UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


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

~~For the quarterly period ended~~ ~~September 30, 2019~~


		For the quarterly period ended March 31, 2020 or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-16391

~~001-16391~~

Axon Enterprise, Inc.

(Exact name of registrant as specified in its charter)


Delaware					86-0741227
~~Delaware~~			~~86-0741227~~
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

17800 North 85th Street		85255
Scottsdale, Arizona	,	~~Arizona~~
(Address of principal executive offices)			(Zip Code)

(480)991-0797

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.00001 Par Value	AAXN	The Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	☒	Accelerated filer	☐

Non-accelerated Filer	☐	☐	Smaller reporting company	☐

			Emerging growth company	☐

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

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

The number of shares of the registrant’s common stock outstanding as of ~~October 31, 2019~~April 30, 2020 was ~~59,340,965.~~59,825,208.

Table of Contents

AXON ENTERPRISE, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER 30, 2019~~MARCH 31, 2020

		Page

		~~Page~~

Special Note Regarding Forward-Looking Statements		ii

PART I - FINANCIAL INFORMATION		1
	Item 1. Financial Statements	1
		Condensed Consolidated Balance Sheets as of ~~September 30, 2019~~March 31, 2020 (Unaudited) and December 31, ~~2018~~2019	1
		Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2020 and ~~Nine Months Ended September 30,~~ 2019 ~~and 2018~~	2
		Unaudited Condensed Consolidated Statements of ~~Stockholders'~~Stockholders’ Equity for the Three Months Ended March 31, 2020 and ~~Nine Months Ended September 30,~~ 2019 ~~and 2018~~	3
		Unaudited Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	5 4
		Notes to Unaudited Condensed Consolidated Financial Statements	6 5
	Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	24 26
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	39 37
	Item 4. Controls and Procedures	39 38
PART II - OTHER INFORMATION		38
	Item 1. Legal Proceedings	40 38
	Item 1A. Risk Factors	40 38
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	40 39
	Item 3. Defaults Upon Senior Securities	40 39
	Item 4. Mine Safety Disclosures	40 39
	Item 5. Other Information	40 39
	Item 6. Exhibits	41 40
	SIGNATURES	42 41

Table of Contents

Special Note Regarding Forward-Looking Statements

This Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions and strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995.From time to time, we also provide forward-looking statements in other materials we release to the public as well as verbal forward-looking statements. These forward-looking statements include, without limitation, statements regarding: the impact of the COVID-19 pandemic; proposed products and services and related development efforts and activities; expectations about the market for our current and future products and services; the impact of pending litigation; our outlook for ~~2019~~2020 with respect to revenue, legal expenses relating to the FTC litigation, stock compensation expense, and income tax rate; trends relating to subscription plan programs and revenues; our anticipation that contracts with governmental customers will be fulfilled; expected trends, including the benefits of, research and development investments; the sufficiency of our liquidity and financial resources; that we may repurchase our common stock; expectations about customer behavior;the impact on our investment portfolio of changes in interest rates; trends in the percentage of our revenues denominated in foreign currencies; our potential use of foreign currency forward and option contracts; statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; statements of management’s strategies, goals and objectives and other similar expressions; as well as the ultimate resolution of financial statement items requiring critical accounting estimates, including those set forth in our Form 10-K for the year ended December 31, ~~2018.~~2019. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Words such as “may,” “will,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions, as well as statements in future tense, identify forward-looking statements. However, not all forward-looking statements contain these identifying words.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. The following important factors could cause actual results to differ materially from those in the forward-looking statements: ~~customer purchase behavior, including adoption~~the potential global impacts of the COVID-19 pandemic; our ~~software as a service delivery model; the impact~~exposure to cancellations of product mix on projected gross margins; our ability to manage our supply chain and avoid production delays, shortages, and impacts to expected gross margins; changes in the costs of product components and labor; defects in our products; delayed cash collections and possible credit lossesgovernment contracts due to ~~our subscription model; exposure to international operational risks;~~appropriation clauses, exercise of a cancellation clause, or non-exercise of contractually optional periods; our ability to design, introduce and sell new products or features; our ability to defend against litigation and protect our intellectual property, and the resulting costs of this activity; our ~~exposure~~ability to ~~cancellations~~manage our supply chain and avoid production delays, shortages, and impacts to expected gross margins; the impact of ~~government contracts due to appropriation clauses, exercise~~stock compensation expense, impairment expense, and income tax expense on our financial results; customer purchase behavior, including adoption of our software as a ~~cancellation clause, or non-exercise~~service delivery model; negative media publicity regarding our products; the impact of ~~contractually optional periods;~~product mix on projected gross margins; defects in our products; changes in the costs of product components and labor; loss of customer data, a breach of security, or an extended outage, including our reliance on third party cloud-based storage providers; ~~negative media publicity regarding~~exposure to international operational risks; delayed cash collections and possible credit losses due to our ~~products;~~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 key personnel; and counter-party risks relating to cash balances held in excess of FDIC insurance limits. Many events beyond our control may determine whether results we anticipate will be achieved. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements. The Annual Report on Form 10-K that we filed with the Securities and Exchange Commission ("SEC") on February ~~27, 2019 listed~~28, 2020 and this Quarterly Report on Form 10-Q list various important factors that could cause actual results to differ materially from expected and historical results. These factors are intended as cautionary statements for investors within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. Readers can find them under the heading “Risk Factors” in the Report on Form 10-K and in this Report on Form 10-Q, and investors should refer to them. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

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

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AXON ENTERPRISE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

September 30, 2019 December 31, 2018
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 202,551
$ 349,462
Short-term investments 108,913
—
Accounts and notes receivable, net of allowance of $1,983 and $1,882 as of September 30, 2019 and December 31, 2018, respectively 149,013
130,579
Contract assets, net 33,602
13,960
Inventory 40,666
33,763
Prepaid expenses and other current assets 41,277
30,391
Total current assets 576,022
558,155
Property and equipment, net of accumulated depreciation of $38,470 and $39,885 as of September 30, 2019 and December 31, 2018, respectively 42,592
37,893
Deferred income tax assets, net 23,290
19,347
Intangible assets, net 13,528
15,935
Goodwill 24,876
24,981
Long-term investments 41,391
—
Long-term notes receivable, net of current portion 33,463
40,230
Other assets 37,142
22,999
Total assets $ 792,304
$ 719,540
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 14,638
$ 15,164
Accrued liabilities 35,745
41,092
Current portion of deferred revenue 127,160
107,016
Customer deposits 2,294
2,702
Other current liabilities 3,997
37
Total current liabilities 183,834
166,011
Deferred revenue, net of current portion 82,149
74,417
Liability for unrecognized tax benefits 3,443
2,849
Long-term deferred compensation 3,694
3,235
Other long-term liabilities 11,537
5,704
Total liabilities 284,657
252,216
Commitments and contingencies (Note 12)

Stockholders’ equity:
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of September 30, 2019 and December 31, 2018 —
—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 59,320,793 and 58,810,637 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively 1
1
Additional paid-in capital 480,747
453,400
Treasury stock at cost, 20,220,227 shares as of September 30, 2019 and December 31, 2018 (155,947 ) (155,947 )
Retained earnings 184,644
171,383
Accumulated other comprehensive loss (1,798 ) (1,513 )
Total stockholders’ equity 507,647
467,324
Total liabilities and stockholders’ equity $ 792,304
$ 719,540


	March 31,		December 31,
	2020		2019
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	156,540	$	172,250
Short-term investments		188,673		178,534
Accounts and notes receivable, net of allowance of $1,827 and $1,567 as of March 31, 2020 and December 31, 2019, respectively		147,945		146,878
Contract assets, net		43,959		38,102
Inventory		46,922		38,845
Prepaid expenses and other current assets		34,702		34,866
Total current assets		618,741		609,475
Property and equipment, net		43,065		43,770
Deferred tax assets, net		29,433		27,688
Intangible assets, net		11,929		12,771
Goodwill		24,752		25,013
Long-term investments		50,225		45,499
Long-term notes receivable, net of current portion		27,556		31,598
Long-term contract assets, net		12,293		9,644
Other assets		59,457		40,181
Total assets	$	877,451	$	845,639
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	31,568	$	25,874
Accrued liabilities		36,404		45,001
Current portion of deferred revenue		119,827		117,864
Customer deposits		3,325		2,974
Other current liabilities		3,891		3,853
Total current liabilities		195,015		195,566
Deferred revenue, net of current portion		91,886		87,936
Liability for unrecognized tax benefits		4,173		3,832
Long-term deferred compensation		3,430		3,936
Deferred tax liability, net		342		354
Other long-term liabilities		23,015		10,520
Total liabilities		317,861		302,144
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; 0 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively		-		—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 59,813,163 and 59,497,759 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively		1		1
Additional paid-in capital		543,305		528,272
Treasury stock at cost, 20,220,227 shares as of March 31, 2020 and December 31, 2019		(155,947)		(155,947)
Retained earnings		175,699		172,265
Accumulated other comprehensive loss		(3,468)		(1,096)
Total stockholders’ equity		559,590		543,495
Total liabilities and stockholders’ equity	$	877,451	$	845,639

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

Table of Contents

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(in thousands, except per share data)

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Net sales from products $ 96,497
$ 80,923
$ 264,977
$ 238,618
Net sales from services 34,340
23,913
94,032
66,659
Net sales 130,837
104,836
359,009
305,277
Cost of product sales 42,445
32,953
120,265
96,474
Cost of service sales 8,223
6,250
24,098
15,566
Cost of sales 50,668
39,203
144,363
112,040
Gross margin 80,169
65,633
214,646
193,237
Operating expenses:
Sales, general and administrative 48,424
39,685
134,678
114,787
Research and development 25,129
21,982
71,976
55,602
Total operating expenses 73,553
61,667
206,654
170,389
Income from operations 6,616
3,966
7,992
22,848
Interest and other income (expense), net 1,820
1,274
5,978
2,242
Income before provision for income taxes 8,436
5,240
13,970
25,090
Provision for (benefit from) income taxes 2,332
(471 ) 709
(2,032 )
Net income $ 6,104
$ 5,711
$ 13,261
$ 27,122
Net income per common and common equivalent shares:
Basic $ 0.10
$ 0.10
$ 0.22
$ 0.49
Diluted $ 0.10
$ 0.10
$ 0.22
$ 0.47
Weighted average number of common and common equivalent shares outstanding:
Basic 59,278
58,340
59,128
55,681
Diluted 60,059
59,805
59,938
57,254

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income $ 6,104
$ 5,711
$ 13,261
$ 27,122
Foreign currency translation adjustments (227 ) (107 ) (285 ) (159 )
Comprehensive income $ 5,877
$ 5,604
$ 12,976
$ 26,963


	Three Months Ended March 31,
	2020		2019
Net sales from products	$	107,288	$	88,089
Net sales from services		39,874		27,721
Net sales		147,162		115,810
Cost of product sales		48,884		39,600
Cost of service sales		9,670		7,293
Cost of sales		58,554		46,893
Gross margin		88,608		68,917
Operating expenses:
Sales, general and administrative		63,027		42,892
Research and development		26,381		23,354
Total operating expenses		89,408		66,246
Income (loss) from operations		(800)		2,671
Interest and other income, net		941		2,313
Income before provision for income taxes		141		4,984
Benefit from income taxes		(3,933)		(1,435)
Net income	$	4,074	$	6,419
Net income per common and common equivalent shares:
Basic	$	0.07	$	0.11
Diluted	$	0.07	$	0.11
Weighted average number of common and common equivalent shares outstanding:
Basic		59,609		58,914
Diluted		60,394		59,751
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$	4,074	$	6,419
Foreign currency translation adjustments		(2,372)		50
Comprehensive income	$	1,702	$	6,469

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

Table of Contents

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF ~~STOCKHOLDERS'~~STOCKHOLDERS’ EQUITY

(in thousands, except ~~per~~ share data)

Common Stock Additional
Paid-in
Capital Treasury Stock Retained
Earnings Accumulated
Other
Comprehensive
Loss Total
Stockholders’
Equity
Shares Amount Shares Amount
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 298,649
—
(1,159 ) —
—
—
—
(1,159 )
Stock-based compensation —
—
7,905
—
—
—
—
7,905
Net income —
—
—
—
—
6,419
—
6,419
Foreign currency translation adjustments —
—
—
—
—
—
50
50
Balance, March 31, 2019 59,109,286
1
460,146
20,220,227
(155,947 ) 177,802
(1,463 ) 480,539
Issuance of common stock under employee plans, net 71,832
—
(869 ) —
—
—
—
(869 )
Stock-based compensation —
—
8,627
—
—
—
—
8,627
Issuance of common stock for business combination contingent consideration 70,613
—
—
—
—
—
—
—
Net income —
—
—
—
—
738
—
738
Foreign currency translation adjustments —
—
—
—
—
—
(108 ) (108 )
Balance, June 30, 2019 59,251,731
1
467,904
20,220,227
(155,947 ) 178,540
(1,571 ) 488,927
Issuance of common stock under employee plans, net 69,062
—
(1,134 ) —
—
—
—
(1,134 )
Stock-based compensation —
—
13,977
—
—
—
—
13,977
Net income —
—
—
—
—
6,104
—
6,104
Foreign currency translation adjustments —
—
—
—
—
—
(227 ) (227 )
Balance, September 30, 2019 59,320,793
$ 1
$ 480,747
20,220,227
$ (155,947 ) $ 184,644
$ (1,798 ) $ 507,647

Common Stock Additional
Paid-in
Capital Treasury Stock Retained
Earnings Accumulated
Other
Comprehensive
Loss Total
Stockholders’
Equity
Shares Amount Shares Amount
Balance, December 31, 2017 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 —
—
—
—
—
18,994
—
18,994
Issuance of common stock under employee plans, net 337,214
—
(3,421 ) —
—
—
—
(3,421 )
Stock-based compensation —
—
4,093
—
—
—
—
4,093
Net income —
—
—
—
—
12,926
—
12,926
Foreign currency translation adjustments —
—
—
—
—
—
(707 ) (707 )
Balance, March 31, 2018 53,307,083
1
202,344
20,220,227
(155,947 ) 155,105
(2,174 ) 199,329
Issuance of common stock 4,645,000
—
233,993
—
—
—
—
233,993
Issuance of common stock for business combination 58,843
—
8,226
—
—
—
—
8,226
Issuance of common stock under employee plans, net 278,687
—
(6,800 ) —
—
—
—
—
—
(6,800 )
Stock-based compensation —
—
4,954
—
—
—
—
—
—
4,954
Net income —
—
—
—
—
—
—
8,485
—
8,485
Foreign currency translation adjustments —
—
—
—
—
—
655
655
Balance, June 30, 2018 58,289,613
1
442,717
20,220,227
(155,947 ) 163,590
(1,519 ) 448,842
Issuance of common stock under employee plans 130,129
—
(1,039 ) —
—
—
—
(1,039 )
Stock-based compensation —
—
6,255
—
—
—
—
6,255
Net income —
—
—
—
—
5,711
—
5,711
Foreign currency translation adjustments —
—
—
—
—
—
(107 ) (107 )
Balance, September 30, 2018 58,419,742
$ 1
$ 447,933
20,220,227
$ (155,947 ) $ 169,301
$ (1,626 ) $ 459,662


											Accumulated
				Additional							Other		Total
	Common Stock			Paid-in		Treasury Stock			Retained		Comprehensive		Stockholders’
	Shares	Amount		Capital		Shares	Amount		Earnings		Loss		Equity
Balance, December 31, 2019	59,497,759	$	1	$	528,272	20,220,227	$	(155,947)	$	172,265	$	(1,096)	$	543,495
Cumulative effect of applying a change in accounting principle, net of tax	—		—		—	—		—		(640)		—		(640)
Issuance of common stock under employee plans, net	315,404		—		(5,162)	—		—		—		—		(5,162)
Stock-based compensation	—		—		20,195	—		—		—		—		20,195
Net income	—		—		—	—		—		4,074		—		4,074
Foreign currency translation adjustments	—		—		—	—		—		—		(2,372)		(2,372)
Balance, March 31, 2020	59,813,163	$	1	$	543,305	20,220,227	$	(155,947)	$	175,699	$	(3,468)	$	559,590


											Accumulated
				Additional							Other		Total
	Common Stock			Paid-in		Treasury Stock			Retained		Comprehensive		Stockholders’
	Shares	Amount		Capital		Shares	Amount		Earnings		Loss		Equity
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	298,649		—		(1,159)	—		—		—		—		(1,159)
Stock-based compensation	—		—		7,905	—		—		—		—		7,905
Net income	—		—		—	—		—		6,419		—		6,419
Foreign currency translation adjustments	—		—		—	—		—		—		50		50
Balance, March 31, 2019	59,109,286	$	1	$	460,146	20,220,227	$	(155,947)	$	177,802	$	(1,463)	$	480,539

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

Table of Contents

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Nine Months Ended September 30,
2019 2018
Cash flows from operating activities:
Net income $ 13,261
$ 27,122
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 8,196
8,226
Loss on disposal and impairment of property and equipment, net 2,408
290
Loss on disposal and abandonment of intangible assets 51
2,103
Stock-based compensation 30,195
15,302
Deferred income taxes (3,946 ) (2,326 )
Unrecognized tax benefits 594
99
Other noncash, net 2,923
34
Change in assets and liabilities:
Accounts and notes receivable and contract assets (30,497 ) (51,172 )
Inventory (6,302 ) 9,033
Prepaid expenses and other assets (11,967 ) (12,081 )
Accounts payable, accrued and other liabilities (13,528 ) 4,306
Deferred revenue 28,476
31,700
Net cash provided by operating activities 19,864
32,636
Cash flows from investing activities:
Purchases of investments (242,693 ) (4,331 )
Proceeds from maturity/call of investments 92,207
10,658
Purchases of property and equipment (12,111 ) (6,880 )
Purchases of intangible assets (328 ) (460 )
Business acquisitions —
(4,990 )
Net cash used in investing activities (162,925 ) (6,003 )
Cash flows from financing activities:
Net proceeds from equity offering —
233,993
Proceeds from options exercised 106
713
Income and payroll tax payments for net-settled stock awards (3,268 ) (11,973 )
Payment of contingent consideration for a business acquisition —
(575 )
Net cash provided by (used in) financing activities (3,162 ) 222,158
Effect of exchange rate changes on cash, cash equivalents and restricted cash (678 ) (381 )
Net increase (decrease) in cash, cash equivalents and restricted cash (146,901 ) 248,410
Cash, cash equivalents and restricted cash, beginning of period 351,027
78,438
Cash, cash equivalents and restricted cash, end of period $ 204,126
$ 326,848

Supplemental disclosures:
Cash and cash equivalents $ 202,551
$ 324,371
Restricted cash (Note 1) 1,575
2,477
Total cash, cash equivalents and restricted cash shown in the statements of cash flows $ 204,126
$ 326,848

Cash paid for income taxes, net of refunds $ 2,422
$ 7,957

Non-cash transactions
Property and equipment purchases in accounts payable and accrued liabilities $ 1,047
$ 1,114
Non-cash purchase consideration related to business combinations $ —
$ 12,508
Commission converted to stock-based award $ 314
$ —


	Three Months Ended March 31,
	2020		2019
Cash flows from operating activities:
Net income	$	4,074	$	6,419
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,881		2,800
Loss on disposal and abandonment of intangible assets		13		18
Loss on disposal and impairment of property and equipment, net		517		242
Stock-based compensation		20,195		7,905
Deferred income taxes		(1,548)		577
Unrecognized tax benefits		341		307
Other noncash, net		1,156		896
Provision for expected credit losses		902		—
Change in assets and liabilities:
Accounts and notes receivable and contract assets		(9,700)		(21,994)
Inventory		(8,630)		(3,936)
Prepaid expenses and other assets		2,277		(3,152)
Accounts payable, accrued and other liabilities		(3,562)		(7,284)
Deferred revenue		4,499		3,232
Net cash provided by (used in) operating activities		13,415		(13,970)
Cash flows from investing activities:
Purchases of investments		(99,512)		(105,322)
Proceeds from call / maturity of investments		84,315		—
Purchases of property and equipment		(2,209)		(5,271)
Proceeds from disposal of property and equipment		78		—
Purchases of intangible assets		(45)		(162)
Investment in unconsolidated affiliate		(4,700)		—
Net cash used in investing activities		(22,073)		(110,755)
Cash flows from financing activities:
Proceeds from options exercised		28		100
Income and payroll tax payments for net-settled stock awards		(5,190)		(1,259)
Net cash used in financing activities		(5,162)		(1,159)
Effect of exchange rate changes on cash and cash equivalents		(1,890)		67
Net decrease in cash and cash equivalents		(15,710)		(125,817)
Cash and cash equivalents and restricted cash, beginning of period		172,355		351,027
Cash and cash equivalents and restricted cash, end of period	$	156,645	$	225,210

Supplemental disclosures:
Cash and cash equivalents	$	156,540	$	223,642
Restricted cash (Note 1)		105		1,568
Total cash, cash equivalents and restricted cash shown in the statements of cash flows	$	156,645	$	225,210

Cash paid for income taxes, net of refunds	$	3,863	$	758

Non-cash transactions
Property and equipment purchases in accounts payable and accrued liabilities	$	617	$	328
Investment purchases in accounts payable	$	13,451	$	—

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

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

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

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

The accompanying unaudited condensed consolidated financial statements include the accounts of Axon Enterprise, Inc. and our wholly owned subsidiaries. All material intercompany accounts, transactions, and profits have been eliminated.

Basis of Presentation and Use of Estimates

These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information related to our organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) has been condensed or omitted. The accounting policies followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed in our annual consolidated financial statements for the year ended December 31, ~~2018~~,2019, as filed on Form 10-K, with the exception of our adoption of certain accounting pronouncements which we describe below. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with our Form 10-K for the year ended December 31, ~~2018~~.2019. The results of operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ are not necessarily indicative of the results to be expected for the full year (or any other period). Significant estimates and assumptions in these unaudited condensed consolidated financial statements include:

●

product warranty reserves,

●

inventory valuation,

●

revenue recognition,

●

expected credit loss reserves,

●

valuation of goodwill, intangible and long-lived assets,

●

recognition, measurement and valuation of current and deferred income taxes,

●

stock-based compensation,

●

recognition and measurement of lease liabilities,

●

recognition and measurement of contingencies and accrued litigation expense, and

●

fair values of identified tangible and intangible assets acquired and liabilities assumed in business combinations.

~~product warranty reserves,~~

~~inventory valuation,~~

~~revenue recognition,~~

~~valuation of goodwill, intangible and long-lived assets,~~

~~recognition, measurement and valuation of current and deferred income taxes,~~

~~stock-based compensation,~~

~~recognition and measurement of lease liabilities,~~

~~recognition and measurement of contingencies and accrued litigation expense, and~~

~~fair values of identified tangible and intangible assets acquired and liabilities assumed in business combinations.~~

Actual results could differ materially from those estimates.

Segment Information

Our operations are comprised of 2 reportable segments: the manufacture and sale of conducted electrical ~~weapons~~devices ("~~CEWs"~~CEDs"), batteries, accessories, extended warranties and other products and services (the “TASER” segment);

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

and the development, manufacture, and sale of software and sensors, which includes the sale of devices, wearables, applications, cloud and mobile products, and services (collectively, the “Software and Sensors” segment). ~~Revenue from our “products”~~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, are generally from sales of sensors, including on-officer body cameras, Axon Fleet cameras, other hardware sensors, warranties on sensors, and other products, and is sometimes referred to as "Sensors and Other revenue." Revenue from our “services” in the Software and Sensors segment consist of sales related to the Axon Cloud, whichservice revenue also includes ~~Axon Evidence, cloud-based evidence management software revenue,~~ other recurring cloud-hosted software revenue and related professional ~~services, and~~services. Collectively, this revenue is sometimes referred to as "Axon Cloud revenue." Within the Software and Sensors segment, we include only revenues and costs attributable to that segment, which costs include: costs of sales for both products and services, direct labor, product management and research and development ("R&D") for products included, or to be included, within the Software and Sensors segment. All other costs are included in the TASER segment.

~~Table of Contents~~

~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~Our Chief Executive Officer, who is the Chief Operating Decision Maker (the “CODM”), is not provided asset information or sales, general, and administrative expense by segment.~~

Reportable segments are determined based on discrete financial information reviewed by ~~the CODM.~~our Chief Executive Officer who is our chief operating decision maker ("CODM"). We organize and review operations based on products and ~~services.~~services, and currently there are no operating segments that are aggregated. We perform an analysis of our reportable segments on at least ~~an annual basis.~~annually. Additional information related to our business segments is summarized in Note ~~15.~~

14.

Geographic Information and Major Customers / Suppliers

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ no individual country outside the U.S. represented more than 10% of total net sales. Individual sales transactions in the international market are generally larger and occur more intermittently than in the domestic market due to the profile of our customers. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ no customer represented more than 10% of total net sales. At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, no customer represented more than 10% of the aggregate balance of accounts and notes receivable and contract assets.

We currently purchase both off the shelf and custom components, including, but not limited to, finished circuit boards, injection-molded plastic components, small machined parts, custom cartridge components, electronic components, and off the shelf sub-assemblies from suppliers located in the U.S., Canada, China, Israel, Mexico, Republic of Korea, and Taiwan. Although we currently obtain many of these components from single source suppliers, we own the injection molded component tooling, most of the designs, and the test fixtures used in their production for all custom components. As a result, we believe we could obtain alternative suppliers in most cases without incurring significant production delays. We also strategically hold safety stock levels on custom components to further reduce this risk. For off the shelf components, we believe that in most cases there are readily available alternative suppliers who can consistently meet our needs for these components. We acquire most of our components on a purchase order basis and do not have any significant long-term contracts with component suppliers.

Income per Common Share

Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. ~~Potentially dilutive securities include~~Diluted income per share reflects the potential dilution from outstanding stock options and unvested restricted stock units ("RSUs"). The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of our common stock can result in a greater dilutive effect from potentially dilutive securities.

units. The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):


	Three Months Ended March 31,
	2020		2019
Numerator for basic and diluted earnings per share:
Net income	$	4,074	$	6,419
Denominator:
Weighted average shares outstanding		59,609		58,914
Dilutive effect of stock-based awards		785		837
Diluted weighted average shares outstanding		60,394		59,751
Anti-dilutive stock-based awards excluded		12,161		12,125
Net income per common share:
Basic	$	0.07	$	0.11
Diluted	$	0.07	$	0.11

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Numerator for basic and diluted earnings per share:
Net income $ 6,104
$ 5,711
$ 13,261
$ 27,122
Denominator:
Weighted average shares outstanding 59,278
58,340
59,128
55,681
Dilutive effect of stock-based awards 781
1,465
810
1,573
Diluted weighted average shares outstanding 60,059
59,805
59,938
57,254
Anti-dilutive stock-based awards excluded 12,477
6,793
12,546
6,760
Net income per common share:
Basic $ 0.10
$ 0.10
$ 0.22
$ 0.49
Diluted $ 0.10
$ 0.10
$ 0.22
$ 0.47

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Standard Warranties

We warranty our ~~CEWs,~~CEDs, Axon cameras and certain related accessories from manufacturing defects on a limited basis for a period of one year after purchase and, thereafter, will repair or replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold when revenue is recorded for the related product. Future warranty costs are estimated

~~Table of Contents~~

~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

based on historical data related to warranty claims ~~on a quarterly basis~~ and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure or other issue that could result in larger than anticipated warranty claims from customers. The warranty reserve is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. The warranty reserve is included in accrued liabilities on the accompanying condensed consolidated balance sheets.

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

Nine Months Ended September 30,
2019 2018
Balance, beginning of period $ 898
$ 644
Utilization of accrual (718 ) (384 )
Warranty expense 891
699
Balance, end of period $ 1,071
$ 959


	Three Months Ended March 31,
	2020		2019
Balance, beginning of period	$	1,476	$	898
Utilization of reserve		(171)		(123)
Warranty expense (benefit)		(85)		252
Balance, end of period	$	1,220	$	1,027

Fair Value Measurements and Financial Instruments

~~The~~

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

●

Level 1 – Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.

●

Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.

●

Level 3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect our own assumptions about inputs that market participants would use in pricing an asset or liability.

We have cash equivalents and investments, which at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 were comprised of money market funds, ~~and, at September 30, 2019, also included~~certificates of deposit, commercial paper, corporate bonds, corporate notes, municipal bonds, U.S. Government agency bonds, ~~corporate bonds, municipal bonds,~~U.S. Treasury bills, U.S. Treasury inflation-protected securities, and U.S. Treasury repurchase agreements. See additional disclosure regarding the fair value of our cash equivalents and investments in Note 3. Included in the balance of other assets as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 was ~~$4.0~~$3.5 million and ~~$3.6~~$4.2 million, respectively, related to corporate-owned life insurance policies which are used to fund our deferred compensation plan. We determine

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

the fair value of insurance contracts by obtaining the cash surrender value of the contracts from the issuer, a Level 2 valuation technique.

During the three months ended March 31, 2020, we made an investment of $4.7 million in preferred stock and recorded preferred stock warrants at a fair value of $2.6 million, which is also included in the balance of other assets as of March 31, 2020. The estimated fair value of the investments was determined based on Level 3 inputs. As of March 31, 2020, management estimated that the fair value of the investment equaled its carrying value.

Our financial instruments also include accounts and notes receivable, ~~contract assets,~~ accounts payable and accrued liabilities. AsDue to the short-term nature of these instruments, ~~are generally short-term in nature,~~their fair values approximate their carrying values ~~approximate their fair values~~ on the ~~accompanying condensed consolidated~~ balance ~~sheets.~~

~~Table of Contents~~

~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

sheet.

Restricted Cash

Restricted cash balances as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 included ~~$0.9~~$0.1 million ~~of sales proceeds~~primarily related to ~~long-term contracts with customers,~~funds held in an international bank account for a country in which ~~were~~we are required to maintain a minimum balance to operate. Approximately half of the balance was included in prepaid expenses and other current assets on our condensed consolidated balance sheets. The proceeds are held in escrow until certain billing milestones are achieved, and then specified amounts are transferred to our operating accounts. Restricted cash balances as of September 30, 2019 and December 31, 2018 also included $0.7 million related to a performance guarantee for an international customer sales contract, which weresheets, with the remainder included in other ~~assets on our accompanying condensed consolidated balance sheets.~~

assets.

Valuation of Goodwill, Intangibles and Long-lived Assets

We evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and identifiable intangible assets, excluding goodwill and intangible assets with indefinite useful lives, may warrant revision or that the remaining balance of these assets may not be recoverable. Such circumstances could include, but are not limited to, a change in the product mix, a change in the way products are created, produced or delivered, or a significant change in the way products are branded and marketed. In performing the review for recoverability, we estimate the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair value computed using discounted cash flows. During the nine months ended September 30, 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, which was included in sales, general and administrative expense in the accompanying condensed consolidated statements of operations. During the three months ended September 30, 2019, we abandoned certain planning and site development activities related to our planned new headquarters, resulting in an impairment charge of $0.7 million, which was included in sales, general and administrative expense in the accompanying condensed consolidated statements of operations.

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

Recently Issued Accounting Guidance

Recently Adopted Accounting Pronouncements

In ~~February~~June 2016, the Financial Accounting Standards Board ~~("FASB"~~(“FASB”) issued Accounting Standards Update ~~("ASU"~~(“ASU”) 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. In July 2018, the FASB issued additional guidance which provided an additional transition method for adopting the updated guidance. 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. On 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.

~~Table of Contents~~

~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

The adoption had a material impact to our condensed consolidated balance sheet. The 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 adoption. The adjustments to the opening balance sheet were as follows (in thousands):

December 31, 2018 Impact of Adoption of Topic 842 on Opening Balance Sheet January 1, 2019
(As reported) (As adjusted)
Consolidated Balance Sheet Data:
Other assets $ 22,999
$ 12,483
$ 35,482
Total 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

~~See Note 11 for further disclosures related to Topic 842.~~

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), expanding the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. We adopted this standard on January 1, 2019 and the adoption had no impact on our condensed consolidated financial statements.

~~Effective the first quarter of 2020:~~

~~In June 2016, the FASB issued ASU~~ 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 includes an impairment model (known as the current expected credit loss model) on financial instruments and other commitments that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The use of forecasted information is intended to incorporate more timely information in the estimate of expected credit loss. This ASU ~~will~~ also ~~require~~requires enhanced disclosures relating to significant estimates and judgments used in estimating credit losses, as well as credit quality. ~~We are currently in~~Upon adoption, we recorded a noncash cumulative effect adjustment to retained earnings of $0.6 million, net of $0.2 million of income taxes, on the ~~process~~opening consolidated balance sheet as of ~~selecting~~January 1, 2020, reflecting an overall increase to the ~~appropriate~~allowance for expected credit ~~loss models~~losses. See Notes 3 and 4 for ~~our investments, accounts and notes receivable, and contract assets and evaluating our processes and controls in preparation for the adoption of ASU 2016-13.~~

further disclosures related to Topic 326.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. The amendments apply to the disclosures of changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Adoption of this ASU on January 1, 2020 did not have a material impact on our consolidated financial statements.

Effective the first quarter of 2021:

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The amendments in the ASU are effective for fiscal years beginning after December 15, 2020, including interim periods therein. Early ~~adoption is permitted, and an entity is also permitted to early adopt any removed or modified disclosures and delay~~ adoption of the ~~additional disclosures until their effective date.~~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 our consolidated financial statements.

In January 2020, the FASB issued ASU No. 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (a Consensus of the Emerging Issues Task Force). The guidance clarifies the interaction between ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and the ASU on equity method investments. ASU 2016-01 provides companies with an alternative to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs. ASU 2020-01 clarifies that for purposes of applying the Topic 321 measurement alternative, an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting under Topic 323, immediately before applying or upon discontinuing the equity method. In addition, the new ASU provides direction that a company should not consider whether the underlying securities would be accounted for under the equity method or the fair value option when it is determining the accounting for certain forward contracts and purchased options, upon either settlement or exercise. The amendments in this update become effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, and the amendments are to be applied prospectively. Adoption of this ASU is not expected to have a material impact on our consolidated financial statements.

Reclassification of Prior Year Presentation

Certain prior year amounts, including the long-term portion of contract assets, have been reclassified for consistency with the current year presentation. These reclassifications are not material and had no effect on the reported results of operations.

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

2. Revenues

Nature of Products and Services

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

Three Months Ended September 30, 2019 Three Months Ended September 30, 2018
TASER Software and Sensors Total TASER Software and Sensors Total
TASER 7 $ 20,214
$ —
$ 20,214
$ —
$ —
$ —
TASER X26P 11,578
—
11,578
17,998
—
17,998
TASER X2 13,241
—
13,241
20,392
—
20,392
TASER Pulse and Bolt 1,132
—
1,132
1,402
—
1,402
Single cartridges 18,901
—
18,901
18,406
—
18,406
Axon Body —
6,763
6,763
—
4,744
4,744
Axon Flex —
1,670
1,670
—
1,325
1,325
Axon Fleet —
4,341
4,341
—
1,809
1,809
Axon Dock —
3,358
3,358
—
2,178
2,178
Axon Evidence and cloud services 218
34,022
34,240
—
23,915
23,915
TASER Cam —
534
534
—
717
717
Extended warranties 4,543
4,714
9,257
4,123
3,161
7,284
Other 1,916
3,692
5,608
1,345
3,321
4,666
Total $ 71,743
$ 59,094
$ 130,837
$ 63,666
$ 41,170
$ 104,836

Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018
TASER Software and Sensors Total TASER Software and Sensors Total
TASER 7 $ 39,466
$ —
$ 39,466
$ —
$ —
$ —
TASER X26P 37,832
—
37,832
52,618
—
52,618
TASER X2 40,413
—
40,413
62,686
—
62,686
TASER Pulse and Bolt 2,920
—
2,920
3,849
—
3,849
Single cartridges 57,354
—
57,354
51,763
—
51,763
Axon Body —
18,820
18,820
—
15,082
15,082
Axon Flex —
4,517
4,517
—
4,529
4,529
Axon Fleet —
10,977
10,977
—
6,640
6,640
Axon Dock —
9,401
9,401
—
7,332
7,332
Axon Evidence and cloud services 363
93,461
93,824
—
64,513
64,513
TASER Cam —
2,481
2,481
—
2,839
2,839
Extended warranties 13,341
14,064
27,405
11,567
8,521
20,088
Other 6,017
7,582
13,599
5,331
8,007
13,338
Total $ 197,706
$ 161,303
$ 359,009
$ 187,814
$ 117,463
$ 305,277


	Three Months Ended March 31, 2020						Three Months Ended March 31, 2019
			Software and						Software and
	TASER		Sensors		Total		TASER		Sensors		Total
TASER 7	$	15,326	$	—	$	15,326	$	9,954	$	—	$	9,954
TASER X26P		11,061		—		11,061		15,872		—		15,872
TASER X2		14,075		—		14,075		13,085		—		13,085
TASER Pulse and Bolt		1,200		—		1,200		670		—		670
Single cartridges		26,625		—		26,625		19,160		—		19,160
Axon Body		—		12,823		12,823		—		6,445		6,445
Axon Flex		—		1,183		1,183		—		1,224		1,224
Axon Fleet		—		4,775		4,775		—		3,516		3,516
Axon Dock		—		4,951		4,951		—		3,312		3,312
Axon Evidence and cloud services		498		39,154		39,652		36		27,618		27,654
TASER Cam		—		927		927		—		903		903
Extended warranties		4,977		5,458		10,435		4,316		4,930		9,246
Other		2,133		1,996		4,129		2,298		2,471		4,769
Total	$	75,895	$	71,267	$	147,162	$	65,391	$	50,419	$	115,810

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

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
United States $ 110,809
85 % $ 88,125
84 % $ 298,736
83 % $ 244,806
80 %
Other countries 20,028
15
16,711
16
60,273
17
60,471
20
Total $ 130,837
100 % $ 104,836
100 % $ 359,009
100 % $ 305,277
100 %


	Three Months Ended March 31,
	2020				2019
United States	$	117,463	80	%	$	94,333	81	%
Other countries		29,699	20			21,477	19
Total	$	147,162	100	%	$	115,810	100	%

Contract Balances

The following table presents our contract assets, contract liabilities and certain information related to these balances as of and for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 (in thousands):


	March 31, 2020
Contract assets, net	$	56,252
Contract liabilities (deferred revenue)		211,713
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the period		48,465

September 30, 2019
Contract assets, net $ 33,635
Contract liabilities (deferred revenue) 209,309
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the period 83,159

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

September 30, 2019 December 31, 2018
Current Long-Term Total Current Long-Term Total
Warranty:
TASER $ 11,677
$ 16,633
$ 28,310
$ 12,797
$ 16,847
$ 29,644
Software and Sensors 9,899
5,450
15,349
8,273
6,516
14,789
21,576
22,083
43,659
21,070
23,363
44,433
Hardware:
TASER 4,378
17,601
21,979
9,355
15,598
24,953
Software and Sensors 39,308
27,357
66,665
20,878
24,685
45,563
43,686
44,958
88,644
30,233
40,283
70,516
Services:
TASER 11
396
407
—
—
—
Software and Sensors 61,887
14,712
76,599
55,713
10,771
66,484
61,898
15,108
77,006
55,713
10,771
66,484
Total $ 127,160
$ 82,149
$ 209,309
$ 107,016
$ 74,417
$ 181,433

September 30, 2019 December 31, 2018
Current Long-Term Total Current Long-Term Total
TASER $ 16,066
$ 34,630
$ 50,696
$ 22,152
$ 32,445
$ 54,597
Software and Sensors 111,094
47,519
158,613
84,864
41,972
126,836
Total $ 127,160
$ 82,149
$ 209,309
$ 107,016
$ 74,417
$ 181,433


	March 31, 2020						December 31, 2019
	Current		Long-Term		Total		Current		Long-Term		Total
Warranty:
TASER	$	12,963	$	15,469	$	28,432	$	12,716	$	16,378	$	29,094
Software and Sensors		10,886		4,447		15,333		9,852		5,156		15,008
		23,849		19,916		43,765		22,568		21,534		44,102
Hardware:
TASER		14,097		15,901		29,998		9,569		15,468		25,037
Software and Sensors		17,142		36,062		53,204		22,235		33,759		55,994
		31,239		51,963		83,202		31,804		49,227		81,031
Services:
TASER		588		1,293		1,881		293		765		1,058
Software and Sensors		64,151		18,714		82,865		63,199		16,410		79,609
	$	64,739	$	20,007	$	84,746	$	63,492	$	17,175	$	80,667
Total	$	119,827	$	91,886	$	211,713	$	117,864	$	87,936	$	205,800


	March 31, 2020						December 31, 2019
	Current		Long-Term		Total		Current		Long-Term		Total
TASER	$	27,648	$	32,663	$	60,311	$	22,578	$	32,611	$	55,189
Software and Sensors		92,179		59,223		151,402		95,286		55,325		150,611
Total	$	119,827	$	91,886	$	211,713	$	117,864	$	87,936	$	205,800

Remaining Performance Obligations

As of ~~September 30, 2019,~~March 31, 2020, we had approximately ~~$1.13~~$1.27 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 ~~September 30, 2019.~~March 31, 2020. We expect to recognize between ~~15%~~20% - ~~20%~~25% of this balance over the next twelve months, and generally expect the remainder to be recognized over the following five to seven years, subject to risks related to delayed deployments, budget appropriation or other contract cancellation clauses.

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

3. Cash, Cash Equivalents and Investments

The following tables summarize our cash, cash equivalents, and held-to-maturity investments at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in thousands):

As of September 30, 2019
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Cash and Cash Equivalents Short-Term Investments Long-Term Investments
Cash $ 80,269
$ —
$ —
$ 80,269
$ 80,269
$ —
$ —

Level 1:
Money market funds 37,311
—
—
37,311
37,311
—
—
Agency bonds 32,834
4
(6 ) 32,832
12,068
2,000
18,766
Subtotal 70,145
4
(6 ) 70,143
49,379
2,000
18,766

Level 2:
State and municipal obligations 4,454
1
(1 ) 4,454
—
4,454
—
Corporate bonds 127,987
51
(31 ) 128,007
2,903
102,459
22,625
U.S. Treasury repurchase agreements 70,000

—

—

70,000

70,000

—

—
Subtotal 202,441
52
(32 ) 202,461
72,903
106,913
22,625
Total $ 352,855
$ 56
$ (38 ) $ 352,873
$ 202,551
$ 108,913
$ 41,391

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
$ —
$ —


	As of March 31, 2020
			Gross		Gross				Cash and
	Amortized		Unrealized		Unrealized				Cash		Short-Term		Long-Term
	Cost		Gains		Losses		Fair Value		Equivalents		Investments		Investments
Cash	$	73,560	$	—	$	—	$	73,560	$	73,560	$	—	$	—

Level 1:
Money market funds		3,536		—		—		3,536		3,536		—		—
Agency bonds		40,340		91		(2)		40,429		2,000		12,738		25,602
Treasury bills		17,983		15				17,998		10,995		6,988
Subtotal		61,859		106		(2)		61,963		16,531		19,726		25,602

Level 2:
State and municipal obligations		32,185		34		(27)		32,192		1,991		29,687		507
Certificates of deposit		1,900		—		—		1,900		—		1,400		500
Corporate bonds		145,022		79		(959)		144,142		4,987		119,654		20,381
U.S. Treasury repurchase agreements		49,400		—		—		49,400		49,400		—		—
Treasury inflation-protected securities		3,247		—		(47)		3,200		—		—		3,247
Commercial paper		28,364		—		—		28,364		10,072		18,292		—
Subtotal		260,118		113		(1,033)		259,198		66,450		169,033		24,635
Total	$	395,537	$	219	$	(1,035)	$	394,721	$	156,541	$	188,759	$	50,237

As of March 31, 2020, the balances reflected above were offset by a payable of $13.5 million related to unsettled investment purchases, which was settled in early April. We believe unrealized losses on our investments are due to interest rate fluctuations. ~~As these~~

We adopted Topic 326 on January 1, 2020, and applied the credit loss guidance related to held-to-maturity securities prospectively. Because we do not have any history of losses for our held-to-maturity investments, our expected loss allowance methodology for held-to-maturity investments is developed using published or estimated credit default rates for similar investments and current and future economic and market conditions. At both January 1 and March 31, 2020, our credit loss reserve for held-to-maturity investments was approximately $0.1 million. During the three months ended March 31, 2020, we increased the frequency of review for our investment portfolio in order to more closely monitor potential impacts of the COVID-19 pandemic.

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	As of December 31, 2019
			Gross		Gross				Cash and
	Amortized		Unrealized		Unrealized				Cash		Short-Term		Long-Term
	Cost		Gains		Losses		Fair Value		Equivalents		Investments		Investments
Cash	$	103,319	$	—	$	—	$	103,319	$	103,319	$	—	$	—

Level 1:
Money market funds		8,845		—		—		8,845		8,845		—		—
Agency bonds		32,869		14		(4)		32,879		—		15,131		17,738
Subtotal		41,714		14		(4)		41,724		8,845		15,131		17,738

Level 2:
State and municipal obligations		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	$	396,283	$	107	$	(34)	$	396,356	$	172,250	$	178,534	$	45,499

4. Expected Credit Losses

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

We considered the current and expected future economic and market conditions surrounding the novel coronavirus ("COVID-19") pandemic and recorded additional credit loss expense of approximately $0.9 million during the three months ended March 31, 2020.

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

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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


		March 31, 2020
			United States		Other countries		Total
Balance, beginning of period	��	$	1,395	$	172	$	1,567
Adoption of Topic 326, cumulative-effect adjustment to retained earnings			767		1		768
Provision for expected credit losses			722		164		886
Amounts written off charged against the allowance			(2)		-		(2)
Other, including dispositions and foreign currency translation			-		(4)		(4)
Balance, end of period		$	2,882	$	333	$	3,215

As of March 31, 2020, the ~~ability and intent to hold these investments to maturity, we do not consider these investments to be other than temporarily impaired~~allowance for expected credit losses for each type of customer receivable was as ~~of September 30, 2019.~~

follows:


	March 31,
	2020
Accounts receivable and notes receivable, current	$	1,827
Contract assets, net		429
Long-term notes receivable, net of current portion		959
Total allowance for expected credit losses on customer receivables	$	3,215

5. Inventory

Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average cost of raw materials, which approximates the first-in, first-out (“FIFO”) method and includes allocations of manufacturing labor and overhead. Included in finished goods at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 was ~~$1.4~~$1.5 million and $1.4 million, respectively, of trial and evaluation hardware units. Provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value. Inventory consisted of the following at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in thousands):

September 30, 2019 December 31, 2018
Raw materials $ 21,096
$ 19,670
Finished goods 19,570
14,093
Total inventory $ 40,666
$ 33,763


	March 31, 2020		December 31, 2019
Raw materials	$	21,808	$	20,789
Finished goods		25,114		18,056
Total inventory	$	46,922	$	38,845

~~Table of Contents~~

~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

6. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 were as follows (in thousands):

TASER Software and Sensors Total
Balance, beginning of period $ 1,338
$ 23,643
$ 24,981
Foreign currency translation adjustment (52 ) (53 ) (105 )
Balance, end of period $ 1,286
$ 23,590
$ 24,876


			Software and
	TASER		Sensors		Total
Balance, beginning of period	$	1,354	$	23,659	$	25,013
Foreign currency translation adjustments		(130)		(131)		(261)
Balance, end of period	$	1,224	$	23,528	$	24,752

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Intangible assets (other than goodwill) consisted of the following (in thousands):

September 30, 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
$ (959 ) $ 2,202
$ 3,161
$ (732 ) $ 2,429
Issued patents 4-15 years 3,170
(1,268 ) 1,902
2,940
(1,106 ) 1,834
Issued trademarks 3-11 years 1,006
(532 ) 474
1,053
(599 ) 454
Customer relationships 4-8 years 3,664
(1,263 ) 2,401
3,701
(880 ) 2,821
Non-compete agreements 3-4 years 446
(397 ) 49
540
(439 ) 101
Developed technology 3-7 years 10,660
(5,982 ) 4,678
13,404
(7,081 ) 6,323
Re-acquired distribution rights 2 years 1,932
(1,932 ) —
1,928
(1,813 ) 115
Total amortizable 24,039
(12,333 ) 11,706
26,727
(12,650 ) 14,077
Not amortizable (indefinite-lived) intangible assets:
TASER trademark 900
900
900
900
Patents and trademarks pending 922
922
958
958
Total not amortizable 1,822
1,822
1,858
1,858
Total intangible assets $ 25,861
$ (12,333 ) $ 13,528
$ 28,585
$ (12,650 ) $ 15,935


		March 31, 2020						December 31, 2019
		Gross				Net		Gross				Net
	Useful	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Life	Amount		Amortization		Amount		Amount		Amortization		Amount
Amortizable (definite-lived) intangible assets:
Domain names	5‑10 years	$	3,161	$	(1,111)	$	2,050	$	3,161	$	(1,035)	$	2,126
Issued patents	5‑25 years		3,175		(1,397)		1,778		3,271		(1,339)		1,932
Issued trademarks	3‑15 years		1,164		(553)		611		1,166		(678)		488
Customer relationships	4‑8 years		3,636		(1,497)		2,139		3,721		(1,416)		2,305
Non-compete agreements	3‑4 years		439		(398)		41		450		(404)		46
Developed technology	3‑5 years		10,660		(7,074)		3,586		10,660		(6,528)		4,132
Re-acquired distribution rights	2 years		1,765		(1,765)		—		2,009		(2,009)		—
Total amortizable			24,000		(13,795)		10,205		24,438		(13,409)		11,029
Non-amortizable (indefinite-lived) intangible assets:
TASER trademark			900				900		900				900
Patents and trademarks pending			824				824		842				842
Total non-amortizable			1,724				1,724		1,742				1,742
Total intangible assets		$	25,724	$	(13,795)	$	11,929	$	26,180	$	(13,409)	$	12,771

Amortization expense of intangible assets for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 was $0.8 million and ~~$2.7 million, respectively. Amortization expense of intangible assets for the three and nine months ended September 30, 2018 was $1.6 million and $4.6~~$1.0 million, respectively. Estimated amortization for intangible assets with definite lives for the remaining ~~three~~nine months of ~~2019,~~2020, the next five years ended December 31, and thereafter, is as follows (in thousands):


2020	$	2,476
2021		2,854
2022		1,258
2023		971
2024		890
2025		623
Thereafter		1,133
Total	$	10,205

7. Other Long-Term Assets

Other long-term assets consisted of the following at March 31, 2020 and December 31, 2019 (in thousands):


	March 31, 2020		December 31, 2019
Cash surrender value of corporate-owned life insurance policies	$	3,523	$	4,214
Deferred commissions ⁽¹⁾		21,826		22,068
Restricted cash		55		56
Operating lease assets		21,944		9,653
Investment in unconsolidated affiliate ⁽²⁾		4,700		—
Warrants for unconsolidated affiliate ⁽³⁾		2,588		—
Prepaid expenses, deposits and other		4,821		4,190
Total other long-term assets	$	59,457	$	40,181

2019 Remaining $ 948
2020 3,177
2021 2,862
2022 1,256
2023 962
2024 881
Thereafter 1,620
Total $ 11,706

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

~~6. Other Assets~~

~~Other assets consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):~~

September 30, 2019 December 31, 2018
Cash surrender value of corporate-owned life insurance policies $ 4,020
$ 3,596
Deferred commissions ⁽¹⁾
17,920
15,530
Restricted cash 658
661
Operating lease assets 10,592
—
Prepaid expenses, deposits and other 3,952
3,212
Total other assets $ 37,142
$ 22,999

(1)

Represents the incremental costs of obtaining contracts with customers, which consist primarily of sales commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contracts and amortized consistent with the recognition timing of the revenue for the underlying performance obligations.

(2)

In March 2020, we made an investment in and entered into a commercial partnership agreement with Flock Group Inc., a provider of advanced security for neighborhoods and law enforcement. Our $4.7 million investment resulted in our ownership of approximately 5% of the outstanding equity interests of this company. We account for this investment under the ASC 321 measurement alternative for equity securities without readily determinable fair values, as there are no quoted market prices for the investment. The investment is measured at cost less impairment, adjusted for observable price changes and is assessed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. As of March 31, 2020, no impairment was recorded for the investment.

(3)

In conjunction with the equity investment in and commercial partnership with Flock Group, Inc., we have the ability to commit additional capital over time through warrants where the exercisability and exercise prices are conditional on the achievement of certain partnership performance metrics. The fair value of the preferred stock warrants were estimated at $2.6 million using Monte Carlo simulation.

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

8. Accrued Liabilities

Accrued liabilities consisted of the following at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in thousands):

September 30, 2019 December 31, 2018
Accrued salaries, benefits and bonus $ 17,058
$ 19,063
Accrued professional, consulting and lobbying fees 5,002
4,894
Accrued warranty expense 1,071
898
Accrued income and other taxes 5,143
4,167
Other accrued liabilities 7,471
12,070
Accrued liabilities $ 35,745
$ 41,092


	March 31, 2020		December 31, 2019
Accrued salaries, benefits and bonus	$	13,378	$	24,737
Accrued professional, consulting and lobbying fees		8,993		3,235
Accrued warranty expense		1,220		1,476
Accrued income and other taxes		2,093		3,362
Other accrued expenses		10,720		12,191
Accrued liabilities	$	36,404	$	45,001

9. Income Taxes

On March 27, 2020, the U.S federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act is an emergency economic stimulus package in response to the coronavirus outbreak which, among other things, contains numerous income tax provisions. Some of these tax provisions are expected to be effective retroactively for years ending before the date of enactment. We are currently evaluating the implications of the CARES Act, but its impact on the financial statements and related disclosures is not expected to be material.

We file income tax returns for federal purposes and in many states, as well as in multiple foreign jurisdictions. Our tax filings remain subject to examination by applicable tax authorities for a certain length of time, generally three to four years, following the tax year to which these filings relate. Our U.S. federal income tax return for fiscal year 2016 is currently under audit by the Internal Revenue ~~Service.~~Service and we have been notified our 2016 and 2017 state tax returns will be audited by the state of California. Additionally, we were notified that an audit will commence for Axon Public Safety Southeast Asia LLC, our entity in Vietnam. The tax period has not yet been defined.

In April 2020, recent interpretations of a German law relating to withholding taxes on intellectual property rights have emerged. We are currently evaluating this law and any related impact to our financial position or results of operations.

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Deferred Tax Assets

Net deferred income tax assets at ~~September 30, 2019,~~March 31, 2020, primarily include R&D tax credits, stock-based compensation expense, deferred revenue, accruals and reserves, and net operating losses, partially offset by accelerated depreciation expense and valuation allowance reserve. Our total net deferred tax assets at ~~September 30, 2019~~March 31, 2020 were ~~$23.3~~$29.1 million.

In preparing our condensed consolidated financial statements, management assesses the likelihood that its deferred tax assets will be realized from future taxable income. In evaluating our ability to recover our deferred income tax assets, management considers all available positive and negative evidence, including our operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Management exercises significant judgment in determining our provisions for income taxes, our deferred tax assets and liabilities, and our future taxable income for purposes of assessing our ability to utilize any future tax benefit from our deferred tax assets.

As of ~~September 30, 2019,~~March 31, 2020, we continue to demonstrate three-year cumulative pre-tax income in the U.S. federal and state tax jurisdictions; however, we have Arizona R&D Tax Credits expiring unutilized each year. Therefore, management has concluded that it is more likely than not that our Arizona R&D deferred tax asset will not be realized.

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~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

As of ~~September 30, 2019,~~March 31, 2020, we have cumulative pre-tax losses in ~~Australia,~~ the U.K., and Canada, which limits the ability to consider other subjective evidence, such as projections for future growth. On the basis of this evaluation, a full valuation allowance has been recorded for these jurisdictions. The amount of the deferred tax asset considered 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 where there is not an expectation that the asset may be realized. Therefore, we have recorded a partial valuation allowance for Australia.

We complete R&D tax credit studies for each year that an R&D tax credit is claimed for federal, Arizona, and California income tax purposes. Management has made the determination that it is more likely than not that the full benefit of the R&D tax credit will not be sustained on examination and recorded a liability for unrecognized tax benefits of ~~$6.1~~$6.5 million as of ~~September 30, 2019.~~March 31, 2020. In addition, management accrued $0.1 million of interest for estimated uncertain tax positions related to certain federal income tax liabilities. Should the unrecognized benefit of ~~$6.2~~$6.6 million be recognized, our effective tax rate would be favorably impacted. Approximately ~~$2.9~~$2.6 million of the unrecognized tax benefit associated with R&D credits has been netted against the R&D deferred tax asset.

Effective Tax Rate

Our overall effective tax rate for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, after discrete period adjustments, was ~~5.1%~~(2,789.4%). Before discrete adjustments, the tax rate was ~~19.6%~~90%, which is ~~less~~more than the federal statutory rate, primarily due to state taxes and non-deductible expenses for items such as meals and entertainment, ~~the~~ executive compensation limitation under Internal Revenue Code ("IRC") Section 162(m), and an income inclusion from global intangible low-taxed income ("GILTI"), offset by a reduction for foreign-derived intangible income ("FDII") and R&D tax credits. The effective tax rate was favorably impacted by a ~~$3.9~~$4.1 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for ~~RSUs~~restricted stock units (“RSUs”) that vested or stock options that were exercised during the ~~nine~~three months ended ~~September 30, 2019. This was partially offset by an unfavorable discrete item~~March 31, 2020.

Table of $1.7 million related to the write off of certain deferred tax assets related to future stock compensation awards vesting for certain officers for whom deductibility of compensation is limited by IRC Section 162(m) and return to provision adjustments for jurisdictions in which tax returns have been filed.Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

10. Stockholders’ Equity

Performance-based stock awards

We have issued performance-based stock options and performance-based RSUs, the vesting of which is generally contingent upon the achievement of certain performance criteria related to our operating performance, as well as successful and timely development and market acceptance of future product introductions. In addition, certain of the performance RSUs have additional service requirements subsequent to the achievement of the performance criteria. Compensation expense is recognized over the requisite service period, which is defined as the longest explicit, implicit or derived service period based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date. 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 for each pair of performance and market conditions over the longer of the expected achievement period of the performance and market conditions, beginning at the point in time that the relevant performance condition is considered probable of achievement. The fair value of such awards is estimated on the grant date using Monte Carlo simulations.

CEO Performance Award

On May 24, 2018, ~~(the “Grant Date”),~~ our stockholders approved the Board of Directors’ grant of 6,365,856 stock option awards to Patrick W. Smith, our CEO (the “CEO Performance Award”). The CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational goals (performance conditions) and market capitalization goals (market conditions), assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each vesting date. Each of the 12 vesting tranches of the CEO Performance Award have a 10-year contractual term and will vest upon certification by the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of the following ~~eight~~8 operational goals focused on revenue or ~~eight~~8 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

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~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

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

(1)	In connection with the business acquisition that was completed during the three months ended June 30, 2018, the revenue goals were adjusted for the acquiree’s Target Revenue, as defined in the CEO Performance Award agreement.

⁽¹⁾In connection with the business acquisition that was completed during the three months ended June 30, 2018, the revenue goals were adjusted for the acquiree's Target Revenue, as defined in the CEO Performance Award agreement.

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As of ~~September 30, 2019,~~March 31, 2020, the following operational goals were considered probable of achievement:

~~Total revenue of $710.1 million~~

~~Adjusted EBITDA (CEO Performance Award) of $125.0 million; and~~


•●	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.

The first two market capitalization goals have been achieved as of ~~September 30, 2019.~~March 31, 2020. 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 ~~September 30, 2019.~~March 31, 2020. As there are ~~three~~nine operational goals considered probable of achievement, we recorded stock-based compensation expense of ~~$10.7~~$44.3 million related to the CEO Performance Award from the Grant Date through ~~September 30, 2019.~~March 31, 2020. The number of stock options that would vest related to the ~~three~~nine tranches is approximately ~~1.6~~4.8 million shares.

As of ~~September 30, 2019,~~March 31, 2020, we had ~~$56.9~~$147.3 million of total unrecognized stock-based compensation expense for the performance goals that were considered probable of achievement, which will be recognized over a weighted-average period of ~~7.3~~5.79 years. As of ~~September 30, 2019,~~March 31, 2020, we had unrecognized stock-based compensation expense of ~~$178.3~~$54.4 million for the performance goals that were considered not probable of achievement.

eXponential Stock Performance Plan

On February 12, 2019, our shareholders approved the 2019 Stock Incentive Plan (the “2019 Plan”), which was adopted by the Board of Directors to reserve a sufficient number of shares to facilitate our eXponential Stock Performance Plan (“XSPP”) and grants of eXponential Stock Units (“XSUs”) under the plan. ~~Pursuant to~~Initial awards under the ~~XSPP, all eligible full-time U.S. employees~~plan were granted ~~an award of 60 XSUs~~ in January 2019, ~~and certain employees had the opportunity to elect to receive a percentage of the value of their target compensation over the next nine years (2019-2027) in the form of~~with additional XSUs. For employees who elected to receive XSUs, the XSU grants were made as an up front, lump sum grant in January 2019, and are intended to replace that portion of the target compensation they elected to receive in the form of XSUs for the next nine years. Accordingly, their go forward target compensation will be reduced until 2027 by the amount of such compensation that the employees elected to receive in the form of the January 2019 XSU grants. Additional employee awards ~~were~~ granted ~~in February 2019 and September 2019. A total of approximately 5.9 million XSUs were granted in~~since that date. During the ~~nine~~three months ended ~~September 30, 2019.~~

March 31, 2020, we granted an additional 43 thousand XSUs.

The XSUs are grants of ~~restricted stock units,~~RSUs, each with a term of approximately nine years, that vest in 12 equal tranches. Each of the 12 tranches will vest upon certification by the Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA (CEO Performance Award) have been met for the previous four consecutive fiscal quarters.

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~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

The XSPP contains an anti-dilution provision, which is used to calculate a maximum number of shares outstanding for purposes of determining achievement of the market capitalization goals whereby the maximum number of shares used to calculate the market capitalization goal is calculated by organically growing the current number of shares outstanding by 3% per year (the "XSU Maximum"). Any shares of Stock issued to Patrick W. Smith upon the exercise of the stock options granted to Mr. Smith under the CEO Performance Award shall increase the XSU Maximum. The XSU Maximum shall also be adjusted for acquisitions, spin-offs or other changes in the number of outstanding shares of common stock, if such changes have a corresponding adjustment on the market capitalization goals.

The market capitalization and operational goals are identical to the CEO Performance Award, except for the number of shares that are used to calculate the market capitalization goals if shares outstanding exceed the XSU Maximum. Additionally, because the grant date is different than that of the CEO Performance Award, the measurement period for market capitalization is not identical.

Stock-based compensation expense associated with XSU awards is recognized over the longer of the expected achievement period for each pair of market capitalization and operational goals, beginning at the point in time when the relevant operational goal is considered probable of being met. The market capitalization goal period and the valuation of each tranche are determined using a Monte Carlo simulation, which is also used as the basis for determining the expected achievement period of the market capitalization goal. The probability of meeting an operational goal and the expected achievement point in time for meeting a probable operational goal are based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis. Even though no tranches of the XSU awards vest unless a market capitalization and a matching operational goal are both achieved, stock-based compensation expense is recognized when an operational goal is considered probable of achievement regardless of whether a market capitalization goal is actually achieved.

The first two market capitalization goals have been achieved as of ~~September 30, 2019.~~March 31, 2020. However, none of the XSU tranches have vested thus far as the operational goals have not yet been achieved as of ~~September 30, 2019.~~March 31, 2020. As there are ~~three~~nine operational goals considered probable of achievement, we recorded stock-based compensation expense of ~~$4.3~~$23.2 million related to the XSU awards from their respective grant dates through ~~September 30, 2019.~~March 31, 2020. The number of XSU awards that would vest related to the ~~three~~nine tranches is approximately ~~1.4~~4.1 million shares.

As of ~~September 30, 2019,~~March 31, 2020, we had ~~$57.4~~$131.8 million of total unrecognized stock-based compensation expense for the performance goals that were considered probable of achievement, which will be recognized over a weighted-average period of ~~7.3~~5.65 years. As of ~~September 30, 2019,~~March 31, 2020, we had unrecognized stock-based compensation expense of ~~$131.6~~$35.5 million for the performance goals that were considered not probable of achievement.

~~Given the complexity~~

Table of the awards, we utilized Monte Carlo simulations to simulate a range of possible future market capitalizations for the Company over the term of the awards. The average of all iterations of the simulation was used as the basis for the valuation and market capitalization goal derived service period for each tranche. Additionally, we applied an illiquidity discount of between 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 8.4 and 9.0 years, expected volatility of between 44.12% and 45.47%, and dividend yield of 0.00%.Contents

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Restricted Stock Units

The following table summarizes RSU activity for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 (number of units and aggregate intrinsic value in thousands):

Number of
Units

Weighted Average
Grant-Date Fair Value
Aggregate
Intrinsic Value
Units outstanding, beginning of year 1,655
$ 28.34

Granted 6,476
35.87

Released (450 ) 24.47

Forfeited (410 ) 34.63

Units outstanding, end of period 7,271
34.93
$ 412,866


	Number of	Weighted Average		Aggregate
	Units	Grant-Date Fair Value		Intrinsic Value
Units outstanding, beginning of year	1,249	$	45.47
Granted	78		69.19
Released	(219)		35.49
Forfeited	(34)		50.82
Units outstanding, end of period	1,074		49.05	$	75,985

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~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was ~~$56.78~~$70.77 per share, multiplied by the number of RSUs outstanding. As of ~~September 30, 2019,~~March 31, 2020, there was ~~$99.2~~$41.4 million in unrecognized compensation costs related to RSUs under our stock plans for shares that are expected to vest. We expect to recognize the cost related to the RSUs over a weighted average period of ~~5.16~~2.09 years. RSUs are released when vesting requirements are met.

During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, we granted ~~6.5 million RSUs, consisting of 0.5~~0.1 million service-based RSUs and approximately 6.0 million performance-based RSUs, including 5.9 million XSUs. As of September 30, 2019, the performance criteria had been met for approximately 5000 of the 6.0 million performance-based RSUs outstanding. Certain of the performance-based RSUs outstanding as of September 30, 2019 can vest with a range of shares earned being between 0% and 200% of the targeted shares granted, depending on the final achievement of pre-determined performance criteria as of the vesting date. The amount of RSUs included in the table above related to such grants is the target level. The maximum additional number of performance-based RSUs that could be earned is 0.3 million, which are not included in the table above.

RSUs. Certain RSUs that vested in the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 were net-share settled such that we withheld shares to cover the employees’ tax obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld related to RSUs were approximately 4753 thousand and had a value of ~~$3.3~~$4.0 million on their respective vesting dates as determined by the closing stock price on such dates. Payments for the employees’ tax obligations are reflected as a financing activity within the condensed consolidated statements of cash flows. We record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital.

Performance Stock Units

The following table summarizes Performance Stock Units (“PSUs“) activity for the three months ended March 31, 2020 (number of units and aggregate intrinsic value in thousands):


	Number of	Weighted Average		Aggregate
	Units	Grant-Date Fair Value		Intrinsic Value
Units outstanding, beginning of year	6,033	$	34.47
Granted	102		42.41
Released	(158)		24.88
Forfeited	(188)		34.97
Units outstanding, end of period	5,789		34.86	$	409,657

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $70.77 per share, multiplied by the number of PSUs outstanding. As of March 31, 2020, there was $137.1 million in unrecognized compensation costs related to PSUs under our stock plans for shares that are expected to vest. We expect to recognize the cost related to the PSUs over a weighted average period of 5.52 years. PSUs are released when vesting requirements are met.

During the three months ended March 31, 2020, we granted 0.1 million PSUs, including approximately 43 thousand XSUs. As of March 31, 2020, the performance criteria had been met for approximately 0.1 million of the 5.8 million PSUs outstanding. Certain of the PSUs outstanding as of March 31, 2020 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. The amount of PSUs included in the table above related to such grants is the

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

target level. The maximum additional number of PSUs that could be earned is 0.2 million, which are not included in the table above.

Certain PSUs that vested in the three months ended March 31, 2020 were net-share settled such that we withheld shares to cover the employees’ tax obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld related to PSUs were approximately 15 thousand and had a value of $1.2 million on their respective vesting dates as determined by the closing stock price on such dates. Payments for the employees’ tax obligations are reflected as a financing activity within the condensed consolidated statements of cash flows. We record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital.

Stock Option Activity

The following table summarizes stock option activity for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 (number of units and aggregate intrinsic value in thousands):

Number
of
Options

Weighted
Average
Exercise
Price
Weighted Average Remaining Contractual Life (years) Aggregate
Intrinsic Value
Options outstanding, beginning of year 6,458
$ 28.24

Granted —
—

Exercised (25 ) 4.23

Expired / terminated —
—

Options outstanding, end of period 6,433
28.33
8.33 $ 183,023
Options exercisable, end of period 67
4.53
1.19 3,506


				Weighted
		Weighted		Average
	Number	Average		Remaining
	of	Exercise		Contractual	Aggregate
	Options	Price		Life (years)	Intrinsic Value
Options outstanding, beginning of year	6,431	$	28.34
Granted	—		—
Exercised	(6)		4.74
Expired / terminated	—		—
Options outstanding, end of period	6,425		28.36	7.84	$	272,512
Options exercisable, end of period	59		4.50	0.67		3,936

Aggregate intrinsic value represents the difference between the exercise price of the underlying stock option awards and the closing market price of our common stock of ~~$56.78~~$70.77 on ~~September 30, 2019.~~March 31, 2020. The intrinsic value of options exercised for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ was ~~$1.1~~$0.3 million and ~~$20.5~~$1.0 million, respectively. As of ~~September 30, 2019,~~March 31, 2020, total options outstanding included 6.4 million unvested performance-based stock options. Of this total, ~~1.6~~4.8 million options relate to tranches of the CEO Performance Award considered probable of achievement.

Stock-based Compensation Expense

The following table summarizes the composition of stock-based compensation expense for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Cost of products sold and services delivered $ 312
$ 93
$ 775
$ 359
Sales, general and administrative expenses 9,508
3,748
19,130
8,783
Research and development expenses 3,843
2,414
10,290
6,160
Total stock-based compensation expense $ 13,663
$ 6,255
$ 30,195
$ 15,302


	Three Months Ended March 31,
	2020		2019
Cost of products sold and services delivered	$	590	$	226
Sales, general and administrative expenses		14,970		4,681
Research and development expenses		4,635		2,998
Total stock-based compensation expense	$	20,195	$	7,905

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~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Stock Incentive Plan

In February 2019, our shareholders approved the 2019 Plan authorizing an additional 6.0 million shares, plus remaining available shares under prior plans, for issuance under the new plan. Combined with the legacy stock incentive plans, there are ~~2.2~~2.1 million shares available for grant as of ~~September 30, 2019.~~March 31, 2020.

~~Stock Inducement Plan~~

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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. 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 employed by us (or following such individuals’ bona fide periods of non-employment by us), as an inducement material to the individuals’ entry into employment with us. The terms and conditions of the 2019 Inducement Plan are substantially similar to our stockholder-approved 2019 Plan. As of September 30, 2019, there were 30,000 shares available for grant under the 2019 Inducement Plan.

Stock Repurchase Plan

In February 2016, our Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of our outstanding common stock subject to stock market conditions and corporate considerations. During the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ 0 common shares were purchased under the program. As of ~~September 30, 2019,~~March 31, 2020, $16.3 million remains available under the plan for future purchases. Any future purchases will be discretionary.

~~10.~~

11. Line of Credit

We have a $50.0 million unsecured revolving line of credit with a domestic bank, of which $10.0 million is available for letters of credit. The credit agreement matures on December 31, 2021 and has an accordion feature which allows for an increase in the total line of credit up to $100.0 million, subject to certain conditions, including the availability of additional bank commitments.

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, there were 0 borrowings under the line. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. As of ~~September 30, 2019,~~March 31, 2020, we had letters of credit outstanding of approximately ~~$3.6~~$2.7 million under the facility and available borrowing of ~~$46.4~~$47.3 million, excluding amounts available under the accordion feature. Advances under the line of credit bear interest at LIBOR plus 1.0 to 1.5% per year determined in accordance with a pricing grid based on our funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio.

We are required to comply with a maximum funded debt to EBITDA ratio of no greater than 2.50 to 1.00 based upon a trailing four fiscal quarter period. At ~~September 30, 2019,~~March 31, 2020, our funded debt to EBITDA ratio was ~~0.001~~0.0003 to 1.00.

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~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~11. Leases~~

~~Lease Obligations~~

We determine if an arrangement is a lease at inception. Operating lease ROU assets and liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Additionally, we use the portfolio approach in determining the discount rate used to present value lease payments. We give consideration to our line of credit as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates. The ROU asset also includes any lease payments made and 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.

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 September 30, 2019 were immaterial.~~

Leases (in thousands) Classification September 30, 2019
Assets
Operating lease assets Other assets $ 10,592
Liabilities
Current
Operating Other current liabilities $ 3,959
Noncurrent
Operating Other long-term liabilities 7,687
Total lease liabilities $ 11,646

~~The components of lease expense were as follows (in thousands):~~

Classification Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Operating lease expense ⁽¹⁾

Sales, general and administrative expenses ⁽²⁾
$ 1,264
$ 3,418
Sublease income Other income (82 ) (219 )
Net lease expense $ 1,182
$ 3,199

⁽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.~~

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~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~Other information related to leases was as follows (in thousands, except lease term and discount rate):~~

Nine Months Ended September 30, 2019
Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 3,229
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases 888
Weighted average remaining lease term:
Operating leases 3.3 years
Weighted average discount rate:
Operating leases 3.4 %

~~Future minimum lease payments under non-cancellable leases as of September 30, 2019 were as follows (in thousands):~~

Operating Sublease income Net
2019 Remaining $ 1,114
$ (82 ) $ 1,032
2020 4,545
(82 ) 4,463
2021 3,639
—
3,639
2022 2,638
—
2,638
2023 1,173
—
1,173
2024 —
—
—
Thereafter —
—
—
Total minimum lease payments 13,109
(164 ) 12,945
Less: Amount representing interest (1,299 )
Present value of lease payments $ 11,646

~~As of September 30, 2019, we do not have any leases that have not yet commenced.~~

~~Disclosures related to periods prior to adoption of Topic 842~~

~~Rent expense under all operating leases, including both cancelable and non-cancellable leases, was $4.2 million and $2.9 million for the years ended December 31, 2018 and 2017, respectively.~~

~~Future minimum lease payments under non-cancelable leases at December 31, 2018, were as follows (in thousands):~~

Operating Capital
2019 $ 3,670
$ 40
2020 3,572
36
2021 2,961
—
2022 2,001
—
2023 573
—
Thereafter —
—
Total minimum lease payments $ 12,777
76
Less: Amount representing interest (6 )
Capital lease obligation $ 70

12. Commitments and Contingencies

~~Land Lease Purchase Agreement~~

~~On December 13, 2018, we entered into~~

Product Litigation

As a ~~Purchase and Sale Agreement ("PSA") to purchase a leasehold interest to a parcel~~manufacturer of land located in Maricopa County, Arizona for a period of 84 years, on which we intended to construct our new headquarters. On October 10, 2019, we terminated the PSA because we were unable to secure design approval by the Salt River Pima-Maricopa Indian Community. We expect to forfeit our escrow deposit of approximately $0.2 million, and no further amounts are owed to the counterparty under the agreement. In connection with the termination of the PSA, we recorded an impairment charge of $0.7 million, excluding the aforementioned forfeited deposit, related to the abandonment of certain planning and site development activities.

~~Data Storage Purchase Commitment~~

In June 2019, we entered into a purchase agreement for cloud data storage with 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 expensesweapons and other ~~current assets on~~law enforcement tools used in high-risk field environments, we are often the subject of products liability litigation concerning the use of our condensed consolidated balance sheet. Storage fees under this agreement were $3.7 million for the three and nine months ended September 30, 2019, and were recorded in cost of service sales. The remaining purchase commitment at September 30, 2019 was $46.3 million.

~~Product Litigation~~

products. We are currently named as a defendant in 8 lawsuits in which the plaintiffs allege either wrongful death or personal injury in situations in which a TASER ~~CEW~~CED was used by law enforcement officers in connection with ~~arrests.~~arrests or training. While the facts vary from case to case, these product liability claims typically allege defective product design, manufacturing, and/or failure to warn. They seek compensatory and sometimes punitive damages, often in unspecified amounts.

We continue to aggressively defend all product litigation. As a general rule, it is our policy not to settle suspect injury or death cases. Exceptions are sometimes made where the settlement is strategically beneficial to us. Due to the confidential nature of our litigation strategy and the confidentiality agreements that are executed in the event of a settlement, we do not identify or comment on specific settlements by case or amount. Based on current information, we do not believe that the outcome of any such legal proceeding will have a material effect on our financial position, results of operations, or cash flows. We are self-insured for the first $5.0 million of any product claim made after 2014. No judgment or settlement has ever exceeded this amount in any products case. We continue to maintain product liability insurance coverage, including an insurance policy fronting arrangement, above our self-insured retention with various limits depending on the policy period.

Other Litigation

We are a defendant in a litigation matter filed by Digital Ally Inc. (“Digital”) in the District of Kansas alleging patent infringement regarding our Axon Signal technology. Axon was granted summary judgment of non-infringement on June 17, 2019 and judgment was entered in our favor on all of Digital’s claims. Digital’s appeal was submitted on briefs

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

without oral argument. On April 22, 2020, the Federal Circuit Court of Appeals affirmed the District Court’s non-infringement ruling and entered judgment on Digital's ~~claims. Digital has appealed the ruling.~~

appeal in favor of Axon.

We are also a defendant in a consumer class action lawsuit ~~previously~~ filed ~~and dismissed in California in 2018 and now refiled~~ in the District of Nevada on April 9, 2019 ~~(Case No. 3:1-cv-00192)~~ by ~~consumer weapon purchaser~~ Douglas Richey (“Richey”). The case alleges the TASER Pulse, X2 and X26P ~~CEWs~~CEDs have a faulty safety switch based on Richey’s Pulse allegedly discharging inside its neoprene case in a jacket pocket without injury. Any such discharge was likely due to static electricity, as disclosed in our consumer warnings. We will vigorously defend this claim and the propriety of any class certification. ~~Our motion to dismiss~~

The litigation information in this note is ~~pending.~~

current through the date of these financial statements.

U.S. Federal Trade Commission Investigation

~~In June 2018 we received a letter from the~~

The U.S. Federal Trade Commission (“FTC”) ~~with respect to its non-public investigation into our~~filed an enforcement action on January 3, 2020 regarding Axon’s May 2018 acquisition of ~~VIEVU,~~Vievu LLC ~~in May 2018.~~from Safariland LLC. The FTC ~~issued a subpoena~~alleges the merger was anticompetitive and adversely affected the body worn camera ("BWC") and digital evidence management systems ("DEMS") market for ~~certain information and documentation relating~~“large metropolitan police departments.” The administrative proceedings are currently stayed until June 4, 2020 due to the ~~acquisition on March 21, 2019.~~COVID-19 pandemic and the hearing has been reset for September 9, 2020. If successful, the FTC may require us to divest Vievu and other assets, which could be material to Axon. We are ~~cooperating with~~vigorously defending the ~~investigation.~~

~~Table~~matter. At this time, we cannot predict the eventual scope, duration, or outcome of ~~Contents~~this request and accordingly we have not recorded any liability in the accompanying condensed consolidated financial statements.

~~AXON ENTERPRISE, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Also on January 3, 2020, we sued the FTC in the District of Arizona for declaratory and injunctive relief alleging the FTC’s structure and administrative processes violate Article II of the U.S. Constitution and our Fifth Amendment rights to due process and equal protection. On April 8, 2020, the district court dismissed the action, without prejudice, for lack of jurisdiction, requiring Axon to first bring its constitutional claims in the administrative case. Axon has appealed that ruling to the Ninth Circuit (No. 20-15662), which has granted expedited consideration and set oral argument for July 17.

General

From time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us. It is our policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on us. After carefully assessing the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously defend any lawsuit filed against us. We record a liability when losses are deemed probable and reasonably estimable. When losses are deemed reasonably possible but not probable, we determine whether it is possible to provide an estimate of the amount of the loss or range of possible losses for the claim, if material for disclosure. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of any potential loss. We reevaluate and update accruals as matters progress over time.

Based on our assessment of outstanding litigation and claims as of ~~September 30, 2019,~~March 31, 2020, we have determined that it is not reasonably possible that these lawsuits will individually, or in the aggregate, materially affect our results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on our operating results, financial condition or cash flows.

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Off-Balance Sheet Arrangements

Under certain circumstances, we use letters of credit and surety bonds to guarantee our performance under various contracts, principally in connection with the installation and integration of Axon cameras and related technologies. Certain of our letters of credit and surety bonds have stated expiration dates with others being released as the contractual performance terms are completed. At ~~September 30, 2019,~~March 31, 2020, we had outstanding letters of credit of ~~$3.6~~$2.7 million that are expected to expire in May 2020 and September 2021. Additionally, we had ~~$24.6~~$24.1 million of outstanding surety bonds at ~~September 30, 2019,~~March 31, 2020, with ~~$1.1~~$0.5 million expiring in 2020, ~~$2.3~~$2.4 million expiring in 2021, $3.2 million expiring in 2022, $7.5 million expiring in 2023 and the remaining $10.5 million expiring in 2024.

13. ~~Related Party Transactions~~

We subscribe to various cloud-based applications from Salesforce. Bret Taylor, who was a member of our Board of Directors through June 14, 2019, serves as President and Chief Product Officer of Salesforce. We incur costs at different times throughout the year, typically in advance of services being provided, and subsequently amortize these costs ratably to expense as services are provided over the contractual term. The cost to subscribe to various cloud-based hosting arrangements from Salesforce was $0.5 million and $0.4 million for the three months ended September 30, 2019 and 2018, respectively, and $1.4 million and $1.3 million for the nine months ended September 30, 2019 and 2018, respectively. There were 0 amounts due to Salesforce as of September 30, 2019. Amounts due to Salesforce as of December 31, 2018 were negligible.

~~14.~~ Employee Benefit Plans

We have a defined contribution 401(k) plan for eligible employees, which is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. Employees are entitled to make tax-deferred contributions of up to the maximum amount allowed by law of their eligible compensation.

We also have a non-qualified deferred compensation plan for certain executives, employees and non-employee directors through which participants may elect to postpone the receipt and taxation of a portion of their compensation, including stock-based compensation, received from us. The non-qualified deferred compensation plan allows eligible participants to defer up to 80% of their base salary and up to 100% of other types of compensation. The plan also allows for matching and discretionary employer contributions. Employee deferrals are deemed 100% vested upon contribution. Distributions from the plan are made upon retirement, death, separation of service, specified date or upon the occurrence of an unforeseeable emergency. Distributions can be paid in a variety of forms from lump sum to installments over a period of years. Participants in the plan are entitled to select from a wide variety of investments available under the plan and are allocated gains or losses based upon the performance of the investments selected by the participant. All gains or losses are allocated fully to plan participants and we do not guarantee a rate of return on deferred balances. Assets related to this plan consist of corporate-owned life insurance contracts and are included in

other assets in the condensed consolidated balance sheets; see Note 67 for balances. Participants have no rights or claims with respect to any plan assets and any such assets are subject to the claims of our general creditors.

Contributions to the plans are made by both the employee and us. Our contributions to the 401(k) plan are based on the level of employee contributions and are immediately vested. Future matching contributions to the plans 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 were ~~$0.9~~$1.5 million and ~~$0.9~~$1.4 million for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, respectively, and $3.5 million and $2.4 million for the nine months ended September 30, 2019 and 2018,~~ respectively.

~~15.~~

14. Segment Data

Our operations are comprised of 2 reportable segments: the manufacture and sale of ~~CEWs,~~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.

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Information relative to our reportable segments was as follows (in thousands):


	Three Months Ended March 31, 2020						Three Months Ended March 31, 2019
			Software and						Software and
	TASER		Sensors		Total		TASER		Sensors		Total
Net sales from products	$	75,175	$	32,113	$	107,288	$	65,301	$	22,788	$	88,089
Net sales from services		720		39,154		39,874		90		27,631		27,721
Net sales		75,895		71,267		147,162		65,391		50,419		115,810
Cost of product sales		30,248		18,636		48,884		23,278		16,322		39,600
Cost of service sales		—		9,670		9,670		—		7,293		7,293
Cost of sales		30,248		28,306		58,554		23,278		23,615		46,893
Gross margin	$	45,647	$	42,961	$	88,608	$	42,113	$	26,804	$	68,917

Research and development	$	3,032	$	23,349	$	26,381	$	3,712	$	19,642	$	23,354

Three Months Ended September 30, 2019 Three Months Ended September 30, 2018
TASER
Software and Sensors ¹
Total TASER Software and Sensors Total
Net sales from products $ 71,424
$ 25,073
$ 96,497
$ 63,666
$ 17,257
$ 80,923
Net sales from services 319
34,021
34,340
—
23,913
23,913
Net sales 71,743
59,094
130,837
63,666
41,170
104,836
Cost of product sales 26,504
15,941
42,445
19,256
13,697
32,953
Cost of service sales —
8,223
8,223
—
6,250
6,250
Cost of sales 26,504
24,164
50,668
19,256
19,947
39,203
Gross margin $ 45,239
$ 34,930
$ 80,169
$ 44,410
$ 21,223
$ 65,633

Research and development $ 3,485
$ 21,644
$ 25,129
$ 4,837
$ 17,145
$ 21,982

Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018
TASER
Software and Sensors ¹
Total TASER Software and Sensors Total
Net sales from products $ 197,148
$ 67,829
$ 264,977
$ 187,814
$ 50,804
$ 238,618
Net sales from services 558
93,474
94,032
—
66,659
66,659
Net sales 197,706
161,303
359,009
187,814
117,463
305,277
Cost of product sales 74,044
46,221
120,265
57,480
38,994
96,474
Cost of service sales —
24,098
24,098
—
15,566
15,566
Cost of sales 74,044
70,319
144,363
57,480
54,560
112,040
Gross margin $ 123,662
$ 90,984
$ 214,646
$ 130,334
$ 62,903
$ 193,237

Research and development $ 10,284
$ 61,692
$ 71,976
$ 11,816
$ 43,786
$ 55,602

¹~~Cost~~Table of ~~service sales for the three and nine months ended September 30, 2019 includes approximately $0.7 million and $1.6 million, respectively, of third party installation costs.~~Contents

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

The following discussion and analysis of our financial condition as of ~~September 30, 2019,~~March 31, 2020, and results of operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ should be read in conjunction with the condensed consolidated financial

statements and related notes included in this Report on Form 10-Q and ~~those~~the audited consolidated financial statements in our ~~2018~~2019 Annual Report on Form 10-K filed with the SEC on February ~~27, 2019.~~28, 2020. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in such forward-looking statements as a result of certain factors, including but not limited to those described under “Risk Factors” in our ~~2018~~2019 Annual Report on Form 10-K. See also "Special Note Regarding Forward-Looking Statements" on page ii of this Report on Form 10-Q.

Overview

~~Overview~~

Axon is a ~~market-leading provider~~global network of ~~connected~~devices, apps, training and people that helps public safety ~~technology solutions.~~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 life. We fulfill that mission through developing hardware and software products that advance ~~the~~our long term ~~objectives~~vision of a) obsoleting the bullet, b) reducing social conflict, and c) enabling a fair and effective justice system.

Our revenues for the three months ended ~~September 30, 2019~~March 31, 2020 were ~~$130.8~~$147.2 million, an increase of ~~$26.0~~$31.4 million, or ~~24.8%~~27.1%, from the comparable period in the prior year. We had a loss from operations of $0.8 million compared to income from operations of ~~$6.6 million compared to $4.0~~$2.7 million for the same period in the prior year. ~~The increase in income from operations was due~~Gross margin improved compared to the ~~increase in revenues,~~three months ended March 31, 2019 as a result of product mix, with improvement partially offset by ~~an increase in cost of sales and investments over~~additional expenses related to the ~~past year for additional headcount in research and development and sales, general and administrative functions~~COVID-19 pandemic. Increased operating expenses to support continued and future ~~growth. Gross margins were compressed~~growth also contributed to the decline in operating results. Expenses for the quarter ended March 31, 2020 also reflected an increase of $10.5 million in stock-based compensation expense related to the ~~rollout of our latest generation TASER device.~~ CEO Performance Award and XSPP. An increase in litigation costs also contributed to the higher selling, general and administrative expense. For the three months ended ~~September 30, 2019,~~March 31, 2020, we recorded net income of ~~$6.1~~$4.1 million, which reflected an income tax benefit of $3.9 million, compared to ~~$5.7~~$6.4 million for the comparable period in the prior year.

COVID-19

In late 2019, COVID-19 was first detected in Wuhan, China. In March 2020 the World Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has adversely affected workforces, economies, and financial markets globally, leading to an economic downturn. As an essential provider of products and services for law enforcement and other first responders, we remain focused on protecting the health and wellbeing of our employees while assuring the continuity of our business operations.

In response to the pandemic, Axon has taken a number of actions:

Customer support:

●

Free access to Axon Citizen cloud software to all public law enforcement agencies for the remainder of 2020 to enable social distancing;

●

A partnership with the National Police Foundation to provide personal protective equipment (“PPE”) for first responders;

●

An online support center for our customers, www.axon.com/covid-19-support-center; and

●

Our annual Axon Accelerate user conference will be held virtually in early August.

Employee safety and manufacturing:

●

Curbed all non-essential travel at the beginning of March;

●

Moved to a remote work model for support employees; and

●

Mitigating contamination risk in our facilities through staggered shifts, the use of PPE, increased distancing, cleaning standards that exceed CDC guidance, access to an onsite registered nurse, and paying or subsidizing certain high-risk employees while they stay at home.

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Supply chain:

●

We previously took steps to diversify our supply chain and global manufacturing footprint, which have positioned us well to manage through the pandemic. Thus far, we have been able to produce and ship our critical core products with little to no interruption.

●

We are continuously monitoring our supply chain to manage through potential impacts, finding alternate sources when available or working with foreign regulators to ensure that our suppliers can provide parts.

Shareholder engagement:

●

We have pivoted our shareholder engagement to a virtual format. Our annual meeting, scheduled for May 29, 2020, will be held online at www.virtualshareholdermeeting.com/AAXN2020, and we will be participating in several upcoming investor conferences utilizing video conferencing. All investor materials and events are available at investor.axon.com.

We are in a strong liquidity position, with substantial cash and investments on hand, which are discussed in more detail under Liquidity and Capital Resources. We believe that our existing liquidity and other 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. Our ~~revenues~~expenses for the ~~nine~~three months ended ~~September 30, 2019 were $359.0 million, an increase of $53.7 million, or 17.6%, from the comparable period in the prior year. We had income from operations of $8.0 million compared to $22.8~~March 31, 2020 increased by approximately $1.2 million for the same period in the prior year. The decrease in operating results was due to increased cost of sales, selling, general and administrative expenses, and research and development expenses to support continued and future growth. Gross margins were compressedcosts related to the ~~rollout of our latest generation TASER device~~pandemic, and ~~increased data storage expenses. For the nine months ended September 30, 2019, we recorded net income of $13.3 million compared to $27.1 million for the comparable period in the prior year.~~

~~2019 Outlook~~

~~For the year ending December 31, 2019,~~ we expect ~~revenue~~ongoing increased costs related to the mitigation of contamination risk at our facilities and donations to first responders. We expect these incremental costs will continue to be in the range of $500 million to $510 million. Gross margin for the quarter ending December 31, 2019 is expected to decline compared to the quarter ended September 30, 2019, primarily due to the anticipated mix of lower-margin revenue from shipments of Axon Body 3partially offset by savings on travel and TASER 7 cartridges. We expect margin compression on new hardware shipments in anticipation of higher-margin revenue on additional cloud services over time. We expect stock-based compensation expenses to be approximately $41 million for the full year, which is subject to change depending on our assessment of the probability of attaining operational metrics for the CEO Performance Awardevents and XSU awards, and on the expected timing of such attainment. We expect a normalized income tax rate of between 20% and 25%; this rate can fluctuate depending on geography of income and the effects of discrete items, including changes in our stock price.

other cost-savings measures.

Results of Operations

Three Months Ended ~~September 30, 2019~~March 31, 2020 Compared to the Three Months Ended ~~September 30, 2018~~

March 31, 2019

The following table presents data from our condensed consolidated statements of operations as well as the percentage relationship to total net sales of items included in our statements of operations (dollars in thousands):


	Three Months Ended March 31,
	2020				2019
Net sales from products	$	107,288	72.9	%	$	88,089	76.1	%
Net sales from services		39,874	27.1			27,721	23.9
Net sales		147,162	100.0			115,810	100.0
Cost of product sales		48,884	33.2			39,600	34.2
Cost of service sales		9,670	6.6			7,293	6.3
Cost of sales		58,554	39.8			46,893	40.5
Gross margin		88,608	60.2			68,917	59.5
Operating expenses:
Sales, general and administrative		63,027	42.8			42,892	37.0
Research and development		26,381	17.9			23,354	20.2
Total operating expenses		89,408	60.7			66,246	57.2
Income (loss) from operations		(800)	(0.5)			2,671	2.3
Interest and other income, net		941	0.6			2,313	2.0
Income before provision for income taxes		141	0.1			4,984	4.3
Benefit from income taxes		(3,933)	(2.7)			(1,435)	(1.2)
Net income	$	4,074	2.8	%	$	6,419	5.5	%

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Three Months Ended September 30,
2019 2018
Net sales from products $ 96,497
73.8 % $ 80,923
77.2 %
Net sales from services 34,340
26.2
23,913
22.8
Net sales 130,837
100.0
104,836
100.0
Cost of product sales 42,445
32.4
32,953
31.4
Cost of service sales 8,223
6.3
6,250
6.0
Cost of sales 50,668
38.7
39,203
37.4
Gross margin 80,169
61.3
65,633
62.6
Operating expenses:
Sales, general and administrative 48,424
37.0
39,685
37.8
Research and development 25,129
19.2
21,982
21.0
Total operating expenses 73,553
56.2
61,667
58.8
Income from operations 6,616
5.1
3,966
3.8
Interest and other income (expense), net 1,820
1.4
1,274
1.2
Income before provision for income taxes 8,436
6.5
5,240
5.0
Provision for (benefit from) income taxes 2,332
1.8
(471 ) (0.4 )
Net income $ 6,104
4.7 % $ 5,711
5.4 %

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

Three Months Ended September 30,
2019 2018
United States $ 110,809
85 % $ 88,125
84 %
Other countries 20,028
15
16,711
16
Total $ 130,837
100 % $ 104,836
100 %


	Three Months Ended March 31,
	2020				2019
United States	$	117,463	80	%	$	94,333	81	%
Other countries		29,699	20			21,477	19
Total	$	147,162	100	%	$	115,810	100	%

International revenue increased compared to the prior year comparable period, driven primarily by increased sales in ~~Europe and Africa, which were partially offset by lower sales in~~ Canada and the Asia Pacific region.

Net Sales

Net sales by product line were as follows (dollars in thousands):

Three Months Ended September 30,
Dollar
Change

Percent
Change
2019 2018
TASER segment:
TASER 7 $ 20,214
15.4 % $ —
— % $ 20,214
*
TASER X26P 11,578
8.8
17,998
17.2
(6,420 ) (35.7 )
TASER X2 13,241
10.1
20,392
19.4
(7,151 ) (35.1 )
TASER Pulse and Bolt 1,132
0.9
1,402
1.3
(270 ) (19.3 )
Single cartridges 18,901
14.4
18,406
17.6
495
2.7
Axon Evidence and cloud services 218
0.2
—
—
218
*
Extended warranties 4,543
3.5
4,123
3.9
420
10.2
Other 1,916
1.5
1,345
1.3
571
42.5
Total TASER segment 71,743
54.8
63,666
60.7
8,077
12.7
Software and Sensors segment:

Axon Body 6,763
5.2
4,744
4.5
2,019
42.6
Axon Flex 1,670
1.3
1,325
1.3
345
26.0
Axon Fleet 4,341
3.3
1,809
1.7
2,532
140.0
Axon Dock 3,358
2.6
2,178
2.1
1,180
54.2
Axon Evidence and cloud services 34,022
26.0
23,915
22.8
10,107
42.3
TASER Cam 534
0.4
717
0.7
(183 ) (25.5 )
Extended warranties 4,714
3.6
3,161
3.0
1,553
49.1
Other 3,692
2.8
3,321
3.2
371
11.2
Total Software and Sensors segment 59,094
45.2
41,170
39.3
17,924
43.5
Total net sales $ 130,837
100.0 % $ 104,836
100.0 % $ 26,001
24.8 %

* Not applicable


	Three Months Ended March 31,								Dollar		Percent
	2020				2019				Change		Change
TASER segment:
TASER 7	$	15,326	10.4	%	$	9,954	8.6	%	$	5,372	54.0	%
TASER X26P		11,061	7.5			15,872	13.7			(4,811)	(30.3)
TASER X2		14,075	9.6			13,085	11.3			990	7.6
TASER Pulse and Bolt		1,200	0.8			670	0.6			530	79.1
Single cartridges		26,625	18.1			19,160	16.6			7,465	39.0
Axon Evidence and cloud services		498	0.3			36	—			462	1,283.3
Extended warranties		4,977	3.4			4,316	3.7			661	15.3
Other		2,133	1.5			2,298	2.0			(165)	(7.2)
Total TASER segment		75,895	51.6			65,391	56.5			10,504	16.1
Software and Sensors segment:
Axon Body		12,823	8.7			6,445	5.6			6,378	99.0
Axon Flex		1,183	0.8			1,224	1.1			(41)	(3.3)
Axon Fleet		4,775	3.2			3,516	3.0			1,259	35.8
Axon Dock		4,951	3.4			3,312	2.9			1,639	49.5
Axon Evidence and cloud services		39,154	26.6			27,618	23.7			11,536	41.8
TASER Cam		927	0.6			903	0.8			24	2.7
Extended warranties		5,458	3.7			4,930	4.3			528	10.7
Other		1,996	1.4			2,471	2.1			(475)	(19.2)
Total Software and Sensors segment		71,267	48.4			50,419	43.5			20,848	41.3
Total net sales	$	147,162	100.0	%	$	115,810	100.0	%	$	31,352	27.1	%

Net unit sales for TASER segment products and Software and Sensors segment products were as follows:



	Three Months Ended March 31,		Unit	Percent
	2020	2019	Change	Change
TASER 7	11,430	8,835	2,595	29.4
TASER X26P	11,003	14,985	(3,982)	(26.6)
TASER X2	10,478	9,861	617	6.3
TASER Pulse and Bolt	3,261	1,253	2,008	160.3
Cartridges	873,364	616,517	256,847	41.7
Axon Body	39,864	25,848	14,016	54.2
Axon Flex	3,074	3,591	(517)	(14.4)
Axon Fleet	2,676	1,735	941	54.2
Axon Dock	5,297	4,994	303	6.1
TASER Cam	1,514	1,741	(227)	(13.0)

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Three Months Ended September 30,
Unit
Change

Percent
Change
2019 2018
TASER 7 17,674
—
17,674
*
TASER X26P 10,766
18,842
(8,076 ) (42.9 )
TASER X2 9,819
16,729
(6,910 ) (41.3 )
TASER Pulse and Bolt 3,923
3,750
173
4.6
Cartridges 566,347
598,119
(31,772 ) (5.3 )
Axon Body 22,037
17,622
4,415
25.1
Axon Flex 5,409
3,487
1,922
55.1
Axon Fleet 2,967
1,601
1,366
85.3
Axon Dock 3,724
3,525
199
5.6
TASER Cam 899
1,339
(440 ) (32.9 )

*Not applicable

Net sales for the TASER segment increased ~~12.7%~~16.1% primarily due to an increase of $7.5 million in cartridge revenue, as well as a net increase of ~~$6.4~~$2.1 million in TASER device ~~sales, as well as smaller increases in cartridge and warranty revenue.~~sales. As expected, we have continued to see a shift to purchases of our latest generation device, TASER 7, from legacy X2 and X26P devices. ~~Lower unit sales~~The increase in cartridge revenue was due to a combination of X2increased units and ~~X26P devices were partially offset~~the higher average selling price for TASER 7 cartridges compared to legacy cartridges. Revenue was also impacted by higher average selling ~~prices. Net sales~~prices for the three months ended September 30, 2019 included a total of $6.0 million in revenue that was not recognized during the three months ended June 30, 2019 as forecasted due to an inventory shortfall impacting delivery of TASER 7 ~~devices~~units, and ~~cartridges.~~

by lower average selling prices for X26P units.

Net sales for the Software and Sensors segment increased ~~43.5%~~41.3% during the three months ended March 31, 2020 as we continued to add users and associated devices to our ~~network during the three months ended September 30, 2019.~~network. The increase in the aggregate number of users resulted in increased Axon Evidence ~~and extended warranty revenues~~revenue of ~~$10.1 million and $1.6 million, respectively. Increased revenues for Axon Body, Axon Dock, and Axon Fleet reflected a combination~~$11.5 million. Sales of ~~a higher number of units sold and an increase in the average selling prices. We began selling~~ our newest generation body camera, Axon Body 3, ~~devices during~~which began shipping in September 2019, drove the ~~quarter ended September 30, 2019. An~~ increase of $6.4 million in Axon ~~Flex units was partially offset by a decline~~Body revenue and the increase of $1.6 million in ~~the average selling price.~~

~~To gain more immediate feedback regarding activity for Software and Sensors products and services, we also review bookings for these products.~~ dock revenue.

We consider ~~bookings to be~~total company future contracted revenues a ~~statistical measure defined~~forward-looking performance indicator. As of March 31, 2020, we had approximately $1.27 billion of total company future contracted revenue, which included both recognized contract liabilities as the sales price of orders (not invoiced sales), including contractual optional periods we expect to be exercised, net of cancellations, inclusive of renewals, placed in the relevant fiscal period, regardless of when the products or services ultimately will be provided. Most bookingswell as amounts that will be invoiced and recognized in ~~subsequent~~future periods. ~~Due~~We expect to ~~municipal government funding rules, in some cases certain~~recognize between 20% - 25% of this balance over the ~~future period amounts included in bookings are~~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. Although we have entered into contracts for the delivery of products and services in the future and anticipate the contracts will be fulfilled, if agencies do not exercise contractual options, do not appropriate funds in future year budgets, or do enact a cancellation clause, revenue associated with these bookings may not ultimately be recognized, resulting in a future reduction to bookings. Bookings related to our Software and Sensors segment, net of cancellations, were $128.2 million and $92.9 million during the three months ended September 30, 2019 and 2018, respectively, an increase of $35.3 million, or 38.0%.

~~The chart below illustrates our Software and Sensors segment quarterly bookings for each of the previous six fiscal quarters (in thousands):~~

Cost of Product and Service Sales

Within the TASER segment, cost of product sales increased to ~~$26.5~~$30.2 million for the three months ended ~~September 30, 2019~~March 31, 2020 from ~~$19.3~~$23.3 million for the same period in ~~2018.~~2019. Cost as a percentage of sales increased to ~~36.9%~~40.2% from ~~30.2%~~35.6%. The increase in cost of product sales was primarily attributable to the mix of products, with higher cost per unit for TASER 7 handles and cartridges as well as higher depreciation on new production equipment for the TASER 7.

Additionally, we incurred expense of approximately $0.8 million in response to COVID-19, primarily related to a two week manufacturing shutdown where we continued to pay nonworking employees.

Within the Software and Sensors segment, cost of product and service sales increased to ~~$24.2~~$28.3 million for the three months ended ~~September 30, 2019~~March 31, 2020 from ~~$19.9~~$23.6 million for the same period in ~~2018.~~2019. Cost as a percentage of sales decreased to ~~40.9%~~39.7% from ~~48.5%~~46.8%. Cost of product sales increased ~~$2.2~~$2.3 million, but decreased as a percentage of sales ~~reflecting non-recurrence~~as a result of ~~customer fulfillment costs associated with our acquisition of VIEVU in May 2018. The savings were partially offset by increased freight~~

~~and customs expenses.~~the higher average selling prices during the quarter. Cost of service sales increased ~~$2.0~~$2.4 million, ~~but~~and decreased as a percentage of sales, driven by ~~cost efficiencies on higher revenue.~~

the mix of higher-margin software revenues. Cloud costs increased $0.7 million reflecting increased usage of Axon Evidence and new capabilities within that platform requiring LTE technology.

Gross Margin

As a percentage of net sales, gross margin for the TASER segment decreased to ~~63.1%~~60.1% from ~~69.8%~~64.4% for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The decrease was primarily a result of the mix of higher cost TASER 7 devices ~~have a~~and cartridges, the lower average selling price ~~per unit than legacy products due~~on X26P devices, and expenses related to the bundle of products and 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.

COVID-19.

As a percentage of net sales, gross margin for the Software and Sensors segment increased to ~~59.1%~~60.3% from ~~51.5%~~53.2% for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. Within the Software and Sensors segment, hardware gross margin was ~~36.4%~~42.0% for the three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~20.6%~~28.4% for the same period in ~~2018,~~2019, while the service margins were ~~75.8%~~75.3% and ~~73.9%~~73.6% during those same periods, respectively.

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Sales, General and Administrative Expenses

Sales, general and administrative ("SG&A") expenses were comprised as follows (dollars in thousands):

Three Months Ended September 30, Dollar
Change Percent
Change
2019 2018
Total sales, general and administrative expenses $ 48,424
$ 39,685
$ 8,739
22.0
Sales, general, and administrative as a percentage of net sales 37.0 % 37.8 %


	Three Months Ended March 31,						Dollar		Percent
	2020			2019			Change		Change
Total sales, general and administrative expenses	$	63,027		$	42,892		$	20,135	46.9
Sales, general, and administrative as a percentage of net sales		42.8	%		37.0	%

Stock-based compensation expense increased ~~$5.8~~$10.3 million in comparison to the prior year comparable period, which was primarily attributable to an increase of ~~$3.3~~$5.5 million in expense related to the CEO Performance Award and ~~expense~~an increase of ~~$1.5~~$3.5 million related to our XSPP. During the three months ended September 30, 2019, attainment of the third tranche of the CEO Performance Award and XSPP became probable. Accordingly, we recorded expense of $3.2 million for the CEO Performance Award and $0.8 million for the XSPP reflecting the cumulative expense for the third tranche from the grant dates through September 30, 2019. Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount.

Professional, consulting and lobbying expenses increased $6.3 million, primarily driven by an increase of $6.1 million in expenses related to the FTC litigation. As discussed in Note 12 of the notes to our condensed consolidated financial statements within this Report on Form 10-Q, 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.

Sales and marketing expenses increased $1.7 million, driven by a $1.2 million increase in commissions tied to higher revenues.

Salaries, benefits and bonus expense increased ~~$1.4~~$0.6 million, reflecting an increase of approximately $1.5 million in salaries and benefits primarily due to an increase in headcount. The increase was partially offset by a ~~decline in bonus expense, reflecting lower anticipated attainment~~decrease of $0.7 million related to participant losses for the ~~annual bonus plan, and by a decline in~~Company’s non-qualified deferred compensation plan.

Credit loss expense ~~for contract labor.~~

~~Sales and marketing expenses increased $3.2~~was $0.9 million ~~driven by a $3.3~~compared to bad debt expense of $0.5 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.~~

~~During~~during the three months ended ~~September 30,~~March 31, 2019, ~~we abandoned certain capitalized planning and site development costs~~ related to our adoption of Topic 326 and the ~~site on which we previously intended to construct our new headquarters,~~expected impact of the COVID-19 pandemic and resulting in an impairment charge of $0.7 million. During the prior year comparable period, we recorded an impairment charge of $2.0 million related to the abandonment of certain developed technology acquired in a business combination.

broad economic downturn.

Research and Development Expenses

Research and development ("R&D") expenses were comprised as follows (dollars in thousands):



	Three Months Ended March 31,						Dollar		Percent
	2020			2019			Change		Change
Total research and development expenses	$	26,381		$	23,354		$	3,027	13.0
Research and development as a percentage of net sales		17.9	%		20.2	%

Three Months Ended September 30, Dollar
Change Percent
Change
2019 2018
Total research and development expenses $ 25,129
$ 21,982
$ 3,147
14.3
Research and development as a percentage of net sales 19.2 % 21.0 %

The increase in R&D expense was fully attributable to our Software and Sensors segment. Within the TASER segment, R&D expense decreased ~~$1.4~~$0.7 million, due to lower ~~headcount and a decrease in hardware spending, which was higher during the prior year comparable period leading up to the TASER 7 launch.~~headcount. R&D expense for the Software and Sensors segment increased ~~$4.5~~$3.7 million, primarily due to an increase in salaries and benefits, inclusive of stock-based compensation, of ~~$4.5~~$2.9 million. Contributing to the increase was ~~expense~~an increase of ~~$0.8~~$1.3 million related to our XSPP. ~~During~~Additionally, professional and consulting expenses increased $0.7 million for the three months ended ~~September 30, 2019, attainment~~March 31, 2020 related to development of next generation products, including the ~~third tranche of the XSPP became probable. Accordingly, we recorded expense of $0.4 million for the XSPP~~

~~reflecting the cumulative expense for the third tranche from the grant dates through September 30, 2019.~~

upcoming Fleet 3.

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subscription revenue base, which over time will result in revenue increasing faster than the increase in SG&A expenses and R&D costs, as we reach economies of scale.

Interest and Other Income (Expense), Net

Interest and other income (expense), net was ~~$1.8~~$0.9 million for the three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~$1.3~~$2.3 million for the same period in ~~2018.~~2019. The ~~increase~~decrease was primarily attributable to ~~increased~~a $0.7 million investment loss related to our non-qualified deferred compensation plan in 2020 as compared to a $0.3 million gain during the prior year comparable period. Additionally, interest income ~~on our higher average balance~~decreased $0.3 million as a result of ~~cash, cash equivalents and investments.~~

decreased interest rates during the current period.

Provision for Income Taxes

~~The provision for income taxes was $2.3 million~~

Our overall effective tax rate for the three months ended ~~September 30, 2019, which was an effective tax rate of 27.6%. Our estimated full year effective income tax rate for 2019, before~~March 31, 2020, after discrete period adjustments, ~~is 19.6%~~was (2,789.4%). Before discrete adjustments, the tax rate was 90%, which is ~~less~~more than the federal statutory rate, primarily due to state taxes and non-deductible expenses for items such as meals and entertainment, executive compensation ~~limited~~limitation under ~~IRC~~Internal Revenue Code ("IRC") Section 162(m), and an income inclusion from ~~GILTI,~~global intangible low-taxed income ("GILTI"), offset by a reduction for ~~FDII~~foreign-derived intangible income ("FDII") and R&D tax credits. The effective tax rate was favorably impacted by a $0.9 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for RSUs that vested or stock options that were exercised and the release of a liability due to a lapse in the applicable statute of limitations during the three months ended September 30, 2019. This was offset by an unfavorable discrete item of $1.6 million related to the write off of certain deferred tax assets related to future stock compensation vests for certain officers for whom deductibility of compensation is limited by IRC Section 162(m) and return to provision adjustments for jurisdictions in which tax returns have been filed.

~~Net Income~~

Our net income increased by $0.4 million to $6.1 million for the three months ended September 30, 2019 compared to $5.7 million for the same period in 2018. Net income per basic and diluted share was $0.10 for the three months ended September 30, 2019 compared to $0.10 per basic and diluted share for the same period in 2018.

~~Three Months Ended September 30, 2019 Compared to the Three Months Ended June 30, 2019~~

~~Net Sales~~

~~Net sales by product line were as follows (dollars in thousands):~~

Three Months Ended September 30, 2019
Three Months Ended
June 30, 2019
Dollar
Change Percent
Change
TASER segment:
TASER 7 $ 20,214
15.4 % $ 9,298
8.3 % $ 10,916
117.4 %
TASER X26P 11,578
8.8
10,382
9.2
1,196
11.5
TASER X2 13,241
10.1
14,087
12.5
(846 ) (6.0 )
TASER Pulse and Bolt 1,132
0.9
1,118
1.0
14
1.3
Single cartridges 18,901
14.4
19,293
17.3
(392 ) (2.0 )
Axon Evidence and cloud services 218
0.2
109
0.1
109
100.0
Extended warranties 4,543
3.5
4,482
4.0
61
1.4
Other 1,916
1.5
1,803
1.6
113
6.3
Total TASER segment 71,743
54.8
60,572
54.0
11,171
18.4
Software and Sensors segment:
Axon Body 6,763
5.2
5,612
5.0
1,151
20.5
Axon Flex 1,670
1.3
1,623
1.4
47
2.9
Axon Fleet 4,341
3.3
3,120
2.8
1,221
39.1
Axon Dock 3,358
2.6
2,731
2.4
627
23.0
Axon Evidence and cloud services 34,022
26.0
31,821
28.3
2,201
6.9
TASER Cam 534
0.4
1,044
0.9
(510 ) (48.9 )
Extended warranties 4,714
3.6
4,420
3.9
294
6.7
Other 3,692
2.8
1,419
1.3
2,273
160.2
Total Software and Sensors segment 59,094
45.2
51,790
46.0
7,304
14.1
Total net sales $ 130,837
100.0 % $ 112,362
100.0 % $ 18,475
16.4 %

~~Net unit sales for TASER segment products and Software and Sensors segment products were as follows:~~

Three Months Ended September 30, 2019 Three Months Ended June 30, 2019 Unit
Change Percent
Change
TASER 7 17,674
8,135
9,539
117.3 %
TASER X26P 10,766
9,493
1,273
13.4
TASER X2 9,819
9,759
60
0.6
TASER Pulse and Bolt 3,923
3,631
292
8.0
Cartridges 566,347
606,220
(39,873 ) (6.6 )
Axon Body 22,037
20,346
1,691
8.3
Axon Flex 5,409
3,508
1,901
54.2
Axon Fleet 2,967
2,441
526
21.5
Axon Dock 3,724
3,408
316
9.3
TASER Cam 899
1,716
(817 ) (47.6 )

Net sales within the TASER segment increased by approximately $11.2 million or 18.4% as compared to the prior quarter. Sales were negatively impacted by a total of $6.0 million during the three months ended June 30, 2019 due to an inventory shortfall impacting TASER 7 devices and cartridges. Net sales for the three months ended September 30, 2019 included this $6.0 million. A decline in the number of units of our legacy TASER devices was offset by increases in the average selling prices. Revenue for cartridges was also impacted by a decline in the number of units sold, partially offset by an increase in the blended average selling price.

Within the Software and Sensors segment, net sales increased 14.1% during the three months ended September 30, 2019 as we continued to add users and associated devices to our network. The increase in the aggregate number of users, including on-premise users in secondary international markets, resulted in increased Axon Evidence revenues of $2.2 million. Increased revenues for Axon Body and Axon Fleet reflected a combination of a higher number of units sold and an increase in the average selling prices. We began selling our Axon Body 3 devices during the quarter ended September 30, 2019. Revenue from other products increased $2.3 million compared to the prior quarter reflecting large sales of Signal Sidearm, Axon Commander, and other smaller product lines.

~~Nine Months EndedSeptember 30, 2019 Compared to the Nine Months Ended September 30, 2018~~

Nine Months Ended September 30,
2019 2018
Net sales from products $ 264,977
73.8 % $ 238,618
78.2 %
Net sales from services 94,032
26.2
66,659
21.8
Net sales 359,009
100.0
305,277
100.0
Cost of product sales 120,265
33.5
96,474
31.6
Cost of service sales 24,098
6.7
15,566
5.1
Cost of sales 144,363
40.2
112,040
36.7
Gross margin 214,646
59.8
193,237
63.3
Operating expenses:
Sales, general and administrative 134,678
37.6
114,787
37.6
Research and development 71,976
20.0
55,602
18.2
Total operating expenses 206,654
57.6
170,389
55.8
Income from operations 7,992
2.2
22,848
7.5
Interest and other income, net 5,978
1.7
2,242
0.7
Income before provision for income taxes 13,970
3.9
25,090
8.2
Provision for (benefit from) income taxes 709
0.2
(2,032 ) (0.7 )
Net income $ 13,261
3.7 % $ 27,122
8.9 %

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

Nine Months Ended September 30,
2019 2018
United States $ 298,736
83 % $ 244,806
80 %
Other countries 60,273
17
60,471
20
Total $ 359,009
100 % $ 305,277
100 %

International revenue remained consistent with the prior year comparable period, but decreased as a percentage of total revenue. Revenues increased in Europe and Africa, with the increases partially offset by large sales in the prior year period in the Asia Pacific region and in Canada that did not recur in the current period.

~~Net Sales~~

~~Net sales by product line were as follows (dollars in thousands):~~

Nine Months Ended September 30,
Dollar
Change

Percent
Change
2019 2018
TASER segment:
TASER 7 $ 39,466
11.0 % $ —
— % $ 39,466
*
TASER X26P 37,832
10.5
52,618
17.2
(14,786 ) (28.1 )
TASER X2 40,413
11.3
62,686
20.5
(22,273 ) (35.5 )
TASER Pulse and Bolt 2,920
0.8
3,849
1.3
(929 ) (24.1 )
Single cartridges 57,354
16.0
51,763
17.0
5,591
10.8
Axon Evidence and cloud services 363
0.1
—
—
363
*
Extended warranties 13,341
3.7
11,567
3.8
1,774
15.3
Other 6,017
1.7
5,331
1.7
686
12.9
Total TASER segment 197,706
55.1
187,814
61.5
9,892
5.3
Software and Sensors segment:
Axon Body 18,820
5.2
15,082
4.9
3,738
24.8
Axon Flex 4,517
1.3
4,529
1.5
(12 ) (0.3 )
Axon Fleet 10,977
3.1
6,640
2.2
4,337
65.3
Axon Dock 9,401
2.6
7,332
2.4
2,069
28.2
Axon Evidence and cloud services 93,461
26.0
64,513
21.2
28,948
44.9
TASER Cam 2,481
0.7
2,839
0.9
(358 ) (12.6 )
Extended warranties 14,064
3.9
8,521
2.8
5,543
65.1
Other 7,582
2.1
8,007
2.6
(425 ) (5.3 )
Total Software and Sensors segment 161,303
44.9
117,463
38.5
43,840
37.3
Total net sales $ 359,009
100.0 % $ 305,277
100.0 % $ 53,732
17.6 %

* Not applicable

~~Net unit sales for TASER segment products and Software and Sensors segment products were as follows:~~

Nine Months Ended September 30,
Unit
Change

Percent
Change
2019 2018
TASER 7 34,644
—
34,644
*
TASER X26P 35,244
53,226
(17,982 ) (33.8 )
TASER X2 29,439
52,767
(23,328 ) (44.2 )
TASER Pulse and Bolt 8,807
10,908
(2,101 ) (19.3 )
Cartridges 1,789,084
1,742,207
46,877
2.7
Axon Body 68,231
59,798
8,433
14.1
Axon Flex 12,508
10,461
2,047
19.6
Axon Fleet 7,143
5,537
1,606
29.0
Axon Dock 12,126
13,903
(1,777 ) (12.8 )
TASER Cam 4,356
6,358
(2,002 ) (31.5 )

*Not applicable

Net sales for the TASER segment increased 5.3% primarily as a result of a $5.6 million increase in cartridge revenue, an increase of $1.8 million in warranty revenue, and a net increase of $1.5 million in TASER device sales. Cartridge revenues increased due to both increased unit sales and an increase in 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.

Net sales for the Software and Sensors segment increased 37.3% as we continued to add users and associated devices to our network during the nine months ended September 30, 2019. The increase in the aggregate number of users resulted in increased Axon Evidence and extended warranty revenues of $28.9 million and $5.5 million, respectively. Increased revenues for Axon Body and Axon Fleet reflected a combination of a higher number of units sold and an increase in the average selling price. A decrease in Axon Dock units was offset by an increase in the average selling price.

~~Cost of Product and Service Sales~~

Within the TASER segment, cost of product sales increased to $74.0 million for the nine months ended September 30, 2019 from $57.5 million for the same period in 2018. Cost as a percentage of sales increased to 37.5% from 30.6%. The increase in cost of product sales was primarily attributable to the mix of products, with higher cost per unit 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 $2.3 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 increased to $70.3 million for the nine months ended September 30, 2019 from $54.6 million for the same period in 2018. Cost as a percentage of sales decreased to 43.6% from 46.4%. Cost of product sales increased $7.2 million primarily driven by the impact of increased units as well as increased freight and customs expenses, but decreased as a percentage of sales, reflecting non-recurrence of customer fulfillment costs associated with our acquisition of VIEVU in May 2018. Cost of service sales increased $8.5 million driven primarily by a $4.1 million increase in third party cloud data storage and compute costs, and by a $3.4 million increase in professional services expense due to both significant Fleet installations during the nine months ended September 30, 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~~

As a percentage of net sales, gross margin for the TASER segment decreased to 62.5% from 69.4% for the nine months ended September 30, 2019 and 2018, respectively. TASER 7 devices have a lower average selling price per unit than legacy products due to the bundle of products and 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.

As a percentage of net sales, gross margin for the Software and Sensors segment increased slightly to 56.4% from 53.6%. Within the Software and Sensors segment, hardware gross margin was 31.9% for the nine months ended September 30, 2019 compared to 23.2% for the same period in 2018, while the service margins were 74.2% and 76.6% during those same periods, respectively.

~~Sales, General and Administrative Expenses~~

~~SG&A expenses were comprised as follows (dollars in thousands):~~

Nine Months Ended September 30, Dollar
Change Percent
Change
2019 2018
Total sales, general and administrative expenses $ 134,678
$ 114,787
$ 19,891
17.3
Sales, general, and administrative as a percentage of net sales 37.6 % 37.6 %

Stock-based compensation expense increased $10.3 million in comparison to the prior year comparable period, which was primarily attributable to an increase of $5.6 million in expense related to the CEO Performance Award and expense of $2.8 million related to our XSPP. During the three months ended September 30, 2019, attainment of the third tranche of the CEO Performance Award and XSPP became probable. Accordingly, we recorded expense of $3.2 million for the CEO Performance Award and $0.8 million for the XSPP reflecting the cumulative expense for the third tranche from the grant dates through September 30, 2019. Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount.

Salaries, benefits and bonus expenses increased $4.0 million primarily due to an increase in headcount. The increase was partially offset by a decline in bonus expense, reflecting lower anticipated attainment for the annual bonus plan, and by a decline in expense for contract labor.

Sales and marketing expenses increased $7.0 million driven primarily by a $5.9 million increase in commissions tied to higher revenues and increased promotions, sponsorship, and tradeshow expenses primarily related to Axon Accelerate. The increase in commissions was also driven by higher commission rates for higher value bundled deals, which have continued to increase.

~~Travel expenses increased $1.1 million driven primarily by increased headcount.~~

~~Research and Development Expenses~~

~~R&D expenses were comprised as follows (dollars in thousands):~~

Nine Months Ended September 30, Dollar
Change Percent
Change
2019 2018
Total research and development expenses $ 71,976
$ 55,602
$ 16,374
29.4
Research and development as a percentage of net sales 20.0 % 18.2 %

The increase in R&D expense was fully attributable to our Software and Sensors segment. R&D expense for the Software and Sensors segment increased $17.9 million, primarily due to a $15.4 million increase related to salaries and benefits, inclusive of stock-based compensation. Contributing to the increase was expense of $1.4 million related to our XSPP. During the three months ended September 30, 2019, attainment of the third tranche of the XSPP became probable. Accordingly, we recorded expense of $0.4 million for the XSPP reflecting the cumulative expense for the third tranche from the grant dates through September 30, 2019. Within the TASER segment, R&D expense decreased $1.5 million, due to lower headcount and a decrease in hardware spending, which was higher during the prior year comparable period leading up to the TASER 7 launch.

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

~~Interest and Other Income (Expense), Net~~

Interest and other income, net was $6.0 million for the nine months ended September 30, 2019 compared to $2.2 million for the same period in 2018. The increase was primarily attributable to increased investment interest income on our higher average balance of cash, cash equivalents and investments.

~~Provision for Income Taxes~~

The provision for income taxes was an expense of $0.7 million for the nine months ended September 30, 2019, which was an effective tax rate of 5.1%. Our estimated full year effective income tax rate for 2019, before discrete period adjustments, is 19.6%, which is less than the federal statutory rate, primarily due to state taxes and non-deductible expenses for items such as meals and entertainment, executive compensation limited under IRC Section 162(m), and an income inclusion from GILTI, offset by a reduction for FDII and R&D tax credits. The effective tax rate was favorably impacted by a $3.9 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for RSUs that vested or stock options that were exercised during the ~~nine~~three months ended September 30, 2019. This was offset by an unfavorable discrete item of $1.7 million related to the write off of certain deferred tax assets related to future stock compensation vests for certain officers for whom deductibility of compensation is limited by IRC Section 162(m) and return to provision adjustments for jurisdictions in which tax returns have been filed.

March 31, 2020.

Net Income

Our net income decreased by ~~$13.9~~$2.3 million to ~~$13.3~~$4.1 million for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~$27.1~~$6.4 million for the same period in ~~2018.~~2019. Net income per basic and diluted share was ~~$0.22~~$0.07 for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~$0.49~~$0.11 per basic ~~share~~ and ~~$0.47 per~~ diluted share for the same period in ~~2018.~~2019.

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Three Months Ended March 31, 2020 Compared to the Three Months Ended December 31, 2019

Net Sales

Net sales by product line were as follows (dollars in thousands):


	Three Months Ended				Three Months Ended				Dollar		Percent
	March 31, 2020				December 31, 2019				Change		Change
TASER segment:
TASER 7	$	15,326	10.4	%	$	17,186	10.0	%	$	(1,860)	(10.8)	%
TASER X26P		11,061	7.5			14,692	8.5			(3,631)	(24.7)
TASER X2		14,075	9.6			15,507	9.0			(1,432)	(9.2)
TASER Pulse and Bolt		1,200	0.8			1,169	0.7			31	2.7
Cartridges		26,625	18.1			28,633	16.7			(2,008)	(7.0)
Axon Evidence and cloud services		498	0.3			341	0.2			157	46.0
Extended warranties		4,977	3.4			4,733	2.8			244	5.2
Other		2,133	1.5			1,694	1.0			439	25.9
TASER segment		75,895	51.6			83,955	48.9			(8,060)	(9.6)
Software and Sensors segment:
Axon Body		12,823	8.7			25,219	14.7			(12,396)	(49.2)
Axon Flex		1,183	0.8			1,411	0.8			(228)	(16.2)
Axon Fleet		4,775	3.2			5,205	3.0			(430)	(8.3)
Axon Dock		4,951	3.4			11,048	6.4			(6,097)	(55.2)
Axon Evidence and cloud services		39,154	26.6			36,804	21.4			2,350	6.4
TASER Cam		927	0.6			623	0.4			304	48.8
Extended warranties		5,458	3.7			5,124	3.0			334	6.5
Other		1,996	1.4			2,462	1.4			(466)	(18.9)
Software and Sensors segment		71,267	48.4			87,896	51.1			(16,629)	(18.9)
Total net sales	$	147,162	100.0	%	$	171,851	100.0	%	$	(24,689)	(14.4)	%

Net unit sales for TASER segment products and Software and Sensors segment products were as follows:


	Three Months Ended
			Unit	Percent
	March 31, 2020	December 31, 2019	Change	Change
TASER 7	11,430	14,577	(3,147)	(21.6)	%
TASER X26P	11,003	13,554	(2,551)	(18.8)	%
TASER X2	10,478	11,534	(1,056)	(9.2)	%
TASER Pulse and Bolt	3,261	2,978	283	9.5	%
Cartridges	873,364	962,519	(89,155)	(9.3)	%
Axon Body	39,864	83,268	(43,404)	(52.1)	%
Axon Flex	3,074	3,078	(4)	(0.1)	%
Axon Fleet	2,676	3,324	(648)	(19.5)	%
Axon Dock	5,297	10,149	(4,852)	(47.8)	%
TASER Cam	1,514	1,177	337	28.6	%

Net sales within the TASER segment decreased by approximately $8.1 million or 9.6% as compared to the prior quarter, due primarily to a net decrease of $6.9 million in TASER device sales and a decrease of $2.0 million in cartridge revenue. Unit sales of all non-consumer TASER devices declined from the prior quarter. Additionally, TASER device revenue was impacted by lower average selling prices for X26P and consumer devices during the three months ended March 31, 2020. Higher average selling prices for TASER 7 partially offset the decline.

Within the Software and Sensors segment, net sales decreased $16.6 million or 18.9% during the three months ended March 31, 2020. Revenue from Axon Body cameras decreased $12.4 million and revenue from docks decreased

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$6.1 million, primarily due to a significant number of shipments that occurred during the prior quarter following the introduction of our Axon Body 3 devices. Higher average selling prices for legacy body cameras partially offset the decline in units. Additionally, Axon Evidence revenues increased $2.4 million based on an increase in the aggregate number of users on our Axon network.

Non-GAAP Measures

To supplement our financial results presented in accordance with 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.

~~EBITDA (Most comparable GAAP Measure: Net income) - Earnings before interest expense, investment interest income, taxes, depreciation and amortization.~~

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 Quarterly Report on Form 10-Q were prepared under a comprehensive set of rules or principles.

~~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~~

EBITDA and Adjusted EBITDA (CEO Performance Award) reconciles to net income as follows (in thousands):


	Three Months Ended
	March 31,		December 31,		March 31,
	2020		2019		2019
Net income (loss)	$	4,074	$	(12,379)	$	6,419
Depreciation and amortization		2,881		3,165		2,800
Interest expense		7		19		6
Investment interest income		(693)		(1,760)		(2,003)
Provision for (benefit from) income taxes		(3,933)		479		(1,435)
EBITDA	$	2,336	$	(10,476)	$	5,787

Adjustments:
Stock-based compensation expense		20,195		48,300		7,905
Adjusted EBITDA (CEO Performance Award)	$	22,531	$	37,824	$	13,692

Three Months Ended Nine Months Ended
September 30, 2019 June 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
Net income $ 6,104
$ 738
$ 5,711
$ 13,261
$ 27,122
Depreciation and amortization 2,709
2,687
3,065
8,196
8,226
Interest expense 4
17
16
27
53
Investment interest income (1,647 ) (1,630 ) (1,256 ) (5,280 ) (1,926 )
Provision for (benefit from) income taxes 2,332
(188 ) (471 ) 709
(2,032 )
EBITDA $ 9,502
$ 1,624
$ 7,065
$ 16,913
$ 31,443

Adjustments:
Stock-based compensation expense 13,663
8,627
6,255
30,195
15,302
Adjusted EBITDA (CEO Performance Award) $ 23,165
$ 10,251
$ 13,320
$ 47,108
$ 46,745

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Liquidity and Capital Resources

Summary

As of ~~September 30, 2019,~~March 31, 2020, we had ~~$204.1~~$156.5 million of cash and cash equivalents, ~~and restricted cash,~~ a decrease of ~~$146.9~~$15.7 million as compared to December 31, ~~2018. The decrease in the balance of cash,~~2019. Cash and cash equivalents and ~~restricted cash was primarily attributable~~investments totaled $395.4 million; including a payable of $13.5 million related to ~~the~~unsettled investment purchases at March 31, 2020, this represented a net ~~purchase~~decrease of ~~investments of $150.5 million. As of September 30, 2019, we had $202.6~~$14.3 million ~~of cash and cash equivalents, of which $48.6 million was held in foreign locations.~~ from December 31, 2019.

Our ongoing sources of cash include cash on hand, investments, and cash flows from operations. In addition, our $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. Advances under the line of credit bear interest at LIBOR plus 1.0 to 1.5% per year determined in accordance with a pricing grid based on our funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio.

As of ~~September 30, 2019,~~March 31, 2020, we had letters of credit outstanding of ~~$3.6~~$2.7 million, leaving the net amount available for borrowing of ~~$46.4~~$47.3 million. The facility matures on December 31, 2021, and has an accordion feature which allows for an increase in the total line of credit up to $100.0 million, subject to certain conditions, including the availability of additional bank commitments. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our revolving credit facility. At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, there were no borrowings under the line other than the outstanding letters of credit.

Our agreement with the bank requires us to comply with a maximum funded debt to EBITDA ratio, as defined, of no greater than 2.50 to 1.00 based upon a trailing four fiscal quarter period. At ~~September 30, 2019,~~March 31, 2020, our funded debt to EBITDA ratio was ~~0.001~~0.0003 to 1.00.

TASER 60 installment purchase arrangements typically involve amounts invoiced in five equal installments at the beginning of each year of the five-year term. This is in contrast to a traditional ~~CEW~~CED sale in which the entire amount being charged for the hardware is invoiced upon shipment. This impacts liquidity in a commensurate fashion, with the cash for the TASER 60 arrangement received in five annual installments rather than up front. It is our strategic intent to shift an increasing amount of our business to a subscription model, to better match the municipal budgeting process of our customers as well as to allow for multiple product offerings to be bundled into existing subscriptions. We carefully considered the cash flow impacts of this strategic shift and regularly revisit our cash flow forecast with the goal of maintaining a comfortable level of liquidity as we introduce commercial offerings in which we incur upfront cash costs to produce and fulfill hardware sales ahead of the cash inflows from our customers. We anticipate, and have prepared for, the majority of our arrangements in both reportable segments to be offered in similar subscription-type offerings over the coming years. With the launch of the TASER 7, which is primarily being sold in subscription offerings, ~~we expect~~ this strategic shift continues to accelerate.

Based on our strong balance sheet and the fact that we do not have long-term debt at ~~September 30, 2019,~~March 31, 2020, we believe financing will be available, both through our existing credit line and possible additional financing. However, there is no assurance that such funding will be available on terms acceptable to us, or at all. We believe that our sources of funding will be sufficient to satisfy our currently anticipated cash requirements including capital expenditures, working capital requirements, potential acquisitions and other liquidity requirements through at least the next 12 months. We and our Board of Directors may consider repurchases of our common stock from time to time pursuant to our stock repurchase plan. Further repurchases of our common stock would take place on the open market, would be financed with available cash and are subject to market and business conditions.

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Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities (in thousands):

Nine Months Ended September 30,
2019 2018
Net cash provided by operating activities $ 19,864
$ 32,636
Net cash used in investing activities (162,925 ) (6,003 )
Net cash provided by (used in) financing activities (3,162 ) 222,158
Effect of exchange rate changes on cash, cash equivalents and restricted cash (678 ) (381 )
Net increase (decrease) in cash, cash equivalents and restricted cash $ (146,901 ) $ 248,410


	Three Months Ended March 31,
	2020		2019
Operating activities	$	13,415	$	(13,970)
Investing activities		(22,073)		(110,755)
Financing activities		(5,162)		(1,159)
Effect of exchange rate changes on cash and cash equivalents		(1,890)		67
Net increase (decrease) in cash and cash equivalents and restricted cash	$	(15,710)	$	(125,817)

Operating activities

Net cash provided by operating activities in the first ~~nine~~three months of ~~2019~~2020 of ~~$19.9~~$13.4 million reflects ~~$13.3~~$4.1 million in net income, non-cash income statement items totaling ~~$40.4~~$24.5 million, and a negative impact on cash of ~~$33.8~~$15.1 million for the net change in operating assets and liabilities. Included in the non-cash items were ~~$8.2~~$2.9 million in depreciation and amortization expense and ~~$30.2~~$20.2 million in stock-based compensation expense. Cash used in operations was impacted by increased accounts and notes receivable and contract assets of ~~$30.5~~$9.7 million, increased inventory of $8.6 million, decreased accounts payable, accrued liabilities and other liabilities of ~~$13.5~~$3.6 million, increased ~~inventory~~deferred revenue of ~~$6.3~~$4.5 million, and ~~increased~~decreased prepaid ~~expenses~~ and other assets of ~~$12.0~~$2.3 million. The increase in accounts and notes receivable and contract assets was attributable to increased sales over the last several quarters, primarily sales made under subscription plans. The decrease in accounts payable, accrued liabilities and other liabilities was primarily attributable to the timing of payments, and ~~to payments made during 2019~~was partially offset by a $13.5 million payable for ~~operating leases following our adoption of Topic 842.~~unsettled investment purchases at March 31, 2020 which was settled in early April 2020. The increase in deferred revenue was primarily attributable to increased hardware deferred revenue from TASER subscription sales, partially offset by a decrease in prepayments for Software and Sensors services. The decrease in prepaid expenses and other assets was primarily attributable to ~~a $15.0 million prepayment related to a purchase agreement for~~usage of prepaid cloud ~~data~~ storage ~~that commenced~~fees, partially offset by an increase in ~~July 2019. Cash provided by operations was positively impacted by various other operating items, including increased deferred revenue of $28.5 million.~~

income tax receivable.

Net cash ~~provided by~~used in operating activities in the first ~~nine~~three months of ~~2018~~2019 of ~~$32.6~~$14.0 million reflects ~~$27.1~~$6.4 million in net income, ~~impacted by the net increase of~~ non-cash income statement items totaling ~~$23.7~~$12.7 million, and cash outflows of ~~$18.2~~$33.1 million for the net change in operating assets and liabilities. Included in the non-cash items were ~~$8.2~~$2.8 million in depreciation and amortization expense and ~~$15.3~~$7.9 million in stock-based compensation expense. ~~Increases to operating cash flows consisted primarily~~Cash used in operations was impacted by increased accounts and notes receivable and contract assets of $22.0 million, decreased accounts payable, accrued liabilities and other liabilities of $7.3 million, increased ~~deferred revenue~~inventory of ~~$31.7~~$3.9 million, and ~~decreased inventory~~increased prepaid expenses and other assets of ~~$9.0~~$3.2 million. The increase in ~~deferred revenue~~accounts and notes receivable and contract assets was attributable to increased sales over the several prior quarters, primarily sales made under subscription plans, as well as slower customer collections. The decrease in accounts payable, accrued liabilities and other liabilities was primarily ~~driven by increased Software and Sensors services invoiced in advance.~~attributable to the timing of payments for our annual bonus plan. Cash used in operations was also impacted by various other operating items, ~~with the most significant component related to~~including increased ~~accounts and notes receivable and contract assets~~deferred revenue of $51.2 million, primarily related to increased customer balances under our Officer Safety Plan and TASER 60 purchase programs, including adjustments to our opening balance sheet related to our adoption of ASC 606. Cash provided by operations was also impacted by increased accounts payable and accrued liabilities of $4.3 million and decreased inventory of $9.0$3.2 million.

Investing activities

We used ~~$162.9~~$22.1 million in investing activities during the first ~~nine~~three months of ~~2019,~~2020, which was comprised of ~~$150.5~~$15.2 million for the purchase of investments, net of proceeds, $4.7 million for an equity investment in an unconsolidated affiliate, and ~~$12.4~~$2.2 million for the purchase of property and equipment and intangible assets.

We used ~~$6.0~~$110.8 million in investing activities during the first ~~nine~~three months of ~~2018. Maturities and calls~~2019, which was comprised of $105.3 million for the purchase of investments ~~net of purchases, were $6.3 million. We invested $7.3~~and $5.4 million infor the purchase of property and equipment and intangible ~~assets in addition to our $5.0 million investment related to the acquisition~~assets.

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Financing activities

Net cash used in financing activities was ~~$3.2~~$5.2 million during the first ~~nine~~three months of 2020. During the first three months of 2020, we paid income and payroll taxes of $5.2 million on behalf of employees who net-settled stock awards during the period, which was partially offset by proceeds from options exercised of less than $0.1 million.

Net cash used in financing activities was $1.2 million during the first three months of 2019. During the first ~~nine~~three months of 2019, we paid income and payroll taxes of ~~$3.3~~$1.3 million on behalf of employees who net-settled stock awards during the period, which was partially offset by proceeds from options exercised of $0.1 million.

Net cash generated by financing activities was $222.2 million during the first nine months of 2018 . In May 2018, we completed a public follow-on equity offering that generated net proceeds of $234.0 million which was partially offset by income and payroll taxes of $12.0 million paid by us on behalf of employees who net-settled stock awards during the period.

Off-Balance Sheet Arrangements

The discussion of off-balance sheet arrangements in Note 12 of the notes to our condensed consolidated financial statements within this Report on Form 10-Q is incorporated by reference herein.

Critical Accounting Estimates

We have identified the following accounting estimates as critical to our business operations and the understanding of our results of operations. The preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our unaudited condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. While we do not believe that a change in these estimates is reasonably likely, there can be no assurance that our actual results will not differ from these estimates. The effect of these estimates on our ~~financial condition and results of~~business operations are discussed below.

Stock-Based Compensation

We have historically granted stock-based compensation to key employees and non-employee directors as a means of attracting and retaining highly qualified personnel. Stock-based compensation awards primarily consist of service-based RSUs, performance-based RSUs, and performance-based options. ~~RSUs~~Our stock-based compensation awards are classified as equity and measured at the fair market value of the underlying stock at the grant date. WeFor service-based awards, we recognize RSU expense using the straight-line attribution method over the requisite service period. ~~We also issue~~Vesting of performance-based RSUs ~~the vesting of which~~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, ~~and~~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 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 awards, stock-based compensation expense is recognized over the expected performance achievement period of individual performance goals when the achievement of each individual performance goal becomes probable. For performance-based awards with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized ~~for each pair of performance and market conditions~~ over the longer of the expected achievement period of the performance and market conditions, beginning at the point in time that the relevant performance condition

is considered probable of achievement. The fair value of such awards is estimated on the grant date using Monte Carlo simulations. Refer to Note 910 of the notes to our condensed consolidated financial statements within this Report on Form 10-Q.

We have granted a total of ~~13.5~~14.6 million performance-based awards (options and restricted stock units) of which ~~12.4~~12.2 million are outstanding as of ~~September 30, 2019,~~March 31, 2020, the vesting of which is contingent upon the achievement of certain performance criteria including the successful development and market acceptance of future product introductions, our

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future sales targets and operating performance and market capitalization. ~~These~~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 estimate of the fair value of the awards and timing of recognition of stock-based compensation and consequently, the related amount recognized in our condensed consolidated statements of operations and comprehensive income.

~~Leases~~

Allowance for Expected Credit Losses

We ~~adopted Topic 842~~are exposed to the risk of credit losses primarily through sales of products and services. Our expected loss allowance for accounts receivable, notes receivable, and contract assets represents management’s best estimate and application of judgment considering a number of factors, including historical collection experience, published or estimated credit default rates for entities that represent our customer base, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Our monitoring activities include account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible.

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

A majority of our customers are governmental agencies. 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. Economic slowdowns that negatively affect municipal tax collections and put pressure on law enforcement may increase this risk and negatively impact the realizability of our accounts and notes receivable and contract assets. We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and recorded additional credit loss expense of approximately $0.9 million during the three months ended March 31, 2020.

Based on the balances of our financial instruments as of ~~January 1, 2019. Refer to Note 1 of~~March 31, 2020, a hypothetical 25 percent increase in expected credit loss rates across all pools would result in a $0.7 million increase in the ~~notes to our condensed consolidated financial statements within this Report on Form 10-Q~~allowance for ~~further discussion about the new standard and its impact on our condensed consolidated balance sheet.~~

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

Our lease term includes options to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of 12 months or less are not recorded on the balance sheet. Our lease agreements do not contain any residual value guarantees.

losses.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We typically invest in a limited number of financial instruments, consisting principally of investments in money market accounts, certificates of deposit, and corporate and municipal bonds with a typical long-term debt rating of “A” or better by any nationally recognized statistical rating organization, denominated in U.S. dollars. All of our cash equivalents and investments are treated as “held-to-maturity.” Investments in fixed-rate interest-earning instruments carry a degree of interest rate risk as their market value may be adversely impacted due to a rise in interest rates. As a result, we may suffer losses in principal if we sell securities that have declined in market value due to changes in interest rates. However, because we classify our debt securities as “held-to-maturity” based on our intent and ability to hold these instruments to maturity, no gains or losses are recognized due to changes in interest rates. These securities are reported at amortized cost. Based on investment positions as of ~~September 30, 2019,~~March 31, 2020, a hypothetical 100 basis point increase in interest rates across all maturities would result in a ~~$0.7~~$1.1 million decline in the fair market value of the portfolio. Such losses would only be realized if we sold the investments prior to maturity.

Additionally, we have access to a $50.0 million line of credit borrowing facility which bears interest at LIBOR plus 1.0 to 1.5% per year determined in accordance with a pricing grid based on our funded debt to EBITDA ratio. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit, which totaled ~~$3.6~~$2.7 million at ~~September 30, 2019.~~March 31, 2020. At ~~September 30, 2019,~~March 31, 2020, there was no amount outstanding under the line of credit and the available borrowing under the line of credit was ~~$46.4~~$47.3 million. We have not borrowed any funds under the line of credit since its

Table of Contents

inception; however; should we need to do so in the future, such borrowings could be subject to adverse or favorable changes in the underlying interest rate.

Exchange Rate Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, in each case compared to the U.S. dollar, related to transactions by our foreign subsidiaries. The majority of our sales to international customers are transacted in U.S. dollars and therefore, are not subject to exchange rate fluctuations on these transactions. However, the cost of our products to our customers increases when the U.S. dollar strengthens against their local currency, and we may have more sales and expenses denominated in foreign currencies in future years which could increase our foreign exchange rate risk. Additionally, intercompany sales to our non-U.S. dollar functional currency international subsidiaries are transacted in U.S. dollars which could increase our foreign exchange rate risk caused by foreign currency transaction gains and losses.

To date, we have not engaged in any currency hedging activities. However, we may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. However, we may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to the prohibitive economic cost of hedging particular exposures. As such, fluctuations in currency exchange rates could harm our business in the future.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer are responsible for the evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of ~~September 30, 2019.~~

March 31, 2020.

Change in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fiscal quarter ended ~~September 30, 2019~~March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the potential impact of COVID-19 on our internal controls to minimize the impact on their design and operating effectiveness.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The discussion under the headings Product Litigation, Other Litigation, and U.S. Federal Trade Commission Investigation in Note 12 of the notes to our condensed consolidated financial statements included in ~~PART~~Part I, ~~ITEM~~Item 1 of this Report on Form 10-Q is incorporated by reference herein.

Item 1A. Risk Factors

~~There~~

Except as noted below, there are no ~~other~~ material changes from the risk factors previously disclosed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common ~~stock, except as noted below.~~stock.

~~Higher costs or unavailability~~

Table of ~~materials could adversely affect our financial results.~~Contents

We depend on certain domestic and international suppliers for the delivery of components used in the assembly of our products. Our reliance on third-party suppliers creates risks related to our potential inability to obtain an adequate supply of components or sub-assemblies and reduced control over pricing and timing of delivery of components and sub-assemblies. Specifically, we depend on suppliers of sub-assemblies, machined parts, injection molded plastic parts, printed circuit boards, custom wire fabrications and other miscellaneous customer parts for our products. We do not have any significant long-term agreements with any of our suppliers and there is no guarantee that supply will not be interrupted.

Single or sole-source components used in the manufacture of our products may become unavailable or discontinued. Delays caused by industry allocations or obsolescence may take weeks or months to resolve. In some cases, parts obsolescence may require a product re-design to ensure quality replacement components. These delays could cause significant delays in manufacturing and loss of sales, leading to adverse effects

The COVID-19 pandemic has significantly ~~impacting our financial condition or results of operations~~impacted worldwide economic conditions and could ~~injure our reputation.~~

A significant number of our raw materials or components are comprised of petroleum-based products or incur some form of landed cost associated with transporting the raw materials or components to our facility. Our freight and import costs and the timely delivery of our products could be adversely impacted by a number of factors 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~~operations and business.

In March 2020 the World Health Organization declared coronavirus (or “COVID-19”) a global pandemic. This contagious disease outbreak, which has continued to spread, has adversely affected workforces, economies, and financial ~~condition. International or domestic geopolitical or~~markets globally, leading to an economic downturn. As an essential provider of products and services for law enforcement and other first responders, we remain focused on protecting the health and well-being of our employees while assuring the continuity of our business operations.

COVID-19-related risks that may affect our operations and financial results include, but are not limited to:

●

Manufacturing disruptions at our Scottsdale headquarters or at our suppliers;

●

A change in our classification as an essential business that impairs our ability to continue operating;

●

Economic slowdowns that negatively affect municipal tax collections and put pressure on law enforcement budgets that in turn increases the risk that our customers will be unable to appropriate funds for existing or future contracts with us; this could also affect customer demand and ability to pay, cause decreases in sales, and negatively impact the realizability of our accounts and notes receivable and contract assets;

●

Existing and potential increased costs relating to personal protective equipment, which we are sourcing for our employees and customers;

●

Costs incurred to shut down and decontaminate our facilities if the virus is detected;

●

Extended illness, incapacitation or death of key personnel or executives;

●

Ongoing governmental mandates to shutdown factories or limit travel and the movement of people;

●

Compounding risk from the potential for second and third wave infections around the world, including in the U.S.; and

●

Additional airline bankruptcies or further reduction in very limited global freight capacity that causes interruptions to our supply chain or extended supply chain.

These 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,have had and could ~~adversely~~continue to have an impact ~~the profitability of~~on our operations.

If our backup and mitigation plans are not sufficient to minimize business disruption, our financial results could be adversely affected. The ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments that cannot be predicted. We are continuously monitoring our operations and intend to take appropriate actions to mitigate the risks arising from the COVID-19 pandemic, but there can be no assurances that we will be successful in doing so.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

~~None.~~

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Item 6. Exhibits



~~10.1~~	31.1*	~~Axon Enterprise, Inc. 2019 Stock Inducement Plan (incorporated by reference to Exhibit 99.1 to the registration statement on Form S-8, filed September 23, 2019)~~
31.1*		Principal Executive Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2*			Principal Financial Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32**			Principal Executive Officer and Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		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 Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		The cover page from the ~~Company's~~Company’s Quarterly Report for the quarter ended ~~September 30, 2019,~~March 31, 2020, formatted in Inline XBRL

* Filed herewith

** Furnished herewith

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




AXON ENTERPRISE, INC.

Date:	~~November~~ May 8, ~~2019~~2020
		By:	/s/ PATRICK W. SMITH
			Chief Executive Officer
			(Principal Executive Officer)

Date:	~~November~~ May 8, ~~2019~~2020	By:	/s/ JAWAD A. AHSAN
			Chief Financial Officer
			(Principal Financial and
			Accounting Officer)



	September 30, 2019			December 31, 2018
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	202,551		$	349,462
Short-term investments	108,913			—
Accounts and notes receivable, net of allowance of $1,983 and $1,882 as of September 30, 2019 and December 31, 2018, respectively	149,013			130,579
Contract assets, net	33,602			13,960
Inventory	40,666			33,763
Prepaid expenses and other current assets	41,277			30,391
Total current assets	576,022			558,155
Property and equipment, net of accumulated depreciation of $38,470 and $39,885 as of September 30, 2019 and December 31, 2018, respectively	42,592			37,893
Deferred income tax assets, net	23,290			19,347
Intangible assets, net	13,528			15,935
Goodwill	24,876			24,981
Long-term investments	41,391			—
Long-term notes receivable, net of current portion	33,463			40,230
Other assets	37,142			22,999
Total assets	$	792,304		$	719,540
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	14,638		$	15,164
Accrued liabilities	35,745			41,092
Current portion of deferred revenue	127,160			107,016
Customer deposits	2,294			2,702
Other current liabilities	3,997			37
Total current liabilities	183,834			166,011
Deferred revenue, net of current portion	82,149			74,417
Liability for unrecognized tax benefits	3,443			2,849
Long-term deferred compensation	3,694			3,235
Other long-term liabilities	11,537			5,704
Total liabilities	284,657			252,216
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of September 30, 2019 and December 31, 2018	—			—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 59,320,793 and 58,810,637 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively	1			1
Additional paid-in capital	480,747			453,400
Treasury stock at cost, 20,220,227 shares as of September 30, 2019 and December 31, 2018	(155,947		)	(155,947		)
Retained earnings	184,644			171,383
Accumulated other comprehensive loss	(1,798		)	(1,513		)
Total stockholders’ equity	507,647			467,324
Total liabilities and stockholders’ equity	$	792,304		$	719,540



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net sales from products	$	96,497		$	80,923		$	264,977		$	238,618
Net sales from services	34,340			23,913			94,032			66,659
Net sales	130,837			104,836			359,009			305,277
Cost of product sales	42,445			32,953			120,265			96,474
Cost of service sales	8,223			6,250			24,098			15,566
Cost of sales	50,668			39,203			144,363			112,040
Gross margin	80,169			65,633			214,646			193,237
Operating expenses:
Sales, general and administrative	48,424			39,685			134,678			114,787
Research and development	25,129			21,982			71,976			55,602
Total operating expenses	73,553			61,667			206,654			170,389
Income from operations	6,616			3,966			7,992			22,848
Interest and other income (expense), net	1,820			1,274			5,978			2,242
Income before provision for income taxes	8,436			5,240			13,970			25,090
Provision for (benefit from) income taxes	2,332			(471		)	709			(2,032		)
Net income	$	6,104		$	5,711		$	13,261		$	27,122
Net income per common and common equivalent shares:
Basic	$	0.10		$	0.10		$	0.22		$	0.49
Diluted	$	0.10		$	0.10		$	0.22		$	0.47
Weighted average number of common and common equivalent shares outstanding:
Basic	59,278			58,340			59,128			55,681
Diluted	60,059			59,805			59,938			57,254

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$	6,104		$	5,711		$	13,261		$	27,122
Foreign currency translation adjustments	(227		)	(107		)	(285		)	(159		)
Comprehensive income	$	5,877		$	5,604		$	12,976		$	26,963



	Common Stock			Additional Paid-in Capital			Treasury Stock				Retained Earnings		Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital			Shares	Amount			Retained Earnings		Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
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	298,649	—		(1,159		)	—	—			—		—			(1,159		)
Stock-based compensation	—	—		7,905			—	—			—		—			7,905
Net income	—	—		—			—	—			6,419		—			6,419
Foreign currency translation adjustments	—	—		—			—	—			—		50			50
Balance, March 31, 2019	59,109,286	1		460,146			20,220,227	(155,947		)	177,802		(1,463		)	480,539
Issuance of common stock under employee plans, net	71,832	—		(869		)	—	—			—		—			(869		)
Stock-based compensation	—	—		8,627			—	—			—		—			8,627
Issuance of common stock for business combination contingent consideration	70,613	—		—			—	—			—		—			—
Net income	—	—		—			—	—			738		—			738
Foreign currency translation adjustments	—	—		—			—	—			—		(108		)	(108		)
Balance, June 30, 2019	59,251,731	1		467,904			20,220,227	(155,947		)	178,540		(1,571		)	488,927
Issuance of common stock under employee plans, net	69,062	—		(1,134		)	—	—			—		—			(1,134		)
Stock-based compensation	—	—		13,977			—	—			—		—			13,977
Net income	—	—		—			—	—			6,104		—			6,104
Foreign currency translation adjustments	—	—		—			—	—			—		(227		)	(227		)
Balance, September 30, 2019	59,320,793	$	1	$	480,747		20,220,227	$	(155,947	)	$	184,644	$	(1,798	)	$	507,647



	December 31, 2018		Impact of Adoption of Topic 842 on Opening Balance Sheet			January 1, 2019
	(As reported)		Impact of Adoption of Topic 842 on Opening Balance Sheet			(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



	Three Months Ended September 30, 2019						Three Months Ended September 30, 2018
	TASER		Software and Sensors		Total		TASER		Software and Sensors		Total
TASER 7	$	20,214	$	—	$	20,214	$	—	$	—	$	—
TASER X26P	11,578		—		11,578		17,998		—		17,998
TASER X2	13,241		—		13,241		20,392		—		20,392
TASER Pulse and Bolt	1,132		—		1,132		1,402		—		1,402
Single cartridges	18,901		—		18,901		18,406		—		18,406
Axon Body	—		6,763		6,763		—		4,744		4,744
Axon Flex	—		1,670		1,670		—		1,325		1,325
Axon Fleet	—		4,341		4,341		—		1,809		1,809
Axon Dock	—		3,358		3,358		—		2,178		2,178
Axon Evidence and cloud services	218		34,022		34,240		—		23,915		23,915
TASER Cam	—		534		534		—		717		717
Extended warranties	4,543		4,714		9,257		4,123		3,161		7,284
Other	1,916		3,692		5,608		1,345		3,321		4,666
Total	$	71,743	$	59,094	$	130,837	$	63,666	$	41,170	$	104,836



	Nine Months Ended September 30, 2019						Nine Months Ended September 30, 2018
	TASER		Software and Sensors		Total		TASER		Software and Sensors		Total
TASER 7	$	39,466	$	—	$	39,466	$	—	$	—	$	—
TASER X26P	37,832		—		37,832		52,618		—		52,618
TASER X2	40,413		—		40,413		62,686		—		62,686
TASER Pulse and Bolt	2,920		—		2,920		3,849		—		3,849
Single cartridges	57,354		—		57,354		51,763		—		51,763
Axon Body	—		18,820		18,820		—		15,082		15,082
Axon Flex	—		4,517		4,517		—		4,529		4,529
Axon Fleet	—		10,977		10,977		—		6,640		6,640
Axon Dock	—		9,401		9,401		—		7,332		7,332
Axon Evidence and cloud services	363		93,461		93,824		—		64,513		64,513
TASER Cam	—		2,481		2,481		—		2,839		2,839
Extended warranties	13,341		14,064		27,405		11,567		8,521		20,088
Other	6,017		7,582		13,599		5,331		8,007		13,338
Total	$	197,706	$	161,303	$	359,009	$	187,814	$	117,463	$	305,277



	September 30, 2019
Contract assets, net	$	33,635
Contract liabilities (deferred revenue)	209,309
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the period	83,159



	September 30, 2019						December 31, 2018
	Current		Long-Term		Total		Current		Long-Term		Total
Warranty:
TASER	$	11,677	$	16,633	$	28,310	$	12,797	$	16,847	$	29,644
Software and Sensors	9,899		5,450		15,349		8,273		6,516		14,789
	21,576		22,083		43,659		21,070		23,363		44,433
Hardware:
TASER	4,378		17,601		21,979		9,355		15,598		24,953
Software and Sensors	39,308		27,357		66,665		20,878		24,685		45,563
	43,686		44,958		88,644		30,233		40,283		70,516
Services:
TASER	11		396		407		—		—		—
Software and Sensors	61,887		14,712		76,599		55,713		10,771		66,484
	61,898		15,108		77,006		55,713		10,771		66,484
Total	$	127,160	$	82,149	$	209,309	$	107,016	$	74,417	$	181,433



	As of September 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short-Term Investments		Long-Term Investments
Cash	$	80,269	$	—	$	—		$	80,269	$	80,269	$	—	$	—

Level 1:
Money market funds	37,311		—		—			37,311		37,311		—		—
Agency bonds	32,834		4		(6		)	32,832		12,068		2,000		18,766
Subtotal	70,145		4		(6		)	70,143		49,379		2,000		18,766

Level 2:
State and municipal obligations	4,454		1		(1		)	4,454		—		4,454		—
Corporate bonds	127,987		51		(31		)	128,007		2,903		102,459		22,625
U.S. Treasury repurchase agreements	70,000		—		—			70,000		70,000		—		—
Subtotal	202,441		52		(32		)	202,461		72,903		106,913		22,625
Total	$	352,855	$	56	$	(38	)	$	352,873	$	202,551	$	108,913	$	41,391



	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	$	—	$	—



		September 30, 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	$	(959	)	$	2,202	$	3,161	$	(732	)	$	2,429
Issued patents	4-15 years	3,170		(1,268		)	1,902		2,940		(1,106		)	1,834
Issued trademarks	3-11 years	1,006		(532		)	474		1,053		(599		)	454
Customer relationships	4-8 years	3,664		(1,263		)	2,401		3,701		(880		)	2,821
Non-compete agreements	3-4 years	446		(397		)	49		540		(439		)	101
Developed technology	3-7 years	10,660		(5,982		)	4,678		13,404		(7,081		)	6,323
Re-acquired distribution rights	2 years	1,932		(1,932		)	—		1,928		(1,813		)	115
Total amortizable		24,039		(12,333		)	11,706		26,727		(12,650		)	14,077
Not amortizable (indefinite-lived) intangible assets:
TASER trademark		900					900		900					900
Patents and trademarks pending		922					922		958					958
Total not amortizable		1,822					1,822		1,858					1,858
Total intangible assets		$	25,861	$	(12,333	)	$	13,528	$	28,585	$	(12,650	)	$	15,935



2019 Remaining	$	948
2020	3,177
2021	2,862
2022	1,256
2023	962
2024	881
Thereafter	1,620
Total	$	11,706



	Number of Units		Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value
Units outstanding, beginning of year	1,655		$	28.34
Granted	6,476		35.87
Released	(450	)	24.47
Forfeited	(410	)	34.63
Units outstanding, end of period	7,271		34.93		$	412,866



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value
Options outstanding, beginning of year	6,458		$	28.24
Granted	—		—
Exercised	(25	)	4.23
Expired / terminated	—		—
Options outstanding, end of period	6,433		28.33		8.33	$	183,023
Options exercisable, end of period	67		4.53		1.19	3,506



Leases (in thousands)	Classification	September 30, 2019
Assets
Operating lease assets	Other assets	$	10,592
Liabilities
Current
Operating	Other current liabilities	$	3,959
Noncurrent
Operating	Other long-term liabilities	7,687
Total lease liabilities		$	11,646



	Nine Months Ended September 30, 2019
Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	3,229
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases	888
Weighted average remaining lease term:
Operating leases	3.3 years
Weighted average discount rate:
Operating leases	3.4		%



	Operating		Sublease income			Net
2019 Remaining	$	1,114	$	(82	)	$	1,032
2020	4,545		(82		)	4,463
2021	3,639		—			3,639
2022	2,638		—			2,638
2023	1,173		—			1,173
2024	—		—			—
Thereafter	—		—			—
Total minimum lease payments	13,109		(164		)	12,945
Less: Amount representing interest						(1,299		)
Present value of lease payments						$	11,646



	Operating		Capital
2019	$	3,670	$	40
2020	3,572		36
2021	2,961		—
2022	2,001		—
2023	573		—
Thereafter	—		—
Total minimum lease payments	$	12,777	76
Less: Amount representing interest			(6		)
Capital lease obligation			$	70



	Three Months Ended September 30,								Dollar Change			Percent Change
	2019				2018				Dollar Change			Percent Change
TASER segment:
TASER 7	$	20,214	15.4	%	$	—	—	%	$	20,214		*
TASER X26P	11,578		8.8		17,998		17.2		(6,420		)	(35.7	)
TASER X2	13,241		10.1		20,392		19.4		(7,151		)	(35.1	)
TASER Pulse and Bolt	1,132		0.9		1,402		1.3		(270		)	(19.3	)
Single cartridges	18,901		14.4		18,406		17.6		495			2.7
Axon Evidence and cloud services	218		0.2		—		—		218			*
Extended warranties	4,543		3.5		4,123		3.9		420			10.2
Other	1,916		1.5		1,345		1.3		571			42.5
Total TASER segment	71,743		54.8		63,666		60.7		8,077			12.7
Software and Sensors segment:
Axon Body	6,763		5.2		4,744		4.5		2,019			42.6
Axon Flex	1,670		1.3		1,325		1.3		345			26.0
Axon Fleet	4,341		3.3		1,809		1.7		2,532			140.0
Axon Dock	3,358		2.6		2,178		2.1		1,180			54.2
Axon Evidence and cloud services	34,022		26.0		23,915		22.8		10,107			42.3
TASER Cam	534		0.4		717		0.7		(183		)	(25.5	)
Extended warranties	4,714		3.6		3,161		3.0		1,553			49.1
Other	3,692		2.8		3,321		3.2		371			11.2
Total Software and Sensors segment	59,094		45.2		41,170		39.3		17,924			43.5
Total net sales	$	130,837	100.0	%	$	104,836	100.0	%	$	26,001		24.8	%



	Three Months Ended September 30,		Unit Change		Percent Change
	2019	2018	Unit Change		Percent Change
TASER 7	17,674	—	17,674		*
TASER X26P	10,766	18,842	(8,076	)	(42.9	)
TASER X2	9,819	16,729	(6,910	)	(41.3	)
TASER Pulse and Bolt	3,923	3,750	173		4.6
Cartridges	566,347	598,119	(31,772	)	(5.3	)
Axon Body	22,037	17,622	4,415		25.1
Axon Flex	5,409	3,487	1,922		55.1
Axon Fleet	2,967	1,601	1,366		85.3
Axon Dock	3,724	3,525	199		5.6
TASER Cam	899	1,339	(440	)	(32.9	)



	Three Months Ended September 30, 2019				Three Months Ended June 30, 2019				Dollar Change			Percent Change
TASER segment:
TASER 7	$	20,214	15.4	%	$	9,298	8.3	%	$	10,916		117.4	%
TASER X26P	11,578		8.8		10,382		9.2		1,196			11.5
TASER X2	13,241		10.1		14,087		12.5		(846		)	(6.0	)
TASER Pulse and Bolt	1,132		0.9		1,118		1.0		14			1.3
Single cartridges	18,901		14.4		19,293		17.3		(392		)	(2.0	)
Axon Evidence and cloud services	218		0.2		109		0.1		109			100.0
Extended warranties	4,543		3.5		4,482		4.0		61			1.4
Other	1,916		1.5		1,803		1.6		113			6.3
Total TASER segment	71,743		54.8		60,572		54.0		11,171			18.4
Software and Sensors segment:
Axon Body	6,763		5.2		5,612		5.0		1,151			20.5
Axon Flex	1,670		1.3		1,623		1.4		47			2.9
Axon Fleet	4,341		3.3		3,120		2.8		1,221			39.1
Axon Dock	3,358		2.6		2,731		2.4		627			23.0
Axon Evidence and cloud services	34,022		26.0		31,821		28.3		2,201			6.9
TASER Cam	534		0.4		1,044		0.9		(510		)	(48.9	)
Extended warranties	4,714		3.6		4,420		3.9		294			6.7
Other	3,692		2.8		1,419		1.3		2,273			160.2
Total Software and Sensors segment	59,094		45.2		51,790		46.0		7,304			14.1
Total net sales	$	130,837	100.0	%	$	112,362	100.0	%	$	18,475		16.4	%



	Three Months Ended September 30, 2019	Three Months Ended June 30, 2019	Unit Change		Percent Change
TASER 7	17,674	8,135	9,539		117.3	%
TASER X26P	10,766	9,493	1,273		13.4
TASER X2	9,819	9,759	60		0.6
TASER Pulse and Bolt	3,923	3,631	292		8.0
Cartridges	566,347	606,220	(39,873	)	(6.6	)
Axon Body	22,037	20,346	1,691		8.3
Axon Flex	5,409	3,508	1,901		54.2
Axon Fleet	2,967	2,441	526		21.5
Axon Dock	3,724	3,408	316		9.3
TASER Cam	899	1,716	(817	)	(47.6	)



	Three Months Ended									Nine Months Ended
	September 30, 2019			June 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018
Net income	$	6,104		$	738		$	5,711		$	13,261		$	27,122
Depreciation and amortization	2,709			2,687			3,065			8,196			8,226
Interest expense	4			17			16			27			53
Investment interest income	(1,647		)	(1,630		)	(1,256		)	(5,280		)	(1,926		)
Provision for (benefit from) income taxes	2,332			(188		)	(471		)	709			(2,032		)
EBITDA	$	9,502		$	1,624		$	7,065		$	16,913		$	31,443

Adjustments:
Stock-based compensation expense	13,663			8,627			6,255			30,195			15,302
Adjusted EBITDA (CEO Performance Award)	$	23,165		$	10,251		$	13,320		$	47,108		$	46,745