UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20172019
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 001-16391
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Axon Enterprise, Inc. |
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| Delaware | | 86-0741227 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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17800 North 85th85th Street Scottsdale, Arizona
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| Scottsdale | , | Arizona | | | |
| (Address of principal executive offices) | | | (Zip Code) |
Registrant’s telephone number, including area code:
(480) (480) 991-0797
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Trading Symbol(s) | Name of exchange on which registered |
| Common Stock, $0.00001 par value per share | AAXN | The NasdaqNASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨☒ No ý☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐ No ý☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | | ý☒ | | Accelerated filer | | ¨☐ |
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| Non-accelerated filer | | ¨ (Do not check if a smaller reporting company)☐
| | Smaller reporting company | | ¨☐ |
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| | | | | Emerging growth company | | ¨☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨☐ No ý☒
TheAs of June 30, 2019, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $3.737 billion based on the last salesclosing sale price of the issuer’s common stock on June 30, 2017, which was the last business day of the registrant’s most recently completed second fiscal quarter, as reported byon the NASDAQ was approximately $1,303,000,000. Solely for purposes of this disclosure, shares of common stock held by executive officers and directors of the registrant as of such date have been excluded because such persons may be deemed to be affiliates. This determination of executive officers and directors as affiliates is not necessarily a conclusive determination for any other purposes.Global Select Market.
The number of shares of the registrant’s common stock outstanding as of February 15, 201818, 2020 was 53,034,29959,528,200.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the registrant’s definitive proxy statement for its 20182020 annual meeting of stockholders to be prepared and filed with the Securities and Exchange Commission not later than 120 days after December 31, 20172019 are incorporated by reference into Part III of this Form 10-K.
AXON ENTERPRISE, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 20172019
PART I
Statements contained in this report that are not historical are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions and strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements give our current expectations or forecasts of future events; they do not relate strictly to among other things:
our intentions about future development effortshistorical or current facts. Words such as “may,” “will,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and activities, including our intentions to invest in research and developmentsimilar expressions, as well as the developmentstatements 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 new productfuture results is subject to risks, uncertainties and service lines and enhanced features for our existing product and service lines;
our need that customers upgrade and replace existing conducted electrical weapons (“CEW”) units and the willingness of customerspotentially inaccurate assumptions. The following important factors could cause actual results to do so;
that we may have more sales denominated in foreign currencies in 2018;
our intention to increase our investmentdiffer materially from those 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;
the benefits of our CEW products compared to other lethal and less-lethal alternatives;
the benefits of our Software and Sensors products compared to our competitors';
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;
our insulation from competition and our competitive advantage in the weapons business;
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: our decision not to pay dividends, 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;
forward-looking statements: our ability to maintain securedesign, introduce and consistent customer data accesssell new products or features; our ability to defend against litigation and storage, includingprotect our intellectual property, and the useresulting costs of third-party data storage providers,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; our exposure to cancellations of government contracts due to appropriation clauses, exercise of a cancellation clause, or non-exercise of contractually optional periods; 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;
outage, including our reliance on 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 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 the qualified professional services necessarykey personnel; and counter-party risks relating to implementcash 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 maintain our business, both through employment and through other partnership arrangements;
the effect of current and future tax strategies;
the fluctuationsthose anticipated, estimated or projected. You should bear this in our effective tax rate;
the impact 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 2014-09, Revenue from Contracts with Customers (“ASU 2014-09” or “Topic 606”);
that the complaint filed by Digital Ally is frivolous; and
the ultimate resolution of financial statement items requiring critical accounting estimates.
These statements are qualified bymind as you consider forward-looking statements. This report lists various important factors that could cause our actual results to differ materially from those reflected by the forward-looking statements. Such factors include, but are not limited to, those factors detailed in Part I Item 1A of this Annual Report on Form 10-K entitled “Risk Factors.” The forward-looking statements included in the foregoing list are not exhaustive. Other sections of this report may include additional such statements and factors that could adversely impact our expectations and affect our business and financial performance. New risk factors emerge from time to time, and it is not possible for management to predict all such factors, nor can it assess the impact of all such risk factors or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those containedexpected and historical results. These factors are intended as cautionary statements for investors within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. Readers can find them under the heading “Risk Factors” in this Annual Report on Form 10-K, and investors should refer to them. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any forward-looking statements. Wesuch list to be a complete set of all potential risks or uncertainties.
Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, to reflect changed assumptions, the occurrencewhether as a result of unanticipatednew information, future events or changesotherwise. You are advised, however, to expectations over time.
Axon,consult any further disclosures we make on related subjects in our Form 10-Q, 8-K and 10-K reports to the “Axon Delta” logo, Axon network, Axon Body 2, Axon Fleet, Axon Flex 2, Axon Citizen, Axon Signal, Evidence.com, Smart Weapons,Securities and TASER are trademarks of Axon Enterprise, Inc., some of which are registered inExchange Commission ("SEC"). Our filings with the U.S. and other countries. For more information, visit www.axon.com/legal. All rights reserved. The information on our website, including information about our trademarks, is not incorporated by reference into or otherwise a part of this report.SEC may be accessed at the SEC’s web site at www.sec.gov.
Item 1. Business
Company Background and Business Strategy
Axon Enterprise, Inc.’s (the “Company” may be referred to as “the Company,” “Axon,” “we,” or “Axon”“our.” We were incorporated in Arizona in September 1993 as ICER Corporation. We changed our name to AIR TASER, Inc. in December 1993 and to TASER International, Incorporated in April 1998. In January 2001, we reincorporated in Delaware as TASER International, Inc., and in April 2017, changed our name to Axon Enterprise, Inc.
Our headquarters in Scottsdale, Arizona houses our executive management, sales, marketing, certain engineering, manufacturing, finance and other administrative support functions. Our global software hub is located in Seattle, Washington, and we also have subsidiaries and / or “we” or “our”) coreoffices located in Australia, Canada, Finland, Hong Kong, Germany, India, Italy, the Netherlands, the United Kingdom, and Vietnam.
Overview
Axon’s mission is to protect lifelife. We fulfill this mission through innovative technologiesdeveloping hardware and software products that make communities safer. We areadvance our long term vision of a) obsoleting the market leaderbullet, b) reducing social conflict, and c) enabling a fair and effective justice system. Our products solve some of society's most challenging problems and our mission attracts top talent.
An axon is a nerve fiber that serves as the primary communication link in a nervous system — similarly, we see ourselves as building the development, manufacture and salenervous system for public safety. Our growth strategy includes heavy R&D investment to support continuous innovation on behalf of CEWs designed for use by law enforcement customers. In addition, we are expanding our sales force to support sales into law-enforcement-adjacent markets, to include the U.S. federal government and military, U.S. and international departments of corrections military forces, private security personnel(prisons), and by private individuals for personal defense. We are also the market leader in developing, manufacturingfire and selling connected wearable on-officer cameras as well as developing and selling cloud-based digital evidence management software. We have established a robust network that connects devices, apps and people primarily in the law enforcement vertical market. We aimemergency medical services markets.
In these markets, we seek to have every public safety officer in the world carry a TASER, deploy an Axon camera and be connected to the Axon network.
The three foundations for our growth strategy are:
Devices - Our TASER CEWs are oneincreasingly drive adoption of the few weapons that can incapacitate a person while drastically limiting the risk for death and/or serious injury. Over the past two decades, the TASER CEW has become one of the most frequently used weapons in the North American law enforcement market, with use-of-force injuries and deaths dropping dramatically as a result. Outside of weapons, we produce devices that primarily fall within three categories: on-officer cameras that capture critical digital evidence aimed at protecting truth, a range of related accessory hardware devices and an in-car camera variant called Axon Fleet. We refer to these cameras, related accessories and devices collectively as "Axon" products. We believe our CEWs and Axon cameras should be standard-issue equipment for all patrol officers domestically and internationally. We have created and are continuing to create service plans andintegrated product bundles to allow agencies to havethat generate recurring revenue and cash flow. The Axon Network is a mutually reinforcing suite — the latest devices and technology at predictable annual costs.
Apps - Axon's Evidence.com platform is designed to help agencies securely store, manage and share all digital evidence. Our software platform features continuous improvement with regular software updates that enable our customers to always have access tomore subscribers we attract, the latest technology. Recent new features include secure sharing, audit trails, integration of other data sources, and transcription and redaction services. These feature sets are designed to provide our customers with valuable tools to police more efficiently and effectively while enabling greater transparency with the communities they serve. An increasing number police agencies trust Axon to host their video evidence data, which is captured via our devices, apps and software, and stored in our secure cloud and accessed via the Axon network.
People - Our TASER weapons and Axon software and sensors platforms have allowed us to build relationships with more than 20,000 public safety agencies worldwide. Axon's goal is to bring modern information technology capabilities to every law enforcement officer. Some of our customers report that police officers are spending over 60% of their time on paperwork-related tasks, rather than on value-added public safety work. We see a large opportunity to leverage our connected platform to enable a broad suite of mobile, wearable, and data management capabilities. Axon is also improving workflows throughout the public safety chain, from the incident on the scene to the court room. With our software, police officers can share evidence with prosecutors during discovery while maintaining a secure and encrypted chain of custody. Axon's cohesive ecosystem is delivering increased value to all public safety stakeholders, including state and municipal police agencies, police chiefs and other leadership, patrol officers, state patrols and officers, agency detectives, public prosecutors, district attorneys, and others in the public safety and judicial communities, as well as the public communities they serve.
We have four strategic growth areas:
Expand TASER CEW adoption: We believe we can increase the ratio of TASER CEWs to patrol officers domestically as well as continue expand into new international markets. We believe that our strategy of offering payment plansoffer. More value delivered drives user adoption, which generates data for collaborative sharing, real-time communications, and eventually subscription hardware plans will shorten upgrade cycles and expand our immediately addressable market. Also, through continuing research and development ("R&D"), we believe that our TASER CEWs will become more capable and more connected over time, thus increasing in value and utility for our customers.
Expand Axon body camera and Evidence.com market share and increase average revenue per user ("ARPU"): Axon is the market leader in body-worn cameras and digital evidence management. Of the top 50 metropolitan areas in the U.S., 38 are on the Axon network. We believe we are well-positioned to build upon our prior success, and that our software offerings can become more valuable to our customers as we continue to expand our service offerings to better help agencies store, manage and share evidence data.
Capture in-car video market shareimproving product performance with Axon Fleet: In the second quarter of 2017, we began shipping our in-car video offering, Axon Fleet. This is a new and adjacent market for Axon that we believe we can continue to grow through offering a superior product and service with disruptive pricing.
Expand into police agency records management systems and computer-aided dispatch software: In late 2016, we announced our intention to develop a police agency enterprise resource planning ("ERP") system, Axon Records, that would put officers back on the streets, help to solve and prosecute crime, and help to prevent crime and other incidents. Our development of Axon Records supports our strategic focus and vision of growing recurring cash flows by leveraging the data we host to unlock value-added services to our customers.
Technological innovation is key to all four long-term growth areas. By investing in R&D, we intend to continue to develop novel, high-value solutions across our product platforms and expand our total addressable market within the law enforcement and public safety vertical markets. In 2017, we invested heavily in a new artificial intelligence (“AI”("AI") group, Axon AI. Through two acquisitions plus additional hires, we have developed a team that is delivering AI features in our products as well as winning industry recognition. In 2017, we were named the preferred AI vendor for the Los Angeles Police Department. In early 2018, we opened an R&D office in Tampere, Finland, with 10 imaging and sensor experts who will work with our existing teams to create best-in-class smart cameras that integrate with our cloud platform. We also continue to add engineering talent to our Scottsdale headquarters and Seattle engineering and development office.training.
Company Organization
Axon sells its products to law enforcement worldwide through its direct sales force, distribution partners, online store and third-party resellers. The Company manages its business primarily on a geographic basis, with various sales representatives strategically located throughout the world. Domestic and international law enforcement agencies are primarily served through the Company's headquarters in Scottsdale, Arizona, and its software engineering development center located in Seattle, Washington. The Company also has subsidiaries located in the United Kingdom, Germany, the Netherlands, Australia, Vietnam and Canada.
The Company’sAxon's operations are comprised ofcomprise two reportable segments: the sale of CEWs, accessories and other related products and services (the “TASER Weapons” segment); and the software and sensors business, focused on Axon devices, wearables, applications, cloud and mobile products (the "Software and Sensors" segment). 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 expense for the sales team, product management and marketing expenses, trade shows and related expenses, finance and accounting expenses, and research and development for products included, or to be included, within the Software and Sensors segment. All other costs are included in the TASER Weapons segment.
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| 1. | TASER: Axon is the market leader in the development, manufacture and sale of conducted energy weapons ("CEWs"), also known as conducted energy devices ("CEDs"), which we sell under our brand name, TASER. Research has shown that the TASER device is the most effective less-than-lethal force option, with the lowest likelihood of injury to officers and assailants. Since our inception in 1993, the TASER has been adopted by a majority of U.S. police departments and is used daily to help keep communities safe. |
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| 2. | Software and Sensors: Axon is the market leader in on-officer body (Axon Body and Flex) and in-car (Axon Fleet) cameras as well as cloud-based digital evidence management software (Evidence.com). We develop, manufacture and sell fully integrated hardware and cloud-based software solutions that enable law enforcement to capture, securely store, manage, share and analyze video and other digital evidence. Of the 69 largest metropolitan area police departments in the U.S., 47 are on the Axon Network. |
Further information about our reportable segments and sales by geographic region is included in Notes 1 and 1617 of the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K. We have made certain acquisitions of companies or their assets in the past two years that are described in Note 15 of our consolidated financial statements included inFor backlog by reportable segment, refer to Part II, Item 87 of this report.Annual Report on Form 10-K.
Guiding Product Principles
Axon’s products are generally cloud-connected, designed to drive better outcomes and customer experiences, and sold via bundles. Our solutions are organized into four categories:
•De-escalation: We develop smart weapons and tools that support public safety officers in de-escalating situations, avoiding or minimizing use of force. These tools include the cloud-connected TASER CED (TASER 7) as
Products
TASER Weapons Products
We make CEWs for two main typeswell as a suite of market segments: (i) the law enforcement, military, correctionsAugmented Reality and private security markets; and (ii) the consumer market. Our CEWs use our proprietary Neuro Muscular Incapacitation (“NMI”Virtual Reality ("AR/VR") technology to effectively neutralize suspects or threats. From a replaceable cartridge containing compressed nitrogen, two small probes that are attached to the CEW by insulated conductive wires are deployed from up to 35 feet away. Electrical pulses are transmitted along the wires and into the body, affecting the sensory and motor functions of the peripheral nervous system.
Since 2009, our CEWs have been on our Smart Weapons system, an all-digital platform that features the ability to regulate charge output, perform health checks, update firmware over the Internet, and provide analytics on device usage. Through the Company's Evidence.com platform, important records such as the event logs, which record user actions such as safety activation and trigger event durations, can be viewed and analyzed.
The benefits of using CEWs in the field have been significant. Studies have shown that TASER CEWs have prevented death or serious injury more than 178,000 times from the first deployment in 2000 to the end of 2017. The use of these devices instead of other force options has significantly reduced injuries for suspects and officers, with substantial liability and workers’ compensation savings to government agencies around the world.
The following products are core to the Company's TASER Weapons product line:
TASER X26P- The X26P is a single-shot, compact Smart Weapon designedtraining services for law enforcement, delivered through our Axon Academy training platform. To obsolete firearms and military use. It featuresbullets, we intend to not only develop more effective TASER devices over time but also drive training and adoption of the smallest form factor of our law enforcement models and was ergonomically designed with ease of usebest practices in mind.modern policing.
TASER X2- The X2 is a double-shot Smart Weapon designed for law enforcement and military use. In addition to the back-up shot, the X2 also features dual lasers and the warning arc, a visible electric charge that increases voluntary surrenders and de-escalates conflicts without cartridge deployment.
Consumer CEWs - The Company has two consumer CEW models, the Bolt (formerly known as the C2) and the Pulse. The two products differ in form factor but both feature the same NMI effects as the CEW models available to law enforcement and run in cycles of 30 seconds, which is intended to allow adequate time for the user to escape a threat.
Replacement Cartridges and Consumables - The Company manufactures multiple cartridge types with effective ranges from 15' to 35'. Smart cartridges communicate with the firing control system within the TASER X2 to indicate the type of cartridge loaded in each bay and its deployment status. Standard replacement cartridges are used in the TASER X26P as well as our consumer models. The Company also offers Performance Power Magazines (“PPM”), batteries that power the CEWs. PPMs are available in several options, such as Tactical (“TPPM”) or Automatic Shut-Down (“APPM”).
Axon Connected Solutions
Axon creates connected technologies to protect truth in public safety. As a company that grew from our TASER business, we are building on a history of innovation in policing. Axon is more than a collection of individual technologies; it is a cohesive ecosystem. Every product from our Smart Weapons to our body-worn cameras to our•Sensors: Our digital evidence management system integrates seamlessly with one another,software, Axon Evidence, supports our network of cloud-connected cameras and often complementssensors. Axon Evidence addresses the systems and processes a customer already uses. Below are the products and features that are core to the Axon platform.
Axon Hardware Products:
Axon Body 2- Axon Body 2 builds upon the original platformchallenges presented by bringing officers new features such as high-definition ("HD") video, wireless fidelity ("Wi-Fi") offload capabilities, extended battery life, and additional security enhancements. The Axon Body 2 can be mounted on the officer's shirt at mid-chest level and eliminates all wires from the wearer’s body.
Axon Flex 2- The Axon Flex 2 builds upon the original Axon Flex camera system and features a more rugged industrial design, new mounts and advanced capabilities like unlimited HD video, a 120-degree field of view, extended battery life, improved buffering and wireless activation.
Axon Fleet- Axon Fleet is a breakthrough in-car video system with advanced capabilities and a price that is significantly less than traditional systems. Axon Fleet includes automatic activation, HD video and a flexible design.
Axon Dock- With the Axon Dock, the camera charging station is also the automatic data downloader. At the end of a shift, the Axon Dock syncs video from the user's Axon Flex or Axon Body camera during routine charging. Videos are uploaded directly to Evidence.com, eliminating manual filing processes.
TASER CAM HD- The TASER CAM HD is a recording device built into a PPM battery pack for use with compatible TASER CEWs. The device can capture critical video and audio before, during and after a TASER CEW deployment.
Axon Signal- Axon Signal is a technology that enables Axon Body 2, Axon Flex 2 and Axon Fleet cameras to start recording upon certain triggering events such as the opening of a patrol car door, activation of a patrol car lightbar or the unholstering of a TASER CEW.
Signal Sidearm - Signal Sidearm is a device that is compatible with most firearm holsters. The moment an officer removes a firearm from a holster, Signal Sidearm wirelessly alerts all nearby Axon cameras to begin recording.
Axon Software and Mobile Technologies:
Evidence.com- As the sourcesgrowing amounts of digital evidence expand, storage alone is not enough to keep track of the body-wornvia closed circuit television video, body worn camera videos, photos, audio recordingsvideo, in-car camera video, and other data that is overwhelming agency servers and systems. Evidence.com is a robust end-to-end solution that not only allows agencies to store all that data, but also enables new workflows for managing and sharing that data. Officers and command staff can upload content from Axon and TASER devices or other systems easily, manage it with search and retrieval features, and collaborate with prosecutors by using powerful sharing features. When storage needs or users increase, the cloud-based system allows agencies to scale instantly and cost-effectively.
Evidence Sync- Evidence Sync is a desktop-based application that enables evidence in any format, from any source to be uploaded to Evidence.com. TASER Smart Weapon logs, Axon camera videos, interview room footage, photos and more can be uploaded, stored, and managed in one location. Sources new and old—from TASER devices or other brands—are equally supported. Network servers, secure digital memory cards ("SD cards"), compact discs ("CDs"), and computer folders can be synced with ease, and frequently used folders or drives can be set up to automatically sync on schedule.
Commander- Axon Commander is an on-premise application that consolidates all of a customer'scitizen-captured digital evidence, in one secure location, making it easy to store, manage, redact and access while maintaining securityshare on one platform. Axon Evidence is the world’s largest cloud-hosted data repository of law enforcement video data and chainother types of custody. Designed to meetelectronic evidence. Axon is also driving innovation in the evidence management needs of agencies in regions without reliable high-speed Internet access, Commander delivers many of the same features of cloud-based Evidence.com to customers using on-premise storage systems.
body camera category through developing solutions that do more than collect, store and manage video. In September 2019, we began shipping Axon Citizen- Axon Citizen isBody 3, a mobile application that providescamera with an LTE antenna and a public safety portal where community members can submit photos and videos of an incident they witness directly to their agency on Evidence.com.
Axon Capture- Axon Capture is a mobile application that allows officers to capture digital evidence right from the field. The app eliminates the need to carry three separate devices for photo, video, and audio recording by securely building upon the capabilities of an officer's mobile phone. Officers can add tags, titles or Global Positioning System ("GPS") coordinateschip, which supports real-time awareness.
•Productivity: Our productivity suite of tools is designed to any recordings before uploading the data to Evidence.com.
reduce time spent on paperwork. Axon View- Axon ViewRecords, an emerging product, is a mobile applicationcloud-based report-writing software tool that wirelessly connects with antakes a disruptive modern approach to displace legacy records management systems ("RMS") by putting body camera video at the heart of the incident record. Axon Records includes Axon Standards, a radically simpler approach to use-of-force reporting that can be easily adopted alongside a traditional RMS before upgrading to the full service. Axon Performance helps agencies to ensure that officers are adhering to agency policies, and provides them the analytics to demonstrate the effectiveness of their body-worn camera programs. Redaction Assistant enables agencies to provide instant playbackredact videos in a fraction of unfolding events from the field, intime through the field. The app's live display ensuresuse of artificial intelligence ("AI").
•Communications: We are developing communication tools that support real-time situational awareness through the camera is positioned correctly.
sharing of information across myriad media, including voice, messaging, location mapping, and intelligence and evidence sharing. Products include Axon Interview- Axon Interview is a recording system designed for the interview room. The system records crucial interviews with redundant, high-quality video and audio technology, ensuring that every moment is captured. The system is available with a 24/7 buffering option thatAware, which allows agencies to capture key dialogue even after it occurs.know the GPS location of their officers and what those officers are experiencing through live video streaming, and Axon Dispatch, which is a computer-aided dispatch ("CAD") product that is designed to empower everyone in public safety who is involved in incident response: dispatchers, call takers, command staff, patrol officers, firefighters and medical personnel.
MarketsSales and Distribution
Law Enforcement
Axon's direct sales force and strong customer relationships represent key strategic advantages. The majority of our revenues are generated via direct sales, including our online store, although we do leverage distribution partners and third-party resellers.
No customer represented more than 10% of total net sales for the years ended December 31, 2019, 2018 or 2017.
Our primary targetcustomer market for both our weapon and video products is federal, state and localUS law enforcement. Of the approximately 18,000 law enforcement agencies in the U.S. and throughoutUS, we have a customer relationship with approximately 17,000. Axon has dedicated sales representatives for the world. We estimate that in the1,200 largest agencies, which account for 70% to 80% of U.S., approximately two-thirds of all law enforcement patrol officers carry a TASER CEW and internationally, approximately one out of every fifty eligible law enforcement officers carries a TASER CEW. Our goal is to haveofficers. The remaining agencies are served via our CEWs be standard issue equipment for all domestic and international law agencies.
Other Markets
We also target military forces, private security, correctional facilities and consumer personal protection markets to provide technologies that offer a less lethal form of protection.
U.S. Distribution
The Company sells directly to law enforcement agencies in the U.S.telesales team as well as throughdistributors. Internationally, we began focusing on a distribution network. Distributors are selected based upon their reputation within their respective industries, contacts and distribution network. Our regional sales managers work closely with the distributors in their territory to inform and educate the law enforcement communities. We continue to monitor our law enforcement distributors closely to help ensure that our service standards are achieved. Where appropriate, we intend to grow our direct sales over time. Distributors often allow us to penetrate regions at lower fixed costs; however,strategy in 2017, and in 2018 and 2019 we made significant investments in building out our international direct sales allow us greater control over the customer relationship.
Salesforce, particularly in the private citizen market are primarily made through our distributorsUnited Kingdom, Europe, Australia and our website. We have implemented a variety of marketing initiatives to support sales of our consumer products, with a focus on web, public relations and consumer trade shows. We have consulted with professional digital media and public relations professionals to assist us in media and press events and editorial placements along with attending numerous trade shows specifically to target the consumer market.New Zealand.
International Distribution
We market and distribute our CEW products to foreign markets through our international subsidiaries as well as through a network of distributors. For geographical and cultural reasons, our distributors usually have a territory defined by their country’s borders. These distributors market both our law enforcement, military, and corrections products, and our consumer products where allowed by law. Our distributors work with local law enforcement, military and corrections agencies in the same manner as our domestic market distributors. For example, they may perform demonstrations, attend industry trade shows, maintain country specific websites, engage in print advertising and arrange training classes.
In order to more effectively engage customers internationally,2019, we have also implemented direct sales teams strategically located throughout each major geographic region of the world. Having dedicatedadded sales personnel stationed full timeto capture law enforcement-adjacent markets, such as the US federal government and military, U.S. and international departments of corrections, and the fire and emergency medical services markets.
Governmental agencies generally have the ability to terminate our contracts, in these regions will allow uswhole or in part, for reasons including, but not limited to, better serve existing customers as well as execute our salesnon-appropriation of funds.
Manufacturing and marketing strategies more efficiently in order to continue to grow our customer base in new markets.
ManufacturingSupply Chain
We perform light manufacturing, final assembly, and final test operations at our headquarters in Scottsdale, Arizona, and own substantially all of the equipment required to develop, prototype, manufacture and assemble our finished products. This includes critical injection molds, schematics, automation equipment, test equipment and prototypes utilized by our supply chain for the conversion of raw materials into sub-assemblies. We have implemented lean/six sigma methodologies to optimize most direct and indirect resources within the organization, which has helped boost capacity for existing products, as well as provide flexibility to accommodate production of new TASER and Axon product introductions. We are currently operating one to two production shifts depending on inventory levels and demand. However, other capacity options, including the use of additional shifts, will be considered should we experience higher demand resulting from large orders of legacy or new product releases. We have continued to maintain both our ISO 9001 certification and have recently attained the newour ISO 9001:2015 certification.certifications.
The Company currently purchases both off-the-shelf and custom components, including finished circuit boards assemblies and injection-molded plastic components, primarily from suppliers located in the U.S., Mexico, China and Taiwan. Although the Company currently obtains
We obtain many of theseour components from single sources of supply, the Company owns the designs as well assource suppliers; however, because we own the injection molded component tooling and test fixtures used in their production, for all custom components. As a result, management believes itwe believe we could obtain alternative suppliers in most cases without incurring significant production delays. For additional discussion of sources and availability of raw materials, refer to Note 1 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
We provide limited manufacturer's warranties on our CEDs and Axon devices. For additional information about our warranties, refer to Note 1 to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
Competition
De-escalation — TASER for Law Enforcement, Corrections and Private Security Markets:Our CEDs compete with a variety of other less-lethal alternatives to firearms, including rubber bullets or rubber baton rounds, pepper spray, mace, traditional stun guns, hand-held remote restraint devices involving a tether, laser dazzlers that cause temporary blindness, stun grenades, long-range acoustic devices, police batons and night sticks. TASER devices offer advanced technology, versatility, portability, effectiveness, built-in accountability systems, and low injury rates, which enable us to compete effectively against other less-lethal alternatives. TASER devices also offer connectivity to our cloud network, which allows agencies to more effectively manage their less-lethal programs and automate use-of-force reporting.
The Companyprimary competitive factors in this market include a device’s accuracy, effectiveness, reputation, safety, cost, ease of use, and exceptional customer experience. The design maturity of the TASER platform, as well as our development and sale of a two-shot device, are also strategically holdskey competitive differentiators. We are aware of competitors providing competing CED products primarily in international markets.
De-escalation — TASER for Private Citizen Market:In the private citizen market, these devices primarily compete with firearms, but also with other less lethal self-defense options such as pepper spray and stun guns. The primary competitive factors in this market include a device’s cost, effectiveness, safety stock levels on custom components to further reduce this risk. For off-the-shelf components, Management believes thatand ease of use. The TASER StrikeLight competes in the flashlight category, in which there are readily available alternative suppliersdozens, if not hundreds, of competitors, including tactical flashlight providers such as SureFire, 5.11 Tactical, Blackhawk, Maglite, and many more.
Sensors — Connected Cameras and Digital Evidence Management Software:The body-worn camera and in-car video market is highly competitive. Our competition includes Motorola Solutions and WatchGuard, which Motorola purchased in most cases who can consistently meet the Company's needs for these components. The Company acquires most of its components on a purchase order basis2019, Panasonic Corp., Reveal Media, L3 Mobile-Vision, Coban Technologies, Digital Ally, Getac, Utility Associates, Intrensic, Safety Vision and does not have any significant long-term contractsVisual Labs. We also compete with suppliers.consumer wearable camera makers including GoPro and Garmin.
Business Seasonality and Product Introductions
The Company hasmarket for software solutions to improve public safety agency workflows is highly fragmented and highly competitive. Our cloud-based digital evidence management system, Axon Evidence, competes with both cloud-based platforms and on-premises based systems designed by third-parties or in-house by an agency's technology staff.
Key competitive factors in this market include product performance, product features, battery life, product quality and warranty, total cost of ownership, data security, data and information work flows, company reputation and financial strength, and relationships with customers.
Productivity and Communications — RMS and CAD:The RMS and CAD markets are highly competitive and highly fragmented. We have identified more than 50 incumbent software providers, including Motorola Solutions, Tyler Technologies, Central Square Technologies (formerly Superion, TriTech and Aptean), Northrop Grumman, Hexagon
AB, Niche Technology Inc., Caliber Public Safety (parent, Harris Systems USA), Saab, Sopra Steria, and Mark 43 Inc. In addition, not all law enforcement agencies use software for report writing — some still use paper. We believe our network of camera sensors and digital evidence management platform give us a strategic advantage in these product categories.
Seasonality
We have historically experienced higher net sales in its second andour fourth quartersquarter compared to other quarters in itsour fiscal year due primarily to municipal budget cycles. Additionally, new product introductions can significantly impact the cadence of net sales, product costs and operating expenses. However, historical seasonal patterns, municipal budgets or historical patterns of product introductions should not be considered reliable indicators of the Company’sour future net sales or financial performance.
Backlog
Our backlog for products and services includes all orders that have been received and are believed to be firm. As of December 31, 2017 and 2016, our backlog was $582.7 million and $384.2 million, respectively.
In the TASER Weapons segment, we define backlog as equal to deferred revenue. Deferred revenue represents amounts billed and collected from the customer for goods and services to be delivered in subsequent periods. The Company processes orders within the TASER Weapons segment quickly, and our best estimate of firm orders outstanding as of period end represents those that have been paid for but remain undelivered. The TASER weapons backlog balance was $46.7 million as of December 31, 2017. The Company expects to realize $16.7 million of this deferred revenue balance as revenue during the next 12 months. This represents cash received from customers on or prior to December 31, 2017 for products and services expected to be delivered in the next 12 months.
In the Software and Sensors segment, we define backlog as cumulative bookings, net of cancellations, less product and service revenue recognized to date. Bookings are generally realized as revenue over multiple years. The Software and Sensors backlog balance was $536.0 million as of December 31, 2017. This backlog balance includes $78.6 million of deferred revenue, $27.0 million that has been invoiced, but not yet collected, and $430.4 million that has been recorded as bookings but not yet invoiced, all as of December 31, 2017. The Company expects to realize approximately $110.0 million of the December 31, 2017 backlog balance as revenue during the next 12 months.
Backlog - Year ended December 31, 2017 (in thousands) |
| | | | | | | | | | | |
| | TASER Weapons | | Software and Sensors | | Total |
| Balance, beginning of period | $ | 33,391 |
| | $ | 350,792 |
| | $ | 384,183 |
|
| Add: additions to backlog, net of cancellations | 247,806 |
| | 291,152 |
| | 538,958 |
|
| Less: revenue recognized during period | 234,512 |
| | 105,928 |
| | 340,440 |
|
| Balance end of period | $ | 46,685 |
| | $ | 536,016 |
| | $ | 582,701 |
|
Competition
Law Enforcement, Corrections and Private Security Markets
Law enforcement customers partner with TASER for the long-term. The primary competitive factors in the law enforcement and corrections market include a weapon’s accuracy, effectiveness, safety, cost, ease of use and an exceptional customer experience. We are aware of competitors providing competing CEW products, primarily in international markets.
We also believe our CEWs compete indirectly with a variety of other less-lethal alternatives. These alternatives include, but are not limited to, pepper spray, batons and impact weapons sold by companies such as Defense Technology. We believe our TASER brand devices’ advanced technology, versatility, portability, effectiveness, built-in accountability systems, and low injury rate enable us to compete effectively against these other less-lethal alternatives.
Private Citizen Market
CEWs have gained limited acceptance in the private citizen market. These devices primarily compete with guns, but also with other less lethal weapons such as pepper spray. The primary competitive factors in the private citizen market include a weapon’s cost, effectiveness, safety and ease of use.
Video Evidence Market
Axon is the market leader in a video evidence capture and management market that is highly fragmented and competitive. Continued evolution in the industry and technology shifts are creating opportunities for both established and new competitors. Key competitive factors include: product performance, product features, product quality and warranty, total cost of ownership, data security, data and information work flows, company reputation and financial strength, and relationships with customers.
Our digital evidence management system, Evidence.com, is a cloud-based platform. Cloud computing fundamentally changes the way local, state and federal government agencies will develop and deploy software applications. Applications used by these agencies have historically required the agency to deploy their own infrastructure of servers, storage, network devices and operating systems. With a cloud-based system, the entire storage infrastructure is managed by third-parties who specialize in infrastructure management. Agencies use Internet web browsers to access the application. Our cloud-based Evidence.com service enables
agencies to store, manage and analyze digital evidence. We believe our end-to-end solution providing a combination of both products and services is a compelling value proposition for law enforcement agencies to implement.
Regulatory Matters
U.S.Environmental Regulation
The majority of TASER CEWs, as well as the cartridges used by these devices, are subject to regulations; however, most are not considered to be “firearms” by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives. Many states have regulations restricting the sale and use of stun guns, hand-held shock devices and electronic weapons. We believe existing stun gun laws and regulations apply to TASER CEWs.
In many cases, the law enforcement and corrections market is subject to different regulations than the private citizen market. Where different regulations exist, we assume the regulations affecting the private citizen market also apply to the private security markets, except as the applicable regulations otherwise specifically provide.
As of December 31, 2017, the possession of stun guns by the general public, including TASER CEWs, is prohibited in four states: Hawaii, Massachusetts, New York, and Rhode Island, as well as in the District of Columbia. In 2017, New Jersey ended its state ban on stun guns for civilians. Some cities and municipalities also prohibit private citizen possession or use of our CEW products.
We are also subject to environmental laws and regulations, including restrictions on the presence of certain substances in electronic products. Reference is madeRefer to Section 1A, Risk Factors under the heading “Environmental“A variety of new and existing laws and/or interpretations could materially and regulations subject us to a number of risks and could result in significant liabilities and costs.”
Axon body worn cameras and fleet vehicle cameras are subject to regulations including 21-CFR-47 Part 15, Subpart C for Bluetooth and WiFi transmission, US-DOT/UN 38.3 for transportation of lithium batteries, and FCC KDB 447498 + IEEE 1528-2013 Specific Absorption Rate ("SAR") regulations. These regulations are also beginning to affect CEWs with signal performance power magazine ("SPPM") technology and future CEWs implementing wireless technology into the feature set.
Evidence.com is subject to government regulation of the Internet in many areas, including telecommunications, data protection, user privacy and online content.
U.S. Export Regulation
CEWs are considered a crime control product (ECCN: 0A985) by the U.S. government. Accordingly, the export of our devices is regulated under export administration regulations. As a result, we must obtain export licenses from the Department of Commerce for all shipments to foreign countries other than Canada. Most of our requests for export licenses have been granted, and the need to obtain these licenses has not caused a material delay in our shipments. Export regulations also prohibit the further shipment of our products from foreign markets in which we hold a valid export license to foreign markets in which we do not hold an export license for our products.
Export Administration Regulations ("EAR") established by the U.S. Department of Commerce restrict the export of technology used in our CEWs. These regulations apply to both the technology incorporated in our CEW systems and to the processes used to produce them. These restrictions apply to any individual that is not a U.S. Citizen, U.S. Permanent Resident, or “protected person” as defined in 8 U.S.C. 1324b(a)(3).
Foreign Regulation
Foreign regulations, which mayadversely affect our devices, and sale thereof, are numerous and often unclear. We prefer to work with a distributor who is familiar with the applicable import regulations in each of our foreign markets. Experience with foreign distributors in the past indicates that restrictions may prohibit certain sales of our products in a number of countries. However, the majority of countries permit TASER devices to be sold and used by law enforcement. We maintain strong communication channels with our distributors to ensure that we are aware of ongoing regulation of our products and of those countries where TASER CEW devices are prohibited or restricted.
Contracts
Our business is affected by numerous laws and regulations, including those related to the award, administration and performance of contracts. Governmental agencies generally have the ability to terminate our contracts, in whole or in part, for
reasons including, but not limited to, non-appropriation of funds. We monitor our policies and procedures with respect to our contracts on a regular basis to enhance consistent application under similar terms and conditions, as well as compliance with all applicable laws and regulations. We provide limited manufacturer's warranties on our CEWs and Axon devices. Further information about our warranties is included in Note 1 of the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.business.”
Intellectual Property
We protect our intellectual property with U.S. and foreigninternational patents and trademarks. Our patents and pending patent applications relate to technology used by us in connection with our products. We also rely on international treaties, organizations and foreign laws to protect our intellectual property. As of December 31, 2017,2019, we hold 137183 U.S. patents, 6375 U.S. registered trademarks, 98 foreign127 international patents, and 278 foreign313 international registered trademarks, and also have numerous patents and trademarks pending. We are constantly innovating across all of our platforms, including on the TASER platform, and in the next few years expect to file more patent applications related to TASER 7 alone than there are TASER patents expiring due to age.
We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as the commercial significance of our operations and our competitors’ operations in particular countries and regions, our strategic technology or product directions in different countries, and the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions. Axon hasWe have the exclusive rights to many Internet domain names, primarily including “TASER.com”, “Axon.com”, “Axon.net”, “Evidence.com” and “Axon.io.”
Confidentiality agreements are used with employees, consultants and key suppliers to help ensure the confidentiality of our trade secrets.
Research and Development
Our R&D initiatives focus on next generation technology. We continue to develop new technologies to enhance existing products and services, and to expand the range of our offerings through R&D, licensing of intellectual property and acquisition of third-party businesses and technology. Our investment in internally funded research and development totaled $55.4 million, $30.6 million and $23.6 million in 2017, 2016, and 2015, respectively.
Within the Software and Sensors segment, the Company's team of application developers conduct R&D initiatives for cloud applications, wearable and mobile technologies in law enforcement, focused specifically on new revenue opportunities that align with our Software and Sensors product and services solutions.
Within the TASER Weapons segment, current R&D initiatives include bio-medical research and electrical, mechanical and software engineering. We expect that future CEW development projects will focus on extending the range, reducing the size, improving the functionality and developing new delivery options for our products.
Our return on investment is intended to be realized over the long-term, although new systems and technologies often can have a more immediate impact on our business.
Employees
As of December 31, 2017,2019, we had 9491,323 full-time employees and 146593 temporary employees. The breakdown of our full-time employees by department was as follows: 354249 direct manufacturing employees, 600408 research and development employees, 401 administrative and manufacturing support employees and 141265 employees within sales, marketing, communications and training. Of the 146593 temporary employees, more than 91%nearly 70% worked in direct manufacturing roles. Our employees are not covered by any collective bargaining agreement, and we have never experienced a work stoppage. We believe that our relations with our employees are good.
Available Information
We were incorporated in Arizona in September 1993 as ICER Corporation. We changed our name to AIR TASER, Inc. in December 1993 and to Axon Enterprise, Incorporated in April 1998. In January 2001, we reincorporated in Delaware as TASER International, Inc., and in April 2017, changed our name to Axon Enterprise, Inc.
Our Annual ReportReports on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q, current reportsCurrent Reports on Form 8-K, proxy statements and amendments to those reports filed with or furnished pursuant to Section 13(a) or 15(d) of the Exchange ActSEC are available free of charge on our website at http://www.axon.cominvestor.axon.com as soon as reasonably practicable after we electronically file such material with, or furnish such material to the SEC. The information on our website, including information about our trademarks, is not incorporated by reference
into or otherwise a part of this report.Annual Report on Form 10-K. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
Item 1A. Risk Factors
Because of the following factors, as well as other variables affecting our operating results, our past financial performance may not be a reliable indicator of our future performance and historical trends should not be used to anticipate our results or trends in future periods. You should carefully consider the trends, risks and uncertainties described below and other information in this Form 10-K and subsequent reports filed with or furnished to the Securities and Exchange Commission (the “SEC”)SEC before making any investment decision with respect to our securities. If any of the following trends, risks or uncertainties actually occurs or continues, our business, financial condition or operating results could be materially adversely affected, the trading prices of our securities could decline, and you could lose all or part of your investment. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.
We are materially dependent on acceptance of our products by law enforcement markets, both domestic and international. If law enforcement agencies do not continue to purchase and use our products, our revenues will be adversely affected.
At any point, due to external factors and opinions.opinions, whether or not not related to product performance, law enforcement agencies may elect to no longer purchase our CEWsCEDs or other productsproducts.
We substantially depend on sales of our TASER X26P and X2 CEWs,CEDs, and if these products do not continue to be widely accepted, our growth prospects will be diminished.
In the years ended December 31, 2017, 20162019, 2018 and 2015,2017, we derived a significant portion of our revenues predominantly from sales of TASER CEWCED brand devices and related cartridges, and expect to depend on sales of these products for a predominantsignificant portion of our revenue fofor the foreseeable future. We are seeing a large number of customers upgrade their devices to the X2 or the new X26P device. This is a trend we expect to continue. A decrease in the selling prices of, or demand for these products, or their failure to maintain broad market acceptance, would significantly harm our growth prospects, operating results and financial condition.
The success of our Evidence.com software as a service (“SaaS”) delivery model is materially dependent on acceptance of this business model by our law enforcement customers. Delayed or lengthy time to adoption by law enforcement agencies will negatively impact our sales and profitability.
A substantial number of law enforcement agencies may be slow to adopt our Evidence.com digital data evidence management and storage solution, requiring extended periods of trial and evaluation. The hosted service delivery business model is not presently widely adopted by our law enforcement customer base. As such, the sales cycle has additional complexity with the need to educate our customers and address issues regarding agency bandwidth requirements, data retention policies, data security and chain of evidence custody. Delays in successfully securing widespread adoption of Evidence.com services could adversely affect our revenues, profitability and financial condition.
If we are unable to design, introduce, sell and selldeploy new products or new product features successfully, our business and financial results could be adversely affected.
Our future success will depend on our ability to develop new products or new product features that achieve market acceptance in a timely and cost-effective manner. These products include, but are not limited to, Axon Body 3, Axon Aware, Axon Records, Axon Dispatch, and future generations of the TASER CED and Axon Fleet. The development of new products and new product features is complex, time consuming and expensive, and we may experience delays in completing the development and introduction of new products. We may choose to carry higher level of inventories to mitigate the risk of production delays, which may in turn expose us to an increased risk of obsolescence.
We are devoting significant resources to develop and deploy our cloud-based productivity and communication software-as-a-service ("SaaS") solutions, which we intend to broadly deploy to a large number of customers. Customer requirements for these products are complex and varied. If we are unable to develop scalable solutions that can consistently be configured for customers with minimal effort, or if we are unable to build out a professional services team that can consistently configure our products to meet the requirements of large numbers of customers in a timely and cost-effective manner, our ability to broadly scale our cloud-based productivity and communication SaaS solutions could be negatively impacted, and our deployment costs could negatively impact our operating results.
We cannot provide any assurance that products that we may develop in the future will achieve market acceptance. If we fail to develop new products or new product features on a timely basis that achieve market acceptance, our business, financial results and competitive position could be adversely affected.
Delays in product development schedules may adversely affect our revenues and cash flows.
The development of CEWs,CEDs, devices, sensors and software is a complex and time-consuming process. New products and enhancements to existing products can require long development and testing periods. Our increasing focus on our SaaS platform also presents new and complex development issues. Significant delays in new product or service releases or significant problems in creating new products or services could adversely affect our business, financial results and competitive position.
We face risks associated with rapid technological change and new competing products.
The technology associated with law enforcement devices is receiving significant attention and is rapidly evolving. While we have some patent protection in certain key areas of our CEW,CED, Axon Device and SaaS technology, it is possible that new technology may result in competing products that operate outside our patents and could present significant competition for our products, which could adversely affect our business, financial results and competitive position.
Defects in our products could reduce demand for our products and result in a lossHigher costs or unavailability of sales, delay in market acceptance and damage to our reputation.
Complex components and assemblies used in our products may contain undetected defects that are subsequently discovered at any point in the life of the product. Defects in our products could result in a loss of sales, delay in market acceptance and damage to our reputation and increased warranty costs, whichmaterials could adversely affect our business, financial results and competitive position.
If our security measures are breached and unauthorized access is obtained to customers’ data or our data, our network, data centers and service may be perceived as not being secure, customers may curtail or stop using our service and we may incur significant legal and financial exposure and liabilities.
Our service involves the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of information or the total deletion of all stored customer data, litigation and possible liability. We devote significant resources to engineer secure products and ensure security vulnerabilities are mitigated, and we require out third-party service providers to do so as well. Despite these efforts, security measures may be breached as a result of third-party action, employee error, and malfeasance or otherwise. Breaches could occur during transfer of data to data centers or at any time, and result in unauthorized access to our data or our customers’ data. Third-parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our data or our customers’ data. Additionally, hackers may develop and deploy viruses, worms, and other malicious software programs that attack or gain access to our networks and data centers. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Moreover, our security measures and/or those of our third party service providers and/or customers may not detect such security breaches if they occur. Any security breach could result in a loss of confidence in the security of our service, damage our reputation, lead to legal liability, negatively impact our future sales and significantly harm our growth prospects, operating results and financial condition.
Interruptions or delays in service from our third-party cloud storage providers for our Evidence.com service, or the loss or corruption of digitally stored evidence, would impair the delivery of our service and harm our business.
We currently serve our Evidence.com customers from third-party cloud storage providers based in the U.S. and other countries. Interruptions in our service, or loss or corruption of digital evidence, may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.
Most of our end-user customers are subject to budgetary and political constraints that may delay or prevent sales.
Most of our end-user customers are government agencies. These agencies often do not set their own budgets and therefore, have limited control over the amount of money they can spend. In addition, these agencies experience political pressure that may dictate the manner in which they spend money. As a result, even if an agency wants to acquire our products, it may be unable to purchase them due to budgetary or political constraints, particularly in challenging economic environments. There can be no assurance that the economic and budgeting issues will not worsen and adversely impact sales of our products. Some government agency orders may also be canceled or substantially delayed due to budgetary, political or other scheduling delays, which frequently occur in connection with the acquisition of products by such agencies, and such cancellations may accelerate or be more severe than we have experienced historically.
We expend significant resources in anticipation of a sale due to our lengthy sales cycle and may receive no revenue in return.
Generally, law enforcement and corrections agencies consider a wide range of issues before committing to purchase our products, including product benefits, training costs, the cost to use our products in addition to, or in place of, other products, budget constraints and product reliability, safety and efficacy. The length of our sales cycle may range from a few weeks to as long as several years. Adverse publicity surrounding our products or the safety of such products has in the past, and could in the future, lengthen our sales cycle with customers. In the past, we believe that the Company’s sales were adversely impacted by negative publicity surrounding our products or the use of our products. See, for example, “Litigation - Product Litigation” in Note 9 of our consolidated financial statements included in Part II, Item 8 of this report. We may incur substantial selling costs and expend significant effort in connection with the evaluation of our products by potential customers before they place an order. If these potential customers do not purchase our products, we will have expended significant resources and received no revenue in return.
Due to municipal government funding rules, certain of our contracts are subject to appropriation, termination for convenience, or similar cancellation clauses, which could allow our customers to cancel or not exercise options to renew contracts in the future.
Although Axon has entered into contracts for the delivery of products and services in the future and anticipates the contracts will be completed, if agencies do not appropriate money in future year budgets, terminate contracts for convenience or if other cancellation clauses are invoked, revenue associated with these bookings will not ultimately be recognized, and could result in a reduction to bookings.
An increasing percentage of our revenue is derived from subscription billing arrangements which may result in delayed cash collections and may increase customer credit risk on receivables
A growing portion of our sales are derived from subscription billing arrangements and on an open credit basis. While we perform ongoing credit evaluations of our customers' financial condition, if we become aware of information related to the creditworthiness of a major customer, or if future actual default rates on receivables in general differ from those currently anticipated, we may have to adjust our allowance for doubtful accounts, which could adversely affect our business, financial condition or operating results.
Changes in civil forfeiture laws may affect our customers’ ability to purchase our products
Some of our customers use funds seized through civil forfeiture proceedings to fund the purchase of our products. Changes in state legislatures could impact our customers’ ability to seize funds or use seized funds to fund purchases. Changes in civil forfeiture statutes or regulations are outside of our control and could limit the amount of funds available to our customers, which could adversely affect the sale of our products.
SaaS revenue for Evidence.com is recognized over the terms of the contracts, which may be several years, and, as such, trends in new business may not be immediately reflected in our operating results.
Our SaaS service revenue is generally recognized ratably over the terms of the contracts, which generally range from one to five years. As a result, most of the SaaS revenue we report each quarter is the result of agreements entered into during previous quarters. Consequently, current positive or negative trends in this portion of our business may not be fully reflected in our revenue results for several periods.
We utilize multiple third-party cloud-based storage providers to host the Axon Evidence.com platform.
Utilizing and administering multiple cloud-based storage providers may result in duplication of efforts and resources, increased cost structure, and organization complexities. These complexities and additional costs could adversely affect our business, financial condition or operating results.
We may face personal injury, wrongful death and other liability claims that harm our reputation and adversely affect our sales and financial condition.
Our CEW products are often used in aggressive confrontations that may result in serious, permanent bodily injury or death to those involved. Our CEW products may be associated with these injuries. A person, or the family members of a person, injured in a confrontation or otherwise in connection with the use of our products, may bring legal action against us to recover damages on the basis of theories including wrongful death, personal injury, negligent design, defective product or inadequate warning. We are currently subject to a number of such lawsuits and we have been subject to significant adverse judgments and settlements. We may also be subject to lawsuits involving allegations of misuse of our products. If successful, wrongful death, personal injury, misuse and other claims could have a material adverse effect on our operating results and financial condition and could result in negative publicity about our products. Although we carry product liability insurance, we do incur significant legal expenses within our self-insured retention in defending these lawsuits and significant litigation could also result in a diversion of management’s attention and resources, negative publicity and a potential award of monetary damages in excess of our insurance coverage. The outcome of any litigation is inherently uncertain and there can be no assurance that our existing or any future litigation will not have a material adverse effect on our business, financial condition or operating results.
Other litigation may subject us to significant litigation costs and judgments and divert management attention from our business.
We have been or could in the future be involved in numerous other litigation matters relating to our products, contracts and business relationships, including litigation against persons whom we believe have infringed on our intellectual property, infringement litigation filed against the Company, litigation against a competitor and litigation filed by a former distributor against the Company. Such matters have resulted, and are expected to continue to result in, substantial costs to us, including in the form of attorney’s fees and costs, damages, fines or other penalties, whether pursuant to a judgment or settlement, and diversion of our management’s attention, which could adversely affect our business, financial condition or operating results. There is also a risk of adverse judgments, as the outcome of litigation is inherently uncertain.
If we are unable to protect our intellectual property, we may lose our competitive advantage or incur substantial litigation costs to protect our rights. We may be subject to intellectual property infringement claims, which could cause us to incur litigation costs and divert management attention from our business.
Our future success depends upon our proprietary technology. Our protective measures, including patents, trademarks, copyrights, trade secret protection, and Internet identity registrations, may prove inadequate to protect our proprietary rights and market advantage. The right to stop others from misusing our trademarks and service marks in commerce depends, to some extent, on our ability to show evidence of enforcement of our rights against such misuse in commerce. Our efforts to stop improper use, if insufficient, may lead to loss of trademark and service mark rights, brand loyalty and notoriety among our customers and prospective customers. The scope of any patent to which we have or may obtain rights may not prevent others from developing and selling competing products. The validity and breadth of claims covered in technology patents involve complex legal and factual questions, and the resolution of such claims may be highly uncertain, lengthy and expensive. In addition, our patents may be held invalid upon challenge, or others may claim rights in or ownership of our patents. Moreover, we are subject to litigation with parties that claim, among other matters, that we infringed their patents or other intellectual property rights. The defense and prosecution of patent and other intellectual property claims are both costly and time consuming, divert our management’s attention from our business and could result in a material adverse effect on our business, and financial position and operating results.
If our products were found to infringe a third-party’s proprietary rights, we could be forced to enter into costly royalty or licensing agreements in order to be able to sell our products or discontinue use of the protected technology. Such royalty and licensing agreements may not be available on terms acceptable to us or at all. We could also be required to pay substantial damages, fines or other penalties, indemnify customers or distributors, cease the manufacture, use, or sale of infringing products or processes, and/or expend significant resources to develop or acquire non-infringing technologies. There is no guarantee that our use of conventional technology searching and brand clearance searching will identify all potential rights holders. Rights holders may demand payment for past infringements and/or force us to accept costly license terms or discontinue use of protected technology and/or works of authorship that may include, for example, photos, videos, and software. Our current research and development focus on developing software-based products increases this risk.
In foreign countries, we can enforce patent rights only in the jurisdictions in which our patent applications have been granted.
Our U.S. patents protect us from imported infringing products coming into the U.S. from abroad. We have made applications for patents in a few foreign countries; however, these may be inadequate to protect markets for our products in other foreign countries. Each foreign patent is examined and granted according to the law of the country where it was filed independent of whether a U.S. patent on similar technology was granted. A patent in a foreign country may be subject to cancellation if the claimed invention has not been sold in that country. Meeting the requirements of working invention differs by country and ranges from sales in the country to manufacturing in the country. U.S. export law, or the laws of some foreign countries, may prohibit us from satisfying the requirements for working the invention, creating a risk that some of our foreign patents may become unenforceable.
Government regulations applied to our CEW products may affect our markets for and sales of these products.
We rely on the opinions of the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, including the determination that a device that has projectiles propelled by the release of compressed gas in place of the expanding gases from ignited gunpowder, are not classified as firearms. Changes in statutes, regulations, and interpretation outside of our control may result in our products being classified or reclassified as firearms. Our private citizen market could be substantially reduced if consumers are required to obtain a registration to own a firearm prior to purchasing our products.
Federal regulation of sales in the U.S.: Our CEWs are not firearms regulated by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, but our consumer products are regulated by the U.S. Consumer Product Safety Commission. Although there are currently no Federal laws restricting sales of our core CEW products in the U.S., future Federal regulation could adversely affect sales of our products.
Federal regulation of international sales: Our CEW devices are considered a “crime control” product by the U.S. Department of Commerce (“DOC”) for export directly from the U.S. Consequently, we must obtain an export license from the DOC for the export of our CEW devices from the U.S. other than to Canada. In addition, certain of our camera and software products require classifications from the DOC before they may be shipped internationally. Our inability to obtain DOC export licenses or classifications on a timely basis for sales of our products to our international customers could significantly and adversely affect our international sales.
State and local regulation: Our CEW devices are controlled, restricted or their use prohibited by a number of state and local governments. Our CEW devices are banned from private citizen purchase or use by statute in five states: Hawaii, Massachusetts, New York, and Rhode Island, as well as in the District of Columbia. Some cities and municipalities also prohibit private citizen possession or use of our CEW products. Other jurisdictions may ban or restrict the sale of our CEW products and our product sales may be significantly affected by additional state, county and city governmental regulation.
Foreign regulation: Certain foreign jurisdictions prohibit, restrict, or require a permit for the importation, sale, possession or use of CEWs, including in some countries by law enforcement agencies, limiting our international sales opportunities.
Our CEW products are also subject to regulation by testing, safety and other standard organizations (e.g. ANSI, IEC, NIST).
Our international operations expose us to additional risks that could harm our business, operating results, and financial condition.
Our international operations are significant, and we plan to continue to grow internationally by acquiring existing entities or setting up new legal entities in new markets. In certain international markets, we have limited operating experience and may not benefit from any first-to-market advantages or otherwise succeed. In addition to risks described elsewhere in this section, our international operations expose us to other risks, including the following:
Restrictions on foreign ownership and investments, and stringent foreign exchange controls that might prevent us from repatriating cash earned in countries outside the U.S.
Import and export requirements, tariffs, trade disputes and barriers, and customs classifications that may prevent us from offering products or providing services to a particular market or obtaining necessary parts and components to manufacture products, which may lead to decreased sales and may increase our operating costs.
Longer payment cycles in some countries, increased credit risk, and higher levels of payment fraud.
Uncertainty regarding liability for products and services, including uncertainty as a result of local laws and lack of legal precedent.
Different employee/employer relationships, existence of workers' councils and labor unions, and other challenges caused by distance, language, and cultural differences, making it harder to do business in certain jurisdictions.
Additionally, changes in international local political, economic, regulatory, tax, social, and labor conditions may adversely harm our business and compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business. These numerous and sometimes conflicting laws and regulations include, among others, internal control and disclosure rules, privacy and data protection requirements, anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, and other local laws prohibiting corrupt payments to governmental officials, and competition regulations, among others. Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially affect our brand, our international growth efforts, our ability to attract and retain employees, our business, and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies.
Environmental laws and regulations subject us to a number of risks and could result in significant liabilities and costs.
We are subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in our products and making producers for those products financially responsible for the collection, treatment, recycling and disposal. Environmental legislation within the European Union (“EU”) may increase our cost of doing business internationally and impact our revenues from EU countries as we comply with and implement these requirements.
The EU has published Directives on the restriction of certain hazardous substances in electronic and electrical equipment (the “RoHS Directive”) and on electronic and electrical waste management (the “WEEE Directive”). The RoHS Directive restricts the use of a number of substances, including lead. The WEEE Directive directs members of the EU to enact laws, regulations, and administrative provisions to ensure that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the EU. In addition, similar
environmental legislation has been or may be enacted in other jurisdictions, including the U.S. (under federal and state laws) and other countries, the cumulative impact of which could be significant.
We continue to monitor the impact of specific registration and compliance activities required by the RoHS and WEEE Directives. We endeavor to comply with applicable environmental laws, yet compliance with such laws could increase our operations and product costs, increase the complexities of product design, procurement, and manufacturing, limit our ability to manage excess and obsolete non-compliant inventory, limit our sales activities, and impact our future financial results. Any violation of these laws can subject us to significant liability, including fines, penalties, and prohibiting sales of our products into one or more states or countries, and result in a material adverse effect on our financial condition.
Regulations related to voice, data and communications services may impact our ability to sell our products.
The radio spectrum is required to provide wireless voice, data and video communications services. The allocation of spectrum is regulated in the U.S. and other countries and limited spectrum space is allocated to wireless services and specifically to public safety users. In the U.S., the Federal Communications Commission (“FCC”) regulates spectrum use by non-federal entities and federal entities. Similarly, countries around the world have one or more regulatory bodies that define and implement the rules for use of radio spectrum and electromagnetic interference, pursuant to their respective national laws. We manufacture and market products in spectrum bands already made available by regulatory bodies. Consequently, our results could be positively or negatively affected by the rules and regulations adopted from time to time by the FCC or regulatory agencies in other countries. Regulatory changes in current spectrum bands may also provide opportunities or may require modifications to some of our products so they can continue to be manufactured and marketed. If current products do not comply with the regulations set forth by these governing bodies, we may be unable to sell our products or could incur penalties, which could have an adverse impact on our financial condition, results of operations and cash flows.
Regulations related to conflict minerals may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.
The U.S. Securities and Exchange Commission ("SEC") has enacted disclosure requirements for companies that use certain minerals and metals, known as “conflict minerals,” in their products, whether or not these products are manufactured by third-parties. These requirements require companies to perform due diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. We have incurred and will likely continue to incur costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. In addition, these new requirements could adversely affect the sourcing, availability and pricing of minerals used in our products. Because our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such an event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict-free.
Our dependence on third-party suppliers for key components of our devices could delay shipment of our products and reduce our sales.
We depend on certain domestic and foreigninternational suppliers for the delivery of components used in the assembly of our products. Our reliance on third-party suppliers creates risks related to our potential inability to obtain an adequate supply of components or sub-assemblies and reduced control over pricing and timing of delivery of components and sub-assemblies. Specifically, we depend on suppliers of sub-assemblies, machined parts, injection molded plastic parts, printed circuit boards, custom wire fabrications and other miscellaneous customer parts for our products. We do not have any significant long-term agreements with any of our suppliers and there is no guarantee that supply will not be interrupted. Due to changes imposed for imports of foreign products into the U.S., as well as potential port closures and delays created by terrorist attacks or threats, public health issues, national disasters or work stoppages, we are exposed to risk of delays caused by freight carriers or customs clearance issues for our imported parts. Any interruption of supply for any material components of our products could significantly delay the shipment of our products and have a material adverse effect on our revenues, profitability and financial condition.
Component shortages could result in our inability to produce at a volume to adequately meet customer demand, which could result in a loss of sales, delay in deliveries and injury to our reputation.
Single or sole-source components used in the manufacture of our products may become unavailable or discontinued. Delays caused by industry allocations or obsolescence may take weeks or months to resolve. In some cases, parts obsolescence may require a product re-design to ensure quality replacement components. These delays could cause significant delays in manufacturing and loss of sales, leading to adverse effects significantly impacting our financial condition or results of operations and could injure our reputation.
We may experience a decline in gross margins due to rising raw material and transportation costs associated with a future increase in petroleum prices.
A significant number of our raw materials 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. A significant rise in oil pricesOur freight and import costs and the timely delivery of our products could be adversely impacted by a number of factors which could reduce the profitability of our operations, 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 our revenues, profitability and financial condition. International or domestic geopolitical or other events, including the 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 ability to sustain current gross margins by increasing component pricing and transportation costs.
We may experience a decline in gross margins due to a shift in product sales from CEWs to Axon devices which may continue to carry a lower gross margin.
We continue to invest in the growth of the Software and Sensors segment, and this expected growth may result in a higher percentage of total revenues being comprised of Software and Sensors products and services. Gross margin as a percentage of net sales for the Software and Sensors segment is currently lower than that of the TASER Weapons segment, and may continue to be lower in the future.operations.
To the extent demand for our products increases, our future success will be dependent upon our ability to manage our growth and to increase manufacturing production capacity, which may be accomplished by the implementation of customized manufacturing automation equipment.
To the extent demand for our products increases significantly in future periods, one of our key challenges will be to increase our production capacity to meet sales demand while maintaining product quality. Our primary strategies to accomplish this include introducing additional shifts, increasing the physical size of our assembly facilities, the hiring of additional production staff, and the implementation of additional customized automation equipment. The investments we make in this equipment may not yield the anticipated labor and material efficiencies. Our inability to meet any future increase in sales demand or effectively manage our expansion could have a material adverse effect on our revenues, financial results and financial condition.
Our future success is dependent on our ability to expand sales through distributors and direct sales and our inability to recruit new distributors or increase direct sales would negatively affect our sales.
Our distribution strategy is to pursue sales through multiple channels with an emphasis on independent distributors and direct sales. Our inability to establish relationships with and retain law enforcement equipment distributors, who we believe can successfully sell our products, would adversely affect our sales. In addition, our arrangements with our distributors are generally short-term. We are also focusing on direct sales to larger agencies through our regional sales managers and our inability to grow sales to these agencies in this manner could adversely affect our sales. If we do not competitively price our products, meet the requirements of our distributors or end-users, provide adequate marketing support, or comply with the terms of our distribution arrangements, our distributors may fail to aggressively market our products or may terminate their relationships with us. These developments would likely have a material adverse effect on our sales. Our reliance on the sales of our products by others also makes it more difficult to predict our revenues, cash flow and operating results.
The increased focus on direct sales compared to sales through distribution is dependent on our ability to sell into the states or foreign jurisdictions that have established distributor relationships.
In certain states and foreign jurisdictions we have decided to pursue sales directly with law enforcement customers, rather than working through established distribution channels. Our customers may have strong working relationships with distributors and we may face resistance to this change. If we do not overcome this resistance and effectively build a direct relationship with our customers, sales may be adversely affected.
We expend significant resources in anticipation of a sale due to our lengthy sales cycle and may receive no revenue in return.
Generally, law enforcement and corrections agencies consider a wide range of issues before committing to purchase our products, including product benefits, training costs, the cost to use our products in addition to, or in place of, other products, budget constraints and product reliability, safety and efficacy. The length of our sales cycle may range from a few weeks to as long as several years. Adverse publicity surrounding our products or the safety of such products has in the past, and could in the future, lengthen our sales cycle with customers. In the past, we believe that our sales were adversely impacted by negative publicity surrounding our products or the use of our products. See, for example, “Litigation - Product Litigation” in Note 9 of our consolidated financial statements included in Part II, Item 8 of this report. We may incur substantial selling costs and expend significant effort in connection with the evaluation of our products by potential customers before they place an order. If these potential customers do not purchase our products, we will have expended significant resources and received no revenue in return.
An increasing percentage of our revenue is derived from subscription billing arrangements which may result in delayed cash collections and may increase customer credit risk on receivables and contract assets.
A growing portion of our sales are derived from subscription billing arrangements and on an open credit basis. While we perform ongoing credit evaluations of our customers' financial condition, if we become aware of information related to the creditworthiness of a major customer, or if future actual default rates on receivables in general differ from those currently anticipated, we may have to adjust our allowance for doubtful accounts, which could adversely affect our business, financial condition or operating results.
We may experience a decline in gross margins due to a shift in product sales from CEDs to software and sensors products and services which may continue to carry a lower gross margin.
We continue to invest in the growth of the Software and Sensors segment, and this expected growth may result in a higher percentage of total revenues being comprised of Software and Sensors products and services. Gross margin as a percentage of net sales for the Software and Sensors segment is currently lower than that of the TASER segment, and may continue to be lower in the future.
SaaS revenue for Axon Evidence is recognized over the terms of the contracts, which may be several years, and, as such, trends in new business may not be immediately reflected in our operating results.
Our SaaS service revenue is generally recognized ratably over the terms of the contracts, which generally range from one to five years. As a result, most of the SaaS revenue we report each quarter is the result of agreements entered into during previous quarters. Consequently, current positive or negative trends in this portion of our business may not be fully reflected in our revenue results for several periods.
Most of our end-user customers are subject to budgetary and political constraints that may delay or prevent sales.
Most of our end-user customers are government agencies. These agencies often do not set their own budgets and therefore, have limited control over the amount of money they can spend. In addition, these agencies experience political pressure that may dictate the manner in which they spend money. As a result, even if an agency wants to acquire our products, it may be unable to purchase them due to budgetary or political constraints, particularly in challenging economic environments. There can be no assurance that the economic and budgeting issues will not worsen and adversely impact sales of our products. Some government agency orders may also be canceled or substantially delayed due to budgetary, political or other scheduling delays, which frequently occur in connection with the acquisition of products by such agencies, and such cancellations may accelerate or be more severe than we have experienced historically.
Due to municipal government funding rules, certain of our contracts are subject to appropriation, termination for convenience, or similar cancellation clauses, which could allow our customers to cancel or not exercise options to renew contracts in the future.
Although we have entered into contracts for the delivery of products and services in the future and anticipate the contracts will be completed, if agencies do not appropriate money in future year budgets, terminate contracts for convenience or if other cancellation clauses are invoked, revenue and cash associated with these bookings will not ultimately be recognized, and could result in a reduction to bookings and revenue.
Changes in civil forfeiture laws may affect our customers’ ability to purchase our products.
Some of our customers use funds seized through civil forfeiture proceedings to fund the purchase of our products. Legislative changes could impact our customers’ ability to seize funds or use seized funds to fund purchases. Changes in civil forfeiture statutes or regulations are outside of our control and could limit the amount of funds available to our customers, which could adversely affect the sale of our products.
If our security measures or those of our third-party cloud storage providers are breached and unauthorized access is obtained to customers’ data or our data, our network, data centers and service may be perceived as not being secure, customers may curtail or stop using our service and we may incur significant legal and financial exposure and liabilities.
Our service involves the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of information or the total or partial deletion or encryption of all stored customer data, litigation and possible liability. We devote significant resources to engineer secure products and ensure security vulnerabilities are mitigated, and we require our third-party service providers to do so as well. Despite these efforts, security measures may be breached as a result of third-party action, employee error, and malfeasance or otherwise. Breaches could occur during transfer of data to data centers or at any time, and result in unauthorized access to our data or our customers’ data. Third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our data or our customers’ data. Additionally, hackers may develop and deploy viruses, worms, and other malicious software programs that attack or gain access to our networks and data centers.
Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently, grow more complex over time, and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Moreover, our security measures and those of our third-party service providers or customers may not detect such security breaches if they occur. Although we have
developed systems and processes that are designed to protect our data and user data, to prevent data loss, and to prevent or detect security breaches, we cannot assure that such measures will provide absolute security, and we may incur significant costs in protecting against or remediating cyber-attacks.
A security breach could expose us to a risk of loss or inappropriate use of proprietary and sensitive data, or the denial of access to this data. A security breach could also result in a loss of confidence in the security of our service, disrupt our business, damage our reputation, lead to legal liability, negatively impact our future sales and significantly harm our growth prospects, operating results and financial condition.
Defects or disruptions in our services could impact demand for our services and subject us to substantial liability.
We currently serve our Axon Evidence customers from third-party cloud storage providers based in the U.S. and other countries. Interruptions in our service, or loss or corruption of digital evidence, may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.
Since our customers use our services for important aspects of their operations, any errors, defects, disruptions in service or other performance problems could hurt our reputation and may damage our customers’ operations. As a result, customers could elect to not renew our services or delay or withhold payment to us. We could also lose future sales or customers may make warranty or other claims against us, which could result in an increase in our warranty expense, an increase in collection cycles for and decline in the collectability of accounts receivable, and an increase in the expense and risk of litigation.
Defects in our products could reduce demand for our products and result in a loss of sales, delay in market acceptance and damage to our reputation.
Complex components and assemblies used in our products may contain undetected defects that are subsequently discovered at any point in the life of the product. Defects in our products could result in a loss of sales, delay in market acceptance, damage to our reputation and increased warranty costs, which could adversely affect our business, financial results and competitive position.
A variety of new and existing laws and/or interpretations could materially and adversely affect our business.
We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, including privacy, data protection and personal information, rights of publicity, content, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, electronic contracts and other communications, competition, consumer protection, telecommunications, product liability, taxation, labor and employment, economic or other trade prohibitions or sanctions, securities law compliance, and online payment services. The introduction of new products, expansion of our activities in certain jurisdictions, or other actions that we may take may subject us to additional laws, regulations, or other government scrutiny. In addition, foreign data protection, privacy, content, competition, and other laws and regulations can impose different obligations or be more restrictive than those in the United States.
These U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these laws and regulations are often uncertain and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices. New laws and regulations (or new interpretations of existing laws and regulations) may require us to incur substantial costs, expose us to unanticipated civil or criminal liability, or cause us to change our business practices.
The costs of compliance with these laws and regulation are high and are likely to increase in the future. Additionally, these laws and regulations, or any associated inquiries or investigations or other government actions, may delay or impede the development of new products, result in negative publicity, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices.
TASER and Axon devices
For our TASER products, we rely on the opinions of the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, including the determination that a device that has projectiles propelled by the release of compressed gas in place of the expanding gases from ignited gunpowder is not classified as a firearm. Changes in statutes, regulations, and interpretation outside of our control may result in our products being classified or reclassified as firearms. If this were to occur, our private citizen market could be substantially reduced because consumers would be required to comply with federal, state, or local firearm transfer requirements prior to purchasing our products.
Federal regulation of sales in the U.S.: Our CEDs are not firearms regulated by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, but our consumer products are regulated by the U.S. Consumer Product Safety Commission. Although there are currently no federal laws restricting sales of our core CED products in the U.S., future federal regulation could adversely affect sales of our products.
Axon devices using lithium batteries are subject to US-DOT/UN 38.3 for transportation, and all our products containing hazardous chemicals require an additional safety data sheet following Occupational Safety and Health Administration ("OSHA") recommendation.
Our CED products are also subject to regulation by testing, safety and other standard organizations such as the American National Standards Institute, the International Electrotechnical Commission ("IEC"), the National Institute of Standards and Technology, and Underwriters Laboratories ("UL"). We follow IEC 62133 for our rechargeable battery packs, UL 1642 for cells, and IEC 60950 (soon to be replaced by IEC 62368) for our wireless and docks devices. These regulations also affect CEDs with Axon signal technology, including signal performance power magazine technology, TASER 7 battery packs and could impact future CEDs that feature wireless technology. Compliance with government regulations could increase our operations and product costs and impact our future financial results.
Federal regulation of international sales: Our CEDs are considered a “crime control” product by the U.S. Department of Commerce (“DOC”) for export directly from the U.S. Consequently, we must obtain an export license from the DOC for the export of our CED devices from the U.S. other than to Canada. In addition, certain of our camera and software products require classifications from the DOC before they may be shipped internationally. Our inability to obtain DOC export licenses or classifications on a timely basis for sales of our products to our international customers could significantly and adversely affect our international sales.
State and local regulation: Our CEDs are controlled, restricted or, less frequently, prohibited by a number of state and local governments. As of December 31, 2019, the possession of stun guns by the general public, including our CEDs, is prohibited in Hawaii and Rhode Island. Some cities and municipalities also prohibit private citizen possession or use of our CED products. Other jurisdictions may ban or restrict the sale of our CED products and our product sales may be significantly affected by additional state, county and city governmental regulation.
International regulation: Certain jurisdictions prohibit, restrict, or require a permit for the importation, sale, possession or use of CEDs, including in some countries by law enforcement agencies, limiting our international sales opportunities.
Radio spectrum devices
Certain of our products utilize the radio spectrum to provide wireless voice, data and video communications services. The allocation of spectrum is regulated in the U.S. and other countries and limited spectrum space is allocated to wireless services and specifically to public safety users. In the U.S., the Federal Communications Commission (“FCC”) regulates spectrum use by non-federal entities and federal entities. Similarly, countries around the world have one or more regulatory bodies that define and implement the rules for use of radio spectrum and electromagnetic interference, pursuant to their respective national laws. We manufacture and market products in spectrum bands already made available by regulatory bodies. Consequently, our results could be negatively affected by the rules and regulations adopted from time to time by the FCC or regulatory agencies in other countries. Regulatory changes in current spectrum bands may also require modifications to some of our products so they can continue to be manufactured and marketed. If current products do not comply with the regulations set forth by these governing bodies, we may be unable to sell our products or could incur penalties, which could have an adverse impact on our financial condition, results of operations and cash flows.
Axon body worn cameras, docks, fleet vehicle cameras and signal devices are subject to FCC’s rules and regulations. The FCC regulates not only the "intentional radiation" of radio transmitters, but also the "unintentional radiation" of noise from all sorts of electrical equipment. The FCC regulations appear in title 47 of the United States Code of Federal Regulations (47CFR).The current Axon products use Bluetooth, WiFi and/or LTE radio technologies. With the integration of LTE technologies, it is required to apply for the approval of private certifications such as CTIA, required by FirstNet and other operators. These regulations are also beginning to affect CEDs with signal performance power magazine technology and future CEDs implementing wireless technology into the feature set. Compliance with government regulations could increase our operations and product costs and impact our future financial results.
Environmental regulations
We are subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in our products and making producers of those products financially responsible for the collection, treatment, recycling and disposal of such products. In particular, environmental legislation within the European Union ("EU") may increase our cost of doing business internationally and impact our revenues from EU countries as we comply with and implement these requirements.
The EU has published Directives on the restriction of certain hazardous substances in electronic and electrical equipment (the “RoHS Directive”) and on electronic and electrical waste management (the “WEEE Directive”). The RoHS Directive restricts the use of a number of substances, including lead. The WEEE Directive directs members of the EU to enact laws, regulations, and administrative provisions to ensure that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the EU. In addition, similar environmental legislation has been or may be enacted in other jurisdictions, including the U.S. (under federal and state laws) and other countries, the cumulative impact of which could be significant.
In addition, the EU has defined a regulation for Registration, Evaluation, Authorization and Restriction of Chemicals (the “REACH Regulation”) that places responsibility on industry to manage the risks from chemicals contained in products and to provide safety information about such substances. Manufacturers and importers are required to gather information on the properties of the chemical substances in their products, which will allow their safe handling. Starting January 5, 2021, companies supplying products containing substances of very high concern as identified by the EU on the EU market have to submit information on these products to the European Chemicals Agency. The information in their database is then made available to waste operators and consumers.
We continue to monitor the impact of specific registration and compliance activities required by the RoHS, WEEE Directives, and REACH Regulation. We endeavor to comply with applicable environmental laws, yet compliance with such laws could increase our operations and product costs, increase the complexities of product design, procurement, and manufacturing, limit our ability to manage excess and obsolete non-compliant inventory, limit our sales activities, and impact our future financial results. Any violation of these laws can subject us to significant liability, including fines, penalties, and prohibiting sales of our products into one or more states or countries, and result in a material adverse effect on our financial condition.
Privacy regulations
We are also subject to laws and regulations that dictate whether, how, and under what circumstances we can transfer, process and/or receive certain data that is critical to our operations, including data shared between countries or regions in which we operate and data shared among our products and services. For example, in 2016, the EU and the U.S. agreed to an alternative transfer framework for data transferred from the EU to the U.S., called the Privacy Shield, but this new framework is subject to an annual review that could result in changes to our obligations and also may be challenged by national regulators or private parties. If one or more of the legal bases for transferring data from the EU to the U.S. is invalidated, if we are unable to transfer data between and among countries and regions in which we operate, or if we are prohibited from sharing data among our products and services, it could affect the manner in which we provide our services or adversely affect our financial results.
Proposed or new legislation and regulations could also significantly affect our business. There currently are a number of proposals pending before federal, state, and foreign legislative and regulatory bodies. In addition, the European General Data Protection Regulation ("GDPR") took effect in May 2018 and applies to all of our products
and services that provide service in Europe. The GDPR includes operational requirements for companies that receive or process personal data of residents of the EU that are different than those previously in place in the EU. In addition, the GDPR includes significant penalties for non-compliance. Similarly, there are a number of legislative proposals in the U.S., at both the federal and state level, that could impose new obligations in areas affecting our business, such as liability for copyright infringement by third parties. In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services.
We may face personal injury, wrongful death and other liability claims that harm our reputation and adversely affect our sales and financial condition.
Our CED products are often used in aggressive confrontations that may result in serious, permanent bodily injury or death to those involved. Our CED products may be associated with these injuries. A person, or the family members of a person, injured in a confrontation or otherwise in connection with the use of our products, may bring legal action against us to recover damages on the basis of theories including wrongful death, personal injury, negligent design, defective product or inadequate warning. We are currently subject to a number of such lawsuits and we have been subject to significant adverse judgments and settlements. We may also be subject to lawsuits involving allegations of misuse of our products. If successful, wrongful death, personal injury, misuse and other claims could have a material adverse effect on our operating results and financial condition and could result in negative publicity about our products. We incur significant legal expenses in defending these cases, and significant litigation could also result in a diversion of management’s attention and resources, negative publicity and a potential award of monetary damages in excess of our insurance coverage. The outcome of any litigation is inherently uncertain and there can be no assurance that our existing or any future litigation will not have a material adverse effect on our business, financial condition or operating results.
Other litigation may subject us to significant litigation costs and judgments and divert management attention from our business.
We have been or could in the future be involved in numerous other litigation matters relating to our products, contracts and business relationships, including litigation against persons whom we believe have infringed on our intellectual property, infringement litigation filed against us, litigation against a competitor, enforcement actions filed against us, and litigation involving the U.S. Federal Trade Commission(“FTC”). Such matters have resulted, and are expected to continue to result in, substantial costs to us, including in the form of attorneys' fees and costs, damages, fines or other penalties, whether pursuant to a judgment or settlement, and diversion of our management’s attention, which could adversely affect our business, financial condition or operating results. There is also a risk of adverse judgments, as the outcome of litigation is inherently uncertain.
We have been, and may be in the future, subject to intellectual property infringement and other claims, which could incur substantial litigation costs, result in significant damage awards, inhibit our use of certain technologies, and divert management attention from our business.
Many companies own intellectual property rights that are directly or indirectly related to public safety technologies. These companies periodically demand licensing agreements or engage in litigation based on allegations of infringement or other violations of their patents, trademarks, copyrights, or trade secrets. Non-practicing entities also have patents they have been granted or otherwise acquired, including patents that are directly or indirectly related to public safety technologies. These entities may seek compensation for perceived infringement of their patents, including by filing claims against us, independent of the merit of any such claims. As we enter new markets, expand into new product categories, and otherwise offer new products, services, and technologies, additional intellectual property claims may be filed against us by these companies, entities, and other third parties. Additional intellectual property claims may also be filed against us as our current products, services, and technologies gain additional market share.
Currently, we are a defendant in a patent litigation matter filed by Digital Ally Inc. (“Digital”) in the District of Kansas alleging patent infringement regarding our Axon Signal technology. For additional discussion of this matter, refer to Note 9 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-
K. We believe the patent in question is both invalid and not infringed. However, if Digital ultimately succeeds in their appeal, the outcome could have an adverse effect on our results of operations in the period in which a liability is recognized and on our cash flows for the period in which any damages are paid.
If our products, services, or technologies were found to infringe a third-party’s proprietary rights, we could be forced to enter into costly royalty or licensing agreements in order to be able to sell our products or discontinue use of the protected technology. Such royalty and licensing agreements may not be available on terms acceptable to us or at all. We could also be required to pay substantial damages, fines or other penalties, indemnify customers or distributors, cease the manufacture, use, or sale of infringing products or processes, and/or expend significant resources to develop or acquire non-infringing technologies. Our suppliers may not provide, or we may not be able to obtain, intellectual property indemnification sufficient to offset all damages, fines or other penalties resulting from any claims of intellectual property infringement brought against us or our customers. There is no guarantee that our use of conventional technology searching and brand clearance searching will identify all potential rights holders. Rights holders may demand payment for past infringements and/or force us to accept costly license terms or discontinue use of protected technology and/or works of authorship that may include, for example, photos, videos, and software. Our current research and development focus on developing software-based products, including that which is related to artificial intelligence, increases this risk.
If we are unable to protect our intellectual property, the value of our brands and products may decrease and we may lose our competitive market advantage.
Our future success depends upon our proprietary technology. Our protective measures for this proprietary technology include patents, trademarks, copyrights, and trade secret protection. However, these protective measures, as well as our efforts to pursue such protective measures, may prove inadequate. For example, the value of intellectual property protection in certain countries may not be apparent until after such protection can no longer be pursued. As such, our intellectual property protection may not extend to all countries in which our products are distributed or will be distributed in the future. Though we work to protect our innovations, we may not be able to obtain protection for certain innovations. For example, we may be unable to patent some software-based products. The scope of any patent protection we have obtained, or may obtain, may not prevent others from developing and selling competing products. Despite our efforts, any intellectual property protection we obtain may be later determined to be insufficient or ineffective.
Our protective measures may prove inadequate for reasons outside of our control. Different intellectual property laws between different countries may lead to differences in protection between such countries. In certain countries in which our products are distributed, the ability to effectively enforce intellectual property rights may not exist. Patent requirements differ by country and certain domestic or foreign laws may prohibit us from satisfying these requirements, creating a risk that some of our international patents may become unenforceable. Patents for older technologies, such as our M26 model of CEDs, have expired or will expire due to statutory limits on patent term. Despite policies and efforts to maintain secrecy, trade secrets and other confidential information we maintain, or may choose to maintain in the future, could be compromised by employees, partners, or other third parties.
Once established, there is no guarantee that our intellectual property rights will remain in force. Issued patents may be re-examined and subsequently ruled invalid or unenforceable. Our registered trademarks may also be diminished or lost. For example, there is a risk that our “TASER” trademark could become synonymous with the general product category of “conducted energy devices”. The right to stop others from misusing our trademarks and service marks in commerce depends, to some extent, on our ability to show evidence of enforcement of our rights against such misuse in commerce. Our efforts to stop improper use, if insufficient, may lead to loss of trademark and service mark rights, brand loyalty and notoriety among our customers and prospective customers.
Our intellectual property may also be at risk if we are unable to defend from enforcement actions, such as that filed by the FTC against us regarding our acquisition of Vievu LLC from Safariland LLC on May 3, 2018. For additional discussion of this matter, refer to Note 9 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. If successful, the FTC is seeking a divestiture of Vievu along with Axon assets sufficient to stand up a viable competitor.
Inability to protect our intellectual property could negatively impact our commercial efforts and competitive market advantage. Regardless of outcome, the prosecution of patent and other intellectual property claims is both costly and time consuming. Unauthorized use of our proprietary technology could divert our management’s attention from our business, and could result in a material adverse effect on our business, financial position, and operating results.
Internationally, we can enforce patent rights only in the jurisdictions in which our patent applications have been granted.
Our U.S. patents protect us from imported infringing products coming into the U.S. from abroad. We have made applications for patents in a few foreign countries; however, these may be inadequate to protect markets for our products in other foreign countries. Each patent is examined and granted according to the law of the country where it was filed independent of whether a U.S. patent on similar technology was granted. A patent in a foreign country may be subject to cancellation if the claimed invention has not been sold in that country. Meeting the requirements of working invention differs by country and ranges from sales in the country to manufacturing in the country. U.S. export law, or the laws of some foreign countries, may prohibit us from satisfying the requirements for working the invention, creating a risk that some of our international patents may become unenforceable.
Our international operations expose us to additional risks that could harm our business, operating results, and financial condition.
Our international operations are significant, and we plan to continue to grow internationally by acquiring existing entities or setting up new legal entities in new markets. In certain international markets, we have limited operating experience and may not benefit from any first-to-market advantages or otherwise succeed. In addition to risks described elsewhere in this section, our international operations expose us to other risks, including the following:
Restrictions on foreign ownership and investments, and stringent foreign exchange controls that might prevent us from repatriating cash earned in countries outside the U.S.
Import and export requirements, tariffs, trade disputes and barriers, and customs classifications that may prevent us from offering products or providing services to a particular market or obtaining necessary parts and components to manufacture products, which may lead to decreased sales and may increase our operating costs.
Longer payment cycles in some countries, increased credit risk, and higher levels of payment fraud.
Uncertainty regarding liability for our products and services, including uncertainty as a result of local laws and lack of legal precedent.
Different employee/employer relationships, existence of workers' councils and labor unions, and other challenges caused by distance, language, and cultural differences, making it harder to do business in certain jurisdictions.
Additionally, changes in international local political, economic, regulatory, tax, social, and labor conditions may adversely harm our business and compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business. These numerous and sometimes conflicting laws and regulations include, among others, environmental regulations, internal control and disclosure rules, privacy and data protection requirements, anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, and other local laws prohibiting corrupt payments to governmental officials, and competition regulations, among others.
Our business in the United Kingdom may be negatively impacted by uncertainty regarding the exit of the United Kingdom from the EU (commonly referred to as "Brexit"). The exit itself could negatively impact the United Kingdom and other economies, which could adversely affect sales of our products and services. We may also experience increased volatility in the value of the pound sterling, the euro and other European currencies. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations in the United Kingdom and the EU, and we may incur additional costs or need to make operational changes as we adapt to potentially divergent regulatory frameworks.
Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially affect our brand, our international growth efforts, our ability to attract and retain employees, our business, and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies.
Acquisitions, and joint ventures, and other strategic investments may have an adverse effect on our business.
We may consider additional acquisitions, or joint ventures, or other strategic investments as part of our long-term business strategy. These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, thatexpected synergies are not achieved, we do not realize a satisfactory return on our investment, or that we experience difficulty in the integration or coordination of new employees, business systems, and technology, we incur unanticipated liabilities, or there is a diversion of management’s attention from our other businesses. These events could harm our operating results, financial condition or cash flows.
If our goodwill or indefinite-livedintangible assets become impaired, we may be required to record a significant charge to earnings.
We acquire other companies and intangible assets and may not realize all the economic benefit from those acquisitions, which could cause an impairment of goodwill or intangibles. We review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We test goodwill and non-amortizable intangible assets for impairment at least annually. If such goodwill or indefinite-lived intangible assets are deemed to be impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets would be recognized. We review our indefinite-lived intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Events which might indicate impairment include, but are not limited to, declines in stock price market capitalization or cash flows, adverse cost factors, deteriorating financial performance, strategic decisions made in response to economic, market and competitive conditions, the impact of the economic environment on us and our customer base, and/or relevant events such as changes in management, key personnel, litigation or customers.
We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or indefinite-lived intangible assets is determined, which would negatively affect our results of operations.
Catastrophic events may disrupt our business.
A disruption or failure of our systems or operations in the event of a major earthquake, weather event, fire, explosion, failure to contain hazardous materials, industrial accident, cyber-attack, terrorist attack, public health crisis, or other catastrophic event could cause delays in completing sales, providing services, or performing other mission-critical functions. A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and our operating results as well as expose us to claims, litigation and governmental investigations and fines.
The Company’sIn late 2019, a novel strain of coronavirus was first detected in Wuhan, China. Following the outbreak of this virus, the Chinese government has quarantined certain affected regions and certain travel restrictions have been imposed. These events have had and could continue to have an impact on our supply chain. At the time of this filing, the outbreak has been largely concentrated in China, although a growing number of cases have been confirmed in other countries. If our backup and mitigation plans are not sufficient to minimize business disruption, our financial results could be adversely affected.
Our financial performance is subject to risks associated with changes in the value of the U.S. dollar versus local currencies.
For current and potential foreigninternational customers whose contracts are denominated in U.S. dollars, the relative change in local currency values creates relative fluctuations in our product pricing. These changes in foreigninternational end-user costs may result in lost orders and reduce the competitiveness of our products in certain foreign markets.
Additionally, intercompany sales to our non-U.S. dollar functional currency international subsidiaries are transacted in U.S. dollars which could increase our foreign exchange rate risk caused by foreign currency transaction gains and losses.
For non-U.S. dollar denominated sales, weakening of foreign currencies relative to the U.S. dollar generally leads us to raise international pricing, potentially reducing demand for our products. Should we decide not to raise local prices to fully offset the dollar’s strengthening, or at all, the U.S. dollar value of our foreign currency denominated sales and earnings would be adversely affected. We do not currently engage in hedging activities. Fluctuations in foreign currency could result in a change in the U.S. dollar value of our foreign denominated assets and liabilities including accounts receivable. Therefore, the U.S. dollar equivalent collected on a given sale could be less than the amount invoiced causing the sale to be less profitable than contemplated.
We also import selected components which are used in the manufacturing of some of our products. Although our purchase orders are generally in U.S. dollars, weakness in the U.S. dollar could lead to price increases for the components.
Unanticipated changes in our effective tax rate and additional tax liabilities may impact our operating resultsresults.
We are subject to income taxes in the United StatesU.S. and various jurisdictions outside of the United States.U.S. Our effective tax rate could fluctuate due to changes in the mix of earnings and losses in countries with differing statutory tax rates. Our tax expense could also be impacted by changes in non-deductible expenses, changes in excess tax benefits related to exercises of stock options and vesting of stock-based expense,restricted stock units, changes in the valuation of deferred tax assets and liabilities and our ability to utilize them, and the applicability of withholding taxes.taxes, and changes in our liability for unrecognized tax benefits.
We are subject to tax examinations in multiple jurisdictions. While we regularly evaluate new information that may change our judgment resulting in recognition, derecognition or change in measurement of a tax position taken, there can be no assurance that the final determination of any examinations will not have an adverse effect on our operating results and financial position.
Our tax provision could also be impacted by changes in federal, state or international tax laws including fundamental tax law changes applicable to corporate multinationals.
Additionally, we may be subject to additional tax liabilities due to changes in non-incomenon-income-based taxes resulting from changes in federal, state or international tax laws, changes in taxing jurisdictions’ administrative interpretations, decisions, policies, and positions, results of tax examinations, settlements or judicial decisions, changes in accounting principles, changes to the business operations, including acquisitions, as well as the evaluation of new information that results in a change to a tax position taken in a prior period.
The enactment of tax reform legislation, including legislation implementing changes in taxation of international business activities, could materially impact our financial position and results of operations.
Legislation or other changes in the tax laws could increase our liability and adversely affect our after-tax profitability. For example, the Tax Cuts and Jobs Act ("Tax Act") was enacted in the United States on December 22, 2017. The Tax Cuts and Jobs Act could havehad a significant impact on our effective tax rate, cash tax expenses and net deferred tax assets. The Tax Cuts and Jobs Act, reducesamong other things, reduced the U.S. corporate statutory tax rate, eliminateseliminated or limitslimited deduction of several expenses which were previously deductible, imposesimposed a mandatory deemed repatriation tax on undistributed historic earnings of foreign subsidiaries, requiresrequired a minimum tax on earnings generated by foreign subsidiaries and permitspermitted a tax-free repatriation of foreign earnings through a dividends received deduction. We are evaluating the overall impact of the Tax Cuts and Jobs Act on our effective tax rate and balance sheet, but expect that the impact may be significant for fiscal year 2018 and future periods.
We maintain most of our cash balances, some of which are not insured, at four depository institutions.
We maintain the majority of itsour cash and cash equivalents accounts at four depository institutions. As of December 31, 2017,2019, the aggregate balances in such accounts were $53.4$161.8 million. The Company’sOur balances with these institutions regularly exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits for domestic deposits and various foreign deposit insurance programs covering our deposits in Australia, Canada, Finland, Germany, Hong Kong, India, Italy, the Netherlands, the United Kingdom, Australia and Germany.Vietnam.
We could suffer losses with respect to the uninsured balances if the depositarydepository institutions failed and the institution’s assets were insufficient to cover its deposits and/or the governments did not take actions to support deposits in excess of existing insurance limits. Any such losses could have a material adverse effect on our liquidity, financial condition and results of operations.
We depend on our ability to attract and retain our key management, sales and technical personnel.
Our success depends upon the continued service of our key management personnel. Our success also depends on our ability to continue to attract, retain and motivate qualified technical personnel.employees. Although we have employment agreements with certain of our officers and other members of our executeexecutive management team, the employment of such persons is “at-will” and either we or the employee can terminate the employment relationship at any time, subject to the applicable terms of the employment agreements. The competition for our key employees is intense. The loss of the service of one or more of our key personnel could adversely impact our business, prospects, financial condition and operating results.
We are highly dependent on the services of Patrick W. Smith, our Chief Executive Officer.
We are highly dependent on the services of Patrick W. Smith, our founder and Chief Executive Officer. Our future success depends upon our ability to retain executive officers, specifically Mr. Smith, and any failure to do so could adversely impact our business, prospects, financial condition and operating results.
Stock compensation expense may have a material, unpredictable impact on our results of operations.
We have identifiedhistorically granted and expect to continue to grant stock-based compensation to key employees and non-employee directors as a material weakness in our internal control over financial reporting which could, if not remediated, result in material misstatementsmeans of attracting and retaining highly qualified personnel. All stock-based awards are required to be recognized in our financial statements.statements based on their grant date fair values. The amount recognized for stock compensation expense could vary depending on a number of assumptions or changes that may occur.
Although we have concluded thatFor awards containing multiple service, performance and market conditions, where 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 and timing of the performance criteria being satisfied, adjusted at each balance sheet date. Changes in the subjective and probability-based assumptions can materially affect the estimates of the fair value of the awards and timing of recognition of stock-based compensation expense and consequently, the related amount recognized in our consolidated financial statements as of December 31, 2017, present fairly, in all material respects, the results of operations financial position, and cash flows ofcomprehensive income.
If we achieve specific operational goals and the covered employees complete the requisite service conditions for the performance-based awards with multiple service, performance, and market conditions, including our company and its subsidiaries in conformity with generally accepted accounting principles, we have identified a material weakness in internal control over financial reporting related to the monitoring controls of the Company's subsidiary, Axon Public Safety U.K. Ltd. Under standards established by the Public Company Accounting Oversight Board, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. See Item 9A, "Controls and Procedures."
We have initiated remedial measures, but if our remedial measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements, and we could be required to restate our financial results. In addition, if we are unable to successfully remediate this material weakness and if we are unable to produce accurate and timely financial statements, it could adversely impact our businessCEO Performance Award and our eXponential Stock Performance Plan ("XSPP"), we will recognize stock price.
compensation expense regardless of whether the market conditions are achieved and the underlying tranches vest.
Risks Related to Ownership of Our Common Stock
The trading price of our common stock has been, and is likely to continue to be, volatile. In addition to the factors discussed in this Annual Report on Form 10-K, the trading price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
actual or anticipated fluctuations in our revenue and other operating results;
the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
investor sentiment with respect to our competitors, our business partners, and our industry in general;
announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
announcements by us or estimates by third-parties of actual or anticipated changes in the size of our user base, addressable market or the effectiveness of our products;
changes in operation performance and stock market valuations of technology companies in our industries, including our developers and competitors;
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
media coverage of our business and financial performance;
lawsuits threatened or filed against us;
developments in anticipated or new legislation and pending lawsuits or regulator actions, including interim or final rulings by tax, judicial or regulatory bodies; and
other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.
Our revenues and operating results may fluctuate unexpectedly from quarter-to-quarter, which may cause our stock price to decline.
Our revenues and operating results have varied significantly in the past and may vary significantly in the future due to various factors, including, but not limited to:
budgetary cycles of municipal, state and federal law enforcement and corrections agencies;
market acceptance of our products and services;
the timing of large domestic and international orders;
the outcome of any existing or future litigation;
adverse publicity surrounding our products, the safety of our products, or the use of our products;
changes in our sales mix;
new product introduction costs;
increased raw material expenses;
changes in our operating expenses;expenses, including stock-based compensation expense;
changes in foreign currency exchange rates and
regulatory changes that may affect the marketability of our products.
As a result of these and other factors, we believe that period-to-period comparisons of our operating results may not be meaningful in the short term, and our performance in a particular period may not be indicative of our performance in any future period.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters and manufacturing facilities are based in aan approximately 100,000 square foot facility in Scottsdale, Arizona, which we own. We also lease premises in Phoenix, Arizona; Scottsdale, Arizona; Topsfield, Massachusetts; Seattle, Washington; Topsfield, Massachusetts; Melbourne, Australia; Sydney, Australia; Toronto, Canada; Daventry, England;London, England; Tampere, Finland; Frankfurt, Germany; Mumbai, India;Amsterdam, Netherlands; Daventry, England; London, England; Frankfurt, Germany; Brisbane, Australia; Sydney, Australia,and Ho Chi Minh City, Vietnam and Tampere, Finland. Vietnam.
We believe our existing facilities are well maintained and in good operating condition. We also believe we have adequate manufacturing capacity for our existing product lines. To the extent that we introduce new products in the future, we will likely need to acquire additional facilities to locate the associated production lines. However, we believe we can acquire or lease such facilities on reasonable terms. The Company continuesWe continue to make investments in capital equipment as needed to meet anticipated demand for itsour products.
The majority of our locations support both of our reportable segments, except for our Vietnam and Seattle, Washington locations, which primarily support our Software & Sensors segment.
Item 3. Legal Proceedings
See discussion of litigation in Note 9 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, which discussion is incorporated by reference herein.
Item 4. Mine Safety Disclosures
None.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is quoted under the symbol “AAXN” on The NASDAQ Global Select Market. The following tables set forth the high and low sales prices per share for our common stock as reported by NASDAQ for each quarter of the last two fiscal years.
|
| | | | | | | |
| | High | | Low |
| Year Ended December 31, 2017: | | | |
| First quarter | $ | 27.56 |
| | $ | 22.05 |
|
| Second quarter | 28.17 |
| | 21.18 |
|
| Third quarter | 26.31 |
| | 21.25 |
|
| Fourth quarter | 27.09 |
| | 20.57 |
|
|
| | | | | | | |
| | High | | Low |
| Year Ended December 31, 2016: | | | |
| First quarter | $ | 20.69 |
| | $ | 13.56 |
|
| Second quarter | 24.94 |
| | 17.18 |
|
| Third quarter | 30.15 |
| | 24.46 |
|
| Fourth quarter | 28.49 |
| | 21.50 |
|
Holders
As of December 31, 2017,2019, there were 255241 holders of record of our common stock.
Dividends
To date, the Company haswe have not declared or paid cash dividends on itsour common stock. The Company doesWe do not intend to pay cash dividends in the foreseeable future, and its revolving line of credit prohibits the payment of cash dividends.future.
Issuer Purchases of Equity Securities
In February 2016, the Company'sour Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of the Company’sour outstanding common stock subject to stock market conditions and corporate considerations. The stock repurchase program does not have a stated expiration date. During the year ended December 31, 2017,2019, no common shares were purchased under the program. As of December 31, 20172019 and 2016,2018, $16.3 million remainsremained available under the plan for future purchases. During 2016, the Company suspended its 10b-5 plan, and any future purchases would be discretionary.
Stock Performance Graph
The following stock performance graph compares the performance of our common stock to the NASDAQ Composite Index and the Russell 3000 Index. The graph covers the period from December 31, 20122014 to December 31, 2017.2019. The graph assumes that the value of the investment in our stock and in each index was $100 at December 31, 2012,2014, and that all dividends were reinvested. We do not pay dividends on our common stock.
| | | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
| Axon Enterprise, Inc. | $ | 100.00 |
| | $ | 177.63 |
| | $ | 296.20 |
| | $ | 193.40 |
| | $ | 271.14 |
| | $ | 296.42 |
| $ | 100.00 |
| | $ | 65.29 |
| | $ | 91.54 |
| | $ | 100.08 |
| | $ | 165.22 |
| | $ | 276.74 |
|
| NASDAQ Composite | 100.00 |
| | 141.63 |
| | 162.09 |
| | 173.33 |
| | 187.19 |
| | 242.29 |
| 100.00 |
| | 106.96 |
| | 116.45 |
| | 150.96 |
| | 146.67 |
| | 200.49 |
|
| Russell 3000 | 100.00 |
| | 133.55 |
| | 150.32 |
| | 151.04 |
| | 170.28 |
| | 206.26 |
| 100.00 |
| | 100.48 |
| | 113.27 |
| | 137.21 |
| | 130.02 |
| | 170.35 |
|
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with our consolidated financial statements and the notes thereto, and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The statement of operations data for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, and the balance sheet data as of December 31, 20172019 and 2016,2018, have been derived from, and should be read in conjunction with, our audited consolidated financial statements and the notes thereto included herein. The statement of operations data for the years ended December 31, 20142016 and 2013,2015, and the balance sheet data as of December 31, 2015, 20142017, 2016 and 2013,2015, is derived from our historical audited consolidated financial statements and the notes thereto which are not included in this Annual Report on Form 10-K. Dollars are in thousands, except per share amounts.
|
| | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Statements of Operations Data: | | | | | | | | | |
| Net sales from products | $ | 285,859 |
| | $ | 238,573 |
| | $ | 185,230 |
| | $ | 160,313 |
| | $ | 136,123 |
|
| Net sales from services | 57,939 |
| | 29,672 |
| | 12,662 |
| | 4,212 |
| | 1,708 |
|
| Net sales | 343,798 |
| | 268,245 |
| | 197,892 |
| | 164,525 |
| | 137,831 |
|
| Cost of product sales | 117,997 |
| | 91,536 |
| | 65,022 |
| | 60,913 |
| | 50,099 |
|
| Cost of service sales | 18,713 |
| | 6,173 |
| | 4,223 |
| | 2,064 |
| | 1,889 |
|
| Cost of sales | 136,710 |
| | 97,709 |
| | 69,245 |
| | 62,977 |
| | 51,988 |
|
| Gross margin | 207,088 |
| | 170,536 |
| | 128,647 |
| | 101,548 |
| | 85,843 |
|
| Sales, general and administrative expenses | 138,692 |
| | 108,076 |
| | 69,698 |
| | 54,158 |
| | 46,557 |
|
| Research and development expenses | 55,373 |
| | 30,609 |
| | 23,614 |
| | 14,885 |
| | 9,888 |
|
| Litigation judgments | — |
| | — |
| | — |
| | — |
| | 1,450 |
|
| Income from operations | 13,023 |
| | 31,851 |
| | 35,335 |
| | 32,505 |
| | 27,948 |
|
| Interest and other (expense) income, net | 2,738 |
| | (354 | ) | | 26 |
| | (194 | ) | | 86 |
|
| Income before provision for income taxes | 15,761 |
| | 31,497 |
| | 35,361 |
| | 32,311 |
| | 28,034 |
|
| Provision for income taxes | 10,554 |
| | 14,200 |
| | 15,428 |
| | 12,393 |
| | 9,790 |
|
| Net income | $ | 5,207 |
| | $ | 17,297 |
| | $ | 19,933 |
| | $ | 19,918 |
| | $ | 18,244 |
|
| Net income per common and common equivalent shares: | | | | | | | | | |
| Basic | $ | 0.10 |
| | $ | 0.33 |
| | $ | 0.37 |
| | $ | 0.38 |
| | $ | 0.35 |
|
| Diluted | $ | 0.10 |
| | $ | 0.32 |
| | $ | 0.36 |
| | $ | 0.37 |
| | $ | 0.34 |
|
| Weighted average number of common and common equivalent shares outstanding: | | | | | | | | | |
| Basic | 52,726 |
| | 52,667 |
| | 53,548 |
| | 52,948 |
| | 51,880 |
|
| Diluted | 53,898 |
| | 53,536 |
| | 54,638 |
| | 54,500 |
| | 54,152 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Statements of Operations Data: | | | | | | | | | |
Net sales (1) | $ | 530,860 |
| | $ | 420,068 |
| | $ | 343,798 |
| | $ | 268,245 |
| | $ | 197,892 |
|
| Gross margin | 307,286 |
| | 258,583 |
| | 207,088 |
| | 170,536 |
| | 128,647 |
|
Income (loss) from operations (2) (3) | (6,394 | ) | | 24,841 |
| | 13,023 |
| | 31,851 |
| | 35,335 |
|
Net income (3) (4) | 882 |
| | 29,205 |
| | 5,207 |
| | 17,297 |
| | 19,933 |
|
Diluted earnings per share (3) (4) | $ | 0.01 |
| | $ | 0.50 |
| | $ | 0.10 |
| | $ | 0.32 |
| | $ | 0.36 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Balance Sheet Data: | | | | | | | | | |
| Working capital | $ | 97,242 |
| | $ | 99,192 |
| | $ | 123,269 |
| | $ | 102,669 |
| | $ | 67,237 |
|
| Total assets | 338,112 |
| | 278,163 |
| | 229,881 |
| | 185,368 |
| | 148,382 |
|
| Total current liabilities | 107,950 |
| | 78,039 |
| | 38,140 |
| | 31,973 |
| | 23,129 |
|
| Total long-term debt and capital leases, net of current portion | 41 |
| | 118 |
| | 81 |
| | 29 |
| | 67 |
|
| Total stockholders’ equity | 167,444 |
| | 150,888 |
| | 157,004 |
| | 129,106 |
| | 108,347 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Balance Sheet Data: | | | | | | | | | |
Working capital (5) (6) | $ | 423,525 |
| | $ | 392,144 |
| | $ | 97,242 |
| | $ | 99,192 |
| | $ | 123,269 |
|
Total assets (5) (6) | 845,639 |
| | 719,540 |
| | 338,112 |
| | 278,163 |
| | 229,881 |
|
Total current liabilities (7) | 195,566 |
| | 166,011 |
| | 107,950 |
| | 78,039 |
| | 38,140 |
|
Total stockholders’ equity (3) (5) (6) (8) | 543,495 |
| | 467,324 |
| | 167,444 |
| | 150,888 |
| | 157,004 |
|
(1) Amounts for the years ended December 31, 2017, 2016, and 2015 have not been adjusted under the modified retrospective method of adoption of Accounting Standards Codification Topic 606, Revenue from Contracts from Customers ("Topic 606"), and are presented consistent with the prior period amounts reported under ASC 605.
(2) Reflects the impact of increased spending on research and development and selling, general and administrative expenses to support growth.
(3) Reflects the impact of $51.6 million and $3.3 million in stock compensation expense related to the CEO Performance Award and XSPP for the years ended December 31, 2019 and 2018, respectively.
(4) Includes the favorable impact of a $5.0 million, $8.9 million, and $1.8 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for restricted stock units ("RSUs") that vested or stock options that were exercised during the years ended December 31, 2019, 2018, and 2017, respectively. Includes tax expense of $8.0 million for the year ended December 31, 2017 related to the enactment of the Tax Cuts and Jobs Act.
(5) In May 2018, we sold 4,645,000 shares of our common stock, which included 645,000 shares pursuant to the full exercise of the underwriters' option to purchase additional shares, in an underwritten public offering at a price of $53.00 per share, which resulted in gross proceeds of $246.2 million. Net proceeds after deducting fees, commissions, and other expenses related to the offering were $234.0 million.
(6) In 2016 and 2015, we used cash and cash equivalents to repurchase approximately $33.7 million and $7.6 million, respectively, of our common shares.
(7) Reflects the impact of higher deferred revenue resulting from shifting an increasing amount of our business to a subscription model.
(8) We recorded a net increase in stockholders’ equity (retained earnings) of $19.0 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606 on contracts that were not complete as of that date.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“("MD&A”&A") is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with the other sections of this Annual Report on Form 10-K, including Part I, Item 1A: “Risk Factors”; Part II, Item 6: “Selected Financial Data”; and Part II, Item 8: “Financial Statements and Supplementary Data.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing. The tables in the MD&A sections below are derived from exact numbers and may have immaterial rounding differences.
This section discusses our results of operations for the year ended December 31, 2019 as compared to the year ended December 31, 2018. For a discussion and analysis of the year ended December 31, 2018, compared to the same period in 2017 please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 27, 2019.
Overview and Strategy
Axon Enterprise, Inc.’s (the “Company” or “Axon” or “we” or “our”)is a global network of devices, apps, training and people that helps public safety personnel become smarter and safer. Our technologies give law enforcement the confidence, focus and time they need to protect their communities. Our products impact every aspect of an officer's day-to-day experience. Our core mission is to protect lifelife. We fulfill that mission through innovative technologiesdeveloping hardware and software products that make communities safer.advance our long term vision of a) obsoleting the bullet, b) reducing social conflict, and c) enabling a fair and effective justice system.
Our revenues for the year ended December 31, 2019 were $530.9 million, an increase of $110.8 million, or 26.4%, from the prior year. We are the market leaderhad a loss from operations of $6.4 million compared to income from operations of $24.8 million in the development, manufacture and sale of conducted electrical weapons (“CEWs”) designed for use by law enforcement, corrections, military forces, private security personnel and by private individuals for personal defense. We are also the market leader in developing, manufacturing and selling connected wearable on-officer cameras as well as developing and selling cloud-based digital evidence management software. We have established a robust network that connects devices, apps and people primarily in the law enforcement vertical. We aim to have every public safety officer in the world carry a TASER, deploy an Axon camera and be connectedprior year. Gross margins were compressed related to the Axon network.
The three foundationsrollout of our latest generation TASER device and increased data storage expenses, partially offset by higher margins for ourSoftware & Sensors devices. Increased cost of sales, selling, general and administrative expenses, and research and development expenses to support continued and future growth strategy are:
Devices - Our TASER CEWs are one of the few weapons that can incapacitate a person while drastically limiting the risk for death and/or serious injury. Over the past two decades, the TASER CEW has become one of the most frequently used weapons in the North American law enforcement market, with use-of-force injuries and deaths dropping dramatically as a result. Outside of weapons, we produce devices that primarily fall within three categories: On-officer cameras that capture critical digital evidence aimed at protecting truth, a range of related accessory hardware devices and an in-car camera variant called Axon Fleet. We believe our CEWs and Axon cameras should be standard-issue equipment for all patrol officers domestically and internationally. We have created and are continuing to create service plans and product bundles to ensure agencies have the latest devices and technology at predictable annual costs.
Apps - Axon's Evidence.com platform is designed to help agencies securely store, manage and share all digital evidence. Our software platform features continuous improvement with regular software updates that enable our customers to always have accessalso contributed to the latest technology. Recent new features include secure sharing, audit trails, integrationdecline in operating results. Additionally, expenses for the year ended December 31, 2019 reflected $51.6 million in incremental stock-based compensation expense related to the CEO Performance Award and XSPP. The decline in operating results was partially offset by a $4.3 million increase in interest income. For the year ended December 31, 2019, we recorded net income of other data sources,$0.9 million compared to $29.2 million for the prior year.
2020 Outlook
For the year ending December 31, 2020, we expect revenue of $615 million to $625 million. We anticipate that revenue for the three months ending March 31, 2020 will reflect approximately 13% growth as compared to the three months ended March 31, 2019. We anticipate that the timing of 2020 revenue will reflect a similar distribution as in 2019. We expect a normalized income tax rate of between 20% and transcription25%; this rate can fluctuate depending on geography of income and redaction services. These feature sets are designed to provide our customers with valuable tools to police more efficiently and effectively while enabling greater transparency with the communities they serve. More and more police agencies trust Axon to host their video evidence data, which is captured via our devices, apps and software, and storedeffects of discrete items, including changes in our secure cloudstock price.
In late 2019, a novel strain of coronavirus was first detected in Wuhan, China. Following the outbreak of this virus, the Chinese government has quarantined certain affected regions and accessed viacertain travel restrictions have been imposed. Our operations team is closely monitoring the Axon network.
People - potential impact to our supply chain. At this time we have successfully managed through the current impacts. Our TASER weapons and Axon software and sensors platforms have allowed usoperations team has some flexibility to build relationships with more than 20,000 public safety agencies worldwide. Axon is bringing modern information technology capabilities to every law enforcement officer. Some of our customers report that police officers are spending over 60% of their time on paperwork-related tasks, rather than on value-added public safety work. We see a large opportunity to leverage our connected platform to enable a broad suite of mobile, wearable, and data management capabilities. Axon is also improving workflows throughout the public safety chain, from the incident on the sceneadapt to the court room. Withchanging situation; however, if the situation further deteriorates or the outbreak results in further travel restriction on both supply and demand, these impacts could affect our software, police officers can share evidencefull year guidance.
with prosecutors during discovery while maintaining a secure and encrypted chain of custody. Axon's cohesive ecosystem is delivering increased value to all public safety stakeholders, including state and municipal police agencies, police chiefs and other leadership, patrol officers, state patrols and officers, agency detectives, public prosecutors, district attorneys, and others in the public safety and judicial communities, as well as the public communities they serve.
Results of Operations
The following table presents data from our consolidated statements of operations as well as the percentage relationship to total net sales of items included in our statements of operations (dollars in thousands):
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | 2019 | | 2018 |
| Net sales from products | $ | 285,859 |
| | 83.1 | % | | $ | 238,573 |
| | 88.9 | % | | $ | 185,230 |
| | 93.6 | % | $ | 399,474 |
| | 75.3 | % | | $ | 327,635 |
| | 78.0 | % |
| Net sales from services | 57,939 |
| | 16.9 |
| | 29,672 |
| | 11.1 |
| | 12,662 |
| | 6.4 |
| 131,386 |
| | 24.7 | % | | 92,433 |
| | 22.0 | % |
| Net sales | 343,798 |
| | 100.0 |
| | 268,245 |
| | 100.0 |
| | 197,892 |
| | 100.0 |
| 530,860 |
| | 100.0 | % | | 420,068 |
| | 100.0 | % |
| Cost of product sales | 117,997 |
| | 34.3 |
| | 91,536 |
| | 34.1 |
| | 65,022 |
| | 32.9 |
| 190,683 |
| | 35.9 | % | | 139,337 |
| | 33.2 | % |
| Cost of service sales | 18,713 |
| | 5.4 |
| | 6,173 |
| | 2.3 |
| | 4,223 |
| | 2.1 |
| 32,891 |
| | 6.2 | % | | 22,148 |
| | 5.3 | % |
| Cost of sales | 136,710 |
| | 39.8 |
| | 97,709 |
| | 36.4 |
| | 69,245 |
| | 35.0 |
| 223,574 |
| | 42.1 | % | | 161,485 |
| | 38.5 | % |
| Gross margin | 207,088 |
| | 60.2 |
| | 170,536 |
| | 63.6 |
| | 128,647 |
| | 65.0 |
| 307,286 |
| | 57.9 | % | | 258,583 |
| | 61.5 | % |
| Operating expenses: | | | | | | | | | | | | | | | | | | |
| Sales, general and administrative | 138,692 |
| | 40.3 |
| | 108,076 |
| | 40.3 |
| | 69,698 |
| | 35.2 |
| 212,959 |
| | 40.1 | % | | 156,886 |
| | 37.3 | % |
| Research and development | 55,373 |
| | 16.1 |
| | 30,609 |
| | 11.4 |
| | 23,614 |
| | 11.9 |
| 100,721 |
| | 19.0 | % | | 76,856 |
| | 18.3 | % |
| Total operating expenses | 194,065 |
| | 56.4 |
| | 138,685 |
| | 51.7 |
| | 93,312 |
| | 47.2 |
| 313,680 |
| | 59.1 | % | | 233,742 |
| | 55.6 | % |
| Income from operations | 13,023 |
| | 3.8 |
| | 31,851 |
| | 11.9 |
| | 35,335 |
| | 17.9 |
| |
| Interest and other income (expense), net | 2,738 |
| | 0.8 |
| | (354 | ) | | (0.1 | ) | | 26 |
| | — |
| |
| Income (loss) from operations | | (6,394 | ) | | (1.2 | )% | | 24,841 |
| | 5.9 | % |
| Interest and other income, net | | 8,464 |
| | 1.6 | % | | 3,263 |
| | 0.8 | % |
| Income before provision for income taxes | 15,761 |
| | 4.6 |
| | 31,497 |
| | 11.7 |
| | 35,361 |
| | 17.9 |
| 2,070 |
| | 0.4 | % | | 28,104 |
| | 6.7 | % |
| Provision for income taxes | 10,554 |
| | 3.1 |
| | 14,200 |
| | 5.3 |
| | 15,428 |
| | 7.8 |
| |
| Provision (benefit) for income taxes | | 1,188 |
| | 0.2 | % | | (1,101 | ) | | (0.3 | )% |
| Net income | $ | 5,207 |
| | 1.5 | % | | $ | 17,297 |
| | 6.4 | % | | $ | 19,933 |
| | 10.1 | % | $ | 882 |
| | 0.2 | % | | $ | 29,205 |
| | 7.0 | % |
Net sales to the U.S. and other countries are summarized as follows (dollars in thousands):
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | 2019 | | 2018 |
| United States | $ | 282,810 |
| | 82.3 | % | | $ | 218,757 |
| | 81.6 | % | | $ | 161,803 |
| | 81.8 | % | $ | 446,100 |
| | 84.0 | % | | $ | 335,310 |
| | 79.8 | % |
| Other Countries | 60,988 |
| | 17.7 |
| | 49,488 |
| | 18.4 |
| | 36,089 |
| | 18.2 |
| 84,760 |
| | 16.0 | % | | 84,758 |
| | 20.2 | % |
| Total | $ | 343,798 |
| | 100.0 | % | | $ | 268,245 |
| | 100.0 | % | | $ | 197,892 |
| | 100.0 | % | $ | 530,860 |
| | 100.0 | % | | $ | 420,068 |
| | 100.0 | % |
International revenue in 2019 remained consistent with 2018. Lower sales in Canada and the Asia Pacific region were offset by increased sales in Europe and Africa.
The Company’sOur operations are comprised of two reportable segments: the manufacture and sale of CEWs,CEDs, batteries, accessories and extended warranties and other related products and services (the “TASER Weapons”(collectively, the “TASER” segment); and the development, manufacture, and sale of software and sensors, business, focused onwhich includes the sale of devices, wearables, applications, cloud and mobile products, (theand 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 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." Revenue from our “products” in the Software and Sensors segment are generally from sales of sensors, including on-officer body cameras, Axon Fleet cameras, other hardware sensors, warranties on sensors, and other products, and is sometimes referred to as "Sensors and Other revenue." 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,and product managemanagement 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 CODM does not review assets by segment as part of the financial information provided; therefore, no asset information is provided in the following tables.
Net Sales - For the Years Ended December 31, 20172019 and 20162018
Net Sales
Net sales by product line were as follows for the years ended December 31, 20172019 and 20162018 (dollars in thousands):
| | | | Year Ended December 31, | | Dollar Change | | Percent Change | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2017 | | 2016 | | 2019 | | 2018 | |
| TASER Weapons segment: | | | | | | | | | | | | |
| TASER segment: | | | | | | | | | | | | |
| TASER 7 | | $ | 56,652 |
| | 10.7 | % | | $ | 7,358 |
| | 1.8 | % | | $ | 49,294 |
| | 669.9 | % |
| TASER X26P | $ | 64,426 |
| | 18.7 | % | | $ | 72,490 |
| | 27.0 | % | | $ | (8,064 | ) | | (11.1 | )% | 52,524 |
| | 9.9 | % | | 70,638 |
| | 16.8 | % | | (18,114 | ) | | (25.6 | )% |
| TASER X2 | 81,417 |
| | 23.7 |
| | 52,665 |
| | 19.6 |
| | 28,752 |
| | 54.6 |
| 55,920 |
| | 10.5 | % | | 78,837 |
| | 18.8 | % | | (22,917 | ) | | (29.1 | )% |
| TASER Pulse and Bolt | 4,340 |
| | 1.3 |
| | 3,580 |
| | 1.3 |
| | 760 |
| | 21.2 |
| 4,089 |
| | 0.8 | % | | 5,182 |
| | 1.2 | % | | (1,093 | ) | | (21.1 | )% |
| Single cartridges | 63,203 |
| | 18.4 |
| | 52,305 |
| | 19.5 |
| | 10,898 |
| | 20.8 |
| |
| Cartridges | | 85,987 |
| | 16.2 | % | | 68,258 |
| | 16.3 | % | | 17,729 |
| | 26.0 | % |
| Axon Evidence and cloud services | | 704 |
| | 0.1 | % | | — |
| | — | % | | 704 |
| | * |
|
| Extended warranties | 12,426 |
| | 3.6 |
| | 9,880 |
| | 3.7 |
| | 2,546 |
| | 25.8 |
| 18,074 |
| | 3.4 | % | | 15,753 |
| | 3.8 | % | | 2,321 |
| | 14.7 | % |
| Other | 8,700 |
| | 2.5 |
| | 11,724 |
| | 4.4 |
| | (3,024 | ) | | (25.8 | ) | 7,711 |
| | 1.5 | % | | 7,089 |
| | 1.7 | % | | 622 |
| | 8.8 | % |
| TASER Weapons segment | 234,512 |
| | 68.2 |
| | 202,644 |
| | 75.5 |
| | 31,868 |
| | 15.7 |
| |
| TASER segment | | 281,661 |
| | 53.1 | % | | 253,115 |
| | 60.4 | % | | 28,546 |
| | 11.3 | % |
| Software and Sensors segment: | | | | | | | | | | | | | | | | | | | | | | |
| Axon Body | 15,184 |
| | 4.4 |
| | 12,911 |
| | 4.8 |
| | 2,273 |
| | 17.6 |
| 44,039 |
| | 8.3 | % | | 21,883 |
| | 5.2 | % | | 22,156 |
| | 101.2 | % |
| Axon Flex | 10,083 |
| | 2.9 |
| | 5,323 |
| | 2.0 |
| | 4,760 |
| | 89.4 |
| 5,928 |
| | 1.1 | % | | 6,509 |
| | 1.5 | % | | (581 | ) | | (8.9 | )% |
| Axon Fleet | 2,954 |
| | 0.9 |
| | — |
| | — |
| | 2,954 |
| | * |
| 16,182 |
| | 3.0 | % | | 12,527 |
| | 3.0 | % | | 3,655 |
| | 29.2 | % |
| Axon Dock | 9,736 |
| | 2.8 |
| | 7,422 |
| | 2.8 |
| | 2,314 |
| | 31.2 |
| 20,449 |
| | 3.9 | % | | 10,706 |
| | 2.5 | % | | 9,743 |
| | 91.0 | % |
| Evidence.com | 57,841 |
| | 16.8 |
| | 29,260 |
| | 10.9 |
| | 28,581 |
| | 97.7 |
| |
| TASER CAM | 3,358 |
| | 1.0 |
| | 4,888 |
| | 1.8 |
| | (1,530 | ) | | (31.3 | ) | |
| Axon Evidence and cloud services | | 130,265 |
| | 24.5 | % | | 90,291 |
| | 21.5 | % | | 39,974 |
| | 44.3 | % |
| TASER Cam | | 3,104 |
| | 0.6 | % | | 3,871 |
| | 0.9 | % | | (767 | ) | | (19.8 | )% |
| Extended warranties | 7,110 |
| | 2.1 |
| | 3,710 |
| | 1.4 |
| | 3,400 |
| | 91.6 |
| 19,188 |
| | 3.6 | % | | 11,860 |
| | 2.8 | % | | 7,328 |
| | 61.8 | % |
| Other | 3,020 |
| | 0.9 |
| | 2,087 |
| | 0.8 |
| | 933 |
| | 44.7 |
| 10,044 |
| | 1.9 | % | | 9,306 |
| | 2.2 | % | | 738 |
| | 7.9 | % |
| Software and Sensors segment | 109,286 |
| | 31.8 |
| | 65,601 |
| | 24.5 |
| | 43,685 |
| | 66.6 |
| 249,199 |
| | 46.9 | % | | 166,953 |
| | 39.6 | % | | 82,246 |
| | 49.3 | % |
| Total net sales | $ | 343,798 |
| | 100.0 | % | | $ | 268,245 |
| | 100.0 | % | | $ | 75,553 |
| | 28.2 | % | $ | 530,860 |
| | 100.0 | % | | $ | 420,068 |
| | 100.0 | % | | $ | 110,792 |
| | 26.4 | % |
* Not meaningful
Net unit sales for TASER Weapons and Software and Sensors segment were as follows:
| | | | Year Ended December 31, | | | | | Year Ended December 31, | | | | |
| | 2017 | | 2016 | | Unit Change | | Percent Change | 2019 | | 2018 | | Unit Change | | Percent Change |
| TASER 7 | | 49,221 |
| | 5,759 |
| | 43,462 |
| | 754.7 | % |
| TASER X26P | 70,381 |
| | 79,218 |
| | (8,837 | ) | | (11.2 | )% | 48,798 |
| | 71,823 |
| | (23,025 | ) | | (32.1 | )% |
| TASER X2 | 76,106 |
| | 47,700 |
| | 28,406 |
| | 59.6 |
| 40,973 |
| | 65,855 |
| | (24,882 | ) | | (37.8 | )% |
| TASER Pulse and Bolt | 12,504 |
| | 9,549 |
| | 2,955 |
| | 30.9 |
| 11,785 |
| | 18,398 |
| | (6,613 | ) | | (35.9 | )% |
| Cartridges | 2,408,471 |
| | 1,979,051 |
| | 429,420 |
| | 21.7 |
| 2,751,603 |
| | 2,342,897 |
| | 408,706 |
| | 17.4 | % |
| Axon Body | 89,808 |
| | 66,154 |
| | 23,654 |
| | 35.8 |
| 151,499 |
| | 85,965 |
| | 65,534 |
| | 76.2 | % |
| Axon Flex | 26,025 |
| | 14,173 |
| | 11,852 |
| | 83.6 |
| 15,586 |
| | 15,541 |
| | 45 |
| | 0.3 | % |
| Axon Fleet | 3,795 |
| | — |
| | 3,795 |
| | * |
| 10,467 |
| | 9,445 |
| | 1,022 |
| | 10.8 | % |
| Axon Dock | 23,492 |
| | 16,983 |
| | 6,509 |
| | 38.3 |
| 22,275 |
| | 17,762 |
| | 4,513 |
| | 25.4 | % |
| TASER CAM | 6,432 |
| | 9,566 |
| | (3,134 | ) | | (32.8 | ) | |
| TASER Cam | | 5,533 |
| | 8,310 |
| | (2,777 | ) | | (33.4 | )% |
*Not meaningful
Net sales were $343.8 million and $268.2 million for the years ended December 31, 2017 and 2016, respectively, an increase of $75.6 million or 28.2%. Net sales for the TASER Weapons segment were $234.5increased $28.5 million, or 11.3%, primarily as a result of a $17.7 million increase in cartridge revenue and $202.6 million for the years ended December 31, 2017 and 2016, respectively, ana net increase of $31.9 million or 15.7%. Net sales for the Software and Sensors segment were $109.3 million and $65.6 million for the years ended December 31, 2017 and 2016, respectively, an increase of $43.7 million or 66.6%. International sales were $61.0$7.2 million in 2017 comparedTASER device sales. Cartridge revenues increased due to $49.5 million in 2016, an increase of 23.2%.
The increase in netboth increased unit sales for 2017 compared to 2016 in the TASER Weapons segment was primarily attributable to increased sales under the Officer Safety Plan ("OSP") and TASER 60 installment payment programs. During the first quarter of 2017, the
Home Office of the U.K. government approved the Company's Smart Weapons for sale which resulted in increased TASER X2 sales within the U.K. of $8.5 million for the year ended December 31, 2017 compared to no sales during 2016. Additionally, the Company increased cartridge sales by $10.9 million to $63.2 million during the year ended December 31, 2017 as compared to $52.3 million during the same period in 2016 which was primarily attributable to an increase in total weapons in the field.average selling price. The decreased unit sales of X2 and X26P were partially offset by higher average selling prices. As expected, we continue to see a shift to purchases of our latest generation device, TASER 7, from legacy X2 and X26P devices. We expect recurring payment plan subscriptions to increase as we drive sales of TASER 7, which includes a software subscription with Axon Evidence.
Net sales for the Software and Sensors segment were $109.3increased $82.2 million, or 49.3%. Revenue from Axon Evidence and $65.6cloud services increased $40.0 million foras we continued to add users and associated devices to our network during the yearsyear ended December 31, 20172019. The increase in the aggregate number of users and 2016, respectively,devices also resulted in increased extended warranty revenues of $7.3 million. Revenue from Axon Body cameras increased $22.2 million and included $19.3 million in sales of Axon Body 3, which was introduced during the third quarter of 2019. Axon Dock revenue also increased $9.7 million with increased units largely driven by the introduction of Axon Body 3, as well as an increase of $43.7 million, or 66.6%. The overall increase in the average selling price.
For the past few years, we have considered bookings for our Software and Sensors segment was driven by continued adoptionas an early indicator of on-officer cameras and related technologies, including the Company's Evidence.com digital evidence management software suite. Combined net sales related to the Company's Axon Body, Axon Flex, and Axon Dock products increased approximately $9.3 million. The Company recorded net sales of $3.0 million related to Axon Fleet, the Company's newly introduced in-car camera system, with no amounts recorded during the same period in 2016. Evidence.com revenues for the twelve months ended December 31, 2017 increased $28.6 million to $57.8 million as compared to the same period in 2016. This increase was primarily driven by the continued increase in active users on the Company's Evidence.com platform.
To gain more immediate feedback regarding activity for Axon camera products and Evidence.com services,Axon Evidence services. We have shifted our focus to total company future contracted revenue, which we also review bookings for these products. We consider bookings to bebelieve is a statistical measure definedmore relevant and comprehensive forward-looking performance indicator, as the sales priceit encompasses all company contracts, including TASER. As of orders (not invoiced sales), including contractual optional periodsDecember 31, 2019, we expect to be exercised, nethad approximately $1.23 billion of cancellations, placed in the relevant fiscal period, regardless of when the products or services ultimately will be provided. Most bookingstotal company future contracted revenue, which included both recognized contract liabilities as well as amounts that will be invoiced and recognized in subsequentfuture periods. DueWe expect to municipal government funding rules, in some cases certainrecognize between 20% - 25% of this balance over the future period amounts included in bookings arenext twelve months, and 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. Although the Company has entered into contracts for the delivery of products and services in the future and anticipates 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's Software and Sensors segment, net of cancellations, were $291.2 million during 2017, compared to $254.1 million in 2016, an increase of 14.6%.
The chart below illustrates the Company's quarterly Software and Sensors bookings for each of the previous six fiscal quarters (in thousands):
Backlog - As of December 31, 20172019 compared to December 31, 20162018
Our backlog for products and services includes all orders that have been received and are believed to be firm.
In the TASER segment, we define backlog as equal to deferred revenue. Deferred revenue represents amounts invoiced to customers for goods and services to be delivered in subsequent periods. We process orders within the TASER segment quickly, and our best estimate of $582.7firm orders outstanding as of period end represents those that have been paid for but remain undelivered. The TASER segment backlog balance was $55.2 million as of December 31, 20172019. We expect to realize $22.6 million of this deferred revenue balance as revenue during the next 12 months. This represents cash received and accounts receivable from customers on or prior to December 31, 2019 for products and services expected to be delivered in the next 12 months.
In the Software and Sensors segment, we define backlog as cumulative bookings, net of cancellations, less product and service revenue recognized to date. Bookings are generally realized as revenue over multiple years. The Software and Sensors backlog balance was $1.0 billion as of December 31, 2019. This backlog balance includes $150.6 million of deferred revenue, and $875.6 million that has been recorded as bookings but not yet invoiced, all as of December 31, 2019. We expect to realize approximately $270.0 million of the December 31, 2019 backlog balance as revenue during the next 12 months.
|
| | | | | | | | | | | |
| | TASER | | Software and Sensors | | Total |
| | (in thousands) |
| Balance, beginning of period | $ | 54,597 |
| | $ | 758,125 |
| | $ | 812,722 |
|
| Add: additions to backlog, net of cancellations | 282,253 |
| | 517,266 |
| | 799,519 |
|
| Less: revenue recognized during period | ( | 281,661 | ) | | ( | 249,199 | ) | | ( | 530,860 | ) |
| Balance end of period | $ | 55,189 |
| | $ | 1,026,192 |
| | $ | 1,081,381 |
|
Our backlog of $1.1 billion as of December 31, 2019 has increased significantly from $384.2$812.7 million as of December 31, 2016.2018. The increase in WeaponsTASER segment backlog is not expected to have a material impact on revenue or operating margins. Our significant increase in backlog, primarily in the Software and Sensors segment is indicative of expected revenue growth in this segment. Revenue growth in the Software and Sensors segment is expected to result in improved operating margins over time as additional revenue will cover a larger portion of our selling, general and administrative expenses and research and development costs, while the Company does not expect any material changescosts. We also anticipate gross margins to improve gradually in gross margins.
Net Sales - Three Months Ended December 31, 2017 Compared to September 30, 2017
Net sales by product line were as follows for the three months ended December 31, 2017 and September 30, 2017 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2017 | | Three Months Ended September 30, 2017 | | Dollar
Change | | Percent
Change |
| TASER Weapons segment: | | | | | | | | | | | |
| TASER X26P | $ | 19,259 |
| | 20.3 | % | | $ | 13,264 |
| | 14.7 | % | | $ | 5,995 |
| | 45.2 | % |
| TASER X2 | 23,662 |
| | 25.0 |
| | 22,717 |
| | 25.2 |
| | 945 |
| | 4.2 |
|
| TASER Pulse and Bolt | 1,448 |
| | 1.5 |
| | 1,069 |
| | 1.2 |
| | 379 |
| | 35.5 |
|
| Single cartridges | 14,198 |
| | 15.0 |
| | 17,474 |
| | 19.4 |
| | (3,276 | ) | | (18.7 | ) |
| Extended warranties | 3,506 |
| | 3.7 |
| | 3,086 |
| | 3.4 |
| | 420 |
| | 13.6 |
|
| Other | 2,336 |
| | 2.5 |
| | 1,806 |
| | 2.0 |
| | 530 |
| | 29.3 |
|
| TASER Weapons segment | 64,409 |
| | 68.0 |
| | 59,416 |
| | 65.8 |
| | 4,993 |
| | 8.4 |
|
| Software and Sensors segment: | | | | | | | | | | | |
| Axon Body | 3,459 |
| | 3.7 |
| | 4,527 |
| | 5.0 |
| | (1,068 | ) | | (23.6 | ) |
| Axon Flex | 2,194 |
| | 2.3 |
| | 2,563 |
| | 2.8 |
| | (369 | ) | | (14.4 | ) |
| Axon Fleet | 1,661 |
| | 1.8 |
| | 1,113 |
| | 1.2 |
| | 548 |
| | 49.2 |
|
| Axon Dock | 2,327 |
| | 2.5 |
| | 2,639 |
| | 2.9 |
| | (312 | ) | | (11.8 | ) |
| Evidence.com | 17,143 |
| | 18.1 |
| | 16,200 |
| | 17.9 |
| | 943 |
| | 5.8 |
|
| TASER CAM | 951 |
| | 1.0 |
| | 922 |
| | 1.0 |
| | 29 |
| | 3.1 |
|
| Extended warranties | 2,128 |
| | 2.2 |
| | 1,945 |
| | 2.2 |
| | 183 |
| | 9.4 |
|
| Other | 379 |
| | 0.4 |
| | 937 |
| | 1.0 |
| | (558 | ) | | (59.6 | ) |
| Software and Sensors segment | 30,242 |
| | 32.0 |
| | 30,846 |
| | 34.2 |
| | (604 | ) | | (2.0 | ) |
| Total net sales | $ | 94,651 |
| | 100.0 | % | | $ | 90,262 |
| | 100.0 | % | | $ | 4,389 |
| | 4.9 | % |
Net unit sales for TASER Weapons and Software and Sensors segment were as follows:
|
| | | | | | | | | | | |
| | Three Months Ended | | | | |
| | 12/31/2017 | | 9/30/2017 | | Unit
Change | | Percent
Change |
| TASER X26P | 23,350 |
| | 13,472 |
| | 9,878 |
| | 73.3 | % |
| TASER X2 | 21,683 |
| | 21,896 |
| | (213 | ) | | (1.0 | ) |
| TASER Pulse and Bolt | 3,641 |
| | 2,944 |
| | 697 |
| | 23.7 |
|
| Cartridges | 590,126 |
| | 643,077 |
| | (52,951 | ) | | (8.2 | ) |
| Axon Body | 13,944 |
| | 28,669 |
| | (14,725 | ) | | (51.4 | ) |
| Axon Flex | 5,253 |
| | 8,298 |
| | (3,045 | ) | | (36.7 | ) |
| Axon Fleet | 2,197 |
| | 1,598 |
| | 599 |
| | 37.5 |
|
| Axon Dock | 3,908 |
| | 6,440 |
| | (2,532 | ) | | (39.3 | ) |
| TASER CAM | 2,245 |
| | 1,512 |
| | 733 |
| | 48.5 |
|
Net sales were $94.7 million and $90.3 million for the three months ended December 31, 2017 and September 30, 2017, respectively, an increase of $4.4 million or 4.9%. Net sales for the TASER Weapons segment were $64.4 million and $59.4 million for the three months ended December 31, 2017 and September 30, 2017, respectively, an increase of $5.0 million or 8.4%. Net sales for the Software and Sensors segment were $30.2 million and $30.8 million for the three months ended December 31, 2017 and September 30, 2017, respectively, a decrease of $0.6 million or 2.0%. International sales were $16.0 million in for the three months ended December 31, 2017 compared to $17.1 million for the three months ended September 30, 2017, a decrease of $1.1 million.
The increase in net sales in the TASER Weapons segment on a sequential basis was partially attributable to the expiration of annual budget appropriations resulting in higher purchases for the quarter ended December 31, 2017 as compared to the quarter
ended September 30, 2017. Increased sales of TASER Weapons handles was partially offset by lower sequential cartridge sales, which was primarily attributable to timing. In the Software and Sensors segment, the Company experienced a decrease in net sales of $0.6 million. Axon hardware and device sales were lower due to timing of deployments, which were partially offset by increased service revenues which were attributable to more cumulative Axon devices in the field with extended warranty coverage and more cumulative active users on the Company's Evidence.com platform.
Net Sales - For the Years Ended December 31, 2016 and 2015
Net sales by product line were as follows for the years ended December 31, 2016 and 2015 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2016 | | 2015 | | |
| TASER Weapons segment: | | | | | | | | | | | |
| TASER X26P | $ | 72,490 |
| | 27.0 | % | | $ | 55,969 |
| | 28.3 | % | | $ | 16,521 |
| | 29.5 | % |
| TASER X2 | 52,665 |
| | 19.6 |
| | 42,746 |
| | 21.6 |
| | 9,919 |
| | 23.2 |
|
| TASER Pulse and Bolt | 3,580 |
| | 1.3 |
| | 2,146 |
| | 1.1 |
| | 1,434 |
| | 66.8 |
|
| Single cartridges | 52,305 |
| | 19.5 |
| | 41,674 |
| | 21.1 |
| | 10,631 |
| | 25.5 |
|
| Extended warranties | 9,880 |
| | 3.7 |
| | 7,402 |
| | 3.7 |
| | 2,478 |
| | 33.5 |
|
| Other | 11,724 |
| | 4.4 |
| | 12,438 |
| | 6.3 |
| | (714 | ) | | (5.7 | ) |
| TASER Weapons segment | 202,644 |
| | 75.5 |
| | 162,375 |
| | 82.1 |
| | 40,269 |
| | 24.8 |
|
| Software and Sensors segment: | | | | | | | | | | | |
| Axon Body | 12,911 |
| | 4.8 |
| | 4,029 |
| | 2.0 |
| | 8,882 |
| | 220.5 |
|
| Axon Flex | 5,323 |
| | 2.0 |
| | 6,880 |
| | 3.5 |
| | (1,557 | ) | | (22.6 | ) |
| Axon Dock | 7,422 |
| | 2.8 |
| | 4,022 |
| | 2.0 |
| | 3,400 |
| | 84.5 |
|
| Evidence.com | 29,260 |
| | 10.9 |
| | 11,765 |
| | 5.9 |
| | 17,495 |
| | 148.7 |
|
| TASER CAM | 4,888 |
| | 1.8 |
| | 5,746 |
| | 2.9 |
| | (858 | ) | | (14.9 | ) |
| Extended warranties | 3,710 |
| | 1.4 |
| | 1,794 |
| | 0.9 |
| | 1,916 |
| | 106.8 |
|
| Other | 2,087 |
| | 0.8 |
| | 1,281 |
| | 0.6 |
| | 806 |
| | 62.9 |
|
| Software and Sensors segment | 65,601 |
| | 24.5 |
| | 35,517 |
| | 17.9 |
| | 30,084 |
| | 84.7 |
|
| Total net sales | $ | 268,245 |
| | 100.0 | % | | $ | 197,892 |
| | 100.0 | % | | $ | 70,353 |
| | 35.6 | % |
Net unit sales for TASER Weapons and Software and Sensors segment were as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2016 | | 2015 | | Unit Change | | Percent Change |
| TASER X26P | 79,218 |
| | 62,383 |
| | 16,835 |
| | 27.0 | % |
| TASER X2 | 47,700 |
| | 38,050 |
| | 9,650 |
| | 25.4 |
|
| TASER Pulse and Bolt | 9,549 |
| | 8,121 |
| | 1,428 |
| | 17.6 |
|
| Cartridges | 1,979,051 |
| | 1,694,450 |
| | 284,601 |
| | 16.8 |
|
| Axon Body | 66,154 |
| | 17,522 |
| | 48,632 |
| | 277.5 |
|
| Axon Flex | 14,173 |
| | 18,823 |
| | (4,650 | ) | | (24.7 | ) |
| Axon Dock | 16,983 |
| | 6,979 |
| | 10,004 |
| | 143.3 |
|
| TASER CAM | 9,566 |
| | 11,634 |
| | (2,068 | ) | | (17.8 | ) |
Net sales were $268.2 million and $197.9 million for the years ended December 31, 2016 and 2015, respectively, an increase of $70.4 million or 35.6%. Net sales for the TASER Weapons segment were $202.6 million and $162.4 million for the years ended December 31, 2016 and 2015, respectively, an increase of $40.3 million or 24.8%. Net sales for the Software and Sensors segment were $65.6 million and $35.5 million for the years ended December 31, 2016 and 2015, respectively, an increase of $30.1 million or 84.7%. International sales were $49.5 million in 2016 compared to $36.1 million in 2015, an increase of 37.1%.
The increase in net sales for 2016 compared to 2015 in the TASER Weapons segment was primarily driven by the Company's ability to increase the frequency of upgrades through trade-in programs along with increased demand for the Company's installment payment plans, OSP and TASER 60. These programs allow customers to pay for hardware and services over an extended contractual life, which is typically fivefuture years. In the Software and Sensors segment, the increase in net sales was driven by the continued adoption of the Axon on-officer cameras and Evidence.com application in the law enforcement markets, which was further impacted by a large deployment of Axon Body 2 cameras to a major international customer.
Cost of Product and Service Sales
Cost of productProduct and service sales was as follows for the years ended December 31, 2017, 2016 and 2015Service Sales (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, |
| | | | Dollar Change | | Percent Change | | | | Dollar
Change | | Percent
Change |
| | 2017 | | 2016 | | | | 2016 | | 2015 | | |
| TASER Weapons segment: | | | | | | | | | | | | | | | |
| Cost of product sales | $ | 72,054 |
| | $ | 61,930 |
| | $ | 10,124 |
| | 16.3 | % | | $ | 61,930 |
| | $ | 48,821 |
| | $ | 13,109 |
| | 26.9 | % |
| Cost as % of sales | 30.7 |
| | 30.6 |
| | | | | | 30.6 |
| | 30.1 |
| | | | |
| Software and Sensors segment: | | | | | | | | | | | | | | | |
| Cost of product sales | 45,943 |
| | 29,606 |
| | 16,337 |
| | 55.2 |
| | 29,606 |
| | 16,201 |
| | 13,405 |
| | 82.7 |
|
| Cost of service sales | 18,713 |
| | 6,173 |
| | 12,540 |
| | 203.1 |
| | 6,173 |
| | 4,223 |
| | 1,950 |
| | 46.2 |
|
| Total cost of product and service sales | 64,656 |
| | 35,779 |
| | 28,877 |
| | 80.7 |
| | 35,779 |
| | 20,424 |
| | 15,355 |
| | 75.2 |
|
| Cost as % of sales | 59.2 |
| | 54.5 |
| | | | | | 54.5 |
| | 57.5 |
| | | | |
| Total cost of product and service sales | $ | 136,710 |
| | $ | 97,709 |
| | $ | 39,001 |
| | 39.9 |
| | $ | 97,709 |
| | $ | 69,245 |
| | $ | 28,464 |
| | 41.1 |
|
| Cost as % of sales | 39.8 |
| | 36.4 |
| | | | | | 36.4 |
| | 35.0 |
| | | | |
Cost of product and service sales was $136.7 million and $97.7 million for the years ended December 31, 2017 and 2016, respectively, an increase of $39.0 million or 39.9%. As a percentage of net sales, cost of product and service sales increased to 39.8% in 2017 compared to 36.4% in 2016. |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar
Change | | Percent
Change |
| | 2019 | | 2018 | | |
| TASER segment: | | | | | | | | | | | |
| Cost of product sales | $ | 107,188 |
| | 38.1 | % | | $ | 80,354 |
| | 31.7 | % | | $ | 26,834 |
| | 33.4 | % |
| Software and Sensors segment: | | | | | | | | | | | |
| Cost of product sales | 83,495 |
| | 33.5 | % | | 58,983 |
| | 35.3 | % | | 24,512 |
| | 41.6 | % |
| Cost of service sales | 32,891 |
| | 13.2 | % | | 22,148 |
| | 13.3 | % | | 10,743 |
| | 48.5 | % |
| Total cost of sales | 116,386 |
| | 46.7 | % | | 81,131 |
| | 48.6 | % | | 35,255 |
| | 43.5 | % |
| Total cost of product and service sales | $ | 223,574 |
| | 42.1 | % | | $ | 161,485 |
| | 38.4 | % | | $ | 62,089 |
| | 38.4 | % |
Within the TASER Weapons segment, cost of product sales increased $10.1$26.8 million, or 16.3%33.4%, to $72.1$107.2 million in 2017,2019, compared to $61.9$80.4 million in 2016, and remained relatively consistent2018. Cost as a percentage of sales at 30.7%increased to 38.1% from 30.6%31.7%. The Company did not experience significant changes in variable manufacturing costs during the year ended December 31, 2017 as compared to 2016. The overall increase in cost of products soldproduct sales was primarily attributable to the mix of products, with higher cost per unit sales.for TASER 7 handles and cartridges as well as higher depreciation on new production equipment for the TASER 7. Additionally, cost of product sales included approximately $3.0 million in expense for TASER 7 ramp-up and optimization costs related to scrap, obsolete inventory, and higher labor costs.
Within the Software and Sensors segment, cost of product and service sales was $64.7$116.4 million, an increase of $28.9$35.3 million, or 80.7%43.5%, from 2016. As a percentage of net sales, cost of product and service sales increased to 59.2% in 2017 from 54.5% in 2016. The increase in cost of product sales was primarily attributable to higher sales volumes, and the increase in cost of service sales was driven by increased cloud storage costs. The increase in total cost of sales as a percentage of total net sales was primarily attributable to non-recurring expenses related to the Company's data migration to a new cloud-storage provider.
Cost of product and service sales was $97.7 million and $69.2 million for the years ended December 31, 2016 and 2015, respectively, an increase of $28.5 million or 41.1%. As a percentage of net sales, cost of product and service sales increased to 36.4% in 2016 compared to 35.0% in 2015. Within the TASER Weapons segment, cost of product sales increased $13.1 million, or 26.9%, to $61.9 million in 2016, compared to $48.8 million in 2015, and remained relatively consistent as a percent of sales at 30.6% from 30.1%.
Within the Software and Sensors segment, cost of product and service sales was $35.8 million, an increase of $15.4 million, or 75.2% from 2015.2018. As a percentage of net sales, cost of product and service sales decreased to 54.5%46.7% in 20162019 from 57.5%48.6% in 2015. The increase in cost2018. Cost of product and service sales wasincreased $24.5 million primarily driven by continued growth,the impact of increased data storage costs as more agencies utilized Evidence.com,units as well as increased costs for our professional services team. The decrease in total costsfreight and customs expenses, but decreased as a percentage of total segment net sales, wasreflecting non-recurrence of customer fulfillment costs associated with our acquisition of VIEVU in May 2018 and higher pricing on Axon Body 2 cameras and docks. Cost of service sales increased $10.7 million driven primarily driven by improvements in Evidence.com service margins.
a $5.0 million increase in third party cloud data storage and compute costs, and by a $3.9 million increase in professional services expense due to both significant Fleet installations during 2019 and an overall increase following the acquisition of VIEVU in May 2018. In June 2019, we entered into a purchase agreement for cloud data storage with a three year term beginning July 1, 2019. We expect that this agreement, in combination with moving certain data into archive storage, will slow the growth of our future storage and compute costs, despite anticipated increases in the amount of data stored.
Gross Margin
Gross margin was as follows for the years ended December 31, 2017, 2016 and 2015Margin (dollars in thousands):
| | | | Year Ended December 31, | | Year Ended December 31, | Year Ended December 31, |
| | | | Dollar Change | | Percent Change | | | | Dollar Change | | Percent Change | | | Dollar Change | | Percent Change |
| | 2017 | | 2016 | | 2016 | | 2015 | | 2019 | | 2018 | |
| TASER Weapons segment | $ | 162,458 |
| | $ | 140,714 |
| | $ | 21,744 |
| | 15.5 | % | | $ | 140,714 |
| | $ | 113,554 |
| | $ | 27,160 |
| | 23.9 | % | |
| Software and Sensors Segment | 44,630 |
| | 29,822 |
| | 14,808 |
| | 49.7 |
| | 29,822 |
| | 15,093 |
| | 14,729 |
| | 97.6 |
| |
| TASER segment | | $ | 174,473 |
| | $ | 172,761 |
| | $ | 1,712 |
| | 1.0 | % |
| Software and Sensors segment | | 132,813 |
| | 85,822 |
| | 46,991 |
| | 54.8 | % |
| Total gross margin | $ | 207,088 |
| | $ | 170,536 |
| | $ | 36,552 |
| | 21.4 |
| | $ | 170,536 |
| | $ | 128,647 |
| | $ | 41,889 |
| | 32.6 |
| $ | 307,286 |
| | $ | 258,583 |
| | $ | 48,703 |
| | 18.8 | % |
| Gross margin as % of net sales | 60.2 |
| | 63.6 |
| | | | | | 63.6 |
| | 65.0 |
| | | | | 57.9 | % | | 61.5 | % | | | | |
Gross margin increased $36.6$48.7 million to $207.1$307.3 million for the year ended December 31, 20172019 compared to $170.5$258.6 million for 2016.2018. As a percentage of net sales, gross margin decreased to 60.2%57.9% for 20172019 from 63.6%61.5% for 2016. 2018.
As a percentage of net sales, gross margin for the TASER Weapons segment was relatively consistent at 69.3% and 69.4%decreased to 61.9% for the year ended December 31, 20172019 from 68.3% for the year ended December 31, 2018. TASER 7 devices have a lower average selling price per unit than legacy products due to the bundle of products and 2016, respectively. services included, and a higher cost per unit than legacy products. Additionally, gross margin was impacted by trade in credits provided to certain customers purchasing TASER 7 devices.
Within the Software and Sensors segment, gross margin as a percentage of total segment net sales was 40.8%53.3% and 45.5%51.4% for the years ended 20172019 and 2016,2018, respectively. Within the Software and Sensors segment, hardwareproduct gross margin was 10.5%29.8% for the year ended December 31, 2017and 17.6%2019 and 20.8% for the same period in 2016,2018, while the service margins were 67.7%74.8% and 79.2%76.0% during those same periods, respectively. The decreased hardware margins were primarily attributable to higher discounting. In certain customer contracts, primarily within the Software and Sensors segment, the level of discounting resulted in a portion of the contractual consideration allocated to the delivered hardware to be recognized as revenue ratably over the Evidence.com subscription term. However, the full cost of the product is recognized when the hardware is delivered to the customer resulting in lower gross margins initially. The decrease in service margins was primarily attributable to non-recurring expenses related to the Company's data migration to a new cloud-storage provider.
Gross margin increased $41.9 million to $170.5 million for 2016 compared to $128.6 million for 2015. As a percentage of net sales, gross margin decreased to 63.6% for 2016 from 65.0% for 2015. The decrease in gross margin as a percentage of sales was due primarily to a change in product mix, as lower margin Axon hardware product sales became a greater percentage of the consolidated total. As a percentage of net sales, gross margin for the TASER Weapons segment was relatively consistent at 69.4% and 69.9% for 2016 and 2015, respectively, while the same measure for these years for the Software and Sensors segment were 45.5% and 42.5%, respectively. The improvement in Software and Sensors segment gross margin was primarily attributable to higher service margins due to increased users on the Evidence.com platform.
Sales, General and Administrative Expenses
Sales, generalGeneral and administrative (“Administrative ("SG&A”&A") expenses were comprised of the following for 2017 and 2016Expenses (dollars in thousands):
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2017 | | 2016 | | |
| Salaries, benefits and bonus | $ | 58,450 |
| | $ | 43,058 |
| | $ | 15,392 |
| | 35.7 | % |
| Stock-based compensation | 9,047 |
| | 5,707 |
| | 3,340 |
| | 58.5 |
|
| Professional, consulting and lobbying | 24,267 |
| | 19,321 |
| | 4,946 |
| | 25.6 |
|
| Sales and marketing | 17,368 |
| | 15,132 |
| | 2,236 |
| | 14.8 |
|
| Travel and meals | 10,637 |
| | 8,970 |
| | 1,667 |
| | 18.6 |
|
| Other | 18,923 |
| | 15,888 |
| | 3,035 |
| | 19.1 |
|
| Total sales, general and administrative expenses | $ | 138,692 |
| | $ | 108,076 |
| | $ | 30,616 |
| | 28.3 |
|
| Sales, general, and administrative as a percentage of net sales | 40.3 | % | | 40.3 | % | | | | |
Sales, general and administrative expenses were $138.7 million and $108.1 million for the years ended December 31, 2017 and 2016, respectively, an increase of $30.6 million, or 28.3%. As a percentage of total net sales, SG&A expenses were 40.3% for the years ended December 31, 2017 and 2016. |
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2019 | | 2018 | | |
| Salaries, benefits and bonus | $ | 67,582 |
| | $ | 63,185 |
| | $ | 4,397 |
| | 7.0 | % |
| Stock-based compensation | 59,341 |
| | 12,710 |
| | 46,631 |
| | 366.9 | % |
| Professional, consulting and lobbying | 21,590 |
| | 24,469 |
| | (2,879 | ) | | (11.8 | )% |
| Sales and marketing | 28,961 |
| | 19,427 |
| | 9,534 |
| | 49.1 | % |
| Travel and meals | 11,407 |
| | 9,908 |
| | 1,499 |
| | 15.1 | % |
| Depreciation and amortization | 5,739 |
| | 6,051 |
| | (312 | ) | | (5.2 | )% |
| Other | 18,339 |
| | 21,136 |
| | (2,797 | ) | | (13.2 | )% |
| Total sales, general and administrative expenses | $ | 212,959 |
| | $ | 156,886 |
| | $ | 56,073 |
| | 35.7 | % |
| SG&A expenses as a percentage of net sales | 40.1 | % | | 37.3 | % | | | | |
SG&A by typeincreased $56.1 million, or 35.7%. Stock-based compensation expense increased $46.6 million in comparison to the prior year comparable period, which was primarily attributable to an increase of $30.8 million in expense related to the CEO Performance Award and by segment were as follows forexpense of $11.5 million related to our XSPP. During the yearsyear ended December 31, 20172019, attainment of the third through ninth tranches of the CEO Performance Award and 2016XSPP became probable. Accordingly, we recorded expense of $26.5 million for the CEO Performance Award and $7.3 million for the XSPP reflecting the cumulative expense for the third through ninth tranches from the grant dates through December 31, 2019. Refer to Note 12 of the notes to our consolidated financial statements within this Annual Report on Form 10-K for additional discussion of the CEO Performance Award and XSPP. Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount.
Salaries, benefits and bonus expense increased $4.4 million, primarily due to an increase in headcount. The increase was partially offset by a decline in expense for contract labor. Salaries, benefits and bonus expense decreased as a percentage of sales from 15.0% for 2018 to 12.7% for 2019.
Sales and marketing expenses increased $9.5 million, driven by a $8.7 million increase in commissions tied to higher revenues. The increase in commissions was also driven by higher commission rates for higher value bundled deals, which have continued to increase.
The increases were partially offset by a decrease of $2.9 million in professional, consulting and lobbying expenses. Legal expenses increased by approximately $1.0 million, offset by a $3.8 million decrease in professional fees, which were higher during 2018 related to our acquisition of Vievu, the adoption of Topic 606, and the implementation of the CEO Performance Award and XSPP.
During 2019, we abandoned certain capitalized software related to implementation work on an enterprise resource planning system conversion, resulting in an impairment charge of $1.3 million, and certain planning and site development activities related to our planned new headquarters, resulting in an impairment charge of $0.7 million. During 2018, we recorded an impairment charge of $2.0 million related to the abandonment of certain developed technology acquired in a business combination.
As discussed in Note 9 of the notes to our consolidated financial statements within this Annual Report on Form 10-K, on January 3, 2020, we sued the FTC in the District of Arizona, and the FTC filed an enforcement action regarding our May 2018 acquisition of Vievu LLC. This litigation is expected to result in an increase in legal expenses during the year ending December 31, 2020. While the amount and timing of such expenses is unknown and will vary depending on the progression of litigation, we currently anticipate expenses in the range of $10.0 million to $15.0 million for the year, with a higher proportion of the expense expected during the first half of 2020.
Research and Development Expenses
Research and Development ("R&D") Expenses (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2017 | | 2016 | | |
| TASER Weapons segment: | | | | | | | | | | | |
| Salaries, benefits and bonus | $ | 32,009 |
| | 23.1 | % | | $ | 24,534 |
| | 22.7 | % | | $ | 7,475 |
| | 30.5 | % |
| Stock-based compensation | 6,115 |
| | 4.4 |
| | 3,339 |
| | 3.1 |
| | 2,776 |
| | 83.1 |
|
| Professional, consulting and lobbying | 12,017 |
| | 8.7 |
| | 10,128 |
| | 9.4 |
| | 1,889 |
| | 18.7 |
|
| Sales and marketing | 8,357 |
| | 6.0 |
| | 8,305 |
| | 7.7 |
| | 52 |
| | 0.6 |
|
| Travel and meals | 4,867 |
| | 3.5 |
| | 4,277 |
| | 4.0 |
| | 590 |
| | 13.8 |
|
| Other | 14,837 |
| | 10.7 |
| | 13,034 |
| | 12.1 |
| | 1,803 |
| | 13.8 |
|
| TASER Weapons segment | 78,202 |
| | 56.4 |
| | 63,617 |
| | 58.9 |
| | 14,585 |
| | 22.9 |
|
| Software and Sensors segment: | | | | | | | | | | | |
| Salaries, benefits and bonus | 26,441 |
| | 19.1 |
| | 18,524 |
| | 17.1 |
| | 7,917 |
| | 42.7 |
|
| Stock-based compensation | 2,932 |
| | 2.1 |
| | 2,368 |
| | 2.2 |
| | 564 |
| | 23.8 |
|
| Professional, consulting and lobbying | 12,250 |
| | 8.8 |
| | 9,193 |
| | 8.5 |
| | 3,057 |
| | 33.3 |
|
| Sales and marketing | 9,011 |
| | 6.5 |
| | 6,827 |
| | 6.3 |
| | 2,184 |
| | 32.0 |
|
| Travel and meals | 5,770 |
| | 4.2 |
| | 4,693 |
| | 4.3 |
| | 1,077 |
| | 22.9 |
|
| Other | 4,086 |
| | 2.9 |
| | 2,854 |
| | 2.6 |
| | 1,232 |
| | 43.2 |
|
| Software and Sensors segment | 60,490 |
| | 43.6 |
| | 44,459 |
| | 41.1 |
| | 16,031 |
| | 36.1 |
|
| Total sales, general and administrative expenses | $ | 138,692 |
| | 100.0 | % | | $ | 108,076 |
| | 100.0 | % | | $ | 30,616 |
| | 28.3 |
|
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2019 | | 2018 | | |
| Salaries, benefits and bonus | $ | 63,763 |
| | $ | 49,792 |
| | $ | 13,971 |
| | 28.1 | % |
| Stock-based compensation | 17,588 |
| | 8,658 |
| | 8,930 |
| | 103.1 | % |
| Professional and consulting | 4,525 |
| | 4,183 |
| | 342 |
| | 8.2 | % |
| Travel and meals | 2,247 |
| | 2,192 |
| | 55 |
| | 2.5 | % |
| Other | 12,598 |
| | 12,031 |
| | 567 |
| | 4.7 | % |
| Total research and development expenses | $ | 100,721 |
| | $ | 76,856 |
| | $ | 23,865 |
| | 31.1 | % |
| R&D expenses as a percentage of net sales | 19.0 | % | | 18.3 | % | | | | |
The increase in R&D expense was fully attributable to our Software and Sensors segment. Within the TASER Weapons segment, SG&A increased $14.6R&D expenses decreased $2.5 million or 22.9%,14.9% due to $78.2 million from $63.6 millionlower headcount and a decrease in 2016. This increasehardware spending,
which was primarily attributablehigher during the prior year comparable period leading up to the Company's continued efforts to build the necessary infrastructure to facilitate future growth which was evidenced by higher salaries, benefits, bonus and stock-based compensation of $10.3 millionTASER 7 launch. R&D expense for the year ended December 31, 2017 as compared to 2016. Increased professional, consulting and lobbying fees of $1.9 million were primarily related to accounting and finance consulting costs attributable to the Company's adoption of the new revenue recognition rules, international tax restructuring,and efforts towards remediation of internal control matters. The remaining other operating expenses were primarily attributable to the overall growth of operations during 2017.
Within the Software and Sensors segment, SG&A increased $16.0 million, or 36.1%, to $60.5 million in 2017 in comparison to the prior year. Salaries, benefits, bonus and stock-based compensation in the Software and Sensors segment increased $8.5 million as the Company continued to hire additional engineering, product management personnel, sales and marketing personnel and general support staff to further expand upon existing product offerings as well as the development of new products such as records management systems and computer aided dispatch systems. The increase in professional, consulting and lobbying expenses of $3.1 million was related to higher professional and consulting costs related to the implementation of a new revenue accounting software platform. Additionally, the Company incurred higher marketing consulting fees related to hosted events and conferences for customers as well as internal sales meetings. The increase in sales and marketing expense of $2.2 million relates to higher commissions on increased bookings, increased customer samples attributable to the Company delivering on-officer cameras, Signal Sidearm, among other technologies, to prospective customers for evaluation purposes, as well as increased spending on sponsorships for major city police chief associations and major county sheriffs' associations. The remaining other operating expenses are primarily attributable to the overall growth of operations during 2017.
Sales, general and administrative expenses were comprised of the following for 2016 and 2015 (dollars in thousands): |
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2016 | | 2015 | | |
| Salaries, benefits and bonus | $ | 43,058 |
| | $ | 25,032 |
| | $ | 18,026 |
| | 72.0 | % |
| Stock-based compensation | 5,707 |
| | 4,299 |
| | 1,408 |
| | 32.8 |
|
| Professional, consulting and lobbying | 19,321 |
| | 13,165 |
| | 6,156 |
| | 46.8 |
|
| Sales and marketing | 15,132 |
| | 10,776 |
| | 4,356 |
| | 40.4 |
|
| Travel and meals | 8,970 |
| | 5,649 |
| | 3,321 |
| | 58.8 |
|
| Other | 15,888 |
| | 10,777 |
| | 5,111 |
| | 47.4 |
|
| Total sales, general and administrative expenses | $ | 108,076 |
| | $ | 69,698 |
| | $ | 38,378 |
| | 55.1 |
|
| Sales, general, and administrative as a percentage of net sales | 40.3 | % | | 35.2 | % | | | | |
Sales, general and administrative expenses were $108.1 million and $69.7 million for the years ended December 31, 2016 and 2015, respectively, an increase of $38.4$26.4 million or 55.1%. As a percentage44.1%, but decreased to 34.6% of total net sales SG&A expenses increased to 40.3% for 2016 compared to 35.2% for 2015.
SG&A by type and by segment were as follows for the years ended December 31, 2016 and 2015 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2016 | | 2015 | | |
| TASER Weapons segment: | | | | | | | | | | | |
| Salaries, benefits and bonus | $ | 24,534 |
| | 22.7 | % | | $ | 16,767 |
| | 24.1 | % | | $ | 7,767 |
| | 46.3 | % |
| Stock-based compensation | 3,339 |
| | 3.1 |
| | 3,187 |
| | 4.6 |
| | 152 |
| | 4.8 |
|
| Professional, consulting and lobbying | 10,128 |
| | 9.4 |
| | 10,258 |
| | 14.7 |
| | (130 | ) | | (1.3 | ) |
| Sales and marketing | 8,305 |
| | 7.7 |
| | 5,411 |
| | 7.8 |
| | 2,894 |
| | 53.5 |
|
| Travel and meals | 4,277 |
| | 4.0 |
| | 3,089 |
| | 4.4 |
| | 1,188 |
| | 38.5 |
|
| Other | 13,034 |
| | 12.1 |
| | 8,928 |
| | 12.8 |
| | 4,106 |
| | 46.0 |
|
| TASER Weapons segment | 63,617 |
| | 58.9 |
| | 47,640 |
| | 68.4 |
| | 15,977 |
| | 33.5 |
|
| Software and Sensors segment: | | | | | | | | | | | |
| Salaries, benefits and bonus | 18,524 |
| | 17.1 |
| | 8,265 |
| | 11.9 |
| | 10,259 |
| | 124.1 |
|
| Stock-based compensation | 2,368 |
| | 2.2 |
| | 1,112 |
| | 1.6 |
| | 1,256 |
| | 112.9 |
|
| Professional, consulting and lobbying | 9,193 |
| | 8.5 |
| | 2,907 |
| | 4.2 |
| | 6,286 |
| | 216.2 |
|
| Sales and marketing | 6,827 |
| | 6.3 |
| | 5,365 |
| | 7.7 |
| | 1,462 |
| | 27.3 |
|
| Travel and meals | 4,693 |
| | 4.3 |
| | 2,560 |
| | 3.7 |
| | 2,133 |
| | 83.3 |
|
| Other | 2,854 |
| | 2.6 |
| | 1,849 |
| | 2.7 |
| | 1,005 |
| | 54.4 |
|
| Software and Sensors segment | 44,459 |
| | 41.1 |
| | 22,058 |
| | 31.6 |
| | 22,401 |
| | 101.6 |
|
| Total sales, general and administrative expenses | $ | 108,076 |
| | 100.0 | % | | $ | 69,698 |
| | 100.0 | % | | $ | 38,378 |
| | 55.1 |
|
Within the TASER Weapons segment, SG&A increased $16.0 million, or 33.5%, to $63.6 million from $47.6 million in 2015. Salaries, benefits, bonus and stock-based compensation in the TASER Weapons increased approximately $7.9 million in 2016 compared to 2015. This increase was primarily attributable to the Company's efforts to build the corporate infrastructure to facilitate future growth in departments such as supply chain, legal, finance and information technology. The increase in travel and meals was primarily attributable to the growth in the direct sales teams both domestically and internationally. The increase in sales and marketing of $2.9 million was primarily attributable to higher commissions of $3.2 million partially offset by a decrease in marketing related costs partially due to lower spending at the 2016 International Association of Chiefs of Police conference as compared to 2015. The increase35.8% in other expenses was made up primarily of $1.2 million in higher computer related costs, $0.3 million of higher rent expense, and $2.0 million of litigation costs incurred, including resolution expenses, that were not incurred during the same period in 2015.
Within the Software and Sensors segment, SG&A increased $22.4 million, or 101.6%, to $44.5 million in 2016 in comparison to the prior year. Salaries, benefits, bonus and stock-based compensation in the Software and Sensors segment increased $11.5
million as the Company continued to hire additional engineering, product management personnel, sales and marketing personnel and general support staff to further expand upon existing product offerings as well as the development of new apps and cloud technologies. The increase in travel and meals was primarily attributable to the growth in the direct sales teams both domestically and internationally. Of the increase, in professional, consulting and lobbying, $4.1 million represented primarily increased lobbying fees aimed at securing long-term body-worn camera and service contracts, $0.8 million of increased legal costs primarily attributable to the ongoing Digital Ally lawsuit, and $0.6 million related to increased patent and trademark costs. The increase in sales and marketing of $1.5 million was primarily attributable to higher commissions of $2.4 million partially offset by a decrease of $0.9 million in marketing related costs partially due to lower spending at the 2016 International Association of Chiefs of Police conference as compared to 2015.
Research and Development Expenses
Research and development ("R&D") expenses were comprised of the following for 2017 and 2016 (dollars in thousands): |
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2017 | | 2016 | | |
| Salaries, benefits and bonus | $ | 33,682 |
| | $ | 17,205 |
| | $ | 16,477 |
| | 95.8 | % |
| Stock-based compensation | 6,055 |
| | 3,320 |
| | 2,735 |
| | 82.4 |
|
| Professional and consulting | 4,351 |
| | 3,212 |
| | 1,139 |
| | 35.5 |
|
| Travel and meals | 1,674 |
| | 969 |
| | 705 |
| | 72.8 |
|
| Other | 9,611 |
| | 5,903 |
| | 3,708 |
| | 62.8 |
|
| Total research and development expenses | $ | 55,373 |
| | $ | 30,609 |
| | $ | 24,764 |
| | 80.9 |
|
| Research and development as a percentage of net sales | 16.1 | % | | 11.4 | % | | | | |
R&D expenses were $55.4 million and $30.6 million for the years ended December 31, 2017 and 2016, respectively, an increase of $24.8 million, or 80.9%. As a percentage of net sales, R&D increased to 16.1% in 2017 in compared to 11.4% in 2016.
R&D by type and by segment were as follows for the years ended December 31, 2017 and 2016 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2017 | | 2016 | | |
| TASER Weapons segment: | | | | | | | | | | | |
| Salaries, benefits and bonus | $ | 4,243 |
| | 7.7 | % | | $ | 2,301 |
| | 7.5 | % | | $ | 1,942 |
| | 84.4 | % |
| Stock-based compensation | 517 |
| | 0.9 |
| | 639 |
| | 2.1 |
| | (122 | ) | | (19.1 | ) |
| Professional and consulting | 1,098 |
| | 2.0 |
| | 1,167 |
| | 3.8 |
| | (69 | ) | | (5.9 | ) |
| Travel and meals | 388 |
| | 0.7 |
| | 345 |
| | 1.1 |
| | 43 |
| | 12.5 |
|
| Other | 2,131 |
| | 3.8 |
| | 1,435 |
| | 4.7 |
| | 696 |
| | 48.5 |
|
| TASER Weapons segment | 8,377 |
| | 15.1 |
| | 5,887 |
| | 19.2 |
| | 2,490 |
| | 42.3 |
|
| Software and Sensors segment: | | | | | | | | | | | |
| Salaries, benefits and bonus | 29,439 |
| | 53.2 |
| | 14,904 |
| | 48.7 |
| | 14,535 |
| | 97.5 |
|
| Stock-based compensation | 5,538 |
| | 10.0 |
| | 2,681 |
| | 8.8 |
| | 2,857 |
| | 106.6 |
|
| Professional and consulting | 3,253 |
| | 5.9 |
| | 2,045 |
| | 6.7 |
| | 1,208 |
| | 59.1 |
|
| Travel and meals | 1,286 |
| | 2.3 |
| | 624 |
| | 2.0 |
| | 662 |
| | 106.1 |
|
| Other | 7,480 |
| | 13.5 |
| | 4,468 |
| | 14.6 |
| | 3,012 |
| | 67.4 |
|
| Software and Sensors segment | 46,996 |
| | 84.9 |
| | 24,722 |
| | 80.8 |
| | 22,274 |
| | 90.1 |
|
| Total research and development expenses | $ | 55,373 |
| | 100.0 | % | | $ | 30,609 |
| | 100.0 | % | | $ | 24,764 |
| | 80.9 |
|
Within the TASER Weapons segment, R&D expenses increased $2.5 million, or 42.3%, to $8.4 million in 2017. Salaries, benefits, bonus and stock-based compensation in the TASER Weapons increased $1.8 million in 2017 compared to 2016. The increase for 2017 compared to 2016 is primarily driven by additional headcount as the Company continued to invest in the development of new CEW related technologies.
Within the Software and Sensors segment, R&D expenses increased $22.3 million, or 90.1%, to $47.0 million in 2017 from the prior year. The Company's Software and Sensors segment was responsible for approximately 85% of the overall expenses in
R&D. Of the $22.3 million increase in R&D for the Software and Sensors segment, $17.4$16.1 million related to salaries, benefits, and bonus attributable to increased headcount.
Stock-based compensation expense increased $8.9 million. Contributing to the increase was expense of $5.2 million related to our XSPP. During 2019, attainment of the third through ninth tranches of the XSPP became probable. Accordingly, we recorded expense of $3.4 million for the XSPP reflecting the cumulative expense for the third through ninth tranches from the grant dates through December 31, 2019. Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount.
Hardware spending increased approximately $2.6 million leading up to the Axon Body 3 launch. This increase was largely offset by decreases in depreciation and stock-based compensation. The Company remains focusedother expenses.
We expect R&D expense to continue to increase in absolute dollars as we focus on growing the Software and Sensors segment as it addswe add headcount and additional resources to develop new products and services including records management systems and computer aided dispatch systems, to further advance itsour scalable cloud-connected device platform. TheWe believe that these investments will result in an increase in professionalour subscription revenue base, which over time will result in revenue increasing faster than the increase in SG&A expenses and consulting expenseR&D costs, as we reach economies of $1.2 millionscale.
Interest and Other Income, Net
Interest and other income, net was primarily attributable to increased technical consulting fees related to the development and release of Signal Sidearm. Included in other R&D expenses for the Software and Services segment was $1.9 million of amortization of intangible assets related to acquired developed technology that was yet to be put into service. Additionally, during 2017, the Company abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $1.0 million which was included in other R&D expenses.
Research and development expenses were comprised of the following for 2016 and 2015 (dollars in thousands):
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2016 | | 2015 | | |
| Salaries, benefits and bonus | $ | 17,205 |
| | $ | 13,013 |
| | $ | 4,192 |
| | 32.2 | % |
| Stock-based compensation | 3,320 |
| | 2,576 |
| | 744 |
| | 28.9 |
|
| Professional and consulting | 3,212 |
| | 3,835 |
| | (623 | ) | | (16.2 | ) |
| Travel and meals | 969 |
| | 1,034 |
| | (65 | ) | | (6.3 | ) |
| Other | 5,903 |
| | 3,156 |
| | 2,747 |
| | 87.0 |
|
| Total research and development expenses | $ | 30,609 |
| | $ | 23,614 |
| | $ | 6,995 |
| | 29.6 |
|
| Research and development as a percentage of net sales | 11.4 | % | | 11.9 | % | | | | |
Research and development expenses were $30.6$8.5 million and $23.6$3.3 million for the years ended December 31, 20162019 and 2015, respectively, an increase of $7.0 million, or 29.6%. As a percentage of net sales, R&D decreased to 11.4% in 2016 as compared to 11.9% in 2015.
R&D by type and by segment were as follows for the years ended December 31, 2016 and 2015 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2016 | | 2015 | | |
| TASER Weapons segment: | | | | | | | | | | | |
| Salaries, benefits and bonus | $ | 2,301 |
| | 7.5 | % | | $ | 1,596 |
| | 6.8 | % | | $ | 705 |
| | 44.2 | % |
| Stock-based compensation | 639 |
| | 2.1 |
| | 394 |
| | 1.7 |
| | 245 |
| | 62.2 |
|
| Professional and consulting | 1,167 |
| | 3.8 |
| | 1,196 |
| | 5.1 |
| | (29 | ) | | (2.4 | ) |
| Travel and meals | 345 |
| | 1.1 |
| | 261 |
| | 1.1 |
| | 84 |
| | 32.2 |
|
| Other | 1,435 |
| | 4.7 |
| | 1,023 |
| | 4.3 |
| | 412 |
| | 40.3 |
|
| TASER Weapons segment | 5,887 |
| | 19.2 |
| | 4,470 |
| | 18.9 |
| | 1,417 |
| | 31.7 |
|
| Software and Sensors segment: | | | | | | | | | | | |
| Salaries, benefits and bonus | 14,904 |
| | 48.7 |
| | 11,417 |
| | 48.3 |
| | 3,487 |
| | 30.5 |
|
| Stock-based compensation | 2,681 |
| | 8.8 |
| | 2,182 |
| | 9.2 |
| | 499 |
| | 22.9 |
|
| Professional and consulting | 2,045 |
| | 6.7 |
| | 2,639 |
| | 11.2 |
| | (594 | ) | | (22.5 | ) |
| Travel and meals | 624 |
| | 2.0 |
| | 773 |
| | 3.3 |
| | (149 | ) | | (19.3 | ) |
| Other | 4,468 |
| | 14.6 |
| | 2,133 |
| | 9.0 |
| | 2,335 |
| | 109.5 |
|
| Software and Sensors segment | 24,722 |
| | 80.8 |
| | 19,144 |
| | 81.1 |
| | 5,578 |
| | 29.1 |
|
| Total research and development expenses | $ | 30,609 |
| | 100.0 | % | | $ | 23,614 |
| | 100.0 | % | | $ | 6,995 |
| | 29.6 |
|
Within the TASER Weapons segment, R&D expenses increased $1.4 million, or 31.7%, to $5.9 million in 2016. Salaries, benefits, bonus and stock-based compensation in the TASER Weapons increased approximately $1.0 million in 2016 as compared to 2015. The increase for 2016 as compared to 2015 is primarily driven by additional headcount as the Company continued to invest in the development of new CEW related technologies.
Within the Software and Sensors segment, R&D expenses increased $5.6 million, or 29.1%, to $24.7 million in 2016 from the prior year. The Company's Software and Sensors segment was responsible for approximately 81% of the overall expenses in
R&D. Of the $5.6 million increase in R&D for the Software and Sensors segment, $4.0 million related to salaries and benefits, inclusive of bonus and stock-based compensation. Included in the increase of other R&D for the Software and Sensors segment was sales and marketing expenses of $0.9 million related to contractual earn-outs for legacy MediaSolv employees, who work in R&D. The Company remained focused on growing the Software and Sensors segment as it added headcount and external resources to develop new products and services to further advance its scalable cloud-connected device platform. These increases were partially offset by decreases in professional and consulting of $0.6 million related primarily to the Company being more selective in the utilization of consultants as compared to hiring additional employees. The biggest portion of the increase in other R&D expenses related to tooling and supplies that made up $0.8 million of the overall increase. The remaining increase was attributable to the overall growth in of the Software and Sensors R&D department.
Interest and Other Income (Expense), Net
Interest and other income (expense), net was $2.7 million, $(0.4) million and $26,000 for the years ended December 31, 2017, 2016 and 2015,2018, respectively.
For the year ended December 31, 2017, the Company2019, we earned interest income of $1.6$8.7 million and had gainslosses from foreign currency transaction adjustments of $1.4$0.3 million, which were partially offset byother income, net of $0.1 million, and interest expense of $0.2less than $0.1 million. For the year ended December 31, 2016,2018, we earned interest income of $0.7$4.4 million was more than offset byand had losses onfrom foreign currency transaction adjustments of $1.1 million. For the year ended December 31, 2015,million, interest incomeexpense of $0.3$0.1 million, was partially offset by losses on foreign currency transaction adjustmentsand other expense of $0.2$0.1 million.
Provision for Income Taxes
The provision for income taxes was $10.6$1.2 million for the year ended December 31, 2017.2019. The effective income tax rate for 20172019 was 66.9%57.4%. In connection with our initial analysis of the impact of the Tax Act, we were able to make reasonable estimates of the impact of the Tax Act and recorded a provisional net tax expense of $8.0 million in the period ended December 31, 2017, primarily related to the impact of the tax rate reduction on our deferred tax assets and deferred tax liabilities. $0.4 million of the adjustment impacted the valuation allowance. This was partially offset by a $1.8 million benefitThe benefits related to excess stock-based compensation deductions, as well as a $2.4of $5.0 million benefit forand research and development credits duringof $4.9 million were partially offset by the year ended December 31, 2017. In addition,tax effects of permanently non-deductible expenses for executive compensation of $7.6 million, an additionalincrease in uncertain tax benefits of $1.2 million and other permanently non-deductible expenses of $1.1 million and state tax expense of $0.5 million. Additionally, we recorded a $0.4 million increase to our valuation allowance in the amount of $1.9 million was recorded as of December 31, 2017,2019 related to certain research and development credits that may not be utilized prior to expiration and losses in certain foreign jurisdictions in which there was a cumulative loss.
The provision for income taxes was $14.2 million for the year ended December 31, 2016. The effective income tax rate for 2016 was 45.1%. The effect of state income taxes of $0.9 million and the tax effects of intercompany transactions of $0.6 million were offset by a benefit of $1.9 million for research and development credits in the current year. The difference between statutory and foreign tax rates of $1.5 million was largely driven by losses incurred in a foreign entity for which no tax benefit will be realized. In addition, a valuation allowance in the amount of $1.8 million was recorded as of December 31, 2016 related to certain research and development tax credits that may not be utilized prior to expiration, and lossespartially offset by changes in certain foreign jurisdictions in which there was a cumulative loss.jurisdictions.
The provision for income taxestax benefit was $15.4$1.1 million for the year ended December 31, 2015.2018. The effective income tax rate for 20152018 was 43.7%(3.9%). The effectbenefits related to excess stock-based compensation of state income tax of $1.1$8.9 million was largely offset by a benefit of $1.0 million ofand research and development credits inof $6.9 million were partially offset by the current year. The difference between statutory and foreign tax rateseffects of $2.4 million was largely driven by losses incurred in a newly formed foreign entitypermanently non-deductible expenses for which no tax benefit will be realized, partially reduced by a tax benefit for newly formed foreign entities for which the statutory tax rate was lower than the U.S. statutory tax rate. In addition, valuation allowance in the amountexecutive compensation of $1.2 million, was recorded.an increase in uncertain tax benefits of $1.8 million and return to provision adjustments of $1.8 million. Additionally, we recorded a $2.0 million increase to our valuation allowance as of December 31, 2018 related to research and development tax credits that may not be utilized prior to expiration, partially offset by changes in certain foreign jurisdictions.
Net Income
Our net income decreased by $12.1$28.3 million to $5.2$0.9 million for the year ended December 31, 20172019 compared to $17.3$29.2 million in 2016.2018. Net income per basic and diluted share was $0.10$0.01 for 20172019, compared to $0.33 and $0.32 per basic and diluted share, respectively, for 2016.
Our net income decreased by $2.6 million to $17.3 million for the year ended December 31, 2016 compared to $19.9 million 2015. Net income per basic and diluted share of $0.52 and $0.50, respectively, for 2018.
Three Months Ended December 31, 2019 Compared to September 30, 2019
Net sales by product line were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2019 | | Three Months Ended September 30, 2019 | | Dollar
Change | | Percent
Change |
| TASER segment: | | | | | | | | | | | |
| TASER 7 | $ | 17,186 |
| | 10.0 | % | | $ | 20,214 |
| | 15.4 | % | | $ | (3,028 | ) | | (15.0 | )% |
| TASER X26P | 14,692 |
| | 8.5 | % | | 11,578 |
| | 8.8 | % | | 3,114 |
| | 26.9 | % |
| TASER X2 | 15,507 |
| | 9.0 | % | | 13,241 |
| | 10.1 | % | | 2,266 |
| | 17.1 | % |
| TASER Pulse and Bolt | 1,169 |
| | 0.7 | % | | 1,132 |
| | 0.9 | % | | 37 |
| | 3.3 | % |
| Cartridges | 28,633 |
| | 16.7 | % | | 18,901 |
| | 14.4 | % | | 9,732 |
| | 51.5 | % |
| Axon Evidence and cloud services | 341 |
| | 0.2 | % | | 218 |
| | 0.2 | % | | 123 |
| | 56.4 | % |
| Extended warranties | 4,733 |
| | 2.8 | % | | 4,543 |
| | 3.5 | % | | 190 |
| | 4.2 | % |
| Other | 1,694 |
| | 1.0 | % | | 1,916 |
| | 1.5 | % | | (222 | ) | | (11.6 | )% |
| TASER segment | 83,955 |
| | 48.9 | % | | 71,743 |
| | 54.8 | % | | 12,212 |
| | 17.0 | % |
| Software and Sensors segment: | | | | | | | | | | | |
| Axon Body | 25,219 |
| | 14.7 | % | | 6,763 |
| | 5.2 | % | | 18,456 |
| | 272.9 | % |
| Axon Flex | 1,411 |
| | 0.8 | % | | 1,670 |
| | 1.3 | % | | (259 | ) | | (15.5 | )% |
| Axon Fleet | 5,205 |
| | 3.0 | % | | 4,341 |
| | 3.3 | % | | 864 |
| | 19.9 | % |
| Axon Dock | 11,048 |
| | 6.4 | % | | 3,358 |
| | 2.6 | % | | 7,690 |
| | 229.0 | % |
| Axon Evidence and cloud services | 36,804 |
| | 21.4 | % | | 34,022 |
| | 26.0 | % | | 2,782 |
| | 8.2 | % |
| TASER Cam | 623 |
| | 0.4 | % | | 534 |
| | 0.4 | % | | 89 |
| | 16.7 | % |
| Extended warranties | 5,124 |
| | 3.0 | % | | 4,714 |
| | 3.6 | % | | 410 |
| | 8.7 | % |
| Other | 2,462 |
| | 1.4 | % | | 3,692 |
| | 2.8 | % | | (1,230 | ) | | (33.3 | )% |
| Software and Sensors segment | 87,896 |
| | 51.1 | % | | 59,094 |
| | 45.2 | % | | 28,802 |
| | 48.7 | % |
| Total net sales | $ | 171,851 |
| | 100.0 | % | | $ | 130,837 |
| | 100.0 | % | | $ | 41,014 |
| | 31.3 | % |
Net unit sales were as follows:
|
| | | | | | | | | | | |
| | Three Months Ended | | | | |
| | December 31, 2019 | | September 30, 2019 | | Unit
Change | | Percent
Change |
| TASER 7 | 14,577 |
| | 17,674 |
| | (3,097 | ) | | (17.5 | )% |
| TASER X26P | 13,554 |
| | 10,766 |
| | 2,788 |
| | 25.9 | % |
| TASER X2 | 11,534 |
| | 9,819 |
| | 1,715 |
| | 17.5 | % |
| TASER Pulse and Bolt | 2,978 |
| | 3,923 |
| | (945 | ) | | (24.1 | )% |
| Cartridges | 962,519 |
| | 566,347 |
| | 396,172 |
| | 70.0 | % |
| Axon Body | 83,268 |
| | 22,037 |
| | 61,231 |
| | 277.9 | % |
| Axon Flex | 3,078 |
| | 5,409 |
| | (2,331 | ) | | (43.1 | )% |
| Axon Fleet | 3,324 |
| | 2,967 |
| | 357 |
| | 12.0 | % |
| Axon Dock | 10,149 |
| | 3,724 |
| | 6,425 |
| | 172.5 | % |
| TASER Cam | 1,177 |
| | 899 |
| | 278 |
| | 30.9 | % |
Net sales for the TASER segment increased $12.2 million, or 17.0%, on a sequential basis primarily due to an overall increase in revenue from cartridges. An inventory shortfall earlier in the year resulted in a backlog primarily for TASER 7 and X2 cartridges; this backlog was $0.33 and $0.32 for 2016, respectively,cleared during the quarter ended December 31, 2019. The increase in cartridge units were partially offset by a decrease in the average selling price. Net sales also included a net increase of $2.4 million in TASER device sales. TASER 7 sales declined compared to $0.37the three months ending September 30, 2019; as a result of a battery component supplier not being able to timely fulfill our production needs, approximately $3 million of forecasted TASER 7 sales shifted from the three months ended June 30, 2019 to the three months ending September 30, 2019. Units of our legacy TASER devices increased, while the average selling prices remained consistent with the prior quarter.
Net sales for the Software and $0.36 per basicSensors segment increased $28.8 million, or 48.7%, on a sequential basis. Revenue from Axon Body cameras increased $18.5 million and diluted shareincluded $18.7 million in sales of Axon Body 3, which was introduced during the third quarter of 2019. Partially offsetting this increase was a decrease in units and average selling price of Axon Body 2 units. Axon Dock revenue also increased $7.7 million with increased units largely driven by the introduction of Axon Body 3, as well as an increase in the average selling price. The increase in the aggregate number of users on our network, including on-premise users in secondary international markets, resulted in increased Axon Evidence and cloud services revenues of $2.8 million.
International sales were $24.5 million in for 2015, respectively.the three months ended December 31, 2019 as compared to $20.0 million for the three months ended September 30, 2019, an increase of $4.5 million, driven by increased sales in the Asia Pacific region which were partially offset by lower sales in Africa.
Non-GAAP Financial Measures
To supplement our financial results presented in accordance with accounting principles generally accepted in the U.S. ("GAAP"), we present the non-GAAP financial measures of EBITDA and Adjusted EBITDA (CEO Performance Award). Our management uses these non-GAAP financial measures in evaluating our performance in comparison to prior periods. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance, and when planning and forecasting our future periods. A reconciliation of GAAP to the non-GAAP financial measures is presented below.
EBITDA (Most comparable GAAP Measure: Net income) - Earnings before interest expense, investment interest income, taxes, depreciation and amortization.
Adjusted EBITDA (CEO Performance Award) (Most comparable GAAP Measure: Net income) - Earnings before interest expense, investment interest income, taxes, depreciation, amortization and non-cash stock-based compensation expense.
Although these non-GAAP financial measures are not consistent with GAAP, management believes investors will benefit by referring to these non-GAAP financial measures when assessing our operating results, as well as when forecasting and analyzing future periods. However, management recognizes that:
these non-GAAP financial measures are limited in their usefulness and should be considered only as a supplement to our GAAP financial measures;
these non-GAAP financial measures should not be considered in isolation from, or as a substitute for, our GAAP financial measures;
these non-GAAP financial measures should not be considered to be superior to our GAAP financial measures; and
these non-GAAP financial measures were not prepared in accordance with GAAP and investors should not assume that the non-GAAP financial measures presented in this Annual Report on Form 10-K were prepared under a comprehensive set of rules or principles.
EBITDA and Adjusted EBITDA (CEO Performance Award) reconcile to net income as follows (dollars in thousands):
|
| | | | | | | | |
| | | For the Years Ended December 31, |
| | | 2019 | | 2018 |
| Net income | | $ | 882 |
| | $ | 29,205 |
|
| Depreciation and amortization | | 11,361 |
| | 10,615 |
|
| Interest expense | | 46 |
| | 86 |
|
| Investment interest income | | (7,040 | ) | | (3,002 | ) |
| Provision for (benefit from) income taxes | | 1,188 |
| | (1,101 | ) |
| EBITDA | | $ | 6,437 |
| | $ | 35,803 |
|
| | |
| |
|
| Adjustments: | |
| |
|
| Stock-based compensation expense | | 78,495 |
| | 21,879 |
|
| Adjusted EBITDA (CEO Performance Award) | | $ | 84,932 |
| | $ | 57,682 |
|
Liquidity and Capital Resources
Summary
As of December 31, 2017,2019, we had $75.1$172.3 million of cash and cash equivalents, a decrease of $177.2 million from December 31, 2018. Cash and cash equivalents and investments totaled $396.3 million, an increase of $34.5$46.8 million from the end of 2016.December 31, 2018.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities (in thousands):
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | 2019 | | 2018 |
| Operating activities | $ | 18,490 |
| | $ | 17,925 |
| | $ | 46,445 |
| $ | 65,673 |
| | $ | 63,875 |
|
| Investing activities | 19,082 |
| | (3,045 | ) | | (36,009 | ) | (240,737 | ) | | (9,860 | ) |
| Financing activities | (3,854 | ) | | (34,661 | ) | | 603 |
| (3,937 | ) | | 219,348 |
|
| Effect of exchange rate changes on cash and cash equivalents | 736 |
| | 906 |
| | 120 |
| 329 |
| | (774 | ) |
| Net increase (decrease) in cash and cash equivalents | $ | 34,454 |
| | $ | (18,875 | ) | | $ | 11,159 |
| |
| Net increase (decrease) in cash and cash equivalents and restricted cash | | $ | (178,672 | ) | | $ | 272,589 |
|
Operating activities
Net cash provided by operating activities in 20172019 of $18.5$65.7 million consisted of $5.2$0.9 million in net income, the net add-back of non-cash income statement items totaling $28.0$89.4 million and a negative $14.8$24.6 million net change in operating assets and liabilities. Included in the non-cash items are $8.0were $11.4 million in depreciation and amortization expense, $1.1$2.5 million related to the disposalimpairment of certain property and abandonment of intangible assets, $15.6equipment, $78.5 million in stock-based compensation expense, $0.7and a $8.0 million of bond premium amortization and $2.8 million related toincrease in deferred income taxes.tax assets. The most significant increase to the portion of cash fromprovided by operating activities related to the changes in operating assets and liabilities was a $39.7$24.0 million increase in deferred revenue. Of the deferred revenue increase, $7.4 million resulted from additional extended warranty sales, $20.2$10.5 million resulted from increased hardware deferred revenue from TASER Assurance Program ("TAP") and OSPsubscription sales, and $12.5$13.1 million related to prepayments for Software and Sensors services. These increasesAdditionally, operating cash flows were offsetpositively impacted by an increase of $5.0 million in accounts payable and accrued liabilities,
which was primarily a result of the timing of invoice payments. Operating cash flows were negatively impacted by increased inventory of $4.9 million, increased accounts and notes receivable and contract assets of $35.3 million, inventory of $11.7$38.8 million and increased prepaid expenses and other assets of $9.0 million during 2017.$9.8 million. The increasesincrease in accounts and notes receivable were dueand contract assets was attributable to increased sales during 2017, specificallyin 2019, primarily sales made under the OSP and TASER 60 installmentsubscription plans. Operating cash flows were also impacted by increased inventory of $11.7 million in anticipation of higher sales in 2018 and for the Company's National Field Trial Offer for body cameras. The increase in prepaid expenses and other asset accountsassets of $9.0$9.8 million during 20172019 was driven primarily by increased deferred cost of product sales of $5.0attributable to a $15.0 million prepayment related to increased deferred costa purchase agreement for cloud data storage that commenced in July 2019, net of product and service sales related to contracts where the product had shipped but revenue was deferred due to contractual provisions resulting in the costusage of product sales being deferred as an asset to be recognized in subsequent periods when revenue recognition criteria have been met, higher deferred commissions of $2.1 million representing amounts earned when a contract is booked which is then subsequently amortized over the contractual period as products and services are delivered and increased prepaid income taxes of $3.4 million.
Net cash provided by operating activities in 2016 of $17.9 million consisted of $17.3 million in net income, the net add-back of non-cash income statement items totaling $8.9$7.0 million, and a negative $8.2 million net change in operating assets and liabilities. Included in the non-cash items are $3.7 million in depreciation and amortization expense, $9.4 million in stock-based compensation expense, and $1.3 million of bond premium amortization. These additions were partially offset by an $1.4 million reduction related to excess tax benefit from stock-based compensation and $5.2 million related to deferred income taxes. The most significant increase to the portion of cash from operating activities related to the changes in operating assets and liabilities was a $34.3 millionsmaller increase in deferred revenue. Of the increase, $8.1 million resulted from additional extended warranty sales, $15.6 million resulted from increased hardware deferred revenue from TAP and OSP sales, and $10.5 million related to prepayments for Software and Sensors services. The Company also had increases in cash provided from operating activities of $17.6 million for increases in accounts payable and accrued liabilities related primarily to increased inventory purchases. These increases were offset by increased prepaid expenses and other current assets of $29.1 million, inventory of $18.7 million and accounts and notes receivable of $13.3 million during 2016. The increases in accounts and notes receivable were due to increased sales during 2016, and increases in inventory resulted from higher anticipated sales for 2017. Long-term accounts receivable increased by $16.4 million during 2016 for sales made under OSP and TASER 60. The increase in prepaid expenses and other asset accounts during 2016 was driven primarily increased prepaid commissions of $1.8 million attributable to higher sales, increased balances under corporate-owed life insurance policies of $1.1 million, $3.3 million of restricted cash related primarily to a customer contract requiring certain contractual payments to be deposited in escrow until approved for release, and $1.7 million of long-term contingent consideration deposited in escrow in connection with a business combination that was completed in December 2016.commissions.
Net cash provided by operating activities in 2015 of $46.4 million consisted of $19.9 million in net income, the net add-back of non-cash income statement items totaling $6.3 million, and a positive $20.2 million net change in operating assets and liabilities. Included in the non-cash items was $3.3 million in depreciation and amortization expense, $7.3 million in stock-based compensation expense, and $1.7 million of bond premium amortization. Those additions were partially offset by a $6.9 million reduction related to excess tax benefit from stock-based compensation that was treated as a financing activity for cash flow purposes. The most significant increase to the portion of cash from operating activities related to the changes in operating assets and liabilities was a $15.3 million increase to deferred revenue. Of the increase in deferred revenue, $4.0 million resulted from additional extended warranty sales, $7.3 million resulted from increased hardware deferred revenue from the Company's TAP and OSP sales programs, and $4.0 million related to prepayments for Software and Sensors SaaS and related services. The Company also had increases in cash provided from operating activities of $4.2 million and $3.1 million for decreases in accounts and notes receivable and inventory, respectively. In addition, the $5.9 million increase to cash from operating activities related to increases in accounts payable, accrued and other liabilities that was primarily caused by current income tax expense, which would have resulted in an increase to income tax payable, if it had not been reduced by the excess tax benefit from stock-based compensation discussed above. Those increases were partially offset by increased prepaid expenses and other current assets of $8.6 million during 2015. The increase in other asset accounts during 2015 was driven by primarily by increased prepaid commissions of $2.5 million, increased long-term accounts receivable of $1.2 million for sales made under OSP, increased balances under corporate-owed life insurance policies of $1.1 million, and a deposit made with a foreign component manufacturer of $2.6 million related to future services.
Investing activities
Primarily as the result of investments that matured during the year, we generated $19.1 million from investing activities in 2017. Calls and maturities on our investments, net of purchases, were $41.1 million. During 2017, we invested $10.6 million for the acquisition of Dextro, Inc., to continue building upon the Company's Axon Artificial Intelligence group, and for the acquisition of Breon, the Company's former distributor in Australia. The Company also invested $11.4 million in the purchase of property and equipment and intangibles, net of proceeds related to disposals.
Primarily as a result of investing cash generated from operating activities, weWe used $3.0 million in investing activities in 2016. Calls and maturities on our investments, net of purchases, were $8.9 million. During 2016, we invested $3.5 million for the acquisition of developed technology and hiring of personnel to form the Axon Artificial Intelligence group. The Company also invested $8.4 million in the purchase of property and equipment and intangibles, net of proceeds related to disposals.
Primarily as a result of investing cash generated from operating activities, the Company used $36.0$240.7 million for investing activities in 2015.2019. Purchases of investments, net of calls and maturities, were $18.4$224.4 million. During 2015, net cash of $11.2 million was used for the acquisitions of MediaSolv Solutions Corporation and Tactical Safety Responses LTD. The CompanyWe also invested $6.5$16.3 million in the purchase of property and equipment and intangibles.
Financing activities
Net cash used byin financing activities was $3.9 million for the year ended December 31, 2017.2019. During 2017, the Company2019, we paid income and payroll taxes of $3.5 million on behalf of employees who net-settled stock awards during the period. Additionally, the Company paid $1.8 million for contingent consideration amounts earned during 2017 related to the acquisition of certain assets from Fossil Group, Inc. and Fossil Vietnam, Limited Liability Company in 2016. These decreases were partially offset by $1.4 million of proceeds from the exercise of stock options.
Net cash used by financing activities was $34.7 million for the year ended December 31, 2016. During 2016, the Company repurchased $33.7 million of its common stock, which was purchased for a weighted average cost of $18.90 per share, inclusive of applicable administrative costs. Additionally, the Company paid payroll taxes of $1.8approximately $4.1 million on behalf of employees who net-settled stock awards during the period. These decreasescash outflows were partially offset by $0.5$0.1 million of proceeds from the exercise of stock options, and $1.4 million of excess tax benefit from stock-based compensation. The purchase of common stock was made under a stock repurchase program authorized by the Company's Board of Directors.
Net cash provided by financing activities was $0.6 million for the year ended December 31, 2015. During 2015, the Company repurchases $7.6 million of the Company’s common stock, which was purchased for a weighted average cost of $25.86 per share. The Company also paid payroll taxes of $1.4 million on behalf of employees who net-settled stock awards during the year. These decreases were partially offset by $2.7 million of proceeds from the exercise of stock options, and $6.9 million of excess tax benefit from stock proceeds. The purchase of common stock was made under a stock repurchase program authorized by the Company’s Board of Directors.
options.
Liquidity and Capital Resources
Our most significant source of liquidity continues to be funds generated by operating activities and available cash and cash equivalents. In addition, our $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 December 31, 2017,2019, we had letters of credit outstanding of $2.7 million, leaving the net amount available for borrowing of $7.3$47.3 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 December 31, 20172019 and 2016,2018, there were no borrowings under the line.
Our agreement with the bank requires us to comply with a maximum funded debt to EBITDA ratio, as defined, of no greater than 2.002.50 to 1.00 based upon a trailing twelve-monthfour fiscal quarter period. At December 31, 2017,2019, the Company’s funded debt to EBITDA ratio was 0.340.0004 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 CEWCED sale in which the entire amount being charged for the hardware is invoiced upon shipment. This impacts liquidity in a commensurate fashion, with the cash for the TASER 60 arrangement received in five annual installments rather than up front. It is our strategic intent to shift an increasing amount of our business to a subscription model, to better match the municipal budgeting process of our customers as well as to allow for multiple product
offerings to be bundled into existing subscriptions. We carefully considered the cash flow impacts of this strategic shift and regularly revisit our cash flow forecast with the goal of maintaining a comfortable level of liquidity as we introduce commercial offerings in which we incur upfront cash costs to produce and fulfill hardware sales ahead of the cash inflows from our customers. We anticipate, and have prepared for, the majority of our arrangements in both reportable segments to be offered in similar subscription-type offerings over the coming years. With the launch of the TASER 7, which is primarily being sold in subscription offerings, this strategic shift continues to accelerate.
Based on our strong balance sheet and the fact that we had justless than $0.1 million in total long-term debt and capitalfinancing lease obligations at December 31, 2017,2019, 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. Further repurchases of our common stock would take place on the open market, would be financed with available cash and are subject to authorization as well as market and business conditions.
Contractual Obligations
The following table outlines our future contractual financial obligations by period in which payment is expected, as of December 31, 20172019 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | Less than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | More than 5 Years |
| Non-cancelable operating leases | | $ | 7,655 |
| | $ | 2,313 |
| | $ | 3,129 |
| | $ | 2,170 |
| | $ | 43 |
|
| Capital leases including interest | | 116 |
| | 40 |
| | 76 |
| | — |
| | — |
|
| Open purchase orders | | 51,855 |
| | 51,855 |
| | — |
| | — |
| | — |
|
| Total contractual obligations | | $ | 59,626 |
| | $ | 54,208 |
| | $ | 3,205 |
| | $ | 2,170 |
| | $ | 43 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | Less than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | More than 5 Years |
| Operating lease obligations | | $ | 12,042 |
| | $ | 4,539 |
| | $ | 6,330 |
| | $ | 1,173 |
| | $ | — |
|
| Financing leases including interest | | 36 |
| | 36 |
| | — |
| | — |
| | — |
|
| Purchase obligations | | 193,322 |
| | 154,845 |
| | 24,118 |
| | 4,413 |
| | 9,946 |
|
| Total contractual obligations | | $ | 205,400 |
| | $ | 159,420 |
| | $ | 30,448 |
| | $ | 5,586 |
| | $ | 9,946 |
|
OpenPurchase obligations in the table above represent $137.9 million of open purchase orders in the above tableand $55.4 million of other purchase obligations. The open purchase orders represent both cancelable and non-cancelable purchase orders with key vendors, which are included in this table due to the Company’sour strategic relationships with these vendors.
We are subject to U.S. Federalfederal income tax as well as income taxes imposed by several statesstate and foreign jurisdictions. As of December 31, 2017,2019, we had $4.2$6.9 million of gross unrecognized tax benefits related to uncertain tax positions. The settlement period for our long-term income tax liabilities cannot be determined; however, the liabilities are expected to increase by approximately $0.2$1.2 million within the next 12 months.
Off-Balance Sheet Arrangements
The discussion of off-balance sheet arrangements in Note 9 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K is incorporated by reference herein.
Critical Accounting Estimates
We have identified the following accounting estimates as critical to our business operations and the understanding of our results of operations. The preparation of this Annual Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. While we do not believe that a change in these estimates is reasonably likely, there can be no assurance that our actual results will not differ from these estimates. The effect of these estimates on our business operations is discussed below.
Product Warranties
The Company warranties its CEWs,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 replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold when revenue is recorded for the related product. Future warranty costs are estimated based on historical data related to warranty claims on a quarterly basis and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure or other issue that could result in larger than anticipated warranty claims from customers. The
warranty reserve is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. As of December 31, 20172019 and 2016,2018, our warranty reserve was approximately $0.6$1.5 million and $0.8$0.9 million, respectively. Warranty expense (recoveries) for the years ended December 31, 2019, 2018 and 2017 2016 and 2015 was $0.1$1.6 million, $0.6$0.7 million and $(0.1)$0.1 million, respectively. The decreaseincrease in warranty reserve and related expense as of and for the year ended December 31, 2019 was primarily driven by the initial reserves on the new product launch of our Axon Body 3 camera as well as our continued support of TASER 7. As of December 31, 2019, our reserve included initial reserves related to Axon Body 3 cameras and docks. Warranty expense for the year ended December 31, 2018 was impacted by higher than initially expected warranty claims for the Axon Flex 2 on-officer body camera. Warranty expense for the year ended December 31, 2017, was primarily drivenimpacted by lower than initially expected warranty claims for the Axon Body 2 on-officer body camera. As of December 31, 2017, the Company's warranty reserve included initial reserves related to the new Axon Flex 2 on-officer camera and Axon Fleet in-car camera systems.
Revenue related to separately-priced extended warranties is initially recorded as deferred revenue at its contractualallocated amount and subsequently recognized as net sales on a straight-line basis over the warranty service period. Costs related to extended warranties are charged to cost of product and service sales when incurred.
Inventory
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average cost of raw materials, which approximates the first-in, first-out (“FIFO”) method and includes allocations of manufacturing labor and overhead. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories, as well as trial and evaluation inventories to their net realizable value. These provisions are based on management’s best estimate after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions among other factors. Management evaluatesWe evaluate inventory costs for abnormal costs due to excess production capacity and treats such costs as period costs.
During the year ended December 31, 2017, the Company2019, we recorded provisions to reduce inventories to their lower of cost and net realizable value of approximately $2.0$1.3 million compared to $1.2$3.8 million during 2016.the year ended December 31, 2018. The increaseprovision in provisions made during 2017 was primarily attributable to increased deployments of trial and evaluation equipment and was also attributable to the phasing out of certain previous generations of its CEWs, the legacy TASER X26, TASER M26 and TASER C2 models. The remaining increase in the provision for 20172019 was driven by analyses looking atof projected sales data for existing products and making correspondingresulting in adjustments to state inventories at their lower of cost and net realizable value. The provision for 2018 was primarily attributable to the impact of phasing out previous generations of VIEVU cameras in an effort to convert existing customers to Axon body camera deployments.
Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable
The Company derivesWe derive revenue from two primary sources: (1) the sale of physical products, including CEWs,CEDs, Axon cameras, Axon Signal enabled devices, corresponding hardware extended warranties, and related accessories such as Axon docks, cartridges and batteries, among others, and (2) subscriptionsubscriptions to the Company's Evidence.comour Axon Evidence digital evidence management software as a service ("SaaS")SaaS (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, the Companywe also recognizesrecognize training, professional services and revenue related to other software and SaaS services. Revenue is recognized when persuasive evidenceWe apply the five-step model outlined in Topic 606.
Many of an arrangement exists, delivery has occurred orour products and services have been rendered, title has transferred,are sold on a standalone basis. We also bundle our hardware products and services together and sell them to our customers in single transactions, where the price is fixedcustomer can make payments over a multi-year period. For the years ended December 31, 2019, 2018 and collectability is reasonably assured. Contractual arrangements may contain explicit customer acceptance provisions, and under such arrangements,2017, the Company defers recognitioncomposition of revenue until formal customer acceptance is received. Extended warranty revenue, SaaS revenuerecognized from contracts containing multiple performance obligations and related data storage revenue are recognized ratably over the term of the contract commencing on a pre-determined date subsequent to the delivery of the hardware. Training and professional service revenues are generally recorded once the services are completed.those not containing multiple performance obligations was as follows (dollars in thousands):
Revenue arrangements with multiple deliverables are divided into separate units and revenue is allocated using the relative selling price method based upon vendor-specific objective evidence ("VSOE") of selling price or third-party evidence of the selling prices if VSOE of selling prices does not exist. If neither VSOE nor third-party evidence exists, management uses its best estimate of selling price. The majority of the Company’s allocations of arrangement consideration under multiple element arrangements are performed utilizing prices charged to customers |
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2019 |
| | TASER | | Software and Sensors | | Total |
| Contracts with Multiple Performance Obligations | $ | 130,761 |
| | 46.4 | % | | $ | 245,416 |
| | 98.5 | % | | $ | 376,177 |
| | 70.9 | % |
| Contracts without Multiple Performance Obligations | 150,900 |
| | 53.6 |
| | 3,783 |
| | 1.5 |
| | 154,683 |
| | 29.1 |
|
| Total | $ | 281,661 |
| | 100.0 | % | | $ | 249,199 |
| | 100.0 | % | | $ | 530,860 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2018 |
| | TASER | | Software and Sensors | | Total |
| Contracts with Multiple Performance Obligations | $ | 72,355 |
| | 28.6 | % | | $ | 159,318 |
| | 95.4 | % | | $ | 231,673 |
| | 55.2 | % |
| Contracts without Multiple Performance Obligations | 180,760 |
| | 71.4 |
| | 7,635 |
| | 4.6 |
| | 188,395 |
| | 44.8 |
|
| Total | $ | 253,115 |
| | 100.0 | % | | $ | 166,953 |
| | 100.0 | % | | $ | 420,068 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2017 (1) |
| | TASER | | Software and Sensors | | Total |
| Contracts with Multiple Performance Obligations | $ | 53,865 |
| | 23.0 | % | | $ | 102,529 |
| | 93.8 | % | | $ | 156,394 |
| | 45.5 | % |
| Contracts without Multiple Performance Obligations | 180,647 |
| | 77.0 |
| | 6,757 |
| | 6.2 |
| | 187,404 |
| | 54.5 |
|
| Total | $ | 234,512 |
| | 100.0 | % | | $ | 109,286 |
| | 100.0 | % | | $ | 343,798 |
| | 100.0 | % |
(1) Amounts for deliverables when sold separately. The Company’s multiple element arrangements may include rights to future CEWs and/or Axon devices to be delivered at defined points within a multi-year contract, and in those arrangements, the Company allocates total arrangement consideration over the life of the multi-year contract to future deliverables using management’s best estimate of selling price. The Company has not utilized third-party evidence of selling price.
For the the years ended December 31, 2017 2016have not been adjusted under the modified retrospective method of adoption of Topic 606, and 2015,are presented consistent with the composition of revenue recognized from arrangements containing multiple elements and those not containing multiple elements was as follows:prior period amounts reported under ASC 605.
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2017 |
| | TASER Weapons | | Software and Sensors | | Total |
| Arrangements with multiple elements | $ | 53,865 |
| | 23.0 | % | | $ | 102,529 |
| | 93.8 | % | | $ | 156,394 |
| | 45.5 | % |
| Arrangements without multiple elements | 180,647 |
| | 77.0 |
| | 6,757 |
| | 6.2 |
| | 187,404 |
| | 54.5 |
|
| Total | $ | 234,512 |
| | 100.0 | % | | $ | 109,286 |
| | 100.0 | % | | $ | 343,798 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2016 |
| | TASER Weapons | | Software and Sensors | | Total |
| Arrangements with multiple elements | $ | 34,558 |
| | 17.1 | % | | $ | 56,270 |
| | 85.8 | % | | $ | 90,828 |
| | 33.9 | % |
| Arrangements without multiple elements | 168,086 |
| | 82.9 |
| | 9,331 |
| | 14.2 |
| | 177,417 |
| | 66.1 |
|
| Total | $ | 202,644 |
| | 100.0 | % | | $ | 65,601 |
| | 100.0 | % | | $ | 268,245 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2015 |
| | TASER Weapons | | Software and Sensors | | Total |
| Arrangements with multiple elements | $ | 11,141 |
| | 6.9 | % | | $ | 26,489 |
| | 74.6 | % | | $ | 37,630 |
| | 19.0 | % |
| Arrangements without multiple elements | 151,234 |
| | 93.1 |
| | 9,028 |
| | 25.4 |
| | 160,262 |
| | 81.0 |
|
| Total | $ | 162,375 |
| | 100.0 | % | | $ | 35,517 |
| | 100.0 | % | | $ | 197,892 |
| | 100.0 | % |
The Company offersAdditionally, we offer customers the opportunityability to purchase extended warranties that include additionalCED cartridges and certain services and coverage beyondon an unlimited basis over the standard limited warranty for certain products. Revenue for extended warranty purchases is deferredcontractual term. Due to the unlimited nature of these arrangements whereby we are obligated to deliver unlimited products at the time of salecustomer’s request, we account for these arrangements as stand-ready obligations, and recognizedrecognize revenue ratably over the warranty period commencing oncontract period. Cost of product sales is recognized as the dateproducts are shipped to the customer.
Revenues are recognized upon transfer of sale. Extended warranties rangecontrol of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, each of which is generally distinct and accounted for as a separate performance obligation. Revenue is recognized net of allowances for returns and any taxes collected from onecustomers, which are subsequently remitted to five years.governmental taxing authorities.
Evidence.com
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and Axonis the unit of account in Topic 606. For contracts with multiple performance obligations, we allocate the contract transaction price to each performance obligation using our estimate of the standalone selling price ("SSP") of each distinct good or service in the contract.
Performance obligations to deliver products, including CEDs, cameras and related accessories such as cartridges, batteries and docks, are generally satisfied at the point in time we ship the product, as this is when the customer obtains control of the asset under our standard terms and conditions. In certain contracts with non-standard terms and conditions, these performance obligations may not be satisfied until formal customer acceptance occurs. Performance obligations to fulfill service-type extended warranties and provide our SaaS offerings, including Axon Evidence and other cloud services, are generally satisfied over time as the customer receives and consumes the benefits of these services over the stated service period.
We have stand-alone valueelected 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 and are sometimes sold separately, but in most instances are sold together. In these instances, customers typically purchase and pay for the equipment and one year of Evidence.com in advance. Additional years of service are generally billed annually over a specified service term, which has typically ranged from one to five years. Generally, the Company recognizes revenue for the Axon equipment at the time of the sale consistent with the discussion of multiple deliverable arrangements above. Revenue for Evidence.com is deferred at the time of the sale and recognized over the service period. At times, the Company discounts the price of Axon devices provided to customers to secure long-term Evidence.com service contracts. In such circumstances, revenue related to the Axon devices recognized at the time of delivery is limited to the amount allocated to the Axon device deliverable that the Company is contractually entitled to that is not contingent upon the delivery of future Evidence.com services. The Company recognizes the remaining allocated contingent revenue related to discounted Axon devices over the remaining period it provides the contracted Evidence.com services.customer.
Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis.
Deferred revenue consists of payments received in advance related to products and services for which the criteria for revenue recognition have not yet been met. Deferred revenue that will be recognized during the subsequent twelve month period from the balance sheet date is recorded as current deferred revenue and the remaining portion is recorded as long-term. Generally, customers are billed in annual installments. See Note 7 for further disclosures about the Company’s deferred revenue.
The Company records reductions to net sales for expected future product returns based on the Company’s historical experience.
Sales are typically made on credit, and the Companywe generally doesdo not require collateral. Management performs ongoing credit evaluations of its customers’ financial condition, and maintains an allowance for doubtful accounts. Uncollectible accounts are charged to expense when deemed uncollectible, and accounts and notes receivable are presented net of an allowance for doubtful accounts. This allowance represents management’s best estimate and application of judgment considering a number of factors, including third-party credit reports, actual payment history, cash discounts, customer-specific financial information and broader market and economic trends and conditions.
Valuation of Goodwill, Intangibles and Long-lived Assets
The Company doesWe do not amortize goodwill and intangible assets with indefinite useful lives. Such assets are required to be tested for impairment at least annually, or sooner whenever events or changes in circumstances indicate that the assets may be impaired. The Company performs itsWe perform our annual impairment assessment in the fourth quarter of each year. Finite-lived intangible assets and other long-lived assets are amortized over their estimated useful lives. Management evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and intangible assets may warrant revision or that the remaining balance of these assets, including intangible assets with indefinite lives, may not be recoverable.
Circumstances that might indicate long-lived assets might not be recoverable could include, but are not limited to, a change in the product mix, a change in the way products and services are created, produced or delivered, or a significant change in the way the Company'sour products are branded and marketed. When performing a review for recoverability, management estimates the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair value computed using discounted cash flows. During the year ended December 31, 2019, we abandoned certain capitalized software related to implementation work on an enterprise resource planning system conversion, resulting in an impairment charge of $1.3 million, and certain planning and site development activities related to our planned new headquarters, resulting in an impairment charge of $0.7 million, both of which were included in sales, general and administrative expense in the accompanying consolidated statements of operations. During the year ended December 31, 2018, we abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $2.0 million. During the year ended December 31, 2017, the Companywe abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $1.0 million. No impairment losses were recorded during the years ended December 31, 2016 and 2015.
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. ManagementWe must also assess whether uncertain tax positions as filed could result in the recognition of a liability for possible interest and penalties if any. We have completed research and development tax credit studies which identified approximately $15.2 million infor each year a tax creditscredit was claimed for federal, Arizona, and California income tax purposes related to the 2003 through 2017 tax years, net of the federal benefit on the Arizona and California research and development tax credits. Managementpurposes. We determined that it was more likely than not that the full benefit of the research and development tax credit would not be sustained on examination and accordingly, hashave established a liability for unrecognized tax benefits of $4.1$6.1 million as of December 31, 2017.2019. In addition, we established a $0.1 million liability related to uncertain tax positions for certain statefederal income tax liabilities, for a total unrecognized tax benefit at December 31, 2017 of $4.2$6.2 million. Management expectsWe expect the amount of the unrecognized tax benefit liability to increase by approximately $0.2$1.2 million within the next 12 months. Should the unrecognized tax benefit of $4.2$6.2 million be recognized, the Company’sour effective tax rate would be favorably impacted. Our estimates are based on the information available to us at the time we prepare the income tax provisions.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 U.S. federal income tax return for fiscal year 2016 is currently under audit by the IRS.
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,internationally, 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 greater than our current assessment, we may be required to recognize an income tax benefit, or additional income tax expense, respectively, in our consolidated financial statements.
In preparing our consolidated financial statements, management assesseswe assess the likelihood that our deferred tax assets will be realized from future taxable income. In evaluating our ability to recover our deferred income tax assets, management considerswe consider all available positive and negative evidence, including operating results, ongoing tax planning and forecasts of future taxable
income on a jurisdiction by jurisdiction basis. A valuation allowance is established if we determine that it is more likely than not that some portion or all of the net deferred tax assets will not be realized.
Although management believeswe believe that itsour tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of December 31, 2017, the Company2019, we would need to generate approximately $56.0$88.5 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 approximately $14.6$25.3 million ofin gross deferred tax liabilities, $3.5$6.2 million tax-effected. We have state net operating losses ("NOLs") of $4.5$1.2 million, which produce deferred tax assets of $0.2$0.1 million, which expire at various dates between 20192029 and 2036. We anticipate the Company’ssufficient 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. However, based on specificexpected income projections infor years in which certainArizona R&D tax assetscredits are set to expire, and cumulative losses in certain foreign tax jurisdictions, a reserve of approximately $5.4$7.2 million has been recorded as a valuation allowance against deferred tax assets as of December 31, 2017.2019.
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. The Company recognizes expense related to stock-based payment transactions in which it receives employee services in exchange for equity instruments of the Company. Stock-based compensation expense forawards primarily consist of service-based RSUs, isperformance-based RSUs, and performance-based stock options. Our stock-based compensation awards are classified as equity and measured based onat the closing fair market value of the Company’s commonunderlying stock onat the dategrant date. For service-based awards, we recognize RSU expense using the straight-line attribution method over the requisite service period. Vesting of grant. The Company recognizes stock-basedperformance-based RSUs and options is contingent upon the achievement of certain performance criteria related to our operating performance, as well as successful and timely development and market acceptance of future product introductions. For performance-based RSUs containing only performance conditions, compensation cost is recognized using the graded attribution model over the explicit or implicit service period. For awards containing multiple
service, performance or market conditions, where all conditions must be satisfied prior to vesting, compensation expense is recognized over the award’s requisite service period, which is defined as the longest explicit, implicit or derived service period, based on a straight-line basismanagement’s estimate of the probability and timing of the performance criteria being satisfied, adjusted at each balance sheet date. For both service-based and performance-based RSUs, we account for time-based RSUs and on a graded basis for RSUs that are contingent on the achievement of performance conditions. The Company recognizes forfeitures as they occur as a reduction to stock-based compensation expense and to additional paid-in-capital.
For performance-based options, stock-based compensation expense is recognized over the expected performance achievement period of individual performance goals when the achievement of each individual performance goal becomes probable. For performance-based awards with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized 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 Company calculates the fair value of stock optionssuch awards is estimated on the grant date using Monte Carlo simulations. Refer to Note 12 of the Black-Scholes-Merton option pricing valuation model, which incorporates various assumptions including expected volatility, expected life, expected dividends and risk-free interest rates. No options were awarded during the years ended December 31, 2017, 2016 or 2015.notes to our consolidated financial statements within this Annual Report on Form 10-K.
We have granted a total of approximately 2.014.5 million performance-based awards (options and restricted stock units) of which approximately 0.712.4 million are outstanding as of December 31, 2017,2019, the vesting of which is contingent upon the achievement of certain performance criteria including the successful development and market acceptance of future product introductions as well as our future sales targets and operating performance. Theseperformance and market capitalization. Compensation expense for performance 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 estimateestimates of the fair value of the awards and timing of recognition of stock-based compensation and consequently, the related amount recognized in our statements of operations.operations and comprehensive income.
Contingencies and Accrued Litigation Expense
We are subject to the possibility of various loss contingencies arising in the ordinary course of business, including product-related and other litigation. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. Refer to Note 9 of our consolidated financial statements for further discussion.within this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We typically invest in a limited number of financial instruments, consisting principally of investments in money market accounts, certificates of deposit, corporate and municipal bonds with a typical long-term debt rating of “A” or better by any nationally recognized statistical rating organization, denominated in U.S. dollars. All of our cash equivalents and investments are treated as “held-to-maturity.” Investments in fixed-rate interest-earning instruments carry a degree of interest rate risk as their market value may be adversely impacted due to a rise in interest rates. As a result, we may suffer losses in principal if we sell securities that have declined in market value due to changes in interest rates. However, because we classify our debt securities as “held-to-maturity” based on our intent and ability to hold these instruments to maturity, no gains or losses are recognized due to changes in interest rates. These securities are reported at amortized cost. Based on investment positions as of December 31, 2017,2019, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $16,000 incremental$0.8 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
$2.7 million at December 31, 2017.2019. At December 31, 2017,2019, there was no amount outstanding under the line of credit, and the available borrowing under the line of credit was $7.3$47.3 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 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 assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. However, the Companywe 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 8. Financial Statements and Supplementary Data
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| Index to Consolidated Financial Statements | | Page |
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AXON ENTERPRISE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) | | | | December 31, | December 31, |
| | 2017 | | 2016 | 2019 | | 2018 |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 75,105 |
| | $ | 40,651 |
| $ | 172,250 |
| | $ | 349,462 |
|
| Short-term investments | 6,862 |
| | 48,415 |
| 178,534 |
| | — |
|
| Accounts and notes receivable, net of allowance of $754 and $443 as of December 31, 2017 and 2016, respectively | 56,064 |
| | 39,466 |
| |
| Accounts and notes receivable, net of allowance of $1,567 and $1,882 as of December 31, 2019 and 2018, respectively | | 146,878 |
| | 130,579 |
|
| Contract assets, net | | 47,718 |
|
| 13,960 |
|
| Inventory | 45,465 |
| | 34,841 |
| 38,845 |
| | 33,763 |
|
| Prepaid expenses and other current assets | 21,696 |
| | 13,858 |
| 34,866 |
| | 30,391 |
|
| Total current assets | 205,192 |
| | 177,231 |
| 619,091 |
| | 558,155 |
|
| Property and equipment, net | 31,172 |
| | 24,004 |
| 43,770 |
| | 37,893 |
|
| Deferred income tax assets, net | 15,755 |
| | 19,515 |
| |
| Deferred tax assets, net | | 27,688 |
| | 19,347 |
|
| Intangible assets, net | 18,823 |
| | 15,218 |
| 12,771 |
| | 15,935 |
|
| Goodwill | 14,927 |
| | 10,442 |
| 25,013 |
| | 24,981 |
|
| Long-term investments | — |
| | 234 |
| 45,499 |
| | — |
|
| Long-term accounts and notes receivable, net of current portion | 36,877 |
| | 17,602 |
| |
| Long-term notes receivable, net of current portion | | 31,598 |
| | 40,230 |
|
| Other assets | 15,366 |
| | 13,917 |
| 40,209 |
| | 22,999 |
|
| Total assets | $ | 338,112 |
| | $ | 278,163 |
| $ | 845,639 |
| | $ | 719,540 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
| Current liabilities: | | | | | | |
| Accounts payable | $ | 8,592 |
| | $ | 10,736 |
| $ | 25,874 |
| | $ | 15,164 |
|
| Accrued liabilities | 23,502 |
| | 18,248 |
| 45,001 |
| | 41,092 |
|
| Current portion of deferred revenue | 70,401 |
| | 45,137 |
| 117,864 |
| | 107,016 |
|
| Customer deposits | 3,673 |
| | 2,148 |
| 2,974 |
| | 2,702 |
|
| Current portion of business acquisition contingent consideration | 1,693 |
| | 1,690 |
| |
| Other current liabilities | 89 |
| | 80 |
| 3,853 |
| | 37 |
|
| Total current liabilities | 107,950 |
| | 78,039 |
| 195,566 |
| | 166,011 |
|
| Deferred revenue, net of current portion | 54,881 |
| | 40,054 |
| 87,936 |
| | 74,417 |
|
| Liability for unrecognized tax benefits | 1,706 |
| | 1,896 |
| 3,832 |
| | 2,849 |
|
| Long-term deferred compensation | 3,859 |
| | 3,362 |
| 3,936 |
| | 3,235 |
|
| Business acquisition contingent consideration, net of current portion | 1,048 |
| | 1,635 |
| |
| Deferred tax liability, net | | 354 |
| | — |
|
| Other long-term liabilities | 1,224 |
| | 2,289 |
| 10,520 |
| | 5,704 |
|
| Total liabilities | 170,668 |
| | 127,275 |
| 302,144 |
| | 252,216 |
|
| Commitments and contingencies (Note 9) |
| |
|
| |
|
| Stockholders’ equity: | | | | | | |
| Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of December 31, 2017 and 2016 | — |
| | — |
| |
| Common stock, $0.00001 par value; 200,000,000 shares authorized; 52,969,869 and 52,325,251 shares issued and outstanding as of December 31, 2017 and 2016, respectively | 1 |
| | 1 |
| |
| Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of December 31, 2019 and 2018 | | — |
| | — |
|
| Common stock, $0.00001 par value; 200,000,000 shares authorized; 59,497,759 and 58,810,637 shares issued and outstanding as of December 31, 2019 and 2018, respectively | | 1 |
| | 1 |
|
| Additional paid-in capital | 201,672 |
| | 187,656 |
| 528,272 |
| | 453,400 |
|
| Treasury stock at cost, 20,220,227 shares as of December 31, 2017 and 2016 | (155,947 | ) | | (155,947 | ) | |
| Treasury stock at cost, 20,220,227 shares as of December 31, 2019 and 2018 | | (155,947 | ) | | (155,947 | ) |
| Retained earnings | 123,185 |
| | 118,275 |
| 172,265 |
| | 171,383 |
|
| Accumulated other comprehensive income (loss) | (1,467 | ) | | 903 |
| |
| Accumulated other comprehensive loss | | (1,096 | ) | | (1,513 | ) |
| Total stockholders’ equity | 167,444 |
| | 150,888 |
| 543,495 |
| | 467,324 |
|
| Total liabilities and stockholders’ equity | $ | 338,112 |
| | $ | 278,163 |
| $ | 845,639 |
| | $ | 719,540 |
|
The accompanying notes are an integral part of these consolidated financial statements.
AXON ENTERPRISE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| Net sales from products | $ | 285,859 |
| | $ | 238,573 |
| | $ | 185,230 |
| $ | 399,474 |
| | $ | 327,635 |
| | $ | 285,859 |
|
| Net sales from services | 57,939 |
| | 29,672 |
| | 12,662 |
| 131,386 |
| | 92,433 |
| | 57,939 |
|
| Net sales | 343,798 |
| | 268,245 |
| | 197,892 |
| 530,860 |
| | 420,068 |
| | 343,798 |
|
| Cost of product sales | 117,997 |
| | 91,536 |
| | 65,022 |
| 190,683 |
| | 139,337 |
| | 117,997 |
|
| Cost of service sales | 18,713 |
| | 6,173 |
| | 4,223 |
| 32,891 |
| | 22,148 |
| | 18,713 |
|
| Cost of sales | 136,710 |
| | 97,709 |
| | 69,245 |
| 223,574 |
| | 161,485 |
| | 136,710 |
|
| Gross margin | 207,088 |
| | 170,536 |
| | 128,647 |
| 307,286 |
| | 258,583 |
| | 207,088 |
|
| Sales, general and administrative | 138,692 |
| | 108,076 |
| | 69,698 |
| 212,959 |
| | 156,886 |
| | 138,692 |
|
| Research and development | 55,373 |
| | 30,609 |
| | 23,614 |
| 100,721 |
| | 76,856 |
| | 55,373 |
|
| Total operating expenses | 194,065 |
| | 138,685 |
| | 93,312 |
| 313,680 |
| | 233,742 |
| | 194,065 |
|
| Income from operations | 13,023 |
| | 31,851 |
| | 35,335 |
| |
| Interest and other income (expense), net | 2,738 |
| | (354 | ) | | 26 |
| |
| Income (loss) from operations | | (6,394 | ) | | 24,841 |
| | 13,023 |
|
| Interest and other income, net | | 8,464 |
| | 3,263 |
| | 2,738 |
|
| Income before provision for income taxes | 15,761 |
| | 31,497 |
| | 35,361 |
| 2,070 |
| | 28,104 |
| | 15,761 |
|
| Provision for income taxes | 10,554 |
| | 14,200 |
| | 15,428 |
| |
| Provision (benefit) for income taxes | | 1,188 |
| | (1,101 | ) | | 10,554 |
|
| Net income | $ | 5,207 |
| | $ | 17,297 |
| | $ | 19,933 |
| $ | 882 |
| | $ | 29,205 |
| | $ | 5,207 |
|
| Net income per common and common equivalent shares: | | | | | | |
| Net income per share: | | | | | | |
| Basic | $ | 0.10 |
| | $ | 0.33 |
| | $ | 0.37 |
| $ | 0.01 |
| | $ | 0.52 |
| | $ | 0.10 |
|
| Diluted | $ | 0.10 |
| | $ | 0.32 |
| | $ | 0.36 |
| $ | 0.01 |
| | $ | 0.50 |
| | $ | 0.10 |
|
| Weighted average number of common and common equivalent shares outstanding: | | | | | | |
| Weighted average shares outstanding: | | | | | | |
| Basic | 52,726 |
| | 52,667 |
| | 53,548 |
| 59,190 |
| | 56,392 |
| | 52,726 |
|
| Diluted | 53,898 |
| | 53,536 |
| | 54,638 |
| 60,018 |
| | 57,922 |
| | 53,898 |
|
| | | | | | | | | | | |
| | | | | | | |
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |
| Net income | $ | 5,207 |
| | $ | 17,297 |
| | $ | 19,933 |
| $ | 882 |
| | $ | 29,205 |
| | $ | 5,207 |
|
| Foreign currency translation adjustments | (2,370 | ) | | 820 |
| | 19 |
| 417 |
| | (46 | ) | | (2,370 | ) |
| Comprehensive income | $ | 2,837 |
| | $ | 18,117 |
| | $ | 19,952 |
| $ | 1,299 |
| | $ | 29,159 |
| | $ | 2,837 |
|
The accompanying notes are an integral part of these consolidated financial statements.
AXON ENTERPRISE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
| | | | Common Stock | | Additional
Paid-in
Capital | | Treasury Stock | | Accumulated
Other
Comprehensive
Income (Loss) | | Retained
Earnings | | Total
Stockholders’
Equity | Common Stock | | Additional
Paid-in
Capital | | Treasury Stock | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total
Stockholders’
Equity |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
| Balance, December 31, 2014 | 53,000,867 |
| | $ | 1 |
| | $ | 162,641 |
| | 18,139,958 |
| | $ | (114,645 | ) | | $ | 64 |
| | $ | 81,045 |
| | $ | 129,106 |
| |
| Stock options exercised and RSUs vested, net of withholdings | 983,525 |
| | — |
| | 1,303 |
| | — |
| | — |
| | — |
| | — |
| | 1,303 |
| |
| Stock-based compensation | — |
| | — |
| | 7,263 |
| | — |
| | — |
| | — |
| | — |
| | 7,263 |
| |
| Excess tax benefit from stock-based compensation | — |
| | — |
| | 6,936 |
| | — |
| | — |
| | — |
| | — |
| | 6,936 |
| |
| Purchase of treasury stock | (292,200 | ) | | — |
| | — |
| | 292,200 |
| | (7,556 | ) | | — |
| | — |
| | (7,556 | ) | |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 19,933 |
| | 19,933 |
| |
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | 19 |
| | — |
| | 19 |
| |
| Balance, December 31, 2015 | 53,692,192 |
| | 1 |
| | 178,143 |
| | 18,432,158 |
| | (122,201 | ) | | 83 |
| | 100,978 |
| | 157,004 |
| |
| Stock options exercised and RSUs vested, net of withholdings | 421,128 |
| | — |
| | (1,294 | ) | | — |
| | — |
| | — |
| | — |
| | (1,294 | ) | |
| Stock-based compensation | — |
| | — |
| | 9,369 |
| | — |
| | — |
| | — |
| | — |
| | 9,369 |
| |
| Excess tax benefit from stock-based compensation | — |
| | — |
| | 1,438 |
| | — |
| | — |
| | — |
| | — |
| | 1,438 |
| |
| Purchase of treasury stock | (1,788,069 | ) | | — |
| | — |
| | 1,788,069 |
| | (33,746 | ) | | — |
| | — |
| | (33,746 | ) | |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17,297 |
| | 17,297 |
| |
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | 820 |
| | — |
| | 820 |
| |
| Balance, December 31, 2016 | 52,325,251 |
| | 1 |
| | 187,656 |
| | 20,220,227 |
| | (155,947 | ) | | 903 |
| | 118,275 |
| | 150,888 |
| 52,325,251 |
| | $ | 1 |
| | $ | 187,656 |
| | 20,220,227 |
| | $ | (155,947 | ) | | $ | 118,275 |
| | $ | 903 |
| | $ | 150,888 |
|
| Cumulative effect of applying a change in accounting principle | — |
| | — |
| | 475 |
| | — |
| | — |
| | — |
| | (297 | ) | | 178 |
| — |
| | — |
| | 475 |
| | — |
| | — |
| | (297 | ) | | — |
| | 178 |
|
| Stock options exercised and RSUs vested, net of withholdings | 644,618 |
| | — |
| | (2,069 | ) | | — |
| | — |
| | — |
| | — |
| | (2,069 | ) | |
| Issuance of common stock under employee plans, net | | 644,618 |
| | — |
| | (2,069 | ) | | — |
| | — |
| | — |
| | — |
| | (2,069 | ) |
| Stock-based compensation | — |
| | — |
| | 15,610 |
| | — |
| | — |
| | — |
| | — |
| | 15,610 |
| — |
| | — |
| | 15,610 |
| | — |
| | — |
| | — |
| | — |
| | 15,610 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,207 |
| | 5,207 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 5,207 |
| | — |
| | 5,207 |
|
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | (2,370 | ) | | — |
| | (2,370 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,370 | ) | | (2,370 | ) |
| Balance, December 31, 2017 | 52,969,869 |
| | $ | 1 |
| | $ | 201,672 |
| | 20,220,227 |
| | $ | (155,947 | ) | | $ | (1,467 | ) | | $ | 123,185 |
| | $ | 167,444 |
| 52,969,869 |
| | $ | 1 |
| | $ | 201,672 |
| | 20,220,227 |
| | $ | (155,947 | ) | | $ | 123,185 |
| | $ | (1,467 | ) | | $ | 167,444 |
|
| Cumulative effect of applying a change in accounting principle | | — |
| | — |
| | — |
| | — |
| | — |
| | 18,993 |
| | — |
| | 18,993 |
|
| Issuance of common stock | | 4,645,000 |
| | — |
| | 233,993 |
| | — |
| | — |
| | — |
| | — |
| | 233,993 |
|
| Issuance of common stock business combination | | 58,843 |
| | — |
| | 8,226 |
| | — |
| | — |
| | — |
| | — |
| | 8,226 |
|
| Issuance of common stock under employee plans, net | | 1,136,925 |
| | — |
| | (12,370 | ) | | — |
| | — |
| | — |
| | — |
| | (12,370 | ) |
| Stock-based compensation | | — |
| | — |
| | 21,879 |
| | — |
| | — |
| | — |
| | — |
| | 21,879 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 29,205 |
| | — |
| | 29,205 |
|
| Foreign currency translation adjustments | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (46 | ) | | (46 | ) |
| Balance, December 31, 2018 | | 58,810,637 |
| | $ | 1 |
| | $ | 453,400 |
| | 20,220,227 |
| | $ | (155,947 | ) | | $ | 171,383 |
| | $ | (1,513 | ) | | $ | 467,324 |
|
| Issuance of common stock under employee plans, net | | 616,509 |
| | — |
| | (3,937 | ) | | — |
| | — |
| | — |
| | — |
| | (3,937 | ) |
| Stock-based compensation | | — |
| | — |
| | 78,809 |
| | — |
| | — |
| | — |
| | — |
| | 78,809 |
|
| Issuance of common stock for business combination contingent consideration | | 70,613 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 882 |
| | — |
| | 882 |
|
| Foreign currency translation adjustments | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 417 |
| | 417 |
|
| Balance, December 31, 2019 | | 59,497,759 |
| | $ | 1 |
| | $ | 528,272 |
| | 20,220,227 |
| | $ | (155,947 | ) | | $ | 172,265 |
| | $ | (1,096 | ) | | $ | 543,495 |
|
The accompanying notes are an integral part of these consolidated financial statements.
AXON ENTERPRISE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities: | | | | | | | | | | |
| Net income | $ | 5,207 |
| | $ | 17,297 |
| | $ | 19,933 |
| $ | 882 |
| | $ | 29,205 |
| | $ | 5,207 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | Adjustments to reconcile net income to net cash provided by operating activities: |
| Depreciation and amortization | 8,041 |
| | 3,658 |
| | 3,291 |
| 11,361 |
| | 10,615 |
| | 8,041 |
|
| Loss on disposal and abandonment of intangible assets | 1,146 |
| | 21 |
| | 225 |
| 67 |
| | 2,117 |
| | 1,146 |
|
| Purchase accounting adjustments to goodwill | (23 | ) | | 520 |
| | — |
| — |
| | — |
| | (23 | ) |
| (Gain) loss on disposal of property and equipment, net | (28 | ) | | 42 |
| | (19 | ) | |
| Bond premium amortization | 657 |
| | 1,265 |
| | 1,650 |
| |
| Loss (gain) on disposal and impairment of property and equipment, net | | 2,542 |
| | 303 |
| | (28 | ) |
| Stock-based compensation | 15,610 |
| | 9,369 |
| | 7,263 |
| 78,495 |
| | 21,879 |
| | 15,610 |
|
| Deferred income taxes | 2,830 |
| | (5,167 | ) | | 994 |
| (7,987 | ) | | (3,592 | ) | | 2,830 |
|
| Unrecognized tax benefits | (191 | ) | | 582 |
| | (156 | ) | 983 |
| | 1,144 |
| | (191 | ) |
| Tax benefit from stock-based compensation | — |
| | (1,438 | ) | | (6,936 | ) | |
| Other noncash, net | | 3,928 |
| | 34 |
| | 657 |
|
| Change in assets and liabilities: | | | | | | | | | | |
| Accounts and notes receivable | (35,305 | ) | | (28,438 | ) | | 3,017 |
| |
| Accounts and notes receivable and contract assets | | (38,830 | ) | | (67,643 | ) | | (35,305 | ) |
| Inventory | (11,746 | ) | | (18,668 | ) | | 3,140 |
| (4,903 | ) | | 14,804 |
| | (11,746 | ) |
| Prepaid expenses and other assets | (9,007 | ) | | (13,928 | ) | | (7,352 | ) | (9,845 | ) | | (12,739 | ) | | (8,992 | ) |
| Accounts payable, accrued and other liabilities | 39 |
| | 17,584 |
| | 5,868 |
| 4,967 |
| | 13,506 |
| | 1,530 |
|
| Deferred revenue | 39,735 |
| | 34,304 |
| | 15,289 |
| 24,013 |
| | 54,242 |
| | 39,735 |
|
| Customer deposits | 1,525 |
| | 922 |
| | 238 |
| |
| Net cash provided by operating activities | 18,490 |
| | 17,925 |
| | 46,445 |
| 65,673 |
| | 63,875 |
| | 18,471 |
|
| | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | |
| Purchases of investments | (19,950 | ) | | (56,086 | ) | | (62,464 | ) | (354,477 | ) | | (4,331 | ) | | (19,950 | ) |
| Proceeds from call / maturity of investments | 61,080 |
| | 64,951 |
| | 44,105 |
| 130,083 |
| | 11,158 |
| | 61,080 |
|
| Purchases of property and equipment | (10,419 | ) | | (4,957 | ) | | (6,003 | ) | (15,939 | ) | | (11,139 | ) | | (10,419 | ) |
| Proceeds from disposal of property and equipment | 24 |
| | 42 |
| | 40 |
| — |
| | — |
| | 24 |
|
| Purchases of intangible assets | (1,024 | ) | | (3,495 | ) | | (501 | ) | (404 | ) | | (558 | ) | | (1,024 | ) |
| Business acquisitions, net of cash acquired | (10,629 | ) | | (3,500 | ) | | (11,186 | ) | — |
| | (4,990 | ) | | (10,629 | ) |
| Net cash provided by (used in) investing activities | 19,082 |
| | (3,045 | ) | | (36,009 | ) | (240,737 | ) | | (9,860 | ) | | 19,082 |
|
| | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | |
| Repurchase of common stock | — |
| | (33,746 | ) | | (7,556 | ) | |
| Net proceeds from equity offering | | — |
| | 233,993 |
| | — |
|
| Proceeds from options exercised | 1,383 |
| | 478 |
| | 2,673 |
| 114 |
| | 1,757 |
| | 1,383 |
|
| Payroll tax payments for net-settled stock awards | (3,453 | ) | | (1,772 | ) | | (1,370 | ) | |
| Payments on capital lease obligation | (34 | ) | | (32 | ) | | (80 | ) | |
| Payments on notes payable | — |
| | (75 | ) | | — |
| |
| Payment of contingent consideration for business acquisition | (1,750 | ) | | (952 | ) | | — |
| |
| Excess tax benefit from stock-based compensation | — |
| | 1,438 |
| | 6,936 |
| |
| Net cash (used in) provided by financing activities | (3,854 | ) | | (34,661 | ) | | 603 |
| |
| Income and payroll tax payments for net-settled stock awards | | (4,051 | ) | | (14,127 | ) | | (3,453 | ) |
| Payment of contingent consideration for business acquisitions | | — |
| | (2,275 | ) | | (1,750 | ) |
| Net cash provided by (used in) financing activities | | (3,937 | ) | | 219,348 |
| | (3,820 | ) |
| | | | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | 736 |
| | 906 |
| | 120 |
| 329 |
| | (774 | ) | | 737 |
|
| | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | 34,454 |
| | (18,875 | ) | | 11,159 |
| (178,672 | ) | | 272,589 |
| | 34,470 |
|
| Cash and cash equivalents, beginning of year | 40,651 |
| | 59,526 |
| | 48,367 |
| |
| Cash and cash equivalents, end of year | $ | 75,105 |
| | $ | 40,651 |
| | $ | 59,526 |
| |
| Cash and cash equivalents and restricted cash, beginning of year | | 351,027 |
| | 78,438 |
| | 43,968 |
|
| Cash and cash equivalents and restricted cash, end of year | | $ | 172,355 |
| | $ | 351,027 |
| | $ | 78,438 |
|
The accompanying notes are an integral part of these consolidated financial statements.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Axon Enterprise, Inc. (“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 corporate headquarters and manufacturing facilities are located in Scottsdale, Arizona. The Company’s software development division is located in Seattle, Washington. Axon Public Safety BV, a wholly owned subsidiary of the Company, supports the Company's international sales and marketing efforts, and is 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 in 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. In 2015, the Company formed Axon Public Safety Canada, Inc., a wholly owned subsidiary, to facilitate transactions for its products and services with new and existing customers located in Canada.effective justice system.
The accompanying 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
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions in these consolidated financial statements include:
product warranty reserves,
inventory valuation,
revenue recognition, allocated in multiple-deliverable contracts or arrangements,
valuation of goodwill, intangible and long-lived assets,
recognition, measurement and valuation of current and deferred income taxes,
fair value of stock awards issued and the estimated vesting period for performance-based stock awards, andstock-based compensation,
recognition and measurement of contingencies and accrued litigation expense.expense, and
fair values of identified tangible and intangible assets acquired and liabilities assumed in business combinations.
Actual results could differ materially from those estimates.
Cash, Cash Equivalents and Investments
Cash, cash equivalents and investments include cash, money market funds, certificates of deposit, state and municipal obligations and corporate bonds. The Company places itsWe place our cash and cash equivalents with high quality financial institutions. Although the Company deposits itswe deposit our cash with multiple financial institutions, itsour deposits at times, doregularly exceed federally insured limits.
Cash and cash equivalents include funds on hand and highly liquid investments purchased with initial maturity of three months or less. Short-term investments include securities with an expected maturity date within one year of the balance sheet date that do not meet the definition of a cash equivalent, and long-term investments are securities with an expected maturity date greater than one year. Based on management’s intent and ability, the Company’sour investments are classified as held to maturity investments and are recorded at amortized cost. Held-to-maturity investments are reviewed quarterly for impairment to determine if other-than-temporary declines in the fair value have occurred for any individual investment that may affect the Company'sour intent and ability to hold the investment until recovery. Other-than-temporary declines in the value of held-to-maturity investments are recorded as expense in the period the determination is made.
Restricted Cash
Restricted cash balance of $0.1 million as of December 31, 2019 primarily relates 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 consolidated balance sheets, with the remainder included in other assets. Restricted cash balances as of 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 consolidated balance sheets. The proceeds were held in escrow until certain billing milestones were
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
achieved, and then specified amounts were transferred to our operating accounts. Restricted cash balances as of 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 consolidated balance sheets.
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
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 evaluatesWe evaluate inventory costs for abnormal costs due to excess production capacity and treatstreat such costs as period costs.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Additions and improvements are capitalized, while ordinary maintenance and repair expenditures are charged to expense as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets.
Software Development Costs
The Company expensesWe expense software development costs, including costs to develop software products or the software component of products and services to be marketed to external users, before technological feasibility of such products is reached. The Company hasWe have determined that technological feasibility is reached shortly before the release of those products and as a result, the development costs incurred after the establishment of technological feasibility and before the release of those products are not material.
Software development costs also include costs to develop software programs to be used solely to meet the Company'sour internal needs and applications used to deliver its services. The Company capitalizesapplications. We capitalize development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the intended function. Additionally, the Company capitalizeswe capitalize qualifying costs incurred for upgrades and enhancements to existing software that result in additional functionality. Costs related to preliminary project planning activities, post-implementation activities, maintenance and minor modifications are expensed as incurred. Internal-use software is amortized on a straight line basis over its estimated useful life.
Management evaluatesWe evaluate the useful lives of these assets on an annual basis and teststest for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Valuation of Goodwill, Intangible and Long-lived Assets
The Company doesFinite-lived intangible assets and other long-lived assets are amortized over their estimated useful lives. We do not amortize goodwill and intangible assets with indefinite useful lives,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 impairment assessment in the fourth quarter of each year. Finite-lived intangible assets and other long-lived assets are amortized over their estimated useful lives. Management evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and intangible assets may warrant revision or that the remaining balance of these assets, including intangible assets with indefinite lives, may not be recoverable.
Circumstances that might indicate long-lived assets might not be recoverable could include, but are not limited to, a change in the product mix, a change in the way products and services are created, produced or delivered, or a significant change in the way the Company'sour 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
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
amounts of the assets over their estimated fair value computed using discounted cash flows. During the year ended December 31, 2019, we abandoned certain capitalized software related to implementation work on an enterprise resource planning system conversion, resulting in an impairment charge of $1.3 million, and certain planning and site development activities related to our planned new headquarters, resulting in an impairment charge of $0.7 million, both of which were included in sales, general and administrative expense in the accompanying consolidated statements of operations and comprehensive income. During the year ended December 31, 2018, we abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $2.0 million which was included in sales, general and administrative expense in the accompanying consolidated statements of operations and comprehensive income. During the year ended December 31, 2017, the Companywe abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $1.0 million. The impairment chargemillion which was included in research and development expense in the accompanying consolidated statements of operations and comprehensive income, and recorded within the Software and Sensors Segment. No impairment losses were recorded during the years ended December 31, 2016 and 2015.
Customer Deposits
The Company requiresWe require deposits in advance of shipment for certain customer sales orders. Additionally, customers may elect to make deposits with the Companyus related to contracts for the Company'sour products and services that were not executed as of the end of a reporting period. Customer deposits are recorded as a current liability in the accompanying consolidated balance sheets.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable
The Company derivesWe derive revenue from two2 primary sources: (1) the sale of physical products, including CEWs,conducted energy devices ("CEDs"), Axon cameras, Axon Signal enabled devices, corresponding hardware extended warranties, and related accessories such as Axon docks, cartridges and batteries, among others, and (2) subscriptionsubscriptions to the Company's Evidence.comour Axon Evidence digital evidence management software as a servicesoftware-as-a-service ("SaaS") (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, the Companywe also recognizesrecognize training, professional services and revenue related to other software and SaaS services. We apply the five-step model outlined in Accounting Standards Codification ("ASC") Topic 606, Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, title has transferred, the price is fixed and collectability is reasonably assured. Contractual arrangements may contain explicit customer acceptance provisions, and under such arrangements, the Company defers recognition of revenue until formal customer acceptance is received. Extended warranty revenue, SaaS revenue and related data storage revenue are recognized ratably over the termfrom Contracts from Customers ("Topic 606"). For additional discussion of the contract commencingadoption of Topic 606, see Note 2.
Many of our products and services are sold on a pre-determined date subsequentstandalone basis. We also bundle our hardware products and services together and sell them to our customers in single transactions, where the delivery of the hardware. Training and professional service revenues are generally recorded once the services are completed.
Revenue arrangements with multiple deliverables are divided into separate units and revenue is allocated using the relative selling price method based upon vendor-specific objective evidence ("VSOE") of selling price or third-party evidence of the selling prices if VSOE of selling prices does not exist. If neither VSOE nor third-party evidence exists, management uses its best estimate of selling price. The majority of the Company’s allocations of arrangement consideration under multiple element arrangements are performed utilizing prices charged to customers for deliverables when sold separately. The Company’s multiple element arrangementscustomer can make payments over a multi-year period. These sales may include rights to future CEWs and/or Axon devices to be delivered at defined points within a multi-year contract,payments for upfront hardware and in those arrangements, the Company allocates total arrangement consideration over the life of the multi-year contract to future deliverables using management’s best estimate of selling price. The Company has not utilized third-party evidence of selling price.
The Company offers the opportunity to purchase extended warranties that include additional services, and coverage beyond the standard limited warranty for certain products. Revenue for extended warranty purchases is deferred at the time of sale and recognized over the warranty period commencing on the date of sale. Extended warranties range from one to five years.
Evidence.com and Axon cameras and related accessories have stand-alone value to the customer and are sometimes sold separately, but in most instances are sold together. In these instances, customers typically purchase and pay for the equipment and one year of Evidence.com in advance. Additional years of service are generally billed annually over a specified service term, which has typically ranged from one to five years. Generally, the Company recognizes revenue for the Axon equipment at the time of the sale consistent with the discussion of multiple deliverable arrangements above. Revenue for Evidence.com is deferred at the time of the sale and recognized over the service period. At times, the Company discounts the price of Axon devices provided to customers to secure long-term Evidence.com service contracts. In such circumstances, revenue related to the Axon devices recognized at the time of delivery is limited to the amount allocated to the Axon device deliverable that the Company is contractually entitled to that is not contingent upon the delivery of future Evidence.com services. The Company recognizes the remaining allocated contingent revenue related to discounted Axon devices over the remaining period it provides the contracted Evidence.com services.
In 2012, the Company introduced a program, the TASER Assurance Program (“TAP”) whereby a customer purchasing a product and joining the program will have the right to trade-in the original product for a new product of the same or like model in the future. Upon joining TAP, customers also receive an extended warranty for the initial products purchased. Under this program the customer generally pays additional annual installments over the contract period, generally three to five years. The Company records consideration received related to the right to the future hardware product as deferred revenue until all revenue recognition criteria are met, which is generally when the new product is delivered. Consideration related to the right to the future hardware product is determined at the inception of the arrangement using management’s best estimate of selling price. Management’s estimate is principally based on the current selling price for such products, with evaluation of the impact of any expected product and pricing changes, which have historically had an immaterial influence on management’s best estimate of selling price.
In 2015, the Company introduced the Officer Safety Plan (“OSP”), whereby a customer typically enters into a five year Evidence.com subscription that includes all of its standard advanced features along with unlimited storage. The OSP also includes a service plan that includes upgrades of (i) the Axon devices every 2.5 years and (ii) a CEW at any point within the contract period. Upon entering into the OSP, customers also receive extended warranties on the Axon and CEW devices upon delivery to cover the contract periods. Under this program the customer generally makes an initial purchase of Axon cameras and related accessories, and CEWs at inception along with annual installments for services and future hardware deliverables over the contract period. The Company records consideration received related to the right to future hardware product as deferred revenue until all revenue recognition criteria are met, which is generally when the new product is delivered.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In 2016, the Company introduced the TASER 60 Plan ("TASER 60") whereby a customer typically enters into a five year CEW installment purchase arrangement. TASER 60 also includes extended warranties on the CEW devices upon delivery covering the contract periods as well as holsters,payments for hardware and services to be provided by us at a future date. Additionally, we offer customers the ability to purchase CED cartridges and on-site spares. Generally, the Company allocates revenue to the deliverables using the relative selling price method and recognizes revenue at the time of sale for the amount allocated to the CEW devices, net of imputed interest, and the amount allocated to the extended warranty is recognized over five years. The Company performscertain services on an initial credit evaluation prior to execution of TASER 60 arrangements and subsequently performs quarterly credit evaluations by monitoring public municipal bond ratings, as applicable, and any subsequent credit upgrades or downgrades, to monitor for each customer's credit risk. Additionally, the Company tracks payment activity for amounts currently due to assess the credit quality of its notes receivable portfolio. As the Company’s customers generally have investment-grade municipal bond ratings, the Company considers collectability of the contracted amounts in such installment purchase arrangements to be reasonably assured, unless other factors or payment history indicate otherwise. For customers where municipal bond information is not available, the Company considers factors such as payment history, customer-specific information and broader market and economic trends and conditions to determine whether collectability is reasonably assured. The Company considers this information when establishing its allowance for doubtful accounts. For the years ended December 31, 2017 and 2016, the Company recorded revenue of $40.7 million and $17.9 million, respectively, under the Company's TASER 60 Plan. No such amounts were recorded during the year ended December 31, 2015.
In 2017, the Company introduced new subscription programs that allow for agencies to purchase the Company's training and duty cartridges over a five-year term whereby the customer makes five equal annual installments at the beginning of each contract year. The Company offers two tiers under this program: the basic and unlimited plan. The Basic Cartridge Plan entitles customers to a fixed number of training and duty cartridges per year as well as a fixed number of battery replacementsbasis over the contractual term. For the Basic Cartridge Plan, the Company allocates the contractual consideration to all identified deliverables using the relative selling price method. Generally, the Company recognizes revenue for the amounts allocated to the cartridges and batteries when they are delivered to the customer. The Unlimited Cartridge Plan entitles customers to a fixed number of training cartridges per year and an unlimited amount of duty cartridges and replacement batteries. Due to the unlimited nature of the arrangementthese arrangements whereby the Company iswe are obligated to deliver unlimited products at the customer’s request, the Company accountswe account for these arrangements as stand-ready obligations, and recognizesrecognize revenue ratably over the contract period. Cost of product sales is recognized when control of hardware products or accessories have transferred to the customer.
Revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, each of which is generally distinct and accounted for as a separate performance obligation. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental taxing authorities.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Topic 606. For contracts with multiple performance obligations, we allocate the contract transaction price to each performance obligation using our estimate of the standalone selling price ("SSP") of each distinct good or service in the contract.
Performance obligations to deliver products, including CEDs, cameras and related accessories such as cartridges, batteries and docks, are generally satisfied at the point in time we ship the product, as this is when the customer obtains control of the asset under our standard terms and conditions. In certain contracts with non-standard terms and conditions,
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
these performance obligations may not be satisfied until formal customer acceptance occurs. Performance obligations to fulfill service-type extended warranties and provide our SaaS offerings, including Axon Evidence and other cloud services, are generally satisfied over time as the customer receives and consumes the benefits of these services over the stated service period.
We have elected to recognize shipping costs as an expense in cost of product sales when the control of hardware products are deliveredor accessories have transferred to the customer.
Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis.
Deferred revenue consistsThe timing of payments received in advance related to products and services for which the criteria for revenue recognition may differ from the timing of invoicing to customers. We generally have not yet been met.an unconditional right to consideration when we invoice our customers and record a receivable. We record a contract asset when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing. Deferred revenue that will be recognized during the subsequent twelve month period from the balance sheet date is recorded as current deferred revenue and the remaining portion is recorded as long-term.long-term deferred revenue. Contract asset amounts that will be invoiced during the subsequent twelve month period from the balance sheet date are classified as current assets and the remaining portion is recorded within other assets on our consolidated balance sheets. Generally, customers are billed in annual installments. See Note 72 for further disclosures about the Company’s deferred revenue.
The Company records reductions to net sales for expected future product returns based on the Company’s historical experience. our contract assets.
Sales are typically made on credit, and the Companywe generally doesdo not require collateral. Management performs ongoing credit evaluations of its customers’ financial condition, and maintains an allowance for doubtful accounts. Uncollectible accounts are charged to expense when deemed uncollectible, and accounts and notes receivable are presented net of an allowance for doubtful accounts.accounts, which totaled $1.6 million and $1.9 million as of December 31, 2019 and 2018, respectively. This allowance represents management’s best estimate and application of judgment considering a number of factors, including third-party credit reports, actual payment history, cash discounts, customer-specific financial information and broader market and economic trends and conditions. In the event that actual uncollectible amounts differ from our estimates, additional expense could be necessary.
Cost of Product and Service Sales
Cost of product sales represents manufacturing costs, consisting of materials, labor and overhead related to finished goods and components. Shipping costs incurred related to product delivery are also included in cost of products sold. Cost of service sales includes third-party cloud services, and software maintenance and support costs, including personnel costs, associated with supporting Evidence.com and other software related services.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Advertising Costs
The Company expensesWe expense advertising costs in the period in which they are incurred. The CompanyWe incurred advertising costs of $0.5$0.9 million, $0.4$1.1 million and $0.6$0.5 million in the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. Advertising costs are included in sales, general and administrative expenses in the accompanying statements of operations.
Standard Warranties
The Company warranties its CEWs,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 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 on a quarterly basis based on historical data related to warranty claims on a quarterly basis and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure or other issue that could result in larger than anticipated warranty claims from customers. The warranty reserve is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. The warranty reserve is included in accrued liabilities on the accompanying consolidated balance sheets.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Changes in the Company’sour estimated warranty reserve were as follows (in thousands):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Balance, January 1 | $ | 898 |
| | $ | 644 |
| | $ | 780 |
|
| Utilization of reserve | (973 | ) | | (458 | ) | | (245 | ) |
| Warranty expense | 1,551 |
| | 712 |
| | 109 |
|
| Balance, December 31 | $ | 1,476 |
| | $ | 898 |
| | $ | 644 |
|
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Balance, January 1 | $ | 780 |
| | $ | 314 |
| | $ | 675 |
|
| Utilization of reserve | (245 | ) | | (155 | ) | | (299 | ) |
| Warranty expense (recoveries) | 109 |
| | 621 |
| | (62 | ) |
| Balance, December 31 | $ | 644 |
| | $ | 780 |
| | $ | 314 |
|
Research and Development Expenses
The Company expensesWe expense as incurred research and development costs that do not meet the qualifications to be capitalized. The CompanyWe incurred research and development expense of $100.7 million, $76.9 million and $55.4 million $30.6 millionin 2019, 2018 and $23.6 million in 2017, 2016 and 2015, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in future years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced through the establishment of a valuation allowance if, based upon available evidence, it is determined that it is more likely than not that the deferred tax assets will not be realized.
The Company recognizesWe recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. ManagementWe also assessesassess whether uncertain tax positions, as filed, could result in the recognition of a liability for possible interest and penalties. The Company’sOur policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. Refer to Note 10 for additional information regarding the change in unrecognized tax benefits.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Concentration of Credit Risk and Major Customers / Suppliers
Financial instruments that potentially subject the Companyus to concentrations of credit risk consist of accounts and notes receivable, contract assets, and cash. Sales are typically made on credit and the Company generally does not require collateral. Management performs ongoing credit evaluations of its customers’ financial condition and maintainsHistorically, we have experienced an allowance for estimated losses. Uncollectible accounts are written off when deemed uncollectible, and accounts receivable are presented net of an allowance for doubtful accounts, which totaled $0.8 million and $0.4 million as of December 31, 2017 and 2016, respectively. Historically, the Company has experienced a lowimmaterial level of write-offs related to doubtfuluncollectible accounts.
The Company maintainsWe maintain the majority of itsour cash at four4 depository institutions. As of December 31, 2017,2019, the aggregate balances in such accounts were $53.4$161.8 million. The Company’sOur balances with these institutions regularly exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits for domestic deposits and various deposit insurance programs covering our deposits in Australia, Canada, Finland, Germany, Hong Kong, India, Italy, the Netherlands, the United Kingdom, Germany and Australia.Vietnam. To manage the related credit exposure, management continually monitors the creditworthiness of the financial institutions where the Company haswe have deposits.
The Company sellsWe sell some of itsour products through a network of unaffiliated distributors. The CompanyWe also reserves the right to sell directly to the end user to secure the customer’s account.customers. No customer represented more than 10% of total net sales for the years ended December 31, 2017, 20162019, 2018 or 2015.
2017. At December 31, 2017,2019, and 2018, no customer represented more than 10% of total accounts and notes receivable. As of December 31, 2016, the Company had a trade receivable from one unaffiliated customer comprising 14.5% of the aggregate balance of accounts and notes receivable balance.and contract assets.
The Company
We currently purchasespurchase both off the shelf and custom components, including, but not limited to, finished circuit boards, and injection-molded plastic components, small machined parts, custom cartridge components, electronic
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
components, and off the shelf sub-assemblies from suppliers located in the U.S., Canada, China, Israel, Mexico, Republic of Korea, and Taiwan. Although the Companywe currently obtainsobtain many of these components from single source suppliers, the Company ownswe own the injection molded component tooling, most of the designs, and the test fixtures used in their production.production for all custom components. As a result, management believes itwe believe we could obtain alternative suppliers in most cases without incurring significant production delays. The CompanyWe also purchases small, machined parts from a vendorstrategically hold safety stock levels on custom components to further reduce this risk. For off the shelf components, we believe that in Taiwan, custom cartridge assemblies from a proprietary vendor in the U.S., and electronic components from a variety of foreign and domestic distributors. Management believes thatmost cases there are readily available alternative suppliers in most cases who couldcan consistently meet the Company'sour needs for these components. The Company acquiresWe acquire most of itsour components on a purchase order basis and doesdo not have any significant long-term contracts with component suppliers.
Fair Value of Financial Instruments
The Company usesWe 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. 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 December 31, 20172019 and 2016,2018, were comprised of money market funds, state and municipal obligations,at December 31, 2019, also included agency bonds, certificates of deposit, commercial paper, corporate bonds, municipal bonds, and certificates of deposits.U.S. Treasury repurchase agreements, and U.S. Treasury inflation-protected securities. See additional disclosure regarding the fair value of the Company’sour cash equivalents and investments in Note 2.3. Included in the balance of other assets as of December 31, 20172019 and 20162018 was $3.8$4.2 million and $3.2$3.6 million, respectively, related to corporate-owned life insurance policies which are used
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
to fund the Company’sour deferred compensation plan. The Company determinesWe determine the fair value of itsour 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 and accrued liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the balance sheet.
Segment and Geographic Information
The Company isOur operations are comprised of two2 reportable segments: the manufacture and sale of CEWs,CEDs, batteries, accessories, extended warranties and other related products and services (the “TASER Weapons”“TASER” segment); and the development, manufacture and sale of software and sensors, business, focused onwhich includes the sale of devices, wearables, applications, cloud and mobile products, (theand services (collectively, the "Software and Sensors" segment). Reportable segments are determined based on discrete financial information reviewed by the Company’sour Chief Executive Officer who is theour chief operating decision maker ("CODM") for the Company. The Company organizes. We organize and reviewsreview operations based on products and services, and currently there are no operating segments that are aggregated. The Company performsWe perform an annual analysis of itsour reportable segments.segments at least annually. Additional information related to the Company’sour business segments is summarized in Note 16.17.
For the years ended December 31, 2017, 2016 and 2015,a summary of net sales by geographic area, as well as the percentage relationship to total net sales included in the accompanying statements of operations were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| United States | $ | 282,810 |
| | 82.3 | % | | $ | 218,757 |
| | 81.6 | % | | $ | 161,803 |
| | 81.8 | % |
| Other Countries | 60,988 |
| | 17.7 |
| | 49,488 |
| | 18.4 |
| | 36,089 |
| | 18.2 |
|
| Total | $ | 343,798 |
| | 100.0 | % | | $ | 268,245 |
| | 100.0 | % | | $ | 197,892 |
| | 100.0 | % |
see Note 2. Sales to customers outside of the U.S. are typically denominated in U.S. dollars and are attributed to each country based on the shipping address of the distributor or customer. For the years ended December 31, 2017, 20162019, 2018 and 2015,2017, no individual country outside the U.S. represented more than 10% of net sales. Substantially all of the Company’sour assets are located in the U.S.
Stock-Based Compensation
The Company recognizesWe recognize expense related to stock-based compensation transactions in which it receives employeewe receive services in exchange for equity instruments of the Company. Stock-based compensation expense for RSUsrestricted stock units ("RSUs") is measured based on the closing fair market value of the Company’sour common stock on the date of grant. The Company recognizesWe recognize stock-based compensation expense over the award’s requisite service period on a straight-line basis for time-based RSUs. For performance-based RSUs, andcompensation 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 performance-based options with a graded basis for RSUs that are contingentvesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized over the longer of the expected achievement period of the performance conditions. The Company recognizesand market conditions, beginning at the point in time that the relevant performance condition is considered probable of achievement. For both time-based and performance-based RSUs, we recognize forfeitures as they occur as a reduction to stock-based compensation expense and to additional paid-in-capital.
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. 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. A total of approximately 5.9 million XSUs were granted in the year ended December 31, 2019.
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.
Given the complexity of the awards, we utilized Monte Carlo simulations to simulate a range of possible future market capitalizations for the Company calculatesover 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 9.8% 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 1.64% and 2.62%, expected term of between 8.3 and 9.0 years, expected volatility of between 44.12% and 45.47%, and dividend yield of 0.00%.
Stock Options
Historically, we have calculated the fair value of stock options using the Black-Scholes-Merton option pricing valuation model, which incorporates various assumptions including expected volatility, expected life, expected dividends and risk-free interest rates. NoOn May 24, 2018 (the “ CEO Grant Date”), our stockholders approved the Board of Directors’ grant of 6,365,856 stock option awards to Patrick W. Smith, our CEO (the “CEO Performance Award”). The CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational goals (performance conditions) and market capitalization goals (market conditions), assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each vesting date. Stock-based compensation expense associated with the CEO Performance Award is recognized over the requisite service period, which is defined as the longer of the expected achievement period for each pair of market capitalization and operational goals, beginning at the point in time when the relevant operational goal is considered probable of being met.
Given the complexity of the award, we utilized Monte Carlo simulations to simulate a range of possible future market capitalizations for the Company over the term of the options. The average of all iterations of the simulation was used as the basis for the valuation and market capitalization goal derived service period for each tranche. Additionally, we applied an illiquidity discount of 9.2% to the valuation because the award specifies a post-exercise holding period of 2.5 years. This discount was estimated using the Finnerty model and reduced by the impact of expected payroll and income taxes due upon exercise of the options, as the related proportion of shares are expected to be sold to satisfy such obligations. Additional assumptions used for the CEO Performance Award and the resulting estimates of weighted-average fair value per share of options granted are as follows:
|
| | |
| Volatility | | 47.71% |
| Risk-free interest rate | | 2.98% |
| Dividend rate | | — |
| Expected life of options | | 9.76 years |
| Weighted average grant date fair value of options granted | | $38.64 |
The expected life of the options represents the estimated period of time from grant date until exercise; in this case, exercise is assumed to occur at the full contractual term of ten years from grant and is based on input from the CEO and his historical behavior of not exercising vested options until the end of their terms. Expected stock price volatility is based on the average of the 9.76-year historical volatility and the implied volatility on 1,080-day call option for the Company. The risk-free interest rate is based on the implied yield available on United States Treasury bill zero-coupon issuances with an equivalent remaining term to the term of the options. We have not paid dividends in the past and do not plan to pay any dividends in the near future.
NaN options were awarded during the yearsyear ended December 31, 2017, 2016 or 2015.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2019. Other than the CEO Performance Award, 0 options were awarded during the year ended December 31, 2018. NaN options were awarded during the year ended December 31, 2017.
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 that would occur iffrom outstanding stock options were exercised utilizing the treasuryand unvested restricted stock method.units. The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Numerator for basic and diluted earnings per share: | | | | | |
| Net income | $ | 882 |
| | $ | 29,205 |
| | $ | 5,207 |
|
| Denominator: | | | | | |
| Weighted average shares outstanding—basic | 59,190 |
| | 56,392 |
| | 52,726 |
|
| Dilutive effect of stock-based awards | 828 |
| | 1,530 |
| | 1,172 |
|
| Diluted weighted average shares outstanding | 60,018 |
| | 57,922 |
| | 53,898 |
|
| Anti-dilutive stock-based awards excluded | 12,627 |
| | 6,757 |
| | 386 |
|
| Net income per common share: | | | | | |
| Basic | $ | 0.01 |
| | $ | 0.52 |
| | $ | 0.10 |
|
| Diluted | $ | 0.01 |
| | $ | 0.50 |
| | $ | 0.10 |
|
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Numerator for basic and diluted earnings per share: | | | | | |
| Net income | $ | 5,207 |
| | $ | 17,297 |
| | $ | 19,933 |
|
| Denominator: | | | | | |
| Weighted average shares outstanding—basic | 52,726 |
| | 52,667 |
| | 53,548 |
|
| Dilutive effect of stock-based awards | 1,172 |
| | 869 |
| | 1,090 |
|
| Diluted weighted average shares outstanding | 53,898 |
| | 53,536 |
| | 54,638 |
|
| Anti-dilutive stock-based awards excluded | 386 |
| | 443 |
| | 198 |
|
| Net income per common share: | | | | | |
| Basic | $ | 0.10 |
| | $ | 0.33 |
| | $ | 0.37 |
|
| Diluted | $ | 0.10 |
| | $ | 0.32 |
| | $ | 0.36 |
|
Recently Issued Accounting Guidance
Recently Adopted Accounting Pronouncements
In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”("FASB") issued a new standard related to revenue recognition, Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09” or “Topic 606”("ASU"). This authoritative guidance includes a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 also includes ASC 340-40 which codifies the guidance on other assets and deferred costs relating to contracts with customers. ASC 340-40 specifies the accounting for costs an entity incurs to obtain and fulfill a contract to provide goods and services to customers.
The standard permits two methods of adoption: retrospectively to each prior reporting period presented (the “full retrospective method”), or retrospectively with the cumulative effect of initially applying Topic 606 recognized at the date of initial application (the “modified retrospective method”) effective January 1, 2018. The Company has adopted the standard using the modified retrospective method. Under this method, the Company could elect to apply the cumulative effect method to either all contracts as of the date of initial application or only to contracts that are not complete as of that date. The Company has adopted the standard effective January 1, 2018, and has elected to apply the modified retrospective method to contracts that were not complete as of the date of initial application.
The adoption of Topic 606 is expected to have a material effect on the Company's consolidated financial statements. In addition to the enhanced footnote disclosures related to revenue from contracts with customers, the areas most significantly impacted will be contracts with contingent hardware revenue, contracts containing termination for convenience provisions, contracts containing software licenses and post-contract customer support, and the treatment of incremental costs of obtaining contracts with customers. However, due to the terms and conditions in certain customer contracts, the actual revenue recognition treatment under the new standard will be dependent on contract-specific terms, and may vary in some instances from the general recognition discussed below.
Prior to applying Topic 606, for bundled arrangements containing Evidence.com services in which the Company has provided significantly discounted or free of charge hardware, the Company has limited the amount of revenue it recognizes for the hardware to the amount that it is entitled to and is not contingent on future performance. Revenue allocated to the hardware that is in excess of the invoiced amount of that hardware is recognized over the contractual term when recognition of that revenue is contingent upon the delivery of Evidence.com services. Under the new standard, the Company is generally required to recognize hardware revenue upon fulfillment of the distinct hardware performance obligation, which
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
is when control of the hardware transfers to the customer, rather than recognizing any contingent hardware revenue over the term of the Evidence.com services.
Prior to applying Topic 606, for long-term contracts containing termination for convenience provisions, the Company allocates revenue to all identified deliverables included in the contractual term assuming the termination provisions will not be exercised. Under the standard preceding Topic 606, revenue is recognized when it has been earned, which is generally when products have been delivered and services have been provided. For contracts under the new standard containing termination for convenience provisions, the contract term will be limited to the period in which the Company has enforceable rights or the period in which the customer has been granted a material right for goods or services in the future. These material rights create future performance obligations that will not be satisfied until a later date, thereby increasing the contract term. In instances in which the contract term is determined to be less than the term stated in the contract, the portion of transaction price that is subject to present enforceable rights and obligations and the related identified performance obligations shall be accounted for at contract inception. Any future transaction price and performance obligations outside the initial contract term will be accounted for as revenue when customers renew subsequent periods, which is generally when the Company has the right to invoice the customer for the subsequent period. Revenue will then be recognized when the Company fulfills its performance obligations by transferring a promised good or service to a customer.
Prior to applying Topic 606, for sales of the Company's software products containing software licenses and post-contract customer support ("PCS") that have previously been accounted for under ASC 985-605, the entire arrangement fee was recognized ratably over the PCS term because the Company did not have sufficient VSOE required to allocate the fee to the separate elements. Under the new standard, and the Company will allocate the total transaction price based on the relative stand-alone selling price of each performance obligation and recognize the full amount of revenue attributable to the distinct software license predominately at the time control of the software license is transferred to the customer, while the amount allocated to the PCS performance obligation will be recognized ratably over the support term.
Prior to applying ASC 340-40, the Company has an established policy within the Software and Sensors segment to defer certain commissions costs, which are direct and incremental costs of obtaining certain long-term customer contracts, and recognize the costs as expense over the contractual term as the goods and services are delivered to the customer. The new standard specifies that all incremental costs of obtaining customer contracts and direct costs of fulfilling contracts with customers should be deferred and recognized as expense when the related performance obligations are fulfilled, which may be at points in time or over the contract term. Under the new standard, the Company will defer all incremental costs of obtaining customer contracts and recognize them as the related performance obligations are fulfilled for both the Software and Sensors and TASER Weapons segments. The Company generally expects that direct costs of fulfilling contracts with customers occur in the same period as the fulfillment of the related performance obligations and as a result, those fulfillment costs will continue to be recognized as incurred.
The cumulative impact of adopting the standard on January 1, 2018 is expected to result in an increase in stockholders' equity (retained earnings) of between $15.0 million and $25.0 million primarily related to the application of the aforementioned impacts to contracts that were not complete as of the date of initial application of Topic 606. As of the date of this report, we have finalized most of our accounting assessment of the new standard and we are nearly complete in determining the impacts of the disclosure requirements of the new standard. Additionally, the Company is in process of updating its internal control framework as it relates to the new standard. While the Company's quantification of the impact is ongoing and the actual opening balance sheet impact may differ from the estimated range above, the Company does expect to be in a position to begin reporting under the new standard beginning with the first quarter of 2018.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330). The amendments require that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted this guidance effective January 1, 2017 and it did not have a material impact on its consolidated financial statements.
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 previous U.S. GAAP. ASU 2016-02 requiresOn January 1, 2019, we adopted Topic 842 by applying the non-comparative modified retrospective method 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 continue 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 or contains a lease, lease classification, or initial lease costs for all leases that commenced before the adoption date.
The adoption had a lessee should recognize a liabilitymaterial impact to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on theour consolidated balance sheet. ASU 2016-02 is effectiveThe most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. There was no other impact from the fiscal year beginning after December 15, 2018 (including interim periods within that year) using
adoption. The adjustments to the opening balance sheet were as follows (in thousands):
61 |
| | | | | | | | | | | |
| | 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 assets | 719,540 |
| | 12,483 |
| | 732,023 |
|
| | | | | | |
| Accrued liabilities | 41,092 |
| | (1,138 | ) | | 39,954 |
|
| Other current liabilities | 37 |
| | 3,588 |
| | 3,625 |
|
| Total current liabilities | 166,011 |
| | 2,450 |
| | 168,461 |
|
| Other long-term liabilities | 5,704 |
| | 10,033 |
| | 15,737 |
|
| Total liabilities | 252,216 |
| | 12,483 |
| | 264,699 |
|
| Total liabilities and stockholders' equity | 719,540 |
| | 12,483 |
| | 732,023 |
|
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), expanding the scope of Contents
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
a modified retrospective approachTopic 718 to include share-based payment transactions for acquiring goods and earlyservices from nonemployees. We adopted this standard on January 1, 2019 and the adoption is permitted. The Company is currently in the process of evaluating thehad no impact of adoption of this ASU on itsour consolidated financial statements.
In March 2016,
Effective the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification (Topic 718), Compensation – Stock Compensation. ASU 2016-09 impacts several aspectsfirst quarter of the accounting for share-based payment transactions. The Company adopted this guidance effective January 1, 2017, which required the following changes to the presentation of the Company's financial statements:2020:
Excess tax benefits or deficiencies for share-based payments are now recorded as a discrete item in the period shares vest or stock options are exercised as an adjustment to income tax expense or benefit rather than additional paid-in capital. This change was applied prospectively as of January 1, 2017. The Company did not have any excess tax benefits that were not previously recognized as of January 1, 2017.
As of January 1, 2017, the calculation of diluted weighted average shares outstanding was changed prospectively to no longer include excess tax benefits as assumed proceeds. This change resulted in recording an increased number of dilutive shares, but did not have a material impact on the Company's current year diluted earnings per share;
Cash flows related to excess tax benefits or deficiencies are included in the statement of cash flows as an operating activity rather than as a financing activity. The Company adopted this change prospectively.
Cash paid to taxing authorities when withholding shares from an employee's vesting or exercise of equity-based compensation awards for tax-withholding purposes is now considered a repurchase of the Company's equity instruments and is classified as cash used in financing activities. The Company already classifies these transactions as a financing activity, and as such, there was no impact upon adoption.
The Company has made the election to account for forfeitures when they occur rather than estimating forfeitures. The Company adopted this change on a modified retrospective basis, which resulted in an increase to additional paid-in capital and decrease to retained earnings of $0.5 million as of January 1, 2017. The decrease to retained earnings of $0.5 million was partially reduced by the income tax effect of the adjustment of $0.2 million.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses.Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB also issued various updates to ASU 2016-13 to provide additional guidance and clarification. 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, differs from existing U.S. GAAPan entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in that previous standards generally delayedmore timely recognition of credit losses until the loss was probable. ASU 2016-13 eliminates the probable initial recognition threshold and, instead, reflect an entity’s current estimate of all expected creditsuch 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 will adopt this guidance on January 1, 2020. We are nearing completion of the opening balance sheet adjustment related to ASU 2016-13 is effectiveand expect to record an opening balance sheet adjustment of less than $1.0 million reflecting an overall increase to the allowance 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.expected credit losses.
In August 2016,2018, the FASB issued ASU 2016-15, Statement of Cash Flows2018-13, Fair Value Measurement (Topic 230)820): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 eliminates the diversity in practice relatedDisclosure Framework—Changes to the classificationDisclosure 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 certain cash receiptschanges in unrealized gains and payments. ASU 2016-15 designateslosses, the appropriate cash flow classification, including requirementsrange and weighted average of significant unobservable inputs used to allocate certain componentsdevelop Level 3 fair value measurements, and the narrative description of these cash receipts and payments among operating, investing and financing activities. ASU 2016-15 ismeasurement 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 for the fiscal year beginning after December 15, 2017, and interim periods within that fiscal year, and earlydate. Early adoption is permitted. The retrospective transition method, requiring adjustmentpermitted, and an entity is also permitted to all comparative periods presented, is required unless it is impracticable for someearly adopt any removed or modified disclosures and delay adoption of the amendments, in which case those amendments would be prospectively applied as of the earliest date practicable. The Company does not expect the adoptionadditional disclosures until their effective date. Adoption of this ASU is not expected to have a material impact on itsour consolidated financial statements.
In October 2016,December 2019, the FASB issued ASU 2016-16,2019-12, Simplifying the Accounting for 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 allowing postponement of recognition until the asset has been sold to an outside party. ASU 2016-16 is effective for fiscal year beginning after December 15, 2017 using a modified retrospective approach, and early adoption is permitted.Taxes. The Company is currentlyamendments in the process of evaluating the impact of adoption of this ASU 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. ASU 2016-18 isare effective for the fiscal years beginning after December 15, 2017, and2020, including interim periods within that fiscal year, and early adoption is permitted. The Company does not expect thetherein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. Adoption of this ASU is not expected to have a material impact on its consolidated financial statements.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. ASU 2017-01 is effective for the fiscal year beginning after December 15, 2017, and interim periods within that year, and early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350), which simplifies the goodwill impairment test by eliminating Step 2 of the quantitative assessment and should reduce the cost and complexity of evaluating goodwill for impairment. Under the amended guidance, when a quantitative assessment is required, an entity will perform a goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge will be measured as the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of recorded goodwill. ASU 2017-04 is effective for the fiscal year beginning after December 15, 2019, and interim periods within that fiscal year, and early adoption is permitted. The Company's early adoption on January 1, 2017 did not have an impact on its 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. ASU 2017-09 is effective for the fiscal year beginning after December 15, 2017 using a prospective approach, and early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on itsour 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
Nature of Products and Services
The following table presents our revenues by primary product and service offering (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 | | Year Ended December 31, 2018 |
| | TASER | | Software and Sensors | | Total | | TASER | | Software and Sensors | | Total |
| TASER 7 | $ | 56,652 |
| | $ | — |
| | $ | 56,652 |
| | $ | 7,358 |
| | $ | — |
| | $ | 7,358 |
|
| TASER X26P | 52,524 |
| | — |
| | 52,524 |
| | 70,638 |
| | — |
| | 70,638 |
|
| TASER X2 | 55,920 |
| | — |
| | 55,920 |
| | 78,837 |
| | — |
| | 78,837 |
|
| TASER Pulse and Bolt | 4,089 |
| | — |
| | 4,089 |
| | 5,182 |
| | — |
| | 5,182 |
|
| Cartridges | 85,987 |
| | — |
| | 85,987 |
| | 68,258 |
| | — |
| | 68,258 |
|
| Axon Body | — |
| | 44,039 |
| | 44,039 |
| | — |
| | 21,883 |
| | 21,883 |
|
| Axon Flex | — |
| | 5,928 |
| | 5,928 |
| | — |
| | 6,509 |
| | 6,509 |
|
| Axon Fleet | — |
| | 16,182 |
| | 16,182 |
| | — |
| | 12,527 |
| | 12,527 |
|
| Axon Dock | — |
| | 20,449 |
| | 20,449 |
| | — |
| | 10,706 |
| | 10,706 |
|
| Axon Evidence and cloud services | 704 |
| | 130,265 |
| | 130,969 |
| | — |
| | 90,291 |
| | 90,291 |
|
| TASER Cam | — |
| | 3,104 |
| | 3,104 |
| | — |
| | 3,871 |
| | 3,871 |
|
| Extended warranties | 18,074 |
| | 19,188 |
| | 37,262 |
| | 15,753 |
| | 11,860 |
| | 27,613 |
|
| Other | 7,711 |
| | 10,044 |
| | 17,755 |
| | 7,089 |
| | 9,306 |
| | 16,395 |
|
| Total | $ | 281,661 |
| | $ | 249,199 |
| | $ | 530,860 |
| | $ | 253,115 |
| | $ | 166,953 |
| | $ | 420,068 |
|
The following table presents our revenues disaggregated by geography (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 (1)
|
| United States | $ | 446,100 |
| | 84.0 | % | | $ | 335,310 |
| | 79.8 | % | | $ | 282,810 |
| | 82.3 | % |
| Other Countries | 84,760 |
| | 16.0 |
| | 84,758 |
| | 20.2 |
| | 60,988 |
| | 17.7 |
|
| Total | $ | 530,860 |
| | 100.0 | % | | $ | 420,068 |
| | 100.0 | % | | $ | 343,798 |
| | 100.0 | % |
(1) Amounts for the year ended December 31, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Contract Balances
The timing of revenue recognition may differ from the timing of invoicing to customers. We generally have an unconditional right to consideration when we invoice our customers and record a receivable. We record a contract asset when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing.
Contract assets generally result from our subscription programs where we satisfy a hardware performance obligation upon shipment to the customer, and the right to the portion of the transaction price allocated to that hardware performance obligation is conditional on our future performance of a SaaS service obligation under the contract. We recognize a portion of the amount allocated to hardware products shipped to the customer as accounts receivable when invoiced to the customer, and record the remaining allocated value as a contract asset as we have generally fulfilled our hardware performance obligation upon shipment. Unbilled accounts receivable expected to be invoiced and collected within twelve months was $19.7 million as of December 31, 2019, and was included in accounts and notes receivable, net on our consolidated balance sheet.
Contract liabilities generally consist of deferred revenue on our subscription programs where we generally invoice customers at the beginning of each annual period and record a receivable at the time of invoicing when there is an unconditional right to consideration.
Deferred revenue is comprised mainly of unearned revenue related to our Axon Evidence SaaS platform, secure cloud-based storage, service-type extended warranties, stand-ready obligations in our cartridge programs, and rights to future CED, camera and related accessories hardware in our subscription programs. Revenue for Axon Evidence and cloud-based storage, our service-type extended warranties and stand-ready cartridge programs is generally recognized on a straight-line basis over the subscription term. Revenue for the rights to future hardware is generally recognized at the point in time the hardware products are shipped to the customer.
Payment terms and conditions vary by contract type and geography, but our standard terms are that payments are due within 30 days from the date of invoice.
The following table presents our contract assets, contract liabilities and certain information related to these balances as of and for the year ended December 31, 2019 (in thousands):
|
| | | |
| | December 31, 2019 |
| Contract assets, net | $ | 47,746 |
|
| Contract liabilities (deferred revenue) | 205,800 |
|
| Revenue recognized in the period from: | |
| Amounts included in contract liabilities at the beginning of the period | 101,768 |
|
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Contract liabilities (deferred revenue) consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| | Current | | Long-Term | | Total | | Current | | Long-Term | | Total |
| Warranty: | | | | | | | | | | | |
| TASER | $ | 12,716 |
| | $ | 16,378 |
| | $ | 29,094 |
| | $ | 12,797 |
| | $ | 16,847 |
| | $ | 29,644 |
|
| Software and Sensors | 9,852 |
| | 5,156 |
| | 15,008 |
| | 8,273 |
| | 6,516 |
| | 14,789 |
|
| | 22,568 |
| | 21,534 |
| | 44,102 |
| | 21,070 |
| | 23,363 |
| | 44,433 |
|
| Hardware: | | | | | | | | | | | |
| TASER | 9,569 |
| | 15,468 |
| | 25,037 |
| | 9,355 |
| | 15,598 |
| | 24,953 |
|
| Software and Sensors | 22,235 |
| | 33,759 |
| | 55,994 |
| | 20,878 |
| | 24,685 |
| | 45,563 |
|
| | 31,804 |
| | 49,227 |
| | 81,031 |
| | 30,233 |
| | 40,283 |
| | 70,516 |
|
| Services: | | | | | | | | | | | |
| TASER | 293 |
| | 765 |
| | 1,058 |
| | — |
| | — |
| | — |
|
| Software and Sensors | 63,199 |
| | 16,410 |
| | 79,609 |
| | 55,713 |
| | 10,771 |
| | 66,484 |
|
| | $ | 63,492 |
| | $ | 17,175 |
| | $ | 80,667 |
| | $ | 55,713 |
| | $ | 10,771 |
| | $ | 66,484 |
|
| Total | $ | 117,864 |
| | $ | 87,936 |
| | $ | 205,800 |
| | $ | 107,016 |
| | $ | 74,417 |
| | $ | 181,433 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| | Current | | Long-Term | | Total | | Current | | Long-Term | | Total |
| TASER | $ | 22,578 |
| | $ | 32,611 |
| | $ | 55,189 |
| | $ | 22,152 |
| | $ | 32,445 |
| | $ | 54,597 |
|
| Software and Sensors | 95,286 |
| | 55,325 |
| | 150,611 |
| | 84,864 |
| | 41,972 |
| | 126,836 |
|
| Total | $ | 117,864 |
| | $ | 87,936 |
| | $ | 205,800 |
| | $ | 107,016 |
| | $ | 74,417 |
| | $ | 181,433 |
|
Remaining Performance Obligations
As of December 31, 2019, we had approximately $1.23 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 December 31, 2019. We expect to recognize between 20% - 25% of this balance over the next twelve months, and expect the remainder to be recognized over the following five to seven years, subject to risks related to delayed deployments, budget appropriation or other contract cancellation clauses.
Costs to Obtain a Contract
We recognize an asset for the incremental costs of obtaining a contract with a customer, which consist primarily of sales commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contract and amortized consistent with the recognition timing of the revenue for the underlying performance obligations.
For contract costs related to performance obligations with an amortization period of one year or less, we apply the practical expedient to expense these sales commissions when incurred. These costs are recognized as incurred within sales, general and administrative expenses on the accompanying consolidated statements of operations and comprehensive income.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2019, our assets for costs to obtain contracts were as follows (in thousands):
|
| | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
Current deferred commissions (1) | $ | 9,623 |
| | $ | 7,062 |
|
Deferred commissions, net of current portion (2) | 22,068 |
| | 15,530 |
|
| | $ | 31,691 |
| | $ | 22,592 |
|
(1) Current deferred commissions are included within prepaid expenses and other current assets on the accompanying consolidated balance sheet.
(2) Deferred commissions, net of current portion, are included in other assets on the accompanying consolidated balance sheet.
During the years ended December 31, 2019 and 2018, we recognized $8.2 million and $5.3 million, respectively, of amortization related to deferred commissions. These costs are recorded within sales, general and administrative expenses on the accompanying consolidated statements of operations and comprehensive income.
Significant Judgments
Our contracts with certain municipal government customers may be subject to budget appropriation, other contract cancellation clauses or future periods which are optional. In contracts where the customer’s performance is subject to budget appropriation clauses, we generally consider the likelihood of non-appropriation to be remote when determining the contract term and transaction price. Contracts with other cancellation provisions or optional periods may require judgment in determining the contract term, including the existence of material rights, transaction price and identifying the performance obligations.
At times, customers may request changes that either amend, replace or cancel existing contracts. Judgment is required to determine whether the specific facts and circumstances within the contracts require the changes to be accounted for as a separate contract or as a modification. Generally, contract modifications containing additional goods and services that are determined to be distinct and sold at their SSP are accounted for as a separate contract. For contract modifications where both criteria are not met, the original contract is updated and the required adjustments to revenue and contract assets, liabilities, and other accounts will be made accordingly.
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately rather than together may require significant judgment. We consider CED devices and related accessories, as well as cameras and related accessories, to be separately identifiable from each other as well as from extended warranties on these products and the SaaS subscriptions to Axon Evidence and other cloud services.
In contracts where there are timing differences between when we transfer a promised good or service to the customer and when the customer pays for that good or service, we have determined that, with the exception of our TASER 60 installment purchase arrangements, our contracts generally do not include a significant financing component. For the year ended December 31, 2019, we recorded revenue of $39.3 million, including $1.6 million of interest income, under our TASER 60 plan. For the year ended December 31, 2018, we recorded revenue of $48.2 million including $1.3 million of interest income under our TASER 60 plan. For the year ended December 31, 2017, we recorded revenue of $40.7 million including $0.7 million of interest income under our TASER 60 plan. Amounts for the year ended December 31, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606.
Judgment is required to determine the SSP for each distinct performance obligation.We analyze separate sales of our products and services as a basis for estimating the SSP of our products and services and then use that SSP as the basis for allocating the transaction price when our products and services are sold together in a contract with multiple performance obligations. In instances where the SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions, time value of money and other observable inputs. We typically have more than one SSP for individual products and services due to the
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
stratification of those products and services by customers and circumstances. In these instances, we may use information such as geographic region and distribution channel in determining the SSP.
3. Cash, Cash Equivalents and Investments
The following tables summarize the Company's cash, cash equivalents, and held-to-maturity investments at December 31, 20172019 and December 31, 20162018 (in thousands):
| | | | As of December 31, 2017 | As of December 31, 2019 |
| | Amortized Cost | | Gross Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Short-Term Investments | | Long-Term Investments | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Short-Term Investments | | Long-Term Investments |
| Cash | $ | 53,459 |
| | $ | — |
| | $ | 53,459 |
| | $ | 53,459 |
| | $ | — |
| | $ | — |
| $ | 103,319 |
| | $ | — |
| | $ | — |
| | $ | 103,319 |
| | $ | 103,319 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Level 1: | | | | | | | | | | | | | | | | | | | | | | | | |
| Money market funds | 20,884 |
| | — |
| | 20,884 |
| | 20,884 |
| | — |
| | — |
| 8,845 |
| | — |
| | — |
| | 8,845 |
| | 8,845 |
| | — |
| | — |
|
| Corporate bonds | 6,632 |
| | (6 | ) | | 6,626 |
| | — |
| | 6,632 |
| | — |
| |
| Agency bonds | | 32,869 |
| | 14 |
| | (4 | ) | | 32,879 |
| | — |
| | 15,131 |
| | 17,738 |
|
| Subtotal | 27,516 |
| | (6 | ) | | 27,510 |
| | 20,884 |
| | 6,632 |
| | — |
| 41,714 |
| | 14 |
| | (4 | ) | | 41,724 |
| | 8,845 |
| | 15,131 |
| | 17,738 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Level 2: | | | | | | | | | | | | | | | | | | | | | | | | |
| State and municipal obligations | 992 |
| | — |
| | 992 |
| | 762 |
| | 230 |
| | — |
| 25,038 |
| | 8 |
| | — |
| | 25,046 |
| |
|
| | 21,560 |
| | 3,478 |
|
| Certificates of deposit | | 1,400 |
| | — |
| | — |
| | 1,400 |
| | — |
| | 1,400 |
| | — |
|
| Corporate bonds | | 135,175 |
| | 71 |
| | (30 | ) | | 135,216 |
| | 886 |
| | 113,241 |
| | 21,048 |
|
| U.S. Treasury repurchase agreements | | 57,200 |
| | — |
| | — |
| | 57,200 |
| | 57,200 |
| | — |
| | — |
|
| Treasury inflation-protected securities | | 3,235 |
| | 14 |
| | — |
| | 3,249 |
| | — |
| | — |
| | 3,235 |
|
| Commercial paper | | 29,202 |
| | — |
| | — |
| | 29,202 |
| | 2,000 |
| | 27,202 |
| | — |
|
| Subtotal | | 251,250 |
| | 93 |
| | (30 | ) | | 251,313 |
| | 60,086 |
| | 163,403 |
| | 27,761 |
|
| Total | $ | 81,967 |
| | $ | (6 | ) | | $ | 81,961 |
| | $ | 75,105 |
| | $ | 6,862 |
| | $ | — |
| $ | 396,283 |
| | $ | 107 |
| | $ | (34 | ) | | $ | 396,356 |
| | $ | 172,250 |
| | $ | 178,534 |
| | $ | 45,499 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2018 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Short-Term Investments | | Long-Term Investments |
| Cash | $ | 144,095 |
| | $ | — |
| | $ | — |
| | $ | 144,095 |
| | $ | 144,095 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | |
| Level 1: | | | | | | | | | | | | | |
| Money market funds | 205,367 |
| | — |
| | — |
| | 205,367 |
| | 205,367 |
| | — |
| | — |
|
| Total | $ | 349,462 |
| | $ | — |
| | $ | — |
| | $ | 349,462 |
| | $ | 349,462 |
| | $ | — |
| | $ | — |
|
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2016 |
| | Amortized Cost | | Gross Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Short-Term Investments | | Long-Term Investments |
| Cash | $ | 32,802 |
| | $ | — |
| | $ | 32,802 |
| | $ | 32,802 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | |
| Level 1: | | | | | | | | | | | |
| Money market funds | 7,849 |
| | — |
| | 7,849 |
| | 7,849 |
| | — |
| | — |
|
| Corporate bonds | 33,379 |
| | (57 | ) | | 33,322 |
| | — |
| | 33,379 |
| | — |
|
| Subtotal | 41,228 |
| | (57 | ) | | 41,171 |
| | 7,849 |
| | 33,379 |
| | — |
|
| | | | | | | | | | | | |
| Level 2: | | | | | | | | | | | |
| State and municipal obligations | 14,477 |
| | (10 | ) | | 14,467 |
| | — |
| | 14,243 |
| | 234 |
|
| Certificates of deposit | 793 |
| | — |
| | 793 |
| | — |
| | 793 |
| | — |
|
| Subtotal | 15,270 |
| | (10 | ) | | 15,260 |
| | — |
| | 15,036 |
| | 234 |
|
| Total | $ | 89,300 |
| | $ | (67 | ) | | $ | 89,233 |
| | $ | 40,651 |
| | $ | 48,415 |
| | $ | 234 |
|
The Company believes the unrealized losses on the Company’s investments are due to interest rate fluctuations. As these investments are short-term in nature, are expected to be redeemed at par value, and because the Company has the ability and intent to hold these investments to maturity, the Company does not consider these investments to be other than temporarily impaired at December 31, 2017.
3.4. Inventory
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average cost of raw materials which approximates the FIFO method and includes allocations of manufacturing labor and overhead. Included in finished goods at December 31, 20172019 and December 31, 20162018 was $1.4 million and $0.7$1.4 million, respectively, of trial and evaluation hardware units. Provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value. Inventories consisted of the following at December 31 (in thousands):
|
| | | | | | | |
| | 2019 | | 2018 |
| Raw materials | $ | 20,789 |
| | $ | 19,670 |
|
| Finished goods | 18,056 |
| | 14,093 |
|
| Total inventory | $ | 38,845 |
| | $ | 33,763 |
|
|
| | | | | | | |
| | 2017 | | 2016 |
| Raw materials | $ | 20,119 |
| | $ | 18,002 |
|
| Finished goods | 25,346 |
| | 16,839 |
|
| Total inventory | $ | 45,465 |
| | $ | 34,841 |
|
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
4.5. Property and Equipment
Property and equipment consisted of the following at December 31 (in thousands):
|
| | | | | | | | | |
| | Estimated Useful Life | | 2019 | | 2018 |
| Land | N/A | | $ | 2,900 |
| | $ | 2,900 |
|
| Building and leasehold improvements | 3-39 years | | 20,089 |
| | 19,578 |
|
| Production equipment | 3-7 years | | 29,961 |
| | 19,817 |
|
| Computers, equipment and software | 3-5 years | | 8,126 |
| | 8,392 |
|
| Furniture and office equipment | 5-7 years | | 6,514 |
| | 6,529 |
|
| Vehicles | 5 years | | 1,753 |
| | 1,385 |
|
| Website development costs | 3 years | | 204 |
| | 687 |
|
| Capitalized internal-use software development costs | 3 years | | 3,670 |
| | 3,670 |
|
| Construction-in-process | N/A | | 12,385 |
| | 14,820 |
|
| Total cost | | | 85,602 |
| | 77,778 |
|
| Less: Accumulated depreciation | | | (41,832 | ) | | (39,885 | ) |
| Property and equipment, net | | | $ | 43,770 |
| | $ | 37,893 |
|
|
| | | | | | | | | |
| | Estimated Useful Life | | 2017 | | 2016 |
| Land | N/A | | $ | 2,900 |
| | $ | 2,900 |
|
| Building and leasehold improvements | 3-39 years | | 18,383 |
| | 15,295 |
|
| Production equipment | 3-7 years | | 19,075 |
| | 19,849 |
|
| Computers, equipment and software | 3-5 years | | 6,780 |
| | 7,985 |
|
| Furniture and office equipment | 5-7 years | | 5,262 |
| | 4,990 |
|
| Vehicles | 5 years | | 1,057 |
| | 675 |
|
| Website development costs | 3 years | | 687 |
| | 601 |
|
| Capitalized internal-use software development costs | 3 years | | 3,695 |
| | 3,695 |
|
| Construction-in-process | N/A | | 9,810 |
| | 5,813 |
|
| Total cost | | | 67,649 |
| | 61,803 |
|
| Less: Accumulated depreciation | | | (36,477 | ) | | (37,799 | ) |
| Property and equipment, net | | | $ | 31,172 |
| | $ | 24,004 |
|
Depreciation and amortization expense related to property and equipment was $3.4$7.9 million, $2.5$4.9 million and $2.3$3.4 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively, of which $1.1$3.5 million, $0.7$1.4 million and $0.7$1.1 million was included in cost of sales for the respective years.
5.6. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the year ended December 31, 20172019 were as follows (in thousands): |
| | | | | | | | | | | |
| | TASER Weapons | | Software and Sensors | | Total |
| Balance, January 1, 2017 | $ | 562 |
| | $ | 9,880 |
| | $ | 10,442 |
|
| Goodwill acquired | 825 |
| | 3,505 |
| | 4,330 |
|
| Purchase accounting adjustments | — |
| | 23 |
| | 23 |
|
| Foreign currency translation adjustments | 66 |
| | 66 |
| | 132 |
|
| Balance, December 31, 2017 | $ | 1,453 |
| | $ | 13,474 |
| | $ | 14,927 |
|
|
| | | | | | | | | | | |
| | TASER | | Software and Sensors | | Total |
| Balance, December 31, 2018 | $ | 1,338 |
| | $ | 23,643 |
| | $ | 24,981 |
|
| Foreign currency translation adjustments | 16 |
| | 16 |
| | 32 |
|
| Balance, December 31, 2019 | $ | 1,354 |
| | $ | 23,659 |
| | $ | 25,013 |
|
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Intangible assets (other than goodwill) consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 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 names | 5-10 years | | $ | 3,161 |
| | $ | (1,035 | ) | | $ | 2,126 |
| | $ | 3,161 |
| | $ | (732 | ) | | $ | 2,429 |
|
| Issued patents | 5-25 years | | 3,271 |
| | (1,339 | ) | | 1,932 |
| | 2,940 |
| | (1,106 | ) | | 1,834 |
|
| Issued trademarks | 3-15 years | | 1,166 |
| | (678 | ) | | 488 |
| | 1,053 |
| | (599 | ) | | 454 |
|
| Customer relationships | 4-8 years | | 3,721 |
| | (1,416 | ) | | 2,305 |
| | 3,701 |
| | (880 | ) | | 2,821 |
|
| Non-compete agreements | 3-4 years | | 450 |
| | (404 | ) | | 46 |
| | 540 |
| | (439 | ) | | 101 |
|
| Developed technology | 3-5 years | | 10,660 |
| | (6,528 | ) | | 4,132 |
| | 13,404 |
| | (7,081 | ) | | 6,323 |
|
| Re-acquired distribution rights | 2 years | | 2,009 |
| | (2,009 | ) | | — |
| | 1,928 |
| | (1,813 | ) | | 115 |
|
| Total amortizable | | | 24,438 |
| | (13,409 | ) | | 11,029 |
| | 26,727 |
| | (12,650 | ) | | 14,077 |
|
| Non-amortizable (indefinite-lived) intangible assets: | | | | | | | | | | | | | |
| TASER trademark | | | 900 |
| | | | 900 |
| | 900 |
| | | | 900 |
|
| Patents and trademarks pending | | | 842 |
| | | | 842 |
| | 958 |
| | | | 958 |
|
| Total non-amortizable | | | 1,742 |
| | | | 1,742 |
| | 1,858 |
| | | | 1,858 |
|
| Total intangible assets | | | $ | 26,180 |
| | $ | (13,409 | ) | | $ | 12,771 |
| | $ | 28,585 |
| | $ | (12,650 | ) | | $ | 15,935 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2017 | | December 31, 2016 |
| | Useful Life | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Amortized (definite-lived intangible assets): | | | | | | | | | | | | | |
| Domain names | 5-10 years | | $ | 3,161 |
| | $ | (428 | ) | | $ | 2,733 |
| | $ | 3,161 |
| | $ | (125 | ) | | $ | 3,036 |
|
| Issued patents | 4-15 years | | 2,697 |
| | (913 | ) | | 1,784 |
| | 1,942 |
| | (780 | ) | | 1,162 |
|
| Issued trademarks | 3-11 years | | 860 |
| | (397 | ) | | 463 |
| | 655 |
| | (320 | ) | | 335 |
|
| Customer relationships | 4-8 years | | 1,377 |
| | (451 | ) | | 926 |
| | 914 |
| | (240 | ) | | 674 |
|
| Non-compete agreements | 3-4 years | | 556 |
| | (346 | ) | | 210 |
| | 465 |
| | (236 | ) | | 229 |
|
| Developed technology | 3-7 years | | 13,469 |
| | (3,956 | ) | | 9,513 |
| | 8,661 |
| | (824 | ) | | 7,837 |
|
| Re-acquired distribution rights | 2 years | | 2,133 |
| | (711 | ) | | 1,422 |
| | — |
| | — |
| | — |
|
| Total amortized | | | 24,253 |
| | (7,202 | ) | | 17,051 |
| | 15,798 |
| | (2,525 | ) | | 13,273 |
|
| Not amortized (indefinite-lived intangible assets: | | | | | | | | | | | | | |
| TASER trademark | | | 900 |
| | | | 900 |
| | 900 |
| | | | 900 |
|
| Patents and trademarks pending | | | 872 |
| | | | 872 |
| | 1,045 |
| | | | 1,045 |
|
| Total not amortized | | | 1,772 |
| | | | 1,772 |
| | 1,945 |
| | | | 1,945 |
|
| Total intangible assets | | | $ | 26,025 |
| | $ | (7,202 | ) | | $ | 18,823 |
| | $ | 17,743 |
| | $ | (2,525 | ) | | $ | 15,218 |
|
Amortization expense of intangible assets was $4.7$3.5 million, $0.9$5.7 million and $0.8$4.7 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. Estimated amortization for intangible assets with definitive lives for the next five years ended December 31, and thereafter, is as follows (in thousands):
|
| | | |
| 2020 | $ | 3,316 |
|
| 2021 | 2,868 |
|
| 2022 | 1,266 |
|
| 2023 | 971 |
|
| 2024 | 887 |
|
| Thereafter | 1,721 |
|
| Total | $ | 11,029 |
|
|
| | | |
| 2018 | $ | 5,415 |
|
| 2019 | 3,868 |
|
| 2020 | 2,401 |
|
| 2021 | 2,266 |
|
| 2022 | 834 |
|
| Thereafter | 2,267 |
|
| Total | $ | 17,051 |
|
6.7. Other Long-Term Assets
Other long-term assets consisted of the following at December 31 (in thousands):
|
| | | | | | | |
| | 2019 | | 2018 |
| Cash surrender value of corporate-owned life insurance policies | $ | 4,214 |
| | $ | 3,596 |
|
| Deferred commissions | 22,068 |
| | 15,530 |
|
| Restricted cash | 56 |
| | 661 |
|
| Operating lease assets | 9,653 |
| | — |
|
| Prepaid expenses, deposits and other | 4,218 |
| | 3,212 |
|
| Total other long-term assets | $ | 40,209 |
| | $ | 22,999 |
|
|
| | | | | | | |
| | 2017 | | 2016 |
| Cash surrender value of corporate-owned life insurance policies | $ | 3,846 |
| | $ | 3,240 |
|
Deferred commissions (i) | 6,803 |
| | 5,302 |
|
Restricted cash (ii) | 3,333 |
| | 3,317 |
|
| Prepaid expenses, deposits and other | 1,384 |
| | 2,058 |
|
| Total other long-term assets | $ | 15,366 |
| | $ | 13,917 |
|
(i) Deferred commissions represent customer acquisition costs to secure long-term contracts. The Company capitalizes incremental and direct costs related to a specific contract and recognizes such costs as expense over the term of the contract in proportion to the contract revenue.8. Accrued Liabilities
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(ii) As of December 31, 2017, restricted cash primarily consisted of $2.7 million of sales proceeds related to a long-term contract with a specific customer. These proceeds are held in escrow until certain billing milestones are achieved, and then specified amounts are transferred to the Company's operating accounts. Restricted cash also contained $0.6 million related to a performance guarantee related to an international customer sales contract.
7. Deferred Revenue
Deferred revenue consisted of the following at December 31 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | Current | | Long-Term | | Total | | Current | | Long-Term | | Total |
| Warranty: | | | | | | | | | | | |
| TASER Weapons | $ | 12,501 |
| | $ | 18,619 |
| | $ | 31,120 |
| | $ | 9,980 |
| | $ | 17,319 |
| | $ | 27,299 |
|
| Software and Sensors | 6,293 |
| | 4,195 |
| | 10,488 |
| | 3,979 |
| | 2,926 |
| | 6,905 |
|
| | 18,794 |
| | 22,814 |
| | 41,608 |
| | 13,959 |
| | 20,245 |
| | 34,204 |
|
| Hardware: | | | | | | | | | | | |
| TASER Weapons | 4,164 |
| | 11,401 |
| | 15,565 |
| | 1,702 |
| | 4,390 |
| | 6,092 |
|
| Software and Sensors | 16,956 |
| | 14,781 |
| | 31,737 |
| | 9,850 |
| | 11,205 |
| | 21,055 |
|
| | 21,120 |
| | 26,182 |
| | 47,302 |
| | 11,552 |
| | 15,595 |
| | 27,147 |
|
| Software and Sensors Services | 30,487 |
| | 5,885 |
| | 36,372 |
| | 19,626 |
| | 4,214 |
| | 23,840 |
|
| Total | $ | 70,401 |
| | $ | 54,881 |
| | $ | 125,282 |
| | $ | 45,137 |
| | $ | 40,054 |
| | $ | 85,191 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | Current | | Long-Term | | Total | | Current | | Long-Term | | Total |
| TASER Weapons | $ | 16,665 |
| | $ | 30,020 |
| | $ | 46,685 |
| | $ | 11,682 |
| | $ | 21,709 |
| | $ | 33,391 |
|
| Software and Sensors | 53,736 |
| | 24,861 |
| | 78,597 |
| | 33,455 |
| | 18,345 |
| | 51,800 |
|
| Total | $ | 70,401 |
| | $ | 54,881 |
| | $ | 125,282 |
| | $ | 45,137 |
| | $ | 40,054 |
| | $ | 85,191 |
|
8. Accrued Liabilities
Accrued liabilities consisted of the following at December 31 (in thousands):
|
| | | | | | | |
| | 2019 | | 2018 |
| Accrued salaries, benefits and bonus | $ | 24,737 |
| | $ | 19,063 |
|
| Accrued professional, consulting and lobbying fees | 3,235 |
| | 4,894 |
|
| Accrued warranty expense | 1,476 |
| | 898 |
|
| Accrued income and other taxes | 3,362 |
| | 4,167 |
|
| Other accrued expenses | 12,191 |
| | 12,070 |
|
| Accrued liabilities | $ | 45,001 |
| | $ | 41,092 |
|
|
| | | | | | | |
| | 2017 | | 2016 |
| Accrued salaries, benefits and bonus | $ | 8,957 |
| | $ | 6,474 |
|
| Accrued professional, consulting and lobbying fees | 3,870 |
| | 3,673 |
|
| Accrued warranty expense | 644 |
| | 780 |
|
| Accrued income and other taxes | 2,558 |
| | 4,581 |
|
| Other accrued expenses | 7,473 |
| | 2,740 |
|
| Accrued liabilities | $ | 23,502 |
| | $ | 18,248 |
|
9. Commitments and Contingencies
Operating and capital lease obligations
The Company hasData Storage Purchase Commitment
In June 2019, we entered into operating leasesa purchase agreement for various office space,cloud data storage facilitieswith a 3 year term beginning July 1, 2019. The purchase agreement includes a total commitment of $50.0 million, with an up-front prepayment of $15.0 million that was made in July 2019. The current balance of the prepayment is included within prepaid expenses and equipment. As of December 31, 2017, the Company's leases are for terms ranging from less than one year to six years. The Company's leases generally contain multi-year renewal options and escalation clauses. Rent expenseother current assets on our consolidated balance sheet. Storage fees under all operating leases, including both cancelable and non-cancelable leases, was $2.9 million, $1.8 million and $1.0this agreement were $7.0 million for the yearsyear ended December 31, 2017, 2016,2019, and 2015, respectively.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Future minimum lease payments under non-cancelable leasesservice sales. The remaining purchase commitment at December 31, 2017, are as follows (in thousands):2019 was $43.0 million.
|
| | | | | | | |
| | Operating | | Capital |
| 2018 | $ | 2,313 |
| | $ | 40 |
|
| 2019 | 1,893 |
| | 40 |
|
| 2020 | 1,236 |
| | 36 |
|
| 2021 | 1,097 |
| | — |
|
| 2022 | 1,073 |
| | — |
|
| Thereafter | 43 |
| | — |
|
| Total minimum lease payments | $ | 7,655 |
| | 116 |
|
| Less: Amount representing interest | | | (7 | ) |
| Capital lease obligation | | | $ | 109 |
|
Purchase commitments
The CompanyWe routinely entersenter into cancellablecancelable and non-cancellablenon-cancelable purchase orders with many of itsour key vendors. Based on the strategic relationships with many of these vendors, the Company’sour ability to cancel these purchase orders and maintain a favorable relationship would be limited. As of December 31, 2017, the Company has2019, we had approximately $51.9$137.9 million of open purchase orders.
Litigation
Product Litigation
The Company isAs a manufacturer of weapons and other law enforcement tools used in high-risk field environments, we are often the subject of products liability litigation concerning the use of our products. We are currently named as a defendant in sixeight lawsuits in which the plaintiffs allege either wrongful death or personal injury in situations in which a TASER CEWCED was used by law enforcement officers in connection with arrests.arrests or training. 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 or negligent design,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 carrier has settled such lawsuits over the Company’s objection where the risk exceeds 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,such legal proceeding will have a material effect on our financial position, results of operations, or cash flows. We are self-insured for the Company implemented new risk management strategies, including revisionsfirst $5.0 million of any product claim made after 2014. No judgment or settlement has ever exceeded this amount in any products case. We continue to 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 through the date of these financial statements,maintain product liability cases have been reduced from 55 active to six active cases.
Management believes that pre-2009 cases have a different risk profile than cases which have occurred sinceinsurance coverage, including an insurance policy fronting arrangement, above our self-insured retention with various limits depending on 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 practice of aggressively defending and generally not settling litigation except in very limited and unusual circumstances as described above.period.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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
| | Jurisdiction | | Claim Type | | Status |
Derbyshire | | Nov-09 | | Ontario, Canada Superior Court of Justice | | Officer Injury | | Discovery Phase. Trial scheduled for October 14, 2019 |
Shymko | | Dec-10 | | The Queen's Bench, Winnipeg Centre, Manitoba | | Wrongful Death | | Pleading Phase |
Ramsey | | Jan-12 | | 12th Judicial Circuit Court, Broward County, FL | | Wrongful Death | | Discovery Phase |
Bennett | | Sep-15 | | 11th Judicial Circuit Court, Miami-Dade County, FL | | Wrongful Death | | Discovery Phase. |
Masters | | Nov-16 | | U.S. District Court, Western District of Missouri | | Suspect Injury | | Discovery Phase. Trial scheduled for December 10, 2018 |
Taylor | | Mar-17 | | U.S. District Court, Southern District of Texas | | Officer Injury | | Discovery Phase. Docket call August 31, 2018 |
There are no product litigation matters in which the Company is involved that are currently on appeal.
The following case was dismissed during the fourth quarter of 2017:
|
| | | | | | | | |
Plaintiff | | Month
Served
| | Jurisdiction | | Claim Type | | Status |
Suarez | | Sep-16 | | U.S. District Court, Southern District of Florida | | Wrongful Death | | Dismissed |
The claims of each of these lawsuits have been submitted to the Company’s insurance carriers that maintained insurance coverage during the applicable periods. The Company continues to maintain product liability insurance coverage with varying limits and deductibles. The following table provides information regarding 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 |
Other Litigation
Phazzer Patent Infringement Litigation
In March 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 granted Axon’s Motion for Sanctions and for a Permanent Injunction against Florida-based Phazzer, banning sales of the infringing Phazzer Enforcer CEWs and dart cartridges. The injunction prohibits Phazzer and its officers, agents, employees, and anyone else acting in concert with them, from making, using, offering for sale, selling, distributing, donating, importing or exporting Phazzer CEWs and associated cartridges. The Court also awarded Axon compensatory and treble damages for willful infringement, as well as its reasonable attorneys’ fees and costs. Both Phazzer and its U.S. distributors are barred from exporting CEWs or cartridges to fill foreign orders.
In imposing severe sanctions against Phazzer, including an award of Axon’s attorneys’ fees and costs, 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.”
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Axon’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. The Court found that patent was “valid, enforceable, and infringed by Phazzer.” The injunction will remain in effect until the patent expires, and includes any CEW or device not colorably different from the Phazzer Enforcer CEW.
The Axon trademark subject to 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 Court found the trademark “valid and enforceable, not generic, functional, or merely descriptive, and infringed by Phazzer.” The permanent injunction covers all Phazzer CEW dart cartridges that are confusingly similar to, or not more than a colorable imitation of, TASER CEW cartridges, and includes Phazzer product numbers 1-DC15, 1-DC21, 1-DC25, 1-DC21-SIDT, 1-PB30, 1-PB8F, 1-PB15943, 1-RB30, 1-PA30, and 1-LOWIMPT2015. Phazzer has appealed the judgment and injunction.
The Court expressly found that Phazzer cartridges currently marketed and sold as compatible with TASER brand CEWs embody the protected appearance and constitute infringing products enjoined under its Order. Phazzer was also ordered by the Court “not [to] challenge or continue to challenge the validity or enforceability of the ‘789 Registration in any manner in any forum, including the USPTO.” Accordingly, Phazzer’s pending USPTO cancellation action, which was stayed while the litigation ran its course, will be dismissed. On August 10 2017, Phazzer filed a notice of appeal.
Digital Ally Patent Litigation
In March 2016, the Company was served with a second amended complaintmatter filed by Digital Ally Inc. (“Digital”) in the Federal District Court for the District of Kansas alleging patent infringement of two patents and a variety of antitrust and unfair competition claims, seeking aregarding our Axon Signal technology. Axon was granted summary judgment of infringement, monetary damages, a permanent injunction, punitive damagesnon-infringement on June 17, 2019 and attorneys’ fees and costs. On January 12, 2017, the court granted the Company’s motion to dismiss all six antitrust claims andjudgment was entered final judgment on those claims in the Company’sour favor on April 14, 2017. Digital Ally has appealed that judgment to the Federal Circuit.
The Company filed inter parte reviews ("IPRs") with the USPTO to invalidate Digital Ally’s patents-in-suit regarding its auto-activation camera technology. On June 6, 2017, the USPTO instituted one IPR on patent No. 8,781,292 (the “’292 patent”). Digital Ally thereafter filed a motion to dismiss the ‘292 patent with prejudice and a covenant not to sue the Company in the district court litigation. Digital Ally then filed a motion to amend all claims of the ‘292 patent in the IPR proceedings, whichDigital's claims. Digital's appeal is setscheduled for oral argument on February 23, 2018. On July 7, 2017,April 6, 2020.
We are also a defendant in a consumer class action lawsuit filed in the USPTO rejected the Company’s IPR filed against claim 10District of Digital Ally's patent No. 9,253,452 (the “452 patent”Nevada on April 9, 2019 by Douglas Richey (“Richey”). The Company filedcase alleges the TASER Pulse, X2 and X26P CEDs have a petition to reconsider that decision, which remains pending with the USPTO. This patent claim 10 is being challenged in District Courtfaulty safety switch based on fraud claims, invalidity claims and non-infringement claims filed by the Company. Although the patent office later also rejected the Company’s IPR on claim 1 of the ‘452 patent, Digital Ally has dismissed that claim from the litigation. In November 2017, the district court liftedRichey’s Pulse allegedly discharging inside its litigation stay and enteredneoprene case in a new scheduling order on December 20, 2017. A claim construction hearing on Digital Ally’s sole remaining independent claim 10 of the ‘452 patent will take place on March 7, 2018.
Pending Patent Appeals
Two appeals are pendingjacket pocket without injury. Any such discharge was likely due to static electricity, as disclosed in the Federal Circuit arising out of patent litigation involving the district court’s dismissal of Digital Ally's antitrust claims against the Company, and a judgment and permanent injunction in the Company's favor against Phazzer Electronics Inc., as noted in the following table.
|
| | | | | | | | |
Appellant | | Month Served | | Jurisdiction | | Claim Type | | Active Cases and Cases on
Appeal
|
Digital Ally | | Mar-16
| | U.S. District Court, District of Kansas, appealed to Federal Circuit
| | Antitrust Claims | | Axon's motion to dismiss antitrust claims was granted on January 12, 2017 with judgment entered in Axon's favor on April 14, 2017. Digital Ally filed its notice of appeal on April 20, 2017. The appeal has been fully briefed.
|
Phazzer | | Mar-16
| | U.S. District Court, Middle District of Florida, appealed to Federal Circuit
| | Judgment and Permanent Injunction Patent Infringement
| | Axon received judgment in its favor and a permanent injunction against Phazzer’s CEW and cartridge infringement on July 21, 2017. Phazzer filed a notice of appeal on August 10, 2017. The appeal is in the briefing stage.
|
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Antoine di Zazzo Arbitration
In April 2016, the Company was served with a notice of arbitration claim filed by Antoine di Zazzo, the Company’s former distributor 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 in controversy is approximately $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. In relatedclaim and the propriety of any class certification.
The litigation information in this note is current through the date of these financial statements.
U.S. Federal Trade Commission Enforcement Action
The U.S. Federal Trade Commission (“FTC”) filed an enforcement action on January 3, 2020 regarding Axon’s May 2018 acquisition of Vievu LLC from Safariland LLC. The FTC alleges the merger was anticompetitive and adversely affected the body worn camera ("BWC") and digital evidence management systems ("DEMS") market for “large metropolitan police departments.” The administrative hearing is set for May 19, 2020. If successful, the FTC may require us to divest Vievu and other assets, which could be material to Axon. We are vigorously defending the matter. At this time, we cannot predict the eventual scope, duration, or outcome of this request and accordingly we have not recorded any liability in the Tribunalaccompanying financial statements.
Also on January 3, 2020, we sued the FTC in the District of Commerce of Marseille, judgment was entered in favorArizona for declaratory and injunctive relief alleging the FTC’s structure and administrative processes violate Article II of the CompanyU.S. Constitution and our Fifth Amendment rights to due process and equal protection. We further seek a declaration on January 18, 2018, and Mr. di Zazzo has appealed.
VieVu Commercial Litigation
In February 2017, the Company was served with a complaint filed by VieVu LLC ("VieVu") alleging tortious interference with a business expectancy. In May 2017, the Company filed and served a complaint against VieVu in the U.S. District Court for Arizona for violationmerits of the Lanham Act. On February 14, 2018,Vievu acquisition’s lawfulness. Motions for a preliminary injunction and a stay of the Company and VieVu entered into an agreement for the dismissal of both lawsuits, with each party to bear its own attorney’s fees and costs.FTC administrative proceedings remain pending.
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 it. 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 itsour 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 updates itsupdate accruals as matters progress over time.
Based on the Company'sour assessment of outstanding litigation and claims as of December 31, 2017, the Company has2019, 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 our insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on the Company'sour operating results, financial condition or cash flows.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 itsour Axon cameras and related technologies. Certain of the Company'sour letters of credit contracts and surety bonds have stated expiration dates, with others being released as the contractual performance terms are completed. The Company expectsWe expect to fulfill all contractual performance obligations related to outstanding guarantees. At December 31, 2017, the Company2019, we had an outstanding letterletters of credit of approximately $2.7 million, which isare expected to expire in May 2018.2020 and September 2021. Additionally, the Companywe had approximately $7.4$24.0 million of outstanding surety bonds at December 31, 2017,2019, with $1.0 million expiring in 2018, $0.1$0.5 million expiring in 2020, $2.3 million expiring in 2021, $2.3 million expiring in 2022, $7.5 million expiring in 2023 and the remaining $4.0$10.5 million expiring in 2023.2024.
10. Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code which impacted 2017 including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent for tax years beginning 2018.
ASC 740 requires a company to record the effects of a tax law change in the period of enactment, however, shortly after the enactment of 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 in the tax law. The measurement period ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In connection with the Company's initial analysis of the impact of the Tax Act, it was able to make a reasonable estimate of the impact of the Tax Act and recorded a provisional net tax expense of $8.0 million in the period ended December 31, 2017, primarily related to the impact of the tax rate reduction on the Company's deferred tax assets and deferred tax liabilities. This amount includes a $0.4 million increase in the Company's valuation allowance.
Reasonable estimates have also been made for the effects of other provisions of the Tax Act, but they do not have a material impact on the Company’s consolidated financial statements. These estimates may be impacted by the need for further analysis, future clarification and guidance regarding available tax accounting methods and elections. Any subsequent adjustments to these provisional amounts will be recorded in the quarter in 2018 when the analysis is complete.
The Company has completed its analysis of the one-time transition tax on undistributed earnings of its foreign subsidiaries, the Alternative Minimum Tax (“AMT”), and the Base Erosion Anti-abuse Tax (“BEAT”) and is not being affected by these provisions.
Income (loss) before income taxes included the following components for the years ended December 31 (in thousands):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| United States | $ | (1,449 | ) | | $ | 25,751 |
| | $ | 14,978 |
|
| Foreign | 3,519 |
| | 2,353 |
| | 783 |
|
| Total | $ | 2,070 |
| | $ | 28,104 |
| | $ | 15,761 |
|
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| United States | $ | 14,978 |
| | $ | 38,414 |
| | $ | 42,761 |
|
| Foreign | 783 |
| | (6,917 | ) | | (7,400 | ) |
| Total | $ | 15,761 |
| | $ | 31,497 |
| | $ | 35,361 |
|
Significant components of the Company’sprovision for income taxes are as follows for the years ended December 31 (in thousands):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Current: | | | | | |
| Federal | $ | 4,247 |
| | $ | 4,900 |
| | $ | 6,039 |
|
| State | 2,414 |
| | 1,377 |
| | 1,263 |
|
| Foreign | 1,533 |
| | 228 |
| | 656 |
|
| Total current | 8,194 |
| | 6,505 |
| | 7,958 |
|
| Deferred: | | | | | |
| Federal | (6,060 | ) | | (8,382 | ) | | 4,539 |
|
| State | (1,665 | ) | | (364 | ) | | (1,631 | ) |
| Foreign | (264 | ) | | (3 | ) | | (78 | ) |
| Total deferred | (7,989 | ) | | (8,749 | ) | | 2,830 |
|
| Tax impact of unrecorded tax benefits liability | 983 |
| | 1,143 |
| | (234 | ) |
| Provision for income taxes (Income tax benefit) | $ | 1,188 |
| | $ | (1,101 | ) | | $ | 10,554 |
|
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A reconciliation of our effective income tax rate to the federal statutory rate follows for the years ended December 31 (in thousands):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Federal income tax at the statutory rate | $ | 435 |
| | $ | 5,902 |
| | $ | 5,518 |
|
| State income taxes, net of federal benefit | 526 |
| | (215 | ) | | 339 |
|
| Difference between statutory and foreign tax rates | 43 |
| | 7 |
| | (560 | ) |
Permanent differences (1) | 1,139 |
| | 725 |
| | 300 |
|
| Executive compensation limitation | 7,596 |
| | 1,167 |
| | — |
|
| Research and development | (4,911 | ) | | (6,908 | ) | | (2,380 | ) |
| Return to provision adjustment | (9 | ) | | 1,780 |
| | 23 |
|
| Change in liability for unrecognized tax benefits | 1,191 |
| | 1,768 |
| | 7 |
|
| Excess stock-based compensation benefit | (4,999 | ) | | (8,907 | ) | | (1,819 | ) |
| Change in valuation allowance | 368 |
| | 1,984 |
| | 1,949 |
|
| Tax effects of intercompany transactions | 16 |
| | 1,004 |
| | (277 | ) |
Adjustments to deferred tax assets, net resulting from enactment of new tax law (2) | — |
| | — |
| | 7,601 |
|
| Other | (207 | ) | | 592 |
| | (147 | ) |
| Provision for income taxes (Income tax benefit) | $ | 1,188 |
| | $ | (1,101 | ) | | $ | 10,554 |
|
| Effective tax rate | 57.4 | % | | (3.9 | )% | | 66.9 | % |
| |
(1) | Permanent differences include certain expenses that are not deductible for tax purposes including meals and entertainment, certain transaction costs, lobbying fees, and taxable income as a result of global intangible low-tax income ("GILTI") offset by favorable items including the domestic production activities deduction, for tax year 2017, and a deduction for foreign derived intangible income ("FDII") beginning in 2018. |
| |
(2) | The adjustment to deferred tax assets of $7.6 million in 2017 was a result of the impact of changes in the U.S. federal effective tax rate, as well as a reduction of the stock-based compensation deferred tax asset due to expected permanent limitations on its deductibility for certain key executives under the Tax Cuts and Jobs Act. |
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Significant components of our deferred income tax assets and liabilities are as follows at December 31 (in thousands):
|
| | | | | | | |
| | 2019 | | 2018 |
| Deferred income tax assets: | | | |
| Net operating loss carryforward | $ | 2,341 |
| | $ | 2,347 |
|
| Deferred revenue | 15,348 |
| | 13,304 |
|
| Deferred compensation | 971 |
| | 858 |
|
| Lease liability | 2,460 |
| | — |
|
| Inventory reserve | 1,258 |
| | 1,294 |
|
| Stock-based compensation | 10,769 |
| | 3,758 |
|
| Amortization | 1,133 |
| | 412 |
|
| Research and development tax credit carryforward | 4,957 |
| | 5,193 |
|
| Reserves, accruals, and other | 3,394 |
| | 3,094 |
|
| Total deferred income tax assets | 42,631 |
| | 30,260 |
|
| Deferred income tax liabilities: | | | |
| Customer contract asset | (883 | ) | | — |
|
| Right of use asset | (2,228 | ) | | — |
|
| Depreciation | (3,715 | ) | | (2,195 | ) |
| Amortization | (62 | ) | | (57 | ) |
| Other | (1,237 | ) | | (1,232 | ) |
| Total deferred income tax liabilities | (8,125 | ) | | (3,484 | ) |
| Net deferred income tax assets before valuation allowance | 34,506 |
| | 26,776 |
|
| Valuation allowance | (7,172 | ) | | (7,429 | ) |
| Net deferred income tax assets | $ | 27,334 |
| | $ | 19,347 |
|
|
| | | | | | | |
| | 2017 | | 2016 |
| Deferred income tax assets: | | | |
| Net operating loss carryforward | $ | 3,691 |
| | $ | 2,405 |
|
| Deferred revenue | 9,442 |
| | 11,537 |
|
| Deferred compensation | 1,109 |
| | 1,695 |
|
| Inventory reserve | 702 |
| | 1,126 |
|
| Non-qualified and non-employee stock option expense | 3,704 |
| | 4,410 |
|
| Capitalized research and development | 485 |
| | 1,991 |
|
| Research and development tax credit carryforward | 3,817 |
| | 2,722 |
|
| Reserves, accruals, and other | 1,921 |
| | 1,239 |
|
| Total deferred income tax assets | 24,871 |
| | 27,125 |
|
| Deferred income tax liabilities: | | | |
| Depreciation | (2,027 | ) | | (2,364 | ) |
| Amortization | (1,398 | ) | | (1,473 | ) |
| Other | (256 | ) | | (294 | ) |
| Total deferred income tax liabilities | (3,681 | ) | | (4,131 | ) |
| Net deferred income tax assets before valuation allowance | 21,190 |
| | 22,994 |
|
| Valuation allowance | (5,435 | ) | | (3,479 | ) |
| Net deferred income tax assets | $ | 15,755 |
| | $ | 19,515 |
|
For the year ended December 31, 2017, the provision for income taxes, in accordance with the provisions set forth in ASC 2016-09, included $1.8 million of tax expense resulting from stock-based compensation tax benefits that were recorded as a decrease in the provision for income taxes, and for the years ended December 31, 2016 and 2015, $1.4 million and $6.9 million, respectively, of tax expense resulting from stock-based compensation tax benefits thatWe have been recorded as increases to additional paid-in capital on the consolidated statement of changes in stockholders’ equity.
The Company has $4.5$1.2 million of state net operating losses (“NOLs”) which expire at various dates between 20192029 and 2036. The CompanyWe also has Federal NOLshave a federal NOL of $2.2$0.8 million which expire between 2035 andexpires in 2036, and areis subject to limitation under
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Internal Revenue Code (“IRC”) Section 382. The Company hasWe have $0.1 million of federal R&D credits, which expire in 2024between 2034 and 2027,2037, and are also subject to limitation under IRC Section 382. The Company has $7.3We have $9.2 million of Arizona R&D credits carrying forward, which expire at various dates between 20182020 and 2032.2034. In Australia, the U.K., Canada, and Germany, the Company has $2.2Australia, we have $8.0 million, $10.3 million, $1.6$1.2 million, and $0.3$1.4 million of NOLs, respectively, which expire at various dates or may be carried forward indefinitely.
In preparing the Company’sour consolidated financial statements, management haswe have assessed the likelihood that deferred income tax assets will be realized from future taxable income. In evaluating the ability to recover its deferred income tax assets, management considerswe consider all available evidence, positive and negative, including the Company’sour operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred income tax assets will not be realized. Management exercisesWe exercise significant judgment in determining the Company’s provisionsour provision for income taxes, itsour deferred income tax assets and liabilities, and itsour future taxable income for purposes of assessing itsour ability to utilize any future tax benefit from itsour deferred income 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 regards to future realization of deferred tax assets. As of December 31, 2017, the Company continues2019, we continue to demonstrate three-year cumulative pre-taxpositive income in the U.S. federal and Arizonastate tax jurisdictions; however, thewe have Arizona R&D Tax Credits start to expire in 2018 with a significant tranche with a gross value of $1.2 milliontax credits expiring in 2019.unutilized each year. Therefore, management haswe have concluded that it is more likely than not that a portion of the Company’s U.S.our Arizona R&D deferred tax assetsasset will not be realized.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2017, the Company has2019, we have cumulative pre-tax losses in Australia, the U.K., and Canada, and a history of losses in 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,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. Although we also have cumulative pre-tax losses in Australia, we have determined that sufficient deferred tax liabilities will reverse in order to realize all assets except one long-lived intangible asset where there is not an expectation that the deferred tax asset may be realized. Therefore, we have recorded a partial valuation allowance for Australia.
Significant componentsWe consider the undistributed earnings of certain non-U.S. subsidiaries to be indefinitely reinvested outside of the provisionUnited 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 income taxes are as followsreinvestment of those subsidiary earnings. We project that our foreign earnings will be utilized offshore for the years ended December 31 (in thousands): |
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Current: | | | | | |
| Federal | $ | 6,039 |
| | $ | 16,346 |
| | $ | 13,594 |
|
| State | 1,263 |
| | 1,534 |
| | 996 |
|
| Foreign | 656 |
| | 1,050 |
| | — |
|
| Total current | 7,958 |
| | 18,930 |
| | 14,590 |
|
| Deferred: | | | | | |
| Federal | 4,539 |
| | (4,145 | ) | | 288 |
|
| State | (1,631 | ) | | (977 | ) | | 984 |
|
| Foreign | (78 | ) | | (45 | ) | | (278 | ) |
| Total deferred | 2,830 |
| | (5,167 | ) | | 994 |
|
| Tax provision recorded as an increase (decrease) in liability for unrecorded tax benefits | (234 | ) | | 437 |
| | (156 | ) |
| Provision for income taxes | $ | 10,554 |
| | $ | 14,200 |
| | $ | 15,428 |
|
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A reconciliationworking capital and future foreign growth. The determination of the Company’s effectiveunrecognized deferred tax liability on those undistributed earnings is not practicable due to our legal entity structure and the complexity of U.S. and local country tax laws. If we decide to repatriate the undistributed foreign earnings, we will need to recognize the income tax rate toeffects in the federal statutory rate follows for the years ended December 31 (in thousands):period we change our assertion on indefinite reinvestment.
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Federal income tax at the statutory rate | $ | 5,518 |
| | $ | 11,024 |
| | $ | 12,347 |
|
| State income taxes, net of federal benefit | 339 |
| | 889 |
| | 1,061 |
|
| Difference between statutory and foreign tax rates | (560 | ) | | 1,521 |
| | 2,442 |
|
Permanent differences (i) | 300 |
| | (457 | ) | | (205 | ) |
| Research and development | (2,380 | ) | | (1,928 | ) | | (1,050 | ) |
| Return to provision adjustment | 23 |
| | 327 |
| | (67 | ) |
| Change in liability for unrecognized tax benefits | 7 |
| | 700 |
| | (156 | ) |
| Excess stock-based compensation benefit | (1,819 | ) | | (77 | ) | | (144 | ) |
| Change in valuation allowance | 1,949 |
| | 1,779 |
| | 1,200 |
|
| Tax effects of intercompany transactions | (277 | ) | | 630 |
| | — |
|
Adjustments to deferreds resulting from enactment of new tax law(ii) | 7,601 |
| | — |
| | — |
|
| Other | (147 | ) | | (208 | ) | | — |
|
| Provision for income taxes | $ | 10,554 |
| | $ | 14,200 |
| | $ | 15,428 |
|
| Effective tax rate | 66.9 | % | | 45.1 | % | | 43.6 | % |
| |
(i)
| Permanent differences include certain expenses that are not deductible for tax purposes including lobbying fees as well as favorable items including the domestic production activities deduction. |
| |
(ii)
| The adjustment to deferreds of $7.6 million was a result of the impact of changes in the U.S. federal effective tax rate, as well as a reduction of the stock-based compensation deferred tax asset due to expected permanent limitations on its deductibility for certain key executives under the recently enacted tax law. |
The Company has completedWe complete R&D tax credit studies which identified approximately $15.2 million infor each year that an R&D tax creditscredit is claimed for federal, Arizona, and California income tax purposes related to the 2003 through 2017 tax years.purposes. Management has made the determination that it is more likely than not that the full benefit of the R&D tax credit will not be sustained on examination and recorded a liability for unrecognized tax benefits of $4.1$6.1 million as of December 31, 2017.2019. In addition, management accrued approximately $0.1 million for estimated uncertain tax positions related to certain statefederal income tax liabilities. Should the unrecognized tax benefit of $4.2$6.2 million be recognized, the Company’sour effective tax rate would be favorably impacted.
The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statements of operations. As of December 31, 2017 and 2016, the Company had accrued interest of $0.1 million.
The following table presents a roll forward of the Company'sour liability for unrecognized tax benefits, exclusive of accrued interest, as of December 31 (in thousands):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Balance, beginning of period | $ | 6,058 |
| | $ | 4,243 |
| | $ | 4,050 |
|
| Increase (decrease) in previous year tax positions | (615 | ) | | 213 |
| | 379 |
|
| Increase in current year tax positions | 1,749 |
| | 1,982 |
| | 587 |
|
| Decrease due to lapse of statutes of limitations | (331 | ) | | (380 | ) | | (773 | ) |
| Balance, end of period | $ | 6,861 |
| | $ | 6,058 |
| | $ | 4,243 |
|
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Balance, beginning of period | $ | 4,050 |
| | $ | 3,396 |
| | $ | 3,325 |
|
| Increase (decrease) in previous year tax positions | 123 |
| | — |
| | (389 | ) |
| Increase in current year tax positions | 587 |
| | 448 |
| | 270 |
|
| Decrease due to lapse of statute of limitations | (773 | ) | | — |
| | (14 | ) |
| Increase related to adjustment of previous estimates of activity | 256 |
| | 206 |
| | 204 |
|
| Balance, end of period | $ | 4,243 |
| | $ | 4,050 |
| | $ | 3,396 |
|
Federal income tax returns for 20142016 through 20172018 remain open to examination by the U.S. Internal Revenue Service (the “IRS”), while state and local income tax returns for 2015 through 2018 also generally remain open to examination by state taxing authorities. The 20042005 through 20132014 income tax returns are only open to the extent that net operating loss or other tax attributes carrying forward from those years were utilized in 20142015 through 2017.2018. The foreign tax returns for 20132015 through 20172018 also generally remain open to examination. The Company has not been notifiedOur U.S. federal income tax return for fiscal year 2016 is currently under audit by any major federal, foreign, or state tax jurisdictions that it will be subject to examination.the Internal Revenue Service.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company considers 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 needsWe recognize interest and the Company's specific plans for reinvestment of those subsidiary earnings. It is not practicable to estimate the amount of the deferred tax liability, if any,penalties related to investments in those foreign subsidiaries. Ifunrecognized tax benefits within the Company decides to repatriate the foreign earnings, it would need to adjust itsprovision (benefit) for income tax provisionexpense line in the period it determined that the earnings will no longer be indefinitely invested outside the United States.accompanying consolidated statements of operations and comprehensive income. As of December 31, 2019 and 2018, we had accrued interest of $0.2 million and $0.1 million, respectively.
11. 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 December 31, 20172019 and 2016,2018, there were no0 borrowings under the line. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. As of December 31, 2017, the Company2019, we had letters of credit outstanding of approximately $2.7 million under the facility and available borrowing of $7.3$47.3 million. The line is secured by substantially all ofAdvances under the assets of 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 December 31, 2017, the Company’s2019, our funded debt to EBITDA ratio was 0.340.0004 to 1.00.
12. Stockholders’ Equity
Common Stock and Preferred Stock
The Company hasWe have authorized the issuance of two2 classes of stock designated as “common stock” and “preferred stock,” each having a par value of $0.00001 per share. The Company isWe are authorized to issue 200 million shares of common stock and 25 million shares of preferred stock.
Stock Repurchase
In February 2016, the Company announced that Axon'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 year ended December 31, 2016, the Company purchased, under a Rule 10b5-1 plan, approximately 1.8 million common shares for a total cost of approximately $33.7 million, or a weighted average cost of $18.90 per share. As of December 31, 2017 and 2016, $16.3 million remained available under the plan for future purchases. During 2016, the Company suspended its 10b-5 plan, and any future purchases would be discretionary.
Stock-based Compensation Plans
The Company hasWe 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 510 years and a contractual maturity of ten years.
On February 26, 2016,12, 2019, our shareholders approved the Company’s2019 Plan, which was adopted by the Board of Directors approvedto reserve a sufficient number of shares to facilitate our eXponential Stock Performance Plan ("XSPP") and grants of eXponential Stock Units ("XSUs") under the 2016 Stock Incentive Plan (the “2016 Plan"), which was subsequently approved by stockholders at the Annual Meeting of Stockholders on May 26, 2016.plan. Under the 20162019 Plan, the Companywe reserved for future grants: (i) 2.06.0 million shares of common stock, plus (ii) the number of shares of common stock that were authorized but unissued under the Company’s 2013our 2018 Stock Incentive Plan (the “2013“2018 Plan”) and all prior Company equity plans as of the effective date of the 20162019 Plan, and (iii) the number of shares of stock that have been granted under the 2013 Plan or the 2009 Stock Incentive Planprior plans that either terminate, expire or lapse for any reason after the effective date of the 20162019 Plan. As of December 31, 2017,2019, approximately 0.82.0 million shares remain available for future grants. Shares issued upon exercise of stock awards from these plans have historically been issued from the Company’sour authorized unissued shares.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Performance-based stock awards
The Company hasWe 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 theour operating performance, of the Company, 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 implicitrequisite service period, (the longer ofwhich is defined as the period the performance condition is expected to be achievedlongest explicit, implicit or the requiredderived service period)period based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date. For both service-based and performance-based RSUs, we account for forfeitures as they occur as a reduction to stock-based compensation expense and additional paid-in-capital
For performance-based options with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized 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.
CEO Performance Award
On May 24, 2018, our stockholders approved the CEO Performance Award of 6,365,856 stock option awards. The CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational goals (performance conditions) and market capitalization goals (market conditions), assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each vesting date. Each of the 12 vesting tranches of the CEO Performance Award have a 10-year contractual term and will vest upon certification by the Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of the following eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA have been met for the previous four consecutive fiscal quarters. Adjusted EBITDA for purposes of the CEO Performance Award ("Adjusted EBITDA (CEO Performance Award)") is defined as net income (loss) attributable to common stockholders before interest expense, investment interest income, provision (benefit) for income taxes, depreciation and amortization,and stock-based compensation expense.
|
| | |
Eight Separate Revenue Goals (1) (in thousands) | | Eight Separate Adjusted EBITDA (CEO Performance Award) Goals (in thousands) |
| Goal #1, $710,058 | | Goal #9, $125,000 |
| Goal #2, $860,058 | | Goal #10, $155,000 |
| Goal #3, $1,010,058 | | Goal #11, $175,000 |
| Goal #4, $1,210,058 | | Goal #12, $190,000 |
| Goal #5, $1,410,058 | | Goal #13, $200,000 |
| Goal #6, $1,610,058 | | Goal #14, $210,000 |
| Goal #7, $1,810,058 | | Goal #15, $220,000 |
| Goal #8, $2,010,058 | | Goal #16, $230,000 |
(1) In connection with the acquisition of Vievu that was completed during 2018, the revenue goals were adjusted for the acquiree's Target Revenue, as defined in the CEO Performance Award agreement.
As of December 31, 2019, the following operational goals were considered probable of achievement:
Total revenue of $710.1 million, $860.1 million, and $1,010.1 million; and
| |
| • | Adjusted EBITDA (CEO Performance Award) of $125.0 million, $155.0 million, $175.0 million, $190.0 million, $200.0 million, and $210.0 million. |
Stock-based compensation expense associated with the CEO Performance Award is recognized over the longer of the expected achievement period for each pair of market capitalization and operational goals, beginning at the point in time when the relevant operational goal is considered probable of being met. The probability of meeting an operational goal and the expected achievement point in time for meeting a probable operational goal are based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis. Even though no tranches of the CEO Performance Award vest unless a market capitalization and a matching operational goal are both achieved, stock-based compensation expense is recognized when an operational goal is considered probable of achievement regardless of whether a market capitalization goal is actually achieved. 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.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
eXponential Stock Performance Plan
On February 12, 2019, our shareholders approved the 2019 Plan, which was adopted by the Board of Directors to reserve a sufficient number of shares to facilitate our 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
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
Restricted Stock Units
The following table summarizes RSU activity for the years ended December 31 (number of units and aggregate intrinsic value in thousands):
|
| | | | | | | | | | | | | | | | | | | | | |
| | 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 |
| | | |
| | | |
| | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | 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 | 1,330 |
| | $ | 20.40 |
| | 1,139 |
| | $ | 19.30 |
| | 1,226 |
| | $ | 13.23 |
|
| Granted | 1,731 |
| | 24.59 |
| | 718 |
| | 19.75 |
| | 516 |
| | 26.18 |
|
| Released | (519 | ) | | 18.85 |
| | (414 | ) | | 15.91 |
| | (488 | ) | | 11.82 |
|
| Forfeited | (194 | ) | | 24.61 |
| | (113 | ) | | 21.65 |
| | (115 | ) | | 16.72 |
|
| Units outstanding, end of year | 2,348 |
| | 23.47 |
| | 1,330 |
| | 20.40 |
| | 1,139 |
| | 19.30 |
|
| Aggregate intrinsic value at year end | $ | 62,222 |
| | | |
| | | |
| | |
Aggregate intrinsic value represents the Company’sour closing stock price on the last trading day of the period, which was $26.50$73.28 per share at December 29, 2017,31, 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, was $14.5 million.respectively. Certain RSUs that vested in 20172019 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 during 20172019 were 0.1 million and had a value of approximately $3.5 million on their respective vesting dates as determined by the Company’s closing stock price.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 the Companyus as they reduced the amount of shares that would have otherwise been issued as a result of the vesting.
In 2019, 2018 and 2017, 2016 and 2015, the Companywe granted approximately 353,000, 79,0006.0 million, 0.1 million and 49,0000.4 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, 20172019 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, 2017,2019, the performance criteria had been met for 36,000approximately 0.1 million of the 0.4 million performance-based RSUs outstanding, exclusive of XSUs outstanding. The CompanyWe recognized $2.5$24.1 million, $2.1$4.8 million and $1.5$2.5 million of compensation expense related to performance-based RSUs during the years ended December 31, 2019, 2018 and 2017, 2016 and 2015, respectively.
respectively, which included expense related to XSUs of $17.5 million during the year ended December 31, 2019.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
Stock Option Activity
The following table summarizes stock option activity for the years ended December 31 (number of options in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | 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 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | 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 | 1,008 |
| | $ | 5.40 |
| | 1,103 |
| | $ | 5.37 |
| | 1,641 |
| | $ | 5.26 |
|
| Exercised | (198 | ) | | 6.99 |
| | (95 | ) | | 5.02 |
| | (525 | ) | | 4.95 |
|
| Expired / terminated | (6 | ) | | 8.32 |
| | — |
| | — |
| | (13 | ) | | 7.27 |
|
| Options outstanding, end of year | 804 |
| | 4.99 |
| | 1,008 |
| | 5.40 |
| | 1,103 |
| | 5.37 |
|
| Options exercisable, end of year | 775 |
| | 5.00 |
| | 977 |
| | 5.42 |
| | 1,072 |
| | 5.39 |
|
| Options expected to vest, end of year | 25 |
| | 4.75 |
| |
| |
| |
| |
|
NoWe granted 6.4 million stock options were granted in 2017, 20162018 and NaN in 2019 or 2015. Total2017. The total intrinsic value of options exercised was $3.2$1.2 million, $2.0$28.5 million and $13.6$3.2 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, 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 the Company’sour common stock on the date of exercise.
The following table summarizes information about stock options outstanding and exercisablethat were fully vested or expected to vest as of December 31, 20172019 (number of options in thousands):
|
| | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
Range of Exercise Price | | Number of Options Outstanding | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (Years) | | Number of Options Exercisable | | Weighted
Average
Exercise
Price | | Weighted Average Remaining Contractual Life (Years) |
| $4.34 - $4.97 | | 65 |
| | $ | 4.52 |
| | 0.94 | | 65 |
| | $ | 4.52 |
| | 0.94 |
|
| | | | | | | | | | | | | | | | | | |
| | | 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) |
| $4.15 - $7.01 | | 733 |
| | $ | 4.78 |
| | 1.49 | | 704 |
| | $ | 4.78 |
| | 1.51 |
| $7.13 - $7.21 | | 71 |
| | 7.14 |
| | 0.41 | | 71 |
| | 7.15 |
| | 0.41 |
| $4.15 - $7.21 | | 804 |
| | 4.99 |
| | 1.40 | | 775 |
| | 5.00 |
| | 1.41 |
The aggregate intrinsic value of options outstanding and options exercisable at December 31, 20172019 was $17.3$4.5 million and $16.7$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 the Company’sour common stock of $26.50$73.28 on December 29, 2017.31, 2019.
At December 31, 2017, the Company2019, we had 29,3506.4 million unvested options outstanding with a weighted average exercise price of $4.75$28.58 per share, weighted average grant-date fair value of $2.58$38.64 per share and weighted average remaining contractual life of 1.0 year.8.2 years. The aggregate intrinsic value of unvested options at December 31, 20172019 was $0.6$284.6 million.
The Company granted approximately 1.0 million performance-based stock options (included in the table above) from 2008 through 2011. As of December 31, 2017, approximately 0.2 million performance-based stock options are outstanding, of which approximately 29,350 are unvested and 25,000 are expected to vest. The aggregate grant-date fair value of the 0.2 million performance-based stock options vested and expected to vest as of December 31, 2017 was approximately $0.5 million. The Company recognized no stock-based compensation expense related to performance-based stock options during the years ended December 31, 2017 and 2016, and $0.1 million during the year ended December 31, 2015.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Stock-based Compensation Expense
The Company accountsWe account for stock-based compensation using the fair-value method. Reported stock-based compensation was classified as follows for the years ended December 31 (in thousands):
|
| | | | | | | | | | | |
| | 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 |
|
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Cost of product and service sales | $ | 508 |
| | $ | 342 |
| | $ | 402 |
|
| Sales, general and administrative expenses | 9,047 |
| | 5,707 |
| | 4,285 |
|
| Research and development expenses | 6,055 |
| | 3,320 |
| | 2,576 |
|
| Total stock-based compensation expense | $ | 15,610 |
| | $ | 9,369 |
| | $ | 7,263 |
|
ThereStock Inducement Plan
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 no stock-based compensation expense recognized inadopted without stockholder approval pursuant to Rule 5635(c)(4) and Rule 5635(c)(3) of the consolidated statements of operationsNasdaq Listing Rules. The Inducement Plan provides for the years ended December 31, 2017grant of equity-based awards, including restricted stock units, restricted stock, performance shares and 2016 relatedperformance units, and its terms are substantially similar to incentive stock options ("ISOs"). Total stock-based compensation expense forour stockholder-approved 2019 Plan. In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the year ended December 31, 2015 included $0.1 million relatedNasdaq Listing Rules, awards under the Inducement Plan may only be made to ISOs for which no tax benefit was recognized. Theindividuals not previously employees or non-employee directors of the Company recorded a tax benefit in 2017, 2016, and 2015(or following such individuals’ bona fide period of $0.1 million, $0.2 million, and $0.2 million, respectively, to offset taxes payable relatednon-employment with the Company), as an inducement material to the non-qualified disposition of ISOs exercised and sold.individuals’ entry into employment with the Company.
As of December 31, 2017,2019, there was $42.8 million in unrecognized compensation costs related to RSUswere 29,600 shares available for grant under the Company's2019 Inducement Plan.
Stock Repurchase Plan
In February 2016, our Board of Directors authorized a stock plans. The Company expectsrepurchase program to recognizeacquire up to $50.0 million of our outstanding common stock subject to stock market conditions and corporate considerations. As of December 31, 2019 and 2018, $16.3 million remained available under the cost related to the RSUs over a weighted average period of 2.80 years.plan for future purchases.
13. 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 initial direct costs incurred and excludes lease incentives.
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.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Our leases have remaining terms of less than 1 to approximately 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 December 31, 2019 were immaterial.
|
| | | | | | |
| Leases (in thousands) | | Classification | | December 31, 2019 |
| Assets | | | | |
| Operating lease assets | | Other assets | | $ | 9,653 |
|
| Liabilities | | | | |
| Current | | | | |
| Operating | | Other current liabilities | | $ | 3,817 |
|
| Noncurrent | | | | |
| Operating | | Other long-term liabilities | | 6,792 |
|
| Total lease liabilities | | | | $ | 10,609 |
|
The components of lease expense were as follows (in thousands):
|
| | | | | | |
| | | Classification | | Twelve Months Ended December 31, 2019 |
Operating lease expense (1) | | Sales, general and administrative expenses (2) | | $ | 4,627 |
|
| Sublease income | | Interest and other income, net | | (301 | ) |
| Net lease expense | | | | $ | 4,326 |
|
(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):
|
| | | | |
| | | Twelve Months Ended December 31, 2019 |
| Supplemental Cash Flows Information | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | |
| Operating cash flows for operating leases | | $ | 4,374 |
|
| Right-of-use assets obtained in exchange for lease liabilities: | | |
| Operating leases | | 888 |
|
| Weighted average remaining lease term: | | |
| Operating leases | | 3.1 years |
|
| Weighted average discount rate: | | |
| Operating leases | | 3.55 | % |
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Future minimum lease payments under non-cancellable leases as of December 31, 2019 were as follows (in thousands):
|
| | | | | | | | | |
| | Operating | | Sublease income | | Net |
| 2020 | 4,539 |
| | (82 | ) | | 4,457 |
|
| 2021 | 3,641 |
| | — |
| | 3,641 |
|
| 2022 | 2,689 |
| | — |
| | 2,689 |
|
| 2023 | 1,173 |
| | — |
| | 1,173 |
|
| 2024 | — |
| | — |
| | — |
|
| Thereafter | — |
| | — |
| | — |
|
| Total minimum lease payments | 12,042 |
| | (82 | ) | | 11,960 |
|
| Less: Amount representing interest | | | | | (1,351 | ) |
| Present value of lease payments | | | | | $ | 10,609 |
|
As of December 31, 2019, we do not have any leases that have not yet commenced that create significant rights and obligations for us.
14. Related Party Transactions
The Company subscribesWe subscribe to a mobile collaboration software suite from Quip, a company that was co-founded and managed by Bret Taylor, a former member of the Company'sour Board of Directors. Mr. Taylor resigned from the Board of Directors in June 2019. In April 2016, Quip was acquired by Salesforce, and subsequent to the acquisition, the Companywe continued to consider Quip a related party. In November 2017, Mr. Taylor was appointed to President and Chief Product Officer of Salesforce. The Company now considersWe consider the consolidated Salesforce entity to be a related party.party through the year ended December 31, 2019. The cost to subscribe to various cloud-based hosting arrangements from Salesforce and Quip was $1.2$1.9 million, $0.8$1.8 million and $0.5$1.2 million for the years ended December 31, 2019, 2018 and 2017, 2016 and 2015, respectively, and amounts owed as of December 31, 2017 were $0.5 million.respectively. Amounts owed as of December 31, 20162019 and 2018 were negligible.
14.15. 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 allowed by law of their eligible compensation. Contributions to the plans are made by both the employee and the Company. Company contributions are based on the level of employee contributions and are immediately vested. The Company’s matching contributions to the plan for the years ended December 31, 2017, 2016 and 2015, were approximately $2.5 million, $1.6 million and $1.2 million, respectively.
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 generally commence upon retirement, death, separation of service, specified date or upon the occurrence of an unforeseeable emergency. Distributions can be paid in a variety of forms from lump sum to installments over a period of years. Participants in the plan are entitled to select from a wide variety of investments available under the plan and are allocated gains or losses based upon the performance of the investments selected by the participant. All gains or losses are allocated fully to plan participants and 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 consolidated balance sheets.sheets; see Note 7 for balances. 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. Subsequent
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Contributions to December 31, 2017, the Companyplans are made by both the employee and us. Our contributions to the non-qualified deferred compensation401(k) plan relatedare based on the level of employee contributions and are immediately vested. Future matching contributions to the yearplans are at our sole discretion.
We also sponsor defined contribution plans in Australia, Finland, and the United Kingdom.
Our matching contributions for all defined contribution plans for the years ended December 31, 2019, 2018 and 2017, ofwere approximately $29,000.$4.8 million, $3.2 million and $2.5 million, respectively. Future matching or profit sharing contributions to the plans are at the Company’sour sole discretion.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
15.16. Business Acquisitions
Axon Artificial Intelligence
On December 30, 2016, the Company acquired certain intellectual property from Fossil Group, Inc. and Fossil Vietnam, Limited Liability Company. This transaction, which was accounted for as a business combination under ASC 805, was part of the Company's efforts to expand on the Software and Sensors platform by transforming workflows using computer vision and natural language with machine learning techniques in order to analyze data and multimedia captured throughout the course of policing. Additionally, as part of the acquisition, a team of researchers and software engineers joined the Company as part of the newly established Axon AI team. The purchase price, totaling approximately $6.8 million, consisted of $3.5 million cash at close, and up to an additional $3.3 million of consideration contingent upon the satisfaction of certain conditions. As of September 30, 2017, no amounts were earned relative to the earn-out provisions.
The major classes of assets and liabilities to which the Company has allocated the purchase price were as follows (in thousands):
|
| | | |
| Developed technology | $ | 5,210 |
|
| Goodwill | 1,615 |
|
| Total purchase price | $ | 6,825 |
|
The Company assigned the goodwill to the Software and Sensors segment. The acquired developed technology was assigned an amortization period of five years. Costs related to the acquisition were expensed as incurred and were considered insignificant.
Dextro, Inc.
On February 8, 2017, the Companywe acquired all of the outstanding common stock of Dextro for a total purchase price of $7.5 million. Dextro's technology provides one of the first computer-vision and deep learning systems to make the visual contents in video searchable in real time. This technology will allow law enforcement agencies and departments to quickly isolate and analyze critical seconds of footage from massive amounts of video data. The technology acquired, along with the Dextro employees that joined the Company,Axon, were key additions to the Axon AIArtificial Intelligence team.
The purchase price of $7.5 million consisted primarily of cash, net of cash acquired, and contingent consideration of $1.0 million representing potential earn-outs to former stockholders based on predetermined future metrics. Asmetrics, which was fully earned and paid as of December 31, 2017, no amounts were earned relative to the former stockholder earn-out provisions. The Company2019. We also agreed to additional earn-out provisions to former Dextro employees totaling approximately $1.4 million based, in part, on predetermined future metrics. The additional earn-outs were not included as part of the purchase price and are being expensed as compensation for the employees in the period earned.
The major classes of assets and liabilities to which the Company haswe allocated the purchase price were as follows (in thousands):
|
| | | |
| Accounts receivable | $ | 12 |
|
| Property and equipment | 46 |
|
| Developed technology | 5,800 |
|
| Goodwill | 2,703 |
|
| Deferred income tax liabilities, net | (1,074 | ) |
| Total purchase price | $ | 7,487 |
|
|
| | | |
| Accounts receivable | $ | 12 |
|
| Property and equipment | 46 |
|
| Developed technology | 5,800 |
|
| Goodwill | 2,703 |
|
| Deferred income tax liabilities, net | (1,074 | ) |
| Total purchase price | $ | 7,487 |
|
The Company hasWe assigned the goodwill to the Software and Sensors segment. Identifiable definite-lived intangible assets were assigned a total weighted average amortization period of 3.4 years. Dextro has been included in the Company'sour consolidated results of operations subsequent to the acquisition date. Pro forma results of operations for Dextro have not been presented because they are not material to the consolidated results of operations. In connection with the acquisition, the Companywe incurred and expensed costs of approximately $0.2 million, which included legal, accounting and other third-party expenses related to the transaction.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Breon Enterprises
On July 1, 2017, the Companywe acquired certain tangible and intangible assets from Breon, which was the Company'sour distributor in the Australia region. This transaction, which was accounted for as a business combination under ASC 805, is intended to expand the Company'sour growth across Australia and surrounding regions by growing itsour in-country sales and support team.
The purchase price of $4.2 million was paid in full through two wire transactions completed duringin July 2017. As of the acquisition date, the Companywe had a $2.2 million pre-existing accounts receivable balance from Breon for the Company'sour sales of goods and services to Breon prior to the acquisition date. This receivable balance was cash settled in full separately from the business combination at its book value, which was considered to be the fair value due to the short-term nature of the receivable.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The major classes of assets to which the Company haswe allocated the purchase price were as follows (in thousands):
|
| | | |
| Re-acquired distribution rights | $ | 2,100 |
|
| Customer relationships | 400 |
|
| Goodwill | 1,650 |
|
| Total purchase price | $ | 4,150 |
|
|
| | | |
| Re-acquired distribution rights | $ | 2,100 |
|
| Customer relationships | 400 |
|
| Goodwill | 1,650 |
|
| Total purchase price | $ | 4,150 |
|
The Company hasWe assigned $0.8 million of the goodwill to each of the TASER Weapons and Software and Sensors segments. The assignment of goodwill was based on the Company'sour estimate of how the acquired assets would contribute cash flows to the Companyus over time. Identifiable definite-lived intangible assets were assigned a total weighted average amortization period of 2.1 years. Breon has been included in the Company'sour consolidated results of operations subsequent to the acquisition date. Pro forma results of operations for Breon have not been presented because they are not material to the consolidated results of operations. Costs related to the acquisition were expensed as incurred and were considered insignificant.
16. Segment DataOn May 3, 2018, we acquired all of the outstanding ownership interests of VIEVU, a public safety camera and cloud-based evidence management system provider for law enforcement agencies.
The Company’s operationspurchase price of $17.6 million consisted of $5.0 million in cash, net of cash acquired of $0.1 million, and $2.4 million, or 58,843 shares, of our common stock issued to VIEVU’s parent company, Safariland, LLC (“Safariland”). Additionally, the purchase price consisted of contingent consideration of up to $6.0 million, or 141,226 additional shares of common stock, if certain conditions relating to retention of certain VIEVU customers are comprisedmet as of two reportable segments: TASER Weapons segmentthe first and Softwaresecond 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 Sensors segment.Supplier Agreement (the “Supply Agreement”) with Safariland, pursuant to which Safariland will be our preferred provider of holsters for our CEW products. The Company includes only revenuesestimated fair value of the Supply Agreement as of the acquisition date was $4.5 million, a portion of which was recorded within accrued liabilities and costs attributablethe remaining portion recorded within other long-term liabilities.
The major classes of assets and liabilities to which we have allocated the purchase price were as follows (in thousands):
|
| | | |
| Accounts receivable | $ | 1,776 |
|
| Inventory | 2,626 |
|
| Prepaid expenses and other assets | 362 |
|
| Property and equipment | 459 |
|
| Contract assets | 1,472 |
|
| Intangible assets | 4,510 |
|
| Goodwill | 10,285 |
|
| Accounts payable and accrued liabilities | (3,345 | ) |
| Deferred revenue | (543 | ) |
| Total purchase price | $ | 17,602 |
|
We have assigned the goodwill to the Software and Sensors productssegment. Identifiable definite-lived intangible assets were assigned a total weighted average amortization period of 5.1 years. VIEVU has been included in that segment. Included in Softwareour consolidated results of operations subsequent to the acquisition date. In connection with the acquisition, we incurred and Sensors segment costs are:expensed costs of sales for both productsapproximately $0.8 million, which included legal, accounting and services, overhead allocation based on direct labor, selling expense forother third-party expenses related to the Software and Sensors sales team, product managementtransaction. Subsequent to the acquisition date, we recorded expenses trade shows andof $1.2 million related expenses, and research and development for products includedto purchase commitments assumed in the Software and Sensors segment. All other costs are included in the TASER Weapons segment. The CODM does not review assets by segment as part of the financial information provided; therefore, only limited asset information is provided in the following tables.VIEVU business combination that exceeded estimated future demand.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
17. Segment Data
Our operations are comprised of 2 reportable segments: the manufacture and sale of CEDs, batteries, accessories, extended warranties and other products and services (the “TASER” segment); and the software and sensors business, 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 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." Our Chief Executive Officer, who is the CODM, is not provided asset information or sales, general, and administrative expense by segment.
Information relative to the Company’sour reportable segments was as follows (in thousands):
|
| | | | | | | | | | | |
| | For the year ended December 31, 2019 |
| | TASER | | Software and Sensors | | Total |
| Net sales from products | $ | 280,554 |
| | $ | 118,920 |
| | $ | 399,474 |
|
| Net sales from services | 1,107 |
| | 130,279 |
| | 131,386 |
|
| Net sales | 281,661 |
| | 249,199 |
| | 530,860 |
|
| Cost of product sales | 107,188 |
| | 83,495 |
| | 190,683 |
|
| Cost of service sales | — |
| | 32,891 |
| | 32,891 |
|
| Cost of sales | 107,188 |
| | 116,386 |
| | 223,574 |
|
| Gross margin | $ | 174,473 |
| | $ | 132,813 |
| | $ | 307,286 |
|
| | | | | | |
| Research and development | $ | 14,469 |
| | $ | 86,252 |
| | $ | 100,721 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, 2018 |
| | TASER | | Software and Sensors | | Total |
| Net sales from products | $ | 253,115 |
| | $ | 74,520 |
| | $ | 327,635 |
|
| Net sales from services | — |
| | 92,433 |
| | 92,433 |
|
| Net sales | 253,115 |
| | 166,953 |
| | 420,068 |
|
| Cost of product sales | 80,354 |
| | 58,983 |
| | 139,337 |
|
| Cost of service sales | — |
| | 22,148 |
| | 22,148 |
|
| Cost of sales | 80,354 |
| | 81,131 |
| | 161,485 |
|
| Gross margin | $ | 172,761 |
| | $ | 85,822 |
| | $ | 258,583 |
|
| | | | | | |
| Research and development | $ | 17,012 |
| | $ | 59,844 |
| | $ | 76,856 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, 2017 |
| | TASER Weapons | | Software and Sensors | | Total |
| Net sales from products | $ | 234,512 |
| | $ | 51,347 |
| | $ | 285,859 |
|
| Net sales from services | — |
| | 57,939 |
| | 57,939 |
|
| Net sales | 234,512 |
| | 109,286 |
| | 343,798 |
|
| Cost of product sales | 72,054 |
| | 45,943 |
| | 117,997 |
|
| Cost of service sales | — |
| | 18,713 |
| | 18,713 |
|
| Cost of sales | 72,054 |
| | 64,656 |
| | 136,710 |
|
| Gross margin | 162,458 |
| | 44,630 |
| | 207,088 |
|
| Sales, general and administrative | 78,202 |
| | 60,490 |
| | 138,692 |
|
| Research and development | 8,377 |
| | 46,996 |
| | 55,373 |
|
| Income (loss) from operations | $ | 75,879 |
| | $ | (62,856 | ) | | $ | 13,023 |
|
| Purchase of property and equipment | $ | 4,341 |
| | $ | 6,078 |
| | $ | 10,419 |
|
| Purchase of intangible assets | 259 |
| | 765 |
| | 1,024 |
|
| Purchase of property and equipment and intangible assets, including goodwill, in connection with business acquisitions | 2,075 |
| | 10,624 |
| | 12,699 |
|
| Depreciation and amortization | 2,705 |
| | 5,336 |
| | 8,041 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, 2016 |
| | TASER Weapons | | Software and Sensors | | Total |
| Net sales from products | $ | 202,644 |
| | $ | 35,929 |
| | $ | 238,573 |
|
| Net sales from services | — |
| | 29,672 |
| | 29,672 |
|
| Net sales | 202,644 |
| | 65,601 |
| | 268,245 |
|
| Cost of product sales | 61,930 |
| | 29,606 |
| | 91,536 |
|
| Cost of service sales | — |
| | 6,173 |
| | 6,173 |
|
| Cost of sales | 61,930 |
| | 35,779 |
| | 97,709 |
|
| Gross margin | 140,714 |
| | 29,822 |
| | 170,536 |
|
| Sales, general and administrative | 63,617 |
| | 44,459 |
| | 108,076 |
|
| Research and development | 5,887 |
| | 24,722 |
| | 30,609 |
|
| Income (loss) from operations | $ | 71,210 |
| | $ | (39,359 | ) | | $ | 31,851 |
|
| Purchase of property and equipment | $ | 4,129 |
| | $ | 828 |
| | $ | 4,957 |
|
| Purchase of intangible assets | 262 |
| | 3,233 |
| | 3,495 |
|
| Purchase of intangible assets, including goodwill, in connection with business acquisitions | — |
| | 6,825 |
| | 6,825 |
|
| Depreciation and amortization | 2,207 |
| | 1,451 |
| | 3,658 |
|
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
| | | | | | | | | | | |
| | For the year ended December 31, 2017 |
| | TASER | | Software and Sensors | | Total |
Net sales from products (1) | $ | 234,512 |
| | $ | 51,347 |
| | $ | 285,859 |
|
Net sales from services (1) | — |
| | 57,939 |
| | 57,939 |
|
Net sales (1) | 234,512 |
| | 109,286 |
| | 343,798 |
|
| Cost of product sales | 72,054 |
| | 45,943 |
| | 117,997 |
|
| Cost of service sales | — |
| | 18,713 |
| | 18,713 |
|
| Cost of sales | 72,054 |
| | 64,656 |
| | 136,710 |
|
| Gross margin | $ | 162,458 |
| | $ | 44,630 |
| | $ | 207,088 |
|
| | | | | | |
| Research and development | $ | 8,377 |
| | $ | 46,996 |
| | $ | 55,373 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, 2015 |
| | TASER Weapons | | Software and Sensors | | Total |
| Net sales from products | $ | 162,375 |
| | $ | 22,855 |
| | $ | 185,230 |
|
| Net sales from services | — |
| | 12,662 |
| | 12,662 |
|
| Net sales | 162,375 |
| | 35,517 |
| | 197,892 |
|
| Cost of product sales | 48,821 |
| | 16,201 |
| | 65,022 |
|
| Cost of service sales | — |
| | 4,223 |
| | 4,223 |
|
| Cost of sales | 48,821 |
| | 20,424 |
| | 69,245 |
|
| Gross margin | 113,554 |
| | 15,093 |
| | 128,647 |
|
| Sales, general and administrative | 47,640 |
| | 22,058 |
| | 69,698 |
|
| Research and development | 4,470 |
| | 19,144 |
| | 23,614 |
|
| Income (loss) from operations | $ | 61,444 |
| | $ | (26,109 | ) | | $ | 35,335 |
|
| Purchase of property and equipment | $ | 4,159 |
| | $ | 1,844 |
| | $ | 6,003 |
|
| Purchase of intangible assets | 277 |
| | 224 |
| | 501 |
|
| Purchase of property and equipment and intangible assets, including goodwill, in connection with business acquisitions | 1,453 |
| | 11,146 |
| | 12,599 |
|
| Depreciation and amortization | 2,311 |
| | 980 |
| | 3,291 |
|
17.18. Selected Quarterly Financial Data (unaudited)
Selected quarterly financial data for years ended December 31, 20172019 and 20162018 follows (in thousands, except per share data):
|
| | | | | | | | | | | | | | | |
| | Quarter Ended |
| | March 31, | | June 30, | | September 30, | | December 31, |
| | 2019 | | 2019 | | 2019 | | 2019 |
| Net sales | $ | 115,810 |
| | $ | 112,362 |
| | $ | 130,837 |
| | $ | 171,851 |
|
| Gross margin | 68,917 |
| | 65,560 |
| | 80,169 |
| | 92,640 |
|
| Net income | 6,419 |
| | 738 |
| | 6,104 |
| | (12,379 | ) |
Earnings (loss) per share (2): | | | | | | | |
| Basic | $ | 0.11 |
| | $ | 0.01 |
| | $ | 0.10 |
| | $ | (0.21 | ) |
| Diluted | $ | 0.11 |
| | $ | 0.01 |
| | $ | 0.10 |
| | $ | (0.21 | ) |
| | | | | | | | |
| | Quarter Ended |
| | March 31, | | June 30, | | September 30, | | December 31, |
| | 2018 | | 2018 | | 2018 | | 2018 (1) |
| Net sales | $ | 101,215 |
| | $ | 99,226 |
| | $ | 104,836 |
| | $ | 114,791 |
|
| Gross margin | 64,461 |
| | 63,143 |
| | 65,633 |
| | 65,346 |
|
| Net income | 12,926 |
| | 8,485 |
| | 5,711 |
| | 2,083 |
|
Earnings per share (2): | | | | | | | |
| Basic | $ | 0.24 |
| | $ | 0.15 |
| | $ | 0.10 |
| | $ | 0.04 |
|
| Diluted | $ | 0.24 |
| | $ | 0.15 |
| | $ | 0.10 |
| | $ | 0.03 |
|
(1) Results of operations for the three months ended December 31, 2018 included out of period adjustments related to prior quarterly periods in 2018 and 2017. The aggregate out of period adjustment was approximately $1.8 million, reflecting a $0.9 million decrease to net sales, a $1.3 million increase to sales, general and administrative expense, and a $0.4 million decrease to provision for income taxes. Based on our quantitative and qualitative analysis, we do not consider the out of period impact to be material to our financial position or results of operations for any prior periods or for the quarter or year ended December 31, 2018.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
| | | | | | | | | | | | | | | |
| | Quarter Ended |
| | March 31, | | June 30, | | September 30, | | December 31, |
| | 2017 | | 2017 | | 2017 | | 2017 |
| Net sales | $ | 79,242 |
| | $ | 79,643 |
| | $ | 90,262 |
| | $ | 94,651 |
|
| Gross margin | 48,670 |
| | 45,637 |
| | 49,765 |
| | 63,016 |
|
| Net income (loss) | 4,580 |
| | 2,276 |
| | 422 |
| | (2,071 | ) |
Earnings per share (1): | | | | | | | |
| Basic | $ | 0.09 |
| | $ | 0.04 |
| | $ | 0.01 |
| | $ | (0.04 | ) |
| Diluted | $ | 0.09 |
| | $ | 0.04 |
| | $ | 0.01 |
| | $ | (0.04 | ) |
| | | | | | | | |
| | Quarter Ended |
| | March 31, | | June 30, | | September 30, | | December 31, |
| | 2016 | | 2016 | | 2016 | | 2016 |
| Net sales | $ | 55,530 |
| | $ | 58,756 |
| | $ | 71,882 |
| | $ | 82,077 |
|
| Gross margin | 36,902 |
| | 37,299 |
| | 46,565 |
| | 49,770 |
|
| Net income | 3,463 |
| | 3,650 |
| | 3,843 |
| | 6,341 |
|
Earnings per share (1): | | | | | | | |
| Basic | $ | 0.06 |
| | $ | 0.07 |
| | $ | 0.07 |
| | $ | 0.12 |
|
| Diluted | $ | 0.06 |
| | $ | 0.07 |
| | $ | 0.07 |
| | $ | 0.12 |
|
(1)(2) Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
18.19. Supplemental Disclosure to Cash Flows
Supplemental non-cash and other cash flow information were as follows as of and for the years ended December 31 (in thousands):
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Supplemental disclosures: | | | | | |
| Cash and cash equivalents | $ | 172,250 |
| | $ | 349,462 |
| | $ | 75,105 |
|
| Restricted cash | $ | 105 |
| | $ | 1,565 |
| | $ | 3,333 |
|
| Total cash, cash equivalents and restricted cash shown in the statements of cash flows | $ | 172,355 |
| | $ | 351,027 |
| | $ | 78,438 |
|
| | | | | | |
| Cash paid for income taxes, net of refunds | $ | 3,669 |
| | $ | 10,609 |
| | $ | 11,487 |
|
| | | | | | |
| Non-cash transactions: | | | | | |
| Contingent consideration related to business combinations | $ | — |
| | $ | — |
| | $ | 1,007 |
|
| Non-cash purchase consideration related to business combinations | — |
| | 12,508 |
| | — |
|
| Property and equipment purchases in accounts payable | 834 |
| | 501 |
| | 133 |
|
| Commission payable converted to stock-based award | 314 |
| | — |
| | — |
|
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Cash paid for income taxes, net of refunds | $ | 11,487 |
| | $ | 14,048 |
| | $ | 6,759 |
|
| Non-cash transactions: | | | | | |
| Contingent consideration related to business combinations | $ | 1,007 |
| | $ | 3,325 |
| | $ | 952 |
|
| Property and equipment purchases in accounts payable | 133 |
| | 82 |
| | 315 |
|
| Purchase of assets under capital lease obligations | — |
| | 134 |
| | — |
|
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
19. Subsequent Event
On February 26, 2018, the Company's Board of Directors approved a new stock option grant to Patrick W. Smith, the Company's Chief Executive Officer (“CEO Performance Award”), which is subject to shareholder approval. The CEO Performance Award will consist of 12 vesting tranches, each equal to 1% of our outstanding common stock as of February 23, 2018, the business day prior to the award date. The CEO Performance Award will have a per share exercise price equal to $28.58, the closing price of our common stock on February 23, 2018, and will have a vesting schedule based entirely on the attainment of both operational and market capitalization milestones.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Axon Enterprise, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Axon Enterprise, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 20172019 and 2016,2018, the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,2019, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, thefinancial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 1, 2018February 27, 2020 expressed an adverse opinion.unqualified opinion thereon.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition - Bundled Arrangements with Multiple Performance Obligations
As described further in Notes 1 and 2 to the consolidated financial statements, the Company derives revenue from two primary sources: the sale of physical products (including conducted energy devices (CEDs), cameras, corresponding hardware extended warranties, and related accessories), and subscriptions to the Axon Evidence digital evidence
management software as a service and support. To a lesser extent, the Company also recognizes revenue related to training, professional services and other software services. Many of the Company’s products are sold on a standalone basis, however, the Company also bundles its hardware products and services together and sells them to customers as part of a single transaction. For contracts with multiple performance obligations, the Company allocates the contract transaction price to each performance obligation using its estimate of the standalone selling price of each distinct good or service in the contract. Further, performance obligations can be satisfied at a point in time when the Company ships the product, or over time as the customer receives and consumes the benefit of services over a stated period of time. In addition, the Company will, on occasion, agree to terms that amend the performance obligations in an existing contract. We consider the identification of performance obligations, the determination of the standalone selling price and allocation of the transaction price to multiple performance obligations, including the determination as to whether any amendments to an existing contract result in a modification, to be a critical audit matter.
Identifying performance obligations in each contract involves identifying all promises in the contract and determining whether such promises are limited to explicit goods or services or whether they may be implied. In addition, determining whether the customer can benefit from the promised goods or services on their own or whether the contract promises to deliver goods or services on a combined basis impacts whether such performance obligations should be accounted for separately or together with other performance obligations. Judgment is also required to determine the standalone selling price for each distinct performance obligation, which serves as a basis for allocating the transaction price amongst products and services when sold together. Estimates of standalone selling price involve the use of observable data and can include selling prices for each performance obligation when sold separately, a market assessment of what the customer would be willing to pay for each performance obligation, or an estimate of the expected cost plus an appropriate estimated margin of the performance obligation. In addition, amendments to existing contracts require additional judgment since they involve an assessment of whether a modification occurred. The related audit effort to test these items was extensive and required a high degree of auditor judgment.
Our audit procedures related to the revenue recognition of bundled arrangements with multiple performance obligations included the following, among others.
We tested the design and operating effectiveness of controls over the Company’s contract review process, including those over the identification of all material terms and promises included in the initial or amended contract, and the establishment and monitoring of standalone selling prices.
For a sample of contracts, we compared the identified performance obligations in the allocation to the underlying contract, recalculated the allocation of the total transaction price to each performance obligation, and, if applicable, reviewed contract amendments and management’s assessment of the amendments for appropriate accounting treatment. We also evaluated the reasonableness of management’s estimate of standalone selling prices for products and services that are not sold separately. For sample selections where revenue was recognized at a point in time, we inspected shipping documents and contract terms to evaluate whether control transferred to the customer. For sample selections where revenue was recognized over time, we traced the term of the revenue recognition period to the contract and recalculated the expected revenue recognized during the period.
Stock Based Compensation - Initial Measurement of Fair Value
As described further in Notes 1 and 12 to the consolidated financial statements, the Company’s stockholders approved the eXponential Stock Performance Plan (“XSPP ”) during the year ended December 31, 2019. Under the terms of the XSPP the Company’s employees were granted eXponential Stock Units (“XSUs”) which vest in 12 tranches with a vesting schedule based entirely on the attainment of both operational and market capitalization goals. To estimate the grant date fair value of the awards, the Company utilized a Monte Carlo simulation to simulate a range of possible future market capitalizations for the Company over the term of the XSUs and assigned a value to each market capitalization tranche. We consider the determination of grant date fair value for the XSUs to be a critical audit matter.
The Company’s determination of the grant date fair value of the XSUs required complex modeling and significant judgment related to inputs and assumptions used in the Monte Carlo simulation. Such assumptions include determining an estimate of volatility associated with achieving the Company’s market capitalization, the expected impact of dilution resulting from the XSPP, a risk free interest rate associated with the term of the XSPP and a discount rate associated
with the holding period required as part of the XSPP. Auditing the initial measurement of fair value also requires the use of valuation specialists.
Our audit procedures related to the grant date fair value of the XSUs included the following procedures, among others.
We evaluated the expertise and experience of the valuation specialists who determined the fair value measurements on behalf of the Company. We reviewed the methodologies employed by the specialists in determining the value of the XSUs and determined whether the use of a Monte Carlo simulation was reasonable. We reviewed the key assumptions utilized in the valuation, including volatility, the expected impact of dilution, the risk-free rate, and discounts for illiquidity by comparing them to the terms of the XSU awards, historical information and market data. We also used a specialist to develop an independent model to assist us in evaluating the appropriateness and reasonableness of the Monte Carlo simulation.
Stock Based Compensation - Ongoing Assessment of Vesting Probabilities
As described further in Notes 1 and 12 to the consolidated financial statements, the Company’s stockholders approved the CEO Performance Award during the year ended December 31, 2018 and the XSPP during the year ended December 31, 2019. The CEO Performance Award provides for the granting of stock options to the Company’s CEO and the XSPP provides for the granting of eXponential Stock Units (XSUs) to the Company’s employees. Both the stock options and XSUs vest in 12 tranches with a vesting schedule based entirely on the attainment of both operational and market capitalization goals. Each of the 12 tranches for both the CEO Performance Award and the XSPP will vest upon the achievement of market capitalization and operational goals. Stock-based compensation expense associated with the awards is recognized beginning at the point in time when the relevant operational goal is considered probable of being met. We consider the probability assessment of achieving the operational goals to be a critical audit matter.
At the grant date and continuing on an ongoing basis over the term of the award, the Company must determine the number of operational goals that are probable to be achieved, and the expected point in time the goals will be 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 the Company’s forward-looking financial projections, taking into consideration statistical analysis. The probability assessments require management to estimate the successful development and market acceptance of future product introductions, future sales targets and operating performance. Changes in the subjective probability-based assumptions can materially affect the amount and timing of the recognition of stock based compensation expense.
Our audit procedures related to the ongoing assessment of vesting probabilities included the following procedures, among others.
We evaluated the expertise and experience of the valuation specialists who prepared the statistical analysis considered by the Company in determining the probability assessments for the operation goals. We reviewed the statistical analysis employed by the specialists in determining the projected achievement of each operational goal and determined whether such assessment was reasonable. We evaluated the reasonableness of management’s forecasts as an input into the model by comparing management’s previous forecasts to actual results to assess management’s ability to accurately forecast actual results. We also evaluated the impact of market and industry trends on management’s forecast and used a specialist to develop an independent model to assist us in evaluating the appropriateness and reasonableness of the Company’s statistical analysis.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2005.
Phoenix, Arizona
March 1, 2018February 27, 2020
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Attached as exhibits to this Form 10-K are certifications of the Chief Executive Officer (as the principal executive officer) and Chief Financial Officer (as the principal financial and accounting officer), which are required in accordance with Rule 13a-14 of the Exchange Act. This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications. This section should be read in conjunction with the certifications and the Grant Thornton LLP attestation report for a more complete understanding of the topics presented. Grant Thornton LLP has independently assessed the effectiveness of our internal control over financial reporting and its report is included below.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer are responsible for the evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Our disclosure controls and procedures are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the 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 thatthis evaluation, our Chief Executive Officer and Principalour Chief Financial and Accounting Officer have concluded that because a material weakness exists in our internal control over financial reporting, as further described below,of December 31, 2019 our disclosure controls and procedures were not effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as of December 31, 2017 at a level that provides reasonable assurance as of the last day of the period covered by this report.appropriate to allow timely decisions regarding required disclosure.
Management Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 20172019 based on criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). As a result of this assessment, management concluded that, as of December 31, 2017,2019, our internal control over financial reporting was not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
During the years ended December 31, 2017 and 2016, we identified material weaknesses in our internal control over financial reporting. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.
We previously identified and disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, as well as in our Quarterly Reports on Form 10-Q for each interim period in fiscal 2017, material weaknesses in our internal control over financial reporting. Specifically, during the quarter ended March 31, 2017, we identified a material weakness over accounting for income taxes. During the year ended December 31, 2016, we identified material weaknesses in our internal controls over revenue recognition, cost of goods sold and services delivered and the reporting of deferred revenue. Further, we identified material weaknesses in our account reconciliations and monitoring processes. These material weaknesses in internal control over financial reporting resulted from a breakdown in the operation of identified preventative and detective controls which led to the Company not initially recording some transactions correctly.
To remediate the material weaknesses described above, we designed and implemented controls and enhanced and revised the design of existing controls and procedures. Specifically:
we added resources to our revenue, tax and general accounting teams to ensure that we have the knowledge and resources to properly account for transactions in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”),
we implemented additional internal reporting procedures, including those designed to add depth to our detailed review processes of sales transactions and related accounting for deferred revenue and cost of product and service sales,
we implemented additional monitoring controls that help detect data entry errors of transactional information within the Company’s general ledger system, as well as added and refined existing system reports to help isolate outliers within the Company’s transactional data for further review, and
we improved communication and coordination among our finance and accounting departments and we expanded cross-functional involvement and input into period-end accruals.
We successfully completed the testing of these remedial controls related to the previously reported material weaknesses and concluded that they are designed and operating effectively to provide reasonable assurance regarding the reliability of our financial reporting and preparation of financial statements in accordance with generally accepted accounting principles.
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:
during the 2017 year-end close of our accounting records 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 to perform these additional review procedures on an ongoing basis, and
we plan to add 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.
The material weakness specific to APS U.K. 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 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 December 31, 2017 at a level that provides reasonable assurance as of the last day of the period covered by this report.
Grant Thornton LLP has independently assessed the effectiveness of our internal control over financial reporting and its report is included below.
Changes in Internal Control over Financial Reporting
Except as noted above, thereThere was no change in our internal control over financial reporting during the fiscal quarter ended December 31, 2017,2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Axon Enterprise, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Axon Enterprise, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2017,2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of the material weakness described in the following paragraphs on the achievement of the objectives of the control criteria, the Company has not maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment.
Management identified deficiencies in the Company’s internal controls related to account reconciliations and monitoring controls over its wholly-owned subsidiary, Axon Public Safety U.K. Ltd. (“APS-UK”). The combination of these deficiencies, when aggregated, resulted in a material weakness in the design and operating effectiveness of the Company’s controls.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2017. The material weakness identified above was considered in determining the nature, timing,2019, and extent of audit tests applied in our audit of the 2017 consolidated financial statements, and this report does not affect our report dated March 1, 2018 whichFebruary 27, 2020 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Other information
We do not express an opinion or any other form of assurance on management’s description of the steps the Company has taken to remediate any of the material weaknesses as described in Management’s Report.
/s/ GRANT THORNTON LLP
Phoenix, Arizona
March 1, 2018February 27, 2020
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required to be disclosed by this item is incorporated herein by reference to our definitive proxy statement for the 20182020 Annual Meeting of Stockholders (the “2018“2020 Proxy Statement”), which proxy statement we expect to file with the SEC within 120 days after the end of our fiscal year ended December 31, 2017.2019.
Item 11. Executive Compensation
The information required to be disclosed by this item is incorporated herein by reference to our 20182020 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
A description of our equity compensation plans approved by our stockholders is included in Note 12 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. The following table provides details of our equity compensation plans at December 31, 2017:2019:
| | | Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a) | | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (b) (1) | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a) | | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (b) (1) | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) |
| Equity compensation plans approved by security holders | 3,152,315 |
| | $ | 4.99 |
| | 1,154,395 |
| 13,242,645 |
| | $ | 28.34 |
| | 1,979,076 |
|
Equity compensation plans not approved by security holders | — |
| | | | — |
| 470,400 |
| | | | 29,600 |
|
| Total | 3,152,315 |
| | $ | — |
| | 1,154,395 |
| 13,713,045 |
| | $ | — |
| | 2,008,676 |
|
| |
(1) | The weighted average exercise price is calculated based solely on the exercise prices of the outstanding options and does not reflect the shares that will be issued upon the vesting of outstanding awards of RSUs which have no exercise price. |
| |
(2) | 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. |
All other information required to be disclosed by this item is incorporated herein by reference to our 20182020 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required to be disclosed by this item is incorporated herein by reference to our 20182020 Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required to be disclosed by this item is incorporated herein by reference to our 20182020 Proxy Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this report:
| |
| 1. | Consolidated financial statements: All consolidated financial statements as set forth under Part II, Item 8 of this report. |
| |
| 2. | Supplementary Financial Statement Schedules: Schedule II — Valuation and Qualifying Accounts |
Other schedules have not been included because they are not applicable or because the information is included elsewhere in this report.(Dollars in thousands)
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Description | Balance at Beginning of Period | | Charged to (Recovered from) Costs and Expenses | | Charged to Other Accounts | | Deductions | | Balance at End of Period |
| Allowance for doubtful accounts: | | | | | | | | | |
| Year ended December 31, 2019 | $ | 1,882 |
| | $ | (226 | ) | | $ | — |
| | $ | (89 | ) | | $ | 1,567 |
|
| Year ended December 31, 2018 | 729 |
| | 1,189 |
| | — |
| | (36 | ) | | 1,882 |
|
| Year ended December 31, 2017 | 443 |
| | 592 |
| | — |
| | (306 | ) | | 729 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Description | Balance at Beginning of Period | | Charged to Costs and Expenses | | Charged to Other Accounts | | Deductions | | Balance at End of Period |
| Allowance for doubtful accounts: | | | | | | | | | |
| Year ended December 31, 2017 | $ | 443 |
| | $ | 592 |
| | $ | — |
| | $ | (306 | ) | | $ | 729 |
|
| Year ended December 31, 2016 | 322 |
| | 205 |
| | — |
| | (84 | ) | | 443 |
|
| Year ended December 31, 2015 | 251 |
| | 86 |
| | — |
| | (15 | ) | | 322 |
|
| Warranty reserve: | | | | | | | | | |
| Year ended December 31, 2017 | $ | 780 |
| | $ | 109 |
| | $ | — |
| | $ | (245 | ) | | $ | 644 |
|
| Year ended December 31, 2016 | 314 |
| | 621 |
| | — |
| | (155 | ) | | 780 |
|
| Year ended December 31, 2015 | 675 |
| | (62 | ) | | — |
| | (299 | ) | | 314 |
|
3. Exhibits:
|
| | |
Exhibit Number | | Description |
| 3.1 | | Complete copy of the Certificate of Incorporation, as amended consisting of (i) Certificate of Incorporation filed January 5, 2001, (ii) Certificate of Amendment filed April 20, 2001, (iii) Certificate of Amendment filed December 31, 2004, and (iv) Certificate of Amendment filed April 4, 2017 (incorporated by reference to Exhibit 3.13.5 to Registration Statementthe Quarterly Report on Form SB-2, effective10-Q, filed May 11, 2001 (Registration No. 333-55658))10, 2018) |
| 3.2 | | Bylaws, as amended, effectiveconsisting of Bylaws adopted January 6, 2001, amended April 10, 2001, January 17, 2016, April 5, 2017, and December 13, 2018 (incorporated by reference to Exhibit 3.2 to the Annual Report filed on Form 10-K, filed March 7, 2016)February 27, 2019) |
3.34.1+ | | |
3.4 | | |
4.1 | | |
10.1*4.2* | | |
| 10.1+ | | |
10.2*10.2+ | | |
10.3*10.3+ | | |
10.4* | | |
10.5* | | |
|
| | |
Exhibit
Number
| | Description |
10.6* | | |
10.7*10.4+ | | |
10.8*10.5+ | | |
10.9* | | |
10.10*10.6+ | | |
10.1110.7+ | | |
10.12 | | |
10.13* | |
|
|
10.14** | | |
Exhibit Number | | Description |
| 10.8+ | | |
10.15*10.9+ | | |
| 10.10+ | | |
| 10.11+ | |
|
| 10.12 | | |
10.16*10.13+ | | |
10.17*10.14+ | | |
| 10.15+ | | |
10.18*10.16+ * | | |
| 10.17+ | | |
10.19**21.1* | | |
10.20**23.1* | | |
21.1** | | |
23.1** | | |
24.1** | | |
31.1** | | |
31.2** | | |
32*** | | |
101.INS** | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH** | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL** | | Inline XBRL Taxonomy Calculation Linkbase Document |
101.LAB** | | Inline XBRL Taxonomy Label Linkbase Document |
101.PRE** | | Inline XBRL Taxonomy Presentation Linkbase Document |
| 104 | | The cover page from the Company's Annual Report for the year ended December 31, 2019, formatted in Inline XBRL |
*+ Management contract or compensatory plan or arrangement
** Filed herewith
*** Furnished herewith
Item 16. Form 10-K Summary
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | |
| | | | | |
| AXON ENTERPRISE, INC. | | | |
| | | | | |
| Date: | March 1, 2018February 27, 2020 | | | |
| | | By: | | /s/ PATRICK W. SMITH |
| | | | | Chief Executive Officer, Director |
| | | | | (Principal Executive Officer) |
| | | | |
| Date: | March 1, 2018February 27, 2020 | By: | | /s/ JAWAD A. AHSAN |
| | | | | Chief Financial Officer |
| | | | | (Principal Financial and Accounting Officer) |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Patrick W. Smith his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| | | | | |
| Signature | | Title | | Date |
| | | |
| | | Chief Executive Officer, Director | | |
| /s/ PATRICK W. SMITH | | (Principal Executive Officer) | | March 1, 2018February 27, 2020 |
| Patrick W. Smith | | | | |
| | | | | |
| | | Chief Financial Officer | | |
| /s/ JAWAD A. AHSAN | | (Principal Financial and Accounting Officer) | | March 1, 2018February 27, 2020 |
| Jawad A. Ahsan | | | | |
| | | | | |
/s/ MICHAEL GARNREITER | | Director | | March 1, 2018 |
Michael Garnreiter | | | | |
| | | | |
/s/ HADI PARTOVI | | Director | | March 1, 2018 |
Hadi Partovi | | | | |
| | |
/s/ MARK W. KROLL | | Director | | March 1, 2018 |
Mark W. Kroll | | | | |
| | |
/s/ RICHARD H. CARMONA | | Director | | March 1, 2018February 27, 2020 |
| Richard H. Carmona | | | | |
| | |
/s/ BRET S. TAYLOR | | Director | | March 1, 2018 |
Bret S. Taylor | | | | |
| | |
/s/ MATTHEW R. MCBRADY | | Director | | March 1, 2018 |
Matthew R. McBrady | | | | |
| | | | | |
| /s/ JULIE A. CULLIVAN | | Director | | March 1, 2018February 27, 2020 |
| Julie A. Cullivan | | | | |
| | |
| /s/ MICHAEL GARNREITER | | Director | | February 27, 2020 |
| Michael Garnreiter | | | | |
| | |
| /s/ CAITLIN E. KALINOWSKI | | Director | | February 27, 2020 |
| Caitlin E. Kalinowski | | | | |
| | |
| /s/ MARK W. KROLL | | Director | | February 27, 2020 |
| Mark W. Kroll | | | | |
| | |
| /s/ MATTHEW R. MCBRADY | | Director | | February 27, 2020 |
| Matthew R. McBrady | | | | |
| | | | |
| /s/ HADI PARTOVI | | Director | | February 27, 2020 |
| Hadi Partovi | | | | |
