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 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 | (I.R.S. Employer |
| |
17800 North 85th Street |
|
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 | 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 July 30, 2021May 6, 2022 was 65,675,685.71,011,451.
AXON ENTERPRISE, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2021MARCH 31, 2022
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| Notes to Unaudited Condensed Consolidated Financial Statements |
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| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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Special Note Regarding Forward-Looking Statements
This Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions and strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. From time to time, we also provide forward-looking statements in other materials we release to the public as well as verbal forward-looking statements. These forward-looking statements include, without limitation, statements regarding: proposed products and services and related development efforts and activities; our projected revenue and capital expenditures for the full year 2022; expectations about the market for our current and future products and services; the impact of pending litigation; strategies and trends relating to subscription plan programs and revenues; our anticipation that contracts with governmental customers will be fulfilled; strategies and trends, including the benefits of, research and development investments; the sufficiency of our liquidity and financial resources; expectations about customer behavior; the impact on our investment portfolio of changes in interest rates; our potential use of foreign currency forward and option contracts; statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; statements of management’s strategies, goals and objectives and other similar expressions; as well as the ultimate resolution of financial statement items requiring critical accounting estimates, including those set forth in our Form 10-K for the year ended December 31, 2020.2021. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Words such as “may,” “will,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions, as well as statements in future tense, identify forward-looking statements. However, not all forward-looking statements contain these identifying words.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. The following important factors could cause actual results to differ materially from those in the forward-looking statements: the potential global impacts of the COVID-19 pandemic; our exposure to cancellations of government contracts due to appropriation clauses, exercise of a cancellation clause, or non-exercise of contractually optional periods; our ability to design, introduce and sell new products or features; our ability to defend against litigation and protect our intellectual property, and the resulting costs of this activity; our ability to manage our supply chain and avoid production delays, shortages, and impacts to expected gross margins; the impact of stock compensation expense, impairment expense, and income tax expense on our financial results; customer purchase behavior, including adoption of our software as a service delivery model; negative media publicity regarding our products; the impact of product mix on projected gross margins; defects in our products; changes in the costs of product components and labor; loss of customer data, a breach of security, or an extended outage, including by our third party cloud-based storage providers; exposure to international operational risks; delayed cash collections and possible credit losses due to our subscription model; changes in government regulations in the U.S. and in foreign markets, especially related to the classification of our products by the United States Bureau of Alcohol, Tobacco, Firearms and Explosives; our ability to integrate acquired businesses; our ability to attract and retain key personnel; and counter-party risks relating to cash balances held in excess of FDIC insurance limits. Many events beyond our control may determine whether results we anticipate will be achieved. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements. The Annual Report on Form 10-K that we filed with the Securities and Exchange Commission ("SEC") on February 26, 202125, 2022 lists various important factors that could cause actual results to differ materially from expected and historical results. These factors are intended as cautionary statements for investors within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. Readers can find them under the heading “Risk Factors” in the Report on Form 10-K, and investors should refer to them. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.
Except as required by law, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q, 8-K and 10-K reports to the SEC. Our filings with the SEC may be accessed at the SEC’s web site at www.sec.gov.
ii
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AXON ENTERPRISE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | | | | |
|
| June 30, | | December 31, | ||
| | 2021 | | 2020 | ||
| | (Unaudited) | | | | |
ASSETS |
| |
|
| |
|
Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 266,372 | | $ | 155,440 |
Short-term investments | |
| 388,895 | |
| 406,525 |
Accounts and notes receivable, net of allowance of $1,973 and $2,105 as of June 30, 2021 and December 31, 2020, respectively | |
| 201,907 | |
| 229,201 |
Contract assets, net | |
| 86,561 | |
| 63,945 |
Inventory | |
| 91,739 | |
| 89,958 |
Prepaid expenses and other current assets | |
| 45,456 | |
| 36,883 |
Total current assets | |
| 1,080,930 | |
| 981,952 |
Property and equipment, net | |
| 119,933 | |
| 105,494 |
Deferred tax assets, net | |
| 52,387 | |
| 45,770 |
Intangible assets, net | |
| 7,870 | |
| 9,448 |
Goodwill | |
| 25,178 | |
| 25,205 |
Long-term investments | |
| 48,669 | |
| 90,681 |
Long-term notes receivable, net of current portion | |
| 17,466 | |
| 22,457 |
Long-term contract assets, net | | | 31,691 | | | 20,099 |
Strategic investments | | | 58,520 | | | 11,711 |
Other assets | |
| 84,244 | |
| 68,206 |
Total assets | | $ | 1,526,888 | | $ | 1,381,023 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
|
| |
|
|
Current liabilities: | |
|
| |
|
|
Accounts payable | | $ | 7,778 | | $ | 24,142 |
Accrued liabilities | |
| 66,908 | |
| 59,843 |
Current portion of deferred revenue | |
| 186,909 | |
| 163,959 |
Customer deposits | |
| 4,872 | |
| 2,956 |
Other current liabilities | |
| 6,404 | |
| 5,431 |
Total current liabilities | |
| 272,871 | |
| 256,331 |
Deferred revenue, net of current portion | |
| 113,815 | |
| 111,222 |
Liability for unrecognized tax benefits | |
| 4,550 | |
| 4,503 |
Long-term deferred compensation | |
| 5,216 | |
| 4,732 |
Deferred tax liability, net | | | 377 | | | 649 |
Other long-term liabilities | |
| 32,360 | |
| 27,331 |
Total liabilities | |
| 429,189 | |
| 404,768 |
Commitments and contingencies (Note 12) | |
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|
Stockholders’ equity: | |
|
| |
|
|
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; 0 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | |
| — | |
| — |
Common stock, $0.00001 par value; 200,000,000 shares authorized; 65,674,346 and 63,766,555 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | |
| 1 | |
| 1 |
Additional paid-in capital | |
| 1,179,005 | |
| 962,159 |
Treasury stock at cost, 20,220,227 shares as of June 30, 2021 and December 31, 2020 | |
| (155,947) | |
| (155,947) |
Retained earnings | |
| 74,867 | |
| 169,901 |
Accumulated other comprehensive income (loss) | |
| (227) | |
| 141 |
Total stockholders’ equity | |
| 1,097,699 | |
| 976,255 |
Total liabilities and stockholders’ equity | | $ | 1,526,888 | | $ | 1,381,023 |
| | | | | | |
|
| March 31, | | December 31, | ||
| | 2022 | | 2021 | ||
| | (Unaudited) | | | | |
ASSETS |
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Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 386,367 | | $ | 356,332 |
Marketable securities | | | 57,600 | | | 72,180 |
Short-term investments | |
| 20,024 | |
| 14,510 |
Accounts and notes receivable, net of allowance of $2,424 and $2,203 as of March 31, 2022 and December 31, 2021, respectively | |
| 344,907 | |
| 320,819 |
Contract assets, net | |
| 147,861 | |
| 180,421 |
Inventory | |
| 122,150 | |
| 108,688 |
Prepaid expenses and other current assets | |
| 67,208 | |
| 56,540 |
Total current assets | |
| 1,146,117 | |
| 1,109,490 |
Property and equipment, net | |
| 149,505 | |
| 138,457 |
Deferred tax assets, net | |
| 108,840 | |
| 127,193 |
Intangible assets, net | |
| 14,399 | |
| 15,470 |
Goodwill | |
| 43,607 | |
| 43,592 |
Long-term investments | |
| 17,731 | |
| 31,232 |
Long-term notes receivable, net | |
| 10,184 | |
| 11,256 |
Long-term contract assets, net | | | 29,616 | | | 29,753 |
Strategic investments | | | 154,452 | | | 83,520 |
Other long-term assets | |
| 98,003 | |
| 98,247 |
Total assets | | $ | 1,772,454 | | $ | 1,688,210 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
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Current liabilities: | |
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Accounts payable | | $ | 49,348 | | $ | 32,220 |
Accrued liabilities | |
| 69,435 | |
| 103,707 |
Current portion of deferred revenue | |
| 326,627 | |
| 265,591 |
Customer deposits | |
| 18,411 | |
| 10,463 |
Other current liabilities | |
| 6,858 | |
| 6,540 |
Total current liabilities | |
| 470,679 | |
| 418,521 |
Deferred revenue, net of current portion | |
| 140,938 | |
| 185,721 |
Liability for unrecognized tax benefits | |
| 5,162 | |
| 3,797 |
Long-term deferred compensation | |
| 5,833 | |
| 5,679 |
Deferred tax liability, net | | | 348 | | | 811 |
Long-term lease liabilities | |
| 20,112 | |
| 20,440 |
Other long-term liabilities | |
| 4,593 | |
| 5,392 |
Total liabilities | |
| 647,665 | |
| 640,361 |
Commitments and contingencies (Note 13) | |
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Stockholders’ equity: | |
|
| |
|
|
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; 0 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | |
| — | |
| — |
Common stock, $0.00001 par value; 200,000,000 shares authorized; 70,996,658 and 70,896,856 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | |
| 1 | |
| 1 |
Additional paid-in capital | |
| 1,118,859 | |
| 1,095,229 |
Treasury stock at cost, 20,220,227 shares as of March 31, 2022 and December 31, 2021 | |
| (155,947) | |
| (155,947) |
Retained earnings | |
| 164,754 | |
| 109,883 |
Accumulated other comprehensive income (loss) | |
| (2,878) | |
| (1,317) |
Total stockholders’ equity | |
| 1,124,789 | |
| 1,047,849 |
Total liabilities and stockholders’ equity | | $ | 1,772,454 | | $ | 1,688,210 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
AXON ENTERPRISE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | ||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||||
Net sales from products | | $ | 156,427 | | $ | 98,755 | | $ | 297,313 | | $ | 206,043 | | $ | 176,204 | | $ | 140,886 |
Net sales from services | |
| 62,368 | |
| 42,504 | |
| 116,501 | |
| 82,378 | |
| 80,222 | |
| 54,133 |
Net sales | |
| 218,795 | |
| 141,259 | |
| 413,814 | |
| 288,421 | |
| 256,426 | |
| 195,019 |
Cost of product sales | |
| 65,301 | |
| 43,825 | |
| 123,917 | |
| 92,709 | |
| 79,352 | |
| 58,616 |
Cost of service sales | |
| 15,565 | |
| 9,257 | |
| 28,615 | |
| 18,927 | |
| 21,335 | |
| 13,050 |
Cost of sales | |
| 80,866 | |
| 53,082 | |
| 152,532 | |
| 111,636 | |
| 100,687 | |
| 71,666 |
Gross margin | |
| 137,929 | |
| 88,177 | |
| 261,282 | |
| 176,785 | |
| 155,739 | |
| 123,353 |
Operating expenses: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Sales, general and administrative | |
| 177,662 | |
| 72,293 | |
| 304,259 | |
| 135,320 | |
| 90,129 | |
| 126,597 |
Research and development | |
| 53,952 | |
| 29,560 | |
| 100,970 | |
| 55,941 | |
| 48,416 | |
| 47,018 |
Total operating expenses | |
| 231,614 | |
| 101,853 | |
| 405,229 | |
| 191,261 | |
| 138,545 | |
| 173,615 |
Loss from operations | |
| (93,685) | |
| (13,676) | |
| (143,947) | |
| (14,476) | ||||||
Income (loss) from operations | |
| 17,194 | |
| (50,262) | ||||||||||||
Interest and other income, net | |
| 41,841 | |
| 1,613 | |
| 42,426 | |
| 2,554 | |
| 55,299 | |
| 585 |
Loss before provision for income taxes | |
| (51,844) | |
| (12,063) | |
| (101,521) | |
| (11,922) | ||||||
Income (loss) before provision for income taxes | |
| 72,493 | |
| (49,677) | ||||||||||||
Provision for (benefit from) income taxes | |
| (4,727) | |
| 18,696 | |
| (6,487) | |
| 14,763 | |
| 17,622 | |
| (1,760) |
Net loss | | $ | (47,117) | | $ | (30,759) | | $ | (95,034) | | $ | (26,685) | ||||||
Net loss per common and common equivalent shares: | |
|
| |
|
| |
|
| |
|
| ||||||
Net income (loss) | | $ | 54,871 | | $ | (47,917) | ||||||||||||
Net income (loss) per common and common equivalent shares: | |
|
| |
|
| ||||||||||||
Basic | | $ | (0.72) | | $ | (0.51) | | $ | (1.47) | | $ | (0.44) | | $ | 0.77 | | $ | (0.75) |
Diluted | | $ | (0.72) | | $ | (0.51) | | $ | (1.47) | | $ | (0.44) | | $ | 0.76 | | $ | (0.75) |
Weighted average number of common and common equivalent shares outstanding: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Basic | |
| 65,166 | |
| 60,346 | |
| 64,604 | |
| 59,977 | |
| 70,950 | |
| 64,036 |
Diluted | |
| 65,166 | |
| 60,346 | |
| 64,604 | |
| 59,977 | |
| 72,349 | |
| 64,036 |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | | | | | | | | | | | | | | | | | | |
Net loss | | $ | (47,117) | | $ | (30,759) | | $ | (95,034) | | $ | (26,685) | ||||||
Net income (loss) | | $ | 54,871 | | $ | (47,917) | ||||||||||||
Foreign currency translation adjustments | |
| (369) | |
| 678 | |
| (368) | |
| (1,694) | |
| (1,072) | |
| 1 |
Comprehensive loss | | $ | (47,486) | | $ | (30,081) | | $ | (95,402) | | $ | (28,379) | ||||||
Unrealized gains (losses) on available-for-sale investments | | | (489) | | | — | ||||||||||||
Comprehensive income (loss) | | $ | 53,310 | | $ | (47,916) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
AXON ENTERPRISE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | |
| | |
| Accumulated |
| | |
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| | |
| | |
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| | |
| | |
| 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 | | Income (Loss) | | Equity | | Shares | | Amount | | Capital | | Shares | | Amount | | Earnings | | Loss | | Equity | ||||||||||||
Balance, December 31, 2020 |
| 63,766,555 | | $ | 1 | | $ | 962,159 |
| 20,220,227 | | $ | (155,947) | | $ | 169,901 | | $ | 141 | | $ | 976,255 | ||||||||||||||||||||||
Balance, December 31, 2021 |
| 70,896,856 | | $ | 1 | | $ | 1,095,229 |
| 20,220,227 | | $ | (155,947) | | $ | 109,883 | | $ | (1,317) | | $ | 1,047,849 | ||||||||||||||||||||||
Issuance of common stock | | — | | | — | | | (70) | | — | | | — | | | — | | | — | | | (70) | ||||||||||||||||||||||
Issuance of common stock under employee plans, net |
| 906,536 | | | — | | | (7,045) | | — | | | — | | | — | | | — | |
| (7,045) |
| 99,802 | | | — | | | (1,388) | | — | | | — | | | — | | | — | | | (1,388) |
Stock-based compensation |
| — | | | — | | | 89,610 | | — | | | — | | | — | | | — | |
| 89,610 |
| — | | | — | | | 25,088 | | — | | | — | | | — | | | — | | | 25,088 |
Net loss |
| — | | | — | | | — | | — | | | — | | | (47,917) | | | — | |
| (47,917) | ||||||||||||||||||||||
Foreign currency translation adjustments |
| — | | | — | | | — | | — | | | — | | | — | | | 1 | | | 1 | ||||||||||||||||||||||
Balance, March 31, 2021 |
| 64,673,091 | | $ | 1 | | $ | 1,044,724 |
| 20,220,227 | | $ | (155,947) | | $ | 121,984 | | $ | 142 | | $ | 1,010,904 | ||||||||||||||||||||||
Issuance of common stock under employee plans, net |
| 1,001,255 | |
| — | |
| (3,268) |
| — | |
| — | |
| — | |
| — | |
| (3,268) | ||||||||||||||||||||||
Stock-based compensation |
| — | |
| — | |
| 137,549 |
| — | |
| — | |
| — | |
| — | |
| 137,549 | ||||||||||||||||||||||
Net loss |
| — | |
| — | |
| — |
| — | |
| — | |
| (47,117) | |
| — | |
| (47,117) | ||||||||||||||||||||||
Foreign currency translation adjustments |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (369) | |
| (369) | ||||||||||||||||||||||
Balance, June 30, 2021 |
| 65,674,346 | | $ | 1 | | $ | 1,179,005 |
| 20,220,227 | | $ | (155,947) | | $ | 74,867 | | $ | (227) | | $ | 1,097,699 | ||||||||||||||||||||||
Net income |
| — | | | — | | | — | | — | | | — | | | 54,871 | | | — | | | 54,871 | ||||||||||||||||||||||
Other comprehensive loss, net |
| — | | | — | | | — | | — | | | — | | | — | | | (1,561) | | | (1,561) | ||||||||||||||||||||||
Balance, March 31, 2022 |
| 70,996,658 | | $ | 1 | | $ | 1,118,859 |
| 20,220,227 | | $ | (155,947) | | $ | 164,754 | | $ | (2,878) | | $ | 1,124,789 |
3
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| | ||||||||
| | | | | | | 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 | ||||||||||||||||||||||
Foreign currency translation adjustments |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (2,372) | |
| (2,372) | ||||||||||||||||||||||
Balance, March 31, 2020 |
| 59,813,163 | | $ | 1 | | $ | 543,305 |
| 20,220,227 | | $ | (155,947) | | $ | 175,699 | | $ | (3,468) | | $ | 559,590 | ||||||||||||||||||||||
Issuane 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 | |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — | ||||||||||||||||||||||
Net loss |
| — | |
| — | |
| — |
| — | |
| — | |
| (30,759) | |
| — | |
| (30,759) | | — | | | — | | — | | — | | — | | (47,917) | | | — | |
| (47,917) | |||
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 | ||||||||||||||||||||||
Other comprehensive income, net |
| — | | | — | | | — | | — | | | — | | | — | | | 1 | | | 1 | ||||||||||||||||||||||
Balance, March 31, 2021 |
| 64,673,091 | | $ | 1 | | $ | 1,044,724 |
| 20,220,227 | | $ | (155,947) | | $ | 121,984 | | $ | 142 | | $ | 1,010,904 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
43
AXON ENTERPRISE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | Three Months Ended March 31, | ||||||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
Cash flows from operating activities: |
| |
|
| |
|
| |
|
| |
|
Net loss | | $ | (95,034) | | $ | (26,685) | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||
Net income (loss) | | $ | 54,871 | | $ | (47,917) | ||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
|
| |
|
| ||||||
Depreciation and amortization | |
| 8,582 | |
| 5,811 | |
| 5,755 | |
| 4,291 |
Loss on disposal and abandonment of intangible assets | |
| 130 | |
| 113 | |
| 40 | |
| 11 |
Loss on disposal and impairment of property and equipment, net | |
| 43 | |
| 1,305 | |
| 106 | |
| 45 |
Realized and unrealized gains on strategic investments | | | (40,855) | | | — | ||||||
Net unrealized gain on strategic investments and marketable securities | | | (55,851) | | | — | ||||||
Stock-based compensation | |
| 227,159 | |
| 54,030 | |
| 25,088 | |
| 89,610 |
Deferred income taxes | |
| (6,889) | |
| (6,152) | |
| 18,029 | |
| (598) |
Unrecognized tax benefits | |
| 47 | |
| 612 | |
| 1,365 | |
| 194 |
Other noncash, net | |
| 5,760 | |
| 2,596 | ||||||
Bond amortization | | | 159 | |
| 1,504 | ||||||
Noncash lease expense | |
| 1,556 | |
| 1,111 | ||||||
Provision for expected credit losses | | | 62 | | | 658 | | | 228 | | | (335) |
Change in assets and liabilities: | |
| | |
| | |
| | |
| |
Accounts and notes receivable and contract assets | |
| (3,988) | |
| (9,375) | |
| 7,495 | |
| 31,298 |
Inventory | |
| (1,848) | |
| (43,271) | |
| (14,260) | |
| 520 |
Prepaid expenses and other assets | |
| (13,320) | |
| (8,551) | |
| (7,074) | |
| (6,952) |
Accounts payable, accrued and other liabilities | |
| (10,381) | |
| 16,708 | |
| (9,580) | |
| (18,062) |
Deferred revenue | |
| 25,647 | |
| 5,224 | |
| 16,037 | |
| 6,219 |
Net cash provided by (used in) operating activities | |
| 95,115 | |
| (6,977) | ||||||
Net cash provided by operating activities | |
| 43,964 | |
| 60,939 | ||||||
Cash flows from investing activities: | |
|
| |
|
| |
|
| |
|
|
Purchases of investments | |
| (238,288) | |
| (292,597) | |
| — | |
| (155,825) |
Proceeds from call / maturity of investments | |
| 294,814 | |
| 158,670 | |
| 7,200 | |
| 132,254 |
Proceeds from sale of strategic investments | | | 14,546 | | | — | ||||||
Purchases of property and equipment | |
| (24,031) | |
| (7,551) | |
| (17,098) | |
| (10,521) |
Proceeds from disposal of property and equipment | | | 48 | | | 78 | | | 87 | | | 10 |
Purchases of intangible assets | |
| (143) | |
| (111) | |
| (37) | |
| (41) |
Strategic investments | |
| (20,500) | |
| (4,700) | |
| (500) | |
| (20,000) |
Net cash provided by (used in) investing activities | |
| 26,446 | |
| (146,211) | ||||||
Net cash used in investing activities | |
| (10,348) | |
| (54,123) | ||||||
Cash flows from financing activities: | |
|
| |
|
| |
|
| |
|
|
Net proceeds from equity offering | |
| 0 | |
| 306,779 | | | (71) | |
| — |
Proceeds from options exercised | |
| 0 | |
| 295 | ||||||
Income and payroll tax payments for net-settled stock awards | |
| (10,312) | |
| (5,767) | |
| (1,388) | |
| (7,045) |
Net cash provided by (used in) financing activities | |
| (10,312) | |
| 301,307 | ||||||
Net cash used in financing activities | |
| (1,459) | |
| (7,045) | ||||||
Effect of exchange rate changes on cash and cash equivalents | |
| (319) | |
| (1,115) | |
| (157) | |
| (392) |
Net increase in cash and cash equivalents | |
| 110,930 | |
| 147,004 | ||||||
Net increase (decrease) in cash and cash equivalents | |
| 32,000 | |
| (621) | ||||||
Cash and cash equivalents and restricted cash, beginning of period | |
| 155,551 | |
| 172,355 | |
| 356,438 | |
| 155,551 |
Cash and cash equivalents and restricted cash, end of period | | $ | 266,481 | | $ | 319,359 | | $ | 388,438 | | $ | 154,930 |
| | | | | | | | | | | | |
Supplemental disclosures: | |
|
| |
|
| |
|
| |
|
|
Cash and cash equivalents | | $ | 266,372 | | $ | 319,253 | | $ | 386,367 | | $ | 154,822 |
Restricted cash (Note 1) | |
| 109 | |
| 106 | |
| 2,071 | |
| 108 |
Total cash, cash equivalents and restricted cash shown in the statements of cash flows | | $ | 266,481 | | $ | 319,359 | | $ | 388,438 | | $ | 154,930 |
| | | | | | | | | | | | |
Cash paid for income taxes, net of refunds | | $ | 5,295 | | $ | 6,327 | | $ | 334 | | $ | 4,152 |
| | | | | | | | | | | | |
Non-cash transactions | |
|
| |
|
| |
|
| |
|
|
Property and equipment purchases in accounts payable and accrued liabilities | | $ | 571 | | $ | 430 | | $ | 888 | | $ | 517 |
Investment purchases in accounts payable, net | | $ | 0 | | $ | 10,400 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
54
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.Note 1 - Organization and Summary of Significant Accounting Policies
Axon Enterprise, Inc. (“Axon,” the “Company,” "we," or "us") is a market-leading provider of law enforcement technology solutions. Our core mission is to protect life. We fulfill that mission through developing hardware and software products that advance the long term objectives of a) obsoleting the bullet, b) reducing social conflict, and c) enabling a fair and effective justice system.
Our headquarters in Scottsdale, Arizona houses our executive management, sales, marketing, certain engineering, manufacturing, finance and other administrative support functions. Our global software hub is located in Seattle, Washington, and we also have subsidiaries and / or offices located in Australia, Canada, Finland, France, Germany, Hong Kong, India, Italy, the Netherlands, the United Kingdom, and Vietnam.
The accompanying unaudited condensed consolidated financial statements include the accounts of Axon Enterprise, Inc. and our 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, 2020,2021, as filed on Form 10-K, with the exception of our adoption of certain accounting pronouncements which we describe below. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with our Form 10-K for the year ended December 31, 2020.2021. The results of operations for the three months and six months ended June 30, 2021March 31, 2022 are not necessarily indicative of the results to be expected for the full year (or any other period). Significant estimates and assumptions in these unaudited condensed consolidated financial statements include:
● | product warranty reserves, |
● | inventory valuation, |
● | revenue recognition, |
● | reserve for expected credit loss, |
● | valuation of goodwill, intangible and long-lived assets, |
● | valuation of strategic investments, |
● | recognition, measurement and valuation of current and deferred income taxes, |
● | stock-based compensation, and |
● | recognition and measurement of contingencies and accrued litigation expense. |
Actual results could differ materially from those estimates.
Segment Information
Our operations are comprised of 2 reportable segments: the manufacture and sale of conducted electrical devices ("CEDs"), batteries, accessories, extended warranties and other products and services (the “TASER” segment); and the development, manufacture, and sale of software and sensors, which includes the sale of devices, wearables, applications, cloud and mobile products, and services (collectively, the “Software and Sensors” segment). In both segments, we report sales of products and services. Service revenue in both segments includes sales related to Axon
65
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 14.16.
Geographic Information and Major Customers / Suppliers
For the three and six months ended June 30, 2021,March 31, 2022, 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 six months ended June 30, 2021,March 31, 2022, 0 customer represented more than 10% of total net sales. At June 30, 2021March 31, 2022 and December 31, 2020,2021, 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., Canada, China, Israel, Republic of Korea, Malaysia, Mexico, Sri Lanka,Taiwan, and Taiwan.Vietnam. We may source from other countries as well. Although we currently obtain many of these components from single source suppliers, we own the injection molded component tooling, most of the designs, and the test fixtures used in their production for all custom components. As a result, we believe we could obtain alternative suppliers in most cases without incurring significant production delays.cases. Although we have experienced supply chain disruptions relating to materials and port constraints, we have remained focused on closely managing our supply chain. We also strategically hold safety stock levels on custom componentscontinue to further reduce this risk. For off the shelf components, we believe thatbolster our strategic relationships in most cases there are readily available alternative suppliers who can consistently meet our needs for these components.supply chain, identifying secondary/alternate sourcing, adjusting build plans accordingly, and building in logistic modes in support of our increasing demand while working to minimize disruption to customers. We acquire most of our components on a purchase order basis and do not currently have any significant long-term purchase contracts with most component suppliers.
Income per Common Share
Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. Diluted income per share reflects the potential dilution from outstanding stock options and unvested restricted stock units. The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | ||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||||
Numerator for basic and diluted earnings per share: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Net loss | | $ | (47,117) | | $ | (30,759) | | $ | (95,034) | | $ | (26,685) | ||||||
Net income (loss) | | $ | 54,871 | | $ | (47,917) | ||||||||||||
Denominator: | |
|
| |
|
| |
|
| |
| | |
|
| |
|
|
Weighted average shares outstanding | |
| 65,166 | |
| 60,346 | |
| 64,604 | |
| 59,977 | |
| 70,950 | |
| 64,036 |
Dilutive effect of stock-based awards | |
| — | |
| — | |
| — | |
| — | |
| 1,399 | |
| — |
Diluted weighted average shares outstanding | |
| 65,166 | |
| 60,346 | |
| 64,604 | |
| 59,977 | |
| 72,349 | |
| 64,036 |
Anti-dilutive stock-based awards excluded | |
| 10,537 | |
| 12,773 | |
| 8,950 | |
| 12,866 | |
| 2,942 | |
| 12,234 |
Net loss per common share: | |
| | |
|
| |
|
| |
|
| ||||||
Net income (loss) per common share: | |
| | |
| | ||||||||||||
Basic | | $ | (0.72) | | $ | (0.51) | | $ | (1.47) | | $ | (0.44) | | $ | 0.77 | | $ | (0.75) |
Diluted | | $ | (0.72) | | $ | (0.51) | | $ | (1.47) | | $ | (0.44) | | $ | 0.76 | | $ | (0.75) |
76
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Standard Warranties
We warranty our CEDs, Axon cameras and certain related accessories from manufacturing defects on a limited basis for a period of one year after purchase and, thereafter, will repair or replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold when revenue is recorded for the related product. Future warranty costs are estimated based on historical data related to warranty claims and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure or other issue that could result in larger than anticipated warranty claims from customers. The warranty reserve is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. The warranty reserve is included in accrued liabilities on the accompanying condensed consolidated balance sheets.
Changes in our estimated product warranty liabilities were as follows (in thousands):
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | Three Months Ended March 31, | ||||||||
|
| 2021 | | 2020 |
| 2022 | | 2021 | ||||
Balance, beginning of period | | $ | 769 | | $ | 1,476 | | $ | 2,822 | | $ | 769 |
Utilization of reserve | |
| (481) | |
| (350) | |
| (1,434) | |
| (231) |
Warranty expense (benefit) | |
| 613 | |
| (114) | ||||||
Warranty expense | |
| 116 | |
| 406 | ||||||
Balance, end of period | | $ | 901 | | $ | 1,012 | | $ | 1,504 | | $ | 944 |
Fair Value Measurements and Financial Instruments
We use the fair value framework that prioritizes the inputs to valuation techniques for measuring financial assets and liabilities measured on a recurring basis and for non-financial assets and liabilities when these items are re-measured. Fair value is considered to be the exchange price in an orderly transaction between market participants, to sell an asset or transfer a liability at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
● | Level 1 – Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured. |
● | Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques. |
● | Level 3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect our own assumptions about inputs that market participants would use in pricing an asset or liability. |
We have cash equivalents and investments, which at June 30, 2021March 31, 2022 and December 31, 20202021 were comprised of money market funds, certificates of deposit, commercial paper, corporate bonds, municipal bonds, and U.S. Government agency bonds, and U.S. Treasury bills. Also included in cash equivalents and investments at December 31, 2020 were U.S. Treasury repurchase agreements and U.S. Treasury inflation-protected securities.bonds. See additional disclosure regarding the fair value of our cash equivalents and investments in Note 3. Included in the balance of other assets as of June 30, 2021March 31, 2022 and December 31, 20202021 was $5.1$4.9 million and $4.7$5.3 million, respectively, related to corporate-owned life insurance policies
8
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.
7
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We have an investment in marketable securities, for which changes in fair value are recorded in the condensed consolidated statement of operations as unrealized gain or (loss) on marketable securities, which is included in interest and other income, net.
We have strategic investments in 34 unconsolidated affiliates which are included within other assets.as of March 31, 2022. The estimated fair value of the investments was determined based on Level 3 inputs. As of June 30, 2021,March 31, 2022, management estimated that the fair value of the investments equaled the carrying value.
Our financial instruments also include accounts and notes receivable, accounts payable and accrued liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the condensed consolidated balance sheet.
Restricted Cash
Restricted cash balances as of June 30, 2021March 31, 2022 were $2.1 million primarily related to funds held in an international bank account securing a guarantee and funds held in an international bank account for a country in which we are required to maintain a minimum balance to operate. Approximately $2.0 million was included in prepaid expenses and other current assets on our condensed consolidated balance sheet, with the remainder included in other assets. Restricted cash balances as of December 31, 20202021 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,sheet, with the remainder included in other assets.
Valuation of Goodwill, Intangibles and Long-lived Assets
We evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and identifiable intangible assets, excluding goodwill and intangible assets with indefinite useful lives, may warrant revision or that the remaining balance of these assets may not be recoverable. Such circumstances could include, but are not limited to, a change in the product mix, a change in the way products are created, produced or delivered, or a significant change in the way products are branded and marketed. In performing the review for recoverability, we estimate the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair value computed using discounted cash flows.
We do not amortize goodwill and intangible assets with indefinite useful lives; rather such assets are required to be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that the assets may be impaired. We perform our annual goodwill and intangible asset impairment tests in the fourth quarter of each year.
Recently Issued Accounting Guidance
Recently Adopted Accounting Pronouncements
In December 2019,November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, SimplifyingNo. 2021-10, Government Assistance (Topic 832). The guidance improves the Accountingtransparency of government assistance accounting as it requires business entities to disclose transactions that involve government assistance received if the transactions were accounted for Income Taxes.by applying a grant or contribution accounting model by analogy. The ASU is effective for annual periods beginning after December 15, 2021. We adopted ASU 2021-10 on January 1, 2022 and will apply the disclosure requirement prospectively to all transactions within the scope of the amendments that are reflected in the financial statements at the date of the initial application along with new transactions that are entered into after the date of initial application. Adoption of this ASU on January 1, 2021 did not 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
98
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. Adoption of this ASU on January 1, 2021 did not have a material impact on our consolidated financial statements.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications are not material and had no effect on the reported results of operations.
2.Note 2 - Revenues
Nature of Products and Services
The following tables present our revenues by primary product and service offering (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2021 | | Three Months Ended June 30, 2020 | ||||||||||||||
|
| | |
| Software and |
| | |
| | |
| Software and |
| | | ||
| | TASER | | Sensors | | Total | | TASER | | Sensors | | Total | ||||||
TASER 7 | | $ | 28,128 | | | — | | $ | 28,128 | | $ | 11,588 | | $ | 0 | | $ | 11,588 |
TASER X26P | |
| 9,569 | | | — | |
| 9,569 | |
| 9,511 | |
| 0 | |
| 9,511 |
TASER X2 | |
| 16,145 | | | — | |
| 16,145 | |
| 16,832 | |
| 0 | |
| 16,832 |
TASER Pulse | |
| 1,701 | | | — | |
| 1,701 | |
| 2,193 | |
| 0 | |
| 2,193 |
Cartridges | |
| 46,678 | | | — | |
| 46,678 | |
| 23,772 | |
| 0 | |
| 23,772 |
Axon Body | |
| — | | | 19,927 | |
| 19,927 | |
| 0 | |
| 11,844 | |
| 11,844 |
Axon Flex | |
| — | | | 1,088 | |
| 1,088 | |
| 0 | |
| 680 | |
| 680 |
Axon Fleet | |
| — | | | 5,247 | |
| 5,247 | |
| 0 | |
| 4,098 | |
| 4,098 |
Axon Dock | |
| — | | | 5,509 | |
| 5,509 | |
| — | |
| 4,055 | |
| 4,055 |
Axon Evidence and cloud services | |
| 1,702 | | | 60,367 | |
| 62,069 | |
| 586 | |
| 41,891 | |
| 42,477 |
Extended warranties | |
| 5,857 | | | 8,149 | |
| 14,006 | |
| 5,098 | |
| 5,735 | |
| 10,833 |
Other | |
| 2,748 | | | 5,980 | |
| 8,728 | |
| 910 | |
| 2,466 | |
| 3,376 |
Total | | $ | 112,528 | | $ | 106,267 | | $ | 218,795 | | $ | 70,490 | | $ | 70,769 | | $ | 141,259 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2021 | | Six Months Ended June 30, 2020 | | Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||
|
| | |
| Software and |
| | |
| | |
| Software and |
| | |
| | |
| Software and |
| | |
| | |
| Software and |
| | | ||||
| | TASER | | Sensors | | Total | | TASER | | Sensors | | Total | | TASER | | Sensors | | Total | | TASER | | Sensors | | Total | ||||||||||||
TASER 7 | | $ | 62,119 | | | — | | $ | 62,119 | | $ | 26,914 | | $ | — | | $ | 26,914 | | $ | 50,066 | | $ | — | | $ | 50,066 | | $ | 33,991 | | $ | — | | $ | 33,991 |
TASER X26P | |
| 19,532 | | | — | |
| 19,532 | |
| 20,572 | |
| — | |
| 20,572 | |
| 9,479 | |
| — | |
| 9,479 | |
| 9,963 | |
| — | |
| 9,963 |
TASER X2 | |
| 28,923 | | | — | |
| 28,923 | |
| 30,907 | |
| — | |
| 30,907 | |
| 3,619 | |
| — | |
| 3,619 | |
| 12,778 | |
| — | |
| 12,778 |
TASER Pulse | |
| 3,906 | | | — | |
| 3,906 | |
| 3,393 | |
| — | |
| 3,393 | ||||||||||||||||||
TASER Consumer devices | |
| 1,696 | |
| — | |
| 1,696 | |
| 2,205 | |
| — | |
| 2,205 | ||||||||||||||||||
Cartridges | |
| 77,096 | | | — | |
| 77,096 | |
| 50,397 | |
| — | |
| 50,397 | |
| 37,825 | |
| — | |
| 37,825 | |
| 30,418 | |
| — | |
| 30,418 |
Axon Body | |
| — | | | 39,683 | |
| 39,683 | |
| — | |
| 24,667 | |
| 24,667 | |
| — | |
| 29,708 | |
| 29,708 | |
| — | |
| 19,756 | |
| 19,756 |
Axon Flex | |
| — | | | 1,993 | |
| 1,993 | |
| — | |
| 1,863 | |
| 1,863 | |
| — | |
| 1,329 | |
| 1,329 | |
| — | |
| 905 | |
| 905 |
Axon Fleet | |
| — | | | 9,010 | |
| 9,010 | |
| — | |
| 8,873 | |
| 8,873 | |
| — | |
| 13,820 | |
| 13,820 | |
| — | |
| 3,763 | |
| 3,763 |
Axon Dock | |
| — | | | 12,429 | |
| 12,429 | |
| — | |
| 9,006 | |
| 9,006 | |
| — | |
| 7,480 | |
| 7,480 | |
| — | |
| 6,920 | |
| 6,920 |
Axon Evidence and cloud services | |
| 3,098 | | | 112,661 | |
| 115,759 | |
| 1,084 | |
| 81,045 | |
| 82,129 | |
| 3,017 | |
| 79,939 | |
| 82,956 | |
| 1,396 | |
| 52,294 | |
| 53,690 |
Extended warranties | |
| 11,503 | | | 15,649 | |
| 27,152 | |
| 10,075 | |
| 11,193 | |
| 21,268 | |
| 6,679 | |
| 9,061 | |
| 15,740 | |
| 5,646 | |
| 7,500 | |
| 13,146 |
Other | |
| 5,350 | | | 10,862 | |
| 16,212 | |
| 3,043 | |
| 5,389 | |
| 8,432 | |
| 1,979 | |
| 729 | |
| 2,708 | |
| 2,602 | |
| 4,882 | |
| 7,484 |
Total | | $ | 211,527 | | $ | 202,287 | | $ | 413,814 | | $ | 146,385 | | $ | 142,036 | | $ | 288,421 | | $ | 114,360 | | $ | 142,066 | | $ | 256,426 | | $ | 98,999 | | $ | 96,020 | | $ | 195,019 |
The following table presents our revenues disaggregated by geography (in thousands):
| | | | | | | | | | | | |
| | Three Months Ended March 31, | | |||||||||
| | 2022 | | | 2021 | | ||||||
United States |
| $ | 214,214 |
| 84 | % | | $ | 160,386 |
| 82 | % |
Other countries | |
| 42,212 |
| 16 | | |
| 34,633 |
| 18 | |
Total | | $ | 256,426 |
| 100 | % | | $ | 195,019 |
| 100 | % |
Contract Balances
The following table presents our contract assets, contract liabilities and certain information related to these balances as of and for the three months ended March 31, 2022 (in thousands):
| | | |
|
| March 31, 2022 | |
Contract assets, net | | $ | 177,477 |
Contract liabilities (deferred revenue) | |
| 467,565 |
Revenue recognized in the period from: | |
|
|
Amounts included in contract liabilities at the beginning of the period | |
| 104,043 |
9
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Contract liabilities (deferred revenue) consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 | ||||||||||||||
|
| Current |
| Long-Term |
| Total |
| Current |
| Long-Term |
| Total | ||||||
Warranty: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
TASER | | $ | 27,476 | | $ | 1,401 | | $ | 28,877 | | $ | 21,257 | | $ | 4,766 | | $ | 26,023 |
Software and Sensors | |
| 21,736 | |
| 15,621 | |
| 37,357 | |
| 23,175 | |
| 18,137 | |
| 41,312 |
| |
| 49,212 | |
| 17,022 | |
| 66,234 | |
| 44,432 | |
| 22,903 | |
| 67,335 |
Hardware: | |
|
| | �� |
| |
|
| |
|
| |
|
| |
|
|
TASER | |
| 38,828 | |
| 3,618 | |
| 42,446 | |
| 12,944 | |
| 28,727 | |
| 41,671 |
Software and Sensors | |
| 50,151 | |
| 71,408 | |
| 121,559 | |
| 34,862 | |
| 81,223 | |
| 116,085 |
| |
| 88,979 | |
| 75,026 | |
| 164,005 | |
| 47,806 | |
| 109,950 | |
| 157,756 |
Services: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
TASER | |
| 4,309 | |
| 2,066 | |
| 6,375 | |
| 2,701 | |
| 3,482 | |
| 6,183 |
Software and Sensors | |
| 184,127 | |
| 46,824 | |
| 230,951 | |
| 170,652 | |
| 49,386 | |
| 220,038 |
| | | 188,436 | | | 48,890 | | | 237,326 | | | 173,353 | | | 52,868 | | | 226,221 |
Total | | $ | 326,627 | | $ | 140,938 | | $ | 467,565 | | $ | 265,591 | | $ | 185,721 | | $ | 451,312 |
| | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 | ||||||||||||||
|
| Current |
| Long-Term |
| Total |
| Current |
| Long-Term |
| Total | ||||||
TASER | | $ | 70,613 | | $ | 7,085 | | $ | 77,698 | | $ | 36,902 | | $ | 36,975 | | $ | 73,877 |
Software and Sensors | |
| 256,014 | |
| 133,853 | |
| 389,867 | |
| 228,689 | |
| 148,746 | |
| 377,435 |
Total | | $ | 326,627 | | $ | 140,938 | | $ | 467,565 | | $ | 265,591 | | $ | 185,721 | | $ | 451,312 |
Remaining Performance Obligations
As of March 31, 2022, we had approximately $2.97 billion of remaining performance obligations, which included both recognized contract liabilities as well as amounts that will be invoiced and recognized in future periods. The remaining performance obligations are limited only to arrangements that meet the definition of a contract under Topic 606 as of March 31, 2022. We expect to recognize between 15% - 20% of this balance over the next twelve months, and generally expect the remainder to be recognized over the following five to seven years, subject to risks related to delayed deployments, budget appropriation or other contract cancellation clauses.
10
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents our revenues disaggregated by geography (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Six Months Ended June 30, |
| |||||||||||||||||
| | 2021 | | | 2020 | | | 2021 | | 2020 |
| ||||||||||||
United States |
| $ | 164,908 |
| 75 | % | | $ | 107,547 |
| 76 | % | | $ | 325,294 |
| 79 | % | $ | 225,010 |
| 78 | % |
Other countries | |
| 53,887 |
| 25 | | |
| 33,712 |
| 24 | | |
| 88,520 |
| 21 | |
| 63,411 |
| 22 | |
Total | | $ | 218,795 |
| 100 | % | | $ | 141,259 |
| 100 | % | | $ | 413,814 |
| 100 | % | $ | 288,421 |
| 100 | % |
Contract Balances
The following table presents our contract assets, contract liabilities and certain information related to these balances as of and for the six months ended June 30, 2021 (in thousands):
| | | |
|
| June 30, 2021 | |
Contract assets, net | | $ | 118,252 |
Contract liabilities (deferred revenue) | |
| 300,724 |
Revenue recognized in the period from: | |
|
|
Amounts included in contract liabilities at the beginning of the period | |
| 111,375 |
Contract liabilities (deferred revenue) consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 | ||||||||||||||
|
| Current |
| Long-Term |
| Total |
| Current |
| Long-Term |
| Total | ||||||
Warranty: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
TASER | | $ | 12,467 | | $ | 16,937 | | $ | 29,404 | | $ | 11,635 | | $ | 16,953 | | $ | 28,588 |
Software and Sensors | |
| 14,606 | |
| 5,493 | |
| 20,099 | |
| 13,926 | |
| 5,025 | |
| 18,951 |
| |
| 27,073 | |
| 22,430 | |
| 49,503 | |
| 25,561 | |
| 21,978 | |
| 47,539 |
Hardware: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
TASER | |
| 22,408 | |
| 11,498 | |
| 33,906 | |
| 16,314 | |
| 14,304 | |
| 30,618 |
Software and Sensors | |
| 30,033 | |
| 50,081 | |
| 80,114 | |
| 25,181 | |
| 50,981 | |
| 76,162 |
| |
| 52,441 | |
| 61,579 | |
| 114,020 | |
| 41,495 | |
| 65,285 | |
| 106,780 |
Services: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
TASER | |
| 1,200 | |
| 3,455 | |
| 4,655 | |
| 996 | |
| 1,554 | |
| 2,550 |
Software and Sensors | |
| 106,195 | |
| 26,351 | |
| 132,546 | |
| 95,907 | |
| 22,405 | |
| 118,312 |
| | | 107,395 | | | 29,806 | | | 137,201 | | | 96,903 | | | 23,959 | | | 120,862 |
Total | | $ | 186,909 | | $ | 113,815 | | $ | 300,724 | | $ | 163,959 | | $ | 111,222 | | $ | 275,181 |
| | | | | | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 | ||||||||||||||
|
| Current |
| Long-Term |
| Total |
| Current |
| Long-Term |
| Total | ||||||
TASER | | $ | 36,075 | | $ | 31,890 | | $ | 67,965 | | $ | 28,945 | | $ | 32,811 | | $ | 61,756 |
Software and Sensors | |
| 150,834 | |
| 81,925 | |
| 232,759 | |
| 135,014 | |
| 78,411 | |
| 213,425 |
Total | | $ | 186,909 | | $ | 113,815 | | $ | 300,724 | | $ | 163,959 | | $ | 111,222 | | $ | 275,181 |
Remaining Performance Obligations
As of June 30, 2021, we had approximately $2.04 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 June 30, 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.
11
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
3.Note 3 - Cash, Cash Equivalents and Investments
The following tables summarize our cash, cash equivalents, marketable securities, and held-to-maturityavailable-for-sale investments at June 30, 2021March 31, 2022 and December 31, 20202021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of June 30, 2021 | | As of March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||
|
| | |
| Gross |
| Gross |
| | |
|
| Cash and |
| | |
| | |
| | |
| Gross |
| Gross |
| | |
|
| Cash and |
| | |
| | |
| | | ||||||
| | Amortized | | Unrealized | | Unrealized | | | | | | Cash | | Short-Term | | Long-Term | | Amortized | | Unrealized | | Unrealized | | | |
| | Cash | | Marketable | | Short-Term | | Long-Term | |||||||||||||
| | Cost | | Gains | | Losses | | Fair Value | | | Equivalents | | Investments | | Investments | | Cost | | Gains | | Losses | | Fair Value |
| | Equivalents | | Securities | | Investments | | Investments | |||||||||||||||
Cash | | $ | 199,426 | | $ | — | | $ | — | | $ | 199,426 | | | $ | 199,426 | | $ | — | | $ | — | | $ | 376,031 | | $ | — | | $ | — | | $ | 376,031 | | | $ | 376,031 | | $ | — | | $ | — | | $ | — |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Level 1: | |
|
| |
|
| |
|
| |
|
| | |
|
| |
|
| |
|
| |
|
| | | | |
|
| |
|
| | |
|
| |
|
| |
|
| | |
|
Money market funds | |
| 48,052 | |
| — | |
| — | |
| 48,052 | | |
| 48,052 | |
| — | |
| — | |
| 10,336 | | | — | |
| — | |
| 10,336 | | |
| 10,336 | |
| — | |
| — | | | — |
Agency bonds | |
| 73,669 | |
| 74 | |
| — | |
| 73,743 | | |
| 5,500 | |
| 60,169 | |
| 8,000 | |
| 4,700 | | | 1 | |
| — | |
| 4,701 | | |
| — | |
| — | |
| 4,701 | | | — |
Treasury bills | | | 96,795 | | | 2 | | | (1) | | | 96,796 | | | | 12,600 | | | 84,195 | | | — | |||||||||||||||||||||||||
Marketable securities | | | 90,000 | | | — | | | (32,400) | | | 57,600 | | |
| — | |
| 57,600 | |
| — | | | — | ||||||||||||||||||||||
Subtotal | |
| 218,516 | |
| 76 | |
| (1) | |
| 218,591 | | |
| 66,152 | |
| 144,364 | |
| 8,000 | |
| 105,036 | | | 1 | |
| (32,400) | |
| 72,637 | | | | 10,336 | | | 57,600 | | | 4,701 | | | — |
| | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||
Level 2: | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
State and municipal obligations | |
| 101,610 | | | 14 | | | (27) | | | 101,597 | | | | 801 | | | 87,596 | | | 13,213 | | | 2,550 | | | — | | | (30) | | | 2,520 | | | | — | | | — | | | 1,759 | | | 761 |
Certificates of deposit | | | 500 | | | — | | | — | | | 500 | | | | — | | | 500 | | | — | |||||||||||||||||||||||||
Corporate bonds | | | 150,082 | | | 105 | | | (32) | | | 150,155 | | | | — | | | 122,607 | | | 27,475 | | | 31,409 | | | — | | | (875) | | | 30,534 | | | | — | | | — | | | 13,564 | | | 16,970 |
Commercial paper | |
| 33,983 | | | — | | | — | | | 33,983 | | | | — | | | 33,983 | | | — | |||||||||||||||||||||||||
Subtotal | |
| 286,175 | | | 119 | | | (59) | | | 286,235 | | | | 801 | | | 244,686 | | | 40,688 | | | 33,959 | | | — | | | (905) | | | 33,054 | | | | — | | | — | | | 15,323 | | | 17,731 |
Total | | $ | 704,117 | | $ | 195 | | $ | (60) | | $ | 704,252 | | | | 266,379 | | | 389,050 | | | 48,688 | | $ | 515,026 | | $ | 1 | | $ | (33,305) | | $ | 481,722 | | | $ | 386,367 | | $ | 57,600 | | $ | 20,024 | | $ | 17,731 |
Expected credit loss reserve | | | | | | | | | | | | | | | | (7) | | | (155) | | | (19) | |||||||||||||||||||||||||
Total, net of reserve for expected credit losses | | | | | | | | | | | | | | | $ | 266,372 | | $ | 388,895 | | $ | 48,669 |
During the year ended December 31, 2021, we acquired 9,000,000 shares of common stock of Cellebrite DI Ltd (“CLBT”) with a fair value of $90.0 million. The CLBT common stock is recorded as marketable securities in the accompanying condensed consolidated balance sheets and its fair value is adjusted every reporting period. Changes in fair value are recorded in the condensed consolidated statement of operations as unrealized gain or (loss) on marketable securities, which is included in interest and other income, net. During the three months ended March 31, 2022, we recorded a $14.6 million unrealized loss on marketable securities relating to CLBT.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 | |||||||||||||||||||||||
|
| | |
| Gross |
| Gross |
| | |
|
| Cash and |
| | |
| | |
| | | |||
| | Amortized | | Unrealized | | Unrealized | | | |
| | Cash | | Marketable | | Short-Term | | Long-Term | |||||||
| | Cost | | Gains | | Losses | | Fair Value |
| | Equivalents | | Securities | | Investments | | Investments | ||||||||
Cash | | $ | 353,488 | | $ | — | | $ | — | | $ | 353,488 | | | $ | 353,488 | | $ | — | | $ | — | | $ | — |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Level 1: | |
|
| | | | |
|
| |
|
| | |
|
| |
|
| |
|
| | |
|
Money market funds | |
| 2,844 | | | — | |
| — | |
| 2,844 | | |
| 2,844 | |
| — | |
| — | | | — |
Agency bonds | |
| 10,700 | | | 4 | |
| — | |
| 10,704 | | |
| — | |
| — | |
| 10,704 | | | — |
Marketable securities | | | 90,000 | | | — | | | (17,820) | | | 72,180 | | |
| — | |
| 72,180 | |
| — | | | — |
Subtotal | |
| 103,544 | | | 4 | |
| (17,820) | |
| 85,728 | | | | 2,844 | | | 72,180 | | | 10,704 | | | — |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Level 2: | | | | | | | | | | | | | | | | | | | | | | | | | |
State and municipal obligations | | | 2,570 | | | — | | | (5) | | | 2,565 | | | | — | | | — | | | 1,400 | | | 1,165 |
Corporate bonds | | | 32,748 | | | 1 | | | (276) | | | 32,473 | | | | — | | | — | | | 2,406 | | | 30,067 |
Subtotal | | | 35,318 | | | 1 | | | (281) | | | 35,038 | | | | — | | | — | | | 3,806 | | | 31,232 |
Total | | $ | 492,350 | | $ | 5 | | $ | (18,101) | | $ | 474,254 | | | $ | 356,332 | | $ | 72,180 | | $ | 14,510 | | $ | 31,232 |
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 each of June 30, 2021 and December 31, 2020, our credit loss reserve for held-to-maturity investments was approximately $0.2 million.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | $ | — | | $ | — | | $ | 116,107 | | | $ | 116,107 | | $ | — | | $ | — |
| | | | | | | | | | | | | | | | | | | | | | |
Level 1: | |
|
| |
|
| |
|
| |
|
| | |
|
| |
|
| |
|
|
Money market funds | |
| 23,611 | |
| — | |
| — | |
| 23,611 | | |
| 23,611 | |
| — | |
| — |
Agency bonds | |
| 63,794 | |
| 122 | |
| — | |
| 63,916 | | |
| — | |
| 23,794 | |
| 40,000 |
Treasury Bills | | | 96,384 | | | 6 | | | — | | | 96,390 | | | | | | | 96,384 | | | |
Subtotal | |
| 183,789 | |
| 128 | |
| — | |
| 183,917 | | |
| 23,611 | |
| 120,178 | |
| 40,000 |
| | | | | | | | | | | | | | | | | | | | | | |
Level 2: | | | | | | | | | | | | | | | | | | | | | | |
State and municipal obligations | | | 77,130 | | | 25 | | | (28) | | | 77,127 | | | | — | | | 66,519 | | | 10,611 |
Certificates of deposit | | | 500 | | | — | | | — | | | 500 | | | | — | | | 500 | | | — |
Corporate bonds | | | 212,825 | | | 232 | | | (100) | | | 212,957 | | | | 2,525 | | | 170,205 | | | 40,095 |
U.S. Treasury repurchase agreements | | | 13,200 | | | — | | | — | | | 13,200 | | | | 13,200 | | | — | | | — |
Treasury inflation-protected securities | | | 3,291 | | | 16 | | | — | | | 3,307 | | | | — | | | 3,291 | | | |
Commercial paper | | | 45,974 | | | — | | | — | | | 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 |
Expected credit loss reserve | | | | | | | | | | | | | | | | (3) | | | (142) | | | (25) |
Total, net of reserve for expected credit losses | | | | | | | | | | | | | | | $ | 155,440 | | $ | 406,525 | | $ | 90,681 |
4.Note 4 - Expected Credit Losses
We are exposed to credit losses primarily through sales of products and services. Our expected loss allowance methodology for accounts receivable, notes receivable, and contract assets is developed using historical collection experience, published or estimated credit default rates for entities that represent our customer base, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Our monitoring activities include account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible.
We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and recorded an additional reserve for credit loss of approximately $1.0 million as of June 30, 2021.
We review receivables for U.S. and international customers separately to better reflect different published credit default rates and economic and market conditions.
13
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):
| | | | | | | | | | | | | | | | | | |
|
| Six Months Ended June 30, 2021 |
| Three Months Ended March 31, 2022 | ||||||||||||||
| | | United States | | | Other countries | | | Total | | | United States | | | Other countries | | | Total |
Balance, beginning of period | | $ | 2,902 | | $ | 474 | | $ | 3,376 | | $ | 3,171 | | $ | 178 | | $ | 3,349 |
Provision for expected credit losses | | | 256 | | | (130) | | | 126 | | | 57 | | | 171 | | | 228 |
Amounts written off charged against the allowance | | | (54) | | | - | | | (54) | | | (137) | | | - | | | (137) |
Other, including dispositions and foreign currency translation | |
| 78 | |
| (9) | |
| 69 | |||||||||
Other, including foreign currency translation | |
| - | |
| (2) | |
| (2) | |||||||||
Balance, end of period | | $ | 3,182 | | $ | 335 | | $ | 3,517 | | $ | 3,091 | | $ | 347 | | $ | 3,438 |
As of June 30,March 31, 2022 and December 31, 2021, the allowance for expected credit losses for each type of customer receivable was as follows:follows (in thousands):
| | | | | | | | | | | | |
| | June 30, | | December 31, | | March 31, | | December 31, | ||||
|
| 2021 | | 2020 |
| 2022 | | 2021 | ||||
Accounts receivable and notes receivable, current | | $ | 1,973 | | $ | 2,105 | | $ | 2,424 | | $ | 2,203 |
Contract assets, net | |
| 1,186 | |
| 794 | |
| 891 | |
| 1,010 |
Long-term notes receivable, net of current portion | |
| 358 | |
| 477 | |
| 123 | |
| 136 |
Total allowance for expected credit losses on customer receivables | | $ | 3,517 | | $ | 3,376 | | $ | 3,438 | | $ | 3,349 |
Note 5 - Inventory
Inventories are stated at the lower of cost, determined on the first-in, first-out (“FIFO”) basis, or net realizable value, net of an inventory valuation allowance. We use a standard cost methodology to determine the cost basis for its inventories. Costs include allocations for materials, labor, and overhead. All variances between actual costs and standard costs are apportioned to inventory and cost of goods sold based upon inventory turnover. We evaluate inventory on a quarterly basis for obsolete or slow-moving items to ascertain if the recorded allowance is reasonable and adequate. Additional provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value.
12
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Inventory consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | |
|
| March 31, 2022 |
| December 31, 2021 | ||
Raw materials | | $ | 42,452 | | $ | 38,267 |
Finished goods | |
| 79,698 | |
| 70,421 |
Total inventory | | $ | 122,150 | | $ | 108,688 |
5. InventoryNote 6 – Property and Equipment
Inventories are stated at the lower of cost
Property and net realizable value. Cost is determined using the weighted average cost of raw materials, which approximates the first-in, first-out (“FIFO”) method and includes allocations of manufacturing labor and overhead. Provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value. Inventoryequipment consisted of the following (in thousands):
| | | | | | | | |
| | Estimated | | | | | | |
|
| Useful Life |
| March 31, 2022 |
| December 31, 2021 | ||
Land | | N/A | | $ | 54,868 | | $ | 54,868 |
Building and leasehold improvements | | 3-39 years | | | 26,456 | | | 25,712 |
Production equipment | | 3-5 years | |
| 54,416 | |
| 54,090 |
Computers, equipment and software | | 3-5 years | |
| 17,400 | |
| 15,343 |
Furniture and office equipment | | 3-5 years | |
| 6,842 | |
| 6,838 |
Vehicles | | 5 years | |
| 3,123 | |
| 2,932 |
Website development costs | | 3 years | |
| 204 | |
| 204 |
Capitalized internal-use software development costs | | 3-5 years | |
| 11,996 | |
| 11,996 |
Construction-in-process | | N/A | |
| 37,667 | |
| 25,258 |
Total cost | | | |
| 212,972 | |
| 197,241 |
Less: Accumulated depreciation | | | |
| (63,467) | |
| (58,784) |
Property and equipment, net | | |
| $ | 149,505 | | $ | 138,457 |
Construction-in-process includes $17.6 million and $12.4 million related to the development of the new Company’s campus at June 30, 2021March 31, 2022 and December 31, 2020 (in thousands):
| | | | | | |
|
| June 30, 2021 |
| December 31, 2020 | ||
Raw materials | | $ | 35,935 | | $ | 39,194 |
Finished goods | |
| 55,804 | |
| 50,764 |
Total inventory | | $ | 91,739 | | $ | 89,958 |
2021, respectively.
6.Note 7 - Strategic Investments
Strategic investments include investments in a number of non-public technology-driven companies. We account for strategic investments under the ASCAccounting Standards Codification (“ASC”) 321 measurement alternative for equity securities without readily determinable fair values, as there are no quoted market prices for the investments. The investments are measured at cost less impairment, adjusted for observable price changes and are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
In conjunction with onecertain of our strategic investments, 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. During the three months ended March 31, 2022, we attained the performance metric for the first tranche of performance stock warrants for one of our strategic investees. The amount reflected in other assetsrecorded on our condensed consolidated balance sheets represents the fair value of the preferred stock warrants as of June 30, 2021.March 31, 2022.
1413
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables providesprovide a roll-forward of the balance of strategic investments (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2021 | | Three Months Ended March 31, 2022 | ||||||||||||||
| | Strategic investments | | Warrants for strategic investment | | Total | | Strategic investments | | Warrants for strategic investment | | Total | ||||||
Balance, beginning of period | | $ | 9,500 | | $ | 2,211 | | $ | 11,711 | | $ | 80,775 | | $ | 2,745 | | $ | 83,520 |
Investments | | | 20,500 | | | - | | | 20,500 | | | 500 | | | — | | | 500 |
Observable price changes | | | 40,321 | | | 534 | | | 40,855 | | | 41,893 | | | 28,539 | | | 70,432 |
Sales | | | (14,546) | | | - | | | (14,546) | |||||||||
Balance, end of period | | $ | 55,775 | | $ | 2,745 | | $ | 58,520 | | $ | 123,168 | | $ | 31,284 | | $ | 154,452 |
| | | | | | | | | | |||||||||
| | | | | | | | | | |||||||||
| | Inception to date | ||||||||||||||||
| | Strategic investments | | Warrants for strategic investment | | Total | ||||||||||||
Investments | | $ | 27,568 | | $ | 2,588 | | $ | 30,156 | |||||||||
Observable price changes | | | 42,753 | | | 157 | | | 42,910 | |||||||||
Sales | | | (14,546) | | | - | | | (14,546) | |||||||||
Balance, end of period | | $ | 55,775 | | $ | 2,745 | | $ | 58,520 |
| | | | | | | | | |
| | Inception to date | |||||||
| | Strategic investments | | Warrants for strategic investment | | Total | |||
Investments | | $ | 53,068 | | $ | 2,588 | | $ | 55,656 |
Observable price changes | | | 84,646 | | | 28,696 | | | 113,342 |
Sales | | | (14,546) | | | — | | | (14,546) |
Balance, end of period | | $ | 123,168 | | $ | 31,284 | | $ | 154,452 |
During the periodthree months ended June 30, 2021,March 31, 2022, certain of our strategic investees issued new equity to us and/or other investors. These events represented observable price changes for our existing investments and related warrants. Of the total observable price changes, we realized awarrants, resulting in an aggregate unrealized gain of approximately $12.3 million on the sale of a portion of one of our existing investments.$70.4 million. The estimated fair value of the retained existing investments was calculated using valuation techniques that included both observable and unobservable inputs, and was lower than the issue per share of the new equity issued by the strategic investeeinvestees because of different characteristics of the newly issued equity instruments compared to our existing investments. The valuation techniques included both Level 2 and Level 3 inputs as defined by ASC Topic 820.
Subsequent Events
On April 5, 2022, we exercised warrants in one of our strategic investees for a total exercise price of $6.6 million. We are still finalizing the accounting impact of the transaction, but preliminarily expect to recognize an increase of approximately $60.0 million to the carrying value of our strategic investments, which we would recognize in earnings during the quarter ending June 30, 2022.
On April 29, 2022, we made a $21.0 million non-controlling minority investment in preferred stock of Fusus, Inc. We were also issued a warrant that gives us the ability to purchase additional preferred stock and a call option to acquire the remaining outstanding equity at specified enterprise values.
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AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
7.Note 8 - Other Long-Term Assets
Other long-term assets consisted of the following at June 30, 2021March 31, 2022 and December 31, 20202021 (in thousands):
| | | | | | | | | | | | |
|
| June 30, 2021 |
| December 31, 2020 |
| March 31, 2022 |
| December 31, 2021 | ||||
Cash surrender value of corporate-owned life insurance policies | | $ | 5,055 | | $ | 4,654 | | $ | 4,912 | | $ | 5,276 |
Deferred commissions (1) | |
| 36,489 | |
| 32,455 | |
| 55,114 | |
| 54,028 |
Restricted cash | |
| 60 | |
| 62 | |
| 56 | |
| 57 |
Operating lease assets | |
| 26,885 | |
| 22,308 | |
| 23,242 | |
| 23,270 |
Deferred implementation costs (2) | | | 3,697 | | | 3,915 | ||||||
Prepaid expenses, deposits and other | |
| 15,755 | |
| 8,727 | | | 10,982 | | | 11,701 |
Total other long-term assets | | $ | 84,244 | | $ | 68,206 | |
| 98,003 | | $ | 98,247 |
(1) | Represents the incremental costs of obtaining contracts with customers, which consist primarily of sales commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contracts and amortized consistent with the recognition timing of the revenue for the underlying performance obligations. |
(2) | During the year ended December 31, 2021, we completed an implementation of several software-as-a-service applications supporting our internal operations. Following the implementation, we placed $4.3 million of deferred implementation costs assets related to these applications into service. |
15
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
8.Note 9 - Accrued Liabilities
Accrued liabilities consisted of the following at June 30, 2021March 31, 2022 and December 31, 20202021 (in thousands):
| | | | | | | | | | | | |
|
| June 30, 2021 |
| December 31, 2020 |
| March 31, 2022 |
| December 31, 2021 | ||||
Accrued salaries, benefits and bonus | | $ | 39,487 | | $ | 36,892 | | $ | 33,242 | | $ | 62,425 |
Accrued professional, consulting and lobbying fees | |
| 1,201 | |
| 3,055 | |
| 6,982 | |
| 7,152 |
Accrued warranty expense | |
| 901 | |
| 769 | |
| 1,504 | |
| 2,822 |
Accrued income and other taxes | | | 3,780 | | | 3,848 | |
| 3,615 | |
| 3,736 |
Accrued inventory in transit | |
| 10,979 | |
| 4,597 | | | 8,910 | | | 9,945 |
Other accrued expenses | |
| 10,560 | |
| 10,682 | |
| 15,182 | |
| 17,627 |
Accrued liabilities | | $ | 66,908 | | $ | 59,843 | | $ | 69,435 | | $ | 103,707 |
9.Note 10 - 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, but can be up to ten years in some jurisdictions following the tax year to which these filings relate. 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 was completed during Q2 2021. During the second quarter of 2021, an audit with the State of Illinois for our fiscal year 2018 state return commenced. Additionally, weWe have been previously notified that an income tax audit may commence for Axon Public Safety Southeast Asia LLC, our entity in Vietnam. The tax periodVietnam; however, there has not yet been defined.
On March 11, 2021, the U.S. federal government enacted the American Rescue Plan Act. This act is an emergency economic stimulus package in responseno movement to the COVID-19 pandemic, which, among other things, contains numerous income tax provisions. We are continuing to evaluate the implications of the American Rescue Plan Act, but its impact on the financial statements and related disclosures is not expected to be material.date.
Deferred Tax Assets
Net deferred income tax assets at June 30, 2021,March 31, 2022, primarily include R&D tax credits, stock-based compensation expense, deferred revenue, accruals and reserves, R&D capitalization, net of amortization and net operating losses, partially offset by accelerated depreciation expense, unrealized investment gains, and valuation allowance reserve. Our total net deferred tax assets at June 30, 2021March 31, 2022 were $51.9$108.5 million.
In preparing our condensed consolidated financial statements, management assesses the likelihood that its deferred tax assets will be realized from future taxable income. In evaluating our ability to recover our deferred income
15
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 provisionsprovision 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 June 30, 2021,March 31, 2022, management continues to believe the positive evidence from projected future earnings outweighs the negative evidence and a valuation allowance is not needed. We have concluded that a valuation allowance is necessary against unrealized investment losses and related costs incurred in connection with certain investments. Additionally, we continue to demonstrate three-year cumulative pre-tax income in the U.S. federal and state tax jurisdictions; however, wedo have Arizona R&D tax credits expiring unutilized each year. Therefore,year; therefore, management has concluded that it is more likely than not that our Arizona R&D deferred tax asset will not be realized.realized, and a valuation allowance has been recorded against this net asset.
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 continue to recognize a partial valuation allowance for Australia.
16
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We complete R&D tax credit studies for each year that an R&D tax credit is claimed for federal Arizona, and Californiastate 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 $7.6$18.9 million as of June 30, 2021.March 31, 2022. Should the unrecognized benefit of $7.6$18.9 million be recognized, our effective tax rate would be favorably impacted. Approximately $3.3$12.8 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 sixthree months ended June 30, 2021,March 31, 2022, after discrete period adjustments, was 6.4%24.3%. Before discrete adjustments, the tax rate was (19.1%)25.7%, which differs from the federal statutory rate, primarily due to the impact of R&D tax credits offset by the executive compensation limitation under Internal Revenue Code ("IRC") Section 162(m), partially offset by R&D and an increase in valuation allowance and unrecognized tax credits, on a projected pre-tax loss for the year.benefits. The effective tax rate was favorably impacted by a $25.7$1.1 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for restricted stock units (“RSUs”) orand performance stock units (“PSUs”) that vested during the sixthree months ended June 30, 2021.March 31, 2022.
10.Note 11 - Stockholders’ Equity
Performance-based stock awards
We have issued performance-based stock options and performance-based RSUs, the vesting of which is generally contingent upon the achievement of certain performance criteria related to our operating performance, as well as successful and timely development and market acceptance of future product introductions. In addition, certain of the performance RSUs have additional service requirements subsequent to the achievement of the performance criteria. Compensation expense is recognized over the requisite service period, which is defined as the longest explicit, implicit or derived service period based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date. For both service-based and performance-based RSUs, we account for forfeitures as they occur as a reduction to stock-based compensation expense and additional paid-in-capital.
For performance-based options with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized for each pair of performance and market conditions over the longer of the expected achievement period of the performance and market conditions, beginning at the point in
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AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
time that the relevant performance condition is considered probable of achievement. The fair value of such awards is estimated on the grant date using Monte Carlo simulations.
CEO Performance Award
On May 24, 2018, our stockholders approved the 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 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 Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of the following 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 Award)") is defined as net income (loss) attributable to common stockholders before interest expense, interest and other income (such as dividends) earned on investments in marketable securities, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense.
| | | | | | |
Revenue Goal (1) | | Achievement Status | | Adjusted EBITDA | | Achievement Status |
Goal #1, $710,058 | | Achieved | | Goal #1, $125,000 | | Achieved |
Goal #2, $860,058 | | Achieved | | Goal #2, $155,000 | | Achieved |
Goal #3, $1,010,058 | | Probable | | Goal #3, $175,000 | | Achieved |
Goal #4, $1,210,058 | | Probable | | Goal #4, $190,000 | | Achieved |
Goal #5, $1,410,058 | | Not Applicable | | Goal #5, $200,000 | | Achieved |
Goal #6, $1,610,058 | | Not Applicable | | Goal #6, $210,000 | | Achieved |
Goal #7, $1,810,058 | | Not Applicable | | Goal #7, $220,000 | | Achieved |
Goal #8, $2,010,058 | | Not Applicable | | Goal #8, $230,000 | | Achieved |
(1) | In connection with the business acquisition that was completed during the three months ended September 30, 2018, the revenue goals were adjusted for the acquiree’s Target Revenue, as defined in the CEO Performance Award agreement. |
Stock-based compensation expense associated with the CEO Performance Award is recognized over the longer of the expected achievement period for each pair of market capitalization and operational goals, beginning at the point in time when the relevant operational goal is considered probable of being met. The probability of meeting an operational goal and the expected achievement point in time for meeting a probable operational goal are based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis. Even though no tranches of the CEO Performance Award vest unless a market capitalization and a matching operational goal are both achieved, stock-based compensation expense is recognized when an operational goal is considered probable of achievement regardless of whether a market capitalization goal is actually achieved. Stock-based compensation represents a non-cash expense and is recorded in sales, general, and administrative operating expense on our consolidated statements of operations and comprehensive income.
The first ten market capitalization goals have been achieved as of March 31, 2022. As of March 31, 2022, 5.3 million stock options have been certified by the Compensation Committee and vested. As twelve operational goals have been achieved or are considered probable of achievement, we recorded stock-based compensation expense of $233.1 million related to the CEO Performance Award from the grant date through March 31, 2022. The number of stock options that would vest related to the remaining unvested tranches is approximately 1.1 million shares. As of March 31,
17
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
and other income (such as dividends) earned on investments in marketable securities, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense.
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As of June 30, 2021, the following operational goals were achieved, with vesting of the related tranches pending certification by the Compensation Committee:
As of June 30, 2021, the following operational goals were considered probable of achievement:
As of June 30, 2021, the following operational goals were previously achieved and the related tranches vested:
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 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 when considered appropriate. 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.
Beginning with the three months ended June 30, 2021, management discontinued consideration of the statistical model based on actual and anticipated attainment of the remaining operational goals. During the three months and six months ended June 30, 2021, we recorded an additional $107.3 million and $158.7 million, respectively, in stock-based
18
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
compensation expense as a result of updated estimates for the CEO Performance Award and eXponential Stock Performance Plan (discussed below).
The first eight market capitalization goals have been achieved as of June 30, 2021. As of June 30, 2021, 1.6 million stock options have vested. As twelve operational goals are considered probable of achievement, we recorded stock-based compensation expense of $204.2 million related to the CEO Performance Award from the Grant Date through June 30, 2021. The number of stock options that would vest related to the remaining unvested tranches is approximately 4.8 million shares. As of June 30, 2021,2022, we had $41.7$12.8 million of total unrecognized stock-based compensation expense for the performance goals that were considered probable of achievement, which will be recognized over a weighted-average period of 1.571.3 years years..
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 six months ended June 30, 2021 we granted an additional twenty three thousand and thirty three thousand XSUs, respectively.
The XSUs are grants of RSUs,Restricted Stock Units (“RSUs”), each with a term of approximately nine years, that vest in 12 equal tranches. Each of the 12 tranches will vest upon certification by the Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of 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. Beginning with the quarter ended June 30, 2021, new XSU grants are divided into a reduced number of tranches depending on employee eligibility and current market capitalization attainment.
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 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 market capitalization is not identical. As of June 30, 2021,March 31, 2022, actual shares outstanding exceeded the XSU Maximum as a result of the common stock offering completed in June 2020.Maximum. 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 nine market capitalization goals have been achieved as of March 31, 2022. The tenth market capitalization goal has not yet been attained, though the related operational goal was achieved as of September 30, 2021. As all twelve operational goals have been achieved or are considered probable of achievement, we recorded stock-based compensation expense of $180.4 million related to the XSU awards from their respective grant dates through March 31, 2022. The number of XSU awards that would vest related to the remaining three tranches is approximately 1.3 million shares. As of March 31, 2022, we had $18.4 million of total unrecognized stock-based compensation expense, which will be recognized over a weighted-average period of 1.8 years.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The first eight market capitalization goals have been achieved as of June 30, 2021. The first XSU tranche vested in March 2021, and the second and third tranches vested in May 2021. As all twelve operational goals are considered probable of achievement, we recorded stock-based compensation expense of $151.4 million related to the XSU awards from their respective grant dates through June 30, 2021. The number of XSU awards that would vest related to the remaining nine tranches is approximately 4.0 million shares. As of June 30, 2021, we had $42.3 million of total unrecognized stock-based compensation expense, which will be recognized over a weighted-average period of 2.20 years.
Restricted Stock Units
The following table summarizes RSU activity for the sixthree months ended June 30, 2021March 31, 2022 (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 |
| 1,107 | | $ | 76.10 |
| |
|
| 1,115 | | $ | 133.40 |
| |
|
Granted |
| 98 | |
| 149.92 |
| |
|
| 149 | |
| 137.89 |
| |
|
Released |
| (276) | |
| 51.65 |
| |
|
| (93) | |
| 76.70 |
| |
|
Forfeited |
| (64) | |
| 98.43 |
| |
|
| (25) | |
| 136.92 |
| |
|
Units outstanding, end of period |
| 865 | |
| 90.59 | | $ | 152,892 |
| 1,146 | |
| 138.48 | | $ | 157,892 |
Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $176.80$137.73 per share, multiplied by the number of RSUs outstanding. As of June 30, 2021,March 31, 2022, there was $57.4$126.6 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 2.102.2 years. RSUs are released when vesting requirements are met.
Certain RSUs that vested in the sixthree months ended June 30, 2021March 31, 2022 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 forty six4 thousand and had a value of $7.5$0.5 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 PSU activity, inclusive of XSUs, for the sixthree months ended June 30, 2021March 31, 2022 (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 |
| 5,618 | | $ | 35.71 |
| |
|
| 1,499 | | $ | 39.86 |
| |
|
Granted |
| 225 | |
| 50.00 |
| |
|
| 46 | |
| 130.33 |
| |
|
Released |
| (1,696) | |
| 41.20 |
| |
|
| (18) | |
| 128.52 |
| |
|
Forfeited |
| (60) | |
| 35.80 |
| |
|
| (10) | |
| 53.93 |
| |
|
Units outstanding, end of period |
| 4,087 | |
| 34.22 | | $ | 722,593 |
| 1,517 | |
| 41.48 | | $ | 208,987 |
Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $176.80$137.73 per share, multiplied by the number of PSUs outstanding. As of June 30, 2021,March 31, 2022, there was $44.8$27.2 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 2.221.8 years. PSUs are released when vesting requirements are met.
As of March 31, 2022, the performance criteria had been met for approximately 17 thousand of the 1.5 million PSUs outstanding.
Certain PSUs that vested in the three months ended March 31, 2022 were net-share settled such that we withheld shares to cover the employees’ tax obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld related to PSUs were approximately 6 thousand and had a
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of June 30, 2021, the performance criteria had been met for approximately 2.2 million of the 4.1 million PSUs outstanding.
On March 8 and May 17, 2021, the Compensation Committee of our Board of Directors approved waivers of the holding period requirements for each XSPP participant who is an Arizona resident and elected to receive XSUs in lieu of On-Target Earnings. This waiver releases the holding period requirements to allow participants the ability to choose to sell a portion of their vested shares to satisfy new income tax obligations pursuant to Arizona Proposition 208, which was passed in the November 2020 state-wide election. This waiver applied only to 4% of the XSUs for the impacted participants which vested on March 8 and May 17, 2021, amounting to approximately 36 thousand shares. The remainder of the shares not sold to satisfy tax obligations are subject to a 2.5 year minimum holding period. We accounted for this change as a Type I modification under ASC 718 since there was no impact on attainment of the operational or market capitalization goals. We recognized additional stock-based compensation expense of $0.5 million and $0.9 million for the three months and six months ended June 30, 2021, respectively, because of this modification.
Certain PSUs that vested in the six months ended June 30, 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 approximately 19 thousand and had a value of $2.8$0.8 million on their respective vesting dates as determined by the closing stock price on such dates. Payments for the employees’ tax obligations are reflected as a financing activity within the condensed consolidated statements of cash flows. We record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital.
Stock Option Activity
The following table summarizes stock option activity for the sixthree months ended June 30, 2021March 31, 2022 (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 |
| 6,366 | | $ | 28.58 |
|
|
| |
|
| 2,438 | | $ | 28.58 |
|
|
| |
|
Granted |
| — | | | — |
|
|
| |
|
| — | |
| — |
|
|
| |
|
Exercised |
| — | | | — |
|
|
| |
|
| — | |
| — |
|
|
| |
|
Expired / terminated |
| — | | | — |
|
|
| |
|
| — | |
| — |
| |
| |
|
Options outstanding, end of period |
| 6,366 | |
| 28.58 |
| 6.66 | | $ | 943,547 |
| 2,438 | |
| 28.58 |
| 5.91 | | $ | 266,103 |
Options exercisable, end of period |
| 4,243 | |
| 28.58 |
| 6.66 | |
| 629,031 |
| 1,377 | |
| 28.58 |
| 5.91 | |
| 150,297 |
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 $176.80$137.73 on June 30, 2021.March 31, 2022. There were 0 options exercised for the sixthree months ended June 30, 2021. The intrinsic value of options exercised for the six months ended June 30, 2020 was $5.1 million.March 31, 2022. As of June 30, 2021,March 31, 2022, total options outstanding included 2.11.1 million unvested performance-based stock options, which relate to the CEO Performance Award and are probable of achievement.
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AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Stock-based Compensation Expense
The following table summarizes the composition of stock-based compensation expense for the three and six months ended June 30,March 31, 2022 and 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | ||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||||
Cost of products sold and services delivered | | $ | 1,838 | | $ | 836 | | $ | 3,327 | | $ | 1,426 | | $ | 1,108 | | $ | 1,489 |
Sales, general and administrative expenses | |
| 114,089 | |
| 26,766 | |
| 185,104 | |
| 41,736 | �� |
| 10,998 | |
| 71,015 |
Research and development expenses | |
| 21,622 | |
| 6,233 | |
| 38,728 | |
| 10,868 | |
| 12,982 | |
| 17,106 |
Total stock-based compensation expense | | $ | 137,549 | | $ | 33,835 | | $ | 227,159 | | $ | 54,030 | | $ | 25,088 | | $ | 89,610 |
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 1.80.9 million shares available for grant as of June 30, 2021.March 31, 2022.
Stock Inducement Plan
In September 2019, our Board of Directors adopted the Axon Enterprise, Inc. 2019 Stock Inducement Plan (the “2019 Inducement Plan”) pursuant to which we reserved 500,000 shares of common stock for issuance under the Inducement Plan. In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules, awards under the Inducement Plan may only be made to individuals not previously employed by us (or following such individuals’ bona fide periods of non-employment by us), as an inducement material to the individuals’ entry into employment with us. The terms and conditions of the 2019 Inducement Plan are substantially similar to our stockholder-approved 2019 Plan. As of March 31, 2022, there were 29,600 shares available for grant under the 2019 Inducement Plan. On April 6, 2022, we
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AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
granted 29,507 shares from the 2019 Inducement Plan to new employees who joined the Company as a result of an acquisition.
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 sixthree months ended June 30,March 31, 2022 and 2021, and 2020, 0 common shares were purchased under the program. As of June 30, 2021,March 31, 2022, $16.3 million remains available under the plan for future purchases. Any future purchases will be discretionary.
11.At-the-Market equity offering
During the year ended December 31, 2021, we sold 577,956 shares of our common stock under our "at-the-market" equity offering program (the “ATM”). We generated approximately $107.6 million in aggregate gross proceeds from sales under the ATM. Aggregate net proceeds from the ATM were $105.4 million after deducting related expenses, including commissions to the sales agent of $1.6 million and issuance costs of $0.5 million.
We may sell up to a total of 3.0 million shares of our common stock under the ATM. The ATM expires on April 20, 2024. We intend to use the net proceeds from this offering for general corporate purposes, which may include, among other things, providing capital to satisfy a portion of the tax obligations related to the vesting and settlement of stock compensation awards granted to our executive officers and other employees under our stock incentive plans, to support our growth, and to acquire or invest in product lines, products, services, technologies or facilities.
Note 12 - Line of Credit
We have a $50.0 million unsecured revolving line of credit with a domestic bank, of which $20.0 million is available for letters of credit. The credit agreement matures on December 31, 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.
At June 30, 2021March 31, 2022 and December 31, 2020,2021, 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 June 30, 2021,March 31, 2022, we had letters of credit outstanding of approximately $6.1$6.3 million under the facility and available borrowing of $43.9$43.7 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 June 30, 2021,March 31, 2022, our funded debt to EBITDA ratio was 0.00 to 1.00.
12.Note 13 - 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 43 lawsuits 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 from case to case,
22
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
21
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 administrative hearing is presently stayed by the Ninth Circuitpending Axon’s Supreme Court challenge (see below). If ultimately successful, the FTC may require Axon 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 consolidated financial statements.
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 our Fifth Amendment rights to due process and equal protection. The district court dismissed the action, without prejudice, for lack of jurisdiction. The Ninth Circuit affirmed in a split decision but granted Axon’s motion to stay the appellate mandate pending the filing of its petition for certiorari with the U.S. Supreme Court. That petition was filed July 20, 2021.On January 24, 2022, the Supreme Court granted Axon’s petition. Merits briefing will occur over the next several months with oral argument likely in October 2022. The 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 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 theamount of the loss or range of possible losses for the claim, if material for disclosure. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of any potential loss. We reevaluate and update accruals as matters progress over time.
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AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Based on our assessment of outstanding litigation and claims as of June 30, 2021,March 31, 2022, 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 June 30, 2021,March 31, 2022, we had outstanding letters of credit of $6.1$6.3 million that are expected to expire in September 2021February and June 2022.of 2023. We also had outstanding letters of credit and bank guarantees of $2.0$0.5 million that do not draw against our credit facility. The outstanding letters of credit are expected to expire in March 2022 and May 2022.2023. Additionally, we had $21.5 million of outstanding surety bonds at June 30, 2021,March 31, 2022, with $0.4 million expiring in 2021, $3.1$3.5 million expiring in 2022, $7.5 million expiring in 2023 and the remaining $10.5 million expiring in 2024.
Share Purchase AgreementNote 14 – Accumulated Other Comprehensive Income (loss)
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 aggregateThe following tables reflect the changes in accumulated other comprehensive income (loss), net 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.tax (in thousands):
| | | | | | | | | |
| | | Unrealized Gains (Losses) | | | | | | |
| | | on Available-for-Sale | | | Foreign Currency | | | |
| | | Investments | | | Translation | | Total | |
Balance, December 31, 2021 | | $ | (207) | | $ | (1,110) | | $ | (1,317) |
Other comprehensive loss | | | (489) | | | (1,072) | | | (1,561) |
Balance, March 31, 2022 | | $ | (696) | | $ | (2,182) | | $ | (2,878) |
| | | | | | | | | |
| | | Unrealized Gains (Losses) | | | | | | |
| | | on Available-for-Sale | | | Foreign Currency | | | |
| | | Investments | | | Translation | | Total | |
Balance, December 31, 2020 | | $ | — | | $ | 141 | | $ | 141 |
Other comprehensive income | | | — | | | 1 | | | 1 |
Balance, March 31, 2021 | | $ | — | | $ | 142 | | $ | 142 |
13.
Note 15 - Employee Benefit Plans
We have a defined contribution 401(k) plan for eligible employees, which is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. Employees are entitled to make tax-deferred contributions of up to the maximum amount allowed by law of their eligible compensation.
We also have a non-qualified deferred compensation plan for certain executives, employees and non-employee directors through which participants may elect to postpone the receipt and taxation of a portion of their compensation, including stock-based compensation, received from us. The non-qualified deferred compensation plan allows eligible participants to defer up to 80% of their base salary and up to 100% of other types of compensation. The plan also allows for matching and discretionary employer contributions. Employee deferrals are deemed 100% vested upon contribution. Distributions from the plan are made upon retirement, death, separation of service, specified date or upon the occurrence
23
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
of an unforeseeable emergency. Distributions can be paid in a variety of forms from lump sum to installments over a period of years. Participants in the plan are entitled to select from a wide variety of investments available under the plan and are allocated gains or losses based upon the performance of the investments selected by the participant. All gains or losses are allocated fully to plan participants and we do not guarantee a rate of return on deferred balances. Assets related to this plan consist of corporate-owned life insurance contracts and are included in other assets in the condensed consolidated balance sheets; see Note 78 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.
24
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.Finland.
Our matching contributions for all defined contribution plans were $1.8$3.1 million and $1.3$2.1 million for the three months ended June 30,March 31, 2022 and 2021, and 2020, respectively and $3.8 million and $2.8 million for the six months ended June 30, 2021 and 2020, respectively.
14.Note 16 - Segment Data
Our operations are comprised of 2 reportable segments: the manufactureTASER segment 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 June 30, 2021 | | Three Months Ended June 30, 2020 | | Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||
| | | | | Software and | | | | | | | | Software and | | | | | | | | Software and | | | | | | | | Software and | | | | ||||
|
| TASER |
| Sensors |
| Total |
| TASER |
| Sensors |
| Total |
| TASER |
| Sensors |
| Total |
| TASER |
| Sensors |
| Total | ||||||||||||
Net sales from products | | $ | 110,637 | | $ | 45,790 | | $ | 156,427 | | $ | 69,877 | | $ | 28,878 | | $ | 98,755 | | $ | 111,154 | | $ | 65,050 | | $ | 176,204 | | $ | 97,302 | | $ | 43,584 | | $ | 140,886 |
Net sales from services | |
| 1,891 | |
| 60,477 | |
| 62,368 | |
| 613 | |
| 41,891 | |
| 42,504 | |
| 3,206 | |
| 77,016 | |
| 80,222 | |
| 1,697 | |
| 52,436 | |
| 54,133 |
Net sales | |
| 112,528 | |
| 106,267 | |
| 218,795 | |
| 70,490 | |
| 70,769 | |
| 141,259 | |
| 114,360 | |
| 142,066 | |
| 256,426 | |
| 98,999 | |
| 96,020 | |
| 195,019 |
Cost of product sales | |
| 37,701 | |
| 27,600 | |
| 65,301 | |
| 27,242 | |
| 16,583 | |
| 43,825 | |
| 40,625 | |
| 38,727 | |
| 79,352 | |
| 32,945 | |
| 25,671 | |
| 58,616 |
Cost of service sales | |
| 145 | |
| 15,420 | |
| 15,565 | |
| 0 | |
| 9,257 | |
| 9,257 | |
| 0 | |
| 21,335 | |
| 21,335 | |
| 0 | |
| 13,050 | |
| 13,050 |
Cost of sales | |
| 37,846 | |
| 43,020 | |
| 80,866 | |
| 27,242 | |
| 25,840 | |
| 53,082 | |
| 40,625 | |
| 60,062 | |
| 100,687 | |
| 32,945 | |
| 38,721 | |
| 71,666 |
Gross margin | | $ | 74,682 | | $ | 63,247 | | $ | 137,929 | | $ | 43,248 | | $ | 44,929 | | $ | 88,177 | | $ | 73,735 | | $ | 82,004 | | $ | 155,739 | | $ | 66,054 | | $ | 57,299 | | $ | 123,353 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Research and development | | $ | 12,313 | | $ | 41,639 | | $ | 53,952 | | $ | 3,762 | | $ | 25,798 | | $ | 29,560 | | $ | 9,896 | | $ | 38,520 | | $ | 48,416 | | $ | 9,243 | | $ | 37,775 | | $ | 47,018 |
| | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2021 | | Six Months Ended June 30, 2020 | ||||||||||||||
| | | | | Software and | | | | | | | | Software and | | | | ||
|
| TASER |
| Sensors |
| Total |
| TASER |
| Sensors |
| Total | ||||||
Net sales from products | | $ | 207,939 | | | 89,374 | | $ | 297,313 | | $ | 145,052 | | | 60,991 | | $ | 206,043 |
Net sales from services | |
| 3,588 | |
| 112,913 | |
| 116,501 | |
| 1,333 | |
| 81,045 | |
| 82,378 |
Net sales | |
| 211,527 | |
| 202,287 | |
| 413,814 | |
| 146,385 | |
| 142,036 | |
| 288,421 |
Cost of product sales | |
| 70,646 | |
| 53,271 | |
| 123,917 | |
| 57,490 | |
| 35,219 | |
| 92,709 |
Cost of service sales | |
| 145 | |
| 28,470 | |
| 28,615 | |
| 0 | |
| 18,927 | |
| 18,927 |
Cost of sales | |
| 70,791 | |
| 81,741 | |
| 152,532 | |
| 57,490 | |
| 54,146 | |
| 111,636 |
Gross margin | | $ | 140,736 | | $ | 120,546 | | $ | 261,282 | | $ | 88,895 | | $ | 87,890 | | $ | 176,785 |
| | | | | | | | | | | | | | | | | | |
Research and development | | $ | 21,556 | | $ | 79,414 | | $ | 100,970 | | $ | 6,794 | | $ | 49,147 | | $ | 55,941 |
2524
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 June 30, 2021,March 31, 2022, and results of operations for the three and six months ended June 30,March 31, 2022 and 2021, and 2020, should be read in conjunction with the condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes in our 20202021 Annual Report on Form 10-K filed with the SEC on February 26, 2021.25, 2022. 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 20202021 Annual Report on Form 10-K. See also "Special Note Regarding Forward-Looking Statements" on page ii of this Quarterly Report on Form 10-Q.
Overview
Axon is a global network of devices, apps and people that helps public safety personnel become smarter and safer. 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 a public safety officer’s day-to-day experience with the goal of helping everyone get home safe.
Our revenues for the three months ended June 30, 2021March 31, 2022 were $218.8$256.4 million, an increase of $77.5$61.4 million, or 54.9%31.5%, from the comparable period in the prior year. We had a lossincome from operations of $93.7$17.2 million compared to $13.7a loss of $50.3 million for the same period in the prior year. Gross margin improveddollars increased $32.4 million but decreased as a percentage of revenue compared to the three months ended June 30, 2020,March 31, 2021, reflecting strong demand for our premium TASER offeringshigher freight and manufacturing cost improvement.labor costs. Operating expenses increased $129.8decreased $35.1 million, reflecting an increasea decrease of $100.9$64.1 million in stock-based compensation expense related to the CEO Performance Award and XSPP, and an increase of $16.3$12.1 million in salaries, benefits and bonus expense, and increases in marketing, commissions, and travel expense. NFor the three months ended June 30, 2021, we recorded a net losset income of $47.1$54.9 million which reflected an income tax benefitincludes unrealized gains of $4.7 million and a gain of $40.9$70.4 million related to observable price changes for our investmests in certain unconsolidated affiliatesexisting investments and related warrants and an unrealized loss of $14.6 million on marketable securities related to our investment in CLBT, compared to net loss of $30.8$47.9 million for the comparable period in the prior year.
Our revenues for the six months ended June 30, 2021 were $413.8 million, an increase of $125.4 million, or 43.5%, from the comparable period in the prior year. We had a loss from operations of $143.9 million compared to $14.5 million for the same period in the prior year. Gross margin improved compared to the six months ended June 30, 2020 as a result of product mix, reflecting strong demand for our premium TASER offerings and manufacturing cost improvement. Operating expenses increased $214.0 million, reflecting an increase of $162.8 million in stock-based compensation expense related to the CEO Performance Award and XSPP and an increase of $31.0 million in salaries, benefits and bonus expense. For the six months ended June 30, 2021, we recorded a net loss of $95.0 million, which reflected an income tax benefit of $6.5 million and a gain of $40.9 million related to observable price changes for our investmests in certain unconsolidated affiliates and related warrants, compared to net loss of $26.7 million for the comparable period in the prior year.
Outlook
For the year ending December 31, 2021,2022, we expect revenue in the range of $825 millionapproximately $1.05 billion to $850 million.$1.1 billion. Our expectation foranticipated capital expenditures of approximately $65$135 million to $70$160 million in 2021 remains unchanged.
COVID-19
The COVID-19 pandemic has adversely affected workforces, economies,2022 remain consistent with our prior expectations, and financial markets globally, leading to an economic downturn. As an essential provider of products and servicesinclude approximately $85 million for law enforcement and other first responders, we remain focused on protecting the health and wellbeingdevelopment of our employees while assuringmanufacturing facility and campus in Scottsdale, Arizona, approximately $40 million to support capacity expansion and automation of TASER devices, and the continuity ofremainder on additional investments to support our business operations.
continued growth.
We have taken a number of actions in response to the pandemic, as described in our Annual Report on Form 10-K. In April and May 2021, we hosted several onsite vaccination clinics for our employees and their family members.
2625
We elected to participate in the social security deferral program offered under the Coronavirus Aid, Relief, and Economic Security Act, whereby we deferred payment of the employer portion of all social security taxes that would otherwise have 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.
Results of Operations
Three Months Ended June 30, 2021March 31, 2022 Compared to the Three Months Ended June 30, 2020March 31, 2021
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 June 30, |
| | Three Months Ended March 31, |
| ||||||||||||||||||
|
| 2021 |
| | 2020 |
|
| 2022 |
| | 2021 |
| ||||||||||||
Net sales from products | | $ | 156,427 | | 71.5 | % | | $ | 98,755 | | 69.9 | % | | $ | 176,204 | | 68.7 | % | | $ | 140,886 | | 72.2 | % |
Net sales from services | |
| 62,368 |
| 28.5 | | |
| 42,504 |
| 30.1 | | |
| 80,222 |
| 31.3 | | |
| 54,133 |
| 27.8 | |
Net sales | |
| 218,795 |
| 100.0 | | |
| 141,259 |
| 100.0 | | |
| 256,426 |
| 100.0 | | |
| 195,019 |
| 100.0 | |
Cost of product sales | |
| 65,301 |
| 29.8 | | |
| 43,825 |
| 31.0 | | |
| 79,352 |
| 31.0 | | |
| 58,616 |
| 30.1 | |
Cost of service sales | |
| 15,565 |
| 7.1 | | |
| 9,257 |
| 6.6 | | |
| 21,335 |
| 8.3 | | |
| 13,050 |
| 6.7 | |
Cost of sales | |
| 80,866 |
| 36.9 | | |
| 53,082 |
| 37.6 | | |
| 100,687 |
| 39.3 | | |
| 71,666 |
| 36.8 | |
Gross margin | |
| 137,929 |
| 63.0 | | |
| 88,177 |
| 62.4 | | |
| 155,739 |
| 60.7 | | |
| 123,353 |
| 63.2 | |
Operating expenses: | |
|
|
|
| | |
|
|
|
| | |
|
|
|
| | |
|
|
|
| |
Sales, general and administrative | |
| 177,662 |
| 81.2 | | |
| 72,293 |
| 51.2 | | |
| 90,129 |
| 35.1 | | |
| 126,597 |
| 64.9 | |
Research and development | |
| 53,952 |
| 24.7 | | |
| 29,560 |
| 20.9 | | |
| 48,416 |
| 18.9 | | |
| 47,018 |
| 24.1 | |
Total operating expenses | |
| 231,614 |
| 105.9 | | |
| 101,853 |
| 72.1 | | |
| 138,545 |
| 54.0 | | |
| 173,615 |
| 89.0 | |
Loss from operations | |
| (93,685) |
| (42.9) | | |
| (13,676) |
| (9.7) | | ||||||||||||
Income (loss) from operations | |
| 17,194 |
| 6.7 | | |
| (50,262) |
| (25.8) | | ||||||||||||
Interest and other income, net | |
| 41,841 |
| 19.1 | | |
| 1,613 |
| 1.1 | | |
| 55,299 |
| 21.6 | | |
| 585 |
| 0.3 | |
Loss before provision for income taxes | |
| (51,844) |
| (23.7) | | |
| (12,063) |
| (8.6) | | ||||||||||||
Income (loss) before provision for income taxes | |
| 72,493 |
| 28.3 | | |
| (49,677) |
| (25.5) | | ||||||||||||
Provision for (benefit from) income taxes | |
| (4,727) |
| (2.2) | | |
| 18,696 |
| 13.2 | | |
| 17,622 |
| 6.9 | | |
| (1,760) |
| (0.9) | |
Net loss | | $ | (47,117) |
| (21.5) | % | | $ | (30,759) |
| (21.8) | % | ||||||||||||
Net income (loss) | | $ | 54,871 |
| 21.4 | % | | $ | (47,917) |
| (24.6) | % |
The following table presents our revenues disaggregated by geography (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Three Months Ended March 31, | | ||||||||||||||||||
|
| 2021 |
| | 2020 | |
| 2022 |
| | 2021 | | ||||||||||||
United States | | $ | 164,908 | | 75 | % | | $ | 107,547 | | 76 | % | | $ | 214,214 | | 84 | % | | $ | 160,386 | | 82 | % |
Other countries | |
| 53,887 |
| 25 | | |
| 33,712 |
| 24 | | |
| 42,212 |
| 16 | | |
| 34,633 |
| 18 | |
Total | | $ | 218,795 |
| 100 | % | | $ | 141,259 | | 100 | % | | $ | 256,426 |
| 100 | % | | $ | 195,019 | | 100 | % |
International revenue increased compared to the prior year comparable period, driven primarily by increased sales in the our Europe, Middle East, and Africa (“EMEA”) region.
2726
Net Sales
Net sales by product line were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Dollar | | Percent | | Three Months Ended March 31, | | Dollar | | Percent | ||||||||||||||||||||
|
| 2021 |
| 2020 |
| Change |
| Change |
| 2022 |
| 2021 |
| Change |
| Change | ||||||||||||||||
TASER segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
TASER 7 | | $ | 28,128 |
| 12.9 | % | $ | 11,588 |
| 8.2 | % | $ | 16,540 |
| 142.7 | % | | $ | 50,066 |
| 19.5 | % | $ | 33,991 |
| 17.5 | % | $ | 16,075 |
| 47.3 | % |
TASER X26P | |
| 9,569 |
| 4.4 | |
| 9,511 |
| 6.7 | |
| 58 |
| 0.6 | | |
| 9,479 |
| 3.7 | |
| 9,963 |
| 5.1 | |
| (484) |
| (4.9) | |
TASER X2 | |
| 16,145 |
| 7.4 | |
| 16,832 |
| 11.9 | |
| (687) |
| (4.1) | | |
| 3,619 |
| 1.4 | |
| 12,778 |
| 6.6 | |
| (9,159) |
| (71.7) | |
TASER Pulse | |
| 1,701 |
| 0.8 | |
| 2,193 |
| 1.6 | |
| (492) |
| (22.4) | | ||||||||||||||||
TASER Consumer devices | |
| 1,696 |
| 0.7 | |
| 2,205 |
| 1.1 | |
| (509) |
| (23.1) | | ||||||||||||||||
Cartridges | |
| 46,678 |
| 21.3 | |
| 23,772 |
| 16.8 | |
| 22,906 |
| 96.4 | | |
| 37,825 |
| 14.7 | |
| 30,418 |
| 15.6 | |
| 7,407 |
| 24.4 | |
Axon Evidence and cloud services | |
| 1,702 |
| 0.8 | |
| 586 |
| 0.4 | |
| 1,116 |
| 190.4 | | |
| 3,017 |
| 1.2 | |
| 1,396 |
| 0.7 | |
| 1,621 |
| 116.1 | |
Extended warranties | |
| 5,857 |
| 2.7 | |
| 5,098 |
| 3.6 | |
| 759 |
| 14.9 | | |
| 6,679 |
| 2.6 | |
| 5,646 |
| 2.9 | |
| 1,033 |
| 18.3 | |
Other | |
| 2,748 |
| 1.2 | |
| 910 |
| 0.5 | |
| 1,838 |
| 202.0 | | |
| 1,979 |
| 0.8 | |
| 2,602 |
| 1.3 | |
| (623) |
| (23.9) | |
Total TASER segment | |
| 112,528 |
| 51.5 | |
| 70,490 |
| 49.7 | |
| 42,038 |
| 59.6 | | |
| 114,360 |
| 44.6 | |
| 98,999 |
| 50.8 | |
| 15,361 |
| 15.5 | |
Software and Sensors segment: | |
|
|
|
| |
|
|
|
| |
|
|
|
| | |
|
|
| | |
|
|
| | |
|
|
|
| |
Axon Body | |
| 19,927 |
| 9.1 | |
| 11,844 |
| 8.4 | |
| 8,083 |
| 68.2 | | |
| 29,708 |
| 11.6 | |
| 19,756 |
| 10.1 | |
| 9,952 |
| 50.4 | |
Axon Flex | |
| 1,088 |
| 0.5 | |
| 680 |
| 0.5 | |
| 408 |
| 60.0 | | |
| 1,329 |
| 0.5 | |
| 905 |
| 0.5 | |
| 424 |
| 46.9 | |
Axon Fleet | |
| 5,247 |
| 2.4 | |
| 4,098 |
| 2.9 | |
| 1,149 |
| 28.0 | | |
| 13,820 |
| 5.4 | |
| 3,763 |
| 1.9 | |
| 10,057 |
| 267.3 | |
Axon Dock | |
| 5,509 |
| 2.5 | |
| 4,055 |
| 2.9 | |
| 1,454 |
| 35.9 | | |
| 7,480 |
| 2.9 | |
| 6,920 |
| 3.5 | |
| 560 |
| 8.1 | |
Axon Evidence and cloud services | |
| 60,367 |
| 27.6 | |
| 41,891 |
| 29.7 | |
| 18,476 |
| 44.1 | | |
| 79,939 |
| 31.2 | |
| 52,294 |
| 26.9 | |
| 27,645 |
| 52.9 | |
Extended warranties | |
| 8,149 |
| 3.7 | |
| 5,735 |
| 4.1 | |
| 2,414 |
| 42.1 | | |
| 9,061 |
| 3.5 | |
| 7,500 |
| 3.8 | |
| 1,561 |
| 20.8 | |
Other | |
| 5,980 |
| 2.7 | |
| 2,466 |
| 1.8 | |
| 3,514 |
| 142.5 | | |
| 729 |
| 0.3 | |
| 4,882 |
| 2.5 | |
| (4,153) |
| (85.1) | |
Total Software and Sensors segment | |
| 106,267 |
| 48.5 | |
| 70,769 |
| 50.3 | |
| 35,498 |
| 50.2 | | |
| 142,066 |
| 55.4 | |
| 96,020 |
| 49.2 | |
| 46,046 |
| 48.0 | |
Total net sales | | $ | 218,795 |
| 100.0 | % | $ | 141,259 |
| 100.0 | % | $ | 77,536 |
| 54.9 | % | | $ | 256,426 |
| 100.0 | % | $ | 195,019 |
| 100.0 | % | $ | 61,407 |
| 31.5 | % |
Net unit sales for TASER segment products and Software and Sensors segment products were as follows:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
|
| Three Months Ended June 30, |
| Unit |
| Percent |
| Three Months Ended March 31, |
| Unit |
| Percent | ||||
| | 2021 | | 2020 |
| Change |
| Change | | 2022 | | 2021 |
| Change |
| Change |
TASER 7 |
| 17,711 |
| 9,014 |
| 8,697 |
| 96.5 |
| 31,395 |
| 23,360 |
| 8,035 |
| 34.4 |
TASER X26P |
| 7,012 |
| 7,658 |
| (646) |
| (8.4) |
| 6,338 |
| 8,229 |
| (1,891) |
| (23.0) |
TASER X2 |
| 9,788 |
| 13,100 |
| (3,312) |
| (25.3) |
| 2,006 |
| 8,838 |
| (6,832) |
| (77.3) |
TASER Pulse |
| 6,307 |
| 5,429 |
| 878 |
| 16.2 | ||||||||
TASER Consumer devices |
| 6,201 |
| 8,686 |
| (2,485) |
| (28.6) | ||||||||
Cartridges |
| 1,413,329 |
| 715,268 |
| 698,061 |
| 97.6 |
| 1,089,939 |
| 1,009,760 |
| 80,179 |
| 7.9 |
Axon Body |
| 45,572 |
| 35,066 |
| 10,506 |
| 30.0 |
| 62,562 |
| 46,094 |
| 16,468 |
| 35.7 |
Axon Flex |
| 1,846 |
| 1,964 |
| (118) |
| (6.0) |
| 3,127 |
| 1,565 |
| 1,562 |
| 99.8 |
Axon Fleet |
| 2,462 |
| 2,327 |
| 135 |
| 5.8 |
| 5,747 |
| 1,440 |
| 4,307 |
| 299.1 |
Axon Dock |
| 5,283 |
| 4,634 |
| 649 |
| 14.0 |
| 8,064 |
| 6,786 |
| 1,278 |
| 18.8 |
| | | | | | | | | | | | | | | | |
Net sales for the TASER segment increased 59.6%15.5% primarily due to an increase of $22.9 million in cartridge revenue and and an increase of $16.5$16.1 million in TASER 7 device sales.devices and $7.4 million in cartridge revenue. We continue to see a shift to purchases of our latest generation device, TASER 7, from legacy devices. Internationally, we continue to see increase sales of our legacy devices. RevenueTASER 7 revenue was also impacted by higher average selling prices for TASER devices other than TASER Pulse. Theand an increase in cartridgeunit sales. Sales of our TASER 7 device also drove the increase in revenue from Axon Evidence and cloud services. Cartridge revenue was due to increasedimpacted by an increase in unit sales and was partially offset by a decline inhigher average selling prices. In May, we began taking ordersOffsetting the increases were decreased unit sales for our new wirelesslegacy TASER devices and our consumer devices. During the three months ended March 31, 2022, we recognized $33.1 million in TASER 7 revenue for orders that were Virtual Reality (VR) Simulator Training. While revenuesscheduled to ship prior to December 31, 2021, but could not be fulfilled due to the delayed receipt of a manufacturing component for this product were less than $0.1 million during the period, future contracted revenues for VR products grew to nearly $8.0 million.our TASER 7 devices.
Net sales for the Software and Sensors segment increased 50.2%48.0% during the three months ended June 30, 2021March 31, 2022 as we continued to add users and associated devices to our network. The increase in the aggregate number of users drove the majority of the increase in Axon Evidence revenue of $18.5 million; $1.8$27.6 million. The $10.1 million of the increase related to non-recurringin Axon Fleet revenue
2827
low-to-no margin professional services revernue. Sales of our Axon Body 3 camera drove most of the $8.1 million increase in Axon Body revenue. The increase in the aggregate number of users and devices also resulted in increased extended warranty revenues of $2.4 million. The increase of $3.5 million in Other revenue was primarily driven by higher unit sales, of Signal Sidearm and Interview Room.partially offset by lower average selling prices. Our newest Fleet product, Axon Fleet 3, which includes automated license plate reader technology, began shipping on June 30, 2021. Increased unit sales of our Axon Body 3 camera drove the $10.5 million increase in Axon Body and Axon Dock revenue and were partially offset by a decrease in Axon Dock average selling prices. Other revenue in the Software and Sensors segment decreased $4.2 million, driven primarily by $2.9 million of contra-revenue during the current quarter related to a free trial program of third party products. During the three months ended March 31, 2022, we recognized $13.0 million for orders that were scheduled to ship prior to December 31, 2021, but could not be fulfilled due to supply chain constraints for our Axon Body 3 devices.
We consider total company future contracted revenues a forward-looking performance indicator. As of June 30, 2021,March 31, 2022, we had approximately $2.04$2.97 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%15% - 25%20% 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.
Cost of Product and Service Sales
Within the TASER segment, cost of product and service sales increased to $37.8$40.6 million for the three months ended June 30, 2021March 31, 2022 from $27.2$32.9 million for the same period in 2020,2021, primarily related to higher unit sales. Cost as a percentage of sales decreasedincreased to 33.6%35.5% from 38.6%33.3%. The improvementincrease was mainlyprimarily attributable to a combination ofhigher freight and labor costs as well as increased manufacturing cost improvement and strong demand for our premium TASER offerings. We are building manufacturing capacity to support our TASER device and cartridge manufacturing lines in response to 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 savings in 2021. Segment gross margins mayoverhead costs. While we continue to fluctuateadjust strategic inventory levels based on customerareas of risk to mitigate potential supply disruptions, global supply conditions and product mix.local closures related to the COVID-19 pandemic could further impact our margins.
Within the Software and Sensors segment, cost of product and service sales increased to $43.0$60.1 million for the three months ended June 30, 2021March 31, 2022 from $25.8$38.7 million for the same period in 2020.2021. Cost as a percentage of sales increased slightly to 40.5%42.3% from 36.5%40.3%. 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. 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 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.The increase was primarily driven by product mix.
Gross Margin
As a percentage of net sales, gross margin for the TASER segment increaseddecreased to 66.4%64.5% from 61.4%66.7% for the three months ended June 30,March 31, 2022 and 2021, and 2020, respectively. The increasedecrease was a result of higher manufacturing cost improvement and product mix, as discussed above.freight costs.
As a percentage of net sales, gross margin for the Software and Sensors segment decreased to 59.5%57.7% from 63.5%59.7% for the three months ended June 30,March 31, 2022 and 2021, and 2020, respectively. Within the Software and Sensors segment, hardware gross margin was 39.7%40.5% for the three months ended June 30, 2021March 31, 2022 compared to 42.6%41.1% for the same period in 2020,2021, while the service margins were 74.5%72.3% and 77.9%75.1% during those same periods, respectively.
29
Sales, General and Administrative Expenses
Sales, general and administrative ("SG&A") expenses were comprised as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended June 30, |
| Dollar |
| Percent |
| Three Months Ended March 31, |
| Dollar |
| Percent | ||||||||||
| | 2021 | | 2020 |
| Change |
| Change | | 2022 | | 2021 |
| Change |
| Change | ||||||
Total sales, general and administrative expenses | | $ | 177,662 | | $ | 72,293 | | $ | 105,369 |
| 145.8 | | $ | 90,129 | | $ | 126,597 | | $ | (36,468) |
| (28.8) |
Sales, general, and administrative as a percentage of net sales | |
| 81.2 | % |
| 51.2 | % |
|
|
|
| |
| 35.1 | % |
| 64.9 | % |
|
|
|
|
Stock-based compensation expense increased $87.3decreased $58.0 million in comparison to the prior year comparable period, which was attributable to an increasea decrease of $55.6$35.7 million in expense related to the CEO Performance Award and an increasea decrease of $33.9$25.3 million related to our XSPP. AccelerationThe decrease was attributable to the vesting of ten tranches of the CEO Performance Award and nine tranches of the XSPP in the anticipated timing of attainment for the unvested probable tranches resulted in a $93.2 million increase to stock-based compensation expense. The increase was partially offset by a decrease of $3.6 million for tranches that have vested and2021, which have no remaining unrecognized expense. The decrease was partially offset by increased stock-based compensation expense due to increased headcount.
28
Salaries, benefits and bonus expense increased $10.7$6.1 million primarily due to an increase in headcount and an increase in payroll taxes on a higher base of salaries and bonus and commission expense. Included in thisPartially offsetting the increase was $2.0a decrease of $1.4 million in payroll taxes related to the vesting of the second and third tranchesfirst tranche of our XSPP in May 2021.March 2021; as no tranches of the XSPP have vested in 2022, we have not recognized payroll tax expense related to the program this year.
Sales and marketing and travel expenses increased $6.1 million,$8.0 million. The increase was primarily driven by a $4.0$3.6 million increase in commissions expense tied to higher revenues, and by higher spending on content development, promotional videos, spending for new product launches, and advertising.
Travel$3.4 million increase in travel expenses, increased $2.1 million, reflectingreflected a return to pre-pandemic spending levels as travel levels for certainrestrictions have eased and in-person meetings have resumed, and an increase of our employees.$1.1 million related to trade shows, seminars, and strategic meetings. Also impacting higher travel expense was increased travel costs per trip.
Professional and consulting expenses remained consistent withincreased $3.0 million in comparison to the prior year comparable period. This included a decrease of $3.7 million inperiod, driven primarily by increased legal expenses relating to the FTC litigation; as discussed in Note 12 of the notes to our condensed consolidated financial statements within this Report on Form 10-Q, we sued the FTC in the District of Arizona, and the FTC filed an enforcement action regarding our May 2018 acquisition of Vievu LLC. Offsetting the decrease in legal expenses was an increase in other professional and consulting expenses including consulting costs related to an expense. enterprise resource planning system conversion and expenses for contract employees.
Research and Development Expenses
Research and development ("R&D") expenses were comprised as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended June 30, |
| Dollar |
| Percent |
| Three Months Ended March 31, |
| Dollar |
| Percent | ||||||||||
| | 2021 | | 2020 |
| Change |
| Change | | 2022 | | 2021 |
| Change |
| Change | ||||||
Total research and development expenses | | $ | 53,952 | | $ | 29,560 | | $ | 24,392 |
| 82.5 | | $ | 48,416 | | $ | 47,018 | | $ | 1,398 |
| 3.0 |
Research and development as a percentage of net sales | |
| 24.7 | % |
| 20.9 | % |
|
|
|
| |
| 18.9 | % |
| 24.1 | % |
|
|
|
|
Within the TASER segment, R&D expense increased $8.6$0.7 million reflecting increased stock-based compensation expense, professional and consulting expenses and salaries,. An increase of $1.4 million in salaries, benefits and bonus expense in the current period. The increase of $4.7 million in stock-based compensation expense related primarily to acceleration in the anticipated timing of attainment for the remaining probable tranches of our XSPP. Professional reflected higher headcount. Additionally, indirect manufacturing costs and consulting expensessupplies increased $2.1$0.9 million related to the development of next generation products, and salaries, benefits and bonusproducts. Fully offsetting these increases was a decrease in stock-based compensation expense increased $1.5of $2.7 million, on higher headcount.due to the vesting of XSPP tranches during 2021, for which there is no remaining unamortized expense.
R&D expense for the Software and Sensors segment increased $15.8$0.7 million, reflecting an increase of $10.7$4.6 million in salaries, benefits and bonus expense due to higher headcount. Partially offsetting the increase was a decrease in stock-based compensation expense and an increase of $4.1$3.4 million, in salaries, benefits and bonus expense. Ofdue to the total increase in stock-based compensationvesting of nine XSPP tranches during 2021, for which there is no remaining unamortized expense $7.0 million was attributable to our XSPP and was due primarily to acceleration in the anticipated timing of attainment for the remaining probable tranches. vested tranchesStock-based compensation
30
expense. Professional and consulting expenses also increased overdecreased $1.1 million, reflecting higher spending during the prior year comparable period duerelated to an increase in headcount. The increase in salaries, benefits and bonus was primarily a resultthe development of increased headcount.next generation products.
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,CEDs, 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.
Interest and Other Income, (Expense), Net
Interest and other income, (expense), net was $41.8$55.3 million for the three months ended June 30, 2021March 31, 2022, compared to $1.6income of $0.6 million for the same period in 2020. We2021. During the first quarter of 2022, we recorded aan unrealized gain of $40.9$70.4 million related to observable price changes for our investmests in certain unconsolidated affiliatesexisting investments and related warrants; $12.3warrants, and a $14.6 million of this gain was realized during the period unrealized loss on the sale of a portion ofmarketable securities related to our existing investment. The increaseinvestment in other income was partially offset by a decrease in interest income CLBT.attributable to decreased interest rates on investments during the current period.
Provision for Income Taxes
The provision for income taxes was a benefitan expense of $4.7$17.6 million for the three months ended June 30, 2021,March 31, 2022, which was an effective tax rate of 9.1%24.3%. Our estimated full year effective income tax rate for 2021,2022, before discrete period adjustments, is (19.1%)25.7%, which differs from the federal statutory rate primarily due to the impact of R&D tax credits offset by the executive compensation limitation under Internal Revenue Code ("IRC") Section 162(m), partially offset by R&D and an increase in
29
valuation allowance and unrecognized tax credits, on a projected pre-tax loss for the year.benefits. The effective tax rate was favorably impacted by a $13.9$1.1 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for RSUs and PSUs that vested during the three months ended June 30, 2021.March 31, 2022.
Net Income
We recorded net lossincome of $47.1$54.9 million for the three months ended June 30, 2021March 31, 2022 compared to net loss of $30.8$47.9 million for the same period in 2020. 2021. Net lossincome per basic and diluted share was $0.72$0.77 for the three months ended June 30, 2021March 31, 2022 compared to $0.51$0.75 net loss per basic andshare for the same period in 2021. Net income per diluted share was $0.76 for the three months ended March 31, 2022 compared to $0.75 net loss per diluted share for the same period in 2020.2021.
31
Three Months Ended June 30, 2021March 31, 2022 Compared to the Three Months Ended MarchDecember 31, 2021
Net Sales
Net sales by product line were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended |
| Three Months Ended |
| Dollar |
| Percent |
| Three Months Ended |
| Three Months Ended |
| Dollar |
| Percent | ||||||||||||||||
| | June 30, 2021 | | March 31, 2021 | | Change | | Change | | March 31, 2022 | | December 31, 2021 | | Change | | Change | ||||||||||||||||
TASER segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
TASER 7 | | $ | 28,128 |
| 12.9 | % | $ | 33,991 |
| 17.5 | % | $ | (5,863) |
| (17.2) | % | | $ | 50,066 |
| 19.5 | % | $ | 23,146 |
| 10.6 | % | $ | 26,920 |
| 116.3 | % |
TASER X26P | |
| 9,569 |
| 4.4 | |
| 9,963 |
| 5.1 | |
| (394) |
| (4.0) | | |
| 9,479 |
| 3.7 | |
| 12,011 |
| 5.5 | |
| (2,532) |
| (21.1) | |
TASER X2 | |
| 16,145 |
| 7.4 | |
| 12,778 |
| 6.6 | |
| 3,367 |
| 26.3 | | |
| 3,619 |
| 1.4 | |
| 19,080 |
| 8.8 | |
| (15,461) |
| (81.0) | |
TASER Pulse | |
| 1,701 |
| 0.8 | |
| 2,205 |
| 1.1 | |
| (504) |
| (22.9) | | ||||||||||||||||
TASER Consumer devices | |
| 1,696 |
| 0.7 | |
| 2,259 |
| 1.0 | |
| (563) |
| (24.9) | | ||||||||||||||||
Cartridges | | | 46,678 | | 21.3 | | | 30,418 | | 15.6 | | | 16,260 | | 53.5 | | | | 37,825 | | 14.7 | | | 36,433 | | 16.7 | | | 1,392 | | 3.8 | |
Axon Evidence and cloud services | |
| 1,702 |
| 0.8 | |
| 1,396 |
| 0.7 | |
| 306 |
| 21.9 | | |
| 3,017 |
| 1.2 | |
| 3,350 |
| 1.5 | |
| (333) |
| (9.9) | |
Extended warranties | |
| 5,857 |
| 2.7 | |
| 5,646 |
| 2.9 | |
| 211 |
| 3.7 | | |
| 6,679 |
| 2.6 | |
| 6,523 |
| 3.0 | |
| 156 |
| 2.4 | |
Other | |
| 2,748 |
| 1.2 | |
| 2,602 |
| 1.3 | |
| 146 |
| 5.6 | | |
| 1,979 |
| 0.8 | |
| 1,107 |
| 0.7 | |
| 872 |
| 78.8 | |
TASER segment | |
| 112,528 |
| 51.5 | |
| 98,999 |
| 50.8 | |
| 13,529 |
| 13.7 | | |
| 114,360 |
| 44.6 | |
| 103,909 |
| 47.8 | |
| 10,451 |
| 10.1 | |
Software and Sensors segment: | |
|
|
|
| |
|
|
|
| |
|
|
|
| | |
|
|
|
| |
|
|
|
| |
|
|
|
| |
Axon Body | |
| 19,927 |
| 9.1 | |
| 19,756 |
| 10.1 | |
| 171 |
| 0.9 | | |
| 29,708 |
| 11.6 | |
| 14,939 |
| 6.9 | |
| 14,769 |
| 98.9 | |
Axon Flex | |
| 1,088 |
| 0.5 | |
| 905 |
| 0.5 | |
| 183 |
| 20.2 | | |
| 1,329 |
| 0.5 | |
| 674 |
| 0.3 | |
| 655 |
| 97.2 | |
Axon Fleet | |
| 5,247 |
| 2.4 | |
| 3,763 |
| 1.9 | |
| 1,484 |
| 39.4 | | |
| 13,820 |
| 5.4 | |
| 9,246 |
| 4.2 | |
| 4,574 |
| 49.5 | |
Axon Dock | |
| 5,509 |
| 2.5 | |
| 6,920 |
| 3.5 | |
| (1,411) |
| (20.4) | | |
| 7,480 |
| 2.9 | |
| 5,552 |
| 2.5 | |
| 1,928 |
| 34.7 | |
Axon Evidence and cloud services | |
| 60,367 |
| 27.6 | |
| 52,294 |
| 26.9 | |
| 8,073 |
| 15.4 | | |
| 79,939 |
| 31.2 | |
| 70,072 |
| 32.2 | |
| 9,867 |
| 14.1 | |
Extended warranties | |
| 8,149 |
| 3.7 | |
| 7,500 |
| 3.8 | |
| 649 |
| 8.7 | | |
| 9,061 |
| 3.5 | |
| 9,054 |
| 4.2 | |
| 7 |
| 0.1 | |
Other | |
| 5,980 |
| 2.7 | |
| 4,882 |
| 2.5 | |
| 1,098 |
| 22.5 | | |
| 729 |
| 0.3 | |
| 4,132 |
| 1.9 | |
| (3,403) |
| (82.4) | |
Software and Sensors segment | |
| 106,267 |
| 48.5 | |
| 96,020 |
| 49.2 | |
| 10,247 |
| 10.7 | | |
| 142,066 |
| 55.4 | |
| 113,669 |
| 52.2 | |
| 28,397 |
| 25.0 | |
Total net sales | | $ | 218,795 |
| 100.0 | % | $ | 195,019 |
| 100.0 | % | $ | 23,776 |
| 12.2 | % | | $ | 256,426 |
| 100.0 | % | $ | 217,578 |
| 100.0 | % | $ | 38,848 |
| 17.9 | % |
30
Net unit sales for TASER segment products and Software and Sensors segment products were as follows:
| | | | | | | | | | | | | | | | | | |
|
| Three Months Ended |
| |
| |
|
| Three Months Ended |
| |
| |
| ||||
| | | | | | Unit | | Percent | | | | | | Unit | | Percent | ||
| | June 30, 2021 | | March 31, 2021 | | Change | | Change | | March 31, 2022 | | December 31, 2021 | | Change | | Change | ||
TASER 7 |
| 17,711 |
| 23,360 |
| (5,649) |
| (24.2) | % |
| 31,395 |
| 12,927 |
| 18,468 |
| 142.9 | % |
TASER X26P |
| 7,012 |
| 8,229 |
| (1,217) |
| (14.8) | % |
| 6,338 |
| 8,246 |
| (1,908) |
| (23.1) | % |
TASER X2 |
| 9,788 |
| 8,838 |
| 950 |
| 10.7 | % |
| 2,006 |
| 14,432 |
| (12,426) |
| (86.1) | % |
TASER Pulse |
| 6,307 |
| 8,686 |
| (2,379) |
| (27.4) | % | |||||||||
TASER Consumer devices |
| 6,201 |
| 8,733 |
| (2,532) |
| (29.0) | % | |||||||||
Cartridges |
| 1,413,329 |
| 1,009,760 |
| 403,569 |
| 40.0 | % |
| 1,089,939 |
| 1,194,867 |
| (104,928) |
| (8.8) | % |
Axon Body |
| 45,572 |
| 46,094 |
| (522) |
| (1.1) | % |
| 62,562 |
| 31,749 |
| 30,813 |
| 97.1 | % |
Axon Flex |
| 1,846 |
| 1,565 |
| 281 |
| 18.0 | % |
| 3,127 |
| 1,027 |
| 2,100 |
| 204.5 | % |
Axon Fleet |
| 2,462 |
| 1,440 |
| 1,022 |
| 71.0 | % |
| 5,747 |
| 4,609 |
| 1,138 |
| 24.7 | % |
Axon Dock |
| 5,283 |
| 6,786 |
| (1,503) |
| (22.1) | % |
| 8,064 |
| 4,959 |
| 3,105 |
| 62.6 | % |
| | | | | | | | | |
Net sales within the TASER segment increased by approximately $13.5$10.5 million or 13.7%10.1% as compared to the prior quarter, primarily due to an increase of $16.3$26.9 million in cartridgeTASER 7 revenue andas a result of higher unit sales, partially offset by lower average selling prices. The increase in TASER segment revenue was partially offset by a net decrease in revenue from other TASER devices of $3.4$18.6 million as a result of lowerfewer units sold. Cartridge revenue increased on both higher units sold andby $1.4 million due to higher average selling prices, partially offset by decreased units sold. During the three months ended March 31, 2022, we recognized $33.0 million in TASER 7 revenue for orders that were scheduled to ship prior to December 31, 2021, but could not be fulfilled due to the mixdelayed receipt of cartridge types sold during the period. The decrease ina manufacturing component for our TASER device revenues was partially offset by higher average selling prices.7 devices.
Within the Software and Sensors segment, net sales increased $10.2$28.4 million or 10.7%25.0% during the three months ended June 30, 2021March 31, 2022 compared to the prior quarter.quarter, primarily due to an increase of $14.8 million in Axon Body revenue as a result of higher average selling price offset by fewer units sold. The increase in the aggregate number of users resulted in increased Axon Evidence revenue of $8.1$9.9 million. Axon Fleet revenue increased $1.5$4.6 million whiledue to higher average selling prices and increased units sold. Axon Dock revenue decreased $1.4increased $1.9 million both primarily driven by corresponding changesan increase in the number of units sold.
32
Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 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):
| | | | | | | | | | | | |
| | Six Months Ended June 30, |
| |||||||||
| | 2021 |
| | 2020 |
| ||||||
Net sales from products |
| $ | 297,313 |
| 71.8 | % | | $ | 206,043 |
| 71.4 | % |
Net sales from services | |
| 116,501 |
| 28.2 | | |
| 82,378 |
| 28.6 | |
Net sales | |
| 413,814 |
| 100.0 | | |
| 288,421 |
| 100.0 | |
Cost of product sales | |
| 123,917 |
| 29.9 | | |
| 92,709 |
| 32.1 | |
Cost of service sales | |
| 28,615 |
| 6.9 | | |
| 18,927 |
| 6.6 | |
Cost of sales | |
| 152,532 |
| 36.9 | | |
| 111,636 |
| 38.7 | |
Gross margin | |
| 261,282 |
| 63.1 | | |
| 176,785 |
| 61.3 | |
Operating expenses: | | | | | | | | | | | | |
Sales, general and administrative | |
| 304,259 |
| 73.5 | | |
| 135,320 |
| 46.9 | |
Research and development | |
| 100,970 |
| 24.4 | | |
| 55,941 |
| 19.4 | |
Total operating expenses | |
| 405,229 |
| 97.9 | | |
| 191,261 |
| 66.3 | |
Loss from operations | |
| (143,947) |
| (34.8) | | |
| (14,476) |
| (5.0) | |
Interest and other income, net | |
| 42,426 |
| 10.3 | | |
| 2,554 |
| 0.9 | |
Loss before provision for income taxes | |
| (101,521) |
| (24.5) | | |
| (11,922) |
| (4.1) | |
Provision for (benefit from) income taxes | |
| (6,487) |
| (1.6) | | |
| 14,763 |
| 5.1 | |
Net loss |
| $ | (95,034) |
| (23.0) | % | | $ | (26,685) |
| (9.2) | % |
The following table presents our revenues disaggregated by geography (in thousands):
| | | | | | | | | | | | |
| | Six Months Ended June 30, |
| |||||||||
| | 2021 | | | 2020 |
| ||||||
United States |
| $ | 325,294 |
| 79 | % | | $ | 225,010 |
| 78 | % |
Other Countries | |
| 88,520 |
| 21 | | |
| 63,411 |
| 22 | |
Total | | $ | 413,814 |
| 100 | % | | $ | 288,421 |
| 100 | % |
International revenue increased compared to the prior year comparable period, driven primarily by increased sales in the Americas and EMEA regions.
33
Net Sales
Net sales by product line were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| Dollar |
| Percent |
| |||||||||
| | 2021 | | 2020 | | Change | | Change |
| |||||||
TASER segment: |
| |
|
|
|
| |
|
|
|
| |
|
|
| |
TASER 7 | | $ | 62,119 |
| 15.0 | % | $ | 26,914 |
| 9.3 | % | $ | 35,205 |
| 130.8 | % |
TASER X26P | |
| 19,532 |
| 4.7 | |
| 20,572 |
| 7.1 | |
| (1,040) |
| (5.1) | |
TASER X2 | |
| 28,923 |
| 7.0 | |
| 30,907 |
| 10.7 | |
| (1,984) |
| (6.4) | |
TASER Pulse | |
| 3,906 |
| 0.9 | |
| 3,393 |
| 1.2 | |
| 513 |
| 15.1 | |
Cartridges | |
| 77,096 |
| 18.6 | |
| 50,397 |
| 17.5 | |
| 26,699 |
| 53.0 | |
Axon Evidence and cloud services | |
| 3,098 |
| 0.7 | |
| 1,084 |
| 0.4 | |
| 2,014 |
| 185.8 | |
Extended warranties | |
| 11,503 |
| 2.8 | |
| 10,075 |
| 3.5 | |
| 1,428 |
| 14.2 | |
Other | |
| 5,350 |
| 1.4 | |
| 3,043 |
| 1.0 | |
| 2,307 |
| 75.8 | |
TASER segment | |
| 211,527 |
| 51.1 | |
| 146,385 |
| 50.7 | |
| 65,142 |
| 44.5 | |
Software and Sensors segment: | |
| |
| | |
| |
| | |
|
|
|
| |
Axon Body | |
| 39,683 |
| 9.6 | |
| 24,667 |
| 8.6 | |
| 15,016 |
| 60.9 | |
Axon Flex | |
| 1,993 |
| 0.5 | |
| 1,863 |
| 0.6 | |
| 130 |
| 7.0 | |
Axon Fleet | |
| 9,010 |
| 2.2 | |
| 8,873 |
| 3.1 | |
| 137 |
| 1.5 | |
Axon Dock | |
| 12,429 |
| 3.0 | |
| 9,006 |
| 3.1 | |
| 3,423 |
| 38.0 | |
Axon Evidence and cloud services | |
| 112,661 |
| 27.2 | |
| 81,045 |
| 28.1 | |
| 31,616 |
| 39.0 | |
Extended warranties | |
| 15,649 |
| 3.8 | |
| 11,193 |
| 3.9 | |
| 4,456 |
| 39.8 | |
Other | |
| 10,862 |
| 2.6 | |
| 5,389 |
| 1.9 | |
| 5,473 |
| 101.6 | |
Software and Sensors segment | |
| 202,287 |
| 48.9 | |
| 142,036 |
| 49.3 | |
| 60,251 |
| 42.4 | |
Total net sales | | $ | 413,814 |
| 100.0 | % | $ | 288,421 |
| 100.0 | % | $ | 125,393 |
| 43.5 | % |
Net unit sales for TASER segment products and Software and Sensors segment products were as follows:
| | | | | | | | | |
| | Six Months Ended June 30, | | Unit | | Percent | |||
|
| 2021 |
| 2020 |
| Change |
| Change | |
TASER 7 |
| 41,071 |
| 20,444 |
| 20,627 |
| 100.9 | % |
TASER X26P |
| 15,241 |
| 18,661 |
| (3,420) |
| (18.3) | % |
TASER X2 |
| 18,626 |
| 23,578 |
| (4,952) |
| (21.0) | % |
TASER Pulse |
| 14,993 |
| 8,690 |
| 6,303 |
| 72.5 | % |
Cartridges |
| 2,423,089 |
| 1,588,632 |
| 834,457 |
| 52.5 | % |
Axon Body |
| 91,666 |
| 74,930 |
| 16,736 |
| 22.3 | % |
Axon Flex |
| 3,411 |
| 5,038 |
| (1,627) |
| (32.3) | % |
Axon Fleet |
| 3,902 |
| 5,003 |
| (1,101) |
| (22.0) | % |
Axon Dock |
| 12,069 |
| 9,931 |
| 2,138 |
| 21.5 | % |
Net sales for the TASER segment increased $65.1 million, or 44.5%, primarily due to a net increase of $32.7$3.4 million in TASER device sales and an increase of $26.7 million in cartridge revenue. We continue to see a shift to purchases of our latest generation device, TASER 7, from legacy devices. Revenue was also impacted by higher average selling prices for TASER devices other than TASER Pulse. The increase in cartridge revenue was primarily due to increased unit sales, with average selling prices remaining flat.
Net sales forrevenues across multiple smaller product offerings within the Software and Sensors segment increased $60.3 million, or 42.4%, duringsegment. During the sixthree months ended June 30,March 31, 2022, we recognized $13.0 million for orders that were scheduled to ship prior to December 31, 2021, as we continuedbut could not be fulfilled due to add users and associated devices to our network. The increase in the aggregate number of users resulted in increased Axon Evidence revenue of $31.6 million. Sales ofsupply chain constraints for our Axon Body 3 camera drove most ofdevices.
34
the $15.0 million increase in Axon Body revenue and the $3.4 million increase in Axon Dock revenue. The increase in the aggregate number of users and devices also resulted in increased extended warranty revenues of $4.5 million. The increase of $5.5 million in Other revenue was primarily driven by higher sales of Signal Sidearm and Interview Room.
Cost of Product and Service Sales
Within the TASER segment, cost of product sales increased to $70.7 million for the six months ended June 30, 2021 from $57.5 million for the same period in 2020. Cost as a percentage of sales decreased to 33.5% from 39.3%. The improvement was primarily attributable to a combination of manufacturing cost improvement and strong demand for our premium TASER offerings, which resulted in a favorable product mix. We are building manufacturing capacity to support our TASER device and cartridge manufacturing lines in response to growing international and federal demand and an increased install base.
Within the Software and Sensors segment, cost of product and service sales increased to $81.7 million for the six months ended June 30, 2021 from $54.1 million for the same period in 2020. Cost as a percentage of sales increased to 40.4% from 38.1%. Cost of product sales increased $18.1 million, and increased as a percentage of sales primarily as a result of product mix. Cost of service sales increased $9.5 million, and increased as a percentage of sales. 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.
Gross Margin
As a percentage of net sales, gross margin for the TASER segment increased to 66.5% from 60.7% for the six months ended June 30, 2021 and 2020, respectively. The increase was a result of manufacturing cost improvement and product mix, as discussed above.
As a percentage of net sales, gross margin for the Software and Sensors segment decreased to 59.6% from 61.9% for the six months ended June 30, 2021 and 2020, respectively. Within the Software and Sensors segment, hardware gross margin was 40.4% for the six months ended June 30, 2021 compared to 42.3% for the same period in 2020, while the service margins were 74.8% and 76.6% during those same periods, respectively.
Sales, General and Administrative Expenses
Sales, general and administrative ("SG&A") expenses were comprised as follows (dollars in thousands):
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | Dollar | | Percent | ||||||
|
| 2021 |
| 2020 |
| Change |
| Change | ||||
Total sales, general and administrative expenses | | $ | 304,259 | | $ | 135,320 | | $ | 168,939 |
| 124.8 | % |
SG&A expenses as a percentage of net sales | | | 73.5 | % | | 46.9 | % | | | | | |
Stock-based compensation expense increased $143.4 million in comparison to the prior year comparable period, which was attributable to an increase of $87.3 million in expense related to the CEO Performance Award and an increase of $56.9 million related to our XSPP, which were primarily attributable to acceleration in the anticipated timing of attainment for the remaining probable tranches. Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount.
Salaries, benefits and bonus expense increased $20.2 million primarily due to an increase in headcount. Included in this increase was $3.3 million in payroll taxes related to the vesting of three tranches of our XSPP in March and May 2021.
Sales and marketing expenses increased $9.4 million, driven by a $6.4 million increase in commissions expense tied to higher revenues and by higher spending on content development, promotional videos, new product launches, and advertising.
35
Professional, consulting and lobbying expenses decreased $5.7 million, driven by a $9.6 million decrease in expenses relating to the FTC litigation. Offsetting the decrease in legal expenses was an increase in other professional and consulting expenses for consulting costs related to an enterprise resource planning system conversion and for sales to new markets, and expenses for contract employees.
Research and Development Expenses
Research and development ("R&D") expenses were comprised as follows (dollars in thousands):
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | Dollar | | Percent | ||||||
|
| 2021 |
| 2020 |
| Change |
| Change | ||||
Total research and development expenses | | $ | 100,970 | | $ | 55,941 | | $ | 45,029 |
| 80.5 | % |
R&D expenses as a percentage of net sales | | | 24.4 | % | | 19.4 | % | | | | | |
Within the TASER segment, R&D expense increased $14.8 million, reflecting increased stock-based compensation expense, salaries, benefits and bonus expense, and professional and consulting expenses in the current period. The increase of $8.3 million in stock-based compensation expense related primarily to acceleration in the anticipated timing of attainment for the remaining probable tranches of our XSPP and to attainment of other PSU awards. Salaries, benefits and bonus expense increased $2.7 million on higher headcount, and professional and consulting expenses increased $3.4 million related to the development of next generation products.
R&D expense for the Software and Sensors segment increased $30.3 million, reflecting an increase of $19.5 million in stock-based compensation expense, an increase of $8.1 million in salaries, benefits and bonus expense, and an increase of $1.5 million in professional and consulting expenses. Of the total increase in stock-based compensation expense, $11.3 million was attributable to our XSPP and was due primarily to acceleration in the anticipated timing of attainment for the remaining probable tranches. Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount. The increase in salaries, benefits and bonus was primarily a result of increased headcount. The increase in professional and consulting expenses was attributable to development of next generation products.
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. These investments include Axon Records and computer-aided dispatch software. 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, net was $42.4 million for the six months ended June 30, 2021 compared to $2.6 million for the same period in 2020. We recorded a gain of $40.9 million related to observable price changes for our investmests in certain unconsolidated affiliates and related warrants; $12.3 million of this gain was realized during the period on the sale of a portion of our existing investment. The increase in other income was partially offset by a decrease in interest income attributable to decreased interest rates on investments during the current period.
Provision for Income Taxes
The provision for income taxes was a benefit of $6.5 million for the six months ended June 30, 2021, which was an effective tax rate of 6.4%. Our estimated full year effective income tax rate for 2021, before discrete period adjustments, is (19.1%), which differs from the federal statutory rate primarily due to the impact of the executive compensation limitation under 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 $25.7 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for RSUs and PSUs that vested during the six months ended June 30, 2021.
36
Net Income
Our net income decreased by $68.3 million to a net loss of $95.0 million for the six months ended June 30, 2021 compared to net loss of $26.7 million for the same period in 2020. Net loss per basic and diluted share was $1.47 for the six months ended June 30, 2021 compared to $0.44 net loss per basic and diluted share for the same period in 2020.
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. |
31
Although these non-GAAP financial measures are not consistent with GAAP, management believes investors will benefit by referring to these non-GAAP financial measures when assessing our operating results, as well as when forecasting and analyzing future periods. However, management recognizes that:
● | these non-GAAP financial measures are limited in their usefulness and should be considered only as a supplement to our GAAP financial measures; |
● | these non-GAAP financial measures should not be considered in isolation from, or as a substitute for, our GAAP financial measures; |
● | these non-GAAP financial measures should not be considered to be superior to our GAAP financial measures; and |
● | these non-GAAP financial measures were not prepared in accordance with GAAP and investors should not assume that the non-GAAP financial measures presented in this Quarterly Report on Form 10-Q were prepared under a comprehensive set of rules or principles. |
37
EBITDA and Adjusted EBITDA (CEO Performance Award) reconciles to net income (loss) as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | ||
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | ||||||||||||||||||
|
| June 30, |
| March 31, |
| June 30, |
| June 30, |
| June 30, |
| March 31, |
| December 31, |
| March 31, |
| ||||||||
| | 2021 | | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2021 | | ||||||||
Net income (loss) | | $ | (47,117) | | $ | (47,917) | | $ | (30,759) | | $ | (95,034) | | $ | (26,685) | | $ | 54,871 | | $ | (13,508) | | $ | (47,917) | |
Depreciation and amortization | |
| 4,291 | |
| 4,291 | |
| 2,930 | |
| 8,582 | |
| 5,811 | |
| 5,755 | |
| 5,274 | |
| 4,291 | |
Interest expense | |
| 17 | |
| 5 | |
| 5 | |
| 22 | |
| 12 | |
| 8 | |
| 1 | |
| 5 | |
Investment interest income | |
| (502) | |
| (533) | |
| (1,499) | |
| (1,035) | |
| (2,192) | ||||||||||
Investment interest (income) loss | |
| 346 | |
| (353) | |
| (533) | | |||||||||||||||
Provision for (benefit from) income taxes | |
| (4,727) | |
| (1,760) | |
| 18,696 | |
| (6,487) | |
| 14,763 | |
| 17,622 | |
| (23,706) | |
| (1,760) | |
EBITDA | | $ | (48,038) | | $ | (45,914) | | $ | (10,627) | | $ | (93,952) | | $ | (8,291) | | $ | 78,602 | | $ | (32,292) | | $ | (45,914) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Adjustments: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Stock-based compensation expense | |
| 137,549 | |
| 89,610 | |
| 33,835 | |
| 227,159 | |
| 54,030 | |
| 25,088 | |
| 41,110 | |
| 89,610 | |
Adjusted EBITDA (CEO Performance Award) | | $ | 89,511 | | $ | 43,696 | | $ | 23,208 | | $ | 133,207 | | $ | 45,739 | | $ | 103,690 | | $ | 8,818 | | $ | 43,696 | |
Liquidity and Capital Resources
Summary
As of June 30, 2021,March 31, 2022, we had $266.4$386.4 million of cash and cash equivalents, an increase of $110.9$30.0 million as compared to December 31, 2020.2021. Cash and cash equivalents and investments totaled $703.9$424.1 million, representing an increase of $51.3$22.0 million from December 31, 2020.2021.
Our ongoing sources of cash include cash on hand, investments, and cash flows from operations. Of theRestricted cash and cash equivalents, $0.1 is restricted cash, which consistsbalance of $2.1 million primarily ofrelated to funds held in an international bank account securing a guarantee and funds held in an international bank account for a country in which we are required to maintain a minimum balance to operate. This balance is included in prepaid expenses and other current assets, as well as other assets on our condensed consolidated balance sheet. 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 June 30, 2021,March 31, 2022, we had letters of credit outstanding of $6.1$6.3 million, leaving the net amount available for borrowing of $43.9$43.7 million. The facility matures on December 31, 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
32
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 June 30, 2021March 31, 2022 and December 31, 2020,2021, 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 June 30, 2021,March 31, 2022, our funded debt to EBITDA ratio was 0.00 to 1.00.
TASER subscription 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 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.
38
Based on our strong balance sheet and the fact that we do not have long-term debt at June 30, 2021,March 31, 2022, 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 investments, income and payroll tax payments for net-settled stock awards, 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.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities (in thousands):
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | Three Months Ended March 31, | ||||||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
Operating activities | | $ | 95,115 | | $ | (6,977) | | $ | 43,964 | | $ | 60,939 |
Investing activities | | | 26,446 | | | (146,211) | | | (10,348) | | | (54,123) |
Financing activities | | | (10,312) | | | 301,307 | | | (1,459) | | | (7,045) |
Effect of exchange rate changes on cash and cash equivalents | |
| (319) | |
| (1,115) | |
| (157) | |
| (392) |
Net increase in cash and cash equivalents and restricted cash | | $ | 110,930 | | $ | 147,004 | ||||||
Net increase (decrease) in cash and cash equivalents and restricted cash | | $ | 32,000 | | $ | (621) |
Operating activities
Net cash provided by operating activities in the first sixthree months of 20212022 of $95.1$44.0 million reflects $95.0net income of $54.9 million, in net loss, non-cash income statement items totaling $194.0$3.5 million, and a decrease of $3.9$7.4 million for the net change in operating assets and liabilities. Included in the non-cash items were $8.6$25.1 million in stock-based compensation expense, a decrease of $18.0 million in deferred tax assets, net, $5.8 million in depreciation and amortization expense, $227.2 million in stock-based compensation expense and $40.9a $70.4 million gain on the change in fair value of strategic investments.investments, offset by an unrealized loss of $14.6 million on marketable securities. Cash provided by operations was primarily drivenimpacted by increased deferred revenue of $25.6 million. The increase in deferred revenue is$16.0 million, which was primarily attributable to increased sales. ThisAdditionally, accounts and notes receivable and contract assets decreased by $7.5 million, primarily as a result of improved collection timing. Offsetting this activity was an increase was partially offset by increasedof $14.3 million in inventory, an increase in prepaid expenses and other assets of $13.3$7.1 million, and decreaseda decrease in accounts payable, accrued liabilities and other liabilities of $10.4$9.6 million. The increase in inventory was primarily driven by the proactive buildup required to meet future demand. The increase in prepaid expenses and other assets was driven by an increase in prepaid commissions related to higher bookings not yet recognized as revenue, an increase in capitalized cloud computing costs related to an enterprise resource planning system conversion, an increase in right-of-use lease assets,the timing of payments and an increase in income tax receivable as compared to the prior year end
33
deferred cost of goods sold. The decrease in accounts payable, accrued liabilities and other liabilities relatedwas driven primarily toby the timing of invoice payments at the end of the current period.annual bonus payout.
Net cash used inprovided by operating activities in the first sixthree months of 20202021 of $7.0$60.9 million reflects $26.7$47.9 million in net loss, non-cash income statement items totaling $59.0$95.8 million, and a usepositive impact of cash of $39.3$13.0 million for the net change in operating assets and liabilities. Included in the non-cash items were $5.8$4.3 million in depreciation and amortization expense $54.0and $89.6 million in stock-based compensation expense, and a $6.1 million increase in deferred tax assets, net.expense. Cash used inprovided by operations was primarily driven by increased inventory of $43.3 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 $9.4$31.3 million and increased prepaid and other assetsdeferred revenue of $8.6$6.2 million. The increasedecrease in accounts and notes receivable and contract assets was primarily attributable to increased sales over the last several quarters, primarily sales made undertiming of payments received, as well as an overall increase in subscription plans. The increase insales. Cash provided by operations was partially offset by increased prepaid expenses and other assets was primarily attributable to a $10.4of $7.0 million receivable related to held-to-maturity securities sold at the end of the current quarter. Partially offsetting the uses of cash were increases inand decreased accounts payable, accrued liabilities and other liabilities of $16.7 million, and in deferred revenue of $5.2$18.1 million. The increase indecrease of accounts payable, accrued liabilities and other liabilities was primarily attributable to accruals for 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 Softwarereduction of accrued commissions due to decreased bookings as compared to the quarter ended December 31, 2020 and Sensors services.timing of inventory purchases.
39
Investing activities
Net cash provided byWe used $10.3 million in investing activities was $28.6 million during the first sixthree months of 2021.2022. Cash inflows from investing activities included proceeds from held-to-maturityavailable-for-sale investments of $56.5 million, net of purchases, and $14.5 million of proceeds from the sale of a portion of one of our existing strategic investments.$7.2 million. The inflows were partially offset by outflows of $20.5$17.1 million for new or incrementalthe purchase of property and equipment and $0.5 million for a strategic minority investment.
We used $54.1 million in investing activities during the first three months of 2021, which was comprised of $23.6 million for the purchase of investments, net of proceeds, $20.0 million for a strategic minority investment, and $21.8$10.6 million for the purchase of property and equipment and intangible assets.
We used $146.2 million in investing activities during the first six months of 2020, which was comprised of $133.9 million for the purchase of held-to-maturity investments, net of proceeds, $4.7 million for an equity investment in an unconsolidated affiliate, and $7.7 million for the purchase of property and equipment and intangible assets, which was partially offset by proceeds from the disposal of property and equipment of less than $0.1 million.
Financing activities
Net cash used in financing activities was $10.3$1.5 million during the first sixthree months of 2022 and was attributable to the payment of income and payroll taxes on behalf of employees who net-settled stock awards during the period.
Net cash used in financing activities was $7.0 million during the first three months of 2021 and was attributable to the payment of income and payroll taxes on behalf of employees who net-settled stock awards during the period.
Net cash provided by financing activities was $301.3 million during the first six months of 2020. During the first six 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 payments of income and payroll taxes of $5.8 million on behalf of employees who net-settled stock awards during the period.
Off-Balance Sheet Arrangements
The discussion under the heading off-balance sheet arrangements in Note 1213 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 operationsOur management’s discussion and the understandinganalysis of our financial condition and results of operations.operation is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amountamounts of assets, liabilities, revenue and expenses, and related disclosures. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, and we evaluate our estimates and assumptions on an ongoing basis. Due to the ongoing COVID-19 pandemic, there is ongoing uncertainty and significant disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require an update to our estimates or assumptions or a revision of the carrying value of assets or liabilities the disclosureas of contingent assets and liabilities atMay 10, 2022, the date of our unaudited condensed consolidated financial statements,issuance of this Quarterly Report on Form 10-Q. These estimates and the reported amounts of revenue and expenses during the reporting period. While we do not believe that aassumptions may change in these estimatesthe future, however, as new events occur and additional information is reasonably likely, there can be no assurance that ourobtained. Our actual results will notcould 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 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 pointOur significant accounting policies are discussed 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. ReferNote 1 to Note 10 of the notes to our condensed consolidated financial statements within thisincluded in our Annual Report on Form 10-Q.
Stock-based compensation expense associated with10-K for 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 datefiscal year ended December 31, 2021. There have been no significant changes to these policies for meeting a probable operational goal are based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis when considered appropriate. 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.
Beginning with the three months ended June 30, 2021, management discontinued consideration of the statistical model based on actual and anticipated attainment of the remaining operational goals. During the six months ended June 30, 2021, we recorded an additional $158.7 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 15.0 million performance-based awards (options and restricted stock units) of which 10.5 million are outstanding as of June 30, 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).
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
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economic and market conditions surrounding the COVID-19 pandemic and recorded an additional credit loss reserve of approximately $1.0 million as of June 30, 2021.
Based on the balances of our financial instruments as of June 30, 2021, a hypothetical 25 percent increase in expected credit loss rates across all pools would result in a $0.8 million increase in the allowance for expected credit losses.March 31, 2022.
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“available-for-sale”. We report available-for-sale investments at fair value as of interest rate risk as their market value may be adversely impacted due to a rise in interest rates. As a result, we may suffer losses in principal if we sell securities that have declined in market value due to changes in interest rates. However, because we classify our debt securities as “held-to-maturity” based on our intenteach balance sheet date and ability to hold these instruments to maturity, norecord any unrealized gains or losses as a component of stockholders’ equity. The cost of securities sold is determined on a specific identification basis, and realized gains and losses are included in interest and other income, net within the consolidated statements of operations. When the fair value is below the amortized cost of a marketable security, an estimate of expected credit losses is made. The credit-related impairment amount is recognized in the consolidated statements of operations. Credit losses are recognized duethrough the use of an allowance for credit losses account in the consolidated balance sheet and subsequent improvements in expected credit losses are recognized as a reversal of an amount in the allowance account. If we have the intent to changessell the security or it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis, then the allowance for the credit loss is written-off and the excess of the amortized cost basis of the asset over its fair value is recorded in interest rates. These securities are reported at amortized cost.the consolidated statements of operations.. Based on investment positions as of June 30, 2021,March 31, 2022, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $1.4$0.6 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$6.3 million at June 30, 2021.March 31, 2022. At June 30, 2021,March 31, 2022, there was no amount outstanding under the line of credit and the available borrowing under the line of credit was $43.9$43.7 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.
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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
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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 June 30, 2021.March 31, 2022.
Change in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the fiscal quarter ended June 30, 2021March 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The discussion under the headings Product Litigation and U.S. Federal Trade Commission InvestigationLitigation in Note 1213 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
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, 2020, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock.2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
Item 5.03 Amendments to Articles5.02 Departure of IncorporationDirectors or Bylaws; Change in Fiscal YearPrincipal Officers; Election of Directors; Appointment of Principal Officers
On May 9, 2022 Axon Enterprise, Inc. (the “Company”) entered into a new executive employment agreement (the “Agreement”) with James C. Zito, Interim Chief Financial Officer (the “Executive”).
AtFollowing is a summary of the Company’s Annual Meetingkey provisions of Shareholders, held onthe Agreement.
Term of Employment: The Agreement has an effective date of May 27, 2021, our shareholders approved an amendment9, 2022 and continues for a period of one year. The Agreement will automatically renew and continue for successive one year terms unless terminated pursuant to our Amended
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qualifying termination events, and Restated Certificatewill automatically terminate, without notice, when the Executive reaches 70 years of Incorporation (the “Certificate”)age.
Base Salary, Bonus Opportunity and Equity Incentives: During the term of the Agreement, the Executive shall receive a base salary and be eligible to increaseparticipate in any cash bonus programs and receive equity compensation awards (time and/or performance based) as determined in the maximum sizesole discretion of the Compensation Committee of the Board of Directors from 9 to 11 directors. (the “Committee”).
To give effect to this amendment,Termination and Severance: The Company or the Executive may terminate the Agreement and the Executive’s employment in various circumstances and, depending on August 4, 2021,the circumstances, the benefits that may be due following such termination are described below.
For a termination by the Company filedwith cause, no severance benefits are payable.
Severance benefits and acceleration of equity awards relating to a certificateChange in Control are subject to a qualifying termination (i.e., double trigger). Generally, qualifying terminations include a resignation by the Executive for Good Reason following a Change in Control, or by the Company without cause six months prior to a Change in Control, except with respect to XSUs (as defined and discussed below).
The table below depicts the cash severance payments that would be payable under the circumstances indicated.
| | | | |
| | Termination | | |
By the Company Without Cause | By Executive Following a Change in Control For Good Reason or by the Company Without Cause Six Months Prior to Change in Control | Death or Disability | ||
6 months salary; target bonus for calendar year of effective date of termination | 36 months salary; prorata portion of annual target bonus for the year in which termination occurs; 12 months COBRA | 18 months salary; prorata portion of annual target bonus for the year in which termination occurs |
RSUs and performance share awards (“PSUs”) may vest as follows:
● | Termination with cause: no accelerated vesting |
● | Termination without cause: only time-based RSUs vesting during the notice and severance period will vest |
● | Termination following death or disability, termination by the Executive following a Change in Control for good reason or by the Company six months prior to a Change in Control without cause, all RSUs will vest and all PSUs will vest at target levels |
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XSUs may vest as follows:
Termination | ||||
without Cause | Change in Control* | Death or Disability | ||
XSU operational goals are disregarded and market capitalization is calculated as of the last date of employment; next unattained tranche will partially vest on a prorated basis by comparing the six-month market capitalization to the goal | XSU operational goals are disregarded and an alternative market capitalization calculation is utilized for purposes of determining attainment of unvested tranches, plus one additional tranche | N/A |
*Including by the Executive for good reason following a Change in Control or by the Company without cause 90 days prior to, or one year after, a Change in Control.
Executive Covenants: In consideration of Amendment”)each Executive's continued employment with the Company and the benefits and payments described in his respective Agreement, each Executive agrees to comply with and adhere to the Certificatefollowing covenants during their term of his employment with the SecretaryCompany, including during any notice period of Statetermination of employment and during a period of twelve months commencing upon termination of employment with the Company for any reason:
● | Covenant not to compete; |
● | Covenant not to disparage the Company or its products; |
● | Covenant not to solicit customers; |
● | Covenant not to recruit or hire the Company’s employees; |
● | Assignment of inventions; and |
● | Nondisclosure of Company confidential information |
The preceding description of the StateAgreement is a summary of Delaware. Aits material terms, does not purport to be complete, and is qualified in its entirety by reference to the Agreement, a copy of the Certificate of Amendmentwhich is being filed as Exhibit 3.110.1 to this Quarterly Report on Form 10-Q and is incorporated herein by reference herein..
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Item 6. Exhibits
| | |
| | |
| | |
3.1 | | |
10.1+* | | |
31.1* 31.1* 31.1* | | |
31.2* | | |
32** | | |
101.INS* | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH* | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL* | | Inline XBRL Taxonomy 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 on Form 10-Q for the quarter ended |
+Management contract or compensatory plan or arrangement
* 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: |
| | |
| | By: | /s/ PATRICK W. SMITH |
| | | Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
Date: |
| By: | /s/ |
| | | Interim Chief Financial Officer |
| | | (Principal Financial and |
| | | Accounting Officer) |
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