AXON ENTERPRISE, INC. - Quarter Report: 2007 June (Form 10-Q)

 

 

United States Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to

TASER INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)		86-0741227 (I.R.S. Employer Identification Number)
17800 N. 85th St., SCOTTSDALE, ARIZONA (Address of principal executive offices)		85255 (Zip Code)

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o      Accelerated Filer þ      Non-accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

There were 62,934,697 shares of the issuer’s common stock, par value $0.00001 per share, outstanding as of August 6, 2007.

 

 

TASER INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 2007
TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance sheets as of June 30, 2007 and December 31, 2006		3
Statements of operations for the three and six months ended June 30, 2007 and 2006		4
Statements of cash flows for the six months ended June 30, 2007 and 2006		5
Notes to financial statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3. Quantitative and Qualitative Disclosures About Market Risk		26
Item 4. Controls and Procedures		26
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		27
Item 1A. Risk Factors		27
Item 1A. Risk Factors		27
Item 2. Recent Sales of Unregistered Securities		33
Item 4. Submission of Matters to a Vote of Security Holders		33
Item 6. Exhibits		33
SIGNATURES		34
INDEX TO EXHIBITS		35
EX-10.18
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TASER INTERNATIONAL, INC.
BALANCE SHEETS
(UNAUDITED)

		June 30, 2007				December 31, 2006
ASSETS
Current assets
Cash and cash equivalents		$	20,533,196			$	18,773,685
Short-term investments			2,980,297				3,557,289
Accounts receivable, net of allowance of $109,000 and $110,000 in 2007 and 2006, respectively			14,896,802				10,068,049
Inventory			9,947,077				9,257,746
Prepaids and other assets			1,885,628				2,164,002
Current deferred income tax assets			8,667,952				12,295,493
Total current assets			58,910,952				56,116,264
Long-term investments			20,988,796				25,477,574
Property and equipment, net			21,287,980				20,842,632
Deferred income tax assets			16,385,344				15,868,719
Intangible assets, net			1,735,766				1,532,500
Total assets		$	119,308,838			$	119,837,689
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of capital lease obligations		$	39,334			$	45,214
Accounts payable and accrued liabilities			6,959,982				6,789,474
Current deferred revenue			1,293,786				1,037,441
Deferred insurance settlement proceeds			508,114				509,067
Litigation settlement liabilities			—				9,750,000
Customer deposits			533,419				171,492
Total current liabilities			9,334,635				18,302,688
Capital lease obligations, net of current portion			14,522				30,974
Deferred revenue, net of current portion			2,637,479				1,975,489
Other liabilities			—				199,999
Total liabilities			11,986,636				20,509,150
Commitments and Contingencies			—				—
Stockholders’ equity
Preferred stock, $0.00001 par value per share; 25 million shares authorized; 0 shares issued and outstanding at June 30, 2007 and December 31, 2006			—				—
Common stock, $0.00001 par value per share; 200 million shares authorized; 62,835,894 and 61,939,974 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively			631				622
Additional paid-in capital			84,429,551				80,629,659
Treasury stock, 300,000 shares			(2,208,957	)			(2,208,957	)
Retained earnings			25,100,977				20,907,215
Total stockholders’ equity			107,322,202				99,328,539
Total liabilities and stockholders’ equity		$	119,308,838			$	119,837,689

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

TASER INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)

		For the Three Months Ended								For the Six Months Ended
		June 30, 2007				June 30, 2006				June 30, 2007				June 30, 2006
Net Sales		$	25,863,376			$	16,225,197			$	41,165,191			$	30,118,760
Cost of Products Sold:
Direct manufacturing expense			7,338,890				4,229,384				11,947,459				7,758,785
Indirect manufacturing expense (1)			2,993,227				1,605,190				4,797,444				3,014,658
Total Cost of Products Sold			10,332,117				5,834,574				16,744,903				10,773,443
Gross Margin			15,531,259				10,390,623				24,420,288				19,345,317
Sales, general and administrative expenses (1)			8,344,927				7,603,035				15,926,835				14,857,347
Research and development expenses (1)			1,262,849				562,991				2,233,635				1,226,801
Shareholder litigation settlement expense			—				17,650,000				—				17,650,000
Income (loss) from operations			5,923,483				(15,425,403	)			6,259,818				(14,388,831	)
Interest and other income, net			427,033				428,594				933,402				793,910
Income (loss) before provision (benefit) for income taxes			6,350,516				(14,996,809	)			7,193,220				(13,594,921	)
Provision (benefit) for income taxes			2,651,308				(5,390,225	)			2,999,458				(4,794,316	)
Net income (loss)		$	3,699,208			$	(9,606,584	)		$	4,193,762			$	(8,800,605	)
Income (loss) per common and common equivalent shares
Basic		$	0.06			$	(0.15	)		$	0.07			$	(0.14	)
Diluted		$	0.06				(0.15	)			0.06			$	(0.14	)
Weighted average number of common and common equivalent shares outstanding
Basic			62,374,946				62,035,485				62,192,193				61,990,714
Diluted			65,214,726				62,035,485				64,928,190				61,990,714

		For the Three Months Ended								For the Six Months Ended
		June 30, 2007				June 30, 2006				June 30, 2007				June 30, 2006
(1) Stock-based compensation was allocated as follows:
Indirect manufacturing expense		$	43,704			$	30,711			$	75,402			$	62,545
Sales, general and administrative			238,330				233,236				426,103				500,380
Research and development expenses			47,110				47,701				89,802				110,723
		$	329,144			$	311,648			$	591,307			$	673,648

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

TASER INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)

		For the Six Months Ended
		June 30, 2007				June 30, 2006
Cash Flows from Operating Activities:
Net income (loss)		$	4,193,762			$	(8,800,605	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization			1,171,102				1,043,069
Loss on disposal of fixed assets			4,930				—
Provision for excess and obsolete inventory			56,690				3,472
Provision for warranty			548,229				169,125
Stock-based compensation expense			591,307				673,648
Deferred insurance settlement proceeds recognized			(953	)			(37,289	)
Provision (benefit) for deferred income taxes			3,110,916				(4,939,517	)
Change in assets and liabilities:
Accounts receivable			(4,828,753	)			(2,385,813	)
Inventory			(746,021	)			496,246
Prepaids and other assets			278,374				1,566,973
Insurance settlement proceeds receivable			—				(3,925,000	)
Accounts payable and accrued liabilities			(577,720	)			(20,238	)
Deferred revenue			918,335				486,219
Accrued securities settlement			(8,000,000	)			21,750,000
Customer deposits			361,927				12,977
Net cash provided by (used for) operating activities			(2,917,875	)			6,093,267
Cash Flows from Investing Activities:
Purchases of investments			(64,647,257	)			(63,087,942	)
Proceeds from sale of investments			69,713,027				56,913,001
Purchases of property and equipment			(1,592,988	)			(995,205	)
Purchases of intangible assets			(231,658	)			(101,058	)
Net cash provided (used) by investing activities			3,241,124				(7,271,204	)
Cash Flows from Financing Activities:
Payments under capital leases			(22,332	)			(21,306	)
Proceeds from options exercised			1,458,594				267,166
Net cash provided by financing activities			1,436,262				245,860
Net increase (decrease) in Cash and Cash Equivalents			1,759,511				(932,077	)
Cash and Cash Equivalents, beginning of period			18,773,685				16,351,909
Cash and Cash Equivalents, end of period		$	20,533,196			$	15,419,832
Supplemental Disclosure:
Cash paid for interest		$	2,865			$	3,890
Cash paid for income taxes — net		$	281,000			$	—
Non Cash Transactions—
Common stock issued for shareholder derivative lawsuit settlement		$	1,750,000			$	—

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

TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited)

1. Company background

     TASER International, Inc. (“TASER” or the “Company”) is a global leader in the development and manufacture of advanced electronic control devices designed for use in law enforcement, corrections, private security and personal defense. The Company’s core expertise includes proprietary, patented technology which is capable of incapacitating highly focused and aggressive subjects. The Company’s proprietary Neuro-Muscular Incapacitation (NMI) technology uses electrical impulses to interfere with a subject’s neuron-muscular system, causing substantial incapacitation regardless of whether the subject feels or responds to pain. The Company’s current flagship products are the TASER X26 and TASER M26 models. Both the X26 and the M26 are hand-held devices which launch two wire-tethered probes at a remote target up to a maximum distance of 35 feet. These wire tethered probes serve to form an electrical connection from the TASER device to the subject, thereby eliminating the need for the user to make close contact with the potentially dangerous target. In addition to the hand-held devices, the Company also sells disposable cartridges which contain the probes, wires, and proprietary nitrogen propulsion system. These cartridges are disposable and provide a recurring revenue stream from the Company’s installed customer base. There are several models of cartridges with ranges from 15 feet to 35 feet and include both electrically active cartridges and inert simulation cartridges used only in training. The Company also sells batteries, chargers, holsters and other accessories including the TASERCam.

     The Company’s products are often used in aggressive confrontations that may result in serious, permanent bodily injury or death to those involved. A person injured in a confrontation or otherwise in connection with the use of the Company’s products may bring legal action against the Company to recover damages on the basis of theories including personal injury, wrongful death, negligent design, dangerous product or inadequate warning. The Company is currently subject to a number of such lawsuits. The Company may also be subject to lawsuits involving allegations of misuse of its products. The Company has seen and expects to continue to see additional lawsuits filed against it alleging injuries resulting from the use of a TASER device. If successful, personal injury, misuse and other claims could have a material adverse effect on the operating results and financial condition of the Company. Although the Company carries product liability insurance, significant litigation could also result in a diversion of management’s attention and resources, negative publicity and an award of monetary damages in excess of its insurance coverage. The outcome of any litigation is inherently uncertain and there can be no assurance that existing or any future litigation will not have a material adverse effect on the Company’s revenues, financial condition or financial results.

     The Company’s deferred tax asset includes approximately $54.6 million in net operating loss carryforwards. The amount of the deferred tax asset is considered realizable; however, it could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.

2. Summary of significant accounting policies

a. Basis of presentation

     The accompanying unaudited financial statements of TASER International, Inc. include all adjustments (consisting only of normal recurring accruals) which management considers necessary for the fair presentation of the Company’s operating results, financial position and cash flows as of June 30, 2007 and 2006 and for the periods then ended. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from these unaudited financial statements in accordance with applicable rules.

     The results of operations for the three and six month periods ended June 30, 2007 are not necessarily indicative of the results to be expected for the full year (or any other period) and should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as filed on March 15, 2007.

b. Segment information

     Management has determined that its operations are comprised of one reportable segment. For the three and six months ended June 30, 2007 and 2006, sales by geographic area were as follows:

		For the Three Months Ended								For the Six Months Ended
		June 30, 2007				June 30, 2006				June 30, 2007				June 30, 2006
United States			79	%			88	%			82	%			90	%
Other Countries			21	%			12	%			18	%			10	%
Total			100	%			100	%			100	%			100	%

     Sales to customers outside the United States are denominated in U.S. dollars. Substantially all assets of the Company are located in the United States.

TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) — Continued

c. Stock-Based compensation

     Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), “Share Based Payment” (“SFAS No. 123(R)”) using the modified prospective transition method. Under that transition method, compensation cost recognized in the three and six months ended June 30, 2007 and 2006 includes: (a) compensation cost for all stock-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all stock-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated, as provided for under the modified-prospective method.

     Total stock-based compensation expense recognized in the income statement for the three and six months ended June 30, 2007 was $329,144 and $591,307 before income taxes, respectively, $256,447 and $480,468 of which was related to Incentive Stock Options (“ISOs”) for which no tax benefit is recognized. The total deferred tax benefits related to non-qualified stock options were approximately $41,209 and $52,403 for the three and six months ended June 30, 2007, respectively. Total stock-based compensation expense recognized in the income statement for the three and six months ended June 30, 2006 was $311,648, and $673,648 before income taxes, respectively, $236,134 and $486,621 of which was related to ISOs for which no tax benefit is recognized. The total deferred tax benefits related to non-qualified stock options were approximately $106,000 and $221,000 for the three and six months ended June 30, 2006, respectively. As a result of the adoptions of SFAS No. 123(R) the Company did not tax effect the stock based compensation expenses for tax purposes related to options exercised. The benefit will be recorded when the Company is in a position to realize it with an offset to taxes payable in future periods.

     SFAS No. 123(R) requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes-Merton (“BSM”) option valuation model, which incorporates various assumptions including volatility, expected life, and interest rates. The assumptions used for the three and six month periods ended June 30, 2007 and 2006 and the resulting estimates of weighted-average fair value per share of options granted during those periods are as follows:

		Three Months Ended								Six Months Ended
		June 30, 2007				June 30, 2006				June 30, 2007				June 30, 2006
Expected life of options		4.00 years				3.49 years				4.00 years				3.49 years
Weighted average volatility			58.52	%			69.36	%			58.63	%			69.00	%
Weighted average risk-free interest rate			4.75	%			5.02	%			4.74	%			4.89	%
Dividend rate			0.0	%			0.0	%			0.0	%			0.0	%
Weighted average fair value of options granted		$	5.06			$	4.63			$	4.98			$	4.58

     The expected life of the options represents the estimated period of time until exercise and is based on the Company’s historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on a combination of historical volatility of the Company’s stock and the one-year implied volatility of its traded options for the related vesting periods. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The Company has not paid dividends in the past and does not plan to pay any dividends in the near future. As stock-based compensation expense is recognized on awards ultimately expected to vest, it should be reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company forfeiture rate was calculated based on its historical experience of awards which ultimately vested.

d. Income per Common Share

     The Company accounts for earnings per share in accordance with SFAS No. 128, “Earnings per Share.” Basic income per share is computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. Diluted income per share reflects the potential dilution that could occur if outstanding stock options were exercised. The calculation of the weighted average number of shares outstanding and earnings per share are as follows:

TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) — Continued

		Earnings Per Share								Earnings Per Share
		For the Three Months Ended								For the Six Months Ended
		June 30, 2007				June 30, 2006				June 30, 2007				June 30, 2006
Numerator for basic and diluted earnings per share
Net income (loss)		$	3,699,208			$	(9,606,584	)		$	4,193,762			$	(8,800,605	)
Denominator for basic earnings per share — weighted average shares outstanding			62,374,946				62,035,485				62,192,193				61,990,714
Dilutive effect of shares issuable under stock options outstanding			2,839,780				—				2,735,997				—
Denominator for diluted earnings per share — adjusted weighted average shares outstanding			65,214,726				62,035,485				64,928,190				61,990,714
Net income (loss) per common share
Basic		$	0.06			$	(0.15	)		$	0.07			$	(0.14	)
Diluted		$	0.06			$	(0.15	)		$	0.06			$	(0.14	)

     Basic net income per share is based upon the weighted average number of common shares outstanding during the period. For the three and six months ended June 30, 2007, the effects of 666,423 and 639,267 stock options, respectively, were excluded from the calculation of diluted net income per share as their effect would have been antidilutive and increased the net income per share. As a result of the net loss for the three and six months ended June 30, 2006, 2,760,707 and 2,704,115, respectively, of potential dilutive shares were considered anti-dilutive and excluded from the calculation as their effect would have been to reduce the net loss per share.

e. Warranty Costs

     The Company warrants its products from manufacturing defects on a limited basis for a period of one year after purchase, and thereafter will replace any defective TASER unit for a fee. The Company also sells extended warranties for periods of up to four years after the expiration of the limited one year warranty. The Company tracks historical data related to returns and related warranty costs on a quarterly basis, and estimates future warranty claims by applying the estimated average return rate to the product sales for the period. Historically, the reserve amount is increased if the Company becomes aware of a component failure that could result in larger than anticipated returns from its customers. After the one year warranty expires, if the device fails to operate properly for any reason, the Company will replace the ADVANCED TASER device for a fee and the TASER X26 for a prorated discounted price depending on when the product was placed into service. These fees are intended to cover the handling and repair costs and include a profit. A summary of changes in the warranty accrual for the six months ended June 30, 2007 and 2006 is as follows:

		June 30, 2007				June 30, 2006
Balance at Beginning of Period		$	713,135			$	851,920
Utilization of Accrual			(376,018	)			(273,221	)
Warranty Expense			548,229				169,125
Balance at End of the Period		$	885,346			$	747,824

f. Recent Accounting Pronouncements

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. Statement 159 is effective for fiscal years beginning after November 15, 2007, and early application is allowed under certain circumstances. Management has not yet determined the impact, if any, the adoption of SFAS No. 159 will have on our financial position.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”.) SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. We plan to adopt SFAS No. 157 beginning in the first quarter of fiscal 2008. Management has not yet determined the impact, if any, the adoption of SFAS No. 157 will have on our financial position.

TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) — Continued

3. Cash, cash equivalents and investments

     Cash and cash equivalents include funds on hand and short-term investments with original maturities of three months or less. Short-term investments include securities generally having original maturities of 90 days to one year. Long-term investments include securities having original maturities of more than one year. The Company’s long-term investments are invested in federal agency mortgage-backed securities, and are classified as held to maturity. These investments are recorded at amortized cost. The Company intends to hold these securities until maturity. The Company intends to reinvest the proceeds from maturing long term investments into securities with similar original maturities.

     The following is a summary of cash, cash equivalents and held-to-maturity investments by type at June 30, 2007 and December 31, 2006:

		June 30, 2007																December 31, 2006
						Gross				Gross												Gross				Gross
						Unrealized				Unrealized												Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value				Cost				Gains				Losses				Fair Value
Cash		$	10,414,965			$	—			$	—			$	10,414,965			$	14,130,112			$	—			$	—			$	14,130,112
Government sponsored entity securities			34,087,324				1,978				(143,019	)			33,946,283				33,678,436				3,756				(221,849	)			33,460,343
Total cash, cash equivalents and investments		$	44,502,289			$	1,978			$	(143,019	)		$	44,361,248			$	47,808,548			$	3,756			$	(221,849	)		$	47,590,455

		June 30,				December 31,
		2007				2006
Government sponsored entity securities reported as:
Cash equivalents		$	5,118,231			$	4,643,573
Cash equivalents expected to be reinvested into long term investments			5,000,000			$	—
Short term investments			2,980,297				3,557,289
Long term investments			20,988,796				25,477,574
		$	34,087,324			$	33,678,436

     The following table summarizes the contractual maturities of government sponsored entity securities at June 30, 2007 and December 31, 2006:

		June 30,				December 31,
		2007				2006
Less than 1 year		$	29,087,324			$	22,694,186
1-3 years			5,000,000				10,984,250
		$	34,087,324			$	33,678,436

     The following table provides information about held-to-maturity investments with gross unrealized losses and the length of time that individual investments have been in a continuous unrealized loss position at June 30, 2007:

		Less than 12 months								12 months or more								Total
						Gross Unrealized								Gross Unrealized								Gross Unrealized
Description of Securities		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
Government sponsored entity securities		$	13,049,643			$	(48,885	)		$	13,899,360			$	(94,134	)		$	26,949,003			$	(143,019	)

     The unrealized losses on the Company’s investment in government sponsored entity securities were caused by interest rate increases. The contractual cash flows of these investments are guaranteed by an agency of the U.S. Government and, accordingly it is expected that the securities would not be settled for a price less than the amortized cost of the investment. Since the decline in fair value was attributable to interest rates and not credit quality, and 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 June 30, 2007.

TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) — Continued

4. Inventory

     Inventory is stated at the lower of cost or market. Cost is determined using the weighted average cost of raw materials which approximates the first-in, first-out (FIFO) method and manufacturing labor and overhead. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories to their net realizable value. Inventories as of June 30, 2007 and December 31, 2006 consist of the following:

		June 30, 2007				December 31, 2006
Raw materials and work-in-process		$	6,785,790			$	5,990,238
Finished goods			3,332,197				3,490,709
Reserve for excess and obsolete inventory			(170,910	)			(223,201	)
Total Inventory		$	9,947,077			$	9,257,746

5. Intangible assets

     Intangible assets consist of the following at June 30, 2007 and December 31, 2006:

						June 30, 2007												December 31, 2006
						Gross Carrying				Accumulated				Net Carrying				Gross Carrying				Accumulated				Net Carrying
		Useful Life				Amount				Amortization				Amount				Amount				Amortization				Amount
Amortized intangible assets:
TASER.com domain name		5 Years				$	60,000			$	60,000			$	—			$	60,000			$	60,000			$	—
Issued patents			4 to 15 Years				272,010				98,264				173,746				248,984				84,248				164,736
Issued trademarks			9 to 11 Years				20,637				3,005				17,632				15,434				2,200				13,234
Non compete agreements			5 to 7 Years				150,000				38,571				111,429				50,000				25,000				25,000
							502,647				199,840				302,807				374,418				171,448				202,970
Unamortized intangible assets:
TASER Trademark							900,000								900,000				900,000								900,000
Patents and trademarks pending							532,959								532,959				429,530								429,530
							1,432,959								1,432,959				1,329,530								1,329,530
Total intangible assets						$	1,935,606			$	199,840			$	1,735,766			$	1,703,948			$	171,448			$	1,532,500

     Amortization expense for the three and six months ended June 30, 2007 was $14,465 and $28,392, respectively. Amortization expense for the three and six months ended June 30, 2006 was $9,129 and $20,145, respectively. Estimated amortization expense of intangible assets for the balance of 2007, the next four years and thereafter is as follows:

2007		$	29,247
2008			58,493
2009			46,749
2010			38,773
2011			31,060
Thereafter			98,485
		$	302,807

6. Accounts payable and accrued liabilities

     Accounts payable and accrued liabilities consist of the following at June 30, 2007 and December 31, 2006:

		June 30, 2007				December 31, 2006
Accounts payable		$	3,788,518			$	4,554,203
Accrued salaries and benefits			1,465,139				832,576
Accrued expenses			820,979				689,560
Accrued warranty expense			885,346				713,135
Total		$	6,959,982			$	6,789,474

TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) — Continued

7. Income taxes

     The deferred income tax assets at June 30, 2007 is comprised primarily of a net operating loss carryforward, which resulted from the compensation expense the Company recorded for income tax purposes when employees exercised stock options in 2004. For the three and six months ended June 30, 2007, the Company did not recognize additional tax benefits related to stock options exercised. Additionally, warranty and inventory reserves, accrued vacation and other items have contributed to the deferred income tax assets.

     The Company’s total current and long term deferred tax assets at June 30, 2007 is $25.1 million. In preparing the Company’s financial statements, the Company has assessed the likelihood that its deferred tax assets will be realized from future taxable income. In evaluating the ability to recover its deferred income tax assets, the Company 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. The Company 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 the Company 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 a result of the shareholder litigation settlement expense recorded in the second quarter of 2006, the Company has determined that it is more likely than not that its net operating loss carryforwards for the state of Arizona, which expire in 2009, will not be fully realized. Accordingly, the Company has a valuation allowance of $250,000, against its deferred tax assets as of June 30, 2007. Management believes that, other than as previously described, as of June 30, 2007, based on an evaluation and projections of future sales and profitability, no other valuation allowance was deemed necessary as the Company concluded that it is more likely than not that the Company’s net deferred tax assets will be realized. However, the deferred tax asset could be reduced in the near-term if estimates of future taxable income during the carryforward period are reduced.

     In July 2006, the FASB issued Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which became effective for the Company beginning in 2007. FIN 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Under FIN 48, management must also assess whether uncertain tax positions as filed could result in the recognition of a liability for possible interest and penalties. The Company adopted the provisions of FIN 48 effective January 1, 2007. The impact on the Company’s reassessment of its tax positions in accordance with FIN 48 did not have a material impact on the results of operations, financial condition or liquidity.

     The Company is currently under audit by the United States Internal Revenue Service for 2004. The Company is unable to determine the outcome of the audit process at this time. There can be no assurance the outcome of this audit will not have an adverse effect on the Company’s future operating results. See note 10.

8. Stockholders equity
Stock Award Activity

     At June 30, 2007, the Company had three stock-based compensation plans, which are described more fully in Note 11 to the financial statements included in the Company’s Annual Report on Form 10-K as filed on March 15, 2007.

     The following table summarizes the stock options available and outstanding as of June 30, 2007 as well as activity during the six months then ended:

						Outstanding Options
		Shares Available								Weighted Average
		for Grant				Number of options				Exercise Price
Balance at December 31, 2006			5,340,411				5,902,182			$	5.13
Granted			(490,538	)			490,538			$	10.06
Exercised			—				(679,565	)		$	2.15
Expired/terminated			64,731				(64,731	)		$	9.54
Balance at June 30, 2007			4,914,604				5,648,424			$	5.87

TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) — Continued

The options outstanding as of June 30, 2007 have been segregated into five ranges for additional disclosure as follows:

		Options Outstanding												Options Exercisable
						Weighted				Weighted								Weighted
						Average				Average								Average
		Number				Exercise				Remaining				Number				Exercise
Range of Exercise Price		Outstanding				Price				Contractual Life				Exercisable				Price
$0.28 — $0.99			1,258,201			$	0.36				5.4				1,258,201			$	0.36
$1.03 — $2.41			1,134,730			$	1.54				5.1				1,134,730			$	1.54
$5.89 — $9.93			2,326,130			$	8.07				6.8				2,146,250			$	8.07
$10.10 — $19.76			865,963			$	12.25				8.6				391,495			$	14.38
$20.12 — $29.98			63,400			$	23.96				7.0				60,369			$	23.81
$0.28 — $29.98			5,648,424			$	5.87				6.4				4,991,045			$	5.33

     At June 30, 2007, the Company had 657,379 unvested options outstanding with a weighted average exercise price of $9.92 per share and weighted average remaining contractual life of 9.5 years. Of the unvested options outstanding, the Company expects that 643,705 options will ultimately vest based on its historical experience.

     Aggregate intrinsic value of options outstanding and options exercisable at June 30, 2007 was $47.1 million and $44.4 million, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $13.96, and the exercise price multiplied by the number of options outstanding. Total intrinsic value of options exercised was $4.8 million and $0.9 million for the six month periods ended June 30, 2007 and 2006, respectively. As of June 30, 2007, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $3.3 million, which is expected to be recognized over a weighted average period of approximately 16.5 months.

     The total fair value of options exercisable at June 30, 2007 and June 30, 2006 was $13.8 million and $14.3 million, respectively.

9. Line of credit

     The Company has a line of credit agreement with a bank which provides for a total availability of $10 million. The line is secured primarily by the Company’s accounts receivable and inventory and bears interest at varying rates of interest, ranging from LIBOR plus 1.5% to prime. The availability under this line is computed on a monthly borrowing base, which is based on the Company’s eligible accounts receivable and inventory. The line of credit matures on June 30, 2008 and requires monthly payments of interest only. At June 30, 2007 the available borrowing was $10.0 million and there was no amount outstanding under the line of credit. There have been no borrowings under the line of credit to date.

     The Company’s agreement with the bank requires the Company to comply with certain financial and other covenants including maintenance of minimum tangible net worth and fixed charge coverage ratios. At June 30, 2007, the Company was in compliance with all such covenants.

10. Commitments and Contingencies

Equipment purchase commitment

     On July 2, 2007, the Company entered into a contract with ATS Automation Tooling Systems Inc. (“ATS”) for the purchase of equipment at a cost of approximately $7.8 million. The equipment is expected to be delivered to and installed at the Company’s facility in 2008. Payments will be made in installments, with an initial $3.1 million to be paid in 2007 and the balance in 2008.

Proposed assessment for failure to timely deposit payroll taxes related to option exercises

     As part of the audit by the United States Internal Revenue Service (“IRS”) for the Company’s 2004 fiscal year, the IRS has notified the Company that it intends to propose an assessment for failure to timely deposit employment taxes with respect to stock option exercises. At this time the Company has yet to receive the proposed assessment and is unable to reasonably estimate its amount due to uncertainty related to which stock options the assessment will apply. Management believes that it has meritorious defenses against a proposed assessment and intends to vigorously appeal and, if necessary, litigate the matter to obtain a favorable outcome. Accordingly, the Company has not recorded any potential liability with respect to this matter as of June 30, 2007. However, there can be no assurance that an unfavorable outcome of a proposed assessment will not have a material adverse effect on the Company’s future operating results and cash flow.