UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, ~~2017~~2018



¨	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

Axon Enterprise, 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)

(480) 991-0797

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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	¨

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The number of shares of the registrant’s common stock outstanding as of July 31, ~~2017~~2018 was ~~52,833,429.~~58,319,695.

AXON ENTERPRISE, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, ~~2017~~2018



			Page
PART I - FINANCIAL INFORMATION
	Item 1. Financial Statements		3
		Condensed Consolidated Balance Sheets as of June 30, ~~2017~~2018 (Unaudited) and December 31, ~~2016~~2017	3
		Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, ~~2017~~2018 and ~~2016~~2017	4
		Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, ~~2017~~2018 and ~~2016~~2017	5
		Notes to Unaudited Condensed Consolidated Financial Statements	6
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		2629
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		4546
	Item 4. Controls and Procedures		4647
PART II - OTHER INFORMATION
	Item 1. Legal Proceedings		4849
	Item 1A. Risk Factors		4849
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		4849
	Item 3. Defaults Upon Senior Securities		4849
	Item 4. Mine Safety Disclosures		4849
	Item 5. Other Information		4849
	Item 6. Exhibits		4950
	SIGNATURES		5051

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AXON ENTERPRISE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	June 30, 2017			December 31, 2016			June 30, 2018			December 31, 2017
	(Unaudited)						(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	28,038		$	40,651		$	307,507		$	75,105
Short-term investments	33,796			48,415			4,124			6,862
Accounts and notes receivable, net of allowance of $590 and $443 as of June 30, 2017 and December 31, 2016, respectively	45,428			39,466
Accounts and notes receivable, net of allowance of $1,327 and $754 as of June 30, 2018 and December 31, 2017, respectively							94,296			56,064
Contract assets, net							10,468			—
Inventory	60,743			34,841			43,967			45,465
Prepaid expenses and other current assets	22,949			13,858			26,604			21,696
Total current assets	190,954			177,231			486,966			205,192
Property and equipment, net of accumulated depreciation of $34,569 and $37,799 as of June 30, 2017 and December 31, 2016, respectively	29,603			24,004
Property and equipment, net of accumulated depreciation of $37,142 and $36,477 as of June 30, 2018 and December 31, 2017, respectively							34,503			31,172
Deferred income tax assets, net	20,264			19,515			15,813			15,755
Intangible assets, net	19,334			15,218			20,442			18,823
Goodwill	13,183			10,442			24,684			14,927
Long-term investments	—			234
Long-term accounts and notes receivable, net of current portion	27,791			17,602
Long-term notes receivable, net of current portion							37,158			36,877
Other assets	15,182			13,917			22,831			15,366
Total assets	$	316,311		$	278,163		$	642,397		$	338,112
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	17,993		$	10,736		$	9,213		$	8,592
Accrued liabilities	19,879			18,248			29,995			23,502
Current portion of deferred revenue	52,562			45,137			76,583			70,401
Customer deposits	2,221			2,148			2,970			3,673
Current portion of business acquisition contingent consideration	1,720			1,690			1,946			1,693
Other current liabilities	469			80			191			89
Total current liabilities	94,844			78,039			120,898			107,950
Deferred revenue, net of current portion	47,608			40,054			61,456			54,881
Liability for unrecognized tax benefits	2,179			1,896			1,918			1,706
Long-term deferred compensation	3,655			3,362			3,560			3,859
Business acquisition contingent consideration, net of current portion	2,689			1,635			203			1,048
Other long-term liabilities	1,875			2,289			5,520			1,224
Total liabilities	152,850			127,275			193,555			170,668
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of June 30, 2017 and December 31, 2016	—			—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 52,808,919 and 52,325,251 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively	1			1
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of June 30, 2018 and December 31, 2017							—			—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 58,289,613 and 52,969,869 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively							1			1
Additional paid-in capital	194,221			187,656			442,717			201,672
Treasury stock at cost, 20,220,227 shares as of June 30, 2017 and December 31, 2016	(155,947		)	(155,947		)
Treasury stock at cost, 20,220,227 shares as of June 30, 2018 and December 31, 2017							(155,947		)	(155,947		)
Retained earnings	124,834			118,275			163,590			123,185
Accumulated other comprehensive income	352			903
Accumulated other comprehensive loss							(1,519		)	(1,467		)
Total stockholders’ equity	163,461			150,888			448,842			167,444
Total liabilities and stockholders’ equity	$	316,311		$	278,163		$	642,397		$	338,112

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

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(in thousands, except per share data)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Net sales from products													$	76,721		$	66,875		$	157,695		$	134,366
Net sales from services													22,505			12,768			42,746			24,519
Net sales	$	79,643		$	58,756		$	158,885		$	114,286		99,226			79,643			200,441			158,885
Cost of products sold and services delivered	34,006			21,457			64,578			40,085
Cost of product sales													31,087			30,172			63,521			57,244
Cost of service sales													4,996			3,834			9,316			7,334
Cost of sales													36,083			34,006			72,837			64,578
Gross margin	45,637			37,299			94,307			74,201			63,143			45,637			127,604			94,307
Operating expenses:
Sales, general and administrative	31,824			24,379			62,681			49,212			39,343			31,824			75,102			62,681
Research and development	12,989			6,710			25,452			13,637			18,501			12,989			33,620			25,452
Total operating expenses	44,813			31,089			88,133			62,849			57,844			44,813			108,722			88,133
Income from operations	824			6,210			6,174			11,352			5,299			824			18,882			6,174
Interest and other income (expense), net	1,684			(123		)	1,890			(5		)	(295		)	1,684			968			1,890
Income before provision for income taxes	2,508			6,087			8,064			11,347			5,004			2,508			19,850			8,064
Provision for income taxes	232			2,437			1,208			4,234
Provision for (benefit from) income taxes													(3,481		)	232			(1,561		)	1,208
Net income	$	2,276		$	3,650		$	6,856		$	7,113		$	8,485		$	2,276		$	21,411		$	6,856
Net income per common and common equivalent shares:
Basic	$	0.04		$	0.07		$	0.13		$	0.13		$	0.15		$	0.04		$	0.39		$	0.13
Diluted	$	0.04		$	0.07		$	0.13		$	0.13		$	0.15		$	0.04		$	0.38		$	0.13
Weighted average number of common and common equivalent shares outstanding:
Basic	52,736			52,480			52,578			53,087			55,527			52,736			54,330			52,578
Diluted	53,770			53,289			53,723			53,890			57,054			53,770			55,892			53,723

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$	2,276		$	3,650		$	6,856		$	7,113		$	8,485		$	2,276		$	21,411		$	6,856
Foreign currency translation adjustments	(716		)	25			(551		)	259			655			(716		)	(52		)	(551		)
Comprehensive income	$	1,560		$	3,675		$	6,305		$	7,372		$	9,140		$	1,560		$	21,359		$	6,305

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

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Six Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2018			2017
Cash flows from operating activities:
Net income	$	6,856		$	7,113		$	21,411		$	6,856
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	3,400			1,843			5,161			3,400
Purchase accounting adjustments to goodwill	—			349
Loss on inventory nonmonetary exchanges	—			90
Gain on disposal of property and equipment, net	—			(17		)
Loss on disposal of intangible assets	—			14
Loss on disposal and impairment of property and equipment, net							153			—
Loss on disposal and abandonment of intangible assets							54			—
Bond premium amortization	427			712			30			427
Stock-based compensation	7,423			4,526			9,047			7,423
Deferred income taxes	(1,458		)	(1,445		)	(58		)	(1,458		)
Unrecognized tax benefits	282			193			212			282
Tax benefit from stock-based compensation	—			(88		)
Change in assets and liabilities:
Accounts and notes receivable	(4,500		)	(3,211		)
Accounts and notes receivable and contract assets							(24,791		)	(15,925		)
Inventory	(25,768		)	(6,748		)	4,508			(25,768		)
Prepaid expenses and other assets	(21,484		)	(14,657		)	(7,429		)	(10,055		)
Accounts payable, accrued and other liabilities	7,474			5,078			(2,688		)	7,531
Deferred revenue	14,829			15,812			10,496			14,829
Customer deposits	73			772
Net cash provided by (used in) operating activities	(12,446		)	10,336			16,106			(12,458		)
Cash flows from investing activities:
Purchases of investments	(19,950		)	(28,667		)	(4,331		)	(19,950		)
Proceeds from call / maturity of investments	34,377			32,429
Proceeds from maturity of investments							7,038			34,377
Purchases of property and equipment	(5,741		)	(1,964		)	(4,665		)	(5,741		)
Proceeds from disposal of property and equipment	—			33
Purchases of intangible assets	(170		)	(185		)	(254		)	(170		)
Business acquisitions, net of cash acquired	(6,479		)	—
Net cash provided by investing activities	2,037			1,646
Business acquisitions							(5,014		)	(6,479		)
Net cash provided (used in) by investing activities							(7,226		)	2,037
Cash flows from financing activities:
Repurchase of common stock	—			(33,746		)
Net proceeds from equity offering							233,993			—
Proceeds from options exercised	1,241			222			586			1,241
Payroll tax payments for net-settled stock awards	(2,572		)	(1,036		)	(10,807		)	(2,572		)
Payments on capital lease obligation	(16		)	(19		)
Payments on notes payable	—			(29		)
Tax benefit from stock-based compensation	—			88
Net cash used in financing activities	(1,347		)	(34,520		)
Effect of exchange rate changes on cash and cash equivalents	(857		)	318
Net decrease in cash and cash equivalents	(12,613		)	(22,220		)
Cash and cash equivalents, beginning of period	40,651			59,526
Cash and cash equivalents, end of period	$	28,038		$	37,306
Supplemental disclosure:
Payment of contingent consideration for a business acquisition							(575		)	—
Net cash provided by (used in) financing activities							223,197			(1,331		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash							(538		)	(857		)
Net increase (decrease) in cash, cash equivalents and restricted cash							231,539			(12,609		)
Cash, cash equivalents and restricted cash, beginning of period							78,438			43,969
Cash, cash equivalents and restricted cash, end of period							$	309,977		$	31,360

Supplemental disclosures:
Cash and cash equivalents							$	307,507		$	28,038
Restricted cash (Note 6)							2,470			3,322
Total cash, cash equivalents and restricted cash shown in the statements of cash flows							$	309,977		$	31,360

Cash paid for income taxes, net of refunds	$	9,934		$	8,271		$	7,758		$	9,934

Non-cash transactions
Property and equipment purchases in accounts payable and accrued liabilities	$	1,351		$	90		$	665		$	1,351
Contingent consideration related to business combinations	$	1,026		$	—
Non-cash purchase consideration related to business combinations							$	12,288		$	1,026

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

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Axon Enterprise, Inc. (“Axon” or the “Company”)~~, formerly known as TASER International, Inc.,~~ is a developer and manufacturer of advanced conducted electrical weapons (“CEWs”) designed for use by law enforcement, military, corrections, private security personnel, and by private individuals for personal defense. In addition, the Company has developed full technology solutions for the capture, secure storage and management of video/audio evidence as well as other tactical capabilities for use in law enforcement. The Company sells its products worldwide through its direct sales force, distribution partners, online store and third-party resellers. The Company was incorporated in Arizona in September 1993, and reincorporated in Delaware in January 2001. The Company’s corporate headquarters and manufacturing facilities are located in Scottsdale, Arizona. The Company’s main software development ~~unit facility~~division is located in Seattle, ~~Washington.~~Washington, and it develops artificial intelligence technologies through its wholly-owned subsidiary in Vietnam, Axon Public Safety ~~BV, formerly known as TASER International~~Southeast Asia LLC. During 2018, the Company established Axon Public Safety Finland OY in Tampere, Finland that operates a connected hardware team focused on the development of the Company's hardware products. Axon Public Safety BV, a wholly owned subsidiary of the Company, ~~serves as~~supports the Company's international ~~headquarters,~~sales and marketing efforts, and is located in Amsterdam, Netherlands. Axon Public Safety BV wholly owns two subsidiaries, Axon Public Safety U.K. LTD and Axon Public Safety AU, that serve as direct sales operations in the United Kingdom ("U.K.") and Australia, respectively. The Company also sells to certain international markets through a ~~wholly owned~~wholly-owned subsidiary, Axon Public Safety Germany ~~SE. In 2015,~~SE, and sells into the ~~Company formed~~Canadian market through its wholly-owned subsidiary, Axon Public Safety Canada, Inc.~~, a wholly owned subsidiary, to facilitate transactions for its products and services with new and existing customers located in Canada.~~

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts, transactions, and profits have been eliminated.

a. Basis of Presentation and Use of Estimates

These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information related to the Company’s organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“USU.S. GAAP”) has been condensed or omitted. The accounting policies followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed in the Company’s annual consolidated financial statements for the year ended December 31, ~~2016~~2017, as filed on Form ~~10-K.~~10-K, with the exception of the Company's adoption of Topic 606. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state the Company’s financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with the Company’s Form 10-K for the year ended December 31, ~~2016~~2017. The results of operations for the six months ended June 30, ~~2017~~2018 and ~~2016~~2017 are not necessarily indicative of the results to be expected for the full year (or any other period). Significant estimates and assumptions in these unaudited condensed consolidated financial statements include:

product warranty reserves,

inventory valuation,

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

valuation of goodwill, ~~intangibles~~intangible and long-lived assets,

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

fair value of stock awards issued and the estimated vesting ~~period~~periods for performance-based stock awards, ~~and~~

recognition and measurement of contingencies and accrued litigation ~~expense.~~expense, and

fair values of identified tangible and intangible assets acquired and liabilities assumed in business combinations.

Actual results could differ materially from those estimates.

b. Segment Information

The Company is comprised of two reportable segments: the manufacture and sale of CEWs, batteries, accessories, extended warranties and other products and services (the “TASER Weapons” segment); and the software and sensors business, which includes the ~~TASER Cam, Axon cameras~~sale of devices, wearables, applications, cloud and ~~related accessories, Evidence.com, and the Axon Artificial Intelligence team ("Axon AI")~~mobile products (collectively, the “Software and Sensors” segment). ~~Reportable segments are determined based on discrete financial information reviewed by~~Within the ~~Company’s Chief Executive Officer who is~~Software and Sensors segment, the ~~Chief Operating Decision Maker (the “CODM”) for the Company. The~~ Company ~~organizes and reviews operations based on~~specifies sales of products and ~~services,~~services. Revenue from the Company's “products” in the Software and ~~currently there~~Sensors segment are ~~no operating segments that are aggregated. The Company performs an annual analysis~~generally sales of ~~its reportable segments. Additional information~~sensors, including on-officer body cameras, Axon Fleet cameras, other hardware sensors, warranties on sensors, and other products, and is sometimes referred to as Sensors and Other revenue. Revenue from the Company's “services” in the Software and Sensors segment comprise sales related to the ~~Company’s business segments is summarized in Note 14.~~Axon Cloud, which includes Evidence.com, cloud-based evidence management software revenue, other recurring cloud-hosted software revenue and related

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

c. professional services, and is sometimes referred to as Axon Cloud revenue. Within the Software and Sensors 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 expenses for the sales team, product management and research and development ("R&D") for products included, or to be included, within the Software and Sensors segment. All other costs are included in the TASER Weapons segment.

The Company’s Chief Executive Officer, who is the Chief Operating Decision Maker (the “CODM”), is not provided asset information by segment. Reportable segments are determined based on discrete financial information reviewed by the CODM for the Company. The Company organizes and reviews operations based on products and services. The Company performs an annual analysis of its reportable segments. Additional information related to the Company’s business segments is summarized in Note 14.

Geographic Information and Major Customers

For the three and six months ended June 30, ~~2017~~2018 and ~~2016, net sales by geographic area were as follows (in thousands):~~

Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 2016
United States $ 66,200
83.1 % $ 52,219
88.9 % $ 130,952
82.4 % $ 94,687
82.9 %
Other Countries 13,443
16.9
6,537
11.1
27,933
17.6
19,599
17.1
Total $ 79,643
100.0 % $ 58,756
100.0 % $ 158,885
100.0 % $ 114,286
100.0 %

Sales to customers outside of the U.S. are typically denominated in U.S. dollars, and are attributed to each country based on the shipping address of the distributor or customer. For the three and six months ended June 30, 2017, ~~and 2016,~~ no individual country outside the U.S. represented more than 10% of total net sales. Individual sales transactions in the international market are generally larger and occur more intermittently than in the domestic market due to the profile of the Company's customers.

For the three and six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, no customer represented more than 10% of total net sales. At June 30, 2018 and December 31, 2017, ~~there was an outstanding~~no customer ~~balance from one unaffiliated customer that comprised 10.8%~~represented more than 10% of the aggregate accounts and notes receivable ~~balance. At December 31, 2016, the Company had a trade receivable from one unaffiliated customer comprising 14.5% of the aggregate accounts receivable balance.~~balance and contract assets.

d. Income per Common Share

Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. Potentially dilutive securities include outstanding stock options and unvested restricted stock ~~units.~~units ("RSUs"). The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities.

The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):

Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 2016
Numerator for basic and diluted earnings per share:
Net income $ 2,276
$ 3,650
$ 6,856
$ 7,113
Denominator:
Weighted average shares outstanding - basic 52,736
52,480
52,578
53,087
Dilutive effect of stock-based awards 1,034
809
1,145
803
Diluted weighted average shares outstanding 53,770
53,289
53,723
53,890
Anti-dilutive stock-based awards excluded 544
369
690
520
Net income per common share:
Basic $ 0.04
$ 0.07
$ 0.13
$ 0.13
Diluted $ 0.04
$ 0.07
$ 0.13
$ 0.13

~~e. Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable~~

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Numerator for basic and diluted earnings per share:
Net income	$	8,485	$	2,276	$	21,411	$	6,856
Denominator:
Weighted average shares outstanding	55,527		52,736		54,330		52,578
Dilutive effect of stock-based awards	1,527		1,034		1,562		1,145
Diluted weighted average shares outstanding	57,054		53,770		55,892		53,723
Anti-dilutive stock-based awards excluded	3,023		544		1,533		690
Net income per common share:
Basic	$	0.15	$	0.04	$	0.39	$	0.13
Diluted	$	0.15	$	0.04	$	0.38	$	0.13

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Contractual arrangements may contain explicit customer acceptance provisions, and under such arrangements, the Company defers recognition of revenue until formal customer acceptance is received. Extended warranty revenue, SaaS revenue and related data storage revenue are recognized ratably over the term of the contract beginning on the commencement date of each contract.

Revenue arrangements with multiple deliverables are divided into separate units and revenue is allocated using the relative selling price method based upon vendor-specific objective evidence ("VSOE") of selling price or third-party evidence of the selling prices if vendor-specific objective evidence of selling prices does not exist. If neither vendor-specific objective evidence nor third-party evidence exists, management uses its best estimate of selling price. The majority of the Company’s allocations of arrangement consideration under multiple element arrangements are performed utilizing prices charged to customers for deliverables when sold separately. The Company’s multiple element arrangements may include future CEWs and/or Axon devices to be delivered at defined points within a multi-year contract, and in those arrangements, the Company allocates total arrangement consideration over the life of the multi-year contract to future deliverables using management’s best estimate of selling price. The Company has not utilized third party evidence of selling price.

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

Evidence.com and Axon cameras and related accessories have stand-alone value to the customer and are sometimes sold separately, but in most instances are sold together. In these instances, customers typically purchase and pay for the equipment and one year of Evidence.com in advance. Additional years of service are generally billed annually over a specified service term, which has typically ranged from ~~one~~ to ~~five~~ years. Generally, the Company recognizes revenue for the Axon equipment at the time of the sale consistent with the discussion of multiple deliverable arrangements above. Revenue for Evidence.com is deferred at the time of the sale and recognized over the service period. At times the Company subsidizes the cost of Axon devices provided to customers to secure long-term Evidence.com service contracts. In such circumstances, revenue related to the Axon devices recognized at the time of delivery is limited to the amount collected from the customer that is not contingent upon the delivery of future Evidence.com services. The Company recognizes the remaining allocated revenue related to subsidized Axon devices over the remaining period it provides the contracted Evidence.com services.

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

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

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

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~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

In 2017, the Company introduced new subscription programs that allow for agencies to purchase the Company's training and duty cartridges over a five-year term whereby the customer would make five equal annual installments. The Company offers two tiers under this program; the basic and unlimited plan. The Axon Basic Cartridge Plan entitles customers to a fixed number of training and duty cartridges as well as a fixed number battery replacements over the contractual term, while the Axon Unlimited Cartridge Plan entitles customers to a fixed number of training cartridges and unlimited duty cartridges and replacement batteries. Generally, the Company accounts for these arrangements as stand-ready obligations, and recognizes revenue ratably over the contract period.

~~Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis. Training and professional service revenues are recorded as the services are provided.~~

Deferred revenue consists of payments received in advance related to products and services for which the criteria for revenue recognition have not yet been met. Deferred revenue that will be recognized during the succeeding twelve month period is recorded as current deferred revenue and the remaining portion is recorded as long-term. Deferred revenue does not include future revenue from multi-year contracts for which no invoice has yet been created. Generally, customers are billed in annual installments. See Note 6 for further disclosures about the Company’s deferred revenue.

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

f. Standard Warranties

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

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


	Six Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2018			2017
Balance, beginning of period	$	780		$	314		$	644		$	780
Utilization of accrual	(120		)	(49		)	(149		)	(120		)
Warranty expense (recoveries)	(96		)	520
Warranty expense (recovery)							10			(96		)
Balance, end of period	$	564		$	785		$	505		$	564

g. Fair Value ofMeasurements and Financial Instruments

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

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~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

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

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

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

The Company has cash equivalents and investments, which at June 30, ~~2017~~2018 and December 31, ~~2016~~2017 were comprised of money market funds, state and municipal obligations, corporate bonds, and certificates of deposits. See additional disclosure regarding the fair value of the Company’s cash equivalents and investments in Note 2.3. Included in the balance of Other assets as of June 30, ~~2017~~2018 and December 31, ~~2016~~2017 was ~~$3.6~~$3.8 million ~~and $3.2 million, respectively,~~ related to corporate-owned life insurance policies which are used to fund the Company’s deferred compensation plan. The Company determines the fair value of its insurance contracts by obtaining the cash surrender value of the contracts from the issuer, a Level 2 valuation technique.

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

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

Management evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and identifiable intangible assets, excluding goodwill and intangible assets with indefinite useful lives, may

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

warrant revision or that the remaining balance of these assets may not be recoverable. Such circumstances could include, but are not limited to, a change in the product mix, a change in the way products are created, produced or delivered, or a significant change in the way products are branded and marketed. In performing the review for recoverability, management estimates the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair value computed using discounted cash flows.

The Company does not amortize goodwill and intangible assets with indefinite useful ~~lives,~~lives; rather such assets are required to be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that the assets may be impaired. The Company performs its goodwill and intangible asset impairment tests in the fourth quarter of each year.

i. Recently Issued Accounting Guidance

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers ~~(Topic 606)~~(“ASU 2014-09”) and Accounting Standards Codification ("ASC") Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers ("ASC 340-40"), (collectively, “Topic 606”). On January 1, 2018, the Company adopted Topic 606 by applying the modified retrospective method of adoption for all contracts that were not substantially completed as of the adoption date. ASU 2014-09 requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations. ~~Subsequently, the FASB issued the following accounting standard updates related~~Refer to ~~Topic 606, Revenue from Contracts with Customers:~~

ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) in March 2016. ASU 2016-08 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on principal versus agent considerations.

ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing in April 2016. ASU 2016-10 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on identifying performance obligations and its licensing.

ASUs 2016-12 and 2016-20, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, respectively, issued in May and December 2016, respectively. These ASUs do not change the core principle of revenue

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~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~recognition in Topic 606 but clarify the implementation guidance on a few narrow areas and add some practical expedients to the guidance.~~

~~The amendments are effective~~Note 2 for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company's internal implementation team has completed the initial evaluation of the new standard, and is now working on the implementation of new technology systems and internal controls necessary to adopt the new guidance effective January 1, 2018. The Company's election of the full retrospective adoption or modified retrospective application is dependent on system readiness and the analysis necessary to meet the requirements under ASU 2014-09.

While the Company's assessment is not finalized, it believes the areas most significantly impacted will be contracts with significantly discounted hardware, the timing of recognition of contracts containing software licenses and post-contract customer support, and the treatment of incremental costs of obtaining contracts with customers. However, due to the complexity of certain customer contracts, the actual revenue recognition treatment required under the new standard will be dependent on contract-specific terms, and may vary in some instances from the recognition discussed below.

Currently, for bundled arrangements containing Evidence.com services where the Company has provided significantly discounted or free of charge hardware, the Company recognizes the revenue allocated to the hardware in excess of the invoiced amount over the contractual term. Under ASU 2014-09, the Company anticipates being able to generally recognize revenue upon shipment which represents the point in time when the risks and rewards pass to the customer.

Currently, for sales of the Company's Axon Commander software product containing post-contract customer support ("PCS"), because the Company does not have sufficient VSOE to allocate the fee to the separate elements, the entire arrangement fee is recognized ratably over the support period term. Under the new standard, the Company expects to recognize the full amount of revenue attributable to the software license predominately at the time the software is delivered to the customer, while the amount of PCS will be recognized ratably over the support term.

Currently, the Company has an established policy to capitalize direct incremental costs of obtaining long-term customer contracts within the Software and Sensors segment as assets and recognize them as expense over the contractual term as the goods and services are delivered to the customer. The new guidance specifies that all incremental costs of obtaining customer contracts and direct costs of fulfilling our contracts with customers should be deferred and recognized over the contract period or expected customer life. The Company will modify its policy to defer all direct and incremental costs related to all customer contracts within both the Software and Sensors and TASER Weapons segments.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330). The amendments require that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted this guidance effective January 1, 2017 and it did not have a material impact on its consolidated financial statements.further discussion.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under ~~previous GAAP.~~existing GAAP guidance. ASU 2016-02 requires ~~that~~ a lessee ~~should~~to recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for the fiscal year beginning after December 15, 2018 (including interim periods within that year) using a modified retrospective approach and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of this ASU on its consolidated financial ~~statements.~~

~~In March 2016,~~statements, but expects that the ~~FASB issued~~adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification (Topic 718), Compensation – Stock Compensation. ASU 2016-09 impacts several aspects of the accounting for share-based payment transactions. The Company adopted this guidance effective January 1, 2017, which required the following changes to the presentation of the Company's financial statements:

Excess tax benefits or deficiencies for share-based payments are now recorded as a discrete item in the period shares vest or stock options are exercised as an adjustment to income tax expense or benefit rather than additional paid-in capital. This change was applied prospectively as of January 1, 2017. The Company did not have any excess tax benefits that were not previously recognized as of January 1, 2017.

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~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

As of January 1, 2017, the calculation of diluted weighted average shares outstanding was changed prospectively to no longer include excess tax benefits as assumed proceeds. This change resulted in recording an increased number of dilutive shares, but did not2016-02 will have a material impact on the Company's ~~current year diluted earnings per share;~~

~~Cash flows related to excess tax benefits or deficiencies are included as an operating activity rather than as a financing activity. The Company adopted this change prospectively.~~

Cash paid to taxing authorities when withholding shares from an employee's vesting or exercise of equity-based compensation awards for tax-withholding purposes is now considered a repurchase of the Company's equity instruments and is classified as cash used in financing activities. The Company already classifies these transactions as a financing activity, and as such, there was no impact upon adoption.

The Company has made the election to account for forfeitures when they occur rather than estimating forfeitures. The Company adopted this change on a modified retrospective basis, which resulted in an increase to additional paid-in capital and decrease to retained earnings of $0.5 million as of December 31, 2016.consolidated balance sheet.

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

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The Company adopted ASU 2016-15 is effective ~~for the fiscal year beginning after December 15, 2017,~~January 1, 2018, and interim periods within that fiscal year, and early adoption is permitted. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be prospectively as of the earliest date practicable. The Company does not expect the adoption of this ASU todid not have a material impact on its consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires an entity to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This removes the exception to postpone recognition until the asset has been sold to an outside party. The Company adopted ASU 2016-16 is effective ~~for fiscal year beginning after December 15, 2017 using a modified retrospective approach,~~January 1, 2018, and ~~early adoption is permitted. The Company is currently in~~ the ~~process of evaluating the impact of~~ adoption of this ASU did not have a material impact on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows - Restricted Cash (Topic 230), which amends the existing guidance relating to the treatment of restricted cash and restricted cash equivalents on the statement of cash flows. The Company adopted ASU 2016-18 is effective ~~for~~January 1, 2018, and retrospectively updated the ~~fiscal year beginning after December 15, 2017,~~presentation of its unaudited consolidated statements of cash flows to include amounts of restricted cash with cash and ~~interim periods within that fiscal year,~~cash equivalents when reconciling the beginning-of-period and ~~early adoption is permitted.~~end-of-period amounts. The ~~Company does not expect the~~ adoption of ~~this~~ ASU to2016-18 did not have a material impact on ~~its~~the Company's consolidated financial statements.

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) to provide a more robust framework to use in determining when a set of acquired assets and activities is a business. The amendments in ASU 2017-01 provide a screen to determine when a set of acquired integrated assets and activities is ~~effective for~~not a business, and if the ~~fiscal year beginning after December 15, 2017, and interim periods within~~screen is not met it may result in fewer transactions that ~~year and early adoption is permitted.~~qualify as a business combination under ASC Topic 805. The Company ~~does not expect~~adopted ASU 2017-01 January 1, 2018, and the adoption of this ASU todid not have a material impact on ~~its consolidated financial statements.~~

~~In January 2017,~~ the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) which simplifies the goodwill impairment test by eliminating Step 2 of the quantitative assessment and should reduce the cost and complexity of evaluating goodwill for impairment. Under the amended guidance, when a quantitative assessment is required, an entity will perform a goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge will be measured as the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of recorded goodwill. ASU 2017-04 is effective for the fiscal year beginning after December 15, 2019, and interim periods within

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~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~that fiscal year, and early adoption is permitted. The~~ Company's ~~early adoption on January 1, 2017 did not have an impact on its~~ consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic ~~708)~~718), which provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic ~~708.~~718. The Company adopted ASU 2017-09 effective January 1, 2018, and the adoption of this ASU did not have a material impact on its consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), expanding the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for the fiscal year beginning after December 15, ~~2017 using a prospective approach,~~2018, and ~~early adoption is permitted. The Company does not expect~~interim periods within that fiscal year, and the adoption of this ASU is not expected to have a material impact on ~~its~~the Company's consolidated financial statements.

j. Reclassification of Prior Year Presentation

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

2. ~~Cash, Cash Equivalents~~Revenues

Adoption of ASC Topic 606, "Revenue from Contracts with Customers"

On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted, and ~~Investments~~

continue to be reported in accordance with our historic accounting under ASC 605. The ~~following tables summarize~~Company recorded a net increase in stockholders’ equity (retained earnings) of $19.0 million as of January 1, 2018 due to the ~~Company's cash, cash equivalents,~~cumulative impact of adopting Topic 606 on contracts that were not complete as of that date. The areas most significantly impacted were contracts with contingent hardware revenue and ~~held-to-maturity investments at~~the treatment of incremental costs of obtaining contracts with customers. The impacts as a result of applying Topic 606 were a net increase to revenue of $0.6 million and $2.3 million, respectively, for the three and six months ended June 30, ~~2017~~2018, and a net decrease to selling, general and administrative expenses of approximately $0.9 million and $1.6 million, respectively, related to the costs of obtaining contracts for the same periods, as compared to what would have been recognized under ASC 605. The impacts to the December 31, ~~2016~~2017 balance sheet of adopting Topic 606 are presented below (in thousands):

As of June 30, 2017
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Cash and Cash Equivalents Short-Term Investments Long-Term Investments
Cash $ 27,029
$ —
$ —
$ 27,029
$ 27,029
$ —
$ —

Level 1:
Money market funds 1,009
—
—
1,009
1,009
—
—
Corporate bonds 31,030
—
(35 ) 30,995
—
31,030
—
Subtotal 32,039
—
(35 ) 32,004
1,009
31,030
—

Level 2:
State and municipal obligations 2,517
—
(1 ) 2,516
—
2,517
—
Certificates of deposit 249
—
—
249
—
249
—
Subtotal 2,766
—
(1 ) 2,765
—
2,766
—
Total $ 61,834
$ —
$ (36 ) $ 61,798
$ 28,038
$ 33,796
$ —



	December 31, 2017 (As reported)		Impact of Adoption of Topic 606 on Opening Balance Sheet			January 1, 2018 (As adjusted)
Accounts and notes receivable, net	$	56,064	$	28,915		$	84,979
Contract assets, net	—		5,512			5,512
Prepaid expense and other current assets	21,696		2,003			23,699
Total impacted current assets	77,760		36,430			114,190
Deferred income tax assets, net	15,755		(5,158		)	10,597
Long-term notes receivable, net of current portion	36,877		(12,977		)	23,900
Other assets	15,366		5,323			20,689
Total impacted assets	145,758		23,618			169,376

Accrued liabilities	23,502		2,512			26,014
Current portion of deferred revenue	70,401		863			71,264
Total impacted current liabilities	93,903		3,375			97,278
Deferred revenue, net of current portion	54,881		1,249			56,130
Total impacted liabilities	148,784		4,624			153,408
Retained earnings	123,185		18,994			142,179
Total impacted stockholders' equity	123,185		18,994			142,179
Total impacted liabilities and stockholders' equity	271,969		23,618			295,587

Revenue Recognition

Revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, each of which are generally distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental taxing authorities.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Topic 606. For contracts with multiple performance obligations, the Company allocates the contract transaction price to each performance obligation using the Company's estimate of the standalone selling price ("SSP") of each distinct good or service in the contract.

Performance obligations to deliver products, including CEWs, Axon cameras and related accessories such as cartridges, batteries and docks, are generally satisfied at the point in time the Company ships the product, as this is when the customer obtains control of the asset under our standard terms and conditions. In certain contracts with non-standard terms and conditions, these performance obligations may not be satisfied until formal customer acceptance occurs. Performance obligations to fulfill service-type extended warranties and provide our Software-as-a-Service (“SaaS”) offerings, including Evidence.com and other cloud

services, are generally satisfied over time as the customer receives and consumes the benefits of these services over the stated service period.

The Company has elected to recognize shipping costs as an expense in Cost of product sales when the control of hardware products or accessories have transferred to the customer.

Nature of Products and Services

The following table presents the Company's revenues by primary product and service offering (in thousands):



	Three Months Ended June 30, 2018						Three Months Ended June 30, 2017 ⁽¹⁾
	TASER Weapons		Software and Sensors		Total		TASER Weapons		Software and Sensors		Total
TASER X26P	$	18,146	$	—	$	18,146	$	16,235	$	—	$	16,235
TASER X2	18,362		—		18,362		16,052		—		16,052
TASER Pulse and Bolt	1,101		—		1,101		801		—		801
Single cartridges	17,243		—		17,243		14,867		—		14,867
Axon Body	—		4,780		4,780		—		3,752		3,752
Axon Flex	—		1,535		1,535		—		3,851		3,851
Axon Dock	—		2,119		2,119		—		2,783		2,783
Axon Fleet	—		2,715		2,715		—		—		—
Evidence.com and cloud services	—		20,357		20,357		—		12,756		12,756
TASER Cam	—		762		762		—		766		766
Extended warranties	3,738		2,870		6,608		2,991		1,619		4,610
Other	2,034		3,464		5,498		2,070		1,100		3,170
Total	$	60,624	$	38,602	$	99,226	$	53,016	$	26,627	$	79,643



	Six Months Ended June 30, 2018						Six Months Ended June 30, 2017 ⁽¹⁾
	TASER Weapons		Software and Sensors		Total		TASER Weapons		Software and Sensors		Total
TASER X26P	$	34,620	$	—	$	34,620	$	31,903	$	—	$	31,903
TASER X2	42,294		—		42,294		35,038		—		35,038
TASER Pulse and Bolt	2,447		—		2,447		1,823		—		1,823
Single cartridges	33,357		—		33,357		31,531		—		31,531
Axon Body	—		10,338		10,338		—		7,198		7,198
Axon Flex	—		3,204		3,204		—		5,326		5,326
Axon Dock	—		5,154		5,154		—		4,770		4,770
Axon Fleet	—		4,831		4,831		—		—		—
Evidence.com and cloud services	—		40,598		40,598		—		24,498		24,498
TASER Cam	—		2,122		2,122		—		1,485		1,485
Extended warranties	7,444		5,360		12,804		5,834		3,037		8,871
Other	3,986		4,686		8,672		4,558		1,884		6,442
Total	$	124,148	$	76,293	$	200,441	$	110,687	$	48,198	$	158,885

⁽¹⁾ Amounts for the three and six months ended June 30, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.

The Company derives revenue from two primary sources: (1) the sale of physical products, including CEWs, Axon cameras, Axon Signal enabled devices, corresponding hardware extended warranties, and related accessories such as Axon docks, cartridges and batteries, among others, and (2) subscription to the Company's Evidence.com digital evidence management SaaS (including secure cloud-based storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, the Company also recognizes revenue from training, professional services and revenue related to other software and cloud services.

Many of the Company's products and services are sold on a standalone basis. The Company also bundles its hardware products and services together and sells them to its customers in single transactions, where the customer can make payments over a multi-year period. These sales may include payments for upfront hardware and services, as well as payments for hardware and services to be provided by the Company at a future date. Additionally, the Company offers customers the ability to purchase CEW cartridges and certain services on an unlimited basis over the contractual term. Due to the unlimited nature of these arrangements whereby the Company is obligated to deliver unlimited products at the customer’s request, the Company accounts for these arrangements as stand-ready obligations, and recognizes revenue ratably over the contract period. Cost of product sales will be recognized as the products are shipped to the customer.

The following table presents the Company's revenues disaggregated by geography (in thousands):



	Three Months Ended June 30,								Six Months Ended June 30,
	2018				2017 ⁽¹⁾				2018				2017 ⁽¹⁾
United States	$	78,731	79	%	$	66,200	83	%	$	156,681	78	%	$	130,952	82	%
Other countries	20,495		21		13,443		17		43,760		22		27,933		18
Total	$	99,226	100	%	$	79,643	100	%	$	200,441	100	%	$	158,885	100	%

Contract Balances

The timing of revenue recognition may differ from the timing of invoicing to customers. The Company generally has an unconditional right to consideration when it invoices its customers and records a receivable. The Company records a contract asset when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing.

Contract assets generally result from the Company's subscription programs where the Company satisfies a hardware performance obligation upon shipment to the customer and the right to the portion of the transaction price allocated to that hardware performance obligation is conditional on the Company’s future performance of a SaaS service obligation under the contract. The Company recognizes a portion the amount allocated to hardware products shipped to the customer as accounts receivable when invoiced to the customer, and records the remaining allocated value as a contract asset as the Company has generally fulfilled its hardware performance obligation upon shipment.

Contract liabilities generally consist of deferred revenue on the Company’s subscription programs where the Company generally invoices customers at the beginning of each annual period and records a receivable at the time of invoicing when there is an unconditional right to consideration.

Deferred revenue is comprised mainly of unearned revenue related to the Company's Evidence.com SaaS platform, secure cloud-based storage, service-type extended warranties, stand-ready obligations in our cartridge programs, and rights to future CEW, camera and related accessories hardware in our subscription programs. Revenue for Evidence.com and cloud-based storage, our service-type extended warranties and stand-ready cartridge programs is generally recognized on a straight-line basis over the subscription term. Revenue for the rights to future hardware is generally recognized at the point in time the hardware products are shipped to the customer.

Payment terms and conditions vary by contract type and geography, but our standard terms are that payments are due within 30 days from the date of invoice.

The following table presents the Company's contract assets, contract liabilities and certain information related to these balances as of and for the six months ended June 30, 2018 (in thousands):



	June 30, 2018
Contract assets ⁽¹⁾	$	11,021
Contract liabilities (deferred revenue)	138,039
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the period	43,282

⁽¹⁾ Of the $11.0 million balance of contract assets as of June 30, 2018, $0.6 million was classified as long-term and included within "Other assets" on the accompanying condensed consolidated balance sheet.

Contract liabilities (deferred revenue) consisted of the following (in thousands):



	June 30, 2018						December 31, 2017 ⁽¹⁾
	Current		Long-Term		Total		Current		Long-Term		Total
Warranty:
TASER Weapons	$	11,593	$	16,508	$	28,101	$	12,501	$	18,619	$	31,120
Software and Sensors	7,001		5,551		12,552		6,293		4,195		10,488
	18,594		22,059		40,653		18,794		22,814		41,608
Hardware:
TASER Weapons	6,264		14,787		21,051		4,164		11,401		15,565
Software and Sensors	15,931		15,379		31,310		16,956		14,781		31,737
	22,195		30,166		52,361		21,120		26,182		47,302
Software and Sensors Services	35,794		9,231		45,025		30,487		5,885		36,372
Total	$	76,583	$	61,456	$	138,039	$	70,401	$	54,881	$	125,282



	June 30, 2018						December 31, 2017 ⁽¹⁾
	Current		Long-Term		Total		Current		Long-Term		Total
TASER Weapons	$	17,857	$	31,295	$	49,152	$	16,665	$	30,020	$	46,685
Software and Sensors	58,726		30,161		88,887		53,736		24,861		78,597
Total	$	76,583	$	61,456	$	138,039	$	70,401	$	54,881	$	125,282

⁽¹⁾ Amounts as of December 31, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.

Remaining Performance Obligations

As of June 30, 2018, the Company had approximately $750 million of remaining performance obligations, which included both recognized contract liabilities as well as amounts that will be invoiced and recognized in future periods. The remaining performance obligations are limited only to arrangements that meet the definition of a contract under Topic 606 as of June 30, 2018. The Company expects to recognize between 15% - 20% of this balance over the next twelve months and expects the remainder to be recognized over the following five to seven years, subject to risks related to delayed deployments, budget appropriation or other contract cancellation clauses.

Costs to Obtain a Contract

The Company recognizes an asset for the incremental costs of obtaining a contract with a customer, which consist primarily of sales commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contract and amortized consistent with the recognition timing of the revenue for the underlying performance obligations.

For contract costs related to performance obligations with an amortization period of one year or less, the Company applies the practical expedient to expense these sales commissions when incurred. These costs are recorded as incurred within sales, general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive income.

As of June 30, 2018, the Company's assets for costs to obtain contracts were as follows (in thousands):



	June 30, 2018
Current deferred commissions ⁽¹⁾	$	5,941
Deferred commissions, net of current portion ⁽²⁾	13,766
	$	19,707

⁽¹⁾ Current deferred commissions are included within "Prepaid expenses and other current assets" on the accompanying condensed consolidated balance sheet.

⁽²⁾Deferred commissions, net of current portion, are included in "Other assets" on the accompanying condensed consolidated balance sheet.

During the three and six months ended June 30, 2018, the Company recognized $1.2 million and $2.3 million, respectively, of amortization related to deferred commissions. These costs are recorded within sales, general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive income.

Significant Judgments

The Company’s contracts with certain municipal government customers may be subject to budget appropriation, other contract cancellation clauses or future periods which are optional. In contracts where the customer’s performance is subject to budget appropriation clauses, we generally consider the likelihood of non-appropriation to be remote when determining the contract term and transaction price. Contracts with other cancellation provisions or optional periods may require judgment in determining the contract term, including the existence of material rights, transaction price and identifying the performance obligations.

At times, customers may request changes that either amend, replace or cancel existing contracts. Judgment is required to determine whether the specific facts and circumstances within the contracts require the changes to be accounted for as a separate contract or as a modification. Generally, contract modifications containing additional goods and services that are determined to be distinct and sold at their SSP are accounted for as a separate contract. For contract modifications where both criteria are not met, the original contract is updated and the required adjustments to revenue will be made accordingly.

The Company's contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately rather than together may require significant judgment. The Company considers CEW devices and related accessories as well as cameras and related accessories to be separately identifiable from each other as well as from extended warranties on these products and the SaaS subscriptions to Evidence.com and other cloud services.

In contracts where there are timing differences between when the Company transfers a promised good or service to the customer and when the customer pays for that good or service, the Company has determined that, with the exception of its TASER 60 installment purchase arrangements, its contracts generally do not include a significant financing component. For the three and six months ended June 30, 2018, the Company recorded revenue of $10.2 million and $24.2 million, respectively, including $0.3 million and $0.6 million, respectively, of interest income, under the Company’s TASER 60 plan. For the three and six months ended June 30, 2017, the Company recorded revenue of $5.3 million and $13.3 million, respectively, including $0.2 million and $0.3 million, respectively, of interest income, under the Company’s TASER 60 plan. Amounts for the three and six months ended June 30, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606.

Judgment is required to determine the SSP for each distinct performance obligation. The Company analyzes separate sales of its products and services as a basis for estimating the SSP of its products and services and then uses that SSP as the basis for allocating the transaction price when its products and services are sold together in a contract with multiple performance obligations. In instances where the SSP is not directly observable, such as when the Company does not sell the product or service separately, it determines the SSP using information that may include market conditions, time value of money and other observable inputs. The Company typically has more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, the Company may use information such geographic region and distribution channel in determining the SSP.

Sales are typically made on credit and we generally do not require collateral. We perform ongoing credit evaluations of our customers’ financial condition and maintain an allowance for doubtful accounts. Uncollectible accounts are written off when deemed uncollectible, and accounts and notes receivable are presented net of an allowance for doubtful accounts. This allowance represents our best estimate and is based on our judgment after considering a number of factors including third-party credit reports, actual payment history, customer-specific financial information and broader market and economic trends and conditions. In the event that actual uncollectible amounts differ from our estimates, additional expense could be necessary.

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

3. Cash, Cash Equivalents and Investments

The following tables summarize the Company's cash, cash equivalents, and held-to-maturity investments at June 30, 2018 and December 31, 2017 (in thousands):


	As of December 31, 2016															As of June 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short-Term Investments		Long-Term Investments		Amortized Cost		Gross Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short-Term Investments
Cash	$	32,802	$	—	$	—		$	32,802	$	32,802	$	—	$	—	$	47,837	$	—		$	47,837	$	47,837	$	—

Level 1:
Money market funds	7,849		—		—			7,849		7,849		—		—		256,679		—			256,679		256,679		—
Corporate bonds	33,379		—		(57		)	33,322		—		33,379		—		4,528		(3		)	4,525		1,000		3,528
Subtotal	41,228		—		(57		)	41,171		7,849		33,379		—		261,207		(3		)	261,204		257,679		3,528

Level 2:
State and municipal obligations	14,477		—		(10		)	14,467		—		14,243		234		2,587		—			2,587		1,991		596
Certificates of deposit	793		—		—			793		—		793		—
Subtotal	15,270		—		(10		)	15,260		—		15,036		234
Total	$	89,300	$	—	$	(67	)	$	89,233	$	40,651	$	48,415	$	234	$	311,631	$	(3	)	$	311,628	$	307,507	$	4,124



	As of December 31, 2017
	Amortized Cost		Gross Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short-Term Investments
Cash	$	53,459	$	—		$	53,459	$	53,459	$	—

Level 1:
Money market funds	20,884		—			20,884		20,884		—
Corporate bonds	6,632		(6		)	6,626		—		6,632
Subtotal	27,516		(6		)	27,510		20,884		6,632

Level 2:
State and municipal obligations	992		—			992		762		230
Total	$	81,967	$	(6	)	$	81,961	$	75,105	$	6,862

The Company believes the unrealized losses on ~~the Company’s~~its investments are due to interest rate fluctuations. As these investments are ~~either~~ short-term in nature, are expected to be redeemed at par value, and/or because the Company has the ability and intent to hold these investments to maturity, the Company does not consider these investments to be other than temporarily impaired at ~~June��~~June 30, 2018 or as of December 31, 2017.

3.4. Inventory

Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average cost of raw materials which approximates the first-in, first-out (“FIFO”) method and includes allocations of manufacturing labor and overhead. Included in finished goods at June 30, 2018 and December 31, 2017 was $1.7 million and $1.4 million, respectively, of trial and evaluation hardware units. Provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value. ~~Inventories~~Inventory consisted of the following at June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (in thousands):

2017 2016
Raw materials $ 32,852
$ 18,002
Finished goods 27,891
16,839
Total inventory $ 60,743
$ 34,841

~~4. Goodwill and Intangible Assets~~

~~The changes in the carrying amount of goodwill for the six months ended June 30, 2017 were as follows (in thousands):~~

Balance, beginning of period $ 10,442
Goodwill acquired 2,681
Foreign currency translation adjustment 60
Balance, end of period $ 13,183

~~Table of Contents~~

~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

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

June 30, 2017 December 31, 2016

Useful
Life

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount
Amortized:
Domain names 5-10 years $ 3,161
$ (276 ) $ 2,885
$ 3,161
$ (125 ) $ 3,036
Issued patents 4-15 years 1,976
(842 ) 1,134
1,942
(780 ) 1,162
Issued trademarks 3-11 years 674
(357 ) 317
655
(320 ) 335
Customer relationships 4-8 years 947
(324 ) 623
914
(240 ) 674
Non-compete agreements 3-4 years 450
(286 ) 164
465
(236 ) 229
Developed technology 3-7 years 14,480
(2,330 ) 12,150
8,661
(824 ) 7,837
Total amortized 21,688
(4,415 ) 17,273
15,798
(2,525 ) 13,273
Not amortized:
TASER trademark 900
900
900
900
Patents and trademarks pending 1,161
1,161
1,045
1,045
Total not amortized 2,061
2,061
1,945
1,945
Total intangible assets $ 23,749
$ (4,415 ) $ 19,334
$ 17,743
$ (2,525 ) $ 15,218

Amortization expense relative to intangible assets for the three and six months ended June 30, 2017 was $1.0 million and $1.9 million, respectively. Amortization expense relative to intangible assets for the three and six months ended June 30, 2016 was $0.2 million and $0.5 million, respectively. Estimated amortization for intangible assets with definitive lives for the remaining six months of 2017, the next five years ended December 31, and thereafter, is as follows (in thousands):

2017 (remaining six months) $ 2,031
2018 4,051
2019 3,928
2020 2,460
2021 2,325
2022 726
Thereafter 1,752
Total $ 17,273

~~5. Other Long-Term Assets~~

~~Other long-term assets consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):~~

2017 2016
Cash surrender value of corporate-owned life insurance policies $ 3,633
$ 3,240
Prepaid commissions ⁽ⁱ⁾
6,063
5,302
Restricted cash ⁽ⁱⁱ⁾
3,322
3,317
Prepaid expenses, deposits and other ⁽ⁱⁱⁱ⁾
2,164
2,058
Total other long-term assets $ 15,182
$ 13,917

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

~~Table of Contents~~

~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

⁽ⁱⁱ⁾ As of June 30, 2017 and December 31, 2016, restricted cash primarily consisted of $2.7 million of sales proceeds related to a long-term contract with a specific customer. These proceeds are held in escrow until certain billing milestones are achieved, and then specified amounts are transferred to the Company's operating accounts. Restricted cash at each period end also included $0.6 million related to a performance guarantee related to an international customer sales contract.

⁽ⁱⁱⁱ⁾ Included in long-term assets as of June 30, 2017 and December 31, 2016 was $1.8 million of funds deposited in escrow related to contingent consideration in connection with a business combination (see Note 15). The funds will be held in escrow and released to selling shareholders if certain conditions are subsequently met. If the conditions are not met, the funds will be released back to the Company.

~~6. Deferred Revenue~~

~~Deferred revenue consisted of the following (in thousands):~~

June 30, 2017 December 31, 2016
Current Long-Term Total Current Long-Term Total
Warranty:
TASER Weapons $ 9,630
$ 17,346
$ 26,976
$ 9,980
$ 17,319
$ 27,299
Software and Sensors 5,484
4,255
9,739
3,979
2,926
6,905
15,114
21,601
36,715
13,959
20,245
34,204
Hardware:
TASER Weapons 3,114
9,764
12,878
1,702
4,390
6,092
Software and Sensors 9,908
11,905
21,813
9,850
11,205
21,055
13,022
21,669
34,691
11,552
15,595
27,147
Software and Sensors Services 24,426
4,338
28,764
19,626
4,214
23,840
Total $ 52,562
$ 47,608
$ 100,170
$ 45,137
$ 40,054
$ 85,191

June 30, 2017 December 31, 2016
Current Long-Term Total Current Long-Term Total
TASER Weapons $ 12,744
$ 27,110
$ 39,854
$ 11,682
$ 21,709
$ 33,391
Software and Sensors 39,818
20,498
60,316
33,455
18,345
51,800
Total $ 52,562
$ 47,608
$ 100,170
$ 45,137
$ 40,054
$ 85,191

~~7. Accrued Liabilities~~

~~Accrued liabilities consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):~~

2017 2016
Accrued salaries, benefits and bonus $ 5,649
$ 6,474
Accrued professional, consulting and lobbying 2,181
3,673
Accrued warranty expense 564
780
Accrued income and other taxes 3,756
4,581
Other accrued liabilities 7,729
2,740
Accrued liabilities $ 19,879
$ 18,248



	2018		2017
Raw materials	$	20,288	$	20,119
Finished goods	23,679		25,346
Total inventory	$	43,967	$	45,465

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

5. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the six months ended June 30, 2018 were as follows (in thousands):



	TASER Weapons			Software and Sensors			Total
Balance, beginning of period	$	1,453		$	13,474		$	14,927
Goodwill acquired	—			9,870			9,870
Foreign currency translation adjustment	(56		)	(57		)	(113		)
Balance, end of period	$	1,397		$	23,287		$	24,684

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



		June 30, 2018							December 31, 2017
	Useful Life	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Amortized:
Domain names	5-10 years	$	3,161	$	(580	)	$	2,581	$	3,161	$	(428	)	$	2,733
Issued patents	4-15 years	2,858		(1,004		)	1,854		2,697		(913		)	1,784
Issued trademarks	3-11 years	1,010		(545		)	465		860		(397		)	463
Customer relationships	4-8 years	3,742		(616		)	3,126		1,377		(451		)	926
Non-compete agreements	3-4 years	548		(398		)	150		556		(346		)	210
Developed technology	3-7 years	15,449		(5,594		)	9,855		13,469		(3,956		)	9,513
Re-acquired distribution rights	2 years	2,023		(1,349		)	674		2,133		(711		)	1,422
Total amortized		28,791		(10,086		)	18,705		24,253		(7,202		)	17,051
Not amortized:
TASER trademark		900					900		900					900
Patents and trademarks pending		837					837		872					872
Total not amortized		1,737					1,737		1,772					1,772
Total intangible assets		$	30,528	$	(10,086	)	$	20,442	$	26,025	$	(7,202	)	$	18,823

Amortization expense of intangible assets for the three and six months ended June 30, 2018 was $1.7 million and $3.0 million, respectively. Amortization expense of intangible assets for the three and six months ended June 30, 2017 was $1.0 million and $1.9 million, respectively. Estimated amortization for intangible assets with definite lives for the remaining six months of 2018, the next five years ended December 31, and thereafter, is as follows (in thousands):



2018	$	3,179
2019	4,884
2020	3,417
2021	2,847
2022	1,192
2023	926
Thereafter	2,260
Total	$	18,705

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

6. Other Long-Term Assets

Other long-term assets consisted of the following at June 30, 2018 and December 31, 2017 (in thousands):



	2018		2017
Cash surrender value of corporate-owned life insurance policies	$	3,847	$	3,846
Deferred commissions ⁽¹⁾	13,766		6,803
Restricted cash ⁽²⁾	2,470		3,333
Prepaid expenses, deposits and other	2,748		1,384
Total other long-term assets	$	22,831	$	15,366

⁽¹⁾Represents assets for the incremental costs of obtaining a contract with a customer, which consist primarily of sales commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contract and amortized consistent with the recognition timing of the revenue for the underlying performance obligations. The amounts as of December 31, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts. In connection with the Company's adoption of Topic 606, it recorded an adjustment of $7.3 million as of January 1, 2018, and of that amount, $5.4 million was recorded within long-term other assets. The adjusted balance of long-term deferred commissions as of January 1, 2018 was $12.2 million.

⁽²⁾ As of June 30, 2018 and December 31, 2017, restricted cash primarily consisted of $1.8 million and $2.7 million, respectively, of sales proceeds related to long-term contracts with customers. As of June 30, 2018, the proceeds are held in escrow until certain billing milestones are achieved, and then specified amounts are transferred to the Company's operating accounts.

7. Accrued Liabilities

Accrued liabilities consisted of the following at June 30, 2018 and December 31, 2017 (in thousands):



	2018		2017
Accrued salaries, benefits and bonus	$	12,527	$	8,957
Accrued professional, consulting and lobbying fees	2,683		3,870
Accrued warranty expense	505		644
Accrued income and other taxes	2,894		2,558
Other accrued liabilities	11,386		7,473
Accrued liabilities	$	29,995	$	23,502

8. Income Taxes

ASC 740 requires a company to record the effects of a tax law change in the period of enactment; however, shortly after the enactment of the Tax Cuts and Jobs Act (the "Tax Act"), the SEC staff issued Staff Accounting Bulletin 118 ("SAB 118"), which allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. The measurement period ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. The Company continues to analyze the impact of the Tax Act and expects that as additional guidance from IRS Treasury is provided, further updates will be necessary.

The Tax Act imposes a U.S. entity tax on global intangible low-taxed income ("GILTI") earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Given the complexity of the GILTI provisions, we are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy. At June 30, 2018, because we are still evaluating the GILTI provisions and our analysis of future taxable income that is subject to GILTI, we have included GILTI related to current-year operations only in our EAETR (estimated annual effective tax rate) and have not provided additional GILTI on deferred items.

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Deferred Tax Assets

Net deferred income tax assets at June 30, ~~2017,~~2018, include capitalized ~~research and development~~R&D costs, ~~research and development~~R&D tax credits, ~~non-qualified~~ stock-based compensation expense, deferred ~~warranty~~ revenue, warranty and inventory reserves, accrued vacation, and other items, partially offset by accelerated depreciation expense and intangible amortization that is not tax deductible. The Company’s total net deferred tax assets at June 30, ~~2017~~2018 were ~~$20.3~~$15.8 million.

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

Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of each reporting date, management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. As of June 30, ~~2017,~~2018, the Company continues to demonstrate three-year cumulative pre-tax income in the U.S. federal and Arizona tax jurisdictions; however, the Company's Arizona R&D Tax Credits start to expire in 2018 with a significant tranche with a gross value of $1.2 million expiring if not used by the end of 2019. It appears ~~that~~ that the Company’s long term investments, which impact short term profits, will likely result in some of the R&D credits expiring before they are utilized. Therefore, management has concluded that it is more likely than not that a portion of the Company’s deferred tax assets will not be realized and has established a valuation allowance.

The Company has ~~completed research and development (“~~claimed R~~&D”)~~&D tax ~~credit studies which identified~~credits of approximately ~~$15.6~~$17.0 million ~~in tax credits~~ for federal, Arizona and California income tax purposes related to ~~the~~tax years 2003 ~~through 2017 tax years.~~to 2018. Management has made the determination that it is more likely than not that the full benefit of the R&D tax ~~credit~~credits will not be sustained onupon examination and recorded a liability for unrecognized tax benefits of ~~$4.3~~$3.8 million as of June 30, ~~2017.~~2018. In addition, management accrued ~~approximately~~ $0.1 million for estimated uncertain tax positions related to certain state income tax liabilities, for a total unrecognized tax benefit as of June 30, ~~2017. The Company does not expect a significant increase or decrease in~~2018 of $3.9 million. Management expects the ~~total~~ amount of unrecognized tax ~~benefits~~benefit liability to increase by $0.2 million within the next 12 months. Should the ~~total~~ unrecognized ~~tax~~ benefit of ~~$4.4~~$3.9 million be recognized, the ~~Company’s~~Company's effective tax rate would be favorably impacted. Approximately ~~$1.6~~$2.1 million of the unrecognized tax benefit associated with ~~research and development~~R&D credits has been netted against the ~~research and development credit~~R&D deferred tax asset.

Effective Tax Rate

The Company’s overall effective tax rate for the six months ended June 30, ~~2017,~~2018, after discrete period adjustments, was ~~15.0%~~(7.9)%. Before discrete adjustments, the tax rate was ~~42.2%~~22.8%, which is more than the federal statutory rate primarily due to ~~the impact of non-deductible losses in certain foreign jurisdictions,~~ state taxes and non-deductible expenses for items such as ~~Subpart F income,~~ meals and entertainment, ~~and~~executive compensation limitation under IRC section 162(m), lobbying fees, an income inclusion from GILTI, offset by a reduction for foreign-derived intangible income ("FDII"). This was partially offset by ~~the domestic production activities and research and development~~R&D tax credit deductions. The effective tax rate was ~~unfavorably~~favorably impacted by ~~foreign losses for which the Company is not expected to receive~~ a ~~tax benefit. This was offset by the favorable impact of a $1.4~~$6.1 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for ~~restricted stock units~~RSUs that vested or stock options that were exercised during the six months ended June 30, ~~2017.~~2018. Of this amount $3.4 million related to stock options exercised by the Company's CEO in connection with the Company's follow-on offering.

9. Stockholders’ Equity

Follow-On Offering

In May ~~2016,~~2018, the ~~Company’s stockholders approved~~Company sold 4,645,000 shares of its common stock, which included 645,000 shares pursuant to the full exercise of the underwriters' option to purchase additional shares, in an underwritten public offering at a ~~new stock incentive plan authorizing an additional 2.0 million shares, plus remaining available shares under a prior plan, for issuance under~~price of $53.00 per share, which resulted in gross proceeds of $246.2 million. Net proceeds to the ~~new plan. Combined with~~Company after deducting fees, commissions, and other expenses related to the ~~legacy stock incentive plans, there are approximately 1.6 million shares available for grant as of June 30, 2017.~~offering were $234.0 million.

~~Performance-based stock awards~~

~~The Company has issued performance-based stock options and performance-based restricted stock units ("RSUs"), the~~CEO Performance Award

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

On May 24, 2018 (the “Grant Date”), our stockholders approved the Board of Directors’ grant of 6,365,856 stock option awards to Patrick W. Smith, the Company's CEO (the “CEO Performance Award”). The CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational goals (performance conditions) and market capitalization goals (market conditions), assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each vesting date. Each of the 12 vesting tranches of the CEO Performance Award have a 10-year contractual term and will vest upon certification by the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of the following eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA have been met for the previous four consecutive fiscal quarters. Adjusted EBITDA is defined as net income (loss) attributable to common stockholders before interest expense, provision (benefit) for income taxes, depreciation and amortization, gains and losses on dispositions of property and equipment and intangible assets, and stock-based compensation expense.



Eight Separate Revenue Goals ⁽¹⁾ (in thousands)		Eight Separate Adjusted EBITDA-Goals (in thousands)
Goal #1, $710,058		Goal #9, $125,000
Goal #2, $860,058		Goal #10, $155,000
Goal #3, $1,010,058		Goal #11, $175,000
Goal #4, $1,210,058		Goal #12, $190,000
Goal #5, $1,410,058		Goal #13, $200,000
Goal #6, $1,610,058		Goal #14, $210,000
Goal #7, $1,810,058		Goal #15, $220,000
Goal #8, $2,010,058		Goal #16, $230,000

⁽¹⁾In connection with the business combination that was completed during the three months ended June 30, 2018 (Note 15), the revenue goals have been adjusted for the acquiree's Target Revenue, as defined in the CEO Performance Award agreement.

As of June 30, 2018, the following operational goals were considered probable of achievement:

Total revenue of $710.1 million; and

Adjusted EBITDA of $125.0 million

Stock-based compensation expense associated with the CEO Performance Award is recognized over the longer of the expected achievement period for each pair of market capitalization and operational goals, beginning at the point in time when the relevant operational goal is considered probable of being met. The market capitalization goal period and the valuation of each tranche are determined using a Monte Carlo simulation and is used as the basis for determining the expected achievement period of the market capitalization goal. The probability of meeting an operational goal and the expected achievement point in time for meeting a probable operational goal are based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis. Even though no tranches of the CEO Performance Award vest unless a market capitalization and a matching operational goal are both achieved, stock-based compensation expense is recognized only when an operational goal is considered probable of achievement regardless of whether a market capitalization goal is actually achieved. Additionally, stock-based compensation represents a non-cash expense and is recorded as a selling, general, and administrative operating expense on the Company's condensed and consolidated statement of operations.

None of the stock options granted under the CEO Performance Award have vested thus far as the market capitalization goals and operational goals have not yet been achieved as of June 30, 2018. However, as there are two operational goals considered probable of achievement, the Company recorded stock-based compensation expense of $0.5 million related to the CEO Performance Award from the Grant Date through June 30, 2018. The number of stock options expected to vest is 1.1 million shares.

As of June 30, 2018, the Company had $44.8 million of total unrecognized stock-based compensation expense for the performance goals that were considered probable of achievement, which will be recognized over a weighted-average period of 9.2 years. As of June 30, 2018, the Company had unrecognized stock-based compensation expense of $200.7 million for the performance goals that were considered not probable of achievement.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company measured the fair value of the CEO Performance Award using a Monte Carlo simulation approach with the following assumptions: risk-free interest rate of 2.98%, expected term of 10 years, expected volatility of 47.71% and dividend yield of 0.00%.

Stock Incentive Plan

In May 2018, the Company’s stockholders approved a new stock incentive plan authorizing an additional 1.0 million shares, plus remaining available shares under prior plans, for issuance under the new plan. Combined with the legacy stock incentive plans, there are 1.7 million shares available for grant as of June 30, 2018.

Performance-based stock awards

The Company has issued performance-based stock options and performance-based restricted stock units ("RSUs"), the vesting of which is contingent upon the achievement of certain performance criteria related to the operating performance of the Company, as well as successful and timely development and market acceptance of ~~future product introductions. In addition, certain~~the Company's products.

RSUs are classified as equity and measured at the fair market value of the underlying stock at the grant date. The Company recognizes RSU expense using the straight-line attribution method over the requisite service period. For performance-based RSUs containing only performance ~~RSUs have additional service-based~~conditions, compensation cost is recognized using the accelerated attribution model over the explicit or implicit service period. For awards containing multiple service, performance or market conditions, where all conditions must be satisfied prior to vesting, ~~requirements subsequent to the achievement of the performance criteria. Compensation~~compensation expense is recognized over the longest explicit, implicit or derived service period, ~~(the longer of the period the performance condition is expected to be achieved or the required service period)~~ based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date.

For performance-based options, stock-based compensation expense is recognized over the expected performance achievement period of individual performance goals when the achievement of each individual performance goal becomes probable. For performance-based options with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized for each pair of performance and market conditions over the longer of the expected achievement period of the performance and market conditions, beginning at the point in time that the relevant performance condition is considered probable of achievement. The fair value of such awards is estimated on the grant date using Monte Carlo simulations.

Restricted Stock Units

The following table summarizes RSU activity for the six months ended June 30, ~~2017~~2018 (number of units and aggregate intrinsic value in thousands):


	Number of Units		Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value		Number of Units		Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value
Units outstanding, beginning of year	1,330		$	20.40			2,348		$	23.47
Granted	989		25.17				281		40.79
Released	(350	)	18.68				(436	)	24.08
Forfeited	(46	)	23.56				(172	)	22.40
Units outstanding, end of period	1,923		23.08		$	48,344	2,021		25.89		$	127,687

Aggregate intrinsic value represents the Company’s closing stock price on the last trading day of the period, which was ~~$25.14~~$63.18 per share, multiplied by the number of RSUs outstanding. As of June 30, ~~2017,~~2018, there was ~~$36.6~~$41.7 million in unrecognized compensation costs related to RSUs under the Company's stock plans. The Company expects to recognize the cost related to the RSUs over a weighted average period of ~~2.95~~2.58 years. RSUs are released when vesting requirements are met.

During the six months ended June 30, ~~2017,~~2018, the Company granted ~~approximately~~ 0.1 million performance-based ~~RSUs, which are included in the table above.~~RSUs. As of June 30, ~~2017,~~2018, the performance criteria had not been met for any of the ~~0.2~~0.5 million performance-based RSUs ~~outstanding. Certain of the~~outstanding.The performance-based RSUs granted in 2018, 2017 ,and 2016 ~~and 2015~~ contain provisions whereby the amount of RSUs that ultimately vest is dependent upon the level of achievement of performance metrics. The amount of RSUs included in the table above related to such grants is the target level, which is the Company's best estimate of the amount of RSUs that will vest. The maximum additional number of performance-based RSUs that could be earned is ~~0.2~~0.4 million, which are not included in the table above.

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Certain RSUs that vested in the six months ended June 30, ~~2017~~2018 were net-share settled such that the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld were ~~approximately~~ 0.1 million and had a value of ~~approximately $2.6~~$4.6 million on their respective vesting dates as determined by the Company’s closing stock ~~price.~~price on such dates. Payments for the employees’ tax obligations are reflected as a financing activity within the statement of cash flows. ~~These net-share settlements had~~The Company records a liability for the ~~effect of share repurchases~~tax withholding to be paid by the Company as ~~they reduced the amount of shares that would have otherwise been issued as~~ a ~~result of the vesting.~~

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~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

reduction to additional paid-in capital.

Stock Option Activity

The following table summarizes stock option activity for the six months ended June 30, ~~2017~~2018 (number of units and aggregate intrinsic value in thousands):


	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value		Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value
Options outstanding, beginning of year	1,008		$	5.40				804		$	4.99
Granted	—		—					6,366		28.58
Exercised	(168	)	7.38					(418	)	5.30
Expired / terminated	(6	)	10.07					—		—
Options outstanding, end of period	834		4.98		1.93	$	16,813	6,752		27.21		9.40	$	242,866
Options exercisable, end of period	805		4.99		1.93	16,214		382		4.65		1.06	22,354
Options expected to vest, end of period	25		4.75		1.48	510		1,062

Aggregate intrinsic value represents the difference between the exercise price of the underlying stock option awards and the closing market price of the Company's common stock of ~~$25.14~~$63.18 on June 30, ~~2017.~~2018. The intrinsic value of options exercised for the six months ended June 30, 2018 and 2017 ~~and 2016~~ was ~~$2.6~~$18.8 million and ~~$0.8~~$2.6 million, respectively. As of June 30, ~~2017,~~2018, total options outstanding ~~includes approximately 0.2~~included 6.4 million unvested performance-based stock options, of which ~~29,350 were unvested and of those, 25,000~~1.1 million are expected to vest.

Of the total stock options exercised during the six months ended June 30, 2018, 0.3 million were exercised and the shares then sold by the Company's CEO in connection with the Company's follow-on offering. The CEO surrendered already owned shares to cover the exercise price of the option exercises. The option exercises were net-share settled such that the Company withheld shares with value equivalent to the CEO’s minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld for tax purposes and surrendered to cover the option exercises were 0.1 million and 29,854, respectively, and had a value of $6.2 million and $1.6 million, respectively, on the exercise date as determined by the Company’s closing stock price on that day. Payments for the employees’ tax obligations are reflected as a financing activity within the statement of cash flows. The Company records a liability for the tax withholding to be paid by the Company as a reduction to additional paid-in capital.

Stock-based Compensation Expense

Stock-based compensation cost for RSUs is measured based on the closing fair market value of the Company’s common stock on the date of grant. The Company recognizes stock-based compensation cost over the requisite service period of an award on a straight-line basis for time-based RSUs and on a graded basis for RSUs that are contingent on the achievement of performance conditions. The following table summarizes the composition of ~~stock~~ stock-based compensation for the three and six months ended June 30, ~~2017~~2018 and ~~2016~~2017 (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Cost of products sold and services delivered	$	155	$	70	$	234	$	170	$	125	$	155	$	266	$	234
Sales, general and administrative expenses	2,155		1,459		4,183		2,849		2,731		2,155		5,035		4,183
Research and development expenses	1,666		777		3,006		1,507		2,098		1,666		3,746		3,006
Total stock-based compensation	$	3,976	$	2,306	$	7,423	$	4,526	$	4,954	$	3,976	$	9,047	$	7,423

Stock Repurchase Plan

In February 2016, the Company's Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of the Company’s outstanding common stock subject to stock market conditions and corporate considerations. During the six months ended June 30, 2017, no common shares were purchased under the program. During the three months ended June 30, 2016, the Company purchased, under a Rule 10b5-1 plan, approximately 1.3 million common shares for a total cost of approximately $24.8 million, or a weighted average cost of $18.92 per share. The weighted average cost includes the average price paid per share of $18.89, plus applicable administrative costs for the transaction. During the six months ended June 30, 2016, the Company purchased, under a Rule 10b5-1 plan, approximately 1.8 million common shares for a total cost of approximately $33.8 million, or a weighted average cost of $18.90 per share. The weighted average cost includes the average price paid per share of $18.87, plus applicable administrative costs for the transaction. As of June 30, 2017, $16.2 million remains available under the plan for future purchases. The Company suspended its 10b5-1 plan, and any future purchases will be discretionary.

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

months ended June 30, 2018 and 2017, no common shares were purchased under the program. As of June 30, 2018, $16.3 million remains available under the plan for future purchases. The Company suspended its 10b5-1 plan during 2016, and any future purchases will be discretionary.

10. Line of Credit

The Company has a $10.0 million revolving line of credit with a domestic bank. At both June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, there were no borrowings under the line. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. As of June 30, ~~2017,~~2018, the Company had letters of credit outstanding of ~~approximately~~ $2.7 million under the facility, and available borrowing of ~~approximately~~ $7.3 million. The line is secured by substantially all of the assets of the Company, and bears interest at varying rates (currently LIBOR plus ~~1.75%~~1.25% or Prime less 0.50%). The line of credit matures on December 31, 2018, and requires monthly payments of interest only on outstanding balances. The line of credit matured on July 31, 2017, which was subsequently extended for 90-day term. The Company is currently evaluating its credit needs and anticipates entering into a longer term arrangement prior to the October 31, 2017 maturity date.only. The Company’s agreement with the bank requires it to comply with ~~certain financial and other covenants including maintenance of~~ a maximum ~~leverage~~funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio, ~~and minimum fixed charge coverage ratio. The leverage ratio (ratio~~as defined, of ~~total liabilities to tangible net worth) can be~~ no greater than ~~1:1, and the fixed charge coverage ratio can be no less than 1.25:1,~~2.00 to 1.00 based upon a trailing twelve-month period. At June 30, ~~2017,~~2018, the Company’s ~~leverage~~funded debt to EBITDA ratio was ~~1.17:1 and its fixed charge coverage ratio was 2.65:1. The Company's violation of the leverage ratio requirement was waived by the bank as of June 30, 2017.~~0.002 to 1.00.

11. Commitments and Contingencies

Product Litigation

The Company is 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 ~~(or present)~~ by law enforcement officers in connection with ~~arrests or during training exercises.~~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 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 company has settled such lawsuits over the Company’s objection where the risk is over the Company’s liability insurance deductibles. Due to the confidentiality of the Company's litigation strategy and the confidentiality agreements that are executed in the event of a settlement, the Company does not identify or comment on which specific lawsuits have been settled or the amount of any settlement.

In 2009, the Company implemented new risk management strategies, including revisions to product warnings and training to better protect both the Company and its customers from litigation based on ~~‘failure~~“failure to ~~warn’~~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 to the second quarter of ~~2017,~~2018, product liability cases have been reduced from 55 ~~active~~ to seven 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, 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. Trial scheduled for June 18, 2018.~~
~~Suarez~~	~~Sep-16~~	~~US District Court, Southern District of Florida~~	~~Wrongful Death~~	~~Discovery Phase. Trial scheduled for September 3, 2018.~~Phase
Masters	Nov-16	USU.S. District Court, Western District of Missouri	~~Wrongful Death~~Suspect Injury	Discovery Phase. Trial scheduled for ~~October 9,~~December 10, 2018.
Taylor	Mar-17	USU.S, District Court, Southern District of Texas	Officer Injury	~~Discovery~~Dispositive Motion Phase: The Company filed its motion for summary judgment on April 20, 2018
Wiggington	Apr-18	U.S, District Court, Western District Court of Missouri	Wrongful Death	Pleading Phase

No product liability cases were dismissed or judgments entered during the first six months of 2018 and through the date of these financial statements and there are no product litigation matters in which the Company is involved that are currently on appeal.

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

There are no product litigation matters in which the Company is involved that are currently on appeal, but the judgment entered resulting from the court granting the Company’s motion for dismissal of the Digital Ally, Inc. ("Digital Ally") litigation for antitrust claims is on appeal as noted in the following table.



~~Plaintiff~~	~~Month~~ ~~Served~~	~~Jurisdiction~~	~~Claim Type~~	~~Status~~
~~Digital Ally~~	~~Feb-17~~	~~US District Court, District of Kansas~~	~~Antitrust Claims~~	~~Discovery Phase~~

~~The following cases were dismissed or judgment entered during the second quarter of 2017 and through the date of these financial statements.~~



~~Plaintiff~~	~~Month~~ ~~Served~~	~~Jurisdiction~~	~~Claim Type~~	~~Status~~
~~Firman~~	~~Apr-12~~	~~Ontario, Canada Superior Court of Justice~~	~~Wrongful Death~~	~~Dismissed~~
~~Shrock~~	~~Sep-14~~	~~San Bernardino County Superior Court, CA~~	~~Wrongful Death~~	~~Dismissed~~

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


Policy Year	Policy Start Date	Policy End Date	Insurance Coverage		Deductible Amount		Defense Costs Covered	Remaining Insurance Coverage		Active Cases and Cases on Appeal	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	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	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	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	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	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	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	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	12/15/2014	12/15/2015	10.0		5.0		N	10.0		Bennett
2016	12/15/2015	12/15/2016	10.0		5.0		N	10.0		Suarez, Masters	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	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

Other Litigation

Phazzer Patent Infringement Litigation

In ~~November 2015,~~February 2016, the Company filed a complaint against Phazzer Electronics Inc. ~~("Phazzer") and Sang Min International Co. Ltd. ("Sang Min"~~(“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 ~~Axon’s~~the Company's 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 ~~else~~ 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. ~~The Court also issued an award to Axon of compensatory and treble damages, and also an award of reasonable attorneys’ fees and costs.~~ Both Phazzer and its U.S. distributors are barred from exporting CEWs or cartridges to fill foreign orders. ~~The~~On August 10, 2017, Phazzer filed a notice of appeal to the Federal Circuit, which is fully briefed but remains pending. Phazzer's multiple attempts to stay the injunction ~~also makes clear that nonparties who assist~~pending appeal have been denied by both the district and appellate courts.

On April 4, 2018, the Court entered a judgment for the Company against Phazzer in ~~violating~~an amount exceeding $7.8 million which included an award to the ~~injunction, including specifically Taiwanese CEW manufacturers Sang Min~~Company of compensatory and ~~Double Dragon Development~~treble damages for willful infringement, and ~~Trading Corporation, may be held~~also an award of reasonable attorneys’ fees and costs. The collectability of this judgment is in ~~contempt of court.~~doubt since Phazzer has informed the Court that it is insolvent. On May 1, 2018, Phazzer appealed the damages award to the Federal Circuit. On May 11, 2018, the district court entered final judgment against Phazzer ending the district court proceedings.

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,”

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~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

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.

~~Axon’s~~On April 27, 2017, during the district court litigation, Phazzer filed a second petition for reexamination of the Company’s patent with the USPTO. The Company’s patent (U.S. No. 7,234,262) at issue in the litigation ~~(Case No. 6:16-cv-00366-PGB-KRS)~~ 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. The ~~Court found that~~Company is appealing this decision. The Company’s patent ~~was “valid,~~remains valid and enforceable unless and ~~infringed by Phazzer.” The injunction will remain in effect~~ until all appeals are exhausted and the patent ~~expires,~~is formally canceled (at least a 2-year process). The Phazzer injunction remains in full force and ~~includes any CEW or device not colorably different from the Phazzer Enforcer CEW.~~ effect.

The ~~Axon~~Company's 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 ~~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

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are confusingly similar to, or not more than a colorable imitation of, TASER CEW ~~cartridges, and includes~~cartridges. During the litigation, 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.~~

~~The Court expressly found that Phazzer cartridges currently marketed and sold as compatible with TASER brand CEWs embody~~filed a petition to cancel the ~~protected appearance and constitute infringing products enjoined under its Order. Phazzer was also ordered by~~Company’s trademark, which the ~~Court “not [to] challenge or continue to challenge~~Trademark Board stayed until the ~~validity or enforceability~~conclusion of the ~~‘789 Registration in any manner in any forum, including the USTPO.” Accordingly, Phazzer’s pending USPTO cancellation action, which was stayed while the~~district court litigation ~~ran its course, will be dismissed.~~and all related appeals.

Digital Ally Patent Litigation

In February 2016, the Company was served with a first amended complaint filed by Digital Ally Inc. (“Digital”) in ~~the Federal District Court for~~ the District of Kansas (Case No. CV-16-02032-CM-JPO) alleging patent infringement regarding the Company's Axon Signal technology, commercial bribery, ~~contracts, combinations and conspiracies in restraint of trade~~antitrust, and unfair ~~or anti-competitive acts and practices.~~competition. In March 2016, the Company was served with a second amended complaint with similar allegations. The second amended complaint seeks a judgment of infringement, monetary damages, a permanent injunction, punitive damages and attorneys’ fees and costs.

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, which was affirmed by the Federal Circuit in May 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 independent claim 10 for resolution by the Court. The Company believes the ~~second amended complaint~~remaining claim of the ‘452 patent is ~~frivolous~~invalid and not infringed, and is 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 the Company’s invalidity challenge on June 1, 2018. Although this patent is no longer at issue in the litigation, the Company ~~will vigorously defend~~is appealing this ~~litigation. The Company’s motion to dismiss~~ruling.

On July 19, 2018, the ~~claims involving commercial bribery, contracts, combinations~~district court issued its claim construction ruling on three disputed claim terms in the remaining claim 10 of Digital’s ‘452 patent. This ruling now triggers various discovery and ~~conspiracies~~other deadlines in ~~restraint of trade~~the litigation, including mandatory mediation. No trial date has been set, but the Court has set certain other deadlines, including mediation no later than December 3, 2018 and ~~unfair or anti-competitive acts and practices was granted~~a pretrial conference on January ~~12, 2017 and judgment of dismissal was entered in the Company’s favor on April 14, 2017. Plaintiff filed an appeal on April 20, 2017 to the 10th Circuit Court of Appeals.~~

~~The Company has filed four inter parte reviews ("IPRs") with the USPTO to invalidate Digital Ally’s patents and also has filed~~16, 2019 (where a motion to stay the litigation pending resolution of the inter parte reviews which motion was granted. On June 6, 2017, the USPTO rejected one of the IPRs that Axon filed against the ‘292 patent 8,781,292 but granted the second IPR, and invalidity proceedings have been instituted against that patent regarding its auto-activation camera technology on all asserted claims. On July 7, 2017 the USPTO rejected Axon’s IPR filed against the validity of Digital Ally's ‘452 patent, claim 10; however, this patent claim is being challenged in District Court based on fraud claims, invalidity claims and non-infringement claims filed by Axon. The USPTO has not yet ruled on the second IPR filed against the validity of Digital Ally’s ‘452 patent, claim 1. This litigation is in the discovery phase.trial date may be set).

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 that is claimed in controversy is ~~approximately~~ $0.6 million. The Company’s records reflect that all commissions that were due Mr. di Zazzo under his contract were paid or offered to him and the Company will vigorously defend this arbitration claim.

~~VieVu Commercial~~Richey Class Action Litigation

~~In February 2017,~~On June 25, 2018, consumer weapon purchaser Douglas Richey (“Richey”) filed a class action lawsuit against the Company 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 claims his Pulse CEW discharged while in its case in his jacket pocket due to a faulty safety switch. He was ~~served with a complaint filed by VieVu LLC ("VieVu") alleging tortious interference with a business expectancy. In March 2017,~~not injured. He alleges violation of the Magnuson-Moss Warranty Act, 15 U.S.C. § 2310(D)(1), the Song-Beverly Consumer Warranty Act for Breach of Express Warranty, Cal. Civ. Code § 1790, and California's Consumers Legal Remedies Act, as well as fraudulent omission and unjust enrichment. The Company ~~filed~~is preparing to file a motion to dismiss the complaint, which ~~motion~~it believes is ~~pending. In February~~meritless.

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 fully briefed. The other three appeals relating to the ~~Company filed complaints against VieVu LLC for unfair competition~~district court’s April 4, 2018 damages award in the Company’s favor (No. 18-1914) and ~~false advertising~~its May 4, 2018 contempt order as to Phazzer (No. 18-2059) and Abboud (No. 20-1857) have been consolidated. Phazzer and Abboud’s opening briefs are due August 10, 2018.

On May 2, 2018, the Federal Circuit issued its judgment in ~~both~~ the ~~Superior Court~~Company’s favor affirming the district court’s dismissal of ~~Arizona for Maricopa County as well as the California Superior Court for Santa Cruz County. The California complaint was served on VieVu and this litigation was voluntarily dismissed by Axon.~~

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Digital’s antitrust claims (discussed above). On July 6, 2018, Digital filed a Petition for Writ of Certiorari with the U.S. Supreme Court. The Company has waived its response believing the petition is frivolous.

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

On or about June 14, 2018, the Company received a letter from the U.S. Federal Trade Commission (“FTC”) with respect to its non-public investigation into the Company’s recent acquisition of VIEVU, LLC. See Note 15 for additional information regarding the VIEVU acquisition. In the letter, the FTC has requested that the Company provide, on a voluntary basis, certain information and documentation relating to its acquisition of VIEVU. The Company is reviewing the letter and the information request and is cooperating with the investigation.

General

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

Based on the Company's assessment of outstanding litigation and claims as of June 30, ~~2017,~~2018, 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 its 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, 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. At June 30, ~~2017,~~2018, the Company had outstanding letters of credit of ~~approximately~~ $2.7 million that are expected to expire in May ~~2018.~~2019. Additionally, the Company had ~~approximately $5.7~~$14.1 million of outstanding surety bonds at June 30, ~~2017,~~2018, with $1.0 million expiring in 2018, ~~$2.4~~$0.1 million expiring in 2020, ~~and the remaining~~ $2.3 million expiring in ~~2021.~~2021, $3.1 million expiring in 2022 and the remaining $7.5 million expiring in 2023.

12. Related Party Transactions

The Company engages Dr. Mark Kroll, a member of the Board of Directors, to provide consulting services. The expenses related to these services were approximately $29,000 and $69,000 for the three months ended June 30, 2017 and 2016, respectively, and $73,000 and $97,000 for the six months ended June 30, 2017 and 2016, respectively. At June 30, 2017 and December 31, 2016, the Company had liabilities of approximately $16,000 and $12,000, respectively, related to these services.

The Company subscribes to ~~a mobile collaboration software suite co-founded and managed by~~various cloud-based applications from Salesforce. Bret Taylor, a member of the Company's Board of ~~Directors.~~Directors, serves as President and Chief Product Officer of Salesforce. The ~~cost~~Company incurs costs at different times throughout the year, typically in advance of services being provided, and subsequently amortizes these costs ratably to ~~license this software is approximately~~expense as services are provided over the contractual term. The Company made payments of $1.7 million related to these services during each of the three and six months ended June 30, 2018, and made payments of $0.2 million ~~per year,~~ and ~~as of~~$1.2 million during the three and six months ended June 30, 2017, ~~and December 31, 2016 the Company had $146,000 and $50,500, respectively, of prepaid costs related to the license subscription.~~respectively.

13. Employee Benefit Plans

The Company has a defined contribution profit sharing 401(k) plan for eligible employees, which is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. Employees are entitled to make tax-deferred contributions of up to the maximum amount allowed by law of their eligible compensation.

The Company also has a non-qualified deferred compensation plan for certain executives, key employees and non-employee directors through which participants may elect to postpone the receipt and taxation of a portion of their compensation, including stock-based compensation, received from the Company. The non-qualified deferred compensation plan allows eligible participants to defer up to 80% of their base salary and up to 100% of other types of compensation. The plan also allows for matching and discretionary employer contributions. Employee deferrals are deemed 100% vested upon contribution. Distributions from the plan are made upon retirement, death, separation of service, specified date or upon the occurrence of an unforeseeable emergency. Distributions can be paid in a variety of forms from lump sum to installments over a period of years. Participants in the plan are entitled to select from a wide variety of investments available under the plan and are allocated gains or losses based upon the performance of the investments selected by the participant. All gains or losses are allocated fully to plan participants and the Company does not guarantee a rate of return on deferred balances. Assets related to this plan consist of corporate-owned life

insurance contracts and are included in other assets in the condensed consolidated balance sheets. Participants have no rights or claims with respect to any plan assets and any such assets are subject to the claims of the Company’s general creditors.

Contributions to the plans are made by both the employee and the Company. Company contributions to the 401(k) plan are based on the level of employee contributions and are immediately vested. The Company’s matching contributions to the 401(k) plan for the three months ended June 30, 2018 and 2017, ~~and 2016,~~ were ~~approximately $0.6~~$0.8 million and ~~$0.4~~$0.6 million, respectively, and ~~$1.3~~$1.6 million and ~~$0.8~~$1.3 million for the six months ended June 30, 2018 and 2017, ~~and 2016,~~ respectively. ~~The Company expects to make contributions to the non-qualified deferred compensation plan related to the three months ended June 30, 2017 of approximately $3,000.~~ Future matching or profit sharing contributions to the plans are at the Company’s sole discretion.

14. Segment Data

The ~~Company’s operations are~~Company is comprised of two reportable segments: the manufacture and sale of CEWs, batteries, accessories, extended warranties and other products and services (the “TASER Weapons” segment); and the software and sensors business, which includes the ~~TASER Cam, Axon cameras~~sale of devices, wearables, applications, cloud and ~~related accessories, Evidence.com, and the Axon Artificial Intelligence team ("Axon AI")~~mobile products (collectively, the “Software and Sensors” segment). ~~The~~Within the Software and Sensors segment, the Company specifies sales of products and services. Revenue from the Company's “products” in the Software and Sensors segment are generally sales of sensors, including on-officer body cameras, Axon Fleet cameras, other hardware sensors, warranties on sensors,and other products, and is sometimes referred to as Sensors and Other revenue. Revenue from the Company's “services” in the Software and Sensors segment comprise sales related to the Axon Cloud, which includes Evidence.com, cloud-based evidence management software revenue, other recurring cloud-hosted software revenue and related professional services, and is sometimes referred to as Axon Cloud revenue. Within the Software and Sensors segment, the Company includes only revenues and costs attributable to ~~the Software and Sensors products in~~ that ~~segment. Included in Software and Sensors~~ segment ~~costs are:~~which include: costs of sales for both products and services, ~~overhead allocation based on~~ direct labor, selling ~~expense~~expenses for the ~~Software and Sensors~~ sales team, product management ~~expenses, trade shows~~ and ~~related expenses, and research and development~~R&D for products included, inor to be included, within the Software and Sensors segment. All other costs are included in the TASER Weapons segment. The Company’s Chief Executive Officer, who is the CODM, ~~does~~is not ~~review assets~~provided asset information by segment, ~~as part of the financial information provided;~~and therefore, ~~only limited~~no asset information is ~~provided in the following tables.~~provided.

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

Three Months Ended June 30, 2017 Three Months Ended June 30, 2016

TASER
Weapons
Software and Sensors Total
TASER
Weapons
Software and Sensors Total
Product sales $ 53,016
$ 13,859
$ 66,875
$ 45,536
$ 8,331
$ 53,867
Service revenue —
12,768
12,768
—
4,889
4,889
Net sales 53,016
26,627
79,643
45,536
13,220
58,756
Cost of products sold 16,078
14,094
30,172
14,489
5,565
20,054
Cost of services delivered —
3,834
3,834
—
1,403
1,403
Gross margin 36,938
8,699
45,637
31,047
6,252
37,299
Sales, general and administrative 17,492
14,332
31,824
14,684
9,695
24,379
Research and development 1,863
11,126
12,989
1,245
5,465
6,710
Income (loss) from operations $ 17,583
$ (16,759 ) $ 824
$ 15,118
$ (8,908 ) $ 6,210
Purchase of property and equipment $ 2,641
$ 757
$ 3,398
$ 594
$ 90
$ 684
Purchase of intangible assets 56
19
75
51
36
87
Depreciation and amortization 716
1,080
1,796
560
382
942



	Three Months Ended June 30, 2018							Three Months Ended June 30, 2017 ⁽¹⁾
	TASER Weapons		Software and Sensors			Total		TASER Weapons		Software and Sensors			Total
Net sales from products ⁽²⁾	$	60,624	$	16,097		$	76,721	$	53,016	$	13,859		$	66,875
Net sales from services ⁽³⁾	—		22,505			22,505		—		12,768			12,768
Net sales	60,624		38,602			99,226		53,016		26,627			79,643
Cost of product sales	17,681		13,406			31,087		16,078		14,094			30,172
Cost of service sales	—		4,996			4,996		—		3,834			3,834
Cost of sales	17,681		18,402			36,083		16,078		17,928			34,006
Gross margin	42,943		20,200			63,143		36,938		8,699			45,637
Sales, general and administrative	21,920		17,423			39,343		17,492		14,332			31,824
Research and development	4,019		14,482			18,501		1,863		11,126			12,989
Income (loss) from operations	$	17,004	$	(11,705	)	$	5,299	$	17,583	$	(16,759	)	$	824

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Six Months Ended June 30, 2017 Six Months Ended June 30, 2016
TASER
Weapons Software and Sensors Total TASER
Weapons Software and Sensors Total
Product sales $ 110,687
$ 23,679
$ 134,366
$ 91,370
$ 13,172
$ 104,542
Service revenue —
24,519
24,519
—
9,744
9,744
Net sales 110,687
48,198
158,885
91,370
22,916
114,286
Cost of products sold 34,104
23,140
57,244
28,566
8,943
37,509
Cost of services delivered —
7,334
7,334
—
2,576
2,576
Gross margin 76,583
17,724
94,307
62,804
11,397
74,201
Sales, general and administrative 34,708
27,973
62,681
29,956
19,256
49,212
Research and development 4,075
21,377
25,452
2,365
11,272
13,637
Income (loss) from operations $ 37,800
$ (31,626 ) $ 6,174
$ 30,483
$ (19,131 ) $ 11,352
Purchase of property and equipment $ 3,574
$ 2,167
$ 5,741
$ 1,665
$ 299
$ 1,964
Purchase of intangible assets 120
50
170
113
72
185
Purchase of property and equipment and intangible assets in connection with business acquisition —
8,526
8,526
—
—
—
Depreciation and amortization 1,557
1,843
3,400
1,132
711
1,843



	Six Months Ended June 30, 2018							Six Months Ended June 30, 2017 ⁽¹⁾
	TASER Weapons		Software and Sensors			Total		TASER Weapons		Software and Sensors			Total
Net sales from products ⁽²⁾	$	124,148	$	33,547		$	157,695	$	110,687	$	23,679		$	134,366
Net sales from services ⁽³⁾	—		42,746			42,746		—		24,519			24,519
Net sales	124,148		76,293			200,441		110,687		48,198			158,885
Cost of product sales	38,224		25,297			63,521		34,104		23,140			57,244
Cost of service sales	—		9,316			9,316		—		7,334			7,334
Cost of sales	38,224		34,613			72,837		34,104		30,474			64,578
Gross margin	85,924		41,680			127,604		76,583		17,724			94,307
Sales, general and administrative	43,185		31,917			75,102		34,708		27,973			62,681
Research and development	6,979		26,641			33,620		4,075		21,377			25,452
Income (loss) from operations	$	35,760	$	(16,878	)	$	18,882	$	37,800	$	(31,626	)	$	6,174

⁽²⁾ Software and Sensors “products” revenue consists of sales of sensors, including on-officer body cameras, Axon Fleet cameras, other hardware sensors, warranties on sensors, and other products, and is sometimes referred to as Sensors and Other revenue.

⁽³⁾Software and Sensors “services” revenue comprises sales related to the Axon Cloud, which includes Evidence.com, cloud-based evidence management software revenue, other recurring cloud-hosted software revenue and related professional services and is sometimes referred to as Axon Cloud revenue.

15. Business ~~Acquisitions~~

~~Axon Artificial Intelligence~~Acquisition

On ~~December 30, 2016,~~May 3, 2018, the acquisition date, the Company acquired all of the outstanding ownership interests of VIEVU, a public safety camera and cloud-based evidence management system provider for law enforcement agencies.

The estimated purchase price of $17.3 million consisted of $5.0 million in cash, net of cash acquired of $0.1 million, and $2.4 million or 58,843 shares of the Company's common stock issued to VIEVU’s parent company, Safariland, LLC (“Safariland”). Additionally, the purchase price consisted of contingent consideration of up to $6.0 million or 141,226 additional shares of common stock if certain ~~intellectual property from Fossil Group, Inc.~~conditions relating to retention of certain VIEVU customers are met as of the first and ~~Fossil Vietnam, Limited Liability Company. This transaction,~~second anniversaries of the acquisition date. The fair value of the contingent consideration as of the acquisition date was $5.8 million. The purchase price also included the fair value of a long-term Product Development and Supplier Agreement (the “Supply Agreement”) with Safariland, pursuant to which Safariland will be the Company’s preferred provider of holsters for its CEW products. The estimated fair value of the Supply Agreement as of the acquisition date was $4.2 million, a portion of which was recorded within accrued liabilities and the remaining portion recorded within other long-term liabilities.

Pursuant to ASC 805, the acquisition of VIEVU has been accounted for as a business combination, under ~~ASC 805, was part~~the acquisition method of ~~the Company's efforts to expand on the Axon platform by transforming workflows using computer vision~~accounting, which resulted in acquired assets and ~~natural language with machine learning techniques in order to analyze data and multimedia captured throughout the course of policing. Additionally,~~assumed liabilities being measured at their estimated fair values as ~~part~~ of the acquisition ~~a team of seven researchers and software engineers joined the Company as part~~date. As of the ~~newly established Axon AI team.~~acquisition date, goodwill was measured as the excess of consideration transferred, which is also generally measured at fair value, over the net acquisition date fair values of the assets acquired and liabilities assumed. The final purchase price ~~totaling approximately $6.8 million, consisted of $3.5 million cash at close,~~ and ~~up to an additional $3.3 million of consideration contingent upon the satisfaction of certain conditions. As of June 30, 2017, no amounts were earned relative to the earn-out provisions.~~

~~The Company's~~ purchase price allocation iswill be determined when the Company has completed the detailed valuations and necessary calculations. The final purchase price and purchase price allocation could differ materially from the preliminary ~~and subject to revision as more detailed analyses are completed and additional information about~~allocation disclosed below. The final allocation may include (1) changes in the fair value of the contingent consideration and Supply Agreement, and (2) changes in fair values of assets ~~become available.~~and liabilities, including intangible assets and goodwill.

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

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

The Company assigned the goodwill to the Software and Sensors segment. The acquired developed technology was assigned an amortization period of 5 years. Costs related to the acquisition were expensed as incurred and were considered insignificant.

~~Dextro, Inc.~~

On February 8, 2017, the Company acquired all of the outstanding common stock of Dextro, Inc. ("Dextro"), a Delaware corporation, for a total purchase price of $7.5 million. Dextro's technology provides one of the first computer-vision and deep learning systems to make the visual contents in video searchable in real time. This technology will allow law enforcement agencies and departments to have the ability to quickly isolate and analyze critical seconds of footage from massive amounts of video data. The technology acquired, along with the Dextro employees that joined the Company, will be key additions to the Axon AI team.

~~Table of Contents~~

~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

The purchase price of $7.5 million consisted primarily of cash, net of cash acquired, and contingent consideration of $1.0 million representing potential earn-outs to former stockholders based on predetermined future financial metrics. The Company also agreed to additional earn-out provisions totaling approximately $1.4 million based, in part, on predefined future financial metrics. The additional earn-outs were not included as part of the purchase price and will be expensed as compensation in the period earned. As of June 30, 2017, no amounts were earned relative to the earn-out provisions.

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


Accounts receivable	$	12		$	1,776
Inventory				2,626
Prepaid expenses and other assets				314
Property and equipment	46			459
Developed technology	5,800
Contract assets				1,472
Intangible assets				4,500
Goodwill	2,680			9,870
Deferred income tax liabilities, net	(1,051		)
Accounts payable and accrued liabilities				(3,172		)
Deferred revenue				(543		)
Total purchase price	$	7,487		$	17,302

The Company has assigned the goodwill to the Software and Sensors segment. Identifiable ~~definite lived~~definite-lived intangible assets were assigned a total weighted average amortization period of ~~3.4~~5.1 years. ~~Dextro~~VIEVU has been included in the Company's consolidated results of operations subsequent to the acquisition date. Revenue and loss from operations included in the Company's consolidated financial statements from the acquisition date through June 30, 2018 were $2.2 million and $1.2 million, respectively. Pro forma results of operations for ~~Dextro~~VIEVU have not been presented because they are not material to the consolidated results of operations. In connection with the acquisition, the Company incurred and expensed costs of approximately ~~$0.2~~$0.7 million, which included legal, accounting and other third-party expenses related to the transaction. Subsequent to the acquisition date, the Company recorded an expense of $0.6 million related to purchase commitments assumed in the VIEVU business combination that exceeded estimated future demand.

~~16. Subsequent Event~~

On July 1, 2017, the Company entered into an agreement with Breon Enterprises, Pty Ltd. ("Breon"), an Australian corporation and the Company's licensed distributor of TASER CEWs and Axon cameras and related accessories in Australia, Fiji, New Guinea and New Zealand. Upon execution of the agreement, and for consideration of $4.3 million, Breon's distribution rights would be terminated which is intended to help the Company expand its internal sales teams and grow its presence across the Australian region. The transaction will be accounted for in the third quarter of fiscal 2017.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of the Company’s financial condition as of June 30, ~~2017,~~2018, and results of operations for the ~~three and~~ six months ended June 30, ~~2017~~2018 and ~~2016.~~2017. The following discussion may be understood more fully by reference to the consolidated financial statements, notes to the consolidated financial statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations section contained in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~

2017.

Certain statements contained in this report ~~may be deemed to be forward-looking statements as defined by~~that are not historical are “forward-looking statements” within the ~~Private~~meaning of Section 27A of the Securities ~~Litigation Reform~~ Act of ~~1995,~~1933, as amended (the “Securities Act”), and Section 21E of the ~~Company intends~~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 ~~created thereby.~~provided by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements ~~may~~ relate to, among other things: our ~~strategies relating~~intentions and beliefs about future development efforts and activities, including our intentions to invest in R&D as well as the development of new product and service lines and enhanced features for our ~~Axon business;~~existing product and service lines; intentions to shift an increasing amount of business to a subscription model; our need that customers upgrade and replace existing conducted electrical weapons (“CEW”) units and the willingness of customers to do so; that we may have more sales denominated in foreign currencies in 2018; 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 2018; 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 ~~income trends~~and the reasons for that belief; our intention to continue to pursue the personal security market; our intention to grow direct sales; the sufficiency of our facilities and our ~~ability~~strategy to ~~realized deferred~~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 intention to apply for and prosecute our patents; that selling, general and administrative expense will increase in 2018; that research and development expenses will increase in 2018; the timing of the resolution of uncertain tax ~~assets;~~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; our belief that customers will honor multi-year contracts despite the existence of appropriations, ~~(or similar)~~termination for convenience. or similar clauses; our belief

that customers will renew their Evidence.com service subscriptions at the end of the contractual term; 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: potential joint ventures, mergers and acquisitions, stock repurchases and hedging activities; the safety of our products; our litigation strategy, including the outcome of legal proceedings in which we are currently involved; ~~that we may make further repurchases~~expectations regarding increased operating leverage; our expectations of ~~our common stock;~~ the ~~expected expiration~~probability of ~~outstanding letters~~achievement of ~~credit;~~performance goals in connection with the CEO Performance Award; the impact of a loss of customer data, a breach of security or an extended outage; the effect of current and future tax strategies; the fluctuations in our intention to reinvest earnings from foreign operations outside the United States; our intention to hold investments to maturity; that foreign sales and expenses may increase; the remediation of identified material weaknesses in internal controls over financial reporting; our estimated effective tax ~~rate for full year 2017; that we may engage in currency hedging activities;~~rate; the impact of the U.S. Tax Cuts and Jobs Act (the “Tax Act”); the impact of recently adopted and future accounting ~~standards. We caution that these statements are qualified by important factors that could cause actual results to differ materially~~standards; the impact of Accounting Standards Update (“ASU”) 2014-09, Revenue from ~~those reflected by the forward looking statements herein. Such factors include, but are not limited to: market acceptance of our products; our dependence on sales of our TASER X26P~~Contracts with Customers (“ASU 2014-09”) and ~~X2 CEWs; acceptance of our Evidence.com software as a service delivery model by our law enforcement customers; our ability to design, introduce~~ASC Subtopic 340-40, Other Assets and ~~sell new products; delays in development schedules; rapid technological change and competition; product defects; breach of our security measures resulting~~

in unauthorized access to customer data; outages and disruptions relating to our Evidence.com service; budgetary and political constraints of prospects and customers; the length of our sales cycle and our ability to realize benefits from our marketing and selling efforts; our exposure to cancellations of government contracts due to appropriation clauses; changes in civil forfeiture laws; the long-term revenue recognition cycle for our SaaS Evidence.com product; our reliance on third party cloud-based storage providers; litigation risks resulting from alleged product-related injuries and media publicity concerning allegations of deaths occurring after use of the TASER deviceDeferred Costs - Contracts with Customers ("ASC 340-40") (collectively, “Topic 606”); and the ~~negative impact this publicity could have on sales; the outcome~~ultimate resolution of pending or future litigation; our ability to protect our intellectual property as well as intellectual property infringement claims and relating litigation costs; challenges obtaining and enforcing our patent rights in foreign countries; risks of governmental regulations, including regulations of our products by the United States Consumer Product Safety Commission, regulation of our products as a "crime control" product by the Federal government, state and local government regulation and foreign regulation and the adverse effects that could result from our products being classified as firearms by the United States Bureau of Alcohol, Tobacco, Firearms and Explosives; regulatory and political challenges presented by international markets; the possibility that the United States may withdraw from or materially modify the North American Free Trade Agreement; the adverse effect of the United Kingdom’s exit from the European Union; our compliance with regulations governing the environment, including but not limited to, regulations within the European Union; regulations relating to voice, data and communications services; regulations relating to conflict minerals; our dependence on third party suppliers for key components of our products; component shortages; rising costs of raw materials and transportation relating to petroleum prices; that we may experience declines in gross margins due to a shift in product sales from CEWs to Axon devices; our ability to manage our growth and increase manufacturing production to meet demand; establishment and expansion of our direct and indirect distribution channels; our ability to pursue sales directly with customers; risks relating to acquisitions and joint ventures; goodwill impairment; catastrophic events; the adverse effects on our operations and financial results from foreign currency fluctuations; fluctuations in our effective tax rate; counter-party risks relating to cash balances held in excess of FDIC insurance limits; employee retention risks; volatility in our stock price; quarterly fluctuations in our operating results; and other factors identified in documents filed by us with the Securities and Exchange Commission,statement items requiring critical accounting estimates, including those set forth in our Form 10-K for the year ended December 31, ~~2016.~~

~~Overview~~2017.

Overview

Axon Enterprise, Inc.’s (the “Company” or “Axon” or “we” or “our”) core mission is to protect life, ~~and~~ to protect truth and to reduce social conflict through developing and selling technologies that make communities safer. We are highly focused on disrupting existing categories and bringing public safety technology into the 21st century. We are the market leader in the development, manufacture and sale of conducted electrical weapons (“CEWs”) and other electronic weapons designed for use in law enforcement, military, corrections, private security and personal defense. ~~To address challenges faced by law enforcement officers subsequent to post-incident, we~~We have also developed a fully integrated hardware and cloud-based software solution to provide our law enforcement customers the capabilities to capture, securely store, manage, share and analyze video and other digital evidence.

Our strategic growth areas are TASER weapons, Sensors hardware including on-officer body cameras and Axon Fleet in-car video systems, our Evidence.com connected software network, and Axon Records and Computer Aided Dispatch software. These value streams exist within an estimated $7.7 billion total addressable market, comprising TASER weapons ($1.5 billion), hardware sensors ($0.7 billion), and cloud-based public safety software ($5.5 billion.)

The $1.5 billion TASER Weapons total addressable market estimates 660,000 domestic patrol officers and 1,800,000 immediately addressable international patrol officers at an average revenue of $600 per year ($50 per user per month) including the weapon, cartridges, batteries, and enhanced services currently under development.

The $5.5 billion cloud-based public safety software total addressable market estimates 1,000,000 domestic patrol officers with annual digital evidence management revenue of $750 per year ($63 per user per month, which reflects Axon current list pricing), 1,000,000 domestic police officers with annual advanced intelligence and analytics revenue of $350 per year ($29 per user per month based on estimated market pricing), 400,000 domestic patrol vehicle license evidence management annual revenue of $925 ($77 per user per month, which reflects 60% allocation to software of Axon's $129 per month listed pricing), 2,100,000 public safety employees with annual records management & computer dispatch revenue of $1,500 per year ($125 per user per month based on estimated market pricing and analysis of current existing records management systems (“RMS”) and computer aided dispatch (“CAD”) contracts), and 1,000,000 immediately addressable international officers with annual revenue of $750 per year ($63 per user per month based on Axon's current listed software pricing).

The hardware sensors $0.7 billion total addressable market estimates 660,000 domestic patrol officers and 1,000,000 immediately addressable international officers with annual camera and dock revenue of $200 per year ($16-$19 per user per month based on Axon's listed pricing), 400,000 domestic patrol vehicles with annual hardware revenue of $600 per year ($50 per user per month based on 40% of allocation to hardware of Axon's $129 per month listed pricing), and 660,000 domestic patrol officers with annual revenue of $120 per year ($10 per user per month based on Axon's listed pricing) for the Signal Sidearm product.

Our long-term financial strategy includes shifting our revenue, contracts, and cash flows from book-and-ship hardware transactions to multi-element, multi-year, subscription or recurring payment plans. During the three months ended June 30, 2018, 52% of our consolidated revenues were recognized from contracts with multiple performance obligations, while within our TASER Weapons and Software and Sensors segments, approximately 25% and 96%, respectively, were recognized from contracts containing multiple performance obligations. Recurring revenue refers to those contracts with multiple performance obligations, which we break out in more detail in the Critical Accounting Estimates.

As of June 30, 2018, we have booked 305,200 cloud-based software licenses on the Axon Cloud network and we have annual recurring run-rate Axon Cloud and Sensors and Other revenue of $92.7 million. Annual recurring run-rate revenue is calculated by annualizing our most previous reported month's recurring license, integration, warranty and storage revenue. Our long-term goal is to transition a majority of our customers to recurring payment plan or subscription contracts.

We are also highly focused on driving operating leverage and profitability within our two reportable segments, TASER Weapons and Software and Sensors.

Results of Operations

Three Months Ended June 30, ~~2017~~2018 Compared to the Three Months Ended June 30, ~~2016~~2017

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):


	Three Months Ended June 30,									Three Months Ended June 30,
	2017				2016					2018					2017 ⁽¹⁾
Net sales from products										$	76,721		77.3	%	$	66,875	84.0	%
Net sales from services										22,505			22.7		12,768		16.0
Net sales	$	79,643	100.0	%	$	58,756		100.0	%	99,226			100.0		79,643		100.0
Cost of products sold and services delivered	34,006		42.7		21,457			36.5
Cost of product sales										31,087			31.3		30,172		37.9
Cost of service sales										4,996			5.0		3,834		4.8
Cost of sales										36,083			36.4		34,006		42.7
Gross margin	45,637		57.3		37,299			63.5		63,143			63.6		45,637		57.3
Operating expenses:
Sales, general and administrative	31,824		40.0		24,379			41.5		39,343			39.6		31,824		40.0
Research and development	12,989		16.3		6,710			11.4		18,501			18.6		12,989		16.3
Total operating expenses	44,813		56.3		31,089			52.9		57,844			58.3		44,813		56.3
Income from operations	824		1.0		6,210			10.6		5,299			5.3		824		1.0
Interest and other income (expense), net	1,684		2.1		(123		)	(0.2	)	(295		)	(0.3	)	1,684		2.1
Income before provision for income taxes	2,508		3.1		6,087			10.4		5,004			5.0		2,508		3.1
Provision for income taxes	232		0.3		2,437			4.1
Provision for (benefit from) income taxes										(3,481		)	(3.5	)	232		0.3
Net income	$	2,276	2.9	%	$	3,650		6.2	%	$	8,485		8.6	%	$	2,276	2.9	%

⁽¹⁾ Amounts for the three months ended June 30, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.

~~Net sales to~~The following table presents the ~~U.S. and other countries are summarized as follows (dollars in~~Company's revenues disaggregated by geography (in thousands):


	Three Months Ended June 30,								Three Months Ended June 30,
	2017				2016				2018				2017 ⁽¹⁾
United States	$	66,200	83.1	%	$	52,219	88.9	%	$	78,731	79	%	$	66,200	83	%
Other Countries	13,443		16.9		6,537		11.1
Other countries									20,495		21		13,443		17
Total	$	79,643	100.0	%	$	58,756	100.0	%	$	99,226	100	%	$	79,643	100	%

Net Sales

Net sales by product line were as follows (dollars in thousands):


	Three Months Ended June 30,								Dollar Change				Percent Change		Three Months Ended June 30,								Dollar Change			Percent Change
	2017				2016							2018					2017 ⁽¹⁾						Dollar Change			Percent Change
TASER Weapons segment:									Dollar Change				Percent Change
TASER X26P	$	16,235	20.4	%	$	14,538	24.7	%	$	1,697			11.7	%	$	18,146	18.3	%	$	16,235	20.4	%	$	1,911		11.8	%
TASER X2	16,052		20.2		14,008		23.8		2,044				14.6		18,362		18.5		16,052		20.2		2,310			14.4
TASER Pulse and Bolt	801		1.0		1,055		1.8		(254		)		(24.1	)	1,101		1.1		801		1.0		300			37.5
Single cartridges	14,867		18.7		10,928		18.6		3,939				36.0		17,243		17.4		14,867		18.7		2,376			16.0
Extended warranties including TAP	2,991		3.8		2,306		3.9		685				29.7
Extended warranties															3,738		3.8		2,991		3.8		747			25.0
Other	2,070		2.6		2,701		4.6		(631		)		(23.4	)	2,034		2.0		2,070		2.6		(36		)	(1.7	)
Total TASER Weapons segment	53,016		66.6		45,536		77.5		7,480				16.4		60,624		61.1		53,016		66.6		7,608			14.4
Software and Sensors segment:
Axon Body	3,752		4.7		2,194		3.7		1,558				71.0		4,780		4.8		3,752		4.7		1,028			27.4
Axon Flex	3,851		4.8		1,521		2.6		2,330				153.2		1,535		1.5		3,851		4.8		(2,316		)	(60.1	)
Axon Fleet															2,715		2.7		—		—		2,715			*
Axon Dock	2,783		3.5		1,997		3.4		786				39.4		2,119		2.1		2,783		3.5		(664		)	(23.9	)
Evidence.com	12,756		16.0		4,887		8.3		7,869				161.0
Evidence.com and cloud services															20,357		20.5		12,756		16.0		7,601			59.6
TASER Cam	766		1.0		1,624		2.8		(858		)		(52.8	)	762		0.8		766		1.0		(4		)	(0.5	)
Extended warranties including TAP	1,619		2.0		776		1.3		843				108.6
Extended warranties															2,870		2.9		1,619		2.0		1,251			77.3
Other	1,100		1.4		221		0.4		879				397.7		3,464		3.5		1,100		1.4		2,364			214.9
Total Software and Sensors segment	26,627		33.4		13,220		22.5		13,407				101.4		38,602		38.9		26,627		33.4		11,975			45.0
Total net sales	$	79,643	100.0	%	$	58,756	100.0	%	$	20,887			35.5		$	99,226	100.0	%	$	79,643	100.0	%	$	19,583		24.6

* Not meaningful

Net unit sales for TASER Weapons handles and other products and Software and Sensors segment products were as follows:


	Three Months Ended June 30,		Unit Change			Percent Change		Three Months Ended June 30,					Unit Change			Percent Change
	2017	2016			2018				2017				Unit Change			Percent Change
TASER X26P	18,198	16,559	Unit Change	1,639		Percent Change		9.9	%	18,664		18,198			466			2.6	%
TASER X2	15,390	13,479	1,911			14.2		15,537			15,390		147			1.0
TASER Pulse and Bolt	2,347	3,020	(673	)		(22.3	)	3,158			2,347		811			34.6
Cartridges	579,282	414,828	164,454			39.6		611,136			579,282		31,854			5.5
Axon Body								20,407			26,882		(6,475	)		(24.1	)
Axon Flex	9,373	3,668	5,705			155.5		3,281			9,373		(6,092	)		(65.0	)
Axon Body	26,882	9,686	17,196			177.5
Axon Fleet								2,079			—		2,079			*
Axon Dock	8,269	3,402	4,867			143.1		4,534			8,269		(3,735	)		(45.2	)
TASER Cam	1,336	3,132	(1,796	)		(57.3	)	1,491			1,336		155			11.6

* Not meaningful

Net sales were ~~$79.6~~$99.2 million and ~~$58.8~~$79.6 million for the three months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, an increase of ~~$20.9~~$19.6 million or ~~35.5%~~24.6%. International revenues were ~~$13.4~~$20.5 million and ~~$6.5~~$13.4 million for the three months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, an increase of ~~$6.9~~$7.1 million or ~~105.6%~~52.5%.

Net sales for the TASER Weapons segment were ~~$53.0~~$60.6 million and ~~$45.5~~$53.0 million for the three months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, an increase of ~~$7.5~~$7.6 million or ~~16.4%~~14.4%. The Company ~~continues to experience~~ increased ~~purchases under~~sales of its ~~Officer Safety Plan~~TASER X26P and ~~TASER 60 installment payment programs. During the first quarter of 2017, the Home Office of the U.K. government approved the Company's~~X2 Smart

Weapons for sale which resulted in increased weapons revenues within the U.K. of $0.7 million for the three months ended June 30, 2017 as compared to the same period in 2016. Additionally, the Company increased cartridge sales by ~~$3.9~~$4.2 million to ~~$14.9~~$36.5 million during the quarter ended June 30, ~~2017~~2018 as compared to ~~$10.9~~$32.3 million during ~~2016~~the same period in 2017, which was primarily attributable to ~~an increase in total weapons in~~increased sales under the ~~field.~~Officer Safety Plan and TASER 60 purchase programs.

Net sales for the Software and Sensors segment were ~~$26.6~~$38.6 million and ~~$13.2~~$26.6 million for the three months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, an increase of ~~$13.4~~$12.0 million, or ~~101.4%~~45.0%. The ~~overall increase in the Software and Sensors segment was driven by~~Company continued ~~adoption of on-officer cameras and related technologies, including the Company's Evidence.com digital evidence management software suite. Revenue related~~ to ~~the Company's Axon cameras and docks increased approximately $4.7 million. The Company is continuing~~add users to ~~enter into new contracts with domestic and international agencies seeking to deploy~~ its ~~technologies. Evidence.com revenues for~~network during the three months ended June 30, 2018 resulting in steady product revenues as well as increased aggregate users which resulted in increased Evidence.com and extended warranty revenues of $7.6 million and $1.3 million, respectively. Additionally, the Company recorded revenue of $2.7 million related to Axon Fleet, the Company's in-car camera system that was released towards the end of 2017, ~~increased $7.9 million to $12.8 million as compared to~~during the three months ended June 30, 2018 with no amounts recorded during the same period in ~~2016. This increase was primarily driven by a continued increase in active users on the Company's Evidence.com platform.~~2017.

To gain more immediate feedback regarding activity for ~~Axon camera~~Software and Sensors products and ~~Evidence.com~~ services, we also review bookings for these products. We consider bookings to be a statistical measure defined as the sales price of orders (not invoiced sales), including contractual optional periods we expect to be exercised, net of cancellations, placed in the relevant fiscal period, regardless of when the products or services ultimately will be provided. ~~Some~~Most bookings will be invoiced in subsequent periods. Due to municipal government funding rules, in some cases certain of the future period amounts included in bookings are subject to budget appropriation or other contract cancellation clauses. Although the Company has entered into contracts for the delivery of products and services in the future and anticipates the contracts will be ~~completed,~~fulfilled, if agencies do not exercise contractual options, do not appropriate funds in future year budgets, or do enact a cancellation clause, revenue associated with these bookings may not ultimately be recognized, resulting in a future reduction to bookings. Bookings related to the Company's Software and Sensors segment, net of cancellations, were ~~$81.9~~$88.9 million and ~~$72.0~~$81.9 million during the three months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, an increase of ~~$9.9~~$6.9 million, or ~~13.8%~~8.4%.

The chart below illustrates the Company's Software and Sensors segment quarterly bookings for each of the previous six fiscal quarters (in thousands):

Cost of ~~Products Sold~~Product and ~~Services Delivered~~Service Sales

Cost of ~~products sold~~product and ~~services delivered~~service sales was ~~$34.0~~$36.1 million and ~~$21.5~~$34.0 million for the three months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, an increase of ~~$12.5~~$2.1 million, or ~~58.5%~~6.1%. As a percentage of net sales, cost of ~~products sold~~product and ~~services delivered increased~~service sales decreased to ~~42.7%~~36.4% for the three months ended June 30, ~~2017~~2018 compared to ~~36.5%~~42.7% during the same period in ~~2016.~~2017. The Company noted no significant changes in variable manufacturing costs during the three months ended June 30, 2018 as compared to the same period in 2017.

Within the TASER Weapons segment, cost of ~~products sold~~product sales increased to ~~$16.1~~$17.7 million for the three months ended June 30, ~~2017~~2018 from ~~$14.5~~$16.1 million for the same period in ~~2016,~~2017 as a result of higher sales volumes, and decreased as a percentage of sales to ~~30.3%~~29.2% from ~~31.8%~~30.3%, respectively.

Within the Software and Sensors segment, cost of ~~products sold~~product and ~~services delivered~~service sales increased to ~~$17.9~~$18.4 million for the three months ended June 30, ~~2017~~2018 from ~~$7.0~~$17.9 million for the same period in ~~2016. Cost~~2017 as a result of ~~products sold~~higher sales volumes, and ~~services delivered~~decreased as a percentage of sales ~~increased~~ to ~~67.3%~~47.7% for the three months ended June 30, ~~2017~~2018 from ~~52.7%~~67.3% for the same period in 2016. The overall increase in costs was driven by higher sales volumes, with no significant changes in product costs experienced during the three months ended June 30, 2017 as compared to the same period in 2016.2017.

Gross Margin

Gross margin increased ~~$8.3~~$17.5 million to ~~$45.6~~$63.1 million for the three months ended June 30, ~~2017~~2018 compared to ~~$37.3~~$45.6 million for the same period in ~~2016.~~2017. As a percentage of net sales, gross margin ~~was 57.3%~~increased to 63.6% for the three months ended June 30, ~~2017~~2018 compared to ~~63.5%~~57.3% for the same period in ~~2016.~~2017, which was primarily attributable to increased leveraging of fixed costs related to cloud storage.

As a percentage of net sales, gross margin for the TASER Weapons segment ~~was~~increased slightly to 70.8% from 69.7% ~~compared to 68.2%~~ for the three months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. As a percentage of net sales, gross margin for the Software and Sensors segment was ~~32.7%~~52.3% and ~~47.3%~~32.7% for the three months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. Within the Software and Sensors segment, hardware gross margin was ~~negative 1.7%~~16.7% for the three months ended June 30, ~~2017 and and 33.2%~~2018 compared to a negative 1.7% for the same period in ~~2016,~~2017, while the service margins were ~~70.0%~~77.8% and ~~71.3%~~70.0% during those same periods, respectively. The ~~decrease~~increase in hardware gross margins during the three months ended June 30, 2018 was primarily attributable to ~~higher~~accounting changes required under the new revenue accounting standard. Previously, the level of discounting ~~which~~in the Company's contracts resulted in a portion of the contractual consideration allocated ~~value of~~to the delivered hardware to be recognized as revenue ratably over the ~~contractual~~Evidence.com subscription term, while the full ~~value~~cost of the ~~cost~~product was recognized when the hardware was delivered to the customer resulting in lower gross margins initially. Under the new revenue accounting standard, generally the full amount of ~~goods sold~~revenue related to the delivered hardware is recognized ~~when control~~in the period in which it is ~~transfered to~~delivered resulting in better matching of the ~~customer.~~revenues and related costs. The ~~decrease~~increase in service margins during the three months ended June 30, 2018 as compared to the same period in 2017 was ~~primarily~~ attributable to the reduction of non-recurring expenses related to the Company's data migration to aits new cloud-storage ~~provider.~~provider that was completed in 2018, as well as increased leveraging of fixed costs related to cloud-storage.

Sales, General and Administrative Expenses

~~Sales, general and administrative (“~~SG~~&A”)~~&A expenses were comprised as follows (dollars in thousands):

Three Months Ended June 30, Dollar
Change Percent
Change
2017 2016
Salaries, benefits and bonus $ 13,783
$ 9,327
$ 4,456
47.8 %
Stock-based compensation 2,155
1,459
696
47.7
Professional, consulting and lobbying 4,919
4,861
58
1.2
Sales and marketing 4,450
3,520
930
26.4
Travel and meals 2,688
2,068
620
30.0
Other 3,829
3,144
685
21.8
Total sales, general and administrative expenses $ 31,824
$ 24,379
$ 7,445
30.5
Sales, general, and administrative as a percentage of net sales 40.0 % 41.5 %



	Three Months Ended June 30,						Dollar Change		Percent Change
	2018			2017 ⁽¹⁾			Dollar Change		Percent Change
Total sales, general and administrative expenses	$	39,343		$	31,824		$	7,519	23.6
Sales, general, and administrative as a percentage of net sales	39.6		%	40.0		%

⁽¹⁾ Amounts related to commissions expense for the three months ended June 30, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.

Within the TASER Weapons segment, SG&A expenses ~~were $31.8~~increased $4.4 million, ~~and $24.4~~or 25.3%, to $21.9 million during the three months ended June 30, 2018 as compared to $17.5 million for the three months ended June 30, ~~2017~~2017. Of the increase, $2.0 million related to higher salaries, benefits, bonus and ~~2016, respectively, an increase~~stock-based compensation related primarily to sales and marketing, professional staff and general support staff, as well as increased professional and consulting costs of ~~$7.4~~$1.4 million ~~or 30.5%. As a percentage of total net sales, SG&A expenses decreased~~primarily related to ~~40.0% for the three months ended June 30, 2017 compared to 41.5% for the same period in 2016.~~

~~SG&A by type and by segment was as follows (dollars in thousands):~~

Three Months Ended June 30, Dollar Change Percent Change
2017 2016
TASER Weapons segment:
Salaries, benefits and bonus $ 6,993
22.0 % $ 5,150
21.1 % $ 1,843
35.8 %
Stock-based compensation 1,432
4.5
863
3.5
569
65.9
Professional, consulting and lobbying 2,408
7.6
2,932
12.0
(524 ) (17.9 )
Sales and marketing 2,254
7.1
2,102
8.6
152
7.2
Travel and meals 1,245
3.9
964
4.0
281
29.1
Other 3,160
9.9
2,673
11.0
487
18.2
Total TASER Weapons segment 17,492
55.0
14,684
60.2
2,808
19.1
Software and Sensors segment:
Salaries, benefits and bonus 6,790
21.3
4,177
17.1
2,613
62.6
Stock-based compensation 723
2.3
596
2.4
127
21.3
Professional, consulting and lobbying 2,511
7.9
1,929
7.9
582
30.2
Sales and marketing 2,196
6.9
1,418
5.8
778
54.9
Travel and meals 1,443
4.5
1,104
4.5
339
30.7
Other 669
2.1
471
1.9
198
42.0
Total Software and Sensors segment 14,332
45.0
9,695
39.8
4,637
47.8
Total sales, general and administrative expenses $ 31,824
100.0 % $ 24,379
100.0 % $ 7,445
30.5
increased legal fees.

Within the ~~TASER Weapons~~Software and Sensors segment, SG&A expenses increased ~~$2.8~~$3.1 million, or ~~19.1%~~21.6%, to ~~$17.5~~$17.4 million during the three months ended June 30, ~~2017~~2018 as compared to $14.7 million for the three months ended June 30, 2016. Salaries, benefits and bonus along with stock-based compensation increased approximately $2.4 million during the three months ended June 30, 2017 as compared to the same period in 2016 as the Company continued to build its infrastructure to further facilitate growth while also increasing customer facing roles. Sales and marketing expenses for the TASER Weapons segment increased $0.2 million during the three months ended June 30, 2017 as compared to the same period in 2016 due to higher spending on advertising, promotions and trade shows partially offset by lower payments to outside distributors. Professional, consulting and lobbying expense decreased $0.5 million primarily due to lower patent and trademark related legal fees, and lower spending on lobbying and medical research services than those costs incurred during the three months ended June 30, 2016. Increases in other operating expenses was primarily attributable to the overall growth of the Company's operations.

~~Within the Software and Sensors segment, SG&A increased $4.6 million, or 47.8%, to~~ $14.3 ~~million during the three months ended June 30, 2017 as compared to $9.7~~ million for the same period in ~~2016. Salaries,~~2017. The increase was primarily attributable to increased costs related to salaries, benefits and bonus, ~~along with~~inclusive of stock-based compensation ~~increased approximately $2.7 million during the three months ended June 30, 2017 as compared to 2016 as the Company continues to build its direct sales~~ and support teams and corporate infrastructure to continue to scale the Software and Sensors segment. The increase in travel and meals of $0.3 million during this time period correlated with the increase in employees during the period. The Company continued its increased consulting efforts related to increasing awareness of its Software and Sensors products during the three months ended June 30, 2017 as compared to 2016 which made up a portion of the increase in professional, consulting and lobbying expense. The Company also incurred higher accounting related fees primarily attributable to costs related to ~~the implementation of the new revenue recognition guidance that the Company will adopt during fiscal year 2018.~~

sales and marketing.

Research and Development Expenses

~~Research and development expenses (“~~R~~&D”)~~&D expenses were comprised as follows (dollars in thousands):

Three Months Ended June 30, Dollar
Change Percent
Change
2017 2016
Salaries, benefits and bonus $ 7,028
$ 3,851
$ 3,177
82.5 %
Stock-based compensation 1,666
777
889
114.4
Professional and consulting 1,429
781
648
83.0
Travel and meals 423
301
122
40.5
Other 2,443
1,000
1,443
144.3
Total research and development expenses $ 12,989
$ 6,710
$ 6,279
93.6
Research and development as a percentage of net sales 16.3 % 11.4 %

R&D expenses were $13.0 million and $6.7 million for the three months ended June 30, 2017 and 2016, respectively, an increase of $6.3 million, or 93.6%. As a percentage of net sales, R&D increased to 16.3% for the three months ended June 30, 2017 compared to 11.4% for the same period in 2016.

~~R&D by type and by segment was as follows (dollars in thousands):~~

Three Months Ended June 30, Dollar Change Percent Change
2017 2016
TASER Weapons segment:
Salaries, benefits and bonus $ 742
5.7 % $ 419
6.2 % $ 323
77.1 %
Stock-based compensation 129
1.0
142
2.1
(13 ) (9.2 )
Professional and consulting 324
2.5
156
2.3
168
107.7
Travel and meals 152
1.2
155
2.3
(3 ) (1.9 )
Other 516
4.0
373
5.6
143
38.3
Total TASER Weapons segment 1,863
14.3
1,245
18.6
618
49.6
Software and Sensors segment:
Salaries, benefits and bonus 6,286
48.4
$ 3,432
51.1
2,854
83.2
Stock-based compensation 1,537
11.8
635
9.5
902
142.0
Professional and consulting 1,105
8.5
625
9.3
480
76.8
Travel and meals 271
2.1
146
2.2
125
85.6
Other 1,927
14.8
627
9.3
1,300
207.3
Total Software and Sensors segment: 11,126
85.7
5,465
81.4
5,661
103.6
Total research and development expenses $ 12,989
100.0 % $ 6,710
100.0 % $ 6,279
93.6



	Three Months Ended June 30,						Dollar Change		Percent Change
	2018			2017			Dollar Change		Percent Change
Total research and development expenses	$	18,501		$	12,989		$	5,512	42.4
Research and development as a percentage of net sales	18.6		%	16.3		%

The Company's Software and Sensors segment was responsible for ~~approximately 90%~~61% of the overall increase in R~~&D. The main increase in~~&D expense. Within the TASER Weapons segment, ~~was approximately $0.3~~R&D expense increased $2.2 million, of which $1.7 million was related to increased salaries, benefits and bonus as the Company continues to invest in personnel allocated to the development of new CEW related ~~technologies including the newly announced Signal Sidearm. Of the $5.7~~technologies. The $3.4 million increase in R&D expense for the Software and Sensors segment ~~$3.8~~primarily consisted of a $3.7 million increase

related to salaries and benefits, inclusive of stock-based ~~compensation.~~compensation, which was partially offset by $0.5 million of lower expenses related to external professional and consulting fees. The Company ~~remains focused~~expects R&D expense to continue to increase in absolute dollars as it invests in the deployment of new CEW technologies and focuses on growing the Software and Sensors segment as it adds headcount and ~~external~~additional resources to develop new products and services ~~including records management systems,~~ to further advance its scalable cloud-connected device platform. ~~Included~~The Company believes that these investments will result in ~~other R&D~~an increase in our subscription revenue base, which over time will result in revenue increasing faster than the increase in selling, general and administrative expenses ~~for the Software~~ and ~~Services segment was $0.7 million~~research and development costs, as we reach economies of amortization of intangible assets related to acquired developed technology that was yet to be put into service. Additionally, the Company incurred higher consulting and professional fees primarily related to the development of new products in both of its segments.

scale.

Interest and Other Income ~~(Expense)~~(expense), Net

Interest and other income (expense), net was ~~$1.7 million and $(0.1)~~an expense of $0.3 million for the three months ended June 30, ~~2017~~2018 compared to income of $1.7 million for the same period in 2017. During the three months ended June 30, 2018, interest and ~~2016, respectively.~~other income amounts consisted primarily of interest income related to the Company's sales under hardware installment sale plans and investment and interest income totaling $0.9 million which was more than offset by losses on foreign currency transaction adjustments of $1.2 million. During the three months ended June 30, 2017, interest and other income amounts consisted primarily of investment interest income and interest income related to the Company's installment purchase programs offered to customers as well as foreign currency transaction adjustments. During the three months ended June 30, 2016,included investment and interest income ~~was more than offset by losses~~of $0.4 million and $1.3 million of gains on foreign currency transaction adjustments.

Provision for Income Taxes

The provision for income taxes was ~~$0.2~~a benefit of $3.5 million for the three months ended June 30, ~~2017,~~2018, which was an effective tax rate of ~~9.3%~~(69.6)%. Our estimated full year effective income tax rate for ~~2017,~~2018, before discrete period adjustments, ~~is approximately 42.2%~~was 22.8%, which is more than the federal statutory rate primarily due to ~~the impact of non-deductible losses in certain foreign jurisdictions,~~ state taxes and non-deductible expenses for items such as ~~Subpart F income,~~ meals and entertainment, ~~and~~executive compensation limitation under IRC Section 162(m), lobbying ~~fees.~~fees, an income inclusion from GILTI, offset by a reduction for foreign-derived intangible income ("FDII"). This was partially offset by R&D tax credit deductions. The effective tax rate was ~~unfavorably~~favorably impacted by ~~foreign losses for which the Company is not expected to receive~~ a ~~tax benefit. This was offset by the favorable impact of a $0.4~~$4.6 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for ~~restricted stock units~~RSUs that vested or stock options that were exercised during the ~~six~~three months ended June 30, ~~2017.~~2018. Of this amount $3.4 million related to stock options exercised by the Company's CEO in connection with the Company's follow-on offering.

Net Income

Our ~~net~~ income ~~decreased~~increased by ~~$1.4~~$6.2 million to ~~$2.3~~$8.5 million for the three months ended June 30, ~~2017~~2018 compared to ~~$3.7~~$2.3 million for the same period in ~~2016.~~2017. Net income per basic and diluted share was ~~$0.04~~$0.15 for the three months ended June 30, ~~2017~~2018 compared to ~~$0.07~~$0.04 per basic and diluted share for the same period in ~~2016.~~2017.

Three Months Ended June 30, 2018 Compared to the Three Months Ended March 31, 2018

Net Sales

Net sales by product line were as follows (dollars in thousands):



	Three Months Ended June 30, 2018				Three Months Ended March 31, 2018				Dollar Change			Percent Change
TASER Weapons segment:
TASER X26P	$	18,146	18.3	%	$	16,474	16.3	%	$	1,672		10.1	%
TASER X2	18,362		18.5		23,932		23.6		(5,570		)	(23.3	)
TASER Pulse and Bolt	1,101		1.1		1,346		1.3		(245		)	(18.2	)
Single cartridges	17,243		17.4		16,114		15.9		1,129			7.0
Extended warranties	3,738		3.8		3,706		3.7		32			0.9
Other	2,034		2.0		1,952		1.9		82			4.2
Total TASER Weapons segment	60,624		61.1		63,524		62.8		(2,900		)	(4.6	)
Software and Sensors segment:
Axon Body	4,780		4.8		5,558		5.5		(778		)	(14.0	)
Axon Flex	1,535		1.5		1,669		1.6		(134		)	(8.0	)
Axon Fleet	2,715		2.4		2,116		2.1		599			28.3
Axon Dock	2,119		2.1		3,035		3.0		(916		)	(30.2	)
Evidence.com and cloud services	20,357		20.5		20,241		20.0		116			0.6
TASER Cam	762		0.8		1,360		1.3		(598		)	(44.0	)
Extended warranties	2,870		2.9		2,490		2.5		380			15.3
Other	3,464		3.5		1,222		1.2		2,242			183.5
Total Software and Sensors segment	38,602		38.9		37,691		37.2		911			2.4
Total net sales	$	99,226	100.0	%	$	101,215	100.0	%	$	(1,989	)	(2.0	)%

Net sales within the TASER Weapons segment decreased during the three months ended June 30, 2018 at $60.6 million as compared to $63.5 million for the three months ended March 31, 2018. The decrease is primarily attributable to the timing of customer orders and deployments.

Within the Software and Sensors segment, net sales were $38.6 million for the three months ended June 30, 2018 as compared to $37.7 million for the three months ended March 31, 2018. The Company continued to add users to its network during the three months ended June 30, 2018 resulting in steady service revenues but offset by decreased hardware revenues.

Net unit sales for TASER Weapons handles and other products and Software and Sensors segment products were as follows:



	Three Months Ended June 30, 2018	Three Months Ended March 31, 2018	Unit Change		Percent Change
TASER X26P	18,664	15,720	2,944		18.7	%
TASER X2	15,537	20,501	(4,964	)	(24.2	)
TASER Pulse and Bolt	3,158	4,000	(842	)	(21.1	)
Cartridges	611,136	532,952	78,184		14.7
Axon Body	20,407	21,769	(1,362	)	(6.3	)
Axon Flex	3,281	3,693	(412	)	(11.2	)
Axon Fleet	2,079	1,857	222		12.0
Axon Dock	4,534	5,844	(1,310	)	(22.4	)
TASER Cam	1,491	3,528	(2,037	)	(57.7	)

Six Months Ended June 30, ~~2017~~2018 Compared to the Six Months Ended June 30, ~~2016~~2017

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):


	Six Months Ended June 30,									Six Months Ended June 30,
	2017				2016					2018					2017 ⁽¹⁾
Net sales from products										$	157,695		78.7	%	$	134,366	84.6	%
Net sales from services										42,746			21.3		24,519		15.4
Net sales	$	158,885	100.0	%	$	114,286		100.0	%	200,441			100.0		158,885		100.0
Cost of products sold and services delivered	64,578		40.6		40,085			35.1
Cost of product sales										63,521			31.7		57,244		36.0
Cost of service sales										9,316			4.6		7,334		4.6
Cost of sales										72,837			36.3		64,578		40.6
Gross margin	94,307		59.4		74,201			64.9		127,604			63.7		94,307		59.4
Operating expenses:										��
Sales, general and administrative	62,681		39.5		49,212			43.1		75,102			37.5		62,681		39.5
Research and development	25,452		16.0		13,637			11.9		33,620			16.8		25,452		16.0
Total operating expenses	88,133		55.5		62,849			55.0		108,722			54.2		88,133		55.5
Income from operations	6,174		3.9		11,352			9.9		18,882			9.4		6,174		3.9
Interest and other income (expense), net	1,890		1.2		(5		)	—
Interest and other income										968			0.5		1,890		1.2
Income before provision for income taxes	8,064		5.1		11,347			9.9		19,850			9.9		8,064		5.1
Provision for income taxes	1,208		0.8		4,234			3.7
Provision for (benefit from) income taxes										(1,561		)	(0.8	)	1,208		0.8
Net income	$	6,856	4.3	%	$	7,113		6.2	%	$	21,411		10.7	%	$	6,856	4.3	%

~~Net sales to~~⁽¹⁾ Amounts for the ~~U.S.~~six months ended June 30, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and ~~other countries~~ are ~~summarized as follows (dollars in~~presented consistent with the prior period amounts reported under ASC 605.

The following table presents the Company's revenues disaggregated by geography (in thousands):


	Six Months Ended June 30,								Six Months Ended June 30,
	2017				2016				2018				2017 ⁽¹⁾
United States	$	130,952	82.4	%	$	94,687	82.9	%	$	156,681	78	%	$	130,952	82	%
Other Countries	27,933		17.6		19,599		17.1
Other countries									43,760		22		27,933		18
Total	$	158,885	100.0	%	$	114,286	100.0	%	$	200,441	100	%	$	158,885	100	%

⁽¹⁾ Amounts for the six months ended June 30, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.

Net Sales

Net sales by product line were as follows (dollars in thousands):


	Six Months Ended June 30,								Dollar Change				Percent Change		Six Months Ended June 30,								Dollar Change			Percent Change
	2017				2016							2018					2017 ⁽¹⁾						Dollar Change			Percent Change
TASER Weapons segment:									Dollar Change				Percent Change
TASER X26P	$	31,903	20.1	%	$	33,314	29.1	%	$	(1,411	)		(4.2	)%	$	34,620	17.3	%	$	31,903	20.1	%	$	2,717		8.5	%
TASER X2	35,038		22.1		23,622		20.7		11,416				48.3		42,294		21.1		35,038		22.1		7,256			20.7
TASER Pulse and Bolt	1,823		1.1		1,597		1.4		226				14.2		2,447		1.2		1,823		1.1		624			34.2
Single cartridges	31,531		19.8		23,115		20.2		8,416				36.4		33,357		16.6		31,531		19.8		1,826			5.8
Extended warranties including TAP	5,834		3.7		4,457		3.9		1,377				30.9
Extended warranties															7,444		3.7		5,834		3.7		1,610			27.6
Other	4,558		2.9		5,265		4.6		(707		)		(13.4	)	3,986		2.0		4,558		2.9		(572		)	(12.5	)
Total TASER Weapons segment	110,687		69.7		91,370		79.9		19,317				21.1		124,148		61.9		110,687		69.7		13,461			12.2
Software and Sensors segment:
Axon Body	7,198		4.5		3,677		3.2		3,521				95.8		10,338		5.2		7,198		4.5		3,140			43.6
Axon Flex	5,326		3.4		2,443		2.1		2,883				118.0		3,204		1.6		5,326		3.4		(2,122		)	(39.8	)
Axon Fleet															4,831		2.4		—		—		4,831			*
Axon Dock	4,770		3.0		2,485		2.2		2,285				92.0		5,154		2.6		4,770		3.0		384			8.1
Evidence.com	24,498		15.4		9,477		8.3		15,021				158.5
Evidence.com and cloud services															40,598		20.3		24,498		15.4		16,100			65.7
TASER Cam	1,485		0.9		2,615		2.3		(1,130		)		(43.2	)	2,122		1.1		1,485		0.9		637			42.9
Extended warranties including TAP	3,037		1.9		1,419		1.2		1,618				114.0
Extended warranties															5,360		2.7		3,037		1.9		2,323			76.5
Other	1,884		1.2		800		0.7		1,084				135.5		4,686		2.3		1,884		1.2		2,802			148.7
Total Software and Sensors segment	48,198		30.3		22,916		20.1		25,282				110.3		76,293		38.1		48,198		30.3		28,095			58.3
Total net sales	$	158,885	100.0	%	$	114,286	100.0	%	$	44,599			39.0		$	200,441	100.0	%	$	158,885	100.0	%	$	41,556		26.2

* Not meaningful

Net unit sales for TASER Weapons handles and other products and Software and Sensors segment products were as follows:


	Six Months Ended June 30,		Unit Change			Percent Change		Six Months Ended June 30,					Unit Change			Percent Change
	2017	2016			2018				2017				Unit Change			Percent Change
TASER X26P	33,559	35,126	Unit Change	(1,567	)	Percent Change		(4.5	)%	34,384		33,559			825			2.5	%
TASER X2	32,527	22,216	10,311			46.4		36,038			32,527		3,511			10.8
TASER Pulse and Bolt	5,919	4,586	1,333			29.1		7,158			5,919		1,239			20.9
Cartridges	1,175,268	879,985	295,283			33.6		1,144,088			1,175,268		(31,180	)		(2.7	)
Axon Body								42,176			47,195		(5,019	)		(10.6	)
Axon Flex	12,474	6,065	6,409			105.7		6,974			12,474		(5,500	)		(44.1	)
Axon Body	47,195	15,884	31,311			197.1
Axon Fleet								3,936			—		3,936			*
Axon Dock	13,144	4,804	8,340			173.6		10,378			13,144		(2,766	)		(21.0	)
TASER Cam	2,675	5,137	(2,462	)		(47.9	)	5,019			2,675		2,344			87.6

* Not meaningful

Net sales were ~~$158.9~~$200.4 million and ~~$114.3~~$158.9 million for the six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, an increase of ~~$44.6~~$41.6 million or ~~39.0%~~26.2%. International revenues were ~~$27.9~~$43.8 million and ~~$19.6~~$27.9 million for the six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, an increase of ~~$8.3~~$15.8 million or ~~42.5%~~56.7%.

Net sales for the TASER Weapons segment were ~~$110.7~~$124.1 million and ~~$91.4~~$110.7 million for the six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, an increase of ~~$19.3~~$13.5 million or ~~21.1%~~12.2%. ~~During the first quarter~~The Company increased sales of ~~2017, the Home Office of the U.K. government approved the Company's~~its TASER X26P and X2 Smart Weapons ~~for sale which resulted in increased weapons revenues within the U.K. of $4.2~~by $10.0 million ~~for~~to $76.9 million during the six months ended June 30, ~~2017~~2018 as compared to $66.9 million during the

same period in ~~2016. The Company also experienced~~2017, which was primarily attributable to increased ~~purchases~~sales under ~~its~~the Officer Safety Plan and TASER 60 ~~installment~~ payment programs. ~~Additionally, the Company increased cartridge sales by $8.4 million to $31.5 million during the six months June 30, 2017 as compared to $23.1 million during the same period in 2016.~~

Net sales for the Software and Sensors segment were ~~$48.2~~$76.3 million and ~~$22.9~~$48.2 million for the six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, an increase of ~~$25.3~~$28.1 million, or ~~110.3%~~58.3%. The overall increase in the Software and Sensors segment was driven by continued adoption of on-officer cameras and related technologies, including the Company's Evidence.com digital evidence management software suite. ~~Revenue~~The Company recorded net sales of $4.8 million related to Axon Fleet in the ~~Company's on-officer cameras and related accessories increased approximately $8.7 million. The Company is continuing to enter into new contracts~~six months ended June 30, 2018, with ~~domestic and international agencies seeking to deploy its technologies.~~no amounts recorded during the same period in 2017. Evidence.com revenues for the six months ended June 30, ~~2017~~2018 increased ~~$15.0~~$16.1 million to ~~$24.5~~$40.6 million as compared to the same period in ~~2016.~~2017. This increase was primarily driven by the continued increase in active users on the Company's Evidence.com platform.

~~Cost of Products Sold and Services Delivered~~

Cost of ~~products sold~~Product and ~~services delivered~~Service Sales

Cost of product and service sales was ~~$64.6~~$72.8 million and ~~$40.1~~$64.6 million for the six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, an increase of ~~$24.5~~$8.3 million, or ~~61.1%~~12.8%. As a percentage of net sales, cost of ~~products sold~~product and ~~services delivered increased~~service sales decreased to ~~40.6%~~36.3% for the ~~three~~six months ended June 30, ~~2017~~2018 compared to ~~35.1%~~40.6% during the same period in ~~2016.~~2017. The Company noted no significant changes in variable manufacturing costs during the six months ended June 30, 2018 as compared to the same period in 2017.

Within the TASER Weapons segment, cost of ~~products sold~~product sales increased to ~~$34.1~~$38.2 million for the six months ended June 30, 2018 from $34.1 million for the same period in 2017 ~~from $28.6 million in 2016,~~as a result of higher sales volumes, and ~~decreased slightly~~was consistent as a percentage of sales toat 30.8% ~~from 31.3%, respectively.~~.

Within the Software and Sensors segment, cost of ~~products sold~~product and ~~services delivered~~service sales increased to ~~$30.5~~$34.6 million for the six months ended June 30, ~~2017~~2018 from ~~$11.5~~$30.5 million for the same period in ~~2016. Cost~~2017 as a result of ~~products sold~~higher sales volumes, and ~~services delivered~~decreased as a percentage of sales ~~increased~~ to ~~63.2%~~45.4% for the six months ended June 30, ~~2017~~2018 from ~~50.3%~~63.2% for the same period in 2016. The overall increase in costs was driven by higher sales volumes, with no significant changes in product costs experienced during the six months ended June 30, 2017 as compared to the same period in 2016.2017.

Gross Margin

Gross margin increased ~~$20.1~~$33.3 million to ~~$94.3~~$127.6 million for the six months ended June 30, ~~2017~~2018 compared to ~~$74.2~~$94.3 million for ~~2016.~~the same period in 2017. As a percentage of net sales, gross margin ~~was 59.4%~~increased to 63.7% for the six months ended June 30, ~~2017~~2018 compared to ~~64.9%~~59.4% for ~~2016.~~the same period in 2017, which was primarily attributable to increased leveraging of fixed costs related to cloud storage.

As a percentage of net sales, gross margin for the TASER Weapons segment was 69.2% ~~compared to 68.7%~~ for each of the six months ended June 30, ~~2017~~2018 and ~~2016, respectively.~~2017. As a percentage of net sales, gross margin for the Software and Sensors segment was ~~36.8%~~54.6% and ~~49.7%~~36.8% for the six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. Within the Software and Sensors segment, hardware gross ~~margins were 2.3%~~margin was 24.6% for the six months ended June 30, ~~2017~~2018 and ~~32.1%~~2.3% for the same period in ~~2016,~~2017, while the service margins were ~~70.1%~~78.2% and ~~73.6%~~70.1% during those same periods, respectively. The ~~decrease~~increase in hardware gross margins during the six months ended June 30, 2018 was primarily attributable to ~~higher~~accounting changes required under the new revenue accounting standard. Previously, the level of discounting ~~which~~in the Company's contracts resulted in a portion of the contractual consideration allocated ~~value of~~to the delivered hardware to be recognized as revenue ratably over the ~~contractual~~Evidence.com subscription term, while the full ~~value~~cost of the ~~cost~~product was recognized when the hardware was delivered to the customer resulting in lower gross margins initially. Under the new revenue accounting standard, generally the full amount of ~~goods sold~~revenue related to the delivered hardware is recognized ~~when control~~in the period in which it is ~~transfered to~~delivered resulting in better matching of the ~~customer.~~revenues and related costs. The ~~decrease~~increase in service margins during the six months ended June 30, 2018 as compared to the same period in 2017 was ~~primarily~~ attributable to the reduction of non-recurring expenses related to the Company's data migration to aits new cloud-storage ~~provider.~~provider that was completed in 2018, as well as increased leveraging of fixed costs related to cloud-storage.

Sales, General and Administrative Expenses

Sales, general and administrative (“SG&A”) expenses were comprised as follows (dollars in thousands):

Six Months Ended June 30, Dollar
Change Percent
Change
2017 2016
Salaries, benefits and bonus $ 27,859
$ 19,001
$ 8,858
46.6 %
Stock-based compensation 4,183
2,849
1,334
46.8
Professional, consulting and lobbying 9,483
8,853
630
7.1
Sales and marketing 7,863
8,327
(464 ) (5.6 )
Travel and meals 5,360
4,087
1,273
31.1
Other 7,933
6,095
1,838
30.2
Total sales, general and administrative expenses $ 62,681
$ 49,212
$ 13,469
27.4
Sales, general, and administrative as a percentage of net sales 39.5 % 43.1 %



	Six Months Ended June 30,						Dollar Change		Percent Change
	2018			2017 ⁽¹⁾			Dollar Change		Percent Change
Total sales, general and administrative expenses	$	75,102		$	62,681		$	12,421	19.8
Sales, general, and administrative as a percentage of net sales	37.5		%	39.5		%

⁽¹⁾ Amounts related to commissions expense for the six months ended June 30, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.

Within the TASER Weapons segment, SG&A ~~expenses were $62.7~~expense increased $8.5 million, ~~and $49.2~~or 24.4%, to $43.2 million during the six months ended June 30, 2018 as compared to $34.7 million for the six months ended June 30, ~~2017~~2017. Of the increase, $4.1 million related to higher salaries, benefits, bonus and ~~2016, respectively, an increase~~stock-based compensation related primarily to sales and marketing, professional staff and general support staff, as well as increased professional and consulting of ~~$13.5~~$3.0 million ~~or 27.4%. As a percentage of total net sales, SG&A expenses decreased~~primarily related to ~~39.5% for the six months ended June 30, 2017 compared to 43.1% for the same period in 2016.~~

~~SG&A by type and by segment was as follows (dollars in thousands):~~

Six Months Ended June 30, Dollar Change Percent Change
2017 2016
TASER Weapons segment:
Salaries, benefits and bonus $ 15,067
24.0 % $ 10,870
22.1 % $ 4,197
38.6 %
Stock-based compensation 2,912
4.6
1,621
3.3
1,291
79.6
Professional, consulting and lobbying 4,260
6.8
5,890
12.0
(1,630 ) (27.7 )
Sales and marketing 3,510
5.6
4,770
9.7
(1,260 ) (26.4 )
Travel and meals 2,563
4.1
1,909
3.9
654
34.3
Other 6,396
10.2
4,896
9.9
1,500
30.6
Total TASER Weapons segment 34,708
55.4
29,956
60.9
4,752
15.9
Software and Sensors segment:
Salaries, benefits and bonus 12,792
20.4
8,131
16.5
4,661
57.3
Stock-based compensation 1,271
2.0
1,228
2.5
43
3.5
Professional, consulting and lobbying 5,223
8.3
2,963
6.0
2,260
76.3
Sales and marketing 4,353
6.9
3,557
7.2
796
22.4
Travel and meals 2,797
4.5
2,178
4.4
619
28.4
Other 1,537
2.5
1,199
2.4
338
28.2
Total Software and Sensors segment 27,973
44.6
19,256
39.1
8,717
45.3
Total sales, general and administrative expenses $ 62,681
100.0 % $ 49,212
100.0 % $ 13,469
27.4
increased legal fees.

Within the ~~TASER Weapons~~Software and Sensors segment, SG&A expense increased ~~$4.8~~$3.9 million, or ~~15.9%~~14.1%, to ~~$34.7~~$31.9 million during the six months ended June 30, ~~2017~~2018 as compared to ~~$30.0~~$28.0 million for the six months ended June 30, 2016. Salaries, benefits and bonus along with stock-based compensation increased approximately $5.5 million during the six months ended June 30, 2017 as compared to 2016 as the Company continued to build its infrastructure to further facilitate growth while also increasing customer facing roles. Sales and marketing expenses for the TASER Weapons segment decreased $1.3 million during the six months ended June 30, 2017 as compared to 2016 attributed to lower total commissions related to a large international TASER weapons order in the first quarter of 2016 at a higher contractual commission rate. Professional, consulting and lobbying expense decreased $1.6 million primarily due to lower patent and trademark related legal fees and lower spend on lobbying services during the six months ended June 30, 2016. Increases in other operating expenses2017. The increase was ~~primarily related to overall growth of the Company's operations.~~

Within the Software and Sensors segment, SG&A increased $8.7 million, or 45.3%, to $28.0 million during the six months ended June 30, 2017 as compared to $19.3 million for the same period in 2016. Salaries, benefits and bonus along with stock-based compensation increased approximately $4.7 million during the six months ended June 30, 2017 as compared to 2016 as the Company continues to build its direct sales and support teams and corporate infrastructure to continue to scale the Software and Sensors segment. The Company continued its increased consulting efforts related to increasing awareness of its Software and Sensors products during the six months ended June 30, 2017 as compared to 2016 which made up a majority of the $2.3 million increase in professional, consulting and lobbying expense. The Company also incurred higher accounting related fees primarily attributable to increased costs related to ~~the implementation of the new revenue recognition guidance that the Company will adopt during fiscal year 2018.~~sales and marketing.

Research and Development Expenses

~~Research and development expenses (“~~R~~&D”)~~&D expenses were comprised as follows (dollars in thousands):

Six Months Ended June 30, Dollar
Change Percent
Change
2017 2016
Salaries, benefits and bonus $ 14,184
$ 7,701
$ 6,483
84.2 %
Stock-based compensation 3,006
1,507
1,499
99.5
Professional and consulting 3,001
1,567
1,434
91.5
Travel and meals 725
492
233
47.4
Other 4,536
2,370
2,166
91.4
Total research and development expenses $ 25,452
$ 13,637
$ 11,815
86.6
Research and development as a percentage of net sales 16.0 % 11.9 %

R&D expenses were $25.5 million and $13.6 million for the six months ended June 30, 2017 and 2016, respectively, an increase of $11.8 million, or 86.6%. As a percentage of net sales, R&D increased to 16.0% for the six months ended June 30, 2017 from 11.9% for the same period in 2016.

~~R&D by type and by segment was as follows (dollars in thousands):~~

Six Months Ended June 30, Dollar Change Percent Change
2017 2016
TASER Weapons segment:
Salaries, benefits and bonus $ 1,849
7.3 % $ 713
5.2 % $ 1,136
159.3 %
Stock-based compensation 257
1.0
285
2.1
(28 ) (9.8 )
Professional and consulting 649
2.5
510
3.7
139
27.3
Travel and meals 255
1.0
192
1.4
63
32.8
Other 1,065
4.2
665
4.9
400
60.2
Total TASER Weapons segment 4,075
16.0
2,365
17.3
1,710
72.3
Software and Sensors segment:
Salaries, benefits and bonus 12,335
48.5
$ 6,988
51.2
5,347
76.5
Stock-based compensation 2,749
10.8
1,222
9.0
1,527
125.0
Professional and consulting 2,352
9.2
1,057
7.8
1,295
122.5
Travel and meals 470
1.8
300
2.2
170
56.7
Other 3,471
13.6
1,705
12.5
1,766
103.6
Total Software and Sensors segment: 21,377
84.0
11,272
82.7
10,105
89.6
Total research and development expenses $ 25,452
100.0 % $ 13,637
100.0 % $ 11,815
86.6



	Six Months Ended June 30,						Dollar Change		Percent Change
	2018			2017			Dollar Change		Percent Change
Total research and development expenses	$	33,620		$	25,452		$	8,168	32.1
Research and development as a percentage of net sales	16.8		%	16.0		%

The Company's Software and Sensors segment was responsible for ~~approximately 86%~~64.4% of the overall increase in R~~&D. The main increase in~~&D expense. Within the TASER Weapons segment, ~~was approximately $1.1~~R&D expense increased $2.9 million, of$2.5 million related to increased salaries, benefits and bonus as the Company continues to invest in personnel allocated to the development of new CEW related ~~technologies including the newly announced Signal Sidearm.~~technologies. Of the ~~$10.1~~$5.3 million increase in R&D expense for the Software and Sensors segment, ~~$6.9~~$6.7 million related to salaries and benefits, inclusive of stock-based ~~compensation.~~

compensation, which was partially offset by $1.5 million of lower expenses related to external professional and consulting fees. The Company ~~remains focused~~expects R&D expense to continue to increase in absolute dollars as it invests in the deployment of new CEW technologies and focuses on growing the Software and Sensors segment as it adds headcount and ~~external~~additional resources to develop new products and services ~~including records management systems,~~ to further advance its scalable cloud-connected device platform. The Company ~~also incurred higher consulting~~believes that these investments will result in an increase in our subscription revenue base, which over time will result in revenue increasing faster than the increase in selling, general and ~~professional fees primarily related to the~~administrative expenses and research and development costs, as we reach economies of ~~new products in both of its segments.~~scale.

Interest and Other Income ~~(Expense)~~

Interest and other income ~~(expense)~~ was ~~$1.9~~$1.0 million ~~and $(5,000)~~ for the six months ended June 30, ~~2017 and 2016, respectively.~~2018 compared to $1.9 million for the same period in 2017. During ~~2017,~~the six months ended June 30, 2018, interest and other income ~~amounts~~ consisted primarily of ~~investment interest income and~~ interest income related to the Company's sales under hardware installment ~~purchase programs offered to customers as well as foreign currency transaction adjustments. During 2016,~~sale plans and investment and interest income totaling $1.3 million which was partially offset by losses on foreign currency transaction ~~adjustments.~~adjustments of $0.3 million. During the six months ended June 30, 2017, interest and other income was primarily comprised of $1.2 million of foreign currency transaction gains and investment and interest income of $0.8 million.

Provision for Income Taxes

The provision for income taxes was ~~$1.2~~a benefit of $1.6 million for the six months ended June 30, ~~2017,~~2018, which was an effective tax rate of ~~15.0%~~(7.9)%. Our estimated full year effective income tax rate for ~~2017,~~2018, before discrete period adjustments, ~~is approximately 42.2%~~was 22.8%, which is more than the federal statutory rate primarily due to ~~the impact of non-deductible losses in certain foreign jurisdictions,~~ state taxes and non-deductible expenses for items such as ~~Subpart F income,~~ meals and entertainment, ~~and~~executive compensation limitation under IRC Section 162(m), lobbying ~~fees.~~fees, an income inclusion from GILTI, offset by a reduction for foreign-derived intangible income ("FDII"). This was partially offset by R&D tax credit deductions. The effective tax rate was ~~unfavorably~~favorably impacted by ~~foreign losses for which the Company is not expected to receive~~ a ~~tax benefit. This was offset by the favorable impact of a $1.4~~$6.1 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for ~~restricted stock units~~RSUs that vested or stock options that were exercised during the six months ended June 30, ~~2017.~~2018. Of this amount $3.4 million related to stock options exercised by the Company's CEO in connection with the Company's follow-on offering.

Net Income

Our ~~net~~ income ~~decreased~~increased by ~~$0.3~~$14.6 million to ~~$6.9~~$21.4 million for the six months ended June 30, ~~2017~~2018 compared to ~~$7.1~~$6.9 million for the same period in ~~2016.~~2017. Net income per basic and diluted share was ~~$0.13~~$0.39 and $0.38 for the six months ended June 30, ~~2017~~2018, respectively, compared to $0.13 per basic and ~~2016.~~

~~Three Months Ended June 30, 2017 Compared to the Three Months Ended March 31, 2017~~

~~Net Sales~~

~~Net sales by product line were as follows (dollars in thousands):~~

Three Months Ended June 30, 2017 Three Months Ended March 31, 2017 Dollar
Change Percent
Change
TASER Weapons segment:
TASER X26P $ 16,235
20.4 % $ 15,668
19.8 % $ 567
3.6 %
TASER X2 16,052
20.2
18,986
24.0
(2,934 ) (15.5 )
TASER Pulse and Bolt 801
1.0
1,022
1.3
(221 ) (21.6 )
Single cartridges 14,867
18.7
16,664
21.0
(1,797 ) (10.8 )
Extended warranties including TAP 2,991
3.8
2,843
3.6
148
5.2
Other 2,070
2.6
2,488
3.1
(418 ) (16.8 )
Total TASER Weapons segment 53,016
66.6
57,671
72.8
(4,655 ) (8.1 )
Software and Sensors segment:
Axon Body 3,752
4.7
3,446
4.3
306
8.9
Axon Flex 3,851
4.8
1,475
1.9
2,376
161.1
Axon Dock 2,783
3.5
1,987
2.5
796
40.1
Evidence.com 12,756
16.0
11,742
14.8
1,014
8.6
TASER Cam 766
1.0
719
0.9
47
6.5
Extended warranties including TAP 1,619
2.0
1,418
1.8
201
14.2
Other 1,100
1.4
784
1.0
316
40.3
Total Software and Sensors segment 26,627
33.4
21,571
27.2
5,056
23.4
Total net sales $ 79,643
100.0 % $ 79,242
100.0 % $ 401
0.5

~~Net unit sales for TASER Weapons handles and other products and Software and Sensors segment products were as follows:~~

Three Months Ended June 30, 2017 Three Months Ended March 31, 2017 Unit
Change Percent
Change
TASER X26P 18,198
15,361
2,837
18.5 %
TASER X2 15,390
17,137
(1,747 ) (10.2 )
TASER Pulse and Bolt 2,347
3,572
(1,225 ) (34.3 )
Cartridges 579,282
595,986
(16,704 ) (2.8 )
Axon Flex 9,373
3,101
6,272
202.3
Axon Body 26,882
20,313
6,569
32.3
Axon Dock 8,269
4,875
3,394
69.6
TASER Cam 1,336
1,339
(3 ) (0.2 )

~~Net sales were $79.6 million and $79.2 million~~diluted share for the three months ended June 30, 2017 and March 31, 2017, respectively, an increase of $0.4 million or 0.5%. Net sales for the TASER Weapons segment were $53.0 million and $57.7 million for the three months ended June 30, 2017 and March 31, 2017, respectively, a decrease of $4.7 million or 8.1%. International revenues were $13.4 million for the three months ended June 30, 2017 as compared to $14.5 million for the three months ended March 31,same period in 2017. Individual sales transactions in the international market are generally larger and occur more intermittently than in the domestic market due to the profile of the Company's customers often causing unforeseen quarterly volatility.

Net sales for the Software and Sensors segment were $26.6 million and $21.6 million for the three months ended June 30, 2017 and March 31, 2017, respectively, an increase of $5.1 million or 23.4%. The increase is partially attributable to the Flex 2 backlog being fulfilled during the three months ended June 30, 2017, along with higher Evidence.com revenues due to continued growth of users on the Company's platform.

Liquidity and Capital Resources

Summary

As of June 30, ~~2017,~~2018, we had ~~$61.8~~$310.0 million of cash, cash equivalents and ~~investments, a decrease~~restricted cash, an increase of ~~$27.5~~$231.5 million ~~from the end of 2016.~~as compared to December 31, 2017.

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities (in thousands):

Six Months Ended June 30,
2017 2016
Operating activities $ (12,446 ) $ 10,336
Investing activities 2,037
1,646
Financing activities (1,347 ) (34,520 )
Effect of exchange rate changes on cash and cash equivalents (857 ) 318
Net decrease in cash and cash equivalents $ (12,613 ) $ (22,220 )



	Six Months Ended June 30,
	2018			2017
Net cash provided by (used in) operating activities	$	16,106		$	(12,458	)
Net cash provided by (used in) investing activities	(7,226		)	2,037
Net cash provided by (used in) financing activities	223,197			(1,331		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(538		)	(857		)
Net increase (decrease) in cash, cash equivalents and restricted cash	$	231,539		$	(12,609	)

Operating activities

Net cash provided by operating activities in the first six months of 2018 of $16.1 million reflects $21.4 million in net income impacted by the net increase of non-cash income statement items totaling $14.6 million and decrease of $19.9 million for the net change in operating assets and liabilities. Included in the non-cash items were $5.2 million in depreciation and amortization expense and $9.0 million in stock-based compensation expense. Increases to operating cash flows consisted primarily of increased deferred revenue of $10.5 million and decreased inventory of $4.5 million. The increase in deferred revenue was primarily driven by increased Software and Sensors services invoiced in advance. Cash used in operations was also impacted by various other operating items, with the most significant component related to increased accounts and notes receivable and contract assets of $24.8 million primarily related to increased customer balances under the Company's Officer Safety Plan and TASER 60 purchase programs. Cash used in operations was also impacted by decreased accounts payable and accrued liabilities of $2.7 million and increased prepaid expenses and other assets of $7.4 million driven primarily by increased deferred commissions and higher prepaid software licenses, partially offset by decreased deferred cost of product sales and higher income tax receivables.

Net cash used in operating activities in the first six months of 2017 of $12.4 million consisted of $6.9 million in net income impacted by the net increase of non-cash income statement items totaling $10.1 million and decrease of $29.4 million for the net change in operating assets and liabilities. Included in the non-cash items were $3.4 million in depreciation and amortization expense, $7.4 million in stock-based compensation expense and $0.4 million of bond premium amortization. These non-cash impacts were partially offset by deferred income tax expense of $1.5 million. Increases to operating cash flows consisted of increased accounts payable, accrued and other liabilities of $7.5 million, which reduced the amount of cash used during the period,

along with increased deferred revenue of $14.8 million. The increase in deferred revenue was primarily driven by continued sales growth of products and services within the Company's Software and Sensors segment that are typically invoiced in advance, and recognized over the duration of the contract period as hardware and services are delivered. Of the increase in deferred revenue, $7.5 million resulted from increased hardware deferred revenue along with increased deferred warranty revenue of $2.5 million, and increased services, including Evidence.com subscriptions, of $4.9 million. Cash used in operations was also impacted by various other operating items, with the most significant component related to increased inventory of $25.8 million in anticipation of the Company's national field trial offer for body cameras as well as increased sales throughout the remainder of 2017. Additionally, the Company had increased ~~prepaid expenses and other assets of $21.5 million which was primarily driven by increased~~ long-term accounts receivable of ~~$10.2~~$15.9 million partially related to the Company's Officer Safety Plan and TASER 60 purchase programs and increased prepaid expenses and other assets of $10.1 million which was primarily driven by a $3.2 million increase in customer receivables related to value added taxes passed on to customers which was attributable to higher TASER weapons sales in the U.K., $1.0 million of increased prepaid commissions which are paid for when a contract is booked, and subsequently amortized over the contractual period, and $0.8 million of increased prepaid wages and benefits that will be recognized over the employees' explicit service period. Cash from operations was also ~~decreased due to~~affected by increases in accounts and notes receivable of $4.5 million driven by higher sales.

~~Net cash provided by operating~~

Investing activities

We used $7.2 million in investing activities during the first six months of ~~2016~~2018. Maturities and calls of ~~$10.3 million consisted~~investments, net of ~~$7.1~~purchases, were $2.7 million. We invested $4.9 million in ~~net income impacted by~~ the ~~net increase~~purchase of ~~non-cash income statement items totaling $6.2~~property and equipment and intangible assets in addition to our $5.0 million and decrease of $3.0 million for the net change in operating assets and liabilities. Included in the non-cash items were $1.8 million in depreciation and amortization expense, $4.5 million in stock-based compensation expense and $0.7 million of bond premium amortization. These non-cash impacts were partially offset by deferred income tax expense of $1.4 million. Changes in operating assets and liabilities resulted in a net decrease to cash provided by operating activities of $3.0 million. The most significant component of this decrease related to increases in prepaid expenses and other assets of $14.7 million. This increase was primarily driven by $3.6 million of restricted cash related to a customer contract requiring certain contractual payments to be deposited in escrow, increases in long-term receivables of $3.2 millioninvestment related to the ~~Company's Officer Safety Plan and TASER 60 purchase programs, a $2.6 million increase~~acquisition of VIEVU, LLC (Refer to Note 15 in ~~income taxes receivable, increased prepaid commissions of $1.5 million related~~the Notes to higher sales, and $1.0 million related to increases in prepaid software licenses and related maintenance arrangements. Cash from operations also decreased due to increases in accounts and notes receivable of $3.2 million driven by higher sales and increases in inventory of $6.7 million as the Company continues to invest in anticipation of higher future sales. These decreases were partially offset by increases in accounts payable, accrued and other liabilities of $5.1 million along with increases in deferred revenue and customer deposits of $15.8 million and $0.8 million, respectively. Of the increase in deferred revenue, $10.1 million resulted from increased hardware deferred revenue

along with increased deferred warranty revenue of $3.9 million, and increased Axon Services, including Evidence.com subscriptions, of $1.6 million, with the remaining $0.2 million made up primarily of deferred training revenue.

~~Investing activities~~Unaudited Condensed Consolidated Financial Statements).

We generated $2.0 million from investing activities during the first six months of 2017. Maturities and calls of investments, net of purchases, were $14.4 million, which was partially offset by ~~the Company's~~our investment of $5.9 million in the purchase of property and equipment and intangible assets and ~~its~~our $6.5 million investment related to the acquisition of Dextro, Inc.

Financing activities

Net cash generated ~~$1.6~~by financing activities was $223.2 million ~~from investing activities~~ during the first six months of ~~2016. Maturities and calls~~2018. In May 2018, we completed a public follow-on equity offering that generated net proceeds of ~~investments, net or purchases, were $3.8 million. The Company invested $2.1~~$234.0 million ~~in the purchase of property and equipment and intangible assets~~ which was partially offset by income and payroll taxes of $10.8 million paid by the ~~increase related to net investment activity.~~

~~Financing activities~~Company on behalf of employees who net-settled stock awards during the period.

Net cash used in financing activities was $1.3 million during the first six months of 2017. During the first six months of 2017, the Company paid income and payroll taxes of $2.6 million on behalf of employees who net-settled stock awards during the period which was offset by proceeds from options exercised of $1.2 million.

Net cash used in financing activities was $34.5 million during the first six months of 2016. During the first six months of 2016, the Company repurchased $33.8 million of the Company's common stock, reflecting a weighted average cost of $18.90 per share, inclusive of applicable administrative costs for the transactions. Additionally, the Company paid payroll taxes of $1.0 million on behalf of employees who net-settled stock awards during the period.

Liquidity and Capital Resources

~~Our most significant sources~~As of ~~liquidity continue to be funds generated by operating activities and available~~June 30, 2018, we had $307.5 million of cash and cash ~~equivalents.~~equivalents, of which $36.6 million was held in foreign locations. The majority of our cash and cash equivalents balance as of June 30, 2018 was comprised of the $234.0 million of net proceeds related to the follow-on offering we completed in May 2018. Our ongoing sources of cash are predominately from our sales of products and services to our customers. In addition, our $10.0 million revolving credit facility is available for additional working capital needs or investment opportunities. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. The line is secured by substantially all of the assets of the Company, and bears interest at varying rates, currently LIBOR plus ~~1.75%~~1.25% or Prime less 0.50%. ~~At June 30, 2017 and December 31, 2016, there were no borrowings under the line.~~ As of June 30, ~~2017,~~2018, we had letters of credit outstanding of $2.7 million, leaving the net amount available for borrowing of ~~approximately~~ $7.3 million. The ~~line of~~facility matures on December 31, 2018. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our revolving credit ~~matured on July~~facility. At June 30, 2018 and December 31, 2017, ~~which was subsequently extended for 90-day term. The Company is currently evaluating its credit needs and anticipates entering into a longer term arrangement prior to~~there were no borrowings under the ~~October 31, 2017 maturity date.~~line.

Our agreement with the bank requires us to comply with ~~certain financial and other covenants including maintenance of~~ a maximum ~~leverage~~funded debt to EBITDA ratio, ~~and minimum fixed charge coverage ratio. The leverage ratio (ratio~~as defined, of ~~total liabilities to tangible net worth) can be~~ no greater than ~~1:1, and the fixed charge coverage ratio can be no less than 1.25:1,~~2.00 to 1.00 based upon a trailing twelve-month period. At June 30, ~~2017,~~2018, the Company’s ~~leverage~~funded debt to EBITDA ratio was ~~1.17:1 and its fixed charge coverage ratio was 2.65:1. The Company's violation~~0.002 to 1.00.

TASER 60 installment purchase arrangements typically involve amounts invoiced in five equal installments at the beginning of each year of the ~~leverage ratio requirement was waived by~~five-year term. This is in contrast to a traditional CEW sale in which the ~~bank~~entire amount being charged for the hardware is invoiced upon shipment. This impacts liquidity in a commensurate fashion, with the cash for the TASER 60 arrangements received in five annual installments rather than up front. It is our strategic intent to shift an increasing amount of our business to a subscription model, to better match the municipal budgeting process of our customers as well as to allow for multiple product offerings to be bundled into existing subscriptions. We carefully considered the cash flow impacts of ~~June 30, 2017.~~this strategic shift and regularly revisit our cash flow forecast with the goal of maintaining a comfortable level of liquidity as we introduce new

~~Based on~~

commercial offerings in which we incur upfront cash costs to produce and fulfill hardware sales ahead of the cash inflows from our ~~strong balance sheet at June 30, 2017, we~~customers. We anticipate, and have prepared for, the majority of our arrangements in both reportable segments to be offered in similar subscription-type offerings over the coming years.

We believe financing will be available, both through our existing credit line and possible additional financing. However, there is no assurance that such funding will be available on terms acceptable to us, or at all.

We believe ~~funds generated from~~that our ~~expected results~~sources of ~~operations, as well as available cash and investments,~~funding will be sufficient to ~~finance~~satisfy our ~~operations~~currently anticipated cash requirements including capital expenditures, working capital requirements, potential acquisitions and ~~strategic initiatives for~~other liquidity requirements through at least the ~~remainder~~next 12 months. The Company and its Board of ~~2017 and the foreseeable future. From time to time, our board of directors considers~~Directors may consider repurchases of our common stock. Further repurchases of our common stock ~~may~~would take place on the open market, ~~may~~would be financed with available cash and are subject to ~~board~~ authorization as well as market and business conditions.

Off-Balance Sheet Arrangements

The discussion of off-balance sheet arrangements in Note 11 to the unaudited condensed consolidated financial statements included in PART I, ITEM I of this Form 10-Q is incorporated by reference herein.

Critical Accounting Estimates

We have identified the following accounting estimates as critical to our business operations and the understanding of our results of operations. The preparation of this Quarterly Report on Form 10-Q requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our unaudited condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. While we ~~don’t~~do not believe that a change in these estimates is reasonably likely, there can be no assurance that our actual results will not differ from these estimates. The effect of these estimates on our ~~business~~financial condition and results of operations isare discussed below.

Product Warranties

The Company warranties its CEWs, Axon cameras and ~~Axon Docks~~certain related accessories from manufacturing defects on a limited basis for a period of one year after purchase and, thereafter, will replace any defective unit for a fee. Estimated costs for ~~our~~the standard warranty are charged to cost of products sold ~~and services delivered~~ when revenue is recorded for the related product. ~~We estimate future~~Future warranty costs are estimated based on historical data related to ~~returns and~~ warranty ~~costs~~claims on a quarterly basis and ~~apply~~ this rate is applied to current product ~~anticipated returns from our customers. We~~sales. Historically, reserve amounts have ~~also historically~~been increased ~~our reserve amount~~ if ~~we become~~management becomes aware of a component failure or other issue that could result in larger than anticipated ~~returns~~warranty claims from ~~our~~ customers. The ~~accrued~~ warranty ~~liability~~reserve is reviewed quarterly to ~~evaluate whether~~verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. As of June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, our reserve for warranty returns was ~~approximately $0.6~~$0.5 million and ~~$0.8~~$0.6 million, respectively. Warranty expense ~~(recoveries)~~ for the six months ended June 30, ~~2017~~2018 was negligible, and ~~2016~~there was ~~$(0.1)~~a recovery of $0.1 million ~~and $0.5 million, respectively. The decrease in warranty reserve and related expense as of and for~~during the six months ended June 30, ~~2017 was primarily driven by the release of initial reserves related to the launch of the Axon Body 2 on-officer body camera.~~2017. The Company experienced lower warranty claims than initially expected and, as such, ~~has~~ adjusted the warranty reserve to better reflect actual warranty claims. As of June 30, 2018, the ~~Company continues investing in the development of new technologies, it will continue to assess the adequacy of its warranty~~Company's reserve also included initial reserves related to ~~inherent uncertainties with new product offerings.~~Signal Sidearm.

Revenue related to separately-priced extended warranties is initially recorded as deferred revenue at its contractual amount and subsequently recognized inas net sales ~~on a straight-line basis~~ratably over the ~~delivery~~warranty service period. Costs related to extended warranties are charged to cost of ~~products sold~~product and ~~services delivered~~service sales when incurred.

Inventory

Inventories are stated at the lower of cost and net realizable ~~value, with cost~~value. Cost is determined using the weighted average cost of raw materials, which approximates the first-in, first-out (“FIFO”) method and ~~an allocation~~includes allocations of manufacturing labor and overhead costs. The allocation of manufacturing labor and overhead costs includes management’s judgments of what constitutes normal capacity of our production facilities and a determination of what costs are considered to be abnormal fixed production costs, which are expensed as current period charges.overhead. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories, as well as trial and evaluation inventories to their net realizable value. These provisions are based on ~~our~~management’s best ~~estimates~~estimate after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions ~~and~~among other factors. ~~As the Company phases out previous generations of its CEWs~~Management evaluates inventory costs for abnormal costs due to excess production capacity and ~~body-worn cameras and related technologies, and slows or ceases production of these products, the finished goods and related raw materials may become excess or obsolete.~~treats such costs as period costs.

During the six months ended June 30, 2018 and 2017, the Company recorded provisions for excess and obsolete inventory of ~~approximately~~$2.6 million and $1.0 million, ~~compared to $0.7 million during the same period in 2016. No specific product or product lines made up a meaningful portion of the overall increase.~~respectively. During the six months ended June 30, ~~2017,~~2018, the Company ~~began~~continued phasing out ~~certain~~ previous generations of its ~~CEWs, the TASER M26~~body-worn and ~~TASER C2 models,~~in-car cameras, which made up a portion of the amounts recorded as provisions to excess and obsolete inventory. Included within the $2.6 million expense, the Company recorded $0.6 million related to purchase commitments assumed in the VIEVU business combination that exceeded estimated future demand. The remaining ~~increase~~change for the six months ended June 30, ~~2017~~2018 was driven by analyses looking at projected sales data for existing products and making

corresponding adjustments to state inventories at their lower of cost and net realizable value. Refer to Note 4 in the Notes to Unaudited Condensed Consolidated Financial Statements.

Revenue Recognition, ~~Deferred Revenue~~Contract Assets and Liabilities and Accounts and Notes Receivable

~~We derive our~~The Company derives revenue from two primary sources: (1) the sale of physical products, including CEWs, Axon cameras, Axon Signal enabled devices, corresponding hardware extended warranties, and related accessories such as Axon docks, cartridges and batteries, among others, and (2) subscription to ~~our~~the Company's Evidence.com digital evidence management ~~SaaS~~software as a service ("SaaS") (including ~~data~~secure cloud-based storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, wethe Company also ~~recognize~~recognizes revenue from training and professional services and revenue related to other ~~revenue. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, title has transferred,~~software and SaaS services. Refer to Note 2 in the price is fixed and collectability is reasonably assured. Contractual arrangements may contain explicit customer acceptance provisions, and under such arrangements, the Company defers recognition of revenue until formal customer acceptanceNotes to Unaudited Condensed Consolidated Financial Statements.

~~is received. Extended warranty revenue, SaaS revenue and related data storage revenue are recognized ratably over the term~~Many of the ~~contract beginning~~Company's products and services are sold on a standalone basis. The Company also bundles its hardware products and services together and sells them to its customers in single transactions, where the ~~commencement date of each contract.~~

Revenue arrangements with multiple deliverables are divided into separate units and revenue is allocated using the relative selling price method based upon vendor-specific objective evidence of selling price or third-party evidence of the selling prices if vendor-specific objective evidence of selling prices does not exist. If neither vendor-specific objective evidence nor third-party evidence exists, management uses its best estimate of selling price. The majority of the Company’s allocations of arrangement consideration under multiple element arrangements are performed utilizing prices charged to customers for deliverables when sold separately. The Company’s multiple element arrangements may include future CEWs and/or Axon devices to be delivered at defined points withincustomer can make payments over a multi-year contract, and in those arrangements, the Company allocates total arrangement consideration over the life of the multi-year contract to future deliverables using management’s best estimate of selling price. The Company has not utilized third party evidence of selling price.

period. For the three and six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, the composition of revenue recognized from ~~arrangements~~contracts containing multiple ~~elements~~performance obligations and those not containing multiple ~~elements~~performance obligations was as follows (dollars in thousands):

Three Months Ended June 30, 2017 Three Months Ended June 30, 2016
TASER Weapons Software and Sensors Total TASER Weapons Software and Sensors Total
Arrangements with multiple elements $ 9,784
18.5 % $ 25,063
94.1 % $ 34,847
43.8 % $ 7,094
15.6 % $ 10,709
81.0 % $ 17,803
30.3 %
Arrangements without multiple elements 43,232
81.5
1,564
5.9
44,796
56.2
38,442
84.4
2,511
19.0
40,953
69.7
Total $ 53,016
100.0 % $ 26,627
100.0 % $ 79,643
100.0 % $ 45,536
100.0 % $ 13,220
100.0 % $ 58,756
100.0 %



	Three Months Ended June 30, 2018												Three Months Ended June 30, 2017 ⁽¹⁾
	TASER Weapons				Software and Sensors				Total				TASER Weapons				Software and Sensors				Total
Contracts with Multiple Performance Obligations	$	15,007	24.8	%	$	36,943	95.7	%	$	51,950	52.4	%	$	9,784	18.5	%	$	25,063	94.1	%	$	34,847	43.8	%
Contracts without Multiple Performance Obligations	45,617		75.2		1,659		4.3		47,276		47.6		43,232		81.5		1,564		5.9		44,796		56.2
Total	$	60,624	100.0	%	$	38,602	100.0	%	$	99,226	100.0	%	$	53,016	100.0	%	$	26,627	100.0	%	$	79,643	100.0	%

Six Months Ended June 30, 2017 Six Months Ended June 30, 2016
TASER Weapons Software and Sensors Total TASER Weapons Software and Sensors Total
Arrangements with multiple elements $ 23,723
21.4 % $ 44,577
92.5 % $ 68,300
43.0 % $ 11,192
12.2 % $ 18,186
79.4 % $ 29,378
25.7 %
Arrangements without multiple elements 86,964
78.6
3,621
7.5
90,585
57.0
80,178
87.8
4,730
20.6
84,908
74.3
Total $ 110,687
100.0 % $ 48,198
100.0 % $ 158,885
100.0 % $ 91,370
100.0 % $ 22,916
100.0 % $ 114,286
100.0 %



	Six Months Ended June 30, 2018												Six Months Ended June 30, 2017 ⁽¹⁾
	TASER Weapons				Software and Sensors				Total				TASER Weapons				Software and Sensors				Total
Contracts with Multiple Performance Obligations	$	34,988	28.2	%	$	73,588	96.5	%	$	108,576	54.2	%	$	23,723	21.4	%	$	44,577	92.5	%	$	68,300	43.0	%
Contracts without Multiple Performance Obligations	89,160		71.8		2,705		3.5		91,865		45.8		86,964		78.6		3,621		7.5		90,585		57.0
Total	$	124,148	100.0	%	$	76,293	100.0	%	$	200,441	100.0	%	$	110,687	100.0	%	$	48,198	100.0	%	$	158,885	100.0	%

~~Evidence.com, Axon cameras and related accessories are sometimes sold separately, but in most instances are sold together. In these instances, customers typically purchase and pay~~⁽¹⁾ Amounts for the ~~equipment~~three and ~~one year~~six months ended June 30, 2017 have not been adjusted under the modified retrospective method of ~~Evidence.com in advance. Additional years~~adoption of ~~service~~Topic 606, and are generally billed annually over a specified service term, which has typically ranged from one to five years. Axon equipment represents a deliverable that is provided to the customer at the time of sale, while Evidence.com services are provided over the specified term of the contract. Generally, the Company recognizes revenue for the Axon equipment at the time of the salepresented consistent with the discussion of multiple deliverable arrangements above. Revenue for Evidence.com is deferred at the time of the sale and recognized over the service period. At times the Company subsidizes the cost of Axon devices provided to customers to secure long-term Evidence.com service contracts. In such circumstances, revenue related to the Axon devices recognized at the time of delivery is limited to the amount collected from the customer that is not contingent upon the delivery of future Evidence.com services. The Company recognizes the remaining allocated revenue related to subsidized Axon devices over the remainingprior period ~~it provides the contracted Evidence.com services.~~

Deferred revenue consists of payments received in advance related to products and services for which the criteria for revenue recognition have not yet been met. Deferred revenue that will be recognized during the succeeding twelve month period is recorded as current deferred revenue and the remaining portion is recorded as long-term. Deferred revenue does not include future revenue from multi-year contracts for which no invoice has yet been created. We generally bill customers in annual installments.

Sales are typically made on credit and we generally do not require collateral. We perform ongoing credit evaluations of our customers’ financial condition and maintain an allowance for estimated potential losses. Uncollectible accounts are written off when deemed uncollectible, and accounts and notes receivable are presented net of an allowance for doubtful accounts. This allowance represents our best estimate and is based on our judgment after considering a number of factors including third-party credit reports, actual payment history, customer-specific financial information and broader market and economic trends and conditions. In the event that actual uncollectible amounts ~~differ from our estimates, additional expense could be necessary.~~

reported under ASC 605.

Valuation of Goodwill, Intangibles and Long-lived Assets

The ~~recoverability of the~~Company does not amortize goodwill ~~is evaluated~~ and intangible assets with indefinite useful lives. Such assets are required to be tested for impairment at least annually, ~~during~~or whenever events or changes in circumstances indicate that the assets may be impaired. The Company performs its annual impairment assessment in the fourth quarter ~~or more often, if and when circumstances indicate that goodwill may not be recoverable.~~of each year. Finite-lived intangible assets and other long-lived assets are amortized over their estimated useful lives. ~~We evaluate~~Management evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and intangible assets may warrant revision or that the remaining balance of these assets, including intangible assets with indefinite lives, may not be recoverable.

Circumstances that might indicate long-lived assets might not be recoverable could include, but are not limited to, a change in the product mix, a change in the way products are created, produced or delivered, or a significant change in the way ~~our~~the Company's products are branded and marketed. When performing a review for recoverability, ~~we estimate~~management estimates the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair value computed using discounted cash flows.

Income Taxes

We recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carry forwards.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Management must also assess whether uncertain tax positions as filed could result in the recognition of a liability for possible interest and penalties if any. ~~We have completed research and development~~The Company has claimed R&D tax ~~credit studies which identified approximately $15.6~~credits of approximately$17.0 million ~~in tax credits~~ for federal, Arizona and California income tax purposes related to ~~the~~tax years 2003 ~~through 2017 tax years.~~to 2018. Management determined that it was more likely than not that the full benefit of the ~~research and development~~R&D tax credit would not be sustained on examination and accordingly, has established a liability for unrecognized tax benefits of ~~$4.3~~$3.8 million as of June 30, ~~2017.~~2018. In addition, we established a $0.1 million liability related to uncertain tax positions for certain state income tax liabilities, for a total unrecognized tax benefit at June 30, ~~2017~~2018 of ~~$4.4~~$3.9 million. Approximately ~~$1.6~~$2.1 million of the unrecognized tax benefit associated with ~~research and development~~R&D credits has been netted against the ~~research and development~~R&D credit deferred tax asset. Our estimates are based on the information available to us at the time we prepare the income tax provision. Our income tax returns are subject to audit by federal, state, and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.

Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting or tax laws in the U.S. and overseas, or changes in other facts or circumstances. In addition, we recognize liabilities for potential U.S. tax contingencies based on our estimate of whether, and the extent to which, additional taxes may be due. If we determine that payment of these amounts is unnecessary, or if the recorded tax liability is less than our current assessment, we may be required to recognize an income tax benefit, or additional income tax expense, respectively, in our consolidated financial statements.

In preparing our consolidated financial statements, management assesses the likelihood that our deferred tax assets will be realized from future taxable income. In evaluating our ability to recover our deferred income tax assets, management considers all available positive and negative evidence, including operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if we determine that it is more likely than not that some portion or all of the net deferred tax assets will not be realized.

Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of June 30, ~~2017,~~2018, the Company would need to generate approximately ~~$54.5~~$46.7 million of pre-tax book income in the U.S. in order to realize the net deferred tax assets for which a benefit has been recorded. This estimate considers the reversal of ~~approximately $16.4~~$17.6 million of taxable temporary differences, which produce ~~$6.1~~$4.3 million of deferred tax liabilities. The Company has ~~$4.3~~$4.5 million of state net operating losses (“NOLs”) which expire at various dates between ~~2029~~2030 and ~~2037.~~2036. The Company also has federal NOLs of ~~$2.2~~$1.5 million which expire in 2035 through 2036, and are subject to limitation under IRC Section 382. The Company has ~~$7.0~~$7.4 million of Arizona R&D credits carrying forward, which expire at various dates between 2018 and ~~2032.~~2032, and $0.1 million of federal R&D credits carrying forward which expire in 2034 through 2037. In Australia, the ~~UK,~~U.K., Canada, and Germany, the Company has ~~$1.5~~$2.6 million, ~~$5.2~~$7.6 million, ~~$0.7~~$1.7 million, and ~~$1.1~~$0.4 million of NOLs, respectively, which expire at various dates or may be carried forward indefinitely.

We anticipate the Company’s future income to continue to trend upward from our 2017 results, with sufficient pre-tax book income to realize a large portion of our deferred tax assets. As such, we have not recorded a valuation allowance on our U.S. deferred tax assets as of June 30, ~~2017,~~2018, with the exception of a reserve of ~~approximately $4.4~~$2.4 million that has been recorded due to specific income projections in years in which certain tax assets are set to expire. As of June 30, ~~2017,~~2018, the Company has cumulative losses in Australia, the ~~UK,~~U.K. and Canada, and a history of losses Germany, which limits the ability to consider other subjective evidence, such as projections for future growth. On the basis of this evaluation, a full valuation allowance has been recorded for these jurisdictions. The amount of the deferred tax asset considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for growth.

We consider the earnings of certain non-U.S. subsidiaries to be indefinitely reinvested outside of the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. ItThe determination of the unrecognized deferred tax liability on those undistributed foreign earnings is not practicable due to ~~estimate~~our legal entity structure and the ~~amount~~complexity of ~~the deferred~~U.S. and local country tax ~~liability, if any, related to investments in those foreign subsidiaries.~~laws. If we decide to repatriate the undistributed foreign earnings, we ~~would~~will need to ~~adjust our~~recognize the income tax ~~provision~~effects in the period we ~~determined that~~change our assertion on indefinite reinvestment. Refer to Note 8 in the ~~earnings will no longer be indefinitely invested outside the United States.~~Notes to Unaudited Condensed Consolidated Financial Statements.

Stock-Based Compensation

~~We have historically granted stock-based~~Stock-based compensation ~~to key employees~~primarily consists of service-based RSUs. RSUs are classified as equity and non-employee directors as a means of attracting and retaining quality personnel. We have historically utilized restricted stock units and stock options; however, no stock options have been issued since 2011. Themeasured at the fair market value of ~~restricted~~the underlying stock ~~units is estimated as~~at the ~~closing price of our common stock on the date of grant. We estimate the fair value of granted stock options by~~grant date. The Company recognizes RSU expense using the Black-Scholes-Merton option pricing model, which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their stock options before exercising them (expected term), the estimated volatility of our common stock pricestraight-line attribution method over the ~~expected term and the number of options that will ultimately not vest (forfeitures).~~requisite service period. The ~~expense for both restricted stock units and stock options is recorded over the life of the grant, and forfeitures are recognized when they occur.~~

~~We have granted a total of approximately 1.8 million~~Company also issues performance-based ~~awards (options and restricted stock units) of which approximately 0.5 million are outstanding as of June 30, 2017,~~RSUs, the vesting of which is contingent upon the achievement of certain performance criteria ~~including~~related to the operating performance of the Company, as well as successful and timely development and market acceptance of future product ~~introductions as well as our future sales targets~~introductions. For performance-based RSUs containing only performance conditions, compensation cost is recognized using the accelerated attribution model over the explicit or implicit service period. For awards containing multiple service, performance or market conditions, and ~~operating performance. These awards will vest and~~all conditions must be satisfied prior to vesting, compensation expense ~~will be~~is recognized over the longest explicit, implicit or derived service period, based on management’s ~~best~~ estimate of the probability of the performance criteria being satisfied, ~~using the most currently available projections of future product adoption and operating performance,~~ adjusted at each balance sheet date. ~~Changes~~For both service-based and performance-based RSUs, the Company accounts for forfeitures as they occur as a reduction to stock-based compensation expense and additional paid-in-capital.

For performance-based options, stock-based compensation expense is recognized over the expected performance achievement period of individual performance goals when the achievement of each individual performance goal becomes probable. For performance-based awards with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized for each pair of performance and market conditions over the longer of the expected achievement period of the performance and market conditions, beginning at the point in time that the ~~subjective and probability-based assumptions can materially affect the estimate~~relevant performance condition is considered probable of achievement. The fair value of ~~stock-based compensation~~such awards is estimated on the grant date using Monte Carlo simulations. Refer to Note 9 in the Notes to Unaudited Condensed Consolidated Financial Statements.

We have granted a total of 8.5 million performance-based awards (options and ~~consequently, the related amount recognized in our statements~~restricted stock units) of ~~operations.~~which 6.8 million are outstanding as of June 30, 2018.

Contingencies and Accrued Litigation Expense

We are subject to the possibility of various loss contingencies arising in the ordinary course of business, including product-related litigation. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. Refer to Note 11 of our ~~condensed~~ consolidated financial statements for further discussion.

Except as noted below, as of June 30, 2018, there were no material changes outside of the ordinary course of business to the contractual obligations table, including the notes thereto, contained in our Form 10-K Report for the fiscal year ended December 31, 2017.

In connection with the Company's acquisition of VIEVU, we entered into a long-term Product Development and Supplier Agreement (the “Supply Agreement”) with Safariland, pursuant to which Safariland will be the Company’s preferred provider of holsters for its CEW products. The Supply Agreement provides for a minimum number of units to be purchased by the Company at pre-determined prices over a ten-year period. The total undiscounted value of minimum purchases under the Supply Agreement is approximately $22.0 million.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We typically invest in a limited number of financial instruments, consisting principally of investments in money market accounts, certificates of deposit, and corporate and municipal bonds with a typical long-term debt rating of ~~“AA”~~“A” or better by any nationally recognized statistical rating organization, denominated in U.S. dollars. All of our cash equivalents and investments are treated as “held-to-maturity.” Investments in fixed-rate interest-earning instruments carry a degree of interest rate risk as their market value may be adversely impacted due to a rise in interest rates. As a result, we may suffer losses in principal if we sell securities that have declined in market value due to changes in interest rates. However, because we classify our debt securities as “held-to-maturity” based on our intent and ability to hold these instruments to maturity, no gains or losses are recognized due to changes in interest rates. These securities are reported at amortized cost. Based on investment positions as of June 30, ~~2017,~~2018, a hypothetical 100 basis point increase in interest rates across all maturities would result in ~~a $0.1 million~~an insignificant incremental decline in the fair market value of the portfolio. Such losses would only be realized if the Company sold the investments prior to maturity.

Additionally, we have access to a $10.0 million line of credit borrowing facility which bears interest at varying rates, currently at LIBOR plus ~~1.75%~~1.25% or Prime less 0.50%. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit, which totaled $2.7 million at June 30, ~~2017.~~2018. At June 30, ~~2017,~~2018, there was no amount outstanding under the line of credit and the available borrowing under the line of credit was ~~approximately~~ $7.3 million. We have not borrowed any funds under the line of credit since its inception; however; should we need to do so in the future, such borrowings could be subject to adverse or favorable changes in the underlying interest rate.

Exchange Rate Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, in each case compared to the U.S. Dollar, related to transactions by our foreign subsidiaries. ~~To date, we have not engaged in any currency hedging activities, although we may do so in the future. Fluctuations in currency exchange rates could harm our business in the future.~~

The majority of our sales to international customers are transacted in U.S. dollars and, therefore, are not subject to exchange rate ~~fluctuations on these transactions.~~fluctuations. However, the cost of our products to our customers increases when the U.S. dollar strengthens against their local currency, and the Company may have more sales and expenses denominated in foreign currencies ~~during the remainder of 2017~~in future years which ~~would~~could increase its foreign exchange rate risk.

To date, we have not engaged in any currency hedging activities. However, the Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing or future assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. The Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to the prohibitive economic cost of hedging particular exposures. As such, fluctuations in currency exchange rates could harm our business in the future.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer are responsible for the evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and ~~our~~ Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

~~During the quarter ended March 31, 2017~~ Based on that evaluation, our Chief Executive Officer and ~~year ended December 31, 2016, we identified~~Chief Financial Officer have concluded that because a material ~~weaknesses~~weakness exists in our internal control over financial ~~reporting. A material weakness is defined~~reporting, as further described below, our disclosure controls and procedures were not effective as of June 30, 2018 at a ~~deficiency, or a combination~~level that provides reasonable assurance as of ~~deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement~~the last day of ~~our financial statements will not be prevented or detected on a timely basis.~~the period covered by this report.

~~Specifically, during~~During the fourth quarter ~~ended March 31,~~of 2017, we identified a material weakness over accounting for income taxes. During the year ended December 31, 2016, we identified material weaknesses in our internal controls over revenue recognition, cost of goods sold and services delivered and the reporting of deferred revenue. Further, we identified material weaknesses in ourrelated to account reconciliations and monitoring ~~processes. These material weaknesses in internal control~~ over ~~financial reporting~~our U.K. subsidiary, Axon Public Safety U.K. Ltd. ("APS U.K."), which resulted from a breakdown in the operation of identified preventative and detective controls which led to the Company not initially recording some transactions ~~correctly.~~correctly during 2016 and the interim periods in 2017.

These material weaknesses arose during a period where the timing of the Company’s financial close and reporting process had been adversely impacted by the continued growth in both the volume and complexity of our business transactions. To remediate the material ~~weaknesses~~weakness described above and related to APS U.K., we ~~are working~~designed a specific plan to design ~~and implement~~ new controls, and enhanced the design of existing controls and procedures. Specifically:

for the 2017 year-end close and first quarter 2018 close of our accounting records and during the second quarter of 2018, we sent accounting personnel from our headquarters in Arizona to the U.K. to perform additional review procedures ~~to properly ensure transactions are identified~~of the account reconciliations for APS U.K., and ~~recorded timely and accurately.~~

~~Specifically:~~our corporate accounting team performed additional reviews of APS U.K. activity;

we ~~have added~~plan for our corporate accounting team to continue performing these additional review procedures on an ongoing basis; and will continue to add staff to support the growing operations of the Company. During the year ended December 31, 2016 and the six months ended June 30, 2017, we have added additional resources to our revenue, tax and general accounting teams to ensure that we have the knowledge and resources to properly account for transactions in accordance with GAAP.

we ~~have implemented and are continuing to implement additional~~added internal reporting procedures, including those designed to add depth to our detailed review processes of ~~revenue~~inventory, sales transactions and related accounting for deferred revenue and cost of goods sold and services ~~delivered;~~delivered for APS U.K.; and

on June 1, 2018, we completed the migration of APS U.K. onto the same standard systems, processes and controls as our other locations, which subjects APS U.K. activity to those procedures by the same personnel that perform the accounting activities for our other locations.

we have implemented and are continuing to implement additional system controls that would help prevent data entry errors of transactional information within the Company’s general ledger system, as well as adding and refining existing system reports that would help isolate outliers within the Company’s transactional data for further review; and

we have improved and are continuing to improve communication and coordination among our finance and accounting departments and we have expanded cross-functional involvement and input into period-end accruals.

The material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. ~~We expect that the~~As remediation ~~of these deficiencies will be completed prior to the end of fiscal year 2017. As remediation~~testing has not yet been completed, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of June 30, ~~2017~~2018 at a level that provides reasonable assurance as of the last day of the period covered by this report.

Change in Internal Control over Financial Reporting

Except as noted above, there ~~was~~were no ~~change~~other changes in our internal control over financial reporting during the fiscal quarter ended June 30, ~~2017,~~2018, that ~~has~~have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The discussion of legal proceedings in Note 11 to the unaudited condensed consolidated financial statements included in PART I, ITEM 1 of this Form 10-Q is incorporated by reference herein.

Item 1A. Risk Factors

~~In addition~~Our operations and financial results are subject to ~~the other information set forth~~various risks and uncertainties, including those described in ~~this report, you should carefully consider the factors discussed~~Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, ~~2016, under the heading “Risk Factors,”~~2017, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially, adversely affect our business, financial condition, ~~and/or operating results. Except as discussed blow, there has~~results of operations, cash flows, and the trading price of our common stock. There have been no material ~~change in~~changes to our risk factors ~~as previously disclosed in~~since our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017.

~~Unanticipated changes in our effective tax rate and additional tax liabilities may impact our operating results~~

Additionally, with the adoption of ASU 2016-09, the new guidance requires excess tax benefits and tax deficiencies to be recorded in the consolidated statements of operations when stock awards vest or are settled and as discrete items on the tax rate in the period in which they occur. As a result, for interim reporting purposes, the new standard requires us to exclude the excess tax benefits and tax deficiencies from the annual estimated tax rate and not to forecast the potential impact to the rate. This could cause us to experience an effective tax rate significantly different from previous periods or our current expectations, which could have an adverse effect on our business, financial condition and results of operations and cash flows.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits



~~3.1~~10.1+		~~Certificate of Amendment to Amended and Restated Certificate of Incorporation of Axon Enterprise, Inc.~~ CEO Performance Award (incorporated by reference to ~~Exhibit 3.1 to Form 8-K,~~Annex A of the Company’s definitive proxy statement on Schedule 14A filed on April ~~5, 2017)~~13, 2018)
~~3.2~~10.2+		~~Amendment to Bylaws of~~ Axon Enterprise, Inc. 2018 Stock Incentive Plan (incorporated by reference to ~~Exhibit 3.2 to Form 8-K,~~Annex B of the Company’s definitive proxy statement on Schedule 14A filed on April ~~5, 2017)~~13, 2018)
31.1*		Principal Executive Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2*		Principal Financial Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32**		Principal Executive Officer and Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith

** Furnished herewith

+ Management contract or compensatory plan or arrangement

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




AXON ENTERPRISE, INC.

Date:	August 9, ~~2017~~2018
		By:	/s/ PATRICK W. SMITH
			Chief Executive Officer
			(Principal Executive Officer)

Date:	August 9, ~~2017~~2018	By:	/s/ JAWAD A. AHSAN
			Chief Financial Officer
			(Principal Financial and
			Accounting Officer)

5051



	As of June 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short-Term Investments		Long-Term Investments
Cash	$	27,029	$	—	$	—		$	27,029	$	27,029	$	—	$	—

Level 1:
Money market funds	1,009		—		—			1,009		1,009		—		—
Corporate bonds	31,030		—		(35		)	30,995		—		31,030		—
Subtotal	32,039		—		(35		)	32,004		1,009		31,030		—

Level 2:
State and municipal obligations	2,517		—		(1		)	2,516		—		2,517		—
Certificates of deposit	249		—		—			249		—		249		—
Subtotal	2,766		—		(1		)	2,765		—		2,766		—
Total	$	61,834	$	—	$	(36	)	$	61,798	$	28,038	$	33,796	$	—



2017 (remaining six months)	$	2,031
2018	4,051
2019	3,928
2020	2,460
2021	2,325
2022	726
Thereafter	1,752
Total	$	17,273



	Three Months Ended June 30, 2017							Three Months Ended June 30, 2016
	TASER Weapons		Software and Sensors			Total		TASER Weapons		Software and Sensors			Total
Product sales	$	53,016	$	13,859		$	66,875	$	45,536	$	8,331		$	53,867
Service revenue	—		12,768			12,768		—		4,889			4,889
Net sales	53,016		26,627			79,643		45,536		13,220			58,756
Cost of products sold	16,078		14,094			30,172		14,489		5,565			20,054
Cost of services delivered	—		3,834			3,834		—		1,403			1,403
Gross margin	36,938		8,699			45,637		31,047		6,252			37,299
Sales, general and administrative	17,492		14,332			31,824		14,684		9,695			24,379
Research and development	1,863		11,126			12,989		1,245		5,465			6,710
Income (loss) from operations	$	17,583	$	(16,759	)	$	824	$	15,118	$	(8,908	)	$	6,210
Purchase of property and equipment	$	2,641	$	757		$	3,398	$	594	$	90		$	684
Purchase of intangible assets	56		19			75		51		36			87
Depreciation and amortization	716		1,080			1,796		560		382			942



	Six Months Ended June 30, 2017							Six Months Ended June 30, 2016
	TASER Weapons		Software and Sensors			Total		TASER Weapons		Software and Sensors			Total
Product sales	$	110,687	$	23,679		$	134,366	$	91,370	$	13,172		$	104,542
Service revenue	—		24,519			24,519		—		9,744			9,744
Net sales	110,687		48,198			158,885		91,370		22,916			114,286
Cost of products sold	34,104		23,140			57,244		28,566		8,943			37,509
Cost of services delivered	—		7,334			7,334		—		2,576			2,576
Gross margin	76,583		17,724			94,307		62,804		11,397			74,201
Sales, general and administrative	34,708		27,973			62,681		29,956		19,256			49,212
Research and development	4,075		21,377			25,452		2,365		11,272			13,637
Income (loss) from operations	$	37,800	$	(31,626	)	$	6,174	$	30,483	$	(19,131	)	$	11,352
Purchase of property and equipment	$	3,574	$	2,167		$	5,741	$	1,665	$	299		$	1,964
Purchase of intangible assets	120		50			170		113		72			185
Purchase of property and equipment and intangible assets in connection with business acquisition	—		8,526			8,526		—		—			—
Depreciation and amortization	1,557		1,843			3,400		1,132		711			1,843



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



	Three Months Ended June 30,								Dollar Change			Percent Change
	2017				2016				Dollar Change			Percent Change
TASER Weapons segment:
Salaries, benefits and bonus	$	6,993	22.0	%	$	5,150	21.1	%	$	1,843		35.8	%
Stock-based compensation	1,432		4.5		863		3.5		569			65.9
Professional, consulting and lobbying	2,408		7.6		2,932		12.0		(524		)	(17.9	)
Sales and marketing	2,254		7.1		2,102		8.6		152			7.2
Travel and meals	1,245		3.9		964		4.0		281			29.1
Other	3,160		9.9		2,673		11.0		487			18.2
Total TASER Weapons segment	17,492		55.0		14,684		60.2		2,808			19.1
Software and Sensors segment:
Salaries, benefits and bonus	6,790		21.3		4,177		17.1		2,613			62.6
Stock-based compensation	723		2.3		596		2.4		127			21.3
Professional, consulting and lobbying	2,511		7.9		1,929		7.9		582			30.2
Sales and marketing	2,196		6.9		1,418		5.8		778			54.9
Travel and meals	1,443		4.5		1,104		4.5		339			30.7
Other	669		2.1		471		1.9		198			42.0
Total Software and Sensors segment	14,332		45.0		9,695		39.8		4,637			47.8
Total sales, general and administrative expenses	$	31,824	100.0	%	$	24,379	100.0	%	$	7,445		30.5



	Three Months Ended June 30, 2017				Three Months Ended March 31, 2017				Dollar Change			Percent Change
TASER Weapons segment:
TASER X26P	$	16,235	20.4	%	$	15,668	19.8	%	$	567		3.6	%
TASER X2	16,052		20.2		18,986		24.0		(2,934		)	(15.5	)
TASER Pulse and Bolt	801		1.0		1,022		1.3		(221		)	(21.6	)
Single cartridges	14,867		18.7		16,664		21.0		(1,797		)	(10.8	)
Extended warranties including TAP	2,991		3.8		2,843		3.6		148			5.2
Other	2,070		2.6		2,488		3.1		(418		)	(16.8	)
Total TASER Weapons segment	53,016		66.6		57,671		72.8		(4,655		)	(8.1	)
Software and Sensors segment:
Axon Body	3,752		4.7		3,446		4.3		306			8.9
Axon Flex	3,851		4.8		1,475		1.9		2,376			161.1
Axon Dock	2,783		3.5		1,987		2.5		796			40.1
Evidence.com	12,756		16.0		11,742		14.8		1,014			8.6
TASER Cam	766		1.0		719		0.9		47			6.5
Extended warranties including TAP	1,619		2.0		1,418		1.8		201			14.2
Other	1,100		1.4		784		1.0		316			40.3
Total Software and Sensors segment	26,627		33.4		21,571		27.2		5,056			23.4
Total net sales	$	79,643	100.0	%	$	79,242	100.0	%	$	401		0.5