Axon Enterprise (AXON) 10-K risk factor changes: FY2018 vs FY2017

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 [removed: Securities and Exchange Commission (the “SEC”)] [added: SEC] before making any investment decision with respect to our securities.

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

We substantially depend on sales of our TASER [added: 7, TASER] X26P and X2 CEWs, and if these products do not continue to be widely accepted, our growth prospects will be diminished.

In the years ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015,] [added: 2016,] we derived [added: a significant portion of] our revenues [removed: predominantly] from sales of TASER CEW brand devices and related cartridges, and expect to depend on sales of these products for a [removed: predominant] [added: significant] portion of our revenue [removed: fo] [added: for] the foreseeable future.

The success of our [removed: Evidence.com] [added: Axon Evidence] software as a service (“SaaS”) delivery model is materially dependent on acceptance of this business model by our law enforcement customers.

A substantial number of law enforcement agencies may be slow to adopt our [removed: Evidence.com] [added: Axon Evidence] digital data evidence management and storage solution, requiring extended periods of trial and evaluation.

Delays in successfully securing widespread adoption of [removed: Evidence.com] [added: Axon Evidence] services could adversely affect our revenues, profitability and financial condition.

Our [removed: increasing] focus on our SaaS platform also presents new and complex development issues.

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

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

If our security measures [added: or those of our third-party cloud storage providers] are breached and unauthorized access is obtained to customers’ data or our data, our network, data centers and service may be perceived as not being secure, customers may curtail or stop using our service and we may incur significant legal and financial exposure and liabilities.

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

[removed: Third-parties] [added: Third parties] may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our data or our customers’ data.

Because the techniques used to obtain unauthorized access, or to sabotage systems, change [removed: frequently] [added: frequently, grow more complex over time,] and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.

Moreover, our security measures [removed: and/or] [added: and] those of our [removed: third party] [added: third-tparty] service providers [removed: and/or] [added: or] customers may not detect such security breaches if they occur.

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

We currently serve our [removed: Evidence.com] [added: Axon Evidence] customers from third-party cloud storage providers based in the U.S. and other countries.

In the past, we believe that [removed: the Company’s] [added: our] sales were adversely impacted by negative publicity surrounding our products or the use of our products.

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

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 [added: and contract assets.]

SaaS revenue for [removed: Evidence.com] [added: Axon Evidence] is recognized over the terms of the contracts, which may be several years, and, as such, trends in new business may not be immediately reflected in our operating results.

[removed: Although we carry product liability insurance, we do] [added: We] incur significant legal expenses [removed: within our self-insured retention] in defending these [removed: lawsuits] [added: cases,] and significant litigation could also result in a diversion of management’s attention and resources, negative publicity and a potential award of monetary damages in excess of our insurance coverage.

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 whom we believe have infringed on our intellectual property, infringement litigation filed against [removed: the Company,] [added: us,] litigation against a competitor and litigation filed by a former distributor against [removed: the Company.][added: us.]

The validity and breadth of claims covered in technology patents involve complex legal and factual questions, and the resolution of such claims [removed: may be highly uncertain, lengthy and expensive.]

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

Each [removed: foreign] patent is examined and granted according to the law of the country where it was filed independent of whether a U.S. patent on similar technology was granted.

U.S. export law, or the laws of some foreign countries, may prohibit us from satisfying the requirements for working the invention, creating a risk that some of our [removed: foreign] [added: international] patents may become unenforceable.

[removed: Our CEW devices are banned from private citizen purchase or use] [added: As of December 31, 2018, the possession of stun guns] by [removed: statute] [added: the general public, including our CEW devices, is prohibited] in [removed: five] [added: four] states: Hawaii, Massachusetts, New York, and Rhode Island, as well as in the District of Columbia.

[removed: Foreign] [added: International] regulation: Certain [removed: foreign] jurisdictions prohibit, restrict, or require a permit for the importation, sale, possession or use of CEWs, including in some countries by law enforcement agencies, limiting our international sales opportunities.

These numerous and sometimes conflicting laws and regulations include, among others, [added: environmental regulations,] 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.

[removed: Environmental] [added: In particular, environmental] legislation within the [removed: European Union (“EU”)] [added: EU] may increase our cost of doing business internationally and impact our revenues from EU countries as we comply with and implement these requirements.

[added: 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.

Consequently, our results could be [removed: positively or] negatively affected by the rules and regulations adopted from time to time by the FCC or regulatory agencies in other countries.

Regulatory changes in current spectrum bands may also [removed: provide opportunities or may] require modifications to some of our products so they can continue to be manufactured and marketed.

We depend on certain domestic and [removed: foreign] [added: international] suppliers for the delivery of components used in the assembly of our products.

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

These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, [removed: that] [added: expected synergies are not achieved,] we do not realize a satisfactory return on our investment, [removed: 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: indefinite-lived] [added: intangible] assets become impaired, we may be required to record a significant charge to earnings.

We test goodwill [added: and non-amortizable intangible assets] for impairment at least annually.

If such goodwill or [removed: 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.

These products include, but are not limited to, Axon Body 3, Axon Records, Axon Dispatch, and future generations of the TASER CEW and Axon Fleet.

Significant delays in new product or service releases

Although we have developed systems and processes that are designed to protect our data and user data, to prevent data loss, and to prevent or detect security breaches, we cannot assure that such measures will provide absolute security, and we may incur significant costs in protecting against or remediating cyber-attacks.

A security breach could expose us to a risk of loss or inappropriate use of proprietary and sensitive data, or the denial of access to this data.

Defects or disruptions in our services could impact demand for our services and subject us to substantial liability.

Since our customers use our services for important aspects of their operations, any errors, defects, disruptions in service or other performance problems could hurt our reputation and may damage our customers’ operations.

As a result, customers could elect to not renew our services or delay or withhold payment to us.

We could also lose future sales or customers may make warranty or other claims against us, which could result in an increase in our warranty expense, an increase in collection cycles for and decline in the collectability of accounts receivable, and an increase in the expense and risk of litigation.

Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, content, competition, consumer protection, and other matters.

Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or otherwise harm our business.

We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, including privacy, data protection and personal information, rights of publicity, content, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, electronic contracts and other communications, competition, consumer protection, telecommunications, product liability, taxation, economic or other trade prohibitions or sanctions, securities law compliance, and online payment services.

The introduction of new products, expansion of our activities in certain jurisdictions, or other actions that we may take may subject us to additional laws, regulations, or other government scrutiny.

In addition, foreign data protection, privacy, content, competition, and other laws and regulations can impose different obligations or be more restrictive than those in the United States.

These U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change.

As a result, the application, interpretation, and enforcement of these laws and regulations are often uncertain and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices.

We are also subject to laws and regulations that dictate whether, how, and under what circumstances we can transfer, process and/or receive certain data that is critical to our operations, including data shared between countries or regions in which we operate and data shared among our products and services.

For example, in 2016, the European Union and United States agreed to an alternative transfer framework for data transferred from the European Union to the United States, called the Privacy Shield, but this new framework is subject to an annual review that could result in changes to our obligations and also may be challenged by national regulators or private parties.

If one or more of the legal bases for transferring data from Europe to the United States is invalidated, if we are unable to transfer data between and among countries and regions in which we operate, or if we are prohibited from sharing data among our products and services, it could affect the manner in which we provide our services or adversely affect our financial results.

Proposed or new legislation and regulations could also significantly affect our business.

There currently are a number of proposals pending before federal, state, and foreign legislative and regulatory bodies.

In addition, the new European General Data Protection Regulation ("GDPR") took effect in May 2018 and applies to all of our products and services that provide service in Europe.

The GDPR includes operational requirements for companies that receive or process personal data of residents of the European Union ("EU") that are different than those currently in place in the European Union.

For example, we may be required to obtain consent and/or offer new controls to existing and new users in Europe before processing data for certain aspects of our service.

In addition, the GDPR includes significant penalties for non-compliance.

Similarly, there are a number of legislative proposals in the United States, at both the federal and state level, that could impose new obligations in areas affecting our business, such as liability for copyright infringement by third parties.

In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services.

These laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices.

may be highly uncertain, lengthy and expensive.

We are a defendant in a litigation matter filed by Digital Ally Inc. (“Digital”) in the District of Kansas alleging patent infringement regarding our Axon Signal technology.

For additional discussion of this matter, refer to Note 9 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

We believe the patent in question is both invalid and not infringed, and we do not currently believe it is probable that we will incur a material loss.

If, contrary to our expectations, the court allows Digital’s entire market value and treble damage theories to proceed on summary judgment rulings, and if Digital ultimately succeeds on such theories at trial, the outcome could have an adverse effect on our results of operations in the period in which a liability is recognized and on our cash flows for the period in which any damages are paid.

Government regulations applied to our products could materially and adversely affect our business.

Axon body worn cameras and fleet vehicle cameras are subject to regulations including 21-CFR-47 Part 15, Subpart C for Bluetooth and WiFi transmission, US-DOT/UN 38.3 for transportation of lithium batteries, and FCC KDB 447498 + IEEE 1528-2013 Specific Absorption Rate ("SAR") regulations.

These regulations are also beginning to affect CEWs with signal performance power magazine ("SPPM") technology and future CEWs implementing wireless

technology into the feature set.

Compliance with government regulations could increase our operations and product costs and impact our future financial results.

Our business in the United Kingdom may be negatively impacted by uncertainty regarding the exit of the United Kingdom from the European Union (commonly referred to as "Brexit").

The exit itself could negatively impact the

United Kingdom and other economies, which could adversely affect sales of our products and services.

At any point, due to external factors and opinions.

We are seeing a large number of customers upgrade their devices to the X2 or the new X26P device.

This is a trend we expect to continue.

Interruptions or delays in service from our third-party cloud storage providers for our Evidence.com service, or the loss or corruption of digitally stored evidence, would impair the delivery of our service and harm our business.

Government regulations applied to our CEW products may affect our markets for and sales of these products.

In addition, similar

Regulations related to conflict minerals may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.

The U.S. Securities and Exchange Commission ("SEC") has enacted disclosure requirements for companies that use certain minerals and metals, known as “conflict minerals,” in their products, whether or not these products are manufactured by third-parties.

These requirements require companies to perform due diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries.

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 metals used in our products.

In addition, these new requirements could adversely affect the sourcing, availability and pricing of minerals used in our products.

Because our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation.

In such an event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict-free.

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 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."

We have initiated remedial measures, but if our remedial measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements, and we could be required to restate our financial results.

In addition, if we are unable to successfully remediate this material weakness and if we are unable to produce accurate and timely financial statements, it could adversely impact our business and our stock price.

[removed: ][added: ]

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

| | 2017 [added: (1)] | | | | | | | 2016 [added: (1)] | | | | | | | [removed: 2015] | | | | | |

| Net sales from products | $ | [removed: 285,859] [added: 327,635] | | | [removed: 83.1] [added: 78.0] | % | | $ | [removed: 238,573] [added: 285,859] | | | [removed: 88.9] [added: 83.1] | % | | $ | [removed: 185,230] [added: 238,573] | | | [removed: 93.6] [added: 88.9] | % |

| Net sales from services | [removed: 57,939] [added: 92,433] | | | | [removed: 16.9] [added: 22.0] | [added: %] | | [removed: 29,672] [added: 57,939] | | | | [removed: 11.1] [added: 16.9] | [added: %] | | [removed: 12,662] [added: 29,672] | | | | [removed: 6.4] [added: 11.1] | [added: %] |

| Net sales | [removed: 343,798] [added: 420,068] | | | | 100.0 | [added: %] | | [removed: 268,245] [added: 343,798] | | | | 100.0 | [added: %] | | [removed: 197,892] [added: 268,245] | | | | 100.0 | [added: %] |

| Cost of product sales | [removed: 117,997] [added: 139,337] | | | | [removed: 34.3] [added: 33.2] | [added: %] | | [removed: 91,536] [added: 117,997] | | | | [removed: 34.1] [added: 34.3] | [added: %] | | [removed: 65,022] [added: 91,536] | | | | [removed: 32.9] [added: 34.1] | [added: %] |

| Cost of service sales | [removed: 18,713] [added: 22,148] | | | | [removed: 5.4] [added: 5.3] | [added: %] | | [removed: 6,173] [added: 18,713] | | | | [removed: 2.3] [added: 5.5] | [added: %] | | [removed: 4,223] [added: 6,173] | | | | [removed: 2.1] [added: 2.3] | [added: %] |

| Cost of sales | [removed: 136,710] [added: 161,485] | | | | [removed: 39.8] [added: 38.5] | [added: %] | | [removed: 97,709] [added: 136,710] | | | | [removed: 36.4] [added: 39.8] | [added: %] | | [removed: 69,245] [added: 97,709] | | | | [removed: 35.0] [added: 36.4] | [added: %] |

| Gross margin | [removed: 207,088] [added: 258,583] | | | | [removed: 60.2] [added: 61.5] | [added: %] | | [removed: 170,536] [added: 207,088] | | | | [removed: 63.6] [added: 60.2] | [added: %] | | [removed: 128,647] [added: 170,536] | | | | [removed: 65.0] [added: 63.6] | [added: %] |

| Sales, general and administrative | [removed: 138,692] [added: 156,886] | | | | [removed: 40.3] [added: 37.3] | [added: %] | | [removed: 108,076] [added: 138,692] | | | | 40.3 | [added: %] | | [removed: 69,698] [added: 108,076] | | | | [removed: 35.2] [added: 40.3] | [added: %] |

| Research and development | [removed: 55,373] [added: 76,856] | | | | [removed: 16.1] [added: 18.3] | [added: %] | | [removed: 30,609] [added: 55,373] | | | | [removed: 11.4] [added: 16.1] | [added: %] | | [removed: 23,614] [added: 30,609] | | | | [removed: 11.9] [added: 11.4] | [added: %] |

| Total operating expenses | [removed: 194,065] [added: 233,742] | | | | [removed: 56.4] [added: 55.6] | [added: %] | | [removed: 138,685] [added: 194,065] | | | | [removed: 51.7] [added: 56.4] | [added: %] | | [removed: 93,312] [added: 138,685] | | | | [removed: 47.2] [added: 51.7] | [added: %] |

| Income from operations | [removed: 13,023] [added: 24,841] | | | | [removed: 3.8] [added: 5.9] | [added: %] | | [removed: 31,851] [added: 13,023] | | | | [removed: 11.9] [added: 3.8] | [added: %] | | [removed: 35,335] [added: 31,851] | | | | [removed: 17.9] [added: 11.9] | [added: %] |

| Interest and other income (expense), net | [removed: 2,738] [added: 3,263] | | | | 0.8 | [added: %] | | [removed: (354] [added: 2,738] | | [removed: )] | | [removed: (0.1] [added: 0.8] | [removed: )] [added: %] | | [removed: 26] [added: (354] | | [added: )] | | [removed: —] [added: (0.1] | [added: )%] |

| Income before provision for income taxes | [removed: 15,761] [added: 28,104] | | | | [removed: 4.6] [added: 6.7] | [added: %] | | [removed: 31,497] [added: 15,761] | | | | [removed: 11.7] [added: 4.6] | [added: %] | | [removed: 35,361] [added: 31,497] | | | | [removed: 17.9] [added: 11.7] | [added: %] |

| Provision [added: (benefit)] for income taxes | [removed: 10,554] [added: (1,101] | | [added: )] | | [removed: 3.1] [added: (0.3] | [added: )%] | | [removed: 14,200] [added: 10,554] | | | | [removed: 5.3] [added: 3.1] | [added: %] | | [removed: 15,428] [added: 14,200] | | | | [removed: 7.8] [added: 5.3] | [added: %] |

| Net income | $ | [removed: 5,207] [added: 29,205] | | | [removed: 1.5] [added: 7.0] | % | | $ | [removed: 17,297] [added: 5,207] | | | [removed: 6.4] [added: 1.5] | % | | $ | [removed: 19,933] [added: 17,297] | | | [removed: 10.1] [added: 6.4] | % |

| United States | $ | [removed: 282,810] [added: 335,310] | | | [removed: 82.3] [added: 79.8] | % | | $ | [removed: 218,757] [added: 282,810] | | | [removed: 81.6] [added: 82.3] | % | | $ | [removed: 161,803] [added: 218,757] | | | [removed: 81.8] [added: 81.6] | % |

| Other Countries | [removed: 60,988] [added: 84,758] | | | | [removed: 17.7] [added: 20.2] | [added: %] | | [removed: 49,488] [added: 60,988] | | | | [removed: 18.4] [added: 17.7] | [added: %] | | [removed: 36,089] [added: 49,488] | | | | [removed: 18.2] [added: 18.4] | [added: %] |

| Total | $ | [removed: 343,798] [added: 420,068] | | | 100.0 | % | | $ | [removed: 268,245] [added: 343,798] | | | 100.0 | % | | $ | [removed: 197,892] [added: 268,245] | | | 100.0 | % |

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

[removed: Within] [added: Revenue from our “products” in] the Software and Sensors [removed: segment,] [added: segment are generally from sales of sensors, including on-officer body cameras, Axon Fleet cameras, other hardware sensors, warranties on sensors, and other products, and is sometimes referred to as "Sensors and Other revenue." Revenue from our “services” in] the [removed: Company] [added: Software and Sensors segment comprise sales related to the Axon Cloud, which] includes [added: Axon Evidence, cloud-based evidence management software revenue, other recurring cloud-hosted software revenue and related professional services, and is sometimes referred to as "Axon Cloud revenue." Within the Software and Sensors segment, we include] only revenues and costs attributable to that segment which [added: costs] include: costs of sales for both products and services, direct labor, selling expenses for the sales team, product [removed: manage] [added: management and] R&D for products included, or to be included, within the Software and Sensors segment.

All other costs are included in the TASER [removed: Weapons] segment.

[removed: Net Sales -] For the Years Ended December 31, 2017 and 2016

| | 2017 [added: (1)] | | | | | | | 2016 [added: (1)] | | | | | | | | | | | | |

| TASER [removed: Weapons] segment: | | | | | | | | | | | | | | | | | | | | |

| TASER X2 | 81,417 | | | | 23.7 | [added: %] | | 52,665 | | | | 19.6 | [added: %] | | 28,752 | | | | 54.6 | [added: %] |

| TASER Pulse and Bolt | 4,340 | | | | 1.3 | [added: %] | | 3,580 | | | | 1.3 | [added: %] | | 760 | | | | 21.2 | [added: %] |

| [removed: Single cartridges] [added: Cartridges] | 63,203 | | | | 18.4 | [added: %] | | 52,305 | | | | 19.5 | [added: %] | | 10,898 | | | | 20.8 | [added: %] |

| Extended warranties | 12,426 | | | | 3.6 | [added: %] | | 9,880 | | | | 3.7 | [added: %] | | 2,546 | | | | 25.8 | [added: %] |

| Other | 8,700 | | | | 2.5 | [added: %] | | 11,724 | | | | 4.4 | [added: %] | | (3,024 | | ) | | (25.8 | [removed: )] [added: )%] |

| TASER [removed: Weapons] segment | 234,512 | | | | 68.2 | [added: %] | | 202,644 | | | | 75.5 | [added: %] | | 31,868 | | | | 15.7 | [added: %] |

| Axon Body | 15,184 | | | | 4.4 | [added: %] | | 12,911 | | | | 4.8 | [added: %] | | 2,273 | | | | 17.6 | [added: %] |

| Axon Flex | 10,083 | | | | 2.9 | [added: %] | | 5,323 | | | | 2.0 | [added: %] | | 4,760 | | | | 89.4 | [added: %] |

| Axon Fleet | 2,954 | | | | 0.9 | [added: %] | | — | | | | — | [added: %] | | 2,954 | | | | * | |

| Axon Dock | 9,736 | | | | 2.8 | [added: %] | | 7,422 | | | | 2.8 | [added: %] | | 2,314 | | | | 31.2 | [added: %] |

| [removed: Evidence.com] [added: Axon Evidence and cloud services] | 57,841 | | | | 16.8 | [added: %] | | 29,260 | | | | 10.9 | [added: %] | | 28,581 | | | | 97.7 | [added: %] |

| TASER [removed: CAM] [added: Cam] | 3,358 | | | | 1.0 | [added: %] | | 4,888 | | | | 1.8 | [added: %] | | (1,530 | | ) | | (31.3 | [removed: )] [added: )%] |

| Extended warranties | 7,110 | | | | 2.1 | [added: %] | | 3,710 | | | | 1.4 | [added: %] | | 3,400 | | | | 91.6 | [added: %] |

Overview

Axon is a market-leading provider of law enforcement technology solutions.

Our core mission is to protect life.

We fulfill that mission through developing hardware and software products that advance the long term objectives of a) obsoleting the bullet, b) reducing social conflict, and c) enabling a fair and effective justice system.

2019 Outlook

For the year ending December 31, 2019, we expect revenue of $480 million to $490 million.

We expect a normalized income tax rate of between 20% and 25%; this rate can fluctuate depending on geography of income and the effects of discrete items, including changes in our stock price.

| | 2018 | | | | | | | 2017 (1) | | | | | | | 2016 (1) | | | | | |

(1) Amounts for the years ended December 31, 2017 and 2016 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.

International revenue grew 39.0% from 2017 to 2018, driven by increased sales in Australia, France, Singapore and the U.K.

Within the Software and Sensors segment, we specify sales of products and services.

Net Sales

| | 2018 | | | | | | | 2017 (1) | | | | | | | | | | | | |

| TASER 7 | $ | 7,358 | | | 1.8 | % | | $ | — | | | — | % | | $ | 7,358 | | | * | |

| TASER X26P | 70,638 | | | | 16.8 | % | | 64,426 | | | | 18.7 | % | | 6,212 | | | | 9.6 | % |

| TASER X2 | 78,837 | | | | 18.8 | % | | 81,417 | | | | 23.7 | % | | (2,580 | | ) | | (3.2 | )% |

| TASER Pulse and Bolt | 5,182 | | | | 1.2 | % | | 4,340 | | | | 1.3 | % | | 842 | | | | 19.4 | % |

| Cartridges | 68,258 | | | | 16.3 | % | | 63,203 | | | | 18.4 | % | | 5,055 | | | | 8.0 | % |

| Extended warranties | 15,753 | | | | 3.8 | % | | 12,426 | | | | 3.6 | % | | 3,327 | | | | 26.8 | % |

| Other | 7,089 | | | | 1.7 | % | | 8,700 | | | | 2.5 | % | | (1,611 | | ) | | (18.5 | )% |

| TASER segment | 253,115 | | | | 60.4 | % | | 234,512 | | | | 68.2 | % | | 18,603 | | | | 7.9 | % |

| Axon Body | 21,883 | | | | 5.2 | % | | 15,184 | | | | 4.4 | % | | 6,699 | | | | 44.1 | % |

| Axon Flex | 6,509 | | | | 1.5 | % | | 10,083 | | | | 2.9 | % | | (3,574 | | ) | | (35.4 | )% |

| Axon Fleet | 12,527 | | | | 3.0 | % | | 2,954 | | | | 0.9 | % | | 9,573 | | | | 324.1 | % |

| Axon Dock | 10,706 | | | | 2.5 | % | | 9,736 | | | | 2.8 | % | | 970 | | | | 10.0 | % |

| Axon Evidence and cloud services | 90,291 | | | | 21.5 | % | | 57,841 | | | | 16.8 | % | | 32,450 | | | | 56.1 | % |

| TASER Cam | 3,871 | | | | 0.9 | % | | 3,358 | | | | 1.0 | % | | 513 | | | | 15.3 | % |

| Extended warranties | 11,860 | | | | 2.8 | % | | 7,110 | | | | 2.1 | % | | 4,750 | | | | 66.8 | % |

| Other | 9,306 | | | | 2.2 | % | | 3,020 | | | | 0.9 | % | | 6,286 | | | | 208.1 | % |

| Software and Sensors segment | 166,953 | | | | 39.6 | % | | 109,286 | | | | 31.8 | % | | 57,667 | | | | 52.8 | % |

| Total net sales | $ | 420,068 | | | 100.0 | % | | $ | 343,798 | | | 100.0 | % | | $ | 76,270 | | | 22.2 | % |

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

| TASER 7 | 5,759 | | | — | | | 5,759 | | | * | |

| TASER X26P | 71,823 | | | 70,381 | | | 1,442 | | | 2.0 | % |

| TASER X2 | 65,855 | | | 76,106 | | | (10,251 | ) | | (13.5 | )% |

| TASER Pulse and Bolt | 18,398 | | | 12,504 | | | 5,894 | | | 47.1 | % |

| Cartridges | 2,342,897 | | | 2,408,471 | | | (65,574 | ) | | (2.7 | )% |

| Axon Body | 85,965 | | | 89,808 | | | (3,843 | ) | | (4.3 | )% |

| Axon Flex | 15,541 | | | 26,025 | | | (10,484 | ) | | (40.3 | )% |

| Axon Fleet | 9,445 | | | 3,795 | | | 5,650 | | | 148.9 | % |

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.

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 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%.

During the first quarter of 2017, the


| 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 | |

| 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 | ) |

| Total net sales | $ | 94,651 | | | 100.0 | % | | $ | 90,262 | | | 100.0 | % | | $ | 4,389 | | | 4.9 | % |

| 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 | |

Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit, which totaled [removed: $2.7] [added: $3.1] million at December 31, [removed: 2017.][added: 2018.]

At December 31, [removed: 2017,] [added: 2018,] there was no amount outstanding under the line of credit, and the available borrowing under the line of credit was [removed: $7.3] [added: $96.9] million.

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

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

At December 31, 2018, we did not have any held-to-maturity investments.

Additionally, we have access to a $50.0 million line of credit borrowing facility which bears interest at LIBOR plus 1.0 to 1.5% per year determined in accordance with a pricing grid based on our funded debt to EBITDA ratio.

Additionally, intercompany sales to our non-U.S. dollar functional currency international subsidiaries are transacted in U.S. dollars which could increase our foreign exchange rate risk caused by foreign currency transaction gains and losses.

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

Such losses would only be realized if the Company sold the investments prior to maturity.

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

[removed: We are also] [added: 2)Software and Sensors: Axon is] the market leader in [removed: developing, manufacturing and selling connected wearable] on-officer [added: body (Axon Body and Flex) and in-car (Axon Fleet)] cameras as well as [removed: developing and selling] cloud-based digital evidence management [removed: software.][added: software (Evidence.com).]

[removed: We have four strategic growth areas:][added: Strategic Growth Areas]

[removed: Markets] [added: Sales] and Distribution

We have continued to maintain [added: both] our ISO 9001 [removed: certification] and [removed: have recently attained the new] [added: our] ISO 9001:2015 [removed: certification.][added: certifications.]

[removed: The Company has] [added: We have] historically experienced higher net sales in [removed: its] [added: our] second and fourth quarters compared to other quarters in [removed: its] [added: our] fiscal year due primarily to municipal budget cycles.

However, historical seasonal patterns, municipal budgets or historical patterns of product introductions should not be considered reliable indicators of [removed: the Company’s] [added: our] future net sales or financial performance.

The primary competitive factors in [removed: the law enforcement and corrections] [added: this] market include a [removed: weapon’s] [added: device’s] accuracy, effectiveness, safety, cost, ease of use and an exceptional customer experience.

We are aware of competitors providing competing CEW [removed: products,] [added: products] primarily in international markets.

[removed: We believe our] TASER [removed: brand devices’] [added: devices offer] advanced technology, versatility, portability, effectiveness, built-in accountability systems, and low injury [removed: rate] [added: rates, which] enable us to compete effectively against [removed: these] other less-lethal alternatives.

[removed: These] [added: TASER: Private Citizen Market: In the private citizen market, these] devices primarily compete with [removed: guns,] [added: firearms,] but also with other less lethal [removed: weapons] [added: self-defense options] such as pepper spray.

The primary competitive factors in [removed: the private citizen] [added: this] market include a [removed: weapon’s] [added: device’s] cost, effectiveness, safety and ease of use.

Key competitive factors [removed: include:] [added: in this market include] product performance, product features, [added: battery life,] product quality and warranty, total cost of ownership, data security, data and information work flows, company reputation and financial strength, and relationships with customers.

[removed: Our] [added: based] digital evidence management [removed: system, Evidence.com, is a cloud-based platform.][added: system.]

We are [removed: also] subject to environmental laws and regulations, including restrictions on the presence of certain substances in electronic products.

[removed: Reference is made] [added: Refer] to Section 1A, Risk Factors under the heading “Environmental laws and regulations subject us to a number of risks and could result in significant liabilities and costs.”

Governmental agencies generally have the ability to terminate our contracts, in whole or in part, for [added: reasons including, but not limited to, non-appropriation of funds.]

[removed: Further] [added: For additional] information about our [removed: warranties is included in] [added: warranties, refer to] Note 1 [removed: of] [added: to] the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.

We protect our intellectual property with U.S. and [removed: foreign] [added: international] patents and trademarks.

We also rely on international treaties, organizations and [removed: foreign] laws to protect our intellectual property.

As of December 31, [removed: 2017,] [added: 2018,] we hold [removed: 137] [added: 158] U.S. patents, [removed: 63] [added: 70] U.S. registered trademarks, [removed: 98 foreign] [added: 102 international] patents, and [removed: 278 foreign] [added: 293 international] registered trademarks, and also have numerous patents and trademarks pending.

[removed: We continuously assess whether and where to seek formal protection for] particular innovations and technologies based on such factors as the commercial significance of our operations and our competitors’ operations in particular countries and regions, our strategic technology or product directions in different countries, and the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions.

[removed: Axon has] [added: We have] the exclusive rights to many Internet domain names, primarily including “TASER.com”, “Axon.com”, “Axon.net”, “Evidence.com” and “Axon.io.”

As of December 31, [removed: 2017,] [added: 2018,] we had [removed: 949] [added: 1,155] full-time employees and [removed: 146] [added: 231] temporary employees.

The breakdown of our full-time employees by department was as follows: [removed: 354] [added: 217] direct manufacturing employees, [removed: 600] [added: 360 research and development employees, 336] administrative and manufacturing support employees and [removed: 141] [added: 242] employees within sales, marketing, communications and training.

Of the [removed: 146] [added: 231] temporary employees, [removed: more than 91%] [added: approximately 80%] worked in direct manufacturing roles.

[added: Axon Enterprise, Inc. may be referred to as “the Company,” “Axon,” “we,” or “our.”] We were incorporated in Arizona in September 1993 as ICER Corporation.

We changed our name to AIR TASER, Inc. in December 1993 and to [removed: Axon Enterprise,] [added: TASER International,] Incorporated in April 1998.

Our Annual [removed: Report] [added: Reports] on Form 10-K, [removed: quarterly reports] [added: Quarterly Reports] on Form 10-Q, [removed: current reports] [added: Current Reports] on Form [removed: 8-K] [added: 8-K, proxy statements] and amendments to those reports filed [added: with] or furnished [removed: pursuant] to [removed: Section 13(a) or 15(d) of] the [removed: Exchange Act] [added: SEC] are available free of charge on our website at [removed: http://www.axon.com] [added: http://investor.axon.com] as soon as reasonably practicable after we electronically file [removed: such material with,] or furnish such material [removed: to,] [added: to] the SEC.

The information on our website, including information about our trademarks, is not incorporated by reference into or otherwise a part of this [removed: report.][added: Annual Report on Form 10-K.]

Overview

Axon is a market-leading provider of law enforcement technology solutions.

Our core mission is to protect life.

We fulfill that mission through developing hardware and software products that advance the long term objectives of a) obsoleting the bullet, b) reducing social conflict, and c) enabling a fair and effective justice system.

We believe we are creating a sustainable and profitable business model while solving society's most challenging problems.

Financially, we seek to sell our solutions via subscription plans that generate recurring revenue and cash flow and demonstrate leverage as we scale.

Our headquarters in Scottsdale, Arizona houses our executive management, sales, marketing, certain engineering, manufacturing, and other administrative support functions.

We also have a software engineering development center located in Seattle, Washington, and subsidiaries located in Australia, Canada, Finland, Hong Kong, Germany, India, the Netherlands, the United Kingdom, and Vietnam.

Axon's operations comprise two reportable segments:

1)TASER: Axon is the market leader in the development, manufacture and sale of conducted energy weapons (CEWs), also known as conducted energy devices (CEDs), which we sell under our brand name, TASER.

Research has shown that the TASER device is the most effective less than lethal force option, with the lowest likelihood of injury to officers and assailants.

Since our inception in 1993, the TASER has been adopted by a majority of U.S. police departments and is used daily to help keep communities safe.

We develop, manufacture and sell fully integrated hardware and cloud-based software solutions that enable law enforcement to capture, securely store, manage, share and analyze video and other digital evidence.

Of the 69 largest metropolitan area police departments in the U.S., 46 are on the Axon network.

For backlog by reportable segment, refer to Part II, Item 7 of this Annual Report on Form 10-K.

In 2018, Axon invested heavily in four strategic growth areas, which were 1) TASER devices, 2) Sensors hardware, including on-officer body cameras and Axon Fleet in-car video systems, and our Axon Evidence connected software network, 3) Axon Records and 4) computer-aided dispatch software.

The latter three growth areas are reported in our Software and Sensors segment.

These four strategic growth areas exist within an estimated $8.4 billion total addressable market, comprising CEWs ($1.8 billion), hardware sensors ($0.8 billion), and cloud-based public safety software ($5.8 billion.)

A description of each growth area follows:

- TASER devices: In December 2018, we began shipping TASER 7, which we believe is the most effective CEW ever made and is the first TASER device that works with a dock, allowing device logs to upload to our cloud-

We are continuing to invest to make our TASER CEWs more capable and more connected over time.

- Axon sensors hardware and Axon Evidence digital evidence management software: We are continuing to invest in connected sensors to improve and create the next generation of body-worn and in-car cameras.

Additionally, we are continuing to invest heavily in Axon Evidence features and roll out updates to Axon Evidence customers on a regular basis, meaning that our software solutions improve over time.

- Axon Records management systems: We are developing a cloud-based records management system, known in the law enforcement industry as an RMS, that is intuitive and easy-to-use.

We believe that body camera video is a key source of truth on what transpired during any incident, and therefore should be the heart of the incident record.

Axon Records will integrate seamlessly with the body camera video stored in Axon Evidence, and will leverage the data we are hosting to unlock value-added services for our customers.

- Computer-aided dispatch software: We aim to improve the dispatch market by developing software, known in the industry as computer-aided dispatch, or CAD.

This type of software assists emergency call center operators in dispatching police, fire or medical services to respond to incidents.

Our CAD software will seamlessly integrate with Axon Records and Axon Evidence, allowing for easier and more streamlined workflows for dispatchers, first responders, detectives, and the justice system.

Axon's direct sales force and strong customer relationships represent key strategic advantages.

The majority of our revenues are generated via direct sales, including our online store, although we do leverage distribution partners and third-party resellers.

Of the approximately 18,000 law enforcement agencies in the US, we have a customer relationship with approximately 17,000.

Axon has dedicated sales representatives for the 1,200 largest agencies, which account for 70% to 80% of patrol officers.

The remaining agencies are served via our telesales team as well as distributors.

Internationally, we began focusing on a direct sales strategy in 2017, and in 2018 we made significant strides toward building out our international direct sales force, particularly in the United Kingdom, Europe, Australia and New Zealand.

No customer represented more than 10% of total net sales for the years ended December 31, 2018, 2017 or 2016.

Manufacturing and Supply Chain

We obtain many of our components from single source suppliers; however, because we own the injection molded component tooling used in their production, we believe we could obtain alternative suppliers in most cases without incurring significant production delays.

For additional discussion of sources and availability of raw materials, refer to Note 1 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

TASER: Law Enforcement, Corrections and Private Security Markets: Our CEWs compete with a variety of other less-lethal alternatives, including rubber bullets or rubber baton rounds, pepper spray, mace, traditional stun guns, and police batons and night sticks.

Company Background and Business 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 CEWs designed for use by law enforcement, corrections, military forces, private security personnel and by private individuals for personal defense.

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

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 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. |

| • | 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.

Company Organization

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

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

Domestic and international law enforcement agencies are primarily served through the Company's headquarters in Scottsdale, Arizona, and its software engineering development center located in Seattle, Washington.

The Company also has subsidiaries located in the United 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 software and sensors business, focused on Axon 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 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 Software and Sensors segment.

All other costs are included in the TASER Weapons segment.

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.

Products

TASER Weapons Products

We make CEWs for two main types of market segments: (i) the law enforcement, military, corrections and private security markets; and (ii) the consumer market.

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

From a replaceable cartridge containing compressed nitrogen, two small probes that are attached to the CEW by insulated conductive wires are deployed from up to 35 feet away.

Electrical pulses are transmitted along the wires and into the body, affecting the sensory and motor functions of the peripheral nervous system.

Since 2009, our CEWs have been on our Smart Weapons system, an all-digital platform that features the ability to regulate charge output, perform health checks, update firmware over the Internet, and provide analytics on device usage.

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

For the fiscal year ended December 31, [removed: 2017][added: 2018]

Yes [removed: ¨ No] ý [added: No ¨]

Indicate by check mark whether the registrant has submitted electronically [removed: and posted on its corporate Website, if any,] every Interactive Data File required to be submitted [removed: and posted] pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit [removed: and post] such files).

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

| Non-accelerated filer | | ¨ [removed: (Do not check if a smaller reporting company)] | | Smaller reporting company | | ¨ |

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: 2017,] [added: 2018,] which was the last business day of the registrant’s most recently completed second fiscal quarter, as reported by NASDAQ, was approximately [removed: $1,303,000,000.][added: $3,613,000,000.]

The number of shares of the registrant’s common stock outstanding as of February [removed: 15, 2018] [added: 18, 2019] was [removed: 53,034,299][added: 58,829,384.]

Parts of the registrant’s definitive proxy statement for its [removed: 2018] [added: 2019] annual meeting of stockholders to be prepared and filed with the Securities and Exchange Commission not later than 120 days after December 31, [removed: 2017] [added: 2018] are incorporated by reference into Part III of this Form 10-K.

FOR THE YEAR ENDED DECEMBER 31, [removed: 2017][added: 2018]

| | [PART [removed: I](#s59903BDF127CEF9EC902B6DF773A8B59)] [added: I](#s6B458E4AD5C981CBC6AFF435DF8794A6)] | Page |

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10-K 1 a10kaaxn123118.htm 10-K

| | [PART II](#s4E47464274DE0E08B64CF435E0B4D546) | |

| | [PART IV](#s385BAF7BF2C5261496E3F435EB727661) | |

Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts.

Words such as “may,” “will,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions, as well as statements in future tense, identify forward-looking statements.

However, not all forward-looking statements contain these identifying words.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions.

Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions.

The following important factors could cause actual results to differ materially from those in the forward-looking statements: customer purchase behavior, including adoption of our software as a service delivery model; our exposure to cancellations of government contracts due to appropriation clauses, exercise of a cancellation clause, or non-exercise of contractually optional periods; our ability to design, introduce and sell new products or features; our ability to manage our supply chain and avoid production delays or shortages; changes in the costs of product components and labor; defects in our products; the impact of product mix on projected gross margins; loss of customer data, a breach of security or an extended outage, including our reliance on third-party cloud-based storage providers; negative media publicity regarding our products; our ability to defend against litigation and protect our intellectual property, and the resulting costs of this activity; changes in government regulations in the U.S. and internationally, especially related to the classification of our product by the United States Bureau of Alcohol, Tobacco, Firearms and Explosives and to evolving regulations surrounding privacy and data protection; counter-party risks relating to cash balances held in excess of FDIC insurance limits; our ability to integrate acquired businesses; and our ability to attract and retain key personnel.

Many events beyond our control may determine whether results we anticipate will be achieved.

Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected.

You should bear this in mind as you consider forward-looking statements.

This report lists various important factors that could cause actual results to differ materially from expected and historical results.

These factors are intended as cautionary statements for investors within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act.

Readers can find them under the heading “Risk Factors” in this Annual Report on Form 10-K, and investors should refer to them.

You should understand that it is not possible to predict or identify all such factors.

Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

Except as required by law, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.

You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission ("SEC").

Our filings with the SEC may be accessed at the SEC’s web site at www.sec.gov.

10-K 1 a10kaaxn123117.htm 10-K

| | |

| --- | --- |

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

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

Such forward-looking statements relate to, among other things:

| • | our intentions about future development efforts and activities, including our intentions to invest in research and development as well as the development of new product and service lines and enhanced features for our existing product and service lines; |

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

| • | that we may have more sales denominated in foreign currencies in 2018; |

| • | our intention to increase our investment in the development of sales in the international, military and law enforcement market; |

| • | our plans to expand our sales force; |

| • | that cloud and mobile technologies are fundamentally changing the police environment; |

| • | our plan to invest in web activities and law enforcement trade shows in 2018; |

| • | our intention to not pay dividends; |

| • | that increases in marketing and sales activities will lead to an increase in sales; |

| • | our belief that the video evidence capture and management market will grow significantly in the near future and the reasons for that belief; |

| • | our intention to continue to pursue the personal security market; |

| • | our intention to grow direct sales; |

| • | the sufficiency of our facilities and our strategy to expand manufacturing capacity if needed; |

| • | that we may lease facilities from parties that specialize in handling and manufacturing of firearm materials; |

| • | that we expect to continue to depend on sales of our X2 and X26P CEW devices; |

| • | our intention to apply for and prosecute our patents; |

| • | that selling, general and administrative expense will increase in 2018; |

| • | that research and development expenses will increase in 2018; |

| • | the timing of the resolution of uncertain tax positions; |

| • | our intention to hold investments to maturity; |

| • | the effect of interest rate changes on our annual interest income; |

| • | that we may engage in currency hedging activities; |

| • | our intentions concerning, and the effectiveness of, our ongoing marketing efforts through web activities, trial programs, tech summits and law enforcement trade shows; |

| • | the benefits of our CEW products compared to other lethal and less-lethal alternatives; |

| • | the benefits of our Software and Sensors products compared to our competitors'; |

| • | our belief that customers will honor multi-year contracts despite the existence of appropriations, termination for convenience. or similar clauses; |

| • | our belief that customers will renew their Evidence.com service subscriptions at the end of the contractual term; |

| • | our insulation from competition and our competitive advantage in the weapons business; |

| • | estimates regarding the size of our target markets and our competitive position in existing markets; |

| • | the availability of alternative materials and components suppliers; |

| • | the benefits of the continued automation of our production process; |

| • | the sufficiency and availability of our liquid assets and capital resources; |

| • | our financing and growth strategies, including: our decision not to pay dividends, potential joint ventures, mergers and acquisitions, stock repurchases and hedging activities; |

| • | the safety of our products; |

Our corporate headquarters and manufacturing facilities are based in [removed: a] [added: an approximately] 100,000 square foot facility in Scottsdale, Arizona, which we own.

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

[removed: The Company continues] [added: We continue] to make investments in capital equipment as needed to meet anticipated demand for [removed: its] [added: our] products.

Additionally, in December 2018, we entered into an agreement to purchase a leasehold interest to a parcel of land located in Maricopa County, Arizona on which we intend to construct our new headquarters.

The majority of our locations support both of our reportable segments.

Our Vietnam and Seattle, Washington locations primarily support our Software & Sensors segment.

As of December 31, [removed: 2017,] [added: 2018,] there were [removed: 255] [added: 247] holders of record of our common stock.

To date, [removed: the Company has] [added: we have] not declared or paid cash dividends on [removed: its] [added: our] common stock.

In February 2016, [removed: the Company's] [added: our] Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of [removed: the Company’s] [added: our] outstanding common stock subject to stock market conditions and corporate considerations.

During the year ended December 31, [removed: 2017,] [added: 2018,] no common shares were purchased under the program.

As of December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] $16.3 million [removed: remains] [added: remained] available under the plan for future purchases.

During 2016, [removed: the Company] [added: we] suspended [removed: its] [added: our] 10b-5 plan, and any future purchases [removed: would] [added: will] be discretionary.

The graph covers the period from December 31, [removed: 2012] [added: 2013] to December 31, [removed: 2017.][added: 2018.]

The graph assumes that the value of the investment in our stock and in each index was $100 at December 31, [removed: 2012,] [added: 2013,] and that all dividends were reinvested.

[removed: ][added: ]

| | [removed: 2012 | | | |] 2013 | | | | 2014 | | | | 2015 | | | | 2016 | | | | 2017 | | | [added: | 2018 | | |]

We do not intend to pay cash dividends in the foreseeable future.

| Axon Enterprise, Inc. | $ | 100.00 | | | $ | 166.75 | | | $ | 108.88 | | | $ | 152.64 | | | $ | 166.88 | | | $ | 275.50 | |

| NASDAQ Composite | 100.00 | | | | 114.75 | | | | 122.74 | | | | 133.62 | | | | 173.22 | | | | 168.30 | | |

| Russell 3000 | 100.00 | | | | 112.56 | | | | 113.10 | | | | 127.50 | | | | 154.44 | | | | 146.34 | | |

The following tables set forth the high and low sales prices per share for our common stock as reported by NASDAQ for each quarter of the last two fiscal years.

| | | | | | | | |

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

| | High | | | | Low | | |

| Year Ended December 31, 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 | | |

| Year Ended December 31, 2016: | | | | | | | |

| First quarter | $ | 20.69 | | | $ | 13.56 | |

| Second quarter | 24.94 | | | | 17.18 | | |

| Third quarter | 30.15 | | | | 24.46 | | |

| Fourth quarter | 28.49 | | | | 21.50 | | |

The Company does not intend to pay cash dividends in the foreseeable future, and its revolving line of credit prohibits the payment of cash dividends.

| 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 | | |

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: 2017, 2016] [added: 2018, 2017] and [removed: 2015,] [added: 2016,] and the balance sheet data as of December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] 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: 2014] [added: 2015] and [removed: 2013,] [added: 2014,] and the balance sheet data as of December 31, [removed: 2015, 2014] [added: 2016, 2015] and [removed: 2013,] [added: 2014,] 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: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | |

| Net sales [added: (1)] | [removed: 343,798] [added: $] | [added: 420,068] | | | [removed: 268,245] [added: $] | [added: 343,798] | | | [removed: 197,892] [added: $] | [added: 268,245] | | | [removed: 164,525] [added: $] | [added: 197,892] | | | [removed: 137,831] [added: $] | [added: 164,525] | |

| Gross margin | [removed: 207,088] [added: 258,583] | | | | [removed: 170,536] [added: 207,088] | | | | [removed: 128,647] [added: 170,536] | | | | [removed: 101,548] [added: 128,647] | | | | [removed: 85,843] [added: 101,548] | | |

| Income from operations [added: (2)] | [removed: 13,023] [added: 24,841] | | | | [removed: 31,851] [added: 13,023] | | | | [removed: 35,335] [added: 31,851] | | | | [removed: 32,505] [added: 35,335] | | | | [removed: 27,948] [added: 32,505] | | |

| Net income [added: (3)] | [removed: $] [added: 29,205] | [added: | | |] 5,207 | | | [removed: $] | 17,297 | | | [removed: $] | 19,933 | | | [removed: $] | 19,918 | | | [removed: $ | 18,244 | |]

| Diluted [added: earnings per share (3)] | $ | [removed: 0.10] [added: 0.50] | | | $ | [removed: 0.32] [added: 0.10] | | | $ | [removed: 0.36] [added: 0.32] | | | $ | 0.37 | | | $ | 0.34 | |

| Working capital [added: (4) (5)] | $ | [removed: 97,242] [added: 392,144] | | | $ | [removed: 99,192] [added: 97,242] | | | $ | [removed: 123,269] [added: 99,192] | | | $ | [removed: 102,669] [added: 123,269] | | | $ | [removed: 67,237] [added: 102,669] | |

| Total assets [added: (4) (5)] | [removed: 338,112] [added: 719,540] | | | | [removed: 278,163] [added: 338,112] | | | | [removed: 229,881] [added: 278,163] | | | | [removed: 185,368] [added: 229,881] | | | | [removed: 148,382] [added: 185,368] | | |

| Total current liabilities | [removed: 107,950] [added: 166,011] | | | | [removed: 78,039] [added: 107,950] | | | | [removed: 38,140] [added: 78,039] | | | | [removed: 31,973] [added: 38,140] | | | | [removed: 23,129] [added: 31,973] | | |

| Total stockholders’ equity [added: (4) (5) (6)] | [removed: 167,444] [added: 467,324] | | | | [removed: 150,888] [added: 167,444] | | | | [removed: 157,004] [added: 150,888] | | | | [removed: 129,106] [added: 157,004] | | | | [removed: 108,347] [added: 129,106] | | |

| | 2018 | | | | 2017 | | | | 2016 | | | | 2015 | | | | 2014 | | |

(1) Amounts for the years ended December 31, 2017, 2016, 2015, and 2014 have not been adjusted under the modified retrospective method of adoption of Accounting Standards Codification Topic 606, Revenue from Contracts from Customers ("Topic 606"), and are presented consistent with the prior period amounts reported under ASC 605.

Revenue for the year ended December 31, 2018 would have been $415.1 million under ASC 605.

(2) Reflects the impact of increased spending on research and development and selling, general and administrative expenses to support growth.

(3) Includes the favorable impact of a $8.9 million and $1.8 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for restricted stock units ("RSUs") that vested or stock options that were exercised during the years ended December 31, 2018 and 2017, respectively.

Includes tax expense of $8.0 million for the year ended December 31, 2017 related to the the enactment of the Tax Cuts and Jobs Act.

Refer to Note 10 of the notes to our consolidated financial statements within this Annual Report on Form 10-K.

(4) In May 2018, we sold 4,645,000 shares of our common stock, which included 645,000 shares pursuant to the full exercise of the underwriters' option to purchase additional shares, in an underwritten public offering at a price of $53.00 per share, which resulted in gross proceeds of $246.2 million.

Net proceeds after deducting fees, commissions, and other expenses related to the offering were $234.0 million.

(5) In 2016, 2015, and 2014, we used cash and cash equivalents to repurchase approximately $33.7 million, $7.6 million, and $22.4 million, respectively, of our common shares.

(6) We recorded a net increase in stockholders’ equity (retained earnings) of $19.0 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606 on contracts that were not complete as of that date.

Refer to Note 2 of the notes to our consolidated financial statements within this Annual Report on Form 10-K for further discussion.

| 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 | | |

| Sales, general and administrative expenses | 138,692 | | | | 108,076 | | | | 69,698 | | | | 54,158 | | | | 46,557 | | |

| Research and development expenses | 55,373 | | | | 30,609 | | | | 23,614 | | | | 14,885 | | | | 9,888 | | |

| Litigation judgments | — | | | | — | | | | — | | | | — | | | | 1,450 | | |

| Interest and other (expense) income, net | 2,738 | | | | (354 | | ) | | 26 | | | | (194 | | ) | | 86 | | |

| Income before provision for income taxes | 15,761 | | | | 31,497 | | | | 35,361 | | | | 32,311 | | | | 28,034 | | |

| Provision for income taxes | 10,554 | | | | 14,200 | | | | 15,428 | | | | 12,393 | | | | 9,790 | | |

| Net income per common and common equivalent shares: | | | | | | | | | | | | | | | | | | | |

| Basic | $ | 0.10 | | | $ | 0.33 | | | $ | 0.37 | | | $ | 0.38 | | | $ | 0.35 | |

| Weighted average number of common and common equivalent shares outstanding: | | | | | | | | | | | | | | | | | | | |

| Basic | 52,726 | | | | 52,667 | | | | 53,548 | | | | 52,948 | | | | 51,880 | | |

| Diluted | 53,898 | | | | 53,536 | | | | 54,638 | | | | 54,500 | | | | 54,152 | | |

| Total long-term debt and capital leases, net of current portion | 41 | | | | 118 | | | | 81 | | | | 29 | | | | 67 | | |

| [Consolidated Balance Sheets as of December 31, [removed: 2017] [added: 2018] and [removed: 2016](#sD406E9EDA5905CCF9C5CB6DE02E88830)] [added: 2017](#s7E3C179D942092BB19FCF434E0EAECE4)] | | [removed: [49](#sD406E9EDA5905CCF9C5CB6DE02E88830)] [added: [53](#s7E3C179D942092BB19FCF434E0EAECE4)] |

| [Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015](#s8C53480EFE083D5CE0F0B6DE0300199F)] [added: 2016](#sA4CAACDB1412539D1FB8F434E1C375E2)] | | [removed: [50](#s8C53480EFE083D5CE0F0B6DE0300199F)] [added: [54](#sA4CAACDB1412539D1FB8F434E1C375E2)] |

| [Consolidated Statements of Stockholders' Equity for the years ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015](#s815D902E304B0ADA85FAB6DE030EB721)] [added: 2016](#s1EAFEFE706B47F04C81FF434E1940393)] | | [removed: [51](#s815D902E304B0ADA85FAB6DE030EB721)] [added: [55](#s1EAFEFE706B47F04C81FF434E1940393)] |

| [Consolidated Statements of Cash Flows for the years ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015](#sAAF09BAFA39AED69C901B6DE032CD3EE)] [added: 2016](#sADC3F46D3839B9692247F434E2EDA3E5)] | | [removed: [52](#sAAF09BAFA39AED69C901B6DE032CD3EE)] [added: [56](#sADC3F46D3839B9692247F434E2EDA3E5)] |

| [Notes to Consolidated Financial [removed: Statements](#s32B6E39FDC699B80504DB6DE03449F86)] [added: Statements](#s367B1A8B213BEF24A866F434E0BDD467)] | | [removed: [53](#s32B6E39FDC699B80504DB6DE03449F86)] [added: [57](#s367B1A8B213BEF24A866F434E0BDD467)] |

| [Selected Quarterly Financial Information [removed: (Unaudited)](#sB4086DDB41204BCE9BB1B6DE05363EF5)] [added: (Unaudited)](#sC6A9DB72E3A696764149F434E168EA64)] | | [removed: [82](#sB4086DDB41204BCE9BB1B6DE05363EF5)] [added: [90](#sC6A9DB72E3A696764149F434E168EA64)] |

| [Report of Grant Thornton LLP, Independent Registered Public Accounting [removed: Firm](#s0B4DB2CFC4E2A6CBB0DBB6DE054C77F8)] [added: Firm](#sB70E9476E1F70CE9F0E7F434E9399FFD)] | | [removed: [85](#s0B4DB2CFC4E2A6CBB0DBB6DE054C77F8)] [added: [92](#sB70E9476E1F70CE9F0E7F434E9399FFD)] |

| | [added: 2018 | | | |] 2017 | | | | 2016 | | |

| Cash and cash equivalents | $ | [added: 349,462 | | | $ |] 75,105 | | | $ | 40,651 | |

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

| Accounts and notes receivable, net of allowance of [removed: $754] [added: $1,882] and [removed: $443] [added: $754] as of December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] respectively | [removed: 56,064] [added: 130,579] | | | | [removed: 39,466] [added: 56,064] | | |

| Inventory | [removed: 45,465] [added: 33,763] | | | | [removed: 34,841] [added: 45,465] | | |

| Prepaid expenses and other current assets | [removed: 21,696] [added: 30,391] | | | | [removed: 13,858] [added: 21,696] | | |

| Total current assets | [removed: 205,192] [added: 558,155] | | | | [removed: 177,231] [added: 205,192] | | |

| Property and equipment, net | [removed: 31,172] [added: 37,893] | | | | [removed: 24,004] [added: 31,172] | | |

| Deferred income tax assets, net | [removed: 15,755] [added: 19,347] | | | | [removed: 19,515] [added: 15,755] | | |

| Intangible assets, net | [removed: 18,823] [added: 15,935] | | | | [removed: 15,218] [added: 18,823] | | |

| Goodwill | [removed: 14,927] [added: 24,981] | | | | [removed: 10,442] [added: 14,927] | | |

| Long-term [removed: accounts and] notes receivable, net of current portion | [removed: 36,877] [added: 40,230] | | | | [removed: 17,602] [added: 36,877] | | |

| Other assets | [removed: 15,366] [added: 22,999] | | | | [removed: 13,917] [added: 15,366] | | |

| Total assets | $ | [removed: 338,112] [added: 719,540] | | | $ | [removed: 278,163] [added: 338,112] | |

| Accounts payable | $ | [removed: 8,592] [added: 15,164] | | | $ | [removed: 10,736] [added: 8,592] | |

| Accrued liabilities | [removed: 23,502] [added: 41,092] | | | | [removed: 18,248] [added: 23,502] | | |

| Current portion of deferred revenue | [removed: 70,401] [added: 107,016] | | | | [removed: 45,137] [added: 70,401] | | |

| Customer deposits | [removed: 3,673] [added: 2,702] | | | | [removed: 2,148] [added: 3,673] | | |

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

| Other current liabilities | [removed: 89] [added: 37] | | | | [removed: 80] [added: 89] | | |

| Total current liabilities | [removed: 107,950] [added: 166,011] | | | | [removed: 78,039] [added: 107,950] | | |

| Deferred revenue, net of current portion | [removed: 54,881] [added: 74,417] | | | | [removed: 40,054] [added: 54,881] | | |

| Liability for unrecognized tax benefits | [removed: 1,706] [added: 2,849] | | | | [removed: 1,896] [added: 1,706] | | |

| Long-term deferred compensation | [removed: 3,859] [added: 3,235] | | | | [removed: 3,362] [added: 3,859] | | |

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

| Other long-term liabilities | [removed: 1,224] [added: 5,704] | | | | [removed: 2,289] [added: 1,224] | | |

| Total liabilities | [removed: 170,668] [added: 252,216] | | | | [removed: 127,275] [added: 170,668] | | |

| Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of December 31, [removed: 2017] [added: 2018] and [removed: 2016] [added: 2017] | — | | | | — | | |

| Common stock, $0.00001 par value; 200,000,000 shares authorized; [removed: 52,969,869] [added: 58,810,637] and [removed: 52,325,251] [added: 52,969,869] shares issued and outstanding as of December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] respectively | 1 | | | | 1 | | |

| Additional paid-in capital | [removed: 201,672] [added: 453,400] | | | | [removed: 187,656] [added: 201,672] | | |

| Treasury stock at cost, 20,220,227 shares as of December 31, [removed: 2017] [added: 2018] and [removed: 2016] [added: 2017] | (155,947 | | ) | | (155,947 | | ) |

| Retained earnings | [removed: 123,185] [added: 171,383] | | | | [removed: 118,275] [added: 123,185] | | |

| Accumulated other comprehensive [removed: income (loss)] [added: loss] | [removed: (1,467] [added: (1,513] | | ) | | [removed: 903] [added: (1,467] | | [added: )] |

| | 2018 | | | | 2017 | | |

| Contract assets, net | 13,960 | | | | — | | |

| Net income per share: | | | | | | | | | | | |

| Net income | $ | 29,205 | | | $ | 5,207 | | | $ | 17,297 | |

| Issuance of common stock under employee plans | 421,128 | | | — | | | | (1,294 | | ) | | — | | | — | | | | — | | | | — | | | | (1,294 | | ) |

| Issuance of common stock under employee plans | 644,618 | | | — | | | | (2,069 | | ) | | — | | | — | | | | — | | | | — | | | | (2,069 | | ) |

| Cumulative effect of applying a change in accounting principle | — | | | — | | | | — | | | | — | | | — | | | | — | | | | 18,993 | | | | 18,993 | | |

| Issuance of common stock | 4,645,000 | | | | | | | 233,993 | | | | — | | | — | | | | — | | | | — | | | | 233,993 | | |

| Issuance of common stock for business combination (Note 15) | 58,843 | | | — | | | | 8,226 | | | | — | | | — | | | | — | | | | — | | | | 8,226 | | |

| Issuance of common stock under employee plans | 1,136,925 | | | — | | | | (12,370 | | ) | | — | | | — | | | | — | | | | — | | | | (12,370 | | ) |

| Stock-based compensation | — | | | — | | | | 21,879 | | | | — | | | — | | | | — | | | | — | | | | 21,879 | | |

| Balance, December 31, 2018 | 58,810,637 | | | $ | 1 | | | $ | 453,400 | | | 20,220,227 | | | $ | (155,947 | ) | | $ | (1,513 | ) | | $ | 171,383 | | | $ | 467,324 | |

| Net income | $ | 29,205 | | | $ | 5,207 | | | $ | 17,297 | |

| Prepaid expenses and other assets | (12,739 | | ) | | (8,992 | | ) | | (10,611 | | ) |

| Accounts payable, accrued and other liabilities | 13,506 | | | | 1,530 | | | | 18,399 | | |

| Net proceeds from equity offering | 233,993 | | | | — | | | | — | | |

| Cash and cash equivalents and restricted cash, end of year | $ | 351,027 | | | $ | 78,438 | | | $ | 43,968 | |

Axon Enterprise, Inc. (“Axon”, the “Company”, "we", or "us") is a market-leading provider of law enforcement technology solutions.

Our core mission is to protect life.

We fulfill that mission through developing hardware and software products that advance the long term objectives of a) obsoleting the bullet, b) reducing social conflict, and c) enabling a fair and effective justice system.

| • | revenue recognition, |

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

commitments, industry and market trends and conditions among other factors.

During the year ended December 31, 2018, we abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $2.0 million which was included in sales, general and administrative expense in the accompanying statement of operations.

We apply the five-step model outlined in Accounting Standards Codification Topic 606, Revenue from Contracts from Customers ("Topic 606").

For additional discussion of the adoption of Topic 606, see Note 2.

Many of our products and services are sold on a standalone basis.

We also bundle our hardware products and services together and sell them to our customers in single transactions, where the customer can make payments over a multi-year period.

These sales may include payments for upfront hardware and services, as well as payments for hardware and services to be provided by us at a future date.

Additionally, we offer customers the ability to purchase CEW cartridges and certain services on an unlimited basis over the contractual term.

Revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.

We enter into contracts that can include various combinations of products and services, each of which is generally distinct and accounted for as a separate performance obligation.

Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental taxing authorities.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Topic 606.

For contracts with multiple performance obligations, we allocate the contract transaction price to each performance obligation using our estimate of the standalone selling price ("SSP") of each distinct good or service in the contract.

Performance obligations to deliver products, including CEWs, cameras and related accessories such as cartridges, batteries and docks, are generally satisfied at the point in time we ship the product, as this is when the customer obtains control of the asset under our standard terms and conditions.

In certain contracts with non-standard terms and conditions, these performance obligations may not be satisfied until formal customer acceptance occurs.

Performance obligations to fulfill service-type extended warranties and provide our SaaS offerings, including Axon Evidence and other cloud services, are generally satisfied over time as the customer receives and consumes the benefits of these services over the stated service period.

We have elected to recognize shipping costs as an expense in cost of product sales when the control of hardware products or accessories have transferred to the customer.

In the event that actual uncollectible amounts differ from our estimates, additional expense could be necessary.

| Long-term investments | — | | | | 234 | | |

| Net income per common and common equivalent shares: | | | | | | | | | | | |

| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | | | | | | | | | | |

| Balance, December 31, 2014 | 53,000,867 | | | $ | 1 | | | $ | 162,641 | | | 18,139,958 | | | $ | (114,645 | ) | | $ | 64 | | | $ | 81,045 | | | $ | 129,106 | |

| Stock options exercised and RSUs vested, net of withholdings | 983,525 | | | — | | | | 1,303 | | | | — | | | — | | | | — | | | | — | | | | 1,303 | | |

| Purchase of treasury stock | (292,200 | ) | | — | | | | — | | | | 292,200 | | | (7,556 | | ) | | — | | | | — | | | | (7,556 | | ) |

| Stock options exercised and RSUs vested, net of withholdings | 421,128 | | | — | | | | (1,294 | | ) | | — | | | — | | | | — | | | | — | | | | (1,294 | | ) |

| Stock options exercised and RSUs vested, net of withholdings | 644,618 | | | — | | | | (2,069 | | ) | | — | | | — | | | | — | | | | — | | | | (2,069 | | ) |

| Customer deposits | 1,525 | | | | 922 | | | | 238 | | |

| Payments on notes payable | — | | | | (75 | | ) | | — | | |

Axon Enterprise, Inc. (“Axon” or the “Company”) is a developer and manufacturer of advanced conducted electrical weapons (“CEWs”) designed for use by law enforcement, military, corrections, private security personnel, and by private individuals for personal defense.

In addition, the Company has developed full technology solutions for the capture, secure storage and management of video/audio evidence as well as other tactical capabilities for use in law enforcement.

The Company sells its products worldwide through its direct sales force, distribution partners, online store and third-party resellers.

The Company was incorporated in Arizona in September 1993, and reincorporated in Delaware in January 2001.

The Company’s corporate headquarters and manufacturing facilities are located in Scottsdale, Arizona.

The Company’s software development division is located in Seattle, Washington.

Axon Public Safety BV, a wholly owned subsidiary of the Company, supports the Company's international sales and marketing efforts, and is located in Amsterdam, Netherlands.

Axon Public Safety BV wholly owns two subsidiaries, Axon Public Safety U.K. LTD 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.

| | |

| --- | --- |

| • | revenue recognition allocated in multiple-deliverable contracts or arrangements, |

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

inventories to their net realizable value.

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.

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.

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 [removed: Securities and Exchange Commission’s] [added: SEC’s] rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management has assessed the effectiveness of our internal control over financial reporting as of December 31, [removed: 2017] [added: 2018] based on criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).

As a result of this assessment, management concluded that, as of December 31, [removed: 2017,] [added: 2018,] our internal control over financial reporting was [removed: 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.

[removed: We] [added: Management] previously identified and disclosed in our Annual Report on Form 10-K for the year ended December 31, [removed: 2016,] [added: 2017,] as well as in our Quarterly Reports on Form 10-Q for each interim period in fiscal [removed: 2017,] [added: 2018, a] material [removed: weaknesses in our internal control over financial reporting.][added: weakness]

To remediate the material [removed: weaknesses] [added: weakness] described above, [removed: we designed and] [added: management] implemented [added: a plan to design new] controls and [removed: enhanced and revised] [added: enhance] the design of existing controls and procedures.

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

Except as noted above, there was no change in our internal control over financial reporting during the fiscal quarter ended December 31, [removed: 2017,] [added: 2018,] 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 Axon Enterprise, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, [removed: 2017,] [added: 2018,] based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, [removed: because of] the [removed: effect of the material weakness described in the following paragraphs on the achievement of the objectives of the control criteria, the] Company [removed: has not maintained] [added: maintained, in all material respects,] effective internal control over financial reporting as of December 31, [removed: 2017,] [added: 2018,] 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 States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, [removed: 2017.][added: 2018, and our report dated February 27, 2019 expressed an unqualified opinion on those financial statements.]

Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of December 31, 2018 our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

In accordance with guidance issued by the SEC, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting for the fiscal year in which the acquisition occurred.

Our management’s evaluation of internal control over financial reporting excluded the internal control activities of VIEVU, which we acquired in May 2018 as discussed in Note 15 to our consolidated financial statements.

We have included the financial results of VIEVU in the consolidated financial statements from the date of acquisition.

Total revenue excluded from our assessment of internal control over financial reporting represented approximately 2% of our consolidated total revenue in 2018.

Total VIEVU assets excluded from our assessment of internal control over financial reporting represented approximately 3% of our consolidated total assets as of December 31, 2018.

Remediation of Prior Period Material Weakness

in our internal control over financial reporting.

| • | on June 1, 2018, management completed the migration of APS UK onto the same ERP and global set of controls as other locations, which subjects APS UK activity to those processes and controls by the same corporate accounting team in Scottsdale, Arizona that perform the accounting activities for other locations; and |

| • | management transitioned all accounting reconciliation and review procedures and controls to the corporate accounting team. |

Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of VIEVU, a wholly-owned subsidiary, whose financial statements reflect total assets and revenues constituting 3 percent and 2 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.

As indicated in Management’s Report, VIEVU was acquired during 2018.

Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of VIEVU.

February 27, 2019

Based on that evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer have concluded that because a material weakness exists in our internal control over financial reporting, as further described below, 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.

During the years ended December 31, 2017 and 2016, we identified material weaknesses in our internal control over financial reporting.

A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.

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

During the year ended December 31, 2016, we identified material weaknesses in our internal controls over revenue recognition, cost of goods sold and services delivered and the reporting of deferred revenue.

Further, we identified material weaknesses in our account reconciliations and monitoring processes.

These material weaknesses in internal control over financial reporting resulted from a breakdown in the operation of identified preventative and detective controls which led to the Company not initially recording some transactions correctly.

Specifically:

| | |

| --- | --- |

| • | 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 implemented additional monitoring controls that help detect data entry errors of transactional information within the Company’s general ledger system, as well as added and refined existing system reports to help isolate outliers within the Company’s transactional data for further review, and |

| • | we improved communication and coordination among our finance and accounting departments and we expanded cross-functional involvement and input into period-end accruals. |

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.

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.

| • | 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 |

| • | we plan to add internal reporting procedures, including those designed to add depth to our detailed review processes of inventory, sales transactions and related accounting for deferred revenue and cost of goods sold and services delivered for APS U.K. |

The material 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.

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.

A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The following material weakness has been identified and included in management’s assessment.

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.

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

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.

March 1, 2018

The information required to be disclosed by this item is incorporated herein by reference to our definitive proxy statement for the [removed: 2018] [added: 2019] Annual Meeting of Stockholders (the [removed: “2018] [added: “2019] Proxy Statement”), which proxy statement we expect to file with the SEC within 120 days after the end of our fiscal year ended December 31, [removed: 2017.][added: 2018.]

The information required to be disclosed by this item is incorporated herein by reference to our [removed: 2018] [added: 2019] Proxy Statement.

The following table provides details of our equity compensation plans at December 31, [removed: 2017:][added: 2018:]

All other information required to be disclosed by this item is incorporated herein by reference to our [removed: 2018] [added: 2019] Proxy Statement.

| Equity compensation plans approved by security holders | 8,138,060 | | | $ | 28.24 | | | 1,721,538 | |

| Total | 8,138,060 | | | $ | — | | | 1,721,538 | |

| Equity compensation plans approved by security holders | 3,152,315 | | | $ | 4.99 | | | 1,154,395 | |

| Total | 3,152,315 | | | $ | — | | | 1,154,395 | |

The information required to be disclosed by this item is incorporated herein by reference to our [removed: 2018] [added: 2019] Proxy Statement.

The information required to be disclosed by this item is incorporated herein by reference to our [removed: 2018] [added: 2019] Proxy Statement.

| Year ended December 31, 2017 | [removed: $ |] 443 | | | [removed: $] | 592 | | | [removed: $] | — | | | [removed: $] | (306 | [removed: )] | [added: )] | [removed: $] | 729 | | [added: |]

| [removed: 3.2] [added: 10.4*] | | [removed: [Bylaws,] [added: [2004 Outside Director Stock Option Plan,] as [removed: amended, effective January 17, 2016] [added: amended] (incorporated by reference to Exhibit [removed: 3.2] [added: 10.16] to [added: the] Annual Report [removed: filed] on Form [removed: 10-K,] [added: 10-KSB,] filed March [removed: 7, 2016)](http://www.sec.gov/Archives/edgar/data/1069183/000106918316000148/ex32-amendedbylawsoftaseri.htm)] [added: 31, 2005)](http://www.sec.gov/Archives/edgar/data/1069183/000095015305000689/p70387exv10w16.htm)] |

| [removed: 3.4] [added: 10.8*] | | [removed: [Amended and Restated Certificate of Incorporation] [added: [2016 Stock Incentive Plan] (incorporated by reference to Annex [removed: A to] [added: B of] 2016 Proxy Statement, filed [added: on] April 15, [removed: 2016.](http://www.sec.gov/Archives/edgar/data/1069183/000106918316000167/a2016proxystatement.htm)] [added: 2016)](http://www.sec.gov/Archives/edgar/data/1069183/000106918316000167/a2016proxystatement.htm#s4d59a241557640109430de27df198419)] |

| [removed: 10.4*] [added: 10.13*] | | [Executive Employment Agreement with [removed: Daniel Behrendt,] [added: Joshua M. Isner,] dated [removed: April 28, 2004] [added: December 1, 2017] (incorporated by reference to Exhibit [removed: 10.14] [added: 10.4] to [removed: Annual] [added: the Current] Report on Form [removed: 10-KSB,] [added: 8-K,] filed [removed: March 31, 2005)](http://www.sec.gov/Archives/edgar/data/1069183/000095015305000689/p70387exv10w14.txt)] [added: December 4, 2017)](http://www.sec.gov/Archives/edgar/data/1069183/000106918317000139/a104-joshuamisner.htm)] |

| [removed: 10.7*] [added: 10.5*] | | [2009 Stock Incentive Plan (incorporated by reference to Appendix A to 2009 Proxy Statement, filed April 15, 2009)](http://www.sec.gov/Archives/edgar/data/1069183/000095015309000283/p14714def14a.htm#024) |

| [removed: 10.8*] [added: 10.10*] | | [Executive Employment Agreement with [removed: Jeff Kukowski,] [added: Patrick W. Smith,] dated [removed: August 9, 2010] [added: December 1, 2017] (incorporated by reference to Exhibit [removed: 10.18] [added: 10.1] to the [removed: Annual] [added: Current] Report on Form [removed: 10-K,] [added: 8-K,] filed [removed: March 8, 2013)](http://www.sec.gov/Archives/edgar/data/1069183/000119312513098571/d444092dex1018.htm)] [added: December 4, 2017)](http://www.sec.gov/Archives/edgar/data/1069183/000106918317000139/a101-patrickwsmith.htm)] |