Commitments and Contingencies

Product Litigation

We are currently named as a defendant in seven 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 and/or design defect, and the plaintiffs are seeking monetary damages. The information in this note is current through the date of these financial statements.

As a general rule, it is our policy not to settle suspect injury or death cases. Exceptions are sometimes made where the settlement is strategically beneficial to us. Due to the confidentiality of our litigation strategy and the confidentiality agreements that are executed in the event of a settlement, we do not identify or comment on which specific lawsuits have been settled or the amount of any settlement.

In 2009, we implemented new risk management strategies, including revisions to product warnings and training to better protect both us and our customers from litigation based on “failure to warn” theories - which comprise the vast majority of the cases against us. These risk management strategies have been highly effective in reducing the rate and exposure from litigation post-2009. Since the third quarter of 2011, product liability cases have been reduced from 55 to seven active cases.

We intend to continue our 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 we were 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, currently inactive
Ramsey	Jan-12	12th Judicial Circuit Court, Broward County, FL	Wrongful Death	Discovery Phase, currently inactive
Bennett	Sep-15	11th Judicial Circuit Court, Miami-Dade County, FL	Wrongful Death	Discovery Phase
Taylor	Mar-17	U.S, District Court, Southern District of Texas	Officer Injury	Dispositive Motion Phase: We filed our motion for summary judgment on April 20, 2018.
Wiggington	Apr-18	U.S, District Court, Western District Court of Missouri	Wrongful Death	Pleading Phase
Lewis	Oct-18	General Court of Justice Superior Court Division, Stanly County, NC	Wrongful Death	Pleading Phase

Through the date of these financial statements, one product liability case was dismissed with prejudice on October 1, 2018. There are no product litigation matters in which we are involved that are currently on appeal.

The claims, and in some instances the defense, of each of these lawsuits have been submitted to our insurance carriers that maintained insurance coverage during the applicable periods. We continue to maintain product liability insurance coverage with varying limits and deductibles. The following table provides information regarding our product liability insurance. Remaining insurance coverage is based on information received from our 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
Jan-Jun 2012	12/15/2011	6/25/2012	7.0		1.0		N	7.0		Ramsey
2015	12/15/2014	12/15/2015	10.0		5.0		N	10.0		Bennett
2017	12/15/2016	12/15/2017	10.0		5.0		N	10.0		Taylor
2018	12/15/2017	12/15/2018	10.0		5.0		N	10.0		Wiggington, Lewis

Other Litigation

Phazzer Patent Infringement Litigation

In February 2016, we 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 (Case No. 6:16-cv-00366-PGB-KRS) granted our Motion for Sanctions and for a Permanent Injunction against Florida-based Phazzer. The Court issued a broad permanent injunction against Phazzer banning sales of the infringing Phazzer Enforcer CEWs and dart cartridges. The injunction prohibits Phazzer and its officers, agents, employees, and anyone acting in concert with them, from making, using, offering for sale, selling, distributing, importing or exporting Phazzer CEWs and associated cartridges. Phazzer is further enjoined from dumping its infringing inventory by “donating” CEWs to law enforcement, and from false advertising and comparison to TASER brand products. Both Phazzer and its U.S. distributors are barred from exporting CEWs or cartridges to fill foreign orders. On August 10, 2017, Phazzer filed a notice of appeal to the Federal Circuit. Phazzer's multiple attempts to stay the injunction pending appeal have been denied by both the district and appellate courts. The appeal was argued on October 2, 2018, and the Federal Circuit issued its opinion affirming the both judgment and injunction in all respects on October 26, 2018.

On April 4, 2018, the Court entered a judgment for us against Phazzer in an amount exceeding $7.8 million which included an award to us of compensatory and treble damages for willful infringement, and also an award of reasonable attorneys’ fees and costs. Post-judgment collection efforts are underway, but the collectability of this judgment is in doubt since Phazzer has informed the Court it is insolvent. On May 1, 2018, Phazzer appealed the damages award to the Federal Circuit. Briefing is not yet complete.

In imposing severe sanctions against Phazzer, 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.” The Court made similar findings in both the damages and contempt orders.

On April 27, 2017, during the district court litigation, Phazzer filed a second petition for reexamination of our patent with the U.S. Patent and Trademark Office ("USPTO"). Our 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. On April 2, 2018, the examiner issued a final office action rejecting all claims. We are appealing this decision. Our patent remains valid and enforceable unless and until all appeals are exhausted and the patent is formally canceled (estimated to be at least a 2-year process).

Our trademark that is the subject of 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 injunction covers all Phazzer CEW dart cartridges that are confusingly similar to, or not more than a colorable imitation of, TASER CEW cartridges. During the litigation, Phazzer filed a petition to cancel our trademark, which the Trademark Board stayed until the conclusion of the district court litigation and all related appeals.

Digital Ally Patent Litigation

In February 2016, we were served with a first amended complaint filed by Digital Ally Inc. (“Digital”) in the U.S. District Court for the District of Kansas (Case No. CV-16-02032-CM-JPO) alleging patent infringement regarding our Axon Signal technology, commercial bribery, antitrust, and unfair competition. In March 2016, we were served with a second amended complaint with similar allegations. The second amended complaint seeks a judgment of infringement, monetary damages, a permanent injunction, punitive damages and attorneys’ fees and costs.

Digital Ally’s complaint has been substantially narrowed based on (1) the district court’s dismissal of all of Digital’s antitrust claims in January 2017; this ruling was affirmed by the Federal Circuit in May 2018, and the Supreme Court denied certiorari on October 1, 2018; (2) the district court’s dismissal of Digital’s ‘292 patent from the litigation with prejudice in March 2018, and Digital’s execution of a covenant not to sue Axon on that patent on all existing Axon products; and (3) Digital’s dismissal of certain inconsistent claims in the ‘452 patent, leaving only one independent claim for resolution by the Court. We believe the remaining claim of the ‘452 patent is invalid and not infringed, and are vigorously defending this litigation.

After instituting inter parte review of Digital’s ‘292 patent in June 2017, the Patent Trial and Appeal Board ("PTAB") ultimately rejected our invalidity challenge on June 1, 2018. Although this patent is no longer at issue in the litigation, we are appealing this ruling.

On July 19, 2018, the district court issued its claim construction ruling on three disputed claim terms in the remaining claim 10 of Digital’s ‘452 patent. Fact discovery concluded on October 8, 2018, and expert reports and discovery are now underway. No trial date has been set, but the Court has set certain other deadlines, including mediation no later than December 3, 2018 and a pretrial conference on January 16, 2019 (at which a trial date will likely be set).

Antoine di Zazzo Arbitration

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

Richey Class Action Litigation

On June 25, 2018, consumer weapon purchaser Douglas Richey (“Richey”) filed a class action lawsuit against us in the Northern District of California (Case No. 3:18-cv-03751-WHA) purporting to assert claims on behalf of all persons in the United States who purchased or acquired a TASER Pulse, TASER X2 and TASER X26P model CEW in the four-year period preceding the complaint. Richey claimed his Pulse CEW discharged while in its case in his jacket pocket due to a faulty safety switch. He was not injured. Richey voluntarily dismissed the case on August 9, 2018.

Amani Kendi Kiogora Employment Related Litigation

On October 24, 2018, Amani Kendi Kiogora, a former employee of VIEVU, LLC ("VIEVU"), filed a lawsuit in the Superior Court of Washington for King County (Case No. 18-2-26784-6 SEA) naming us, VIEVU and Safariland, LLC in an employment dispute relating to Washington’s wage laws, laws against discrimination, and the Equal Opportunity Act. Ms. Kiogora claims disparate treatment against her and wrongful withholding of commission payments related to the New York Police Department (NYPD) body worn camera contract while employed with VIEVU. We acquired VIEVU in May 2018; see Note 15 for further discussion. We are tendering this matter to Safariland, LLC for defense and indemnification.

Appeals

Four appeals are currently pending in the Federal Circuit regarding various orders entered in the Phazzer litigation (see above). Appeal No. 17-2637 relates to the district court’s July 21, 2017 sanctions order and permanent injunction and is awaiting decision. The other three appeals relating to the district court’s April 4, 2018 damages award in our favor (No. 18-1914) and its May 4, 2018 contempt order as to Phazzer (No. 18-2059) and its agent Steven Abboud (No. 20-1857) were consolidated and are in the briefing stage.

We have appealed two decisions from the USPTO proceedings relating (1) to the patent examiner’s rejection of the ‘262 patent in a second reexamination petition filed by Phazzer, and (2) the PTAB’s denial of Axon’s IPR petition regarding Digital’s ‘292 patent (Federal Circuit No. 18-2217). Briefing has not yet begun in either appeal.

Voluntary Request Letter from the U.S. Federal Trade Commission

On or about June 14, 2018, we received a letter from the U.S. Federal Trade Commission (“FTC”) with respect to its non-public investigation into our acquisition of VIEVU, LLC in May of 2018. In the letter, the FTC has requested that we provide, on a voluntary basis, certain information and documentation relating to our acquisition of VIEVU. We are cooperating with the investigation.

General

From time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us. It is our policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on us. After carefully assessing the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously defend any lawsuit filed against us. In certain legal matters, we record a liability when losses are deemed probable and reasonably estimable. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of any potential loss. We reevaluate and update accruals as matters progress over time.

Based on our assessment of outstanding litigation and claims as of September 30, 2018, we have determined that it is not reasonably possible that these lawsuits will individually, or in the aggregate, materially affect our 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 our insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on our operating results, financial condition or cash flows.

Off-Balance Sheet Arrangements

Under certain circumstances, we use letters of credit and surety bonds to guarantee our performance under various contracts, principally in connection with the installation and integration of Axon cameras and related technologies. Certain of our letters of credit and surety bonds have stated expiration dates with others being released as the contractual performance terms are completed. At September 30, 2018, we had outstanding letters of credit of $3.1 million that are expected to expire in May 2019. Additionally, we had $14.1 million of outstanding surety bonds at September 30, 2018, with $0.6 million expiring in 2018, $0.4 million expiring in 2019, $0.1 million expiring in 2020, $2.4 million expiring in 2021, $3.1 million expiring in 2022 and the remaining $7.5 million expiring in 2023.

Land Lease Purchase Agreement

On September 14, 2018, we entered into a Purchase and Sale Agreement (the "agreement") to purchase a leasehold interest to a parcel of land located in Maricopa County, Arizona for a period of 69 years, on which we intended to construct our new headquarters. On November 2, 2018, we canceled the agreement. We expect our escrow deposit of approximately $0.2 million will be returned, and no further amounts are owed under the agreement.