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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with the other sections of this Annual Report on Form 10-K, including Part I, Item 1A: “Risk Factors”; Part II, Item 6: “Selected Financial Data”; and Part II, Item 8: “Financial Statements and Supplementary Data.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing. The tables in the MD&A sections below are derived from exact numbers and may have immaterial rounding differences.

Overview and Strategy

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 the market leader in the development, manufacture and sale of conducted electrical weapons (“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 developing, manufacturing and selling connected wearable on-officer cameras as well as developing and selling cloud-based digital evidence management software. We have established a robust network that connects devices, apps and people primarily in the law enforcement vertical. We aim to have every public safety officer in the world carry a TASER, deploy an Axon camera and be connected to the Axon network.

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.

Results of Operations

The following table presents data from our statements of operations as well as the percentage relationship to total net sales of items included in our statements of operations (dollars in thousands):

	Year Ended December 31,
	2017							2016							2015
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
Net sales	343,798				100.0			268,245				100.0			197,892				100.0
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
Gross margin	207,088				60.2			170,536				63.6			128,647				65.0
Operating expenses:
Sales, general and administrative	138,692				40.3			108,076				40.3			69,698				35.2
Research and development	55,373				16.1			30,609				11.4			23,614				11.9
Total operating expenses	194,065				56.4			138,685				51.7			93,312				47.2
Income from operations	13,023				3.8			31,851				11.9			35,335				17.9
Interest and other income (expense), net	2,738				0.8			(354		)		(0.1	)		26				—
Income before provision for income taxes	15,761				4.6			31,497				11.7			35,361				17.9
Provision for income taxes	10,554				3.1			14,200				5.3			15,428				7.8
Net income	$	5,207			1.5	%		$	17,297			6.4	%		$	19,933			10.1	%

Net sales to the U.S. and other countries are summarized as follows (dollars in thousands):

	Year Ended December 31,
	2017							2016							2015
United States	$	282,810			82.3	%		$	218,757			81.6	%		$	161,803			81.8	%
Other Countries	60,988				17.7			49,488				18.4			36,089				18.2
Total	$	343,798			100.0	%		$	268,245			100.0	%		$	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 software and sensors business, focused on devices, wearables, applications, cloud and mobile products (the "Software and Sensors" segment). Within the Software and Sensors segment, the Company includes only revenues and costs attributable to that segment which include: costs of sales for both products and services, direct labor, selling expenses for the sales team, product manage R&D for products included, or to be included, within the Software and Sensors segment. All other costs are included in the TASER Weapons segment. The CODM does not review assets by segment as part of the financial information provided; therefore, no asset information is provided in the following tables.

Net Sales - For the Years Ended December 31, 2017 and 2016

Net sales by product line were as follows for the years ended December 31, 2017 and 2016 (dollars in thousands):

	Year Ended December 31,														Dollar Change				Percent Change
	2017							2016
TASER Weapons segment:
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:

	Year Ended December 31,
	2017			2016			Unit Change			Percent Change
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
Axon Fleet	3,795			—			3,795			*
Axon Dock	23,492			16,983			6,509			38.3
TASER CAM	6,432			9,566			(3,134	)		(32.8	)

*Not meaningful

Net sales were $343.8 million and $268.2 million for the years ended December 31, 2017 and 2016, respectively, an increase of $75.6 million or 28.2%. Net sales for the TASER Weapons segment were $234.5 million and $202.6 million for the years ended December 31, 2017 and 2016, respectively, an increase of $31.9 million or 15.7%. Net sales for the Software and Sensors segment were $109.3 million and $65.6 million for the years ended December 31, 2017 and 2016, respectively, an increase of $43.7 million or 66.6%. International sales were $61.0 million in 2017 compared to $49.5 million in 2016, an increase of 23.2%.

The increase in net sales for 2017 compared to 2016 in the TASER Weapons segment was primarily attributable to increased sales under the Officer Safety Plan ("OSP") and TASER 60 installment payment programs. During the first quarter of 2017, the

Home Office of the U.K. government approved the Company's Smart Weapons for sale which resulted in increased TASER X2 sales within the U.K. of $8.5 million for the year ended December 31, 2017 compared to no sales during 2016. Additionally, the Company increased cartridge sales by $10.9 million to $63.2 million during the year ended December 31, 2017 as compared to $52.3 million during the same period in 2016 which was primarily attributable to an increase in total weapons in the field.

Net sales for the Software and Sensors segment were $109.3 million and $65.6 million for the years ended December 31, 2017 and 2016, respectively, an increase of $43.7 million, or 66.6%. The overall increase in the Software and Sensors segment was driven by continued adoption of on-officer cameras and related technologies, including the Company's Evidence.com digital evidence management software suite. Combined net sales related to the Company's Axon Body, Axon Flex, and Axon Dock products increased approximately $9.3 million. The Company recorded net sales of $3.0 million related to Axon Fleet, the Company's newly introduced in-car camera system, with no amounts recorded during the same period in 2016. Evidence.com revenues for the twelve months ended December 31, 2017 increased $28.6 million to $57.8 million as compared to the same period in 2016. This increase was primarily driven by the continued increase in active users on the Company's Evidence.com platform.

To gain more immediate feedback regarding activity for Axon 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 price of orders (not invoiced sales), including contractual optional periods we expect to be exercised, net of cancellations, placed in the relevant fiscal period, regardless of when the products or services ultimately will be provided. Most bookings will be invoiced in subsequent periods. Due to municipal government funding rules, in some cases certain of the future period amounts included in bookings are subject to budget appropriation or other contract cancellation clauses. Although the Company has entered into contracts for the delivery of products and services in the future and anticipates the contracts will be fulfilled, if agencies do not exercise contractual options, do not appropriate funds in future year budgets, or do enact a cancellation clause, revenue associated with these bookings may not ultimately be recognized, resulting in a future reduction to bookings. Bookings related to the Company's Software and Sensors segment, net of cancellations, were $291.2 million during 2017, compared to $254.1 million in 2016, an increase of 14.6%.

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

Backlog - As of December 31, 2017 compared to December 31, 2016

Our backlog of $582.7 million as of December 31, 2017 has increased significantly from $384.2 million as of December 31, 2016. The increase in Weapons segment backlog is not expected to have a material impact on revenue or operating margins. Our significant increase in backlog, primarily in the Software and Sensors segment is indicative of expected revenue growth in this segment. Revenue growth in the Software and Sensors segment is expected to result in improved operating margins over time as additional revenue will cover a larger portion of our selling, general and administrative expenses, and research and development costs, while the Company does not expect any material changes in gross margins.

Net Sales - Three Months Ended December 31, 2017 Compared to September 30, 2017

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

	Three Months Ended December 31, 2017							Three Months Ended September 30, 2017							Dollar Change				Percent Change
TASER Weapons segment:
TASER X26P	$	19,259			20.3	%		$	13,264			14.7	%		$	5,995			45.2	%
TASER X2	23,662				25.0			22,717				25.2			945				4.2
TASER Pulse and Bolt	1,448				1.5			1,069				1.2			379				35.5
Single cartridges	14,198				15.0			17,474				19.4			(3,276		)		(18.7	)
Extended warranties	3,506				3.7			3,086				3.4			420				13.6
Other	2,336				2.5			1,806				2.0			530				29.3
TASER Weapons segment	64,409				68.0			59,416				65.8			4,993				8.4
Software and Sensors segment:
Axon Body	3,459				3.7			4,527				5.0			(1,068		)		(23.6	)
Axon Flex	2,194				2.3			2,563				2.8			(369		)		(14.4	)
Axon Fleet	1,661				1.8			1,113				1.2			548				49.2
Axon Dock	2,327				2.5			2,639				2.9			(312		)		(11.8	)
Evidence.com	17,143				18.1			16,200				17.9			943				5.8
TASER CAM	951				1.0			922				1.0			29				3.1
Extended warranties	2,128				2.2			1,945				2.2			183				9.4
Other	379				0.4			937				1.0			(558		)		(59.6	)
Software and Sensors segment	30,242				32.0			30,846				34.2			(604		)		(2.0	)
Total net sales	$	94,651			100.0	%		$	90,262			100.0	%		$	4,389			4.9	%

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

	Three Months Ended
	12/31/2017			9/30/2017			Unit Change			Percent Change
TASER X26P	23,350			13,472			9,878			73.3	%
TASER X2	21,683			21,896			(213	)		(1.0	)
TASER Pulse and Bolt	3,641			2,944			697			23.7
Cartridges	590,126			643,077			(52,951	)		(8.2	)
Axon Body	13,944			28,669			(14,725	)		(51.4	)
Axon Flex	5,253			8,298			(3,045	)		(36.7	)
Axon Fleet	2,197			1,598			599			37.5
Axon Dock	3,908			6,440			(2,532	)		(39.3	)
TASER CAM	2,245			1,512			733			48.5

Net sales were $94.7 million and $90.3 million for the three months ended December 31, 2017 and September 30, 2017, respectively, an increase of $4.4 million or 4.9%. Net sales for the TASER Weapons segment were $64.4 million and $59.4 million for the three months ended December 31, 2017 and September 30, 2017, respectively, an increase of $5.0 million or 8.4%. Net sales for the Software and Sensors segment were $30.2 million and $30.8 million for the three months ended December 31, 2017 and September 30, 2017, respectively, a decrease of $0.6 million or 2.0%. International sales were $16.0 million in for the three months ended December 31, 2017 compared to $17.1 million for the three months ended September 30, 2017, a decrease of $1.1 million.

The increase in net sales in the TASER Weapons segment on a sequential basis was partially attributable to the expiration of annual budget appropriations resulting in higher purchases for the quarter ended December 31, 2017 as compared to the quarter

ended September 30, 2017. Increased sales of TASER Weapons handles was partially offset by lower sequential cartridge sales, which was primarily attributable to timing. In the Software and Sensors segment, the Company experienced a decrease in net sales of $0.6 million. Axon hardware and device sales were lower due to timing of deployments, which were partially offset by increased service revenues which were attributable to more cumulative Axon devices in the field with extended warranty coverage and more cumulative active users on the Company's Evidence.com platform.

Net Sales - For the Years Ended December 31, 2016 and 2015

Net sales by product line were as follows for the years ended December 31, 2016 and 2015 (dollars in thousands):

	Year Ended December 31,														Dollar Change				Percent Change
	2016							2015
TASER Weapons segment:
TASER X26P	$	72,490			27.0	%		$	55,969			28.3	%		$	16,521			29.5	%
TASER X2	52,665				19.6			42,746				21.6			9,919				23.2
TASER Pulse and Bolt	3,580				1.3			2,146				1.1			1,434				66.8
Single cartridges	52,305				19.5			41,674				21.1			10,631				25.5
Extended warranties	9,880				3.7			7,402				3.7			2,478				33.5
Other	11,724				4.4			12,438				6.3			(714		)		(5.7	)
TASER Weapons segment	202,644				75.5			162,375				82.1			40,269				24.8
Software and Sensors segment:
Axon Body	12,911				4.8			4,029				2.0			8,882				220.5
Axon Flex	5,323				2.0			6,880				3.5			(1,557		)		(22.6	)
Axon Dock	7,422				2.8			4,022				2.0			3,400				84.5
Evidence.com	29,260				10.9			11,765				5.9			17,495				148.7
TASER CAM	4,888				1.8			5,746				2.9			(858		)		(14.9	)
Extended warranties	3,710				1.4			1,794				0.9			1,916				106.8
Other	2,087				0.8			1,281				0.6			806				62.9
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	%

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

	Year Ended December 31,
	2016			2015			Unit Change			Percent Change
TASER X26P	79,218			62,383			16,835			27.0	%
TASER X2	47,700			38,050			9,650			25.4
TASER Pulse and Bolt	9,549			8,121			1,428			17.6
Cartridges	1,979,051			1,694,450			284,601			16.8
Axon Body	66,154			17,522			48,632			277.5
Axon Flex	14,173			18,823			(4,650	)		(24.7	)
Axon Dock	16,983			6,979			10,004			143.3
TASER CAM	9,566			11,634			(2,068	)		(17.8	)

Net sales were $268.2 million and $197.9 million for the years ended December 31, 2016 and 2015, respectively, an increase of $70.4 million or 35.6%. Net sales for the TASER Weapons segment were $202.6 million and $162.4 million for the years ended December 31, 2016 and 2015, respectively, an increase of $40.3 million or 24.8%. Net sales for the 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%. International sales were $49.5 million in 2016 compared to $36.1 million in 2015, an increase of 37.1%.

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, OSP and TASER 60. These programs allow customers to pay for hardware and services over an extended contractual life, which is typically five years. In the 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 markets, which was further impacted by a large deployment of Axon Body 2 cameras to a major international customer.

Cost of Product and Service Sales

Cost of product and service sales was as follows for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands):

	Year Ended December 31,															Year Ended December 31,
									Dollar Change				Percent Change											Dollar Change				Percent Change
	2017				2016						2016				2015
TASER Weapons segment:
Cost of product sales	$	72,054			$	61,930			$	10,124			16.3	%		$	61,930			$	48,821			$	13,109			26.9	%
Cost as % of sales	30.7				30.6											30.6				30.1
Software and Sensors segment:
Cost of product sales	45,943				29,606				16,337				55.2			29,606				16,201				13,405				82.7
Cost of service sales	18,713				6,173				12,540				203.1			6,173				4,223				1,950				46.2
Total cost of product and service sales	64,656				35,779				28,877				80.7			35,779				20,424				15,355				75.2
Cost as % of sales	59.2				54.5											54.5				57.5
Total cost of product and service sales	$	136,710			$	97,709			$	39,001			39.9			$	97,709			$	69,245			$	28,464			41.1
Cost as % of sales	39.8				36.4											36.4				35.0

Cost of product and service sales was $136.7 million and $97.7 million for the years ended December 31, 2017 and 2016, respectively, an increase of $39.0 million or 39.9%. As a percentage of net sales, cost of product and service sales increased to 39.8% in 2017 compared to 36.4% in 2016.

Within the TASER Weapons segment, cost of product sales increased $10.1 million, or 16.3%, to $72.1 million in 2017, compared to $61.9 million in 2016, and remained relatively consistent as a percentage of sales at 30.7% from 30.6%. The Company did not experience significant changes in variable manufacturing costs during the year ended December 31, 2017 as compared to 2016. The overall increase in cost of products sold was attributable to higher unit sales.

Within the Software and Sensors segment, cost of product and service sales was $64.7 million, an increase of $28.9 million, or 80.7%, from 2016. As a percentage of net sales, cost of product and service sales increased to 59.2% in 2017 from 54.5% in 2016. The increase in cost of product sales was primarily attributable to higher sales volumes, and the increase in cost of service sales was driven by increased cloud storage costs. The increase in total cost of sales as a percentage of total net sales was primarily attributable to non-recurring expenses related to the Company's data migration to a new cloud-storage provider.

Cost of product and service sales was $97.7 million and $69.2 million for the years ended December 31, 2016 and 2015, respectively, an increase of $28.5 million or 41.1%. As a percentage of net sales, cost of product and service sales increased to 36.4% in 2016 compared to 35.0% in 2015. Within the TASER Weapons segment, cost of product sales increased $13.1 million, or 26.9%, to $61.9 million in 2016, compared to $48.8 million in 2015, and remained relatively consistent as a percent of sales at 30.6% from 30.1%.

Within the Software and Sensors segment, cost of product and service sales was $35.8 million, an increase of $15.4 million, or 75.2% from 2015. As a percentage of net sales, cost of product and service sales decreased to 54.5% in 2016 from 57.5% in 2015. The increase in cost of product and service sales was driven by continued growth, increased data storage costs as more agencies utilized Evidence.com, as well as increased costs for our professional services team. The decrease in total costs as a percentage of sales was primarily driven by improvements in Evidence.com service margins.

Gross Margin

Gross margin was as follows for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands):

	Year Ended December 31,															Year Ended December 31,
									Dollar Change				Percent Change											Dollar Change				Percent Change
	2017				2016						2016				2015
TASER Weapons segment	$	162,458			$	140,714			$	21,744			15.5	%		$	140,714			$	113,554			$	27,160			23.9	%
Software and Sensors Segment	44,630				29,822				14,808				49.7			29,822				15,093				14,729				97.6
Total gross margin	$	207,088			$	170,536			$	36,552			21.4			$	170,536			$	128,647			$	41,889			32.6
Gross margin as % of net sales	60.2				63.6											63.6				65.0

Gross margin increased $36.6 million to $207.1 million for the year ended December 31, 2017 compared to $170.5 million for 2016. As a percentage of net sales, gross margin decreased to 60.2% for 2017 from 63.6% for 2016. As a percentage of net sales, gross margin for the TASER Weapons segment was relatively consistent at 69.3% and 69.4% for the year ended December 31, 2017 and 2016, respectively. Within the Software and Sensors segment gross margin as a percentage of net sales was 40.8% and 45.5% for the years ended 2017 and 2016, respectively. Within the Software and Sensors segment, hardware gross margin was 10.5% for the year ended December 31, 2017and 17.6% for the same period in 2016, while the service margins were 67.7% and 79.2% during those same periods, respectively. The decreased hardware margins were primarily attributable to higher discounting. In certain customer contracts, primarily within the Software and Sensors segment, the level of discounting resulted in a portion of the contractual consideration allocated to the delivered hardware to be recognized as revenue ratably over the Evidence.com subscription term. However, the full cost of the product is recognized when the hardware is delivered to the customer resulting in lower gross margins initially. The decrease in service margins was primarily attributable to non-recurring expenses related to the Company's data migration to a new cloud-storage provider.

Gross margin increased $41.9 million to $170.5 million for 2016 compared to $128.6 million for 2015. As a percentage of net sales, gross margin decreased to 63.6% for 2016 from 65.0% for 2015. The decrease in gross margin as a percentage of sales was due primarily to a change in product mix, as lower margin Axon hardware product sales became a greater percentage of the consolidated total. As a percentage of net sales, gross margin for the TASER Weapons segment was relatively consistent at 69.4% and 69.9% for 2016 and 2015, respectively, while the same measure for these years for the Software and Sensors segment were 45.5% and 42.5%, respectively. The improvement in Software and Sensors segment gross margin was primarily attributable to higher service margins due to increased users on the Evidence.com platform.

Sales, General and Administrative Expenses

Sales, general and administrative (“SG&A”) expenses were comprised of the following for 2017 and 2016 (dollars in thousands):

	Year Ended December 31,								Dollar Change				Percent Change
	2017				2016
Salaries, benefits and bonus	$	58,450			$	43,058			$	15,392			35.7	%
Stock-based compensation	9,047				5,707				3,340				58.5
Professional, consulting and lobbying	24,267				19,321				4,946				25.6
Sales and marketing	17,368				15,132				2,236				14.8
Travel and meals	10,637				8,970				1,667				18.6
Other	18,923				15,888				3,035				19.1
Total sales, general and administrative expenses	$	138,692			$	108,076			$	30,616			28.3
Sales, general, and administrative as a percentage of net sales	40.3		%		40.3		%

Sales, general and administrative expenses were $138.7 million and $108.1 million for the years ended December 31, 2017 and 2016, respectively, an increase of $30.6 million, or 28.3%. As a percentage of total net sales, SG&A expenses were 40.3% for the years ended December 31, 2017 and 2016.

SG&A by type and by segment were as follows for the years ended December 31, 2017 and 2016 (dollars in thousands):

	Year Ended December 31,														Dollar Change				Percent Change
	2017							2016
TASER Weapons segment:
Salaries, benefits and bonus	$	32,009			23.1	%		$	24,534			22.7	%		$	7,475			30.5	%
Stock-based compensation	6,115				4.4			3,339				3.1			2,776				83.1
Professional, consulting and lobbying	12,017				8.7			10,128				9.4			1,889				18.7
Sales and marketing	8,357				6.0			8,305				7.7			52				0.6
Travel and meals	4,867				3.5			4,277				4.0			590				13.8
Other	14,837				10.7			13,034				12.1			1,803				13.8
TASER Weapons segment	78,202				56.4			63,617				58.9			14,585				22.9
Software and Sensors segment:
Salaries, benefits and bonus	26,441				19.1			18,524				17.1			7,917				42.7
Stock-based compensation	2,932				2.1			2,368				2.2			564				23.8
Professional, consulting and lobbying	12,250				8.8			9,193				8.5			3,057				33.3
Sales and marketing	9,011				6.5			6,827				6.3			2,184				32.0
Travel and meals	5,770				4.2			4,693				4.3			1,077				22.9
Other	4,086				2.9			2,854				2.6			1,232				43.2
Software and Sensors segment	60,490				43.6			44,459				41.1			16,031				36.1
Total sales, general and administrative expenses	$	138,692			100.0	%		$	108,076			100.0	%		$	30,616			28.3

Within the TASER Weapons segment, SG&A increased $14.6 million, or 22.9%, to $78.2 million from $63.6 million in 2016. This increase was primarily attributable to the Company's continued efforts to build the necessary infrastructure to facilitate future growth which was evidenced by higher salaries, benefits, bonus and stock-based compensation of $10.3 million for the year ended December 31, 2017 as compared to 2016. Increased professional, consulting and lobbying fees of $1.9 million were primarily related to accounting and finance consulting costs attributable to the Company's adoption of the new revenue recognition rules, international tax restructuring,and efforts towards remediation of internal control matters. The remaining other operating expenses were primarily attributable to the overall growth of operations during 2017.

Within the Software and Sensors segment, SG&A increased $16.0 million, or 36.1%, to $60.5 million in 2017 in comparison to the prior year. Salaries, benefits, bonus and stock-based compensation in the Software and Sensors segment increased $8.5 million as the Company continued to hire additional engineering, product management personnel, sales and marketing personnel and general support staff to further expand upon existing product offerings as well as the development of new products such as records management systems and computer aided dispatch systems. The increase in professional, consulting and lobbying expenses of $3.1 million was related to higher professional and consulting costs related to the implementation of a new revenue accounting software platform. Additionally, the Company incurred higher marketing consulting fees related to hosted events and conferences for customers as well as internal sales meetings. The increase in sales and marketing expense of $2.2 million relates to higher commissions on increased bookings, increased customer samples attributable to the Company delivering on-officer cameras, Signal Sidearm, among other technologies, to prospective customers for evaluation purposes, as well as increased spending on sponsorships for major city police chief associations and major county sheriffs' associations. The remaining other operating expenses are primarily attributable to the overall growth of operations during 2017.

Sales, general and administrative expenses were comprised of the following for 2016 and 2015 (dollars in thousands):

	Year Ended December 31,								Dollar Change				Percent Change
	2016				2015
Salaries, benefits and bonus	$	43,058			$	25,032			$	18,026			72.0	%
Stock-based compensation	5,707				4,299				1,408				32.8
Professional, consulting and lobbying	19,321				13,165				6,156				46.8
Sales and marketing	15,132				10,776				4,356				40.4
Travel and meals	8,970				5,649				3,321				58.8
Other	15,888				10,777				5,111				47.4
Total sales, general and administrative expenses	$	108,076			$	69,698			$	38,378			55.1
Sales, general, and administrative as a percentage of net sales	40.3		%		35.2		%

Sales, general and administrative expenses were $108.1 million and $69.7 million for the years ended December 31, 2016 and 2015, respectively, an increase of $38.4 million, or 55.1%. As a percentage of total net sales, SG&A expenses increased to 40.3% for 2016 compared to 35.2% for 2015.

SG&A by type and by segment were as follows for the years ended December 31, 2016 and 2015 (dollars in thousands):

	Year Ended December 31,														Dollar Change				Percent Change
	2016							2015
TASER Weapons segment:
Salaries, benefits and bonus	$	24,534			22.7	%		$	16,767			24.1	%		$	7,767			46.3	%
Stock-based compensation	3,339				3.1			3,187				4.6			152				4.8
Professional, consulting and lobbying	10,128				9.4			10,258				14.7			(130		)		(1.3	)
Sales and marketing	8,305				7.7			5,411				7.8			2,894				53.5
Travel and meals	4,277				4.0			3,089				4.4			1,188				38.5
Other	13,034				12.1			8,928				12.8			4,106				46.0
TASER Weapons segment	63,617				58.9			47,640				68.4			15,977				33.5
Software and Sensors segment:
Salaries, benefits and bonus	18,524				17.1			8,265				11.9			10,259				124.1
Stock-based compensation	2,368				2.2			1,112				1.6			1,256				112.9
Professional, consulting and lobbying	9,193				8.5			2,907				4.2			6,286				216.2
Sales and marketing	6,827				6.3			5,365				7.7			1,462				27.3
Travel and meals	4,693				4.3			2,560				3.7			2,133				83.3
Other	2,854				2.6			1,849				2.7			1,005				54.4
Software and Sensors segment	44,459				41.1			22,058				31.6			22,401				101.6
Total sales, general and administrative expenses	$	108,076			100.0	%		$	69,698			100.0	%		$	38,378			55.1

Within the TASER Weapons segment, SG&A increased $16.0 million, or 33.5%, to $63.6 million from $47.6 million in 2015. Salaries, benefits, bonus and stock-based compensation in the TASER Weapons increased approximately $7.9 million in 2016 compared to 2015. This increase was primarily attributable to the Company's efforts to build the corporate infrastructure to facilitate future growth in departments such as supply chain, legal, finance and information technology. The increase in travel and meals was primarily attributable to the growth in the direct sales teams both domestically and internationally. The increase in sales and marketing of $2.9 million was primarily attributable to higher commissions of $3.2 million partially offset by a decrease in marketing related costs partially due to lower spending at the 2016 International Association of Chiefs of Police conference as compared to 2015. The increase in other expenses was made up primarily of $1.2 million in higher computer related costs, $0.3 million of higher rent expense, and $2.0 million of litigation costs incurred, including resolution expenses, that were not incurred during the same period in 2015.

Within the Software and Sensors segment, SG&A increased $22.4 million, or 101.6%, to $44.5 million in 2016 in comparison to the prior year. Salaries, benefits, bonus and stock-based compensation in the Software and Sensors segment increased $11.5

million as the Company continued to hire additional engineering, product management personnel, sales and marketing personnel and general support staff to further expand upon existing product offerings as well as the development of new apps and cloud technologies. The increase in travel and meals was primarily attributable to the growth in the direct sales teams both domestically and internationally. Of the increase in professional, consulting and lobbying, $4.1 million represented primarily increased lobbying fees aimed at securing long-term body-worn camera and service contracts, $0.8 million of increased legal costs primarily attributable to the ongoing Digital Ally lawsuit, and $0.6 million related to increased patent and trademark costs. The increase in sales and marketing of $1.5 million was primarily attributable to higher commissions of $2.4 million partially offset by a decrease of $0.9 million in marketing related costs partially due to lower spending at the 2016 International Association of Chiefs of Police conference as compared to 2015.

Research and Development Expenses

Research and development ("R&D") expenses were comprised of the following for 2017 and 2016 (dollars in thousands):

	Year Ended December 31,								Dollar Change				Percent Change
	2017				2016
Salaries, benefits and bonus	$	33,682			$	17,205			$	16,477			95.8	%
Stock-based compensation	6,055				3,320				2,735				82.4
Professional and consulting	4,351				3,212				1,139				35.5
Travel and meals	1,674				969				705				72.8
Other	9,611				5,903				3,708				62.8
Total research and development expenses	$	55,373			$	30,609			$	24,764			80.9
Research and development as a percentage of net sales	16.1		%		11.4		%

R&D expenses were $55.4 million and $30.6 million for the years ended December 31, 2017 and 2016, respectively, an increase of $24.8 million, or 80.9%. As a percentage of net sales, R&D increased to 16.1% in 2017 in compared to 11.4% in 2016.

R&D by type and by segment were as follows for the years ended December 31, 2017 and 2016 (dollars in thousands):

	Year Ended December 31,														Dollar Change				Percent Change
	2017							2016
TASER Weapons segment:
Salaries, benefits and bonus	$	4,243			7.7	%		$	2,301			7.5	%		$	1,942			84.4	%
Stock-based compensation	517				0.9			639				2.1			(122		)		(19.1	)
Professional and consulting	1,098				2.0			1,167				3.8			(69		)		(5.9	)
Travel and meals	388				0.7			345				1.1			43				12.5
Other	2,131				3.8			1,435				4.7			696				48.5
TASER Weapons segment	8,377				15.1			5,887				19.2			2,490				42.3
Software and Sensors segment:
Salaries, benefits and bonus	29,439				53.2			14,904				48.7			14,535				97.5
Stock-based compensation	5,538				10.0			2,681				8.8			2,857				106.6
Professional and consulting	3,253				5.9			2,045				6.7			1,208				59.1
Travel and meals	1,286				2.3			624				2.0			662				106.1
Other	7,480				13.5			4,468				14.6			3,012				67.4
Software and Sensors segment	46,996				84.9			24,722				80.8			22,274				90.1
Total research and development expenses	$	55,373			100.0	%		$	30,609			100.0	%		$	24,764			80.9

Within the TASER Weapons segment, R&D expenses increased $2.5 million, or 42.3%, to $8.4 million in 2017. Salaries, benefits, bonus and stock-based compensation in the TASER Weapons increased $1.8 million in 2017 compared to 2016. The increase for 2017 compared to 2016 is primarily driven by additional headcount as the Company continued to invest in the development of new CEW related technologies.

Within the Software and Sensors segment, R&D expenses increased $22.3 million, or 90.1%, to $47.0 million in 2017 from the prior year. The Company's Software and Sensors segment was responsible for approximately 85% of the overall expenses in

R&D. Of the $22.3 million increase in R&D for the Software and Sensors segment, $17.4 million related to salaries, benefits, bonus, and stock-based compensation. The Company remains focused on growing the Software and Sensors segment as it adds headcount and additional resources to develop new products and services, including records management systems and computer aided dispatch systems, to further advance its scalable cloud-connected device platform. The increase in professional and consulting expense of $1.2 million was primarily attributable to increased technical consulting fees related to the development and release of Signal Sidearm. Included in other R&D expenses for the Software and Services segment was $1.9 million of amortization of intangible assets related to acquired developed technology that was yet to be put into service. Additionally, during 2017, the Company abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $1.0 million which was included in other R&D expenses.

Research and development expenses were comprised of the following for 2016 and 2015 (dollars in thousands):

	Year Ended December 31,								Dollar Change				Percent Change
	2016				2015
Salaries, benefits and bonus	$	17,205			$	13,013			$	4,192			32.2	%
Stock-based compensation	3,320				2,576				744				28.9
Professional and consulting	3,212				3,835				(623		)		(16.2	)
Travel and meals	969				1,034				(65		)		(6.3	)
Other	5,903				3,156				2,747				87.0
Total research and development expenses	$	30,609			$	23,614			$	6,995			29.6
Research and development as a percentage of net sales	11.4		%		11.9		%

Research and development expenses were $30.6 million and $23.6 million for the years ended December 31, 2016 and 2015, respectively, an increase of $7.0 million, or 29.6%. As a percentage of net sales, R&D decreased to 11.4% in 2016 as compared to 11.9% in 2015.

R&D by type and by segment were as follows for the years ended December 31, 2016 and 2015 (dollars in thousands):

	Year Ended December 31,														Dollar Change				Percent Change
	2016							2015
TASER Weapons segment:
Salaries, benefits and bonus	$	2,301			7.5	%		$	1,596			6.8	%		$	705			44.2	%
Stock-based compensation	639				2.1			394				1.7			245				62.2
Professional and consulting	1,167				3.8			1,196				5.1			(29		)		(2.4	)
Travel and meals	345				1.1			261				1.1			84				32.2
Other	1,435				4.7			1,023				4.3			412				40.3
TASER Weapons segment	5,887				19.2			4,470				18.9			1,417				31.7
Software and Sensors segment:
Salaries, benefits and bonus	14,904				48.7			11,417				48.3			3,487				30.5
Stock-based compensation	2,681				8.8			2,182				9.2			499				22.9
Professional and consulting	2,045				6.7			2,639				11.2			(594		)		(22.5	)
Travel and meals	624				2.0			773				3.3			(149		)		(19.3	)
Other	4,468				14.6			2,133				9.0			2,335				109.5
Software and Sensors segment	24,722				80.8			19,144				81.1			5,578				29.1
Total research and development expenses	$	30,609			100.0	%		$	23,614			100.0	%		$	6,995			29.6

Within the TASER Weapons segment, R&D expenses increased $1.4 million, or 31.7%, to $5.9 million in 2016. Salaries, benefits, bonus and stock-based compensation in the TASER Weapons increased approximately $1.0 million in 2016 as compared to 2015. The increase for 2016 as compared to 2015 is primarily driven by additional headcount as the Company continued to invest in the development of new CEW related technologies.

Within the Software and Sensors segment, R&D expenses increased $5.6 million, or 29.1%, to $24.7 million in 2016 from the prior year. The Company's Software and Sensors segment was responsible for approximately 81% of the overall expenses in

R&D. Of the $5.6 million increase in R&D for the Software and Sensors segment, $4.0 million related to salaries and benefits, inclusive of bonus and stock-based compensation. Included in the increase of other R&D for the Software and Sensors segment was sales and marketing expenses of $0.9 million related to contractual earn-outs for legacy MediaSolv employees, who work in R&D. The Company remained focused on growing the Software and Sensors segment as it added headcount and external resources to develop new products and services to further advance its scalable cloud-connected device platform. These increases were partially offset by decreases in professional and consulting of $0.6 million related primarily to the Company being more selective in the utilization of consultants as compared to hiring additional employees. The biggest portion of the increase in other R&D expenses related to tooling and supplies that made up $0.8 million of the overall increase. The remaining increase was attributable to the overall growth in of the Software and Sensors R&D department.

Interest and Other Income (Expense), Net

Interest and other income (expense), net was $2.7 million, $(0.4) million and $26,000 for the years ended December 31, 2017, 2016 and 2015, respectively.

For the year ended December 31, 2017, the Company earned interest income of $1.6 million and had gains from foreign currency transaction adjustments of $1.4 million which were partially offset by interest expense of $0.2 million. For the year ended December 31, 2016, interest income of $0.7 million was more than offset by losses on foreign currency transaction adjustments of $1.1 million. For the year ended December 31, 2015, interest income of $0.3 million was partially offset by losses on foreign currency transaction adjustments of $0.2 million.

Provision for Income Taxes

The provision for income taxes was $10.6 million for the year ended December 31, 2017. The effective income tax rate for 2017 was 66.9%. In connection with our initial analysis of the impact of the Tax Act, we were able to make reasonable estimates of the impact of the Tax Act and recorded a provisional net tax expense of $8.0 million in the period ended December 31, 2017, primarily related to the impact of the tax rate reduction on our deferred tax assets and deferred tax liabilities. $0.4 million of the adjustment impacted the valuation allowance. This was partially offset by a $1.8 million benefit related to excess stock-based compensation deductions, as well as a $2.4 million benefit for research and development credits during the year ended December 31, 2017. In addition, an additional valuation allowance in the amount of $1.9 million was recorded as of December 31, 2017, related to certain research and development credits that may not be utilized prior to expiration and losses in certain foreign jurisdictions in which there was a cumulative loss.

The provision for income taxes was $14.2 million for the year ended December 31, 2016. The effective income tax rate for 2016 was 45.1%. The effect of state income taxes of $0.9 million and the tax effects of intercompany transactions of $0.6 million were offset by a benefit of $1.9 million for research and development credits in the current year. The difference between statutory and foreign tax rates of $1.5 million was largely driven by losses incurred in a foreign entity for which no tax benefit will be realized. In addition, a valuation allowance in the amount of $1.8 million was recorded as of December 31, 2016 related to certain research and development tax credits that may not be utilized prior to expiration and losses in certain foreign jurisdictions in which there was a cumulative loss.

The provision for income taxes was $15.4 million for the year ended December 31, 2015. The effective income tax rate for 2015 was 43.7%. The effect of state income tax of $1.1 million was largely offset by a benefit of $1.0 million of research and development credits in the current year. The difference between statutory and foreign tax rates of $2.4 million was largely driven by losses incurred in a newly formed foreign entity for which no tax benefit will be realized, partially reduced by a tax benefit for newly formed foreign entities for which the statutory tax rate was lower than the U.S. statutory tax rate. In addition, valuation allowance in the amount of $1.2 million was recorded.

Net Income

Our net income decreased by $12.1 million to $5.2 million for the year ended December 31, 2017 compared to $17.3 million in 2016. Net income per basic and diluted share was $0.10 for 2017 compared to $0.33 and $0.32 per basic and diluted share, respectively, for 2016.

Our net income decreased by $2.6 million to $17.3 million for the year ended December 31, 2016 compared to $19.9 million 2015. Net income per basic and diluted share was $0.33 and $0.32 for 2016, respectively, compared to $0.37 and $0.36 per basic and diluted share for 2015, respectively.

Liquidity and Capital Resources

Summary

As of December 31, 2017, we had $75.1 million of cash and cash equivalents, an increase of $34.5 million from the end of 2016.

Cash Flows

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

	Year Ended December 31,
	2017				2016				2015
Operating activities	$	18,490			$	17,925			$	46,445
Investing activities	19,082				(3,045		)		(36,009		)
Financing activities	(3,854		)		(34,661		)		603
Effect of exchange rate changes on cash and cash equivalents	736				906				120
Net increase (decrease) in cash and cash equivalents	$	34,454			$	(18,875	)		$	11,159

Operating activities

Net cash provided by operating activities in 2017 of $18.5 million consisted of $5.2 million in net income, the net add-back of non-cash income statement items totaling $28.0 million and a negative $14.8 million net change in operating assets and liabilities. Included in the non-cash items are $8.0 million in depreciation and amortization expense, $1.1 million related to the disposal and abandonment of intangible assets, $15.6 million in stock-based compensation expense, $0.7 million of bond premium amortization and $2.8 million related to deferred income taxes. The most significant increase to the portion of cash from operating activities related to the changes in operating assets and liabilities was a $39.7 million increase in deferred revenue. Of the increase, $7.4 million resulted from additional extended warranty sales, $20.2 million resulted from increased hardware deferred revenue from TASER Assurance Program ("TAP") and OSP sales, and $12.5 million related to prepayments for Software and Sensors services. These increases were offset by increased accounts and notes receivable of $35.3 million, inventory of $11.7 million and prepaid expenses and other assets of $9.0 million during 2017. The increases in accounts and notes receivable were due to increased sales during 2017, specifically sales made under the OSP and TASER 60 installment plans. Operating cash flows were also impacted by increased inventory of $11.7 million in anticipation of higher sales in 2018 and for the Company's National Field Trial Offer for body cameras. The increase in prepaid expenses and other asset accounts of $9.0 million during 2017 was driven primarily by increased deferred cost of product sales of $5.0 million related to increased deferred cost of product and service sales related to contracts where the product had shipped but revenue was deferred due to contractual provisions resulting in the cost of product sales being deferred as an asset to be recognized in subsequent periods when revenue recognition criteria have been met, higher deferred commissions of $2.1 million representing amounts earned when a contract is booked which is then subsequently amortized over the contractual period as products and services are delivered and increased prepaid income taxes of $3.4 million.

Net cash provided by operating activities in 2016 of $17.9 million consisted of $17.3 million in net income, the net add-back of non-cash income statement items totaling $8.9 million and a negative $8.2 million net change in operating assets and liabilities. Included in the non-cash items are $3.7 million in depreciation and amortization expense, $9.4 million in stock-based compensation expense, and $1.3 million of bond premium amortization. These additions were partially offset by an $1.4 million reduction related to excess tax benefit from stock-based compensation and $5.2 million related to deferred income taxes. The most significant increase to the portion of cash from operating activities related to the changes in operating assets and liabilities was a $34.3 million increase in deferred revenue. Of the increase, $8.1 million resulted from additional extended warranty sales, $15.6 million resulted from increased hardware deferred revenue from TAP and OSP sales, and $10.5 million related to prepayments for Software and Sensors services. The Company also had increases in cash provided from operating activities of $17.6 million for increases in accounts payable and accrued liabilities related primarily to increased inventory purchases. These increases were offset by increased prepaid expenses and other current assets of $29.1 million, inventory of $18.7 million and accounts and notes receivable of $13.3 million during 2016. The increases in accounts and notes receivable were due to increased sales during 2016, and increases in inventory resulted from higher anticipated sales for 2017. Long-term accounts receivable increased by $16.4 million during 2016 for sales made under OSP and TASER 60. The increase in prepaid expenses and other asset accounts during 2016 was driven primarily increased prepaid commissions of $1.8 million attributable to higher sales, increased balances under corporate-owed life insurance policies of $1.1 million, $3.3 million of restricted cash related primarily to a customer contract requiring certain contractual payments to be deposited in escrow until approved for release, and $1.7 million of long-term contingent consideration deposited in escrow in connection with a business combination that was completed in December 2016.

Net cash provided by operating activities in 2015 of $46.4 million consisted of $19.9 million in net income, the net add-back of non-cash income statement items totaling $6.3 million, and a positive $20.2 million net change in operating assets and liabilities. Included in the non-cash items was $3.3 million in depreciation and amortization expense, $7.3 million in stock-based compensation expense, and $1.7 million of bond premium amortization. Those additions were partially offset by a $6.9 million reduction related to excess tax benefit from stock-based compensation that was treated as a financing activity for cash flow purposes. The most significant increase to the portion of cash from operating activities related to the changes in operating assets and liabilities was a $15.3 million increase to deferred revenue. Of the increase in deferred revenue, $4.0 million resulted from additional extended warranty sales, $7.3 million resulted from increased hardware deferred revenue from the Company's TAP and OSP sales programs, and $4.0 million related to prepayments for Software and Sensors SaaS and related services. The Company also had increases in cash provided from operating activities of $4.2 million and $3.1 million for decreases in accounts and notes receivable and inventory, respectively. In addition, the $5.9 million increase to cash from operating activities related to increases in accounts payable, accrued and other liabilities that was primarily caused by current income tax expense, which would have resulted in an increase to income tax payable, if it had not been reduced by the excess tax benefit from stock-based compensation discussed above. Those increases were partially offset by increased prepaid expenses and other current assets of $8.6 million during 2015. The increase in other asset accounts during 2015 was driven by primarily by increased prepaid commissions of $2.5 million, increased long-term accounts receivable of $1.2 million for sales made under OSP, increased balances under corporate-owed life insurance policies of $1.1 million, and a deposit made with a foreign component manufacturer of $2.6 million related to future services.

Investing activities

Primarily as the result of investments that matured during the year, we generated $19.1 million from investing activities in 2017. Calls and maturities on our investments, net of purchases, were $41.1 million. During 2017, we invested $10.6 million for the acquisition of Dextro, Inc., to continue building upon the Company's Axon Artificial Intelligence group, and for the acquisition of Breon, the Company's former distributor in Australia. The Company also invested $11.4 million in the purchase of property and equipment and intangibles, net of proceeds related to disposals.

Primarily as a result of investing cash generated from operating activities, we used $3.0 million in investing activities in 2016. Calls and maturities on our investments, net of purchases, were $8.9 million. During 2016, we invested $3.5 million for the acquisition of developed technology and hiring of personnel to form the Axon Artificial Intelligence group. The Company also invested $8.4 million in the purchase of property and equipment and intangibles, net of proceeds related to disposals.

Primarily as a result of investing cash generated from operating activities, the Company used $36.0 million for investing activities in 2015. Purchases of investments, net of calls and maturities, were $18.4 million. During 2015, net cash of $11.2 million was used for the acquisitions of MediaSolv Solutions Corporation and Tactical Safety Responses LTD. The Company also invested $6.5 million in the purchase of property and equipment and intangibles.

Financing activities

Net cash used by financing activities was $3.9 million for the year ended December 31, 2017. During 2017, the Company paid payroll taxes of $3.5 million on behalf of employees who net-settled stock awards during the period. Additionally, the Company paid $1.8 million for contingent consideration amounts earned during 2017 related to the acquisition of certain assets from Fossil Group, Inc. and Fossil Vietnam, Limited Liability Company in 2016. These decreases were partially offset by $1.4 million of proceeds from the exercise of stock options.

Net cash used by financing activities was $34.7 million for the year ended December 31, 2016. During 2016, the Company repurchased $33.7 million of its common stock, which was purchased for a weighted average cost of $18.90 per share, inclusive of applicable administrative costs. Additionally, the Company paid payroll taxes of $1.8 million on behalf of employees who net-settled stock awards during the period. These decreases were partially offset by $0.5 million of proceeds from the exercise of stock options, and $1.4 million of excess tax benefit from stock-based compensation. The purchase of common stock was made under a stock repurchase program authorized by the Company's Board of Directors.

Net cash provided by financing activities was $0.6 million for the year ended December 31, 2015. During 2015, the Company repurchases $7.6 million of the Company’s common stock, which was purchased for a weighted average cost of $25.86 per share. The Company also paid payroll taxes of $1.4 million on behalf of employees who net-settled stock awards during the year. These decreases were partially offset by $2.7 million of proceeds from the exercise of stock options, and $6.9 million of excess tax benefit from stock proceeds. The purchase of common stock was made under a stock repurchase program authorized by the Company’s Board of Directors.

Liquidity and Capital Resources

Our most significant source of liquidity continues to be funds generated by operating activities and available cash and cash equivalents. In addition, our $10.0 million revolving credit facility is available for additional working capital needs or investment opportunities. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. The line is secured by substantially all of the assets of the Company, and bears interest at varying rates, currently LIBOR plus 1.25% or Prime less 0.50%. As of December 31, 2017, we had letters of credit outstanding of $2.7 million, leaving the net amount available for borrowing of $7.3 million. The facility matures on December 31, 2018. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our revolving credit facility. At December 31, 2017 and 2016, there were no borrowings under the line.

Our agreement with the bank requires us to comply with a maximum funded debt to EBITDA ratio, as defined, of no greater than 2.00 to 1.00 based upon a trailing twelve-month period. At December 31, 2017, the Company’s funded debt to EBITDA ratio was 0.34 to 1.00.

TASER 60 installment purchase arrangements typically involve amounts invoiced in five equal installments at the beginning of each year of the five-year term. This is in contrast to a traditional CEW sale in which the entire amount being charged for the hardware is invoiced upon shipment. This impacts liquidity in a commensurate fashion, with the cash for the TASER 60 arrangement received in five annual installments rather than up front. It is our strategic intent to shift an increasing amount of our business to a subscription model, to better match the municipal budgeting process of our customers as well as to allow for multiple product

offerings to be bundled into existing subscriptions. We carefully considered the cash flow impacts of this strategic shift and regularly revisit our cash flow forecast with the goal of maintaining a comfortable level of liquidity as we introduce commercial offerings in which we incur upfront cash costs to produce and fulfill hardware sales ahead of the cash inflows from our customers. We anticipate, and have prepared for, the majority of our arrangements in both reportable segments to be offered in similar subscription-type offerings over the coming years.

Based on our strong balance sheet and the fact that we had just $0.1 million in total long-term debt and capital lease obligations at December 31, 2017, we believe financing will be available, both through our existing credit line and possible additional financing. However, there is no assurance that such funding will be available on terms acceptable to us, or at all.

We believe that our sources of funding will be sufficient to satisfy our currently anticipated cash requirements including capital expenditures, working capital requirements, potential acquisitions and other liquidity requirements through at least the next 12 months. The Company and its Board of Directors may consider repurchases of our common stock. Further repurchases of our common stock would take place on the open market, would be financed with available cash and are subject to authorization as well as market and business conditions.

Contractual Obligations

The following table outlines our future contractual financial obligations by period in which payment is expected, as of December 31, 2017 (dollars in thousands):

		Total				Less than 1 Year				1 - 3 Years				3 - 5 Years				More than 5 Years
Non-cancelable operating leases		$	7,655			$	2,313			$	3,129			$	2,170			$	43
Capital leases including interest		116				40				76				—				—
Open purchase orders		51,855				51,855				—				—				—
Total contractual obligations		$	59,626			$	54,208			$	3,205			$	2,170			$	43

Open purchase orders in the above table represent both cancelable and non-cancelable purchase orders with key vendors, which are included in this table due to the Company’s strategic relationships with these vendors.

We are subject to U.S. Federal income tax as well as income taxes imposed by several states and foreign jurisdictions. As of December 31, 2017, we had $4.2 million of gross unrecognized tax benefits related to uncertain tax positions. The settlement period for our long-term income tax liabilities cannot be determined; however, the liabilities are expected to increase by approximately $0.2 million within the next 12 months.

Off-Balance Sheet Arrangements

The discussion of off-balance sheet arrangements in Note 9 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K is incorporated by reference herein.

Critical Accounting Estimates

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

Product Warranties

The Company warranties its CEWs, Axon cameras and certain related accessories from manufacturing defects on a limited basis for a period of one year after purchase and, thereafter, will replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold when revenue is recorded for the related product. Future warranty costs are estimated based on historical data related to warranty claims on a quarterly basis and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure or other issue that could result in larger than anticipated warranty claims from customers. The warranty reserve is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. As of December 31, 2017 and 2016, our warranty reserve was approximately $0.6 million and $0.8 million, respectively. Warranty expense (recoveries) for the years ended December 31, 2017, 2016 and 2015 was $0.1 million, $0.6 million and $(0.1) million, respectively. The decrease in warranty reserve and related expense as of and for the year ended ended December 31, 2017 was primarily driven by lower than initially expected warranty claims for the Axon Body 2 on-officer body camera. As of December 31, 2017, the Company's warranty reserve included initial reserves related to the new Axon Flex 2 on-officer camera and Axon Fleet in-car camera systems.

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

Inventory

Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average cost of raw materials, which approximates the first-in, first-out (“FIFO”) method and includes allocations of manufacturing labor and overhead. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories, as well as trial and evaluation inventories to their net realizable value. These provisions are based on management’s best estimate after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions among other factors. Management evaluates inventory costs for abnormal costs due to excess production capacity and treats such costs as period costs.

During the year ended December 31, 2017, the Company recorded provisions to reduce inventories to their lower of cost and net realizable value of approximately $2.0 million compared to $1.2 million during 2016. The increase in provisions made during 2017 was primarily attributable to increased deployments of trial and evaluation equipment and was also attributable to the phasing out of certain previous generations of its CEWs, the legacy TASER X26, TASER M26 and TASER C2 models. The remaining increase in the provision for 2017 was driven by analyses looking at projected sales data for existing products and making corresponding adjustments to state inventories at their lower of cost and net realizable value.

Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable

The Company derives revenue from two primary sources: (1) the sale of physical products, including CEWs, Axon cameras, corresponding hardware extended warranties, and related accessories such as Axon docks, cartridges and batteries, among others, and (2) subscription to the Company's Evidence.com digital evidence management software as a service ("SaaS") (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, the Company also recognizes training, professional services and revenue related to other software and SaaS services. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, title has transferred, the price is fixed and collectability is reasonably assured. Contractual arrangements may contain explicit customer acceptance provisions, and under such arrangements, the Company defers recognition of revenue until formal customer acceptance is received. Extended warranty revenue, SaaS revenue and related data storage revenue are recognized ratably over the term of the contract commencing on a pre-determined date subsequent to the delivery of the hardware. Training and professional service revenues are generally recorded once the services are completed.

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

For the the years ended December 31, 2017, 2016 and 2015, the composition of revenue recognized from arrangements containing multiple elements and those not containing multiple elements was as follows:

	For the Year Ended December 31, 2017
	TASER Weapons							Software and Sensors							Total
Arrangements with multiple elements	$	53,865			23.0	%		$	102,529			93.8	%		$	156,394			45.5	%
Arrangements without multiple elements	180,647				77.0			6,757				6.2			187,404				54.5
Total	$	234,512			100.0	%		$	109,286			100.0	%		$	343,798			100.0	%

	For the Year Ended December 31, 2016
	TASER Weapons							Software and Sensors							Total
Arrangements with multiple elements	$	34,558			17.1	%		$	56,270			85.8	%		$	90,828			33.9	%
Arrangements without multiple elements	168,086				82.9			9,331				14.2			177,417				66.1
Total	$	202,644			100.0	%		$	65,601			100.0	%		$	268,245			100.0	%

	For the Year Ended December 31, 2015
	TASER Weapons							Software and Sensors							Total
Arrangements with multiple elements	$	11,141			6.9	%		$	26,489			74.6	%		$	37,630			19.0	%
Arrangements without multiple elements	151,234				93.1			9,028				25.4			160,262				81.0
Total	$	162,375			100.0	%		$	35,517			100.0	%		$	197,892			100.0	%

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

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

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

Deferred revenue consists of payments received in advance related to products and services for which the criteria for revenue recognition have not yet been met. Deferred revenue that will be recognized during the subsequent twelve month period from the balance sheet date is recorded as current deferred revenue and the remaining portion is recorded as long-term. Generally, customers are billed in annual installments. See Note 7 for further disclosures about the Company’s deferred revenue.

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

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

Valuation of Goodwill, Intangibles and Long-lived Assets

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

Circumstances that might indicate long-lived assets might not be recoverable could include, but are not limited to, a change in the product mix, a change in the way products are created, produced or delivered, or a significant change in the way the Company's products are branded and marketed. When performing a review for recoverability, management estimates the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair value computed using discounted cash flows. During the 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. No impairment losses were recorded during the years ended December 31, 2016 and 2015.

Income Taxes

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

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Management must also assess whether uncertain tax positions as filed could result in the recognition of a liability for possible interest and penalties if any. We have completed research and development tax credit studies which identified approximately $15.2 million in tax credits for federal, Arizona and California income tax purposes related to the 2003 through 2017 tax years, net of the federal benefit on the Arizona and California research and development tax credits. Management determined that it was more likely than not that the full benefit of the research and development tax credit would not be sustained on examination and accordingly, has established a liability for unrecognized tax benefits of $4.1 million as of December 31, 2017. In addition, we established a $0.1 million liability related to uncertain tax positions for certain state income tax liabilities, for a total unrecognized tax benefit at December 31, 2017 of $4.2 million. Management expects the amount of the unrecognized tax benefit liability to increase by approximately $0.2 million within the next 12 months. Should the unrecognized tax benefit of $4.2 million be recognized, the Company’s effective tax rate would be favorably impacted. Our estimates are based on the information available to us at the time we prepare the income tax provisions. Our income tax returns are subject to audit by federal, state, and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.

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

In preparing our consolidated financial statements, management assesses the likelihood that our deferred tax assets will be realized from future taxable income. In evaluating our ability to recover our deferred income tax assets, management considers all available positive and negative evidence, including operating results, ongoing tax planning and forecasts of future taxable

income on a jurisdiction by jurisdiction basis. A valuation allowance is established if we determine that it is more likely than not that some portion or all of the net deferred tax assets will not be realized.

Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of December 31, 2017, the Company would need to generate approximately $56.0 million of pre-tax book income in order to realize the net deferred tax assets for which a benefit has been recorded. This estimate considers the reversal of approximately $14.6 million of gross deferred tax liabilities, $3.5 million tax-effected. We have state net operating losses ("NOLs") of $4.5 million, which produce deferred tax assets of $0.2 million, which expire at various dates between 2019 and 2036. We anticipate the Company’s future income to continue to trend upward from our 2017 results, with sufficient pre-tax book income to realize a large portion of our deferred tax assets. However, based on specific income projections in years in which certain tax assets are set to expire, and cumulative losses in certain foreign tax jurisdictions, a reserve of approximately $5.4 million has been recorded as a valuation allowance against deferred tax assets as of December 31, 2017.

Stock-Based Compensation

We have historically granted stock-based compensation to key employees and non-employee directors as a means of attracting and retaining highly qualified personnel. The Company recognizes expense related to stock-based payment transactions in which it receives employee services in exchange for equity instruments of the Company. Stock-based compensation expense for RSUs is measured based on the closing fair market value of the Company’s common stock on the date of grant. The Company recognizes stock-based compensation expense over the award’s requisite service period on a straight-line basis for time-based RSUs and on a graded basis for RSUs that are contingent on the achievement of performance conditions. The Company recognizes forfeitures as they occur as a reduction to stock-based compensation expense and to additional paid-in-capital.

The Company calculates the fair value of stock options using the Black-Scholes-Merton option pricing valuation model, which incorporates various assumptions including expected volatility, expected life, expected dividends and risk-free interest rates. No options were awarded during the years ended December 31, 2017, 2016 or 2015.

We have granted a total of approximately 2.0 million performance-based awards (options and restricted stock units) of which approximately 0.7 million are outstanding as of December 31, 2017, the vesting of which is contingent upon the achievement of certain performance criteria including the successful development and market acceptance of future product introductions as well as our future sales targets and operating performance. These awards will vest and compensation expense will be recognized based on management’s best estimate of the probability of the performance criteria being satisfied using the most currently available projections of future product adoption and operating performance, adjusted at each balance sheet date. Changes in the subjective and probability-based assumptions can materially affect the estimate of the fair value of stock-based compensation and consequently, the related amount recognized in our statements of operations.

Contingencies and Accrued Litigation Expense

We are subject to the possibility of various loss contingencies arising in the ordinary course of business, including product-related litigation. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. Refer to Note 9 of our consolidated financial statements for further discussion.