Axon Enterprise (AXON) 10-K risk factor changes: FY2019 vs FY2018

[removed: We] [added: We] are materially dependent on acceptance of our products by law enforcement markets, both domestic and international.

If law enforcement agencies do not continue to purchase and use our products, our revenues will be adversely [removed: affected.][added: affected.]

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

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

In the years ended December 31, [removed: 2018, 2017] [added: 2019, 2018] and [removed: 2016,] [added: 2017,] we derived a significant portion of our revenues from sales of TASER [removed: CEW] [added: CED] brand devices and related cartridges, and expect to depend on sales of these products for a significant portion of our revenue for the foreseeable future.

[removed: If] [added: If] we are unable to design, [removed: introduce and] [added: introduce,] sell [added: and deploy] new products or new product features successfully, our business and financial results could be adversely [removed: affected.][added: affected.]

These products include, but are not limited to, Axon Body 3, Axon [added: Aware, Axon] Records, Axon Dispatch, and future generations of the TASER [removed: CEW] [added: CED] and Axon Fleet.

[removed: Delays] [added: Delays] in product development schedules may adversely affect our revenues and cash [removed: flows.][added: flows.]

The development of [removed: CEWs,] [added: CEDs,] devices, sensors and software is a complex and time-consuming process.

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

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

[removed: We] [added: We] face risks associated with rapid technological change and new competing [removed: products.][added: products.]

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

[removed: Defects] [added: Defects] in our products could reduce demand for our products and result in a loss of sales, delay in market acceptance and damage to our [removed: reputation.][added: reputation.]

[removed: If] [added: If] our security measures 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 [removed: liabilities.][added: liabilities.]

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

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

[removed: 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.

[removed: Defects] [added: Defects] or disruptions in our services could impact demand for our services and subject us to substantial [removed: liability.][added: liability.]

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, [added: labor and employment,] economic or other trade prohibitions or sanctions, securities law compliance, and online payment services.

For example, in 2016, the [removed: European Union] [added: EU] and [removed: United States] [added: the U.S.] agreed to an alternative transfer framework for data transferred from the [removed: European Union] [added: EU] to the [removed: United States,] [added: U.S.,] 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 [removed: Europe] [added: the EU] to the [removed: United States] [added: U.S.] 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.

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

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

Similarly, there are a number of legislative proposals in the [removed: United States,] [added: U.S.,] 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.

[removed: These] [added: Additionally, these] laws and regulations, [removed: as well as] [added: or] any associated inquiries or investigations or [removed: any] other government actions, may [removed: be costly to comply with and may] delay or impede the development of new products, result in negative publicity, [removed: 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.

[removed: Most] [added: Most] of our end-user customers are subject to budgetary and political constraints that may delay or prevent [removed: sales.][added: sales.]

[removed: We] [added: We] expend significant resources in anticipation of a sale due to our lengthy sales cycle and may receive no revenue in [removed: return.][added: return.]

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

[removed: An] [added: 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 and contract [removed: assets.][added: assets.]

[removed: Changes] [added: Changes] in civil forfeiture laws may affect our customers’ ability to purchase our [removed: products][added: products.]

[removed: Changes in state legislatures] [added: Legislative changes] could impact our customers’ ability to seize funds or use seized funds to fund purchases.

[removed: SaaS] [added: SaaS] revenue for 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 [removed: results.][added: results.]

[removed: These complexities and additional] [added: Higher] costs [added: or unavailability of materials] could adversely affect our [removed: business,] financial [removed: condition or operating results.][added: results.]

[removed: We] [added: We] may face personal injury, wrongful death and other liability claims that harm our reputation and adversely affect our sales and financial [removed: condition.][added: condition.]

Our [removed: CEW] [added: CED] products are often used in aggressive confrontations that may result in serious, permanent bodily injury or death to those involved.

Our [removed: CEW] [added: CED] products may be associated with these injuries.

[removed: Other] [added: Other] litigation may subject us to significant litigation costs and judgments and divert management attention from our [removed: business.][added: business.]

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 us, litigation against a [removed: competitor and litigation] [added: competitor, enforcement actions] filed [removed: by a former distributor] against [removed: us.][added: us, and litigation involving the U.S. Federal Trade Commission (“FTC”).]

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

We may choose to carry higher level of inventories to mitigate the risk of production delays, which may in turn expose us to an increased risk of obsolescence.

We are devoting significant resources to develop and deploy our cloud-based productivity and communication software-as-a-service ("SaaS") solutions, which we intend to broadly deploy to a large number of customers.

Customer requirements for these products are complex and varied.

If we are unable to develop scalable solutions that can consistently be configured for customers with minimal effort, or if we are unable to build out a professional services team that can consistently configure our products to meet the requirements of large numbers of customers in a timely and cost-effective manner, our ability to broadly scale our cloud-based productivity and communication SaaS solutions could be negatively impacted, and our deployment costs could negatively impact our operating results.

International or domestic geopolitical or other events, including the imposition of new or increased tariffs and/or quotas by the U.S. government on any of these raw materials or components, could adversely impact the supply and cost of these raw materials or components, and could adversely impact the profitability of our operations.

Although we have

New laws and regulations (or new interpretations of existing laws and regulations) may require us to incur substantial costs, expose us to unanticipated civil or criminal liability, or cause us to change our business practices.

The costs of compliance with these laws and regulation are high and are likely to increase in the future.

*TASER and Axon devices*

Axon devices using lithium batteries are subject to US-DOT/UN 38.3 for transportation, and all our products containing hazardous chemicals require an additional safety data sheet following Occupational Safety and Health Administration ("OSHA") recommendation.

We follow IEC 62133 for our rechargeable battery packs, UL 1642 for cells, and IEC 60950 (soon to be replaced by IEC 62368) for our wireless and docks devices.

These regulations also affect CEDs with Axon signal technology, including signal performance power magazine technology, TASER 7 battery packs and could impact future CEDs that feature wireless technology.

*Radio spectrum devices*

Axon body worn cameras, docks, fleet vehicle cameras and signal devices are subject to FCC’s rules and regulations.

The FCC regulates not only the "intentional radiation" of radio transmitters, but also the "unintentional radiation" of noise from all sorts of electrical equipment.

The FCC regulations appear in title 47 of the United States Code of Federal Regulations (47CFR).The current Axon products use Bluetooth, WiFi and/or LTE radio technologies.

With the integration of LTE technologies, it is required to apply for the approval of private certifications such as CTIA, required by FirstNet and other operators.

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

*Environmental regulations*

In addition, the EU has defined a regulation for Registration, Evaluation, Authorization and Restriction of Chemicals (the “REACH Regulation”) that places responsibility on industry to manage the risks from chemicals contained in products and to provide safety information about such substances.

Manufacturers and importers are required to gather information on the properties of the chemical substances in their products, which will allow their safe handling.

Starting January 5, 2021, companies supplying products containing substances of very high concern as identified by the EU on the EU market have to submit information on these products to the European Chemicals Agency.

The information in their database is then made available to waste operators and consumers.

*Privacy regulations*

and services that provide service in Europe.

Many companies own intellectual property rights that are directly or indirectly related to public safety technologies.

These companies periodically demand licensing agreements or engage in litigation based on allegations of infringement or other violations of their patents, trademarks, copyrights, or trade secrets.

Non-practicing entities also have patents they have been granted or otherwise acquired, including patents that are directly or indirectly related to public safety technologies.

These entities may seek compensation for perceived infringement of their patents, including by filing claims against us, independent of the merit of any such claims.

As we enter new markets, expand into new product categories, and otherwise offer new products, services, and technologies, additional intellectual property claims may be filed against us by these companies, entities, and other third parties.

Additional intellectual property claims may also be filed against us as our current products, services, and technologies gain additional market share.

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.

Our suppliers may not provide, or we may not be able to obtain, intellectual property indemnification sufficient to offset all damages, fines or other penalties resulting from any claims of intellectual property infringement brought against us or our customers.

If we are unable to protect our intellectual property, the value of our brands and products may decrease and we may lose our competitive market advantage.

Our protective measures for this proprietary technology include patents, trademarks, copyrights, and trade secret protection.

However, these protective measures, as well as our efforts to pursue such protective measures, may prove inadequate.

For example, the value of intellectual property protection in certain countries may not be apparent until after such protection can no longer be pursued.

As such, our intellectual property protection may not extend to all countries in which our products are distributed or will be distributed in the future.

Though we work to protect our innovations, we may not be able to obtain protection for certain innovations.

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

Delayed or lengthy time to adoption by law enforcement agencies will negatively impact our sales and profitability.

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

The hosted service delivery business model is not presently widely adopted by our law enforcement customer base.

As such, the sales cycle has additional complexity with the need to educate our customers and address issues regarding agency bandwidth requirements, data retention policies, data security and chain of evidence custody.

Delays in successfully securing widespread adoption of Axon Evidence services could adversely affect our revenues, profitability and financial condition.

Significant delays in new product or service releases

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.

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.

We utilize multiple third-party cloud-based storage providers to host the Axon Evidence.com platform.

Utilizing and administering multiple cloud-based storage providers may result in duplication of efforts and resources, increased cost structure, and organization complexities.

If we are unable to protect our intellectual property, we may lose our competitive advantage or incur substantial litigation costs to protect our rights.

Our protective measures, including patents, trademarks, copyrights, trade secret protection, and Internet identity registrations, may prove inadequate to protect our proprietary rights and market advantage.

The validity and breadth of claims covered in technology patents involve complex legal and factual questions, and the resolution of such claims

may be highly uncertain, lengthy and expensive.

In addition, our patents may be held invalid upon challenge, or others may claim rights in or ownership of our patents.

Moreover, we are subject to litigation with parties that claim, among other matters, that we infringed their patents or other intellectual property rights.

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.

technology into the feature set.

The exit itself could negatively impact the

Environmental laws and regulations subject us to a number of risks and could result in significant liabilities and costs.

Regulations related to voice, data and communications services may impact our ability to sell our products.

Our dependence on third-party suppliers for key components of our devices could delay shipment of our products and reduce our sales.

Component shortages could result in our inability to produce at a volume to adequately meet customer demand, which could result in a loss of sales, delay in deliveries and injury to our reputation.

We may experience a decline in gross margins due to rising raw material and transportation costs associated with a future increase in petroleum prices.

A significant rise in oil prices could adversely impact our ability to sustain current gross margins by increasing component pricing and transportation costs.

systems could harm our ability to conduct normal business operations and our operating results as well as expose us to claims, litigation and governmental investigations and fines.

We are subject to income taxes in the United States and various jurisdictions outside of the United States.

[removed: Overview][added: Overview]

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

For the year ending December 31, [removed: 2019,] [added: 2020,] we expect revenue of [removed: $480] [added: $615] million to [removed: $490] [added: $625] million.

[removed: Results] [added: Results] of [removed: Operations][added: Operations]

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

| Net sales from products | $ | [removed: 327,635 | | | 78.0 | % | | $ | 285,859] [added: 399,474] | | | [removed: 83.1] [added: 75.3] | % | | $ | [removed: 238,573] [added: 327,635] | | | [removed: 88.9] [added: 78.0] | % |

| Net sales from services | [removed: 92,433 | | | | 22.0 | % | | 57,939] [added: 131,386] | | | | [removed: 16.9] [added: 24.7] | % | | [removed: 29,672] [added: 92,433] | | | | [removed: 11.1] [added: 22.0] | % |

| Net sales | [removed: 420,068 | | | | 100.0 | % | | 343,798] [added: 530,860] | | | | 100.0 | % | | [removed: 268,245] [added: 420,068] | | | | 100.0 | % |

| Cost of product sales | [removed: 139,337 | | | | 33.2 | % | | 117,997] [added: 190,683] | | | | [removed: 34.3] [added: 35.9] | % | | [removed: 91,536] [added: 139,337] | | | | [removed: 34.1] [added: 33.2] | % |

| Cost of service sales | [removed: 22,148 | | | | 5.3 | % | | 18,713] [added: 32,891] | | | | [removed: 5.5] [added: 6.2] | % | | [removed: 6,173] [added: 22,148] | | | | [removed: 2.3] [added: 5.3] | % |

| Operating expenses: | | | | | | | | | | | | | | [removed: | | | | | | |]

| Sales, general and administrative | [removed: 156,886 | | | | 37.3 | % | | 138,692] [added: 212,959] | | | | [removed: 40.3] [added: 40.1] | % | | [removed: 108,076] [added: 156,886] | | | | [removed: 40.3] [added: 37.3] | % |

| Research and development | [removed: 76,856 | | | | 18.3 | % | | 55,373] [added: 100,721] | | | | [removed: 16.1] [added: 19.0] | % | | [removed: 30,609] [added: 76,856] | | | | [removed: 11.4] [added: 18.3] | % |

| Total operating expenses | [removed: 233,742 | | | | 55.6 | % | | 194,065] [added: 313,680] | | | | [removed: 56.4] [added: 59.1] | % | | [removed: 138,685] [added: 233,742] | | | | [removed: 51.7] [added: 55.6] | % |

| Income [added: (loss)] from operations | [removed: 24,841 | | | | 5.9 | % | | 13,023] [added: (6,394] | | [added: )] | | [removed: 3.8] [added: (1.2] | [removed: %] [added: )%] | | [removed: 31,851] [added: 24,841] | | | | [removed: 11.9] [added: 5.9] | % |

| Interest and other [removed: income (expense),] [added: income,] net | [removed: 3,263] [added: 8,464] | | | | [removed: 0.8] [added: 1.6] | % | | [removed: 2,738] [added: 3,263] | | | | 0.8 | % | [removed: | (354 | | ) | | (0.1 | )% |]

| Income before provision for income taxes | [removed: 28,104 | | | | 6.7 | % | | 15,761] [added: 2,070] | | | | [removed: 4.6] [added: 0.4] | % | | [removed: 31,497] [added: 28,104] | | | | [removed: 11.7] [added: 6.7] | % |

| Provision (benefit) for income taxes | [removed: (1,101 | | ) | | (0.3 | )% | | 10,554] [added: 1,188] | | | | [removed: 3.1] [added: 0.2] | % | | [removed: 14,200] [added: (1,101] | | [added: )] | | [removed: 5.3] [added: (0.3] | [removed: %] [added: )%] |

| Net income | $ | [removed: 29,205 | | | 7.0 | % | | $ | 5,207] [added: 882] | | | [removed: 1.5] [added: 0.2] | % | | $ | [removed: 17,297] [added: 29,205] | | | [removed: 6.4] [added: 7.0] | % |

| Other Countries | [removed: 84,758 | | | | 20.2 | % | | 60,988] [added: 84,760] | | | | [removed: 17.7] [added: 16.0] | % | | [removed: 49,488] [added: 84,758] | | | | [removed: 18.4] [added: 20.2] | % |

| Total | $ | [removed: 420,068 | | | 100.0 | % | | $ | 343,798] [added: 530,860] | | | 100.0 | % | | $ | [removed: 268,245] [added: 420,068] | | | 100.0 | % |

(1) Amounts for the years ended December 31, 2017 [removed: 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.

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

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

[removed: For] [added: For] the Years Ended December [removed: 31, 2018 and 2017][added: 31, 2019 and 2018]

[removed: Net Sales][added: Net Sales]

Net sales by product line were as follows for the years ended December 31, [removed: 2018] [added: 2019] and [removed: 2017] [added: 2018] (dollars in thousands):

| | [removed: Year] [added: Year] Ended December [removed: 31,] [added: 31,] | | | | | | | | | | | | | | [removed: Dollar Change] [added: Dollar Change] | | | | [removed: Percent Change] [added: Percent Change] | |

| TASER 7 | $ | [removed: 7,358] [added: 56,652] | | | [removed: 1.8] [added: 10.7] | % | | $ | [removed: —] [added: 7,358] | | | [removed: —] [added: 1.8] | % | | $ | [removed: 7,358] [added: 49,294] | | | [removed: *] [added: 669.9] | [added: %] |

| TASER Pulse and Bolt | [removed: 5,182] [added: 4,089] | | | | [removed: 1.2] [added: 0.8] | % | | [removed: 4,340] [added: 5,182] | | | | [removed: 1.3] [added: 1.2] | % | | [removed: 842] [added: (1,093] | | [added: )] | | [removed: 19.4] [added: (21.1] | [removed: %] [added: )%] |

| [removed: Software and Sensors segment:] | [removed: | | | | | | | | |] [added: TASER] | | | | [added: Software and Sensors] | | | | [added: Total] | | |

| Axon Evidence and cloud services | [removed: 90,291] [added: 130,265] | | | | [removed: 21.5] [added: 24.5] | % | | [removed: 57,841] [added: 90,291] | | | | [removed: 16.8] [added: 21.5] | % | | [removed: 32,450] [added: 39,974] | | | | [removed: 56.1] [added: 44.3] | % |

| Software and Sensors segment | [removed: 166,953] [added: 249,199] | | | | [removed: 39.6] [added: 46.9] | % | | [removed: 109,286] [added: 166,953] | | | | [removed: 31.8] [added: 39.6] | % | | [removed: 57,667] [added: 82,246] | | | | [removed: 52.8] [added: 49.3] | % |

| Total net sales | $ | [removed: 420,068] [added: 530,860] | | | 100.0 | % | | $ | [removed: 343,798] [added: 420,068] | | | 100.0 | % | | $ | [removed: 76,270] [added: 110,792] | | | [removed: 22.2] [added: 26.4] | % |

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

| | [removed: 2018] [added: 2019] | | | [removed: 2017] [added: 2018] | | | [removed: Unit Change] [added: Unit Change] | | | [removed: Percent Change] [added: Percent Change] | |

| TASER 7 | [removed: 5,759] [added: 49,221] | | | [removed: —] [added: 5,759] | | | [removed: 5,759] [added: 43,462] | | | [removed: *] [added: 754.7] | [added: %] |

| TASER Pulse and Bolt | [removed: 18,398] [added: 11,785] | | | [removed: 12,504] [added: 18,398] | | | [removed: 5,894] [added: (6,613] | [added: )] | | [removed: 47.1] [added: (35.9] | [removed: %] [added: )%] |

[removed: Backlog] [added: Backlog] - As of December [removed: 31, 2018 compared] [added: 31, 2019 compared] to December [removed: 31, 2017][added: 31, 2018]

The TASER segment backlog balance was [removed: $54.6] [added: $55.2] million as of December 31, [removed: 2018.][added: 2019.]

This section discusses our results of operations for the year ended December 31, 2019 as compared to the year ended December 31, 2018.

For a discussion and analysis of the year ended December 31, 2018, compared to the same period in 2017 please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 27, 2019.

Axon is a global network of devices, apps, training and people that helps public safety personnel become smarter and safer.

Our technologies give law enforcement the confidence, focus and time they need to protect their communities.

Our products impact every aspect of an officer's day-to-day experience.

Our revenues for the year ended December 31, 2019 were $530.9 million, an increase of $110.8 million, or 26.4%, from the prior year.

We had a loss from operations of $6.4 million compared to income from operations of $24.8 million in the prior year.

Gross margins were compressed related to the rollout of our latest generation TASER device and increased data storage expenses, partially offset by higher margins for Software & Sensors devices.

Increased cost of sales, selling, general and administrative expenses, and research and development expenses to support continued and future growth also contributed to the decline in operating results.

Additionally, expenses for the year ended December 31, 2019 reflected $51.6 million in incremental stock-based compensation expense related to the CEO Performance Award and XSPP.

The decline in operating results was partially offset by a $4.3 million increase in interest income.

2020 Outlook

We anticipate that revenue for the three months ending March 31, 2020 will reflect approximately 13% growth as compared to the three months ended March 31, 2019.

We anticipate that the timing of 2020 revenue will reflect a similar distribution as in 2019.

In late 2019, a novel strain of coronavirus was first detected in Wuhan, China.

Following the outbreak of this virus, the Chinese government has quarantined certain affected regions and certain travel restrictions have been imposed.

Our operations team is closely monitoring the potential impact to our supply chain.

At this time we have successfully managed through the current impacts.

Our operations team has some flexibility to adapt to the changing situation; however, if the situation further deteriorates or the outbreak results in further travel restriction on both supply and demand, these impacts could affect our full year guidance.

| | | | | | | | | | | | | | |

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

| | | | | | | | | | | | | | |

| | 2019 | | | | | | | 2018 | | | | | |

| Cost of sales | 223,574 | | | | 42.1 | % | | 161,485 | | | | 38.5 | % |

| Gross margin | 307,286 | | | | 57.9 | % | | 258,583 | | | | 61.5 | % |

| | | | | | | | | | | | | | |

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

| | | | | | | | | | | | | | |

| | 2019 | | | | | | | 2018 | | | | | |

| United States | $ | 446,100 | | | 84.0 | % | | $ | 335,310 | | | 79.8 | % |

International revenue in 2019 remained consistent with 2018.

Lower sales in Canada and the Asia Pacific region were offset by increased sales in Europe and Africa.

In both segments, we report sales of products and services.

Service revenue in both segments includes sales related to Axon Evidence.

In the Software and Sensors segment, service revenue also includes other recurring cloud-hosted software revenue and related professional services.

| | 2019 | | | | | | | 2018 | | | | | | | | | | | | |

| TASER X26P | 52,524 | | | | 9.9 | % | | 70,638 | | | | 16.8 | % | | (18,114 | | ) | | (25.6 | )% |

| TASER X2 | 55,920 | | | | 10.5 | % | | 78,837 | | | | 18.8 | % | | (22,917 | | ) | | (29.1 | )% |

| Cartridges | 85,987 | | | | 16.2 | % | | 68,258 | | | | 16.3 | % | | 17,729 | | | | 26.0 | % |

| Axon Evidence and cloud services | 704 | | | | 0.1 | % | | — | | | | — | % | | 704 | | | | * | |

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

2019 Outlook

| | | | | | | | | | | | | | | | | | | | | |

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

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

| Cost of sales | 161,485 | | | | 38.5 | % | | 136,710 | | | | 39.8 | % | | 97,709 | | | | 36.4 | % |

| Gross margin | 258,583 | | | | 61.5 | % | | 207,088 | | | | 60.2 | % | | 170,536 | | | | 63.6 | % |

| United States | $ | 335,310 | | | 79.8 | % | | $ | 282,810 | | | 82.3 | % | | $ | 218,757 | | | 81.6 | % |

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.

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

| TASER segment: | | | | | | | | | | | | | | | | | | | | |

| 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 | )% |

| 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 | % |

| 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 | % |

* Not meaningful

(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.

Net unit sales were as follows:

| | | | | | | | | | | | |

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

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

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

| 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 | % |

| Axon Dock | 17,762 | | | 23,492 | | | (5,730 | ) | | (24.4 | )% |

| TASER Cam | 8,310 | | | 6,432 | | | 1,878 | | | 29.2 | % |

*Not meaningful

Net sales for the TASER segment increased $18.6 million, or 7.9%, primarily as a result of increased sales of TASER devices primarily attributable to increased sales under the Officer Safety Plan ("OSP") and TASER 60 installment payment programs, including sales of TASER 7 devices, which commenced during the three months ended December 31, 2018.

[removed: Interest] [added: Interest] Rate [removed: Risk][added: Risk]

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

At December 31, [removed: 2018,] [added: 2019,] there was no amount outstanding under the line of credit, and the available borrowing under the line of credit was [removed: $96.9] [added: $47.3] million.

[removed: Exchange] [added: Exchange] Rate [removed: Risk][added: Risk]

Based on investment positions as of December 31, 2019, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $0.8 million decline in the fair market value of the portfolio.

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

$2.7 million at December 31, 2019.

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

[removed: Overview][added: Overview]

[removed: Our core] [added: Axon’s] mission is to protect life.

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

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

[removed: We also have a] [added: Our global] software [removed: engineering development center] [added: hub is] located in Seattle, Washington, and [added: we also have] subsidiaries [added: and / or offices] located in Australia, Canada, Finland, Hong Kong, Germany, India, [added: Italy,] the Netherlands, the United Kingdom, and Vietnam.

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

[removed: 2)Software and Sensors: Axon is the market leader in on-officer body (Axon Body] [added: *Sensors — Connected Cameras] and [removed: Flex)] [added: Digital Evidence Management Software:* The body-worn camera] and in-car [removed: (Axon Fleet) cameras as well as cloud-based digital evidence management software (Evidence.com).][added: video market is highly competitive.]

[added: | 2. | Software and Sensors: Axon is the market leader in on-officer body (Axon Body and Flex) and in-car (Axon Fleet) cameras as well as cloud-based digital evidence management software (Evidence.com).] 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. [added: Of the 69 largest metropolitan area police departments in the U.S., 47 are on the Axon Network. |]

Further information about our reportable segments and sales by geographic region is included in Notes 1 and [removed: 16] [added: 17] of the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.

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

Axon has dedicated sales representatives for the 1,200 largest agencies, which account for 70% to 80% of [added: U.S. law enforcement] patrol officers.

Internationally, we began focusing on a direct sales strategy in 2017, and in 2018 [added: and 2019] we made significant [removed: strides toward] [added: investments in] 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, [removed: 2018, 2017] [added: 2019, 2018] or [removed: 2016.][added: 2017.]

[removed: Manufacturing] [added: Manufacturing] and Supply [removed: Chain][added: Chain]

We provide limited manufacturer's warranties on our [removed: CEWs] [added: CEDs] and Axon devices.

[removed: Competition][added: Competition]

[removed: TASER:] [added: *De-escalation — TASER for] Law Enforcement, Corrections and Private Security [removed: Markets:] [added: Markets:*] Our [removed: CEWs] [added: CEDs] compete with a variety of other less-lethal [removed: alternatives,] [added: alternatives to firearms,] including rubber bullets or rubber baton rounds, pepper spray, mace, traditional stun guns, [removed: and] [added: hand-held remote restraint devices involving a tether, laser dazzlers that cause temporary blindness, stun grenades, long-range acoustic devices,] police batons and night sticks.

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

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

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

[removed: Cameras & Software: Video Evidence Market: In the body-worn camera and in-car video markets, our] [added: Our] competition [removed: primarily] includes Motorola [removed: Solutions,] [added: Solutions and WatchGuard, which Motorola purchased in 2019,] Panasonic Corp., Reveal Media, [removed: Watchguard,] L3 Mobile-Vision, Coban Technologies, Digital Ally, [removed: Getac and] [added: Getac,] Utility [removed: Associates.][added: Associates, Intrensic, Safety Vision and Visual Labs.]

Our [removed: cloud based] [added: cloud-based] digital evidence management system, Axon Evidence, competes with both cloud-based platforms and on-premises based systems designed by third-parties or in-house by an agency's technology staff.

[removed: Records Management] [added: *Productivity] and [removed: Computer-Aided Dispatch:] [added: Communications — RMS and CAD:*] The RMS and CAD markets are highly competitive and highly fragmented.

[removed: Incumbent] [added: We have identified more than 50 incumbent] software [removed: providers include] [added: providers, including] Motorola Solutions, Tyler Technologies, Central Square Technologies (formerly Superion, TriTech and Aptean), [added: Northrop Grumman,] Hexagon [removed: AB, Niche Technology Inc., ALEN Inc., Caliber Public Safety (parent, Harris Systems USA), and Mark 43 Inc.]

[removed: Seasonality][added: Seasonality]

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

Additionally, new product introductions can significantly impact [added: the cadence of] net sales, product costs and operating expenses.

[removed: Environmental Regulation][added: Environmental Regulation]

[removed: Intellectual Property][added: Intellectual Property]

As of December 31, [removed: 2018,] [added: 2019,] we hold [removed: 158] [added: 183] U.S. patents, [removed: 70] [added: 75] U.S. registered trademarks, [removed: 102] [added: 127] international patents, and [removed: 293] [added: 313] international registered trademarks, and also have numerous patents and trademarks pending.

[added: 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: Employees][added: Employees]

As of December 31, [removed: 2018,] [added: 2019,] we had [removed: 1,155] [added: 1,323] full-time employees and [removed: 231] [added: 593] temporary employees.

The breakdown of our full-time employees by department was as follows: [removed: 217] [added: 249] direct manufacturing employees, [removed: 360] [added: 408] research and development employees, [removed: 336] [added: 401] administrative and manufacturing support employees and [removed: 242] [added: 265] employees within sales, marketing, communications and training.

Of the [removed: 231] [added: 593] temporary employees, [removed: approximately 80%] [added: nearly 70%] worked in direct manufacturing roles.

[removed: Available Information][added: Available Information]

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports filed with or furnished to the SEC are available free of charge on our website at [removed: http://investor.axon.com] [added: *http://investor.axon.com*] as soon as reasonably practicable after we electronically file or furnish such material to the SEC.

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

The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at [removed: http://www.sec.gov.][added: *http://www.sec.gov*.]

Our products solve some of society's most challenging problems and our mission attracts top talent.

An axon is a nerve fiber that serves as the primary communication link in a nervous system — similarly, we see ourselves as building the nervous system for public safety.

Our growth strategy includes heavy R&D investment to support continuous innovation on behalf of law enforcement customers.

In addition, we are expanding our sales force to support sales into law-enforcement-adjacent markets, to include the U.S. federal government and military, U.S. and international departments of corrections (prisons), and the fire and emergency medical services markets.

In these markets, we seek to increasingly drive adoption of integrated product bundles that generate recurring revenue and cash flow.

The Axon Network is a mutually reinforcing suite — the more subscribers we attract, the more value we can offer.

More value delivered drives user adoption, which generates data for collaborative sharing, real-time communications, and improving product performance with artificial intelligence ("AI") training.

| | |

| --- | --- |

| | |

| --- | --- |

Guiding Product Principles

Axon’s products are generally cloud-connected, designed to drive better outcomes and customer experiences, and sold via bundles.

Our solutions are organized into four categories:

- De-escalation: We develop smart weapons and tools that support public safety officers in de-escalating situations, avoiding or minimizing use of force.

These tools include the cloud-connected TASER CED (TASER 7) as

well as a suite of Augmented Reality and Virtual Reality ("AR/VR") training services for law enforcement, delivered through our Axon Academy training platform.

To obsolete firearms and bullets, we intend to not only develop more effective TASER devices over time but also drive training and adoption of the best practices in modern policing.

- Sensors: Our digital evidence management software, Axon Evidence, supports our network of cloud-connected cameras and sensors.

Axon Evidence addresses the challenges presented by growing amounts of digital evidence via closed circuit television video, body worn camera video, in-car camera video, and citizen-captured digital evidence, making it easy to store, manage, redact and share on one platform.

Axon Evidence is the world’s largest cloud-hosted data repository of law enforcement video data and other types of electronic evidence.

Axon is also driving innovation in the body camera category through developing solutions that do more than collect, store and manage video.

In September 2019, we began shipping Axon Body 3, a camera with an LTE antenna and a Global Positioning System ("GPS") chip, which supports real-time awareness.

- Productivity: Our productivity suite of tools is designed to reduce time spent on paperwork.

Axon Records, an emerging product, is a cloud-based report-writing software tool that takes a disruptive modern approach to displace legacy records management systems ("RMS") by putting body camera video at the heart of the incident record.

Axon Records includes Axon Standards, a radically simpler approach to use-of-force reporting that can be easily adopted alongside a traditional RMS before upgrading to the full service.

Axon Performance helps agencies to ensure that officers are adhering to agency policies, and provides them the analytics to demonstrate the effectiveness of their body-worn camera programs.

Redaction Assistant enables agencies to redact videos in a fraction of the time through the use of artificial intelligence ("AI").

- Communications: We are developing communication tools that support real-time situational awareness through the sharing of information across myriad media, including voice, messaging, location mapping, and intelligence and evidence sharing.

Products include Axon Aware, which allows agencies to know the GPS location of their officers and what those officers are experiencing through live video streaming, and Axon Dispatch, which is a computer-aided dispatch ("CAD") product that is designed to empower everyone in public safety who is involved in incident response: dispatchers, call takers, command staff, patrol officers, firefighters and medical personnel.

Our primary customer market is US law enforcement.

In 2019, we added sales personnel to capture law enforcement-adjacent markets, such as the US federal government and military, U.S. and international departments of corrections, and the fire and emergency medical services markets.

TASER devices also offer connectivity to our cloud network, which allows agencies to more effectively manage their less-lethal programs and automate use-of-force reporting.

The design maturity of the TASER platform, as well as our development and sale of a two-shot device, are also key competitive differentiators.

The TASER StrikeLight competes in the flashlight category, in which there are dozens, if not hundreds, of competitors, including tactical flashlight providers such as SureFire, 5.11 Tactical, Blackhawk, Maglite, and many more.

The market for software solutions to improve public safety agency workflows is highly fragmented and highly competitive.

AB, Niche Technology Inc., Caliber Public Safety (parent, Harris Systems USA), Saab, Sopra Steria, and Mark 43 Inc. In addition, not all law enforcement agencies use software for report writing — some still use paper.

We believe our network of camera sensors and digital evidence management platform give us a strategic advantage in these product categories.

Refer to Section 1A, Risk Factors under the heading “A variety of new and existing laws and/or interpretations could materially and adversely affect our business.”

We are constantly innovating across all of our platforms, including on the TASER platform, and in the next few years expect to file more patent applications related to TASER 7 alone than there are TASER patents expiring due to age.

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

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.

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.

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

Strategic Growth Areas

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-

based digital evidence management system.

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.

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.”

We continuously assess whether and where to seek formal protection for

[removed: UNITED STATES][added: UNITED STATES]

[removed: SECURITIES] [added: SECURITIES] AND EXCHANGE [removed: COMMISSION][added: COMMISSION]

[removed: Washington,] [added: Washington,] D.C. [removed: 20549][added: 20549]

[removed: | Form 10-K |][added: Form 10-K]

[removed: (Mark One)][added: (Mark One)]

| [removed: x] [added: ☒] | [removed: ANNUAL] [added: ANNUAL] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF [removed: 1934] [added: 1934] |

[removed: For] [added: For] the fiscal year [removed: ended December] [added: ended December] 31, [removed: 2018][added: 2019]

| [removed: ¨] [added: ☐] | [removed: TRANSITION] [added: TRANSITION] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF [removed: 1934] [added: 1934] |

[removed: For] [added: For] the transition period [removed: from to][added: from to]

[removed: Commission] [added: Commission] File [removed: Number: 001-16391][added: Number: 001-16391]

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

| [removed: Delaware] [added: Delaware] | | [removed: 86-0741227] | [added: | | 86-0741227 |]

| (State or other jurisdiction of incorporation or organization) | | [added: | | |] (I.R.S. Employer Identification No.) |

| [removed: 17800] [added: 17800] North 85th [removed: Street Scottsdale, Arizona] [added: Street] | | [removed: 85255] | [added: | | 85255 |]

| (Address of principal executive offices) | | [added: | | |] (Zip Code) |

[removed: Registrant’s] [added: Registrant’s] telephone number, including area [removed: code:][added: code:]

[removed: (480) 991-0797][added: (480) 991-0797]

[removed: Securities] [added: Securities] registered pursuant to Section 12(b) of the [removed: Act:][added: Act:]

| Title of each class | [added: Trading Symbol(s)] | Name of exchange on which registered |

| Common Stock, $0.00001 par value per share | [added: AAXN] | The [removed: Nasdaq] [added: NASDAQ] Global Select Market |

[removed: Securities] [added: Securities] registered pursuant to Section 12(g) of the [removed: Act:][added: Act:]

[removed: None][added: None]

[removed: (Title] [added: (Title] of [removed: Class)][added: Class)]

Yes [removed: ý] [added: ☒] No [removed: ¨][added: ☐]

Yes [removed: ¨] [added: ☐] No [removed: ý][added: ☒]

| Large accelerated filer | | [removed: ý] [added: ☒] | | Accelerated filer | | [removed: ¨] [added: ☐] |

| Non-accelerated filer | | [removed: ¨] [added: ☐] | | Smaller reporting company | | [removed: ¨] [added: ☐] |

| | | | | Emerging growth company | | [removed: ¨] [added: ☐] |

[removed: The] [added: As of June 30, 2019, the] aggregate market value of the [added: registrant’s] common stock held by non-affiliates of the [removed: registrant,] [added: registrant was approximately $3.737 billion] based on the [removed: last sales] [added: closing sale] price [removed: of the issuer’s common stock on June 30, 2018, which was the last business day of the registrant’s most recently completed second fiscal quarter,] as reported [removed: by NASDAQ, was approximately $3,613,000,000.][added: on the NASDAQ Global Select Market.]

The number of shares of the registrant’s common stock outstanding as of February 18, [removed: 2019] [added: 2020] was [removed: 58,829,384.][added: 59,528,200.]

[removed: DOCUMENTS] [added: DOCUMENTS] INCORPORATED BY [removed: REFERENCE][added: REFERENCE]

Parts of the registrant’s definitive proxy statement for its [removed: 2019] [added: 2020] annual meeting of stockholders to be prepared and filed with the Securities and Exchange Commission not later than 120 days after December 31, [removed: 2018] [added: 2019] are incorporated by reference into Part III of this Form 10-K.

[removed: AXON ENTERPRISE, INC.][added: | Axon Enterprise, Inc. |]

[removed: INDEX] [added: INDEX] TO ANNUAL REPORT ON FORM [removed: 10-K][added: 10-K]

[removed: FOR] [added: FOR] THE YEAR ENDED DECEMBER [removed: 31, 2018][added: 31, 2019]

| | [removed: [PART I](#s6B458E4AD5C981CBC6AFF435DF8794A6)] [added: [PART I](#sB67EE9971A8B5AF7A54472B389162729)] | [removed: Page] [added: Page] |

| [Item [removed: 1.](#s1930B40EE704FD5BDC59F434FE6DA797)] [added: 1.](#sC3308B3476365CFF82AC0C53D6BF4F21)] | [removed: [Business](#s1930B40EE704FD5BDC59F434FE6DA797)] [added: [Business](#sC3308B3476365CFF82AC0C53D6BF4F21)] | [removed: [4](#s1930B40EE704FD5BDC59F434FE6DA797)] [added: [4](#sC3308B3476365CFF82AC0C53D6BF4F21)] |

| [Item [removed: 1A.](#sCA4B1DB7445E320BCE42F435DFDBEF17)] [added: 1A.](#sD9235E13ACFB5D0AAC5D72BE74C3289C)] | [Risk [removed: Factors](#sCA4B1DB7445E320BCE42F435DFDBEF17)] [added: Factors](#sD9235E13ACFB5D0AAC5D72BE74C3289C)] | [removed: [8](#sCA4B1DB7445E320BCE42F435DFDBEF17)] [added: [8](#sD9235E13ACFB5D0AAC5D72BE74C3289C)] |

| [Item [removed: 1B.](#s18BEBD4A04CDE30DF329F435E00CF97C)] [added: 1B.](#s24C6EEDA3AF95EE7881AB3A676F29E2C)] | [Unresolved Staff [removed: Comments](#s18BEBD4A04CDE30DF329F435E00CF97C)] [added: Comments](#s24C6EEDA3AF95EE7881AB3A676F29E2C)] | [removed: [20](#s18BEBD4A04CDE30DF329F435E00CF97C)] [added: [21](#s24C6EEDA3AF95EE7881AB3A676F29E2C)] |

| [Item [removed: 2.](#sC755F4F3A820996DA1B6F435E02EB283)] [added: 2.](#sDD8B6E1D33D955B3AB50FB7CE1937A55)] | [removed: [Properties](#sC755F4F3A820996DA1B6F435E02EB283)] [added: [Properties](#sDD8B6E1D33D955B3AB50FB7CE1937A55)] | [removed: [21](#sC755F4F3A820996DA1B6F435E02EB283)] [added: [22](#sDD8B6E1D33D955B3AB50FB7CE1937A55)] |

or

| | | | | | |

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

| | | | | | |

| | | | | | |

| Scottsdale | , | Arizona | | | |

Yes ☒ No ☐

Yes ☒ No ☐

Yes ☐ No ☒

AXON ENTERPRISE, INC.

| | [PART IV](#s366374DBAD1557D0B897F6BAA0080400) | |

10-K 1 a10kaaxn123118.htm 10-K

| |

| --- |

or

| | | |

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Solely for purposes of this disclosure, shares of common stock held by executive officers and directors of the registrant as of such date have been excluded because such persons may be deemed to be affiliates.

This determination of executive officers and directors as affiliates is not necessarily a conclusive determination for any other purposes.

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

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

[removed: Our] [added: The majority of our locations support both of our reportable segments, except for our] Vietnam and Seattle, Washington [removed: locations] [added: locations, which] primarily support our Software & Sensors segment.

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.

[removed: PART II][added: PART II]

[removed: Market Information][added: Market Information]

[removed: Holders][added: Holders]

As of December 31, [removed: 2018,] [added: 2019,] there were [removed: 247] [added: 241] holders of record of our common stock.

[removed: Dividends][added: Dividends]

[removed: Issuer] [added: Issuer] Purchases of Equity [removed: Securities][added: Securities]

During the year ended December 31, [removed: 2018,] [added: 2019,] no common shares were purchased under the program.

As of December 31, [removed: 2018] [added: 2019] and [removed: 2017,] [added: 2018,] $16.3 million remained available under the plan for future purchases.

[removed: Stock] [added: Stock] Performance [removed: Graph][added: Graph]

The graph covers the period from December 31, [removed: 2013] [added: 2014] to December 31, [removed: 2018.][added: 2019.]

The graph assumes that the value of the investment in our stock and in each index was $100 at December 31, [removed: 2013,] [added: 2014,] and that all dividends were reinvested.

[removed: ][added: ]

| | [removed: 2013] [added: 2014] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2017] [added: 2018] | | | | [removed: 2018] [added: 2019] | | |

| Axon Enterprise, Inc. | $ | 100.00 | | | $ | 65.29 | | | $ | 91.54 | | | $ | 100.08 | | | $ | 165.22 | | | $ | 276.74 | |

| NASDAQ Composite | 100.00 | | | | 106.96 | | | | 116.45 | | | | 150.96 | | | | 146.67 | | | | 200.49 | | |

| Russell 3000 | 100.00 | | | | 100.48 | | | | 113.27 | | | | 137.21 | | | | 130.02 | | | | 170.35 | | |

During 2016, we suspended our 10b-5 plan, and any future purchases will be discretionary.

| 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 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: 2018, 2017] [added: 2019, 2018] and [removed: 2016,] [added: 2017,] and the balance sheet data as of December 31, [removed: 2018] [added: 2019] and [removed: 2017,] [added: 2018,] 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: 2015] [added: 2016] and [removed: 2014,] [added: 2015,] and the balance sheet data as of December 31, [removed: 2016, 2015] [added: 2017, 2016] and [removed: 2014,] [added: 2015,] 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: For] [added: For] the Year Ended December [removed: 31,] [added: 31,] | | | | | | | | | | | | | | | | | | |

| | [removed: 2018] [added: 2019] | | | | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | |

| [removed: Statements] [added: Statements] of Operations [removed: Data:] [added: Data:] | | | | | | | | | | | | | | | | | | | |

| Net sales (1) | $ | [removed: 420,068] [added: 530,860] | | | $ | [removed: 343,798] [added: 420,068] | | | $ | [removed: 268,245] [added: 343,798] | | | $ | [removed: 197,892] [added: 268,245] | | | $ | [removed: 164,525] [added: 197,892] | |

| Gross margin | [removed: 258,583] [added: 307,286] | | | | [removed: 207,088] [added: 258,583] | | | | [removed: 170,536] [added: 207,088] | | | | [removed: 128,647] [added: 170,536] | | | | [removed: 101,548] [added: 128,647] | | |

| Income [added: (loss)] from operations (2) [added: (3)] | [removed: 24,841] [added: (6,394] | | [added: )] | | [removed: 13,023] [added: 24,841] | | | | [removed: 31,851] [added: 13,023] | | | | [removed: 35,335] [added: 31,851] | | | | [removed: 32,505] [added: 35,335] | | |

| Net income (3) [added: (4)] | [removed: 29,205] [added: 882] | | | | [removed: 5,207] [added: 29,205] | | | | [removed: 17,297] [added: 5,207] | | | | [removed: 19,933] [added: 17,297] | | | | [removed: 19,918] [added: 19,933] | | |

| Diluted earnings per share (3) [added: (4)] | $ | [removed: 0.50] [added: 0.01] | | | $ | [removed: 0.10] [added: 0.50] | | | $ | [removed: 0.32] [added: 0.10] | | | $ | [removed: 0.37] [added: 0.32] | | | $ | [removed: 0.34] [added: 0.36] | |

| | [removed: As] [added: As] of December [removed: 31,] [added: 31,] | | | | | | | | | | | | | | | | | | |

| [removed: Balance] [added: Balance] Sheet [removed: Data:] [added: Data:] | | | | | | | | | | | | | | | | | | | |

| Working capital [removed: (4)] (5) [added: (6)] | $ | [removed: 392,144] [added: 423,525] | | | $ | [removed: 97,242] [added: 392,144] | | | $ | [removed: 99,192] [added: 97,242] | | | $ | [removed: 123,269] [added: 99,192] | | | $ | [removed: 102,669] [added: 123,269] | |

| Total assets [removed: (4)] (5) [added: (6)] | [removed: 719,540] [added: 845,639] | | | | [removed: 338,112] [added: 719,540] | | | | [removed: 278,163] [added: 338,112] | | | | [removed: 229,881] [added: 278,163] | | | | [removed: 185,368] [added: 229,881] | | |

| Total current liabilities [added: (7)] | [removed: 166,011] [added: 195,566] | | | | [removed: 107,950] [added: 166,011] | | | | [removed: 78,039] [added: 107,950] | | | | [removed: 38,140] [added: 78,039] | | | | [removed: 31,973] [added: 38,140] | | |

| Total stockholders’ equity [removed: (4)] [added: (3)] (5) (6) [added: (8)] | [removed: 467,324] [added: 543,495] | | | | [removed: 167,444] [added: 467,324] | | | | [removed: 150,888] [added: 167,444] | | | | [removed: 157,004] [added: 150,888] | | | | [removed: 129,106] [added: 157,004] | | |

(1) Amounts for the years ended December 31, 2017, 2016, [removed: 2015,] and [removed: 2014] [added: 2015] 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.

[removed: (3)] [added: (4)] Includes the favorable impact of a [added: $5.0 million,] $8.9 [removed: million] [added: 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, [removed: 2018] [added: 2019, 2018,] and 2017, respectively.

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

[removed: (4)] [added: (5)] 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.

[removed: (5)] [added: (6)] In [removed: 2016, 2015,] [added: 2016] and [removed: 2014,] [added: 2015,] we used cash and cash equivalents to repurchase approximately $33.7 [removed: million, $7.6 million,] [added: million] and [removed: $22.4] [added: $7.6] million, respectively, of our common shares.

[removed: (6)] [added: (8)] 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.

| | 2019 | | | | 2018 | | | | 2017 | | | | 2016 | | | | 2015 | | |

(3) Reflects the impact of $51.6 million and $3.3 million in stock compensation expense related to the CEO Performance Award and XSPP for the years ended December 31, 2019 and 2018, respectively.

(7) Reflects the impact of higher deferred revenue resulting from shifting an increasing amount of our business to a subscription model.

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

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

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

| [removed: Index] [added: Index] to Consolidated Financial [removed: Statements] [added: Statements] | | [removed: Page] [added: Page] |

| [Consolidated Balance Sheets as of December 31, [removed: 2018] [added: 2019] and [removed: 2017](#s7E3C179D942092BB19FCF434E0EAECE4)] [added: 2018](#s801C9BB26E8751239EB640DA851FEFC9)] | | [removed: [53](#s7E3C179D942092BB19FCF434E0EAECE4)] [added: [46](#s801C9BB26E8751239EB640DA851FEFC9)] |

| [Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, [removed: 2018, 2017] [added: 2019, 2018] and [removed: 2016](#sA4CAACDB1412539D1FB8F434E1C375E2)] [added: 2017](#s38C339F1DA925817B3DF2BD516A109D9)] | | [removed: [54](#sA4CAACDB1412539D1FB8F434E1C375E2)] [added: [47](#s38C339F1DA925817B3DF2BD516A109D9)] |

| [Consolidated Statements of Stockholders' Equity for the years ended December 31, [removed: 2018, 2017] [added: 2019, 2018] and [removed: 2016](#s1EAFEFE706B47F04C81FF434E1940393)] [added: 2017](#s0280A89C7783542E880D7C11ACE8DEEF)] | | [removed: [55](#s1EAFEFE706B47F04C81FF434E1940393)] [added: [48](#s0280A89C7783542E880D7C11ACE8DEEF)] |

| [Consolidated Statements of Cash Flows for the years ended December 31, [removed: 2018, 2017] [added: 2019, 2018] and [removed: 2016](#sADC3F46D3839B9692247F434E2EDA3E5)] [added: 2017](#sBF2E7AFF5D7B5DE2A4902B368E1D832E)] | | [removed: [56](#sADC3F46D3839B9692247F434E2EDA3E5)] [added: [49](#sBF2E7AFF5D7B5DE2A4902B368E1D832E)] |

[removed: | [Notes to Consolidated Financial Statements](#s367B1A8B213BEF24A866F434E0BDD467) | | [57](#s367B1A8B213BEF24A866F434E0BDD467) |][added: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS]

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

| [Report of Grant Thornton LLP, Independent Registered Public Accounting [removed: Firm](#sB70E9476E1F70CE9F0E7F434E9399FFD)] [added: Firm](#s77E9CD3395085DF7A64C928FC1A7E9D0)] | | [removed: [92](#sB70E9476E1F70CE9F0E7F434E9399FFD)] [added: [85](#s77E9CD3395085DF7A64C928FC1A7E9D0)] |

[removed: AXON] [added: AXON] ENTERPRISE, [removed: INC.][added: INC.]

[removed: CONSOLIDATED] [added: CONSOLIDATED] BALANCE [removed: SHEETS][added: SHEETS]

| | [removed: December 31,] [added: December 31,] | | | | | | |

| | [removed: 2018] [added: 2019] | | | | [removed: 2017] [added: 2018] | | | [added: | 2017 | | |]

| [removed: ASSETS] [added: ASSETS] | | | | | | | |

| [removed: Current assets:] [added: Current assets:] | | | | | | | |

| Cash and cash equivalents | $ | [added: 172,250 | | | $ |] 349,462 | | | $ | 75,105 | |

| Short-term investments | [removed: —] [added: 178,534] | | | | [removed: 6,862] [added: —] | | |

| Accounts and notes receivable, net of allowance of [removed: $1,882] [added: $1,567] and [removed: $754] [added: $1,882] as of December 31, [removed: 2018] [added: 2019] and [removed: 2017,] [added: 2018,] respectively | [removed: 130,579] [added: 146,878] | | | | [removed: 56,064] [added: 130,579] | | |

| Contract assets, net | [removed: 13,960] [added: 47,718] | | | | [removed: —] [added: 13,960] | | |

| Inventory | [removed: 33,763] [added: 38,845] | | | | [removed: 45,465] [added: 33,763] | | |

| Prepaid expenses and other current assets | [removed: 30,391] [added: 34,866] | | | | [removed: 21,696] [added: 30,391] | | |

| Total current assets | [removed: 558,155] [added: 619,091] | | | | [removed: 205,192] [added: 558,155] | | |

| Property and equipment, net | [removed: 37,893] [added: 43,770] | | | | [removed: 31,172] [added: 37,893] | | |

| [removed: Deferred] [added: Net deferred] income tax [removed: assets, net] [added: assets] | [removed: 19,347] [added: $] | [added: 27,334] | | | [removed: 15,755] [added: $] | [added: 19,347] | |

| Intangible assets, net | [removed: 15,935] [added: 12,771] | | | | [removed: 18,823] [added: 15,935] | | |

| Goodwill | [removed: 24,981] [added: 25,013] | | | | [removed: 14,927] [added: 24,981] | | |

| Long-term notes receivable, net of current portion | [removed: 40,230] [added: 31,598] | | | | [removed: 36,877] [added: 40,230] | | |

| Other assets | [removed: 22,999] [added: 40,209] | | | | [removed: 15,366] [added: 22,999] | | |

| [removed: Total assets] [added: Total assets] | $ | [removed: 719,540] [added: 845,639] | | | $ | [removed: 338,112] [added: 719,540] | |

| [removed: LIABILITIES] [added: LIABILITIES] AND STOCKHOLDERS’ [removed: EQUITY] [added: EQUITY] | | | | | | | |

| [removed: Current liabilities:] [added: Current liabilities:] | | | | | | | |

| Accounts payable | $ | [removed: 15,164] [added: 25,874] | | | $ | [removed: 8,592] [added: 15,164] | |

| Accrued liabilities | [removed: 41,092] [added: 45,001] | | | | [removed: 23,502] [added: 41,092] | | |

| Current portion of deferred revenue | [removed: 107,016] [added: 117,864] | | | | [removed: 70,401] [added: 107,016] | | |

| Customer deposits | [removed: 2,702] [added: 2,974] | | | | [removed: 3,673] [added: 2,702] | | |

| Other current liabilities | [removed: 37] [added: 3,853] | | | | [removed: 89] [added: 37] | | |

| Total current liabilities | [removed: 166,011] [added: 195,566] | | | | [removed: 107,950] [added: 166,011] | | |

| Deferred revenue, net of current portion | [removed: 74,417] [added: 87,936] | | | | [removed: 54,881] [added: 74,417] | | |

| Liability for unrecognized tax benefits | [removed: 2,849] [added: 3,832] | | | | [removed: 1,706] [added: 2,849] | | |

| Long-term deferred compensation | [removed: 3,235] [added: 3,936] | | | | [removed: 3,859] [added: 3,235] | | |

| Other long-term liabilities | [removed: 5,704] [added: 10,520] | | | | [removed: 1,224] [added: 5,704] | | |

| Long-term investments | 45,499 | | | | — | | |

| Deferred tax liability, net | 354 | | | | — | | |

AXON ENTERPRISE, INC.

AXON ENTERPRISE, INC.

| Issuance of common stock for business combination contingent consideration | 70,613 | | | — | | | | — | | | | — | | | — | | | | — | | | | — | | | | — | | |

| Net income | — | | | — | | | | — | | | | — | | | — | | | | 882 | | | | — | | | | 882 | | |

| Balance, December 31, 2019 | 59,497,759 | | | $ | 1 | | | $ | 528,272 | | | 20,220,227 | | | $ | (155,947 | ) | | $ | 172,265 | | | $ | (1,096 | ) | | $ | 543,495 | |

AXON ENTERPRISE, INC.

| Net income | $ | 882 | | | $ | 29,205 | | | $ | 5,207 | |

| Other noncash, net | 3,928 | | | | 34 | | | | 657 | | |

AXON ENTERPRISE, INC.

1.

Restricted Cash

Restricted cash balance of $0.1 million as of December 31, 2019 primarily relates to funds held in an international bank account for a country in which we are required to maintain a minimum balance to operate.

Approximately half of the balance was included in prepaid expenses and other current assets on our consolidated balance sheets, with the remainder included in other assets.

Restricted cash balances as of December 31, 2018 included $0.9 million of sales proceeds related to long-term contracts with customers, which were included in prepaid expenses and other current assets on our consolidated balance sheets.

The proceeds were held in escrow until certain billing milestones were

AXON ENTERPRISE, INC.

achieved, and then specified amounts were transferred to our operating accounts.

The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

During the year ended December 31, 2019, we abandoned certain capitalized software related to implementation work on an enterprise resource planning system conversion, resulting in an impairment charge of $1.3 million, and certain planning and site development activities related to our planned new headquarters, resulting in an impairment charge of $0.7 million, both of which were included in sales, general and administrative expense in the accompanying consolidated statements of operations and comprehensive income.

In certain contracts with non-standard terms and conditions,

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Contract asset amounts that will be invoiced during the subsequent twelve month period from the balance sheet date are classified as current assets and the remaining portion is recorded within other assets on our consolidated balance sheets.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

We currently purchase both off the shelf and custom components, including, but not limited to, finished circuit boards, injection-molded plastic components, small machined parts, custom cartridge components, electronic

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

| Current portion of business acquisition contingent consideration | — | | | | 1,693 | | |

| Business acquisition contingent consideration, net of current portion | — | | | | 1,048 | | |

| Balance, December 31, 2015 | 53,692,192 | | | $ | 1 | | | $ | 178,143 | | | 18,432,158 | | | $ | (122,201 | ) | | $ | 83 | | | $ | 100,978 | | | $ | 157,004 | |

| Purchase of treasury stock | (1,788,069 | ) | | — | | | | — | | | | 1,788,069 | | | (33,746 | | ) | | — | | | | — | | | | (33,746 | | ) |

| Bond premium amortization | 34 | | | | 657 | | | | 1,265 | | |

| Tax benefit from stock-based compensation | — | | | | — | | | | (1,438 | | ) |

| Excess tax benefit from stock-based compensation | — | | | | — | | | | 1,438 | | |

1.

| | |

| --- | --- |

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

The impairment charges were recorded within the Software and Sensors Segment.

Deferred revenue consists of payments received and amounts invoiced in advance related to products and services for which the criteria for revenue recognition have not yet been met.

temporary differences are expected to be recovered or settled.

Sales are typically made on credit and we generally do not require collateral.

Management performs ongoing credit evaluations of its customers’ financial condition and maintains an allowance for estimated losses.

Uncollectible accounts are written off when deemed uncollectible, and accounts receivable are presented net of an allowance for doubtful accounts, which totaled $1.9 million and $0.8 million as of December 31, 2018 and 2017, respectively.

We currently purchase finished circuit boards and injection-molded plastic components from suppliers located in the U.S., Mexico and Taiwan.

We also purchase small, machined parts from a vendor in Taiwan, custom cartridge components from a proprietary vendor in the U.S., and electronic components from a variety of international and domestic distributors.

For the years ended December 31, 2018, 2017 and 2016, net sales by geographic area as well as the percentage relationship to total net sales included in the accompanying statements of operations were as follows (in thousands):

No stock options were awarded from 2012 to 2017.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) and Accounting Standards Codification ("ASC") Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers ("ASC 340-40"), (collectively, “Topic 606”).

On January 1, 2018, we adopted Topic 606 by applying the modified retrospective method of adoption for all contracts that were not substantially completed as of the adoption date.

ASU 2014-09 requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations.

Refer to Note 2 for further discussion.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.

ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments.

ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory.

ASU 2016-16 requires an entity to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.

This removes the exception to postpone recognition until the asset has been sold to an outside party.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows - Restricted Cash (Topic 230), which amends the existing guidance relating to the treatment of restricted cash and restricted cash equivalents on the statement of cash flows.

We adopted ASU 2016-18 effective January 1, 2018, and retrospectively updated the

presentation of our consolidated statements of cash flows to include amounts of restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) to provide a more robust framework to use in determining when a set of acquired assets and activities is a business.

The amendments in ASU 2017-01 provide a screen to determine when a set of acquired integrated assets and activities is not a business, and if the screen is not met it may result in fewer transactions that qualify as a business combination under ASC Topic 805.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718), which provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718.

We adopted ASU 2017-09 effective January 1, 2018, and the adoption of this ASU did not have a material impact on our consolidated financial statements.

In September 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.

The guidance reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).

[removed: Evaluation] [added: Evaluation] of Disclosure Controls and [removed: Procedures][added: Procedures]

Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of December 31, [removed: 2018] [added: 2019] 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.

[removed: Management] [added: Management] Report on Internal Control over Financial [removed: Reporting][added: Reporting]

Management has assessed the effectiveness of our internal control over financial reporting as of December 31, [removed: 2018] [added: 2019] based on criteria set forth in [removed: Internal] [added: *Internal] Control - Integrated [removed: Framework] [added: 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: 2018,] [added: 2019,] our internal control over financial reporting was 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.

[added: Changes] in [removed: our internal control] [added: Internal Control] over [removed: financial reporting.][added: Financial Reporting]

[removed: Changes in Internal Control] [added: Opinion on internal control] over [removed: Financial Reporting][added: financial reporting]

[removed: Except as noted above, there] [added: There] was no change in our internal control over financial reporting during the fiscal quarter ended December 31, [removed: 2018,] [added: 2019,] that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

[removed: REPORT] [added: REPORT] OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING [removed: FIRM][added: FIRM]

[removed: Opinion on] [added: Definition and limitations of] internal control over financial [removed: reporting][added: 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: 2018,] [added: 2019,] based on criteria established in the 2013 [removed: Internal] [added: *Internal] Control-Integrated [removed: Framework] [added: Framework*] issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, [removed: 2018,] [added: 2019,] based on criteria established in the 2013 [removed: Internal] [added: *Internal] Control-Integrated [removed: Framework] [added: 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: 2018,] [added: 2019,] and our report dated February 27, [removed: 2019] [added: 2020] expressed an unqualified opinion on those financial statements.

[removed: Basis] [added: Basis] for [removed: opinion][added: opinion]

February 27, 2020

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

Management previously identified and disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017, as well as in our Quarterly Reports on Form 10-Q for each interim period in fiscal 2018, a material weakness

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

To remediate the material weakness described above, management implemented a plan to design new controls and enhance the design of existing controls and procedures.

Specifically:

| | |

| --- | --- |

| • | 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.

Definition and limitations of internal control over financial reporting

February 27, 2019

[removed: PART III][added: PART III]

The information required to be disclosed by this item is incorporated herein by reference to our definitive proxy statement for the [removed: 2019] [added: 2020] Annual Meeting of Stockholders (the [removed: “2019] [added: “2020] 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: 2018.][added: 2019.]

The information required to be disclosed by this item is incorporated herein by reference to our [removed: 2019] [added: 2020] Proxy Statement.

[removed: Equity] [added: Equity] Compensation Plan [removed: Information][added: Information]

The following table provides details of our equity compensation plans at December 31, [removed: 2018:][added: 2019:]

| [removed: Plan Category] [added: Plan Category] | [removed: Number of Securities] [added: Number of Securities] to [removed: be Issued upon Exercise] [added: be Issued upon Exercise] of [removed: Outstanding Options,] [added: Outstanding Options,] Warrants and [removed: Rights (a)] [added: Rights (a)] | | | [removed: Weighted] [added: Weighted] Average Exercise Price of Outstanding [removed: Options, Warrants] [added: Options, Warrants] and [removed: Rights (b) (1)] [added: Rights (b) (1)] | | | | [removed: Number] [added: Number] of [removed: Securities Remaining] [added: Securities Remaining] Available [removed: for Future] [added: for Future] Issuance Under [removed: Equity Compensation] [added: Equity Compensation] Plans (Excluding Securities [removed: Reflected in] [added: Reflected in] Column [removed: (a)) (c)] [added: (a)) (c)] | |

| Equity compensation plans [added: not] approved by security [removed: holders] [added: holders(2)] | [removed: 8,138,060] [added: 470,400] | | | [removed: $] | [removed: 28.24] | | | [removed: 1,721,538] [added: 29,600] | |

| Equity compensation plans [removed: not] approved by security holders | [removed: —] [added: 13,242,645] | | | [added: $] | [added: 28.34] | | | [removed: —] [added: 1,979,076] | |

All other information required to be disclosed by this item is incorporated herein by reference to our [removed: 2019] [added: 2020] Proxy Statement.

| Total | 13,713,045 | | | $ | — | | | 2,008,676 | |

| | |

| --- | --- |

| (2) | In September 2019, our Board of Directors adopted the Axon Enterprise, Inc. 2019 Stock Inducement Plan (the “2019 Inducement Plan”) pursuant to which we reserved 500,000 shares of common stock for issuance under the Inducement Plan. The 2019 Inducement Plan was adopted without stockholder approval pursuant to Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules. The Inducement Plan provides for the grant of equity-based awards, including restricted stock units, restricted stock, performance shares and performance units, and its terms are substantially similar to our stockholder-approved 2019 Plan. In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules, awards under the Inducement Plan may only be made to individuals not previously employees or non-employee directors of the Company (or following such individuals’ bona fide period of non-employment with the Company), as an inducement material to the individuals’ entry into employment with the Company. |

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

The information required to be disclosed by this item is incorporated herein by reference to our [removed: 2019] [added: 2020] Proxy Statement.

The information required to be disclosed by this item is incorporated herein by reference to our [removed: 2019] [added: 2020] Proxy Statement.

[removed: PART IV][added: PART IV]

[removed: SCHEDULE] [added: SCHEDULE] II – VALUATION AND QUALIFYING [removed: ACCOUNTS][added: ACCOUNTS]

[removed: (Dollars] [added: *(Dollars] in [removed: thousands)][added: thousands)*]

| [removed: Description] [added: Description] | [removed: Balance at Beginning of Period] [added: Balance at Beginning of Period] | | | | [removed: Charged] [added: Charged] to [added: (Recovered from)] Costs [removed: and Expenses] [added: and Expenses] | | | | [removed: Charged to Other Accounts] [added: Charged to Other Accounts] | | | | [removed: Deductions] [added: Deductions] | | | | [removed: Balance at End of Period] [added: Balance at End of Period] | | |