5 plan, and any future purchases will be discretionary.
18
TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
10. Line of Credit
The Company has a $10.0 million revolving line of credit with a domestic bank. At both September 30, 2016 and December 31, 2015, there were no borrowings under the line. As of September 30, 2016, the Company had letters of credit outstanding of approximately $3.9 million under the facility and available borrowing of approximately $6.1 million. The line is secured by substantially all of the assets of the Company, and bears interest at varying rates (currently LIBOR plus 1.5% or Prime less 0.75%). The line of credit matures on July 31, 2017, and requires monthly payments of interest only. The Company’s agreement with the bank requires it to comply with certain financial and other covenants including maintenance of a maximum leverage ratio and minimum fixed charge coverage ratio. The leverage ratio (ratio of total liabilities to tangible net worth) can be no greater than 1:1, and the fixed charge coverage ratio can be no less than 1.25:1, based upon a trailing twelve-month period. At September 30, 2016, the Company’s leverage ratio was 0.88:1 and its fixed charge coverage ratio was 2.23:1. Accordingly, the Company was in compliance with these covenants.
11. Commitments and Contingencies
Product Litigation
The Company is currently named as a defendant in eight lawsuits in which the plaintiffs allege either wrongful death or personal injury in situations in which a TASER CEW was used (or present) by law enforcement officers in connection with arrests or during training exercises. 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. The information throughout this note is current through the date of these financial statements.
As a general rule, it is the Company’s policy not to settle suspect injury or death cases. Exceptions are sometimes made where the settlement is strategically beneficial to the Company. Also, on occasion, the Company’s insurance company has settled such lawsuits over the Company’s objection where the risk is over the Company’s liability insurance deductibles. Due to the confidentiality of the Company's 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.
In 2009, the Company implemented new risk management strategies, including revisions to product warnings and training to better protect both the Company and its customers from litigation based on ‘failure to warn’ theories - which comprise the vast majority of the cases against the Company. These risk management strategies have been highly effective in reducing the rate and exposure from litigation post-2009. From the third quarter of 2011 to the third quarter of 2016, product liability cases have been reduced from 55 active to eight active cases.
Management believes that pre-2009 cases have a different risk profile than cases which have occurred since the risk management procedures were introduced in 2009. Therefore, the Company necessarily treats certain pre-2009 cases as exceptions to the Company’s general no settlement policy in order to reduce caseload, legal costs and liability exposure. The Company intends to continue its successful practice of aggressively defending and generally not settling litigation except in very limited and unusual circumstances as described above.
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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
With respect to each of the pending lawsuits, the following table lists the name of plaintiff, the date the Company was served with process, the jurisdiction in which the case is pending, the type of claim and the status of the matter.
Plaintiff | Month Served | Jurisdiction | Claim Type | Status | ||||
Derbyshire | Nov-09 | Ontario, Canada Superior Court of Justice | Officer Injury | Discovery Phase | ||||
Doan | Apr-10 | The Queen's Bench, Alberta, Red Deer Judicial Dist. | Wrongful Death | Discovery Phase | ||||
Shymko | Dec-10 | The Queen's Bench, Winnipeg Centre, Manitoba | Wrongful Death | Pleading Phase | ||||
Ramsey | Jan-12 | 12th Judicial Circuit Court, Broward County, FL | Wrongful Death | Discovery Phase | ||||
Firman | Apr-12 | Ontario, Canada Superior Court of Justice | Wrongful Death | Pleading Phase | ||||
Schrock | Sep-14 | San Bernardino County Superior Court, CA | Wrongful Death | Motion of Summary Judgment Granted on all claims except negligent design and manufacture, subject to repleading by Plaintiff. Plaintiff filed an amended complaint for negligent design claims as well as a Petition for Writ of Mandate or Prohibition Petition from the Court; which writ was summarily denied. | ||||
Bennett | Sep-15 | 11th Judicial Circuit Court, Miami-Dade County, FL | Wrongful Death | Discovery Phase | ||||
Suarez | Sep-16 | US District Court, Southern District of Florida | Wrongful Death | Pleading Phase | ||||
There are no product litigation matters in which the Company is involved that are currently on appeal.
The following cases were dismissed or judgment entered during the third quarter of 2016 and through the date of these financial statements.
Plaintiff | Month Served | Jurisdiction | Claim Type | Status | ||||
Thompson | Mar-10 | 11th Judicial Circuit Court, Miami-Dade County, FL | Wrongful Death | Dismissed | ||||
Hernandez/llach | Sep-15 | 11th Judicial Circuit Court, Miami-Dade County, FL | Wrongful Death | Dismissed | ||||
Williams | Aug-16 | US District Court for the Northern District Georgia | Wrongful Death | Dismissed | ||||
The claims, and in some instances the defense, of each of these lawsuits have been submitted to the Company’s insurance carriers that maintained insurance coverage during the applicable periods. The Company continues to maintain product liability insurance coverage with varying limits and deductibles. The following table provides information regarding the Company’s product liability insurance. Remaining insurance coverage is based on information received from the Company’s insurance provider (in millions).
Policy Year | Policy Start Date | Policy End Date | Insurance Coverage | Deductible Amount | Defense Costs Covered | Remaining Insurance Coverage | Active Cases and Cases on Appeal | ||||||||||
2009 | 12/15/2008 | 12/15/2009 | 10.0 | 1.0 | N | 10.0 | Derbyshire | ||||||||||
2010 | 12/15/2009 | 12/15/2010 | 10.0 | 1.0 | N | 10.0 | Shymko, Doan | ||||||||||
2011 | 12/15/2010 | 12/15/2011 | 10.0 | 1.0 | N | 10.0 | n/a | ||||||||||
Jan-Jun 2012 | 12/15/2011 | 6/25/2012 | 7.0 | 1.0 | N | 7.0 | Ramsey, Firman | ||||||||||
Jul-Dec 2012 | 6/25/2012 | 12/15/2012 | 12.0 | 1.0 | N | 12.0 | n/a | ||||||||||
2013 | 12/15/2012 | 12/15/2013 | 12.0 | 1.0 | N | 12.0 | n/a | ||||||||||
2014 | 12/15/2013 | 12/15/2014 | 11.0 | 4.0 | N | 11.0 | Schrock | ||||||||||
2015 | 12/15/2014 | 12/15/2015 | 10.0 | 5.0 | N | 10.0 | Bennett | ||||||||||
2016 | 12/15/2015 | 12/15/2016 | 10.0 | 5.0 | N | 10.0 | Suarez | ||||||||||
Other Litigation
In November, 2015 the Company filed a complaint against Phazzer Electronics Inc. and Sang Min International Co. Ltd. for patent infringement, trademark infringement and false advertising. Defendant Phazzer has filed a motion to dismiss as well as an ex parte reexamination request with the United States Patent and Trademark Officer of TASER’s US Patent No. 7,234,262, which request was granted. This litigation is in the motion/discovery phase.
20
TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In February, 2016 the Company was served with a first amended complaint filed by Digital Ally in the Federal District Court for the District of Kansas alleging patent infringement, commercial bribery, contracts, combinations and conspiracies in restraint of trade and unfair or anti-competitive acts and practices. In March 2016, the Company was served with a second amended complaint with similar allegations. The second amended complaint seeks a judgment of infringement, monetary damages, a permanent injunction, punitive damages and attorneys’ fees and costs. The Company believes the second amended complaint is frivolous and the Company will vigorously defend this litigation. The Company has filed a motion to dismiss the claims involving commercial bribery, contracts, combinations and conspiracies in restraint of trade and unfair or anti-competitive acts and practices. This litigation is in the discovery phase.
In April, 2016 the Company was served with a notice of arbitration claim filed by Antoine di Zazzo, the Company’s former distributor in France, for commissions allegedly owed Mr. di Zazzo. The arbitration claim was filed with the International Court of Arbitration of the International Chamber of Commerce in Paris, France, and the amount that is claimed in controversy is approximately $0.6 million. The Company’s records reflect that all commissions that were due Mr. di Zazzo under his contract were paid or offered to him and the Company will vigorously defend this arbitration claim.
General
From time to time, the Company is notified that it may be a party to a lawsuit or that a claim is being made against it. It is the Company’s policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on the Company. After carefully assessing the claim, and assuming the Company determines that it is not at fault or it disagrees with the damages or relief demanded, the Company vigorously defends any lawsuit filed against the Company. In certain legal matters, the Company records a liability when losses are deemed probable and reasonably estimable. In evaluating matters for accrual and disclosure purposes, the Company takes into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of any potential loss. The Company reevaluates and updates accruals as matters progress over time.
Based on the Company's assessment of outstanding litigation and claims as of September 30, 2016, the Company has determined that it is not reasonably possible that these lawsuits will individually, or in the aggregate, materially affect its results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by its insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on our operating results, financial condition or cash flows.
Off-Balance Sheet Arrangements
Under certain circumstances, the Company uses letters of credit and surety bonds to guarantee its performance under various contracts, principally in connection with the installation and integration of its Axon cameras and related technologies. Certain of the Company's letters of credit contracts and surety bonds have stated expiration dates with others being released as the contractual performance terms are completed. At September 30, 2016, the Company had outstanding letters of credit of approximately $3.9 million. Of that amount, $2.7 million is expected to expire in May 2017 and $1.2 million is expected to expire in February 2017. Additionally, the Company had approximately $5.7 million of outstanding surety bonds at September 30, 2016, with $0.4 million expiring in 2018, $2.4 million expiring in 2020, and the remaining $2.9 million expiring in 2021 and thereafter.
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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
12. Related Party Transactions
The Company engages Dr. Mark Kroll, a member of the Board of Directors, to provide consulting services. The expenses related to these services were approximately $14,000 and $44,000 for the three months ended September 30, 2016 and 2015, respectively, and $111,000 and $156,000 for the nine months ended September 30, 2016 and 2015, respectively. At September 30, 2016 and December 31, 2015, the Company had liabilities of approximately $3,000 and $31,000, respectively, related to these services.
The Company subscribes to a mobile collaboration software suite co-founded and managed by Bret Taylor, a member of the Company's Board of Directors. The cost to license this software is approximately $30,000 per quarter, and as of September 30, 2016 and December 31, 2015 the Company had $80,800 and $36,000, respectively, of prepaid costs related to the license subscription.
In connection with the acquisition of Tactical Safety Responses Limited (Note 15), the Company assumed a long-term non-cancellable operating lease for office space with the former owners, one of whom is an employee of the Company. The lease has a remaining contractual term of approximately five years and requires annual rental payments of approximately $25,000.
13. Employee Benefit Plans
The Company has a defined contribution profit sharing 401(k) plan for eligible employees, which is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. Employees are entitled to make tax-deferred contributions of up to the maximum allowed by law of their eligible compensation.
The Company also has a non-qualified deferred compensation plan for certain executives, key employees and non-employee directors through which participants may elect to postpone the receipt and taxation of a portion of their compensation, including stock-based compensation, received from the Company. The non-qualified deferred compensation plan allows eligible participants to defer up to 80% of their base salary and up to 100% of other types of compensation. The plan also allows for (i) matching and discretionary employer contributions and (ii) the deferral of vested RSU awards. Employee deferrals are deemed 100% vested upon contribution. Distributions from the plan are made upon retirement, death, separation of service, specified date or upon the occurrence of an unforeseeable emergency. Distributions can be paid in a variety of forms from lump sum to installments over a period of years. Participants in the plan are entitled to select from a wide variety of investments available under the plan and are allocated gains or losses based upon the performance of the investments selected by the participant. All gains or losses are allocated fully to plan participants and the Company does not guarantee a rate of return on deferred balances. Assets related to this plan consist of corporate-owned life insurance contracts and are included in other assets in the condensed consolidated balance sheets. Participants have no rights or claims with respect to any plan assets and any such assets are subject to the claims of the Company’s general creditors.
Contributions to the plans are made by both the employee and the Company. Company contributions to the 401(k) plan are based on the level of employee contributions and are immediately vested. The Company’s matching contributions to the 401(k) plan for the three months ended September 30, 2016 and 2015, were approximately $0.4 million and $0.3 million, respectively, and for the nine months ended September 30, 2016 and 2015, were approximately $1.2 million and $0.9 million, respectively. The Company expects to make contributions to the non-qualified deferred compensation plan related to the three months ended September 30, 2016, of approximately $8,000. Future matching or profit sharing contributions to the plans are at the Company’s sole discretion.
22
TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
14. Segment Data
The Company’s operations are comprised of two reportable segments: the manufacture and sale of CEWs, accessories and other products and services (the “TASER Weapons” segment); and the video business, which includes the TASER Cam, Axon products, Evidence.com, and MediaSolv (the “Axon” segment). The Company includes only revenues and costs attributable to the Axon segment in that segment. Included in Axon segment costs are: costs of sales for both products and services, overhead allocation based on direct labor, selling expense for the Axon sales team, Axon product management expenses, trade shows and related expenses, and research and development for products included in the Axon segment. All other costs are included in the TASER Weapons segment. The CODM does not review assets by segment as part of the financial information provided; therefore, only limited asset information is provided in the following tables.
Information relative to the Company’s reportable segments is as follows (in thousands):
Three Months Ended September 30, 2016 | Three Months Ended September 30, 2015 | ||||||||||||||||||||||
TASER Weapons | Axon | Total | TASER Weapons | Axon | Total | ||||||||||||||||||
Product sales | $ | 52,938 | $ | 10,266 | $ | 63,204 | $ | 39,520 | $ | 7,745 | $ | 47,265 | |||||||||||
Service revenue | — | 8,678 | 8,678 | — | 3,111 | 3,111 | |||||||||||||||||
Net sales | 52,938 | 18,944 | 71,882 | 39,520 | 10,856 | 50,376 | |||||||||||||||||
Cost of products sold | 14,973 | 8,691 | 23,664 | 12,445 | 5,829 | 18,274 | |||||||||||||||||
Cost of services delivered | — | 1,653 | 1,653 | — | 1,034 | 1,034 | |||||||||||||||||
Gross margin | 37,965 | 8,600 | 46,565 | 27,075 | 3,993 | 31,068 | |||||||||||||||||
Sales, general and administrative | 16,439 | 11,682 | 28,121 | 11,941 | 5,893 | 17,834 | |||||||||||||||||
Research and development | 1,408 | 5,950 | 7,358 | 1,151 | 5,377 | 6,528 | |||||||||||||||||
Income (loss) from operations | $ | 20,118 | $ | (9,032 | ) | $ | 11,086 | $ | 13,983 | $ | (7,277 | ) | $ | 6,706 | |||||||||
Purchase of property and equipment | $ | 1,064 | $ | 307 | $ | 1,371 | $ | 1,900 | $ | 169 | $ | 2,069 | |||||||||||
Purchase of intangible assets | 77 | 77 | 154 | 114 | 87 | 201 | |||||||||||||||||
Purchase of property and equipment and intangible assets in connection with business acquisition | — | — | — | 1,453 | 1,452 | 3,005 | |||||||||||||||||
Depreciation and amortization | 537 | 364 | 901 | 603 | 345 | 948 | |||||||||||||||||
Nine Months Ended September 30, 2016 | Nine Months Ended September 30, 2015 | ||||||||||||||||||||||
TASER Weapons | Axon | Total | TASER Weapons | Axon | Total | ||||||||||||||||||
Product sales | $ | 144,307 | $ | 23,438 | $ | 167,745 | $ | 115,686 | $ | 18,177 | $ | 133,863 | |||||||||||
Service revenue | — | 18,423 | 18,423 | — | 7,988 | 7,988 | |||||||||||||||||
Net sales | 144,307 | 41,861 | 186,168 | 115,686 | 26,165 | 141,851 | |||||||||||||||||
Cost of products sold | 43,998 | 17,174 | 61,172 | 34,805 | 12,692 | 47,497 | |||||||||||||||||
Cost of services delivered | — | 4,230 | 4,230 | — | 2,695 | 2,695 | |||||||||||||||||
Gross margin | 100,309 | 20,457 | 120,766 | 80,881 | 10,778 | 91,659 | |||||||||||||||||
Sales, general and administrative | 46,395 | 30,938 | 77,333 | 33,469 | 14,373 | 47,842 | |||||||||||||||||
Research and development | 3,773 | 17,222 | 20,995 | 3,418 | 13,574 | 16,992 | |||||||||||||||||
Income (loss) from operations | $ | 50,141 | $ | (27,703 | ) | $ | 22,438 | $ | 43,994 | $ | (17,169 | ) | $ | 26,825 | |||||||||
Purchase of property and equipment | $ | 2,729 | $ | 606 | $ | 3,335 | $ | 2,345 | $ | 1,404 | $ | 3,839 | |||||||||||
Purchase of intangible assets | 190 | 149 | 339 | 195 | 207 | 402 | |||||||||||||||||
Purchase of property and equipment and intangible assets in connection with business acquisition | — | — | — | 1,453 | 11,146 | 12,599 | |||||||||||||||||
Depreciation and amortization | 1,669 | 1,075 | 2,744 | 1,689 | 621 | 2,310 | |||||||||||||||||
23
TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
15. Business Acquisitions
MediaSolv Solutions Corporation
On May 5, 2015, the Company acquired all of the outstanding capital stock of MediaSolv Solutions Corporation, a Delaware corporation for a total purchase price of $8.8 million, net of $0.1 million of cash acquired. MediaSolv primarily provides solutions for interview room video, closed-circuit television ("CCTV") and on-premise digital evidence management. These products connect with the Company's Axon on-officer cameras and, in some cases, its Evidence.com cloud platform, further enabling law enforcement to unify existing silos of digital media and evidence into a seamless workflow from capture to the courtroom. The Company believes the acquisition will continue to allow the Company to leverage MediaSolv’s existing network and relationships to further strengthen its position in the market.
The purchase price consisted primarily of cash, net of cash acquired and working capital adjustments, of $7.8 million and contingent consideration of $1.0 million representing potential earn-outs to former stockholders based on predetermined future financial metrics. The Company also agreed to additional earn-out provisions and compensation adjustments totaling approximately $4.0 million based, in part, on predefined future financial metrics. The additional earn-outs were not included as part of the purchase price and will be expensed as compensation in the period earned.
During the first quarter of 2016, the $1.0 million of earn-outs to former stockholders were earned in full and were paid during the second quarter of 2016. During the three and nine months ended September 30, 2016, the Company recorded $0.2 million and $1.2 million, respectively, of earn-outs that were recorded as commission expense, and as of September 30, 2016, $0.2 million of earn-outs were recorded as accrued liabilities within the accompanying condensed consolidated financial statements.
The major classes of assets and liabilities to which the Company allocated the purchase price were as follows (in thousands):
Accounts receivable and other current assets | $ | 590 | |
Inventory | 35 | ||
Property and equipment | 53 | ||
Intangible assets | 4,145 | ||
Goodwill | 5,496 | ||
Accounts payable and accrued liabilities | (697 | ) | |
Deferred revenue | (111 | ) | |
Deferred income tax liabilities, net | (688 | ) | |
Total purchase price | $ | 8,823 | |
The Company has assigned the goodwill to the Axon segment. Other identifiable definite lived intangible assets were assigned a total weighted average amortization period of 6.5 years. MediaSolv has been included in the Company's consolidated results of operations subsequent to the acquisition date. Pro forma results of operations for MediaSolv have not been presented because they are not material to the consolidated results of operations. In connection with the acquisition, the Company incurred and expensed costs of approximately $0.2 million, which included legal, accounting and other third-party expenses related to the transaction.
Tactical Safety Responses Limited
On July 16, 2015, TASER International B.V., a wholly owned subsidiary of the Company, acquired all of the outstanding capital stock of Tactical Safety Responses Limited ("TSR"), a United Kingdom ("UK") corporation. TSR was the Company's licensed distributor of TASER CEWs and Axon cameras and related accessories in the UK. The acquired entity operates under the name Axon Public Safety UK. The acquisition is intended to help expand the Company's growth across the UK by growing its in-country sales and support team. The total purchase was $3.3 million consisting of $4.0 million cash at close, net of $0.7 million of cash acquired. The Company also agreed to additional amounts in the form of earn-outs, subject to the achievement of predefined performance metrics. The earn-outs were not included as part of the purchase price and will be expensed as compensation in the period earned. During the three and nine months ended September 30, 2016, $0.1 million was recorded as commissions expense under these earn-out provisions.
24
TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The major classes of assets and liabilities to which the Company has allocated the purchase price are as follows (in thousands):
Accounts receivable | $ | 726 | |
Inventory | 497 | ||
Property and equipment | 583 | ||
Other Assets | 20 | ||
Intangible assets | 881 | ||
Goodwill | 1,441 | ||
Accounts payable and accrued liabilities | (207 | ) | |
Notes payable | (169 | ) | |
Income tax liabilities | (438 | ) | |
Total purchase price | $ | 3,334 | |
The Company has assigned the goodwill to the consolidated entity. Other identifiable definite lived intangible assets were assigned a total weighted average amortization period of 7.0 years. TSR has been included in the Company's consolidated results of operations subsequent to the acquisition date. Pro forma results of operations for TSR have not been presented because they are not material to the consolidated results of operations. In connection with the acquisition, the Company incurred and expensed costs of approximately $0.1 million, which included legal, accounting and other third-party expenses related to the transaction.
25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of the Company’s financial condition as of September 30, 2016, and results of operations for the three and nine months ended September 30, 2016 and 2015. The following discussion may be understood more fully by reference to the consolidated financial statements, notes to the consolidated financial statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations section contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Certain statements contained in this report may be deemed to be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, and the Company intends that such forward-looking statements be subject to the safe-harbor created thereby. Such forward-looking statements may relate to, among other things: our strategies relating to our Axon business; future income trends and our ability to realized deferred tax assets; our belief that customers will honor multi-year contracts despite the existence of appropriations (or similar) clauses; the sufficiency and availability of our liquid assets and capital resources; our litigation strategy, including the outcome of legal proceedings in which we are currently involved; future trends relating to Axon margins; that we may make further repurchases of our common stock; our estimated effective tax rate for full year 2016; that we may engage in currency hedging activities; and the impact of recently adopted and future accounting standards. We caution that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward looking statements herein. Such factors include, but are not limited to: the adverse effect of the United Kingdom's exit from the European Union; market acceptance of our products; our dependence on sales of our TASER X26P and X2 CEWs; our ability to design, introduce and sell new products; delays in development schedules; rapid technological change and competition; product defects; breach of our security measures resulting in unauthorized access to customer data; outages and disruptions relating to our Evidence.com service; budgetary and political constraints of prospects and customers; the length of our sales cycle and our ability to realize benefits from our marketing and selling efforts; our exposure to cancellations of government contracts due to appropriation clauses; changes in civil forfeiture laws; the long-term revenue recognition cycle for our SaaS Evidence.com product; our reliance on third party cloud-based storage providers; litigation risks resulting from alleged product-related injuries and media publicity concerning allegations of deaths occurring after use of the TASER device and the negative impact this publicity could have on sales; the outcome of pending or future litigation; our ability to protect our intellectual property as well as intellectual property infringement claims and relating litigation costs; our successful identification of existing intellectual property rights that might infringe on our developments; competition in foreign countries relating to our inability to protect our patents; risks of governmental regulations, including regulations of our products by the United States Consumer Product Safety Commission, regulation of our products as a "crime control" product by the Federal government, state and local government regulation and foreign regulation and the adverse effects that could result from our products being classified as firearms by the United States Bureau of Alcohol and Firearms; regulatory and political challenges presented by international markets; our compliance with regulations governing the environment, including but not limited to, regulations within the European Union; regulations relating to voice, data and communications services; regulations relating to conflict minerals; our dependence on third party suppliers for key components of our products; component shortages; rising costs of raw materials and transportation relating to petroleum prices; that we may experience declines in gross margins due to a shift in product sales from CEW to Axon devices; our ability to manage our growth and increase manufacturing production to meet demand; establishment and expansion of our direct and indirect distribution channels; our ability to pursue sales directly with customers; risks relating to acquisitions and joint