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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.00001 Par Value

AXON

The Nasdaq Global Select Market

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes      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,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated Filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes       No  

The number of shares of the registrant’s common stock outstanding as of May 6, 2022 was 71,011,451.

AXON ENTERPRISE, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022

Page

Special Note Regarding Forward-Looking Statements

ii

PART I - FINANCIAL INFORMATION

1

Item 1. Financial Statements

1

Condensed Consolidated Balance Sheets as of March 31, 2022 (Unaudited) and December 31, 2021

1

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2022 and 2021

2

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021

3

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021

4

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3. Quantitative and Qualitative Disclosures About Market Risk

35

Item 4. Controls and Procedures

36

PART II - OTHER INFORMATION

36

Item 1. Legal Proceedings

36

Item 1A. Risk Factors

36

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 3. Defaults Upon Senior Securities

36

Item 4. Mine Safety Disclosures

36

Item 5. Other Information

36

Item 6. Exhibits

39

SIGNATURES

40

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; our projected revenue and capital expenditures for the full year 2022; expectations about the market for our current and future products and services; the impact of pending litigation; strategies and trends relating to subscription plan programs and revenues; our anticipation that contracts with governmental customers will be fulfilled; strategies and trends, including the benefits of, research and development investments; the sufficiency of our liquidity and financial resources; expectations about customer behavior; the impact on our investment portfolio of changes in interest rates; our potential use of foreign currency forward and option contracts; statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; 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, 2021. 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: the potential global impacts of the COVID-19 pandemic; our exposure to cancellations of government contracts due to appropriation clauses, exercise of a cancellation clause, or non-exercise of contractually optional periods; our ability to design, introduce and sell new products or features; our ability to defend against litigation and protect our intellectual property, and the resulting costs of this activity; our ability to manage our supply chain and avoid production delays, shortages, and impacts to expected gross margins; the impact of stock compensation expense, impairment expense, and income tax expense on our financial results; customer purchase behavior, including adoption of our software as a service delivery model; negative media publicity regarding our products; the impact of product mix on projected gross margins; defects in our products; changes in the costs of product components and labor; loss of customer data, a breach of security, or an extended outage, including by our third party cloud-based storage providers; exposure to international operational risks; delayed cash collections and possible credit losses due to our subscription model; changes in government regulations in the U.S. and in foreign markets, especially related to the classification of our products by the United States Bureau of Alcohol, Tobacco, Firearms and Explosives; 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 Securities and Exchange Commission ("SEC") on February 25, 2022 lists various important factors that could cause actual results to differ materially from expected and historical results. These factors are intended as cautionary statements for investors within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. Readers can find them under the heading “Risk Factors” in the Report on Form 10-K, and investors should refer to them. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

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

ii

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AXON ENTERPRISE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

    

March 31, 

December 31, 

2022

2021

(Unaudited)

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

386,367

$

356,332

Marketable securities

57,600

72,180

Short-term investments

 

20,024

 

14,510

Accounts and notes receivable, net of allowance of $2,424 and $2,203 as of March 31, 2022 and December 31, 2021, respectively

 

344,907

 

320,819

Contract assets, net

 

147,861

 

180,421

Inventory

 

122,150

 

108,688

Prepaid expenses and other current assets

 

67,208

 

56,540

Total current assets

 

1,146,117

 

1,109,490

Property and equipment, net

 

149,505

 

138,457

Deferred tax assets, net

 

108,840

 

127,193

Intangible assets, net

 

14,399

 

15,470

Goodwill

 

43,607

 

43,592

Long-term investments

 

17,731

 

31,232

Long-term notes receivable, net

 

10,184

 

11,256

Long-term contract assets, net

29,616

29,753

Strategic investments

154,452

83,520

Other long-term assets

 

98,003

 

98,247

Total assets

$

1,772,454

$

1,688,210

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

49,348

$

32,220

Accrued liabilities

 

69,435

 

103,707

Current portion of deferred revenue

 

326,627

 

265,591

Customer deposits

 

18,411

 

10,463

Other current liabilities

 

6,858

 

6,540

Total current liabilities

 

470,679

 

418,521

Deferred revenue, net of current portion

 

140,938

 

185,721

Liability for unrecognized tax benefits

 

5,162

 

3,797

Long-term deferred compensation

 

5,833

 

5,679

Deferred tax liability, net

348

811

Long-term lease liabilities

 

20,112

 

20,440

Other long-term liabilities

 

4,593

 

5,392

Total liabilities

 

647,665

 

640,361

Commitments and contingencies (Note 13)

 

  

 

  

Stockholders’ equity:

 

  

 

  

Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively

 

 

Common stock, $0.00001 par value; 200,000,000 shares authorized; 70,996,658 and 70,896,856 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively

 

1

 

1

Additional paid-in capital

 

1,118,859

 

1,095,229

Treasury stock at cost, 20,220,227 shares as of March 31, 2022 and December 31, 2021

 

(155,947)

 

(155,947)

Retained earnings

 

164,754

 

109,883

Accumulated other comprehensive income (loss)

 

(2,878)

 

(1,317)

Total stockholders’ equity

 

1,124,789

 

1,047,849

Total liabilities and stockholders’ equity

$

1,772,454

$

1,688,210

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

1

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

Three Months Ended March 31, 

    

2022

    

2021

Net sales from products

$

176,204

$

140,886

Net sales from services

 

80,222

 

54,133

Net sales

 

256,426

 

195,019

Cost of product sales

 

79,352

 

58,616

Cost of service sales

 

21,335

 

13,050

Cost of sales

 

100,687

 

71,666

Gross margin

 

155,739

 

123,353

Operating expenses:

 

  

 

  

Sales, general and administrative

 

90,129

 

126,597

Research and development

 

48,416

 

47,018

Total operating expenses

 

138,545

 

173,615

Income (loss) from operations

 

17,194

 

(50,262)

Interest and other income, net

 

55,299

 

585

Income (loss) before provision for income taxes

 

72,493

 

(49,677)

Provision for (benefit from) income taxes

 

17,622

 

(1,760)

Net income (loss)

$

54,871

$

(47,917)

Net income (loss) per common and common equivalent shares:

 

  

 

  

Basic

$

0.77

$

(0.75)

Diluted

$

0.76

$

(0.75)

Weighted average number of common and common equivalent shares outstanding:

 

  

 

  

Basic

 

70,950

 

64,036

Diluted

 

72,349

 

64,036

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Net income (loss)

$

54,871

$

(47,917)

Foreign currency translation adjustments

 

(1,072)

 

1

Unrealized gains (losses) on available-for-sale investments

(489)

Comprehensive income (loss)

$

53,310

$

(47,916)

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

2

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

    

    

    

    

    

    

    

Accumulated

    

Additional

Other

Total

Common Stock

Paid-in

Treasury Stock

Retained

Comprehensive

Stockholders’

Shares

Amount

Capital

Shares

Amount

Earnings

Loss

Equity

Balance, December 31, 2021

 

70,896,856

$

1

$

1,095,229

 

20,220,227

$

(155,947)

$

109,883

$

(1,317)

$

1,047,849

Issuance of common stock

(70)

(70)

Issuance of common stock under employee plans, net

 

99,802

(1,388)

(1,388)

Stock-based compensation

 

25,088

25,088

Net income

 

54,871

54,871

Other comprehensive loss, net

 

(1,561)

(1,561)

Balance, March 31, 2022

 

70,996,658

$

1

$

1,118,859

 

20,220,227

$

(155,947)

$

164,754

$

(2,878)

$

1,124,789

    

    

    

    

    

    

    

    

    

    

    

    

    

Accumulated

    

    

Additional

Other

Total

Common Stock

Paid-in

Treasury Stock

Retained

Comprehensive

Stockholders’

Shares

Amount

Capital

Shares

Amount

Earnings

Income

Equity

Balance, December 31, 2020

    

63,766,555

$

1

$

962,159

 

20,220,227

$

(155,947)

$

169,901

$

141

$

976,255

Issuance of common stock under employee plans, net

 

906,536

(7,045)

 

(7,045)

Stock-based compensation

 

89,610

 

89,610

Net loss

(47,917)

 

(47,917)

Other comprehensive income, net

 

1

1

Balance, March 31, 2021

 

64,673,091

$

1

$

1,044,724

 

20,220,227

$

(155,947)

$

121,984

$

142

$

1,010,904

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

3

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Three Months Ended March 31, 

    

2022

    

2021

Cash flows from operating activities:

 

  

 

  

Net income (loss)

$

54,871

$

(47,917)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

  

 

  

Depreciation and amortization

 

5,755

 

4,291

Loss on disposal and abandonment of intangible assets

 

40

 

11

Loss on disposal and impairment of property and equipment, net

 

106

 

45

Net unrealized gain on strategic investments and marketable securities

(55,851)

Stock-based compensation

 

25,088

 

89,610

Deferred income taxes

 

18,029

 

(598)

Unrecognized tax benefits

 

1,365

 

194

Bond amortization

159

 

1,504

Noncash lease expense

 

1,556

 

1,111

Provision for expected credit losses

228

(335)

Change in assets and liabilities:

 

 

Accounts and notes receivable and contract assets

 

7,495

 

31,298

Inventory

 

(14,260)

 

520

Prepaid expenses and other assets

 

(7,074)

 

(6,952)

Accounts payable, accrued and other liabilities

 

(9,580)

 

(18,062)

Deferred revenue

 

16,037

 

6,219

Net cash provided by operating activities

 

43,964

 

60,939

Cash flows from investing activities:

 

  

 

  

Purchases of investments

 

 

(155,825)

Proceeds from call / maturity of investments

 

7,200

 

132,254

Purchases of property and equipment

 

(17,098)

 

(10,521)

Proceeds from disposal of property and equipment

87

10

Purchases of intangible assets

 

(37)

 

(41)

Strategic investments

 

(500)

 

(20,000)

Net cash used in investing activities

 

(10,348)

 

(54,123)

Cash flows from financing activities:

 

  

 

  

Net proceeds from equity offering

(71)

 

Income and payroll tax payments for net-settled stock awards

 

(1,388)

 

(7,045)

Net cash used in financing activities

 

(1,459)

 

(7,045)

Effect of exchange rate changes on cash and cash equivalents

 

(157)

 

(392)

Net increase (decrease) in cash and cash equivalents

 

32,000

 

(621)

Cash and cash equivalents and restricted cash, beginning of period

 

356,438

 

155,551

Cash and cash equivalents and restricted cash, end of period

$

388,438

$

154,930

Supplemental disclosures:

 

  

 

  

Cash and cash equivalents

$

386,367

$

154,822

Restricted cash (Note 1)

 

2,071

 

108

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

$

388,438

$

154,930

Cash paid for income taxes, net of refunds

$

334

$

4,152

Non-cash transactions

 

  

 

  

Property and equipment purchases in accounts payable and accrued liabilities

$

888

$

517

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

4

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Organization and Summary of Significant Accounting Policies

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

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

The accompanying unaudited condensed consolidated financial statements include the accounts of Axon Enterprise, Inc. and our 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 SEC. Certain information related to our 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 our annual consolidated financial statements for the year ended December 31, 2021, as filed on Form 10-K, with the exception of our adoption of 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 our 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 our Form 10-K for the year ended December 31, 2021. The results of operations for the three months ended March 31, 2022 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,
reserve for expected credit loss,
valuation of goodwill, intangible and long-lived assets,
valuation of strategic investments,
recognition, measurement and valuation of current and deferred income taxes,
stock-based compensation, and
recognition and measurement of contingencies and accrued litigation expense.

Actual results could differ materially from those estimates.

Segment Information

Our operations are comprised of two reportable segments: the manufacture and sale of conducted electrical devices ("CEDs"), batteries, accessories, extended warranties and other products and services (the “TASER” segment); and the development, manufacture, and sale of software and sensors, which includes the sale of devices, wearables, applications, cloud and mobile products, and services (collectively, the “Software and Sensors” segment). In both segments, we report sales of products and services. Service revenue in both segments includes sales related to Axon

5

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Evidence. In the Software and Sensors segment, service revenue also includes other recurring cloud-hosted software revenue and related professional services. Collectively, this revenue is sometimes referred to as "Axon Cloud revenue."  

Reportable segments are determined based on discrete financial information reviewed by our Chief Executive Officer who is our chief operating decision maker ("CODM"). We organize and review operations based on products and services, and currently there are no operating segments that are aggregated. We perform an analysis of our reportable segments at least annually. Additional information related to our business segments is summarized in Note 16.

Geographic Information and Major Customers / Suppliers

For the three months ended March 31, 2022, 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 our customers. For the three months ended March 31, 2022, no customer represented more than 10% of total net sales. At March 31, 2022 and December 31, 2021, no customer represented more than 10% of the aggregate balance of accounts and notes receivable and contract assets.

We currently purchase both off the shelf and custom components, including, but not limited to, finished circuit boards, injection-molded plastic components, small machined parts, custom cartridge components, electronic components, and off the shelf sub-assemblies from suppliers located in the U.S., Canada, China, Republic of Korea, Malaysia, Mexico, Taiwan, and Vietnam. We may source from other countries as well. Although we currently obtain many of these components from single source suppliers, we own the injection molded component tooling, most of the designs, and the test fixtures used in their production for all custom components. As a result, we believe we could obtain alternative suppliers in most cases. Although we have experienced supply chain disruptions relating to materials and port constraints, we have remained focused on closely managing our supply chain. We continue to bolster our strategic relationships in our supply chain, identifying secondary/alternate sourcing, adjusting build plans accordingly, and building in logistic modes in support of our increasing demand while working to minimize disruption to customers. We acquire most of our components on a purchase order basis and do not currently have significant long-term purchase contracts with most component suppliers.

Income per Common Share

Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. Diluted income per share reflects the potential dilution from outstanding stock options and unvested restricted stock units. The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):

Three Months Ended March 31, 

    

2022

    

2021

Numerator for basic and diluted earnings per share:

 

  

 

  

Net income (loss)

$

54,871

$

(47,917)

Denominator:

 

  

 

  

Weighted average shares outstanding

 

70,950

 

64,036

Dilutive effect of stock-based awards

 

1,399

 

Diluted weighted average shares outstanding

 

72,349

 

64,036

Anti-dilutive stock-based awards excluded

 

2,942

 

12,234

Net income (loss) per common share:

 

 

Basic

$

0.77

$

(0.75)

Diluted

$

0.76

$

(0.75)

6

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Standard Warranties

We warranty our CEDs, 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 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.

Changes in our estimated product warranty liabilities were as follows (in thousands):

Three Months Ended March 31, 

    

2022

2021

Balance, beginning of period

$

2,822

$

769

Utilization of reserve

 

(1,434)

 

(231)

Warranty expense

 

116

 

406

Balance, end of period

$

1,504

$

944

Fair Value Measurements and Financial Instruments

We use the fair value framework that prioritizes the inputs to valuation techniques for measuring financial assets and liabilities measured on a recurring basis and for non-financial assets and liabilities when these items are re-measured. Fair value is considered to be the exchange price in an orderly transaction between market participants, to sell an asset or transfer a liability at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

 

Level 1 – Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.
Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.
Level 3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect our own assumptions about inputs that market participants would use in pricing an asset or liability.

We have cash equivalents and investments, which at March 31, 2022 and December 31, 2021 were comprised of money market funds, corporate bonds, municipal bonds, and U.S. Government agency bonds. See additional disclosure regarding the fair value of our cash equivalents and investments in Note 3. Included in the balance of other assets as of March 31, 2022 and December 31, 2021 was $4.9 million and $5.3 million, respectively, related to corporate-owned life insurance policies which are used to fund our deferred compensation plan. We determine the fair value of insurance contracts by obtaining the cash surrender value of the contracts from the issuer, a Level 2 valuation technique.

7

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

We have an investment in marketable securities, for which changes in fair value are recorded in the condensed consolidated statement of operations as unrealized gain or (loss) on marketable securities, which is included in interest and other income, net.

We have strategic investments in four unconsolidated affiliates as of March 31, 2022. The estimated fair value of the investments was determined based on Level 3 inputs. As of March 31, 2022, management estimated that the fair value of the investments equaled the carrying value.

Our financial instruments also include accounts and notes receivable, accounts payable and accrued liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the condensed consolidated balance sheet.

Restricted Cash

Restricted cash balances as of March 31, 2022 were $2.1 million primarily related to funds held in an international bank account securing a guarantee and funds held in an international bank account for a country in which we are required to maintain a minimum balance to operate. Approximately $2.0 million was included in prepaid expenses and other current assets on our condensed consolidated balance sheet, with the remainder included in other assets. Restricted cash balances as of December 31, 2021 included $0.1 million primarily related to funds held in an international bank account for a country in which we are required to maintain a minimum balance to operate. Approximately half of the balance was included in prepaid expenses and other current assets on our condensed consolidated balance sheet, with the remainder included in other assets.

Valuation of Goodwill, Intangibles and Long-lived Assets

We 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 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 products are branded and marketed. In performing the review for recoverability, we 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.

We do not amortize goodwill and intangible assets with indefinite useful lives; rather such assets are required to be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that the assets may be impaired. We perform our annual goodwill and intangible asset impairment tests in the fourth quarter of each year.

Recently Issued Accounting Guidance

Recently Adopted Accounting Pronouncements

In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-10, Government Assistance (Topic 832). The guidance improves the transparency of government assistance accounting as it requires business entities to disclose transactions that involve government assistance received if the transactions were accounted for by applying a grant or contribution accounting model by analogy. The ASU is effective for annual periods beginning after December 15, 2021. We adopted ASU 2021-10 on January 1, 2022 and will apply the disclosure requirement prospectively to all transactions within the scope of the amendments that are reflected in the financial statements at the date of the initial application along with new transactions that are entered into after the date of initial application. Adoption of this ASU did not have a material impact on our consolidated financial statements.

8

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications are not material and had no effect on the reported results of operations.

Note 2 - Revenues

Nature of Products and Services

The following tables present our revenues by primary product and service offering (in thousands):

Three Months Ended March 31, 2022

Three Months Ended March 31, 2021

    

    

Software and

    

    

    

Software and

    

TASER

Sensors

Total

TASER

Sensors

Total

TASER 7

$

50,066

$

$

50,066

$

33,991

$

$

33,991

TASER X26P

 

9,479

 

 

9,479

 

9,963

 

 

9,963

TASER X2

 

3,619

 

 

3,619

 

12,778

 

 

12,778

TASER Consumer devices

 

1,696

 

 

1,696

 

2,205

 

 

2,205

Cartridges

 

37,825

 

 

37,825

 

30,418

 

 

30,418

Axon Body

 

 

29,708

 

29,708

 

 

19,756

 

19,756

Axon Flex

 

 

1,329

 

1,329

 

 

905

 

905

Axon Fleet

 

 

13,820

 

13,820

 

 

3,763

 

3,763

Axon Dock

 

 

7,480

 

7,480

 

 

6,920

 

6,920

Axon Evidence and cloud services

 

3,017

 

79,939

 

82,956

 

1,396

 

52,294

 

53,690

Extended warranties

 

6,679

 

9,061

 

15,740

 

5,646

 

7,500

 

13,146

Other

 

1,979

 

729

 

2,708

 

2,602

 

4,882

 

7,484

Total

$

114,360

$

142,066

$

256,426

$

98,999

$

96,020

$

195,019

The following table presents our revenues disaggregated by geography (in thousands):

Three Months Ended March 31, 

2022

2021

United States

    

$

214,214

    

84

%  

$

160,386

    

82

%  

Other countries

 

42,212

 

16

 

34,633

 

18

Total

$

256,426

 

100

%  

$

195,019

 

100

%  

Contract Balances

The following table presents our contract assets, contract liabilities and certain information related to these balances as of and for the three months ended March 31, 2022 (in thousands):

    

March 31, 2022

Contract assets, net

$

177,477

Contract liabilities (deferred revenue)

 

467,565

Revenue recognized in the period from:

 

  

Amounts included in contract liabilities at the beginning of the period

 

104,043

9

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Contract liabilities (deferred revenue) consisted of the following (in thousands):

March 31, 2022

December 31, 2021

    

Current

    

Long-Term

    

Total

    

Current

    

Long-Term

    

Total

Warranty:

 

  

 

  

 

  

 

  

 

  

 

  

TASER

$

27,476

$

1,401

$

28,877

$

21,257

$

4,766

$

26,023

Software and Sensors

 

21,736

 

15,621

 

37,357

 

23,175

 

18,137

 

41,312

 

49,212

 

17,022

 

66,234

 

44,432

 

22,903

 

67,335

Hardware:

 

  

 

  

 

  

 

  

 

  

 

  

TASER

 

38,828

 

3,618

 

42,446

 

12,944

 

28,727

 

41,671

Software and Sensors

 

50,151

 

71,408

 

121,559

 

34,862

 

81,223

 

116,085

 

88,979

 

75,026

 

164,005

 

47,806

 

109,950

 

157,756

Services:

 

  

 

  

 

  

 

  

 

  

 

  

TASER

 

4,309

 

2,066

 

6,375

 

2,701

 

3,482

 

6,183

Software and Sensors

 

184,127

 

46,824

 

230,951

 

170,652

 

49,386

 

220,038

188,436

48,890

237,326

173,353

52,868

226,221

Total

$

326,627

$

140,938

$

467,565

$

265,591

$

185,721

$

451,312

March 31, 2022

December 31, 2021

    

Current

    

Long-Term

    

Total

    

Current

    

Long-Term

    

Total

TASER

$

70,613

$

7,085

$

77,698

$

36,902

$

36,975

$

73,877

Software and Sensors

 

256,014

 

133,853

 

389,867

 

228,689

 

148,746

 

377,435

Total

$

326,627

$

140,938

$

467,565

$

265,591

$

185,721

$

451,312

Remaining Performance Obligations

As of March 31, 2022, we had approximately $2.97 billion 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 March 31, 2022. We expect to recognize between 15% - 20% of this balance over the next twelve months, and generally expect 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.

10

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 3 - Cash, Cash Equivalents and Investments

The following tables summarize our cash, cash equivalents, marketable securities, and available-for-sale investments at March 31, 2022 and December 31, 2021 (in thousands):

As of March 31, 2022

    

  

Gross

  

Gross

  

  

 

Cash and

  

  

  

Amortized

Unrealized

Unrealized

 

Cash

Marketable

Short-Term

Long-Term

Cost

Gains

Losses

Fair Value

 

Equivalents

Securities

Investments

Investments

Cash

$

376,031

$

$

$

376,031

$

376,031

$

$

$

Level 1:

 

  

 

  

 

  

 

  

 

  

 

  

 

Money market funds

 

10,336

 

 

10,336

 

10,336

 

 

Agency bonds

 

4,700

1

 

 

4,701

 

 

 

4,701

Marketable securities

90,000

(32,400)

57,600

 

 

57,600

 

Subtotal

 

105,036

1

 

(32,400)

 

72,637

10,336

57,600

4,701

Level 2:

State and municipal obligations

2,550

(30)

2,520

1,759

761

Corporate bonds

31,409

(875)

30,534

13,564

16,970

Subtotal

33,959

(905)

33,054

15,323

17,731

Total

$

515,026

$

1

$

(33,305)

$

481,722

$

386,367

$

57,600

$

20,024

$

17,731

During the year ended December 31, 2021, we acquired 9,000,000 shares of common stock of Cellebrite DI Ltd (“CLBT”) with a fair value of $90.0 million. The CLBT common stock is recorded as marketable securities in the accompanying condensed consolidated balance sheets and its fair value is adjusted every reporting period. Changes in fair value are recorded in the condensed consolidated statement of operations as unrealized gain or (loss) on marketable securities, which is included in interest and other income, net. During the three months ended March 31, 2022, we recorded a $14.6 million unrealized loss on marketable securities relating to CLBT.

As of December 31, 2021

  

  

Gross

  

Gross

  

  

 

Cash and

  

  

  

Amortized

Unrealized

Unrealized

 

Cash

Marketable

Short-Term

Long-Term

Cost

Gains

Losses

Fair Value

 

Equivalents

Securities

Investments

Investments

Cash

$

353,488

$

$

$

353,488

$

353,488

$

$

$

Level 1:

 

  

 

  

 

  

 

  

 

  

 

  

 

Money market funds

 

2,844

 

 

2,844

 

2,844

 

 

Agency bonds

 

10,700

4

 

 

10,704

 

 

 

10,704

Marketable securities

90,000

(17,820)

72,180

 

 

72,180

 

Subtotal

 

103,544

4

 

(17,820)

 

85,728

2,844

72,180

10,704

Level 2:

State and municipal obligations

2,570

(5)

2,565

1,400

1,165

Corporate bonds

32,748

1

(276)

32,473

2,406

30,067

Subtotal

35,318

1

(281)

35,038

3,806

31,232

Total

$

492,350

$

5

$

(18,101)

$

474,254

$

356,332

$

72,180

$

14,510

$

31,232

11

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 4 - Expected Credit Losses

We are exposed to credit losses primarily through sales of products and services. Our expected loss allowance methodology for accounts receivable, notes receivable, and contract assets is developed using historical collection experience, published or estimated credit default rates for entities that represent our customer base, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Our monitoring activities include account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible.

We review receivables for U.S. and international customers separately to better reflect different published credit default rates and economic and market conditions.

The following table provides a roll-forward of the allowance for expected credit losses that is deducted from the amortized cost basis of accounts receivable, notes receivable, and contract assets to present the net amount expected to be collected (in thousands):