SECURITIES AND EXCHANGE COMMISSION
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x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31 2017
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¨ | 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)
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Delaware |
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Axon Enterprise, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | | 86-0741227 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | (I.R.S. Employer
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17800 North 85 th85th StreetScottsdale, Arizona
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Scottsdale, Arizona | | (Zip Code) |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of exchange on which registered |
Common Stock, $0.00001 par value per share | AXON | The NasdaqNASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
¨☒ No ý☐Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨☐ No ý ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
ý☒ No ¨ ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
ý☒ No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | ý | | Accelerated filer | | ¨☐ |
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Non-accelerated filer | ☐ | ¨ (Do not check if a smaller reporting company)
| | Smaller reporting company | | ¨☐ |
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| | | | Emerging growth company | | ¨☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨☐Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 762(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
¨☐ No ý The☒As of June 30, 2022, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $6.3 billion based on the last salesclosing sale price of the issuer’s common stock on June 30, 2017, which was the last business day of the registrant’s most recently completed second fiscal quarter, as reported byon The NASDAQ was approximately $1,303,000,000. Solely for purposes of this disclosure, shares of common stock held by executive officers and directors of the registrant as of such date have been excluded because such persons may be deemed to be affiliates. This determination of executive officers and directors as affiliates is not necessarily a conclusive determination for any other purposes.
Global Select Market.The number of shares of the registrant’s common stock outstanding as of February 15, 201824, 2023 was 53,034,299
72,862,227DOCUMENTS INCORPORATED BY REFERENCE
Parts of the registrant’s definitive proxy statement for its 20182023 annual meeting of stockholders to be prepared and filed with the Securities and Exchange Commission not later than 120 days after December 31, 20172022 are incorporated by reference into Part III of this Form10-K.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2017
Statements contained in this report that are not historical are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions and strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements give our current expectations or forecasts of future events; they do not relate strictly to among other things:
our intentions about future development effortshistorical or current facts. Words such as “may,” “will,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and activities, including our intentions to invest in research and developmentsimilar expressions, as well as the development of new product and service lines and enhanced features for our existing product and service lines;
our needstatements in future tense, identify forward-looking statements. However, not all forward-looking statements contain these identifying words.We cannot guarantee that customers upgrade and replace existing conducted electrical weapons (“CEW”) units and the willingness of customers to do so;
thatany forward-looking statement will be realized, although we maybelieve we have more sales denominatedbeen prudent in foreign currencies in 2018;
our intention to increase our investment in the development of sales in the international, military and law enforcement market;
our plans and assumptions. Achievement of future results is subject to expandrisks, uncertainties and potentially inaccurate assumptions. Many events beyond our sales force;
that cloudcontrol 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 mobile technologies are fundamentally changing the police environment;
our plan to investthose anticipated, estimated or projected. You should bear this in web activities and law enforcement trade shows in 2018;
our intention to not pay dividends;
that increases in marketing and sales activities will lead to an increase in sales;
our belief that the video evidence capture and management market will grow significantly in the near future and the reasons for that belief;
our intention to continue to pursue the personal security market;
our intention to grow direct sales;
the sufficiency of our facilities and our strategy to expand manufacturing capacity if needed;
that we may lease facilities from parties that specialize in handling and manufacturing of firearm materials;
that we expect to continue to depend on sales of our X2 and X26P CEW devices;
our intention to apply for and prosecute our patents;
that selling, general and administrative expense will increase in 2018;
that research and development expenses will increase in 2018;
the timing of the resolution of uncertain tax positions;
our intention to hold investments to maturity;
the effect of interest rate changes on our annual interest income;
that we may engage in currency hedging activities;
our intentions concerning, and the effectiveness of, our ongoing marketing efforts through web activities, trial programs, tech summits and law enforcement trade shows;
the benefits of our CEW products compared to other lethal and less-lethal alternatives;
the benefits of our Software and Sensors products compared to our competitors';
our belief that customers will honor multi-year contracts despite the existence of appropriations, termination for convenience. or similar clauses;
our belief that customers will renew their Evidence.com service subscriptions at the end of the contractual term;
our insulation from competition and our competitive advantage in the weapons business;
estimates regarding the size of our target markets and our competitive position in existing markets;
the availability of alternative materials and components suppliers;
the benefits of the continued automation of our production process;
the sufficiency and availability of our liquid assets and capital resources;
our financing and growth strategies, including: our decision not to pay dividends, potential joint ventures, mergers and acquisitions, stock repurchases and hedging activities;
the safety of our products;
our litigation strategy, including the outcome of legal proceedings in which we are currently involved;
our ability to maintain secure and consistent customer data access and storage, including the use of third-party data storage providers, and the impact of a loss of customer data, a breach of security or an extended outage;
our ability to attract and retain the qualified professional services necessary to implement and maintain our business, both through employment and through other partnership arrangements;
the effect of current and future tax strategies;
the fluctuations in our effective tax rate;
the impact of the U.S. Tax Cuts and Jobs Act (the “Tax Act”);
the impact of recently adopted and future accounting standards;
the impact of Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09” or “Topic 606”);
that the complaint filed by Digital Ally is frivolous; and
the ultimate resolution of financial statement items requiring critical accounting estimates.
These statements are qualified bymind as you consider forward-looking statements. This report lists various important factors that could
cause our actual results to differ materially from those reflected by the forward-looking statements. Such factors include, but are not limited to, those factors detailed in Part I Item 1A of this Annual Report on Form 10-K entitled “Risk Factors.” The forward-looking statements included in the foregoing list are not exhaustive. Other sections of this report may include additional such statements and factors that could adversely impact our expectations and affect our business and financial performance. New risk factors emerge from time to time, and it is not possible for management to predict all such factors, nor can it assess the impact of all such risk factors or the extent to which any factor, or combination of factors, may cause actual results to differ materially from
those containedexpected and historical results. These factors are intended as cautionary statements for investors within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. Readers can find them under the heading “Risk Factors” in
this Annual Report on Form 10-K, and investors should refer to them. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any
forward-looking statements. Wesuch list to be a complete set of all potential risks or uncertainties.Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, to reflect changed assumptions, the occurrencewhether as a result of unanticipatednew information, future events or changesotherwise. You are advised, however, to expectations over time.consult any further disclosures we make on related subjects in our Form 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission ("SEC"). Our filings with the SEC may be accessed at the SEC’s web site at www.sec.gov.
Risk Factor Summary
The following is only a summary of the principal risks that may materially adversely affect our business, financial condition, results of operations and cash flows. The following should be read in conjunction with the more complete discussion of the risk factors we face, which are set forth more fully in “Part I. Item 1A. Risk Factors.”
Strategic Risks
| ● | If law enforcement agencies do not continue to purchase and use our products and services, our growth prospects, operating results and financial conditions will be adversely affected. |
| ● | If our TASER conducted energy devices (“CEDs”) do not continue to be widely accepted, our growth prospects will be diminished. |
| ● | If we are unable to design, introduce, sell and deploy new products or new product features successfully, our business and financial results could be adversely affected. |
| ● | We face risks associated with rapid technological change and new competing products. |
| ● | Our future success is dependent on our ability to expand sales through direct sales and distributors and our inability to increase direct sales or recruit new distributors would negatively affect our sales. |
| ● | Acquisitions of, or investments in, other companies, products, or technologies could disrupt our business, dilute stockholder value, and adversely affect our operating results. |
| ● | Our failure to retain executive officers, specifically Patrick W. Smith, could adversely impact our business. |
Operational Risks
| ● | Unavailability of materials or higher costs could adversely affect our financial results. |
Axon, the “Axon Delta” logo, Axon network, Axon Body 2, Axon Fleet, Axon Flex 2, Axon Citizen, Axon Signal, Evidence.com, Smart Weapons, | ● | Material adverse developments in domestic and global economic conditions, or the occurrence of other world events, could materially adversely affect our revenue and results of operations. |
| ● | To the extent demand for our products increases, our future success will be dependent upon our ability to manage our growth and to increase manufacturing production capacity. |
| ● | Delays in product development schedules could adversely affect our revenues and cash flows. |
| ● | We expend significant resources in anticipation of a sale and may receive no revenue in return. |
| ● | Changes in civil forfeiture laws may affect our customers’ ability to purchase our products. |
| ● | Catastrophic events could materially adversely affect our business and/or financial condition. |
| ● | If our security measures or those of our third-party cloud storage providers are breached and unauthorized access is obtained to customers’ data or our data, our network, customers may curtail or stop using our service and we may incur significant legal and financial exposure and liabilities. |
| ● | Defects or disruptions in our services could impact demand for our services and subject us to substantial liability. |
| ● | Defects in our products could reduce demand for our products or result in product recalls and result in a loss of sales, delay in market acceptance and damage to our reputation. |
| ● | Our international operations expose us to additional risks that could adversely affect our business. |
| ● | We depend on our ability to attract and retain our key management, sales and technical personnel. |
| ● | If we fail to comply with federal, state or local regulations applicable to TASER 10 we may be subject to governmental actions or litigation which could adversely affect our business. |
| ● | If we fail to maintain effective internal control over financial reporting or identify a material weakness or significant deficiency, our ability to accurately and timely report our financial condition and results of operations could be adversely affected, investor confidence could diminish, and the value of our common stock may decline. |
Financial Risks
| ● | An increasing percentage of our revenue is derived from subscription billing arrangements which may result in delayed cash collections and may increase customer credit risk on receivables and contract assets. |
| ● | We may experience a decline in gross margins due to a shift in product sales to software and sensors products and services which may continue to carry a lower gross margin than that of TASER devices. |
| ● | Software-as-a-Service revenue for Axon Evidence is recognized over the terms of the contracts, which may be several years, and, as such, trends in new business may not be immediately reflected in our operating results. |
| ● | Most of our end-user customers are subject to budgetary and political constraints that may prevent sales. |
| ● | Due to municipal government funding rules, certain of our contracts are subject to various cancellation clauses, which could allow our customers to cancel or not exercise options to renew contracts in the future. |
| ● | We maintain most of our cash balances, some of which are not insured, at three depository institutions. |
| ● | Stock transactions may have a material, unpredictable impact on our results of operations and may result in dilution to existing shareholders. |
| ● | Our financial performance is subject to risks associated with changes in the value of the U.S. dollar versus local currencies. |
| ● | Unanticipated changes in our effective tax rate and additional tax liabilities may impact our operating results. |
| ● | Our revenues and operating results may fluctuate unexpectedly, which may cause our stock price to decline. |
Legal and TASER are trademarksCompliance Risks
| ● | We may face personal injury, wrongful death, product liability and other liability claims that harm our reputation and adversely affect our sales and financial condition. |
| ● | Other litigation, government inquiries and regulatory actions may subject us to significant costs and judgments and divert management attention from our business. |
| ● | We have been, and may be subject to intellectual property infringement and other claims, which could incur substantial litigation costs, result in significant damage awards, inhibit our use of certain technologies, and divert management attention from our business. |
| ● | If we are unable to protect our intellectual property, the value of our brands and products may decrease and we may lose our competitive market advantage. |
| ● | We may be limited in our ability to enforce patent rights internationally to only those jurisdictions in which our patent applications have been granted. |
| ● | A variety of new and existing laws and/or interpretations could materially and adversely affect our business. |
| o | Our business could be adversely affected by rules and regulations governing our radio spectrum devices. |
| o | Changes in statutes, regulations, and interpretation outside of our control may result in our products being classified or reclassified as firearms and could substantially reduce our private citizen market. |
| o | Failure to comply with U.S. federal regulations could disrupt our operations. |
| o | Our inability to obtain export licenses or classifications on a timely basis for sales of our products to our international customers could adversely affect our international sales. |
| o | Inability to comply with federal regulation of foreign national employees could curtail the company’s ability to execute research and development and production related to CED technology. |
| o | Our product sales may be adversely affected by state and local governmental regulation of our TASER-branded devices. |
| o | Certain jurisdictions prohibit, restrict, or require a permit for importation, sale, possession or use of CEDs, including in some countries by law enforcement agencies, limiting our international sales opportunities. |
| o | Abrupt changes to domestic and international regulation of imports and exports of components in our supply chain can result in delays or interruptions to final product supplies. |
| o | Any failure to properly maintain or license our foreign operations could limit our ability to sell, support, or develop our products and services both internationally and in the U.S. market. |
| o | We may be adversely impacted by environmental or climate change disclosure litigation and new, or changes in, environmental safety laws, regulations or rules. |
| o | Our inability to adequately address privacy concerns, or comply with applicable laws, regulations, policies, industry standards and guidance, contractual obligations, or other legal obligations, could result in significant regulatory and third party liability, increased costs and may adversely affect our business. |
| ● | We are subject to evolving corporate governance and public disclosure regulations and expectations that could expose us to numerous risks. |
Risks Related to our Convertible Notes
| ● | Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow to pay our substantial debt. |
| ● | The conditional conversion feature of our 0.50% Convertible Senior Notes due 2027 (the “Notes”), if triggered, may adversely affect our operating results. |
| ● | Conversion of the Notes may dilute the ownership interest of our stockholders or may otherwise depress the price of our common stock. |
| ● | Changes in the accounting treatment for the Notes may have a material effect on our reported financial results. |
| ● | The convertible note hedge and warrant transactions may affect the value of the Notes and our common stock. |
| ● | We are subject to counterparty risk with respect to the convertible note hedge transactions. |
Item 1. Business
Axon Enterprise, Inc., some of which are registered in the U.S. and other countries. For more information, visit www.axon.com/legal. All rights reserved. The information on our website, including information about our trademarks, is not incorporated by reference into may be referred to as “the Company,” “Axon,” “we,” or otherwise a part of this report.
Item 1. Business
Company Background and Business Strategy
Axon Enterprise, Inc.’s (the “Company” or “Axon” or “we” or “our”) core“our.”Overview
Axon’s mission is to protect life through innovative technologies that make communities safer. We arein service of promoting peace, justice and strong institutions. Our moonshot goal is to cut gun-related deaths between police and the marketpublic in the United States by 50 percent before 2033.
As a technology leader in global public safety, Axon is building the development, manufacturepublic safety operating system of the future by integrating a suite of hardware devices and sale of CEWs designed for use by law enforcement, corrections, military forces, private security personnel and by private individuals for personal defense. We are also the market leader in developing, manufacturing and selling connected wearable on-officercloud software solutions that lead modern policing. Axon's suite includes TASER energy devices, body-worn cameras, as well as developing and selling cloud-basedin-car cameras, cloud-hosted digital evidence management software. We have establishedsolutions, productivity software and real-time operations capabilities.
Our hardware and software solutions advance our long-term strategic vision of a) obsoleting the bullet, b) reducing social conflict, c) enabling a robust network that connects devices, appsfair and people primarily in the law enforcement vertical market. We aimeffective justice system, and d) building for racial equity, diversity, and inclusion. Our products solve some of society's most challenging problems and our mission attracts top talent.
Our research & development (“R&D”) investments support continuous innovation on behalf of our customers. Our financial strategy is to have every public safety officer in the world carry a TASER, deploy anbuild highly recurring, highly profitable businesses. Axon camera and be connected to the Axon network.
The three foundations for our growth strategy are:
Devices - Our TASER CEWsproducts are one of the few weapons that can incapacitate a person while drastically limiting the risk for death and/or serious injury. Over the past two decades, the TASER CEW has become one of the most frequently used weapons in the North American law enforcement market, with use-of-force injuries and deaths dropping dramatically as a result. Outside of weapons, we produce devices that primarily fall within three categories: on-officer cameras that capture critical digital evidence aimed at protecting truth, a range of related accessory hardware devices and an in-car camera variant called Axon Fleet. We refer to these cameras, related accessories and devices collectively as "Axon" products. We believe our CEWs and Axon cameras should be standard-issue equipment for all patrol officers domestically and internationally. We have created and are continuing to create service plans and product bundles to allow agencies to have the latest devices and technology at predictable annual costs.
Apps - Axon's Evidence.com platform isgenerally cloud-connected, designed to help agencies securely store, managedrive better outcomes and share all digital evidence. Our software platform features continuous improvement with regular software updates that enable our customers to always have access to the latest technology. Recent new features include secure sharing, audit trails, integration of other data sources,customer experiences, and transcription and redaction services. These feature sets are designed to provide our customers with valuable tools to police more efficiently and effectively while enabling greater transparency with the communities they serve. An increasing number police agencies trust Axon to host their video evidence data, which is capturedsold via our devices, apps and software, and stored in our secure cloud and accessed via the Axon network.
People - Our TASER weapons and Axon software and sensors platforms have allowed us to build relationships with more than 20,000 public safety agencies worldwide. Axon's goal is to bring modern information technology capabilities to every law enforcement officer. Some of our customers report that police officers are spending over 60% of their time on paperwork-related tasks, rather than on value-added public safety work. We see a large opportunity to leverage our connected platform to enable a broad suite of mobile, wearable, and data management capabilities. Axon is also improving workflows throughout the public safety chain, from the incident on the scene to the court room. With our software, police officers can share evidence with prosecutors during discovery while maintaining a secure and encrypted chain of custody. Axon's cohesive ecosystem is delivering increased value to all public safety stakeholders, including state and municipal police agencies, police chiefs and other leadership, patrol officers, state patrols and officers, agency detectives, public prosecutors, district attorneys, and others in the public safety and judicial communities, as well as the public communities they serve.
We have four strategic growth areas:
Expand TASER CEW adoption: We believe we can increase the ratio of TASER CEWs to patrol officers domestically as well as continue expand into new international markets. We believe that our strategy of offering payment plans and eventually subscription hardware plans will shorten upgrade cycles and expand our immediately addressable market. Also, through continuing research and development ("R&D"), we believe that our TASER CEWs will become more capable and more connected over time, thus increasing in value and utility for our customers.
Expand Axon body camera and Evidence.com market share and increase average revenue per user ("ARPU"): Axon is the market leader in body-worn cameras and digital evidence management. Of the top 50 metropolitan areas in the U.S., 38 are on the Axon network. We believe we are well-positioned to build upon our prior success, and that our software offerings can become more valuable to our customers as we continue to expand our service offerings to better help agencies store, manage and share evidence data.
Capture in-car video market share with Axon Fleet: In the second quarter of 2017, we began shipping our in-car video offering, Axon Fleet. This is a new and adjacent market for Axon that we believe we can continue to grow through offering a superior product and service with disruptive pricing.
Expand into police agency records management systems and computer-aided dispatch software: In late 2016, we announced our intention to develop a police agency enterprise resource planning ("ERP") system, Axon Records, that would put officers back on the streets, help to solve and prosecute crime, and help to prevent crime and other incidents. Our development of Axon Records supports our strategic focus and vision of growing recurring cash flows by leveraging the data we host to unlock value-added services to our customers.
Technological innovation is key to all four long-term growth areas. By investing in R&D, we intend to continue to develop novel, high-value solutions across our product platforms and expand our total addressable market within the law enforcement and public safety vertical markets. In 2017, we invested heavily in a new artificial intelligence (“AI”) group, Axon AI. Through two acquisitions plus additional hires, we have developed a team that is delivering AI features in our products as well as winning industry recognition. In 2017, we were named the preferred AI vendor for the Los Angeles Police Department. In early 2018, we opened an R&D office in Tampere, Finland, with 10 imaging and sensor experts who will work with our existing teams to create best-in-class smart cameras that integrate with our cloud platform. We also continue to add engineering talent to our Scottsdale headquarters and Seattle engineering and development office.
Company Organization
Axon sells its products to law enforcement worldwide through its direct sales force, distribution partners, online store and third-party resellers. The Company manages its business primarily on a geographic basis, with various sales representatives strategically located throughout the world. Domestic and international law enforcement agencies are primarily served through the Company's headquarters in Scottsdale, Arizona, and its software engineering development center located in Seattle, Washington. The Company also has subsidiaries located in the United Kingdom, Germany, the Netherlands, Australia, Vietnam and Canada.
The Company’smutually reinforcing integrated bundles.
Axon’s operations are comprised ofcomprise two reportable segments: the sale of CEWs, accessories and other related products and services (the “TASER Weapons” segment); and the software and sensors business, focused on Axon devices, wearables, applications, cloud and mobile products (the "Software and Sensors" segment). Within the Software and Sensors segment, the Company includes only revenues and costs attributable to that segment which include: costs of sales for both products and services, direct labor, selling expense for the sales team, product management and marketing expenses, trade shows and related expenses, finance and accounting expenses, and research and development for products included, or to be included, within the Software and Sensors segment. All other costs are included in the TASER Weapons segment.
| 1. | Software and Sensors: We develop, manufacture and sell fully integrated hardware and cloud-based software solutions that enable law enforcement to capture, securely store, manage, share and analyze video and other digital evidence. Our software offerings also support productivity and real-time operations. |
| 2. | TASER: Axon is the market leader in the development, manufacture and sale of conducted energy devices ("CEDs"), which we sell under our brand name, TASER. |
Further information about our reportable segments and sales by geographic region is included in Notes 1, 2 and 1620 of the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K. We have made certain acquisitions of companies or their assets in the past two years that are described in Note 15 of our consolidated financial statements included inFor backlog by reportable segment, refer to Part II, Item 87 of this report.
Products
TASER Weapons Products
We make CEWs for two main types of market segments: (i) the law enforcement, military, correctionsAnnual Report on Form 10-K.Axon employees are distributed across multiple geographies and private security markets; and (ii) the consumer market. Our CEWs use our proprietary Neuro Muscular Incapacitation (“NMI”) technologyreport to effectively neutralize suspects or threats. Fromwork via a replaceable cartridge containing compressed nitrogen, two small probes that are attached to the CEW by insulated conductive wires are deployed from up to 35 feet away. Electrical pulses are transmitted along the wires and into the body, affecting the sensory and motor functions of the peripheral nervous system.
Since 2009, our CEWs have been on our Smart Weapons system, an all-digital platform that features the ability to regulate charge output, perform health checks, update firmware over the Internet, and provide analytics on device usage. Through the Company's Evidence.com platform, important records such as the event logs,remote-hybrid model, which record user actions such as safety activation and trigger event durations, can be viewed and analyzed.
The benefits of using CEWs in the field have been significant. Studies have shown that TASER CEWs have prevented death or serious injury more than 178,000 times from the first deployment in 2000 to the end of 2017. The use of these devices instead of other force options has significantly reduced injuries for suspects and officers, with substantial liability and workers’ compensation savings to government agencies around the world.
The following products are core to the Company's TASER Weapons product line:
TASER X26P- The X26P is a single-shot, compact Smart Weapon designed for law enforcement and military use. It features the smallest form factor of our law enforcement models and was ergonomically designed with ease of use in mind.
TASER X2- The X2 is a double-shot Smart Weapon designed for law enforcement and military use. In addition to the back-up shot, the X2 also features dual lasers and the warning arc, a visible electric charge that increases voluntary surrenders and de-escalates conflicts without cartridge deployment.
Consumer CEWs - The Company has two consumer CEW models, the Bolt (formerly known as the C2) and the Pulse. The two products differ in form factor butleverages both feature the same NMI effects as the CEW models available to law enforcement and run in cycles of 30 seconds, which is intended to allow adequate time for the user to escape a threat.
Replacement Cartridges and Consumables - The Company manufactures multiple cartridge types with effective ranges from 15' to 35'. Smart cartridges communicate with the firing control system within the TASER X2 to indicate the type of cartridge loaded in each bay and its deployment status. Standard replacement cartridges are used in the TASER X26Pin-person collaboration environments as well as cloud-based software tools that enable remote productivity. Our physical headquarters in Scottsdale, Arizona houses some executive management, sales, marketing, certain engineering, manufacturing, finance and other administrative support functions. Our other key in-person facilities include Seattle, London and Ho Chi Minh City. We also have subsidiaries, and in some cases offices located in Australia, Canada, Finland, France, Germany, Hong Kong, India, Italy, the Netherlands, Spain, the United Kingdom, and Vietnam.Key Product Category Revenue Drivers: What We Offer
Axon products are generally cloud-connected, designed to drive better outcomes and customer experiences, and sold via mutually reinforcing integrated bundles. Our key revenue drivers belong to three broad product categories:
| ● | TASER: We develop smart devices, tools and services that support public safety officers in de-escalating situations, avoiding or minimizing use of force and aiding consumer personal protection. These tools include TASER devices, virtual reality training services and consumer devices. Research has shown that TASER devices are the most effective less-than-lethal force option, with the lowest likelihood of injury to officers and assailants. Since our inception in 1993, TASER devices have been |
| | adopted by a majority of U.S. state and local police departments and are used daily to help keep communities safe. Global adoption of TASER devices remains early and we are expanding into new geographies. Axon VR solutions make public safety training more accessible, relevant and affordable — with the goal of using new immersive VR technologies to better prepare officers for real-life situations in the field. |
| ● | Sensors: Axon devices address many needs, including transparency, real-time situational awareness, and capturing evidence accurately and integrating with software workflows. Product categories within sensors include Axon body cameras, Axon Fleet in-car systems, and other devices that work with our software. |
| ● | Software: Axon is building a suite of cloud-based, software-as-a-service (“SaaS”) solutions that integrate with our sensors and TASER devices to benefit customers and drive annual recurring revenue, which totaled $473 million(a) as of December 31, 2022. We have many SaaS solutions, which can best be trisected into three categories: digital evidence management, productivity and real-time operations solutions. Axon Evidence is the world’s largest cloud-hosted public safety data repository of public safety video data and other types of digital evidence. Our productivity suite, which includes Axon Records, is designed to save officers time spent writing reports and doing paperwork. And our real-time operations capabilities, which include Axon Respond, integrates location data, signal alerts and video feeds to provide a complete picture of evolving situations. |
| (a) | Monthly recurring license, integration, warranty, and storage revenue for the year ended December 31, 2022. |
Sales and Distribution: Who We Sell To and Where We Deliver
We think of our consumer models.core customers as falling into roughly four categories of funding sources: U.S. state and local governments, the U.S. federal government, international government customers, and commercial enterprises. Additionally, the types of customers who find value in our product offerings are expanding beyond law enforcement to include attorneys, fire and EMS personnel, corrections and the U.S. military.
Axon’s sales force and strong customer relationships represent key strategic advantages. The Company also offers Performance Power Magazines (“PPM”), batteries that power the CEWs. PPMsmajority of our revenues are available in several options, such as Tactical (“TPPM”) or Automatic Shut-Down (“APPM”).
generated via direct sales, including our online store, although we do leverage distribution partners and third-party resellers.Our largest customer segment is U.S. state and local law enforcement. Axon Connected Solutions
Axon creates connected technologies to protect truth in public safety. As a company that grew from our TASER business, we are building on a history of innovation in policing. Axon is more than a collection of individual technologies; it is a cohesive ecosystem. Every product from our Smart Weapons to our body-worn cameras to our digital evidence management system integrates seamlessly with one another, and often complements the systems and processeshas a customer already uses. Below are the products and features that are core to the Axon platform.
Axon Hardware Products:
Axon Body 2- Axon Body 2 builds upon the original platform by bringing officers new features such as high-definition ("HD") video, wireless fidelity ("Wi-Fi") offload capabilities, extended battery life, and additional security enhancements. The Axon Body 2 can be mounted on the officer's shirt at mid-chest level and eliminates all wires from the wearer’s body.
Axon Flex 2- The Axon Flex 2 builds upon the original Axon Flex camera system and features a more rugged industrial design, new mounts and advanced capabilities like unlimited HD video, a 120-degree fieldrelationship with over 95% of view, extended battery life, improved buffering and wireless activation.
Axon Fleet- Axon Fleet is a breakthrough in-car video system with advanced capabilities and a price that is significantly less than traditional systems. Axon Fleet includes automatic activation, HD video and a flexible design.
Axon Dock- With the Axon Dock, the camera charging station is also the automatic data downloader. At the end of a shift, the Axon Dock syncs video from the user's Axon Flex or Axon Body camera during routine charging. Videos are uploaded directly to Evidence.com, eliminating manual filing processes.
TASER CAM HD- The TASER CAM HD is a recording device built into a PPM battery pack for use with compatible TASER CEWs. The device can capture critical video and audio before, during and after a TASER CEW deployment.
Axon Signal- Axon Signal is a technology that enables Axon Body 2, Axon Flex 2 and Axon Fleet cameras to start recording upon certain triggering events such as the opening of a patrol car door, activation of a patrol car lightbar or the unholstering of a TASER CEW.
Signal Sidearm - Signal Sidearm is a device that is compatible with most firearm holsters. The moment an officer removes a firearm from a holster, Signal Sidearm wirelessly alerts all nearby Axon cameras to begin recording.
Axon Software and Mobile Technologies:
Evidence.com- As the sources of digital evidence expand, storage alone is not enough to keep track of the body-worn camera videos, photos, audio recordings and other data that is overwhelming agency servers and systems. Evidence.com is a robust end-to-end solution that not only allows agencies to store all that data, but also enables new workflows for managing and sharing that data. Officers and command staff can upload content from Axon and TASER devices or other systems easily, manage it with search and retrieval features, and collaborate with prosecutors by using powerful sharing features. When storage needs or users increase, the cloud-based system allows agencies to scale instantly and cost-effectively.
Evidence Sync- Evidence Sync is a desktop-based application that enables evidence in any format, from any source to be uploaded to Evidence.com. TASER Smart Weapon logs, Axon camera videos, interview room footage, photos and more can be uploaded, stored, and managed in one location. Sources new and old—from TASER devices or other brands—are equally supported. Network servers, secure digital memory cards ("SD cards"), compact discs ("CDs"), and computer folders can be synced with ease, and frequently used folders or drives can be set up to automatically sync on schedule.
Commander- Axon Commander is an on-premise application that consolidates all of a customer's digital evidence in one secure location, making it easy to manage and access while maintaining security and chain of custody. Designed to meet the evidence management needs of agencies in regions without reliable high-speed Internet access, Commander delivers many of the same features of cloud-based Evidence.com to customers using on-premise storage systems.
Axon Citizen- Axon Citizen is a mobile application that provides a public safety portal where community members can submit photos and videos of an incident they witness directly to their agency on Evidence.com.
Axon Capture- Axon Capture is a mobile application that allows officers to capture digital evidence right from the field. The app eliminates the need to carry three separate devices for photo, video, and audio recording by securely building upon the capabilities of an officer's mobile phone. Officers can add tags, titles or Global Positioning System ("GPS") coordinates to any recordings before uploading the data to Evidence.com.
Axon View- Axon View is a mobile application that wirelessly connects with an Axon camera to provide instant playback of unfolding events from the field, in the field. The app's live display ensures the camera is positioned correctly.
Axon Interview- Axon Interview is a recording system designed for the interview room. The system records crucial interviews with redundant, high-quality video and audio technology, ensuring that every moment is captured. The system is available with a 24/7 buffering option that allows agencies to capture key dialogue even after it occurs.
Markets and Distribution
Law Enforcement
Our primary target market for both our weapon and video products is federal, state and local law enforcement agencies in the U.S. and throughout the world. We estimate that in the U.S., approximately two-thirds of all law enforcement patrol officers carry a TASER CEW and internationally, approximately one out of every fifty eligible law enforcement officers carries a TASER CEW. Our goal is to haveUnited States. The remaining agencies are served via our CEWs be standard issue equipment for all domestic and international law agencies.
Other Markets
We also target military forces, private security, correctional facilities and consumer personal protection markets to provide technologies that offer a less lethal form of protection.
U.S. Distribution
The Company sells directly to law enforcement agencies in the U.S.telesales team, as well as
through a distribution network. Distributorsdistributors.No customer represented more than 10% of total net sales for the years ended December 31, 2022, 2021 or 2020.
We are selected based upon their reputation within their respective industries, contactsdiversifying into new markets by adding new types of customer profiles, or users, and distribution network. Our regionalby adding to our core customer base. In recent years, we have been investing in sales managers work closely withpersonnel to capture these new markets, and in 2023, we will focus on strategic headcount additions to support key new markets and newer products.
Governmental agencies generally have the distributorsability to terminate our contracts, in their territorywhole or in part, for reasons including, but not limited to, inform and educate the law enforcement communities.non-appropriation of funds. We continue to monitor our law enforcement distributors closely to help ensure that our service standards are achieved. Where appropriate, we intend to grow our direct sales over time. Distributors often allow us to penetrate regions at lower fixed costs; however, direct sales allow us greater control over the customer relationship.
Salesdevelopments in
the private citizen market are primarily made through our distributorsfederal government funding.Resources
Manufacturing and our website. We have implemented a variety of marketing initiatives to support sales of our consumer products, with a focus on web, public relations and consumer trade shows. We have consulted with professional digital media and public relations professionals to assist us in media and press events and editorial placements along with attending numerous trade shows specifically to target the consumer market.
International Distribution
We market and distribute our CEW products to foreign markets through our international subsidiaries as well as through a network of distributors. For geographical and cultural reasons, our distributors usually have a territory defined by their country’s borders. These distributors market both our law enforcement, military, and corrections products, and our consumer products where allowed by law. Our distributors work with local law enforcement, military and corrections agencies in the same manner as our domestic market distributors. For example, they may perform demonstrations, attend industry trade shows, maintain country specific websites, engage in print advertising and arrange training classes.
In order to more effectively engage customers internationally, we have also implemented direct sales teams strategically located throughout each major geographic region of the world. Having dedicated sales personnel stationed full time in these regions will allow us to better serve existing customers as well as execute our sales and marketing strategies more efficiently in order to continue to grow our customer base in new markets.
Manufacturing
Supply ChainWe perform light manufacturing, final assembly, and final test operations at our headquarters in Scottsdale, Arizona, and own substantially all of the equipment required to develop, prototype, manufacture and assemble our finished products. This includes critical injection molds, schematics, automation equipment, test equipment and prototypes utilized by our supply chain for the conversion of raw materials into sub-assemblies. We have implemented lean/six sigma methodologies to optimize most direct and indirect resources within the organization, which has helped boost capacity for existing products, as well as provide flexibility to accommodate production of new TASER and Axon product introductions. We are currently operating one to two production shifts depending on inventory levels and demand. However, other capacity options, including the use of additional shifts, will be considered should we experience higher demand resulting from large orders of legacy or new product releases. We have continued to maintain both our ISO 9001 certification and have recently attained the newour ISO 9001:2015 certification.certifications.
The Company currently purchases both off-the-shelfWe continue to take steps to diversify our supply chain and custom components, including finished circuit boards assembliesglobal manufacturing footprint, which positioned us well managing through the recent supply chain challenges. Thus far, we have been able to produce and injection-molded plastic components, primarily fromship our critical core products. As we enter 2023, material availability is improving but still poses real risks to all businesses that manufacture products. Supplier decommitments remain our largest area of risk as we continue to experience this in several areas. However, we have put programs in place to mitigate this risk. We proactively manage our supply chain down to third tier suppliers located in the U.S., Mexico, Chinato overcome material shortages as they arise. These actions align to our strategic model to help meet strong product demand while also preparing us to stagger factory work schedules as needed, which enables us to meet compressed build schedules over short periods of time. We continue to adjust strategic inventory levels based on areas of risk to mitigate potential supply disruptions.
In light of our broad domestic and Taiwan. Although the Company currently obtainsinternational geographic supplier base, we are continuously monitoring our supply chain to manage through potential impacts, identifying alternate shipping / logistic sources, and working with foreign regulators to ensure that our suppliers can provide parts.
We obtain many of theseour components from single sources of supply, the Company owns the designs as well assource suppliers; however, because we own the injection molded component tooling and test fixtures used in their production, for all custom components. As a result, management believes itwe believe we could obtain alternative suppliers in most cases without incurring significant production delays. The Company also strategically holds safety stock levels on custom componentsFor additional discussion of sources and availability of raw materials, refer to further reduce this risk. For off-the-shelf components, Management believes that there are readily available alternative suppliersNote 1 to the consolidated financial statements included in most cases who can consistently meet the Company's needs for these components. The Company acquires most of its components on a purchase order basis and does not have any significant long-term contracts with suppliers.
Business Seasonality and Product Introductions
The Company has historically experienced higher net sales in its second and fourth quarters compared to other quarters in its fiscal year due primarily to municipal budget cycles. Additionally, new product introductions can significantly impact net sales, product costs and operating expenses. However, historical seasonal patterns, municipal budgets or historical patterns of product introductions should not be considered reliable indicators of the Company’s future net sales or financial performance.
Backlog
Our backlog for products and services includes all orders that have been received and are believed to be firm. As of December 31, 2017 and 2016, our backlog was $582.7 million and $384.2 million, respectively.
In the TASER Weapons segment, we define backlog as equal to deferred revenue. Deferred revenue represents amounts billed and collected from the customer for goods and services to be delivered in subsequent periods. The Company processes orders within the TASER Weapons segment quickly, and our best estimate of firm orders outstanding as of period end represents those that have been paid for but remain undelivered. The TASER weapons backlog balance was $46.7 million as of December 31, 2017. The Company expects to realize $16.7 millionPart II, Item 8 of this deferred revenue balance as revenue during the next 12 months. This represents cash received from customersAnnual Report on or prior to December 31, 2017 for products and services expected to be delivered in the next 12 months.
In the Software and Sensors segment, we define backlog as cumulative bookings, net of cancellations, less product and service revenue recognized to date. Bookings are generally realized as revenue over multiple years. The Software and Sensors backlog balance was $536.0 million as of December 31, 2017. This backlog balance includes $78.6 million of deferred revenue, $27.0 million that has been invoiced, but not yet collected, and $430.4 million that has been recorded as bookings but not yet invoiced, all as of December 31, 2017. The Company expects to realize approximately $110.0 million of the December 31, 2017 backlog balance as revenue during the next 12 months.
Backlog - Year ended December 31, 2017 (in thousands) |
| | | | | | | | | | | |
| | TASER Weapons | | Software and Sensors | | Total |
| Balance, beginning of period | $ | 33,391 |
| | $ | 350,792 |
| | $ | 384,183 |
|
| Add: additions to backlog, net of cancellations | 247,806 |
| | 291,152 |
| | 538,958 |
|
| Less: revenue recognized during period | 234,512 |
| | 105,928 |
| | 340,440 |
|
| Balance end of period | $ | 46,685 |
| | $ | 536,016 |
| | $ | 582,701 |
|
Competition
Law Enforcement, Corrections and Private Security Markets
Law enforcement customers partner with TASER for the long-term. The primary competitive factors in the law enforcement and corrections market include a weapon’s accuracy, effectiveness, safety, cost, ease of use and an exceptional customer experience. We are aware of competitors providing competing CEW products, primarily in international markets.
We also believe our CEWs compete indirectly with a variety of other less-lethal alternatives. These alternatives include, but are not limited to, pepper spray, batons and impact weapons sold by companies such as Defense Technology. We believe our TASER brand devices’ advanced technology, versatility, portability, effectiveness, built-in accountability systems, and low injury rate enable us to compete effectively against these other less-lethal alternatives.
Private Citizen Market
CEWs have gained limited acceptance in the private citizen market. These devices primarily compete with guns, but also with other less lethal weapons such as pepper spray. The primary competitive factors in the private citizen market include a weapon’s cost, effectiveness, safety and ease of use.
Video Evidence Market
Axon is the market leader in a video evidence capture and management market that is highly fragmented and competitive. Continued evolution in the industry and technology shifts are creating opportunities for both established and new competitors. Key competitive factors include: product performance, product features, product quality and warranty, total cost of ownership, data security, data and information work flows, company reputation and financial strength, and relationships with customers.
Our digital evidence management system, Evidence.com, is a cloud-based platform. Cloud computing fundamentally changes the way local, state and federal government agencies will develop and deploy software applications. Applications used by these agencies have historically required the agency to deploy their own infrastructure of servers, storage, network devices and operating systems. With a cloud-based system, the entire storage infrastructure is managed by third-parties who specialize in infrastructure management. Agencies use Internet web browsers to access the application. Our cloud-based Evidence.com service enables
agencies to store, manage and analyze digital evidence. We believe our end-to-end solution providing a combination of both products and services is a compelling value proposition for law enforcement agencies to implement.
Regulatory Matters
U.S. Regulation
The majority of TASER CEWs, as well as the cartridges used by these devices, are subject to regulations; however, most are not considered to be “firearms” by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives. Many states have regulations restricting the sale and use of stun guns, hand-held shock devices and electronic weapons. We believe existing stun gun laws and regulations apply to TASER CEWs.
In many cases, the law enforcement and corrections market is subject to different regulations than the private citizen market. Where different regulations exist, we assume the regulations affecting the private citizen market also apply to the private security markets, except as the applicable regulations otherwise specifically provide.
As of December 31, 2017, the possession of stun guns by the general public, including TASER CEWs, is prohibited in four states: Hawaii, Massachusetts, New York, and Rhode Island, as well as in the District of Columbia. In 2017, New Jersey ended its state ban on stun guns for civilians. Some cities and municipalities also prohibit private citizen possession or use of our CEW products.
We are also subject to environmental laws and regulations, including restrictions on the presence of certain substances in electronic products. Reference is made to Section 1A, Risk Factors under the heading “Environmental laws and regulations subject us to a number of risks and could result in significant liabilities and costs.”
Axon body worn cameras and fleet vehicle cameras are subject to regulations including 21-CFR-47 Part 15, Subpart C for Bluetooth and WiFi transmission, US-DOT/UN 38.3 for transportation of lithium batteries, and FCC KDB 447498 + IEEE 1528-2013 Specific Absorption Rate ("SAR") regulations. These regulations are also beginning to affect CEWs with signal performance power magazine ("SPPM") technology and future CEWs implementing wireless technology into the feature set.
Evidence.com is subject to government regulation of the Internet in many areas, including telecommunications, data protection, user privacy and online content.
U.S. Export Regulation
CEWs are considered a crime control product (ECCN: 0A985) by the U.S. government. Accordingly, the export of our devices is regulated under export administration regulations. As a result, we must obtain export licenses from the Department of Commerce for all shipments to foreign countries other than Canada. Most of our requests for export licenses have been granted, and the need to obtain these licenses has not caused a material delay in our shipments. Export regulations also prohibit the further shipment of our products from foreign markets in which we hold a valid export license to foreign markets in which we do not hold an export license for our products.
Export Administration Regulations ("EAR") established by the U.S. Department of Commerce restrict the export of technology used in our CEWs. These regulations apply to both the technology incorporated in our CEW systems and to the processes used to produce them. These restrictions apply to any individual that is not a U.S. Citizen, U.S. Permanent Resident, or “protected person” as defined in 8 U.S.C. 1324b(a)(3).
Foreign Regulation
Foreign regulations, which may affect our devices, and sale thereof, are numerous and often unclear. We prefer to work with a distributor who is familiar with the applicable import regulations in each of our foreign markets. Experience with foreign distributors in the past indicates that restrictions may prohibit certain sales of our products in a number of countries. However, the majority of countries permit TASER devices to be sold and used by law enforcement. We maintain strong communication channels with our distributors to ensure that we are aware of ongoing regulation of our products and of those countries where TASER CEW devices are prohibited or restricted.
Contracts
Our business is affected by numerous laws and regulations, including those related to the award, administration and performance of contracts. Governmental agencies generally have the ability to terminate our contracts, in whole or in part, for
reasons including, but not limited to, non-appropriation of funds. We monitor our policies and procedures with respect to our contracts on a regular basis to enhance consistent application under similar terms and conditions, as well as compliance with all applicable laws and regulations. Form 10-K.We provide limited manufacturer'smanufacturer’s warranties on our CEWsAxon devices and Axon devices. FurtherCEDs, and customers also have the option to purchase extended warranties. For additional information about our warranties, is included inrefer to Note 1 ofin the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
We protect our intellectual property with U.S. and foreigninternational patents and trademarks. Our patents and pending patent applications relate to technology used by us in connection with our products. We also rely on international treaties, organizations and foreign laws to protect our intellectual property. As of December 31, 2017,2022, we hold 137274 U.S. patents, 63109 U.S. registered trademarks, 98 foreign165 international patents, and 278 foreign415 international registered trademarks, and also have numerous patentspatent and trademarkstrademark applications pending.
We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as the commercial significance of our operations and our competitors’ operations in particular countries and regions, our strategic technology or product directions in different countries, and the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions. Axon hasWe have the exclusive rights to many Internet domain names, primarily including “TASER.com”, “Axon.com”, “Axon.net”“Evidence.com”, “Evidence.com” and “Axon.io.“TASER.com.”
We also vigorously protect our intellectual property, including trademarks, patents and trade secrets against third-party infringement.Confidentiality agreements are used with employees, consultants and key suppliers to help ensure the confidentiality of our trade secrets.
Competition
Sensors — Connected Cameras and Digital Evidence Management Software: The body-worn camera and in-car video/automatic license plate readers market is highly competitive. Our competition includes Motorola Solutions, Utility Associates, Getac Technology Corporation, Panasonic Corp., Reveal Media, Safe Fleet, Digital Ally Inc., Visual Labs Inc., Intrensic, LLC, as well as Safety Vision, LLC, Rekor Systems Inc., and Genetec Inc.
The market for software solutions to improve public safety agency workflows is both highly fragmented and highly competitive. Our cloud-based digital evidence management system, Axon Evidence, competes with both cloud-based platforms and on-premises based systems designed by third-parties or developed internally by an agency's technology staff. Our competition includes Motorola Solutions, Panasonic Corp., IBM, Oracle, FotoWare, Vidizmo, LLC, NICE, QueTel Corporation, OpenText Corporation, and FileOnQ among others.
Key competitive factors in this market include product performance, product features (including live-streaming, GPS tracking, and Developmentpre-event buffering), battery life, product quality and warranty, total cost of ownership, data security, data and information workflows, company reputation and financial strength, and relationships with customers.
Productivity and Real-Time Operations — Records Management System (RMS) and Computer Aided Dispatch (CAD): The RMS and CAD markets are highly competitive and highly fragmented. We have identified more than 50 software providers, including Motorola Solutions, Tyler Technologies, Central Square Technologies (formerly Superion, TriTech and Aptean), Northrop Grumman, Hexagon AB, Niche Technology Inc., Caliber Public Safety (parent, Harris Computer Systems), Saab, SOMA Global, RapidDeploy Inc., Sopra Steria, Mark43 Inc, and CSI Technology Group. In addition, not all law enforcement agencies use software for report writing — some still use paper. We believe our network of camera sensors and digital evidence management platform give us a strategic advantage in these product categories. Our Respond offering competes both with real-time operations platforms that ingest body camera video feeds, like Motorola’s CommandCentral Aware, Hitachi's Visualization Suite and Genetec's Citigraf as well as platforms that ingest video feeds exclusively from surveillance cameras, like Rave Mobile Safety, Live Earth and Mutualink among others.
TASER for Professional User Markets: Our CEDs compete with a variety of less-lethal alternatives to firearms, including rubber bullets or rubber baton rounds, such as those made by Combined Systems; pepper spray, pepper spray projectiles, such as those made by Byrna Technologies Inc. (dba Fox Labs), SABRE Corporation, and Mace Security International, Inc.; traditional stun guns, such as those made by UZI and Jolt; hand-held remote restraint devices involving a tether, such as the one made by Wrap Technologies Inc.; laser dazzlers that cause temporary blindness, such as the one made by B.E. Meyers & Co., Inc.; stun grenades, such as those made by Combined Systems, Inc.; long-range acoustic devices, such as the one made by Genasys Inc.; police batons and night sticks, such as those made by Monadnock and by Armament Systems and Procedures, Inc. TASER devices offer advanced technology, versatility, portability, effectiveness, built-in accountability systems, and low injury rates, which enable us to compete effectively against other less-lethal alternatives. TASER devices also offer connectivity to our cloud network, which allows law enforcement agencies and other professional users to more effectively manage their less-lethal programs and automate use-of-force reporting.
The primary competitive factors in this market include a device’s accuracy, effectiveness, reputation, safety, cost, ease of use, and exceptional customer experience. The design maturity of the TASER platform, as well as our development and sale of a two-shot device, are also key competitive differentiators. We are aware of competitors providing competing CED products primarily in international markets.
Virtual Reality (“VR”) De-Escalation Training for Law Enforcement, Corrections and Private Security Markets: Our VR Training platform competes with several other companies in the space who offer simulation scenarios, including simulated training on the use of both lethal and less-lethal alternatives. Our competition in this space includes VirTra Inc., Apex Officer, Laser Shot Inc., InVeris Training Solutions Inc., MILO, Ti Training Corp, Adaptive VR Ltd. (AVRT), V-Armed, Street Smarts VR and WRAP Technologies.
Key competitive factors in this market include scale of content library, integration to additional sensors and devices (e.g. haptic suit, TASER), ease of use, visual fidelity and realism, quality of immersion experience (enhanced by capabilities such as eye tracking and speech recognition) and portability.
TASER for Personal Safety: In the private citizen market, TASER devices compete with firearms and with other less-than-lethal self-defense options such as stun guns and pepper spray-based products including pepper guns and miniature spray cans. Leading competitors in the less-than-lethal space include Byrna Technologies, Inc., Salt Supply Co., PepperBall, Mace, SABRE and Vipertek. The TASER StrikeLight competes in the flashlight category, in which there are dozens, if not hundreds, of competitors, including tactical flashlight providers with and without stun-gun capabilities.
TASER personal safety devices are not stun guns, and have different capabilities, including NMI (neuro-muscular incapacitation) functionality. The broader market for personal safety and home defense is far-reaching, and
categories range from threat detection and accountability (dash and doorbell cameras), to home security (home alarms, locks, and response services) to personal defense (firearms, stun guns, TASER devices, pepper spray, tactical flashlights, and personal alarms), to personal tracking and emergency notification mobile applications.
The primary benefit of TASER devices is in less-than-lethal stopping power. Other competitive factors include a device’s cost, effectiveness, safety, ease of use, and available training options.
Non-Axon trademarks are property of their respective owners.
Seasonality
We have historically experienced higher net sales in our fourth quarter compared to other quarters in our fiscal year due primarily to municipal budget cycles. Additionally, new product introductions can significantly impact the cadence of net sales, product costs and operating expenses. Municipal law enforcement budgets tend to feature a mix of fiscal years that end in either June, September or December. However, historical seasonal patterns, municipal budgets or historical patterns of product introductions should not be considered reliable indicators of our future net sales or financial performance.
Governmental Regulation
We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, including, for example, laws and regulations related to: privacy and data protection, security, retention, and deletion; rights of publicity; content; intellectual property; regulation of certain of our CEDs as firearms; advertising; marketing; distribution; electronic contracts and other communications; competition; consumer protection; telecommunications; product liability; taxation; labor and employment; economic or other trade prohibitions or sanctions; securities; and online payment services. There are a number of legislative proposals in the U.S., at both the federal and state level, that could impose new obligations in areas affecting our business, such as liability for copyright infringement by third parties. Foreign laws and regulations can impose different obligations or be more restrictive than those in the U.S.
These U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these laws and regulations are often uncertain and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices. See “Item 1A. Risk Factors – Legal and Compliance Risks - A variety of new and existing laws and/or interpretations could materially and adversely affect our business.”
Radio Spectrum Devices
Certain of our products utilize the radio spectrum to provide wireless voice, data and video communications services. The allocation of spectrum is regulated in the U.S. and other countries and limited spectrum space is allocated to wireless services and specifically to public safety users. In the U.S., the Federal Communications Commission (“FCC”) regulates spectrum use by non-federal entities and federal entities. Similarly, countries around the world have one or more regulatory bodies that define and implement the rules for use of radio spectrum and electromagnetic interference, pursuant to their respective national laws. We manufacture and, after receiving the required approvals, we market our products in spectrum bands already made available by regulatory bodies.
Axon body worn cameras, docks, fleet vehicle cameras and signal devices are subject to FCC’s rules and regulations. The FCC regulates not only the "intentional radiation" of radio transmitters, but also the "unintentional radiation" of noise from all sorts of electrical equipment. Current Axon products use Bluetooth, WiFi and/or Long-Term Evolution (“LTE”) radio technologies. With the integration of LTE technologies, we must also apply for the approval of private certifications such as Cellular Telecommunications and Internet Association certification, required
by FirstNet and other operators. These regulations affect CEDs with Signal technology, including the TASER 7 and TASER 10, SPPM, and future CEDs implementing wireless technology.
Axon and TASER Devices
For our TASER products, we rely on the opinions of the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives (“ATF”), including the determination that a device that does not expel projectiles by the action of an explosive is not classified as a firearm.
Federal regulation of sales in the U.S.: All current CED models, with the exception of TASER 10, which launched in January 2023, are not firearms regulated by the ATF, and our consumer products are regulated by the U.S. Consumer Product Safety Commission. The TASER 10 is regulated by the ATF under the Gun Control Act of 1968 and is subject to applicable state and local firearms regulations that are jurisdiction-specific. Axon must maintain a federal firearms license to manufacture and sell the TASER 10, which subjects Axon to periodic compliance inspections by the ATF. License violations discovered by the ATF can result in fines, penalties, warning letters or license revocation. Additionally, if we fail to comply with ATF rules and regulations, the ATF may limit our TASER 10 activities or growth, fine us, or ultimately, suspend our ability to produce and sell the TASER 10 product line. There are currently no federal laws restricting sales of our other currently offered CED products in the U.S.
Axon devices using lithium batteries are subject to U.S.-DOT/UN 38.3 for transportation.
Our R&D initiatives focus on next generation technology. We continueCED products are also subject to develop new technologiestesting, safety and other standard organizations such as the American National Standards Institute, the International Electrotechnical Commission, the National Institute of Standards and Technology, and Underwriters Laboratories. These regulations also affect CEDs with Axon Signal technology, including Signal Performance Power Magazine technology, and TASER 7 battery packs.
Federal regulation of international sales: Our CEDs are considered a “crime control” product by the U.S. Department of Commerce (DOC) for export directly from the U.S. which requires us to enhance existingobtain an export license from the DOC for the export of our CED devices from the U.S. to any country other than Canada. Future products and services andmay require classifications from the DOC before they may be shipped internationally. Our inability to expand the rangeobtain DOC export licenses or classifications on a timely basis for sales of our offerings throughproducts to our international customers could significantly and adversely affect our international sales. Although TASER 10 is regulated by the ATF for domestic sales, the U.S. DOC has ruled that the product’s unique propulsion design has no impact on its export classification and that the TASER 10 model’s export classification remains consistent with all other TASER CED models.
Federal regulation of foreign national employees: Our CED development and production is also considered controlled “technology” by the U.S. DOC and is categorized as a “deemed export” for any foreign national employees exposed to the technology within the U.S. Consequently, we must obtain export licenses from the DOC for any deemed export within the U.S. made to a foreign national employee exposed to the deemed controlled technology. Deemed export licenses are subject to DOC approvals and issued licenses require annual status reports for the stated employees. Inability to obtain proper licensing could curtail the company’s ability to recruit employees and execute R&D licensing of intellectual property and acquisition of third-party businessesproduction related to CED technology.
State and technology. local regulation: Our investment in internally funded researchCEDs are controlled, restricted or, less frequently, prohibited by some state and development totaled $55.4 million, $30.6 million and $23.6 million in 2017, 2016, and 2015, respectively.
Within the Software and Sensors segment, the Company's team of application developers conduct R&D initiatives for cloud applications, wearable and mobile technologies in law enforcement, focused specifically on new revenue opportunities that align with our Software and Sensors product and services solutions.
Within the TASER Weapons segment, current R&D initiatives include bio-medical research and electrical, mechanical and software engineering. We expect that future CEW development projects will focus on extending the range, reducing the size, improving the functionality and developing new delivery options for our products.
Our return on investment is intended to be realized over the long-term, although new systems and technologies often can have a more immediate impact on our business.
Employees
local governments. As of December 31,
2017,2022, Rhode Island is the only state that prohibits the possession of our TASER-branded devices that are not regulated by the ATF. However, that prohibition was struck down as unconstitutional by a federal court, and new legislation is expected. Additionally, some cities and municipalities also prohibit private citizen possession or use of our CED products. However, with the launch of TASER 10 in January 2023, we may need to comply with additional state and local requirements governing the sale of firearms if that device is sold to non-law enforcement customers.International regulation of foreign imports and sales: Certain jurisdictions prohibit, restrict, or require a permit for the importation, sale, possession or use of CEDs, including in some countries by law enforcement agencies, limiting our international sales opportunities.
U.S. and International regulation of component movements globally: We rely on a global supply chain of components across our product lines with most final assembly occurring in the U.S. Export of these components from abroad is subject to shifting regulatory landscapes imposed by both the foreign government and U.S. authorities upon import. Additionally, certain TASER 10 components are regulated for import into the U.S. by the ATF and are subject to ATF import permits which limits Axon’s ability to source from some suppliers leading to a potential decrease in supply chain agility.
International regulation of foreign-based operations: We maintain foreign operations in several countries globally for purposes of logistics, sales, general and administrative services, and R&D support. Depending on these activities, regulations can include business activity licensing and registration, import permits and recordkeeping, warehousing & storage security and permitting, and government reporting.
Environmental Regulations
We are subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in our products and making producers of those products financially responsible for the collection, treatment, recycling and disposal of such products.
The European Union (“EU”) has published Directives on the restriction of certain hazardous substances in electronic and electrical equipment (the “RoHS Directive”) and on electronic and electrical waste management (the “WEEE Directive”). The RoHS Directive restricts the use of a number of substances, including lead. The WEEE Directive directs members of the EU to enact laws, regulations, and administrative provisions to ensure that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the EU. In addition, similar environmental legislation has been enacted in other jurisdictions, including the U.S. (under federal and state laws) and other countries.
In addition, the EU has defined a regulation for the registration, evaluation, authorization and restriction of chemicals that places responsibility on companies to manage the risks from chemicals contained in products and to provide safety information about such substances. Manufacturers and importers are required to gather information on the properties of the chemical substances in their products and provide for their safe handling. As of January 5, 2021, companies supplying products on the EU market containing substances of very high concern as identified by the EU have to submit information on these products to the European Chemicals Agency. The information in their database is then made available to waste operators and consumers.
Other countries have adopted chemical restrictions regulations, including but not limited to the U.S., Canada, and Australia. New, or changes in, environmental safety laws, regulations or rules could also lead to increased costs of compliance, including remediations of any discovered issues, and changes to our operations, which may be significant. Any failures to comply could result in significant expenses, delays or fines.
Privacy Regulations
We are subject to laws and regulations that dictate whether, how, and under what circumstances we can collect, transfer, process and/or receive certain data that is critical to our operations, including data shared between countries or regions in which we operate and data shared among our products and services. These laws and regulations often create private rights of action, impose new potential monetary penalties for noncompliance, and may require us to adopt additional contractual obligations as well as restrict our ability to store or process data.
We continue to monitor and assess for compliance as the regulatory environment evolves both within the United States and in relevant international markets. Laws and regulations often involve matters central to our business, including:
| ● | Privacy laws, such as the European General Data Protection Regulation, California’s Consumer Privacy Act and Privacy Rights Act, Illinois’ Biometric Information Privacy Act, Virginia’s Consumer Data Protection Act, the Colorado Privacy Act and other laws. |
| ● | Data protection laws passed by many states within the U.S. regarding notification to data subjects or regulators where there is a security breach of personal data. |
| ● | Data localization or data sovereignty laws requiring that certain data types collected in a particular country be stored or processed within that country. |
Dynamic, and sometimes inconsistent, interpretations of what constitutes “personal information” enhance the complexity of complying with these regulations across jurisdictions.
Human Capital Resources
Our success depends on the continued service of our employees and on our ability to continue to attract, retain, and motivate top talent. To facilitate this, we strive to create a diverse and inclusive environment at Axon, with equitable opportunities for employee growth and development, supported by strong compensation and benefits and by programs that build connections between our employees and their communities. Axon’s mission is central to our recruiting and retention efforts.
As of December 31, 2022, we had 9492,821 full-time employees and 146913 temporary employees. The breakdownemployees (temporary employees include contractors, interns, and consultants). During fiscal 2022, the number of our full-time employees increased by department was as follows: 354 direct manufacturing employees, 600 administrative673 or 31%, primarily for product support, R&D, and manufacturingother support employees and 141 employees within sales, marketing, communications and training. Of the 146 temporary employees, more than 91% worked in direct manufacturing roles. organizations.
Our employees are not covered by any collective bargaining agreement, and we have never experienced a work stoppage. We believe that our relations with our employees are good.strong. We closed the year with our regrettable attrition rate(a) at 2.02%, well under the annual goal of 2.5%. More than 90% of employees reported feeling proud to work at Axon during 2022’s employee engagement survey.
| (a) | Regrettable attrition is defined as rolling 12-month attrition of employees rated as top performing in the prior performance rating cycle. |
Diversity and Inclusion
We embrace diversity, equity and inclusion. A truly innovative workforce needs to be diverse, leverage the skills and perspectives of a wealth of backgrounds and experiences, and ensure that all employees are equitably empowered to succeed. We continue to focus on the hiring, retention, development, and advancement of women and underrepresented communities. We are focused on recruiting diverse candidates and on internal talent development of our diverse leaders so that they can advance their careers and move into leadership positions.
Our employee affinity groups are company-sponsored, employee-led communities that address specific needs, priorities, and barriers to success for each community of focus. These groups provide a forum for employees to discuss problems and craft solutions for each community of focus, while also creating leadership and professional development opportunities for members. Throughout 2022 we continued to see active participation in all six of our affinity groups — Axon Allies for LGBTQ+ employees, APIA for Asian Pacific Islander employees, HOLA for Hispanic employees, Axon Mosaic for Black employees, Axon Vets for service veterans, and Women at Axon. Each affinity group is inclusive of employees who identify as members of each community, as well as allies.
In 2022, we formed the Ethics & Equity Advisory Council (EEAC) to ensure that ethics and equity are at the forefront of our services and product development. We believe that our ability to retain our workforce is dependent
upon fostering an environment that is sustainably safe, respectful, fair and inclusive of everyone and promotes diversity, equity and inclusion inside and outside of our business. Internally, we continue to listen to our employees with town hall sessions, provide expert-led webinars, and host community round tables.
Health and Safety
The health and safety of our employees is of utmost importance to us. We conduct regular self-assessments and audits to ensure compliance with our health and safety guidelines and regulatory requirements. Our ultimate goal is to achieve a level of work-related injuries as close to zero as possible through continuous investment in our safety programs. We provide protective gear (e.g. eye protection, masks and gloves) as required by applicable standards and as appropriate given employee job duties.
To promote mental and emotional wellbeing, all full-time employees are provided free, unlimited access by Axon to Ginger. Ginger is a 24/7 resource that includes individualized coaching via text in addition to access to articles and activities offering guidance on maintaining emotional balance throughout tumultuous times.
Additionally, we have a Wellness Incentive Program for our domestic employees that incentivizes healthy lifestyles. The program rewards employees for completing a variety of well-being activities that help foster their financial wellness, mental health, social wellbeing, community engagement and nutrition.
Corporate Information
We were incorporated in Arizona in September 1993 as ICER Corporation. We changed our name to AIR TASER, Inc. in December 1993 and to Axon Enterprise,TASER International, Incorporated in April 1998. In January 2001, we reincorporated in Delaware as TASER International, Inc., and in April 2017, changed our name to Axon Enterprise, Inc.
Available Information
Our Annual ReportReports on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q, current reportsCurrent Reports on Form 8-K, proxy statements and amendments to those reports filed with or furnished pursuant to Section 13(a) or 15(d) of the Exchange ActSEC are available free of charge on our website at
http://www.axon.cominvestor.axon.com as soon as reasonably practicable after we electronically file such material with, or furnish such material to the SEC. The information on our website, including information about our trademarks, is not incorporated by reference into or otherwise a part of this report.Annual Report on Form 10-K. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
Because of the following factors, as well as other variables affecting our operating results, our past financial performance may not be a reliable indicator of our future performance and historical trends should not be used to anticipate our results or trends in future periods. You should carefully consider the trends, risks and uncertainties described below and other information in this Form 10-K and subsequent reports filed with or furnished to the Securities and Exchange Commission (the “SEC”)SEC before making any investment decision with respect to our securities. If any of the following trends, risks or uncertainties actually occurs or continues, our business, financial condition or operating results could be materially adversely affected, the trading prices of our securities could decline, and you could lose all or part of your investment. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.
Strategic Risks
We are materiallysubstantially dependent on acceptance of our products by law enforcement markets, both domestic and international.throughout the world. If law enforcement agencies do not continue to purchase and use our products and services, our revenuesgrowth prospects, operating results and financial conditions will be materially adversely affected.
At any point, due to external factors and opinions. whether or not not related to productthe performance of our products and services, law enforcement agencies may elect to no longer purchase our CEWsCEDs or other products
and services. For example, in the past, we believe that our sales were adversely impacted by negative coverage and publicity surrounding our products and services and their use. If law enforcement agencies no longer purchase our products and services, or materially decrease their purchases, our growth prospects, operating results and financial condition will be materially adversely affected.We substantially depend on sales of our TASER X26P and X2 CEWs,CEDs, and if these products do not continue to be widely accepted, our growth prospects will be diminished.
In the years ended December 31, 2017, 20162022, 2021 and 2015,2020, we derived a significant portion of our revenues predominantly from sales of TASER CEW brand devices and related cartridges, whether on a standalone basis or as part of a bundled offering, and expect to depend on sales of these products for a predominantsignificant portion of our revenue fofor the foreseeable future. We are seeing a large number of customers upgrade their devices to the X2 or the new X26P device. This is a trend we expect to continue. A decrease in the selling prices of, or demand for these products, or their failure to maintain broad market acceptance, would significantly harm our growth prospects, operating results and financial condition.
The success of our Evidence.com software as a service (“SaaS”) delivery model is materially dependent on acceptance of this business model by our law enforcement customers. Delayed or lengthy time to adoption by law enforcement agencies will negatively impact our sales and profitability.
A substantial number of law enforcement agencies may be slow to adopt our Evidence.com digital data evidence management and storage solution, requiring extended periods of trial and evaluation. The hosted service delivery business model is not presently widely adopted by our law enforcement customer base. As such, the sales cycle has additional complexity with the need to educate our customers and address issues regarding agency bandwidth requirements, data retention policies, data security and chain of evidence custody. Delays in successfully securing widespread adoption of Evidence.com services could adversely affect our revenues, profitability and financial condition.
If we are unable to design, introduce, sell and selldeploy new products or new product features successfully, our business and financial results could be adversely affected.
Our future success will depend on our ability to develop new products or new product features that achieve market acceptance in a timely and cost-effective manner. The development of new products and new product features is complex, time consuming and expensive, and we may experience delays in completing the development and introduction of new products. We may choose to carry higher levels of inventory to mitigate the risk of production delays, which may in turn expose us to an increased risk of obsolescence.
We have devoted, and continue to devote, significant resources to develop and deploy our cloud-based productivity and real-time operations SaaS solutions, which we continue to broadly deploy to a large number of customers. Customer requirements for these products are complex and varied. If we are unable to develop scalable solutions that can be consistently configured for customers with minimal effort, or if we are unable to grow a professional services team that can consistently configure our products to meet the requirements of large numbers of customers in a timely and cost-effective manner, our ability to broadly scale our cloud-based productivity and real-time operations SaaS solutions could be negatively impacted, and our business prospects, operating results and financial condition could be negatively impacted..
We cannot provide any assurance that products that we may develop in the future will achieve market acceptance. If we fail to develop new products or new product features on a timely basis that achieve market acceptance, our business, financial results and competitive position could be adversely affected.
Delays in product development schedules may adversely affect our revenues and cash flows.
The development of CEWs, devices, sensors and software is a complex and time-consuming process. New products and enhancements to existing products can require long development and testing periods. Our increasing focus on our SaaS platform also presents new and complex development issues. Significant delays in new product or service releases or significant problems in creating new products or services could adversely affect our business, financial results and competitive position.
We face risks associated with rapid technological change and new competing products.
The technology associated with law enforcement devices and software is receiving significant attention and is rapidly evolving. While we have some patent protection in certain key areas of our CEW, Axon Devicedevice, CED and SaaS technology, it is possible that new technology may result in competing products that operate outside our patents and could present significant competition for our products, which could adversely affect our business, financial results and competitive position.
Our future success is dependent on our ability to expand sales through direct sales and distributors and our inability to increase direct sales or recruit new distributors would negatively affect our sales.
Our distribution strategy is to pursue sales through multiple channels which is principally through direct sales and independent distributors. We are focusing on direct sales to larger agencies through our regional sales managers
Defectsand our inability to grow sales to these agencies in this manner would materially adversely affect our business prospects, operating results and financial condition In addition, our inability to establish relationships with and retain law enforcement equipment distributors, who we believe can successfully sell our products, would materially adversely affect our business prospects, operating results and financial condition. If we do not competitively price our products, meet the requirements of our distributors or end-users, provide adequate marketing support, or comply with the terms of our distribution arrangements, our distributors may fail to aggressively market our products or may terminate their relationships with us. These developments would likely have a material adverse effect on our sales. Our reliance on the sales of our products by others also makes it more difficult to predict our revenues, cash flow and operating results.
In certain states and foreign jurisdictions we have decided to pursue sales directly with law enforcement customers, rather than working through established distribution channels. Our customers may have strong working relationships with distributors and we may face resistance to this change. If we do not overcome this resistance and effectively build a direct relationship with our customers, sales may be adversely affected.
Acquisitions of, or investments in, other companies, products, or technologies may require significant management attention and could disrupt our business, dilute stockholder value, and adversely affect our operating results.
Our business strategy may include acquiring other complementary products, technologies or businesses. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to close these transactions may be subject to third-party approvals, such as government regulatory approvals, which are beyond our control. Consequently, we can make no assurance that these transactions once undertaken and announced, will close.
These kinds of acquisitions or investments may result in unforeseen operating difficulties and expenditures. If we acquire businesses or technologies, we may not be able to integrate the acquired personnel, operations, and technologies successfully, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including:
| ● | inability to integrate or benefit from acquired technologies, products, personnel or services in a profitable manner; |
| ● | unanticipated costs or liabilities associated with the acquisition, including potential liabilities due to litigation and potential identified or unknown security vulnerabilities in acquired technologies that expose us to additional security risks or delay our ability to integrate the product into our offerings or recognize the benefits of our investment; |
| ● | differences between our values and those of an acquired company, as well as potential disruptions to our workplace culture; |
| ● | incurrence of acquisition-related costs, including costs related to integration activities; |
| ● | difficulty integrating the accounting and information systems, operations, and personnel of the acquired business; |
| ● | augmenting the acquired technologies and platforms to the levels that are consistent with our brand and reputation; |
| ● | difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business; |
| ● | challenges converting the acquired company’s revenue recognition policies and forecasting the related revenues, including subscription-based revenues and software license revenues; |
| ● | potential write-offs of acquired assets or investments, and potential financial and credit risks associated with acquired customers; |
| ● | difficulty converting the customers of the acquired business onto our platform and contract terms; |
| ● | diversion of management’s attention and other company resources; |
| ● | harm to our existing business relationships with business partners and customers as a result of the acquisition; |
| ● | the potential loss of key employees; |
| ● | use of resources that are needed in other parts of our business; and |
| ● | use of substantial portions of our available cash to consummate the acquisition. |
We cannot assure you that the anticipated benefits of any acquisition or investment would be realized or that we would not be exposed to unknown liabilities or risks. Integrating an acquired technology, asset or business into our operations can be challenging, complex and costly and we cannot assure you that we will be successful or that the anticipated benefits of the acquisitions that we complete will be realized or outweigh their costs. If our integration and development efforts are not successful and the anticipated benefits of the acquisitions that we complete are not achieved, our business, operating results, financial condition, and prospects could be adversely affected.
In connection with these types of transactions, we may issue additional equity securities that would dilute our stockholders, use cash that we may need in the future to operate our business, incur debt on terms unfavorable to us or that we are unable to repay, incur large charges or substantial liabilities, encounter difficulties integrating diverse business cultures and values, and become subject to adverse tax consequences, substantial depreciation, or deferred compensation charges. These challenges could adversely affect our business, operating results, financial condition, and prospects.
We are highly dependent on the services of Patrick W. Smith, our Chief Executive Officer.
Our future success depends upon our ability to retain executive officers, specifically Patrick W. Smith, and any failure to do so could adversely impact our business, prospects, new product development, financial condition and operating results.
Operational Risks
Unavailability of materials or higher costs could adversely affect our financial results.
We depend on certain domestic and international suppliers for the delivery of components used in the assembly of our products. Our reliance on third-party suppliers creates risks related to our potential inability to obtain an adequate supply of components or sub-assemblies and reduced control over pricing and timing of delivery of components and sub-assemblies. Specifically, we depend on suppliers of sub-assemblies, machined parts, injection molded plastic parts, printed circuit boards, custom wire fabrications and other miscellaneous customer parts for our products. Although we have and are implementing additional long-term agreements with strategic suppliers to mitigate the risk of supply continuity, there remains risk across our supply chain while we extend our supplier contract program, and there is no guarantee that supply will not be interrupted. Additionally, if our suppliers do not accurately forecast and effectively allocate production or if they are not willing to allocate sufficient production to us, or they decommit to us previously agreed to supply levels, it may reduce our access to components and require us to search for new suppliers. As the scale of our hardware production increases, we will also need to accurately forecast, purchase, warehouse and transport components at high volumes to our manufacturing facilities. If we are unable to accurately match the timing and quantities of component purchases to our actual needs, we may incur unexpected production disruption, storage, transportation and write-off costs, which may harm our business and operating results.
Single or sole-source components used in the manufacture of our products may become unavailable or discontinued. Delays caused by industry allocations or obsolescence may take weeks or months to resolve. In some cases, parts obsolescence may require a product re-design to ensure quality replacement components. These delays could cause significant delays in manufacturing and loss of sales, leading to adverse effects significantly impacting
our financial condition or results of operations and could harm our reputation. For example, revenue from TASER 7 for 2022 was impacted by approximately $35.0 million for orders that were scheduled to ship prior to December 31, 2022, but could not be fulfilled due to the delayed receipt of a manufacturing component for our TASER 7 devices. Additionally, Axon Body revenue was impacted by approximately $15.5 million for orders that were scheduled to ship prior to December 31, 2022, but could not be fulfilled due to supply chain constraints for our Axon Body 3 devices.
Due to the unique requirements of the TASER 10, we purchase our raw materials from a limited number of suppliers. Some of the raw materials that are used in the TASER 10 may be subject to fluctuations in market price which we may be unable to pass through to our customers to offset market fluctuations. Because of the unique requirements of the TASER 10, we cannot change suppliers easily. Any delay or interruption in the supply of these raw materials could impair our ability to manufacture and deliver the TASER 10, harm our reputation or cause a reduction in revenues.
A significant number of our raw materials or components are comprised of petroleum-based products or incur some form of landed cost associated with transporting the raw materials or components to our facility. Our freight and import costs and the timely delivery of our products could be adversely impacted by a number of factors which could reduce demandthe profitability of our operations, including: higher fuel costs; potential port closures; customs clearance issues; increased government regulation or regulatory changes for imports of foreign products into the U.S.; delays created by terrorist attacks or threats, public health issues, national disasters or work stoppages; and other matters. Any interruption of supply for any material components of our products could significantly delay the shipment of our products and resulthave a material adverse effect on our revenues, profitability and financial condition. For example, there have been disruptions in a lossthe semi-conductor supply chain that could negatively impact our ability to make our products.
International or domestic geopolitical or other events, including the imposition of sales, delay in market acceptance and damage to our reputation.
Complexnew or increased tariffs and/or quotas by the U.S. government on any of these raw materials or components and
assemblies usedother government trade policies, could adversely impact the supply and cost of these raw materials or components, and could adversely impact our revenues, profitability and financial condition. In particular, the implementation of tariffs and trade restrictions as well as changes in
trade policies between the U.S. and China may have an adverse effect on our
productssupply chain from a sourcing and cost perspective. We source certain raw materials from China, as do some of our suppliers. We may
contain undetected defects that are subsequently discovered at any point in the life of the product. Defects in our productsbe unable to transition away from China to other jurisdictions or obtain secondary sources for raw materials which could result in a
lossmaterial adverse effect on our revenues, profitability and financial condition.Material adverse developments in domestic and global economic conditions, or the occurrence of sales, delayother world events, could materially adversely affect our revenue and results of operations.
Various factors contribute to the uncertain economic environment, including the conflict between Russia and Ukraine, the increase in, market acceptance and damagevolatility of, interest rates, high inflation, an actual recession or fears of a recession, trade policies and tariffs and geopolitical tensions. Our inability to offset price inflation in our reputationmaterials, components, shipping, or labor through increased prices to customers with long-term fixed contracts and increased warranty costs, whichformula-based or long-term fixed price contracts with suppliers could adversely affect our business, financial condition and results of operations. Global supply chain and competitive position.
Iflabor market challenges could also negatively affect our security measures are breachedperformance as well as the performance of our suppliers. Interest rate increases have also created financial market volatility and unauthorized access is obtainedcould further negatively impact financial markets, lead to customers’ dataan economic downturn or recession or have an adverse effect on our data,operating results. Economic slowdowns can also negatively impact municipal and state tax collections and put pressure on law enforcement budgets which may increase the risk that our network, data centers and service may be perceived as not being secure, customers may curtail or stop using our service and we may incur significant legal and financial exposure and liabilities.
Our service involves the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of information or the total deletion of all stored customer data, litigation and possible liability. We devote significant resources to engineer secure products and ensure security vulnerabilities are mitigated, and we require out third-party service providers to do so as well. Despite these efforts, security measures may be breached as a result of third-party action, employee error, and malfeasance or otherwise. Breaches could occur during transfer of data to data centers or at any time, and result in unauthorized access to our data or our customers’ data. Third-parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our data or our customers’ data. Additionally, hackers may develop and deploy viruses, worms, and other malicious software programs that attack or gain access to our networks and data centers. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we maywill be unable to anticipate these techniquesappropriate funds for existing or future contracts with us. In addition, geopolitical risks could affect our customers’ budgets and policies. These and other factors may adversely affect customer demand and ability to implement adequate preventative measures. Moreover, our security measures and/or thosepay, cause decrease in sales, and negatively impact the realizability of our third party service providers and/or customersaccounts and notes receivable and contract assets.
To the extent demand for our products increases, our future success will be dependent upon our ability to manage our growth and to increase manufacturing production capacity.
To the extent demand for our products increases significantly in future periods, one of our key challenges will be to increase our production capacity to meet sales demand while maintaining product quality. Our primary strategies to accomplish this include introducing additional shifts, increasing the physical size of our assembly facilities, the hiring of additional production staff, and the implementation of additional customized manufacturing automation equipment. The investments we make in this equipment may not detect such security breaches if they occur. Any security breachyield the anticipated labor and material efficiencies. Our inability to meet any future increase in sales demand or effectively manage our expansion could result inhave a loss of confidence in the security ofmaterial adverse effect on our service, damage our reputation, lead to legal liability, negatively impact our future sales and significantly harm our growth prospects,revenues, operating results and financial condition.
Interruptions or delaysDelays in service from our third-party cloud storage providers for our Evidence.com service, or the loss or corruption of digitally stored evidence, would impair the delivery of our service and harm our business
.We currently serve our Evidence.com customers from third-party cloud storage providers based in the U.S. and other countries. Interruptions in our service, or loss or corruption of digital evidence,product development schedules may
reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our
renewal ratesrevenues and
cash flows.The development of CEDs, devices, sensors and software is a complex and time-consuming process. New products and enhancements to existing products can require long development and testing periods. Our focus on our ability to attractSaaS platform also presents complex development issues. Significant delays in new customers. Ourproduct or service releases or significant problems in creating new products or services could adversely affect our business, will also be harmed if our customersoperating results, cash flows and potential customers believe our service is unreliable.
Most of our end-user customers are subject to budgetary and political constraints that may delay or prevent sales.
Most of our end-user customers are government agencies. These agencies often do not set their own budgets and therefore, have limited control over the amount of money they can spend. In addition, these agencies experience political pressure that may dictate the manner in which they spend money. As a result, even if an agency wants to acquire our products, it may be unable to purchase them due to budgetary or political constraints, particularly in challenging economic environments. There can be no assurance that the economic and budgeting issues will not worsen and adversely impact sales of our products. Some government agency orders may also be canceled or substantially delayed due to budgetary, political or other scheduling delays, which frequently occur in connection with the acquisition of products by such agencies, and such cancellations may accelerate or be more severe than we have experienced historically.
competitive position.We expend significant resources in anticipation of a sale due to our lengthy sales cycle and may receive no revenue in return.
Generally, law enforcement and corrections agencies consider a wide range of issues before committing to purchase our products, including product benefits, training costs, the cost to use our products in addition to, or in place of, other products, budget constraints and product reliability, safety and efficacy. The length of our sales cycle may range from a few weeks to as long as several years. Adverse publicity surrounding our products or the safety of such products has in the past, and could in the future, lengthen our sales cycle with customers. In the past, we believe that the Company’sour sales were adversely impacted by negative publicity surrounding our products or the use of our products. See, for example, “Litigation - Product Litigation” in Note 9 of our consolidated financial statements included in Part II, Item 8 of this report. We may incur substantial selling costs and expend significant effort in connection with the evaluation of our products by potential customers before they place an order. If these potential customers do not purchase our products, we will have expended significant resources and received no revenue in return.
Due to municipal government funding rules, certain of our contracts are subject to appropriation, termination for convenience, or similar cancellation clauses, which could allow our customers to cancel or not exercise options to renew contracts in the future.
Although Axon has entered into contracts for the delivery of products and services in the future and anticipates the contracts will be completed, if agencies do not appropriate money in future year budgets, terminate contracts for convenience or if other cancellation clauses are invoked, revenue associated with these bookings will not ultimately be recognized, and could result in a reduction to bookings.
An increasing percentage of our revenue is derived from subscription billing arrangements which may result in delayed cash collections and may increase customer credit risk on receivables
A growing portion of our sales are derived from subscription billing arrangements and on an open credit basis. While we perform ongoing credit evaluations of our customers' financial condition, if we become aware of information related to the creditworthiness of a major customer, or if future actual default rates on receivables in general differ from those currently anticipated, we may have to adjust our allowance for doubtful accounts, which could adversely affect our business, financial condition or operating results.
Changes in civil forfeiture laws may affect our customers’ ability to purchase our products
products.Some of our customers use funds seized through civil forfeiture proceedings to fund the purchase of our products. Changes in state legislaturesLegislative changes could impact our customers’ ability to seize funds or use seized funds to fund purchases. Changes in civil forfeiture statutes or regulations are outside of our control and could limit the amount of funds available to our customers, which could adversely affect the sale of our products.
SaaS revenue for Evidence.com is recognized over the terms of the contracts, which may be several years, and, as such, trends in new business may not be immediately reflected in our operating results.
Our SaaS service revenue is generally recognized ratably over the terms of the contracts, which generally range from one to five years. As a result, most of the SaaS revenue we report each quarter is the result of agreements entered into during previous quarters. Consequently, current positive or negative trends in this portion of our business may not be fully reflected in our revenue results for several periods.
We utilize multiple third-party cloud-based storage providers to host the Axon Evidence.com platform.
Utilizing and administering multiple cloud-based storage providers may result in duplication of efforts and resources, increased cost structure, and organization complexities. These complexities and additional costsCatastrophic events could materially adversely affect our business, results of operations and/or financial conditioncondition.
A disruption or failure of our systems or operations in the event of a major earthquake, weather event, fire, explosion, failure to contain hazardous materials, industrial accident, utility failure, cyber-attack, terrorist attack, public health crisis, pandemic, or other catastrophic event could cause delays in completing sales, providing services, or performing other mission-critical functions. A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and our operating results.results as well as expose us to claims, litigation and governmental investigations and fines.
If our backup and mitigation plans are not sufficient to minimize business disruption, our financial results could be adversely affected. We are continuously monitoring our operations and intend to take appropriate actions to mitigate the risks arising from catastrophic events, but there can be no assurances that we will be successful in doing so.
If our security measures or those of our third-party cloud storage providers are breached and unauthorized access is obtained to customers’ data or our data, our network, data centers and service may face personal injury, wrongful deathbe perceived as not being secure, customers may curtail or stop using our service and we may incur significant legal and financial exposure and liabilities.
Security breaches of Axon body worn cameras, docks, fleet vehicle cameras, signal devices and Axon Evidence and other liability claims that harmcloud services or products could expose our clients and us to a risk of loss or misuse of data. Any security breach could result in a loss of confidence in the security of our services, damage our reputation, disrupt our business, lead to legal liability, and adversely affectnegatively impact our salesfuture sales. We devote significant resources to engineer secure products and financial condition.
Our CEW productsensure security vulnerabilities are
often used in aggressive confrontations that may result in serious, permanent bodily injury or death to those involved. Our CEW products may be associated with these injuries. A person, or the family members of a person, injured in a confrontation or otherwise in connection with the use of our products, may bring legal action against us to recover damages on the basis of theories including wrongful death, personal injury, negligent design, defective product or inadequate warning. We are currently subject to a number of such lawsuitsmitigated, and we
require our third-party service providers to do so as well; however, security breaches that have
been subject to significant adverse judgments and settlements. We may also be subject to lawsuits involving allegations of misuse of our products. If successful, wrongful death, personal injury, misuse and other claims could havenot had a material
adverse effect on our
operating resultsbusiness or our third-party service providers have occurred and
financial conditionwill continue to occur, including as a result of third-party action, employee error, and
malfeasance or otherwise. Remote-work arrangements may also make our systems and employees more susceptible to attack. Breaches could
occur during transfer of data-to-data centers or at any time, and result in
negative publicity aboutunauthorized physical or electronic access to our
products.data or our customers’ data. Third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as usernames, passwords or other information in order to gain access to our data or our customers’ data. Additionally, hackers may develop and deploy viruses, worms, and other malicious software programs that attack or gain access to our networks and data centers. Increasing socioeconomic and political instability in some countries has heightened these risks. In addition, retaliatory acts by Russia in response to Western sanctions could include cyber-attacks that could directly or indirectly impact our operations.
Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently, grow more complex over time, and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Moreover, our security measures and those of our third-party service providers or customers may not detect such security breaches if they occur. Although we carry product liability insurance,have developed systems and processes that are designed to protect our data and user data, to prevent data loss, and to prevent or detect security breaches, we docannot assure that such measures will provide absolute security, and we may incur significant legal expenses within our self-insured retentioncosts in defending these lawsuitsprotecting against or remediating cyber-attacks.
A security breach could expose us to a risk of loss or inappropriate use of proprietary and significant litigationsensitive data, or the denial of access to this data. A real or perceived security breach could also result in a diversionloss of management’s attention and resources, negative publicity and a potential award of monetary damagesconfidence in excessthe security of our insurance coverage. The outcome of any litigation is inherently uncertain and there can be no assurance that our existing or any future litigation will not have a material adverse effect onservice, disrupt our business, damage our reputation, lead to legal liability, negatively impact our future sales and significantly harm our growth prospects, operating results and financial conditioncondition.
Defects or operating results.
Other litigation maydisruptions in our services could impact demand for our services and subject us to
significant litigation costs and judgments and divert management attentionsubstantial liability.We currently serve our Axon Evidence customers from our business.
We have been or couldthird-party cloud storage providers based in the
U.S. and other countries. Interruptions in our service, or loss or corruption of digital evidence, may reduce our revenue, cause us to issue credits or pay penalties, cause customers to file litigation against us, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.Since our customers use our services for important aspects of their operations, any errors, defects, disruptions in service or other performance problems could hurt our reputation and may damage our customers’ operations. As a result, customers could elect to not renew our services or delay or withhold payment to us. We could also lose future be involvedsales or customers may make warranty or other claims against us, which could result in numerous other litigation matters relatingan increase in our warranty expense, an increase in collection cycles for and decline in the collectability of accounts receivable, and an increase in the expense and risk of litigation.
Defects in our products could reduce demand for our products or result in product recalls and result in a loss of sales, delay in market acceptance and damage to our reputation.
Complex components and assemblies used in our products contracts and business relationships, including litigation against persons whom we believe have infringed onmay contain undetected defects that are subsequently discovered at any point in the life of the product. Defects in our intellectual property, infringement litigation filed against the Company, litigation against a competitor and litigation filed by a former distributor against the Company. Such matters have resulted, and are expected to continue toproducts could result in substantiala loss of sales, delay in market
acceptance, damage to our reputation and increased warranty costs, to us, including in the form of attorney’s fees and costs, damages, fines or other penalties, whether pursuant to a judgment or settlement, and diversion of our management’s attention, which could adversely affect our business, financial condition or operating results. There is also a risk of adverse judgments, as the outcome of litigation is inherently uncertain.
If we are unable to protect our intellectual property, we may lose ourresults and competitive advantage or incur substantial litigation costs to protect our rights. We may be subject to intellectual property infringement claims, which could cause us to incur litigation costs and divert management attention from our business.
Our future success depends upon our proprietary technology. Our protective measures, including patents, trademarks, copyrights, trade secret protection, and Internet identity registrations, may prove inadequate to protect our proprietary rights and market advantage. The right to stop others from misusing our trademarks and service marks in commerce depends, to some extent, on our ability to show evidence of enforcement of our rights against such misuse in commerce. Our efforts to stop improper use, if insufficient, may lead to loss of trademark and service mark rights, brand loyalty and notoriety among our customers and prospective customers. The scope of any patent to which we have or may obtain rights may not prevent others from developing and selling competing products. The validity and breadth of claims covered in technology patents involve complex legal and factual questions, and the resolution of such claims may be highly uncertain, lengthy and expensive. In addition, our patents may be held invalid upon challenge, or others may claim rights in or ownership of our patents. Moreover,position.Additionally, we are subject to litigation with parties that claim, among other matters, that we infringed their patents or other intellectual property rights. The defense and prosecution of patent and other intellectual property claims are both costly and time consuming, divert our management’s attention from our business and could result in a material adverse effect on our business, and financial position and operating results.
If our products were found to infringe a third-party’s proprietary rights, we could be forced to enter into costly royalty or licensing agreements in order to be able to sell our products or discontinue use of the protected technology. Such royalty and licensing agreements may not be available on terms acceptable to us or at all. We could also be required to pay substantial damages, fines or other penalties, indemnify customers or distributors, cease the manufacture, use, or sale of infringing products or processes, and/or expend significant resources to develop or acquire non-infringing technologies. There is no guarantee that our use of conventional technology searching and brand clearance searching will identify all potential rights holders. Rights holders may demand payment for past infringements and/or force us to accept costly license terms or discontinue use of protected technology and/or works of authorship that may include, for example, photos, videos, and software. Our current research and development focus on developing software-based products increases this risk.
In foreign countries, we can enforce patent rights only in the jurisdictions in which our patent applications have been granted.
Our U.S. patents protect us from imported infringing products coming into the U.S. from abroad. We have made applications for patents in a few foreign countries; however, these may be inadequate to protect markets for our products in other foreign countries. Each foreign patent is examined and granted according to the law of the country where it was filed independent of whether a U.S. patent on similar technology was granted. A patent in a foreign country may be subject to cancellation if the claimed invention has not been sold in that country. Meeting the requirements of working invention differs by country and ranges from sales in the country to manufacturing in the country. U.S. export law, or the laws of some foreign countries, may prohibit us from satisfying the requirements for working the invention, creating a risk that some of our foreign patents may become unenforceable.
Government regulations applied to our CEW products may affect our markets for and sales of these products.
We rely on the opinions of the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, including the determination that a device that has projectiles propelled by the release of compressed gas in place of the expanding gases from ignited gunpowder, are not classified as firearms. Changes in statutes, regulations, and interpretation outside of our control may result in our products being classified or reclassified as firearms. Our private citizen market could be substantially reduced if consumers are required to obtain a registration to own a firearm prior to purchasing our products.
Federal regulation of sales in the U.S.: Our CEWs are not firearms regulated by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, but our consumer products are regulated by the U.S. Consumer Products Safety Act of 1972, as amended by the Consumer Product Safety Commission. Although thereImprovement Act of 2008, which empowers the Consumer Products Safety Commission to exclude from the market products that are currently no Federalfound to be unsafe or hazardous, and similar laws restricting sales of our core CEW products inunder foreign jurisdictions. Under certain circumstances, the U.S., future Federal regulationConsumer Products Safety Commission or comparable foreign agency could adversely affect salesrequire us to repurchase or recall one or more of our products.
Federal regulation of international sales: Our CEW devices are considered a “crime control” product by the U.S. Department of Commerce (“DOC”) for export directly If we were required to remove, or we voluntarily remove, our products from the U.S. Consequently,market, our reputation could be tarnished, and we must obtain an export license from the DOC for the exportmight have large quantities of our CEW devices from the U.S. other than to Canada. In addition, certain of our camera and softwarefinished products require classifications from the DOC before they may be shipped internationally. Our inability to obtain DOC export licenses or classifications on a timely basis for sales of our products to our international customersthat we could significantly and adversely affect our international sales.
State and local regulation: Our CEW devices are controlled, restricted or their use prohibited by a number of state and local governments. Our CEW devices are banned from private citizen purchase or use by statute in five states: Hawaii, Massachusetts, New York, and Rhode Island, as well as in the District of Columbia. Some cities and municipalities also prohibit private citizen possession or use of our CEW products. Other jurisdictions may ban or restrict the sale of our CEW products and our product sales may be significantly affected by additional state, county and city governmental regulation.
Foreign regulation: Certain foreign jurisdictions prohibit, restrict, or require a permit for the importation, sale, possession or use of CEWs, including in some countries by law enforcement agencies, limiting our international sales opportunities.
Our CEW products are also subject to regulation by testing, safety and other standard organizations (e.g. ANSI, IEC, NIST).
not sell.Our international operations expose us to additional risks that could harm our business, operating results, and financial condition.
Our international operations are significant, and we plan to continue to grow internationally by acquiring existing entities or setting up new legal entities in new markets. In certain international markets, we have limited operating experience and may not benefit from any first-to-market advantages or otherwise succeed. In addition to risks described elsewhere in this section, our international operations expose us to other risks, including the following:
| ● | Restrictions on foreign ownership and investments, and stringent foreign exchange controls that might prevent us from repatriating cash earned in countries outside the U.S. |
| ● | Import and export requirements, tariffs, trade disputes and barriers, product certification requirements, sanctions, and customs classifications that may prevent us from offering products or providing services to a particular market or obtaining necessary parts and components to manufacture products, which may lead to decreased sales and may increase our operating costs. |
| ● | Longer payment cycles in some countries, increased credit risk, and higher levels of payment fraud. |
| ● | Uncertainty regarding liability for our products and services, including uncertainty as a result of local laws and lack of legal precedent. |
| ● | Different labor laws and customs, existence of workers’ councils and labor unions, and other challenges caused by distance, language, and cultural differences, making it harder to do business in certain jurisdictions. |
Restrictions on foreign ownership and investments, and stringent foreign exchange controls that might prevent us from repatriating cash earned in countries outside the U.S.
Import and export requirements, tariffs, trade disputes and barriers, and customs classifications that may prevent us from offering products or providing services to a particular market or obtaining necessary parts and components to manufacture products, which may lead to decreased sales and may increase our operating costs.
Longer payment cycles in some countries, increased credit risk, and higher levels of payment fraud.
Uncertainty regarding liability for products and services, including uncertainty as a result of local laws and lack of legal precedent.
Different employee/employer relationships, existence of workers' councils and labor unions, and other challenges caused by distance, language, and cultural differences, making it harder to do business in certain jurisdictions.
Additionally, changes in international local political, economic, regulatory, tax, social, and labor conditions may adversely harm our business and compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business. These numerous and sometimes conflicting laws and regulations include, among others, environmental regulations, internal control and disclosure rules, privacy and data protection requirements, anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, and other local laws prohibiting corrupt payments to governmental officials, and competition regulations, among others.
Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially adversely affect our brand, our international growth efforts, our ability to attract and retain employees, our business, and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies.
We depend on our ability to attract and retain our key management, sales and technical personnel.
Our success depends upon the continued service of our key management personnel. Our success also depends on our ability to continue to attract, retain and motivate qualified technical employees. Although we have employment agreements with our officers and other members of our executive management team, the employment of such persons is “at-will” and either we or the employee can terminate the employment relationship at any time, subject to the
applicable terms of the employment agreements. In particular, we expect to continue to face significant challenges in hiring personnel, particularly for engineering talent, whether as a result of competition with other companies or other factors.
We have unique equity incentives designed to attract and regulations subject usretain long-term employees. We utilize these plans to a number of risksalign pay and could result in significant liabilitiesperformance and costs.
Wedrive shareholder returns while reducing near-term cash expenditures. Our equity incentives and ongoing stock and option grants are subject to various state, federalhaving sufficient shares under our stock plan and international laws and regulations governingany new plans or increases in the environment, including restricting the presence of certain substances in our products and making producers for those products financially responsible for the collection, treatment, recycling and disposal. Environmental legislation within the European Union (“EU”) may increase our cost of doing business internationally and impact our revenues from EU countries as we comply with and implement these requirements.
The EU has published Directives on the restriction of certain hazardous substances in electronic and electrical equipment (the “RoHS Directive”) and on electronic and electrical waste management (the “WEEE Directive”). The RoHS Directive restricts the use of a number of substances, including lead. The WEEE Directive directs members of the EUshares available for grant under existing plans must be approved by our shareholders. If we are unable to enact laws, regulations, and administrative provisions to ensure that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the EU. In addition, similar
environmental legislation has been or may be enacted in other jurisdictions, including the U.S. (under federal and state laws) and other countries, the cumulative impact of which could be significant.
We continue to monitor the impact of specific registration and compliance activities required by the RoHS and WEEE Directives. We endeavor to comply with applicable environmental laws, yet compliance with such laws could increase our operations and product costs, increase the complexities of product design, procurement, and manufacturing, limit our ability to manage excess and obsolete non-compliant inventory, limit our sales activities, and impact our future financial results. Any violation of these laws can subject us to significant liability, including fines, penalties, and prohibiting sales of our products into one or more states or countries, and result in a material adverse effect on our financial condition.
Regulations related to voice, data and communications services may impact our ability to sell our products.
The radio spectrum is required to provide wireless voice, data and video communications services. The allocation of spectrum is regulated in the U.S. and other countries and limited spectrum space is allocated to wireless services and specifically to public safety users. In the U.S., the Federal Communications Commission (“FCC”) regulates spectrum use by non-federal entities and federal entities. Similarly, countries around the world have one or more regulatory bodies that define and implement the rules for use of radio spectrum and electromagnetic interference, pursuant to their respective national laws. We manufacture and market products in spectrum bands already made available by regulatory bodies. Consequently, our results could be positively or negatively affected by the rules and regulations adopted from time to time by the FCC or regulatory agencies in other countries. Regulatory changes in current spectrum bands may also provide opportunities or may require modifications to some of our products so they can continue to be manufactured and marketed. If current products do not comply with the regulations set forth by these governing bodies,obtain shareholder approval, we may be unable to
sellattract and retain top talent. Our ability to attract, retain, and motivate employees may also be adversely affected by stock price volatility. The loss of the service of one or more of our
productskey personnel could adversely impact our business, prospects, financial condition and operating results.If we fail to comply with federal, state or could incur penalties,local regulations applicable to our firearm product, TASER 10, we may be subject to governmental actions or litigation which could materially harm our business, operating results, and financial condition.
TASER 10 is primarily regulated by the ATF, which licenses the manufacture, sale, and import of firearms in the United States. The primary federal laws are the National Firearms Act of 1934, or NFA, the Gun Control Act of 1968, or GCA, and the Firearms Owners’ Protection Act of 1986, or FOPA, which have been amended from time to time.
The ATF conducts periodic audits of our Arizona facilities which hold federal firearms licenses. If we fail to comply with ATF rules and regulations, the ATF may limit our TASER 10 activities or growth, fine us, or, ultimately, suspend our ability to produce and sell the TASER 10 product line. There are also various state laws, regulations, and local ordinances relating to firearm characteristics, features, and sales. Axon and local distributors must comply with state and local laws, regulations, and ordinances pertaining to firearm and magazine sales in the jurisdictions where TASER 10 is sold. Additionally, certain TASER 10 components are regulated for import into the U.S. by ATF and are subject to ATF import permits which limits Axon’s ability to source from some suppliers leading to a potential decrease in supply chain agility. Supply chain constraints or an inability to source TASER 10 components could have a material adverse impactaffect on our business, prospects, financial condition and operating results.
Federal and state legislatures frequently consider legislation relating to the regulation of firearms, including the amendment or repeal of existing legislation. Existing laws may also be affected by future judicial rulings and interpretations. These possible changes to existing legislation or the enactment of new legislation may seek to restrict the makeup of a firearm, mandate the use of certain technologies in a firearm, remove existing legal defenses in lawsuits, set minimum age limits to purchase certain firearms, or ban the sale and, in some cases, the ownership of various types of firearms and accessories. Such restrictions or bans could have a material adverse affect on our business, prospects, financial condition and operating results
If we fail to maintain effective internal control over financial reporting or identify a material weakness or significant deficiency in our internal control over financial reporting, our ability to report our financial condition and results of operations in a timely and cash flows.
Regulations related to conflict mineralsaccurate manner could be adversely affected, investor confidence in our company could diminish, and the value of our common stock may
force us to incur additional expenses, may makedecline.
Preparing our supply chainconsolidated financial statements involves a number of complex manual and automated processes, which are dependent upon individual data input or review and require significant management judgment. One or more complex andof these processes may result in damageerrors that may not be detected and could result in a material misstatement or other errors of our consolidated financial statements. Such errors may be more likely to occur when implementing new systems and processes, particularly when implementing evolving and complex accounting rules. The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires, among other things, that as a publicly-traded company we disclose whether our reputation with customers.internal control over financial reporting and disclosure controls and procedures are effective.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements
The U.S. Securities and Exchange Commission ("SEC") has enacted disclosure requirements for companies that use certain minerals and metals, knownwill not be prevented or detected on a timely basis. While we continually undertake steps to improve our internal control over financial reporting as “conflict minerals,” in their products, whether or not these products are manufactured by third-parties. These requirements require companies to perform due diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. We have incurred and will likely continue to incur costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. In addition, these new requirements could adversely affect the sourcing, availability and pricing of minerals used in our products. Because our supply chain is complex,business changes, we may not be successful in making the improvements and changes necessary to be able to sufficiently verify the origins for these mineralsidentify and metals usedremediate control deficiencies or material weaknesses on a timely basis. For example, we identified a material weakness in our products throughinternal controls over revenue recognition and the due diligence procedures that we implement, which may harm our reputation. In such an event, we may also face difficulties in satisfying customers who require that allreporting of the components of our products are certified as conflict-free.
Our dependence on third-party suppliers for key components of our devices could delay shipment of our products and reduce our sales.
We depend on certain domestic and foreign suppliersdeferred revenue for the
delivery of components usedyear ended December 31, 2022 which we are working to remediate as further discussed in
the assembly ofItem 9A. Controls and Procedures. If we are unable to successfully remediate any current or future material weaknesses in our
products. Our reliance on third-party suppliers creates risks related to our potential inability to obtain an adequate supply of components or sub-assemblies and reducedinternal control over
pricingfinancial reporting, the accuracy and timing of
delivery of componentsour financial reporting may be adversely affected; our liquidity, access to capital markets and
sub-assemblies. Specifically, we depend on suppliers of sub-assemblies, machined parts, injection molded plastic parts, printed circuit boards, custom wire fabrications and other miscellaneous customer parts for our products. We do not have long-term agreements with anyperceptions of our
supplierscreditworthiness may be adversely affected; we may be unable to maintain compliance with securities laws, stock exchange listing requirements and
theredebt instruments covenants regarding the timely filing of periodic reports; we may be subject to regulatory investigations and penalties; investors may lose confidence in our financial reporting; we may suffer defaults under our debt instruments; and our stock price may decline.
Financial Risks
An increasing percentage of our revenue is no guarantee that supply will not be interrupted. Duederived from subscription billing arrangements which may result in delayed cash collections and may increase customer credit risk on receivables and contract assets.
Our strategy includes continuing to changes imposed for importsshift an increasing amount of foreign products intoour business to a subscription model, to better match the U.S.,municipal budgeting process of our customers as well as potential port closuresto allow for multiple product offerings to be bundled into existing subscriptions. 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 multiple installments rather than up front. While we record an estimate of expected credit losses and delays created by terrorist attacksperform ongoing reviews of trade accounts receivables, if we become aware of information related to the creditworthiness of a major customer, or threats, public health issues, national disasters or work stoppages,if future actual default rates on receivables in general differ from those currently anticipated, we are exposedmay have to risk of delays caused by freight carriers or customs clearance issues foradjust our imported parts. Any interruption of supply for any material components of our products could significantly delay the shipment of our products and have a material adverse effect on our revenues, profitability and financial condition.
Component shortages could result in our inability to produce at a volume to adequately meet customer demand,expected credit loss reserve, which could result in a loss of sales, delay in deliveries and injury toadversely affect our reputation.
Single or sole-source components used in the manufacture of our products may become unavailable or discontinued. Delays caused by industry allocations or obsolescence may take weeks or months to resolve. In some cases, parts obsolescence may require a product re-design to ensure quality replacement components. These delays could cause significant delays in manufacturing and loss of sales, leading to adverse effects significantly impacting ourbusiness, financial condition or results of operations and injure our reputation.
We may experience a decline in gross margins due to rising raw material and transportation costs associated with a future increase in petroleum prices.
A significant number of our raw materials are comprised of petroleum-based products, or incur some form of landed cost associated with transporting the raw materials or components to our facility. A significant rise in oil prices could adversely impact our ability to sustain current gross margins by increasing component pricing and transportation costs.
operating results.We may experience a decline in gross margins due to a shift in product sales from CEWs to Axon devicessoftware and sensors products and services which may continue to carry a lower gross margin.
margin than that of Tasers.We continue to invest in the growth of the Software and Sensors segment, and this expected growth may result in a higher percentage of total revenues being comprised of Software and Sensors products and services. GrossIn 2022, gross margin as a percentage of net sales for the Software and Sensors segment is currently lower than that ofwas 59.5% while it was 63.3% for the TASER Weapons segment, and may continue to be lower in the future.
Tofuture thus decreasing our consolidated gross margin.SaaS revenue for Axon Evidence is recognized over the extent demand for our products increases, our future success will be dependent upon our ability to manage our growth and to increase manufacturing production capacity,terms of the contracts, which may be accomplished byseveral years, and, as such, trends in new business may not be immediately reflected in our operating results.
Our SaaS service revenue is generally recognized ratably over the implementationterms of customized manufacturing automation equipment.
To the
extent demandcontracts, which generally range from one to ten years. As a result, most of the SaaS revenue we report each quarter is the result of agreements entered into during previous quarters. Consequently, current trends, whether positive or negative, in this portion of our business may not be fully reflected in our revenue results for
several periods.Most of our end-user customers are subject to budgetary and political constraints that may delay or prevent sales.
Most of our end-user customers are government agencies. These agencies often do not set their own budgets and therefore, have limited control over the amount of money they can spend. In addition, these agencies experience political pressure that may dictate the manner in which they spend money. As a result, even if an agency wants to acquire our products, increases significantlyit may be unable to purchase them due to budgetary or political constraints, particularly in challenging economic environments. There can be no assurance that the economic, budgeting or political issues will not worsen and adversely impact sales of our products. Some government agency orders may also be canceled or substantially delayed due to budgetary, political or other scheduling delays, which frequently occur in connection with the acquisition of products by such agencies, and such cancellations may accelerate or be more severe than we have
experienced historically. Federal agencies may be particularly impacted by governmental impasse regarding continued government funding and debt limit constraints.
Due to municipal government funding rules, certain of our contracts are subject to appropriation, termination for convenience, or similar cancellation clauses, which could allow our customers to cancel or not exercise options to renew contracts in the future.
Although we have entered into contracts for the delivery of products and services in the future and anticipate the contracts will be completed, if agencies do not appropriate money in future periods, oneyear budgets, terminate contracts for convenience or if other cancellation clauses are invoked, revenue and cash associated with these bookings will not ultimately be recognized, and could result in a reduction to bookings and revenue.
We maintain most of our key challenges will be to increase our production capacity to meet sales demand while maintaining product quality. Our primary strategies to accomplish this include introducing additional shifts, increasingcash balances, some of which are not insured, at three depository institutions.
We maintain the physical sizemajority of our assembly facilities,cash and cash equivalents accounts at three depository institutions. As of December 31, 2022, the hiring of additional production staff,aggregate balances in such accounts at these three institutions were $139.9 million. Our balances with these institutions regularly exceed Federal Deposit Insurance Corporation insured limits for domestic deposits and various foreign deposit insurance programs covering our deposits in Australia, Canada, Finland, France, Germany, Hong Kong, India, Italy, the Netherlands, Spain, the United Kingdom, and Vietnam.
We could suffer losses with respect to the uninsured balances if the depository institutions failed and the implementationinstitution’s assets were insufficient to cover its deposits and/or the governments did not take actions to support deposits in excess of additional customized automation equipment. The investments we make in this equipment may not yield the anticipated labor and material efficiencies. Our inability to meet any future increase in sales demand or effectively manage our expansionexisting insurance limits. Any such losses could have a material adverse effect on our revenues,liquidity, financial condition and results and financial condition.
Our future success is dependent on our ability to expand sales through distributors and direct sales and our inability to recruit new distributors or increase direct sales would negatively affect our sales.
Our distribution strategy is to pursue sales through multiple channels with an emphasis on independent distributors and direct sales. Our inability to establish relationships with and retain law enforcement equipment distributors, who we believe can successfully sell our products, would adversely affect our sales. In addition, our arrangements with our distributors are generally short-term. We are also focusing on direct sales to larger agencies through our regional sales managers and our inability to grow sales to these agencies in this manner could adversely affect our sales. If we do not competitively price our products, meet the requirements of
our distributors or end-users, provide adequate marketing support, or comply with the terms of our distribution arrangements, our distributorsoperations.Stock transactions may fail to aggressively market our products or may terminate their relationships with us. These developments would likely have a material, adverse effectunpredictable impact on our sales. Our relianceresults of operations and may result in dilution to existing shareholders.
We have historically granted and expect to continue to grant stock-based compensation to key employees and non-employee directors as a means of attracting and retaining highly qualified personnel. All stock-based awards are required to be recognized in our financial statements based on the salestheir grant date fair values. The amount recognized for stock compensation expense could vary depending on a number of our products by others also makes it more difficult to predict our revenues, cash flow and operating results.
The increased focus on direct sales compared to sales through distribution is dependent on our ability to sell into the statesassumptions or foreign jurisdictionschanges that have established distributor relationships.
In certain states and foreign jurisdictions we have decided to pursue sales directly with law enforcement customers, rather than working through established distribution channels. Our customers may have strong working relationships with distributors and we may face resistance to this change. If we do not overcome this resistance and effectively build a direct relationship with our customers, sales may be adversely affected.
Acquisitions and joint ventures may have an adverse effect on our business.
We may consider additional acquisitions or joint ventures as part of our long-term business strategy. These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, that we do not realize a satisfactory return on our investment, or that we experience difficultyoccur.Changes in the integration or coordinationsubjective and probability-based assumptions can materially affect the estimates of new employees, business systems, and technology, or there is a diversion of management’s attention from our other businesses. These events could harm our operating results, financial condition or cash flows.
If our goodwill or indefinite-lived assets become impaired, we may be required to record a significant charge to earnings.
We test goodwill for impairment at least annually. If such goodwill or indefinite-lived intangible assets are deemed to be impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the
assets would be recognized. We reviewawards and timing of recognition of stock-based compensation expense and consequently, the related amount recognized in our
indefinite-lived intangible assetsstatements of operations and comprehensive income.If we achieve specific operational goals and the covered employees complete the requisite service conditions for impairment when eventsthe performance-based awards with multiple service, performance, and market conditions, including our CEO Performance Award and our eXponential Stock Performance Plan ("XSPP"), we will recognize stock compensation expense regardless of whether the market conditions are achieved and the underlying tranches vest.
As we continue to mature, the incentives to attract, retain, and motivate employees provided by our equity awards or changes in circumstances indicate the carrying valueby future arrangements may not be recoverable. Events which might indicate impairment include, but are not limited to, declinesas effective as in stock price market capitalization or cash flows, adverse cost factors, deteriorating financial performance, strategic decisions made in response to economic, market and competitive conditions, the impact of the economic environment on us and our customer base, and/or relevant events such as changes in management, key personnel, litigation or customers.
past. We may be requiredalso issue equity securities to record apay for acquisitions and grant stock-based awards to retain the employees of acquired companies. If we issue significant charge inequity to attract additional employees, to retain our financial statements duringexisting employees, or related to acquisitions, we could incur substantial additional share-based compensation expense and the period in which any impairmentownership of our goodwill or indefinite-lived intangible assets is determined, whichexisting stockholders would negatively affect our results of operations.
Catastrophic events may disrupt our business.
A disruption or failure of our systems or operations in the event of a major earthquake, weather event, fire, explosion, failure to contain hazardous materials, industrial accident, cyber-attack, terrorist attack, or other catastrophic event could cause delays in completing sales, providing services, or performing other mission-critical functions. A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and our operating results as well as expose us to claims, litigation and governmental investigations and fines.
The Company’sbe further diluted.Our financial performance is subject to risks associated with changes in the value of the U.S. dollar versus local currencies.
For current and potential foreigninternational customers whose contracts are denominated in U.S. dollars, the relative change in local currency values creates relative fluctuations in our product pricing. These changes in foreigninternational end-user costs may result in lost orders and reduce the competitiveness of our products in certain foreign markets. Additionally, intercompany sales to our non-U.S. dollar functional currency international subsidiaries are transacted
in U.S. dollars which could increase our foreign exchange rate risk caused by foreign currency transaction gains and losses.
For non-U.S. dollar denominated sales, weakening of foreign currencies relative to the U.S. dollar generally leads us to raise international pricing, potentially reducing demand for our products. Should we decide not to raise local prices to fully offset the dollar’s strengthening, or at all, the U.S. dollar value of our foreign currency denominated sales and earnings would be adversely affected. We do not currently engage in hedging activities. Fluctuations in foreign currency could result in a change in the U.S. dollar value of our foreign denominated assets and liabilities including accounts receivable. Therefore, the U.S. dollar equivalent collected on a given sale could be less than the amount invoiced causing the sale to be less profitable than contemplated.
We also import selected components which are used in the manufacturing of some of our products. Although our purchase orders are generally in U.S. dollars, weakness in the U.S. dollar could lead to price increases for the components.
Unanticipated changes in our effective tax rate and additional tax liabilities may impact our operating results
results.We are subject to income taxes in the United StatesU.S. and various jurisdictions outside of the United States.U.S. Our effective tax rate could fluctuate due to changes in the mix of earnings and losses in countries with differing statutory tax rates. Our tax expense could also be impacted by changes in non-deductible expenses, changes in excess tax benefits related to exercises of stock options and vesting of stock-based expense,restricted stock units, changes in the valuation of deferred tax assets and liabilities and our ability to utilize them, and the applicability of withholding taxes.
taxes, and changes in our liability for unrecognized tax benefits.We are subject to potential tax examinations in multiple jurisdictions. While we regularly evaluate new information that may change our judgment resulting in recognition, derecognition or change in measurement of a tax position taken, there can be no assurance that the final determination of any examinations will not have an adverse effect on our operating results and financial position.
Our tax provision could also be impacted by changes in federal, state or international tax laws including fundamental tax law changes applicable to corporate multinationals.
multinationals, including proposals by the current U.S. president.Additionally, we may be subject to additional tax liabilities due to changes in non-incomenon-income-based taxes resulting from changes in federal, state, city or international tax laws, changes in taxing jurisdictions’ administrative interpretations, decisions, policies, and positions, results of tax examinations, settlements or judicial decisions, changes in accounting principles, changes to the business operations, including acquisitions, as well as the evaluation of new information that results in a change to a tax position taken in a prior period.
The enactment of tax reform legislation, including legislation implementing changes in taxation of international business activities, could materially impact our financial position and results of operations.
Legislation or other changes in the tax laws could increase our liability and adversely affect our after-tax profitability. For example, the Tax Cuts and Jobs Act was enacted in the United States on December 22, 2017. The Tax Cuts and Jobs Act could have a significant impact on our effective tax rate, cash tax expenses and net deferred tax assets. The Tax Cuts and Jobs Act reduces the U.S. corporate statutory tax rate, eliminates or limits deduction of several expenses which were previously deductible, imposes a mandatory deemed repatriation tax on undistributed historic earnings of foreign subsidiaries, requires a minimum tax on earnings generated by foreign subsidiaries and permits a tax-free repatriation of foreign earnings through a dividends received deduction. We are evaluating the overall impact of the Tax Cuts and Jobs Act on our effective tax rate and balance sheet, but expect that the impact may be significant for fiscal year 2018 and future periods.
We maintain most of our cash balances, some of which are not insured, at four depository institutions.
We maintain the majority of its cash and cash equivalents accounts at four depository institutions. As of December 31, 2017, the aggregate balances in such accounts were $53.4 million. The Company’s balances with these institutions regularly exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits for domestic deposits and various deposit insurance programs covering our deposits in the Netherlands, the United Kingdom, Australia and Germany.
We could suffer losses with respect to the uninsured balances if the depositary institutions failed and the institution’s assets were insufficient to cover its deposits and/or the governments did not take actions to support deposits in excess of existing insurance limits. Any such losses could have a material adverse effect on our liquidity, financial condition and results of operations.
We depend on our ability to attract and retain our key management, sales and technical personnel.
Our success depends upon the continued service of our key management personnel. Our success also depends on our ability to continue to attract, retain and motivate qualified technical personnel. Although we have employment agreements with certain of our officers and other members of our execute management team, the employment of such persons is “at-will” and either we or the employee can terminate the employment relationship at any time, subject to the applicable terms of the employment agreements. The competition for our key employees is intense. The loss of the service of one or more of our key personnel could adversely impact our business, prospects, financial condition and operating results.
We are highly dependent on the services of Patrick W. Smith, our Chief Executive Officer.
We are highly dependent on the services of Patrick W. Smith, our founder and Chief Executive Officer. Our future success depends upon our ability to retain executive officers, specifically Mr. Smith, and any failure to do so could adversely impact our business, prospects, financial condition and operating results.
We have identified a material weakness in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.
Although we have concluded that our consolidated financial statements as of December 31, 2017, present fairly, in all material respects, the results of operations, financial position, and cash flows of our company and its subsidiaries in conformity with generally accepted accounting principles, we have identified a material weakness in internal control over financial reporting related to the monitoring controls of the Company's subsidiary, Axon Public Safety U.K. Ltd. Under standards established by the Public Company Accounting Oversight Board, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. See Item 9A, "Controls and Procedures."
We have initiated remedial measures, but if our remedial measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements, and we could be required to restate our financial results. In addition, if we are unable to successfully remediate this material weakness and if we are unable to produce accurate and timely financial statements, it could adversely impact our business and our stock price.
Risks Related to Ownership of Our Common Stock
The trading price of our common stock has been, and is likely to continue to be, volatile. In addition to the factors discussed in this Annual Report on Form 10-K, the trading price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
actual or anticipated fluctuations in our revenue and other operating results;
the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
investor sentiment with respect to our competitors, our business partners, and our industry in general;
announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
announcements by us or estimates by third-parties of actual or anticipated changes in the size of our user base, addressable market or the effectiveness of our products;
changes in operation performance and stock market valuations of technology companies in our industries, including our developers and competitors;
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
media coverage of our business and financial performance;
lawsuits threatened or filed against us;
developments in anticipated or new legislation and pending lawsuits or regulator actions, including interim or final rulings by tax, judicial or regulatory bodies; and
other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.
Our revenues and operating results may fluctuate unexpectedly from quarter-to-quarter, which may cause our stock price to decline.
Our revenues and operating results have varied significantly in the past and may vary significantly in the future due to various factors, including, but not limited to:
| ● | budgetary cycles of municipal, state and federal law enforcement and corrections agencies; |
| ● | market acceptance of our products and services; |
| ● | the timing of large domestic and international orders; |
| ● | the outcome of any existing or future litigation; |
| ● | adverse publicity surrounding our products, the safety of our products, or the use of our products; |
| ● | changes in our sales mix; |
| ● | new product introduction costs; |
| ● | increased raw material expenses; |
market acceptance of our products and services; | ● | changes in our operating expenses, including stock-based compensation expense; |
| ● | changes in foreign currency exchange rates, inflation, and interest rates; and |
| ● | regulatory changes that may affect the marketability of our products. |
the timing of large domestic and international orders;
the outcome of any existing or future litigation;
adverse publicity surrounding our products, the safety of our products, or the use of our products;
changes in our sales mix;
new product introduction costs;
increased raw material expenses;
changes in our operating expenses;
changes in foreign currency exchange rates and
regulatory changes that may affect the marketability of our products.
As a result of these and other factors, we believe that period-to-period comparisons of our operating results may not be meaningful in the short term, and our performance in a particular period may not be indicative of our performance in any future period.
Legal and Compliance Risks
We may face personal injury, wrongful death, product liability and other liability claims that harm our reputation and adversely affect our sales and financial condition.
Our CED products are often used in aggressive confrontations that may result in serious, permanent bodily injury or death to those involved. Our CED products may be associated with these injuries. A person, or the family members of a person, injured or killed in a confrontation or otherwise in connection with the use of our products, may bring legal action against us to recover damages on the basis of theories including wrongful death, personal injury, negligent design, defective product, product performance issues, or inadequate warnings or training. We are currently subject to a number of such lawsuits and we have been subject to significant adverse judgments and settlements. We may also be subject to lawsuits involving allegations of criminal misuse of our products. We have no control over how our products and services are used by our customers or other end-users and cannot assure they are used consistent with our specifications and design. While our products are designed to be non-lethal, we cannot guarantee they will be used in a manner consistent with our intent and any such use exposes us to litigation, reputational harm and controversy. If successful, wrongful death, personal injury, misuse and other claims could have a material adverse effect on our operating results and financial condition and could result in negative publicity about our products. Similar to product liability claims, we face exposure to class action lawsuits related to the performance, safety, or advertising of our products. Such class action lawsuits could also result in substantial monetary judgments, injunctions related to the sale of products, and potentially harm our reputation.
Although we maintain product liability insurance in amounts that we believe are reasonable, we may not be able to maintain such insurance on acceptable terms, if at all, and product liability claims may exceed the amount of insurance coverage available to us. Because we manufacture and sell CEDs, insurance carriers may decide not to insure our products or our company in the future. We incur significant legal expenses in defending these cases, and significant litigation could also result in a diversion of management’s attention and resources, negative publicity and a potential award of monetary damages in excess of our insurance coverage. The outcome of any litigation is inherently uncertain and there can be no assurance that our existing or any future litigation will not have a material adverse effect on our business, financial condition or operating results.
Other litigation, government inquiries and regulatory actions may subject us to significant costs and judgments and divert management attention from our business.
We have been or could in the future be involved in numerous other litigation, government inquiries and regulatory matters relating to our products, employees, contracts and business relationships, including litigation against persons whom we believe have infringed on our intellectual property, infringement litigation filed against us, litigation against a competitor, enforcement actions filed against us, and litigation involving the U.S. Federal Trade Commission (FTC).
Such matters have resulted, and are expected to continue to result in, substantial costs to us, including in the form of attorneys’ fees and costs, damages, fines or other penalties, whether pursuant to a judgment or settlement, and diversion of our management’s attention, which could adversely affect our business, financial condition or operating results. There is also a risk of adverse judgments, as the outcome of litigation is inherently uncertain.
We have been, and may be in the future, subject to intellectual property infringement and other claims, which could incur substantial litigation costs, result in significant damage awards, inhibit our use of certain technologies, and divert management attention from our business.
Many companies own intellectual property rights that are directly or indirectly related to public safety technologies. These companies periodically demand licensing agreements or engage in litigation based on allegations of infringement or other violations of their patents, trademarks, copyrights, or trade secrets. Non-practicing entities also have patents they have been granted or otherwise acquired, including patents that are directly or indirectly related to public safety technologies. These entities may seek compensation for perceived infringement of their patents, including by filing claims against us, independent of the merit of any such claims. As we enter new markets, expand into new product categories, and otherwise offer new products, services, and technologies, additional intellectual property claims may be filed against us by these companies, entities, and other third parties. Intellectual property claims may also be filed against us as our current products, services, and technologies gain additional market share.
If our products, services, or technologies were found to infringe a third-party’s proprietary rights, we could be forced to discontinue use of the protected technology or enter into costly royalty or licensing agreements in order to be able to sell our products. Such royalty and licensing agreements may not be available on terms acceptable to us or at all. We could also be required to pay substantial damages, fines or other penalties, indemnify customers or distributors, cease the manufacture, use, or sale of infringing products or processes, make proprietary source code publicly available, and/or expend significant resources to develop or acquire non-infringing technologies. Our suppliers may not provide, or we may not be able to obtain, intellectual property indemnification sufficient to offset all damages, fines or other penalties resulting from any claims of intellectual property infringement brought against us or our customers. There is no guarantee that our use of conventional technology searching and brand clearance searching will identify all potential rights holders. Rights holders may demand payment for past infringements and/or force us to accept costly license terms or discontinue use of protected technology and/or works of authorship that may include, for example, photos, videos, and software. Our current research and development focus on developing software-based products, including that which is related to artificial intelligence or virtual reality, increases this risk.
If we are unable to protect our intellectual property, the value of our brands and products may decrease and we may lose our competitive market advantage.
Our future success depends upon our proprietary technology. Our protective measures for this proprietary technology include patents, trademarks, copyrights, and trade secret protection. However, these protective measures, as well as our efforts to pursue such protective measures, may prove inadequate. For example, the value of intellectual property protection in certain countries may not be apparent until after such protection can no longer be pursued. As such, our intellectual property protection may not extend to all countries in which our products are distributed or will be distributed in the future. Though we work to protect our innovations, we may not be able to obtain protection for certain innovations. For example, we may be unable to patent some software-based products. The scope of any patent protection we have obtained, or may obtain, may not prevent others from developing and selling competing products. Despite our efforts, any intellectual property protection we obtain may be later determined to be insufficient or ineffective.
Our protective measures may prove inadequate for reasons outside of our control. Varying intellectual property laws across countries may lead to differences in protection between such countries. In certain countries in which our products are distributed, the ability to effectively enforce intellectual property rights may not exist. Patent requirements differ by country and certain domestic or foreign laws may prohibit us from satisfying these requirements, creating a risk that some of our international patents may become unenforceable. Patents for older technologies, such as those first introduced in our M26 and X26 models of CEDs, have expired or will expire due to statutory limits on patent term. Despite policies and efforts to maintain secrecy, trade secrets and other confidential information, such information could be compromised by employees, partners, or other third parties.
Once established, there is no guarantee that our intellectual property rights will remain in force. Issued patents may be re-examined and subsequently ruled invalid or unenforceable. Our registered trademarks may also be diminished or lost. For example, there is a risk that our “TASER” trademark could become synonymous with the general product category of “conducted energy devices”. The right to stop others from misusing our trademarks and
service marks in commerce depends, to some extent, on our ability to show evidence of enforcement of our rights against such misuse in commerce. Our efforts to stop improper use, if ineffective, may lead to loss of trademark and service mark rights, brand loyalty and notoriety among our customers and prospective customers.
Our intellectual property may also be at risk if we are unable to defend against enforcement actions, such as that filed by the FTC regarding our acquisition of Vievu LLC from Safariland LLC on May 3, 2018. For additional discussion of this matter, refer to Note 13 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. If successful, the FTC is seeking a divestiture of Vievu along with Axon assets sufficient to stand up a viable competitor.
Inability to protect our intellectual property could negatively impact our commercial efforts and competitive market advantage. Regardless of outcome, the prosecution of patent and other intellectual property claims is both costly and time consuming. Unauthorized use of our proprietary technology could divert our management’s attention from our business, and could result in a material adverse effect on our business, financial position, and operating results.
We may be limited in our ability to enforce patent rights internationally to only those jurisdictions in which our patent applications have been granted.
Our U.S. patents protect us from imported infringing products coming into the U.S. from abroad. We have made applications for patents in a few foreign countries; however, these may be inadequate to protect markets for our products in other foreign countries. Each patent is examined and granted according to the law of the country where it was filed independent of whether a U.S. patent on similar technology was granted. Certain foreign countries have patent working requirements that require a patent owner to practice a patented invention with the respective country. A patent in a foreign country may be subject to cancellation, forfeiture, compulsory license, or other penalty if the claimed invention has not been worked in that country. Meeting the requirements of working an invention differs by country and ranges from sales in the country to manufacturing in the country. U.S. export law, or the laws of some foreign countries, may prohibit us from satisfying the requirements for working the invention, creating a risk that some of our international patents may become unenforceable. In a country in which we do not have a patent or a country in which our patent in that country is unenforceable or unenforced, other companies and makers of similar products and services may be able to copy our products or features of our products without consequence, thus limiting our ability to capture market share or protect our technology, which could materially harm our growth prospects and operating results.
A variety of new and existing laws and/or interpretations could materially and adversely affect our business.
As detailed in “Item I. Business – Government Regulation” we are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, including privacy, data protection and personal information, rights of publicity, content, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, electronic contracts and other communications, competition, consumer protection, telecommunications, product liability, taxation, labor and employment, economic or other trade prohibitions or sanctions, securities law compliance, and online payment services. The introduction of new products, expansion of our activities in certain jurisdictions, or other actions that we may take may subject us to additional laws, regulations, or other government scrutiny. In addition, foreign data protection, privacy, content, competition, and other laws and regulations can impose different obligations or be more restrictive than those in the United States.
These U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these laws and regulations are often uncertain and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices. New laws and regulations (or new interpretations of existing laws and regulations) may require us to incur substantial costs, expose us to unanticipated civil or criminal liability, or cause us to change our business practices.
The costs of compliance with these laws and regulation are high and are likely to increase in the future. Additionally, these laws and regulations, or any associated inquiries or investigations or other government actions,
may delay or impede the development of new products, result in negative publicity, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices. For example, as has been reported in the press, there is a grand jury investigation being conducted by the U.S. Attorney’s Office for the Northern District of Illinois. We have fully cooperated with the investigation and continue to do so. While we conducted an extensive internal investigation into, among other things, lobbying activities, and have found no indication of any wrongdoing by any Axon employee, there can be no assurance that this matter will not harm our business.
Radio Spectrum Devices
Certain of our products utilize the radio spectrum to provide wireless voice, data and video communications services. The allocation of spectrum is regulated in the U.S. and other countries and limited spectrum space is allocated to wireless services and specifically to public safety users. We manufacture and market products in spectrum bands already made available by regulatory bodies. If current products do not comply with the regulations set forth by these governing bodies, we may be unable to sell our products or could incur penalties. Our results could be negatively affected by the rules and regulations adopted from time to time by the U.S. Federal Communications Commission (FCC) or regulatory agencies in other countries. Regulatory changes in current spectrum bands may also require modifications to some of our products so they can continue to be manufactured and marketed.
Axon body worn cameras, docks, fleet vehicle cameras and signal devices are subject to the FCC’s rules and regulations. These regulations affect CEDs with Signal technology, including the TASER 7, SPPM, and future CEDs implementing wireless technology. Compliance with government regulations could increase our operations and product costs and impact our future financial results.
Axon and TASER Devices
For our TASER products, we rely on the opinions of the ATF, including the determination that a device that does not expel projectiles by the action of an explosive is not classified as a firearm. Changes in statutes, regulations, and interpretation outside of our control may result in our products being classified or reclassified as firearms. If this were to occur, our private citizen market could be substantially reduced because consumers would be required to comply with federal, state, or local firearm transfer requirements prior to purchasing our products.
Federal regulation of sales in the U.S.: The majority of our currently offered CEDs are not classified as firearms regulated by the ATF. However, the ATF regulates TASER 10 as a firearm under the Gun Control Act of 1968 due to a technological advancement specific to the propulsion design of the TASER 10 CED’s cartridges. While this classification will have little impact on Axon’s ability to sell TASER 10 to law enforcement and government entities, our private citizen and enterprise market could be substantially reduced because non-governmental end-users would be required to comply with federal, state, or local firearm transfer requirements prior to purchasing TASER 10. Additionally, Axon must maintain a federal firearms license to manufacture and sell the TASER 10, which subjects Axon to periodic compliance inspections by the ATF. License violations discovered by the ATF can result in fines, penalties, warning letters or license revocation, leading to disruptions in operations.
Our CED products are also subject to testing, safety and other standards by organizations such as the American National Standards Institute, the International Electrotechnical Commission, the National Institute of Standards and Technology, and Underwriters Laboratories. These regulations also affect CEDs with Axon Signal technology, including Signal Performance Power Magazine technology, and TASER 7 battery packs.
Federal regulation of international sales: Our CEDs are considered a “crime control” product by the U.S. Department of Commerce (DOC) for export directly from the U.S. which requires us to obtain an export license from the DOC for the export of our CED devices from the U.S. to any country other than Canada. Future products and services may require classifications from the DOC before they may be shipped internationally. Our inability to obtain DOC export licenses or classifications on a timely basis for sales of our products to our international customers could significantly and adversely affect our international sales. Although TASER 10 is regulated by the ATF for domestic sales, the U.S. DOC has ruled that the product’s unique propulsion design has no impact on its export classification and that the TASER 10 model’s export classification remains consistent with all other TASER CED models.
Federal regulation of foreign national employees: Our CED development and production is also considered controlled “technology” by the U.S. DOC and is categorized as a “deemed export” for any foreign national employees exposed to the technology within the U.S. Consequently, we must obtain export licenses from the DOC for any deemed export within the U.S. made to a foreign national employee exposed to the deemed controlled technology. Deemed export licenses are subject to DOC approvals and issued licenses require annual status reports for the stated employees. Inability to obtain proper licensing could curtail the company’s ability to execute R&D and production related to CED technology.
State and local regulation: Our CEDs are controlled, restricted or, less frequently, prohibited by some state and local governments. Other jurisdictions may ban or restrict the sale of our TASER-branded devices, or restrict their use through changes to use-of-force laws or regulations, and our product sales may be significantly affected by additional state, county and city governmental regulation. The change in TASER 10’s propulsion design may impact how TASER 10 is regulated at the state and/or local level depending on each state’s firearm laws.
International regulation of foreign imports and sales: Certain jurisdictions prohibit, restrict, or require a permit for the importation, sale, possession or use of CEDs, including in some countries by law enforcement agencies, limiting our international sales opportunities.
U.S. and International regulation of component movements globally: We rely on a global supply chain of components across our product lines with most final assembly occurring in the U.S. Export of these components from abroad is subject to shifting regulatory landscapes imposed by both the foreign government and U.S. authorities upon import. Abrupt changes to these regulations can result in delays or interruptions to final product supplies. Additionally, ATF regulation of certain imports of TASER 10 components may limit Axon’s supply chain agility.
International regulation of foreign-based operations: We maintain foreign operations in several countries globally for purposes of logistics, sales, general and administrative, and R&D support. Any failure to properly maintain or license could limit our ability to sell, support, or develop our products and services both internationally and in the U.S. market.
Environmental Regulations
We are subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in our products and making us financially responsible for the collection, treatment, recycling and disposal of such products. In addition, further environmental or climate change disclosure legislation may be enacted in other jurisdictions, including the U.S. (under federal and state laws) and other countries, the cumulative impact of which could be significant. New, or changes in, environmental safety laws, regulations or rules could also lead to increased costs of compliance, including remediations of any discovered issues, and changes to our operations, which may be significant. Any failures to comply could result in significant expenses, delays, or fines.
Privacy Regulations
We are subject to various risks and costs associated with the collection, processing, storage and transmission of personally identifiable information and other sensitive and confidential information. This data is wide ranging and relates to our employees, customers, third parties, and the subjects of law enforcement. Our compliance obligations include laws and regulations that dictate whether, how, and under what circumstances we can transfer, process and/or receive and hold certain data that is critical to our operations, including data shared between countries or regions in which we operate and data shared among our products and services. If one or more of the legal mechanisms for transferring data from other countries to the U.S. is invalidated, if we are unable to transfer data between and among countries and regions in which we operate, or if we are prohibited from sharing data among our products and services, it could affect the manner in which we provide our services or adversely affect our financial results. Countries may also pass legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services and expose us to significant penalties for non-compliance. We are also subject to U.S. laws and regulations, including, without limitation, the California Privacy Rights Act, which provides for enhanced consumer protections for California residents, a private
right of action for data breaches and statutory fines and damages for data breaches or other California Consumer Privacy Act violations, as well as a requirement of “reasonable” cybersecurity.
Any inability, or perceived inability, by us to adequately address privacy concerns, or comply with applicable laws, regulations, policies, industry standards and guidance, contractual obligations, or other legal obligations, even if unfounded, could result in significant regulatory and third party liability, increased costs, disruption of our business and operations, and a loss of confidence and other reputational damage. Furthermore, as new privacy- related laws and regulations are implemented, the time and resources needed for us to comply with such laws and regulations continues to increase and become a significant compliance workstream.
Our business is subject to evolving corporate governance and public disclosure regulations and expectations, including with respect to environmental, social and governance matters, that could expose us to numerous risks.
We are subject to changing rules and regulations promulgated by a number of governmental and self-regulatory organizations, including the SEC, the Nasdaq Stock Market and the Financial Accounting Standards Board. These rules and regulations continue to evolve in scope and complexity and many new requirements have been created in response to laws enacted by Congress, making compliance more difficult and uncertain. In addition, increasingly regulators, customers, investors, employees and other stakeholders are focusing on environmental, social and governance (“ESG”) matters and related disclosures. These changing rules, regulations and stakeholder expectations have resulted in, and are likely to continue to result in, increased general and administrative expenses and increased management time and attention spent complying with or meeting such regulations and expectations. For example, developing and acting on initiatives within the scope of ESG, and collecting, measuring and reporting ESG related information and metrics can be costly, difficult and time consuming and is subject to evolving reporting standards, including the SEC’s recently proposed climate-related reporting requirements, and similar proposals by other international regulatory bodies. We may also communicate certain initiatives and goals, regarding environmental matters, diversity, responsible sourcing and social investments and other ESG related matters, in our SEC filings or in other public disclosures. These initiatives and goals within the scope of ESG could be difficult and expensive to implement, the technologies needed to implement them may not be cost effective and may not advance at a sufficient pace, and we could be criticized for the accuracy, adequacy or completeness of the disclosure. Further, statements about our ESG related initiatives and goals, and progress against those goals, may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. In addition, we could be criticized for the scope or nature of such initiatives or goals, or for any revisions to these goals. If our ESG-related data, processes and reporting are incomplete or inaccurate, or if we fail to achieve progress with respect to our goals within the scope of ESG on a timely basis, or at all, our reputation, business, financial performance and growth could be adversely affected.
Risks Related to our Convertible Notes
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our or their businesses to pay our substantial debt.
As of December 31, 2022, we had outstanding an aggregate principal amount of $690.0 million of our 0.50% Convertible Senior Notes due 2027 (the “Notes”). Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our businesses may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations, including the notes.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Notes is triggered, holders of Notes will be entitled to convert their Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, we would be required to settle any converted principal amount of such Notes through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current, rather than long-term, liability, which would result in a material reduction of our net working capital.
Conversion of the Notes may dilute the ownership interest of our stockholders or may otherwise depress the price of our common stock.
The conversion of some or all of the Notes may dilute the ownership interests of our stockholders. Upon conversion of the Notes, we have the option to pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the Notes being converted. If we elect to settle the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the Notes being converted in shares of our common stock or a combination of cash and shares of our common stock, any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could depress the price of our common stock.
Changes in the accounting treatment for the Notes could have a material effect on our reported financial results.
We have adopted Accounting Standards Update (“ASU 2020-06”) 2020-06 as of January 1, 2022. Accordingly, we do not bifurcate the liability and equity components of the Notes on our balance sheet and we use the if-converted method of calculating diluted earnings per share. Under the “if-converted” method, diluted earnings per share will generally be calculated assuming that all the notes were converted solely into shares of common stock at the beginning of the reporting period, unless the result would be anti-dilutive, which could adversely affect our diluted earnings per share. Because the principal amount of the Notes upon conversion is required to be paid in cash, and only the excess is permitted to be settled in shares, the application of the if-converted method will produce a similar result as the treasury stock method prior to the adoption of ASU 2020-06. The effect of the treasury stock method is that the shares issuable upon conversion of such Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of such Notes exceeds their principal amount.
In accordance with ASU 2020-06, the Notes are reflected as a liability on our consolidated balance sheets, with the initial carrying amount equal to the principal amount of the Notes, net of issuance costs. The issuance costs will be treated as a debt discount for accounting purposes, which will be amortized into interest expense over the term of the Notes. As a result of this amortization, the interest expense that we expect to recognize for the Notes for accounting purposes will be greater than the cash interest payments we will pay on the Notes, which will result in lower reported income.
We cannot be sure whether future changes made to the current accounting standards related to the Notes will not have a material effect on our reported financial results.
The convertible note hedge and warrant transactions may affect the value of the Notes and our common stock.
In connection with the pricing of the Notes, we have entered into convertible note hedge transactions with the option counterparties. We have also entered into warrant transactions with the option counterparties. The convertible note hedge transactions are expected generally to reduce the potential dilution to our common stock upon any conversion of Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted notes, as the case may be. However, the warrant transactions could have a dilutive effect on our common stock to the extent that the market price per share of our common stock exceeds the strike price of the warrants.
In addition, the option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions following the pricing of the notes and prior to the maturity of the notes (and are likely to do in connection with any conversion of the Notes or redemption or repurchase of the Notes). This activity could cause or avoid an increase or a decrease in the market price of our common stock.
In addition, if any such convertible note hedge and warrant hedging transactions fail to become effective, the option counterparties or their respective affiliates may unwind their hedge positions with respect to our common stock, which could adversely affect the value of our common stock.
The potential effect, if any, of these transactions and activities on the market price of our common stock will depend in part on market conditions and cannot be ascertained at this time. Any of these activities could adversely affect the value of our common stock.
We are subject to counterparty risk with respect to the convertible note hedge transactions.
The option counterparties are financial institutions, and we will be subject to the risk that any or all of them might default under the convertible note hedge transactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral.
If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the convertible note hedge transactions with such option counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be correlated to an increase in the market price and in the volatility of our common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the option counterparties.
Item 1B.
Unresolved Staff Comments
Our corporate headquarters and manufacturing facilities are based in aan approximately 100,000 square foot facility in Scottsdale, Arizona, which we own. We also lease premises in Phoenix and Scottsdale, Arizona; Seattle, Washington;San Leandro, California; East Point, Georgia; Topsfield, Massachusetts; Seattle and Spokane, Washington; Melbourne and Sydney, Australia; Toronto, Canada; Daventry and London, England; Tampere, Finland; Frankfurt, Germany; Delhi, India; Rome, Italy; Amsterdam, Netherlands; Daventry, England; London, England; Frankfurt, Germany; Brisbane, Australia; Sydney, Australia,and Ho Chi Minh City, Vietnam and Tampere, Finland. Vietnam. We also own a parcel of land located in Scottsdale, Arizona on which we intend to develop a new campus.
We believe our existing facilities are well maintained and in good operating condition. We also believe we have adequate manufacturing capacity for our existing product lines. To the extent that we introduce new products in the future, we will likely need to acquire additional facilities to locate the associated production lines. However, we believe we can acquire or lease such facilities on reasonable terms. The Company continuesWe continue to make investments in capital equipment as needed to meet anticipated demand for itsour products.
The majority of our locations support both of our reportable segments, except for our Vietnam and Seattle, Washington locations, which primarily support our Software & Sensors segment.
Item 3.
Legal ProceedingsSee discussion of litigation in Note 913 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, which discussion is incorporated by reference herein.
Item 4.
Mine Safety DisclosuresNone.
PART II
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock is quoted under the symbol “AAXN”“AXON” on The NASDAQ Global Select Market. The following tables set forth the high and low sales prices per share for our common stock as reported by NASDAQ for each quarter of the last two fiscal years.
|
| | | | | | | |
| | High | | Low |
| Year Ended December 31, 2017: | | | |
| First quarter | $ | 27.56 |
| | $ | 22.05 |
|
| Second quarter | 28.17 |
| | 21.18 |
|
| Third quarter | 26.31 |
| | 21.25 |
|
| Fourth quarter | 27.09 |
| | 20.57 |
|
|
| | | | | | | |
| | High | | Low |
| Year Ended December 31, 2016: | | | |
| First quarter | $ | 20.69 |
| | $ | 13.56 |
|
| Second quarter | 24.94 |
| | 17.18 |
|
| Third quarter | 30.15 |
| | 24.46 |
|
| Fourth quarter | 28.49 |
| | 21.50 |
|
As of December 31, 2017,2022, there were 255212 holders of record of our common stock.
To date, the Company haswe have not declared or paid cash dividends on itsour common stock. The Company doesWe do not intend to pay cash dividends in the foreseeable future, and its revolving line of credit prohibits the payment of cash dividends.
future.Issuer Purchases of Equity Securities
In February 2016, the Company'sour Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of the Company’sour outstanding common stock subject to stock market conditions and corporate considerations. The stock repurchase program does not have a stated expiration date. During the year ended December 31, 2017,2022, no common shares were purchased under the program. As of December 31, 2017 and 2016,2022, $16.3 million remainsremained available under the plan for future purchases. During 2016, the Company suspended its 10b-5 plan, and any future purchases would be discretionary.
The following stock performance graph compares the performance of our common stock to the NASDAQ Composite Index, Russell 2000 Index, Russell Midcap Index, and the Russell 3000S&P 500 Index.
The graph covers the period from December 31, 20122017 to December 31, 2017.2022. The graph assumes that the value of the investment in our stock and in each index was $100 at December 31, 2012,2017, and that all dividends were reinvested. We do not pay dividends on our common stock.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| Axon Enterprise, Inc. | $ | 100.00 |
| | $ | 177.63 |
| | $ | 296.20 |
| | $ | 193.40 |
| | $ | 271.14 |
| | $ | 296.42 |
|
| NASDAQ Composite | 100.00 |
| | 141.63 |
| | 162.09 |
| | 173.33 |
| | 187.19 |
| | 242.29 |
|
| Russell 3000 | 100.00 |
| | 133.55 |
| | 150.32 |
| | 151.04 |
| | 170.28 |
| | 206.26 |
|
| | | | | | | | | | | | | | | | | | |
| | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
Axon Enterprise, Inc. | | $ | 100.00 | | $ | 165.09 | | $ | 276.53 | | $ | 462.38 | | $ | 592.45 | | $ | 626.08 |
NASDAQ Composite | | | 100.00 | | | 97.16 | | | 132.81 | | | 192.47 | | | 235.15 | | | 158.65 |
Russell 2000 | | | 100.00 | | | 88.99 | | | 111.70 | | | 134.00 | | | 153.85 | | | 122.41 |
Russell Midcap Index | | | 100.00 | | | 90.94 | | | 118.72 | | | 139.02 | | | 170.42 | | | 140.91 |
S&P 500 | | | 100.00 | | | 95.62 | | | 125.72 | | | 148.85 | | | 191.58 | | | 156.88 |
Note: Index data copyright NASDAQ OMX, Inc.; Russell Investments; and Standard and Poor’s, Inc. Used with permission. All rights reserved.
Item 6.
Selected Financial DataThe following selected financial data should be read in conjunction with our consolidated financial statements and the notes thereto, and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The statement of operations data for the years ended December 31, 2017, 2016 and 2015, and the balance sheet data as of December 31, 2017 and 2016, have been derived from, and should be read in conjunction with, our audited consolidated financial statements and the notes thereto included herein. The statement of operations data for the years ended December 31, 2014 and 2013, and the balance sheet data as of December 31, 2015, 2014 and 2013, is derived from our historical audited consolidated financial statements and the notes thereto which are not included in this Annual Report on Form 10-K. Dollars are in thousands, except per share amounts.[Reserved]
|
| | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Statements of Operations Data: | | | | | | | | | |
| Net sales from products | $ | 285,859 |
| | $ | 238,573 |
| | $ | 185,230 |
| | $ | 160,313 |
| | $ | 136,123 |
|
| Net sales from services | 57,939 |
| | 29,672 |
| | 12,662 |
| | 4,212 |
| | 1,708 |
|
| Net sales | 343,798 |
| | 268,245 |
| | 197,892 |
| | 164,525 |
| | 137,831 |
|
| Cost of product sales | 117,997 |
| | 91,536 |
| | 65,022 |
| | 60,913 |
| | 50,099 |
|
| Cost of service sales | 18,713 |
| | 6,173 |
| | 4,223 |
| | 2,064 |
| | 1,889 |
|
| Cost of sales | 136,710 |
| | 97,709 |
| | 69,245 |
| | 62,977 |
| | 51,988 |
|
| Gross margin | 207,088 |
| | 170,536 |
| | 128,647 |
| | 101,548 |
| | 85,843 |
|
| Sales, general and administrative expenses | 138,692 |
| | 108,076 |
| | 69,698 |
| | 54,158 |
| | 46,557 |
|
| Research and development expenses | 55,373 |
| | 30,609 |
| | 23,614 |
| | 14,885 |
| | 9,888 |
|
| Litigation judgments | — |
| | — |
| | — |
| | — |
| | 1,450 |
|
| Income from operations | 13,023 |
| | 31,851 |
| | 35,335 |
| | 32,505 |
| | 27,948 |
|
| Interest and other (expense) income, net | 2,738 |
| | (354 | ) | | 26 |
| | (194 | ) | | 86 |
|
| Income before provision for income taxes | 15,761 |
| | 31,497 |
| | 35,361 |
| | 32,311 |
| | 28,034 |
|
| Provision for income taxes | 10,554 |
| | 14,200 |
| | 15,428 |
| | 12,393 |
| | 9,790 |
|
| Net income | $ | 5,207 |
| | $ | 17,297 |
| | $ | 19,933 |
| | $ | 19,918 |
| | $ | 18,244 |
|
| Net income per common and common equivalent shares: | | | | | | | | | |
| Basic | $ | 0.10 |
| | $ | 0.33 |
| | $ | 0.37 |
| | $ | 0.38 |
| | $ | 0.35 |
|
| Diluted | $ | 0.10 |
| | $ | 0.32 |
| | $ | 0.36 |
| | $ | 0.37 |
| | $ | 0.34 |
|
| Weighted average number of common and common equivalent shares outstanding: | | | | | | | | | |
| Basic | 52,726 |
| | 52,667 |
| | 53,548 |
| | 52,948 |
| | 51,880 |
|
| Diluted | 53,898 |
| | 53,536 |
| | 54,638 |
| | 54,500 |
| | 54,152 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Balance Sheet Data: | | | | | | | | | |
| Working capital | $ | 97,242 |
| | $ | 99,192 |
| | $ | 123,269 |
| | $ | 102,669 |
| | $ | 67,237 |
|
| Total assets | 338,112 |
| | 278,163 |
| | 229,881 |
| | 185,368 |
| | 148,382 |
|
| Total current liabilities | 107,950 |
| | 78,039 |
| | 38,140 |
| | 31,973 |
| | 23,129 |
|
| Total long-term debt and capital leases, net of current portion | 41 |
| | 118 |
| | 81 |
| | 29 |
| | 67 |
|
| Total stockholders’ equity | 167,444 |
| | 150,888 |
| | 157,004 |
| | 129,106 |
| | 108,347 |
|
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of OperationsManagement’s Discussion and Analysis of Financial Condition and Results of Operations (“("MD&A”&A")Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with the other sections of this Annual Report on Form 10-K, including Part I, Item 1A: “Risk Factors”; Part II, Item 6: “Selected Financial Data”; and Part II, Item 8: “Financial Statements and Supplementary Data.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing. The tables in the MD&A sections below are derived from exact numbers and may have immaterial rounding differences.
OverviewThis section discusses our results of operations for the year ended December 31, 2022 as compared to the year ended December 31, 2021. For a discussion and Strategy
Axon Enterprise, Inc.’s (the “Company” or “Axon” or “we” or “our”) core missionanalysis of the year ended December 31, 2021, compared to the same period in 2020 please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022.Overview
Axon's product suite includes TASER energy devices, body-worn cameras, in-car cameras, cloud-hosted digital evidence management solutions, productivity software and real-time operations capabilities. Our financial strategy is to protect life through innovative technologies that make communities safer. Webuild highly recurring, highly profitable businesses. Axon products are generally cloud-connected, designed to drive better outcomes and customer experiences, and sold via mutually reinforcing integrated bundles.
Axon’s operations comprise two reportable segments:
| 1. | Software and Sensors: We develop, manufacture and sell fully integrated hardware and cloud-based software solutions that enable law enforcement to capture, securely store, manage, share and analyze video and other digital evidence. Our software offerings also support productivity and real-time operations. |
| 2. | TASER: Axon is the market leader in the development, manufacture and sale of CEDs, which we sell under our brand name, TASER. |
We derive revenue from two primary sources: (1) the sale of conducted electrical weapons (“CEWs”physical products, including Axon cameras, Axon Signal enabled devices, CEDs, corresponding hardware extended warranties, and related accessories such as Axon docks, cartridges and batteries, among others, and (2) subscriptions to our Axon Evidence digital evidence management software-as-a-service ("SaaS") designed(including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, we also recognize revenue from training, professional services and other software and SaaS services.
Some of our products and services are sold on a standalone basis. We also bundle our hardware products and services together and sell them to our customers in single transactions, where the customer can make payments over a multi-year period. These sales may include payments for use by law enforcement, corrections, military forces, private security personnelupfront hardware and by private individuals for personal defense. We are also the market leader in developing, manufacturing and selling connected wearable on-officer camerasservices, as well as developingpayments for hardware and selling cloud-based digital evidence management software.services to be provided by us at a future date.
Our revenues for the year ended December 31, 2022 were $1,189.9 million, an increase of $326.6 million, or 37.8%, from the prior year. We have establishedhad income from operations of $93.3 million compared to a robust network that connects devices, apps and people primarilyloss from operations of $168.1 million in the law enforcement vertical. We aimprior year. Gross margin dollars increased by $187.7 million, but decreased as a percentage of revenue compared to have every public safety officer2021, reflecting higher labor and freight costs. Operating expenses decreased $73.6 million, reflecting a decrease of $195.9 million in the world carry a TASER, deploy an Axon camera and be connectedstock-based compensation expense primarily related to the Axon network.
The three foundationsCEO Performance Award and XSPP, partially offset by an increase in salaries and bonus expense, and increases in travel and commissions expense. For the year ended December 31, 2022, we recorded net income of $147.1 million, which reflected net unrealized gains of $131.9 million related to observable price changes for our growth strategy are:
Devices - Our TASER CEWs are one of the few weapons that can incapacitate a person while drastically limiting the risk for death and/or serious injury. Over the past two decades, the TASER CEW has become one of the most frequently used weapons in the North American law enforcement market, with use-of-force injuriesexisting investments and deaths dropping dramatically as a result. Outside of weapons, we produce devices that primarily fall within three categories: On-officer cameras that capture critical digital evidence aimed at protecting truth, a range of related accessory hardware deviceswarrants and an in-car camera variant called Axon Fleet. We believeunrealized loss of $32.9 million on market securities related to our CEWs and Axon cameras should be standard-issue equipmentinvestment in Cellebrite DI Ltd (“CLBT”), compared to a net loss of $60.0 million for all patrol officers domestically and internationally. We have created and are continuing to create service plans and product bundles to ensure agencies have the latest devices and technology at predictable annual costs.prior year.
Apps - Axon's Evidence.com platform is designed to help agencies securely store, manage and share all digital evidence. Our software platform features continuous improvement with regular software updates that enable our customers to always have access to the latest technology. Recent new features include secure sharing, audit trails, integrationContentsPeople - Our TASER weapons and Axon software and sensors platforms have allowed us to build relationships with more than 20,000 public safety agencies worldwide. Axon is bringing modern information technology capabilities to every law enforcement officer. Some of our customers report that police officers are spending over 60% of their time on paperwork-related tasks, rather than on value-added public safety work. We see a large opportunity to leverage our connected platform to enable a broad suite of mobile, wearable, and data management capabilities. Axon is also improving workflows throughout the public safety chain, from the incident on the scene to the court room. With our software, police officers can share evidence
with prosecutors during discovery while maintaining a secure and encrypted chain of custody. Axon's cohesive ecosystem is delivering increased value to all public safety stakeholders, including state and municipal police agencies, police chiefs and other leadership, patrol officers, state patrols and officers, agency detectives, public prosecutors, district attorneys, and others in the public safety and judicial communities, as well as the public communities they serve.
The following table presents data from our consolidated statements of operations as well as the percentage relationship to total net sales of items included in our statements of operations (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net sales from products | $ | 285,859 |
| | 83.1 | % | | $ | 238,573 |
| | 88.9 | % | | $ | 185,230 |
| | 93.6 | % |
| Net sales from services | 57,939 |
| | 16.9 |
| | 29,672 |
| | 11.1 |
| | 12,662 |
| | 6.4 |
|
| Net sales | 343,798 |
| | 100.0 |
| | 268,245 |
| | 100.0 |
| | 197,892 |
| | 100.0 |
|
| Cost of product sales | 117,997 |
| | 34.3 |
| | 91,536 |
| | 34.1 |
| | 65,022 |
| | 32.9 |
|
| Cost of service sales | 18,713 |
| | 5.4 |
| | 6,173 |
| | 2.3 |
| | 4,223 |
| | 2.1 |
|
| Cost of sales | 136,710 |
| | 39.8 |
| | 97,709 |
| | 36.4 |
| | 69,245 |
| | 35.0 |
|
| Gross margin | 207,088 |
| | 60.2 |
| | 170,536 |
| | 63.6 |
| | 128,647 |
| | 65.0 |
|
| Operating expenses: | | | | | | | | | | | |
| Sales, general and administrative | 138,692 |
| | 40.3 |
| | 108,076 |
| | 40.3 |
| | 69,698 |
| | 35.2 |
|
| Research and development | 55,373 |
| | 16.1 |
| | 30,609 |
| | 11.4 |
| | 23,614 |
| | 11.9 |
|
| Total operating expenses | 194,065 |
| | 56.4 |
| | 138,685 |
| | 51.7 |
| | 93,312 |
| | 47.2 |
|
| Income from operations | 13,023 |
| | 3.8 |
| | 31,851 |
| | 11.9 |
| | 35,335 |
| | 17.9 |
|
| Interest and other income (expense), net | 2,738 |
| | 0.8 |
| | (354 | ) | | (0.1 | ) | | 26 |
| | — |
|
| Income before provision for income taxes | 15,761 |
| | 4.6 |
| | 31,497 |
| | 11.7 |
| | 35,361 |
| | 17.9 |
|
| Provision for income taxes | 10,554 |
| | 3.1 |
| | 14,200 |
| | 5.3 |
| | 15,428 |
| | 7.8 |
|
| Net income | $ | 5,207 |
| | 1.5 | % | | $ | 17,297 |
| | 6.4 | % | | $ | 19,933 |
| | 10.1 | % |
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2022 | | | 2021 | |
Net sales from products | | $ | 801,388 | | 67.3 | % | | $ | 608,525 | | 70.5 | % |
Net sales from services | | | 388,547 | | 32.7 | | | | 254,856 | | 29.5 | |
Net sales | | | 1,189,935 | | 100.0 | | | | 863,381 | | 100.0 | |
Cost of product sales | | | 363,219 | | 30.5 | | | | 260,098 | | 30.1 | |
Cost of service sales | | | 98,078 | | 8.3 | | | | 62,373 | | 7.2 | |
Cost of sales | | | 461,297 | | 38.8 | | | | 322,471 | | 37.3 | |
Gross margin | | | 728,638 | | 61.2 | | | | 540,910 | | 62.7 | |
Operating expenses: | | | | | | | | | | | | |
Sales, general and administrative | | | 401,575 | | 33.7 | | | | 515,007 | | 59.7 | |
Research and development | | | 233,810 | | 19.7 | | | | 194,026 | | 22.5 | |
Total operating expenses | | | 635,385 | | 53.4 | | | | 709,033 | | 82.2 | |
Income (loss) from operations | | | 93,253 | | 7.8 | | | | (168,123) | | (19.5) | |
Interest and other income, net | | | 103,265 | | 8.7 | | | | 26,748 | | 3.1 | |
Income (loss) before provision for income taxes | | | 196,518 | | 16.5 | | | | (141,375) | | (16.4) | |
Provision for (benefit from) income taxes | | | 49,379 | | 4.1 | | | | (81,357) | | (9.4) | |
Net income (loss) | | $ | 147,139 | | 12.4 | % | | $ | (60,018) | | (7.0) | % |
Net sales to the U.S. and other countries are summarized as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| United States | $ | 282,810 |
| | 82.3 | % | | $ | 218,757 |
| | 81.6 | % | | $ | 161,803 |
| | 81.8 | % |
| Other Countries | 60,988 |
| | 17.7 |
| | 49,488 |
| | 18.4 |
| | 36,089 |
| | 18.2 |
|
| Total | $ | 343,798 |
| | 100.0 | % | | $ | 268,245 |
| | 100.0 | % | | $ | 197,892 |
| | 100.0 | % |
The Company’s
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2022 | | | 2021 | |
United States | | $ | 987,975 | | 83 | % | | $ | 686,914 | | 80 | % |
Other Countries | | | 201,960 | | 17 | | | | 176,467 | | 20 | |
Total | | $ | 1,189,935 | | 100 | % | | $ | 863,381 | | 100 | % |
International revenue increased in 2022, driven by strength in our Asia-Pacific (“APAC”) region, but decreased as a percentage of total revenue compared to 2021.
Our operations are comprised of two reportable segments: the salesegments. In both segments, we report sales of CEWs, accessories and other related products and services (the “TASER Weapons” segment); and the software and sensors business, focused on devices, wearables, applications, cloud and mobile products (the "Software and Sensors" segment). services. Service revenue in both segments includes sales related to Axon Evidence.
| ● | The "Software and Sensors" segment includes software and sensors, which includes the sale of devices, wearables, applications, cloud and mobile products, and services. |
| o | “Axon Cloud revenue” includes recurring cloud-hosted software revenue, related non-recurring professional services, and certain software, including on-premise licenses. |
| o | “Sensors and Other revenue” is referred to as revenue from our “products” in the Software and Sensors segment, which is generally from the sales of sensors, including on-officer body cameras, Axon Fleet cameras, other hardware sensors, warranties on sensors, and other products. |
| ● | The “TASER” segment includes the manufacture and sale of CEDs, batteries, accessories and extended warranties and other products and services; |
| o | Service revenue in this segment also includes digital subscription training content, VR training content, TASER Evidence.com, and other professional services tied to TASER and VR deployments. |
Within the Software and Sensors segment, the Company includeswe include only revenues and costs attributable to that segment which costs include: costs of sales for both products and services, direct labor, selling expenses for the sales team,and product managemanagement and R&D for products included, or to be included, within the Software and Sensors segment. All other costs are included in the TASER Weapons segment. The CODM does not review assets by segment as part of the financial information provided; therefore, no asset information is provided in the following tables.
Net Sales,
- general and administrative expenses are reported on a consolidated basis.For the Years Ended December 31, 20172022 and 2016
2021Net Sales
Net sales by product line were as follows for the years ended December 31, 20172022 and 20162021 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2017 | | 2016 | | |
| TASER Weapons segment: | | | | | | | | | | | |
| TASER X26P | $ | 64,426 |
| | 18.7 | % | | $ | 72,490 |
| | 27.0 | % | | $ | (8,064 | ) | | (11.1 | )% |
| TASER X2 | 81,417 |
| | 23.7 |
| | 52,665 |
| | 19.6 |
| | 28,752 |
| | 54.6 |
|
| TASER Pulse and Bolt | 4,340 |
| | 1.3 |
| | 3,580 |
| | 1.3 |
| | 760 |
| | 21.2 |
|
| Single cartridges | 63,203 |
| | 18.4 |
| | 52,305 |
| | 19.5 |
| | 10,898 |
| | 20.8 |
|
| Extended warranties | 12,426 |
| | 3.6 |
| | 9,880 |
| | 3.7 |
| | 2,546 |
| | 25.8 |
|
| Other | 8,700 |
| | 2.5 |
| | 11,724 |
| | 4.4 |
| | (3,024 | ) | | (25.8 | ) |
| TASER Weapons segment | 234,512 |
| | 68.2 |
| | 202,644 |
| | 75.5 |
| | 31,868 |
| | 15.7 |
|
| Software and Sensors segment: | | | | | | | | | | | |
| Axon Body | 15,184 |
| | 4.4 |
| | 12,911 |
| | 4.8 |
| | 2,273 |
| | 17.6 |
|
| Axon Flex | 10,083 |
| | 2.9 |
| | 5,323 |
| | 2.0 |
| | 4,760 |
| | 89.4 |
|
| Axon Fleet | 2,954 |
| | 0.9 |
| | — |
| | — |
| | 2,954 |
| | * |
|
| Axon Dock | 9,736 |
| | 2.8 |
| | 7,422 |
| | 2.8 |
| | 2,314 |
| | 31.2 |
|
| Evidence.com | 57,841 |
| | 16.8 |
| | 29,260 |
| | 10.9 |
| | 28,581 |
| | 97.7 |
|
| TASER CAM | 3,358 |
| | 1.0 |
| | 4,888 |
| | 1.8 |
| | (1,530 | ) | | (31.3 | ) |
| Extended warranties | 7,110 |
| | 2.1 |
| | 3,710 |
| | 1.4 |
| | 3,400 |
| | 91.6 |
|
| Other | 3,020 |
| | 0.9 |
| | 2,087 |
| | 0.8 |
| | 933 |
| | 44.7 |
|
| Software and Sensors segment | 109,286 |
| | 31.8 |
| | 65,601 |
| | 24.5 |
| | 43,685 |
| | 66.6 |
|
| Total net sales | $ | 343,798 |
| | 100.0 | % | | $ | 268,245 |
| | 100.0 | % | | $ | 75,553 |
| | 28.2 | % |
* Not meaningful
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar | | Percent | |
| | 2022 | | 2021 | | Change | | Change | |
TASER segment: | | | | | | | | | | | | | | | | |
TASER 7 | | $ | 224,905 | | 18.9 | % | $ | 135,906 | | 15.7 | % | $ | 88,999 | | 65.5 | % |
TASER X26P | | | 33,725 | | 2.8 | | | 40,629 | | 4.7 | | | (6,904) | | (17.0) | |
TASER X2 | | | 24,068 | | 2.0 | | | 58,081 | | 6.7 | | | (34,013) | | (58.6) | |
TASER Consumer devices | | | 6,420 | | 0.5 | | | 7,132 | | 0.8 | | | (712) | | (10.0) | |
Cartridges | | | 181,686 | | 15.3 | | | 152,842 | | 17.8 | | | 28,844 | | 18.9 | |
Axon Evidence and cloud services | | | 18,752 | | 1.6 | | | 9,159 | | 1.1 | | | 9,593 | | 104.7 | |
Extended warranties | | | 29,008 | | 2.5 | | | 24,125 | | 2.8 | | | 4,883 | | 20.2 | |
Other | | | 13,002 | | 1.1 | | | 9,053 | | 1.0 | | | 3,949 | | 43.6 | |
TASER segment | | | 531,566 | | 44.7 | | | 436,927 | | 50.6 | | | 94,639 | | 21.7 | |
Software and Sensors segment: | | | | | | | | | | | | | | | | |
Axon Body | | | 124,164 | | 10.4 | | | 75,484 | | 8.8 | | | 48,680 | | 64.5 | |
Axon Flex | | | 3,031 | | 0.3 | | | 4,155 | | 0.5 | | | (1,124) | | (27.1) | |
Axon Fleet | | | 63,017 | | 5.3 | | | 24,319 | | 2.8 | | | 38,698 | | 159.1 | |
Axon Dock | | | 30,086 | | 2.5 | | | 24,441 | | 2.8 | | | 5,645 | | 23.1 | |
Axon Evidence and cloud services | | | 371,889 | | 31.2 | | | 246,005 | | 28.5 | | | 125,884 | | 51.2 | |
Extended warranties | | | 49,765 | | 4.2 | | | 33,686 | | 3.9 | | | 16,079 | | 47.7 | |
Other | | | 16,417 | | 1.4 | | | 18,364 | | 2.1 | | | (1,947) | | (10.6) | |
Software and Sensors segment | | | 658,369 | | 55.3 | | | 426,454 | | 49.4 | | | 231,915 | | 54.4 | |
Total net sales | | $ | 1,189,935 | | 100.0 | % | $ | 863,381 | | 100.0 | % | $ | 326,554 | | 37.8 | % |
Net unit sales for TASER Weapons and Software and Sensors segment were as follows:
| | | | | | | | | |
| | Year Ended December 31, | | Unit | | Percent |
| | 2022 | | 2021 | | Change | | Change |
TASER 7 | | 139,217 | | 90,348 | | 48,869 | | 54.1 | % |
TASER X26P | | 22,651 | | 30,083 | | (7,432) | | (24.7) | |
TASER X2 | | 13,927 | | 38,620 | | (24,693) | | (63.9) | |
TASER Consumer devices | | 23,223 | | 26,958 | | (3,735) | | (13.9) | |
Cartridges | | 5,635,369 | | 4,945,927 | | 689,442 | | 13.9 | |
Axon Body | | 253,501 | | 181,663 | | 71,838 | | 39.5 | |
Axon Flex | | 6,018 | | 7,828 | | (1,810) | | (23.1) | |
Axon Fleet | | 24,344 | | 11,264 | | 13,080 | | 116.1 | |
Axon Dock | | 28,844 | | 25,584 | | 3,260 | | 12.7 | |
| | | | | | | | | |
|
| | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2017 | | 2016 | | Unit Change | | Percent Change |
| TASER X26P | 70,381 |
| | 79,218 |
| | (8,837 | ) | | (11.2 | )% |
| TASER X2 | 76,106 |
| | 47,700 |
| | 28,406 |
| | 59.6 |
|
| TASER Pulse and Bolt | 12,504 |
| | 9,549 |
| | 2,955 |
| | 30.9 |
|
| Cartridges | 2,408,471 |
| | 1,979,051 |
| | 429,420 |
| | 21.7 |
|
| Axon Body | 89,808 |
| | 66,154 |
| | 23,654 |
| | 35.8 |
|
| Axon Flex | 26,025 |
| | 14,173 |
| | 11,852 |
| | 83.6 |
|
| Axon Fleet | 3,795 |
| | — |
| | 3,795 |
| | * |
|
| Axon Dock | 23,492 |
| | 16,983 |
| | 6,509 |
| | 38.3 |
|
| TASER CAM | 6,432 |
| | 9,566 |
| | (3,134 | ) | | (32.8 | ) |
*Not meaningfulNet sales were $343.8 million and $268.2 million for the years ended December 31, 2017 and 2016, respectively, an increase of $75.6 million or 28.2%. Net sales for the TASER Weapons segment were $234.5increased $94.6 million, and $202.6 million for the years ended December 31, 2017 and 2016, respectively,or 21.7%, primarily as a result of an increase of $31.9$89.0 million or 15.7%. in TASER 7 devices and a $28.8 million increase in cartridge revenue. The increase in TASER 7 revenue is the result of increased unit sales and higher average selling prices. We continue to see a shift to purchases of TASER 7 from legacy devices. Cartridge revenue increased due to increased unit sales and higher average selling prices due to product mix shift from legacy handles to TASER 7. Axon Evidence and cloud services revenue increased based on the increased number of TASER 7 devices in the field. Partially offsetting the increases was a decrease in revenue of legacy devices of $40.9 million. The decrease was attributable to decreased unit sales and was partially offset by higher average selling prices.
Net sales for the Software and Sensors segment were $109.3increased $231.9 million, or 54.4%. Revenue from Axon Evidence and $65.6cloud services increased $125.9 million foras we continued to add users to our network during the yearsyear ended December 31, 2017 and 2016, respectively, an increase of $43.7 million or 66.6%. International sales were $61.0 million in 2017 compared to $49.5 million in 2016, an increase of 23.2%.
2022. The increase in net sales for 2017 compared to 2016 in the TASER Weapons segment was primarily attributable to increased sales under the Officer Safety Plan ("OSP")aggregate number of users and TASER 60 installment payment programs. During the first quarter of 2017, the
Home Office of the U.K. government approved the Company's Smart Weapons for sale whichdevices also resulted in increased
extended warranty revenues of $16.1 million. Sales of our Axon Body 3 camera drove most of the $48.7 million increase in Axon Body revenue and the $5.6 million increase in Axon Dock revenue. Fleet revenue increased $38.7 million driven by an increase in both units and higher average selling prices, driven largely by Fleet 3.Backlog - As of December 31, 2022 compared to December 31, 2021
Our backlog for products and services includes all orders that have been received and are believed to be firm. We define backlog as cumulative bookings, net of cancellations, less product and service revenue recognized to date. Bookings are generally realized as revenue over multiple years.
The TASER X2 sales withinsegment backlog balance was $824.4 million as of December 31, 2022. This backlog balance includes $111.0 million of deferred revenue, and $713.5 million that has been recorded as bookings but not yet invoiced, all as of December 31, 2022. We expect to realize approximately $176.8 million of the U.K.December 31, 2022 backlog balance as revenue during the next 12 months.
The Software and Sensors backlog balance was $3.8 billion as of $8.5December 31, 2022. This backlog balance includes $497.1 million of deferred revenue, and $3.3 billion that has been recorded as bookings but not yet invoiced, all as of December 31, 2022. We expect to realize approximately $780.7 million of the December 31, 2022 backlog balance as revenue during the next 12 months.
| | | | | | | | | |
| | TASER | | Software and Sensors | | Total |
|
| | (in millions) |
Balance, beginning of period | | $ | 449 | | $ | 2,353 | | $ | 2,802 |
Add: additions to backlog, net of cancellations | | | 907 | | | 2,128 | | | 3,035 |
Less: revenue recognized during period | | | (532) | | | (658) | | | (1,190) |
Balance end of period | | $ | 824 | | $ | 3,823 | | $ | 4,647 |
Our backlog of $4.6 billion as of December 31, 2022 has increased significantly from $2.8 billion as of December 31, 2021.
Gross Margin
Gross Margin (dollars in thousands):
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | | | | | | | Dollar | | Percent | |
| | 2022 | | 2021 | | Change | | Change | |
TASER segment | | | | | | | | | | | | |
Product gross margin | | $ | 316,053 | | $ | 277,177 | | $ | 38,876 | | 14.0 | % |
Service gross margin | | | 20,556 | | | 9,866 | | | 10,690 | | 108.4 | |
Total TASER segment gross margin | | | 336,609 | | | 287,043 | | | 49,566 | | 17.3 | |
Software and Sensors segment | | | | | | | | | | | | |
Product gross margin | | | 122,116 | | | 71,250 | | | 50,866 | | 71.4 | |
Service gross margin | | | 269,913 | | | 182,617 | | | 87,296 | | 47.8 | |
Total Software and Sensors segment gross margin | | | 392,029 | | | 253,867 | | | 138,162 | | 54.4 | |
Total gross margin | | $ | 728,638 | | $ | 540,910 | | $ | 187,728 | | 34.7 | % |
Gross margin as % of net sales | | | 61.2 | % | | 62.7 | % | | | | | |
Gross margin increased $187.7 million to $728.6 million for the year ended December 31, 20172022 compared to no sales during 2016. Additionally, the Company increased cartridge sales by $10.9 million to $63.2 million during the year ended December 31, 2017 as compared to $52.3 million during the same period in 2016 which was primarily attributable to an increase in total weapons in the field.
Net sales for the Software and Sensors segment were $109.3 million and $65.6$540.9 million for the years ended December 31, 2017 and 2016, respectively, an increase of $43.7 million, or 66.6%. The overall increase in the Software and Sensors segment was driven by continued adoption of on-officer cameras and related technologies, including the Company's Evidence.com digital evidence management software suite. Combined net sales related to the Company's Axon Body, Axon Flex, and Axon Dock products increased approximately $9.3 million. The Company recorded net sales of $3.0 million related to Axon Fleet, the Company's newly introduced in-car camera system, with no amounts recorded during the same period in 2016. Evidence.com revenues for the twelve months ended December 31, 2017 increased $28.6 million to $57.8 million as compared to the same period in 2016. This increase was primarily driven by the continued increase in active users on the Company's Evidence.com platform.
To gain more immediate feedback regarding activity for Axon camera products and Evidence.com services, we also review bookings for these products. We consider bookings to be a statistical measure defined as the sales price of orders (not invoiced sales), including contractual optional periods we expect to be exercised, net of cancellations, placed in the relevant fiscal period, regardless of when the products or services ultimately will be provided. Most bookings will be invoiced in subsequent periods. Due to municipal government funding rules, in some cases certain of the future period amounts included in bookings are subject to budget appropriation or other contract cancellation clauses. Although the Company has entered into contracts for the delivery of products and services in the future and anticipates the contracts will be fulfilled, if agencies do not exercise contractual options, do not appropriate funds in future year budgets, or do enact a cancellation clause, revenue associated with these bookings may not ultimately be recognized, resulting in a future reduction to bookings. Bookings related to the Company's Software and Sensors segment, net of cancellations, were $291.2 million during 2017, compared to $254.1 million in 2016, an increase of 14.6%.
The chart below illustrates the Company's quarterly Software and Sensors bookings for each of the previous six fiscal quarters (in thousands):
Backlog - As of December 31, 2017 compared to December 31, 2016
Our backlog of $582.7 million as of December 31, 2017 has increased significantly from $384.2 million as of December 31, 2016. The increase in Weapons segment backlog is not expected to have a material impact on revenue or operating margins. Our significant increase in backlog, primarily in the Software and Sensors segment is indicative of expected revenue growth in this segment. Revenue growth in the Software and Sensors segment is expected to result in improved operating margins over time as additional revenue will cover a larger portion of our selling, general and administrative expenses, and research and development costs, while the Company does not expect any material changes in gross margins.
Net Sales - Three Months Ended December 31, 2017 Compared to September 30, 2017
Net sales by product line were as follows for the three months ended December 31, 2017 and September 30, 2017 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2017 | | Three Months Ended September 30, 2017 | | Dollar
Change | | Percent
Change |
| TASER Weapons segment: | | | | | | | | | | | |
| TASER X26P | $ | 19,259 |
| | 20.3 | % | | $ | 13,264 |
| | 14.7 | % | | $ | 5,995 |
| | 45.2 | % |
| TASER X2 | 23,662 |
| | 25.0 |
| | 22,717 |
| | 25.2 |
| | 945 |
| | 4.2 |
|
| TASER Pulse and Bolt | 1,448 |
| | 1.5 |
| | 1,069 |
| | 1.2 |
| | 379 |
| | 35.5 |
|
| Single cartridges | 14,198 |
| | 15.0 |
| | 17,474 |
| | 19.4 |
| | (3,276 | ) | | (18.7 | ) |
| Extended warranties | 3,506 |
| | 3.7 |
| | 3,086 |
| | 3.4 |
| | 420 |
| | 13.6 |
|
| Other | 2,336 |
| | 2.5 |
| | 1,806 |
| | 2.0 |
| | 530 |
| | 29.3 |
|
| TASER Weapons segment | 64,409 |
| | 68.0 |
| | 59,416 |
| | 65.8 |
| | 4,993 |
| | 8.4 |
|
| Software and Sensors segment: | | | | | | | | | | | |
| Axon Body | 3,459 |
| | 3.7 |
| | 4,527 |
| | 5.0 |
| | (1,068 | ) | | (23.6 | ) |
| Axon Flex | 2,194 |
| | 2.3 |
| | 2,563 |
| | 2.8 |
| | (369 | ) | | (14.4 | ) |
| Axon Fleet | 1,661 |
| | 1.8 |
| | 1,113 |
| | 1.2 |
| | 548 |
| | 49.2 |
|
| Axon Dock | 2,327 |
| | 2.5 |
| | 2,639 |
| | 2.9 |
| | (312 | ) | | (11.8 | ) |
| Evidence.com | 17,143 |
| | 18.1 |
| | 16,200 |
| | 17.9 |
| | 943 |
| | 5.8 |
|
| TASER CAM | 951 |
| | 1.0 |
| | 922 |
| | 1.0 |
| | 29 |
| | 3.1 |
|
| Extended warranties | 2,128 |
| | 2.2 |
| | 1,945 |
| | 2.2 |
| | 183 |
| | 9.4 |
|
| Other | 379 |
| | 0.4 |
| | 937 |
| | 1.0 |
| | (558 | ) | | (59.6 | ) |
| Software and Sensors segment | 30,242 |
| | 32.0 |
| | 30,846 |
| | 34.2 |
| | (604 | ) | | (2.0 | ) |
| Total net sales | $ | 94,651 |
| | 100.0 | % | | $ | 90,262 |
| | 100.0 | % | | $ | 4,389 |
| | 4.9 | % |
Net unit sales for TASER Weapons and Software and Sensors segment were as follows:
|
| | | | | | | | | | | |
| | Three Months Ended | | | | |
| | 12/31/2017 | | 9/30/2017 | | Unit
Change | | Percent
Change |
| TASER X26P | 23,350 |
| | 13,472 |
| | 9,878 |
| | 73.3 | % |
| TASER X2 | 21,683 |
| | 21,896 |
| | (213 | ) | | (1.0 | ) |
| TASER Pulse and Bolt | 3,641 |
| | 2,944 |
| | 697 |
| | 23.7 |
|
| Cartridges | 590,126 |
| | 643,077 |
| | (52,951 | ) | | (8.2 | ) |
| Axon Body | 13,944 |
| | 28,669 |
| | (14,725 | ) | | (51.4 | ) |
| Axon Flex | 5,253 |
| | 8,298 |
| | (3,045 | ) | | (36.7 | ) |
| Axon Fleet | 2,197 |
| | 1,598 |
| | 599 |
| | 37.5 |
|
| Axon Dock | 3,908 |
| | 6,440 |
| | (2,532 | ) | | (39.3 | ) |
| TASER CAM | 2,245 |
| | 1,512 |
| | 733 |
| | 48.5 |
|
Net sales were $94.7 million and $90.3 million for the three months ended December 31, 2017 and September 30, 2017, respectively, an increase of $4.4 million or 4.9%. Net sales for the TASER Weapons segment were $64.4 million and $59.4 million for the three months ended December 31, 2017 and September 30, 2017, respectively, an increase of $5.0 million or 8.4%. Net sales for the Software and Sensors segment were $30.2 million and $30.8 million for the three months ended December 31, 2017 and September 30, 2017, respectively, a decrease of $0.6 million or 2.0%. International sales were $16.0 million in for the three months ended December 31, 2017 compared to $17.1 million for the three months ended September 30, 2017, a decrease of $1.1 million.
The increase in net sales in the TASER Weapons segment on a sequential basis was partially attributable to the expiration of annual budget appropriations resulting in higher purchases for the quarter ended December 31, 2017 as compared to the quarter
ended September 30, 2017. Increased sales of TASER Weapons handles was partially offset by lower sequential cartridge sales, which was primarily attributable to timing. In the Software and Sensors segment, the Company experienced a decrease in net sales of $0.6 million. Axon hardware and device sales were lower due to timing of deployments, which were partially offset by increased service revenues which were attributable to more cumulative Axon devices in the field with extended warranty coverage and more cumulative active users on the Company's Evidence.com platform.
Net Sales - For the Years Ended December 31, 2016 and 2015
Net sales by product line were as follows for the years ended December 31, 2016 and 2015 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2016 | | 2015 | | |
| TASER Weapons segment: | | | | | | | | | | | |
| TASER X26P | $ | 72,490 |
| | 27.0 | % | | $ | 55,969 |
| | 28.3 | % | | $ | 16,521 |
| | 29.5 | % |
| TASER X2 | 52,665 |
| | 19.6 |
| | 42,746 |
| | 21.6 |
| | 9,919 |
| | 23.2 |
|
| TASER Pulse and Bolt | 3,580 |
| | 1.3 |
| | 2,146 |
| | 1.1 |
| | 1,434 |
| | 66.8 |
|
| Single cartridges | 52,305 |
| | 19.5 |
| | 41,674 |
| | 21.1 |
| | 10,631 |
| | 25.5 |
|
| Extended warranties | 9,880 |
| | 3.7 |
| | 7,402 |
| | 3.7 |
| | 2,478 |
| | 33.5 |
|
| Other | 11,724 |
| | 4.4 |
| | 12,438 |
| | 6.3 |
| | (714 | ) | | (5.7 | ) |
| TASER Weapons segment | 202,644 |
| | 75.5 |
| | 162,375 |
| | 82.1 |
| | 40,269 |
| | 24.8 |
|
| Software and Sensors segment: | | | | | | | | | | | |
| Axon Body | 12,911 |
| | 4.8 |
| | 4,029 |
| | 2.0 |
| | 8,882 |
| | 220.5 |
|
| Axon Flex | 5,323 |
| | 2.0 |
| | 6,880 |
| | 3.5 |
| | (1,557 | ) | | (22.6 | ) |
| Axon Dock | 7,422 |
| | 2.8 |
| | 4,022 |
| | 2.0 |
| | 3,400 |
| | 84.5 |
|
| Evidence.com | 29,260 |
| | 10.9 |
| | 11,765 |
| | 5.9 |
| | 17,495 |
| | 148.7 |
|
| TASER CAM | 4,888 |
| | 1.8 |
| | 5,746 |
| | 2.9 |
| | (858 | ) | | (14.9 | ) |
| Extended warranties | 3,710 |
| | 1.4 |
| | 1,794 |
| | 0.9 |
| | 1,916 |
| | 106.8 |
|
| Other | 2,087 |
| | 0.8 |
| | 1,281 |
| | 0.6 |
| | 806 |
| | 62.9 |
|
| Software and Sensors segment | 65,601 |
| | 24.5 |
| | 35,517 |
| | 17.9 |
| | 30,084 |
| | 84.7 |
|
| Total net sales | $ | 268,245 |
| | 100.0 | % | | $ | 197,892 |
| | 100.0 | % | | $ | 70,353 |
| | 35.6 | % |
Net unit sales for TASER Weapons and Software and Sensors segment were as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2016 | | 2015 | | Unit Change | | Percent Change |
| TASER X26P | 79,218 |
| | 62,383 |
| | 16,835 |
| | 27.0 | % |
| TASER X2 | 47,700 |
| | 38,050 |
| | 9,650 |
| | 25.4 |
|
| TASER Pulse and Bolt | 9,549 |
| | 8,121 |
| | 1,428 |
| | 17.6 |
|
| Cartridges | 1,979,051 |
| | 1,694,450 |
| | 284,601 |
| | 16.8 |
|
| Axon Body | 66,154 |
| | 17,522 |
| | 48,632 |
| | 277.5 |
|
| Axon Flex | 14,173 |
| | 18,823 |
| | (4,650 | ) | | (24.7 | ) |
| Axon Dock | 16,983 |
| | 6,979 |
| | 10,004 |
| | 143.3 |
|
| TASER CAM | 9,566 |
| | 11,634 |
| | (2,068 | ) | | (17.8 | ) |
Net sales were $268.2 million and $197.9 million for the years ended December 31, 2016 and 2015, respectively, an increase of $70.4 million or 35.6%. Net sales for the TASER Weapons segment were $202.6 million and $162.4 million for the years ended December 31, 2016 and 2015, respectively, an increase of $40.3 million or 24.8%. Net sales for the Software and Sensors segment were $65.6 million and $35.5 million for the years ended December 31, 2016 and 2015, respectively, an increase of $30.1 million or 84.7%. International sales were $49.5 million in 2016 compared to $36.1 million in 2015, an increase of 37.1%.
The increase in net sales for 2016 compared to 2015 in the TASER Weapons segment was primarily driven by the Company's ability to increase the frequency of upgrades through trade-in programs along with increased demand for the Company's installment payment plans, OSP and TASER 60. These programs allow customers to pay for hardware and services over an extended contractual life, which is typically five years. In the Software and Sensors segment, the increase in net sales was driven by the continued adoption of the Axon on-officer cameras and Evidence.com application in the law enforcement markets, which was further impacted by a large deployment of Axon Body 2 cameras to a major international customer.
Cost of Product and Service Sales
Cost of product and service sales was as follows for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, |
| | | | Dollar Change | | Percent Change | | | | Dollar
Change | | Percent
Change |
| | 2017 | | 2016 | | | | 2016 | | 2015 | | |
| TASER Weapons segment: | | | | | | | | | | | | | | | |
| Cost of product sales | $ | 72,054 |
| | $ | 61,930 |
| | $ | 10,124 |
| | 16.3 | % | | $ | 61,930 |
| | $ | 48,821 |
| | $ | 13,109 |
| | 26.9 | % |
| Cost as % of sales | 30.7 |
| | 30.6 |
| | | | | | 30.6 |
| | 30.1 |
| | | | |
| Software and Sensors segment: | | | | | | | | | | | | | | | |
| Cost of product sales | 45,943 |
| | 29,606 |
| | 16,337 |
| | 55.2 |
| | 29,606 |
| | 16,201 |
| | 13,405 |
| | 82.7 |
|
| Cost of service sales | 18,713 |
| | 6,173 |
| | 12,540 |
| | 203.1 |
| | 6,173 |
| | 4,223 |
| | 1,950 |
| | 46.2 |
|
| Total cost of product and service sales | 64,656 |
| | 35,779 |
| | 28,877 |
| | 80.7 |
| | 35,779 |
| | 20,424 |
| | 15,355 |
| | 75.2 |
|
| Cost as % of sales | 59.2 |
| | 54.5 |
| | | | | | 54.5 |
| | 57.5 |
| | | | |
| Total cost of product and service sales | $ | 136,710 |
| | $ | 97,709 |
| | $ | 39,001 |
| | 39.9 |
| | $ | 97,709 |
| | $ | 69,245 |
| | $ | 28,464 |
| | 41.1 |
|
| Cost as % of sales | 39.8 |
| | 36.4 |
| | | | | | 36.4 |
| | 35.0 |
| | | | |
Cost of product and service sales was $136.7 million and $97.7 million for the years ended December 31, 2017 and 2016, respectively, an increase of $39.0 million or 39.9%. As a percentage of net sales, cost of product and service sales increased to 39.8% in 2017 compared to 36.4% in 2016.
Within the TASER Weapons segment, cost of product sales increased $10.1 million, or 16.3%, to $72.1 million in 2017, compared to $61.9 million in 2016, and remained relatively consistent as a percentage of sales at 30.7% from 30.6%. The Company did not experience significant changes in variable manufacturing costs during the year ended December 31, 2017 as compared to 2016. The overall increase in cost of products sold was attributable to higher unit sales.
Within the Software and Sensors segment, cost of product and service sales was $64.7 million, an increase of $28.9 million, or 80.7%, from 2016. As a percentage of net sales, cost of product and service sales increased to 59.2% in 2017 from 54.5% in 2016. The increase in cost of product sales was primarily attributable to higher sales volumes, and the increase in cost of service sales was driven by increased cloud storage costs. The increase in total cost of sales as a percentage of total net sales was primarily attributable to non-recurring expenses related to the Company's data migration to a new cloud-storage provider.
Cost of product and service sales was $97.7 million and $69.2 million for the years ended December 31, 2016 and 2015, respectively, an increase of $28.5 million or 41.1%. As a percentage of net sales, cost of product and service sales increased to 36.4% in 2016 compared to 35.0% in 2015. Within the TASER Weapons segment, cost of product sales increased $13.1 million, or 26.9%, to $61.9 million in 2016, compared to $48.8 million in 2015, and remained relatively consistent as a percent of sales at 30.6% from 30.1%.
Within the Software and Sensors segment, cost of product and service sales was $35.8 million, an increase of $15.4 million, or 75.2% from 2015. As a percentage of net sales, cost of product and service sales decreased to 54.5% in 2016 from 57.5% in 2015. The increase in cost of product and service sales was driven by continued growth, increased data storage costs as more agencies utilized Evidence.com, as well as increased costs for our professional services team. The decrease in total costs as a percentage of sales was primarily driven by improvements in Evidence.com service margins.
Gross Margin
Gross margin was as follows for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, |
| | | | Dollar Change | | Percent Change | | | | Dollar Change | | Percent Change |
| | 2017 | | 2016 | | | | 2016 | | 2015 | | |
| TASER Weapons segment | $ | 162,458 |
| | $ | 140,714 |
| | $ | 21,744 |
| | 15.5 | % | | $ | 140,714 |
| | $ | 113,554 |
| | $ | 27,160 |
| | 23.9 | % |
| Software and Sensors Segment | 44,630 |
| | 29,822 |
| | 14,808 |
| | 49.7 |
| | 29,822 |
| | 15,093 |
| | 14,729 |
| | 97.6 |
|
| Total gross margin | $ | 207,088 |
| | $ | 170,536 |
| | $ | 36,552 |
| | 21.4 |
| | $ | 170,536 |
| | $ | 128,647 |
| | $ | 41,889 |
| | 32.6 |
|
| Gross margin as % of net sales | 60.2 |
| | 63.6 |
| | | | | | 63.6 |
| | 65.0 |
| | | | |
Gross margin increased $36.6 million to $207.1 million for the year ended December 31, 2017 compared to $170.5 million for 2016.2021. As a percentage of net sales, gross margin decreased to
60.2%61.2% for
20172022 from
63.6%62.7% for
2016. 2021 due to a mix of low to no margin professional services revenue and increased raw materials and labor expense.As a percentage of total segment net sales, gross margin for the TASER Weapons segment was relatively consistent at 69.3% and 69.4%decreased to 63.3% for the year ended December 31, 20172022 from 65.7% for the year ended December 31, 2021 as a result of higher direct cost of goods. Impacting higher cost of goods sold were cost increases in raw materials and 2016, respectively. increased labor expense.
Within the Software and Sensors segment, gross margin as a percentage of total segment net sales was 40.8% and 45.5%remained consistent at 59.5% for each of the years ended 20172022 and 2016,2021, respectively. Within the Software and Sensors segment, hardwareproduct gross margin was 10.5%42.1% for the year ended December 31, 2017and 17.6%2022 and 39.2% for the same period in 2016, while2021. The increase in product gross margin was attributable to higher average selling prices for the Axon Body 3 and Fleet 3. The service margins were 67.7%73.3% for the year ended December 31, 2022 and 79.2% during those74.6% for the same periods, respectively. The decreased hardware margins were primarily attributable to higher discounting. In certain customer contracts, primarily within the Software and Sensors segment, the level of discounting resultedperiod in a portion of the contractual consideration allocated to the delivered hardware to be recognized as revenue ratably over the Evidence.com subscription term. However, the full cost of the product is recognized when the hardware is delivered to the customer resulting in lower gross margins initially.2021. The decrease in service margins was driven by a higher mix of low margin professional service revenue in 2022.
Sales, General and Administrative Expenses
Sales, General and Administrative ("SG&A") Expenses (dollars in thousands):
| | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar | | Percent |
| | 2022 | | 2021 | | Change | | Change |
Salaries, benefits and bonus | | $ | 160,936 | | $ | 140,075 | | $ | 20,861 | | 14.9 | % |
Stock-based compensation | | | 51,301 | | | 238,813 | | | (187,512) | | (78.5) | |
Sales and marketing | | | 72,451 | | | 52,058 | | | 20,393 | | 39.2 | |
Other | | | 116,887 | | | 84,061 | | | 32,826 | | 39.1 | |
Total sales, general and administrative expenses | | $ | 401,575 | | $ | 515,007 | | $ | (113,432) | | (22.0) | % |
SG&A expenses as a percentage of net sales | | | 33.7 | % | | 59.7 | % | | | | | |
SG&A expenses decreased $113.4 million, or 22.0%. Stock-based compensation expense decreased $187.5 million in comparison to the prior year comparable period, which was primarily attributable to non-recurring expensesa decrease of $122.9 million in expense related to the Company's data migrationCEO Performance Award and a decrease of $83.8 million related to a new cloud-storage provider.our XSPP. The decrease related to the vesting of ten tranches of the CEO Performance Award and nine tranches of the XSPP in 2021, which have no remaining unrecognized expense for the vested tranches, as well as no additional tranches that vested in 2022. The decrease was partially offset by increased stock-based compensation expense for time-based awards due to higher headcount.
Salaries, benefits and bonus expense increased $41.9$20.9 million. Of the total increase, $32.3 million is attributable to $170.5an increase in salaries and related primarily to increased headcount. An increase in bonus expense of $10.2 million for 2016reflected incremental bonuses paid during the year to employees at the senior director level and below, as well as higher attainment on the annual company bonus performance metrics compared to $128.62021. Partially offsetting the increase was a decrease of $18.4 million for 2015. As a percentagein payroll taxes related to the vesting of net sales, gross marginnine tranches of the XSPP and the exercise of options under the CEO Performance Award in 2021; as no tranches vested in 2022, we did not recognize any payroll tax expense related to the program in 2022. Salaries, benefits and bonus expense decreased to 63.6% for 2016 from 65.0% for 2015. The decrease in gross margin as a percentage of sales was due primarilyfrom 16.2% for 2021 to 13.5% for 2022.
Sales and marketing expenses increased $20.4 million, driven by a change$16.9 million increase in product mix,commissions tied to higher revenues. Of the total increase, $3.3 million related to trade shows and seminars, as lower marginwe hosted additional in-person events including our annual user conference, Axon hardware product sales became a greater percentage ofAccelerate, in 2022.
Other SG&A expenses increased by $32.8 million, reflecting higher headcount and the consolidated total. As a percentage of net sales, gross margin forfollowing:
| ● | Travel expenses increased $8.4 million reflecting increased in-person customer and vendor meetings. Increased travel costs per trip also impacted higher travel expenses. |
| ● | Professional, consulting and lobbying expenses increased $5.2 million, driven primarily by initiatives supporting company growth and expansion. |
| ● | Depreciation and amortization increased $4.5 million primarily due to an increase in depreciation and amortization expense following the implementation of several phases of our enterprise resource planning and related systems during 2021. |
Research and Development Expenses
Research and Development ("R&D") Expenses (dollars in thousands):
| | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar | | Percent |
| | 2022 | | 2021 | | Change | | Change |
Salaries, benefits and bonus | | $ | 135,596 | | $ | 95,057 | | $ | 40,539 | | 42.6 | % |
Stock-based compensation | | | 50,268 | | | 58,674 | | | (8,406) | | (14.3) | |
Indirect manufacturing costs and supplies | | | 18,955 | | | 13,312 | | | 5,643 | | 42.4 | |
Other | | | 28,991 | | | 26,983 | | | 2,008 | | 7.4 | |
Total research and development expenses | | $ | 233,810 | | $ | 194,026 | | $ | 39,784 | | 20.5 | % |
R&D expenses as a percentage of net sales | | | 19.7 | % | | 22.5 | % | | | | | |
Within the TASER Weapons segment, R&D expenses increased $5.5 million or 11.9%. An increase of $8.3 million in salaries, benefits and bonus expense reflected higher headcount. Additionally, indirect manufacturing costs and supplies increased $3.8 million related to the development of next generation products. Partially offsetting these increases was relatively consistent at 69.4% and 69.9%a decrease in stock-based compensation expense of $5.7 million, due to the vesting of nine XSPP tranches during 2021, for 2016 and 2015, respectively, while the same measure for these yearswhich there is no remaining unamortized expense, as well as no additional tranches that vested in 2022.
R&D expense for the Software and Sensors segment were 45.5%increased $34.3 million or 23.2% and 42.5%, respectively. The improvementdecreased as a percentage of sales to 27.7% compared to 34.7% in the prior year. An increase of $32.2 million related to salaries, benefits, and bonus attributable to increased headcount.
Stock-based compensation expense for the Software and Sensors segment gross margindecreased $2.7 million. Contributing to the decrease was primarily attributable to higher service marginsthe vesting of nine XSPP tranches during 2021, for which there is no remaining unamortized expense, as well as no additional tranches that vested in 2022. Partially offsetting the decrease was an increase in general stock-based compensation expense due to increased users on the Evidence.com platform.
Sales, General and Administrative Expenses
Sales, general and administrative (“SG&A”) expenses were comprised of the following for 2017 and 2016 (dollarsan increase in thousands):headcount.
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2017 | | 2016 | | |
| Salaries, benefits and bonus | $ | 58,450 |
| | $ | 43,058 |
| | $ | 15,392 |
| | 35.7 | % |
| Stock-based compensation | 9,047 |
| | 5,707 |
| | 3,340 |
| | 58.5 |
|
| Professional, consulting and lobbying | 24,267 |
| | 19,321 |
| | 4,946 |
| | 25.6 |
|
| Sales and marketing | 17,368 |
| | 15,132 |
| | 2,236 |
| | 14.8 |
|
| Travel and meals | 10,637 |
| | 8,970 |
| | 1,667 |
| | 18.6 |
|
| Other | 18,923 |
| | 15,888 |
| | 3,035 |
| | 19.1 |
|
| Total sales, general and administrative expenses | $ | 138,692 |
| | $ | 108,076 |
| | $ | 30,616 |
| | 28.3 |
|
| Sales, general, and administrative as a percentage of net sales | 40.3 | % | | 40.3 | % | | | | |
Sales, generalInterest and administrative expenses were $138.7Other Income, Net
Interest and other income, net was $103.3 million and $108.1$26.7 million for the years ended December 31, 20172022 and 2016, respectively, an increase of $30.6 million, or 28.3%. As a percentage of total net sales, SG&A expenses were 40.3% for2021, respectively.
For the yearsyear ended December 31, 20172022, we recorded a net unrealized gain of $131.9 million related to observable price changes for our investments in certain strategic investments and 2016.
SG&Arelated warrants and the exercise of warrants in one of our strategic investees, which was partially offset by
typea $32.9 million unrealized loss on marketable securities related to our investment in CLBT. Interest and
by segment were as follows forother income, net also reflected net interest income of $4.8 million and losses from foreign currency transactions of $0.9 million.For the yearsyear ended December 31, 20172021, we recorded a gain of $40.9 million related to observable price changes for our investments in certain strategic investments and 2016 (dollarsrelated warrants. The gain was partially offset by a $17.8 million unrealized loss on marketable securities related to our investment in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2017 | | 2016 | | |
| TASER Weapons segment: | | | | | | | | | | | |
| Salaries, benefits and bonus | $ | 32,009 |
| | 23.1 | % | | $ | 24,534 |
| | 22.7 | % | | $ | 7,475 |
| | 30.5 | % |
| Stock-based compensation | 6,115 |
| | 4.4 |
| | 3,339 |
| | 3.1 |
| | 2,776 |
| | 83.1 |
|
| Professional, consulting and lobbying | 12,017 |
| | 8.7 |
| | 10,128 |
| | 9.4 |
| | 1,889 |
| | 18.7 |
|
| Sales and marketing | 8,357 |
| | 6.0 |
| | 8,305 |
| | 7.7 |
| | 52 |
| | 0.6 |
|
| Travel and meals | 4,867 |
| | 3.5 |
| | 4,277 |
| | 4.0 |
| | 590 |
| | 13.8 |
|
| Other | 14,837 |
| | 10.7 |
| | 13,034 |
| | 12.1 |
| | 1,803 |
| | 13.8 |
|
| TASER Weapons segment | 78,202 |
| | 56.4 |
| | 63,617 |
| | 58.9 |
| | 14,585 |
| | 22.9 |
|
| Software and Sensors segment: | | | | | | | | | | | |
| Salaries, benefits and bonus | 26,441 |
| | 19.1 |
| | 18,524 |
| | 17.1 |
| | 7,917 |
| | 42.7 |
|
| Stock-based compensation | 2,932 |
| | 2.1 |
| | 2,368 |
| | 2.2 |
| | 564 |
| | 23.8 |
|
| Professional, consulting and lobbying | 12,250 |
| | 8.8 |
| | 9,193 |
| | 8.5 |
| | 3,057 |
| | 33.3 |
|
| Sales and marketing | 9,011 |
| | 6.5 |
| | 6,827 |
| | 6.3 |
| | 2,184 |
| | 32.0 |
|
| Travel and meals | 5,770 |
| | 4.2 |
| | 4,693 |
| | 4.3 |
| | 1,077 |
| | 22.9 |
|
| Other | 4,086 |
| | 2.9 |
| | 2,854 |
| | 2.6 |
| | 1,232 |
| | 43.2 |
|
| Software and Sensors segment | 60,490 |
| | 43.6 |
| | 44,459 |
| | 41.1 |
| | 16,031 |
| | 36.1 |
|
| Total sales, general and administrative expenses | $ | 138,692 |
| | 100.0 | % | | $ | 108,076 |
| | 100.0 | % | | $ | 30,616 |
| | 28.3 |
|
Within the TASER Weapons segment, SG&A increased $14.6CLBT. Interest and other income, net also reflected interest income of $1.7 million, or 22.9%, to $78.2other income of $0.9 million from $63.6 million in 2016. This increasea government grant, and gains from foreign currency transactions of $0.4 million.Provision for Income Taxes
The provision for income taxes was primarily attributable to the Company's continued efforts to build the necessary infrastructure to facilitate future growth which was evidenced by higher salaries, benefits, bonus and stock-based compensationan expense of $10.3$49.4 million for the year ended December 31, 2017 as compared to 2016. Increased professional, consulting and lobbying fees of $1.9 million were primarily related to accounting and finance consulting costs attributable to the Company's adoption of the new revenue recognition rules, international tax restructuring,and efforts towards remediation of internal control matters. The remaining other operating expenses were primarily attributable to the overall growth of operations during 2017.
Within the Software and Sensors segment, SG&A increased $16.0 million, or 36.1%, to $60.5 million in 2017 in comparison to the prior year. Salaries, benefits, bonus and stock-based compensation in the Software and Sensors segment increased $8.5 million as the Company continued to hire additional engineering, product management personnel, sales and marketing personnel and general support staff to further expand upon existing product offerings as well as the development of new products such as records management systems and computer aided dispatch systems. The increase in professional, consulting and lobbying expenses of $3.1 million was related to higher professional and consulting costs related to the implementation of a new revenue accounting software platform. Additionally, the Company incurred higher marketing consulting fees related to hosted events and conferences for customers as well as internal sales meetings. The increase in sales and marketing expense of $2.2 million relates to higher commissions on increased bookings, increased customer samples attributable to the Company delivering on-officer cameras, Signal Sidearm, among other technologies, to prospective customers for evaluation purposes, as well as increased spending on sponsorships for major city police chief associations and major county sheriffs' associations. The remaining other operating expenses are primarily attributable to the overall growth of operations during 2017.
Sales, general and administrative expenses were comprised of the following for 2016 and 2015 (dollars in thousands): |
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2016 | | 2015 | | |
| Salaries, benefits and bonus | $ | 43,058 |
| | $ | 25,032 |
| | $ | 18,026 |
| | 72.0 | % |
| Stock-based compensation | 5,707 |
| | 4,299 |
| | 1,408 |
| | 32.8 |
|
| Professional, consulting and lobbying | 19,321 |
| | 13,165 |
| | 6,156 |
| | 46.8 |
|
| Sales and marketing | 15,132 |
| | 10,776 |
| | 4,356 |
| | 40.4 |
|
| Travel and meals | 8,970 |
| | 5,649 |
| | 3,321 |
| | 58.8 |
|
| Other | 15,888 |
| | 10,777 |
| | 5,111 |
| | 47.4 |
|
| Total sales, general and administrative expenses | $ | 108,076 |
| | $ | 69,698 |
| | $ | 38,378 |
| | 55.1 |
|
| Sales, general, and administrative as a percentage of net sales | 40.3 | % | | 35.2 | % | | | | |
Sales, general and administrative expenses were $108.1 million and $69.7 million for the years ended December 31, 2016 and 2015, respectively, an increase of $38.4 million, or 55.1%. As a percentage of total net sales, SG&A expenses increased to 40.3% for 2016 compared to 35.2% for 2015.
SG&A by type and by segment were as follows for the years ended December 31, 2016 and 2015 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2016 | | 2015 | | |
| TASER Weapons segment: | | | | | | | | | | | |
| Salaries, benefits and bonus | $ | 24,534 |
| | 22.7 | % | | $ | 16,767 |
| | 24.1 | % | | $ | 7,767 |
| | 46.3 | % |
| Stock-based compensation | 3,339 |
| | 3.1 |
| | 3,187 |
| | 4.6 |
| | 152 |
| | 4.8 |
|
| Professional, consulting and lobbying | 10,128 |
| | 9.4 |
| | 10,258 |
| | 14.7 |
| | (130 | ) | | (1.3 | ) |
| Sales and marketing | 8,305 |
| | 7.7 |
| | 5,411 |
| | 7.8 |
| | 2,894 |
| | 53.5 |
|
| Travel and meals | 4,277 |
| | 4.0 |
| | 3,089 |
| | 4.4 |
| | 1,188 |
| | 38.5 |
|
| Other | 13,034 |
| | 12.1 |
| | 8,928 |
| | 12.8 |
| | 4,106 |
| | 46.0 |
|
| TASER Weapons segment | 63,617 |
| | 58.9 |
| | 47,640 |
| | 68.4 |
| | 15,977 |
| | 33.5 |
|
| Software and Sensors segment: | | | | | | | | | | | |
| Salaries, benefits and bonus | 18,524 |
| | 17.1 |
| | 8,265 |
| | 11.9 |
| | 10,259 |
| | 124.1 |
|
| Stock-based compensation | 2,368 |
| | 2.2 |
| | 1,112 |
| | 1.6 |
| | 1,256 |
| | 112.9 |
|
| Professional, consulting and lobbying | 9,193 |
| | 8.5 |
| | 2,907 |
| | 4.2 |
| | 6,286 |
| | 216.2 |
|
| Sales and marketing | 6,827 |
| | 6.3 |
| | 5,365 |
| | 7.7 |
| | 1,462 |
| | 27.3 |
|
| Travel and meals | 4,693 |
| | 4.3 |
| | 2,560 |
| | 3.7 |
| | 2,133 |
| | 83.3 |
|
| Other | 2,854 |
| | 2.6 |
| | 1,849 |
| | 2.7 |
| | 1,005 |
| | 54.4 |
|
| Software and Sensors segment | 44,459 |
| | 41.1 |
| | 22,058 |
| | 31.6 |
| | 22,401 |
| | 101.6 |
|
| Total sales, general and administrative expenses | $ | 108,076 |
| | 100.0 | % | | $ | 69,698 |
| | 100.0 | % | | $ | 38,378 |
| | 55.1 |
|
Within the TASER Weapons segment, SG&A increased $16.0 million, or 33.5%, to $63.6 million from $47.6 million in 2015. Salaries, benefits, bonus and stock-based compensation in the TASER Weapons increased approximately $7.9 million in 2016 compared to 2015. This increase was primarily attributable to the Company's efforts to build the corporate infrastructure to facilitate future growth in departments such as supply chain, legal, finance and information technology. The increase in travel and meals was primarily attributable to the growth in the direct sales teams both domestically and internationally. The increase in sales and marketing of $2.9 million was primarily attributable to higher commissions of $3.2 million partially offset by a decrease in marketing related costs partially due to lower spending at the 2016 International Association of Chiefs of Police conference as compared to 2015. The increase in other expenses was made up primarily of $1.2 million in higher computer related costs, $0.3 million of higher rent expense, and $2.0 million of litigation costs incurred, including resolution expenses, that were not incurred during the same period in 2015.
Within the Software and Sensors segment, SG&A increased $22.4 million, or 101.6%, to $44.5 million in 2016 in comparison to the prior year. Salaries, benefits, bonus and stock-based compensation in the Software and Sensors segment increased $11.5
million as the Company continued to hire additional engineering, product management personnel, sales and marketing personnel and general support staff to further expand upon existing product offerings as well as the development of new apps and cloud technologies. The increase in travel and meals was primarily attributable to the growth in the direct sales teams both domestically and internationally. Of the increase in professional, consulting and lobbying, $4.1 million represented primarily increased lobbying fees aimed at securing long-term body-worn camera and service contracts, $0.8 million of increased legal costs primarily attributable to the ongoing Digital Ally lawsuit, and $0.6 million related to increased patent and trademark costs. The increase in sales and marketing of $1.5 million was primarily attributable to higher commissions of $2.4 million partially offset by a decrease of $0.9 million in marketing related costs partially due to lower spending at the 2016 International Association of Chiefs of Police conference as compared to 2015.
Research and Development Expenses
Research and development ("R&D") expenses were comprised of the following for 2017 and 2016 (dollars in thousands): |
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2017 | | 2016 | | |
| Salaries, benefits and bonus | $ | 33,682 |
| | $ | 17,205 |
| | $ | 16,477 |
| | 95.8 | % |
| Stock-based compensation | 6,055 |
| | 3,320 |
| | 2,735 |
| | 82.4 |
|
| Professional and consulting | 4,351 |
| | 3,212 |
| | 1,139 |
| | 35.5 |
|
| Travel and meals | 1,674 |
| | 969 |
| | 705 |
| | 72.8 |
|
| Other | 9,611 |
| | 5,903 |
| | 3,708 |
| | 62.8 |
|
| Total research and development expenses | $ | 55,373 |
| | $ | 30,609 |
| | $ | 24,764 |
| | 80.9 |
|
| Research and development as a percentage of net sales | 16.1 | % | | 11.4 | % | | | | |
R&D expenses were $55.4 million and $30.6 million for the years ended December 31, 2017 and 2016, respectively, an increase of $24.8 million, or 80.9%. As a percentage of net sales, R&D increased to 16.1% in 2017 in compared to 11.4% in 2016.
R&D by type and by segment were as follows for the years ended December 31, 2017 and 2016 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2017 | | 2016 | | |
| TASER Weapons segment: | | | | | | | | | | | |
| Salaries, benefits and bonus | $ | 4,243 |
| | 7.7 | % | | $ | 2,301 |
| | 7.5 | % | | $ | 1,942 |
| | 84.4 | % |
| Stock-based compensation | 517 |
| | 0.9 |
| | 639 |
| | 2.1 |
| | (122 | ) | | (19.1 | ) |
| Professional and consulting | 1,098 |
| | 2.0 |
| | 1,167 |
| | 3.8 |
| | (69 | ) | | (5.9 | ) |
| Travel and meals | 388 |
| | 0.7 |
| | 345 |
| | 1.1 |
| | 43 |
| | 12.5 |
|
| Other | 2,131 |
| | 3.8 |
| | 1,435 |
| | 4.7 |
| | 696 |
| | 48.5 |
|
| TASER Weapons segment | 8,377 |
| | 15.1 |
| | 5,887 |
| | 19.2 |
| | 2,490 |
| | 42.3 |
|
| Software and Sensors segment: | | | | | | | | | | | |
| Salaries, benefits and bonus | 29,439 |
| | 53.2 |
| | 14,904 |
| | 48.7 |
| | 14,535 |
| | 97.5 |
|
| Stock-based compensation | 5,538 |
| | 10.0 |
| | 2,681 |
| | 8.8 |
| | 2,857 |
| | 106.6 |
|
| Professional and consulting | 3,253 |
| | 5.9 |
| | 2,045 |
| | 6.7 |
| | 1,208 |
| | 59.1 |
|
| Travel and meals | 1,286 |
| | 2.3 |
| | 624 |
| | 2.0 |
| | 662 |
| | 106.1 |
|
| Other | 7,480 |
| | 13.5 |
| | 4,468 |
| | 14.6 |
| | 3,012 |
| | 67.4 |
|
| Software and Sensors segment | 46,996 |
| | 84.9 |
| | 24,722 |
| | 80.8 |
| | 22,274 |
| | 90.1 |
|
| Total research and development expenses | $ | 55,373 |
| | 100.0 | % | | $ | 30,609 |
| | 100.0 | % | | $ | 24,764 |
| | 80.9 |
|
Within the TASER Weapons segment, R&D expenses increased $2.5 million, or 42.3%, to $8.4 million in 2017. Salaries, benefits, bonus and stock-based compensation in the TASER Weapons increased $1.8 million in 2017 compared to 2016. The increase for 2017 compared to 2016 is primarily driven by additional headcount as the Company continued to invest in the development of new CEW related technologies.
Within the Software and Sensors segment, R&D expenses increased $22.3 million, or 90.1%, to $47.0 million in 2017 from the prior year. The Company's Software and Sensors segment was responsible for approximately 85% of the overall expenses in
R&D. Of the $22.3 million increase in R&D for the Software and Sensors segment, $17.4 million related to salaries, benefits, bonus, and stock-based compensation. The Company remains focused on growing the Software and Sensors segment as it adds headcount and additional resources to develop new products and services, including records management systems and computer aided dispatch systems, to further advance its scalable cloud-connected device platform. The increase in professional and consulting expense of $1.2 million was primarily attributable to increased technical consulting fees related to the development and release of Signal Sidearm. Included in other R&D expenses for the Software and Services segment was $1.9 million of amortization of intangible assets related to acquired developed technology that was yet to be put into service. Additionally, during 2017, the Company abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $1.0 million which was included in other R&D expenses.
Research and development expenses were comprised of the following for 2016 and 2015 (dollars in thousands):
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2016 | | 2015 | | |
| Salaries, benefits and bonus | $ | 17,205 |
| | $ | 13,013 |
| | $ | 4,192 |
| | 32.2 | % |
| Stock-based compensation | 3,320 |
| | 2,576 |
| | 744 |
| | 28.9 |
|
| Professional and consulting | 3,212 |
| | 3,835 |
| | (623 | ) | | (16.2 | ) |
| Travel and meals | 969 |
| | 1,034 |
| | (65 | ) | | (6.3 | ) |
| Other | 5,903 |
| | 3,156 |
| | 2,747 |
| | 87.0 |
|
| Total research and development expenses | $ | 30,609 |
| | $ | 23,614 |
| | $ | 6,995 |
| | 29.6 |
|
| Research and development as a percentage of net sales | 11.4 | % | | 11.9 | % | | | | |
Research and development expenses were $30.6 million and $23.6 million for the years ended December 31, 2016 and 2015, respectively, an increase of $7.0 million, or 29.6%. As a percentage of net sales, R&D decreased to 11.4% in 2016 as compared to 11.9% in 2015.
R&D by type and by segment were as follows for the years ended December 31, 2016 and 2015 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | Percent Change |
| | 2016 | | 2015 | | |
| TASER Weapons segment: | | | | | | | | | | | |
| Salaries, benefits and bonus | $ | 2,301 |
| | 7.5 | % | | $ | 1,596 |
| | 6.8 | % | | $ | 705 |
| | 44.2 | % |
| Stock-based compensation | 639 |
| | 2.1 |
| | 394 |
| | 1.7 |
| | 245 |
| | 62.2 |
|
| Professional and consulting | 1,167 |
| | 3.8 |
| | 1,196 |
| | 5.1 |
| | (29 | ) | | (2.4 | ) |
| Travel and meals | 345 |
| | 1.1 |
| | 261 |
| | 1.1 |
| | 84 |
| | 32.2 |
|
| Other | 1,435 |
| | 4.7 |
| | 1,023 |
| | 4.3 |
| | 412 |
| | 40.3 |
|
| TASER Weapons segment | 5,887 |
| | 19.2 |
| | 4,470 |
| | 18.9 |
| | 1,417 |
| | 31.7 |
|
| Software and Sensors segment: | | | | | | | | | | | |
| Salaries, benefits and bonus | 14,904 |
| | 48.7 |
| | 11,417 |
| | 48.3 |
| | 3,487 |
| | 30.5 |
|
| Stock-based compensation | 2,681 |
| | 8.8 |
| | 2,182 |
| | 9.2 |
| | 499 |
| | 22.9 |
|
| Professional and consulting | 2,045 |
| | 6.7 |
| | 2,639 |
| | 11.2 |
| | (594 | ) | | (22.5 | ) |
| Travel and meals | 624 |
| | 2.0 |
| | 773 |
| | 3.3 |
| | (149 | ) | | (19.3 | ) |
| Other | 4,468 |
| | 14.6 |
| | 2,133 |
| | 9.0 |
| | 2,335 |
| | 109.5 |
|
| Software and Sensors segment | 24,722 |
| | 80.8 |
| | 19,144 |
| | 81.1 |
| | 5,578 |
| | 29.1 |
|
| Total research and development expenses | $ | 30,609 |
| | 100.0 | % | | $ | 23,614 |
| | 100.0 | % | | $ | 6,995 |
| | 29.6 |
|
Within the TASER Weapons segment, R&D expenses increased $1.4 million, or 31.7%, to $5.9 million in 2016. Salaries, benefits, bonus and stock-based compensation in the TASER Weapons increased approximately $1.0 million in 2016 as compared to 2015. The increase for 2016 as compared to 2015 is primarily driven by additional headcount as the Company continued to invest in the development of new CEW related technologies.
Within the Software and Sensors segment, R&D expenses increased $5.6 million, or 29.1%, to $24.7 million in 2016 from the prior year. The Company's Software and Sensors segment was responsible for approximately 81% of the overall expenses in
R&D. Of the $5.6 million increase in R&D for the Software and Sensors segment, $4.0 million related to salaries and benefits, inclusive of bonus and stock-based compensation. Included in the increase of other R&D for the Software and Sensors segment was sales and marketing expenses of $0.9 million related to contractual earn-outs for legacy MediaSolv employees, who work in R&D. The Company remained focused on growing the Software and Sensors segment as it added headcount and external resources to develop new products and services to further advance its scalable cloud-connected device platform. These increases were partially offset by decreases in professional and consulting of $0.6 million related primarily to the Company being more selective in the utilization of consultants as compared to hiring additional employees. The biggest portion of the increase in other R&D expenses related to tooling and supplies that made up $0.8 million of the overall increase. The remaining increase was attributable to the overall growth in of the Software and Sensors R&D department.
Interest and Other Income (Expense), Net
Interest and other income (expense), net was $2.7 million, $(0.4) million and $26,000 for the years ended December 31, 2017, 2016 and 2015, respectively.
For the year ended December 31, 2017, the Company earned interest income of $1.6 million and had gains from foreign currency transaction adjustments of $1.4 million which were partially offset by interest expense of $0.2 million. For the year ended December 31, 2016, interest income of $0.7 million was more than offset by losses on foreign currency transaction adjustments of $1.1 million. For the year ended December 31, 2015, interest income of $0.3 million was partially offset by losses on foreign currency transaction adjustments of $0.2 million.
Provision for Income Taxes
The provision for income taxes was $10.6 million for the year ended December 31, 2017.2022. The effective income tax rate for 20172022 was 66.9%25.1%. In connection with our initial analysis of the impact of the Tax Act, we were able to make reasonable estimates of the impact of the Tax Act and recorded a provisional net tax expense of $8.0 million in the period ended December 31, 2017, primarily related to the impact of the tax rate reduction on our deferred tax assets and deferred tax liabilities. $0.4 million of the adjustment impacted the valuation allowance. This was partially offset by a $1.8 million benefitThe benefits related to excess stock-based compensation deductions, as well as a $2.4of $4.6 million benefit forand research and development credits duringof $13.3 million, and a deduction for foreign derived intangible income (“FDII”) of $2.6 million were offset by the year ended December 31, 2017. In addition,tax effects of permanently non-deductible expenses for executive compensation of $5.8 million, an additionalincrease in uncertain tax benefits of $3.2 million, and other permanently non-deductible expenses of $1.8 million. Additionally, we recorded a $10.2 million increase to our valuation allowance in the amount of $1.9 million was recorded as of December 31, 2017,2022 related to certain research and development credits that may not be utilized prior to expiration and losses in certain foreign jurisdictions in which there was a cumulative loss.
The provision for income taxes was $14.2 million for the year ended December 31, 2016. The effective income tax rate for 2016 was 45.1%. The effect of state income taxes of $0.9 million and the tax effects of intercompany transactions of $0.6 million were offset by a benefit of $1.9 million for research and development credits in the current year. The difference between statutory and foreign tax rates of $1.5 million was largely driven by losses incurred in a foreign entity for which no tax benefit will be realized. In addition, a valuation allowance in the amount of $1.8 million was recorded as of December 31, 2016 related to certain research and development tax credits that may not be utilized prior to expiration and losses in certain foreign jurisdictions in which there was a cumulativean unrealized investment loss.
The provision for income taxes was $15.4a benefit of $81.4 million for the year ended December 31, 2015.2021. The effective income tax rate for 20152021 was 43.7%57.5%. The effectbenefits related to excess stock-based compensation of state income tax of $1.1$205.5 million was largely offset by a benefit of $1.0 million ofand research and development credits of $34.4 million were partially offset by the tax effects of permanently non-deductible expenses for executive compensation of $180.5 million, an increase in the current year. The difference between statutoryuncertain tax benefits of $10.2 million, and foreign tax ratesother permanently non-deductible expenses of $2.4$1.8 million. Additionally, we recorded a $9.0 million was largely driven by losses incurred in a newly formed foreign entity for which no tax benefit will be realized, partially reduced by a tax benefit for newly formed foreign entities for which the statutory tax rate was lower than the U.S. statutory tax rate. In addition,increase to our valuation allowance in the amountas of $1.2 million was recorded.
December 31, 2021 related to research and development tax credits that may not be utilized prior to expiration and an unrealized investment loss.Net Income
OurWe recorded net income decreased by $12.1 million to $5.2of $147.1 million for the year ended December 31, 20172022 compared to $17.3a net loss of $60.0 million in 2016.2021. Net income per basic and diluted share was $0.10 for 2017$2.07 while diluted net income per share was $2.03, compared to $0.33 and $0.32net loss per basic and diluted net loss per share respectively,of $0.91 for 2016.2021.
Three Months Ended December 31, 2022 Compared to September 30, 2022
Net sales by product line were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | | Dollar | | Percent |
| | December 31, 2022 | | September 30, 2022 | | Change | | Change |
TASER segment: | | | | | | | | | | | | | | | | |
TASER 7 | | $ | 55,448 | | 16.5 | % | $ | 65,951 | | 21.2 | % | $ | (10,503) | | (15.9) | % |
TASER X26P | | | 6,010 | | 1.8 | | | 5,897 | | 1.9 | | | 113 | | 1.9 | |
TASER X2 | | | 7,617 | | 2.3 | | | 8,298 | | 2.7 | | | (681) | | (8.2) | |
TASER Consumer devices | | | 1,335 | | 0.4 | | | 1,702 | | 0.6 | | | (367) | | (21.6) | |
Cartridges | | | 47,541 | | 14.1 | | | 46,475 | | 14.9 | | | 1,066 | | 2.3 | |
Axon Evidence and cloud services | | | 6,890 | | 2.0 | | | 5,125 | | 1.6 | | | 1,765 | | 34.4 | |
Extended warranties | | | 7,580 | | 2.3 | | | 7,290 | | 2.3 | | | 290 | | 4.0 | |
Other | | | 4,316 | | 1.3 | | | 4,145 | | 1.3 | | | 171 | | 4.1 | |
TASER segment | | | 136,737 | | 40.7 | | | 144,883 | | 46.5 | | | (8,146) | | (5.6) | |
Software and Sensors segment: | | | | | | | | | | | | | | | | |
Axon Body | | | 31,561 | | 9.4 | | | 35,427 | | 11.4 | | | (3,866) | | (10.9) | |
Axon Flex | | | 394 | | 0.1 | | | 687 | | 0.2 | | | (293) | | (42.6) | |
Axon Fleet | | | 23,177 | | 6.9 | | | 10,139 | | 3.3 | | | 13,038 | | 128.6 | |
Axon Dock | | | 11,927 | | 3.5 | | | 4,830 | | 1.5 | | | 7,097 | | 146.9 | |
Axon Evidence and cloud services | | | 113,225 | | 33.7 | | | 96,814 | | 31.1 | | | 16,411 | | 17.0 | |
Extended warranties | | | 13,695 | | 4.1 | | | 14,511 | | 4.6 | | | (816) | | (5.6) | |
Other | | | 5,426 | | 1.6 | | | 4,463 | | 1.4 | | | 963 | | 21.6 | |
Software and Sensors segment | | | 199,405 | | 59.3 | | | 166,871 | | 53.5 | | | 32,534 | | 19.5 | |
Total net sales | | $ | 336,142 | | 100.0 | % | $ | 311,754 | | 100.0 | % | $ | 24,388 | | 7.8 | % |
Net unit sales were as follows:
| | | | | | | | | |
| | Three Months Ended | | | | | |
| | | | | | Unit | | Percent |
| | December 31, 2022 | | September 30, 2022 | | Change | | Change |
TASER 7 | | 34,530 | | 40,502 | | (5,972) | | (14.7) | % |
TASER X26P | | 3,737 | | 3,745 | | (8) | | (0.2) | |
TASER X2 | | 4,056 | | 5,120 | | (1,064) | | (20.8) | |
TASER Consumer devices | | 4,685 | | 7,180 | | (2,495) | | (34.7) | |
Cartridges | | 1,527,929 | | 1,481,169 | | 46,760 | | 3.2 | |
Axon Body | | 60,018 | | 71,070 | | (11,052) | | (15.6) | |
Axon Flex | | 567 | | 1,188 | | (621) | | (52.3) | |
Axon Fleet | | 10,109 | | 2,342 | | 7,767 | | 331.6 | |
Axon Dock | | 11,644 | | 3,822 | | 7,822 | | 204.7 | |
| | | | | | | | | |
Net sales for the TASER segment decreased $8.1 million, or 5.6%, on a sequential basis primarily due to a $10.5 million decrease in revenue from TASER 7 devices. This is tied to shipment timing on hardware, and we see healthy demand for TASER products and services for 2023. The decrease in TASER 7 revenues was partially offset by $2.6an increase in Axon Evidence revenue of $1.8 million and increased cartridge revenue of $1.1 million of other TASER devices. The decrease in revenue was a result of decreased unit sales, and was partially offset by higher average selling prices on our TASER 7 devices. The increase in Axon Evidence revenue was a result of more TASER devices in the field, as well as higher VR revenue. Cartridge revenue increased due to $17.3increased units, partially offset by lower average selling prices.
Net sales for the Software and Sensors segment increased $32.5 million, or 19.5%, on a sequential basis primarily due to a $16.4 million increase in Axon Evidence and cloud services revenue and a $13.0 million increase in Axon
Fleet revenue. The increase in Axon Evidence and cloud services revenue was a result of the increase in the aggregate number of users on our network. Axon Fleet revenue was driven primarily by increased unit sales, partially offset by a decrease in the average selling price.
International sales were $55.5 million in for the three months ended December 31, 2022 as compared to $47.1 million for the yearthree months ended December 31, 2016 comparedSeptember 30, 2022, an increase of $8.4 million, primarily driven by increased sales in the EMEA region.
Non-GAAP Financial Measures
To supplement our financial results presented in accordance with accounting principles generally accepted in the U.S. ("GAAP"), we present the non-GAAP financial measures of EBITDA and Adjusted EBITDA. Our management uses these non-GAAP financial measures in evaluating our performance in comparison to $19.9 million 2015.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 (Most comparable GAAP Measure: Net income) - Earnings before interest expense, investment interest income, taxes, depreciation, amortization and non-cash stock-based compensation expense, realized and unrealized gains and losses on strategic investments and marketable securities, and certain other pre-tax items. |
Although these non-GAAP financial measures are not consistent with GAAP, management believes investors will benefit by referring to these non-GAAP financial measures when assessing our operating results, as well as when forecasting and analyzing future periods. However, management recognizes that:
| ● | these non-GAAP financial measures are limited in their usefulness and should be considered only as a supplement to our GAAP financial measures; |
| ● | these non-GAAP financial measures should not be considered in isolation from, or as a substitute for, our GAAP financial measures; |
| ● | these non-GAAP financial measures should not be considered to be superior to our GAAP financial measures; and |
| ● | these non-GAAP financial measures were not prepared in accordance with GAAP and investors should not assume that the non-GAAP financial measures presented in this Annual Report on Form 10-K were prepared under a comprehensive set of rules or principles. |
EBITDA and Adjusted EBITDA reconcile to net income per basic and diluted share was $0.33 and $0.32 for 2016, respectively, compared to $0.37 and $0.36 per basic and diluted share for 2015, respectively.
as follows (dollars in thousands):
| | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 |
Net income (loss) | | $ | 147,139 | | $ | (60,018) |
Depreciation and amortization | | | 24,381 | | | 18,694 |
Interest expense | | | 488 | | | 28 |
Investment interest (income) loss | | | (4,782) | | | (1,511) |
Provision for (benefit from) income taxes | | | 49,379 | | | (81,357) |
EBITDA | | $ | 216,605 | | $ | (124,164) |
| | | | | | |
Non-GAAP adjustments: | | | | | | |
Stock-based compensation expense | | | 106,176 | | | 303,331 |
Realized and unrealized gains on strategic investments and marketable securities, net | | | (98,943) | | | (23,035) |
Transaction costs related to strategic investments and acquisitions | | | 2,368 | | | 2,068 |
Loss on disposal and abandonment of intangible assets | | | 110 | | | 146 |
Loss on disposal and impairment of property, equipment and other assets, net | | | 5,452 | | | 92 |
Costs related to FTC litigation | | | 545 | | | 741 |
Payroll taxes related to XSPP vesting and CEO Award option exercises | | | — | | | 18,933 |
Adjusted EBITDA | | $ | 232,313 | | $ | 178,112 |
Liquidity and Capital Resources
As of December 31, 2017,2022, we had $75.1$353.7 million of cash and cash equivalents, a decrease of $2.6 million from December 31, 2021. Cash and cash equivalents and investments totaled $1.1 billion, an increase of $34.5$689.6 million from the end of 2016.
December 31, 2021.Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Operating activities | $ | 18,490 |
| | $ | 17,925 |
| | $ | 46,445 |
|
| Investing activities | 19,082 |
| | (3,045 | ) | | (36,009 | ) |
| Financing activities | (3,854 | ) | | (34,661 | ) | | 603 |
|
| Effect of exchange rate changes on cash and cash equivalents | 736 |
| | 906 |
| | 120 |
|
| Net increase (decrease) in cash and cash equivalents | $ | 34,454 |
| | $ | (18,875 | ) | | $ | 11,159 |
|
| | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 |
Operating activities | | $ | 235,361 | | $ | 124,494 |
Investing activities | | | (830,967) | | | 252,556 |
Financing activities | | | 598,100 | | | (174,181) |
Effect of exchange rate changes on cash and cash equivalents | | | (3,380) | | | (1,982) |
Net increase (decrease) in cash and cash equivalents and restricted cash | | $ | (886) | | $ | 200,887 |
Operating activities
Net cash provided by operating activities in 20172022 of $18.5$235.4 million consisted of $5.2$147.1 million in net income, thea net add-back of non-cash income statement items totaling $28.0$69.2 million, and a negative $14.8an $19.1 million net change in operating assets and liabilities. Included in the non-cash items are $8.0were $106.2 million in stock-based compensation expense, a $98.9 million net gain on the change in fair value of strategic investments and marketable securities, $24.4 million in depreciation and amortization expense, $1.1 million related to the disposal and abandonment of intangible assets, $15.6 million in stock-based compensation expense, $0.7 million of bond premium amortization and $2.8 million related to deferred income taxes. The most significant increase to the portion of cash from operating activities related to the changes in operating assets and liabilities was a $39.7$22.1 million increase in deferred revenue. Of the increase, $7.4 million resulted from additional extended warranty sales, $20.2 million resulted from increased hardware deferred revenue from TASER Assurance Program ("TAP") and OSP sales, and $12.5 million related to prepayments for Software and Sensors services. These increases were offsetincome tax assets. Cash provided by increased accounts and notes receivable of $35.3 million, inventory of $11.7 million and prepaid expenses and other assets of $9.0 million during 2017. The increases in accounts and notes receivable were due to increased sales during 2017, specifically sales made under the OSP and TASER 60 installment plans. Operating cash flows were alsooperations was impacted by increased inventoryan increase of $11.7$73.2 million in anticipation of higher sales in 2018 and for the Company's National Field Trial Offer for body cameras. The increase in prepaid expenses and other asset accounts of $9.0 million during 2017 was driven primarily by increased deferred cost of product sales of $5.0 million related to increased deferred cost of product and service sales related to contracts where the product had shipped but revenue was deferred due to contractual provisions resulting in the cost of product sales being deferred as an asset to be recognized in subsequent periods when revenue recognition criteria have been met, higher deferred commissions of $2.1 million representing amounts earned when a contract is booked which is then subsequently amortized over the contractual period as products and services are delivered and increased prepaid income taxes of $3.4 million.
Net cash provided by operating activities in 2016 of $17.9 million consisted of $17.3 million in net income, the net add-back of non-cash income statement items totaling $8.9 million and a negative $8.2 million net change in operating assets and liabilities. Included in the non-cash items are $3.7 million in depreciation and amortization expense, $9.4 million in stock-based compensation expense, and $1.3 million of bond premium amortization. These additions were partially offset by an $1.4 million reduction related to excess tax benefit from stock-based compensation and $5.2 million related to deferred income taxes. The most significant increase to the portion of cash from operating activities related to the changes in operating assets and liabilities was a $34.3 million increase in deferred revenue. Of the increase, $8.1 million resulted from additional extended warranty sales, $15.6 million resulted from increased hardware deferred revenue from TAP and OSP sales, and $10.5 million related to prepayments for Software and Sensors services. The Company also had increases in cash provided from operating activities of $17.6 million for increases in accounts payable and accrued liabilities related primarily to increased inventory purchases. These increases were offset by increased prepaid expenses and other current assets of $29.1 million, inventory of $18.7 million and accounts and notes receivable of $13.3 million during 2016. The increases in accounts and notes receivable were due to increased sales during 2016, and increases in inventory resulted from higher anticipated sales for 2017. Long-term accounts receivable increased by $16.4 million during 2016 for sales made under OSP and TASER 60. The increase in prepaid expenses and other asset accounts during 2016 was driven primarily increased prepaid commissions of $1.8 million attributable to higher sales, increased balances under corporate-owed life insurance policies of $1.1 million, $3.3 million of restricted cash related primarily to a customer contract requiring certain contractual payments to be deposited in escrow until approved for release, and $1.7 million of long-term contingent consideration deposited in escrow in connection with a business combination that was completed in December 2016.
Net cash provided by operating activities in 2015 of $46.4 million consisted of $19.9 million in net income, the net add-back of non-cash income statement items totaling $6.3 million, and a positive $20.2 million net change in operating assets and liabilities. Included in the non-cash items was $3.3 million in depreciation and amortization expense, $7.3 million in stock-based compensation expense, and $1.7 million of bond premium amortization. Those additions were partially offset by a $6.9 million reduction related to excess tax benefit from stock-based compensation that was treated as a financing activity for cash flow purposes. The most significant increase to the portion of cash from operating activities related to the changes in operating assets and liabilities was a $15.3 million increase to deferred revenue. Of the increase in deferred revenue, $4.0 million resulted from additional extended warranty sales, $7.3 million resulted from increased hardware deferred revenue from the Company's TAP and OSP sales programs, and $4.0 million related to prepayments for Software and Sensors SaaS and related services. The Company also had increases in cash provided from operating activities of $4.2 million and $3.1 million for decreases in accounts and notes receivable and inventory, respectively. In addition, the $5.9 million increasecontract assets, which was largely attributable to cash from operating activities related to increasesincreased sales in accounts payable, accrued and other liabilities that2022, particularly for sales made under subscription plans. Cash provided by operations was primarily causedalso impacted by current income tax expense, which would have resulted in an increase to income tax payable, if it had not been reduced by the excess tax benefit from stock-based compensation discussed above. Those increases were partially offset by increasedof $52.2 million in prepaid expenses and other current assets, resulting
primarily from an increase in other asset accounts during 2015deferred commissions expense offset by a decrease in income tax receivable due to utilization of overpayments, plus an increase of $96.0 million in inventory as we proactively built up inventory to help meet future product demand. Partially offsetting this activity was driven byan increase in deferred revenue of $159.7 million, which was primarily byattributable to increased prepaid commissionssubscription invoicing for Software and Sensors hardware and services in advance of $2.5 million, increased long-term accounts receivable of $1.2fulfillment, and a smaller increase in hardware deferred revenue from TASER subscription sales.
Investing activities
We used $831.0 million for sales made under OSP, increased balances under corporate-owed life insurance policies of $1.1 million, and a deposit made with a foreign component manufacturer of $2.6 million related to future services.
Investinginvesting activities
Primarily as the result of investments that matured during the year, we generated $19.1 million in 2022. Cash outflows from investing activities in 2017. Calls and maturities on ourincluded $692.2 million for purchases of available-for-sale investments, net of purchases, were $41.1 million. During 2017, we invested $10.6proceeds from calls and maturities, $74.3 million for new strategic minority investments and $6.6 million for the acquisitionexercise of Dextro, Inc.,price of warrants related to continue building upon the Company's Axon Artificial Intelligence group, and for the acquisition of Breon, the Company's former distributor in Australia. The Companyour strategic investments. We also invested $11.4$55.5 million in the purchase of property and equipment and intangibles, net of proceeds related toon disposals.
Primarily as a result of investing cash generated from operating activities, we used $3.0 million in investing activities in 2016. Calls and maturities on our investments, net of purchases, were $8.9 million. During 2016, we invested $3.5 million for the acquisition of developed technology and hiring of personnel to form the Axon Artificial Intelligence group. The Company also invested $8.4 million in the purchase of property and equipment and intangibles, net of proceeds related to disposals.
Primarily as a result of investing cash generated from operating activities, the Company used $36.0 million for investing activities in 2015. Purchases of investments, net of calls and maturities, were $18.4 million. During 2015, net cash of $11.2 million was used for the acquisitions of MediaSolv Solutions Corporation and Tactical Safety Responses LTD. The Company also invested $6.5 million in the purchase of property and equipment and intangibles.
Net cash usedprovided by financing activities was $3.9$598.1 million for the year ended December 31, 2017. During 2017, the Company paid payroll taxes of $3.5 million on behalf of employees who net-settled stock awards during the period. Additionally, the Company paid $1.8 million for contingent consideration amounts earned during 2017 related to the acquisition of certain assets from Fossil Group, Inc. and Fossil Vietnam, Limited Liability Company2022. The increase in 2016. These decreases were partially offset by $1.4 million of proceeds from the exercise of stock options.
Net cash used by financing activities was $34.7 million for the year ended December 31, 2016. During 2016, the Company repurchased $33.7 million of its common stock, which was purchased for a weighted average cost of $18.90 per share, inclusive of applicable administrative costs. Additionally, the Company paid payroll taxes of $1.8 million on behalf of employees who net-settled stock awards during the period. These decreases were partially offset by $0.5 million of proceeds from the exercise of stock options, and $1.4 million of excess tax benefit from stock-based compensation. The purchase of common stock was made under a stock repurchase program authorized by the Company's Board of Directors.
Net cash provided by financing activities was $0.6primarily due to net proceeds of $603.0 million from issuing the Notes and Warrants and the purchase of the Note Hedge. Partially offsetting the increase were payments totaling $4.9 million for certain restricted stock units (“RSUs”) that were net-share settled, such that we withheld shares to cover the year ended December 31, 2015. During 2015,employees’ tax obligation for the Company repurchases $7.6 million ofapplicable income and other employment taxes, and remitted the Company’s common stock, which was purchased for a weighted average cost of $25.86 per share. The Company also paid payroll taxes of $1.4 million on behalf of employees who net-settled stock awards duringcash to the year. These decreases were partially offset by $2.7 million of proceeds from the exercise of stock options, and $6.9 million of excess tax benefit from stock proceeds. The purchase of common stock was made under a stock repurchase program authorized by the Company’s Board of Directors.
appropriate taxing authorities.Liquidity and Capital Resources
Our most significant source of liquidity continues to be funds generated by operating activities and available cash and cash equivalents.equivalents and short-term investments. In addition, our $10.0$200.0 million revolving credit facility is available for additional working capital needs or investment opportunities. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. TheAdvances under the line of credit bear interest at Term SOFR plus 1.25 to 1.75% per year determined in accordance with a pricing grid based on our net debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio. “SOFR” is defined as a rate equal to the secured overnight financing rate as administered by substantially allthe Federal Reserve Bank of New York or a successor administrator of the assets of the Company, and bears interest at varying rates, currently LIBOR plus 1.25% or Prime less 0.50%. secured overnight financing rate.
As of December 31, 2017,2022, we had letters of credit outstanding of $2.7$7.0 million, leaving the net amount available for borrowing of $7.3 million.$193.0 million The facility maturescredit agreement will mature on the earlier of December 15, 2027 or the date that is six months prior to the stated maturity date of the 0.50% convertible senior notes due 2027 unless such Notes have been redeemed, repurchased, converted or defeased in full. Additionally, the credit agreement has an accordion feature which allows for an increase in the total line of credit up to $300.0 million, subject to each lender’s sole discretion. At December 31, 2018. 2022 and 2021, there were no borrowings under the line.
There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our revolving credit facility. At December 31, 2017 and 2016, there were no borrowings under the line.
Our agreement with the bank requires us to comply with a maximum funded debtnet leverage ratio, defined as consolidated total indebtedness to EBITDA, ratio, as defined, of no greater than 2.003.50 to 1.00 based upon a trailing twelve-monthfour fiscal quarter period. At December 31, 2017, the Company’s funded debt to EBITDA2022, our net leverage ratio was 0.340.97 to 1.00.
Additionally, we must comply with a consolidated interest coverage ratio, defined as EBITDA to consolidated interest expense, of no less than 3.50 to 1.00 based upon a trailing four fiscal quarter end. We are compliant with the consolidated interest coverage ratio, which is not meaningful for the year ended December 31, 2022.TASER 60subscription and installment purchase arrangements typically involve amounts invoiced in five equal installments at the beginning of each year of the five-year term. This is in contrast to a traditional CEWCED sale in which
the entire amount being charged for the hardware is invoiced upon shipment. This impacts liquidity in a commensurate fashion, with the cash for the TASER 60 arrangementsubscription or installment purchase received in five annual installments rather than up front. It is our strategic intentOur strategy includes continuing 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 offeringscontinue to offer products and services in which we incur upfront cash costs to produce and fulfill hardware sales ahead of the cash inflows from our customers. We anticipate, and have prepared for, the majority of our arrangements in both reportable segments to be offered in similar subscription-type offerings over the coming years.
Based on our strong balance sheet and the fact that we had just $0.1 million in total long-term debt and capital lease obligations at December 31, 2017,2022 and successful convertible senior notes offering completed during 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. The CompanyWe and itsour Board of Directors may consider repurchases of our common stock. Further repurchases of our common stock would take place on the open market, would be financed with available cash and are subject to authorization as well as market and business conditions.
The following table outlines our future contractual financial obligations by period in which payment is expected, as of December 31, 20172022 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | Less than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | More than 5 Years |
| Non-cancelable operating leases | | $ | 7,655 |
| | $ | 2,313 |
| | $ | 3,129 |
| | $ | 2,170 |
| | $ | 43 |
|
| Capital leases including interest | | 116 |
| | 40 |
| | 76 |
| | — |
| | — |
|
| Open purchase orders | | 51,855 |
| | 51,855 |
| | — |
| | — |
| | — |
|
| Total contractual obligations | | $ | 59,626 |
| | $ | 54,208 |
| | $ | 3,205 |
| | $ | 2,170 |
| | $ | 43 |
|
Open
| | | | | | | | | |
| | | | | Short | | Long |
| | Total | | Term | | Term |
Operating lease obligations | | $ | 55,893 | | $ | 8,448 | | $ | 47,445 |
Purchase obligations | | | 915,102 | | | 544,341 | | | 370,761 |
Principal amount payable on our convertible senior notes | | | 690,000 | | | — | | | 690,000 |
Total contractual obligations | | $ | 1,660,995 | | $ | 552,789 | | $ | 1,108,206 |
Purchase obligations in the table above represent $499.7 million of open purchase orders in the above tableand $415.4 million of other purchase obligations. The open purchase orders represent both cancelable and non-cancelable purchase orders with key vendors, which are included in this table due to the Company’sour strategic relationships with these vendors.
For additional information regarding our convertible senior notes, refer to Note 12 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
We are subject to U.S. Federalfederal income tax as well as income taxes imposed by several statesstate and foreign jurisdictions. As of December 31, 2017,2022, we had $4.2$21.5 million of gross unrecognized tax benefits related to uncertain tax positions. The settlement period for ourthese long-term income tax liabilities cannot be determined; however, the liabilities are expected to increase by approximately $0.2$0.9 million within the next 12 months.
Off-Balance Sheet Arrangements
The discussion of off-balance sheet arrangements in Note 9 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K is incorporated by reference herein.
Critical Accounting Estimates
We have identified the following accounting estimates as critical to our business operations and the understanding of our results of operations. The preparation of this Annual Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. While we do not believe that a change in these estimates is reasonably likely, there can
be no assurance that our actual results will not differ from these estimates. The effect of these estimates on our business operations is discussed below.
ProductStandard Warranties
The Company warranties its CEWs,We warranty our CEDs, Axon cameras and certain related accessories from manufacturing defects on a limited basis for a period of one year after purchase and, thereafter, will replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold when revenue is recorded for the related product. Future warranty costs are estimated on a quarterly basis based on historical data related to warranty claims on a quarterly basis and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure or other issue that could result in larger than anticipated warranty claims from customers. The warranty reserve is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. As of December 31, 2017 and 2016, our warranty reserve was approximately $0.6 million and $0.8 million, respectively. Warranty expense (recoveries) for the years ended December 31, 2017, 2016 and 2015 was $0.1 million, $0.6 million and $(0.1) million, respectively. The decrease in warranty reserve and related expense as of and for the year ended ended December 31, 2017 was primarily driven by lower than initially expected warranty claims for the Axon Body 2 on-officer body camera. As of December 31, 2017, the Company's warranty reserve included initial reserves related to the new Axon Flex 2 on-officer camera and Axon Fleet in-car camera systems.
Revenue related to separately-priced extended warranties is initially recorded as deferred revenue at its contractual amount and subsequently recognized as net sales on a straight-line basis over the warranty service period. Costs related to extended warranties are charged to cost of product and service sales when incurred.
Inventory
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average cost of raw materials, which approximates the first-in, first-out (“FIFO”) method and includes allocations of manufacturing labor and overhead. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories, as well as trial and evaluation inventories to their net realizable value. These provisions are based on management’s best estimate after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions among other factors. Management evaluates inventory costs for abnormal costs due to excess production capacity and treats such costs as period costs.
During the year ended December 31, 2017, the Company recorded provisions to reduce inventories to their lower of cost and net realizable value of approximately $2.0 million compared to $1.2 million during 2016. The increase in provisions made during 2017 was primarily attributable to increased deployments of trial and evaluation equipment and was also attributable to the phasing out of certain previous generations of its CEWs, the legacy TASER X26, TASER M26 and TASER C2 models. The remaining increase in the provision for 2017 was driven by analyses looking at projected sales data for existing products and making corresponding adjustments to state inventories at their lower of cost and net realizable value.
Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable
The Company derives revenue from two primary sources: (1) the sale of physical products, including CEWs, Axon cameras, corresponding hardware extended warranties, and related accessories such as Axon docks, cartridges and batteries, among others, and (2) subscription to the Company's Evidence.com digital evidence management software as a service ("SaaS") (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, the Company also recognizes training, professional services and revenue related to other software and SaaS services. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, title has transferred, the price is fixed and collectability is reasonably assured. Contractual arrangements may contain explicit customer acceptance provisions, and under such arrangements, the Company defers recognition of revenue until formal customer acceptance is received. Extended warranty revenue, SaaS revenue and related data storage revenue are recognized ratably over the term of the contract commencing on a pre-determined date subsequent to the delivery of the hardware. Training and professional service revenues are generally recorded once the services are completed.
Revenue arrangements with multiple deliverables are divided into separate units and revenue is allocated using the relative selling price method based upon vendor-specific objective evidence ("VSOE") of selling price or third-party evidence of the selling prices if VSOE of selling prices does not exist. If neither VSOE nor third-party evidence exists, management uses its best estimate of selling price. The majority of the Company’s allocations of arrangement consideration under multiple element arrangements are performed utilizing prices charged to customers for deliverables when sold separately. The Company’s multiple element arrangements may include rights to future CEWs and/or Axon devices to be delivered at defined points within a multi-year contract, and in those arrangements, the Company allocates total arrangement consideration over the life of the multi-year contract to future deliverables using management’s best estimate of selling price. The Company has not utilized third-party evidence of selling price.
For the the years ended December 31, 2017, 2016 and 2015, the composition of revenue recognized from arrangements containing multiple elements and those not containing multiple elements was as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2017 |
| | TASER Weapons | | Software and Sensors | | Total |
| Arrangements with multiple elements | $ | 53,865 |
| | 23.0 | % | | $ | 102,529 |
| | 93.8 | % | | $ | 156,394 |
| | 45.5 | % |
| Arrangements without multiple elements | 180,647 |
| | 77.0 |
| | 6,757 |
| | 6.2 |
| | 187,404 |
| | 54.5 |
|
| Total | $ | 234,512 |
| | 100.0 | % | | $ | 109,286 |
| | 100.0 | % | | $ | 343,798 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2016 |
| | TASER Weapons | | Software and Sensors | | Total |
| Arrangements with multiple elements | $ | 34,558 |
| | 17.1 | % | | $ | 56,270 |
| | 85.8 | % | | $ | 90,828 |
| | 33.9 | % |
| Arrangements without multiple elements | 168,086 |
| | 82.9 |
| | 9,331 |
| | 14.2 |
| | 177,417 |
| | 66.1 |
|
| Total | $ | 202,644 |
| | 100.0 | % | | $ | 65,601 |
| | 100.0 | % | | $ | 268,245 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2015 |
| | TASER Weapons | | Software and Sensors | | Total |
| Arrangements with multiple elements | $ | 11,141 |
| | 6.9 | % | | $ | 26,489 |
| | 74.6 | % | | $ | 37,630 |
| | 19.0 | % |
| Arrangements without multiple elements | 151,234 |
| | 93.1 |
| | 9,028 |
| | 25.4 |
| | 160,262 |
| | 81.0 |
|
| Total | $ | 162,375 |
| | 100.0 | % | | $ | 35,517 |
| | 100.0 | % | | $ | 197,892 |
| | 100.0 | % |
The Company offers the opportunity to purchase extended warranties that include additional services and coverage beyond the standard limited warranty for certain products. Revenue for extended warranty purchases is deferred at the time of sale and recognized over the warranty period commencing on the date of sale. Extended warranties range from one to five years.
Evidence.com and Axon cameras and related accessories have stand-alone value to the customer and are sometimes sold separately, but in most instances are sold together. In these instances, customers typically purchase and pay for the equipment and one year of Evidence.com in advance. Additional years of service are generally billed annually over a specified service term, which has typically ranged from one to five years. Generally, the Company recognizes revenue for the Axon equipment at the time of the sale consistent with the discussion of multiple deliverable arrangements above. Revenue for Evidence.com is deferred at the time of the sale and recognized over the service period. At times, the Company discounts the price of Axon devices provided to customers to secure long-term Evidence.com service contracts. In such circumstances, revenue related to the Axon devices recognized at the time of delivery is limited to the amount allocated to the Axon device deliverable that the Company is contractually entitled to that is not contingent upon the delivery of future Evidence.com services. The Company recognizes the remaining allocated contingent revenue related to discounted Axon devices over the remaining period it provides the contracted Evidence.com services.
Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis.
Deferred revenue consists of payments received in advance related to products and services for which the criteria for revenue recognition have not yet been met. Deferred revenue that will be recognized during the subsequent twelve month period from the balance sheet date is recorded as current deferred revenue and the remaining portion is recorded as long-term. Generally, customers are billed in annual installments. See Note 7 for further disclosures about the Company’s deferred revenue.
The Company records reductions to net sales for expected future product returns based on the Company’s historical experience.
Sales are typically made on credit, and the Company generally does not require collateral. Management performs ongoing credit evaluations of its customers’ financial condition, and maintains an allowance for doubtful accounts. Uncollectible accounts are charged to expense when deemed uncollectible, and accounts and notes receivable are presented net of an allowance for doubtful accounts. This allowance represents management’s best estimate and application of judgment considering a number of factors, including third-party credit reports, actual payment history, cash discounts, customer-specific financial information and broader market and economic trends and conditions.
Valuation of Goodwill, Intangibles and Long-lived Assets
The Company does not amortize goodwill and intangible assets with indefinite useful lives. Such assets are required to be tested for impairment at least annually, or sooner whenever events or changes in circumstances indicate that the assets may be impaired. The Company performs its annual impairment assessment in the fourth quarter of each year. Finite-lived intangible assets and other long-lived assets are amortized over their estimated useful lives. Management evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and intangible assets may warrant revision or that the remaining balance of these assets, including intangible assets with indefinite lives, may not be recoverable.
Circumstances that might indicate long-lived assets might not be recoverable could include, but are not limited to, a change in the product mix, a change in the way products are created, produced or delivered, or a significant change in the way the Company's products are branded and marketed. When performing a review for recoverability, management estimates the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair value computed using discounted cash flows. During the year ended December 31, 2017, the Company abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $1.0 million. No impairment losses were recorded during the years ended December 31, 2016 and 2015.
Income Taxes
We recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carry forwards.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Management must also assess whether uncertain tax positions as filed could result in the recognition of a liability for possible interest and penalties if any. We have completed research and development tax credit studies which identified approximately $15.2 million in tax credits for federal, Arizona and California income tax purposes related to the 2003 through 2017 tax years, net of the federal benefit on the Arizona and California research and development tax credits. Management determined that it was more likely than not that the full benefit of the research and development tax credit would not be sustained on examination and accordingly, has established a liability for unrecognized tax benefits of $4.1 million as of December 31, 2017. In addition, we established a $0.1 million liability related to uncertain tax positions for certain state income tax liabilities, for a total unrecognized tax benefit at December 31, 2017 of $4.2 million. Management expects the amount of the unrecognized tax benefit liability to increase by approximately $0.2 million within the next 12 months. Should the unrecognized tax benefit of $4.2 million be recognized, the Company’s effective tax rate would be favorably impacted. Our estimates are based on the information available to us at the time we prepare the income tax provisions. Our income tax returns are subject to audit by federal, state, and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.
Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting or tax laws in the U.S. and overseas, or changes in other facts or circumstances. In addition, we recognize liabilities for potential U.S. tax contingencies based on our estimate of whether, and the extent to which, additional taxes may be due. If we determine that payment of these amounts is unnecessary, or if the recorded tax liability is greater than our current assessment, we may be required to recognize an income tax benefit, or additional income tax expense, respectively, in our consolidated financial statements.
In preparing our consolidated financial statements, management assesses the likelihood that our deferred tax assets will be realized from future taxable income. In evaluating our ability to recover our deferred income tax assets, management considers all available positive and negative evidence, including operating results, ongoing tax planning and forecasts of future taxable
income on a jurisdiction by jurisdiction basis. A valuation allowance is established if we determine that it is more likely than not that some portion or all of the net deferred tax assets will not be realized.
Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of December 31, 2017, the Company would need to generate approximately $56.0 million of pre-tax book income in order to realize the net deferred tax assets for which a benefit has been recorded. This estimate considers the reversal of approximately $14.6 million of gross deferred tax liabilities, $3.5 million tax-effected. We have state net operating losses ("NOLs") of $4.5 million, which produce deferred tax assets of $0.2 million, which expire at various dates between 2019 and 2036. We anticipate the Company’s future income to continue to trend upward from our 2017 results, with sufficient pre-tax book income to realize a large portion of our deferred tax assets. However, based on specific income projections in years in which certain tax assets are set to expire, and cumulative losses in certain foreign tax jurisdictions, a reserve of approximately $5.4 million has been recorded as a valuation allowance against deferred tax assets as of December 31, 2017.
Stock-Based Compensation
We have historically granted stock-based compensation to key employees and non-employee directors as a means of attracting and retaining highly qualified personnel. The Company recognizes expense related to stock-based payment transactions in which it receives employee services in exchange for equity instruments of the Company. Stock-based compensation expense for RSUs is measured based on the closing fair market value of the Company’s common stock on the date of grant. The Company recognizes stock-based compensation expense over the award’s requisite service period on a straight-line basis for time-based RSUs and on a graded basis for RSUs that are contingent on the achievement of performance conditions. The Company recognizes forfeitures as they occur as a reduction to stock-based compensation expense and to additional paid-in-capital.
The Company calculates the fair value of stock options using the Black-Scholes-Merton option pricing valuation model, which incorporates various assumptions including expected volatility, expected life, expected dividends and risk-free interest rates. No options were awarded during the years ended December 31, 2017, 2016 or 2015.
We have granted a total of approximately 2.0 million performance-based awards (options and restricted stock units) of which approximately 0.7 million are outstanding as of December 31, 2017, 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. These awards will vest and compensation expense will be recognized based on management’s best estimate of the probability of the performance criteria being satisfied using the most currently available projections of future product adoption and operating performance, adjusted at each balance sheet date. Changes in the subjective and probability-based assumptions can materially affect the estimate of the fair value of stock-based compensation and consequently, the related amount recognized in our statements of operations.
Contingencies and Accrued Litigation Expense
We are subject to the possibility of various loss contingencies arising in the ordinary course of business, including product-related litigation. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. Refer to Note 9 of our consolidated financial statements for further discussion.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We typically invest in a limited number of financial instruments, consisting principally of investments in money market accounts, certificates of deposit, corporate and municipal bonds with a typical long-term debt rating of “A” or better by any nationally recognized statistical rating organization, denominated in U.S. dollars. All of our cash equivalents and investments are treated as “held-to-maturity.” Investments in fixed-rate interest-earning instruments carry a degree of interest rate risk as their market value may be adversely impacted due to a rise in interest rates. As a result, we may suffer losses in principal if we sell securities that have declined in market value due to changes in interest rates. However, because we classify our debt securities as “held-to-maturity” based on our intent and ability to hold these instruments to maturity, no gains or losses are recognized due to changes in interest rates. These securities are reported at amortized cost. Based on investment positions as of December 31, 2017, a hypothetical 100 basis point increase across all maturities would result in a $16,000 incremental decline in the fair market value of the portfolio. Such losses would only be realized if the Company sold the investments prior to maturity.
Additionally, we have access to a $10.0 million line of credit borrowing facility which bears interest at varying rates, currently at LIBOR plus 1.25% or Prime less 0.50%. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit, which totaled $2.7 million at December 31, 2017. At December 31, 2017, there was no amount outstanding under the line of credit, and the available borrowing under the line of credit was $7.3 million. We have not borrowed any funds under the line of credit since its inception; however; should we need to do so in the future, such borrowings could be subject to adverse or favorable changes in the underlying interest rate.
Exchange Rate Risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, in each case compared to the U.S. Dollar, related to transactions by our foreign subsidiaries. The majority of our sales to international customers are transacted in U.S. dollars and therefore, are not subject to exchange rate fluctuations on these transactions. However, the cost of our products to our customers increases when the U.S. dollar strengthens against their local currency, and the Company may have more sales and expenses denominated in foreign currencies in future years which could increase its foreign exchange rate risk.
To date, we have not engaged in any currency hedging activities. However, the Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. However, the Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to the prohibitive economic cost of hedging particular exposures. As such, fluctuations in currency exchange rates could harm our business in the future.
Item 8. Financial Statements and Supplementary Data
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Index to Consolidated Financial Statements | | Page |
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| | |
AXON ENTERPRISE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) |
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 75,105 |
| | $ | 40,651 |
|
| Short-term investments | 6,862 |
| | 48,415 |
|
| Accounts and notes receivable, net of allowance of $754 and $443 as of December 31, 2017 and 2016, respectively | 56,064 |
| | 39,466 |
|
| Inventory | 45,465 |
| | 34,841 |
|
| Prepaid expenses and other current assets | 21,696 |
| | 13,858 |
|
| Total current assets | 205,192 |
| | 177,231 |
|
| Property and equipment, net | 31,172 |
| | 24,004 |
|
| Deferred income tax assets, net | 15,755 |
| | 19,515 |
|
| Intangible assets, net | 18,823 |
| | 15,218 |
|
| Goodwill | 14,927 |
| | 10,442 |
|
| Long-term investments | — |
| | 234 |
|
| Long-term accounts and notes receivable, net of current portion | 36,877 |
| | 17,602 |
|
| Other assets | 15,366 |
| | 13,917 |
|
| Total assets | $ | 338,112 |
| | $ | 278,163 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 8,592 |
| | $ | 10,736 |
|
| Accrued liabilities | 23,502 |
| | 18,248 |
|
| Current portion of deferred revenue | 70,401 |
| | 45,137 |
|
| Customer deposits | 3,673 |
| | 2,148 |
|
| Current portion of business acquisition contingent consideration | 1,693 |
| | 1,690 |
|
| Other current liabilities | 89 |
| | 80 |
|
| Total current liabilities | 107,950 |
| | 78,039 |
|
| Deferred revenue, net of current portion | 54,881 |
| | 40,054 |
|
| Liability for unrecognized tax benefits | 1,706 |
| | 1,896 |
|
| Long-term deferred compensation | 3,859 |
| | 3,362 |
|
| Business acquisition contingent consideration, net of current portion | 1,048 |
| | 1,635 |
|
| Other long-term liabilities | 1,224 |
| | 2,289 |
|
| Total liabilities | 170,668 |
| | 127,275 |
|
| Commitments and contingencies (Note 9) |
| |
|
| Stockholders’ equity: | | | |
| Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of December 31, 2017 and 2016 | — |
| | — |
|
| Common stock, $0.00001 par value; 200,000,000 shares authorized; 52,969,869 and 52,325,251 shares issued and outstanding as of December 31, 2017 and 2016, respectively | 1 |
| | 1 |
|
| Additional paid-in capital | 201,672 |
| | 187,656 |
|
| Treasury stock at cost, 20,220,227 shares as of December 31, 2017 and 2016 | (155,947 | ) | | (155,947 | ) |
| Retained earnings | 123,185 |
| | 118,275 |
|
| Accumulated other comprehensive income (loss) | (1,467 | ) | | 903 |
|
| Total stockholders’ equity | 167,444 |
| | 150,888 |
|
| Total liabilities and stockholders’ equity | $ | 338,112 |
| | $ | 278,163 |
|
The accompanying notes are an integral part of these consolidated financial statements.
AXON ENTERPRISE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net sales from products | $ | 285,859 |
| | $ | 238,573 |
| | $ | 185,230 |
|
| Net sales from services | 57,939 |
| | 29,672 |
| | 12,662 |
|
| Net sales | 343,798 |
| | 268,245 |
| | 197,892 |
|
| Cost of product sales | 117,997 |
| | 91,536 |
| | 65,022 |
|
| Cost of service sales | 18,713 |
| | 6,173 |
| | 4,223 |
|
| Cost of sales | 136,710 |
| | 97,709 |
| | 69,245 |
|
| Gross margin | 207,088 |
| | 170,536 |
| | 128,647 |
|
| Sales, general and administrative | 138,692 |
| | 108,076 |
| | 69,698 |
|
| Research and development | 55,373 |
| | 30,609 |
| | 23,614 |
|
| Total operating expenses | 194,065 |
| | 138,685 |
| | 93,312 |
|
| Income from operations | 13,023 |
| | 31,851 |
| | 35,335 |
|
| Interest and other income (expense), net | 2,738 |
| | (354 | ) | | 26 |
|
| Income before provision for income taxes | 15,761 |
| | 31,497 |
| | 35,361 |
|
| Provision for income taxes | 10,554 |
| | 14,200 |
| | 15,428 |
|
| Net income | $ | 5,207 |
| | $ | 17,297 |
| | $ | 19,933 |
|
| Net income per common and common equivalent shares: | | | | | |
| Basic | $ | 0.10 |
| | $ | 0.33 |
| | $ | 0.37 |
|
| Diluted | $ | 0.10 |
| | $ | 0.32 |
| | $ | 0.36 |
|
| Weighted average number of common and common equivalent shares outstanding: | | | | | |
| Basic | 52,726 |
| | 52,667 |
| | 53,548 |
|
| Diluted | 53,898 |
| | 53,536 |
| | 54,638 |
|
| | | | | | |
| | | | | | |
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
| Net income | $ | 5,207 |
| | $ | 17,297 |
| | $ | 19,933 |
|
| Foreign currency translation adjustments | (2,370 | ) | | 820 |
| | 19 |
|
| Comprehensive income | $ | 2,837 |
| | $ | 18,117 |
| | $ | 19,952 |
|
The accompanying notes are an integral part of these consolidated financial statements.
AXON ENTERPRISE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional
Paid-in
Capital | | Treasury Stock | | Accumulated
Other
Comprehensive
Income (Loss) | | Retained
Earnings | | Total
Stockholders’
Equity |
| | Shares | | Amount | | | Shares | | Amount | | | |
| Balance, December 31, 2014 | 53,000,867 |
| | $ | 1 |
| | $ | 162,641 |
| | 18,139,958 |
| | $ | (114,645 | ) | | $ | 64 |
| | $ | 81,045 |
| | $ | 129,106 |
|
| Stock options exercised and RSUs vested, net of withholdings | 983,525 |
| | — |
| | 1,303 |
| | — |
| | — |
| | — |
| | — |
| | 1,303 |
|
| Stock-based compensation | — |
| | — |
| | 7,263 |
| | — |
| | — |
| | — |
| | — |
| | 7,263 |
|
| Excess tax benefit from stock-based compensation | — |
| | — |
| | 6,936 |
| | — |
| | — |
| | — |
| | — |
| | 6,936 |
|
| Purchase of treasury stock | (292,200 | ) | | — |
| | — |
| | 292,200 |
| | (7,556 | ) | | — |
| | — |
| | (7,556 | ) |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 19,933 |
| | 19,933 |
|
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | 19 |
| | — |
| | 19 |
|
| Balance, December 31, 2015 | 53,692,192 |
| | 1 |
| | 178,143 |
| | 18,432,158 |
| | (122,201 | ) | | 83 |
| | 100,978 |
| | 157,004 |
|
| Stock options exercised and RSUs vested, net of withholdings | 421,128 |
| | — |
| | (1,294 | ) | | — |
| | — |
| | — |
| | — |
| | (1,294 | ) |
| Stock-based compensation | — |
| | — |
| | 9,369 |
| | — |
| | — |
| | — |
| | — |
| | 9,369 |
|
| Excess tax benefit from stock-based compensation | — |
| | — |
| | 1,438 |
| | — |
| | — |
| | — |
| | — |
| | 1,438 |
|
| Purchase of treasury stock | (1,788,069 | ) | | — |
| | — |
| | 1,788,069 |
| | (33,746 | ) | | — |
| | — |
| | (33,746 | ) |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17,297 |
| | 17,297 |
|
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | 820 |
| | — |
| | 820 |
|
| Balance, December 31, 2016 | 52,325,251 |
| | 1 |
| | 187,656 |
| | 20,220,227 |
| | (155,947 | ) | | 903 |
| | 118,275 |
| | 150,888 |
|
| Cumulative effect of applying a change in accounting principle | — |
| | — |
| | 475 |
| | — |
| | — |
| | — |
| | (297 | ) | | 178 |
|
| Stock options exercised and RSUs vested, net of withholdings | 644,618 |
| | — |
| | (2,069 | ) | | — |
| | — |
| | — |
| | — |
| | (2,069 | ) |
| Stock-based compensation | — |
| | — |
| | 15,610 |
| | — |
| | — |
| | — |
| | — |
| | 15,610 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,207 |
| | 5,207 |
|
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | (2,370 | ) | | — |
| | (2,370 | ) |
| Balance, December 31, 2017 | 52,969,869 |
| | $ | 1 |
| | $ | 201,672 |
| | 20,220,227 |
| | $ | (155,947 | ) | | $ | (1,467 | ) | | $ | 123,185 |
| | $ | 167,444 |
|
The accompanying notes are an integral part of these consolidated financial statements.
AXON ENTERPRISE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 5,207 |
| | $ | 17,297 |
| | $ | 19,933 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 8,041 |
| | 3,658 |
| | 3,291 |
|
| Loss on disposal and abandonment of intangible assets | 1,146 |
| | 21 |
| | 225 |
|
| Purchase accounting adjustments to goodwill | (23 | ) | | 520 |
| | — |
|
| (Gain) loss on disposal of property and equipment, net | (28 | ) | | 42 |
| | (19 | ) |
| Bond premium amortization | 657 |
| | 1,265 |
| | 1,650 |
|
| Stock-based compensation | 15,610 |
| | 9,369 |
| | 7,263 |
|
| Deferred income taxes | 2,830 |
| | (5,167 | ) | | 994 |
|
| Unrecognized tax benefits | (191 | ) | | 582 |
| | (156 | ) |
| Tax benefit from stock-based compensation | — |
| | (1,438 | ) | | (6,936 | ) |
| Change in assets and liabilities: | | | | | |
| Accounts and notes receivable | (35,305 | ) | | (28,438 | ) | | 3,017 |
|
| Inventory | (11,746 | ) | | (18,668 | ) | | 3,140 |
|
| Prepaid expenses and other assets | (9,007 | ) | | (13,928 | ) | | (7,352 | ) |
| Accounts payable, accrued and other liabilities | 39 |
| | 17,584 |
| | 5,868 |
|
| Deferred revenue | 39,735 |
| | 34,304 |
| | 15,289 |
|
| Customer deposits | 1,525 |
| | 922 |
| | 238 |
|
| Net cash provided by operating activities | 18,490 |
| | 17,925 |
| | 46,445 |
|
| | | | | | |
| Cash flows from investing activities: | | | | | |
| Purchases of investments | (19,950 | ) | | (56,086 | ) | | (62,464 | ) |
| Proceeds from call / maturity of investments | 61,080 |
| | 64,951 |
| | 44,105 |
|
| Purchases of property and equipment | (10,419 | ) | | (4,957 | ) | | (6,003 | ) |
| Proceeds from disposal of property and equipment | 24 |
| | 42 |
| | 40 |
|
| Purchases of intangible assets | (1,024 | ) | | (3,495 | ) | | (501 | ) |
| Business acquisitions, net of cash acquired | (10,629 | ) | | (3,500 | ) | | (11,186 | ) |
| Net cash provided by (used in) investing activities | 19,082 |
| | (3,045 | ) | | (36,009 | ) |
| | | | | | |
| Cash flows from financing activities: | | | | | |
| Repurchase of common stock | — |
| | (33,746 | ) | | (7,556 | ) |
| Proceeds from options exercised | 1,383 |
| | 478 |
| | 2,673 |
|
| Payroll tax payments for net-settled stock awards | (3,453 | ) | | (1,772 | ) | | (1,370 | ) |
| Payments on capital lease obligation | (34 | ) | | (32 | ) | | (80 | ) |
| Payments on notes payable | — |
| | (75 | ) | | — |
|
| Payment of contingent consideration for business acquisition | (1,750 | ) | | (952 | ) | | — |
|
| Excess tax benefit from stock-based compensation | — |
| | 1,438 |
| | 6,936 |
|
| Net cash (used in) provided by financing activities | (3,854 | ) | | (34,661 | ) | | 603 |
|
| | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | 736 |
| | 906 |
| | 120 |
|
| | | | | | |
| Net increase (decrease) in cash and cash equivalents | 34,454 |
| | (18,875 | ) | | 11,159 |
|
| Cash and cash equivalents, beginning of year | 40,651 |
| | 59,526 |
| | 48,367 |
|
| Cash and cash equivalents, end of year | $ | 75,105 |
| | $ | 40,651 |
| | $ | 59,526 |
|
The accompanying notes are an integral part of these consolidated financial statements.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Axon Enterprise, Inc. (“Axon” or the “Company”) is a developer and manufacturer of advanced conducted electrical weapons (“CEWs”) designed for use by law enforcement, military, corrections, private security personnel, and by private individuals for personal defense. In addition, the Company has developed full technology solutions for the capture, secure storage and management of video/audio evidence as well as other tactical capabilities for use in law enforcement. The Company sells its products worldwide through its direct sales force, distribution partners, online store and third-party resellers. The Company was incorporated in Arizona in September 1993, and reincorporated in Delaware in January 2001. The Company’s corporate headquarters and manufacturing facilities are located in Scottsdale, Arizona. The Company’s software development division is located in Seattle, Washington. Axon Public Safety BV, a wholly owned subsidiary of the Company, supports the Company's international sales and marketing efforts, and is located in Amsterdam, Netherlands. Axon Public Safety BV wholly owns two subsidiaries, Axon Public Safety U.K. LTD and Axon Public Safety AU, that serve as direct sales operations in the United Kingdom (“U.K.”) and Australia, respectively. The Company also sells to certain international markets through a wholly owned subsidiary, Axon Public Safety Germany SE. In 2015, the Company formed Axon Public Safety Canada, Inc., a wholly owned subsidiary, to facilitate transactions for its products and services with new and existing customers located in Canada.
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts, transactions, and profits have been eliminated.
Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions in these consolidated financial statements include:
product warranty reserves,
inventory valuation,
revenue recognition allocated in multiple-deliverable contracts or arrangements,
valuation of goodwill, intangible and long-lived assets,
recognition, measurement and valuation of current and deferred income taxes,
fair value of stock awards issued and the estimated vesting period for performance-based stock awards, and
recognition and measurement of contingencies and accrued litigation expense.
Actual results could differ materially from those estimates.
Cash, Cash Equivalents and Investments
Cash, cash equivalents and investments include cash, money market funds, certificates of deposit, state and municipal obligations and corporate bonds. The Company places its cash and cash equivalents with high quality financial institutions. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, do exceed federally insured limits.
Cash and cash equivalents include funds on hand and highly liquid investments purchased with initial maturity of three months or less. Short-term investments include securities with an expected maturity date within one year of the balance sheet date that do not meet the definition of a cash equivalent, and long-term investments are securities with an expected maturity date greater than one year. Based on management’s intent and ability, the Company’s investments are classified as held to maturity investments and are recorded at amortized cost. Held-to-maturity investments are reviewed quarterly for impairment to determine if other-than-temporary declines in the fair value have occurred for any individual investment that may affect the Company's intent and ability to hold the investment until recovery. Other-than-temporary declines in the value of held-to-maturity investments are recorded as expense in the period the determination is made.
Inventory
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average cost of raw materials, which approximates the first-in, first-out (“FIFO”) method and includes allocations of manufacturing labor and overhead. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories, as well as trial and evaluation
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
inventories to their net realizable value. These provisions are based on management’s best estimate after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions among other factors. Management evaluates inventory costs for abnormal costs due to excess production capacity and treats such costs as period costs.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Additions and improvements are capitalized, while ordinary maintenance and repair expenditures are charged to expense as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets.
Software Development Costs
The Company expenses software development costs, including costs to develop software products or the software component of products and services to be marketed to external users, before technological feasibility of such products is reached. The Company has determined that technological feasibility is reached shortly before the release of those products and as a result, the development costs incurred after the establishment of technological feasibility and before the release of those products are not material.
Software development costs also include costs to develop software programs to be used solely to meet the Company's internal needs and applications used to deliver its services. The Company capitalizes development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the intended function. Additionally, the Company capitalizes qualifying costs incurred for upgrades and enhancements to existing software that result in additional functionality. Costs related to preliminary project planning activities, post-implementation activities, maintenance and minor modifications are expensed as incurred. Internal-use software is amortized on a straight line basis over its estimated useful life.
Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Valuation of Goodwill, Intangible and Long-lived Assets
The Company does 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. The Company performs its annual impairment assessment in the fourth quarter of each year. Finite-lived intangible assets and other long-lived assets are amortized over their estimated useful lives. Management evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and intangible assets may warrant revision or that the remaining balance of these assets, including intangible assets with indefinite lives, may not be recoverable.
Circumstances that might indicate long-lived assets might not be recoverable could include, but are not limited to, a change in the product mix, a change in the way products are created, produced or delivered, or a significant change in the way the Company's products are branded and marketed. When performing a review for recoverability, management estimates the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair value computed using discounted cash flows. During the year ended December 31, 2017, the Company abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $1.0 million. The impairment charge was recorded within the Software and Sensors Segment. No impairment losses were recorded during the years ended December 31, 2016 and 2015.
Customer Deposits
The Company requires deposits in advance of shipment for certain customer sales orders. Additionally, customers may elect to make deposits with the Company related to contracts for the Company's products and services that were not executed as of the end of a reporting period. Customer deposits are recorded as a current liability in the accompanying consolidated balance sheets.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable
The Company derives revenue from two primary sources: (1) the sale of physical products, including CEWs, Axon cameras, corresponding hardware extended warranties, and related accessories such as Axon docks, cartridges and batteries, among others, and (2) subscription to the Company's Evidence.com digital evidence management software as a service ("SaaS") (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, the Company also recognizes training, professional services and revenue related to other software and SaaS services. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, title has transferred, the price is fixed and collectability is reasonably assured. Contractual arrangements may contain explicit customer acceptance provisions, and under such arrangements, the Company defers recognition of revenue until formal customer acceptance is received. Extended warranty revenue, SaaS revenue and related data storage revenue are recognized ratably over the term of the contract commencing on a pre-determined date subsequent to the delivery of the hardware. Training and professional service revenues are generally recorded once the services are completed.
Revenue arrangements with multiple deliverables are divided into separate units and revenue is allocated using the relative selling price method based upon vendor-specific objective evidence ("VSOE") of selling price or third-party evidence of the selling prices if VSOE of selling prices does not exist. If neither VSOE nor third-party evidence exists, management uses its best estimate of selling price. The majority of the Company’s allocations of arrangement consideration under multiple element arrangements are performed utilizing prices charged to customers for deliverables when sold separately. The Company’s multiple element arrangements may include rights to future CEWs and/or Axon devices to be delivered at defined points within a multi-year contract, and in those arrangements, the Company allocates total arrangement consideration over the life of the multi-year contract to future deliverables using management’s best estimate of selling price. The Company has not utilized third-party evidence of selling price.
The Company offers the opportunity to purchase extended warranties that include additional services and coverage beyond the standard limited warranty for certain products. Revenue for extended warranty purchases is deferred at the time of sale and recognized over the warranty period commencing on the date of sale. Extended warranties range from one to five years.
Evidence.com and Axon cameras and related accessories have stand-alone value to the customer and are sometimes sold separately, but in most instances are sold together. In these instances, customers typically purchase and pay for the equipment and one year of Evidence.com in advance. Additional years of service are generally billed annually over a specified service term, which has typically ranged from one to five years. Generally, the Company recognizes revenue for the Axon equipment at the time of the sale consistent with the discussion of multiple deliverable arrangements above. Revenue for Evidence.com is deferred at the time of the sale and recognized over the service period. At times, the Company discounts the price of Axon devices provided to customers to secure long-term Evidence.com service contracts. In such circumstances, revenue related to the Axon devices recognized at the time of delivery is limited to the amount allocated to the Axon device deliverable that the Company is contractually entitled to that is not contingent upon the delivery of future Evidence.com services. The Company recognizes the remaining allocated contingent revenue related to discounted Axon devices over the remaining period it provides the contracted Evidence.com services.
In 2012, the Company introduced a program, the TASER Assurance Program (“TAP”) whereby a customer purchasing a product and joining the program will have the right to trade-in the original product for a new product of the same or like model in the future. Upon joining TAP, customers also receive an extended warranty for the initial products purchased. Under this program the customer generally pays additional annual installments over the contract period, generally three to five years. The Company records consideration received related to the right to the future hardware product as deferred revenue until all revenue recognition criteria are met, which is generally when the new product is delivered. Consideration related to the right to the future hardware product is determined at the inception of the arrangement using management’s best estimate of selling price. Management’s estimate is principally based on the current selling price for such products, with evaluation of the impact of any expected product and pricing changes, which have historically had an immaterial influence on management’s best estimate of selling price.
In 2015, the Company introduced the Officer Safety Plan (“OSP”), whereby a customer typically enters into a five year Evidence.com subscription that includes all of its standard advanced features along with unlimited storage. The OSP also includes a service plan that includes upgrades of (i) the Axon devices every 2.5 years and (ii) a CEW at any point within the contract period. Upon entering into the OSP, customers also receive extended warranties on the Axon and CEW devices upon delivery to cover the contract periods. Under this program the customer generally makes an initial purchase of Axon cameras and related accessories, and CEWs at inception along with annual installments for services and future hardware deliverables over the contract period. The Company records consideration received related to the right to future hardware product as deferred revenue until all revenue recognition criteria are met, which is generally when the new product is delivered.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In 2016, the Company introduced the TASER 60 Plan ("TASER 60") whereby a customer typically enters into a five year CEW installment purchase arrangement. TASER 60 also includes extended warranties on the CEW devices upon delivery covering the contract periods as well as holsters, cartridges and on-site spares. Generally, the Company allocates revenue to the deliverables using the relative selling price method and recognizes revenue at the time of sale for the amount allocated to the CEW devices, net of imputed interest, and the amount allocated to the extended warranty is recognized over five years. The Company performs an initial credit evaluation prior to execution of TASER 60 arrangements and subsequently performs quarterly credit evaluations by monitoring public municipal bond ratings, as applicable, and any subsequent credit upgrades or downgrades, to monitor for each customer's credit risk. Additionally, the Company tracks payment activity for amounts currently due to assess the credit quality of its notes receivable portfolio. As the Company’s customers generally have investment-grade municipal bond ratings, the Company considers collectability of the contracted amounts in such installment purchase arrangements to be reasonably assured, unless other factors or payment history indicate otherwise. For customers where municipal bond information is not available, the Company considers factors such as payment history, customer-specific information and broader market and economic trends and conditions to determine whether collectability is reasonably assured. The Company considers this information when establishing its allowance for doubtful accounts. For the years ended December 31, 2017 and 2016, the Company recorded revenue of $40.7 million and $17.9 million, respectively, under the Company's TASER 60 Plan. No such amounts were recorded during the year ended December 31, 2015.
In 2017, the Company introduced new subscription programs that allow for agencies to purchase the Company's training and duty cartridges over a five-year term whereby the customer makes five equal annual installments at the beginning of each contract year. The Company offers two tiers under this program: the basic and unlimited plan. The Basic Cartridge Plan entitles customers to a fixed number of training and duty cartridges per year as well as a fixed number of battery replacements over the contractual term. For the Basic Cartridge Plan, the Company allocates the contractual consideration to all identified deliverables using the relative selling price method. Generally, the Company recognizes revenue for the amounts allocated to the cartridges and batteries when they are delivered to the customer. The Unlimited Cartridge Plan entitles customers to a fixed number of training cartridges per year and an unlimited amount of duty cartridges and replacement batteries. Due to the unlimited nature of the arrangement whereby the Company is obligated to deliver unlimited products at the customer’s request, the Company accounts for these arrangements as stand-ready obligations, and recognizes revenue ratably over the contract period. Cost of product sales is recognized as the products are delivered to the customer.
Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis.
Deferred revenue consists of payments received in advance related to products and services for which the criteria for revenue recognition have not yet been met. Deferred revenue that will be recognized during the subsequent twelve month period from the balance sheet date is recorded as current deferred revenue and the remaining portion is recorded as long-term. Generally, customers are billed in annual installments. See Note 7 for further disclosures about the Company’s deferred revenue.
The Company records reductions to net sales for expected future product returns based on the Company’s historical experience.
Sales are typically made on credit, and the Company generally does not require collateral. Management performs ongoing credit evaluations of its customers’ financial condition, and maintains an allowance for doubtful accounts. Uncollectible accounts are charged to expense when deemed uncollectible, and accounts and notes receivable are presented net of an allowance for doubtful accounts. This allowance represents management’s best estimate and application of judgment considering a number of factors, including third-party credit reports, actual payment history, cash discounts, customer-specific financial information and broader market and economic trends and conditions.
Cost of Product and Service Sales
Cost of product sales represents manufacturing costs, consisting of materials, labor and overhead related to finished goods and components. Shipping costs incurred related to product delivery are also included in cost of products sold. Cost of service sales includes third-party cloud services, and software maintenance and support costs, including personnel costs, associated with supporting Evidence.com and other software related services.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Advertising Costs
The Company expenses advertising costs in the period in which they are incurred. The Company incurred advertising costs of $0.5 million, $0.4 million and $0.6 million in the years ended December 31, 2017, 2016 and 2015, respectively. Advertising costs are included in sales, general and administrative expenses in the accompanying statements of operations.
Standard Warranties
The Company warranties its CEWs, Axon cameras and certain related accessories from manufacturing defects on a limited basis for a period of one year after purchase and, thereafter, will replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold when revenue is recorded for the related product. Future warranty costs are estimated based on historical data related to warranty claims on a quarterly basis and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure or other issue that could result in larger than anticipated warranty claims from customers. The warranty reserve is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. The warranty reserve is included in accrued liabilities on the accompanying consolidated balance sheets.
As of December 31, 2022 and 2021, our warranty reserve was approximately $0.8 million and $2.8 million, respectively. Warranty expense for the years ended December 31, 2022, 2021 and 2020 was $0.2 million, $2.9 million and $0.0 million, respectively. Warranty expense for the year ended December 31, 2022 was impacted by lower than expected warranty claims for the Axon on-officer body cameras and TASER 7 handles. Warranty expense for the year ended December 31, 2021, was impacted by higher battery degradation resulting in shorter battery lives for the Axon Body 3 on-officer body camera and warranty claims for TASER 7 handles. Warranty expense for the year ended December 31, 2020 was impacted by lower than expected warranty claims for the Axon Body 3 on-officer body camera.Revenue related to separately-priced extended warranties is initially recorded as deferred revenue at its allocated amount and subsequently recognized as net sales on a straight-line basis over the warranty service period. Costs related to extended warranties are charged to cost of product and service sales when incurred.
Inventory
Inventories are stated at the lower of cost, 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 approximate the cost basis for our inventories. Costs include allocations for materials, labor, and overhead. All variances between actual costs and standard costs are apportioned to inventory and cost of product sales based upon inventory turnover. Additional provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value. These provisions are based on management’s best estimate after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions among other factors. We evaluate inventory costs for abnormal costs due to excess production capacity and treat such costs as period costs.
During the year ended December 31, 2022, we recorded provisions to reduce inventories to their lower of cost and net realizable value of approximately $1.5 million compared to $0.9 million during the year ended December 31, 2021.
Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable and Contract Assets
We derive revenue from two primary sources: (1) the sale of physical products, including conducted energy devices ("CEDs"), Axon cameras, Axon Signal enabled devices, corresponding hardware extended warranties, and related accessories such as Axon docks, cartridges and batteries, among others, and (2) subscriptions to our Axon Evidence digital evidence management software-as-a-service ("SaaS") (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, we also recognize revenue from training, professional services and other software and SaaS services. We apply the five-step model outlined in Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts from Customers ("Topic 606"). For additional discussion of the adoption of Topic 606, see Note 2.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Topic 606. For contracts with multiple performance obligations, we allocate the contract transaction price to each performance obligation using our estimate of the standalone selling price ("SSP") of each distinct good or service in the contract.
Revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, each of which is generally distinct and accounted for as a separate performance obligation. Revenue is recognized net of allowances for returns.
Performance obligations to deliver products, including CEDs, cameras and related accessories such as cartridges, batteries and docks, are generally satisfied at the point in time we ship the product, as this is when the customer obtains control of the asset under our standard terms and conditions. In certain contracts with non-standard terms and conditions, these performance obligations may not be satisfied until formal customer acceptance occurs. Performance obligations to fulfill service-type extended warranties and provide our SaaS offerings, including Axon Evidence and other cloud services, are generally satisfied over time as the customer receives and consumes the benefits of these services over the stated service period.
Many of our products and services are sold on a standalone basis. We also bundle our hardware products and services together and sell them to our customers in single transactions, where the customer can make payments over a multi-year period. These sales may include payments for upfront hardware and services, as well as payments for hardware and services to be provided by us at a future date.
Additionally, we offer customers the ability to purchase CED cartridges and certain services on an unlimited basis over the contractual term. Due to the unlimited nature of these arrangements whereby we are obligated to deliver unlimited products at the customer’s request, we account for these arrangements as stand-ready obligations and recognize revenue ratably over the contract period. Cost of product sales is recognized when control of hardware products or accessories have transferred to the customer.
We have elected to recognize shipping costs as an expense in cost of product sales when the control of hardware products or accessories have transferred to the customer.
Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis.
The timing of revenue recognition may differ from the timing of invoicing to customers. We generally have an unconditional right to consideration when we invoice our customers and record a receivable. We record a contract asset when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing. Contract asset amounts that will be invoiced during the subsequent twelve month period from the balance sheet date are classified as current assets and the remaining portion is recorded within other assets on our consolidated balance sheets. Deferred revenue that will be recognized during the subsequent twelve month period from the balance sheet date is recorded as current deferred revenue and the remaining portion is recorded as long-term deferred revenue. Generally, customers are billed in annual installments. See Note 2 for further disclosures about our contract assets.
Sales are typically made on credit, and we generally do not require collateral. 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. We review receivables for U.S. and international customers separately to better reflect different published credit default rates and economic and market conditions. Additionally, specific reserve 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.
Valuation of Goodwill, Intangible 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.
Finite-lived intangible assets and other long-lived assets are amortized over their estimated useful lives. We do not amortize goodwill and intangible assets with indefinite useful lives; 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.
During the year ended December 31, 2022, we recorded $5.3 million of impairment charges. Of this total, $3.3 million related to the cease-use of a portion of our Seattle office. An additional $1.4 million related to the decision to slow pacing on construction of our new Scottsdale, Arizona campus. During the year ended December 31, 2021, we recorded an immaterial amount of impairment charges. During the year ended December 31, 2020, we abandoned certain planning and site development activities related to our planned new headquarters, resulting in an impairment charge of $0.7 million. Additionally, we recognized impairment charges totaling $0.5 million related to improvements and remodeling of certain of our offices. During the year ended December 31, 2022, these charges were included in sales, general and administrative expense, except for $2.7 million related to the Seattle office lease cease-use, which was recorded in R&D, in the accompanying consolidated statements of operations.
Income Taxes
We recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carry forwards.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. We must also assess whether uncertain tax positions as filed could result in the recognition of a liability for possible interest and penalties if any. We have completed research and development tax credit studies for each year a tax credit was claimed for federal and state income tax purposes. We determined that it was more likely than not that the full benefit of the research and development tax credit would not be sustained on examination and accordingly, have established a liability for unrecognized tax benefits of $21.5 million as of December 31, 2022. We expect the amount of the unrecognized tax benefit to increase by approximately $0.9 million within the next 12 months. Should the unrecognized tax benefit of $21.5 million be recognized, our effective tax rate would be favorably impacted. Our estimates are based on information available to us at the time we prepare the income tax provision. Our income tax returns are subject to audit by federal, state, and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.
Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax
assets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting or tax laws in the U.S. and internationally, or changes in other facts or circumstances. In addition, we recognize liabilities for potential tax contingencies based on our estimate of whether, and the extent to which, additional taxes may be due. If we determine that payment of these amounts is unnecessary, or if the actual tax liability is greater than our current assessment, we may be required to recognize an income tax benefit, or additional income tax expense, respectively, in our consolidated financial statements.
In preparing our consolidated financial statements, we assess the likelihood that our deferred tax assets will be realized from future taxable income. In evaluating our ability to recover our deferred income tax assets, we consider all available positive and negative evidence, including operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. A valuation allowance is established if we determine that it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business.
We have state net operating loss (“NOLs”) of $89.5 million, which expire at various dates between 2026 and 2041 or carryforward indefinitely. We anticipate sufficient future pre-tax book income to realize a large portion of our deferred tax assets. However, based on expected income for years in which Arizona R&D tax credits are set to expire, unrealized investment losses for which realization is uncertain, and specific identified intangibles with an indefinite life, a reserve of $26.4 million has been recorded as a valuation allowance against deferred tax assets as of December 31, 2022.
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 stock 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 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 and timing of the performance criteria being satisfied, adjusted at each balance sheet date. For both service-based and performance-based RSUs, we account for forfeitures as they occur as a reduction to stock-based compensation expense and additional paid-in-capital.
For performance-based options, stock-based compensation expense is recognized over the expected performance achievement period of individual performance goals when the achievement of each individual performance goal becomes probable. For performance-based awards with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized over the longer of the expected achievement period of the performance and market conditions, beginning at the point in time that the relevant performance condition is considered probable of achievement. The fair value of such awards is estimated on the grant date using Monte Carlo simulations. Refer to Note 16 of the notes to our consolidated financial statements within this Annual Report on Form 10-K.
We have granted a total of approximately 15.3 million performance-based awards (options and restricted stock units) of which approximately 3.8 million are outstanding as of December 31, 2022, 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. Of the 3.8 million performance-based awards that are outstanding, 1.4 million are options that are exercisable.
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 Company’ssubjective and probability-based assumptions can materially affect the estimates of the fair value of the awards and timing of recognition of stock-based compensation and consequently, the related amount recognized in our statements of operations and comprehensive income.
Contingencies and Accrued Litigation Expense
We are subject to the possibility of various loss contingencies arising in the ordinary course of business, including product-related and other litigation. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. Refer to Note 13 of our consolidated financial statements within this Annual Report on Form 10-K.
Reserve for Expected Credit Losses
We are exposed to credit losses primarily through sales of products and services. Our expected loss allowance methodology for accounts receivable, notes receivable, and contract assets is developed using historical collection experience, published or estimated credit default rates for entities that represent our customer base, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Our monitoring activities include account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible.
We review receivables for U.S. and international customers separately to better reflect different published credit default rates and economic and market conditions.
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.
Based on the balances of our financial instruments as of December 31, 2022, 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We typically invest in a limited number of financial instruments, consisting principally of investments in money market accounts, certificates of deposit, corporate and municipal bonds with a typical long-term debt rating of “A” or better by any nationally recognized statistical rating organization, denominated in U.S. dollars. All of our cash equivalents and investments are treated as “available-for-sale”. We report available-for-sale investments at fair value as of each balance sheet date and record 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 through 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 sell 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 the consolidated statements of operations. Based on investment positions as of December 31, 2022, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $3.4 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 $200.0 million line of credit borrowing facility which bears interest at SOFR 1.25 to 1.75% per year determined in accordance with a pricing grid based on our net leverage ratio and consolidated interest coverage ratio. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit, which totaled $7.0 million at December 31, 2022. At December 31, 2022, there was no amount outstanding under the line of credit, and the available borrowing under the line of credit was $193.0 million. We have not borrowed any funds under the line of credit since its inception; however; should we need to do so in the future, such borrowings could be subject to adverse or favorable changes in the underlying interest rate.
Exchange Rate Risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, in each case compared to the U.S. dollar, related to transactions by our foreign subsidiaries. The majority of our sales to international customers are transacted in foreign currencies and therefore are subject to exchange rate fluctuations on these transactions. The cost of our products to our customers increases when the U.S. dollar strengthens against their local currency, and we may have more sales and expenses denominated in foreign currencies in future years which could increase our foreign exchange rate risk. Additionally, intercompany sales to our non-U.S. dollar functional currency international subsidiaries are transacted in U.S. dollars which could increase our foreign exchange rate risk caused by foreign currency transaction gains and losses.
To date, we have not engaged in any currency hedging activities. However, we may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. However, we may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to the prohibitive economic cost of hedging particular exposures. As such, fluctuations in currency exchange rates could harm our business in the future.
Item 8. Financial Statements and Supplementary Data
AXON ENTERPRISE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | | | | |
| | December 31, | | December 31, |
| | 2022 | | 2021 |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 353,684 | | $ | 356,332 |
Marketable securities | | | 39,240 | | | 72,180 |
Short-term investments | | | 581,769 | | | 14,510 |
Accounts and notes receivable, net of allowance of $2,176 and $2,203 as of December 31, 2022 and December 31, 2021, respectively | | | 358,190 | | | 320,819 |
Contract assets, net | | | 196,902 | | | 180,421 |
Inventory | | | 202,471 | | | 108,688 |
Prepaid expenses and other current assets | | | 73,022 | | | 56,540 |
Total current assets | | | 1,805,278 | | | 1,109,490 |
Property and equipment, net | | | 169,843 | | | 138,457 |
Deferred tax assets, net | | | 156,866 | | | 127,193 |
Intangible assets, net | | | 12,158 | | | 15,470 |
Goodwill | | | 44,983 | | | 43,592 |
Long-term investments | | | 156,207 | | | 31,232 |
Long-term notes receivable, net | | | 5,210 | | | 11,256 |
Long-term contract assets, net | | | 45,170 | | | 29,753 |
Strategic investments | | | 296,563 | | | 83,520 |
Other long-term assets | | | 159,616 | | | 98,247 |
Total assets | | $ | 2,851,894 | | $ | 1,688,210 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | 59,918 | | $ | 32,220 |
Accrued liabilities | | | 155,934 | | | 103,707 |
Current portion of deferred revenue | | | 360,037 | | | 265,591 |
Customer deposits | | | 20,399 | | | 10,463 |
Other current liabilities | | | 6,358 | | | 6,540 |
Total current liabilities | | | 602,646 | | | 418,521 |
Deferred revenue, net of current portion | | | 248,003 | | | 185,721 |
Liability for unrecognized tax benefits | | | 10,745 | | | 3,797 |
Long-term deferred compensation | | | 6,285 | | | 5,679 |
Deferred tax liability, net | | | 1 | | | 811 |
Long-term lease liabilities | | | 37,143 | | | 20,440 |
Convertible notes, net | | | 673,967 | | | - |
Other long-term liabilities | | | 4,613 | | | 5,392 |
Total liabilities | | | 1,583,403 | | | 640,361 |
Commitments and contingencies (Note 13) | | | | | | |
Stockholders’ equity: | | | | | | |
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of December 31, 2022 and December 31, 2021, respectively | | | — | | | — |
Common stock, $0.00001 par value; 200,000,000 shares authorized; 71,474,581 and 70,896,856 shares issued and outstanding as of December 31, 2022 and December 31, 2021, respectively | | | 1 | | | 1 |
Additional paid-in capital | | | 1,174,594 | | | 1,095,229 |
Treasury stock at cost, 20,220,227 shares as of December 31, 2022 and December 31, 2021 | | | (155,947) | | | (155,947) |
Retained earnings | | | 257,022 | | | 109,883 |
Accumulated other comprehensive loss | | | (7,179) | | | (1,317) |
Total stockholders’ equity | | | 1,268,491 | | | 1,047,849 |
Total liabilities and stockholders’ equity | | $ | 2,851,894 | | $ | 1,688,210 |
The accompanying notes are an integral part of these consolidated financial statements.
AXON ENTERPRISE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
| | | | | | | | | |
| | For the Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Net sales from products | | $ | 801,388 | | $ | 608,525 | | $ | 500,250 |
Net sales from services | | | 388,547 | | | 254,856 | | | 180,753 |
Net sales | | | 1,189,935 | | | 863,381 | | | 681,003 |
Cost of product sales | | | 363,219 | | | 260,098 | | | 224,131 |
Cost of service sales | | | 98,078 | | | 62,373 | | | 40,541 |
Cost of sales | | | 461,297 | | | 322,471 | | | 264,672 |
Gross margin | | | 728,638 | | | 540,910 | | | 416,331 |
Sales, general and administrative | | | 401,575 | | | 515,007 | | | 307,286 |
Research and development | | | 233,810 | | | 194,026 | | | 123,195 |
Total operating expenses | | | 635,385 | | | 709,033 | | | 430,481 |
Income (loss) from operations | | | 93,253 | | | (168,123) | | | (14,150) |
Interest and other income, net | | | 103,265 | | | 26,748 | | | 7,859 |
Income (loss) before provision (benefit) for income taxes | | | 196,518 | | | (141,375) | | | (6,291) |
Provision (benefit) for income taxes | | | 49,379 | | | (81,357) | | | (4,567) |
Net income (loss) | | $ | 147,139 | | $ | (60,018) | | $ | (1,724) |
Net income (loss) per share: | | | | | | | | | |
Basic | | $ | 2.07 | | $ | (0.91) | | $ | (0.03) |
Diluted | | $ | 2.03 | | $ | (0.91) | | $ | (0.03) |
Weighted average shares outstanding: | | | | | | | | | |
Basic | | | 71,093 | | | 66,191 | | | 61,782 |
Diluted | | | 72,534 | | | 66,191 | | | 61,782 |
| | | | | | | | | |
Net income (loss) | | $ | 147,139 | | $ | (60,018) | | $ | (1,724) |
Foreign currency translation adjustments | | | (4,818) | | | (1,251) | | | 1,237 |
Unrealized losses on available-for-sale investments | | | (1,044) | | | (207) | | | — |
Comprehensive income (loss) | | $ | 141,277 | | $ | (61,476) | | $ | (487) |
The accompanying notes are an integral part of these consolidated financial statements.
AXON ENTERPRISE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | |
| | | | | | | Additional | | | | | | | | | | Other | | Total |
| | Common Stock | | Paid-in | | Treasury Stock | | Retained | | Comprehensive | | Stockholders’ |
| | Shares | | Amount | | Capital | | Shares | | Amount | | Earnings | | Income (Loss) | | Equity |
Balance, December 31, 2019 | | 59,497,759 | | $ | 1 | | $ | 528,272 | | 20,220,227 | | $ | (155,947) | | $ | 172,265 | | $ | (1,096) | | $ | 543,495 |
Cumulative effect of applying a change in accounting principle | | — | | | — | | | — | | — | | | — | | | (640) | | | — | | | (640) |
Issuance of common stock | | 3,450,000 | | | — | | | 306,779 | | — | | | — | | | — | | | — | | | 306,779 |
Issuance of common stock under employee plans, net of shares withheld for payroll taxes | | 748,183 | | | — | | | (7,514) | | — | | | — | | | — | | | — | | | (7,514) |
Stock-based compensation | | — | | | — | | | 133,572 | | — | | | — | | | — | | | — | | | 133,572 |
Issuance of common stock for business combination contingent consideration and related tax effects | | 70,613 | | | — | | | 1,050 | | — | | | — | | | — | | | — | | | 1,050 |
Net loss | | — | | | — | | | — | | — | | | — | | | (1,724) | | | — | | | (1,724) |
Other comprehensive income, net | | — | | | — | | | — | | — | | | — | | | — | | | 1,237 | | | 1,237 |
Balance, December 31, 2020 | | 63,766,555 | | $ | 1 | | $ | 962,159 | | 20,220,227 | | $ | (155,947) | | $ | 169,901 | | $ | 141 | | $ | 976,255 |
Issuance of common stock | | 577,956 | | | — | | | 105,514 | | — | | | — | | | — | | | — | | | 105,514 |
Issuance of common stock under employee plans, net of shares withheld for payroll taxes | | 2,624,446 | | | — | | | (331,309) | | — | | | — | | | — | | | — | | | (331,309) |
Stock options exercised | | 3,927,899 | | | — | | | 51,614 | | — | | | — | | | — | | | — | | | 51,614 |
Stock-based compensation | | — | | | — | | | 303,331 | | — | | | — | | | — | | | — | | | 303,331 |
Issuance of common stock for business combination contingent consideration | | — | | | — | | | 3,920 | | — | | | — | | | — | | | — | | | 3,920 |
Net loss | | — | | | — | | | — | | — | | | — | | | (60,018) | | | — | | | (60,018) |
Other comprehensive loss, net | | — | | | — | | | — | | — | | | — | | | — | | | (1,458) | | | (1,458) |
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 | | — | | | — | | | (74) | | — | | | — | | | — | | | — | | | (74) |
Issuance of common stock under employee plans, net of shares withheld for payroll taxes | | 566,780 | | | — | | | (4,870) | | — | | | — | | | — | | | — | | | (4,870) |
Stock-based compensation | | — | | | — | | | 106,176 | | — | | | — | | | — | | | — | | | 106,176 |
Issuance of common stock for business combination contingent consideration | | 10,945 | | | — | | | — | | — | | | — | | | — | | | — | | | — |
Tax benefit related to convertible note hedge | | — | | | — | | | 48,858 | | — | | | — | | | — | | | — | | | 48,858 |
Purchase of convertible note hedge | | — | | | — | | | (194,994) | | — | | | — | | | — | | | — | | | (194,994) |
Issuance of warrants | | — | | | — | | | 124,269 | | — | | | — | | | — | | | — | | | 124,269 |
Net income | | — | | | — | | | — | | — | | | — | | | 147,139 | | | — | | | 147,139 |
Other comprehensive loss, net | | — | | | — | | | — | | — | | | — | | | — | | | (5,862) | | | (5,862) |
Balance, December 31, 2022 | | 71,474,581 | | $ | 1 | | $ | 1,174,594 | | 20,220,227 | | $ | (155,947) | | $ | 257,022 | | $ | (7,179) | | $ | 1,268,491 |
The accompanying notes are an integral part of these consolidated financial statements.
AXON ENTERPRISE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | |
| | For the Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Cash flows from operating activities: | | | | | | | | | |
Net income (loss) | | $ | 147,139 | | $ | (60,018) | | $ | (1,724) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | |
Depreciation and amortization | | | 24,381 | | | 18,694 | | | 12,475 |
Amortization of issuance cost | | | 198 | | | — | | | — |
Coupon interest expense | | | 211 | | | — | | | — |
Purchase accounting adjustments to goodwill | | | 58 | | | — | | | — |
Loss on disposal and abandonment of intangible assets | | | 110 | | | 146 | | | 320 |
Loss on disposal and impairment of property, equipment, and other assets, net | | | 5,452 | | | 92 | | | 1,722 |
Realized and unrealized gains on strategic investments and marketable securities, net | | | (98,943) | | | (23,035) | | | — |
Stock-based compensation | | | 106,176 | | | 303,331 | | | 133,572 |
Deferred income taxes | | | 22,090 | | | (81,303) | | | (16,528) |
Unrecognized tax benefits | | | 3,475 | | | (706) | | | 671 |
Bond amortization | | | (1,463) | | | 5,217 | | | 3,345 |
Noncash lease expense | | | 6,725 | | | 5,573 | | | 4,104 |
Provision for expected credit losses | | | 699 | | | (214) | | | 1,302 |
Change in assets and liabilities: | | | | | | | | | |
Accounts and notes receivable and contract assets | | | (73,228) | | | (205,769) | | | (107,762) |
Inventory | | | (95,987) | | | (18,272) | | | (52,156) |
Prepaid expenses and other assets | | | (52,207) | | | (40,158) | | | (14,885) |
Accounts payable, accrued and other liabilities | | | 80,757 | | | 45,301 | | | 8,886 |
Deferred revenue | | | 159,718 | | | 175,615 | | | 65,139 |
Net cash provided by operating activities | | | 235,361 | | | 124,494 | | | 38,481 |
Cash flows from investing activities: | | | | | | | | | |
Purchases of investments | | | (764,374) | | | (362,479) | | | (656,522) |
Proceeds from call / maturity of investments | | | 72,138 | | | 718,617 | | | 379,839 |
Exercise of warrants of strategic investments | | | (6,555) | | | — | | | — |
Proceeds from sale of strategic investments | | | — | | | 14,546 | | | — |
Purchases of property and equipment | | | (55,802) | | | (49,886) | | | (72,629) |
Proceeds from disposal of property and equipment | | | 287 | | | 43 | | | 95 |
Purchases of intangible assets | | | (307) | | | (392) | | | (241) |
Strategic investments | | | (74,250) | | | (45,500) | | | (7,068) |
Business acquisition, net of cash acquired | | | (2,104) | | | (22,393) | | | — |
Net cash provided by (used in) investing activities | | | (830,967) | | | 252,556 | | | (356,526) |
Cash flows from financing activities: | | | | | | | | | |
Net proceeds from equity offering | | | (74) | | | 105,514 | | | 306,779 |
Proceeds from options exercised | | | — | | | 51,614 | | | 295 |
Income and payroll tax payments for net-settled stock awards | | | (4,870) | | | (331,309) | | | (7,809) |
Net proceeds from issuance of convertible senior notes | | | 673,769 | | | — | | | — |
Proceeds from issuance of warrants | | | 124,269 | | | — | | | — |
Purchase of convertible note hedge | | | (194,994) | | | — | | | — |
Net cash provided by (used in) financing activities | | | 598,100 | | | (174,181) | | | 299,265 |
Effect of exchange rate changes on cash and cash equivalents | | | (3,380) | | | (1,982) | | | 1,976 |
Net increase (decrease) in cash and cash equivalents | | | (886) | | | 200,887 | | | (16,804) |
Cash and cash equivalents and restricted cash, beginning of period | | | 356,438 | | | 155,551 | | | 172,355 |
Cash and cash equivalents and restricted cash, end of period | | $ | 355,552 | | $ | 356,438 | | $ | 155,551 |
The accompanying notes are an integral part of these consolidated financial statements.
Note 1 - Organization and Summary of Significant Accounting Policies
Axon Enterprise, Inc. (“Axon”, the “Company”, "we", or "us") is a market-leading provider of law enforcement technology solutions. Our mission is to protect life in service of promoting peace, justice and strong institutions.
The accompanying 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
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions in these consolidated financial statements include:
| ● | product warranty reserves, |
| ● | reserve for expected credit losses |
| ● | 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.
Cash, Cash Equivalents and Investments
Cash, cash equivalents and investments include cash, money market funds, certificates of deposit, commercial paper, corporate bonds, term deposits, U.S. Government bonds, municipal bonds, agency bonds, U.S. Treasury bills, and U.S. Treasury inflation-protected securities. We place our cash and cash equivalents with high quality financial institutions. Although we deposit our cash with multiple financial institutions, our deposits regularly exceed federally insured limits. Cash and cash equivalents include funds on hand and highly liquid investments purchased with initial maturity of three months or less. Short-term investments include securities with an expected maturity date within one year of the balance sheet date that do not meet the definition of a cash equivalent, and long-term investments are securities with an expected maturity date greater than one year and less than two years in accordance with our investment policy.
We report available-for-sale investments at fair value as of each balance sheet date and record 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 through the use of an allowance for expected 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 sell 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 the consolidated statements of operations. We do not intend to sell
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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases. There were no credit losses recorded on our investment portfolio during the years ended December 31, 2022 and 2021.
Restricted Cash
Restricted cash balances of $1.9 million and $0.1 million as of December 31, 2022 and 2021, respectively, primarily relate to funds held in an international bank account for a country in which we are required to maintain a minimum balance to operate. As of December 31, 2022, approximately $1.8 million was included in prepaid expenses and other assets on our condensed consolidated balance sheet, with the remainder in other long-term assets.
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 approximate the cost basis for our inventories. Costs include allocations for materials, labor, and overhead. All variances between actual costs and standard costs are apportioned to inventory and cost of product sales based upon inventory turnover. Additional provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value. These provisions are based on management’s best estimate after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions among other factors. We evaluate inventory costs for abnormal costs due to excess production capacity and treat such costs as period costs.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Additions and improvements are capitalized, while ordinary maintenance and repair expenditures are charged to expense as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Land is not depreciated.
Software Development Costs
We expense software development costs, including costs to develop software products or the software component of products and services to be marketed to external users, before technological feasibility of such products is reached. We have determined that technological feasibility is reached shortly before the release of those products and as a result, the development costs incurred after the establishment of technological feasibility and before the release of those products are not material.
Software development costs also include costs to develop software programs to be used solely to meet our internal needs and applications. We capitalize development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the intended function. Additionally, we capitalize qualifying costs incurred for upgrades and enhancements to existing software that result in additional functionality. Costs related to preliminary project planning activities, post-implementation activities, maintenance and minor modifications are expensed as incurred. Internal-use software development costs are amortized on a straight line basis over the estimated useful life of the software.
We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Valuation of Goodwill, Intangible 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.
Finite-lived intangible assets and other long-lived assets are amortized over their estimated useful lives. We do not amortize goodwill and intangible assets with indefinite useful lives; 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.
During the year ended December 31, 2022, we recorded $5.3 million of impairment charges. Of this total, $3.3 million related to the cease-use of a portion of our Seattle office. An additional $1.4 million related to the decision to slow pacing on construction of our new Scottsdale, Arizona campus. During the year ended December 31, 2021, we recorded an immaterial amount of impairment charges. During the year ended December 31, 2020, we abandoned certain planning and site development activities related to our planned new headquarters, resulting in an impairment charge of $0.7 million, as well as recognized impairment charges totaling $0.5 million related to improvements and remodeling of certain of our offices. During the year ended December 31, 2022, these charges were included in sales, general and administrative expense, except for $2.7 million related to the Seattle office lease cease-use, which was recorded in research and development (“R&D”), in the accompanying consolidated statements of operations.
Customer Deposits
We require deposits in advance of shipment for certain customer sales orders. Additionally, customers may elect to make deposits with us related to contracts for our products and services that were not executed as of the end of a reporting period. Customer deposits are included in other current liabilities in the accompanying consolidated balance sheets.
Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable and Contract Assets
We derive revenue from two primary sources: (1) the sale of physical products, including conducted energy devices ("CEDs"), Axon cameras, Axon Signal enabled devices, corresponding hardware extended warranties, and related accessories such as Axon docks, cartridges and batteries, among others, and (2) subscriptions to our Axon Evidence digital evidence management software-as-a-service ("SaaS") (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, we also recognize revenue from training, professional services and other software and SaaS services. We apply the five-step model outlined in Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts from Customers ("Topic 606"). For additional discussion of the adoption of Topic 606, see Note 2.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Topic 606. For contracts with multiple performance obligations, we allocate the contract transaction price to each performance obligation using our estimate of the standalone selling price ("SSP") of each distinct good or service in the contract.
Revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can
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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
include various combinations of products and services, each of which is generally distinct and accounted for as a separate performance obligation. Revenue is recognized net of allowances for returns.
Performance obligations to deliver products, including CEDs, cameras and related accessories such as cartridges, batteries and docks, are generally satisfied at the point in time we ship the product, as this is when the customer obtains control of the asset under our standard terms and conditions. In certain contracts with non-standard terms and conditions, these performance obligations may not be satisfied until formal customer acceptance occurs. Performance obligations to fulfill service-type extended warranties and provide our SaaS offerings, including Axon Evidence and other cloud services, are generally satisfied over time as the customer receives and consumes the benefits of these services over the stated service period.
Many of our products and services are sold on a standalone basis. We also bundle our hardware products and services together and sell them to our customers in single transactions, where the customer can make payments over a multi-year period. These sales may include payments for upfront hardware and services, as well as payments for hardware and services to be provided by us at a future date. Additionally, we offer customers the ability to purchase CED cartridges and certain services on an unlimited basis over the contractual term. Due to the unlimited nature of these arrangements whereby we are obligated to deliver unlimited products at the customer’s request, we account for these arrangements as stand-ready obligations, and recognize revenue ratably over the contract period. Cost of product sales is recognized when control of hardware products or accessories have transferred to the customer.
We have elected to recognize shipping costs as an expense in cost of product sales when the control of hardware products or accessories have transferred to the customer.
Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis.
The timing of revenue recognition may differ from the timing of invoicing to customers. We generally have an unconditional right to consideration when we invoice our customers and record a receivable. We record a contract asset when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing. Contract asset amounts that will be invoiced during the subsequent twelve month period from the balance sheet date are classified as current assets and the remaining portion is recorded within other assets on our consolidated balance sheets. Deferred revenue that will be recognized during the subsequent twelve month period from the balance sheet date is recorded as current deferred revenue and the remaining portion is recorded as long-term deferred revenue. Generally, customers are billed in annual installments. See Note 2 for further disclosures about our contract assets.
Sales are typically made on credit, and we generally do not require collateral. 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. We review receivables for U.S. and international customers separately to better reflect different published credit default rates and economic and market conditions. Additionally, specific reserve 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. Accounts and notes receivable and contract assets are presented net of a reserve for expected credit losses, which totaled $3.6 million and $3.3 million as of December 31, 2022 and 2021, respectively. This reserve represents management’s best estimate and application of judgment considering a number of factors, including those listed above. In the event that actual uncollectible amounts differ from our estimates, additional expense could be necessary.
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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Cost of Product and Service Sales
Cost of product sales represents manufacturing costs, consisting of materials, labor and overhead related to finished goods and components. Shipping costs incurred related to product delivery are also included in cost of products sold. Cost of service sales includes third-party cloud services, and software maintenance and support costs, including personnel costs, associated with supporting Evidence.com and other software related services.
Advertising Costs
We expense advertising costs in the period in which they are incurred. We incurred advertising costs of $2.3 million, $2.6 million and $1.3 million in the years ended December 31, 2022, 2021 and 2020, respectively. Advertising costs are included in sales, general and administrative expenses in the accompanying statements of operations.
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 replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold when revenue is recorded for the related product. Future warranty costs are estimated on a quarterly basis based on historical data related to warranty claims and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure or other issue that could result in larger than anticipated warranty claims from customers. The warranty reserve is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. The warranty reserve is included in accrued liabilities on the accompanying consolidated balance sheets.
Changes in our estimated warranty reserve were as follows (in thousands):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Balance, January 1 | $ | 780 |
| | $ | 314 |
| | $ | 675 |
|
| Utilization of reserve | (245 | ) | | (155 | ) | | (299 | ) |
| Warranty expense (recoveries) | 109 |
| | 621 |
| | (62 | ) |
| Balance, December 31 | $ | 644 |
| | $ | 780 |
| | $ | 314 |
|
| | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Balance, beginning of period | | $ | 2,822 | | $ | 769 | | $ | 1,476 |
Utilization of reserve | | | (2,209) | | | (873) | | | (700) |
Warranty expense | | | 198 | | | 2,926 | | | (7) |
Balance, end of period | | $ | 811 | | $ | 2,822 | | $ | 769 |
Research and Development Expenses
The Company expensesWe expense as incurred research and developmentR&D costs that do not meet the qualifications to be capitalized. The CompanyWe incurred research and developmentR&D expense of $55.4$233.8 million, $30.6$194.0 million and $23.6$123.2 million in 2017, 20162022, 2021 and 2015,2020, respectively.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards.carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in future years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced through the establishment of a valuation allowance if, based upon available evidence, it is determined that it is more likely than not that the deferred tax assets will not be realized.
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We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. ManagementWe also assessesassess whether uncertain tax positions, as filed, could result in the recognition of a liability for possible interest and penalties. The Company’sOur policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. Refer to Note 1014 for additional information regarding the change in unrecognized tax benefits.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2017 contains a provision which subjects a U.S. parent of a foreign subsidiary to current U.S. tax on its global intangible low-taxed income (“GILTI”). GILTI is eligible for a deduction which lowers the effective tax rate on GILTI to 10.5% for calendar years 2018 through 2025 and 13.125% after 2025. We report the tax impact of GILTI as a period cost when incurred. Accordingly, we do not provide deferred taxes for basis differences expected to reverse as GILTI.Concentration of Credit Risk and Major Customers / Suppliers
Financial instruments that potentially subject the Companyus to concentrations of credit risk consist of accounts and notes receivable, contract assets, and cash. Sales are typically made on credit and the Company generally does not require collateral. Management performs ongoing credit evaluations of its customers’ financial condition and maintainsHistorically, we have experienced an allowance for estimated losses. Uncollectible accounts are written off when deemed uncollectible, and accounts receivable are presented net of an allowance for doubtful accounts, which totaled $0.8 million and $0.4 million as of December 31, 2017 and 2016, respectively. Historically, the Company has experienced a lowimmaterial level of write-offs related to doubtfuluncollectible accounts.
The Company maintainsWe maintain the majority of itsour cash at fourthree depository institutions. As of December 31, 2017,2022, the aggregate balances in such accounts were $53.4$139.9 million. The Company’sOur balances with these three institutions regularly exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits for domestic deposits and various deposit insurance programs covering our deposits in Australia, Canada, Finland, France, Germany, Hong Kong, India, Italy, the Netherlands, Spain, the United Kingdom, Germany and Australia.Vietnam. To manage the related credit exposure, management continually monitors the creditworthiness of the financial institutions where the Company haswe have deposits.
The Company sells some of its products through a network of unaffiliated distributors. The Company also reserves the right to sell directly to the end user to secure the customer’s account. No customer represented more than 10% of total net sales for the years ended December 31, 2017, 20162022, 2021 or 2015.
2020. At December 31, 2017,2022, and 2021, no customer represented more than 10% of total accounts and notes receivable. As of December 31, 2016, the Company had a trade receivable from one unaffiliated customer comprising 14.5% of the aggregate balance of accounts and notes receivable balance.
The Companyand contract assets.We currently purchasespurchase both off the shelf and custom components, including, but not limited to, finished circuit boards, and injection-molded plastic components, small machined parts, custom cartridge components, electronic components, and off the shelf sub-assemblies from suppliers located in the U.S., Canada, China, Malaysia, Mexico, Republic of Korea, Taiwan, and Taiwan.Vietnam. We may source from other countries as well. Although the Companywe currently obtainsobtain many of these components from single source suppliers, the Company ownswe own the injection molded component tooling, most of the designs, and test fixtures used in their production.production for all custom components. As a result, management believes itwe believe we could obtain alternative suppliers in most cases without incurring significant production delays. The Company also purchases small, machined parts from a vendorcases. Although we have experienced supply chain disruptions relating to materials and port constraints, we have remained focused on closely managing our supply chain. We continue to bolster our strategic relationships in Taiwan, custom cartridge assemblies from a proprietary vendorour supply chain, identifying secondary/alternate sourcing, adjusting build plans accordingly, and building in the U.S., and electronic components from a varietylogistic modes in support of foreign and domestic distributors. Management believes that there are readily available alternative suppliers in most cases who could consistently meet the Company's needs for these components. The Company acquiresour increasing demand while working to minimize disruption to customers. We acquire most of itsour components on a purchase order basis and doesdo not currently have any significant long-term purchase contracts with most component suppliers.
Fair Value ofMeasurements and Financial Instruments
The Company usesWe use the fair value framework that prioritizes the inputs to valuation techniques for measuring financial assets and liabilities measured on a recurring basis and for non-financial assets and liabilities when these items are re-measured. Fair value is considered to be the exchange price in an orderly transaction between market participants, to sell an asset or transfer a liability at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The Company categorizesWe categorize each of itsour fair value measurements in
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. |
Level 1 – Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.
Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.
Level 3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect the Company's own assumptions about inputs that market participants would use in pricing an asset or liability.
The Company hasWe have cash equivalents and investments, which at December 31, 2017 and 2016,2022 were comprised of money market funds, state and municipal obligations,certificates of deposit, commercial paper, corporate bonds, term deposits, U.S. Government bonds, municipal bonds, agency bonds, U.S. Treasury bills, and certificatesU.S. Treasury inflation-protected securities. Cash equivalents and investments at December 31, 2021 were comprised of deposits. money market funds, corporate bonds, municipal bonds, and U.S. Government agency bonds. See additional disclosure regarding the fair value of the Company’sour cash equivalents and investments in Note 2.3. Included in the balance of other assets as of December 31, 20172022 and 20162021 was $3.8$4.3 million and $3.2$5.3 million, respectively, related to corporate-owned life insurance policies which are used
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
to fund the Company’sour deferred compensation plan. The Company determinesWe determine the fair value of itsour insurance contracts by obtaining the cash surrender value of the contracts from the issuer, a Level 2 valuation technique.
We have investments in marketable securities, for which changes in fair value are recorded in the 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 various unconsolidated affiliates as of December 31, 2022. The Company’sestimated fair value of the investments was determined based on Level 3 inputs. In determining the estimated fair value of our strategic investments in privately held companies, we utilize observable data available to us as discussed further in Note 8.
We have convertible senior notes, for which the fair value is determined based on the closing trading price per $1,000 of the Notes as of the last day of trading for the period. We consider the fair value of the Notes at December 31, 2022 to be a Level 2 measurement as they are not publicly traded. The fair value of the Notes is primarily affected by the trading price of our common stock and market interest rates.
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 consolidated balance sheet.
Segment and Geographic Information
The Company isOur operations are comprised of two reportable segments: the development, manufacture and sale of CEWs, accessoriesfully integrated hardware and cloud-based software solutions that enable law enforcement to capture, securely store, manage, share and analyze video and other relateddigital evidence (collectively, the "Software and Sensors" segment); and the manufacture and sale of conducted electrical devices ("CEDs"), batteries, accessories, extended warranties and other products and services (the “TASER Weapons” segment); and(collectively, the software and sensors business, focused on devices, wearables, applications, cloud and mobile products (the "Software and Sensors"“TASER” 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 the Company’sour Chief Executive Officer who is theour chief operating decision maker ("CODM") for the Company. The Company organizes. We organize and reviewsreview operations based on products and services, and currently there are no operating segments that are aggregated. The Company performsWe perform an annual analysis of itsour reportable segments.segments at least annually. Additional information related to the Company’sour business segments is summarized in Note 16.
20.For the years ended December 31, 2017, 2016 and 2015,a summary of net sales by geographic area, as well as the percentage relationshipsee Note 2. The majority of our sales to total net sales includedinternational customers are transacted in the accompanying statements of operations were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| United States | $ | 282,810 |
| | 82.3 | % | | $ | 218,757 |
| | 81.6 | % | | $ | 161,803 |
| | 81.8 | % |
| Other Countries | 60,988 |
| | 17.7 |
| | 49,488 |
| | 18.4 |
| | 36,089 |
| | 18.2 |
|
| Total | $ | 343,798 |
| | 100.0 | % | | $ | 268,245 |
| | 100.0 | % | | $ | 197,892 |
| | 100.0 | % |
Sales to customers outside of the U.S. are typically denominated in U.S. dollarsforeign currencies and are attributed to each country based on the shipping address of the distributor or customer. For the years ended December 31, 2017, 20162022, 2021 and 2015,2020, no individual country outside the U.S. represented more than 10% of net sales. Substantially all of the Company’sour assets are located in the U.S.
The Company recognizesWe recognize expense related to stock-based compensation transactions in which it receives employeewe receive services in exchange for equity instruments of the Company. Stock-based compensation expense for RSUsrestricted stock units ("RSUs") is measured based on the closing fair market value of the Company’sour common stock on the date of grant. The Company recognizesWe recognize stock-based compensation expense over the award’s requisite service period on a straight-line basis for time-based RSUs. For performance-based RSUs, andstock-based 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 performance-based options with a graded basis for RSUs that are contingentvesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized over the longer of the expected achievement period of the performance conditions. The Company recognizesand market conditions, beginning at the point in time that the relevant performance condition is considered probable of achievement. For both time-based and performance-based RSUs, we recognize forfeitures as they occur as a reduction to stock-based compensation expense and to additional paid-in-capital.
eXponential Stock Performance Plan
On February 12, 2019, our shareholders approved the 2019 Stock Incentive Plan (the “2019 Plan”), which was adopted by the Board of Directors to reserve a sufficient number of shares to facilitate our eXponential Stock Performance Plan (“XSPP”) and grants of eXponential Stock Units (“XSUs”) under the plan. The XSUs are grants of restricted stock units, each with a term of approximately nine years, that vest in 12 equal tranches. Each of the 12 tranches will vest upon certification by the Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA (CEO Performance Award) have been met for the previous four consecutive fiscal quarters. A total of less than 0.1 million XSUs were granted during the year ended December 31, 2022.
Stock-based compensation expense associated with XSU awards is recognized over the longest explicit, implicit or derived service period for each pair of market capitalization and operational goals, beginning at the point in time when the relevant operational goal is considered probable of being met. The market capitalization goal period and the valuation of each tranche are determined using a Monte Carlo simulation, which is also used as the basis for determining the expected achievement period of the market capitalization goal. The probability of meeting an operational goal and the expected achievement point in time for meeting a probable operational goal are based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis. Even though no tranches of the XSU awards vest unless a market capitalization and a matching operational goal are both achieved, stock-based compensation expense is recognized when an operational goal is considered probable of achievement regardless of whether a market capitalization goal is actually achieved.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Given the complexity of the awards, we utilized Monte Carlo simulations to simulate a range of possible future market capitalizations for the Company over the term of the awards at each of the respective grant dates. The Company calculatesaverage of all iterations of the simulation was used as the basis for the valuation and market capitalization goal derived service period for each tranche. Additionally, we applied an illiquidity discount of between 10.3% and 17.6% to the valuation of XSUs because the awards specify a post-vest holding period of 2.5 years for the acquired shares that vest. Certain of the XSU awards specify a post-vest holding period of the longer of 2.5 years or until the next tranche vests. The illiquidity discounts were estimated using the Finnerty model and reduced by the impact of expected payroll and income taxes due upon vesting of the awards, as the related proportion of shares are expected to be sold to satisfy such obligations. We measured the grant date fair value of stock options using the Black-Scholes-Merton option pricing valuation model, which incorporates various assumptions includingXSU awards with the following assumptions: risk-free interest rate of between 0.5% and 4.1%, expected term of between 5.2 and 8.0 years, expected volatility of between 46.4% and 55.8%, and dividend yield of 0.00%.
Stock Options
On May 24, 2018 (the “CEO Grant Date”), our stockholders approved the Board of Directors’ grant of 6,365,856 stock option awards to Patrick W. Smith, our CEO (the “CEO Performance Award”). The CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational goals (performance conditions) and market capitalization goals (market conditions), assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each vesting date. Stock-based compensation expense associated with the CEO Performance Award is recognized over the requisite service period, which is defined as the longer of the expected life, expected dividendsachievement period for each pair of market capitalization and risk-free interest rates. operational goals, beginning at the point in time when the relevant operational goal is considered probable of being met.
No options were awarded during the years ended December 31, 2017, 20162022, 2021, or 2015.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2020.Income (Loss) per Common Share
Basic income or loss per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the periods presented. Diluted income (loss) per share reflects the potential dilution that would occur iffrom outstanding stock options were exercised utilizingand unvested restricted stock units. The effects of outstanding stock options, unvested restricted stock units, our 2027 convertible senior notes (the “Notes” or “2027 Notes”), and warrants to acquire the treasurynumber of shares of our common stock method.(the “Warrants” or “2027 Warrants”) are excluded from the computation of diluted net income per share in periods in which the effect would be antidilutive. The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):
| | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Numerator for basic and diluted earnings per share: | | | | | | | | | |
Net income (loss) | | $ | 147,139 | | $ | (60,018) | | $ | (1,724) |
Denominator: | | | | | | | | | |
Weighted average shares outstanding-basic | | | 71,093 | | | 66,191 | | | 61,782 |
Dilutive effect of stock-based awards | | | 1,441 | | | — | | | — |
Diluted weighted average shares outstanding | | | 72,534 | | | 66,191 | | | 61,782 |
Net income (loss) per common share: | | | | | | | | | |
Basic | | $ | 2.07 | | $ | (0.91) | | $ | (0.03) |
Diluted | | $ | 2.03 | | $ | (0.91) | | $ | (0.03) |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Numerator for basic and diluted earnings per share: | | | | | |
| Net income | $ | 5,207 |
| | $ | 17,297 |
| | $ | 19,933 |
|
| Denominator: | | | | | |
| Weighted average shares outstanding—basic | 52,726 |
| | 52,667 |
| | 53,548 |
|
| Dilutive effect of stock-based awards | 1,172 |
| | 869 |
| | 1,090 |
|
| Diluted weighted average shares outstanding | 53,898 |
| | 53,536 |
| | 54,638 |
|
| Anti-dilutive stock-based awards excluded | 386 |
| | 443 |
| | 198 |
|
| Net income per common share: | | | | | |
| Basic | $ | 0.10 |
| | $ | 0.33 |
| | $ | 0.37 |
|
| Diluted | $ | 0.10 |
| | $ | 0.32 |
| | $ | 0.36 |
|
Potentially dilutive securities that are not included in the calculation of diluted net income per share because doing so would be antidilutive are as follows (in thousands):
| | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Stock-based awards | | | 3,264 | | | 7,690 | | | 12,150 |
2027 Notes | | | 3,017 | | | — | | | — |
2027 Warrants | | | 3,017 | | | — | | | — |
Total potentially dilutive securities | | | 9,298 | | | 7,690 | | | 12,150 |
For additional information regarding our convertible senior notes, refer to Note 12.
Recently Issued Accounting Guidance
Recently Adopted Accounting Pronouncements
In May 2014,August 2020, the Financial Accounting Standards Board (“FASB”) issued a new standard related to revenue recognition, Accounting Standards Update 2014-09,
Revenue from(“ASU”) 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts with Customers (“ASU 2014-09” or “Topic 606”). This authoritative guidance includes a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of promised goods or services to a customer in an amount that reflectsEntity’s Own Equity. Under ASU 2020-06, the considerationembedded conversion features are no longer separated from the entity expects to receive in exchangehost contract for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contractsconvertible instruments with customers. ASU 2014-09 also includes ASC 340-40 which codifies the guidance on other assets and deferred costs relating to contracts with customers. ASC 340-40 specifies the accounting for costs an entity incurs to obtain and fulfill a contract to provide goods and services to customers.The standard permits two methods of adoption: retrospectively to each prior reporting period presented (the “full retrospective method”), or retrospectively with the cumulative effect of initially applying Topic 606 recognized at the date of initial application (the “modified retrospective method”) effective January 1, 2018. The Company has adopted the standard using the modified retrospective method. Under this method, the Company could elect to apply the cumulative effect method to either all contracts as of the date of initial application or only to contractsconversion features that are not complete as of that date. The Company has adopted the standard effective January 1, 2018, and has elected to apply the modified retrospective method to contracts that were not complete as of the date of initial application.
The adoption of Topic 606 is expected to have a material effect on the Company's consolidated financial statements. In addition to the enhanced footnote disclosures related to revenue from contracts with customers, the areas most significantly impacted will be contracts with contingent hardware revenue, contracts containing termination for convenience provisions, contracts containing software licenses and post-contract customer support, and the treatment of incremental costs of obtaining contracts with customers. However, due to the terms and conditions in certain customer contracts, the actual revenue recognition treatment under the new standard will be dependent on contract-specific terms, and may vary in some instances from the general recognition discussed below.
Prior to applying Topic 606, for bundled arrangements containing Evidence.com services in which the Company has provided significantly discounted or free of charge hardware, the Company has limited the amount of revenue it recognizes for the hardware to the amount that it is entitled to and is not contingent on future performance. Revenue allocated to the hardware that is in excess of the invoiced amount of that hardware is recognized over the contractual term when recognition of that revenue is contingent upon the delivery of Evidence.com services. Under the new standard, the Company is generally required to recognize hardware revenue upon fulfillment of the distinct hardware performance obligation, which
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
is when control of the hardware transfers to the customer, rather than recognizing any contingent hardware revenue over the term of the Evidence.com services.
Prior to applying Topic 606, for long-term contracts containing termination for convenience provisions, the Company allocates revenue to all identified deliverables included in the contractual term assuming the termination provisions will not be exercised. Under the standard preceding Topic 606, revenue is recognized when it has been earned, which is generally when products have been delivered and services have been provided. For contracts under the new standard containing termination for convenience provisions, the contract term will be limited to the period in which the Company has enforceable rights or the period in which the customer has been granted a material right for goods or services in the future. These material rights create future performance obligations that will not be satisfied until a later date, thereby increasing the contract term. In instances in which the contract term is determined to be less than the term stated in the contract, the portion of transaction price that is subject to present enforceable rights and obligations and the related identified performance obligations shall be accounted for at contract inception. Any future transaction priceas derivatives under Derivatives and performance obligations outside the initial contract termHedging (Topic 815), or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as revenue when customers renew subsequent periods, whicha single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The guidance also requires the if-converted method to be applied for all convertible instruments. ASU 2020-06 is generally when the Company has the right to invoice the customereffective for the subsequent period. Revenue will then be recognized when the Company fulfills its performance obligations by transferring a promised good or service to a customer.
Prior to applying Topic 606, for salesfiscal years beginning after December 15, 2021, with early adoption permitted. Adoption of the
Company's software products containing software licenses and post-contract customer support ("PCS")standard requires using either a modified retrospective or a full retrospective approach. Effective January 1, 2022, we adopted ASU 2020-06. There was no impact upon adoption as we had no outstanding debt upon adoption.
In November 2021, FASB issued ASU No. 2021-10, Government Assistance (Topic 832). The guidance improves the transparency of government assistance accounting as it requires business entities to disclose transactions that have previously beeninvolve government assistance received if the transactions were accounted for under ASC 985-605, the entire arrangement fee was recognized ratably over the PCS term because the Company did not have sufficient VSOE required to allocate the fee to the separate elements. Under the new standard, and the Company will allocate the total transaction price based on the relative stand-alone selling price of each performance obligation and recognize the full amount of revenue attributable to the distinct software license predominately at the time control of the software licenseby applying a grant or contribution accounting model by analogy. The ASU is transferred to the customer, while the amount allocated to the PCS performance obligation will be recognized ratably over the support term.
Prior to applying ASC 340-40, the Company has an established policy within the Software and Sensors segment to defer certain commissions costs, which are direct and incremental costs of obtaining certain long-term customer contracts, and recognize the costs as expense over the contractual term as the goods and services are delivered to the customer. The new standard specifies that all incremental costs of obtaining customer contracts and direct costs of fulfilling contracts with customers should be deferred and recognized as expense when the related performance obligations are fulfilled, which may be at points in time or over the contract term. Under the new standard, the Company will defer all incremental costs of obtaining customer contracts and recognize them as the related performance obligations are fulfilledeffective for both the Software and Sensors and TASER Weapons segments. The Company generally expects that direct costs of fulfilling contracts with customers occur in the same period as the fulfillment of the related performance obligations and as a result, those fulfillment costs will continue to be recognized as incurred.
The cumulative impact of adopting the standardannual periods beginning after December 15, 2021. We adopted ASU 2021-10 on January 1, 2018 is expected2022 and will apply the disclosure requirement prospectively to result in an increase in stockholders' equity (retained earnings) of between $15.0 million and $25.0 million primarily related toall transactions within the applicationscope of the aforementioned impacts to contractsamendments that were not complete asare 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 of Topic 606. As of the dateapplication. Adoption of this report, we have finalized most of our accounting assessment of the new standard and we are nearly complete in determining the impacts of the disclosure requirements of the new standard. Additionally, the Company is in process of updating its internal control framework as it relates to the new standard. While the Company's quantification of the impact is ongoing and the actual opening balance sheet impact may differ from the estimated range above, the Company does expect to be in a position to begin reporting under the new standard beginning with the first quarter of 2018.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330). The amendments require that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted this guidance effective January 1, 2017 and it did not have a material impact on itsour consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous U.S. GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for the fiscal year beginning after December 15, 2018 (including interim periods within that year) using
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
a modified retrospective approach and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of this ASU on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification (Topic 718), Compensation – Stock Compensation. ASU 2016-09 impacts several aspects of the accounting for share-based payment transactions. The Company adopted this guidance effective January 1, 2017, which required the following changes to the presentation of the Company's financial statements:
Excess tax benefits or deficiencies for share-based payments are now recorded as a discrete item in the period shares vest or stock options are exercised as an adjustment to income tax expense or benefit rather than additional paid-in capital. This change was applied prospectively as of January 1, 2017. The Company did not have any excess tax benefits that were not previously recognized as of January 1, 2017.
As of January 1, 2017, the calculation of diluted weighted average shares outstanding was changed prospectively to no longer include excess tax benefits as assumed proceeds. This change resulted in recording an increased number of dilutive shares, but did not have a material impact on the Company's current year diluted earnings per share;
Cash flows related to excess tax benefits or deficiencies are included in the statement of cash flows as an operating activity rather than as a financing activity. The Company adopted this change prospectively.
Cash paid to taxing authorities when withholding shares from an employee's vesting or exercise of equity-based compensation awards for tax-withholding purposes is now considered a repurchase of the Company's equity instruments and is classified as cash used in financing activities. The Company already classifies these transactions as a financing activity, and as such, there was no impact upon adoption.
The Company has made the election to account for forfeitures when they occur rather than estimating forfeitures. The Company adopted this change on a modified retrospective basis, which resulted in an increase to additional paid-in capital and decrease to retained earnings of $0.5 million as of January 1, 2017. The decrease to retained earnings of $0.5 million was partially reduced by the income tax effect of the adjustment of $0.2 million.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The new guidance differs from existing U.S. GAAP in that previous standards generally delayed recognition of credit losses until the loss was probable. ASU 2016-13 eliminates the probable initial recognition threshold and, instead, reflect an entity’s current estimate of all expected credit losses. The use of forecasted information is intended to incorporate more timely information in the estimate of expected credit loss. ASU 2016-13 is effective for the fiscal year beginning after December 15, 2019, and interim periods within that fiscal year, and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-13 on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. ASU 2016-15 is effective for the fiscal year beginning after December 15, 2017, and interim periods within that fiscal year, and early adoption is permitted. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be prospectively applied as of the earliest date practicable. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires an entity to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This removes the exception allowing postponement of recognition until the asset has been sold to an outside party. ASU 2016-16 is effective for fiscal year beginning after December 15, 2017 using a modified retrospective approach, and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of this ASU on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows - Restricted Cash (Topic 230), which amends the existing guidance relating to the treatment of restricted cash and restricted cash equivalents on the statement of cash flows. ASU 2016-18 is effective for the fiscal years beginning after December 15, 2017, and interim periods within that fiscal year, and early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) to provide a more robust framework to use in determining when a set of acquired assets and activities is a business. ASU 2017-01 is effective for the fiscal year beginning after December 15, 2017, and interim periods within that year, and early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350), which simplifies the goodwill impairment test by eliminating Step 2 of the quantitative assessment and should reduce the cost and complexity of evaluating goodwill for impairment. Under the amended guidance, when a quantitative assessment is required, an entity will perform a goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge will be measured as the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of recorded goodwill. ASU 2017-04 is effective for the fiscal year beginning after December 15, 2019, and interim periods within that fiscal year, and early adoption is permitted. The Company's early adoption on January 1, 2017 did not have an impact on its consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718), which provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. ASU 2017-09 is effective for the fiscal year beginning after December 15, 2017 using a prospective approach, and early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its 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. Cash, Cash EquivalentsCorrection of an Immaterial Error
During the fourth quarter of 2022 we recorded out of period adjustments related to prior periods reflecting an $8.5 million increase to net sales and Investments
The following tables summarizea $2.1 million increase to provision for income taxes. This increase to net sales relates primarily to Axon Cloud SaaS, software and professional services performance obligations which were fulfilled in prior periods, including $2.3 million which related to prior years. Based on our quantitative and qualitative analysis, we do not consider the Company's cash, cash equivalents, and held-to-maturity investments atout of period impact to be material to our financial position or results of operations for any prior periods or for the year ended December 31, 2017 and December 31, 2016 (in thousands):2022.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 |
| | Amortized Cost | | Gross Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Short-Term Investments | | Long-Term Investments |
| Cash | $ | 53,459 |
| | $ | — |
| | $ | 53,459 |
| | $ | 53,459 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | |
| Level 1: | | | | | | | | | | | |
| Money market funds | 20,884 |
| | — |
| | 20,884 |
| | 20,884 |
| | — |
| | — |
|
| Corporate bonds | 6,632 |
| | (6 | ) | | 6,626 |
| | — |
| | 6,632 |
| | — |
|
| Subtotal | 27,516 |
| | (6 | ) | | 27,510 |
| | 20,884 |
| | 6,632 |
| | — |
|
| | | | | | | | | | | | |
| Level 2: | | | | | | | | | | | |
| State and municipal obligations | 992 |
| | — |
| | 992 |
| | 762 |
| | 230 |
| | — |
|
| Total | $ | 81,967 |
| | $ | (6 | ) | | $ | 81,961 |
| | $ | 75,105 |
| | $ | 6,862 |
| | $ | — |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 2 - Revenues
Nature of Products and Services
The following table presents our revenues by primary product and service offering (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| | | | | Software and | | | | | | | | Software and | | | |
| | TASER | | Sensors | | Total | | TASER | | Sensors | | Total |
TASER 7 | | $ | 224,905 | | $ | — | | $ | 224,905 | | $ | 135,906 | | $ | — | | $ | 135,906 |
TASER X26P | | | 33,725 | | | — | | | 33,725 | | | 40,629 | | | — | | | 40,629 |
TASER X2 | | | 24,068 | | | — | | | 24,068 | | | 58,081 | | | — | | | 58,081 |
TASER Consumer devices | | | 6,420 | | | — | | | 6,420 | | | 7,132 | | | — | | | 7,132 |
Cartridges | | | 181,686 | | | — | | | 181,686 | | | 152,842 | | | — | | | 152,842 |
Axon Body | | | — | | | 124,164 | | | 124,164 | | | — | | | 75,484 | | | 75,484 |
Axon Flex | | | — | | | 3,031 | | | 3,031 | | | — | | | 4,155 | | | 4,155 |
Axon Fleet | | | — | | | 63,017 | | | 63,017 | | | — | | | 24,319 | | | 24,319 |
Axon Dock | | | — | | | 30,086 | | | 30,086 | | | — | | | 24,441 | | | 24,441 |
Axon Evidence and cloud services | | | 18,752 | | | 371,889 | | | 390,641 | | | 9,159 | | | 246,005 | | | 255,164 |
Extended warranties | | | 29,008 | | | 49,765 | | | 78,773 | | | 24,125 | | | 33,686 | | | 57,811 |
Other | | | 13,002 | | | 16,417 | | | 29,419 | | | 9,053 | | | 18,364 | | | 27,417 |
Total | | $ | 531,566 | | $ | 658,369 | | $ | 1,189,935 | | $ | 436,927 | | $ | 426,454 | | $ | 863,381 |
| | | | | | | | | |
| | Year Ended December 31, 2020 |
| | | | | Software and | | | |
| | TASER | | Sensors | | Total |
TASER 7 | | $ | 107,506 | | $ | — | | $ | 107,506 |
TASER X26P | | | 41,724 | | | — | | | 41,724 |
TASER X2 | | | 60,107 | | | — | | | 60,107 |
TASER Consumer devices | | | 9,407 | | | — | | | 9,407 |
Cartridges | | | 115,193 | | | — | | | 115,193 |
Axon Body | | | — | | | 57,150 | | | 57,150 |
Axon Flex | | | — | | | 4,082 | | | 4,082 |
Axon Fleet | | | — | | | 20,108 | | | 20,108 |
Axon Dock | | | — | | | 19,723 | | | 19,723 |
Axon Evidence and cloud services | | | 2,935 | | | 176,797 | | | 179,732 |
Extended warranties | | | 20,754 | | | 24,408 | | | 45,162 |
Other | | | 8,926 | | | 12,183 | | | 21,109 |
Total | | $ | 366,552 | | $ | 314,451 | | $ | 681,003 |
The following table presents our revenues disaggregated by geography (in thousands):
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2022 | | 2021 | | 2020 | |
United States | | $ | 987,975 | | 83 | % | $ | 686,914 | | 80 | % | $ | 535,079 | | 79 | % |
Other Countries | | | 201,960 | | 17 | | | 176,467 | | 20 | | | 145,924 | | 21 | |
Total | | $ | 1,189,935 | | 100 | % | $ | 863,381 | | 100 | % | $ | 681,003 | | 100 | % |
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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2016 |
| | Amortized Cost | | Gross Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Short-Term Investments | | Long-Term Investments |
| Cash | $ | 32,802 |
| | $ | — |
| | $ | 32,802 |
| | $ | 32,802 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | |
| Level 1: | | | | | | | | | | | |
| Money market funds | 7,849 |
| | — |
| | 7,849 |
| | 7,849 |
| | — |
| | — |
|
| Corporate bonds | 33,379 |
| | (57 | ) | | 33,322 |
| | — |
| | 33,379 |
| | — |
|
| Subtotal | 41,228 |
| | (57 | ) | | 41,171 |
| | 7,849 |
| | 33,379 |
| | — |
|
| | | | | | | | | | | | |
| Level 2: | | | | | | | | | | | |
| State and municipal obligations | 14,477 |
| | (10 | ) | | 14,467 |
| | — |
| | 14,243 |
| | 234 |
|
| Certificates of deposit | 793 |
| | — |
| | 793 |
| | — |
| | 793 |
| | — |
|
| Subtotal | 15,270 |
| | (10 | ) | | 15,260 |
| | — |
| | 15,036 |
| | 234 |
|
| Total | $ | 89,300 |
| | $ | (67 | ) | | $ | 89,233 |
| | $ | 40,651 |
| | $ | 48,415 |
| | $ | 234 |
|
Contract Balances
The Company believestiming of revenue recognition may differ from the unrealized lossestiming of invoicing to customers. We generally have an unconditional right to consideration when we invoice our customers and record a receivable. We record a contract asset when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing.
Contract assets generally result from our subscription programs where we satisfy a hardware performance obligation upon shipment to the customer, and the right to the portion of the transaction price allocated to that hardware performance obligation is conditional on our future performance of a SaaS service obligation under the Company’s investments are duecontract. We recognize a portion of the amount allocated to interest rate fluctuations. As these investments are short-term in nature, arehardware products shipped to the customer as accounts receivable when invoiced to the customer, and record the remaining allocated value as a contract asset as we have generally fulfilled our hardware performance obligation upon shipment. Unbilled accounts receivable expected to be redeemedinvoiced and collected within twelve months was $8.9 million as of December 31, 2022, and was included in accounts and notes receivable, net on our consolidated balance sheet.
Contract liabilities generally consist of deferred revenue on our subscription programs where we generally invoice customers at par value,the beginning of each annual contract period and becauserecord a receivable at the Company hastime of invoicing when there is an unconditional right to consideration.
Deferred revenue is comprised mainly of unearned revenue related to our Axon Evidence SaaS platform, secure cloud-based storage, service-type extended warranties, stand-ready obligations in our cartridge programs, and rights to future CED, camera and related accessories hardware in our subscription programs. Revenue for Axon Evidence and cloud-based storage, our service-type extended warranties and stand-ready cartridge programs is generally recognized on a straight-line basis over the abilitysubscription term. Revenue for the rights to future hardware is generally recognized at the point in time the hardware products are shipped to the customer.
Payment terms and intentconditions vary by contract type and geography, but our standard terms are that payments are due within 30 days from the date of invoice.
The following table presents our contract assets, contract liabilities and certain information related to hold these investmentsbalances as of and for the year ended December 31, 2022 (in thousands):
| | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Contract assets, net | | $ | 242,072 | | $ | 210,174 | | $ | 84,044 |
Contract liabilities (deferred revenue) | | | 608,040 | | | 451,312 | | | 275,181 |
Revenue recognized in the period from: | | | | | | | | | |
Amounts included in contract liabilities at the beginning of the period | | | 261,271 | | | 177,812 | | | 135,513 |
During the year ended December 31, 2022, our contract assets balance increased by $31.9 million or 15.2% due to maturity,increased sales under subscription plans. Contract liabilities increased $156.7 million or 34.7% for the Company does not consider these investmentsyear ended December 31, 2022 due to increased subscription invoicing for Software and Sensors hardware and services in advance of fulfilling performance obligations to customers.
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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Contract liabilities (deferred revenue) consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| | Current | | Long-Term | | Total | | Current | | Long-Term | | Total |
Warranty: | | | | | | | | | | | | | | | | | | |
TASER | | $ | 14,207 | | $ | 17,618 | | $ | 31,825 | | $ | 21,257 | | $ | 4,766 | | $ | 26,023 |
Software and Sensors | | | 26,229 | | | 15,338 | | | 41,567 | | | 23,175 | | | 18,137 | | | 41,312 |
| | | 40,436 | | | 32,956 | | | 73,392 | | | 44,432 | | | 22,903 | | | 67,335 |
Hardware: | | | | | | | | | | | | | | | | | | |
TASER | | | 49,361 | | | 12,640 | | | 62,001 | | | 12,944 | | | 28,727 | | | 41,671 |
Software and Sensors | | | 50,426 | | | 109,227 | | | 159,653 | | | 34,862 | | | 81,223 | | | 116,085 |
| | | 99,787 | | | 121,867 | | | 221,654 | | | 47,806 | | | 109,950 | | | 157,756 |
Services: | | | | | | | | | | | | | | | | | | |
TASER | | | 7,637 | | | 9,501 | | | 17,138 | | | 2,701 | | | 3,482 | | | 6,183 |
Software and Sensors | | | 212,177 | | | 83,679 | | | 295,856 | | | 170,652 | | | 49,386 | | | 220,038 |
| | | 219,814 | | | 93,180 | | | 312,994 | | | 173,353 | | | 52,868 | | | 226,221 |
Total | | $ | 360,037 | | $ | 248,003 | | $ | 608,040 | | $ | 265,591 | | $ | 185,721 | | $ | 451,312 |
| | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| | Current | | Long-Term | | Total | | Current | | Long-Term | | Total |
TASER | | $ | 71,205 | | $ | 39,759 | | $ | 110,964 | | $ | 36,902 | | $ | 36,975 | | $ | 73,877 |
Software and Sensors | | | 288,832 | | | 208,244 | | | 497,076 | | | 228,689 | | | 148,746 | | | 377,435 |
Total | | $ | 360,037 | | $ | 248,003 | | $ | 608,040 | | $ | 265,591 | | $ | 185,721 | | $ | 451,312 |
Remaining Performance Obligations
As of December 31, 2022, we had approximately $4.6 billion of remaining performance obligations, which included both recognized contract liabilities as well as amounts that will be invoiced and recognized in future periods. The remaining performance obligations are limited only to arrangements that meet the definition of a contract under Topic 606 as of December 31, 2022. We expect to recognize between approximately 15% - 25% of this balance over the next twelve months, and expect the remainder to be recognized over the following ten years, subject to risks related to delayed deployments, budget appropriation or other contract cancellation clauses.
Costs to Obtain a Contract
We recognize an asset for the incremental costs of obtaining a contract with a customer, which consist primarily of sales commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contract and amortized consistent with the recognition timing of the revenue for the underlying performance obligations.
For contract costs related to performance obligations with an amortization period of one year or less, we apply the practical expedient to expense these sales commissions when incurred. These costs are recognized as incurred within sales, general and administrative expenses on the accompanying consolidated statements of operations and comprehensive income.
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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2022, our assets for costs to obtain contracts were as follows (in thousands):
| | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Current deferred commissions (1) | | $ | 29,405 | | $ | 19,962 |
Deferred commissions, net of current portion (2) | | | 93,213 | | | 54,028 |
| | $ | 122,618 | | $ | 73,990 |
| (1) | Current deferred commissions are included within prepaid expenses and other current assets on the accompanying consolidated balance sheet. |
| (2) | Deferred commissions, net of current portion, are included in other assets on the accompanying consolidated balance sheet. |
During the years ended December 31, 2022, 2021 and 2020, we recognized $24.2 million, $16.6 million, and $11.3 million, respectively, of amortization related to deferred commissions. These costs are recorded within sales, general and administrative expenses on the accompanying consolidated statements of operations and comprehensive income (loss).
Significant Judgments
Our contracts with certain municipal government customers may be subject to budget appropriation, other contract cancellation clauses or future periods which are optional. In contracts where the customer’s performance is subject to budget appropriation clauses, we generally consider the likelihood of non-appropriation to be remote when determining the contract term and transaction price. Contracts with other cancellation provisions or optional periods may require judgment in determining the contract term, including the existence of material rights, determining transaction price and identifying the performance obligations.
At times, customers may request changes that either amend, replace or cancel existing contracts. Judgment is required to determine whether the specific facts and circumstances within the contracts require the changes to be accounted for as a separate contract or as a modification. Generally, contract modifications containing additional goods and services that are determined to be distinct and sold at their SSP are accounted for as a separate contract. For contract modifications where both criteria are not met, the original contract is updated and the required adjustments to revenue and contract assets, liabilities, and other accounts are made accordingly.
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately rather than temporarily impairedtogether may require significant judgment. We consider CED devices and related accessories, as well as cameras and related accessories, to be separately identifiable from each other as well as from extended warranties on these products and the SaaS subscriptions to Axon Evidence and other cloud services.
In contracts where there are timing differences between when we transfer a promised good or service to the customer and when the customer pays for that good or service, we have determined that, with the exception of our TASER 60 installment purchase arrangements, our contracts generally do not include a significant financing component. For the years ended December 31, 2022, 2021, and 2020, we recorded interest income of $0.6 million, $1.0 million, and $1.5 million, respectively.
Judgment is required to determine the SSP for each distinct performance obligation. We analyze separate sales of our products and services as a basis for estimating the SSP of our products and services and then use that SSP as the basis for allocating the transaction price when our products and services are sold together in a contract with multiple performance obligations. In instances where the SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions, time value of money and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of
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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
those products and services by customers and circumstances. In these instances, we may use information such as geographic region and distribution channel in determining the SSP.
Note 3 - Cash, Cash Equivalents and Investments
The following table summarizes our cash, cash equivalents, marketable securities, and available-for-sale investments at December 31, 2017.2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2022 |
| | | | | Gross | | Gross | | | | | | Cash and | | | | | | | | | |
| | Amortized | | Unrealized | | Unrealized | | | | | | Cash | | Marketable | | Short-Term | | Long-Term |
| | Cost | | Gains | | Losses | | Fair Value | | | Equivalents | | Securities | | Investments | | Investments |
Cash | | $ | 143,744 | | $ | — | | $ | — | | $ | 143,744 | | | $ | 143,744 | | $ | — | | $ | — | | $ | — |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Level 1: | | | | | | | | | | | | | | | | | | | | | | | | | |
Money market funds | | | 2,669 | | | — | | | — | | | 2,669 | | | | 2,669 | | | — | | | — | | | — |
Agency bonds | | | 164,486 | | | 6 | | | (263) | | | 164,229 | | | | — | | | — | | | 69,862 | | | 94,367 |
Treasury bills | | | 121,650 | | | 18 | | | (3) | | | 121,665 | | | | 113,100 | | | — | | | 8,565 | | | — |
Marketable securities | | | 90,000 | | | — | | | (50,760) | | | 39,240 | | | | — | | | 39,240 | | | — | | | — |
Subtotal | | | 378,805 | | | 24 | | | (51,026) | | | 327,803 | | | | 115,769 | | | 39,240 | | | 78,427 | | | 94,367 |
Level 2: | | | | | | | | | | | | | | | | | | | | | | | | | |
State and municipal obligations | | | 4,980 | | | — | | | (33) | | | 4,947 | | | | — | | | — | | | 4,947 | | | — |
Certificate of deposits | | | 5,002 | | | — | | | — | | | 5,002 | | | | — | | | — | | | 5,002 | | | — |
Term deposits | | | 200,000 | | | — | | | — | | | 200,000 | | | | 25,000 | | | — | | | 175,000 | | | — |
Corporate bonds | | | 257,422 | | | 33 | | | (1,159) | | | 256,296 | | | | 28,883 | | | — | | | 168,074 | | | 59,339 |
U.S. Government | | | 30,525 | | | — | | | (159) | | | 30,366 | | | | — | | | — | | | 30,366 | | | — |
Treasury inflation-protected securities | | | 2,503 | | | — | | | (2) | | | 2,501 | | | | — | | | — | | | — | | | 2,501 |
Commercial paper | | | 160,241 | | | — | | | — | | | 160,241 | | | | 40,288 | | | — | | | 119,953 | | | — |
Subtotal | | | 660,673 | | | 33 | | | (1,353) | | | 659,353 | | | | 94,171 | | | — | | | 503,342 | | | 61,840 |
Total | | $ | 1,183,222 | | $ | 57 | | $ | (52,379) | | $ | 1,130,900 | | | $ | 353,684 | | $ | 39,240 | | $ | 581,769 | | $ | 156,207 |
As of December 31, 2022, we had $349.6 million of available-for-sale investments with unrealized losses.
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 consolidated balance sheets and its fair value is adjusted every reporting period. Changes in fair value are recorded in the consolidated statement of operations as unrealized gain or (loss) on marketable securities, which is included in interest and other income, net. During the year ended December 31, 2022, we recorded a $32.9 million unrealized loss on marketable securities from our investment in CLBT.
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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
3. Inventory
Inventories are stated at the lower of cost
The following table summarizes our cash, cash equivalents, and net realizable value. Cost is determined using the weighted average cost of raw materials which approximates the FIFO method and includes allocations of manufacturing labor and overhead. Included in finished goodsavailable-for-sale investments at December 31, 20172021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
During the year ended December 31, 2021, we sold held-to-maturity securities with a net carrying amount of $165.4 million prior to their maturity.
Note 4 - Expected Credit Losses
We are exposed to credit losses primarily through sales of products and services. Our expected loss allowance methodology for accounts receivable, notes receivable, and contract assets is developed using historical collection experience, published or estimated credit default rates for entities that represent our customer base, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Our monitoring activities include account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible.
We review receivables for U.S. and international customers separately to better reflect different published credit default rates and economic and market conditions.
Table of Contents
AXON ENTERPRISE, INC.
NOTES TO 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):
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| | United States | | Other countries | | Total | | United States | | Other countries | | Total |
Balance, beginning of period | | $ | 3,171 | | $ | 178 | | $ | 3,349 | | $ | 2,902 | | $ | 474 | | $ | 3,376 |
Provision for (recovery of) expected credit losses | | | 309 | | | 391 | | | 700 | | | 245 | | | (291) | | | (46) |
Amounts written off charged against the allowance | | | (416) | | | — | | | (416) | | | (54) | | | — | | | (54) |
Other, including foreign currency translation | | | — | | | (3) | | | (3) | | | 78 | | | (5) | | | 73 |
Balance, end of period | | $ | 3,064 | | $ | 566 | | $ | 3,630 | | $ | 3,171 | | $ | 178 | | $ | 3,349 |
As of December 31, 2022 and December 31, 20162021, the allowance for expected credit losses for each type of customer receivable was $1.4 million and $0.7 million, respectively, of trial and evaluation hardware units. Provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value. Inventoriesas follows (in thousands):
| | | | | | |
| | December 31, | | December 31, |
| | 2022 | | 2021 |
Accounts receivable and notes receivable, current | | $ | 2,176 | | $ | 2,203 |
Contract assets, net | | | 1,360 | | | 1,010 |
Long-term notes receivable, net of current portion | | | 94 | | | 136 |
Total allowance for expected credit losses on customer receivables | | $ | 3,630 | | $ | 3,349 |
Note 5 - Inventory
Inventory consisted of the following at December 31, 2022 and December 31, 2021 (in thousands):
| | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Raw materials | | $ | 72,740 | | $ | 38,267 |
Finished goods | | | 129,731 | | | 70,421 |
Total inventory | | $ | 202,471 | | $ | 108,688 |
|
| | | | | | | |
| | 2017 | | 2016 |
| Raw materials | $ | 20,119 |
| | $ | 18,002 |
|
| Finished goods | 25,346 |
| | 16,839 |
|
| Total inventory | $ | 45,465 |
| | $ | 34,841 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
4.Note 6 - Property and Equipment
Property and equipment consisted of the following at December 31 (in thousands):
|
| | | | | | | | | |
| | Estimated Useful Life | | 2017 | | 2016 |
| Land | N/A | | $ | 2,900 |
| | $ | 2,900 |
|
| Building and leasehold improvements | 3-39 years | | 18,383 |
| | 15,295 |
|
| Production equipment | 3-7 years | | 19,075 |
| | 19,849 |
|
| Computers, equipment and software | 3-5 years | | 6,780 |
| | 7,985 |
|
| Furniture and office equipment | 5-7 years | | 5,262 |
| | 4,990 |
|
| Vehicles | 5 years | | 1,057 |
| | 675 |
|
| Website development costs | 3 years | | 687 |
| | 601 |
|
| Capitalized internal-use software development costs | 3 years | | 3,695 |
| | 3,695 |
|
| Construction-in-process | N/A | | 9,810 |
| | 5,813 |
|
| Total cost | | | 67,649 |
| | 61,803 |
|
| Less: Accumulated depreciation | | | (36,477 | ) | | (37,799 | ) |
| Property and equipment, net | | | $ | 31,172 |
| | $ | 24,004 |
|
| | | | | | | | |
| | Estimated | | | | | | |
| | Useful Life | | December 31, 2022 | | December 31, 2021 |
Land | | N/A | | $ | 51,612 | | $ | 54,868 |
Building and leasehold improvements | | 3-39 years | | | 25,874 | | | 25,712 |
Production equipment | | 3-5 years | | | 57,170 | | | 54,090 |
Computers, equipment and software | | 3-5 years | | | 25,154 | | | 15,343 |
Furniture and office equipment | | 3-5 years | | | 7,420 | | | 6,838 |
Vehicles | | 5 years | | | 4,027 | | | 2,932 |
Capitalized internal software development costs | | 3-5 years | | | 14,198 | | | 12,200 |
Construction-in-process | | N/A | | | 62,283 | | | 25,258 |
Total cost | | | | | 247,738 | | | 197,241 |
Less: Accumulated depreciation | | | | | (77,895) | | | (58,784) |
Property and equipment, net | | | | $ | 169,843 | | $ | 138,457 |
Construction-in-process included $28.3 million and $12.4 million related to the development of our new campus at December 31, 2022 and December 31, 2021, respectively.
Depreciation and amortization expense related to property and equipment was $3.4$20.4 million, $2.5$15.8 million and $2.3$9.2 million for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively, of which $1.1$8.5 million, $0.7$6.3 million and $0.7$4.0 million was included in cost of sales for the respective years.
5.Note 7 - Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the year ended December 31, 20172022 were as follows (in thousands):
| | | | | | | | | |
| | | | | Software and | | | |
| | TASER | | Sensors | | Total |
Balance, beginning of period | | $ | 1,396 | | $ | 42,196 | | $ | 43,592 |
Goodwill acquired | | | 1,674 | | | — | | | 1,674 |
Purchase accounting adjustments | | | — | | | (58) | | | (58) |
Foreign currency translation adjustments | | | (113) | | | (112) | | | (225) |
Balance, end of period | | $ | 2,957 | | $ | 42,026 | | $ | 44,983 |
|
| | | | | | | | | | | |
| | TASER Weapons | | Software and Sensors | | Total |
| Balance, January 1, 2017 | $ | 562 |
| | $ | 9,880 |
| | $ | 10,442 |
|
| Goodwill acquired | 825 |
| | 3,505 |
| | 4,330 |
|
| Purchase accounting adjustments | — |
| | 23 |
| | 23 |
|
| Foreign currency translation adjustments | 66 |
| | 66 |
| | 132 |
|
| Balance, December 31, 2017 | $ | 1,453 |
| | $ | 13,474 |
| | $ | 14,927 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Intangible assets (other than goodwill) consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2017 | | December 31, 2016 |
| | Useful Life | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Amortized (definite-lived intangible assets): | | | | | | | | | | | | | |
| Domain names | 5-10 years | | $ | 3,161 |
| | $ | (428 | ) | | $ | 2,733 |
| | $ | 3,161 |
| | $ | (125 | ) | | $ | 3,036 |
|
| Issued patents | 4-15 years | | 2,697 |
| | (913 | ) | | 1,784 |
| | 1,942 |
| | (780 | ) | | 1,162 |
|
| Issued trademarks | 3-11 years | | 860 |
| | (397 | ) | | 463 |
| | 655 |
| | (320 | ) | | 335 |
|
| Customer relationships | 4-8 years | | 1,377 |
| | (451 | ) | | 926 |
| | 914 |
| | (240 | ) | | 674 |
|
| Non-compete agreements | 3-4 years | | 556 |
| | (346 | ) | | 210 |
| | 465 |
| | (236 | ) | | 229 |
|
| Developed technology | 3-7 years | | 13,469 |
| | (3,956 | ) | | 9,513 |
| | 8,661 |
| | (824 | ) | | 7,837 |
|
| Re-acquired distribution rights | 2 years | | 2,133 |
| | (711 | ) | | 1,422 |
| | — |
| | — |
| | — |
|
| Total amortized | | | 24,253 |
| | (7,202 | ) | | 17,051 |
| | 15,798 |
| | (2,525 | ) | | 13,273 |
|
| Not amortized (indefinite-lived intangible assets: | | | | | | | | | | | | | |
| TASER trademark | | | 900 |
| | | | 900 |
| | 900 |
| | | | 900 |
|
| Patents and trademarks pending | | | 872 |
| | | | 872 |
| | 1,045 |
| | | | 1,045 |
|
| Total not amortized | | | 1,772 |
| | | | 1,772 |
| | 1,945 |
| | | | 1,945 |
|
| Total intangible assets | | | $ | 26,025 |
| | $ | (7,202 | ) | | $ | 18,823 |
| | $ | 17,743 |
| | $ | (2,525 | ) | | $ | 15,218 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2022 | | December 31, 2021 |
| | | | Gross | | | | | Net | | Gross | | | | | Net |
| | Useful | | Carrying | | Accumulated | | Carrying | | Carrying | | Accumulated | | Carrying |
| | Life | | Amount | | Amortization | | Amount | | Amount | | Amortization | | Amount |
Amortizable (definite-lived) intangible assets: | | | | | | | | | | | | | | | |
Domain names | | 5 ‑ 10 years | | $ | 3,043 | | $ | (1,823) | | $ | 1,220 | | $ | 3,043 | | $ | (1,518) | | $ | 1,525 |
Issued patents | | 5 ‑ 25 years | | | 2,981 | | | (1,507) | | | 1,474 | | | 3,061 | | | (1,457) | | | 1,604 |
Issued trademarks | | 3 ‑ 15 years | | | 1,119 | | | (713) | | | 406 | | | 1,130 | | | (643) | | | 487 |
Customer relationships | | 4 ‑ 8 years | | | 4,892 | | | (2,995) | | | 1,897 | | | 4,985 | | | (2,439) | | | 2,546 |
Non-compete agreements | | 3 ‑ 4 years | | | 447 | | | (447) | | | — | | | 454 | | | (444) | | | 10 |
Developed technology | | 3 ‑ 5 years | | | 18,586 | | | (13,244) | | | 5,342 | | | 18,060 | | | (10,465) | | | 7,595 |
Total amortizable | | | | | 31,068 | | | (20,729) | | | 10,339 | | | 30,733 | | | (16,966) | | | 13,767 |
Non-amortizable (indefinite-lived) intangible assets: | | | | | | | | | | | | | | |
TASER trademark | | | | | 900 | | | — | | | 900 | | | 900 | | | — | | | 900 |
My90 trademark | | | | | 168 | | | — | | | 168 | | | 168 | | | — | | | 168 |
Patents and trademarks pending | | | | | 751 | | | — | | | 751 | | | 635 | | | — | | | 635 |
Total non-amortizable | | | | | 1,819 | | | — | | | 1,819 | | | 1,703 | | | — | | | 1,703 |
Total intangible assets | | | | $ | 32,887 | | $ | (20,729) | | $ | 12,158 | | $ | 32,436 | | $ | (16,966) | | $ | 15,470 |
Amortization expense of intangible assets was $4.7$4.0 million, $0.9$2.9 million and $0.8$3.3 million for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively. Estimated amortization for intangible assets with definitive lives for the next five years ended December 31, and thereafter, is as follows (in thousands):
| | | |
2023 | | $ | 3,786 |
2024 | | | 3,722 |
2025 | | | 887 |
2026 | | | 688 |
2027 | | | 354 |
Thereafter | | | 902 |
Total | | $ | 10,339 |
Note 8 – Strategic Investments
Strategic investments include investments in a number of non-public technology-driven companies. We account for strategic investments under the ASC Topic 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 certain of our strategic investments, we have the ability to commit additional capital over time through warrants and call options; for some investments, the exercisability and exercise prices are conditional on the achievement of certain performance metrics.
|
| | | |
| 2018 | $ | 5,415 |
|
| 2019 | 3,868 |
|
| 2020 | 2,401 |
|
| 2021 | 2,266 |
|
| 2022 | 834 |
|
| Thereafter | 2,267 |
|
| Total | $ | 17,051 |
|
Table of Contents
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables provide a roll-forward of the balance of strategic investments (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| | Strategic investments | | Warrants | | | Call options | | Total | | Strategic investments | | Warrants | | | Total |
Balance, beginning of period | | $ | 80,775 | | $ | 2,745 | | $ | — | | $ | 83,520 | | $ | 9,500 | | $ | 2,211 | | $ | 11,711 |
Investments | | | 56,914 | | | 459 | | | 17,233 | | | 74,606 | | | 45,500 | | | — | | | 45,500 |
Observable price changes: | | | | | | | | | | | | | | | | | | | | | |
Realized gains | | | — | | | — | | | — | | | — | | | 12,312 | | | — | | | 12,312 |
Unrealized gains | | | 44,376 | | | 28,539 | | | — | | | 72,915 | | | 28,009 | | | 534 | | | 28,543 |
Unrealized losses | | | (1,108) | | | — | | | — | | | (1,108) | | | — | | | — | | | — |
Exercises | | | 96,719 | | | (30,089) | | | — | | | 66,630 | | | — | | | — | | | — |
Sales | | | — | | | — | | | — | | | — | | | (14,546) | | | — | | | (14,546) |
Balance, end of period | | $ | 277,676 | | $ | 1,654 | | $ | 17,233 | | $ | 296,563 | | $ | 80,775 | | $ | 2,745 | | $ | 83,520 |
| | | | | | | | | | | | |
| | Inception to date |
| | Strategic investments | | Warrants | | | Call options | | Total |
Investments | | $ | 109,482 | | $ | 3,047 | | $ | 17,233 | | $ | 129,762 |
Observable price changes: | | | | | | | | | | | | |
Realized gains | | | 12,312 | | | — | | | — | | | 12,312 |
Unrealized gains | | | 74,817 | | | 29,073 | | | — | | | 103,890 |
Unrealized losses | | | (1,108) | | | (377) | | | — | | | (1,485) |
Exercises | | | 96,719 | | | (30,089) | | | — | | | 66,630 |
Sales | | | (14,546) | | | — | | | — | | | (14,546) |
Balance, end of period | | $ | 277,676 | | $ | 1,654 | | $ | 17,233 | | $ | 296,563 |
As part of our strategy, we continuously evaluate opportunities for strategic investments that align with our mission. During the year ended December 31, 2022 our investment areas included real-time crime center software, drones and related software, biometric sensors, and weapon detection solutions.
In the year ended December 31, 2022, we exercised warrants in one of our strategic investees for a total exercise price of $6.6 million, resulting in an unrealized gain of $60.1 million that was recognized in earnings for the year ended December 31, 2022. The estimated fair value of the investments were calculated using valuation techniques that included both observable and unobservable inputs. This estimated fair value reflects a value that was lower than the issue per share of the new equity issued by the strategic investees 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.
Note 9 – Variable Interest Entities
We evaluate our investments and other significant relationships to determine whether any investee is a variable interest entity (“VIE”). If we conclude that an investee is a VIE, we evaluate our power to direct the activities of the investee, our obligation to absorb the expected losses of the investee and our right to receive the expected residual returns of the investee to determine whether we are the primary beneficiary of the investee. If we are the primary beneficiary of a VIE, we consolidate such entity and reflect the non-controlling interest of other beneficiaries of that entity.
Table of Contents
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We determine whether we are the primary beneficiary of a VIE by performing an analysis that principally considers:
| ● | The VIE’s purpose, design, and risks the VIE was designed to create and pass through to its variable interest holders; |
| ● | The VIE’s capital structure; |
| ● | The terms between the VIE and its variable interest holders and other parties involved with the VIE; and |
| ● | Related-party affiliations. |
The table below presents a summary of the nonconsolidated VIEs in which we hold variable interests:
| | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Total nonconsolidated variable interest entities: | | | | | | |
Carrying value of variable interest - assets | | $ | 11,530 | | $ | 895 |
Carrying value of variable interest - liabilities | | | — | | | — |
Maximum exposure to loss: | | | | | | |
Non-public equity (1) | | | 11,530 | | | 895 |
Total | | $ | 11,530 | | $ | 895 |
(1) The maximum exposure to loss is limited to the carrying value of the interest.
In the table above:
| ● | The nature of our variable interest is described in the row under maximum exposure to loss. |
| ● | Our exposure to the obligations of the VIE is limited to our interest in the entity. |
The primary purpose of our U.S-based, nonconsolidated VIE investments is to create strategic partnerships within market-leading providers of law enforcement technology solutions. We present all variable interests in unconsolidated VIEs as strategic investments within the long-term assets section of the condensed consolidated balance sheet.
We have provided financial support to the nonconsolidated VIEs in exchange for preferred equity as well as other financial instruments that give us the ability to commit additional capital overtime. Financial support provided to the nonconsolidated VIEs is used to continue to finance their operations. We have no explicit or implicit arrangements to provide additional financial support to the VIEs and we have no liabilities to the VIEs as of December 31, 2022 and December 31, 2021.
Note 10 - Other Long-Term Assets
Other long-term assets consisted of the following at December 31 (in thousands):
| | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Cash surrender value of corporate-owned life insurance policies | | $ | 4,274 | | $ | 5,276 |
Deferred commissions (1) | | | 93,213 | | | 54,028 |
Restricted cash | | | 54 | | | 57 |
Operating lease assets | | | 38,370 | | | 23,270 |
Deferred implementation costs (2) | | | 3,045 | | | 3,915 |
Prepaid expenses, deposits and other | | | 20,660 | | | 11,701 |
Total other long-term assets | | $ | 159,616 | | $ | 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 |
|
| | | | | | | |
| | 2017 | | 2016 |
| Cash surrender value of corporate-owned life insurance policies | $ | 3,846 |
| | $ | 3,240 |
|
Deferred commissions (i) | 6,803 |
| | 5,302 |
|
Restricted cash (ii) | 3,333 |
| | 3,317 |
|
| Prepaid expenses, deposits and other | 1,384 |
| | 2,058 |
|
| Total other long-term assets | $ | 15,366 |
| | $ | 13,917 |
|
(i) Deferred commissions represent customer acquisition costs to secure long-term contracts. The Company capitalizes incremental and direct costs related to a specific contract and recognizes such costs as expense over the term of the contract in proportion to the contract revenue.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| consistent with the recognition timing of the revenue for the underlying performance obligations. See Note 2 “Costs to Obtain a Contract”. |
| (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. |
(ii) As of December 31, 2017, restricted cash primarily consisted of $2.7 million of sales proceeds related to a long-term contract with a specific customer. These proceeds are held in escrow until certain billing milestones are achieved, and then specified amounts are transferred to the Company's operating accounts. Restricted cash also contained $0.6 million related to a performance guarantee related to an international customer sales contract.
7. Deferred Revenue
Deferred revenue consisted of the following at December 31 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | Current | | Long-Term | | Total | | Current | | Long-Term | | Total |
| Warranty: | | | | | | | | | | | |
| TASER Weapons | $ | 12,501 |
| | $ | 18,619 |
| | $ | 31,120 |
| | $ | 9,980 |
| | $ | 17,319 |
| | $ | 27,299 |
|
| Software and Sensors | 6,293 |
| | 4,195 |
| | 10,488 |
| | 3,979 |
| | 2,926 |
| | 6,905 |
|
| | 18,794 |
| | 22,814 |
| | 41,608 |
| | 13,959 |
| | 20,245 |
| | 34,204 |
|
| Hardware: | | | | | | | | | | | |
| TASER Weapons | 4,164 |
| | 11,401 |
| | 15,565 |
| | 1,702 |
| | 4,390 |
| | 6,092 |
|
| Software and Sensors | 16,956 |
| | 14,781 |
| | 31,737 |
| | 9,850 |
| | 11,205 |
| | 21,055 |
|
| | 21,120 |
| | 26,182 |
| | 47,302 |
| | 11,552 |
| | 15,595 |
| | 27,147 |
|
| Software and Sensors Services | 30,487 |
| | 5,885 |
| | 36,372 |
| | 19,626 |
| | 4,214 |
| | 23,840 |
|
| Total | $ | 70,401 |
| | $ | 54,881 |
| | $ | 125,282 |
| | $ | 45,137 |
| | $ | 40,054 |
| | $ | 85,191 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | Current | | Long-Term | | Total | | Current | | Long-Term | | Total |
| TASER Weapons | $ | 16,665 |
| | $ | 30,020 |
| | $ | 46,685 |
| | $ | 11,682 |
| | $ | 21,709 |
| | $ | 33,391 |
|
| Software and Sensors | 53,736 |
| | 24,861 |
| | 78,597 |
| | 33,455 |
| | 18,345 |
| | 51,800 |
|
| Total | $ | 70,401 |
| | $ | 54,881 |
| | $ | 125,282 |
| | $ | 45,137 |
| | $ | 40,054 |
| | $ | 85,191 |
|
8.Note 11 - Accrued Liabilities
Accrued liabilities consisted of the following at December 31 (in thousands):
| | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Accrued salaries, benefits and bonus | | $ | 97,882 | | $ | 62,425 |
Accrued professional, consulting and lobbying fees | | | 3,861 | | | 7,152 |
Accrued warranty expense | | | 811 | | | 2,822 |
Accrued income and other taxes | | | 13,559 | | | 3,736 |
Accrued inventory in transit | | | 10,548 | | | 9,945 |
Other accrued expenses | | | 29,273 | | | 17,627 |
Accrued liabilities | | $ | 155,934 | | $ | 103,707 |
Note 12 – Convertible Senior Notes
2027 Notes
In December 2022, we issued $690.0 million aggregate principal amount of our 0.50% Convertible Senior Notes due 2027 in a private offering, which aggregate principal amount included the exercise in full of the initial purchasers’ option to purchase up to an additional $90.0 million principal amount of the Notes. The Notes mature on December 15, 2027 and bear interest at a fixed rate of 0.500% per annum, payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2023. The total net proceeds from the issuance of the Notes, after deducting initial purchasers' discounts and commissions and estimated debt issuance costs of $16.2 million, were approximately $673.8 million.
The Notes are our senior unsecured obligations and rank senior in right of payment to any indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
Upon conversion, the Notes will be settled in cash up to the aggregate principal amount of the Notes to be converted, and in cash, shares of our common stock or a combination thereof, at our option, in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal amount of the Notes being converted.
| | | | | | | | | | |
| | December 31, 2022 |
| | | | | | Initial Conversion | | |
| | Maturity | | Initial Conversion | | Rate per | | Initial Number |
| | Date | | Price per Share | | $1,000 Par Value | | of Shares |
2027 Notes | | December 15, 2027 | | $ | 228.73 | | | 4.3720 shares | | 3,016,680 |
|
| | | | | | | |
| | 2017 | | 2016 |
| Accrued salaries, benefits and bonus | $ | 8,957 |
| | $ | 6,474 |
|
| Accrued professional, consulting and lobbying fees | 3,870 |
| | 3,673 |
|
| Accrued warranty expense | 644 |
| | 780 |
|
| Accrued income and other taxes | 2,558 |
| | 4,581 |
|
| Other accrued expenses | 7,473 |
| | 2,740 |
|
| Accrued liabilities | $ | 23,502 |
| | $ | 18,248 |
|
9. Commitments and Contingencies
Operating and capital lease obligations
The Company has entered into operating leases for various office space, storage facilities and equipment. As of December 31, 2017, the Company's leases are for terms ranging from less than one year to six years. The Company's leases generally contain multi-year renewal options and escalation clauses. Rent expense under all operating leases, including both cancelable and non-cancelable leases, was $2.9 million, $1.8 million and $1.0 million for the years ended December 31, 2017, 2016, and 2015, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Future minimum lease paymentsThe Notes are convertible, in multiples of $1,000 principal amount, at the option of the holders prior to the close of business on the business day immediately preceding September 15, 2027 only under non-cancelable leasesthe following circumstances:
| • | during any calendar quarter commencing after the calendar quarter ending on March 31, 2023 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; |
| • | during the five business day period after any ten consecutive trading day period (“the 2027 Measurement Period”) in which the trading price (as defined in the 2027 indenture governing the Notes) per $1,000 principal amount of the Notes for each trading day of the 2027 Measurement Period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate in effect on each such trading day; |
| • | if we call any or all of the Notes for redemption, but only with respect to the Notes called (or deemed called) for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; |
| • | upon the occurrence of specified corporate events as set forth within the indenture governing the Notes. |
On or after September 15, 2027 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their notes, in integral multiples of $1,000 principal amount, at their option, regardless of the foregoing conditions.
If we undergo a fundamental change (as defined in the indenture governing the Notes), subject to certain conditions, holders may require us to repurchase for cash all or any portion of their Notes, in principal amounts of $1,000 or a multiple thereof, at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events or if we issue a notice of redemption, it will, under certain circumstances, increase the conversion rate for holders who elect to convert their notes in connection with such corporate event or during the relevant redemption period.
We may not redeem the Notes prior to December 22, 2025. We may redeem for cash all or any portion of the Notes, at our option, on or after December 22, 2025 and prior to December 15, 2027, if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. No sinking fund is provided for the Notes.
In accounting for the Notes after adoption of ASU 2020-06, the Notes are accounted for as a single liability, and the carrying amount of the Notes is $674.0 million as of December 31, 2017,2022, with principal of $690.0 million, net of unamortized debt issuance costs of $16.0 million. The Notes were classified as long-term liabilities as of December 31, 2022. The issuance costs related to the Notes are being amortized to interest expense over the contractual term of the Notes at an effective interest rate of 0.99%.
Table of Contents
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The net carrying amount of the Notes was as follows (in thousands):
| | | | | |
| December 31, 2022 | | December 31, 2021 |
Principal | $ | 690,000 | | $ | — |
Unamortized debt issuance costs | | (16,033) | | | — |
Convertible notes carrying amount, net | $ | 673,967 | | $ | — |
The total fair value of the Notes was $687.3 million as of December 31, 2022. The fair value was determined based on the closing trading price per $1,000 of the Notes as of the last day of trading for the period. We consider the fair value of the Notes at December 31, 2022 to be a Level 2 measurement as they are not publicly traded. The fair value of the Notes is primarily affected by the trading price of our common stock and market interest rates.
There have been no changes to the initial conversion price of the Notes since issuance.
Interest expense related to the Notes was as follows (in thousands):
| | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Contractual interest expense | | $ | 211 | | $ | — |
Amortization of debt issuance costs | | | 198 | | | — |
Total interest expense | | $ | 409 | | $ | — |
Note Hedge
To reduce the impact of potential economic dilution upon conversion of the Notes, we entered into a convertible note hedge transaction (the “Note Hedge” or “2027 Note Hedge”) with certain investment banks, with respect to our common stock, concurrently with the issuance of the 2027 Notes.
| | | | | |
| Purchase Price | | Shares Purchased |
2027 Note Hedge | $ | 194,994 | | | 3,016,680 |
The Note Hedge covers shares of our common stock at a strike price per share that corresponds to the initial conversion price of the respective Notes, subject to adjustment, and are exercisable upon conversion of the Notes. If exercised, we may elect to receive cash, shares of our common stock, or a combination of cash and shares. We have accounted for the aggregate amount of purchase price for the Note Hedge as a reduction to additional paid-in capital. The Note Hedge will expire upon the maturity of the Notes. The Note Hedge is intended to reduce the potential economic dilution upon conversion of the Notes in the event that the fair value per share of our common stock at the time of exercise is greater than the conversion price of the Notes. The Note Hedge is a separate transaction and is not part of the terms of the Notes. Holders of the Notes do not have any rights with respect to the Note Hedge. The Note Hedge does not impact earnings per share, as it was entered into to offset any dilution from the Notes. As of December 31, 2022, 3,016,680 shares remain subject to the Note Hedge.
Table of Contents
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
| | | | | | | |
| | Operating | | Capital |
| 2018 | $ | 2,313 |
| | $ | 40 |
|
| 2019 | 1,893 |
| | 40 |
|
| 2020 | 1,236 |
| | 36 |
|
| 2021 | 1,097 |
| | — |
|
| 2022 | 1,073 |
| | — |
|
| Thereafter | 43 |
| | — |
|
| Total minimum lease payments | $ | 7,655 |
| | 116 |
|
| Less: Amount representing interest | | | (7 | ) |
| Capital lease obligation | | | $ | 109 |
|
Note Warrants
| | | | | | | | | | | |
| Proceeds | | Shares | | Strike Price | | First Expiration |
2027 Warrants | $ | 124,269 | | | 3,016,680 | | $ | 338.86 | | | March 15, 2028 |
Separately, we entered into warrant transactions with certain investment banks, whereby we sold warrants to acquire, subject to adjustment, the number of shares of our common stock shown in the table above. If the average market value per share of our common stock, on each expiration date exceeds the strike price of the Warrants expiring on that day, such Warrants would have a dilutive effect on our earnings per share to the extent we report net income. According to the terms of the Warrants, the Warrants will be automatically exercised over a 60-trading day period beginning on the first expiration date as set forth above.
Note 13 - Commitments and Contingencies
Data Storage Commitment
In June 2022, we entered into a purchase agreement for cloud hosting with a six year term beginning July 1, 2022. The purchase agreement includes a total commitment of $425.0 million. Storage fees under this agreement were $23.8 million for the year ended December 31, 2022. The remaining purchase commitment at December 31, 2022 was $401.2 million.
Purchase commitments
The CompanyCommitmentsWe routinely entersenter into cancellablecancelable and non-cancellablenon-cancelable purchase orders with many of itsour key vendors. Based on the strategic relationships with many of these vendors, the Company’sour ability to cancel these purchase orders and maintain a favorable relationship would be limited. As of December 31, 2017, the Company has2022, we had approximately $51.9$499.7 million of open purchase orders.
Litigation
orders and $415.4 million of other purchase obligations, inclusive of the data storage commitment noted above.Product Litigation
The Company isAs a manufacturer of weapons and other law enforcement tools used in high-risk field environments, we are often the subject of products liability litigation concerning the use of our products. We are currentlynamed as a defendant in sixfour lawsuits in which the plaintiffs allege either wrongful death or personal injury in situations in which a TASER CEWCED was used by law enforcement officers in connection with arrests.arrests or training. While the facts vary from case to case, thethese product liability claims are typically based on an allegedallege defective product defect resulting in injury design, manufacturing, and/or death, usually involving a failure to warn or negligent design,warn. They seek compensatory and the plaintiffs are seeking monetary damages. The information throughout this note is current through the date of these financial statements.
sometimes punitive damages, often in unspecified amounts.
We continue to aggressively defend all product litigation. As a general rule, it is the Company’sour policy not to settle suspect injury or death cases. Exceptions are sometimes made where the settlement is strategically beneficial to the Company. Also, on occasion, the Company’s insurance carrier has settled such lawsuits over the Company’s objection where the risk exceeds the Company’s liability insurance deductibles.us. Due to the confidentialityconfidential nature of the Company'sour litigation strategy and the confidentiality agreements that are executed in the event of a settlement, the Company doeswe do not identify or comment on which specific lawsuits have been settledsettlements by case or amount. Based on current information, we do not believe that the amountoutcome of any settlement.
In 2009,such legal proceeding will have a material effect on our financial position, results of operations, or cash flows. We are self-insured for the
Company implemented new risk management strategies, including revisionsfirst $5.0 million of any product claim made after 2014. No judgment or settlement has ever exceeded this amount in any products case. We continue to
product warnings and training to better protect both the Company and its customers from litigation based on "failure to warn" theories – which comprise the vast majority of the cases against the Company. These risk management strategies have been highly effective in reducing the rate and exposure from litigation post-2009. From the third quarter of 2011 through the date of these financial statements,maintain product liability
cases have been reduced from 55 active to six active cases.insurance coverage, including an insurance policy fronting arrangement, above our self-insured retention with various limits depending on the policy period.
U.S. Federal Trade Commission Litigation
The U.S. Federal Trade Commission (“FTC”) filed an administrative enforcement action in January 2020 regarding our May 2018 acquisition of an insolvent body worn camera competitor, Vievu LLC. The FTC alleges the
Management believes that pre-2009 cases have a different risk profile than cases which have occurred since the risk management procedures were introduced in 2009. Therefore, the Company necessarily treats certain pre-2009 cases as exceptions to the Company’s general no settlement policy in order to reduce caseload, legal costs and liability exposure. The Company intends to continue its successful practice of aggressively defending and generally not settling litigation except in very limited and unusual circumstances as described above.84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
With respect to each ofmerger was anticompetitive and adversely affected the body worn camera and digital evidence management market for “large metropolitan police departments,” which we deny. The administrative hearing remains stayed pending lawsuits, the following table lists the name of plaintiff, the date the Company was served with process, the jurisdiction in which the case is pending, the type of claim and the status of the matter.
|
| | | | | | | | |
Plaintiff | | Month
Served
| | Jurisdiction | | Claim Type | | Status |
Derbyshire | | Nov-09 | | Ontario, Canada Superior Court of Justice | | Officer Injury | | Discovery Phase. Trial scheduled for October 14, 2019 |
Shymko | | Dec-10 | | The Queen's Bench, Winnipeg Centre, Manitoba | | Wrongful Death | | Pleading Phase |
Ramsey | | Jan-12 | | 12th Judicial Circuit Court, Broward County, FL | | Wrongful Death | | Discovery Phase |
Bennett | | Sep-15 | | 11th Judicial Circuit Court, Miami-Dade County, FL | | Wrongful Death | | Discovery Phase. |
Masters | | Nov-16 | | U.S. District Court, Western District of Missouri | | Suspect Injury | | Discovery Phase. Trial scheduled for December 10, 2018 |
Taylor | | Mar-17 | | U.S. District Court, Southern District of Texas | | Officer Injury | | Discovery Phase. Docket call August 31, 2018 |
There are no product litigation matters in which the Company is involved that are currently on appeal.
The following case was dismissed during the fourth quarter of 2017:
|
| | | | | | | | |
Plaintiff | | Month
Served
| | Jurisdiction | | Claim Type | | Status |
Suarez | | Sep-16 | | U.S. District Court, Southern District of Florida | | Wrongful Death | | Dismissed |
The claims of each of these lawsuits have been submittedour federal court constitutional challenges to the Company’s insurance carriers that maintained insurance coverage during the applicable periods. The Company continuesFTC’s structure and administrative processes. Even if we ultimately are required to maintain product liability insurance coveragedivest Vievu and other assets, any such result will not interfere with varying limits and deductibles. The following table provides information regarding the Company’s product liability insurance. Remaining insurance coverage is based on information received from the Company’s insurance provider (in millions).
|
| | | | | | | | | | | | | | | | | | | | |
| Policy Year | | Policy Start Date | | Policy End Date | | Insurance Coverage | | Deductible Amount | | Defense Costs Covered | | Remaining Insurance Coverage | | Active Cases and Cases on Appeal |
| 2009 | | 12/15/2008 | | 12/15/2009 | | $ | 10.0 |
| | $ | 1.0 |
| | N | | $ | 10.0 |
| | Derbyshire |
| 2010 | | 12/15/2009 | | 12/15/2010 | | 10.0 |
| | 1.0 |
| | N | | 10.0 |
| | Shymko |
| 2011 | | 12/15/2010 | | 12/15/2011 | | 10.0 |
| | 1.0 |
| | N | | 10.0 |
| | n/a |
| Jan-Jun 2012 | | 12/15/2011 | | 6/25/2012 | | 7.0 |
| | 1.0 |
| | N | | 7.0 |
| | Ramsey |
| Jul-Dec 2012 | | 6/25/2012 | | 12/15/2012 | | 12.0 |
| | 1.0 |
| | N | | 12.0 |
| | n/a |
| 2013 | | 12/15/2012 | | 12/15/2013 | | 12.0 |
| | 1.0 |
| | N | | 12.0 |
| | n/a |
| 2014 | | 12/15/2013 | | 12/15/2014 | | 11.0 |
| | 4.0 |
| | N | | 11.0 |
| | n/a |
| 2015 | | 12/15/2014 | | 12/15/2015 | | 10.0 |
| | 5.0 |
| | N | | 10.0 |
| | Bennett |
| 2016 | | 12/15/2015 | | 12/15/2016 | | 10.0 |
| | 5.0 |
| | N | | 10.0 |
| | Masters |
| 2017 | | 12/15/2016 | | 12/15/2017 | | 10.0 |
| | 5.0 |
| | N | | 10.0 |
| | Taylor |
Other Litigation
Phazzer Patent Infringement Litigation
In March 2016, the Company filed a complaint against Phazzer Electronics Inc. (“Phazzer”) for patent infringement, trademark infringement and false advertising. On July 21, 2017, the U.S. District Court for the Middle District of Florida granted Axon’s Motion for Sanctions and for a Permanent Injunction against Florida-based Phazzer, banning sales of the infringing Phazzer Enforcer CEWs and dart cartridges. The injunction prohibits Phazzer and its officers, agents, employees, and anyone else acting in concert with them, from making, using, offering for sale, selling, distributing, donating, importingour ability to meet contractual obligations or exporting Phazzer CEWs and associated cartridges. The Court also awarded Axon compensatory and treble damages for willful infringement, as well as its reasonable attorneys’ fees and costs. Both Phazzer and its U.S. distributors are barred from exporting CEWs or cartridges to fill foreign orders.
In imposing severe sanctions against Phazzer, including an award of Axon’s attorneys’ fees and costs, the Court found that Phazzer “engaged in a pattern of bad faith conduct designed and intended to delay, stall, and increase the cost of this litigation,” and that Phazzer repeatedly disregarded Court orders thereby exhibiting “contemptuous”, “egregious”, “flagrant” and “intentional obstructionist behavior” resulting in willful “abuse [of] the judicial process.”
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Axon’s patent (U.S. No. 7,234,262) at issue in the litigation relatesimplement our solutions.
Prior to the CEW’s data recording of date and time of each trigger operation and duration ofFTC’s enforcement action, we sued the stimulus. The Court found that patent was “valid, enforceable, and infringed by Phazzer.” The injunction will remainFTC in effect until the patent expires, and includes any CEW or device not colorably different from the Phazzer Enforcer CEW.
The Axon trademark subject to the injunction is Federal Registration No. 4,423,789, relating to the non-functional shape of TASER CEW cartridges used to launch the darts. The Court found the trademark “valid and enforceable, not generic, functional, or merely descriptive, and infringed by Phazzer.” The permanent injunction covers all Phazzer CEW dart cartridges that are confusingly similar to, or not more than a colorable imitation of, TASER CEW cartridges, and includes Phazzer product numbers 1-DC15, 1-DC21, 1-DC25, 1-DC21-SIDT, 1-PB30, 1-PB8F, 1-PB15943, 1-RB30, 1-PA30, and 1-LOWIMPT2015. Phazzer has appealed the judgment and injunction.
The Court expressly found that Phazzer cartridges currently marketed and sold as compatible with TASER brand CEWs embody the protected appearance and constitute infringing products enjoined under its Order. Phazzer was also ordered by the Court “not [to] challenge or continue to challenge the validity or enforceability of the ‘789 Registrationfederal court in any manner in any forum, including the USPTO.” Accordingly, Phazzer’s pending USPTO cancellation action, which was stayed while the litigation ran its course, will be dismissed. On August 10 2017, Phazzer filed a notice of appeal.
Digital Ally Patent Litigation
In March 2016, the Company was served with a second amended complaint filed by Digital Ally in the Federal District Court for the District of
KansasArizona for declaratory and injunctive relief alleging
infringementthe FTC’s structure and administrative processes violate Article II of
two patentsthe 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 our motion to stay the appellate mandate pending the filing of our petition for certiorari with the U.S. Supreme Court. On January 24, 2022, the Supreme Court granted our petition. Oral argument was held November 7, 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 varietybenefit to Vievu’s customers, the cost, risk and distraction of antitrust and unfair competition claims, seeking a judgmentprotracted litigation merit consideration of infringement, monetary damages, a permanent injunction, punitive damages and attorneys’ fees and costs. On January 12, 2017, the court granted the Company’s motion to dismiss all six antitrust claims and entered final judgmentsettlement if achievable on those claims in the Company’s favor on April 14, 2017. Digital Ally has appealed that judgmentterms agreeable to the Federal Circuit.
The Company filed inter parte reviews ("IPRs") with the USPTO to invalidate Digital Ally’s patents-in-suit regarding its auto-activation camera technology. On June 6, 2017, the USPTO instituted one IPR on patent No. 8,781,292 (the “’292 patent”). Digital Ally thereafter filed a motion to dismiss the ‘292 patent with prejudiceFTC and a covenant not to sue the Company in the district court litigation. Digital Ally then filed a motion to amend all claims of the ‘292 patent in the IPR proceedings, which is set for oral argument on February 23, 2018. On July 7, 2017, the USPTO rejected the Company’s IPR filed against claim 10 of Digital Ally's patent No. 9,253,452 (the “452 patent”). The Company filed a petition to reconsider that decision, which remains pending with the USPTO. This patent claim 10 is being challenged in District Court based on fraud claims, invalidity claims and non-infringement claims filed by the Company. Although the patent office later also rejected the Company’s IPR on claim 1 of the ‘452 patent, Digital Ally has dismissed that claim from the litigation. In November 2017, the district court lifted its litigation stay and entered a new scheduling order on December 20, 2017. A claim construction hearing on Digital Ally’s sole remaining independent claim 10 of the ‘452 patent will take place on March 7, 2018.
Pending Patent Appeals
Two appeals are pending in the Federal Circuit arising out of patent litigation involving the district court’s dismissal of Digital Ally's antitrust claims against the Company, and a judgment and permanent injunction in the Company's favor against Phazzer Electronics Inc., as noted in the following table.
|
| | | | | | | | |
Appellant | | Month Served | | Jurisdiction | | Claim Type | | Active Cases and Cases on
Appeal
|
Digital Ally | | Mar-16
| | U.S. District Court, District of Kansas, appealed to Federal Circuit
| | Antitrust Claims | | Axon's motion to dismiss antitrust claims was granted on January 12, 2017 with judgment entered in Axon's favor on April 14, 2017. Digital Ally filed its notice of appeal on April 20, 2017. The appeal has been fully briefed.
|
Phazzer | | Mar-16
| | U.S. District Court, Middle District of Florida, appealed to Federal Circuit
| | Judgment and Permanent Injunction Patent Infringement
| | Axon received judgment in its favor and a permanent injunction against Phazzer’s CEW and cartridge infringement on July 21, 2017. Phazzer filed a notice of appeal on August 10, 2017. The appeal is in the briefing stage.
|
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Antoine di Zazzo Arbitration
In April 2016, the Company was served with a notice of arbitration claim filed by Antoine di Zazzo, the Company’s former distributor in France, for commissions allegedly owed Mr. di Zazzo. The arbitration claim was filed with the International Court of Arbitration of the International Chamber of Commerce in Paris, France, and the amount in controversy is approximately $0.6 million. The Company’s records reflect that all commissions that were due Mr. di Zazzo under his contract were paid or offered to him and the Company will vigorously defend this arbitration claim. In related litigation in the Tribunal of Commerce of Marseille, judgment was entered in favor of the Company on January 18, 2018, and Mr. di Zazzo has appealed.
VieVu Commercial Litigation
In February 2017, the Company was served with a complaint filed by VieVu LLC ("VieVu") alleging tortious interference with a business expectancy. In May 2017, the Company filed and served a complaint against VieVu in the U.S. District Court for Arizona for violation of the Lanham Act. On February 14, 2018, the Company and VieVu entered into an agreement for the dismissal of both lawsuits, with each party to bear its own attorney’s fees and costs.
From time to time, the Company iswe are notified that itwe may be a party to a lawsuit or that a claim is being made against it.us. It is the Company’sour policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on the Company.us. After carefully assessing the claim, and assuming the Company determineswe determine that it iswe are not at fault or it disagreeswe disagree with the damages or relief demanded, the Companywe vigorously defendsdefend any lawsuit filed against it. In certain legal matters, the Company recordsus. We record a liability when losses are deemed probable and reasonably estimable. When losses are deemed reasonably possible but not probable, we determine whether it is possible to provide an estimate of the amount of the loss or range of possible losses for the claim, if material for disclosure. In evaluating matters for accrual and disclosure purposes, the Company takeswe take into consideration factors such as itsour historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of any potential loss. The Company reevaluatesWe reevaluate and updates itsupdate accruals as matters progress over time.
Based on the Company'sour assessment of outstanding litigation and claims as of December 31, 2017, the Company has2022, we have determined that it is not reasonably possible that these losses, if any, from these lawsuits will individually, or in the aggregate, materially affect itsour results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on the Company'sour operating results, financial condition or cash flows.
Off-Balance Sheet Arrangements
Under certain circumstances, the Company useswe use letters of credit and surety bonds to guarantee itsour performance under various contracts, principally in connection with the installation and integration of its Axon cameras and related technologies. Certain of the Company'sour letters of credit contracts and surety bonds have stated expiration dates with others being released as the contractual performance terms are completed. The Company expects to fulfill all contractual performance obligations related to outstanding guarantees. At December 31, 2017, the Company2022, we had an outstanding letterletters of credit issued under our credit facility of approximately $2.7$7.0 million which isthat are expected to expire in May 2018.throughout 2023 and 2024. Additionally, the Companywe had approximately $7.4$18.0 million of outstanding surety bonds at December 31, 2017,2022, with $1.0$7.5 million expiring in 2018, $0.12023 and the remaining $10.5 million expiring in 2020, $2.3 million expiring in 2021 and the remaining $4.0 million expiring in 2023.2024.
10. Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code which impacted 2017 including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent for tax years beginning 2018.
ASC 740 requires a company to record the effects of a tax law change in the period of enactment, however, shortly after the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. The measurement period ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In connection with the Company's initial analysis of the impact of the Tax Act, it was able to make a reasonable estimate of the impact of the Tax Act and recorded a provisional net tax expense of $8.0 million in the period ended December 31, 2017, primarily related to the impact of the tax rate reduction on the Company's deferred tax assets and deferred tax liabilities. This amount includes a $0.4 million increase in the Company's valuation allowance.
Reasonable estimates have also been madeNote 14 - Income Taxes
Income (loss) before provision (benefit) for the effects of other provisions of the Tax Act, but they do not have a material impact on the Company’s consolidated financial statements. These estimates may be impacted by the need for further analysis, future clarification and guidance regarding available tax accounting methods and elections. Any subsequent adjustments to these provisional amounts will be recorded in the quarter in 2018 when the analysis is complete.
The Company has completed its analysis of the one-time transition tax on undistributed earnings of its foreign subsidiaries, the Alternative Minimum Tax (“AMT”), and the Base Erosion Anti-abuse Tax (“BEAT”) and is not being affected by these provisions.
Income before income taxes included the following components for the years ended December 31 (in thousands):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| United States | $ | 14,978 |
| | $ | 38,414 |
| | $ | 42,761 |
|
| Foreign | 783 |
| | (6,917 | ) | | (7,400 | ) |
| Total | $ | 15,761 |
| | $ | 31,497 |
| | $ | 35,361 |
|
| | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
United States | | $ | 191,631 | | $ | (146,995) | | $ | (11,529) |
Foreign | | | 4,887 | | | 5,620 | | | 5,238 |
Total | | $ | 196,518 | | $ | (141,375) | | $ | (6,291) |
Significant components of the Company’sprovision (benefit) for income taxes were as follows for the years ended December 31 (in thousands):
| | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Current: | | | | | | | | | |
Federal | | $ | 10,804 | | $ | (331) | | $ | 5,277 |
State | | | 10,118 | | | 85 | | | 3,886 |
Foreign | | | 2,892 | | | (60) | | | 1,943 |
Total current | | | 23,814 | | | (306) | | | 11,106 |
Deferred: | | | | | | | | | |
Federal | | | 26,238 | | | (65,557) | | | (10,175) |
State | | | (2,002) | | | (15,266) | | | (3,111) |
Foreign | | | (2,146) | | | 478 | | | (3,131) |
Total deferred | | | 22,090 | | | (80,345) | | | (16,417) |
Tax impact of unrecorded tax benefits liability | | | 3,475 | | | (706) | | | 744 |
Provision for income taxes (Income tax benefit) | | $ | 49,379 | | $ | (81,357) | | $ | (4,567) |
A reconciliation of our effective income tax rate to the federal statutory rate follows for the years ended December 31 (in thousands):
| | | | | | | | | | |
| | 2022 | | 2021 | | 2020 | |
Federal income tax at the statutory rate | | $ | 41,283 | | $ | (29,691) | | $ | (1,321) | |
State income taxes, net of federal benefit | | | 7,928 | | | (12,717) | | | 935 | |
Difference between statutory and foreign tax rates | | | (428) | | | (155) | | | (86) | |
Other permanent differences (1) | | | 1,771 | | | 1,842 | | | 794 | |
Foreign derived intangible income deduction | | | (2,597) | | | — | | | (902) | |
Executive compensation limitation | | | 5,784 | | | 180,509 | | | 15,463 | |
R&D credits | | | (13,340) | | | (34,376) | | | (10,246) | |
Return to provision adjustment | | | (757) | | | 204 | | | (1,078) | |
Change in liability for unrecognized tax benefits | | | 3,215 | | | 10,188 | | | 987 | |
Excess stock-based compensation benefit | | | (4,616) | | | (205,483) | | | (9,002) | |
Change in valuation allowance | | | 10,216 | | | 8,961 | | | 163 | |
Tax effects of intercompany transactions | | | (417) | | | 96 | | | (389) | |
Other | | | 1,337 | | | (735) | | | 115 | |
Provision for income taxes (Income tax benefit) | | $ | 49,379 | | $ | (81,357) | | $ | (4,567) | |
Effective tax rate | | | 25.1 | % | | 57.5 | % | | 72.6 | % |
| (1) | Other permanent differences include certain expenses that are not deductible for tax purposes including meals and entertainment, lobbying fees, and taxable income as a result of global intangible low-tax income ("GILTI"). |
Table of Contents
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Significant components of our deferred income tax assets and liabilities are as follows at December 31 (in thousands):
|
| | | | | | | |
| | 2017 | | 2016 |
| Deferred income tax assets: | | | |
| Net operating loss carryforward | $ | 3,691 |
| | $ | 2,405 |
|
| Deferred revenue | 9,442 |
| | 11,537 |
|
| Deferred compensation | 1,109 |
| | 1,695 |
|
| Inventory reserve | 702 |
| | 1,126 |
|
| Non-qualified and non-employee stock option expense | 3,704 |
| | 4,410 |
|
| Capitalized research and development | 485 |
| | 1,991 |
|
| Research and development tax credit carryforward | 3,817 |
| | 2,722 |
|
| Reserves, accruals, and other | 1,921 |
| | 1,239 |
|
| Total deferred income tax assets | 24,871 |
| | 27,125 |
|
| Deferred income tax liabilities: | | | |
| Depreciation | (2,027 | ) | | (2,364 | ) |
| Amortization | (1,398 | ) | | (1,473 | ) |
| Other | (256 | ) | | (294 | ) |
| Total deferred income tax liabilities | (3,681 | ) | | (4,131 | ) |
| Net deferred income tax assets before valuation allowance | 21,190 |
| | 22,994 |
|
| Valuation allowance | (5,435 | ) | | (3,479 | ) |
| Net deferred income tax assets | $ | 15,755 |
| | $ | 19,515 |
|
For the year ended December 31, 2017, the provision for income taxes, in accordance with the provisions set forth in ASC 2016-09, included $1.8 million of tax expense resulting from stock-based compensation tax benefits that were recorded as a decrease in the provision for income taxes, and for the years ended December 31, 2016 and 2015, $1.4 million and $6.9 million, respectively, of tax expense resulting from stock-based compensation tax benefits that
| | | | | | |
| | 2022 | | 2021 |
Deferred income tax assets: | | | | | | |
Net operating loss carryforward | | $ | 4,874 | | $ | 68,353 |
Deferred revenue | | | 47,586 | | | 27,031 |
Deferred compensation | | | 1,575 | | | 1,414 |
Lease liability | | | 9,973 | | | 5,886 |
Inventory reserve | | | 1,279 | | | 684 |
Stock based compensation | | | 15,374 | | | 10,913 |
Amortization | | | 2,820 | | | 2,672 |
R&D tax credit carryforward | | | 12,826 | | | 29,249 |
Reserves, accruals, and other | | | 17,732 | | | 14,717 |
R&D capitalization, net | | | 46,122 | | | — |
Convertible debt, net | | | 48,378 | | | — |
Total deferred income tax assets | | | 208,539 | | | 160,919 |
Deferred income tax liabilities: | | | | | | |
Customer contract asset | | | (552) | | | (1,104) |
Right of use asset | | | (8,748) | | | (5,008) |
Depreciation | | | (10,272) | | | (8,938) |
Strategic investments | | | (4,615) | | | (2,653) |
Prepaid expenses | | | (1,119) | | | (594) |
Other | | | — | | | (72) |
Total deferred income tax liabilities | | | (25,306) | | | (18,369) |
Net deferred income tax assets before valuation allowance | | | 183,233 | | | 142,550 |
Valuation allowance | | | (26,368) | | | (16,168) |
Net deferred income tax assets | | $ | 156,865 | | $ | 126,382 |
We have been recorded as increases to additional paid-in capital on the consolidated statement of changes in stockholders’ equity.
The Company has $4.5$89.5 million of state net operating losses (“NOLs”) which will expire at various dates between 20192026 and 2036. The Company also has Federal NOLs of $2.2 million which expire between 2035 and 2036, and are subject to limitation under
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Internal Revenue Code (“IRC”) Section 382. The Company has $0.12041 or carry forward indefinitely. We have $4.4 million of federal R&D credits, which expire in 2024between 2034 and 2027,2041, and are also$0.1 million of which is subject to limitation under IRC Section 382. The Company has $7.3We have $21.6 million of Arizonastate R&D credits carrying forward, which expire at various dates between 20182023 and 2032.2037, or carry forward indefinitely. In Australia, the U.K., Canada, and Germany, the Company has $2.2 million, $10.3 million, $1.6 million, and $0.3we have $4.1 million of NOLs respectively, which expire at various dates or may be carried forward indefinitely.
In preparing the Company’sour condensed consolidated financial statements, management has assessedassesses the likelihood that its deferred income tax assets will be realized from future taxable income. In evaluating theour ability to recover itsour deferred income tax assets, management considers all available evidence, positive and negative evidence, including the Company’sour operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred income tax assets will not be realized. Management exercises significant judgment in determining the Company’s provisionsour provision for income taxes, itsour deferred income tax assets and liabilities, and itsour future taxable income for purposes of assessing itsour ability to utilize any future tax benefit from its deferred income tax assets.
Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of each reporting date, management considers new evidence, both positive and negative, that could impact management’s view with regards to future realization ofour deferred tax assets.
As of December 31, 2017, the Company2022, management continues to demonstrate three-year cumulative pre-tax incomebelieve the positive evidence from projected future earnings outweighs the negative evidence and a valuation allowance is only needed on specific deferred tax assets. We have concluded that a valuation allowance is necessary against unrealized investment losses as well as transaction costs incurred in the U.S. federal and Arizona tax jurisdictions; however, theconnection with certain investments. Additionally, we do have Arizona R&D Tax Credits start to expire in 2018 with a significant tranche with a gross value of $1.2 milliontax credits expiring in 2019. Therefore,unutilized each year; therefore, management has concluded that it is more likely than not that a portion of the Company’s U.S.our Arizona R&D deferred tax assetsasset will not be realized.
As of December 31, 2017, the Company has cumulative losses in Australia, the U.K.,realized, and Canada, and a history of losses in Germany, which limits the ability to consider other subjective evidence, such as projections for future growth. On the basis of this evaluation, a full valuation allowance has been recorded for these jurisdictions. The amount of the deferred tax asset considered realizable, however, could be adjusted in future periods if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for growth.against this net asset.
Significant components of the provision for income taxes are as follows for the years ended December 31 (in thousands): |
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Current: | | | | | |
| Federal | $ | 6,039 |
| | $ | 16,346 |
| | $ | 13,594 |
|
| State | 1,263 |
| | 1,534 |
| | 996 |
|
| Foreign | 656 |
| | 1,050 |
| | — |
|
| Total current | 7,958 |
| | 18,930 |
| | 14,590 |
|
| Deferred: | | | | | |
| Federal | 4,539 |
| | (4,145 | ) | | 288 |
|
| State | (1,631 | ) | | (977 | ) | | 984 |
|
| Foreign | (78 | ) | | (45 | ) | | (278 | ) |
| Total deferred | 2,830 |
| | (5,167 | ) | | 994 |
|
| Tax provision recorded as an increase (decrease) in liability for unrecorded tax benefits | (234 | ) | | 437 |
| | (156 | ) |
| Provision for income taxes | $ | 10,554 |
| | $ | 14,200 |
| | $ | 15,428 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A reconciliationIn Australia, we have determined that sufficient deferred tax liabilities will reverse in order to realize all assets except one long-lived intangible asset where there is not an expectation that the asset may be realized. Therefore, we continue to have a partial valuation allowance for Australia.
We consider the undistributed earnings of certain non-U.S. subsidiaries to be indefinitely reinvested outside of the Company’s effectiveUnited States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. We project that our foreign earnings will be utilized offshore for working capital and future foreign growth and we have not made a provision for U.S. or additional foreign withholding taxes of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. We have determined the amount of deferred tax liability related to investments in these foreign subsidiaries is immaterial. If we decide to repatriate the undistributed foreign earnings, we will recognize the income tax rate toeffects in the federal statutory rate follows for the years ended December 31 (in thousands):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Federal income tax at the statutory rate | $ | 5,518 |
| | $ | 11,024 |
| | $ | 12,347 |
|
| State income taxes, net of federal benefit | 339 |
| | 889 |
| | 1,061 |
|
| Difference between statutory and foreign tax rates | (560 | ) | | 1,521 |
| | 2,442 |
|
Permanent differences (i) | 300 |
| | (457 | ) | | (205 | ) |
| Research and development | (2,380 | ) | | (1,928 | ) | | (1,050 | ) |
| Return to provision adjustment | 23 |
| | 327 |
| | (67 | ) |
| Change in liability for unrecognized tax benefits | 7 |
| | 700 |
| | (156 | ) |
| Excess stock-based compensation benefit | (1,819 | ) | | (77 | ) | | (144 | ) |
| Change in valuation allowance | 1,949 |
| | 1,779 |
| | 1,200 |
|
| Tax effects of intercompany transactions | (277 | ) | | 630 |
| | — |
|
Adjustments to deferreds resulting from enactment of new tax law(ii) | 7,601 |
| | — |
| | — |
|
| Other | (147 | ) | | (208 | ) | | — |
|
| Provision for income taxes | $ | 10,554 |
| | $ | 14,200 |
| | $ | 15,428 |
|
| Effective tax rate | 66.9 | % | | 45.1 | % | | 43.6 | % |
| |
(i)
| Permanent differences include certain expenses that are not deductible for tax purposes including lobbying fees as well as favorable items including the domestic production activities deduction. |
| |
(ii)
| The adjustment to deferreds of $7.6 million was a result of the impact of changes in the U.S. federal effective tax rate, as well as a reduction of the stock-based compensation deferred tax asset due to expected permanent limitations on its deductibility for certain key executives under the recently enacted tax law. |
The Company has completedperiod we change our assertion on indefinite reinvestment.We complete R&D tax credit studies which identified approximately $15.2 million infor each year that an R&D tax creditscredit is claimed for federal Arizona and Californiastate income tax purposes related to the 2003 through 2017 tax years.purposes. Management has made the determination that it is more likely than not that the full benefit of the R&D tax credit will not be sustained on examination and recorded a liability for unrecognized tax benefits of $4.1$21.5 million as of December 31, 2017. In addition, management accrued approximately $0.1 million for estimated uncertain tax positions related to certain state income tax liabilities.2022. Should the unrecognized tax benefit of $4.2$21.5 million be recognized, the Company’sour effective tax rate would be favorably impacted.
The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statements of operations. As of December 31, 2017 and 2016, the Company had accrued interest of $0.1 million.
The following table presents a roll forward of the Company'sour liability for unrecognized tax benefits, exclusive of accrued interest, as of December 31 (in thousands):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Balance, beginning of period | $ | 4,050 |
| | $ | 3,396 |
| | $ | 3,325 |
|
| Increase (decrease) in previous year tax positions | 123 |
| | — |
| | (389 | ) |
| Increase in current year tax positions | 587 |
| | 448 |
| | 270 |
|
| Decrease due to lapse of statute of limitations | (773 | ) | | — |
| | (14 | ) |
| Increase related to adjustment of previous estimates of activity | 256 |
| | 206 |
| | 204 |
|
| Balance, end of period | $ | 4,243 |
| | $ | 4,050 |
| | $ | 3,396 |
|
| | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Balance, beginning of period | | $ | 18,249 | | $ | 7,657 | | $ | 6,861 |
Increase (decrease) in previous year tax positions | | | 232 | | | 22 | | | (34) |
Increase in current year tax positions | | | 3,343 | | | 11,416 | | | 950 |
Decrease due to lapse of statutes of limitations | | | (332) | | | (846) | | | (120) |
Balance, end of period | | $ | 21,492 | | $ | 18,249 | | $ | 7,657 |
Federal income tax returns for 20142019 through 20172021 remain open to examination by the U.S. Internal Revenue Service (the “IRS”), while state and local income tax returns for 2018 through 2021 also generally remain open to examination by state taxing authorities. The 20042008 through 20132017 state and local income tax returns are only open to the extent that net operating loss or other tax attributes carrying forward from those years were utilized in 20142018 through 2017.2021. The foreign tax returns for 20132018 through 20172021 also generally remain open to examination.examination, although some foreign statutes can audit returns up to ten years.
We recognize interest and penalties related to unrecognized tax benefits within the provision (benefit) for income tax expense line in the accompanying consolidated statements of operations and comprehensive income (loss). As of December 31, 2022, and 2021, we had accrued interest of $0.3 million and $0.2 million, respectively.
Note 15 - Line of Credit
In December 2022, we entered into a Credit Agreement that provides for a senior unsecured multi-currency revolving credit facility in an aggregate principal amount of up to $200.0 million, $30.0 million of which is available for the issuance of letters of credit. The Companycredit agreement will mature on the earlier of December 15, 2027 or the date that is six months prior to the stated maturity date of the 0.50% convertible senior notes due 2027 unless such Notes have been redeemed, repurchased, converted or defeased in full. Additionally, the credit agreement has not been notified by any major federal, foreign, or state tax jurisdictions that it will bean accordion feature which allows for an increase in the total line of credit up to $300.0 million, subject to examination.each lender’s sole discretion.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company considers the earningsAs of certain non-U.S. subsidiaries to be indefinitely reinvested outside of the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and the Company's specific plans for reinvestment of those subsidiary earnings. It is not practicable to estimate the amount of the deferred tax liability, if any, related to investments in those foreign subsidiaries. If the Company decides to repatriate the foreign earnings, it would need to adjust its income tax provision in the period it determined that the earnings will no longer be indefinitely invested outside the United States.
11. Line of Credit
The Company has a $10.0 million revolving line of credit with a domestic bank. At December 31,
2017 and 2016,2022, there were no borrowings under the line. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. As of December 31,
2017, the Company2022, we had letters of credit outstanding of approximately
$2.7$7.0 million under the facility and available borrowing of
$7.3 million. The line is secured by substantially all of$193.0 million, excluding amounts available under the
assets ofaccordion feature. Advances under the
Company, and bears interest at varying rates (currently LIBOR plus 1.25% or Prime less 0.50%). The line of credit
matures on December 31, 2018, and requires monthly payments ofbear interest
only. The Company’s agreement with the bank requires itat Term SOFR plus 1.25 to
comply1.75% per year determined in accordance with a
maximum fundedpricing grid based on our net debt to earnings before interest, taxes, depreciation and amortization ("EBITDA")
ratio.We are required to comply with a net leverage ratio, defined as defined,consolidated total indebtedness to EBITDA, of no greater than 2.003.50 to 1.00 based upon a trailing twelve-monthfour fiscal quarter period. At December 31, 2017, the Company’s funded debt to EBITDA2022, our leverage ratio was 0.340.97 to 1.00.
12. Additionally, we must comply with a consolidated interest coverage ratio, defined as EBITDA to consolidated interest expense, of no less than 3.50 to 1.00 based upon a trailing four fiscal quarter end. We are compliant with the consolidated interest coverage ratio, which is not meaningful for the year ended December 31, 2022.
Note 16 - Stockholders’ Equity
Common Stock and Preferred Stock
The Company hasWe have authorized the issuance of two classes of stock designated as “common stock” and “preferred stock,” each having a par value of $0.00001 per share. The Company isWe are authorized to issue 200 million shares of common stock and 25 million shares of preferred stock.
Stock Repurchase
In February 2016, the Company announced that Axon's Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of the Company’s outstanding common stock subject to stock market conditions and corporate considerations. During the year ended December 31, 2016, the Company purchased, under a Rule 10b5-1 plan, approximately 1.8 million common shares for a total cost of approximately $33.7 million, or a weighted average cost of $18.90 per share. As of December 31, 2017 and 2016, $16.3 million remained available under the plan for future purchases. During 2016, the Company suspended its 10b-5 plan, and any future purchases would be discretionary.
Stock-based Compensation Plans
The Company hasWe have historically utilized stock-based compensation, consisting of RSUs and stock options, for key employees and non-employee directors as a means of attracting and retaining qualitytalented personnel. Service-based grants generally have a vesting period of 31 to 5 years and a contractual maturity of ten years. Performance-based grants generally have vesting periods ranging from 1 to 510 years and a contractual maturity of ten years.
On February 26, 2016, the Company’s Board of DirectorsIn May 2022, our shareholders approved the 2016Axon Enterprise, Inc. 2022 Stock Incentive Plan (the “2016 Plan"“2022 Plan”), which was subsequently approved by stockholders at the Annual Meeting of Stockholders on May 26, 2016. Under the 2016 Plan, the Company reserved for future grants: (i) 2.0 authorizing an additional 2.5 million shares, of common stock, plus (ii) the number ofremaining available shares of common stock that were authorized but unissuedunder prior plans, for issuance under the Company’s 2013 Stock Incentive Plan (the “2013 Plan”) as ofnew plan. Combined with the effective date of the 20162019 Plan and (iii) the number ofother legacy stock incentive plans, there are 2.7 million shares of stock that have been granted under the 2013 Plan or the 2009 Stock Incentive Plan that either terminate, expire or lapseavailable for any reason after the effective date of the 2016 Plan. Asgrant as of December 31, 2017, approximately 0.8 million shares remain available for future grants. Shares issued upon exercise of stock awards from these plans have historically been issued from the Company’s authorized unissued shares.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2022.Performance-based stock awards
The Company hasWe have issued performance-based stock options and performance-based RSUs, the vesting of which is generally contingent upon the achievement of certain performance criteria related to theour operating performance, of the Company, as well as successful and timely development and market acceptance of future product introductions. In addition, certain of the performance RSUs have additional service requirements subsequent to the achievement of the performance criteria. Compensation expense is recognized over the implicitrequisite service period, (the longer ofwhich is defined as the period the performance condition is expected to be achievedlongest explicit, implicit or the requiredderived service period)period based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date. For both service-based and performance-based RSUs, we account for forfeitures as they occur as a reduction to stock-based compensation expense and additional paid-in-capital
For performance-based options with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized for each pair of performance and market conditions over the longer of the expected achievement period of the performance and market conditions, beginning at the point in time that the relevant performance condition is considered probable of achievement. The fair value of such awards is estimated on the grant date using Monte Carlo simulations.
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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA have been met for the previous four consecutive fiscal quarters. Adjusted EBITDA for purposes of the CEO Performance Award ("Adjusted EBITDA (CEO Performance Award)") is defined as net income (loss) attributable to common stockholders before interest expense, 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)
(in thousands) | | Achievement Status | | Adjusted EBITDA
(in thousands) | | 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 | | Achieved | | 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 June 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 December 31, 2022. As of December 31, 2022, 5.3 million stock options have been certified by the Compensation Committee and vested. The eleventh market capitalization goal has not yet been attained, though the related operational goal has been achieved as of December 31, 2022. As twelve operational goals have been achieved or are considered probable of achievement, we recorded stock-based compensation expense of $243.9 million related to the CEO Performance Award from the grant date through December 31, 2022. The number of stock options that would vest related to the remaining unvested tranches is approximately 1.1 million shares. As of December 31, 2022, we had $2.1 million of total unrecognized stock-based
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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
compensation expense for the performance goals that were considered probable of achievement, which will be recognized over a weighted-average period of 0.2 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 year ended December 31, 2022 we granted an additional seventy-four thousand XSUs.
The XSUs are grants of Restricted Stock Units (“RSUs”), each with a term of approximately nine years, that vest in 12 equal tranches. Each of the 12 tranches will vest upon certification by the Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA (CEO Performance Award) have been met for the previous four consecutive fiscal quarters. 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 December 31, 2022, actual shares outstanding exceeded the XSU Maximum. Accordingly, market capitalization as calculated for the purposes of achieving additional XSPP market capitalization goals uses the lower XSU Maximum share amount rather than actual shares outstanding.
The first nine market capitalization goals have been achieved as of December 31, 2022. The tenth and eleventh market capitalization goals have not yet been attained, though the related operational goals have been achieved as of December 31, 2022. The first XSU tranche vested in March 2021, the second and third tranches vested in May 2021, five tranches vested in September 2021, and one tranche vested in December 2021. As all twelve operational goals have been achieved or are considered probable of achievement, we recorded stock-based compensation expense of $186.2 million related to the XSU awards from their respective grant dates through December 31, 2022. The number of XSU awards that would vest related to the remaining three tranches is approximately 1.2 million shares. As of December 31, 2022, we had
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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
$14.7 million of total unrecognized stock-based compensation expense, which will be recognized over a weighted-average period of 1.2 years.
Restricted Stock Units
The following table summarizes RSU activity for the years ended December 31 (number of units and aggregate intrinsic value in thousands):
|
| | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | Number of Units | | Weighted Average Grant-Date Fair Value | | Number of Units | | Weighted Average Grant-Date Fair Value | | Number of Units | | Weighted Average Grant-Date Fair Value |
| Units outstanding, beginning of year | 1,330 |
| | $ | 20.40 |
| | 1,139 |
| | $ | 19.30 |
| | 1,226 |
| | $ | 13.23 |
|
| Granted | 1,731 |
| | 24.59 |
| | 718 |
| | 19.75 |
| | 516 |
| | 26.18 |
|
| Released | (519 | ) | | 18.85 |
| | (414 | ) | | 15.91 |
| | (488 | ) | | 11.82 |
|
| Forfeited | (194 | ) | | 24.61 |
| | (113 | ) | | 21.65 |
| | (115 | ) | | 16.72 |
|
| Units outstanding, end of year | 2,348 |
| | 23.47 |
| | 1,330 |
| | 20.40 |
| | 1,139 |
| | 19.30 |
|
| Aggregate intrinsic value at year end | $ | 62,222 |
| | | |
| | | |
| | |
| | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | | | | Weighted | | | | Weighted | | | | Weighted |
| | Number | | Average | | Number | | Average | | Number | | Average |
| | of | | Grant-Date | | of | | Grant-Date | | of | | Grant-Date |
| | Units | | Fair Value | | Units | | Fair Value | | Units | | Fair Value |
Units outstanding, beginning of year | | | 1,115 | | $ | 133.40 | | 1,107 | | $ | 76.10 | | 1,249 | | $ | 45.47 |
Granted | | | 1,142 | | | 143.03 | | 686 | | | 165.67 | | 577 | | | 100.76 |
Released | | | (541) | | | 117.49 | | (554) | | | 66.23 | | (598) | | | 40.68 |
Forfeited | | | (151) | | | 138.99 | | (124) | | | 100.64 | | (121) | | | 52.40 |
Units outstanding, end of year | | | 1,565 | | | 145.48 | | 1,115 | | | 133.40 | | 1,107 | | | 76.10 |
Aggregate intrinsic value at year end | | $ | 259,729 | | | | | | | | | | | | | |
Aggregate intrinsic value represents the Company’sour closing stock price on the last trading day of the period, which was $26.50$165.93 per share aton December 29, 2017,30, 2022, multiplied by the number of RSUs.RSUs outstanding. The fair value as of the respective vesting dates of RSUs that vested during the year was $84.9 million, $96.4 million, and $56.0 million for the years ended December 31, 2017 was $14.5 million. 2022, 2021, and 2020, respectively.
Certain RSUs that vested in 2017the year ended December 31, 2022 were net-share settled, such that the Companywe withheld shares with value equivalent to cover the employees’ minimum statutorytax obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld related to RSUs during 20172022 were 0.1 millioneleven thousand and had a value of approximately $3.5$1.6 million on their respective vesting dates as determined by the Company’s closing stock price.price on such dates. Payments for the employees’ tax obligations are reflected as a financing activity within the statementconsolidated statements of cash flows. These net-share settlements hadWe record a liability for the effect of share repurchasestax withholding to be paid by the Company as they reduced the amount of shares that would have otherwise been issuedus as a result of the vesting.
In 2017, 2016 and 2015, the Company granted approximately 353,000, 79,000 and 49,000 performance-based RSUs, respectively (included in the table above). Certain of the performance-based RSUs outstanding as of December 31, 2017 can vest with a range of shares earned being between 0% and 200% of the targeted shares granted, depending on the final achievement of pre-determined performance criteria as of the vesting date. reduction to additional paid-in capital.As of December 31, 2017,2022, we had $192.7 million of total unrecognized stock-based compensation expense 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 2.32 years. RSUs are released when vesting requirements are met.
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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Performance Stock Units
The following table summarizes PSU activity, inclusive of XSUs, for the years ended December 31 (number of units and aggregate intrinsic value in thousands):
| | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | | | | Weighted | | | | Weighted | | | | Weighted |
| | Number | | Average | | Number | | Average | | Number | | Average |
| | of | | Grant-Date | | of | | Grant-Date | | of | | Grant-Date |
| | Units | | Fair Value | | Units | | Fair Value | | Units | | Fair Value |
Units outstanding, beginning of year | | | 1,499 | | $ | 39.86 | | 5,618 | | $ | 35.71 | | 6,033 | | $ | 34.47 |
Granted | | | 158 | | | 106.57 | | 309 | | | 77.53 | | 417 | | | 58.11 |
Released | | | (78) | | | 107.58 | | (4,345) | | | 37.16 | | (184) | | | 27.79 |
Forfeited | | | (210) | | | 41.62 | | (83) | | | 40.91 | | (648) | | | 40.83 |
Units outstanding, end of year | | | 1,369 | | | 43.43 | | 1,499 | | | 39.86 | | 5,618 | | | 35.71 |
Aggregate intrinsic value at year end | | $ | 227,125 | | | | | | | | | | | | | |
Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $165.93 per share, multiplied by the number of PSUs outstanding. As of December 31, 2022, there was $19.2 million in total unrecognized stock-based compensation expense 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 1.17 years. PSUs are released when vesting requirements are met.
As of December 31, 2022, the performance criteria had been met for 36,000approximately twenty thousand of the 0.41.4 million performance-based RSUsPSUs outstanding. The Company recognized $2.5 million, $2.1 million
Certain PSUs that vested in the year ended December 31, 2022 were net-share settled such that we withheld shares to cover the employees’ tax obligation for the applicable income and $1.5 million of compensation expenseother employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld related to performance-based RSUs duringPSUs were approximately twenty-six thousand and had a value of $3.3 million on their respective vesting dates as determined by the years ended December 2017, 2016 and 2015, respectively.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
cash flows. We record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital. Payments for the employees’ tax obligations are reflected as a financing activity within the 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 years ended December 31 (number of options in thousands):
| | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | | | | Weighted | | | | Weighted | | | | Weighted |
| | Number | | Average | | Number | | Average | | Number | | Average |
| | of | | Exercise | | of | | Exercise | | of | | Exercise |
| | Options | | Price | | Options | | Price | | Options | | Price |
Options outstanding, beginning of year | | | 2,438 | | $ | 28.58 | | 6,366 | | $ | 28.58 | | 6,431 | | $ | 28.34 |
Granted | | | — | | | — | | — | | | — | | — | | | — |
Exercised | | | — | | | — | | (3,928) | | | 28.58 | | (65) | | | 4.52 |
Expired / terminated | | | — | | | — | | — | | | — | | — | | | — |
Options outstanding, end of year | | | 2,438 | | | 28.58 | | 2,438 | | | 28.58 | | 6,366 | | | 28.58 |
Options exercisable, end of year | | | 1,377 | | | 28.58 | | 1,377 | | | 28.58 | | 530 | | | 28.58 |
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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
| | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | Number of Options | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price |
| Options outstanding, beginning of year | 1,008 |
| | $ | 5.40 |
| | 1,103 |
| | $ | 5.37 |
| | 1,641 |
| | $ | 5.26 |
|
| Exercised | (198 | ) | | 6.99 |
| | (95 | ) | | 5.02 |
| | (525 | ) | | 4.95 |
|
| Expired / terminated | (6 | ) | | 8.32 |
| | — |
| | — |
| | (13 | ) | | 7.27 |
|
| Options outstanding, end of year | 804 |
| | 4.99 |
| | 1,008 |
| | 5.40 |
| | 1,103 |
| | 5.37 |
|
| Options exercisable, end of year | 775 |
| | 5.00 |
| | 977 |
| | 5.42 |
| | 1,072 |
| | 5.39 |
|
| Options expected to vest, end of year | 25 |
| | 4.75 |
| |
| |
| |
| |
|
NoWe did not grant any stock options in 2022, 2021 or 2020. No options were grantedexercised in 2017, 2016 or 2015. Totalthe year ending December 31, 2022. The total intrinsic value of options exercised was $3.2 million, $2.0$571.4 million and $13.6$5.1 million for the years ended December 31, 2017, 20162021 and 2015,2020, respectively. The intrinsic value for options exercised was calculated as the difference between the exercise price of the underlying stock option awards and the market price of the Company’sour common stock on the date of exercise.
The following table summarizes information about stock options outstanding and exercisablethat were fully vested or expected to vest as of December 31, 20172022 (number of options in thousands):
|
| | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
Range of Exercise Price | | Number of Options Outstanding | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (Years) | | Number of Options Exercisable | | Weighted
Average
Exercise
Price | | Weighted Average Remaining Contractual Life (Years) |
| $4.15 - $7.01 | | 733 |
| | $ | 4.78 |
| | 1.49 | | 704 |
| | $ | 4.78 |
| | 1.51 |
| $7.13 - $7.21 | | 71 |
| | 7.14 |
| | 0.41 | | 71 |
| | 7.15 |
| | 0.41 |
| $4.15 - $7.21 | | 804 |
| | 4.99 |
| | 1.40 | | 775 |
| | 5.00 |
| | 1.41 |
| | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
| | | | | | | Weighted | | | | | | | Weighted |
| | | | Weighted | | Average | | Weighted | | | | Average |
| | Number of | | Average | | Remaining | | Number of | | Average | | Remaining |
Range of | | Options | | Exercise | | Contractual | | Options | | Exercise | | Contractual |
Exercise Price | | Outstanding | | Price | | Life (Years) | | Exercisable | | Price | | Life (Years) |
$28.58 | | 1,377 | | $ | 28.58 | | 5.16 | | 1,377 | | $ | 28.58 | | 5.16 |
The aggregate intrinsic value of options outstanding and options exercisable at December 31, 20172022 was $17.3 million and $16.7$189.1 million, respectively. Aggregate intrinsic value represents the difference between the exercise price of the underlying stock option awards and the closing market price of the Company’sour common stock of $26.50$165.93 on December 29, 2017.
30, 2022.At December 31, 2017, the Company2022, we had 29,3501.1 million unvested options outstanding with a weighted average exercise price of $4.75$28.58 per share, weighted average grant-date fair value of $2.58$35.80 per share and weighted average remaining contractual life of 1.0 year.5.16 years. The aggregate intrinsic value of unvested options at December 31, 20172022 was $0.6$145.7 million.
The Company granted approximately 1.0 million performance-based stock options (included in the table above) from 2008 through 2011. As of December 31, 2017, approximately 0.2 million performance-based stock options are outstanding, of which approximately 29,350 are unvested and 25,000 are expected to vest. The aggregate grant-date fair value of the 0.2 million performance-based stock options vested and expected to vest as of December 31, 2017 was approximately $0.5 million. The Company recognized no stock-based compensation expense related to performance-based stock options during the years ended December 31, 2017 and 2016, and $0.1 million during the year ended December 31, 2015.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Stock-based Compensation Expense
The Company accountsWe account for stock-based compensation using the fair-value method. Reported stock-based compensation expense was classified as follows for the years ended December 31 (in thousands):
| | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Cost of product and service sales | | $ | 4,607 | | $ | 5,844 | | $ | 3,464 |
Sales, general and administrative expenses | | | 51,301 | | | 238,813 | | | 103,860 |
Research and development expenses | | | 50,268 | | | 58,674 | | | 26,248 |
Total stock-based compensation expense | | $ | 106,176 | | $ | 303,331 | | $ | 133,572 |
Income tax benefit | | $ | 25,154 | | $ | 30,586 | | $ | 29,329 |
Stock Inducement Plan
In September 2022, our Board of Directors adopted the Axon Enterprise, Inc. 2022 Stock Inducement Plan (the “2022 Inducement Plan”) pursuant to which we reserved 250,000 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 2022 Inducement Plan are substantially similar to our 2019 Stock Inducement Plan. There are approximately 0.1 million shares available for grant as of December 31, 2022.
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
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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
commissions to the sales agent of $1.6 million and issuance costs of $0.5 million. During the year ending December 31, 2022, no shares were sold under the ATM.
We may sell up to a total of 3.0 million shares of our common stock under the ATM, of which approximately 2.4 are remaining. The ATM expires on April 20, 2024. We intend to use the net proceeds from the ATM 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.
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. As of December 31, 2022 and 2021, $16.3 million remained available under the plan for future purchases.
Note 17 – Accumulated Other Comprehensive Income (loss)
The following table reflects the changes in accumulated other comprehensive income (loss), net of tax (in thousands):
| | | | | | | | | |
| | | | | | | | | |
| | | Unrealized Gains (Losses) | | | | | | |
| | | on Available-for-Sale | | | Foreign Currency | | |
| | | Investments | | | Translation | | Total |
Balance, December 31, 2019 | | $ | — | | $ | (1,096) | | $ | (1,096) |
Other comprehensive income | | | — | | | 1,237 | | | 1,237 |
Balance, December 31, 2020 | | $ | — | | $ | 141 | | $ | 141 |
Other comprehensive loss | | | (207) | | | (1,251) | | | (1,458) |
Balance, December 31, 2021 | | $ | (207) | | $ | (1,110) | | $ | (1,317) |
Other comprehensive loss | | | (1,044) | | | (4,818) | | | (5,862) |
Balance, December 31, 2022 | | $ | (1,251) | | $ | (5,928) | | $ | (7,179) |
Note 18 - Leases
Lease Obligations
We determine if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets and liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Additionally, we use the portfolio approach in determining the discount rate used to present value lease payments. We give consideration to our convertible notes, line of credit, macroeconomic factors as well as publicly available data for instruments with similar characteristics when estimating our incremental borrowing rates. The ROU asset also includes any lease payments made and initial direct costs incurred and excludes lease incentives.
We have operating leases for office space and logistical functions. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. For leases beginning on or after January 1, 2019, we account for lease components separately from non-lease components for all asset classes.
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Cost of product and service sales | $ | 508 |
| | $ | 342 |
| | $ | 402 |
|
| Sales, general and administrative expenses | 9,047 |
| | 5,707 |
| | 4,285 |
|
| Research and development expenses | 6,055 |
| | 3,320 |
| | 2,576 |
|
| Total stock-based compensation expense | $ | 15,610 |
| | $ | 9,369 |
| | $ | 7,263 |
|
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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Our leases have remaining terms of less than 1 to approximately 11 years, some of which include one or more options to renew for up to 5 years, and some of which include options to terminate the leases within 1 year. The exercise of lease renewal options is at our sole discretion and such options are included in ROU assets and liabilities for renewal periods that are reasonably certain of exercise. Certain of our lease agreements include stated rental payment escalations. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We had no stock-based compensationfinance leases as of December 31, 2022.
| | | | | | | | |
Leases (in thousands) | | Classification | | December 31, 2022 | | December 31, 2021 |
Assets | | | | | | | | |
Operating lease assets | | Other assets | | $ | 38,370 | | $ | 23,270 |
Liabilities | | | | | | | | |
Current | | | | | | | | |
Operating | | Other current liabilities | | $ | 6,357 | | $ | 6,540 |
Noncurrent | | | | | | | | |
Operating | | Other long-term liabilities | | | 37,143 | | | 20,440 |
Total lease liabilities | | | | $ | 43,500 | | $ | 26,980 |
The components of operating lease expense recognized in the consolidated statements of operationswere as follows for the years ended December 31 2017 and 2016(in thousands):
| | | | | | | | | | | |
| | Classification | | 2022 | | 2021 | | 2020 |
Operating lease expense | | Sales, general and administrative expenses (1) | | $ | 4,388 | | $ | 3,820 | | $ | 3,762 |
| | Research and development expense | | | 4,315 | | | 3,675 | | | 2,995 |
| | Total operating lease expense (2) | | | 8,703 | | | 7,495 | | | 6,757 |
| | | | | | | | | | | |
Sublease income | | Other income | | | — | | | — | | | (55) |
Net lease expense | | | | $ | 8,703 | | $ | 7,495 | | $ | 6,702 |
| (1) | An immaterial portion of operating lease expense is included within cost of sales. |
| (2) | Includes short-term leases, which are immaterial. |
Other information related to incentive stock options ("ISOs"). Total stock-based compensation expense for the year endedleases was as follows (in thousands, except lease term and discount rate):
| | | | | | | | |
| | Twelve Months Ended | | | Twelve Months Ended | |
| | December 31, 2022 | | | December 31, 2021 | |
Supplemental Cash Flows Information | | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
Operating cash flows for operating leases | | $ | 9,216 | | | $ | 7,506 | |
Right-of-use assets obtained in exchange for lease liabilities: | | | | | | | | |
Operating leases | | | 21,815 | | | | 6,726 | |
Weighted average remaining lease term: | | | | | | | | |
Operating leases | | | 7.2 | years | | | 4.2 | years |
Weighted average discount rate: | | | | | | | | |
Operating leases | | | 5.44 | % | | | 2.73 | % |
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AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Future minimum lease payments under non-cancellable leases as of December 31, 2015 included $0.1 million related to ISOs for which no tax benefit was recognized. The Company recorded a tax benefit in 2017, 2016, and 2015 of $0.1 million, $0.2 million, and $0.2 million, respectively, to offset taxes payable related to the non-qualified disposition of ISOs exercised and sold.
2022 were as follows (in thousands):
| | | |
| | Operating |
2023 | | | 8,448 |
2024 | | | 8,936 |
2025 | | | 8,990 |
2026 | | | 5,374 |
2027 | | | 3,566 |
Thereafter | | | 20,579 |
Total minimum lease payments | | | 55,893 |
Less: Amount representing interest | | | (12,393) |
Present value of lease payments | | $ | 43,500 |
As of December 31, 2017, there was $42.8 million in unrecognized compensation costs related to RSUs under the Company's stock plans. The Company expects to recognize the cost related to the RSUs over a weighted average period of 2.80 years.
13. Related Party Transactions
The Company subscribes to a mobile collaboration software suite from Quip, a company2022, we do not have any leases that was co-foundedhave not yet commenced that create significant rights and managed by Bret Taylor, a member of the Company's Board of Directors. In April 2016, Quip was acquired by Salesforce, and subsequent to the acquisition, the Company continued to consider Quip a related party. In November 2017, Mr. Taylor was appointed to President and Chief Product Officer of Salesforce. The Company now considers the consolidated Salesforce entity to be a related party. The cost to subscribe to various cloud-based hosting arrangements from Salesforce and Quip was $1.2 million, $0.8 million and $0.5 millionobligations for the years ended December 31, 2017, 2016 and 2015, respectively, and amounts owed as of December 31, 2017 were $0.5 million. Amounts owed as of December 31, 2016 were negligible.
14.us.
Note 19 - Employee Benefit Plans
The Company hasWe have a defined contribution profit sharing 401(k) plan for eligible employees, which is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. Employees are entitled to make tax-deferred contributions of up to the maximum allowed by law of their eligible compensation. Contributions to the
We also sponsor defined contribution plans are made by both the employeein Australia, Canada, Finland, and the Company. Company contributions are based on the level of employee contributions and are immediately vested. The Company’sUnited Kingdom.
Our matching contributions to the planfor all defined contribution plans for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, were approximately $2.5$10.9 million, $1.6$7.4 million and $1.2$5.6 million, respectively.
The Company also has a non-qualified deferred compensation plan for certain executives, key employees and non-employee directors through which participants may elect to postpone the receipt and taxation of a portion of their compensation, including stock-based compensation, received from the Company. The non-qualified deferred compensation plan allows eligible participants to defer up to 80% of their base salary and up to 100% of other types of compensation. The plan also allows for matching and discretionary employer contributions. Employee deferrals are deemed 100% vested upon contribution. Distributions from the plan generally commence upon retirement, death, separation of service, specified date or upon the occurrence of an unforeseeable emergency. Distributions can be paid in a variety of forms from lump sum to installments over a period of years. Participants in the plan are entitled to select from a wide variety of investments available under the plan and are allocated gains or losses based upon the performance of the investments selected by the participant. All gains or losses are allocated fully to plan participants and the Company does not guarantee a rate of return on deferred balances. Assets related to this plan consist of corporate-owned life insurance contracts and are included in other assets in the consolidated balance sheets. Participants have no rights or claims with respect to any plan assets and any such assets are subject to the claims of the Company’s general creditors. Subsequent to December 31, 2017, the Company made contributions to the non-qualified deferred compensation plan related to the year ended December 31, 2017 of approximately $29,000. Future matching or profit sharing contributions to the plans are at the Company’s sole discretion.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
15. Business Acquisitions
Axon Artificial Intelligence
On December 30, 2016, the Company acquired certain intellectual property from Fossil Group, Inc. and Fossil Vietnam, Limited Liability Company. This transaction, which was accounted for as a business combination under ASC 805, was part of the Company's efforts to expand on the Software and Sensors platform by transforming workflows using computer vision and natural language with machine learning techniques in order to analyze data and multimedia captured throughout the course of policing. Additionally, as part of the acquisition, a team of researchers and software engineers joined the Company as part of the newly established Axon AI team. The purchase price, totaling approximately $6.8 million, consisted of $3.5 million cash at close, and up to an additional $3.3 million of consideration contingent upon the satisfaction of certain conditions. As of September 30, 2017, no amounts were earned relative to the earn-out provisions.
The major classes of assets and liabilities to which the Company has allocated the purchase price were as follows (in thousands):
|
| | | |
| Developed technology | $ | 5,210 |
|
| Goodwill | 1,615 |
|
| Total purchase price | $ | 6,825 |
|
The Company assigned the goodwill to the Software and Sensors segment. The acquired developed technology was assigned an amortization period of five years. Costs related to the acquisition were expensed as incurred and were considered insignificant.
Dextro, Inc.
On February 8, 2017, the Company acquired all of the outstanding common stock of Dextro for a total purchase price of $7.5 million. Dextro's technology provides one of the first computer-vision and deep learning systems to make the visual contents in video searchable in real time. This technology will allow law enforcement agencies and departments to quickly isolate and analyze critical seconds of footage from massive amounts of video data. The technology acquired, along with the Dextro employees that joined the Company, were key additions to the Axon AI team.
The purchase price of $7.5 million consisted primarily of cash, net of cash acquired, and contingent consideration of $1.0 million representing potential earn-outs to former stockholders based on predetermined future metrics. As of December 31, 2017, no amounts were earned relative to the former stockholder earn-out provisions. The Company also agreed to additional earn-out provisions to former Dextro employees totaling approximately $1.4 million based, in part, on predetermined future metrics. The additional earn-outs were not included as part of the purchase price and are being expensed as compensation for the employees in the period earned.
The major classes of assets and liabilities to which the Company has allocated the purchase price were as follows (in thousands):
|
| | | |
| Accounts receivable | $ | 12 |
|
| Property and equipment | 46 |
|
| Developed technology | 5,800 |
|
| Goodwill | 2,703 |
|
| Deferred income tax liabilities, net | (1,074 | ) |
| Total purchase price | $ | 7,487 |
|
The Company has assigned the goodwill to the Software and Sensors segment. Identifiable definite-lived intangible assets were assigned a total weighted average amortization period of 3.4 years. Dextro has been included in the Company's consolidated results of operations subsequent to the acquisition date. Pro forma results of operations for Dextro have not been presented because they are not material to the consolidated results of operations. In connection with the acquisition, the Company incurred and expensed costs of approximately $0.2 million, which included legal, accounting and other third-party expenses related to the transaction.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Breon Enterprises
On July 1, 2017, the Company acquired certain tangible and intangible assets from Breon, which was the Company's distributor in the Australia region. This transaction, which was accounted for as a business combination under ASC 805, is intended to expand the Company's growth across Australia and surrounding regions by growing its in-country sales and support team.
The purchase price of $4.2 million was paid in full through two wire transactions completed during July 2017. As of the acquisition date, the Company had a $2.2 million pre-existing accounts receivable balance from Breon for the Company's sales of goods and services to Breon prior to the acquisition date. This receivable balance was cash settled in full separately from the business combination at its book value, which was considered to be the fair value due to the short-term nature of the receivable.
The major classes of assets to which the Company has allocated the purchase price were as follows (in thousands):
|
| | | |
| Re-acquired distribution rights | $ | 2,100 |
|
| Customer relationships | 400 |
|
| Goodwill | 1,650 |
|
| Total purchase price | $ | 4,150 |
|
The Company has assigned $0.8 million of the goodwill to each of the TASER Weapons and Software and Sensors segments. The assignment of goodwill was based on the Company's estimate of how the acquired assets would contribute cash flows to the Company over time. Identifiable definite-lived intangible assets were assigned a total weighted average amortization period of 2.1 years. Breon has been included in the Company's consolidated results of operations subsequent to the acquisition date. Pro forma results of operations for Breon have not been presented because they are not material to the consolidated results of operations. Costs related to the acquisition were expensed as incurred and were considered insignificant.
16.Note 20 - Segment Data
The Company’sOur operations are comprised of two reportable segments: the TASER Weapons segment and Software and Sensors segment. The Company includes only revenues and costs attributable to the Software and Sensors products in that segment. Included in Software and Sensors segment costs are: costs of sales for both products and services, overhead allocation based on direct labor, selling expense for the Software and Sensors sales team, product management expenses, trade shows and related expenses, and research and development for products included in the Software and Sensors segment. All other costs are includedIn both segments, we report sales of products and services. Service revenue in both segments includes sales related to Axon Evidence. In the TASER Weapons segment. Thesegment, service revenue also includes digital subscription training content. 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, doesis not review assets by segment as part of the financial information provided; therefore, only limitedprovided asset information is provided in the following tables.or sales, general, and administrative expense by segment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Information relative to the Company’sour reportable segments was as follows (in thousands):
| | | | | | | | | |
| | For the year ended December 31, 2022 |
| | | | | Software and | | | |
| | TASER | | Sensors | | Total |
Net sales from products | | $ | 511,010 | | $ | 290,378 | | $ | 801,388 |
Net sales from services | | | 20,556 | | | 367,991 | | | 388,547 |
Net sales | | | 531,566 | | | 658,369 | | | 1,189,935 |
Cost of product sales | | | 194,957 | | | 168,262 | | | 363,219 |
Cost of service sales | | | — | | | 98,078 | | | 98,078 |
Cost of sales | | | 194,957 | | | 266,340 | | | 461,297 |
Gross margin | | $ | 336,609 | | $ | 392,029 | | $ | 728,638 |
| | | | | | | | | |
Research and development | | $ | 51,607 | | $ | 182,203 | | $ | 233,810 |
| | | | | | | | | |
| | For the year ended December 31, 2021 |
| | | | | Software and | | | |
| | TASER | | Sensors | | Total |
Net sales from products | | $ | 426,916 | | $ | 181,609 | | $ | 608,525 |
Net sales from services | | | 10,011 | | | 244,845 | | | 254,856 |
Net sales | | | 436,927 | | | 426,454 | | | 863,381 |
Cost of product sales | | | 149,739 | | | 110,359 | | | 260,098 |
Cost of service sales | | | 145 | | | 62,228 | | | 62,373 |
Cost of sales | | | 149,884 | | | 172,587 | | | 322,471 |
Gross margin | | $ | 287,043 | | $ | 253,867 | | $ | 540,910 |
| | | | | | | | | |
Research and development | | $ | 46,136 | | $ | 147,890 | | $ | 194,026 |
| | | | | | | | | |
| | For the year ended December 31, 2020 |
| | | | | Software and | | | |
| | TASER | | Sensors | | Total |
Net sales from products | | $ | 362,649 | | $ | 137,601 | | $ | 500,250 |
Net sales from services | | | 3,903 | | | 176,850 | | | 180,753 |
Net sales | | | 366,552 | | | 314,451 | | | 681,003 |
Cost of product sales | | | 136,925 | | | 87,206 | | | 224,131 |
Cost of service sales | | | — | | | 40,541 | | | 40,541 |
Cost of sales | | | 136,925 | | | 127,747 | | | 264,672 |
Gross margin | | $ | 229,627 | | $ | 186,704 | | $ | 416,331 |
| | | | | | | | | |
Research and development | | $ | 15,380 | | $ | 107,815 | | $ | 123,195 |
|
| | | | | | | | | | | |
| | For the year ended December 31, 2017 |
| | TASER Weapons | | Software and Sensors | | Total |
| Net sales from products | $ | 234,512 |
| | $ | 51,347 |
| | $ | 285,859 |
|
| Net sales from services | — |
| | 57,939 |
| | 57,939 |
|
| Net sales | 234,512 |
| | 109,286 |
| | 343,798 |
|
| Cost of product sales | 72,054 |
| | 45,943 |
| | 117,997 |
|
| Cost of service sales | — |
| | 18,713 |
| | 18,713 |
|
| Cost of sales | 72,054 |
| | 64,656 |
| | 136,710 |
|
| Gross margin | 162,458 |
| | 44,630 |
| | 207,088 |
|
| Sales, general and administrative | 78,202 |
| | 60,490 |
| | 138,692 |
|
| Research and development | 8,377 |
| | 46,996 |
| | 55,373 |
|
| Income (loss) from operations | $ | 75,879 |
| | $ | (62,856 | ) | | $ | 13,023 |
|
| Purchase of property and equipment | $ | 4,341 |
| | $ | 6,078 |
| | $ | 10,419 |
|
| Purchase of intangible assets | 259 |
| | 765 |
| | 1,024 |
|
| Purchase of property and equipment and intangible assets, including goodwill, in connection with business acquisitions | 2,075 |
| | 10,624 |
| | 12,699 |
|
| Depreciation and amortization | 2,705 |
| | 5,336 |
| | 8,041 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, 2016 |
| | TASER Weapons | | Software and Sensors | | Total |
| Net sales from products | $ | 202,644 |
| | $ | 35,929 |
| | $ | 238,573 |
|
| Net sales from services | — |
| | 29,672 |
| | 29,672 |
|
| Net sales | 202,644 |
| | 65,601 |
| | 268,245 |
|
| Cost of product sales | 61,930 |
| | 29,606 |
| | 91,536 |
|
| Cost of service sales | — |
| | 6,173 |
| | 6,173 |
|
| Cost of sales | 61,930 |
| | 35,779 |
| | 97,709 |
|
| Gross margin | 140,714 |
| | 29,822 |
| | 170,536 |
|
| Sales, general and administrative | 63,617 |
| | 44,459 |
| | 108,076 |
|
| Research and development | 5,887 |
| | 24,722 |
| | 30,609 |
|
| Income (loss) from operations | $ | 71,210 |
| | $ | (39,359 | ) | | $ | 31,851 |
|
| Purchase of property and equipment | $ | 4,129 |
| | $ | 828 |
| | $ | 4,957 |
|
| Purchase of intangible assets | 262 |
| | 3,233 |
| | 3,495 |
|
| Purchase of intangible assets, including goodwill, in connection with business acquisitions | — |
| | 6,825 |
| | 6,825 |
|
| Depreciation and amortization | 2,207 |
| | 1,451 |
| | 3,658 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
| | | | | | | | | | | |
| | For the year ended December 31, 2015 |
| | TASER Weapons | | Software and Sensors | | Total |
| Net sales from products | $ | 162,375 |
| | $ | 22,855 |
| | $ | 185,230 |
|
| Net sales from services | — |
| | 12,662 |
| | 12,662 |
|
| Net sales | 162,375 |
| | 35,517 |
| | 197,892 |
|
| Cost of product sales | 48,821 |
| | 16,201 |
| | 65,022 |
|
| Cost of service sales | — |
| | 4,223 |
| | 4,223 |
|
| Cost of sales | 48,821 |
| | 20,424 |
| | 69,245 |
|
| Gross margin | 113,554 |
| | 15,093 |
| | 128,647 |
|
| Sales, general and administrative | 47,640 |
| | 22,058 |
| | 69,698 |
|
| Research and development | 4,470 |
| | 19,144 |
| | 23,614 |
|
| Income (loss) from operations | $ | 61,444 |
| | $ | (26,109 | ) | | $ | 35,335 |
|
| Purchase of property and equipment | $ | 4,159 |
| | $ | 1,844 |
| | $ | 6,003 |
|
| Purchase of intangible assets | 277 |
| | 224 |
| | 501 |
|
| Purchase of property and equipment and intangible assets, including goodwill, in connection with business acquisitions | 1,453 |
| | 11,146 |
| | 12,599 |
|
| Depreciation and amortization | 2,311 |
| | 980 |
| | 3,291 |
|
17. Selected Quarterly Financial Data (unaudited)
Selected quarterly financial data for years ended December 31, 2017 and 2016 follows (in thousands, except per share data):
|
| | | | | | | | | | | | | | | |
| | Quarter Ended |
| | March 31, | | June 30, | | September 30, | | December 31, |
| | 2017 | | 2017 | | 2017 | | 2017 |
| Net sales | $ | 79,242 |
| | $ | 79,643 |
| | $ | 90,262 |
| | $ | 94,651 |
|
| Gross margin | 48,670 |
| | 45,637 |
| | 49,765 |
| | 63,016 |
|
| Net income (loss) | 4,580 |
| | 2,276 |
| | 422 |
| | (2,071 | ) |
Earnings per share (1): | | | | | | | |
| Basic | $ | 0.09 |
| | $ | 0.04 |
| | $ | 0.01 |
| | $ | (0.04 | ) |
| Diluted | $ | 0.09 |
| | $ | 0.04 |
| | $ | 0.01 |
| | $ | (0.04 | ) |
| | | | | | | | |
| | Quarter Ended |
| | March 31, | | June 30, | | September 30, | | December 31, |
| | 2016 | | 2016 | | 2016 | | 2016 |
| Net sales | $ | 55,530 |
| | $ | 58,756 |
| | $ | 71,882 |
| | $ | 82,077 |
|
| Gross margin | 36,902 |
| | 37,299 |
| | 46,565 |
| | 49,770 |
|
| Net income | 3,463 |
| | 3,650 |
| | 3,843 |
| | 6,341 |
|
Earnings per share (1): | | | | | | | |
| Basic | $ | 0.06 |
| | $ | 0.07 |
| | $ | 0.07 |
| | $ | 0.12 |
|
| Diluted | $ | 0.06 |
| | $ | 0.07 |
| | $ | 0.07 |
| | $ | 0.12 |
|
(1) Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
18.Note 21 - Supplemental Disclosure to Cash Flows
Supplemental non-cash and other cash flow information were as follows as of and for the years ended December 31 (in thousands):
| | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Supplemental disclosures: | | | | | | | | | |
Cash and cash equivalents | | $ | 353,684 | | $ | 356,332 | | $ | 155,440 |
Restricted cash | | $ | 1,868 | | $ | 106 | | $ | 111 |
Total cash, cash equivalents and restricted cash shown in the statements of cash flows | | $ | 355,552 | | $ | 356,438 | | $ | 155,551 |
| | | | | | | | | |
Cash paid for income taxes, net of refunds | | $ | 10,508 | | $ | 5,108 | | $ | 10,893 |
| | | | | | | | | |
Non-cash transactions: | | | | | | | | | |
Property and equipment purchases in accounts payable | | $ | 1,056 | | $ | 1,994 | | | 878 |
Non-cash purchase consideration related to business combinations | | | — | | | 3,920 | | | — |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Cash paid for income taxes, net of refunds | $ | 11,487 |
| | $ | 14,048 |
| | $ | 6,759 |
|
| Non-cash transactions: | | | | | |
| Contingent consideration related to business combinations | $ | 1,007 |
| | $ | 3,325 |
| | $ | 952 |
|
| Property and equipment purchases in accounts payable | 133 |
| | 82 |
| | 315 |
|
| Purchase of assets under capital lease obligations | — |
| | 134 |
| | — |
|
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
19. Subsequent Event
On February 26, 2018, the Company's Board of Directors approved a new stock option grant to Patrick W. Smith, the Company's Chief Executive Officer (“CEO Performance Award”), which is subject to shareholder approval. The CEO Performance Award will consist of 12 vesting tranches, each equal to 1% of our outstanding common stock as of February 23, 2018, the business day prior to the award date. The CEO Performance Award will have a per share exercise price equal to $28.58, the closing price of our common stock on February 23, 2018, and will have a vesting schedule based entirely on the attainment of both operational and market capitalization milestones.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Axon Enterprise, Inc. (a Delaware corporation) and subsidiaries (the(the “Company”) as of December 31, 20172022 and 2016,2021, the related consolidatedstatements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Companyas of December 31, 20172022 and 2016,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2022, in conformity with accounting principles generally accepted in the United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017,2022, based on criteria established in the 2013
Internal Control-IntegratedInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 1, 2018February 28, 2023 expressed an adverse opinion.These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition – Bundled Arrangements with Multiple Performance Obligations
As described further in Notes 1 and 2 to the financial statements, the Company derives revenue from two primary sources: the sale of physical products (including conducted energy devices (CEDs), cameras, corresponding hardware extended warranties, and related accessories), and subscriptions to the Axon Evidence digital evidence management software-as-a-service. To a lesser extent, the Company also recognizes revenue related to training, professional services and other software services. Many of the Company’s products are sold on a standalone basis; however, the Company also bundles its hardware product and service performance obligations and sells them to customers as part of a single transaction.
We consider the identification of performance obligations, treatment of contract term assessments, the determination of the standalone selling price and allocation of the transaction price to multiple performance obligations, including the determination as to whether any amendments to an existing contract result in a modification, to be a critical audit matter.
The principal consideration for our determination that these revenue recognition matters are a critical audit matter is that significant judgment is exercised by the Company in determining revenue recognition for contracts with multiple performance obligations, and includes the following:
Judgment in modification assessment and conclusions resulting from amendments to existing contracts.
Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., substantive termination penalties).
Identification of all promises in the contract and whether such promises are limited to distinct explicit goods or services or whether they may be implied.
Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately, which may include a market assessment of what the customer would be willing to pay for each performance obligation or an estimate of the expected cost plus an appropriate estimated margin of the performance obligation.
These judgments require significant auditor subjectivity in evaluating the reasonableness of those judgments. Our audit procedures related to the revenue recognition for contracts with multiple performance obligations included the following, among others:
We tested the design and operating effectiveness of controls over the Company’s contract review process, including those over the assessment of amendments to existing contracts, treatment of contract term assessments, the identification of distinct performance obligations included in the initial or amended contract, and the establishment and monitoring of standalone selling prices.
We evaluated management’s judgment in significant accounting polices related to these arrangements for reasonableness.
For a sample of contracts, we performed the following procedures:
| - | Obtained and analyzed the contract source documents for each selection, and other documents deemed a component of the arrangement, in order to test the appropriateness of management’s identification and determination of contract terms. |
| - | Assessed contractual terms and the appropriateness of material right determinations. |
| - | Obtained management’s contract review assessment and corroborate the judgments applied in accounting for the arrangements. |
| - | Assessed the terms in the arrangement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions. |
| - | Traced the term of the revenue recognition period to the contract and recalculated the expected revenue recognized during the period. |
We evaluated the reasonableness of management’s estimate of stand-alone selling prices for products and services by comparing the stand-alone prices to historic stand-alone transactions and other data.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2005.
Phoenix, Arizona
February 28, 2023
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial DisclosureItem 9A.
Controls and ProceduresAttached as exhibits to this Form 10-K are certifications of the Chief Executive Officer (as the principal executive officer) and Chief Financial Officer (as the principal financial and accounting officer), which are required in accordance with Rule 13a-14 of the Exchange Act. This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications. This section should be read in conjunction with the certifications and the Grant Thornton LLP attestation report for a more complete understanding of the topics presented. Grant Thornton LLP has independently assessed the effectiveness of our internal control over financial reporting and its report is included below.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer are responsible for the evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Our disclosure controls and procedures are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on thatthis evaluation, our Chief Executive Officer and Principalour Chief Financial and Accounting Officer have concluded that because a material weakness exists in our internal control over financial reporting, as further described below,of December 31, 2022 our disclosure controls and procedures were not effective as of December 31, 2017 at a level that provides reasonable assurance asbecause of the last day of the period covered by this report.
material weakness in our internal control over financial reporting described below.Management Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act). Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 20172022 based on criteria set forthestablished in
Internal Control - IntegratedControl-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).Commission. As a result of this assessment, management concluded that, as of December 31, 2017,2022, our internal control over financial reporting was not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.During the yearsyear ended December 31, 2017 and 2016,2022, we identified a material weaknessesweakness in our internal control over financial reporting. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.
We previously identified and disclosed in our Annual Report on Form 10-K forSpecifically, during the year ended December 31, 2016, as well as in our Quarterly Reports on Form 10-Q for each interim period in fiscal 2017, material weaknesses in our internal control over financial reporting. Specifically, during the quarter ended March 31, 2017,2022, we identified a material weakness over accounting for income taxes. During the year ended December 31, 2016, we identified material weaknesses in our internal controls over revenue recognition, coststemming from control deficiencies with respect to the risks of goods soldunderstatement of software and services deliveredrevenue and the reportingoverstatement of deferred revenue. Further, we identifiedThis material weaknesses in our account reconciliations and monitoring processes. These material weaknessesweakness in internal control over financial reporting resulted from a breakdownfailure to effectively manage the migration of triggering events for certain software and services performance obligations during the quote-to-cash phase of the implementation of our Enterprise Resource Planning (“ERP”) and related systems in 2021. Additionally, there were limited instances of invoicing errors resulting from ineffective change management of the operation of identified preventativequote-to-cash systems implementation. The manual business processes for tracking open software and services performance obligations and for monitoring billing events were not sufficiently robust to prevent the errors. The related business processes and account reconciliation detective controls which led to the Companywere not initially recording some transactions correctly.
To remediate the material weaknesses described above, we designed and implemented controls and enhanced and revised the design of existing controls and procedures. Specifically:
we added resources to our revenue, tax and general accounting teams to ensure that we have the knowledge and resources to properly account for transactions in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”),
we implemented additional internal reporting procedures, including those designed to add depthoperate with a sufficient degree of precision to our detailed review processesidentify these errors on a timely basis. These deficiencies resulted in immaterial understatements of sales transactionsrevenue that accumulated over time and related accounting for deferred revenue and cost of product and service sales,
we implemented additional monitoring controls that help detect data entry errors of transactional information within the Company’s general ledger system, as well as added and refined existing system reports to help isolate outliers within the Company’s transactional data for further review, and
we improved communication and coordination among our finance and accounting departments and we expanded cross-functional involvement and input into period-end accruals.
We successfully completed the testing of these remedial controls related to the previously reported material weaknesses and concluded that they are designed and operating effectively to provide reasonable assurance regarding the reliability of our financial reporting and preparation of financial statementswere corrected in accordance with generally accepted accounting principles.
During the fourth quarter of
2017, we identified a material weakness related to account reconciliations2022 as disclosed in Note 1 of the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
Grant Thornton LLP has independently assessed the effectiveness of our internal control over financial reporting and monitoring over our U.K. subsidiary, Axon Public Safety U.K. Ltd. ("APS U.K"), which resulted from a breakdown in the operation of identified preventative and detective controls which led to the Company not initially recording some transactions correctly during 2016 and the interim periods in 2017.
its report is included below.
Remediation Plan
To remediate the material weakness described above, we are designing and related to APS U.K., we designed a specific plan to designimplementing new business processes and automation of integrations between our systems as well as enhancing our reconciliation controls and enhancedmonitoring procedures to properly ensure transactions are identified and recorded timely and accurately.
We are in the designprocess of existing controlsdocumenting, assessing and procedures. Specifically:
duringtesting the 2017 year-end closenecessary changes in our internal control over financial reporting as part of our accounting records we sent accounting personnel from our headquarters in Arizonaefforts to the U.K. to perform additional review procedurescomply with Section 404 of the account reconciliations for APS U.K. and our corporate accounting team performed additional reviews of APS U.K. activity,
we plan for our corporate accounting team to continue to perform these additional review procedures on an ongoing basis, and
we plan to add internal reporting procedures, including those designed to add depth to our detailed review processes of inventory, sales transactions and related accounting for deferred revenue and cost of goods sold and services delivered for APS U.K.
Sarbanes-Oxley Act. The material weakness specific to APS U.K.weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. As
We expect that the remediation has not yet beenof this material weakness will be completed our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective asprior to the end of December 31, 2017 at a level that provides reasonable assurance as of the last day of the period covered by this report.
Grant Thornton LLP has independently assessed the effectiveness of our internal control over financial reporting and its report is included below.
fiscal year 2023. Changes in Internal Control over Financial Reporting
Except asfor the changes noted above, there washave been no changeother changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2017,2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Axon Enterprise, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2017,2022, based on criteria established in the 2013 Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of the material weakness described in the following paragraphs on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2017,2022, based on criteria established in the 2013 Internal Control-IntegratedControl—Integrated Framework issued by COSO.
A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment.
Management has identified deficiencies in the Company’s internal controls related to account reconciliations and monitoring controls over its wholly-owned subsidiary, Axon Public Safety U.K. Ltd. (“APS-UK”). The combination of these deficiencies, when aggregated, resulted in a material weakness inresulting from a failure to effectively manage the designmigration of triggering events for certain software and operating effectivenessservices performance obligations and invoicing errors during the quote-to-cash cycle. The related business processes and account reconciliation detective controls were not designed to operate with a sufficient degree of the Company’s controls.
precision to identify these errors on a timely basis.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2017.2022. The material weakness identified above was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 20172022 consolidated financial statements, and this report does not affect our report dated March 1, 2018February 28, 2023 which expressed an unqualified opinion on those financial statements.
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting (“Management’s Report”).Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Other information
We do not express an opinion or any other form of assurance on management’s description of the steps the Company has taken to remediate any of the material weaknesses as described in Management’s Report.
Phoenix, Arizona
February 28, 2023
Item 9B.
Other InformationItem 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
PART III
Item 10.
Directors, Executive Officers and Corporate GovernanceThe information required to be disclosed by this item is incorporated herein by reference to our definitive proxy statement for the 20182023 Annual Meeting of Stockholders (the “2018“2023 Proxy Statement”), which proxy statement we expect to file with the SEC within 120 days after the end of our fiscal year ended December 31, 2017.
Item 11.
Executive CompensationThe information required to be disclosed by this item is incorporated herein by reference to our 20182023 Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersEquity Compensation Plan Information
A description of our equity compensation plans approved by our stockholders is included in Note 1216 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. The following table provides details of our equity compensation plans at December 31, 2017:
| | | | | | | |
| | Number of | | Weighted | | Number of Securities |
| | Securities to be | | Average | | Remaining Available for |
| | Issued upon | | Exercise Price | | Future Issuance Under Equity |
| | Exercise of Outstanding | | of Outstanding Options, | | Compensation Plans (Excluding Securities |
| | Options, Warrants and Rights | | Warrants and Rights | | Reflected |
Plan Category | | (a) | | (b) (1) | | in Column (a)) (c) |
Equity compensation plans approved by security holders | | 5,096,956 | | $ | 28.58 | | 2,749,539 |
Equity compensation plans not approved by security holders(2) | | 275,095 | | | | | 112,505 |
Total | | 5,372,051 | | $ | — | | 2,862,044 |
|
| | | | | | | | | |
| Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a) | | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (b) (1) | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) |
| Equity compensation plans approved by security holders | 3,152,315 |
| | $ | 4.99 |
| | 1,154,395 |
|
| Equity compensation plans not approved by security holders | — |
| | | | — |
|
| Total | 3,152,315 |
| | $ | — |
| | 1,154,395 |
|
| (1) | |
(1)
| The weighted average exercise price is calculated based solely on the exercise prices of the outstanding options and does not reflect the shares that will be issued upon the vesting of outstanding awards of RSUs which have no exercise price. |
| (2) | In September 2022, our Board of Directors adopted the Axon Enterprise, Inc. 2022 Stock Inducement Plan (the “2022 Inducement Plan”) pursuant to which we reserved 250,000 shares of common stock for issuance under the Inducement Plan. In September 2019, our Board of Directors adopted the Axon Enterprise, Inc. 2019 Stock Inducement Plan (the “2019 Inducement Plan”) pursuant to which we reserved 500,000 shares of common stock for issuance under the Inducement Plan. The 2022 and 2019 Inducement Plans were adopted without stockholder approval pursuant to Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules. The Inducement Plans provides for the grant of equity-based awards, including restricted stock units, restricted stock, performance shares and performance units, and its terms are substantially similar to our stockholder-approved 2022 Plan and 2019 Plan, respectively. In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules, awards under the Inducement Plan may only be |
| made to individuals not previously employees or non-employee directors of the Company (or following such individuals’ bona fide period of non-employment with the Company), as an inducement material to the individuals’ entry into employment with the Company. |
All other information required to be disclosed by this item is incorporated herein by reference to our 20182023 Proxy Statement.
Item 13.
Certain Relationships and Related Transactions, and Director IndependenceThe information required to be disclosed by this item is incorporated herein by reference to our 20182023 Proxy Statement.
Item 14.
Principal AccountingAccountant Fees and ServicesThe information required to be disclosed by this item is incorporated herein by reference to our 20182023 Proxy Statement.
Item 15.
Exhibits, Financial Statement Schedules(a) The following documents are filed as part of this report:
| (a) | The following documents are filed as part of this report: |
| |
| 1. | Consolidated financial statements: All consolidated financial statements as set forth under Part II, Item 8 of this report. |
| |
| 2. | Supplementary Financial Statement Schedules: Schedule II — Valuation and Qualifying AccountsSupplementary schedules have not been included because they are not applicable or because the information is included elsewhere in this report. |
Other schedules have not been included because they are not applicable or because the information is included elsewhere in this report. (Dollars in thousands)
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
|
| | | | | | | | | | | | | | | | | | | |
| Description | Balance at Beginning of Period | | Charged to Costs and Expenses | | Charged to Other Accounts | | Deductions | | Balance at End of Period |
| Allowance for doubtful accounts: | | | | | | | | | |
| Year ended December 31, 2017 | $ | 443 |
| | $ | 592 |
| | $ | — |
| | $ | (306 | ) | | $ | 729 |
|
| Year ended December 31, 2016 | 322 |
| | 205 |
| | — |
| | (84 | ) | | 443 |
|
| Year ended December 31, 2015 | 251 |
| | 86 |
| | — |
| | (15 | ) | | 322 |
|
| Warranty reserve: | | | | | | | | | |
| Year ended December 31, 2017 | $ | 780 |
| | $ | 109 |
| | $ | — |
| | $ | (245 | ) | | $ | 644 |
|
| Year ended December 31, 2016 | 314 |
| | 621 |
| | — |
| | (155 | ) | | 780 |
|
| Year ended December 31, 2015 | 675 |
| | (62 | ) | | — |
| | (299 | ) | | 314 |
|
3. Exhibits:
| Exhibit
Number |
| Description |
|---|
3.1 | | |
Exhibit
Number
| | Description |
3.1 | | |
3.2 | | |
3.3 | | |
3.4 | | |
4.13.2 | | |
4.1 | | Form of Common Stock Certificate (incorporated by reference to Exhibit 4.2 to Registration Statement on Form SB-2, effective May 11, 2001 (Registration No. 333-55658)) |
10.1*4.2 | | |
4.3 | | Indenture, dated as of December 9, 2022, between Axon Enterprise, Inc. and U.S. Bank Trust Company, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed December 9, 2022) |
4.4 | | Form of 0.50% Convertible Senior Note due 2027 (incorporated by reference to Exhibit A in Exhibit 4.1 to the Current Report on Form 8-K, filed December 9, 2022) |
10.1+ | | Form of Indemnification Agreement between the Company and its directors (incorporated by reference to Exhibit 10.4 to Registration Statement on Form SB-2, effective May 11, 2001 (Registration No. 333-55658)) |
10.2*10.2+ | | |
10.3*10.3+ | | |
10.4* | | |
10.5* | | |
Exhibit
Number |
| Description |
|---|
10.6+ | | CEO Performance Award (incorporated by reference to Annex A of the Company’s Proxy Statement, filed on April 13, 2018) |
10.7+ | | Axon Enterprise, Inc. 2019 Stock Incentive Plan (incorporated by reference to Annex A of the Company’s Proxy Statement, filed on December 31, 2018) |
10.8+ | | Axon Enterprise, Inc. 2019 Stock Incentive Plan Exponential Stock Unit Grant Notice (incorporated by reference to Annex B of the Company’s Proxy Statement, filed on December 31, 2018) |
10.9+ | | Executive Employment Agreement with Jawad A. Ahsan, dated March 20, 2017by and between Axon Enterprise, Inc. and Luke S. Larson (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed June 4, 2019) |
10.15*10.10+ | | |
10.11+ | | Executive Employment Agreement by and between Axon Enterprise, Inc. and Jeffrey C. Kunins, dated December 1, 2017September 23, 2019 (incorporated by reference to Exhibit 10.16 to the Annual Report on Form 10-K, filed February 28, 2020) |
10.12+ | | Axon Enterprise, Inc. 2019 Stock Inducement Plan (incorporated by reference to Exhibit 99.1 to the registration statement on Form S-8, filed September 23, 2019) |
10.13+ | | Auction Statement from the Company to the Arizona State Land Department (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q, filed November 6, 2020) |
10.14± | | Construction Management Agreement, dated February 23, 2022, by and between Axon Enterprise, Inc. and Okland Construction Company, Inc. (incorporated by reference to Exhibit 10.19 to the Annual Report on Form 10-K, filed February 24, 2022) |
10.15+ | | Executive Employment Agreement by and between Axon Enterprise, Inc. and James C. Zito (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q, filed August 9, 2022) |
10.16+ | | Axon Enterprise, Inc. 2022 Stock Incentive Plan (incorporated by reference to Annex B of the Company’s Proxy Statement, filed April 8, 2022) |
10.17+ | | Axon Enterprise, Inc. 2022 Stock Inducement Plan (incorporated by reference to Exhibit 99.1 to the registration statement on Form S-8, filed September 23, 2022) |
10.18+ | | Executive Employment Agreement by and between Axon Enterprise, Inc. and Brittany Bagley (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q, filed November 9, 2022) |
10.19 | | Form of Convertible Note Hedge Confirmation (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed December 4, 2017)9, 2022) |
10.16*10.20 | | |
10.17*10.21* | | |
10.18* | | |
10.19** | | |
10.20** | | |
21.1** | | |
23.1** | | |
24.1** | | |
31.1** | | |
31.2** | | |
32*** | | |
101.INS** | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH** | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL** | | Inline XBRL Taxonomy Calculation Linkbase Document |
101.LAB** | | Inline XBRL Taxonomy Label Linkbase Document |
101.PRE** | | Inline XBRL Taxonomy Presentation Linkbase Document |
104 | | The cover page from the Company’s Annual Report for the year ended December 31, 2022, formatted in Inline XBRL |
+ | Management contract or compensatory plan or arrangement |
* Management contract or compensatory plan or arrangement
** Filed herewith*** Furnished herewith
± | Certain confidential portions of this Exhibit were omitted by means of marking such portions with brackets (“[***]”) because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed. |
Item 16.
Form 10-K Summary
SIGNATURESSIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | |
| | | | |
| | | | |
AXON ENTERPRISE, INC. | | | |
| | | | |
Date: February 28, 2023 | March 1, 2018 | | | |
| By: | By: | | /s/ PATRICK W. SMITH |
| | | | Chief Executive Officer, Director |
| | | | (Principal Executive Officer) |
| | | |
Date: February 28, 2023 | March 1, 2018By: | By: | | /s/ JAWAD A. AHSANBRITTANY BAGLEY |
| | | | Chief Financial Officer and Chief Business Officer |
| | | | (Principal Financial and Accounting Officer) |
KNOW ALL PERSONS BY THESE PRESENTS
, that each person whose signature appears below constitutes and appoints Patrick W. Smith his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
| | | | |
| | | | |
Signature | | Title | | Date |
| | |
| | Chief Executive Officer, Director | | |
/s/ PATRICK W. SMITH | | (Principal Executive Officer) | | March 1, 2018February 28, 2023 |
Patrick W. Smith | | | | |
| | | | |
| | Chief Financial Officer and Chief Business Officer | | |
/s/ JAWAD A. AHSANBRITTANY BAGLEY | | (Principal Financial and Accounting Officer) | | March 1, 2018February 28, 2023 |
Jawad A. AhsanBrittany Bagley | | | | |
| | | | |
/s/ ADRIANE M. BROWN | | Director | | February 28, 2023 |
Adriane M. Brown | | | | |
| | | | |
/s/ JULIE A. CULLIVAN | | Director | | February 28, 2023 |
Julie A. Cullivan | | | | |
| | | | |
/s/ MICHAEL GARNREITER | | Director | | March 1, 2018February 28, 2023 |
Michael Garnreiter | | | | |
| | | | |
/s/ HADI PARTOVICAITLIN E. KALINOWSKI | | Director | | March 1, 2018February 28, 2023 |
Hadi PartoviCaitlin E. Kalinowski | | | | |
| | | | |
/s/ MARK W. KROLL | | Director | | March 1, 2018February 28, 2023 |
Mark W. Kroll | | | | |
| | | | |
/s/ RICHARD H. CARMONA | | Director | | March 1, 2018 |
Richard H. Carmona | | | | |
| | |
/s/ BRET S. TAYLOR | | Director | | March 1, 2018 |
Bret S. Taylor | | | | |
| | |
/s/ MATTHEW R. MCBRADY | | Director | | March 1, 2018February 28, 2023 |
Matthew R. McBrady | | | | |
| | | | |
/s/ JULIE A. CULLIVANHADI PARTOVI | | Director | | March 1, 2018February 28, 2023 |
Julie A. CullivanHadi Partovi | | | | |
