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TASR > SEC Filings for TASR > Form 10-Q on 5-Aug-2014All Recent SEC Filings

Show all filings for TASER INTERNATIONAL INC

Form 10-Q for TASER INTERNATIONAL INC


5-Aug-2014

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 June 30, 2014, and results of operations for the three and six months ended June 30, 2014 and 2013. 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, 2013.

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; the gross margins in the EVIDENCE.com & Video Segment will be lower in the near term; that increased marketing expenditure will lead to sales growth; our anticipation that government contracts will be completed; that fixed costs in our EVIDENCE.com & Video segment will remain stable and result in a lower cost of services delivered as a percentage of revenue; that R&D and SG&A expenses will continue to increase; our litigation strategy and the outcome of pending litigation against us; the sufficiency of our valuation reserves, including warranty, accounts receivable, deferred taxes and inventory reserves; our projected effective tax rate for 2014; 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; our exposure to cancellations of government contracts due to appropriation clauses; the length of our sales cycle and our ability to realize benefits from our marketing and selling efforts; the long-term revenue recognition cycle for our SaaS EVIDENCE.com product; regulatory and political challenges presented by international markets; 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 and 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; rising costs of raw materials and transportation relating to petroleum prices; our ability to manage our growth and increase manufacturing production to meet demand; establishment and expansion of our direct and indirect distribution channels; our ability to pursue sales directly with customers; risks relating to acquisitions and joint 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 for the year ended December 31, 2013.

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.


Table of Contents

Results of Operations

Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013

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

                                                 Three Months Ended June 30,                  Increase / (Decrease)
                                                2014                      2013                  $                %
Net sales                               $ 37,175       100.0 %    $ 32,175       100.0 %    $    5,000            15.5 %
Cost of products sold and services
delivered                                 13,961        37.6        12,433        38.6           1,528            12.3

Gross margin                              23,214        62.4        19,742        61.4           3,472            17.6
Sales, general and administrative
expenses                                  13,547        36.4        10,941        34.0           2,606            23.8
Research and development expenses          3,455         9.3         1,992         6.2           1,463            73.4

Income from operations                     6,212        16.7         6,809        21.2            (597 )          (8.8 )
Interest and other income, net                42         0.1            19         0.1              23           121.1

Income before provision for income
taxes                                      6,254        16.8         6,828        21.2            (574 )          (8.4 )
Provision for income taxes                 2,370         6.4         2,371         7.4              (1 )          (0.0 )

Net income                              $  3,884        10.4 %    $  4,457        13.9 %    $     (573 )         (12.9 )

* Not meaningful

Net Sales

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



                                                  Three Months Ended June 30,                 Dollar       Percent
                                                 2014                      2013               Change        Change
TASER Weapons segment:
TASER X26                                $  4,813        12.9 %    $  6,906        21.5 %    $ (2,093 )       (30.3 )%
TASER X2                                    5,569        15.0         6,442        20.0          (873 )       (13.6 )
TASER X26P                                 10,281        27.7         4,617        14.3         5,664         122.7
TASER C2                                      469         1.3           545         1.7           (76 )       (13.9 )
M26                                           110         0.3           187         0.6           (77 )       (41.2 )
Single Cartridges                           8,827        23.7         9,374        29.1          (547 )        (5.8 )
StrikeLight                                    95         0.3            -           -             95             *
TASER XREP                                     84         0.2            -           -             84             *
Extended Warranties                         1,443         3.9         1,096         3.4           347          31.7
Other                                         984         2.6         1,105         3.4          (121 )       (11.0 )

TASER Weapons segment                      32,675        87.9        30,272        94.1         2,403           7.9

EVIDENCE.com & Video segment:
AXON/EVIDENCE.com                           2,764         7.4           848         2.6         1,916         225.9
TASER Cam                                   1,280         3.4           964         3.0           316          32.8
Other                                         456         1.2            91         0.3           365         401.1

EVIDENCE.com & Video segment                4,500        12.1         1,903         5.9         2,597         136.5

Total net sales                          $ 37,175       100.0 %    $ 32,175       100.0 %    $  5,000          15.5

* Not meaningful


Table of Contents

Net unit sales for the TASER Weapons products and EVIDENCE.com & Video segment products are as follows:

                                          Three Months Ended June 30,
                                                            Unit         Percent
                                2014          2013         Change         Change
          TASER X26               4,436         8,047        (3,611 )       (44.9 )%
          TASER X26P             12,148         6,021         6,127         101.8
          TASER X2                4,563         7,016        (2,453 )       (35.0 )
          M26                       383           508          (125 )       (24.6 )
          TASER C2                1,521         2,030          (509 )       (25.1 )
          TASER Cam               2,713         2,693            20           0.7
          Single Cartridges     369,534       412,132       (42,598 )       (10.3 )
          AXON flex               2,022         1,081           941          87.0
          AXON body               2,834            -          2,834             *
          StrikeLight             1,061            -          1,061             *
          TASER XREP                530            -            530             *

* Not meaningful

Net sales to the United States and other countries are summarized as follows (dollars in thousands):

                                         Three Months Ended June 30,
                                         2014                    2013
                United States     $ 32,155        86 %    $ 27,239        85 %
                Other Countries      5,020        14         4,936        15

                Total             $ 37,175       100 %    $ 32,175       100 %

Net sales were $37.2 million and $32.2 million for the three months ended June 30, 2014 and 2013, respectively, an increase of $5.0 million, or 15.5%. The increase in net sales for the second quarter of 2014 compared to 2013 was primarily driven by the continued adoption of the TASER X26P Smart Weapon, which contributed $10.3 million of sales for the second quarter of 2014. Total law enforcement weapon handles sales in the second quarter were $20.8 million compared to prior year sales of $18.2 million. Sales of the TASER X26 CEW decreased $2.1 million in the second quarter of 2014 when compared to the same period in the previous year as a result of customers embracing the X26P SMART Weapon platform. Sales of the TASER X2 also decreased $0.9 million compared to the prior year.

Revenue relative to our EVIDENCE.com & Video segment increased $2.6 million to $4.5 million for the three months ended June 30, 2014, due to additional revenue recognized from higher sales of our AXON on-officer cameras and our EVIDENCE.com SaaS as well as TASER Cams. Service revenue related to the implementation of our AXON and EVIDENCE.com solution also contributed to the increase in the current quarter. AXON body was launched in the third quarter of 2013 and AXON flex was launched in 2012. Revenue related to EVIDENCE.com is recognized over the requisite service period of one to five years.

To gain more immediate feedback regarding activity for AXON flex, AXON body and EVIDENCE.com, 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) placed in the relevant fiscal period, regardless of when the products or services ultimately will be provided. Some bookings will be invoiced in subsequent periods. Due to municipal government funding rules, certain of the future period 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 invoke 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, AXON body and AXON flex increased to $11.3 million during the three months ended June 30, 2014, compared to $2.0 million in the same quarter in the prior year. We continue to generate traction with a number of new agencies adopting this platform.


Table of Contents

International sales for the second quarter of 2014 and 2013 represented approximately $5.0 million, or 13.5%, and $4.9 million, or 15.3%, 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 and Services Delivered

Cost of products sold and services delivered were $14.0 million and $12.4 million for the three months ended June 30, 2014 and 2013, respectively, an increase of $1.5 million, or 12.3%. As a percentage of net sales, cost of products sold and services delivered decreased to 37.6% in the second quarter of 2014 compared to 38.6% in the second quarter of 2013. Cost of products sold for our TASER Weapons segment were $10.7 million for the three months ended June 30, 2014, or 32.6% of TASER Weapons segment sales, compared to $10.4 million for the three months ended June 30, 2013, or 34.4% of TASER Weapons segment sales. The decrease as a percentage of net sales is primarily derived from increased leverage due to higher sales and a higher average selling price.

Cost of products sold and services delivered for the EVIDENCE.com & Video segment were $3.3 million for the second quarter of 2014, an increase of $1.3 million, or 63.0% from the second quarter of 2013. Increased product costs related to the EVIDENCE.com & Video segment related to growing sales in this segment were partially offset by decreased service costs. The decrease in service costs is comprised of cost savings resulting from the completion of depreciation of capitalized EVIDENCE.com software development costs as of June 30, 2013. As a percentage of net sales, cost of products sold and services delivered decreased to 73.3% in the second quarter of 2014 from 106.3% in the second quarter of 2013. There are a number of fixed costs for the EVIDENCE.com & Video segment which, as we generate 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 was $23.2 million and $19.7 million for the three months ended June 30, 2014 and 2013, respectively, an increase of $3.5 million, or 17.6%. Our gross margin as a percent of sales increased to 62.4% for the second quarter of 2014 compared to 61.4% for the second quarter of 2013, a result of the factors discussed above under costs of products sold and services delivered as well as leverage in overhead expense from increased sales and increased sales prices. In the fourth quarter of 2013, we introduced a new pricing program reducing the price of the AXON cameras and separately pricing the EVIDENCE.com service. In previous quarters, the cameras and service were primarily sold together with one price for both. We believe lowering the price of the cameras and offering separately-priced EVIDENCE.com SaaS contracts at various levels of functionality, promotes pricing transparency for our customers. As a result, the gross margins in the EVIDENCE.com & Video segment are expected to be lower in the near-term as the service portion is deferred and recognized over the contract term. The AXON flex and the AXON body are currently being sold at low gross margins in an effort to continue to accelerate the Company's traction in the market.


Table of Contents

Sales, General and Administrative Expenses

For the three months ended June 30, 2014 and 2013, sales, general and
administrative expenses ("SG&A") were comprised of the following (dollars in
thousands):



                                                            Three Months Ended June 30,
                                                                                 $             %
                                                  2014           2013         Change        Change
Salaries, benefits and bonus                    $  4,041       $  3,488       $   553          15.9 %
Professional, accounting and legal fees and
litigation expenses *                              3,256          2,089         1,167          55.9
Travel and meals                                   1,162            802           360          44.9
Stock-based compensation                             954            827           127          15.4
Consulting and lobbying                              936            562           374          66.5
Depreciation and amortization                        311            313            (2 )        (0.6 )
Sales and marketing *                              1,460          1,135           325          28.6
Liability insurance                                  211            482          (271 )       (56.2 )
Other                                              1,216          1,243           (27 )        (2.2 )

Total                                           $ 13,547       $ 10,941       $ 2,606          23.8

Sales, general and administrative as a % of
net sales                                           36.4 %         34.0 %

* Sales and marketing, and Professional, accounting and legal fees and litigation expenses are presented excluding salaries, benefits and stock compensation for those departments. Compensation related expenses for those areas are captured in the "Salaries, benefits and bonus" and "Stock-based compensation" lines.

SG&A expenses were $13.5 million and $10.9 million for the three months ended June 30, 2014 and 2013, respectively, an increase of $2.6 million, or 23.8%. As a percentage of net sales, SG&A expenses increased to 36.4% for the second quarter of 2014 compared to 34.0% for the second quarter of 2013.

Within the TASER Weapons segment, SG&A increased $1.5 million, or 15.7%, to $10.9 million from $9.4 million in the second quarter of 2013. Within the current quarter TASER Weapons SG&A, there is approximately $2.2 million relating to the settlements of disputes with two former distributors. Excluding these two items, SG&A for the second quarter would have been approximately $8.7 million in the TASER Weapons segment. Travel expenses increased approximately $0.2 million due to increased travel internationally as the Company develops incremental business abroad. Consulting and lobbying expenses also increased in the quarter. These increases were offset by a decrease in liability insurance coverage expenses due to favorable pricing changes as well as lower sales and marketing expenses as resources are shifted to the EVIDENCE.com & Video segment.

Within the EVIDENCE.com & Video segment, SG&A increased $1.1 million, or 73.7%, to $2.6 million in the second quarter of 2014 in comparison to the prior year. Salaries, benefits and bonus and stock compensation in the EVIDENCE.com & Video segment increased $0.4 million primarily as a result of the Company doubling its video salesforce and hiring incremental functions such as customer service, account management and other customer-facing roles. Sales and marketing expenses in the EVIDENCE.com & Video segment also increased approximately $0.5 million in comparison to the second quarter 2013 as a result of TASER-hosted Technology Summits to promote customer awareness about cloud technology as well as EVIDENCE.com promotions and advertising efforts during the quarter. Also included in sales and marketing expenses is increased commissions expense of approximately $0.2 million as a result of increased sales. We believe these increases in marketing activities will increase customer awareness of the benefits of EVIDENCE.com and ultimately lead to sales growth in future periods.

The Company expects to see 2014 SG&A continue to increase from the 2013 level of spend as continued investments are made in the EVIDENCE.com and Video segment and as we expand internationally and in incremental administrative functions to support the growing business.


Table of Contents

Research and Development Expenses

Research and development ("R&D") expenses were $3.5 million for the three months ended June 30, 2014 an increase of $1.5 million or 73.4% over the same period in the prior year. As a percentage of net sales, R&D expense increased to 9.3% in the second quarter of 2014 in comparison to 6.2% in the second quarter of 2013. Research and development expense increased primarily due to additional personnel expense related to EVIDENCE.com & Video segment development initiatives. In the TASER Weapons segment, R&D expenses decreased $0.2 million to $0.8 million in comparison to the same period in the previous year as resources were shifted to developing our next generation products and features for the EVIDENCE.com & Video segment.

The Company expects to continue to see increased expenses in R&D through 2014 as EVIDENCE.com develops products to expand into adjacent technologies.

Provision for Income Taxes

The provision for income taxes was $2.4 million for the three months ended June 30, 2014, which was an effective tax rate of 37.9%. Our estimated full year effective tax rate for 2014, before discrete period adjustments, is approximately 38.9%, 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, but also reduced by the domestic production activities deduction, the net effects of which makes our projected annual net income for tax purposes higher than our book pre-tax income.

Net Income

Our net income decreased to $3.9 million, or $0.07 per diluted share, for the second quarter of 2014 compared to net income of $4.5 million, or $0.08 per diluted share, for the second quarter of 2013.


Table of Contents

Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013

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



                                                        Six Months Ended June 30,                   Increase / (Decrease)
                                                     2014                      2013                    $                %
Net sales                                    $ 73,360       100.0 %    $ 62,609        100.0 %    $    10,751           17.2 %
Cost of products sold                          27,938        38.1        24,416         39.0            3,522           14.4

Gross margin                                   45,422        61.9        38,193         61.0            7,229           18.9
Sales, general and administrative expenses     27,293        37.2        22,122         35.3            5,171           23.4
Research and development expenses               7,061         9.6         4,005          6.4            3,056           76.3

Income from operations                         11,068        15.1        12,066         19.3             (998 )         (8.3 )
Interest and other income (expense), net           72         0.1            (4 )       (0.0 )             76              *

Income before provision for income taxes       11,140        15.2        12,062         19.3             (922 )         (7.6 )
Provision for income taxes                      3,865         5.3         4,307          6.9             (442 )        (10.3 )

Net income                                   $  7,275         9.9 %    $  7,755         12.4 %    $      (480 )         (6.2 )

* Not meaningful

Net Sales

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



                                                   Six Months Ended June 30,                  Dollar       Percent
                                                 2014                      2013               Change        Change
TASER Weapons segment:
TASER X26                                $ 11,815        16.1 %    $ 15,029        24.0 %    $ (3,214 )       (21.4 )%
TASER X2                                    9,319        12.7        11,177        17.9        (1,858 )       (16.6 )
TASER X26P                                 18,155        24.7         8,017        12.8        10,138         126.5
TASER C2                                      938         1.3         1,357         2.2          (419 )       (30.9 )
M26                                           310         0.4           407         0.7           (97 )       (23.8 )
Single Cartridges                          17,474        23.8        17,861        28.5          (387 )        (2.2 )
StrikeLight                                   170         0.2            -           -            170             *
TASER XREP                                  2,615         3.6            -           -          2,615             *
Extended Warranties                         2,756         3.8         2,124         3.4           632          29.8
Other                                       1,598         2.2         2,303         3.7          (705 )       (30.6 )
. . .
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