We have historically utilized stock-based compensation, consisting of RSUs and stock options, for key employees and non-employee directors as a means of attracting and retaining quality personnel. Service-based grants generally have a vesting period of 3 to 5 years and a contractual maturity of ten years. Performance-based grants generally have vesting periods ranging from 1 to 10 years and a contractual maturity of ten years.

On February 12, 2019, our shareholders approved the 2019 Plan, which was adopted by the Board of Directors to reserve a sufficient number of shares to facilitate our eXponential Stock Performance Plan ("XSPP") and grants of eXponential Stock Units ("XSUs") under the plan. Under the 2019 Plan, we reserved for future grants: (i) 6.0 million shares of common stock, plus (ii) the number of shares of common stock that were authorized but unissued under our 2018 Stock Incentive Plan (the “2018 Plan”) and all prior Company equity plans as of the effective date of the 2019 Plan, and (iii) the number of shares of stock that have been granted under the prior plans that either terminate, expire or lapse for any reason after the effective date of the 2019 Plan. As of December 31, 2019, approximately 2.0 million shares remain available for future grants. Shares issued upon exercise of stock awards from these plans have historically been issued from our authorized unissued shares.

We have issued performance-based stock options and performance-based RSUs, the vesting of which is generally contingent upon the achievement of certain performance criteria related to our operating performance, as well as successful and timely development and market acceptance of future product introductions. In addition, certain of the performance RSUs have additional service requirements subsequent to the achievement of the performance criteria. Compensation expense is recognized over the requisite service period, which is defined as the longest explicit, implicit or derived service period based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date. For both service-based and performance-based RSUs, we account for forfeitures as they occur as a reduction to stock-based compensation expense and additional paid-in-capital

On May 24, 2018, our stockholders approved the CEO Performance Award of 6,365,856 stock option awards. The CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational goals (performance conditions) and market capitalization goals (market conditions), assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each vesting date. Each of the 12 vesting tranches of the CEO Performance Award have a 10-year contractual term and will vest upon certification by the Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of the following eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA have been met for the previous four consecutive fiscal quarters. Adjusted EBITDA for purposes of the CEO Performance Award ("Adjusted EBITDA (CEO Performance Award)") is defined as net income (loss) attributable to common stockholders before interest expense, investment interest income, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense.



Eight Separate Revenue Goals ⁽¹⁾ (in thousands)		Eight Separate Adjusted EBITDA (CEO Performance Award) Goals (in thousands)
Goal #1, $710,058		Goal #9, $125,000
Goal #2, $860,058		Goal #10, $155,000
Goal #3, $1,010,058		Goal #11, $175,000
Goal #4, $1,210,058		Goal #12, $190,000
Goal #5, $1,410,058		Goal #13, $200,000
Goal #6, $1,610,058		Goal #14, $210,000
Goal #7, $1,810,058		Goal #15, $220,000
Goal #8, $2,010,058		Goal #16, $230,000

Stock-based compensation expense associated with the CEO Performance Award is recognized over the longer of the expected achievement period for each pair of market capitalization and operational goals, beginning at the point in time when the relevant operational goal is considered probable of being met. The probability of meeting an operational goal and the expected achievement point in time for meeting a probable operational goal are based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis. Even though no tranches of the CEO Performance Award vest unless a market capitalization and a matching operational goal are both achieved, stock-based compensation expense is recognized when an operational goal is considered probable of achievement regardless of whether a market capitalization goal is actually achieved. Stock-based compensation represents a non-cash expense and is recorded in sales, general, and administrative operating expense on our consolidated statements of operations and comprehensive income.

The first two market capitalization goals have been achieved as of December 31, 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 December 31, 2019. As there are nine operational goals considered probable of achievement, we recorded stock-based compensation expense of $37.4 million related to the CEO Performance Award from the CEO Grant Date through December 31, 2019. The number of stock options that would vest related to the nine tranches is approximately 4.8 million shares.

As of December 31, 2019, we had $154.2 million of total unrecognized stock-based compensation expense related to the CEO Performance Award for the operational goals that were considered probable of achievement, which will be recognized over a weighted-average period of 6.0 years. As of December 31, 2019, we had unrecognized stock-based compensation expense of $54.4 million for the operational goals that were considered not probable of achievement.

On February 12, 2019, our shareholders approved the 2019 Plan, which was adopted by the Board of Directors to reserve a sufficient number of shares to facilitate our XSPP and grants of 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 following 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 subsequent 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. Additional employee awards were granted in February, September and November of 2019. A total of approximately 5.9 million XSUs were granted during the year ended December 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.

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 XSU 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, which is also 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

XSU awards vest unless a market capitalization and a matching operational goal are both achieved, stock-based compensation expense is recognized when an operational goal is considered probable of achievement regardless of whether a market capitalization goal is actually achieved.

The first two market capitalization goals have been achieved as of December 31, 2019. However, none of the XSU tranches have vested thus far as the operational goals have not yet been achieved as of December 31, 2019. As there are nine operational goals considered probable of achievement, we recorded stock-based compensation expense of $17.5 million related to the XSU awards from their respective grant dates through December 31, 2019. The number of XSU awards that would vest related to the nine tranches is approximately 4.2 million shares.

As of December 31, 2019, we had $139.8 million of total unrecognized stock-based compensation expense related to the XSU awards for the performance goals that were considered probable of achievement, which will be recognized over a weighted-average period of 5.9 years. As of December 31, 2019, we had unrecognized stock-based compensation expense of $35.9 million for the performance goals that were considered not probable of achievement.



	2019					2018				2017
	Number of Units			Weighted Average Grant-Date Fair Value		Number of Units		Weighted Average Grant-Date Fair Value		Number of Units		Weighted Average Grant-Date Fair Value
Units outstanding, beginning of year	1,655			$	28.34	2,348		$	23.47	1,330		$	20.40
Granted	6,759			37.21		381		46.06		1,731		24.59
Released	(650		)	25.75		(772	)	23.85		(519	)	18.85
Forfeited	(482		)	34.97		(302	)	24.73		(194	)	24.61
Units outstanding, end of year	7,282			36.36		1,655		28.34		2,348		23.47
Aggregate intrinsic value at year end	$	533,623

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $73.28 per share at December 31, 2019, multiplied by the number of RSUs. The fair value as of the respective vesting dates of RSUs that vested during the year was $39.4 million, $36.6 million, and $14.5 million for the years ended December 31, 2019, 2018, and 2017, respectively. Certain RSUs that vested in 2019 were net-share settled, such that we withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld during 2019 were 0.1 million and had a value of approximately $3.5 million on their respective vesting dates as determined by the closing stock price of our stock. Payments for the employees’ tax obligations are reflected as a financing activity within the statement of cash flows. These net-share settlements had the effect of share repurchases by us as they reduced the amount of shares that would have otherwise been issued as a result of the vesting.

In 2019, 2018 and 2017, we granted approximately 6.0 million, 0.1 million and 0.4 million performance-based RSUs, respectively (included in the table above). Of the 6.0 million performance-based RSUs granted in 2019, 5.9 million were XSUs. Certain of the performance-based RSUs outstanding as of December 31, 2019 can vest with a range of shares earned being between 0% and 200% of the targeted shares granted, depending on the final achievement of pre-determined performance criteria as of the vesting date. As of December 31, 2019, the performance criteria had been met for approximately 0.1 million of the 0.4 million performance-based RSUs outstanding, exclusive of XSUs outstanding. We recognized $24.1 million, $4.8 million and $2.5 million of compensation expense related to performance-based RSUs during the years ended December 31, 2019, 2018 and 2017, respectively, which included expense related to XSUs of $17.5 million during the year ended December 31, 2019.

As of December 31, 2019, we had $190.8 million of total unrecognized stock-based compensation expense for time-based RSUs and PSUs for which the performance goals were considered probable of achievement. We expect to recognize the cost related to the RSUs over a weighted average period of 4.9 years.



	2019				2018				2017
	Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
Options outstanding, beginning of year	6,458		$	28.24	804		$	4.99	1,008		$	5.40
Granted	—		—		6,366		28.58		—		—
Exercised	(27	)	4.27		(664	)	5.09		(198	)	6.99
Expired / terminated	—		—		(48	)	4.55		(6	)	8.32
Options outstanding, end of year	6,431		28.34		6,458		28.24		804		4.99
Options exercisable, end of year	65		4.52		92		4.45		775		5.00

We granted 6.4 million stock options in 2018 and none in 2019 or 2017. The total intrinsic value of options exercised was $1.2 million, $28.5 million and $3.2 million for the years ended December 31, 2019, 2018 and 2017, respectively. The intrinsic value for options exercised was calculated as the difference between the exercise price of the underlying stock option awards and the market price of our common stock on the date of exercise.



	Options Outstanding				Options Exercisable
Range of Exercise Price	Number of Options Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Number of Options Exercisable	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
$4.34 - $4.97	65	$	4.52	0.94	65	$	4.52	0.94

The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2019 was $4.5 million and $4.5 million, respectively. Aggregate intrinsic value represents the difference between the exercise price of the underlying stock option awards and the closing market price of our common stock of $73.28 on December 31, 2019.

At December 31, 2019, we had 6.4 million unvested options outstanding with a weighted average exercise price of $28.58 per share, weighted average grant-date fair value of $38.64 per share and weighted average remaining contractual life of 8.2 years. The aggregate intrinsic value of unvested options at December 31, 2019 was $284.6 million.



	2019		2018		2017
Cost of product and service sales	$	1,565	$	511	$	508
Sales, general and administrative expenses	59,342		12,710		9,047
Research and development expenses	17,588		8,658		6,055
Total stock-based compensation expense	$	78,495	$	21,879	$	15,610
Income tax benefit	$	11,457	$	4,049	$	5,791

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