UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-16391
Axon Enterprise, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
86-0741227
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
17800 North 85 th  Street
Scottsdale, Arizona
 
85255
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(480) 991-0797
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of exchange on which registered
Common Stock, $0.00001 par value per share
 
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    
Yes   ý     No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨     No   ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   ý     No   ¨
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.   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   ¨     No   ý
The aggregate market value of the common stock held by non-affiliates of the registrant, based on the last sales price of the issuer’s common stock on June 30, 2018 , which was the last business day of the registrant’s most recently completed second fiscal quarter, as reported by NASDAQ, was approximately $3,613,000,000 . 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.
The number of shares of the registrant’s common stock outstanding as of February 18, 2019 was 58,829,384 .
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the registrant’s definitive proxy statement for its 2019 annual meeting of stockholders to be prepared and filed with the Securities and Exchange Commission not later than 120 days after December 31, 2018 are incorporated by reference into Part III of this Form 10-K.

 


Table of Contents

AXON ENTERPRISE, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2018
 
 
Page
 
 
 
 
 
 


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PART I
Statements contained in this report that are not historical are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions and strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Words such as “may,” “will,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions, as well as statements in future tense, identify forward-looking statements. However, not all forward-looking statements contain these identifying words.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. The following important factors could cause actual results to differ materially from those in the forward-looking statements: customer purchase behavior, including adoption of our software as a service delivery model; our exposure to cancellations of government contracts due to appropriation clauses, exercise of a cancellation clause, or non-exercise of contractually optional periods; our ability to design, introduce and sell new products or features; our ability to manage our supply chain and avoid production delays or shortages; changes in the costs of product components and labor; defects in our products; the impact of product mix on projected gross margins; loss of customer data, a breach of security or an extended outage, including our reliance on third-party cloud-based storage providers; negative media publicity regarding our products; our ability to defend against litigation and protect our intellectual property, and the resulting costs of this activity; changes in government regulations in the U.S. and internationally, especially related to the classification of our product by the United States Bureau of Alcohol, Tobacco, Firearms and Explosives and to evolving regulations surrounding privacy and data protection; counter-party risks relating to cash balances held in excess of FDIC insurance limits; our ability to integrate acquired businesses; and our ability to attract and retain key personnel. Many events beyond our control may determine whether results we anticipate will be achieved. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements. This report lists various important factors that could cause actual results to differ materially from expected and historical results. These factors are intended as cautionary statements for investors within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. Readers can find them under the heading “Risk Factors” in this Annual Report on Form 10-K, and investors should refer to them. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

Except as required by law, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission ("SEC"). Our filings with the SEC may be accessed at the SEC’s web site at www.sec.gov.

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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.
Overview

Axon is a market-leading provider of law enforcement technology solutions. Our core mission is to protect life. We fulfill that mission through developing hardware and software products that advance the long term objectives of a) obsoleting the bullet, b) reducing social conflict, and c) enabling a fair and effective justice system.

We believe we are creating a sustainable and profitable business model while solving society's most challenging problems. Financially, we seek to sell our solutions via subscription plans that generate recurring revenue and cash flow and demonstrate leverage as we scale.

Our headquarters in Scottsdale, Arizona houses our executive management, sales, marketing, certain engineering, manufacturing, and other administrative support functions. We also have a software engineering development center located in Seattle, Washington, and subsidiaries located in Australia, Canada, Finland, Hong Kong, Germany, India, the Netherlands, the United Kingdom, and Vietnam.

Axon's operations comprise two reportable segments:

1) TASER: Axon is the market leader in the development, manufacture and sale of conducted energy weapons (CEWs), also known as conducted energy devices (CEDs), which we sell under our brand name, TASER. Research has shown that the TASER device is the most effective less than lethal force option, with the lowest likelihood of injury to officers and assailants. Since our inception in 1993, the TASER has been adopted by a majority of U.S. police departments and is used daily to help keep communities safe.

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

Further information about our reportable segments and sales by geographic region is included in Notes 1 and 16 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.
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-

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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.
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.

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

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

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 CEWs 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.


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Competition

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

The primary competitive factors in this market include a device’s accuracy, effectiveness, safety, cost, ease of use and an exceptional customer experience. We are aware of competitors providing competing CEW products primarily in international markets.

TASER: 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. The primary competitive factors in this market include a device’s cost, effectiveness, safety and ease of use.

Cameras & Software: Video Evidence Market: In the body-worn camera and in-car video markets, our competition primarily includes Motorola Solutions, Panasonic Corp., Reveal Media, Watchguard, L3 Mobile-Vision, Coban Technologies, Digital Ally, Getac and Utility Associates. We also compete with consumer wearable camera makers including GoPro and Garmin.

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.

Records Management and Computer-Aided Dispatch: The RMS and CAD markets are highly competitive and highly fragmented. Incumbent software providers include Motorola Solutions, Tyler Technologies, Central Square Technologies (formerly Superion, TriTech and Aptean), Hexagon AB, Niche Technology Inc., ALEN Inc., Caliber Public Safety (parent, Harris Systems USA), and Mark 43 Inc.
Seasonality
We have historically experienced higher net sales in our second and fourth quarters compared to other quarters in our fiscal year due primarily to municipal budget cycles. Additionally, new product introductions can significantly impact 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 “Environmental laws and regulations subject us to a number of risks and could result in significant liabilities and costs.”
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, 2018 , we hold 158 U.S. patents, 70 U.S. registered trademarks, 102 international patents, and 293 international registered trademarks, and also have numerous patents and trademarks pending. We continuously assess whether and where to seek formal protection for

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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, 2018, we had 1,155 full-time employees and 231 temporary employees. The breakdown of our full-time employees by department was as follows: 217 direct manufacturing employees, 360 research and development employees, 336 administrative and manufacturing support employees and 242 employees within sales, marketing, communications and training. Of the 231 temporary employees, approximately 80% 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 .

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Item 1A. Risk Factors
Because of the following factors, as well as other variables affecting our operating results, our past financial performance may not be a reliable indicator of our future performance and historical trends should not be used to anticipate our results or trends in future periods. You should carefully consider the trends, risks and uncertainties described below and other information in this Form 10-K and subsequent reports filed with or furnished to the SEC before making any investment decision with respect to our securities. If any of the following trends, risks or uncertainties actually occurs or continues, our business, financial condition or operating results could be materially adversely affected, the trading prices of our securities could decline, and you could lose all or part of your investment. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.
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 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 CEWs or other products.
We substantially depend on sales of our TASER 7, TASER X26P and X2 CEWs, and if these products do not continue to be widely accepted, our growth prospects will be diminished.
In the years ended December 31, 2018 , 2017 and 2016 , we derived a significant portion of our revenues from sales of TASER CEW 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. A decrease in the selling prices of, or demand for these products, or their failure to maintain broad market acceptance, would significantly harm our growth prospects, operating results and financial condition.
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.
If we are unable to design, introduce and sell new products or new product features successfully, our business and financial results could be adversely affected.
Our future success will depend on our ability to develop new products or new product features that achieve market acceptance in a timely and cost-effective manner. These products include, but are not limited to, Axon Body 3, Axon Records, Axon Dispatch, and future generations of the TASER CEW and Axon Fleet. The development of new products and new product features is complex, time consuming and expensive, and we may experience delays in completing the development and introduction of new products. We cannot provide any assurance that products that we may develop in the future will achieve market acceptance. If we fail to develop new products or new product features on a timely basis that achieve market acceptance, our business, financial results and competitive position could be adversely affected.
Delays in product development schedules may adversely affect our revenues and cash flows.
The development of CEWs, devices, sensors and software is a complex and time-consuming process. New products and enhancements to existing products can require long development and testing periods. Our focus on our SaaS platform also presents new and complex development issues. Significant delays in new product or service releases

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or significant problems in creating new products or services could adversely affect our business, financial results and competitive position.
We face risks associated with rapid technological change and new competing products.
The technology associated with law enforcement devices is receiving significant attention and is rapidly evolving. While we have some patent protection in certain key areas of our CEW, 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.

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 reputation.
Complex components and assemblies used in our products may contain undetected defects that are subsequently discovered at any point in the life of the product. Defects in our products could result in a loss of sales, delay in market acceptance, damage to our reputation and increased warranty costs, which could adversely affect our business, financial results and competitive position.
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 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 deletion of all stored customer data, litigation and possible liability. We devote significant resources to engineer secure products and ensure security vulnerabilities are mitigated, and we require our third-party service providers to do so as well. Despite these efforts, security measures may be breached as a result of third-party action, employee error, and malfeasance or otherwise. Breaches could occur during transfer of data to data centers or at any time, and result in unauthorized access to our data or our customers’ data. Third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our data or our customers’ data. Additionally, hackers may develop and deploy viruses, worms, and other malicious software programs that attack or gain access to our networks and data centers.
Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently, grow more complex over time, and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Moreover, our security measures and those of our third-tparty service providers or customers may not detect such security breaches if they occur. Although we have developed systems and processes that are designed to protect our data and user data, to prevent data loss, and to prevent or detect security breaches, we cannot assure that such measures will provide absolute security, and we may incur significant costs in protecting against or remediating cyber-attacks.
A security breach could expose us to a risk of loss or inappropriate use of proprietary and sensitive data, or the denial of access to this data. A security breach could also result in a loss of confidence in the security of our service, disrupt our business, damage our reputation, lead to legal liability, negatively impact our future sales and significantly harm our growth prospects, operating results and financial condition.
Defects or disruptions in our services could impact demand for our services and subject us to substantial liability.
We currently serve our Axon Evidence customers from third-party cloud storage providers based in the U.S. and other countries. Interruptions in our service, or loss or corruption of digital evidence, may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.

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Since our customers use our services for important aspects of their operations, any errors, defects, disruptions in service or other performance problems could hurt our reputation and may damage our customers’ operations. As a result, customers could elect to not renew our services or delay or withhold payment to us. We could also lose future sales or customers may make warranty or other claims against us, which could result in an increase in our warranty expense, an increase in collection cycles for and decline in the collectability of accounts receivable, and an increase in the expense and risk of litigation.

Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, content, competition, consumer protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or otherwise harm our business.
We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, including privacy, data protection and personal information, rights of publicity, content, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, electronic contracts and other communications, competition, consumer protection, telecommunications, product liability, taxation, economic or other trade prohibitions or sanctions, securities law compliance, and online payment services. The introduction of new products, expansion of our activities in certain jurisdictions, or other actions that we may take may subject us to additional laws, regulations, or other government scrutiny. In addition, foreign data protection, privacy, content, competition, and other laws and regulations can impose different obligations or be more restrictive than those in the United States.
These U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these laws and regulations are often uncertain and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices. 
We are also subject to laws and regulations that dictate whether, how, and under what circumstances we can transfer, process and/or receive certain data that is critical to our operations, including data shared between countries or regions in which we operate and data shared among our products and services. For example, in 2016, the European Union and United States agreed to an alternative transfer framework for data transferred from the European Union to the United States, called the Privacy Shield, but this new framework is subject to an annual review that could result in changes to our obligations and also may be challenged by national regulators or private parties. If one or more of the legal bases for transferring data from Europe to the United States is invalidated, if we are unable to transfer data between and among countries and regions in which we operate, or if we are prohibited from sharing data among our products and services, it could affect the manner in which we provide our services or adversely affect our financial results.
Proposed or new legislation and regulations could also significantly affect our business. There currently are a number of proposals pending before federal, state, and foreign legislative and regulatory bodies. In addition, the new European General Data Protection Regulation ("GDPR") took effect in May 2018 and applies to all of our products and services that provide service in Europe. The GDPR includes operational requirements for companies that receive or process personal data of residents of the European Union ("EU") that are different than those currently in place in the European Union. For example, we may be required to obtain consent and/or offer new controls to existing and new users in Europe before processing data for certain aspects of our service. In addition, the GDPR includes significant penalties for non-compliance. Similarly, there are a number of legislative proposals in the United States, at both the federal and state level, that could impose new obligations in areas affecting our business, such as liability for copyright infringement by third parties. In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services.
These laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices.


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Most of our end-user customers are subject to budgetary and political constraints that may delay or prevent sales.
Most of our end-user customers are government agencies. These agencies often do not set their own budgets and therefore, have limited control over the amount of money they can spend. In addition, these agencies experience political pressure that may dictate the manner in which they spend money. As a result, even if an agency wants to acquire our products, it may be unable to purchase them due to budgetary or political constraints, particularly in challenging economic environments. There can be no assurance that the economic and budgeting issues will not worsen and adversely impact sales of our products. Some government agency orders may also be canceled or substantially delayed due to budgetary, political or other scheduling delays, which frequently occur in connection with the acquisition of products by such agencies, and such cancellations may accelerate or be more severe than we have experienced historically.
We expend significant resources in anticipation of a sale due to our lengthy sales cycle and may receive no revenue in return.
Generally, law enforcement and corrections agencies consider a wide range of issues before committing to purchase our products, including product benefits, training costs, the cost to use our products in addition to, or in place of, other products, budget constraints and product reliability, safety and efficacy. The length of our sales cycle may range from a few weeks to as long as several years. Adverse publicity surrounding our products or the safety of such products has in the past, and could in the future, lengthen our sales cycle with customers. In the past, we believe that our sales were adversely impacted by negative publicity surrounding our products or the use of our products. See, for example, “Litigation - Product Litigation” in Note 9 of our consolidated financial statements included in Part II, Item 8 of this report. We may incur substantial selling costs and expend significant effort in connection with the evaluation of our products by potential customers before they place an order. If these potential customers do not purchase our products, we will have expended significant resources and received no revenue in return.
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 future.
Although we have entered into contracts for the delivery of products and services in the future and anticipate the contracts will be completed, if agencies do not appropriate money in future year budgets, terminate contracts for convenience or if other cancellation clauses are invoked, revenue and cash associated with these bookings will not ultimately be recognized, and could result in a reduction to bookings and revenue.
An increasing percentage of our revenue is derived from subscription billing arrangements which may result in delayed cash collections and may increase customer credit risk on receivables and contract assets.
A growing portion of our sales are derived from subscription billing arrangements and on an open credit basis. While we perform ongoing credit evaluations of our customers' financial condition, if we become aware of information related to the creditworthiness of a major customer, or if future actual default rates on receivables in general differ from those currently anticipated, we may have to adjust our allowance for doubtful accounts, which could adversely affect our business, financial condition or operating results.
Changes in civil forfeiture laws may affect our customers’ ability to purchase our products
Some of our customers use funds seized through civil forfeiture proceedings to fund the purchase of our products.  Changes in state legislatures could impact our customers’ ability to seize funds or use seized funds to fund purchases. Changes in civil forfeiture statutes or regulations are outside of our control and could limit the amount of funds available to our customers, which could adversely affect the sale of our products.

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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 results.
Our SaaS service revenue is generally recognized ratably over the terms of the contracts, which generally range from one to five years. As a result, most of the SaaS revenue we report each quarter is the result of agreements entered into during previous quarters. Consequently, current positive or negative trends in this portion of our business may not be fully reflected in our revenue results for several periods.
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. These complexities and additional costs could adversely affect our business, financial condition or operating results.
We may face personal injury, wrongful death and other liability claims that harm our reputation and adversely affect our sales and financial condition.
Our CEW products are often used in aggressive confrontations that may result in serious, permanent bodily injury or death to those involved. Our CEW products may be associated with these injuries. A person, or the family members of a person, injured in a confrontation or otherwise in connection with the use of our products, may bring legal action against us to recover damages on the basis of theories including wrongful death, personal injury, negligent design, defective product or inadequate warning. We are currently subject to a number of such lawsuits and we have been subject to significant adverse judgments and settlements. We may also be subject to lawsuits involving allegations of misuse of our products. If successful, wrongful death, personal injury, misuse and other claims could have a material adverse effect on our operating results and financial condition and could result in negative publicity about our products. We incur significant legal expenses in defending these cases, and significant litigation could also result in a diversion of management’s attention and resources, negative publicity and a potential award of monetary damages in excess of our insurance coverage. The outcome of any litigation is inherently uncertain and there can be no assurance that our existing or any future litigation will not have a material adverse effect on our business, financial condition or operating results.
Other litigation may subject us to significant litigation costs and judgments and divert management attention from our 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 competitor and litigation filed by a former distributor against us. Such matters have resulted, and are expected to continue to result in, substantial costs to us, including in the form of attorney’s 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. There is also a risk of adverse judgments, as the outcome of litigation is inherently uncertain.
If we are unable to protect our intellectual property, we may lose our competitive advantage or incur substantial litigation costs to protect our rights. We may be subject to intellectual property infringement claims, which could cause us to incur litigation costs and divert management attention from our business.
Our future success depends upon our proprietary technology. 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 right to stop others from misusing our trademarks and service marks in commerce depends, to some extent, on our ability to show evidence of enforcement of our rights against such misuse in commerce. Our efforts to stop improper use, if insufficient, may lead to loss of trademark and service mark rights, brand loyalty and notoriety among our customers and prospective customers. The scope of any patent to which we have or may obtain rights may not prevent others from developing and selling competing products. The validity and breadth of claims covered in technology patents involve complex legal and factual questions, and the resolution of such claims

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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. The defense and prosecution of patent and other intellectual property claims are both costly and time consuming, divert our management’s attention from our business and could result in a material adverse effect on our business, and financial position and operating results.
If our products were found to infringe a third-party’s proprietary rights, we could be forced to enter into costly royalty or licensing agreements in order to be able to sell our products or discontinue use of the protected technology. Such royalty and licensing agreements may not be available on terms acceptable to us or at all. We could also be required to pay substantial  damages, fines or other penalties, indemnify customers or distributors, cease the manufacture, use, or sale of infringing  products or processes, and/or expend significant resources to develop or acquire non-infringing technologies. There is no guarantee that our use of conventional technology searching and brand clearance searching will identify all potential rights holders. Rights holders may demand payment for past infringements and/or force us to accept costly license terms or discontinue use of protected technology and/or works of authorship that may include, for example, photos, videos, and software. Our current research and development focus on developing software-based products increases this risk.
We are a defendant in a litigation matter filed by Digital Ally Inc. (“Digital”) in the District of Kansas alleging patent infringement regarding our Axon Signal technology. For additional discussion of this matter, refer to Note 9 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. We believe the patent in question is both invalid and not infringed, and we do not currently believe it is probable that we will incur a material loss. If, contrary to our expectations, the court allows Digital’s entire market value and treble damage theories to proceed on summary judgment rulings, and if Digital ultimately succeeds on such theories at trial, the outcome could have an adverse effect on our results of operations in the period in which a liability is recognized and on our cash flows for the period in which any damages are paid.
Internationally, we can enforce patent rights only in the jurisdictions in which our patent applications have been granted.
Our U.S. patents protect us from imported infringing products coming into the U.S. from abroad. We have made applications for patents in a few foreign countries; however, these may be inadequate to protect markets for our products in other foreign countries. Each patent is examined and granted according to the law of the country where it was filed independent of whether a U.S. patent on similar technology was granted. A patent in a foreign country may be subject to cancellation if the claimed invention has not been sold in that country. Meeting the requirements of working invention differs by country and ranges from sales in the country to manufacturing in the country. U.S. export law, or the laws of some foreign countries, may prohibit us from satisfying the requirements for working the invention, creating a risk that some of our international patents may become unenforceable.
Government regulations applied to our products could materially and adversely affect our business.
We rely on the opinions of the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, including the determination that a device that has projectiles propelled by the release of compressed gas in place of the expanding gases from ignited gunpowder, are not classified as firearms. Changes in statutes, regulations, and interpretation outside of our control may result in our products being classified or reclassified as firearms. Our private citizen market could be substantially reduced if consumers are required to obtain a registration to own a firearm prior to purchasing our products.
Federal regulation of sales in the U.S. : Our CEWs are not firearms regulated by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, but our consumer products are regulated by the U.S. Consumer Product Safety Commission. Although there are currently no Federal laws restricting sales of our core CEW products in the U.S., future Federal regulation could adversely affect sales of our products.
Axon body worn cameras and fleet vehicle cameras are subject to regulations including 21-CFR-47 Part 15, Subpart C for Bluetooth and WiFi transmission, US-DOT/UN 38.3 for transportation of lithium batteries, and FCC KDB 447498 + IEEE 1528-2013 Specific Absorption Rate ("SAR") regulations. These regulations are also beginning to affect CEWs with signal performance power magazine ("SPPM") technology and future CEWs implementing wireless

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technology into the feature set. Compliance with government regulations could increase our operations and product costs and impact our future financial results. 
Federal regulation of international sales : Our CEW devices are considered a “crime control” product by the U.S. Department of Commerce (“DOC”) for export directly from the U.S. Consequently, we must obtain an export license from the DOC for the export of our CEW devices from the U.S. other than to Canada. In addition, certain of our camera and software products require classifications from the DOC before they may be shipped internationally. Our inability to obtain DOC export licenses or classifications on a timely basis for sales of our products to our international customers could significantly and adversely affect our international sales.
State and local regulation: Our CEW devices are controlled, restricted or their use prohibited by a number of state and local governments. As of December 31, 2018, the possession of stun guns by the general public, including our CEW devices, is prohibited in four states: Hawaii, Massachusetts, New York, and Rhode Island, as well as in the District of Columbia. Some cities and municipalities also prohibit private citizen possession or use of our CEW products. Other jurisdictions may ban or restrict the sale of our CEW products and our product sales may be significantly affected by additional state, county and city governmental regulation.
International regulation : Certain jurisdictions prohibit, restrict, or require a permit for the importation, sale, possession or use of CEWs, including in some countries by law enforcement agencies, limiting our international sales opportunities.
Our CEW products are also subject to regulation by testing, safety and other standard organizations (e.g. ANSI, IEC, NIST).
Our international operations expose us to additional risks that could harm our business, operating results, and financial condition.
Our international operations are significant, and we plan to continue to grow internationally by acquiring existing entities or setting up new legal entities in new markets. In certain international markets, we have limited operating experience and may not benefit from any first-to-market advantages or otherwise succeed. In addition to risks described elsewhere in this section, our international operations expose us to other risks, including the following:
•
Restrictions on foreign ownership and investments, and stringent foreign exchange controls that might prevent us from repatriating cash earned in countries outside the U.S.
•
Import and export requirements, tariffs, trade disputes and barriers, and customs classifications that may prevent us from offering products or providing services to a particular market or obtaining necessary parts and components to manufacture products, which may lead to decreased sales and may increase our operating costs.
•
Longer payment cycles in some countries, increased credit risk, and higher levels of payment fraud.
•
Uncertainty regarding liability for products and services, including uncertainty as a result of local laws and lack of legal precedent.
•
Different employee/employer relationships, existence of workers' councils and labor unions, and other challenges caused by distance, language, and cultural differences, making it harder to do business in certain jurisdictions.

Additionally, changes in international local political, economic, regulatory, tax, social, and labor conditions may adversely harm our business and compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business. These numerous and sometimes conflicting laws and regulations include, among others, environmental regulations, internal control and disclosure rules, privacy and data protection requirements, anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, and other local laws prohibiting corrupt payments to governmental officials, and competition regulations, among others.

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

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United Kingdom and other economies, which could adversely affect sales of our products and services. We may also experience increased volatility in the value of the pound sterling, the euro and other European currencies. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations in the United Kingdom and the European Union, and we may incur additional costs or need to make operational changes as we adapt to potentially divergent regulatory frameworks. 

Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially affect our brand, our international growth efforts, our ability to attract and retain employees, our business, and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies.
Environmental laws and regulations subject us to a number of risks and could result in significant liabilities and costs.
We are subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in our products and making producers for those products financially responsible for the collection, treatment, recycling and disposal. In particular, environmental legislation within the EU may increase our cost of doing business internationally and impact our revenues from EU countries as we comply with and implement these requirements.
The EU has published Directives on the restriction of certain hazardous substances in electronic and electrical equipment (the “RoHS Directive”) and on electronic and electrical waste management (the “WEEE Directive”). The RoHS Directive restricts the use of a number of substances, including lead. The WEEE Directive directs members of the EU to enact laws, regulations, and administrative provisions to ensure that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the EU. In addition, similar environmental legislation has been or may be enacted in other jurisdictions, including the U.S. (under federal and state laws) and other countries, the cumulative impact of which could be significant.
We continue to monitor the impact of specific registration and compliance activities required by the RoHS and WEEE Directives. We endeavor to comply with applicable environmental laws, yet compliance with such laws could increase our operations and product costs, increase the complexities of product design, procurement, and manufacturing, limit our ability to manage excess and obsolete non-compliant inventory, limit our sales activities, and impact our future financial results. Any violation of these laws can subject us to significant liability, including fines, penalties, and prohibiting sales of our products into one or more states or countries, and result in a material adverse effect on our financial condition.
Regulations related to voice, data and communications services may impact our ability to sell our products.
The radio spectrum is required to provide wireless voice, data and video communications services. The allocation of spectrum is regulated in the U.S. and other countries and limited spectrum space is allocated to wireless services and specifically to public safety users. In the U.S., the Federal Communications Commission (“FCC”) regulates spectrum use by non-federal entities and federal entities. Similarly, countries around the world have one or more regulatory bodies that define and implement the rules for use of radio spectrum and electromagnetic interference, pursuant to their respective national laws. We manufacture and market products in spectrum bands already made available by regulatory bodies. Consequently, our results could be negatively affected by the rules and regulations adopted from time to time by the FCC or regulatory agencies in other countries. Regulatory changes in current spectrum bands may also require modifications to some of our products so they can continue to be manufactured and marketed. If current products do not comply with the regulations set forth by these governing bodies, we may be unable to sell our products or could incur penalties, which could have an adverse impact on our financial condition, results of operations and cash flows.

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Our dependence on third-party suppliers for key components of our devices could delay shipment of our products and reduce our sales.
We depend on certain domestic and international suppliers for the delivery of components used in the assembly of our products. Our reliance on third-party suppliers creates risks related to our potential inability to obtain an adequate supply of components or sub-assemblies and reduced control over pricing and timing of delivery of components and sub-assemblies. Specifically, we depend on suppliers of sub-assemblies, machined parts, injection molded plastic parts, printed circuit boards, custom wire fabrications and other miscellaneous customer parts for our products. We do not have long-term agreements with any of our suppliers and there is no guarantee that supply will not be interrupted. Due to changes imposed for imports of foreign products into the U.S., as well as potential port closures and delays created by terrorist attacks or threats, public health issues, national disasters or work stoppages, we are exposed to risk of delays caused by freight carriers or customs clearance issues for our imported parts. Any interruption of supply for any material components of our products could significantly delay the shipment of our products and have a material adverse effect on our revenues, profitability and financial condition.
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.
Single or sole-source components used in the manufacture of our products may become unavailable or discontinued. Delays caused by industry allocations or obsolescence may take weeks or months to resolve. In some cases, parts obsolescence may require a product re-design to ensure quality replacement components. These delays could cause significant delays in manufacturing and loss of sales, leading to adverse effects significantly impacting our financial condition or results of operations and injure 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 number of our raw materials are comprised of petroleum-based products, or incur some form of landed cost associated with transporting the raw materials or components to our facility. A significant rise in oil prices could adversely impact our ability to sustain current gross margins by increasing component pricing and transportation costs.
We may experience a decline in gross margins due to a shift in product sales from CEWs to Axon devices which may continue to carry a lower gross margin.
We continue to invest in the growth of the Software and Sensors segment, and this expected growth may result in a higher percentage of total revenues being comprised of Software and Sensors products and services. Gross margin as a percentage of net sales for the Software and Sensors segment is currently lower than that of the TASER Devices segment, and may continue to be lower in the future.
To the extent demand for our products increases, our future success will be dependent upon our ability to manage our growth and to increase manufacturing production capacity, which may be accomplished by the implementation of customized manufacturing automation equipment.
To the extent demand for our products increases significantly in future periods, one of our key challenges will be to increase our production capacity to meet sales demand while maintaining product quality. Our primary strategies to accomplish this include introducing additional shifts, increasing the physical size of our assembly facilities, the hiring of additional production staff, and the implementation of additional customized automation equipment. The investments we make in this equipment may not yield the anticipated labor and material efficiencies. Our inability to meet any future increase in sales demand or effectively manage our expansion could have a material adverse effect on our revenues, financial results and financial condition.

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Our future success is dependent on our ability to expand sales through distributors and direct sales and our inability to recruit new distributors or increase direct sales would negatively affect our sales.
Our distribution strategy is to pursue sales through multiple channels with an emphasis on independent distributors and direct sales. Our inability to establish relationships with and retain law enforcement equipment distributors, who we believe can successfully sell our products, would adversely affect our sales. In addition, our arrangements with our distributors are generally short-term. We are also focusing on direct sales to larger agencies through our regional sales managers and our inability to grow sales to these agencies in this manner could adversely affect our sales. If we do not competitively price our products, meet the requirements of our distributors or end-users, provide adequate marketing support, or comply with the terms of our distribution arrangements, our distributors may fail to aggressively market our products or may terminate their relationships with us. These developments would likely have a material adverse effect on our sales. Our reliance on the sales of our products by others also makes it more difficult to predict our revenues, cash flow and operating results.
The increased focus on direct sales compared to sales through distribution is dependent on our ability to sell into the states or foreign jurisdictions that have established distributor relationships.
In certain states and foreign jurisdictions we have decided to pursue sales directly with law enforcement customers, rather than working through established distribution channels. Our customers may have strong working relationships with distributors and we may face resistance to this change. If we do not overcome this resistance and effectively build a direct relationship with our customers, sales may be adversely affected.
Acquisitions and joint ventures may have an adverse effect on our business.
We may consider additional acquisitions or joint ventures as part of our long-term business strategy. These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, expected synergies are not achieved, we do not realize a satisfactory return on our investment, we experience difficulty in the integration or coordination of new employees, business systems, and technology, or there is a diversion of management’s attention from our other businesses. These events could harm our operating results, financial condition or cash flows.
If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings. 
We acquire other companies and intangible assets and may not realize all the economic benefit from those acquisitions, which could cause an impairment of goodwill or intangibles. We review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We test goodwill and non-amortizable intangible assets for impairment at least annually. If such goodwill or intangible assets are deemed to be impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets would be recognized. Events which might indicate impairment include, but are not limited to, declines in stock price market capitalization or cash flows, adverse cost factors, deteriorating financial performance, strategic decisions made in response to economic, market and competitive conditions, the impact of the economic environment on us and our customer base, and/or relevant events such as changes in management, key personnel, litigation or customers.
We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or intangible assets is determined, which would negatively affect our results of operations.
Catastrophic events may disrupt our business.
A disruption or failure of our systems or operations in the event of a major earthquake, weather event, fire, explosion, failure to contain hazardous materials, industrial accident, cyber-attack, terrorist attack, or other catastrophic event could cause delays in completing sales, providing services, or performing other mission-critical functions.  A catastrophic event that results in the destruction or disruption of any of our critical business or information technology

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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.
Our financial performance is subject to risks associated with changes in the value of the U.S. dollar versus local currencies.
For current and potential international customers whose contracts are denominated in U.S. dollars, the relative change in local currency values creates relative fluctuations in our product pricing. These changes in international end-user costs may result in lost orders and reduce the competitiveness of our products in certain foreign markets. Additionally, intercompany sales to our non-U.S. dollar functional currency international subsidiaries are transacted in U.S. dollars which could increase our foreign exchange rate risk caused by foreign currency transaction gains and losses.
For non-U.S. dollar denominated sales, weakening of foreign currencies relative to the U.S. dollar generally leads us to raise international pricing, potentially reducing demand for our products. Should we decide not to raise local prices to fully offset the dollar’s strengthening, the U.S. dollar value of our foreign currency denominated sales and earnings would be adversely affected. We do not currently engage in hedging activities. Fluctuations in foreign currency could result in a change in the U.S. dollar value of our foreign denominated assets and liabilities including accounts receivable. Therefore, the U.S. dollar equivalent collected on a given sale could be less than the amount invoiced causing the sale to be less profitable than contemplated.
We also import selected components which are used in the manufacturing of some of our products. Although our purchase orders are generally in U.S. dollars, weakness in the U.S. dollar could lead to price increases for the components.
Unanticipated changes in our effective tax rate and additional tax liabilities may impact our operating results
We are subject to income taxes in the United States and various jurisdictions outside of the United States. Our effective tax rate could fluctuate due to changes in the mix of earnings and losses in countries with differing statutory tax rates. Our tax expense could also be impacted by changes in non-deductible expenses, changes in excess tax benefits related to exercises of stock options and vesting of restricted stock units, changes in the valuation of deferred tax assets and liabilities and our ability to utilize them, the applicability of withholding taxes, and changes in our liability for unrecognized tax benefits.
We are subject to tax examinations in multiple jurisdictions. While we regularly evaluate new information that may change our judgment resulting in recognition, derecognition or change in measurement of a tax position taken, there can be no assurance that the final determination of any examinations will not have an adverse effect on our operating results and financial position.
Our tax provision could also be impacted by changes in federal, state or international tax laws including fundamental tax law changes applicable to corporate multinationals.
Additionally, we may be subject to additional tax liabilities due to changes in non-income taxes resulting from changes in federal, state or international tax laws, changes in taxing jurisdictions’ administrative interpretations, decisions, policies, and positions, results of tax examinations, settlements or judicial decisions, changes in accounting principles, changes to the business operations, including acquisitions, as well as the evaluation of new information that results in a change to a tax position taken in a prior period.
The enactment of tax reform legislation, including legislation implementing changes in taxation of international business activities, could materially impact our financial position and results of operations.
Legislation or other changes in the tax laws could increase our liability and adversely affect our after-tax profitability. For example, the Tax Cuts and Jobs Act ("Tax Act") was enacted in the United States on December 22, 2017. The Tax Act had a significant impact on our effective tax rate, cash tax expenses and net deferred tax assets. The Tax Act, among other things, reduced the U.S. corporate statutory tax rate, eliminated or limited deduction of several expenses which were previously deductible, imposed a mandatory deemed repatriation tax on undistributed historic earnings of foreign subsidiaries, required a minimum tax on earnings generated by foreign subsidiaries and permitted a tax-free repatriation of foreign earnings through a dividends received deduction.

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We maintain most of our cash balances, some of which are not insured, at four depository institutions.
We maintain the majority of our cash and cash equivalents accounts at four depository institutions. As of December 31, 2018 , the aggregate balances in such accounts were $342.3 million . Our balances with these institutions regularly exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits for domestic deposits and various deposit insurance programs covering our deposits in Australia, Finland, Germany, the Netherlands, the United Kingdom, and Vietnam.
We could suffer losses with respect to the uninsured balances if the depositary institutions failed and the institution’s assets were insufficient to cover its deposits and/or the governments did not take actions to support deposits in excess of existing insurance limits. Any such losses could have a material adverse effect on our liquidity, financial condition and results of operations.
We depend on our ability to attract and retain our key management, sales and technical personnel.
Our success depends upon the continued service of our key management personnel. Our success also depends on our ability to continue to attract, retain and motivate qualified technical personnel. Although we have employment agreements with certain of our officers and other members of our execute management team, the employment of such persons is “at-will” and either we or the employee can terminate the employment relationship at any time, subject to the applicable terms of the employment agreements. The competition for our key employees is intense. The loss of the service of one or more of our key personnel could adversely impact our business, prospects, financial condition and operating results.
We are highly dependent on the services of Patrick W. Smith, our Chief Executive Officer.
We are highly dependent on the services of Patrick W. Smith, our founder and Chief Executive Officer. Our future success depends upon our ability to retain executive officers, specifically Mr. Smith, and any failure to do so could adversely impact our business, prospects, financial condition and operating results.
Risks Related to Ownership of Our Common Stock
The trading price of our common stock has been, and is likely to continue to be, volatile. In addition to the factors discussed in this Annual Report on Form 10-K, the trading price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

•
actual or anticipated fluctuations in our revenue and other operating results;
•
the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
•
actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
•
investor sentiment with respect to our competitors, our business partners, and our industry in general;
•
announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
•
announcements by us or estimates by third-parties of actual or anticipated changes in the size of our user base, addressable market or the effectiveness of our products;
•
changes in operation performance and stock market valuations of technology companies in our industries, including our developers and competitors;
•
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
•
media coverage of our business and financial performance;
•
lawsuits threatened or filed against us;

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•
developments in anticipated or new legislation and pending lawsuits or regulator actions, including interim or final rulings by tax, judicial or regulatory bodies; and
•
other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.
Our revenues and operating results may fluctuate unexpectedly from quarter-to-quarter, which may cause our stock price to decline.
Our revenues and operating results have varied significantly in the past and may vary significantly in the future due to various factors, including, but not limited to:
•
budgetary cycles of municipal, state and federal law enforcement and corrections agencies;
•
market acceptance of our products and services;
•
the timing of large domestic and international orders;
•
the outcome of any existing or future litigation;
•
adverse publicity surrounding our products, the safety of our products, or the use of our products;
•
changes in our sales mix;
•
new product introduction costs;
•
increased raw material expenses;
•
changes in our operating expenses;
•
changes in foreign currency exchange rates and
•
regulatory changes that may affect the marketability of our products.
As a result of these and other factors, we believe that period-to-period comparisons of our operating results may not be meaningful in the short term, and our performance in a particular period may not be indicative of our performance in any future period.
Item 1B. Unresolved Staff Comments
None.

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Item 2. Properties
Our corporate headquarters and manufacturing facilities are based in an approximately 100,000 square foot facility in Scottsdale, Arizona, which we own. We also lease premises in Phoenix, Arizona; Scottsdale, Arizona; Topsfield, Massachusetts; Seattle, Washington; Melbourne, Australia; Sydney, Australia; Daventry, England; London, England; Tampere, Finland; Frankfurt, Germany; Mumbai, India; Amsterdam, Netherlands; and Ho Chi Minh City, Vietnam. 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.
We believe our existing facilities are well maintained and in good operating condition. We also believe we have adequate manufacturing capacity for our existing product lines. To the extent that we introduce new products in the future, we will likely need to acquire additional facilities to locate the associated production lines. However, we believe we can acquire or lease such facilities on reasonable terms. We continue to make investments in capital equipment as needed to meet anticipated demand for our products.
The majority of our locations support both of our reportable segments. Our Vietnam and Seattle, Washington locations primarily support our Software & Sensors segment.
Item 3. Legal Proceedings
See discussion of litigation in Note 9 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, which discussion is incorporated by reference herein.
Item 4. Mine Safety Disclosures
None.


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PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is quoted under the symbol “AAXN” on The NASDAQ Global Select Market.
Holders
As of December 31, 2018 , there were 247 holders of record of our common stock.
Dividends
To date, we have not declared or paid cash dividends on our common stock. We do not intend to pay cash dividends in the foreseeable future.
Issuer Purchases of Equity Securities
In February 2016, our Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of our outstanding common stock subject to stock market conditions and corporate considerations. The stock repurchase program does not have a stated expiration date. During the year ended December 31, 2018, no common shares were purchased under the program. As of December 31, 2018 and 2017, $16.3 million remained available under the plan for future purchases. During 2016, we suspended our 10b-5 plan, and any future purchases will be discretionary.

Stock Performance Graph
The following stock performance graph compares the performance of our common stock to the NASDAQ Composite Index and the Russell 3000 Index. The graph covers the period from December 31, 2013 to December 31, 2018. The graph assumes that the value of the investment in our stock and in each index was $100 at December 31, 2013, and that all dividends were reinvested. We do not pay dividends on our common stock.

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A10KTASR123_CHART-29274A06.JPG
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
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



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Item 6.     Selected Financial Data
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, 2018 , 2017 and 2016 , and the balance sheet data as of December 31, 2018 and 2017 , have been derived from, and should be read in conjunction with, our audited consolidated financial statements and the notes thereto included herein. The statement of operations data for the years ended December 31, 2015 and 2014 , and the balance sheet data as of December 31, 2016 , 2015 and 2014 , is derived from our historical audited consolidated financial statements and the notes thereto which are not included in this Annual Report on Form 10-K. Dollars are in thousands, except per share amounts.
 
For the Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
Statements of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales (1)
$
420,068

 
$
343,798

 
$
268,245

 
$
197,892

 
$
164,525

Gross margin
258,583

 
207,088

 
170,536

 
128,647

 
101,548

Income from operations (2)
24,841

 
13,023

 
31,851

 
35,335

 
32,505

Net income (3)
29,205

 
5,207

 
17,297

 
19,933

 
19,918

Diluted earnings per share (3)
$
0.50

 
$
0.10

 
$
0.32

 
$
0.37

 
$
0.34

 
As of December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Working capital (4) (5)
$
392,144

 
$
97,242

 
$
99,192

 
$
123,269

 
$
102,669

Total assets (4) (5)
719,540

 
338,112

 
278,163

 
229,881

 
185,368

Total current liabilities
166,011

 
107,950

 
78,039

 
38,140

 
31,973

Total stockholders’ equity (4) (5) (6)
467,324

 
167,444

 
150,888

 
157,004

 
129,106

(1) Amounts for the years ended December 31, 2017, 2016, 2015, and 2014 have not been adjusted under the modified retrospective method of adoption of Accounting Standards Codification Topic 606, Revenue from Contracts from Customers ("Topic 606"), and are presented consistent with the prior period amounts reported under ASC 605. Revenue for the year ended December 31, 2018 would have been $415.1 million under ASC 605.
(2) Reflects the impact of increased spending on research and development and selling, general and administrative expenses to support growth.
(3) Includes the favorable impact of a $8.9 million and $1.8 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for restricted stock units ("RSUs") that vested or stock options that were exercised during the years ended December 31, 2018 and 2017, respectively. Includes tax expense of $8.0 million for the year ended December 31, 2017 related to the the enactment of the Tax Cuts and Jobs Act. Refer to Note 10 of the notes to our consolidated financial statements within this Annual Report on Form 10-K.
(4) In May 2018, we sold 4,645,000 shares of our common stock, which included 645,000 shares pursuant to the full exercise of the underwriters' option to purchase additional shares, in an underwritten public offering at a price of $53.00 per share, which resulted in gross proceeds of $246.2 million. Net proceeds after deducting fees, commissions, and other expenses related to the offering were $234.0 million.
(5) In 2016, 2015, and 2014, we used cash and cash equivalents to repurchase approximately $33.7 million, $7.6 million, and $22.4 million, respectively, of our common shares.
(6) We recorded a net increase in stockholders’ equity (retained earnings) of $19.0 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606 on contracts that were not complete as of that date. Refer to Note 2 of the notes to our consolidated financial statements within this Annual Report on Form 10-K for further discussion.

24
Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with the other sections of this Annual Report on Form 10-K, including Part I, Item 1A: “Risk Factors”; Part II, Item 6: “Selected Financial Data”; and Part II, Item 8: “Financial Statements and Supplementary Data.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing. The tables in the MD&A sections below are derived from exact numbers and may have immaterial rounding differences.
Overview

Axon is a market-leading provider of law enforcement technology solutions. Our core mission is to protect life. We fulfill that mission through developing hardware and software products that advance the long term objectives of a) obsoleting the bullet, b) reducing social conflict, and c) enabling a fair and effective justice system.

2019 Outlook

For the year ending December 31, 2019, we expect revenue of $480 million to $490 million. We expect a normalized income tax rate of between 20% and 25%; this rate can fluctuate depending on geography of income and the effects of discrete items, including changes in our stock price.
Results of Operations
The following table presents data from our consolidated statements of operations as well as the percentage relationship to total net sales of items included in our statements of operations (dollars in thousands):
 
Year Ended December 31,
 
2018
 
2017 (1)
 
2016 (1)
Net sales from products
$
327,635

 
78.0
 %
 
$
285,859

 
83.1
%
 
$
238,573

 
88.9
 %
Net sales from services
92,433

 
22.0
 %
 
57,939

 
16.9
%
 
29,672

 
11.1
 %
Net sales
420,068

 
100.0
 %
 
343,798

 
100.0
%
 
268,245

 
100.0
 %
Cost of product sales
139,337

 
33.2
 %
 
117,997

 
34.3
%
 
91,536

 
34.1
 %
Cost of service sales
22,148

 
5.3
 %
 
18,713

 
5.5
%
 
6,173

 
2.3
 %
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
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Sales, general and administrative
156,886

 
37.3
 %
 
138,692

 
40.3
%
 
108,076

 
40.3
 %
Research and development
76,856

 
18.3
 %
 
55,373

 
16.1
%
 
30,609

 
11.4
 %
Total operating expenses
233,742

 
55.6
 %
 
194,065

 
56.4
%
 
138,685

 
51.7
 %
Income from operations
24,841

 
5.9
 %
 
13,023

 
3.8
%
 
31,851

 
11.9
 %
Interest and other income (expense), net
3,263

 
0.8
 %
 
2,738

 
0.8
%
 
(354
)
 
(0.1
)%
Income before provision for income taxes
28,104

 
6.7
 %
 
15,761

 
4.6
%
 
31,497

 
11.7
 %
Provision (benefit) for income taxes
(1,101
)
 
(0.3
)%
 
10,554

 
3.1
%
 
14,200

 
5.3
 %
Net income
$
29,205

 
7.0
 %
 
$
5,207

 
1.5
%
 
$
17,297

 
6.4
 %

25

Net sales to the U.S. and other countries are summarized as follows (dollars in thousands):
 
Year Ended December 31,
 
2018
 
2017 (1)
 
2016 (1)
United States
$
335,310

 
79.8
%
 
$
282,810

 
82.3
%
 
$
218,757

 
81.6
%
Other Countries
84,758

 
20.2
%
 
60,988

 
17.7
%
 
49,488

 
18.4
%
Total
$
420,068

 
100.0
%
 
$
343,798

 
100.0
%
 
$
268,245

 
100.0
%
(1) Amounts for the years ended December 31, 2017 and 2016 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.
International revenue grew  39.0% from 2017 to 2018, driven by increased sales in Australia, France, Singapore and the U.K.
Our operations are comprised of two reportable segments: the manufacture and sale of CEWs, 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 products (collectively, the "Software and Sensors" segment). Within the Software and Sensors segment, we specify sales of products and services. 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." 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, selling expenses for the sales team, product management and R&D for products included, or to be included, within the Software and Sensors segment. All other costs are included in the TASER segment.

26

For the Years Ended December 31, 2018 and 2017
Net Sales
Net sales by product line were as follows for the years ended December 31, 2018 and 2017 (dollars in thousands):
 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
 
2018
 
2017  (1)
 
 
TASER segment:
 
 
 
 
 
 
 
 
 
 
 
TASER 7
$
7,358

 
1.8
%
 
$
—

 
—
%
 
$
7,358

 
*

TASER X26P
70,638

 
16.8
%
 
64,426

 
18.7
%
 
6,212

 
9.6
 %
TASER X2
78,837

 
18.8
%
 
81,417

 
23.7
%
 
(2,580
)
 
(3.2
)%
TASER Pulse and Bolt
5,182

 
1.2
%
 
4,340

 
1.3
%
 
842

 
19.4
 %
Cartridges
68,258

 
16.3
%
 
63,203

 
18.4
%
 
5,055

 
8.0
 %
Extended warranties
15,753

 
3.8
%
 
12,426

 
3.6
%
 
3,327

 
26.8
 %
Other
7,089

 
1.7
%
 
8,700

 
2.5
%
 
(1,611
)
 
(18.5
)%
TASER segment
253,115

 
60.4
%
 
234,512

 
68.2
%
 
18,603

 
7.9
 %
Software and Sensors segment:
 
 
 
 
 
 
 
 
 
 
 
Axon Body
21,883

 
5.2
%
 
15,184

 
4.4
%
 
6,699

 
44.1
 %
Axon Flex
6,509

 
1.5
%
 
10,083

 
2.9
%
 
(3,574
)
 
(35.4
)%
Axon Fleet
12,527

 
3.0
%
 
2,954

 
0.9
%
 
9,573

 
324.1
 %
Axon Dock
10,706

 
2.5
%
 
9,736

 
2.8
%
 
970

 
10.0
 %
Axon Evidence and cloud services
90,291

 
21.5
%
 
57,841

 
16.8
%
 
32,450

 
56.1
 %
TASER Cam
3,871

 
0.9
%
 
3,358

 
1.0
%
 
513

 
15.3
 %
Extended warranties
11,860

 
2.8
%
 
7,110

 
2.1
%
 
4,750

 
66.8
 %
Other
9,306

 
2.2
%
 
3,020

 
0.9
%
 
6,286

 
208.1
 %
Software and Sensors segment
166,953

 
39.6
%
 
109,286

 
31.8
%
 
57,667

 
52.8
 %
Total net sales
$
420,068

 
100.0
%
 
$
343,798

 
100.0
%
 
$
76,270

 
22.2
 %
* 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.

27

Net unit sales were as follows:
 
Year Ended December 31,
 
 
 
 
 
2018
 
2017
 
Unit
Change
 
Percent
Change
TASER 7
5,759

 
—

 
5,759

 
*

TASER X26P
71,823

 
70,381

 
1,442

 
2.0
 %
TASER X2
65,855

 
76,106

 
(10,251
)
 
(13.5
)%
TASER Pulse and Bolt
18,398

 
12,504

 
5,894

 
47.1
 %
Cartridges
2,342,897

 
2,408,471

 
(65,574
)
 
(2.7
)%
Axon Body
85,965

 
89,808

 
(3,843
)
 
(4.3
)%
Axon Flex
15,541

 
26,025

 
(10,484
)
 
(40.3
)%
Axon Fleet
9,445

 
3,795

 
5,650

 
148.9
 %
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. Unit sales for law enforcement TASER devices decreased as compared to 2017 primarily as a result of the timing of the TASER 7 release and limited production of that device in 2018. We continue to see an increase in extended warranty revenue primarily as a result of the increased number of CEW devices in the field. Cartridge sales also increased compared to 2017 as an increase in the average sales price more than offset a slight decrease in unit sales. During the first quarter of 2017, the Home Office of the U.K. government approved our X2 devices for sale which resulted in increased sales within the U.K. of $6.4 million for the year ended December 31, 2018 compared to 2017.
Net sales for the Software and Sensors segment increased $57.7 million , or 52.8% , primarily due to continued adoption of on-officer cameras and related technologies, including our Axon Evidence digital evidence management software suite. Axon Evidence revenues increased  $32.5 million , primarily driven by the continued increase in active users on the platform. Revenues related to Axon Fleet, which was introduced in the third quarter of 2017, increased $9.6 million . Combined net sales related to our Axon Body, Axon Flex, and Axon Dock products increased approximately $4.1 million as an increase in the average sales price more than offset the decrease in unit sales.
To gain more immediate feedback regarding activity for Axon camera products and Axon Evidence services, we also review bookings for these products. We consider bookings to be a statistical measure defined as the sales price of orders (not invoiced sales), including contractual optional periods we expect to be exercised, net of cancellations, placed in the relevant fiscal period, regardless of when the products or services ultimately will be provided. Most bookings will be invoiced in subsequent periods. Due to municipal government funding rules, in some cases certain of the future period amounts included in bookings are subject to budget appropriation or other contract cancellation clauses. Although we have entered into contracts for the delivery of products and services in the future and anticipate the contracts will be fulfilled, if agencies do not exercise contractual options, do not appropriate funds in future year budgets, or do enact a cancellation clause, revenue associated with these bookings may not ultimately be recognized, resulting in a future reduction to bookings. Bookings related to our Software and Sensors segment, net of cancellations, were $389.1 million during 2018 , compared to $291.2 million in 2017 , an increase of 33.6% .

28

The chart below illustrates our quarterly Software and Sensors bookings for each of the previous six fiscal quarters (in thousands):
A10KTASR123_CHART-32731A04.JPG
Backlog - As of December 31, 2018 compared to December 31, 2017
Our backlog for products and services includes all orders that have been received and are believed to be firm.
In the TASER segment, we define backlog as equal to deferred revenue. Deferred revenue represents amounts invoiced to customers for goods and services to be delivered in subsequent periods. We process orders within the TASER segment quickly, and our best estimate of firm orders outstanding as of period end represents those that have been paid for but remain undelivered. The TASER segment backlog balance was $54.6 million as of December 31, 2018 . We expect to realize $22.2 million of this deferred revenue balance as revenue during the next 12 months. This represents cash received and accounts receivable from customers on or prior to December 31, 2018 for products and services expected to be delivered in the next 12 months.
In the Software and Sensors segment, we define backlog as cumulative bookings, net of cancellations, less product and service revenue recognized to date. Bookings are generally realized as revenue over multiple years. The Software and Sensors backlog balance was $758.1 million as of December 31, 2018 . This backlog balance includes $126.8 million of deferred revenue, and $631.3 million that has been recorded as bookings but not yet invoiced, all as of December 31, 2018 . We expect to realize approximately $225.0 million of the December 31, 2018 backlog balance as revenue during the next 12 months.
 
TASER
 
Software and Sensors
 
Total
 
(in thousands)
Balance, beginning of period
$
46,685

 
$
536,016

 
$
582,701

Add: additions to backlog, net of cancellations
261,027

 
389,062

 
650,089

Less: revenue recognized during period
253,115

 
166,953

 
420,068

Balance end of period
$
54,597

 
$
758,125

 
$
812,722

Our backlog of $812.7 million as of December 31, 2018 has increased significantly from $582.7 million as of December 31, 2017 . The increase in TASER segment backlog is not expected to have a material impact on revenue or operating margins. Our significant increase in backlog, primarily in the Software and Sensors segment is indicative of expected revenue growth in this segment. Revenue growth in the Software and Sensors segment is expected to result in improved operating margins over time as additional revenue will cover a larger portion of our selling, general and

29

administrative expenses, and research and development costs, while we do not expect any material changes in gross margins.
Cost of Product and Service Sales (dollars in thousands):
 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
 
2018
 
2017 (1)
 
 
TASER segment:
 
 
 
 
 
 
 
 
 
 
 
Cost of product sales
$
80,354

 
31.7
%
 
$
72,054

 
30.7
%
 
$
8,300

 
11.5
%
Software and Sensors segment:
 
 
 
 
 
 
 
 
 
 
 
Cost of product sales
58,983

 
35.3
%
 
45,943

 
42.0
%
 
13,040

 
28.4
%
Cost of service sales
22,148

 
13.3
%
 
18,713

 
17.1
%
 
3,435

 
18.4
%
Total cost of sales
81,131

 
48.6
%
 
64,656

 
59.2
%
 
16,475

 
25.5
%
Total cost of product and service sales
$
161,485

 
38.4
%
 
$
136,710

 
39.8
%
 
$
24,775

 
18.1
%
(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.
Within the TASER segment, cost of product sales increased $8.3 million , or 11.5% , to $80.4 million in 2018 , compared to $72.1 million in 2017 , and increased as a percentage of sales to 31.7% from 30.7% . We did not experience significant changes in variable manufacturing costs during the year ended December 31, 2018 as compared to 2017. The overall increase in cost of product sales was attributable to higher unit sales. The increase in cost of product sales as a percentage of sales was primarily attributable to initial production costs for the TASER 7 device.
Within the Software and Sensors segment, cost of product and service sales was $81.1 million , an increase of $16.5 million , or 25.5% , from 2017 . As a percentage of net sales, cost of product and service sales decreased to 48.6% in 2018 from 59.2% in 2017 . The increase in cost of product sales was primarily attributable to higher sales volumes, and the increase in cost of service sales was driven by increased cloud storage costs. The decrease in total cost of sales as a percentage of total net sales was primarily due to the reduction of non-recurring expenses related to our data migration to our new cloud-storage provider that was completed in 2018, as well as increased leveraging of fixed costs related to cloud-storage.
Gross Margin (dollars in thousands):
 
Year Ended December 31,
 
 
 
Dollar
Change
 
Percent
Change
 
2018
 
2017 (1)
 
 
TASER segment
$
172,761

 
$
162,458

 
$
10,303

 
6.3
%
Software and Sensors segment
85,822

 
44,630

 
41,192

 
92.3
%
Total gross margin
$
258,583

 
$
207,088

 
$
51,495

 
24.9
%
Gross margin as % of net sales
61.6
%
 
60.2
%
 
 
 
 
(1) Amounts for the year ended December 31, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.
Gross margin increased $51.5 million to $258.6 million for the year ended December 31, 2018 compared to $207.1 million for 2017 . As a percentage of net sales, gross margin increased to 61.6% for 2018 from 60.2% for 2017 . As a percentage of net sales, gross margin for the TASER segment decreased slightly to 68.3% for the year ended December 31, 2018 from 69.3% for the year ended December 31, 2017 . Within the Software and Sensors segment, gross margin as a percentage of net sales was 51.4% and 40.8% for the years ended 2018 and 2017, respectively. Within the Software and Sensors segment, hardware gross margin was 20.8% for the year ended December 31, 2018 and 10.5%

30

for the same period in 2017, while the service margins were 76.0% and 67.7% during those same periods, respectively. The increase in hardware gross margins during 2018 was primarily attributable to accounting changes required under the new revenue accounting standard. Previously, the level of discounting in our contracts resulted in a portion of the contractual consideration allocated to the delivered hardware being recognized as revenue ratably over the Axon Evidence subscription term, while the full cost of the product was recognized when the hardware was delivered to the customer resulting in lower gross margins initially. Under the new revenue accounting standard, generally the full amount of revenue related to the delivered hardware is recognized in the period in which it is delivered, resulting in better matching of the revenues and related costs. The increase in service margins during the year ended December 31, 2018 as compared to 2017 was attributable to the reduction of non-recurring expenses related to our data migration to our new cloud-storage provider that was completed in 2018, as well as increased leveraging of fixed costs related to cloud-storage.
Sales, General and Administrative ("SG&A") Expenses (dollars in thousands):
 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
 
2018
 
2017 (1)
 
 
Salaries, benefits and bonus
$
63,185

 
$
58,450

 
$
4,735

 
8.1
 %
Stock-based compensation
12,710

 
9,047

 
3,663

 
40.5
 %
Professional, consulting and lobbying
24,469

 
24,267

 
202

 
0.8
 %
Sales and marketing
19,427

 
17,368

 
2,059

 
11.9
 %
Travel and meals
9,908

 
10,637

 
(729
)
 
(6.9
)%
Depreciation and amortization
6,051

 
3,517

 
2,534

 
72.1
 %
Other
21,136

 
15,406

 
5,730

 
37.2
 %
Total sales, general and administrative expenses
$
156,886

 
$
138,692

 
$
18,194

 
13.1
 %
Sales, general, and administrative as a percentage of net sales
37.3
%
 
40.3
%
 
 
 
 

31

SG&A by type and by segment were as follows for the years ended December 31, 2018 and 2017 (dollars in thousands):
 
Year Ended December 31,
 
Dollar Change
 
Percent Change
 
2018
 
2017 (1)
 
 
TASER segment:
 
 
 
 
 
 
 
 
 
 
 
Salaries, benefits and bonus
$
35,024

 
22.3
%
 
$
32,009

 
23.1
%
 
$
3,015

 
9.4
 %
Stock-based compensation
11,178

 
7.1
%
 
6,115

 
4.4
%
 
5,063

 
82.8
 %
Professional, consulting and lobbying
14,861

 
9.5
%
 
12,017

 
8.7
%
 
2,844

 
23.7
 %
Sales and marketing
7,535

 
4.8
%
 
8,357

 
6.0
%
 
(822
)
 
(9.8
)%
Travel and meals
4,765

 
3.0
%
 
4,867

 
3.5
%
 
(102
)
 
(2.1
)%
Depreciation and amortization
2,945

 
1.9
%
 
607

 
0.4
%
 
2,338

 
385.2
 %
Other
14,602

 
9.3
%
 
14,230

 
10.3
%
 
372

 
2.6
 %
TASER segment
90,910

 
57.9
%
 
78,202

 
56.4
%
 
12,708

 
16.3
 %
Software and Sensors segment:
 
 
 
 
 
 
 
 
 
 
 
Salaries, benefits and bonus
28,161

 
17.9
%
 
26,441

 
19.1
%
 
1,720

 
6.5
 %
Stock-based compensation
1,532

 
1.0
%
 
2,932

 
2.1
%
 
(1,400
)
 
(47.7
)%
Professional, consulting and lobbying
9,608

 
6.1
%
 
12,250

 
8.8
%
 
(2,642
)
 
(21.6
)%
Sales and marketing
11,892

 
7.6
%
 
9,011

 
6.5
%
 
2,881

 
32.0
 %
Travel and meals
5,143

 
3.3
%
 
5,770

 
4.2
%
 
(627
)
 
(10.9
)%
Depreciation and amortization
3,106

 
2.0
%
 
2,910

 
2.1
%
 
196

 
6.7
 %
Other
6,534

 
4.2
%
 
1,176

 
0.8
%
 
5,358

 
455.6
 %
Software and Sensors segment
65,976

 
42.1
%
 
60,490

 
43.6
%
 
5,486

 
9.1
 %
Total sales, general and administrative expenses
$
156,886

 
100.0
%
 
$
138,692

 
100.0
%
 
$
18,194

 
13.1
 %
(1) Amounts related to commissions expense 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.
Within the TASER segment, SG&A increased $12.7 million , or 16.3% . Of the increase, $8.1 million related to higher salaries, benefits, bonus and stock-based compensation related primarily to sales and marketing, professional staff and general support staff, including $3.3 million of stock-based compensation expense related to the CEO Performance Award. Refer to Note 12 of the notes to our consolidated financial statements within this Annual Report on Form 10-K for additional discussion of the CEO Performance Award. Additionally, professional, consulting and lobbying expenses increased $2.8 million primarily related to increased legal fees, and depreciation and amortization expenses increased $2.3 million related to the expansion of our facilities and amortization of additional intangible assets over the past year.
Within the Software and Sensors segment, SG&A increased $5.5 million , or 9.1% , but decreased to 39.5% of sales as compared to 55.4% in the prior year. Commissions increased $2.3 million on higher sales, and salaries, benefits and bonus increased $1.7 million for additional headcount. Additionally, during 2018, we abandoned certain developed technology acquired in a business combination resulting in an impairment charge of approximately $2.0 million, which is included in the "Other" category. The remaining increases were primarily attributable to the overall growth of operations during 2018. Partially offsetting the increases was a $2.6 million decrease in professional, consulting and lobbying expense as spending normalized compared to the prior year.

32

Research and Development ("R&D") Expenses (dollars in thousands):
 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
 
2018
 
2017
 
 
Salaries, benefits and bonus
$
49,792

 
$
33,682

 
$
16,110

 
47.8
 %
Stock-based compensation
8,658

 
6,055

 
2,603

 
43.0
 %
Professional and consulting
4,183

 
4,351

 
(168
)
 
(3.9
)%
Travel and meals
2,192

 
1,674

 
518

 
30.9
 %
Other
12,031

 
9,611

 
2,420

 
25.2
 %
Total research and development expenses
$
76,856

 
$
55,373

 
$
21,483

 
38.8
 %
Research and development as a percentage of net sales
18.3
%
 
16.1
%
 
 
 
 
R&D by type and by segment were as follows for the years ended December 31, 2018 and 2017 (dollars in thousands):
 
Year Ended December 31,
 
Dollar Change
 
Percent Change
 
2018
 
2017
 
 
TASER segment:
 
 
 
 
 
 
 
 
 
 
 
Salaries, benefits and bonus
$
9,174

 
11.9
%
 
$
4,243

 
7.7
%
 
$
4,931

 
116.2
 %
Stock-based compensation
1,594

 
2.1
%
 
517

 
0.9
%
 
1,077

 
208.3
 %
Professional and consulting
1,192

 
1.6
%
 
1,098

 
2.0
%
 
94

 
8.6
 %
Travel and meals
511

 
0.7
%
 
388

 
0.7
%
 
123

 
31.7
 %
Other
4,541

 
5.9
%
 
2,131

 
3.8
%
 
2,410

 
113.1
 %
TASER segment
17,012

 
22.2
%
 
8,377

 
15.1
%
 
8,635

 
103.1
 %
Software and Sensors segment:
 
 
 
 
 
 
 
 
 
 
 
Salaries, benefits and bonus
40,618

 
52.8
%
 
29,439

 
53.2
%
 
11,179

 
38.0
 %
Stock-based compensation
7,064

 
9.2
%
 
5,538

 
10.0
%
 
1,526

 
27.6
 %
Professional and consulting
2,991

 
3.9
%
 
3,253

 
5.9
%
 
(262
)
 
(8.1
)%
Travel and meals
1,681

 
2.2
%
 
1,286

 
2.3
%
 
395

 
30.7
 %
Other
7,490

 
9.7
%
 
7,480

 
13.5
%
 
10

 
0.1
 %
Software and Sensors segment
59,844

 
77.8
%
 
46,996

 
84.9
%
 
12,848

 
27.3
 %
Total research and development expenses
$
76,856

 
100.0
%
 
$
55,373

 
100.0
%
 
$
21,483

 
38.8
 %
Within the TASER segment, R&D expenses increased $8.6 million or 103.1% . Salaries, benefits, bonus and stock-based compensation in the TASER segment increased $6.0 million in 2018 compared to 2017 as we continue to invest in personnel allocated to the development of new CEW related technologies. Additionally, test build materials included in the "Other" category were higher than the prior year primarily related to the launch of the TASER 7 device.

Our Software and Sensors segment was responsible for  59.8%  of the overall increase in R&D expense. Within this segment, R&D expenses increased $12.8 million or 27.3% , but decreased to 35.8% of sales as compared to 43.0% in the prior year. Of the increase, $12.7 million related to salaries, benefits, bonus, and stock-based compensation. Partially offsetting the increase was a $1.0 million decrease in impairment expense as compared to 2017; during 2017, we abandoned certain developed technology acquired in a business combination.

We expect R&D expense to continue to increase in absolute dollars as we invest in the deployment of new CEW technologies and focus on growing the Software and Sensors segment as we add headcount and additional resources to develop new products and services to further advance our scalable cloud-connected device platform. We believe that these investments will result in an increase in our subscription revenue base, which over time will result in revenue increasing faster than the increase in SG&A expenses and R&D costs, as we reach economies of scale.

33

Interest and Other Income (Expense), Net
Interest and other income (expense), net was $3.3 million and $2.7 million for the years ended December 31, 2018 and 2017 , respectively.
For the year ended December 31, 2018 , we earned interest income of $4.4 million and had losses from foreign currency transaction adjustments of $1.1 million and interest expense of $0.1 million. For the year ended December 31, 2017, we earned interest income of $1.6 million and had gains from foreign currency transaction adjustments of $1.4 million which were partially offset by interest expense of $0.2 million.
Provision for Income Taxes
The income tax benefit was $1.1 million for the year ended December 31, 2018 . The effective income tax rate for 2018 was (3.9%). The benefits related to excess stock-based compensation of $8.9 million and research and development credits of $6.9 million were partially offset by the tax effects of permanently non-deductible expenses for executive compensation of $1.2 million, an increase in uncertain tax benefits of $1.8 million and return to provision adjustments of $1.8 million. Additionally, we recorded a $2.0 million increase to our valuation allowance as of December 31, 2018 related to research and development tax credits that may not be utilized prior to expiration, partially offset by changes in certain foreign jurisdictions.
The provision for income taxes was $10.6 million for the year ended December 31, 2017. The effective income tax rate for 2017 was 66.9%. In connection with our initial analysis of the impact of the Tax Act, we were able to make reasonable estimates of the impact of the Tax Act and recorded a provisional net tax expense of $8.0 million in the period ended December 31, 2017, primarily related to the impact of the tax rate reduction on our deferred tax assets and deferred tax liabilities. This was partially offset by a $1.8 million benefit related to excess stock-based compensation deductions, as well as a $2.4 million benefit for research and development credits during the year ended December 31, 2017. An additional valuation allowance in the amount of $1.9 million was recorded as of December 31, 2017, related to certain research and development credits that may not be utilized prior to expiration and losses in certain foreign jurisdictions in which there was a cumulative loss.
Net Income
Our net income increased by $24.0 million to $29.2 million for the year ended December 31, 2018 compared to $5.2 million in 2017 . Net income per basic and diluted share was $0.52 and $0.50 , respectively, for 2018 compared to $0.10 per basic and diluted share for 2017 .

34

Three Months Ended December 31, 2018 Compared to September 30, 2018
Net sales by product line were as follows (dollars in thousands):
 
Three Months Ended December 31, 2018
 
Three Months Ended September 30, 2018
 
Dollar
Change
 
Percent
Change
TASER segment:
 
 
 
 
 
 
 
 
 
 
 
TASER 7
$
7,358

 
6.4
%
 
$
—

 
—
%
 
$
7,358

 
*
TASER X26P
18,020

 
15.7
%
 
17,998

 
17.2
%
 
22

 
0.1
 %
TASER X2
16,151

 
14.1
%
 
20,392

 
19.4
%
 
(4,241
)
 
(20.8
)%
TASER Pulse and Bolt
1,333

 
1.2
%
 
1,402

 
1.3
%
 
(69
)
 
(4.9
)%
Cartridges
16,495

 
14.4
%
 
18,406

 
17.6
%
 
(1,911
)
 
(10.4
)%
Extended warranties
4,186

 
3.6
%
 
4,123

 
3.9
%
 
63

 
1.5
 %
Other
1,758

 
1.5
%
 
1,345

 
1.3
%
 
413

 
30.7
 %
TASER segment
65,301

 
56.9
%
 
63,666

 
60.7
%
 
1,635

 
2.6
 %
Software and Sensors segment:
 
 
 
 
 
 
 
 
 
 
 
Axon Body
6,801

 
5.9
%
 
4,744

 
4.5
%
 
2,057

 
43.4
 %
Axon Flex
1,980

 
1.7
%
 
1,325

 
1.3
%
 
655

 
49.4
 %
Axon Fleet
5,887

 
5.1
%
 
1,809

 
1.7
%
 
4,078

 
225.4
 %
Axon Dock
3,374

 
3.0
%
 
2,178

 
2.1
%
 
1,196

 
54.9
 %
Axon Evidence and cloud services
25,778

 
22.5
%
 
23,915

 
22.8
%
 
1,863

 
7.8
 %
TASER Cam
1,032

 
0.9
%
 
717

 
0.7
%
 
315

 
43.9
 %
Extended warranties
3,339

 
2.9
%
 
3,161

 
3.0
%
 
178

 
5.6
 %
Other
1,299

 
1.1
%
 
3,321

 
3.2
%
 
(2,022
)
 
(60.9
)%
Software and Sensors segment
49,490

 
43.1
%
 
41,170

 
39.3
%
 
8,320

 
20.2
 %
Total net sales
$
114,791

 
100.0
%
 
$
104,836

 
100.0
%
 
$
9,955

 
9.5
 %
*Not meaningful
Net unit sales were as follows:
 
Three Months Ended
 
 
 
 
 
December 31, 2018
 
September 30, 2018
 
Unit
Change
 
Percent
Change
TASER 7
5,759

 
—

 
5,759

 
*

TASER X26P
18,597

 
18,842

 
(245
)
 
(1.3
)%
TASER X2
13,088

 
16,729

 
(3,641
)
 
(21.8
)%
TASER Pulse and Bolt
7,490

 
3,750

 
3,740

 
99.7
 %
Cartridges
600,690

 
598,119

 
2,571

 
0.4
 %
Axon Body
26,167

 
17,622

 
8,545

 
48.5
 %
Axon Flex
5,080

 
3,487

 
1,593

 
45.7
 %
Axon Fleet
3,908

 
1,601

 
2,307

 
144.1
 %
Axon Dock
3,859

 
3,525

 
334

 
9.5
 %
TASER Cam
1,952

 
1,339

 
613

 
45.8
 %
*Not meaningful


35

Net sales for the TASER segment increased $1.6 million , or 2.6% , on a sequential basis primarily due to an overall increase in TASER device handles, including initial sales of TASER 7. This increase was partially offset by lower sequential cartridge revenue, which was primarily attributable to timing.

Net sales for the Software and Sensors segment increased $8.3 million , or 20.2% , on a sequential basis. Axon Fleet contributed $4.1 million of the increase, driven by an increase in both units and average sales price following the release of the Fleet 2 device. Combined net sales related to our Axon Body, Axon Flex, and Axon Dock products contributed an additional increase of $3.9 million , primarily due to an increase in units. Axon Evidence revenues increased $1.9 million driven by the continued increase in active users on the platform. The increases were partially offset by a decrease in other revenue.

International sales were $24.3 million in for the three months ended December 31, 2018 compared to $16.7 million for the three months ended September 30, 2018, an increase of $7.6 million, driven by increased sales from Australia and Canada.
For the Years Ended December 31, 2017 and 2016
Net Sales
Net sales by product line were as follows for the years ended December 31, 2017 and 2016 (dollars in thousands):
 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
 
2017 (1)
 
2016 (1)
 
 
TASER segment:
 
 
 
 
 
 
 
 
 
 
 
TASER X26P
$
64,426

 
18.7
%
 
$
72,490

 
27.0
%
 
$
(8,064
)
 
(11.1
)%
TASER X2
81,417

 
23.7
%
 
52,665

 
19.6
%
 
28,752

 
54.6
 %
TASER Pulse and Bolt
4,340

 
1.3
%
 
3,580

 
1.3
%
 
760

 
21.2
 %
Cartridges
63,203

 
18.4
%
 
52,305

 
19.5
%
 
10,898

 
20.8
 %
Extended warranties
12,426

 
3.6
%
 
9,880

 
3.7
%
 
2,546

 
25.8
 %
Other
8,700

 
2.5
%
 
11,724

 
4.4
%
 
(3,024
)
 
(25.8
)%
TASER segment
234,512

 
68.2
%
 
202,644

 
75.5
%
 
31,868

 
15.7
 %
Software and Sensors segment:
 
 
 
 
 
 
 
 
 
 
 
Axon Body
15,184

 
4.4
%
 
12,911

 
4.8
%
 
2,273

 
17.6
 %
Axon Flex
10,083

 
2.9
%
 
5,323

 
2.0
%
 
4,760

 
89.4
 %
Axon Fleet
2,954

 
0.9
%
 
—

 
—
%
 
2,954

 
*

Axon Dock
9,736

 
2.8
%
 
7,422

 
2.8
%
 
2,314

 
31.2
 %
Axon Evidence and cloud services
57,841

 
16.8
%
 
29,260

 
10.9
%
 
28,581

 
97.7
 %
TASER Cam
3,358

 
1.0
%
 
4,888

 
1.8
%
 
(1,530
)
 
(31.3
)%
Extended warranties
7,110

 
2.1
%
 
3,710

 
1.4
%
 
3,400

 
91.6
 %
Other
3,020

 
0.9
%
 
2,087

 
0.8
%
 
933

 
44.7
 %
Software and Sensors segment
109,286

 
31.8
%
 
65,601

 
24.5
%
 
43,685

 
66.6
 %
Total net sales
$
343,798

 
100.0
%
 
$
268,245

 
100.0
%
 
$
75,553

 
28.2
 %
(1) Amounts for the years ended December 31, 2017 and 2016 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.


36

Net unit sales were as follows:
 
Year Ended December 31,
 
 
 
 
 
2017
 
2016
 
Unit
Change
 
Percent
Change
TASER X26P
70,381

 
79,218

 
(8,837
)
 
(11.2
)%
TASER X2
76,106

 
47,700

 
28,406

 
59.6
 %
TASER Pulse and Bolt
12,504

 
9,549

 
2,955

 
30.9
 %
Cartridges
2,408,471

 
1,979,051

 
429,420

 
21.7
 %
Axon Body
89,808

 
66,154

 
23,654

 
35.8
 %
Axon Flex
26,025

 
14,173

 
11,852

 
83.6
 %
Axon Fleet
3,795

 
—

 
3,795

 
*

Axon Dock
23,492

 
16,983

 
6,509

 
38.3
 %
TASER Cam
6,432

 
9,566

 
(3,134
)
 
(32.8
)%
The increase in net sales for 2017 compared to 2016 in the TASER segment was primarily attributable to increased sales under the OSP and TASER 60 installment payment programs. During the first quarter of 2017, the Home Office of the U.K. government approved our X2 devices for sale which resulted in increased TASER X2 sales within the U.K. of $8.5 million for the year ended December 31, 2017 compared to no sales during 2016. Additionally, we increased cartridge sales by $10.9 million to $63.2 million during the year ended December 31, 2017 as compared to $52.3 million during the same period in 2016 which was primarily attributable to an increase in total devices in the field.
Net sales for the Software and Sensors segment were $109.3 million and $65.6 million for the years ended December 31, 2017 and 2016, respectively, an increase of $43.7 million, or 66.6%. The overall increase in the Software and Sensors segment was driven by continued adoption of on-officer cameras and related technologies, including our Axon Evidence digital evidence management software suite. Combined net sales related to our Axon Body, Axon Flex, and Axon Dock products increased approximately $9.3 million. We recorded net sales of $3.0 million related to Axon Fleet, our then-newly introduced in-car camera system, with no amounts recorded during the same period in 2016. Axon Evidence revenues for the year ended December 31, 2017 increased $28.6 million to $57.8 million as compared to the same period in 2016. This increase was primarily driven by the continued increase in active users on our Axon Evidence platform.
Cost of Product and Service Sales (dollars in thousands):
 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
 
2017 (1)
 
2016 (1)
 
 
TASER segment:
 
 
 
 
 
 
 
 
 
 
 
Cost of product sales
$
72,054

 
30.7
%
 
$
61,930

 
30.6
%
 
$
10,124

 
16.3
%
Software and Sensors segment:
 
 
 
 
 
 
 
 
 
 
 
Cost of product sales
45,943

 
42.0
%
 
29,606

 
45.1
%
 
16,337

 
55.2
%
Cost of service sales
18,713

 
17.1
%
 
6,173

 
9.4
%
 
12,540

 
203.1
%
Total cost of sales
64,656

 
59.2
%
 
35,779

 
54.5
%
 
28,877

 
80.7
%
Total cost of product and service sales
$
136,710

 
39.8
%
 
$
97,709

 
36.4
%
 
$
39,001

 
39.9
%
(1) Amounts for the years ended December 31, 2017 and 2016 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.
Within the TASER segment, cost of product sales increased $10.1 million, or 16.3%, to $72.1 million in 2017, compared to $61.9 million in 2016, and remained relatively consistent as a percentage of sales at 30.7% from 30.6%.

37

We did not experience significant changes in variable manufacturing costs during the year ended December 31, 2017 as compared to 2016. The overall increase in cost of products sold was attributable to higher unit sales.
Within the Software and Sensors segment, cost of product and service sales was $64.7 million, an increase of $28.9 million, or 80.7%, from 2016. As a percentage of net sales, cost of product and service sales increased to 59.2% in 2017 from 54.5% in 2016. The increase in cost of product sales was primarily attributable to higher sales volumes, and the increase in cost of service sales was driven by increased cloud storage costs. The increase in total cost of sales as a percentage of total net sales was primarily attributable to non-recurring expenses related to our data migration to a new cloud-storage provider.
Gross Margin (dollars in thousands):
 
Year Ended December 31,
 
 
 
Dollar
Change
 
Percent
Change
 
2017
 
2016
 
 
TASER segment
$
162,458

 
$
140,714

 
$
21,744

 
15.5
%
Software and Sensors Segment
44,630

 
29,822

 
14,808

 
49.7
%
Total gross margin
$
207,088

 
$
170,536

 
$
36,552

 
21.4
%
Gross margin as % of net sales
60.2
%
 
63.6
%
 
 
 
 
Gross margin increased $36.6 million to $207.1 million for the year ended December 31, 2017 compared to $170.5 million for 2016 . As a percentage of net sales, gross margin decreased to 60.2% for 2017 from 63.6% for 2016 . As a percentage of net sales, gross margin for the TASER segment was relatively consistent at 69.3% and 69.4% for the years ended December 31, 2017 and 2016, respectively. Within the Software and Sensors segment gross margin as a percentage of net sales was 40.8% and 45.5% for the years ended 2017 and 2016, respectively. Within the Software and Sensors segment, hardware gross margin was 10.5% for the year ended December 31, 2017 and 17.6% for the same period in 2016, while the service margins were 67.7% and 79.2% during those same periods, respectively. The decreased hardware margins were primarily attributable to higher discounting. In certain customer contracts, primarily within the Software and Sensors segment, the level of discounting resulted in a portion of the contractual consideration allocated to the delivered hardware to be recognized as revenue ratably over the Axon Evidence subscription term. However, the full cost of the product is recognized when the hardware is delivered to the customer resulting in lower gross margins initially. The decrease in service margins was primarily attributable to non-recurring expenses related to our data migration to a new cloud-storage provider.
Sales, General and Administrative Expenses (dollars in thousands):
 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
 
2017
 
2016
 
 
Salaries, benefits and bonus
$
58,450

 
$
43,058

 
$
15,392

 
35.7
%
Stock-based compensation
9,047

 
5,707

 
3,340

 
58.5
%
Professional, consulting and lobbying
24,267

 
19,321

 
4,946

 
25.6
%
Sales and marketing
17,368

 
15,132

 
2,236

 
14.8
%
Travel and meals
10,637

 
8,970

 
1,667

 
18.6
%
Other
18,923

 
15,888

 
3,035

 
19.1
%
Total sales, general and administrative expenses
$
138,692

 
$
108,076

 
$
30,616

 
28.3
%
Sales, general, and administrative as a percentage of net sales
40.3
%
 
54.6
%
 
 
 
 

38

SG&A by type and by segment were as follows for the years ended December 31, 2017 and 2016 (dollars in thousands):
 
Year Ended December 31,
 
Dollar Change
 
Percent Change
 
2017
 
2016
 
 
TASER segment:
 
 
 
 
 
 
 
 
 
 
 
Salaries, benefits and bonus
$
32,009

 
23.1
%
 
$
24,534

 
22.7
%
 
$
7,475

 
30.5
 %
Stock-based compensation
6,115

 
4.4
%
 
3,339

 
3.1
%
 
2,776

 
83.1
 %
Professional, consulting and lobbying
12,017

 
8.7
%
 
10,128

 
9.4
%
 
1,889

 
18.7
 %
Sales and marketing
8,357

 
6.0
%
 
8,305

 
7.7
%
 
52

 
0.6
 %
Travel and meals
4,867

 
3.5
%
 
4,277

 
4.0
%
 
590

 
13.8
 %
Other
14,837

 
10.3
%
 
13,034

 
12.1
%
 
1,196

 
9.2
 %
TASER segment
78,202

 
56.4
%
 
63,617

 
58.9
%
 
14,585

 
22.9
 %
Software and Sensors segment:
 
 
 
 
 
 
 
 
 
 
 
Salaries, benefits and bonus
26,441

 
19.1
%
 
18,524

 
17.1
%
 
7,917

 
42.7
 %
Stock-based compensation
2,932

 
2.1
%
 
2,368

 
2.2
%
 
564

 
23.8
 %
Professional, consulting and lobbying
12,250

 
8.8
%
 
9,193

 
8.5
%
 
3,057

 
33.3
 %
Sales and marketing
9,011

 
6.5
%
 
6,827

 
6.3
%
 
2,184

 
32.0
 %
Travel and meals
5,770

 
4.2
%
 
4,693

 
4.3
%
 
1,077

 
22.9
 %
Other
4,086

 
0.8
%
 
2,854

 
2.6
%
 
(1,678
)
 
(58.8
)%
Software and Sensors segment
60,490

 
43.6
%
 
44,459

 
41.1
%
 
16,031

 
36.1
 %
Total sales, general and administrative expenses
$
138,692

 
100.0
%
 
$
108,076

 
100.0
%
 
$
30,616

 
28.3
 %
(1) Amounts related to commissions expense for the years ended December 31, 2017 and 2016 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.
Within the TASER segment, SG&A increased $14.6 million, or 22.9%, to $78.2 million from $63.6 million in 2016. This increase was primarily attributable to our continued efforts to build the necessary infrastructure to facilitate future growth which was evidenced by higher salaries, benefits, bonus and stock-based compensation of $10.3 million for the year ended December 31, 2017 as compared to 2016. Increased professional, consulting and lobbying fees of $1.9 million were primarily related to accounting and finance consulting costs attributable to our adoption of the new revenue recognition rules, international tax restructuring,and efforts towards remediation of internal control matters. The remaining other operating expenses were primarily attributable to the overall growth of operations during 2017.

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

39

Research and Development Expenses (dollars in thousands):
 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
 
2017
 
2016
 
 
Salaries, benefits and bonus
$
33,682

 
$
17,205

 
$
16,477

 
95.8
%
Stock-based compensation
6,055

 
3,320

 
2,735

 
82.4
%
Professional and consulting
4,351

 
3,212

 
1,139

 
35.5
%
Travel and meals
1,674

 
969

 
705

 
72.8
%
Other
9,611

 
5,903

 
3,708

 
62.8
%
Total research and development expenses
$
55,373

 
$
30,609

 
$
24,764

 
80.9
%
Research and development as a percentage of net sales
16.1
%
 
11.4
%
 
 
 
 
R&D by type and by segment were as follows for the years ended December 31, 2017 and 2016 (dollars in thousands):
 
Year Ended December 31,
 
Dollar Change
 
Percent Change
 
2017
 
2016
 
 
TASER segment:
 
 
 
 
 
 
 
 
 
 
 
Salaries, benefits and bonus
$
4,243

 
7.7
%
 
$
2,301

 
7.5
%
 
$
1,942

 
84.4
 %
Stock-based compensation
517

 
0.9
%
 
639

 
2.1
%
 
(122
)
 
(19.1
)%
Professional and consulting
1,098

 
2.0
%
 
1,167

 
3.8
%
 
(69
)
 
(5.9
)%
Travel and meals
388

 
0.7
%
 
345

 
1.1
%
 
43

 
12.5
 %
Other
2,131

 
3.8
%
 
1,435

 
4.7
%
 
696

 
48.5
 %
TASER segment
8,377

 
15.1
%
 
5,887

 
19.2
%
 
2,490

 
42.3
 %
Software and Sensors segment:
 
 
 
 
 
 
 
 
 
 
 
Salaries, benefits and bonus
29,439

 
53.2
%
 
14,904

 
48.7
%
 
14,535

 
97.5
 %
Stock-based compensation
5,538

 
10.0
%
 
2,681

 
8.8
%
 
2,857

 
106.6
 %
Professional and consulting
3,253

 
5.9
%
 
2,045

 
6.7
%
 
1,208

 
59.1
 %
Travel and meals
1,286

 
2.3
%
 
624

 
2.0
%
 
662

 
106.1
 %
Other
7,480

 
13.5
%
 
4,468

 
14.6
%
 
3,012

 
67.4
 %
Software and Sensors segment
46,996

 
84.9
%
 
24,722

 
80.8
%
 
22,274

 
90.1
 %
Total research and development expenses
$
55,373

 
100.0
%
 
$
30,609

 
100.0
%
 
$
24,764

 
80.9
 %
Within the TASER segment, R&D expenses increased $2.5 million, or 42.3%, to $8.4 million in 2017. Salaries, benefits, bonus and stock-based compensation in the TASER segment increased $1.8 million in 2017 compared to 2016. The increase for 2017 compared to 2016 was primarily driven by additional headcount as we continued to invest in the development of new CEW related technologies.

Within the Software and Sensors segment, R&D expenses increased $22.3 million, or 90.1%, to $47.0 million in 2017 from the prior year. Our Software and Sensors segment was responsible for approximately 85% of the overall expenses in R&D. Of the $22.3 million increase in R&D for the Software and Sensors segment, $17.4 million related to salaries, benefits, bonus, and stock-based compensation. The increase in professional and consulting expense of $1.2 million was primarily attributable to increased technical consulting fees related to the development and release of Signal Sidearm. Included in other R&D expenses for the Software and Services segment was $1.9 million of amortization of intangible assets related to acquired developed technology that was yet to be put into service. Additionally, during 2017, we abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $1.0 million which was included in other R&D expenses.

40

Interest and Other Income (Expense), Net
Interest and other income (expense), net was $2.7 million and $(0.4) million for the years ended December 31, 2017 and 2016 , respectively.
For the year ended December 31, 2017, we earned interest income of $1.6 million and had gains from foreign currency transaction adjustments of $1.4 million which were partially offset by interest expense of $0.2 million. For the year ended December 31, 2016, interest income of $0.7 million was more than offset by losses on foreign currency transaction adjustments of $1.1 million.
Provision for Income Taxes
The provision for income taxes was $10.6 million for the year ended December 31, 2017. The effective income tax rate for 2017 was 66.9%. In connection with our initial analysis of the impact of the Tax Act, we were able to make reasonable estimates of the impact of the Tax Act and recorded a provisional net tax expense of $8.0 million in the period ended December 31, 2017, primarily related to the impact of the tax rate reduction on our deferred tax assets and deferred tax liabilities. This was partially offset by a $1.8 million benefit related to excess stock-based compensation deductions, as well as a $2.4 million benefit for research and development credits during the year ended December 31, 2017. In addition, an additional valuation allowance in the amount of $1.9 million was recorded as of December 31, 2017, related to certain research and development credits that may not be utilized prior to expiration and losses in certain foreign jurisdictions in which there was a cumulative loss.
The provision for income taxes was $14.2 million for the year ended December 31, 2016. The effective income tax rate for 2016 was 45.1%. The effect of state income taxes of $0.9 million and the tax effects of intercompany transactions of $0.6 million were offset by a benefit of $1.9 million for research and development credits in the current year. The difference between statutory and foreign tax rates of $1.5 million was largely driven by losses incurred in a foreign entity for which no tax benefit will be realized. In addition, a valuation allowance in the amount of $1.8 million was recorded as of December 31, 2016 related to certain research and development tax credits that may not be utilized prior to expiration and losses in certain foreign jurisdictions in which there was a cumulative loss.
Net Income
Our net income decreased by $12.1 million to $5.2 million for the year ended December 31, 2017 compared to $17.3 million in 2016 . Net income per basic and diluted share was $0.10 for 2017 compared to $0.33 and $0.32 per basic and diluted share, respectively, for 2016 .
Non-GAAP Financial Measures

To supplement our financial results presented in accordance with accounting principles generally accepted in the U.S. ("GAAP"), we present the non-GAAP financial measures of EBITDA and Adjusted EBITDA (CEO Performance Award). Our management uses these non-GAAP financial measures in evaluating our performance in comparison to prior periods. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance, and when planning and forecasting our future periods. A reconciliation of GAAP to the non-GAAP financial measures is presented below.

•
EBITDA (Most comparable GAAP Measure: Net income) - Earnings before interest expense, investment interest income, taxes, depreciation and amortization.
•
Adjusted EBITDA (CEO Performance Award) (Most comparable GAAP Measure: Net income) - Earnings before interest expense, investment interest income, taxes, depreciation, amortization and non-cash stock-based compensation expense.

Although these non-GAAP financial measures are not consistent with GAAP, management believes investors will benefit by referring to these non-GAAP financial measures when assessing our operating results, as well as when forecasting and analyzing future periods. However, management recognizes that:

41


•
these non-GAAP financial measures are limited in their usefulness and should be considered only as a supplement to our GAAP financial measures;
•
these non-GAAP financial measures should not be considered in isolation from, or as a substitute for, our GAAP financial measures;
•
these non-GAAP financial measures should not be considered to be superior to our GAAP financial measures; and
•
these non-GAAP financial measures were not prepared in accordance with GAAP and investors should not assume that the non-GAAP financial measures presented in this Annual Report on Form 10-K were prepared under a comprehensive set of rules or principles.
    
EBITDA and Adjusted EBITDA (CEO Performance Award) reconcile to net income as follows (dollars in thousands):
 
 
For the Years Ended December 31,
 
 
2018
 
2017
Net income
 
$
29,205

 
$
5,207

Depreciation and amortization
 
10,615

 
8,041

Interest expense
 
86

 
186

Investment interest income
 
(3,002
)
 
(904
)
Provision for (benefit from) income taxes
 
(1,101
)
 
10,554

EBITDA
 
$
35,803

 
$
23,084

 
 

 

Adjustments:
 

 

Stock-based compensation expense
 
21,879

 
15,610

Adjusted EBITDA (CEO Performance Award)
 
$
57,682

 
$
38,694

Liquidity and Capital Resources
Summary
As of December 31, 2018 , we had $349.5 million of cash and cash equivalents, an increase of $274.4 million from December 31, 2017 .
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities (in thousands):
 
Year Ended December 31,
 
2018
 
2017
 
2016
Operating activities
$
63,875

 
$
18,471

 
$
21,135

Investing activities
(9,860
)
 
19,082

 
(3,045
)
Financing activities
219,348

 
(3,820
)
 
(34,554
)
Effect of exchange rate changes on cash and cash equivalents
(774
)
 
737

 
906

Net increase (decrease) in cash and cash equivalents
$
272,589

 
$
34,470

 
$
(15,558
)

42

Operating activities
Net cash provided by operating activities in 2018 of $63.9 million consisted of $29.2 million in net income, the net add-back of non-cash income statement items totaling $32.5 million and a positive $2.2 million net change in operating assets and liabilities. Included in the non-cash items were $10.6 million in depreciation and amortization expense, $2.1 million related to the disposal and abandonment of intangible assets, $21.9 million in stock-based compensation expense, and $3.6 million related to deferred income taxes. The most significant increase to the portion of cash provided by operating activities related to the changes in operating assets and liabilities was a $54.2 million increase in deferred revenue. Of the increase, $2.8 million resulted from additional extended warranty sales, $23.2 million resulted from increased hardware deferred revenue from TASER Assurance Program ("TAP"), OSP and TASER 7 sales, and $30.1 million related to prepayments for Software and Sensors services. Operating cash flows were also impacted by decreased inventory of $14.8 million resulting from continued inventory optimization efforts. These increases were offset by increased accounts and notes receivable of $67.6 million and prepaid expenses and other assets of $12.7 million during 2018. The increases in accounts and notes receivable were due to increased sales during 2018, primarily sales made under the OSP and TASER 60 installment plans. The increase in prepaid expenses and other asset accounts of $12.7 million during 2018 was driven primarily by an increase in deferred commissions of $13.0 million representing amounts earned when a contract is booked which is then subsequently amortized.
Net cash provided by operating activities in 2017 of $18.5 million consisted of $5.2 million in net income, the net add-back of non-cash income statement items totaling $28.0 million and a negative $14.8 million net change in operating assets and liabilities. Included in the non-cash items are $8.0 million in depreciation and amortization expense, $1.1 million related to the disposal and abandonment of intangible assets, $15.6 million in stock-based compensation expense, $0.7 million of bond premium amortization and $2.8 million related to deferred income taxes. The most significant increase to the portion of cash provided by operating activities related to the changes in operating assets and liabilities was a $39.7 million increase in deferred revenue. Of the increase, $7.4 million resulted from additional extended warranty sales, $20.2 million resulted from increased hardware deferred revenue from TAP and OSP sales, and $12.5 million related to prepayments for Software and Sensors services. These increases were offset by increased accounts and notes receivable of $35.3 million, inventory of $11.7 million and prepaid expenses and other assets of $9.0 million during 2017. The increases in accounts and notes receivable were due to increased sales during 2017, specifically sales made under the OSP and TASER 60 installment plans. Operating cash flows were also impacted by increased inventory of $11.7 million in anticipation of higher sales in 2018 and for our National Field Trial Offer for body cameras. The increase in prepaid expenses and other asset accounts of $9.0 million during 2017 was driven primarily by increased deferred cost of product sales of $5.0 million related to contracts where the product had shipped but revenue was deferred due to contractual provisions resulting in the cost of product sales being deferred as an asset to be recognized in subsequent periods when revenue recognition criteria have been met, an increase in deferred commissions of $2.1 million representing amounts earned when a contract is booked, which is then subsequently amortized over the contractual period as products and services are delivered, and increased prepaid income taxes of $3.4 million.
Net cash provided by operating activities in 2016 of $21.1 million consisted of $17.3 million in net income, the net add-back of non-cash income statement items totaling approximately $8.8 million and a negative $4.9 million net change in operating assets and liabilities. Included in the non-cash items are $3.7 million in depreciation and amortization expense, $9.4 million in stock-based compensation expense, and $1.3 million of bond premium amortization. These additions were partially offset by an $1.4 million reduction related to excess tax benefit from stock-based compensation and $5.2 million related to deferred income taxes. The most significant increase to the portion of cash provided by operating activities related to the changes in operating assets and liabilities was a $34.3 million increase in deferred revenue. Of the increase, $8.1 million resulted from additional extended warranty sales, $15.6 million resulted from increased hardware deferred revenue from TAP and OSP sales, and $10.5 million related to prepayments for Software and Sensors services. We also had increases in cash provided from operating activities of $17.6 million for increases in accounts payable and accrued liabilities related primarily to increased inventory purchases. These increases were offset by increased prepaid expenses and other current assets of $10.6 million, inventory of $18.7 million and accounts and notes receivable of $28.4 million during 2016. The increases in accounts and notes receivable were due to increased sales during 2016, and increases in inventory resulted from higher anticipated sales for 2017. The increase in prepaid expenses and other asset accounts during 2016 was driven primarily increased deferred commissions of $1.8 million

43

attributable to higher sales, increased balances under corporate-owed life insurance policies of $1.1 million, $3.3 million of restricted cash related primarily to a customer contract requiring certain contractual payments to be deposited in escrow until approved for release, and $1.7 million of long-term contingent consideration deposited in escrow in connection with a business combination that was completed in December 2016.

Investing activities
Primarily as the result of equipment purchases and business acquisitions during the year, we used $9.9 million for investing activities in 2018 . Calls and maturities on our investments, net of purchases, were $6.8 million . During 2018, we invested $5.0 million in cash for the acquisition of VIEVU, LLC, a public safety camera and cloud-based evidence management system provider for law enforcement agencies. We also invested $11.7 million in the purchase of property and equipment and intangibles, net of proceeds related to disposals.
Primarily as the result of investments that matured during the year, we generated $19.1 million from investing activities in 2017. Calls and maturities on our investments, net of purchases, were $41.1 million. During 2017, we invested $10.6 million in cash for the acquisition of Dextro, Inc., to continue building upon our Axon Artificial Intelligence group, and for the acquisition of Breon, our former distributor in Australia. We also invested $11.4 million in the purchase of property and equipment and intangibles, net of proceeds related to disposals.
Primarily as a result of investing cash generated from operating activities, we used $3.0 million in investing activities in 2016. Calls and maturities on our investments, net of purchases, were $8.9 million. During 2016, we invested $3.5 million in cash for the acquisition of developed technology and hiring of personnel to form the Axon Artificial Intelligence group. We also invested $8.4 million in the purchase of property and equipment and intangibles, net of proceeds related to disposals.

Financing activities
Net cash provided by financing activities was $219.3 million for the year ended December 31, 2018 . In May 2018, we completed a public follow-on equity offering that generated net proceeds of $234.0 million. During 2018 , we paid income and payroll taxes of $14.1 million on behalf of employees who net-settled stock awards during the period. Additionally, we paid $2.3 million for contingent consideration amounts earned during 2018 related to the acquisition of certain assets from Fossil Group, Inc. and Fossil Vietnam, Limited Liability Company in 2016 and to the acquisition of Dextro in 2017. These cash outflows were partially offset by $1.8 million of proceeds from the exercise of stock options.
Net cash used by financing activities was $3.8 million for the year ended December 31, 2017 . During 2017, we paid income and payroll taxes of $3.5 million on behalf of employees who net-settled stock awards during the period. Additionally, we paid $1.8 million for contingent consideration amounts earned during 2017 related to the acquisition of certain assets from Fossil Group, Inc. and Fossil Vietnam, Limited Liability Company in 2016. These cash outflows were partially offset by $1.4 million of proceeds from the exercise of stock options.
Net cash used by financing activities was $34.6 million for the year ended December 31, 2016. During 2016, we repurchased $33.7 million of our common stock, which was purchased for a weighted average cost of $18.90 per share, inclusive of applicable administrative costs. Additionally, we paid income and payroll taxes of $1.8 million on behalf of employees who net-settled stock awards during the period. These cash outflows were partially offset by $0.5 million of proceeds from the exercise of stock options, and $1.4 million of excess tax benefit from stock-based compensation. The purchase of common stock was made under a stock repurchase program authorized by our Board of Directors.
Liquidity and Capital Resources
Our most significant source of liquidity continues to be funds generated by operating activities and available cash and cash equivalents. In addition, our $100.0 million revolving credit facility is available for additional working capital needs or investment opportunities. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. Advances under the line of credit bear interest at LIBOR plus 1.0 to 1.5% per year determined in

44

accordance with a pricing grid based on our funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio.  
As of December 31, 2018 , we had letters of credit outstanding of $3.1 million , leaving the net amount available for borrowing of $96.9 million . The facility matures on December 31, 2021 and has an accordion feature which allows for an increase in the total line of credit up to $100.0 million, subject to certain conditions, including the availability of additional bank commitments. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our revolving credit facility. At December 31, 2018 and 2017 , there were no borrowings under the line.
Our agreement with the bank requires us to comply with a maximum funded debt to EBITDA ratio, as defined, of no greater than 2.50 to 1.00 based upon a trailing four fiscal quarter period. At December 31, 2018 , the Company’s funded debt to EBITDA ratio was 0.001 to 1.00.
TASER 60 installment purchase arrangements typically involve amounts invoiced in five equal installments at the beginning of each year of the five-year term. This is in contrast to a traditional CEW sale in which the entire amount being charged for the hardware is invoiced upon shipment. This impacts liquidity in a commensurate fashion, with the cash for the TASER 60 arrangement received in five annual installments rather than up front. It is our strategic intent to shift an increasing amount of our business to a subscription model, to better match the municipal budgeting process of our customers as well as to allow for multiple product offerings to be bundled into existing subscriptions. We carefully considered the cash flow impacts of this strategic shift and regularly revisit our cash flow forecast with the goal of maintaining a comfortable level of liquidity as we introduce commercial offerings in which we incur upfront cash costs to produce and fulfill hardware sales ahead of the cash inflows from our customers. We anticipate, and have prepared for, the majority of our arrangements in both reportable segments to be offered in similar subscription-type offerings over the coming years. With the launch of the TASER 7, which is primarily being sold in subscription offerings, we expect this strategic shift to accelerate.
Based on our strong balance sheet and the fact that we had just $0.1 million in total long-term debt and capital lease obligations at December 31, 2018 , we believe financing will be available, both through our existing credit line and possible additional financing. However, there is no assurance that such funding will be available on terms acceptable to us, or at all.
We believe that our sources of funding will be sufficient to satisfy our currently anticipated cash requirements including capital expenditures, working capital requirements, potential acquisitions and other liquidity requirements through at least the next 12 months. We and our Board of Directors may consider repurchases of our common stock. Further repurchases of our common stock would take place on the open market, would be financed with available cash and are subject to authorization as well as market and business conditions.
Contractual Obligations
The following table outlines our future contractual financial obligations by period in which payment is expected, as of December 31, 2018 (dollars in thousands):
 
 
Total
 
Less than
1 Year
 
1 - 3 Years
 
3 - 5 Years
 
More than
5 Years
Non-cancelable operating leases
 
$
12,777

 
$
3,670

 
$
6,533

 
$
2,574

 
$
—

Capital leases including interest
 
76

 
40

 
36

 
—

 
—

Open purchase orders
 
66,613

 
66,613

 
—

 
—

 
—

Total contractual obligations
 
$
79,466

 
$
70,323

 
$
6,569

 
$
2,574

 
$
—

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

45

We are subject to U.S. federal income tax as well as income taxes imposed by several states and foreign jurisdictions. As of December 31, 2018 , we had $6.1 million of gross unrecognized tax benefits related to uncertain tax positions. The settlement period for our long-term income tax liabilities cannot be determined; however, the liabilities are expected to increase by approximately $1.4 million within the next 12 months.
Off-Balance Sheet Arrangements
The discussion of off-balance sheet arrangements in Note 9 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K is incorporated by reference herein. 
Critical Accounting Estimates
We have identified the following accounting estimates as critical to our business operations and the understanding of our results of operations. The preparation of this Annual Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. While we do not believe that a change in these estimates is reasonably likely, there can be no assurance that our actual results will not differ from these estimates. The effect of these estimates on our business operations is discussed below.
Product Warranties
We warranty our CEWs, Axon cameras and certain related accessories from manufacturing defects on a limited basis for a period of one year after purchase and, thereafter, will replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold when revenue is recorded for the related product. Future warranty costs are estimated based on historical data related to warranty claims on a quarterly basis and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure or other issue that could result in larger than anticipated warranty claims from customers. The warranty reserve is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. As of December 31, 2018 and 2017 , our warranty reserve was approximately $0.9 million and $0.6 million , respectively.  Warranty expense for the years ended December 31, 2018 , 2017 and 2016 was $0.7 million , $0.1 million and $0.6 million , respectively. The increase in warranty expense for the year ended December 31, 2018 was primarily driven by higher than initially expected warranty claims for the Axon Flex 2 on-officer body camera. Warranty expense for the year ended December 31, 2017, was impacted by lower than initially expected warranty claims for the Axon Body 2 on-officer body camera. As of December 31, 2018 , our reserve also included initial reserves related to TASER 7, Signal Sidearm, and Axon Fleet 2.
Revenue related to separately-priced extended warranties is initially recorded as deferred revenue at its contractual amount and subsequently recognized as net sales on a straight-line basis over the warranty service period. Costs related to extended warranties are charged to cost of product and service sales when incurred.
Inventory
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average cost of raw materials, which approximates the first-in, first-out (“FIFO”) method and includes allocations of manufacturing labor and overhead. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories, as well as trial and evaluation inventories to their net realizable value. These provisions are based on management’s best estimate after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions among other factors. We evaluate inventory costs for abnormal costs due to excess production capacity and treats such costs as period costs.

46

During the year ended December 31, 2018 , we recorded provisions to reduce inventories to their lower of cost and net realizable value of approximately $3.8 million compared to $2.0 million during 2017 . The increase in provisions made during 2018 was primarily attributable to the impact of phasing out previous generations of VIEVU cameras in an effort to convert existing customers to Axon body camera deployments. The remaining change in the provision for 2018 was driven by analyses looking at projected sales data for existing products and making corresponding adjustments to state inventories at their lower of cost and net realizable value.
Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable
We derive revenue from two primary sources: (1) the sale of physical products, including CEWs, Axon cameras, Axon Signal enabled devices, corresponding hardware extended warranties, and related accessories such as Axon docks, cartridges and batteries, among others, and (2) subscriptions to our Axon Evidence digital evidence management software as a service ("SaaS") (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, we also recognize training, professional services and revenue related to other software and SaaS services. We apply the five-step model outlined in Topic 606.

Many of our products and services are sold on a standalone basis.We also bundle our hardware products and services together and sell them to our customers in single transactions, where the customer can make payments over a multi-year period. For the the years ended December 31, 2018 , 2017 and 2016 , the composition of revenue recognized from contracts containing multiple performance obligations and those not containing multiple performance obligations was as follows (dollars in thousands):
 
For the Year Ended December 31, 2018
 
TASER
 
Software and Sensors
 
Total
Contracts with Multiple Performance Obligations
$
72,355

 
28.6
%
 
$
159,318

 
95.4
%
 
$
231,673

 
55.2
%
Contracts without Multiple Performance Obligations
180,760

 
71.4

 
7,635

 
4.6

 
188,395

 
44.8

Total
$
253,115

 
100.0
%
 
$
166,953

 
100.0
%
 
$
420,068

 
100.0
%
 
For the Year Ended December 31, 2017  (1)
 
TASER
 
Software and Sensors
 
Total
Contracts with Multiple Performance Obligations
$
53,865

 
23.0
%
 
$
102,529

 
93.8
%
 
$
156,394

 
45.5
%
Contracts without Multiple Performance Obligations
180,647

 
77.0

 
6,757

 
6.2

 
187,404

 
54.5

Total
$
234,512

 
100.0
%
 
$
109,286

 
100.0
%
 
$
343,798

 
100.0
%
 
For the Year Ended December 31, 2016  (1)
 
TASER
 
Software and Sensors
 
Total
Contracts with Multiple Performance Obligations
$
34,558

 
17.1
%
 
$
56,270

 
85.8
%
 
$
90,828

 
33.9
%
Contracts without Multiple Performance Obligations
168,086

 
82.9

 
9,331

 
14.2

 
177,417

 
66.1

Total
$
202,644

 
100.0
%
 
$
65,601

 
100.0
%
 
$
268,245

 
100.0
%

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

Additionally, we offer customers the ability to purchase CEW cartridges and certain services on an unlimited basis over the contractual term. Due to the unlimited nature of these arrangements whereby we are obligated to deliver

47

unlimited products at the customer’s request, we account for these arrangements as stand-ready obligations, and recognize revenue ratably over the contract period. Cost of product sales is recognized as the products are shipped to the customer.

Revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, each of which is generally distinct and accounted for as a separate performance obligation. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental taxing authorities.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Topic 606. For contracts with multiple performance obligations, we allocate the contract transaction price to each performance obligation using our estimate of the standalone selling price ("SSP") of each distinct good or service in the contract.

Performance obligations to deliver products, including CEWs, cameras and related accessories such as cartridges, batteries and docks, are generally satisfied at the point in time we ship the product, as this is when the customer obtains control of the asset under our standard terms and conditions. In certain contracts with non-standard terms and conditions, these performance obligations may not be satisfied until formal customer acceptance occurs. Performance obligations to fulfill service-type extended warranties and provide our SaaS offerings, including Axon Evidence and other cloud services, are generally satisfied over time as the customer receives and consumes the benefits of these services over the stated service period.

We have elected to recognize shipping costs as an expense in cost of product sales when the control of hardware products or accessories have transferred to the customer.
Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis.
Deferred revenue consists of payments received in advance related to products and services for which the criteria for revenue recognition have not yet been met. Deferred revenue that will be recognized during the subsequent twelve month period from the balance sheet date is recorded as current deferred revenue and the remaining portion is recorded as long-term. Generally, customers are billed in annual installments.
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 doubtful accounts. Uncollectible accounts are charged to expense when deemed uncollectible, and accounts and notes receivable are presented net of an allowance for doubtful accounts. This allowance represents management’s best estimate and application of judgment considering a number of factors, including third-party credit reports, actual payment history, cash discounts, customer-specific financial information and broader market and economic trends and conditions.
Valuation of Goodwill, Intangibles and Long-lived Assets
We do not amortize goodwill and intangible assets with indefinite useful lives. Such assets are required to be tested for impairment at least annually, or sooner whenever events or changes in circumstances indicate that the assets may be impaired. We perform our annual impairment assessment in the fourth quarter of each year. Finite-lived intangible assets and other long-lived assets are amortized over their estimated useful lives. Management evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and intangible assets may warrant revision or that the remaining balance of these assets, including intangible assets with indefinite lives, may not be recoverable.
Circumstances that might indicate long-lived assets might not be recoverable could include, but are not limited to, a change in the product mix, a change in the way products and services are created, produced or delivered, or a significant change in the way our products are branded and marketed. When performing a review for recoverability, management estimates the future undiscounted cash flows expected to result from the use of the assets and their eventual

48

disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair value computed using discounted cash flows. During the year ended December 31, 2018 , we abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $2.0 million . During the year ended December 31, 2017, we abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $1.0 million. The impairment charges were recorded within the Software and Sensors Segment. No impairment losses were recorded during the year ended December 31, 2016 .
Income Taxes
We recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carry forwards.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. We must also assess whether uncertain tax positions as filed could result in the recognition of a liability for possible interest and penalties if any. We have completed research and development tax credit studies for each year a tax credit was claimed for federal, Arizona, and California income tax purposes. We determined that it was more likely than not that the full benefit of the research and development tax credit would not be sustained on examination and accordingly, have established a liability for unrecognized tax benefits of $5.2 million as of December 31, 2018. In addition, we established a $0.1 million liability related to uncertain tax positions for certain federal income tax liabilities, for a total unrecognized tax benefit of $5.3 million. We expect the amount of the unrecognized tax benefit to increase by approximately $1.4 million within the next 12 months. Should the unrecognized tax benefit of $5.3 million be recognized, our effective tax rate would be favorably impacted. Our estimates are based on information available to us at the time we prepare the income tax provision. Our income tax returns are subject to audit by federal, state, and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.
Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting or tax laws in the U.S. and internationally, or changes in other facts or circumstances. In addition, we recognize liabilities for potential tax contingencies based on our estimate of whether, and the extent to which, additional taxes may be due. If we determine that payment of these amounts is unnecessary, or if the recorded tax liability is greater than our current assessment, we may be required to recognize an income tax benefit, or additional income tax expense, respectively, in our consolidated financial statements.
In preparing our consolidated financial statements, we assess the likelihood that our deferred tax assets will be realized from future taxable income. In evaluating our ability to recover our deferred income tax assets, we consider all available positive and negative evidence, including operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if we determine that it is more likely than not that some portion or all of the net deferred tax assets will not be realized.
Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of December 31, 2018, we would need to generate approximately $55.1 million of pre-tax income in the U.S. in order to realize the net deferred tax assets for which a benefit has been recorded. This estimate considers the reversal of approximately $14.1 million in gross deferred tax liabilities, $3.5 million tax-effected. We have state net operating losses ("NOLs") of $2.5 million, which produce deferred tax assets of $0.2 million, which expire at various dates between 2029 and 2036. We anticipate our future income to continue to trend upward from our 2018 results, with sufficient pre-tax book income to realize a large portion of our deferred tax assets. However, based on specific income projections for years in which

49

Arizona R&D tax credits are set to expire, and cumulative losses in certain foreign jurisdictions, a reserve of $7.4 million has been recorded as a valuation allowance against deferred tax assets as of December 31, 2018.
Stock-Based Compensation
We have historically granted stock-based compensation to key employees and non-employee directors as a means of attracting and retaining highly qualified personnel. Stock-based compensation awards primarily consist of service-based RSUs. RSUs are classified as equity and measured at the fair market value of the underlying stock at the grant date. We recognize RSU expense using the straight-line attribution method over the requisite service period. We also issue performance-based RSUs, the vesting of which is contingent upon the achievement of certain performance criteria related to our operating performance, as well as successful and timely development and market acceptance of future product introductions. For performance-based RSUs containing only performance conditions, compensation cost is recognized using the graded attribution model over the explicit or implicit service period. For awards containing multiple service, performance or market conditions, and all conditions must be satisfied prior to vesting, compensation expense is recognized over the requisite service period, which is defined as the longest explicit, implicit or derived service period, based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date. For both service-based and performance-based RSUs,we account for forfeitures as they occur as a reduction to stock-based compensation expense and additional paid-in-capital.
For performance-based options, stock-based compensation expense is recognized over the expected performance achievement period of individual performance goals when the achievement of each individual performance goal becomes probable. For performance-based awards with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized for each pair of performance and market conditions over the longer of the expected achievement period of the performance and market conditions, beginning at the point in time that the relevant performance condition is considered probable of achievement. The fair value of such awards is estimated on the grant date using Monte Carlo simulations. Refer to Note 12 of the notes to our consolidated financial statements within this Annual Report on Form 10-K.
We have granted a total of approximately 8.5 million  performance-based awards (options and restricted stock units) of which approximately 6.8 million  are outstanding as of December 31, 2018 , the vesting of which is contingent upon the achievement of certain performance criteria including the successful development and market acceptance of future product introductions as well as our future sales targets and operating performance. These awards will vest and compensation expense will be recognized based on management’s best estimate of the probability of the performance criteria being satisfied using the most currently available projections of future product adoption and operating performance, adjusted at each balance sheet date. Changes in the subjective and probability-based assumptions can materially affect the estimate of the fair value of stock-based compensation and consequently, the related amount recognized in our statements of operations and comprehensive income.
Contingencies and Accrued Litigation Expense
We are subject to the possibility of various loss contingencies arising in the ordinary course of business, including product-related litigation. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. Refer to Note 9 of our consolidated financial statements within this Annual Report on Form 10-K.

50

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We typically invest in a limited number of financial instruments, consisting principally of investments in money market accounts, certificates of deposit, corporate and municipal bonds with a typical long-term debt rating of “A” or better by any nationally recognized statistical rating organization, denominated in U.S. dollars. All of our cash equivalents and investments are treated as “held-to-maturity.” Investments in fixed-rate interest-earning instruments carry a degree of interest rate risk as their market value may be adversely impacted due to a rise in interest rates. As a result, we may suffer losses in principal if we sell securities that have declined in market value due to changes in interest rates. However, because we classify our debt securities as “held-to-maturity” based on our intent and ability to hold these instruments to maturity, no gains or losses are recognized due to changes in interest rates. These securities are reported at amortized cost. At December 31, 2018 , we did not have any held-to-maturity investments.
Additionally, we have access to a $50.0 million line of credit borrowing facility which bears interest at LIBOR plus 1.0 to 1.5% per year determined in accordance with a pricing grid based on our funded debt to EBITDA ratio. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit, which totaled $3.1 million at December 31, 2018 . At December 31, 2018 , there was no amount outstanding under the line of credit, and the available borrowing under the line of credit was $96.9 million . We have not borrowed any funds under the line of credit since its inception; however; should we need to do so in the future, such borrowings could be subject to adverse or favorable changes in the underlying interest rate.
Exchange Rate Risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, in each case compared to the U.S. dollar, related to transactions by our foreign subsidiaries. The majority of our sales to international customers are transacted in U.S. dollars and therefore, are not subject to exchange rate fluctuations on these transactions. However, the cost of our products to our customers increases when the U.S. dollar strengthens against their local currency, and we may have more sales and expenses denominated in foreign currencies in future years which could increase our foreign exchange rate risk. Additionally, intercompany sales to our non-U.S. dollar functional currency international subsidiaries are transacted in U.S. dollars which could increase our foreign exchange rate risk caused by foreign currency transaction gains and losses.
To date, we have not engaged in any currency hedging activities. However, we may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. However, we may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to the prohibitive economic cost of hedging particular exposures. As such, fluctuations in currency exchange rates could harm our business in the future.




51
Table of Contents

Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements
 
Page
 
 
 
 
 
 
 



52
Table of Contents

AXON ENTERPRISE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
December 31,
 
2018
 
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
349,462

 
$
75,105

Short-term investments
—

 
6,862

Accounts and notes receivable, net of allowance of $1,882 and $754 as of December 31, 2018 and 2017, respectively
130,579

 
56,064

Contract assets, net
13,960


—

Inventory
33,763

 
45,465

Prepaid expenses and other current assets
30,391

 
21,696

Total current assets
558,155

 
205,192

Property and equipment, net
37,893

 
31,172

Deferred income tax assets, net
19,347

 
15,755

Intangible assets, net
15,935

 
18,823

Goodwill
24,981

 
14,927

Long-term notes receivable, net of current portion
40,230

 
36,877

Other assets
22,999

 
15,366

Total assets
$
719,540

 
$
338,112

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
15,164

 
$
8,592

Accrued liabilities
41,092

 
23,502

Current portion of deferred revenue
107,016

 
70,401

Customer deposits
2,702

 
3,673

Current portion of business acquisition contingent consideration
—

 
1,693

Other current liabilities
37

 
89

Total current liabilities
166,011

 
107,950

Deferred revenue, net of current portion
74,417

 
54,881

Liability for unrecognized tax benefits
2,849

 
1,706

Long-term deferred compensation
3,235

 
3,859

Business acquisition contingent consideration, net of current portion
—

 
1,048

Other long-term liabilities
5,704

 
1,224

Total liabilities
252,216

 
170,668

Commitments and contingencies (Note 9)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of December 31, 2018 and 2017
—

 
—

Common stock, $0.00001 par value; 200,000,000 shares authorized; 58,810,637 and 52,969,869 shares issued and outstanding as of December 31, 2018 and 2017, respectively
1

 
1

Additional paid-in capital
453,400

 
201,672

Treasury stock at cost, 20,220,227 shares as of December 31, 2018 and 2017
(155,947
)
 
(155,947
)
Retained earnings
171,383

 
123,185

Accumulated other comprehensive loss
(1,513
)
 
(1,467
)
Total stockholders’ equity
467,324

 
167,444

Total liabilities and stockholders’ equity
$
719,540

 
$
338,112

The accompanying notes are an integral part of these consolidated financial statements.

53
Table of Contents

AXON ENTERPRISE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
 
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Net sales from products
$
327,635

 
$
285,859

 
$
238,573

Net sales from services
92,433

 
57,939

 
29,672

Net sales
420,068

 
343,798

 
268,245

Cost of product sales
139,337

 
117,997

 
91,536

Cost of service sales
22,148

 
18,713

 
6,173

Cost of sales
161,485

 
136,710

 
97,709

Gross margin
258,583

 
207,088

 
170,536

Sales, general and administrative
156,886

 
138,692

 
108,076

Research and development
76,856

 
55,373

 
30,609

Total operating expenses
233,742

 
194,065

 
138,685

Income from operations
24,841

 
13,023

 
31,851

Interest and other income (expense), net
3,263

 
2,738

 
(354
)
Income before provision for income taxes
28,104

 
15,761

 
31,497

Provision (benefit) for income taxes
(1,101
)
 
10,554

 
14,200

Net income
$
29,205

 
$
5,207

 
$
17,297

Net income per share:
 
 
 
 
 
Basic
$
0.52

 
$
0.10

 
$
0.33

Diluted
$
0.50

 
$
0.10

 
$
0.32

Weighted average shares outstanding:
 
 
 
 
 
Basic
56,392

 
52,726

 
52,667

Diluted
57,922

 
53,898

 
53,536

 
 
 
 
 
 
Net income
$
29,205

 
$
5,207

 
$
17,297

Foreign currency translation adjustments
(46
)
 
(2,370
)
 
820

Comprehensive income
$
29,159

 
$
2,837

 
$
18,117


The accompanying notes are an integral part of these consolidated financial statements.


54
Table of Contents

AXON ENTERPRISE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Balance, December 31, 2015
53,692,192

 
$
1

 
$
178,143

 
18,432,158

 
$
(122,201
)
 
$
83

 
$
100,978

 
$
157,004

Issuance of common stock under employee plans
421,128

 
—

 
(1,294
)
 
—

 
—

 
—

 
—

 
(1,294
)
Stock-based compensation
—

 
—

 
9,369

 
—

 
—

 
—

 
—

 
9,369

Excess tax benefit from stock-based compensation
—

 
—

 
1,438

 
—

 
—

 
—

 
—

 
1,438

Purchase of treasury stock
(1,788,069
)
 
—

 
—

 
1,788,069

 
(33,746
)
 
—

 
—

 
(33,746
)
Net income
—

 
—

 
—

 
—

 
—

 
—

 
17,297

 
17,297

Foreign currency translation adjustments
—

 
—

 
—

 
—

 
—

 
820

 
—

 
820

Balance, December 31, 2016
52,325,251

 
1

 
187,656

 
20,220,227

 
(155,947
)
 
903

 
118,275

 
150,888

Cumulative effect of applying a change in accounting principle
—

 
—

 
475

 
—

 
—

 
—

 
(297
)
 
178

Issuance of common stock under employee plans
644,618

 
—

 
(2,069
)
 
—

 
—

 
—

 
—

 
(2,069
)
Stock-based compensation
—

 
—

 
15,610

 
—

 
—

 
—

 
—

 
15,610

Net income
—

 
—

 
—

 
—

 
—

 
—

 
5,207

 
5,207

Foreign currency translation adjustments
—

 
—

 
—

 
—

 
—

 
(2,370
)
 
—

 
(2,370
)
Balance, December 31, 2017
52,969,869

 
1

 
201,672

 
20,220,227

 
(155,947
)
 
(1,467
)
 
123,185

 
167,444

Cumulative effect of applying a change in accounting principle
—

 
—

 
—

 
—

 
—

 
—

 
18,993

 
18,993

Issuance of common stock
4,645,000





233,993


—


—


—


—


233,993

Issuance of common stock for business combination (Note 15)
58,843

 
—

 
8,226

 
—

 
—

 
—

 
—

 
8,226

Issuance of common stock under employee plans
1,136,925

 
—

 
(12,370
)
 
—

 
—

 
—

 
—

 
(12,370
)
Stock-based compensation
—

 
—

 
21,879

 
—

 
—

 
—

 
—

 
21,879

Net income
—

 
—

 
—

 
—

 
—

 
—

 
29,205

 
29,205

Foreign currency translation adjustments
—

 
—

 
—

 
—

 
—

 
(46
)
 
—

 
(46
)
Balance, December 31, 2018
58,810,637

 
$
1

 
$
453,400

 
20,220,227

 
$
(155,947
)
 
$
(1,513
)
 
$
171,383

 
$
467,324

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

AXON ENTERPRISE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
 
Net income
$
29,205

 
$
5,207

 
$
17,297

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
10,615

 
8,041

 
3,658

Loss on disposal and abandonment of intangible assets
2,117

 
1,146

 
21

Purchase accounting adjustments to goodwill
—

 
(23
)
 
520

Loss (gain) on disposal and impairment of property and equipment, net
303

 
(28
)
 
42

Bond premium amortization
34

 
657

 
1,265

Stock-based compensation
21,879

 
15,610

 
9,369

Deferred income taxes
(3,592
)
 
2,830

 
(5,167
)
Unrecognized tax benefits
1,144

 
(191
)
 
582

Tax benefit from stock-based compensation
—

 
—

 
(1,438
)
Change in assets and liabilities:
 
 
 
 
 
Accounts and notes receivable
(67,643
)
 
(35,305
)
 
(28,438
)
Inventory
14,804

 
(11,746
)
 
(18,668
)
Prepaid expenses and other assets
(12,739
)
 
(8,992
)
 
(10,611
)
Accounts payable, accrued and other liabilities
13,506

 
1,530

 
18,399

Deferred revenue
54,242

 
39,735

 
34,304

Net cash provided by operating activities
63,875

 
18,471

 
21,135

 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
Purchases of investments
(4,331
)
 
(19,950
)
 
(56,086
)
Proceeds from call / maturity of investments
11,158

 
61,080

 
64,951

Purchases of property and equipment
(11,139
)
 
(10,419
)
 
(4,957
)
Proceeds from disposal of property and equipment
—

 
24

 
42

Purchases of intangible assets
(558
)
 
(1,024
)
 
(3,495
)
Business acquisitions, net of cash acquired
(4,990
)
 
(10,629
)
 
(3,500
)
Net cash provided by (used in) investing activities
(9,860
)
 
19,082

 
(3,045
)
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
Net proceeds from equity offering
233,993

 
—

 
—

Repurchase of common stock
—

 
—

 
(33,746
)
Proceeds from options exercised
1,757

 
1,383

 
478

Income and payroll tax payments for net-settled stock awards
(14,127
)
 
(3,453
)
 
(1,772
)
Payment of contingent consideration for business acquisitions
(2,275
)
 
(1,750
)
 
(952
)
Excess tax benefit from stock-based compensation
—

 
—

 
1,438

Net cash provided by (used in) financing activities
219,348

 
(3,820
)
 
(34,554
)
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(774
)
 
737

 
906

 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
272,589

 
34,470

 
(15,558
)
Cash and cash equivalents and restricted cash, beginning of year
78,438

 
43,968

 
59,526

Cash and cash equivalents and restricted cash, end of year
$
351,027

 
$
78,438

 
$
43,968

The accompanying notes are an integral part of these consolidated financial statements.

56
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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 . Organization and Summary of Significant Accounting Policies
Axon Enterprise, Inc. (“Axon”, the “Company”, "we", or "us") is a market-leading provider of law enforcement technology solutions. Our core mission is to protect life. We fulfill that mission through developing hardware and software products that advance the long term objectives of a) obsoleting the bullet, b) reducing social conflict, and c) enabling a fair and effective justice system.
The accompanying consolidated financial statements include the accounts of Axon Enterprise, Inc. and our wholly owned subsidiaries. All material intercompany accounts, transactions, and profits have been eliminated.
Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions in these consolidated financial statements include:
 
•
product warranty reserves,
•
inventory valuation,
•
revenue recognition,
•
valuation of goodwill, intangible and long-lived assets,
•
recognition, measurement and valuation of current and deferred income taxes,
•
stock-based compensation,
•
recognition and measurement of contingencies and accrued litigation expense, and
•
fair values of identified tangible and intangible assets acquired and liabilities assumed in business combinations.
Actual results could differ materially from those estimates.
Cash, Cash Equivalents and Investments
Cash, cash equivalents and investments include cash, money market funds, certificates of deposit, state and municipal obligations and corporate bonds. We place our cash and cash equivalents with high quality financial institutions. Although we deposit our cash with multiple financial institutions, our deposits regularly exceed federally insured limits. 
Cash and cash equivalents include funds on hand and highly liquid investments purchased with initial maturity of three months or less. Short-term investments include securities with an expected maturity date within one year of the balance sheet date that do not meet the definition of a cash equivalent, and long-term investments are securities with an expected maturity date greater than one year. Based on management’s intent and ability, our investments are classified as held to maturity investments and are recorded at amortized cost. Held-to-maturity investments are reviewed quarterly for impairment to determine if other-than-temporary declines in the fair value have occurred for any individual investment that may affect our intent and ability to hold the investment until recovery. Other-than-temporary declines in the value of held-to-maturity investments are recorded as expense in the period the determination is made.
Inventory
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average cost of raw materials, which approximates the first-in, first-out (“FIFO”) method and includes allocations of manufacturing labor and overhead. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories, as well as trial and evaluation inventories to their net realizable value. These provisions are based on management’s best estimate after considering historical demand, projected future demand, inventory purchase

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commitments, industry and market trends and conditions among other factors. We evaluate inventory costs for abnormal costs due to excess production capacity and treat such costs as period costs.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Additions and improvements are capitalized, while ordinary maintenance and repair expenditures are charged to expense as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets.
Software Development Costs
We expense software development costs, including costs to develop software products or the software component of products and services to be marketed to external users, before technological feasibility of such products is reached. We have determined that technological feasibility is reached shortly before the release of those products and as a result, the development costs incurred after the establishment of technological feasibility and before the release of those products are not material.

Software development costs also include costs to develop software programs to be used solely to meet our internal needs and applications. We capitalize development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the intended function. Additionally, we capitalize qualifying costs incurred for upgrades and enhancements to existing software that result in additional functionality. Costs related to preliminary project planning activities, post-implementation activities, maintenance and minor modifications are expensed as incurred. Internal-use software is amortized on a straight line basis over its estimated useful life.
We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Valuation of Goodwill, Intangible and Long-lived Assets
We do not amortize goodwill and intangible assets with indefinite useful lives; rather, such assets are required to be tested for impairment at least annually, or sooner whenever events or changes in circumstances indicate that the assets may be impaired. We perform our annual impairment assessment in the fourth quarter of each year. Finite-lived intangible assets and other long-lived assets are amortized over their estimated useful lives. Management evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and intangible assets may warrant revision or that the remaining balance of these assets, including intangible assets with indefinite lives, may not be recoverable.
Circumstances that might indicate long-lived assets might not be recoverable could include, but are not limited to, a change in the product mix, a change in the way products and services are created, produced or delivered, or a significant change in the way our products are branded and marketed. When performing a review for recoverability, management estimates the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair value computed using discounted cash flows. During the year ended December 31, 2018 , we abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $2.0 million which was included in sales, general and administrative expense in the accompanying statement of operations. During the year ended December 31, 2017, we abandoned certain developed technology acquired in a business combination resulting in an impairment charge of  $1.0 million which was included in research and development expense in the accompanying statement of operations. The impairment charges were recorded within the Software and Sensors Segment. No impairment losses were recorded during the year ended December 31, 2016 .
Customer Deposits

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We require deposits in advance of shipment for certain customer sales orders. Additionally, customers may elect to make deposits with us related to contracts for our products and services that were not executed as of the end of a reporting period. Customer deposits are recorded as a current liability in the accompanying consolidated balance sheets.
Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable
We derive revenue from two primary sources: (1) the sale of physical products, including CEWs, Axon cameras, Axon Signal enabled devices, corresponding hardware extended warranties, and related accessories such as Axon docks, cartridges and batteries, among others, and (2) subscriptions to our Axon Evidence digital evidence management software as a service ("SaaS") (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, we also recognize training, professional services and revenue related to other software and SaaS services. We apply the five-step model outlined in Accounting Standards Codification Topic 606, Revenue from Contracts from Customers ("Topic 606"). For additional discussion of the adoption of Topic 606, see Note 2.

Many of our products and services are sold on a standalone basis. We also bundle our hardware products and services together and sell them to our customers in single transactions, where the customer can make payments over a multi-year period. These sales may include payments for upfront hardware and services, as well as payments for hardware and services to be provided by us at a future date. Additionally, we offer customers the ability to purchase CEW cartridges and certain services on an unlimited basis over the contractual term. Due to the unlimited nature of these arrangements whereby we are obligated to deliver unlimited products at the customer’s request, we account for these arrangements as stand-ready obligations, and recognize revenue ratably over the contract period. Cost of product sales is recognized as the products are shipped to the customer.

Revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, each of which is generally distinct and accounted for as a separate performance obligation. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental taxing authorities.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Topic 606. For contracts with multiple performance obligations, we allocate the contract transaction price to each performance obligation using our estimate of the standalone selling price ("SSP") of each distinct good or service in the contract.

Performance obligations to deliver products, including CEWs, cameras and related accessories such as cartridges, batteries and docks, are generally satisfied at the point in time we ship the product, as this is when the customer obtains control of the asset under our standard terms and conditions. In certain contracts with non-standard terms and conditions, these performance obligations may not be satisfied until formal customer acceptance occurs. Performance obligations to fulfill service-type extended warranties and provide our SaaS offerings, including Axon Evidence and other cloud services, are generally satisfied over time as the customer receives and consumes the benefits of these services over the stated service period.

We have elected to recognize shipping costs as an expense in cost of product sales when the control of hardware products or accessories have transferred to the customer.
Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis.
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. Deferred revenue that will be recognized during the subsequent twelve month period from the balance sheet date is recorded as current deferred revenue and the remaining portion is recorded as long-term. Generally, customers are billed in annual installments. See Note 2 for further disclosures about our deferred revenue.

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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 doubtful accounts. Uncollectible accounts are charged to expense when deemed uncollectible, and accounts and notes receivable are presented net of an allowance for doubtful accounts. This allowance represents management’s best estimate and application of judgment considering a number of factors, including third-party credit reports, actual payment history, cash discounts, customer-specific financial information and broader market and economic trends and conditions.  In the event that actual uncollectible amounts differ from our estimates, additional expense could be necessary.
Cost of Product and Service Sales
Cost of product sales represents manufacturing costs, consisting of materials, labor and overhead related to finished goods and components. Shipping costs incurred related to product delivery are also included in cost of products sold. Cost of service sales includes third-party cloud services, and software maintenance and support costs, including personnel costs, associated with supporting Evidence.com and other software related services.
Advertising Costs
We expense advertising costs in the period in which they are incurred. We incurred advertising costs of $1.1 million , $0.5 million and $0.4 million in the years ended December 31, 2018 , 2017 and 2016 , respectively. Advertising costs are included in sales, general and administrative expenses in the accompanying statements of operations.
Standard Warranties
We warranty our CEWs, Axon cameras and certain related accessories from manufacturing defects on a limited basis for a period of one year after purchase and, thereafter, will replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold when revenue is recorded for the related product. Future warranty costs are estimated based on historical data related to warranty claims on a quarterly basis and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure or other issue that could result in larger than anticipated warranty claims from customers. The warranty reserve is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. The warranty reserve is included in accrued liabilities on the accompanying consolidated balance sheets. 
Changes in our estimated warranty reserve were as follows (in thousands):
 
2018
 
2017
 
2016
Balance, January 1
$
644

 
$
780

 
$
314

Utilization of reserve
(458
)
 
(245
)
 
(155
)
Warranty expense
712

 
109

 
621

Balance, December 31
$
898

 
$
644

 
$
780

Research and Development Expenses
We expense as incurred research and development costs that do not meet the qualifications to be capitalized. We incurred research and development expense of $76.9 million , $55.4 million and $30.6 million in 2018 , 2017 and 2016 , respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in future years in which those

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temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced through the establishment of a valuation allowance if, based upon available evidence, it is determined that it is more likely than not that the deferred tax assets will not be realized.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Management also assesses whether uncertain tax positions, as filed, could result in the recognition of a liability for possible interest and penalties. Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. Refer to Note 10 for additional information regarding the change in unrecognized tax benefits.
Concentration of Credit Risk and Major Customers / Suppliers
Financial instruments that potentially subject us to concentrations of credit risk consist of accounts and notes receivable, contract assets, and cash. 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. Historically, we have experienced a low level of write-offs related to uncollectible accounts.
We maintain the majority of our cash at four depository institutions. As of December 31, 2018 , the aggregate balances in such accounts were $342.3 million . Our balances with these institutions regularly exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits for domestic deposits and various deposit insurance programs covering our deposits in Australia, Germany, Finland, the Netherlands, the United Kingdom, and Vietnam. To manage the related credit exposure, management continually monitors the creditworthiness of the financial institutions where we have deposits.
We sell some of our products through a network of unaffiliated distributors. We also sell directly to customers. No customer represented more than 10% of total net sales for the years ended December 31, 2018 , 2017 or 2016 .
At December 31, 2018 , and 2017, no customer represented more than 10% of the aggregate balance of accounts and notes receivable and contract assets.
We currently purchase finished circuit boards and injection-molded plastic components from suppliers located in the U.S., Mexico and Taiwan. Although we currently obtain many of these components from single source suppliers, we own the injection molded component tooling used in their production. As a result, management believes it could obtain alternative suppliers in most cases without incurring significant production delays. 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. We believe that there are readily available alternative suppliers in most cases who could consistently meet our needs for these components. We acquire most of our components on a purchase order basis and do not have any significant long-term contracts with suppliers.
Fair Value of Financial Instruments
We use the fair value framework that prioritizes the inputs to valuation techniques for measuring financial assets and liabilities measured on a recurring basis and for non-financial assets and liabilities when these items are re-measured. Fair value is considered to be the exchange price in an orderly transaction between market participants, to sell an asset or transfer a liability at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

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•
Level 1 – Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.
•
Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.
•
Level 3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect our own assumptions about inputs that market participants would use in pricing an asset or liability.
We have cash equivalents and investments, which at December 31, 2018 and 2017 , were comprised of money market funds, state and municipal obligations, corporate bonds, and certificates of deposits. See additional disclosure regarding the fair value of our cash equivalents and investments in Note 3. Included in the balance of other assets as of December 31, 2018 and 2017 was $3.6 million and $3.8 million , respectively, related to corporate-owned life insurance policies which are used to fund our deferred compensation plan. We determine the fair value of our insurance contracts by obtaining the cash surrender value of the contracts from the issuer, a Level 2 valuation technique.
Our financial instruments also include accounts and notes receivable, accounts payable and accrued liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the balance sheet.
Segment and Geographic Information
Our operations are comprised of two reportable segments: the manufacture and sale of CEWs, batteries, accessories, extended warranties and other products and services (the “TASER” segment); and the development, manufacture and sale of software and sensors, which includes the sale of devices, wearables, applications, cloud and mobile products (collectively, the "Software and Sensors" segment). Reportable segments are determined based on discrete financial information reviewed by our Chief Executive Officer who is our chief operating decision maker ("CODM"). We organize and review operations based on products and services, and currently there are no operating segments that are aggregated. We perform an analysis of our reportable segments at least annually. Additional information related to our business segments is summarized in Note 16.

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):
 
Year Ended December 31,
 
2018
 
2017 (1)
 
2016 (1)
United States
$
335,310

 
79.8
%
 
$
282,810

 
82.3
%
 
$
218,757

 
81.6
%
Other Countries
84,758

 
20.2

 
60,988

 
17.7

 
49,488

 
18.4

Total
$
420,068

 
100.0
%
 
$
343,798

 
100.0
%
 
$
268,245

 
100.0
%
(1) Amounts for the years ended December 31, 2017 and 2016 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.

Sales to customers outside of the U.S. are typically denominated in U.S. dollars and are attributed to each country based on the shipping address of the distributor or customer. For the years ended December 31, 2018 , 2017 and 2016 , no individual country outside the U.S. represented more than 10% of net sales. Substantially all of our assets are located in the U.S.

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Stock-Based Compensation
We recognize expense related to stock-based compensation transactions in which we receive services in exchange for equity instruments of the Company. Stock-based compensation expense for RSUs is measured based on the closing fair market value of our common stock on the date of grant. We recognize stock-based compensation expense over the award’s requisite service period on a straight-line basis for time-based RSUs and on a graded basis for RSUs that are contingent on the achievement of performance conditions. We recognize forfeitures as they occur as a reduction to stock-based compensation expense and to additional paid-in-capital.
Historically, we have calculated the fair value of stock options using the Black-Scholes-Merton option pricing valuation model, which incorporates various assumptions including expected volatility, expected life, expected dividends and risk-free interest rates. No stock options were awarded from 2012 to 2017.
On May 24, 2018 (the “Grant Date”), our stockholders approved the Board of Directors’ grant of 6,365,856  stock option awards to Patrick W. Smith, our CEO (the “CEO Performance Award”). The CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational goals (performance conditions) and market capitalization goals (market conditions), assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each vesting date. Stock-based compensation expense associated with the CEO Performance Award is recognized over the requisite service period, which is defined as the longer of the expected achievement period for each pair of market capitalization and operational goals, beginning at the point in time when the relevant operational goal is considered probable of being met.
Given the complexity of the award, we utilized Monte Carlo simulations to simulate a range of possible future market capitalizations for the Company over the term of the options. The average of all iterations of the simulation was used as the basis for the valuation and market capitalization goal derived service period for each tranche. Additionally, we applied an illiquidity discount of 9.2% to the valuation because the award specifies a post-exercise holding period of 2.5 years. This discount was estimated using the Finnerty model and reduced by the impact of expected payroll and income taxes due upon exercise of the options, as the related proportion of shares are expected to be sold to satisfy such obligations. Additional assumptions used for the CEO Performance Award and the resulting estimates of weighted-average fair value per share of options granted are as follows:
Volatility
 
47.71%
Risk-free interest rate
 
2.98%
Dividend rate
 
—
Expected life of options
 
9.76 years
Weighted average grant date fair value of options granted
 
$38.64

The expected life of the options represents the estimated period of time from grant date until exercise; in this case, exercise is assumed to occur at the full contractual term of ten years from grant and is based on input from the CEO and his historical behavior of not exercising vested options. Expected stock price volatility is based on the average of the 9.76-year historical volatility and the implied volatility on 1,080-day call option for the Company. The risk-free interest rate is based on the implied yield available on United States Treasury bill zero-coupon issuances with an equivalent remaining term to the term of the options. We have not paid dividends in the past and do not plan to pay any dividends in the near future.
Other than the CEO Performance Award, no options were awarded during the year ended December 31, 2018. No options were awarded during the years ended December 31, 2017 or 2016 .

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Income per Common Share
Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. Diluted income per share reflects the potential dilution from outstanding stock options and unvested restricted stock units. The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):
 
For the Year Ended December 31,
 
2018
 
2017
 
2016
Numerator for basic and diluted earnings per share:
 
 
 
 
 
Net income
$
29,205

 
$
5,207

 
$
17,297

Denominator:
 
 
 
 
 
Weighted average shares outstanding—basic
56,392

 
52,726

 
52,667

Dilutive effect of stock-based awards
1,530

 
1,172

 
869

Diluted weighted average shares outstanding
57,922

 
53,898

 
53,536

Anti-dilutive stock-based awards excluded
6,757

 
386

 
443

Net income per common share:
 
 
 
 
 
Basic
$
0.52

 
$
0.10

 
$
0.33

Diluted
$
0.50

 
$
0.10

 
$
0.32

Recently Issued Accounting Guidance

Recently Adopted Accounting Pronouncements
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. We adopted ASU 2016-15 effective January 1, 2018, and the adoption of this ASU did not have a material impact on our consolidated financial statements.
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. We adopted ASU 2016-16 effective January 1, 2018, and the adoption of this ASU did not have a material impact on our consolidated financial statements.
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

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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. We adopted ASU 2017-01 effective January 1, 2018, and the adoption of this ASU did not have a material impact on our consolidated financial statements.
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).  The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. We adopted ASU 2018-15 prospectively effective July 1, 2018, and the adoption of this ASU did not have a material impact on our consolidated financial statements.

Effective the first quarter of 2019:
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. In July 2018, the FASB issued additional guidance which provided an additional transition method for adopting the updated guidance.  Under the additional transition method, entities may elect to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. We currently plan to adopt this standard using the modified retrospective approach.
Most prominent among the changes in the standard is the requirement for lessees to recognize ROU assets and lease liabilities for those leases classified as operating leases under current U.S. GAAP. The standard requires additional disclosures to enable users of financial statements to assess the amount, timing, and certainty of cash flows arising from leases. We intend to elect certain of the available practical expedients upon adoption. We have evaluated our existing lease portfolio and believe that our population of leases is relatively low in number. We have implemented key processes and controls to enable the accurate assessment of leases and preparation of related financial information.
We are nearing completion of the opening balance sheet adjustment related to ASU 2016-02. We expect adoption of the standard will result in the recognition of ROU assets of approximately $11 million and lease liabilities of approximately $12 million for operating leases as of January 1, 2019, with no impact to retained earnings. Additionally, we anticipate that our accounting for capital leases will remain substantially unchanged.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), expanding the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.


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Effective the first quarter of 2020:
 
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 includes an impairment model (known as the current expected credit loss model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The use of forecasted information is intended to incorporate more timely information in the estimate of expected credit loss. Early adoption is permitted.We are currently in the process of evaluating the impact of adoption of ASU 2016-13 on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. The amendments applicable to the disclosures of changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted, and an entity is also permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until their effective date. As ASU 2018-13 only revises disclosure requirements, it will not have a material impact on our consolidated financial statements.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
2. Revenues
Adoption of ASC Topic 606, "Revenue from Contracts with Customers"
On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted, and continue to be reported in accordance with our historic accounting under ASC 605. 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. The areas most significantly impacted were contracts with contingent hardware revenue and the treatment of incremental costs of obtaining contracts with customers.
The impact as a result of applying Topic 606 was a net increase to net sales of  $5.0 million for the twelve months ended December 31, 2018, and a net decrease to sales, general and administrative expenses of approximately $3.6 million related to the costs of obtaining contracts for the same periods, as compared to what would have been recognized under ASC 605. The impacts to the December 31, 2017 balance sheet of adopting Topic 606 are presented below (in thousands):
 
December 31, 2017
(As reported)
 
Impact of Adoption
of Topic 606 on
Opening Balance Sheet
 
January 1, 2018
(As adjusted)
Accounts and notes receivable, net
$
56,064

 
$
28,915

 
$
84,979

Contract assets, net
—

 
5,512

 
5,512

Prepaid expense and other current assets
21,696

 
2,003

 
23,699

Total impacted current assets
77,760

 
36,430

 
114,190

Deferred income tax assets, net
15,755

 
(5,158
)
 
10,597

Long-term notes receivable
36,877

 
(12,977
)
 
23,900

Other assets
15,366

 
5,323

 
20,689

Total impacted assets
145,758

 
23,618

 
169,376

 
 
 
 
 
 
Accrued liabilities
23,502

 
2,512

 
26,014

Current portion of deferred revenue
70,401

 
863

 
71,264

Total impacted current liabilities
93,903

 
3,375

 
97,278

Deferred revenue, net of current portion
54,881

 
1,249

 
56,130

Total impacted liabilities
148,784

 
4,624

 
153,408

Retained earnings
123,185

 
18,994

 
142,179

Total impacted stockholders' equity
123,185

 
18,994

 
142,179

Total impacted liabilities and stockholders' equity
271,969

 
23,618

 
295,587


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Nature of Products and Services
The following table presents our revenues by primary product and service offering (in thousands):
 
Year Ended December 31, 2018
 
Year Ended December 31, 2017 (1)
 
TASER
 
Software and Sensors
 
Total
 
TASER
 
Software and Sensors
 
Total
TASER 7
$
7,358

 
$
—

 
$
7,358

 
$
—

 
$
—

 
$
—

TASER X26P
70,638

 
—

 
70,638

 
64,426

 
—

 
64,426

TASER X2
78,837

 
—

 
78,837

 
81,417

 
—

 
81,417

TASER Pulse and Bolt
5,182

 
—

 
5,182

 
4,340

 
—

 
4,340

Cartridges
68,258

 
—

 
68,258

 
63,203

 
—

 
63,203

Axon Body
—

 
21,883

 
21,883

 
—

 
15,184

 
15,184

Axon Flex
—

 
6,509

 
6,509

 
—

 
10,083

 
10,083

Axon Fleet
—

 
12,527

 
12,527

 
—

 
2,954

 
2,954

Axon Dock
—

 
10,706

 
10,706

 
—

 
9,736

 
9,736

Axon Evidence and cloud services
—

 
90,291

 
90,291

 
—

 
57,841

 
57,841

TASER Cam
—

 
3,871

 
3,871

 
—

 
3,358

 
3,358

Extended warranties
15,753

 
11,860

 
27,613

 
12,426

 
7,110

 
19,536

Other
7,089

 
9,306

 
16,395

 
8,700

 
3,020

 
11,720

Total
$
253,115

 
$
166,953

 
$
420,068

 
$
234,512

 
$
109,286

 
$
343,798

(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.
Contract Balances
The timing of revenue recognition may differ from the timing of invoicing to customers. We generally have an unconditional right to consideration when we invoice our customers and record a receivable. We record a contract asset when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing.
Contract assets generally result from our subscription programs where we satisfy a hardware performance obligation upon shipment to the customer, and the right to the portion of the transaction price allocated to that hardware performance obligation is conditional on our future performance of a SaaS service obligation under the contract. We recognize a portion of the amount allocated to hardware products shipped to the customer as accounts receivable when invoiced to the customer, and record the remaining allocated value as a contract asset as we have generally fulfilled our hardware performance obligation upon shipment. Unbilled accounts receivable expected to be invoiced and collected within twelve months was $17.3 million as of December 31, 2018, and was included in accounts receivable on our consolidated balance sheet.
Contract liabilities generally consist of deferred revenue on our subscription programs where we generally invoice customers at the beginning of each annual period and record a receivable at the time of invoicing when there is an unconditional right to consideration.
Deferred revenue is comprised mainly of unearned revenue related to our Axon Evidence SaaS platform, secure cloud-based storage, service-type extended warranties, stand-ready obligations in our cartridge programs, and rights to future CEW, camera and related accessories hardware in our subscription programs. Revenue for Axon Evidence and cloud-based storage, our service-type extended warranties and stand-ready cartridge programs is generally

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recognized on a straight-line basis over the subscription term. Revenue for the rights to future hardware is generally recognized at the point in time the hardware products are shipped to the customer.

Payment terms and conditions vary by contract type and geography, but our standard terms are that payments are due within  30 days from the date of invoice.
The following table presents our contract assets, contract liabilities and certain information related to these balances as of and for the year ended December 31, 2018 (in thousands):
 
December 31, 2018
Contract assets, net
$
13,960

Contract liabilities (deferred revenue)
181,433

Revenue recognized in the period from:
 
Amounts included in contract liabilities at the beginning of the period
63,475

Contract liabilities (deferred revenue) consisted of the following (in thousands):
 
December 31, 2018
 
December 31, 2017 (1)
 
Current
 
Long-Term
 
Total
 
Current
 
Long-Term
 
Total
Warranty:
 
 
 
 
 
 
 
 
 
 
 
TASER
$
12,797

 
$
16,847

 
$
29,644

 
$
12,501

 
$
18,619

 
$
31,120

Software and Sensors
8,273

 
6,516

 
14,789

 
6,293

 
4,195

 
10,488

 
21,070

 
23,363

 
44,433

 
18,794

 
22,814

 
41,608

Hardware:
 
 
 
 
 
 
 
 
 
 
 
TASER
9,355

 
15,598

 
24,953

 
4,164

 
11,401

 
15,565

Software and Sensors
20,878

 
24,685

 
45,563

 
16,956

 
14,781

 
31,737

 
30,233

 
40,283

 
70,516

 
21,120

 
26,182

 
47,302

Software and Sensors Services
55,713

 
10,771

 
66,484

 
30,487

 
5,885

 
36,372

Total
$
107,016

 
$
74,417

 
$
181,433

 
$
70,401

 
$
54,881

 
$
125,282

 
December 31, 2018
 
December 31, 2017 (1)
 
Current
 
Long-Term
 
Total
 
Current
 
Long-Term
 
Total
TASER
$
22,152

 
$
32,445

 
$
54,597

 
$
16,665

 
$
30,020

 
$
46,685

Software and Sensors
84,864

 
41,972

 
126,836

 
53,736

 
24,861

 
78,597

Total
$
107,016

 
$
74,417

 
$
181,433

 
$
70,401

 
$
54,881

 
$
125,282

(1) Amounts as of 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.
Remaining Performance Obligations
As of December 31, 2018 , we had approximately $900 million of remaining performance obligations, which included both recognized contract liabilities as well as amounts that will be invoiced and recognized in future periods. The remaining performance obligations are limited only to arrangements that meet the definition of a contract under Topic 606 as of December 31, 2018 . We expect to recognize between 15% - 20% of this balance over the next twelve months, and expect the remainder to be recognized over the following five to seven years, subject to risks related to

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delayed deployments, budget appropriation or other contract cancellation clauses.
Costs to Obtain a Contract
We recognize an asset for the incremental costs of obtaining a contract with a customer, which consist primarily of sales commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contract and amortized consistent with the recognition timing of the revenue for the underlying performance obligations.
For contract costs related to performance obligations with an amortization period of one year or less, we apply the practical expedient to expense these sales commissions when incurred. These costs are recognized as incurred within sales, general and administrative expenses on the accompanying consolidated statements of operations and comprehensive income.
As of December 31, 2018 , our assets for costs to obtain contracts were as follows (in thousands):
 
December 31, 2018
Current deferred commissions (1)
$
7,062

Deferred commissions, net of current portion (2)
15,530

 
$
22,592

(1) Current deferred commissions are included within prepaid expenses and other current assets on the accompanying consolidated balance sheet.
(2) Deferred commissions, net of current portion, are included in other assets on the accompanying consolidated balance sheet.
During the year ended December 31, 2018 , we recognized $5.3 million of amortization related to deferred commissions. These costs are recorded within sales, general and administrative expenses on the accompanying consolidated statements of operations and comprehensive income.
Significant Judgments
Our contracts with certain municipal government customers may be subject to budget appropriation, other contract cancellation clauses or future periods which are optional. In contracts where the customer’s performance is subject to budget appropriation clauses, we generally consider the likelihood of non-appropriation to be remote when determining the contract term and transaction price. Contracts with other cancellation provisions or optional periods may require judgment in determining the contract term, including the existence of material rights, transaction price and identifying the performance obligations.
At times, customers may request changes that either amend, replace or cancel existing contracts. Judgment is required to determine whether the specific facts and circumstances within the contracts require the changes to be accounted for as a separate contract or as a modification. Generally, contract modifications containing additional goods and services that are determined to be distinct and sold at their SSP are accounted for as a separate contract. For contract modifications where both criteria are not met, the original contract is updated and the required adjustments to revenue and contract assets, liabilities, and other accounts will be made accordingly.
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately rather than together may require significant judgment. We consider CEW devices and related accessories, as well as cameras and related accessories, to be separately identifiable from each other as well as from extended warranties on these products and the SaaS subscriptions to Axon Evidence and other cloud services.
In contracts where there are timing differences between when we transfer a promised good or service to the customer and when the customer pays for that good or service, we have determined that, with the exception of our TASER 60 installment purchase arrangements, our contracts generally do not include a significant financing component.

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For the year ended December 31, 2018 , we recorded revenue of $48.2 million , including $1.3 million of interest income, under our TASER 60 plan. For the year ended December 31, 2017, we recorded revenue of $40.7 million including $0.7 million of interest income under our TASER 60 plan. Amounts for the year ended December 31, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606.
Judgment is required to determine the SSP for each distinct performance obligation.We analyze separate sales of our products and services as a basis for estimating the SSP of our products and services and then use that SSP as the basis for allocating the transaction price when our products and services are sold together in a contract with multiple performance obligations. In instances where the SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions, time value of money and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as geographic region and distribution channel in determining the SSP.
3. Cash, Cash Equivalents and Investments
The following tables summarize the Company's cash, cash equivalents, and held-to-maturity investments at December 31, 2018 and December 31, 2017 (in thousands):
 
As of December 31, 2018
 
Amortized Cost
 
Gross Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Short-Term Investments
Cash
$
144,095

 
$
—

 
$
144,095

 
$
144,095

 
$
—

 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
Money market funds
205,367

 
—

 
205,367

 
205,367

 
—

Total
$
349,462

 
$
—

 
$
349,462

 
$
349,462

 
$
—


 
As of December 31, 2017
 
Amortized Cost
 
Gross Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Short-Term Investments
Cash
$
53,459

 
$
—

 
$
53,459

 
$
53,459

 
$
—

 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
Money market funds
20,884

 
—

 
20,884

 
20,884

 
—

Corporate bonds
6,632

 
(6
)
 
6,626

 
—

 
6,632

Subtotal
27,516

 
(6
)
 
27,510

 
20,884

 
6,632

 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
State and municipal obligations
992

 
—

 
992

 
762

 
230

Subtotal
992

 
—

 
992

 
762

 
230

Total
$
81,967

 
$
(6
)
 
$
81,961

 
$
75,105

 
$
6,862


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4. Inventory
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average cost of raw materials which approximates the FIFO method and includes allocations of manufacturing labor and overhead. Included in finished goods at December 31, 2018 and December 31, 2017 was $1.4 million and $1.4 million , respectively, of trial and evaluation hardware units. Provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value. Inventories consisted of the following at December 31 (in thousands):
 
2018
 
2017
Raw materials
$
19,670

 
$
20,119

Finished goods
14,093

 
25,346

Total inventory
$
33,763

 
$
45,465

5. Property and Equipment
Property and equipment consisted of the following at December 31 (in thousands):
 
Estimated
Useful Life
 
2018
 
2017
Land
N/A
 
$
2,900

 
$
2,900

Building and leasehold improvements
3-39 years
 
19,578

 
18,383

Production equipment
3-7 years
 
19,817

 
19,075

Computers, equipment and software
3-5 years
 
8,392

 
6,780

Furniture and office equipment
5-7 years
 
6,529

 
5,262

Vehicles
5 years
 
1,385

 
1,057

Website development costs
3 years
 
687

 
687

Capitalized internal-use software development costs
3 years
 
3,670

 
3,695

Construction-in-process
N/A
 
14,820

 
9,810

Total cost
 
 
77,778

 
67,649

Less: Accumulated depreciation
 
 
(39,885
)
 
(36,477
)
Property and equipment, net
 
 
$
37,893

 
$
31,172

Depreciation and amortization expense related to property and equipment was $4.9 million , $3.4 million and $2.5 million for the years ended December 31, 2018 , 2017 and 2016 , respectively, of which $1.4 million , $1.1 million and $0.7 million was included in cost of sales for the respective years.
6. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the year ended December 31, 2018 were as follows (in thousands):
 
TASER
 
Software and
Sensors
 
Total
Balance, January 1, 2018
$
1,453

 
$
13,474

 
$
14,927

Goodwill acquired
—

 
10,285

 
10,285

Foreign currency translation adjustments
(115
)
 
(116
)
 
(231
)
Balance, December 31, 2018
$
1,338

 
$
23,643

 
$
24,981


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Intangible assets (other than goodwill) consisted of the following (in thousands):
 
 
 
December 31, 2018
 
December 31, 2017
 
Useful
Life
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortizable (definite-lived) intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Domain names
5-10 years
 
$
3,161

 
$
(732
)
 
$
2,429

 
$
3,161

 
$
(428
)
 
$
2,733

Issued patents
4-15 years
 
2,940

 
(1,106
)
 
1,834

 
2,697

 
(913
)
 
1,784

Issued trademarks
3-11 years
 
1,053

 
(599
)
 
454

 
860

 
(397
)
 
463

Customer relationships
4-8 years
 
3,701

 
(880
)
 
2,821

 
1,377

 
(451
)
 
926

Non-compete agreements
3-4 years
 
540

 
(439
)
 
101

 
556

 
(346
)
 
210

Developed technology
3-7 years
 
13,404

 
(7,081
)
 
6,323

 
13,469

 
(3,956
)
 
9,513

Re-acquired distribution rights
2 years
 
1,928

 
(1,813
)
 
115

 
2,133

 
(711
)
 
1,422

Total amortizable
 
 
26,727

 
(12,650
)
 
14,077

 
24,253

 
(7,202
)
 
17,051

Non-amortizable (indefinite-lived) intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
TASER trademark
 
 
900

 
 
 
900

 
900

 
 
 
900

Patents and trademarks pending
 
 
958

 
 
 
958

 
872

 
 
 
872

Total non-amortizable
 
 
1,858

 
 
 
1,858

 
1,772

 
 
 
1,772

Total intangible assets
 
 
$
28,585

 
$
(12,650
)
 
$
15,935

 
$
26,025

 
$
(7,202
)
 
$
18,823

Amortization expense of intangible assets was $5.7 million , $4.7 million and $0.9 million for the years ended December 31, 2018 , 2017 and 2016 , respectively. Estimated amortization for intangible assets with definitive lives for the next five years ended December 31, and thereafter, is as follows (in thousands):
2019
$
3,463

2020
3,294

2021
2,852

2022
1,211

2023
934

Thereafter
2,323

Total
$
14,077

7. Other Long-Term Assets
Other long-term assets consisted of the following at December 31 (in thousands):
 
2018
 
2017
Cash surrender value of corporate-owned life insurance policies
$
3,596

 
$
3,846

Deferred commissions (1)
15,530

 
6,803

Restricted cash (2)
661

 
3,333

Prepaid expenses, deposits and other
3,212

 
1,384

Total other long-term assets
$
22,999

 
$
15,366

(1) Represents assets for the incremental costs of obtaining contracts with customers, which consist primarily of sales commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contracts and

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amortized consistent with the recognition timing of the revenue for the underlying performance obligations. The amounts as of 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. In connection with our adoption of Topic 606, we recorded an adjustment of  $7.3 million  as of January 1, 2018, and of that amount,  $5.4 million  was recorded within other assets. The adjusted balance of long-term deferred commissions as of January 1, 2018 was  $12.2 million .
(2) As of December 31, 2018, restricted cash primarily consisted of $0.6 million for a performance guarantee related to an international customer sales contract.
8. Accrued Liabilities
Accrued liabilities consisted of the following at December 31 (in thousands):
 
2018
 
2017
Accrued salaries, benefits and bonus
$
19,063

 
$
8,957

Accrued professional, consulting and lobbying fees
4,894

 
3,870

Accrued warranty expense
898

 
644

Accrued income and other taxes
4,167

 
2,558

Other accrued expenses
12,070

 
7,473

Accrued liabilities
$
41,092

 
$
23,502

9. Commitments and Contingencies
Operating and capital lease obligations
We have entered into operating leases for various office space, storage facilities and equipment. As of December 31, 2018 , our leases are for terms ranging from less than one year to five years. Our leases generally contain multi-year renewal options and escalation clauses. Rent expense under all operating leases, including both cancelable and non-cancelable leases, was $4.2 million , $2.9 million and $1.8 million for the years ended December 31, 2018 , 2017 , and 2016 , respectively.
Future minimum lease payments under non-cancelable leases at December 31, 2018 , are as follows (in thousands):
 
Operating
 
Capital
2019
$
3,670

 
$
40

2020
3,572

 
36

2021
2,961

 
—

2022
2,001

 
—

2023
573

 
—

Thereafter
—

 
—

Total minimum lease payments
$
12,777

 
76

Less: Amount representing interest
 
 
(6
)
Capital lease obligation
 
 
$
70


Land Lease Purchase Agreement

On December 13, 2018, we entered into a Purchase and Sale Agreement ("PSA") to purchase a leasehold interest to a parcel of land located in Maricopa County, Arizona for a period of 84 years, on which we intend to construct our

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new headquarters. The purchase price of the land lease was $13.1 million . It is also contemplated that we will prepay the rent under the lease in the amount of $10.9 million . The PSA includes a due diligence period, during which we may terminate and forfeit our initial deposit of $0.2 million .

Purchase commitments
We routinely enter into cancelable and non-cancelable purchase orders with many of our key vendors. Based on the strategic relationships with many of these vendors, our ability to cancel these purchase orders and maintain a favorable relationship would be limited. As of December 31, 2018 , we had approximately $66.6 million of open purchase orders.
Litigation
Product Litigation
As a manufacturer of weapons and other law enforcement tools used in high-risk field environments, we are often the subject of products liability litigation concerning the use of our products. We are currently named as a defendant in eight lawsuits on the TASER weapons side of our business, all brought by individuals alleging either wrongful death or personal injury in connection with arrests. While the facts vary from case to case, these product liability claims typically allege defective product design, manufacturing, and/or failure to warn. They seek compensatory and sometimes punitive damages, often in unspecified amounts.
We continue to aggressively defend all product litigation. As a general rule, it is our policy not to settle suspect injury or death cases. Exceptions are sometimes made where the settlement is strategically beneficial to us. Due to the confidential nature of our litigation strategy and the confidentiality agreements that are executed in the event of a settlement, we do not identify or comment on specific settlements by case or amount. Based on current information, we do not believe that the outcome of any such legal proceeding will have a material effect on our financial position, results of operations, or cash flows. We are self-insured for the first $5.0 million of any product claim made after 2014. No judgment or settlement has ever exceeded this amount in any products case. We continue to maintain product liability insurance coverage, including an insurance policy fronting arrangement, above our self-insured retention with various limits depending on the policy period.
Other Litigation
We are a defendant in a litigation matter filed by Digital Ally Inc. (“Digital”) in the District of Kansas alleging patent infringement regarding our Axon Signal technology. Digital seeks a judgment of infringement, monetary damages, a permanent injunction, punitive damages and attorneys’ fees and costs. Both fact and expert discovery are now complete. The parties filed motions for summary judgment on January 31, 2019 and briefing is expected to be complete by the end of March 2019. No trial date has yet been set but, if necessary, is expected to occur in Q4 2019 or Q1 2020.
We are vigorously defending this litigation. The case has been substantially narrowed based on (1) the district court’s dismissal of all of Digital’s antitrust claims in January 2017; this ruling was affirmed by the Federal Circuit in May 2018 and the U.S. Supreme Court denied review; (2) the district court’s dismissal of Digital’s ‘292 patent from the litigation with prejudice in March 2018, and Digital’s execution of a covenant not to sue Axon on that patent on existing Axon products; and (3) Digital’s dismissal of certain inconsistent claims in the ‘452 patent, leaving only one independent claim for resolution by the court. We believe the ‘452 patent is both invalid and not infringed, and we do not believe it is probable that we will incur a material loss.
The October 2018 litigation filed by former VIEVU, LLC employee Amani Kiogora in King County, Washington has been dismissed against Axon. Safariland, LLC has accepted the defense and indemnification of VIEVU for any alleged commissions owed.

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The April 2016 arbitration claim filed by Antoine di Zazzo, our former distributor in France, was successfully resolved in our favor in December 2018, including an award of fees and costs.
The litigation information in this note is current through the date of these financial statements.

U.S. Federal Trade Commission Investigation
In June 2018 we received a letter from the U.S. Federal Trade Commission (“FTC”) with respect to its non-public investigation into our acquisition of VIEVU, LLC in May 2018.  The FTC requested that we provide certain information and documentation relating to the acquisition. We are cooperating with the investigation.
General
From time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us. It is our policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on us. After carefully assessing the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously defend any lawsuit filed against us. We record a liability when losses are deemed probable and reasonably estimable. When losses are deemed reasonably possible but not probable, we determine whether it is possible to provide an estimate of the amount of the loss or range of possible losses for the claim, if material for disclosure. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of any potential loss. We reevaluate and update accruals as matters progress over time.
Based on our assessment of outstanding litigation and claims as of December 31, 2018 , we have determined that it is not reasonably possible that these lawsuits will individually, or in the aggregate, materially affect our results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on our operating results, financial condition or cash flows.
Off-Balance Sheet Arrangements
Under certain circumstances, we use letters of credit and surety bonds to guarantee our performance under various contracts, principally in connection with the installation and integration of our Axon cameras and related technologies. Certain of our letters of credit contracts and surety bonds have stated expiration dates, with others being released as the contractual performance terms are completed. We expect to fulfill all contractual performance obligations related to outstanding guarantees. At December 31, 2018 , we had outstanding letters of credit of approximately  $3.1 million , which are expected to expire in May 2019 and September 2021. Additionally, we had approximately  $14.1 million of outstanding surety bonds at December 31, 2018 , with $0.4 million expiring in 2019, $0.7 million expiring in 2020, $2.3 million expiring in 2021, $3.1 million expiring in 2022 and the remaining $7.6 million expiring in 2023.
10. Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent for tax years beginning in 2018 and requiring companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. The Tax Act established certain new provisions which are applicable to us including (1) creating a new provision designed to tax global intangible low-tax income ("GILTI"); (2) establishing a deduction for foreign derived intangible income ("FDII"); (3) repealing the domestic production activity deduction; and (4) establishing new limitations on certain executive compensation.

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During the year ended December 31, 2017, we recorded additional net tax expense of $7.6 million for the impact of the Tax Act using the current available information and technical guidance on the interpretations of the Tax Act. As permitted by SEC Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, we recorded provisional estimates and have subsequently finalized our accounting analysis based on the guidance, interpretations, and data available as of December 31, 2018. We recorded additional tax expense of $0.3 million during the three months ended December 31, 2018 upon finalization of our accounting analysis.
Income before income taxes included the following components for the years ended December 31 (in thousands):
 
2018
 
2017
 
2016
United States
$
25,751

 
$
14,978

 
$
38,414

Foreign
2,353

 
783

 
(6,917
)
Total
$
28,104

 
$
15,761

 
$
31,497

Significant components of the provision for income taxes are as follows for the years ended December 31 (in thousands):
 
2018
 
2017
 
2016
Current:
 
 
 
 
 
Federal
$
4,900

 
$
6,039

 
$
16,346

State
1,377

 
1,263

 
1,534

Foreign
228

 
656

 
1,050

Total current
6,505

 
7,958

 
18,930

Deferred:
 
 
 
 
 
Federal
(8,382
)
 
4,539

 
(4,145
)
State
(364
)
 
(1,631
)
 
(977
)
Foreign
(3
)
 
(78
)
 
(45
)
Total deferred
(8,749
)
 
2,830

 
(5,167
)
Tax impact of unrecorded tax benefits liability
1,143

 
(234
)
 
437

Provision for income taxes (Income tax benefit)
$
(1,101
)
 
$
10,554

 
$
14,200



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

A reconciliation of our effective income tax rate to the federal statutory rate follows for the years ended December 31 (in thousands):
 
2018
 
2017
 
2016
Federal income tax at the statutory rate
$
5,902

 
$
5,518

 
$
11,024

State income taxes, net of federal benefit
(215
)
 
339

 
889

Difference between statutory and foreign tax rates
7

 
(560
)
 
1,521

Permanent differences (1)
725

 
300

 
(457
)
Executive compensation limitation
1,167

 
—

 
—

Research and development
(6,908
)
 
(2,380
)
 
(1,928
)
Return to provision adjustment
1,780

 
23

 
327

Change in liability for unrecognized tax benefits
1,768

 
7

 
700

Excess stock-based compensation benefit (2)
(8,907
)
 
(1,819
)
 
(77
)
Change in valuation allowance
1,984

 
1,949

 
1,779

Tax effects of intercompany transactions
1,004

 
(277
)
 
630

Adjustments to deferred tax assets, net resulting from enactment of new tax law (3)
—

 
7,601

 
—

Other
592

 
(147
)
 
(208
)
Provision for income taxes (Income tax benefit)
$
(1,101
)
 
$
10,554

 
$
14,200

Effective tax rate
(3.9
)%
 
66.9
%
 
45.1
%
(1)  
Permanent differences include certain expenses that are not deductible for tax purposes including meals and entertainment, certain transaction costs, lobbying fees, and unfavorable income as a result of GILTI offset by favorable items including the domestic production activities deduction, for tax years 2017 and 2016, and a deduction for FDII for 2018.
(2)  
For the years ended December 31, 2018 and 2017 , the provision for income taxes included $8.9 million and $1.8 million , respectively, of benefits resulting from excess stock-based compensation that were recorded as a decrease in the provision for income taxes. For the year ended December 31, 2016, we included $1.4 million of benefits resulting from excess stock-based compensation that were recorded as increases to additional paid-in capital in the consolidated statement of changes in stockholders' equity.
(3)  
The adjustment to deferred tax assets of $7.6 million was a result of the impact of changes in the U.S. federal effective tax rate, as well as a reduction of the stock-based compensation deferred tax asset due to expected permanent limitations on its deductibility for certain key executives under the Tax Act.

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Significant components of our deferred income tax assets and liabilities are as follows at December 31 (in thousands):
 
2018
 
2017
Deferred income tax assets:
 
 
 
Net operating loss carryforward
$
2,347

 
$
3,691

Deferred revenue
13,304

 
9,442

Deferred compensation
858

 
1,109

Inventory reserve
1,294

 
702

Non-qualified and non-employee stock option expense
3,758

 
3,704

Capitalized research and development
—

 
485

Amortization
412

 
—

Research and development tax credit carryforward
5,193

 
3,817

Reserves, accruals, and other
3,094

 
1,921

Total deferred income tax assets
30,260

 
24,871

Deferred income tax liabilities:
 
 
 
Depreciation
(2,195
)
 
(2,027
)
Amortization
(57
)
 
(1,398
)
Other
(1,232
)
 
(256
)
Total deferred income tax liabilities
(3,484
)
 
(3,681
)
Net deferred income tax assets before valuation allowance
26,776

 
21,190

Valuation allowance
(7,429
)
 
(5,435
)
Net deferred income tax assets
$
19,347

 
$
15,755

We have $2.5 million of state net operating losses (“NOLs”) which expire at various dates between 2029 and 2036 . We also have a federal NOL of $1.5 million which expires in 2036 , and is subject to limitation under Internal Revenue Code (“IRC”) Section 382. We have $0.1 million of federal R&D credits, which expire in 2024 and 2027, and are also subject to limitation under IRC Section 382. We have $9.7 million of Arizona R&D credits carrying forward, which expire at various dates between 2019 and 2033 . In the U.K., Canada, and Germany, we have $8.9 million , $1.4 million , and $0.1 million of NOLs, respectively, which expire at various dates or may be carried forward indefinitely.
In preparing our consolidated financial statements, management has assessed the likelihood that deferred income tax assets will be realized from future taxable income. In evaluating the ability to recover its deferred income tax assets, management considers all available evidence, positive and negative, including our operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred income tax assets will not be realized. Management exercises significant judgment in determining our provisions for income taxes, our deferred income tax assets and liabilities, and our future taxable income for purposes of assessing our ability to utilize any future tax benefit from our deferred income tax assets.
As of December 31, 2018, we continue to demonstrate positive income in the U.S. federal and state tax jurisdictions; however, we have Arizona R&D tax credits expiring unutilized each year. Therefore, management has concluded that it is more likely than not that our Arizona R&D deferred tax asset will not be realized.
As of December 31, 2018 , we have cumulative pre-tax losses in Australia, the U.K., and Canada, which limits the ability to consider other subjective evidence, such as projections for future growth. On the basis of this evaluation, a full valuation allowance has been recorded for these jurisdictions. The amount of the deferred tax asset considered

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realizable; however, could be adjusted in future periods if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for growth.
We consider the undistributed earnings of certain non-U.S. subsidiaries to be indefinitely reinvested outside of the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. We project that our foreign earnings will be utilized offshore for working capital and future foreign growth. The determination of the unrecognized deferred tax liability on those undistributed earnings is not practicable due to our legal entity structure and the complexity of U.S. and local country tax laws. If we decide to repatriate the undistributed foreign earnings, we will need to recognize the income tax effects in the period we change our assertion on indefinite reinvestment.
We complete R&D tax credit studies for each year that an R&D tax credit is claimed for federal, Arizona, and California income tax purposes. Management has made the determination that it is more likely than not that the full benefit of the R&D tax credit will not be sustained on examination and recorded a liability for unrecognized tax benefits of $5.2 million as of December 31, 2018 . In addition, management accrued approximately $0.1 million for estimated uncertain tax positions related to certain federal income tax liabilities. Should the unrecognized tax benefit of $5.3 million be recognized, our effective tax rate would be favorably impacted.
The following table presents a roll forward of our liability for unrecognized tax benefits, exclusive of accrued interest, as of December 31 (in thousands):
 
2018
 
2017
 
2016
Balance, beginning of period
$
4,243

 
$
4,050

 
$
3,396

Increase in previous year tax positions
213

 
379

 
206

Increase in current year tax positions
1,982

 
587

 
448

Decrease due to lapse of statutes of limitations
(380
)
 
(773
)
 
—

Balance, end of period
$
6,058

 
$
4,243

 
$
4,050

Federal income tax returns for 2015 through 2017 remain open to examination by the U.S. Internal Revenue Service (the “IRS”), while state and local income tax returns for 2014 through 2017 also generally remain open to examination by state taxing authorities. The 2004 through 2013 income tax returns are only open to the extent that net operating loss or other tax attributes carrying forward from those years were utilized in 2014 through 2017. The foreign tax returns for 2014 through 2017 also generally remain open to examination. Our U.S. federal income tax return for fiscal year 2016 is currently under audit by the Internal Revenue Service.
We recognize interest and penalties related to unrecognized tax benefits within the provision (benefit) for income tax expense line in the accompanying consolidated statements of operations and comprehensive income. As of December 31, 2018 and 2017, we had accrued interest of $0.1 million .
11. Line of Credit
We have a $100.0 million unsecured revolving line of credit with a domestic bank, of which $10.0 million is available for letters of credit. The credit agreement matures on December 31, 2021 and has an accordion feature which allows for an increase in the total line of credit up to $100.0 million , subject to certain conditions, including the availability of additional bank commitments.
At December 31, 2018 and 2017 , there were no borrowings under the line. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. As of December 31, 2018 , we had letters of credit outstanding of approximately $3.1 million under the facility and available borrowing of $96.9 million . Advances under the line of credit bear interest at LIBOR plus 1.0 to 1.5% per year determined in accordance with a pricing grid based on our funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio.  

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We are required to comply with a maximum funded debt to EBITDA ratio of no greater than 2.50 to 1.00 based upon a trailing four fiscal quarter period. At December 31, 2018 , our funded debt to EBITDA ratio was 0.001 to 1.00.
12. Stockholders’ Equity
Common Stock and Preferred Stock
We have authorized the issuance of two classes of stock designated as “common stock” and “preferred stock,” each having a par value of $0.00001 per share. We are authorized to issue 200 million shares of common stock and 25 million shares of preferred stock.
Follow-On Offering
In May 2018, we sold  4,645,000  shares of our common stock, which included  645,000  shares pursuant to the full exercise of the underwriters' option to purchase additional shares, in an underwritten public offering at a price of  $53.00  per share, which resulted in gross proceeds of  $246.2 million . Net proceeds after deducting fees, commissions, and other expenses related to the offering were  $234.0 million .
CEO Performance Award
On May 24, 2018, our stockholders approved the CEO Performance Award of 6,365,856  stock option awards. The CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational goals (performance conditions) and market capitalization goals (market conditions), assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each vesting date. Each of the 12 vesting tranches of the CEO Performance Award have a 10-year contractual term and will vest upon certification by the Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of  $1.0 billion thereafter, and (ii) any one of the following eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA have been met for the previous four consecutive fiscal quarters. Adjusted EBITDA for purposes of the CEO Performance Award ("Adjusted EBITDA (CEO Performance Award)") is defined as net income (loss) attributable to common stockholders before interest expense, investment interest income, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense.
Eight Separate Revenue Goals (1)
(in thousands)
 
Eight Separate Adjusted EBITDA (CEO Performance Award) Goals
(in thousands)
Goal #1, $710,058
 
Goal #9, $125,000
Goal #2, $860,058
 
Goal #10, $155,000
Goal #3, $1,010,058
 
Goal #11, $175,000
Goal #4, $1,210,058
 
Goal #12, $190,000
Goal #5, $1,410,058
 
Goal #13, $200,000
Goal #6, $1,610,058
 
Goal #14, $210,000
Goal #7, $1,810,058
 
Goal #15, $220,000
Goal #8, $2,010,058
 
Goal #16, $230,000
(1) In connection with the business acquisition that was completed during the three months ended June 30, 2018 (Note 15), the revenue goals have been adjusted for the acquiree's Target Revenue, as defined in the CEO Performance Award agreement.
As of December 31, 2018 , the following operational goals were considered probable of achievement:
•
Total revenue of $710.1 million ; and

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•
Adjusted EBITDA (CEO Performance Award) of $125.0 million .
Stock-based compensation expense associated with the CEO Performance Award is recognized over the longer of the expected achievement period for each pair of market capitalization and operational goals, beginning at the point in time when the relevant operational goal is considered probable of being met. The probability of meeting an operational goal and the expected achievement point in time for meeting a probable operational goal are based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis. Even though no tranches of the CEO Performance Award vest unless a market capitalization and a matching operational goal are both achieved, stock-based compensation expense is recognized when an operational goal is considered probable of achievement regardless of whether a market capitalization goal is actually achieved. Additionally, stock-based compensation represents a non-cash expense and is recorded in sales, general, and administrative operating expense on our consolidated statements of operations and comprehensive income.
The first two market capitalization goals have been achieved as of December 31, 2018. However, none of the stock options granted under the CEO Performance Award have vested thus far as the operational goals have not yet been achieved as of December 31, 2018 . As there are two operational goals considered probable of achievement, we recorded stock-based compensation expense of $3.3 million related to the CEO Performance Award from the Grant Date through December 31, 2018 . The number of stock options that would vest related to the two tranches is approximately 1.1 million shares.
As of  December 31, 2018 , we had $42.0 million of total unrecognized stock-based compensation expense for the operational goals that were considered probable of achievement, which will be recognized over a weighted-average period of 7.2 years. As of  December 31, 2018 , we had unrecognized stock-based compensation expense of $200.7 million for the operational goals that were considered not probable of achievement.
Stock-based Compensation Plans
We have historically utilized stock-based compensation, consisting of RSUs and stock options, for key employees and non-employee directors as a means of attracting and retaining quality personnel. Service-based grants generally have a vesting period of 3 to 5 years and a contractual maturity of ten years . Performance-based grants generally have vesting periods ranging from 1 to 5 years and a contractual maturity of ten years .
On March 29, 2018, our Board of Directors approved the 2018 Stock Incentive Plan (the “2018 Plan"), which was subsequently approved by stockholders at the Annual Meeting of Stockholders on May 24, 2018. Under the 2018 Plan, we reserved for future grants: (i)  1.0 million shares of common stock, plus (ii) the number of shares of common stock that were authorized but unissued under our 2016 Stock Incentive Plan (the “2016 Plan”) and all prior Company equity plans as of the effective date of the 2018 Plan, and (iii) the number of shares of stock that have been granted under the prior plans that either terminate, expire or lapse for any reason after the effective date of the 2016 Plan. As of December 31, 2018 , approximately 1.7 million shares remain available for future grants. Shares issued upon exercise of stock awards from these plans have historically been issued from our authorized unissued shares.
Performance-based stock awards
We have issued performance-based stock options and performance-based RSUs, the vesting of which is generally contingent upon the achievement of certain performance criteria related to our operating performance, as well as successful and timely development and market acceptance of future product introductions. In addition, certain of the performance RSUs have additional service requirements subsequent to the achievement of the performance criteria. Compensation expense is recognized over the requisite service period, which is defined as the longest explicit, implicit or derived service period based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date.

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Restricted Stock Units
The following table summarizes RSU activity for the years ended December 31 (number of units and aggregate intrinsic value in thousands):
 
2018
 
2017
 
2016
 
Number
of
Units
 
Weighted
Average
Grant-Date
Fair Value
 
Number
of
Units
 
Weighted
Average
Grant-Date
Fair Value
 
Number
of
Units
 
Weighted
Average
Grant-Date
Fair Value
Units outstanding, beginning of year
2,348

 
$
23.47

 
1,330

 
$
20.40

 
1,139

 
$
19.30

Granted
381

 
46.06

 
1,731

 
24.59

 
718

 
19.75

Released
(772
)
 
23.85

 
(519
)
 
18.85

 
(414
)
 
15.91

Forfeited
(302
)
 
24.73

 
(194
)
 
24.61

 
(113
)
 
21.65

Units outstanding, end of year
1,655

 
28.34

 
2,348

 
23.47

 
1,330

 
20.40

Aggregate intrinsic value at year end
$
72,406

 
 
 

 
 
 

 
 
Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $43.75 per share at December 31, 2018 , multiplied by the number of RSUs. The fair value as of the respective vesting dates of RSUs that vested during the year ended December 31, 2018 was $36.6 million . Certain RSUs that vested in 2018 were net-share settled, such that we withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld during 2018 were 0.2 million and had a value of approximately $7.8 million on their respective vesting dates as determined by the closing stock price of our stock. Payments for the employees’ tax obligations are reflected as a financing activity within the statement of cash flows. These net-share settlements had the effect of share repurchases by us as they reduced the amount of shares that would have otherwise been issued as a result of the vesting.
In 2018 , 2017 and 2016 , we granted approximately 94,000 , 353,000 and 79,000 performance-based RSUs, respectively (included in the table above). Certain of the performance-based RSUs outstanding as of December 31, 2018 can vest with a range of shares earned being between 0% and 200% of the targeted shares granted, depending on the final achievement of pre-determined performance criteria as of the vesting date. As of December 31, 2018 , the performance criteria had been met for approximately 4,000 of the 0.4 million performance-based RSUs outstanding. We recognized $4.8 million , $2.5 million and $2.1 million of compensation expense related to performance-based RSUs during the years ended December 2018 , 2017 and 2016 , respectively.
As of December 31, 2018 , there was $35.9 million in unrecognized compensation costs related to RSUs under our stock plans. We expect to recognize the cost related to the RSUs over a weighted average period of 2.26 years .
 

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Stock Option Activity
The following table summarizes stock option activity for the years ended December 31 (number of options in thousands):
 
2018
 
2017
 
2016
 
Number
of
Options
 
Weighted
Average
Exercise
Price
 
Number
of
Options
 
Weighted
Average
Exercise
Price
 
Number
of
Options
 
Weighted
Average
Exercise
Price
Options outstanding, beginning of year
804

 
$
4.99

 
1,008

 
$
5.40

 
1,103

 
$
5.37

Granted
6,366

 
28.58

 
—

 
—

 
—

 
—

Exercised
(664
)
 
5.09

 
(198
)
 
6.99

 
(95
)
 
5.02

Expired / terminated
(48
)
 
4.55

 
(6
)
 
8.32

 
—

 
—

Options outstanding, end of year
6,458

 
28.24

 
804

 
4.99

 
1,008

 
5.40

Options exercisable, end of year
92

 
4.45

 
775

 
5.00

 
977

 
5.42

6.4 million stock options were granted in 2018 and none were granted in 2017 or 2016 . The total intrinsic value of options exercised was $28.5 million , $3.2 million and $2.0 million for the years ended December 31, 2018 , 2017 and 2016 , respectively. The intrinsic value for options exercised was calculated as the difference between the exercise price of the underlying stock option awards and the market price of our common stock on the date of exercise.

Of the total stock options exercised during the year ended December 31, 2018,  0.3 million  were exercised and the shares then sold by our CEO in connection with our follow-on offering. The CEO surrendered already owned shares to cover the exercise price of the option exercises. The option exercises were net-share settled such that we withheld shares with value equivalent to the CEO’s minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld for tax purposes and surrendered to cover the option exercises were  0.1 million  and  29,854 , respectively, and had a value of  $6.2 million  and  $1.6 million , respectively, on the exercise date as determined by the closing stock price on that day. Payments for the employee's tax obligations are reflected as a financing activity within the statement of cash flows. We recorded a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital.
The following table summarizes information about stock options that were fully vested or expected to vest as of December 31, 2018 (number of options in thousands):
 
 
Options Outstanding
 
Options Exercisable
Range of
Exercise Price
 
Number of
Options
Outstanding
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life (Years)
 
Number of
Options
Exercisable
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life (Years)
$4.20 - $6.30
 
92

 
$
4.45

 
1.54
 
92

 
$
4.45

 
1.54
The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2018 was $3.6 million and $3.6 million , respectively. Aggregate intrinsic value represents the difference between the exercise price of the underlying stock option awards and the closing market price of our common stock of $43.75 on December 31, 2018 .
At December 31, 2018 , we had 6,365,856 unvested options outstanding with a weighted average exercise price of $28.58 per share, weighted average grant-date fair value of $38.64 per share and weighted average remaining contractual life of 9.8 years . The aggregate intrinsic value of unvested options at December 31, 2018 was $96.6 million .
We granted approximately 1.0 million performance-based stock options (included in the table above) from 2008 through 2011. As of December 31, 2018 , approximately 0.1 million performance-based stock options are outstanding

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and exercisable. The aggregate grant-date fair value of the 0.1 million performance-based stock options vested as of December 31, 2018 was approximately $3.6 million .
Stock-based Compensation Expense
We account for stock-based compensation using the fair-value method. Reported stock-based compensation was classified as follows for the years ended December 31 (in thousands):
 
2018
 
2017
 
2016
Cost of product and service sales
$
511

 
$
508

 
$
342

Sales, general and administrative expenses
12,710

 
9,047

 
5,707

Research and development expenses
8,658

 
6,055

 
3,320

Total stock-based compensation expense
$
21,879

 
$
15,610

 
$
9,369

Income tax benefit
$
4,049

 
$
5,791

 
$
3,526

Stock Repurchase
In February 2016, our Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of our outstanding common stock subject to stock market conditions and corporate considerations. During the year ended December 31, 2016, we purchased, under a Rule 10b5-1 plan, approximately 1.8 million common shares for a total cost of approximately $33.7 million , or a weighted average cost of $18.90 per share. As of December 31, 2018 and 2017, $16.3 million remained available under the plan for future purchases. We suspended our 10b5-1 plan during 2016, and any future purchases will be discretionary.
Stock Incentive Plan

In February 2019, our shareholders approved a new stock incentive plan (the “2019 Plan”) authorizing an additional  6.0 million  shares, plus remaining available shares under prior plans, for issuance under the new plan.
eXponential Stock Performance Plan
On February 12, 2019 , our shareholders approved the 2019 Plan, which was adopted by the Board of Directors to reserve a sufficient number of shares to facilitate our eXponential Stock Performance Plan (“XSPP”) and grants of eXponential Stock Units (“XSUs”) under the plan. Pursuant to the XSPP, all eligible full-time U.S. employees were granted an award of 60 XSUs in January 2019, and certain employees had the opportunity to elect to receive a percentage of the value of their target compensation over the next nine years (2019-2027) in the form of additional XSUs. For employees who elected to receive XSUs, the XSU grants were made as an up front, lump sum grant in January 2019, and are intended to replace that portion of the target compensation they elected to receive in the form of XSUs for the next nine years. Accordingly, their go forward target compensation will be reduced until 2027 by the amount of such compensation that the employees elected to receive in the form of the January 2019 XSU grants. A total of approximately 5.1 million XSUs were granted in January 2019.
The XSUs are grants of restricted stock units, each with a term of approximately nine years, that vest in 12 equal tranches. Each of the 12 tranches will vest upon certification by the Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at  $2.5 billion  for the first tranche and increases by increments of  $1.0 billion  thereafter, and (ii) any one of eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA have been met for the previous four consecutive fiscal quarters.

The XSPP contains an anti-dilution provision, which is used to calculate a maximum number of shares outstanding for purposes of determining achievement of the market capitalization goals whereby the maximum number of shares used to calculate the market capitalization goal is calculated by organically growing the current number of shares outstanding by 3% per year (the "XSU Maximum"). Any shares of Stock issued to Patrick W. Smith upon the

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exercise of the stock options granted to Mr. Smith under the CEO Performance Award shall increase the XSU Maximum. The XSU Maximum shall also be adjusted for acquisitions, spin-offs or other changes in the number of outstanding shares of common stock, if such changes have a corresponding adjustment on the market capitalization goals.

The market capitalization and operational goals are identical to the CEO Performance Award, except for the number of shares that are used to calculate the market capitalization goals if shares outstanding exceed the XSU Maximum. Additionally, because the grant date is different than that of the CEO Performance Award, the measurement period for market capitalization is not identical.
13. Related Party Transactions
We subscribe to a mobile collaboration software suite from Quip, a company that was co-founded and managed by Bret Taylor, a member of our Board of Directors. In April 2016, Quip was acquired by Salesforce, and subsequent to the acquisition, we continue to consider Quip a related party. In November 2017, Mr. Taylor was appointed to President and Chief Product Officer of Salesforce. We now consider the consolidated Salesforce entity to be a related party. The cost to subscribe to various cloud-based hosting arrangements from Salesforce and Quip was $1.8 million , $1.2 million and $0.8 million for the years ended December 31, 2018 , 2017 and 2016 , respectively. Amounts owed as of December 31, 2018 and 2017 were negligible.
14 . Employee Benefit Plans
We have a defined contribution profit sharing 401 (k) plan for eligible employees, which is qualified under Sections 401 (a) and 401 (k) of the Internal Revenue Code of 1986, as amended. Employees are entitled to make tax-deferred contributions of up to the maximum allowed by law of their eligible compensation.
We also have a non-qualified deferred compensation plan for certain executives, key employees and non-employee directors through which participants may elect to postpone the receipt and taxation of a portion of their compensation, including stock-based compensation, received from us. The non-qualified deferred compensation plan allows eligible participants to defer up to 80% of their base salary and up to 100% of other types of compensation. The plan also allows for matching and discretionary employer contributions. Employee deferrals are deemed 100% vested upon contribution. Distributions from the plan generally commence upon retirement, death, separation of service, specified date or upon the occurrence of an unforeseeable emergency. Distributions can be paid in a variety of forms from lump sum to installments over a period of years. Participants in the plan are entitled to select from a wide variety of investments available under the plan and are allocated gains or losses based upon the performance of the investments selected by the participant. All gains or losses are allocated fully to plan participants and we do not guarantee a rate of return on deferred balances. Assets related to this plan consist of corporate-owned life insurance contracts and are included in other assets in the consolidated balance sheets. Participants have no rights or claims with respect to any plan assets and any such assets are subject to the claims of our general creditors.
Contributions to the plans are made by both the employee and us. Our contributions are based on the level of employee contributions and are immediately vested. Our matching contributions to the 401(k) plan for the years ended December 31, 2018 , 2017 and 2016 , were approximately $3.2 million , $2.5 million and $1.6 million , respectively. Future matching or profit sharing contributions to the plans are at our sole discretion.
15. Business Acquisitions
Dextro, Inc.
On February 8, 2017, we acquired all of the outstanding common stock of Dextro for a total purchase price of $7.5 million . Dextro's technology provides one of the first computer-vision and deep learning systems to make the visual contents in video searchable in real time. This technology will allow law enforcement agencies and departments

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to quickly isolate and analyze critical seconds of footage from massive amounts of video data. The technology acquired, along with the Dextro employees that joined Axon, were key additions to the Axon Artificial Intelligence team.
The purchase price of $7.5 million consisted primarily of cash, net of cash acquired, and contingent consideration of $1.0 million representing potential earn-outs to former stockholders based on predetermined future metrics. As of December 31, 2018, 0.6 million was earned and paid relative to the former stockholder earn-out provisions. We also agreed to additional earn-out provisions to former Dextro employees totaling approximately  $1.4 million based, in part, on predetermined future metrics. The additional earn-outs were not included as part of the purchase price and are being expensed as compensation for the employees in the period earned.
The major classes of assets and liabilities to which we allocated the purchase price were as follows (in thousands):
Accounts receivable
$
12

Property and equipment
46

Developed technology
5,800

Goodwill
2,703

Deferred income tax liabilities, net
(1,074
)
Total purchase price
$
7,487

We assigned the goodwill to the Software and Sensors segment. Identifiable definite-lived intangible assets were assigned a total weighted average amortization period of 3.4 years. Dextro has been included in our consolidated results of operations subsequent to the acquisition date. Pro forma results of operations for Dextro have not been presented because they are not material to the consolidated results of operations. In connection with the acquisition, we incurred and expensed costs of approximately $0.2 million , which included legal, accounting and other third-party expenses related to the transaction.
Breon Enterprises
On July 1, 2017, we acquired certain tangible and intangible assets from Breon, which was our distributor in the Australia region. This transaction, which was accounted for as a business combination under ASC 805, is intended to expand our growth across Australia and surrounding regions by growing our in-country sales and support team.
The purchase price of $4.2 million was paid in full in July 2017. As of the acquisition date, we had a $2.2 million pre-existing accounts receivable balance from Breon for our sales of goods and services to Breon prior to the acquisition date. This receivable balance was cash settled in full separately from the business combination at its book value, which was considered to be the fair value due to the short-term nature of the receivable.
The major classes of assets to which we allocated the purchase price were as follows (in thousands):
Re-acquired distribution rights
$
2,100

Customer relationships
400

Goodwill
1,650

Total purchase price
$
4,150

We assigned $0.8 million of the goodwill to each of the TASER and Software and Sensors segments. The assignment of goodwill was based on our estimate of how the acquired assets would contribute cash flows to us over time. Identifiable definite-lived intangible assets were assigned a total weighted average amortization period of 2.1 years. Breon has been included in our consolidated results of operations subsequent to the acquisition date. Pro forma results of operations for Breon have not been presented because they are not material to the consolidated results of operations. Costs related to the acquisition were expensed as incurred and were considered insignificant.

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VIEVU
On May 3, 2018, we acquired all of the outstanding ownership interests of VIEVU, a public safety camera and cloud-based evidence management system provider for law enforcement agencies.
The estimated purchase price of $17.6 million consisted of $5.0 million in cash, net of cash acquired of $0.1 million , and $2.4 million , or 58,843 shares, of our common stock issued to VIEVU’s parent company, Safariland, LLC (“Safariland”). Additionally, the purchase price consisted of contingent consideration of up to $6.0 million , or 141,226 additional shares of common stock, if certain conditions relating to retention of certain VIEVU customers are met as of the first and second anniversaries of the acquisition date. The fair value of the contingent consideration as of the acquisition date was $5.8 million . The purchase price also included the fair value of a long-term Product Development and Supplier Agreement (the “Supply Agreement”) with Safariland, pursuant to which Safariland will be our preferred provider of holsters for our CEW products. The estimated fair value of the Supply Agreement as of the acquisition date was $4.5 million , a portion of which was recorded within accrued liabilities and the remaining portion recorded within other long-term liabilities.
Pursuant to ASC 805, the acquisition of VIEVU has been accounted for as a business combination, under the acquisition method of accounting, which resulted in acquired assets and assumed liabilities being measured at their estimated fair values as of the acquisition date. As of the acquisition date, goodwill was measured as the excess of consideration transferred, which is also generally measured at fair value, over the net acquisition date fair values of the assets acquired and liabilities assumed. Goodwill includes the value of intangible assets that do not qualify for separate recognition as well as strategic benefits we expect to realize from the acquisition. $5.2 million of the acquired goodwill is expected to be deductible for tax purposes.
The major classes of assets and liabilities to which we have allocated the purchase price were as follows (in thousands):
Accounts receivable
$
1,776

Inventory
2,626

Prepaid expenses and other assets
362

Property and equipment
459

Contract assets
1,472

Intangible assets
4,510

Goodwill
10,285

Accounts payable and accrued liabilities
(3,345
)
Deferred revenue
(543
)
Total purchase price
$
17,602

We have assigned the goodwill to the Software and Sensors segment. Identifiable definite-lived intangible assets were assigned a total weighted average amortization period of 5.1 years. VIEVU has been included in our consolidated results of operations subsequent to the acquisition date. Revenue included in our consolidated financial statements from the acquisition date through December 31, 2018 was $6.7 million . Direct costs incurred by the VIEVU legal entity and costs attributable to legacy VIEVU employees were approximately $16.9 million through December 31, 2018.
The following unaudited pro forma financial information presents the combined results of operations for the years ending December 31, 2018, and 2017, respectively, as though the VIEVU acquisition that occurred during the reporting period had occurred as of January 1, 2017. The unaudited pro forma results include certain adjustments, which are primarily comprised of the change in amortization of intangible assets established in purchase accounting compared to VIEVU's legacy intangible assets, and reclassifying the expense recorded during the three months ended June 30, 2018 related to assumed purchase commitments to the pro forma 2017 results. In addition, we have made pro forma adjustments in 2018 to exclude nonrecurring transaction costs directly attributable to the acquisition.

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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

These unaudited pro forma results of operations are presented for informational purposes only as required by U.S. GAAP, and do not include any anticipated cost savings or other effects of future integration efforts associated with the Company's acquisition strategy to secure major city customer relationships. As such, they may not be indicative of the results we would have achieved if the acquisition had taken place on January 1, 2017, nor are they indicative of future results of operations (in thousands, except per share amounts):
 
 
For the Years Ended December 31,
 
 
2018
 
2017
Net sales
 
$
423,890

 
$
352,985

Net income (loss)
 
$
27,035

 
$
(2,145
)
Net income (loss) per share:
 
 
 
 
Basic
 
$
0.49

 
$
(0.04
)
Diluted
 
$
0.47

 
$
(0.04
)
In connection with the acquisition, we incurred and expensed costs of approximately $0.8 million , which included legal, accounting and other third-party expenses related to the transaction. Subsequent to the acquisition date, we recorded expenses of $1.2 million related to purchase commitments assumed in the VIEVU business combination that exceeded estimated future demand.
16 . Segment Data
Our operations are comprised of two reportable segments: the manufacture and sale of CEWs, batteries, accessories, extended warranties and other products and services (the “TASER” segment); and the development, manufacture, and sale of software and sensors, which includes the sale of devices, wearables, applications, cloud and mobile products (collectively, the “Software and Sensors” segment). Within the Software and Sensors segment, we specify sales of products and services. 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." 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, selling expenses for the sales team, product management and R&D for products included, or to be included, within the Software and Sensors segment. All other costs are included in the TASER segment. Our Chief Executive Officer, who is the CODM, is not provided asset information by segment, and therefore, no asset information is provided.

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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Information relative to our reportable segments was as follows (in thousands):
 
For the year ended December 31, 2018
 
TASER
 
Software and Sensors
 
Total
Net sales from products
$
253,115

 
$
74,520

 
$
327,635

Net sales from services
—

 
92,433

 
92,433

Net sales
253,115

 
166,953

 
420,068

Cost of product sales
80,354

 
58,983

 
139,337

Cost of service sales
—

 
22,148

 
22,148

Cost of sales
80,354

 
81,131

 
161,485

Gross margin
172,761

 
85,822

 
258,583

Sales, general and administrative
90,910

 
65,976

 
156,886

Research and development
17,012

 
59,844

 
76,856

Income (loss) from operations
$
64,839

 
$
(39,998
)
 
$
24,841

 
For the year ended December 31, 2017
 
TASER
 
Software and Sensors
 
Total
Net sales from products (1)
$
234,512

 
$
51,347

 
$
285,859

Net sales from services (1)
—

 
57,939

 
57,939

Net sales (1)
234,512

 
109,286

 
343,798

Cost of product sales
72,054

 
45,943

 
117,997

Cost of service sales
—

 
18,713

 
18,713

Cost of sales
72,054

 
64,656

 
136,710

Gross margin
162,458

 
44,630

 
207,088

Sales, general and administrative  (1)
78,202

 
60,490

 
138,692

Research and development
8,377

 
46,996

 
55,373

Income (loss) from operations
$
75,879

 
$
(62,856
)
 
$
13,023




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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 
For the year ended December 31, 2016
 
TASER
 
Software and Sensors
 
Total
Net sales from products (1)
$
202,644

 
$
35,929

 
$
238,573

Net sales from services (1)
—

 
29,672

 
29,672

Net sales (1)
202,644

 
65,601

 
268,245

Cost of product sales
61,930

 
29,606

 
91,536

Cost of service sales
—

 
6,173

 
6,173

Cost of sales
61,930

 
35,779

 
97,709

Gross margin
140,714

 
29,822

 
170,536

Sales, general and administrative (1)
63,617

 
44,459

 
108,076

Research and development
5,887

 
24,722

 
30,609

Income (loss) from operations
$
71,210

 
$
(39,359
)
 
$
31,851

(1) Amounts for the years ended December 31, 2017 and 2016 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.
17 . Selected Quarterly Financial Data (unaudited)
Selected quarterly financial data for years ended December 31, 2018 and 2017 follows (in thousands, except per share data):
 
Quarter Ended
 
March 31,
 
June 30,
 
September 30,
 
December 31,
 
2018
 
2018
 
2018
 
2018 (1)
Net sales
$
101,215

 
$
99,226

 
$
104,836

 
$
114,791

Gross margin
64,461

 
63,143

 
65,633

 
65,346

Net income
12,926

 
8,485

 
5,711

 
2,083

Earnings per share  (2) :
 
 
 
 
 
 
 
Basic
$
0.24

 
$
0.15

 
$
0.10

 
$
0.04

Diluted
$
0.24

 
$
0.15

 
$
0.10

 
$
0.03

 
 
 
 
 
 
 
 
 
Quarter Ended
 
March 31,
 
June 30,
 
September 30,
 
December 31,
 
2017
 
2017
 
2017
 
2017
Net sales (3)
$
79,242

 
$
79,643

 
$
90,262

 
$
94,651

Gross margin
48,670

 
45,637

 
49,765

 
63,016

Net income (loss) (3)
4,580

 
2,276

 
422

 
(2,071
)
Earnings (loss) per share  (2) (3) :
 
 
 
 
 
 
 
Basic
$
0.09

 
$
0.04

 
$
0.01

 
$
(0.04
)
Diluted
$
0.09

 
$
0.04

 
$
0.01

 
$
(0.04
)
(1) Results of operations for the three months ended December 31, 2018 included out of period adjustments related to prior quarterly periods in 2018 and 2017. The aggregate out of period adjustment was approximately $1.8 million , reflecting a $0.9 million decrease to net sales, a $1.3 million increase to sales, general and administrative expense, and a $0.4 million decrease to provision for income taxes. Based on our quantitative and qualitative analysis, we do not

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

consider the out of period impact to be material to our financial position or results of operations for any prior periods or for the quarter or year ended December 31, 2018.
(2) Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share.
(3) Amounts for 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.
18. Supplemental Disclosure to Cash Flows
Supplemental non-cash and other cash flow information were as follows as of and for the years ended December 31 (in thousands):
 
2018
 
2017
 
2016
Supplemental disclosures:
 
 
 
 
 
Cash and cash equivalents
$
349,462

 
$
75,105

 
$
40,651

Restricted cash
$
1,565

 
$
3,333

 
$
3,317

Total cash, cash equivalents and restricted cash shown in the statements of cash flows
$
351,027

 
$
78,438

 
$
43,968

 
 
 
 
 
 
Cash paid for income taxes, net of refunds
$
10,609

 
$
11,487

 
$
14,048

 
 
 
 
 
 
Non-cash transactions:
 
 
 
 
 
Contingent consideration related to business combinations
$
—

 
$
1,007

 
$
3,325

Property and equipment purchases in accounts payable
501

 
133

 
82

Non-cash purchase consideration related to business combinations
12,508

 
—

 
—

Purchase of assets under capital lease obligations
—

 
—

 
134


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Stockholders
Axon Enterprise, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Axon Enterprise, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 27, 2019 expressed an unqualified opinion.
Change in accounting principle
As discussed in Note 2 to the consolidated financial statements, in the first quarter of 2018, the Company changed its method of accounting for revenue due to the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.


/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2005.

Phoenix, Arizona
February 27, 2019

92

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Attached as exhibits to this Form 10-K are certifications of the Chief Executive Officer (as the principal executive officer) and Chief Financial Officer (as the principal financial and accounting officer), which are required in accordance with Rule 13a-14 of the Exchange Act. This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications. This section should be read in conjunction with the certifications and the Grant Thornton LLP attestation report for a more complete understanding of the topics presented. Grant Thornton LLP has independently assessed the effectiveness of our internal control over financial reporting and its report is included below.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer are responsible for the evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Our disclosure controls and procedures are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of December 31, 2018 our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2018 based on criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). As a result of this assessment, management concluded that, as of December 31, 2018, 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. Grant Thornton LLP has independently assessed the effectiveness of our internal control over financial reporting and its report is included below.
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

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in our internal control over financial reporting. 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.
Changes in Internal Control over Financial Reporting
Except as noted above, there was no change in our internal control over financial reporting during the fiscal quarter ended December 31, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Axon Enterprise, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Axon Enterprise, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2018, and our report dated February 27, 2019 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ GRANT THORNTON LLP

Phoenix, Arizona
February 27, 2019



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Item 9B. Other Information
None.
PART III
 
Item 10.     Directors, Executive Officers and Corporate Governance
The information required to be disclosed by this item is incorporated herein by reference to our definitive proxy statement for the 2019 Annual Meeting of Stockholders (the “ 2019 Proxy Statement”), which proxy statement we expect to file with the SEC within 120 days after the end of our fiscal year ended December 31, 2018 .
Item 11. Executive Compensation
The information required to be disclosed by this item is incorporated herein by reference to our 2019 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
A description of our equity compensation plans approved by our stockholders is included in Note 12 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. The following table provides details of our equity compensation plans at December 31, 2018 :
Plan Category
Number of 
Securities to be 
Issued upon 
Exercise of Outstanding 
Options, Warrants and Rights
(a)
 
Weighted Average Exercise Price of Outstanding Options,
Warrants and Rights
(b) (1)
 
Number of Securities
Remaining Available for
Future Issuance Under Equity
Compensation Plans (Excluding Securities Reflected
in Column (a))
(c)
Equity compensation plans approved by security holders
8,138,060

 
$
28.24

 
1,721,538

Equity compensation plans not approved by security holders
—

 
 
 
—

Total
8,138,060

 
$
—

 
1,721,538

 
(1)  
The weighted average exercise price is calculated based solely on the exercise prices of the outstanding options and does not reflect the shares that will be issued upon the vesting of outstanding awards of RSUs which have no exercise price.
All other information required to be disclosed by this item is incorporated herein by reference to our 2019 Proxy Statement.
Item 13.     Certain Relationships and Related Transactions, and Director Independence
The information required to be disclosed by this item is incorporated herein by reference to our 2019 Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required to be disclosed by this item is incorporated herein by reference to our 2019 Proxy Statement.

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PART IV
 
Item 15.         Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this report:
 

1.
Consolidated financial statements: All consolidated financial statements as set forth under Part II, Item 8 of this report.
2.
Supplementary Financial Statement Schedules: Schedule II — Valuation and Qualifying Accounts
Other schedules have not been included because they are not applicable or because the information is included elsewhere in this report.
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS  
(Dollars in thousands)
Description
Balance at
Beginning
of Period
 
Charged to
Costs and
Expenses
 
Charged to
Other
Accounts
 
Deductions
 
Balance at
End of
Period
Allowance for doubtful accounts:
 
 
 
 
 
 
 
 
 
Year ended December 31, 2018
$
729

 
$
1,189

 
$
—

 
$
(36
)
 
$
1,882

Year ended December 31, 2017
443

 
592

 
—

 
(306
)
 
729

Year ended December 31, 2016
322

 
205

 
—

 
(84
)
 
443

3. Exhibits:
Exhibit
Number
 
Description
3.1
 
3.2**
 
4.1
 
10.1*
 
10.2*
 
10.3*
 
10.4*
 
10.5*
 
10.6*
 


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Exhibit
Number
 
Description
10.7*
 
10.8*
 
10.9*
 
10.10*
 
10.11*
 
10.12*
 
10.13*
 
10.14*
 
10.15*
 
10.16**^
 
10.17
 
10.18*
 
10.19*
 
21.1**
 
23.1**
 
24.1**
 
31.1**
 
31.2**
 
32***
 
101.INS**
 
XBRL Instance Document
101.SCH**
 
XBRL Taxonomy Extension Schema Document
101.CAL**
 
XBRL Taxonomy Calculation Linkbase Document
101.LAB**
 
XBRL Taxonomy Label Linkbase Document
101.PRE**
 
XBRL Taxonomy Presentation Linkbase Document
 
*    Management contract or compensatory plan or arrangement
**    Filed herewith
***    Furnished herewith
^
Confidential treatment was requested with respect to omitted portions of this Exhibit, which portions have been filed separately with the U.S. Securities and Exchange Commission.
Item 16.         Form 10-K Summary

Not applicable.


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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
AXON ENTERPRISE, INC.
 
 
 
 
 
 
 
 
Date:
February 27, 2019
 
 
 
 
 
By:
 
/s/ PATRICK W. SMITH
 
 
 
 
Chief Executive Officer, Director
 
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
February 27, 2019
By:
 
/s/ JAWAD A. AHSAN
 
 
 
 
Chief Financial Officer
 
 
 
 
(Principal Financial and Accounting Officer)

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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS , that each person whose signature appears below constitutes and appoints Patrick W. Smith his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
 
 
 
 
Signature
  
Title
 
Date
 
 
 
 
 
Chief Executive Officer, Director
 
 
/s/ PATRICK W. SMITH
 
(Principal Executive Officer)
 
February 27, 2019
Patrick W. Smith
 
 
 
 
 
 
 
 
 
 
 
Chief Financial Officer
 
 
/s/ JAWAD A. AHSAN
 
(Principal Financial and Accounting Officer)
 
February 27, 2019
Jawad A. Ahsan
 
 
 
 
 
 
 
 
 
/s/ MICHAEL GARNREITER
  
Director
 
February 27, 2019
Michael Garnreiter
  
 
 
 
 
 
 
 
 
/s/ HADI PARTOVI
  
Director
 
February 27, 2019
Hadi Partovi
  
 
 
 
 
 
 
/s/ MARK W. KROLL
  
Director
 
February 27, 2019
Mark W. Kroll
  
 
 
 
 
 
 
/s/ RICHARD H. CARMONA
  
Director
 
February 27, 2019
Richard H. Carmona
  
 
 
 
 
 
 
/s/ BRET S. TAYLOR
  
Director
 
February 27, 2019
Bret S. Taylor
  
 
 
 
 
 
 
/s/ MATTHEW R. MCBRADY
 
Director
 
February 27, 2019
Matthew R. McBrady
  
 
 
 
 
 
 
 
 
/s/ JULIE A. CULLIVAN
 
Director
 
February 27, 2019
Julie A. Cullivan
  
 
 
 


101
BYLAWS OF AXON ENTERPRISE, INC.,
a Delaware corporation












Adopted January 6, 2001
Amended April 10, 2001
Amended January 17, 2016
Amended April 5, 2017
Amended December 14, 2018



AMENDMENTS



Section Number/file
Date Approved
2.03-a. Business to be Transacted
April 10, 2001 (by Directors)
April 20, 2001 (by Stockholders)
2.04. Special Meetings
April 10, 2001 (by Directors)
April 20, 2001 (by Stockholders)
3.03. Classes and Terms
April 10, 2001 (by Directors)
April 20, 2001 (by Stockholders)
3.04. Vacancies
April 10, 2001 (by Directors)
April 20, 2001 (by Stockholders)
3.10. Resignation and Removal
April 10, 2001 (by Directors)
April 20, 2001 (by Stockholders)
Article X: Amendments
April 10, 2001 (by Directors)
April 20, 2001 (by Stockholders)
2.12. Action in Writing
January 17, 2016 (by Directors)
1.01. Registered Office; corporate name change
April 5, 2017 (by Directors)
2.08. Quorum; Adjournment
2.09. Vote Required
December 14, 2018 (by Directors)
 
 
 
 


TABLE OF CONTENTS
 
 
 
ARTICLE I: OFFICES
1
 
Section 1.01 Registered Office
1
 
Section 1.02. Other Offices
1
 
 
 
ARTICLE II: MEETINGS OF STOCKHOLDERS
1
 
Section 2.01. Place of Meetings
1
 
Section 2.02. Time of Meetings
1
 
Section 2.03. Annual Meetings
1
 
Section 2.04. Special Meetings
2
 
Section 2.05. Purpose of Special Meeting
2
 
Section 2.06. Notice of Meetings
2
 
Section 2.07. Waiver of Notice
3
 
Section 2.08. Quorum; Adjournment.
3
 
Section 2.09. Vote Required
3
 
Section 2.10. Voting Rights
3
 
Section 2.11. Proxies
3
 
Section 2.12. Action in Writing
4
 
Section 2.13. Closing of Books; Record Date
7
 
 
 
ARTICLE III: DIRECTORS
7
 
Section 3.01. General Powers
7
 
Section 3.02. Number and Qualification
7
 
Section 3.03. Classes and Terms
7
 
Section 3.04. Vacancies
8
 
Section 3.05. Meetings
8
 
Section 3.06. Committees
10
 
Section 3.07. Telephone Conference Meetings
10
 
Section 3.08. Compensation
10
 
Section 3.09. Limitation of Director Liability
10
 
Section 3.10. Resignation and Removal.
11
 
 
 
ARTICLE IV: OFFICERS
11
 
Section 4.01. Selection: Qualifications
11
 
Section 4.02. Salaries
11
 
Section 4.03. Term of Office
11
 
Section 4.04. Chairman of the Board
11
 
Section 4.05. Chief Executive Officer
12
 
Section 4.06. President
12
 
Section 4.07. Vice-Presidents
12
 
Section 4.08. Secretary and Assistant Secretary
12
 
Section 4.09. Chief Financial Officer
12


 
 
 
ARTICLE V. CERTIFICATES FOR SHARES
13
 
Section 5.01. Issuance of Shares and Fractional Shares
13
 
Section 5.02. Form of Certificate
13
 
Section 5.03. Facsimile Signatures
13
 
Section 5.04. Lost, Stolen, or Destroyed Certificates
14
 
Section 5.05. Transfers of Stock
14
 
Section 5.06. Uncertificated Shares
14
 
Section 5.07. Closing of Transfer Books: Record Date
14
 
Section 5.08. Registered Stockholders
15
 
Section 5.09. Stock Options and Agreements
15
 
 
 
ARTICLE VI: DIVIDENDS
15
 
Section 6.01. Method of Payment.
15
 
Section 6.02. Closing of Books: Record Date
15
 
Section 6.03. Reserves
15
 
 
 
ARTICLE VII: CHECKS
16
 
 
 
ARTICLE VIII: CORPORATE SEAL
16
 
 
 
ARTICLE IX: FISCAL YEAR
16
 
 
 
ARTICLE X: AMENDMENTS
16
 
 
 
ARTICLE XI: BOOKS AND RECORDS
16
 
Section 11.01. Books and Records
16
 
Section 11.02. Computerized Records
16
 
Section 11.03. Examination and Copying by Stockholders
17
 
 
 
ARTICLE XII: LOANS AND ADVANCES
17
 
Section 12.01. Loans, Guarantees, and Suretyship
17
 
Section 12.02. Advances to Officers, Directors, and Employees
17
 
 
 
ARTICLE XIII: INDEMNIFICATION
17
 
Section 13.01. Directors and Officers
17
 
Section 13.02. Employees and Other Agents
18
 
Section 13.03. Good Faith
18
 
Section 13.04. Advances of Expenses
19
 
Section 13.05. Enforcement
19
 
Section 13.06. Non-Exclusivity of Rights
20
 
Section 13.07. Survival of Rights
20
 
Section 13.08. Insurance
20


 
Section 13.09. Amendments
20
 
Section 13.10. Savings Clause
20
 
Section 13.11. Certain Definitions
20
 
Section 13.12. Notification and Defense of Claim
21
 
Section 13.13. Exclusions
22
 
Section 13.14. Subrogation
23
 
 
 
ARTICLE XIV: DEFINITIONS AND USAGE
23






BYLAWS OF AXON ENTERPRISE, INC.

ARTICLE I: OFFICES

Section 1.01 Registered Office.

The registered office of Axon Enterprise, Inc. (the “Corporation”) in the State of Delaware shall be that set forth in the Certificate of Incorporation or in the most recent amendment of the Certificate of Incorporation or in a certificate prepared by the Board of Directors and filed with the Secretary of State of Delaware changing the registered office.

Section 1.02. Other Offices.

The Corporation may also have offices and places of business at such other places of business both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.

ARTICLE II: MEETINGS OF STOCKHOLDERS

Section 2.01. Place of Meetings.

All meetings of the stockholders of the Corporation shall be held at its registered office or at such other place within or without the State of Delaware as shall be stated by the Board of Directors in the notice of the meeting. In the absence of designation otherwise, meetings shall be held at the principal executive offices of the Corporation in the State of Arizona.

Section 2.02. Time of Meetings.

The Board of Directors shall designate the time and day for each meeting. In the absence of such designation, all meetings of the stockholders shall be held at 1:00 p.m., Mountain Time.

Section 2.03. Annual Meetings.

Section 2.03-a. Business to be Transacted . Except as otherwise required by law or regulation, no business proposed by a stockholder to be considered at an annual meeting of the stockholders (including the nomination of any person to be elected as a director of the Corporation) shall be considered by the stockholders at that meeting unless, no later than sixty (60) days before the annual meeting of stockholders or (if later) ten (10) days after the first public notice of that meeting is sent to stockholders, the Corporation receives from the stockholder proposing that business a written notice that sets forth: (1) the nature of the proposed business with reasonable particularity, including the exact text of any proposal to be presented for adoption, and the reasons for conducting that business at the annual meeting; (2) with respect to each such stockholder, that stockholder's name and address (as they appear on the records of the Corporation), business address and telephone number, residence address and telephone number, and the number of shares of each class of stock of the Corporation beneficially owned by that stockholder; (3) any interest of the stockholder in the proposed business; (4) the name or names of each person nominated by the stockholder to be elected or re-elected as a director, if any; and (5) with respect to each nominee, that nominee's name, business address and telephone number, and residence address and telephone number, the number of shares, if any, of each class of stock of the Corporation owned directly and beneficially by that nominee, and all information relating to that nominee that is required to be disclosed in solicitations of proxies for elections of directors, or is other required,

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pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, or any provision of law subsequently replacing Regulation 14A, together with a duly acknowledged letter signed by the nominee stating his or her acceptance of the nomination by that stockholder, stating his or her intention to serve as a director if elected, and consenting to being named as a nominee for director in any proxy statement relating to such election. The person presiding at the annual meeting shall determine whether business (including the nomination of any person as a director) has been properly brought before the meeting and, if the facts so warrant, shall not permit any business (or voting with respect to any particular nominee) to be transacted that has not been properly brought before the meeting. Notwithstanding any other provision of the Certificate of Incorporation or any provision of law that might otherwise permit a lesser or no vote, and in addition to any affirmative vote of the holders of any particular class or series of the capital stock of the Corporation required by law or by the Certificate of Incorporation, the affirmative vote of the holders of not less than 66.67% of the voting power of the then outstanding shares of capital stock entitled to vote thereon (the "Voting Stock"), voting together as a single class, shall be required to amend or repeal, or to adopt a provision inconsistent with, this Section 2.03-a.

Section 2.03-b. Date and Time . Annual meetings of stockholders shall be held at such date and time as shall be designated by the Board of Directors and stated in the notice of the meeting.

Section 2.03-c. Election of Directors . At each annual meeting of stockholders beginning in 2001, the stockholders, voting as provided in the Certificate of Incorporation or in these Bylaws, shall elect directors to succeed directors whose terms are expiring, each such director to hold office until the third annual meeting of stockholders after his or her election and until his or her successor is elected and qualified or until his or her earlier death, resignation or removal.

Section 2.04. Special Meetings.

Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may only be called and proposed by: (i) the Chairman of the Board; (ii)the Chief Executive Officer; (iii) the holder(s) of a majority of the voting power of the Voting Stock; or (iv) the Board of Directors pursuant to a resolution adopted by a majority of the then-authorized number of directors. Such request shall state the purpose or purposes of the proposed meeting.

Section 2.05. Purpose of Special Meeting.

Business transacted at any special meeting of the stockholders shall be limited to the matters stated in the notice of such meeting, or other matters necessarily incidental therefore.

Section 2.06. Notice of Meetings.

Notice of stockholder meetings shall be in writing. Such notice shall state the place, date and time of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. A copy of such notice shall be either delivered personally or mailed, postage prepaid, to each stockholder of record entitled to vote at such meeting pursuant to Section 2.13 hereof not less than ten (10) nor more than sixty (60) days before such meeting. If mailed, it shall be directed to each stockholder at his or her address as it appears upon the records of the Corporation, and upon such mailing of any such notice, the service thereof shall be complete, and the time of the notice shall begin to run from the date that such notice is deposited in the mail for transmission to such stockholder. Personal delivery of any such notice to a

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corporation, an association, or a partnership shall be accomplished by personal delivery of such notice to any officer of a corporation or an association or to any member of a partnership.

Section 2.07. Waiver of Notice.

Notice of any meeting of the stockholders may be waived before, at, or after such meeting in a writing signed by the stockholder or representative thereof entitled to vote the shares so represented. Such waiver shall be filed with the Secretary or entered upon the records of the meeting.

Section 2.08. Quorum; Adjournment.

The holders of a majority of the voting power of all shares entitled to vote, present in person or represented by proxy, shall constitute a quorum for the transaction of all business at meetings of the stockholders, except as may be otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the original meeting in accordance with the notice thereof. If a quorum is present when a duly called or held meeting is convened, the stockholders present in person or represented by proxy may continue to transact business until adjournment notwithstanding the withdrawal of enough stockholders originally present in person or by proxy to leave less than a quorum.

Section 2.09. Vote Required.

When a quorum is present or represented at any meeting of stockholders, any matter before any such meeting (other than an election of a director or directors) shall be decided by a majority of the votes properly cast for and against such matter, except where a larger vote is required by law, by the Certificate of Incorporation or by these Bylaws. Any election of directors by stockholders shall be determined by a plurality of the votes properly cast on the election of directors.

Section 2.10. Voting Rights.

Except as may be otherwise required by statute or the Certificate of Incorporation or these Bylaws, every stockholder of record of the Corporation shall be entitled at each meeting of the stockholders to one vote for each share of stock standing in his or her name on the books of the Corporation.

Section 2.11. Proxies.

At any meeting of the stockholders, any stockholder may be represented and vote by a proxy or proxies appointed by an instrument in writing, signed by the stockholder, and filed with the Secretary at or before the meeting. In addition, a stockholder may cast or authorize the casting of a vote by a proxy by transmitting to the Corporation or the Corporation's duly authorized agent before the meeting, an appointment of a proxy by means of a telegram, cablegram, or any other form of electronic transmission, including telephonic transmission, whether or not accompanied by written instructions of the stockholder. The electronic transmission must set forth or be submitted with information from which it can be determined that the appointment was authorized by the stockholder. If it is determined that a telegram, cablegram, or

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other electronic transmission is valid, the inspectors of election or, if there are no inspectors, the other persons making that determination shall specify the information upon which they relied to make that determination.

An appointment of a proxy or proxies for shares held jointly by two or more stockholders is valid if signed by any one of them, unless and until the Corporation receives from any one of those stockholders written notice denying the authority of such other person or persons to appoint a proxy or proxies or appointing a different proxy or proxies, in which case no proxy shall be appointed unless the instrument shall otherwise provide. No proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period.

Subject to the above, any duly executed proxy shall continue in full force and effect and shall not be revoked unless written notice of its revocation or a duly executed proxy bearing a later date is filed with the Secretary of the Corporation. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable proxy.

Section 2.12. Action in Writing.

All actions required or permitted to be taken by the holders of common stock of the Corporation may be effected by the written consent of such holders pursuant to Section 228 of the General Corporation Law of the State of Delaware; provided that no such action may be effected except in accordance with the provisions of this Section 2.12 and applicable law. 

(a)
Request for Record Date. The record date for determining such stockholders entitled to consent to corporate action in writing without a meeting shall be as fixed by the Board of Directors or as otherwise established under this Section 2.12. Any holder of common stock of the Corporation seeking to have such stockholders authorize or take corporate action by written consent without a meeting shall, by written notice addressed to the Secretary of this Corporation, delivered to this Corporation and signed by holders of record at the time such notice is delivered holding shares representing in the aggregate at least twenty percent (20%) of the outstanding shares of common stock of the Corporation request that a record date be fixed for such purpose. The written notice must contain the information set forth in paragraph (b) of this Section 2.12. Following delivery of the notice, the Board of Directors shall, by the later of (i) 20 days after delivery of a valid request to set a record date and (ii) 5 days after delivery of any information required by the Corporation to determine the validity of the request for a record date or to determine whether the action to which the request relates may be effected by written consent under paragraph (c) of this Section 2.12, determine the validity of the request and whether the request relates to an action that may be taken by written consent and, if appropriate, adopt a resolution fixing the record date for such purpose. The record date for such purpose shall be no more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors and shall not precede the date such resolution is adopted. If a notice complying with the second and third sentences of this paragraph (a) has been duly delivered to the Secretary of the Corporation but no record date has been fixed by the Board of Directors by the date required by the preceding sentence, the record date shall be the first date on which a signed written consent relating to the action taken or proposed to be taken by written consent is delivered to this Corporation in the matter described in paragraph (f) of this Section 2.12; provided that, if prior action by the Board of Directors is required under the provisions of Delaware law, the record date shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action.


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(b)
Notice Requirements. Any notice required by paragraph (a) of this Section 2.12 must be delivered by the holders of record of at least twenty percent (20%) of the outstanding shares of common stock of the Corporation (with evidence of ownership attached to the notice), must describe the action proposed to be taken by written consent of stockholders and must contain (i) such information and representations, to the extent applicable, then required by this Corporation’s Bylaws as though such stockholder was intending to make a nomination of persons for election to the Board of Directors or to bring any other matter before a meeting of stockholders, as applicable, and (ii) the text of the proposed action to be taken (including the text of any resolutions to be adopted by written consent of stockholders and the language of any proposed amendment to the Bylaws of this Corporation). This Corporation may require the stockholder(s) submitting such notice to furnish such other information as may be requested by this Corporation to determine whether the request relates to an action that may be effected by written consent under paragraph (c) of this Section2.12. In connection with an action or actions proposed to be taken by written consent in accordance with this Section 2.12, the stockholders seeking such action or actions shall further update and supplement the information previously provided to this Corporation in connection therewith, if necessary, as required by Article II of this Corporation’s Bylaws.

(c)
Actions Which May Be Taken by Written Consent. Stockholders are not entitled to act by written consent if (i) the action relates to an item of business that is not a proper subject for stockholder action under applicable law, (ii) the request for a record date for such action is delivered to the Corporation during the period commencing 90 days prior to the first anniversary of the date of the notice of annual meeting for the immediately preceding annual meeting and ending on the earlier of (x) the date of the next annual meeting and (y) 30 calendar days after the first anniversary of the date of the immediately preceding annual meeting, (iii) an identical or substantially similar item (as determined in good faith by the Board of Directors, a “Similar Item”), other than the election or removal of directors, was presented at a meeting of stockholders held not more than 12 months before the request for a record date for such action is delivered to the Corporation, (iv) a Similar Item consisting of the election or removal of directors was presented at a meeting of stockholders held not more than 90 days before the request for a record date was delivered to the Corporation (and, for purposes of this clause, the election or removal of directors shall be deemed a “Similar Item” with respect to all items of business involving the election or removal of directors), (v) a Similar Item is included in the Corporation’s notice as an item of business to be brought before a stockholders meeting that has been called by the time the request for a record date is delivered to the Corporation but not yet held, (vi) such record date request was made in a manner that involved a violation of Regulation 14A under the Securities Exchange Act of 1934 or other applicable law, or (vii) sufficient written consents are not dated and delivered to the Corporation prior to the first anniversary of the date of the notice of annual meeting for the immediately preceding annual meeting.

(d)
Manner of Consent Solicitation. Holders of common stock of the Corporation may take action by written consent only if consents are solicited by the stockholder or group of stockholders seeking to take action by written consent of stockholders from all holders of capital stock of this Corporation entitled to vote on the matter and in accordance with applicable law.

(e)
Date of Consent. Every written consent purporting to take or authorize the taking of corporate action (each such written consent is referred to in this paragraph and in paragraph (f) as a “Consent”) must bear the date of signature of each stockholder who signs the Consent, and no Consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated

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Consent delivered in the manner required by paragraph (f) of this Section 2.12, consents signed by a sufficient number of stockholders to take such action are so delivered to this Corporation.

(f)
Delivery of Consents. No Consents may be dated or delivered to this Corporation or its registered office in the State of Delaware until 60 days after the delivery of a valid request to set a record date. Consents must be delivered to this Corporation by delivery to its registered office in the State of Delaware or its principal place of business. Delivery must be made by hand or by certified or registered mail, return receipt requested. In the event of the delivery to this Corporation of Consents, the Secretary of this Corporation, or such other officer of this Corporation as the Board of Directors may designate, shall provide for the safe-keeping of such Consents and any related revocations and shall promptly conduct such ministerial review of the sufficiency of all Consents and any related revocations and of the validity of the action to be taken by written consent as the Secretary of this Corporation, or such other officer of this Corporation as the Board of Directors may designate, as the case may be, deems necessary or appropriate, including, without limitation, whether the stockholders of a number of shares having the requisite voting power to authorize or take the action specified in Consents have given consent; provided, however, that if the action to which the Consents relate is the election or removal of one or more members of the Board of Directors, the Secretary of this Corporation, or such other officer of this Corporation as the Board of Directors may designate, as the case may be, shall promptly designate two persons, who shall not be members of the Board of Directors, to serve as inspectors (“Inspectors”) with respect to such Consent, and such Inspectors shall discharge the functions of the Secretary of this Corporation, or such other officer of this Corporation as the Board of Directors may designate, as the case may be, under this Section 2.12. If after such investigation the Secretary of this Corporation, such other officer of this Corporation as the Board of Directors may designate or the Inspectors, as the case may be, shall determine that the action purported to have been taken is duly authorized by the Consents, that fact shall be certified on the records of this Corporation kept for the purpose of recording the proceedings of meetings of stockholders and the Consents shall be filed in such records. In conducting the investigation required by this section, the Secretary of this Corporation, such other officer of this Corporation as the Board of Directors may designate or the Inspectors, as the case may be, may, at the expense of this Corporation, retain special legal counsel and any other necessary or appropriate professional advisors as such person or persons may deem necessary or appropriate and, to the fullest extent permitted by law, shall be fully protected in relying in good faith upon the opinion of such counsel or advisors.

(g)
Effectiveness of Consent. Notwithstanding anything in these Bylaws to the contrary, no action may be taken by written consent of the holders of common stock of the Corporation except in accordance with this Section 2.12.

If the Board of Directors shall determine that any request to fix a record date or to take stockholder action by written consent was not properly made in accordance with, or relates to an action that may not be effected by written consent pursuant to, this Section 2.12, or the stockholder or stockholders seeking to take such action do not otherwise comply with this Section 2.12, then the Board of Directors shall not be required to fix a record date and any such purported action by written consent shall be null and void to the fullest extent permitted by applicable law. No action by written consent without a meeting shall be effective until such date as the Secretary of this Corporation, such other officer of this Corporation as the Board of Directors may designate, or the Inspectors, as applicable, certify to this Corporation that the Consents delivered to this Corporation in accordance with paragraph (f) of this Section 2.12, represent at least the minimum number of votes that would be necessary to take the corporate action at a meeting at which all shares entitled to vote thereon were

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present and voted, in accordance with Delaware law and this Corporation’s Certificate of Incorporation and Bylaws.

(h)
Challenge to Validity of Consent. Nothing contained in this Section 2.12 shall in any way be construed to suggest or imply that the Board of Directors of this Corporation or any stockholder shall not be entitled to contest the validity of any Consent or related revocations, whether before or after such certification by the Secretary of this Corporation, such other officer of this Corporation as the Board of Directors may designate or the Inspectors, as the case may be, or to prosecute or defend any litigation with respect thereto.

(i)
Board-solicited Stockholder Action by Written Consent. Notwithstanding anything to the contrary set forth above, (x) none of the foregoing provisions of this Section 2.12 shall apply to any solicitation of stockholder action by written consent by or at the direction of the Board of Directors and (y) the Board of Directors shall be entitled to solicit stockholder action by written consent in accordance with applicable law.

Section 2.13. Closing of Books; Record Date.

The Board of Directors may fix, or authorize an officer to fix, a date, not more than sixty (60) nor less than ten (10) days preceding the date of any meeting of the stockholders of the Corporation, as a record date for the determination of the stockholders of record on the date so fixed or their legal representatives shall be entitled to notice of and to vote at such meeting, notwithstanding any transfer of shares on the books of the Corporation against the transfer of shares during the whole or any part of such period.

ARTICLE III: DIRECTORS

Section 3.01. General Powers.

The business of the Corporation shall be managed by its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are by statute or by the Certificate of Incorporation or by these Bylaws permitted, directed or required to be exercised or done by the Board of Directors.

Section 3.02. Number and Qualification.

The number of directors that shall constitute the whole Board of Directors shall from time to time be fixed exclusively by the Board of Directors by a resolution adopted by a majority of the whole Board of Directors serving at the time of that vote. In no event shall the number of directors that constitute the whole Board of Directors be fewer than three (3), nor greater than nine (9). No decrease in the number of directors shall have the effect of shortening the term of any incumbent director. Directors of the Corporation need not be elected by written ballot. Directors need not be stockholders.

Section 3.03. Classes and Terms.

The Board of Directors of the Corporation shall be divided into three classes designated Class A, Class B, and Class C, respectively, all as nearly equal in number as possible, with each director then in office receiving the classification that at least a majority of the Board of Directors designates. The initial term of office of directors of Class A shall expire at the annual meeting of stockholders of the Corporation in 2001,

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of Class B shall expire at the annual meeting of stockholders of the Corporation in 2002, and of Class C shall expire at the annual meeting of stockholders of the Corporation in 2003, and in all cases a director shall serve until the director's successor is elected and qualified or until his earlier death, resignation or removal. At each annual meeting of stockholders beginning with the annual meeting of stockholders in 2001, each director elected to succeed a director whose term is then expiring shall hold office until the third annual meeting of stockholders after his or her election and until his or her successor is elected and qualified or until his or her earlier death, resignation or removal. If the number of directors that constitutes the whole Board of Directors is changed as permitted by the Certificate of incorporation or these Bylaws, the majority of the whole Board of Directors that adopts the change shall also fix and determine the number of directors comprising each class; provided, however, that any increase or decrease in the number of directors shall be apportioned among the classes as equally as possible. Notwithstanding any provision of the Certificate of Incorporation or any provision of law that might otherwise permit a lesser or no vote, and in addition to any affirmative vote of the holders of any particular class or series of the capital stock of the Corporation required by law or by the Certificate of Incorporation, the affirmative vote of 66.67% of the Voting Stock, voting together as a single class, shall be required to amend or repeal, or to adopt any provision inconsistent with, this Section 3.03.

Section 3.04. Vacancies.

Vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office, or other cause, and newly-created directorships resulting from any increase in the authorized number of directors, may be filled by no less than a majority vote of the remaining directors then in office, though less than a quorum, who are designated to represent the same class or classes of stockholders that the vacant position, when filled, is to represent or by the sole remaining director (but not by the stockholders except as required by law); provided, however, that, with respect to any directorship to be filled by the Board of Directors by reason of an increase in the number of directors: (a) such directorship shall be for a term of office continuing only until the next election of one or more directors by the stockholders; and (b) the Board of Directors may not fill more than two such directorships during the period between any two successive annual meetings of stockholders. Each director chosen in accordance with this provision shall receive the classification of the vacant directorship to which he or she has been appointed or, if it is a newly-created directorship, shall receive the classification that at least a majority of the Board of Directors designates and shall hold office until the first meeting of stockholders held after his or her election for the purpose of electing directors of that classification and until his or her successor is elected and qualified or until his or her earlier death, resignation, or removal from office. Notwithstanding any provision of the Certificate of Incorporation or any provision of law that might otherwise permit a lesser or no vote, and in addition to any affirmative vote of the holders of any particular class or series of the capital stock of the Corporation required by law or by the Certificate of Incorporation, the affirmative vote of 66.67% of the Voting Stock, voting together as a single class, shall be required to amend or repeal, or to adopt any provision inconsistent with, this Section 3.04.

Section 3.05. Meetings.

Section 3.05-a. Place of Meetings . The Board of Directors may hold meetings, both regular and special, either within or without the State of Delaware.

Section 3.05-b. Regular Meetings . As soon as practicable after each regular election of directors, the Board of Directors shall meet at the registered office of the Corporation, or at such other place within or without the State of Delaware as may be designated by the Board of Directors, for the purpose of electing

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the officers of the Corporation and for the transaction of such other business as shall come before the meeting. Other regular meetings of the Board of Directors may be held without notice at such time and place within and without the State of Delaware as shall from time to time be determined by resolution of the Board of Directors.

Section 3.05-c. Special Meetings . Special meetings of the Board of Directors may be called by the Chairman, Chief Executive Officer, or a majority of the then directors, and shall be held at such time and place as shall be designated in the notice thereof.

Section 3.05-d. Notice . Notice of a special meeting shall be given to each Director at least twenty-four (24) hours before the time of the meeting. Said notice shall be in writing and state the place, date and hour of the meeting and the purpose or purposes for which the meeting is called. Whenever any provision of law, the Certificate of Incorporation, or the Bylaws require notice to be given, any director may, in writing, either before or after the meeting, waive notice thereof. Without notice, any director, by his or her attendance at and participation in the action taken at the meeting, shall be deemed to have waived notice thereof.

Section 3.05-e. Quorum: Voting Requirements: Adjournment . A majority of the Board of Directors then in office shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation or these Bylaws.

If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting to another time or place, and no notice as to such adjourned meeting need be given other than by announcement at the meeting at which such adjournment is taken. If a quorum is present at the call of a meeting, the directors may continue to transact business until adjournment notwithstanding the withdrawal of enough directors to leave less than a quorum.

Section 3.05-f. Organization of Meetings . At all meetings of the Board of Directors, the Chairman of the Board, or in his absence, the Chief Executive Officer, or in his absence, any director appointed by the Chief Executive Officer, shall preside, and the Secretary, or in his absence, any person appointed by the Chairman, shall act as Secretary.

Section 3.05-g. Action in Writing . Except as may be otherwise required by statute or the Certificate of Incorporation, any action required or permitted to be taken at any meeting of the Board of Directors of the Corporation or of any committee thereof may be taken by written consent in lieu of a meeting, if all members of the Board or committee consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee.

Section 3.05-h. Absent Directors . A director may give advance written consent or opposition to a proposal to be acted on at a meeting of the Board of Directors. Such advance written consent or opposition shall be ineffective unless the writing is delivered to the Chief Executive Officer, Chairman or Secretary of the Corporation prior to the meeting at which such proposal is to be considered. If the director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but such consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected, such substantial similarity to be determined in the sole judgment of the presiding officer at the meeting.

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Section 3.06. Committees.

Section 3.06-a. Designation . The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee.

Section 3.06-b. Limitations on Authority. No committees of the Corporation shall have authority as to any of the following matters:

(a)
Approving or adopting, or recommending to the stockholders any action or matter expressly required by law to be submitted to stockholders for approval; or
(b)
Adopting, amending or repealing any bylaw of the Corporation.

Section 3.06-c. Minutes of Committee Meetings . Committees shall keep regular minutes of their proceedings and report the same to the Board of Directors when required.

Section 3.07. Telephone Conference Meetings.

Any Director or any member of a duly constituted committee of the Board of Directors may participate in any meeting of the Board of Directors or of any duly constituted committee thereof by means of a conference telephone or other comparable communication technique whereby all persons participating in such a meeting can hear and communicate with each other. For the purpose of establishing a quorum and taking any action at such a meeting, the members participating in such a meeting pursuant to this Section 3.07 shall be deemed present in person at such meeting

Section 3.08. Compensation.

Unless otherwise provided by the Board of Directors, directors shall be paid their expenses, if any, of attendance at each meeting of the Board of Directors or a committee thereof. Directors who are not employees of the Corporation shall be paid at least $500 for attendance at each meeting of the Board of Directors, or any committee thereof, unless a different sum is fixed by resolution of the Board of Directors. Directors may also receive other compensation, such as stock options or grants, for their service as directors or committee members as determined by the Board of Directors. Nothing herein contained shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor.

Section 3.09. Limitation of Director Liability.

A director shall not be liable to the Corporation or its stockholders for dividends illegally declared, distributions illegally made to stockholders, or any other actions taken in good faith reliance upon financial statements of the Corporation represented to the director to be correct by the Chief Executive Officer of the Corporation or the officer having charge of its books of account or certified by an independent or certified public accountant to fairly reflect the financial condition of the Corporation; nor shall the director be liable if in good faith in determining the amount available for dividends or distributions the Board values the assets in a manner allowable under applicable law.


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Section 3.10. Resignation and Removal.

A director may resign at any time by giving written notice to the Secretary or Assistant Secretary. Such resignation shall take effect on the date of the receipt of such notice or at such later date as specified therein. A director of any class of directors of the Corporation may be removed before the expiration date of that director's term of office only by an affirmative vote of the holders of 66.67% of the voting power of the Voting Stock, voting together as a single class. Notwithstanding any provision of the Certificate of Incorporation or any provision of law that might otherwise permit a lesser or no vote, and in addition to any affirmative vote of the holders of any particular class or series of the capital stock of the Corporation required by law or by the Certificate of Incorporation, the affirmative vote of 66.67% of the Voting Stock, voting together as a single class, shall be required to amend or repeal, or to adopt any provision inconsistent with, this Section 3.10.

ARTICLE IV: OFFICERS

Section 4.01. Selection: Qualifications.

Section 4.01-a. Election: Qualifications . The Board of Directors at its next meeting after each annual meeting of the stockholders shall choose a Chairman of the Board, a Chief Executive Officer, a Secretary, a Chief Financial Officer, and such other officers or agents as it deems necessary, none of whom need be members of the Board.

Section 4.01-b. Additional Officers . The Board of Directors may choose a President, additional Vice Presidents, Assistant Secretaries and Assistant Treasurers and such other officers and agents as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board.

Section 4.02. Salaries.

The salaries of all officers, and of the Chairman of the Corporation, shall be fixed by the Board of Directors on an annual basis.

Section 4.03. Term of Office.

The officers of the Corporation shall hold office until their successors are chosen and qualified. Any officer elected or appointed by the Board of Directors may be removed at any time with or without cause by the affirmative vote of a majority of the Board of Directors. Any officer may resign at any time by giving written notice to the Chief Executive Officer or the Secretary of the Corporation. Any vacancy occurring in any office of the Corporation by death, resignation, removal, or otherwise shall be filled by the Board of Directors.

Section 4.04. Chairman of the Board.

The Chairman of the Board of Directors shall preside at all meetings of the Board of Directors and of the stockholders and shall perform such other duties as he or she may be directed to perform by the Board of Directors.


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Section 4.05. Chief Executive Officer.

The Chief Executive Officer of the Corporation shall have general active management of the business of the Corporation. Unless the Board has elected a Chairman of the Board of Directors, the Chief Executive Officer shall preside at meetings of the stockholders of the Corporation and at meetings of the Board of Directors. The Chief Executive Officer may execute and deliver in the name of the Corporation any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the Corporation, except in cases in which the authority to sign and deliver is required by law to be exercised by another person or is expressly delegated by the Board to some other officer or agent of the Corporation; may delegate the authority to execute and deliver documents to other officers of the Corporation; shall maintain records of and, whenever necessary, certify any proceedings of the stockholders and the Board; shall perform such other duties as may from time to time be prescribed by the Board; and, in general, shall perform all duties usually incident to the office of the Chief Executive Officer.

Section 4.06. President.

The President of the Corporation shall have general active management of the business of the Corporation in the absence or disability of the Chief Executive Officer. He shall also generally assist the Chief Executive Officer and exercise such other powers and perform such other duties as are delegated to him by the Chief Executive Officer or Chairman, or as the Board of Directors shall prescribe.

Section 4.07. Vice-Presidents.

Unless otherwise determined by the Board of Directors, the Vice Presidents, if any, shall, in the absence or disability of the President, perform the duties and exercise the powers of the President. They shall also generally assist the Chief Executive Officer and the President and exercise such other powers and perform such other duties as are delegated to them by the Chief Executive Officer or the President or as the Board of Directors shall prescribe.

Section 4.08. Secretary and Assistant Secretary.

The Secretary or Assistant Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall record all the proceedings of the meetings of the stockholders and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required, and shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Chairman or the Board of Directors, under whose supervision he shall be.

The Assistant Secretary, or if there be more than one, the assistant secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the Secretary or in the event of inability or refusal to act by the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Chairman, or Board of Directors, may, from time to time, prescribe.

Section 4.09. Chief Financial Officer.

Section 4.09-a. Custody of Funds and Accounting . The Chief Financial Officer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements

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in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors.

Section 4.09-b. Disbursements and Reports . The Chief Financial Officer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Chief Executive Officer and the Board of Directors, at the regular meetings of the Board, or when the Board of Directors so requires, an account of all his transactions as Chief Financial Officer and of the financial condition of the Corporation.

Section 4.09-c. Bond . If required by the Board of Directors, the Chief Financial Officer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration, upon the expiration of his term of office or his resignation, retirement, or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation.

ARTICLE V. CERTIFICATES FOR SHARES

Section 5.01. Issuance of Shares and Fractional Shares.

The Board of Directors is authorized to issue shares and fractional shares of stock of the Corporation up to the full amount authorized by the Certificate of Incorporation in such amounts as may be determined by the Board of Directors and as permitted by law.

Section 5.02. Form of Certificate.

The shares of the Corporation shall be represented by certificates, provided that the Board of Directors of the Corporation may resolve that some or all of any or all classes or series of its stock will be uncertificated shares as provided in Section 5.06. Certificates shall be signed by the Chairman of the Board or the President and by the Secretary or Assistant Secretary of the Corporation, certifying the number of shares of capital stock owned by him in the Corporation. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the designations, preferences, and relative, participating, optional, or other special rights of the various classes of stock or series thereof and the qualifications, limitations, or restrictions of such rights, together with a statement of the authority of the Board of Directors to determine the relative rights and preferences of subsequent classes or series, shall be set forth in full on the face or back of the certificate which the Corporation shall issue to represent such stock, or, in lieu thereof, such certificate shall contain a statement that the stock is, or may be, subject to certain rights, preferences, or restrictions and that a statement of the same will be furnished without charge by the Corporation upon request by any stockholder.

Certificates representing the shares of the capital stock of the Corporation shall be in such form not inconsistent with law or the Certificate of Incorporation or these Bylaws as shall be determined by the Board of Directors.

Section 5.03. Facsimile Signatures.

Whenever any certificate is countersigned or otherwise authenticated by a transfer agent, transfer clerk, or registrar, then a facsimile of the signatures of the officers or agents of the Corporation may be printed or lithographed upon such certificate in lieu of the actual signatures. In case any officer or officers

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who shall have signed, or whose facsimile signature shall have been used on, any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation, or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be signed and delivered as though the person or persons who signed such certificate or certificates, or whose facsimile signature or signatures shall have been used thereon, had not ceased to be the officer or officers of the Corporation.

Section 5.04. Lost, Stolen, or Destroyed Certificates.

The Board of Directors may direct a certificate or certificates to be issued in place of a certificate or certificates previously issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates or uncertificated shares, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed.

Section 5.05. Transfers of Stock.

Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books; except that the Board of Directors may, by resolution duly adopted, establish conditions upon the transfer of shares of stock to be issued by the Corporation, and the purchasers of such shares shall be deemed to have accepted such conditions on transfer upon the receipt of the certificate representing such shares, provided that the restrictions shall be referred to on the certificates or the purchaser shall have otherwise been notified thereof.

Section 5.06. Uncertificated Shares.

Unless prohibited by the Certificate of Incorporation or these Bylaws, some or all of any or all classes and series of the Corporation's shares may be uncertificated shares. Upon receipt of proper transfer instructions from the registered owner of uncertificated shares, such uncertificated shares shall be canceled and issuance of new equivalent uncertificated shares or certificated shares shall be made to the person entitled thereto and the transaction shall be recorded upon the books of the Corporation. Within a reasonable time after the issuance or transfer of uncertificated shares, the Corporation shall send to the new stockholder the information required by Section 5.02 to be stated on certificates. If this Corporation becomes a publicly held corporation which adopts, in compliance with Section 17 of the Securities Exchange Act of 1934, a system of issuance, recordation, and transfer of its shares by electronic or other means not involving an issuance of certificates, this information is not required to be sent to new stockholders.

Section 5.07. Closing of Transfer Books: Record Date.

The Board of Directors or an officer of the Corporation authorized by the Board may close the stock transfer books of the Corporation for a period not exceeding sixty (60) days preceding the date of any meeting of stockholders as provided in Section 2.13 hereof or the date for payment of any dividend as provided in

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Section 6.02 hereof or the date for the allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect. In lieu of closing the stock transfer books as aforesaid, the Board of Directors or an officer of the Corporation authorized by the Board may fix, in advance, a date, not exceeding sixty (60) days preceding the date for payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, as a record date for the determination of the stockholders entitled to receive payment.

Section 5.08. Registered Stockholders.

The Corporation shall be entitled to recognize the exclusive right of the persons registered on its books as the owners of shares to receive dividends and to vote as such owners and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided in the laws of Delaware.

Section 5.09. Stock Options and Agreements.

In addition to any stock options, plans, or agreements into which the Corporation may enter, any stockholder of the Corporation may enter into an agreement giving any other stockholder or stockholders or any third party an option to purchase any of his stock in the Corporation, and such shares of stock shall thereupon be subject to such agreement and transferable only upon proof of compliance therewith; provided, however, that a copy of such agreement shall be filed with the Corporation and reference thereto placed upon the certificates representing said shares of stock.

ARTICLE VI: DIVIDENDS

Section 6.01. Method of Payment.

Dividends upon the capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation.

Section 6.02. Closing of Books: Record Date.

The Board of Directors or an officer of the Corporation authorized by the Board may fix a date not exceeding sixty (60) days preceding the date fixed for the payment of any dividend as the record date for the determination of the stockholders entitled to receive payment of the dividend and, in such case, only stockholders of record on the date so fixed shall be entitled to receive payment of such dividend notwithstanding any transfer of shares on the books of the Corporation after the record date. The Board of Directors or an officer of the Corporation authorized by the Board may close the books of the Corporation against the transfer of shares during the whole or any part of such period. If the Board of Directors or an officer of the Corporation authorized by the Board fails to fix such a record date, the record date shall be the thirtieth (30th) day preceding the date of such payment.

Section 6.03. Reserves.

Before payment of any dividend, there may be set aside out of the funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves for meeting contingencies, or for equalizing dividends, or for repairing or

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maintaining any property of the Corporation, or for such other purpose as the Board shall think conducive to the interest of the Corporation, and the Board may modify or abolish any such reserve in the manner in which it was created.

ARTICLE VII: CHECKS

All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate.

ARTICLE VIII: CORPORATE SEAL

The Corporation shall have no corporate seal.

ARTICLE IX: FISCAL YEAR

The fiscal year of the Corporation shall end on December 31 unless otherwise fixed by resolution of the Board of Directors.

ARTICLE X: AMENDMENTS

These Bylaws shall not be adopted, altered, amended or repealed except in accordance with the provisions of the Certificate of Incorporation and these Bylaws. Unless a different requirement is mandated by the Certificate of Incorporation or these Bylaws, adoption, alteration, amendment or repeal of these Bylaws requires the affirmative action of a majority of the directors then in office or the vote of the holders of not less than 66.67% of the Voting Stock, voting together as a single class, at an annual meeting of the stockholders or any special meeting of the stockholders.

ARTICLE XI: BOOKS AND RECORDS

Section 11.01. Books and Records.

The Board of Directors of the Corporation shall cause to be kept:

Section 11.01-a . A share register not more than one year old, giving the names and addresses of the stockholders, the number and classes held by each, and the dates on which the certificated or uncertificated shares were issued;

Section 11.01-b . Records of all proceedings of stockholders and directors; and

Section 11.01-c . Such other records and books of account as shall be necessary and appropriate to the conduct of the corporate business.

Section 11.02. Computerized Records.

The records maintained by the Corporation, including its share register, financial records, and minute books, may utilize any information storage technique, including, for example, computer memory or micro images, even though that makes them illegible visually, if the records can be converted, by machine and within a reasonable time, into a form that is legible visually and whose contents are assembled by related subject matter to permit convenient use by persons in the normal course of business.

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Section 11.03. Examination and Copying by Stockholders.

Every stockholder of record of the Corporation shall have a right to examine, in person or by agent or attorney, at any reasonable time or times, at the place or places where usually kept, and upon the showing of a proper purpose, the Corporation's stock ledger, a list of its stockholders and its other books and records, and to make copies or extracts therefrom.

ARTICLE XII: LOANS AND ADVANCES

Section 12.01. Loans, Guarantees, and Suretyship.

The Corporation may lend money to, guarantee an obligation of, become a surety for, or otherwise financially assist a person, if the transaction, or a class of transactions to which the transaction belongs, is approved by the affirmative vote of a majority of the directors present at a lawfully convened meeting and such action: (a) is in the usual and regular course of business of the Corporation; (b) is with, or for the benefit of, a related corporation, an organization with which the Corporation has the power to make donations; (c) is with, or for the benefit of, an officer or other employee of the Corporation or a subsidiary, including an officer or employee who is a director of the Corporation or a subsidiary, and may reasonably be expected, in the judgment of the Board of Directors, to benefit the Corporation; or (d) has been approved by the affirmative vote of the holders of seventy-five percent (75%) of the Voting Stock, voting together as a single class. The loan, guarantee, or other assistance may be with or without interest and may be unsecured or may be secured in any manner that a majority of the Board of Directors approves, including, without limitation, a pledge of or other security interest in shares of the Corporation.

Section 12.02. Advances to Officers, Directors, and Employees.

The Corporation may, without a vote of the directors, advance money to its directors, officers, or employees to cover expenses that can reasonably be anticipated to be incurred by them in the performance of their duties and for which they would be entitled to reimbursement in the absence of an advance.

ARTICLE XIII: INDEMNIFICATION

Section 13.01. Directors and Officers

Section 13.01-a. Indemnity in Third-Party Proceedings . The Corporation shall indemnify its directors and officers in accordance with the provisions of this Section 13.01- a if the director or officer was or is a party to, or is threatened to be made a party to, any proceeding (other than a proceeding by or in the right of the Corporation to procure a judgment in its favor), against all expenses, judgments, fines and amounts paid in settlement, actually and reasonably incurred by the director or officer in connection with such proceeding if the director or officer acted in good faith and in a manner the director or officer reasonably believed was in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, the director or officer, in addition, had no reasonable cause to believe that the director's or officer's conduct was unlawful; provided, however, that the director or officer shall not be entitled to indemnification under this Section 13.01-a: (1) in connection with any proceeding charging improper personal benefit to the director or officer in which the director or officer is adjudged liable on the basis that personal benefit was improperly received by the director or officer unless and only to the extent that the court conducting such proceeding or any other court of competent jurisdiction determines upon application that, despite the adjudication of

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liability, the director or officer is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, or (2) in connection with any proceeding (or part thereof) initiated by such person or any proceeding by such person against the Corporation or its directors, officers, employees or other agents unless: (A) such indemnification is expressly required to be made by law, (B) the proceeding was authorized by the Board of Directors, or (C) such indemnification is provided by the Corporation, in its sole discretion, pursuant to the powers vested in the Corporation under the Delaware General Corporation Law.

Section 13.01-b. Indemnity in Proceedings by or in the Right of the Corporation . The Corporation shall indemnify its directors and officers in accordance with the provisions of this Section 13.01-b if the director or officer was or is a party to, or is threatened to be made a party to, any proceeding by or in the right of the Corporation to procure a judgment in its favor, against all expenses actually and reasonably incurred by the director or officer in connection with the defense or settlement of such proceeding if the director or officer acted in good faith and in a manner the director or officer reasonably believed was in or not opposed to the best interests of the corporation; provided, however, that the director or officer shall not be entitled to indemnification under this Section 13.01-b: (1) in connection with any proceeding in which the director or officer has been adjudged liable to the Corporation unless and only to the extent that the court conducting such proceeding, or the Delaware Court of Chancery, determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the director or officer is fairly and reasonably entitled to indemnification for such expenses as such court shall deem proper, or (2) in connection with any proceeding (or part thereof) initiated by such person or any proceeding by such person against the Corporation or its directors, officers, employees or other agents unless (A) such indemnification is expressly required to be made by law, (B) the proceeding was authorized by the Board of Directors, or (A) such indemnification is provided by the Corporation, in its sole discretion, pursuant to the powers vested in the Corporation under the Delaware General Corporation Law.

Section 13.02. Employees and Other Agents

The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article XIII to directors and officers of the Corporation.

Section 13.03. Good Faith.

Section 13.03-a . For purposes of any determination under this Article XIII, a director or officer shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding to have had no reasonable cause to believe that his or her conduct was unlawful, if his or her action is based on information, opinions, reports and statements, including financial statements and other financial data, in each case prepared or presented by:

1.
one or more officers or employees of the Corporation whom the director or officer believed to be reliable and competent in the matters presented;
2.
counsel, independent accountants or other persons as to matters which the director or officer believed to be within such person's professional or expert competence; or
3.
with respect to a director, a committee of the Board of Directors upon which such director does not serve, as to matters within such committee's designated authority, which committee the director believes to merit confidence; so long as, in each case, the director or executive officer acts without knowledge that would cause such reliance to be unwarranted.

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Section 13.03-b . The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of  nolo contendere  or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal proceeding, that he had reasonable cause to believe that his or her conduct was unlawful.

Section 13.03-c . The provisions of this Section 13.03 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth by the Delaware General Corporation Law.

Section 13.04. Advances of Expenses

The Corporation shall pay the expenses incurred by its directors or officers in any proceeding (other than a proceeding brought for an accounting of profits made from the purchase and sale by the director or officer of securities of the corporation within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provision of any state statutory law or common law) in advance of the final disposition of the proceeding at the written request of the director or officer, if the director or officer: (a) furnishes the Corporation a written affirmation of the director's or officer's good faith belief that the director or officer is entitled to be indemnified under this Article XIII, and (b) furnishes the Corporation a written undertaking to repay the advance to the extent that it is ultimately determined that the director or officer is not entitled to be indemnified by the Corporation. Such undertaking shall be an unlimited general obligation of the director or officer but need not be secured. Advances pursuant to this Section 13.04 shall be made no later than 10 days after receipt by the Corporation of the affirmation and undertaking described in clauses (a) and (b) above, and shall be made without regard to the director's or officer's ability to repay the amount advanced and without regard to the director's or officer's ultimate entitlement to indemnification under this Article XIII. The Corporation may establish a trust, escrow account or other secured funding source for the payment of advances made and to be made pursuant to this Section 13.04 or of other liability incurred by the director or officer in connection with any proceeding.

Section 13.05. Enforcement

Without the necessity of entering into an express contract, all rights to indemnification and advances to directors and officers under this Article XIII shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the Corporation and the director or officer. Any director or officer may enforce any right to indemnification or advances under this Article XIII in any court of competent jurisdiction if: (a) the Corporation denies the claim for indemnification or advances, in whole or in part, or (b) the Corporation does not dispose of such claim within 45 days of request therefor. It shall be a defense to any such enforcement action (other than an action brought to enforce a claim for advancement of expenses pursuant to, and in compliance with, Section 13.01 of this Article XIII) that the director or officer is not entitled to indemnification under this Article XIII. However, except as provided in Section 13.12 of this Article XIII, the Corporation shall not assert any defense to an action brought to enforce a claim for advancement of expenses pursuant to Section 13.04 of this Article XIII if the director or officer has tendered to the Corporation the affirmation and undertaking required thereunder. The burden of proving by clear and convincing evidence that indemnification is not appropriate shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification is proper in the circumstances because the director or officer has met the applicable standard of conduct nor an actual determination by the

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Corporation (including its Board of Directors or independent legal counsel) that indemnification is improper because the director or officer has not met such applicable standard of conduct, shall be asserted as a defense to the action or create a presumption that the director or officer is not entitled to indemnification under this Article XIII or otherwise. The director's or officer's expenses incurred in connection with successfully establishing such person's right to indemnification or advances, in whole or in part, in any proceeding shall also be paid or reimbursed by the Corporation.

Section 13.06. Non-Exclusivity of Rights

The rights conferred on any person by this Article XIII shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding office. The Corporation is authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the Delaware General Corporation Law.

Section 13.07. Survival of Rights

The rights conferred on any person by this Article XIII shall continue as to a person who has ceased to be a director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

Section 13.08. Insurance

To the fullest extent permitted by the Delaware General Corporation Law, the Corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Article XIII.

Section 13.09. Amendments

Any repeal or modification of this Article XIII shall only be prospective and shall not affect the rights under this Article XIII in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any director, officer, employee or agent of the Corporation.

Section 13.10. Savings Clause

If this Article XIII or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director and officer to the full extent not prohibited by any applicable portion of this Article XIII that shall not have been invalidated, or by any other applicable law.

Section 13.11. Certain Definitions

For the purposes of this Article XIII, the following definitions shall apply:

Section 13.11-a . The term “proceeding” shall include any threatened, pending or completed action, suit or proceeding, whether brought in the right of the Corporation or otherwise, and whether of a civil, criminal, administrative or investigative nature, in which the director or officer may be or may have been

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involved as a party, witness or otherwise, by reason of the fact that the director or officer is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, whether or not serving in such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Article XIII.

Section 13.11-b . The term “expenses” includes, without limitation thereto, expenses of investigations, judicial or administrative proceedings or appeals, attorney, accountant and other professional fees and disbursements and any expenses of establishing a right to indemnification under this Article XIII, but shall not include amounts paid in settlement by the director or officer or the amount of judgments or fines against the director or officer.

Section 13.11-c . References to “other enterprise” include, without limitation, employee benefit plans; references to "fines" include, without limitation, any excise taxes assessed on a person with respect to any employee benefit plan; references to "serving at the request of the Corporation" include, without limitation, any service as a director, officer, employee or agent which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or its beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article XIII.

Section 13.11-d . References to “the Corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer or employee of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article XIII with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued.

Section 13.11-e . The meaning of the phrase “to the fullest extent permitted by law” shall include, but not be limited to: (i) to the fullest extent authorized or permitted by any amendments to or replacements of the Delaware General Corporation Law adopted after the date of this Article XIII that increase the extent to which a corporation may indemnify its directors and officers, and (ii) to the fullest extent permitted by the provision of the Delaware General Corporation Law that authorizes or contemplates additional indemnification by agreement, or the corresponding provision of any amendment to or replacement of the Delaware General Corporation Law.

Section 13.12. Notification and Defense of Claim

As a condition precedent to indemnification under this Article XIII, not later than 30 days after receipt by the director or officer of notice of the commencement of any proceeding the director or officer shall, if a claim in respect of the proceeding is to be made against the Corporation under this Article XIII, notify the Corporation in writing of the commencement of the proceeding. The failure to properly notify the Corporation shall not relieve the Corporation from any liability which it may have to the director or officer otherwise than under this Article XIII. With respect to any proceeding as to which the director or officer so notifies the Corporation of the commencement:

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Section 13.12-a . The Corporation shall be entitled to participate in the proceeding at its own expense.

Section 13.12-b . Except as otherwise provided in this Section 13.12, the Corporation may, at its option and jointly with any other indemnifying party similarly notified and electing to assume such defense, assume the defense of the proceeding, with legal counsel reasonably satisfactory to the director or officer. The director or officer shall have the right to use separate legal counsel in the proceeding, but the Corporation shall not be liable to the director or officer under this Article XIII for the fees and expenses of separate legal counsel incurred after notice from the Corporation of its assumption of the defense, unless (1) the director or officer reasonably concludes that there may be a conflict of interest between the Corporation and the director or officer in the conduct of the defense of the proceeding, or (2) the Corporation does not use legal counsel to assume the defense of such proceeding. The Corporation shall not be entitled to assume the defense of any proceeding brought by or on behalf of the Corporation or as to which the director or officer has made the conclusion provided for in (1) above.

Section 13.12-c . If two or more persons who may be entitled to indemnification from the Corporation, including the director or officer seeking indemnification, are parties to any proceeding, the Corporation may require the director or officer to use the same legal counsel as the other parties. The director or officer shall have the right to use separate legal counsel in the proceeding, but the Corporation shall not be liable to the director or officer under this Article XIII for the fees and expenses of separate legal counsel incurred after notice from the Corporation of the requirement to use the same legal counsel as the other parties, unless the director or officer reasonably concludes that there may be a conflict of interest between the director or officer and any of the other parties required by the Corporation to be represented by the same legal counsel.

Section 13.12-d . The Corporation shall not be liable to indemnify the director or officer under this Article XIII for any amounts paid in settlement of any proceeding effected without its written consent, which shall not be unreasonably withheld. The director or officer shall permit the Corporation to settle any proceeding that the Corporation assumes the defense of, except that the Corporation shall not settle any action or claim in any manner that would impose any penalty or limitation on the director or officer without such person's written consent.

Section 13.13. Exclusions

Notwithstanding any provision in this Article XIII, the Corporation shall not be obligated under this Article XIII to make any indemnification in connection with any claim made against any director or officer: (a) for which payment is required to be made to or on behalf of the director or officer under any insurance policy, except with respect to any excess amount to which the director or officer is entitled under this Article XIII beyond the amount of payment under such insurance policy; (b) if a court having jurisdiction in the matter finally determines that such indemnification is not lawful under any applicable statute or public policy; (c) in connection with any proceeding (or part of any proceeding) initiated by the director or officer, or any proceeding by the director or officer against the Corporation or its directors, officers, employees or other persons entitled to be indemnified by the Corporation, unless: (1) the Corporation is expressly required by law to make the indemnification; (2) the proceeding was authorized by the Board of Directors of the Corporation; or (3) the director or officer initiated the proceeding pursuant to Section 13.05 of this Article XIII and the director or officer is successful in whole or in part in such proceeding; or (d) for an accounting of profits made from the

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purchase and sale by the director or officer of securities of the Corporation within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provision of any state statutory law or common law.

Section 13.14. Subrogation

In the event of payment under this Article XIII, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the director or officer. The director or officer shall execute all documents required and shall do all acts that may be necessary to secure such ri2hts and to enable the Corporation effectively to bring suit to enforce such rights.

ARTICLE XIV: DEFINITIONS AND USAGE

Whenever the context of these Bylaws requires, the plural shall be read to include the singular, and vice versa; and word; of the masculine gender shall refer to the feminine gender, and vice versa; and words of the neuter gender shall refer to any gender.

The undersigned, Secretary of the Corporation, hereby certifies that the foregoing is a true and complete copy of the Corporation 's Bylaws as amended effective April 10, 2001 and the same have not been modified and remain in full force and effect on the date of this certificate.


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AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT THIS AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT (this "Agreement") is made and entered into as of the 13th day of December, 2018 ("Effective Date"), by and between Apex Park at Pima, L.L.C., an Arizona limited liability company and its assignee under the substitute lease (collectively, "Seller") and Axon Enterprise Holding Company, LLC, a Delaware limited liability company ("Buyer") (sometimes collectively, the "Parties" and individually, a "Party"). RECITALS A. On or about May 30, 2003, Seller entered into that certain business lease (Business Lease B-704) as amended by that certain First Amendment to Business Lease B-704 dated November 7, 2016, as the same may be amended from time to time, with Certain Allotted Landowners of Land within the Salt River Pima-Maricopa Indian Community, as "Lessor" thereunder (the "Landowners") (hereinafter the "Master Lease"), with respect to certain land located on the Salt River Pima-Maricopa Indian Community (the "Community") in Maricopa County, Arizona, commonly known as "Riverwalk" or "Riverwalk Arizona" (the "Development"). B. Buyer and Seller have agreed to a form of Substitute Lease attached hereto as Exhibit A (the "Substitute Lease"), that Seller will assign to Buyer, and Buyer will assume, all of Seller's rights, title and interest under the Substitute Lease, pursuant to the terms of this Agreement. C. On September 14, 2018, Seller and Buyer entered into a Purchase and Sale Agreement for the assignment of the Substitute Lease. On November 2, 2018, Buyer terminated the Purchase and Sale Agreement and was refunded all payments previously made into Escrow. D. Buyer and Seller now desire to enter into this Amended Purchase and Sale Agreement to, among other things, increase the Real Property by five (5) acres (the "Additional Five Acres"), amend the terms of the Agreement to provide for non-refundable deposits to Seller and provide for an extended due diligence period, on the terms and conditions set forth herein. AGREEMENT IN CONSIDERATION of the respective agreements hereinafter set forth, Seller and Buyer agree as follows: 1. Property Included in Sale. Seller hereby agrees to sell and convey to Buyer, and Buyer hereby agrees to purchase from Seller the following: (a) all of Seller's interest, as Lessee, under the Substitute Lease. Buyer acknowledges and agrees that the sale to Buyer of Seller's interest under the Substitute Lease is and shall remain subject and subordinate to the easements, restrictions, reservations and all other encumbrances recorded against the underlying real property consisting of approximately 28.57 The mark *** indicates that text has been redacted pursuant to 1 a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
acres of land located at approximately 7400 North Dobson Road, Scottsdale, Arizona 85256 and more particularly described on Exhibit B attached hereto and made a part hereof (the "Real Property"), including the Declaration of Covenants, Conditions and Restrictions recorded in the Official Records of Maricopa County, Arizona as Instrument No. 2005-0220102, as well as that certain Amended and Restated Declaration of Covenants, Conditions, Restrictions and Easements for Riverwalk recorded on July 15, 2008, as Instrument No. 20080616403 in the Official Records of the Maricopa County Recorder and that certain First Amendment to Amended and Restated Declaration of Covenants, Conditions, Restrictions and Easements for Riverwalk recorded on September 17, 2013 as Instrument No. 20130832529 and that certain Second Amendment to Amended and Restated Declaration of Covenants, Conditions, Restrictions and Easements for Riverwalk recorded on April 19, 2018 as Instrument No. 2018- 0295812 in the Official Records of the Maricopa County Recorder and that certain Second Amended and Restated Declaration of Covenants, Conditions, Restrictions and Easements for Riverwalk recorded on September 14, 2018 as Instrument No. 2018-0693825 in the Official Records of the Maricopa County Recorder, as amended or hereafter may be further amended (collectively, the "Declarations"). For purposes of this Agreement, the term "Real Property" shall be limited to Seller's leasehold interest in the Real Property pursuant to the Substitute Lease and access and utility easements located within the original Master Lease necessary for Buyer's use of the Substitute Lease premises for the Substitute Lease term. Buyer understands and acknowledges that Seller has no right, title or interest in or to the underlying fee interest in the Real Property; (b) improvements located on the Real Property (if any exist); and (c) any rights and privileges appurtenant to the Real Property, all of which (if any exist) are agreed to be and constitute part of the Real Property. All of the items referred to in subparagraphs (a), (b) and (c) are collectively referred to as the "Property". 2. Opening of Escrow, Purchase Price and Deposit. 2.1. Opening of Escrow. Within three (3) days following the Effective Date, the Parties hereto shall each deposit two (2) original executed counterparts of this Agreement with Title Company (defined below) and Title Company shall notify the Parties, in writing, of its receipt of such counterparts. This Agreement shall serve as escrow instructions to the Title Company, as escrow holder, for consummation of the purchase and sale contemplated hereby. Seller and Buyer agree to execute such additional or supplementary escrow instructions as may be appropriate to enable the escrow holder to comply with the terms of this Agreement; provided, however, that in the event of any conflict between the provisions of this Agreement and any such additional or supplementary escrow instructions, the terms of this Agreement shall control. 2.2. Purchase Price and Prepaid Rent. 2

 
(a) Purchase Price. The purchase price for the Property ("Purchase Price") shall be Thirteen Million Ninety Eight Thousand Four Hundred and Ninety Two Dollars and 00/100 ($13,098,492.00). (b) Prepaid Rent. In addition to the Purchase Price, Buyer has agreed to pay a one-time prepaid rent payment to the Landowners, in accordance with the Substitute Lease. The Prepaid Rental Amount shall be Ten Million Nine Hundred Fourteen Thousand Four Hundred Eight Dollars and 00/100 ($10,914,408.00) ("Prepaid Rental Amount"). The Prepaid Rental Amount shall be approved by the Spokespersons named pursuant to the Master Lease ("Spokespersons"), the Community and BIA prior to the expiration of the Due Diligence Period (defined below). Seller shall meet with the Spokespersons and Landowners during the Due Diligence Period to discuss the Prepaid Rental Amount and the terms of the Substitute Lease. 2.3. Deposit. The Purchase Price shall be paid as follows: (a) Escrow. Buyer shall deposit in escrow (the "Escrow") with First American Title Insurance Company ("Title Company"), 2425 E. Camelback Road, Suite 300, Phoenix, Arizona 85016, Attention: Tom Anzaldua ("Escrow Agent") a deposit in the amount of One Hundred Fifty Thousand Dollars and 00/100 ($150,000.00) (the "Initial Deposit") no later than the third (3rd) day following the Effective Date. The Initial Deposit shall be non-refundable to Buyer and released to Seller at Seller's written request to Escrow Agent. Unless this Agreement is terminated by the Due Diligence Deadline Date (defined below), Buyer shall deposit an additional Two Hundred Fifty Thousand Dollars and 00/100 ($250,000.00) (the "Additional Deposit") into Escrow. The Additional Deposit shall be non-refundable to Buyer and released to Seller at Seller's written request to Escrow Agent. The Initial Deposit and Additional Deposit shall be referred to collectively as the "Deposit." (b) The balance of the Purchase Price (i.e., the Purchase Price less (i) the Deposit, and (ii) if applicable, the Closing Extension Fee (defined below) and any pro rations payable by Buyer hereunder, shall be paid to Seller on the Closing Date (defined below). (c) Title Company is instructed to deposit the Deposit and the Closing Extension Fee in a federally insured money market or other similar account, subject to immediate withdrawal, at a bank or savings and loan institution located in Phoenix, Arizona. (d) Interest earned on the Deposit and the Closing Extension Fee (if any) shall be retained in Escrow until the Closing (or termination or cancellation), at which time, such interest shall be paid to Seller. 3. Due Diligence. 3.1. Due Diligence Period. The "Due Diligence Period" shall commence on the Effective Date and expire on March 4, 2019 (the "Due Diligence Deadline Date"). 3.2. Right of Entry. During the Due Diligence Period, Buyer may perform, in its discretion, site investigations and feasibility studies and analyses with respect to the Property as deemed necessary by Buyer pursuant to the terms of that certain Site Access and Indemnification Agreement to be entered into by the Parties as of the Effective Date ("Access Agreement"), 3

 
which is attached hereto as Exhibit D. Buyer shall not access the Property until an executed Access Agreement is provided to Seller with the required insurance certificates. The terms of the Access Agreement shall be incorporated herein as though fully set forth herein. This indemnity and covenants contained in the Access Agreement shall survive the termination of this Agreement and the Closing, as applicable, and remain in full force and effect. 3.3. Due Diligence Activities. (a) During the Due Diligence Period, the following shall occur: (1) Survey. Buyer shall, at its sole cost and expense, cause the Real Property to be surveyed (or the initial survey to be updated to include the additional five (5) acres) and an ALTA/ACSM Land Title Survey prepared in accordance with the 2016 Minimum Standard Detail (the "ALTA Survey"), which ALTA Survey shall, among other things, include as a part thereof, a determination of the gross acreage and the gross square footage of the entire Real Property, the identification of each allotment and any and all other requirements of the Community. The ALTA Survey shall be prepared by Survey Innovations Group and shall be certified to Seller as well as Buyer. Subject to Seller's written approval of the ALTA Survey (and at Seller's option, further subject to the approval of the Community), the gross square footage of the Real Property as indicated on the ALTA Survey shall then be used for purposes of determining and calculating the final Purchase Price for the Real Property. Buyer shall pay $10/per square foot for the Real Property and for any Real Property in excess of 23.57 acres, Buyer shall pay $13/per square foot. Buyer shall also obtain a final proforma title policy from the Title Company in a form acceptable to Buyer. (2) Environmental Reports. In accordance with the terms of the Access Agreement, Buyer shall, at Buyer's sole cost and expense, cause a Phase 1 environmental survey and report to be completed on the Real Property (including the additional five (5) acres) by a duly certified and licensed professional. In the event that the Phase 1 Report recommends completion of a Phase 2 Environmental Report, Buyer shall notify Seller and Seller may terminate this Agreement or may agree to cause a Phase 2 Report to be conducted at Buyer's sole cost and expense. (3) Development Agreement. Buyer shall negotiate a Development Agreement with the Community that may include provisions related to: (i) a waiver or cap of the Community's possessory interest tax; (ii) a cap on the construction sales tax and impact fees; (iii) resolution of any outstanding issues related to the adoption of the Liability Limitation Ordinance approved by the Community; and (iv) resolution of the location of the bridge required by the Community. The Parties agree that the execution of a Development Agreement is not required during the Due Diligence Period and that Buyer only needs to obtain reasonable assurances from the Community that acceptable terms of the Development Agreement would be agreed to prior to Closing. However, if prior to Closing, the Community refuses to execute the Development Agreement, Buyer shall have the right to terminate this Agreement and shall have no obligation to pay the balance of the Purchase Price to Seller. Buyer shall not be entitled to a refund of the Deposit. 4

 
(4) Easements. Buyer and Seller shall also obtain approval from the Community of the draft Easement Agreements attached hereto at Exhibit C. (5) Substitute Lease. Buyer and Seller shall obtain reasonable assurances that approval of the Substitute Lease (including the Prepaid Rental Amount and timing thereof and an extension of the lease term to eighty-four (84) years) and the Assignment will be obtained prior to Closing by the Spokespersons, and Secretary and the Community. (b) Expiration of the Due Diligence Period. Unless otherwise stated herein, Buyer shall have the right to terminate this Agreement by written notice to the Title Company and Seller at any time prior to the expiration of the Due Diligence Period and upon such termination, Seller and Buyer shall have no further obligations under this Agreement, except for Buyer's obligations that survive termination of this Agreement, and the Deposit, less all escrow cancellation charges and costs, will be released to Seller (if not previously released to Seller). If Buyer does not terminate the Agreement prior to the expiration of the Due Diligence Period, Buyer shall be deemed to have waived its right to terminate during the Due Diligence Period and prior to the Due Diligence Deadline Date, Buyer shall deposit the Additional Deposit into Escrow. The Additional Deposit shall be non-refundable to Buyer. 4. Community Approval Period. 4.1. Timeframe for Required Community Approvals. Buyer shall have 150 days after the Due Diligence Deadline Date (the "Approval Period") to obtain the Community Approvals. For purposes of this Agreement, the term "Community Approvals" shall mean the Conditional Use approvals from the Land Management Board and/or any Tribal Council approvals (if required); and Design Review Committee Approval and/or any necessary zoning approvals from the Community Development Department. Buyer shall deliver written notice to Seller of its receipt of any of the Community Approvals promptly after obtaining the same. 4.2. Extensions. In the event Buyer, despite its best efforts, has not obtained the Community Approvals prior to the expiration of the Approval Period and provided that Buyer is not in default of this Agreement, Buyer may, at its option, extend the Approval Period for thirty (30) days by providing written notice to Seller (the "First Extension Period"). If Buyer has not obtained the Community Approvals prior to the expiration of the First Extension Period and provided that Buyer is not in default of this Agreement, Buyer may extend the Approval Period for an additional thirty (30) days by providing written notice to Seller. 5. Community Approvals. 5.1. Development Consultant. All submittals, correspondence, scheduling of meetings and other Community activities shall be reviewed by Mr. Kent Moe, Seller's representative, and Buyer shall make reasonable efforts to notify Seller's representative of its communications with the Community. 5.2. Design. Seller has approved the Buyer's Master Plan, Site Plan, and Colored Elevations (the "Conceptual Plans"), a copy of the Site Plan/Pre-App Plans is attached at Exhibit E. Seller's approval also constitutes approval by the Architectural Review Committee of the Association. Buyer and Buyer's Consultants shall continue to design the Real Property 5

 
improvements consisting of an approximate 325,000 square foot AXON corporate headquarters building, containing corporate office space, light assembly manufacturing, warehouse space, public space, and other first class related amenities, driveways, sidewalks, parking structures, lots and areas, parking lot lighting, landscaping, off-site improvements (including extensions of existing utilities, if required), as generally shown on Exhibit F-2 (Water/Sewer), and Exhibit F-3 (Electric/Gas/Telephone) attached hereto (collectively, the "Buyer Improvements"), except the Private Roads as described in Section 7.6. 5.3. Pre-Application Plans. Buyer has submitted the following plans to the Community: Master Plan, Site Plan, Colored Elevations, Conceptual Grading & Drainage Plans, Conceptual Utility Plans, and Conceptual Landscape Plans (the "Pre-App Plans"), a copy is attached as Exhibit E. Buyer shall schedule a Pre-App Meeting with the Community. To ensure consistency in the overall design integrity of the land located on the Community in Maricopa County, Arizona, commonly known as "Riverwalk" or "Riverwalk Arizona," during the design and construction process, Buyer covenants that it will, at its sole cost and expense, hire and utilize Civil Engineering Consultants for civil engineering work associated with the Real Property. 5.4. CUP & DRC Plans. Following the Pre-Application meeting and comments from the Community Development Department, Buyer and Buyer's Consultants shall prepare, for review and approval by Seller, the application materials for a request for Conditional Use Permit and Design Review Committee (which shall include the Additional Five Acres) (the "CUP & DRC Package"). Buyer shall provide the CUP & DRC Package to Seller no later than seventy- five (75) days after the Pre-App meeting. Seller shall then have fourteen (14) days to review the CUP & DRC Package and provide any comments to Buyer. Buyer shall incorporate Seller's comments (if any) and after obtaining Seller's approval to the revised CUP & DRC Package, the Parties agree that such approved CUP & DRC Package shall form the basis for moving forward and Buyer, with Seller's approval, shall formally submit the CUP & DRC Package for approvals by the Community in substantial conformance with the Pre-App Plans. The CUP & DRC Package shall be submitted to the Community and Buyer shall take all necessary action to obtain Community Approvals during the Approval Period as set forth in Section 4. Seller shall be responsible for obtaining approval of the CUP & DRC Package from the Architectural Review Committee of the Association and shall provide Buyer with a letter of approval. 5.5. Signage. As part of the CUP and DRC submittal, Buyer shall submit any Buyer signage requirements and obtain (a) Seller's written approval of its proposed signage (which shall also constitute approval by the Architectural Review Committee of the Association); and (b) approval of the Community. All signage in the Development shall comply with the Comprehensive Sign Criteria for Riverwalk (per approved CUP and DRC Packages), as determined by Seller from time to time, and the applicable provisions in the Master Lease. Buyer shall have the right, to the extent permitted by applicable governmental laws, regulations and ordinances, to erect its own signage on the Property. All costs associated with Buyer's signage, including installation and maintenance costs, shall be paid by Buyer. In the event that an update to the Comprehensive Sign Criteria for Riverwalk is required for Buyer's signage within the Development, Buyer may, at its sole cost and expense, obtain such update; provided Buyer obtains Seller's prior written approval of the amendment and utilizes JRC Design as its sign consultant. 6

 
6. Closing and Escrow. 6.1. Closing Date. Closing of the transaction will occur on the date on which Seller conveys to Buyer title to the Real Property (the "Closing"). Subject to an extension pursuant to Section 6.2, the Closing shall occur on the business day that is thirty (30) days after the date of Community Approvals (the "Closing Date"). 6.2. Closing Extension Fee. After Community Approvals are obtained and prior to the Closing Date, Buyer may, in its sole discretion, extend the Closing Date by up to one hundred twenty (120) days by (i) providing written notice to Seller of its intent to extend the Closing Date; and (ii) depositing into Escrow a non-refundable payment in the amount of One Million One Hundred Thousand Dollars and 00/100 ($1,100,000.00) ("Closing Extension Fee"). The Closing Extension Fee is non-refundable to Buyer and shall be applied to the Purchase Price on the Closing Date, as extended. In the event that Buyer fails to close by the Closing Date (as extended), this Agreement shall terminate and the Closing Extension Fee and the Deposit shall be released to Seller and neither Party shall have any further rights or obligations under this Agreement except for those that survive termination. 6.3. Title to the Property. At the Closing, Seller shall convey to Buyer title to the Real Property by duly executed and acknowledged Assignment of Amended and Restated Substitute Lease substantially in the form attached as Exhibit G (the "Assignment"), which will be recorded at Closing. Prior to the expiration of the Approval Period and at the Closing, Seller at no cost to Buyer, shall obtain from the Title Company for Buyer an American Land Title Association Standard Leasehold Owner's Policy (2006) (without revision, modification or amendment) in the amount of not less than the sum of the Purchase Price and Prepaid Rental Amount, insuring title to the Real Property (including acceptable endorsements insuring access and utilities) (the "Title Policy"). Buyer, at its sole cost and expense, shall also be entitled to obtain extended owner's leasehold estate coverage insuring the leasehold interest of Buyer for an amount equal to the value of the leasehold and Buyer's Improvements. Buyer shall also pay any additional premium(s) for any endorsements, lenders' policy or any other title insurance requirements of Buyer or Buyer's title insurer. Seller will use reasonable efforts, at no out-of- pocket expense to Seller, to comply with any reasonable requirements of the title insurer regarding the issuance of an extended owner's leasehold title insurance policy to Buyer. After expiration of the Approval Period, Buyer's ability to obtain extended coverage title insurance, lender's title insurance or any particular title insurance endorsements, however, shall not be a condition to the effectiveness of this Agreement. 6.4. Delivery to Escrow by Seller. At or before the Closing, Seller shall deposit with Title Company, in Escrow, the following: (a) three (3) originals of the duly executed and acknowledged Assignment of Substitute Lease, with Lessor, Community and BIA approvals attached; (b) three (3) originals of a duly executed affidavit pursuant to Section 1445(b)(2) of the Federal Code, and on which Buyer is entitled to rely, that Seller is not a "foreign person" within the meaning of Section 1445(f)(3) of the Federal Code; 7

 
(c) one (1) original of the Substitute Lease signed by (i) the Spokespersons, (ii) to the extent required by the Title Company, Community or BIA, by the applicable percentage of the Landowners required under 25 USC 2218(b), (iii) to the extent required, any Landowners that own more than fifty percent (50%) of any one allotment, (iv) the Community, (v) BIA and (vi) Seller (including any documents required thereunder); (d) a bill of sale conveying to Buyer, free and clear of all liens and encumbrances, all of Seller's personal property located on the Real Property; (e) one (1) original, duly executed Subordination and Non-Disturbance Agreement, in recordable form, with the Community, the Landowners and any lender thereof guaranteeing access and other utility easements to the Property in the event that Seller's leasehold is foreclosed; (f) one (1) original, duly executed estoppel from the Community and the Landowners certifying to Buyer and any lender of Buyer that there are no defaults under the Master Lease, Substitute Lease and any/all access (ingress, egress, utilities) leasehold easements; (g) one (1) original, duly executed estoppel from any lender of Seller or the Landowners certifying that there are no defaults under any financing that may encumber the Seller's or Landowners' respective interests in the property; (h) a closing statement prepared by the Title Company duly executed by Seller in form and content reasonably satisfactory to Buyer and Seller; and (i) any other instruments, records or correspondence in Seller's possession called for hereunder which have not previously been delivered to Buyer. 6.5. Delivery to Escrow by Buyer. At or before the Closing, Buyer shall deposit with Title Company, in Escrow, the following: (a) a duly executed and acknowledged Assignment of Substitute Lease; (b) a closing statement duly executed by Buyer in form and content satisfactory to Buyer and Seller; (c) resolutions, authorizations and organizational documents relating to Buyer and its members, partners, principals or shareholders, as applicable, as shall be reasonably required by Title Company; and (d) the balance of the Purchase Price. Seller and Buyer shall each deposit such other instruments as are reasonably required by the Title Company or otherwise required to close the escrow and consummate the transaction contemplated hereby in accordance with the terms hereof. 8

 
6.6. Apportionments. The following are to be apportioned as of the Closing Date, as follows: (a) Rent. Rent under the Substitute Lease shall be apportioned as of the Closing Date, regardless of whether or not such rent has been paid. (b) Other Apportionments. Buyer shall pay for the ALTA Survey, the Phase 1 Environmental Report and any update to the ALTA Survey or the Phase 1 of the Property. Seller will pay for the cost of a title policy as required under Section 6.3. Buyer shall be responsible for payment of any premiums or charges in excess of the cost of title policy required to be paid by Buyer under Section 6.3. Escrow fees and recording fees, if any, shall be paid in equal shares by Buyer and Seller. Seller shall pay the cost of the documentary transfer taxes applicable to the sale. All other costs and charges of the escrow for the sale not otherwise provided for in this Section 6.6 or elsewhere in this Agreement shall be allocated in accordance with the closing customs for Maricopa County, Arizona. (c) Possessory Interest Taxes and Special Assessments. Non-delinquent general real estate taxes for the tax year of the Closing and any assessments against the Property, including interest in connection payable therewith, for the tax year of the Closing shall be prorated by Seller and Buyer as of the Closing Date. (d) Post-Closing Reconciliation. If any of the aforesaid prorations cannot be calculated accurately on the Closing Date, then they shall be calculated as soon after the Closing Date as feasible, but in any event, not later than thirty (30) days after the last of the calendar year in which the Closing shall occur and either Party owing the other Party a sum of money based on such subsequent proration(s) shall promptly pay said sum to the other Party. (e) Survival. The provisions of this Section 6.6 shall survive the Closing. 6.7. Closing Instructions. At the Closing, Title Company shall: (a) at such time as Title Company is irrevocably obligated to issue the Title Policy to Buyer, record a Memorandum of Substitute Lease and the Assignment in the (1) Official Records of Maricopa County, Arizona (2) Community's Title Office, and (3) Bureau of Indian Affairs Title Office; (b) deliver to Seller the Purchase Price (as adjusted for the prorations hereunder) by wire transfer of immediately available federal funds to a bank account designated by Seller in writing to Title Company; (c) deliver to Seller and Buyer the closing statements approved by Seller and Buyer, as applicable; and (d) deliver the Title Policy to Buyer. 7. Post-Closing Development Covenants. Buyer and Seller agree to the following process and schedule for the post-closing development of the Property, which covenants, conditions and agreements shall survive Closing: 9

 
7.1. Permit Plans. Buyer shall prepare all application materials as necessary to obtain a building permit and sign permit(s) from the Community, including but not limited to, a complete set of construction documents and specifications for the site, shell building and other improvements and amenities on the Real Property suitable for bidding, permitting and construction processes (the "Permit Plans"). The Permit Plans shall be prepared in accordance with the approved CUP & DRC Package and as required for this Agreement, the Substitute Lease, the Declarations, Community Approvals and applicable zoning and Community codes and regulations (as amended). Further, Buyer shall also be responsible for compliance with any Community requirements, approvals or zoning regulations in the event Buyer seeks to expand the improvements shown on the Conceptual Plans. Buyer shall diligently pursue and obtain approval of the Permit Plans. Buyer shall not make any material changes to the Permit Plans unless such revised Permit Plans ("Revised Permit Plans") have been submitted to Seller and the Revised Permit Plans have been approved by Seller in advance of submission to the Community. In such event, Buyer shall also provide a copy of the Community approval of the Revised Permit Plans to Seller. For the sake of clarity, Buyer is not required to obtain Seller approval of the initial Permit Plans provided such plans are prepared in accordance with the approved CUP & DRC Package. Buyer is only required to obtain Seller approval on any Revised Permit Plans. 7.2. Intentionally Deleted. 7.3. Reservation of Rights. Seller (and after Closing, the Governing Body in accordance with the CC&RS ) hereby reserves the right and option, and reserves unto itself, its tenants, sublessees, subtenants, users, employees, agents, servants, contractors, invitees, successors, assigns and other parties and their respective vehicles, equipment, fixtures and improvements to grant, have and hold one (1) or more easements and rights-of-way upon, across, over and through the Real Property for purposes of a cross-access easement, driveway, access drive, roadway, signage and utilities easement and right-of-way, right of ingress, egress and access, right to install, construct, maintain, repair and replace roadways, bridges, utilities and improvements and common area access; provided that such easements and right of ways shall not interfere with Buyer's Improvements or materially reduce the value of the Real Property. 7.4. General Guidelines. Buyer shall construct the Buyer Improvements at its sole cost and expense, in a good and workmanlike manner, in material conformance with the approved Permit Plans and in compliance with applicable laws, regulations, building codes and applicable CC&R and other land use restrictions of record. The general contractor for the construction of the Buyer Improvements shall be licensed and bonded in Arizona and shall be subject to Seller's reasonable prior written approval (provided that Oakland Construction is hereby deemed to be approved by Seller). Within forty five days (45) after completion of Buyer’s Improvements, Buyer shall provide Seller with a final ALTA survey. 7.5. Alterations. Removal or demolition of any improvements, alterations, additions or repairs to any exterior improvements that require Design Review Committee (or similar department of the Community) approval shall not be made without the prior consent of the Governing Body in accordance with the CC&Rs, which consent and approval shall not be unreasonably withheld or delayed. Buyer shall prepare and submit its plans for removal or demolition of improvements or exterior alterations, additions or repairs to any improvements 10

 
requiring Design Review Committee approval to the Governing Party in accordance with the CC&Rs. Unless earlier approved, or rejected in writing, such plans shall be deemed approved thirty (30) days following submission. Alterations or repairs to the interior of buildings do not require approval of Seller, Governing Body, Master Lessor, Community, or Secretary. 7.6. Roadway Improvements and Construction of Private Roads. The Parties agree that (i) the Real Property will have access as generally shown in the vicinity and roughly depicted on Exhibit F-1 attached hereto and made a part hereof and labeled "Buyer's Dedicated Roadway Access", "Buyer's ½ Width Roadway Access" and "Seller's Dedicated Roadway Access" (the "Access Roadway"); (ii) the roadways shown as "Seller's Dedicated Roadway Access" are hereby accepted by Buyer in its existing "as-is" and "where is" condition with all faults; (iii) the costs and expenses associated with Buyer's Dedicated Roadway Access and Buyer's ½ Width Roadway Access (collectively, the "Private Roads") shall be paid by Buyer and constructed by Seller. At its sole cost and expense, Seller shall also construct the other half of the Buyer's ½ Width Roadway Access. As soon as reasonably possible, Buyer shall notify Seller of its expected date for issuance of a Certificate of Occupancy for the Buyer Improvements and Seller shall use commercially reasonable efforts to cause such Private Roads to be completed six (6) months prior to the expected date of the Certificate of Occupancy (provided Buyer provides notice at least nine (9) months in advance). Seller shall obtain a bid for the construction of the Private Roads and within fifteen (15) days, Buyer shall pay Seller one hundred fifteen percent (115%) of the costs set forth in the bid. Upon payment for the Private Roads, Seller shall cause the Private Roads to be substantially completed materially in accordance with permit plans approved by the Community and all applicable approving authorities. Upon completion, Seller shall refund Buyer any excess amounts paid or in the event of an overage, Seller shall provide Buyer with an invoice for payment within thirty (30) days. Buyer grants Seller the right to use the Real Property for construction purposes associated with the Private Roads and any other improvements to be constructed by Seller. Seller shall ensure that the Private Roads will be maintained by the Association after completion. 8. Representations and Warranties of Seller. Seller hereby represents and warrants to and covenants with Buyer as follows: (a) Seller is an Arizona limited liability company duly organized and validly existing and in good standing under the laws of the State of Arizona; this Agreement and all documents executed by Seller which are to be delivered to Buyer at the Closing are and at the time of the Closing will be duly authorized, executed and delivered by Seller, are and at the time of the Closing will be legal, valid and binding obligations of Seller enforceable against Seller in accordance with their respective terms, are and at the time of the Closing will be sufficient to convey title (if they purport to do so), and do not and at the time of the Closing will not violate any provision of any agreement or judicial order to which Seller or the Property is subject. (b) Seller is not a party to any pending or, to its actual present knowledge with no duty of investigation or inquiry threatened action, suit, proceeding or investigation, at law or in equity or otherwise, in, for or by any court or governmental board, commission, agency, department or officer arising from or relating to this transaction, the Property or to the past or present operations and activities of Seller upon or relating to the Property. No litigation, administrative or other proceeding (including any condemnation proceeding), or order or 11

 
judgment is pending, outstanding, or to Seller's actual, present knowledge threatened against or relating to any portion of the Property or which could affect the performance by Seller of any of its obligations under this Agreement. (c) Seller holds the leasehold interest in the Property and no other party has any interest in the Property other than Seller's leasehold interest and Landowners' fee interest. (d) The Master Lease is in full force and effect, has not been altered, amended or modified except pursuant to any amendments disclosed by Seller. Neither the landlord named in the Master Lease or Substitute Lease nor Seller is in default under the Master Lease or Substitute Lease, nor has any event or circumstance occurred, to the knowledge of Seller that would with the passage of time or giving of notice, or both, result in an event of default under the Master Lease or Substitute Lease by such landlord and/or tenant. Seller as tenant has not given written notice of any offsets, defenses or claims available against Rent or other charges or amounts payable by it or other performance or obligations otherwise due from it under the Master Lease or Substitute Lease. (e) Neither Seller nor any of its managers or members are the subject debtor(s) under any federal, state or local bankruptcy or insolvency proceeding, or any other proceeding for dissolution, liquidation or winding up of its assets, and, to the best of Seller's knowledge, no such actions have been threatened against Seller or its managers and members. (f) Seller has not received any written notice and has no knowledge of any pending or threatened condemnation action or proceeding affecting any portion of the Property. (g) Seller has not received written notice from any governmental or regulatory agency of any violation of any environmental law related to the Property or the presence or release of any hazardous materials on or from the Property. (h) Seller has received no written notice nor, to the best of Seller's knowledge, is any such notice pending or threatened in writing, from any governmental authority having jurisdiction over the Property, or from any other person or entity, to the effect that the Property is not currently in compliance with applicable laws and ordinances, including, without limitation, environmental, zoning, ADA compliance, subdivision, building or similar laws, ordinances, codes, orders or regulations, and Seller has no actual knowledge that the Property is not currently in compliance with all applicable laws and ordinances. (i) On the Closing Date there will be no outstanding contracts made by Seller for any improvements to the Property which have not been fully paid for, and Seller shall cause to be discharged all mechanics or materialmen's liens arising from any labor or materials furnished to the Property prior to the Closing Date. (j) Seller is not a "foreign person" within the meaning of Section 1445(0(3) of the Federal Code. (k) To Seller's actual knowledge, Seller: (i) is not under investigation by any governmental authority for, or have been charged with, or convicted of, money laundering, drug trafficking, terrorist-related activities, any crimes which in the United States would be predicate 12

 
crimes to money laundering, or any violation of any Anti Money Laundering Laws (as hereinafter defined in this Article); (ii) has not been assessed civil or criminal penalties under any Anti-Money Laundering Laws; or (iii) has not had any of its funds seized or forfeited in any action under any Anti Money Laundering Laws. The term "Anti­Money Laundering Laws" shall mean all applicable laws, regulations and sanctions, state and federal, criminal and civil, that: (w) limit the use of and/or seek the forfeiture of proceeds from illegal transactions; (x) limit commercial transactions with designated countries or individuals believed to be terrorists, narcotics dealers or otherwise engaged in activities contrary to the interests of the United States; (y) require identification and documentation of the parties with whom a financial institution conducts business; or (z) are designed to disrupt the flow of funds to terrorist organizations. (l) That the copies of the Master Lease, Substitute Lease and applicable Declarations provided to Buyer by Seller are true and complete copies of the then-current Master Lease, Substitute Lease and Declarations, that the Master Lease and Substitute Lease are in full force and effect and that Seller is not in default under either the Master Lease or Substitute Lease. (m) To Seller's actual knowledge, Exhibit F-3 hereof accurately depicts the location of electric, gas, telephone, and Exhibit F-2 depicts the location of the water utilities on, or near the Real Property. (n) To the extent Seller has authority to do so (and without any inquiry or knowledge), the use by Buyer of the Buyer Improvements, as approved by Seller pursuant to this Agreement, does not violate the Declarations (specifically Section 5.2(c)(vii) and (c)(viii). The representations and warranties set forth in this Section 8 are true and correct on the Effective Date, shall be true and correct on the Closing Date, and shall survive the Closing for a period of one (1) year. Buyer's obligation to complete Closing is subject to the foregoing representations and warranties being true and correct on the Closing Date. If such representations and warranties are not true and correct at Closing, Buyer shall have the right to terminate this Agreement and, notwithstanding any provision of this Agreement to the contrary, to receive a refund of the Deposit. If prior to the Closing, Seller becomes aware that any representation or warranty set forth in this Agreement that was true and correct on the date of this Agreement has become incorrect due to changes in conditions or the discovery by Seller of information of which Seller was unaware on the date of this Agreement, then Seller shall immediately notify Buyer thereof and the representations and warranties set forth herein which are to be remade and reaffirmed by Seller at the Closing shall be supplemented by such new information. If such notification occurs after expiration of the Approval Period, and if in Buyer's reasonable judgment such change in condition or new information has a material adverse impact on the Property or transactions contemplated hereunder, Buyer may elect within five (5) business days after receipt of such notice to provide written notice to Seller of Buyer's intent to terminate this Agreement. 9. Representations and Warranties of Buyer. Buyer hereby represents and warrants to Seller as follows: (a) Buyer is a corporation duly organized and validly existing and in good standing under the laws of the Delaware. This Agreement and all documents executed by Buyer 13

 
which are to be delivered to Seller at the Closing are and at the time of the Closing will be duly authorized, executed and delivered by Buyer, are and at the time of the Closing will be legal, valid and binding obligations of Buyer enforceable against Buyer in accordance with their respective terms, and do not and at the time of the Closing will not violate any provision of any agreement or judicial order to which Buyer is subject. Buyer shall have obtained final approval of this Agreement by its Board of Directors. (b) Buyer represents and warrants that (a) Buyer and each person or entity owning an interest in Buyer is (i) not currently identified on the Specially Designated Nationals and Blocked Persons List maintained by the OFAC and/or on any other similar List, (ii) not a person or entity with whom a citizen of the United States is prohibited to engage in transactions by any trade embargo, economic sanction, or other prohibition of United States law, regulation, or Executive Order of the President of the United States, and (iii) not an "Embargoed Person" (b) to Buyer's actual knowledge, none of the funds or other assets of Buyer constitute property of, or are beneficially owned, directly or indirectly, by any Embargoed Person (as hereinafter defined), and (c) to Buyer's actual knowledge, no Embargoed Person has any interest of any nature whatsoever in Buyer (whether directly or indirectly). (c) Buyer covenants that during the entire course of the design and construction process for the Real Property it shall, at its sole cost and expense, hire and utilize consultants selected by Seller for civil engineering design (Civil Engineering Consultants). (d) EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, IT IS UNDERSTOOD AND AGREED THAT SELLER IS NOT MAKING AND HAS NOT AT ANY TIME MADE ANY WARRANTIES OR REPRESENTATIONS OF ANY KIND OR CHARACTER, EXPRESS OR IMPLIED, WITH MASTER LEASE, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OR REPRESENTATIONS AS TO HABITABILITY, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, ZONING, TAX CONSEQUENCES, LATENT OR PATENT PHYSICAL OR ENVIRONMENTAL CONDITION, UTILITIES, OPERATING HISTORY OR PROJECTIONS, VALUATION, GOVERNMENTAL APPROVALS, THE COMPLIANCE OF THE PROPERTY WITH GOVERNMENTAL LAWS, THE TRUTH, ACCURACY OR COMPLETENESS OF THE PROPERTY-RELATED DOCUMENTS OR ANY OTHER INFORMATION PROVIDED BY OR ON BEHALF OF SELLER TO BUYER, OR ANY OTHER MATTER OR THING REGARDING THE SAME. BUYER ACKNOWLEDGES AND AGREES THAT UPON THE CLOSING, SELLER SHALL ACCEPT THIS PROPERTY AND ALL OF SELLER'S INTEREST IN THE SUBSTITUTE LEASE IN "AS IS, WHERE IS CONDITION WITH ALL FAULTS AND DEFECTS," EXCEPT TO THE EXTENT EXPRESSLY PROVIDED OTHERWISE IN THIS AGREEMENT. (e) BUYER AGREES THAT, EXCEPT AS SPECIFICALLY SET FORTH IN THIS AGREEMENT, BUYER IS NOT RELYING ON ANY WARRANTY OR REPRESENTATION OF SELLER OR ANY AGENT, EMPLOYEE, REPRESENTATIVE, MEMBER OR MANAGER OF SELLER, AND THAT BUYER IS ACQUIRING THE PROPERTY, AND ALL IMPROVEMENTS THEREON OR THEREUNDER, BASED UPON BUYER'S EXAMINATION AND INVESTIGATION OF THE PROPERTY AND THE EXERCISE OF BUYER'S JUDGMENT, "AS IS," "WHERE IS" SUBJECT TO ALL FAULTS 14

 
AND DEFECTS AND WITHOUT ANY EXPRESSED, IMPLIED OR STATUTORY WARRANTIES OR REPRESENTATIONS OF ANY KIND, INCLUDING, BUT NOT LIMITED TO, MATERIALS, WORKMANSHIP, GOOD AND WORKMANLIKE CONSTRUCTION, DESIGN, CONDITION, HABITABILITY, TENANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY, ACCESS TO PUBLIC ROADS, INCOME POTENTIAL, FUTURE VALUE, THE ENVIRONMENTAL CONDITION OF THE PROPERTY OR THE CONDITION OR SUITABILITY OF ALL ON-SITE AND OFF-SITE IMPROVEMENTS, INCLUDING COMMON AREAS, AND SELLER HEREBY DISCLAIMS ANY SUCH WARRANTY. BY THE EXPIRATION OF THE DUE DILIGENCE PERIOD, BUYER AGREES THAT BUYER SHALL HAVE DETERMINED (1) THE PHYSICAL CONDITION OF THE PROPERTY AND ALL ON-SITE AND OFF-SITE IMPROVEMENTS, INCLUDING COMMON AREAS, AND THAT THERE IS NO DEFECT OF CONDITION WHICH IS UNACCEPTABLE TO BUYER, (2) WHETHER ANY PORTION OF THE PROPERTY LIES IN ANY FLOOD PLAIN, FLOOD WAY OR SPECIAL FLOOD HAZARD AREA, (3) WHETHER ANY GEOLOGICAL FAULT OR UNSATISFACTORY SOIL CONDITION EXISTS ON ANY PORTION OF THE PROPERTY, INCLUDING COMMON AREAS, (4) THAT ALL ENVIRONMENTAL CONDITIONS RELATING TO THE PROPERTY AND COMMON AREAS ARE ACCEPTABLE TO BUYER, AND (5) THAT ALL FEES, COSTS, PERMITS AND OTHER EXPENSES AND OBLIGATIONS ASSOCIATED WITH THE DEVELOPMENT OF THE PROPERTY, WHETHER KNOWN OR UNKNOWN, ARE ACCEPTABLE TO BUYER. (f) HAVING BEEN GIVEN THE OPPORTUNITY TO INSPECT THE PROPERTY AND ALL ON-SITE AND OFF-SITE IMPROVEMENTS, INCLUDING COMMON AREAS, BUYER ACKNOWLEDGES THAT AS OF THE EXPIRATION OF THE DUE DILIGENCE PERIOD, BUYER (1) SHALL BE THOROUGHLY ACQUAINTED WITH THE PHYSICAL CONDITION OF THE PROPERTY AND ALL ON-SITE AND OFF-SITE IMPROVEMENTS, INCLUDING COMMON AREAS, AND (2) IS RELYING SOLELY ON ITS OWN INVESTIGATION AND INSPECTION OF THE PROPERTY AND ALL ON-SITE AND OFF-SITE IMPROVEMENTS, INCLUDING COMMON AREAS, AND NOT ON ANY INFORMATION PROVIDED OR TO BE PROVIDED BY OR ON BEHALF OF SELLER OR ANY AGENT OF SELLER. BUYER FURTHER ACKNOWLEDGES THAT NO INDEPENDENT INVESTIGATION OR VERIFICATION HAS BEEN OR WILL BE MADE BY SELLER WITH RESPECT TO ANY INFORMATION SUPPLIED BY OR ON BEHALF OF SELLER CONCERNING THE PROPERTY, ALL ON-SITE AND OFF-SITE IMPROVEMENTS, INCLUDING COMMON AREAS, OR THE DOCUMENTS PROVIDED BY SELLER, AND SELLER HAS MADE NO REPRESENTATION AS TO THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION ITSELF. (g) BUYER ACKNOWLEDGES, UNDERSTANDS AND AGREES THAT BUYER'S ACCEPTANCE OF THE PROVISIONS OF THIS SECTION CONSTITUTES A MATERIAL INDUCEMENT FOR SELLER TO ENTER INTO THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT AND THAT ABSENT SUCH ACCEPTANCE, SELLER WOULD NOT ENTER INTO THIS AGREEMENT. ANY ATTEMPT BY BUYER TO PURSUE A CLAIM BASED UPON ANY CLAIMED REPRESENTATIONS, WARRANTIES, PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES NOT EXPRESSLY EMBODIED IN THIS AGREEMENT SHALL CONSTITUTE A DEFAULT BY 15

 
BUYER UNDER THIS AGREEMENT. BUYER ON ITS BEHALF AND ON BEHALF OF ITS HEIRS, SUCCESSORS AND ASSIGNS, HEREBY UNCONDITIONALLY AND FOREVER WAIVES ANY CLAIM AGAINST SELLER OR ANY AFFILIATE OF SELLER BASED (1) UPON ANY CLAIMED REPRESENTATIONS, WARRANTIES, PROMISES, COVENANTS, AGREEMENT OR GUARANTIES NOT EXPRESSLY EMBODIED IN THIS AGREEMENT, (2) ON THE CONDITION OF THE PROPERTY, OR (3) ON THE CONDITION OF ALL ON-SITE AND OFF-SITE IMPROVEMENTS, INCLUDING, WITHOUT LIMITATION, COMMON AREAS. (h) BUYER, AS A SOPHISTICATED BUYER, HEREBY ACKNOWLEDGES THAT THE COST OF THE WAIVERS CONTAINED IN SECTION 8 WERE NEGOTIATED BETWEEN THE PARTIES AND INCLUDED IN THE PURCHASE PRICE. THE PROVISIONS OF SECTION 7 SHALL SURVIVE THE CLOSING AND SHALL BIND ANY SUCCESSOR OR ASSIGN OF BUYER TO ANY PORTION OF THE PROPERTY. 10. Buyer and Seller Indemnification. Each Party hereby agrees to indemnify the other Party and defend and hold it harmless from and against any and all claims, demands, liabilities, costs, expenses, penalties, damages and losses, including, without limitation, attorneys' fees, resulting from (i) any misrepresentation or breach of warranty made by such Party in Section 8 or Section 9 of this Agreement, as applicable, or in any document, certificate, or exhibit given or delivered to the other pursuant to or in connection with this Agreement, or (ii) post-Closing or post-termination breach of a covenant which, by the terms hereof, survives the Closing or earlier termination of this Agreement. 11. Possession. Possession of the Property shall be delivered to Buyer on the Closing Date, subject to the permitted exceptions on title. 12. Notices. Any notices which Seller or Buyer are required or desire to give the other hereunder shall in writing and delivered personally (with written confirmation thereof), by a reputable overnight delivery company (with written confirmation thereof) or sent through the U.S. Mail by certified mail, postage prepaid, to the following addresses: (a) If to Seller: c/o The Alter Group, Ltd. 3201 Old Glenview Road, Suite 302 Wilmette, IL 60091 Attn: Randolph Thomas Fax: (847) 676-4309 With a copy to: Lawrence M. Freedman Ash, Anos, Freedman & Logan, L.L.C. 77 West Washington Street, Suite 1211 Chicago, IL 60602 Fax: 312.346.7487 16

 
Samuel F. Gould Alter Asset Management, L.L.C. 1980 Springer Drive Lombard, IL 60148 Fax: 630.620.3606 Kerry K. Patterson Procopio, Cory, Hargreaves & Savitch LLP 8355 E Hartford Dr #202 Scottsdale, AZ 85255 Fax: 619.788.5505 (b) If to Buyer: Axon Enterprise Holding Company, LLC 17800 North 85th Street Scottsdale, Arizona 85255 Fax: 480.991.0791 Attn: Doug Klint With a copy to: Snell & Wilmer LLP One Arizona Center Phoenix, Arizona 85004 Fax: 602.382.6070 Attn: Mark Ohre Any notice delivered personally shall be deemed delivered when received. Any properly addressed notice given herein by certified mail, return receipt requested, or by recognized overnight courier shall be deemed delivered on the date on which the notice is deposited with the U.S. Postal Service or with the recognized overnight courier. Seller and Buyer agree that any and all notices given by either Party shall be provided simultaneously to any assignee of Buyer or any lender to Buyer when such assignee or lender has been previously identified in writing to the Parties along with the appropriate address for such notices. Either Party may, at any time, change its address for the above purposes by sending a notice to the other Party stating the change and setting forth the new address. 13. Miscellaneous. 13.1. Captions. Captions or headings of Sections are for convenience only and shall not be considered in construing the meaning of the contents of such Section. 13.2. Partial Invalidity. If any term, covenant, or condition of this Agreement or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall 17

 
not be affected thereby and each term, covenant, or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law. It is the intention of the Parties hereto that the covenants of this Agreement are independent of each other. 13.3. No Prior Agreements. This Agreement supersedes and cancels all prior negotiations between the Parties. 13.4. Amendments and Modifications. All amendments or modifications to this Agreement must be in writing signed by the Parties. 13.5. Interpretation. The singular shall include the plural, and the masculine or neuter shall include the other. 13.6. Real Estate Brokers. Except for Cushman & Wakefield, NOVO Development and The Alter Group, Ltd., all licensed real estate brokers in the State of Arizona, each of whose commission shall be paid by Seller, each Party covenants, warrants and represents to the other that no conversation or negotiations were had by either with any broker, agent, subagent, salesperson or finder concerning the acquisition of the Property. Each Party agrees to protect, indemnify, save and keep harmless the other, against and from all liabilities, claims, losses, costs, damages and expenses, including attorneys' fees, arising out of, resulting from or in connection with a breach of the foregoing covenant, warranty and representation. 13.7. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Arizona. 13.8. Counterparts, Facsimile or Electronic Execution. This Agreement may be executed in one or more counterparts by the Parties and all counterparts taken together shall constitute one and the same document. The Parties hereto agree that: (a) counterparts may be executed by one or more Parties via use of facsimile signatures or electronic (e-mail) signatures and the sending by one or more Parties of signatures via Facsimile or via e-mail correspondence shall also constitute execution and delivery of this Agreement; and (b) signature pages from one or more counterparts may be removed from such counterparts and such signature pages may be attached to a single instrument so that signatures of all Parties may be physically attached to a single counterpart hereof. 13.9. Attorneys' Fees. Should either Party institute any legal proceedings against the other for breach of any provisions herein contained or any matter in connection with this Agreement or any matter in connection with this Agreement, the prevailing Party in such action shall in addition be entitled to recover its reasonable costs and expenses from the losing Party including court costs and its reasonable attorney fees and expert witness fees (and costs and reasonable attorney fees on appeal). [Signature pages follow] 18

 
IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement effective as of the Effective Date. "SELLER": APEX Park at Pima, LLC, an Arizona limited liability company By: Alter Park at Pima, L.L.C., a Delaware limited liability company By: 18-Chai Corp., an Illinois corporation Its: M:�ger�fc:;2, Name:- Title: --- - ---- Date: "BUYER": AXON ENTERPRISE HOLDING COMPANY, LLC, a Delaware limited liability company By: __________ Name: Jawad Ahsan Title: Chief Financial Officer Date: ----------- [Signature Page to Amended and Restated Purchase and Sale Agreement]

 
EXHIBIT INDEX Exhibit Title A Substitute Lease B Legal Description C Draft Easement Agreements D Site Access and Indemnification Agreement E Site Plan/Pre-App Plans F-1 Access Improvements F-2 Water/Sewer Improvements F-3 Electric/Gas/Telephone Improvements G Assignment of Substitute Lease

 
EXHIBIT A SUBSTITUTE LEASE Form of Substitute Lease to be approved and finalized during the Due Diligence Period and placed into Escrow by Seller and Buyer

 
SUBSTITUTE LEASE IN REFERENCE TO BUSINESS LEASE B-704-____ Between CERTAIN ALLOTTED LANDOWNERS OF LAND WITHIN THE SALT RIVER PIMA-MARICOPA INDIAN COMMUNITY (“Lessor”) and APEX 7400 NORTH DOBSON, L.L.C., an Arizona limited liability company (“Lessee”) 1 This Substitute Lease incorporates the provisions of that certain business lease (Business Lease B-704) approved by the Secretary on May 30, 2003 between APEX Park at Pima, L.L.C., an Arizona limited liability company and Certain Allotted Landowners of Land within the Salt River Pima-Maricopa Indian Community and that certain First Amendment to Business Lease B-704 entered into and effective on November 7, 2016.

 
INDEX NO. ARTICLE NAME ............................................................................................................................. PAGE 1. Definitions. ............................................................................................................................................ 1 2. Demise of Leased Premises. ................................................................................................................. 4 3. Lease Term. ........................................................................................................................................... 4 4. Permitted Uses of Leased Premises. ..................................................................................................... 4 5. Rent. ...................................................................................................................................................... 5 6. Business Hours and Activity. ................................................................................................................ 8 7. Improvements and Completion of Development. ................................................................................. 9 8. Substitute Lease. ................................................................................................................................... 9 9. Title to Buildings and Improvements. ................................................................................................... 9 10. Construction, Maintenance, Repair, Alteration............................................................................... 10 11. Non-Responsibility Notices. ........................................................................................................... 10 12. Rental Bond. ................................................................................................................................... 11 13. Performance Bond. ......................................................................................................................... 11 14. Public Liability Insurance. .............................................................................................................. 12 15. Sublease, Assignment, Transfer. ..................................................................................................... 12 16. Status of Subleases. ......................................................................................................................... 15 17. Agreements for Utility Facilities. .................................................................................................... 15 18. Rights-of-Way for Streets and Utility Facilities. ............................................................................ 16 19. Encumbrance. .................................................................................................................................. 17 20. Liens, Taxes, Assessments, Utility Charges. .................................................................................. 23 21. Lessor’s Paying Claims ................................................................................................................... 23 22. Claim or Assessment of State Taxes. .............................................................................................. 24 23. Eminent Domain. ............................................................................................................................ 25 24. Rezoning. ........................................................................................................................................ 26 25. Default............................................................................................................................................. 27 26. Attorney’s Fees. .............................................................................................................................. 28 27. Holding Over. ................................................................................................................................. 28 28. No Partnership. ............................................................................................................................... 28 29. Termination of Federal Trust. ......................................................................................................... 28 30. Lessee’s Obligations to the United States. ...................................................................................... 28 31. Payments and Notices. .................................................................................................................... 29 32. Inspection. ....................................................................................................................................... 30 ii DOCS 125208-000003/3409232.5

 
33. Delivery of Leased Premises........................................................................................................... 30 34. Lease Binding. ................................................................................................................................ 30 35. Interest of Member of Congress. ..................................................................................................... 30 36. Tax Immunity. ................................................................................................................................. 31 37. Force Majeure. ................................................................................................................................ 31 38. Laws and Ordinances of the Community. ....................................................................................... 31 39. Arbitration. ...................................................................................................................................... 31 40. Employment Preference. ................................................................................................................. 32 41. Validity. .......................................................................................................................................... 34 42. Indemnification. .............................................................................................................................. 34 43. Fire and Damage Insurance............................................................................................................. 35 44. Accounting and Audits.................................................................................................................... 36 45. Plans and Designs. .......................................................................................................................... 37 46. Title Insurance; Opinion of Counsel ............................................................................................... 37 47. Power of Attorney to Spokespersons. ............................................................................................. 39 48. Covenants, Conditions and Restrictions ......................................................................................... 41 49. Quiet Enjoyment. ............................................................................................................................ 41 50. Severability. .................................................................................................................................... 42 51. Multiple Counterparts. .................................................................................................................... 42 52. Companies Bonding and Insuring. .................................................................................................. 42 53. Compliance with Arizona Subdivision Requirements. ................................................................... 43 54. Estoppel Certificates. ...................................................................................................................... 43 55. Environmental Protection Requirements ........................................................................................ 43 56. Confidentiality. ............................................................................................................................... 49 57. Short Form of Lease. ....................................................................................................................... 49 SCHEDULE OF EXHIBITS A Schedule of Landowners B Legal Description of Original Leased Premises C Legal Description of Premises C-1 Preliminary Site Plan of Premises D Approval of Secretary E Declaration and Grant of Easements F Sublease Addendum G Spokespersons H Council Resolution SR-2234-2003 iii

 
SUBSTITUTE BUSINESS LEASE B-704 THIS SUBSTITUTE BUSINESS LEASE B-704 (this “Lease”) is made and entered into this ___ day of ____________, 20___, by and between CERTAIN ALLOTTED LANDOWNERS OF LAND WITHIN THE SALT RIVER PIMA-MARICOPA INDIAN COMMUNITY identified on Exhibit A attached hereto, hereinafter collectively called the “Lessor,” whose address is 10005 East Osborn Road, Scottsdale, Arizona 85256 and, APEX 7400 NORTH DOBSON, L.L.C., an Arizona limited liability company, hereinafter called the “Lessee,” under the provisions of the Act of November 2,1966 (80 Stat. 1112), as amended (25 U.S.C. § 416, et seq.), as supplemented by Part 162, et seq., Leases and Permits, of the Code of Federal Regulations, Title 25 - Indians, and any amendments thereto relative to business leases on restricted Indian lands, all of which by reference are made a part hereof. This Lease amends and restated that certain business lease (Business Lease B-704) approved by the Secretary on May 30, 2003 between APEX Park at Pima, L.L.C., an Arizona limited liability company and Certain Allotted Landowners of Land within the Salt River Pima-Maricopa Indian Community, as amended by that certain First Amendment to Business Lease B-704 entered into and effective on November 7, 2016. Lessee intends to assign this Lease to Axon Enterprise Holding Company, LLC, a Delaware limited liability company (“Axon”) after Secretary approval of this Lease, the Axon Assignment (as defined in that certain Purchase and Sale Agreement dated December 11, 2018, the “PSA”) and satisfaction of all the PSA’s closing conditions. This Lease will be effective on the Closing Date (as defined in the PSA) and only after Secretary approves both this Lease and the Assignment. 1. Definitions. For the purpose of this Lease, the following terms shall have the meanings set forth below: A. Approved Encumbrance. A mortgage, deed of trust, lien or other security interest in or against Lessee’s interest in the Leased Premises meeting the requirements of Article 19 below, and which has been approved by the Lessor, the Community and the Secretary. B. Approved Encumbrance. The holder of an Approved Encumbrance. C. Approved Sublease or Sublease. A sublease of all or any part of the Leased Premises meeting the requirements of Article 15A or 15A(1) below. D. Base Index: As defined in Section 5.3 (as adjusted and deemed amended from time to time). E. Basic Rent. As provided in Article 5(a) below.

 
F. Commercial Buildings. Business offices, professional offices, Axon’s Headquarters, eating, retail and service establishments; hotel; entertainment, light manufacturing and warehouse facilities, and commercial recreation facilities; amphitheater, convention and reception facilities; theaters and schools. G. Certificate of Occupancy. A certificate of occupancy, temporary certificate of occupancy or certificate of completion of the Headquarters issued by the Community department authorized to issue such permits to Lessee, Developer Sublessee or a Sublessee. H. Community. The Salt River Pima-Maricopa Indian Community, a federally recognized Indian tribe. I. Covenants, Conditions and Restrictions or CC&R’s. As described in Article 48 below, including, without limitation, the that certain Amended and Restated Declaration of Covenants, Conditions, Restrictions and Easements for Riverwalk executed by Declarant and 7350 LLC June 10, 2008, recorded on July 15, 2008 as instrument no. 20080616403 in the Official Records of the Maricopa County Recorder, and which was duly amended by that certain First Amendment to Amended and Restated Declaration of Covenants, Conditions, Restrictions and Easements for Riverwalk on August 25, 2013, recorded on September 17, 2013 as instrument no. 20130832529 in the Official Records of the Maricopa County Recorder, and was further amended by that certain Second Amendment to Amended and Restated Declaration of Covenants, Conditions, Restrictions and Easements for Riverwalk on October 30, 2017, which was recorded on April 19, 2018 as instrument no. 20180295812 in the Official Records of the Maricopa County Recorder and that certain Second Amended and Restated Declaration of Covenants, Conditions, Restrictions and Easements for Riverwalk recorded on September 14, 2018 as instrument no. 20180693825 in the Official Records of the Maricopa County Recorder, and as may be amended in the future (collectively “Amended Declaration”). J. Developer Sublessee. A Sublessee of a portion of the Leased Premises that, pursuant to its Sublease, constructs one (1) or more Commercial Buildings. K. Governmental Authority. Any governmental or quasi-governmental entity, regardless of how constituted, having or claiming jurisdiction over the Leased Premises or any portion thereof, or over the design, planning, construction, use, operation, maintenance or occupancy of all or any portion of the Leased Premises. 2

 
L. Headquarters. Means all improvements built on the Leased Premises, including, without limitation, Axon’s headquarters consisting of an approximate 325,000 square foot Axon corporate headquarters building, containing corporate office space, light assembly manufacturing, warehouse space, public space, and other related Buildings and amenities, driveways, sidewalks, parking structures, lots and areas. M. Lease. This Substitute Lease in Reference to Business Lease B-704, as may be amended. N. Lease Term. As provided in Article 3 below. O. Lease Year. Each period of twelve (12) consecutive months, commencing on, each January 1 and ending on the next succeeding December 31, except that the first Lease Year shall begin when the Lease Term shall commence and shall end at midnight on the next succeeding December 31 which is at least twelve (12) months after the date on which the Lease Term shall commence, in which event the first Lease Year may consist of more than twelve (12) months. P. Leased Premises or Premises. That certain real property located in Maricopa County, Arizona, and legally described on Exhibit C attached hereto, together with a right of ingress and egress thereto and the access and utility easements, as described in the Declaration and Grant of Easements attached hereto as Exhibit E, and all other easements, rights-of-way, privileges, licenses, appurtenances, water and well rights and other rights and benefits belonging to, running with or in any way related to such real property, the Leased Premises and all of the improvements now or hereafter located thereon or on the Leased Premises. Q. Legal Requirements. All statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions of federal and Tribal governmental entities and other governmental entities having jurisdiction affecting either the Leased Premises or the construction, use, occupancy, repair, renovation, replacement or alteration thereto, whether now or hereafter enacted and enforced, including any of the same which may (i) require repairs, modifications or alterations in or to any portion of the Leased Premises; or (ii) in any way limit, restrict or impose conditions upon the use and authorizations and regulations relating to the Leased Premises, and all covenants, agreements, restrictions and encumbrances contained in any instruments, either of record or known to Lessee (other than encumbrances created by Lessor without the consent of Lessee), at any time in force or effect pertaining to the Leased Premises or any portion thereof or interest therein. 3

 
R. Lessee. APEX 7400 NORTH DOBSON, L.L.C., an Arizona limited liability company. S. Lessor. Those certain allotted landowners of land within the Salt River Pima- Maricopa Indian Community identified on Exhibit A attached hereto. T. Original Leased Premises. That certain real property located in Maricopa County, Arizona, and legally described on Exhibit _B attached hereto, together with a right of ingress and egress thereto and all easements, rights-of-way, privileges, licenses, appurtenances, water and well rights and other rights and benefits belonging to, running with or in any way related to such real property and all of the improvements now or hereafter located thereon. U. Person. An individual, corporation, limited liability company (“L.L.C.”), partnership, joint venture, association, firm, joint stock company, trust, unincorporated association or other legal entity. V. Preapproved Transferee: Any one or more of the following entities: Axon Enterprise Holding Company, LLC, a Delaware limited liability company; and/or Axon Enterprise OFA Holding Company, LLC, a Delaware limited liability company. W. Prepaid Rent Amount: $10,914,408. [Note: 28.57 Acres of Leased Premises at $382,024 per acre] X. Price Index: The consumer price index compiled and published by the United States Department of Labor, Bureau of Labor Statistics, designated Consumer Price Index - U.S. City Average All Urban Consumers (CPI-U) 1982 to 1984 = 100, all items, or, if said consumer price index ceases to be published and there is no successor index, a reasonably equivalent index published by an authoritative third party that SRPMIC reasonably designates. The Price Index for any date means the Price Index last published before the calendar month that includes such date. Y. Prime Rate. The rate of interest regularly published in the Wall Street Journal, Section “C” under “Money Rates”, as the “Prime Rate” and defined therein as the base rate on corporate loans posted by at least seventy-five (75%) of the nation’s thirty (30) largest banks. Z. Removable Personal Property. All personal property, of every kind and nature, belonging to Lessee or any Sublessee, excluding, however, property which normally would be attached or affixed to the buildings, improvements or the Leased Premises in such a manner that such property 4

 
would become a part of the realty, regardless of whether such property is in fact so placed in or on or affixed to the buildings, improvements or the Leased Premises. AA. Rent. All rent payable under Article 5 hereof. BB. Rental Bond. As provided in Article 12 below. CC. Required Consent. Any governmental approval or other consent, license, grant, authorization or agreement from any Governmental Authority or any public or private provider of public utility services, the procurement or maintenance of which may reasonably be necessary, desirable or appropriate as a condition or prerequisite to the proper development, improvement, use, occupancy or operation of all or any portion of the Leased Premises in accordance with the provisions of this Lease. DD. Secretary. The Secretary of the Interior, United States Department of the Interior or his or her authorized representative. AA. Sublessee. A lessee of all or any portion of the Leased Premises pursuant to an Approved Sublease. AB. Substitute Lease. As described in Article 8 below. AC. Superintendent. The Superintendent, Field Administrator, Coordinator or other officer in charge of the Salt River Agency, Bureau of Indian Affairs. 2. Demise of Leased Premises. For and in consideration of the Rents and Agreements hereinafter set forth, the Lessor hereby leases the Leased Premises to the Lessee, and the Lessee hereby leases and accepts the Leased Premises from Lessor. 3. Lease Term. The Lease Term shall expire on May 29, 2103. 4. Permitted Uses of Leased Premises. The purpose of this Lease is to bring about the commercial development of the Leased Premises. The development and use of the Leased Premises will be consistent with the plan of development provided in this Lease, the permitted uses described herein and with the zoning ordinances of the 5

 
Community. The permitted uses are: Commercial Buildings and such other uses as are normally or reasonably incidental to the foregoing uses. The Lessee shall develop all of the structures on the Leased Premises except that Lessee may, with the approvals required pursuant to Article 15 of this Lease, sublease portions of the Leased Premises which have been improved with offsite improvements to a user Sublessee for the development of any of the permitted uses. Any Sublessee under this Lease will be responsible for the development of such subleased portions of the Leased Premises in accordance with this Lease and with the zoning and other development and planning ordinances of the Community. If the Lessee or any Sublessee uses the Leased Premises for any use inconsistent with the provisions of this Article 4 without the prior written permission of the Lessor and the Community, such misuse shall constitute a default and a breach of this Lease. Lessee agrees not to use or cause to be used any part of the Leased Premises for any unlawful conduct or purpose. Lessee further covenants and agrees that it will not commit or permit on the Leased Premises any act that causes waste or a nuisance or which create a hazard to health of persons or to property wherever such persons or property may be. 5. Rent. All monies payable under this Lease as Rent or otherwise shall be payable to the Community which shall receive all payments for and on behalf of Lessor, each of whom hereby acknowledge that such payment shall constitute payment in fact and each of whom hereby irrevocably, for the Lease Term, designates the Community as its agent and attorney-in-fact for the receipt of such payments. Lessor agrees that no enforcement action or default against Lessee shall be made by or on behalf of Lessor in the event the Community fails to pay any sum due to Lessor herein, where such sums have been tendered to the Community in accordance with the provisions of this Article 5. The rent as set forth below shall be deemed “Rent”: (a) Prepaid Rent Amount on the earlier of the Third Anniversary of the Secretary Approval, or issuance of Certificate of Occupancy. Not later than 30 days after the earlier of (i) the issuance of a Certificate of Occupancy by the Community for Axon’s Headquarters on the Leased Premises or (ii) the third anniversary of the Secretary approval of this Lease, the Lessee will pay a onetime rent prepayment in the amount of the Prepaid Rent Amount to Lessor representing the present value of rent for the remainder of the term of this Lease. This onetime payment of the Prepaid Rent Amount represents all rent and other charges that would have otherwise been paid by Lessee to Lessor during the term of this Lease and subsequently distributed by the Community to the Lessor. Upon Lessee’s payment of the Prepaid Rent Amount and Community’s 6

 
distribution to Lessor, no additional payments, rents, fees, or charges will be paid by Lessee and Lessor will receive no additional distributions during the remaining term of this Lease. In addition, and notwithstanding any terms to the contrary in this Lease, the Lessee will not be required to obtain the required approvals or consents from the Lessor or their Spokespersons under Sections 1(A), 1(C), 4, 8, 10, 15, 19 and 45, any time after the date the Prepaid Rent Amount is paid. (b) Timely Payment. All Rent shall be paid without prior notice or demand on or before the fifteenth (15th) day of each calendar month. Past due Rent shall bear interest at the Prime Rate plus five (5) percentage points from the date due until paid, but this provision shall not be construed to relieve Lessee from its obligation to make timely Rent payments, nor of the operation of the provisions of this Lease relating to default. In addition to the Rent payments due under Article 5 of this Lease, Lessee shall pay to the Treasurer of the Community a sum equal to the actual amount expended in the receipt, handling and distribution of Rent to the Lessor. The Treasurer will send a statement for that amount to the Lessee and the Lessee will pay the amount of the statement within ten (10) days of its receipt. In the event that Lessee disputes the statement, the Treasurer and the Lessee will meet within ten (10) days after Lessee gives notice to the Treasurer of the dispute and seek to resolve the dispute. (c) Alternate Payment Provision. The provisions of this Article 5 notwithstanding, in the event of the death of any of the allotted landowners comprising the Lessor during the Lease Term and while the Leased Premises are in trust or restricted status, all Rent remaining due or payable to the decedent or his representative under the provisions of this Lease shall be paid to the official of the Bureau of Indian Affairs having jurisdiction over the Leased Premises. The Lessee’s obligation under this Article 5 shall commence upon written notice from the Community to Lessee of the identity of the deceased landowner and his or her percentage interest in the Rent payment. 7

 
6. Business Hours and Activity. Lessee agrees that subject to damage or destruction, that at all times during this Lease, it will keep the Leased Premises actively used. All businesses shall be conducted during the regular and customary hours of such business and on all business days in good faith. 7. Improvements and Completion of Development. All buildings and improvements developed on the Leased Premises shall be constructed in accordance with applicable legal requirements. Lessee shall use best efforts to develop the Leased Premises consistent with market conditions. 8. Substitute Lease and Amendments. It is further agreed that (i) upon completion of the development of the premises, or (ii) consistent with needs incident to debt and/or equity financing, or (iii) to facilitate development of the Leased Premises, Lessee shall be entitled to any reasonable subdivisions of the Leased Premises, and a separate Lease containing all of the applicable terms and provisions of this Lease (a “Substitute Lease”) shall be executed by the parties hereto covering only such parcel or subdivision of the Leased Premises, and this Lease shall then terminate with respect to such parcel or subdivision and be superseded by the terms of such Substitute Lease. The respective priority positions of the Lessor, Lessee and any Approved Encumbrancer shall be identified and preserved in the same manner as prior to the execution of such Substitute Lease. 9. Title to Buildings and Improvements. All buildings and improvements that may be placed upon, installed in or attached to the Leased Premises by Lessee or Sublessee shall be the property of and assets of Lessor during the Lease Term. Lessee shall, during the Lease Term, be solely entitled to any rights or benefits associated with such buildings and improvements including, but not limited to, any depreciation, investment tax credits or other tax benefits, and such buildings and improvements are not made in lieu of Rent. Notwithstanding the foregoing, the Lessor shall have the right to require Lessee to remove any or all of the buildings or improvements on the Leased Premises at the termination of the Lease. If so notified, Lessee, at the Lessee’s sole cost and expense, shall remove said buildings or improvements within six (6) months thereafter, and shall restore that portion of the Leased Premises as nearly as possible to the condition existing at the time this Lease commenced. 8

 
10. Construction, Maintenance, Repair, Alteration. All improvements placed on the Leased Premises shall be constructed in a good and workmanlike manner and in compliance with all Legal Requirements. All parts of buildings exposed to perimeter properties shall present a pleasant appearance and all service areas shall be screened from public view. The Lessee shall have the right at any time during the Lease Term to make limited alterations, additions or repairs to any improvement on the Leased Premises in an amount not to exceed Two Hundred Fifty Thousand and No/100 Dollars $250,000 per acre (“Material Improvements”), on the exterior of any single building or improvement during any Lease Year. Such sum shall be subject to adjustment in accordance with changes in the Price Index. Except as set forth in Article 43 below, removal or demolition of any improvements, alterations, additions or repairs to any improvements in excess of the above Material Improvements amount shall not be made without the prior consent of the Lessor and the Community and the approval of the Secretary, which consent and approval shall not be unreasonably withheld or delayed. Lessee shall prepare and submit its plans for removal or demolition of improvements or alterations, additions or repairs to any improvements in excess of the above amount to the Lessor, the Community and the Secretary in writing. Unless earlier approved, or rejected in writing, such plans shall be deemed approved thirty (30) days following submission. Lessee shall, at all times during the term of this Lease and at the Lessee’s sole cost and expense, maintain the Leased Premises and all improvements thereon in good order and repair and in a neat, sanitary and attractive condition and in compliance with all Legal Requirements. 11. Reserved. 12. Rental Bond. The Lessor agrees to waive the requirement for a rental bond. The Lessor and Secretary may later reinstate the requirement of the Rental Bond and Lessee hereby agrees to comply with said requirement. Within one hundred fifty (150) days after reinstatement of the rental bond requirement, the Lessee shall post a bond (the “Rental Bond”) in a form satisfactory to the Community, Lessor and Secretary in a penal sum of not less than the aggregate of the second year’s Basic Rent which bond shall be deposited with the Secretary. The Rental Bond shall be maintained at all times (except after the Prepaid Rent Amount is paid in full to Lessor) in an amount not less than the sum of the Basic Rent payments to become due and payable during the ensuing twelve (12) calendar months of the Lease, unless and until the requirement for the Rental Bond is waived by the Lessor, the Community and the Secretary. Should Lessee fail to post the Rental Bond within the specified one hundred fifty (150) day period, or thereafter fail to maintain the Rental bond, Lessee shall be deemed to be in default. Lessee may furnish a 9

 
corporate surety bond, or in lieu thereof, may deposit with the Secretary cash or negotiable United States Treasury Bonds or other negotiable Treasury obligations in the appropriate amount, together with a power of attorney, empowering the Secretary, in the event of Lessee’s default in any of the provisions of Article 5 above to pay over such cash, or to dispose of any such bonds and pay over the proceeds derived therefrom, to or for the benefit of the Lessor, subject to Lessee’s privilege of curing said default as hereinafter provided. Any other type of security which may be offered by Lessee to satisfy the requirements of this Article 12 will be given reasonable consideration by the Lessor and the Secretary, and it is agreed that acceptance of security in lieu of those described above shall not be unreasonably withheld or delayed. It is agreed that the Rental Bond required by this Article 12 shall guarantee payment of Basic Rent only and that any corporate surety bond shall be in continuous form and may be subject to the provisions that the surety may terminate the rental Bond thirty (30) days subsequent to the then next ensuing anniversary date of this Lease by giving at least forty-five (45) days written notice to the Lessor and the Secretary. If U.S. Treasury Bonds are provided, Lessee agrees to make up any deficiency between the value of the Treasury Bonds and the required Rental Bond. Interest on the Treasury Bonds shall be paid to Lessee. 13. Performance Bond. The parties agree that it is in the best interests of the Lessor and Lessee to waive the requirement for a performance bond, provided that the waiver may be rescinded and the requirement for a performance bond may be reinstated in accordance with 25 CFR 162.434 or its successor, in the Lessor’s sole and absolute discretion by act of the Spokespersons under Article 47. 14. Public Liability Insurance. At all times during the Lease Term, Lessee shall carry a public liability insurance policy with coverages of not less than Five Million, Five Hundred Thousand and No/100 Dollars ($5,500,000.00), combined single limit coverage, per occurrence. Five Hundred Thousand and No/100 Dollars ($500,000.00) of this coverage shall be in the form of primary coverage and the remaining Five Million and No/100 Dollars ($5,000,000.00) shall be pursuant to an umbrella liability insurance policy of not less than Five Million and No/100 Dollars ($5,000,000.00), combined single limit, per occurrence. Upon the issuance of the certificate of occupancy for a hotel, Lessee shall increase the liability coverage of the umbrella liability insurance policy to Ten Million and No/100 Dollars ($10,000,000.00), combined single limit, per occurrence. All policies shall be written to protect both Lessee and Lessor. Evidence of the foregoing reasonably acceptable to the Secretary shall be furnished to the Secretary. 10

 
15. Sublease, Assignment, Transfer. A. Sublease. This Lessee shall not, except as expressly authorized herein, sublease all or any part of the Leased Premises, without the approval of the Community, the Secretary and the Lessor, which approval will not be unreasonably withheld or delayed. No Sublease shall be valid or binding without the approval of the Community, the Secretary and the Lessor, and then only upon the condition that each Sublessee has agreed in writing that, in the event of conflict between the provisions of this Lease and of its Sublease, the provisions of this Lease shall govern. The Lessor, the Secretary and the Community shall either approve or state with reasonable specificity their reasons for disapproval of a proposed Sublease within thirty (30) days after the proposed sublease is submitted for approval. The failure of the Lessor, the Secretary and Community to so act within the thirty (30) day period provided for in this Article 15A shall constitute approval of the proposed Sublease by the Lessor, the Secretary and Community. Any Sublease made except as aforesaid shall be deemed a breach of this Lease. (1) Short Term Subleases. For Subleases not exceeding ten (10) years, prior to offering commercial, retail or office space within the Commercial Buildings for Sublease, Lessee shall submit to the Community and the Lessor, for approval, proposed schedules of Sublease rent, which shall show minimums, but not maximum rents, proposed to be charged to Sublessees. In conjunction with the submission of the schedules of rent, Lessee shall also submit to the Lessor and the Community, for approval, proposed sublease forms and an assignment of Sublease form for use in subleasing such commercial, retail or office space within the Commercial Building Approval of the within described forms and schedules of rents by the Lessor and the Community shall constitute approval of all Subleases of such commercial or office space and assignments of said Subleases entered into by the Lessee pursuant to this Lease which are consistent with such schedule and are on said forms Five (5) copies of such Sublease and assignment forms shall be furnished to the Lessor and the Community. The Sublease form shall provide that the Sublessee shall be subject to and bound by each and all of the conditions of this Lease. No such subletting shall affect any of the obligations or liabilities of the Lessee hereunder. The term, including any option period, of Subleases on the preapproved forms as described in this Article 15A(1) shall not exceed ten (10) years. The Lessor and the Community .may, on an annual basis, request the Lessee to submit revised schedules of Sublease rent and such Sublease rents may be adjusted with the written consent and agreement of the Lessee and Lessor. Such adjusted Sublease rents shall become effective as the then existing Subleases are terminated or expire. Notwithstanding any provision in this Lease to the contrary, any portion of the Leased Premises may be subleased after Lessor receives the Prepaid Rent Amount without the need for the consent of the Lessor 11

 
and without the need for the approval of the Secretary or the Community if (1) the Sublease does not relieve Lessee of any liability, (2) Lessee provides the Spokespersons , the Community and the Secretary with a copy of the Sublease within 30 days after it is executed, (3) there is incorporated into the Sublease an addendum in the form attached hereto as Exhibit F or other form approved by the Community. B. Assignment or Transfer. The Lessee shall not assign or transfer all or any part of its interest in this Lease without the written approval of the Lessor, the Community, the Secretary and Approved Encumbrancers, which approval shall not be unreasonably withheld or delayed. This Article 15B shall not, however, restrict transfers of ownership within Lessee’s entity, except as restricted in Article 15C below. No such assignment or transfer shall be valid or binding without such approval, and then only upon the condition that the assignee or other successor in interest, excepting an Approved Encumbrancer, shall agree in writing to be bound by each and all of the covenants and conditions of this Lease. Any such assignment or transfer not, complying with the provisions of this, Article 15B shall be deemed a breach of this Lease. The Lessor, the Community and the Secretary shall either approve or state, with reasonable specificity, their reasons for disapproval of any proposed assignment or transfer within sixty (60) days after it is submitted for approval. Lessor, the Community and the Secretary shall not withhold approval to an assignment or transfer by any successor to the Lessee of all or any part of its interest in this Lease to a “Qualified Transferee”. Upon an assignment or transfer by any successor to the Lessee of all or any part of its interest in this Lease to a Qualified Transferee and an assumption by the Qualified Transferee of the portions of this Lease so assigned or transferred, such successor to the Lessee shall be released from any liability accruing thereafter with respect to the portion of the Lease so assigned or transferred. For the purposes of this Article 15B, a Qualified Transferee means a Person (a) having a net worth, calculated in accordance with generally accepted accounting principles, consistently applied, of not less than five (5) times the Rent, if any, paid by lessee to Lessor during the immediately preceding twelve (12) months of the Lease Term, and (b) either (i) a Person having at least seven (7) years’ experience in the ownership and/or operation of commercial real estate projects, or (ii) a Person whose senior management has, in the aggregate, not less than ten (10) years’ experience in the ownership and/or operation of commercial real estate, or (iii) a Person who has engaged a property management company satisfying the requirements of clauses (i) or (ii), and (c) either (i) a Person who currently owns and operates at least one real estate project of comparable size as the project then developed on the Leased premises, or (ii) a Person who operates at least one project of at least one-half (1/2) the size of the project then developed on the Leased Premises and all of whose projects are at least three (3) times the size of the project then developed on the Leased Premises, or (iii) a Person who has engaged a property management company that satisfies the 12

 
requirements of clauses (i) and (ii). In the event the Qualified Transferee is a single-purpose entity, in determining whether the Qualified Transferee satisfies the requirements set forth in clauses (b) and (c) above, the ownership and experience of affiliated entities may be considered. C. Assignment by Transfer of Interest. For the purposes of this Article 15, the sale, assignment, transfer or other disposition of any of the issued and outstanding capital stock of Lessee, or of the interest of any general partner or joint venturer or syndicate member or cotenant, if Lessee is a partnership, limited liability company, joint venture, syndicate or cotenancy, which shall result in changing the control of Lessee, shall be construed as an assignment of this Lease requiring the approval of the Secretary, the Lessor and the Community. Control, for the purposes of this Article, shall mean more than fifty percent (50%) of the voting power of the corporation, or more than fifty percent (50%) of the ownership of a partnership, limited liability company, joint venture, syndicate or cotenancy, except for limited partnerships, in which case a change in ownership of more than fifty percent (50%) of general partnership interest shall constitute a change in control of the limited partnership. Limited partnership interests shall be alienable without restriction. Upon a transfer of less than a controlling interest in Lessee, the identity of the transferee shall be provided to the Lessor, the Community and the Secretary. Notwithstanding the foregoing, no notice shall be required, and there shall not be deemed to be an assignment or transfer pursuant to this Section 15(C), in the event of (1) if Lessee is an individual, devolution by will or otherwise upon death, (2) a transfer to (x) a member or members of the Lessee’s family (or to a trust for their benefit) if Lessee is an individual, or (y) any stockholder, partner, member, joint venturer, or other owner of Lessee, or (z) any co-tenant of Lessee, (3) if Lessee is an individual, a transfer to a personal representative upon Lessee’s death or incompetence or (4) any Preapproved Transferee. Any transfers set forth in these Subsections 15(C) (1), (2), (3) and (4) shall not require the approval of Lessor, SRPMIC or Secretary. D. Affiliate Assignment. Notwithstanding Section 15, an Affiliate Assignment shall not require the approval or consent of Lessor, SRPMIC or the Secretary. An “Affiliate Assignment” shall mean an assignment of all or any part of Lessee’s interest in this Lease to a Person directly or indirectly controlling, controlled by, or under common control with Lessee. Upon any Affiliate Assignment, Lessee shall deliver written notice to Lessor and SRPMIC identifying the assignee. E. Publicly Traded Corporations. The provisions of Sections 15 shall not apply to a corporation, partnership, trust or other entity publicly traded on a nationally recognized stock exchange or traded over the counter on the National Association of Security Dealers Automated 13

 
Quotation System (NASDAQ) or a successor system (collectively, a “PTC Entity”) and any ownership transfers (including any changes in control) or assignments by PTC Entities shall not require the approval of Lessor, SRPMIC or Secretary. Upon any Assignment by Lessee (as a PTC Entity), Lessee shall deliver written notice to Lessor and SRPMIC identifying the assignee. F. Assignment After Payment of Prepaid Rent. Notwithstanding any provision in this Lease to the contrary, any portion of the Leased Premises may be assigned after Lessor receives the Prepaid Rent Amount without the need for the consent of the Lessor if (1) the Assignment does not relieve Lessee of any liability, and (2) Lessee provides the Spokespersons with a copy of the Assignment within 30 days after it is executed. 16. Status of Subleases. Termination of this Lease, by cancellation or otherwise shall not serve to cancel Approved Subleases and/or subtenancies, but shall operate as an assignment to Lessor of any and all such Subleases and/or subtenancies. Provided that a Sublessee is not in default under the terms of its Sublease, Lessor shall honor such Sublease and shall not disturb the tenancy of such Sublessee. If Lessee shall so request, within forty-five (45) days after receipt of such request, the Lessor, the Community and the Secretary shall execute, acknowledge and deliver to a Sublessee, one or more non-disturbance agreements, in a form reasonably satisfactory to such Sublessee, whereby Lessor, the Community and the Secretary expressly agree that, notwithstanding any default by Lessee hereunder, or any termination or alteration of this Lease, the Lessor, the Community and the Secretary shall honor and acknowledge the continuing validity of such Sublessee’s Sublease. Any Sublessee may assign its Sublease or sub-let its premises for a term not to exceed the term of the original Sublease, together with options, if any, without the requirement of approval of the Lessor, the Community or the Secretary. 17. Agreements for Utility Facilities. The Community reserves the right to provide to the Lessee, either through its own resources or by contract with other governmental or private entities, utility services, including, but not by way of limitation, gas, water, electric, telecommunications, television, solid waste removal and sewer facilities, at appropriate rates and charges; provided however, that such utility services shall be of a quality, capacity and at substantially similar rates as would be available to Lessee within the political boundaries of the City of Scottsdale. In the event Lessee has, at its expense, constructed utility facilities or is in the process of constructing such facilities, the Community will not provide service within the Leased Premises without first purchasing those facilities from the Lessee at a cash price which is equal to the “straight 14

 
line” depreciated value thereof. Except as otherwise limited herein, the Community shall have the absolute right to purchase such utility facilities for the purpose of interconnecting such facilities with an existing Community utility system. Lessor, the Community and the Secretary hereby grant to Lessee the right to install and operate utility services, including sewer, water, electric, gas, telecommunications and television, etcetera, in the event the Community is unable to provide such utility services within the time frame necessary to meet Lessee’s timetable for development of the Leased Premises, or if the Community is unable to provide such utility services at a quality, capacity and at substantially similar rates as would be available to the Lessee within the political boundaries of the City of Scottsdale. In the event that such utility improvements constructed by Lessee or a Developer Sublessee are purchased by the Community, the capacity of such utilities to serve the additional developments on the Leased Premises planned by Lessee and any Developer sublessee shall be computed. That capacity, together with the capacity being used by Lessee and any Developer Sublessee at the time of the acquisition by the Community, shall remain available to Lessee and any Developer Sublessee for uses on the Leased Premises. The Lessor and the Secretary shall cooperate with Lessee to the end that such agreements may be consummated and further agree to grant rights-of-way and/or easements for the completion of such utilities, in accordance with and subject to the terms of this Lease. The Lessee shall furnish to the Community, the Lessor and the Secretary executed copies of any proposed agreement together with a plat or diagram showing the true location of the utility lines to be constructed in accordance with such proposed agreement. Lessee shall not enter into such proposed agreement until the Community Council approves the proposed location of the utility facilities to be constructed, which approval shall not be unreasonably withheld or delayed. The proposed location of utility facilities may be approved contemporaneously with or prior to the approval of this Lease. A copy of the executed agreement shall be furnished to the Community, the Lessor and the Secretary, together with the final plat or diagram of the utility installation. If sewer and water facilities are not immediately and readily available for use in developing the Leased Premises either from public utility companies, other third parties or the Community, Lessee shall have the right to use temporary facilities such as septic tanks and other procedures, subject to the approval of the Community, which approval will not be unreasonably or arbitrarily withheld or delayed. The Lessee and their Sublessees may employ unarmed security personnel to patrol their leasehold premises as may be required by their business operations. 18. Rights-of-Way for Streets and Utility Facilities. Lessor hereby consents to the granting of rights-of-way for streets and utility facilities necessary to the full enjoyment of the Original Leased Premises, Axon’s Headquarters and development thereof; according to the plans approved by Lessor and the Community in accordance with the provisions of 15

 
Article 45 below. While it is intended that this provision shall be self-operative, Lessor agrees to execute, acknowledge and deliver to Lessee such instruments or documents reasonably necessary to effectuate, acknowledge and deliver to Lessee such instruments or documents reasonably necessary to effectuate the provisions of this Article 18. Such right-of-way are subject to grant by the Secretary in accordance with the approved general development plan and pursuant to the Act of February 5, 1948 (62 Stat. 17), and any amendments thereto as supplemented by regulations of the Secretary applicable thereto. Such grants of rights-of-way are subject to the approval of the Community Council which approval shall not be unreasonably withheld or delayed. 19. Encumbrance. A. The Lessee, from time to time during the Lease Term, may make one or more Approved Encumbrances upon Lessee’s leasehold interest in this Lease, or any part thereof, or any of the improvements on the Leased Premises by mortgage to any person, firm, corporation or other entity or combination thereof, and assign this Lease, or any part or parts thereof, as collateral security therefor provided that: (1) The Lessee or the holder of the Approved Encumbrance shall promptly deliver to the Lessor in the manner herein provided for the giving of notice to the Lessor, a true copy of the Approved Encumbrance and of any assignment thereof, and shall notify the Lessor of the Address to which notices may be sent; (2) An Approved Encumbrance shall be utilized for the development and improvement of the Leased Premises in such amount as the Lessee determines to be appropriate and the Secretary may approve, or to secure such other obligations as the Community and the Secretary may approve; (3) No Approved Encumbrance shall extend to or affect the reversionary interest and estate of Lessor in and to the Leased Premises, or in any way attach to or affect the Leased premises from and after any expiration or termination of this Lease; (4) An Approved Encumbrance shall provide that any notice of default thereunder shall be delivered to Lessor, as well as to Lessee, and that Lessor shall have the right to cure such default if the Lessee fails to do so. Lessor shall have the same time period as is available to the Lessee within which to cure a default, which time period will not commence until the expiration of the time period available to Lessee. Neither Lessor’s right to cure a default nor Lessor’s exercise of such right shall be deemed to be an assumption by Lessor of liability under the Approved Encumbrance; and 16

 
(5) From and after receiving notice of the existence of an Approved Encumbrance, Lessor and Lessee shall not mutually agree to cancel, surrender, modify or amend this Lease in any respect without the prior written consent of the Approved Encumbrancer. B. With respect to any Approved Encumbrance made in accordance with the provisions of this Article 19, and until the time, if any, that said mortgage shall be satisfied of record or said Approved Encumbrancer shall give to Lessor written notice that said mortgage has been satisfied, the following provisions shall apply: (1) For the purposes of this Article 19, and throughout this Lease, the term “Approved Encumbrance” shall mean a mortgage on Lessee’s interest in this Lease, which shall be deemed to include a deed of trust and such other types of security instruments as are commonly given to secure loans or advances on, the unpaid purchase price of leasehold estates and the construction and permanent financing and refinancing of improvements under the laws of the State of Arizona and the note or other credit instrument secured thereby. (2) For the purposes of this Article 19, and throughout this Lease, the term “Approved Encumbrancer” shall mean the holder of record of any Approved Encumbrance including the trustee and beneficiary under a deed of trust, and the parties secured by any other security instrument. (3) If Lessor shall give any notice, demand, election or other communication (collectively, “Messages”) to Lessee hereunder, Lessor shall at the same time give a copy of each such Message to each Approved Encumbrancer at the address theretofore designated by each Approved Encumbrancer. Copies of Messages shall be sent by registered or certified mail, and shall be deemed given upon the earlier of actual receipt or seventy-two (72) hours after the date such copy is deposited in a United States Post Office with postage charges prepaid. No Message given by Lessor to Lessee shall be effective unless and until a copy of said Message shall be given to each Approved Encumbrancer pursuant to this Article 19. In the case of an assignment of the mortgage or change in address of the Approved Encumbrancer, the assignee or Approved Encumbrancer, by written notice to Lessor, may change the address to which copies of Messages are to be sent. Lessor shall not be bound to recognize any assignment of the mortgage unless and until Lessor shall be given written notice of such assignment and the name and address of the assignee, and thereafter such assignee shall be deemed to be an “Approved Encumbrancer” under this Lease. 17

 
(4) Each Approved Encumbrancer, after receiving notice in accordance with subsection (3) of this Article 19B will have forty-five (45) days more than is given the Lessee after notice to it, to remedy any default or to cause the same to be remedied. (5) In case the Lessee shall default under any of the provisions of this Lease, each Approved Encumbrancer shall have the right to make good such default whether the same consists of the failure to pay rent or the failure to perform any other matter or thing which the Lessee is hereby required to do or perform, and the Lessor shall accept such performance on the part of the Approved Encumbrancer as though the same had been done or performed by the Lessee. (6) Lessee may delegate irrevocably to an Approved Encumbrancer the authority to exercise any or all of Lessee’s rights hereunder, but no such delegation shall be binding upon Lessor unless and until either Lessee or the Approved Encumbrancer shall give to Lessor a true copy of a written instrument effecting such delegation. Such delegation of authority may be effected by the terms of the Approved Encumbrance itself, in which case the service upon Lessor of an executed counterpart or certified copy of the Approved Encumbrance, together with a written notice specifying the provisions therein which delegate such authority to the Approved Encumbrancer, shall be sufficient to give Lessor notice of such delegation. (7) Any Approved Encumbrancer may, at the time of any damage or destruction, by fire or otherwise, to the Leased Premises or any machines, fixtures or equipment therein, or improvements thereon, at its sole cost and expense, repair the same or construct new improvements, as the case may be, and in such event, if the Approved Encumbrancer repairs or constructs, it shall be subrogated to the rights of Lessor and Lessee to all insurance proceeds payable as a result of such damage or destruction, and shall be entitled, if Lessee is not then in default hereunder, to have (and Lessee hereby authorizes Lessor to do so) all insurance proceeds paid out by Lessor in the same manner and in every respect as if the Approved Encumbrancer were the Lessee hereunder. (8) In the case of any default hereunder to the Lessee, other than in the payment of money, the Lessor will take no action to effect a termination of this Lease by reason of any such default without first giving to the Approved Encumbrancer a reasonable time within which either (i) to obtain possession of the Leased Premises (including possession by a receiver) and cure such default in the case of a default which is susceptible of being cured when the Approved Encumbrancer has obtained possession, or (ii) to institute foreclosure proceedings and complete such foreclosure, or otherwise acquire the Lessee’s interest under this Lease with diligence and continuity in the case of a default which is not susceptible of being cured by the Approved Encumbrancer; provided, however, that 18

 
the Approved Encumbrancer shall not be required to continue such possession or continue such foreclosure proceedings if the default which would have been the reason for termination shall be cured. (9) Any Approved Encumbrancer may become the legal owner and holder of Lessee’s interest in this Lease by foreclosure of its Approved Encumbrance or as a result of the assignment of this Lease in lieu of foreclosure. No Approved Encumbrancer, however, shall become liable under the provisions of this Lease, unless and until such time as it becomes, and then only for as long as it remains, the owner of the Lessee’s interest in the leasehold estate. If an Approved Encumbrancer shall acquire Lessee’s interest in this Lease as a result of a sale under such Approved Encumbrance pursuant to a judgment of foreclosure and sale, or through any transfer in lieu of foreclosure, or through settlement of or arising out of any pending or contemplated foreclosure action, such Approved Encumbrancer shall have the privilege of transferring its interest in this Lease to a nominee or assignee without the prior consent of Lessor, provided, however, that there shall be delivered to Lessor in due form for recording, within ten (10) days after the date of such transfer, (a) a duplicate of the instrument of assignment and (b) an instrument of assumption by the assignee of all of the Lessee’s obligations under the Lease, and said Approved Encumbrancer shall be relieved of any further liability under this Lease from and after such transfer. Any purchaser at a foreclosure sale, other than an Approved Encumbrancer, must assume this Lease and it shall have no right with respect to the Leased Premises unless it so assumes and delivers a duplicate of the assumption agreement (to be executed in due form for recording) with ten (10) days after such purchaser acquires title to the Lessee’s interest in this Lease. (10) In the event of the termination of this Lease or of any succeeding lease made pursuant to the provisions of this Article 19B(10) prior to its stated expiration date, the Lessor will enter into a new lease of the Leased Premises with the Approved Encumbrancer or, if there be more than one Approved Encumbrance, then with the Approved Encumbrancer entitled under Subparagraph (a) of this Article 19B(10) or, at the request of such Approved Encumbrancer, to its designee or nominee, for the remainder of the Lease Term, effective as of the date of such termination, at the Rent and upon all the covenants, conditions, agreements, terms, provisions and limitations contained in this Lease, provided that: (a) Such Approved Encumbrancer makes written request upon the Lessor for such new lease within forty (40) days after the date of such termination, and such written request is accompanied by payment to the Lessor of all amounts then due hereunder; 19

 
(b) Such Approved Encumbrancer pays, or causes to be paid, to the Lessor, at the time of the execution and delivery of said new lease, any and all sums which would at the time of the execution and delivery thereof be due under this Lease but for such termination, and pays or causes to be paid to Lessor any and all expenses, including reasonable attorneys’ fees, court costs and disbursements incurred by the Lessor in connection with any such default and termination, as well as in connection with the execution and delivery of such new lease, less the net income collected by the Lessor subsequent to the date of termination of this lease and prior to the execution and delivery of the new lease, any excess of such net income over the aforesaid sums and expenses to be applied in payment of the rent thereafter becoming due under said new lease; and (c) If more than one such Approved Encumbrancer makes written request upon the Lessor in accordance with the provisions of Subparagraph (a) of this Article 19B, the new lease shall be delivered pursuant to the request of the Approved Encumbrancer whose Approved Encumbrance is prior in lien, and the written request of any Approved Encumbrancer whose Approved Encumbrance is subordinate in lien shall be void and of no force or effect; such new lease executed and delivered in accordance with the provisions of this Article 19B shall provide that, with respect to each and every Sublease which immediately prior to the termination of the term of this Lease was superior to the lien of the Approved Encumbrance held by the Approved Encumbrancer who obtains such new lease, by entering into such new lease, the Lessee thereunder shall be deemed to have recognized the sublessee under the Sublease pursuant to the terms of the Sublease as though the Sublease had never terminated but had continued in full force and effect after the termination of the term of this Lease, and to have assumed all of the obligations of the Lessor under the Sublease accruing from and after the termination of the term of this Lease, except that the obligation of the Lessee under such new lease on any covenant of quiet enjoyment, expressed or implied, contained in the Sublease, shall be limited to the acts of such Lessee and those claiming by, under or through such Lessee. (d) Each sublessee of the Leased Premises whose Sublease was in force and effect immediately prior to termination of this Lease, and which did not expire of its own terms prior to the delivery of said new lease, shall attorn to the Lessee under said new lease; furthermore, each Sublessee who hereafter subleases a portion of the Leased Premises shall be deemed to have agreed to the provisions of this subsection. (11) Any new lease made in accordance with the provisions of Article 19B(10) and the leasehold estate thereby created, shall, subject to the same conditions contained in this Lease, continue to maintain the same priority as this Lease with regard to any mortgage on the 20

 
Leased Premises or any part thereof or any other lien, charge or encumbrance thereon, whether or not the same shall then be in existence. (12) Upon the execution and delivery of a new lease in accordance with the provisions of Article 19B(10), all Subleases which theretofore may have been assigned and transferred to the Lessor shall thereupon be assigned and transferred without recourse by the Lessor to the Approved Encumbrancer, as the new Lessee. (13) Any Approved Encumbrancer may freely assign all of its right, title and interest in and to the new lease without obtaining Lessor’s prior consent and in no event shall an Approved Encumbrancer be under any obligation or liability whatsoever except as herein expressly provided beyond the period of its occupancy of the Leased Premises (or portion thereof) under the new lease. (14) If under the provisions of Article 19B(9) or if under any new lease made in accordance with the provisions of Article 19B(10) an institutional investor shall be the Lessee as a trustee, each and every obligation of such trustee shall be binding upon it solely in its fiduciary capacity and shall have no force and effect against such institutional investor in its individual capacity. (15) Lessor shall, upon request of an Approved Encumbrancer, execute, acknowledge and deliver to each Approved Encumbrancer, an agreement prepared at the sole cost and expense of Lessee, in a form satisfactory to such Approved Encumbrancer, between Lessor, Lessee and Approved Encumbrancer, agreeing to all of the provisions of Articles 19A and 19B. (16) Lessor agrees that the name of any Approved Encumbrancer may be added as a named insured or to the “loss payable endorsement” of any and all insurance policies required to be carried by Lessee hereunder on the condition that the insurance proceeds are to be applied in the manner specified in the Approved Encumbrance. The proceeds of any insurance policies arising from a condemnation are to be held by any Approved Encumbrancer and distributed pursuant to the provisions of this Lease, but the Approved Encumbrancer may reserve its right to apply to the mortgage debt all, or any part, of Lessee’s share of such proceeds pursuant to such mortgage. (17) As to any Approved Encumbrance, Lessor consents to a provision therein for an assignment of rents due to Lessee from Sublessees to the holder thereof, effective upon any default under the Approved Encumbrance, and to a provision therein that the holder thereof in any action to foreclose the same shall be entitled to the appointment of a receiver. 21

 
(18) Simultaneously with the making of a new lease as is contemplated by Article 19B(10), the party obtaining the new lease and all other parties junior in priority in interest in the Leased Premises shall execute, acknowledge and deliver such new instruments, including new mortgages and new Subleases, as the case may be, and shall make such payments and adjustments among themselves, as shall be necessary and proper for the purpose of restoring each of such parties to, as nearly as reasonable possible, the respective interests and status with respect to the property which was possessed by it prior to the termination of this Lease as aforesaid. (19) Nothing herein contained shall be deemed to impose any obligation on the part of Lessor to deliver physical possession of the Leased Premises to any Approved Encumbrancer, or to its nominee. Lessor agrees, however, that Lessor will, at the sole cost and expense of such Approved Encumbrancer, or its nominee, cooperate in the prosecution of summary proceedings to evict the then defaulting Lessee. (20) Lessor agrees that if any Approved Encumbrancer to whom Lessee proposed to make an Approved Encumbrance on Lessee’s leasehold estate hereby created shall require as a condition to making any loan secured by such mortgage that Lessor agree to reasonable modifications of this Lease, then Lessor will enter into an agreement with Lessee, in recordable form, making the reasonable modifications that are requested by such lender, provided that such changes are reasonable, and do not unreasonably expand or enlarge Lessor’s obligations under this Lease, and do not change or modify the basic purpose of this Lease, the Lease Term, the rental, or any other substantive rights of the parties. 20. Liens, Taxes, Assessments, Utility Charges. Lessee shall not permit to be enforced against the Leased Premises, or any part thereof, any liens arising from any work performed, materials furnished, or obligations incurred by Lessee, and Lessee shall discharge or post a bond against all such liens before an action is brought to enforce the same. Lessee shall pay, when and as the same become due and payable, all taxes, assessments, licenses, fees and other like charges levied during the Lease Term upon or against the Leased Premises, all interests therein and property thereon, for which either the Lessee or Lessor may become liable. Upon written request, the Lessee shall furnish to the Secretary written evidence, duly certified, that any and all taxes required to be paid by Lessee have been paid, satisfied or otherwise discharged. Lessee shall have the right to contest any claim, tax or assessment against the Leased Premises or any interests therein and property thereon by posting bonds to prevent enforcement of any lien resulting therefrom. Lessee agrees to protect and hold harmless the Lessor, the Secretary and the Leased Premises and all interests therein and improvements 22

 
thereon from any and all claims, taxes, assessments and like charges and from any lien therefor or sale or other proceedings to enforce payment thereof, and all costs in connection therewith. Lessor shall promptly execute and deliver for filing any appropriate documents with reference to the real estate tax exemption of the Leased Premises when so requested by Lessee. In addition to the Rent, taxes and other charges herein described, Lessee shall pay all charges for water, sewerage, gas, electricity, telephone and other utility services supplied to the Leased Premises as the same shall become due. 21. Lessor’s Paying Claims. Lessor shall have the right to pay any lien or charge payable by Lessee under this Lease, or settle any action therefor, if the Lessee, after written notice from the Lessor or the Secretary, fails to pay or to post bonds against enforcement. All costs and other expenses incurred by Lessor in so doing shall be paid to Lessor by Lessee upon demand, with interest from date of payment until repaid at the rate of interest two (2) percentage points greater than the Prime Rate. Failure to make such repayment on demand shall constitute a breach of the covenants of this Lease. 22. Claim or Assessment of State Taxes. A. Lessee will forthwith notify the Community of any claim of right by the State of Arizona or any of its political subdivisions or municipalities to or assessment of taxes and will forthwith send to the Community copies of all notices or other documents received by it in connection with any such claim or assessment of taxes. B. Lessee will make no payment of such taxes without approval of the Community and the Lessors unless such payment is made under protest that there is no right to assess or claim such taxes. C. Lessee will cooperate in any action undertaken by the Community or the Lessors in regard to any claim or assessment of such taxes and will further cooperate with the Community and the Lessor in any litigation resulting from a payment under protest as set out in Subparagraph B hereof. Such cooperation, however, shall not require or subject Lessee to any additional cost or expense except those provided for under the Lease, and any such litigation shall be undertaken by and the expenses thereof shall be borne exclusively by the Community and the Lessor. In addition, Lessee shall not be obligated to be a party initiating such action or litigation brought by the Community or the Lessors without its written consent thereto. 23

 
D. Nothing contained herein shall require Lessee to take any action that (i) is inconsistent with its rights and obligations under the Lease; (ii) will subject it to any penalty, fine or lien imposed by any taking authority; or (iii) otherwise diminish or jeopardize its leasehold interest or its ability to develop the leasehold estate as provided for under the Lease. E. For purposes of this Article 22, “taxes” shall mean any ad valorem taxes, including leasehold or government property lease excise taxes sought to be assessed by or collected by the State of Arizona or any of its political subdivisions or municipalities having or claiming to have authority by virtue of the Arizona State Constitution or laws, against the property interest in the leasehold subject of the Lease or any other property or possessory interest connected with that leasehold. 23. Eminent Domain. A. Definition of Terms; Lessee’s Option. The term “Total Taking”, as used in this Article 23A, means the taking by a Governmental Authority of the entire Leased Premises in fee under the power of eminent domain or a voluntary transfer in lieu thereof. The term “Partial Taking”, means any other taking by a Governmental Authority in fee under the power of eminent domain (or a voluntary transfer in lieu thereof), except that if one quarter or more by area, but not all of the Leased Premises is so taken, then Lessee shall have the option, exercisable within sixty (60) days after the date of such taking, by notice in writing to Lessor and the Secretary, and with the consent of all Approved Encumbrancers, to have such Partial Taking deemed to be a “Total Taking”. B. Total Taking. In case of a Total Taking, the Leasehold estate of Lessee and its liability for payment of Rental of every kind whatsoever shall cease and terminate as of the date possession of the Leased Premises shall be so taken. C. Partial Taking. In case of a Partial Taking, this Lease shall terminate as to the portion of the Leased Premises so taken as of the date on which possession of said portion is taken, but this Lease shall continue in full force and effect as to the remainder of the Leased Premises. Thereafter, each ensuing installment of Rent shall be abated in the ratio that the value of the Leased Premises taken as unimproved real property being put to its highest and best use bears to the total value of the Leased Premises as unimproved real property being put to its highest and best use prior to such taking. D. Refund of Advance Rentals. There shall be no refund of Basic Rent paid in advance because of either a Total or Partial Taking of the Leased Premises. However, in the event of an overpayment of Rent due to a Partial Taking (determined with reference to the abatement of Rent in 24

 
Article 23C above), any such overpayment shall be credited toward future payments of Rents as the same become due. E. Allocation of Awards. In the event of either a Partial or Total Taking of the Leased Premises. Lessor shall be entitled to that portion of the entire award (subject to the rights of any Approved Encumbrancer) made with respect to the then discounted present value of Rent (provided that discounted present value of Rent will be determined to be zero after payment of the Prepaid Rent Amount is made to Lessor) payable under this Lease for the remainder of the Lease Term, and the then discounted present value of the residual value of the Leased Premises to Lessor upon the termination of this Lease. Lessee, or any Approved Encumbrancer, as their interests may appear, shall be entitled to that portion of the entire award made with respect to the taking of the improvements erected on the Leased Premises by Lessee and with respect to Lessee’s leasehold interest in the Leased Premises (which interest shall be the total value of the Leased Premises minus Lessor’s interest in the Leased Premises as set forth above). All compensation and damages awarded for the taking of the Leased Premises or the improvements or any portion thereof shall, except as otherwise herein provided, and except as to such compensation as may be deemed “relocation benefits”, belong to and be the sole property of Lessor. F. Taking for a Term. In case the Leased Premises or any portion thereof are taken for a term of years, then Lessee shall remain bound by all of the terms and provisions of this Lease and shall be entitled to the entire award made in connection with such taking; except such part, if any, as is allocable to a period beyond the Lease Term. G. Voluntary Conveyance. A voluntary conveyance by Lessor to a Governmental Authority under a threat of a taking under the power of eminent domain, in lieu of formal proceedings, with the written consent of the Lessee and any holder of an Approved Encumbrance, shall be deemed to be a taking within the meaning of this Article 23. 24. Rezoning. It is understood, by and between the parties hereto, that if after the beginning of the Lease Term, the zoning of the Leased Premises or any part thereof is changed and such rezoning in the reasonable judgment of Lessor, Lessee and the Community has a material and adverse effect on the present or future operation of all or part of the Leased Premises for the uses permitted in Article 4 hereof, then that part of the Leased Premises so affected may be withdrawn from this Lease and the Rent applicable to such withdrawn land shall thereafter be abated in full and shall no longer be an obligation of the Lessee. The 25

 
Lessee shall give effect to the election provided for in this Article 24 by a written notice to the Lessor, the Community and the Secretary (“Notice of Election”). In the event the Lessor disputes Lessee’s election to withdraw such land from this. Lease, such dispute shall be settled by binding arbitration in accordance with the provisions of Article 39. The demand for binding arbitration must be made within forty-five (45) days after receipt by the Lessor and the Community of Lessee’s Notice of Election. The failure to demand arbitration within such forty-five (45) day period shall be deemed to be an acceptance of Lessee’s election to withdraw such land from this Lease and a waiver of any right to dispute such withdrawal. The effective date of the withdrawal of such land, abatement of Rent and the release of Lessee’s obligation therefor shall be forty-five (45) days after the receipt of notice by the parties who are to receive notice. Such notice shall be effective only if delivered in accordance with the terms of this Article. If, however, Lessor requests arbitration, the effective date of the withdrawal of such land, the abatement of Rent and the release of Lessee’s obligation therefor shall be twenty-five (25) days following the final adjudication under the Arbitration proceedings. 25. Default. Time is of the essence of this Lease. Should Lessee default in any payment of monies or fail to post any bond as required by the terms of this Lease, and if such default shall continue uncured for the period of twelve (12) days after certified mailing of written notice thereof by the Secretary to Lessee, or should Lessee breach any other covenant of this Lease, and if the breach of such other covenant shall continue uncured for a period of sixty (60) days (or if such breach of such other covenant cannot reasonably be cured within sixty (60) days, Lessee shall have a reasonable time to cure such breach provided that Lessee proceeds in good faith and with due diligence) after written notice thereof by the Secretary to Lessee, then the Lessor and the Secretary may (provided that such default is not then the subject of arbitration in accordance with the provisions of Article 39, below) either: A. Proceed by suit or otherwise to enforce collection or to enforce any other provision of this Lease; or B. Re-enter the Leased Premises and subject to the provisions of Article 16 hereof remove all persons and property therefrom, excluding the person and property belonging to sublessees, and (1) Re-let the Leased Premises in a commercially reasonable manner, without terminating this Lease, as the agent and for the account of Lessee, but without prejudice to the right to terminate this Lease thereafter, and without invalidating any right of Lessor and the Secretary or 26

 
any obligation of Lessee hereunder. The terms and conditions of such re-letting shall be at the discretion of Lessor and the Secretary, who shall have the right to alter and repair the Leased Premises as they deem advisable, and to re-let with or without any equipment or fixtures situated thereon. If a sufficient sum is not thus realized to liquidate the total amount due, including reasonable attorney’s fees and real estate commissions actually paid, Lessee shall pay to Lessor monthly, when due, any deficiency, and Lessor or the Secretary may sue thereafter as each monthly deficiency shall arise; or (2) Subject to the provisions of Subparagraphs 19A(4) and (5) and 19B(3),(4),(5) and (8) above, terminate this Lease at any time even though Lessor and the Secretary may have exercised the rights outlined in Subparagraph 25B(1) above. Any action taken or suffered by Lessee as a debtor under any insolvency or bankruptcy act shall constitute a breach of this Lease. In such event, the Lessor and the Secretary shall have the options set forth in Articles 25A and B above. No waiver of a breach of any of the covenants of this Lease shall be construed to be a waiver of any succeeding breach of the same or any other covenant. Lessor shall make commercially reasonable efforts to re-let and shall maintain the Leased Premises. 26. Attorney’s Fees. If an action be brought by Lessor in unlawful detainer, for Rent or any other sums of money due under this Lease, or if either party shall bring an action to enforce performance of any of the covenants and conditions of this Lease whether in court or pursuant to the Arbitration provisions set forth in Article 39 below, the losing party shall pay such reasonable attorney’s fees of the prevailing party, as may be determined and fixed by the Court (or Arbitration panel) as a part of the costs in any such action. 27. Holding Over. Holding over by the Lessee after the termination or expiration of this Lease shall not constitute a renewal or extension of this Lease or give the Lessee any rights hereunder in or to the Leased Premises. Lessee agrees to remove all Removable Personal Property prior to the termination or expiration of this Lease; provided, however, that if this Lease is terminated prior to the expiration date, Lessee shall have thirty (30) days after the termination date to remove all its Removable Personal Property. Should the Lessee fail to remove any Removable Personal Property within the specified time, Lessor shall have the right to remove it and dispose of it or have it stored, all at Lessee’s expense. 27

 
28. No Partnership. Lessee and Lessor are not in partnership. 29. Termination of Federal Trust. Nothing contained in this Lease shall operate to delay or prevent a termination of Federal trust responsibilities with respect to the Leased Premises by the issuance of a fee patent or otherwise during the Lease Term; however, such termination shall not serve to abrogate this Lease. Lessor, Lessee and its surety or sureties and Approved Encumbrancers shall be notified of any such change in the status of the Leased Premises. 30. Lessee’s Obligations to the United States. While the Leased Premises are held in trust by the United States or subject to a restriction against alienation imposed by the United States, all of the Lessee’s obligations under this Lease, and the obligations of Lessee’s sureties, are to the United States as well as to the Lessor. 31. Payments and Notices. All notices, payments and demands shall be sent to the parties hereto at the address herein recited or to such addresses as the parties may hereafter designate in writing: For SRPMIC: Lessor – Business Lease B-704 c/o Director, Community Development Department Salt River Pima-Maricopa Indian Community 10005 East Osborn Road Scottsdale, AZ 85256 with a copy to: Office of the General Counsel Salt River Pima-Maricopa Indian Community 10005 East Osborn Road Scottsdale, AZ 85256 For Lessee: c/o The Alter Group, Ltd. Attention: Mr. Randolph Thomas 3201 Old Glenview Road, Suite 302 Wilmette, IL 60091 Fax No.: (847) 676-4309 With copies to: Lawrence M. Freedman Ash, Anos, Freedman & Logan, L.L.C. 77 West Washington Street, Suite 1211 Chicago, IL 60602 Fax No.: (312) 346-1390 28

 
The Alter Group Attn: Kent Moe 7500 North Dobson Road, Suite #151 Scottsdale, AZ 85256 Fax No.: (480) 302-6606 Samuel F. Gould Alter Asset Management, L.L.C. 1980 Springer Drive, Lombard, IL 60148 Fax No.: (630) 620-3606 Procopio Cory, Hargreaves & Savitch LLP Attn: Kerry Patterson 8355 Hartford Drive, Suite 202 Scottsdale, AZ 85255 Fax No.: (619)788-5505 For Community: Director, Community Development Department Salt River Pima-Maricopa Indian Community 10005 East Osborn Road Scottsdale, AZ 85256 Payments through the Community: Salt River Pima-Maricopa Indian Community Finance Department 10005 East Osborn Road Scottsdale, AZ 85256 For Secretary: Superintendent, Salt River Agency Bureau of Indian Affairs 10000 East McDowell Road Scottsdale, AZ 85256 Notice, demands and payments shall be delivered in person or sent by certified or registered mail, return receipt requested. Service of any notice or demand shall be deemed completed seventy-two (72) hours after deposit in the mail or on the date actually received, whichever occurs first. 32. Inspection. The Secretary, the Community and the Lessor, and their authorized representatives shall have the right, at any reasonable times during the Lease Term, upon reasonable advance notice, which, depending upon the necessity or emergency determined by the Secretary, Community or Lessor, may be reduced to very short or no notice, to enter upon the Leased Premises, or any part thereof, to inspect the same and all buildings and other improvements erected and placed thereon. 29

 
33. Delivery of Leased Premises. At the termination or expiration of this Lease, Lessee will peaceably and without legal process deliver up the possession of the Leased Premises, in good condition, usual wear and tear excepted. 34. Lease Binding. This Lease and the covenants, conditions and restrictions hereof shall extend to and be binding upon the successors, heirs, assigns, executors and administrators of the parties hereto. 35. Interest of Member of Congress. No member of, or delegate to Congress, or Resident Commissioner, shall be admitted to any share or part of this Lease or to any benefit that may arise herefrom, but this provision shall not be construed to extend to this Lease if made with a corporation or company for its general benefit. 36. Tax Immunity. Nothing contained in this Lease shall be deemed to constitute a waiver of applicable laws providing tax immunity to trust or restricted Indian property or any interest therein or income therefrom. 37. Force Majeure. Whenever under this Lease a time is stated within which or by which original construction, repairs or reconstruction of improvements shall be completed, and if during such period a general or sympathetic strike or lockout, war or rebellion, or some other event occurs or fails to occur beyond, Lessee’s or Lessor’s power to control, or if Lessee is unable, despite the exercise of reasonable and diligent efforts, to obtain any Required Consent, the period of delay so caused shall be added to the period allowed herein for the completion of such work. 38. Laws and Ordinances of the Community. The Lessee, Lessee’s employees, agents and Sublessees and their employees and agents agree to abide by all laws, regulations and ordinances of the Community now in force and effect, or those that may be hereafter in force and effect. 39. Arbitration. Any controversy which shall arise between the Lessor, the Community and Lessee regarding the rights, duties or liabilities hereunder of Lessor, the Community and/or Lessee, except such in which there 30

 
is a claim that a lien (excluding Approved Encumbrances) exists or ought to exist on Lessor’s interest in real property within the Community and except such controversies involving claims for money damages in a sum of less than Forty Thousand and No/100 Dollars ($40,000.00), shall be settled by binding arbitration pursuant to the authority of the Act of November 22, 1983, (7 Stat. 1016). Both Lessor and Lessee may bring actions in Tribal Court for matters involving claims for money damages that are not, pursuant to this Article 39, subject to binding arbitration. Such binding arbitration shall be conducted, upon the request of either the Lessor, the Lessee or the Community before three (3) arbitrators (unless the Lessor, the Lessee and/or the Community agree to one (1) arbitrator) designated by the American Arbitration Association and in accordance with the rules of such Association (except as such rules may contemplate state court jurisdiction) and as provided for under the Act of November 22, 1983 (97 Stat. 1016). The conduct of any arbitration shall be solely within the jurisdiction of the United States District Court. The arbitrators designated to act under this Lease shall make their award in strict conformity with such rules and shall have no power to depart from or change any of the provisions thereof except as provided herein. The Community, as Lease Administrator, agrees to administer this Lease in accordance with any order, decree or judgment issued as a result of any arbitration or judicial proceeding permissible under Article 39 of this Lease. 40. Employment Preference. A. It is recognized that one of the basic factors involved in this Lease is the fact that substantial and persistent unemployment and underemployment exist within the Community and the project of Lessee hereunder is reasonably calculated to provide more than a temporary alleviation of such unemployment and underemployment. B. Qualified members of the Community or members of any other federally recognized Indian tribe shall receive preference in hiring and in all other aspects of employment with Lessee in connection with the construction and operation of the improvements to be developed on the Leased Premises in accordance with terms of this Lease. C. Lessee shall notify the Director of the Human Resources Department of the Community of all job openings and the required qualifications for such job openings. D. Lessee shall not employ any person who is not a member of the Community or member of any other federally recognized Indian tribe without giving the Director of the Human Resources Department of the Community three (3) days’ notice so that a qualified member of the 31

 
Community or a member of any other federally recognized Indian tribe may be referred for employment. E. Qualified members of the Community or members of any other federally recognized Indian tribe shall have preference in promotions and such openings shall be announced at least three (3) days prior to filling them. Notice, together with the required qualifications for such open position, shall be given to the Director of the Human Resources Department of the Community at least three (3) days prior to the filling of any such vacancy if Lessee intends to fill said vacancy with a non- member of the Community. F. Lessee shall report the following employment information to the Director of the Human Resources Department of the Community on January 1 and July 1 of each year designating members and non-members of the Community in separate categories. (1) The number of each pay grade; (2) All lay-offs and re-calls; (3) All promotions/demotions, job reclassifications and terminations; and (4) The number receiving merit increases and the number denied merit increases. G. The Community shall notify Lessee, in writing, of business enterprises owned by members of the Community which are qualified to provide services of any kind with respect to the construction and operation of the premises including without limitation the buildings, grounds or equipment. It shall thereafter be the policy of Lessee in connection with the improvements to be developed on the Leased Premises that prior to contracting with any business enterprise which is not owned by (a) Member(s) of the Community for services with respect to the construction and operation of the premises including without limitation the buildings, grounds or equipment, Lessee shall give to the Community Manager the same notice of contracting opportunity and required qualifications as is given by Lessee in the ordinary course of business. H. Lessee may vary from the provisions of Articles 40C and 40D above in the event of an emergency situation or when it is not reasonable or practical to give the notice referred to above. 32

 
I. In the event it is determined by the Director of the Human Resources Department that Lessee has committed a violation of a provision of this Article 40, such a violation shall not be considered a breach or default of this Lease unless it has been determined in a procedure under Article 39 hereof that the violation is part of a pattern or practice of such violations; rather, in such event, a fine, in an amount not to exceed Two Hundred Fitly and No/100 Dollars ($250.00) per occurrence, may be imposed upon Lessee, which fine shall be paid to the Community to support job training. J. Lessee agrees to specify and purchase and require its contractors, subcontractors and material suppliers to specify and purchase from Salt River Sand & Rock Company, Phoenix Cement Company, or other business enterprises owned by or which are divisions of the Community (“Community Suppliers”) as designated in writing by the Community (a) sand and gravel; (b) cement; (c) asphaltic paving materials; (d) fly ash; (e) concrete; and (f) landfill services and such other goods and services which can be supplied by the Community (the “product”) in connection with the improvements to be developed on the Leased Premises to the extent that the quantity, quality, specifications, cost and availability of the product available from Community Suppliers are equivalent to or better than those which are required by Lessee and if available from other suppliers as available from such suppliers. The contracts under which the product or services are purchased from the Community Suppliers shall provide equivalent or better terms and conditions, including but not limited to bonds, penalties, and enforceability, as would be available in a contract for the purchase of equivalent product or services from other suppliers. In the event a Community Supplier fails to materially comply with the terms and conditions of a contract for the sale of a product or services entered into pursuant to this Article 40K and is so notified in writing by Lessee, its contractor or subcontractor specifying the lack of compliance, the Lessee’s, contractor’s or subcontractor’s obligation to purchase that product or service from that Community Supplier under that contract shall cease. Any dispute arising under this Article 40J shall be subject to binding arbitration under the provisions of Article 39. No single violation of this Article 40K shall be considered a breach or default of this Lease but shall be subject to a fine on a finding of liability by an arbitrator under the provisions of Article 39 hereof in an amount equal to ten percent (10%) of the contract price but in no event more than Fifty Thousand and No/100 Dollars ($50,000.00) per contract, to be paid by Lessee to the Community to support job training. K. It is the purpose and intent of the Provisions of this Article 40 that if there are two (2) or more persons qualified for a job opening, and one of such persons is a member or, a spouse of a member of the Community or member of any other federally recognized Indian tribe, the qualified 33

 
person who is a member or a spouse of a member of the Community shall be selected. If no qualified member of the Community applies for the job opening, a person who is not a member of the Community may be selected for employment. It is not the intent and purpose of Articles 40A through H above to establish quotas. Further, Lessee shall not be required to discharge existing employees in order to create job openings, it being the purpose and intent that the provisions of Articles 40A through H above apply with respect to job openings and newly created positions. L. The provisions of this Article shall be applicable only to the Lessee and the operations of Sublessees at the Leased Premises. 41. Validity. This Lease, and any modifications of or amendments to this Lease, shall not be valid or binding upon either party hereto until approved by the Secretary. 42. Indemnification. Neither the Lessor, the Community, nor the United States, nor their officers, agents and employees shall be liable for any loss, damage or injury of any kind whatsoever to the person or property of the Lessee or Sublessees or any other person whomsoever, caused by any use of the Leased Premises, or by any defect in any structure erected thereon, or arising from an accident, fire or other casualty on the Leased Premises or from any other cause whatsoever, other than the negligent or willful misconduct of Lessor, the Community, the Secretary or the United States. Lessee hereby waives all claims against the Lessor, the Community and the United States arising from the condition of the Leased Premises and agrees to hold the Lessor, the Community and the United States free and harmless from liability for any loss, damage or injury arising from the use of the Leased Premises by Lessee, together with all costs and expenses in connection therewith, except if caused by the negligent or willful misconduct of Lessor, the Community, the Secretary or the United States. Lessor agrees to defend and hold Lessee harmless from the negligent or intentional acts of Lessor. 43. Fire and Damage Insurance. Lessee shall, from the date of the approval of this Lease and thereafter, carry fire insurance with extended coverage endorsements, to include vandalism, covering the full replacement cost of all improvements on the Leased Premises, and naming Lessor as an additional insured. Evidence reasonably acceptable to the Lessor and the Secretary of such coverage shall be furnished to the Lessor and the Secretary. 34

 
Lessee shall pay all premiums and other charges for such insurance and shall deposit with the Lessor and the Secretary the receipt for each premium or other charges as paid or satisfactory evidence thereof. In the event of damage to any improvements on the Leased Premises, subject to the provisions of any Approved Encumbrance or Sublease to the contrary, the Lessee shall reconstruct, or cause to be reconstructed the damaged improvements in compliance with applicable Legal Requirements, and in accordance with plans to be approved pursuant to Article 45 below. Such reconstruction shall commence and be completed within a reasonable time after the damage occurs and shall be pursued diligently. Insurance proceeds shall be deposited in escrow with an institution approved by the Secretary, subject, however, to the provisions of any Approved Encumbrance or Sublease to the contrary. The Lessee shall deposit in said escrow or otherwise provide adequate funds through the use of a letter of credit or loan commitments from reliable lending institutions to reconstruct the damaged improvements. Escrow instructions shall include provisions that all funds so deposited shall be used to reconstruct the damaged improvements, and shall be disbursed during the progress of construction on proper architect’s, engineer’s or contractor’s certificates. If Lessee has not defaulted under this Lease, all money remaining in escrow after reconstruction has been completed shall be paid to Lessee. If a default has taken place which remains uncured, said money shall remain in escrow as security for performance by Lessee until said default is corrected, at which time, such funds remaining in escrow shall be paid to Lessee. If Lessee does not correct the default within the time frames set forth in Article 25, such funds as are necessary to correct the default shall be paid to Lessor, and the balance shall be paid Lessee. 44. Accounting and Audits. Lessor or the Secretary shall be entitled at any time within three (3) years after the receipt of any payment to question the sufficiency of the amount thereof and/or the accuracy of the statements furnished by Lessee to substantiate the same, and shall have the right to examine and/or audit as hereinbefore described. Lessee shall, for such three (3) year period, keep safe and intact all of Lessee’s records, books; accounts and other data which in any way bear upon or are required to substantiate in detail any such report, and Lessee shall insert in all Subleases a similar provision requiring retention of records. 45. Plans and Designs. Attached hereto as Exhibit C-1 is a copy of a preliminary site plan for the complete development of the entire Leased Premises (which has already been approved pursuant to the Master Lease B-704). Lessor and the Lessee acknowledge that the preliminary site plan is tentative and a final site plan will be 35

 
submitted to the Community for their approval prior to any construction on the premises. Following approval by the Community of the final site plan and before any comprehensive plans for building improvements are submitted to the Community, Lessee shall submit to the Community for approval total site grading, drainage, utility, roadway and signage plans (“infrastructure plans”). The Community shall approve such infrastructure plans if the same conform generally to the final site plan and applicable Legal Requirements. Before beginning any construction whatsoever on the Leased Premises, the Lessee shall submit to the Community comprehensive plans for the improvements then proposed, which may be submitted in phases; the Community shall approve such plans if the same conform generally to the site plan and infrastructure plans. The Community does not, however, assume any responsibility whatsoever for the detailed design of any structure of structures, or for any violation of any applicable Legal Requirements. The Community shall either approve or state, in reasonable specificity, its reasons for disapproval of Lessee’s plans within thirty (30) days after receipt thereof from Lessee (which has already been approved pursuant to Master Lease B-704). No material change will be made in plans after original approval without the further approval of the Community, which approval shall not be unreasonably withheld or delayed. The Lessee shall be responsible for securing all necessary building permits. 46. Title Insurance. A. Title Insurance. Lessee agrees to obtain, at its expense, an ALTA extended coverage Lessee’s policy of title insurance, assuring the conveyance of a valid leasehold interest in the Leased Premises to Lessee, and insuring Lessee’s interest in the Leased Premises in a sum deemed necessary by Lessee. In the event that a title search reveals a defect in title, Lessor shall have sixty (60) days within which to remove such defect. If it is not so removed, Lessee may, in its sole discretion, terminate this Lease or the portion thereof affected by such defect, or may continue with this Lease as if no defect existed. If Lessee shall so request, Lessor shall arrange for the execution of one or more Requests for Title Status Reports and/or Requests for Recordation by an authorized representative of the Community or by the Superintendent. B. Certification of Signatures and Certification of Council Resolution. An authorized representative of the Community Development Department of the Community will certify as to the authenticity of the signatures of the landowners or those having power of attorney or legal right to execute this Lease. Master Lease B-704 was previously approved under Council Resolution SR-2234- 2003 as required by SRO-25-75, and so Certified by the Community. C. Reserved. D. Reserved. 36

 
47. Power of Attorney to Spokespersons. a. Designation of Spokespersons. In various portions of this Lease (including Article 8), the consent or approval of the Lessor is required. All or a substantial portion of the Leased Premises is owned by individual Allottees who have executed this Lease as Lessor. Since there are a large number of individual Allottees comprising the Lessor, it would be burdensome and inconvenient for each of the individual Allottees to be required to personally execute all of those documents or matters which require consent, approval or some other action on the part of the Allottees which comprise the Lessor. Accordingly, those individuals identified on Exhibit G attached hereto who have previously been designated to the position of Spokesperson for the individual Allottees which comprise the Lessor are hereby irrevocably granted a Durable Power of Attorney to represent and act on behalf of the individual Allottees which comprise the Lessor in regard to all consents, approvals and other actions required or permitted under this Lease. b. Appointment of Spokespersons. Each of the individual Allottees which comprise the Lessor, by executing this Lease, hereby makes, constitutes and irrevocably appoints each of the Spokespersons designated on Exhibit G hereto, but only for so long as he or she remains an allotted owner of a portion of Leased Premises, his true and lawful attorney, with full power of substitution, for him (her) and in his (her) name, place, and stead; and for his (her) use and benefit, to sign, execute, certify, deliver, acknowledge and record any consent, approval, Substitute Lease, Short Form of Lease, Lease Amendment, estoppel or any other instrument or document required, necessary, advisable or convenient under the terms of this Lease, in the same manner as each of the individual Allottees which comprise the Lessor could do if her (she) were personally present taking such action, all in the sole and absolute discretion of such Spokespersons. c. Acknowledgement. Each of the individual Allottees which comprise the Lessor acknowledges that the foregoing Irrevocable Durable Power of Attorney (1) is coupled with an interest, and is thereby irrevocable, (2) shall survive the death, dissolution, bankruptcy, incompetency, incapacity or other legal disability of any Allottee and shall extend to the legal representatives, heirs and assigns of each of them, and (3) is given in consideration of this Lease and of the execution by each individual Allottee which comprises the Lessor of this Lease. 37

 
d. Binding Action. The individual Allottees which comprise the Lessor agree to have Spokespersons duly appointed at all times and acknowledge and agree that the action of a majority of the Spokespersons shall be binding upon the Lessor. e. Removal by Majority Vote. A Spokesperson may be removed from that position only by a vote of a Majority of the Individual Allottees which comprise the Lessor. f. Replacement of Spokesperson. In the event of the death, disability, inability to act, removal or resignation of any Spokesperson, a Majority of the Individual Allottees which comprise the Lessor shall have thirty (30) days within which to appoint a substitute Spokesperson in accordance with the provisions of this Article 47. Such substitute Spokesperson shall be one of the individual Allottees which comprise the Lessor (or a successor, assign or devisee of such allottee) appointed in accordance with the provisions of this Article 47. In the event a Majority of the Individual Allottees which comprise the Lessor fails to appoint a substitute Spokesperson within such thirty (30) day period, then, the substitute Spokesperson shall be appointed by the remaining Spokespersons within ten (10) days after the expiration of said thirty (30) day period. In the event the Allottees or the remaining Spokespersons fail or refuse, for any reason, to have the Spokespersons appointed, or to appoint a substitute Spokesperson when required, either Lessor or Lessee may apply the provisions of Article 39 above to have the Spokesperson or Spokespersons appointed by arbitration. As used herein and elsewhere in this Business Lease, the term “Majority of the Individual Allottees” shall mean those Allottees representing the ownership of a majority (more than one-half (1/2)) of the gross acreage of the Leased Premises, regardless of the actual number of allottees involved. g. Consent to Lease Amendment to Lease by Lessor. This Lease may be amended in any manner by the Spokespersons (hereinafter a “Lease Amendment”). Any Lease Amendment that would increase or reduce the payment obligations to Lessor, increase or decrease the area of the Leased Premises, change the Lease Term or modify the dispute resolution procedures set forth in Article 39 shall be processed as follows: (1) Lessee shall provide written notice of the Lease Amendment to the individual Allottees at their last known address; (2) Lessee shall hold an informational meeting for the individual Allottees to allow them to ask questions and express their wishes to the Spokespersons, with notice of the meeting to be provided at least fifteen (15) days prior to the meeting; and 38

 
(3) After the meeting, Lessee shall provide at least thirty (30) days for approval or disapproval of the Lease Amendment by the Spokespersons. The Spokespersons are hereby authorized to consent to any Lease Amendment on behalf of the individual Allottees. The Spokespersons shall provide written notice of consent as soon as reasonably possible but in no event later than thirty (30) days after written notice of the Lease Amendment (or thirty (30) days after the meeting referenced in (g)(3) above if applicable). In the event the Spokespersons do not consent to the Lease Amendment, the Spokepersons shall notify Lessee of the disapproval and state with reasonable specificity the reasons for the disapproval. At its option, Lessee may amend the Lease Amendment to address the reasons for disapproval and submit it for consent by the Spokesperson. No Lease Amendment shall be valid unless approved by the Spokespersons pursuant to Article 47(d). h. Non-conflict. Neither Lessee nor any Sublessee or Approved Encumbrancer, nor any other Person acting on its or their behalf or in its or their interest, shall, directly or indirectly, employ, retain, or pay bonuses, gratuities or other compensation, however characterized, or make gifts or give perks to, any Spokesman, except only, with regard to the payment of money, if the money is paid to SRPMIC for distribution pro rata (consistent with allocations of Rent) among all Allotted Landowners which comprise Lessor, and, with regard to nonmonetary gifts or perks, the same gift or perk is made or given (or offered and available to) all Allotted Landowners which comprise Lessor and written notice of the making or giving of any such gift or perk is delivered to the Director, Community Development Department and Office of the General Counsel of SRPMIC at the addresses set forth in Article 31. Spokespersons shall not have the authority to amend this item h. 48. Covenants, Conditions and Restrictions. Covenants, conditions and restrictions, which shall be submitted to and approved by the Community, may thereafter be recorded by Lessee against the Leased Premises and shall be binding upon the interests of Lessee, Lessor, Sublessees and Approved Encumbrancers in the Leased Premises for the duration of the Lease Term. 49. Quiet Enjoyment. Lessor warrants to Lessee as follows: 39

 
A. That Lessor is the owner of equitable title to the Leased Premises, with fee title held in trust by the United States; B. Lessor has good right to lease the Leased Premises to Lessee for the Lease Term, subject to the approval of the Secretary; and C. That if Lessee punctually and in accordance with the terms hereof performs the obligations herein contained to be performed by Lessee, Lessee shall have and enjoy, during the Lease Term, the quiet and undisturbed use, possession and enjoyment of the Leased Premises, together with all appurtenances thereto. Lessor shall indemnify Lessee and hold it harmless from any and all claims, demands, costs and liabilities directly or indirectly resulting from or caused by any third party claiming any title to or right of possession of the Leased Premises or any right to receive any portion of the rental to be paid by Lessee hereunder. 50. Severability. If any term or provision of this Lease or the application thereof to any person or circumstances shall, to any extent be invalid or unenforceable, (except those which would substantially alter Lessee’s monetary obligations hereunder or which would diminish Lessee’s obligations to develop the Leased Premises in accordance with this Lease), the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby. Each term and provision of this Lease shall be valid and enforced to the fullest extent permitted by law. 51. Multiple Counterparts. This Lease may be executed in any number of counterparts, and when so executed, all such counterparts shall constitute a single instrument binding upon all parties hereto notwithstanding the fact that all parties are not a signatory to the original or to the same counterpart. The parties hereto agree that the signature pages from one or more counterparts may be removed from such counterparts and such signature pages may be attached to a single instrument so that the signature of all parties may be physically attached to a single counterpart of this Lease. 52. Companies Bonding and Insuring. To the extent applicable, all corporate surety bonds provided by Lessee in accordance with the provisions of this Lease shall be furnished by companies holding Certificates of Authority from the Secretary of the Treasury as acceptable sureties of federal bonds. Insurance policies shall be furnished and 40

 
maintained by such responsible companies as are rated A- or better in the then current edition of the Best’s Insurance Guide. 53. Compliance with Arizona Subdivision Requirements. In order to develop and sublease the Leased Premises in accordance with and in the manner provided for under this Lease, if it is determined by the Lessee that compliance is necessary, the Lessee may comply with the statutory requirements of A.R.S. § 32-2181 et seq., pertaining to the lease .of subdivided lands in Arizona. The Lessor, the Community and the Secretary shall execute, have acknowledged and deliver such documents and/or instruments as are reasonably requested by Lessee to facilitate the Lessee’s compliance with these statutory requirements; provided, however, that nothing contained herein nor any action taken under this Article 53 shall be a determination by the Lessor, Community or the Secretary of any claim by the State of Arizona that A.R.S. § 32-2181 et seq. are application to the Leased Premises. Lessee shall give written notice to the Community of its determination under this Article 53 prior to the time that it may comply with the statutory requirements, but the decision as to whether compliance is necessary shall be within the sole and absolute discretion of Lessee. 54. Estoppel Certificates. Lessor, Lessee, the Community and the Secretary shall, within thirty (30) days after receipt of a written request therefor from any of the parties hereto, or an Approved Encumbrancer or its surety, and at no cost and expense to the party requesting the same, execute, have acknowledged and deliver to the requesting party a statement in writing certifying: (i) that this Lease is unmodified and in full force and effect (or, if there has been modifications, identifying such modifications and certifying that the Lease, as modified, is in full force and effect); (ii) the dates to which rentals hereunder have been paid; (iii) that neither party is in default under any term, covenant or provision of this Lease (or, if a party is in default specifying each such default); (iv) the address to which notices to a party shall be sent; and (v) such other statements requested in the request as may be true and correct. Lessor, Lessee, the Community and the Secretary acknowledge that any such statement so delivered may be relied upon by any third party dealing with the Lessor, the Lessee, the Community of the Secretary, this Lease or the Leased Premises. 55. Environmental Protection Requirements The Lessee shall strictly comply with all applicable Federal and Community Environmental Laws. The Lessee is responsible for any costs incurred in effecting such compliance with Environmental and related Laws regarding this Lease, and for securing all necessary permits for any activity approved 41

 
under the terms of this Lease. Environmental mitigation measures required by any governmental authority having regulatory jurisdiction over the Leased Premises shall be strictly adhered to by the Lessee. A. Definitions. (1) “CES” means the Community’s Department responsible for cultural and environmental resources. (2) “Environmental Laws” means any Community or applicable federal environmental statute, common law duty, regulation, policy, procedure, standard or ordinance now in effect or that may be promulgated in the future, as such statutes, regulations, standards and ordinances may be amended from time to time, that deal with the regulation or protection or pollution of the environment, including the ambient air, groundwater, surface water, and land use, including substrata land, and including but not limited to the following: Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), 42 U.S.C. §9601, et seq.; the Resource Conservation and Recovery Act (“RCRA”) 42 U.S.C. §6901, et seq.; the Toxic Substances Control Act, 15 USC § 2601 et seq. seq.; the Clean Air Act, 42 USC § 7401 et seq.; the Clean Water Act, (33 U.S.C. §1362(6)); the Safe. Drinking Water Act, 42 USC § 3001 et seq.; the Emergency Planning and Community Right-to-Know Act, 42 USC § 11001 et seq. the Hazardous Materials Transportation Act, 49 U.S.C. §1801 et seq.; and any amendments to the foregoing. B. Historic Preservation and Archeological Resources. The Lessee acknowledges the particular relevance and applicability of Federal and Community laws pertaining to the protection and preservation of historic and archeological resources on Indian lands, which are widespread throughout the Community. Such laws include, without limitation, the Historic Preservation Act of 1966, the Archeological Resources Protection Act of 1979, the Native American Graves Protection and Repatriation Act of 1991, and the Community’s Antiquities Ordinance of 1986, Code § 19-1 et seq. Lessee agrees to strict compliance with such laws for purposes of development and use of its Leased Premises and further agrees, during the term of this Lease to notify CES immediately upon the discovery or reasonable suspicion of the presence of archeological resources within the Leased Premises. 42

 
C. Hazardous Materials. (1) Definitions. (a) “Hazardous Materials Laws” means all laws, ordinances, rules, decrees, orders, standards, procedures, policies or regulations of any federal or Community governmental authority relating to hazardous substances, hazardous materials, hazardous waste, toxic substances, including but not limited to, CERCLA, RCRA, the Hazardous Materials Transportation Act, 49 U.S.C. §1801 et seq. and any amendments to the foregoing. (b) “Hazardous Materials” means: (1) hazardous materials, hazardous wastes, and hazardous substances as those or similar terms are defined under any Environmental Laws; (2) petroleum and petroleum products, including crude oil and any fractions thereof; (3) natural gas, synthetic gas, and any mixture thereof; (4) asbestos and/or any material which contains any hydrated mineral silicate, including but not limited to chrysolite, amosite, crocidolite, tremolite, anthopylite and/or actinolite, whether friable or non-friable; (5) PCBs or PCB-containing materials or fluids; (6) radon; (7) explosives; (8) radioactive materials; (9) toxic substances; (10) poly- chlorinated biphenyls and similar materials; and any other substance or material with respect to which any federal, state, local or Community Environmental Laws or governmental agency requires environmental investigation, monitoring, regulation or remediation. (c) Any reference to a specific statute, common law duty, regulation, policy, procedure, standard or ordinance includes any amendment thereto or any successor statute, common law duty, regulation, policy , procedure, standard or ordinance. (2) Use. Lessee shall not allow any Hazardous Material to be used, generated, released, stored or disposed of on the Leased Premises, unless: (i) such Hazardous Materials are (a) used in the construction, repair or maintenance of the Leased Premises, (b) used in normal commercial or retail applications, or (c) sold as retail consumer products; (ii) such use in compliance with the provisions of this Article 55, and (iii) Lessee gives prior notification of such use to the CES, which may require periodic reporting by Lessee of such use. (3) Compliance with Laws. Lessee’s use of Hazardous Materials on the Leased Premises shall be in compliance with all Hazardous Materials and Environmental Laws. Lessee shall obtain and maintain in full force and effect all permits licenses and other governmental approvals required for Lessee’s use of Hazardous Materials on the Leased Premises under such Hazardous Materials Laws and shall comply with all terms and conditions thereof. Upon request, Lessee shall 43

 
deliver copies of, or allow Lessor and Community to inspect, all such permits, licenses and approvals. Lessee shall perform any monitoring, investigation, clean-up, removal and other remedial work (collectively, “Remedial Work”) required as a result of any release or discharge by Lessee of Hazardous Materials on the Leased Premises or any violation of Hazardous Materials Laws by Lessee. All MSDS sheets must be kept at the facility and made available upon demand by the Community Lessee will promptly supply MSDS sheets to the CES upon the receipt of the MSDS sheets from the supplier. (4) Compliance with Insurance Requirements. Lessee shall comply with the requirements of its insurers regarding the use of Hazardous Materials at the Leased Premises and with such insurers’ recommendations based upon prudent industry practices regarding management of Hazardous Materials. (5) Notice; Reporting. Lessee shall notify the CES immediately (or no later than 9 a.m. the next business day if the incident occurs on a weekend or holiday) by fax or telephone confirmed by written notice within two (2) days, and the Lessor in writing within two (2) days after any of the following: (a) a release or discharge by Lessee of any Hazardous Materials and in addition Lessee shall notify the Community of any immediately upon learning of such incident by calling the Community Development Department-Environmental Protection and Natural Resources Division (“CDD-EPNR”) Manager at (480) 362-7639 or on its hotline number at (480) 362-7500 and by email at epnr@srpmic-nsn.gov (or its successor); (b) Lessee’s receipt of any order of a governmental agency requiring any Remedial Work pursuant to any violation by Lessee of Hazardous Materials Laws; (c) Lessee’s receipt of any notice of violation by Lessee of any Hazardous Materials Law; (d) Lessee’s receipt of notice of any claims made by any third party against Lessee relating to any loss or injury resulting from the generation, release, storage or disposal at the Leased Premises by Lessee of Hazardous Materials; or (e) delivery to the Premises of Hazardous Materials from any source, to be reported pursuant to the manifest requirements of 40 CFR § 261. Termination; Expiration. Upon the termination or expiration of this Lease, Lessee shall remove from the Leased Premises any equipment, improvements or storage facilities installed by Lessee and utilized by Lessee in connection with any Hazardous Materials and shall clean up, detoxify, repair, remediate, and otherwise restore Leased Premises to a condition such that Hazardous Materials generated, released, stored or disposed of by Lessee on the Leased Premises, if any, are not present in concentrations requiring Remedial Work under Hazardous Materials Laws. 44

 
D. Water Pollution Prevention. (1) Discharge or Spillage. Lessee’s approved activities shall be performed by methods that are designed to preclude or prevent the discharge or accidental spillage of pollutants, as that is defined by the Clean Water Act (33 U.S.C. §1362(6)), into flowing or dry watercourses, lakes, ponds, wetlands, any other waters of the United States, or underground water sources within the Leased Premises. Lessee shall not deposit or stockpile excavated, construction or industrial materials or debris within fifty (50) feet of any watercourses within the Leased Premises. (2) Stormwater Runoff. Lessee agrees to design and operate its business or approved activity in such a way that stormwater runoff is contained and controlled as required by the Community. Lessee shall comply with all applicable Environmental Laws pertaining to runoff, including but not limited to, all applicable provisions pertaining to industrial stormwater runoff in 33 USC § 1342(p). Lessee shall file for review with the CES a copy of their storm water runoff plan. E. Solid Waste Disposal; Storage or Industrial Liquids. (1) Solid Waste. It shall be Lessee’s responsibility to arrange for disposal of all solid waste as defined by 42 U.S.C. §6903(27) generated by Lessee or generated within the Leased Premises in a manner consistent with Community and applicable Federal Environmental Law, including but not limited to, 42 U.S.C. §6901 et seq. and 25 C.F.R. Part 258. Open dumping, burial, or stockpiling of solid waste within the Leased Premises is strictly prohibited. Lessee shall contain organic solid waste subject to decomposition so as to prevent access by birds, animals or other disease vectors, and shall arrange for haulage of all solid waste no less than once per week to the Salt River Commercial Landfill or its successor. (2) Storage of Industrial Liquids. In the event Lessee’s approved activity includes the above ground or underground storage in tanks of regulated substances as defined in 42 U.S.C. §6951(2), Lessee shall comply strictly with the provisions of Community Environmental Laws and 42 U.S.C. §6991 et seq. and all implementing regulations thereto. Any proposed construction of such storage tanks by Lessee within the Leased Premises shall be disclosed to Lessor and CES prior to the execution of this Lease. In addition to the foregoing, no storage tank shall be located within fifty (50) feet of any waterway, dry or flowing, and all such storage tanks shall be placed within separate secondary protective, impermeable containment whose performance equals or exceeds such liner as required by 40 C.F.R. §258.40. Lessee shall submit to the CES all Underground Storage Tanks spill mitigation plans and pollution prevention measures, as well as compliance review. 45

 
F. Indemnification. (1) Lessee shall protect, indemnify, defend and hold harmless Lessor, the Community and the Secretary for, from and against any and all losses, claims, costs, fees, expenses, suits, damages, attorneys fees, judgments, actions, investigation costs, remediation costs, consulting fees, proceedings and liabilities in any way arising out of or from or in connection with: (a) any breach by Lessee of any provisions of this Article 55; or (b) arising out of the use, generation, storage, release, disposal or transportation of Hazardous Materials by Lessee or its agents, contractors, employees, or licensees; or (c) any release; threatened release, or disposal of any Hazardous Material at or from the Leased Premises; or (d) the violation of any Environmental Law at the Leased Premises; or (e) any environmental claim in connection with the Leased Premises. 2. The indemnification and waiver shall be binding upon the successors and assigns of Lessee and to the benefit of the Lessor, the Community and the Secretary and their directors, officers, employees and agents, and their successors and assigns. G. Entry and Inspection. Lessor, the Community, the Secretary and their agents, employees and contractors, shall have the right, but not the obligation, to enter the Leased Premises at all reasonable times, upon advance notice reasonable to the circumstances, to inspect Leased Premises and Lessee’s compliance with the terms and additions of this Article 55. The foregoing notwithstanding, Lessor, the Community, the Secretary and their agents, employees and contractors shall have the right to inspect the areas of the Leased Premises that are open to the public at any time the areas are open to the public without prior notice. Any such entry shall be conducted in a manner that minimizes disruption of Lessee’s business on the Leased Premises. 46

 
H. Default Under Environmental Provisions. Lessee’s failure to comply with any provisions under this Article 55 (not cured in accordance with the provisions of Article 21 of this Lease) shall be a material default of this Lease which shall entitle Lessor, the Community or the Secretary to all available remedies under this Lease and otherwise. I. Survival of This. Section Lessee specifically agrees that the obligations of Lessee, and of any of its successors and assigns, under this section shall survive the expiration or termination of this Lease. 56. Confidentiality. The Lessor, Lessee, Community and Secretary mutually agree to hold confidential the information supplied by either party to the other pursuant to the terms of this Lease or other documents or information reasonably deemed by either party to contain or constitute trade secret or proprietary information, and designated as such. 57. Short Form of Lease. A Short Form of Lease for purposes of recordation will be executed by the Lessee and the Spokespersons for the Lessor. The Short Form of Lease will be filed in the appropriate records offices for the purpose of providing notice of the existence of this Lease. The Short Form of Lease shall contain only such information as is required for recordation and as to such information shall accurately restate the comparable information set out in this Lease. The Short Form of Lease shall not amend or change the effect of this Lease. 47

 
IN WITNESS WHEREOF, the Lessor and Lessee have executed this Lease as of the date and year first above written. ORIGINAL LESSEE: APEX Park at Pima, L.L.C., an Arizona limited liability company: By: Name: Title: LESSEE: APEX 7400 NORTH DOBSON, L.L.C., an Arizona limited liability company By: Name: Title: State of ) ) ss. County of ) SUBSCRIBED AND SWORN To before me this ____ day of _____________, 2017 by ___________________________. Notary Public My Commission Expires 49

 
COMMUNITY APPROVAL The AMENDED AND RESTATED SUBSTITUTE LEASE IN REFERENCE TO BUSINESS LEASE B-704 between CERTAIN ALLOTTED LANDOWNERS OF LAND WITHIN THE SALT RIVER PIMA-MARICOPA INDIAN COMMUNITY and APEX 7400 NORTH DOBSON, L.L.C., an Arizona limited liability company is hereby approved by the Salt River-Pima Maricopa Indian Community in accordance with its laws and the Master Lease. SALT RIVER PIMA-MARICOPA INDIAN COMMUNITY By: Its: State of Arizona ) ) ss. County of Maricopa ) The foregoing instrument was acknowledged before me, a notary public, this ____ day of _____________, 2017 by ___________________________. Notary Public My Commission Expires [SIGNATURES CONTINUED ON NEXT PAGE] 50

 
Secretarial Approval Form UNITED STATES DEPARTMENT OF INTERIOR Bureau of Indian Affairs Sal River Field Office 10000 East McDowell Road Scottsdale, AZ 85256 The AMENDED AND RESTATED SUBSTITUTE LEASE IN REFERENCE TO BUSINESS LEASE B-704 between CERTAIN ALLOTTED LANDOWNERS OF LAND WITHIN THE SALT RIVER PIMA-MARICOPA INDIAN COMMUNITY and APEX 7400 NORTH DOBSON, L.L.C., an Arizona limited liability company is hereby approved pursuant to the authority delegated ot the Assistant Secretary-Indian Affairs by 209 DM 8, to the Director of BIA by 230 DMA 1, to the Western Regional Director by3Iam 4, and to the Superintendent by historic Phoenix Area Re-Delegation Documents in 10 BIAM. Superintendent, Salt River Field Office Date Bureau of Indian Affairs Department of the Interior State of Arizona ) ) ss. County of Maricopa ) The foregoing instrument was acknowledged before me, a notary public, this ____ day of _____________, 2017 by ___________________________. Notary Public My Commission Expires 51

 
EXHIBIT B LEGAL DESCRIPTION

 

 

 

 
EXHIBIT C DRAFT EASEMENT AGREEMENTS

 
WHEN RECORDED, RETURN TO: Procopio, Cory, Hargreaves & Savitch LLP 8355 E Hartford Dr. #202 Scottsdale, AZ 85255 Attn: Kerry K. Patterson DECLARATION AND GRANT OF EASEMENTS THIS DECLARATION AND GRANT OF EASEMENTS (this “Grant of Easements”) is made as of the ____ day of ____________, 20___, by APEX PARK AT PIMA, L.L.C., an Arizona limited liability company (“Declarant”), and by APEX 9500 EAST INDIAN BEND, LLC, an Arizona limited liability company (“9500 LLC”), APEX 7350 NORTH DOBSON, L.L.C., an Arizona limited liability company (“7350 LLC”), APEX 7530 NORTH DOBSON, L.L.C., an Arizona limited liability company (“7530 LLC”), and APEX 7500/7580 NORTH DOBSON ROAD, L.L.C., an Arizona limited liability company (“7500/7580 LLC”) (each a “Grantor”, and collectively “Grantors”). RECITALS A. Declarant is the ground lessee of that certain real property in the Salt River Pima- Maricopa Indian Community, in Maricopa County, Arizona, described in Exhibit A attached hereto and incorporated herein by this reference (the “Master Ground Lease Property”), pursuant to that certain Business Lease B-704 between certain Allotted Landowners of Land Within the Salt River Pima-Maricopa Indian Community (named therein) as lessor (the “Landowners”) and Declarant as lessee (referred to herein as the “Master Ground Lease”) dated January 15, 2003, as amended by that certain First Amendment dated November 7, 2016. B. Pursuant to that certain Amended and Restated Declaration of Covenants, Conditions, Restrictions and Easements for Riverwalk executed by Declarant and 7350 LLC June 10, 2008, recorded on July 15, 2008 as instrument no. 20080616403 in the Official Records of the Maricopa County Recorder, and which was duly amended by that certain First Amendment to Amended and Restated Declaration of Covenants, Conditions, Restrictions and Easements for Riverwalk on August 25, 2013, recorded on September 17, 2013 as instrument no. 20130832529 in the Official Records of the Maricopa County Recorder, and was further amended by that certain Second Amendment to Amended and Restated Declaration of Covenants, Conditions, Restrictions and Easements for Riverwalk on October 30, 2017, which was recorded on April 19, 2018 as instrument no. 20180295812 in the Official Records of the Maricopa County Recorder and that certain Second Amended and Restated Declaration of Covenants, Conditions, Restrictions and Easements for Riverwalk recorded on September 14, 2018 as instrument no. 20180693825 in the Official Records of the Maricopa County Recorder, and as may be amended in the future (collectively “Amended Declaration”). Declarant has established certain easements, conditions and restrictions with respect to the 1

 
development of the Master Ground Lease Property. Defined terms used in this Grant of Easement not otherwise defined herein shall have the meaning assigned to such term in the Amended Declaration. C. Article 8 of the Master Ground Lease allows Declarant, in connection with development of the Master Ground Lease Property, to cause the Community to enter into a Substitute Lease, as defined in the Master Ground Lease, wherein a party other than Declarant becomes the ground lessee of a Lot included in the Master Ground Lease Property, causing such Lot to be removed as property governed by the Master Ground Lease and to instead to be governed by such Substitute Lease. D. Each Grantor (other than Declarant) is the Ground Lessee under one or more of the following Substitute Leases: [Insert Full Description of Each Substitute Lease], (collectively referred to as the “Substitute Leases”). In addition to the Substitute Leases, Declarant has executed that certain Substitute Lease B-704___ (the “Axon Substitute Lease”) with APEX 7400 NORTH DOBSON, L.L.C. an Arizona limited liability company and its successor and assigns (“Grantee”) as described on Exhibit B (the “Axon Substitute Lease Property”). E. Declarant, 7350 LLC, 7500/7580 LLC and 7530 LLC collectively are the Ground Lessees of the real property described on Exhibit C attached hereto (the “North Access Easement Area”), and desire to declare and grant an easement over and across the North Access Easement Area for private road access to public streets for the benefit of all Ground Lessees and for all Ground Lease Subtenants. F. Declarant and 9500 LLC collectively are the Ground Lessees of the real property described on Exhibit D attached hereto (the “South Access Easement Area”), and desire to declare and grant an easement over and across the South Access Easement Area for private road access to public streets for the benefit of all Ground Lessees and for all Ground Lease Subtenants. NOW THEREFORE, in furtherance of the foregoing recitals, Declarant and Grantors hereby grant and declare, as follows: 1. Grant of Easements. (a) Declarant and Grantors hereby declare, grant and convey unto each Ground Lessee and to each Ground Lease Subtenant, and each of their successors and assigns, and their respective partners, members, directors, officers, employees, tenants, subtenants, agents, contractors, licensees and invitees, and any lawful occupant of the Master Ground Lease Property, Axon Substitute Lease Property or any portion thereof, an appurtenant, non-exclusive access, ingress and egress easement on, over and across the North Access Easement Area and South Access Easement Area to be used for street and roadway purposes, and pedestrian and vehicular ingress and egress to and from any portion of the Master Ground Lease Property and to and from Dobson Road and Talking Stick Way (formerly known as Indian Bend Road) and all other publicly dedicated streets and rights-of-way furnishing access to any portion of the Master Ground Lease Property. Nothing contained in this Grant of Easements shall be deemed to grant, 2

 
convey or reserve unto any party or other person an easement, license or right to park vehicles upon the North Access Easement Area or the South Access Easement Area. (b) Declarant and Grantors hereby declare, grant and convey unto each Ground Lessee and to each Ground Lease Subtenant, and each of their successors and assigns, and their respective partners, members, directors, officers, employees, tenants, subtenants, agents, contractors, licensees and invitees, and any lawful occupant of the Master Ground Lease Property, Axon Substitute Lease Property or any portion thereof, a perpetual non-exclusive easements through, over, under, across and on certain portions of the Master Ground Lease Property described on Exhibit E attached hereto (the “Utility Easements”) for gas, electrical, communications, water, storm and sanitary sewer lines and systems and other utilities serving the Axon Substitute Leased Property. Such utility easements shall include the right to cross the Master Grant Lease Property as shown on Exhibit E, and to construct, replace, modify, relocate, repair and maintain such utility lines and facilities as may be reasonably necessary to enjoy the benefit of the utility easements granted by this Agreement. In addition, Grantee shall have the right to connect the utility and sewer lines serving the Axon Substitute Lease Property to the utility and sewer lines serving the Master Ground Lease Property and property of the other Substitute Leases. All construction, replacement, modification, relocation, repair and maintenance of such utility and sewer lines shall be performed in accordance with the Amended Declaration and in such a manner as does not unreasonably interfere with the normal and usual operation of the Declarant and Grantors. In the event Grantee makes such replacements or repairs it shall promptly restore all paving, landscaping and any other improvements disturbed thereby to its former condition as near as possible at its sole cost and expense. (c) The easements granted in this Section 1 are collectively referred to hereinafter as the “Easements.” 2. Duration of Easements. The Easements herein shall automatically terminate upon the later of the date of termination or expiration of (i) the Axon Substitute Lease, (ii) the Master Lease, or (iii) the other Substitute Leases. 3. Reasonable Use of Easement Areas. The Easements shall be used and enjoyed in such a manner as to not unreasonably interfere with the use and enjoyment of the Master Ground Lease Property. 4. Run with Land. The Easements, covenants, conditions and restrictions, and the other provisions of this Grant of Easements shall run with and be appurtenant to the Master Ground Lease Property, and shall bind the Landowners, Declarant and each Grantor and their respective heirs, executors, legal representatives, successors-in-title and assigns, and all those (including mortgagees and tenants) now and hereafter holding under Declarant or a Grantor. The Landowners, hereby acknowledge and agree that if the Master Ground Lease, or any Substitute Lease, is terminated prior to the expiration of the Axon Substitute Lease, or if Landowners acquire the Leasehold Interest in the Master Ground Lease Property or Substitute Leases, that this Agreement and the Easements shall remain in full force and effect and shall remain binding on the Landowners and Grantee and their successor and assigns. 3

 
5. Use of Property. Nothing contained herein shall be deemed to limit the rights of Declarant or a Grantor, or their respective successors and assigns, to grant other easements, rights, privileges and licenses on, across, over or under their respective properties, so long as such other easements, rights, privileges and licenses do not interfere with or adversely affect the use and enjoyment of the Easements and rights granted herein. 6. No Dedication. The Easements granted hereunder is solely for the purposes described herein and nothing in this Grant of Easements is intended to create, nor shall be deemed or construed to create, any rights in the general public to use the Easements area or any other portion of the Master Ground Lease Property. 7. Integration; Modification. This Grant of Easements constitutes the entire declaration and grant pertaining to the subject matter hereof and all prior or contemporaneous agreements and understandings, oral or written, are hereby superseded and merged herein. The provisions hereof may be abrogated, modified, rescinded or amended in whole or in part only by written instrument executed by the parties hereto and recorded in the appropriate records office for purposes of providing notice of the existence of this Agreement. 8. Mortgagee Protection. No breach of any of the covenants and restrictions, nor the enforcement of any remedy provisions contained in this Grant of Easements shall render invalid the lien of any mortgage, deed of trust, or other lien against any property of Declarant or a Grantor made in good faith and for value. All of the covenants and restrictions herein contained shall be binding upon and effective against any successor whose title is derived through foreclosure, trustee sale, or deed in lieu thereof or otherwise, except as provided herein. 9. Severability. Every provision of this Grant of Easements is hereby declared to be independent of, and severable from, every other provision. If any provision is held to be invalid or unenforceable, that holding shall be without effect upon the validity or enforceability of any other provision of this Grant of Easements. 10. Attorneys’ Fees. If suit is brought to enforce or interpret any part of this Grant of Easements, the prevailing party shall be entitled to recover from the non-prevailing party its reasonable attorneys’ fees, court costs, expert witness fees and other litigation-related expenses. 11. Dispute and Attorneys’ Fees. Axon Substitute Lease Section 39 is hereby incorporated into this Grant of Easements and all disputes shall be brought by the Parties in accordance with that Section 39 as incorporated into this Agreement. If arbitration or suit is brought to enforce or interpret any part of this Grant of Easements, the prevailing party shall be entitled to recover from the non-prevailing party its reasonable attorneys’ fees, court costs, expert witness fees and other litigation-related expenses. 12. Miscellaneous. No delay or failure by any party to exercise any right under this Grant of Easements will constitute a waiver of that or any other right granted hereunder. Declarant and Grantors shall execute promptly such other documents and perform such other acts as may be reasonably necessary to carry out the purpose and intent of this Grant of Easements. All exhibits attached hereto are by this reference incorporated herein. This Grant of 4

 
Easements may be executed in two or more counterparts and each such counterpart, when taken together with all other counterparts, shall be deemed one and the same original instrument. [SIGNATURES PAGES FOLLOW] 5

 
IN WITNESS WHEREOF, Declarant and Grantors have executed this Declaration and Grant of Easements to be effective as of the date first set forth above. DECLARANT: APEX PARK AT PIMA, L.L.C., an Arizona limited liability company By: Alter Park at Pima, L.L.C., a Delaware limited liability company, its Manager By: 18 Chai Corp., an Illinois corporation, its Manager By: Name: Title: STATE OF ) ) ss. County of ) The foregoing instrument was acknowledged before me this _____ day of ____________, 20___, by _____________________, as _____________________ of 18 Chai Corp., an Illinois corporation and manager of Alter Park at Pima, L.L.C., a Delaware limited liability company and manager of Apex Park at Pima, L.L.C., a Delaware limited liability company, on behalf of the limited liability company. Notary Public [Declarant Signature Page to Declaration and Grant of Easement Business Lease B-704]

 
GRANTOR: APEX 9500 EAST INDIAN BEND, L.L.C., an Arizona limited liability company By: Alter Park at Pima, L.L.C., a Delaware limited liability company, its Manager By: 18 Chai Corp., an Illinois corporation, its Manager By: Name: Title: STATE OF ) ) ss. County of ) The foregoing instrument was acknowledged before me this _____ day of ____________, 20___, by _____________________, as _____________________ of 18 Chai Corp., an Illinois corporation and manager of Alter Park at Pima, L.L.C., a Delaware limited liability company and manager of Apex 9500 East Indian Bend, L.L.C., a Delaware limited liability company, on behalf of the limited liability company. Notary Public [Grantor Signature Page to Declaration and Grant of Easement Business Lease B-704]

 
GRANTOR: APEX 7350 NORTH DOBSON L.L.C., an Arizona limited liability company By: Alter Park at Pima, L.L.C., a Delaware limited liability company, its Manager By: 18 Chai Corp., an Illinois corporation, its Manager By: Name: Title: STATE OF ) ) ss. County of ) The foregoing instrument was acknowledged before me this _____ day of ____________, 20___, by _____________________, as _____________________ of 18 Chai Corp., an Illinois corporation and manager of Alter Park at Pima, L.L.C., a Delaware limited liability company and manager of Apex 7350 North Dobson L.L.C., a Delaware limited liability company, on behalf of the limited liability company. Notary Public [Grantor Signature Page to Declaration and Grant of Easement Business Lease B-704]

 
GRANTOR: APEX 7530 NORTH DOBSON L.L.C., an Arizona limited liability company By: Alter Park at Pima, L.L.C., a Delaware limited liability company, its Manager By: 18 Chai Corp., an Illinois corporation, its Manager By: Name: Title: STATE OF ) ) ss. County of ) The foregoing instrument was acknowledged before me this _____ day of ____________, 20___, by _____________________, as _____________________ of 18 Chai Corp., an Illinois corporation and manager of Alter Park at Pima, L.L.C., a Delaware limited liability company and manager of Apex 7530 North Dobson L.L.C., a Delaware limited liability company, on behalf of the limited liability company. Notary Public [Grantor Signature Page to Declaration and Grant of Easement Business Lease B-704]

 
GRANTOR: APEX 7500/7580 DOBSON ROAD, L.L.C., an Arizona limited liability company By: Alter Park at Pima, L.L.C., a Delaware limited liability company, its Manager By: 18 Chai Corp., an Illinois corporation, its Manager By: Name: Title: STATE OF ) ) ss. County of ) The foregoing instrument was acknowledged before me this _____ day of ____________, 20___, by _____________________, as _____________________ of 18 Chai Corp., an Illinois corporation and manager of Alter Park at Pima, L.L.C., a Delaware limited liability company and manager of Apex 7500/7580 North Dobson Road, L.L.C., a Delaware limited liability company, on behalf of the limited liability company. Notary Public [Grantor Signature Page to Declaration and Grant of Easement Business Lease B-704]

 
FORM OF SPOKESPERSONS SIGNATURE PAGE ATTACHED TO AND FORMING A PART OF THIS DECLARATION AND GRANT OF EASEMENT (THE “AGREEMENT”) IS THE WITNESSED AND NOTARIZED SIGNATURE OF THE FOLLOWING SPOKESPERSONS: I, the undersigned Spokesperson for the Landowners, approve of, consent to and join in the execution of the Agreement as a Spokesperson for the Landowners, I, the undersigned a Spokesperson for the Landowners, sign my name to the Agreement on the date noted below. I, the undersigned Spokesperson for the Landowners, hereby approve of the Easements as set forth in Section 1 for Lease Term under the Axon Substitute Lease. Date: ___________, 201__ __________________, as Spokesperson for the Landowners ID Number: SRAL No. STATE OF ARIZONA ) ) ss. County of Maricopa ) Subscribed, sworn to and acknowledged before me by _____________________, the Landowner, this ____ day of ______________, 201___. Notary Public [Spokesperson Signature Page to Declaration and Grant of Easement Business Lease B-704]

 
COMMUNITY APPROVAL THE WITHIN DECLARATION AND GRANT OF EASEMENTS IS HEREBY APPROVED BY THE COMMUNITY IN ACCORDANCE WITH THE GROUND LEASE AND ALL APPLICABLE LAWS: SALT RIVER PIMA-MARICOPA INDIAN COMMUNITY By: Its: STATE OF ARIZONA ) ) ss. County of Maricopa ) On this _____ day of ______________, 20__, before me personally appeared ___________________________________, to me known to be the authorized representative of the Salt River Pima- Maricopa Indian Community, for the purposes stated therein. Notary Public (Seal) [SRPMIC Signature Page to Declaration and Grant of Easement Business Lease B-704]

 
Exhibit A Master Ground Lease Property

 
Exhibit B Axon Substitute Lease Property

 
Exhibit C North Access Easement Area

 
Exhibit D South Access Easement Area

 
Exhibit E Utility Easements Location

 
EXHIBIT D SITE ACCESS AND INDEMNIFICATION AGREEMENT

 
SITE ACCESS AND INDEMNIFICATION AGREEMENT This Site Access and Indemnification Agreement (the “Agreement”) dated this 13th day of December, 2018 is by and among APEX Park at Pima , LLC, an Arizona limited liability company and its Assignee (“Licensor”) and AXON Enterprise Holding Company, LLC, a Delaware limited liability company, or its affiliate (“Licensee”), with an office at 17800 North 85th Street, Scottsdale, AZ 85255. RECITALS: A. Licensor is the Lessee of that certain unimproved real property consisting of approximately 28.57 net acres of land located at 7400 North Dobson Road, Scottsdale, Arizona 85256 and as further described in Exhibit “B” (the “Property”). B. Licensor wishes to grant Licensee access to the Property in order to allow Licensee to assess the physical, environmental, engineering, and financial aspects of the Property for purposes of entering into a Purchase and Sale Agreement all as set forth herein. C. Licensee has or will retain third party experts (collectively, “Licensee’s Consultants”) to perform assessments of the environmental, engineering, and physical condition aspects of the Property. D. Licensor wishes to grant to Licensee a license to conduct such assessments subject to certain conditions and requirements. NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, the parties agree as follows: 1. Non-Exclusive License. (a) Licensor hereby grants to Licensee a temporary non-exclusive license, subject to the terms hereof, to enter upon that portion of the Property for the purpose of conducting at Licensee’s sole expense, through Licensee’s Consultants, the activities on the Property specifically described (as to location, type of tests, and the like) in Exhibit “A” attached hereto and made a part of this Agreement (the “Due Diligence Activities”). (b) The license granted herein shall continue in force, subject to Licensor’s right of revocation described below, until the earliest of (“License Term”): (i) the completion of the Due Diligence Activities; (ii) written notice to Licensee by Licensor, (iii) written notice to Licensor by Licensee (iv) the commencement of any written contract to lease the Property which is entered into by Licensee and Licensor. (c) The temporary non-exclusive license to enter and conduct the Due Diligence Activities upon the Property granted to Licensee does not constitute the grant of an easement or any other interest in the Property.

 
2. Licensee’s Consultants. (a) Licensee agrees that the Due Diligence Activities shall be performed solely by Licensee, through Licensee’s Consultants, as Licensee’s special agent, and no other person or entity may perform such activities without the prior written consent of Licensor. (b) Licensee agrees to provide this Agreement to Licensee’s Consultants and advise Licensee’s Consultants that Licensee and Licensee’s Consultants are bound by the terms of this Agreement. 3. Access to the Property (a) Licensee, through Licensee’s Consultants, shall conduct the Due Diligence Activities only during normal business hours and Licensor shall have the right to impose reasonable conditions on performance of the Due Diligence Activities (including, without limitation, reasonable schedule modifications so as to minimize disturbances at the Property), including those specified in Exhibit “A”. (b) Licensee shall be solely responsible at its own cost for the temporary construction and maintenance of any improvements at the Property, which are required in order to conduct the Due Diligence Activities. No permanent improvements are permitted. (c) Licensee shall give Licensor reasonable prior notice before conducting the Due Diligence Activities, including locations and times at which the activities will take place. (d) Licensee agrees that entry upon the Property shall be limited to the extent necessary for the performance of the Due Diligence Activities and shall otherwise be limited as provided herein. 4. Equipment. (a) In connection with conducting the Due Diligence Activities, Licensor hereby agrees that Licensee’s Consultants, as special agent of Licensee, may bring onto the Property the equipment and machinery, if any, reasonably necessary to perform the Due Diligence Activities, but no other equipment or machinery. (b) Licensee agrees to maintain equipment and other materials in an orderly manner while they are located on the Property. Licensee agrees to remove all debris and trash resulting from the Due Diligence Activities on a daily basis and to remove all equipment and other materials used by Licensee’s Consultants as soon as the activity for which such equipment and other materials are used is completed. 5. Safety; Restoration. (a) Licensee shall take all appropriate measures for the safety of persons on the Property and shall comply with all legal requirements. - 2 -

 
(b) Upon completion of the Due Diligence Activities, Licensee shall restore the Property to substantially the same condition as at the commencement of the Due Diligence Activities and including, but not limited to repair of surface openings resulting from tests. 6. Wastes. Any and all samples, sample residues, by-products from the sampling process, extracts, well purgings, core borings and hazardous and other wastes (collectively, “Wastes”) derived from the Due Diligence Activities (including, without limitation, any contaminated protective clothing or other materials used in performing the Due Diligence Activities) when removed from the Property shall be deemed the Property of Licensee and shall be transported and disposed of by Licensee in accordance with applicable law. 7. Indemnity. Licensee shall indemnify, defend, save and hold Licensor and Licensor’s officers, agents, employees, directors, trustees, invitees, successors, and assigns (collectively “Indemnitees”) harmless against all losses, costs, expenses, liabilities, claims, litigation, demands, proceedings and damages (including but not limited to reasonable attorneys’ fees actually incurred) suffered or incurred by Licensor or any such Indemnitees arising out of the Due Diligence Activities. Licensee waives any claims against Licensor arising out of the Due Diligence Activities or this Agreement. Licensee hereby assumes all responsibility for claims arising out of or incurred in connection with the Due Diligence Activities or this Agreement against Licensor by Licensee’s Consultants, and the contractors, subcontractors, employees, and agents of Licensee and Licensee’s Consultants. Notwithstanding the foregoing, Licensee shall have no responsibility or liability for (i) any adverse condition or defect on or affecting the Property not caused or contributed to by Licensee or its employees, agents, consultants or contractors but merely discovered during their inspections (including, without limitation, the pre-existing presence or discovery of any matter, such as, but not limited to, hazardous substance or material); (ii) the results or findings of any inspection; (iii) Licensee’s election to terminate this Agreement as a result of any inspection pursuant to this Agreement; or (iv) the gross negligence or intentional and willful acts of Licensor or any of its officers, directors, agents, contractors, servants, employees, licensee or invitees. 8. Insurance. (a) Licensee shall, during the term of this Agreement and at all times during which access is available to it, maintain, and require Licensee’s Consultants and its subcontractors and agents to maintain insurance, in form and substance reasonably satisfactory to Licensor, with insurance companies reasonably acceptable to Licensor, the following insurance: (i) Comprehensive General Liability or Commercial General Liability Insurance, in an amount of not less than $5,500,000. $500,000 of this coverage shall be in the form of primary coverage and the remaining $5,000,000 shall be pursuant to an umbrella liability insurance policy of not less than $5,000,000, combined single limit, per occurrence. (b) Each policy of insurance shall: (i) Name Licensor and any other affiliate or subsidiary to which this Agreement may be assigned by Licensor as additional insureds; - 3 -

 
(ii) State that such policy is primary and noncontributing with any insurance carried by Licensor; (iii) Contain a provision that the naming of the additional insured shall not negate any right the additional insured would have had as a claimant under the policy if not so named; and (iv) Shall contain severability of interest and cross-liability clauses. (c) A certificate, together with any endorsements to the policy required to evidence the coverage which is to be obtained hereunder, shall be delivered to Licensor simultaneously with the execution and delivery of this Agreement. Licensee will provide Licensor no less than thirty (30) days’ prior written notice in the event of any material alteration to or cancellation of the coverages evidenced by said certificate. A renewal certificate for each of the policies required in this Section shall be delivered to Licensor within three (3) days following the expiration date of the term of such policy. (d) Any policies required by the provisions of this Section may be made a part of a blanket policy of insurance with a “per project, per location endorsement” so long as such blanket policy contains all of the provisions required herein and does not reduce the coverage, impair the rights of the other party to this Agreement or negate the requirements of this Agreement. 9. Privileged Information. (a) During the course of the performance of the Due Diligence Activities, Licensee may acquire knowledge concerning environmental problems that exist at the Property, other knowledge concerning the Property or Licensor, or knowledge of other matters of a sensitive business nature (collectively, “Privileged Information”). (b) Except as described below, neither Licensee, nor Licensee’s Consultants shall disclose to any third party (other than Licensee’s lenders or investors), publicize or suffer or permit any of its employees to so disclose or publicize any such Privileged Information. In the event that Licensee believes in good faith that it is required by any legal requirement to disclose any such Privileged Information, then Licensee shall immediately notify Licensor of such belief and the reasons for such belief. If Licensor, within ten (10) days after receipt of such notice, advises the party that sent the notice that Licensor shall itself disclose the information, then Licensee shall not make such disclosure (unless either such party reasonably believes that it must disclose such information by law). If Licensee reasonably believes that such disclosure is required to be made in less than the 10-day period, then the notice to Licensor shall so state, and Licensor ’s time to respond will be reduced accordingly. Licensee agrees to provide this Section of this Agreement to Licensee’s Consultants and notify Licensee’s Consultants that Licensee and Licensee’s Consultants are bound by the terms of this Section. Licensee shall be responsible for any disclosure or publication of Privileged Information by Licensee’s Consultants in violation of the terms hereof. 10. Survival. The obligations of Licensee in Sections 7, 9, and 12 shall survive termination of the license granted hereunder and any termination of this Agreement. Other - 4 -

 
Licensee obligations of this Agreement shall survive the expiration of the License Term or termination of the license granted hereunder for a period of two (2) months following expiration of the License Term or termination of this Agreement, as applicable. 11. Default. In the event that any default by Licensee hereunder is not cured after five (5) business days written notice from Licensor of such default, Licensor may, by notice to Licensee, immediately terminate the license granted hereunder. 12. Liens. Licensee shall not allow any lien to be placed on the Property in connection with any Test or any entry on the Property by Licensee or Licensee’s agents or contractors. Licensee shall indemnify and hold harmless Licensor from and against claims, damages, losses and expenses, including but not limited to reasonable attorneys’ fees, arising out of or resulting from any Due Diligence Activities. If any lien is filed against the Property on account of the Due Diligence Activities, Licensee shall bond for or discharge the same within ten (10) business days after the filing thereof. 13. Notices. All notices, consents, approvals, acceptances, demands, waivers and other communications (“Notice”) required or permitted hereunder must be in writing and must be sent by (i) personal delivery, (ii) certified mail, return receipt requested, (iii) for next day delivery by nationally recognized overnight delivery service that provides evidence of the date of delivery, or (iv) electronic mail, in any case with all charges prepaid, addressed to the appropriate party at its address listed below. To Licensor: APEX Park at Pima, L.L.C. c/o The Alter Group, Ltd. 7500 N. Dobson Road, Suite 151 Scottsdale, AZ 85256 Attn: Kent Moe, Senior Vice President Email: kmoe@altergroup.com To Licensee: AXON Enterprise Holding Company, LLC 17800 North 85th Street Scottsdale, AZ 85255 Attention: Doug Klint, General Counsel Email: doug@axon.com All Notices given in accordance with this Section will be deemed to have been received three (3) business days after having been deposited in any mail depository regularly maintained by the United States Postal Service, if sent by certified mail, on the date delivered if by personal delivery or electronic mail or on the date on which the Notice is deposited with a nationally recognized overnight delivery service, if sent by overnight delivery, or on the date delivery is refused, as indicated on the return receipt or the delivery records of the delivery service, as applicable. Notices given by counsel to a party in accordance with the above shall be deemed given by such party. 14. Severability. If any term in this Agreement shall be deemed unenforceable, such term shall be deemed independent from the remainder of this Agreement, the enforceability of - 5 -

 
which shall in no way be affected thereby, and the term in question shall be deemed to be rewritten so as to be enforceable to the fullest extent possible consistent with the intention of the parties. 15. Amendments. No purported alteration, amendment, change, waiver, termination or other modification of this Agreement shall be binding upon any of the parties hereto or have any other force or effect in any respect or particular, unless the same shall be in writing and signed by or on behalf of the parties to be charged therewith. 16. Merger. All prior understandings and agreements among the parties are merged in this Agreement, which alone fully and completely express the understandings among the parties thereto and which are entered into after full investigation. This Agreement shall be given a fair and reasonable construction in accordance with the intention of the parties hereto and without regard to or aid of canons requiring construction against the party responsible for the drafting of the same. 17. Non-Waiver. No failure or delay of any party in the exercise of any right given to such party hereunder, or the waiver by any party of any condition hereunder for its benefit, shall constitute a waiver of any other or further right, nor shall any single or partial exercise of any right preclude other or further exercise thereof or any other right. The waiver of any breach hereunder shall not be deemed to be a waiver of any other or subsequent breach hereof. 18. Waiver of Trial by Jury. The respective parties hereto shall and they hereby do waive trial by jury in any action brought by any of the parties hereto against another on any matters whatsoever arising out of or in any way connected with this Agreement. The parties shall endeavor to resolve any disputes under this Agreement by mediation which, unless the parties mutually agree otherwise, shall be administered by the American Arbitration Association in accordance with Real Estate Industry Rules in effect on the date of the Agreement. A request for mediation shall be made in writing, delivered to the other party to this Agreement, and filed with the person or entity administering the mediation. 19. Non-Assignability. This Agreement and the privileges of Licensee hereunder may not be assigned by Licensee. 20. No Agreement of Lease. The parties hereto do hereby acknowledge and agree that nothing contained herein shall constitute an acknowledgment or agreement by Licensor to lease the Property to Licensee, such lease being accomplished only following the entering into of a specific Ground Sublease agreement between Licensor and Licensee in accordance with Licensor having obtained requisite approval and corporate authorization. 21. Counterparts. This Agreement may be executed in one or more counterparts each counterpart of which shall constitute an executed agreement. 22. Applicable Law. The parties hereto do hereby agree that this Agreement and the rights and obligations of the parties hereto shall be governed by the laws and jurisdiction of the State of Arizona. - 6 -

 
23. E-mail or PDF Signatures. Signatures to this Agreement transmitted by e-mail or PDF shall be valid and effective to bind the party so signing provided that a copy of the electronic mail or PDF also is sent to the intended addressee by one of the means described in clauses (i) through (iii) of Section 13 above, in any case with all charges prepaid, addressed to the appropriate party at its address listed above. Delivery of the execution original to the Agreement or any e-mail signature or PDF page thereof may be given on behalf of a party by the attorney of such party. IN WITNESS HEREOF, the parties have duly executed this Agreement as of the date firstset forthabove. LICENSOR: APEX Park at Pima, L.L.C., an Arizona limited ilicy c y : � : � � Name: ------Samuel F.-- Gould--- -- Title:-- ------Vice President--- --- LICENSEE: AXON Enterprise Holding Company, LLC, a Delaware limited liability company By: ____________ Name: Jawad Ahsan Title: Chief Financial Officer - 7 -

 
EXHIBIT “A” DUE DILIGENCE ACTIVITIES Licensor agrees to provide Licensee access to the Property during the License Term for the limited purpose of performing at Licensee’s sole cost and expense, except as provided herein: 1. Physical Inspections. Licensee shall be granted access to the Property to perform studies, physical inspections, investigations and tests on the Property (each a “Test” and, collectively, the “Tests”); provided, however, that Licensee shall not perform or allow any Phase II environmental site assessment or other intrusive or invasive testing of the Property (collectively, a “Phase II”) without providing Licensor five business (5) days’ notice (the “Phase II Notice”) and obtaining Licensor ’s prior written consent, which may be withheld in Licensor ’s discretion. The Phase II Notice shall include the following: (i) the proposed date and time of the Phase II; (ii) a detailed description of each of the proposed tests and intrusive acts to be performed as part of the Phase II; (iii) the proposed location of each site of such tests and intrusive acts; (iv) the work to be performed to repair and restore any damage to the Property; and (v) the total amount of time required for the Phase II and such repair and restoration work. Any Phase II shall be performed in accordance with the description provided in the applicable Phase II Notice, except, if Licensor determines in its discretion that the Phase II and related repair and restoration work described in the Phase II Notice will unreasonably affect the Property, Licensee shall comply with Licensor’s reasonable requests to change the date, time, nature, location and/or duration of the Phase II and/or related repair and restoration work. Licensor shall have the right to have a representative of Licensor present for any inspections performed by Licensee pursuant to this Agreement. In the event that such Phase II is recommended and Licensor elects not to terminate this Agreement, Licensee shall cause the Phase II to be conducted at Licensor’s sole cost and expense. Prior to issuing any Phase II Environmental reports, Licensee shall provide a clearly marked draft version of such report. Licensor shall than be given five (5) business days to review and, if appropriate, comment on the draft report. At Licensors absolute discretion, Licensor shall have the opportunity to cease all testing and related work and (a) no further work shall be conducted and, (b) no final report shall be issued.

 
EXHIBIT “B” LEGAL DESCRIPTION OF PROPERTY - 9 -

 
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EXHIBIT E SITE PLAN / PRE-APP PLANS

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
[…***…] The mark *** indicates that text has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934 and filed separately with the Securities and Exchange Commission.

 
EXHIBIT F-1 ACCESS IMPROVEMENTS

 
EXHIBIT F-2 WATER/SEWER IMPROVEMENTS

 
EXHIBIT F-3 ELECTRIC/GAS/TELEPHONE IMPROVEMENTS

 
EXHIBIT G ASSIGNMENT OF SUBSTITUTE LEASE Form of Assignment of Substitute Lease to be approved and finalized during the Due Diligence Period and placed into Escrow by Seller and Buyer

 
RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: Kerry K. Patterson Procopio 8355 E. Hartford Drive, Suite 202 Scottsdale, AZ 85255 (Above Space for Recorder’s Use Only) ASSIGNMENT AND ASSUMPTION OF SUBSTITUTE LEASE THIS ASSIGNMENT AND ASSUMPTION OF SUBSTITUTE LEASE (this “Assignment”) is entered into as of _______________________________, 2018, between ________________________________________, an Arizona limited liability company (“Assignor”), and _______________________________________, an Arizona limited liability company (“Assignee”). RECITALS A. Assignor and Assignee are seller and buyer, respectively, under that certain Purchase and Sale Agreement dated as of ___________________________ (the “Purchase Agreement”), pursuant to which Assignor will transfer to Assignee its Substitute Lease interest in certain improved real property which is described on Exhibit A attached hereto (the “Property”). B. Assignor is the owner of the Lessee’s interest pursuant to that certain Substitute Lease, dated ___________________________, a memorandum of which is recorded as Instrument No. _____________________, Official Records of Maricopa County, Arizona, and approved on ___________________________, by the Superintendent, Salt River Field Office, on behalf of the Secretary of the Department of the Interior, Bureau of Indian Affairs and filed as Document No. ___________________with the Bureau of Indian Affairs Land, Titles and Records Office (the Official recordation entity) in Albuquerque, New Mexico (the “Substitute Lease”), which Substitute Lease relates solely to the Property. C. Assignor desires to assign its interest as the Lessee in, to and under the Substitute Lease to Assignee, and Assignee desires to assume certain rights and obligations of Assignor as the Lessee under the Substitute Lease, all as more particularly set forth below. NOW, THEREFORE, in consideration of the covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

 
1. Effective as of the date this Assignment is recorded in the Official Records of Maricopa County, Arizona (the “Effective Date”), Assignor hereby assigns, transfers and conveys to Assignee all of Assignor’s right, title and interest as Lessee in, to and under the Substitute Lease, subject to all of the terms, covenants, conditions and provisions hereof and thereof. 2. Assignee hereby accepts the foregoing assignment and hereby assumes and agrees to perform all of the obligations of Assignor as the Lessee under the Substitute Lease, so long as such obligations are first arising and required to be performed from and after the Effective Date. 3. Assignor shall indemnify, pay, defend and hold Assignee harmless for, from, and against any liabilities, obligations, actions, suits, proceedings or claims, and all costs and expenses (including, without limitation, reasonable attorneys’ fees) incurred in connection with the Substitute Lease based upon or arising out of any act, occurrence, or omission occurring or alleged to have occurred prior to the Effective Date. 4. Assignee shall indemnify, pay, defend and hold Assignor harmless for, from and against any liabilities, obligations, actions, suits, proceedings or claims, and all costs and expenses (including without limitation, reasonable attorneys’ fees) incurred in connection with the Substitute Lease based upon or arising out of any act, occurrence, or omission occurring or alleged to have occurred from and after the Effective Date. 5. As between Assignor and Assignee, this Assignment shall be construed in accordance with the laws of the State of Arizona. 6. This Assignment may be executed in one or more counterparts, each of which shall be an original, and all of which together shall constitute a single instrument. This Assignment shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns. 7. Assignor irrevocably appoints Assignee, its successors and assigns, as the attorney and agent of Assignor, in Assignor’s name and stead, to enforce the provisions of the Substitute Lease. [Signatures begin on next page.] - 2 -

 
IN WITNESS WHEREOF, this Assignment has been executed as of the date first above written. ASSIGNOR: APEX Park at Pima, LLC, an Arizona limited liability company By: Alter Park at Pima, L.L.C., a Delaware limited liability company By: 18-Chai Corp., an Illinois corporation Its: Manager By: _________________________ Name: ___________________ Title: ___________________ Date: ___________________ State of ) ) ss. County of ) SUBSCRIBED AND SWORN To before me this ____ day of _____________, 2018 by ___________________________. _________________________________ Notary Public ________________________________ My Commission Expires - 3 -

 
ASSIGNEE: ___________________________________________ By: _________________________ Name: ___________________ Title: ___________________ Date: ___________________ State of ) ) ss. County of ) SUBSCRIBED AND SWORN To before me this ____ day of _____________, 2018 by ___________________________. _________________________________ Notary Public ________________________________ My Commission Expires - 4 -

 
COMMUNITY APPROVAL: The foregoing Assignment of Substitute Lease is hereby approved. THE SALT RIVER PIMA MARICOPA INDIAN COMMUNITY By: ________________________________ Name: __________________________ Title: __________________________ Date: __________________________ State of ) ) ss. County of ) SUBSCRIBED AND SWORN To before me this ____ day of _____________, 2018 by ___________________________. _________________________________ Notary Public ________________________________ My Commission Expires - 5 -

 
CONSENTED TO BY MASTER LESSOR: Acting collectively through their Spokespersons, who execute this Assignment on behalf of the Lessor pursuant to the authority granted to them in the Substitute Lease, Master Lessor consents to the Assignment. The undersigned Spokespersons hereby approve this Assignment. ________________________________________ [INSERT NAME OF SPOKESPERSON] ________________________________________ [INSERT NAME OF SPOKESPERSON] ________________________________________ [INSERT NAME OF SPOKESPERSON] ________________________________________ [INSERT NAME OF SPOKESPERSON] ________________________________________ [INSERT NAME OF SPOKESPERSON] STATE OF ARIZONA ) ) ss County of MARICOPA ) The foregoing instrument was acknowledged before me this _____ day of ________, 20___, by ______________________________________________________________________________ ______________________________________________________________________________ _______________________, as Spokespersons acting on behalf of certain allotted landowners of land within the Salt River Pima-Maricopa Indian Community, pursuant to authority granted in the Master Lease. _______________________________ Notary Public (Notary Seal) - 6 -

 
SECRETARY’S APPROVAL UNITED STATES DEPARTMENT OF THE INTERIOR Bureau of Indian Affairs Salt River Filing Office 10000 East McDowell Road Scottsdale, AZ 85256 The within ASSIGNMENT OF SUBSTITUTE LEASE is hereby approved pursuant to authority delegated from the Secretary of the Interior to the Assistant Secretary – Indian Affairs by 209 DM 8 230 DM 1, and to the Western Regional Director by 3 IAM 4 (Release No. 99-03), and to the Superintendent/Field Representative by 10 BIAM 11, as amended by Western Regional Release No. 97-1. ______________________________________ ____________________________ Superintendent Date Salt River Field Office Bureau of Indian Affairs Department of the Interior State of ) ) ss. County of ) SUBSCRIBED AND SWORN To before me this ____ day of _____________, 2018 by ___________________________. _________________________________ Notary Public ________________________________ My Commission Expires - 7 -

 


EXHIBIT 21.1
List of Subsidiaries*
 
 
Jurisdiction of Incorporation
Axon Public Safety B.V.
 
The Netherlands
Dextro, Inc.
 
Delaware, U.S.

* Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Axon Enterprise, Inc. are omitted because, considered in the aggregate, they would not constitute a significant subsidiary as of the end of the year covered by this report.





EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated February 27, 2019 , with respect to the consolidated financial statements and internal control over financial reporting included in the Annual Report of Axon Enterprise, Inc. on Form 10-K for the year ended December 31, 2018 . We consent to the incorporation by reference of said reports in the Registration Statements of Axon Enterprise, Inc. on Form S-3 (File No. 333-224918) and on Forms S-8 (File No. 333-212069; File No. 333-190442; File No. 333-190441; File No. 333-161183; File No. 333-125455; File No. 333-65046; File No. 333-225660; File No. 333-225661).
 

/s/ GRANT THORNTON LLP

Phoenix, Arizona
February 27, 2019





EXHIBIT 31.2
CERTIFICATION PURSUANT TO
Rule 13a-14(a) or Rule 15d-14(a) of Principal Accounting Officer
I, Jawad A. Ahsan, certify that:
 
1.
I have reviewed this Annual Report on Form 10-K of Axon Enterprise, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 
 
 
 
 
Date:
February 27, 2019
By:
 
/s/ JAWAD A. AHSAN
 
 
 
 
Jawad A. Ahsan
 
 
 
 
Chief Financial Officer
 
 
 
 
(Principal Financial and Accounting Officer)




EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Axon Enterprise, Inc. (the “Company”) for the year ended December 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Patrick W. Smith, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
/s/ Patrick W. Smith
 
Patrick W. Smith
 
Chief Executive Officer
 
February 27, 2019
In connection with the Annual Report on Form 10-K of Axon Enterprise, Inc. (the “Company”) for the year ended December 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jawad A. Ahsan, Principal Accounting Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
/s/ JAWAD A. AHSAN
 
Jawad A. Ahsan
 
Chief Financial Officer
 
(Principal Financial and Accounting Officer)
 
February 27, 2019




EXHIBIT 31.1
CERTIFICATION PURSUANT TO
Rule 13a-14(a) or Rule 15d-14(a) of Chief Executive Officer
I, Patrick W. Smith, certify that:
 
1.
I have reviewed this Annual Report on Form 10-K of Axon Enterprise, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 
 
 
 
 
Date:
February 27, 2019
By:
 
/s/ Patrick W. Smith
 
 
 
 
Chief Executive Officer