Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements		Page
Consolidated Balance Sheets as of December 31, 2015 and 2014		45
Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2015, 2014 and 2013		46
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2015, 2014 and 2013		47
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013		48
Notes to Consolidated Financial Statements		49
Selected Quarterly Financial Information (Unaudited)		74
Report of Grant Thornton LLP, Independent Registered Public Accounting Firm		76

TASER INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	December 31,
	2015				2014
ASSETS
Current assets:
Cash and cash equivalents	$	59,526			$	48,367
Short-term investments	50,254				32,774
Accounts and notes receivable, net of allowance of $322 and $251 as of December 31, 2015 and 2014, respectively	27,701				30,735
Inventory	15,763				18,323
Prepaid expenses and other current assets	8,165				4,443
Total current assets	161,409				134,642
Property and equipment, net	21,848				17,523
Deferred income tax assets, net	13,719				16,063
Intangible assets, net	7,588				3,115
Goodwill	9,596				2,206
Long-term investments	8,525				9,296
Other assets	7,196				2,523
Total assets	$	229,881			$	185,368
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,333			$	7,682
Accrued liabilities	8,643				9,245
Current portion of deferred revenue	20,851				14,020
Customer deposits	1,226				988
Current portion of notes payable and capital lease payable	87				38
Total current liabilities	38,140				31,973
Deferred revenue, net of current portion	30,190				21,668
Liability for unrecognized tax benefits	1,315				1,471
Long-term deferred compensation	2,199				1,121
Long-term business acquisition contingent consideration	952				—
Long-term portion of notes payable and capital lease payable	81				29
Total liabilities	72,877				56,262
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of December 31, 2015 and 2014	—				—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 53,692,192 and 53,000,867 shares issued and outstanding as of December 31, 2015 and 2014, respectively	1				1
Additional paid-in capital	178,143				162,641
Treasury stock at cost,18,432,158 and 18,139,958 shares as of December 31, 2015 and 2014, respectively	(122,201		)		(114,645		)
Retained earnings	100,978				81,045
Accumulated other comprehensive income	83				64
Total stockholders’ equity	157,004				129,106
Total liabilities and stockholders’ equity	$	229,881			$	185,368

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

TASER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(in thousands, except per share data)

	For the Years Ended December 31,
	2015				2014				2013
Net sales	$	197,892			$	164,525			$	137,831
Cost of products sold and services delivered	69,245				62,977				51,988
Gross margin	128,647				101,548				85,843
Operating expenses:
Sales, general and administrative	69,698				54,158				46,557
Research and development	23,614				14,885				9,888
Litigation judgments	—				—				1,450
Total operating expenses	93,312				69,043				57,895
Income from operations	35,335				32,505				27,948
Interest and other income (expense), net	26				(194		)		86
Income before provision for income taxes	35,361				32,311				28,034
Provision for income taxes	15,428				12,393				9,790
Net income	$	19,933			$	19,918			$	18,244
Net income per common and common equivalent shares:
Basic	$	0.37			$	0.38			$	0.35
Diluted	$	0.36			$	0.37			$	0.34
Weighted average number of common and common equivalent shares outstanding:
Basic	53,548				52,948				51,880
Diluted	54,638				54,500				54,152
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$	19,933			$	19,918			$	18,244
Foreign currency translation adjustments	19				66				55
Comprehensive income	$	19,952			$	19,984			$	18,299

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

TASER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

	Common Stock							Additional Paid-in Capital				Treasury Stock							Accumulated Other Comprehensive Income (Loss)				Retained Earnings				Total Stockholders’ Equity
	Shares			Amount					Shares			Amount
Balance, December 31, 2012	52,770,392			$	1			$	111,661			13,363,789			$	(67,203	)		$	(57	)		$	42,883			$	87,285
Stock options exercised and RSUs vested, net of withholdings	2,896,072			—				15,048				—			—				—				—				15,048
Stock-based compensation	—			—				4,340				—			—				—				—				4,340
Excess tax benefit from stock-based compensation	—			—				6,797				—			—				—				—				6,797
Purchase of treasury stock	(3,048,966	)		—				—				3,048,966			(25,000		)		—				—				(25,000		)
Shares issued related to business acquisition	107,749			—				1,578				—			—				—				—				1,578
Net income	—			—				—				—			—				—				18,244				18,244
Foreign currency translation adjustments	—			—				—				—			—				55				—				55
Balance, December 31, 2013	52,725,247			1				139,424				16,412,755			(92,203		)		(2		)		61,127				108,347
Stock options exercised and RSUs vested, net of withholdings	2,002,823			—				9,653				—			—				—				—				9,653
Stock-based compensation	—			—				5,579				—			—				—				—				5,579
Excess tax benefit from stock-based compensation	—			—				7,985				—			—				—				—				7,985
Purchase of treasury stock	(1,727,203	)		—				—				1,727,203			(22,442		)		—				—				(22,442		)
Net income	—			—				—				—			—				—				19,918				19,918
Foreign currency translation adjustments	—			—				—				—			—				66				—				66
Balance, December 31, 2014	53,000,867			1				162,641				18,139,958			(114,645		)		64				81,045				129,106
Stock options exercised and RSUs vested, net of withholdings	983,525			—				1,303				—			—				—				—				1,303
Stock-based compensation	—			—				7,263				—			—				—				—				7,263
Excess tax benefit from stock-based compensation	—			—				6,936				—			—				—				—				6,936
Purchase of treasury stock	(292,200	)		—				—				292,200			(7,556		)		—				—				(7,556		)
Net income	—			—				—				—			—				—				19,933				19,933
Foreign currency translation adjustments	—			—				—				—			—				19				—				19
Balance, December 31, 2015	53,692,192			$	1			$	178,143			18,432,158			$	(122,201	)		$	83			$	100,978			$	157,004

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

TASER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	For the Years Ended December 31,
	2015				2014				2013
Cash flows from operating activities:
Net income	$	19,933			$	19,918			$	18,244
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	3,291				4,317				5,131
(Gain) loss on disposals of property and equipment, net	(19		)		17				(27		)
Loss on disposal of intangibles	225				215				168
Bond premium amortization	1,650				957				289
Stock-based compensation	7,263				5,579				4,340
Deferred income taxes	994				3,598				621
Unrecognized tax benefits	(156		)		202				219
Excess tax benefit from stock-based compensation	(6,936		)		(7,985		)		(6,797		)
Change in assets and liabilities:
Accounts and notes receivable	4,244				(8,247		)		(4,387		)
Inventory	3,140				(7,214		)		(116		)
Prepaid expenses and other assets	(8,579		)		(1,080		)		(569		)
Accounts payable, accrued and other liabilities	5,868				9,852				6,560
Deferred revenue	15,289				15,469				8,096
Customer deposits	238				(166		)		654
Net cash provided by operating activities	46,445				35,432				32,426
Cash flows from investing activities:
Purchases of investments	(62,464		)		(32,900		)		(29,112		)
Proceeds from call / maturity of investments	44,105				10,997				9,380
Purchases of property and equipment	(6,003		)		(2,505		)		(1,783		)
Proceeds from disposal of fixed assets	40				10				34
Purchases of intangible assets	(501		)		(183		)		(323		)
Business acquisitions, net of cash acquired	(11,186		)		—				(1,258		)
Net cash used in investing activities	(36,009		)		(24,581		)		(23,062		)
Cash flows from financing activities:
Repurchase of common stock	(7,556		)		(22,442		)		(25,000		)
Proceeds from options exercised	2,673				11,000				15,357
Payroll tax payments for net-settled stock awards	(1,370		)		(1,347		)		(309		)
Payments on capital lease obligation	(80		)		(36		)		(34		)
Excess tax benefit from stock-based compensation	6,936				7,985				6,797
Net cash provided by (used in) 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
Cash and cash equivalents, beginning of year	48,367				42,271				36,127
Cash and cash equivalents, end of year	$	59,526			$	48,367			$	42,271

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

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

TASER International, Inc. (“TASER” or the “Company”) is a developer and manufacturer of advanced conducted electrical weapons (“CEWs”) designed for use by law enforcement, military, corrections, and private security personnel, and by private individuals for personal defense. In addition, the Company has developed full technology solutions for the capture, storage and management of video/audio evidence as well as other tactical capabilities for use in law enforcement. The Company sells its products worldwide through its direct sales force, distribution partners, online store and third-party resellers. The Company was incorporated in Arizona in September 1993, and reincorporated in Delaware in January 2001. The Company’s corporate headquarters and manufacturing facilities are located in Scottsdale, Arizona. The Company’s software development unit facility is located in Seattle, Washington. TASER International BV, a wholly owned subsidiary of the Company, serves as the Company's international headquarters, and is located in Amsterdam, Netherlands.

The accompanying consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, including TASER International Europe SE (“TASER Europe”), TASER International B.V., and MediaSolv Solutions Corporation ("MediaSolv"). All material intercompany accounts, transactions, and profits have been eliminated.

a. Basis of Presentation and Use of Estimates

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions in these consolidated financial statements include:

•	product warranty reserves,

•	inventory valuation,

•	revenue recognition allocated in multiple-deliverable contracts or arrangements,

•	valuation of goodwill, intangibles and long-lived assets,

•	recognition, measurement and valuation of current and deferred income taxes,

•	fair value of stock awards issued, the estimated vesting period for performance-based stock awards and forfeiture rates, and

•	recognition and measurement of contingencies and accrued litigation expense.

Actual results could differ materially from those estimates.

b. Cash, Cash Equivalents and Investments

Cash, cash equivalents and investments include cash, money market funds, certificates of deposit, state and municipal obligations and corporate bonds. The Company places its cash and cash equivalents with high quality financial institutions. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, may exceed federally insured limits.

Cash and cash equivalents include funds on hand and highly liquid investments purchased with initial maturity of three months or less. Short-term investments include securities with an expected maturity date within one year of the balance sheet date that do not meet the definition of a cash equivalent, and long-term investments are securities with an expected maturity date greater than one year. Based on management’s intent and ability, the Company’s investments are classified as held to maturity investments and are recorded at amortized cost. Held-to-maturity investments are reviewed quarterly for impairment to determine if other-than-temporary declines in the carrying value have occurred for any individual investment. Other-than-temporary declines in the value of held-to-maturity investments are recorded as expense in the period the determination is made.

c. Inventory

Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost of raw materials which approximates the first-in, first-out (“FIFO”) method and includes allocations of manufacturing labor and overhead. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories to their net realizable value. These provisions are based on management’s best estimate after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions and other factors. Management evaluates inventory costs for abnormal costs due to excess production capacity and treats such costs as period costs.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

d. Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Additions and improvements are capitalized, while ordinary maintenance and repair expenditures are charged to expense as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets.

e. Software Development Costs

The Company expenses software development costs, including costs to develop software products or the software component of products to be marketed to external users, before technological feasibility of such products is reached. The Company has determined that technological feasibility is reached shortly before the release of those products and as a result, the development costs incurred after the establishment of technological feasibility and before the release of those products are not material.

Software development costs also include costs to develop software programs to be used solely to meet the Company's internal needs and cloud-based applications used to deliver its services. The Company capitalizes development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the intended function. Additionally, the Company capitalizes qualifying costs incurred for upgrades and enhancements to existing software that result in additional functionality. Costs related to preliminary project planning activities, post-implementation activities, maintenance and minor modifications are expensed as incurred. Internal-use software is amortized on a straight line basis over its estimated useful life. The capitalized development costs related to the Company’s software as a service (“SaaS”) product, Evidence.com, were fully amortized as of December 31, 2013. Amortization of capitalized software development costs was $0.6 million for the year ended December 31, 2013.

Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

f. Valuation of Goodwill, Intangibles and Long-lived Assets

The Company recorded goodwill related to the acquisitions of Tactical Safety Responses Limited, MediaSolv Solutions Corporation and Familiar, Inc. The recoverability of 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. Management evaluates 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 the Company's products are branded and marketed. When performing a review for recoverability, management estimates the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair value computed using discounted cash flows. No impairment losses were recorded during the years ended December 31, 2015, 2014 and 2013.

g. Customer Deposits

The Company requires deposits in advance of shipment for certain customer sales orders. Customer deposits are recorded as a current liability in the accompanying consolidated balance sheets.

h. Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable

The Company derives revenue from two primary sources: (1) the sale of physical products, including CEWs, Axon cameras, corresponding extended warranties, and related accessories such as E-docks, cartridges and batteries, among others, and (2) subscription to the Company's Evidence.com software as a service ("SaaS") (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, the Company also recognizes training and other professional services revenue. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, title has transferred, the price is fixed and collectability is reasonably assured. Contractual arrangements may contain explicit customer acceptance provisions, and under such arrangements, the Company defers recognition of revenue until

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

The Company offers the right to purchase extended warranties that include additional services and coverage beyond the standard limited warranty for certain products. Revenue for extended warranty purchases is deferred at the time of sale and recognized over the warranty period commencing on the date of sale. Extended warranties range from one to five years.

Evidence.com and Axon cameras and related accessories have stand-alone value to the customer and are sometimes sold separately, but in most instances are sold together. In these instances, customers typically purchase and pay for the equipment and one year of Evidence.com in advance. Additional years of service are generally billed annually over a specified service term, which has typically ranged from one to five years. 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.

In 2012, the Company introduced a program, the TASER Assurance Program (“TAP”), whereby a customer purchasing a product and joining the program will have the right to trade-in the original product for a new product of the same or like model in the future. Upon joining TAP, customers also receive an extended warranty for the initial products purchased and spare inventory. Under this program the customer generally pays additional annual installments over the contract period, generally three to five years. The Company records consideration received related to the future product purchase as deferred revenue until all revenue recognition criteria are met, which is generally at the end of the contract period. Consideration related to future product purchases is determined at the inception of the arrangement using management’s best estimate of selling price. Management’s estimate is principally based on the current selling price for such products, with due evaluation of the impact of any expected product and pricing changes, which have historically had an immaterial influence on management’s best estimate of selling price.

In 2015, The Company introduced the Officer Safety Plan (“OSP”), whereby a customer typically enters into a five year Evidence.com subscription that includes all of its standard advanced features along with unlimited storage. The OSP also includes a service plan that includes upgrades of (i) the Axon devices every 2.5 years and (ii) a TASER CEW at any point within the contract period. Upon entering into the OSP, customers also receive extended warranties on the Axon and CEW devices over the five-year contract periods as well as spare inventory units. Under this program the customer generally makes an initial purchase of Axon cameras and related accessories, and CEWs at inception and pays the first of its annual installments for services and future hardware deliverables over the contract period. The Company records consideration received related to the future purchase as deferred revenue until all revenue recognition criteria are met, which is generally when the products or services are delivered.

Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis. Training revenue is recorded as the service is provided.

Deferred revenue consists of payments received in advance related to products and services for which the criteria for revenue recognition have not yet been met. Deferred revenue that will be recognized during the succeeding twelve month period is recorded as current deferred revenue and the remaining portion is recorded as long-term. Deferred revenue does not include future revenue from multi-year contracts for which no invoice has yet been created. Generally, customers are billed in annual installments. See Note 7 for further disclosures about of the Company’s deferred revenue.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Sales are typically made on credit and the Company generally does not require collateral. Management performs ongoing credit evaluations of its customers’ financial condition and maintains an allowance for estimated potential losses. Uncollectible accounts are charged to expense when deemed uncollectible, and accounts and notes receivable are presented net of an allowance for doubtful accounts. This allowance represents management’s best estimate and is based on their judgment after considering a number of factors, including third-party credit reports, actual payment history, cash discounts, customer-specific financial information and broader market and economic trends and conditions.

The Company may, from time to time, enter into agreements with its customers to finance their purchases with a note receivable that may range in terms up to five years. Sales are recorded at the fair value of the note, which is generally sold and assigned to a third-party financing company. The terms of the assignments are such that the Company expects to receive payment within 30 days of the original sale. The assignments are non-recourse and the Company has no obligations or continuing involvement with the notes receivable. Prior to entering into an assignment, the Company evaluates the credit quality and financial condition of the third-party financing company. The Company does not generally record interest income on notes receivable due to minimal holding periods, nor has the Company recognized gains or losses upon the assignment of the notes. As of December 31, 2015 and 2014, there was no balance in accounts and notes receivable related to such arrangements.

i. Cost of Products Sold and Services Provided

Cost of products sold represents manufacturing costs, consisting of materials, labor and overhead related to finished goods and components. Shipping costs incurred related to product delivery are also included in cost of products sold. Cost of services delivered includes third party cloud services, and software maintenance and support costs, including personnel costs, associated with supporting Evidence.com.

j. Advertising Costs

The Company expenses advertising costs in the period in which they are incurred. The Company incurred advertising costs of $0.6 million, $0.3 million and $0.2 million in the years ended December 31, 2015, 2014 and 2013, respectively. Advertising costs are included in sales, general and administrative expenses in the accompanying statements of operations.

k. Standard Warranties

The Company warranties its CEWs, Axon cameras and certain related accessories from manufacturing defects on a limited basis for a period of one year after purchase and, thereafter, will replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold and services delivered when revenue is recorded for the related product. Future warranty costs are estimated based on historical data related to returns and warranty costs on a quarterly basis and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure that could result in larger than anticipated returns from customers. The accrued warranty liability expense is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. Costs related to extended warranties are charged to cost of products sold and services delivered when incurred. The reserve for warranty returns is included in accrued liabilities on the accompanying consolidated balance sheets.

Changes in the Company’s estimated product warranty liabilities were as follows (in thousands):

	2015				2014				2013
Balance, January 1	$	675			$	955			$	484
Utilization of accrual	(299		)		(676		)		(530		)
Warranty (recoveries) expense	(62		)		396				1,001
Balance, December 31	$	314			$	675			$	955

l. Research and Development Expenses

The Company expenses as incurred research and development costs that do not meet the qualifications to be capitalized. The Company incurred research and development expense of $23.6 million, $14.9 million and $9.9 million, in 2015, 2014 and 2013, respectively.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

m. Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in future years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced through the establishment of a valuation allowance if, based upon available evidence, it is determined that it is more likely than not that the deferred tax assets will not be realized.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Management also assesses whether uncertain tax positions, as filed, could result in the recognition of a liability for possible interest and penalties. The Company’s policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. Refer to Note 10 for additional information regarding the change in unrecognized tax benefits.

n. Concentration of Credit Risk and Major Customers / Suppliers

Financial instruments that potentially subject the Company to concentrations of credit risk consist of accounts and notes receivable and cash. Sales are typically made on credit and the Company generally does not require collateral. Management performs ongoing credit evaluations of its customers’ financial condition and maintains an allowance for estimated losses. Uncollectible accounts are written off when deemed uncollectible, and accounts receivable are presented net of an allowance for doubtful accounts, which totaled $0.3 million as of December 31, 2015 and 2014. Historically, the Company has experienced a low level of write-offs related to doubtful accounts.

The Company maintains the majority of its cash and cash equivalents accounts at three depository institutions. As of December 31, 2015, the aggregate balances in such accounts were $57.1 million. The Company’s balances with these institutions regularly exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits for domestic deposits and various deposit insurance programs covering our deposits in the Netherlands, the United Kingdom and Germany. To manage the related credit exposure, management continually monitors the creditworthiness of the financial institutions where the Company has deposits.

The Company sells some of its products through a network of unaffiliated distributors. The Company also reserves the right to sell directly to the end user to secure the customer’s account. In 2015 and 2014, no customer represented more than 10% of total net sales. In 2013 one distributor represented 12.2% of total net sales with no other customers exceeding 10%.

At December 31, 2015 and 2014, the Company had a trade receivable from one unaffiliated customer comprising 12.5% and 13.4%, respectively, of the aggregate accounts receivable balance.

The Company currently purchases finished circuit boards and injection-molded plastic components from suppliers located in the U.S., Mexico and Taiwan. Although the Company currently obtains many of these components from single source suppliers, the Company owns the injection molded component tooling used in their production. As a result, management believes it could obtain alternative suppliers in most cases without incurring significant production delays. The Company also purchases small, machined parts from a vendor in Taiwan, custom cartridge assemblies from a proprietary vendor in the U.S., and electronic components from a variety of foreign and domestic distributors. Management believes that there are readily available alternative suppliers in most cases who can consistently meet the Company's needs for these components. The Company acquires most of its components on a purchase order basis and does not have long-term contracts with suppliers.

o. Fair Value of Financial Instruments

The Company uses the fair value framework that prioritizes the inputs to valuation techniques for measuring financial assets and liabilities measured on a recurring basis and for non-financial assets and liabilities when these items are re-measured. Fair value is considered to be the exchange price in an orderly transaction between market participants, to sell an asset or transfer a liability at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The Company categorizes each of its fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

•	Level 1 – Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.

•

Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.

•	Level 3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect the Company's own assumptions about inputs that market participants would use in pricing an asset or liability.

The Company has cash equivalents and investments, which at December 31, 2015 and 2014, were comprised of money market funds, state and municipal obligations, corporate bonds, and certificates of deposits. See additional disclosure regarding the fair value of the Company’s cash equivalents and investments in Note 2. Included in the balance of other assets as of December 31, 2015 and 2014 was $2.2 million and $1.1 million, respectively, related to corporate-owned life insurance policies which are used to fund the Company’s deferred compensation plan. The Company determines the fair value of its insurance contracts by obtaining the cash surrender value of the contracts from the issuer, a Level 2 valuation technique.

The Company’s financial instruments also include accounts and notes receivable, accounts payable and accrued liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the balance sheet.

p. Segment and Geographic Information

The Company is comprised of two reportable segments: the sale of CEWs, accessories and other products and services (the “TASER Weapons” segment); and the video business which includes the TASER Cam, Axon camera products and Evidence.com and MediaSolv (the “Axon” segment). Reportable segments are determined based on discrete financial information reviewed by the Company’s Chief Executive Officer who is the chief operating decision maker for the Company. The Company organizes and reviews operations based on products and services, and currently there are no operating segments that are aggregated. The Company performs an annual analysis of its reportable segments. Additional information related to the Company’s business segments is summarized in Note 16.

For the three years ended December 31, 2015, 2014 and 2013, net sales by geographic area were as follows (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	%

Sales to customers outside of the U.S. are typically denominated in U.S. dollars and are attributed to each country based on the shipping address of the distributor or customer. For the three years ended December 31, 2015, 2014 and 2013, no individual country outside the U.S. represented more than 10% of net sales. Substantially all of the Company’s assets are located in the U.S.

q. Stock-Based Compensation

The Company calculates the fair value of stock options using the Black-Scholes-Merton option pricing valuation model, which incorporates various assumptions including volatility, expected life and risk-free interest rates. No options were awarded during the years ended December 31, 2015, 2014 or 2013. The fair value of restricted stock units is estimated as the closing price of the Company's common stock on the date of grant.

The estimated fair value of stock-based compensation awards is amortized to expense on a straight-line basis over the requisite service periods. As stock-based compensation expense recognized is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company’s forfeiture rate was calculated based on its historical experience of awards which ultimately vested. See Note 12 for further disclosure about the Company’s stock-based compensation.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

r. Income per Common Share

Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. Diluted income per share reflects the potential dilution that would occur if outstanding stock options were exercised utilizing the treasury stock method. The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):

	For the Year Ended December 31,
	2015				2014				2013
Numerator for basic and diluted earnings per share:
Net income	$	19,933			$	19,918			$	18,244
Denominator:
Weighted average shares outstanding—basic	53,548				52,948				51,880
Dilutive effect of stock-based awards	1,090				1,552				2,272
Diluted weighted average shares outstanding	54,638				54,500				54,152
Anti-dilutive stock-based awards excluded	198				177				507
Net income per common share:
Basic	$	0.37			$	0.38			$	0.35
Diluted	$	0.36			$	0.37			$	0.34

s. Recently Issued Accounting Guidance

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The core principle of ASU 2014-09 provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company anticipates it will apply the guidance retrospectively to each prior period reported, and is evaluating the impact the adoption of this guidance will have on its financial position, results of operations and cash flows.

In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU 2014-12”). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC Topic No. 718, “Compensation—Stock Compensation” (“ASC 718”) as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company does not expect the adoption of this guidance to have any impact on its financial position, results of operations or cash flows.

In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330)" ("ASU 2015-11"). The amendments require that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company does not expect the adoption of this guidance to have any impact on its financial position, results of operations or cash flows.

In September 2015, the FASB issued ASU No. 2015-16, "Business Combinations (Topic 805)" ("ASU 2015-16"). The amendments require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

date. The amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company does not expect the adoption of this guidance to have any impact on its financial position, results of operations or cash flows.

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). The standard requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted and the standard may be applied either retrospectively or on a prospective basis to all deferred tax assets and liabilities. The Company early adopted ASU 2015-17 during the fourth quarter of fiscal year 2015 on a retrospective basis. Accordingly, the Company reclassified the current deferred taxes to noncurrent on the Consolidated Balance Sheet as of December 31, 2014, which increased noncurrent deferred tax assets $5.2 million.

t. Foreign Currency Translation

The Company’s foreign subsidiaries use their local currency as their functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at the average monthly exchange rates during the year. Resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) on the consolidated balance sheets.

u. Reclassification of Prior Year Presentation

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

2. Cash, Cash Equivalents and Investments

The following tables summarize the Company's cash, cash equivalents, and held-to-maturity investments at December 31 (in thousands):

	As of December 31, 2015
	Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value				Cash and Cash Equivalents				Short-Term Investments				Long-Term Investments
Cash	$	57,137			$	—			$	—			$	57,137			$	57,137			$	—			$	—
Level 1:
Money market funds	2,389				—				—				2,389				2,389				—				—
Corporate bonds	36,406				—				(70		)		36,336				—				35,677				729
Subtotal	38,795				—				(70		)		38,725				2,389				35,677				729
Level 2:
State and municipal obligations	19,002				11				(9		)		19,004				—				12,000				7,002
Certificates of deposit	3,371				—				—				3,371				—				2,577				794
Subtotal	22,373				11				(9		)		22,375				—				14,577				7,796
Total	$	118,305			$	11			$	(79	)		$	118,237			$	59,526			$	50,254			$	8,525

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	As of December 31, 2014
	Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value				Cash and Cash Equivalents				Short-Term Investments				Long-Term Investments
Cash	$	44,260			$	—			$	—			$	44,260			$	44,260			$	—			$	—
Level 1:
Money market funds	3,932				—				—				3,932				3,932				—				—
Corporate bonds	20,388				—				(34		)		20,354				—				15,656				4,732
Subtotal	24,320				—				(34		)		24,286				3,932				15,656				4,732
Level 2:
State and municipal obligations	19,145				18				—				19,163				175				15,891				3,079
Certificates of deposit	2,712				—				—				2,712				—				1,227				1,485
Subtotal	21,857				18				—				21,875				175				17,118				4,564
Total	$	90,437			$	18			$	(34	)		$	90,421			$	48,367			$	32,774			$	9,296

The Company believes the unrealized losses on the Company’s investments are due to interest rate fluctuations. As these investments are either short-term in nature, are expected to be redeemed at par value and/or because the Company has the ability and intent to hold these investments to maturity, the Company does not consider these investments to be other than temporarily impaired at December 31, 2015. None of Company’s investments have been in an unrealized loss position for more than one year.

The following table summarizes the amortized cost and fair value of the short-term and long-term investments held by the Company at December 31, 2015 by contractual maturity (in thousands):

	Amortized Cost				Fair Value
Due in less than one year	$	50,254			$	50,190
Due after one year, through two years	8,525				8,521
Due after two years	—				—
Total short-term and long-term investments	$	58,779			$	58,711

3. Inventory

Inventories consisted of the following at December 31 (in thousands):

	2015				2014
Raw materials	$	8,748			$	11,031
Work-in-process	105				111
Finished goods	6,910				7,181
Total inventory	$	15,763			$	18,323

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

4. Property and Equipment

Property and equipment consisted of the following at December 31 (in thousands):

	Estimated Useful Life		2015				2014
Land	N/A		$	2,900			$	2,900
Building and leasehold improvements	3-39 years		15,246				14,302
Production equipment	3-7 years		18,689				18,443
Computer equipment	3-5 years		8,048				7,209
Furniture and office equipment	5-7 years		4,116				3,066
Vehicles	5 years		713				270
Website development costs	3 years		601				601
Capitalized software development costs	3 years		3,670				3,670
Construction-in-process	N/A		3,885				968
Total cost			57,868				51,429
Less: Accumulated depreciation			(36,020		)		(33,906		)
Property and equipment, net			$	21,848			$	17,523

During the years ended December 31, 2015, 2014 and 2013 the Company recognized a net gain (loss) of approximately $19,000, $(17,000) and $27,000, respectively, for the disposal of property and equipment.

Depreciation and amortization expense relative to property and equipment, including equipment under capital lease, was $2.3 million, $4.0 million and $4.8 million for the years ended December 31, 2015, 2014 and 2013, respectively, of which $0.7 million, $2.8 million and $3.7 million is included in cost of products sold and services provided for the respective years.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

5. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the year ended December 31, 2015 were as follows (in thousands):

Balance, January 1, 2015	$	2,206
Goodwill acquired	7,390
Balance, December 31, 2015	$	9,596

Intangible assets (other than goodwill) consisted of the following (in thousands):

			December 31, 2015												December 31, 2014
	Useful Life		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount				Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
Amortized:
Domain names	5 years		$	125			$	(120	)		$	5			$	125			$	(114	)		$	11
Issued patents	4-15 years		1,866				(659		)		1,207				1,759				(549		)		1,210
Issued trademarks	3-11 years		603				(255		)		348				566				(205		)		361
Customer relationships	4-8 years		1,035				(93		)		942				—				—				—
Non-compete agreements	3-4 years		464				(164		)		300				—				—				—
Developed technology	7 years		3,470				(326		)		3,144				—				—				—
Total amortized			7,563				(1,617		)		5,946				2,450				(868		)		1,582
Not amortized:
TASER trademark			900								900				900								900
Patents and trademarks pending			742								742				633								633
Total not amortized			1,642								1,642				1,533								1,533
Total intangible assets			$	9,205			$	(1,617	)		$	7,588			$	3,983			$	(868	)		$	3,115

Amortization expense related to intangible assets was $0.8 million, $0.2 million and $0.2 million for the years ended December 31, 2015, 2014 and 2013, respectively. Estimated amortization for intangible assets with definitive lives for the next five years is as follows for the years ended December 31 (in thousands):

2016	$	942
2017	938
2018	925
2019	803
2020	741
Thereafter	1,597
Total	$	5,946

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

6. Other Long-Term Assets

Other long-term assets consisted of the following at December 31 (in thousands):

	2015				2014
Cash surrender value of corporate-owned life insurance policies (Note 1)	$	2,180			$	1,080
Prepaid commissions (i)	3,543				1,058
Accounts receivable (ii)	1,227				—
Prepaid expenses, deposits and other	246				385
Total other long-term assets	$	7,196			$	2,523

(i) Prepaid commissions represent customer acquisition costs to secure long-term contracts. The Company capitalizes incremental and direct costs related to a specific contract and recognizes expense over the term of the contract.

(ii) Long-term accounts receivable as of December 31, 2015 consist of balances related to sales made under the Officer Safety Program (Note 1h). These balances are collectible over the stated contract period, which is typically five years, and are actively monitored for collectability.

7. Deferred Revenue

Deferred revenue consisted of the following at December 31 (in thousands):

	December 31, 2015												December 31, 2014
	Current				Long-Term				Total				Current				Long-Term				Total
Warranty:
TASER Weapons	$	7,278			$	13,982			$	21,260			$	6,591			$	13,809			$	20,400
Axon	2,332				2,344				4,676				679				894				1,573
	9,610				16,326				25,936				7,270				14,703				21,973
Hardware:
TASER Weapons	952				2,459				3,411				365				753				1,118
Axon	786				7,382				8,168				491				2,643				3,134
	1,738				9,841				11,579				856				3,396				4,252
Axon Services	9,303				4,023				13,326				5,717				3,569				9,286
Other	200				—				200				177				—				177
Total	$	20,851			$	30,190			$	51,041			$	14,020			$	21,668			$	35,688

	December 31, 2015												December 31, 2014
	Current				Long-Term				Total				Current				Long-Term				Total
TASER Weapons and other	$	8,430			$	16,441			$	24,871			$	7,133			$	14,562			$	21,695
Axon	12,421				13,749				26,170				6,887				7,106				13,993
Total	$	20,851			$	30,190			$	51,041			$	14,020			$	21,668			$	35,688

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

8. Accrued Liabilities

Accrued liabilities consisted of the following at December 31 (in thousands):

	2015				2014
Accrued salaries and benefits	$	3,637			$	3,699
Accrued judgments and settlements	65				108
Accrued professional fees	718				257
Accrued warranty expense	314				675
Accrued income and other taxes	1,215				539
Other accrued expenses	2,694				3,967
Accrued liabilities	$	8,643			$	9,245

9. Commitments and Contingencies

a. Operating and capital lease obligations

The Company has entered into operating leases for various office space, storage facilities and equipment. As of December 31, 2015, the Company's leases are for terms ranging from less than one year to 15 years. The Company's leases generally contain multi-year renewal options and escalation clauses. Rent expense under all operating leases, including both cancelable and non-cancelable leases, was $1.0 million, $0.9 million and $0.8 million for the years ended December 31, 2015, 2014, and 2013, respectively.

Future minimum lease payments under non-cancelable leases at December 31, 2015, are as follows (in thousands):

	Operating				Capital
2016	$	771			$	30
2017	776				—
2018	702				—
2019	474				—
2020	484				—
Thereafter	1,112				—
Total minimum lease payments	$	4,319			30
Less: Amount representing interest					(1		)
Capital lease obligation					$	29

b. Purchase commitments

The Company routinely enters into cancelable purchase orders with many of its key vendors. Based on the strategic relationships with many of these vendors, the Company’s ability to cancel these purchase orders and maintain a favorable relationship would be limited. As of December 31, 2015, the Company has approximately $23.0 million of open purchase orders.

c. Litigation

Product Litigation

The Company is currently named as a defendant in 9 lawsuits in which the plaintiffs allege either wrongful death or personal injury in situations in which a TASER CEW was used (or present) by law enforcement officers in connection with arrests or during training exercises. While the facts vary from case to case, the product liability claims are typically based on an alleged product defect resulting in injury or death, usually involving a failure to warn, and the plaintiffs are seeking monetary damages. One recent lawsuit alleges fraud and misrepresentation and is seeking punitive damages in addition to compensatory damages. The information throughout this note is current through the date of these financial statements.

As a general rule, it is the Company’s policy not to settle suspect injury or death cases. Exceptions are sometimes made where the settlement is strategically beneficial to the Company. Also, on occasion, the Company’s insurance carrier has settled

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

such lawsuits over the Company’s objection where the risk is over the Company’s liability insurance deductibles. Due to the confidentiality of the Company's litigation strategy and the confidentiality agreements that are executed in the event of a settlement, the Company does not identify or comment on which specific lawsuits have been settled or the amount of any settlement.

In 2009, the Company implemented new risk management strategies, including revisions to product warnings and training to better protect both the Company and its customers from litigation based on ‘failure to warn’ theories – which comprise the vast majority of the cases against the Company. These risk management strategies have been highly effective in reducing the rate and exposure from litigation post-2009. From the third quarter of 2011 through the date of these financial statements, product liability cases have been reduced from 55 active to 9 active cases.

Management believes that pre-2009 cases have a different risk profile than cases which have occurred since the risk management procedures were introduced in 2009. Therefore, the Company necessarily treats certain pre-2009 cases as exceptions to the Company’s general no settlement policy in order to reduce caseload, legal costs and liability exposure. The Company intends to continue its successful practice of aggressively defending and generally not settling litigation except in very limited and unusual circumstances as described above.

With respect to each of the pending lawsuits, the following table lists the name of plaintiff, the date the Company was served with process, the jurisdiction in which the case is pending, the type of claim and the status of the matter.

Plaintiff		Month Served		Jurisdiction		Claim Type		Status
Derbyshire		Nov-09		Ontario, Canada Superior Court of Justice		Officer Injury		Discovery Phase
Thompson		Mar-10		11th Judicial Circuit Court, Miami-Dade County, FL		Suspect Injury During Arrest		Discovery Phase
Doan		Apr-10		The Queen's Bench Alberta, Red Deer Judicial Dist.		Wrongful Death		Discovery Phase
Shymko		Dec-10		The Queen's Bench, Winnipeg Centre, Manitoba		Wrongful Death		Pleading Phase
Ramsey		Jan-12		12th Judicial Circuit Court, Manatee County, FL		Wrongful Death		Discovery Phase
Firman		Apr-12		Ontario, Canada Superior Court of Justice		Wrongful Death		Pleading Phase
Schrock		Sep-14		San Bernardino County Superior Court, CA		Wrongful Death		Discover Phase - Trial scheduled July 2016
Llach		Sep-15		11th Judicial Circuit Court, Miami-Dade County, FL		Wrongful Death		Discovery Phase
Bennett		Sep-15		11th Judicial Circuit Court, Miami-Dade County, FL		Wrongful Death		Discovery Phase

There were 7 cases that were dismissed or judgment entered during the fourth quarter of 2015 and through the date of these financial statements. Cases that were dismissed or judgment entered in prior fiscal quarters are not included.

Plaintiff		Month Served		Jurisdiction		Claim Type		Status
Koon		Dec-08		17th Judicial Circuit Court, Broward County, FL		Training Injury		Dismissed
Moore		Nov-14		St. Louis County Circuit Court, MO		Wrongful Death		Dismissed
Jones		Jan-15		Los Angeles County Superior Court, CA		Suspect Injury		Dismissed
McKelvey		Apr-15		US District Court, OR		Wrongful Death		Dismissed
Price		Jul-15		US District Court, OR		Wrongful Death		Dismissed
Mitchell		Apr-12		US District Court, ED MI		Wrongful Death		Company won appeal with three judge panel, Plaintiff's petition for full Court of Appeals review denied
Demery		Aug-15		US District Court, WD LA		Wrongful Death		Dismissed

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The claims, and in some instances the defense, of each of these lawsuits have been submitted to the Company’s insurance carriers that maintained insurance coverage during the applicable periods. The Company continues to maintain product liability insurance coverage with varying limits and deductibles. The following table provides information regarding the Company’s product liability insurance. Remaining insurance coverage is based on information received from the Company’s insurance provider (in millions).

Policy Year		Policy Start Date		Policy End Date		Insurance Coverage				Deductible Amount				Defense Costs Covered		Remaining Insurance Coverage				Active Cases and Cases on Appeal
2004		12/1/2003		12/1/2004		$	2.0			$	0.1			N		$	2.0			n/a
2005		12/1/2004		12/1/2005		10.0				0.3				Y		7.0				n/a
2006		12/1/2005		12/1/2006		10.0				0.3				Y		3.7				n/a
2007		12/1/2006		12/1/2007		10.0				0.3				Y		8.0				n/a
2008		12/1/2007		12/15/2008		10.0				0.5				Y		—				n/a
2009		12/15/2008		12/15/2009		10.0				1.0				N		10.0				Derbyshire
2010		12/15/2009		12/15/2010		10.0				1.0				N		10.0				Thompson, Shymko, Doan
2011		12/15/2010		12/15/2011		10.0				1.0				N		10.0				n/a
Jan-Jun 2012		12/15/2011		6/25/2012		7.0				1.0				N		7.0				Ramsey, Firman
Jul-Dec 2012		6/25/2012		12/15/2012		12.0				1.0				N		12.0				n/a
2013		12/15/2012		12/15/2013		12.0				1.0				N		12.0				n/a
2014		12/15/2013		12/15/2014		11.0				4.0				N		11.0				Schrock
2015		12/15/2014		12/15/2015		10.0				5.0				N		10.0				Llach, Bennett

Other Litigation

In November, 2015 the Company filed a complaint against Phazzer Electronics Inc. and Sang Min International Co. Ltd. for patent infringement, trademark infringement and false advertising. This litigation is in the pleading phase.

In February 2016, the Company was served with a first amended complaint filed by Digital Ally in the Federal District Court for the District of Kansas alleging patent infringement, commercial bribery, contracts, combinations and conspiracies in restraint of trade and unfair or anti-competitive acts and practices. The first amended complaint seeks a judgment of infringement, monetary damages, a permanent injunction, punitive damages and attorneys’ fees and costs. The Company believes the first amended complaint is frivolous and the Company will vigorously defend this litigation. This litigation is in the pleading phase.

General

From time to time, the Company is notified that it may be a party to a lawsuit or that a claim is being made against it. It is the Company’s policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on the Company. After carefully assessing the claim, and assuming the Company determines that it is not at fault or it disagrees with the damages or relief demanded, the Company vigorously defends any lawsuit filed against the Company. In certain legal matters, the Company records a liability when losses are deemed probable and reasonably estimable. In evaluating matters for accrual and disclosure purposes, the Company takes into consideration factors such as its historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of prevailing, and the severity of any potential loss. The Company reevaluates and updates its accruals as matters progress over time.

Based on the Company's assessment of outstanding litigation and claims as of December 31, 2015, the Company has determined that it is not reasonably possible that these lawsuits will individually, or in the aggregate, materially affect its results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on the Company's operating results, financial condition or cash flows.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

d. Employment Agreements

The Company has employment agreements with certain key executives. The Company may terminate the agreements with or without cause. Should the Company terminate the agreements without cause, or upon a change of control of the Company or death or disability of the employee, the employee, or family of the employee, are entitled to additional compensation. Under these circumstances, these officers and employees would receive cash compensation amounts remaining under their contracts upon termination, which range from approximately $1.0 million to $2.0 million in the aggregate at December 31, 2015, depending on the nature of the termination event. In March 2015, the Company finalized its severance agreement with a former executive whose position was eliminated in 2014, and for which the Company had accrued approximately $0.5 million as of December 31, 2014.

e. Off-Balance Sheet Arrangements

Under certain circumstances, the Company uses letters of credit and surety bonds to guarantee its performance under various contracts, principally in connection with the installation and integration of its Axon cameras and related technologies. Certain of the Company's letters of credit contracts and surety bonds have stated expiration dates with others being released as the contractual performance terms are completed. The Company expects to fulfill all contractual performance obligations related to outstanding guarantees. At December 31, 2015, the Company had outstanding letters of credit of approximately $3.0 million. Of that amount, $2.7 million is expected to expire in May 2017 and $0.3 million is expected to expire in January 2017. Additionally, the Company had approximately $2.4 million of outstanding surety bonds at December 31, 2015, with $2.2 million expiring in July 2018 and the remaining $0.2 million expected to be released during the third quarter of 2016.

10. Income Taxes

Significant components of the Company’s deferred income tax assets and liabilities are as follows at December 31 (in thousands):

	2015				2014
Deferred income tax assets:
Net operating loss carryforward	$	649			$	343
Deferred revenue	6,762				4,141
Deferred compensation	1,252				423
Inventory reserve	956				508
Non-qualified and non-employee stock option expense	3,393				3,094
Capitalized research and development	3,348				4,847
Alternative minimum tax carryforward	—				1,081
Research and development tax credit carryforward	2,386				2,139
Reserves, accruals, and other	1,067				1,897
Total deferred income tax assets	19,813				18,473
Deferred income tax liabilities:
Depreciation	(2,228		)		(1,674		)
Amortization	(1,979		)		(236		)
Other	(187		)		—
Total deferred income tax liabilities	(4,394		)		(1,910		)
Net deferred income tax assets before valuation allowance	15,419				16,563
Valuation allowance	(1,700		)		(500		)
Net deferred income tax assets	$	13,719			$	16,063

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

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

to the net noncurrent deferred tax asset in the Consolidated Balance Sheet as of both December 31, 2015 and December 31, 2014. This accounting change had no impact on the Company's consolidated results of operations or comprehensive income.

For the years ended December 31, 2015, 2014 and 2013 the provision for income taxes includes $6.9 million, $8.0 million and $6.8 million, respectively, of tax expense resulting from stock-based compensation tax benefits that have been recorded as increases to additional paid-in capital on the consolidated statement of changes in stockholders’ equity.

The Company has $0.3 million of state net operating losses ("NOLs") which expire at various dates between 2016 and 2031. The Company also has Federal NOLs of $1.3 million which expire between 2031 and 2035, and are subject to limitation under IRC Section 382. The Company has $43,000 of federal research and development ("R&D") credits which expire in 2022 and 2023, and are also subject to limitation under IRC Section 382. The Company has $5.8 million of Arizona R&D credits carrying forward, which expire at various dates between 2018 and 2029, and California R&D credit carry forwards for financial reporting purposes of $0.1 million which do not expire. In the UK, the Company has $1.0 million of NOLs which do not expire.

In preparing the Company’s consolidated financial statements, management has assessed the likelihood that deferred income tax assets will be realized from future taxable income. In evaluating the ability to recover its deferred income tax assets, management considers all available evidence, positive and negative; including the Company’s operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred income tax assets will not be realized. Management exercises significant judgment in determining the Company’s provisions for income taxes, its deferred income tax assets and liabilities and its future taxable income for purposes of assessing its ability to utilize any future tax benefit from its deferred income tax assets.

Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of each reporting date, management considers new evidence, both positive and negative, that could impact management’s view with regards to future realization of deferred tax assets. As of December 31, 2015, the Company continues to demonstrate three-year cumulative pre-tax income in the U.S. federal and Arizona tax jurisdictions; however, the Arizona R&D Tax Credits start to expire in 2018 with a significant tranche with a gross value of $1.2 million expiring in 2019. Under the Company’s new structure, it appears that long term investments which impact short term profits will likely result in some of the R&D credits expiring before they are utilized. Therefore, management has concluded that it is more likely than not that a portion of the Company’s deferred tax assets will not be realized.

Significant components of the provision for income taxes are as follows for the years ended December 31 (in thousands):

	2015				2014				2013
Current:
Federal	$	13,594			$	7,793			$	7,963
State	996				800				987
Total current	14,590				8,593				8,950
Deferred:
Federal	288				2,656				764
State	984				942				(143		)
Foreign	(278		)		—				—
Total deferred	994				3,598				621
Tax provision recorded as an increase in liability for unrecorded tax benefits	(156		)		202				219
Provision for income taxes	$	15,428			$	12,393			$	9,790

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

A reconciliation of the Company’s effective income tax rate to the federal statutory rate follows for the years ended December 31 (in thousands):

	2015				2014				2013
Federal income tax at the statutory rate	$	12,347			$	11,236			$	9,812
State income taxes, net of federal benefit	1,061				1,433				1,283
Difference between statutory and foreign tax rates (i)	2,442				—				—
Permanent differences (ii)	(205		)		98				(96		)
Research and development	(1,050		)		(452		)		(386		)
Return to provision adjustment	(67		)		28				(361		)
Change in liability for unrecognized tax benefits	(156		)		202				219
Incentive stock option benefit	(144		)		(616		)		(538		)
Change in valuation allowance	1,200				500				—
Other	—				(36		)		(143		)
Provision for income taxes	$	15,428			$	12,393			$	9,790
Effective tax rate	43.6		%		38.4		%		34.9		%

(i)	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, partially reduced by a tax benefit for newly formed foreign entities for which the statutory tax rate is lower than the U.S. statutory tax rate.

(ii)	Permanent differences include certain expenses that are not deductible for tax purposes including lobbying fees as well as favorable items including the domestic production activities deduction

The Company has completed research and development tax credit studies which identified approximately $12.0 million in tax credits for federal, Arizona and California income tax purposes related to the 2003 through 2015 tax years. Management has made the determination that it is more likely than not that the full benefit of the R&D tax credit will not be sustained on examination and recorded a liability for unrecognized tax benefits of $3.2 million as of December 31, 2015. In addition, management accrued approximately $0.2 million for estimated uncertain tax positions related to certain state income tax liabilities. Should the unrecognized tax benefit of $3.4 million be recognized, the Company’s effective tax rate would be favorably impacted.

The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying Consolidated Statement of Operations. As of December 31, 2015 and 2014, respectively, the Company had accrued interest of $55,000 and $46,000.

The following table presents a roll forward of the Company's liability for unrecognized tax benefits, exclusive of accrued interest, as of December 31 (in thousands):

	2015				2014				2013
Balance, beginning of period	$	3,325			$	3,110			$	2,903
(Decrease) increase in previous year tax positions	(389		)		—				57
Increase in current year tax positions	270				121				144
Decrease due to lapse of statute of limitations	(14		)		—				—
Increase related to adjustment of previous estimates of activity	204				94				6
Balance, end of period	$	3,396			$	3,325			$	3,110

Federal income tax returns for 2004 through 2015 remain open to examination by the U.S. Internal Revenue Service (the “IRS”), while state and local income tax returns for 2004 through 2015 also remain open to examination by state taxing authorities. The 2004 through 2009 income tax returns are only open to the extent that net operating loss or other tax attributes carrying forward from those years were utilized in 2011 through 2015. The foreign tax returns for 2012 through 2015 also remain open to examination. During 2015 the IRS completed its examination of the Company's 2012 tax year. The Company has not been notified by any major state tax jurisdictions that it will be subject to examination.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company considers the earnings of certain non-U.S. subsidiaries to be indefinitely reinvested outside of the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and the Company's specific plans for reinvestment of those subsidiary earnings. It is not practicable to estimate the amount of the deferred tax liability, if any, related to investments in those foreign subsidiaries. If the Company decides to repatriate the foreign earnings, it would need to adjust its income tax provision in the period it determined that the earnings will no longer be indefinitely invested outside the United States.

11. Line of Credit

The Company has a $10.0 million revolving line of credit with a domestic bank. At December 31, 2015 and 2014, there were no borrowings under the line. As of December 31, 2015, the Company had letters of credit outstanding of $3.0 million under the facility and available borrowing of $7.0 million. The line is secured by substantially all of the assets of the Company, and bears interest at varying rates (currently LIBOR plus 1.5% or Prime less 0.75%). The line of credit matures on July 31, 2017, and requires monthly payments of interest only. The Company’s agreement with the bank requires it to comply with certain financial and other covenants including maintenance of a 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.

12. Stockholders’ Equity

a. Common Stock and Preferred Stock

The Company has authorized the issuance of two classes of stock designated as “common stock” and “preferred stock,” each having a par value of $0.00001 per share. The Company is authorized to issue 200 million shares of common stock and 25 million shares of preferred stock.

b. Stock Repurchase

In May 2014, the Company's Board of Directors authorized a stock repurchase program to acquire up to $30.0 million of the Company’s outstanding common stock subject to stock market conditions and corporate considerations. Under this program, which was completed in the third quarter of 2015, the Company purchased approximately 2.0 million common shares for a total cost of approximately $30.0 million, or a weighted average cost, including commissions of $14.85 per share. As of December 31, 2015, no amounts remain available under the plan for future purchases.

In February 2013, the Company’s Board of Directors authorized a stock repurchase program to acquire up to $25.0 million of the Company’s outstanding common stock subject to stock market conditions and corporate considerations. Under this program, which was completed in the second quarter of 2013, the Company purchased approximately 3.0 million common shares for a total cost of approximately $25.0 million, or a weighted average cost, including commissions, of $8.20 per share.

c. Stock-based Compensation Plans

The Company has historically utilized stock-based compensation, consisting of restricted stock units (“RSUs”) and stock options, for key employees and non-employee directors as a means of attracting and retaining quality personnel. Service-based grants generally have a vesting period of 3 to 5 years and a contractual maturity of ten years. Performance-based grants generally have vesting periods ranging from 1 to 5 years and a contractual maturity of ten years.

On February 25, 2013, the Company’s Board of Directors approved the 2013 Stock Incentive Plan (the “2013 Plan") which was subsequently approved by stockholders at the Annual Meeting of Stockholders on May 23, 2013. Under the 2013 Plan, the Company reserved for future grants: (i) 1.6 million shares of common stock, plus (ii) the number of shares of common stock that were authorized but unissued under the Company’s 2009 Stock Incentive Plan (the “2009 Plan”) as of the effective date of the 2013 Plan, and (iii) the number of shares of stock that have been granted under the 2009 Plan that either terminate, expire or lapse for any reason after the effective date of the 2013 Plan. As of December 31, 2015, approximately 1.3 million shares remain available for future grants. Shares issued upon exercise of stock awards from these plans have historically been issued from the Company’s authorized unissued shares.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

d. Performance-based stock awards

The Company has issued performance-based stock options and performance-based RSUs, the vesting of which is contingent upon the achievement of certain performance criteria related to the operating performance of the Company as well as successful and timely development and market acceptance of future product introductions. In addition, certain of the performance RSUs have additional service requirements subsequent to the achievement of the performance criteria. Compensation expense is recognized over the implicit service period (the longer of the period the performance condition is expected to be achieved or the required service period) based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date.

e. Restricted Stock Units

The following table summarizes RSU activity for the years ended December 31:

	2015								2014							2013
	Number of Units				Weighted Average Grant-Date Fair Value				Number of Units			Weighted Average Grant-Date Fair Value				Number of Units			Weighted Average Grant-Date Fair Value
Units outstanding, beginning of year	1,226,088				$	13.23			1,279,123			$	9.67			582,212			$	5.42
Granted	515,633				26.18				554,328			16.98				1,054,293			10.72
Released	(487,951		)		11.82				(432,706	)		7.61				(257,693	)		5.44
Forfeited	(114,493		)		16.72				(174,657	)		13.08				(99,689	)		6.86
Units outstanding, end of year	1,139,277				19.30				1,226,088			13.23				1,279,123			9.67
Aggregate intrinsic value at year end (in thousands)	$	19,698

Aggregate intrinsic value represents the Company’s closing stock price on the last trading day of the period, which was $17.29 per share at December 31, 2015, multiplied by the number of restricted stock units. The fair value as of the respective vesting dates of RSUs that vested during the year ended December 31, 2015 was $12.2 million. Certain RSUs that vested in 2015 were net-share settled such that the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld during 2015 were 54,182 and had a value of approximately $1.4 million on their respective vesting dates as determined by the Company’s closing stock price. Payments for the employees’ tax obligations are reflected as a financing activity within the statement of cash flows. These net-share settlements had the effect of share repurchases by the Company as they reduced the amount of shares that would have otherwise been issued as a result of the vesting.

In 2015, 2014 and 2013, the Company granted approximately 49,000, 140,000 and 270,000 performance-based RSUs, respectively (included in the table above). Certain of the performance-based RSUs outstanding as of December 31, 2015 can vest with a range of shares earned being between 0% and 200% of the targeted shares granted, depending on the final achievement of pre-determined performance criteria achieved as of the measurement date. As of December 31, 2015, the performance criteria has been met for none of the 0.1 million performance-based RSUs outstanding. The Company recognized $1.5 million, $1.0 million and $1.4 million of compensation expense related to performance-based RSUs during the years ended December 2015, 2014 and 2013, respectively.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

f. Stock Option Activity

The following table summarizes stock option activity for the years ended December 31:

	2015							2014							2013
	Number of Options			Weighted Average Exercise Price				Number of Options			Weighted Average Exercise Price				Number of Options			Weighted Average Exercise Price
Options outstanding, beginning of year	1,641,083			$	5.26			3,365,692			$	6.15			6,321,076			$	6.05
Granted	—			—				—			—				—			—
Exercised	(525,180	)		4.95				(1,644,146	)		6.69				(2,671,058	)		5.75
Expired / terminated	(13,158	)		7.27				(80,463	)		16.59				(284,326	)		7.83
Options outstanding, end of year	1,102,745			5.37				1,641,083			5.26				3,365,692			6.15
Options exercisable, end of year	1,072,145			5.39				1,605,789			5.27				3,217,146			6.22
Options expected to vest, end of year	25,000			4.75

No stock options were granted in 2015, 2014 or 2013. Total intrinsic value of options exercised was $13.6 million, $20.2 million and $15.7 million for the years ended December 31, 2015, 2014 and 2013, respectively. The intrinsic value for options exercised was calculated as the difference between the exercise price of the underlying stock option awards and the market price of the Company’s common stock on the date of exercise.

The following table summarizes information about stock options outstanding and exercisable as of December 31, 2015:

	Options Outstanding									Options Exercisable
Range of Exercise Price	Number of Options Outstanding			Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (Years)		Number of Options Exercisable			Weighted Average Price				Weighted Average Remaining Contractual Life (Years)
$4.00 - $5.00	783,598			$	4.64			3.73		752,998			$	4.63			3.76
$5.01 - $7.00	137,936			5.58				2.95		137,936			5.58				2.95
$7.01 - $10.00	113,322			7.24				2.20		113,322			7.24				2.20
$10.01 - $16.23	67,889			10.30				1.40		67,889			10.30				1.40
$4.00 - $16.23	1,102,745			5.37				3.33		1,072,145			5.39				3.34

The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2015, was $13.1 million and $12.8 million, respectively. Aggregate intrinsic value represents the difference between the exercise price of the underlying stock option awards and the closing market price of the Company’s common stock of $17.29 on December 31, 2015.

At December 31, 2015, the Company had 30,600 unvested options outstanding with a weighted average exercise price of $4.75 per share, weighted average grant-date fair value of $2.58 per share and weighted average remaining contractual life of 3.0 years. The aggregate intrinsic value of unvested options at December 31, 2015 was $0.4 million.

The Company granted approximately 1.0 million performance-based stock options (included in the table above) from 2008 through 2011. As of December 31, 2015, approximately 0.2 million performance-based stock options are outstanding, of which approximately 30,600 are unvested and 25,000 are expected to vest. The aggregate grant-date fair value of the 0.2 million performance-based stock options vested and expected to vest as of December 31, 2015 was approximately $0.6 million. During 2015, the Company determined that 25,000 performance-based stock options that were previously not expected to vest were now expected to vest, and the Company recorded approximately $0.1 million of expense related to these options during the year ended December 31, 2015. The Company recognized no stock-based compensation expense related to performance-based stock options during the year ended December 31, 2014 and approximately $0.1 million during the year ended December 31, 2013.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

g. Stock-based Compensation Expense

The Company accounts for stock-based compensation using the fair-value method. Reported stock-based compensation was classified as follows for the years ended December 31 (in thousands):

	2015				2014				2013
Cost of products sold and services delivered	$	402			$	204			$	175
Sales, general and administrative expenses	4,285				3,555				3,158
Research and development expenses	2,576				1,820				1,007
Total stock-based compensation	$	7,263			$	5,579			$	4,340

Total stock-based compensation expense recognized in the statements of operations for the years ended December 31, 2015, 2014 and 2013 includes $0.1 million, $28,000 and $0.1 million, respectively, related to ISOs for which no tax benefit is recognized. The Company recorded a tax benefit in 2015, 2014, and 2013 of $0.2 million, $0.7 million, and $0.6 million, respectively, to offset taxes payable related to the non-qualified disposition of ISOs exercised and sold. For the years ended December 31, 2015, 2014 and 2013 the provision for income taxes included $6.9 million, $8.0 million and $6.8 million, respectively, of tax expense resulting from the fact that stock-based compensation tax benefits have been recorded as increases to additional paid-in capital on the consolidated statements of changes in stockholders' equity. The total future tax benefits related to non-qualified and restricted stock units was $3.4 million and $3.1 million as of December 31, 2015 and 2014, respectively.

As of December 31, 2015, there was $16.8 million in unrecognized compensation costs related to RSUs under the Company's stock plans. The Company expects to recognize the cost related to the RSUs over a weighted average period of 2.65 years.

13. Related Party Transactions

The Company engages Mark Kroll, a member of the Board of Directors, to provide consulting services. The expenses related to these services were $0.2 million for each of the years ended December 31, 2015, 2014 and 2013. At December 31, 2015 and 2014, the Company had accrued liabilities of approximately $31,000 and $8,000, respectively, related to these services.

The Company subscribes to a mobile collaboration software suite co-founded and managed by Bret Taylor, a member of the Board of Directors. The Company licenses the software for approximately $80,000 per year. As of December 31, 2015 and 2014 the Company had prepaid subscription costs of approximately $36,000 and $20,000, respectively.

In connection with the acquisition of Tactical Safety Responses Limited (Note 15), the Company assumed two long-term non-cancellable operating leases for business premises with the former owners who are now employees of the Company. The leases have an average remaining contractual term 11.3 years and require aggregate annual rental payments of approximately $45,000.

14. Employee Benefit Plans

The Company has a defined contribution profit sharing 401(k) plan for eligible employees, which is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. Employees are entitled to make tax-deferred contributions of up to the maximum allowed by law of their eligible compensation. Contributions to the plans are made by both the employee and the Company. Company contributions are based on the level of employee contributions and are immediately vested. The Company’s matching contributions to the plan for the years ended December 31, 2015, 2014 and 2013, were approximately $1.2 million, $0.9 million and $0.7 million, respectively.

The Company also has a non-qualified deferred compensation plan for certain executives, key employees and non-employee directors through which participants may elect to postpone the receipt and taxation of a portion of their compensation, including stock-based compensation, received from the Company. The non-qualified deferred compensation plan allows eligible participants to defer up to 80% of their base salary and up to 100% of other types of compensation. The plan also allows for (i) matching and discretionary employer contributions and (ii) the deferral of vested RSU awards. Employee deferrals are deemed 100% vested upon contribution. Distributions from the plan are made upon retirement, death, separation of service, specified date or upon the occurrence of an unforeseeable emergency. Distributions can be paid in a variety of forms from lump sum to installments over a period of years. Participants in the plan are entitled to select from a wide variety of investments available under the plan and are

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

allocated gains or losses based upon the performance of the investments selected by the participant. All gains or losses are allocated fully to plan participants and the Company does not guarantee a rate of return on deferred balances. Assets related to this plan consist of corporate-owned life insurance contracts and are included in other assets in the consolidated balance sheets. Participants have no rights or claims with respect to any plan assets and any such assets are subject to the claims of the Company’s general creditors. Subsequent to December 31, 2015, the Company made contributions to the non-qualified deferred compensation plan related to the year ended December 31, 2015, of approximately $40,000. Future matching or profit sharing contributions to the plans are at the Company’s sole discretion.

15. Business Acquisitions

MediaSolv Solutions Corporation

On May 5, 2015, the Company acquired all of the outstanding capital stock of MediaSolv Solutions Corporation, a Delaware corporation for a total purchase price of $8.8 million, net of $0.1 million of cash acquired. MediaSolv primarily provides solutions for interview room video, closed-circuit television ("CCTV") and on-premise digital evidence management. These products will connect with the Company's Axon on-officer cameras and, in some cases, its Evidence.com cloud platform, further enabling law enforcement to unify existing silos of digital media and evidence into a seamless workflow from capture to the courtroom. The Company believes the acquisition will also allow the Company to leverage MediaSolv’s existing network and relationships to further strengthen the Company's position in the market.

The purchase price consisted primarily of cash, net of cash acquired and working capital adjustments, of $7.8 million and contingent consideration of $1.0 million representing potential earn-outs to former stockholders based on predetermined future financial metrics. The Company also agreed to additional earn-out provisions and compensation adjustments totaling approximately $4.0 million based, in part, on predefined future financial metrics. The additional earn-outs were not included as part of the purchase price and will be expensed as compensation in the period earned. The fair value of the contingent consideration liability was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820, Fair Value Measurements and Disclosures. The significant inputs in the Level 3 measurement not supported by market activity included primarily probability assessments related to the attainment of new customers during the earn-out period, appropriately discounted considering the uncertainties associated with the obligation. Subsequent to the date of acquisition, there was no significant change in the estimated fair value of the liability.

The Company's purchase price allocation is preliminary and subject to revision as more detailed analyses are completed and additional information about fair value of assets and liabilities become available, including additional information relating to tax matters and finalization of the valuation of identifiable intangible assets.

The major classes of assets and liabilities to which the Company has allocated the purchase price, on a preliminary basis, are as follows (in thousands):

Accounts receivable and other current assets	$	590
Inventory	35
Property and equipment	53
Intangible assets	4,145
Goodwill	5,849
Accounts payable and accrued liabilities	(697		)
Deferred revenue	(111		)
Deferred income tax liabilities, net	(1,041		)
Total purchase price	$	8,823

The Company has assigned the goodwill to the Axon segment. Other identifiable definite lived intangible assets were assigned a total weighted average amortization period of 6.5 years. MediaSolv has been included in the Company's consolidated results of operations subsequent to the acquisition date. Pro forma results of operations for MediaSolv have not been presented because they are not material to the consolidated results of operations. In connection with the acquisition, the Company incurred and expensed costs of approximately $0.2 million, which included legal, accounting and other third-party expenses related to the transaction.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Tactical Safety Responses Limited

On July 16, 2015, TASER International B.V., a wholly owned subsidiary of the Company, acquired all of the outstanding capital stock of Tactical Safety Responses Limited ("TSR"), a United Kingdom ("UK") corporation. TSR is the Company's licensed distributor of TASER CEWs and Axon cameras and related accessories in the UK. The acquisition is intended to help expand the Company's growth across the UK by growing its in-country sales and support team. The total purchase was $3.3 million consisting of $4.0 million cash at close, net of $0.7 million of cash acquired. The Company also agreed to additional amounts in the form of earn-outs, subject to the achievement of predefined performance metrics. The earn-outs were not included as part of the purchase price and will be expensed as compensation in the period earned. The acquired entity will operate under the name Axon Public Safety UK.

The Company's purchase price allocation is preliminary and subject to revision as more detailed analyses are completed and additional information about fair value of assets and liabilities become available, including additional information relating to tax matters and finalization of the valuation of identifiable intangible assets.

The major classes of assets and liabilities to which the Company has allocated the purchase price, on a preliminary basis, are as follows (in thousands):

Accounts receivable	$	726
Inventory	497
Property and equipment	583
Other Assets	20
Intangible assets	881
Goodwill	1,608
Accounts payable and accrued liabilities	(207		)
Notes payable	(169		)
Income tax liabilities	(605		)
Total purchase price	$	3,334

The Company has assigned the goodwill to the consolidated entity. Other identifiable definite lived intangible assets were assigned a total weighted average amortization period of 7.0 years. TSR has been included in the Company's consolidated results of operations subsequent to the acquisition date. Pro forma results of operations for TSR have not been presented because they are not material to the consolidated results of operations. In connection with the acquisition, the Company incurred and expensed costs of approximately $0.1 million, which included legal, accounting and other third-party expenses related to the transaction.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

16. Segment Data

The Company’s operations are comprised of two reportable segments: the sale of CEWs, accessories and other products and services (the “TASER Weapons” segment); and the video business, which includes the TASER Cam, Axon video products and 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 video sales team, video product management expenses, video 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, only limited asset information is provided in the following tables.

Information relative to the Company’s reportable segments is as follows (in thousands):

	For the year ended December 31, 2015
	TASER Weapons				Axon				Total
Product sales	$	162,375			$	22,855			$	185,230
Service revenue	—				12,662				12,662
Net sales	162,375				35,517				197,892
Cost of products sold	48,821				16,201				65,022
Cost of services delivered	—				4,223				4,223
Gross margin	113,554				15,093				128,647
Sales, general and administrative	47,640				22,058				69,698
Research and development	4,470				19,144				23,614
Income (loss) from operations	$	61,444			$	(26,109	)		$	35,335
Purchase of property and equipment	$	4,159			$	1,844			$	6,003
Purchase of intangible assets	277				224				501
Purchase of property and equipment and intangible assets in connection with business acquisitions (a)	1,536				11,583				13,119
Depreciation and amortization	2,311				980				3,291

(a) Total goodwill recorded in connection with business acquisitions during the year ended December 31, 2015 was $7.5 million. Of this amount, $0.8 million was assigned to the TASER Weapons segment and $6.7 million was assigned to the Axon segment.

	For the year ended December 31, 2014
	TASER Weapons				Axon				Total
Product sales	$	145,613			$	14,700			$	160,313
Service revenue	—				4,212				4,212
Net sales	145,613				18,912				164,525
Cost of products sold	47,680				13,233				60,913
Cost of services delivered	—				2,064				2,064
Gross margin	97,933				3,615				101,548
Sales, general and administrative	42,989				11,169				54,158
Research and development	3,872				11,013				14,885
Litigation judgment	—				—				—
Income (loss) from operations	$	51,072			$	(18,567	)		$	32,505
Purchase of property and equipment	$	2,233			$	272			$	2,505
Purchase of intangible assets	180				3				183
Depreciation and amortization	3,936				381				4,317

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	For the year ended December 31, 2013
	TASER Weapons				Axon				Total
Product sales	$	127,474			$	8,649			$	136,123
Service revenue	—				1,708				1,708
Net sales	127,474				10,357				137,831
Cost of products sold	44,025				6,074				50,099
Cost of services delivered	—				1,889				1,889
Gross margin	83,449				2,394				85,843
Sales, general and administrative	40,174				6,383				46,557
Research and development	4,311				5,577				9,888
Litigation recovery	1,450				—				1,450
Income (loss) from operations	$	37,514			$	(9,566	)		$	27,948
Purchase of property and equipment	$	1,324			$	459			$	1,783
Purchase of intangible assets	307				16				323
Depreciation and amortization	4,011				1,120				5,131

17. Selected Quarterly Financial Data (unaudited)

Selected quarterly financial data for years ended December 31, 2015 and 2014 follows (in thousands, except per share data):

	Quarter Ended
	March 31,				June 30,				September 30,				December 31,
	2015				2015				2015				2015
Net sales	$	44,762			$	46,713			$	50,376			$	56,041
Gross margin	29,868				30,723				31,068				36,988
Net income	7,205				6,103				1,521				5,104
Earnings per share (1):
Basic	$	0.14			$	0.11			$	0.03			$	0.10
Diluted	$	0.13			$	0.11			$	0.03			$	0.09
	Quarter Ended
	March 31,				June 30,				September 30,				December 31,
	2014				2014				2014				2014
Net sales	$	36,185			$	37,175			$	44,349			$	46,816
Gross margin	22,208				23,214				28,713				27,413
Net income	3,391				3,883				7,558				5,086
Earnings per share (1):
Basic	$	0.06			$	0.07			$	0.14			$	0.10
Diluted	$	0.06			$	0.07			$	0.14			$	0.09

(1) Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

18. Supplemental Disclosure to Cash Flows

Supplemental non-cash and other cash flow information are as follows for the years ended December 31 (in thousands):

	2015				2014				2013
Cash paid for income taxes, net of refunds	$	6,759			$	386			$	3,625
Non-cash transactions:
Stock issued for business acquisition	$	—			$	—			$	1,578
Property and equipment purchases in accounts payable	315				270				279

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

TASER International, Inc.

We have audited the accompanying consolidated balance sheets of TASER International, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and

disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TASER International, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 3, 2016 expressed an unqualified opinion.

/s/ GRANT THORNTON LLP

Phoenix, Arizona

March 3, 2016