Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements		Page
Consolidated Balance Sheets as of December 31, 2016 and 2015		47
Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2016, 2015 and 2014		48
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2016, 2015 and 2014		49
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014		50
Notes to Consolidated Financial Statements		51
Selected Quarterly Financial Information (Unaudited)		77
Report of Grant Thornton LLP, Independent Registered Public Accounting Firm		78

TASER INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	December 31,
	2016				2015
ASSETS
Current assets:
Cash and cash equivalents	$	40,651			$	59,526
Short-term investments	48,415				50,254
Accounts and notes receivable, net of allowance of $443 and $322 as of December 31, 2016 and 2015, respectively	39,466				27,701
Inventory	34,841				15,763
Prepaid expenses and other current assets	13,858				8,165
Total current assets	177,231				161,409
Property and equipment, net	24,004				21,848
Deferred income tax assets, net	19,515				13,719
Intangible assets, net	15,218				7,588
Goodwill	10,442				9,596
Long-term investments	234				8,525
Long-term accounts and notes receivable, net of current portion	17,602				1,227
Other assets	13,917				5,969
Total assets	$	278,163			$	229,881
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	10,736			$	7,333
Accrued liabilities	18,248				8,643
Current portion of deferred revenue	45,137				20,851
Customer deposits	2,148				1,226
Current portion of business acquisition contingent consideration	1,690				—
Other current liabilities	80				87
Total current liabilities	78,039				38,140
Deferred revenue, net of current portion	40,054				30,190
Liability for unrecognized tax benefits	1,896				1,315
Long-term deferred compensation	3,362				2,199
Business acquisition contingent consideration, net of current portion	1,635				952
Other long-term liabilities	2,289				81
Total liabilities	127,275				72,877
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, 2016 and 2015	—				—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 52,325,251 and 53,692,192 shares issued and outstanding as of December 31, 2016 and 2015, respectively	1				1
Additional paid-in capital	187,656				178,143
Treasury stock at cost, 20,220,227 and 18,432,158 shares as of December 31, 2016 and 2015, respectively	(155,947		)		(122,201		)
Retained earnings	118,275				100,978
Accumulated other comprehensive income	903				83
Total stockholders’ equity	150,888				157,004
Total liabilities and stockholders’ equity	$	278,163			$	229,881

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,
	2016				2015				2014
Net sales	$	268,245			$	197,892			$	164,525
Cost of products sold and services delivered	97,709				69,245				62,977
Gross margin	170,536				128,647				101,548
Operating expenses:
Sales, general and administrative	108,076				69,698				54,158
Research and development	30,609				23,614				14,885
Total operating expenses	138,685				93,312				69,043
Income from operations	31,851				35,335				32,505
Interest and other income (expense), net	(354		)		26				(194		)
Income before provision for income taxes	31,497				35,361				32,311
Provision for income taxes	14,200				15,428				12,393
Net income	$	17,297			$	19,933			$	19,918
Net income per common and common equivalent shares:
Basic	$	0.33			$	0.37			$	0.38
Diluted	$	0.32			$	0.36			$	0.37
Weighted average number of common and common equivalent shares outstanding:
Basic	52,667				53,548				52,948
Diluted	53,536				54,638				54,500
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$	17,297			$	19,933			$	19,918
Foreign currency translation adjustments	820				19				66
Comprehensive income	$	18,117			$	19,952			$	19,984

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, 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
Stock options exercised and RSUs vested, net of withholdings	421,128			—				(1,294		)		—			—				—				—				(1,294		)
Stock-based compensation	—			—				9,369				—			—				—				—				9,369
Excess tax benefit from stock-based compensation	—			—				1,438				—			—				—				—				1,438
Purchase of treasury stock	(1,788,069	)		—				—				1,788,069			(33,746		)		—				—				(33,746		)
Net income	—			—				—				—			—				—				17,297				17,297
Foreign currency translation adjustments	—			—				—				—			—				820				—				820
Balance, December 31, 2016	52,325,251			$	1			$	187,656			20,220,227			$	(155,947	)		$	903			$	118,275			$	150,888

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,
	2016				2015				2014
Cash flows from operating activities:
Net income	$	17,297			$	19,933			$	19,918
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	3,658				3,291				4,317
Purchase accounting adjustments to goodwill	520				—				—
Loss (gain) on disposals of property and equipment, net	42				(19		)		17
Loss on disposal of intangible assets	21				225				215
Bond premium amortization	1,265				1,650				957
Stock-based compensation	9,369				7,263				5,579
Deferred income taxes	(5,167		)		994				3,598
Unrecognized tax benefits	582				(156		)		202
Tax benefit from stock-based compensation	(1,438		)		(6,936		)		(7,985		)
Change in assets and liabilities:
Accounts and notes receivable	(13,297		)		4,244				(8,247		)
Inventory	(18,668		)		3,140				(7,214		)
Prepaid expenses and other assets	(29,069		)		(8,579		)		(1,080		)
Accounts payable, accrued and other liabilities	17,584				5,868				9,852
Deferred revenue	34,304				15,289				15,469
Customer deposits	922				238				(166		)
Net cash provided by operating activities	17,925				46,445				35,432
Cash flows from investing activities:
Purchases of investments	(56,086		)		(62,464		)		(32,900		)
Proceeds from call / maturity of investments	64,951				44,105				10,997
Purchases of property and equipment	(4,957		)		(6,003		)		(2,505		)
Proceeds from disposal of property and equipment	42				40				10
Purchases of intangible assets	(3,495		)		(501		)		(183		)
Business acquisitions, net of cash acquired	(3,500		)		(11,186		)		—
Net cash used in investing activities	(3,045		)		(36,009		)		(24,581		)
Cash flows from financing activities:
Repurchase of common stock	(33,746		)		(7,556		)		(22,442		)
Proceeds from options exercised	478				2,673				11,000
Payroll tax payments for net-settled stock awards	(1,772		)		(1,370		)		(1,347		)
Payments on capital lease obligation	(32		)		(80		)		(36		)
Payments on notes payable	(75		)		—				—
Payment of contingent consideration for business acquisition	(952		)		—				—
Excess tax benefit from stock-based compensation	1,438				6,936				7,985
Net cash (used in) provided by financing activities	(34,661		)		603				(4,840		)
Effect of exchange rate changes on cash and cash equivalents	906				120				85
Net increase (decrease) in cash and cash equivalents	(18,875		)		11,159				6,096
Cash and cash equivalents, beginning of year	59,526				48,367				42,271
Cash and cash equivalents, end of year	$	40,651			$	59,526			$	48,367

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., Axon Public Safety Canada, 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,

•	recognition and measurement of contingencies and accrued litigation expense. and

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

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.

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 does not amortize goodwill and intangible assets with indefinite useful lives, rather such assets are required to be tested for impairment at least annually during the fourth quarter or sooner whenever events or changes in circumstances indicate that the assets may be impaired. 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, 2016, 2015 and 2014.

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 Axon 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 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.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 when the new product is delivered. 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.

In 2016, the Company introduced the TASER 60 Plan ("TASER 60") whereby a customer typically enters into a five year CEW installment purchase arrangement. The TASER 60 plan also includes extended warranties on the CEW devices upon delivery covering the contract periods as well as on-site spares, holsters and cartridges. Generally, the Company recognizes revenue for the amount allocated to the CEW at the time of sale for the amount of the customer receivable, net of imputed interest, and the amount allocated to the extended warranty is recognized over five years.

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

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

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.

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 $0.4 million, $0.6 million and $0.3 million in the years ended December 31, 2016, 2015 and 2014, 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):

	2016				2015				2014
Balance, January 1	$	314			$	675			$	955
Utilization of accrual	(155		)		(299		)		(676		)
Warranty expense (recoveries)	621				(62		)		396
Balance, December 31	$	780			$	314			$	675

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 $30.6 million, $23.6 million and $14.9 million, in 2016, 2015 and 2014, respectively.

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

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 $0.4 million and $0.3 million as of December 31, 2016 and 2015, respectively. 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 five depository institutions. As of December 31, 2016, the aggregate balances in such accounts were $33.2 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, Germany and Australia. 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. No customer represented more than 10% of total net sales for the years ended December 31, 2016, 2015 or 2014.

At December 31, 2016 and 2015, the Company had a trade receivable from one unaffiliated customer comprising 14.5% and 12.5%, 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 any significant 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:

•	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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

•

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, 2016 and 2015, 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, 2016 and 2015 was $3.2 million and $2.2 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 Axon business, focused on devices, wearables, applications, cloud and mobile products (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, 2016, 2015 and 2014, net sales by geographic area were as follows (in thousands):

	Year Ended December 31,
	2016							2015							2014
United States	$	218,757			81.6	%		$	161,803			81.8	%		$	132,205			80.4	%
Other Countries	49,488				18.4			36,089				18.2			32,320				19.6
Total	$	268,245			100.0	%		$	197,892			100.0	%		$	164,525			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, 2016, 2015 and 2014, 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, 2016, 2015 or 2014. 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.

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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,
	2016				2015				2014
Numerator for basic and diluted earnings per share:
Net income	$	17,297			$	19,933			$	19,918
Denominator:
Weighted average shares outstanding—basic	52,667				53,548				52,948
Dilutive effect of stock-based awards	869				1,090				1,552
Diluted weighted average shares outstanding	53,536				54,638				54,500
Anti-dilutive stock-based awards excluded	443				198				177
Net income per common share:
Basic	$	0.33			$	0.37			$	0.38
Diluted	$	0.32			$	0.36			$	0.37

s. Recently Issued Accounting Guidance

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations. Subsequently, the FASB issued the following accounting standard updates related to Topic 606, Revenue Contracts with Customers:

•	ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) in March 2016. ASU 2016-08 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on principal versus agent considerations.

•	ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing in April 2016. ASU 2016-10 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on identifying performance obligations and the licensing

•	ASUs No. 2016-12 and 2016-20, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. These ASUs do not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on a few narrow areas and adds some practical expedients to the guidance.

The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. During Fiscal 2016, the Company established an internal implementation team and engaged a third-party advisory firm to assist in the implementation of the new standard. The Company is currently finalizing its assessment relative to the adoption of this guidance, and currently does not expect it will have significant impact on its consolidated financial statements. The Company is also evaluating whether to adopt the guidance using the full or modified retrospective basis, and will likely make that determination during the first half of Fiscal 2017.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330). 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 Company adopted this guidance effective January 1, 2017 and does not expect this ASU to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

leases under previous GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for the fiscal year beginning after December 15, 2018 (including interim periods within that year) using a modified retrospective approach and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-02 on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification (Topic 718), Compensation – Stock Compensation. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted this guidance effective January 1, 2017. Under this standard, all excess tax benefits and tax deficiencies related to stock compensation will be recognized as income tax expense or benefit in the consolidated statement of operations. The Company will recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period, subject to normal valuation allowance considerations. The standard will be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of Fiscal 2017. The Company does not expect the provisions of this ASU to have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which amends ASC 326. The new guidance differs from existing GAAP wherein previous objectives generally delayed recognition of credit losses until the loss was probable. ASU 2016-13 eliminates the probable initial recognition threshold and, instead, reflect an entity’s current estimate of all expected credit losses. The use of forecasted information is intended to incorporate more timely information in the estimate of expected credit loss. ASU 2016-13 is effective for the fiscal year beginning after December 15, 2019, and interim periods within that fiscal year, and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-13 on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. ASU 2016-15 is effective for the fiscal year beginning after December 15, 2017, and interim periods within that fiscal year, and early adoption is permitted. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be prospectively as of the earliest date practicable. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires an entity to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This removes the exception to postpone recognition until the asset has been sold to an outside party. ASU 2016-16 is effective for fiscal year beginning after December 15, 2017 using a modified retrospective approach, and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-16 on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows - Restricted Cash (Topic 230), which amends the existing guidance relating to the disclosure of restricted cash and restricted cash equivalents on the statement of cash flows. ASU 2016-18 is effective for the fiscal year beginning after December 15, 2017, and interim periods within that fiscal year, and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-18 on its Consolidated Statements of Cash Flows.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) to provide a more robust framework to use in determining when a set of assets and activities is a business. ASU 2017-01 is effective for the fiscal year beginning after December 15, 2017, and interim periods within that year and early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 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, 2016
	Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value				Cash and Cash Equivalents				Short-Term Investments				Long-Term Investments
Cash	$	32,802			$	—			$	—			$	32,802			$	32,802			$	—			$	—
Level 1:
Money market funds	7,849				—				—				7,849				7,849				—				—
Corporate bonds	33,379				—				(57		)		33,322				—				33,379				—
Subtotal	41,228				—				(57		)		41,171				7,849				33,379				—
Level 2:
State and municipal obligations	14,477				—				(10		)		14,467				—				14,243				234
Certificates of deposit	793				—				—				793				—				793				—
Subtotal	15,270				—				(10		)		15,260				—				15,036				234
Total	$	89,300			$	—			$	(67	)		$	89,233			$	40,651			$	48,415			$	234

	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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

and intent to hold these investments to maturity, the Company does not consider these investments to be other than temporarily impaired at December 31, 2016. 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, 2016 by contractual maturity (in thousands):

	Amortized Cost				Fair Value
Due in less than one year	$	48,415			$	48,349
Due after one year, through two years	234				233
Due after two years	—				—
Total short-term and long-term investments	$	48,649			$	48,582

3. Inventory

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

	2016				2015
Raw materials	$	18,002			$	8,853
Finished goods	16,839				6,910
Total inventory	$	34,841			$	15,763

4. Property and Equipment

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

	Estimated Useful Life		2016				2015
Land	N/A		$	2,900			$	2,900
Building and leasehold improvements	3-39 years		15,295				15,246
Production equipment	3-7 years		19,849				18,689
Computer equipment	3-5 years		7,985				8,048
Furniture and office equipment	5-7 years		4,990				4,116
Vehicles	5 years		675				713
Website development costs	3 years		601				601
Capitalized software development costs	3 years		3,695				3,670
Construction-in-process	N/A		5,813				3,885
Total cost			61,803				57,868
Less: Accumulated depreciation			(37,799		)		(36,020		)
Property and equipment, net			$	24,004			$	21,848

Depreciation and amortization expense relative to property and equipment, including equipment under capital lease, was $2.5 million, $2.3 million and $4.0 million for the years ended December 31, 2016, 2015 and 2014, respectively, of which $0.7 million, $0.7 million and $2.8 million was included in cost of products sold and services delivered for the respective years.

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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, 2016 were as follows (in thousands):

Balance, January 1, 2015	$	9,596
Goodwill acquired	1,615
Purchase accounting adjustments	(520		)
Foreign currency translation adjustments	(249		)
Balance, December 31, 2016	$	10,442

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

			December 31, 2016												December 31, 2015
	Useful Life		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount				Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
Amortized:
Domain names	5-10 years		$	3,161			$	(125	)		$	3,036			$	125			$	(120	)		$	5
Issued patents	4-15 years		1,942				(780		)		1,162				1,866				(659		)		1,207
Issued trademarks	3-11 years		655				(320		)		335				603				(255		)		348
Customer relationships	4-8 years		914				(240		)		674				1,035				(93		)		942
Non-compete agreements	3-4 years		465				(236		)		229				464				(164		)		300
Developed technology	5-7 years		8,661				(824		)		7,837				3,470				(326		)		3,144
Total amortized			15,798				(2,525		)		13,273				7,563				(1,617		)		5,946
Not amortized:
TASER trademark			900								900				900								900
Patents and trademarks pending			1,045								1,045				742								742
Total not amortized			1,945								1,945				1,642								1,642
Total intangible assets			$	17,743			$	(2,525	)		$	15,218			$	9,205			$	(1,617	)		$	7,588

Amortization expense related to intangible assets was $0.9 million, $0.8 million and $0.2 million for the years ended December 31, 2016, 2015 and 2014, respectively. Estimated amortization for intangible assets with definitive lives for the next five years, and thereafter, is as follows for the years ended December 31 (in thousands):

2017	$	2,281
2018	2,268
2019	2,145
2020	2,084
2021	2,076
Thereafter	2,419
Total	$	13,273

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

6. Other Long-Term Assets

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

	2016				2015
Cash surrender value of corporate-owned life insurance policies (Note 1)	$	3,240			$	2,180
Prepaid commissions (i)	5,302				3,543
Restricted cash (ii)	3,317				—
Prepaid expenses, deposits and other (iii)	2,058				246
	$	13,917			$	5,969

(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) As of December 31, 2016, restricted cash primarily consisted of $2.7 million of sales proceeds related to a long-term contract with a specific customer. These proceeds are held in escrow until certain billing milestones are achieved, and then specified amounts are transferred to the Company's operating accounts. Restricted also contained $0.6 million related to a performance guarantee related to an international customer sales contract.

(iii) Included in long-term assets as of December 31, 2016 was $1.8 million of funds deposited in escrow related to contingent consideration in connection with a business combination (see Note 15). The funds will be held in escrow and released to selling shareholders if certain conditions are subsequently met. If the conditions are not met, the funds will be released back to the Company.

7. Deferred Revenue

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

	December 31, 2016												December 31, 2015
	Current				Long-Term				Total				Current				Long-Term				Total
Warranty:
TASER Weapons	$	9,783			$	17,319			$	27,102			$	7,278			$	13,982			$	21,260
Axon	3,979				2,926				6,905				2,332				2,344				4,676
	13,762				20,245				34,007				9,610				16,326				25,936
Hardware:
TASER Weapons	1,702				4,390				6,092				952				2,459				3,411
Axon	9,850				11,205				21,055				786				7,382				8,168
	11,552				15,595				27,147				1,738				9,841				11,579
Axon Services	19,626				4,214				23,840				9,303				4,023				13,326
Other	197				—				197				200				—				200
Total	$	45,137			$	40,054			$	85,191			$	20,851			$	30,190			$	51,041

	December 31, 2016												December 31, 2015
	Current				Long-Term				Total				Current				Long-Term				Total
TASER Weapons and other	$	11,682			$	21,709			$	33,391			$	8,430			$	16,441			$	24,871
Axon	33,455				18,345				51,800				12,421				13,749				26,170
Total	$	45,137			$	40,054			$	85,191			$	20,851			$	30,190			$	51,041

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

8. Accrued Liabilities

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

	2016				2015
Accrued salaries, benefits and bonus	$	6,474			$	3,637
Accrued professional, consulting and lobbying	3,673				1,098
Accrued warranty expense	780				314
Accrued income and other taxes	4,581				1,215
Other accrued expenses	2,740				2,379
Accrued liabilities	$	18,248			$	8,643

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, 2016, the Company's leases are for terms ranging from less than one year to six 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 $1.8 million, $1.0 million and $0.9 million for the years ended December 31, 2016, 2015, and 2014, respectively.

Future minimum lease payments under non-cancelable leases at December 31, 2016, are as follows (in thousands):

	Operating				Capital
2017	$	1,440			$	36
2018	1,278				36
2019	646				36
2020	653				33
2021	596				—
Thereafter	504				—
Total minimum lease payments	$	5,117			141
Less: Amount representing interest					(11		)
Capital lease obligation					$	130

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, 2016, the Company has approximately $46.0 million of open purchase orders.

c. Litigation

Product Litigation

The Company is currently named as a defendant in eight 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. 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 such lawsuits over the Company’s objection where the risk is over the Company’s liability insurance deductibles. Due to the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 eight 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
Shymko		Dec-10		The Queen's Bench, Winnipeg Centre, Manitoba		Wrongful Death		Pleading Phase
Ramsey		Jan-12		12th Judicial Circuit Court, Broward County, FL		Wrongful Death		Discovery Phase
Firman		Apr-12		Ontario, Canada Superior Court of Justice		Wrongful Death		Dismissal Pending
Schrock		Sep-14		San Bernardino County Superior Court, CA		Wrongful Death		Motion of Summary Judgment Granted on all claims except negligent design and manufacture, subject to repleading by Plaintiff. Plaintiff filed an amended complaint for negligent design claims as well as a Petition for Writ of Mandate or Prohibition Petition from the Court; which writ was summarily denied. Trial scheduled for August 14, 2017
Bennett		Sep-15		11th Judicial Circuit Court, Miami-Dade County, FL		Wrongful Death		Discovery Phase
Suarez		Sep-16		US District Court, Southern District of Florida		Wrongful Death		Pleading Phase
Masters		Nov-16		US District Court, Western District of Missouri		Suspect Injury		Pleading Phase

There are no product litigation matters in which the Company is involved that are currently on appeal.

There were 4 cases that were dismissed or judgment entered during the fourth quarter of 2016 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
Doan		Apr-10		The Queen's Bench Alberta, Red Deer Judicial Dist.		Wrongful Death		Dismissed
Hernandez/Llach		Sep-15		11th Judicial Circuit Court, Miami-Dade County, FL		Wrongful Death		Dismissed
Williams		Aug-16		US District Court for the Northern District of Georgia		Wrongful Death		Dismissed
Ramos		Dec-16		US District Court for the Northern District of Illinois		Conspiracy and negligent spoliation		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
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				Shymko
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				Bennett
2016		12/15/2015		12/15/2016		10.0				5.0				N		10.0				Suarez, Masters

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. Defendant Phazzer has filed a motion to dismiss. Phazzer has filed an ex parte review with the USPTO to invalidate the Company’s patent on its data log as well as a cancellation of the Company’s trademark on its cartridge, which cancellation proceeding has been stayed. This litigation is in the motion/discovery phase with a trial date on September 5, 2017.

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. In March 2016, the Company was served with a second amended complaint with similar allegations. The second amended complaint seeks a judgment of infringement, monetary damages, a permanent injunction, punitive damages and attorneys’ fees and costs. The Company believes the second amended complaint is frivolous and the Company will vigorously defend this litigation. The Company’s motion to dismiss the claims involving commercial bribery, contracts, combinations and conspiracies in restraint of trade and unfair or anti-competitive acts and practices, was granted. The Company has filed four inter parte reviews with the USPTO to invalidate Digital Ally’s patents and also has filed a motion to stay the litigation pending resolution of the inter parte reviews. This litigation is in the discovery phase.

In April 2016, the Company was served with a notice of arbitration claim filed by Antoine di Zazzo, the Company’s former distributor in France, for commissions allegedly owed Mr. di Zazzo. The arbitration claim was filed with the International Court of Arbitration of the International Chamber of Commerce in Paris, France, and the amount that is claimed in controversy is approximately $0.6 million. The Company’s records reflect that all commissions that were due Mr. di Zazzo under his contract were paid or offered to him and the Company will vigorously defend this arbitration claim.

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, 2016, 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

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

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 $0.7 million to $1.3 million as of December 31, 2016, depending on the nature of the termination event. In November 2016, the Company announced a transition plan with an executive officer. In connection with the severance agreement, the Company accrued approximately $0.6 million as of December 31, 2016, and will incur approximately $0.9 million in additional severance during the first quarter of 2017.

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, 2016, the Company had an outstanding letter of credit of approximately $2.7 million which is expected to expire in May 2017. Additionally, the Company had approximately $5.7 million of outstanding surety bonds at December 31, 2016, with $0.4 million expiring in 2018, $2.4 million expiring in 2020, and the remaining $2.9 million expiring in 2021.

10. Income Taxes

Income before income taxes included the following components for the years ended December 31 (in thousands):

	2016				2015				2014
United States	$	38,414			$	42,761			$	32,751
Foreign	(6,917		)		(7,400		)		(440		)
Total	$	31,497			$	35,361			$	32,311

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

	2016				2015
Deferred income tax assets:
Net operating loss carryforward	$	2,405			$	649
Deferred revenue	11,537				6,762
Deferred compensation	1,695				1,252
Inventory reserve	1,126				956
Non-qualified and non-employee stock option expense	4,410				3,393
Capitalized research and development	1,991				3,348
Research and development tax credit carryforward	2,722				2,386
Reserves, accruals, and other	1,239				1,067
Total deferred income tax assets	27,125				19,813
Deferred income tax liabilities:
Depreciation	(2,364		)		(2,228		)
Amortization	(1,473		)		(1,979		)
Other	(294		)		(187		)
Total deferred income tax liabilities	(4,131		)		(4,394		)
Net deferred income tax assets before valuation allowance	22,994				15,419
Valuation allowance	(3,479		)		(1,700		)
Net deferred income tax assets	$	19,515			$	13,719

For the years ended December 31, 2016, 2015 and 2014 the provision for income taxes includes $1.4 million, $6.9 million and $8.0 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 $1.8 million of state net operating losses ("NOLs") which expire at various dates between 2029 and 2034. The Company also has Federal NOLs of $0.9 million which expire between 2032 and 2034, 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 $6.4 million of Arizona R&D credits carrying forward, which expire at various dates between 2018 and 2032, In Australia, the UK, Canada, and Germany, the Company has $1.5 million, $5.5 million, $0.7 million, and $1.1 million of NOLs, respectively, which expire at various dates or may be carried forward indefinitely.

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, 2016, 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.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Therefore, management has concluded that it is more likely than not that a portion of the Company’s U.S. deferred tax assets will not be realized.

As of December 31, 2016, the Company has cumulative losses in Australia, the UK, Canada, and Germany, which limits the ability to consider other subjective evidence, such as projections for future growth. On the basis of this evaluation, a full valuation allowance has been recorded for these jurisdictions. The amount of the deferred tax asset considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for growth.

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

	2016				2015				2014
Current:
Federal	$	16,346			$	13,594			$	7,793
State	1,534				996				800
Foreign	1,050				—				—
Total current	18,930				14,590				8,593
Deferred:
Federal	(4,145		)		288				2,656
State	(977		)		984				942
Foreign	(45		)		(278		)		—
Total deferred	(5,167		)		994				3,598
Tax provision recorded as an increase (decrease) in liability for unrecorded tax benefits	437				(156		)		202
Provision for income taxes	$	14,200			$	15,428			$	12,393

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

	2016				2015				2014
Federal income tax at the statutory rate	$	11,024			$	12,347			$	11,236
State income taxes, net of federal benefit	889				1,061				1,433
Difference between statutory and foreign tax rates (i)	1,521				2,442				—
Permanent differences (ii)	(457		)		(205		)		98
Research and development	(1,928		)		(1,050		)		(452		)
Return to provision adjustment	327				(67		)		28
Change in liability for unrecognized tax benefits	700				(156		)		202
Incentive stock option benefit	(77		)		(144		)		(616		)
Change in valuation allowance	1,779				1,200				500
Tax effects of intercompany transactions	630				—				—
Other	(208		)		—				(36		)
Provision for income taxes	$	14,200			$	15,428			$	12,393
Effective tax rate	45.1		%		43.6		%		38.4		%

(i)	The difference between statutory and foreign tax rates of $1.5 million was largely driven by losses incurred in a foreign entity for which no tax benefit will be realized, partially reduced by a tax benefit for 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.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company has completed research and development tax credit studies which identified approximately $14.1 million in tax credits for federal, Arizona and California income tax purposes related to the 2003 through 2016 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 $3.9 million as of December 31, 2016. 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 $4.1 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, 2016 and 2015, respectively, the Company had accrued interest of $98,000 and $55,000.

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):

	2016				2015				2014
Balance, beginning of period	$	3,396			$	3,325			$	3,110
Decrease in previous year tax positions	—				(389		)		—
Increase in current year tax positions	448				270				121
Decrease due to lapse of statute of limitations	—				(14		)		—
Increase related to adjustment of previous estimates of activity	206				204				94
Balance, end of period	$	4,050			$	3,396			$	3,325

Federal income tax returns for 2004 through 2016 remain open to examination by the U.S. Internal Revenue Service (the “IRS”), while state and local income tax returns for 2004 through 2016 also remain open to examination by state taxing authorities. The 2004 through 2011 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 2012 through 2016. The foreign tax returns for 2013 through 2016 also remain open to examination. The Company has not been notified by any major federal, foreign, or state tax jurisdictions that it will be subject to examination.

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, 2016 and 2015, there were no borrowings under the line. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. As of December 31, 2016, the Company had letters of credit outstanding of approximately $2.7 million under the facility and available borrowing of $7.3 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, 2016, the Company’s tangible net worth ratio was 1.02:1 and its fixed charge coverage ratio was 2.30:1. The Company's violation of the leverage ratio requirement was waived as of December 31, 2016.

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.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

b. Stock Repurchase

In February 2016, the Company announced that TASER's Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of the Company’s outstanding common stock subject to stock market conditions and corporate considerations. During the year ended December 31, 2016, the Company purchased, under a Rule 10b5-1 plan, approximately 1.8 million common shares for a total cost of approximately $33.7 million, or a weighted average cost of $18.90 per share. As of December 31, 2016, $16.2 million remains available under the plan for future purchases. The Company suspended its 10b-5 plan, and any future purchases will be discretionary.

In May 2014, the Company announced that TASER's Board of Directors authorized a stock repurchase program to acquire up to $30.0 million of the Company’s outstanding common stock subject to stock market conditions and corporate considerations. 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 remained available under the plan for future purchases.

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 26, 2016, the Company’s Board of Directors approved the 2016 Stock Incentive Plan (the “2016 Plan") which was subsequently approved by stockholders at the Annual Meeting of Stockholders on May 26, 2016. Under the 2016 Plan, the Company reserved for future grants: (i) 2.0 million shares of common stock, plus (ii) the number of shares of common stock that were authorized but unissued under the Company’s 2013 Stock Incentive Plan (the “2013 Plan”) as of the effective date of the 2016 Plan, and (iii) the number of shares of stock that have been granted under the 2013 Plan or the 2009 Stock Incentive Plan that either terminate, expire or lapse for any reason after the effective date of the 2016 Plan. As of December 31, 2016, approximately 2.7 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.

d. Performance-based stock awards

The Company has issued performance-based stock options and performance-based RSUs, the vesting of which is generally 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.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

e. Restricted Stock Units

The following table summarizes RSU activity for the years ended December 31 (number of units and aggregate intrinsic value in thousands):

	2016								2015							2014
	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	1,139				$	19.30			1,226			$	13.23			1,279			$	9.67
Granted	718				19.75				516			26.18				554			16.98
Released	(414		)		15.91				(488	)		11.82				(433	)		7.61
Forfeited	(113		)		21.65				(115	)		16.72				(174	)		13.08
Units outstanding, end of year	1,330				20.40				1,139			19.30				1,226			13.23
Aggregate intrinsic value at year end (in thousands)	$	32,239

Aggregate intrinsic value represents the Company’s closing stock price on the last trading day of the period, which was $24.24 per share at December 30, 2016, 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, 2016 was $8.4 million. Certain RSUs that vested in 2016 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 2016 were 88,289 and had a value of approximately $1.8 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 2016, 2015 and 2014, the Company granted approximately 79,000, 49,000 and 140,000 performance-based RSUs, respectively (included in the table above). Certain of the performance-based RSUs outstanding as of December 31, 2016 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, 2016, the performance criteria had been met for 0.1 million of the 0.2 million performance-based RSUs outstanding. The Company recognized $2.1 million, $1.5 million and $1.0 million of compensation expense related to performance-based RSUs during the years ended December 2016, 2015 and 2014, respectively.

f. Stock Option Activity

The following table summarizes stock option activity for the years ended December 31 (number of options in thousands):

	2016							2015							2014
	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	1,103			$	5.37			1,641			$	5.26			3,366			$	6.15
Granted	—			—				—			—				—			—
Exercised	(95	)		5.02				(525	)		4.95				(1,644	)		6.69
Expired / terminated	—			—				(13	)		7.27				(81	)		16.59
Options outstanding, end of year	1,008			5.40				1,103			5.37				1,641			5.26
Options exercisable, end of year	977			5.42				1,072			5.39				1,606			5.27
Options expected to vest, end of year	25			4.75

No stock options were granted in 2016, 2015 or 2014. Total intrinsic value of options exercised was $2.0 million, $13.6 million and $20.2 million for the years ended December 31, 2016, 2015 and 2014, respectively. The intrinsic value for options

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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, 2016 (number of options in thousands):

	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	722			$	4.65			2.66		691			$	4.64			2.69
$5.01 - $7.00	112			5.57				1.70		112			5.57				1.70
$7.01 - $10.00	106			7.25				1.19		106			7.25				1.19
$10.01 - $16.23	68			10.30				0.40		68			10.30				0.40
$4.00 - $16.23	1,008			5.40				2.25		977			5.42				2.25

The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2016 was $19.0 million and $18.4 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 $24.24 on December 30, 2016.

At December 31, 2016, 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 2.0 years. The aggregate intrinsic value of unvested options at December 31, 2016 was $0.6 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, 2016, 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, 2016 was approximately $0.6 million. The Company recognized no stock-based compensation expense related to performance-based stock options during the year ended December 31, 2016, $0.1 million during the year ended December 31, 2015, and no expense during the year ended December 31, 2014.

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):

	2016				2015				2014
Cost of products sold and services delivered	$	342			$	402			$	204
Sales, general and administrative expenses	5,707				4,285				3,555
Research and development expenses	3,320				2,576				1,820
Total stock-based compensation	$	9,369			$	7,263			$	5,579

There was no stock-based compensation expense recognized in the consolidate statements of operations for the year ended December 31, 2016. Total stock-based compensation expense for the years ended December 31, 2015 and 2014 includes $54,000 and $28,000, respectively, related to ISOs for which no tax benefit is recognized. The Company recorded a tax benefit in 2016, 2015, and 2014 of $0.2 million, $0.2 million, and $0.7 million, respectively, to offset taxes payable related to the non-qualified disposition of ISOs exercised and sold. For the years ended December 31, 2016, 2015 and 2014 the provision for income taxes included $1.4 million, $6.9 million and $8.0 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 $4.4 million and $3.4 million as of December 31, 2016 and 2015, respectively.

As of December 31, 2016, there was $20.2 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 2.71 years.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

13. Related Party Transactions

The Company engages Dr. Mark Kroll, a member of the Board of Directors, to provide consulting services. The expenses related to these services were approximately $0.2 million for each of the years ended December 31, 2016, 2015 and 2014. At December 31, 2016 and 2015, the Company had accrued liabilities of approximately $12,000 and $31,000, 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 Company's Board of Directors. The cost to license this software is approximately $0.1 million per year, and as of December 31, 2016 and 2015 the Company had $50,500 and $36,000, respectively, of prepaid costs related to the license subscription.

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, 2016, 2015 and 2014, were approximately $1.6 million, $1.2 million and $0.9 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 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, 2016, the Company made contributions to the non-qualified deferred compensation plan related to the year ended December 31, 2016 of approximately $32,000. 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 connect with the Company's Axon on-officer cameras and, in some cases, its Evidence.com cloud platform. The Company believes the acquisition will continue to allow the Company to leverage MediaSolv’s existing network and relationships to further strengthen its position in the market.

The purchase price consisted primarily of cash, net of cash acquired and working capital adjustments, $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.

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

During the first quarter of 2016, the $1.0 million of earn-outs to former stockholders were earned in full and were paid during the second quarter of 2016. During the years ended December 31, 2016 and 2015, the Company recorded an additional $1.5 million and $0.2 million, respectively, of earn-outs that were recorded as commission expense, and as of December 31, 2016, $0.2 million of earn-outs were recorded as accrued liabilities within the accompanying consolidated financial statements.

The major classes of assets and liabilities to which the Company allocated the purchase price was as follows (in thousands):

Accounts receivable and other current assets	$	590
Inventory	35
Property and equipment	53
Intangible assets	4,145
Goodwill	5,496
Accounts payable and accrued liabilities	(697		)
Deferred revenue	(111		)
Deferred income tax liabilities, net	(688		)
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.

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 price 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. During the year ended December 31, 2016, $0.1 million was recorded as commissions expense under these earn-out provisions. No such expense was recorded during 2015.

The major classes of assets and liabilities to which the Company allocated the purchase price was as follows (in thousands):

Accounts receivable	$	726
Inventory	497
Property and equipment	583
Other Assets	20
Intangible assets	881
Goodwill	1,441
Accounts payable and accrued liabilities	(207		)
Notes payable	(169		)
Income tax liabilities	(438		)
Total purchase price	$	3,334

The Company has assigned the goodwill equally between the TASER Weapons and Axon segments. 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)

Axon Artificial Intelligence

On December 30, 2016, the Company acquired certain intellectual property from Fossil Group, Inc. and Fossil Vietnam, Limited Liability Company. This transaction, which was accounted for as a business combination under ASC 805, was part of the Company's efforts to expand on the Axon platform by transforming workflows using computer vision and natural language with machine learning techniques in order to analyze data and multimedia captured throughout the course of policing. Additionally, as part of the acquisition, a team of seven researchers and software engineers joined the Company, and will part of the newly established Axon Artificial Intelligence team. The purchase price, totaling approximately $6.8 million, consisted of $3.5 million cash at close, and up to an additional $3.3 million of consideration contingent upon the satisfaction of certain conditions.

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 become available.

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

Developed technology	$	5,210
Goodwill	1,615
Total purchase price	$	6,825

The Company assigned the goodwill to the Axon segment. The acquired developed technology was assigned an amortization period of 5.0 years. Costs related to the acquisition were expensed as incurred and were considered insignificant.

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 Axon business, focused on devices, wearables, applications, cloud and mobile products (the "Axon" segment). Within the Axon segment, the Company includes only revenues and costs attributable to that segment which include: costs of sales for both products and services, direct labor, selling expense for the sales team, product management and marketing expenses, trade shows and related expenses, finance and accounting expenses, and research and development for products included, or to be included, within 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 was as follows (in thousands):

	For the year ended December 31, 2016
	TASER Weapons				Axon				Total
Product sales	$	202,644			$	35,929			$	238,573
Service revenue	—				29,672				29,672
Net sales	202,644				65,601				268,245
Cost of products sold	61,930				29,606				91,536
Cost of services delivered	—				6,173				6,173
Gross margin	140,714				29,822				170,536
Sales, general and administrative	63,617				44,459				108,076
Research and development	5,887				24,722				30,609
Income (loss) from operations	$	71,210			$	(39,359	)		$	31,851
Purchase of property and equipment	$	4,129			$	828			$	4,957
Purchase of intangible assets	262				3,233				3,495
Purchase of intangible assets in connection with business acquisitions	—				6,825				6,825
Depreciation and amortization	2,207				1,451				3,658

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	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	1,453				11,146				12,599
Depreciation and amortization	2,311				980				3,291

	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
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)

17. Selected Quarterly Financial Data (unaudited)

Selected quarterly financial data for years ended December 31, 2016 and 2015 follows (in thousands, except per share data):

	Quarter Ended
	March 31,				June 30,				September 30,				December 31,
	2016				2016				2016				2016
Net sales	$	55,530			$	58,756			$	71,882			$	82,077
Gross margin	36,902				37,299				46,565				49,770
Net income	3,463				3,650				3,843				6,341
Earnings per share (1):
Basic	$	0.06			$	0.07			$	0.07			$	0.12
Diluted	$	0.06			$	0.07			$	0.07			$	0.12
	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

(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.

18. Supplemental Disclosure to Cash Flows

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

	2016				2015				2014
Cash paid for income taxes, net of refunds	$	14,048			$	6,759			$	386
Non-cash transactions:
Contingent consideration related to business combinations	$	3,325			$	952			$	—
Property and equipment purchases in accounts payable	82				315				270
Purchase of assets under capital lease obligations	134				—				—

19. Subsequent Events

On February 9, 2017, the Company acquired all of the outstanding capital stock of Dextro, Inc. ("Dextro"). Dextro's products aim to make videos discoverable and searchable using machine learning further consisting of developed algorithms that can analyze the audiovisual contents of video footage in real time in order to provide meaningful data to end users. These capabilities are intended to expand the Axon platform and the newly developed Axon Artificial Intelligence team.

The purchase price consisted of $7.1 million cash, including $1.1 million in the form of earn-outs, subject to the achievement of predefined performance metrics. The acquisition will be accounted for in the first quarter of Fiscal 2017 using the acquisition method in accordance with ASC 805, Business Combinations. Accordingly, the identifiable assets acquired and liabilities assumed will be measured at their acquisition-date fair value. Operating results will be included in the Company’s consolidated financial statements from the effective date of the acquisition.

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, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 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, 2016, 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 6, 2017 expressed an adverse opinion.

/s/ GRANT THORNTON LLP

Phoenix, Arizona

March 6, 2017