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AXON ENTERPRISE, INC. - Quarter Report: 2015 June (Form 10-Q)

Table of Contents

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 June 30, 2015
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
 
¨
Accelerated filer
 
ý
 
 
 
 
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 July 31, 2015 was 53,881,744.


Table of Contents

TASER INTERNATIONAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TASER INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
June 30, 2015
 
December 31, 2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
40,354

 
$
48,367

Short-term investments
46,252

 
32,774

Accounts and notes receivable, net of allowance of $250 and $251 as of June 30, 2015 and December 31, 2014, respectively
25,753

 
30,735

Inventory, net
23,687

 
18,323

Prepaid expenses and other current assets
10,068

 
4,443

Deferred income tax assets, net
5,186

 
5,186

Total current assets
151,300

 
139,828

Property and equipment, net of accumulated depreciation of $34,881 and $33,906 as of June 30, 2015 and December 31, 2014, respectively
18,231

 
17,523

Deferred income tax assets, net
10,398

 
10,877

Intangible assets, net
7,085

 
3,115

Goodwill
7,786

 
2,206

Long-term investments
12,377

 
9,296

Other assets
4,976

 
2,523

Total assets
$
212,153

 
$
185,368

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
7,477

 
$
7,682

Accrued liabilities
6,605

 
9,245

Current portion of deferred revenue
16,249

 
14,020

Customer deposits
1,322

 
988

Current portion of capital lease payable
40

 
38

Total current liabilities
31,693

 
31,973

Deferred revenue, net of current portion
22,725

 
21,668

Liability for unrecognized tax benefits
1,152

 
1,471

Long-term deferred compensation
1,739

 
1,121

Long-term contingent consideration
950

 

Long-term portion of capital lease payable
9

 
29

Total liabilities
58,268

 
56,262

Commitments and contingencies (Note 10)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of June 30, 2015 and December 31, 2014

 

Common stock, $0.00001 par value; 200,000,000 shares authorized; 53,865,918 and 53,000,867 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively
1

 
1

Additional paid-in capital
174,015

 
162,641

Treasury stock at cost, 18,139,958 shares as of June 30, 2015 and December 31, 2014
(114,645
)
 
(114,645
)
Retained earnings
94,353

 
81,045

Accumulated other comprehensive income
161

 
64

Total stockholders’ equity
153,885

 
129,106

Total liabilities and stockholders’ equity
$
212,153

 
$
185,368

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

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Table of Contents

TASER INTERNATIONAL, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net sales
$
46,713

 
$
37,175

 
$
91,475

 
$
73,360

Cost of products sold and services delivered
15,990

 
13,961

 
30,884

 
27,938

Gross margin
30,723

 
23,214

 
60,591

 
45,422

Operating expenses:
 
 
 
 
 
 
 
Sales, general and administrative
15,443

 
13,547

 
30,008

 
27,293

Research and development
5,906

 
3,455

 
10,464

 
7,061

Total operating expenses
21,349

 
17,002

 
40,472

 
34,354

Income from operations
9,374

 
6,212

 
20,119

 
11,068

Interest and other income, net
99

 
42

 
34

 
72

Income before provision for income taxes
9,473

 
6,254

 
20,153

 
11,140

Provision for income taxes
3,370

 
2,370

 
6,845

 
3,865

Net income
$
6,103

 
$
3,884

 
$
13,308

 
$
7,275

Net income per common and common equivalent shares:
 
 
 
 
 
 
 
Basic
$
0.11

 
$
0.07

 
$
0.25

 
$
0.14

Diluted
$
0.11

 
$
0.07

 
$
0.24

 
$
0.13

Weighted average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic
53,644

 
53,383

 
53,407

 
53,287

Diluted
54,800

 
54,755

 
54,662

 
54,928

 
 
 
 
 
 
 
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
$
6,103

 
$
3,884

 
$
13,308

 
$
7,275

Foreign currency translation adjustments
8

 
5

 
97

 
15

Comprehensive income
$
6,111

 
$
3,889

 
$
13,405

 
$
7,290


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


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TASER INTERNATIONAL, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
13,308

 
$
7,275

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,362

 
2,267

Loss on write-down / disposal of property and equipment, net

 
17

Loss on disposal of intangibles
165

 
126

Bond premium amortization
826

 
428

Change in provision for doubtful accounts
(44
)
 
84

Change in provision for excess and obsolete inventory
(85
)
 
15

Change in provision for warranty expense
(19
)
 
426

Stock-based compensation
3,223

 
2,684

Deferred income taxes
(511
)
 
7,910

Unrecognized tax benefits
(319
)
 
(1,257
)
Excess tax benefit from stock-based compensation
(6,245
)
 
(5,516
)
Change in assets and liabilities:
 
 
 
Accounts and notes receivable
5,613

 
(663
)
Inventory
(5,244
)
 
(4,017
)
Prepaid expenses and other assets
(8,174
)
 
(3,689
)
Accounts payable, accrued and other liabilities
3,646

 
(3,282
)
Deferred revenue
3,133

 
3,920

Customer deposits
334

 
(766
)
Net cash provided by operating activities
10,969

 
5,962

Cash flows from investing activities:
 
 
 
Purchases of investments
(38,750
)
 
(17,312
)
Proceeds from call / maturity of investments
21,365

 
4,200

Purchases of property and equipment
(1,770
)
 
(1,222
)
Purchases of intangible assets
(201
)
 
(109
)
Business acquisition, net of cash acquired
(7,840
)
 

Net cash used in investing activities
(27,196
)
 
(14,443
)
Cash flows from financing activities:
 
 
 
Repurchase of common stock

 
(19,552
)
Proceeds from options exercised
2,553

 
7,372

Payroll tax payments for net-settled stock awards
(647
)
 
(1,190
)
Payments on capital lease obligation
(18
)
 
(18
)
Excess tax benefit from stock-based compensation
6,245

 
5,516

Net cash provided by (used in) financing activities
8,133

 
(7,872
)
Effect of exchange rate changes on cash and cash equivalents
81

 
25

Net decrease in cash and cash equivalents
(8,013
)
 
(16,328
)
Cash and cash equivalents, beginning of period
48,367

 
42,271

Cash and cash equivalents, end of period
$
40,354

 
$
25,943

 
 
 
 
Supplemental disclosure:
 
 
 
Cash paid for income taxes, net
$
4,848

 
$
367

Non-cash transactions
 
 
 
Property and equipment purchases in accounts payable and accrued liabilities
$
205

 
$
75

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

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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.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, including TASER International Europe SE (“TASER Europe”), TASER International B.V., and MediaSolv Solutions Corporation ("MediaSolv"). 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, 2014, 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, 2014. The results of operations for the three and six months ended June 30, 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 reserves,
accounts receivable reserves,
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,
projection of future taxable income in both United States and foreign jurisdictions for estimating consolidated income tax expense,
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 revenues generated by 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 13.

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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


c. Geographic Information and Major Customers

For the three and six months ended June 30, 2015 and 2014, net sales by geographic area were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
United States
$
38,695

 
82.8
%
 
$
32,155

 
86.5
%
 
$
74,196

 
81.1
%
 
$
57,731

 
78.7
%
Other Countries
8,018

 
17.2

 
5,020

 
13.5

 
17,279

 
18.9

 
15,629

 
21.3

Total
$
46,713

 
100.0
%
 
$
37,175

 
100.0
%
 
$
91,475

 
100.0
%
 
$
73,360

 
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 six months ended June 30, 2015 and 2014, no individual country outside the U.S. represented more than 10% of net sales. Sales 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 six months ended June 30, 2015 and 2014, no customer represented more than 10% of total net sales. At June 30, 2015 there were no outstanding customer balances representing more than 10% of the aggregate accounts receivable balance. At December 31, 2014, the Company had a trade receivable from one unaffiliated customer comprising 13.4% 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. Diluted income per share reflects the potential dilution that would occur if outstanding stock options were exercised utilizing the treasury stock method. 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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Numerator for basic and diluted earnings per share:
 
 
 
 
 
 
 
Net income
$
6,103

 
$
3,884

 
$
13,308

 
$
7,275

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
53,644

 
53,383

 
53,407

 
53,287

Dilutive effect of stock-based awards
1,156

 
1,372

 
1,255

 
1,641

Diluted weighted average shares outstanding
54,800

 
54,755

 
54,662

 
54,928

Anti-dilutive stock-based awards excluded
153

 
361

 
173

 
309

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.11

 
$
0.07

 
$
0.25

 
$
0.14

Diluted
$
0.11

 
$
0.07

 
$
0.24

 
$
0.13

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. 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

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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


vendor-specific objective evidence of selling prices does not exist. If neither vendor-specific objective evidence nor third-party evidence exists, management uses its best estimate of selling price.
The Company offers the right to purchase extended warranties that include additional services and coverage beyond the 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. The Company recognizes revenue for the Axon hardware 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. In certain circumstances, not all requirements are met for the recognition of revenue relative to equipment sold in conjunction with Evidence.com at the time the equipment is provided to customers. In such circumstances, based on limitations associated with the allocation of arrangement consideration, part of the revenue for the equipment may be recognized ratably over the specified term of the contract, or when all conditions for revenue recognition are met, if sooner.
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 at the end of the contract period.

The Company recently launched 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 the Axon devices every 2.5 years, and includes 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 over the five-year contract periods as well as spare inventory units. Under this program the customer generally makes an initial purchase of Axon cameras and related accessories 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.
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 5 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.
 
 The Company may, from time to time, enter into agreements with its customers to finance their purchases with a note receivable that may range in terms up to five years. Sales are recorded at the fair value of the note, which is generally sold and assigned to a third-party financing company. The terms of the assignments are such that the Company expects to receive payment within 30 days of the original sale. The assignments are non-recourse and the Company has no obligations or continuing involvement with the notes receivable. Prior to entering into an assignment, the Company evaluates the credit quality and financial condition of the third-party financing company. The Company does not generally record interest income on notes receivable due to minimal

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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


holding periods, nor has the Company recognized significant gains or losses upon the assignment of the notes. As of June 30, 2015 the Company had an outstanding balance of $0.1 million related to such arrangements, and as of December 31, 2014 no such balances existed.
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 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):
 
Six Months Ended June 30,
 
2015
 
2014
Balance, beginning of period
$
675

 
$
955

Utilization of accrual
(200
)
 
(303
)
Warranty (recovery) expense
(19
)
 
426

Balance, end of period
$
456

 
$
1,078

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.
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 June 30, 2015 and December 31, 2014 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 June 30, 2015 and December 31, 2014 was $1.7 million and $1.1 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 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.

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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


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 $0.2 million and $0.1 million during the six months ended June 30, 2015 and 2014, respectively.
i. Recently Issued Accounting Guidance

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, ASU 2014-09 provides for the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") Topic No. 605, “Revenue Recognition,” most industry-specific guidance throughout the industry topics of the ASC, and some cost guidance related to construction-type and production-type contracts. ASU 2014-09 is effective for public entities for annual periods and interim periods within those annual periods beginning after December 15, 2016. In July 2015, the FASB voted to amend ASU 2014-09 by proposing a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. The Company is currently evaluating the timing of its adoption and the impact of adopting the new revenue standard on its consolidated financial statements.

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU 2014-12”). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC Topic No. 718, “Compensation—Stock Compensation” (“ASC 718”), as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in ASU 2014-12 either: (i) prospectively to all awards granted or modified after the effective date; or (ii) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The Company is currently evaluating the potential impact of the adoption of this guidance on its consolidated financial statements, however does not expect there to be a material impact at this time.

In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330)" ("ASU 2015-11"). 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 fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the potential impact of the adoption of this guidance on its consolidated financial statements, however does not expect there to be a material impact at this time.
j. Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


2. Cash, Cash Equivalents and Investments
The following tables summarize the Company's cash, cash equivalents, and held-to-maturity investments at June 30, 2015 and December 31, 2014 (in thousands):
 
As of June 30, 2015
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Short-Term Investments
 
Long-Term Investments
Cash
$
37,225

 
$

 
$

 
$
37,225

 
$
37,225

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
2,649

 

 

 
2,649

 
2,649

 

 

Corporate bonds
34,478

 

 
(53
)
 
34,425

 

 
30,038

 
4,440

Subtotal
37,127

 

 
(53
)
 
37,074

 
2,649

 
30,038

 
4,440

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
State and municipal obligations
20,276

 
19

 
(3
)
 
20,292

 
480

 
13,500

 
6,296

Certificates of deposit
4,355

 

 

 
4,355

 

 
2,714

 
1,641

Subtotal
24,631

 
19

 
(3
)
 
24,647

 
480

 
16,214

 
7,937

Total
$
98,983

 
$
19

 
$
(56
)
 
$
98,946

 
$
40,354

 
$
46,252

 
$
12,377


 
As of December 31, 2014
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Short-Term Investments
 
Long-Term Investments
Cash
$
44,260

 
$

 
$

 
$
44,260

 
$
44,260

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
3,932

 

 

 
3,932

 
3,932

 

 

Corporate bonds
20,388

 

 
(34
)
 
20,354

 

 
15,656

 
4,732

Subtotal
24,320

 

 
(34
)
 
24,286

 
3,932

 
15,656

 
4,732

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
State and municipal obligations
19,145

 
18

 

 
19,163

 
175

 
15,891

 
3,079

Certificates of deposit
2,712

 

 

 
2,712

 

 
1,227

 
1,485

Subtotal
21,857

 
18

 

 
21,875

 
175

 
17,118

 
4,564

Total
$
90,437

 
$
18

 
$
(34
)
 
$
90,421

 
$
48,367

 
$
32,774

 
$
9,296

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 June 30, 2015.

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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 June 30, 2015 by contractual maturity (in thousands):
 
Amortized Cost
 
Fair Value
Due in less than one year
$
46,252

 
$
46,216

Due after one year, through two years
12,377

 
12,376

Due after two years

 

Total short-term and long-term investments
$
58,629

 
$
58,592

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 potentially excess, obsolete or slow-moving inventories to their net realizable value. Inventories consisted of the following at June 30, 2015 and December 31, 2014 (in thousands):
 
2015
 
2014
Raw materials
$
13,355

 
$
12,229

Work-in-process
119

 
111

Finished goods
11,759

 
7,337

Reserve for excess and obsolete inventory
(1,546
)
 
(1,354
)
Total inventory
$
23,687

 
$
18,323


 
4. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the six months ended June 30, 2015 were as follows (in thousands):
Balance, beginning of period
$
2,206

Goodwill acquired
5,580

Balance, end of period
$
7,786



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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):
 
 
 
June 30, 2015
 
December 31, 2014
 
Useful
Life
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortized:
 
 
 
 
 
 
 
 
 
 
 
 
 
Domain names
5 years
 
$
125

 
$
(120
)
 
$
5

 
$
125

 
$
(114
)
 
$
11

Issued patents
4-15 years
 
1,842

 
(613
)
 
1,229

 
1,759

 
(549
)
 
1,210

Issued trademarks
3-11 years
 
594

 
(222
)
 
372

 
566

 
(205
)
 
361

Customer relationships
4 years
 
310

 
(12
)
 
298

 

 

 

Non-compete agreements
4 years
 
350

 
(13
)
 
337

 

 

 

Developed technology
7 years
 
3,470

 
(76
)
 
3,394

 

 

 

Total amortized
 
 
6,691

 
(1,056
)
 
5,635

 
2,450

 
(868
)
 
1,582

Not amortized:
 
 
 
 
 
 
 
 
 
 
 
 
 
TASER trademark
 
 
900

 
 
 
900

 
900

 
 
 
900

Patents and trademarks pending
 
 
550

 
 
 
550

 
633

 
 
 
633

Total not amortized
 
 
1,450

 
 
 
1,450

 
1,533

 
 
 
1,533

Total intangible assets
 
 
$
8,141

 
$
(1,056
)
 
$
7,085

 
$
3,983

 
$
(868
)
 
$
3,115

Amortization expense relative to intangible assets for the three months ended June 30, 2015 and 2014 was approximately $150,000 and $42,000, respectively. Amortization expense relative to intangible assets for the six months ended June 30, 2015 and 2014 was approximately $211,000 and $81,000, respectively. Estimated amortization for intangible assets with definitive lives for the remaining six months of 2015, the next five years ended December 31, and thereafter, is as follows (in thousands):
2015 (remaining six months)
$
426

2016
846

2017
842

2018
829

2019
709

2020
646

Thereafter
1,337

Total
$
5,635


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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


5. Deferred Revenue
Deferred revenue consisted of the following (in thousands):
 
June 30, 2015
 
December 31, 2014
 
Current
 
Long-Term
 
Total
 
Current
 
Long-Term
 
Total
Warranty:
 
 
 
 
 
 
 
 
 
 
 
TASER Weapons
$
6,722

 
$
12,757

 
$
19,479

 
$
6,591

 
$
13,809

 
$
20,400

Axon
1,464

 
1,913

 
3,377

 
679

 
894

 
1,573

 
8,186

 
14,670

 
22,856

 
7,270

 
14,703

 
21,973

Hardware:
 
 
 
 
 
 
 
 
 
 
 
TASER Weapons
951

 
1,073

 
2,024

 
365

 
753

 
1,118

Axon
665

 
3,897

 
4,562

 
491

 
2,643

 
3,134

 
1,616

 
4,970

 
6,586

 
856

 
3,396

 
4,252

Axon Services
6,145

 
3,085

 
9,230

 
5,717

 
3,569

 
9,286

Other
302

 

 
302

 
177

 

 
177

Total
$
16,249

 
$
22,725

 
$
38,974

 
$
14,020

 
$
21,668

 
$
35,688


 
June 30, 2015
 
December 31, 2014
 
Current
 
Long-Term
 
Total
 
Current
 
Long-Term
 
Total
TASER Weapons
$
7,975

 
$
13,830

 
$
21,805

 
$
7,133

 
$
14,562

 
$
21,695

Axon
8,274

 
8,895

 
17,169

 
6,887

 
7,106

 
13,993

Total
$
16,249

 
$
22,725

 
$
38,974

 
$
14,020

 
$
21,668

 
$
35,688


6. Accrued Liabilities
Accrued liabilities consisted of the following at June 30, 2015 and December 31, 2014 (in thousands):
 
2015
 
2014
Accrued salaries and benefits
$
2,580

 
$
3,699

Accrued judgments and settlements
80

 
108

Accrued professional fees
228

 
257

Accrued warranty expense
456

 
675

Accrued income and other taxes
663

 
539

Other accrued expenses
2,598

 
3,967

Accrued liabilities
$
6,605

 
$
9,245


 
7. Income Taxes

Deferred Tax Assets
Net deferred income tax assets at June 30, 2015, 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. The Company’s total current and long-term net deferred tax assets at June 30, 2015 were $15.6 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

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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


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 June 30, 2015, the Company continues to demonstrate three-year cumulative pre-tax income in the U.S. federal and Arizona tax jurisdictions; however, the 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.
The Company has completed research and development (“R&D”) tax credit studies which identified approximately $10.5 million in tax credits for federal, Arizona and California income tax purposes related to the 2003 through 2015 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 $2.8 million as of June 30, 2015. In addition, management accrued approximately $0.2 million for estimated uncertain tax positions related to certain state income tax liabilities. The Company recently completed an IRS audit for the tax year 2012, and as of June 30, 2015, the amount of unrecognized tax benefits decreased by $0.4 million.  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 $3.0 million be recognized, the Company’s effective tax rate would be favorably impacted. Approximately $1.2 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 six months ended June 30, 2015, after discrete period adjustments, was 34.0%. Before discrete adjustments the tax rate was 36.6%, which is below the statutory rate primarily due to the impact of the domestic production activities deduction, as well as tax rates in foreign jurisdictions and the relative amounts of income earned in those jurisdictions, but also increased by the impact of state taxes and non-deductible expenses for items such as ISO stock option expense, meals and entertainment, and lobbying fees. The Company has nearly completed the full implementation of its new international structure, which is new for 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.  The Company has chosen this method, from among those available to it, because of its expectation that it will produce the least amount of variability during the year.
8. Stockholders’ Equity

In May 2013, the Company’s stockholders approved a new stock incentive plan authorizing an additional 1.6 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 1.3 million shares available for grant as of June 30, 2015.
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 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.

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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Restricted Stock Units
The following table summarizes RSU activity for the six months ended June 30, 2015 (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
1,226

 
$
13.23

 
 
Granted
368

 
27.44

 
 
Released
(364
)
 
11.14

 
 
Forfeited
(47
)
 
15.70

 
 
Units outstanding, end of period
1,183

 
18.18

 
$
39,411

Aggregate intrinsic value represents the Company’s closing stock price on the last trading day of the period, which was $33.31 per share, multiplied by the number of RSUs outstanding. As of June 30, 2015, there was $17.5 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 2.85 years. RSUs are released when vesting requirements are met.
During the six months ended June 30, 2015, the Company granted approximately 36,101 performance-based RSUs, which are included in the table above. As of June 30, 2015, the performance criteria had not been met for any of the 0.1 million performance-based RSUs outstanding. Certain of the performance-based RSUs granted in 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 0.1 million, which are not included in the table above.
Certain RSUs that vested in the six months ended June 30, 2015 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 25,000 and had a value of approximately $0.6 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.
 
Stock Option Activity
The following table summarizes stock option activity for the six months ended June 30, 2015 (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
1,641

 
$
5.26

 
 
 
 
Granted

 

 
 
 
 
Exercised
(500
)
 
4.96

 
 
 
 
Expired / terminated
(8
)
 
8.71

 
 
 
 
Options outstanding, end of period
1,133

 
5.35

 
3.87
 
$
31,685

Options exercisable, end of period
1,101

 
5.37

 
3.88
 
30,772

Options expected to vest, end of period
26

 
4.75

 
3.61
 
750

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 $33.31 on June 30, 2015. The intrinsic value of options exercised for the six months ended June 30, 2015 and 2014 was $13.2 million and $12.6 million, respectively. Options expected to vest are presented

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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


net of forfeitures. As of June 30, 2015, 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.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Cost of products sold and services delivered
$
89

 
$
65

 
$
159

 
$
88

Sales, general and administrative expenses
925

 
948

 
1,858

 
1,658

Research and development expenses
665

 
494

 
1,206

 
938

Total stock-based compensation
$
1,679

 
$
1,507

 
$
3,223

 
$
2,684

Stock Repurchase Plan
In May 2014, the Company announced that TASER’s Board of Directors authorized a stock repurchase program to acquire up to $30.0 million of the Company’s outstanding common stock subject to stock market conditions and corporate considerations. There were no stock repurchase transactions during the six months ended June 30, 2015. During the three months ended June 30, 2014, the Company purchased 1.5 million common shares under this program for a total cost of approximately $19.6 million, or a weighted average cost of $13.16 per share. The weighted average cost includes the average price paid per share of $13.13, plus any applicable administrative costs for the transaction.  As of June 30, 2015, $7.6 million remains available under the plan for future purchases.

9. Line of Credit
The Company has a $10.0 million revolving line of credit with a domestic bank. At both June 30, 2015 and December 31, 2014, there were no borrowings under the line. As of June 30, 2015, the Company had letters of credit outstanding of approximately $3.0 million under the facility and available borrowing of approximately $7.0 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, 2016, 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 June 30, 2015, the Company’s tangible net worth ratio was 0.42:1 and its fixed charge coverage ratio was 2.81:1. Accordingly, the Company was in compliance with these covenants.
10. Commitments and Contingencies
Product Litigation
The Company is currently named as a defendant in 12 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. In addition, one other product litigation matter in which the Company is involved is currently on appeal. 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. Three recent lawsuits allege fraud and misrepresentation and are seeking punitive damages in addition to compensatory damages. The information throughout this note is current through the filing date of this Quarterly Report on Form 10-Q.

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 our litigation strategy and the confidentiality agreements that are executed in the event of a settlement, the Company does not identify or comment on which specific lawsuits have been settled or the amount of any settlement.

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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


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 second quarter of 2015, product liability cases have been reduced from 55 active to 13 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.
 
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
Koon
  
Dec-08
  
17th Judicial Circuit Court, Broward County, FL
  
Training Injury
  
Discovery Phase
Derbyshire
  
Nov-09
  
Ontario, Canada Superior Court of Justice
  
Officer Injury
  
Discovery Phase
Thompson
  
Mar-10
  
11th Judicial Circuit Court, Miami-Dade County, FL
  
Suspect Injury During Arrest
  
Discovery Phase - Trial scheduled November 2015
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
  
17th 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
  
Discovery Phase - Trial scheduled July 2016
Moore
  
Nov-14
  
St. Louis County Circuit Court, MO
  
Wrongful Death
  
Pleading Phase
Jones
  
Jan-15
  
Los Angeles County Superior Court, CA
  
Suspect Injury
  
Discovery Phase - Trial scheduled April 2016
McKelvey
 
Apr-15
 
US District Court, OR
 
Wrongful Death
 
Pleading Phase
Price
 
Jul-15
 
US District Court, OR
 
Wrongful Death
 
Pleading Phase
In addition, other product litigation matters in which the Company is involved that are currently on appeal are listed below:
Plaintiff
  
Month
Served
  
Jurisdiction
  
Claim Type
  
Status
Mitchell
  
Apr-12
  
US District Court, ED MI
  
Wrongful Death
  
Notice of Appeal filed August 2014

Cases that were dismissed or judgment entered during the second quarter of 2015 and through the filing date of this Quarterly Report on Form 10-Q are listed in the table below. Cases that were dismissed or judgment entered in prior fiscal quarters are not included in this table.
Plaintiff
  
Month
Served
  
Jurisdiction
  
Claim Type
  
Status
Ricks
 
May-12
 
US District Court, WD LA
 
Wrongful Death
 
Motion for Directed Verdict granted

18

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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


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
2004
 
12/1/2003
 
12/1/2004
 
$
2.0

 
$
0.1

 
N
 
$
2.0

 
n/a
2005
 
12/1/2004
 
12/1/2005
 
10.0

 
0.3

 
Y
 
7.0

 
n/a
2006
 
12/1/2005
 
12/1/2006
 
10.0

 
0.3

 
Y
 
3.7

 
n/a
2007
 
12/1/2006
 
12/1/2007
 
10.0

 
0.3

 
Y
 
8.0

 
n/a
2008
 
12/1/2007
 
12/15/2008
 
10.0

 
0.5

 
Y
 

 
Koon
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

 
Thompson, 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, Mitchell, 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, Moore
2015
 
12/15/2014
 
12/15/2015
 
10.0

 
5.0

 
N
 
10.0

 
Jones, McKelvey, Price
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 we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously defend any lawsuit filed against the Company. In certain legal matters, we record a liability when losses are deemed probable and reasonably estimable. In evaluating matters for accrual and disclosure purposes, we take 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, and the severity of any potential loss. We reevaluate and update our accruals as matters progress over time.

Based on our assessment of outstanding litigation and claims as of June 30, 2015, the Company has determined that it is not reasonably possible that these lawsuits will individually, or in the aggregate, materially affect our 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 our 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 June 30, 2015, the Company had outstanding letters of credit of approximately $3.0 million. Of that amount, $2.7 million is expected to expire in May 2017 and $0.3 million is expected to expire in January 2017. Additionally, the Company had approximately $2.4 million of outstanding surety bonds at June 30, 2015, with $2.2 million expiring in July 2018 and the remaining $0.2 million expected to be released during the third quarter of 2015 with the completion of the remaining contractual performance terms.


19

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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


11. 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 $65,000 and $41,000 for the three months ended June 30, 2015 and 2014, respectively, and $112,000 and $71,000 for the six months ended June 30, 2015 and 2014, respectively. At June 30, 2015 and December 31, 2014, the Company had accrued liabilities of approximately $21,000 and $8,000, respectively, related to these services. Additionally, the Company subscribes to a mobile collaboration software suite co-founded and managed by Bret Taylor, a member of the Board of Directors. The Company licenses the software for approximately $20,000 per quarter, and as of June 30, 2015 had deferred costs related to an annual subscription of approximately $80,000. No such deferred costs were recorded at December 31, 2014.
12. 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 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 June 30, 2015 and 2014, were approximately $0.3 million and $0.2 million, respectively. The Company’s matching contributions to the 401(k) plan for the six months ended June 30, 2015 and 2014, were approximately $0.6 million and $0.4 million, respectively. The Company expects to make contributions to the non-qualified deferred compensation plan related to the three and six months ended June 30, 2015, of approximately $7,000 and $23,000, respectively. Future matching or profit sharing contributions to the plans are at the Company’s sole discretion.

 

20

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TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


13. 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 revenue generated by MediaSolv (the “Axon” segment). The Company includes only revenues and costs directly 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, no asset information is provided in the following tables.
Information relative to the Company’s reportable segments is as follows (in thousands):
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
 
TASER
Weapons
 
Axon
 
Total
 
TASER
Weapons
 
Axon
 
Total
Product sales
$
37,825

 
$
5,930

 
$
43,755

 
$
32,675

 
$
3,593

 
$
36,268

Service revenue

 
2,958

 
2,958

 

 
907

 
907

Net sales
37,825

 
8,888

 
46,713

 
32,675

 
4,500

 
37,175

Cost of products sold
11,278

 
3,716

 
14,994

 
10,663

 
2,760

 
13,423

Cost of services delivered

 
996

 
996

 

 
538

 
538

Gross margin
26,547

 
4,176

 
30,723

 
22,012

 
1,202

 
23,214

Sales, general and administrative
10,823

 
4,620

 
15,443

 
10,901

 
2,646

 
13,547

Research and development
1,077

 
4,829

 
5,906

 
793

 
2,662

 
3,455

Income (loss) from operations
$
14,647

 
$
(5,273
)
 
$
9,374

 
$
10,318

 
$
(4,106
)
 
$
6,212

Purchase of property and equipment
$
188

 
$
1,158

 
$
1,346

 
$
336

 
$
87

 
$
423

Purchase of intangible assets
35

 
116

 
151

 
42

 

 
42

Purchase of property and equipment and intangible assets in connection with business acquisition

 
9,779

 
9,779

 

 

 

Depreciation and amortization
556

 
189

 
745

 
990

 
115

 
1,105


 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
 
TASER
Weapons
 
Axon
 
Total
 
TASER
Weapons
 
Axon
 
Total
Product sales
$
76,166

 
$
10,432

 
$
86,598

 
$
65,150

 
$
6,631

 
$
71,781

Service revenue

 
4,877

 
4,877

 

 
1,579

 
1,579

Net sales
76,166

 
15,309

 
91,475

 
65,150

 
8,210

 
73,360

Cost of products sold
22,359

 
6,864

 
29,223

 
21,581

 
5,416

 
26,997

Cost of services delivered

 
1,661

 
1,661

 

 
941

 
941

Gross margin
53,807

 
6,784

 
60,591

 
43,569

 
1,853

 
45,422

Sales, general and administrative
21,528

 
8,480

 
30,008

 
22,190

 
5,103

 
27,293

Research and development
2,267

 
8,197

 
10,464

 
1,610

 
5,451

 
7,061

Income (loss) from operations
$
30,012

 
$
(9,893
)
 
$
20,119

 
$
19,769

 
$
(8,701
)
 
$
11,068

Purchase of property and equipment
$
535

 
$
1,235

 
$
1,770

 
$
1,033

 
$
189

 
$
1,222

Purchase of intangible assets
81

 
120

 
201

 
109

 

 
109

Purchase of property and equipment and intangible assets in connection with business acquisition

 
9,779

 
9,779

 

 

 

Depreciation and amortization
1,086

 
276

 
1,362

 
2,068

 
199

 
2,267



21

Table of Contents
TASER INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


15. Business Acquisition
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. 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 has also agreed to additional earn-out provisions and compensation adjustments totaling approximately $4.0 million based, in part, on predefined future financial metrics that are not included as part of the purchase price. MediaSolv primarily provides solutions for interview room video, CCTV and on premise digital evidence management. These products will 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 acquisition will also allow the Company to leverage MediaSolv’s existing network and relationships to further strengthen its position in the market. The Company's purchase price allocation is preliminary and subject to revision as more detailed analyses are completed and additional information about fair value of assets and liabilities become available, including additional information relating to tax matters and finalization of the valuation of identifiable intangible assets.
The major classes of assets and liabilities to which the Company has allocated the purchase price, on a preliminary basis, are as follows (in thousands):
Accounts receivable and other current assets
$
591

Inventory
35

Property and equipment
54

Intangible assets
4,145

Goodwill
5,580

Accounts payable and accrued liabilities
(403
)
Deferred revenue
(153
)
Deferred income tax liabilities, net
(1,057
)
Total purchase price
$
8,792

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.

15. Subsequent Events
Business Acquisition
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, a United Kingdom ("UK") corporation ("TSR"). TSR is the Company's licensed distributor of TASER CEWs and Axon cameras and related accessories in the UK. The purchase price consisted of $4.0 million cash at close, and additional amounts in the form of earn-outs, subject to the achievement of predefined performance metrics. The acquired entity will operate under the name Axon Public Safety UK. The acquisition will be accounted for in the third quarter of fiscal 2015 using the acquisition method in accordance with ASC 805, Business Combinations. Accordingly, the identifiable assets acquired and liabilities assumed will be measured at their acquisition-date fair value. Operating results will be included in the Company’s consolidated financial statements from the effective date of the acquisition.

Stock Repurchases
In August 2015, the Company repurchased approximately 0.3 million common shares under an existing stock repurchase program for a total cost of approximately $7.6 million, or a weighted average cost of $25.86per share. The weighted average cost includes the average price paid per share of $25.83, plus applicable administrative costs for the transactions. These repurchase transactions substantially exhausted the remaining available balance at June 30, 2015 under the stock repurchase program approved by the Board of Directors in May 2014.

22

Table of Contents


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 June 30, 2015, and results of operations for the three and six months ended June 30, 2015 and 2014. 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, 2014.
 
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: that the Company’s future income will trend upward; 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; our intentions about future development efforts and activities, including our intentions to invest in research and development; that selling, general and administrative expense will increase in the remainder of 2015; that fixed costs in the Axon segment will stabilize and result in lower cost of services as a percentage of revenue; that we may experience a decrease in overall margins; trends in stock-based compensation for the remainder of 2015; our plans for our Netherlands international headquarters facility; that we may have more sales and expenses denominated in foreign currencies in 2015; 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: market acceptance of our products; our ability to design, introduce and sell new products; delays in development schedules; rapid technological change and competition; 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; our dependence on sales of our TASER X26P and X2 CEWs; the acceptance of our Evidence.com software model; the long-term revenue recognition cycle for our SaaS Evidence.com product; the length of our sales cycle and our ability to realize benefits from our marketing and selling efforts; breach of our security measures resulting in unauthorized access to customer data; outages and disruptions relating to our Evidence.com service; 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; product defects; our anticipation that certain orders will be completed; risks relating to acquisitions and joint ventures; catastrophic events; fluctuations in quarterly operating results; increases in non-U.S. denominated expenses; employee retention risks; budgetary and political constraints of prospects and customers; our exposure to cancellations of government contracts due to appropriation clauses; our compliance with regulations governing the environment, including but not limited to, regulations within the European Union; new regulations relating to conflict minerals; 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; fluctuations in our effective tax rate; foreign currency fluctuations; counter-party risks relating to cash balances held in excess of FDIC insurance limits; 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; intellectual property infringement claims and relating litigation costs; competition in foreign countries relating to foreign patents; our successful identification of existing intellectual property rights that might infringe on our developments and other factors identified in documents filed by us with the Securities and Exchange Commission, including those set forth in our Form 10-K for the year ended December 31, 2014.

Overview

TASER International, Inc.’s (the “Company” or “TASER” or “we” or “our”) core mission is to protect life and to protect truth through technologies that make communities safer. We are the market leader in the development, manufacture and sale of conducted electrical weapons (“CEWs”) and other electronic weapons designed for use in law enforcement, military, corrections, private security and personal defense. To address challenges faced by law enforcement officers subsequent to post-incident, we have developed a fully integrated hardware and software solution to provide our law enforcement customers the capabilities to capture, store, manage, share and analyze video and other digital evidence.


23

Table of Contents

Results of Operations

Three Months Ended June 30, 2015 Compared to the Three Months Ended June 30, 2014
The following table presents data from our statements of operations as well as the percentage relationship to total net sales of items included in our statements of operations (dollars in thousands):
 
Three Months Ended June 30,
 
2015
 
2014
Net sales
$
46,713

 
100.0
%
 
$
37,175

 
100.0
%
Cost of products sold and services delivered
15,990

 
34.2

 
13,961

 
37.6

Gross margin
30,723

 
65.8

 
23,214

 
62.4

Operating expenses:
 
 
 
 
 
 
 
Sales, general and administrative
15,443

 
33.1

 
13,547

 
36.4

Research and development
5,906

 
12.6

 
3,455

 
9.3

Total operating expenses
21,349

 
45.7

 
17,002

 
45.7

Income from operations
9,374

 
20.1

 
6,212

 
16.7

Interest and other income, net
99

 
0.2

 
42

 
0.1

Income before provision for income taxes
9,473

 
20.3

 
6,254

 
16.8

Provision for income taxes
3,370

 
7.2

 
2,370

 
6.4

Net income
$
6,103

 
13.1
%
 
$
3,884

 
10.4
%
Net sales to the U.S. and other countries are summarized as follows (dollars in thousands):
 
Three Months Ended June 30,
 
2015
 
2014
United States
$
38,695

 
82.8
%
 
$
32,155

 
86.5
%
Other Countries
8,018

 
17.2

 
5,020

 
13.5

Total
$
46,713

 
100.0
%
 
$
37,175

 
100.0
%


24

Table of Contents

Net Sales
Net sales by product line were as follows for the three months ended June 30, 2015 and 2014 (dollars in thousands):
 
Three Months Ended June 30,
 
Dollar
Change
 
Percent
Change
 
2015
 
2014
 
 
TASER Weapons segment:
 
 
 
 
 
 
 
 
 
 
 
TASER X26P
$
13,284

 
28.4
%
 
$
10,281

 
27.7
%
 
$
3,003

 
29.2
 %
TASER X2
10,110

 
21.6

 
5,569

 
15.0

 
4,541

 
81.5

TASER X26
1,754

 
3.8

 
4,813

 
12.9

 
(3,059
)
 
(63.6
)
TASER C2
472

 
1.0

 
469

 
1.3

 
3

 
0.6

TASER M26
168

 
0.4

 
110

 
0.3

 
58

 
52.7

TASER XREP

 
0.0

 
84

 
0.2

 
(84
)
 
(100.0
)
Single cartridges
9,231

 
19.8

 
8,827

 
23.7

 
404

 
4.6

Extended warranties including TAP
1,794

 
3.8

 
1,443

 
3.9

 
351

 
24.3

Other
1,012

 
2.2

 
1,079

 
2.9

 
(67
)
 
(6.2
)
TASER Weapons segment
37,825

 
81.0

 
32,675

 
87.9

 
5,150

 
15.8

Axon segment:
 
 
 
 
 
 
 
 

 


Axon solutions
3,492

 
7.5

 
1,749

 
4.7

 
1,743

 
99.7

Evidence.com
2,672

 
5.7

 
1,015

 
2.7

 
1,657

 
163.3

TASER Cam
2,008

 
4.3

 
1,280

 
3.4

 
728

 
56.9

Extended warranties including TAP
343

 
0.7

 

 
0.0

 
343

 
*

Other
373

 
0.8

 
456

 
1.2

 
(83
)
 
(18.2
)
Axon segment
8,888

 
19.0

 
4,500

 
12.1

 
4,388

 
97.5

Total net sales
$
46,713

 
100.0
%
 
$
37,175

 
100.0
%
 
$
9,538

 
25.7

* Not meaningful
Net unit sales for the TASER Weapons handles and other products and Axon segment products are as follows:
 
Three Months Ended June 30,
 
Unit
Change
 
Percent
Change
 
2015
 
2014
 
 
TASER X26P
15,041

 
12,148

 
2,893

 
23.8
 %
TASER X2
9,748

 
4,563

 
5,185

 
113.6

TASER X26
1,285

 
4,436

 
(3,151
)
 
(71.0
)
TASER M26
738

 
383

 
355

 
92.7

TASER C2
2,029

 
1,521

 
508

 
33.4

Cartridges
383,221

 
369,534

 
13,687

 
3.7

Axon Flex
5,347

 
2,022

 
3,325

 
164.4

Axon Body
4,743

 
2,834

 
1,909

 
67.4

TASER Cam
3,995

 
2,713

 
1,282

 
47.3

Net sales were $46.7 million and $37.2 million for the three months ended June 30, 2015 and 2014, respectively, an increase of $9.5 million or 25.7%. Net sales for the TASER Weapons segment were $37.8 million and $32.7 million for the three months ended June 30, 2015 and 2014, respectively, an increase of $5.2 million or 15.8%. Net sales for the Axon segment were $8.9 million and $4.5 million for the three months ended June 30, 2015 and 2014, respectively, an increase of $4.4 million or 97.5%.
The increase in net sales for the three months ended June 30, 2015 compared to same period in 2014 in the TASER Weapons segment was primarily driven by increased adoption of the TASER X26P smart weapon, as customers continue to upgrade their legacy CEWs to the new X26P and TASER X2 smart weapons. In the Axon segment, the increase in net sales was driven by the continued adoption of the Axon on-officer cameras and Evidence.com application in the law enforcement markets. International

25

Table of Contents

customers continued to be a steady contributor to the results with $8.0 million in the three months ended June 30, 2015 versus $5.0 million in the same period in 2014. During 2014, the Company established TASER International, B.V. located in Amsterdam, Netherlands, that serves as our international headquarters to facilitate transactions with existing customers as well as allow for continued expansion into other foreign markets. Additionally, subsequent to June 30, 2015, we acquired Tactical Safety Responses Limited, our licensed distributor of TASER CEWs and on-officer cameras in the United Kingdom ("UK"). We believe this investment will help expand TASER's ability to bring key public safety technologies to its partners across the UK by growing its on-the-ground sales and support team.

To gain more immediate feedback regarding activity for Axon camera products and Evidence.com services, we also review bookings for these products. We consider bookings to be a statistical measure defined as the sales price of orders (not invoiced sales), net of cancellations, placed in the relevant fiscal period, regardless of when the products or services ultimately will be provided. Some bookings will be invoiced in subsequent years. Due to municipal government funding rules, certain of the future year amounts included in bookings are subject to budget appropriation or other contract cancellation clauses. Although TASER has entered into contracts for the delivery of products and services in the future and anticipates the contracts will be completed, if agencies do not appropriate funds in future year budgets, or enact a cancellation clause, revenue associated with these bookings will not ultimately be recognized, resulting in a future reduction to bookings. Bookings related to Evidence.com and Axon products and services were $30.6 million and $11.3 million during the three months ended June 30, 2015 and 2014, respectively, an increase of $19.3 million, or 170.0%.
Cost of Products Sold and Services Delivered
Cost of products sold and services delivered was $16.0 million and $14.0 million for the three months ended June 30, 2015 and 2014, respectively, an increase of $2.0 million or 14.5%. As a percentage of net sales, cost of products sold and services delivered decreased to 34.2% for the three months ended June 30, 2015 compared to 37.6% during the same period in 2014.
Within the TASER Weapons segment, cost of products sold increased $0.6 million, or 5.8%, to $11.3 million for the three months ended June 30, 2015, compared to $10.7 million in 2014, but decreased as a percentage of sales to 29.8% from 32.6%. The net decrease in cost of products sold as a percent of sales primarily reflects increased leverage of fixed overhead costs due to higher production levels, higher average selling prices, as well as the completion of the depreciation of our automated cartridge production line at the end of the fourth quarter 2014.
Within the Axon segment, cost of products sold and services delivered were $4.7 million for the three months ended June 30, 2015, an increase of $1.4 million, or 42.9% from the same period in 2014. The increase was driven by growing sales in this segment, increased data storage costs as more agencies utilize Evidence.com, as well as growth in the newly established professional services team. Cost of products sold and services delivered as a percentage of sales decreased to 53.0% for the three months ended June 30, 2015 from 73.3% for the same period in 2014. The decrease was driven by higher sales and by improvements to our Evidence.com SaaS margins. There are a number of fixed costs for the Axon segment which, as we generate additional traction in the business, we expect to remain relatively stable and should allow for lower cost of services delivered as a percentage of service revenue.
Gross Margin
Gross margin increased $7.5 million to $30.7 million for the three months ended June 30, 2015 compared to $23.2 million for 2014. As a percentage of net sales, gross margin increased to 65.8% for the three months ended June 30, 2015 compared to 62.4% for 2014. The increase is attributable to strong sales and margins in the TASER Weapons segment, and also improved margins in the Axon segment as it continues to scale and leverage fixed costs. Gross margin also improved due to increased leveraging of fixed overhead costs, as the Company increased production of inventory in anticipation of higher future sales volumes. As a percentage of net sales, gross margin for the TASER Weapons segment was 70.2% and 67.4% for the three months ended June 30, 2015 and 2014, respectively, while the same measure for these periods for the Axon segment were 47.0% and 26.7%, respectively. The Company is continuing to see improvements in margins for the Weapons and Axon segments individually, due primarily to additional leveraging of fixed costs and higher average selling prices. However, as the Axon segment continues to become a greater percentage of total sales, the Company may experience a decrease in overall margins as a percentage of sales.


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Table of Contents

Sales, General and Administrative Expenses
Sales, general and administrative (“SG&A”) expenses were comprised as follows for the three months ended June 30, 2015 and 2014 (dollars in thousands):
 
Three Months Ended June 30,
 
Dollar
Change
 
Percent
Change
 
2015
 
2014
 
 
Salaries, benefits and bonus
$
5,626

 
$
3,741

 
$
1,885

 
50.4
 %
Stock-based compensation
925

 
954

 
(29
)
 
(3.0
)
Legal, professional and accounting
1,279

 
3,256

 
(1,977
)
 
(60.7
)
Sales and marketing
2,117

 
1,460

 
657

 
45.0

Consulting and lobbying services
1,471

 
936

 
535

 
57.2

Travel and meals
1,592

 
1,162

 
430

 
37.0

Building
902

 
767

 
135

 
17.6

Supplies
582

 
489

 
93

 
19.0

Depreciation and amortization
369

 
311

 
58

 
18.6

Liability insurance
370

 
284

 
86

 
30.3

Other
211

 
187

 
24

 
12.8

Total sales, general and administrative expenses
$
15,444

 
$
13,547

 
$
1,897

 
14.0

Sales, general, and administrative as a percentage of net sales
33.1
%
 
36.4
%
 
 
 
 
SG&A expenses were $15.4 million and $13.5 million for the three months ended June 30, 2015 and 2014, respectively, an increase of $1.9 million or 14.0%. As a percentage of total net sales, SG&A expenses decreased to 33.1% for the three months ended June 30, 2015 compared to 36.4% for the same period in 2014.
Within the TASER Weapons segment, SG&A remained relatively consistent at $10.8 million during the three months ended June 30, 2015 as compared to $10.9 million for three months ended June 30, 2014. Within the Axon segment, SG&A increased $2.0 million, or 74.6%, to $4.6 million during the three months ended June 30, 2015 as compared to $2.6 million for the same period in 2014.
Of the $1.9 million increase in consolidated salaries, benefits, bonus and stock-based compensation during the three months ended June 30, 2015 as compared to the same period in 2014, the TASER Weapons segment increased approximately $0.8 million while the Axon segment increased $1.1 million. The incremental increase in the TASER Weapons segment was primarily attributable to the Company's efforts to build out international and direct sales teams internally. The increase in the Axon segment relates to additional engineering and software development personnel hired to continue expanding upon existing product offerings as well as the development of new mobile and cloud technologies. The decrease in stock-based compensation during the second quarter of 2015 was driven by forfeitures related to the departure of employees within the TASER Weapons segment, and a continued decrease for the remainder of fiscal 2015 is not expected.
Sales and marketing expenses along with consulting and lobbying expenses increased approximately $1.2 million on a consolidated basis during the three months ended June 30, 2015 as compared to the same period in 2014. The Company is continuing to drive growth internationally in both segments of the business, and is doing so through increased marketing and promotional activities as well through engaging international sales and consulting experts. Lobbying expenses are also increasing in both segments as the Company engages third party experts to present at technology summits and other similar events to drive increased awareness of the Company's products. The increase in travel and meals of $0.4 million during current quarter is a function of the Company's increase in direct sales efforts.
Partially offsetting the above increases, legal, professional and accounting expenses in the TASER Weapons segment decreased $1.9 million during the three months ended June 30, 2015 compared to 2014, primarily related to the settlement of two commercial litigation cases with two former distributors in 2014. The remaining reduction in professional fees is primarily attributable to an overall continued decrease in litigation matters.
The remaining increase in SG&A balances during the three months ended June 30, 2015 as compared to the same period in 2014 is attributable to the overall growth of the business. The Company expects to see additional increases in SG&A throughout the remainder of 2015 as it continues to invest in the strategic initiatives discussed above.

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Table of Contents

Research and Development Expenses
Research and development (“R&D”) expenses were $5.9 million and $3.5 million for the three months ended June 30, 2015 and 2014, respectively, an increase of $2.5 million, or 70.9%. As a percentage of net sales, R&D increased to 12.6% for the three months ended June 30, 2015 compared to 9.3% for the same period in 2014. The Company's TASER Weapons and Axon segments made up $0.3 million and $2.2 million of the total increase, respectively. Of the $2.2 million increase in R&D for the Axon segment, $1.5 million and $0.6 million related to salaries and benefits and consulting services, respectively. The Company remains focused on growing the Axon segment as it adds headcount and external resources to develop new products and services for cloud, mobile and wearable technologies along with adding new functionality and capabilities to existing software platforms as well as camera hardware and related accessories.
Provision for Income Taxes
The provision for income taxes was $3.5 million for the three months ended June 30, 2015, which was an effective tax rate of 32.6%. Our estimated full year effective income tax rate for 2015, before discrete period adjustments, is approximately 32.9%, which is below the statutory rate due to the impact of the domestic production activities deduction, as well as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, but also increased by the impact of state taxes and non-deductible expenses for items such as ISO stock option expense, meals and entertainment, and lobbying fees. The Company has nearly completed the full implementation of its new international structure, which is new for 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.  The Company has chosen this method, from among those available to it, because of its expectation that it will produce the least amount of variability during the year.
Net Income
Our net income improved by $2.2 million to $6.1 million for the three months ended June 30, 2015 compared to $3.9 million for the same period in 2014. Net income per basic and diluted share was $0.11 for the three months ended June 30, 2015 compared to $0.07 per basic and diluted share for the same period in 2014.



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Six Months Ended June 30, 2015 Compared to the Six Months Ended June 30, 2014
The following table presents data from our statements of operations as well as the percentage relationship to total net sales of items included in our statements of operations (dollars in thousands):
 
Six Months Ended June 30,
 
2015
 
2014
Net sales
$
91,475

 
100.0
%
 
$
73,360

 
100.0
%
Cost of products sold and services delivered
30,884

 
33.8

 
27,938

 
38.1

Gross margin
60,591

 
66.2

 
45,422

 
61.9

Operating expenses:
 
 
 
 
 
 
 
Sales, general and administrative
30,008

 
32.8

 
27,293

 
37.2

Research and development
10,464

 
11.4

 
7,061

 
9.6

Total operating expenses
40,472

 
44.2

 
34,354

 
46.8

Income from operations
20,119

 
22.0

 
11,068

 
15.1

Interest and other income, net
33

 
0.0

 
72

 
0.1

Income before provision for income taxes
20,153

 
22.0

 
11,140

 
15.2

Provision for income taxes
6,845

 
7.5

 
3,865

 
5.3

Net income
$
13,308

 
14.5
%
 
$
7,275

 
9.9
%
Net sales to the U.S. and other countries are summarized as follows (dollars in thousands):
 
Six Months Ended June 30,
 
2015
 
2014
United States
$
74,196

 
81.1
%
 
$
57,731

 
78.7
%
Other Countries
17,279

 
18.9

 
15,629

 
21.3

Total
$
91,475

 
100.0
%
 
$
73,360

 
100.0
%


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Table of Contents

Net Sales
Net sales by product line were as follows for the six months ended June 30, 2015 and 2014 (dollars in thousands):
 
Six Months Ended June 30,
 
Dollar
Change
 
Percent
Change
 
2015
 
2014
 
 
TASER Weapons segment:
 
 
 
 
 
 
 
 
 
 
 
TASER X26P
$
28,356

 
31.0
%
 
$
18,155

 
24.7
%
 
$
10,201

 
56.2
 %
TASER X2
18,637

 
20.4

 
9,319

 
12.7

 
9,318

 
100.0

TASER X26
4,223

 
4.6

 
11,815

 
16.1

 
(7,592
)
 
(64.3
)
TASER C2
961

 
1.1

 
938

 
1.3

 
23

 
2.5

TASER M26
322

 
0.4

 
310

 
0.4

 
12

 
3.9

TASER XREP

 
0.0

 
2,615

 
3.6

 
(2,615
)
 
(100.0
)
Single cartridges
18,233

 
19.9

 
17,474

 
23.8

 
759

 
4.3

Extended warranties including TAP
2,822

 
3.1

 
2,756

 
3.8

 
66

 
2.4

Other
2,612

 
2.9

 
1,768

 
2.4

 
844

 
47.7

TASER Weapons segment
76,166

 
83.3

 
65,150

 
88.8

 
11,016

 
16.9

Axon segment:

 


 

 


 

 


Axon solutions
6,761

 
7.4

 
3,072

 
4.2

 
3,689

 
120.1

Evidence.com
4,591

 
5.0

 
1,687

 
2.3

 
2,904

 
172.1

TASER Cam
2,986

 
3.3

 
2,745

 
3.7

 
241

 
8.8

Extended warranties including TAP
637

 
0.7

 

 
0.0

 
637

 
*

Other
334

 
0.4

 
706

 
1.0

 
(372
)
 
(52.7
)
Axon segment
15,309

 
16.7

 
8,210

 
11.2

 
7,099

 
86.5

Total net sales
$
91,475

 
100.0
%
 
$
73,360

 
100.0
%
 
$
18,115

 
24.7


* Not meaningful
Net unit sales for the TASER Weapons handles and other products and Axon segment products are as follows:
 
Six Months Ended June 30,
 
Unit
Change
 
Percent
Change
 
2015
 
2014
 
 
TASER X26P
32,287

 
21,207

 
11,080

 
52.2
 %
TASER X2
17,474

 
7,979

 
9,495

 
119.0

TASER X26
3,523

 
11,445

 
(7,922
)
 
(69.2
)
TASER M26
1,243

 
878

 
365

 
41.6

TASER C2
3,984

 
3,541

 
443

 
12.5

Cartridges
753,881

 
739,050

 
14,831

 
2.0

Axon Flex
9,162

 
3,599

 
5,563

 
154.6

Axon Body
10,603

 
5,427

 
5,176

 
95.4

TASER Cam
6,106

 
5,207

 
899

 
17.3

Net sales were $91.5 million and $73.4 million for the six months ended June 30, 2015 and 2014, respectively, an increase of $18.1 million or 24.7%. Net sales for the TASER Weapons segment were $76.2 million and $65.2 million for six months ended June 30, 2015 and 2014, respectively, an increase of $11.0 million or 16.9%. Net sales for the Axon segment were $15.3 million and $8.2 million for the six months ended June 30, 2015 and 2014, respectively, an increase of $7.1 million or 86.5%.
The increase in net sales for the six months ended June 30, 2015 compared to same period in 2014 in the TASER Weapons segment was primarily driven by increased adoption of the TASER X26P smart weapon, as customers continue to upgrade their

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Table of Contents

legacy CEWs to the new X26P and TASER X2 smart weapons. In the Axon segment, the increase in net sales was driven by the continued adoption of the Axon on-officer cameras and Evidence.com application in the law enforcement markets. International customers continued to be a steady contributor to the results with $17.3 million in the six months ended June 30, 2015 versus $15.6 million for the same period in 2014. During 2014, the Company established TASER International, B.V. located in Amsterdam, Netherlands, that serves as our international headquarters to facilitate transactions with existing customers as well as allow for continued expansion into other foreign markets. Additionally, subsequent to June 30, 2015, we acquired Tactical Safety Responses Limited, our licensed distributor of TASER CEWs and on-officer cameras in the United Kingdom ("UK"). We believe this investment will help expand TASER's ability to bring key public safety technologies to its partners across the UK by growing its on-the-ground sales and support team.

To gain more immediate feedback regarding activity for Axon camera products and Evidence.com services, we also review bookings for these products. We consider bookings to be a statistical measure defined as the sales price of orders (not invoiced sales), net of cancellations, placed in the relevant fiscal period, regardless of when the products or services ultimately will be provided. Some bookings will be invoiced in subsequent years. Due to municipal government funding rules, certain of the future year amounts included in bookings are subject to budget appropriation or other contract cancellation clauses. Although TASER has entered into contracts for the delivery of products and services in the future and anticipates the contracts will be completed, if agencies do not appropriate funds in future year budgets, or enact a cancellation clause, revenue associated with these bookings will not ultimately be recognized, resulting in a future reduction to bookings. Bookings related to Evidence.com and the Axon product line were $53.6 million and $17.3 million during the six months ended June 30, 2015 and 2014, respectively, and increase of $36.3 million or 210.3%.

The chart below illustrates the Company's quarterly bookings for each of the previous six fiscal quarters (in thousands):
Cost of Products Sold and Services Delivered
Cost of products sold and services delivered was $30.9 million and $27.9 million for the six months ended June 30, 2015 and 2014, respectively, an increase of $2.9 million or 10.5%. As a percentage of net sales, cost of products sold and services delivered decreased to 33.8% for the six months ended June 30, 2015 compared to 38.1% during the same period in 2014.
Within the TASER Weapons segment, cost of products sold increased $0.8 million, or 3.6%, to $22.4 million for the six months ended June 30, 2015, compared to $21.6 million in 2014, but decreased as a percentage of sales to 29.4% from 33.1%. The net decrease in cost of products sold as a percent of sales primarily reflects increased leverage of fixed overhead costs due to higher production levels, higher average selling prices, as well as the completion of the depreciation of our automated cartridge production line at the end of the fourth quarter 2014.
Within the Axon segment, cost of products sold and services delivered were $8.5 million for the six months ended June 30, 2015, an increase of $2.2 million, or 34.1% from the same period in 2014. The increase was driven by growing sales in this segment and increased data storage costs as more agencies utilize Evidence.com, as well as growth in the newly established professional services team. Cost of products sold and services delivered as a percentage of sales decreased to 55.7% for the six months ended June 30, 2015 from 77.4% for the same period in 2014. The decrease was driven by higher sales and by improvements to our Evidence.com SaaS margins. There are a number of fixed costs for the Axon segment which, as we generate additional traction in the business, we expect to remain relatively stable and should allow for lower cost of services delivered as a percentage of service revenue.

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Gross Margin
Gross margin increased $15.2 million to $60.6 million for the six months ended June 30, 2015 compared to $45.4 million for 2014. As a percentage of net sales, gross margin increased to 66.2% for the six months ended June 30, 2015 compared to 61.9% for the six months ended June 30, 2014. The increase is attributable to stronger sales and margins in the TASER Weapons segment, and also improved margins in the Axon segment as it continues to scale and leverage fixed costs. Gross margin also improved due to increased leveraging of fixed overhead costs, as the Company increased production activity in anticipation of higher future sales volumes. As a percentage of net sales, gross margin for the TASER Weapons segment was 70.6% and 66.9% for the six months ended June 30, 2015 and 2014, respectively, while the same measure for these periods for the Axon segment were 44.3% and 22.6%, respectively. The Company is continuing to see improvements in margins for the TASER Weapons and Axon segments individually, due primarily to additional leveraging of fixed costs and higher average selling prices. However, as the Axon segment continues to become a greater percentage of total sales, the Company may experience a decrease in overall margins as a percentage of sales.

Sales, General and Administrative Expenses
Sales, general and administrative (“SG&A”) expenses were comprised as follows for the six months ended June 30, 2015 and 2014 (dollars in thousands):
 
Six Months Ended June 30,
 
Dollar
Change
 
Percent
Change
 
2015
 
2014
 
 
Salaries, benefits and bonus
$
10,989

 
$
8,230

 
$
2,759

 
33.5
 %
Stock-based compensation
1,858

 
1,658

 
200

 
12.1

Legal, professional and accounting
2,744

 
5,956

 
(3,212
)
 
(53.9
)
Sales and marketing
4,322

 
3,553

 
769

 
21.6

Consulting and lobbying services
2,641

 
1,728

 
913

 
52.8

Travel and meals
2,864

 
2,298

 
566

 
24.6

Building
1,676

 
1,506

 
170

 
11.3

Supplies
1,138

 
881

 
257

 
29.2

Depreciation and amortization
694

 
612

 
82

 
13.4

Liability insurance
682

 
599

 
83

 
13.9

Other
400

 
272

 
128

 
47.1

Total sales, general and administrative expenses
$
30,008

 
$
27,293

 
$
2,715

 
9.9

Sales, general, and administrative as a percentage of net sales
32.8
%
 
37.2
%
 
 
 
 
SG&A expenses were $30.0 million and $27.3 million for the six months ended June 30, 2015 and 2014, respectively, an increase of $2.7 million or 9.9%. As a percentage of total net sales, SG&A expenses decreased to 32.8% for the six months ended June 30, 2015 compared to 37.2% for the same period in 2014.
Within the TASER Weapons segment, SG&A decreased $0.7 million, or 3.0%, to $21.5 million during the six months ended June 30, 2015 as compared to $22.2 million for six months ended June 30, 2014. Within the Axon segment, SG&A increased $3.4 million, or 66.2%, to $8.5 million during the six months ended June 30, 2015 as compared to the same period in 2014.
Of the $3.0 million increase in consolidated salaries, benefits, bonus and stock-based compensation in the six months ended June 30, 2015 as compared to the same period in 2014, the TASER Weapons segment increased approximately $1.1 million while the Axon segment increased $1.9 million. The incremental increase in the Weapons segment was primarily attributable to the Company's efforts to build out international and direct sales teams internally. The increase in the Axon segment relates to additional engineering and software development personnel hired to continue expanding upon existing product offerings as well as the development of new mobile and cloud technologies.
Sales and marketing expenses along with consulting and lobbying expenses increased approximately $1.7 million on a consolidated basis during the six months ended June 30, 2015 as compared to the same period in 2014. The Company is continuing to drive growth internationally in both segments of the business, and is doing so through increased marketing and promotional activities as well through engaging international sales and consulting experts. Lobbying expenses are also increasing in both segments as the Company engages third party experts to present at tech summits and other similar events to drive increased

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Table of Contents

awareness of the Company's products. The increase in travel and meals of $0.6 million during this period is a function of the Company's increase in direct sales efforts.
Partially offsetting the above increases, legal, professional and accounting expenses in the TASER Weapons segment deceased $3.2 million during the six months ended June 30, 2015 compared to 2014, primarily related to the settlement of two commercial litigation cases that with two former distributors that totaled approximately $2.2 million in 2014. The remaining reduction in professional fees is attributable to an overall continued decrease in litigation matters.
The remaining increase in SG&A balances during the six months ended June 30, 2015 as compared to the same period in 2014 is attributable to the overall growth of the business. The Company expects to see additional increases in SG&A throughout the remainder of 2015 as it continues to invest in the strategic initiatives discussed above.
Research and Development Expenses
Research and development (“R&D”) expenses were $10.5 million and $7.1 million for the six months ended June 30, 2015 and 2014, respectively, an increase of $3.4 million or 48.2%. As a percentage of net sales, R&D increased to 11.4% for the six months ended June 30, 2015 compared to 9.6% for 2014, respectively. The Company's TASER Weapons and Axon segments made up $0.7 million and $2.7 million of the total increase, respectively. Of the $2.7 million increase in R&D for the Axon segment, $1.9 million and $0.6 million related to salaries and benefits and consulting services, respectively. The Company remains focused on growing the Axon segment as it adds headcount and external resources to develop new products and services for cloud, mobile and wearable technologies along with adding new functionality and capabilities to existing software platforms as well as camera hardware and related accessories.
Provision for Income Taxes
The provision for income taxes was $6.8 million for the six months ended June 30, 2015, which was an effective tax rate of 34.0%. Our estimated full year effective income tax rate for 2015, before discrete period adjustments, is approximately 36.6%, which is below the statutory rate due to the impact of the domestic production activities deduction, as well as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, but also increased by the impact of state taxes and non-deductible expenses for items such as ISO stock option expense, meals and entertainment, and lobbying fees. The Company has nearly completed the full implementation of its new international structure, which is new for 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.  The Company has chosen this method, from among those available to it, because of its expectation that it will produce the least amount of variability during the year.
Net Income
Our net income improved by $6.0 million to $13.3 million for the six months ended June 30, 2015 compared to $7.3 million for the same period in 2014. Net income per basic and diluted share was $0.25 and $0.24 for the six months ended June 30, 2015, respectively, compared to $0.14 and $0.13 per basic and diluted share, respectively, for the same period in 2014.


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Table of Contents

Liquidity and Capital Resources
Summary
As of June 30, 2015, we had $99.0 million of cash, cash equivalents and investments, an increase of $8.5 million from the end of 2014.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities (in thousands):
 
Six Months Ended June 30,
 
2015
 
2014
Operating activities
$
10,969

 
$
5,962

Investing activities
(27,196
)
 
(14,443
)
Financing activities
8,133

 
(7,872
)
Effect of exchange rate changes on cash and cash equivalents
81

 
25

Net decrease in cash and cash equivalents
$
(8,013
)
 
$
(16,328
)
Operating activities
Net cash provided by operating activities in the first six months of 2015 of $11.0 million consisted of $13.3 million in net income offset by the net decrease of non-cash income statement items totaling $1.6 million and decrease of $0.7 million for the net change in operating assets and liabilities. Included in the non-cash items were $1.4 million in depreciation and amortization expense, $3.2 million in stock-based compensation expense and $0.8 million of bond premium amortization. These additions were offset by an $6.2 million reduction related to excess tax benefit from stock-based compensation that is treated as a financing activity for cash flow purposes. The most significant increases to the portion of cash from operating activities related to the changes in operating assets and liabilities were a $5.6 million decrease in accounts receivable, an increase in deferred revenue of $3.3 million, and change in accounts payable, accrued liabilities and other liabilities of $3.6 million. The increase in deferred revenue is driven by the continued adoption of Axon products and services that are typically invoiced at inception of the contract, and recognized over the duration of the contract period as hardware and services are delivered. Of the increase in deferred revenue, $3.3 million resulted from increased hardware deferred revenue from TASER Assurance Program ("TAP") sales along with increased deferred warranty revenue of $0.9 million, which was partially offset by a decrease of $1.0 million related to prepayments for Axon SaaS services. Offsetting these increases in cash from operating activities were increased prepaid expenses and other assets of $8.2 million and an increase in inventory of $5.2 million in anticipation of higher sales for the remainder of 2015.

Net cash provided by operating activities in the first six months of 2014 of $6.0 million was primarily driven by $7.3 million of net income for the period, adjusted for the net add-back of non-cash expenses of $7.2 million, including depreciation and amortization expense of $2.3 million, deferred income taxes of $7.9 million and stock-based compensation expense of $2.7 million, offset by a $5.5 million reduction related to excess tax benefit from stock-based compensation. Cash from operating activities reflected a net decrease of $8.5 million related to the net change in assets and liabilities. The net decrease in operating cash was primarily driven by an increase in prepaid expenses and other assets of $3.7 million, increased inventory of $4.0 million, and a reduction of accounts payable and accrued liabilities of $3.3 million. The increase in inventory was due to normal timing fluctuations and anticipated sales. The decrease in accounts payable and accrued liabilities was driven by the payment of $4.5 million during the second quarter of 2014 on the judgment in the AA & SABA Consultants, Inc. v. TASER litigation. Offsetting these reductions to operating cash inflows was an increase to operating cash flow of $3.9 million resulting from an increased balance of deferred revenue. The increase in deferred revenue primarily related to approximately $1.8 million from growing warranty sales and $0.8 million from increased Evidence.com sales.

Investing activities
Primarily as a result of investing cash generated from operating activities, we used $27.2 million for investing activities during the first six months of 2015. Purchases of investments, net of calls and maturities, were $17.4 million. In May, the Company acquired the net assets MediaSolv for an aggregate purchase price of $8.8 million including $7.8 million of cash. The Company also invested $2.0 million in the purchase of property and equipment and intangible assets, excluding the assets acquired in the MediaSolv acquisition.


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We used $14.4 million for investing activities during the first six months of 2014 primarily as a result of investing cash generated from operating activities. Purchases of investments, net of calls and maturities, were $13.1 million. The Company also invested $1.3 million in the purchase of property and equipment and intangibles.
Financing activities
Net cash provided by financing activities was $8.1 million during the first six months of 2015. This was comprised primarily of $2.6 million of proceeds from the exercise of stock options and $6.2 million of excess tax benefit from stock proceeds offset by $0.6 million of payroll taxes funded by the Company on behalf of employees who net-settled stock awards during the period.

During the first six months of 2014, net cash used in financing activities was $7.9 million and was primarily attributable to the repurchase of $19.6 million of our common stock, which was purchased for a weighted average cost of $13.16 per share, offset by $11.7 million of stock option exercises and other share-based payment activities.
Liquidity and Capital Resources
Our most significant sources of liquidity continue to be funds generated by operating activities and available cash and cash equivalents. In addition, our $10.0 million revolving credit facility is available for additional working capital needs or investment opportunities. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. 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%. At June 30, 2015 and December 31, 2014, there were no borrowings under the line. As of June 30, 2015, we had letters of credit outstanding of $3.0 million, leaving the net amount available for borrowing of approximately $7.0 million. The facility matures on July 31, 2016. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our revolving credit facility.
Our agreement with the bank requires us 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 December 31, 2015, the Company’s tangible net worth ratio was 0.42:1 and its fixed charge coverage ratio was 2.81:1. Accordingly, the Company was in compliance with these covenants.
Based on our strong balance sheet and the fact that we had only approximately $50,000 total long-term debt and capital lease obligations at June 30, 2015, we believe financing will be available, both through our existing credit line and possible additional financing. However, there is no assurance that such funding will be available on terms acceptable to us, or at all.
We believe funds generated from our expected results of operations, as well as available cash and investments, will be sufficient to finance our operations and strategic initiatives for 2015 and the foreseeable future. From time to time, our board of directors considers repurchases of our common stock. Further repurchases of our common stock will take place on the open market, will be financed with available cash and are subject to authorization as well as market and business conditions.

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 products. 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 June 30, 2015, the Company had outstanding letters of credit of approximately $3.0 million. Of that amount, $2.7 million are expected to expire in May 2017 with the remaining amounts expected to settle in the near term. Additionally, the Company had approximately $2.4 million of outstanding surety bonds at June 30, 2015, with $2.2 million expiring in July 2018 with the remaining $0.2 million expected to be released during the third quarter of 2015 with the completion of the remaining contractual performance terms.

Critical Accounting Estimates
We have identified the following accounting estimates as critical to our business operations and the understanding of our results of operations. The preparation of this Quarterly Report on Form 10-Q requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our unaudited condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. While we don’t believe that a change in these estimates is reasonably likely, there can be no assurance that our actual results will not differ from these estimates. The effect of these estimates on our business operations is discussed below.

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Product Warranties
The Company warranties its CEWs, Axon cameras and E-Docks 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 our standard warranty are charged to cost of products sold and services delivered when revenue is recorded for the related product. We estimate future warranty costs based on historical data related to returns and warranty costs on a quarterly basis and apply this rate to current product anticipated returns from our customers. We have also historically increased our reserve amount if we become aware of a component failure that could result in larger than anticipated returns from our customers. The accrued warranty liability is reviewed quarterly to evaluate whether 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. As of June 30, 2015 and December 31, 2014, our reserve for warranty returns was approximately $0.5 million and $0.7 million, respectively. Warranty (recovery) expense for the six months ended June 30, 2015 and 2014 was $(19,000) and $0.4 million, respectively. The decrease in warranty reserve and related expense as of and for the six months ended June 30, 2015 was primarily driven by the Company's completion of its replacement program for existing Evidence Transfer Machine ("ETM") units in the field being upgraded to the newer E-Dock product line. Additionally, the Company has experienced decreased warranty claims in 2015 on its other existing products which has led to lower warranty reserves. As the Company continues investing in the development of new technologies it will continue to assess the adequacy of its reserves related to inherent uncertainties with new product offerings.
Revenue related to separately-priced extended warranties is recorded as deferred revenue at its contractual amount and subsequently recognized in net sales on a straight-line basis over the delivery period. Costs related to extended warranties are charged to cost of products sold and services delivered when incurred.
Inventory
Inventories are stated at the lower of cost or market, with cost determined using the weighted average cost of raw materials, which approximates the first-in, first-out (“FIFO”) method, and an allocation of manufacturing labor and overhead costs. The allocation of manufacturing labor and overhead costs includes management’s judgments of what constitutes normal capacity of our production facilities and a determination of what costs are considered to be abnormal fixed production costs, which are expensed as current period charges. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories to their net realizable value. These provisions are based on our best estimates after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions and other factors. Our reserve for excess and obsolete inventory increased to $1.5 million at June 30, 2015, compared to $1.4 million at December 31, 2014. This increase was primarily related to reserves on components the Company may not be able to use in production of certain Axon camera products. In the event that actual excess, obsolete or slow-moving inventories differ from these estimates, changes to inventory reserves may be necessary.
Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable
We derive our revenue from two primary sources: (1) the sale of physical products, including our CEWs, Axon cameras, corresponding hardware extended warranties, and related accessories such as E-docks, cartridges and batteries, and (2) subscription to our Evidence.com digital evidence management SaaS (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, we also recognize training and other 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. 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.
Evidence.com, Axon cameras and related accessories 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. Axon equipment represents a deliverable that is provided to the customer at the time of sale, while Evidence.com services are provided over the specified term of the contract. 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. In certain circumstances, not all requirements are met for the recognition of revenue relative to equipment sold in conjunction with Evidence.com at the time the equipment is provided to customers. In such

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circumstances, based on limitations associated with the allocation of arrangement consideration, part of the revenue may be recognized ratably over the specified term of the contract, or when all conditions for revenue recognition are met, if sooner.
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. We generally bill customers in annual installments.
Sales are typically made on credit and we generally do not require collateral. We perform ongoing credit evaluations of our customers’ financial condition and maintain an allowance for estimated potential losses. Uncollectible accounts are written off when deemed uncollectible, and accounts and notes receivable are presented net of an allowance for doubtful accounts. This allowance represents our best estimate and is based on our judgment after considering a number of factors including third-party credit reports, actual payment history, customer-specific financial information and broader market and economic trends and conditions. In the event that actual uncollectible amounts differ from our estimates, additional expense could be necessary.
Valuation of Goodwill, Intangibles and Long-lived Assets
The recoverability of the goodwill is evaluated and tested for impairment at least annually during the fourth quarter or more often, if and when circumstances indicate that goodwill may not be recoverable. Finite-lived intangible assets and other long-lived assets are amortized over their useful lives. We evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and intangible assets may warrant revision or that the remaining balance of these assets, including intangible assets with indefinite lives, may not be recoverable.
Circumstances that might indicate long-lived assets might not be recoverable 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 our products are branded and marketed. When performing a review for recoverability, we estimate 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.
Income Taxes
We recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carry forwards.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Management must also assess whether uncertain tax positions as filed could result in the recognition of a liability for possible interest and penalties if any. We have completed research and development tax credit studies which identified approximately $10.5 million in tax credits for federal, Arizona and California income tax purposes related to the 2003 through 2015 tax years. Management determined that it was more likely than not that the full benefit of the research and development tax credit would not be sustained on examination and accordingly, has established a liability for unrecognized tax benefits of $2.8 million as of June 30, 2015. In addition, we established a $0.2 million liability related to uncertain tax positions for certain state income tax liabilities, for a total unrecognized tax benefit at June 30, 2015 of $3.0 million. The Company recently completed an IRS audit for the tax year 2012, and as of June 30, 2015, the amount of unrecognized tax benefits decreased by $0.4 million.  The Company does not expect a significant increase or decrease in the total amount of unrecognized tax benefits within the next 12 months. Should the unrecognized tax benefit of $3.0 million be recognized, the Company’s effective tax rate would be favorably impacted. Approximately $1.2 million of the unrecognized tax benefit associated with research and development credits has been netted against the research and development credit deferred tax asset. Our estimates are based on the information available to us at the time we prepare the income tax provisions. Our income tax returns are subject to audit by federal, state, and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.

Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting or tax laws in the U.S. and overseas, or changes in other facts or circumstances. In addition, we recognize liabilities for potential U.S. tax contingencies

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based on our estimate of whether, and the extent to which, additional taxes may be due. If we determine that payment of these amounts is unnecessary, or if the recorded tax liability is less than our current assessment, we may be required to recognize an income tax benefit, or additional income tax expense, respectively, in our consolidated financial statements.

In preparing our consolidated financial statements, management assesses the likelihood that our deferred tax assets will be realized from future taxable income. In evaluating our ability to recover our deferred income tax assets, management considers all available positive and negative evidence, including operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if we determine that it is more likely than not that some portion or all of the net deferred tax assets will not be realized.

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 June 30, 2015, the Company would need to generate approximately $42.3 million of pre-tax book income in order to realize the net deferred tax assets for which a benefit has been recorded. This estimate considers the reversal of approximately $9.2 million of taxable temporary differences, which produce $3.5 of deferred tax liabilities. We also have state NOLs of $0.2 million, which expire at various dates between 2024 and 2031, and which produce deferred tax assets of approximately $6,000. We anticipate the Company’s future income to continue to trend upward from our 2015 results, with sufficient pre-tax book income to realize a large portion of our deferred tax assets. As such, we have not recorded a valuation allowance on our deferred tax assets as of June 30, 2015, with the exception of a reserve of approximately $0.5 million that has been recorded due to specific income projections in years in which certain tax assets are set to expire.
Stock-Based Compensation
We have historically granted stock-based compensation to key employees and non-employee directors as a means of attracting and retaining quality personnel. We have utilized restricted stock units and stock options; however, no stock options have been issued since 2011. The fair value of restricted stock units is estimated as the closing price of our common stock on the date of grant. We estimate the fair value of granted stock options by using the Black-Scholes-Merton option pricing model, which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their stock options before exercising them (expected term), the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not vest (forfeitures). The expense for both restricted stock units and stock options is recorded over the life of the grant, net of forfeitures.
We have granted a total of approximately 1.9 million performance-based awards (options and restricted stock units) of which approximately 0.4 million are outstanding as of June 30, 2015, the vesting of which is contingent upon the achievement of certain performance criteria including the successful development and market acceptance of future product introductions as well as our future sales targets and operating performance. These awards will vest and compensation expense will be recognized based on management’s best estimate of the probability of the performance criteria being satisfied using the most currently available projections of future product adoption and operating performance, adjusted at each balance sheet date. Changes in the subjective and probability-based assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized in our statements of operations.
Contingencies and Accrued Litigation Expense
We are subject to the possibility of various loss contingencies including product-related litigation, arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. Refer to Note 10 of our condensed consolidated financial statements for further discussion.


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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We typically invest in a limited number of financial instruments, consisting principally of investments in money market accounts, certificates of deposit and corporate and municipal bonds with a typical long-term debt rating of “AA” or better by any nationally recognized statistical rating organization, denominated in U.S. dollars. All of our cash equivalents and investments are treated as “held-to-maturity.” Investments in fixed-rate interest-earning instruments carry a degree of interest rate risk as their market value may be adversely impacted due to a rise in interest rates. As a result, we may suffer losses in principal if we sell securities that have declined in market value due to changes in interest rates. However, because we classify our debt securities as “held-to-maturity” based on our intent and ability to hold these instruments to maturity, no gains or losses are recognized due to changes in interest rates. These securities are reported at amortized cost. As of June 30, 2015, we estimate that a 10 basis point increase or decrease in interest rates would result in a change in the fair market value of these instruments of less than $0.1 million and would result in a change in annual interest income of less than $0.1 million.
Additionally, we have access to a line of credit borrowing facility which bears interest at varying rates, currently at LIBOR plus 1.5% or Prime less 0.75%. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit, which totaled $3.0 million at June 30, 2015. At June 30, 2015, there was no amount outstanding under the line of credit and the available borrowing under the line of credit was approximately $7.0 million. We have not borrowed any funds under the line of credit since its inception; however; should we need to do so in the future, such borrowings could be subject to adverse or favorable changes in the underlying interest rate.
Exchange Rate Risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro related to transactions by TASER Europe, and to the Pound related to transactions by TASER International B.V. To date, we have not engaged in any currency hedging activities, although we may do so in the future. Fluctuations in currency exchange rates could harm our business in the future.
The majority of our sales to international customers are transacted in U.S. dollars and therefore, are not subject to exchange rate fluctuations on these transactions. However, the cost of our products to our customers increases when the U.S. dollar strengthens against their local currency, and the Company may have more sales and expenses denominated in foreign currencies in 2015 which would increase its foreign exchange rate risk.


Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2015 to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the fiscal quarter ended June 30, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings
The discussion of legal proceedings in Note 10 to the unaudited condensed consolidated financial statements included in PART I, ITEM 1 of this Form 10-Q is incorporated by reference herein.

Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2014, under the heading “Risk Factors,” which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially, adversely affect our business, financial condition and/or operating results. Except as disclosed below, there has been no material change in our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014 and Form 10-Q for the quarter ended March 31, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item 3. Defaults Upon Senior Securities
None.

Item 4. Mine Safety Disclosures
None.

Item 5. Other Information
None.
 

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Item 6. Exhibits
31.1
 
Principal Executive Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2
 
Principal Financial Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32
 
Principal Executive Officer and Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document
101.LAB
 
XBRL Taxonomy Label Linkbase Document
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document



 



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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
TASER INTERNATIONAL, INC.
 
 
 
 
 
 
 
 
Date:
August 6, 2015
 
 
 
 
 
By:
 
/s/ PATRICK W. SMITH
 
 
 
 
Chief Executive Officer, Director
 
 
 
 
Date:
August 6, 2015
By:
 
/s/ DANIEL M. BEHRENDT
 
 
 
 
Chief Financial Officer
 
 
 
 
(Principal Financial and
 
 
 
 
Accounting Officer)


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Index to Exhibits

Exhibit
Number
 
Description
31.1
 
Principal Executive Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2
 
Principal Financial Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32
 
Principal Executive Officer and Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document
101.LAB
 
XBRL Taxonomy Label Linkbase Document
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document


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