Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
 
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018March 31, 2019
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 85th Street
Scottsdale, Arizona
 85255
(Address of principal executive offices) (Zip Code)
(480) 991-0797
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
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”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ýAccelerated filer ¨
    
Non-accelerated filer 
¨(Do not check if a smaller reporting company)
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 Exchange Act).    Yes  ¨    No  ý

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.00001 Par ValueAAXNThe Nasdaq Global Select Market
The number of shares of the registrant’s common stock outstanding as of July 31, 2018April 30, 2019 was 58,319,695.59,127,439.
 

AXON ENTERPRISE, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018MARCH 31, 2019
 
   Page
Special Note Regarding Forward-Looking Statements

ii
PART I - FINANCIAL INFORMATION
 
 
Item 1. Financial Statements
31
  
Condensed Consolidated Balance Sheets as of June 30, 2018March 31, 2019 (Unaudited) and December 31, 20172018
31
  
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30,March 31, 2019 and 2018 and 2017
42
Unaudited Condensed Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2019 and 2018
3
  
Unaudited Condensed Consolidated Statements of Cash Flows for the SixThree Months Ended June 30,March 31, 2019 and 2018 and 2017
54
  
Notes to Unaudited Condensed Consolidated Financial Statements
65
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
2921
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
4629
 
Item 4. Controls and Procedures
4729
PART II - OTHER INFORMATION
 
 
Item 1. Legal Proceedings
4930
 
Item 1A. Risk Factors
4930
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
4930
 
Item 3. Defaults Upon Senior Securities
4930
 
Item 4. Mine Safety Disclosures
4930
 
Item 5. Other Information
4930
 
Item 6. Exhibits
5031
 
SIGNATURES
5132


Special Note Regarding Forward-Looking Statements

This Report on Form 10-Q contains “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.From time to time, we also provide forward-looking statements in other materials we release to the public as well as verbal forward-looking statements. These forward-looking statements include, without limitation, statements regarding: proposed products and services and related development efforts and activities; expectations about the market for our current and future products and services; the impact of pending litigation; our outlook for 2019 with respect to revenue and income tax rate; trends relating to subscription plan programs and revenues; our anticipation that contracts with governmental customers will be fulfilled; expected trends, including the benefits of, research and development expense; the sufficiency of our liquidity and financial resources; that we may repurchase our common stock; expectations about customer behavior; statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; and statements of management’s strategies, goals and objectives and other similar expressions; as well as the ultimate resolution of financial statement items requiring critical accounting estimates, including those set forth in our Form 10-K for the year ended December 31, 2018. 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; delayed cash collections and possible credit losses due to our subscription model; exposure to international operational risks; changes in the costs of product components and labor; defects in our products; the impact of product mix on projected gross margins; our ability to manage our supply chain and avoid production delays, shortages, and impacts to expected gross margins; our ability to design, introduce and sell new products or features; our ability to defend against litigation and protect our intellectual property, and the resulting costs of this activity; our exposure to cancellations of government contracts due to appropriation clauses, exercise of a cancellation clause, or non-exercise of contractually optional periods; 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; changes in government regulations in the U.S. and in foreign markets, 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; our ability to integrate acquired businesses; our ability to attract and retain key personnel; and counter-party risks relating to cash balances held in excess of FDIC insurance limits. 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. The Annual Report on Form 10-K that we filed with the SEC on February 27, 2019 listed 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 the Report on Form 10-K and in this Report on Form 10-Q, 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.


ii
Table of Contents

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AXON ENTERPRISE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, 2018 December 31, 2017March 31, 2019 December 31, 2018
(Unaudited)  (Unaudited)  
ASSETS      
Current assets:      
Cash and cash equivalents$307,507
 $75,105
$223,642
 $349,462
Short-term investments4,124
 6,862
105,312
 —
Accounts and notes receivable, net of allowance of $1,327 and $754 as of June 30, 2018 and December 31, 2017, respectively94,296
 56,064
Accounts and notes receivable, net of allowance of $2,355 and $1,882 as of March 31, 2019 and December 31, 2018, respectively149,096
 130,579
Contract assets, net10,468
 —
17,945
 13,960
Inventory43,967
 45,465
37,587
 33,763
Prepaid expenses and other current assets26,604
 21,696
33,340
 30,391
Total current assets486,966
 205,192
566,922
 558,155
Property and equipment, net of accumulated depreciation of $37,142 and $36,477 as of June 30, 2018 and December 31, 2017, respectively34,503
 31,172
Property and equipment, net of accumulated depreciation of $41,707 and $39,885 as of March 31, 2019 and December 31, 2018, respectively
41,347
 37,893
Deferred income tax assets, net15,813
 15,755
18,770
 19,347
Intangible assets, net20,442
 18,823
15,067
 15,935
Goodwill24,684
 14,927
25,017
 24,981
Long-term notes receivable, net of current portion37,158
 36,877
36,316
 40,230
Other assets22,831
 15,366
35,756
 22,999
Total assets$642,397
 $338,112
$739,195
 $719,540
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Current liabilities:      
Accounts payable$9,213
 $8,592
$9,865
 $15,164
Accrued liabilities29,995
 23,502
36,348
 41,092
Current portion of deferred revenue76,583
 70,401
110,063
 107,016
Customer deposits2,970
 3,673
3,604
 2,702
Current portion of business acquisition contingent consideration1,946
 1,693
Other current liabilities191
 89
3,914
 37
Total current liabilities120,898
 107,950
163,794
 166,011
Deferred revenue, net of current portion61,456
 54,881
74,784
 74,417
Liability for unrecognized tax benefits1,918
 1,706
3,156
 2,849
Long-term deferred compensation3,560
 3,859
3,675
 3,235
Business acquisition contingent consideration, net of current portion203
 1,048
Other long-term liabilities5,520
 1,224
13,247
 5,704
Total liabilities193,555
 170,668
258,656
 252,216
Commitments and contingencies (Note 11)
 
Commitments and contingencies (Note 12)
 
Stockholders’ equity:      
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of June 30, 2018 and December 31, 2017—
 —
Common stock, $0.00001 par value; 200,000,000 shares authorized; 58,289,613 and 52,969,869 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively1
 1
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of March 31, 2019 and December 31, 2018—
 —
Common stock, $0.00001 par value; 200,000,000 shares authorized; 59,109,286 and 58,810,637 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively1
 1
Additional paid-in capital442,717
 201,672
460,146
 453,400
Treasury stock at cost, 20,220,227 shares as of June 30, 2018 and December 31, 2017(155,947) (155,947)
Treasury stock at cost, 20,220,227 shares as of March 31, 2019 and December 31, 2018(155,947) (155,947)
Retained earnings163,590
 123,185
177,802
 171,383
Accumulated other comprehensive loss(1,519) (1,467)(1,463) (1,513)
Total stockholders’ equity448,842
 167,444
480,539
 467,324
Total liabilities and stockholders’ equity$642,397
 $338,112
$739,195
 $719,540
The accompanying notes are an integral part of these condensed consolidated financial statements.

AXON ENTERPRISE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
 
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
2018 2017 2018 20172019 2018
Net sales from products$76,721
 $66,875
 $157,695
 $134,366
$88,089
 $80,974
Net sales from services22,505
 12,768
 42,746
 24,519
27,721
 20,241
Net sales99,226
 79,643
 200,441
 158,885
115,810
 101,215
Cost of product sales31,087
 30,172
 63,521
 57,244
39,600
 32,434
Cost of service sales4,996
 3,834
 9,316
 7,334
7,293
 4,320
Cost of sales36,083
 34,006
 72,837
 64,578
46,893
 36,754
Gross margin63,143
 45,637
 127,604
 94,307
68,917
 64,461
Operating expenses:          
Sales, general and administrative39,343
 31,824
 75,102
 62,681
42,892
 35,759
Research and development18,501
 12,989
 33,620
 25,452
23,354
 15,119
Total operating expenses57,844
 44,813
 108,722
 88,133
66,246
 50,878
Income from operations5,299
 824
 18,882
 6,174
2,671
 13,583
Interest and other income (expense), net(295) 1,684
 968
 1,890
Interest and other income, net2,313
 1,263
Income before provision for income taxes5,004
 2,508
 19,850
 8,064
4,984
 14,846
Provision for (benefit from) income taxes(3,481) 232
 (1,561) 1,208
(1,435) 1,920
Net income$8,485
 $2,276
 $21,411
 $6,856
$6,419
 $12,926
Net income per common and common equivalent shares:          
Basic$0.15
 $0.04
 $0.39
 $0.13
$0.11
 $0.24
Diluted$0.15
 $0.04
 $0.38
 $0.13
$0.11
 $0.24
Weighted average number of common and common equivalent shares outstanding:          
Basic55,527
 52,736
 54,330
 52,578
58,914
 53,119
Diluted57,054
 53,770
 55,892
 53,723
59,751
 54,532
          
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income$8,485
 $2,276
 $21,411
 $6,856
$6,419
 $12,926
Foreign currency translation adjustments655
 (716) (52) (551)50
 (707)
Comprehensive income$9,140
 $1,560
 $21,359
 $6,305
$6,469
 $12,219

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


AXON ENTERPRISE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share data)

 Common Stock Additional
Paid-in
Capital		 Treasury Stock Retained
Earnings		 Accumulated
Other
Comprehensive
Income (Loss)		 Total
Stockholders’
Equity
 Shares Amount  Shares Amount   
Balance, December 31, 201752,969,869
 $1
 $201,672
 20,220,227
 $(155,947) $123,185
 $(1,467) $167,444
Cumulative effect of applying a change in accounting principle—
 —
 —
 —
 —
 18,994
 —
 18,994
Issuance of common stock under employee plans337,214
 —
 (3,421) —
 —
 —
 —
 (3,421)
Stock-based compensation—
 —
 4,093
 —
 —
 —
 —
 4,093
Net income—
 —
 —
 —
 —
 12,926
 —
 12,926
Foreign currency translation adjustments—
 —
 —
 —
 —
 —
 (707) (707)
Balance, March 31, 201853,307,083
 $1
 $202,344
 20,220,227
 $(155,947) $155,105
 $(2,174) $199,329
                
Balance, December 31, 201858,810,637
 $1
 $453,400
 20,220,227
 $(155,947) $171,383
 $(1,513) $467,324
Issuance of common stock under employee plans298,649
 —
 (1,159) —
 —
 —
 —
 (1,159)
Stock-based compensation—
 —
 7,905
 —
 —
 —
 —
 7,905
Net income—
 —
 —
 —
 —
 6,419
 —
 6,419
Foreign currency translation adjustments—
 —
 —
 —
 —
 —
 50
 50
Balance, March 31, 201959,109,286
 $1
 $460,146
 20,220,227
 $(155,947) $177,802
 $(1,463) $480,539

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


AXON ENTERPRISE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended June 30,Three Months Ended March 31,
2018 20172019 2018
Cash flows from operating activities:      
Net income$21,411
 $6,856
$6,419
 $12,926
Adjustments to reconcile net income to net cash provided by (used in) operating activities:      
Depreciation and amortization5,161
 3,400
2,800
 2,411
Loss on disposal and impairment of property and equipment, net153
 —
242
 34
Loss on disposal and abandonment of intangible assets54
 —
18
 —
Bond premium amortization30
 427
Stock-based compensation9,047
 7,423
7,905
 4,093
Deferred income taxes(58) (1,458)577
 1,514
Unrecognized tax benefits212
 282
307
 104
Other noncash, net896
 22
Change in assets and liabilities:      
Accounts and notes receivable and contract assets(24,791) (15,925)(21,994) (17,060)
Inventory4,508
 (25,768)(3,936) 2,408
Prepaid expenses and other assets(7,429) (10,055)(3,152) (1,702)
Accounts payable, accrued and other liabilities(2,688) 7,531
(7,284) 6,740
Deferred revenue10,496
 14,829
3,232
 6,554
Net cash provided by (used in) operating activities16,106
 (12,458)(13,970) 18,044
Cash flows from investing activities:      
Purchases of investments(4,331) (19,950)(105,322) (802)
Proceeds from maturity of investments7,038
 34,377
Proceeds from maturity/call of investments—
 3,167
Purchases of property and equipment(4,665) (5,741)(5,271) (1,063)
Purchases of intangible assets(254) (170)(162) (34)
Business acquisitions(5,014) (6,479)
Net cash provided (used in) by investing activities(7,226) 2,037
Net cash provided by (used in) investing activities(110,755) 1,268
Cash flows from financing activities:      
Net proceeds from equity offering233,993
 —
Proceeds from options exercised586
 1,241
100
 356
Payroll tax payments for net-settled stock awards(10,807) (2,572)
Payment of contingent consideration for a business acquisition(575) —
Net cash provided by (used in) financing activities223,197
 (1,331)
Income and payroll tax payments for net-settled stock awards(1,259) (3,777)
Net cash used in financing activities(1,159) (3,421)
Effect of exchange rate changes on cash, cash equivalents and restricted cash(538) (857)67
 469
Net increase (decrease) in cash, cash equivalents and restricted cash231,539
 (12,609)(125,817) 16,360
Cash, cash equivalents and restricted cash, beginning of period78,438
 43,969
351,027
 78,438
Cash, cash equivalents and restricted cash, end of period$309,977
 $31,360
$225,210
 $94,798
      
Supplemental disclosures:      
Cash and cash equivalents$307,507
 $28,038
$223,642
 $92,330
Restricted cash (Note 6)2,470
 3,322
Restricted cash (Note 1)1,568
 2,468
Total cash, cash equivalents and restricted cash shown in the statements of cash flows$309,977
 $31,360
$225,210
 $94,798
      
Cash paid for income taxes, net of refunds$7,758
 $9,934
$758
 $63
      
Non-cash transactions      
Property and equipment purchases in accounts payable and accrued liabilities$665
 $1,351
$328
 $136
Non-cash purchase consideration related to business combinations$12,288
 $1,026
The accompanying notes are an integral part of these condensed consolidated financial statements.

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AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1. Organization and Summary of Significant Accounting Policies
Axon Enterprise, Inc. (“Axon”Axon,” the “Company,” "we," or the “Company”"us") is a developer and manufacturermarket-leading provider of advanced conducted electrical weapons (“CEWs”) designed for use by law enforcement military, corrections, private security personnel,technology solutions. Our core mission is to protect life. We fulfill that mission through developing hardware and by private individuals for personal defense. In addition,software products that advance the Company has developed full technology solutions forlong term objectives of a) obsoleting the capture, secure storagebullet, b) reducing social conflict, and management of video/audio evidence as well as other tactical capabilities for use in law enforcement. The Company sells its products worldwide through its direct sales force, distribution partners, online storec) enabling a fair and third-party resellers. The Company was incorporated in Arizona in September 1993, and reincorporated in Delaware in January 2001. The Company’s corporateeffective justice system.

Our headquarters and manufacturing facilities are located in Scottsdale, Arizona. The Company’s mainArizona houses our executive management, sales, marketing, certain engineering, manufacturing, and other administrative support functions. We also have a software engineering development division iscenter located in Seattle, Washington, and it develops artificial intelligence technologies through its wholly-owned subsidiary in Vietnam, Axon Public Safety Southeast Asia LLC. During 2018, the Company established Axon Public Safety Finland OY in Tampere, Finland that operates a connected hardware team focused on the development of the Company's hardware products. Axon Public Safety BV, a wholly owned subsidiary of the Company, supports the Company's international sales and marketing efforts, and issubsidiaries located in Amsterdam, Netherlands. Axon Public Safety BV wholly owns two subsidiaries, Axon Public Safety U.K. LTD and Axon Public Safety AU, that serve as direct sales operations inAustralia, Canada, Finland, Hong Kong, Germany, India, the Netherlands, the United Kingdom, ("U.K.") and Australia, respectively. The Company also sells to certain international markets through a wholly-owned subsidiary, Axon Public Safety Germany SE, and sells into the Canadian market through its wholly-owned subsidiary, Axon Public Safety Canada, Inc.Vietnam.
The accompanying unaudited condensed consolidated financial statements include the accounts of the CompanyAxon Enterprise, Inc. and itsour wholly owned subsidiaries. All material intercompany accounts, transactions, and profits have been eliminated.
Basis of Presentation and Use of Estimates
These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.SEC. Certain information related to the Company’sour organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) has been condensed or omitted. The accounting policies followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed in the Company’sour annual consolidated financial statements for the year ended December 31, 20172018, as filed on Form 10-K, with the exception of the Company'sour adoption of Topic 606.certain accounting pronouncements which we describe below. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state the Company’sour financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with the Company’sour Form 10-K for the year ended December 31, 20172018. The results of operations for the sixthree months ended June 30,March 31, 2019 and 2018 and 2017 are not necessarily indicative of the results to be expected for the full year (or any other period). Significant estimates and assumptions in these unaudited condensed 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,
fair valuestock-based compensation,
recognition and measurement of stock awards issued and the estimated vesting periods for performance-based stock awards,lease liabilities,
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.
Segment Information
The Company isOur operations are comprised of two reportable segments: the manufacture and sale of CEWs,conducted electrical weapons ("CEWs"), batteries, accessories, extended warranties and other products and services (the “TASER Weapons”“TASER” segment); and the development, manufacture, and sale of software and sensors, business, which includes the sale of devices, wearables, applications, cloud and mobile products (collectively, the “Software and Sensors” segment). Within the Software and Sensors segment, the Company specifies sales of products and services. Revenue from the Company'sour “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"Sensors and Other revenue." Revenue from the Company'sour “services” in the Software and Sensors segment comprise sales related to the Axon Cloud, which includes Evidence.com,Axon Evidence, cloud-based evidence management software revenue, other recurring cloud-hosted software revenue and related

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


professional services, and is sometimes referred to as Axon"Axon Cloud revenue." Within the Software and Sensors segment, the Company includeswe 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 research and development ("R&D") for products included, or to be included, within the Software and Sensors segment. All other costs are included in the TASER Weapons segment.
The Company’s
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AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




Our Chief Executive Officer, who is the Chief Operating Decision Maker (the “CODM”), is not provided asset information or sales, general, and administrative expense by segment. Reportable segments are determined based on discrete financial information reviewed by the CODM for the Company. The Company organizesCODM. We organize and reviewsreview operations based on products and services. The Company performsWe perform an analysis of our reportable segments on at least an annual analysis of its reportable segments.basis. Additional information related to the Company’sour business segments is summarized in Note 14.15.
Geographic Information and Major Customers
For the three and six months ended June 30,March 31, 2019 and 2018, and 2017, no individual country outside the U.S. represented more than 10% of total net sales. Individual sales transactions in the international market are generally larger and occur more intermittently than in the domestic market due to the profile of the Company'sour customers.
For the three and six months ended June 30,March 31, 2019 and 2018, and 2017, no customer represented more than 10% of total net sales. At June 30, 2018March 31, 2019 and December 31, 2017,2018, no customer represented more than 10% of the aggregate balance of accounts and notes receivable balance and contract assets.
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. Potentially dilutive securities include outstanding stock options and unvested restricted stock units ("RSUs"). The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’sour common stock can result in a greater dilutive effect from potentially dilutive securities.
The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):
 Three Months Ended June 30, Six Months Ended June 30,
 2018 2017 2018 2017
Numerator for basic and diluted earnings per share:       
Net income$8,485
 $2,276
 $21,411
 $6,856
Denominator:       
Weighted average shares outstanding55,527
 52,736
 54,330
 52,578
Dilutive effect of stock-based awards1,527
 1,034
 1,562
 1,145
Diluted weighted average shares outstanding57,054
 53,770
 55,892
 53,723
Anti-dilutive stock-based awards excluded3,023
 544
 1,533
 690
Net income per common share:       
Basic$0.15
 $0.04
 $0.39
 $0.13
Diluted$0.15
 $0.04
 $0.38
 $0.13

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 Three Months Ended March 31,
 2019 2018
Numerator for basic and diluted earnings per share:   
Net income$6,419
 $12,926
Denominator:   
Weighted average shares outstanding58,914
 53,119
Dilutive effect of stock-based awards837
 1,413
Diluted weighted average shares outstanding59,751
 54,532
Anti-dilutive stock-based awards excluded12,125
 404
Net income per common share:   
Basic$0.11
 $0.24
Diluted$0.11
 $0.24
Standard Warranties
The Company warranties itsWe 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 repair or 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 condensed consolidated balance sheets. 

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Changes in the Company’sour estimated product warranty liabilities were as follows (in thousands):
Six Months Ended June 30,Three Months Ended March 31,
2018 20172019 2018
Balance, beginning of period$644
 $780
$898
 $644
Utilization of accrual(149) (120)(123) (93)
Warranty expense (recovery)10
 (96)
Warranty expense252
 8
Balance, end of period$505
 $564
$1,027
 $559
Fair Value Measurements and Financial Instruments
The Company uses 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. The Company categorizesWe categorize each of itsour 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:
 
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 the Company'sour own assumptions about inputs that market participants would use in pricing an asset or liability.
The Company hasWe have cash equivalents and investments, which at June 30, 2018March 31, 2019 and December 31, 20172018 were comprised of money market funds state and, municipal obligations,at March 31, 2019, also included corporate bonds, and certificates of deposits.bonds. See additional disclosure regarding the fair value of the Company’sour cash equivalents and investments in Note 3. Included in the balance of Otherother assets as of June 30, 2018March 31, 2019 and December 31, 20172018 was $3.8$3.9 million and $3.6 million, respectively, related to corporate-owned life insurance policies which are used to fund the Company’sour deferred compensation plan. The Company determinesWe determine the fair value of its insurance contracts by obtaining the cash surrender value of the contracts from the issuer, a Level 2 valuation technique.
The Company’sOur financial instruments also include accounts and notes receivable, accounts payable, notes payable and accrued liabilities. Due to the short-term nature of these instruments, their faircarrying values approximate their carryingfair values on the accompanying condensed consolidated balance sheets.

Restricted Cash

Restricted cash balances as of March 31, 2019 and December 31, 2018 included $0.9 million of sales proceeds related to long-term contracts with customers, which were included in prepaid expenses and other current assets on our condensed consolidated balance sheets. The proceeds are held in escrow until certain billing milestones are achieved, and then specified amounts are transferred to our operating accounts. Restricted cash balances as of March 31, 2019 and December 31, 2018 also included $0.7 million related to a performance guarantee for an international customer sales contract, which were included in other assets on our accompanying condensed consolidated balance sheets.
Valuation of Goodwill, Intangibles and Long-lived Assets
Management evaluatesWe evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and identifiable intangible assets, excluding goodwill and intangible assets with indefinite useful lives, may

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warrant revision or that the remaining balance of these assets may not be recoverable. Such circumstances could include, but are not limited to, a change in the product mix, a change in the way products are created, produced or delivered, or a significant change in the way

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




products are branded and marketed. In performing the review for recoverability, management estimateswe estimate 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.
The Company doesWe 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. The Company performs itsWe perform our annual goodwill and intangible asset impairment tests in the fourth quarter of each year.
Recently Issued Accounting Guidance

Recently Adopted Accounting Pronouncements
In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”("FASB") issued Accounting Standards Update (“ASU”("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, the Company 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 February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order, which is intended to increase transparency and comparability among organizations by recognizing leaserequiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheetsheet. In July 2018, the FASB issued additional guidance which provided an additional transition method for adopting the updated guidance.  Most prominent among the changes in the standard is the requirement for lessees to recognize ROU assets and lease liabilities for those leases that were classified as operating leases under existing GAAP guidance. ASU 2016-02 requires a lessee to recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to useprevious U.S. GAAP. On January 1, 2019, we adopted Topic 842 by applying the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for the fiscal year beginning after December 15, 2018 (including interim periods within that year) using anon-comparative modified retrospective approachmethod of adoption. Under this method, financial information related to periods prior to adoption will be as originally reported under the then-current standard (Topic 840, Leases).

Results for reporting periods beginning on or after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted, and early adoptioncontinue to be reported in accordance with our historic accounting under Topic 840. We elected to apply the package of practical expedients to not reassess whether a contract is permitted. The Company is currently in the process of evaluating the impact of adoption of this ASU on its consolidated financial statements, but expectsor contains a lease, lease classification, or initial lease costs for all leases that commenced before the adoption of ASU 2016-02 will havedate.

The adoption had a material impact on the Company'sto our condensed consolidated balance sheet.
In June 2016, The most significant impact was the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which amends ASC 326. The new guidance differs from existing GAAP guidance wherein previous standards generally delayed recognition of credit losses untilROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. There was no other impact from the loss was probable. ASU 2016-13 eliminatesadoption. The adjustments to the probable initial recognition threshold and, instead, reflects an entity’s current estimate of all expected credit losses. The use of forecasted information is intended to incorporate more timely information in the estimate of expected credit loss. ASU 2016-13 is effectiveopening balance sheet were as follows (in thousands):
 December 31, 2018 Impact of Adoption of Topic 842 on Opening Balance Sheet January 1, 2019
 (As reported)  (As adjusted)
Consolidated Balance Sheet Data:     
Other assets$22,999
 $12,483
 $35,482
Total assets719,540
 12,483
 732,023
     —
Accrued liabilities41,092
 (1,138) 39,954
Other current liabilities37
 3,588
 3,625
Total current liabilities166,011
 2,450
 168,461
Other long-term liabilities5,704
 10,033
 15,737
Total liabilities252,216
 12,483
 264,699
Total liabilities and stockholders' equity719,540
 12,483
 732,023

See Note 11 for the fiscal year beginning after December 15, 2019, and interim periods within that fiscal year, and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-13 on its consolidated financial statements.
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 practicefurther disclosures 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. The Company adopted ASU 2016-15 effective January 1, 2018, and the adoption of this ASU did not have a material impact on its 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. The Company adopted ASU 2016-16 effective January 1, 2018, and the adoption of this ASU did not have a material impact on its 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.  The Company adopted ASU 2016-18 effective January 1, 2018, and retrospectively updated the presentation of its unaudited 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. The adoption of ASU 2016-18 did not have a material impact on the Company's consolidated financial statements.

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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. The Company adopted ASU 2017-01 January 1, 2018, and the adoption of this ASU did not have a material impact on the Company's 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. The Company adopted ASU 2017-09 effective January 1, 2018, and the adoption of this ASU did not have a material impact on its consolidated financial statements.842.
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. ASU 2018-07 is effective for the fiscal year beginning after December 15, 2018, and interim periods within that fiscal year,We adopted this standard on January 1, 2019 and the adoption had no impact on our condensed 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) on financial instruments and other commitments 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. This ASU will also require enhanced disclosures relating to significant estimates and judgments used in estimating credit losses, as well as credit quality. We are currently in the process of evaluating the impact of adoption of ASU 2016-13 on our condensed 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 apply 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 is not expected to have a material impact on the Company'sour condensed 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, the Company 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. The Company 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 impacts as a result of applying Topic 606 were a net increase to revenue of $0.6 million and $2.3 million, respectively, for the three and six months ended June 30, 2018, and a net decrease to selling, general and administrative expenses of approximately $0.9 million and $1.6 million, respectively, 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 assets21,696
 2,003
 23,699
Total impacted current assets77,760
 36,430
 114,190
Deferred income tax assets, net15,755
 (5,158) 10,597
Long-term notes receivable, net of current portion36,877
 (12,977) 23,900
Other assets15,366
 5,323
 20,689
Total impacted assets145,758
 23,618
 169,376
      
Accrued liabilities23,502
 2,512
 26,014
Current portion of deferred revenue70,401
 863
 71,264
Total impacted current liabilities93,903
 3,375
 97,278
Deferred revenue, net of current portion54,881
 1,249
 56,130
Total impacted liabilities148,784
 4,624
 153,408
Retained earnings123,185
 18,994
 142,179
Total impacted stockholders' equity123,185
 18,994
 142,179
Total impacted liabilities and stockholders' equity271,969
 23,618
 295,587
Revenue Recognition
Revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, each of which are generally distinct and accounted for as separate performance obligations. 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, the Company allocates the contract transaction price to each performance obligation using the Company's estimate of the standalone selling price ("SSP") of each distinct good or service in the contract.
Performance obligations to deliver products, including CEWs, Axon cameras and related accessories such as cartridges, batteries and docks, are generally satisfied at the point in time the Company ships 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 Software-as-a-Service (“SaaS”) offerings, including Evidence.com 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.
The Company has 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.
Nature of Products and Services
The following table presents the Company'sour revenues by primary product and service offering (in thousands):
Three Months Ended June 30, 2018 
Three Months Ended June 30, 2017 (1)
Three Months Ended March 31, 2019 Three Months Ended March 31, 2018
TASER Weapons Software and Sensors Total TASER Weapons Software and Sensors TotalTASER Software and Sensors Total TASER Software and Sensors Total
TASER 7$9,954
 $—
 $9,954
 $—
 $—
 $—
TASER X26P$18,146
 $—
 $18,146
 $16,235
 $—
 $16,235
15,872
 —
 15,872
 16,474
 —
 16,474
TASER X218,362
 —
 18,362
 16,052
 —
 16,052
13,085
 —
 13,085
 23,932
 —
 23,932
TASER Pulse and Bolt1,101
 —
 1,101
 801
 —
 801
670
 —
 670
 1,346
 —
 1,346
Single cartridges17,243
 —
 17,243
 14,867
 —
 14,867
19,160
 —
 19,160
 16,114
 —
 16,114
Axon Body—
 4,780
 4,780
 —
 3,752
 3,752
—
 6,445
 6,445
 —
 5,558
 5,558
Axon Flex—
 1,535
 1,535
 —
 3,851
 3,851
—
 1,224
 1,224
 —
 1,669
 1,669
Axon Fleet—
 3,516
 3,516
 —
 2,116
 2,116
Axon Dock—
 2,119
 2,119
 —
 2,783
 2,783
—
 3,312
 3,312
 —
 3,035
 3,035
Axon Fleet—
 2,715
 2,715
 —
 —
 —
Evidence.com and cloud services—
 20,357
 20,357
 —
 12,756
 12,756
Axon Evidence and cloud services36
 27,618
 27,654
 —
 20,241
 20,241
TASER Cam—
 762
 762
 —
 766
 766
—
 903
 903
 —
 1,360
 1,360
Extended warranties3,738
 2,870
 6,608
 2,991
 1,619
 4,610
4,316
 4,930
 9,246
 3,706
 2,490
 6,196
Other2,034
 3,464
 5,498
 2,070
 1,100
 3,170
2,298
 2,471
 4,769
 1,952
 1,222
 3,174
Total$60,624
 $38,602
 $99,226
 $53,016
 $26,627
 $79,643
$65,391
 $50,419
 $115,810
 $63,524
 $37,691
 $101,215

 Six Months Ended June 30, 2018 
Six Months Ended June 30, 2017 (1)
 TASER Weapons Software and Sensors Total TASER Weapons Software and Sensors Total
TASER X26P$34,620
 $—
 $34,620
 $31,903
 $—
 $31,903
TASER X242,294
 —
 42,294
 35,038
 —
 35,038
TASER Pulse and Bolt2,447
 —
 2,447
 1,823
 —
 1,823
Single cartridges33,357
 —
 33,357
 31,531
 —
 31,531
Axon Body—
 10,338
 10,338
 —
 7,198
 7,198
Axon Flex—
 3,204
 3,204
 —
 5,326
 5,326
Axon Dock—
 5,154
 5,154
 —
 4,770
 4,770
Axon Fleet—
 4,831
 4,831
 —
 —
 —
Evidence.com and cloud services—
 40,598
 40,598
 —
 24,498
 24,498
TASER Cam—
 2,122
 2,122
 —
 1,485
 1,485
Extended warranties7,444
 5,360
 12,804
 5,834
 3,037
 8,871
Other3,986
 4,686
 8,672
 4,558
 1,884
 6,442
Total$124,148
 $76,293
 $200,441
 $110,687
 $48,198
 $158,885
(1) Amounts for the three and six months ended June 30, 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.

The Company derives 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) subscription to the Company's Evidence.com digital evidence management SaaS (including secure cloud-based storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, the Company also recognizes revenue from training, professional services and revenue related to other software and cloud services.

Many of the Company's products and services are sold on a standalone basis. The Company also bundles its hardware products and services together and sells them to its 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 the Company at a future date. Additionally, the Company offers 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 the Company is obligated to deliver unlimited products at the customer’s request, the Company accounts for these arrangements as stand-ready obligations, and recognizes revenue ratably over the contract period. Cost of product sales will be recognized as the products are shipped to the customer.
The following table presents the Company'sour revenues disaggregated by geography (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2018 
2017 (1)
 2018 
2017 (1)
United States$78,731
 79% $66,200
 83% $156,681
 78% $130,952
 82%
Other countries20,495
 21
 13,443
 17
 43,760
 22
 27,933
 18
Total$99,226
 100% $79,643
 100% $200,441
 100% $158,885
 100%
(1) Amounts for the three and six months ended June 30, 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.
 Three Months Ended March 31,
 2019 2018
United States$94,333
 81% $77,950
 77%
Other countries21,477
 19
 23,265
 23
Total$115,810
 100% $101,215
 100%
Contract Balances
The timing of revenue recognition may differ from the timing of invoicing to customers. The Company generally has an unconditional right to consideration when it invoices its customers and records a receivable. The Company records 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 the Company's subscription programs where the Company satisfies 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 the Company’s future performance of a SaaS service obligation under the contract. The Company recognizes a portion the amount allocated to hardware products shipped to the customer as accounts receivable when invoiced to the customer, and records the remaining allocated value as a contract asset as the Company has generally fulfilled its hardware performance obligation upon shipment.
Contract liabilities generally consist of deferred revenue on the Company’s subscription programs where the Company generally invoices customers at the beginning of each annual period and records 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 the Company's Evidence.com 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 Evidence.com and cloud-based storage, our service-type extended warranties and stand-ready cartridge programs is generally 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 the Company'sour contract assets, contract liabilities and certain information related to these balances as of and for the sixthree months ended June 30, 2018March 31, 2019 (in thousands):
 June 30, 2018
Contract assets (1)
$11,021
Contract liabilities (deferred revenue)138,039
Revenue recognized in the period from: 
Amounts included in contract liabilities at the beginning of the period43,282
(1) Of the $11.0 million balance of contract assets as of June 30, 2018, $0.6 million was classified as long-term and included within "Other assets" on the accompanying condensed consolidated balance sheet.

 March 31, 2019
Contract assets, net$18,257
Contract liabilities (deferred revenue)184,847
Revenue recognized in the period from: 
Amounts included in contract liabilities at the beginning of the period31,222
Contract liabilities (deferred revenue) consisted of the following (in thousands):
June 30, 2018 
December 31, 2017 (1)
March 31, 2019 December 31, 2018
Current Long-Term Total Current Long-Term TotalCurrent Long-Term Total Current Long-Term Total
Warranty:                      
TASER Weapons$11,593
 $16,508
 $28,101
 $12,501
 $18,619
 $31,120
TASER$11,821
 $15,770
 $27,591
 $12,797
 $16,847
 $29,644
Software and Sensors7,001
 5,551
 12,552
 6,293
 4,195
 10,488
8,779
 6,060
 14,839
 8,273
 6,516
 14,789
18,594
 22,059
 40,653
 18,794
 22,814
 41,608
20,600
 21,830
 42,430
 21,070
 23,363
 44,433
Hardware:                      
TASER Weapons6,264
 14,787
 21,051
 4,164
 11,401
 15,565
TASER3,845
 16,091
 19,936
 9,355
 15,598
 24,953
Software and Sensors15,931
 15,379
 31,310
 16,956
 14,781
 31,737
31,104
 24,023
 55,127
 20,878
 24,685
 45,563
22,195
 30,166
 52,361
 21,120
 26,182
 47,302
34,949
 40,114
 75,063
 30,233
 40,283
 70,516
Software and Sensors Services35,794
 9,231
 45,025
 30,487
 5,885
 36,372
Services:           
TASER75
 438
 513
 —
 —
 —
Software and Sensors54,439
 12,402
 66,841
 55,713
 10,771
 66,484
54,514
 12,840
 67,354
 55,713
 10,771
 66,484
Total$76,583
 $61,456
 $138,039
 $70,401
 $54,881
 $125,282
$110,063
 $74,784
 $184,847
 $107,016
 $74,417
 $181,433

 June 30, 2018 
December 31, 2017 (1)
 Current Long-Term Total Current Long-Term Total
TASER Weapons$17,857
 $31,295
 $49,152
 $16,665
 $30,020
 $46,685
Software and Sensors58,726
 30,161
 88,887
 53,736
 24,861
 78,597
Total$76,583
 $61,456
 $138,039
 $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.
 March 31, 2019 December 31, 2018
 Current Long-Term Total Current Long-Term Total
TASER$15,741
 $32,299
 $48,040
 $22,152
 $32,445
 $54,597
Software and Sensors94,322
 42,485
 136,807
 84,864
 41,972
 126,836
Total$110,063
 $74,784
 $184,847
 $107,016
 $74,417
 $181,433
Remaining Performance Obligations
As of June 30, 2018, the CompanyMarch 31, 2019, we had approximately $750$930 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 June 30, 2018. The Company expectsMarch 31, 2019. We expect to recognize between 15% - 20% of this balance over the next twelve months, and expectsexpect the remainder to be recognized over the following five to seven years, subject to risks related to delayed deployments, budget appropriation or other contract cancellation clauses.
Costs to Obtain a Contract
The Company recognizes 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, the Company applies the practical expedient to expense these sales commissions when incurred. These costs are recorded as incurred within sales, general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive income.
As of June 30, 2018, the Company's assets for costs to obtain contracts were as follows (in thousands):
 June 30, 2018
Current deferred commissions (1)
$5,941
Deferred commissions, net of current portion (2)
13,766
 $19,707
(1) Current deferred commissions are included within "Prepaid expenses and other current assets" on the accompanying condensed consolidated balance sheet.
(2) Deferred commissions, net of current portion, are included in "Other assets" on the accompanying condensed consolidated balance sheet.

During the three and six months ended June 30, 2018, the Company recognized $1.2 million and $2.3 million, respectively, of amortization related to deferred commissions. These costs are recorded within sales, general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive income.
Significant Judgments
The Company’s 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 will be made accordingly.
The Company's 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. The Company considers 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 Evidence.com and other cloud services.
In contracts where there are timing differences between when the Company transfers a promised good or service to the customer and when the customer pays for that good or service, the Company has determined that, with the exception of its TASER 60 installment purchase arrangements, its contracts generally do not include a significant financing component. For the three and six months ended June 30, 2018, the Company recorded revenue of $10.2 million and $24.2 million, respectively, including $0.3 million and $0.6 million, respectively, of interest income, under the Company’s TASER 60 plan. For the three and six months ended June 30, 2017, the Company recorded revenue of $5.3 million and $13.3 million, respectively, including $0.2 million and $0.3 million, respectively, of interest income, under the Company’s TASER 60 plan. Amounts for the three and six months ended June 30, 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. The Company analyzes separate sales of its products and services as a basis for estimating the SSP of its products and services and then uses that SSP as the basis for allocating the transaction price when its 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 the Company does not sell the product or service separately, it determines the SSP using information that may include market conditions, time value of money and other observable inputs. The Company typically has 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, the Company may use information such geographic region and distribution channel in determining the SSP.
Sales are typically made on credit and we generally do not require collateral. We perform ongoing credit evaluations of our customers’ financial condition and maintain an allowance for doubtful accounts. Uncollectible accounts are written off when deemed uncollectible, and accounts and notes receivable are presented net of an allowance for doubtful accounts. This allowance represents our best estimate and is based on our judgment after considering a number of factors including third-party credit reports, actual payment history, 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.

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3. Cash, Cash Equivalents and Investments
The following tables summarize the Company'sour cash, cash equivalents, and held-to-maturity investments at June 30, 2018March 31, 2019 and December 31, 20172018 (in thousands):
As of June 30, 2018As of March 31, 2019
Amortized Cost Gross Unrealized Losses Fair Value Cash and Cash Equivalents Short-Term InvestmentsAmortized Cost Gross Unrealized Losses Fair Value Cash and Cash Equivalents Short-Term Investments
Cash$47,837
 $—
 $47,837
 $47,837
 $—
$123,098
 $—
 $123,098
 $123,098
 $—
                  
Level 1:                  
Money market funds256,679
 —
 256,679
 256,679
 —
83,449
 —
 83,449
 83,449
 —
Corporate bonds4,528
 (3) 4,525
 1,000
 3,528
Subtotal261,207
 (3) 261,204
 257,679
 3,528
                  
Level 2:                  
State and municipal obligations2,587
 —
 2,587
 1,991
 596
Corporate bonds122,407
 (56) 122,351
 17,095
 105,312
Total$311,631
 $(3) $311,628
 $307,507
 $4,124
$328,954
 $(56) $328,898
 $223,642
 $105,312

As of December 31, 2017As of December 31, 2018
Amortized Cost Gross Unrealized Losses Fair Value Cash and Cash Equivalents Short-Term InvestmentsAmortized Cost Gross Unrealized Losses Fair Value Cash and Cash Equivalents Short-Term Investments
Cash$53,459
 $—
 $53,459
 $53,459
 $—
$144,095
 $—
 $144,095
 $144,095
 $—
                  
Level 1:                  
Money market funds20,884
 —
 20,884
 20,884
 —
205,367
 —
 205,367
 205,367
 —
Corporate bonds6,632
 (6) 6,626
 —
 6,632
Subtotal27,516
 (6) 27,510
 20,884
 6,632
         
Level 2:         
State and municipal obligations992
 —
 992
 762
 230
Total$81,967
 $(6) $81,961
 $75,105
 $6,862
$349,462
 $—
 $349,462
 $349,462
 $—
The Company believes theWe believe unrealized losses on itsour investments are due to interest rate fluctuations. As these investments are short-term in nature, are expected to be redeemed at par value, and/or because the Company haswe have the ability and intent to hold these investments to maturity, the Company doeswe do not consider these investments to be other than temporarily impaired at June 30, 2018 or as of DecemberMarch 31, 2017.2019.
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 first-in, first-out (“FIFO”) method and includes allocations of manufacturing labor and overhead. Included in finished goods at June 30, 2018March 31, 2019 and December 31, 20172018 was $1.7$1.3 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. Inventory consisted of the following at June 30, 2018March 31, 2019 and December 31, 20172018 (in thousands):
2018 2017March 31, 2019 December 31, 2018
Raw materials$20,288
 $20,119
$20,574
 $19,670
Finished goods23,679
 25,346
17,013
 14,093
Total inventory$43,967
 $45,465
$37,587
 $33,763
5. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the three months ended March 31, 2019 were as follows (in thousands):
 TASER Software and Sensors Total
Balance, beginning of period$1,338
 $23,643
 $24,981
Foreign currency translation adjustment18
 18
 36
Balance, end of period$1,356
 $23,661
 $25,017

Intangible assets (other than goodwill) consisted of the following (in thousands):
   March 31, 2019 December 31, 2018
 
Useful
Life
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortizable (definite-lived) intangible assets:          
Domain names5-10 years $3,161
 $(808) $2,353
 $3,161
 $(732) $2,429
Issued patents4-15 years 2,982
 (1,158) 1,824
 2,940
 (1,106) 1,834
Issued trademarks3-11 years 922
 (490) 432
 1,053
 (599) 454
Customer relationships4-8 years 3,717
 (1,027) 2,690
 3,701
 (880) 2,821
Non-compete agreements3-4 years 452
 (375) 77
 540
 (439) 101
Developed technology3-7 years 10,660
 (4,889) 5,771
 13,404
 (7,081) 6,323
Re-acquired distribution rights2 years 2,031
 (2,031) —
 1,928
 (1,813) 115
Total amortizable  23,925
 (10,778) 13,147
 26,727
 (12,650) 14,077
Not amortizable (indefinite-lived) intangible assets:          
TASER trademark  900
   900
 900
   900
Patents and trademarks pending  1,020
   1,020
 958
   958
Total not amortizable  1,920
   1,920
 1,858
   1,858
Total intangible assets  $25,845
 $(10,778) $15,067
 $28,585
 $(12,650) $15,935
Amortization expense of intangible assets for the three months ended March 31, 2019 and 2018 was $1.0 million and $1.4 million, respectively. Estimated amortization for intangible assets with definite lives for the remaining nine months of 2019, the next five years ended December 31, and thereafter, is as follows (in thousands):
2019 Remaining$2,501
20203,293
20212,846
20221,244
2023946
2024862
Thereafter1,455
Total$13,147

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5. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the six months ended June 30, 2018 were as follows (in thousands):
 TASER
Weapons		 Software and Sensors Total
Balance, beginning of period$1,453
 $13,474
 $14,927
Goodwill acquired—
 9,870
 9,870
Foreign currency translation adjustment(56) (57) (113)
Balance, end of period$1,397
 $23,287
 $24,684

Intangible assets (other than goodwill) consisted of the following (in thousands):
   June 30, 2018 December 31, 2017
 
Useful
Life
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortized:             
Domain names5-10 years $3,161
 $(580) $2,581
 $3,161
 $(428) $2,733
Issued patents4-15 years 2,858
 (1,004) 1,854
 2,697
 (913) 1,784
Issued trademarks3-11 years 1,010
 (545) 465
 860
 (397) 463
Customer relationships4-8 years 3,742
 (616) 3,126
 1,377
 (451) 926
Non-compete agreements3-4 years 548
 (398) 150
 556
 (346) 210
Developed technology3-7 years 15,449
 (5,594) 9,855
 13,469
 (3,956) 9,513
Re-acquired distribution rights2 years 2,023
 (1,349) 674
 2,133
 (711) 1,422
Total amortized  28,791
 (10,086) 18,705
 24,253
 (7,202) 17,051
Not amortized:             
TASER trademark  900
   900
 900
   900
Patents and trademarks pending  837
   837
 872
   872
Total not amortized  1,737
   1,737
 1,772
   1,772
Total intangible assets  $30,528
 $(10,086) $20,442
 $26,025
 $(7,202) $18,823
Amortization expense of intangible assets for the three and six months ended June 30, 2018 was $1.7 million and $3.0 million, respectively. Amortization expense of intangible assets for the three and six months ended June 30, 2017 was $1.0 million and $1.9 million, respectively. Estimated amortization for intangible assets with definite lives for the remaining six months of 2018, the next five years ended December 31, and thereafter, is as follows (in thousands):
2018$3,179
20194,884
20203,417
20212,847
20221,192
2023926
Thereafter2,260
Total$18,705

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


6. Other Long-Term Assets
Other long-term assets consisted of the following at June 30, 2018March 31, 2019 and December 31, 20172018 (in thousands):
2018 2017March 31, 2019 December 31, 2018
Cash surrender value of corporate-owned life insurance policies$3,847
 $3,846
$3,919
 $3,596
Deferred commissions (1)
13,766
 6,803
16,141
 15,530
Restricted cash (2)
2,470
 3,333
659
 661
Operating lease assets11,659
 —
Prepaid expenses, deposits and other2,748
 1,384
3,378
 3,212
Total other long-term assets$22,831
 $15,366
$35,756
 $22,999
(1) Represents assets for the incremental costs of obtaining a contractcontracts with a customer,customers, which consist primarily of sales commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contractcontracts and 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 the Company's adoption of Topic 606, it recorded an adjustment of $7.3 million as of January 1, 2018, and of that amount, $5.4 million was recorded within long-term other assets. The adjusted balance of long-term deferred commissions as of January 1, 2018 was $12.2 million.
(2) As of June 30, 2018 and December 31, 2017, restricted cash primarily consisted of $1.8 million and $2.7 million, respectively, of sales proceeds related to long-term contracts with customers. As of June 30, 2018, the proceeds are held in escrow until certain billing milestones are achieved, and then specified amounts are transferred to the Company's operating accounts.
7. Accrued Liabilities
Accrued liabilities consisted of the following at June 30, 2018March 31, 2019 and December 31, 20172018 (in thousands):
2018 2017March 31, 2019 December 31, 2018
Accrued salaries, benefits and bonus$12,527
 $8,957
$13,993
 $19,063
Accrued professional, consulting and lobbying fees2,683
 3,870
4,476
 4,894
Accrued warranty expense505
 644
1,027
 898
Accrued income and other taxes2,894
 2,558
4,392
 4,167
Other accrued liabilities11,386
 7,473
12,460
 12,070
Accrued liabilities$29,995
 $23,502
$36,348
 $41,092
8. Income Taxes
ASC 740 requires
We file income tax returns for federal purposes and in many states, as well as in multiple foreign jurisdictions. Our tax filings remain subject to examination by applicable tax authorities for a companycertain length of time, generally three to record the effects of a tax law change in the period of enactment; however, shortly after the enactment of the Tax Cuts and Jobs Act (the "Tax Act"), the SEC staff issued Staff Accounting Bulletin 118 ("SAB 118"), which allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change infour years, following the tax law. The measurement period ends whenyear to which these filings relate. Our U.S. federal income tax return for fiscal year 2016 is currently under audit by the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. The Company continues to analyze the impact of the Tax Act and expects that as additional guidance from IRS Treasury is provided, further updates will be necessary.
The Tax Act imposes a U.S. entity tax on global intangible low-taxed income ("GILTI") earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Given the complexity of the GILTI provisions, we are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy. At June 30, 2018, because we are still evaluating the GILTI provisions and our analysis of future taxable income that is subject to GILTI, we have included GILTI related to current-year operations only in our EAETR (estimated annual effective tax rate) and have not provided additional GILTI on deferred items.


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Internal Revenue Service.

Deferred Tax Assets
Net deferred income tax assets at June 30, 2018,March 31, 2019, primarily include capitalized R&D costs, R&D tax credits, stock-based compensation expense, deferred revenue, warrantyaccruals and inventory reserves, accrued vacation, and other items,net operating losses, partially offset by accelerated depreciation expense and intangible amortization that is not tax deductible. The Company’svaluation allowance reserve. Our total net deferred tax assets at June 30, 2018March 31, 2019 were $15.8$18.8 million.
In preparing the Company’sour condensed consolidated financial statements, management assesses the likelihood that its deferred tax assets will be realized from future taxable income. In evaluating the Company’sour ability to recover itsour deferred income tax assets, management considers all available positive and negative evidence, including itsour 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 tax assets will not be realized. Management exercises significant judgment in determining itsour provisions for income taxes, itsour deferred tax assets and liabilities, and itsour future taxable income for purposes of assessing itsour ability to utilize any future tax benefit from itsour deferred tax assets.
Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of each reporting date, management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. As of June 30, 2018, the Company continuesMarch 31, 2019, we continue to demonstrate three-year cumulative pre-tax income in the U.S. federal and Arizonastate tax jurisdictions; however, the Company'swe have Arizona R&D Tax Credits start to expire in 2018 with a significant tranche with a gross value of $1.2 million expiring if not used by the end of 2019. It appears that the Company’s long term investments, which impact short term profits, will likely result in some of the R&D credits expiring before they are utilized.unutilized each year. Therefore, management has concluded that it is more likely than not that a portion of the Company’sour Arizona R&D deferred tax assetsasset will not be realizedrealized.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




As of March 31, 2019, 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 established a valuation allowance.been recorded for these jurisdictions. The amount of the deferred tax asset considered 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.
The Company has claimedWe complete R&D tax credits of approximately $17.0 millioncredit studies for each year that an R&D tax credit is claimed for federal, Arizona, and California income tax purposes related to tax years 2003 to 2018.purposes. Management has made the determination that it is more likely than not that the full benefit of the R&D tax creditscredit will not be sustained uponon examination and recorded a liability for unrecognized tax benefits of $3.8$5.7 million as of June 30, 2018.March 31, 2019. In addition, management accrued $0.1 million for estimated uncertain tax positions related to certain statefederal income tax liabilities, for a total unrecognized tax benefit as of June 30, 2018 of $3.9 million. Management expects the amount of unrecognized tax benefit liability to increase by $0.2 million within the next 12 months.liabilities. Should the unrecognized benefit of $3.9$5.7 million be recognized, the Company'sour effective tax rate would be favorably impacted. Approximately $2.1$2.7 million of the unrecognized tax benefit associated with R&D credits has been netted against the R&D deferred tax asset.

Effective Tax Rate
The Company’sOur overall effective tax rate for the sixthree months ended June 30, 2018,March 31, 2019, after discrete period adjustments, was (7.9)(28.8)%. Before discrete adjustments, the tax rate was 22.8%21.1%, which is moregreater than the federal statutory rate, primarily due to state taxes and non-deductible expenses for items such as meals and entertainment, executive compensation limitation under IRC sectionInternal Revenue Code ("IRC") Section 162(m), lobbying fees, and an income inclusion from GILTI,global intangible low-taxed income ("GILTI"), offset by a reduction for foreign-derived intangible income ("FDII"). This was partially offset by and R&D tax credit deductions.credits. The effective tax rate was favorably impacted by a $6.1$2.7 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for RSUs that vested or stock options that were exercised during the sixthree months ended June 30, 2018. Of this amount $3.4March 31, 2019. This was offset by an unfavorable discrete item of $0.3 million related to the write off of certain deferred tax assets related to future stock options exercisedcompensation vests for certain officers for whom deductibility of compensation is limited by the Company's CEO in connection with the Company's follow-on offering.IRC Section 162(m).
9. Stockholders’ Equity
Follow-On OfferingPerformance-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 May 2018,addition, certain of the Company sold 4,645,000 shares of its common stock, which included 645,000 shares pursuantperformance RSUs have additional service requirements subsequent to the full exerciseachievement of the underwriters' optionperformance 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. For awards containing multiple service, performance or market conditions, and all conditions must be satisfied prior to purchasevesting, 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 shares,paid-in-capital.

For performance-based options 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 an underwritten public offering at a pricetime that the relevant performance condition is considered probable of $53.00 per share, which resulted in gross proceedsachievement. The fair value of $246.2 million. Net proceeds tosuch awards is estimated on the Company after deducting fees, commissions, and other expenses related to the offering were $234.0 million.grant date using Monte Carlo simulations.
CEO Performance Award

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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, the Company'sour 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. Each of the 12 vesting tranches of the CEO Performance Award have a 10-year contractual term and will vest upon certification by 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

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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, gains and losses on dispositions of property and equipment and intangible assets, and stock-based compensation expense.
Eight Separate Revenue Goals (1)
(in thousands)
 
Eight Separate Adjusted EBITDA-GoalsEBITDA (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 combinationacquisition 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 June 30, 2018,March 31, 2019, the following operational goals were considered probable of achievement:
Total revenue of $710.1 million; and
Adjusted EBITDA (CEO Performance Award) of $125.0 million
The first two market capitalization goals have been achieved as of March 31, 2019. 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 March 31, 2019. As there are two operational goals considered probable of achievement, we recorded stock-based compensation expense of $4.7 million related to the CEO Performance Award from the Grant Date through March 31, 2019. The number of stock options that would vest related to the two tranches is approximately 1.1 million shares.
As of March 31, 2019, we had $40.5 million of total unrecognized stock-based compensation expense for the performance goals that were considered probable of achievement, which will be recognized over a weighted-average period of 7.0 years. As of March 31, 2019, we had unrecognized stock-based compensation expense of $200.7 million for the performance goals that were considered not probable of achievement.
eXponential Stock Performance Plan
On February 12, 2019, our shareholders approved the 2019 Stock Incentive Plan (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 5.2 million XSUs were granted in the three months ended March 31, 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 (CEO Performance Award) have been met for the previous four consecutive fiscal quarters.


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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 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.
Stock-based compensation expense associated with the CEO Performance AwardXSU awards 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 market capitalization goal period and the valuation of each tranche are determined using a Monte Carlo simulation andwhich is also is used as the basis for determining the expected achievement period of the market capitalization goal. 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 AwardXSU awards vest unless a market capitalization and a matching operational goal are both achieved, stock-based compensation expense is recognized only 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
The first market capitalization goal has been achieved as a selling, general, and administrative operating expense on the Company's condensed and consolidated statement of operations.
NoneMarch 31, 2019. However, none of the stock options granted under the CEO Performance AwardXSU tranches have vested thus far as the market capitalization goals and operational goals have not yet been achieved as of June 30, 2018. However, asMarch 31, 2019. As there are two operational goals considered probable of achievement, the Companywe recorded stock-based compensation expense of $0.5$0.7 million related to the CEO Performance AwardXSU awards from the Grant Datetheir respective grant dates through June 30, 2018.March 31, 2019. The number of stock options expectedXSU awards that would vest related to vestthe two tranches is 1.1approximately 0.9 million shares.
As of June 30, 2018, the CompanyMarch 31, 2019, we had $44.8$36.8 million of total unrecognized stock-based compensation expense for the performance goals that were considered probable of achievement, which will be recognized over a weighted-average period of 9.27 years. As of June 30, 2018, the CompanyMarch 31, 2019, we had unrecognized stock-based compensation expense of $200.7$137.0 million for the performance goals that were considered not probable of achievement.
Given the complexity of the awards, we utilized Monte Carlo simulations to simulate a range of possible future market capitalizations for the Company over the term of the awards. 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 between 10.0% and 16.8% to the valuation of XSUs because the awards specify a post-vest holding period of 2.5 years. Certain of the XSU awards specify a post-vest holding period of the longer of 2.5 years or until the next tranche vests. The illiquidity discounts were estimated using the Finnerty model and reduced by the impact of expected payroll and income taxes due upon vesting of the awards, as the related proportion of shares are expected to be sold to satisfy such obligations. We measured the grant date fair value of the XSU awards with the following assumptions: risk-free interest rate of between 2.47% and 2.62%, expected term of approximately 9 years, expected volatility of between 44.96% and 45.47%, and dividend yield of 0.00%.
Restricted Stock Units
The following table summarizes RSU activity for the three months ended March 31, 2019 (number of units and aggregate intrinsic value in thousands):
 
Number of
Units
 
Weighted Average
Grant-Date Fair Value
 Aggregate
Intrinsic Value
Units outstanding, beginning of year1,655
 $28.34
  
Granted5,667
 34.32
  
Released(290) 20.91
  
Forfeited(46) 34.43
  
Units outstanding, end of period6,986
 33.47
 $380,123

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The Company measured the fair value of the CEO Performance Award using a Monte Carlo simulation approach with the following assumptions: risk-free interest rate of 2.98%, expected term of 10 years, expected volatility of 47.71% and dividend yield of 0.00%.

Stock Incentive Plan
In May 2018, the Company’s stockholders approved a new stock incentive plan authorizing an additional 1.0 million shares, plus remaining available shares under prior plans, for issuance under the new plan. Combined with the legacy stock incentive plans, there are 1.7 million shares available for grant as of June 30, 2018.
Performance-based stock awards
The Company has issued performance-based stock options and performance-based restricted stock units ("RSUs"), the vesting of which is contingent upon the achievement of certain performance criteria related to the operating performance of the Company, as well as successful and timely development and market acceptance of the Company's products.
RSUs are classified as equity and measured at the fair market value of the underlying stock at the grant date. The Company recognizes RSU expense using the straight-line attribution method over the requisite service period. For performance-based RSUs containing only performance conditions, compensation cost is recognized using the accelerated attribution model over the explicit or implicit service period. For awards containing multiple service, performance or market conditions, where all conditions must be satisfied prior to vesting, compensation expense is recognized over 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 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 options 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.
Restricted Stock Units
The following table summarizes RSU activity for the six months ended June 30, 2018 (number of units and aggregate intrinsic value in thousands):
 
Number
of
Units
 
Weighted
Average
Grant-Date
Fair Value
 Aggregate
Intrinsic Value
Units outstanding, beginning of year2,348
 $23.47
  
Granted281
 40.79
  
Released(436) 24.08
  
Forfeited(172) 22.40
  
Units outstanding, end of period2,021
 25.89
 $127,687
Aggregate intrinsic value represents the Company’sour closing stock price on the last trading day of the period, which was $63.18$54.41 per share, multiplied by the number of RSUs outstanding. As of June 30, 2018,March 31, 2019, there was $41.7$84.9 million in unrecognized compensation costs related to RSUs under the Company'sour stock plans. The Company expectsplans for shares that are expected to vest. We expect to recognize the cost related to the RSUs over a weighted average period of 2.584.59 years. RSUs are released when vesting requirements are met.
During the sixthree months ended June 30, 2018, the CompanyMarch 31, 2019, we granted 0.15.7 million RSUs, consisting of 0.3 million service-based RSUs and 5.4 million performance-based RSUs.RSUs, including 5.2 million XSUs. As of June 30, 2018,March 31, 2019, the performance criteria had not been met for anyapproximately five thousand of the 0.55.7 million performance-based RSUs outstanding.Theoutstanding. Certain of the performance-based RSUs outstanding as of March 31, 2019 can vest with a range of shares earned being between 0% and 200% of the targeted shares granted, in 2018, 2017 and 2016 contain provisions wherebydepending on the amount of RSUs that ultimately vest is dependent upon the level offinal achievement of pre-determined performance metrics.criteria as of the vesting date. The amount of RSUs included in the table above related to such grants is the target level, which is the Company's best estimate of the amount of RSUs that will vest.level. The maximum additional number of performance-based RSUs that could be earned is 0.40.3 million, which are not included in the table above.

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Certain RSUs that vested in the sixthree months ended June 30, 2018March 31, 2019 were net-share settled such that the Companywe 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 related to RSUs were 0.1 millionapproximately 15 thousand and had a value of $4.6$1.3 million on their respective vesting dates as determined by the Company’s closing stock price on such dates. Payments for the employees’ tax obligations are reflected as a financing activity within the statementcondensed consolidated statements of cash flows. The Company recordsWe record a liability for the tax withholding to be paid by the Companyus as a reduction to additional paid-in capital.
Stock Option Activity
The following table summarizes stock option activity for the sixthree months ended June 30, 2018March 31, 2019 (number of units and aggregate intrinsic value in thousands):
Number
of
Options
 
Weighted
Average
Exercise
Price
 Weighted Average Remaining Contractual Life (years) Aggregate
Intrinsic Value
Number
of
Options
 
Weighted
Average
Exercise
Price
 Weighted Average Remaining Contractual Life (years) Aggregate
Intrinsic Value
Options outstanding, beginning of year804
 $4.99
  6,458
 $28.24
  
Granted6,366
 28.58
  —
 —
  
Exercised(418) 5.30
  (24) 4.20
  
Expired / terminated—
 —
  —
 —
  
Options outstanding, end of period6,752
 27.21
 9.40 $242,866
6,434
 28.33
 8.83 $167,827
Options exercisable, end of period382
 4.65
 1.06 22,354
68
 4.54
 1.69 3,397
Options expected to vest, end of period1,062
 

 
 

Aggregate intrinsic value represents the difference between the exercise price of the underlying stock option awards and the closing market price of the Company'sour common stock of $63.18$54.41 on June 30, 2018.March 31, 2019. The intrinsic value of options exercised for the sixthree months ended June 30,March 31, 2019 and 2018 and 2017 was $18.8$1.0 million and $2.6$2.0 million, respectively. As of June 30, 2018,March 31, 2019, total options outstanding included 6.4 million unvested performance-based stock options, of whichoptions. Of this total, 1.1 million are expectedoptions relate to vest.
Of the total stock options exercised during the six months ended June 30, 2018, 0.3 million were exercised and the shares then sold by the Company's CEO in connection with the Company's follow-on offering. The CEO surrendered already owned shares to cover the exercise pricetranches of the option exercises. The option exercises were net-share settled such that the Company 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 valueCEO Performance Award considered probable of $6.2 million and $1.6 million, respectively, on the exercise date as determined by the Company’s closing stock price on that day. Payments for the employees’ tax obligations are reflected as a financing activity within the statement of cash flows. The Company records a liability for the tax withholding to be paid by the Company as a reduction to additional paid-in capital.achievement.
Stock-based Compensation Expense
The following table summarizes the composition of stock-based compensation for the three and six months ended June 30,March 31, 2019 and 2018 and 2017 (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2018 2017 2018 2017
Cost of products sold and services delivered$125
 $155
 $266
 $234
Sales, general and administrative expenses2,731
 2,155
 5,035
 4,183
Research and development expenses2,098
 1,666
 3,746
 3,006
Total stock-based compensation$4,954
 $3,976
 $9,047
 $7,423
Stock Repurchase Plan
In February 2016, the Company's Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of the Company’s outstanding common stock subject to stock market conditions and corporate considerations. During the six
 Three Months Ended March 31,
 2019 2018
Cost of products sold and services delivered$226
 $141
Sales, general and administrative expenses4,681
 2,304
Research and development expenses2,998
 1,648
Total stock-based compensation$7,905
 $4,093

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Stock Incentive Plan

In February 2019, our shareholders approved the 2019 Plan authorizing an additional 6.0 million shares, plus remaining available shares under prior plans, for issuance under the new plan. Combined with the legacy stock incentive plans, there are 2.2 million shares available for grant as of March 31, 2019.
Stock Repurchase Plan
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 three months ended June 30,March 31, 2019 and 2018, and 2017, no common shares were purchased under the program. As of June 30, 2018,March 31, 2019, $16.3 million remains available under the plan for future purchases. The Company suspended its 10b5-1 plan during 2016, and anyAny future purchases will be discretionary.
10. Line of Credit
The Company hasWe have a $10.0$50.0 million unsecured revolving line of credit with a domestic bank. 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 both June 30, 2018March 31, 2019 and December 31, 2017,2018, 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 June 30, 2018, the CompanyMarch 31, 2019, we had letters of credit outstanding of $2.7approximately $3.1 million under the facility and available borrowing of $7.3 million. The line is secured by substantially all of$46.9 million, excluding amounts available under the assets ofaccordion feature. Advances under the Company, and bears interest at varying rates (currently LIBOR plus 1.25% or Prime less 0.50%). The line of credit matures on December 31, 2018, and requires monthly payments ofbear interest only. The Company’s agreement with the bank requires itat LIBOR plus 1.0 to comply1.5% per year determined in accordance with a maximumpricing grid based on our funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio.  
We are required to comply with a maximum funded debt to EBITDA ratio as defined, of no greater than 2.002.50 to 1.00 based upon a trailing twelve-monthfour fiscal quarter period. At June 30, 2018, the Company’sMarch 31, 2019, our funded debt to EBITDA ratio was 0.0020.001 to 1.00.
11. Leases
Lease Obligations
We determine if an arrangement is a lease at inception. Operating lease ROU assets and liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Additionally, we use the portfolio approach in determining the discount rate used to present value lease payments. We give consideration to our line of credit as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates. The ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred.
We have operating and finance leases for office space and certain equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. For leases beginning on or after January 1, 2019, we account for lease components separately from non-lease components for all asset classes.
Our leases have remaining terms of less than 1 to 4 years, some of which include one or more options to renew for up to 2 years, and some of which include options to terminate the leases within 1 year. The exercise of lease renewal options is at our sole discretion and such options are included in ROU assets and liabilities for renewal periods that are reasonably certain of exercise. Certain of our lease agreements include stated rental payment escalations. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We sublease certain real estate to third parties. Finance leases as of March 31, 2019 were immaterial.

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Leases (in thousands) Classification March 31, 2019
Assets    
Operating lease assets Other assets $11,659
Liabilities    
Current    
Operating Other current liabilities $3,877
Noncurrent    
Operating Other long-term liabilities 8,897
Total lease liabilities   $12,774
The components of lease expense were as follows (in thousands):
  Classification Three Months Ended March 31, 2019
Operating lease expense (1)
 
Sales, general and administrative expenses (2)
 $1,017
Sublease income Other income (42)
Net lease expense   $975
(1) Includes short-term leases, which are immaterial.
(2) An immaterial portion of operating lease expense is included within research and development expenses and cost of sales.
Other information related to leases was as follows (in thousands, except lease term and discount rate):
  Three Months Ended March 31, 2019
Supplemental Cash Flows Information  
Cash paid for amounts included in the measurement of lease liabilities:  
Operating cash flows from operating leases $961
Right-of-use assets obtained in exchange for lease liabilities  
Operating leases 84
Weighted average remaining lease term  
Operating leases 3.2 years
Weighted average discount rate  
Operating leases 3.6%

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Future minimum lease payments under non-cancellable leases as of March 31, 2019 were as follows (in thousands):
 Operating Sublease income Net
2019 Remaining$3,419
 $(246) $3,173
20204,203
 (82) 4,121
20213,325
 —
 3,325
20222,449
 —
 2,449
20231,173
 —
 1,173
2024—
 —
 —
Thereafter—
 —
 —
Total minimum lease payments14,569
 (328) 14,241
Less: Amount representing interest    (1,467)
Present value of lease payments    $12,774
As of March 31, 2019, we do not have any leases that have not yet commenced other than the land lease purchase agreement described in Note 12.

Disclosures related to periods prior to adoption of Topic 842
Rent expense under all operating leases, including both cancelable and non-cancelable leases, was $4.2 million and $2.9 million for the years ended December 31, 2018 and 2017, respectively.
Future minimum lease payments under non-cancelable leases at December 31, 2018, were as follows (in thousands):
 Operating Capital
2019$3,670
 $40
20203,572
 36
20212,961
 —
20222,001
 —
2023573
 —
Thereafter—
 —
Total minimum lease payments$12,777
 76
Less: Amount representing interest  (6)
Capital lease obligation  $70
12. Commitments and Contingencies
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 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. On March 4, 2019, we entered into an amendment to the PSA which extended the due diligence period to May 3, 2019. On May 3, 2019, we entered into a second amendment to the PSA which extended the due diligence period to June 28, 2019. The second amendment also revised certain stated approval dates and removed the requirement for an additional deposit originally due at the end of the due diligence period.
Product Litigation
The Company isWe are currently named as a defendant in seven lawsuits in which the plaintiffs allege either wrongful death or personal injury in situations in which a TASER CEW was used by law enforcement officers in connection with arrests. While the facts vary from case to case, thethese product liability claims are typically based on an allegedallege defective product defect resulting in injury design, manufacturing, and/or death, usually involving a failure to warn,warn. They seek compensatory and the plaintiffs are seeking monetary damages. The information throughout this note is current through the date of these financial statements.sometimes punitive damages, often in unspecified amounts.

We continue to aggressively defend all product litigation. As a general rule, it is the Company’sour policy not to settle suspect injury or death cases. Exceptions are sometimes made where the settlement is strategically beneficial to the Company. Also, on occasion, the Company’s insurance company has settled such lawsuits over the Company’s objection where the risk is over the Company’s liability insurance deductibles.us. Due to the confidentialityconfidential nature of the Company'sour litigation strategy and the confidentiality agreements that are executed in the event of a settlement, the Company doeswe do not identify or comment on which specific lawsuits have been settledsettlements by case or amount. Based on current information, we do not believe that the amountoutcome of any settlement.
In 2009, the Company implemented new risk management strategies, including revisions to product warnings and training to better protect both the Company and its customers from litigation based on “failure to warn” theories - which comprise the vast majority of the cases against the Company. These risk management strategies have been highly effective in reducing the rate and exposure from litigation post-2009. From the third quarter of 2011 to the second quarter of 2018, product liability cases have been reduced from 55 to seven active cases.
Management believes that pre-2009 casessuch legal proceeding will have a different risk profile than cases which have occurred since the risk management procedures were introduced in 2009. Therefore, the Company necessarily treats certain pre-2009 cases as exceptions to the Company’s general no settlement policy in order to reduce caseload, legal costs and liability exposure.
The Company intends to continue its successful practicematerial effect on our financial position, results of aggressively defending and generally not settling litigation except in very limited and unusual circumstances as described above. With respect to each of the pending lawsuits, the following table lists the name of plaintiff, the date the Company was served with process, the jurisdiction in which the case is pending, the type of claim and the status of the matter.
Plaintiff
Month
Served
JurisdictionClaim TypeStatus
DerbyshireNov-09Ontario, Canada Superior Court of JusticeOfficer InjuryDiscovery Phase. Trial scheduledoperations, or cash flows. We are self-insured for October 14, 2019.
ShymkoDec-10The Queen's Bench, Winnipeg Centre, ManitobaWrongful DeathPleading Phase, currently inactive
RamseyJan-1212th Judicial Circuit Court, Broward County, FLWrongful DeathDiscovery Phase, currently inactive
BennettSep-1511th Judicial Circuit Court, Miami-Dade County, FLWrongful DeathDiscovery Phase
MastersNov-16U.S. District Court, Western District of MissouriSuspect InjuryDiscovery Phase. Trial scheduled for December 10, 2018.
TaylorMar-17U.S, District Court, Southern District of TexasOfficer InjuryDispositive Motion Phase: The Company filed its motion for summary judgment on April 20, 2018
WiggingtonApr-18U.S, District Court, Western District Court of MissouriWrongful DeathPleading Phase
No product liability cases were dismissed or judgments entered during the first six months$5.0 million of 2018 and through the date of these financial statements and there are noany product litigation mattersclaim made after 2014. No judgment or settlement has ever exceeded this amount in which the Company is involved that are currently on appeal.

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The claims, and in some instances the defense, of each of these lawsuits have been submitted to the Company’s insurance carriers that maintained insurance coverage during the applicable periods. The Company continuesany products case. We continue to maintain product liability insurance coverage, including an insurance policy fronting arrangement, above our self-insured retention with varyingvarious limits and deductibles. The following table provides information regardingdepending on the Company’s product liability insurance. Remaining insurance coverage is based on information received from the Company’s insurance provider (in millions).
Policy Year 
Policy
Start
Date
 
Policy
End
Date
 
Insurance
Coverage
 
Deductible
Amount
 
Defense
Costs
Covered
 
Remaining
Insurance
Coverage
 
Active Cases and Cases on
Appeal
2009 12/15/2008 12/15/2009 $10.0
 $1.0
 N $10.0
 Derbyshire
2010 12/15/2009 12/15/2010 10.0
 1.0
 N 10.0
 Shymko
2011 12/15/2010 12/15/2011 10.0
 1.0
 N 10.0
 n/a
Jan-Jun 2012 12/15/2011 6/25/2012 7.0
 1.0
 N 7.0
 Ramsey
Jul-Dec 2012 6/25/2012 12/15/2012 12.0
 1.0
 N 12.0
 n/a
2013 12/15/2012 12/15/2013 12.0
 1.0
 N 12.0
 n/a
2014 12/15/2013 12/15/2014 11.0
 4.0
 N 11.0
 n/a
2015 12/15/2014 12/15/2015 10.0
 5.0
 N 10.0
 Bennett
2016 12/15/2015 12/15/2016 10.0
 5.0
 N 10.0
 Masters
2017 12/15/2016 12/15/2017 10.0
 5.0
 N 10.0
 Taylor
2018 12/15/2017 12/15/2018 10.0
 5.0
 N 10.0
 Wiggington
policy period.
Other Litigation
Phazzer Patent Infringement Litigation
In February 2016, the Company filedWe are a complaint against Phazzer Electronics Inc. (“Phazzer”) for patent infringement, trademark infringement and false advertising. On July 21, 2017, the U.S. District Court for the Middle District of Florida (Case No. 6:16-cv-00366-PGB-KRS) granted the Company's Motion for Sanctions and for a Permanent Injunction against Florida-based Phazzer. The Court issued a broad permanent injunction against Phazzer banning sales of the infringing Phazzer Enforcer CEWs and dart cartridges. The injunction prohibits Phazzer and its officers, agents, employees, and anyone acting in concert with them, from making, using, offering for sale, selling, distributing, importing or exporting Phazzer CEWs and associated cartridges. Phazzer is further enjoined from dumping its infringing inventory by “donating” CEWs to law enforcement, and from false advertising and comparison to TASER brand products. Both Phazzer and its U.S. distributors are barred from exporting CEWs or cartridges to fill foreign orders. On August 10, 2017, Phazzer filed a notice of appeal to the Federal Circuit, which is fully briefed but remains pending. Phazzer's multiple attempts to stay the injunction pending appeal have been denied by both the district and appellate courts.
On April 4, 2018, the Court entered a judgment for the Company against Phazzer in an amount exceeding $7.8 million which included an award to the Company of compensatory and treble damages for willful infringement, and also an award of reasonable attorneys’ fees and costs. The collectability of this judgment is in doubt since Phazzer has informed the Court that it is insolvent. On May 1, 2018, Phazzer appealed the damages award to the Federal Circuit. On May 11, 2018, the district court entered final judgment against Phazzer ending the district court proceedings.
In imposing severe sanctions against Phazzer, the Court found that Phazzer “engageddefendant in a pattern of bad faith conduct designed and intended to delay, stall, and increase the cost of this litigation,” and that Phazzer repeatedly disregarded Court Orders thereby exhibiting “contemptuous”, “egregious”, “flagrant” and “intentional obstructionist behavior” resulting in willful “abuse [of] the judicial process.” The Court made similar findings in both the damages and contempt orders.
On April 27, 2017, during the district court litigation Phazzer filed a second petition for reexamination of the Company’s patent with the USPTO. The Company’s patent (U.S. No. 7,234,262) at issue in the litigation relates to the CEW’s data recording of date and time of each trigger operation and duration of the stimulus. On April 2, 2018, the examiner issued a final office action rejecting all claims. The Company is appealing this decision. The Company’s patent remains valid and enforceable unless and until all appeals are exhausted and the patent is formally canceled (at least a 2-year process). The Phazzer injunction remains in full force and effect.
The Company's trademark that is the subject of the injunction is Federal Registration No. 4,423,789, relating to the non-functional shape of TASER CEW cartridges used to launch the darts. The injunction covers all Phazzer CEW dart cartridges that

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are confusingly similar to, or not more than a colorable imitation of, TASER CEW cartridges. During the litigation, Phazzer filed a petition to cancel the Company’s trademark, which the Trademark Board stayed until the conclusion of the district court litigation and all related appeals.
Digital Ally Patent Litigation
In February 2016, the Company was served with a first amended complaintmatter filed by Digital Ally Inc. (“Digital”) in the District of Kansas (Case No. CV-16-02032-CM-JPO) alleging patent infringement regarding the Company'sour Axon Signal technology, commercial bribery, antitrust, and unfair competition. In March 2016, the Company was served with a second amended complaint with similar allegations. The second amended complainttechnology. Digital seeks a judgment of infringement, monetary damages, a permanent injunction, punitive damages and attorneys’ fees and costs. Both fact and expert discovery are complete. The parties filed motions for summary judgment on January 31, 2019 and briefing is now complete. Rulings are not expected before the fourth quarter of 2019. No trial date has been set but, if necessary, is not expected to occur before the first quarter of 2020.
Digital Ally’s complaint
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, which ruling was affirmed by the Federal Circuit in May 2018;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 all existing Axon products; and (3) Digital’s dismissal of certain inconsistent claims in the ‘452 patent, leaving only one independent claim 10 for resolution by the Court. The Company believes the remaining claim ofcourt. We believe the ‘452 patent is both invalid and not infringed, and we do not believe it is vigorously defending this litigation.probable that we will incur a material loss.
After instituting inter parte review of Digital’s ‘292 patent
Although we have not yet been served, we are aware that a consumer class action lawsuit previously filed and dismissed in June 2017, the Patent Trial and Appeal Board ("PTAB") ultimately rejected the Company’s invalidity challenge on June 1, 2018. Although this patent is no longer at issueCalifornia in the litigation, the Company is appealing this ruling.
On July 19, 2018 the district court issued its claim construction ruling on three disputed claim terms in the remaining claim 10 of Digital’s ‘452 patent. This ruling now triggers various discovery and other deadlines in the litigation, including mandatory mediation. No trial date has been set, butrefiled in Nevada. The case alleges the Court has set certain other deadlines, including mediation no later than December 3, 2018TASER Pulse, X2 and X26P CEWs have a pretrial conferencefaulty safety switch based on January 16, 2019 (whereDouglas Richey’s Pulse allegedly discharging inside its neoprene case in a trial date may be set).
Antoine di Zazzo Arbitration
In April 2016, the Companyjacket pocket without injury. Any such discharge was served with a notice of arbitration claim filed by Antoine di Zazzo, the Company’s former distributorlikely due to static electricity, as disclosed in France, for commissions allegedly owed Mr. di Zazzo. The arbitration claim was filed with the International Court of Arbitration of the International Chamber of Commerce in Paris, France, and the amount that is claimed in controversy is $0.6 million. The Company’s records reflect that all commissions that were due Mr. di Zazzo under his contract were paid or offered to him and the Companyour consumer warnings. We will vigorously defend this arbitration claim.claim and the propriety of any class certification.
Richey Class Action Litigation
OnU.S. Federal Trade Commission Investigation

In June 25, 2018 consumer weapon purchaser Douglas Richeywe received a letter from the U.S. Federal Trade Commission (“Richey”FTC”) filedwith respect to its non-public investigation into our acquisition of VIEVU, LLC in May 2018.  The FTC issued a class action lawsuit against the Company in the Northern District of California (Case No. 3:18-cv-03751-WHA) purporting to assert claims on behalf of all persons in the United States who purchased or acquired a TASER Pulse, TASER X2subpoena for certain information and TASER X26P model CEW in the four-year period preceding the complaint. Richey claims his Pulse CEW discharged while in its case in his jacket pocket due to a faulty safety switch. He was not injured. He alleges violation of the Magnuson-Moss Warranty Act, 15 U.S.C. § 2310(D)(1), the Song-Beverly Consumer Warranty Act for Breach of Express Warranty, Cal. Civ. Code § 1790, and California's Consumers Legal Remedies Act, as well as fraudulent omission and unjust enrichment. The Company is preparing to file a motion to dismiss the complaint, which it believes is meritless.
Appeals
Four appeals are currently pending in the Federal Circuit regarding various orders entered in the Phazzer litigation (see above). Appeal No. 17-2637 relates to the district court’s July 21, 2017 sanctions order and permanent injunction and is fully briefed. The other three appealsdocumentation relating to the district court’s April 4, 2018 damages award inacquisition on March 21, 2019. We are cooperating with the Company’s favor (No. 18-1914) and its May 4, 2018 contempt order as to Phazzer (No. 18-2059) and Abboud (No. 20-1857) have been consolidated. Phazzer and Abboud’s opening briefs are due August 10, 2018.
On May 2, 2018, the Federal Circuit issued its judgment in the Company’s favor affirming the district court’s dismissal ofinvestigation.

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Digital’s antitrust claims (discussed above). On July 6, 2018, Digital filed a Petition for Writ of Certiorari with the U.S. Supreme Court. The Company has waived its response believing the petition is frivolous.

Voluntary Request Letter from the U.S. Federal Trade Commission
On or about June 14, 2018, the Company received a letter from the U.S. Federal Trade Commission (“FTC”) with respect to its non-public investigation into the Company’s recent acquisition of VIEVU, LLC. See Note 15 for additional information regarding the VIEVU acquisition.  In the letter, the FTC has requested that the Company provide, on a voluntary basis, certain information and documentation relating to its acquisition of VIEVU. The Company is reviewing the letter and the information request and is cooperating with the investigation. 
General
From time to time, the Company iswe are notified that itwe may be a party to a lawsuit or that a claim is being made against it.us. It is the Company’sour policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on the Company.us. After carefully assessing the claim, and assuming the Company determineswe determine that it iswe are not at fault or it disagreeswe disagree with the damages or relief demanded, the Companywe vigorously defendsdefend any lawsuit filed against the Company. In certain legal matters, the Company recordsus. 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, the Company takeswe 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. The Company reevaluatesWe reevaluate and updatesupdate accruals as matters progress over time.
Based on the Company'sour assessment of outstanding litigation and claims as of June 30, 2018, the Company hasMarch 31, 2019, we have determined that it is not reasonably possible that these lawsuits will individually, or in the aggregate, materially affect itsour 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 itsour 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, the Company useswe use letters of credit and surety bonds to guarantee itsour performance under various contracts, principally in connection with the installation and integration of its Axon cameras and related technologies. Certain of the Company'sour letters of credit and surety bonds have stated expiration dates with others being released as the contractual performance terms are completed. At June 30, 2018, the CompanyMarch 31, 2019, we had outstanding letters of credit of $2.7$3.1 million that are expected to expire in May 2019.2019 and September 2021. Additionally, the Companywe had $14.1$24.6 million of outstanding surety bonds at June 30, 2018,March 31, 2019, with $1.0$0.4 million expiring in 2018, $0.12019, $0.7 million expiring in 2020, $2.3 million expiring in 2021, $3.1$3.2 million expiring in 2022, and the remaining $7.5 million expiring in 2023.2023 and the remaining $10.5 million expiring in 2024.
12.13. Related Party Transactions
The Company subscribesWe subscribe to various cloud-based applications from Salesforce. Bret Taylor, a member of the Company'sour Board of Directors, serves as President and Chief Product Officer of Salesforce. The Company incursWe incur costs at different times throughout the year, typically in advance of services being provided, and subsequently amortizesamortize these costs ratably to expense as services are provided over the contractual term. The Company made payments of $1.7cost to subscribe to various cloud-based hosting arrangements from Salesforce and Quip was $0.5 million related to these services during each ofand $0.4 million for the three and six months ended June 30,March 31, 2019 and 2018, and made paymentsrespectively. As of $0.2March 31, 2019, $0.1 million and $1.2 million during the three and six months ended June 30, 2017, respectively.was due to Salesforce for such arrangements. Amounts due to Salesforce as of December 31, 2018 were negligible.

13.14. Employee Benefit Plans
The Company hasWe 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 amount allowed by law of their eligible compensation.
The CompanyWe also hashave 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 the Company.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 are made 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 the Company doeswe 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 condensed 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 the Company’sour general creditors.
Contributions to the plans are made by both the employee and the Company. Companyus. Our contributions to the 401(k) plan are based on the level of employee contributions and are immediately vested. The Company’sOur matching contributions to the 401(k) and non-qualified deferred compensation plan for the three months ended June 30,March 31, 2019 and 2018, were $1.4 million and 2017, were $0.8 million, and $0.6 million, respectively, and $1.6 million and $1.3 million for the six months ended June 30, 2018 and 2017, respectively. Future matching or profit sharing contributions to the plans are at the Company’sour sole discretion.
14.15. Segment Data
The Company isOur operations are comprised of two reportable segments: the manufacture and sale of CEWs, batteries, accessories, extended warranties and other products and services (the “TASER Weapons”“TASER” segment); and the software and sensors business, which includes the sale of devices, wearables, applications, cloud and mobile products (collectively, the “Software and Sensors” segment). Within the Software and Sensors segment, the Company specifies sales of products and services. Revenue from the Company's “products” in the Software and Sensors segment are generally 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 the Company's “services” in the Software and Sensors segment comprise sales related to the Axon Cloud, which includes Evidence.com, 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, the Company includes only revenues and costs attributable to that segment which include: costs of sales for both products and services, direct labor, selling expenses for the sales team, product 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 Weapons segment. The Company’sOur Chief Executive Officer, who is the CODM, is not provided asset information or sales, general, and administrative expense by segment, and therefore, no asset information is provided.segment.
Information relative to the Company’sour reportable segments was as follows (in thousands):
 Three Months Ended June 30, 2018 
Three Months Ended June 30, 2017 (1)
 
TASER
Weapons
 Software and Sensors Total 
TASER
Weapons
 Software and Sensors Total
Net sales from products (2)
$60,624
 $16,097
 $76,721
 $53,016
 $13,859
 $66,875
Net sales from services (3)
—
 22,505
 22,505
 —
 12,768
 12,768
Net sales60,624
 38,602
 99,226
 53,016
 26,627
 79,643
Cost of product sales17,681
 13,406
 31,087
 16,078
 14,094
 30,172
Cost of service sales—
 4,996
 4,996
 —
 3,834
 3,834
Cost of sales17,681
 18,402
 36,083
 16,078
 17,928
 34,006
Gross margin42,943
 20,200
 63,143
 36,938
 8,699
 45,637
Sales, general and administrative21,920
 17,423
 39,343
 17,492
 14,332
 31,824
Research and development4,019
 14,482
 18,501
 1,863
 11,126
 12,989
Income (loss) from operations$17,004
 $(11,705) $5,299
 $17,583
 $(16,759) $824


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 Six Months Ended June 30, 2018 
Six Months Ended June 30, 2017 (1)
 
TASER
Weapons
 Software and Sensors Total 
TASER
Weapons
 Software and Sensors Total
Net sales from products (2)
$124,148
 $33,547
 $157,695
 $110,687
 $23,679
 $134,366
Net sales from services (3)
—
 42,746
 42,746
 —
 24,519
 24,519
Net sales124,148
 76,293
 200,441
 110,687
 48,198
 158,885
Cost of product sales38,224
 25,297
 63,521
 34,104
 23,140
 57,244
Cost of service sales—
 9,316
 9,316
 —
 7,334
 7,334
Cost of sales38,224
 34,613
 72,837
 34,104
 30,474
 64,578
Gross margin85,924
 41,680
 127,604
 76,583
 17,724
 94,307
Sales, general and administrative43,185
 31,917
 75,102
 34,708
 27,973
 62,681
Research and development6,979
 26,641
 33,620
 4,075
 21,377
 25,452
Income (loss) from operations$35,760
 $(16,878) $18,882
 $37,800
 $(31,626) $6,174
(1) Amounts for the three and six months ended June 30, 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.
(2) Software and Sensors “products” revenue consists of 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.
(3) Software and Sensors “services” revenue comprises sales related to the Axon Cloud, which includes Evidence.com, 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.
 Three Months Ended March 31, 2019 Three Months Ended March 31, 2018
 TASER Software and Sensors Total TASER Software and Sensors Total
Net sales from products$65,301
 $22,788
 $88,089
 $63,524
 $17,450
 $80,974
Net sales from services90
 27,631
 27,721
 —
 20,241
 20,241
Net sales65,391
 50,419
 115,810
 63,524
 37,691
 101,215
Cost of product sales23,278
 16,322
 39,600
 20,543
 11,891
 32,434
Cost of service sales—
 7,293
 7,293
 —
 4,320
 4,320
Cost of sales23,278
 23,615
 46,893
 20,543
 16,211
 36,754
Gross margin42,113
 26,804
 68,917
 42,981
 21,480
 64,461
            
Research and development3,712
 19,642
 23,354
 2,960
 12,159
 15,119
15. Business Acquisition
On May 3, 2018, the acquisition date, the Company 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 $17.3 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 the Company's 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 the Company’s preferred provider of holsters for its CEW products. The estimated fair value of the Supply Agreement as of the acquisition date was $4.2 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. The final purchase price and purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final purchase price and purchase price allocation could differ materially from the preliminary allocation disclosed below. The final allocation may include (1) changes in the fair value of the contingent consideration and Supply Agreement, and (2) changes in fair values of assets and liabilities, including intangible assets and goodwill.

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The major classes of assets and liabilities to which the Company has allocated the purchase price, on a preliminary basis, were as follows (in thousands):
Accounts receivable$1,776
Inventory2,626
Prepaid expenses and other assets314
Property and equipment459
Contract assets1,472
Intangible assets4,500
Goodwill9,870
Accounts payable and accrued liabilities(3,172)
Deferred revenue(543)
Total purchase price$17,302
The Company has 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 the Company's consolidated results of operations subsequent to the acquisition date. Revenue and loss from operations included in the Company's consolidated financial statements from the acquisition date through June 30, 2018 were $2.2 million and $1.2 million, respectively. Pro forma results of operations for VIEVU have not been presented because they are not material to the consolidated results of operations. In connection with the acquisition, the Company incurred and expensed costs of approximately $0.7 million, which included legal, accounting and other third-party expenses related to the transaction. Subsequent to the acquisition date, the Company recorded an expense of $0.6 million related to purchase commitments assumed in the VIEVU business combination that exceeded estimated future demand.
Item 7.2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of the Company’sour financial condition as of June 30, 2018,March 31, 2019, and results of operations for the sixthree months ended June 30,March 31, 2019 and 2018, and 2017. The following discussion mayshould be understood more fully by reference toread in conjunction with the consolidated financial statements, notes to thecondensed consolidated financial statements and Management’s Discussionrelated notes included in this Report on Form 10-Q and Analysis of Financial Condition and Results of Operations section containedthose in the Company’sour 2018 Annual Report on Form 10-K forfiled with the year ended December 31, 2017.
CertainSEC on February 27, 2019. This discussion contains forward-looking statements containedthat involve risks and uncertainties. Our actual results may differ materially from those anticipated 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 subjectas a result of certain factors, including but not limited to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things: our intentions and beliefs about future development efforts and activities, including our intentions to invest in R&D as well as the development of new product and service lines and enhanced features for our existing product and service lines; intentions to shift an increasing amount of business to a subscription model; our need that customers upgrade and replace existing conducted electrical weapons (“CEW”) units and the willingness of customers to do so; that we may have more sales denominated in foreign currencies in 2018; our intention to increase our investment in the development of sales in the international, military and law enforcement market; our plans to expand our sales force; that cloud and mobile technologies are fundamentally changing the police environment; our plan to invest in web activities and law enforcement trade shows in 2018; our intention to not pay dividends; that increases in marketing and sales activities will lead to an increase in sales; our belief that the video evidence capture and management market will grow significantly in the near future and the reasons for that belief; our intention to continue to pursue the personal security market; our intention to grow direct sales; the sufficiency of our facilities and our strategy to expand manufacturing capacity if needed; that we may lease facilities from parties that specialize in handling and manufacturing of firearm materials; that we expect to continue to depend on sales of our X2 and X26P CEW devices; our intention to apply for and prosecute our patents; that selling, general and administrative expense will increase in 2018; that research and development expenses will increase in 2018; the timing of the resolution of uncertain tax positions; our intention to hold investments to maturity; the effect of interest rate changes on our annual interest income; that we may engage in currency hedging activities; our intentions concerning, and the effectiveness of, our ongoing marketing efforts through web activities, trial programs, tech summits and law enforcement trade shows; our belief that customers will honor multi-year contracts despite the existence of appropriations, termination for convenience. or similar clauses; our belief

that customers will renew their Evidence.com service subscriptions at the end of the contractual term; estimates regarding the size of our target markets and our competitive position in existing markets; the availability of alternative materials and components suppliers; the benefits of the continued automation of our production process; the sufficiency and availability of our liquid assets and capital resources; our financing and growth strategies, including: potential joint ventures, mergers and acquisitions, stock repurchases and hedging activities; the safety of our products; our litigation strategy, including the outcome of legal proceedings in which we are currently involved; expectations regarding increased operating leverage; our expectations of the probability of achievement of performance goals in connection with the CEO Performance Award; the impact of a loss of customer data, a breach of security or an extended outage; the effect of current and future tax strategies; the fluctuationsthose described under “Risk Factors” in our effective tax rate; the impact2018 Annual Report on Form 10-K. See also "Special Note Regarding Forward-Looking Statements" on page ii of the U.S. Tax Cuts and Jobs Act (the “Tax Act”); the impact of recently adopted and future accounting standards; the impact of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) and ASC Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers ("ASC 340-40") (collectively, “Topic 606”); and the ultimate resolution of financial statement items requiring critical accounting estimates, including those set forth in ourthis Report on Form 10-K for the year ended December 31, 2017.10-Q.

Overview

Axon Enterprise, Inc.’s (the “Company” or “Axon” or “we” or “our”)is a market-leading provider of law enforcement technology solutions. Our core mission is to protect life, to protect truthlife. We fulfill that mission through developing hardware and to reducesoftware products that advance the long term objectives of a) obsoleting the bullet, b) reducing social conflict, through developing and selling technologies that make communities safer. We are highly focused on disrupting existing categoriesc) enabling a fair and bringing public safety technology into the 21st century. We are the market leader in the development, manufacture and sale of conducted electrical weapons (“CEWs”) and other electronic weapons designed for use in law enforcement, military, corrections, private security and personal defense. We have also developed a fully integrated hardware and cloud-based software solution to provide our law enforcement customers the capabilities to capture, securely store, manage, share and analyze video and other digital evidence.effective justice system.

Our strategic growth areas are TASER weapons, Sensors hardware including on-officer body cameras and Axon Fleet in-car video systems, our Evidence.com connected software network, and Axon Records and Computer Aided Dispatch software. These value streams exist within an estimated $7.7 billion total addressable market, comprising TASER weapons ($1.5 billion), hardware sensors ($0.7 billion), and cloud-based public safety software ($5.5 billion.)
The $1.5 billion TASER Weapons total addressable market estimates 660,000 domestic patrol officers and 1,800,000 immediately addressable international patrol officers at an average revenue of $600 per year ($50 per user per month) including the weapon, cartridges, batteries, and enhanced services currently under development.
The $5.5 billion cloud-based public safety software total addressable market estimates 1,000,000 domestic patrol officers with annual digital evidence management revenue of $750 per year ($63 per user per month, which reflects Axon current list pricing), 1,000,000 domestic police officers with annual advanced intelligence and analytics revenue of $350 per year ($29 per user per month based on estimated market pricing), 400,000 domestic patrol vehicle license evidence management annual revenue of $925 ($77 per user per month, which reflects 60% allocation to software of Axon's $129 per month listed pricing), 2,100,000 public safety employees with annual records management & computer dispatch revenue of $1,500 per year ($125 per user per month based on estimated market pricing and analysis of current existing records management systems (“RMS”) and computer aided dispatch (“CAD”) contracts), and 1,000,000 immediately addressable international officers with annual revenue of $750 per year ($63 per user per month based on Axon's current listed software pricing).
The hardware sensors $0.7 billion total addressable market estimates 660,000 domestic patrol officers and 1,000,000 immediately addressable international officers with annual camera and dock revenue of $200 per year ($16-$19 per user per month based on Axon's listed pricing), 400,000 domestic patrol vehicles with annual hardware revenue of $600 per year ($50 per user per month based on 40% of allocation to hardware of Axon's $129 per month listed pricing), and 660,000 domestic patrol officers with annual revenue of $120 per year ($10 per user per month based on Axon's listed pricing)revenues for the Signal Sidearm product.
Our long-term financial strategy includes shifting our revenue, contracts, and cash flows from book-and-ship hardware transactions to multi-element, multi-year, subscription or recurring payment plans. During the three months ended June 30, 2018, 52%March 31, 2019 were $115.8 million, an increase of $14.6 million, or 14.4%, from the comparable period in the prior year. We had income from operations of $2.7 million compared to $13.6 million for the same period in the prior year. The decrease in operating results was due to an increase in cost of sales as well as investments over the past year for additional headcount in research and development and sales, general and administrative functions to support continued and future growth. Additionally, margins were compressed related to the rollout of our consolidated revenues were recognized from contracts with multiple performance obligations, while within ournewest TASER Weaponsdevice and Softwareincreased data storage and Sensors segments, approximately 25%tariff and 96%, respectively, were recognized from contracts containing multiple performance obligations. Recurring revenue referscustoms expenses. We recorded net income of $6.4 million compared to those contracts with multiple performance obligations, which we break out in more detail$12.9 million for the comparable period in the Critical Accounting Estimates.prior year.
As

2019 Outlook

For the year ending December 31, 2019, we expect revenue $485 million to $495 million. We expect stock-based compensation expenses to be approximately $35 million for the full year, which is subject to change depending on our assessment of June 30, 2018, we have booked 305,200 cloud-based software licensesthe probability of attaining operational metrics for the CEO Performance Award and XSU awards, and on the Axon Cloud networkexpected timing of such attainment. We expect a normalized income tax rate of between 20% and we have annual recurring run-rate Axon Cloud25%; this rate can fluctuate depending on geography of income and Sensors and Other revenuethe effects of $92.7 million. Annual recurring run-rate revenue is calculated by annualizingdiscrete items, including changes in our most previous reported month's recurring license, integration, warranty and storage revenue. Our long-term goal is to transition a majority of our customers to recurring payment plan or subscription contracts.stock price.

We are also highly focused on driving operating leverage and profitability within our two reportable segments, TASER Weapons and Software and Sensors.
Results of Operations

Three Months Ended June 30, 2018March 31, 2019 Compared to the Three Months Ended June 30, 2017March 31, 2018
The following table presents data from our condensed 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):
 Three Months Ended June 30,
 2018 
2017 (1)
Net sales from products$76,721
 77.3 % $66,875
 84.0%
Net sales from services22,505
 22.7
 12,768
 16.0
Net sales99,226
 100.0
 79,643
 100.0
Cost of product sales31,087
 31.3
 30,172
 37.9
Cost of service sales4,996
 5.0
 3,834
 4.8
Cost of sales36,083
 36.4
 34,006
 42.7
Gross margin63,143
 63.6
 45,637
 57.3
Operating expenses:       
Sales, general and administrative39,343
 39.6
 31,824
 40.0
Research and development18,501
 18.6
 12,989
 16.3
Total operating expenses57,844
 58.3
 44,813
 56.3
Income from operations5,299
 5.3
 824
 1.0
Interest and other income (expense), net(295) (0.3) 1,684
 2.1
Income before provision for income taxes5,004
 5.0
 2,508
 3.1
Provision for (benefit from) income taxes(3,481) (3.5) 232
 0.3
Net income$8,485
 8.6 % $2,276
 2.9%
(1) Amounts for the three months ended June 30, 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.
 Three Months Ended March 31,
 2019 2018
Net sales from products$88,089
 76.1 % $80,974
 80.0%
Net sales from services27,721
 23.9
 20,241
 20.0
Net sales115,810
 100.0
 101,215
 100.0
Cost of product sales39,600
 34.2
 32,434
 32.0
Cost of service sales7,293
 6.3
 4,320
 4.3
Cost of sales46,893
 40.5
 36,754
 36.3
Gross margin68,917
 59.5
 64,461
 63.7
Operating expenses:       
Sales, general and administrative42,892
 37.0
 35,759
 35.3
Research and development23,354
 20.2
 15,119
 14.9
Total operating expenses66,246
 57.2
 50,878
 50.2
Income from operations2,671
 2.3
 13,583
 13.5
Interest and other income, net2,313
 2.0
 1,263
 1.2
Income before provision for income taxes4,984
 4.3
 14,846
 14.7
Provision for (benefit from) income taxes(1,435) (1.2) 1,920
 1.9
Net income$6,419
 5.5 % $12,926
 12.8%
The following table presents the Company'sour revenues disaggregated by geography (in thousands):
Three Months Ended June 30,Three Months Ended March 31,
2018 
2017 (1)
2019 2018
United States$78,731
 79% $66,200
 83%$94,333
 81% $77,950
 77%
Other countries20,495
 21
 13,443
 17
21,477
 19
 23,265
 23
Total$99,226
 100% $79,643
 100%$115,810
 100% $101,215
 100%
(1) Amounts for the three months ended June 30, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with
International revenue decreased slightly compared to the prior year comparable period, amounts reported under ASC 605.driven primarily by large sales in the prior year period in the Asia Pacific region that did not recur in the current period.


Net Sales
Net sales by product line were as follows (dollars in thousands):
Three Months Ended June 30, 
Dollar
Change
 
Percent
Change
Three Months Ended March 31, 
Dollar
Change
 
Percent
Change
2018 
2017 (1)
 2019 2018 
TASER Weapons segment:           
TASER segment:           
TASER 7$9,954
 8.6% $—
 —% $9,954
 *
TASER X26P$18,146
 18.3% $16,235
 20.4% $1,911
 11.8 %15,872
 13.7
 16,474
 16.4
 (602) (3.7)
TASER X218,362
 18.5
 16,052
 20.2
 2,310
 14.4
13,085
 11.3
 23,932
 23.6
 (10,847) (45.3)
TASER Pulse and Bolt1,101
 1.1
 801
 1.0
 300
 37.5
670
 0.6
 1,346
 1.3
 (676) (50.2)
Single cartridges17,243
 17.4
 14,867
 18.7
 2,376
 16.0
19,160
 16.6
 16,114
 15.9
 3,046
 18.9
Axon Evidence and cloud services36
 —
 —
 —
 36
 *
Extended warranties3,738
 3.8
 2,991
 3.8
 747
 25.0
4,316
 3.7
 3,706
 3.7
 610
 16.5
Other2,034
 2.0
 2,070
 2.6
 (36) (1.7)2,298
 2.0
 1,952
 1.9
 346
 17.7
Total TASER Weapons segment60,624
 61.1
 53,016
 66.6
 7,608
 14.4
Total TASER segment65,391
 56.5
 63,524
 62.8
 1,867
 2.9
Software and Sensors segment:        
 

        
 

Axon Body4,780
 4.8
 3,752
 4.7
 1,028
 27.4
6,445
 5.6
 5,558
 5.5
 887
 16.0
Axon Flex1,535
 1.5
 3,851
 4.8
 (2,316) (60.1)1,224
 1.1
 1,669
 1.6
 (445) (26.7)
Axon Fleet2,715
 2.7
 —
 —
 2,715
 *
3,516
 3.0
 2,116
 2.1
 1,400
 66.2
Axon Dock2,119
 2.1
 2,783
 3.5
 (664) (23.9)3,312
 2.9
 3,035
 3.0
 277
 9.1
Evidence.com and cloud services20,357
 20.5
 12,756
 16.0
 7,601
 59.6
Axon Evidence and cloud services27,618
 23.7
 20,241
 20.0
 7,377
 36.4
TASER Cam762
 0.8
 766
 1.0
 (4) (0.5)903
 0.8
 1,360
 1.3
 (457) (33.6)
Extended warranties2,870
 2.9
 1,619
 2.0
 1,251
 77.3
4,930
 4.3
 2,490
 2.5
 2,440
 98.0
Other3,464
 3.5
 1,100
 1.4
 2,364
 214.9
2,471
 2.1
 1,222
 1.2
 1,249
 102.2
Total Software and Sensors segment38,602
 38.9
 26,627
 33.4
 11,975
 45.0
50,419
 43.5
 37,691
 37.2
 12,728
 33.8
Total net sales$99,226
 100.0% $79,643
 100.0% $19,583
 24.6
$115,810
 100.0% $101,215
 100.0% $14,595
 14.4 %
* Not meaningful
(1) Amounts for the three months ended June 30, 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.applicable
Net unit sales for TASER Weaponsdevice handles and other products and Software and Sensors segment products were as follows:
Three Months Ended June 30, 
Unit
Change
 
Percent
Change
Three Months Ended March 31, 
Unit
Change
 
Percent
Change
2018 2017 2019 2018 
TASER 78,835
 —
 8,835
 *
TASER X26P18,664
 18,198
 466
 2.6 %14,985
 15,720
 (735) (4.7)
TASER X215,537
 15,390
 147
 1.0
9,861
 20,501
 (10,640) (51.9)
TASER Pulse and Bolt3,158
 2,347
 811
 34.6
1,253
 4,000
 (2,747) (68.7)
Cartridges611,136
 579,282
 31,854
 5.5
616,517
 532,952
 83,565
 15.7
Axon Body20,407
 26,882
 (6,475) (24.1)25,848
 21,769
 4,079
 18.7
Axon Flex3,281
 9,373
 (6,092) (65.0)3,591
 3,693
 (102) (2.8)
Axon Fleet2,079
 —
 2,079
 *
1,735
 1,857
 (122) (6.6)
Axon Dock4,534
 8,269
 (3,735) (45.2)4,994
 5,844
 (850) (14.5)
TASER Cam1,491
 1,336
 155
 11.6
1,741
 3,528
 (1,787) (50.7)
*Not meaningful
Net sales were $99.2 million and $79.6 million for the three months ended June 30, 2018 and 2017, respectively, an increase of $19.6 million or 24.6%. International revenues were $20.5 million and $13.4 million for the three months ended June 30, 2018 and 2017, respectively, an increase of $7.1 million or 52.5%.applicable
Net sales for the TASER Weapons segment were $60.6increased 2.9% primarily as a result of increased cartridge revenue, partially offset by a net decrease of $2.2 million and $53.0 million for the three months ended June 30, 2018 and 2017, respectively, an increase of $7.6 million or 14.4%.in TASER device sales. The Company increaseddecreased unit sales of itsX2 and X26P were partially offset by higher average selling prices. As expected, we have started to see a shift to purchases of our newest device, TASER 7, from legacy X2 and X26P and X2 Smartdevices. We expect recurring payment plan subscriptions to increase in 2019 as we drive sales of TASER 7, which includes a software subscription with Axon Evidence.

Weapons by $4.2 million to $36.5 million during the quarter ended June 30, 2018 as compared to $32.3 million during the same period in 2017, which was primarily attributable to increased sales under the Officer Safety Plan and TASER 60 purchase programs.
Net sales for the Software and Sensors segment were $38.6 million and $26.6 million for the three months ended June 30, 2018 and 2017, respectively, an increase of $12.0 million, or 45.0%. The Companyincreased 33.8% as we continued to add users and associated devices to itsour network during the three months ended June 30, 2018March 31, 2019, resulting in steady product revenues as well as increased revenues. Our aggregate number of users continued to increase, which resulted in increased Evidence.comAxon Evidence and extended warranty revenues of $7.6$7.4 million and $1.3$2.4 million, respectively. Additionally, the Companywe recorded a $1.4 million increase in revenue of $2.7 million related to Axon Fleet, the Company's in-car camera system that was released towards the end of 2017, during the three months ended June 30, 2018 with no amounts recorded during the same period in 2017.primarily driven by increased pricing.
To gain more immediate feedback regarding activity for Software and Sensors products and 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, inclusive of renewals, placed in the relevant fiscal period, regardless of when the products or services ultimately will be provided. Most bookings will be invoiced in subsequent periods. Due to municipal government funding rules, in some cases certain of the future period amounts included in bookings are subject to budget appropriation or other contract cancellation clauses. Although the Company haswe have entered into contracts for the delivery of products and services in the future and anticipatesanticipate the contracts will be fulfilled, if agencies do not exercise contractual options, do not appropriate funds in future year budgets, or do enact a cancellation clause, revenue associated with these bookings may not ultimately be recognized, resulting in a future reduction to bookings. Bookings related to the Company'sour Software and Sensors segment, net of cancellations, were $88.9$76.4 million and $81.9$97.5 million during the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively, an increasea decrease of $6.9$21.1 million, or 8.4%21.7%. Bookings for the current quarter reflect typical Q1 seasonality, which we did not experience in Q1 2018 due to a substantial international order. We anticipate that bookings growth will increase when Axon Body 3 begins shipping in Q3 2019.
The chart below illustrates the Company'sour Software and Sensors segment quarterly bookings for each of the previous six fiscal quarters (in thousands):
chart-789020516a4d55a4899.jpgchart-4682d2c1d5375d83909.jpg
Cost of Product and Service Sales
Cost of product and service sales was $36.1 million and $34.0 million for the three months ended June 30, 2018 and 2017, respectively, an increase of $2.1 million, or 6.1%. As a percentage of net sales, cost of product and service sales decreased to 36.4% for the three months ended June 30, 2018 compared to 42.7% during the same period in 2017. The Company noted no significant changes in variable manufacturing costs during the three months ended June 30, 2018 as compared to the same period in 2017.
Within the TASER Weapons segment, cost of product sales increased to $17.7$23.3 million for the three months ended June 30, 2018March 31, 2019 from $16.1$20.5 million for the same period in 2017 as a result of higher sales volumes, and decreased2018. Cost as a percentage of sales increased to 29.2%35.6% from 30.3%, respectively.32.3%. The increase in cost of product sales as a percentage of sales was primarily attributable to initial production costs as well as higher depreciation on new production equipment for the TASER 7.
Within the Software and Sensors segment, cost of product and service sales increased to $18.4$23.6 million for the three months ended June 30, 2018March 31, 2019 from $17.9$16.2 million for the same period in 2017 as a result of higher sales volumes, and decreased2018. Cost as a percentage of sales increased to 47.7% for46.8% from 43.0%. Cost of product sales increased $4.4 million primarily driven by the three months ended June 30, 2018 from 67.3% forimpact of increased units as well as increased freight and customs expenses. Cost of service sales increased $3.0 million driven by a $2.1 million increase in third party cloud costs as well as an increase in professional services following the same periodacquisition of VIEVU in 2017.

May 2018.
Gross Margin
Gross margin increased $17.5 million to $63.1 million for the three months ended June 30, 2018 compared to $45.6 million for the same period in 2017. As a percentage of net sales, gross margin increased to 63.6% for the three months ended June 30, 2018 compared to 57.3% for the same period in 2017, which was primarily attributable to increased leveraging of fixed costs related to cloud storage.
As a percentage of net sales, gross margin for the TASER Weapons segment increased slightlydecreased to 70.8%64.4% from 69.7%67.7% for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively. In addition to the cost impacts noted above, trade-in credits for certain customers purchasing TASER 7 devices negatively impacted gross margin.

As a percentage of net sales, gross margin for the Software and Sensors segment was 52.3% and 32.7%decreased to 53.2% from 57.0% for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively. Within the Software and Sensors segment, hardware gross margin was 16.7%28.4% for the three months ended June 30, 2018March 31, 2019 compared to a negative 1.7%31.9% for the same period in 2017,2018, while the service margins were 77.8%73.6% and 70.0%78.7% during those same periods, respectively. The increase in hardware gross margins during the three months ended June 30, 2018 was primarily attributable to accounting changes required under the new revenue accounting standard. Previously, the level of discounting in the Company's contracts resulted in a portion of the contractual consideration allocated to the delivered hardware to be recognized as revenue ratably over the Evidence.com subscription term, 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 three months ended June 30, 2018 as compared to the same period in 2017 was attributable to the reduction of non-recurring expenses related to the Company's data migration to its 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 Expenses
Sales, general and administrative ("SG&A&A) expenses were comprised as follows (dollars in thousands):
Three Months Ended June 30, Dollar
Change		 Percent
Change		Three Months Ended March 31, Dollar
Change		 Percent
Change
2018 
2017 (1)
 2019 2018 
Total sales, general and administrative expenses$39,343
 $31,824
 $7,519
 23.6$42,892
 $35,759
 $7,133
 19.9
Sales, general, and administrative as a percentage of net sales39.6% 40.0%   37.0% 35.3%   
(1) Amounts relatedStock-based compensation expense increased $2.4 million in comparison to commissions expense for the three months ended June 30, 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 Weapons segment, SG&A expenses increased $4.4 million, or 25.3%, to $21.9 million during the three months ended June 30, 2018 as compared to $17.5 million for the three months ended June 30, 2017. Of the increase, $2.0 million related to higher salaries, benefits, bonus and stock-based compensation related primarily to sales and marketing, professional staff and general support staff, as well as increased professional and consulting costs of $1.4 million primarily related to increased legal fees.
Within the Software and Sensors segment, SG&A expenses increased $3.1 million, or 21.6%, to $17.4 million during the three months ended June 30, 2018 as compared to $14.3 million for the same period in 2017. The increasequarter, which was primarily attributable to increased costs related to salaries,expense of $1.9 million from the CEO Performance Award and XSUs. Salaries, benefits and bonus inclusiveexpenses increased $2.1 million primarily due to a continued increase in headcount. Sales and marketing expenses increased $0.9 million primarily as a result of stock-based compensation andhigher commissions on increased costs related to sales and marketing.sales.
Research and Development Expenses
Research and development ("R&D&D") expenses were comprised as follows (dollars in thousands):
Three Months Ended June 30, Dollar
Change		 Percent
Change		Three Months Ended March 31, Dollar
Change		 Percent
Change
2018 2017 2019 2018 
Total research and development expenses$18,501
 $12,989
 $5,512
 42.4$23,354
 $15,119
 $8,235
 54.5
Research and development as a percentage of net sales18.6% 16.3%   20.2% 14.9%   
The Company'sOur Software and Sensors segment was responsible for 61%91% of the overall increase in R&D expense. Within the TASER Weapons segment, R&D expense increased $2.2$0.8 million, of which $1.7$0.7 million was related to increased stock-based compensation expense and salaries benefits and bonus as the Company continueswe continue to invest in personnel allocated to the development of new CEW related technologies. The $3.4 million increase in R&D expense for the Software and Sensors segment increased $7.5 million, primarily consisted ofdue to a $3.7$6.1 million increase

related to salaries and benefits, inclusive of stock-based compensation, which was partially offset by $0.5 million of lower expenses related to external professional and consulting fees. The Company expectscompensation. We expect R&D expense to continue to increase in absolute dollars as it invests in the deployment of new CEW technologies and focuseswe focus on growing the Software and Sensors segment as it addswe add headcount and additional resources to develop new products and services to further advance itsour scalable cloud-connected device platform. The Company believesThese investments include Axon Records and computer-aided dispatch software. 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 selling, general and administrativeSG&A expenses and research and developmentR&D costs, as we reach economies of scale.
Interest and Other Income, (expense), Net
Interest and other income, (expense), net was an expense of $0.3$2.3 million for the three months ended June 30, 2018March 31, 2019 compared to income of $1.7$1.3 million for the same period in 2017. During the three months ended June 30, 2018, interest and other income amounts consisted2018. The increase was primarily ofattributable to increase investment interest income related to the Company's sales under hardware installment sale planson our higher balance of cash, cash equivalents and investment and interest income totaling $0.9 million which was more than offset by losses on foreign currency transaction adjustments of $1.2 million. During the three months ended June 30, 2017, interest and other income included investment and interest income of $0.4 million and $1.3 million of gains on foreign currency transaction adjustments.investments.
Provision for Income Taxes
The provision for income taxes was a benefit of $3.5$1.4 million for the three months ended June 30, 2018,March 31, 2019, which was an effective tax rate of (69.6)(28.8)%. Our estimated full year effective income tax rate for 2018,2019, before discrete period adjustments, was 22.8%is 21.1%, which is moregreater than the federal statutory rate, primarily due to state taxes and non-deductible expenses for items such as meals and entertainment, executive compensation limitationlimited under IRC Section 162(m), lobbying fees, and an income inclusion from GILTI, offset by a reduction for foreign-derived intangible income ("FDII"). This was partially offset byFDII and R&D tax credit deductions.credits. The effective tax rate was favorably impacted by a $4.6$2.7 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for RSUs that vested or stock options that were exercised during the three months ended June 30, 2018. Of this amount $3.4March 31, 2019. This was offset by an unfavorable discrete item of $0.3 million related to the write off of certain deferred tax assets related to future stock options exercisedcompensation vests for certain officers for whom deductibility of compensation is limited by the Company's CEO in connection with the Company's follow-on offering.IRC Section 162(m).

Net Income
Our net income increaseddecreased by $6.2$6.5 million to $8.5$6.4 million for the three months ended June 30, 2018March 31, 2019 compared to $2.3$12.9 million for the same period in 2017.2018. Net income per basic and diluted share was $0.15$0.11 for the three months ended June 30, 2018March 31, 2019 compared to $0.04$0.24 per basic and diluted share for the same period in 2017.

2018.
Three Months Ended June 30, 2018March 31, 2019 Compared to the Three Months Ended MarchDecember 31, 2018
Net Sales
Net sales by product line were as follows (dollars in thousands):
Three Months Ended June 30, 2018 Three Months Ended
March 31, 2018		 Dollar
Change		 Percent
Change		Three Months Ended March 31, 2019 
Three Months Ended
December 31, 2018
 Dollar
Change		 Percent
Change
TASER Weapons segment:           
TASER segment:           
TASER 7$9,954
 8.6% $7,358
 6.4% $2,596
 35.3 %
TASER X26P$18,146
 18.3% $16,474
 16.3% $1,672
 10.1 %15,872
 13.7
 18,020
 15.7
 (2,148) (11.9)
TASER X218,362
 18.5
 23,932
 23.6
 (5,570) (23.3)13,085
 11.3
 16,151
 14.1
 (3,066) (19.0)
TASER Pulse and Bolt1,101
 1.1
 1,346
 1.3
 (245) (18.2)670
 0.6
 1,333
 1.2
 (663) (49.7)
Single cartridges17,243
 17.4
 16,114
 15.9
 1,129
 7.0
19,160
 16.6
 16,495
 14.4
 2,665
 16.2
Axon Evidence and cloud services36
 —
 —
 —
 36
 *
Extended warranties3,738
 3.8
 3,706
 3.7
 32
 0.9
4,316
 3.7
 4,186
 3.6
 130
 3.1
Other2,034
 2.0
 1,952
 1.9
 82
 4.2
2,298
 2.0
 1,758
 1.5
 540
 30.7
Total TASER Weapons segment60,624
 61.1
 63,524
 62.8
 (2,900) (4.6)
Total TASER segment65,391
 56.5
 65,301
 56.9
 90
 0.1
Software and Sensors segment:                      
Axon Body4,780
 4.8
 5,558
 5.5
 (778) (14.0)6,445
 5.6
 6,801
 5.9
 (356) (5.2)
Axon Flex1,535
 1.5
 1,669
 1.6
 (134) (8.0)1,224
 1.1
 1,980
 1.7
 (756) (38.2)
Axon Fleet2,715
 2.4
 2,116
 2.1
 599
 28.3
3,516
 3.0
 5,887
 5.1
 (2,371) (40.3)
Axon Dock2,119
 2.1
 3,035
 3.0
 (916) (30.2)3,312
 2.9
 3,374
 2.9
 (62) (1.8)
Evidence.com and cloud services20,357
 20.5
 20,241
 20.0
 116
 0.6
Axon Evidence and cloud services27,618
 23.7
 25,778
 22.6
 1,840
 7.1
TASER Cam762
 0.8
 1,360
 1.3
 (598) (44.0)903
 0.8
 1,032
 0.9
 (129) (12.5)
Extended warranties2,870
 2.9
 2,490
 2.5
 380
 15.3
4,930
 4.3
 3,339
 2.9
 1,591
 47.6
Other3,464
 3.5
 1,222
 1.2
 2,242
 183.5
2,471
 2.1
 1,299
 1.1
 1,172
 90.2
Total Software and Sensors segment38,602
 38.9
 37,691
 37.2
 911
 2.4
50,419
 43.5
 49,490
 43.1
 929
 1.9
Total net sales$99,226
 100.0% $101,215
 100.0% $(1,989) (2.0)%$115,810
 100.0% $114,791
 100.0% $1,019
 0.9 %
Net sales within the TASER Weapons segment decreased during the three months ended June 30, 2018 at $60.6 million as compared to $63.5 million for the three months ended March 31, 2018. The decrease is primarily attributable to the timing of customer orders and deployments.
Within the Software and Sensors segment, net sales were $38.6 million for the three months ended June 30, 2018 as compared to $37.7 million for the three months ended March 31, 2018. The Company continued to add users to its network during the three months ended June 30, 2018 resulting in steady service revenues but offset by decreased hardware revenues.*Not applicable.
Net unit sales for TASER Weaponsdevice handles and other products and Software and Sensors segment products were as follows:
Three Months Ended June 30, 2018 Three Months Ended
March 31, 2018		 Unit
Change		 Percent
Change		Three Months Ended March 31, 2019 Three Months Ended December 31, 2018 Unit
Change		 Percent
Change
TASER 78,835
 5,759
 3,076
 53.4 %
TASER X26P18,664
 15,720
 2,944
 18.7 %14,985
 18,597
 (3,612) (19.4)
TASER X215,537
 20,501
 (4,964) (24.2)9,861
 13,088
 (3,227) (24.7)
TASER Pulse and Bolt3,158
 4,000
 (842) (21.1)1,253
 7,490
 (6,237) (83.3)
Cartridges611,136
 532,952
 78,184
 14.7
616,517
 600,690
 15,827
 2.6
Axon Body20,407
 21,769
 (1,362) (6.3)25,848
 26,167
 (319) (1.2)
Axon Flex3,281
 3,693
 (412) (11.2)3,591
 5,080
 (1,489) (29.3)
Axon Fleet2,079
 1,857
 222
 12.0
1,735
 3,905
 (2,170) (55.6)
Axon Dock4,534
 5,844
 (1,310) (22.4)4,994
 3,859
 1,135
 29.4
TASER Cam1,491
 3,528
 (2,037) (57.7)1,741
 1,952
 (211) (10.8)

Six Months Ended June 30, 2018 Compared toNet sales within the Six Months Ended June 30, 2017
The following table presents data from our statements of operations as well as the percentage relationship to total net sales of items included in our statements of operations (dollars in thousands):
 Six Months Ended June 30,
 2018 
2017 (1)
Net sales from products$157,695
 78.7 % $134,366
 84.6%
Net sales from services42,746
 21.3
 24,519
 15.4
Net sales200,441
 100.0
 158,885
 100.0
Cost of product sales63,521
 31.7
 57,244
 36.0
Cost of service sales9,316
 4.6
 7,334
 4.6
Cost of sales72,837
 36.3
 64,578
 40.6
Gross margin127,604
 63.7
 94,307
 59.4
Operating expenses:��      
Sales, general and administrative75,102
 37.5
 62,681
 39.5
Research and development33,620
 16.8
 25,452
 16.0
Total operating expenses108,722
 54.2
 88,133
 55.5
Income from operations18,882
 9.4
 6,174
 3.9
Interest and other income968
 0.5
 1,890
 1.2
Income before provision for income taxes19,850
 9.9
 8,064
 5.1
Provision for (benefit from) income taxes(1,561) (0.8) 1,208
 0.8
Net income$21,411
 10.7 % $6,856
 4.3%
(1) Amounts for the six months ended June 30, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presentedTASER segment remained consistent with the prior period amounts reported under ASC 605.
The following table presents the Company's revenues disaggregated by geography (in thousands):
 Six Months Ended June 30,
 2018 
2017 (1)
United States$156,681
 78% $130,952
 82%
Other countries43,760
 22
 27,933
 18
Total$200,441
 100% $158,885
 100%
(1) Amounts for the six months ended June 30, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.

Net Sales
Net sales by product line were as follows (dollars in thousands):
 Six Months Ended June 30, 
Dollar
Change
 
Percent
Change
 2018 
2017 (1)
  
TASER Weapons segment:           
TASER X26P$34,620
 17.3% $31,903
 20.1% $2,717
 8.5 %
TASER X242,294
 21.1
 35,038
 22.1
 7,256
 20.7
TASER Pulse and Bolt2,447
 1.2
 1,823
 1.1
 624
 34.2
Single cartridges33,357
 16.6
 31,531
 19.8
 1,826
 5.8
Extended warranties7,444
 3.7
 5,834
 3.7
 1,610
 27.6
Other3,986
 2.0
 4,558
 2.9
 (572) (12.5)
Total TASER Weapons segment124,148
 61.9
 110,687
 69.7
 13,461
 12.2
Software and Sensors segment:           
Axon Body10,338
 5.2
 7,198
 4.5
 3,140
 43.6
Axon Flex3,204
 1.6
 5,326
 3.4
 (2,122) (39.8)
Axon Fleet4,831
 2.4
 —
 —
 4,831
 *
Axon Dock5,154
 2.6
 4,770
 3.0
 384
 8.1
Evidence.com and cloud services40,598
 20.3
 24,498
 15.4
 16,100
 65.7
TASER Cam2,122
 1.1
 1,485
 0.9
 637
 42.9
Extended warranties5,360
 2.7
 3,037
 1.9
 2,323
 76.5
Other4,686
 2.3
 1,884
 1.2
 2,802
 148.7
Total Software and Sensors segment76,293
 38.1
 48,198
 30.3
 28,095
 58.3
Total net sales$200,441
 100.0% $158,885
 100.0% $41,556
 26.2
* Not meaningful
(1) Amounts for the six months ended June 30, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.
Net unit salesquarter. Revenues for TASER Weapons handles and other products and Software and Sensors segment products were as follows:
 Six Months Ended June 30, 
Unit
Change
 
Percent
Change
 2018 2017  
TASER X26P34,384
 33,559
 825
 2.5 %
TASER X236,038
 32,527
 3,511
 10.8
TASER Pulse and Bolt7,158
 5,919
 1,239
 20.9
Cartridges1,144,088
 1,175,268
 (31,180) (2.7)
Axon Body42,176
 47,195
 (5,019) (10.6)
Axon Flex6,974
 12,474
 (5,500) (44.1)
Axon Fleet3,936
 —
 3,936
 *
Axon Dock10,378
 13,144
 (2,766) (21.0)
TASER Cam5,019
 2,675
 2,344
 87.6
* Not meaningful
Net sales were $200.4devices decreased $3.3 million and $158.9 million for the six months ended June 30, 2018 and 2017, respectively, an increase of $41.6 million or 26.2%. International revenues were $43.8 million and $27.9 million for the six months ended June 30, 2018 and 2017, respectively, an increase of $15.8 million or 56.7%.
Net sales for the TASER Weapons segment were $124.1 million and $110.7 million for the six months ended June 30, 2018 and 2017, respectively, an increase of $13.5 million or 12.2%. The Company increased sales of its TASER X26P and X2 Smart Weapons by $10.0 million to $76.9 million during the six months ended June 30, 2018 as compared to $66.9 million during the

same period in 2017, which was primarily attributable to increased sales under the Officer Safety Plan and TASER 60 payment programs.
Net sales for the Software and Sensors segment were $76.3 million and $48.2 million for the six months ended June 30, 2018 and 2017, respectively, an increase of $28.1 million, or 58.3%. The overall increase in the Software and Sensors segment was driven by continued adoption of on-officer cameras and related technologies, including the Company's Evidence.com digital evidence management software suite. The Company recorded net sales of $4.8 million related to Axon Fleet in the six months ended June 30, 2018, with no amounts recorded during the same period in 2017. Evidence.com revenues for the six months ended June 30, 2018 increased $16.1 million to $40.6 million as compared to the same period in 2017. This increase was primarily driven by the continued increasedecrease in active users onunit sales, partially offset by higher average selling prices for X2, X26P, and consumer devices. Trade-in credits for certain customers negatively impacted the Company's Evidence.com platform.

Cost of Product and Service Sales
Cost of product and service sales was $72.8 million and $64.6 millionaverage selling price for the six months ended June 30, 2018 and 2017, respectively, an increase of $8.3 million, or 12.8%. AsTASER 7 devices. Cartridge revenue increased primarily due to a percentage of net sales, cost of product and service sales decreased to 36.3% for the six months ended June 30, 2018 compared to 40.6% during the same period in 2017. The Company noted no significant changes in variable manufacturing costs during the six months ended June 30, 2018higher average selling price, as compared to the same period in 2017.
Within the TASER Weapons segment, cost of product saleswell as increased to $38.2 million for the six months ended June 30, 2018 from $34.1 million for the same period in 2017 as a result of higher sales volumes, and was consistent as a percentage of sales at 30.8%.units.
Within the Software and Sensors segment, cost of product and servicenet sales increased 1.9% as we continued to $34.6 millionadd users to our network, resulting in higher service revenues. Additionally, extended warranty revenue increased driven by the higher number of cameras and docks in the field. The increases were partially offset by a decline in hardware revenues. Unit sales for the six months ended June 30, 2018 from $30.5 million for the same periodAxon Body cameras slowed in 2017 as a result of higher sales volumes, and decreased as a percentage of sales to 45.4% for the six months ended June 30, 2018 from 63.2% for the same period in 2017.
Gross Margin
Gross margin increased $33.3 million to $127.6 million for the six months ended June 30, 2018 compared to $94.3 million for the same period in 2017. As a percentage of net sales, gross margin increased to 63.7% for the six months ended June 30, 2018 compared to 59.4% for the same period in 2017, which was primarily attributable to increased leveraging of fixed costs related to cloud storage.
As a percentage of net sales, gross margin for the TASER Weapons segment was 69.2% for eachadvance of the six months ended June 30, 2018 and 2017. As a percentagerelease of net sales, gross margin for the Software and Sensors segment was 54.6% and 36.8% for the six months ended June 30, 2018 and 2017, respectively. Within the Software and Sensors segment, hardware gross margin was 24.6% for the six months ended June 30, 2018 and 2.3% for the same period in 2017, while the service margins were 78.2% and 70.1% during those same periods, respectively. The increase in hardware gross margins during the six months ended June 30, 2018 was primarily attributable to accounting changes required under the new revenue accounting standard. Previously, the level of discountingAxon Body 3, which is anticipated in the Company's contracts resultedthird quarter of 2019.
Non-GAAP Measures

To supplement our financial results presented in a portionaccordance with GAAP, we present the non-GAAP financial measures of the contractual consideration allocatedEBITDA 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 delivered hardwarenon-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 be recognized as revenue ratably over the Evidence.com subscription term, while the full cost of the product was recognizedthese non-GAAP financial measures 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 six months ended June 30, 2018 as compared to the same period in 2017 was attributable to the reduction of non-recurring expenses related to the Company's data migration to its new cloud-storage provider that was completed in 2018,assessing our operating results, as well as increased leveraging of fixed costs related to cloud-storage.when forecasting and analyzing future periods. However, management recognizes that:

Sales, Generalthese non-GAAP financial measures are limited in their usefulness and Administrative Expensesshould be considered only as a supplement to our GAAP financial measures;
Sales, generalthese 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 administrative (“SG&A”) expenses
these non-GAAP financial measures were comprised as follows (dollarsnot prepared in thousands):accordance with GAAP and investors should not assume that the non-GAAP financial measures presented in this Quarterly Report on Form 10-Q were prepared under a comprehensive set of rules or principles.
 Six Months Ended June 30, Dollar
Change		 Percent
Change
 2018 
2017 (1)
  
Total sales, general and administrative expenses$75,102
 $62,681
 $12,421
 19.8
Sales, general, and administrative as a percentage of net sales37.5% 39.5%    
(1) Amounts relatedEBITDA and Adjusted EBITDA (CEO Performance Award) reconcile to commissions expense for the six months ended June 30, 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 Weapons segment, SG&A expense increased $8.5 million, or 24.4%, to $43.2 million during the six months ended June 30, 2018 as compared to $34.7 million for the six months ended June 30, 2017. Of the increase, $4.1 million related to higher salaries, benefits, bonus and stock-based compensation related primarily to sales and marketing, professional staff and general support staff, as well as increased professional and consulting of $3.0 million primarily related to increased legal fees.
Within the Software and Sensors segment, SG&A expense increased $3.9 million, or 14.1%, to $31.9 million during the six months ended June 30, 2018 as compared to $28.0 million for the six months ended June 30, 2017. The increase was primarily attributable to increased costs related to sales and marketing.
Research and Development Expenses
R&D expenses were comprisednet income as follows (dollars in thousands):
 Six Months Ended June 30, Dollar
Change		 Percent
Change
 2018 2017  
Total research and development expenses$33,620
 $25,452
 $8,168
 32.1
Research and development as a percentage of net sales16.8% 16.0%    
The Company's Software and Sensors segment was responsible for 64.4% of the overall increase in R&D expense. Within the TASER Weapons segment, R&D expense increased $2.9 million, $2.5 million related to increased salaries, benefits and bonus as the Company continues to invest in personnel allocated to the development of new CEW related technologies. Of the $5.3 million increase in R&D expense for the Software and Sensors segment, $6.7 million related to salaries and benefits, inclusive of stock-based compensation, which was partially offset by $1.5 million of lower expenses related to external professional and consulting fees. The Company expects R&D expense to continue to increase in absolute dollars as it invests in the deployment of new CEW technologies and focuses on growing the Software and Sensors segment as it adds headcount and additional resources to develop new products and services to further advance its scalable cloud-connected device platform. The Company believes 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 selling, general and administrative expenses and research and development costs, as we reach economies of scale.
Interest and Other Income
Interest and other income was $1.0 million for the six months ended June 30, 2018 compared to $1.9 million for the same period in 2017. During the six months ended June 30, 2018, interest and other income consisted primarily of interest income related to the Company's sales under hardware installment sale plans and investment and interest income totaling $1.3 million which was partially offset by losses on foreign currency transaction adjustments of $0.3 million. During the six months ended June 30, 2017, interest and other income was primarily comprised of $1.2 million of foreign currency transaction gains and investment and interest income of $0.8 million.

Provision for Income Taxes
The provision for income taxes was a benefit of $1.6 million for the six months ended June 30, 2018, which was an effective tax rate of (7.9)%. Our estimated full year effective income tax rate for 2018, before discrete period adjustments, was 22.8%, which is more than the federal statutory rate primarily due to state taxes and non-deductible expenses for items such as meals and entertainment, executive compensation limitation under IRC Section 162(m), lobbying fees, an income inclusion from GILTI, offset by a reduction for foreign-derived intangible income ("FDII"). This was partially offset by R&D tax credit deductions. The effective tax rate was favorably impacted by a $6.1 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for RSUs that vested or stock options that were exercised during the six months ended June 30, 2018. Of this amount $3.4 million related to stock options exercised by the Company's CEO in connection with the Company's follow-on offering.
Net Income
Our income increased by $14.6 million to $21.4 million for the six months ended June 30, 2018 compared to $6.9 million for the same period in 2017. Net income per basic and diluted share was $0.39 and $0.38 for the six months ended June 30, 2018, respectively, compared to $0.13 per basic and diluted share for the same period in 2017.
 Three Months Ended
 March 31, 2019 December 31, 2018 March 31, 2018
Net income$6,419
 $2,083
 $12,926
Depreciation and amortization2,800
 2,389
 2,411
Interest expense6
 33
 20
Investment interest income(2,003) (1,076) (75)
Provision for (benefit from) income taxes(1,435) 931
 1,920
EBITDA$5,787
 $4,360
 $17,202
      
Adjustments:     
Stock-based compensation expense7,905
 6,577
 4,093
Adjusted EBITDA (CEO Performance Award)$13,692
 $10,937
 $21,295
Liquidity and Capital Resources
Summary
As of June 30, 2018,March 31, 2019, we had $310.0$225.2 million of cash, cash equivalents and restricted cash, an increasea decrease of $231.5$125.8 million as compared to December 31, 2017.
Cash Flows
2018. The following table summarizes our cash flows from operating, investing and financing activities (in thousands):
 Six Months Ended June 30,
 2018 2017
Net cash provided by (used in) operating activities$16,106
 $(12,458)
Net cash provided by (used in) investing activities(7,226) 2,037
Net cash provided by (used in) financing activities223,197
 (1,331)
Effect of exchange rate changes on cash, cash equivalents and restricted cash(538) (857)
Net increase (decrease) in cash, cash equivalents and restricted cash$231,539
 $(12,609)
Operating activities
Net cash provided by operating activitiesdecrease in the first six monthsbalance of 2018 of $16.1 million reflects $21.4 million in net income impacted by the net increase of non-cash income statement items totaling $14.6 millioncash, cash equivalents and decrease of $19.9 million for the net change in operating assets and liabilities. Included in the non-cash items were $5.2 million in depreciation and amortization expense and $9.0 million in stock-based compensation expense. Increases to operatingrestricted cash flows consisted primarily of increased deferred revenue of $10.5 million and decreased inventory of $4.5 million. The increase in deferred revenue was primarily driven by increased Software and Sensors services invoiced in advance. Cash used in operations was also impacted by various other operating items, with the most significant component related to increased accounts and notes receivable and contract assets of $24.8 million primarily related to increased customer balances under the Company's Officer Safety Plan and TASER 60 purchase programs. Cash used in operations was also impacted by decreased accounts payable and accrued liabilities of $2.7 million and increased prepaid expenses and other assets of $7.4 million driven primarily by increased deferred commissions and higher prepaid software licenses, partially offset by decreased deferred cost of product sales and higher income tax receivables.
Net cash used in operating activities in the first six months of 2017 of $12.4 million consisted of $6.9 million in net income impacted by the net increase of non-cash income statement items totaling $10.1 million and decrease of $29.4 million for the net change in operating assets and liabilities. Included in the non-cash items were $3.4 million in depreciation and amortization expense, $7.4 million in stock-based compensation expense and $0.4 million of bond premium amortization. These non-cash impacts were partially offset by deferred income tax expense of $1.5 million. Increases to operating cash flows consisted of increased accounts payable, accrued and other liabilities of $7.5 million, which reduced the amount of cash used during the period,

along with increased deferred revenue of $14.8 million. The increase in deferred revenue was primarily driven by continued sales growth of products and services within the Company's Software and Sensors segment that are typically invoiced in advance, and recognized over the duration of the contract period as hardware and services are delivered. Of the increase in deferred revenue, $7.5 million resulted from increased hardware deferred revenue along with increased deferred warranty revenue of $2.5 million, and increased services, including Evidence.com subscriptions, of $4.9 million. Cash used in operations was also impacted by various other operating items, with the most significant component related to increased inventory of $25.8 million in anticipation of the Company's national field trial offer for body cameras as well as increased sales throughout the remainder of 2017. Additionally, the Company had increased long-term accounts receivable of $15.9 million partially related to the Company's Officer Safety Plan and TASER 60 purchase programs and increased prepaid expenses and other assets of $10.1 million which was primarily driven by a $3.2 million increase in customer receivables related to value added taxes passed on to customers which was attributable to higher TASER weapons sales in the U.K., $1.0 million of increased prepaid commissions which are paid for when a contract is booked, and subsequently amortized over the contractual period, and $0.8 million of increased prepaid wages and benefits that will be recognized over the employees' explicit service period. Cash from operations was also affected by increases in accounts and notes receivable of $4.5 million driven by higher sales.

Investing activities
We used $7.2 million in investing activities during the first six months of 2018. Maturities and calls of investments, net of purchases, were $2.7 million. We invested $4.9 million in the purchase of property and equipment and intangible assets in addition to our $5.0 million investment related to the acquisitioninvestments of VIEVU, LLC (Refer to Note 15 in the Notes to Unaudited Condensed Consolidated Financial Statements).
We generated $2.0 million from investing activities during the first six months of 2017. Maturities and calls of investments, net of purchases, were $14.4 million, which was partially offset by our investment of $5.9 million in the purchase of property and equipment and intangible assets and our $6.5 million investment related to the acquisition of Dextro, Inc.

Financing activities
Net cash generated by financing activities was $223.2 million during the first six months of 2018. In May 2018, we completed a public follow-on equity offering that generated net proceeds of $234.0 million which was partially offset by income and payroll taxes of $10.8 million paid by the Company on behalf of employees who net-settled stock awards during the period.
Net cash used in financing activities was $1.3 million during the first six months of 2017. During the first six months of 2017, the Company paid income and payroll taxes of $2.6 million on behalf of employees who net-settled stock awards during the period which was offset by proceeds from options exercised of $1.2$105.3 million.
Liquidity and Capital Resources
As of June 30, 2018,March 31, 2019, we had $307.5$223.6 million of cash and cash equivalents, of which $36.6$42.0 million was held in foreign locations. The majority of our cash and cash equivalents balance as of June 30, 2018 was comprised of the $234.0 million of net proceeds related to the follow-on offering we completed in May 2018. Our ongoing sources of cash are predominatelyinclude cash on hand, investments, and cash flows from our sales of products and services to our customers.operations. In addition, our $10.0$50.0 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. TheAdvances under the line is secured by substantially all of the assets of the Company, and bearscredit bear interest at varying rates, currently LIBOR plus 1.25% or Prime less 0.50%. 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.  
As of June 30, 2018,March 31, 2019, we had letters of credit outstanding of $2.7$3.1 million, leaving the net amount available for borrowing of $7.3$46.9 million. The facility matures on December 31, 2018.2021, 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 June 30, 2018March 31, 2019 and December 31, 2017,2018, there were no borrowings under the line.line other than the outstanding letters of credit.
Our agreement with the bank requires us to comply with a maximum funded debt to EBITDA ratio, as defined, of no greater than 2.002.50 to 1.00 based upon a trailing twelve-monthfour fiscal quarter period. At June 30, 2018, the Company’sMarch 31, 2019, our funded debt to EBITDA ratio was 0.0020.001 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 arrangementsarrangement 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 new

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.
We
Based on our strong balance sheet and the fact that we do not have long-term debt at March 31, 2019, we believe financing will be available, both through our existing credit line and possible additional financing. However, there is no assurance that such funding will be available on terms acceptable to us, or at all. We believe that our sources of funding will be sufficient to satisfy our currently anticipated cash requirements including capital expenditures, working capital requirements, potential acquisitions and other liquidity requirements through at least the next 12 months. The CompanyWe and itsour Board of Directors may consider repurchases of our common stock.stock from time to time. Further repurchases of our common stock would take place on the open market, would be financed with available cash and are subject to authorizationmarket and business conditions.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities (in thousands):
 Three Months Ended March 31,
 2019 2018
Net cash provided by (used in) operating activities$(13,970) $18,044
Net cash provided by (used in) investing activities(110,755) 1,268
Net cash used in financing activities(1,159) (3,421)
Effect of exchange rate changes on cash, cash equivalents and restricted cash67
 469
Net increase (decrease) in cash, cash equivalents and restricted cash$(125,817) $16,360

Operating activities
Net cash used in operating activities in the first three months of 2019 of $14.0 million reflects $6.4 million in net income, non-cash income statement items totaling $12.7 million, and cash outflows of $33.1 million for the net change in operating assets and liabilities. Included in the non-cash items were $2.8 million in depreciation and amortization expense and $7.9 million in stock-based compensation expense. Cash used in operations was impacted by increased accounts and notes receivable and contract assets of $22.0 million, decreased accounts payable, accrued liabilities and other liabilities of $7.3 million, increased inventory of $3.9 million, and increased prepaid expenses and other assets of $3.2 million. The increase in accounts and notes receivable and contract assets was attributable to increased sales over the last several quarters, primarily sales made under subscription plans, as well as marketslower customer collections. The decrease in accounts payable, accrued liabilities and business conditions.other liabilities was primarily attributable to the timing of payments for our annual bonus plan. Cash used in operations was also impacted by various other operating items, including increased deferred revenue of $3.2 million.

Net cash provided by operating activities in the first three months of 2018 of $18.0 million reflects $12.9 million in net income impacted by the net increase of non-cash income statement items totaling $8.2 million and a decrease of $3.1 million for the net change in operating assets and liabilities. Included in the non-cash items were $2.4 million in depreciation and amortization expense and $4.1 million in stock-based compensation expense, and deferred income tax expense of $1.5 million. Increases to operating cash flows consisted of increased accounts payable, accrued and other liabilities of $6.7 million, which reduced the amount of cash used during the period, along with increased deferred revenue of $6.6 million and decreased inventory of $2.4 million. The increase in deferred revenue was primarily driven by increased software and sensors services invoiced in advance. Cash used in operations was also impacted by various other operating items, with the most significant component related to increased accounts and notes receivable and contract assets of $17.1 million primarily related to increased customer balances under our Officer Safety Plan and TASER 60 purchase programs. Cash used in operations was also impacted by increased prepaid expenses and other assets of $1.7 million which was primarily related to increased deferred commissions balances of $9.3 million partially offset by lower deferred cost of products sold of $1.5 million. Both of these changes were driven by accounting changes related to the adoption of new guidance on revenue recognition.

Investing activities
We used $110.8 million in investing activities during the first three months of 2019, which was comprised of $105.3 million for the purchase of investments and $5.4 million for the purchase of property and equipment and intangible assets.

We generated $1.3 million from investing activities during the first three months of 2018. Maturities and calls of investments, net of purchases, were $2.4 million, which was partially offset by an investment of $1.1 million in the purchase of property and equipment and intangible assets.

Financing activities
Net cash used in financing activities was $1.2 million during the first three months of 2019. During the first three months of 2019, we paid income and payroll taxes of $1.3 million on behalf of employees who net-settled stock awards during the period, which was partially offset by proceeds from options exercised of $0.1 million.

Net cash used in financing activities was $3.4 million during the first three months of 2018. During the first three months of 2018, we paid income and payroll taxes of $3.8 million on behalf of employees who net-settled stock awards during the period, which was partially offset by proceeds from options exercised of $0.4 million.
Off-Balance Sheet Arrangements
The discussion of off-balance sheet arrangements in Note 1112 of the notes to the unauditedour condensed consolidated financial statements included in PART I, ITEM I ofwithin this Report on Form 10-Q 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 Quarterly Report on Form 10-Qfinancial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our unaudited condensed 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 financial condition and results of operations are discussed below.
Product Warranties
The Company warranties its CEWs, Axon cameras and certain related accessories from manufacturing defects on a limited basis for a period of one year after purchase and, thereafter, will replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold when revenue is recorded for the related product. Future warranty costs are estimated based on historical data related to warranty claims on a quarterly basis and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure or other issue that could result in larger than anticipated warranty claims from customers. The warranty reserve is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. As of June 30, 2018 and December 31, 2017, our reserve for warranty returns was $0.5 million and $0.6 million, respectively. Warranty expense for the six months ended June 30, 2018 was negligible, and there was a recovery of $0.1 million during the six months ended June 30, 2017. The Company experienced lower warranty claims than initially expected and, as such, adjusted the warranty reserve to better reflect actual warranty claims. As of June 30, 2018, the Company's reserve also included initial reserves related to Signal Sidearm.
Revenue related to separately-priced extended warranties is initially recorded as deferred revenue at its contractual amount and subsequently recognized as net sales ratably over the warranty service period. Costs related to extended warranties are charged to cost of product and service sales when incurred.
Inventory
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average cost of raw materials, which approximates the first-in, first-out (“FIFO”) method and includes allocations of manufacturing labor and overhead. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories, as well as trial and evaluation inventories to their net realizable value. These provisions are based on management’s best estimate after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions among other factors. Management evaluates inventory costs for abnormal costs due to excess production capacity and treats such costs as period costs.
During the six months ended June 30, 2018 and 2017, the Company recorded provisions for excess and obsolete inventory of $2.6 million and $1.0 million, respectively. During the six months ended June 30, 2018, the Company continued phasing out previous generations of its body-worn and in-car cameras, which made up a portion of the amounts recorded as provisions to excess and obsolete inventory. Included within the $2.6 million expense, the Company recorded $0.6 million related to purchase commitments assumed in the VIEVU business combination that exceeded estimated future demand. The remaining change for the six months ended June 30, 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. Refer to Note 4 in the Notes to Unaudited Condensed Consolidated Financial Statements.
Revenue Recognition, Contract Assets and Liabilities and Accounts and Notes Receivable
The Company derives 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) subscription to the Company's Evidence.com digital evidence management software as a service ("SaaS") (including secure cloud-based storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, the Company also recognizes revenue from training and professional services and revenue related to other software and SaaS services. Refer to Note 2 in the Notes to Unaudited Condensed Consolidated Financial Statements.
Many of the Company's products and services are sold on a standalone basis. The Company also bundles its hardware products and services together and sells them to its customers in single transactions, where the customer can make payments over a multi-year period. For the three and six months ended June 30, 2018 and 2017, the composition of revenue recognized from contracts containing multiple performance obligations and those not containing multiple performance obligations was as follows (dollars in thousands):
 Three Months Ended June 30, 2018 
Three Months Ended June 30, 2017 (1)
 TASER Weapons Software and Sensors Total TASER Weapons Software and Sensors Total
Contracts with Multiple Performance Obligations$15,007
 24.8% $36,943
 95.7% $51,950
 52.4% $9,784
 18.5% $25,063
 94.1% $34,847
 43.8%
Contracts without Multiple Performance Obligations45,617
 75.2
 1,659
 4.3
 47,276
 47.6
 43,232
 81.5
 1,564
 5.9
 44,796
 56.2
Total$60,624
 100.0% $38,602
 100.0% $99,226
 100.0% $53,016
 100.0% $26,627
 100.0% $79,643
 100.0%
 Six Months Ended June 30, 2018 
Six Months Ended June 30, 2017 (1)
 TASER Weapons Software and Sensors Total TASER Weapons Software and Sensors Total
Contracts with Multiple Performance Obligations$34,988
 28.2% $73,588
 96.5% $108,576
 54.2% $23,723
 21.4% $44,577
 92.5% $68,300
 43.0%
Contracts without Multiple Performance Obligations89,160
 71.8
 2,705
 3.5
 91,865
 45.8
 86,964
 78.6
 3,621
 7.5
 90,585
 57.0
Total$124,148
 100.0% $76,293
 100.0% $200,441
 100.0% $110,687
 100.0% $48,198
 100.0% $158,885
 100.0%
(1) Amounts for the three and six months ended June 30, 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.
Valuation of Goodwill, Intangibles and Long-lived Assets
The Company does not amortize goodwill and intangible assets with indefinite useful lives. Such assets are required to be tested for impairment at least annually, or whenever events or changes in circumstances indicate that the assets may be impaired. The Company performs its annual impairment assessment in the fourth quarter of each year. Finite-lived intangible assets and other long-lived assets are amortized over their estimated useful lives. Management evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and intangible assets may warrant revision or that the remaining balance of these assets, including intangible assets with indefinite lives, may not be recoverable.
Circumstances that might indicate long-lived assets might not be recoverable could include, but are not limited to, a change in the product mix, a change in the way products are created, produced or delivered, or a significant change in the way the Company's products are branded and marketed. When performing a review for recoverability, management estimates the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair value computed using discounted cash flows.

Income Taxes
We recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carry forwards.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Management must also assess whether uncertain tax positions as filed could result in the recognition of a liability for possible interest and penalties if any. The Company has claimed R&D tax credits of approximately$17.0 million for federal, Arizona and California income tax purposes related to tax years 2003 to 2018. Management determined that it was more likely than not that the full benefit of the R&D tax credit would not be sustained on examination and accordingly, has established a liability for unrecognized tax benefits of $3.8 million as of June 30, 2018. In addition, we established a $0.1 million liability related to uncertain tax positions for certain state income tax liabilities, for a total unrecognized tax benefit at June 30, 2018 of $3.9 million. Approximately $2.1 million of the unrecognized tax benefit associated with R&D credits has been netted against the R&D credit deferred tax asset. Our estimates are based on the 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 overseas, or changes in other facts or circumstances. In addition, we recognize liabilities for potential U.S. tax contingencies based on our estimate of whether, and the extent to which, additional taxes may be due. If we determine that payment of these amounts is unnecessary, or if the recorded tax liability is less than our current assessment, we may be required to recognize an income tax benefit, or additional income tax expense, respectively, in our consolidated financial statements.
In preparing our consolidated financial statements, management assesses the likelihood that our deferred tax assets will be realized from future taxable income. In evaluating our ability to recover our deferred income tax assets, management considers all available positive and negative evidence, including operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if we determine that it is more likely than not that some portion or all of the net deferred tax assets will not be realized.
Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of June 30, 2018, the Company would need to generate approximately $46.7 million of pre-tax book 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 $17.6 million of taxable temporary differences, which produce $4.3 million of deferred tax liabilities. The Company has $4.5 million of state net operating losses (“NOLs”) which expire at various dates between 2030 and 2036. The Company also has federal NOLs of $1.5 million which expire in 2035 through 2036, and are subject to limitation under IRC Section 382. The Company has $7.4 million of Arizona R&D credits carrying forward, which expire at various dates between 2018 and 2032, and $0.1 million of federal R&D credits carrying forward which expire in 2034 through 2037. In Australia, the U.K., Canada, and Germany, the Company has $2.6 million, $7.6 million, $1.7 million, and $0.4 million of NOLs, respectively, which expire at various dates or may be carried forward indefinitely.
We anticipate the Company’s future income to continue to trend upward from our 2017 results, with sufficient pre-tax book income to realize a large portion of our deferred tax assets. As such, we have not recorded a valuation allowance on our U.S. deferred tax assets as of June 30, 2018, with the exception of a reserve of $2.4 million that has been recorded due to specific income projections in years in which certain tax assets are set to expire. As of June 30, 2018, the Company has cumulative losses in Australia, the U.K. and Canada, and a history of losses Germany, 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 realizable, however, could be adjusted 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 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. The determination of the unrecognized deferred tax liability on those undistributed foreign 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. Refer to Note 8 in the Notes to Unaudited Condensed Consolidated Financial Statements.

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 consistsconsist of service-based RSUs.RSUs, performance-based RSUs, and performance-based options. RSUs are classified as equity and measured at the fair market value of the underlying stock at the grant date. The Company recognizesWe recognize RSU expense using the straight-line attribution method over the requisite service period. The CompanyWe also issuesissue performance-based RSUs, the vesting of which is contingent upon the achievement of certain performance criteria related to theour operating performance, of the Company, 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 acceleratedgraded 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, the Company accountswe account for forfeitures as they occur as a reduction to stock-based compensation expense and additional paid-in-capital.

For performance-based options,awards, 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 9 inof the Notesnotes to Unaudited Condensed Consolidated Financial Statements.our condensed consolidated financial statements within this Report on Form 10-Q.
We have granted a total of 8.512.9 million performance-based awards (options and restricted stock units) of which 6.812.0 million are outstanding as of June 30, 2018.March 31, 2019, the vesting of which is contingent upon the achievement of certain performance criteria including the successful development and market acceptance of future product introductions, our future sales targets, operating performance, and market capitalization. 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 condensed consolidated statements of operations and comprehensive income.
Contingencies and Accrued Litigation ExpenseLeases

We adopted Topic 842 as of January 1, 2019. Refer to Note 1 of the notes to our condensed consolidated financial statements within this Report on Form 10-Q for further discussion about the new standard and its impact on our condensed consolidated balance sheet.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are subjectrecognized at the lease commencement date based on the estimated present value of lease payments over the lease term. We use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. We give consideration to the possibilityour line 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,credit as well as publicly available data for instruments with similar characteristics when calculating our abilityincremental borrowing rates.

Our lease term includes options to reasonably estimateextend the amount of loss in determining loss contingencies. An estimated loss contingency is accruedlease when it is probablereasonably certain that an asset has been impairedwe will exercise that option. Leases with a term of 12 months or a liability has been incurred andless are not recorded on 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 11 of our consolidated financial statements for further discussion.
Except as noted below, as of June 30, 2018, there were no material changes outside of the ordinary course of business to the contractual obligations table, including the notes thereto, contained in our Form 10-K Report for the fiscal year ended December 31, 2017.
In connection with the Company's acquisition of VIEVU, we entered into a long-term Product Development and Supplier Agreement (the “Supply Agreement”) with Safariland, pursuant to which Safariland will be the Company’s preferred provider of holsters for its CEW products. The Supply Agreement provides for a minimum number of units to be purchased by the Company at pre-determined prices over a ten-year period. The total undiscountedbalance sheet. Our lease agreements do not contain any residual value of minimum purchases under the Supply Agreement is approximately $22.0 million.guarantees.
Item 3. 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, and 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. Based on investment positions as of June 30, 2018,March 31, 2019, a hypothetical 100 basis point increase in interest rates across all maturities would result in an insignificant incrementala $0.4 million decline in the fair market value of the portfolio. Such losses would only be realized if the Companywe sold the investments prior to maturity.
Additionally, we have access to a $10.0$50.0 million line of credit borrowing facility which bears interest at varying rates, currently at LIBOR plus 1.25% or Prime less 0.50%.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 $2.7$3.1 million at June 30, 2018.March 31, 2019. At June 30, 2018,March 31, 2019, there was no amount outstanding under the line of credit and the available borrowing under the line of credit was $7.3$46.9 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,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.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 the Companywe may have more sales and expenses denominated in foreign currencies in future years which could increase itsour 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, the Companywe may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing or future assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. The CompanyHowever, 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.
Item 4. Controls and Procedures
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) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. 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 Securities and Exchange Commission’sSEC’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 that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that because a material weakness exists in our internal control over financial reporting, as further described below, our disclosure controls and procedures were not effective as of June 30, 2018 at a level that provides reasonable assurance as of the last day of the period covered by this report.
During the fourth quarter of 2017, we identified a material weakness related to account reconciliations and monitoring over our U.K. subsidiary, Axon Public Safety U.K. Ltd. ("APS U.K."), which resulted from a breakdown in the operation of identified preventative and detective controls which led to the Company not initially recording some transactions correctly during 2016 and the interim periods in 2017.
To remediate the material weakness described above and related to APS U.K., we designed a specific plan to design new controls, and enhanced the design of existing controls and procedures. Specifically:

for the 2017 year-end close and first quarter 2018 close of our accounting records and during the second quarter of 2018, we sent accounting personnel from our headquarters in Arizona to the U.K. to perform additional review procedures of the account reconciliations for APS U.K., and our corporate accounting team performed additional reviews of APS U.K. activity;
we plan for our corporate accounting team to continue performing these additional review procedures on an ongoing basis; and
we added internal reporting procedures, including those designed to add depth to our detailed review processes of inventory, sales transactions and related accounting for deferred revenue and cost of goods sold and services delivered for APS U.K.; and
on June 1, 2018, we completed the migration of APS U.K. onto the same standard systems, processes and controls as our other locations, which subjects APS U.K. activity to those procedures by the same personnel that perform the accounting activities for our other locations.

The material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. As remediation testing has not yet been completed, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2018 at a level that provides reasonable assurance as of the last day of the period covered by this report.

March 31, 2019.
Change in Internal Control over Financial Reporting
Except as noted above, thereThere were no other changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2018,March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings
The discussion of legal proceedingsunder the headings Product Litigation, Other Litigation, and Federal Trade Commission Investigation in Note 1112 of the notes to the unauditedour condensed consolidated financial statements included in PART I, ITEM 1 of this Report on Form 10-Q is incorporated by reference herein.
Item 1A. Risk Factors
Our operations and financial results
There are subject to various risks and uncertainties, including those describedno other material changes from the risk factors previously disclosed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2017,2018, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock. There have been no material changesstock, except as noted below.

Higher costs or unavailability of materials could adversely affect our financial results.

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 riskpotential 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.

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 could injure our reputation.

A significant number of our raw materials or components are comprised of petroleum-based products or incur some form of landed cost associated with transporting the raw materials or components to our facility. Our freight and import costs and the timely delivery of our products could be adversely impacted by a number of factors sincewhich could reduce the profitability of our Annual Reportoperations, including: higher fuel costs; potential port closures; customs clearance issues; increased government regulation or changes for imports of foreign products into the U.S.; delays created by terrorist attacks or threats, public health issues, national disasters or work stoppages; and other matters. 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 Form 10-K forour revenues, profitability and financial condition. International or domestic geopolitical or other events, including the year ended December 31, 2017.imposition of new or increased tariffs and/or quotas by the U.S. government on any of these raw materials or components, could adversely impact the supply and cost of these raw materials or components, and could adversely impact the profitability of our operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information

None.

Item 6. Exhibits
10.1+10.1* 
CEO Performance Award (incorporated by referenceFirst Amendment to Annex A of the Company’s definitive proxy statement on Schedule 14A filed on April 13, 2018)Purchase and Sale Agreement between Axon Enterprise Holding Company and Apex Park at Pima, L.L.C.
10.2+10.2* 
Second Amendment to Purchase and Sale Agreement between Axon Enterprise Inc. 2018 Stock Incentive Plan (incorporated by reference to Annex B of the Company’s definitive proxy statement on Schedule 14A filed on April 13, 2018)Holding Company and Apex Park at Pima, L.L.C.
31.1* 
Principal Executive Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2* 
Principal Financial Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32** 
Principal Executive Officer and Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document

*    Filed herewith
**    Furnished herewith
+    Management contract or compensatory plan or arrangement


 



SIGNATURES
Pursuant to the requirements 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:August 9, 2018May 10, 2019   
  By: /s/ PATRICK W. SMITH
    Chief Executive Officer
    (Principal Executive Officer)
    
Date:August 9, 2018May 10, 2019By: /s/ JAWAD A. AHSAN
    Chief Financial Officer
    (Principal Financial and
    Accounting Officer)


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