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, 2020~~March 31, 2021 or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-16391

Axon Enterprise, Inc.

(Exact name of registrant as specified in its charter)


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

17800 North 85th Street	85255
Scottsdale, 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~~AXON	The Nasdaq Global Select Market

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

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

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


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated Filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

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

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

The number of shares of the registrant’s common stock outstanding as of ~~October~~April 30, ~~2020~~2021 was ~~63,549,898.~~64,684,364.

Table of Contents

AXON ENTERPRISE, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER 30, 2020~~MARCH 31, 2021

			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, 2020~~March 31, 2021 (Unaudited) and December 31, ~~2019~~2020	1
		Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2021 and ~~Nine Months Ended September 30,~~ 2020 ~~and 2019~~	2
		Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2021 and ~~Nine Months Ended September 30,~~ 2020 ~~and 2019~~	3
		Unaudited Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30, 2020~~March 31, 2021 and ~~2019~~2020	54
		Notes to Unaudited Condensed Consolidated Financial Statements	65
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		2924
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		4435
	Item 4. Controls and Procedures		4536
PART II - OTHER INFORMATION			4637
	Item 1. Legal Proceedings		4637
	Item 1A. Risk Factors		4637
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		4637
	Item 3. Defaults Upon Senior Securities		4737
	Item 4. Mine Safety Disclosures		4737
	Item 5. Other Information		4737
	Item 6. Exhibits		4838
	SIGNATURES		4939

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; ~~expected costs relating to the FTC litigation;~~ the impact of pending litigation; strategies and trends relating to subscription plan programs and revenues; our anticipation that contracts with governmental customers will be fulfilled; strategies and trends, including the benefits of, research and development investments; the sufficiency of our liquidity and financial resources; ~~that we may repurchase our common stock;~~ expectations about customer behavior; the impact on our investment portfolio of changes in interest rates; our potential use of foreign currency forward and option contracts; statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; statements of management’s strategies, goals and objectives and other similar expressions; as well as the ultimate resolution of financial statement items requiring critical accounting estimates, including those set forth in our Form 10-K for the year ended December 31, ~~2019.~~2020. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Words such as “may,” “will,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions, as well as statements in future tense, identify forward-looking statements. However, not all forward-looking statements contain these identifying words.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. The following important factors could cause actual results to differ materially from those in the forward-looking statements: the potential global impacts of the COVID-19 pandemic; our exposure to cancellations of government contracts due to appropriation clauses, exercise of a cancellation clause, or non-exercise of contractually optional periods; our ability to design, introduce and sell new products or features; our ability to defend against litigation and protect our intellectual property, and the resulting costs of this activity; our ability to manage our supply chain and avoid production delays, shortages, and impacts to expected gross margins; the impact of stock compensation expense, impairment expense, and income tax expense on our financial results; customer purchase behavior, including adoption of our software as a service delivery model; negative media publicity regarding our products; the impact of product mix on projected gross margins; defects in our products; changes in the costs of product components and labor; loss of customer data, a breach of security, or an extended outage, including by our ~~reliance on~~ third party cloud-based storage providers; exposure to international operational risks; delayed cash collections and possible credit losses due to our subscription model; changes in government regulations in the U.S. and in foreign markets, especially related to the classification of our products by the United States Bureau of Alcohol, Tobacco, Firearms and ~~Explosives and to evolving regulations surrounding privacy and data protection;~~Explosives; our ability to integrate acquired businesses; our ability to attract and retain key personnel; and counter-party risks relating to cash balances held in excess of FDIC insurance limits. Many events beyond our control may determine whether results we anticipate will be achieved. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements. The Annual Report on Form 10-K that we filed with the Securities and Exchange Commission ("SEC") on February ~~28, 2020 and this Quarterly Report on Form 10-Q list~~26, 2021 lists various important factors that could cause actual results to differ materially from expected and historical results. These factors are intended as cautionary statements for investors within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. Readers can find them under the heading “Risk Factors” in the Report on Form 10-K, ~~and 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,		December 31,		March 31,		December 31,
	2020		2019		2021		2020
	(Unaudited)				(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	176,000	$	172,250	$	154,822	$	155,440
Short-term investments		330,914		178,534		440,842		406,525
Accounts and notes receivable, net of allowance of $1,787 and $1,567 as of September 30, 2020 and December 31, 2019, respectively		172,803		146,878
Accounts and notes receivable, net of allowance of $1,796 and $2,105 as of March 31, 2021 and December 31, 2020, respectively						185,373		229,201
Contract assets, net		63,105		38,102		72,472		63,945
Inventory		97,610		38,845		89,657		89,958
Prepaid expenses and other current assets		35,421		34,866		43,063		36,883
Total current assets		875,853		609,475		986,229		981,952
Property and equipment, net		102,718		43,770		112,119		105,494
Deferred tax assets, net		39,773		27,688		46,403		45,770
Intangible assets, net		10,260		12,771		8,642		9,448
Goodwill		25,012		25,013		25,194		25,205
Long-term investments		120,615		45,499		78,464		90,681
Long-term notes receivable, net of current portion		22,611		31,598
Long-term notes receivable, net						18,546		22,457
Long-term contract assets, net		15,019		9,644		26,341		20,099
Other assets		67,288		40,181		102,920		79,917
Total assets	$	1,279,149	$	845,639	$	1,404,858	$	1,381,023
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	22,441	$	25,874	$	19,791	$	24,142
Accrued liabilities		74,114		45,001		41,097		59,843
Current portion of deferred revenue		154,731		117,864		165,086		163,959
Customer deposits		2,132		2,974		8,134		2,956
Other current liabilities		5,137		3,853		5,667		5,431
Total current liabilities		258,555		195,566		239,775		256,331
Deferred revenue, net of current portion		87,733		87,936		116,107		111,222
Liability for unrecognized tax benefits		4,406		3,832		4,697		4,503
Long-term deferred compensation		4,150		3,936		4,825		4,732
Deferred tax liability, net		560		354		684		649
Other long-term liabilities		28,592		10,520		27,866		27,331
Total liabilities		383,996		302,144		393,954		404,768
Commitments and contingencies (Note 13)
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively		—		—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 63,548,081 and 59,497,759 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively		1		1
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; 0 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively						—		—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 64,673,091 and 63,766,555 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively						1		1
Additional paid-in capital		908,584		528,272		1,044,724		962,159
Treasury stock at cost, 20,220,227 shares as of September 30, 2020 and December 31, 2019		(155,947)		(155,947)
Treasury stock at cost, 20,220,227 shares as of March 31, 2021 and December 31, 2020						(155,947)		(155,947)
Retained earnings		144,067		172,265		121,984		169,901
Accumulated other comprehensive loss		(1,552)		(1,096)
Accumulated other comprehensive income						142		141
Total stockholders’ equity		895,153		543,495		1,010,904		976,255
Total liabilities and stockholders’ equity	$	1,279,149	$	845,639	$	1,404,858	$	1,381,023

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 (LOSS)

(in thousands, except per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020
Net sales from products	$	120,091	$	96,497	$	326,134	$	264,977	$	140,886	$	107,288
Net sales from services		46,351		34,340		128,729		94,032		54,133		39,874
Net sales		166,442		130,837		454,863		359,009		195,019		147,162
Cost of product sales		57,798		42,445		150,507		120,265		58,616		48,884
Cost of service sales		10,404		8,223		29,331		24,098		13,050		9,670
Cost of sales		68,202		50,668		179,838		144,363		71,666		58,554
Gross margin		98,240		80,169		275,025		214,646		123,353		88,608
Operating expenses:
Sales, general and administrative		74,443		48,424		209,763		134,678		126,597		63,027
Research and development		29,246		25,129		85,187		71,976		47,018		26,381
Total operating expenses		103,689		73,553		294,950		206,654		173,615		89,408
Income (loss) from operations		(5,449)		6,616		(19,925)		7,992		(50,262)		(800)
Interest and other income, net		2,040		1,820		4,594		5,978		585		941
Income (loss) before provision for income taxes		(3,409)		8,436		(15,331)		13,970		(49,677)		141
Provision for (benefit from) income taxes		(2,536)		2,332		12,227		709		(1,760)		(3,933)
Net income (loss)	$	(873)	$	6,104	$	(27,558)	$	13,261	$	(47,917)	$	4,074
Net income (loss) per common and common equivalent shares:
Basic	$	(0.01)	$	0.10	$	(0.45)	$	0.22	$	(0.75)	$	0.07
Diluted	$	(0.01)	$	0.10	$	(0.45)	$	0.22	$	(0.75)	$	0.07
Weighted average number of common and common equivalent shares outstanding:
Basic		63,496		59,278		61,159		59,128		64,036		59,609
Diluted		63,496		60,059		61,159		59,938		64,036		60,394
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net income (loss)	$	(873)	$	6,104	$	(27,558)	$	13,261	$	(47,917)	$	4,074
Foreign currency translation adjustments		1,238		(227)		(456)		(285)		1		(2,372)
Comprehensive income (loss)	$	365	$	5,877	$	(28,014)	$	12,976	$	(47,916)	$	1,702

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’ EQUITY

(in thousands, except share data)


											Accumulated														Accumulated
				Additional							Other		Total					Additional							Other		Total
	Common Stock			Paid-in		Treasury Stock			Retained		Comprehensive		Stockholders’		Common Stock			Paid-in		Treasury Stock			Retained		Comprehensive		Stockholders’
	Shares	Amount		Capital		Shares	Amount		Earnings		Loss		Equity		Shares	Amount		Capital		Shares	Amount		Earnings		Income		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)
Balance, December 31, 2020															63,766,555	$	1	$	962,159	20,220,227	$	(155,947)	$	169,901	$	141	$	976,255
Issuance of common stock under employee plans, net	315,404		—		(5,162)	—		—		—		—		(5,162)	906,536		—		(7,045)	—		—		—		—		(7,045)
Stock-based compensation	—		—		20,195	—		—		—		—		20,195	—		—		89,610	—		—		—		—		89,610
Net income	—		—		—	—		—		4,074		—		4,074	—		—		—	—		—		(47,917)		—		(47,917)
Foreign currency translation adjustments	—		—		—	—		—		—		(2,372)		(2,372)	—		—		—	—		—		—		1		1
Balance, March 31, 2020	59,813,163		1		543,305	20,220,227		(155,947)		175,699		(3,468)		559,590
Issuance of common stock	3,450,000		—		306,779	—		—		—		—		306,779
Issuance of common stock under employee plans, net	134,571		—		(310)	—		—		—		—		(310)
Stock-based compensation	—		—		33,835	—		—		—		—		33,835
Issuance of common stock for business combination contingent consideration	70,613		—		—	—		—		—		—		0
Net income (loss)	—		—		—	—		—		(30,759)		—		(30,759)
Foreign currency translation adjustments	—		—		—	—		—		—		678		678
Balance, June 30, 2020	63,468,347		1		883,609	20,220,227		(155,947)		144,940		(2,790)		869,813
Issuance of common stock under employee plans, net	79,734		—		(1,119)	—		—		—		—		(1,119)
Stock-based compensation	—		—		26,094	—		—		—		—		26,094
Net income (loss)	—		—		—	—		—		(873)		—		(873)
Foreign currency translation adjustments	—		—		—	—		—		—		1,238		1,238
Balance, September 30, 2020	63,548,081	$	1	$	908,584	20,220,227	$	(155,947)	$	144,067	$	(1,552)	$	895,153
Balance, March 31, 2021															64,673,091	$	1	$	1,044,724	20,220,227	$	(155,947)	$	121,984	$	142	$	1,010,904

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

~~Table of Contents~~

~~AXON ENTERPRISE, INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONT’D)~~

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


												Accumulated														Accumulated
					Additional							Other		Total					Additional							Other		Total
	Common Stock				Paid-in		Treasury Stock			Retained		Comprehensive		Stockholders’		Common Stock			Paid-in		Treasury Stock			Retained		Comprehensive		Stockholders’
	Shares	Amount			Capital		Shares	Amount		Earnings		Loss		Equity		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
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	298,649		—			(1,159)	—		—		—		—		(1,159)	315,404		—		(5,162)	—		—		—		—		(5,162)
Stock-based compensation	—		—			7,905	—		—		—		—		7,905	—		—		20,195	—		—		—		—		20,195
Net income	—		—			—	—		—		6,419		—		6,419	—		—		—	—		—		4,074		—		4,074
Foreign currency translation adjustments	—		—			—	—		—		—		50		50	—		—		—	—		—		—		(2,372)		(2,372)
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)
Issuance of common stock for business combination contingent consideration	70,613		—			—	—		—		—		—		—
Stock-based compensation	—		—			8,627	—		—		—		—		8,627
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	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
Balance, March 31, 2020																59,813,163	$	1	$	543,305	20,220,227	$	(155,947)	$	175,699	$	(3,468)	$	559,590

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,				Three Months Ended March 31,
	2020		2019		2021		2020
Cash flows from operating activities:
Net income (loss)	$	(27,558)	$	13,261	$	(47,917)	$	4,074
Adjustments to reconcile net income to net cash used in operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		8,944		8,196		4,291		2,881
Loss on disposal and abandonment of intangible assets		252		51		11		13
Loss on disposal and impairment of property and equipment, net		1,429		2,408		45		517
Stock-based compensation		80,124		30,195		89,610		20,195
Deferred income taxes		(11,670)		(3,946)		(598)		(1,548)
Unrecognized tax benefits		573		594		194		341
Other noncash, net		4,573		2,923
Other noncash						2,615		1,156
Provision for expected credit losses		776		0		(335)		902
Change in assets and liabilities:
Accounts and notes receivable and contract assets		(48,551)		(30,497)		31,298		(9,700)
Inventory		(59,371)		(6,302)		520		(8,630)
Prepaid expenses and other assets		(4,822)		(11,967)		(6,952)		2,277
Accounts payable, accrued and other liabilities		25,365		(13,528)		(18,062)		(3,562)
Deferred revenue		34,099		28,476		6,219		4,499
Net cash provided by operating activities		4,163		19,864		60,939		13,415
Cash flows from investing activities:
Purchases of investments		(516,687)		(242,693)		(155,825)		(99,512)
Proceeds from call / maturity of investments		287,199		92,207		132,254		84,315
Purchases of property and equipment		(66,023)		(12,111)		(10,521)		(2,209)
Proceeds from disposal of property and equipment		94		0		10		78
Purchases of intangible assets		(177)		(328)		(41)		(45)
Investment in unconsolidated affiliate		(4,700)		0
Strategic investments						(20,000)		(4,700)
Net cash used in investing activities		(300,294)		(162,925)		(54,123)		(22,073)
Cash flows from financing activities:
Net proceeds from equity offering		306,779		0
Proceeds from options exercised		295		106		0		28
Income and payroll tax payments for net-settled stock awards		(6,886)		(3,268)		(7,045)		(5,190)
Net cash provided by (used in) financing activities		300,188		(3,162)
Net cash used in financing activities						(7,045)		(5,162)
Effect of exchange rate changes on cash and cash equivalents		(303)		(678)		(392)		(1,890)
Net increase (decrease) in cash and cash equivalents		3,754		(146,901)
Net decrease in cash and cash equivalents						(621)		(15,710)
Cash and cash equivalents and restricted cash, beginning of period		172,355		351,027		155,551		172,355
Cash and cash equivalents and restricted cash, end of period	$	176,109	$	204,126	$	154,930	$	156,645

Supplemental disclosures:
Cash and cash equivalents	$	176,000	$	202,551	$	154,822	$	156,540
Restricted cash (Note 1)		109		1,575		108		105
Total cash, cash equivalents and restricted cash shown in the statements of cash flows	$	176,109	$	204,126	$	154,930	$	156,645

Cash paid for income taxes, net of refunds	$	7,678	$	2,422	$	4,152	$	3,863

Non-cash transactions
Property and equipment purchases in accounts payable and accrued liabilities	$	1,734	$	1,047	$	517	$	617
Commission converted to stock-based award	$	0	$	314
Investment purchases in accounts payable, net					$	0	$	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, finance and other administrative support functions. ~~We also have a~~Our global software ~~engineering development center~~hub is located in Seattle, Washington, and we also have subsidiaries and / or offices located in Australia, Canada, Finland, Germany, 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, ~~2019,~~2020, 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, ~~2019.~~2020. The results of operations for the three months ~~and nine months~~ ended ~~September 30, 2020 and 2019~~March 31, 2021 are not necessarily indicative of the results to be expected for the full year (or any other period). Significant estimates and assumptions in these unaudited condensed consolidated financial statements include:

●

product warranty reserves,

●

inventory valuation,

●

revenue recognition,

●

reserve for expected credit loss, ~~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~~expense.

●

~~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 devices ("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). In both segments, we report sales of products and services. Service revenue in both segments includes sales related to Axon

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

Reportable segments are determined based on discrete financial information reviewed by our Chief Executive Officer who is our chief operating decision maker ("CODM"). We organize and review operations based on products and services, and currently there are no operating segments that are aggregated. We perform an analysis of our reportable segments at least annually. Additional information related to our business segments is summarized in Note ~~15.~~13.

Geographic Information and Major Customers / Suppliers

For the three ~~and nine~~ months ended ~~September 30, 2020 and 2019,~~March 31, 2021, 0 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, 2020 and 2019,~~March 31, 2021, 0 customer represented more than 10% of total net sales. At ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, 0 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., ~~Australia,~~ Canada, China, ~~Germany, Japan,~~Israel, Republic of Korea, Mexico, Sri Lanka, 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. Diluted income per share reflects the potential dilution from outstanding stock options and unvested restricted stock units. The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):


	Three Months Ended March 31,
	2021		2020
Numerator for basic and diluted earnings per share:
Net income (loss)	$	(47,917)	$	4,074
Denominator:
Weighted average shares outstanding		64,036		59,609
Dilutive effect of stock-based awards		—		785
Diluted weighted average shares outstanding		64,036		60,394
Anti-dilutive stock-based awards excluded		12,234		12,161
Net income (loss) per common share:
Basic	$	(0.75)	$	0.07
Diluted	$	(0.75)	$	0.07

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Three Months Ended September 30,

Nine Months Ended September 30,


2020

2019

2020

2019
Numerator for basic and diluted earnings per share:








Net income (loss)

$
(873)

$
6,104

$
(27,558)

$
13,261
Denominator:







Weighted average shares outstanding

63,496

59,278

61,159

59,128
Dilutive effect of stock-based awards

—

781

—

810
Diluted weighted average shares outstanding

63,496

60,059

61,159

59,938
Anti-dilutive stock-based awards excluded

12,793

12,477

12,904

12,546
Net income (loss) per common share:






Basic

$
(0.01)

$
0.10

$
(0.45)

$
0.22
Diluted

$
(0.01)

$
0.10

$
(0.45)

$
0.22

Standard Warranties

We warranty our CEDs, Axon cameras and certain related accessories from manufacturing defects on a limited basis for a period of one year after purchase and, thereafter, will repair or replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold when revenue is recorded for the related product. Future warranty costs are estimated based on historical data related to warranty claims and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure or other issue that could result in larger than anticipated warranty claims from customers. The warranty reserve is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. The warranty reserve is included in accrued liabilities on the accompanying condensed consolidated balance sheets.

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


	Nine Months Ended September 30,				Three Months Ended March 31,
	2020		2019		2021		2020
Balance, beginning of period	$	1,476	$	898	$	769	$	1,476
Utilization of reserve		(539)		(718)		(231)		(171)
Warranty expense (benefit)		(192)		891		406		(85)
Balance, end of period	$	745	$	1,071	$	944	$	1,220

Fair Value Measurements and Financial Instruments

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

●

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

●

Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets

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~~AXON ENTERPRISE, INC.~~

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

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, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were comprised of money market funds, certificates of deposit, commercial paper, corporate bonds, municipal bonds, U.S. Government agency bonds, U.S. Treasury bills, and U.S. Treasury inflation-protected ~~securities,~~securities. Also included in cash equivalents and investments at December 31, 2020 were 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, 2020~~March 31, 2021 and December 31, ~~2019~~2020 was ~~$4.2~~$4.8 million and ~~$4.2~~$4.7 million, respectively, related to corporate-owned life insurance policies

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

which are used to fund our deferred compensation plan. We determine the fair value of insurance contracts by obtaining the cash surrender value of the contracts from the issuer, a Level 2 valuation technique. ~~In March 2020, we made an investment of $4.7 million~~

We have strategic investments in ~~preferred stock and recorded preferred stock warrants at a fair value of $2.6 million,~~three unconsolidated affiliates, which ~~is also~~are included ~~in the balance of~~within other ~~assets as of September 30, 2020.~~assets. The estimated fair value of the investments was determined based on Level 3 inputs. As of ~~September 30, 2020,~~March 31, 2021, management estimated that the fair value of the ~~investment~~investments equaled ~~its~~the carrying value.

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

Restricted Cash

Restricted cash balances as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 included $0.1 million primarily related to funds held in an international bank account for a country in which we are required to maintain a minimum balance to operate. Approximately half of the balance was included in prepaid expenses and other current assets on our condensed consolidated balance sheets, with the remainder included in other assets.

Valuation of Goodwill, Intangibles and Long-lived Assets

We evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and identifiable intangible assets, excluding goodwill and intangible assets with indefinite useful lives, may warrant revision or that the remaining balance of these assets may not be recoverable. Such circumstances could include, but are not limited to, a change in the product mix, a change in the way products are created, produced or delivered, or a significant change in the way products are branded and marketed. In performing the review for recoverability, we estimate the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair value computed using discounted cash flows.

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

Recently Issued Accounting Guidance

Recently Adopted Accounting Pronouncements

In ~~June 2016,~~December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial~~

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~~AXON ENTERPRISE, INC.~~

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

~~Instruments. ASU 2016-13 includes an impairment model (known as~~2019-12, Simplifying 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 also requires enhanced disclosures relating to significant estimates and judgments used in estimating credit losses, as well as credit quality. 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 opening consolidated balance sheet as of January 1, 2020, ~~reflecting an overall increase to the allowance~~Accounting for ~~expected credit losses~~. ~~See Notes 3 and 4 for 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 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.Income Taxes. Adoption of this ASU on January 1, ~~2020~~2021 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 of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. Adoption of this ASU is not expected to have a material impact on 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

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 ison January 1, 2021 did 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.

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~~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, 2020

Three Months Ended September 30, 2019




Software and





Software and


TASER

Sensors

Total

TASER

Sensors

Total
TASER 7

$
21,702

$
0

$
21,702

$
20,214

$
0

$
20,214
TASER X26P

9,766

0

9,766

11,578

0

11,578
TASER X2

14,494

0

14,494

13,241

0

13,241
TASER Pulse

2,981

0

2,981

1,132

0

1,132
Cartridges

26,335

0

26,335

18,901

0

18,901
Axon Body

0

15,978

15,978

0

6,763

6,763
Axon Flex

0

1,589

1,589

0

1,670

1,670
Axon Fleet

0

4,215

4,215

0

4,341

4,341
Axon Dock

0

5,708

5,708

0

3,358

3,358
Axon Evidence and cloud services

692

45,450

46,142

218

34,022

34,240
Extended warranties

5,265

6,514

11,779

4,543

4,714

9,257
Other

3,171

2,582

5,753

1,916

4,226

6,142
Total

$
84,406

$
82,036

$
166,442

$
71,743

$
59,094

$
130,837


	Nine Months Ended September 30, 2020						Nine Months Ended September 30, 2019						Three Months Ended March 31, 2021						Three Months Ended March 31, 2020
			Software and						Software and						Software and						Software and
	TASER		Sensors		Total		TASER		Sensors		Total		TASER		Sensors		Total		TASER		Sensors		Total
TASER 7	$	48,616	$	—	$	48,616	$	39,466	$	—	$	39,466	$	33,991	$	—	$	33,991	$	15,326	$	0	$	15,326
TASER X26P		30,338		—		30,338		37,832		—		37,832		9,963		—		9,963		11,061		0		11,061
TASER X2		45,401		—		45,401		40,413		—		40,413		12,778		—		12,778		14,075		0		14,075
TASER Pulse		6,374		—		6,374		2,920		—		2,920		2,205		—		2,205		1,200		0		1,200
Cartridges		76,732		—		76,732		57,354		—		57,354		30,418		—		30,418		26,625		0		26,625
Axon Body		—		40,645		40,645		—		18,820		18,820		—		19,756		19,756		0		12,823		12,823
Axon Flex		—		3,452		3,452		—		4,517		4,517		—		905		905		0		1,183		1,183
Axon Fleet		—		13,088		13,088		—		10,977		10,977		—		3,763		3,763		0		4,775		4,775
Axon Dock		—		14,714		14,714		—		9,401		9,401		—		6,920		6,920		0		4,951		4,951
Axon Evidence and cloud services		1,776		126,495		128,271		363		93,461		93,824		1,396		52,294		53,690		498		39,154		39,652
Extended warranties		15,340		17,707		33,047		13,341		14,064		27,405		5,646		7,500		13,146		4,977		5,458		10,435
Other		6,214		7,971		14,185		6,017		10,063		16,080		2,602		4,882		7,484		2,133		2,923		5,056
Total	$	230,791	$	224,072	$	454,863	$	197,706	$	161,303	$	359,009	$	98,999	$	96,020	$	195,019	$	75,895	$	71,267	$	147,162

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


	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended March 31,
	2020				2019				2020				2019				2021				2020
United States	$	143,380	86	%	$	110,809	85	%	$	368,390	81	%	$	298,736	83	%	$	160,386	82	%	$	117,463	80	%
Other countries		23,062	14			20,028	15			86,473	19			60,273	17			34,633	18			29,699	20
Total	$	166,442	100	%	$	130,837	100	%	$	454,863	100	%	$	359,009	100	%	$	195,019	100	%	$	147,162	100	%

119

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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, 2020~~March 31, 2021 (in thousands):


	September 30, 2020		March 31, 2021
Contract assets, net	$	78,124	$	98,813
Contract liabilities (deferred revenue)		242,464		281,193
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the period		113,422		63,871

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


	September 30, 2020						December 31, 2019						March 31, 2021						December 31, 2020
	Current		Long-Term		Total		Current		Long-Term		Total		Current		Long-Term		Total		Current		Long-Term		Total
Warranty:
TASER	$	13,267	$	14,824	$	28,091	$	12,716	$	16,378	$	29,094	$	10,501	$	16,486	$	26,987	$	11,635	$	16,953	$	28,588
Software and Sensors		12,328		3,983		16,311		9,852		5,156		15,008		14,432		5,322		19,754		13,926		5,025		18,951
		25,595		18,807		44,402		22,568		21,534		44,102		24,933		21,808		46,741		25,561		21,978		47,539
Hardware:
TASER		15,621		12,124		27,745		9,569		15,468		25,037		16,040		15,024		31,064		16,314		14,304		30,618
Software and Sensors		27,225		40,443		67,668		22,235		33,759		55,994		23,723		51,265		74,988		25,181		50,981		76,162
		42,846		52,567		95,413		31,804		49,227		81,031		39,763		66,289		106,052		41,495		65,285		106,780
Services:
TASER		722		1,091		1,813		293		765		1,058		969		1,997		2,966		996		1,554		2,550
Software and Sensors		85,568		15,268		100,836		63,199		16,410		79,609		99,421		26,013		125,434		95,907		22,405		118,312
		86,290		16,359		102,649		63,492		17,175		80,667		100,390		28,010		128,400		96,903		23,959		120,862
Total	$	154,731	$	87,733	$	242,464	$	117,864	$	87,936	$	205,800	$	165,086	$	116,107	$	281,193	$	163,959	$	111,222	$	275,181


	September 30, 2020						December 31, 2019						March 31, 2021						December 31, 2020
	Current		Long-Term		Total		Current		Long-Term		Total		Current		Long-Term		Total		Current		Long-Term		Total
TASER	$	29,610	$	28,039	$	57,649	$	22,578	$	32,611	$	55,189	$	27,510	$	33,507	$	61,017	$	28,945	$	32,811	$	61,756
Software and Sensors		125,121		59,694		184,815		95,286		55,325		150,611		137,576		82,600		220,176		135,014		78,411		213,425
Total	$	154,731	$	87,733	$	242,464	$	117,864	$	87,936	$	205,800	$	165,086	$	116,107	$	281,193	$	163,959	$	111,222	$	275,181

Remaining Performance Obligations

As of ~~September 30, 2020,~~March 31, 2021, we had approximately ~~$1.51~~$1.79 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, 2020.~~March 31, 2021. We expect to recognize between 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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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, 2020~~March 31, 2021 and December 31, ~~2019~~2020 (in thousands):


	As of September 30, 2020														As of March 31, 2021
			Gross		Gross				Cash and								Gross		Gross				Cash and
	Amortized		Unrealized		Unrealized				Cash		Short-Term		Long-Term		Amortized		Unrealized		Unrealized				Cash		Short-Term		Long-Term
	Cost		Gains		Losses		Fair Value		Equivalents		Investments		Investments		Cost		Gains		Losses		Fair Value		Equivalents		Investments		Investments
Cash	$	91,499	$	—	$	0	$	91,499	$	91,499	$	0	$	—	$	137,003	$	—	$	—	$	137,003	$	137,003	$	—	$	—

Level 1:
Money market funds		31,298		—		0		31,298		31,298		0		—		16,819		—		—		16,819		16,819		—		—
Agency bonds		68,111		141		0		68,252		0		24,610		43,501		73,996		94		—		74,090		—		45,995		28,001
Treasury bills		57,284		3		0		57,287		5,499		51,785		—		104,184		13		—		104,197		—		104,184		—
Subtotal		156,693		144		0		156,837		36,797		76,395		43,501		194,999		107		—		195,106		16,819		150,179		28,001

Level 2:
State and municipal obligations		63,363		49		(14)		63,398		1,001		49,441		12,921		83,086		12		(30)		83,068		—		74,295		8,791
Certificates of deposit		1,900		—		0		1,900		0		1,400		500		500		—		—		500		—		500		—
Corporate bonds		222,817		389		(166)		223,040		2,908		156,178		63,731		186,406		140		(81)		186,465		1,002		143,712		41,692
U.S. Treasury repurchase agreements		43,800		—		0		43,800		43,800		0		—
Treasury inflation-protected securities		3,270		24		0		3,294		0		3,270		—		3,310		7		—		3,317		—		3,310		—
Commercial paper		44,356		—		0		44,356		0		44,356		—		68,961		—		—		68,961		—		68,961		—
Subtotal		379,506		462		(180)		379,788		47,709		254,645		77,152		342,263		159		(111)		342,311		1,002		290,778		50,483
Total	$	627,698	$	606	$	(180)	$	628,124	$	176,005	$	331,040	$	120,653	$	674,265	$	266	$	(111)	$	674,420	$	154,824	$	440,957	$	78,484

~~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 credit 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 ~~January 1~~March 31, 2021 and ~~September 30,~~December 31, 2020, our credit loss reserve for held-to-maturity investments was approximately $0.1 million and ~~$0.2~~$0.1 million, respectively. During the three and nine months ended September 30, 2020, we increased the frequency of review for our investment portfolio in order to more closely monitor potential impacts of the novel coronavirus ("COVID-19”) pandemic.

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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

$
—

$
0

$
103,319

$
103,319

$
0

$
—

Level 1:














Money market funds

8,845

—

0

8,845

8,845

0

—
Agency bonds

32,869

14

(4)

32,879

0

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

0

25,046

0

21,560

3,478
Certificates of deposit

1,400

—

0

1,400

0

1,400

—
Corporate bonds

135,175

71

(30)

135,216

886

113,241

21,048
U.S. Treasury repurchase agreements

57,200

—

0

57,200

57,200

0

—
Treasury inflation-protected securities

3,235

14

0

3,249

0

0

3,235
Commercial paper

29,202

—

0

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


	As of December 31, 2020
			Gross		Gross				Cash and
	Amortized		Unrealized		Unrealized				Cash		Short-Term		Long-Term
	Cost		Gains		Losses		Fair Value		Equivalents		Investments		Investments
Cash	$	116,107	$	—	$	0	$	116,107	$	116,107	$	0	$	—

Level 1:
Money market funds		23,611		—		0		23,611		23,611		0		—
Agency bonds		63,794		122		0		63,916		0		23,794		40,000
Treasury Bills		96,384		6		0		96,390				96,384
Subtotal		183,789		128		0		183,917		23,611		120,178		40,000

Level 2:
State and municipal obligations		77,130		25		(28)		77,127		0		66,519		10,611
Certificates of deposit		500		—		0		500		0		500		—
Corporate bonds		212,825		232		(100)		212,957		2,525		170,205		40,095
U.S. Treasury repurchase agreements		13,200		—		0		13,200		13,200		0		—
Treasury inflation-protected securities		3,291		16		0		3,307		0		3,291
Commercial paper		45,974		—		0		45,974				45,974		—
Subtotal		352,920		273		(128)		353,065		15,725		286,489		50,706
Total	$	652,816	$	401	$	(128)	$	653,089	$	155,443	$	406,667	$	90,706

4. Expected Credit Losses

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

We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and recorded an additional reserve for credit loss ~~expense~~ of approximately $0.8 million ~~during the nine months ended September 30, 2020.~~as of March 31, 2021.

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

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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 collected (in thousands):


	Nine Months Ended September 30, 2020						Three Months Ended March 31, 2021
		United States		Other countries		Total	United States		Other countries		Total
Balance, beginning of period	$	1,395	$	172	$	1,567	$	2,902	$	474	$	3,376
Adoption of Topic 326, cumulative-effect adjustment to retained earnings		767		1		768
Provision for expected credit losses		578		115		693		(99)		(205)		(304)
Amounts written off charged against the allowance		(61)		(2)		(63)		(39)		-		(39)
Other, including dispositions and foreign currency translation		-		(3)		(3)
Other, including foreign currency translation								134		1		135
Balance, end of period	$	2,679	$	283	$	2,962	$	2,898	$	270	$	3,168

As of ~~September 30, 2020,~~March 31, 2021, the allowance for expected credit losses for each type of customer receivable was as follows:


	September 30,		March 31,		December 31,
	2020		2021		2020
Accounts receivable and notes receivable, current	$	1,787	$	1,796	$	2,105
Contract assets, net		711		991		794
Long-term notes receivable, net of current portion		464		381		477
Total allowance for expected credit losses on customer receivables	$	2,962	$	3,168	$	3,376

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, 2020 and December 31, 2019 was $2.1 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, 2020~~March 31, 2021 and December 31, ~~2019~~2020 (in thousands):


	September 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Raw materials	$	43,082	$	20,789	$	33,918	$	39,194
Finished goods		54,528		18,056		55,739		50,764
Total inventory	$	97,610	$	38,845	$	89,657	$	89,958

~~Table of Contents~~

~~AXON ENTERPRISE, INC.~~

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

~~6. Property and Equipment~~

~~Property and equipment consisted of the following (in thousands):~~

Estimated


Useful Life

September 30, 2020

December 31, 2019
Land

N/A

$
57,052

$
2,900
Building and leasehold improvements

3-39 years

20,330

20,089
Production equipment

3-7 years

32,919

29,961
Computers, equipment and software

3-5 years

7,839

8,126
Furniture and office equipment

5-7 years

6,014

6,514
Vehicles

5 years

1,782

1,753
Website development costs

3 years

204

204
Capitalized internal-use software development costs

3 years

3,670

3,670
Construction-in-process

N/A

17,546

12,385
Total cost

147,356

85,602
Less: Accumulated depreciation

(44,638)

(41,832)
Property and equipment, net

$
102,718

$
43,770

In September 2020, we purchased a parcel of land located in Scottsdale, Arizona at auction from the Arizona State Land Department, on which we intend to construct our new manufacturing and office facility. The purchase price of the land was $49.1 million, plus selling fees, administrative fees, and certain other costs and expenses incurred by the Arizona State Land Department pursuant to the auction, for a total of approximately $50.6 million. We also capitalized legal and broker fees related to the purchase totaling approximately $1.3 million. Additionally, we capitalized approximately $2.2 million paid to the City of Scottsdale under a separate public infrastructure reimbursement development agreement; we are eligible for a refund of this and other infrastructure and development costs to be paid by Axon up to a total of approximately $9.4 million if certain milestones in the agreement are achieved.

7~~. Goodwill and Intangible Assets~~

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

Software and


TASER

Sensors

Total
Balance, beginning of period

$
1,354

$
23,659

$
25,013
Foreign currency translation adjustments

—

(1)

(1)
Balance, end of period

$
1,354

$
23,658

$
25,012

~~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, 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

$
(1,263)

$
1,898

$
3,161

$
(1,035)

$
2,126
Issued patents

5‑25 years

3,216

(1,510)

1,706

3,271

(1,339)

1,932
Issued trademarks

3‑15 years

1,200

(573)

627

1,166

(678)

488
Customer relationships

4‑8 years

3,712

(1,784)

1,928

3,721

(1,416)

2,305
Non-compete agreements

3‑4 years

452

(419)

33

450

(404)

46
Developed technology

3‑5 years

10,660

(8,167)

2,493

10,660

(6,528)

4,132
Re-acquired distribution rights

2 years

2,042

(2,042)

0

2,009

(2,009)

—
Total amortizable



24,443

(15,758)

8,685

24,438

(13,409)

11,029
Non-amortizable (indefinite-lived) intangible assets:










TASER trademark



900



900

900



900
Patents and trademarks pending



675



675

842



842
Total non-amortizable



1,575



1,575

1,742



1,742
Total intangible assets



$
26,018

$
(15,758)

$
10,260

$
26,180

$
(13,409)

$
12,771

Amortization expense of intangible assets for the three and nine months ended September 30, 2020 was $0.8 million and $2.5 million, respectively. Amortization expense of intangible assets for the three and nine months ended September 30, 2019 was $0.8 million and $2.7 million, respectively. Estimated amortization for intangible assets with definite lives for the remaining three months of 2020, the next five years ended December 31, and thereafter, is as follows (in thousands):

2020 remaining

$
831
2021

2,879
2022

1,277
2023

982
2024

899
2025

632
Thereafter

1,185
Total

$
8,685

8.6. Other Long-Term Assets

Other long-term assets consisted of the following at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 (in thousands):


	September 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Cash surrender value of corporate-owned life insurance policies	$	4,225	$	4,214	$	4,806	$	4,654
Deferred commissions ⁽¹⁾		27,263		22,068		32,337		32,455
Restricted cash		59		56		59		62
Operating lease assets		22,368		9,653		23,168		22,308
Investment in unconsolidated affiliate ⁽²⁾⁽⁴⁾		4,700		—
Warrants for unconsolidated affiliate ⁽³⁾⁽⁴⁾		2,588		—
Strategic investments ⁽²⁾						29,500		9,500
Warrants for strategic investment ⁽³⁾						2,211		2,211
Prepaid expenses, deposits and other		6,085		4,190		10,839		8,727
Total other long-term assets	$	67,288	$	40,181	$	102,920	$	79,917

~~Table of Contents~~

~~AXON ENTERPRISE, INC.~~

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

(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.

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(2)

~~In March 2020, we made an investment~~Strategic investments include investments 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.non-public technology-driven companies. We account for ~~this investment~~strategic investments 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~~investments are 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 ~~September 30, 2020,~~March 31, 2021, 0 impairment was recorded for the investments. We did not recognize any adjustments to the recorded cost bases during the three months ended March 31, 2021. We have recognized an increase of $2.4 million in the cost bases since our initial investment.

During the three months ended March 31, 2021, we made a $20.0 million minority investment in RapidSOS, Inc.

(3)

In conjunction with ~~the equity~~our strategic 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 amount reflected in other assets represents the fair value of the preferred stock warrants, ~~was estimated at $2.6~~as adjusted for observable price changes of $0.4 million ~~using Monte Carlo~~ ~~simulation.~~during the quarter ended December 31, 2020.

~~(4)~~

In October 2020, we made an additional $2.1 million investment in Flock Group Inc. After this incremental investment, we hold approximately 4% of the outstanding equity interests. The issuance of new equity by Flock Group Inc. to us and other investors represents an observable price change for our existing investment and related warrants which will be reflected in the consolidated financial statements for the period ending December 31, 2020.

9.7. Accrued Liabilities

Accrued liabilities consisted of the following at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 (in thousands):


	September 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Accrued salaries, benefits and bonus	$	25,365	$	24,737	$	21,880	$	36,892
Accrued professional, consulting and lobbying fees		11,483		3,235		1,318		3,055
Accrued warranty expense		745		1,476		944		769
Accrued income and other taxes		18,086		3,362		2,482		3,848
Accrued inventory in transit		10,185		4,156		4,696		4,597
Other accrued expenses		8,250		8,035		9,777		10,682
Accrued liabilities	$	74,114	$	45,001	$	41,097	$	59,843

~~10.~~8. Income Taxes

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. ~~In July 2020, we received notification from the Internal Revenue Service that the audit of our U.S. federal income tax return for fiscal year 2016 was completed.~~ During the second quarter of 2020 we began an audit with the State of California for our fiscal year 2016 and 2017 state tax returns, which is currently ~~ongoing.~~in the final closing phase. During the first quarter of 2021, we were notified that an audit with the State of Illinois for our fiscal year 2018 will commence during the second quarter of 2021. Additionally, we have been notified that an audit ~~will~~may commence for Axon Public Safety Southeast Asia LLC, our entity in Vietnam. The tax period has not yet been defined.

On March ~~27, 2020,~~11, 2021, the U.S. federal government enacted the ~~Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act~~American Rescue Plan Act. This act is an emergency economic stimulus package in response to the ~~coronavirus outbreak~~COVID-19 pandemic, 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 continuing to evaluate the implications of the ~~CARES~~American Rescue Plan Act, but its impact on ~~our~~the financial statements and related disclosures is not expected to be material.

~~Table of Contents~~

~~AXON ENTERPRISE, INC.~~

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

In April 2020, recent interpretations of a German law relating to withholding taxes on intellectual property rights emerged. We have evaluated this law and do not expect a material impact to our financial position or results of operations.

The issuance of new equity in October 2020 by Flock Group Inc. to us and other investors represents an observable price change for our existing investment and related warrants which will be reflected in the consolidated financial statements for the period ending December 31, 2020. The taxability of any unrealized gain recognized will be deferred, creating a deferred tax liability in the period in which it is recognized.

Deferred Tax Assets

Net deferred income tax assets at ~~September 30, 2020,~~March 31, 2021, 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, 2020~~March 31, 2021 were ~~$39.2~~$45.7 million.

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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, 2020,~~March 31, 2021, 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~~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.

We have certain foreign net operating loss carryovers, which have previously been fully offset with a valuation allowance. As of September 30, 2020, we now have cumulative pre-tax income in the U.K. and Canada, as measured over a three year rolling period, along with positive evidence from projections of future taxable income growth for both jurisdictions. Therefore, we have released the full valuation allowances against net operating loss carryovers in the U.K. and Canada of $1.3 million and $0.3 million, respectively, in the third quarter of 2020.

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 ~~$7.0~~$7.2 million as of ~~September 30, 2020.~~March 31, 2021. Should the unrecognized benefit of ~~$7.0~~$7.2 million be recognized, our effective tax rate would be favorably impacted. Approximately ~~$2.8~~$2.7 million of the unrecognized tax benefit associated with R&D credits has been netted against the R&D deferred tax asset.

Effective Tax Rate

Our overall effective tax rate for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, after discrete period adjustments, was ~~(79.8%)~~3.5%. Before discrete adjustments, the tax rate was ~~(137.0%~~(20.5%), which differs from the federal statutory rate, primarily due to the impact of the executive compensation limitation under Internal Revenue Code ("IRC") Section 162(m), partially offset by R&D tax credits, on a projected pre-tax loss for the year. The effective tax rate was favorably impacted by ~~a $6.6~~an $11.7 million discrete tax benefit

~~Table of Contents~~

~~AXON ENTERPRISE, INC.~~

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

primarily associated with windfalls related to stock-based compensation for restricted stock units (“RSUs”) or performance stock units (“PSUs”) that vested ~~or stock options that were exercised~~ during the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021.

~~11.~~9. Stockholders’ Equity

~~Follow-on offering~~

In June 2020, we sold 3,450,000 shares of our common stock, which included 450,000 shares pursuant to the full exercise of the underwriters' option to purchase additional shares, in an underwritten public offering at a price of $92.00 per share, which resulted in gross proceeds of $317.4 million. Net proceeds to us after deducting fees, commissions, and other expenses related to the offering were $306.8 million.

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.

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CEO Performance Award

On May 24, 2018, 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~~attainment 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 8 operational goals focused on revenue or 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 ("Adjusted EBITDA (CEO Performance

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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 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.

As of ~~September 30, 2020,~~March 31, 2021, the following operational goals were achieved, with vesting of the related tranche pending certification by the Compensation Committee:

●

Adjusted EBITDA (CEO Performance Award) of $155.0 million

●

Total revenue of $710.1 million

As of March 31, 2021, the following operational goals were considered probable of achievement:

●

Total revenue of ~~$710.1 million,~~ $860.1 million, $1,010.1 million, and ~~$1,010.1~~$1,210.1 million; and

●

Adjusted EBITDA (CEO Performance Award) of ~~$125.0 million, $155.0 million,~~ $175.0 million, $190.0 million, $200.0 million, $210.0 million, $220.0 million, and $230.0 million.

The operational goal of $125.0 million Adjusted EBITDA (CEO Performance Award) was previously achieved and the related options vested in March 2021.

Stock-based compensation expense associated with the CEO Performance Award is recognized over the requisite service period, which is defined as the longest explicit, implicit or derived service period, based on management’s estimate of the probability and timing of the performance criteria being satisfied, adjusted at each balance sheet date. Expense recognition begins at the point in time when the relevant operational goal is considered probable of being met. The

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probability of attaining an operational goal and the expected attainment date for meeting a probable operational goal are based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis. The statistical model and the assessment that determine the estimated attainment dates are subject to a number of estimated inputs, including expected volatility rates, management’s forward-looking financial projections, in particular for operational goals that are anticipated to be attained in the near future, and adjustment of other estimates based on the passage of time. During the period we recorded an additional $51.4 million in stock-based compensation expense as a result of updated estimates for the CEO Performance Award and eXponential Stock Performance Plan (discussed below).

The first ~~three~~seven market capitalization goals have been achieved as of ~~September 30, 2020, and the fourth market capitalization goal was achieved in October 2020. However, none~~March 31, 2021. As of ~~the~~March 31, 2021, 0.5 million stock options ~~granted under the CEO Performance Award~~ have ~~vested thus far as the~~vested. As all twelve operational goals ~~have not yet been achieved as of September 30, 2020. As there~~ are ~~eleven operational goals~~ considered probable of achievement, we recorded stock-based compensation expense of ~~$69.5~~$132.4 million related to the CEO Performance Award from the Grant Date through ~~September 30, 2020.~~March 31, 2021. The number of stock options that would vest related to the ~~eleven~~remaining unvested tranches is approximately 5.8 million shares.

As of ~~September 30, 2020,~~March 31, 2021, we had ~~$158.9~~$113.6 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 ~~5.09~~3.17 years. ~~As of September 30, 2020, we had unrecognized stock-based compensation expense of $17.6 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. Initial awards under the plan were granted in January 2019, with additional employee awards granted since that date. During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021, and 2020 we granted an additional ~~0.1 million~~10 thousand and ~~0.3 million~~forty three thousand XSUs, respectively.

The XSUs are grants of 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 8 operational goals focused on revenue or 8 operational goals focused on Adjusted EBITDA (CEO Performance Award) have been met for the previous four consecutive fiscal quarters.

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The XSPP contains an anti-dilution provision incorporated into the plan based on shareholder feedback, which affects the calculation of the market capitalization goals in the plan. The plan defines a maximum number of shares outstanding that may be used in the calculation of the market capitalization goals (the “XSU Maximum”). If the actual number of shares outstanding exceeds the XSU Maximum guardrail, then the lower pre-defined number of shares in the XSU Maximum, rather than the higher actual number of shares outstanding, is used to calculate market capitalization for the determination of the market capitalization goals in the XSPP, which, together with the operational goals, determines whether XSUs vest for participating employees.

The XSU Maximum is defined as the actual number of shares outstanding on the original XSU grant date of January 2, 2019, increased by a 3% annual rate over the term of the XSPP and by shares issued upon the exercise of CEO Performance Award options. The XSU Maximum is also 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.

New shares issued for any other reasons, including shares issued upon vesting of XSUs, RSUs, and ~~PSUs~~Performance Stock Units (“PSUs”) as well as shares issued to raise capital through equity issuances or in other transactions, do not increase the XSU Maximum.

The market capitalization and operational goals are identical to the CEO Performance Award, but a different number of shares is 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

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market capitalization is not identical.

As of ~~September 30, 2020,~~March 31, 2021, actual shares outstanding exceeded the XSU Maximum as a result of the common stock offering completed in June 2020. Accordingly, market capitalization as calculated for the purposes of achieving additional goals uses the lower XSU Maximum share amount rather than actual shares outstanding.

The first ~~three~~six market capitalization goals have been achieved as of ~~September 30, 2020,~~March 31, 2021, and the ~~fourth~~seventh market capitalization goal was achieved in ~~November 2020. However, none of the~~April 2021. The first XSU ~~tranches have~~tranche vested ~~thus far as the~~in March 2021. As all twelve operational goals ~~have not yet been achieved as of September 30, 2020. As there~~ are ~~eleven operational goals~~ considered probable of achievement, we recorded stock-based compensation expense of ~~$42.0~~$94.8 million related to the XSU awards from their respective grant dates through ~~September 30, 2020.~~March 31, 2021. The number of XSU awards that would vest related to the remaining eleven tranches is approximately ~~5.0~~4.9 million shares.

As of ~~September 30, 2020,~~March 31, 2021, we had ~~$139.9~~$96.7 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 ~~4.91~~3.00 years. ~~As of September 30, 2020, we had unrecognized stock-based compensation expense of $11.4 million for the performance goals that were considered not probable of achievement.~~

Restricted Stock Units

The following table summarizes RSU activity for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 (number of units and aggregate intrinsic value in thousands):


	Number of	Weighted Average		Aggregate		Number of	Weighted Average		Aggregate
	Units	Grant-Date Fair Value		Intrinsic Value		Units	Grant-Date Fair Value		Intrinsic Value
Units outstanding, beginning of year	1,249	$	45.47			1,107	$	76.10
Granted	279		78.86			57		152.58
Released	(394)		39.00			(184)		47.57
Forfeited	(85)		50.82			(25)		91.87
Units outstanding, end of period	1,049		56.34	$	95,112	955		85.76	$	136,019

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Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was ~~$90.70~~$142.42 per share, multiplied by the number of RSUs outstanding. As of ~~September 30, 2020,~~March 31, 2021, there was ~~$41.7~~$64.3 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 ~~1.99~~2.22 years. RSUs are released when vesting requirements are met.

Certain RSUs that vested in the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 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 13 thousand~~less than 0.1 million and had a value of ~~$1.1~~$6.9 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”)~~PSU activity, inclusive of XSUs, for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 (number of units and aggregate intrinsic value in thousands):


	Number of	Weighted Average		Aggregate		Number of	Weighted Average		Aggregate
	Units	Grant-Date Fair Value		Intrinsic Value		Units	Grant-Date Fair Value		Intrinsic Value
Units outstanding, beginning of year	6,033	$	34.47			5,618	$	35.71
Granted	380		55.94			190		43.83
Released	(160)		25.20			(765)		37.61
Forfeited	(474)		43.09			(41)		34.70
Units outstanding, end of period	5,779		35.43	$	524,180	5,002		35.74	$	712,357

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Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was ~~$90.70~~$142.42 per share, multiplied by the number of PSUs outstanding. As of ~~September 30, 2020,~~March 31, 2021, there was ~~$143.9~~$100.7 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 ~~4.82~~2.98 years. PSUs are released when vesting requirements are met.

As of ~~September 30, 2020,~~March 31, 2021, the performance criteria had been met for approximately ~~0.1~~0.9 million of the ~~5.8~~5.0 million PSUs outstanding. Certain of the PSUs outstanding as of September 30, 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 target level. The maximum additional number of PSUs that could be earned is 0.2 million, which are not included in the table above.

On ~~November 3, 2020,~~March 8, 2021, the Compensation Committee of our Board of Directors approved a ~~modification~~one-time waiver of the holding period requirements for each XSPP participant who elected to receive XSUs in lieu of On-Target Earnings and is an Arizona resident. This waiver allows participants to sell a portion of their vested shares to satisfy income tax obligations pursuant to Arizona Proposition 208 which was passed in November 2020. Such one-time waiver applied only to 4% of the ~~definition of a metric~~XSUs for ~~certain of our outstanding PSU awards.~~the impacted participants which vested on March 8, 2021, which was approximately 13 thousand shares. We ~~will account~~accounted for this change as a Type ~~III~~I modification under ASC 718 since ~~the expectation~~there was no impact on attainment of the ~~attainment for this metric changed from improbable to probable.~~operational or market capitalization goals. We ~~expect to recognize~~recognized additional stock-based compensation expense of ~~approximately $3.5~~$0.4 million ~~over~~for the ~~remaining requisite service period, beginning from the modification date.~~three months ended March 31, 2021.

Certain PSUs that vested in the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 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 ~~less than 1~~approximately 2 thousand and had a value of $0.1 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.

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Stock Option Activity

The following table summarizes stock option activity for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 (number of units and aggregate intrinsic value in thousands):


				Weighted						Weighted
		Weighted		Average				Weighted		Average
	Number	Average		Remaining			Number	Average		Remaining
	of	Exercise		Contractual	Aggregate		of	Exercise		Contractual	Aggregate
	Options	Price		Life (years)	Intrinsic Value		Options	Price		Life (years)	Intrinsic Value
Options outstanding, beginning of year	6,431	$	28.34				6,366	$	28.58
Granted	0		0				—		—
Exercised	(65)		4.52				—		—
Expired / terminated	0		0				—		—
Options outstanding, end of period	6,366		28.58	7.41	$	395,449	6,366		28.58	6.91	$	724,689
Options exercisable, end of period	1		4.70	0.26		2	1,591		28.58	6.91		181,172

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 ~~$90.70~~$142.42 on ~~September 30, 2020.~~March 31, 2021. There were 0 options exercised for the three months ended March 31, 2021. The intrinsic value of options exercised for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 ~~and 2019~~ was ~~$5.1 million and $1.1 million, respectively.~~$0.3 million. As of ~~September 30, 2020,~~March 31, 2021, total options outstanding included ~~6.4~~4.8 million unvested performance-based stock ~~options. Of this total, 5.8 million~~ options, which relate to ~~tranches of~~ the CEO Performance Award ~~considered probable of achievement~~ and ~~0.5 million relate to the tranche of the CEO Performance Award not considered~~are probable of achievement.

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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, 2021 and 2020 ~~and 2019~~ (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020
Cost of products sold and services delivered	$	744	$	312	$	2,170	$	775	$	1,489	$	590
Sales, general and administrative expenses		19,117		9,508		60,853		19,130		71,015		14,970
Research and development expenses		6,233		3,843		17,101		10,290		17,106		4,635
Total stock-based compensation expense	$	26,094	$	13,663	$	80,124	$	30,195	$	89,610	$	20,195

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 ~~2.0~~1.9 million shares available for grant as of ~~September 30, 2020.~~March 31, 2021.

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, 2021 and 2020, ~~and 2019,~~ 0 common shares were purchased under the program. As of ~~September 30, 2020,~~March 31, 2021, $16.3 million remains available under the plan for future purchases. Any future purchases will be discretionary.

~~12.~~10. Line of Credit

We have a $50.0 million unsecured revolving line of credit with a domestic bank, of which ~~$10.0~~$20.0 million is available for letters of credit. The credit agreement matures on December 31, ~~2021~~2023 and has an accordion feature which

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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, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, 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, 2020,~~March 31, 2021, we had letters of credit outstanding of approximately $6.1 million under the facility and available borrowing of $43.9 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, 2020,~~March 31, 2021, our funded debt to EBITDA ratio was 0.00 to 1.00.

~~13.~~11. Commitments and Contingencies

Product Litigation

As a manufacturer of weapons and other law enforcement tools used in high-risk field environments, we are often the subject of products liability litigation concerning the use of our products. We are currently named as a defendant in 125 lawsuits (2(1 pending dismissal) in which the plaintiffs allege either wrongful death or personal injury in situations in which a TASER CED was used by law enforcement officers in connection with arrests or training. While the facts vary

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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.

The litigation information in this note is current through the date of these financial statements.

U.S. Federal Trade Commission Litigation

The U.S. Federal Trade Commission (“FTC”) filed an enforcement action on January 3, 2020 regarding Axon’s May 2018 acquisition of Vievu LLC from Safariland LLC. The FTC alleges the merger was anticompetitive and adversely affected the body worn camera (“BWC”) and digital evidence management systems (“DEMS”) market for “large metropolitan police departments.” ~~The stay of the administrative proceedings due to the COVID-19 pandemic lifted July 7, 2020 and fact~~Fact and expert discovery is ~~now~~ complete. On October 2, 2020, the Ninth Circuit stayed the administrative hearing ~~scheduled~~set for October 13, 2020 pending decision on Axon’s appeal ~~in the related matter discussed below.~~(see below). If ultimately successful, the FTC may require usAxon to divest Vievu and other assets or take other remedial measures, any of which could be material to Axon. We are vigorously defending the matter. At this time, we cannot predict the eventual scope, duration, or outcome of the proceeding and accordingly we have not recorded any liability in the accompanying ~~condensed~~ consolidated financial statements.

~~Separately, on January 3, 2020,~~Prior to the FTC’s enforcement action, Axon sued the FTC in federal court 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

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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 appealed~~The Ninth Circuit affirmed that ruling ~~to the Ninth Circuit~~on January 28, 2021 (No. 20-15662)~~, which granted expedited consideration~~ in a split 2-1 decision and ~~heard oral argument on July 17, 2020.~~has denied Axon’s petition for rehearing en banc. However, the Court did grant Axon’s motion to stay the appellate mandate pending the filing of its petition for certiorari with the U.S. Supreme Court. That petition must be filed by September 13, 2021. The ~~matter is now under advisement.~~FTC’s administrative case will remain stayed pending resolution of the Supreme Court proceedings.

In parallel to these matters, we are evaluating strategic alternatives to litigation, which we might pursue if determined to be in the best interests of shareholders and customers. This could include a divestiture of the Vievu entity and/or related assets and the licensure of certain intellectual and other intangible property. While we continue to believe the acquisition of Vievu was lawful and a benefit to Vievu’s customers, the cost, risk and distraction of protracted litigation merit consideration of settlement if achievable on terms agreeable to the FTC and ~~us.~~the company.

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

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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, 2020,~~March 31, 2021, 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.

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, 2020,~~March 31, 2021, we had outstanding letters of credit of $6.1 million that are expected to expire in June 2021 and September 2021. We also had outstanding letters of credit and bank guarantees of $2.0 million that do not draw against our credit facility. The outstanding letters of credit are expected to expire in ~~June 2021.~~January 2022 and March 2022. Additionally, we had ~~$24.0~~$21.5 million of outstanding surety bonds at ~~September 30, 2020, with $0.1 million expiring in 2020, $2.7~~March 31, 2021, $0.4 million expiring in 2021, ~~$3.2~~$3.1 million expiring in 2022, $7.5 million expiring in 2023 and the remaining $10.5 million expiring in 2024.

~~14.~~Subsequent Event

On April 8, 2021, we entered into a Share Purchase Agreement with Cellebrite DI Ltd. ("Cellebrite") and Cellebrite’s shareholders, pursuant to which we have agreed to purchase, and Cellebrite has agreed to sell, an aggregate of 9,000,000 shares of common stock of Cellebrite, for a purchase price of $10.00 per share and an aggregate purchase price of $90,000,000. This investment is being made in connection with Cellebrite’s business combination with TWC Tech Holdings II Corp. (“TWC Tech Holdings”), a publicly traded special purpose acquisition company, pursuant to the definitive business combination agreement and plan of merger (the “Business Combination”). The obligations to consummate the transactions contemplated by the Share Purchase Agreement are conditioned upon, among other things, customary closing conditions and the consummation of the Business Combination and other transactions contemplated by the plan of merger between Cellebrite and TWC Tech Holdings.

12. 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,

~~Table of Contents~~

~~AXON ENTERPRISE, INC.~~

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

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

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

consist of corporate-owned life insurance contracts and are included in other assets in the condensed consolidated balance sheets; see Note 86 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, Canada, Finland, and the United Kingdom.

Our matching contributions for all defined contribution plans were ~~$1.3~~$2.1 million and ~~$0.9~~$1.5 million for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, respectively and $4.1 million and $3.5 million for the nine months ended September 30, 2020 and 2019,~~ respectively.

~~15.~~13. Segment Data

Our operations are comprised of 2 reportable segments: the manufacture and sale of CEDs, batteries, accessories, extended warranties and other products and services (the “TASER” segment); and the software and sensors business, which includes the sale of devices, wearables, applications, cloud and mobile products, and services (collectively, the “Software and Sensors” segment). In both segments, we report sales of products and services. Service revenue in both segments includes sales related to Axon Evidence. In the Software and Sensors segment, service revenue also includes other recurring cloud-hosted software revenue and related professional services. Collectively, this revenue is sometimes referred to as "Axon Cloud revenue." Our Chief Executive Officer, who is the CODM, is not provided asset information or sales, general, and administrative expense by segment.

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

Three Months Ended September 30, 2020

Three Months Ended September 30, 2019

Software and

Software and


TASER

Sensors

Total

TASER

Sensors

Total
Net sales from products

$
83,517

$
36,574

$
120,091

$
71,424

$
25,073

$
96,497
Net sales from services

889

45,462

46,351

319

34,021

34,340
Net sales

84,406

82,036

166,442

71,743

59,094

130,837
Cost of product sales

31,297

26,501

57,798

26,504

15,941

42,445
Cost of service sales

0

10,404

10,404

0

8,223

8,223
Cost of sales

31,297

36,905

68,202

26,504

24,164

50,668
Gross margin

$
53,109

$
45,131

$
98,240

$
45,239

$
34,930

$
80,169

Research and development

$
3,355

$
25,891

$
29,246

$
3,485

$
21,644

$
25,129

~~Table of Contents~~

~~AXON ENTERPRISE, INC.~~

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


	Nine Months Ended September 30, 2020						Nine Months Ended September 30, 2019						Three Months Ended March 31, 2021						Three Months Ended March 31, 2020
			Software and						Software and						Software and						Software and
	TASER		Sensors		Total		TASER		Sensors		Total		TASER		Sensors		Total		TASER		Sensors		Total
Net sales from products	$	228,569		97,565	$	326,134	$	197,148	$	67,829	$	264,977	$	97,302	$	43,584	$	140,886	$	75,175	$	32,113	$	107,288
Net sales from services		2,222		126,507		128,729		558		93,474		94,032		1,697		52,436		54,133		720		39,154		39,874
Net sales		230,791		224,072		454,863		197,706		161,303		359,009		98,999		96,020		195,019		75,895		71,267		147,162
Cost of product sales		88,787		61,720		150,507		74,044		46,221		120,265		32,945		25,671		58,616		30,248		18,636		48,884
Cost of service sales		—		29,331		29,331		—		24,098		24,098		0		13,050		13,050		0		9,670		9,670
Cost of sales		88,787		91,051		179,838		74,044		70,319		144,363		32,945		38,721		71,666		30,248		28,306		58,554
Gross margin	$	142,004	$	133,021	$	275,025	$	123,662	$	90,984	$	214,646	$	66,054	$	57,299	$	123,353	$	45,647	$	42,961	$	88,608

Research and development	$	10,149	$	75,038	$	85,187	$	10,284	$	61,692	$	71,976	$	9,243	$	37,775	$	47,018	$	3,032	$	23,349	$	26,381

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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, 2020,~~March 31, 2021, and results of operations ~~For~~for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ should be read in conjunction with the condensed consolidated financial statements and related notes included in this Report on Form 10-Q and the audited consolidated financial statements in our ~~2019~~2020 Annual Report on Form 10-K filed with the SEC on February ~~28, 2020.~~26, 2021. 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 ~~2019~~2020 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

Axon is a global network of devices, apps ~~training~~ and people that helps public safety personnel become smarter and safer. ~~Our~~With a mission of protecting life, 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~~a public safety 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 our long term vision~~experience with the goal of ~~a) obsoleting the bullet, b) reducing social conflict, and c) enabling a fair and effective justice system.~~helping everyone get home safe.

Our revenues for the three months ended ~~September 30, 2020~~March 31, 2021 were ~~$166.4~~$195.0 million, an increase of ~~$35.6~~$47.9 million, or ~~27.2%~~32.5%, from the comparable period in the prior year. We had a loss from operations of ~~$5.4~~$50.3 million compared to income from operations of $6.6 million for the same period in the prior year. Gross margin declined compared to the three months ended September 30, 2019 primarily as a result of product mix and the fulfillment of several large shipments of lower-to-negative-margin body camera hardware to our largest customers. Increased operating expenses to support continued and future growth also contributed to the decline in operating results. Expenses for the three months ended September 30, 2020 also reflected an increase of $10.1 million in stock-based compensation expense related to the 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, 2020, we recorded a net loss of $0.9 million, which reflected an income tax benefit of $2.5 million, compared to net income of $6.1 million for the comparable period in the prior year.

Our revenues for the nine months ended September 30, 2020 were $454.9 million, an increase of $95.9 million, or 26.7%, from the comparable period in the prior year. We had a loss from operations of $19.9 million compared to income from operations of $8.0$0.8 million for the same period in the prior year. Gross margin improved compared to the ~~nine~~three months ended ~~September 30, 2019 as a result of the mix of higher-margin software revenues, with~~March 31, 2020, reflecting strong demand for our premium TASER offerings, manufacturing cost improvement, ~~partially offset by the fulfillment of several large shipments of lower-to-negative-margin body camera hardware to our largest customers.~~and fixed cost leverage. Operating expenses increased $84.2 million, reflecting ~~Increased operating expenses to support continued and future growth also contributed to the decline in operating results. Expenses for the nine months ended September 30, 2020 also reflected~~ an increase of ~~$44.8~~$61.9 million in stock-based compensation expense related to the CEO Performance Award and ~~XSPP. An~~XSPP and an increase of $14.7 million in ~~litigation costs also contributed to the higher selling, general~~salaries, benefits and ~~administrative~~bonus expense. For the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, we recorded a net loss of ~~$27.6~~$47.9 million, which reflected an income tax ~~expense~~benefit of ~~$12.2~~$1.8 million, compared to net income of ~~$13.3~~$4.1 million for the comparable period in the prior year.

Outlook

For the year ending December 31, 2021, we expect revenue in the range of $780 million to $820 million. Our expectation for capital expenditures of approximately $65 million to $70 million in 2021 remains unchanged.

COVID-19

~~In late 2019,~~The 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 throughout the United States and world,pandemic 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.

InWe have taken a number of actions in response to the pandemic, ~~Axon has taken a number of actions:~~

~~Table of Contents~~

~~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 was held virtually in late August 2020.~~

~~Employee safety~~as described in our Annual Report on Form 10-K. In April 2021, we hosted several onsite vaccination clinics for our employees and ~~manufacturing:~~

●

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

●

~~We continue to allow for a remote work model for office staff, with medical screening for any employees who do work in our offices; 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.

~~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 have proactively built up a safety stock of inventory to help meet strong product demand while also preparing us to stagger factory work schedules.~~

●

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 was held virtually on May 29, 2020;~~

~~We completed a follow-on equity offering in June 2020 for which all related marketing was conducted virtually; and~~

~~We will continue to participate 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 expenses for the three months and nine months ended September 30, 2020 increased by approximately $0.4 million and $4.1 million, respectively, for costs related to the pandemic. We expect ongoing increased costs related to the mitigation of contamination risk at our facilities. We expect these incremental costs will continue to be partially offset by savings on travel and events and other cost-savings measures. their family members.

We ~~have~~ elected to participate in the social security deferral program offered under the Coronavirus Aid, Relief, and Economic Security Act, whereby we ~~can defer~~deferred payment of the employer portion of all social security taxes that would otherwise behave been payable from March 27, 2020 through December 31, 2020. Payment of the deferred amount is due 50% on December 31, 2021 and 50% on December 31, 2022.

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Results of Operations

Three Months Ended ~~September 30, 2020~~March 31, 2021 Compared to the Three Months Ended ~~September 30, 2019~~March 31, 2020

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 September 30,


2020


2019

Net sales from products

$
120,091

72.2
%

$
96,497

73.8
%
Net sales from services

46,351

27.8

34,340

26.2

Net sales

166,442

100.0

130,837

100.0

Cost of product sales

57,798

34.7

42,445

32.4

Cost of service sales

10,404

6.3

8,223

6.3

Cost of sales

68,202

41.0

50,668

38.7

Gross margin

98,240

59.0

80,169

61.3

Operating expenses:







Sales, general and administrative

74,443

44.7

48,424

37.0

Research and development

29,246

17.6

25,129

19.2

Total operating expenses

103,689

62.3

73,553

56.2

Income (loss) from operations

(5,449)

(3.3)

6,616

5.1

Interest and other income, net

2,040

1.3

1,820

1.4

Income (loss) before provision for income taxes

(3,409)

(2.0)

8,436

6.5

Provision for (benefit from) income taxes

(2,536)

(1.5)

2,332

1.8

Net income (loss)

$
(873)

(0.5)
%

$
6,104

4.7
%


	Three Months Ended March 31,
	2021				2020
Net sales from products	$	140,886	72.2	%	$	107,288	72.9	%
Net sales from services		54,133	27.8			39,874	27.1
Net sales		195,019	100.0			147,162	100.0
Cost of product sales		58,616	30.1			48,884	33.2
Cost of service sales		13,050	6.7			9,670	6.6
Cost of sales		71,666	36.8			58,554	39.8
Gross margin		123,353	63.2			88,608	60.2
Operating expenses:
Sales, general and administrative		126,597	64.9			63,027	42.8
Research and development		47,018	24.1			26,381	17.9
Total operating expenses		173,615	89.0			89,408	60.7
Income (loss) from operations		(50,262)	(25.8)			(800)	(0.5)
Interest and other income, net		585	0.3			941	0.6
Income (loss) before provision for income taxes		(49,677)	(25.5)			141	0.1
Provision for (benefit from) income taxes		(1,760)	(0.9)			(3,933)	(2.7)
Net income (loss)	$	(47,917)	(24.6)	%	$	4,074	2.8	%

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

Three Months Ended September 30,


2020


2019

United States

$
143,380

86
%

$
110,809

85
%
Other countries

23,062

14

20,028

15

Total

$
166,442

100
%

$
130,837

100
%


	Three Months Ended March 31,
	2021				2020
United States	$	160,386	82	%	$	117,463	80	%
Other countries		34,633	18			29,699	20
Total	$	195,019	100	%	$	147,162	100	%

International revenue increased compared to the prior year comparable period, driven primarily by increased sales in the Americas ~~Asia Pacific,~~ and Europe regions.

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Net Sales

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

Three Months Ended September 30,

Dollar

Percent


2020

2019

Change

Change
TASER segment:

TASER 7

$
21,702

13.0
%
$
20,214

15.4
%
$
1,488

7.4
%
TASER X26P

9,766

5.9

11,578

8.8

(1,812)

(15.7)

TASER X2

14,494

8.7

13,241

10.1

1,253

9.5

TASER Pulse

2,981

1.8

1,132

0.9

1,849

163.3

Cartridges

26,335

15.8

18,901

14.4

7,434

39.3

Axon Evidence and cloud services

692

0.4

218

0.2

474

217.4

Extended warranties

5,265

3.2

4,543

3.5

722

15.9

Other

3,171

1.9

1,916

1.5

1,255

65.5

Total TASER segment

84,406

50.7

71,743

54.8

12,663

17.7

Software and Sensors segment:











Axon Body

15,978

9.6

6,763

5.2

9,215

136.3

Axon Flex

1,589

1.0

1,670

1.3

(81)

(4.9)

Axon Fleet

4,215

2.5

4,341

3.3

(126)

(2.9)

Axon Dock

5,708

3.4

3,358

2.6

2,350

70.0

Axon Evidence and cloud services

45,450

27.3

34,022

26.0

11,428

33.6

Extended warranties

6,514

3.9

4,714

3.6

1,800

38.2

Other

2,582

1.6

4,226

3.2

(1,644)

(38.9)

Total Software and Sensors segment

82,036

49.3

59,094

45.2

22,942

38.8

Total net sales

$
166,442

100.0
%
$
130,837

100.0
%
$
35,605

27.2
%


	Three Months Ended March 31,								Dollar		Percent
	2021				2020				Change		Change
TASER segment:
TASER 7	$	33,991	17.5	%	$	15,326	10.4	%	$	18,665	121.8	%
TASER X26P		9,963	5.1			11,061	7.5			(1,098)	(9.9)
TASER X2		12,778	6.6			14,075	9.6			(1,297)	(9.2)
TASER Pulse		2,205	1.1			1,200	0.8			1,005	83.8
Cartridges		30,418	15.6			26,625	18.1			3,793	14.2
Axon Evidence and cloud services		1,396	0.7			498	0.3			898	180.3
Extended warranties		5,646	2.9			4,977	3.4			669	13.4
Other		2,602	1.3			2,133	1.5			469	22.0
Total TASER segment		98,999	50.8			75,895	51.6			23,104	30.4
Software and Sensors segment:
Axon Body		19,756	10.1			12,823	8.7			6,933	54.1
Axon Flex		905	0.5			1,183	0.8			(278)	(23.5)
Axon Fleet		3,763	1.9			4,775	3.2			(1,012)	(21.2)
Axon Dock		6,920	3.5			4,951	3.4			1,969	39.8
Axon Evidence and cloud services		52,294	26.9			39,154	26.6			13,140	33.6
Extended warranties		7,500	3.8			5,458	3.7			2,042	37.4
Other		4,882	2.5			2,923	2.0			1,959	67.0
Total Software and Sensors segment		96,020	49.2			71,267	48.4			24,753	34.7
Total net sales	$	195,019	100.0	%	$	147,162	100.0	%	$	47,857	32.5	%

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

Three Months Ended September 30,

Unit

Percent

2020

2019

Change

Change
TASER 7

15,908

17,674

(1,766)

(10.0)
TASER X26P

8,119

10,766

(2,647)

(24.6)
TASER X2

10,078

9,819

259

2.6
TASER Pulse

12,811

3,923

8,888

226.6
Cartridges

852,980

566,347

286,633

50.6
Axon Body

62,873

22,037

40,836

185.3
Axon Flex

3,175

5,409

(2,234)

(41.3)
Axon Fleet

2,396

2,967

(571)

(19.2)
Axon Dock

9,165

3,724

5,441

146.1



	Three Months Ended March 31,		Unit	Percent
	2021	2020	Change	Change
TASER 7	23,360	11,430	11,930	104.4
TASER X26P	8,229	11,003	(2,774)	(25.2)
TASER X2	8,838	10,478	(1,640)	(15.7)
TASER Pulse	8,686	3,261	5,425	166.4
Cartridges	1,009,760	873,364	136,396	15.6
Axon Body	46,094	39,864	6,230	15.6
Axon Flex	1,565	3,074	(1,509)	(49.1)
Axon Fleet	1,440	2,676	(1,236)	(46.2)
Axon Dock	6,786	5,297	1,489	28.1

Net sales for the TASER segment increased ~~17.7%~~30.4% primarily due to ~~an increase of $7.4 million in cartridge revenue and~~ a net increase of ~~$2.8~~$17.3 million in TASER device ~~sales. The~~sales and an increase of $3.8 million in cartridge ~~revenue~~revenue. We continue to see a shift to purchases of our latest generation device, TASER 7, from legacy devices. Revenue was ~~due to increased units and was partially offset~~also impacted by ~~a decline in~~higher average selling ~~prices.~~prices for TASER 7 and X26P. Revenue from consumer TASER Pulse devices increased due to a substantial increase in volume, partially offset by lower average selling prices. ~~We continue~~The increase in cartridge revenue was due to ~~see a shift to purchases of our latest generation device, TASER 7, from legacy devices, especially X26P devices. Revenue was also impacted by higher average selling prices~~increased unit sales for TASER 7 ~~X2,~~cartridges, and ~~X26P.~~was partially offset by a decline in average selling prices.

Net sales for the Software and Sensors segment increased ~~38.8%~~34.7% during the three months ended ~~September 30, 2020~~March 31, 2021 as we continued to add users and associated devices to our network. The increase in the aggregate number of users resulted in increased Axon Evidence revenue of ~~$11.4~~$13.1 million. Sales of our ~~newest generation body camera,~~ Axon Body 3 ~~which began shipping in September 2019,~~camera drove most of the $6.9 million increase ~~of $9.2 million~~ in Axon Body revenue and the increase of ~~$2.4~~$2.0 million in Axon Dock revenue. The increase ~~was partially due to~~in the ~~shipment~~aggregate number of ~~contractual hardware upgrades.~~users and devices also resulted in increased extended warranty revenues of $2.0 million

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We consider total company future contracted revenues a forward-looking performance indicator. As of ~~September 30, 2020,~~March 31, 2021, we had approximately ~~$1.51~~$1.79 billion of total company future contracted revenue, which included both recognized contract liabilities as well as amounts that will be invoiced and recognized in future periods. We expect to recognize between 20% - 25% of this balance over the next twelve months, and expect the remainder to be recognized over the following five to seven years, subject to risks related to delayed deployments, budget appropriation or other contract cancellation clauses. The continuing increase in future contracted revenues were driven by continued North American demand for body cameras and cloud software and TASER demand driven by the U.S. Federal and corrections markets.

Cost of Product and Service Sales

Within the TASER segment, cost of product and service sales increased to ~~$31.3~~$32.9 million for the three months ended ~~September 30, 2020~~March 31, 2021 from ~~$26.5~~$30.2 million for the same period in ~~2019.~~2020, primarily related to higher unit sales. Cost as a percentage of sales ~~increased slightly~~decreased to ~~37.1%~~33.3% from ~~36.9%~~39.9%. Approximately half of the improvement was attributable to a combination of manufacturing cost improvement and strong demand for our premium TASER offerings, which resulted in a favorable product mix. The ~~increase~~remaining improvement was ~~primarily a result of product mix during the quarter, as well as~~ ~~an increase~~ ~~of approximately $0.4 million~~attributable to additional leverage on fixed costs. We are building manufacturing capacity to support our TASER device and cartridge manufacturing lines in response to ~~COVID-19, primarily related~~growing international and federal demand and an increased install base.

Investments in manufacturing capacity so far in 2021 have resulted in an approximately 40% capacity increase in TASER 7 propulsion module and cartridge line production capacity, combined with greater per-person efficiency that will generate $1 million in gross cost annual run rate savings on the TASER 7. Manufacturing and supply chain improvements are on track to result in more than $4 million in gross costs ~~for employee quarantines~~savings in 2021. Segment gross margins may continue to fluctuate based on customer and ~~paying or subsidizing certain high-risk employees while they stayed at home.~~product mix.

Within the Software and Sensors segment, cost of product and service sales increased to ~~$36.9~~$38.7 million for the three months ended ~~September 30, 2020~~March 31, 2021 from ~~$24.2~~$28.3 million for the same period in ~~2019.~~2020. Cost as a percentage of sales increased slightly to ~~45.0%~~40.3% from ~~40.9%~~39.7%. ~~The decrease was driven~~We are investing in scaling our cloud business, which includes standing up new cloud environments, cloud applications, and Long-Term Evolution (“LTE”) costs, which can result in some margin compression in advance of anticipated revenue, as well as low-to-no margin professional services that support new installations for software customers.

Although we have experienced port constraints and some increases in raw materials costs, we have remained focused on closely monitoring our supply chain, and mitigating impacts to keep our gross margins predictable and our inventory steady. For instance, during the recent global slowdown in manufacturing affected by the ~~fulfillment of several large shipments of lower-margin body camera hardware~~blockage in the Suez Canal, we duplicated orders by ocean and air, and worked with suppliers to hold higher buffers for Axon on their shelves. We have also worked to mitigate raw materials costs increases through supplier negotiations and buying added non-expiring raw materials. We continue to bolster our ~~largest customers.~~strategic relationships in our supply chain, work to identify secondary sourcing, and build in shipping and inventory buffers, which has kept our supply chain execution solid.

Gross Margin

As a percentage of net sales, gross margin for the TASER segment ~~decreased slightly~~increased to ~~62.9%~~66.7% from ~~63.1%~~60.1% for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. The ~~decrease~~increase was ~~primarily~~ a result of fixed cost leverage, manufacturing cost improvement, and product mix, ~~during the quarter.~~as discussed above.

As a percentage of net sales, gross margin for the Software and Sensors segment decreased to ~~55.0%~~59.7% from ~~59.1%~~60.3% for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. Within the Software and Sensors segment, hardware gross margin was ~~27.5%~~41.1% for the three months ended ~~September 30, 2020~~March 31, 2021 compared to ~~36.4%~~42.0% for the same period in ~~2019,~~2020, while the service margins were ~~77.1%~~75.1% and ~~75.8%~~75.3% during those same periods, respectively. ~~Hardware gross margin was impacted by the fulfillment~~

Table of ~~several large shipments of lower-margin body camera hardware to our largest customers, but was higher than previously anticipated for the quarter due to overall product mix.~~Contents

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

Percent

2020

2019

Change

Change
Total sales, general and administrative expenses

$
74,443

$
48,424

$
26,019

53.7
Sales, general, and administrative as a percentage of net sales

44.7
%

37.0
%


	Three Months Ended March 31,						Dollar		Percent
	2021			2020			Change		Change
Total sales, general and administrative expenses	$	126,597		$	63,027		$	63,570	100.9
Sales, general, and administrative as a percentage of net sales		64.9	%		42.8	%

Stock-based compensation expense increased ~~$9.6~~$56.0 million in comparison to the prior year comparable period, which was primarily attributable to an increase of ~~$4.4~~$31.6 million in expense related to the CEO Performance Award and an increase of ~~$4.2~~$23.1 million related to our XSPP. AsDuring the three months ended March 31, 2021, attainment of ~~September 30, 2020, eleven~~the twelfth operational ~~goals for~~goal of the CEO Performance Award and XSPP ~~are considered probable of attainment;~~became probable; during the prior year comparable period, ~~only three~~nine operational goals were considered probable. ~~Stock-based compensation~~We recognized approximately $9.0 million in cumulative catch-up expense ~~also~~related to the twelfth tranche, and an additional $36.8 million related to acceleration in the anticipated timing of attainment for the remaining probable tranches.

Salaries, benefits and bonus expense increased ~~over the prior year comparable period~~$9.5 million primarily due to an increase in headcount. Included in this increase was $1.4 million in payroll taxes related to the vesting of the first tranche of our XSPP in March 2021.

Sales and marketing expenses increased $3.3 million, driven by a $2.4 million increase in commissions expense tied to higher revenues and by higher spending on content development, promotional videos, and advertising.

Professional, consulting and lobbying expenses ~~increased $9.3~~decreased $4.3 million, primarily driven by ~~an increase of $8.6 million in~~lower expenses related to the FTC litigation. As discussed in Note 1311 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 has resulted in an increase~~

~~Table of Contents~~

~~in legal expenses~~Expenses related to the matter were minimal during the ~~year ending December~~three months ended March 31, ~~2020. While the amount and timing of such~~2021.

Travel expenses ~~is unknown and will vary depending on the progression of litigation, we currently anticipate expenses in the range of $19.0 million to $21.0 million for the year.~~

~~Salaries, benefits and bonus expense increased $5.4~~decreased $1.4 million, primarily due to ~~an increase in headcount.~~

~~Partially offsetting the noted increases were decreases resulting from actions taken in response to~~continued limited travel as a result of the COVID-19 pandemic. Travel expenses decreased $1.6 million following the suspension of all non-essential travel in mid-March 2020. Sales and marketing expenses increased $1.0 million compared to the prior year period, reflecting increased commissions tied to higher revenues.

Research and Development Expenses

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

Three Months Ended September 30,

Dollar

Percent

2020

2019

Change

Change
Total research and development expenses

$
29,246

$
25,129

$
4,117

16.4
Research and development as a percentage of net sales

17.6
%

19.2
%



	Three Months Ended March 31,						Dollar		Percent
	2021			2020			Change		Change
Total research and development expenses	$	47,018		$	26,381		$	20,637	78.2
Research and development as a percentage of net sales		24.1	%		17.9	%

~~The increase in R&D expense was primarily attributable to our Software and Sensors segment.~~ Within the TASER segment, R&D expense ~~was flat,~~increased $6.2 million, reflecting increased stock-based compensation expense, professional and consulting expenses and salaries, benefits and bonus expense in the current ~~quarter, which was partially offset by lower~~period. Increases in stock-based compensation expense included approximately $1.4 million incremental expense related to our XSPP and an additional $0.4 million related to attainment of other PSU awards. Professional and consulting expenses increased $1.3 million related to the development of next generation products, and salaries, benefits ~~resulting from decreased~~and bonus expense increased $1.2 million on higher headcount.

R&D expense for the Software and Sensors segment increased ~~$4.2~~$14.4 million, reflecting an increase of ~~$2.1~~$8.8 million in stock-based compensation expense, an increase of $4.0 million in salaries, benefits and bonus expense, and an increase of ~~$2.4~~$1.2 million in ~~stock-based compensation expense.~~

professional and consulting expenses.~~Stock-based compensation expense increased in comparison to~~During the ~~prior year comparable period, which was primarily attributable to an increase~~three months ended March 31, 2021, attainment of ~~$1.4 million in expense related to our XSPP.~~ Asthe twelfth operational goal of ~~September 30, 2020, eleven operational goals for~~ the XSPP ~~are considered probable of attainment;~~became probable; during the prior year comparable period, ~~only three~~nine operational goals were considered probable. We recognized approximately $0.7 million in cumulative catch-up expense related to the twelfth tranche, and an additional $3.2 million related to acceleration of the anticipated timing of attainment

Table of Contents

for the remaining probable tranches. Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount. The ~~remaining~~ increase in salaries, benefits and bonus was primarily a result of increased headcount. ~~Additionally, professional~~Professional and consulting expenses increased ~~$0.8 million for the three months ended September 30, 2020~~ related to development of next generation products. ~~The increases were partially offset by a decrease of $0.6 million in travel expense following the suspension of all non-essential travel in mid-March 2020 due to the COVID-19 pandemic.~~

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 are investing in technologies that include our conducted energy devices, body cameras, in-car cameras and other sensors, artificial intelligence, digital evidence management, productivity software, communications software, and technologies that enable real-time situational awareness for public safety. 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 as we reach economies of scale.

Interest and Other Income (Expense), Net

Interest and other income (expense), net was ~~$2.0~~$0.6 million for the three months ended ~~September 30, 2020~~March 31, 2021 compared to ~~$1.8~~$0.9 million for the same period in ~~2019.~~2020. The ~~increase~~decrease was primarily attributable to ~~an increase of $1.0 million in realized gains on foreign currency. The increase was partially offset by a decrease of $0.9 million in interest income as a result of~~ decreased interest rates on investments during the current period.

~~Table of Contents~~

~~Provision for Income Taxes~~

The provision for income taxes was a benefit of $2.5 million for the three months ended September 30, 2020, which was an effective tax rate of 74.4%. Our estimated full year effective income tax rate for 2020, before discrete period adjustments, is (137.0%), which differs from the federal statutory rate primarily due to the impact of the executive compensation limitation under Internal Revenue Code ("IRC") Section 162(m) on a projected pre-tax loss for the year. The effective tax rate was favorably impacted by a $0.7 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for RSUs that vested or stock options that were exercised during the three months ended September 30, 2020.

~~Net Income~~

Our net income decreased by $7.0 million to a loss of $0.9 million for the three months ended September 30, 2020 compared to net income of $6.1 million for the same period in 2019. Net loss per basic and diluted share was $0.01 for the three months ended September 30, 2020 compared to $0.10 net income per basic and diluted share for the same period in 2019.

~~Three Months Ended September 30, 2020 Compared to the Three Months Ended June 30, 2020~~

~~Net Sales~~

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

Three Months Ended

Three Months Ended

Dollar

Percent

September 30, 2020

June 30, 2020

Change

Change
TASER segment:

TASER 7

$
21,702

13.0
%
$
11,588

8.2
%
$
10,114

87.3
%
TASER X26P

9,766

5.9

9,511

6.7

255

2.7

TASER X2

14,494

8.7

16,832

11.9

(2,338)

(13.9)

TASER Pulse

2,981

1.8

2,193

1.6

788

35.9

Cartridges

26,335

15.8

23,772

16.8

2,563

10.8

Axon Evidence and cloud services

692

0.4

586

0.4

106

18.1

Extended warranties

5,265

3.2

5,098

3.6

167

3.3

Other

3,171

1.9

910

0.5

2,261

248.5

TASER segment

84,406

50.7

70,490

49.7

13,916

19.7

Software and Sensors segment:













Axon Body

15,978

9.6

11,844

8.4

4,134

34.9

Axon Flex

1,589

1.0

680

0.5

909

133.7

Axon Fleet

4,215

2.5

4,098

2.9

117

2.9

Axon Dock

5,708

3.4

4,055

2.9

1,653

40.8

Axon Evidence and cloud services

45,450

27.3

41,891

29.7

3,559

8.5

Extended warranties

6,514

3.9

5,735

4.1

779

13.6

Other

2,582

1.6

2,466

1.8

116

4.7

Software and Sensors segment

82,036

49.3

70,769

50.3

11,267

15.9

Total net sales

$
166,442

100.0
%
$
141,259

100.0
%
$
25,183

17.8
%

~~Table of Contents~~

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

Three Months Ended




Unit

Percent

September 30, 2020

June 30, 2020

Change

Change
TASER 7

15,908

9,014

6,894

76.5
%
TASER X26P

8,119

7,658

461

6.0
%
TASER X2

10,078

13,100

(3,022)

(23.1)
%
TASER Pulse

12,811

5,429

7,382

136.0
%
Cartridges

852,980

715,268

137,712

19.3
%
Axon Body

62,873

35,066

27,807

79.3
%
Axon Flex

3,175

1,964

1,211

61.7
%
Axon Fleet

2,396

2,327

69

3.0
%
Axon Dock

9,165

4,634

4,531

97.8
%

Net sales within the TASER segment increased by approximately $13.9 million or 19.7% as compared to the prior quarter. The largest driver of the increase was increased revenue from TASER 7 devices driven by higher unit sales and an increase in average selling prices. Additionally, cartridge revenue increased $2.6 million due to increased units, partially offset by a decline in average selling prices. The increases were partially offset by a decrease in revenue from X2 devices driven by a decrease in units.

Within the Software and Sensors segment, net sales increased $11.3 million or 15.9% during the three months ended September 30, 2020 compared to the prior quarter. Revenue from Axon devices increased a combined $6.8 million primarily due to higher unit sales. Higher average selling prices for Axon Flex also contributed to the increase, while lower average selling prices for Axon Body cameras and docks partially offset the increase. Axon Evidence revenues increased $3.6 million primarily based on an increase in the aggregate number of users on our Axon network. The increase was partially due to the shipment of contractual hardware upgrades.

~~Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019~~

Nine Months Ended September 30,

2020


2019

Net sales from products

$
326,134

71.7
%

$
264,977

73.8
%
Net sales from services

128,729

28.3

94,032

26.2

Net sales

454,863

100.0

359,009

100.0

Cost of product sales

150,507

33.1

120,265

33.5

Cost of service sales

29,331

6.4

24,098

6.7

Cost of sales

179,838

39.5

144,363

40.2

Gross margin

275,025

60.5

214,646

59.8

Operating expenses:

Sales, general and administrative

209,763

46.1

134,678

37.6

Research and development

85,187

18.7

71,976

20.0

Total operating expenses

294,950

64.8

206,654

57.6

Income (loss) from operations

(19,925)

(4.3)

7,992

2.2

Interest and other income, net

4,594

0.9

5,978

1.7

Income (loss) before provision for income taxes

(15,331)

(3.4)

13,970

3.9

Provision for (benefit from) income taxes

12,227

2.7

709

0.2

Net income (loss)

$
(27,558)

(6.1)
%

$
13,261

3.7
%

~~Table of Contents~~

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

Nine Months Ended September 30,

2020

2019

United States

$
368,390

81
%

$
298,736

83
%
Other Countries

86,473

19

60,273

17

Total

$
454,863

100
%

$
359,009

100
%

~~International revenue increased compared to the prior year comparable period, driven primarily by increased sales in the Americas, Asia Pacific and Europe regions.~~

~~Net Sales~~

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

Nine Months Ended September 30,

Dollar

Percent

2020

2019

Change

Change

TASER segment:
















TASER 7

$
48,616

10.7
%
$
39,466

11.0
%
$
9,150

23.2
%
TASER X26P

30,338

6.7

37,832

10.5

(7,494)

(19.8)

TASER X2

45,401

10.0

40,413

11.3

4,988

12.3

TASER Pulse

6,374

1.4

2,920

0.8

3,454

118.3

Cartridges

76,732

16.8

57,354

16.0

19,378

33.8

Axon Evidence and cloud services

1,776

0.4

363

0.1

1,413

389.3

Extended warranties

15,340

3.4

13,341

3.7

1,999

15.0

Other

6,214

1.3

6,017

1.7

197

3.3

TASER segment

230,791

50.7

197,706

55.1

33,085

16.7

Software and Sensors segment:





Axon Body

40,645

8.9

18,820

5.2

21,825

116.0

Axon Flex

3,452

0.8

4,517

1.3

(1,065)

(23.6)

Axon Fleet

13,088

2.9

10,977

3.1

2,111

19.2

Axon Dock

14,714

3.2

9,401

2.6

5,313

56.5

Axon Evidence and cloud services

126,495

27.8

93,461

26.0

33,034

35.3

Extended warranties

17,707

3.9

14,064

3.9

3,643

25.9

Other

7,971

1.8

10,063

2.8

(2,092)

(20.8)

Software and Sensors segment

224,072

49.3

161,303

44.9

62,769

38.9

Total net sales

$
454,863

100.0
%
$
359,009

100.0
%
$
95,854

26.7
%

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

Nine Months Ended September 30,

Unit

Percent


2020

2019

Change

Change
TASER 7

36,352

34,644

1,708

4.9
%
TASER X26P

26,780

35,244

(8,464)

(24.0)
%
TASER X2

33,656

29,439

4,217

14.3
%
TASER Pulse

21,501

8,807

12,694

144.1
%
Cartridges

2,441,612

1,789,084

652,528

36.5
%
Axon Body

137,803

68,231

69,572

102.0
%
Axon Flex

8,213

12,508

(4,295)

(34.3)
%
Axon Fleet

7,399

7,143

256

3.6
%
Axon Dock

19,096

12,126

6,970

57.5
%

~~Table of Contents~~

Net sales for the TASER segment increased $33.1 million, or 16.7%, primarily due to an increase of $19.4 million in cartridge revenue, as well as a net increase of $10.1 million in TASER device sales. The increase in cartridge revenue was due to increased units and was partially offset by a decrease in average selling prices. TASER device unit sales increased for all TASER devices except X26P. ~~Revenue was also impacted by higher average selling prices for TASER 7 and X26P devices, while average selling prices were lower for X2 and consumer Pulse devices.~~

Net sales for the Software and Sensors segment increased $62.8 million, or 38.9%, during the nine months ended September 30, 2020 as we continued to add users and associated devices to our network. The increase in the aggregate number of users resulted in increased Axon Evidence revenue of $33.0 million. Sales of our newest generation body camera, Axon Body 3, which began shipping in September 2019, drove the increase of $21.8 million in Axon Body revenue and the increase of $5.3 million in Axon Dock revenue.

~~Cost of Product and Service Sales~~

Within the TASER segment, cost of product sales increased to $88.8 million for the nine months ended September 30, 2020 from $74.0 million for the same period in 2019. Cost as a percentage of sales increased to 38.5% from 37.5%. 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 $2.0 million in response to COVID-19, primarily related to a two week manufacturing shutdown where we continued to pay nonworking employees, as well as costs for employee quarantines and paying or subsidizing certain high-risk employees while they stayed at home. The increases were partially offset by non-recurring costs incurred during the prior year comparable period of ~~approximately $2.3 million 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 $91.1 million for the nine months ended September 30, 2020 from $70.3 million for the same period in 2019. Cost as a percentage of sales decreased to 40.6% from 43.6%. Cost of product sales increased $15.5 million, but decreased as a percentage of sales as a result of ~~product mix and the higher average selling price for Axon Body 3 cameras, which began shipping in September 2019. Cost of service sales increased $5.2 million, and decreased as a percentage of sales, driven by the mix of higher-margin software revenues.~~

~~Gross Margin~~

As a percentage of net sales, gross margin for the TASER segment decreased to 61.5% from 62.5% for the nine months ended September 30, 2020 and 2019, respectively. The decrease was primarily a result of the mix of higher cost TASER 7 devices and cartridges and expenses related to COVID-19.

As a percentage of net sales, gross margin for the Software and Sensors segment increased to 59.4% from 56.4% for the nine months ended September 30, 2020 and 2019, respectively. Within the Software and Sensors segment, hardware gross margin was 36.7% for the nine months ended September 30, 2020 compared to 31.9% for the same period in 2019, while the service margins were 76.8% and 74.2% during those same periods, respectively.

~~Sales, General and Administrative Expenses~~

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

Nine Months Ended September 30,

Dollar

Percent


2020

2019

Change

Change
Total sales, general and administrative expenses

$
209,763

$
134,678

$
75,085

55.8
%
SG&A expenses as a percentage of net sales

46.1
%

37.6
%

Stock-based compensation expense increased $41.7 million in comparison to the prior year comparable period, which was primarily attributable to an increase of $24.7 million in expense related to the CEO Performance Award and an increase of $14.8 million related to our XSPP. ~~As of September 30, 2020, eleven operational goals for the CEO~~

~~Table of Contents~~

~~Performance Award and XSPP are considered probable of attainment; during the prior year comparable period, only three operational goals were considered probable.~~ ~~Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount.~~

~~Professional, consulting and lobbying expenses increased $19.5 million, driven by an increase of $18.5 million in expenses related to the FTC litigation.~~ As discussed in Note 13 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 has resulted 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 $19.0 million to $21.0 million for the year.

~~Salaries, benefits and bonus expense increased $9.9 million primarily due to an increase in headcount.~~

~~Charitable contributions increased $1.7 million, reflecting our donations of PPE under our Got You Covered campaign.~~

Partially offsetting the noted increases were decreases resulting from actions taken in response to the COVID-19 pandemic. Travel expenses decreased $4.1 million following the suspension of all non-essential travel in mid-March 2020. Sales and marketing expenses increased $1.4 million compared to the prior year period, reflecting increased commissions tied to higher revenues, partially offset by savings driven by the cancellation of our in-person Axon Accelerate user conference.

~~Research and Development Expenses~~

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

Nine Months Ended September 30,

Dollar

Percent


2020

2019

Change

Change
Total research and development expenses

$
85,187

$
71,976

$
13,211

18.4
%
R&D expenses as a percentage of net sales

18.7
%

20.0
%

The increase in R&D expense was primarily attributable to our Software and Sensors segment. Within the TASER segment, R&D expense was flat, reflecting increased consulting expense in the current quarter, which was partially offset by lower compensation and benefits resulting from decreased headcount. R&D expense for the Software and Sensors segment increased $13.3 million, reflecting an increase of $6.1 million in salaries, benefits and bonus expense and an increase of $6.4 million in stock-based compensation expense.

~~Stock-based compensation expense increased in comparison to the prior year comparable period, which was primarily attributable to an increase of $5.3 million in expense related to our XSPP.~~ ~~As of September 30, 2020, eleven operational goals for the XSPP are considered probable of attainment; during the prior year comparable period, only three operational goals were considered probable.~~ ~~Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount.~~ The remaining increase in salaries, benefits and bonus was primarily a result of increased headcount. Additionally, professional and consulting expenses increased $1.6 million for the nine months ended September 30, 2020 related to development of next generation products. The increases were partially offset by a decrease of $1.2 million in travel expense following the suspension of all non-essential travel in mid-March 2020 due to the COVID-19 pandemic.

~~Table of Contents~~

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 as we reach economies of scale.

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

Interest and other income, net was $4.6 million for the nine months ended September 30, 2020 compared to $6.0 million for the same period in 2019. The decrease was primarily attributable to a decrease of $1.7 million in interest income as a result of decreased interest rates during the current period.

Provision for Income Taxes

The provision for income taxes was ~~an expense~~a benefit of ~~$12.2~~$1.8 million for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, which was an effective tax rate of ~~(79.8%)~~3.5%. Our estimated full year effective income tax rate for ~~2020,~~2021, before discrete period adjustments, is ~~(137.0%~~(20.5%), which differs from the federal statutory rate primarily due to the impact of the executive compensation limitation under ~~IRC~~Internal Revenue Code ("IRC") Section 162(m), partially offset by R&D tax credits, on a projected pre-tax loss for the year. The effective tax rate was favorably impacted by a ~~$6.6~~$11.7 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for RSUs and PSUs that vested ~~or stock options that were exercised~~ during the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021.

Net Income

~~Our net income decreased by $40.9 million to a~~We recorded net loss of ~~$27.6 million~~$47.9 for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 compared to net income of ~~$13.3~~$4.1 million for the same period in ~~2019.~~2020. Net loss per basic and diluted share was ~~$0.45~~$0.75 for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 compared to $0.07 net income per basic and diluted share ~~of $0.22~~ for the same period in ~~2019.~~2020.

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Three Months Ended March 31, 2021 Compared to the Three Months Ended December 31, 2020

Net Sales

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


	Three Months Ended				Three Months Ended				Dollar		Percent
	March 31, 2021				December 31, 2020				Change		Change
TASER segment:
TASER 7	$	33,991	17.5	%	$	58,890	26.0	%	$	(24,899)	(42.3)	%
TASER X26P		9,963	5.1			11,386	5.0			(1,423)	(12.5)
TASER X2		12,778	6.6			14,706	6.5			(1,928)	(13.1)
TASER Pulse		2,205	1.1			3,033	1.4			(828)	(27.3)
Cartridges		30,418	15.6			38,461	17.0			(8,043)	(20.9)
Axon Evidence and cloud services		1,396	0.7			1,159	0.5			237	20.4
Extended warranties		5,646	2.9			5,414	2.4			232	4.3
Other		2,602	1.3			2,712	1.2			(110)	(4.1)
TASER segment		98,999	50.8			135,761	60.0			(36,762)	(27.1)
Software and Sensors segment:
Axon Body		19,756	10.1			16,505	7.3			3,251	19.7
Axon Flex		905	0.5			630	0.3			275	43.7
Axon Fleet		3,763	1.9			7,020	3.1			(3,257)	(46.4)
Axon Dock		6,920	3.5			5,009	2.2			1,911	38.2
Axon Evidence and cloud services		52,294	26.9			50,302	22.2			1,992	4.0
Extended warranties		7,500	3.8			6,701	3.0			799	11.9
Other		4,882	2.5			4,212	1.9			670	15.9
Software and Sensors segment		96,020	49.2			90,379	40.0			5,641	6.2
Total net sales	$	195,019	100.0	%	$	226,140	100.0	%	$	(31,121)	(13.8)	%

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


	Three Months Ended
			Unit	Percent
	March 31, 2021	December 31, 2020	Change	Change
TASER 7	23,360	41,099	(17,739)	(43.2)	%
TASER X26P	8,229	10,611	(2,382)	(22.4)	%
TASER X2	8,838	9,751	(913)	(9.4)	%
TASER Pulse	8,686	11,657	(2,971)	(25.5)	%
Cartridges	1,009,760	1,272,679	(262,919)	(20.7)	%
Axon Body	46,094	44,735	1,359	3.0	%
Axon Flex	1,565	749	816	108.9	%
Axon Fleet	1,440	3,905	(2,465)	(63.1)	%
Axon Dock	6,786	6,326	460	7.3	%

Net sales within the TASER segment decreased by approximately $36.8 million or 27.1% as compared to the prior quarter. The largest driver of the decrease was lower revenue from all TASER devices, primarily as a result of lower units. The decrease was partially offset by higher average selling prices for TASER X26P devices. Additionally, cartridge revenue decreased $8.0 million due to lower unit sales.

Within the Software and Sensors segment, net sales increased $5.6 million or 6.2% during the three months ended March 31, 2021 compared to the prior quarter. Revenue from Axon Body cameras and Docks increased a combined $5.2 million due primarily to higher average selling prices; revenue in the prior quarter included a large shipment of contractual hardware upgrades. Axon Evidence revenues increased $2.0 million primarily based on an increase in the aggregate

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number of users on our Axon network. Revenue from Axon Fleet cameras decreased $3.3 million on lower unit sales, partially offset by an increase in average selling prices.

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.

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

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●

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.

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

Three Months Ended

Nine Months Ended


September 30,

June 30,

September 30,

September 30,

September 30,

2020

2020

2019

2020

2019
Net income (loss)

$
(873)

$
(30,759)

$
6,104

$
(27,558)

$
13,261
Depreciation and amortization

3,133

2,930

2,709

8,944

8,196
Interest expense

32

5

4

44

27
Investment interest income

(965)

(1,499)

(1,647)

(3,157)

(5,280)
Provision for (benefit from) income taxes

(2,536)

18,696

2,332

12,227

709
EBITDA

$
(1,209)

$
(10,627)

$
9,502

$
(9,500)

$
16,913

Adjustments:










Stock-based compensation expense

26,094

33,835

13,663

80,124

30,195
Adjusted EBITDA (CEO Performance Award)

$
24,885

$
23,208

$
23,165

$
70,624

$
47,108


	Three Months Ended
	March 31,		December 31,		March 31,
	2021		2020		2020
Net income (loss)	$	(47,917)	$	25,834	$	4,074
Depreciation and amortization		4,291		3,531		2,881
Interest expense		5		11		7
Investment interest income		(533)		(929)		(693)
Provision for (benefit from) income taxes		(1,760)		(16,794)		(3,933)
EBITDA	$	(45,914)	$	11,653	$	2,336

Adjustments:
Stock-based compensation expense		89,610		53,448		20,195
Adjusted EBITDA (CEO Performance Award)	$	43,696	$	65,101	$	22,531

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Liquidity and Capital Resources

Summary

As of ~~September 30, 2020,~~March 31, 2021, we had ~~$176.0~~$154.8 million of cash and cash equivalents, ~~an increase~~a decrease of ~~$3.7~~$0.6 million as compared to December 31, ~~2019.~~2020. Cash and cash equivalents and investments totaled ~~$627.5~~$674.1 million, representing an increase of ~~$231.2~~$21.5 million from December 31, ~~2019.~~2020.

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, 2020,~~March 31, 2021, we had letters of credit outstanding of $6.1 million, leaving the net amount available for borrowing of $43.9 million. The facility matures on December 31, ~~2021,~~2023, 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, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, 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, 2020,~~March 31, 2021, our funded debt to EBITDA ratio was 0.00 to 1.00.

TASER 60subscription and 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 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~~subscription or installment purchase 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,~~

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the majority of our arrangements in both reportable segments to be offered in similar subscription-type offerings over the coming years. With the launch of the TASER 7, which is primarily being sold in subscription offerings, this strategic shift continues to accelerate.

Based on our strong balance sheet and the fact that we do not have long-term debt at ~~September 30, 2020,~~March 31, 2021, 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 or strategic investments 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,

2020

2019
Operating activities

$
4,163

$
19,864
Investing activities

(300,294)

(162,925)
Financing activities

300,188

(3,162)
Effect of exchange rate changes on cash and cash equivalents

(303)

(678)
Net increase (decrease) in cash and cash equivalents and restricted cash

$
3,754

$
(146,901)


	Three Months Ended March 31,
	2021		2020
Operating activities	$	60,939	$	13,415
Investing activities		(54,123)		(22,073)
Financing activities		(7,045)		(5,162)
Effect of exchange rate changes on cash and cash equivalents		(392)		(1,890)
Net increase (decrease) in cash and cash equivalents and restricted cash	$	(621)	$	(15,710)

Operating activities

Net cash provided by operating activities in the first ~~nine~~three months of ~~2020~~2021 of ~~$4.2~~$60.9 million reflects ~~$27.6~~$47.9 million in net loss, non-cash income statement items totaling ~~$85.0~~$95.8 million, and a ~~use~~positive impact of ~~cash of $53.3~~$13.0 million for the net change in operating assets and liabilities. Included in the non-cash items were ~~$8.9~~$4.3 million in depreciation and amortization expense ~~$80.1~~and $89.6 million in stock-based compensation ~~expense, and a $11.7 million increase in deferred tax assets, net.~~expense. Cash ~~used in~~provided by operations was primarily driven by increased inventory of $59.4 million, as we proactively built up a safety stock of inventory to help meet strong product demand while also preparing us to stagger factory work schedules. Also contributing to the use of cash were increaseddecreased accounts and notes receivable and contract assets of ~~$48.6~~$31.3 million ~~which~~and increased deferred revenue of $6.2 million. The decrease in accounts and notes receivable and contract assets was primarily attributable to timing of payments received, as well as an overall increase in subscription sales. Cash provided by operations was partially offset by increased ~~sales over the last several quarters, primarily sales made under subscription plans. Partially offsetting the uses~~prepaid expenses and other assets of ~~cash were increases in~~$7.0 million and decreased accounts payable, accrued liabilities and other liabilities of ~~$25.4 million, and in deferred revenue of $34.1~~$18.1 million. The ~~increase in~~decrease of accounts payable, accrued liabilities and other liabilities was primarily attributable to accruals for professional services, inventory in transit, and taxes. The increase in deferred revenue was primarily attributable to increased hardware deferred revenue from TASER subscription sales, partially offsetdriven by a ~~decrease in prepayments for Software~~reduction of accrued commissions due to decreased bookings as compared to the quarter ended December 31, 2020 and ~~Sensors services.~~timing of inventory purchases.

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.

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Investing activities

We used ~~$300.3~~$54.1 million in investing activities during the first ~~nine~~three months of ~~2020,~~2021, which was comprised of ~~$229.5~~$23.6 million for the purchase of investments, net of proceeds, ~~$66.0~~$20.0 million for ~~the purchase of property~~a strategic minority investment, and ~~equipment and intangible assets, and $4.7 million for an equity investment in an unconsolidated affiliate.~~

~~We used $162.9 million in investing activities during the first nine months of 2019, which was comprised of $150.5 million for the purchase of investments, net of proceeds, and $12.4~~$10.6 million for the purchase of property and equipment and intangible assets.

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

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Financing activities

Net cash ~~provided by~~used in financing activities was ~~$300.2~~$7.0 million during the first ~~nine~~three months of ~~2020. During~~2021 and was attributable to the first nine months of 2020, we completed an equity offering that generated net proceeds of $306.8 million and received proceeds from options exercised of $0.3 million; the proceeds were partially offset by paymentspayment of income and payroll taxes ~~of $6.9 million~~ on behalf of employees who net-settled stock awards during the period.

Net cash used in financing activities was ~~$3.2~~$5.2 million during the first ~~nine~~three months of ~~2019.~~2020. During the first ~~nine~~three months of ~~2019,~~2020, we paid income and payroll taxes of ~~$3.3~~$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.~~million.

Off-Balance Sheet Arrangements

The discussion under the heading off-balance sheet arrangements in Note 1311 of the notes to our condensed consolidated financial statements within this Quarterly 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 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. Our stock-based compensation awards are classified as equity and measured at the fair market value of the underlying stock at the grant date. For service-based awards, we recognize RSU expense using the straight-line attribution method over the requisite service period. Vesting of performance-based RSUs and options is contingent upon the achievement of certain performance criteria related to our operating performance, as well as successful and timely development and market acceptance of future product introductions. For performance-based RSUs containing only performance conditions, compensation cost is recognized using the graded attribution model over the explicit or implicit service period. For awards containing multiple service, performance or market conditions, where all conditions must be satisfied prior to vesting, compensation expense is recognized over the 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.

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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 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 119 of the notes to our condensed consolidated financial statements within this Report on Form 10-Q.

Stock-based compensation expense associated with the CEO Performance Award and XSPP is recognized over the requisite service period, which is defined as the longest explicit, implicit or derived service period, based on management’s estimate of the probability and timing of the performance criteria being satisfied, adjusted at each balance sheet date. Expense recognition begins at the point in time when the relevant operational goal is considered probable of being met. The probability of attaining an operational goal and the expected attainment date for meeting a probable

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operational goal are based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis. The statistical model and the assessment that determine the estimated attainment dates are subject to a number of estimated inputs, including expected volatility rates, management’s forward-looking financial projections, in particular for operational goals that are anticipated to be attained in the near future, and adjustment of other estimates based on the passage of time. During the three months ended March 31, 2021, we recorded an additional $51.4 million in stock-based compensation expense as a result of updated estimates for the CEO Performance Award and eXponential Stock Performance Plan.

We have granted a total of ~~14.9~~15.0 million performance-based awards (options and restricted stock units) of which ~~12.1~~11.4 million are outstanding. As of ~~September 30, 2020,~~March 31, 2021, the vesting of which is contingent upon the achievement of certain performance criteria including the successful development and market acceptance of future product introductions as well as our future sales targets and operating performance and market capitalization. Compensation expense for performance awards 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 (loss).

~~Allowance~~Reserve for Expected Credit Losses

We 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 an additional credit loss ~~expense~~reserve of approximately $0.8 million ~~during the nine months ended September 30, 2020.~~as of March 31, 2021.

Based on the balances of our financial instruments as of ~~September 30, 2020,~~March 31, 2021, a hypothetical 25 percent increase in expected credit loss rates across all pools would result in a $0.7 million increase in the allowance for expected credit 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

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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,

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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, 2020,~~March 31, 2021, a hypothetical 100 basis point increase in interest rates across all maturities would result in a ~~$1.9~~$1.7 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 $6.1 million at ~~September 30, 2020.~~March 31, 2021. At ~~September 30, 2020,~~March 31, 2021, there was no amount outstanding under the line of credit and the available borrowing under the line of credit was $43.9 million. We have not borrowed any funds under the line of credit since its inception; however; should we need to do so in the future, such borrowings could be subject to adverse or favorable changes in the underlying interest rate.

Exchange Rate Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, in each case compared to the U.S. dollar, related to transactions by our foreign subsidiaries. The majority of our sales to international customers are transacted in foreign currencies and therefore are subject to exchange rate fluctuations on these transactions. 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, 2020.~~March 31, 2021.

Change in Internal Control over Financial Reporting

There ~~were~~was no ~~changes~~change in our internal control over financial reporting during the fiscal quarter ended ~~September 30, 2020~~March 31, 2021 that ~~have~~has materially affected, or ~~are~~is 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.

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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 1311 of the notes to our condensed consolidated financial statements included within this Quarterly Report on Form 10-Q is incorporated by reference herein.

Item 1A. Risk Factors

~~Except as noted below, there~~There are no 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, ~~2019,~~2020, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock.

~~The COVID-19 pandemic has significantly impacted worldwide economic conditions and could have a material adverse effect on our 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 throughout the United States and world, 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 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 and state 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 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 have had and could continue to have an impact 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.

~~Table of Contents~~

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

~~Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.~~None.

On November 3, 2020, the Compensation Committee of our Board of Directors approved a modification to the definition of a metric for certain of our outstanding PSU awards. The Compensation Committee modified the definition of EBITDA contained in the award to adjust for major developments in the business that have driven additional expense that was not anticipated at the grant date, while fairly compensating management for delivering revenue and EBITDA performance during the 2018-2020 time period covered by the awards.

The number of shares that ultimately vest is based upon Axon's compounded annual revenue growth rate (80% of target shares) and our compounded annual EBITDA growth rate (20% of target shares) both compared to target for the three-year period ending December 31, 2020. The revenue metric was not adjusted. The EBITDA metric was adjusted to add back stock-based compensation expense attributable to the CEO Performance Award and XSPP and for this award modification, to add back expenses related to the FTC litigation, and to adjust for any other financial impacts related to a disposition of Vievu, should such disposition occur. For additional discussion of the FTC litigation and Vievu, refer to the discussion under the headings Product Litigation, Other Litigation, and U.S. Federal Trade Commission Investigation in Note 13 of the notes to our condensed consolidated financial statements included within this Quarterly Report on Form 10-Q.

~~The modification impacts outstanding awards for certain of our executive officers, specifically Patrick W. Smith, Jawad A. Ahsan, Luke S. Larson, and Joshua M. Isner.~~ ~~The following table shows information about the EBITDA portion of the PSU awards, as modified:~~

Estimated future payouts under
equity incentive awards
Name

Threshold
(#)

Target
(#)

Maximum
(#)
Patrick W. Smith

6,224

12,448

24,896
Luke S. Larson

2,490

4,979

9,958
Jawad A. Ahsan

2,490

4,979

9,958
Joshua M. Isner

1,660

3,320

6,640

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Item 6. Exhibits


10.1*10.1		~~Auction Statement from~~Subscription Agreement dated as of April 8, 2021 by and between the Company and Cellebrite DI Ltd. (incorporated by reference to Exhibit 10.1 to the ~~Arizona State Land Department~~Current Report on Form 8-K, filed April 8, 2021).
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 Quarterly Report for the quarter ended ~~September 30, 2020,~~March 31, 2021, formatted in Inline XBRL

* Filed herewith

** Furnished herewith

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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 6, 2020~~May 7, 2021
		By:	/s/ PATRICK W. SMITH
			Chief Executive Officer
			(Principal Executive Officer)

Date:	~~November 6, 2020~~May 7, 2021	By:	/s/ JAWAD A. AHSAN
			Chief Financial Officer
			(Principal Financial and
			Accounting Officer)

4939


	Three Months Ended September 30, 2020						Three Months Ended September 30, 2019
			Software and						Software and
	TASER		Sensors		Total		TASER		Sensors		Total
TASER 7	$	21,702	$	0	$	21,702	$	20,214	$	0	$	20,214
TASER X26P		9,766		0		9,766		11,578		0		11,578
TASER X2		14,494		0		14,494		13,241		0		13,241
TASER Pulse		2,981		0		2,981		1,132		0		1,132
Cartridges		26,335		0		26,335		18,901		0		18,901
Axon Body		0		15,978		15,978		0		6,763		6,763
Axon Flex		0		1,589		1,589		0		1,670		1,670
Axon Fleet		0		4,215		4,215		0		4,341		4,341
Axon Dock		0		5,708		5,708		0		3,358		3,358
Axon Evidence and cloud services		692		45,450		46,142		218		34,022		34,240
Extended warranties		5,265		6,514		11,779		4,543		4,714		9,257
Other		3,171		2,582		5,753		1,916		4,226		6,142
Total	$	84,406	$	82,036	$	166,442	$	71,743	$	59,094	$	130,837


	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	$	—	$	0	$	103,319	$	103,319	$	0	$	—

Level 1:
Money market funds		8,845		—		0		8,845		8,845		0		—
Agency bonds		32,869		14		(4)		32,879		0		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		0		25,046		0		21,560		3,478
Certificates of deposit		1,400		—		0		1,400		0		1,400		—
Corporate bonds		135,175		71		(30)		135,216		886		113,241		21,048
U.S. Treasury repurchase agreements		57,200		—		0		57,200		57,200		0		—
Treasury inflation-protected securities		3,235		14		0		3,249		0		0		3,235
Commercial paper		29,202		—		0		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


	Estimated
	Useful Life	September 30, 2020		December 31, 2019
Land	N/A	$	57,052	$	2,900
Building and leasehold improvements	3-39 years		20,330		20,089
Production equipment	3-7 years		32,919		29,961
Computers, equipment and software	3-5 years		7,839		8,126
Furniture and office equipment	5-7 years		6,014		6,514
Vehicles	5 years		1,782		1,753
Website development costs	3 years		204		204
Capitalized internal-use software development costs	3 years		3,670		3,670
Construction-in-process	N/A		17,546		12,385
Total cost			147,356		85,602
Less: Accumulated depreciation			(44,638)		(41,832)
Property and equipment, net		$	102,718	$	43,770


2020 remaining	$	831
2021		2,879
2022		1,277
2023		982
2024		899
2025		632
Thereafter		1,185
Total	$	8,685


	Three Months Ended						Nine Months Ended
	September 30,		June 30,		September 30,		September 30,		September 30,
	2020		2020		2019		2020		2019
Net income (loss)	$	(873)	$	(30,759)	$	6,104	$	(27,558)	$	13,261
Depreciation and amortization		3,133		2,930		2,709		8,944		8,196
Interest expense		32		5		4		44		27
Investment interest income		(965)		(1,499)		(1,647)		(3,157)		(5,280)
Provision for (benefit from) income taxes		(2,536)		18,696		2,332		12,227		709
EBITDA	$	(1,209)	$	(10,627)	$	9,502	$	(9,500)	$	16,913

Adjustments:
Stock-based compensation expense		26,094		33,835		13,663		80,124		30,195
Adjusted EBITDA (CEO Performance Award)	$	24,885	$	23,208	$	23,165	$	70,624	$	47,108


	Estimated future payouts under equity incentive awards
Name	Threshold (#)	Target (#)	Maximum (#)
Patrick W. Smith	6,224	12,448	24,896
Luke S. Larson	2,490	4,979	9,958
Jawad A. Ahsan	2,490	4,979	9,958
Joshua M. Isner	1,660	3,320	6,640