Item 1. Business

Axon Enterprise, Inc. may be referred to as “the Company,” “Axon,” “we,” or “our.” We were incorporated in Arizona in September 1993 as ICER Corporation. We changed our name to AIR TASER, Inc. in December 1993 and to TASER International, Incorporated in April 1998. In January 2001, we reincorporated in Delaware as TASER International, Inc., and in April 2017, changed our name to Axon Enterprise, Inc.

Our headquarters in Scottsdale, Arizona houses our executive management, sales, marketing, certain engineering, manufacturing, finance and other administrative support functions. Our global software hub is located in Seattle, Washington, and we also have subsidiaries and / or offices located in Australia, Canada, Finland, Hong Kong, Germany, India, Italy, the Netherlands, the United Kingdom, and Vietnam.

Overview

Axon’s mission is to protect life. We fulfill this mission through developing hardware and software products that advance our long term vision of a) obsoleting the bullet, b) reducing social conflict, and c) enabling a fair and effective justice system. 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.

Axon's operations comprise two reportable segments:

Further information about our reportable segments and sales by geographic region is included in Notes 1 and 17 of the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K. For backlog by reportable segment, refer to Part II, Item 7 of this Annual Report on Form 10-K.

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.

Sales and Distribution

Axon's direct sales force and strong customer relationships represent key strategic advantages. The majority of our revenues are generated via direct sales, including our online store, although we do leverage distribution partners and third-party resellers.

No customer represented more than 10% of total net sales for the years ended December 31, 2019, 2018 or 2017.

Our primary customer market is US law enforcement. Of the approximately 18,000 law enforcement agencies in the US, we have a customer relationship with approximately 17,000. Axon has dedicated sales representatives for the 1,200 largest agencies, which account for 70% to 80% of U.S. law enforcement patrol officers. The remaining agencies are served via our telesales team as well as distributors. Internationally, we began focusing on a direct sales strategy in 2017, and in 2018 and 2019 we made significant investments in building out our international direct sales force, particularly in the United Kingdom, Europe, Australia and New Zealand.

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.

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

Manufacturing and Supply Chain

We perform light manufacturing, final assembly, and final test operations at our headquarters in Scottsdale, Arizona, and own substantially all of the equipment required to develop, prototype, manufacture and assemble our finished products. We have continued to maintain both our ISO 9001 and our ISO 9001:2015 certifications.

We obtain many of our components from single source suppliers; however, because we own the injection molded component tooling used in their production, we believe we could obtain alternative suppliers in most cases without incurring significant production delays. For additional discussion of sources and availability of raw materials, refer to Note 1 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

We provide limited manufacturer's warranties on our CEDs and Axon devices. For additional information about our warranties, refer to Note 1 to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.

Competition

De-escalation — TASER for Law Enforcement, Corrections and Private Security Markets: Our CEDs compete with a variety of other less-lethal alternatives to firearms, including rubber bullets or rubber baton rounds, pepper spray, mace, traditional stun guns, 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. TASER devices offer advanced technology, versatility, portability, effectiveness, built-in accountability systems, and low injury rates, which enable us to compete effectively against other less-lethal alternatives. 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 primary competitive factors in this market include a device’s accuracy, effectiveness, reputation, safety, cost, ease of use, and exceptional customer experience. The design maturity of the TASER platform, as well as our development and sale of a two-shot device, are also key competitive differentiators. We are aware of competitors providing competing CED products primarily in international markets.

De-escalation — TASER for Private Citizen Market: In the private citizen market, these devices primarily compete with firearms, but also with other less lethal self-defense options such as pepper spray and stun guns. The primary competitive factors in this market include a device’s cost, effectiveness, safety and ease of use. 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.

Sensors — Connected Cameras and Digital Evidence Management Software: The body-worn camera and in-car video market is highly competitive. Our competition includes Motorola Solutions and WatchGuard, which Motorola purchased in 2019, Panasonic Corp., Reveal Media, L3 Mobile-Vision, Coban Technologies, Digital Ally, Getac, Utility Associates, Intrensic, Safety Vision and Visual Labs. We also compete with consumer wearable camera makers including GoPro and Garmin.

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

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

Productivity and Communications — RMS and CAD: The RMS and CAD markets are highly competitive and highly fragmented. We have identified more than 50 incumbent software providers, including Motorola Solutions, Tyler Technologies, Central Square Technologies (formerly Superion, TriTech and Aptean), Northrop Grumman, Hexagon

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.

Seasonality

We have historically experienced higher net sales in our fourth quarter compared to other quarters in our fiscal year due primarily to municipal budget cycles. Additionally, new product introductions can significantly impact the cadence of net sales, product costs and operating expenses. However, historical seasonal patterns, municipal budgets or historical patterns of product introductions should not be considered reliable indicators of our future net sales or financial performance.

Environmental Regulation

We are subject to environmental laws and regulations, including restrictions on the presence of certain substances in electronic products. 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.”

Intellectual Property

We protect our intellectual property with U.S. and international patents and trademarks. Our patents and pending patent applications relate to technology used by us in connection with our products. We also rely on international treaties, organizations and laws to protect our intellectual property. As of December 31, 2019, we hold 183 U.S. patents, 75 U.S. registered trademarks, 127 international patents, and 313 international registered trademarks, and also have numerous patents and trademarks pending. 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.

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. We have the exclusive rights to many Internet domain names, primarily including “TASER.com”, “Axon.com”, “Axon.net”, “Evidence.com” and “Axon.io.”

Confidentiality agreements are used with employees, consultants and key suppliers to help ensure the confidentiality of our trade secrets.

Employees

As of December 31, 2019, we had 1,323 full-time employees and 593 temporary employees. The breakdown of our full-time employees by department was as follows: 249 direct manufacturing employees, 408 research and development employees, 401 administrative and manufacturing support employees and 265 employees within sales, marketing, communications and training. Of the 593 temporary employees, nearly 70% worked in direct manufacturing roles. Our employees are not covered by any collective bargaining agreement, and we have never experienced a work stoppage. We believe that our relations with our employees are good.

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 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

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 http://www.sec.gov.