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 September 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”~~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 October 31, ~~2017~~2018 was ~~52,912,769.~~58,448,574.

AXON ENTERPRISE, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

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



			Page

Special Note Regarding Forward-Looking Statements			ii

PART I - FINANCIAL INFORMATION
	Item 1. Financial Statements		31
		Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2018 (Unaudited) and December 31, ~~2016~~2017	31
		Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017	42
		Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017	53
		Notes to Unaudited Condensed Consolidated Financial Statements	64
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		2827
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		4945
	Item 4. Controls and Procedures		5046
PART II - OTHER INFORMATION
	Item 1. Legal Proceedings		5148
	Item 1A. Risk Factors		5148
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		5148
	Item 3. Defaults Upon Senior Securities		5148
	Item 4. Mine Safety Disclosures		5148
	Item 5. Other Information		5148
	Item 6. Exhibits		5249
	SIGNATURES		5350

Table of Contents

Special Note Regarding Forward-Looking Statements

This Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions and strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995.From time to time, we also provide forward-looking statements in other materials we release to the public as well as verbal forward-looking statements. These forward-looking statements include, without limitation, statements regarding: proposed products and services and related development efforts and activities; expectations about the market for our current and future products and services; expectations about customer behavior; statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; and statements of management’s strategies, goals and objectives and other similar expressions; as well as the ultimate resolution of financial statement items requiring critical accounting estimates, including those set forth in our Form 10-K for the year ended December 31, 2017. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Words such as “may,” “will,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions, as well as statements in future tense, identify forward-looking statements. However, not all forward-looking statements contain these identifying words.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. The following important factors could cause actual results to differ materially from those in the forward-looking statements: customer purchase behavior, including adoption of our software as a service delivery model; our exposure to cancellations of government contracts due to appropriation clauses, exercise of a cancellation clause, or non-exercise of contractually optional periods; our ability to design, introduce and sell new products or features; our ability to manage our supply chain and avoid production delays or shortages; changes in the costs of product components and labor; defects in our products; the impact of product mix on projected gross margins; loss of customer data, a breach of security or an extended outage, including our reliance on third party cloud-based storage providers; negative media publicity regarding our products; our ability to defend against litigation and protect our intellectual property, and the resulting costs of this activity; changes in government regulations in the U.S. and in foreign markets, especially related to the classification of our product by the United States Bureau of Alcohol, Tobacco, Firearms and Explosives; counter-party risks relating to cash balances held in excess of FDIC insurance limits; our ability to integrate acquired businesses; and our ability to attract and retain key personnel. Many events beyond our control may determine whether results we anticipate will be achieved. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements. The Annual Report on Form 10-K that we filed with the SEC on March 1, 2018 listed various important factors that could cause actual results to differ materially from expected and historical results. These factors are intended as cautionary statements for investors within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. Readers can find them under the heading “Risk Factors” in the Report on Form 10-K and in this Report on Form 10-Q, and investors should refer to them. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

Except as required by law, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission ("SEC"). Our filings with the SEC may be accessed at the SEC’s web site at www.sec.gov.

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AXON ENTERPRISE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	September 30, 2017			December 31, 2016			September 30, 2018			December 31, 2017
	(Unaudited)						(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	43,471		$	40,651		$	324,371		$	75,105
Short-term investments	18,372			48,415			500			6,862
Accounts and notes receivable, net of allowance of $801 and $443 as of September 30, 2017 and December 31, 2016, respectively	51,204			39,466
Accounts and notes receivable, net of allowance of $1,559 and $754 as of September 30, 2018 and December 31, 2017, respectively							116,518			56,064
Contract assets, net							13,263			—
Inventory	52,692			34,841			39,221			45,465
Prepaid expenses and other current assets	23,002			13,858			30,514			21,696
Total current assets	188,741			177,231			524,387			205,192
Property and equipment, net of accumulated depreciation of $35,484 and $37,799 as of September 30, 2017 and December 31, 2016, respectively	31,263			24,004
Property and equipment, net of accumulated depreciation of $38,599 and $36,477 as of September 30, 2018 and December 31, 2017, respectively							35,613			31,172
Deferred income tax assets, net	22,845			19,515			18,080			15,755
Intangible assets, net	20,758			15,218			16,956			18,823
Goodwill	14,923			10,442			25,043			14,927
Long-term investments	—			234
Long-term accounts and notes receivable, net of current portion	32,543			17,602
Long-term notes receivable, net of current portion							38,220			36,877
Other assets	16,534			13,917			23,396			15,366
Total assets	$	327,607		$	278,163		$	681,695		$	338,112
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,354		$	10,736		$	8,998		$	8,592
Accrued liabilities	22,431			18,248			36,908			23,502
Current portion of deferred revenue	60,453			45,137			89,637			70,401
Customer deposits	2,648			2,148			4,111			3,673
Current portion of business acquisition contingent consideration	1,735			1,690			1,736			1,693
Other current liabilities	470			80			115			89
Total current liabilities	100,091			78,039			141,505			107,950
Deferred revenue, net of current portion	51,574			40,054			69,382			54,881
Liability for unrecognized tax benefits	1,763			1,896			1,805			1,706
Long-term deferred compensation	3,533			3,362			3,590			3,859
Business acquisition contingent consideration, net of current portion	2,715			1,635			—			1,048
Other long-term liabilities	1,851			2,289			5,751			1,224
Total liabilities	161,527			127,275			222,033			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 September 30, 2017 and December 31, 2016	—			—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 52,853,920 and 52,325,251 shares issued and outstanding as of September 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 September 30, 2018 and December 31, 2017							—			—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 58,419,742 and 52,969,869 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively							1			1
Additional paid-in capital	197,978			187,656			447,933			201,672
Treasury stock at cost, 20,220,227 shares as of September 30, 2017 and December 31, 2016	(155,947		)	(155,947		)
Treasury stock at cost, 20,220,227 shares as of September 30, 2018 and December 31, 2017							(155,947		)	(155,947		)
Retained earnings	125,256			118,275			169,301			123,185
Accumulated other comprehensive income	(1,208		)	903
Accumulated other comprehensive loss							(1,626		)	(1,467		)
Total stockholders’ equity	166,080			150,888			459,662			167,444
Total liabilities and stockholders’ equity	$	327,607		$	278,163		$	681,695		$	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 (LOSS)

(in thousands, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Net sales from products	$	73,985		$	63,204		$	208,351		$	167,745		$	80,923		$	73,985		$	238,618		$	208,351
Net sales from services	16,277			8,678			40,796			18,423			23,913			16,277			66,659			40,796
Net sales	90,262			71,882			249,147			186,168			104,836			90,262			305,277			249,147
Cost of product sales	34,573			23,664			91,817			61,172			32,953			34,573			96,474			91,817
Cost of service sales	5,924			1,653			13,258			4,230			6,250			5,924			15,566			13,258
Cost of sales	40,497			25,317			105,075			65,402			39,203			40,497			112,040			105,075
Gross margin	49,765			46,565			144,072			120,766			65,633			49,765			193,237			144,072
Operating expenses:
Sales, general and administrative	36,398			28,121			99,079			77,333			39,685			36,398			114,787			99,079
Research and development	14,166			7,358			39,618			20,995			21,982			14,166			55,602			39,618
Total operating expenses	50,564			35,479			138,697			98,328			61,667			50,564			170,389			138,697
Income (loss) from operations	(799		)	11,086			5,375			22,438			3,966			(799		)	22,848			5,375
Interest and other income (expense), net	1,430			(455		)	3,320			(460		)
Interest and other income, net													1,274			1,430			2,242			3,320
Income before provision for income taxes	631			10,631			8,695			21,978			5,240			631			25,090			8,695
Provision for income taxes	209			6,788			1,417			11,022
Provision for (benefit from) income taxes													(471		)	209			(2,032		)	1,417
Net income	$	422		$	3,843		$	7,278		$	10,956		$	5,711		$	422		$	27,122		$	7,278
Net income per common and common equivalent shares:
Basic	$	0.01		$	0.07		$	0.14		$	0.21		$	0.10		$	0.01		$	0.49		$	0.14
Diluted	$	0.01		$	0.07		$	0.14		$	0.20		$	0.10		$	0.01		$	0.47		$	0.14
Weighted average number of common and common equivalent shares outstanding:
Basic	52,831			52,206			52,663			52,791			58,340			52,831			55,681			52,663
Diluted	53,843			53,141			53,762			53,656			59,805			53,843			57,254			53,762

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)													UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net income	$	422		$	3,843		$	7,278		$	10,956		$	5,711		$	422		$	27,122		$	7,278
Foreign currency translation adjustments	(1,560		)	61			(2,111		)	320			(107		)	(1,560		)	(159		)	(2,111		)
Comprehensive income (loss)	$	(1,138	)	$	3,904		$	5,167		$	11,276		$	5,604		$	(1,138	)	$	26,963		$	5,167

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)


	Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2018			2017
Cash flows from operating activities:
Net income	$	7,278		$	10,956		$	27,122		$	7,278
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	5,677			2,744			8,226			5,677
Purchase accounting adjustments to goodwill	(23		)	520			—			(23		)
Loss on inventory nonmonetary exchanges	—			147
Loss on disposal of property and equipment, net	—			40
Loss on disposal of intangible assets	—			21
Loss on disposal and impairment of property and equipment, net							290			—
Loss on disposal and abandonment of intangible assets							2,103			—
Bond premium amortization	594			980			34			594
Stock-based compensation	11,423			6,742			15,302			11,423
Deferred income taxes	(4,155		)	(2,672		)	(2,326		)	(4,155		)
Unrecognized tax benefits	(134		)	17			99			(134		)
Tax benefit from stock-based compensation	—			(919		)
Change in assets and liabilities:
Accounts and notes receivable	(26,027		)	(14,409		)
Accounts and notes receivable and contract assets							(51,172		)	(26,027		)
Inventory	(19,074		)	(10,804		)	9,033			(19,074		)
Prepaid expenses and other assets	(11,261		)	(10,441		)	(12,081		)	(11,252		)
Accounts payable, accrued and other liabilities	2,906			12,566			4,306			3,382
Deferred revenue	26,460			26,331			31,700			26,460
Customer deposits	501			140
Net cash provided by (used in) operating activities	(5,835		)	21,959			32,636			(5,851		)
Cash flows from investing activities:
Purchases of investments	(19,950		)	(49,316		)	(4,331		)	(19,950		)
Proceeds from call / maturity of investments	49,633			55,235
Proceeds from maturity/call of investments							10,658			49,633
Purchases of property and equipment	(9,072		)	(3,335		)	(6,880		)	(9,072		)
Proceeds from disposal of property and equipment	—			40
Purchases of intangible assets	(431		)	(339		)	(460		)	(431		)
Business acquisitions	(10,629		)	—			(4,990		)	(10,629		)
Net cash provided by investing activities	9,551			2,285
Net cash provided by (used in) investing activities							(6,003		)	9,551
Cash flows from financing activities:
Repurchase of common stock	—			(33,746		)
Net proceeds from equity offering							233,993			—
Proceeds from options exercised	1,255			431			713			1,255
Payroll tax payments for net-settled stock awards	(2,830		)	(1,299		)
Payments on capital lease obligation	(25		)	(29		)
Payments on notes payable	—			(77		)
Tax benefit from stock-based compensation	—			919
Net cash used in financing activities	(1,600		)	(33,801		)
Effect of exchange rate changes on cash and cash equivalents	704			631
Net increase (decrease) in cash and cash equivalents	2,820			(8,926		)
Cash and cash equivalents, beginning of period	40,651			59,526
Cash and cash equivalents, end of period	$	43,471		$	50,600
Supplemental disclosure:
Income and payroll tax payments for net-settled stock awards							(11,973		)	(2,830		)
Payment of contingent consideration for a business acquisition							(575		)	—
Net cash provided by (used in) financing activities							222,158			(1,575		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash							(381		)	703
Net increase in cash, cash equivalents and restricted cash							248,410			2,828
Cash, cash equivalents and restricted cash, beginning of period							78,438			43,969
Cash, cash equivalents and restricted cash, end of period							$	326,848		$	46,797

Supplemental disclosures:
Cash and cash equivalents							$	324,371		$	43,471
Restricted cash (Note 6)							2,477			3,326
Total cash, cash equivalents and restricted cash shown in the statements of cash flows							$	326,848		$	46,797

Cash paid for income taxes, net of refunds	$	12,206		$	11,308		$	7,957		$	12,206

Non-cash transactions
Property and equipment purchases in accounts payable and accrued liabilities	$	556		$	145		$	1,114		$	556
Contingent consideration related to business combinations	$	1,007		$	—
Non-cash purchase consideration related to business combinations							$	12,508		$	1,007

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

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Axon Enterprise, Inc. (“~~Axon”~~Axon,” the “Company,” "we," or ~~the “Company”~~"us") 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~~we have 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~~We sell our products worldwide through ~~its~~our direct sales force, distribution partners, online store and third-party resellers. ~~The Company~~Axon was incorporated in Arizona in September 1993, and reincorporated in Delaware in January 2001. ~~The Company’s~~Our corporate headquarters and manufacturing facilities are located in Scottsdale, Arizona. ~~The Company’s~~Our main software development division is located in Seattle, ~~Washington.~~Washington, and we develop artificial intelligence technologies through our wholly-owned subsidiary in Vietnam, Axon Public Safety Southeast Asia LLC. During 2018, we established Axon Public Safety Finland OY in Tampere, Finland that operates a connected hardware team focused on the development of our hardware products. Axon Public Safety BV, a wholly owned subsidiary, ~~of the Company,~~ supports ~~the Company's~~our international sales and marketing efforts, and is located in Amsterdam, Netherlands. Axon Public Safety BV wholly owns two subsidiaries, Axon Public Safety U.K. ~~LTD~~Limited and Axon Public Safety ~~AU,~~Australia Pty Ltd., that serve as direct sales operations in the United Kingdom ("U.K.") and Australia, respectively. ~~The Company~~We also ~~sells~~sell to certain international markets through a ~~wholly owned~~wholly-owned subsidiary, Axon Public Safety Germany ~~SE. In 2015,~~SE, and sell into the ~~Company formed~~Canadian market through our 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~~Axon Enterprise, Inc. and ~~its~~our wholly owned 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.~~SEC. Certain information related to ~~the Company’s~~our 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~~our annual consolidated financial statements for the year ended December 31, ~~2016~~2017, as filed on Form ~~10-K.~~10-K, with the exception of our adoption of certain accounting pronouncements which we describe below and in Note 2. 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~~our 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~~our Form 10-K for the year ended December 31, ~~2016~~2017. The results of operations for the nine months ended September 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 for performance-based stock awards, and~~stock-based compensation,

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~~Our operations are 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 the Chief Operating Decision Maker (the “CODM”) for the Company. The Company organizes~~Software and ~~reviews operations based on~~Sensors segment, we specify sales of products and ~~services,~~services. Revenue from our “products” in the Software and ~~currently there~~Sensors segment are ~~no operating segments that are aggregated. The Company performs an annual analysis~~generally from 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 our “services” in the Software and Sensors segment comprise sales related to the ~~Company’s business segments~~Axon Cloud, which includes Axon Evidence, cloud-based evidence management software revenue, other recurring cloud-hosted software revenue and related professional services, and is ~~summarized in Note 14.~~sometimes referred to as "Axon Cloud revenue." Within the Software and Sensors segment, we include only

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

c. revenues and costs attributable to that segment, which costs 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.

Our 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. We organize and review operations based on products and services. We perform an annual analysis of our reportable segments. Additional information related to our business segments is summarized in Note 14.

Geographic Information and Major Customers

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

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
United States $ 73,203
81.1 % $ 60,558
84.2 % $ 204,155
81.9 % $ 155,245
83.4 %
Other Countries 17,059
18.9
11,324
15.8
44,992
18.1
30,923
16.6
Total $ 90,262
100.0 % $ 71,882
100.0 % $ 249,147
100.0 % $ 186,168
100.0 %

~~Sales to customers~~no individual country outside of the U.S. ~~are typically denominated in U.S. dollars, and are attributed to each country based on the shipping address~~represented more than 10% of ~~the distributor or customer.~~total net sales. For the three months ended September 30, 2017, one country, the U.K. represented more than 10% of the Company's net sales at 10.5%. ~~For the nine months ended September 30, 2017 and the three and nine months ended September 30, 2016, no individual country outside the U.S. represented more than 10% of 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~~our customers.

For the three and nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, no customer represented more than 10% of total net sales. At September 30, 2018 and December 31, 2017, ~~the Company had a trade receivable from one~~no customer ~~comprising 10.3%~~represented more than 10% of the aggregate accounts and notes receivable ~~balance. At December 31, 2016, the Company had a trade receivable from one 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~~our 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 September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Numerator for basic and diluted earnings per share:
Net income $ 422
$ 3,843
$ 7,278
$ 10,956
Denominator:
Weighted average shares outstanding - basic 52,831
52,206
52,663
52,791
Dilutive effect of stock-based awards 1,012
935
1,099
865
Diluted weighted average shares outstanding 53,843
53,141
53,762
53,656
Anti-dilutive stock-based awards excluded 575
227
506
304
Net income per common share:
Basic $ 0.01
$ 0.07
$ 0.14
$ 0.21
Diluted $ 0.01
$ 0.07
$ 0.14
$ 0.20

~~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,



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Numerator for basic and diluted earnings per share:
Net income	$	5,711	$	422	$	27,122	$	7,278
Denominator:
Weighted average shares outstanding	58,340		52,831		55,681		52,663
Dilutive effect of stock-based awards	1,465		1,012		1,573		1,099
Diluted weighted average shares outstanding	59,805		53,843		57,254		53,762
Anti-dilutive stock-based awards excluded	6,793		575		6,760		506
Net income per common share:
Basic	$	0.10	$	0.01	$	0.49	$	0.14
Diluted	$	0.10	$	0.01	$	0.47	$	0.14

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

delivery has occurred or services have been rendered, title has transferred, the price is fixed and collectability is reasonably assured. Contractual arrangements may contain explicit customer acceptance provisions, and under such arrangements, the Company defers recognition of revenue until formal customer acceptance is received. Extended warranty revenue, SaaS revenue and related data storage revenue are recognized ratably over the term of the contract commencing on a pre-determined date subsequent to the delivery of the hardware. Training and professional service revenues are generally recorded once the services are completed.

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 most instances, customers generally 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 discounts 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 allocated to the Axon device deliverable that the Company is contractually entitled to that is not contingent upon the delivery of future Evidence.com services. The Company recognizes the remaining allocated revenue related to discounted 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 deliverables 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. TASER 60 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 allocates revenue to the deliverables using the relative selling price method and recognizes revenue for the amount allocated to the CEW devices at the time of sale for the amount allocated to the CEW devices, net of imputed interest, and the amount allocated to the extended warranty is recognized over five years. The Company performs an initial credit evaluation prior to execution of TASER 60 arrangements and subsequently performs quarterly credit evaluations by monitoring public municipal bond ratings, as applicable, and any subsequent credit upgrades or downgrades, to monitor for each customer's credit risk. Additionally, the Company tracks payment activity for amounts

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~~AXON ENTERPRISE, INC.~~

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

currently due to assess the credit quality of its notes receivable portfolio. As the Company’s customers generally have investment-grade municipal bond ratings, the Company considers collectability of the contracted amounts in such installment purchase arrangements to be reasonably assured, unless other factors or payment history indicate otherwise. For customers where municipal bond information is not available, the Company considers factors such as payment history, customer-specific information and broader market and economic trends and conditions to determine whether collectability is reasonably assured. The Company considers this information when establishing its allowance for doubtful accounts. For the three and nine months ended September 30, 2017, the Company recorded revenue of $7.5 million and $20.8 million, respectively under the Company’s TASER 60 plan, and recorded $5.0 million and $8.6 million, respectively, for the same periods in 2016.

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 per year as well as a fixed number of battery replacements over the contractual term. For the Basic Cartridge Plan, the Company allocates the contractual consideration to all identified deliverables using the relative selling price method. Generally, the Company recognizes revenue for the amounts allocated to the cartridges when they are delivered to the customer. The Unlimited Cartridge Plan entitles customers to a fixed number of training cartridges per year and an unlimited amount of duty cartridges and replacement batteries. Due to the unlimited nature of the arrangement 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 is recognized as the products are delivered to the customer.

~~Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis.~~

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.

~~The Company records reductions to net sales for expected future product returns based on the Company’s historical experience.~~

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~~We warranty our 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 repair or replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold 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~~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. The ~~reserve for~~ warranty ~~returns~~reserve is included in accrued liabilities on the accompanying condensed consolidated balance sheets.

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~~AXON ENTERPRISE, INC.~~

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

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


	Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2018			2017
Balance, beginning of period	$	780		$	314		$	644		$	780
Utilization of accrual	(178		)	(97		)	(384		)	(178		)
Warranty expense	117			531			699			117
Balance, end of period	$	719		$	748		$	959		$	719

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~~We categorize each of ~~its~~our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

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

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~~our own assumptions about inputs that market participants would use in pricing an asset or liability.

~~The Company has~~We have cash equivalents and investments, which at September 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~~our cash equivalents and investments in Note 2.3. Included in the balance of Other assets as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017 was ~~$3.7~~$3.9 million ~~and $3.2 million, respectively,~~ related to corporate-owned life insurance policies which are used to fund ~~the Company’s~~our deferred compensation plan. ~~The Company determines~~We determine 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~~Our 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~~carrying values approximate their ~~carrying~~fair 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. During the three months ended September 30, 2018, we abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $2.0 million, which was included in sales, general and administrative expense in the accompanying condensed consolidated statement of operations.

~~The Company does~~We do 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~~We perform our annual goodwill and intangible asset impairment tests in the fourth quarter of each year.

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~~AXON ENTERPRISE, INC.~~

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

i. Recently Issued Accounting Guidance

Recently Adopted Accounting Pronouncements

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, we 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 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 intends to elect the modified retrospective method of adoption for all contracts that are not completed as of the adoption date.~~

While the Company's assessment is not finalized, it believes the areas most significantly impacted will be contracts with contingent hardware revenue, 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 when it is contingent on delivery of Evidence.com. Under ASU 2014-09, the Company anticipates being required to generally recognize hardware revenue upon fulfillment of the distinct hardware performance obligation when control transfers 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 distinct software license predominately at the time the software is delivered to the customer, while the amount allocated to the PCS performance obligation 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 when the related performance obligations are fulfilled over the contract term 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.

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~~AXON ENTERPRISE, INC.~~

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

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.

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

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification (Topic 718), Compensation – Stock Compensation. ASU 2016-09 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.

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 not 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 in the statement of cash flows 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.

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

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. We 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~~our condensed 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

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~~AXON ENTERPRISE, INC.~~

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

party. We 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~~our condensed 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. We adopted ASU 2016-18 is effective ~~for~~January 1, 2018, and retrospectively updated the ~~fiscal year beginning after December 15, 2017,~~presentation of our 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. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.~~end-of-period amounts.

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 not a business, and if the screen is not met it may result in fewer transactions that qualify as a business combination under ASC Topic 805. We adopted ASU 2017-01 effective ~~for the fiscal year beginning after December 15, 2017,~~January 1, 2018, and ~~interim periods within that year and early adoption is permitted. The Company does not expect~~ 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 that fiscal year, and early adoption is permitted. The Company's early adoption on January 1, 2017 did not have an impact on itsour condensed 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. We adopted ASU 2017-09 is effective ~~for the fiscal year beginning after December 15, 2017 using a prospective approach,~~January 1, 2018, and ~~early adoption is permitted. The Company does not expect~~ the adoption of this ASU did not have a material impact on our condensed consolidated financial statements.

In September 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The guidance reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. We adopted ASU 2018-15 prospectively effective July 1, 2018, and the adoption of this ASU did not have a material impact on our condensed consolidated financial statements.

Effective the first quarter of 2019:

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. In July 2018, the FASB issued additional guidance which provided an additional transition method for adopting the updated guidance. Under the additional transition method, entities may elect to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. We currently plan to adopt this standard using this modified retrospective approach.

Most prominent among the changes in the standard is the requirement for lessees to recognize ROU assets and lease liabilities for those leases classified as operating leases under current U.S. GAAP. The standard requires additional disclosures to enable users of financial statements to assess the amount, timing, and certainty of cash flows arising from leases. We intend to elect certain of the available practical expedients upon adoption. We have evaluated our existing lease portfolio and believe that our population of leases is relatively low in number. We have implemented key processes and controls to enable the accurate assessment of leases and preparation of related financial information.

We are nearing completion of the opening balance sheet adjustment related to ASU 2016-02. We expect adoption of the standard will result in the recognition of ROU assets of between $10 million and $12 million and lease liabilities of between $11 million and $13 million for operating leases as of January 1, 2019, with no impact to retained earnings. Additionally, we anticipate that our accounting for capital leases will remain substantially unchanged.

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. The adoption of this ASU is not expected to have a material impact on ~~its~~our condensed consolidated financial statements.

Effective the first quarter of 2020:

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 includes an impairment model (known as the current expected credit loss model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The use of forecasted information is intended to incorporate more timely information in the estimate of expected credit loss. Early adoption is permitted.We are currently in the process of evaluating the impact of adoption of ASU 2016-13 on our condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. The amendments apply to the disclosures of changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted, and an entity is also permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until their effective date. As ASU 2018-13 only revises disclosure requirements, it will not have a material impact on our condensed consolidated financial statements.

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. Revenues

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

On January 1, 2018, we 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 continue to be reported in accordance with our historic accounting under ASC 605. We recorded a net increase in stockholders’ equity (retained earnings) of $19.0 million as of January 1, 2018 due to the 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 the treatment of incremental costs of obtaining contracts with customers.

The impacts as a result of applying Topic 606 were a net increase to net sales of $2.1 million and $4.4 million, respectively, for the three and nine months ended September 30, 2018, and a net decrease to sales, general and administrative expenses of approximately $0.4 million and $2.0 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, 2017 balance sheet of adopting Topic 606 are presented below (in thousands):



	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	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 we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, each of which is generally distinct and accounted for as a separate performance obligation. 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, we allocate the contract transaction price to each performance obligation using our estimate of the standalone selling price ("SSP") of each distinct good or service in the contract.

Performance obligations to deliver products, including CEWs, cameras and related accessories such as cartridges, batteries and docks, are generally satisfied at the point in time we ship 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 Axon Evidence 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.

We have 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 our revenues by primary product and service offering (in thousands):



	Three Months Ended September 30, 2018						Three Months Ended September 30, 2017 ⁽¹⁾
	TASER Weapons		Software and Sensors		Total		TASER Weapons		Software and Sensors		Total
TASER X26P	$	17,998	$	—	$	17,998	$	13,264	$	—	$	13,264
TASER X2	20,392		—		20,392		22,717		—		22,717
TASER Pulse and Bolt	1,402		—		1,402		1,069		—		1,069
Single cartridges	18,406		—		18,406		17,474		—		17,474
Axon Body	—		4,744		4,744		—		4,527		4,527
Axon Flex	—		1,325		1,325		—		2,563		2,563
Axon Fleet	—		1,809		1,809		—		1,113		1,113
Axon Dock	—		2,178		2,178		—		2,639		2,639
Axon Evidence and cloud services	—		23,915		23,915		—		16,200		16,200
TASER Cam	—		717		717		—		922		922
Extended warranties	4,123		3,161		7,284		3,086		1,945		5,031
Other	1,345		3,321		4,666		1,806		937		2,743
Total	$	63,666	$	41,170	$	104,836	$	59,416	$	30,846	$	90,262



	Nine Months Ended September 30, 2018						Nine Months Ended September 30, 2017 ⁽¹⁾
	TASER Weapons		Software and Sensors		Total		TASER Weapons		Software and Sensors		Total
TASER X26P	$	52,618	$	—	$	52,618	$	45,167	$	—	$	45,167
TASER X2	62,686		—		62,686		57,755		—		57,755
TASER Pulse and Bolt	3,849		—		3,849		2,892		—		2,892
Single cartridges	51,763		—		51,763		49,005		—		49,005
Axon Body	—		15,082		15,082		—		11,725		11,725
Axon Flex	—		4,529		4,529		—		7,889		7,889
Axon Fleet	—		6,640		6,640		—		1,113		1,113
Axon Dock	—		7,332		7,332		—		7,409		7,409
Axon Evidence and cloud services	—		64,513		64,513		—		40,698		40,698
TASER Cam	—		2,839		2,839		—		2,407		2,407
Extended warranties	11,567		8,521		20,088		8,920		4,982		13,902
Other	5,331		8,007		13,338		6,364		2,821		9,185
Total	$	187,814	$	117,463	$	305,277	$	170,103	$	79,044	$	249,147

⁽¹⁾ Amounts for the three and nine months ended September 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.

We derive revenue from two primary sources: (1) the sale of physical products, including CEWs, 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 Axon Evidence digital evidence management SaaS (including secure cloud-based storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, we also recognize revenue from training, professional services and revenue related to other software and cloud services.

Many of our products and services are sold on a standalone basis. We also bundle our hardware products and services together and sell them to our 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 us at a future date. Additionally, we offer 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 we are obligated to deliver unlimited products at the customer’s request, we account for these arrangements as stand-ready obligations, and recognize revenue ratably over the contract period. Cost of product sales is recognized as the products are shipped to the customer.

The following table presents our revenues disaggregated by geography (in thousands):



	Three Months Ended September 30,								Nine Months Ended September 30,
	2018				2017 ⁽¹⁾				2018				2017 ⁽¹⁾
United States	$	88,125	84	%	$	73,203	81	%	$	244,806	80	%	$	204,155	82	%
Other countries	16,711		16		17,059		19		60,471		20		44,992		18
Total	$	104,836	100	%	$	90,262	100	%	$	305,277	100	%	$	249,147	100	%

Contract Balances

The timing of revenue recognition may differ from the timing of invoicing to customers. We generally have an unconditional right to consideration when we invoice our customers and record a receivable. We record 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 our subscription programs where we satisfy 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 our future performance of a SaaS service obligation under the contract. We recognize a portion of the amount allocated to hardware products shipped to the customer as accounts receivable when invoiced to the customer, and record the remaining allocated value as a contract asset as we have generally fulfilled our hardware performance obligation upon shipment.

Contract liabilities generally consist of deferred revenue on our subscription programs where we generally invoice customers at the beginning of each annual period and record 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 our Axon Evidence 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 Axon Evidence 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 our contract assets, contract liabilities and certain information related to these balances as of and for the nine months ended September 30, 2018 (in thousands):



	September 30, 2018
Contract assets, net	$	13,263
Contract liabilities (deferred revenue)	159,019
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the period	63,475

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



	September 30, 2018						December 31, 2017 ⁽¹⁾
	Current		Long-Term		Total		Current		Long-Term		Total
Warranty:
TASER Weapons	$	11,256	$	18,085	$	29,341	$	12,501	$	18,619	$	31,120
Software and Sensors	8,525		5,195		13,720		6,293		4,195		10,488
	19,781		23,280		43,061		18,794		22,814		41,608
Hardware:
TASER Weapons	7,389		15,927		23,316		4,164		11,401		15,565
Software and Sensors	17,681		19,833		37,514		16,956		14,781		31,737
	25,070		35,760		60,830		21,120		26,182		47,302
Software and Sensors Services	44,786		10,342		55,128		30,487		5,885		36,372
Total	$	89,637	$	69,382	$	159,019	$	70,401	$	54,881	$	125,282



	September 30, 2018						December 31, 2017 ⁽¹⁾
	Current		Long-Term		Total		Current		Long-Term		Total
TASER Weapons	$	18,645	$	34,012	$	52,657	$	16,665	$	30,020	$	46,685
Software and Sensors	70,992		35,370		106,362		53,736		24,861		78,597
Total	$	89,637	$	69,382	$	159,019	$	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 September 30, 2018, we had approximately $820 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 September 30, 2018. We expect to recognize between 15% - 20% of this balance over the next twelve months, and expect 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

We recognize 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, we apply the practical expedient to expense these sales commissions when incurred. These costs are recognized as incurred within sales, general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive income.

As of September 30, 2018, our assets for costs to obtain contracts were as follows (in thousands):



	September 30, 2018
Current deferred commissions ⁽¹⁾	$	6,207
Deferred commissions, net of current portion ⁽²⁾	14,175
	$	20,382

⁽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 nine months ended September 30, 2018, we recognized $1.5 million and $3.8 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

Our 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 and contract assets, liabilities, and other accounts will be made accordingly.

Our 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. We consider 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 Axon Evidence and other cloud services.

In contracts where there are timing differences between when we transfer a promised good or service to the customer and when the customer pays for that good or service, we have determined that, with the exception of our TASER 60 installment purchase arrangements, our contracts generally do not include a significant financing component. For the three and nine months ended September 30, 2018, we recorded revenue of $11.9 million and $36.1 million, respectively, including $0.4 million and $1.0 million, respectively, of interest income under our TASER 60 plan. For the three and nine months ended September 30, 2017, we recorded revenue of $7.5 million and $20.8 million, respectively, including $0.2 million and $0.5 million, respectively, of interest income under our TASER 60 plan. Amounts for the three and nine months ended September 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.We analyze separate sales of our products and services as a basis for estimating the SSP of our products and services and then use that SSP as the basis for allocating the transaction price when our 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 we do not sell the product or service separately, we determine the SSP using information that may include market conditions, time value of money and other observable inputs. We typically have 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, we may use information such as 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)

2.3. Cash, Cash Equivalents and Investments

The following tables summarize ~~the Company's~~our cash, cash equivalents, and held-to-maturity investments at September 30, ~~2017~~2018 and December 31, ~~2016~~2017 (in thousands):


	As of September 30, 2017															As of September 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	$	33,825	$	—	$	—		$	33,825	$	33,825	$	—	$	—	$	120,539	$	—	$	120,539	$	120,539	$	—

Level 1:
Money market funds	9,646		—		—			9,646		9,646		—		—		203,832		—		203,832		203,832		—
Corporate bonds	17,403		—		(10		)	17,393		—		17,403		—
Subtotal	27,049		—		(10		)	27,039		9,646		17,403		—

Level 2:
State and municipal obligations	969		—		—			969		—		969		—
Certificates of deposit	—		—		—			—		—		—		—
Subtotal	969		—		—			969		—		969		—
Corporate bonds																500		—		500		—		500
Total	$	61,843	$	—	$	(10	)	$	61,833	$	43,471	$	18,372	$	—	$	324,871	$	—	$	324,871	$	324,371	$	500


	As of December 31, 2016															As of December 31, 2017
	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	$	—	$	—	$	53,459	$	—		$	53,459	$	53,459	$	—

Level 1:
Money market funds	7,849		—		—			7,849		7,849		—		—		20,884		—			20,884		20,884		—
Corporate bonds	33,379		—		(57		)	33,322		—		33,379		—		6,632		(6		)	6,626		—		6,632
Subtotal	41,228		—		(57		)	41,171		7,849		33,379		—		27,516		(6		)	27,510		20,884		6,632

Level 2:
State and municipal obligations	14,477		—		(10		)	14,467		—		14,243		234		992		—			992		762		230
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	$	81,967	$	(6	)	$	81,961	$	75,105	$	6,862

~~The Company believes the~~We believe unrealized losses on ~~the Company’s~~our investments are due to interest rate fluctuations. As these investments are short-term in nature, are expected to be redeemed at par value, and/or because ~~the Company has~~we have the ability and intent to hold these investments to maturity, ~~the Company does~~we do not consider these investments to be other than temporarily impaired ~~at September 30, 2017 or~~ as of December 31, ~~2016.~~2017.

~~Table of Contents~~

~~AXON ENTERPRISE, INC.~~

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

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 September 30, ~~2017~~2018 and December 31, ~~2016~~2017 was ~~$1.3~~$1.7 million and ~~$0.7~~$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 September 30, ~~2017~~2018 and December 31, ~~2016~~2017 (in thousands):


	2017		2016		September 30, 2018		December 31, 2017
Raw materials	$	26,426	$	18,002	$	19,942	$	20,119
Finished goods	26,266		16,839		19,279		25,346
Total inventory	$	52,692	$	34,841	$	39,221	$	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 nine months ended September 30, ~~2017~~2018 were as follows (in thousands):


	TASER Weapons		Software and Sensors		Total		TASER Weapons			Software and Sensors			Total
Balance, beginning of period	$	562	$	9,880	$	10,442	$	1,453		$	13,474		$	14,927
Goodwill acquired	825		3,505		4,330		—			10,285			10,285
Purchase accounting adjustments	—		23		23
Foreign currency translation adjustment	64		64		128		(84		)	(85		)	(169		)
Balance, end of period	$	1,451	$	13,472	$	14,923	$	1,369		$	23,674		$	25,043

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


		September 30, 2017							December 31, 2016								September 30, 2018							December 31, 2017
	Useful Life	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		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	$	(352	)	$	2,809	$	3,161	$	(125	)	$	3,036	5-10 years	$	3,161	$	(656	)	$	2,505	$	3,161	$	(428	)	$	2,733
Issued patents	4-15 years	1,985		(874		)	1,111		1,942		(780		)	1,162		4-15 years	2,916		(1,054		)	1,862		2,697		(913		)	1,784
Issued trademarks	3-11 years	714		(378		)	336		655		(320		)	335		3-11 years	1,052		(567		)	485		860		(397		)	463
Customer relationships	4-8 years	1,374		(389		)	985		914		(240		)	674		4-8 years	3,724		(755		)	2,969		1,377		(451		)	926
Non-compete agreements	3-4 years	555		(317		)	238		465		(236		)	229		3-4 years	545		(423		)	122		556		(346		)	210
Developed technology	3-7 years	14,480		(3,159		)	11,321		8,661		(824		)	7,837		3-7 years	15,449		(8,573		)	6,876		13,469		(3,956		)	9,513
Re-acquired distribution rights	2 years	2,140		(357		)	1,783		—		—			—		2 years	1,973		(1,644		)	329		2,133		(711		)	1,422
Total amortized		24,409		(5,826		)	18,583		15,798		(2,525		)	13,273			28,820		(13,672		)	15,148		24,253		(7,202		)	17,051
Not amortized:
TASER trademark		900					900		900					900			900					900		900					900
Patents and trademarks pending		1,275					1,275		1,045					1,045			908					908		872					872
Total not amortized		2,175					2,175		1,945					1,945			1,808					1,808		1,772					1,772
Total intangible assets		$	26,584	$	(5,826	)	$	20,758	$	17,743	$	(2,525	)	$	15,218		$	30,628	$	(13,672	)	$	16,956	$	26,025	$	(7,202	)	$	18,823

During the three months ended September 30, 2018, we abandoned certain developed technology acquired in a business combination resulting in an impairment charge of approximately $2.0 million.

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Amortization expense of intangible assets for the three and nine months ended September 30, ~~2017~~2018 was ~~$1.4~~$1.6 million and ~~$3.3~~$4.6 million, respectively. Amortization expense of intangible assets for the three and nine months ended September 30, ~~2016~~2017 was ~~$0.2~~$1.4 million and ~~$0.7~~$3.3 million, respectively. Estimated amortization for intangible assets with definite lives for the remaining three months of ~~2017,~~2018, the next five years ended December 31, and thereafter, is as follows (in thousands):


2017 (remaining three months)	$	1,398
2018	5,585		$	1,209
2019	4,036		3,357
2020	2,568		3,296
2021	2,433		2,854
2022	782		1,200
2023			1,393
Thereafter	1,781		1,839
Total	$	18,583	$	15,148

5.6. Other ~~Long-Term~~ Assets

Other ~~long-term~~ assets consisted of the following at September 30, ~~2017~~2018 and December 31, ~~2016~~2017 (in thousands):

2017 2016
Cash surrender value of corporate-owned life insurance policies $ 3,723
$ 3,240
Prepaid commissions ⁽ⁱ⁾
6,556
5,302
Restricted cash ⁽ⁱⁱ⁾
3,326
3,317
Prepaid expenses, deposits and other ⁽ⁱⁱⁱ⁾
2,929
2,058
Total other long-term assets $ 16,534
$ 13,917



	September 30, 2018		December 31, 2017
Cash surrender value of corporate-owned life insurance policies	$	3,949	$	3,846
Deferred commissions ⁽¹⁾	14,175		6,803
Restricted cash ⁽²⁾	2,477		3,333
Prepaid expenses, deposits and other	2,795		1,384
Total other long-term assets	$	23,396	$	15,366

⁽ⁱ⁾⁽¹⁾~~Prepaid commissions represent customer acquisition~~Represents assets for the incremental costs of obtaining contracts with customers, which consist primarily of sales commissions. These costs are ascribed to ~~secure long-term contracts. The Company capitalizes incremental~~or allocated to the underlying performance obligations in the contracts and ~~direct costs related to a specific contract and recognizes as expense over~~amortized consistent with the ~~term~~recognition timing of the ~~contract in proportion to~~revenue for the ~~contract revenue.~~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 our adoption of Topic 606, we recorded an adjustment of $7.3 million as of January 1, 2018, and of that amount, $5.4 million was recorded within other assets. The adjusted balance of long-term deferred commissions as of January 1, 2018 was $12.2 million.

^(ii)(2) As of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, restricted cash primarily consisted of $1.8 million and $2.7 million, respectively, of sales proceeds related to a long-term ~~contract~~contracts with ~~a specific customer. These~~customers. As of September 30, 2018, the proceeds are held in escrow until certain billing milestones are achieved, and then specified amounts are transferred to ~~the Company's~~our 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.~~

7. Accrued Liabilities

⁽ⁱⁱⁱ⁾ ~~Included in long-term assets as~~Accrued liabilities consisted of the following at September 30, ~~2017~~2018 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.2017 (in thousands):



	2018		2017
Accrued salaries, benefits and bonus	$	15,057	$	8,957
Accrued professional, consulting and lobbying fees	2,910		3,870
Accrued warranty expense	959		644
Accrued income and other taxes	4,913		2,558
Other accrued liabilities	13,069		7,473
Accrued liabilities	$	36,908	$	23,502

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

~~6. Deferred Revenue~~8. Income Taxes

~~Deferred revenue consisted~~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 ~~following (in thousands):~~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. We continue to analyze the impact of the Tax Act and expect that as additional guidance from IRS Treasury is provided, further updates will be necessary.

September 30, 2017 December 31, 2016
Current Long-Term Total Current Long-Term Total
Warranty:
TASER Weapons $ 10,622
$ 17,156
$ 27,778
$ 9,980
$ 17,319
$ 27,299
Software and Sensors 6,660
4,811
11,471
3,979
2,926
6,905
17,282
21,967
39,249
13,959
20,245
34,204
Hardware:
TASER Weapons 3,181
10,574
13,755
1,702
4,390
6,092
Software and Sensors 13,542
13,349
26,891
9,850
11,205
21,055
16,723
23,923
40,646
11,552
15,595
27,147
Software and Sensors Services 26,448
5,684
32,132
19,626
4,214
23,840
Total $ 60,453
$ 51,574
$ 112,027
$ 45,137
$ 40,054
$ 85,191
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 September 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.

September 30, 2017 December 31, 2016
Current Long-Term Total Current Long-Term Total
TASER Weapons $ 13,803
$ 27,730
$ 41,533
$ 11,682
$ 21,709
$ 33,391
Software and Sensors 46,650
23,844
70,494
33,455
18,345
51,800
Total $ 60,453
$ 51,574
$ 112,027
$ 45,137
$ 40,054
$ 85,191

~~7. Accrued Liabilities~~

~~Accrued liabilities consisted~~We file income tax returns for federal purposes and in many states, as well as in multiple foreign jurisdictions. Our tax filings remain subject to examination by applicable tax authorities for a certain length of time, generally three to four years, following the ~~following at September 30, 2017 and December 31,~~tax year to which these filings relate. Our U.S. federal income tax return for fiscal year 2016 ~~(in thousands):~~

2017 2016
Accrued salaries, benefits and bonus $ 7,861
$ 6,474
Accrued professional, consulting and lobbying 2,225
3,673
Accrued warranty expense 719
780
Accrued income and other taxes 5,082
4,581
Other accrued liabilities 6,544
2,740
Accrued liabilities $ 22,431
$ 18,248

~~8. Income Taxes~~is currently under audit by the Internal Revenue Service.

Deferred Tax Assets

Net deferred income tax assets at September 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~~Our total net deferred tax assets at September 30, ~~2017~~2018 were ~~$22.8~~$18.1 million.

In preparing ~~the Company’s~~our 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~~our ability to recover ~~its~~our deferred income tax assets, management considers all available positive and negative evidence, including ~~its~~our 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~~our provisions for income taxes, ~~its~~our deferred tax assets and liabilities, and ~~its~~our future taxable income for purposes of assessing ~~its~~our ability to utilize any future tax benefit from ~~its~~our deferred tax assets.

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~~AXON ENTERPRISE, INC.~~

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

Although management believes that ~~its~~our 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 September 30, ~~2017, the Company continues~~2018, we continue to demonstrate three-year cumulative pre-tax income in the U.S. federal and Arizona tax jurisdictions; however, ~~the Company's~~our 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 ~~the Company’s~~our long term investments, which impact ~~short term~~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~~our deferred tax assets will not be realized and has established a valuation allowance.

~~The Company has completed research and development (“~~We have claimed R~~&D”)~~&D tax ~~credit studies which identified~~credits of approximately ~~$17.1~~$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 ~~$4.2~~$3.6 million as of September 30, ~~2017.~~2018. In addition, management accrued ~~approximately $0.1~~$0.2 million for estimated uncertain tax positions related to certain federal and state income tax liabilities, for a total liability for unrecognized tax benefit as of September 30, ~~2017. The Company does not expect a significant increase or decrease in~~2018 of $3.8 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 ~~$4.3~~$3.8 million be recognized, ~~the Company’s~~our effective tax rate would be favorably impacted. Approximately ~~$1.8~~$2.2 million of the unrecognized tax benefit associated with R&D credits has been netted against the R&D ~~credit~~ deferred tax asset.

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Effective Tax Rate

~~The Company’s~~Our overall effective tax rate for the nine months ended September 30, ~~2017,~~2018, after discrete period adjustments, was ~~16.3%~~(8.1)%. Before discrete adjustments, the tax rate was ~~32.5%~~24.0%, which is ~~less~~more than the federal statutory rate, primarily due to state taxes and non-deductible expenses for items such as meals and entertainment, executive compensation limitation under IRC section 162(m), lobbying fees, and an income ~~in certain foreign jurisdictions with lower tax rates,~~inclusion from GILTI, offset by a reduction for foreign-derived intangible income ("FDII"). This was partially offset by ~~state taxes and permanent items such as Subpart F income, meals and entertainment and lobbying fees.~~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 $1.5~~an $8.1 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 nine months ended September 30, ~~2017. In addition, the Company recorded a $0.7~~2018. Of this amount, $3.4 million ~~favorable discrete tax benefit~~ related to the reversal of certain uncertain tax positions due to statute expiration, and a $0.4 million favorable discrete tax benefit related to tax return to provision adjustments recorded during the three months ended September 30, 2017stock options exercised by our CEO in connection with our follow-on offering, as discussed in Note 9.

9. Stockholders’ Equity

Follow-On Offering

In May ~~2016,~~2018, we sold 4,645,000 shares of our common stock, which included 645,000 shares pursuant to the ~~Company’s~~full exercise of the underwriters' option to purchase additional shares, in an underwritten public offering at a price of $53.00 per share, which resulted in gross proceeds of $246.2 million. Net proceeds after deducting fees, commissions, and other expenses related to the offering were $234.0 million.

CEO Performance Award

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, our 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 for purposes of the CEO Performance Award ("Adjusted EBITDA (CEO Performance Award)") is defined as net income (loss) attributable to common stockholders before interest expense, investment interest income, provision (benefit) for income taxes, depreciation and amortization,and stock-based compensation expense.



Eight Separate Revenue Goals ⁽¹⁾ (in thousands)		Eight Separate Adjusted EBITDA (CEO Performance Award) 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 acquisition 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 September 30, 2018, the following operational goals were considered probable of achievement:

Adjusted EBITDA (CEO Performance Award) of $125.0 million; and

Total revenue of $710.1 million

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 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 in sales, general, and administrative operating expense on our condensed 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 September 30, 2018. However, as there are two operational goals considered probable of achievement, we recorded stock-based compensation expense of $1.8 million related to the CEO Performance Award from the Grant Date through September 30, 2018. The number of stock options expected to vest is 1.1 million shares.

As of September 30, 2018, we had $43.4 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 8.3 years. As of September 30, 2018, we had unrecognized stock-based compensation expense of $200.7 million for the performance goals that were considered not probable of achievement.

We measured the grant date 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, our stockholders approved a new stock incentive plan authorizing an additional ~~2.0~~1.0 million shares, plus remaining available shares under a prior ~~plan,~~plans, for issuance under the new plan. Combined with the legacy stock incentive plans, there are ~~approximately 1.4~~1.7 million shares available for grant as of September 30, ~~2017.~~2018.

Performance-based stock awards

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

RSUs are classified as equity and measured at the fair market value of the underlying stock at the grant date. We recognize 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.

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Restricted Stock Units

The following table summarizes RSU activity for the nine months ended September 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	1,176		24.90				341		45.52
Released	(403	)	18.70				(556	)	23.62
Forfeited	(87	)	23.34				(248	)	23.79
Units outstanding, end of period	2,016		23.22		$	45,703	1,885		27.45		$	128,991

Aggregate intrinsic value represents ~~the Company’s~~our closing stock price on the last trading day of the period, which was ~~$22.67~~$68.43 per share, multiplied by the number of RSUs outstanding. As of September 30, ~~2017,~~2018, there was ~~$36.5~~$39.6 million in unrecognized compensation costs related to RSUs under ~~the Company's~~our stock plans. ~~The Company expects~~We expect to recognize the cost related to the RSUs over a weighted average period of ~~2.83~~2.43 years years. RSUs are released when vesting requirements are met.

During the nine months ended September 30, ~~2017, the Company~~2018, we granted ~~approximately 0.2~~0.1 million performance-based ~~RSUs, which are included in the table above.~~RSUs. As of September 30, ~~2017,~~2018, the performance criteria had not been met for any of the ~~0.3~~0.4 million performance-based RSUs outstanding.The performance-based RSUs granted in 2018, 2017 ~~2016~~ and ~~2015~~2016 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~~our 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.

Certain RSUs that vested in the nine months ended September 30, ~~2017~~2018 were net-share settled such that ~~the Company~~we 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 related to RSUs were ~~approximately~~ 0.1 million and had a value of ~~approximately $2.8~~$5.6 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~~We record 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~~us as a ~~result of the vesting.~~reduction to additional paid-in capital.

Stock Option Activity

The following table summarizes stock option activity for the nine months ended September 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	(171	)	7.35					(445	)	5.26
Expired / terminated	(6	)	10.43					(43	)	4.46
Options outstanding, end of period	831		4.98		1.66	$	14,706	6,682		27.45		9.23	$	238,748
Options exercisable, end of period	802		4.99		1.68	14,180		311		4.66		0.69	19,871
Options expected to vest, end of period	25		4.75		1.23	448		1,061

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~~our common stock of ~~$22.67~~$68.43 on September 30, ~~2017.~~2018. The intrinsic value of options exercised for the nine months ended September 30, 2018 and 2017 ~~and 2016~~ was ~~$2.6~~$20.5 million and ~~$1.8~~$2.6 million, respectively. As of September 30, 2018, total options outstanding included 6.4 million unvested performance-based stock options, of which 1.1 million are expected to vest.

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

~~2017,~~Of the total ~~options outstanding includes approximately 0.2 million performance-based~~ stock options exercised during the nine months ended September 30, 2018, 0.3 million were exercised and the shares then sold by our CEO in connection with our follow-on offering. The CEO surrendered already owned shares to cover the exercise price of ~~which 29,350~~the option exercises. The option exercises were ~~unvested~~net-share settled such that we 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 ~~those, 25,000~~$6.2 million and $1.6 million, respectively, on the exercise date as determined by the closing stock price on that day. Payments for the employees’ tax obligations are ~~expected~~reflected as a financing activity within the statement of cash flows. We record a liability for the tax withholding to ~~vest.~~be paid by us 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 nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Cost of products sold and services delivered	$	134	$	77	$	368	$	247	$	93	$	134	$	359	$	368
Sales, general and administrative expenses	2,099		1,348		6,282		4,197		3,748		2,099		8,783		6,282
Research and development expenses	1,767		791		4,773		2,298		2,414		1,767		6,160		4,773
Total stock-based compensation	$	4,000	$	2,216	$	11,423	$	6,742	$	6,255	$	4,000	$	15,302	$	11,423

Stock Repurchase Plan

In February 2016, ~~the Company's~~our Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of ~~the Company’s~~our outstanding common stock subject to stock market conditions and corporate considerations. During the ~~three and~~ nine months ended September 30, 2018 and 2017, no common shares were purchased under the program. During the nine months ended September 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 included the average price paid per share of $18.87, plus applicable administrative costs for the transaction. As of September 30, ~~2017, $16.2~~2018, $16.3 million remains available under the plan for future purchases. ~~The Company~~We suspended ~~its~~our 10b5-1 plan during 2016, and any future purchases will be discretionary.

10. Line of Credit

~~The Company has~~We have a $10.0 million revolving line of credit with a domestic bank. At both September 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 September 30, ~~2017, the Company~~2018, we had letters of credit outstanding of ~~approximately $2.7~~$3.1 million under the facility, and available borrowing of ~~approximately $7.3~~$6.9 million. The line is secured by substantially all of ~~the~~our 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 until December 31, 2017. The Company is currently evaluating its credit needs and anticipates entering into a longer term arrangement prior to the December 31, 2017 maturity date. The Company’sonly. Our agreement with the bank requires itus 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 September 30, ~~2017, the Company’s leverage~~2018, our funded debt to EBITDA ratio was ~~1.24:1 and its fixed charge coverage ratio was 3.88:1. The Company's violation of the leverage ratio requirement was waived by the bank as of September 30, 2017.~~0.001 to 1.00.

11. Commitments and Contingencies

Product Litigation

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

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

2021

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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~~we implemented new risk management strategies, including revisions to product warnings and training to better protect both ~~the Company~~us and ~~its~~our customers from litigation based on ~~‘failure~~“failure to ~~warn’~~warn” theories - which comprise the vast majority of the cases against ~~the Company.~~us. These risk management strategies have been highly effective in reducing the rate and exposure from litigation post-2009. ~~From~~Since the third quarter of 2011, ~~to the third quarter of 2017,~~ product liability cases have been reduced from 55 ~~active~~ to ~~six~~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 intendsWe intend to continue ~~its~~our successful practice of aggressively defending and generally not settling litigation except in very limited and unusual circumstances as described above.

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



Plaintiff	Month Served	Jurisdiction	Claim Type	Status
Derbyshire	Nov-09	Ontario, Canada Superior Court of Justice	Officer Injury	Discovery Phase. Trial scheduled for October 14, 2019.
Shymko	Dec-10	The Queen's Bench, Winnipeg Centre, Manitoba	Wrongful Death	Pleading Phase, currently inactive
Ramsey	Jan-12	12th Judicial Circuit Court, Broward County, FL	Wrongful Death	Discovery Phase, currently inactive
Bennett	Sep-15	11th Judicial Circuit Court, Miami-Dade County, FL	Wrongful Death	Discovery ~~Phase. Trial scheduled for June 18, 2018.~~
~~Masters~~	~~Nov-16~~	~~US District Court, Western District of Missouri~~	~~Suspect Injury~~	~~Discovery Phase. Trial scheduled for October 9, 2018.~~Phase
Taylor	Mar-17	USU.S, District Court, Southern District of Texas	Officer Injury	~~Discovery Phase. Trial scheduled~~Dispositive Motion Phase: We filed our motion for ~~August 18,~~summary judgment on April 20, 2018.
Wiggington	Apr-18	U.S, District Court, Western District Court of Missouri	Wrongful Death	Pleading Phase
Lewis	Oct-18	General Court of Justice Superior Court Division, Stanly County, NC	Wrongful Death	Pleading Phase

Through the date of these financial statements, one product liability case was dismissed with prejudice on October 1, 2018. There are no product litigation matters in which ~~the Company is~~we are involved that are currently on appeal. 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, as well as the judgment and permanent injunction in the Company's favor against Phazzer Electronics Inc. ("Phazzer"), which are 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~~	Axon's motion for dismissal of the antitrust claims was granted on January 12, 2017 with judgment entered in Axon's favor on April 14, 2017 and Plaintiff filed an appeal to the 10th Circuit Court of Appeals on April 20, 2017.
~~Axon~~	~~Feb-17~~	~~US District Court, Middle District of Florida~~	~~Judgment and Permanent Injunction~~	~~Axon received judgment in its favor and a permanent injunction against Phazzer on July 21, 2017. Phazzer filed a notice of appeal on August 10, 2017.~~

~~The following case was dismissed during the third quarter of 2017. No other cases were dismissed or judgment entered into through the date of these financial statements.~~



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

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


Policy Year	Policy Start Date	Policy End Date	Insurance Coverage		Deductible Amount		Defense Costs Covered	Remaining Insurance Coverage		Active Cases and Cases on Appeal	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
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
2013	12/15/2012	12/15/2013	12.0		1.0		N	12.0		n/a
2014	12/15/2013	12/15/2014	11.0		4.0		N	11.0		n/a
2015	12/15/2014	12/15/2015	10.0		5.0		N	10.0		Bennett	12/15/2014	12/15/2015	10.0		5.0		N	10.0		Bennett
2016	12/15/2015	12/15/2016	10.0		5.0		N	10.0		Masters
2017	12/15/2016	12/15/2017	10.0		5.0		N	10.0		Taylor	12/15/2016	12/15/2017	10.0		5.0		N	10.0		Taylor
2018											12/15/2017	12/15/2018	10.0		5.0		N	10.0		Wiggington, Lewis

Other Litigation

Phazzer Patent Infringement Litigation

In ~~November 2015, the Company~~February 2016, we filed a complaint against Phazzer Electronics Inc. ~~and Sang Min International Co. Ltd.~~(“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~~our Motion for Sanctions and for a Permanent Injunction against Florida-based ~~Phazzer Electronics, Inc.~~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. On August 10, 2017, Phazzer filed a notice of appeal to the Federal Circuit. Phazzer's multiple attempts to stay the injunction pending appeal have been denied by both the district and appellate courts. The appeal was argued on October 2, 2018, and the Federal Circuit issued its opinion affirming the both judgment and injunction ~~also makes clear that nonparties who assist~~in all respects on October 26, 2018.

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On April 4, 2018, the Court entered a judgment for us against Phazzer in ~~violating~~an amount exceeding $7.8 million which included an award to us of compensatory and treble damages for willful infringement, and also an award of reasonable attorneys’ fees and costs. Post-judgment collection efforts are underway, but the ~~injunction, including specifically Taiwanese CEW manufacturer Sang Min International and Double Dragon Development and Trading Corporation, may be held~~collectability of this judgment is in ~~contempt of court.~~doubt since Phazzer has informed the Court it is insolvent. On May 1, 2018, Phazzer appealed the damages award to the Federal Circuit. Briefing is not yet complete.

In imposing severe sanctions against Phazzer, ~~including an award of Axon’s attorneys’ fees and costs,~~ the Court found that Phazzer “engaged in a pattern of bad faith conduct designed and intended to delay, stall, and increase the cost of this litigation,” and that Phazzer repeatedly disregarded Court ~~orders~~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 our patent with the U.S. Patent and Trademark Office ("USPTO"). Our 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. ~~The Court found that~~On April 2, 2018, the examiner issued a final office action rejecting all claims. We are appealing this decision. Our 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, and includes any CEW or device not colorably different from the Phazzer Enforcer CEW.~~is formally canceled (estimated to be at least a 2-year process).

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

~~The Court expressly found that Phazzer cartridges currently marketed and sold as compatible with TASER brand CEWs embody~~cartridges. During the protected appearance and constitute infringing products enjoined under its Order. Phazzer was also ordered by the Court “not [to] challenge or continue to challenge the validity or enforceability of the ‘789 Registration in any manner in any

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~~forum, including the USPTO.” Accordingly, Phazzer’s pending USPTO cancellation action, which was stayed while the~~ litigation, ~~ran its course, will be dismissed. On August 10 2017,~~ Phazzer filed a ~~notice~~petition to cancel our trademark, which the Trademark Board stayed until the conclusion of ~~appeal.~~the district court litigation and all related appeals.

Digital Ally Patent Litigation

In February 2016, ~~the Company was~~we were served with a first amended complaint filed by Digital Ally Inc. (“Digital”) in the ~~Federal~~U.S. District Court for the District of Kansas (Case No. CV-16-02032-CM-JPO) alleging patent infringement regarding our Axon Signal technology, commercial bribery, ~~contracts, combinations and conspiracies in restraint of trade~~antitrust, and unfair ~~or anti-competitive acts and practices.~~competition. In March 2016, ~~the Company was~~we were served with a second amended complaint with similar allegations. The second amended complaint seeks a judgment of infringement, monetary damages, a permanent injunction, punitive damages and attorneys’ fees and costs. The Company believes the second amended complaint is frivolous and is vigorously defending this litigation. The Company’s motion to dismiss the claims involving commercial bribery, contracts, combinations and conspiracies in restraint of trade and unfair or anti-competitive acts and practices was granted 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~~complaint has been substantially narrowed based on (1) the district court’s dismissal of all of Digital’s antitrust claims in January 2017; this ruling was affirmed by the Federal Circuit in May 2018, and ~~also has filed a motion to stay~~the Supreme Court denied certiorari on October 1, 2018; (2) the district court’s dismissal of Digital’s ‘292 patent from 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 but has been stayed pending the USPTO proceedings. In August, 2017 the parties filed joint IPR status statement with the court and requested to schedule a conference or briefing on the continued litigation stay. Digital Ally filed a motion (1) for leave to amend their pleading out of time, (2) to dismiss the ‘292 Patent with prejudice in March 2018, and ~~(3) to dismiss the Company’s ‘292 Patent counterclaim for lack~~Digital’s execution of ~~declaratory judgment jurisdiction. Digital Ally also filed~~ 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 ~~Company~~‘452 patent, leaving only one independent claim for resolution by the Court. We believe the remaining claim of the ‘452 patent is invalid and not infringed, and are vigorously defending this litigation.

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

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

Antoine di Zazzo Arbitration

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

~~VieVu Commercial~~Richey Class Action Litigation

~~In February 2017, the Company was served with a complaint filed by VieVu LLC ("VieVu"~~On June 25, 2018, consumer weapon purchaser Douglas Richey (“Richey”) ~~alleging tortious interference with a business expectancy. In March 2017, the Company~~ filed a ~~motion~~class action lawsuit against us in the Northern District of California (Case No. 3:18-cv-03751-WHA) purporting to ~~dismiss which motion is pending. In February 2017,~~assert claims on behalf of all persons in the ~~Company~~United

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States who purchased or acquired a TASER Pulse, TASER X2 and TASER X26P model CEW in the four-year period preceding the complaint. Richey claimed his Pulse CEW discharged while in its case in his jacket pocket due to a faulty safety switch. He was not injured. Richey voluntarily dismissed the case on August 9, 2018.

Amani Kendi Kiogora Employment Related Litigation

On October 24, 2018, Amani Kendi Kiogora, a former employee of VIEVU, LLC ("VIEVU"), filed ~~complaints against VieVu for unfair competition and false advertising~~a lawsuit in ~~both~~ the Superior Court of ~~Arizona~~Washington for ~~Maricopa~~King County ~~as well as~~(Case No. 18-2-26784-6 SEA) naming us, VIEVU and Safariland, LLC in an employment dispute relating to Washington’s wage laws, laws against discrimination, and the ~~California Superior Court~~Equal Opportunity Act. Ms. Kiogora claims disparate treatment against her and wrongful withholding of commission payments related to the New York Police Department (NYPD) body worn camera contract while employed with VIEVU. We acquired VIEVU in May 2018; see Note 15 for ~~Santa Cruz County. The California complaint was served on VieVu~~further discussion. We are tendering this matter to Safariland, LLC for defense and ~~this litigation was voluntarily dismissed by Axon. In May 2017, the Company filed and served a complaint against VieVu~~indemnification.

Appeals

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

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

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

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

General

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

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Based on ~~the Company's~~our assessment of outstanding litigation and claims as of September 30, ~~2017, the Company has~~2018, we have determined that it is not reasonably possible that these lawsuits will individually, or in the aggregate, materially affect ~~its~~our results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by ~~its~~our insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on our operating results, financial condition or cash flows.

Off-Balance Sheet Arrangements

Under certain circumstances, ~~the Company uses~~we use letters of credit and surety bonds to guarantee ~~its~~our performance under various contracts, principally in connection with the installation and integration of ~~its~~ Axon cameras and related technologies. Certain of ~~the Company's~~our letters of credit and surety bonds have stated expiration dates with others being released as the contractual performance terms are completed. At September 30, ~~2017, the Company~~2018, we had outstanding letters of credit of ~~approximately $2.7~~$3.1 million that are expected to expire in May ~~2018.~~2019. Additionally, ~~the Company~~

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we had ~~approximately $5.7~~$14.1 million of outstanding surety bonds at September 30, ~~2017,~~2018, with ~~$1.0~~$0.6 million expiring in 2018, $0.4 million expiring in 2019, $0.1 million expiring in 2020, $2.4 million expiring in ~~2020,~~2021, $3.1 million expiring in 2022 and the remaining ~~$2.3~~$7.5 million expiring in ~~2021.~~2023.

Land Lease Purchase Agreement

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

12. Related Party Transactions

~~The Company engages Dr. Mark Kroll,~~We subscribe to various cloud-based applications from Salesforce. Bret Taylor, a member of ~~the~~our Board of Directors, serves as President and Chief Product Officer of Salesforce. We incur costs at different times throughout the year, typically in advance of services being provided, and subsequently amortize these costs ratably to ~~provide consulting services. The expenses~~expense as services are provided over the contractual term. We made payments of $1.7 million related to these services ~~were approximately $16,000 and $14,000 for~~during the ~~three~~nine months ended September 30, ~~2017~~2018, and ~~2016, respectively, and $89,000 and $111,000 for~~made payments of $1.2 million during the nine months ended September 30, 2017, ~~and 2016,~~ respectively. AtPayments during the three months ended September 30, 2018 and 2017 ~~and December 31, 2016, the Company had liabilities of approximately $4,000 and $12,000, respectively, related to these services.~~

The Company subscribes to a mobile collaboration software suite co-founded and managed by Bret Taylor, a member of the Company's Board of Directors. The cost of the software-as-a-service subscription is approximately $0.2 million per year, and as of September 30, 2017 and December 31, 2016 the Company had $84,000 and $50,500, respectively, of prepaid costs related to the subscription.were each less than $0.1 million.

13. Employee Benefit Plans

~~The Company has~~We have 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~~We also ~~has~~have 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.~~us. 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~~we do 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~~our general creditors.

Contributions to the plans are made by both the employee and ~~the Company. Company~~us. Our contributions to the 401(k) plan are based on the level of employee contributions and are immediately vested. ~~The Company’s~~Our matching contributions to the 401(k) plan for the three months ended September 30, 2018 and 2017, ~~and 2016,~~ were ~~approximately $0.6~~$0.9 million and ~~$0.4~~$0.6 million, respectively, and ~~$1.9~~$2.4 million and ~~$1.2~~$1.9 million for the nine months ended September 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 September 30, 2017 of approximately $8,000.~~ Future matching ~~or profit sharing~~ contributions to the plans are at ~~the Company’s~~our sole discretion.

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

14. Segment Data

~~The Company’s~~Our operations are 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 Company~~Within the Software and Sensors segment, we specify sales of products and services. Revenue from our “products” in the Software and Sensors segment are generally from 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 our “services” in the Software and Sensors segment comprise sales related to the Axon Cloud, which includes Axon Evidence, 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, we include only revenues and costs attributable to ~~the Software and Sensors products in~~ that ~~segment. Included in Software and Sensors~~ segment which costs ~~are:~~include: costs of sales for both products and services, ~~overhead allocation based on~~ direct labor, selling expense for the Software and Sensors sales team, product management expenses, trade shows and related expenses, and research and development for products included in the Software and Sensors segment. All other costs are included in the TASER Weapons segment. The CODM does not review assets by segment as part of the financial information provided; therefore, only limited asset information is provided in the following tables.

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

Three Months Ended September 30, 2017 Three Months Ended September 30, 2016

TASER
Weapons
Software and Sensors Total
TASER
Weapons
Software and Sensors Total
Net sales from products $ 59,416
$ 14,569
$ 73,985
$ 52,938
$ 10,266
$ 63,204
Net sales from services —
16,277
16,277
—
8,678
8,678
Net sales 59,416
30,846
90,262
52,938
18,944
71,882
Cost of product sales 19,237
15,336
34,573
14,973
8,691
23,664
Cost of service sales —
5,924
5,924
—
1,653
1,653
Cost of sales 19,237
21,260
40,497
14,973
10,344
25,317
Gross margin 40,179
9,586
49,765
37,965
8,600
46,565
Sales, general and administrative 20,575
15,823
36,398
16,439
11,682
28,121
Research and development 1,856
12,310
14,166
1,408
5,950
7,358
Income (loss) from operations $ 17,748
$ (18,547 ) $ (799 ) $ 20,118
$ (9,032 ) $ 11,086
Purchase of property and equipment $ 1,666
$ 1,665
$ 3,331
$ 1,064
$ 307
$ 1,371
Purchase of intangible assets 66
195
261
77
77
154
Purchase of intangible assets, including goodwill, in connection with business acquisition 2,075
2,075
4,150
—
—
—
Depreciation and amortization 542
1,735
2,277
537
364
901

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

selling expenses for the sales team, product management and 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. Our Chief Executive Officer, who is the CODM, is not provided asset information by segment, and therefore, no asset information is provided.

Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
TASER
Weapons Software and Sensors Total TASER
Weapons Software and Sensors Total
Net sales from products $ 170,103
$ 38,248
$ 208,351
$ 144,307
$ 23,438
$ 167,745
Net sales from services —
40,796
40,796
—
18,423
18,423
Net sales 170,103
79,044
249,147
144,307
41,861
186,168
Cost of product sales 53,341
38,476
91,817
43,998
17,174
61,172
Cost of service sales —
13,258
13,258
—
4,230
4,230
Cost of sales 53,341
51,734
105,075
43,998
21,404
65,402
Gross margin 116,762
27,310
144,072
100,309
20,457
120,766
Sales, general and administrative 55,283
43,796
99,079
46,395
30,938
77,333
Research and development 5,931
33,687
39,618
3,773
17,222
20,995
Income (loss) from operations $ 55,548
$ (50,173 ) $ 5,375
$ 50,141
$ (27,703 ) $ 22,438
Purchase of property and equipment $ 5,240
$ 3,832
$ 9,072
$ 2,729
$ 606
$ 3,335
Purchase of intangible assets 186
245
431
190
149
339
Purchase of property and equipment and intangible assets, including goodwill, in connection with business acquisitions 2,075
8,554
10,629
—
—
—
Depreciation and amortization 2,099
3,578
5,677
1,669
1,075
2,744

~~15. Business Acquisitions~~

~~Axon Artificial Intelligence~~

On December 30, 2016, the Company acquired certain intellectual property from Fossil Group, Inc. and Fossil Vietnam, Limited Liability Company. This transaction, which was accounted for as a business combination under ASC 805, was part of the Company's efforts to expand on the Axon platform by transforming workflows using computer vision and natural language with machine learning techniques in order to analyze data and multimedia captured throughout the course of policing. Additionally, as part of the acquisition, a team of seven researchers and software engineers joined the Company as part of the newly established Axon AI team. The purchase price, totaling approximately $6.8 million, consisted of $3.5 million cash at close, and up to an additional $3.3 million of consideration contingent upon the satisfaction of certain conditions. As of September 30, 2017, no amounts were earnedInformation relative to ~~the earn-out provisions.~~

~~The Company's purchase price allocation is preliminary and subject to revision as more detailed analyses are completed and additional information about fair value of assets become available.~~

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

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



	Three Months Ended September 30, 2018							Three Months Ended September 30, 2017 ⁽¹⁾
	TASER Weapons		Software and Sensors			Total		TASER Weapons		Software and Sensors			Total
Net sales from products	$	63,666	$	17,257		$	80,923	$	59,416	$	14,569		$	73,985
Net sales from services	—		23,913			23,913		—		16,277			16,277
Net sales	63,666		41,170			104,836		59,416		30,846			90,262
Cost of product sales	19,256		13,697			32,953		19,237		15,336			34,573
Cost of service sales	—		6,250			6,250		—		5,924			5,924
Cost of sales	19,256		19,947			39,203		19,237		21,260			40,497
Gross margin	44,410		21,223			65,633		40,179		9,586			49,765
Sales, general and administrative	22,574		17,111			39,685		20,575		15,823			36,398
Research and development	4,837		17,145			21,982		1,856		12,310			14,166
Income (loss) from operations	$	16,999	$	(13,033	)	$	3,966	$	17,748	$	(18,547	)	$	(799	)

~~The Company assigned~~



	Nine Months Ended September 30, 2018							Nine Months Ended September 30, 2017 ⁽¹⁾
	TASER Weapons		Software and Sensors			Total		TASER Weapons		Software and Sensors			Total
Net sales from products	$	187,814	$	50,804		$	238,618	$	170,103	$	38,248		$	208,351
Net sales from services	—		66,659			66,659		—		40,796			40,796
Net sales	187,814		117,463			305,277		170,103		79,044			249,147
Cost of product sales	57,480		38,994			96,474		53,341		38,476			91,817
Cost of service sales	—		15,566			15,566		—		13,258			13,258
Cost of sales	57,480		54,560			112,040		53,341		51,734			105,075
Gross margin	130,334		62,903			193,237		116,762		27,310			144,072
Sales, general and administrative	65,759		49,028			114,787		55,283		43,796			99,079
Research and development	11,816		43,786			55,602		5,931		33,687			39,618
Income (loss) from operations	$	52,759	$	(29,911	)	$	22,848	$	55,548	$	(50,173	)	$	5,375

⁽¹⁾ Amounts for the ~~goodwill to~~three and nine months ended September 30, 2017 have not been adjusted under the ~~Software~~modified retrospective method of adoption of Topic 606, and ~~Sensors segment. The acquired developed technology was assigned an amortization~~are presented consistent with the prior period ~~of five years. Costs related to~~amounts reported under ASC 605.

15. Business Acquisition

On May 3, 2018, the acquisition ~~were expensed as incurred and were considered insignificant.~~

~~Dextro, Inc.~~

~~On February 8, 2017, the Company~~date, we acquired all of the outstanding ~~common stock~~ownership interests of ~~Dextro, Inc. ("Dextro"),~~VIEVU, a ~~Delaware corporation,~~public safety camera and cloud-based evidence management system provider for ~~a total~~law enforcement agencies.

The estimated purchase price of ~~$7.5 million. Dextro's technology provides one~~$17.6 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 our 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 conditions relating to retention of certain VIEVU customers are met as of the first ~~computer-vision~~ and ~~deep learning systems~~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 ~~make~~which Safariland will be our preferred provider of holsters for its CEW products. The estimated fair value of the ~~visual contents in video searchable in real time. This technology will allow law enforcement agencies~~Supply Agreement as of the acquisition date was $4.5 million, a portion of which was recorded within accrued liabilities and the remaining portion recorded within other long-term liabilities.

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Pursuant to ASC 805, the acquisition of VIEVU has been accounted for as a business combination, under the acquisition method of accounting, which resulted in acquired assets and ~~departments to have~~assumed liabilities being measured at their estimated fair values as of the ~~ability to quickly isolate and analyze critical seconds~~acquisition date. As of ~~footage from massive amounts~~the acquisition date, goodwill was measured as the excess of ~~video data. The technology acquired, along with~~consideration transferred, which is also generally measured at fair value, over the ~~Dextro employees that joined~~net acquisition date fair values of the ~~Company, will be key additions to the Axon AI team.~~

~~The purchase price of $7.5 million consisted primarily of cash, net of cash~~assets acquired and ~~contingent consideration of $1.0 million representing potential earn-outs to former stockholders based on predetermined future financial metrics.~~liabilities assumed. 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 thefinal purchase price and purchase price allocation will be ~~expensed as compensation~~determined when we have completed the detailed valuations and necessary calculations. The final purchase price and purchase price allocation could differ materially from the preliminary allocation disclosed below. The final allocation may include (1) changes in the ~~period earned. As~~fair value of ~~September 30, 2017, no amounts were earned relative to~~ the ~~earn-out provisions.~~contingent consideration and Supply Agreement, and (2) changes in fair values of assets and liabilities, including intangible assets and goodwill.

The major classes of assets and liabilities to which ~~the Company has~~we have 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				362
Property and equipment	46			459
Developed technology	5,800
Contract assets				1,472
Intangible assets				4,510
Goodwill	2,703			10,285
Deferred income tax liabilities, net	(1,074		)
Accounts payable and accrued liabilities				(3,345		)
Deferred revenue				(543		)
Total purchase price	$	7,487		$	17,602

~~The Company has~~We have 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~~our consolidated results of operations subsequent to the acquisition date. Revenue and loss from operations included in our condensed consolidated financial statements from the acquisition date through September 30, 2018 were $5.4 million and $2.6 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~~we incurred and expensed costs of approximately ~~$0.2~~$0.8 million, which included legal, accounting and other third-party expenses related to the transaction.

~~Breon Enterprises~~

On July 1, 2017, the Company acquired certain tangible and intangible assets from Breon Enterprises, Pty Ltd. and Breon Defence Systems (collectively "Breon"). This transaction, which was accounted for as a business combination under ASC 805, was intended Subsequent to ~~expand the Company's growth across Australia and surrounding regions by growing its in-country sales and support team.~~

~~The purchase price of $4.2 million was paid in full through two wire transactions completed during July 2017. As of~~ the acquisition date, we recorded an expense of $0.5 million related to purchase commitments assumed in the Company had a $2.2 million pre-existing accounts receivable balance from Breon for the Company's sales of goods and services to Breon prior to the acquisition date. This receivable balance was cash settled in full separately from theVIEVU business combination ~~at its book value, which was considered to be the fair value due to the short-term nature of the receivable.~~

~~The major classes of assets to which the Company has allocated the purchase price,~~that exceeded estimated future demand. In October 2018, a customer experienced a camera overheating incident on a ~~preliminary basis, were as follows (in thousands):~~VIEVU camera. As a result, we anticipate that this customer will transition to Axon technology sooner than previously expected. This may have an impact on our purchase commitment liability or on our inventory reserve during the quarter ending December 31, 2018; however, we cannot reasonably estimate a range of possible losses at this time.

Re-acquired distribution rights $ 2,100
Customer relationships 400
Goodwill 1,650
Total purchase price $ 4,150

The Company has assigned the goodwill to the TASER Weapons and Software and Sensors segments for $0.8 million to each segment. The assignment of goodwill was based on the Company's estimate of how the acquired assets would contribute cash flows to the Company over time. Identifiable definite lived intangible assets were assigned a total weighted average amortization period of 2.1 years. Breon has been included in the Company's consolidated results of operations subsequent to the acquisition date. Pro forma results of operations for Breon have not been presented because they are not material to the consolidated results of operations. Costs related to the acquisition were expensed as incurred and were considered insignificant.

Item 7.2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following ~~is a~~ discussion and analysis of ~~the Company’s~~our financial condition as of September 30, ~~2017,~~2018, and results of operations for the three and nine months ended September 30, 2018 and 2017, ~~and 2016. The following discussion may~~should be ~~understood more fully by reference to~~read in conjunction with the ~~consolidated financial statements, notes to the~~condensed consolidated financial statements and ~~Management’s Discussion~~related notes included in this Report on Form 10-Q and ~~Analysis of Financial Condition and Results of Operations section contained~~those in ~~the Company’s~~our 2017 Annual Report on Form 10-K ~~for~~filed with the ~~year ended December 31, 2016.~~

~~Certain statements contained in this report may be deemed to be~~SEC on March 1, 2018. This discussion contains forward-looking statements ~~as defined by the Private Securities Litigation Reform Act of 1995,~~that involve risks and the Company intends that such forward-looking statements be subject to the safe-harbor created thereby. Such forward-looking statements may relate to, among other things: our strategies relating to our Axon business; future income trends and our ability to realized deferred tax assets; our belief that customers will honor multi-year contracts despite the existence of appropriations (or similar) clauses; the sufficiency and availability of our liquid assets and capital resources; our litigation strategy, including the outcome of legal proceedings in which we are currently involved; that we may make further repurchases of our common stock; the expected expiration of outstanding letters of credit; our intention to reinvest earnings from foreign operations outside the United States; our intention to hold investments to maturity; that we will not incur expenses in future periods relating to our data migration to a new cloud-storage provider; that CEW installment sales will 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; and the impact of recently adopted and future accounting standards. We caution that these statements are qualified by important factors that could causeuncertainties. Our actual results tomay differ materially from those ~~reflected by the forward looking~~anticipated in such 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 and X2 CEWs; acceptance of our Evidence.com software~~ as a service delivery model by our law enforcement customers; our ability to design, introduce and sell new products; delays in development schedules; rapid technological change and competition; product defects; breachresult 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 device and the negative impact this publicity could have on sales; the outcome 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,certain factors, 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; fluctuationsthose described under “Risk Factors” 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, including those set forth in our2017 Annual Report on Form 10-K ~~for the year ended December 31, 2016.~~and included in Part II, Item 1A of this Report on Form 10-Q. See also "Special Note Regarding Forward-Looking Statements" on page ii of this Report on Form 10-Q.

Overview

Axon Enterprise, Inc.’s (the “Company” or “Axon” or “we” or “our”) core mission is to protect ~~life~~life. We are highly focused on disrupting existing categories and ~~to protect truth through technologies that make communities safer.~~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 Axon Evidence connected software network, and Axon Records and Computer Aided Dispatch software. These value streams exist within an estimated $8.4 billion total addressable market, comprising TASER weapons ($1.8 billion), hardware sensors ($0.8 billion), and cloud-based public safety software ($5.8 billion.)

The $1.8 billion TASER Weapons total addressable market estimates 660,000 domestic patrol officers at an average revenue of $60 per user per month and 1,800,000 immediately addressable international patrol officers at an average revenue of $60 per user per month, including the weapon, cartridges, batteries, and enhanced services currently under development, and reflects current Axon listed pricing.

The $5.8 billion cloud-based public safety software total addressable market estimates 2,100,000 public safety employees with annual records management & computer aided dispatch revenue reflecting an average of $100 per user per month, based on a discount to estimated market pricing and analysis of current existing records management systems (“RMS”) and computer aided dispatch (“CAD”) contracts, 1,000,000 domestic police officers with advanced intelligence and analytics at an average of $100 per user per month based on estimated market pricing, 1,000,000 domestic patrol officers with digital evidence management revenue of $63 per user per month, which reflects Axon current listed software pricing, 1,000,000 immediately addressable international officers with annual revenue of $63 per user per month based on our current listed software pricing, and 400,000 domestic patrol vehicles evidence management license revenue of $77 per user per month, which reflects 60% allocation to software of our $129 per month listed Axon Fleet pricing.

The hardware sensors $0.8 billion total addressable market estimates 660,000 domestic patrol officers and 1,000,000 immediately addressable international officers with annual camera, dock and other hardware sensors including Signal Sidearm with revenue of $30 per user per month based on our listed pricing, and 400,000 domestic patrol vehicles with annual hardware revenue of $52 per user per month based on 40% of allocation to hardware of our $129 per month listed pricing.

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 September 30, 2018, 53% of our consolidated revenues were recognized from contracts with multiple performance obligations, while within our TASER Weapons and Software and Sensors segments, approximately 26% 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 September 30, 2018, we have booked 325,200 cloud-based software licenses on the Axon Cloud network and we have annual recurring run-rate Axon Cloud and Sensors and Other revenue of $101.6 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.

2018 Outlook

For the year ending December 31, 2018, we expect revenue growth of between 18% and 20% as compared to the year ended December 31, 2017. We expect a normalized income tax rate of between 20% and 25%; this rate can fluctuate depending on geography of income and the effects of discrete items, including changes in our stock price. We anticipate investing in capital expenditures in the range of $10 million to $12 million.

We have historically experienced higher net sales in our second and fourth quarters compared to other quarters in our fiscal year due primarily to municipal budget cycles. For the quarter ending December 31, 2018, due to the expected 2019 shipment timing for TASER 7, we anticipate lower sales for our TASER Weapons segment.

Results of Operations

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

The following table presents data from our condensed consolidated 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 September 30,										Three Months Ended September 30,
	2017					2016					2018					2017 ⁽¹⁾
Net sales from products	$	73,985		82.0	%	$	63,204		87.9	%	$	80,923		77.2	%	$	73,985		82.0	%
Net sales from services	16,277			18.0		8,678			12.1		23,913			22.8		16,277			18.0
Net sales	90,262			100.0		71,882			100.0		104,836			100.0		90,262			100.0
Cost of product sales	34,573			38.3		23,664			32.9		32,953			31.4		34,573			38.3
Cost of service sales	5,924			6.6		1,653			2.3		6,250			6.0		5,924			6.6
Cost of sales	40,497			44.9		25,317			35.2		39,203			37.4		40,497			44.9
Gross margin	49,765			55.1		46,565			64.8		65,633			62.6		49,765			55.1
Operating expenses:
Sales, general and administrative	36,398			40.3		28,121			39.1		39,685			37.8		36,398			40.3
Research and development	14,166			15.7		7,358			10.2		21,982			21.0		14,166			15.7
Total operating expenses	50,564			56.0		35,479			49.4		61,667			58.8		50,564			56.0
Income (loss) from operations	(799		)	(0.9	)	11,086			15.4		3,966			3.8		(799		)	(0.9	)
Interest and other income (expense), net	1,430			1.6		(455		)	(0.6	)
Interest and other income, net											1,274			1.2		1,430			1.6
Income before provision for income taxes	631			0.7		10,631			14.8		5,240			5.0		631			0.7
Provision for income taxes	209			0.2		6,788			9.4
Provision for (benefit from) income taxes											(471		)	(0.4	)	209			0.2
Net income	$	422		0.5	%	$	3,843		5.3	%	$	5,711		5.4	%	$	422		0.5	%

~~Net sales to~~⁽¹⁾ Amounts for the ~~U.S.~~three months ended September 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 our revenues disaggregated by geography (in thousands):


	Three Months Ended September 30,								Three Months Ended September 30,
	2017				2016				2018				2017 ⁽¹⁾
United States	$	73,203	81.1	%	$	60,558	84.2	%	$	88,125	84	%	$	73,203	81	%
Other Countries	17,059		18.9		11,324		15.8
Other countries									16,711		16		17,059		19
Total	$	90,262	100.0	%	$	71,882	100.0	%	$	104,836	100	%	$	90,262	100	%

⁽¹⁾ Amounts for the three months ended September 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):


	Three Months Ended September 30,								Dollar Change				Percent Change		Three Months Ended September 30,								Dollar Change			Percent Change
	2017				2016							2018					2017 ⁽¹⁾						Dollar Change			Percent Change
TASER Weapons segment:									Dollar Change				Percent Change
TASER X26P	$	13,264	14.7	%	$	18,943	26.4	%	$	(5,679	)		(30.0	)%	$	17,998	17.2	%	$	13,264	14.7	%	$	4,734		35.7	%
TASER X2	22,717		25.2		13,514		18.8		9,203				68.1		20,392		19.4		22,717		25.2		(2,325		)	(10.2	)
TASER Pulse and Bolt	1,069		1.2		1,039		1.4		30				2.9		1,402		1.3		1,069		1.2		333			31.2
Single cartridges	17,474		19.4		13,898		19.3		3,576				25.7		18,406		17.6		17,474		19.4		932			5.3
Extended warranties including TAP	3,086		3.4		2,645		3.7		441				16.7
Extended warranties															4,123		3.9		3,086		3.4		1,037			33.6
Other	1,806		2.0		2,899		4.0		(1,093		)		(37.7	)	1,345		1.3		1,806		2.0		(461		)	(25.5	)
Total TASER Weapons segment	59,416		65.8		52,938		73.6		6,478				12.2		63,666		60.7		59,416		65.9		4,250			7.2
Software and Sensors segment:
Axon Body	4,527		5.0		3,540		4.9		987				27.9		4,744		4.5		4,527		5.0		217			4.8
Axon Flex	2,563		2.8		2,316		3.2		247				10.7		1,325		1.3		2,563		2.8		(1,238		)	(48.3	)
Axon Fleet	1,113		1.2		—		—		1,113				*		1,809		1.7		1,113		1.2		696			62.5
Axon Dock	2,639		2.9		2,438		3.4		201				8.2		2,178		2.1		2,639		2.9		(461		)	(17.5	)
Evidence.com	16,200		17.9		8,544		11.9		7,656				89.6
Axon Evidence and cloud services															23,915		22.8		16,200		18.0		7,715			47.6
TASER Cam	922		1.0		696		1.0		226				32.5		717		0.7		922		1.0		(205		)	(22.2	)
Extended warranties including TAP	1,945		2.2		1,015		1.4		930				91.6
Extended warranties															3,161		3.0		1,945		2.2		1,216			62.5
Other	937		1.0		395		0.5		542				137.2		3,321		3.2		937		1.0		2,384			254.4
Total Software and Sensors segment	30,846		34.2		18,944		26.4		11,902				62.8		41,170		39.3		30,846		34.1		10,324			33.5
Total net sales	$	90,262	100.0	%	$	71,882	100.0	%	$	18,380			25.6		$	104,836	100.0	%	$	90,262	100.0	%	$	14,574		16.1	%

* Not meaningful⁽¹⁾ Amounts for the three months ended September 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 unit sales for TASER Weapons handles and other products and Software and Sensors segment products were as follows:

Three Months Ended September 30,
Unit
Change

Percent
Change
2017 2016
TASER X26P 13,472
23,259
(9,787 ) (42.1 )%
TASER X2 21,896
12,481
9,415
75.4
TASER Pulse and Bolt 2,944
1,936
1,008
52.1
Cartridges 643,077
544,671
98,406
18.1
Axon Flex 8,298
4,961
3,337
67.3
Axon Body 28,669
25,093
3,576
14.3
Axon Fleet 1,598
—
1,598
*
Axon Dock 6,440
6,432
8
0.1
TASER Cam 1,512
1,323
189
14.3

* Not meaningful

Net sales were $90.3 million and $71.9 million for the three months ended September 30, 2017 and 2016, respectively, an increase of $18.4 million or 25.6%. International revenues were $17.1 million and $11.3 million for the three months ended September 30, 2017 and 2016, respectively, an increase of $5.7 million or 50.6%.



	Three Months Ended September 30,		Unit Change		Percent Change
	2018	2017	Unit Change		Percent Change
TASER X26P	18,842	13,472	5,370		39.9	%
TASER X2	16,729	21,896	(5,167	)	(23.6	)
TASER Pulse and Bolt	3,750	2,944	806		27.4
Cartridges	598,119	643,077	(44,958	)	(7.0	)
Axon Body	17,622	28,669	(11,047	)	(38.5	)
Axon Flex	3,487	8,298	(4,811	)	(58.0	)
Axon Fleet	1,601	1,598	3		0.2
Axon Dock	3,525	6,440	(2,915	)	(45.3	)
TASER Cam	1,339	1,512	(173	)	(11.4	)

Net sales for the TASER Weapons segment ~~were $59.4 million and $52.9 million for the three months ended September 30, 2017 and 2016, respectively, an increase~~increased 7.2% primarily as a result of $6.5 million or 12.2%. The Company increased sales of its TASER Smart Weapons by $3.5 million to $36.0 million during the quarter ended September 30, 2017 as compared to $32.5 million during the same period in 2016 which was primarily attributable to increased sales under the Officer Safety Plan and TASER 60 ~~installment~~purchase programs. We expect recurring payment

~~programs. Additionally, the Company increased cartridge~~ plan subscriptions to increase substantially in 2019 as we drive sales ~~by $3.6 million to $17.5 million during the quarter ended September 30, 2017 as compared to $13.9 million during the same period in 2016~~of TASER 7, which was primarily attributable to an increase in total weapons in the field. During the first quarter of 2017, the Home Office of the U.K. government approved the Company's Smart Weapons for sale which resulted in increased TASER X2 sales within the U.K. of $3.8 million for the three months ended September 30, 2017 as compared to the same period in 2016.includes a software subscription with Axon Evidence.

Net sales for the Software and Sensors segment ~~were $30.8 million and $18.9 million for~~increased 33.5% as we continued to add users to our network during the three months ended September 30, ~~2017~~2018, resulting in steady product revenues and ~~2016, respectively, an increase~~a higher number of ~~$11.9~~aggregate users, which resulted in increased Axon Evidence and extended warranty revenues of $7.7 million ~~or 62.8%. The overall~~and $1.2 million, respectively. Additionally, we recorded a $0.7 million 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 related to the Company's Axon Body, Axon Flex, and Axon Dock increased approximately $1.4 million. The Company recorded net sales of $1.1 millionrevenue related to Axon Fleet, ~~with no amounts recorded during~~our in-car camera system that was released toward the same period in 2016. Evidence.com revenues for the three months ended September 30, 2017 increased $7.7 million to $16.2 million as compared to the same period in 2016. This increase was primarily driven by the continued increase in active users on the Company's Evidence.com platform.end of 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. 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~~we have entered into contracts for the delivery of products and services in the future and ~~anticipates~~anticipate the contracts will be 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~~our Software and Sensors segment, net of cancellations, were ~~$78.0~~$92.9 million and ~~$57.5~~$78.0 million during the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively, an increase of ~~$20.5~~$14.9 million, or ~~35.6%~~19.1%.

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

Cost of Product and Service Sales

Cost of product and service sales was ~~$40.5~~$39.2 million and ~~$25.3~~$40.5 million for the three months ended September 30, 2018 and 2017, ~~and 2016,~~ respectively, ~~an increase~~a decrease of ~~$15.2~~$1.3 million, or ~~60.0%~~3.2%. As a percentage of net sales, cost of product and service sales ~~increased~~decreased to ~~44.9%~~37.4% for the three months ended September 30, ~~2017~~2018 compared to ~~35.2%~~44.9% during the same period in ~~2016.~~

Within the TASER Weapons segment, cost of product sales increased to $19.2 million for the three months ended September 30, 2017 from $15.0 million for the same period in 2016, and increased as a percentage of sales to 32.4% from 28.3%, respectively. The increase in costs as a percentage of net sales was driven by higher discounting and sales mix, with2017. We noted no significant changes in variable manufacturing costs during the three months ended September 30, ~~2017~~2018 as compared to the same period in ~~2016.~~2017.

Within the TASER Weapons segment, cost of product sales increased slightly to $19.3 million for the three months ended September 30, 2018 from $19.2 million for the same period in 2017. Cost as a percentage of sales decreased to 30.2% from 32.4% as a result of the sales mix, which resulted in increased revenue per unit.

Within the Software and Sensors segment, cost of product and service sales ~~increased~~decreased to ~~$21.3~~$19.9 million for the three months ended September 30, ~~2017~~2018 from ~~$10.3~~$21.3 million for the same period in ~~2016. Cost of product and service sales as a percentage of sales increased to 68.9% for the three months ended September 30,~~ 2017 ~~from 54.6% for the same period in 2016. The increase in cost of product sales was~~ primarily attributable to higher sales volumes, and the increase in cost of service sales was driven by increased cloud storage costs. The increase in cost of sales as a percentage of sales was primarily driven by higher discounting and sales mix, with no significant changes in variable manufacturing costs during the three months ended September 30, 2017 as compareddue to the ~~same period~~reduction of non-recurring expenses related to our data migration to our new cloud-storage provider that was completed in ~~2016.~~2018, as well as increased leveraging of fixed costs related to cloud-storage.

Gross Margin

Gross margin increased ~~$3.2~~$15.9 million to ~~$49.8~~$65.6 million for the three months ended September 30, ~~2017~~2018 compared to ~~$46.6~~$49.8 million for the same period in ~~2016.~~2017. As a percentage of net sales, gross margin ~~was 55.1%~~increased to 62.6% for the three months ended September 30, ~~2017~~2018 compared to ~~64.8%~~55.1% 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 to 69.8% from 67.6% ~~compared to 71.7%~~ for the three months ended September 30, 2018 and 2017, ~~and 2016,~~ respectively. The increase was primarily driven by sales mix.

As a percentage of net sales, gross margin for the Software and Sensors segment was ~~31.1%~~51.5% and ~~45.4%~~31.1% for the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. Within the Software and Sensors segment, hardware gross margin was ~~negative 5.3%~~20.6% for the three months ended September 30, ~~2017 and 15.3%~~2018 compared to a negative 5.3% for the same period in ~~2016,~~2017, while the service margins were ~~63.6%~~73.9% and ~~81.0%~~63.6% during those same periods, respectively. The ~~decreased~~increase in hardware gross margins ~~in both segments were~~during the three months ended September 30, 2018 was primarily attributable to ~~higher discounting. In certain customer contracts, primarily within~~accounting changes required under the ~~Software and Sensors segment,~~new revenue accounting standard. Previously, the level of discounting in our contracts resulted in a portion of the contractual consideration allocated to the delivered hardware ~~to be~~being recognized as revenue ratably over the ~~Evidence.com~~Axon Evidence subscription ~~term. However,~~term, while the full cost of the product iswas recognized when the hardware iswas delivered to the customer resulting in lower gross margins initially. Under the new revenue accounting standard, generally the full amount of revenue related to the delivered hardware is recognized in the period in which it is delivered, resulting in better matching of the revenues and related costs. The ~~decrease~~increase in service margins during the three months ended September 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~~our data migration to aour new cloud-storage ~~provider. Once the migration has been~~provider that was completed ~~the Company does not expect these~~in 2018, as well as increased leveraging of fixed costs ~~in subsequent period. Additionally, the Company recognized negative gross margins on $1.1 million of Axon Fleet sales. This was attributable~~related to the Company's strategic investment in the launch of Axon Fleet, which was intended to be a disruptive product offering within the in-car camera market. The Company believes Axon Fleet gross margins will improve in subsequent periods.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 September 30, Dollar
Change Percent
Change
2017 2016
Salaries, benefits and bonus $ 15,348
$ 10,956
$ 4,392
40.1 %
Stock-based compensation 2,099
1,348
751
55.7
Professional, consulting and lobbying 6,623
4,808
1,815
37.7
Sales and marketing 4,219
2,925
1,294
44.2
Travel and meals 2,969
2,506
463
18.5
Other 5,140
5,578
(438 ) (7.9 )
Total sales, general and administrative expenses $ 36,398
$ 28,121
$ 8,277
29.4
Sales, general, and administrative as a percentage of net sales 40.3 % 39.1 %



	Three Months Ended September 30,						Dollar Change		Percent Change
	2018			2017 ⁽¹⁾			Dollar Change		Percent Change
Total sales, general and administrative expenses	$	39,685		$	36,398		$	3,287	9.0
Sales, general, and administrative as a percentage of net sales	37.8		%	40.3		%

⁽¹⁾ Amounts related to commissions expense for the three months ended September 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 $36.4~~increased $2.0 million, ~~and $28.1~~or 9.7%, to $22.6 million during the three months ended September 30, 2018 as compared to $20.6 million for the three months ended September 30, ~~2017~~2017. The increase was primarily attributable to stock-based compensation expense of $1.3 million related to the CEO Performance Award.

Within the Software and ~~2016, respectively, an increase of $8.3 million or 29.4%. As a percentage of total net sales,~~Sensors segment, SG&A expenses increased ~~to 40.3% for the three months ended September 30, 2017 compared to 39.1% for the same period in 2016.~~

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

Three Months Ended September 30, Dollar Change Percent Change
2017 2016
TASER Weapons segment:
Salaries, benefits and bonus $ 7,937
21.8 % $ 6,214
22.1 % $ 1,723
27.7 %
Stock-based compensation 1,469
4.0
806
2.9
663
82.3
Professional, consulting and lobbying 3,701
10.2
2,165
7.7
1,536
70.9
Sales and marketing 1,977
5.4
1,357
4.8
620
45.7
Travel and meals 1,317
3.6
1,152
4.1
165
14.3
Other 4,174
11.5
4,745
16.9
(571 ) (12.0 )
Total TASER Weapons segment 20,575
56.5
16,439
58.5
4,136
25.2
Software and Sensors segment:
Salaries, benefits and bonus 7,411
20.4
4,742
16.9
2,669
56.3
Stock-based compensation 630
1.7
542
1.9
88
16.2
Professional, consulting and lobbying 2,922
8.0
2,643
9.4
279
10.6
Sales and marketing 2,242
6.2
1,568
5.6
674
43.0
Travel and meals 1,652
4.5
1,354
4.8
298
22.0
Other 966
2.7
833
3.0
133
16.0
Total Software and Sensors segment 15,823
43.5
11,682
41.5
4,141
35.4
Total sales, general and administrative expenses $ 36,398
100.0 % $ 28,121
100.0 % $ 8,277
29.4

~~Within the TASER Weapons segment, SG&A increased $4.1~~$1.3 million, or ~~25.2%~~8.1%, to ~~$20.6~~$17.1 million during the three months ended September 30, ~~2017~~2018 as compared to $16.4 million for the three months ended September 30, 2016. Salaries, benefits and bonus inclusive of stock-based compensation increased approximately $2.4 million during the three months ended September 30, 2017 as compared to the same period in 2016 as the Company continued to build its workforce to further facilitate growth while also increasing customer facing sales roles. Professional, consulting and lobbying expense increased $1.5 million primarily due to international tax restructuring and efforts towards remediation of the Company's material weaknesses in internal control. No such costs were incurred during the three months ended September 30, 2016. Sales and marketing expenses for the TASER Weapons segment increased $0.6 million during the three months ended September 30, 2017 as compared to the same period in 2016 due in part to increased commissions of $0.2 million on higher than expected sales.

~~Within the Software and Sensors segment, SG&A increased $4.1 million, or 35.4%, to~~ $15.8 ~~million during the three months ended September 30, 2017 as compared to $11.7~~ million for the same period in ~~2016. Salaries, benefits~~2017. The increase was primarily attributable to an impairment charge of $2.0 million related to the abandonment of certain developed technology acquired in a business combination. Partially offsetting the increase were decreases in professional fees and ~~bonus inclusive of stock-based compensation increased approximately $2.8 million~~severance expense.

In October 2018, a customer experienced a camera overheating incident on a VIEVU camera. As a result, we anticipate that this customer will transition to Axon technology sooner than previously expected. This may have an impact on our purchase commitment liability or on our inventory reserve during the ~~three months ended September 30, 2017 as compared~~quarter ending December 31, 2018; however, we cannot reasonably estimate a range of possible losses at this time. The amount of expense ultimately recorded will be determined by supplier negotiation, shipment timing, and our ability to 2016 as the Company continues to build its direct sales and support teams and corporate workforce to continue to scale the Software and Sensors segment. Sales and marketing expenses for the Software and Sensors segment increased $0.7 million during the three months ended September 30, 2017 as compared to the same period in 2016 due primarily to increased commissions of $0.6 million on higher than expected sales.

utilize VIEVU cameras that were produced but are no longer wanted by this customer.

Research and Development Expenses

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

Three Months Ended September 30, Dollar
Change Percent
Change
2017 2016
Salaries, benefits and bonus $ 9,617
$ 4,332
$ 5,285
122.0 %
Stock-based compensation 1,767
791
976
123.4
Professional and consulting 689
673
16
2.4
Travel and meals 532
213
319
149.8
Other 1,561
1,349
212
15.7
Total research and development expenses $ 14,166
$ 7,358
$ 6,808
92.5
Research and development as a percentage of net sales 15.7 % 10.2 %



	Three Months Ended September 30,						Dollar Change		Percent Change
	2018			2017			Dollar Change		Percent Change
Total research and development expenses	$	21,982		$	14,166		$	7,816	55.2
Research and development as a percentage of net sales	21.0		%	15.7		%

R&D expenses were $14.2 million and $7.4 million for the three months ended September 30, 2017 and 2016, respectively, an increase of $6.8 million, or 92.5%. As a percentage of net sales, R&D increased to 15.7% for the three months ended September 30, 2017 compared to 10.2% for the same period in 2016.

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

Three Months Ended September 30, Dollar Change Percent Change
2017 2016
TASER Weapons segment:
Salaries, benefits and bonus $ 947
6.7 % $ 707
9.6 % $ 240
33.9 %
Stock-based compensation 136
1.0
143
1.9
(7 ) (4.9 )
Professional and consulting 213
1.5
230
3.1
(17 ) (7.4 )
Travel and meals 71
0.5
34
0.5
37
108.8
Other 489
3.5
294
4.0
195
66.3
Total TASER Weapons segment 1,856
13.1
1,408
19.1
448
31.8
Software and Sensors segment:
Salaries, benefits and bonus 8,670
61.2
$ 3,625
49.3
5,045
139.2
Stock-based compensation 1,631
11.5
648
8.8
983
151.7
Professional and consulting 476
3.4
443
6.0
33
7.4
Travel and meals 461
3.3
179
2.4
282
157.5
Other 1,072
7.6
1,055
14.3
17
1.6
Total Software and Sensors segment: 12,310
86.9
5,950
80.9
6,360
106.9
Total research and development expenses $ 14,166
100.0 % $ 7,358
100.0 % $ 6,808
92.5

~~The Company's~~Our Software and Sensors segment was responsible for ~~approximately 93%~~62% of the overall increase in R~~&D. The main increase in~~&D expense. Within the TASER Weapons segment, ~~was approximately $0.2~~R&D expense increased $3.0 million, of which $1.9 million was related to increased salaries, benefits and bonus as ~~the Company continues~~we continue to invest in personnel allocated to the development of new CEW related technologies. ~~Of the $6.4 million increase in~~ R&D expense for the Software and Sensors segment ~~$6.0~~increased $4.8 million, primarily due to a $2.6 million increase related to salaries and benefits, inclusive of stock-based compensation. ~~The Company remains focused~~We expect R&D expense to continue to increase in absolute dollars as we invest in the deployment of new CEW technologies and focus on growing the Software and Sensors segment as ~~it adds~~we add headcount and ~~external~~ additional

resources to develop new products and services ~~including records management systems,~~ to further advance ~~its~~our scalable cloud-connected device platform. ~~Included~~We believe that these investments will result in ~~other~~an increase in our subscription revenue base, which over time will result in revenue increasing faster than the increase in SG&A expenses and R&D ~~expenses for the Software and Services segment was $0.4 million~~costs, as we reach economies of ~~amortization of intangible assets related to acquired developed technology that was yet to be put into service.~~

scale.

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

Interest and other income, net was ~~$1.4~~$1.3 million for the three months ended September 30, ~~2017~~2018 compared to ~~expense of $0.5~~$1.4 million for the same period in ~~2016.~~2017. During the three months ended September 30, 2018, interest and other income amounts consisted primarily of interest income related to our sales under hardware installment sale plans and investment and interest income totaling $1.7 million, which was partially offset by losses on foreign currency transaction adjustments of $0.4 million. During the three months ended September 30, 2017, interest and other income amounts consisted primarily of foreign currency transaction gains of $1.1 million as well as interest income related to the Company's sales under hardware installment plans and investment interest income totaling $0.4 million which was partially offset by other expense of $0.1 million. During 2016,included investment and interest income of ~~$0.2~~$0.4 million ~~was offset by $0.7~~and $1.1 million of ~~losses~~gains on foreign currency transaction adjustments.

Provision for Income Taxes

The provision for income taxes was ~~$0.2~~a benefit of $0.5 million for the three months ended September 30, ~~2017,~~2018, which was an effective tax rate of ~~33.1%~~(9.0)%. Our estimated full year effective income tax rate for ~~2017,~~2018, before discrete period adjustments, is ~~approximately 32.5%~~24.0%, which is ~~less~~more than the federal statutory rate, primarily due to ~~income in certain foreign jurisdictions with lower tax rates, partially offset by~~ state taxes and non-deductible expenses for items such as ~~Subpart F income,~~ meals and entertainment, executive compensation limitation under IRC Section 162(m), lobbying fees, and ~~lobbying fees.~~an income inclusion from GILTI, offset by a reduction for 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 $0.1~~$2.0 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 three months ended September 30, 2017. In addition, the Company recorded a $0.7 million favorable discrete tax benefit related to the reversal of certain uncertain tax positions due to statute expiration, and a $0.4 million favorable discrete tax benefit related to tax return to provision adjustments recorded during the three months ended September 30, 2017.2018.

Net Income

Our income ~~decreased~~increased by ~~$3.4~~$5.3 million to ~~$0.4~~$5.7 million for the three months ended September 30, ~~2017~~2018 compared to ~~$3.8~~$0.4 million for the same period in ~~2016.~~2017. Net income per basic and diluted share was ~~$0.01~~$0.10 for the three months ended September 30, ~~2017~~2018 compared to ~~$0.07~~$0.01 per basic and diluted share for the same period in ~~2016.~~2017.

Three Months Ended September 30, 2018 Compared to the Three Months Ended June 30, 2018

Net Sales

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



	Three Months Ended September 30, 2018				Three Months Ended June 30, 2018				Dollar Change			Percent Change
TASER Weapons segment:
TASER X26P	$	17,998	17.2	%	$	18,146	18.3	%	$	(148	)	(0.8	)%
TASER X2	20,392		19.4		18,362		18.5		2,030			11.1
TASER Pulse and Bolt	1,402		1.3		1,101		1.1		301			27.3
Single cartridges	18,406		17.6		17,243		17.4		1,163			6.7
Extended warranties	4,123		3.9		3,738		3.8		385			10.3
Other	1,345		1.3		2,034		2.0		(689		)	(33.9	)
Total TASER Weapons segment	63,666		60.7		60,624		61.1		3,042			5.0
Software and Sensors segment:
Axon Body	4,744		4.5		4,780		4.8		(36		)	(0.8	)
Axon Flex	1,325		1.3		1,535		1.5		(210		)	(13.7	)
Axon Fleet	1,809		1.7		2,715		2.7		(906		)	(33.4	)
Axon Dock	2,178		2.1		2,119		2.1		59			2.8
Axon Evidence and cloud services	23,915		22.8		20,357		20.6		3,558			17.5
TASER Cam	717		0.7		762		0.8		(45		)	(5.9	)
Extended warranties	3,161		3.0		2,870		2.9		291			10.1
Other	3,321		3.2		3,464		3.5		(143		)	(4.1	)
Total Software and Sensors segment	41,170		39.3		38,602		38.9		2,568			6.7
Total net sales	$	104,836	100.0	%	$	99,226	100.0	%	$	5,610		5.7	%

Net sales within the TASER Weapons segment increased 5.0% primarily due to the timing of customer orders and deployments.

Within the Software and Sensors segment, net sales increased 6.7% as we continued to add users to our network, resulting in higher service revenues in addition to an increase in hardware revenues.

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



	Three Months Ended September 30, 2018	Three Months Ended June 30, 2018	Unit Change		Percent Change
TASER X26P	18,842	18,664	178		1.0	%
TASER X2	16,729	15,537	1,192		7.7
TASER Pulse and Bolt	3,750	3,158	592		18.7
Cartridges	598,119	611,136	(13,017	)	(2.1	)
Axon Body	17,622	20,407	(2,785	)	(13.6	)
Axon Flex	3,487	3,281	206		6.3
Axon Fleet	1,601	2,079	(478	)	(23.0	)
Axon Dock	3,525	4,534	(1,009	)	(22.3	)
TASER Cam	1,339	1,491	(152	)	(10.2	)

Nine Months Ended September 30, ~~2017~~2018 Compared to the Nine Months Ended September 30, ~~2016~~2017


	Nine Months Ended September 30,									Nine Months Ended September 30,
	2017				2016					2018					2017 ⁽¹⁾
Net sales from products	$	208,351	83.6	%	$	167,745		90.1	%	$	238,618		78.2	%	$	208,351	83.6	%
Net sales from services	40,796		16.4		18,423			9.9		66,659			21.8		40,796		16.4
Net sales	249,147		100.0		186,168			100.0		305,277			100.0		249,147		100.0
Cost of product sales	91,817		36.9		61,172			32.9		96,474			31.6		91,817		36.9
Cost of service sales	13,258		5.3		4,230			2.3		15,566			5.1		13,258		5.3
Cost of sales	105,075		42.2		65,402			35.1		112,040			36.7		105,075		42.2
Gross margin	144,072		57.8		120,766			64.9		193,237			63.3		144,072		57.8
Operating expenses:
Sales, general and administrative	99,079		39.8		77,333			41.5		114,787			37.6		99,079		39.8
Research and development	39,618		15.9		20,995			11.3		55,602			18.2		39,618		15.8
Total operating expenses	138,697		55.7		98,328			52.8		170,389			55.8		138,697		55.6
Income from operations	5,375		2.2		22,438			12.1
Interest and other income (expense), net	3,320		1.3		(460		)	(0.2	)
Income (loss) from operations										22,848			7.5		5,375		2.2
Interest and other income										2,242			0.7		3,320		1.3
Income before provision for income taxes	8,695		3.5		21,978			11.8		25,090			8.2		8,695		3.5
Provision for income taxes	1,417		0.6		11,022			5.9
Provision for (benefit from) income taxes										(2,032		)	(0.7	)	1,417		0.6
Net income	$	7,278	2.9	%	$	10,956		5.9	%	$	27,122		8.9	%	$	7,278	2.9	%

⁽¹⁾ Amounts for the nine months ended September 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 U.S. and other countries are summarized as follows (dollars in~~The following table presents our revenues disaggregated by geography (in thousands):


	Nine Months Ended September 30,								Nine Months Ended September 30,
	2017				2016				2018				2017 ⁽¹⁾
United States	$	204,155	81.9	%	$	155,245	83.4	%	$	244,806	80	%	$	204,155	82	%
Other Countries	44,992		18.1		30,923		16.6
Other countries									60,471		20		44,992		18
Total	$	249,147	100.0	%	$	186,168	100.0	%	$	305,277	100	%	$	249,147	100	%

International revenue grew 34.4%, driven by strength in Australia, Canada, and the U.K.

Net Sales

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


	Nine Months Ended September 30,								Dollar Change				Percent Change		Nine Months Ended September 30,								Dollar Change			Percent Change
	2017				2016							2018					2017 ⁽¹⁾						Dollar Change			Percent Change
TASER Weapons segment:									Dollar Change				Percent Change
TASER X26P	$	45,167	18.1	%	$	52,257	28.1	%	$	(7,090	)		(13.6	)%	$	52,618	17.2	%	$	45,167	18.1	%	$	7,451		16.5	%
TASER X2	57,755		23.2		37,136		19.9		20,619				55.5		62,686		20.5		57,755		23.1		4,931			8.5
TASER Pulse and Bolt	2,892		1.2		2,636		1.4		256				9.7		3,849		1.3		2,892		1.2		957			33.1
Single cartridges	49,005		19.7		37,013		19.9		11,992				32.4		51,763		17.0		49,005		19.7		2,758			5.6
Extended warranties including TAP	8,920		3.6		7,102		3.8		1,818				25.6
Extended warranties															11,567		3.8		8,920		3.6		2,647			29.7
Other	6,364		2.6		8,163		4.4		(1,799		)		(22.0	)	5,331		1.7		6,364		2.6		(1,033		)	(16.2	)
Total TASER Weapons segment	170,103		68.3		144,307		77.5		25,796				17.9		187,814		61.5		170,103		68.3		17,711			10.4
Software and Sensors segment:
Axon Body	11,725		4.7		7,217		3.9		4,508				62.5		15,082		4.9		11,725		4.7		3,357			28.6
Axon Flex	7,889		3.2		4,759		2.6		3,130				65.8		4,529		1.5		7,889		3.2		(3,360		)	(42.6	)
Axon Fleet	1,113		0.4		—		—		1,113				*		6,640		2.2		1,113		0.4		5,527			496.6
Axon Dock	7,409		3.0		4,923		2.6		2,486				50.5		7,332		2.4		7,409		3.0		(77		)	(1.0	)
Evidence.com	40,698		16.3		18,021		9.7		22,677				125.8
Axon Evidence and cloud services															64,513		21.2		40,698		16.3		23,815			58.5
TASER Cam	2,407		1.0		3,311		1.8		(904		)		(27.3	)	2,839		0.9		2,407		1.0		432			17.9
Extended warranties including TAP	4,982		2.0		2,434		1.3		2,548				104.7
Extended warranties															8,521		2.8		4,982		2.0		3,539			71.0
Other	2,821		1.1		1,196		0.6		1,625				135.9		8,007		2.6		2,821		1.1		5,186			183.8
Total Software and Sensors segment	79,044		31.7		41,861		22.5		37,183				88.8		117,463		38.5		79,044		31.7		38,419			48.6
Total net sales	$	249,147	100.0	%	$	186,168	100.0	%	$	62,979			33.8		$	305,277	100.0	%	$	249,147	100.0	%	$	56,130		22.5	%

* Not meaningful

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

Nine Months Ended September 30,
Unit
Change

Percent
Change
2017 2016
TASER X26P 47,031
58,385
(11,354 ) (19.4 )%
TASER X2 54,423
34,697
19,726
56.9
TASER Pulse and Bolt 8,863
6,522
2,341
35.9
Cartridges 1,818,345
1,424,656
393,689
27.6
Axon Flex 20,772
11,026
9,746
88.4
Axon Body 75,864
40,977
34,887
85.1
Axon Fleet 1,598
—
1,598
*
Axon Dock 19,584
11,236
8,348
74.3
TASER Cam 4,187
6,460
(2,273 ) (35.2 )

* Not meaningful

Net sales were $249.1 million and $186.2 million for the nine months ended September 30, 2017 and 2016, respectively, an increase of $63.0 million or 33.8%. International revenues were $45.0 million and $30.9 million for the nine months ended September 30, 2017 and 2016, respectively, an increase of $14.1 million or 45.5%.



	Nine Months Ended September 30,		Unit Change		Percent Change
	2018	2017	Unit Change		Percent Change
TASER X26P	53,226	47,031	6,195		13.2	%
TASER X2	52,767	54,423	(1,656	)	(3.0	)
TASER Pulse and Bolt	10,908	8,863	2,045		23.1
Cartridges	1,742,207	1,818,345	(76,138	)	(4.2	)
Axon Body	59,798	75,864	(16,066	)	(21.2	)
Axon Flex	10,461	20,772	(10,311	)	(49.6	)
Axon Fleet	5,537	1,598	3,939		246.5
Axon Dock	13,903	19,584	(5,681	)	(29.0	)
TASER Cam	6,358	4,187	2,171		51.9

Net sales for the TASER Weapons segment ~~were $170.1 million and $144.3 million for~~increased 10.4% primarily due to increased sales under the nine months ended September 30, 2017 and 2016, respectively, an increase of $25.8 million or 17.9%. During the first quarter of 2017, the Home Office of the U.K. government approved the Company's Smart Weapons for sale which resulted in increased TASER X2 sales within the U.K. of $7.6 million for the nine months ended September 30, 2017 as compared to the same period in 2016. The Company also experienced increased purchases under its Officer Safety Plan and TASER 60 ~~installment~~ payment programs. Additionally, the Company increased cartridge sales by $12.0 million to $49.0 million during the nine months September 30, 2017 as compared to $37.0 million during the same period in 2016 due primarily to there being more units in the field.

Net sales for the Software and Sensors segment were $79.0 million and $41.9 million for the nine months ended September 30, 2017 and 2016, respectively, an increase of $37.2 million, or 88.8%. The overall increase in the Software and Sensors segment was driven byincreased 48.6%, primarily due to continued adoption of on-officer cameras and related technologies, including ~~the Company's Evidence.com~~our Axon Evidence digital evidence management software ~~as a service~~ suite. ~~Revenue related to the Company's~~ Axon ~~Body, Axon Flex, and Axon Dock~~Evidence revenues increased ~~approximately $10.1 million. The Company recorded net sales of $1.1~~$23.8 million, related to Axon Fleet with no amounts recorded during the same period in 2016. Evidence.com revenues for the nine months ended September 30, 2017 increased $22.7 million to $40.7 million as compared to the same period in 2016. This increase was primarily driven by the continued increase in active users on the ~~Company's Evidence.com~~ platform. We recorded a $5.5 million increase in revenue related to Axon Fleet.

Cost of Product and Service Sales

Cost of product and service sales was ~~$105.1~~$112.0 million and ~~$65.4~~$105.1 million for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively, an increase of ~~$39.7~~$6.9 million, or ~~60.7%~~6.6%. As a percentage of net sales, cost of product and service sales ~~increased~~decreased to ~~42.2%~~36.7% for the nine months ended September 30, ~~2017~~2018 compared to ~~35.1%~~42.2% during the same period in ~~2016.~~2017.

Within the TASER Weapons segment, cost of ~~products sold~~product sales increased to ~~$53.3~~$57.5 million for the nine months ended September 30, 2018 from $53.3 million for the same period in 2017 ~~from $44.0 million in 2016,~~as a result of higher sales volumes, and ~~increased~~decreased slightly as a percentage of sales to ~~31.4% from 30.5%, respectively. The Company's variable manufacturing cost per unit of its TASER Weapons products did not significantly change during~~30.6% for the nine months ended September 30, ~~2017 as compared to~~2018 from 31.4% for the same period in ~~2016 but higher discounting resulted in an increase in costs as a percentage of sales.~~2017.

Within the Software and Sensors segment, cost of product and service sales increased to ~~$51.7~~$54.6 million for the nine months ended September 30, ~~2017~~2018 from ~~$21.4~~$51.7 million for the same period in ~~2016. Cost~~2017 as a result of ~~product~~higher sales volumes, and ~~service sales~~decreased as a percentage of sales ~~increased~~ to ~~65.4%~~46.4% for the nine months ended September 30, ~~2017~~2018 from ~~51.1%~~65.4% for the same period in 2016. The increase in cost of product sales was primarily attributable to higher sales volumes, and the increase in cost of service sales was driven by increased cloud storage costs. The increase in cost of sales as a percentage of sales was primarily driven by higher discounting and sales mix, with no significant changes in variable manufacturing costs during the nine months ended September 30, 2017 as compared to the same period in 2016.

2017.

Gross Margin

Gross margin increased ~~$23.3~~$49.2 million to ~~$144.1~~$193.2 million for the nine months ended September 30, ~~2017~~2018 compared to ~~$120.8~~$144.1 million for ~~2016.~~the same period in 2017. As a percentage of net sales, gross margin ~~was 57.8%~~increased to 63.3% for the nine months ended September 30, ~~2017~~2018 compared to ~~64.9%~~57.8% 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 69.4% and 68.6% ~~compared to 69.5%~~ for the nine months ended September 30, 2018 and 2017, ~~and 2016,~~ respectively.

As a percentage of net sales, gross margin for the Software and Sensors segment was ~~34.6%~~53.6% and ~~48.9%~~34.6% for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. Within the Software and Sensors segment, hardware gross ~~margins were negative 0.6%~~margin was 23.2% for the nine months ended September 30, ~~2017~~2018 and ~~positive 26.7%~~negative 0.6% for the same period in ~~2016,~~2017, while the service margins were ~~67.5%~~76.6% and ~~77.0%~~67.5% during those same periods, respectively. The ~~decreased~~increase in hardware gross margins ~~in both segments were~~during the nine months ended September 30, 2018 was primarily attributable to ~~higher discounting. In certain customer contracts, primarily within~~accounting changes required under the ~~Software and Sensors segment,~~new revenue accounting standard. Previously, the level of discounting in our contracts resulted in a portion of the contractual consideration allocated to the delivered hardware ~~to be~~being recognized as revenue ratably over the ~~Evidence.com~~Axon Evidence subscription ~~term. However,~~term, while the full cost of the product iswas recognized when the hardware iswas delivered to the customer, resulting in lower gross margins initially. Under the new revenue accounting standard, generally the full amount of revenue related to the delivered hardware is recognized in the period in which it is delivered resulting in better matching of the revenues and related costs. The ~~decrease~~increase in service margins during the nine months ended September 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~~our data migration to aour new cloud-storage ~~provider. Once the migration has been~~provider that was completed ~~the Company does not expect these~~in 2018, as well as increased leveraging of fixed costs ~~in subsequent period. Additionally, the Company recognized negative gross margins on $1.1 million of Axon Fleet sales. This was attributable~~related to the Company's strategic investment in the launch of Axon Fleet, which was intended to be a disruptive product offering within the in-car camera market. The Company believes Axon Fleet gross margins will improve in subsequent periods.cloud-storage.

Sales, General and Administrative Expenses

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

Nine Months Ended September 30, Dollar
Change Percent
Change
2017 2016
Salaries, benefits and bonus $ 43,207
$ 29,957
$ 13,250
44.2 %
Stock-based compensation 6,282
4,197
2,085
49.7
Professional, consulting and lobbying 16,106
13,661
2,445
17.9
Sales and marketing 12,082
11,252
830
7.4
Travel and meals 8,329
6,593
1,736
26.3
Other 13,073
11,673
1,400
12.0
Total sales, general and administrative expenses $ 99,079
$ 77,333
$ 21,746
28.1
Sales, general, and administrative as a percentage of net sales 39.8 % 41.5 %



	Nine Months Ended September 30,						Dollar Change		Percent Change
	2018			2017 ⁽¹⁾			Dollar Change		Percent Change
Total sales, general and administrative expenses	$	114,787		$	99,079		$	15,708	15.9
Sales, general, and administrative as a percentage of net sales	37.6		%	39.8		%

⁽¹⁾ Amounts related to commissions expense for the nine 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 $99.1~~expense increased $10.5 million, ~~and $77.3~~or 18.9%, to $65.8 million during the nine months ended September 30, 2018 as compared to $55.3 million for the nine months ended September 30, ~~2017~~2017. Of the increase, $5.9 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, including $1.8 million of ~~$21.7~~stock-based compensation expense related to the CEO Performance Award. Additionally, professional and consulting expenses increased $2.5 million ~~or 28.1%. As a percentage~~primarily related to increased legal fees, and occupancy and depreciation expenses increased $1.1 million related to the expansion of ~~total net sales, SG&A expenses decreased to 39.8% for~~our facilities over the ~~nine months ended September 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):~~

Nine Months Ended September 30, Dollar Change Percent Change
2017 2016
TASER Weapons segment:
Salaries, benefits and bonus $ 23,004
23.2 % $ 17,084
22.1 % $ 5,920
34.7 %
Stock-based compensation 4,381
4.4
2,427
3.1
1,954
80.5
Professional, consulting and lobbying 7,961
8.0
8,055
10.4
(94 ) (1.2 )
Sales and marketing 5,487
5.5
6,127
7.9
(640 ) (10.4 )
Travel and meals 3,880
3.9
3,061
4.0
819
26.8
Other 10,570
10.7
9,641
12.5
929
9.6
Total TASER Weapons segment 55,283
55.8
46,395
60.0
8,888
19.2
Software and Sensors segment:
Salaries, benefits and bonus 20,203
20.4
12,873
16.6
7,330
56.9
Stock-based compensation 1,901
1.9
1,770
2.3
131
7.4
Professional, consulting and lobbying 8,145
8.2
5,606
7.2
2,539
45.3
Sales and marketing 6,595
6.7
5,125
6.6
1,470
28.7
Travel and meals 4,449
4.5
3,532
4.6
917
26.0
Other 2,504
2.5
2,032
2.6
472
23.2
Total Software and Sensors segment 43,796
44.2
30,938
40.0
12,858
41.6
Total sales, general and administrative expenses $ 99,079
100.0 % $ 77,333
100.0 % $ 21,746
28.1
past year.

Within the ~~TASER Weapons~~Software and Sensors segment, SG&A expense increased ~~$8.9~~$5.2 million, or ~~19.2%~~11.9%, to ~~$55.3~~$49.0 million during the nine months ended September 30, ~~2017~~2018 as compared to ~~$46.4~~$43.8 million for the nine months ended September 30, ~~2016. Salaries, benefits~~2017. The increase

was primarily attributable to increased costs related to sales and ~~bonus along with stock-based compensation increased approximately $7.9 million~~marketing, as well as higher occupancy and depreciation expenses related to the expansion of our facilities over the past year. Additionally, during the ~~nine~~three months ended September 30, ~~2017 as compared to the same period~~2018, we abandoned certain developed technology acquired in 2016, as the Company continued to build its infrastructure to further facilitate growth while also increasing customer facing roles. Professional, consulting and lobby expense decreased $0.1 million during the nine months ended September 30, 2017 as compared to 2016 due to higher incurred expenses related to professional and accounting fees which were more than offset by lower patent and trademark expenses and lower medical research costs. Sales and marketing expenses for the TASER Weapons segment decreased $0.6 million during the nine months ended September 30, 2017 as compared to the same period 2016 attributed to lower total commissions related to a ~~large international TASER weapons order~~business combination resulting in ~~the first quarter~~an impairment charge of ~~2016 at a higher contractual commission rate. Increases in other operating expenses was primarily related to overall growth of the Company's operations.~~

Within the Software and Sensors segment, SG&A increased $12.9 million, or 41.6%, to $43.8 million during the nine months ended September 30, 2017 as compared to $30.9 million for the same period in 2016. Salaries, benefits and bonus along with stock-based compensation increased approximately $7.5 million during the nine months ended September 30, 2017 as compared to the same period 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. Professional, consulting and lobbying for the Software and Sensors segment increased $2.5 million during the nine months ended September 30, 2017 as compared to the same period in 2016 due primarily to increased accounting consulting fees of $0.9 million and increased sales consulting costs of $0.8$2.0 million. Sales and marketing expenses increased $1.5 million during the nine months ended September 30, 2017 as compared to the same period in 2016 due primarily to increased commissions on $0.8 million on higher than expected sales. Increases in other operating expenses was primarily related to overall growth of the Company's operations.

Research and Development Expenses

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

Nine Months Ended September 30, Dollar
Change Percent
Change
2017 2016
Salaries, benefits and bonus $ 23,801
$ 12,033
$ 11,768
97.8 %
Stock-based compensation 4,773
2,298
2,475
107.7
Professional and consulting 3,690
2,240
1,450
64.7
Travel and meals 1,257
705
552
78.3
Other 6,097
3,719
2,378
63.9
Total research and development expenses $ 39,618
$ 20,995
$ 18,623
88.7
Research and development as a percentage of net sales 15.9 % 11.3 %



	Nine Months Ended September 30,						Dollar Change		Percent Change
	2018			2017			Dollar Change		Percent Change
Total research and development expenses	$	55,602		$	39,618		$	15,984	40.3
Research and development as a percentage of net sales	18.2		%	15.8		%

Our Software and Sensors segment was responsible for 63% of the overall increase in R&D expense. Within the TASER Weapons segment, R&D expense increased $5.9 million, of which $4.4 million related to increased salaries, benefits and bonus as we continue to invest in personnel allocated to the development of new CEW related technologies. The $10.1 million increase in R&D expense for the Software and Sensors segment was primarily attributable to an increase of $9.3 million in salaries and benefits, inclusive of stock-based compensation. We expect R&D expense to continue to increase in absolute dollars as we invest in the deployment of new CEW technologies and focus on growing the Software and Sensors segment as we add headcount and additional resources to develop new products and services to further advance our scalable cloud-connected device platform. We believe 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 SG&A expenses ~~were $39.6 million~~ and ~~$21.0~~R&D costs, as we reach economies of scale.

Interest and Other Income

Interest and other income was $2.2 million for the nine months ended September 30, ~~2017~~2018 compared to $3.3 million for the same period in 2017. During the nine months ended September 30, 2018, interest and ~~2016, respectively, an increase~~other income consisted primarily of ~~$18.6~~interest income related to our sales under hardware installment sale plans and investment and interest income totaling $3.0 million ~~or 88.7%. As a percentage~~which was partially offset by losses on foreign currency transaction adjustments of ~~net sales, R&D increased to 15.9% for~~$0.7 million and other expense of $0.1 million. During the nine months ended September 30, 2017, ~~from 11.3% for the same period in 2016.~~

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

Nine Months Ended September 30, Dollar Change Percent Change
2017 2016
TASER Weapons segment:
Salaries, benefits and bonus $ 2,796
7.1 % $ 1,420
6.8 % $ 1,376
96.9 %
Stock-based compensation 393
1.0
428
2.0
(35 ) (8.2 )
Professional and consulting 862
2.2
740
3.5
122
16.5
Travel and meals 326
0.8
226
1.1
100
44.2
Other 1,554
3.9
959
4.6
595
62.0
Total TASER Weapons segment 5,931
15.0
3,773
18.0
2,158
57.2
Software and Sensors segment:
Salaries, benefits and bonus 21,005
53.0
$ 10,613
50.6
10,392
97.9
Stock-based compensation 4,380
11.1
1,870
8.9
2,510
134.2
Professional and consulting 2,828
7.1
1,500
7.1
1,328
88.5
Travel and meals 931
2.3
479
2.3
452
94.4
Other 4,543
11.5
2,760
13.1
1,783
64.6
Total Software and Sensors segment: 33,687
85.0
17,222
82.0
16,465
95.6
Total research and development expenses $ 39,618
100.0 % $ 20,995
100.0 % $ 18,623
88.7

The Company's Software and Sensors segment was responsible for approximately 88% of the overall increase in R&D. The main increase in the Weapons segment was approximately $1.3 million of salaries, benefits and bonus as the Company continues to invest in the development of new CEW related technologies. Included in other R&D expenses for the TASER Weapons segment was $0.4 million of increased test build materials used in the development new products.

Of the $16.5 million increase in R&D for the Software and Sensors segment, $12.9 million related to salaries and benefits, inclusive of stock-based compensation. The Company remains focused on growing the Software and Sensors segment as it adds headcount and external 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 professional and consulting fees primarily related to the development of new products in both of its segments. Included in other R&D expenses for the Software and Services segment was $1.4 million of amortization of intangible assets related to acquired developed technology that was yet to be put into service.

~~Interest and Other Income (Expense)~~

~~Interest~~interest and other income was ~~$3.3~~primarily comprised of $2.3 million ~~for the nine months ended September 30, 2017 compared to expense of $0.5 million for the same period in 2016. During 2017, interest and other income amounts consisted primarily~~ of foreign currency transaction gains ~~of $2.3 million as well as interest income related to sales under the Company's hardware installment plans~~ and investment and interest income totaling $1.1 million which was partially offset by other expense of $0.1 million. ~~During 2016, investment and interest income of $0.5 million was offset by $1.0 million of losses on foreign currency transaction adjustments.~~

Provision for Income Taxes

The provision for income taxes was ~~$1.4~~a benefit of $2.0 million for the nine months ended September 30, ~~2017,~~2018, which was an effective tax rate of ~~16.3%~~(8.1)%. Our estimated full year effective income tax rate for ~~2017,~~2018, before discrete period adjustments, ~~is approximately 32.5%~~was 24.0%, which is ~~less~~more than the federal statutory rate primarily due to ~~income in certain foreign jurisdictions with lower tax rates, partially offset by~~ 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 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 $1.5~~an $8.1 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 nine months ended September 30, ~~2017. In addition, the Company recorded a $0.7~~2018. Of this amount, $3.4 million ~~favorable discrete tax benefit~~ related to the reversal of certain uncertain tax positions due to statute expiration, and a $0.4 million favorable discrete tax benefit related to tax return to provision adjustments recorded during the nine months ended September 30, 2017.stock options exercised by our CEO in connection with our follow-on offering.

Net Income

Our ~~net~~ income ~~decreased~~increased by ~~$3.7~~$19.8 million to ~~$7.3~~$27.1 million for the nine months ended September 30, ~~2017~~2018 compared to ~~$11.0~~$7.3 million for the same period in ~~2016.~~2017. Net income per basic and diluted share was ~~$0.14~~$0.49 and $0.47 for the nine months ended September 30, ~~2017,~~2018, respectively, compared to ~~$0.21 and $0.20~~$0.14 per basic and diluted share ~~respectively,~~ for the same period in ~~2016.~~2017.

~~Three Months Ended September 30, 2017 Compared~~

Non-GAAP Measures

To supplement our financial results presented in accordance with GAAP, we present the non-GAAP financial measures of EBITDA and Adjusted EBITDA (CEO Performance Award). Our management uses these non-GAAP financial measures in evaluating our performance in comparison to prior periods. We believe that both management and investors benefit from referring

to these non-GAAP financial measures in assessing our performance, and when planning and forecasting our future periods. A reconciliation of GAAP to the ~~Three Months Ended June, 2017~~non-GAAP financial measures is presented below.

EBITDA (Most comparable GAAP Measure: Net ~~Sales~~income) - Earnings before interest expense, investment interest income, taxes, depreciation and amortization.

Adjusted EBITDA (CEO Performance Award) (Most comparable GAAP Measure: Net ~~sales~~income) - Earnings before interest expense, investment interest income, taxes, depreciation, amortization and non-cash stock-based compensation expense.

Although these non-GAAP financial measures are not consistent with GAAP, management believes investors will benefit by ~~product line~~referring to these non-GAAP financial measures when assessing our operating results, as well as when forecasting and analyzing future periods. However, management recognizes that:

these non-GAAP financial measures are limited in their usefulness and should be considered only as a supplement to our GAAP financial measures;

these non-GAAP financial measures should not be considered in isolation from, or as a substitute for, our GAAP financial measures;

these non-GAAP financial measures should not be considered to be superior to our GAAP financial measures; and

these non-GAAP financial measures were not prepared in accordance with GAAP and investors should not assume that the non-GAAP financial measures presented in this Quarterly Report on Form 10-Q were prepared under a comprehensive set of rules or principles.

EBITDA and Adjusted EBITDA (CEO Performance Award) reconcile to net income as follows (dollars in thousands):

Three Months Ended September 30, 2017 Three Months Ended
June 30, 2017 Dollar
Change Percent
Change
TASER Weapons segment:
TASER X26P $ 13,264
14.7 % $ 16,235
20.4 % $ (2,971 ) (18.3 )%
TASER X2 22,717
25.2
16,052
20.2
6,665
41.5
TASER Pulse and Bolt 1,069
1.2
801
1.0
268
33.5
Single cartridges 17,474
19.4
14,867
18.7
2,607
17.5
Extended warranties including TAP 3,086
3.4
2,991
3.8
95
3.2
Other 1,806
2.0
2,070
2.6
(264 ) (12.8 )
Total TASER Weapons segment 59,416
65.8
53,016
66.6
6,400
12.1
Software and Sensors segment:
Axon Body 4,527
5.0
3,752
4.7
775
20.7
Axon Flex 2,563
2.8
3,851
4.8
(1,288 ) (33.4 )
Axon Fleet 1,113
0.4
—
—
1,113
*
Axon Dock 2,639
2.9
2,783
3.5
(144 ) (5.2 )
Evidence.com 16,200
17.9
12,756
16.0
3,444
27.0
TASER Cam 922
1.0
766
1.0
156
20.4
Extended warranties including TAP 1,945
2.2
1,619
2.0
326
20.1
Other 937
1.0
1,100
1.4
(163 ) (14.8 )
Total Software and Sensors segment 30,846
34.2
26,627
33.4
4,219
15.8
Total net sales $ 90,262
100.0 % $ 79,643
100.0 % $ 10,619
13.3

* Not meaningful

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

Three Months Ended September 30, 2017 Three Months Ended
June 30, 2017 Unit
Change Percent
Change
TASER X26P 13,472
18,198
(4,726 ) (26.0 )%
TASER X2 21,896
15,390
6,506
42.3
TASER Pulse and Bolt 2,944
2,347
597
25.4
Cartridges 643,077
579,282
63,795
11.0
Axon Body 28,669
26,882
1,787
6.6
Axon Flex 8,298
9,373
(1,075 ) (11.5 )
Axon Fleet 1,598
—
1,598
*
Axon Dock 6,440
8,269
(1,829 ) (22.1 )
TASER Cam 1,512
1,336
176
13.2

* Not meaningful

Net sales were $90.3 million and $79.6 million for the three months ended September 30, 2017 and June 30, 2017, respectively, an increase of $10.6 million or 13.3%. Net sales for the TASER Weapons segment were $59.4 million and $53.0 million for the three months ended September 30, 2017 and June 30, 2017, respectively, an increase of $6.4 million or 12.1%. International revenues were $17.1 million for the three months ended September 30, 2017 as compared to $13.4 million for the three months ended June 30, 2017. During the three months ended September 30, 2017, the Company recorded $3.7 million higher revenues from Smart Weapons compared to the three months ended June 30, 2017. During the first quarter of 2017, the Home Office of the U.K. government approved the Company's Smart Weapons for sale which resulted in increased TASER X2 sales within the U.K.



	Three Months Ended									Nine Months Ended
	September 30, 2018			June 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
Net income	$	5,711		$	8,485		$	422		$	27,122		$	7,278
Depreciation and amortization	3,065			2,750			2,277			8,226			5,677
Interest expense	16			17			49			53			132
Investment interest income	(1,256		)	(595		)	(189		)	(1,926		)	(677		)
Provision for (benefit from) income taxes	(471		)	(3,481		)	209			(2,032		)	1,417
EBITDA	$	7,065		$	7,176		$	2,768		$	31,443		$	13,827

Adjustments:
Stock-based compensation expense	6,255			4,954			4,000			15,302			11,423
Adjusted EBITDA (CEO Performance Award)	$	13,320		$	12,130		$	6,768		$	46,745		$	25,250

of $3.0 million for the three months ended September 30, 2017 compared to the three months ended June 30, 2017. Additionally, the Company increased cartridge sales by $2.6 million to $17.5 million during the three months September 30, 2017 as compared to $14.9 million million during the three months ended June 30, 2017 due primarily to there being more units in the field.

Net sales for the Software and Sensors segment were $30.8 million and $26.6 million for the three months ended September 30, 2017 and June 30, 2017, respectively, an increase of $4.2 million or 15.8%. Sales of the Company's Axon Body camera increased $0.7 million for the three months ended September 30, 2017 as compared to the three months ended June 30, 2017, while sales of its Axon Flex 2 camera decreased $1.3 million during the same time period. During the quarter ended June 30, 2017, the Company was able to satisfy a large portion of its outstanding hardware orders related to the launch of its Axon Flex 2 on-officer camera, which resulted in higher sales as compared to the three months ended September 30, 2017. The Company recorded net sales of $1.1 million related to Axon Fleet with no amounts recorded during the same period in 2016. Evidence.com revenues for the three months ended September 30, 2017 increased $3.4 million compared to three months ended June 30, 2017. This increase was primarily driven by the continued increase in active users on the Company's Evidence.com platform.

Liquidity and Capital Resources

Summary

As of September 30, ~~2017,~~2018, we had ~~$61.8~~$326.8 million of cash, cash equivalents and ~~investments, a decrease~~restricted cash, an increase of ~~$27.5~~$248.4 million as compared to December 31, ~~2016.~~2017. As of September 30, 2018, we had $324.4 million of cash and cash equivalents, of which $31.0 million was held in foreign locations. Our cash and cash equivalents balance as of September 30, 2018 reflects 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 our assets, and bears interest at varying rates, currently LIBOR plus 1.25% or Prime less 0.50%. As of September 30, 2018, we had letters of credit outstanding of $3.1 million, leaving the net amount available for borrowing of $6.9 million. The 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 facility. At September 30, 2018 and December 31, 2017, there were no borrowings under the line other than the outstanding letters of credit.

Our agreement with the bank requires us to comply with a maximum funded debt to EBITDA ratio, as defined, of no greater than 2.00 to 1.00 based upon a trailing twelve-month period. At September 30, 2018, our funded debt to EBITDA ratio was 0.001 to 1.00.

TASER 60 installment purchase arrangements typically involve amounts invoiced in five equal installments at the beginning of each year of the five-year term. This is in contrast to a traditional CEW sale in which the 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 this strategic shift and regularly revisit our cash flow forecast with the goal of maintaining a comfortable level of liquidity as we introduce new commercial offerings in which we incur upfront cash costs to produce and fulfill hardware sales ahead of the cash inflows from our 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 that our sources of funding will be sufficient to satisfy our currently anticipated cash requirements including capital expenditures, working capital requirements, potential acquisitions and other liquidity requirements through at least the next 12 months. We and our Board of Directors may consider repurchases of our common stock from time to time. Further repurchases of our common stock would take place on the open market, would be financed with available cash and are subject to market and business conditions.

Cash Flows

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

Nine Months Ended September 30,
2017 2016
Operating activities $ (5,835 ) $ 21,959
Investing activities 9,551
2,285
Financing activities (1,600 ) (33,801 )
Effect of exchange rate changes on cash and cash equivalents 704
631
Net increase (decrease) in cash and cash equivalents $ 2,820
$ (8,926 )



	Nine Months Ended September 30,
	2018			2017
Net cash provided by (used in) operating activities	$	32,636		$	(5,851	)
Net cash provided by (used in) investing activities	(6,003		)	9,551
Net cash provided by (used in) financing activities	222,158			(1,575		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(381		)	703
Net increase in cash, cash equivalents and restricted cash	$	248,410		$	2,828

Operating activities

Net cash provided by operating activities in the first nine months of 2018 of $32.6 million reflects $27.1 million in net income impacted by the net increase of non-cash income statement items totaling $23.7 million and cash outflows of $18.2 million for the net change in operating assets and liabilities. Included in the non-cash items were $8.2 million in depreciation and amortization expense and $15.3 million in stock-based compensation expense. Increases to operating cash flows consisted primarily of increased deferred revenue of $31.7 million and decreased inventory of $9.0 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 $51.2 million, primarily related to increased customer balances under our Officer Safety Plan and TASER 60 purchase programs, including adjustments to our opening balance sheet related to our adoption of ASC 606. Cash provided by operations was also impacted by increased accounts payable and accrued liabilities of $4.3 million and decreased inventory of $9.0 million.

Net cash used in operating activities in the first nine months of 2017 of ~~$5.8~~$5.9 million reflects $7.3 million in net income impacted by the net increase of non-cash income statement items totaling $13.4 million and decrease of $26.5 million for the net change in operating assets and liabilities. Included in the non-cash items were $5.7 million in depreciation and amortization expense, $11.4 million in stock-based compensation expense and $0.6 million of bond premium amortization. These non-cash increases were partially offset by deferred income tax expense of $4.2 million. Increases to operating cash flows consisted of increased accounts payable, accrued and other liabilities of ~~$2.9~~$3.4 million, which reduced the amount of cash used during the period, along with increased deferred revenue of $26.5 million. The increase in deferred revenue was primarily driven by continued sales growth of products and services that are typically invoiced in advance, on a subscription basis, and recognized over the duration of the contract period as products and services are delivered. Of the increase in deferred revenue, $13.5 million resulted from increased hardware deferred revenue along with increased deferred warranty revenue of $5.0 million, and increased services, including ~~Evidence.com~~Axon Evidence subscriptions, of $8.3 million. Cash used in operations was also impacted by various other operating items, with the most significant component related to increased accounts and notes receivable of $26.0 million, of which $20.4 million related to increased customer balances under ~~the Company's~~our Officer Safety Plan and TASER 60 purchase program while the remaining increase was attributable to increased trade receivable balances resulting from higher net sales. Cash used in operations was also impacted by increased inventory of $19.1 million in anticipation of ~~the Company's~~our National Field Trial Offer for body cameras as well as anticipated higher sales throughout the remainder of 2017. Additionally, ~~the Company~~we had increased prepaid expenses and other assets of $11.3 million, which was primarily related to a $3.7 million increase in customer receivables related to value added taxes passed on to customers which ~~was attributable~~were due to higher TASER weapons sales in the U.K.,; a $1.6 million ~~of increased~~increase in prepaid commissions, which are paid for when a contract is booked, and subsequently amortized over the contractual ~~period,~~period; and $0.9 million of increased employee bonuses that were paid in advance and will be recognized over the employees' explicit required service period.

~~Net cash provided by operating~~Investing activities

We used $6.0 million in investing activities during the first nine months of ~~2016~~2018. Maturities and calls of ~~$22.0 million consisted~~investments, net of ~~$11.0~~purchases, were $6.3 million. We invested $7.3 million in ~~net income impacted by~~ the ~~net increase~~purchase of ~~non-cash income statement items totaling $7.6~~property and equipment and intangible assets in addition to our $5.0 million ~~and decrease~~investment related to the acquisition of ~~$3.4 million for~~VIEVU, LLC (Refer to Note 15 of the ~~net change~~notes to our condensed consolidated financial statements within this Report on Form 10-Q). For the year ending December 31, 2018, we anticipate investing in ~~operating assets and liabilities. Included~~capital expenditures in the ~~non-cash items were $2.7~~range of $10 million in depreciation and amortization expense, $6.7 million in stock-based compensation expense and $1.0 million of bond premium amortization. These non-cash impacts were partially offset by deferred income tax expense of $2.7to $12 million. Changes in operating assets and liabilities resulted in a net increase to cash provided by operating activities of $3.4 million. The largest increases were from increased accounts payable, accrued and other liabilities of $12.6 million along with increased deferred revenue of $26.3 million. The increase in deferred revenue was primarily driven by the continued adoption of Software and Sensors hardware products and services that are typically invoiced at inception of the contract, and recognized over the duration of the contract period as hardware and services are delivered. Of the increase in deferred revenue, $12.8 million resulted from increased hardware deferred revenue along with increased deferred warranty revenue of $6.4 million, and increased services, including Evidence.com subscriptions, of $6.9 million, with the remaining $0.2 million made up primarily of deferred training revenue. Cash used in operations was also impacted by various other operating items, with the most significant component related to increased accounts and notes receivable of $14.4 million of which $13.3 million related to increased customer balances under the Company's Officer Safety Plan purchase program while the remaining increase was attributable to increased trade receivable balances. Cash from operations also decreased due to increases in prepaid expenses and other assets of $10.4 million primarily attributable to $4.0 million related to increased deferred cost of product and service sales related to contracts where the product had shipped but revenue was deferred due to contractual provisions resulting in the cost of product sales being deferred as an asset to be recognized in subsequent periods when revenue recognition criteria have been meet, increased prepaid commissions of $2.2 million, and $1.3 million related to increases in prepaid software licenses and related maintenance agreements and prepaid software-as-a-service subscription costs. These decreases were partially offset by an increase in restricted cash of $3.1 million related to a customer contract requiring certain contractual payments to be deposited in escrow until approved for release. Cash from operations also decreased due to increases in inventory of $10.8 million as the Company continued to invest in anticipation of higher future sales.

~~Investing activities~~

We generated $9.6 million from investing activities during the first nine months of 2017. Maturities and calls of investments, net of purchases, were $29.7 million, which was partially offset by ~~the Company's~~our investment of $9.5 million infor the purchase of property and equipment and intangible assets and $10.6 million used for the acquisitions of Dextro, Inc. and ~~the Company's~~our distributor in Australia, Breon Enterprises, Pty Ltd. and Breon Defence Systems.

Financing activities

Net cash generated ~~$2.3~~by financing activities was $222.2 million ~~from investing activities~~ during the first nine 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 $5.9 million. The Company invested $3.7~~$234.0 million ~~in the purchase of property and equipment and intangible assets~~ which was partially offset by income and payroll taxes of $12.0 million paid by us on behalf of employees who net-settled stock awards during the ~~increase related to net investment activity.~~period.

~~Financing activities~~

Net cash used in financing activities was $1.6 million during the first nine months of 2017. During the first nine months of 2017, ~~the Company~~we paid payroll taxes of $2.8 million on behalf of employees who net-settled stock awards during the period which was partially offset by proceeds from options exercised of $1.3 million.

Net cash used in financing activities was $33.8 million during the first nine months of 2016. During the first nine months of 2016, the Company repurchased $33.7 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 $1.3 million on behalf of employees who net-settled stock awards during the period.

~~Liquidity and Capital Resources~~

Our most significant sources of liquidity continue to be funds generated by operating activities and available cash and cash equivalents. 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% or Prime less 0.50%. At September 30, 2017 and December 31, 2016, there were no borrowings under the line. As of September 30, 2017, 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 credit matured on July 31, 2017, which was subsequently extended until December 31, 2017. The Company is currently evaluating its credit needs and anticipates entering into a longer term arrangement prior to maturity.

Our agreement with the bank requires us to comply with certain financial and other covenants including maintenance of a maximum leverage ratio and minimum fixed charge coverage ratio. The leverage ratio (ratio of total liabilities to tangible net worth) can be no greater than 1:1, and the fixed charge coverage ratio can be no less than 1.25:1, based upon a trailing twelve-

month period. At September 30, 2017, the Company’s leverage ratio was 1.24:1 and its fixed charge coverage ratio was 3.88:1. The Company's violation of the leverage ratio requirement was waived by the bank as of September 30, 2017.

Our TASER 60 installment purchase arrangements typically involve amounts being invoiced in five equal installments at the beginning of each year of the five-year term. This is in contrast to a traditional CEW sale in which the 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 arrangement 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 this strategic shift, and regularly revisit our cash flow forecast with the goal of of maintaining a comfortable level of liquidity as we introduce commercial offerings in which we incur upfront cash costs to produce and fulfill hardware sales ahead of the cash inflows from our 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.

Based on the results of our balance sheet at September 30, 2017, 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 our expected results of operations, as well as available cash and investments, will be sufficient to finance our operations and strategic initiatives for the remainder of 2017 and the foreseeable future. From time to time, our board of directors considers repurchases of our common stock. Further repurchases of our common stock may take place on the open market, may 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 of the notes to ~~the unaudited~~our condensed consolidated financial statements ~~included in PART I, ITEM I of~~within this Report on 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~~financial statements 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 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 financial condition and results of operations are discussed below.

Product Warranties

~~The Company warranties its~~We warranty our 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 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 ~~sales to determine 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 September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, our reserve for product warranty ~~returns~~liabilities was ~~approximately $0.7~~$1.0 million and ~~$0.8~~$0.6 million, respectively. As of September 30, 2018, our reserve also included initial reserves related to Signal Sidearm and Axon Fleet 2. Warranty expense for the nine months ended September 30, 2018 and 2017 was $0.7 million and ~~2016 was~~ $0.1 million, ~~and $0.5 million,~~ respectively. ~~The decrease in~~During the nine months ended September 30, 2018, we increased the warranty reserve ~~and~~ related ~~expense as of and for~~to the Axon Flex 2 on-officer body camera to better reflect actual warranty claims. During the nine months ended September 30, 2017, ~~was primarily driven by~~we decreased the ~~release of initial reserves~~warranty reserve related to the Axon Body 2 on-officer body ~~camera. The Company experienced lower warranty claims than initially expected and, as such, adjusted the warranty reserve~~camera to better reflect actual warranty claims. ~~As of September 30, 2017, the Company's reserve also included an initial reserve related to the new Flex 2 on-officer camera.~~

Revenue related to separately-priced extended warranties is initially recorded as deferred revenue at its contractual amount and subsequently recognized as net sales ~~on a straight-line basis~~ratably over the warranty service period. Costs related to extended warranties are charged to cost of product and 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 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 nine months ended September 30, 2018 and 2017, ~~and 2016, the Company~~we recorded provisions for excess and obsolete inventory of ~~approximately $1.5~~$2.8 million and ~~$0.8~~$1.5 million, respectively. During the nine months ended September 30, ~~2017, the Company began~~2018, we continued phasing out ~~certain~~ previous generations of ~~its CEWs, the legacy TASER X26, TASER M26~~our 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 $2.8 million expense, we recorded $0.5 million related to purchase commitments assumed in the VIEVU business combination that exceeded estimated future demand. The remaining ~~increase~~change for the nine months ended September 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 of the notes to our condensed consolidated financial statements within this Report on Form 10-Q.

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

We derive ~~our~~ revenue from two primary sources: (1) the sale of physical products, including CEWs, cameras, Axon ~~cameras,~~Signal enabled devices, corresponding hardware extended warranties, and related accessories such as Axon docks, cartridges and batteries, among others, and (2) subscription to our ~~Evidence.com~~Axon Evidence 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, we also recognize 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, the price is fixed~~software and collectability is reasonably assured. Contractual arrangements may contain explicit customer acceptance provisions, and under such arrangements, the Company defers recognition of revenue until formal customer acceptance is received. Extended warranty revenue, SaaS ~~revenue and related data storage revenue are recognized ratably over the term~~services. Refer to Note 2 of the ~~contract commencing~~notes to our condensed consolidated financial statements within this Report on Form 10-Q.

Many of our products and services are sold on a ~~pre-determined date subsequent~~standalone basis.We also bundle our hardware products and services together and sell them to our customers in single transactions, where the ~~delivery of the hardware. Training and professional service revenues are generally recorded once the services are completed.~~

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 nine months ended September 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 September 30, 2017 Three Months Ended September 30, 2016
TASER Weapons Software and Sensors Total TASER Weapons Software and Sensors Total
Arrangements with multiple elements $ 11,253
19.0 % $ 29,225
95.0 % $ 40,478
45.0 % $ 10,818
20.4 % $ 17,532
92.5 % $ 28,350
39.4 %
Arrangements without multiple elements 48,050
81.0
1,523
5.0
49,573
55.0
42,120
79.6
1,412
7.5
43,532
60.6
Total $ 59,303
100.0 % $ 30,748
100.0 % $ 90,051
100.0 % $ 52,938
100.0 % $ 18,944
100.0 % $ 71,882
100.0 %



	Three Months Ended September 30, 2018												Three Months Ended September 30, 2017 ⁽¹⁾
	TASER Weapons				Software and Sensors				Total				TASER Weapons				Software and Sensors				Total
Contracts with Multiple Performance Obligations	$	16,301	25.6	%	$	39,600	96.2	%	$	55,901	53.3	%	$	11,253	19.0	%	$	29,225	95.0	%	$	40,478	45.0	%
Contracts without Multiple Performance Obligations	47,365		74.4		1,570		3.8		48,935		46.7		48,050		81.0		1,523		5.0		49,573		55.0
Total	$	63,666	100.0	%	$	41,170	100.0	%	$	104,836	100.0	%	$	59,303	100.0	%	$	30,748	100.0	%	$	90,051	100.0	%

Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
TASER Weapons Software and Sensors Total TASER Weapons Software and Sensors Total
Arrangements with multiple elements $ 34,976
20.6 % $ 73,802
93.5 % $ 108,778
43.7 % $ 22,010
15.3 % $ 35,718
85.3 % $ 57,728
31.0 %
Arrangements without multiple elements 135,014
79.4
5,144
6.5
140,158
56.3
122,297
84.7
6,143
14.7
128,440
69.0
Total $ 169,990
100.0 % $ 78,946
100.0 % $ 248,936
100.0 % $ 144,307
100.0 % $ 41,861
100.0 % $ 186,168
100.0 %



	Nine Months Ended September 30, 2018												Nine Months Ended September 30, 2017 ⁽¹⁾
	TASER Weapons				Software and Sensors				Total				TASER Weapons				Software and Sensors				Total
Contracts with Multiple Performance Obligations	$	51,289	27.3	%	$	113,188	96.4	%	$	164,477	53.9	%	$	34,976	20.6	%	$	73,802	93.5	%	$	108,778	43.7	%
Contracts without Multiple Performance Obligations	136,525		72.7		4,275		3.6		140,800		46.1		135,014		79.4		5,144		6.5		140,158		56.3
Total	$	187,814	100.0	%	$	117,463	100.0	%	$	305,277	100.0	%	$	169,990	100.0	%	$	78,946	100.0	%	$	248,936	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~~nine months ended September 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 discounts 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 discounted 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.~~

~~The Company records reductions to net sales for expected future product returns based on the Company’s historical experience.~~reported under ASC 605.

Valuation of Goodwill, Intangibles and Long-lived Assets

~~The recoverability of the~~We do 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. We perform our 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 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. During the three months ended September 30, 2018, we abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $2.0 million.

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 condensed 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~~claimed R&D tax ~~credit studies which identified~~credits of approximately ~~$17.1~~$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 relating to the R&D tax credits of ~~$4.2~~$3.6 million as of September 30, ~~2017.~~2018. In

addition, we established a ~~$0.1~~$0.2 million liability related to uncertain tax positions for certain federal and state income tax liabilities, for a total unrecognized tax benefit at September 30, ~~2017~~2018 of ~~$4.3~~$3.8 million. Approximately ~~$1.8~~$2.2 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~~filings remain subject to ~~audit~~examination by ~~federal, state, and local governments,~~applicable tax authorities for a certain length of time, generally three to four years, ~~after~~following the ~~returns are filed.~~tax year to which these filings relate. These returns could be subject to material adjustments or differing interpretations of the tax laws. Our U.S. federal income tax return for fiscal year 2016 is currently under audit by the Internal Revenue Service.

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 condensed consolidated financial statements.

In preparing our condensed 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 September 30, ~~2017, the Company~~2018, we would need to generate approximately ~~$55.9~~$55.4 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 $14.2~~$15.8 million of taxable temporary differences, which produce ~~$5.4~~$3.6 million of deferred tax liabilities. ~~The Company has $4.6~~We have $4.5 million of state net operating losses (“NOLs”) which expire at various dates between 2030 and 2036. ~~The Company~~We also ~~has~~have 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~~We have $7.5 million of Arizona R&D credits carrying forward, which expire at various dates between 2018 and 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~~we have $1.1 million, $7.6 million, $1.7 million, ~~$6.9 million, $0.8 million,~~ and ~~$1.5~~$0.4 million of NOLs, respectively, which expire at various dates or may be carried forward indefinitely.

We anticipate ~~the Company’s~~our 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 September 30, ~~2017,~~2018, with the exception of a reserve of ~~approximately $4.1~~$2.5 million that has been recorded due to specific income projections in years in which certain tax assets are set to expire. As of September 30, ~~2017, the Company has~~2018, we have cumulative losses in Australia, the ~~UK,~~U.K. and Canada, and a history of losses in 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-US~~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. The determination of the unrecognized deferred tax liability on those undistributed foreign earnings is not practicable due to our legal entity structure and the complexity of USU.S. and local country tax laws. If we decide to repatriate the undistributed foreign earnings, we will need to recognize the income tax effects in the period we change our assertion on indefinite reinvestment.

Refer to Note 8 of the notes to our condensed consolidated financial statements within this Report on Form 10-Q.

Stock-Based Compensation

~~We have historically issued stock-based payments to key employees~~Stock-based compensation awards primarily consist 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.~~grant date. We ~~estimate the fair value of granted stock options by~~recognize 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). 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.

requisite service period. We ~~have granted a total of approximately 1.9 million~~also issue performance-based ~~awards (options and restricted stock units) of which approximately 0.5 million are outstanding as of September 30, 2017,~~RSUs, the vesting of which is contingent upon the achievement of certain performance criteria ~~including the~~related to our operating performance, 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,we account 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 of the notes to our condensed consolidated financial statements within this Report on Form 10-Q.

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 September 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 the notes to our condensed consolidated financial statements within this Report on Form 10-Q for further discussion.

Except as noted below, as of September 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 Report on Form 10-K for the fiscal year ended December 31, 2017.

In connection with our 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 our preferred provider of holsters for its CEW products. The Supply Agreement provides for a minimum number of units to be purchased by us 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 September 30, ~~2017,~~2018, a hypothetical 100 basis point increase in interest rates across all maturities would result in ~~a $43,000~~an insignificant incremental decline in the fair market value of the portfolio. Such losses would only be realized if ~~the Company~~we 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~~$3.1 million at September 30, ~~2017.~~2018. At September 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~~$6.9 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~~we may have more sales and expenses denominated in foreign currencies ~~during the remainder of 2017 and beyond~~in future years which ~~would~~could increase ~~its~~our foreign exchange rate risk.

To date, we have not engaged in any currency hedging activities. However, we 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. We 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~~SEC’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. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2018 at a level that provides reasonable assurance as of the last day of the period covered by this report for the following reasons:

~~During the quarter ended March 31, 2017~~as disclosed in Part II, Item 5 within this Report on Form 10-Q, we have identified a number of Forms 4 that were not filed timely and ~~year ended December 31, 2016, we identified~~were not disclosed in our Report on Form 10-K as required; and

a material ~~weaknesses~~weakness exists in our internal control over financial ~~reporting. A material weakness is defined~~reporting, as ~~a deficiency, or a combination~~further described below.

During the fourth quarter of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.

~~Specifically, during the quarter ended March 31,~~ 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~~us 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 and have implemented 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, our corporate accounting team performed additional review and monitoring procedures; and during the second and third quarters of 2018, transitioned a majority of accounting procedures to ~~properly ensure transactions are identified and recorded timely and accurately.~~

~~Specifically:~~our headquarters in Arizona;

we ~~have added and will~~plan for our corporate accounting team to continue ~~to add staff to support the growing operations of the Company. During the year ended December 31, 2016 and the nine months ended September 30, 2017, we have added~~performing these 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.~~procedures on an ongoing basis;

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 inventory, sales transactions and related accounting for deferred revenue and cost of goods sold and services ~~delivered;~~

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 datadelivered for ~~further review;~~APS U.K.; and

on June 1, 2018, we ~~have improved~~completed the migration of APS U.K. onto the same standard systems, processes and ~~are continuing~~controls as our other locations, which subjects APS U.K. activity to ~~improve communication and coordination among~~those procedures by the same personnel that perform the accounting activities for our ~~finance and accounting departments and we have expanded cross-functional involvement and input into period-end accruals.~~other locations.

~~These~~

The material ~~weaknesses~~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. ~~Our goal is 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 September 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 September 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 of the notes to ~~the unaudited~~our condensed consolidated financial statements included in PART I, ITEM 1 of this Report on 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 below, 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 1.02 Termination of a Material Definitive Agreement

On November 2, 2018, we terminated the Purchase and Sale Agreement previously disclosed on our Current Report on Form 8-K filed September 19, 2018, pursuant to which we purchased a leasehold interest to a parcel of land located in Maricopa County, Arizona, on which we intended to construct our new headquarters. We expect our escrow deposit of approximately $0.2 million will be returned, and no further amounts are owed under the agreement.

Item 8.01. Other Events

Part III, Item 10 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 incorporated by reference from the Company’s definitive proxy statement for its 2018 Annual Meeting of Stockholders (filed with the SEC on April 13, 2018) (the “2018 Proxy”) the information required by Item 405 of Regulation S-K. The 2018 Proxy stated that the Company’s executive officers and directors had complied with such Section 16(a) filing requirements applicable to them in 2017 except for Julie Cullivan, a member of the Board of Directors, did not timely file one Form 3 and one Form 4 (reporting one transaction). The Company has determined that there were additional Forms 4 not timely filed in 2017. Following is updated disclosure about the Company’s Section 16(a) Beneficial Ownership Reporting Compliance for 2017.

Based solely on a review of the copies of Section 16(a) reports furnished to the Company and written representations from reporting persons that no other reports were required, to the Company’s knowledge, such persons complied with all of the Section 16(a) filing requirements applicable to them in 2017, except as follows: Jawad A. Ahsan, Julie Cullivan, Douglas E. Klint, Hadi Partovi, and Marcus Womack each filed one late Form 4 (each reporting one transaction); Michael Garnreiter, Joshua M. Isner, and Patrick W. Smith each filed two late Form 4s (each reporting one transaction); and Luke S. Larson filed three late Form 4s (each reporting one transaction).

The late filings resulted from administrative oversight and internal logistical issues from delays in reporting equity awards granted and automatic withholding of shares for tax purposes upon vesting of equity awards. The Company has revised its internal processes in order to improve compliance with all Section 16(a) filing deadlines and the disclosures regarding such compliance. None of the transactions reported late involved open market purchases or sales of the Company’s common stock, and all involved transactions exempt from the short-swing profit recovery rules of Section 16(b) of the Exchange Act.

Item 6. Exhibits



10.1		Purchase and Sale Agreement between Axon Enterprise Holding Company and Apex Park at Pima, L.L.C.*
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

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:	November ~~9, 2017~~7, 2018
		By:	/s/ PATRICK W. SMITH
			Chief Executive Officer
			(Principal Executive Officer)

Date:	November ~~9, 2017~~7, 2018	By:	/s/ JAWAD A. AHSAN
			Chief Financial Officer
			(Principal Financial and
			Accounting Officer)

5350



	Three Months Ended September 30, 2017								Three Months Ended September 30, 2016
	TASER Weapons		Software and Sensors			Total			TASER Weapons		Software and Sensors			Total
Net sales from products	$	59,416	$	14,569		$	73,985		$	52,938	$	10,266		$	63,204
Net sales from services	—		16,277			16,277			—		8,678			8,678
Net sales	59,416		30,846			90,262			52,938		18,944			71,882
Cost of product sales	19,237		15,336			34,573			14,973		8,691			23,664
Cost of service sales	—		5,924			5,924			—		1,653			1,653
Cost of sales	19,237		21,260			40,497			14,973		10,344			25,317
Gross margin	40,179		9,586			49,765			37,965		8,600			46,565
Sales, general and administrative	20,575		15,823			36,398			16,439		11,682			28,121
Research and development	1,856		12,310			14,166			1,408		5,950			7,358
Income (loss) from operations	$	17,748	$	(18,547	)	$	(799	)	$	20,118	$	(9,032	)	$	11,086
Purchase of property and equipment	$	1,666	$	1,665		$	3,331		$	1,064	$	307		$	1,371
Purchase of intangible assets	66		195			261			77		77			154
Purchase of intangible assets, including goodwill, in connection with business acquisition	2,075		2,075			4,150			—		—			—
Depreciation and amortization	542		1,735			2,277			537		364			901



	Nine Months Ended September 30, 2017							Nine Months Ended September 30, 2016
	TASER Weapons		Software and Sensors			Total		TASER Weapons		Software and Sensors			Total
Net sales from products	$	170,103	$	38,248		$	208,351	$	144,307	$	23,438		$	167,745
Net sales from services	—		40,796			40,796		—		18,423			18,423
Net sales	170,103		79,044			249,147		144,307		41,861			186,168
Cost of product sales	53,341		38,476			91,817		43,998		17,174			61,172
Cost of service sales	—		13,258			13,258		—		4,230			4,230
Cost of sales	53,341		51,734			105,075		43,998		21,404			65,402
Gross margin	116,762		27,310			144,072		100,309		20,457			120,766
Sales, general and administrative	55,283		43,796			99,079		46,395		30,938			77,333
Research and development	5,931		33,687			39,618		3,773		17,222			20,995
Income (loss) from operations	$	55,548	$	(50,173	)	$	5,375	$	50,141	$	(27,703	)	$	22,438
Purchase of property and equipment	$	5,240	$	3,832		$	9,072	$	2,729	$	606		$	3,335
Purchase of intangible assets	186		245			431		190		149			339
Purchase of property and equipment and intangible assets, including goodwill, in connection with business acquisitions	2,075		8,554			10,629		—		—			—
Depreciation and amortization	2,099		3,578			5,677		1,669		1,075			2,744



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



Re-acquired distribution rights	$	2,100
Customer relationships	400
Goodwill	1,650
Total purchase price	$	4,150



	Three Months Ended September 30,								Dollar Change			Percent Change
	2017				2016				Dollar Change			Percent Change
TASER Weapons segment:
Salaries, benefits and bonus	$	7,937	21.8	%	$	6,214	22.1	%	$	1,723		27.7	%
Stock-based compensation	1,469		4.0		806		2.9		663			82.3
Professional, consulting and lobbying	3,701		10.2		2,165		7.7		1,536			70.9
Sales and marketing	1,977		5.4		1,357		4.8		620			45.7
Travel and meals	1,317		3.6		1,152		4.1		165			14.3
Other	4,174		11.5		4,745		16.9		(571		)	(12.0	)
Total TASER Weapons segment	20,575		56.5		16,439		58.5		4,136			25.2
Software and Sensors segment:
Salaries, benefits and bonus	7,411		20.4		4,742		16.9		2,669			56.3
Stock-based compensation	630		1.7		542		1.9		88			16.2
Professional, consulting and lobbying	2,922		8.0		2,643		9.4		279			10.6
Sales and marketing	2,242		6.2		1,568		5.6		674			43.0
Travel and meals	1,652		4.5		1,354		4.8		298			22.0
Other	966		2.7		833		3.0		133			16.0
Total Software and Sensors segment	15,823		43.5		11,682		41.5		4,141			35.4
Total sales, general and administrative expenses	$	36,398	100.0	%	$	28,121	100.0	%	$	8,277		29.4



	Three Months Ended September 30, 2017				Three Months Ended June 30, 2017				Dollar Change			Percent Change
TASER Weapons segment:
TASER X26P	$	13,264	14.7	%	$	16,235	20.4	%	$	(2,971	)	(18.3	)%
TASER X2	22,717		25.2		16,052		20.2		6,665			41.5
TASER Pulse and Bolt	1,069		1.2		801		1.0		268			33.5
Single cartridges	17,474		19.4		14,867		18.7		2,607			17.5
Extended warranties including TAP	3,086		3.4		2,991		3.8		95			3.2
Other	1,806		2.0		2,070		2.6		(264		)	(12.8	)
Total TASER Weapons segment	59,416		65.8		53,016		66.6		6,400			12.1
Software and Sensors segment:
Axon Body	4,527		5.0		3,752		4.7		775			20.7
Axon Flex	2,563		2.8		3,851		4.8		(1,288		)	(33.4	)
Axon Fleet	1,113		0.4		—		—		1,113			*
Axon Dock	2,639		2.9		2,783		3.5		(144		)	(5.2	)
Evidence.com	16,200		17.9		12,756		16.0		3,444			27.0
TASER Cam	922		1.0		766		1.0		156			20.4
Extended warranties including TAP	1,945		2.2		1,619		2.0		326			20.1
Other	937		1.0		1,100		1.4		(163		)	(14.8	)
Total Software and Sensors segment	30,846		34.2		26,627		33.4		4,219			15.8
Total net sales	$	90,262	100.0	%	$	79,643	100.0	%	$	10,619		13.3