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TASR > SEC Filings for TASR > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for TASER INTERNATIONAL INC


7-May-2013

Quarterly Report


Item 2. 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 March 31, 2013, and results of operations for the three months ended March 31, 2013 and 2012. 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, 2012.

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: the impact of recently issued and adopted accounting standards and guidance; estimated amortization charges in future years and our projected effective tax rate for 2013; our expectations about unrecognized tax benefits and deferred income taxes; assumptions about the future vesting of outstanding stock options and the amortization of costs relating thereto; our litigation strategy; future changes to our accounting estimates; the outcome of pending litigation against us; the sufficiency of our valuation reserves, including warranty, accounts receivable, deferred taxes and inventory reserves; the sufficiency of our capital resources and the availability of financing to the Company and our strategy with respect to hedging activities. 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 dependence on sales of our TASER X26, X26P and X2 CEWs; the acceptance of our EVIDENCE.com software model; our ability to design, introduce and sell new products; delays in development schedules; rapid technological change and competition; product defects; breach of our security measures resulting in unauthorized access to customer data; outages and disruptions relating to our EVIDENCE.com service; budgetary and political constraints of prospects and customers; the length of our sales cycle and our ability to realize benefits from our marketing and selling efforts; 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; 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; the adverse effects that could result from our products being classified as firearms by the United States Bureau of Alcohol and Firearms; our compliance with regulations governing the environment, including but not limited to, regulations within the European Union; new regulations relating to conflict minerals; our dependence on third party suppliers for key components of our products; component shortages, including our dependence on foreign suppliers for key components; rising costs of raw materials and transportation relating to petroleum prices; our ability to manage our growth; our ability to increase manufacturing production to meet demand; establishment and expansion of our direct and indirect distribution channels; our ability to pursue sales directly with customers; risks relating to acquisitions and joint ventures; catastrophic events; fluctuations in quarterly operating results; foreign currency fluctuations; counterparty risks relating to cash balances held in excess of FDIC insurance limits; employee retention risks and other factors identified in documents filed by us with the Securities and Exchange Commission, including those set forth in our Form 10-K.

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") 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.


Table of Contents

Results of Operations

Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012

The following table sets forth, for the periods indicated, our unaudited consolidated statements of operations as well as the percentage relationship to total net sales of items included in our consolidated statements of operations (dollars in thousands):

                                                 Three Months Ended March 31,                  Increase / (Decrease)
                                               2013                       2012                    $               %
Net sales                              $ 30,434        100.0 %    $ 25,641        100.0 %    $     4,792           18.7 %
Cost of products sold and services
delivered                                11,983         39.4        10,400         40.6            1,583           15.2

Gross margin                             18,451         60.6        15,241         59.4            3,210           21.1
Sales, general and administrative
expenses                                 11,211         36.8         8,854         34.5            2,357           26.6
Research and development expenses         2,013          6.6         2,132          8.3             (120 )         (5.6 )
Litigation judgment recovery                -             -         (2,200 )       (8.6 )          2,200         (100.0 )
Gain on write down / disposal of
property and equipment, net                 (29 )       (0.1 )         -            -                (29 )            *

Income from operations                    5,257         17.3         6,455         25.2           (1,199 )        (18.6 )
Interest and other (expense) income,
net                                         (23 )       (0.1 )           7          0.0              (30 )       (425.4 )

Income before provision for income
taxes                                     5,234         17.2         6,462         25.2           (1,228 )        (19.0 )
Provision for income taxes                1,936          6.4         2,658         10.4             (722 )        (27.2 )

Net income                             $  3,298         10.8 %    $  3,804         14.8 %    $      (506 )        (13.3 )

Note: Table may not foot due to rounding differences.

* Not meaningful

Net Sales

Net sales by product line were as follows (dollars in thousands):



                                 Three Months Ended March 31,                Dollar       Percent
                                2013                      2012               Change        Change
  CEW segment:
  TASER X26             $  8,123        26.7 %    $ 10,711        41.8 %    $ (2,588 )       (24.2 )%
  TASER X2                 4,735        15.6         3,209        12.5         1,526          47.6
  TASER X26P               3,400        11.2            -            *         3,400             *
  TASER C2                   812         2.7           811         3.2             1             *
  M26                        220         0.7           247         1.0           (27 )       (10.9 )
  TASER X3                   199         0.7            14         0.1           185             *
  XREP                         2           *           155         0.6          (153 )       (98.7 )
  Single Cartridges        8,487        27.9         7,220        28.2         1,267          17.5
  Extended Warranties      1,028         3.4           849         3.3           179          21.1
  Other                      997         3.3         1,542         6.0          (545 )       (35.3 )

  CEW segment             28,003        92.0        24,758        96.6         3,245          13.1

  Video segment:
  AXON/EVIDENCE.com        1,244         4.1           224         0.9         1,020         455.4
  TASER Cam                  959         3.2           603         2.4           356          59.0
  Other                      228         0.7            56         0.2           172         307.1

  Video segment            2,431         8.0           883         3.4         1,548         175.3

  Total net sales       $ 30,434       100.0 %    $ 25,641       100.0 %    $  4,793          18.7

* not meaningful


Table of Contents

Net sales to the United States and other countries are summarized as follows:

                                          Three Months Ended
                                               March 31,
                                          2013            2012
                      United States           90 %           84 %
                      Other Countries         10             16

                      Total                  100 %          100 %

Net sales were $30.4 million and $25.6 million for the three months ended March 31, 2013 and 2012, respectively, an increase of $4.8 million, or 18.7%. The increase in net sales for the first quarter of 2013 compared to 2012 was primarily driven by the continued adoption of the TASER X2, which contributed $4.7 million of sales for the first quarter of 2013 compared to $3.2 million for the same period in the previous year. The TASER X26P, which was introduced in January 2013, also realized strong initial adoption in the first quarter with sales of $3.4 million. Sales of our X26 CEWs decreased $2.6 million for the first quarter of 2013 when compared to the same period in the previous year as a result of customers upgrading old CEW weapons to the X2 and X26P CEWs.

Revenue relative to our Video segment increased $1.5 million to $2.4 million for the three months ended March 31, 2013. During the second quarter of 2012, we began shipments of our AXON Flex on-officer camera, with our EVIDENCE.com software-as-a-service. We continue to generate traction with a number of new agencies adopting the platform. Bookings related to our Video segment in the current quarter increased to $1.4 million, compared $0.4 million in the same quarter in the prior year. We consider bookings to be a statistical measure defined as the sales price of orders placed in the relevant time period. Bookings are an indication of the activity the Company is seeing relative to AXON Flex and EVIDENCE.com. The Company has deliverables to meet, prior to recognizing revenue related to many of the orders. These statistics represent orders and not invoiced sales. Once invoiced, the revenue related to EVIDENCE.com is recognized over the requisite service period of one to five years.

International sales for the first quarter of 2013 and 2012 represented approximately $3.1 million, or 10%, and $4.0 million, or 16%, of total net sales, respectively. Sales in the international market generally are larger and occur more intermittently than in the domestic market due to the profile of the customers.

Cost of Products Sold

Cost of products sold were $12.0 million and $10.4 million for the three months ended March 31, 2013 and 2012, respectively, an increase of $1.6 million, or 15.2%. As a percentage of net sales, cost of products sold decreased to 39.4% in the first quarter of 2013 compared to 40.6% in the first quarter of 2012. The decrease in overall cost of products sold as a percentage of sales was driven by higher sales and by improvements to our Video segment margins. There are a number of fixed costs for the Video segment which, as we generate traction in the business, remain stable and allow for lower cost of products sold as a percentage of revenue. Cost of products sold for our CEW segment were $10.2 million for the three months ended March 31, 2013, or 36.5% of CEW segment sales, compared to $8.6 million for the three months ended March 31, 2012, or 34.8% of CEW segment sales.

Cost of products sold and services delivered for the Video segment were $1.8 million for the each of the three months ended March 31, 2013 and 2012. The slight decrease in costs for our Video segment for the first quarter of 2013 relates to the increase in sales for the Video segment offset by lower costs from exiting our data center in 2012 which decreased our cost of service delivered. As a percentage of revenue, cost of products sold and services delivered were 72.6% and 202.4% for the three months ended March 31, 2013 and 2012, respectively.

Gross Margin

Gross margin was $18.5 million and $15.2 million for the three months ended March 31, 2013 and 2012, respectively, an increase of $3.2 million, or 21.1%. Our gross margin as a percent of sales increased to 60.6% for the first quarter of 2013 compared to 59.4% for the first quarter of 2012, a result of the factors discussed above under cost of products sold.


Table of Contents

Sales, General and Administrative Expenses

For the three months ended March 31, 2013 and 2012, sales, general and
administrative expenses were comprised of the following (dollars in thousands):



                                                           Three Months Ended March 31,
                                                                                $             %
                                                  2013          2012         Change        Change
Salaries, benefits and bonus                    $  3,630       $ 2,685       $   945          35.2 %
Legal, professional and accounting fees            1,882         1,718           164           9.5
Travel and meals                                     813           696           117          16.8
Stock-based compensation                             731           547           184          33.6
Consulting and lobbying                              562           568            (6 )        (1.1 )
Depreciation and amortization                        321           429          (108 )       (25.2 )
Sales and marketing                                  967           784           183          23.3
D&O and liability insurance                          505           364           141          38.7
Other                                              1,800         1,063           737          69.3

Total                                           $ 11,211       $ 8,854       $ 2,357          26.6

Sales, general and administrative as a % of
net sales                                           36.8 %        34.5 %

Sales, general and administrative expenses were $11.2 million and $8.9 million for the three months ended March 31, 2013 and 2012, respectively, an increase of $2.4 million, or 26.6%. As a percentage of net sales, sales, general and administrative expenses increased to 36.8% for the first quarter of 2013 compared to 34.5% for the first quarter of 2012. Compared to the first quarter of 2012, salaries, benefits and stock compensation expense increased $1.1 million as a result of strategic hires that were made over the last year, primarily in customer facing roles such as telesales, customer service, account management and field services. Included in "Other" are certain expenses related to other litigation activities. Other increases in SG&A during the first quarter of 2013 compared to the first quarter of 2012 relate to general business operations and sales efforts.

Research and Development Expenses

Research and development expenses were $2.0 million for the three months ended March 31, 2013 and are consistent with the prior year.

Litigation Judgment Expense

During the second quarter of 2011, the Company recorded a $3.3 million litigation judgment expense, which represented a charge for an adverse jury verdict received in the Turner case and costs associated with post-trial motions. This charge represented management's best estimate of the Company's uninsured portion of the judgment after consideration of available insurance coverage. During 2011, management estimated the range of loss in the Turner case to be nil to $3.8 million. During March 2012, the Federal District Court for the Western District of North Carolina granted the Company's motion for remittitur and ordered the reduction of the original jury award from $10.0 million to approximately $4.4 million after offsets. On April 20, 2012, the court issued another order, which adjusted the award to $5.5 million. Based on this action by the court, the Company reversed a portion of the previously accrued litigation judgment expense during the three months ended March 31, 2012, which resulted in a benefit of $2.2 million and a reserve of $1.1 million at such time. As of March 31, 2013, the reserve remains at $1.1 million.

Provision for Income Taxes

The provision for income taxes was $1.9 million for the three months ended March 31, 2013. Our estimated full year effective tax rate for 2013, before discrete period adjustments, is approximately 38.8%, which is above the statutory rate due to the impact of state taxes and non-deductible expenses for items such as ISO stock option expense, meals and entertainment and lobbying fees, which make our projected annual net income for tax purposes higher than our book pre-tax income.


Table of Contents

Net Income

Our net income decreased to $3.3 million, or $0.06 per basic and diluted share, for the first quarter of 2013 compared to net income of $3.8 million, or $0.07 per basic and diluted share, for the first quarter of 2012.

Liquidity and Capital Resources

Summary

As of March 31, 2013, we had $38.6 million in cash, an increase of $2.5 million from the end of 2012, which primarily relates to the growth in sales which drove cash from operating activities of $4.5 million. In addition, short-term investment maturities of $1.7 million in the first quarter of 2013 were retained as cash and not reinvested during the first quarter. The increase in cash from operating and investing activities was largely offset by purchases of the Company's common stock under the $25.0 million buyback program authorized on February 25, 2013. Repurchases of our common stock may take place from time to time on the open market, will be financed with available cash and are subject to market and business conditions. There were no cash equivalents or short-term investments at March 31, 2013.

Cash Flows

The following table summarizes our cash flows from operating, investing and
financing activities for the three months ended March 31, 2013 and 2012:



                                                                Three Months Ended
                                                                    March 31,
                                                             2013                2012
Operating activities                                     $  4,519,584         $ 3,662,675
Investing activities                                        1,227,107            (644,103 )
Financing activities                                       (3,319,901 )            14,629
Effect of exchange rate changes on cash and cash
equivalents                                                    26,803              15,649

Increase in cash and cash equivalents                    $  2,453,593         $ 3,048,850

Operating activities

Net cash provided by operating activities in the first three months of 2013 of $4.5 million was primarily driven by $3.3 million of net income for the period, adjusted for the net add-back of non-cash expenses of $2.5 million, including depreciation and amortization expense of $1.4 million, $1.7 million of deferred income taxes and stock-based compensation expense of $0.9 million. In addition, operating cash flows were reduced by $1.9 million related to excess tax benefit from stock-based activities. Cash from operating activities reflects a net $1.3 million outflow related to the net change in assets and liabilities. A decrease in accounts payable and accrued liabilities resulted in an outflow of $2.1 million. This decrease was due to normal fluctuations regarding the receipt of invoices and timing of check runs, as well as the timing of payroll-related liabilities. Increases in prepaids and other assets, and inventory also resulted in outflows of $1.1 million and $0.9 million, respectively. Partially offsetting these outflows from changes in operating assets and liabilities are inflows of $1.7 million related to increased deferred revenue and $1.3 million from decreased accounts and notes receivable. The increase in deferred revenue resulted from growing warranty sales and the decrease in receivables is due to collection of year-end receivables from sales in the fourth quarter of 2012.

Net cash provided by operating activities in the first three months of 2012 of $3.7 million was primarily driven by $3.8 million of net income for the period, adjusted for the net add-back of non-cash expenses of $2.3 million, including depreciation and amortization expense of $1.7 million and stock-based compensation expense of $0.8 million, offset by a $2.2 million litigation judgment recovery. Additionally, changes in operating assets and liabilities were reduced by $2.5 million related to increased accounts and notes receivable due to timing of collections. Increases in other operating asset and liability accounts were largely offsetting.


Table of Contents

Investing activities

Net cash provided by investing activities in the first three months of 2013 was $1.2 million for investing activities in the first three months of 2013, which consists of $1.7 million for net proceeds from the maturity of short-term investments, offset by $0.5 million for the acquisition of property, equipment (net of proceeds received from disposal) and intangible assets. In anticipation of switching investment managers in the subsequent quarter, the Company did not reinvest proceeds from the maturity of short-term investments during the three months ended March 31, 2013.

We used $0.6 million for investing activities in the first three months of 2012, which consists of $0.2 million for net purchases of short-term investments and $0.4 million for the acquisition of property, equipment and intangible assets.

Financing activities

During the first three months of 2013, net cash used by financing activities was approximately $3.3 million primarily attributable to the repurchase of $5.4 million of the Company's common stock, which was purchased for a weighted average cost of $7.61 per share. The weighted average cost includes the average price paid per share of $7.58, plus any applicable administrative costs for the transaction. The repurchase of common stock was made under a stock repurchase program authorized by TASER's Board of Directors on February 25, 2013 under which TASER may acquire up to $25.0 million of the Company's outstanding common stock subject to stock market conditions and corporate considerations.

During the three months ended 2013, the Company recorded $1.9 million for excess tax benefit related to stock-based compensation. The tax benefit relates to exercises occurring through 2013 which gave rise to tax attribute carry forwards such as net operating losses and tax credits. The Company was able to recognize this benefit in 2013 due to its positive taxable income during the period.

During the first three months of 2012, net cash used by financing activities was $15,000 and related to the exercise of stock options.

Liquidity and Capital Resources

Our most significant sources of liquidity continue to be funds generated by operating activities and available cash and cash equivalents. We believe funds generated from our expected results of operations, as well as available cash and cash equivalents, will be sufficient to finance our operations and strategic initiatives for 2013. 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 our accounts receivable and inventory, and bears interest at varying rates currently LIBOR plus 1.5% to prime. As of March 31, 2013, we had letters of credit outstanding of $0.6 million, leaving the net amount available for borrowing of $9.4 million. The facility matures on June 30, 2014. 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. At March 31, 2013, and December 31, 2012 and 2011, there were no borrowings under the line.

Our agreement with the bank requires us to comply with certain financial and other covenants including maintenance of minimum tangible net worth and a fixed charge coverage ratio. The ratio of total liabilities to tangible net worth can be no greater than 1:1, and the fixed coverage charge ratio can be no less than 1.25:1, based upon a trailing twelve-month period. At March 31, 2013, the Company's tangible net worth ratio was 0.34:1 and its fixed charge coverage ratio was 8.57:1. Accordingly, the Company was in compliance with these covenants.

Based on our strong balance sheet and the fact that we had only $0.1 million in long-term debt and capital lease obligations at March 31, 2013, 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.

On February 25, 2013, we announced that that our board of directors authorized a new share repurchase program for up to $25 million of its common stock. During the three months ended March 31, 2013, the Company repurchased approximately $5.4 million of common stock. As of April 25, 2013 the Company has repurchased approximately 1.9 million shares of common stock at a total cost of approximately $14.8 million. Approximately $10.2 million is remaining under the repurchase program. Additional repurchases will be funded by available cash, subject to working capital requirements. During March 2013, the Company obtained a waiver from the provider of its line of credit allowing for the execution of the share repurchase program without violation of the terms and covenants of its credit agreement

Off Balance Sheet Arrangements

We have no off balance sheet arrangements as of March 31, 2013 or December 31, 2012.


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