Commitments and Contingencies

Operating and capital lease obligations

The Company has entered into operating leases for various office space, storage facilities and equipment. As of December 31, 2017, the Company's leases are for terms ranging from less than one year to six years. The Company's leases generally contain multi-year renewal options and escalation clauses. Rent expense under all operating leases, including both cancelable and non-cancelable leases, was $2.9 million, $1.8 million and $1.0 million for the years ended December 31, 2017, 2016, and 2015, respectively.

Future minimum lease payments under non-cancelable leases at December 31, 2017, are as follows (in thousands):



	Operating		Capital
2018	$	2,313	$	40
2019	1,893		40
2020	1,236		36
2021	1,097		—
2022	1,073		—
Thereafter	43		—
Total minimum lease payments	$	7,655	116
Less: Amount representing interest			(7		)
Capital lease obligation			$	109

Purchase commitments

The Company routinely enters into cancellable and non-cancellable purchase orders with many of its key vendors. Based on the strategic relationships with many of these vendors, the Company’s ability to cancel these purchase orders and maintain a favorable relationship would be limited. As of December 31, 2017, the Company has approximately $51.9 million of open purchase orders.

Litigation

Product Litigation

The Company is currently named as a defendant in six lawsuits in which the plaintiffs allege either wrongful death or personal injury in situations in which a TASER CEW was used by law enforcement officers in connection with arrests. While the facts vary from case to case, the product liability claims are typically based on an alleged product defect resulting in injury or death, usually involving a failure to warn or negligent design, and the plaintiffs are seeking monetary damages. The information throughout this note is current through the date of these financial statements.

As a general rule, it is the Company’s policy not to settle suspect injury or death cases. Exceptions are sometimes made where the settlement is strategically beneficial to the Company. Also, on occasion, the Company’s insurance carrier has settled such lawsuits over the Company’s objection where the risk exceeds the Company’s liability insurance deductibles. Due to the confidentiality of the Company's litigation strategy and the confidentiality agreements that are executed in the event of a settlement, the Company does not identify or comment on which specific lawsuits have been settled or the amount of any settlement.

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

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

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



Plaintiff	Month Served	Jurisdiction	Claim Type	Status
Derbyshire	Nov-09	Ontario, Canada Superior Court of Justice	Officer Injury	Discovery Phase. Trial scheduled for October 14, 2019
Shymko	Dec-10	The Queen's Bench, Winnipeg Centre, Manitoba	Wrongful Death	Pleading Phase
Ramsey	Jan-12	12th Judicial Circuit Court, Broward County, FL	Wrongful Death	Discovery Phase
Bennett	Sep-15	11th Judicial Circuit Court, Miami-Dade County, FL	Wrongful Death	Discovery Phase.
Masters	Nov-16	U.S. District Court, Western District of Missouri	Suspect Injury	Discovery Phase. Trial scheduled for December 10, 2018
Taylor	Mar-17	U.S. District Court, Southern District of Texas	Officer Injury	Discovery Phase. Docket call August 31, 2018

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

The following case was dismissed during the fourth quarter of 2017:



Plaintiff	Month Served	Jurisdiction	Claim Type	Status
Suarez	Sep-16	U.S. District Court, Southern District of Florida	Wrongful Death	Dismissed

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



Policy Year	Policy Start Date	Policy End Date	Insurance Coverage		Deductible Amount		Defense Costs Covered	Remaining Insurance Coverage		Active Cases and Cases on Appeal
2009	12/15/2008	12/15/2009	$	10.0	$	1.0	N	$	10.0	Derbyshire
2010	12/15/2009	12/15/2010	10.0		1.0		N	10.0		Shymko
2011	12/15/2010	12/15/2011	10.0		1.0		N	10.0		n/a
Jan-Jun 2012	12/15/2011	6/25/2012	7.0		1.0		N	7.0		Ramsey
Jul-Dec 2012	6/25/2012	12/15/2012	12.0		1.0		N	12.0		n/a
2013	12/15/2012	12/15/2013	12.0		1.0		N	12.0		n/a
2014	12/15/2013	12/15/2014	11.0		4.0		N	11.0		n/a
2015	12/15/2014	12/15/2015	10.0		5.0		N	10.0		Bennett
2016	12/15/2015	12/15/2016	10.0		5.0		N	10.0		Masters
2017	12/15/2016	12/15/2017	10.0		5.0		N	10.0		Taylor

Other Litigation

Phazzer Patent Infringement Litigation

In March 2016, the Company filed a complaint against Phazzer Electronics Inc. (“Phazzer”) for patent infringement, trademark infringement and false advertising. On July 21, 2017, the U.S. District Court for the Middle District of Florida granted Axon’s Motion for Sanctions and for a Permanent Injunction against Florida-based Phazzer, banning sales of the infringing Phazzer Enforcer CEWs and dart cartridges. The injunction prohibits Phazzer and its officers, agents, employees, and anyone else acting in concert with them, from making, using, offering for sale, selling, distributing, donating, importing or exporting Phazzer CEWs and associated cartridges. The Court also awarded Axon compensatory and treble damages for willful infringement, as well as its reasonable attorneys’ fees and costs. Both Phazzer and its U.S. distributors are barred from exporting CEWs or cartridges to fill foreign orders.

In imposing severe sanctions against Phazzer, including an award of Axon’s attorneys’ fees and costs, the Court found that Phazzer “engaged in a pattern of bad faith conduct designed and intended to delay, stall, and increase the cost of this litigation,” and that Phazzer repeatedly disregarded Court orders thereby exhibiting “contemptuous”, “egregious”, “flagrant” and “intentional obstructionist behavior” resulting in willful “abuse [of] the judicial process.”

Axon’s patent (U.S. No. 7,234,262) at issue in the litigation relates to the CEW’s data recording of date and time of each trigger operation and duration of the stimulus. The Court found that patent was “valid, enforceable, and infringed by Phazzer.” The injunction will remain in effect until the patent expires, and includes any CEW or device not colorably different from the Phazzer Enforcer CEW.

The Axon trademark subject to the injunction is Federal Registration No. 4,423,789, relating to the non-functional shape of TASER CEW cartridges used to launch the darts. The Court found the trademark “valid and enforceable, not generic, functional, or merely descriptive, and infringed by Phazzer.” The permanent injunction covers all Phazzer CEW dart cartridges that are confusingly similar to, or not more than a colorable imitation of, TASER CEW cartridges, and includes Phazzer product numbers 1-DC15, 1-DC21, 1-DC25, 1-DC21-SIDT, 1-PB30, 1-PB8F, 1-PB15943, 1-RB30, 1-PA30, and 1-LOWIMPT2015. Phazzer has appealed the judgment and injunction.

The Court expressly found that Phazzer cartridges currently marketed and sold as compatible with TASER brand CEWs embody the protected appearance and constitute infringing products enjoined under its Order. Phazzer was also ordered by the Court “not [to] challenge or continue to challenge the validity or enforceability of the ‘789 Registration in any manner in any forum, including the USPTO.” Accordingly, Phazzer’s pending USPTO cancellation action, which was stayed while the litigation ran its course, will be dismissed. On August 10 2017, Phazzer filed a notice of appeal.

Digital Ally Patent Litigation

In March 2016, the Company was served with a second amended complaint filed by Digital Ally in the Federal District Court for the District of Kansas alleging infringement of two patents and a variety of antitrust and unfair competition claims, seeking a judgment of infringement, monetary damages, a permanent injunction, punitive damages and attorneys’ fees and costs. On January 12, 2017, the court granted the Company’s motion to dismiss all six antitrust claims and entered final judgment on those claims in the Company’s favor on April 14, 2017. Digital Ally has appealed that judgment to the Federal Circuit.

The Company filed inter parte reviews ("IPRs") with the USPTO to invalidate Digital Ally’s patents-in-suit regarding its auto-activation camera technology. On June 6, 2017, the USPTO instituted one IPR on patent No. 8,781,292 (the “’292 patent”). Digital Ally thereafter filed a motion to dismiss the ‘292 patent with prejudice and a covenant not to sue the Company in the district court litigation. Digital Ally then filed a motion to amend all claims of the ‘292 patent in the IPR proceedings, which is set for oral argument on February 23, 2018. On July 7, 2017, the USPTO rejected the Company’s IPR filed against claim 10 of Digital Ally's patent No. 9,253,452 (the “452 patent”). The Company filed a petition to reconsider that decision, which remains pending with the USPTO. This patent claim 10 is being challenged in District Court based on fraud claims, invalidity claims and non-infringement claims filed by the Company. Although the patent office later also rejected the Company’s IPR on claim 1 of the ‘452 patent, Digital Ally has dismissed that claim from the litigation. In November 2017, the district court lifted its litigation stay and entered a new scheduling order on December 20, 2017. A claim construction hearing on Digital Ally’s sole remaining independent claim 10 of the ‘452 patent will take place on March 7, 2018.

Pending Patent Appeals

Two appeals are pending in the Federal Circuit arising out of patent litigation involving the district court’s dismissal of Digital Ally's antitrust claims against the Company, and a judgment and permanent injunction in the Company's favor against Phazzer Electronics Inc., as noted in the following table.



Appellant	Month Served	Jurisdiction	Claim Type	Active Cases and Cases on Appeal
Digital Ally	Mar-16	U.S. District Court, District of Kansas, appealed to Federal Circuit	Antitrust Claims	Axon's motion to dismiss antitrust claims was granted on January 12, 2017 with judgment entered in Axon's favor on April 14, 2017. Digital Ally filed its notice of appeal on April 20, 2017. The appeal has been fully briefed.
Phazzer	Mar-16	U.S. District Court, Middle District of Florida, appealed to Federal Circuit	Judgment and Permanent Injunction Patent Infringement	Axon received judgment in its favor and a permanent injunction against Phazzer’s CEW and cartridge infringement on July 21, 2017. Phazzer filed a notice of appeal on August 10, 2017. The appeal is in the briefing stage.

Antoine di Zazzo Arbitration

In April 2016, the Company was served with a notice of arbitration claim filed by Antoine di Zazzo, the Company’s former distributor in France, for commissions allegedly owed Mr. di Zazzo. The arbitration claim was filed with the International Court of Arbitration of the International Chamber of Commerce in Paris, France, and the amount in controversy is approximately $0.6 million. The Company’s records reflect that all commissions that were due Mr. di Zazzo under his contract were paid or offered to him and the Company will vigorously defend this arbitration claim. In related litigation in the Tribunal of Commerce of Marseille, judgment was entered in favor of the Company on January 18, 2018, and Mr. di Zazzo has appealed.

VieVu Commercial Litigation

In February 2017, the Company was served with a complaint filed by VieVu LLC ("VieVu") alleging tortious interference with a business expectancy. In May 2017, the Company filed and served a complaint against VieVu in the U.S. District Court for Arizona for violation of the Lanham Act. On February 14, 2018, the Company and VieVu entered into an agreement for the dismissal of both lawsuits, with each party to bear its own attorney’s fees and costs.

General

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

Based on the Company's assessment of outstanding litigation and claims as of December 31, 2017, the Company has determined that it is not reasonably possible that these lawsuits will individually, or in the aggregate, materially affect its results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on the Company's operating results, financial condition or cash flows.

Off-Balance Sheet Arrangements

Under certain circumstances, the Company uses letters of credit and surety bonds to guarantee its performance under various contracts, principally in connection with the installation and integration of its Axon cameras and related technologies. Certain of the Company's letters of credit contracts and surety bonds have stated expiration dates, with others being released as the contractual performance terms are completed. The Company expects to fulfill all contractual performance obligations related to outstanding guarantees. At December 31, 2017, the Company had an outstanding letter of credit of approximately $2.7 million, which is expected to expire in May 2018. Additionally, the Company had approximately $7.4 million of outstanding surety bonds at December 31, 2017, with $1.0 million expiring in 2018, $0.1 million expiring in 2020, $2.3 million expiring in 2021 and the remaining $4.0 million expiring in 2023.