10-K 1 a10ktasr123115.htm 10-K 10-K
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-16391
TASER International, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
86-0741227
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
17800 North 85th Street
Scottsdale, Arizona
 
85255
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(480) 991-0797
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of exchange on which registered
Common Stock, $0.00001 par value per share
 
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
The aggregate market value of the common stock held by non-affiliates of the registrant, based on the last sales price of the issuer’s common stock on June 30, 2015, which was the last business day of the registrant’s most recently completed second fiscal quarter, as reported by NASDAQ, was approximately $1,763,000,000. Solely for purposes of this disclosure, shares of common stock held by executive officers and directors of the Registrant as of such date have been excluded because such persons may be deemed to be affiliates. This determination of executive officers and directors as affiliates is not necessarily a conclusive determination for any other purposes.
The number of shares of the registrant’s common stock outstanding as of February 12, 2016 was 53,694,071
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the registrant’s definitive proxy statement for its 2016 annual meeting of stockholders to be prepared and filed with the Securities and Exchange Commission not later than 120 days after December 31, 2015 are incorporated by reference into Part III of this Form 10-K.

 




TASER INTERNATIONAL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2015
 
 
Page
 
 
 
 
 
 


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PART I
Statements contained in this report that are not historical are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions and strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things:
 
our intentions about future development efforts and activities, including our intentions to invest in research and development as well as the development of new product and service lines and enhanced features for our existing product and service lines;
our need and the willingness of customers to upgrade and replace existing conducted electrical weapons (“CEW”) units;
that we may have more sales denominated in foreign currencies in 2016;
our intention to increase our investment in the development of sales in the international, military and law enforcement market;
our plans to expand our sales force;
that cloud and mobile technologies are fundamentally changing the police environment;
our plan to invest in web activities and law enforcement trade shows in 2016;
our intention to not pay dividends;
that increases in marketing and sales activities will lead to an increase in sales;
our belief that the video evidence capture and management market will grow significantly in the near future and the reasons thereto;
our intentions to continue to pursue the personal security market;
our intention to grow direct sales;
the sufficiency of our facilities and our strategy to expand manufacturing capacity if needed;
that we may lease facilities from parties that specialize in handling and manufacturing of firearm materials;
that we expect to continue to depend on sales of our X2 and X26P CEW devices;
our strategy and plans, and the expected benefits relating thereto, to expand our international sales;
that we expect further increases in our trial Axon programs and that these programs will lead to additional sales;
our intention to apply for and prosecute our patents;
that selling, general and administrative expense will increase in 2016;
that research and development expenses will increase in 2016;
the timing of the resolution of uncertain tax positions;
our intention to hold investments to maturity;
the effect of interest rate changes on our annual interest income;
that we may engage in currency hedging activities;
our intentions concerning, and the effectiveness of, our ongoing marketing efforts through web activities, trial programs, tech summits and law enforcement trade shows;
the benefits of our CEW products compared to other lethal and less-lethal alternatives;
the benefits of our Axon products compared to our competitors';
our belief that customers will honor multi-year contracts despite the existence of appropriations (or similar) clauses;
our belief that customers will renew their Evidence.com.com service subscriptions at the end of the contractual term;
our insulation from competition and our competitive advantage in the weapons business;
estimates regarding the size of our target markets and our competitive position in existing markets;
the availability of alternative materials and components suppliers;
the benefits of the continued automation of our production process;
the sufficiency and availability of our liquid assets and capital resources;
our financing and growth strategies, including: our decision not to pay dividends, potential joint ventures, mergers and acquisitions, stock repurchases and hedging activities;
the safety of our products;

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our litigation strategy; including the outcome of legal proceedings in which we are currently involved;
our ability to maintain secure and consistent customer data access and storage, including the use of third party data storage providers, and the impact of a loss of customer data, a breach of security or an extended outage;
our ability to attract and retain the qualified professional services necessary to implement and maintain our business, both through employment and through other partnership arrangements;
the effect of current and future tax strategies;
the impact of recently adopted and future accounting standards;
that the complaint filed by Digital Ally is frivolous;
that Axon Fleet will ship during fiscal 2016; and
the ultimate resolution of financial statement items requiring critical accounting estimates.
These statements are qualified by important factors that could cause our actual results to differ materially from those reflected by the forward-looking statements. Such factors include, but are not limited to, those factors detailed in ITEM 1A of this annual report entitled “Risk Factors.” The risks included in the foregoing list are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. New risk factors emerge from time to time, and it is not possible for management to predict all such factors, nor can it assess the impact of all such risk factors or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to expectations over time.
TASER International, Inc. owns the following trademarks: ADVANCED TASER, CHECKLOK, TASER, XREP, C2, X2, X3, Pulse, the bolt on West Hemisphere logo, the bolt on ball logo, the bolt on circle logo, and the bolt within circle logo, all registered in the United States. All other trademarks and service marks including M18, M26, X26, X26C, X26P, Axon, Axon Flex, Axon Body, Axon Body 2, Axon Interview, Axon Fleet, Axon Signal, Shockwave, TASER CAM and designs belong to TASER International, Inc., except as expressly indicated as belonging to another.


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Item 1. Business
Company Background and Business Strategy
TASER International, Inc.’s (the “Company” or “TASER” or “we” or “our”) core mission is to protect life and to protect truth through innovative technologies that make communities safer. We are the market leader in the development, manufacture and sale of conducted electrical weapons (“CEWs”) designed for use by law enforcement, corrections, military forces, private security personnel and by private individuals for personal defense. We are also the market leader in connected wearable on-officer cameras which utilize our cloud-based digital evidence management solution which we refer to as our Axon solution. The Axon products help agencies capture, store, utilize, manage and share digital evidence.
Technological innovation is the foundation of our long-term growth. By investing in research and development, we will continue to develop novel, high-value solutions across our product platforms. In 2015, we primarily focused on refining our Evidence.com services and exploring next generation hardware for our CEWs and body-worn cameras. In addition to research and development, we are increasingly utilizing strategic partnerships and acquisitions, such as our February 2016 partnership with Amped Software and May 2015 acquisition of MediaSolv Solutions Corporation, to expand our product and services portfolio.
Our core strategy is to increase market penetration in domestic and international law enforcement markets.
In the United States, our focus is on ensuring that our CEWs are standard issue for all patrol officers, and we have developed purchasing programs that allow agencies to spread the cost of ownership over extended time-periods to help alleviate the need to make large up-front capital expenditures. By doing so, our goal is to provide law enforcement officers on-going access to our latest technologies at predictable prices.
In international markets, our focus is on demonstrating the benefits of large-scale adoptions of our CEWs and Axon products. In 2014, to facilitate sales and customer service for large-scale adoptions in foreign markets, we established TASER International, B.V. located in Amsterdam, Netherlands. In 2015, the United Kingdom ("UK") and Australia became benchmarks of successful large-scale deployments of TASER technology. In 2016 and 2017, we plan to continue to develop our pipeline in both number and size of opportunities. In particular, we will be focusing investments on target countries, such as France, the UK, Canada, and Australia, where large police forces represent considerable opportunity for increased sales.
In the near future, we expect the video evidence capture and management market to grow significantly. Therefore, in 2016, we will be devoting significant resources towards enhancing the functionality of our existing software as a service ("SaaS") and developing our next revenue generating Axon product.

Company Organization
Our products are sold directly to law enforcement agencies and through a network of distribution channels we developed for selling and marketing our products and services to law enforcement agencies. The Company manages its business primarily on a geographic basis. Domestic law enforcement agencies are served through the Company's headquarters in Scottsdale, Arizona and its Axon business unit located in Seattle, Washington, with various sales reps strategically located throughout the United States. In 2014, the Company established TASER International, B.V. located in Amsterdam, Netherlands, that serves as a permanent international headquarters to facilitate transactions with existing customers as well as allow for continued expansion into other foreign markets. During 2015, TASER International B.V. acquired Tactical Safety Responses Limited ("TSR"), its licensed distributor of TASER weapons and Axon cameras and related accessories in the UK as a way of expanding the Company's growth across the UK. Also during 2015, the Company formed Axon Public Service Canada, Inc., a wholly owned subsidiary, to facilitate transactions for Axon products and services with new and existing customers located in Canada.
The Company’s operations are comprised of two reportable segments: the sale of CEWs, accessories and other related products and services (the “TASER Weapons” segment); and the Axon business, focused on wearables, cloud and mobile products, including Axon video products, TASER Cam and Evidence.com (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 segment sales team, segment product management and marketing expenses, segment trade shows and related expenses, segment 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. Further information about our reportable segments and sales by geographic region is included in Notes 1(p) and 16 of the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.


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Products
TASER Weapons Products
We make CEWs that use our proprietary Neuro Muscular Incapacitation (“NMI”) effects for two main types of market segments: (i) the law enforcement, military, corrections and professional security markets; and (ii) the consumer market. Our products use a replaceable cartridge containing compressed nitrogen to deploy and propel two small probes that are attached to the CEW by insulated conductive wires with lengths ranging from 15 to 35 feet. Our CEWs transmit electrical pulses along the wires and into the body affecting the sensory and motor functions of the peripheral nervous system. The basic design is to provide incapacitating effects that last in cycles of five seconds for our law enforcement, military, corrections and private security products and up to thirty seconds for our consumer market models. This effect can be extended, if necessary, by the operator.
The benefits of using CEWs in the field have been undeniable and powerful. By some studies, TASER CEWs have prevented death or serious injury more than 160,000 times from the first deployment in 2000 to the end of 2015. In addition to protecting life, the use of these devices instead of other force options has significantly reduced injuries for suspects and officers with substantial liability and workers’ compensation savings to government agencies around the world.
The following products are core to the Company's TASER Weapons product line:
TASER X26P - The X26P is currently our smallest and most compact Smart Weapon for law enforcement, and is ergonomically designed with ease of performance in mind. TASER Smart Weapons are built on an all-digital platform, and have the ability to regulate charge output, perform health checks, update firmware over the Internet and provide analytics displaying how and when someone uses a device. Through the Company's Evidence.com platform important records, such as event logs and pulse logs, can be viewed and analyzed. Event logs save every user action for record-keeping, including safety activation, and trigger event duration with times, dates, and battery life. Pulse logs display a pulse-by-pulse record of weapon output.
TASER X2 - The X2, designed for law enforcement but available to the professional consumer, provides users with the same Smart Weapon features as the X26P. Additionally, the X2 incorporates agencies' most requested features such as a backup shot, dual lasers to ensure accuracy, and a warning arc to ensure accuracy and effectiveness. The warning arc, a visible electric charge, increases voluntary surrenders and helps stop conflicts from escalating. It issues an audible and visual warning directly over the front of live cartridges.
TASER C2 - The C2 is the currently the Company's primary model for the consumer market. The C2 features the same NMI effects as those available to law enforcement in a discreet appearance and compact and light form factor. The TASER C2 provides incapacitating effects that lasts in cycles of 30 seconds which is intended to allow adequate time for the user to escape the threat.
TASER Pulse - During January 2016, the Company introduced its newest consumer product, the TASER Pulse CEW, which is a sub-compact model with a newly designed form factor with additional features as compared to the TASER C2, all at a comparable price point. The TASER Pulse became available for sale in the first quarter of 2016.
Replacement Cartridges - We manufacture multiple cartridge types for varying ranges and purposes. Types of cartridges include, among others, standard cartridges, smart cartridges and training cartridges. Smart cartridges communicate with the fire control system within the TASER X2 indicating the type of cartridge loaded in each bay and its deployment status. Standard cartridges are designed for use within the X26P CEW systems and are also used in our legacy X26E and M26 products. The Company also offers standard replacement cartridges for the C2 and Pulse consumer models. Our cartridges are available in unique variations for warm and cold climates, training scenarios, and tactical situations.

Axon Connected Solutions
Axon creates connected technologies for truth in public safety. As a segment of TASER International, we're building on a history of innovation in policing. Axon isn’t just a collection of individual technologies; it's a cohesive ecosystem. Every product works together, built by the same team of engineers and supported by the same technicians. Every product from our Smart Weapons to our body-worn cameras to our digital evidence management system integrates seamlessly with one another, and often complements the systems and processes a customer already uses. Below are the products and features that are core to the Axon platform.
Hardware Products:
Axon Body - Axon Body is a simple, low-priced body-worn camera for law enforcement, designed for customers seeking deployment at a lower price-point.

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Axon Body 2 - Axon Body 2 builds upon the original platform bringing officers new features such as high-definition ("HD") video, wireless fidelity ("Wi-Fi") offload capabilities, longer battery life, and additional security enhancements. Both the original Axon Body and Axon Body 2 eliminate the need for the camera to be mounted above the shoulder of the individual and rather hooks into the shirt of the officer at mid-chest level. These cameras also eliminate all wires from the wearer’s body. Axon Body 2 was available for shipment in limited quantities during the first quarter of 2016.
Axon Flex - The Axon flex camera system records video and audio of critical incidents from the visual perspective of the officer. Axon flex provides complete flexibility in how an officer chooses to wear the device, including an option to deploy as an attachment to Oakley Flak Jacket eyewear.
TASER Cam HD - Is a recording device, which integrates with Evidence.com, that captures both video and audio of potential and actual TASER use incidents as an accessory to a TASER CEW. The device can capture video and audio before, during and after a TASER CEW deployment, which provides law enforcement with a greater level of accountability to support their use of TASER weapons against a resistant subject.
Axon Fleet - Axon Fleet is a breakthrough in-car video system with advanced capabilities and a price that's 90% less than traditional systems. Axon Fleet includes automatic activation, HD video and a flexible design. It is also upgraded continuously behind the scenes with new software features, and is part of a powerful platform that connects mobile, cloud, and wearable technologies. Axon Fleet is expected to ship during fiscal 2016.
Axon Interview - Axon Interview is a video and audio recording system designed for the critical context of the interview room. The system records crucial interviews with redundant, high-quality video and audio technology, ensuring that every moment is captured. The system is available with a 24/7 buffering option that allows agencies to capture key dialogue even after it occurs.
Axon Signal - Body-worn cameras have been protecting the truth in agencies across the country, but they're only able to clarify events when they're activated. With manual activation, officers are sometimes unable to hit record in intense and stressful situations. We've developed Axon Signal, an automatic activation technology for Axon cameras.
Axon Dock - With the Axon Dock, the camera charging station is also the automatic data downloader. At the end of a shift, the Dock syncs video from the user's Axon Flex or Axon Body camera during routine charging. Videos are uploaded directly to Evidence.com, eliminating manual filing processes and freeing the user to focus on more important duties.

Axon Software and Mobile Technologies:
Evidence.com - As the sources of digital evidence expand, storage alone isn't enough to keep track of the body-worn camera videos, photos, audio recordings, and other data that is overwhelming agency servers and systems. Evidence.com is a robust end-to-end solution that not only allows agencies to store all that data, but also enables new workflows for managing and sharing that data. Officers and command staff can upload content from Axon and TASER devices or other systems easily, manage it simply with search and retrieval features, and then collaborate effortlessly with prosecutors by using powerful sharing features. When storage needs or users increase, the cloud-based system allows agencies to scale instantly and cost-effectively. Evidence.com offers several license options, ranging in price, that tailors to the needs of agencies of all sizes. We currently offer our Basic, Standard and Pro licenses that contain incremental feature sets with Pro license containing all of the advanced features currently available. The Company also offers its Ultimate license that includes the Pro license features with Axon camera upgrades and extended warranty services. The Company's Unlimited plan contains the offerings under the Ultimate tier, and includes unlimited HD storage of Axon digital evidence uploads. Finally, the Company offers its Officer Safety Plan tier that provides the highest value by bundling a TASER Smart Weapon with all of the features offered in the Unlimited Plan. All product and service revenues described above, with the exception of the TASER Smart Weapon, are included in the Company's calculation of Axon segment bookings.
Evidence.com for Prosecutors - The same end-to-end evidence management solutions of Evidence.com now allow prosecutors to manage evidence of any type, from any agency, all in one place. Ramp-up time is immediate, and scaling to meet future needs is effortless. Files can be shared during discovery, complete chain of custody is maintained, and all evidence is encrypted. Plus, for prosecuting attorneys working with agencies already using Evidence.com, standard prosecutor licenses are provided at no cost.
Evidence Sync - Is a desktop-based application that enables evidence in any format, from any source to be uploaded to Evidence.com. TASER Smart Weapon logs, Axon camera videos, dash cam and interview room footage, still photos and more can be uploaded, stored, and managed in one location, accessible anytime, anywhere. Sources new and old—from TASER devices or other brands—are equally supported. Network servers, SD cards, CDs, and computer folders can be synced with ease, and frequently used folders or drives can be set up to automatically sync on schedule.
Axon Capture - Is a mobile application built specifically to allow officers to capture digital evidence right from the field. The app eliminates the need to carry three separate devices for photo, video, and audio recording. Instead, it builds upon the capabilities

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of an officer's mobile phone with the security and organization needed to protect truth. Officers can add tags, titles or GPS coordinates to any recordings before uploading the data to Evidence.com.
Axon View - Is a mobile application that wirelessly connects with an Axon camera to provide instant playback of unfolding events from the field, in the field. The app's live display to ensure the camera is well-placed, and the playback function helps eliminate the “he said, she said” on the spot.
Axon Five - Is the most complete software application available to help you enhance and analyze images and videos. An unmatched feature set lets a customer uncover details that assists officers in solving crimes. Since time is valuable, Axon Five also automates time-consuming tasks like removing duplicated or mismatched frames, making officers more productive at work.
Axon Convert - Is a local software solution that gives customers the power to convert unplayable file formats with ease. It ingests and converts files in minutes with only a few clicks, making manual conversion a thing of the past. Since we know maintaining an evidence trail is important, Axon Convert not only produces a playable file, but also preserves the original and creates a report detailing the exact changes.
Axon Detect - Is a photo analysis program for tamper detection. It goes beyond image-matching to offer a robust suite of authentication tools to certify evidence in-house. This reduces the need for external consultants, shortens turnaround time, and allows for use of evidence captured by the public.
Markets and Distribution
Law Enforcement and Corrections
Our primary target market for both our weapon and video products is federal, state and local law enforcement agencies in the U.S. and throughout the world. In the law enforcement market, more than 17,000 law enforcement agencies in nearly 150 countries have made initial purchases of our TASER brand devices for testing or deployment. Our belief is that in the U.S., approximately two-thirds of all law enforcement patrol officers carry a TASER CEW and internationally, approximately one out of every fifty eligible law enforcement officers carries a TASER CEW. Our goal is to have our CEWs be standard issue equipment for all domestic and international law agencies.
Other Markets
We also target military forces, private security, and consumer personal protection markets to provide technologies that offer a less lethal force of protection.
U.S. Distribution
The Company sells directly to law enforcement agencies in the U.S. as well as through a distribution network. Distributors are selected based upon their reputation within their respective industries, their contacts and their distribution network. Our regional sales managers work closely with the distributors in their territory to inform and educate the law enforcement communities. We continue to monitor our law enforcement distributors closely to help ensure that our service standards are achieved. Where appropriate, we intend to grow our direct sales over time. Distributors often allow us to penetrate regions at lower fixed costs; however, direct sales allow us greater control over the customer relationship.
Sales in the private citizen market are primarily made through our distributors and our website. We have implemented a variety of marketing initiatives to support sales of our consumer products, with a focus on web, public relations and consumer trade shows. We have consulted with professional digital media and public relations professionals to assist us in media and press events, and editorial placements along with attending numerous tradeshows specifically to target the consumer market.
International Distribution
We market and distribute our CEW products to foreign markets through our international subsidiaries as well as through a network of distributors. For geographical and cultural reasons, our distributors usually have a territory defined by their country’s borders. These distributors market both our law enforcement, military, and corrections products, and our consumer products where allowed by law. Our distributors work with local law enforcement, military and corrections agencies in the same manner as our domestic market distributors. For example, they may perform demonstrations, attend industry tradeshows, maintain country specific websites, engage in print advertising and arrange training classes.

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In order to more effectively engage customers internationally, we have also implemented direct sales teams strategically located throughout each major geographic region of the world. Having dedicated sales personnel stationed full time in these regions will allow us to better serve existing customers as well as execute our sales and marketing strategies more efficiently in order to continue to grow our customer base in new markets.
Manufacturing
We perform light manufacturing, final assembly, and final test operations at our headquarters in Scottsdale, Arizona, and own substantially all of the equipment required to develop, prototype, manufacture and assemble our finished products. This includes critical injection molds, schematics, automation equipment, test equipment and prototypes utilized by our supply chain for the conversion of raw materials into sub-assemblies. We have implemented lean/six sigma methodologies to optimize most direct and indirect resources within the organization, which has helped boost capacity for existing products, as well as provide flexibility to accommodate production of new TASER and Axon product introductions. We are currently operating one to two production shifts depending on inventory levels and demand. However, other capacity options, including the use of additional shifts, will be considered should we experience higher demand resulting from large orders of legacy or new product releases. We continue to maintain our ISO 9001 certification.
Although most components essential to the Company’s business are generally available from multiple sources, a number of components are currently obtained from single or limited sources. In addition, the Company competes for various components with other participants in our markets. Therefore, many components used by the Company, are at times subject to industry-wide shortage, and significant pricing fluctuations that could materially adversely affect the Company’s financial condition and operating results.
Business Seasonality and Product Introductions
The Company has historically experienced higher net sales in its second and fourth quarters compared to other quarters in its fiscal year due to municipal budget cycles. Additionally, new product introductions can significantly impact net sales, product costs and operating expenses. However, historical seasonal patterns, municipal budgets or historical patterns of product introductions should be considered reliable indicators of the Company’s future net sales or financial performance.
Backlog
Our backlog for products and services includes all orders that have been received and are believed to be firm. As of December 31, 2015 and 2014 our backlog was $183.9 million and $75.3 million , respectively. Included in our backlog as of December 31, 2015 and 2014 was deferred revenue of $51.0 million and $35.7 million, respectively. Of the deferred revenue balances recorded at December 31, 2015 and 2014, current deferred revenue was $20.9 million and $14.0 million, respectively.
Competition
Law Enforcement, Corrections and Private Security Markets
Law enforcement customers partner with TASER for the long-term. The primary competitive factors in the law enforcement and corrections market include a weapon’s accuracy, effectiveness, safety, cost, ease of use and an exceptional customer experience. We are aware of competitors providing competing CEW products, primarily in international markets.
We also believe our CEWs compete indirectly with a variety of other less-lethal alternatives. These alternatives include, but are not limited to, pepper spray, batons and impact weapons sold by companies such as Defense Technology. We believe our TASER brand devices’ advanced technology, versatility, portability, effectiveness, built-in accountability systems, and low injury rate enable us to compete effectively against these other less-lethal alternatives.
Private Citizen Market
CEWs have gained limited acceptance in the private citizen market. These devices primarily compete with guns, but also with other less lethal weapons such as pepper spray. The primary competitive factors in the private citizen market include a weapon’s cost, effectiveness, safety and ease of use.
Video Evidence Market
The video evidence capture and management market segment is a highly fragmented and competitive market. Continued evolution in the industry and technology shifts are creating opportunities for both established and new competitors. Key competitive factors include: product performance; product features; product quality and warranty; total cost of ownership; data security; data and information work flows; company reputation and financial strength; and relationship with customers. 

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Our digital evidence management system, Evidence.com, is a cloud-based platform. Cloud computing fundamentally changes the way local, state and federal government agencies will develop and deploy software applications. Applications used by these agencies have historically required the agency to deploy their own infrastructure of servers, storage, network devices and operating systems. With a cloud-based system, the entire storage infrastructure is managed by third parties who specialize in infrastructure management. Agencies use Internet web browsers to access the application. Our cloud-based Evidence.com service enables agencies to store, manage and analyze digital evidence. We believe our end-to-end solution of Axon and Evidence.com is a compelling value proposition for law enforcement agencies to implement.

Regulatory Matters
U.S. Regulation
The majority of TASER weapons, as well as the cartridges used by these devices, are subject to regulations; however, most are not considered to be a “firearm” by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives. The TASER XREP, a non-core shotgun CEW product, does use a propellant system which falls under the definition of a “firearm” and is, therefore, subject to federal firearms-related regulations. Many states have regulations restricting the sale and use of stun guns, hand-held shock devices and electronic weapons. We believe existing stun gun laws and regulations apply to our devices.
In many cases, the law enforcement and corrections market is subject to different regulations than the private citizen market. Where different regulations exist, we assume the regulations affecting the private citizen market also apply to the private security markets, except as the applicable regulations otherwise specifically provide.
As of December 31, 2015, the possession of stun guns by the general public, including TASER CEWs, is prohibited in five states: Hawaii, Massachusetts, New Jersey, New York, and Rhode Island, as well as in the District of Columbia. Some cities and municipalities also prohibit private citizen possession or use of our products.
We are also subject to environmental laws and regulations, including restrictions on the presence of certain substances in electronic products. Reference is made to Section 1A, Risk Factors under the heading “Environmental laws and regulations subject us to a number of risks and could result in significant liabilities and costs.”
Evidence.com is subject to government regulation of the Internet in many areas, including telecommunications, data protection, user privacy and online content.
U.S. Export Regulation
CEWs are considered a crime control product by the U.S. government. Accordingly, the export of our devices is regulated under export administration regulations. As a result, we must obtain export licenses from the Department of Commerce for all shipments to foreign countries other than Canada. Most of our requests for export licenses have been granted, and the need to obtain these licenses has not caused a material delay in our shipments. Export regulations also prohibit the further shipment of our products from foreign markets in which we hold a valid export license to foreign markets in which we do not hold an export license for our products.
The Department of Commerce restricts the export of technology used in our CEWs. These regulations apply to both the technology incorporated in our CEW systems and to the processes used to produce them. The technology export regulations do not apply to production that takes place within the U.S. but is applicable to some sub-assemblies and controlled items manufactured outside the U.S.
Foreign Regulation
Foreign regulations, which may affect our devices, and sale thereof, are numerous and often unclear. We prefer to work with a distributor who is familiar with the applicable import regulations in each of our foreign markets. Experience with foreign distributors in the past indicates that restrictions may prohibit certain sales of our products in a number of countries. The vast majority of countries permit TASER devices to be sold and used by law enforcement. We maintain strong communication channels with our distributors to ensure we are aware of those countries where TASER CEW devices are prohibited or restricted.
Contracts
Our business is affected by numerous laws and regulations, including those related to the award, administration and performance of contracts. Governmental agencies generally have the ability to terminate our contracts, in whole or in part, for reasons including, but not limited to, non-appropriation of funds. We monitor our policies and procedures with respect to our

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contracts on a regular basis to enhance consistent application under similar terms and conditions, as well as compliance with all applicable laws and regulations.
Intellectual Property
We protect our intellectual property with U.S. and foreign patents and trademarks. Our patents and pending patent applications relate to technology used by us in connection with our products. We also rely on international treaties, organizations and foreign laws to protect our intellectual property. As of December 31, 2015, we hold 94 U.S. patents and 92 foreign patents and also have numerous patents and trademarks pending. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as the commercial significance of our operations and our competitors’ operations in particular countries and regions, our strategic technology or product directions in different countries and the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions. TASER has the exclusive rights to many Internet domain names primarily including ‘TASER.com’, ‘Evidence.com' and 'Axon.io.’
Confidentiality agreements are used with employees, consultants and key suppliers to help ensure the confidentiality of our trade secrets.
Research and Development
Our research and development initiatives focus on next generation technology. Internally funded research has been primarily focused on improvements to existing TASER products and digital evidence management systems, or the development of new applications for TASER technology that we believe generally will have broad market appeal. Our investment in internally funded research and development totaled $23.6 million, $14.9 million and $9.9 million in 2015, 2014, and 2013, respectively.
Within the Axon segment, the Company's team of application developers conduct research and development initiatives for cloud applications, wearable and mobile technologies in law enforcement, focused specifically on new revenue opportunities that align with our Axon product solutions. We're investing in having the best software and technology talent because we believe this market has suffered from sub par technology for decades and we believe our leading edge gives us a well-appreciated product advantage to disrupt more established technology companies. 
Within the TASER Weapons segment, current research and development initiatives include bio-medical research and electrical, mechanical and software engineering. We expect that future CEW development projects will focus on extending the range, reducing the size, improving the functionality and developing new delivery options for our products.
Our return on investment is intended to be realized over the long term, although new systems and technologies often can have a more immediate impact on our business.
Employees
As of December 31, 2015, we had 549 full-time employees and 121 temporary employees. The breakdown of our full-time employees by department is as follows: 151 direct manufacturing employees and 398 administrative and manufacturing support employees. Of the 398 administrative and manufacturing support employees, 156 were involved in sales, marketing, communications and training. Of the 121 temporary employees, more than 90% worked in direct manufacturing roles. Our employees are not covered by any collective bargaining agreement, and we have never experienced a work stoppage. We believe that our relations with our employees are good.
Available Information
We were incorporated in Arizona in September 1993 as ICER Corporation. We changed our name to AIR TASER, Inc. in December 1993 and to TASER International, Incorporated in April 1998. In January 2001, we reincorporated in Delaware as TASER International, Inc.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our website at http://www.TASER.com as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

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Item 1A. Risk Factors
Because of the following factors, as well as other variables affecting our operating results, our past financial performance may not be a reliable indicator of our future performance and historical trends should not be used to anticipate our results or trends in future periods.
We are materially dependent on acceptance of our products by law enforcement markets, both domestic and international. If law enforcement agencies do not continue to purchase and use our products, our revenues will be adversely affected.
A substantial number of law enforcement and corrections agencies may not continue to purchase our CEWs or video products. Law enforcement and corrections agencies may be influenced by claims or perceptions that CEWs, such as our products, are unsafe or may be used in an abusive manner. Sales of our products to these agencies may be delayed or limited by these claims or perceptions.
We substantially depend on sales of our TASER X26P and X2 CEWs, and if these products do not continue to be widely accepted, our growth prospects will be diminished.
In the years ended December 31, 2015, 2014 and 2013, we derived our revenues predominantly from sales of TASER CEW brand devices and related cartridges, and expect to depend on sales of these products for the foreseeable future. We are seeing a large number of customers upgrade their devices to the X2 or the new X26P device, which we introduced in 2011 and 2013, respectively. This is a trend we expect to continue. A decrease in the prices of, or demand for these products, or their failure to maintain broad market acceptance, would significantly harm our growth prospects, operating results and financial condition.
The success of our Evidence.com software as a service (“SaaS”) delivery model is materially dependent on acceptance of this business model by our law enforcement customers. Delayed or lengthy time to adoption by law enforcement agencies will negatively impact our sales and profitability.
A substantial number of law enforcement agencies may be slow to adopt our Evidence.com digital data evidence management and storage solution, requiring extended periods of trial and evaluation. The hosted service delivery business model is not presently widely adopted by our law enforcement customer base. As such, the sales cycle has additional complexity with the need to educate our customers and address issues regarding agency bandwidth requirements, data retention policies, data security and chain of evidence custody. Delays in successfully securing widespread adoption of Evidence.com services could adversely affect our revenues, profitability and financial condition.
If we are unable to design, introduce and sell new products or new product features successfully, our business and financial results could be adversely affected.
Our future success will depend on our ability to develop new products or new product features that achieve market acceptance in a timely and cost-effective manner. The development of new products and new product features is complex, time consuming and expensive, and we may experience delays in completing the development and introduction of new products. We cannot provide any assurance that products that we may develop in the future will achieve market acceptance. If we fail to develop new products or new product features on a timely basis that achieve market acceptance, our business, financial results and competitive position could be adversely affected.
Delays in product development schedules may adversely affect our revenues and cash flows.
The development of CEWs, cameras and software products such as Evidence.com is a complex and time-consuming process. New products and enhancements to existing products can require long development and testing periods. Our increasing focus on our SaaS platform also presents new and complex development issues. Significant delays in new product or service releases or significant problems in creating new products or services could adversely affect our revenue.
We face risks associated with rapid technological change and new competing products.
The technology associated with law enforcement devices is receiving significant attention and is rapidly evolving. While we have some patent protection in certain key areas of our CEW, Axon and SaaS technology, it is possible that new technology may result in competing products that operate outside our patents and could present significant competition for our products which could adversely affect our revenue.


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Defects in our products could reduce demand for our products and result in a loss of sales, delay in market acceptance and damage to our reputation.
Complex components and assemblies used in our products may contain undetected defects that are subsequently discovered at any point in the life of the product. Defects in our products may result in a loss of sales, delay in market acceptance and damage to our reputation and increased warranty costs, which could have a material adverse effect on profitability and financial condition.
If our security measures are breached and unauthorized access is obtained to customers’ data or our data, our network, data centers and service may be perceived as not being secure, customers may curtail or stop using our service and we may incur significant legal and financial exposure and liabilities.
Our service involves the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. We devote significant resources to engineer secure products and ensure security vulnerabilities are mitigated. Despite these efforts, security measures may be breached as a result of third-party action, employee error, and malfeasance or otherwise. Breaches could occur during transfer of data to data centers or at any time, and result in unauthorized access to our data or our customers’ data. Third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our data or our customers’ data. Additionally, hackers may develop and deploy viruses, worms, and other malicious software programs that attack or gain access to our networks and data centers. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any security breach could result in a loss of confidence in the security of our service, damage our reputation, lead to legal liability and negatively impact our future sales.
Interruptions or delays in service from our third-party cloud storage providers for our Evidence.com service, or the loss or corruption of digitally stored evidence, would impair the delivery of our service and harm our business.
We currently serve our Evidence.com customers from third-party cloud storage providers based in the U.S. and other countries. Interruptions in our service, or loss or corruption of digital evidence, may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.
Most of our end-user customers are subject to budgetary and political constraints that may delay or prevent sales.
Most of our end-user customers are government agencies. These agencies often do not set their own budgets and therefore, have limited control over the amount of money they can spend. In addition, these agencies experience political pressure that may dictate the manner in which they spend money. As a result, even if an agency wants to acquire our products, it may be unable to purchase them due to budgetary or political constraints, particularly in challenging economic environments. There can be no assurance that the economic and budgeting issues will not worsen and adversely impact sales of our products. Some government agency orders may also be canceled or substantially delayed due to budgetary, political or other scheduling delays which frequently occur in connection with the acquisition of products by such agencies and such cancellations may accelerate or be more severe than we have experienced historically.
We expend significant resources in anticipation of a sale due to our lengthy sales cycle and may receive no revenue in return.
Generally, law enforcement and corrections agencies consider a wide range of issues before committing to purchase our products, including product benefits, training costs, the cost to use our products in addition to, or in place of, other products, budget constraints and product reliability, safety and efficacy. The length of our sales cycle may range from a few weeks to as long as several years. Adverse publicity surrounding our products or the safety of such products has in the past, and could in the future, lengthen our sales cycle with customers. In the past, we believe that the Company’s sales were adversely impacted by negative publicity surrounding our products or the use of our products. We may incur substantial selling costs and expend significant effort in connection with the evaluation of our products by potential customers before they place an order. If these potential customers do not purchase our products, we will have expended significant resources and received no revenue in return.
Due to municipal government funding rules, certain of our contracts are subject to appropriation (or similar) cancellation clauses, which could allow our customers to cancel contracts in the future.
Although TASER has entered into contracts for the delivery of products and services in the future and anticipates the contracts will be completed, if agencies do not appropriate money in future year budgets, or if other cancellation clauses are invoked, revenue associated with these bookings will not ultimately be recognized, and will result in a reduction to bookings.



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Changes in civil forfeiture laws may affect our customers’ ability to purchase our products
Some of our customers use funds seized through civil forfeiture proceedings to fund the purchase of our products.  Changes in state legislatures could impact our customers’ ability to seize funds or use seized funds to fund purchases.  Changes in civil forfeiture statutes or regulations are outside of our control and could limit the amount of funds available to our customers which could adversely affect the sale of our products.
SaaS revenue for Evidence.com is recognized over the terms of the contracts, which may be several years, and, as such, trends in new business are not be immediately reflected in our operating results.
Our SaaS product revenue is generally recognized ratably over the terms of the contracts, which generally range from one to five years. As a result, most of the SaaS revenue we report each quarter is the result of agreements entered into during previous quarters. Consequently, current positive or negative trends in this portion of our business are not fully reflected in our revenue results for several periods.
We utilize multiple third party cloud-based storage providers to host the Axon Evidence.com platform.
Utilizing and administering multiple cloud-based storage providers can mean duplication of efforts and resources, increased cost structure, and organization complexities. These complexities and additional costs could adversely affect our business, financial condition or operating results.
We may face personal injury, wrongful death and other liability claims that harm our reputation and adversely affect our sales and financial condition.
Our CEW products are often used in aggressive confrontations that may result in serious, permanent bodily injury or death to those involved. Our CEW products may be associated with these injuries. A person, or the family members of a person, injured in a confrontation or otherwise in connection with the use of our products may bring legal action against us to recover damages on the basis of theories including wrongful death, personal injury, negligent design, defective product or inadequate warning. We are currently subject to a number of such lawsuits and we have recently been subject to significant adverse judgments and settlements. We may also be subject to lawsuits involving allegations of misuse of our products. If successful, wrongful death, personal injury, misuse and other claims could have a material adverse effect on our operating results and financial condition and could result in negative publicity about our products. Although we carry product liability insurance, we do incur significant legal expenses within our self-insured retention in defending these lawsuits and significant litigation could also result in a diversion of management’s attention and resources, negative publicity and a potential award of monetary damages in excess of our insurance coverage. The outcome of any litigation is inherently uncertain and there can be no assurance that our existing or any future litigation will not have a material adverse effect on our revenues, our financial condition or financial results.
Other litigation may subject us to significant litigation costs and judgments and divert management attention from our business.
We have been or could be in the future involved in numerous other litigation matters relating to our products, contracts and business relationships, including litigation against persons who we believe have infringed on our intellectual property, infringement litigation filed against the Company, litigation against a competitor and litigation filed by a former distributor against the Company. Such matters have resulted, and are expected to continue to result in, substantial costs to us, judgments, settlements and some diversion of our management’s attention, which could adversely affect our business, financial condition or operating results. There is also a risk of adverse judgments, as the outcome of litigation is inherently uncertain.
If we are unable to protect our intellectual property, we may lose our competitive advantage or incur substantial litigation costs to protect our rights. We may be subject to intellectual property infringement claims, which could cause us to incur litigation costs and divert management attention from our business.
Our future success depends upon our proprietary technology. Our protective measures, including patents, trademarks, copyrights, trade secret protection, and Internet identity registrations, may prove inadequate to protect our proprietary rights and market advantage. The right to stop others from misusing our trademarks and service marks in commerce depends, to some extent, on our ability to show evidence of enforcement of our rights against such misuse in commerce. Our efforts to stop improper use, if insufficient, may lead to loss of trademark and service mark rights, brand loyalty and notoriety among our customers and prospective customers. The scope of any patent to which we have or may obtain rights to may not prevent others from developing and selling competing products. The validity and breadth of claims covered in technology patents involve complex legal and factual questions, and the resolution of such claims may be highly uncertain, lengthy and expensive. In addition, our patents may be held invalid upon challenge, or others may claim rights in or ownership of our patents. Moreover, we are subject to litigation with parties that claim, among other matters, that we infringed their patents or other intellectual property rights. The defense and

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prosecution of patent and other intellectual property claims are both costly and time consuming and could result in a material adverse effect on our business and financial position. The Company was served with a first amended complaint filed by Digital Ally in the Federal District Court for the District of Kansas alleging that the Company’s Signal technology infringes their patents.  The Company believes this litigation is frivolous and the Company will vigorously defend this litigation.
Also, any intellectual property infringement claims against us, with or without merit, could be costly and time-consuming to defend and divert our management’s attention from our business. If our products were found to infringe a third party’s proprietary rights, we could be forced to enter into costly royalty or licensing agreements in order to be able to sell our products or discontinue use of the protected technology. Such royalty and licensing agreements may not be available on terms acceptable to us or at all. There is no guarantee that our use of conventional technology searching and brand clearance searching will identify all potential rights holders. Rights holders may demand payment for past infringements and/or force us to accept costly license terms or discontinue use of protected technology and/or works of authorship that may include, for example, photos, videos, and software. Our current research and development focus on developing software-based products increases this risk.
In foreign countries we can enforce patent rights only in the jurisdictions in which our patent applications have been granted.
Our U.S. patents protect us from imported infringing products coming into the U.S. from abroad. We have made applications for patents in a few foreign countries; however, these may be inadequate to protect markets for our products in other foreign countries. Each foreign patent is examined and granted according to the law of the country where it was filed independent of whether a U.S. patent on similar technology was granted. A patent in a foreign country may be subject to cancellation if the claimed invention has not been sold in that country. Meeting the requirements of working invention differs by country and ranges from sales in the country to manufacturing in the country. U.S. export law, or the laws of some foreign countries, may prohibit us from satisfying the requirements for working the invention, creating a risk that some of our foreign patents may become unenforceable.
Government regulations applied to our CEW products may affect our markets for and sales of these products.
We rely on the opinions of the Bureau of Alcohol, Tobacco and Firearms, including the determination that a device that has projectiles propelled by the release of compressed gas in place of the expanding gases from ignited gunpowder, are not classified as firearms. Changes in statutes, regulations, and interpretation outside of our control may result in our products being classified or reclassified as firearms. Our private citizen market could be substantially reduced if consumers are required to obtain a registration to own a firearm prior to purchasing our products.
Federal regulation of sales in the U.S.: With the exception of the TASER XREP, our CEWs are not firearms regulated by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, but our consumer products are regulated by the U.S. Consumer Product Safety Commission. Although there are currently no Federal laws restricting sales of our core CEW products in the U.S., future Federal regulation could adversely affect sales of our products.
Federal regulation of international sales: Our CEW devices are considered a “crime control” product by the U.S. Department of Commerce (“DOC”) for export directly from the U.S. Consequently, we must obtain an export license from the DOC for the export of our CEW devices from the U.S. other than to Canada. In addition, certain of our camera and software products require classifications from the DOC before they may be shipped internationally. Our inability to obtain DOC export licenses or classifications on a timely basis for sales of our products to our international customers could significantly and adversely affect our international sales.
State and local regulation: Our devices are controlled, restricted or their use prohibited by a number of state and local governments. Our devices are banned from private citizen purchase or use by statute in five states: Hawaii, Massachusetts, New Jersey, New York, and Rhode Island as well as in the District of Columbia. Some cities and municipalities also prohibit private citizen possession or use of our products. Other jurisdictions may ban or restrict the sale of our products and our product sales may be significantly affected by additional state, county and city governmental regulation.
Foreign regulation: Certain foreign jurisdictions prohibit, restrict, or require a permit for the importation, sale, possession or use of CEWs, including in some countries by law enforcement agencies, limiting our international sales opportunities.
We face unique regulatory and political challenges presented by international markets.
Our international business, including any expansion in new international markets, may be adversely affected by local laws and customs and U.S. laws applicable to foreign operations, including the Foreign Corrupt Practices Act.
Risks inherent in international operations also include, among others:
Foreign countries could change laws and regulations, change tax structures, or impose currency restrictions and other restraints;

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Risks associated with the Foreign Corrupt Practices Act and local anti-bribery law compliance;
Political changes and economic crises may lead to changes in the business environment in which we operate;
Local distributors of our products may not comply with existing laws and regulations;
Some countries impose burdensome tariffs and quotas; and
Economic sanctions may be imposed by the U.S. on some countries, which could disrupt the markets for products we sell, even if we do not sell in the target country.
Environmental laws and regulations subject us to a number of risks and could result in significant liabilities and costs.
We are subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in our products and making producers for those products financially responsible for the collection, treatment, recycling and disposal. Environmental legislation within the European Union (“EU”) may increase our cost of doing business internationally and impact our revenues from EU countries as we comply with and implement these requirements.
The EU has published Directives on the restriction of certain hazardous substances in electronic and electrical equipment (the “RoHS Directive”) and on electronic and electrical waste management (the “WEEE Directive”). The RoHS Directive restricts the use of a number of substances, including lead. The WEEE Directive directs members of the EU to enact laws, regulations, and administrative provisions to ensure that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the EU. In addition, similar environmental legislation has been or may be enacted in other jurisdictions, including the U.S. (under federal and state laws) and other countries, the cumulative impact of which could be significant.
We continue to monitor the impact of specific registration and compliance activities required by the RoHS and WEEE Directives. We endeavor to comply with applicable environmental laws, yet compliance with such laws could increase our operations and product costs, increase the complexities of product design, procurement, and manufacturing, limit our ability to manage excess and obsolete non-compliant inventory, limit our sales activities, and impact our future financial results. Any violation of these laws can subject us to significant liability, including fines, penalties, and prohibiting sales of our products into one or more states or countries, and result in a material adverse effect on our financial condition.
Regulations related to voice, data and communications services may impact our ability to sell our products.
The radio spectrum is required to provide wireless voice, data and video communications services. The allocation of spectrum is regulated in the U.S. and other countries and limited spectrum space is allocated to wireless services and specifically to public safety users. In the U.S., the Federal Communications Commission (“FCC”) regulates spectrum use by non-federal entities and federal entities, respectively. Similarly, countries around the world have one or more regulatory bodies that define and implement the rules for use of radio spectrum and electromagnetic interference, pursuant to their respective national laws. We manufacture and market products in spectrum bands already made available by regulatory bodies. Consequently, our results could be positively or negatively affected by the rules and regulations adopted from time to time by the FCC or regulatory agencies in other countries. Regulatory changes in current spectrum bands may also provide opportunities or may require modifications to some of our products so they can continue to be manufactured and marketed. If current products do not comply with the regulations set forth by these governing bodies, we may be unable to sell our products or could incur penalties, which could have an adverse impact on our financial condition, results of operations and cash flows.
Regulations related to conflict minerals may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.
The U.S. Securities and Exchange Commission ("SEC") has enacted disclosure requirements for companies that use certain minerals and metals, known as “conflict minerals,” in their products, whether or not these products are manufactured by third parties. These requirements require companies to perform due diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. We have incurred and will likely continue to incur costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. In addition, these new requirements could adversely affect the sourcing, availability and pricing of minerals used in our products. Because our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such an event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict-free.



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Our dependence on third-party suppliers for key components of our devices could delay shipment of our products and reduce our sales.
We depend on certain domestic and foreign suppliers for the delivery of components used in the assembly of our products. Our reliance on third-party suppliers creates risks related to our potential inability to obtain an adequate supply of components or sub-assemblies and reduced control over pricing and timing of delivery of components and sub-assemblies. Specifically, we depend on suppliers of sub-assemblies, machined parts, injection molded plastic parts, printed circuit boards, custom wire fabrications and other miscellaneous customer parts for our products. We do not have long-term agreements with any of our suppliers and there is no guarantee that supply will not be interrupted. Due to changes imposed for imports of foreign products into the U.S., as well as potential port closures and delays created by terrorist attacks or threats, public health issues, national disasters or work stoppages, we are exposed to risk of delays caused by freight carriers or customs clearance issues for our imported parts. Any interruption of supply for any material components of our products could significantly delay the shipment of our products and have a material adverse effect on our revenues, profitability and financial condition.
Component shortages could result in our inability to produce at a volume to adequately meet customer demand, which could result in a loss of sales, delay in deliveries and injury to our reputation.
Single or sole-source components used in the manufacture of our products may become unavailable or discontinued. Delays caused by industry allocations or obsolescence may take weeks or months to resolve. In some cases, parts obsolescence may require a product re-design to ensure quality replacement components. These delays could cause significant delays in manufacturing and loss of sales, leading to adverse effects significantly impacting our financial condition or results of operations and injure our reputation.
We may experience a decline in gross margins due to rising raw material and transportation costs associated with a future increase in petroleum prices.
A significant number of our raw materials are comprised of petroleum-based products, or incur some form of landed cost associated with transporting the raw materials or components to our facility. A significant rise in oil prices could adversely impact our ability to sustain current gross margins by increasing component pricing.
We may experience a decline in gross margins due to a shift in product sales from CEWs to Axon devices which may continue to carry a lower gross margin.
We continue to invest in the growth of the Axon segment, and this expected growth may result in a higher percentage of total revenues being comprised of Axon products and services. Gross margin as a percentage of net sales for the Axon segment is currently lower than that of the TASER Weapons segment, and may continue to be lower in the future.
To the extent demand for our products increases, our future success will be dependent upon our ability to manage our growth and to increase manufacturing production capacity, which may be accomplished by the implementation of customized manufacturing automation equipment.
To the extent demand for our products increases significantly in future periods, one of our key challenges will be to increase our production capacity to meet sales demand while maintaining product quality. Our primary strategies to accomplish this include introducing additional shifts, increasing the physical size of our assembly facilities, the hiring of additional production staff, and the implementation of additional customized automation equipment. The investments we make in this equipment may not yield the anticipated labor and material efficiencies. Our inability to meet any future increase in sales demand or effectively manage our expansion could have a material adverse effect on our revenues, financial results and financial condition.
Our future success is dependent on our ability to expand sales through distributors and direct sales and our inability to recruit new distributors or increase direct sales would negatively affect our sales.
Our distribution strategy is to pursue sales through multiple channels with an emphasis on independent distributors and direct sales. Our inability to establish relationships with and retain law enforcement equipment distributors, who we believe can successfully sell our products, would adversely affect our sales. In addition, our arrangements with our distributors are generally short-term. We are also focusing on direct sales to larger agencies through our regional sales managers and our inability to grow sales to these agencies in this manner could adversely affect our sales. If we do not competitively price our products, meet the requirements of our distributors or end-users, provide adequate marketing support, or comply with the terms of our distribution arrangements, our distributors may fail to aggressively market our products or may terminate their relationships with us. These developments would likely have a material adverse effect on our sales. Our reliance on the sales of our products by others also makes it more difficult to predict our revenues, cash flow and operating results.

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The increased focus on direct sales compared to sales through distribution is dependent on our ability to sell into the states or foreign jurisdictions that have established distributor relationships.
In certain states and foreign jurisdictions we have decided to pursue sales directly with law enforcement customers, rather than working through established distribution channels. Our customers may have strong working relationships with distributors and we may face resistance to this change. If we do not overcome this resistance and effectively build a direct relationship with our customers, sales may be adversely affected.
Acquisitions and joint ventures may have an adverse effect on our business.
We may consider additional acquisitions or joint ventures as part of our long-term business strategy. These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, that we don’t realize a satisfactory return on our investment, or that we experience difficulty in the integration or coordination of new employees, business systems, and technology, or there is a diversion of management’s attention from our other businesses. These events could harm our operating results, financial condition or cash flows.
If our goodwill or finite-lived intangible assets become impaired, we may be required to record a significant charge to earnings. 
We review our finite-lived intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable, such as a decline in stock price and market capitalization. We test goodwill for impairment at least annually. If such goodwill or finite-lived intangible assets are deemed to be impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets would be recognized. We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or finite-lived intangible assets is determined, which would negatively affect our results of operations.
Catastrophic events may disrupt our business.
A disruption or failure of our systems or operations in the event of a major earthquake, weather event, fire, explosion, failure to contain hazardous materials, industrial accident, cyber-attack, terrorist attack, or other catastrophic event could cause delays in completing sales, providing services, or performing other mission-critical functions.  A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and our operating results as well as expose us to claims, litigation and governmental investigations and fines.
Our revenues and operating results may fluctuate unexpectedly from quarter-to-quarter, which may cause our stock price to decline.
Our revenues and operating results have varied significantly in the past and may vary significantly in the future due to various factors, including, but not limited to:
budgetary cycles of municipal, state and federal law enforcement and corrections agencies;
market acceptance of our products and services;
the timing of large domestic and international orders;
the outcome of any existing or future litigation;
adverse publicity surrounding our products, the safety of our products, or the use of our products;
changes in our sales mix;
new product introduction costs;
increased raw material expenses;
changes in our operating expenses; and
regulatory changes that may affect the marketability of our products.
As a result of these and other factors, we believe that period-to-period comparisons of our operating results may not be meaningful in the short term, and our performance in a particular period may not be indicative of our performance in any future period.

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The Company’s financial performance is subject to risks associated with changes in the value of the U.S. dollar versus local currencies.
For current and potential foreign customers whose contracts are denominated in U.S. dollars, the relative change in currency values creates fluctuations in our product pricing. These changes in foreign end-user costs may result in lost orders and reduce the competitiveness of our products in certain foreign markets.
For non-U.S. dollar denominated sales, weakening of foreign currencies relative to the U.S. dollar generally leads us to raise international pricing, potentially reducing demand for our products. Should we decide not to raise local prices to fully offset the dollar’s strengthening, or at all, the U.S. dollar value of our foreign currency denominated sales and earnings would be adversely affected. We do not currently engage in hedging activities. Fluctuations in foreign currency could result in a change in the U.S. dollar value of our foreign denominated assets and liabilities including accounts receivable. Therefore, the U.S. dollar equivalent collected on a given sale could be less than the amount invoiced causing the sale to be less profitable than contemplated.
We also import selected components which are used in the manufacturing of some of our products. Although our purchase orders are generally in U.S. dollars, weakness in the U.S. dollar could lead to price increases for the components.
Unanticipated changes in our effective tax rate and additional tax liabilities may impact our operating results
We are subject to income taxes in the United States and various jurisdictions outside of the United States. Our effective tax rate could fluctuate due to changes in the mix of earnings and losses in countries with differing statutory tax rates. Our tax expense could also be impacted by changes in non-deductible expenses, changes in excess tax benefits related to exercises and vesting of stock-based expense, changes in the valuation of deferred tax assets and liabilities and our ability to utilize them and the applicability of withholding taxes.
We are subject to tax examinations in multiple jurisdictions. While we regularly evaluate new information that may change our judgment resulting in recognition, derecognition or change in measurement of a tax position taken, there can be no assurance that the final determination of any examinations will not have an adverse effect on our operating results and financial position.
Our tax provision could also be impacted by changes in federal, state or international tax laws including fundamental tax law changes applicable to corporate multinationals currently being considered by many countries including the United States as well as several European countries.
Additionally, we may be subject to additional tax liabilities due to changes in non-income taxes resulting from changes in federal, state or international tax laws, changes in taxing jurisdictions’ administrative interpretations, decisions, policies, and positions, results of tax examinations, settlements or judicial decisions, changes in accounting principles, changes to the business operations, including acquisitions, as well as the evaluation of new information that results in a change to a tax position taken in a prior period.
We maintain most of our cash balances, some of which are not insured, at three depository institutions.
We maintain most of our cash accounts at three depository institutions. As of December 31, 2015, our aggregate balances in such accounts were $57.1 million. The Company’s balances with these institutions regularly exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits for domestic deposits and various deposit insurance programs covering our deposits in the Netherlands, the United Kingdom and Germany.
We could suffer losses with respect to the uninsured balances if the depositary institutions failed and the institution’s assets were insufficient to cover its deposits and/or the governments did not take actions to support deposits in excess of existing insurance limits. Any such losses could have a material adverse effect on our liquidity, financial condition and results of operations.
We depend on our ability to attract and retain our key management, sales and technical personnel.
Our success depends upon the continued service of our key management personnel. Our success also depends on our ability to continue to attract, retain and motivate qualified technical personnel. Although we have employment agreements with certain of our officers, the employment of such persons is “at-will” and either we or the employee can terminate the employment relationship at any time, subject to the applicable terms of the employment agreements. The competition for our key employees is intense. The loss of the service of one or more of our key personnel could harm our business.
Risks Related to Ownership of Our Common Stock
The trading price of our common stock has been, and is likely to continue to be, volatile. In addition to the factors discussed in this Annual Report on Form 10-K, the trading price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
actual or anticipated fluctuations in our revenue and other operating results;

19


the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
investor sentiment with respect to our competitors, our business partners, and our industry in general;
announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
announcements by us or estimates by third parties of actual or anticipated changes in the size of our user base, addressable market or the effectiveness of our products;
changes in operation performance and stock market valuations of technology companies in our industries, including our developers and competitors;
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
media coverage of our business and financial performance;
lawsuits threatened or filed against us;
developments in anticipated or new legislation and pending lawsuits or regulator actions, including interim or final rulings by tax, judicial or regulatory bodies; and
other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters and manufacturing facilities are based in a 100,000 square foot facility in Scottsdale, Arizona, which we own. We also lease premises in Scottsdale, Arizona; Seattle, Washington; Topsfield, Massachusetts; Amsterdam, Netherlands; Daventry, England; London, England; and Frankfurt, Germany. We believe our existing facilities are well maintained and in good operating condition. We also believe we have adequate manufacturing capacity for our existing product lines for the foreseeable future. To the extent that we introduce new products in the future, we will likely need to acquire additional facilities to locate the associated production lines. However, we believe we can acquire or lease such facilities on reasonable terms. The Company continues to make investments in capital equipment as needed to meet anticipated demand for its products.
Item 3. Legal Proceedings
See discussion of litigation in Note 9(c) to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, which discussion is incorporated by reference herein.
Item 4. Mine Safety Disclosures
None.


20


PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is quoted under the symbol “TASR” on The NASDAQ Global Select Market. The following table sets forth the high and low sales prices per share for our common stock as reported by NASDAQ for each quarter of the last two fiscal years.
 
High
 
Low
Year Ended December 31, 2015:
 
 
 
First quarter
$
28.30

 
$
21.39

Second quarter
35.95

 
23.41

Third quarter
34.91

 
18.05

Fourth quarter
26.48

 
16.14

 
High
 
Low
Year Ended December 31, 2014:
 
 
 
First quarter
$
20.83

 
$
14.89

Second quarter
19.17

 
12.55

Third quarter
18.76

 
10.46

Fourth quarter
27.65

 
13.40

Holders
As of December 31, 2015, there were 280 holders of record of our common stock.
Dividends
To date, we have not declared or paid cash dividends on our common stock. We do not intend to pay cash dividends in the foreseeable future and our revolving line of credit prohibits the payment of cash dividends.
Issuer Purchases of Equity Securities

In May 2014, the Company's Board of Directors authorized a stock repurchase program to acquire up to $30.0 million of the Company’s outstanding common stock subject to stock market conditions and corporate considerations. During the year ended December 31, 2015, the Company repurchased approximately 0.3 million common shares under this program for a total cost of approximately $7.6 million, or a weighted average cost of $25.86 per share. The weighted average cost includes the average price paid per share of $25.83, plus any applicable administrative costs for the transaction. From inception of this program, which was completed in the third quarter of 2015, the Company purchased approximately 2.0 million common shares for a total cost of approximately $30.0 million, or a weighted average cost, including commissions, of $14.85 per share. As of December 31, 2015, no amounts remain available under the plan for future purchases.


21


Stock Performance Graph
The following stock performance graph compares the performance of our common stock to the NASDAQ Stock Market (U.S.) and the Russell 3000 Index. The graph covers the period from December 31, 2010 to December 31, 2015. The graph assumes that the value of the investment in our stock and in each index was $100 at December 31, 2010, and that all dividends were reinvested. We do not pay dividends on our common stock.
 
2010
 
2011
 
2012
 
2013
 
2014
 
2015
TASER International, Inc.
$
100.00

 
$
108.94

 
$
190.21

 
$
337.87

 
$
563.40

 
$
367.87

NASDAQ Composite
100.00

 
100.53

 
116.92

 
166.19

 
188.78

 
199.95

Russell 3000
100.00

 
101.03

 
117.61

 
157.07

 
176.79

 
177.64



22


Item 6.    Selected Financial Data
The following selected financial data should be read in conjunction with our consolidated financial statements and the notes thereto, and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The statement of operations data for the years ended December 31, 2015, 2014 and 2013, and the balance sheet data as of December 31, 2015 and 2014, have been derived from, and should be read in conjunction with, our audited consolidated financial statements and the notes thereto included herein. The statement of operations data for the years ended December 31, 2012 and 2011, and the balance sheet data as of December 31, 2013, 2012 and 2011, is derived from our historical audited consolidated financial statements and the notes thereto which are not included in this Annual Report on Form 10-K. Dollars are in thousands, except per share amounts.
 
For the Year Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
197,892

 
$
164,525

 
$
137,831

 
$
114,753

 
$
90,028

Cost of products sold and services delivered
69,245

 
62,977

 
51,988

 
47,038

 
41,753

Excess inventory charges

 

 

 

 
3,746

Gross margin
128,647

 
101,548

 
85,843

 
67,715

 
44,529

Sales, general and administrative expenses
69,698

 
54,158

 
46,557

 
39,247

 
40,801

Research and development expenses
23,614

 
14,885

 
9,888

 
8,139

 
9,989

Litigation judgments (recoveries)

 

 
1,450

 
(2,200
)
 
3,301

Loss on impairment

 

 

 

 
1,354

Income (loss) from operations
35,335

 
32,505

 
27,948

 
22,529

 
(10,916
)
Interest and other income (expense), net
26

 
(194
)
 
86

 
83

 
1,287

Income (loss) before provision (benefit) for income taxes
35,361

 
32,311

 
28,034

 
22,612

 
(9,629
)
Provision (benefit) for income taxes
15,428

 
12,393

 
9,790

 
7,874

 
(2,589
)
Net income (loss)
$
19,933

 
$
19,918

 
$
18,244

 
$
14,738

 
$
(7,040
)
Net income (loss) per common and common equivalent shares:
 
 
 
 
 
 
 
 
 
Basic
$
0.37

 
$
0.38

 
$
0.35

 
$
0.27

 
$
(0.12
)
Diluted
$
0.36

 
$
0.37

 
$
0.34

 
$
0.27

 
$
(0.12
)
Weighted average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
53,548

 
52,948

 
51,880

 
53,827

 
59,436

Diluted
54,638

 
54,500

 
54,152

 
54,723

 
59,436

 
As of December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Working capital (i)
$
123,269

 
$
102,669

 
$
67,237

 
$
51,548

 
$
35,876

Total assets
229,881

 
185,368

 
148,382

 
116,236

 
104,963

Total current liabilities
38,140

 
31,973

 
23,129

 
18,109

 
15,888

Total long-term debt and capital leases, net of current portion
81

 
29

 
67

 
103

 

Total stockholders’ equity
157,004

 
129,106

 
108,347

 
87,285

 
82,456

(i) Working capital balances as of December 31, 2013, 2012 and 2011 were adjusted to reflect the Company's early adoption of Accounting Standards Update ("ASU") 2015-17 during the fourth quarter of fiscal year 2015 on a retrospective basis. The amount of deferred tax assets reclassified to noncurrent as of December 31, 2013, 2012 and 2011 was $7.1 million, $9.4 million and $10.0 million, respectively.

23


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with the other sections of this annual report on Form 10-K, including Part I, Item 1A: “Risk Factors”; Part II, Item 6: “Selected Financial Data”; and Part II, Item 8: “Financial Statements and Supplementary Data.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing. The tables in the MD&A sections below are derived from exact numbers and may have immaterial rounding differences.
Executive Overview and Key Strategic Initiatives
Our central mission is to make the world a safer place by creating technologies which reduce violence. The best way to understand our business strategy is to understand our three strategic missions.
Our Three Strategic Missions
1. Protect Life (safer weapons). Throughout history, the weapon technology used by individuals to protect themselves have caused death and destruction to another person. We believe this is because the only technologies capable of incapacitating a person to stop a threat have relied on the infliction of death or serious injury. Our TASER conducted electrical weapons (“CEWs”) are one of the few weapons which can truly incapacitate a person without requiring death or serious injury. Dating back to the origins of our technology in the late 1960’s, we have created and continue to lead this market space world-wide. Over the past few decades, the TASER CEW has become one of the most frequently used weapons in the North American Law Enforcement Market, with injuries and deaths dropping dramatically as a result. Today, we are seeing accelerating adoption in other markets around the world.
2. Protect Truth (wearable cameras and software). We believe, with strong scientific support, that the presence of video recordings in incidents involving conflict can dramatically reduce the frequency of severity of such events by both documenting, and altering the behavior of the persons involved. Studies have shown that police officers wearing video camera devices receive up to 90% fewer complaints, and are involved in approximately 60% fewer violent incidents involving the use of force. Our Axon Platform is the market leading solution for wearable cameras with a robust software system for storing, managing, and sharing the related video data. While we are proud of our Axon cameras and believe they are the best cameras in the law enforcement marketplace, we invested heavily to create an integrated hardware-software ecosystem specifically for public safety. Those investments appear to have been very well placed as bookings in the Axon business exceeded $135.1 million in 2015, growing at 136.7% over 2014. As of the date of this Annual Report on Form 10-K, 30 of the 60 major cities in the United States are now using our Axon digital evidence platform.
3. Empower Heroes (cloud-mobile-wearable ecosystem). Every society depends upon a professional class of public safety professionals charged with protecting the general public from threats of all kinds, including from those who would break the law and victimize others. With our TASER weapons and Axon platform, we have created relationships with over 20,000 public safety agencies around the world. We have come to develop a deep organizational understanding of the challenges and opportunities in this market space. One key insight is that law enforcement agencies around the world are significantly “behind the curve” when it comes to technology. Many agencies still rely largely on paper based reporting systems and have limited access to modern mobile smart phone technology. Some of our customers report that police officers are spending over 60% of their time on paperwork related tasks, rather than on value-add public safety work. Internet enabled platforms that connect end users direct to technology providers have dramatically changed industry after industry. These Internet enabled businesses offer accelerated speed of technology innovation, reduced cost of implementation and distribution to the end customer, and network effects enabling easy collaboration and information sharing. We are building out our Axon platform with body cameras and video management, which are driving rapid growth and market penetration today. However, the real opportunity is to leverage this connected platform to enable a broad suite of mobile, wearable, and data management capabilities to bring modern information technology capabilities to every law enforcement officer. With our Axon platform, and the Evidence.com service, we have built the first and largest cloud-hosted platform in the public safety space. We will leverage this platform to roll out additional capabilities, both hardware and software, to empower the heroic men and women of public safety to be more efficient, more effective, and have access to the best information available. There is a deep synergy across our product and service offerings and strategies. For example, the public scrutiny around the usage of TASER devices provides a compelling reason to deploy body cameras, which they require massive amounts of storage and video management capability which is best achieved through a cloud-hosted system such as our Evidence.com service. In fact, the Los Angeles Police Department recently announced plans to deploy TASER devices, Axon Cameras, and Evidence.com to all front line officers as an integrated suite of capabilities.


24


Execution of Our Mission
From an investor point of view, there are two distinct business segments at different levels of maturity. Our TASER weapons business is a mature, profitable, and cash generating business with a moderate growth rate. By comparison, our Axon platform business is a nascent software as a service (SaaS) business which is currently growing recorded bookings at greater than 100% annually, is not yet profitable, and has very different accounting treatment for revenue, which are generally recognized over a longer time horizon such as a five-year service contract. By comparison, most TASER Weapons revenues are generally recognized when shipped and accepted by the customer.
For these reasons, and to help investors and analysts understand the dynamics and progress in both business segments, we publish separate profit and loss tables for both the TASER Weapons and the Axon segments. The TASER segment is our “Protect Life” strategy driven segment. The Axon segment is driven by our “Protect Truth” and “Empower Heroes” strategies to enable body cameras and video storage and sharing today, growing to a full suite of connected technologies and capabilities going forward.
Technological innovation is the foundation for our long-term growth and we intend to maintain our commitment to the research and development of our technology for both new and existing products that further our mission. At the same time we have established industry leading training services to provide our users a comprehensive overview of legal, policy, medical and risk mitigation issues relating to our products and the use of force. We have built a network of distribution channels for selling and marketing our products and services to law enforcement agencies, primarily in North America, with ongoing focus and effort placed on expanding these programs in international, military and other markets. Over 17,000 law enforcement agencies in nearly 150 countries have made initial purchases of our TASER brand devices for testing or deployment. To date, we do not know of any significant sales of any competing CEW products, but acknowledge the continued emergence of competition within the on-officer camera, digital evidence management and related technology market.
Our key strategic initiatives include: Continue investment in development of innovative new products, which both compliment and add to our existing platforms. Our research and development efforts in 2015 were primarily focused on refining our Evidence.com services and exploring next generation hardware for our TASER Weapons and Axon segments.We believe that the video evidence capture and management market will continue to grow significantly due to several factors, including increasing recognition of the benefits and value of video evidence and other mobile technologies. In 2016, we expect to devote significant resources towards both the development of the next revenue generating product for our Axon segment, and additional functionality for our existing SaaS. We aim to work closely with our customers to develop new value added features to our existing platform that are necessary to optimize their workflows, as well as develop adjacent technologies in wearables, cloud, and mobile devices.

Increase market penetration in both international and U.S. law enforcement markets:
Internationally, there is a very significant portion of the market where officers do not carry CEWs or wear on-officer cameras. We believe there is substantial opportunity for more widespread adoption of CEWs and Axon products in foreign countries. In recent years, we have seen international markets become increasingly attractive and we seek to maintain that trend as we demonstrate the benefits of large-scale adoptions of our CEWs and Axon products, using countries such as the United Kingdom and Australia as benchmarks of successful programs. We have also decided to make focused investments in targeted countries such as France, the United Kingdom, Canada and Australia as we see considerable opportunity for increased sales in those regions. Because the sales cycle to sell into a new international market can be as long or longer than 18 to 24 months, it is important that we continue to develop our pipeline in terms of both the number and size of opportunities.
In the U.S., our focus is on driving deeper penetration into law enforcement agencies that do not have a CEW or on-officer camera on every officer, and to upgrade officers using one of our legacy products to our next generation Smart Weapons. Our strategy is to create a dominant market position in domestic law enforcement and internationally over time.
In the Axon segment, our focus is on increasing bookings and brand awareness for Evidence.com and Axon cameras. We have expanded our Axon sales team from 16 at the end of 2014 to 27 full-time salespeople at the end of 2015. We expect the additional salesforce to generate increased bookings in 2016. In addition, during 2016, we expect to continue our concerted efforts to promote the awareness of the benefits of digital evidence management in general, and Evidence.com specifically, throughout the law enforcement community. We expect additional efforts will encompass tech summits, sponsorships, tradeshows, interaction with trade associations (such as the International Association of Chiefs of Police), and other promotional activities.Included in our strategy to demonstrate the benefits of Evidence.com, we have optional test and evaluation periods of the product on-site with customers. We experienced increasing volumes of trial programs in 2015 and believe these trial programs area great way for our customers to see the powerful capabilities, benefits and compelling value proposition of our technology. We anticipate further increases in these trial programs in 2016, ultimately leading to increased sales. As market acceptance grows, we anticipate fewer and/or shorter trial programs will be necessary to capture sales.

25


Additionally, our focus is on maintaining incremental sales channels by continuing to develop purchasing programs that position the Company to own municipality budget lines and become the ongoing technology provider for our customers in order to drive sales growth and allow our customers to keep up with the latest technology while minimizing large upfront purchases. We focus on minimizing attrition rates by providing world class products and services that provide the value necessary to ensure customers continue to renew their contracts. We remain committed to developing our presence in federal government and military markets. We intend to continue to place emphasis on supporting our military customers through our team of professionals with extensive military, homeland defense and law enforcement experience. The primary focus of this team is to support military use for our existing hardware as well as increase technology development through contracted support.Continued application for patents and intellectual property rights, both in the U.S. and internationally, to protect key technology in our products and further attempt to protect and maintain our competitive position.Continued aggressive litigation defense to protect our brand equity. We maintain a team of world class medical experts and internal legal resources to provide an efficient means of defending the Company against product liability claims.
Results of Operations
The following table presents data from our statements of operations as well as the percentage relationship to total net sales of items included in our statements of operations (dollars in thousands):
 
Year Ended December 31,
 
2015
 
2014
 
2013
Net sales
$
197,892

 
100.0
%
 
$
164,525

 
100.0
 %
 
$
137,831

 
100.0
%
Cost of products sold and services delivered
69,245

 
35.0

 
62,977

 
38.3

 
51,988

 
37.7

Gross margin
128,647

 
65.0

 
101,548

 
61.7

 
85,843

 
62.3

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Sales, general and administrative
69,698

 
35.2

 
54,158

 
32.9

 
46,557

 
33.8

Research and development
23,614

 
11.9

 
14,885

 
9.0

 
9,888

 
7.2

Litigation judgments

 

 

 

 
1,450

 
1.1

Total operating expenses
93,312

 
47.2

 
69,043

 
42.0

 
57,895

 
42.0

Income from operations
35,335

 
17.9

 
32,505

 
19.8

 
27,948

 
20.3

Interest and other income (expense), net
26

 

 
(194
)
 
(0.1
)
 
86

 
0.1

Income before provision for income taxes
35,361

 
17.9

 
32,311

 
19.6

 
28,034

 
20.3

Provision for income taxes
15,428

 
7.8

 
12,393

 
7.5

 
9,790

 
7.1

Net income
$
19,933

 
10.1
%
 
$
19,918

 
12.1
 %
 
$
18,244

 
13.2
%
Net sales to the U.S. and other countries are summarized as follows (dollars in thousands):
 
Year Ended December 31,
 
2015
 
2014
 
2013
United States
$
161,803

 
81.8
%
 
$
132,205

 
80.4
%
 
$
115,674

 
83.9
%
Other Countries
36,089

 
18.2

 
32,320

 
19.6

 
22,157

 
16.1

Total
$
197,892

 
100.0
%
 
$
164,525

 
100.0
%
 
$
137,831

 
100.0
%

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

26


Net Sales - For the Years Ended December 31, 2015 and 2014
Net sales by product line were as follows for the years ended December 31, 2015 and 2014 (dollars in thousands):
 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
 
2015
 
2014
 
 
TASER Weapons segment:
 
 
 
 
 
 
 
 
 
 
 
TASER X26P
$
55,969

 
28.3
%
 
$
43,512

 
26.4
%
 
$
12,457

 
28.6
 %
TASER X2
42,746

 
21.6

 
28,774

 
17.5

 
13,972

 
48.6

TASER X26
7,337

 
3.7

 
18,712

 
11.4

 
(11,375
)
 
(60.8
)
TASER C2
2,146

 
1.1

 
2,084

 
1.3

 
62

 
3.0

TASER M26
684

 
0.3

 
693

 
0.4

 
(9
)
 
(1.3
)
TASER XREP

 

 
2,617

 
1.6

 
(2,617
)
 
(100.0
)
Single cartridges
41,674

 
21.1

 
38,539

 
23.4

 
3,135

 
8.1

Extended warranties including TAP
7,402

 
3.7

 
6,024

 
3.7

 
1,378

 
22.9

Other
4,417

 
2.2

 
4,658

 
2.8

 
(241
)
 
(5.2
)
TASER Weapons segment
162,375

 
82.1

 
145,613

 
88.5

 
16,762

 
11.5

Axon segment:

 


 

 


 

 


Axon Body
4,029

 
2.0

 
3,404

 
2.1

 
625

 
18.4

Axon Flex
6,880

 
3.5

 
3,981

 
2.4

 
2,899

 
72.8

E-Dock
4,022

 
2.0

 
1,719

 
1.0

 
2,303

 
134.0

Evidence.com
11,765

 
5.9

 
4,039

 
2.5

 
7,726

 
191.3

TASER Cam
5,746

 
2.9

 
4,674

 
2.8

 
1,072

 
22.9

Extended warranties including TAP
1,794

 
0.9

 

 

 
1,794

 
*

Other
1,281

 
0.6

 
1,095

 
0.7

 
186

 
17.0

Axon segment
35,517

 
17.9

 
18,912

 
11.5

 
16,605

 
87.8

Total net sales
$
197,892

 
100.0
%
 
$
164,525

 
100.0
%
 
$
33,367

 
20.3

 *    not meaningful
Net unit sales for the TASER Weapons products and Axon segment products are as follows:
 
Year Ended December 31,
 
 
 
 
 
2015
 
2014
 
Unit
Change
 
Percent
Change
TASER X26P
62,383

 
51,283

 
11,100

 
21.6
 %
TASER X2
38,050

 
26,901

 
11,149

 
41.4

TASER X26
4,928

 
17,770

 
(12,842
)
 
(72.3
)
TASER M26
2,455

 
1,994

 
461

 
23.1

TASER C2
8,121

 
7,249

 
872

 
12.0

Cartridges
1,694,450

 
1,618,117

 
76,333

 
4.7

Axon Flex
18,823

 
10,034

 
8,789

 
87.6

Axon Body
17,522

 
13,219

 
4,303

 
32.6

E-Dock
6,979

 
4,219

 
2,760

 
65.4

TASER Cam
11,634

 
9,303

 
2,331

 
25.1

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

27


The increase in net sales for 2015 compared to 2014 in the TASER Weapons segment was primarily driven by increased adoption of the TASER X26P and X2 Smart Weapons, as customers upgrade their legacy CEWs to the new models. The Company has also introduced upgrade programs to incentivize agencies to replace older CEWs with the Company's new Smart Weapons. In the Axon segment, the increase in net sales was driven by the continued adoption of the Axon on-officer cameras and Evidence.com application in the law enforcement markets. International customers continued to be a steady contributor to the results with $36.1 million in 2015 versus $32.3 million in 2014, an increase of 11.7%.
To gain more immediate feedback regarding activity for Axon products and Evidence.com services, we also review bookings for these products. We consider bookings to be a statistical measure defined as the sales contract value (not invoiced sales), net of cancellations, placed in the relevant fiscal period, regardless of when the products or services ultimately will be provided. Some bookings will be invoiced in subsequent years. Due to municipal government funding rules, certain of the future year amounts included in bookings are subject to budget appropriation or other contract cancellation clauses. Although TASER has entered into contracts for the delivery of products and services in the future and anticipates the contracts will be completed, if agencies do not appropriate money in future year budgets or enact a cancellation clause, revenue associated with these bookings will not ultimately be recognized, resulting in a future reduction to bookings. Bookings related to Evidence.com and the Axon product line increased to $135.1 million during 2015, compared to $57.1 million in 2014, an increase of 136.7%.
The chart below illustrates the Company's quarterly bookings for each of the previous six fiscal quarters (in thousands):


28


Net Sales - Three Months Ended December 31, 2015 Compared to September 30, 2015
Net sales by product line were as follows for the three months ended December 31, 2015 and September 30, 2015 (dollars in thousands):
 
Three Months Ended
December 31, 2015
 
Three Months Ended
September 30, 2015
 
Dollar
Change
 
Percent
Change
TASER Weapons segment:
 
 
 
 
 
 
 
TASER X26P
$
14,712

 
26.3
%
 
$
12,901

 
25.6
%
 
$
1,811

 
14.0
 %
TASER X2
13,181

 
23.5

 
10,928

 
21.7

 
2,253

 
20.6

TASER X26
1,544

 
2.8

 
1,570

 
3.1

 
(26
)
 
(1.7
)
TASER C2
655

 
1.2

 
530

 
1.1

 
125

 
23.6

TASER M26
155

 
0.3

 
207

 
0.4

 
(52
)
 
(25.1
)
Single cartridges
13,090

 
23.4

 
10,351

 
20.5

 
2,739

 
26.5

Extended warranties including TAP
1,789

 
3.2

 
1,876

 
3.7

 
(87
)
 
(4.6
)
Other
1,563

 
2.8

 
1,157

 
2.3

 
406

 
35.1

TASER Weapons segment
46,689

 
83.3

 
39,520

 
78.5

 
7,169

 
18.1

Axon segment:
 
 
 
 
 
 
 
 
 
 
 
Axon Body
596

 
1.1

 
1,144

 
2.3

 
(548
)
 
(47.9
)
Axon Flex
1,351

 
2.4

 
2,936

 
5.8

 
(1,585
)
 
(54.0
)
E-Dock
580

 
1.0

 
1,562

 
3.1

 
(982
)
 
(62.9
)
Evidence.com
4,410

 
7.9

 
2,764

 
5.5

 
1,646

 
59.6

TASER Cam
1,316

 
2.3

 
1,444

 
2.9

 
(128
)
 
(8.9
)
Extended warranties including TAP
848

 
1.5

 
511

 
1.0

 
337

 
65.9

Other
251

 
0.4

 
495

 
1.0

 
(244
)
 
(49.3
)
Axon segment
9,352

 
16.7

 
10,856

 
21.5

 
(1,504
)
 
(13.9
)
Total net sales
$
56,041

 
100.0
%
 
$
50,376

 
100.0
%
 
$
5,665

 
11.2

Net unit sales for the TASER Weapons products and Axon segment products are as follows:
 
Three Months Ended
 
 
 
 
 
12/31/2015
 
9/30/2015
 
Unit
Change
 
Percent
Change
TASER X26P
16,437

 
13,659

 
2,778

 
20.3
 %
TASER X2
12,540

 
8,036

 
4,504

 
56.0

TASER X26
587

 
818

 
(231
)
 
(28.2
)
TASER M26
503

 
709

 
(206
)
 
(29.1
)
TASER C2
2,336

 
1,801

 
535

 
29.7

Cartridges
505,332

 
435,237

 
70,095

 
16.1

Axon Flex
2,902

 
6,759

 
(3,857
)
 
(57.1
)
Axon Body
2,141

 
4,778

 
(2,637
)
 
(55.2
)
E-Dock
1,425

 
2,075

 
(650
)
 
(31.3
)
TASER Cam
2,641

 
2,887

 
(246
)
 
(8.5
)
Net sales were $56.0 million and $50.4 million for the three months ended December 31, 2015 and September 30, 2015, respectively, an increase of $5.7 million or 11.2%. Net sales for the TASER Weapons segment were $46.7 million and $39.5 million for the three months ended December 31, 2015 and September 30, 2015, respectively, an increase of $7.2 million or 18.1%. Net sales for the Axon segment were $9.4 million and $10.9 million for the three months ended December 31, 2015 and September 30, 2015, respectively, a decrease of $1.5 million or 13.9%.

29


The increase in net sales in the TASER Weapons segment on a quarterly sequential basis was primarily driven by the continued adoption of the TASER X26P and X2 Smart Weapons. Growing demand is seen in the TASER Weapons segment as customers are upgrading their legacy CEWs to the new TASER X2 and X26P Smart Weapons.
During the fourth quarter of 2015, the Company publicly announced the introduction of its next generation on-officer camera, the Axon Body 2. This introduction led to an increase in bookings for the quarter ended December 31, 2015 as compared to September 30, 2015, as many agencies placed orders for the new model, but this adversely impacted recognized revenues, as many agencies opted to order Body 2 instead of the original Axon body and Axon flex units. Axon Body 2 first became available for shipping during the first quarter of 2016, so a large portion of bookings recorded during the fourth quarter of 2015 did not lead to sales recognized during the quarter. Sales of Axon Body 2 will be recognized as units ship starting in 2016.
Net Sales - For the Years Ended December 31, 2014 and 2013
Net sales by product line were as follows for the years ended December 31, 2014 and 2013 (dollars in thousands):
 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
 
2014
 
2013
 
 
TASER Weapons segment:
 
 
 
 
 
 
 
 
 
 
 
TASER X26P
$
43,512

 
26.4
%
 
$
21,860

 
15.9
%
 
$
21,652

 
99.0
 %
TASER X2
28,774

 
17.5

 
26,471

 
19.2

 
2,303

 
8.7

TASER X26
18,712

 
11.4

 
30,883

 
22.4

 
(12,171
)
 
(39.4
)
TASER C2
2,084

 
1.3

 
2,468

 
1.8

 
(384
)
 
(15.6
)
TASER M26
693

 
0.4

 
681

 
0.5

 
12

 
1.8

TASER XREP
2,617

 
1.6

 

 

 
2,617

 
*

Single cartridges
38,539

 
23.4

 
35,660

 
25.9

 
2,879

 
8.1

Extended warranties including TAP
6,024

 
3.7

 
4,617

 
3.3

 
1,407

 
30.5

Other
4,658

 
2.8

 
4,834

 
3.5

 
(176
)
 
(3.6
)
TASER Weapons segment
145,613

 
88.5

 
127,474

 
92.5

 
18,139

 
14.2

Axon segment:
 
 
 
 
 
 
 
 
 
 
 
Axon Body
3,404

 
2.1

 
530

 
0.4

 
2,874

 
542.3

Axon Flex
3,981

 
2.4

 
2,434

 
1.8

 
1,547

 
63.6

E-Dock
1,719

 
1.0

 
490

 
0.4

 
1,229

 
250.8

Evidence.com
4,039

 
2.5

 
1,719

 
1.2

 
2,320

 
135.0

TASER Cam
4,674

 
2.8

 
4,688

 
3.4

 
(14
)
 
(0.3
)
Other
1,095

 
0.7

 
496

 
0.4

 
599

 
120.8

Axon segment
18,912

 
11.5

 
10,357

 
7.5

 
8,555

 
82.6

Total net sales
$
164,525

 
100.0
%
 
$
137,831

 
100.0
%
 
$
26,694

 
19.4

 *    not meaningful

30


Net unit sales for the TASER Weapons products and Axon segment products are as follows:
 
Year Ended December 31,
 
 
 
 
 
2014
 
2013
 
Unit
Change
 
Percent
Change
TASER X26P
51,283

 
28,107

 
23,176

 
82.5
 %
TASER X2
26,901

 
28,164

 
(1,263
)
 
(4.5
)
TASER X26
17,770

 
33,769

 
(15,999
)
 
(47.4
)
TASER M26
1,994

 
2,091

 
(97
)
 
(4.6
)
TASER C2
7,249

 
8,116

 
(867
)
 
(10.7
)
Cartridges
1,618,117

 
1,552,028

 
66,089

 
4.3

Axon Flex
10,034

 
4,903

 
5,131

 
104.7

Axon Body
13,219

 
1,888

 
11,331

 
600.2

E-Dock
4,219

 
579

 
3,640

 
628.7

TASER Cam
9,303

 
10,686

 
(1,383
)
 
(12.9
)
Net sales were $164.5 million and $137.8 million for the years ended December 31, 2014 and 2013, respectively, an increase of $26.7 million or 19.4%. Net sales for the TASER Weapons segment were $145.6 million and $127.5 million for the years ended December 31, 2014 and 2013, respectively, an increase of $18.1 million or 14.2%. Net sales for the Axon segment were $18.9 million and $10.4 million for the years ended December 31, 2014 and 2013, respectively, an increase of $8.6 million or 82.6%.
The increase in net sales for 2014 compared to 2013 in the TASER Weapons segment was primarily driven by the introduction of the TASER X26P smart weapon. Growing demand is seen in the TASER Weapons segment as customers are upgrading their legacy CEWs to the new TASER X2 and X26P smart weapons. In the Axon segment, the increase in net sales was driven by the continued adoption of the Axon on-officer cameras and Evidence.com application in the law enforcement markets. International customers contributed to overall growth with sales of $32.3 million in 2014 versus $22.2 million in 2013, an increase of 45.5%.
Cost of Products Sold and Services Delivered
(dollars in thousands)
 
Year Ended December 31,
 
Year Ended December 31,
 
 
 
Dollar
Change
 
Percent
Change
 
 
 
Dollar
Change
 
Percent
Change
 
2015
 
2014
 
 
 
2014
 
2013
 
 
TASER Weapons segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold
$
48,821

 
$
47,680

 
$
1,141

 
2.4
%
 
$
47,680

 
$
44,025

 
$
3,655

 
8.3
%
Cost as % of sales
30.1

 
32.7

 
 
 
 
 
32.7

 
34.5

 
 
 
 
Axon segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold
16,201

 
13,233

 
2,968

 
22.4

 
13,233

 
6,074

 
7,159

 
117.9

Cost of services delivered
4,223

 
2,064

 
2,159

 
104.6

 
2,064

 
1,889

 
175

 
9.3

Total cost of products sold and services delivered
20,424

 
15,297

 
5,127

 
33.5

 
15,297

 
7,963

 
7,334

 
92.1

Cost as % of sales
57.5

 
80.9

 
 
 
 
 
80.9

 
76.9

 
 
 
 
Total cost of products sold and services delivered
$
69,245

 
$
62,977

 
$
6,268

 
10.0

 
$
62,977

 
$
51,988

 
$
10,989

 
21.1

Cost as % of sales
35.0

 
38.3

 
 
 
 
 
38.3

 
37.7

 
 
 
 
Cost of products sold and services delivered was $69.2 million and $63.0 million for the years ended December 31, 2015 and 2014, respectively, an increase of $6.3 million or 10.0%. As a percentage of net sales, cost of products sold and services delivered decreased to 35.0% in 2015 compared to 38.3% in 2014. Within the TASER Weapons segment, cost of products sold increased $1.1 million, or 2.4%, to $48.8 million in 2015, compared to $47.7 million in 2014, and decreased as a percent of sales to 30.1% from 32.7%. The overall increase in cost of products sold is attributable to higher unit sales, and the decrease of cost as a percentage of sales is primarily attributable to higher average selling prices and increased leverage of fixed operating costs.
Within the Axon segment, cost of products sold and services delivered were $20.4 million, an increase of $5.1 million, or 33.5% from 2014. As a percentage of net sales, cost of products sold and services delivered decreased to 57.5% in 2015 from

31


80.9% in 2014. The increase in cost of products sold and services delivered was driven by growing sales in this segment, increased data storage costs as more agencies utilize Evidence.com, as well as growth in the newly established professional services team. The decrease in cost of products sold and services delivered as a percentage of sales was driven by higher sales and by improvements to our Evidence.com SaaS margins. There are a number of fixed costs for the Axon segment which, as we generate additional revenue in the business, we expect to remain relatively stable and should allow for lower cost of services delivered as a percentage of service revenue.

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

Within the Axon segment, cost of products sold and services delivered were $15.3 million, an increase of $7.3 million, or 92.1% from 2013. The increase was driven by growing sales in this segment, increased data storage costs as more agencies utilize EVIDENCE.com, as well as the introduction of a professional services team. These increases were partially offset by the full depreciation of the capitalized Evidence.com software development costs as of June 30, 2013. The increase in overall cost of products sold and services delivered as a percentage of sales was driven by higher product sales. As a percentage of net sales, cost of products sold and services delivered increased slightly to 80.9% in 2014 from 76.9% in 2013.
Gross Margin
(dollars in thousands)
 
Year Ended December 31,
 
Year Ended December 31,
 
 
 
Dollar
Change
 
Percent
Change
 
 
 
Dollar
Change
 
Percent
Change
 
2015
 
2014
 
 
 
2014
 
2013
 
 
TASER Weapons segment
$
113,554

 
$
97,933

 
$
15,621

 
16.0
%
 
$
97,933

 
$
83,449

 
$
14,484

 
17.4
%
Axon segment
15,093

 
3,615

 
11,478

 
317.5

 
3,615

 
2,394

 
1,221

 
51.0

Total gross margin
$
128,647

 
$
101,548

 
$
27,099

 
26.7

 
$
101,548

 
$
85,843

 
$
15,705

 
18.3

Gross margin as % of sales
65.0

 
61.7

 
 
 
 
 
61.7

 
62.3

 
 
 
 
Gross margin increased $27.1 million to $128.6 million for 2015 compared to $101.5 million for 2014. As a percentage of net sales, gross margin increased to 65.0% for 2015 compared to 61.7% for 2014. The increase is attributable to stronger margins in both the TASER Weapons and Axon segments. As a percentage of net sales, gross margin for the TASER Weapons segment was 69.9% and 67.3% for 2015 and 2014, respectively, while the same measure for these years for the Axon segment were 42.5% and 19.1%, respectively. The Company experienced improvements in margins for the TASER Weapons and Axon segments individually, due to higher average selling prices and continued leverage of Axon fixed operating costs.
Gross margin increased $15.7 million to $101.5 million for 2014 compared to $85.8 million for 2013. As a percentage of net sales, gross margin decreased slightly to 61.7% for 2014 compared to 62.3% for 2013. The decrease is primarily attributable to sales mix and continued growth in the Axon segment. As a percentage of net sales, gross margin for the TASER Weapons segment was 67.3% and 65.5% for 2014 and 2013, respectively, while the same measure for these years for the Axon segment were 19.1% and 23.1%, respectively. The overall increase in margins was negatively impacted by higher inventory reserves taken towards the end of 2014 as compared to 2013 related primarily to the reserve for the X26 CEW that was discontinued as of December 31, 2014. The Company also accrued approximately $1.1 million of inventory losses related to products it may not be able to use in production of certain Axon camera products.


32


Sales, General and Administrative Expenses
Sales, general and administrative (“SG&A”) expenses were comprised as follows for 2015 and 2014 (dollars in thousands):
 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
 
2015
 
2014
 
 
Salaries, benefits and bonus
$
25,032

 
$
18,179

 
$
6,853

 
37.7
 %
Stock-based compensation
4,299

 
3,558

 
741

 
20.8

Legal, professional and accounting
5,645

 
4,711

 
934

 
19.8

Sales and marketing
10,776

 
8,124

 
2,652

 
32.6

Consulting and lobbying services
7,147

 
3,417

 
3,730

 
109.2

Travel and meals
5,649

 
4,778

 
871

 
18.2

Building
3,648

 
2,956

 
692

 
23.4

Supplies
2,975

 
1,898

 
1,077

 
56.7

Depreciation and amortization
1,861

 
1,246

 
615

 
49.4

Liability insurance
1,442

 
1,303

 
139

 
10.7

Other
1,224

 
3,988

 
(2,764
)
 
(69.3
)
Total sales, general and administrative expenses
$
69,698

 
$
54,158

 
$
15,540

 
28.7

Sales, general, and administrative as a percentage of net sales
35.2
%
 
32.9
%
 
 
 
 
Sales, general and administrative expenses were $69.7 million and $54.2 million for the years ended December 31, 2015 and 2014, respectively, an increase of $15.5 million or 28.7%. As a percentage of total net sales, SG&A expenses increased to 35.2% for 2015 compared to 32.9% for 2014.
SG&A by type and by segment were as follows for the years ended December 31, 2015 and 2014 (dollars in thousands):
 
Year Ended December 31,
 
Dollar Change
 
Percent Change
 
2015
 
2014
 
 
TASER Weapons segment:
 
 
 
 
 
 
 
 
 
 
 
Salaries, benefits and bonus
$
16,767

 
24.1
%
 
$
14,522

 
26.8
%
 
$
2,245

 
15.5
 %
Stock-based compensation
3,187

 
4.6

 
2,598

 
4.8

 
589

 
22.7

Legal, professional and accounting
5,442

 
7.8

 
4,578

 
8.5

 
864

 
18.9

Sales and marketing
5,411

 
7.8

 
4,902

 
9.1

 
509

 
10.4

Consulting and lobbying services
4,209

 
6.0

 
2,378

 
4.4

 
1,831

 
77.0

Travel and meals
3,089

 
4.4

 
3,014

 
5.6

 
75

 
2.5

Other
9,535

 
13.7

 
10,997

 
20.3

 
(1,462
)
 
(13.3
)
TASER Weapons segment
47,640

 
68.4

 
42,989

 
79.4

 
4,651

 
10.8

Axon segment:
 
 
 
 
 
 
 
 
 
 
 
Salaries, benefits and bonus
8,265

 
11.9

 
3,657

 
6.8

 
4,608

 
126.0

Stock-based compensation
1,112

 
1.6

 
960

 
1.8

 
152

 
15.8

Legal, professional and accounting
203

 
0.3

 
133

 
0.2

 
70

 
52.6

Sales and marketing
5,365

 
7.7

 
3,222

 
5.9

 
2,143

 
66.5

Consulting and lobbying services
2,938

 
4.2

 
1,039

 
1.9

 
1,899

 
182.8

Travel and meals
2,560

 
3.7

 
1,764

 
3.3

 
796

 
45.1

Other
1,615

 
2.3

 
394

 
0.7

 
1,221

 
309.9

Axon segment
22,058

 
31.6

 
11,169

 
20.6

 
10,889

 
97.5

Total sales, general and administrative expenses
$
69,698

 
100.0
%
 
$
54,158

 
100.0
%
 
$
15,540

 
28.7

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

33


compared to 2014. This increase was primarily attributable to the Company's efforts to build out international and direct sales teams internally as well as increasing headcount in certain administrative departments to support the overall growth of the entity. On a consolidated basis, legal, professional and accounting expenses were up $0.9 million in 2015 compared to 2014, and most of this increase was allocated to the Weapons segment. Audit and tax compliance costs were up approximately $0.7 million due primarily to increased complexity in the business structure as well as overall growth of the Company. Also included in the increase in legal fees was $0.2 million of costs to secure new patents and trademarks. The increase in sales and marketing was primarily attributable to increased efforts at the 2015 International Association of Chiefs of Police in 2015 as compared to 2014. The Company incurred higher consulting and lobbying expense during 2015 as compared to 2014 increase $1.8 million to $4.2 million in 2015. The Company also engaged additional international sales consultants during 2015 to drive increased sales in targeted foreign markets. Offsetting these increases was a decrease to other expenses. The decrease in other is primarily the result of a litigation settlement in 2014 of $3.3 million as compared to settlements of $0.2 million in 2015.
Within the Axon segment, SG&A increased $10.9 million, or 97.5%, to $22.1 million in 2015 in comparison to the prior year. Salaries, benefits, bonus and stock-based compensation in the Axon segment increased $4.8 million as the Company continues to hire additional engineering, product management personnel, sales and marketing personnel and general support staff to further expand upon existing product offerings as well as the development of new mobile and cloud technologies. The Company remains committed to launching new product lines to solidify its competitive advantage in these emerging technologies. Sales and marketing expenses in the Axon segment also increased approximately $2.1 million in comparison to 2014 due primarily to increased commissions on higher sales and increased marketing efforts for Axon technologies. The increase in consulting and lobbying was due to the Axon branding campaign that took place in the third quarter of 2015 as well as increased lobbying and public relations efforts ahead of the IACP conference held in October 2015. The increase in the balance of other expenses of $1.2 million during the 2015 as compared 2014 was related to building expenses, including depreciation and amortization, and supplies. Of this amount $0.7 million related to depreciation and amortization of assets acquired in two business combinations affected during 2015.
The Company expects to see increases in SG&A in 2016 compared to 2015 as it plans to make additional investments in customer-facing positions both domestically and internationally along with increased investments in sales and marketing.
Of the increase in SG&A above, there was increased expense associated with customer-facing positions, including: salaries, benefits, bonus and stock-based compensation, as well as sales commissions, which are included in the sales and marketing line item in the table above. Positions were added throughout the year, with the following customer-facing headcount as of the end of each year:
 
As of December 31,
 
2015