Axon Enterprise (AXON) 10-K risk factor changes: FY2017 vs FY2016

[removed: At any point, due to external factors and opinions] [added: whether or] not [added: not] related to product performance, law enforcement agencies may elect to no longer purchase our CEWs or [removed: video] [added: other] products

In the years ended December 31, [removed: 2016, 2015] [added: 2017, 2016] and [removed: 2014,] [added: 2015,] we derived our revenues predominantly from sales of TASER CEW brand devices and related cartridges, and expect to depend on sales of these products for [added: a predominant portion of our revenue fo] the foreseeable future.

We are seeing a large number of customers upgrade their devices to the X2 or the new X26P [removed: device, which we introduced in 2011 and 2013, respectively.][added: device.]

The development of CEWs, [removed: cameras] [added: devices, sensors] and software [removed: products such as Evidence.com] is a complex and time-consuming process.

Significant delays in new product or service releases or significant problems in creating new products or services could adversely affect our [removed: revenue.][added: business, financial results and competitive position.]

While we have some patent protection in certain key areas of our CEW, Axon [added: Device] and SaaS technology, it is possible that new technology may result in competing products that operate outside our patents and could present significant competition for our [removed: products] [added: products,] which could adversely affect our [removed: revenue.][added: business, financial results and competitive position.]

Defects in our products [removed: may] [added: could] result in a loss of sales, delay in market acceptance and damage to our reputation and increased warranty costs, which could [removed: have a material adverse effect on profitability and] [added: adversely affect our business,] financial [removed: condition.][added: results and competitive position.]

Our service involves the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of [removed: this information,] [added: information or the total deletion of all stored customer data,] litigation and possible liability.

We devote significant resources to engineer secure products and ensure security vulnerabilities are [removed: mitigated.][added: mitigated, and we require out third-party service providers to do so as well.]

Any security breach could result in a loss of confidence in the security of our service, damage our reputation, lead to legal [removed: liability and] [added: liability,] negatively impact our future [removed: sales.][added: sales and significantly harm our growth prospects, operating results and financial condition.]

Some government agency orders may also be canceled or substantially delayed due to budgetary, political or other scheduling [removed: delays] [added: delays,] which frequently occur in connection with the acquisition of products by such [removed: agencies] [added: agencies,] and such cancellations may accelerate or be more severe than we have experienced historically.

Due to municipal government funding rules, certain of our contracts are subject to [removed: appropriation (or similar)] [added: appropriation, termination for convenience, or similar] cancellation clauses, which could allow our customers to cancel [added: or not exercise options to renew] contracts in the future.

Although [removed: TASER] [added: Axon] has entered into contracts for the delivery of products and services in the future and anticipates the contracts will be completed, if agencies do not appropriate money in future year budgets, [added: terminate contracts for convenience] or if other cancellation clauses are invoked, revenue associated with these bookings will not ultimately be recognized, and [removed: will] [added: could] result in a reduction to bookings.

Changes in civil forfeiture statutes or regulations are outside of our control and could limit the amount of funds available to our [removed: customers] [added: customers,] which could adversely affect the sale of our products.

Our SaaS [removed: product] [added: service] revenue is generally recognized ratably over the terms of the contracts, which generally range from one to five years.

We are currently subject to a number of such lawsuits and we have [removed: recently] been subject to significant adverse judgments and settlements.

The outcome of any litigation is inherently uncertain and there can be no assurance that our existing or any future litigation will not have a material adverse effect on our [removed: revenues, our] [added: business,] financial condition or [removed: financial] [added: operating] results.

We have been or could in the future be involved in numerous other litigation matters relating to our products, contracts and business relationships, including litigation against persons [removed: who] [added: whom] we believe have infringed on our intellectual property, infringement litigation filed against the Company, litigation against a competitor and litigation filed by a former distributor against the Company.

Such matters have resulted, and are expected to continue to result in, substantial costs to us, [removed: judgments, settlements] [added: including in the form of attorney’s fees] and [removed: some] [added: costs, damages, fines or other penalties, whether pursuant to a judgment or settlement, and] diversion of our management’s attention, which could adversely affect our business, financial condition or operating results.

The scope of any patent to which we have or may obtain rights [removed: to] may not prevent others from developing and selling competing products.

The defense and prosecution of patent and other intellectual property claims are both costly and time [removed: consuming] [added: consuming, divert our management’s attention from our business] and could result in a material adverse effect on our [removed: business] [added: business,] and financial [removed: position.][added: position and operating results.]

In foreign [removed: countries] [added: countries,] we can enforce patent rights only in the jurisdictions in which our patent applications have been granted.

Federal regulation of sales in the U.S.: [removed: With the exception of the TASER XREP, our] [added: Our] CEWs are not firearms regulated by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, but our consumer products are regulated by the U.S. Consumer Product Safety Commission.

Our CEW devices are banned from private citizen purchase or use by statute in five states: Hawaii, Massachusetts, New [removed: Jersey, New] York, and Rhode Island, as well as in the District of Columbia.

[removed: In addition, similar] environmental legislation has been or may be enacted in other jurisdictions, including the U.S. (under federal and state laws) and other countries, the cumulative impact of which could be significant.

We have incurred and will likely continue to incur costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and [added: metals used in our products.]

We continue to invest in the growth of the [removed: Axon] [added: Software and Sensors] segment, and this expected growth may result in a higher percentage of total revenues being comprised of [removed: Axon] [added: Software and Sensors] products and services.

Gross margin as a percentage of net sales for the [removed: Axon] [added: Software and Sensors] segment is currently lower than that of the TASER Weapons segment, and may continue to be lower in the future.

[added: If we do not competitively price our products, meet the] requirements of our distributors or end-users, provide adequate marketing support, or comply with the terms of our distribution arrangements, our distributors may fail to aggressively market our products or may terminate their relationships with us.

These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, that we [removed: don’t] [added: do not] realize a satisfactory return on our investment, or that we experience difficulty in the integration or coordination of new employees, business systems, and technology, or there is a diversion of management’s attention from our other businesses.

If our goodwill or [removed: finite-lived intangible] [added: indefinite-lived] assets become impaired, we may be required to record a significant charge to earnings.

We review our [removed: finite-lived] [added: indefinite-lived] intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be [removed: recoverable, such as a decline in stock price and market capitalization.][added: recoverable.]

If such goodwill or [removed: finite-lived] [added: indefinite-lived] intangible assets are deemed to be impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets would be recognized.

We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or [removed: finite-lived] [added: indefinite-lived] intangible assets is determined, which would negatively affect our results of operations.

Our tax provision could also be impacted by changes in federal, state or international tax laws including fundamental tax law changes applicable to corporate [removed: multinationals currently being considered by many countries including the United States as well as several European countries.][added: multinationals.]

We maintain most of our cash balances, some of which are not insured, at [removed: five] [added: four] depository institutions.

We maintain the majority of its cash and cash equivalents accounts at [removed: five] [added: four] depository institutions.

As of December 31, [removed: 2016,] [added: 2017,] the aggregate balances in such accounts were [removed: $33.2] [added: $53.4] million.

Although we have employment agreements with certain of our [removed: officers,] [added: officers and other members of our execute management team,] the employment of such persons is “at-will” and either we or the employee can terminate the employment relationship at any time, subject to the applicable terms of the employment agreements.

The loss of the service of one or more of our key personnel could [removed: harm] [added: adversely impact] our [removed: business.][added: business, prospects, financial condition and operating results.]

You should carefully consider the trends, risks and uncertainties described below and other information in this Form 10-K and subsequent reports filed with or furnished to the Securities and Exchange Commission (the “SEC”) before making any investment decision with respect to our securities.

If any of the following trends, risks or uncertainties actually occurs or continues, our business, financial condition or operating results could be materially adversely affected, the trading prices of our securities could decline, and you could lose all or part of your investment.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

At any point, due to external factors and opinions.

Moreover, our security measures and/or those of our third party service providers and/or customers may not detect such security breaches if they occur.

See, for example, “Litigation - Product Litigation” in Note 9 of our consolidated financial statements included in Part II, Item 8 of this report.

An increasing percentage of our revenue is derived from subscription billing arrangements which may result in delayed cash collections and may increase customer credit risk on receivables

A growing portion of our sales are derived from subscription billing arrangements and on an open credit basis.

While we perform ongoing credit evaluations of our customers' financial condition, if we become aware of information related to the creditworthiness of a major customer, or if future actual default rates on receivables in general differ from those currently anticipated, we may have to adjust our allowance for doubtful accounts, which could adversely affect our business, financial condition or operating results.

We could also be required to pay substantial damages, fines or other penalties, indemnify customers or distributors, cease the manufacture, use, or sale of infringing products or processes, and/or expend significant resources to develop or acquire non-infringing technologies.

Our CEW products are also subject to regulation by testing, safety and other standard organizations (e.g. ANSI, IEC, NIST).

Our international operations expose us to additional risks that could harm our business, operating results, and financial condition.

Our international operations are significant, and we plan to continue to grow internationally by acquiring existing entities or setting up new legal entities in new markets.

In certain international markets, we have limited operating experience and may not benefit from any first-to-market advantages or otherwise succeed.

In addition to risks described elsewhere in this section, our international operations expose us to other risks, including the following:

| • | Restrictions on foreign ownership and investments, and stringent foreign exchange controls that might prevent us from repatriating cash earned in countries outside the U.S. |

| • | Import and export requirements, tariffs, trade disputes and barriers, and customs classifications that may prevent us from offering products or providing services to a particular market or obtaining necessary parts and components to manufacture products, which may lead to decreased sales and may increase our operating costs. |

| • | Longer payment cycles in some countries, increased credit risk, and higher levels of payment fraud. |

| • | Uncertainty regarding liability for products and services, including uncertainty as a result of local laws and lack of legal precedent. |

| • | Different employee/employer relationships, existence of workers' councils and labor unions, and other challenges caused by distance, language, and cultural differences, making it harder to do business in certain jurisdictions. |

Additionally, changes in international local political, economic, regulatory, tax, social, and labor conditions may adversely harm our business and compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business.

These numerous and sometimes conflicting laws and regulations include, among others, internal control and disclosure rules, privacy and data protection requirements, anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, and other local laws prohibiting corrupt payments to governmental officials, and competition regulations, among others.

Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially affect our brand, our international growth efforts, our ability to attract and retain employees, our business, and our operating results.

Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies.

In addition, similar

Events which might indicate impairment include, but are not limited to, declines in stock price market capitalization or cash flows, adverse cost factors, deteriorating financial performance, strategic decisions made in response to economic, market and competitive conditions, the impact of the economic environment on us and our customer base, and/or relevant events such as changes in management, key personnel, litigation or customers.

The enactment of tax reform legislation, including legislation implementing changes in taxation of international business activities, could materially impact our financial position and results of operations.

Legislation or other changes in the tax laws could increase our liability and adversely affect our after-tax profitability.

For example, the Tax Cuts and Jobs Act was enacted in the United States on December 22, 2017.

The Tax Cuts and Jobs Act could have a significant impact on our effective tax rate, cash tax expenses and net deferred tax assets.

The Tax Cuts and Jobs Act reduces the U.S. corporate statutory tax rate, eliminates or limits deduction of several expenses which were previously deductible, imposes a mandatory deemed repatriation tax on undistributed historic earnings of foreign subsidiaries, requires a minimum tax on earnings generated by foreign subsidiaries and permits a tax-free repatriation of foreign earnings through a dividends received deduction.

We are evaluating the overall impact of the Tax Cuts and Jobs Act on our effective tax rate and balance sheet, but expect that the impact may be significant for fiscal year 2018 and future periods.

We are highly dependent on the services of Patrick W.

Smith, our Chief Executive Officer.

We are highly dependent on the services of Patrick W.

Smith, our founder and Chief Executive Officer.

Our future success depends upon our ability to retain executive officers, specifically Mr. Smith, and any failure to do so could adversely impact our business, prospects, financial condition and operating results.

We have identified a material weakness in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.

Although we have concluded that our consolidated financial statements as of December 31, 2017, present fairly, in all material respects, the results of operations, financial position, and cash flows of our company and its subsidiaries in conformity with generally accepted accounting principles, we have identified a material weakness in internal control over financial reporting related to the monitoring controls of the Company's subsidiary, Axon Public Safety U.K. Ltd. Under standards established by the Public Company Accounting Oversight Board, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis.

See Item 9A, "Controls and Procedures."

Also, any intellectual property infringement claims against us, with or without merit, could be costly and time-consuming to defend and divert our management’s attention from our business.

We face unique regulatory and political challenges presented by international markets.

Our international business, including any expansion in new international markets, may be adversely affected by local laws and customs and U.S. laws applicable to foreign operations, including the Foreign Corrupt Practices Act.

Risks inherent in international operations also include, among others:

| • | Foreign countries could change laws and regulations, change tax structures, or impose currency restrictions and other restraints; |

| • | Risks associated with the Foreign Corrupt Practices Act and local anti-bribery law compliance; |

| • | Political changes and economic crises may lead to changes in the business environment in which we operate; |

| • | Local distributors of our products may not comply with existing laws and regulations; |

| • | Some countries impose burdensome tariffs and quotas; and |

| • | Economic sanctions may be imposed by the U.S. on some countries, which could disrupt the markets for products we sell, even if we do not sell in the target country. |

An attempt by the President's administration to withdraw from or materially modify the North American Free Trade Agreement ("NAFTA") and certain other international trade agreements could adversely affect our business, financial condition and results of operations.

A portion of our business activities are conducted in foreign countries.

The President's administration has made comments suggesting that it was not supportive of certain existing international trade agreements, including NAFTA.

At this time, it remains unclear what the administration would or would not do with respect to these international trade agreements.

If action is taken to withdraw from, or materially modify NAFTA or certain other international trade agreements, our business, financial condition and results of operations could be adversely affected.

United Kingdom Vote to Exit the European Union

On June 23, 2016, the United Kingdom (“U.K.”) held a referendum in which voters approved an exit from the European Union (“E.U.”), commonly referred to as “Brexit”.

As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s future relationship with the E.U. Although it is unknown what those terms will be, it is possible that there will be greater restrictions and potential increased costs, as well as increased regulatory complexities.

These changes may adversely affect our operations and financial results.

metals used in our products.

If we do not competitively price our products, meet the

[removed: Our] [added: Axon Enterprise, Inc.’s (the “Company” or “Axon” or “we” or “our”)] core mission is to protect life through innovative technologies that make communities safer.

We are also the market leader in [added: developing, manufacturing and selling] connected wearable on-officer cameras [removed: which utilize our] [added: as well as developing and selling] cloud-based digital evidence management [removed: solution which is part of our Axon network that connects devices, apps and people to serve law enforcement.][added: software.]

[removed: Our core goal is] [added: We aim] to have every [added: public safety] officer in the world carry a TASER, deploy an Axon camera and be connected to the Axon network.

[removed: ][added: ]

| | [removed: 2016] [added: 2017] | | | | | | | [removed: 2015] [added: 2016] | | | | | | | [removed: 2014] [added: 2015] | | | | | |

| Net sales | [removed: $] [added: 343,798] | [removed: 268,245] | | | 100.0 | [removed: %] | | [removed: $] [added: 268,245] | [removed: 197,892] | | | 100.0 | [removed: %] | | [removed: $] [added: 197,892] | [removed: 164,525] | | | 100.0 | [removed: %] |

| Gross margin | [removed: 170,536] [added: 207,088] | | | | [removed: 63.6] [added: 60.2] | | | [removed: 128,647] [added: 170,536] | | | | [removed: 65.0] [added: 63.6] | | | [removed: 101,548] [added: 128,647] | | | | [removed: 61.7] [added: 65.0] | |

| Sales, general and administrative | [removed: 108,076] [added: 138,692] | | | | 40.3 | | | [removed: 69,698] [added: 108,076] | | | | [removed: 35.2] [added: 40.3] | | | [removed: 54,158] [added: 69,698] | | | | [removed: 32.9] [added: 35.2] | |

| Research and development | [removed: 30,609] [added: 55,373] | | | | [removed: 11.4] [added: 16.1] | | | [removed: 23,614] [added: 30,609] | | | | [removed: 11.9] [added: 11.4] | | | [removed: 14,885] [added: 23,614] | | | | [removed: 9.0] [added: 11.9] | |

| Total operating expenses | [removed: 138,685] [added: 194,065] | | | | [removed: 51.7] [added: 56.4] | | | [removed: 93,312] [added: 138,685] | | | | [removed: 47.2] [added: 51.7] | | | [removed: 69,043] [added: 93,312] | | | | [removed: 42.0] [added: 47.2] | |

| Income from operations | [removed: 31,851] [added: 13,023] | | | | [removed: 11.9] [added: 3.8] | | | [removed: 35,335] [added: 31,851] | | | | [removed: 17.9] [added: 11.9] | | | [removed: 32,505] [added: 35,335] | | | | [removed: 19.8] [added: 17.9] | |

| Interest and other income (expense), net | [removed: (354] [added: 2,738] | | [removed: )] | | [removed: (0.1] [added: 0.8] | [removed: )] | | [removed: 26] [added: (354] | | [added: )] | | [removed: —] [added: (0.1] | [added: )] | | [removed: (194] [added: 26] | | [removed: )] | | [removed: (0.1] [added: —] | [removed: )] |

| Income before provision for income taxes | [removed: 31,497] [added: 15,761] | | | | [removed: 11.7] [added: 4.6] | | | [removed: 35,361] [added: 31,497] | | | | [removed: 17.9] [added: 11.7] | | | [removed: 32,311] [added: 35,361] | | | | [removed: 19.6] [added: 17.9] | |

| Provision for income taxes | [removed: 14,200] [added: 10,554] | | | | [removed: 5.3] [added: 3.1] | | | [removed: 15,428] [added: 14,200] | | | | [removed: 7.8] [added: 5.3] | | | [removed: 12,393] [added: 15,428] | | | | [removed: 7.5] [added: 7.8] | |

| Net income | $ | [removed: 17,297] [added: 5,207] | | | [removed: 6.4] [added: 1.5] | % | | $ | [removed: 19,933] [added: 17,297] | | | [removed: 10.1] [added: 6.4] | % | | $ | [removed: 19,918] [added: 19,933] | | | [removed: 12.1] [added: 10.1] | % |

| United States | $ | [removed: 218,757] [added: 282,810] | | | [removed: 81.6] [added: 82.3] | % | | $ | [removed: 161,803] [added: 218,757] | | | [removed: 81.8] [added: 81.6] | % | | $ | [removed: 132,205] [added: 161,803] | | | [removed: 80.4] [added: 81.8] | % |

| Other Countries | [removed: 49,488] [added: 60,988] | | | | [removed: 18.4] [added: 17.7] | | | [removed: 36,089] [added: 49,488] | | | | [removed: 18.2] [added: 18.4] | | | [removed: 32,320] [added: 36,089] | | | | [removed: 19.6] [added: 18.2] | |

| Total | $ | [removed: 268,245] [added: 343,798] | | | 100.0 | % | | $ | [removed: 197,892] [added: 268,245] | | | 100.0 | % | | $ | [removed: 164,525] [added: 197,892] | | | 100.0 | % |

The Company’s operations are comprised of two reportable segments: the sale of CEWs, accessories and other related products and services (the “TASER Weapons” segment); and the [removed: Axon] [added: software and sensors] business, focused on devices, wearables, applications, cloud and mobile products (the [removed: "Axon"] [added: "Software and Sensors"] segment).

Within the [removed: Axon] [added: Software and Sensors] segment, the Company includes only revenues and costs attributable to that segment which include: costs of sales for both products and services, direct labor, selling [removed: expense] [added: expenses] for the sales team, product [removed: management and marketing expenses, trade shows and related expenses, finance and accounting expenses, and research and development] [added: manage R&D] for products included, or to be included, within the [removed: Axon] [added: Software and Sensors] segment.

The [removed: chief operating decision maker] [added: CODM] does not review assets by segment as part of the financial information provided; therefore, no asset information is provided in the following tables.

| Extended warranties [removed: including TAP] | 9,880 | | | | 3.7 | | | 7,402 | | | | 3.7 | | | 2,478 | | | | 33.5 | |

| Extended warranties [removed: including TAP] | 3,710 | | | | 1.4 | | | 1,794 | | | | 0.9 | | | 1,916 | | | | 106.8 | |

| [removed: Axon] [added: Software and Sensors] segment | 65,601 | | | | 24.5 | | | 35,517 | | | | 17.9 | | | 30,084 | | | | 84.7 | |

| Total net sales | $ | 268,245 | | | 100.0 | % | | $ | 197,892 | | | 100.0 | % | | $ | 70,353 | | | 35.6 | [added: %] |

Net sales for the [removed: Axon] [added: Software and Sensors] segment were $65.6 million and $35.5 million for the years ended December 31, 2016 and 2015, respectively, an increase of $30.1 million or 84.7%.

The increase in net sales for 2016 compared to 2015 in the TASER Weapons segment was primarily driven by the Company's ability to increase the frequency of upgrades through trade-in programs along with increased demand for the Company's installment payment plans, [removed: the Officer Safety Plan ("OSP")] [added: OSP] and TASER 60.

These programs allow customers to pay for hardware and services [added: over an extended contractual life, which is typically five years.]

In the [removed: Axon] [added: Software and Sensors] segment, the increase in net sales was driven by the continued adoption of the Axon on-officer cameras and Evidence.com application in the law enforcement [removed: markets.][added: markets, which was further impacted by a large deployment of Axon Body 2 cameras to a major international customer.]

To gain more immediate feedback regarding activity for Axon [added: camera] products and Evidence.com services, we also review bookings for these products.

We consider bookings to be a statistical measure defined as the sales [removed: contract value] [added: price of orders] (not invoiced sales), [added: 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.

[removed: Some] [added: Most] bookings will be invoiced in subsequent [removed: years.][added: periods.]

Due to municipal government funding rules, [added: in some cases] certain of the future [removed: year] [added: period] amounts included in bookings are subject to budget appropriation or other contract cancellation clauses.

Although [removed: TASER] [added: the Company] has entered into contracts for the delivery of products and services in the future and anticipates the contracts will be [removed: completed,] [added: fulfilled,] if agencies do not [added: exercise contractual options, do not] appropriate [removed: money] [added: funds] in future year [removed: budgets] [added: budgets,] or [added: do] enact a cancellation clause, revenue associated with these bookings [removed: will] [added: may] not ultimately be recognized, resulting in a future reduction to bookings.

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

[removed: ][added: ]

Net Sales - Three Months Ended December 31, [removed: 2016] [added: 2017] Compared to September 30, [removed: 2016][added: 2017]

Net sales by product line were as follows for the three months ended December 31, [removed: 2016] [added: 2017] and September 30, [removed: 2016] [added: 2017] (dollars in thousands):

| | Three Months Ended December 31, [removed: 2016] [added: 2017] | | | | | | | Three Months Ended September 30, [removed: 2016] [added: 2017] | | | | | | | Dollar Change | | | | Percent Change | |

| TASER Pulse and Bolt | [removed: 944 | | | | 1.2 | | | 1,039 | |] [added: 3,641] | | [removed: 1.4] | [added: 2,944] | | [removed: (95] | [added: 697] | [removed: )] | | [removed: (9.1] [added: 23.7] | [removed: )] |

Overview and Strategy

We have established a robust network that connects devices, apps and people primarily in the law enforcement vertical.

The three foundations for our growth strategy are:

| • | Devices - Our TASER CEWs are one of the few weapons that can incapacitate a person while drastically limiting the risk for death and/or serious injury. Over the past two decades, the TASER CEW has become one of the most frequently used weapons in the North American law enforcement market, with use-of-force injuries and deaths dropping dramatically as a result. Outside of weapons, we produce devices that primarily fall within three categories: On-officer cameras that capture critical digital evidence aimed at protecting truth, a range of related accessory hardware devices and an in-car camera variant called Axon Fleet. We believe our CEWs and Axon cameras should be standard-issue equipment for all patrol officers domestically and internationally. We have created and are continuing to create service plans and product bundles to ensure agencies have the latest devices and technology at predictable annual costs. |

| • | Apps - Axon's Evidence.com platform is designed to help agencies securely store, manage and share all digital evidence. Our software platform features continuous improvement with regular software updates that enable our customers to always have access to the latest technology. Recent new features include secure sharing, audit trails, integration of other data sources, and transcription and redaction services. These feature sets are designed to provide our customers with valuable tools to police more efficiently and effectively while enabling greater transparency with the communities they serve. More and more police agencies trust Axon to host their video evidence data, which is captured via our devices, apps and software, and stored in our secure cloud and accessed via the Axon network. |

| • | People - Our TASER weapons and Axon software and sensors platforms have allowed us to build relationships with more than 20,000 public safety agencies worldwide. Axon is bringing modern information technology capabilities to every law enforcement officer. Some of our customers report that police officers are spending over 60% of their time on paperwork-related tasks, rather than on value-added public safety work. We see a large opportunity to leverage our connected platform to enable a broad suite of mobile, wearable, and data management capabilities. Axon is also improving workflows throughout the public safety chain, from the incident on the scene to the court room. With our software, police officers can share evidence |

with prosecutors during discovery while maintaining a secure and encrypted chain of custody.

Axon's cohesive ecosystem is delivering increased value to all public safety stakeholders, including state and municipal police agencies, police chiefs and other leadership, patrol officers, state patrols and officers, agency detectives, public prosecutors, district attorneys, and others in the public safety and judicial communities, as well as the public communities they serve.

| Net sales from products | $ | 285,859 | | | 83.1 | % | | $ | 238,573 | | | 88.9 | % | | $ | 185,230 | | | 93.6 | % |

| Net sales from services | 57,939 | | | | 16.9 | | | 29,672 | | | | 11.1 | | | 12,662 | | | | 6.4 | |

| Cost of product sales | 117,997 | | | | 34.3 | | | 91,536 | | | | 34.1 | | | 65,022 | | | | 32.9 | |

| Cost of service sales | 18,713 | | | | 5.4 | | | 6,173 | | | | 2.3 | | | 4,223 | | | | 2.1 | |

| Cost of sales | 136,710 | | | | 39.8 | | | 97,709 | | | | 36.4 | | | 69,245 | | | | 35.0 | |

| | 2017 | | | | | | | 2016 | | | | | | | | | | | | |

| TASER X26P | $ | 64,426 | | | 18.7 | % | | $ | 72,490 | | | 27.0 | % | | $ | (8,064 | ) | | (11.1 | )% |

| TASER X2 | 81,417 | | | | 23.7 | | | 52,665 | | | | 19.6 | | | 28,752 | | | | 54.6 | |

| TASER Pulse and Bolt | 4,340 | | | | 1.3 | | | 3,580 | | | | 1.3 | | | 760 | | | | 21.2 | |

| Single cartridges | 63,203 | | | | 18.4 | | | 52,305 | | | | 19.5 | | | 10,898 | | | | 20.8 | |

| Extended warranties | 12,426 | | | | 3.6 | | | 9,880 | | | | 3.7 | | | 2,546 | | | | 25.8 | |

| Other | 8,700 | | | | 2.5 | | | 11,724 | | | | 4.4 | | | (3,024 | | ) | | (25.8 | ) |

| TASER Weapons segment | 234,512 | | | | 68.2 | | | 202,644 | | | | 75.5 | | | 31,868 | | | | 15.7 | |

| Software and Sensors segment: | | | | | | | | | | | | | | | | | | | | |

| Axon Body | 15,184 | | | | 4.4 | | | 12,911 | | | | 4.8 | | | 2,273 | | | | 17.6 | |

| Axon Flex | 10,083 | | | | 2.9 | | | 5,323 | | | | 2.0 | | | 4,760 | | | | 89.4 | |

| Axon Fleet | 2,954 | | | | 0.9 | | | — | | | | — | | | 2,954 | | | | * | |

| Axon Dock | 9,736 | | | | 2.8 | | | 7,422 | | | | 2.8 | | | 2,314 | | | | 31.2 | |

| Evidence.com | 57,841 | | | | 16.8 | | | 29,260 | | | | 10.9 | | | 28,581 | | | | 97.7 | |

| TASER CAM | 3,358 | | | | 1.0 | | | 4,888 | | | | 1.8 | | | (1,530 | | ) | | (31.3 | ) |

| Extended warranties | 7,110 | | | | 2.1 | | | 3,710 | | | | 1.4 | | | 3,400 | | | | 91.6 | |

| Other | 3,020 | | | | 0.9 | | | 2,087 | | | | 0.8 | | | 933 | | | | 44.7 | |

| Software and Sensors segment | 109,286 | | | | 31.8 | | | 65,601 | | | | 24.5 | | | 43,685 | | | | 66.6 | |

| Total net sales | $ | 343,798 | | | 100.0 | % | | $ | 268,245 | | | 100.0 | % | | $ | 75,553 | | | 28.2 | % |

* Not meaningful

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

| TASER X26P | 70,381 | | | 79,218 | | | (8,837 | ) | | (11.2 | )% |

| TASER X2 | 76,106 | | | 47,700 | | | 28,406 | | | 59.6 | |

| TASER Pulse and Bolt | 12,504 | | | 9,549 | | | 2,955 | | | 30.9 | |

| Cartridges | 2,408,471 | | | 1,979,051 | | | 429,420 | | | 21.7 | |

| Axon Body | 89,808 | | | 66,154 | | | 23,654 | | | 35.8 | |

| Axon Flex | 26,025 | | | 14,173 | | | 11,852 | | | 83.6 | |

Executive Overview and Key Strategic Initiatives

Our key strategies going into Fiscal 2017 are as follows:

| • | Devices: Launch innovative new products, scale Axon Fleet, scale existing Axon cameras and devices |

| • | Apps: Drive incremental usage, expand the product platform and deliver quality at scale |

| • | People: Drive network adoption, achieve full deployment, grow global markets and maximize service plans and product bundles. |

Execution of Our Strategy

Devices - Our TASER CEWs are one of the few weapons which can truly incapacitate a person without requiring death or serious injury.

Over the past few decades, the TASER CEW has become one of the most frequently used weapons in the North American Law Enforcement Market, with injuries and deaths dropping dramatically as a result.

Our Axon hardware products currently consist of our on-officer cameras that capture critical digital evidence aimed at protecting truth, a host of related accessory devices and an in-car camera variant which is in field testing preparing for 2017 launch.

We believe our CEWs and Axon cameras should be standard issue equipment for all patrol officers domestically and internationally.

We have created and are continuing to create service plans and product bundles to ensure agencies have the latest devices and technology at predictable annual costs.

Apps - The Axon Evidence.com platform is a central place for all agencies' digital evidence.

It is an end-to-end solution for not only storing data, but also for efficiently managing and sharing that data.

We are continuously seeking to develop new features such as secure sharing, audit trails, integration of other data sources, transcription and redaction services, among others.

These feature sets are designed to provide the customers we serve with valuable tools to police more efficiently and effectively while enabling greater transparency with the communities in which they serve.

Our constant drive to develop innovative apps is evidenced by two recent strategic acquisitions.

In December 2016, the Company launched a new artificial intelligence ("AI") group called "Axon AI." The Company acquired certain proprietary technology and

hired a team of researchers and engineers to accelerate the introduction of new AI-powered capabilities for public safety.

The technology acquired is aimed at improving the accuracy, efficiency and speed of processing images and video to enable customers to gain more insight from video, photos and audio.

In January 2017, the Company completed another transaction which included the acquisition of a computer-vision and deep learning system to make the visual contents in video searchable in real time.

This acquisition will give customers the ability to quickly isolate and analyze the most important aspects of footage from large amounts of video data.

People - With our TASER weapons and Axon platform, we have created relationships with over 20,000 public safety agencies around the world.

Some of our customers report that police officers are spending over 60% of their time on paperwork related tasks, rather than on value-add public safety work.

The real opportunity is to leverage this connected platform to enable a broad suite of mobile, wearable, and data management capabilities to bring modern information technology capabilities to every law enforcement officer.

Our technologies will not only allow our customers to spend more time on public safety work, but will allow for a capture to courtroom workflow of information.

The ability to share files with prosecutors during discovery while maintaining a complete chain of custody and ensuring all evidence remains encrypted will provide a cohesive ecosystem that will deliver increased value to all stakeholders in the public safety and judicial communities.

| Cost of products sold and services delivered | 97,709 | | | | 36.4 | | | 69,245 | | | | 35.0 | | | 62,977 | | | | 38.3 | |

| TASER X26 | 6,372 | | | | 2.4 | | | 7,337 | | | | 3.7 | | | (965 | | ) | | (13.2 | ) |

| Other | 5,352 | | | | 2.0 | | | 5,101 | | | | 2.6 | | | 251 | | | | 4.9 | |

| Axon segment: | | | | | | | | | | | | | | | | | | | | |

Net unit sales by product line were as follows:

| TASER X26 | 2,655 | | | 4,928 | | | (2,273 | ) | | (46.1 | ) |

over an extended contractual life, which is typically five years.

Bookings related to Evidence.com and Axon products and services, net of cancellations, increased to $254.1 million during 2016, compared to $135.1 million in 2015, an increase of 88.0%.

| TASER X26P | $ | 20,233 | | | 24.7 | % | | $ | 18,943 | | | 26.4 | % | | $ | 1,290 | | | 6.8 | % |

| TASER X2 | 15,529 | | | | 18.9 | | | 13,514 | | | | 18.8 | | | 2,015 | | | | 14.9 | |

| TASER X26 | 2,042 | | | | 2.5 | | | 1,549 | | | | 2.2 | | | 493 | | | | 31.8 | |

| Single cartridges | 15,292 | | | | 18.6 | | | 13,898 | | | | 19.3 | | | 1,394 | | | | 10.0 | |

| Extended warranties including TAP | 2,778 | | | | 3.4 | | | 2,645 | | | | 3.7 | | | 133 | | | | 5.0 | |

| Other | 1,519 | | | | 1.9 | | | 1,350 | | | | 1.9 | | | 169 | | | | 12.5 | |

Based on investment positions as of December 31, [removed: 2016,] [added: 2017,] a hypothetical 100 basis point increase across all maturities would result in a [removed: $0.2 million] [added: $16,000] incremental decline in the fair market value of the portfolio.

Additionally, we have access to a [added: $10.0 million] line of credit borrowing facility which bears interest at varying rates, currently at LIBOR plus [removed: 1.5%] [added: 1.25%] or Prime less [removed: 0.75%.][added: 0.50%.]

Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit, which totaled $2.7 million at December 31, [removed: 2016.][added: 2017.]

At December 31, [removed: 2016,] [added: 2017,] there was no amount outstanding under the line of credit, and the available borrowing under the line of credit was $7.3 million.

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, [removed: particularly changes] in [removed: the Euro and the British Pound, in] each case compared to the U.S. Dollar, related to transactions by [removed: TASER International B.V., TASER Europe SE, Axon Public Safety UK LTD, Axon Public Safety Australia Pty Ltd, and Axon Public Safety Canada, Inc. To date, we have not engaged in any currency hedging activities, although we may do so in the future.][added: our foreign subsidiaries.]

[removed: Fluctuations] [added: As such, fluctuations] in currency exchange rates could harm our business in the future.

However, the cost of our products to our customers increases when the U.S. dollar strengthens against their local [removed: currency] [added: currency,] and the Company may have more sales and expenses denominated in foreign currencies in future years which [removed: would] [added: could] increase its foreign exchange rate risk.

To date, we have not engaged in any currency hedging activities.

However, the Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries.

However, the Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to the prohibitive economic cost of hedging particular exposures.

[removed: TASER International,] [added: Axon Enterprise,] Inc.’s (the “Company” or [removed: “TASER”] [added: “Axon”] or “we” or “our”) core mission is to protect life through innovative technologies that make communities safer.

We are the market leader in the development, manufacture and sale of [removed: conducted electrical weapons (“CEWs”)] [added: CEWs] designed for use by law enforcement, corrections, military forces, private security personnel and by private individuals for personal defense.

We are also the market leader in [added: developing, manufacturing and selling] connected wearable on-officer cameras [removed: which utilize our] [added: as well as developing and selling] cloud-based digital evidence management [removed: solution which is part of our Axon network that connects devices, apps and people to serve law enforcement.][added: software.]

[removed: Our core goal is] [added: We aim] to have every [added: public safety] officer in the world carry a TASER, deploy an Axon camera and be connected to the Axon network.

The Company manages its business primarily on a geographic [removed: basis.][added: basis, with various sales representatives strategically located throughout the world.]

Domestic [added: and international] law enforcement agencies are [added: primarily] served through the Company's headquarters in Scottsdale, Arizona, and its [removed: Axon business unit] [added: software engineering development center] located in Seattle, [removed: Washington, with various sales representatives strategically located throughout the United States.][added: Washington.]

The Company also has subsidiaries located in the United [removed: Kingdom ("UK"), Germany] [added: Kingdom, Germany, the Netherlands, Australia, Vietnam] and Canada.

The Company’s operations are comprised of two reportable segments: the sale of CEWs, accessories and other related products and services (the “TASER Weapons” segment); and the [removed: Axon] [added: software and sensors] business, focused on [added: Axon] devices, wearables, applications, cloud and mobile products (the [removed: "Axon"] [added: "Software and Sensors"] segment).

Within the [removed: Axon] [added: Software and Sensors] segment, the Company includes only revenues and costs attributable to that segment which include: costs of sales for both products and services, direct labor, selling expense for the sales team, product management and marketing expenses, trade shows and related expenses, finance and accounting expenses, and research and development for products included, or to be included, within the [removed: Axon] [added: Software and Sensors] segment.

Further information about our reportable segments and sales by geographic region is included in Notes [removed: 1(p)] [added: 1] and 16 of the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.

We make CEWs [removed: that use our proprietary Neuro Muscular Incapacitation (“NMI”) effects] for two main types of market segments: (i) the law enforcement, military, corrections and private security markets; and (ii) the consumer market.

[removed: Our products use] [added: From] a replaceable cartridge containing compressed [removed: nitrogen to deploy and propel] [added: nitrogen,] two small probes that are attached to the CEW by insulated conductive wires [removed: with lengths ranging] [added: are deployed] from [removed: 15] [added: up] to 35 [removed: feet.][added: feet away.]

[removed: Our CEWs transmit electrical] [added: Electrical] pulses [added: are transmitted] along the wires and into the [removed: body] [added: body,] affecting the sensory and motor functions of the peripheral nervous system.

[removed: By some studies,] [added: Studies have shown that] TASER CEWs have prevented death or serious injury more than 178,000 times from the first deployment in 2000 to the end of [removed: 2016.][added: 2017.]

[removed: In addition to protecting life, the] [added: The] use of these devices instead of other force options has significantly reduced injuries for suspects and [removed: officers] [added: officers,] with substantial liability and workers’ compensation savings to government agencies around the world.

TASER X26P [removed: -] [added: \-] The X26P is [removed: currently our smallest and most] [added: a single-shot,] compact Smart Weapon [added: designed] for law enforcement and military [removed: use, and is ergonomically designed with ease of performance in mind.][added: use.]

[removed: TASER] [added: Since 2009, our CEWs have been on our] Smart Weapons [removed: are built on] [added: system,] an all-digital [removed: platform, and have] [added: platform that features] the ability to regulate charge output, perform health checks, update firmware over the [removed: Internet] [added: Internet,] and provide analytics [removed: displaying how and when someone uses a device.][added: on device usage.]

Through the Company's Evidence.com [removed: platform] [added: platform,] important [removed: records,] [added: records] such as [added: the] event [removed: logs and pulse] logs, [added: which record user actions such as safety activation and trigger event durations,] can be viewed and analyzed.

TASER X2 [removed: -] [added: \-] The [removed: X2,] [added: X2 is a double-shot Smart Weapon] designed for law enforcement and [removed: the] military [removed: but available to general consumers, provides users with the same Smart Weapon features as the X26P.][added: use.]

[removed: The] [added: In addition to the back-up shot, the X2 also features dual lasers and the] warning arc, a visible electric [removed: charge,] [added: charge that] increases voluntary surrenders and [removed: helps stop] [added: de-escalates] conflicts [removed: from escalating.][added: without cartridge deployment.]

Smart cartridges communicate with the [removed: fire] [added: firing] control system within the TASER X2 [removed: indicating] [added: to indicate] the type of cartridge loaded in each bay and its deployment status.

Axon creates connected technologies [removed: for] [added: to protect] truth in public safety.

[added: Axon] Hardware Products:

Axon Body 2 [removed: -] [added: \-] Axon Body 2 builds upon the original platform [added: by] bringing officers new features such as high-definition ("HD") video, wireless fidelity ("Wi-Fi") offload capabilities, [removed: longer] [added: extended] battery life, and additional security enhancements.

Axon Flex 2 [removed: -] [added: \-] The Axon Flex 2 builds upon the original Axon Flex camera system and [removed: was designed with] [added: features] a more rugged industrial design, new mounts and advanced capabilities like unlimited HD video, a 120-degree field of view, extended battery life, improved buffering and wireless activation.

The device can capture [added: critical] video and audio before, during and after a TASER CEW [removed: deployment, which provides law enforcement with a greater level of accountability to support their use of TASER weapons against a resistant subject.][added: deployment.]

Axon Interview [removed: -] [added: \-] Axon Interview is a [removed: video and audio] recording system designed for the [removed: critical context of the] interview room.

Axon Dock [removed: -] [added: \-] With the Axon Dock, the camera charging station is also the automatic data downloader.

Axon Signal [removed: -] [added: \-] Axon Signal is a technology that enables Axon Body 2, Axon [removed: Flex, Axon] Flex 2 and Axon Fleet cameras to start recording [removed: automatically] upon certain triggering events such as the opening of a patrol car door, activation of a patrol car lightbar or [removed: when] [added: the unholstering of] a TASER [removed: X26P or X2 Smart Weapon is unholstered.][added: CEW.]

Evidence.com [removed: -] [added: \-] As the sources of digital evidence expand, storage alone is not enough to keep track of the body-worn camera videos, photos, audio recordings and other data that is overwhelming agency servers and systems.

Officers and command staff can upload content from Axon and TASER devices or other systems easily, manage it [removed: simply] with search and retrieval features, and [removed: then] collaborate [removed: effortlessly] with prosecutors by using powerful sharing features.

Evidence Sync [removed: -] [added: \-] Evidence Sync is a desktop-based application that enables evidence in any format, from any source to be uploaded to Evidence.com.

TASER Smart Weapon logs, Axon camera videos, [removed: dash cam and] interview room footage, [removed: still] photos and more can be uploaded, stored, and managed in one [removed: location, accessible anytime, anywhere.][added: location.]

Sources new and old—from TASER devices [added: or other brands—are equally supported.]

Network servers, [removed: SD cards, CDs,] [added: secure digital memory cards ("SD cards"), compact discs ("CDs"),] and computer folders can be synced with ease, and frequently used folders or drives can be set up to automatically sync on schedule.

Axon Capture \- Axon Capture is a mobile application [removed: built specifically to allow] [added: that allows] officers to capture digital evidence right from the field.

The app eliminates the need to carry three separate devices for photo, video, and audio [removed: recording.][added: recording by securely building upon the capabilities of an officer's mobile phone.]

Officers can add tags, titles or [removed: GPS] [added: Global Positioning System ("GPS")] coordinates to any recordings before uploading the data to Evidence.com.

Axon View [removed: -] [added: \-] Axon View is a mobile application that wirelessly connects with an Axon camera to provide instant playback of unfolding events from the field, in the [removed: field, and the app's live display ensures the camera is positioned correctly.][added: field.]

We also target military forces, private security, correctional facilities and consumer personal protection markets to provide technologies that offer a less lethal [removed: force] [added: form] of protection.

We have established a robust network that connects devices, apps and people primarily in the law enforcement vertical market.


The three foundations for our growth strategy are:

| • | Devices - Our TASER CEWs are one of the few weapons that can incapacitate a person while drastically limiting the risk for death and/or serious injury. Over the past two decades, the TASER CEW has become one of the most frequently used weapons in the North American law enforcement market, with use-of-force injuries and deaths dropping dramatically as a result. Outside of weapons, we produce devices that primarily fall within three categories: on-officer cameras that capture critical digital evidence aimed at protecting truth, a range of related accessory hardware devices and an in-car camera variant called Axon Fleet. We refer to these cameras, related accessories and devices collectively as "Axon" products. We believe our CEWs and Axon cameras should be standard-issue equipment for all patrol officers domestically and internationally. We have created and are continuing to create service plans and product bundles to allow agencies to have the latest devices and technology at predictable annual costs. |

| • | Apps - Axon's Evidence.com platform is designed to help agencies securely store, manage and share all digital evidence. Our software platform features continuous improvement with regular software updates that enable our customers to always have access to the latest technology. Recent new features include secure sharing, audit trails, integration of other data sources, and transcription and redaction services. These feature sets are designed to provide our customers with valuable tools to police more efficiently and effectively while enabling greater transparency with the communities they serve. An increasing number police agencies trust Axon to host their video evidence data, which is captured via our devices, apps and software, and stored in our secure cloud and accessed via the Axon network. |

| • | People - Our TASER weapons and Axon software and sensors platforms have allowed us to build relationships with more than 20,000 public safety agencies worldwide. Axon's goal is to bring modern information technology capabilities to every law enforcement officer. Some of our customers report that police officers are spending over 60% of their time on paperwork-related tasks, rather than on value-added public safety work. We see a large opportunity to leverage our connected platform to enable a broad suite of mobile, wearable, and data management capabilities. Axon is also improving workflows throughout the public safety chain, from the incident on the scene to the court room. With our software, police officers can share evidence with prosecutors during discovery while maintaining a secure and encrypted chain of custody. Axon's cohesive ecosystem is delivering increased value to all public safety stakeholders, including state and municipal police agencies, police chiefs and other leadership, patrol officers, state patrols and officers, agency detectives, public prosecutors, district attorneys, and others in the public safety and judicial communities, as well as the public communities they serve. |

We have four strategic growth areas:

| | |

| --- | --- |

| • | Expand TASER CEW adoption: We believe we can increase the ratio of TASER CEWs to patrol officers domestically as well as continue expand into new international markets. We believe that our strategy of offering payment plans and eventually subscription hardware plans will shorten upgrade cycles and expand our immediately addressable market. Also, through continuing research and development ("R&D"), we believe that our TASER CEWs will become more capable and more connected over time, thus increasing in value and utility for our customers. |

| | |

| --- | --- |

| • | Expand Axon body camera and Evidence.com market share and increase average revenue per user ("ARPU"): Axon is the market leader in body-worn cameras and digital evidence management. Of the top 50 metropolitan areas in the U.S., 38 are on the Axon network. We believe we are well-positioned to build upon our prior success, and that our software offerings can become more valuable to our customers as we continue to expand our service offerings to better help agencies store, manage and share evidence data. |

| | |

| --- | --- |

| • | Capture in-car video market share with Axon Fleet: In the second quarter of 2017, we began shipping our in-car video offering, Axon Fleet. This is a new and adjacent market for Axon that we believe we can continue to grow through offering a superior product and service with disruptive pricing. |

| | |

| --- | --- |

| • | Expand into police agency records management systems and computer-aided dispatch software: In late 2016, we announced our intention to develop a police agency enterprise resource planning ("ERP") system, Axon Records, that would put officers back on the streets, help to solve and prosecute crime, and help to prevent crime and other incidents. Our development of Axon Records supports our strategic focus and vision of growing recurring cash flows by leveraging the data we host to unlock value-added services to our customers. |

Technological innovation is key to all four long-term growth areas.

By investing in R&D, we intend to continue to develop novel, high-value solutions across our product platforms and expand our total addressable market within the law enforcement and public safety vertical markets.

In 2017, we invested heavily in a new artificial intelligence (“AI”) group, Axon AI.

Through two acquisitions plus additional hires, we have developed a team that is delivering AI features in our products as well as winning industry recognition.

In 2017, we were named the preferred AI vendor for the Los Angeles Police Department.

In early 2018, we opened an R&D office in Tampere, Finland, with 10 imaging and sensor experts who will work with our existing teams to create best-in-class smart cameras that integrate with our cloud platform.

We also continue to add engineering talent to our Scottsdale headquarters and Seattle engineering and development office.

Axon sells its products to law enforcement worldwide through its direct sales force, distribution partners, online store and third-party resellers.

We have made certain acquisitions of companies or their assets in the past two years that are described in Note 15 of our consolidated financial statements included in Part II, Item 8 of this report.

Our CEWs use our proprietary Neuro Muscular Incapacitation (“NMI”) technology to effectively neutralize suspects or threats.

It features the smallest form factor of our law enforcement models and was ergonomically designed with ease of use in mind.

Consumer CEWs \- The Company has two consumer CEW models, the Bolt (formerly known as the C2) and the Pulse.

The two products differ in form factor but both feature the same NMI effects as the CEW models available to law enforcement and run in cycles of 30 seconds, which is intended to allow adequate time for the user to escape a threat.

Replacement Cartridges and Consumables \- The Company manufactures multiple cartridge types with effective ranges from 15' to 35'.

Standard replacement cartridges are used in the TASER X26P as well as our consumer models.

The Company also offers Performance Power Magazines (“PPM”), batteries that power the CEWs.

PPMs are available in several options, such as Tactical (“TPPM”) or Automatic Shut-Down (“APPM”).

As a company that grew from our TASER business, we are building on a history of innovation in policing.

The Axon Body 2 can be mounted on the officer's shirt at mid-chest level and eliminates all wires from the wearer’s body.

TASER CAM HD \- The TASER CAM HD is a recording device built into a PPM battery pack for use with compatible TASER CEWs.

Signal Sidearm - Signal Sidearm is a device that is compatible with most firearm holsters.

Our key strategies going into Fiscal 2017 are as follows:

| • | Devices: Launch innovative new products, scale Axon Fleet, scale existing Axon cameras and devices |

| • | Apps: Drive incremental usage, expand the product platform and deliver quality at scale |

| • | People: Drive network adoption, achieve full deployment, grow global markets and maximize service plans and product bundles. |

Technological innovation is the foundation of our long-term growth.

By investing in research and development, we will continue to develop novel, high-value solutions across our product platforms.

In 2016, we continued to refine our Axon platform by developing next generation applications and devices.

In December 2016, the Company launched a new artificial intelligence ("AI") group called "Axon AI." The Company acquired certain proprietary technology, and hired a team of researchers and engineers to accelerate the introduction of new AI-powered capabilities for public safety.

The technology acquired is aimed at improving the accuracy, efficiency and speed of processing images and video to enable customers to gain more insight from video, photos and audio.

In January 2017, the Company completed another acquisition bringing the Axon AI team of researchers and engineers to nearly 20.

This transaction included the acquisition of a computer-vision and deep learning systems to make the visual contents in video searchable in real time.

This acquisition will give customers the ability to quickly isolate and analyze the most important aspects of footage from large amounts of video data.

Our products are sold directly to law enforcement agencies and through a network of distribution channels we developed for selling and marketing our products and services.

TASER International, B.V. (the "BV"), a wholly owned subsidiary of the Company, located in Amsterdam, Netherlands, serves as a permanent international headquarters.

During 2016, the BV formed Axon Public Safety Australia Pty LTD to better facilitate growth and serve existing customers in the Australian region.

In May 2015, the Company acquired all of the outstanding common stock of MediaSolv Solutions Corporation ("MediaSolv").

MediaSolv provided solutions for interview room video, closed-circuit television and on-premise digital evidence management.

The acquisition also allowed the Company to leverage MediaSolv's existing network and customer relationships.

In July 2015, the Company acquired, through one of its wholly owned subsidiaries, all of the outstanding common stock of Tactical Safety Responses Limited ("TSR"), the Company's licensed distributor in the United Kingdom ("UK").

The acquisition has allowed the Company to expand operations in the UK and grow its in-country sales and support team.

The basic design is to provide incapacitating effects that last in cycles of five seconds for our law enforcement, military, corrections and private security products and up to thirty seconds for our consumer market models.

This effect can be extended, if necessary, by the operator.

Event logs save every user action for record-keeping, including safety activation, and trigger event duration with times, dates, and battery life.

Pulse logs display a pulse-by-pulse record of weapon output.

Additionally, the X2 incorporates law enforcement agencies' most requested features such as a backup shot, dual lasers to ensure accuracy, and a warning arc to ensure accuracy and effectiveness.

It issues an audible and visual warning directly over the front of live cartridges.

TASER C2 \- The C2 is one of the Company's consumer CEW models.

The C2 features the same NMI effects as those available to law enforcement in a discreet appearance and compact and light form factor.

The TASER C2 provides incapacitating effects that lasts in cycles of 30 seconds which is intended to allow adequate time for the user to escape the threat.

TASER Pulse - During January 2016, the Company introduced its newest consumer product, the TASER Pulse CEW, which is a sub-compact model with a newly designed form factor with additional features as compared to the TASER C2, all at a comparable price point.

The TASER Pulse became available for sale in the first quarter of 2016.

Replacement Cartridges - We manufacture multiple cartridge types for varying ranges and purposes.

Types of cartridges include, among others, standard cartridges, smart cartridges and training cartridges.

Standard cartridges are designed for use within the X26P CEW systems and are also used in our legacy X26E and M26 products.

The Company also offers standard replacement cartridges for the C2 and Pulse consumer models.

Our cartridges are available in unique variations for warm and cold climates, training scenarios, and tactical situations.

As a segment of TASER, we're building on a history of innovation in policing.

Every product works together, built by the same team of engineers and supported by the same technicians.

Both the original Axon Body and Axon Body 2 eliminate the need for the camera to be mounted above the shoulder of the individual and rather hooks into the shirt of the officer at mid-chest level.

These cameras also eliminate all wires from the wearer’s body.

See discussion of litigation in Note [removed: 9(c)] [added: 9] to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, which discussion is incorporated by reference herein.

For the fiscal year ended December 31, [removed: 2016][added: 2017]

| [removed: TASER International,] [added: Axon Enterprise,] Inc. (Exact name of registrant as specified in its charter) |

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, [removed: or] a smaller reporting [added: company or emerging growth] company.

See the definitions of “large accelerated filer,” “accelerated [removed: filer” and] [added: filer,”] “smaller reporting company” [added: and “emerging growth company”] in Rule 12b-2 of the Exchange Act.

The aggregate market value of the common stock held by non-affiliates of the registrant, based on the last sales price of the issuer’s common stock on June 30, [removed: 2016,] [added: 2017,] which was the last business day of the registrant’s most recently completed second fiscal quarter, as reported by NASDAQ, was approximately [removed: $1,273,000,000.][added: $1,303,000,000.]

The number of shares of the registrant’s common stock outstanding as of February 15, [removed: 2017] [added: 2018] was [removed: 52,334,648][added: 53,034,299]

Parts of the registrant’s definitive proxy statement for its [removed: 2017] [added: 2018] annual meeting of stockholders to be prepared and filed with the Securities and Exchange Commission not later than 120 days after December 31, [removed: 2016] [added: 2017] are incorporated by reference into Part III of this Form 10-K.

FOR THE YEAR ENDED DECEMBER 31, [removed: 2016][added: 2017]

| | [PART [removed: I](#s599558D46E6E897B9D9AB5E21E41D69B)] [added: I](#s59903BDF127CEF9EC902B6DF773A8B59)] | Page |

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| [Item [removed: 16.](#s0B428EE9EDFBA925395FB5E1CF21A49D)] [added: 16.](#sF228E503F14E421C4639B6DE054ED3AB)] | [Form 10-K [removed: Summary](#s0B428EE9EDFBA925395FB5E1CF21A49D)] [added: Summary](#sF228E503F14E421C4639B6DE054ED3AB)] | [removed: [83](#s0B428EE9EDFBA925395FB5E1CF21A49D)] [added: [91](#sF228E503F14E421C4639B6DE054ED3AB)] |

| • | our need [removed: and the willingness of] [added: that] customers [removed: to] upgrade and replace existing conducted electrical weapons (“CEW”) [removed: units;] [added: units and the willingness of customers to do so;] |

| • | that we may have more sales denominated in foreign currencies in [removed: 2017;] [added: 2018;] |

| • | our plan to invest in web activities and law enforcement trade shows in [removed: 2017;] [added: 2018;] |

| • | our belief that the video evidence capture and management market will grow significantly in the near future and the reasons [removed: thereto;] [added: for that belief;] |

| • | our [removed: intentions] [added: intention] to continue to pursue the personal security market; |

| • | that selling, general and administrative expense will increase in [removed: 2017;] [added: 2018;] |

| • | that research and development expenses will increase in [removed: 2017;] [added: 2018;] |

| • | the benefits of our [removed: Axon] [added: Software and Sensors] products compared to our competitors'; |

| • | our belief that customers will honor multi-year contracts despite the existence of [removed: appropriations (or similar)] [added: appropriations, termination for convenience. or similar] clauses; |

10-K 1 a10kaaxn123117.htm 10-K

| | | | | | | |

| | | | | 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.

AXON ENTERPRISE, INC.

| | [PART II](#sE0675B0FCFE5C34BF454B6DF854066C9) | |

| | [PART IV](#s1FF807EB4C318FABDAEBB6DFEEFF2D77) | |

| • | the fluctuations in our effective tax rate; |

| • | the impact of the U.S. Tax Cuts and Jobs Act (the “Tax Act”); |

| • | the impact of Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09” or “Topic 606”); |

| | |

| --- | --- |

Axon, the “Axon Delta” logo, Axon network, Axon Body 2, Axon Fleet, Axon Flex 2, Axon Citizen, Axon Signal, Evidence.com, Smart Weapons, and TASER are trademarks of Axon Enterprise, Inc., some of which are registered in the U.S. and other countries.

For more information, visit www.axon.com/legal.

All rights reserved.

The information on our website, including information about our trademarks, is not incorporated by reference into or otherwise a part of this report.

10-K 1 a10ktasr123116.htm 10-K

TASER INTERNATIONAL, INC.

| | [PART II](#sAD37B0C6F7B600C6F5CAB5E21F5D06E3) | |

| | [PART IV](#s7B22309EEF716101C4EDB5E228AB26D2) | |

| • | our strategy and plans, and the expected benefits relating thereto, to expand our international sales; |

| • | that we expect further increases in our trial Axon programs and that these programs will lead to additional sales; |

TASER International, Inc. owns the following trademarks: ADVANCED TASER, Axon, TASER, XREP, the bolt on West Hemisphere logo, the bolt on ball logo, the bolt on circle logo, and the bolt within circle logo, all registered in the United States.

All other trademarks and service marks including Bolt, CheckLok, C2, X2, X3, M18, M26, Protect Life, Protect Truth, Pulse, Strikelight, X26, X26C, X26P, X12, XREP, Axon Flex, Axon Body, Axon Body 2, Axon Flex 2, Axon Interview, Axon Fleet, Axon Mobile, Axon Signal, Evidence.com, Shockwave, TASER CAM and designs belong to TASER International, Inc., except as expressly indicated as belonging to another.

We also lease premises in Scottsdale, Arizona; Seattle, Washington; Topsfield, Massachusetts; Amsterdam, Netherlands; Daventry, England; London, England; Frankfurt, Germany; Brisbane, [removed: Australia and] [added: Australia;] Sydney, [removed: Australia.][added: Australia, Ho Chi Minh City, Vietnam and Tampere, Finland.]

Our common stock is quoted under the symbol [removed: “TASR”] [added: “AAXN”] on The NASDAQ Global Select Market.

| Year Ended December 31, [removed: 2015:] [added: 2017:] | | | | | | | |

As of December 31, [removed: 2016,] [added: 2017,] there were [removed: 274] [added: 255] holders of record of our common stock.

As of December 31, [added: 2017 and] 2016, [removed: $16.2] [added: $16.3] million remains available under the plan for future purchases.

[removed: The] [added: During 2016, the] Company suspended its 10b-5 [removed: plan during the third quarter of 2016,] [added: plan,] and any future purchases [removed: will] [added: would] be discretionary.

The graph covers the period from December 31, [removed: 2011] [added: 2012] to December 31, [removed: 2016.][added: 2017.]

The graph assumes that the value of the investment in our stock and in each index was $100 at December 31, [removed: 2011,] [added: 2012,] and that all dividends were reinvested.

[removed: ][added: ]

| | [removed: 2011 | | | |] 2012 | | | | 2013 | | | | 2014 | | | | 2015 | | | | 2016 | | | [added: | 2017 | | |]

| First quarter | $ | 27.56 | | | $ | 22.05 | |

| Second quarter | 28.17 | | | | 21.18 | | |

| Third quarter | 26.31 | | | | 21.25 | | |

| Fourth quarter | 27.09 | | | | 20.57 | | |

During the year ended December 31, 2017, no common shares were purchased under the program.

| Axon Enterprise, Inc. | $ | 100.00 | | | $ | 177.63 | | | $ | 296.20 | | | $ | 193.40 | | | $ | 271.14 | | | $ | 296.42 | |

| NASDAQ Composite | 100.00 | | | | 141.63 | | | | 162.09 | | | | 173.33 | | | | 187.19 | | | | 242.29 | | |

| Russell 3000 | 100.00 | | | | 133.55 | | | | 150.32 | | | | 151.04 | | | | 170.28 | | | | 206.26 | | |

| First quarter | $ | 28.30 | | | $ | 21.39 | |

| Second quarter | 35.95 | | | | 23.41 | | |

| Third quarter | 34.91 | | | | 18.05 | | |

| Fourth quarter | 26.48 | | | | 16.14 | | |

During the year ended December 31, 2016, the Company purchased, under a Rule 10b5-1 plan, approximately 1.8 million common shares for a total cost of approximately $33.7 million, or a weighted average cost of $18.90 per share.

| TASER International, Inc. | $ | 100.00 | | | $ | 174.61 | | | $ | 310.16 | | | $ | 517.19 | | | $ | 337.70 | | | $ | 473.44 | |

| NASDAQ Composite | 100.00 | | | | 116.41 | | | | 165.47 | | | | 188.69 | | | | 200.32 | | | | 216.54 | | |

| Russell 3000 | 100.00 | | | | 116.42 | | | | 155.47 | | | | 175.00 | | | | 175.84 | | | | 198.23 | | |

The following selected financial data should be read in conjunction with our consolidated financial statements and the notes thereto, and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The statement of operations data for the years ended December 31, [removed: 2016, 2015] [added: 2017, 2016] and [removed: 2014,] [added: 2015,] and the balance sheet data as of December 31, [removed: 2016] [added: 2017] and [removed: 2015,] [added: 2016,] have been derived from, and should be read in conjunction with, our audited consolidated financial statements and the notes thereto included herein.

The statement of operations data for the years ended December 31, [removed: 2013] [added: 2014] and [removed: 2012,] [added: 2013,] and the balance sheet data as of December 31, [removed: 2014, 2013] [added: 2015, 2014] and [removed: 2012,] [added: 2013,] is derived from our historical audited consolidated financial statements and the notes thereto which are not included in this Annual Report on Form 10-K.

| | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | | | [removed: 2012] [added: 2013] | | |

| Net sales | [removed: $] [added: 343,798] | [added: | | |] 268,245 | | | [removed: $] | 197,892 | | | [removed: $] | 164,525 | | | [removed: $] | 137,831 | | | [removed: $ | 114,753 | |]

| Gross margin | [removed: 170,536] [added: 207,088] | | | | [removed: 128,647] [added: 170,536] | | | | [removed: 101,548] [added: 128,647] | | | | [removed: 85,843] [added: 101,548] | | | | [removed: 67,715] [added: 85,843] | | |

| Sales, general and administrative expenses | [removed: 108,076] [added: 138,692] | | | | [removed: 69,698] [added: 108,076] | | | | [removed: 54,158] [added: 69,698] | | | | [removed: 46,557] [added: 54,158] | | | | [removed: 39,247] [added: 46,557] | | |

| Research and development expenses | [removed: 30,609] [added: 55,373] | | | | [removed: 23,614] [added: 30,609] | | | | [removed: 14,885] [added: 23,614] | | | | [removed: 9,888] [added: 14,885] | | | | [removed: 8,139] [added: 9,888] | | |

| Litigation judgments [removed: (recoveries)] | — | | | | — | | | | — | | | | [removed: 1,450] [added: —] | | | | [removed: (2,200] [added: 1,450] | | [removed: )] |

| Income from operations | [removed: 31,851] [added: 13,023] | | | | [removed: 35,335] [added: 31,851] | | | | [removed: 32,505] [added: 35,335] | | | | [removed: 27,948] [added: 32,505] | | | | [removed: 22,529] [added: 27,948] | | |

| Interest and other [removed: income (expense),] [added: (expense) income,] net | [added: 2,738 | | | |] (354 | | ) | | 26 | | | | (194 | | ) | | 86 | | | [removed: | 83 | | |]

| Income before provision for income taxes | [removed: 31,497] [added: 15,761] | | | | [removed: 35,361] [added: 31,497] | | | | [removed: 32,311] [added: 35,361] | | | | [removed: 28,034] [added: 32,311] | | | | [removed: 22,612] [added: 28,034] | | |

| Provision for income taxes | [removed: 14,200] [added: 10,554] | | | | [removed: 15,428] [added: 14,200] | | | | [removed: 12,393] [added: 15,428] | | | | [removed: 9,790] [added: 12,393] | | | | [removed: 7,874] [added: 9,790] | | |

| Net income | $ | [removed: 17,297] [added: 5,207] | | | $ | [removed: 19,933] [added: 17,297] | | | $ | [removed: 19,918] [added: 19,933] | | | $ | [removed: 18,244] [added: 19,918] | | | $ | [removed: 14,738] [added: 18,244] | |

| Basic | $ | [removed: 0.33] [added: 0.10] | | | $ | [removed: 0.37] [added: 0.33] | | | $ | [removed: 0.38] [added: 0.37] | | | $ | [removed: 0.35] [added: 0.38] | | | $ | [removed: 0.27] [added: 0.35] | |

| Diluted | $ | [removed: 0.32] [added: 0.10] | | | $ | [removed: 0.36] [added: 0.32] | | | $ | [removed: 0.37] [added: 0.36] | | | $ | [removed: 0.34] [added: 0.37] | | | $ | [removed: 0.27] [added: 0.34] | |

| Basic | [removed: 52,667] [added: 52,726] | | | | [removed: 53,548] [added: 52,667] | | | | [removed: 52,948] [added: 53,548] | | | | [removed: 51,880] [added: 52,948] | | | | [removed: 53,827] [added: 51,880] | | |

| Diluted | [removed: 53,536] [added: 53,898] | | | | [removed: 54,638] [added: 53,536] | | | | [removed: 54,500] [added: 54,638] | | | | [removed: 54,152] [added: 54,500] | | | | [removed: 54,723] [added: 54,152] | | |

| Working capital | $ | [removed: 99,192] [added: 97,242] | | | $ | [removed: 123,269] [added: 99,192] | | | $ | [removed: 102,669] [added: 123,269] | | | $ | [removed: 67,237] [added: 102,669] | | | $ | [removed: 51,548] [added: 67,237] | |

| Total assets | [removed: 278,163] [added: 338,112] | | | | [removed: 229,881] [added: 278,163] | | | | [removed: 185,368] [added: 229,881] | | | | [removed: 148,382] [added: 185,368] | | | | [removed: 116,236] [added: 148,382] | | |

| Total current liabilities | [removed: 78,039] [added: 107,950] | | | | [removed: 38,140] [added: 78,039] | | | | [removed: 31,973] [added: 38,140] | | | | [removed: 23,129] [added: 31,973] | | | | [removed: 18,109] [added: 23,129] | | |

| Total long-term debt and capital leases, net of current portion | [removed: 118] [added: 41] | | | | [removed: 81] [added: 118] | | | | [removed: 29] [added: 81] | | | | [removed: 67] [added: 29] | | | | [removed: 103] [added: 67] | | |

| Total stockholders’ equity | [removed: 150,888] [added: 167,444] | | | | [removed: 157,004] [added: 150,888] | | | | [removed: 129,106] [added: 157,004] | | | | [removed: 108,347] [added: 129,106] | | | | [removed: 87,285] [added: 108,347] | | |

| Net sales from products | $ | 285,859 | | | $ | 238,573 | | | $ | 185,230 | | | $ | 160,313 | | | $ | 136,123 | |

| Net sales from services | 57,939 | | | | 29,672 | | | | 12,662 | | | | 4,212 | | | | 1,708 | | |

| Cost of product sales | 117,997 | | | | 91,536 | | | | 65,022 | | | | 60,913 | | | | 50,099 | | |

| Cost of service sales | 18,713 | | | | 6,173 | | | | 4,223 | | | | 2,064 | | | | 1,889 | | |

| Cost of sales | 136,710 | | | | 97,709 | | | | 69,245 | | | | 62,977 | | | | 51,988 | | |

| | 2017 | | | | 2016 | | | | 2015 | | | | 2014 | | | | 2013 | | |

| Cost of products sold and services delivered | 97,709 | | | | 69,245 | | | | 62,977 | | | | 51,988 | | | | 47,038 | | |

| [Consolidated Balance Sheets as of December 31, [removed: 2016] [added: 2017] and [removed: 2015](#s2CB47CD8E7A8BD9550B5B5E1D061A600)] [added: 2016](#sD406E9EDA5905CCF9C5CB6DE02E88830)] | | [removed: [47](#s2CB47CD8E7A8BD9550B5B5E1D061A600)] [added: [49](#sD406E9EDA5905CCF9C5CB6DE02E88830)] |

| [Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, [removed: 2016, 2015] [added: 2017, 2016] and [removed: 2014](#s40ACACA39D446F1CD421B5E1CF62503E)] [added: 2015](#s8C53480EFE083D5CE0F0B6DE0300199F)] | | [removed: [48](#s40ACACA39D446F1CD421B5E1CF62503E)] [added: [50](#s8C53480EFE083D5CE0F0B6DE0300199F)] |

| [Consolidated Statements of Stockholders' Equity for the years ended December 31, [removed: 2016, 2015] [added: 2017, 2016] and [removed: 2014](#s3BF65900FF78858EEF3CB5E1D0A6060E)] [added: 2015](#s815D902E304B0ADA85FAB6DE030EB721)] | | [removed: [49](#s3BF65900FF78858EEF3CB5E1D0A6060E)] [added: [51](#s815D902E304B0ADA85FAB6DE030EB721)] |

| [Consolidated Statements of Cash Flows for the years ended December 31, [removed: 2016, 2015] [added: 2017, 2016] and [removed: 2014](#s5BF358FC189632A79BBEB5E1CF500F72)] [added: 2015](#sAAF09BAFA39AED69C901B6DE032CD3EE)] | | [removed: [50](#s5BF358FC189632A79BBEB5E1CF500F72)] [added: [52](#sAAF09BAFA39AED69C901B6DE032CD3EE)] |

| [Notes to Consolidated Financial [removed: Statements](#s1FC085D0AD1FEF109ABAB5E1CF8728EA)] [added: Statements](#s32B6E39FDC699B80504DB6DE03449F86)] | | [removed: [51](#s1FC085D0AD1FEF109ABAB5E1CF8728EA)] [added: [53](#s32B6E39FDC699B80504DB6DE03449F86)] |

| [Selected Quarterly Financial Information [removed: (Unaudited)](#s33F099D31DAD94FA58E8B5E1CF337BD8)] [added: (Unaudited)](#sB4086DDB41204BCE9BB1B6DE05363EF5)] | | [removed: [77](#s33F099D31DAD94FA58E8B5E1CF337BD8)] [added: [82](#sB4086DDB41204BCE9BB1B6DE05363EF5)] |

| [Report of Grant Thornton LLP, Independent Registered Public Accounting [removed: Firm](#s2AE66483FB4FD6280619B5E1D5A0D53E)] [added: Firm](#s0B4DB2CFC4E2A6CBB0DBB6DE054C77F8)] | | [removed: [78](#s2AE66483FB4FD6280619B5E1D5A0D53E)] [added: [85](#s0B4DB2CFC4E2A6CBB0DBB6DE054C77F8)] |

| | [added: 2017 | | | |] 2016 | | | | 2015 | | |

| Cash and cash equivalents | $ | [removed: 40,651] [added: 75,105] | | | $ | [removed: 59,526] [added: 40,651] | |

| Short-term investments | [removed: 48,415] [added: 6,862] | | | | [removed: 50,254] [added: 48,415] | | |

| Accounts and notes receivable, net of allowance of [removed: $443] [added: $754] and [removed: $322] [added: $443] as of December 31, [removed: 2016] [added: 2017] and [removed: 2015,] [added: 2016,] respectively | [removed: 39,466] [added: 56,064] | | | | [removed: 27,701] [added: 39,466] | | |

| Inventory | [removed: 34,841] [added: 45,465] | | | | [removed: 15,763] [added: 34,841] | | |

| Prepaid expenses and other current assets | [removed: 13,858] [added: 21,696] | | | | [removed: 8,165] [added: 13,858] | | |

| Total current assets | [removed: 177,231] [added: 205,192] | | | | [removed: 161,409] [added: 177,231] | | |

| Property and equipment, net | [removed: 24,004] [added: 31,172] | | | | [removed: 21,848] [added: 24,004] | | |

| Deferred income tax assets, net | [removed: 19,515] [added: 15,755] | | | | [removed: 13,719] [added: 19,515] | | |

| Intangible assets, net | [removed: 15,218] [added: 18,823] | | | | [removed: 7,588] [added: 15,218] | | |

| Goodwill | [removed: 10,442] [added: 14,927] | | | | [removed: 9,596] [added: 10,442] | | |

| Long-term investments | [removed: 234] [added: —] | | | | [removed: 8,525] [added: 234] | | |

| Long-term accounts and notes receivable, net of current portion | [removed: 17,602] [added: 36,877] | | | | [removed: 1,227] [added: 17,602] | | |

| Other assets | [removed: 13,917] [added: 15,366] | | | | [removed: 5,969] [added: 13,917] | | |

| Total assets | $ | [removed: 278,163] [added: 338,112] | | | $ | [removed: 229,881] [added: 278,163] | |

| Accounts payable | $ | [removed: 10,736] [added: 8,592] | | | $ | [removed: 7,333] [added: 10,736] | |

| Accrued liabilities | [removed: 18,248] [added: 23,502] | | | | [removed: 8,643] [added: 18,248] | | |

| Current portion of deferred revenue | [removed: 45,137] [added: 70,401] | | | | [removed: 20,851] [added: 45,137] | | |

| Customer deposits | [removed: 2,148] [added: 3,673] | | | | [removed: 1,226] [added: 2,148] | | |

| Current portion of business acquisition contingent consideration | [removed: 1,690] [added: 1,693] | | | | [removed: —] [added: 1,690] | | |

| Other current liabilities | [removed: 80] [added: 89] | | | | [removed: 87] [added: 80] | | |

| Total current liabilities | [removed: 78,039] [added: 107,950] | | | | [removed: 38,140] [added: 78,039] | | |

| Deferred revenue, net of current portion | [removed: 40,054] [added: 54,881] | | | | [removed: 30,190] [added: 40,054] | | |

| Liability for unrecognized tax benefits | [removed: 1,896] [added: 1,706] | | | | [removed: 1,315] [added: 1,896] | | |

| Long-term deferred compensation | [removed: 3,362] [added: 3,859] | | | | [removed: 2,199] [added: 3,362] | | |

| Business acquisition contingent consideration, net of current portion | [removed: 1,635] [added: 1,048] | | | | [removed: 952] [added: 1,635] | | |

| Other long-term liabilities | [removed: 2,289] [added: 1,224] | | | | [removed: 81] [added: 2,289] | | |

| Total liabilities | [removed: 127,275] [added: 170,668] | | | | [removed: 72,877] [added: 127,275] | | |

| Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of December 31, [removed: 2016] [added: 2017] and [removed: 2015] [added: 2016] | — | | | | — | | |

| Common stock, $0.00001 par value; 200,000,000 shares authorized; [removed: 52,325,251] [added: 52,969,869] and [removed: 53,692,192] [added: 52,325,251] shares issued and outstanding as of December 31, [removed: 2016] [added: 2017] and [removed: 2015,] [added: 2016,] respectively | 1 | | | | 1 | | |

| Additional paid-in capital | [removed: 187,656] [added: 201,672] | | | | [removed: 178,143] [added: 187,656] | | |

| Treasury stock at cost, 20,220,227 [removed: and 18,432,158] shares as of December 31, [removed: 2016] [added: 2017] and [removed: 2015, respectively] [added: 2016] | (155,947 | | ) | | [removed: (122,201] [added: (155,947] | | ) |

| Retained earnings | [removed: 118,275] [added: 123,185] | | | | [removed: 100,978] [added: 118,275] | | |

AXON ENTERPRISE, INC.

| | 2017 | | | | 2016 | | |

AXON ENTERPRISE, INC.

| Net sales from products | $ | 285,859 | | | $ | 238,573 | | | $ | 185,230 | |

| Net sales from services | 57,939 | | | | 29,672 | | | | 12,662 | | |

| Cost of product sales | 117,997 | | | | 91,536 | | | | 65,022 | | |

| Cost of service sales | 18,713 | | | | 6,173 | | | | 4,223 | | |

| Cost of sales | 136,710 | | | | 97,709 | | | | 69,245 | | |

| Net income | $ | 5,207 | | | $ | 17,297 | | | $ | 19,933 | |

AXON ENTERPRISE, INC.

| Cumulative effect of applying a change in accounting principle | — | | | — | | | | 475 | | | | — | | | — | | | | — | | | | (297 | | ) | | 178 | | |

| Balance, December 31, 2017 | 52,969,869 | | | $ | 1 | | | $ | 201,672 | | | 20,220,227 | | | $ | (155,947 | ) | | $ | (1,467 | ) | | $ | 123,185 | | | $ | 167,444 | |

AXON ENTERPRISE, INC.

| Net income | $ | 5,207 | | | $ | 17,297 | | | $ | 19,933 | |

AXON ENTERPRISE, INC.

Axon Public Safety BV wholly owns two subsidiaries, Axon Public Safety U.K. LTD and Axon Public Safety AU, that serve as direct sales operations in the United Kingdom (“U.K.”) and Australia, respectively.

The Company also sells to certain international markets through a wholly owned subsidiary, Axon Public Safety Germany SE.

In 2015, the Company formed 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 consolidated financial statements include the accounts of the Company and its subsidiaries.

Provisions are made to reduce potentially excess, obsolete or slow-moving inventories, as well as trial and evaluation

AXON ENTERPRISE, INC.

inventories to their net realizable value.

The Company performs its annual impairment assessment in the fourth quarter of each year.

During the year ended December 31, 2017, the Company abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $1.0 million.

The impairment charge was recorded within the Software and Sensors Segment.

Additionally, customers may elect to make deposits with the Company related to contracts for the Company's products and services that were not executed as of the end of a reporting period.

AXON ENTERPRISE, INC.

Training and professional service revenues are generally recorded once the services are completed.

AXON ENTERPRISE, INC.

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 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 years ended December 31, 2017 and 2016, the Company recorded revenue of $40.7 million and $17.9 million, respectively, under the Company's TASER 60 Plan.

No such amounts were recorded during the year ended December 31, 2015.

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 makes five equal annual installments at the beginning of each contract year.

The Company offers two tiers under this program: the basic and unlimited plan.

The 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.

TASER INTERNATIONAL, INC.

| | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- |

| Cost of products sold and services delivered | 97,709 | | | | 69,245 | | | | 62,977 | | |

| Operating expenses: | | | | | | | | | | | |

| Balance, December 31, 2013 | 52,725,247 | | | $ | 1 | | | $ | 139,424 | | | 16,412,755 | | | $ | (92,203 | ) | | $ | (2 | ) | | $ | 61,127 | | | $ | 108,347 | |

| Purchase of treasury stock | (1,727,203 | ) | | — | | | | — | | | | 1,727,203 | | | (22,442 | | ) | | — | | | | — | | | | (22,442 | | ) |

The accompanying consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, including TASER International Europe SE (“TASER Europe”), TASER International B.V., Axon Public Safety Canada, and MediaSolv Solutions Corporation ("MediaSolv").

a.

b.

c.

d.

e.

f.

g.

h.

Training revenue is recorded as the service is provided.

Deferred revenue does not include future revenue

from multi-year contracts for which no invoice has yet been created.

i.

Cost of Products Sold and Services Provided

j.

k.

Costs related to extended warranties are charged to cost of products sold and services delivered when incurred.

l.

m.

tax rates expected to apply to taxable income in future years in which those temporary differences are expected to be recovered or settled.

n.

o.

p.

q.

The estimated fair value of stock-based compensation awards is amortized to expense on a straight-line basis over the requisite service periods.

As stock-based compensation expense recognized is based on awards ultimately expected to vest, it is reduced for estimated forfeitures.

Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The Company’s forfeiture rate was calculated based on its historical experience of awards which ultimately vested.

See Note 12 for further disclosure about the Company’s stock-based compensation.

r.

s.

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 to Topic 606, Revenue Contracts with Customers:

Attached as exhibits to this Form 10-K are certifications of the [removed: Company’s] Chief Executive Officer [removed: (CEO)] [added: (as the principal executive officer)] and [removed: Principal] [added: Chief] Financial [added: Officer (as the principal financial] and [removed: Accounting Officer,] [added: accounting officer),] which are required in accordance with Rule 13a-14 of the [removed: Securities] Exchange [removed: Act of 1934, as amended (the “Exchange Act”).][added: Act.]

Our Chief Executive Officer and [removed: Principal] [added: Chief] Financial [removed: and Accounting] Officer are responsible for the evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) [removed: or 15d-15(e)] under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K.

Our disclosure controls and procedures are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and [removed: our Principal] [added: Chief] Financial [removed: and Accounting Officer] [added: Officer,] as appropriate to allow timely decisions regarding required disclosure.

Based on that evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer have concluded that because [removed: of certain] [added: a] material [removed: weaknesses] [added: weakness exists] in our internal control over financial [removed: reporting that have not yet been remediated,] [added: reporting,] as further described below, our disclosure controls and procedures were not effective as of December 31, [removed: 2016] [added: 2017] at a level that provides reasonable assurance as of the last day of the period covered by this report.

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) [removed: or 15d-15(f)] under the Exchange Act).

Management has assessed the effectiveness of our internal control over financial reporting as of December 31, [removed: 2016] [added: 2017] based on criteria [removed: established] [added: set forth] in Internal [removed: Control-Integrated] [added: Control - Integrated] Framework [removed: (2013)] issued by the Committee of Sponsoring Organizations of the Treadway [removed: Commission.][added: Commission (2013 framework).]

As a result of this assessment, management concluded that, as of December 31, [removed: 2016,] [added: 2017,] our internal control over financial reporting was not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

During the [removed: year] [added: years] ended December 31, [added: 2017 and] 2016, we identified material weaknesses in our internal control over financial reporting.

[removed: Specifically, during] [added: 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.

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

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

| • | we [removed: have] improved [removed: and are continuing to improve] communication and coordination among our finance and accounting departments and we [removed: have] expanded cross-functional involvement and input into period-end [removed: accruals; and] [added: accruals.] |

The material [removed: weaknesses] [added: weakness specific to APS U.K.] 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.

Except as noted above, there was no change in our internal control over financial reporting during the fiscal quarter ended December 31, [removed: 2016,] [added: 2017,] that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We have audited the internal control over financial reporting of [removed: TASER International,] [added: Axon Enterprise,] Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, [removed: 2016,] [added: 2017,] based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission [removed: (COSO).][added: (“COSO”).]

We conducted our audit in accordance with the standards of the [removed: Public Company Accounting Oversight Board (United States).][added: PCAOB.]

The following material [removed: weaknesses have] [added: weakness has] been identified and included in management’s assessment.

In our opinion, because of the effect of the material [removed: weaknesses] [added: weakness] described [removed: above] [added: in the following paragraphs] on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, [removed: 2016,] [added: 2017,] based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United [removed: States),] [added: States) (“PCAOB”),] the consolidated financial statements of the Company as of and for the year ended December 31, [removed: 2016.][added: 2017.]

The material [removed: weaknesses] [added: weakness] identified above [removed: were] [added: was] considered in determining the nature, timing, and extent of audit tests applied in our audit of the [removed: 2016] [added: 2017] consolidated financial statements, and this report does not affect our report dated March [removed: 6, 2017,] [added: 1, 2018] which expressed an unqualified [added: opinion] on those financial statements.

We previously identified and disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, as well as in our Quarterly Reports on Form 10-Q for each interim period in fiscal 2017, material weaknesses in our internal control over financial reporting.

Specifically, during the quarter ended March 31, 2017, we identified a material weakness over accounting for income taxes.

To remediate the material weaknesses described above, we designed and implemented controls and enhanced and revised the design of existing controls and procedures.

| • | we added 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 accounting principles generally accepted in the United States of America (“U.S. GAAP”), |

| • | we implemented additional internal reporting procedures, including those designed to add depth to our detailed review processes of sales transactions and related accounting for deferred revenue and cost of product and service sales, |

We successfully completed the testing of these remedial controls related to the previously reported material weaknesses and concluded that they are designed and operating effectively to provide reasonable assurance regarding the reliability of our financial reporting and preparation of financial statements in accordance with generally accepted accounting principles.

During the fourth quarter of 2017, we identified a material weakness related to account reconciliations and monitoring over our U.K. subsidiary, Axon Public Safety U.K. Ltd. ("APS U.K"), which resulted from a breakdown in the operation of identified preventative and detective controls which led to the Company not initially recording some transactions correctly during 2016 and the interim periods in 2017.

To remediate the material weakness described above and related to APS U.K., we designed a specific plan to design new controls, and enhanced the design of existing controls and procedures.

Specifically:

| • | during the 2017 year-end close of our accounting records we sent accounting personnel from our headquarters in Arizona to the U.K. to perform additional review procedures of the account reconciliations for APS U.K. and our corporate accounting team performed additional reviews of APS U.K. activity, |

| | |

| --- | --- |

| • | we plan for our corporate accounting team to continue to perform these additional review procedures on an ongoing basis, and |

| | |

| --- | --- |

As remediation 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 December 31, 2017 at a level that provides reasonable assurance as of the last day of the period covered by this report.

Grant Thornton LLP has independently assessed the effectiveness of our internal control over financial reporting and its report is included below.

Axon Enterprise, Inc.

Opinion on internal control over financial reporting

Management identified deficiencies in the Company’s internal controls related to account reconciliations and monitoring controls over its wholly-owned subsidiary, Axon Public Safety U.K. Ltd. (“APS-UK”).

The combination of these deficiencies, when aggregated, resulted in a material weakness in the design and operating effectiveness of the Company’s controls.

Basis for opinion

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

Definition and limitations of internal control over financial reporting

Other information

We do not express an opinion or any other form of assurance on management’s description of the steps the Company has taken to remediate any of the material weaknesses as described in Management’s Report.