Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with the other sections of this annual report on Form 10-K, including Part I, Item 1A: “Risk Factors”; Part II, Item 6: “Selected Financial Data”; and Part II, Item 8: “Financial Statements and Supplementary Data.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing. The tables in the MD&A sections below are derived from exact numbers and may have immaterial rounding differences.

Executive Overview and Key Strategic Initiatives

Our central mission is to make the world a safer place by creating technologies which reduce violence. The best way to understand our business strategy is to understand our three strategic missions.

Our Three Strategic Missions

Protect Life (safer weapons). Throughout history, the weapon technology used by individuals to protect themselves have caused death and destruction to another person. We believe this is because the only technologies capable of incapacitating a person to stop a threat have relied on the infliction of death or serious injury. Our TASER conducted electrical weapons (“CEWs”) are one of the few weapons which can truly incapacitate a person without requiring death or serious injury. Dating back to the origins of our technology in the late 1960’s, we have created and continue to lead this market space world-wide. Over the past few decades, the TASER CEW has become one of the most frequently used weapons in the North American Law Enforcement Market, with injuries and deaths dropping dramatically as a result. Today, we are seeing accelerating adoption in other markets around the world.
Protect Truth (wearable cameras and software). We believe, with strong scientific support, that the presence of video recordings in incidents involving conflict can dramatically reduce the frequency of severity of such events by both documenting, and altering the behavior of the persons involved. Studies have shown that police officers wearing video camera devices receive up to 90% fewer complaints, and are involved in approximately 60% fewer violent incidents involving the use of force. Our Axon Platform is the market leading solution for wearable cameras with a robust software system for storing, managing, and sharing the related video data. While we are proud of our Axon cameras and believe they are the best cameras in the law enforcement marketplace, we invested heavily to create an integrated hardware-software ecosystem specifically for public safety. Those investments appear to have been very well placed as bookings in the Axon business exceeded $135.1 million in 2015, growing at 136.7% over 2014. As of the date of this Annual Report on Form 10-K, 30 of the 60 major cities in the United States are now using our Axon digital evidence platform.
Empower Heroes (cloud-mobile-wearable ecosystem). Every society depends upon a professional class of public safety professionals charged with protecting the general public from threats of all kinds, including from those who would break the law and victimize others. With our TASER weapons and Axon platform, we have created relationships with over 20,000 public safety agencies around the world. We have come to develop a deep organizational understanding of the challenges and opportunities in this market space. One key insight is that law enforcement agencies around the world are significantly “behind the curve” when it comes to technology. Many agencies still rely largely on paper based reporting systems and have limited access to modern mobile smart phone technology. Some of our customers report that police officers are spending over 60% of their time on paperwork related tasks, rather than on value-add public safety work. Internet enabled platforms that connect end users direct to technology providers have dramatically changed industry after industry. These Internet enabled businesses offer accelerated speed of technology innovation, reduced cost of implementation and distribution to the end customer, and network effects enabling easy collaboration and information sharing. We are building out our Axon platform with body cameras and video management, which are driving rapid growth and market penetration today. However, the real opportunity is to leverage this connected platform to enable a broad suite of mobile, wearable, and data management capabilities to bring modern information technology capabilities to every law enforcement officer. With our Axon platform, and the Evidence.com service, we have built the first and largest cloud-hosted platform in the public safety space. We will leverage this platform to roll out additional capabilities, both hardware and software, to empower the heroic men and women of public safety to be more efficient, more effective, and have access to the best information available. There is a deep synergy across our product and service offerings and strategies. For example, the public scrutiny around the usage of TASER devices provides a compelling reason to deploy body cameras, which they require massive amounts of storage and video management capability which is best achieved through a cloud-hosted system such as our Evidence.com service. In fact, the Los Angeles Police Department recently announced plans to deploy TASER devices, Axon Cameras, and Evidence.com to all front line officers as an integrated suite of capabilities.

Execution of Our Mission

From an investor point of view, there are two distinct business segments at different levels of maturity. Our TASER weapons business is a mature, profitable, and cash generating business with a moderate growth rate. By comparison, our Axon platform business is a nascent software as a service (SaaS) business which is currently growing recorded bookings at greater than 100% annually, is not yet profitable, and has very different accounting treatment for revenue, which are generally recognized over a longer time horizon such as a five-year service contract. By comparison, most TASER Weapons revenues are generally recognized when shipped and accepted by the customer.

For these reasons, and to help investors and analysts understand the dynamics and progress in both business segments, we publish separate profit and loss tables for both the TASER Weapons and the Axon segments. The TASER segment is our “Protect Life” strategy driven segment. The Axon segment is driven by our “Protect Truth” and “Empower Heroes” strategies to enable body cameras and video storage and sharing today, growing to a full suite of connected technologies and capabilities going forward.

Technological innovation is the foundation for our long-term growth and we intend to maintain our commitment to the research and development of our technology for both new and existing products that further our mission. At the same time we have established industry leading training services to provide our users a comprehensive overview of legal, policy, medical and risk mitigation issues relating to our products and the use of force. We have built a network of distribution channels for selling and marketing our products and services to law enforcement agencies, primarily in North America, with ongoing focus and effort placed on expanding these programs in international, military and other markets. Over 17,000 law enforcement agencies in nearly 150 countries have made initial purchases of our TASER brand devices for testing or deployment. To date, we do not know of any significant sales of any competing CEW products, but acknowledge the continued emergence of competition within the on-officer camera, digital evidence management and related technology market.

Our key strategic initiatives include: Continue investment in development of innovative new products, which both compliment and add to our existing platforms. Our research and development efforts in 2015 were primarily focused on refining our Evidence.com services and exploring next generation hardware for our TASER Weapons and Axon segments.We believe that the video evidence capture and management market will continue to grow significantly due to several factors, including increasing recognition of the benefits and value of video evidence and other mobile technologies. In 2016, we expect to devote significant resources towards both the development of the next revenue generating product for our Axon segment, and additional functionality for our existing SaaS. We aim to work closely with our customers to develop new value added features to our existing platform that are necessary to optimize their workflows, as well as develop adjacent technologies in wearables, cloud, and mobile devices.

Increase market penetration in both international and U.S. law enforcement markets:

Internationally, there is a very significant portion of the market where officers do not carry CEWs or wear on-officer cameras. We believe there is substantial opportunity for more widespread adoption of CEWs and Axon products in foreign countries. In recent years, we have seen international markets become increasingly attractive and we seek to maintain that trend as we demonstrate the benefits of large-scale adoptions of our CEWs and Axon products, using countries such as the United Kingdom and Australia as benchmarks of successful programs. We have also decided to make focused investments in targeted countries such as France, the United Kingdom, Canada and Australia as we see considerable opportunity for increased sales in those regions. Because the sales cycle to sell into a new international market can be as long or longer than 18 to 24 months, it is important that we continue to develop our pipeline in terms of both the number and size of opportunities.

In the U.S., our focus is on driving deeper penetration into law enforcement agencies that do not have a CEW or on-officer camera on every officer, and to upgrade officers using one of our legacy products to our next generation Smart Weapons. Our strategy is to create a dominant market position in domestic law enforcement and internationally over time.

In the Axon segment, our focus is on increasing bookings and brand awareness for Evidence.com and Axon cameras. We have expanded our Axon sales team from 16 at the end of 2014 to 27 full-time salespeople at the end of 2015. We expect the additional salesforce to generate increased bookings in 2016. In addition, during 2016, we expect to continue our concerted efforts to promote the awareness of the benefits of digital evidence management in general, and Evidence.com specifically, throughout the law enforcement community. We expect additional efforts will encompass tech summits, sponsorships, tradeshows, interaction with trade associations (such as the International Association of Chiefs of Police), and other promotional activities.Included in our strategy to demonstrate the benefits of Evidence.com, we have optional test and evaluation periods of the product on-site with customers. We experienced increasing volumes of trial programs in 2015 and believe these trial programs area great way for our customers to see the powerful capabilities, benefits and compelling value proposition of our technology. We anticipate further increases in these trial programs in 2016, ultimately leading to increased sales. As market acceptance grows, we anticipate fewer and/or shorter trial programs will be necessary to capture sales.

Additionally, our focus is on maintaining incremental sales channels by continuing to develop purchasing programs that position the Company to own municipality budget lines and become the ongoing technology provider for our customers in order to drive sales growth and allow our customers to keep up with the latest technology while minimizing large upfront purchases. We focus on minimizing attrition rates by providing world class products and services that provide the value necessary to ensure customers continue to renew their contracts. We remain committed to developing our presence in federal government and military markets. We intend to continue to place emphasis on supporting our military customers through our team of professionals with extensive military, homeland defense and law enforcement experience. The primary focus of this team is to support military use for our existing hardware as well as increase technology development through contracted support.Continued application for patents and intellectual property rights, both in the U.S. and internationally, to protect key technology in our products and further attempt to protect and maintain our competitive position.Continued aggressive litigation defense to protect our brand equity. We maintain a team of world class medical experts and internal legal resources to provide an efficient means of defending the Company against product liability claims.

Results of Operations

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):



	Year Ended December 31,
	2015				2014					2013
Net sales	$	197,892	100.0	%	$	164,525		100.0	%	$	137,831	100.0	%
Cost of products sold and services delivered	69,245		35.0		62,977			38.3		51,988		37.7
Gross margin	128,647		65.0		101,548			61.7		85,843		62.3
Operating expenses:
Sales, general and administrative	69,698		35.2		54,158			32.9		46,557		33.8
Research and development	23,614		11.9		14,885			9.0		9,888		7.2
Litigation judgments	—		—		—			—		1,450		1.1
Total operating expenses	93,312		47.2		69,043			42.0		57,895		42.0
Income from operations	35,335		17.9		32,505			19.8		27,948		20.3
Interest and other income (expense), net	26		—		(194		)	(0.1	)	86		0.1
Income before provision for income taxes	35,361		17.9		32,311			19.6		28,034		20.3
Provision for income taxes	15,428		7.8		12,393			7.5		9,790		7.1
Net income	$	19,933	10.1	%	$	19,918		12.1	%	$	18,244	13.2	%

Net sales to the U.S. and other countries are summarized as follows (dollars in thousands):



	Year Ended December 31,
	2015				2014				2013
United States	$	161,803	81.8	%	$	132,205	80.4	%	$	115,674	83.9	%
Other Countries	36,089		18.2		32,320		19.6		22,157		16.1
Total	$	197,892	100.0	%	$	164,525	100.0	%	$	137,831	100.0	%

The Company’s operations are comprised of two reportable segments: the manufacture and sale of CEWs, accessories and other related products and services (the “TASER Weapons” segment); and the video business, which includes the TASER Cam, Axon products, Evidence.com, and MediaSolv (the “Axon” segment). The Company includes only revenues and costs attributable to the Axon segment in that segment. Included in Axon segment costs are: costs of sales for both products and services, overhead allocation based on direct labor, selling expense for the Axon sales team, Axon product management expenses, trade shows and related expenses, and research and development for products included in the Axon segment. All other costs are included in the TASER Weapons segment. The chief operating decision maker does not review assets by segment as part of the financial information provided; therefore, no asset information is provided in the following tables.

Net Sales - For the Years Ended December 31, 2015 and 2014

Net sales by product line were as follows for the years ended December 31, 2015 and 2014 (dollars in thousands):



	Year Ended December 31,								Dollar Change			Percent Change
	2015				2014
TASER Weapons segment:
TASER X26P	$	55,969	28.3	%	$	43,512	26.4	%	$	12,457		28.6	%
TASER X2	42,746		21.6		28,774		17.5		13,972			48.6
TASER X26	7,337		3.7		18,712		11.4		(11,375		)	(60.8	)
TASER C2	2,146		1.1		2,084		1.3		62			3.0
TASER M26	684		0.3		693		0.4		(9		)	(1.3	)
TASER XREP	—		—		2,617		1.6		(2,617		)	(100.0	)
Single cartridges	41,674		21.1		38,539		23.4		3,135			8.1
Extended warranties including TAP	7,402		3.7		6,024		3.7		1,378			22.9
Other	4,417		2.2		4,658		2.8		(241		)	(5.2	)
TASER Weapons segment	162,375		82.1		145,613		88.5		16,762			11.5
Axon segment:
Axon Body	4,029		2.0		3,404		2.1		625			18.4
Axon Flex	6,880		3.5		3,981		2.4		2,899			72.8
E-Dock	4,022		2.0		1,719		1.0		2,303			134.0
Evidence.com	11,765		5.9		4,039		2.5		7,726			191.3
TASER Cam	5,746		2.9		4,674		2.8		1,072			22.9
Extended warranties including TAP	1,794		0.9		—		—		1,794			*
Other	1,281		0.6		1,095		0.7		186			17.0
Axon segment	35,517		17.9		18,912		11.5		16,605			87.8
Total net sales	$	197,892	100.0	%	$	164,525	100.0	%	$	33,367		20.3

not meaningful

Net unit sales for the TASER Weapons products and Axon segment products are as follows:



	Year Ended December 31,
	2015	2014	Unit Change		Percent Change
TASER X26P	62,383	51,283	11,100		21.6	%
TASER X2	38,050	26,901	11,149		41.4
TASER X26	4,928	17,770	(12,842	)	(72.3	)
TASER M26	2,455	1,994	461		23.1
TASER C2	8,121	7,249	872		12.0
Cartridges	1,694,450	1,618,117	76,333		4.7
Axon Flex	18,823	10,034	8,789		87.6
Axon Body	17,522	13,219	4,303		32.6
E-Dock	6,979	4,219	2,760		65.4
TASER Cam	11,634	9,303	2,331		25.1

Net sales were $197.9 million and $164.5 million for the years ended December 31, 2015 and 2014, respectively, an increase of $33.4 million or 20.3%. Net sales for the TASER Weapons segment were $162.4 million and $145.6 million for the years ended December 31, 2015 and 2014, respectively, an increase of $16.8 million or 11.5%. Net sales for the Axon segment were $35.5 million and $18.9 million for the years ended December 31, 2015 and 2014, respectively, an increase of $16.6 million or 87.8%.

The increase in net sales for 2015 compared to 2014 in the TASER Weapons segment was primarily driven by increased adoption of the TASER X26P and X2 Smart Weapons, as customers upgrade their legacy CEWs to the new models. The Company has also introduced upgrade programs to incentivize agencies to replace older CEWs with the Company's new 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 $36.1 million in 2015 versus $32.3 million in 2014, an increase of 11.7%.

To gain more immediate feedback regarding activity for Axon products and Evidence.com services, we also review bookings for these products. We consider bookings to be a statistical measure defined as the sales contract value (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 money 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 increased to $135.1 million during 2015, compared to $57.1 million in 2014, an increase of 136.7%.

The chart below illustrates the Company's quarterly bookings for each of the previous six fiscal quarters (in thousands):

Net Sales - Three Months Ended December 31, 2015 Compared to September 30, 2015

Net sales by product line were as follows for the three months ended December 31, 2015 and September 30, 2015 (dollars in thousands):



	Three Months Ended December 31, 2015				Three Months Ended September 30, 2015				Dollar Change			Percent Change
TASER Weapons segment:
TASER X26P	$	14,712	26.3	%	$	12,901	25.6	%	$	1,811		14.0	%
TASER X2	13,181		23.5		10,928		21.7		2,253			20.6
TASER X26	1,544		2.8		1,570		3.1		(26		)	(1.7	)
TASER C2	655		1.2		530		1.1		125			23.6
TASER M26	155		0.3		207		0.4		(52		)	(25.1	)
Single cartridges	13,090		23.4		10,351		20.5		2,739			26.5
Extended warranties including TAP	1,789		3.2		1,876		3.7		(87		)	(4.6	)
Other	1,563		2.8		1,157		2.3		406			35.1
TASER Weapons segment	46,689		83.3		39,520		78.5		7,169			18.1
Axon segment:
Axon Body	596		1.1		1,144		2.3		(548		)	(47.9	)
Axon Flex	1,351		2.4		2,936		5.8		(1,585		)	(54.0	)
E-Dock	580		1.0		1,562		3.1		(982		)	(62.9	)
Evidence.com	4,410		7.9		2,764		5.5		1,646			59.6
TASER Cam	1,316		2.3		1,444		2.9		(128		)	(8.9	)
Extended warranties including TAP	848		1.5		511		1.0		337			65.9
Other	251		0.4		495		1.0		(244		)	(49.3	)
Axon segment	9,352		16.7		10,856		21.5		(1,504		)	(13.9	)
Total net sales	$	56,041	100.0	%	$	50,376	100.0	%	$	5,665		11.2

Net unit sales for the TASER Weapons products and Axon segment products are as follows:



	Three Months Ended
	12/31/2015	9/30/2015	Unit Change		Percent Change
TASER X26P	16,437	13,659	2,778		20.3	%
TASER X2	12,540	8,036	4,504		56.0
TASER X26	587	818	(231	)	(28.2	)
TASER M26	503	709	(206	)	(29.1	)
TASER C2	2,336	1,801	535		29.7
Cartridges	505,332	435,237	70,095		16.1
Axon Flex	2,902	6,759	(3,857	)	(57.1	)
Axon Body	2,141	4,778	(2,637	)	(55.2	)
E-Dock	1,425	2,075	(650	)	(31.3	)
TASER Cam	2,641	2,887	(246	)	(8.5	)

Net sales were $56.0 million and $50.4 million for the three months ended December 31, 2015 and September 30, 2015, respectively, an increase of $5.7 million or 11.2%. Net sales for the TASER Weapons segment were $46.7 million and $39.5 million for the three months ended December 31, 2015 and September 30, 2015, respectively, an increase of $7.2 million or 18.1%. Net sales for the Axon segment were $9.4 million and $10.9 million for the three months ended December 31, 2015 and September 30, 2015, respectively, a decrease of $1.5 million or 13.9%.

The increase in net sales in the TASER Weapons segment on a quarterly sequential basis was primarily driven by the continued adoption of the TASER X26P and X2 Smart Weapons. Growing demand is seen in the TASER Weapons segment as customers are upgrading their legacy CEWs to the new TASER X2 and X26P Smart Weapons.

During the fourth quarter of 2015, the Company publicly announced the introduction of its next generation on-officer camera, the Axon Body 2. This introduction led to an increase in bookings for the quarter ended December 31, 2015 as compared to September 30, 2015, as many agencies placed orders for the new model, but this adversely impacted recognized revenues, as many agencies opted to order Body 2 instead of the original Axon body and Axon flex units. Axon Body 2 first became available for shipping during the first quarter of 2016, so a large portion of bookings recorded during the fourth quarter of 2015 did not lead to sales recognized during the quarter. Sales of Axon Body 2 will be recognized as units ship starting in 2016.

Net Sales - For the Years Ended December 31, 2014 and 2013

Net sales by product line were as follows for the years ended December 31, 2014 and 2013 (dollars in thousands):



	Year Ended December 31,								Dollar Change			Percent Change
	2014				2013
TASER Weapons segment:
TASER X26P	$	43,512	26.4	%	$	21,860	15.9	%	$	21,652		99.0	%
TASER X2	28,774		17.5		26,471		19.2		2,303			8.7
TASER X26	18,712		11.4		30,883		22.4		(12,171		)	(39.4	)
TASER C2	2,084		1.3		2,468		1.8		(384		)	(15.6	)
TASER M26	693		0.4		681		0.5		12			1.8
TASER XREP	2,617		1.6		—		—		2,617			*
Single cartridges	38,539		23.4		35,660		25.9		2,879			8.1
Extended warranties including TAP	6,024		3.7		4,617		3.3		1,407			30.5
Other	4,658		2.8		4,834		3.5		(176		)	(3.6	)
TASER Weapons segment	145,613		88.5		127,474		92.5		18,139			14.2
Axon segment:
Axon Body	3,404		2.1		530		0.4		2,874			542.3
Axon Flex	3,981		2.4		2,434		1.8		1,547			63.6
E-Dock	1,719		1.0		490		0.4		1,229			250.8
Evidence.com	4,039		2.5		1,719		1.2		2,320			135.0
TASER Cam	4,674		2.8		4,688		3.4		(14		)	(0.3	)
Other	1,095		0.7		496		0.4		599			120.8
Axon segment	18,912		11.5		10,357		7.5		8,555			82.6
Total net sales	$	164,525	100.0	%	$	137,831	100.0	%	$	26,694		19.4

not meaningful

Net unit sales for the TASER Weapons products and Axon segment products are as follows:



	Year Ended December 31,
	2014	2013	Unit Change		Percent Change
TASER X26P	51,283	28,107	23,176		82.5	%
TASER X2	26,901	28,164	(1,263	)	(4.5	)
TASER X26	17,770	33,769	(15,999	)	(47.4	)
TASER M26	1,994	2,091	(97	)	(4.6	)
TASER C2	7,249	8,116	(867	)	(10.7	)
Cartridges	1,618,117	1,552,028	66,089		4.3
Axon Flex	10,034	4,903	5,131		104.7
Axon Body	13,219	1,888	11,331		600.2
E-Dock	4,219	579	3,640		628.7
TASER Cam	9,303	10,686	(1,383	)	(12.9	)

Net sales were $164.5 million and $137.8 million for the years ended December 31, 2014 and 2013, respectively, an increase of $26.7 million or 19.4%. Net sales for the TASER Weapons segment were $145.6 million and $127.5 million for the years ended December 31, 2014 and 2013, respectively, an increase of $18.1 million or 14.2%. Net sales for the Axon segment were $18.9 million and $10.4 million for the years ended December 31, 2014 and 2013, respectively, an increase of $8.6 million or 82.6%.

The increase in net sales for 2014 compared to 2013 in the TASER Weapons segment was primarily driven by the introduction of the TASER X26P smart weapon. Growing demand is seen in the TASER Weapons segment as customers are upgrading their legacy CEWs to the new TASER X2 and X26P 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 contributed to overall growth with sales of $32.3 million in 2014 versus $22.2 million in 2013, an increase of 45.5%.

Cost of Products Sold and Services Delivered

(dollars in thousands)



	Year Ended December 31,										Year Ended December 31,
					Dollar Change			Percent Change							Dollar Change		Percent Change
	2015		2014				2014			2013
TASER Weapons segment:
Cost of products sold	$	48,821	$	47,680	$	1,141		2.4	%		$	47,680	$	44,025	$	3,655	8.3	%
Cost as % of sales	30.1		32.7								32.7		34.5
Axon segment:
Cost of products sold	16,201		13,233		2,968			22.4			13,233		6,074		7,159		117.9
Cost of services delivered	4,223		2,064		2,159			104.6			2,064		1,889		175		9.3
Total cost of products sold and services delivered	20,424		15,297		5,127			33.5			15,297		7,963		7,334		92.1
Cost as % of sales	57.5		80.9								80.9		76.9
Total cost of products sold and services delivered	$	69,245	$	62,977	$	6,268		10.0			$	62,977	$	51,988	$	10,989	21.1
Cost as % of sales	35.0		38.3								38.3		37.7

Cost of products sold and services delivered was $69.2 million and $63.0 million for the years ended December 31, 2015 and 2014, respectively, an increase of $6.3 million or 10.0%. As a percentage of net sales, cost of products sold and services delivered decreased to 35.0% in 2015 compared to 38.3% in 2014. Within the TASER Weapons segment, cost of products sold increased $1.1 million, or 2.4%, to $48.8 million in 2015, compared to $47.7 million in 2014, and decreased as a percent of sales to 30.1% from 32.7%. The overall increase in cost of products sold is attributable to higher unit sales, and the decrease of cost as a percentage of sales is primarily attributable to higher average selling prices and increased leverage of fixed operating costs.

Within the Axon segment, cost of products sold and services delivered were $20.4 million, an increase of $5.1 million, or 33.5% from 2014. As a percentage of net sales, cost of products sold and services delivered decreased to 57.5% in 2015 from

80.9% in 2014. The increase in cost of products sold and services delivered 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. The decrease in cost of products sold and services delivered as a percentage of sales 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 revenue in the business, we expect to remain relatively stable and should allow for lower cost of services delivered as a percentage of service revenue.

Cost of products sold and services delivered was $63.0 million and $52.0 million for the years ended December 31, 2014 and 2013, respectively, an increase of $11.0 million or 21.1%. As a percentage of net sales, cost of products sold and services delivered increased to 38.3% in 2014 from 37.7% in 2013. Within the TASER Weapons segment, cost of products sold increased $3.7 million, or 8.3%, to $47.7 million in 2014, compared to $44.0 million in 2013, but decreased as a percent of sales to 32.7% from 34.5%. The net decrease in cost of products sold as a percent of sales primarily reflects increased leverage due to higher sales and a higher average selling prices.

Within the Axon segment, cost of products sold and services delivered were $15.3 million, an increase of $7.3 million, or 92.1% from 2013. The increase was driven by growing sales in this segment, increased data storage costs as more agencies utilize EVIDENCE.com, as well as the introduction of a professional services team. These increases were partially offset by the full depreciation of the capitalized Evidence.com software development costs as of June 30, 2013. The increase in overall cost of products sold and services delivered as a percentage of sales was driven by higher product sales. As a percentage of net sales, cost of products sold and services delivered increased slightly to 80.9% in 2014 from 76.9% in 2013.

Gross Margin

(dollars in thousands)



	Year Ended December 31,										Year Ended December 31,
					Dollar Change			Percent Change							Dollar Change		Percent Change
	2015		2014				2014			2013
TASER Weapons segment	$	113,554	$	97,933	$	15,621		16.0	%		$	97,933	$	83,449	$	14,484	17.4	%
Axon segment	15,093		3,615		11,478			317.5			3,615		2,394		1,221		51.0
Total gross margin	$	128,647	$	101,548	$	27,099		26.7			$	101,548	$	85,843	$	15,705	18.3
Gross margin as % of sales	65.0		61.7								61.7		62.3

Gross margin increased $27.1 million to $128.6 million for 2015 compared to $101.5 million for 2014. As a percentage of net sales, gross margin increased to 65.0% for 2015 compared to 61.7% for 2014. The increase is attributable to stronger margins in both the TASER Weapons and Axon segments. As a percentage of net sales, gross margin for the TASER Weapons segment was 69.9% and 67.3% for 2015 and 2014, respectively, while the same measure for these years for the Axon segment were 42.5% and 19.1%, respectively. The Company experienced improvements in margins for the TASER Weapons and Axon segments individually, due to higher average selling prices and continued leverage of Axon fixed operating costs.

Gross margin increased $15.7 million to $101.5 million for 2014 compared to $85.8 million for 2013. As a percentage of net sales, gross margin decreased slightly to 61.7% for 2014 compared to 62.3% for 2013. The decrease is primarily attributable to sales mix and continued growth in the Axon segment. As a percentage of net sales, gross margin for the TASER Weapons segment was 67.3% and 65.5% for 2014 and 2013, respectively, while the same measure for these years for the Axon segment were 19.1% and 23.1%, respectively. The overall increase in margins was negatively impacted by higher inventory reserves taken towards the end of 2014 as compared to 2013 related primarily to the reserve for the X26 CEW that was discontinued as of December 31, 2014. The Company also accrued approximately $1.1 million of inventory losses related to products it may not be able to use in production of certain Axon camera products.

Sales, General and Administrative Expenses

Sales, general and administrative (“SG&A”) expenses were comprised as follows for 2015 and 2014 (dollars in thousands):



	Year Ended December 31,						Dollar Change			Percent Change
	2015			2014
Salaries, benefits and bonus	$	25,032		$	18,179		$	6,853		37.7	%
Stock-based compensation	4,299			3,558			741			20.8
Legal, professional and accounting	5,645			4,711			934			19.8
Sales and marketing	10,776			8,124			2,652			32.6
Consulting and lobbying services	7,147			3,417			3,730			109.2
Travel and meals	5,649			4,778			871			18.2
Building	3,648			2,956			692			23.4
Supplies	2,975			1,898			1,077			56.7
Depreciation and amortization	1,861			1,246			615			49.4
Liability insurance	1,442			1,303			139			10.7
Other	1,224			3,988			(2,764		)	(69.3	)
Total sales, general and administrative expenses	$	69,698		$	54,158		$	15,540		28.7
Sales, general, and administrative as a percentage of net sales	35.2		%	32.9		%

Sales, general and administrative expenses were $69.7 million and $54.2 million for the years ended December 31, 2015 and 2014, respectively, an increase of $15.5 million or 28.7%. As a percentage of total net sales, SG&A expenses increased to 35.2% for 2015 compared to 32.9% for 2014.

SG&A by type and by segment were as follows for the years ended December 31, 2015 and 2014 (dollars in thousands):



	Year Ended December 31,								Dollar Change			Percent Change
	2015				2014
TASER Weapons segment:
Salaries, benefits and bonus	$	16,767	24.1	%	$	14,522	26.8	%	$	2,245		15.5	%
Stock-based compensation	3,187		4.6		2,598		4.8		589			22.7
Legal, professional and accounting	5,442		7.8		4,578		8.5		864			18.9
Sales and marketing	5,411		7.8		4,902		9.1		509			10.4
Consulting and lobbying services	4,209		6.0		2,378		4.4		1,831			77.0
Travel and meals	3,089		4.4		3,014		5.6		75			2.5
Other	9,535		13.7		10,997		20.3		(1,462		)	(13.3	)
TASER Weapons segment	47,640		68.4		42,989		79.4		4,651			10.8
Axon segment:
Salaries, benefits and bonus	8,265		11.9		3,657		6.8		4,608			126.0
Stock-based compensation	1,112		1.6		960		1.8		152			15.8
Legal, professional and accounting	203		0.3		133		0.2		70			52.6
Sales and marketing	5,365		7.7		3,222		5.9		2,143			66.5
Consulting and lobbying services	2,938		4.2		1,039		1.9		1,899			182.8
Travel and meals	2,560		3.7		1,764		3.3		796			45.1
Other	1,615		2.3		394		0.7		1,221			309.9
Axon segment	22,058		31.6		11,169		20.6		10,889			97.5
Total sales, general and administrative expenses	$	69,698	100.0	%	$	54,158	100.0	%	$	15,540		28.7

Within the TASER Weapons segment, SG&A increased $4.7 million, or 10.8%, to $47.6 million from $43.0 million in 2014. Salaries, benefits, bonus and stock-based compensation in the TASER Weapons increased approximately $2.8 million in 2015

compared to 2014. This increase was primarily attributable to the Company's efforts to build out international and direct sales teams internally as well as increasing headcount in certain administrative departments to support the overall growth of the entity. On a consolidated basis, legal, professional and accounting expenses were up $0.9 million in 2015 compared to 2014, and most of this increase was allocated to the Weapons segment. Audit and tax compliance costs were up approximately $0.7 million due primarily to increased complexity in the business structure as well as overall growth of the Company. Also included in the increase in legal fees was $0.2 million of costs to secure new patents and trademarks. The increase in sales and marketing was primarily attributable to increased efforts at the 2015 International Association of Chiefs of Police in 2015 as compared to 2014. The Company incurred higher consulting and lobbying expense during 2015 as compared to 2014 increase $1.8 million to $4.2 million in 2015. The Company also engaged additional international sales consultants during 2015 to drive increased sales in targeted foreign markets. Offsetting these increases was a decrease to other expenses. The decrease in other is primarily the result of a litigation settlement in 2014 of $3.3 million as compared to settlements of $0.2 million in 2015.

Within the Axon segment, SG&A increased $10.9 million, or 97.5%, to $22.1 million in 2015 in comparison to the prior year. Salaries, benefits, bonus and stock-based compensation in the Axon segment increased $4.8 million as the Company continues to hire additional engineering, product management personnel, sales and marketing personnel and general support staff to further expand upon existing product offerings as well as the development of new mobile and cloud technologies. The Company remains committed to launching new product lines to solidify its competitive advantage in these emerging technologies. Sales and marketing expenses in the Axon segment also increased approximately $2.1 million in comparison to 2014 due primarily to increased commissions on higher sales and increased marketing efforts for Axon technologies. The increase in consulting and lobbying was due to the Axon branding campaign that took place in the third quarter of 2015 as well as increased lobbying and public relations efforts ahead of the IACP conference held in October 2015. The increase in the balance of other expenses of $1.2 million during the 2015 as compared 2014 was related to building expenses, including depreciation and amortization, and supplies. Of this amount $0.7 million related to depreciation and amortization of assets acquired in two business combinations affected during 2015.

The Company expects to see increases in SG&A in 2016 compared to 2015 as it plans to make additional investments in customer-facing positions both domestically and internationally along with increased investments in sales and marketing.

Of the increase in SG&A above, there was increased expense associated with customer-facing positions, including: salaries, benefits, bonus and stock-based compensation, as well as sales commissions, which are included in the sales and marketing line item in the table above. Positions were added throughout the year, with the following customer-facing headcount as of the end of each year:



	As of December 31,
	2015	2014	2013
TASER Weapons sales representatives	18	12	8
Axon sales representatives	27	16	14
International sales representatives (i)	13	5	5
Sales support staff	20	8	8
Telesales	27	17	11
Other customer-facing roles	33	20	14
Total customer-facing roles	138	78	60

(i) In certain international markets where the Company does not have a legal entity, it generally engages sales managers as consultants. These expenses are reflected in the consulting and lobbying line within selling, general and administrative expenses.

Sales, general and administrative expenses were comprised as follows for 2014 and 2013 (dollars in thousands):



	Year Ended December 31,						Dollar Change			Percent Change
	2014			2013
Salaries, benefits and bonus	$	18,179		$	14,723		$	3,456		23.5	%
Stock-based compensation	3,558			3,158			400			12.7
Legal, professional and accounting	4,711			7,323			(2,612		)	(35.7	)
Sales and marketing	8,124			6,025			2,099			34.8
Consulting and lobbying services	3,417			2,097			1,320			62.9
Travel and meals	4,778			3,305			1,473			44.6
Building	2,956			3,160			(204		)	(6.5	)
Supplies	1,898			1,462			436			29.8
Depreciation and amortization	1,246			1,230			16			1.3
Liability insurance	1,303			2,012			(709		)	(35.2	)
Other	3,988			2,062			1,926			93.4
Total sales, general and administrative expenses	$	54,158		$	46,557		$	7,601		16.3
Sales, general, and administrative as a percentage of net sales	32.9		%	33.8		%

Sales, general and administrative expenses were $54.2 million and $46.6 million for the years ended December 31, 2014 and 2013, respectively, an increase of $7.6 million or 16.3%. As a percentage of total net sales, SG&A expenses decreased to 32.9% for 2014 compared to 33.8% for 2013.

SG&A by type and by segment were as follows for the years ended December 31, 2014 and 2013 (dollars in thousands):



	Year Ended December 31,								Dollar Change			Percent Change
	2014				2013
TASER Weapons segment:
Salaries, benefits and bonus	$	14,522	26.8	%	$	12,290	26.4	%	$	2,232		18.2	%
Stock-based compensation	2,598		4.8		2,726		5.9		(128		)	(4.7	)
Legal, professional and accounting	4,578		8.5		7,258		15.6		(2,680		)	(36.9	)
Sales and marketing	4,902		9.1		4,167		9.0		735			17.6
Consulting and lobbying services	2,378		4.4		1,879		4.0		499			26.6
Travel and meals	3,014		5.6		2,214		4.8		800			36.1
Other	10,997		20.3		9,640		20.7		1,357			14.1
TASER Weapons segment	42,989		79.4		40,174		86.3		2,815			7.0
Axon segment:
Salaries, benefits and bonus	3,657		6.8		2,433		5.2		1,224			50.3
Stock-based compensation	960		1.8		432		0.9		528			122.2
Legal, professional and accounting	133		0.2		65		0.1		68			104.6
Sales and marketing	3,222		5.9		1,858		4.0		1,364			73.4
Consulting and lobbying services	1,039		1.9		218		0.5		821			376.6
Travel and meals	1,764		3.3		1,091		2.3		673			61.7
Other	394		0.7		286		0.6		108			37.8
Axon segment	11,169		20.6		6,383		13.7		4,786			75.0
Total sales, general and administrative expenses	$	54,158	100.0	%	$	46,557	100.0	%	$	7,601		16.3

Within the TASER Weapons segment, SG&A increased $2.8 million, or 7.0%, to $43.0 million from $40.2 million in 2013. Salaries, benefits, bonus and stock-based compensation in the TASER Weapons increased approximately $2.1 million in 2014 compared to 2013 partially due to increased international, telesales, and support sales staff. Incremental administrative functions were also added in 2014 in order to support the growing business. Travel and meal expenses also increased approximately $0.8

million compared to the prior year as increased international travel occurred to set up the new international offices in Amsterdam. Offsetting these increases, the Company experienced a decrease in liability insurance costs during 2015.

Within the Axon segment, SG&A increased $4.8 million, or 75.0%, to $11.2 million in 2014 in comparison to the prior year. Salaries, benefits, bonus and stock-based compensation in the Axon segment increased $1.8 million. Sales and marketing expenses in the Axon segment also increased approximately $1.4 million in comparison to 2013 as a result of a large presence and a hosted booth at the International Association of Chiefs of Police. Sales and marketing expenses also include increases of approximately $0.9 million in commissions. Increases were also seen in lobbying and consulting fees of approximately $0.8 million and travel and meal expenses of approximately $0.7 million.

Research and Development Expenses

Research and development (“R&D”) expenses were $23.6 million and $14.9 million for the years ended December 31, 2015 and 2014, respectively, an increase of $8.7 million, or 58.6%. As a percentage of net sales, R&D increased to 11.9% in 2015 in comparison to 9.0% in 2014.

Within the TASER Weapons segment, R&D expenses increased $0.6 million, or 15.4%, to $4.5 million in 2015, which was primarily driven by internal efforts and consulting expenses related to development of future CEW products.

Within the Axon segment, R&D expenses increased $8.1 million, or 73.8%, to $19.1 million in 2015 from the prior year. The increase for 2015 compared to 2014 is primarily driven by additional headcount and higher consulting fees as the Company continues its efforts to launch new product lines and SaaS offerings to strengthen its competitive advantage in these emerging technologies.

Research and development expenses were $14.9 million and $9.9 million for the years ended December 31, 2014 and 2013, respectively, an increase of $5.0 million, or 50.5%. As a percentage of net sales, R&D increased to 9.0% in 2014 in comparison to 7.2% in 2013.

Within the TASER Weapons segment, R&D expenses decreased $0.4 million, or 10.2%, to $3.9 million in 2014, which was primarily driven by a shift in personnel resources to the Axon segment and reduced testing materials expense. Reductions were partially offset by increases in professional and consulting fees.

Within the Axon segment, R&D expenses increased $5.4 million, or 97.5%, to $11.0 million in 2014 from the prior year. The increase for 2014 compared to 2013 is primarily driven by additional headcount and higher consulting fees.

Interest and Other Income (Expense), Net

Interest and other income was $26,000 for the year ended December 31, 2015 compared to expense of $0.2 million for the year ended December 31, 2014 and income of $0.1 million for the year ended December 31, 2013. Other income amounts for 2015, 2014 and 2013 consisted primarily of investment interest income and was partially offset by losses on foreign currency transaction adjustments.

Provision for Income Taxes

The provision for income taxes was $15.4 million for the year ended December 31, 2015. The effective income tax rate for 2015 was 43.6%. The effect of state income taxes of $1.1 million was largely offset by a benefit of $1.0 million for research and development credits in the current year. The difference between statutory and foreign tax rates of $2.4 million was largely driven by losses incurred in a newly formed foreign entity for which no tax benefit will be realized. In addition, a valuation allowance in the amount of $1.2 million was recorded as of December 31 2015 related to certain research and development tax credits the Company estimates may not be utilized prior to expiration.

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). This standard requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. The Company elected early adoption of ASU 2015-17 effective December 31, 2015, on a retrospective basis. Adoption of this ASU resulted in a reclassification of net current deferred tax assets to net noncurrent deferred tax asset in our Consolidated Balance Sheet as of both December 31, 2015 and December 31, 2014. This accounting change had no impact on our consolidated results of operations or comprehensive income.

The provision for income taxes was $12.4 million for the year ended December 31, 2014. The effective income tax rate for 2014 was 38.4%. The effect of state income tax of $1.4 million was largely offset by a benefit of $0.6 million from incentive stock

option deductions as well as $0.5 million of research and development credits in 2014. When an employee exercises ISOs and sells the related stock prior to the end of the mandatory holding period, the associated expense becomes a reduction to the Company’s taxable income.

The provision for income taxes was $9.8 million for the year ended December 31, 2013. The effective income tax rate for 2013 was 34.9%. The effect of state income tax of $1.3 million was largely offset by a benefit of $0.5 million from incentive stock option deductions as well as $0.4 million of research and development credits and a $0.4 million favorable return to provision adjustment in 2013. The 2013 return to provision adjustment was driven by the domestic production activities deduction which decreased taxable income, and therefore, reduced the effective tax rate.

Net Income

Our net income was $19.9 million for each of the years ended December 31, 2015 and 2014. Net income per basic share was $0.37 and $0.36 per diluted share, respectively, for 2015 compared to $0.38 and $0.37 per basic and diluted share, respectively for 2014.

Our net income improved by $1.7 million to $19.9 million of 2014 compared to $18.2 million for 2013. Net income per basic and diluted share was $0.38 and $0.37 for 2014, respectively, compared to $0.34 per basic and diluted share for 2013.

Liquidity and Capital Resources

Summary

As of December 31, 2015, we had $59.5 million of cash and cash equivalents, an increase of $11.2 million from the end of 2014.

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities for each of the past three years (in thousands):



	Year Ended December 31,
	2015			2014			2013
Operating activities	$	46,445		$	35,432		$	32,426
Investing activities	(36,009		)	(24,581		)	(23,062		)
Financing activities	603			(4,840		)	(3,189		)
Effect of exchange rate changes on cash and cash equivalents	120			85			(31		)
Net increase in cash and cash equivalents	$	11,159		$	6,096		$	6,144

Operating activities

Net cash provided by operating activities in 2015 of $46.4 million consists of $19.9 million in net income, the net add-back of non-cash income statement items totaling $6.3 million and a positive $20.2 million net change in operating assets and liabilities. Included in the non-cash items are $3.3 million in depreciation and amortization expense, $7.3 million in stock-based compensation expense, and $1.7 million of bond premium amortization. These additions were partially offset by an $6.9 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 increase to the portion of cash from operating activities related to the changes in operating assets and liabilities is a $15.3 million increase to deferred revenue. Of the increase in deferred revenue, $4.0 million resulted from additional extended warranty sales, $7.3 million resulted from increased hardware deferred revenue from TASER Assurance Program ("TAP") and Officer Safety Program ("OSP") sales, and $4.0 million related to prepayments for Axon SaaS and related services. The Company also had increases in cash provided from operating activities of $4.2 million and $3.1 million for decreases in accounts and notes receivable and inventory, respectively. In addition, the $5.9 million increase to cash from operating activities related to increases in accounts payable, accrued and other liabilities that was primarily caused by current income tax expense, which would have resulted in an increase to income tax payable, if it had not been reduced by the excess tax benefit from stock-based compensation discussed above. These increases were partially offset by increased prepaid expenses and other current assets of $8.6 million during 2015. The increase in other asset accounts during 2015 was driven by primarily by increased prepaid commissions of $2.5 million, increased long-term accounts receivable of $1.2 million for sales made under the Officer Safety Plan, increased balances under corporate-owed life insurance policies of $1.1 million, and a deposit made with a foreign component manufacturer of $2.6 million related to future services.

Net cash provided by operating activities in 2014 of $35.4 million consists of $19.9 million in net income, the net add-back of non-cash income statement items totaling $9.6 million and a positive $5.9 million net change in operating assets and liabilities. Included in the non-cash items are $4.3 million in depreciation and amortization expense and $5.6 million in stock-based compensation expense. These additions were partially offset by an $8.0 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 increase to the portion of cash from operating activities related to the changes in operating assets and liabilities is a $15.5 million increase to deferred revenue. Of the increase in deferred revenue, $6.1 million resulted from additional extended warranty sales, $3.9 million resulted from increased hardware deferred revenue from TASER Assurance Program ("TAP") sales, and $5.3 million related to prepayments for Axon SaaS services. In addition, the $9.5 million increase to cash from operating activities related to increases in accounts payable, accrued and other liabilities that was primarily caused by current income tax expense, which would have resulted in an increase to income tax payable, if it had not been reduced by the excess tax benefit from stock-based compensation discussed above. These increases to operating cash flow were partially offset by an increase in accounts and notes receivable of $8.4 million due to higher sales in the fourth quarter of 2014 compared to the same quarter in 2013, and an increase in inventory of $9.4 million in anticipation of higher sales in 2015.

Net cash provided by operating activities in 2013 of $32.4 million consists of $18.2 million in net income, the net add-back of non-cash income statement items totaling $5.6 million and a positive $8.6 million net change in operating assets (net of operating liabilities). Included in the non-cash items are $5.1 million in depreciation and amortization expense and $4.3 million in stock-based compensation expense. These additions were partially offset by a $6.8 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 increase to cash from operating activities related to the changes in operating assets and liabilities was an $8.1 million increase to deferred revenue. Of the increase in deferred revenue, $5.1 million results from additional extended warranty sales and the remainder is primarily a result of prepayments for our Evidence.com SaaS. In addition, the $5.6 million increase to cash from operating activities related to increases in accounts payable and accrued liabilities was primarily caused by current income tax expense, which would have resulted in an increase to income tax payable, if it had not been reduced by the excess tax benefit from stock-based compensation discussed above. These increases to operating cash flow were partially offset by an increase in accounts and notes receivable of $4.4 million. The fluctuation in accounts and notes receivable was primarily driven by sales, which increased 20.1% during 2013

Investing activities

Primarily as a result of investing cash generated from operating activities, we used $36.0 million for investing activities in 2015. Purchases of investments, net of calls and maturities, were $18.4 million. During 2015, net cash of $11.2 million was used for the acquisitions of MediaSolv Solutions Corporation and Tactical Safety Responses LTD. The Company also invested $6.5 million in the purchase of property and equipment and intangibles.

During the year ended December 31, 2014, we used $24.6 million for investing activities. Purchases of investments, net of calls and maturities, were $21.9 million. The Company also invested $2.7 million in the purchase of property and equipment and intangibles.

During the year ended December 31, 2013, we used $23.1 million from investing activities. Purchases of investments, net of calls and maturities, were $19.7 million. The Company also invested $2.1 million in the purchase of property and equipment and intangibles, as well as $1.3 million, net, to purchase Familiar, Inc.

Financing activities

Net cash used by financing activities was $0.6 million for the year ended December 31, 2015. The repurchase of $7.6 million of the Company’s common stock, which was purchased for a weighted average cost of $25.86 per share, was partially offset by $2.7 million of proceeds from the exercise of stock options, and $6.9 million of excess tax benefit from stock proceeds. The purchase of common stock was made under a stock repurchase program authorized by TASER’s Board of Directors. As of December 31, 2015, no amounts remain available under the plan for future purchases.

Net cash used by financing activities was $4.8 million for the year ended December 31, 2014. The repurchase of $22.4 million of the Company’s common stock, which was purchased for a weighted average cost of $12.99 per share, was partially offset by $11.0 million of proceeds from the exercise of stock options, and $8.0 million of excess tax benefit from stock proceeds. The purchase of common stock was made under a stock repurchase program authorized by TASER’s Board of Directors.

Net cash used by financing activities was $3.2 million for the year ended December 31, 2013. The repurchase of $25.0 million of the Company’s common stock, which was purchased for a weighted average cost of $8.20 per share, was offset by $15.4 million of proceeds from the exercise of stock options, and $6.8 million of excess tax benefit from stock proceeds. The purchase of common stock was made under a stock repurchase program authorized by TASER’s Board of Directors. We completed the authorized repurchases as of June 2013.

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%. As of December 31, 2015, we had letters of credit outstanding of $3.0 million, leaving the net amount available for borrowing of $7.0 million. The facility matures on July 31, 2017. 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 December 31, 2015 and 2014, 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 a minimum leverage ratio and 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 0.52:1 and its fixed charge coverage ratio was 2.41:1. Accordingly, the Company was in compliance with these covenants.

Based on our strong balance sheet and the fact that we had just $0.2 million in total long-term debt and capital lease obligations at December 31, 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 2016 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.

Contractual Obligations

The following table outlines our future contractual financial obligations by period in which payment is expected, as of December 31, 2015 (dollars in thousands):



	Total		Less than 1 Year		1 - 3 Years		4 - 5 Years		More than 5 Years
Non-cancelable operating leases	$	4,319	$	771	$	1,478	$	958	$	1,112
Capital leases including interest	30		30		—		—		—
Open purchase orders	22,983		22,983		—		—		—
Total contractual obligations	$	27,332	$	23,784	$	1,478	$	958	$	1,112

Open purchase orders in the above table primarily represent cancelable purchase orders with key vendors, which are included in this table due to the Company’s strategic relationships with these vendors.

We are subject to U.S. Federal income tax as well as income taxes imposed by several states and foreign jurisdictions. As of December 31, 2015, we had $1.3 million of unrecognized tax benefits related to uncertain tax positions. The settlement period for our long-term income tax liabilities cannot be determined; however, the liabilities are not expected to significantly increase or decrease within the next 12 months.

Off Balance Sheet Arrangements

The discussion of off-balance sheet arrangements in Note 9 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K is incorporated by reference herein.

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 Annual Report on Form 10-K 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 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.

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 December 31, 2015 and 2014, our reserve for warranty returns was approximately $0.3 million and $0.7 million, respectively. Warranty (recoveries) expense in the years ended December 31, 2015, 2014 and 2013 was $(0.1) million, $0.4 million and $1.0 million, respectively. The decrease in warranty reserve and related expense as of and for the year ended ended December 31, 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 continues to experience decreased warranty claims 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. During the year ended December 31, 2015, the Company recorded provisions for obsolete inventory of approximately $0.5 million compared to $2.2 million during 2014. The decrease during 2015 was partially attributable to a reserve taken in 2014 for legacy X26 CEW inventory which ended production during the year ended December 31, 2014. During 2014, the Company also accrued approximately $1.1 million of inventory losses related to products it was not certain could be fully utilized in production of certain Axon camera products.

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. Contractual arrangements may contain explicit customer acceptance provisions, and under such arrangements, the Company defers recognition of revenue until formal customer acceptance is received. Extended warranty revenue, SaaS revenue and related data storage revenue are recognized ratably over the term of the contract beginning on the commencement date of each contract.

Revenue arrangements with multiple deliverables are divided into separate units and revenue is allocated using the relative selling price method based upon vendor-specific objective evidence of selling price or third-party evidence of the selling prices if vendor-specific objective evidence of selling prices does not exist. If neither vendor-specific objective evidence nor third-party evidence exists, management uses its best estimate of selling price. The majority of the Company’s allocations of arrangement consideration under multiple element arrangements are performed using vendor-specific objective evidence by utilizing prices charged to customers for deliverables when sold separately. The Company’s multiple element arrangements may include future CEWs and/or Axon devices to be delivered at defined points within a multi-year contract, and in those arrangements, the Company allocates total arrangement consideration over the life of the multi-year contract to future deliverables using management’s best estimate of selling price. The Company has not utilized third party evidence of selling price.

For the the years ended December 31, 2015, 2014 and 2013, the composition of revenue recognized from arrangements containing multiple elements and those not containing multiple elements was as follows:



	For the Year Ended December 31, 2015
	TASER Weapons				Axon				Total
Arrangements with multiple elements	$	11,141	6.9	%	$	26,489	74.6	%	$	37,630	19.0	%
Arrangements without multiple elements	151,234		93.1		9,028		25.4		160,262		81.0
Total	$	162,375	100.0	%	$	35,517	100.0	%	$	197,892	100.0	%



	For the Year Ended December 31, 2014
	TASER Weapons				Axon				Total
Arrangements with multiple elements	$	5,972	4.1	%	$	12,149	64.2	%	$	18,121	11.0	%
Arrangements without multiple elements	139,641		95.9		6,763		35.8		146,404		89.0
Total	$	145,613	100.0	%	$	18,912	100.0	%	$	164,525	100.0	%



	For the Year Ended December 31, 2013
	TASER Weapons				Axon				Total
Arrangements with multiple elements	$	1,567	1.2	%	$	4,351	42.0	%	$	5,918	4.3	%
Arrangements without multiple elements	125,907		98.8		6,006		58.0		131,913		95.7
Total	$	127,474	100.0	%	$	10,357	100.0	%	$	137,831	100.0	%

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. Generally, the Company recognizes revenue for the Axon equipment at the time of the sale consistent with the discussion of multiple deliverable arrangements above. Revenue for Evidence.com is deferred at the time of the sale and recognized over the service period. At times the Company subsidizes the cost of Axon devices provided to customers to secure long-term Evidence.com service contracts. In such circumstances, revenue related to the Axon devices recognized at the time of delivery is limited to the amount collected from the customer that is not contingent upon the delivery of future Evidence.com services. The Company recognizes the remaining allocated revenue related to subsidized Axon devices over the remaining period it provides the contracted Evidence.com services.

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. No impairment losses were recorded in 2015, 2014 or 2013.

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 $9.4 million in tax credits for federal, Arizona and California income tax purposes related to the 2003 through 2015 tax years, net of the federal benefit on the Arizona and California research and development tax credits. 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 $3.2 million as of December 31, 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 December 31, 2015 of $3.4 million. Management does not expect the amount of the unrecognized tax benefit liability to change significantly within the next 12 months. Should the unrecognized tax benefit of $3.4 million be recognized, the Company’s effective tax rate would be favorably impacted. 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 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 greater 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 December 31, 2015, the Company would need to generate approximately $33.4 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 $11.1 million of gross deferred tax liabilities, $4.2 million tax-effected. We also have state net operating losses ("NOLs") of $0.3 million, which produce deferred tax assets of $10,000, which expire at various dates between 2016 and 2031. 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. However, based on specific income projections in years in which certain tax assets are set to expire, a reserve of approximately $1.7 million has been recorded as a valuation allowance against deferred tax assets as of December 31, 2015.

Stock-Based Compensation

We have historically granted stock-based compensation to key employees and non-employee directors as a means of attracting and retaining highly qualified personnel. We have historically utilized restricted stock units and stock options; however, no stock options were issued during 2015, 2014 or 2013. 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 1.6 million performance-based awards (options and restricted stock units) of which approximately 0.4 million are outstanding as of December 31, 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. Refer to Note 1(q) to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of our valuation assumptions.

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 9(c) of our consolidated financial statements included elsewhere in this annual report on Form 10-K for further discussion of our contingencies and accrued litigation expense.

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