UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
⌧ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2021
or
◻ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to _______
Commission File Number: 001-16391
Axon Enterprise, Inc.
(Exact name of registrant as specified in its charter)
| | |
Delaware |
| 86-0741227 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
| | |
17800 North 85th Street | | 85255 |
Scottsdale, Arizona | | (Zip Code) |
(Address of principal executive offices) | | |
Registrant’s telephone number, including area code:
(480) 991-0797
Securities registered pursuant to Section 12(b) of the Act:
| | |
| | |
Title of each class | Trading Symbol(s) | Name of exchange on which registered |
Common Stock, $0.00001 par value per share | AXON | The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☒ No ☐
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 ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | |
Large accelerated filer | ☒ | | Accelerated filer☐ |
| | | |
Non-accelerated filer | ☐ | | Smaller reporting company☐ |
| | | |
| | | Emerging growth company☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant 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. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2021, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $11.4 billion based on the closing sale price as reported on The NASDAQ Global Select Market.
The number of shares of the registrant’s common stock outstanding as of February 18, 2022 was 70,931,874.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the registrant’s definitive proxy statement for its 2022 annual meeting of stockholders to be prepared and filed with the Securities and Exchange Commission not later than 120 days after December 31, 2021 are incorporated by reference into Part III of this Form 10-K.
AXON ENTERPRISE, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2021
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PART I
Statements contained in this report that are not historical are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions and strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Words such as “may,” “will,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions, as well as statements in future tense, identify forward-looking statements. However, not all forward-looking statements contain these identifying words.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Many events beyond our control may determine whether results we anticipate will be achieved. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements. This report lists various important factors that could cause actual results to differ materially from expected and historical results. These factors are intended as cautionary statements for investors within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. Readers can find them under the heading “Risk Factors” in 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 such list to be a complete set of all potential risks or uncertainties.
Except as required by law, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission ("SEC"). Our filings with the SEC may be accessed at the SEC’s web site at www.sec.gov.
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Item 1. Business
Axon Enterprise, Inc. may be referred to as “the Company,” “Axon,” “we,” or “our.” We were incorporated in Arizona in September 1993 as ICER Corporation. We changed our name to AIR TASER, Inc. in December 1993 and to TASER International, Incorporated in April 1998. In January 2001, we reincorporated in Delaware as TASER International, Inc., and in April 2017, changed our name to Axon Enterprise, Inc.
Our headquarters in Scottsdale, Arizona houses our executive management, sales, marketing, certain engineering, manufacturing, finance and other administrative support functions. Our global software hub is located in Seattle, Washington, and we also have subsidiaries and / or offices located in Australia, Canada, Finland, Germany, Hong Kong, India, Italy, the Netherlands, the United Kingdom, and Vietnam.
Overview
Axon’s mission is to protect life. We fulfill this mission through developing hardware and software products that advance our long-term strategic goals of a) obsoleting the bullet, b) reducing social conflict, c) enabling a fair and effective 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.
An axon is a nerve fiber that serves as the primary communication link in a nervous system — similarly, we see ourselves as building the nervous system for public safety. Our research & development (“R&D”) investments support continuous innovation on behalf of our customers. Our financial strategy is to build highly recurring, highly profitable businesses.
In 2021, we made investments for scale to expand our total addressable market along three axes — introducing new products, selling into new customer market segments, and adding sales channels to new geographic regions. We believe we are serving a $52 billion total addressable market.
| ● | What we build - Technologies to assist officers in de-escalating events, devices, digital evidence management systems, productivity software, real-time operations software and services, and virtual reality training services |
| ● | Who we sell to - State and local law enforcement, U.S. federal civilian and defense agencies, justice and court systems, corrections, fire departments and emergency medical services providers, consumers, and commercial enterprises such as private security firms and transportation providers |
| ● | Where we deliver – U.S., Asia-Pacific (“APAC”); Europe, the Middle East, and Africa (“EMEA”) and the Americas |
Axon’s operations comprise two reportable segments:
| 1. | 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. |
| 2. | 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. |
Further information about our reportable segments and sales by geographic region is included in Notes 1 and 19 of the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K. For backlog by reportable segment, refer to Part II, Item 7 of this Annual Report on Form 10-K.
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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:
| 1. | TASER: We develop smart devices, tools and services that support public safety officers in de-escalating situations, avoiding or minimizing use of force and aid consumers in 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. police departments and are used daily to help keep communities safe. We see opportunity to create more effective and reliable personal protection for private individuals, and, thus, our consumer business is a growing area of investment. Our market penetration among consumers is virtually nil. |
| 2. | 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. |
| 3. | 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 $327.5 million(a) as of December 31, 2021. 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. |
| (a) | Monthly recurring license, integration, warranty, and storage revenue annualized. |
Sales and Distribution: Who We Sell To and Where We Deliver
Axon’s direct sales force and strong customer relationships represent key strategic advantages. The majority of our revenues are generated via direct sales, including our online store, although we do leverage distribution partners and third-party resellers.
No customer represented more than 10% of total net sales for the years ended December 31, 2021, 2020 or 2019.
Our primary customer market is U.S. law enforcement. Of the approximately 18,000 law enforcement agencies in the U.S., we have a customer relationship with approximately 17,000. Axon has dedicated sales representatives for the 1,200 largest agencies, which account for approximately 70% of U.S. law enforcement patrol officers. The remaining agencies are served via our telesales team as well as distributors.
In recent years, we have been investing in sales personnel to capture new markets, including the U.S. federal government and military, departments of corrections, the fire and emergency medical services markets, and new geographies outside the U.S. In 2021, we continued to expand our presence in new markets by growing our dedicated sales teams in the Justice and Enterprise markets.
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.
Resources
Manufacturing and Supply Chain
We perform light manufacturing, final assembly, and final test operations at our headquarters in Scottsdale, Arizona, and own substantially all of the equipment required to develop, prototype, manufacture and assemble our finished products. We have continued to maintain both our ISO 9001 and our ISO 9001:2015 certifications.
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We previously took steps to diversify our supply chain and global manufacturing footprint, which positioned us well to manage through the COVID-19 pandemic. Thus far, we have been able to produce and ship our critical core products. However, as we enter 2022 material availability still poses real risks to all businesses that manufacture products. Supplier decommitments remain our largest area of risk and we have seen this practice increase over the course of the pandemic and global supply chain constraints. We proactively manage our supply chain down to third tier suppliers to 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 (Covid, geopolitical, governmental, etc.) to mitigate potential supply disruptions.
In light of our broad domestic and international 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 our components from single source suppliers; however, because we own the injection molded component tooling used in their production, we believe we could obtain alternative suppliers in most cases without incurring significant production delays. For additional discussion of sources and availability of raw materials, refer to Note 1 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
We provide limited manufacturer’s warranties on our CEDs and Axon devices, and customers also have the option to purchase extended warranties. For additional information about our warranties, refer to Note 1 to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
Intellectual Property
We protect our intellectual property with U.S. and international 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 laws to protect our intellectual property. As of December 31, 2021, we hold 253 U.S. patents, 91 U.S. registered trademarks, 155 international patents, and 383 international registered trademarks, and also have numerous patent and trademark 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. We have the exclusive rights to many Internet domain names, primarily including “TASER.com”, “Axon.com”, “Axon.net”, “Evidence.com” and “Axon.io.” 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
TASER for Law Enforcement, Corrections and Private Security Markets: Our CEDs compete with a variety of other less-lethal alternatives to firearms, including rubber bullets or rubber baton rounds, pepper spray, pepper spray projectiles, mace, traditional stun guns, hand-held remote restraint devices involving a tether, laser dazzlers that cause temporary blindness, stun grenades, long-range acoustic devices, police batons and night sticks. TASER devices offer advanced technology, versatility, portability, effectiveness, built-in accountability systems, and low injury rates, which enable us to compete effectively against other less-lethal alternatives. TASER devices also offer connectivity to our cloud network, which allows agencies to more effectively manage their less-lethal programs and automate use-of-force reporting.
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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.
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. 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.
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, Panasonic Corp., Reveal Media, Coban Technologies, L3 Mobile-Vision, Digital Ally, Visual Labs, Intrensic, LLC, as well as Safety Vision, Rekor, and Genetec.
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, NICE, QueTel, OpenText, and FileOnQ among others.
Key competitive factors in this market include product performance, product features (including live-streaming, GPS tracking, and pre-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 Systems USA), Saab, SOMA Global, RapidDeploy, Sopra Steria, and Mark 43 Inc. In addition, not all law enforcement agencies use software for report writing — some still use paper. We believe our network of camera sensors and digital evidence management platform give us a strategic advantage in these product categories. 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, LiveEarth and Mutualink among others.
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
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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 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.
TASER and Axon Devices
For our TASER products, we rely on the opinions of the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, including the determination that a device that does not expel projectiles by the action of an explosive is not classified as a firearm.
Federal regulation of sales in the U.S.: Our currently offered CEDs are not firearms regulated by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, but our consumer products are regulated by the U.S. Consumer Product Safety Commission. There are currently no federal laws restricting sales of our core 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 CED products are also subject to testing, 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. Consequently, we must obtain an export license from the DOC for the export of our CED devices from the U.S. to any country other than Canada.
Federal regulation of foreign national employees: Our CED technology is 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 an 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.
State and local regulation: Our CEDs are controlled, restricted or, less frequently, prohibited by a number of state and local governments. As of December 31, 2021, the general public in Hawaii and Rhode Island is prohibited from possessing certain of our TASER-branded devices. Some cities and municipalities also prohibit private citizen possession or use of our CED products. Subsequent to December 31, 2021, Hawaii lifted restrictions on possession related to TASER-branded devices.
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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.
International regulation of foreign-based operations: We maintain foreign operations in several countries globally for purposes of logistics, sales, 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.
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, SPPM, and future CEDs implementing wireless technology.
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 the U.S., Canada, and Australia.
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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. We continue to monitor and assess for compliance as the regulatory environment evolves both within the United States and in relevant international markets.
The European General Data Protection Regulation ("GDPR") took effect in May 2018 and applies to many of our products and services that provide service in Europe. The GDPR includes operational requirements for companies that receive or process personal data of residents of the EU. The GDPR includes significant penalties for non-compliance. In addition, some countries have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements.
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, 2021, we had 2,148 full-time employees and 844 temporary employees (temporary employees include contractors, interns, and consultants). The breakdown of our full-time employees by department was as follows: 215 direct manufacturing employees, 614 research and development employees, 381 administrative and support employees, 452 sales employees, and 486 employees within product support. 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 strong.
During fiscal 2021, the number of full-time employees increased by 438, primarily for sales and research and development resources. We closed the year with our regrettable attrition rate(b) at 1.3%, under the annual goal of 2.5%. More than 90% of employees reported feeling proud to work at Axon during this year’s employee engagement survey.
(b) | 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. As of December 31, 2021, we had six 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 2021, we broadened our already strong support for our customers and the communities they are sworn to protect. We added a Vice President of Community Impact to build and lead a team dedicated to listening to
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communities, seeking citizen feedback, and keeping them safe and informed on a variety of topics. In 2020, we launched a company-wide R&D initiative that allowed employees to break from their regular responsibilities and solely focus on developing life-changing solutions to better protect citizens and law enforcement. Internally, we continue to listen to our employees with town hall sessions, provide expert-led webinars for parents, and host community round tables.
Health and Safety
The health and safety of our employees is of utmost important 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. Additionally, during the COVID-19 pandemic, we have invested heavily to help ensure the health of our employees. Through the use of education and awareness, provision of necessary personal protective equipment, and changes to our manufacturing facilities and screening, we strive to make our workplaces a safe place for employees during the workday.
To promote mental and emotional wellbeing, all full time employees globally were 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.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports filed with or furnished to the SEC are available free of charge on our website at http://investor.axon.com as soon as reasonably practicable after we electronically file 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 Annual Report on Form 10-K. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
Item 1A. Risk Factors
Because of the following factors, as well as other variables affecting our operating results, our past financial performance may not be a reliable indicator of our future performance and historical trends should not be used to anticipate our results or trends in future periods. You should carefully consider the trends, risks and uncertainties described below and other information in this Form 10-K and subsequent reports filed with or furnished to the 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.
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Strategic Risks
We are materially dependent on acceptance of our products by law enforcement markets, throughout the world. If law enforcement agencies do not continue to purchase and use our products, our revenues will be adversely affected.
At any point, due to external factors and opinions, whether or not related to product performance, law enforcement agencies may elect to no longer purchase our CEDs or other products.
We substantially depend on sales of our TASER CEDs, and if these products do not continue to be widely accepted, our growth prospects will be diminished.
In the years ended December 31, 2021, 2020 and 2019, we derived a significant portion of our revenues from sales of TASER brand devices and related cartridges, and expect to depend on sales of these products for a significant portion of our revenue for the foreseeable future. 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.
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.
Our future success will depend on our ability to develop new products or new product features that achieve market acceptance in a timely and cost-effective manner. These products include, but are not limited to, Axon Records, Axon Respond, and future generations of the TASER CED and Axon Body Cameras. The development of new products and new product features is complex, time consuming and expensive, and we may experience delays in completing the development and introduction of new products. We may choose to carry higher level of inventories to mitigate the risk of production delays, which may in turn expose us to an increased risk of obsolescence.
We are devoting significant resources to develop and deploy our cloud-based productivity and real-time operations SaaS solutions, which we intend to broadly deploy to a large number of customers. Customer requirements for these products are complex and varied. If we are unable to develop scalable solutions that can 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 deployment costs could negatively impact our operating results.
We cannot provide any assurance that products that we may develop in the future will achieve market acceptance. If we fail to develop new products or new product features on a timely basis that achieve market acceptance, our business, financial results and competitive position could be adversely affected.
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 CED, Axon device and SaaS technology, 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 with an emphasis on direct sales and independent distributors. We are 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. 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. If we do not competitively price our products, meet the requirements of
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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, joint ventures, and other strategic investments may have an adverse effect on our business.
We may consider additional acquisitions, joint ventures, or other strategic investments as part of our long-term business strategy. These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, expected synergies are not achieved, we do not realize a satisfactory return on our investment, we experience difficulty in the integration or coordination of new employees, business systems, and technology, we incur unanticipated liabilities or impairments, or management’s attention is diverted from our other businesses. These events could harm our operating results, financial condition or cash flows.
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
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, utility failure, cyber-attack, terrorist attack, public health crisis, or other catastrophic event could cause delays in completing sales, providing services, or performing other mission-critical functions. A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and our operating results as well as expose us to claims, litigation and governmental investigations and fines.
The COVID-19 global pandemic has adversely affected workforces, economies, and financial markets globally, and led to an economic downturn. As an essential provider of products and services for law enforcement and other first responders, we remain focused on protecting the health and well-being of our employees while assuring the continuity of our business operations.
Although the severity of the pandemic has lessened with the rollout of vaccines and travel restrictions, remote working and schooling and social distancing requirements have been lifted or eased in varying degrees in varying locations throughout the United States and the world, continuing surges and variants have caused certain restrictions to be re-implemented in varying degrees and in varying locations. The severity and duration of the pandemic, including future surges and variants, is impossible to predict. As a result, the ongoing pandemic continues to present various risks that may affect our operations and financial results, including, but not limited to:
| ● | Manufacturing disruptions at our Scottsdale headquarters or at our suppliers; |
| ● | A change in our classification as an essential business that impairs our ability to continue operating; |
| ● | Economic slowdowns that negatively affect municipal and state tax collections and put pressure on law enforcement budgets that in turn increases the risk that our customers will be unable to appropriate funds for existing or future contracts with us; this could also affect customer demand and ability to pay, cause decreases in sales, and negatively impact the realizability of our accounts and notes receivable and contract assets; |
| ● | Costs incurred to shut down and decontaminate our facilities if the virus is detected; |
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| ● | Extended illness, incapacitation or death of key personnel or executives; |
| ● | Ongoing governmental mandates to shutdown factories or limit travel and the movement of people that causes interruptions to our business, supply chain or extended supply chain; |
| ● | Compounding risk from continued surges in infections around the world, including in the U.S.; and |
| ● | Additional airline bankruptcies or further reduction in very limited global freight capacity that causes interruptions to our supply chain or extended supply chain |
These events have had and could continue to have an impact on our operations. If our backup and mitigation plans are not sufficient to minimize business disruption, our financial results could be adversely affected. We are continuously monitoring our operations and intend to take appropriate actions to mitigate the risks arising from the COVID-19 pandemic, but there can be no assurances that we will be successful in doing so.
Higher costs or unavailability of materials 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.
Single or sole-source components used in the manufacture of our products may become unavailable or discontinued. Delays caused by industry allocations or obsolescence may take weeks or months to resolve. In some cases, parts obsolescence may require a product re-design to ensure quality replacement components. These delays could cause significant delays in manufacturing and loss of sales, leading to adverse effects significantly impacting our financial condition or results of operations and could injure our reputation.
A significant number of our raw materials or components are comprised of petroleum-based products or incur some form of landed cost associated with transporting the raw materials or components to our facility. Our freight and import costs and the timely delivery of our products could be adversely impacted by a number of factors which could reduce the profitability of our operations, including: higher fuel costs; potential port closures; customs clearance issues; increased government regulation or 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 have a material adverse effect on our revenues, profitability and financial condition. For example, other industries are experiencing a significant shortage of semiconductors in their supply chains. We are tracking second-and third-level constraints and have taken steps to mitigate the potential impacts by building in buffers in our raw materials inventory and ensuring our suppliers have adequate access to raw material levels aligned to our forecasts. Disruptions in the semi-conductor supply chain could cause a disruption in our ability to make our products.
International or domestic geopolitical or other events, including the imposition of new or increased tariffs and/or quotas by the U.S. government on any of these raw materials or components and other government trade policies, could adversely impact the supply and cost of these raw materials or components, and could adversely impact the profitability of our operations. 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 supply chain from a sourcing and cost perspective. We source certain raw materials from China, as do some of our suppliers. While we have actively implemented programs to increase buffer inventory levels as well as transition from China along with secondary sources of raw materials outside of China, future actions or events could result in a material adverse effect on our revenues, profitability and financial condition.
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To the extent demand for our products increases, our future success will be dependent upon our ability to manage our growth and to increase manufacturing production capacity, which may be accomplished by the implementation of customized manufacturing automation equipment.
To the extent demand for our products increases significantly in future periods, one of our key challenges will be to increase our production capacity to meet sales demand while maintaining product quality. Our primary strategies to accomplish this include introducing additional shifts, increasing the physical size of our assembly facilities, the hiring of additional production staff, and the implementation of additional customized automation equipment. The investments we make in this equipment may not yield the anticipated labor and material efficiencies. Our inability to meet any future increase in sales demand or effectively manage our expansion could have a material adverse effect on our revenues, financial results and financial condition.
Delays in product development schedules may adversely affect our revenues 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 SaaS platform also presents 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 expend significant resources in anticipation of a sale due to our lengthy sales cycle and may receive no revenue in return.
Generally, law enforcement and corrections agencies consider a wide range of issues before committing to purchase our products, including product benefits, training costs, the cost to use our products in addition to, or in place of, other products, budget constraints and product reliability, safety and efficacy. The length of our sales cycle may range from a few weeks to as long as several years. Adverse publicity surrounding our products or the safety of such products has in the past, and could in the future, lengthen our sales cycle with customers. In the past, we believe that our sales were adversely impacted by negative publicity surrounding our products or the use of our products. 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.
Changes in civil forfeiture laws may affect our customers’ ability to purchase our products.
Some of our customers use funds seized through civil forfeiture proceedings to fund the purchase of our products. Legislative changes could impact our customers’ ability to seize funds or use seized funds to fund purchases. Changes in civil forfeiture statutes or regulations are outside of our control and could limit the amount of funds available to our customers, which could adversely affect the sale of our products.
If our security measures or those of our third-party cloud storage providers are breached and unauthorized access is obtained to customers’ data or our data, our network, data centers and service may be perceived as not being secure, customers may curtail or stop using our service and we may incur significant legal and financial exposure and liabilities.
Our service involves the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of information or the total or partial deletion or encryption of all stored customer data, litigation and possible liability. We devote significant resources to engineer secure products and ensure security vulnerabilities are mitigated, and we require our third-party service providers to do so as well. Despite these efforts, security measures may be breached as a result of third-party action, employee error, and malfeasance or otherwise. Breaches could occur during transfer of data to data centers or at any time, and result in unauthorized access to our data or our customers’ data. Third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as 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.
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Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently, grow more complex over time, and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Moreover, our security measures and those of our third-party service providers or customers may not detect such security breaches if they occur. Although we have developed systems and processes that are designed to protect our data and user data, to prevent data loss, and to prevent or detect security breaches, we cannot assure that such measures will provide absolute security, and we may incur significant costs in protecting against or remediating cyber-attacks.
A security breach could expose us to a risk of loss or inappropriate use of proprietary and sensitive data, or the denial of access to this data. A real or perceived security breach could also result in a loss of confidence in the security of our service, disrupt our business, damage our reputation, lead to legal liability, negatively impact our future sales and significantly harm our growth prospects, operating results and financial condition.
Defects or disruptions in our services could impact demand for our services and subject us to substantial liability.
We currently serve our Axon Evidence customers from third-party cloud storage providers based in the U.S. and other countries. Interruptions in our service, or loss or corruption of digital evidence, may reduce our revenue, cause us to issue credits or pay penalties, cause customers to 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 sales or customers may make warranty or other claims against us, which could result in an increase in our warranty expense, an increase in collection cycles for and decline in the collectability of accounts receivable, and an increase in the expense and risk of litigation.
Defects in our products could reduce demand for our products and result in a loss of sales, delay in market acceptance and damage to our reputation.
Complex components and assemblies used in our products may contain undetected defects that are subsequently discovered at any point in the life of the product. Defects in our products could result in a loss of sales, delay in market acceptance, damage to our reputation and increased warranty costs, which could adversely affect our business, financial results and competitive position.
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, 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. |
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| ● | 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. |
Additionally, changes in international local political, economic, regulatory, tax, social, and labor conditions may adversely harm our business and compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business. These numerous and sometimes conflicting laws and regulations include, among others, environmental regulations, internal control and disclosure rules, privacy and data protection requirements, anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, and other local laws prohibiting corrupt payments to governmental officials, and competition regulations, among others.
Our business in the United Kingdom may be negatively impacted by the exit of the United Kingdom from the EU (commonly referred to as "Brexit"). The exit itself could negatively impact the United Kingdom and other economies, which could adversely affect sales of our products and services. We may also experience increased volatility in the value of the pound sterling, the euro and other European currencies. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations in the United Kingdom and the EU, and we may incur additional costs or need to make operational changes as we adapt to potentially divergent regulatory frameworks.
Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially affect our brand, our international growth efforts, our ability to attract and retain employees, our business, and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies.
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.
We have unique equity incentives designed to attract and retain long-term employees. We utilize these plans to align pay and performance and drive shareholder returns while reducing near-term cash expenditures. Our equity incentives and ongoing stock and option grants are subject to having sufficient shares approved by our shareholders. If we are unable to obtain shareholder approval, we may be unable to attract and retain top talent. The competition for our key employees is intense and market competition for top talent has increased since our introduction of our innovative performance-based stock compensation plans in 2018. The loss of the service of one or more of our key personnel could adversely impact our business, prospects, financial condition and operating results.
Global economic conditions could materially adversely affect our revenue and results of operations.
Our inability to offset price inflation in our materials, components, shipping, or labor through increased prices to customers with long-term fixed contracts and formula-based or long-term fixed price contracts with suppliers could adversely affect our business, financial condition and results of operations.
Our suppliers may fail to deliver components according to schedules, prices, quality and volumes that are acceptable to us, or we may be unable to manage these components effectively.
Our products contain many parts purchased globally from numerous suppliers, including single-source direct suppliers, which exposes us to multiple potential sources of component shortages. Unexpected changes in business
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conditions, materials pricing, labor issues, wars, trade policies, natural disasters, health epidemics such as the global COVID-19 pandemic, trade and shipping disruptions, port congestions and other factors beyond our or our suppliers’ control could also affect these suppliers’ ability to deliver components to us or to remain solvent and operational. We have used alternative parts to mitigate the challenges caused by these shortages, but there is no guarantee we may be able to continually do so as we scale production to meet projected future sales activity. 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. The unavailability of any component or supplier could result in production delays, as well as impact our ability to fulfill our obligations under customer contracts. While we believe that we will be able to secure additional or alternate sources for most of our components, there is no assurance that we will be able to do so quickly or at all. 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.
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.
A growing portion of our sales are derived from subscription billing arrangements and on an open credit basis. While we record an estimate of expected credit losses and perform ongoing reviews of trade accounts receivables, 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 expected credit loss reserve, which could adversely affect our business, financial condition or operating results.
We may experience a decline in gross margins due to a shift in product sales from CEDs to software and sensors products and services which may continue to carry a lower gross margin.
We continue to invest in the growth of the Software and Sensors segment, and this expected growth may result in a higher percentage of total revenues being comprised of Software and Sensors products and services. Gross margin as a percentage of net sales for the Software and Sensors segment is currently lower than that of the TASER segment, and may continue to be lower in the future.
SaaS revenue for Axon Evidence is recognized over the terms of the contracts, which may be several years, and, as such, trends in new business may not be immediately reflected in our operating results.
Our SaaS service revenue is generally recognized ratably over the terms of the contracts, which generally range from one to five years. As a result, most of the SaaS revenue we report each quarter is the result of agreements entered into during previous quarters. Consequently, current positive or negative trends in this portion of our business may not be fully reflected in our revenue results for several periods.
Most of our end-user customers are subject to budgetary and political constraints that may delay or prevent sales.
Most of our end-user customers are government agencies. These agencies often do not set their own budgets and therefore, have limited control over the amount of money they can spend. In addition, these agencies experience political pressure that may dictate the manner in which they spend money. As a result, even if an agency wants to acquire our products, it may be unable to purchase them due to budgetary or political constraints, particularly in challenging economic environments. There can be no assurance that the economic, 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.
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Due to municipal government funding rules, certain of our contracts are subject to appropriation, termination for convenience, or similar cancellation clauses, which could allow our customers to cancel or not exercise options to renew contracts in the future.
Although we have entered into contracts for the delivery of products and services in the future and anticipate the contracts will be completed, if agencies do not appropriate money in future year budgets, terminate contracts for convenience or if other cancellation clauses are invoked, revenue and cash associated with these bookings will not ultimately be recognized, and could result in a reduction to bookings and revenue.
We maintain most of our cash balances, some of which are not insured, at four depository institutions.
We maintain the majority of our cash and cash equivalents accounts at three depository institutions. As of December 31, 2021, the aggregate balances in such accounts at these three institutions were $347.3 million. Our balances with these institutions regularly exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits for domestic deposits and various foreign deposit insurance programs covering our deposits in Australia, Canada, Finland, Germany, Hong Kong, India, Italy, the Netherlands, Spain, the United Kingdom, and Vietnam.
We could suffer losses with respect to the uninsured balances if the depository 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.
Stock compensation expense may have a material, unpredictable impact on our results of operations.
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 their grant date fair values. The amount recognized for stock compensation expense could vary depending on a number of assumptions or changes that may occur.
For awards containing multiple service, performance and market conditions, where all conditions must be satisfied prior to vesting, compensation expense is recognized over the requisite service period, which is defined as the longest explicit, implicit or derived service period, based on management’s estimate of the probability and timing of the performance criteria being satisfied, adjusted at each balance sheet date. Changes in the subjective and probability-based assumptions can materially affect the estimates of the fair value of the awards and timing of recognition of stock-based compensation expense and consequently, the related amount recognized in our statements of operations and comprehensive income.
If we achieve specific operational goals and the covered employees complete the requisite service conditions for the performance-based awards with multiple service, performance, and market conditions, including our 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.
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 international 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 international 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, 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
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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.
We are subject to income taxes in the U.S. and various jurisdictions outside of the 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 restricted stock units, changes in the valuation of deferred tax assets and liabilities and our ability to utilize them, the applicability of withholding taxes, and changes in our liability for unrecognized tax benefits.
We are subject to tax examinations in multiple jurisdictions. While we regularly evaluate new information that may change our judgment resulting in recognition, derecognition or change in measurement of a tax position taken, there can be no assurance that the final determination of any examinations will not have an adverse effect on our operating results and financial position.
Our tax provision could also be impacted by changes in federal, state or international tax laws including fundamental tax law changes applicable to corporate multinationals.
Additionally, we may be subject to additional tax liabilities due to changes in non-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.
Our revenues and operating results may fluctuate unexpectedly from quarter-to-quarter, which may cause our stock price to decline.
Our revenues and operating results have varied significantly in the past and may vary significantly in the future due to various factors, including, but not limited to:
| ● | budgetary cycles of municipal, state and federal law enforcement and corrections agencies; |
| ● | market acceptance of our products and services; |
| ● | the timing of large domestic and international orders; |
| ● | the outcome of any existing or future litigation; |
| ● | adverse publicity surrounding our products, the safety of our products, or the use of our products; |
| ● | changes in our sales mix; |
| ● | new product introduction costs; |
| ● | increased raw material expenses; |
| ● | changes in our operating expenses, including stock-based compensation expense; |
| ● | changes in foreign currency exchange rates and |
| ● | regulatory changes that may affect the marketability of our products. |
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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 and other liability claims that harm our reputation and adversely affect our sales and financial condition.
Our CED products are often used in aggressive confrontations that may result in serious, permanent bodily injury or death to those involved. Our CED products may be associated with these injuries. A person, or the family members of a person, injured in a confrontation or otherwise in connection with the use of our products, may bring legal action against us to recover damages on the basis of theories including wrongful death, personal injury, negligent design, defective product or inadequate warning. We are currently subject to a number of such lawsuits and we have been subject to significant adverse judgments and settlements. We may also be subject to lawsuits involving allegations of misuse of our products. If successful, wrongful death, personal injury, misuse and other claims could have a material adverse effect on our operating results and financial condition and could result in negative publicity about our products. We incur significant legal expenses in defending these cases, and significant litigation could also result in a diversion of management’s attention and resources, negative publicity and a potential award of monetary damages in excess of our insurance coverage. The outcome of any litigation is inherently uncertain and there can be no assurance that our existing or any future litigation will not have a material adverse effect on our business, financial condition or operating results.
Other litigation may subject us to significant litigation costs and judgments and divert management attention from our business.
We have been or could in the future be involved in numerous other litigation matters relating to our products, contracts and business relationships, including litigation against persons whom we believe have infringed on our intellectual property, infringement litigation filed against us, litigation against a competitor, enforcement actions filed against us, and litigation involving the U.S. Federal Trade Commission (“FTC”). Such matters have resulted, and are expected to continue to result in, substantial costs to us, including in the form of attorneys’ fees and costs, damages, fines or other penalties, whether pursuant to a judgment or settlement, and diversion of our management’s attention, which could adversely affect our business, financial condition or operating results. There is also a risk of adverse judgments, as the outcome of litigation is inherently uncertain.
We have been, and may be in the future, subject to intellectual property infringement and other claims, which could incur substantial litigation costs, result in significant damage awards, inhibit our use of certain technologies, and divert management attention from our business.
Many companies own intellectual property rights that are directly or indirectly related to public safety technologies. These companies periodically demand licensing agreements or engage in litigation based on allegations of infringement or other violations of their patents, trademarks, copyrights, or trade secrets. Non-practicing entities also have patents they have been granted or otherwise acquired, including patents that are directly or indirectly related to public safety technologies. These entities may seek compensation for perceived infringement of their patents, including by filing claims against us, independent of the merit of any such claims. As we enter new markets, expand into new product categories, and otherwise offer new products, services, and technologies, additional intellectual property claims may be filed against us by these companies, entities, and other third parties. Additional intellectual property claims may also be filed against us as our current products, services, and technologies gain additional market share.
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
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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. Different intellectual property laws between different countries may lead to differences in protection between such countries. In certain countries in which our products are distributed, the ability to effectively enforce intellectual property rights may not exist. Patent requirements differ by country and certain domestic or foreign laws may prohibit us from satisfying these requirements, creating a risk that some of our international patents may become unenforceable. Patents for older technologies, such as our M26 and X26E 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 we maintain, or may choose to maintain in the future, could be compromised by employees, partners, or other third parties.
Once established, there is no guarantee that our intellectual property rights will remain in force. Issued patents may be re-examined and subsequently ruled invalid or unenforceable. Our registered trademarks may also be diminished or lost. For example, there is a risk that our “TASER” trademark could become synonymous with the general product category of “conducted energy devices”. The right to stop others from misusing our trademarks and service marks in commerce depends, to some extent, on our ability to show evidence of enforcement of our rights against such misuse in commerce. Our efforts to stop improper use, if insufficient, may lead to loss of trademark and service mark rights, brand loyalty and notoriety among our customers and prospective customers.
Our intellectual property may also be at risk if we are unable to defend from enforcement actions, such as that filed by the FTC against us regarding our acquisition of Vievu LLC from Safariland LLC on May 3, 2018. For additional discussion of this matter, refer to Note 11 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.
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Internationally, we can enforce patent rights only in the jurisdictions in which our patent applications have been granted.
Our U.S. patents protect us from imported infringing products coming into the U.S. from abroad. We have made applications for patents in a few foreign countries; however, these may be inadequate to protect markets for our products in other foreign countries. Each patent is examined and granted according to the law of the country where it was filed independent of whether a U.S. patent on similar technology was granted. A patent in a foreign country may be subject to cancellation if the claimed invention has not been sold in that country. Meeting the requirements of working invention differs by country and ranges from sales in the country to manufacturing in the country. U.S. export law, or the laws of some foreign countries, may prohibit us from satisfying the requirements for working the invention, creating a risk that some of our international patents may become unenforceable.
A variety of new and existing laws and/or interpretations could materially and adversely affect our business.
As detailed in “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.
TASER and Axon Devices
For our TASER products, we rely on the opinions of the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, including the determination that a device that 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.: Our currently offered CEDs are not firearms regulated by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, but our consumer products are regulated by the U.S. Consumer Product Safety Commission. Although there are currently no federal laws restricting sales of our core currently offered CED products in the U.S., future federal regulation could adversely affect sales of our products.
Our CED products are subject to regulation by testing, safety and other standard organizations. These regulations also affect CEDs with Axon Signal technology, including Signal Performance Power Magazine technology, and TASER 7 battery packs, and could impact future CEDs that feature wireless technology.
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Federal regulation of international sales: Our CEDs are considered a “crime control” product by the U.S. 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.
Federal regulation of foreign national employees: Our intangible CED 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 an 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 a number of state and local governments. Other jurisdictions may ban or restrict the sale of our CED products, 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.
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.
International regulation of foreign-based operations: We maintain foreign operations in several countries globally for purposes of logistics, sales, 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.
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 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 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.
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 legislation may be
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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 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 the various environmental regulations 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 or results of operations.
Privacy Regulations
We are subject to laws and regulations that dictate whether, how, and under what circumstances we can transfer, process and/or receive certain data that is critical to our operations, including data shared between countries or regions in which we operate and data shared among our products and services. 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. Additional countries may 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.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters and manufacturing facilities are based in an approximately 100,000 square foot facility in Scottsdale, Arizona, which we own. We also lease premises in Phoenix and Scottsdale, Arizona; East Point, Georgia; Charlotte, North Carolina; Topsfield, Massachusetts; Seattle and Spokane, Washington; Melbourne and Sydney, Australia; Toronto, Canada; Daventry and London, England; Tampere, Finland; Frankfurt, Germany; Mumbai, India; Rome, Italy; Amsterdam, Netherlands; and Ho Chi Minh City, Vietnam. In 2020, we purchased a parcel of land located in Scottsdale, Arizona on which we intend to construct a new manufacturing and office facility.
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. We continue to make investments in capital equipment as needed to meet anticipated demand for our products.
The majority of our locations support both of our reportable segments, except for our Vietnam and Seattle, Washington locations, which primarily support our Software & Sensors segment.
Item 3. Legal Proceedings
See discussion of litigation in Note 11 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, which discussion is incorporated by reference herein.
Item 4. Mine Safety Disclosures
None.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is quoted under the symbol “AXON” on The NASDAQ Global Select Market.
Holders
As of December 31, 2021, there were 217 holders of record of our common stock.
Dividends
To date, we have not declared or paid cash dividends on our common stock. We do not intend to pay cash dividends in the foreseeable future.
Issuer Purchases of Equity Securities
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. The stock repurchase program does not have a stated expiration date. During the year ended December 31, 2021, no common shares were purchased under the program. As of December 31, 2021, $16.3 million remained available under the plan for future purchases.
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Stock Performance Graph
The following stock performance graph compares the performance of our common stock to the NASDAQ Composite Index, S&P 500 Index, and Russell 2000 Index.
The graph covers the period from December 31, 2016 to December 31, 2021. The graph assumes that the value of the investment in our stock and in each index was $100 at December 31, 2016, and that all dividends were reinvested. We do not pay dividends on our common stock.
| | | | | | | | | | | | | | | | | | |
|
| 2016 |
| 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 | ||||||
Axon Enterprise, Inc. | | $ | 100.00 | | $ | 109.32 | | $ | 180.49 | | $ | 302.31 | | $ | 505.49 | | $ | 647.69 |
NASDAQ Composite | | | 100.00 | | | 129.64 | | | 125.96 | | | 172.18 | | | 249.51 | | | 304.85 |
S&P 500 | | | 100.00 | | | 121.83 | | | 116.49 | | | 153.17 | | | 181.35 | | | 233.41 |
Russell 2000 | | | 100.00 | | | 114.65 | | | 102.02 | | | 128.06 | | | 153.62 | | | 176.39 |
Note: Index data copyright NASDAQ OMX, Inc.; Russell Investments; and Standard and Poor’s, Inc. Used with permission. All rights reserved.
Item 6. [Reserved]
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") 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” and Part II, Item 8: “Financial Statements and Supplementary Data.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing. The tables in the MD&A sections below are derived from exact numbers and may have immaterial rounding differences.
This section discusses our results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020. For a discussion and analysis of the year ended December 31, 2020, compared to the same period in 2019 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, 2020, filed with the SEC on February 26, 2021.
Overview
Axon is a global network of devices, apps and people that helps public safety personnel become smarter and safer. With a mission of protecting life, our technologies give law enforcement the confidence, focus and time they need to protect their communities. Our products impact every aspect of a public safety officer’s day-to-day experience with the goal of helping everyone get home safe.
Our revenues for the year ended December 31, 2021 were $863.4 million, an increase of $182.4 million, or 26.8%, from the prior year. We had a loss from operations of $168.1 million compared to $14.2 million in the prior year. The higher loss from operations was primarily the result of increased stock compensation expense for our CEO Performance Award and XSPP. In addition, operating expenses were higher in 2021 primarily due to an increase in headcount; these other cost increases were largely offset by higher revenue. For the year ended December 31, 2021, we recorded net loss of $60.0 million compared to net loss of $1.7 million for the prior year.
2022 Outlook
For the year ending December 31, 2022, we expect revenue of approximately $1 billion. We anticipate capital expenditures of approximately $135 million to $160 million in 2022, including approximately $85 million for development of our manufacturing facility and campus in Scottsdale, Arizona, approximately $40 million to support capacity expansion and automation of TASER devices, and the remainder on additional investments to support our continued growth.
COVID-19
The COVID-19 pandemic has adversely affected workforces, economies, and financial markets globally, and led to an economic downturn. As an essential provider of products and services for law enforcement and other first responders, we remain focused on protecting the health and wellbeing of our employees while assuring the continuity of our business operations.
We have taken a number of actions in response to the pandemic:
Employee safety and manufacturing:
● | We continue to allow for a remote work model for the majority of our office staff, with medical screening for any employees who do work in our offices; and |
● | We hosted several onsite vaccination clinics for our employees and their family members. |
Supply chain:
● | We previously took steps to diversify our supply chain and global manufacturing footprint, which have positioned us well to manage through the pandemic. |
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● | We have proactively built up a safety stock of raw and finished goods inventory aligned to our strategic model to help meet strong product demand while also preparing us to stagger factory work schedules. We continue to adjust strategic inventory levels based on areas of risk to mitigate potential supply disruptions. |
● | In light of our broad geographic supplier base both domestic and international, we are continuously monitoring our supply chain to manage through potential impacts, identifying alternate sources as well as shipping / logistic sources and working with foreign regulators to ensure that our suppliers can provide parts. |
Shareholder engagement:
● | We have continued our shareholder engagement in a primarily virtual format. |
Results of Operations
The following table presents data from our consolidated statements of operations as well as the percentage relationship to total net sales of items included in our statements of operations (dollars in thousands):
| | | | | | | | | | | | |
| | Year Ended December 31, |
| |||||||||
| | 2021 |
| | 2020 |
| ||||||
Net sales from products |
| $ | 608,525 |
| 70.5 | % | | $ | 500,250 |
| 73.5 | % |
Net sales from services | |
| 254,856 |
| 29.5 | | |
| 180,753 |
| 26.5 | |
Net sales | |
| 863,381 |
| 100.0 | | |
| 681,003 |
| 100.0 | |
Cost of product sales | |
| 260,098 |
| 30.1 | | |
| 224,131 |
| 32.9 | |
Cost of service sales | |
| 62,373 |
| 7.2 | | |
| 40,541 |
| 6.0 | |
Cost of sales | |
| 322,471 |
| 37.3 | | |
| 264,672 |
| 38.9 | |
Gross margin | |
| 540,910 |
| 62.7 | | |
| 416,331 |
| 61.1 | |
Operating expenses: | | | | | | | | | | | | |
Sales, general and administrative | |
| 515,007 |
| 59.7 | | |
| 307,286 |
| 45.1 | |
Research and development | |
| 194,026 |
| 22.5 | | |
| 123,195 |
| 18.1 | |
Total operating expenses | |
| 709,033 |
| 82.2 | | |
| 430,481 |
| 63.2 | |
Loss from operations | |
| (168,123) |
| (19.5) | | |
| (14,150) |
| (2.1) | |
Interest and other income, net | |
| 26,748 |
| 3.1 | | |
| 7,859 |
| 1.1 | |
Loss before provision for income taxes | |
| (141,375) |
| (16.4) | | |
| (6,291) |
| (1.0) | |
Benefit from income taxes | |
| (81,357) |
| (9.4) | | |
| (4,567) |
| (0.7) | |
Net loss |
| $ | (60,018) |
| (7.0) | % | | $ | (1,724) |
| (0.3) | % |
Net sales to the U.S. and other countries are summarized as follows (dollars in thousands):
| | | | | | | | | | | | |
| | Year Ended December 31, | ||||||||||
| | 2021 | | | 2020 |
| ||||||
United States |
| $ | 686,914 |
| 80 | % | | $ | 535,079 |
| 79 | % |
Other Countries | |
| 176,467 |
| 20 | | |
| 145,924 |
| 21 | |
Total | | $ | 863,381 |
| 100 | % | | $ | 681,003 |
| 100 | % |
International revenue in 2021 increased compared to 2020, driven by strength in all of our international regions, particularly in the Americas and EMEA regions.
Our operations are comprised of two reportable segments: the manufacture and sale of CEDs, batteries, accessories and extended warranties and other products and services (collectively, the “TASER” segment); and software and sensors, which includes the sale of devices, wearables, applications, cloud and mobile products, and services (collectively, the "Software and Sensors" segment). In both segments, we report sales of products and services. Service revenue in both segments includes sales related to Axon Evidence. In the TASER segment, service revenue also includes digital subscription training content. In the Software and Sensors segment, service revenue also
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includes other recurring cloud-hosted software revenue and related professional services. Collectively, this revenue is sometimes referred to as "Axon Cloud revenue." Revenue from our “products” in the Software and Sensors segment are generally from sales of sensors, including on-officer body cameras, Axon Fleet cameras, other hardware sensors, warranties on sensors, and other products, and is sometimes referred to as "Sensors and Other revenue." Within the Software and Sensors segment, we include only revenues and costs attributable to that segment which costs include: costs of sales for both products and services, direct labor, and product management and R&D for products included, or to be included, within the Software and Sensors segment. All other costs are included in the TASER segment.
For the Years Ended December 31, 2021 and 2020
Net Sales
Net sales by product line were as follows for the years ended December 31, 2021 and 2020 (dollars in thousands):
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Dollar |
| Percent |
| |||||||||
| | 2021 | | 2020 | | Change | | Change |
| |||||||
TASER segment: |
| |
|
|
|
| |
|
|
|
| |
|
|
| |
TASER 7 | | $ | 135,906 |
| 15.7 | % | $ | 107,506 |
| 15.8 | % | $ | 28,400 |
| 26.4 | % |
TASER X26P | |
| 40,629 |
| 4.7 | |
| 41,724 |
| 6.1 | |
| (1,095) |
| (2.6) | |
TASER X2 | |
| 58,081 |
| 6.7 | |
| 60,107 |
| 8.8 | |
| (2,026) |
| (3.4) | |
TASER Consumer devices | |
| 7,132 |
| 0.8 | |
| 9,407 |
| 1.4 | |
| (2,275) |
| (24.2) | |
Cartridges | |
| 152,842 |
| 17.8 | |
| 115,193 |
| 16.9 | |
| 37,649 |
| 32.7 | |
Axon Evidence and cloud services | |
| 9,159 |
| 1.1 | |
| 2,935 |
| 0.4 | |
| 6,224 |
| 212.1 | |
Extended warranties | |
| 24,125 |
| 2.8 | |
| 20,754 |
| 3.0 | |
| 3,371 |
| 16.2 | |
Other | |
| 9,053 |
| 1.0 | |
| 8,926 |
| 1.3 | |
| 127 |
| 1.4 | |
TASER segment | |
| 436,927 |
| 50.6 | |
| 366,552 |
| 53.7 | |
| 70,375 |
| 19.2 | |
Software and Sensors segment: | |
| |
| | |
| |
| | |
|
|
|
| |
Axon Body | |
| 75,484 |
| 8.8 | |
| 57,150 |
| 8.4 | |
| 18,334 |
| 32.1 | |
Axon Flex | |
| 4,155 |
| 0.5 | |
| 4,082 |
| 0.6 | |
| 73 |
| 1.8 | |
Axon Fleet | |
| 24,319 |
| 2.8 | |
| 20,108 |
| 3.0 | |
| 4,211 |
| 20.9 | |
Axon Dock | |
| 24,441 |
| 2.8 | |
| 19,723 |
| 2.9 | |
| 4,718 |
| 23.9 | |
Axon Evidence and cloud services | |
| 246,005 |
| 28.5 | |
| 176,797 |
| 26.0 | |
| 69,208 |
| 39.1 | |
Extended warranties | |
| 33,686 |
| 3.9 | |
| 24,408 |
| 3.6 | |
| 9,278 |
| 38.0 | |
Other | |
| 18,364 |
| 2.1 | |
| 12,183 |
| 1.8 | |
| 6,181 |
| 50.7 | |
Software and Sensors segment | |
| 426,454 |
| 49.4 | |
| 314,451 |
| 46.3 | |
| 112,003 |
| 35.6 | |
Total net sales | | $ | 863,381 |
| 100.0 | % | $ | 681,003 |
| 100.0 | % | $ | 182,378 |
| 26.8 | % |
Net unit sales were as follows:
| | | | | | | | | |
| | Year Ended December 31, | | Unit | | Percent | |||
|
| 2021 |
| 2020 |
| Change |
| Change | |
TASER 7 |
| 90,348 |
| 77,451 |
| 12,897 |
| 16.7 | % |
TASER X26P |
| 30,083 |
| 37,391 |
| (7,308) |
| (19.5) | % |
TASER X2 |
| 38,620 |
| 43,407 |
| (4,787) |
| (11.0) | % |
TASER Consumer devices |
| 26,958 |
| 33,158 |
| (6,200) |
| (18.7) | % |
Cartridges |
| 4,945,927 |
| 3,714,291 |
| 1,231,636 |
| 33.2 | % |
Axon Body |
| 181,663 |
| 182,538 |
| (875) |
| (0.5) | % |
Axon Flex |
| 7,828 |
| 8,962 |
| (1,134) |
| (12.7) | % |
Axon Fleet |
| 11,264 |
| 11,304 |
| (40) |
| (0.4) | % |
Axon Dock |
| 25,584 |
| 25,422 |
| 162 |
| 0.6 | % |
Net sales for the TASER segment increased $70.4 million, or 19.2%, primarily as a result of an increase of $37.6 million in cartridge revenue and a $28.4 million increase in TASER 7 devices. Cartridge revenue increased due to
30
increased unit sales. Consumer devices revenue decreased $2.3 million or 24.2% driven by a decrease in retail sales due to a shift in consumer shopping behaviors, as well as lower average selling prices, and higher sales during the prior year due to civil unrest. We continue to see a shift to purchases of our latest generation device, TASER 7, from legacy devices, especially X26P devices. Sales of our TASER 7 device also drove the increase in revenue from Axon Evidence and cloud services. Revenue was also impacted by higher average selling prices for TASER devices other than TASER consumer devices. TASER 7 revenue for 2021 was impacted by approximately $35.0 million for orders that were scheduled to ship prior to December 31, 2021, but could not be fulfilled due to the delayed receipt of a manufacturing component for our TASER 7 devices. We expect to recognize this revenue during the first half of 2022.
Net sales for the Software and Sensors segment increased $112.0 million, or 35.6%. Revenue from Axon Evidence and cloud services increased $69.2 million as we continued to add users and associated devices to our network during the year ended December 31, 2021. The increase in the aggregate number of users and devices also resulted in increased extended warranty revenues of $9.3 million. Sales of our Axon Body 3 camera drove most of the $18.3 million increase in Axon Body revenue and the $4.7 million increase in Axon Dock revenue. Other revenue increased $6.2 million or 50.7% due to increases in signal sidearm and signal performance power magazine (SPPM) attributable to increased sales of our TASER 7 devices. Axon Body revenue was impacted by approximately $15.5 million for orders that were scheduled to ship prior to December 31, 2021, but could not be fulfilled due to supply chain constraints for our Axon Body 3 devices. We expect to recognize this revenue during the first half of 2022.
Backlog - As of December 31, 2021 compared to December 31, 2020
Our backlog for products and services includes all orders that have been received and are believed to be firm.
In the TASER segment, we define backlog as equal to deferred revenue. Deferred revenue represents amounts invoiced to customers for goods and services to be delivered in subsequent periods. We process orders within the TASER segment quickly, and our best estimate of firm orders outstanding as of period end represents those that have been invoiced but remain undelivered. The TASER segment backlog balance was $73.9 million as of December 31, 2021. We expect to realize $36.9 million of this deferred revenue balance as revenue during the next 12 months. This represents cash received and accounts receivable from customers on or prior to December 31, 2021 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 $2.4 billion as of December 31, 2021. This backlog balance includes $377.4 million of deferred revenue, and $2.0 billion that has been recorded as bookings but not yet invoiced, all as of December 31, 2021. We expect to realize approximately $510.8 million of the December 31, 2021 backlog balance as revenue during the next 12 months.
| | | | | | | | | |
|
| TASER |
| Software and Sensors |
| Total | |||
| | (in thousands) | |||||||
Balance, beginning of period | | $ | 61,756 |
| $ | 1,427,886 |
| $ | 1,489,642 |
Add: additions to backlog, net of cancellations | | | 449,048 | | | 1,350,696 | | | 1,799,744 |
Less: revenue recognized during period | | | (436,927) | | | (426,454) | | | (863,381) |
Balance end of period | | $ | 73,877 |
| $ | 2,352,128 |
| $ | 2,426,005 |
Our backlog of $2.4 billion as of December 31, 2021 has increased significantly from $1.5 billion as of December 31, 2020. The increase in TASER 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.
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Cost of Product and Service Sales
Cost of product and services sales in dollars and as a percent of related segment sales (dollars in thousands):
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar | | Percent |
| |||||||||
| | 2021 | | 2020 | | Change | | Change |
| |||||||
TASER segment: |
| | |
| |
| | |
| |
| | |
| |
|
Cost of product sales | | $ | 149,739 | | 34.3 | % | $ | 136,925 | | 37.4 | % | $ | 12,814 | | 9.4 | % |
Cost of service sales | | | 145 | | 0.0 | % | | — | | — | % | $ | 145 | | N/A | % |
Total TASER cost of sales | | | 149,884 | | 34.3 | % | | 136,925 | | 37.4 | % | | 12,959 | | 9.5 | % |
Software and Sensors segment: | | | | | | | | | | | | | | | |
|
Cost of product sales | | | 110,359 |
| 25.9 | % |
| 87,206 |
| 27.7 | % |
| 23,153 |
| 26.5 | % |
Cost of service sales | | | 62,228 |
| 14.6 | % |
| 40,541 |
| 12.9 | % |
| 21,687 |
| 53.5 | % |
Total Software and Sensors cost of sales | | | 172,587 |
| 40.5 | % |
| 127,747 |
| 40.6 | % |
| 44,840 |
| 35.1 | % |
Total cost of product and service sales | | $ | 322,471 |
| 37.3 | % | $ | 264,672 |
| 38.9 | % | $ | 57,799 |
| 21.8 | % |
Within the TASER segment, cost of product and service sales was $149.9 million, an increase of $13.0 million, or 9.5%, from 2020. Cost as a percentage of sales decreased to 34.3% from 37.4%. The improvement was primarily attributable to a combination of manufacturing cost improvement and strong demand for our premium TASER offerings, which resulted in a favorable product mix. We are building manufacturing capacity to support our TASER device and cartridge manufacturing lines in response to growing international and federal demand and an increased install base.
Within the Software and Sensors segment, cost of product and service sales was $172.6 million, an increase of $44.8 million, or 35.1%, from 2020. As a percentage of net sales, cost of product and service sales decreased slightly to 40.5% in 2021 from 40.6% in 2020. Cost of product sales increased $23.2 million primarily driven by the impact of increased units, but decreased as a percentage of sales due to the fulfillment of several large shipments of lower-margin body camera hardware to our largest customers during the prior year. Cost of service sales increased $21.7 million and increased as a percentage of sales. We are investing in scaling our cloud business, which includes standing up new cloud environments, cloud applications, and Long-Term Evolution (“LTE”) costs, which can result in some margin compression in advance of anticipated revenue, as well as low-to-no margin professional services that support new installations for software customers.
Gross Margin
Gross Margin (dollars in thousands):
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar | | Percent | | |||||
|
| 2021 |
| 2020 |
| Change |
| Change | | |||
TASER segment | | $ | 287,043 | | $ | 229,627 | | $ | 57,416 | | 25.0 | % |
Software and Sensors segment | | | 253,867 | | | 186,704 | | | 67,163 | | 36.0 | % |
Total gross margin | | $ | 540,910 | | $ | 416,331 | | $ | 124,579 |
| 29.9 | % |
Gross margin as % of net sales | | | 62.7 | % |
| 61.1 | % | | | | | |
Gross margin increased $124.6 million to $540.9 million for the year ended December 31, 2021 compared to $416.3 million for 2020. As a percentage of net sales, gross margin increased to 62.7% for 2021 from 61.1% for 2020.
As a percentage of net sales, gross margin for the TASER segment increased to 65.7% for the year ended December 31, 2021 from 62.6% for the year ended December 31, 2020.
Within the Software and Sensors segment, gross margin as a percentage of total segment net sales was 59.5% and 59.4% for the years ended 2021 and 2020, respectively. Within the Software and Sensors segment, product gross
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margin was 39.2% for the year ended December 31, 2021 and 36.6% for the same period in 2020, while the service margins were 74.6% and 77.1% during those same periods, respectively.
Sales, General and Administrative Expenses
Sales, General and Administrative ("SG&A") Expenses (dollars in thousands):
| | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar | | Percent | ||||||
|
| 2021 |
| 2020 |
| Change |
| Change | ||||
Salaries, benefits and bonus | | $ | 140,075 | | $ | 83,287 | | $ | 56,788 | | 68.2 | % |
Stock-based compensation | | | 238,813 | | | 103,860 | | | 134,953 | | 129.9 | |
Professional, consulting and lobbying | | | 34,338 | | | 45,541 | | | (11,203) | | (24.6) | |
Sales and marketing | | | 52,058 | | | 32,464 | | | 19,594 | | 60.4 | |
Office and building | | | 8,137 | | | 9,076 | | | (939) | | (10.3) | |
Travel and meals | | | 12,058 | | | 5,630 | | | 6,428 | | 114.2 | |
Depreciation and amortization | | | 9,824 | | | 6,079 | | | 3,745 | | 61.6 | |
Other | | | 19,704 | | | 21,349 | | | (1,645) | | (7.7) | |
Total sales, general and administrative expenses | | $ | 515,007 | | $ | 307,286 | | $ | 207,721 |
| 67.6 | % |
SG&A expenses as a percentage of net sales | | | 59.7 | % | | 45.1 | % | | | | | |
SG&A expenses increased $207.7 million, or 67.6%. Stock-based compensation expense increased $135.0 million in comparison to the prior year comparable period, which was attributable to an increase of $137.9 million in expense related to the CEO Performance Award and XSPP, partially offset by a decrease of $1.9 million related to PSUs for certain key employees and executives that fully vested in March 2021. As of December 31, 2021, all twelve operational goals for the CEO Performance Award and XSPP are considered probable of attainment or have been attained; during the prior year comparable period, eleven operational goals were considered probable. Refer to Note 14 of the notes to our consolidated financial statements within this Annual Report on Form 10-K for additional discussion of the CEO Performance Award and XSPP.
Salaries, benefits and bonus expense increased $56.8 million, primarily due to an increase in headcount and an increase in payroll taxes on a higher base of salaries and bonus expense. Salaries, benefits and bonus expense increased as a percentage of sales from 12.2% for 2020 to 16.2% for 2021.
Sales and marketing expenses increased $19.6 million, driven by a $10.5 million increase in commissions tied to higher revenues, and by higher spending on advertising, sponsorships, and customer samples. Included in this increase was $3.4 million related to trade shows and seminars, including our inaugural VR roadshow and $1.0 million attributable to our annual Axon Accelerate user conference being held in-person.
Professional, consulting and lobbying expenses decreased $11.2 million, driven primarily by a decrease of $18.3 million in expenses related to the FTC litigation. As discussed in Note 11 of the notes to our consolidated financial statements within this Annual Report on Form 10-K, we sued the FTC in the District of Arizona, and the FTC filed an enforcement action regarding our May 2018 acquisition of Vievu LLC. Offsetting the decrease in legal expenses was an increase in other professional and consulting expenses for costs related to the implementation of several phases of our enterprise resource planning and related systems.
Other SG&A expenses increased by $7.6 million, primarily driven by the following:
| ● | Travel expenses increased $6.4 million, reflecting a return to pre-pandemic travel levels for certain of our employees. |
| ● | Depreciation and amortization increased $3.7 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. |
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| ● | Supplies expense increased $3.5 million, primarily attributable to an increase in computer licenses and maintenance supporting increased headcount. |
Research and Development Expenses
Research and Development ("R&D") Expenses (dollars in thousands):
| | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar | | Percent | ||||||
|
| 2021 |
| 2020 |
| Change |
| Change | ||||
Salaries, benefits and bonus | | $ | 95,057 | | $ | 71,488 | | $ | 23,569 | | 33.0 | % |
Stock-based compensation | | | 58,674 | | | 26,248 | | | 32,426 | | 123.5 | |
Professional and consulting | | | 20,191 | | | 10,503 | | | 9,688 | | 92.2 | |
Travel and meals | | | 1,344 | | | 594 | | | 750 | | 126.3 | |
Other | | | 18,760 | | | 14,362 | | | 4,398 | | 30.6 | |
Total research and development expenses | | $ | 194,026 | | $ | 123,195 | | $ | 70,831 |
| 57.5 | % |
R&D expenses as a percentage of net sales | | | 22.5 | % | | 18.1 | % | | | | | |
Within the TASER segment, R&D expenses increased $30.8 million or 200%, reflecting increased stock-based compensation expense of $10.8 million, of which $5.7 million related to the XSPP. Salaries, benefits and bonus expense increased $8.2 million, primarily due to an increase in headcount. Consulting expense increased $7.9 million related to the development of next generation products.
R&D expense for the Software and Sensors segment increased $40.1 million or 37.2% and increased slightly as a percentage of sales to 34.7% compared to 34.3% in the prior year. Of the increase, $15.4 million related to salaries, benefits, and bonus attributable to increased headcount.
Stock-based compensation expense for the Software and Sensors segment increased $21.6 million. Contributing to the increase was expense of $12.9 million related to our XSPP. As of December 31, 2021, all twelve operational goals for the XSPP are considered probable of attainment or have been attained; during the prior year comparable period, eleven operational goals were considered probable. Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount.
Professional and consulting expenses increased $9.7 million related to development of next generation products.
We expect R&D expense to continue to increase in absolute dollars as we focus on growing the Software and Sensors segment as we add headcount and additional resources to develop new products and services to further advance our scalable cloud-connected device platform. We are investing in technologies that include our CEDs, body cameras, in-car cameras and other sensors, artificial intelligence, digital evidence management, productivity software, communications software, and technologies that enable real-time situational awareness for public safety.
Interest and Other Income, Net
Interest and other income, net was $26.7 million and $7.9 million for the years ended December 31, 2021 and 2020, respectively.
For the year ended December 31, 2021, we recorded a gain of $40.9 million related to observable price changes for our investments in certain strategic investments and related warrants. The gain was partially offset by a $17.8 million unrealized loss on marketable securities related to our investment in Cellebrite DI Ltd. Interest and other income, net also reflected interest income of $1.7 million, other income of $0.9 million from a government grant, and gains from foreign currency transactions of $0.4 million.
34
For the year ended December 31, 2020, we earned interest income of $5.1 million and had losses from foreign currency transaction adjustments of $0.2 million, other income, net of $0.6 million, and interest expense of $0.1 million.
Provision for Income Taxes
The provision for income taxes was a benefit of $81.4 million for the year ended December 31, 2021. The effective income tax rate for 2021 was 57.5%. The benefits related to excess stock-based compensation of $205.5 million and 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 uncertain tax benefits of $10.2 million, and other permanently non-deductible expenses of $1.8 million. Additionally, we recorded a $9.0 million increase to our valuation allowance as of December 31, 2021 related to research and development tax credits that may not be utilized prior to expiration and an unrealized investment loss.
The provision for income taxes was a benefit of $4.6 million for the year ended December 31, 2020. The effective income tax rate for 2020 was 72.6%. The benefits related to excess stock-based compensation of $9.0 million, research and development credits of $10.2 million, and a deduction for foreign derived intangible income (“FDII”) of $0.9 million were partially offset by the tax effects of permanently non-deductible expenses for executive compensation of $15.5 million, an increase in uncertain tax benefits of $1.0 million, other permanently non-deductible expenses of $0.8 million and state tax expense of $0.9 million. Additionally, we recorded a $0.2 million increase to our valuation allowance as of December 31, 2020 related to research and development tax credits that may not be utilized prior to expiration, partially offset by changes in certain foreign jurisdictions.
Net Income
We recorded net loss of $60.0 million for the year ended December 31, 2021 compared to a net loss of $1.7 million in 2020. Net loss per basic and diluted share was $0.91 for 2021, compared to net loss per basic and diluted share of $0.03 for 2020.
35
Three Months Ended December 31, 2021 Compared to September 30, 2021
Net sales by product line were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | |
|
| Three Months Ended |
| Three Months Ended |
| Dollar |
| Percent | ||||||||
| | December 31, 2021 | | September 30, 2021 | | Change | | Change | ||||||||
TASER segment: | | | | | | | | | | | | | | | | |
TASER 7 | | $ | 23,146 |
| 10.6 | % | $ | 50,641 |
| 21.8 | % | $ | (27,495) |
| (54.3) | % |
TASER X26P | |
| 12,011 |
| 5.5 | |
| 9,086 |
| 3.9 | |
| 2,925 |
| 32.2 | |
TASER X2 | |
| 19,080 |
| 8.8 | |
| 10,078 |
| 4.3 | |
| 9,002 |
| 89.3 | |
TASER Consumer devices | |
| 2,259 |
| 1.0 | |
| 967 |
| 0.4 | |
| 1,292 |
| 133.6 | |
Cartridges | | | 36,433 | | 16.7 | | | 39,313 | | 16.9 | | | (2,880) | | (7.3) | |
Axon Evidence and cloud services | |
| 3,350 |
| 1.5 | |
| 2,711 |
| 1.2 | |
| 639 |
| 23.6 | |
Extended warranties | |
| 6,523 |
| 3.0 | |
| 6,099 |
| 2.6 | |
| 424 |
| 7.0 | |
Other | |
| 1,107 |
| 0.7 | |
| 2,596 |
| 1.3 | |
| (1,489) |
| (57.4) | |
TASER segment | |
| 103,909 |
| 47.8 | |
| 121,491 |
| 52.4 | |
| (17,582) |
| (14.5) | |
Software and Sensors segment: | |
|
|
|
| |
|
|
|
| |
|
|
|
| |
Axon Body | |
| 14,939 |
| 6.9 | |
| 20,862 |
| 9.0 | |
| (5,923) |
| (28.4) | |
Axon Flex | |
| 674 |
| 0.3 | |
| 1,488 |
| 0.6 | |
| (814) |
| (54.7) | |
Axon Fleet | |
| 9,246 |
| 4.2 | |
| 6,063 |
| 2.6 | |
| 3,183 |
| 52.5 | |
Axon Dock | |
| 5,552 |
| 2.5 | |
| 6,460 |
| 2.8 | |
| (908) |
| (14.1) | |
Axon Evidence and cloud services | |
| 70,072 |
| 32.2 | |
| 63,272 |
| 27.3 | |
| 6,800 |
| 10.7 | |
Extended warranties | |
| 9,054 |
| 4.2 | |
| 8,983 |
| 3.9 | |
| 71 |
| 0.8 | |
Other | |
| 4,132 |
| 1.9 | |
| 3,370 |
| 1.4 | |
| 762 |
| 22.6 | |
Software and Sensors segment | |
| 113,669 |
| 52.2 | |
| 110,498 |
| 47.6 | |
| 3,171 |
| 2.9 | |
Total net sales | | $ | 217,578 |
| 100.0 | % | $ | 231,989 |
| 100.0 | % | $ | (14,411) |
| (6.2) | % |
Net unit sales were as follows:
| | | | | | | | | |
|
| Three Months Ended | | Three Months Ended |
| |
| |
|
| | December 31, 2021 | | September 30, 2021 | | Change | | Change | |
TASER 7 |
| 12,927 |
| 36,350 |
| (23,423) |
| (64.4) | % |
TASER X26P |
| 8,246 |
| 6,596 |
| 1,650 |
| 25.0 | % |
TASER X2 |
| 14,432 |
| 5,562 |
| 8,870 |
| 159.5 | % |
TASER Consumer devices |
| 8,733 |
| 3,232 |
| 5,501 |
| 170.2 | % |
Cartridges |
| 1,194,867 |
| 1,327,971 |
| (133,104) |
| (10.0) | % |
Axon Body |
| 31,749 |
| 58,248 |
| (26,499) |
| (45.5) | % |
Axon Flex |
| 1,027 |
| 3,390 |
| (2,363) |
| (69.7) | % |
Axon Fleet |
| 4,609 |
| 2,753 |
| 1,856 |
| 67.4 | % |
Axon Dock |
| 4,959 |
| 8,556 |
| (3,597) |
| (42.0) | % |
Net sales for the TASER segment decreased $17.6 million, or 14.5%, on a sequential basis primarily due to a $27.5 million decrease in revenue from TASER 7 devices and a $2.9 million decrease in cartridge revenue. The decrease in TASER 7 revenues was partially offset by a revenue increase of $13.2 million of other TASER devices. The decrease in revenue is a result of decreased unit sales, partially offset by higher average selling prices on our TASER 7 devices. TASER 7 revenue for the three months ended December 30, 2021 was impacted by approximately $35.0 million for orders that were scheduled to ship prior to December 31, 2021, but could not be fulfilled due to the delayed receipt of a manufacturing component for our TASER 7 devices. We expect to recognize this revenue during the first half of 2022.
Net sales for the Software and Sensors segment increased $3.2 million, or 2.9%, on a sequential basis primarily due to a $6.8 million increase in Axon Evidence and cloud services revenue and a $3.2 million increase in Axon Fleet revenue. The increase in Axon Evidence and cloud services revenue was a result of the increase in the aggregate
36
number of users on our network. Axon Fleet revenue was driven primarily by increased unit sales, as well as an increase in the average selling price. Axon Body revenue was impacted by approximately $15.5 million for orders that were scheduled to ship prior to December 31, 2021, but could not be fulfilled due to supply chain constraints for our Axon Body 3 devices. We expect to recognize this revenue during the first half of 2022.
International sales were $48.7 million in for the three months ended December 31, 2021 as compared to $39.2 million for the three months ended September 30, 2021, an increase of $9.5 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 (CEO Performance Award). Our management uses these non-GAAP financial measures in evaluating our performance in comparison to prior periods. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance, and when planning and forecasting our future periods. A reconciliation of GAAP to the non-GAAP financial measures is presented below.
| ● | EBITDA (Most comparable GAAP Measure: Net income) - Earnings before interest expense, investment interest income, taxes, depreciation and amortization. |
| ● | Adjusted EBITDA (CEO Performance Award) (Most comparable GAAP Measure: Net income) - Earnings before interest expense, investment interest income, taxes, depreciation, amortization and non-cash stock-based compensation expense. |
Although these non-GAAP financial measures are not consistent with GAAP, management believes investors will benefit by referring to these non-GAAP financial measures when assessing our operating results, as well as when forecasting and analyzing future periods. However, management recognizes that:
| ● | these non-GAAP financial measures are limited in their usefulness and should be considered only as a supplement to our GAAP financial measures; |
| ● | these non-GAAP financial measures should not be considered in isolation from, or as a substitute for, our GAAP financial measures; |
| ● | these non-GAAP financial measures should not be considered to be superior to our GAAP financial measures; and |
| ● | these non-GAAP financial measures were not prepared in accordance with GAAP and investors should not assume that the non-GAAP financial measures presented in this Annual Report on Form 10-K were prepared under a comprehensive set of rules or principles. |
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EBITDA and Adjusted EBITDA (CEO Performance Award) reconcile to net income as follows (dollars in thousands):
| | | | | | |
| | For the Years Ended December 31, | ||||
| | 2021 | | 2020 | ||
Net income (loss) | | $ | (60,018) | | $ | (1,724) |
Depreciation and amortization | |
| 18,694 | |
| 12,475 |
Interest expense | |
| 28 | |
| 55 |
Investment interest income | |
| (1,511) | |
| (4,086) |
Provision for (benefit from) income taxes | |
| (81,357) | |
| (4,567) |
EBITDA | | $ | (124,164) | | $ | 2,153 |
| | | | | | |
Adjustments: | |
|
| |
|
|
Stock-based compensation expense | |
| 303,331 | |
| 133,572 |
Adjusted EBITDA (CEO Performance Award) | | $ | 179,167 | | $ | 135,725 |
Liquidity and Capital Resources
Summary
As of December 31, 2021, we had $356.3 million of cash and cash equivalents, an increase of $200.9 million from December 31, 2020. Cash and cash equivalents and investments totaled $402.1 million, a decrease of $250.6 million from December 31, 2020.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities (in thousands):
| | | | | | |
| | Year Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
Operating activities | | $ | 124,494 | | $ | 38,481 |
Investing activities | | | 252,556 | | | (356,526) |
Financing activities | | | (174,181) | | | 299,265 |
Effect of exchange rate changes on cash and cash equivalents | |
| (1,982) | |
| 1,976 |
Net increase (decrease) in cash and cash equivalents and restricted cash | | $ | 200,887 | | $ | (16,804) |
Operating activities
Net cash provided by operating activities in 2021 of $124.5 million consisted of $60.0 million in net loss, the net add-back of non-cash income statement items totaling $227.8 million and a $43.3 million net change in operating assets and liabilities. Included in the non-cash items were $18.7 million in depreciation and amortization expense, $303.3 million in stock-based compensation expense, and an $81.3 million increase in deferred income tax assets. Cash provided by operations was impacted by an increase of $205.8 million in accounts and notes receivable and contract assets, which was largely attributable to increased sales in 2021, particularly for sales made under subscription plans. Cash provided by operations was also impacted by an increase of $40.2 million in prepaid expenses and other assets, resulting primarily from an increase in deferred commissions expense and an increase in income tax receivable due to overpayments, and an increase of $18.3 million in inventory on as we proactively built up inventory to help meet future product demand. Partially offsetting this activity was an increase in deferred revenue of $175.6 million, which was primarily attributable to increased subscription payments for Software and Sensors hardware and services in advance of fulfillment, and a smaller increase in hardware deferred revenue from TASER subscription sales.
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Investing activities
We generated $252.6 million from investing activities in 2021. Proceeds from investments, net of purchases of investments and marketable securities, were $356.1 million, and $14.5 million of proceeds from the sale of a portion of one of our existing strategic investments. We also invested $50.3 million in the purchase of property and equipment and intangibles, $45.5 million for new or incremental strategic minority investments, and $22.4 million in cash paid for business combinations.
Financing activities
Net cash used in financing activities was $174.2 million for the year ended December 31, 2021. During the year ended December 31, 2021, certain restricted stock units (“RSUs”) and stock options were net-share settled, such that we withheld shares to cover the employees’ tax obligation for the applicable income and other employment taxes, and remitted the cash, which payments totaled $331.3 million, to the appropriate taxing authorities. Net-settled stock awards included six tranches of our XSPP which vested during 2021 and 2.1 million stock options which were exercised during 2021. Partially offsetting this use of cash were net proceeds received from our ATM offering during 2021 of $105.5 million in cash and $51.6 million of proceeds from the exercise of stock options where shares were sold to cover the exercise price.
Liquidity and Capital Resources
Our most significant source of liquidity continues to be funds generated by operating activities and available cash and cash equivalents. In addition, our $50.0 million revolving credit facility is available for additional working capital needs or investment opportunities. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. Advances under the line of credit bear interest at LIBOR plus 1.0 to 1.5% per year determined in accordance with a pricing grid based on our funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio.
As of December 31, 2021, we had letters of credit outstanding of $6.1 million, leaving the net amount available for borrowing of $43.9 million. The facility matures on December 31, 2023 and has an accordion feature which allows for an increase in the total line of credit up to $100.0 million, subject to certain conditions, including the availability of additional bank commitments. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our revolving credit facility. At December 31, 2021 and 2020, there were no borrowings under the line.
Our agreement with the bank requires us to comply with a maximum funded debt to EBITDA ratio, as defined, of no greater than 2.50 to 1.00 based upon a trailing four fiscal quarter period. At December 31, 2021, the Company’s funded debt to EBITDA ratio was 0.00 to 1.00.
On January 29, 2021, we entered into an amendment to the credit agreement which extends the maturity date to December 31, 2023 and increased the amount of the unsecured revolving line of credit which is available for letters of credit from $10 million to $20 million.
TASER subscription and installment purchase arrangements typically involve amounts invoiced in five equal installments at the beginning of each year of the five-year term. This is in contrast to a traditional CED sale in which the entire amount being charged for the hardware is invoiced upon shipment. This impacts liquidity in a commensurate fashion, with the cash for the subscription or installment purchase received in five annual installments rather than up front. It is our strategic intent to shift an increasing amount of our business to a subscription model, to better match the municipal budgeting process of our customers as well as to allow for multiple product offerings to be bundled into existing subscriptions. We carefully considered the cash flow impacts of this strategic shift and regularly revisit our cash flow forecast with the goal of maintaining a comfortable level of liquidity as we introduce commercial offerings in which we incur upfront cash costs to produce and fulfill hardware sales ahead of the cash inflows from our customers.
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Based on our strong balance sheet and the fact that we had no long-term debt or financing lease obligations at December 31, 2021, we believe financing will be available, both through our existing credit line and possible additional financing. However, there is no assurance that such funding will be available on terms acceptable to us, or at all.
We believe that our sources of funding will be sufficient to satisfy our currently anticipated cash requirements including capital expenditures, working capital requirements, potential acquisitions or investments, income and payroll tax payments for net-settled stock awards, and other liquidity requirements through at least the next 12 months. We and our Board of Directors may consider repurchases of our common stock. Further repurchases of our common stock would take place on the open market, would be financed with available cash and are subject to authorization as well as market and business conditions.
Contractual Obligations
The following table outlines our future contractual financial obligations by period in which payment is expected, as of December 31, 2021 (dollars in thousands):
| | | | | | | | | | |
| | | | | Short | | Long | | ||
|
| Total |
| Term |
| Term |
| |||
Operating lease obligations | | $ | 29,445 | | $ | 7,782 | | $ | 21,663 | |
Purchase obligations | | | 328,427 | | | 314,206 | | | 14,221 | |
Total contractual obligations |
| $ | 357,872 |
| $ | 321,988 |
| $ | 35,884 |
|
Purchase obligations in the table above represent $313.5 million of open purchase orders and $14.9 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 our strategic relationships with these vendors.
On February 23, 2022, the Company entered into construction management agreement with Okland Construction Company, Inc. for construction of a new manufacturing and office campus on land the Company owns in Scottsdale, Arizona. The contract specifies a maximum guaranteed construction price of approximately $149.7 million, of which approximately $85.0 million is expected to be incurred in 2022. Construction is expected to start no later than May 3, 2022 with final completion by July 25, 2024.
We are subject to U.S. federal income tax as well as income taxes imposed by state and foreign jurisdictions. As of December 31, 2021, we had $18.2 million of gross unrecognized tax benefits related to uncertain tax positions. The settlement period for these long-term income tax liabilities cannot be determined; however, the liabilities are expected to increase by approximately $0.7 million within the next 12 months.
Critical Accounting Estimates
We have identified the following accounting estimates as critical to our business operations and the understanding of our results of operations. The preparation of this Annual Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. While we do not believe that a change in these estimates is reasonably likely, there can be no assurance that our actual results will not differ from these estimates. The effect of these estimates on our business operations is discussed below.
Product Warranties
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
40
warranty costs are estimated based on historical data related to warranty claims on a quarterly basis and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure or other issue that could result in larger than anticipated warranty claims from customers. The warranty reserve is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. As of December 31, 2021 and 2020, our warranty reserve was approximately $2.8 million and $0.8 million, respectively. Warranty expense for the years ended December 31, 2021, 2020 and 2019 was $2.9 million, $0.0 million and $1.6 million, respectively. 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. Warranty expense for the year ended December 31, 2019 was impacted by higher than initially expected warranty claims for the Axon Flex 2 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 determine the cost basis for its inventories. Costs include allocations for materials, labor, and overhead. All variances between actual costs and standard costs are apportioned to inventory and cost of goods sold based upon inventory turnover. We evaluate inventory on a quarterly basis for obsolete or slow-moving items to ascertain if the recorded allowance is reasonable and adequate. Additional provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value.
During the year ended December 31, 2021, we recorded provisions to reduce inventories to their lower of cost and net realizable value of approximately $0.9 million compared to $3.8 million during the year ended December 31, 2020. The largest driver of the decrease in the provision in 2021 compared to 2020 was a one-time prior year reduction in the carrying amount of our trial and evaluation inventory to zero which was our estimate of its net realizable value. The provision in 2021 and in 2020 was driven by analyses for existing products resulting in adjustments to state inventories at their lower of cost and net realizable value.
Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable
We derive revenue from two primary sources: (1) the sale of physical products, including 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 SaaS (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, we also recognize training, professional services and revenue related to other software and SaaS services. We apply the five-step model outlined in Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("Topic 606").
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
41
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. For the years ended December 31, 2021, 2020 and 2019, the composition of revenue recognized from contracts containing multiple performance obligations and those not containing multiple performance obligations was as follows (dollars in thousands):
| | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2021 | | |||||||||||||
| | TASER |
| Software and Sensors |
| Total |
| |||||||||
Contracts with Multiple Performance Obligations |
| $ | 271,333 |
| 62.1 | % | $ | 418,516 |
| 98.1 | % | $ | 689,849 |
| 79.9 | % |
Contracts without Multiple Performance Obligations | | | 165,594 | | 37.9 | | | 7,938 | | 1.9 | | | 173,532 | | 20.1 |
|
Total | | $ | 436,927 | | 100.0 | % | $ | 426,454 | | 100.0 | % | $ | 863,381 | | 100.0 | % |
| | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2020 | | |||||||||||||
|
| TASER |
| Software and Sensors |
| Total |
| |||||||||
Contracts with Multiple Performance Obligations |
| $ | 186,427 |
| 50.9 | % | $ | 311,187 |
| 99.0 | % | $ | 497,614 |
| 73.1 | % |
Contracts without Multiple Performance Obligations | | | 180,125 | | 49.1 | | | 3,264 | | 1.0 | | | 183,389 | | 26.9 |
|
Total | | $ | 366,552 | | 100.0 | % | $ | 314,451 | | 100.0 | % | $ | 681,003 | | 100.0 | % |
| | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2019 | | |||||||||||||
|
| TASER |
| Software and Sensors |
| Total |
| |||||||||
Contracts with Multiple Performance Obligations |
| $ | 130,761 |
| 46.4 | % | $ | 245,416 |
| 98.5 | % | $ | 376,177 |
| 70.9 | % |
Contracts without Multiple Performance Obligations | | | 150,900 | | 53.6 | | | 3,783 | | 1.5 | | | 154,683 | | 29.1 |
|
Total | | $ | 281,661 | | 100.0 | % | $ | 249,199 | | 100.0 | % | $ | 530,860 | | 100.0 | % |
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 as the products are shipped 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.
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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.
Sales are typically made on credit, and we generally do not require collateral.
Valuation of Goodwill, Intangible and Long-lived Assets
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 impairment assessment in the fourth quarter of each year. Finite-lived intangible assets and other long-lived assets are amortized over their estimated useful lives. Management evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and intangible assets may warrant revision or that the remaining balance of these assets, including intangible assets with indefinite lives, may not be recoverable.
Circumstances that might indicate long-lived assets might not be recoverable could include, but are not limited to, a change in the product mix, a change in the way products and services are created, produced or delivered, or a significant change in the way our 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, 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. Both charges were included in sales, general and administrative expense in the accompanying consolidated statements of operations. During the year ended December 31, 2019, we abandoned certain capitalized software related to implementation work on an enterprise resource planning system conversion, resulting in an impairment charge of $1.3 million, and certain planning and site development activities related to our planned new headquarters, resulting in an impairment charge of $0.7 million, both of which were included in sales, general and administrative expense in the accompanying consolidated statements of operations and comprehensive income (loss).
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 $18.2 million as of December 31, 2021. We expect the amount of the unrecognized tax benefit to increase by approximately $0.7 million within the next 12 months. Should the unrecognized tax benefit of $18.2 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
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after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws. During 2021, we completed an audit of our 2018 Illinois income tax return. Additionally, we have been notified that an audit will commence for Axon Public Safety Southeast Asia LLC, our entity in Vietnam. The tax period has not yet been defined.
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 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, 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 federal net operating losses ("NOLs") of $259.0 million, which either carryforward indefinitely or expire in 2036 and $0.1 million of which is subject to limitation under Internal Revenue Code (“IRC”) Section 382. Additionally, we have state NOLs of $251.4 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 loss for which realization is uncertain, and specific identified intangibles with an indefinite life, a reserve of $16.2 million has been recorded as a valuation allowance against deferred tax assets as of December 31, 2021.
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
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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 14 of the notes to our consolidated financial statements within this Annual Report on Form 10-K.
We have granted a total of approximately 15.1 million performance-based awards (options and restricted stock units) of which approximately 3.9 million are outstanding as of December 31, 2021, the vesting of which is contingent upon the achievement of certain performance criteria including the successful development and market acceptance of future product introductions as well as our future sales targets and operating performance and market capitalization. Of the 3.9 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 subjective and probability-based assumptions can materially affect the estimates of the fair value of the awards and timing of recognition of stock-based compensation 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 11 of our consolidated financial statements within this Annual Report on Form 10-K.
Reserve for Expected Credit Losses
We are exposed to the risk of credit losses primarily through sales of products and services. Our expected credit loss allowance for accounts receivable, notes receivable, and contract assets represents management’s best estimate and application of judgment considering a number of factors, including historical collection experience, published or estimated credit default rates for entities that represent our customer base, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Additionally, specific 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.
We review receivables for U.S. and international customers separately to better reflect different published credit default rates and economic and market conditions.
A majority of our customers are governmental agencies. Due to municipal government funding rules, certain of our contracts are subject to appropriation, termination for convenience, or similar cancellation clauses, which could allow our customers to cancel or not exercise options to renew contracts in the future. Economic slowdowns that negatively affect municipal tax collections and put pressure on law enforcement may increase this risk and negatively impact the realizability of our accounts and notes receivable and contract assets. We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and reversed our previously-recorded additional reserve for credit losses of approximately $1.3 million during the year ended December 31, 2021.
Based on the balances of our financial instruments as of December 31, 2021, a hypothetical 25 percent increase in expected credit loss rates across all pools would result in a $0.7 million increase in the allowance for expected credit losses.
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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, 2021, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $0.5 million decline in the fair market value of the portfolio. Such losses would only be realized if we sold the investments prior to maturity.
Additionally, we have access to a $50.0 million line of credit borrowing facility which bears interest at LIBOR plus 1.0 to 1.5% per year determined in accordance with a pricing grid based on our funded debt to EBITDA ratio. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit, which totaled $6.1 million at December 31, 2021. At December 31, 2021, there was no amount outstanding under the line of credit, and the available borrowing under the line of credit was $43.9 million. We have not borrowed any funds under the line of credit since its inception; however; should we need to do so in the future, such borrowings could be subject to adverse or favorable changes in the underlying interest rate.
Exchange Rate Risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, in each case compared to the U.S. dollar, related to transactions by our foreign subsidiaries. The majority of our sales to international customers are transacted in foreign currencies and therefore are subject to exchange rate fluctuations on these transactions. The cost of our products to our customers increases when the U.S. dollar strengthens against their local currency, and we may have more sales and expenses denominated in foreign currencies in future years which could increase our foreign exchange rate risk. Additionally, intercompany sales to our non-U.S. dollar functional currency international subsidiaries are transacted in U.S. dollars which could increase our foreign exchange rate risk caused by foreign currency transaction gains and losses.
To date, we have not engaged in any currency hedging activities. However, we may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. However, we may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to the prohibitive economic cost of hedging particular exposures. As such, fluctuations in currency exchange rates could harm our business in the future.
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Item 8. Financial Statements and Supplementary Data
| | |
Index to Consolidated Financial Statements |
| Page |
Consolidated Balance Sheets as of December 31, 2021 and 2020 | | 48 |
| 49 | |
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021, 2020 and 2019 | | 50 |
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 | | 51 |
| 52 | |
Report of Grant Thornton LLP, Independent Registered Public Accounting Firm (PCAOB ID No. 248) | | 89 |
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AXON ENTERPRISE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | | | | |
|
| December 31, | | December 31, | ||
| | 2021 | | 2020 | ||
| | | | | | |
ASSETS |
| |
|
| |
|
Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 356,332 | | $ | 155,440 |
Marketable securities | | | 72,180 | | | — |
Short-term investments | |
| 14,510 | |
| 406,525 |
Accounts and notes receivable, net of allowance of $2,203 and $2,105 as of December 31, 2021 and December 31, 2020 respectively | |
| 320,819 | |
| 229,201 |
Contract assets, net | |
| 180,421 | |
| 63,945 |
Inventory, net | |
| 108,688 | |
| 89,958 |
Prepaid expenses and other current assets | |
| 56,540 | |
| 36,883 |
Total current assets | |
| 1,109,490 | |
| 981,952 |
Property and equipment, net | |
| 138,457 | |
| 105,494 |
Deferred tax assets, net | |
| 127,193 | |
| 45,770 |
Intangible assets, net | |
| 15,470 | |
| 9,448 |
Goodwill | |
| 43,592 | |
| 25,205 |
Long-term investments | |
| 31,232 | |
| 90,681 |
Long-term notes receivable, net | |
| 11,256 | |
| 22,457 |
Long-term contract assets, net | | | 29,753 | | | 20,099 |
Strategic investments | | | 83,520 | | | 11,711 |
Other long-term assets | |
| 98,247 | |
| 68,206 |
Total assets | | $ | 1,688,210 | | $ | 1,381,023 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
|
| |
|
|
Current liabilities: | |
|
| |
|
|
Accounts payable | | $ | 32,220 | | $ | 24,142 |
Accrued liabilities | |
| 103,707 | |
| 59,843 |
Current portion of deferred revenue | |
| 265,591 | |
| 163,959 |
Customer deposits | |
| 10,463 | |
| 2,956 |
Other current liabilities | |
| 6,540 | |
| 5,431 |
Total current liabilities | |
| 418,521 | |
| 256,331 |
Deferred revenue, net of current portion | |
| 185,721 | |
| 111,222 |
Liability for unrecognized tax benefits | |
| 3,797 | |
| 4,503 |
Long-term deferred compensation | |
| 5,679 | |
| 4,732 |
Deferred tax liabilities, net | | | 811 | | | 649 |
Other long-term liabilities | |
| 25,832 | |
| 27,331 |
Total liabilities | |
| 640,361 | |
| 404,768 |
Commitments and contingencies (Note 11) | |
|
| |
|
|
Stockholders’ equity: | |
|
| |
|
|
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; 0 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively | |
| — | |
| — |
Common stock, $0.00001 par value; 200,000,000 shares authorized; 70,896,856 and 63,766,555 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively | |
| 1 | |
| 1 |
Additional paid-in capital | |
| 1,095,229 | |
| 962,159 |
Treasury stock at cost, 20,220,227 shares as of December 31, 2021 and December 31, 2020 | |
| (155,947) | |
| (155,947) |
Retained earnings | |
| 109,883 | |
| 169,901 |
Accumulated other comprehensive income (loss) | |
| (1,317) | |
| 141 |
Total stockholders’ equity | |
| 1,047,849 | |
| 976,255 |
Total liabilities and stockholders’ equity | | $ | 1,688,210 | | $ | 1,381,023 |
The accompanying notes are an integral part of these consolidated financial statements.
48
AXON ENTERPRISE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
| | | | | | | | | |
| | For the Years Ended December 31, | |||||||
|
| 2021 |
| 2020 | | 2019 | |||
Net sales from products | | $ | 608,525 | | $ | 500,250 | | $ | 399,474 |
Net sales from services | |
| 254,856 | |
| 180,753 | |
| 131,386 |
Net sales | |
| 863,381 | |
| 681,003 | |
| 530,860 |
Cost of product sales | |
| 260,098 | |
| 224,131 | |
| 190,683 |
Cost of service sales | |
| 62,373 | |
| 40,541 | |
| 32,891 |
Cost of sales | |
| 322,471 | |
| 264,672 | |
| 223,574 |
Gross margin | |
| 540,910 | |
| 416,331 | |
| 307,286 |
Sales, general and administrative | |
| 515,007 | |
| 307,286 | |
| 212,959 |
Research and development | |
| 194,026 | |
| 123,195 | |
| 100,721 |
Total operating expenses | |
| 709,033 | |
| 430,481 | |
| 313,680 |
Loss from operations | |
| (168,123) | |
| (14,150) | |
| (6,394) |
Interest and other income, net | |
| 26,748 | |
| 7,859 | |
| 8,464 |
Income (loss) before provision (benefit) for income taxes | |
| (141,375) | |
| (6,291) | |
| 2,070 |
Provision (benefit) for income taxes | |
| (81,357) | |
| (4,567) | |
| 1,188 |
Net income (loss) | | $ | (60,018) | | $ | (1,724) | | $ | 882 |
Net income (loss) per share: | |
|
| |
|
| |
|
|
Basic | | $ | (0.91) | | $ | (0.03) | | $ | 0.01 |
Diluted | | $ | (0.91) | | $ | (0.03) | | $ | 0.01 |
Weighted average shares outstanding: | |
|
| |
|
| |
|
|
Basic | |
| 66,191 | |
| 61,782 | |
| 59,190 |
Diluted | |
| 66,191 | |
| 61,782 | |
| 60,018 |
| | | | | | | | | |
Net income (loss) | | $ | (60,018) | | $ | (1,724) | | $ | 882 |
Foreign currency translation adjustments | | | (1,251) | |
| 1,237 | |
| 417 |
Unrealized gains (losses) on available-for-sale investments | |
| (207) | | | — | | | — |
Comprehensive income (loss) | | $ | (61,476) | | $ | (487) | | $ | 1,299 |
The accompanying notes are an integral part of these consolidated financial statements.
49
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, 2018 |
| 58,810,637 | | $ | 1 | | $ | 453,400 |
| 20,220,227 | | $ | (155,947) | | $ | 171,383 | | $ | (1,513) | | $ | 467,324 |
Issuance of common stock under employee plans, net of shares withheld for payroll taxes | | 616,509 | |
| — | |
| (3,937) |
| — | |
| — | |
| — | |
| — | |
| (3,937) |
Stock-based compensation |
| — | |
| — | |
| 78,809 |
| — | |
| — | |
| — | |
| — | | | 78,809 |
Issuance of common stock for business combination contingent consideration |
| 70,613 | | | — | | | — | | — | | | — | | | — | | | — | |
| — |
Net income |
| — | |
| — | |
| — |
| — | |
| — | |
| 882 | |
| — | |
| 882 |
Other comprehensive income |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 417 | |
| 417 |
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 |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 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 |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (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 |
The accompanying notes are an integral part of these consolidated financial statements.
50
AXON ENTERPRISE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | |
| | For the Years Ended December 31, | |||||||
|
| 2021 |
| 2020 | | 2019 | |||
Cash flows from operating activities: |
| |
|
| |
| | |
|
Net income (loss) | | $ | (60,018) | | $ | (1,724) | | $ | 882 |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | |
|
| |
|
| |
| |
Depreciation and amortization | |
| 18,694 | |
| 12,475 | |
| 11,361 |
Loss on disposal and abandonment of intangible assets | |
| 146 | |
| 320 | |
| 67 |
Loss on disposal and impairment of property and equipment, net | |
| 92 | |
| 1,722 | |
| 2,542 |
Net gain on strategic investments and marketable securities | | | (23,035) | | | — | | | — |
Stock-based compensation expense | |
| 303,331 | |
| 133,572 | |
| 78,495 |
Deferred income taxes | |
| (81,303) | |
| (16,528) | |
| (7,987) |
Unrecognized tax benefits | |
| (706) | |
| 671 | |
| 983 |
Bond amortization | | | 5,217 | | | 3,345 | | | 361 |
Noncash lease expense | |
| 5,573 | |
| 4,104 | |
| 3,567 |
Provision for expected credit losses | | | (214) | | | 1,302 | | | — |
Change in assets and liabilities: | |
| | |
| | |
| |
Accounts and notes receivable and contract assets | |
| (205,769) | |
| (107,762) | |
| (38,830) |
Inventory | |
| (18,272) | |
| (52,156) | |
| (4,903) |
Prepaid expenses and other assets | |
| (40,158) | |
| (14,885) | |
| (9,845) |
Accounts payable, accrued and other liabilities | |
| 45,301 | |
| 8,886 | |
| 4,967 |
Deferred revenue | |
| 175,615 | |
| 65,139 | |
| 24,013 |
Net cash provided by operating activities | |
| 124,494 | |
| 38,481 | |
| 65,673 |
Cash flows from investing activities: | |
|
| |
|
| |
|
|
Purchases of investments and marketable securities | |
| (362,479) | |
| (656,522) | |
| (354,477) |
Proceeds from call, maturity, or sale of investments | |
| 718,617 | |
| 379,839 | |
| 130,083 |
Proceeds from sale of strategic investments | | | 14,546 | | | — | | | — |
Purchases of property and equipment | |
| (49,886) | |
| (72,629) | |
| (15,939) |
Proceeds from disposal of property and equipment | | | 43 | | | 95 | | | — |
Purchases of intangible assets | |
| (392) | |
| (241) | |
| (404) |
Purchases of strategic investments | | | (45,500) | | | (7,068) | | | — |
Business acquisitions, net of cash acquired | | | (22,393) | | | — | | | — |
Net cash provided by (used in) investing activities | |
| 252,556 | |
| (356,526) | |
| (240,737) |
Cash flows from financing activities: | |
| | |
|
| |
|
|
Net proceeds from equity offering | |
| 105,514 | |
| 306,779 | |
| — |
Proceeds from options exercised | |
| 51,614 | |
| 295 | |
| 114 |
Income and payroll tax payments for net-settled stock awards | |
| (331,309) | |
| (7,809) | |
| (4,051) |
Net cash provided by (used in) financing activities | |
| (174,181) | |
| 299,265 | |
| (3,937) |
Effect of exchange rate changes on cash and cash equivalents | |
| (1,982) | |
| 1,976 | |
| 329 |
Net increase (decrease) in cash and cash equivalents | |
| 200,887 | |
| (16,804) | |
| (178,672) |
Cash and cash equivalents and restricted cash, beginning of period | |
| 155,551 | |
| 172,355 | |
| 351,027 |
Cash and cash equivalents and restricted cash, end of period | | $ | 356,438 | | $ | 155,551 | | $ | 172,355 |
The accompanying notes are an integral part of these consolidated financial statements.
51
Note 1 - Organization and Summary of Significant Accounting Policies
Axon Enterprise, Inc. (“Axon”, the “Company”, "we", or "us") is a market-leading provider of law enforcement technology solutions. Our core mission is to protect life. We fulfill that mission through developing hardware and software products that advance the long term objectives of a) obsoleting the bullet, b) reducing social conflict, and c) enabling a fair and effective justice system.
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, |
| ● | inventory valuation, |
| ● | revenue recognition, |
| ● | 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, corporate bonds, municipal bonds, and agency bonds. 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.
During the quarter ended December 31, 2021, upon the sale of a portion of our held-to-maturity security portfolio, we reclassified all remaining held-to-maturity securities to available-for-sale. We do not anticipate using the held-to-maturity classification in the future. The transfers to available-for-sale were made as a result of a change in management’s objectives with respect to its investment portfolio, which was implemented in the fourth quarter.
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
52
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 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 0 credit losses recorded on our investment portfolio during the year ended December 31, 2021.
Restricted Cash
Restricted cash balances of $0.1 million and $0.1 million as of December 31, 2021 and 2020, 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. Approximately half of the balance was included in prepaid expenses and other current assets on our consolidated balance sheets, with the remainder included in other assets.
Inventory
Inventories are stated at the lower of cost, determined on the first-in, first-out (“FIFO”) basis, or net realizable value, net of an inventory valuation allowance. We use a standard cost methodology to determine the cost basis for 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.
53
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.
Valuation of Goodwill, Intangible and Long-lived Assets
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 impairment assessment in the fourth quarter of each year. Management evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and intangible assets may warrant revision or that the remaining balance of these assets, including intangible assets with indefinite lives, may not be recoverable.
Circumstances that might indicate long-lived assets might not be recoverable could include, but are not limited to, a change in the product mix, a change in the way products and services are created, produced or delivered, or a significant change in the way our 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, 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. Both charges were included in sales, general and administrative expense in the accompanying consolidated statements of operations. During the year ended December 31, 2019, we abandoned certain capitalized software related to implementation work on an enterprise resource planning system conversion, resulting in an impairment charge of $1.3 million, and certain planning and site development activities related to our planned new headquarters, resulting in an impairment charge of $0.7 million, both of which were included in sales, general and administrative expense in the accompanying consolidated statements of operations and comprehensive income.
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
We derive revenue from 2 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.
54
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. Accounts and notes receivable and contract assets are presented net of a reserve for expected credit losses, which totaled $3.3 million and $3.4 million as of December 31, 2021 and 2020, 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.
55
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 $2.6 million, $1.3 million and $0.9 million in the years ended December 31, 2021, 2020 and 2019, 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):
| | | | | | |
| | Year Ended December 31, | ||||
|
| 2021 | | 2020 | ||
Balance, beginning of period | | $ | 769 | | $ | 1,476 |
Utilization of reserve | |
| (873) | |
| (700) |
Warranty expense (benefit) | |
| 2,926 | |
| (7) |
Balance, end of period | | $ | 2,822 | | $ | 769 |
Research and Development Expenses
We expense as incurred research and development costs that do not meet the qualifications to be capitalized. We incurred research and development expense of $194.0 million, $123.2 million and $100.7 million in 2021, 2020 and 2019, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement amounts of assets and liabilities and their respective tax bases and operating loss and tax credit 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. We also assess whether uncertain tax positions, as filed, could result in the recognition of a liability for possible interest and penalties. Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. Refer to Note 12 for additional information regarding the change in unrecognized tax benefits.
Concentration of Credit Risk and Major Customers / Suppliers
Financial instruments that potentially subject us to concentrations of credit risk consist of accounts and notes receivable, contract assets, and cash. Historically, we have experienced an immaterial level of write-offs related to uncollectible accounts.
We maintain the majority of our cash at 3 depository institutions. As of December 31, 2021, the aggregate balances in such accounts were $347.3 million. Our 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, Germany, Hong Kong, India, Italy, the Netherlands, Spain, the United Kingdom, and Vietnam. To manage the related credit exposure, management continually monitors the creditworthiness of the financial institutions where we have deposits.
NaN customer represented more than 10% of total net sales for the years ended December 31, 2021, 2020 or 2019. At December 31, 2021, and 2020, 0 customer represented more than 10% of the aggregate balance of accounts and notes receivable and contract assets.
We currently purchase both off the shelf and custom components, including, but not limited to, finished circuit boards, injection-molded plastic components, small machined parts, custom cartridge components, electronic components, and off the shelf sub-assemblies from suppliers located in the U.S., Canada, China, Mexico, Republic of Korea, Sri Lanka, Taiwan, and Vietnam. We may source from other countries as well. Although we currently obtain many of these components from single source suppliers, we own the injection molded component tooling, most of the designs, and test fixtures used in their production for all custom components. As a result, we believe we could obtain alternative suppliers in most cases. Although we have experienced supply chain disruptions relating to materials and port constraints, we have remained focused on closely managing our supply chain. We continue to bolster our strategic relationships in our supply chain, identifying secondary/alternate sourcing, adjusting build plans accordingly, and building in logistic modes in support of our increasing demand while working to minimize disruption to customers. We acquire most of our components on a purchase order basis and do not currently have significant long-term purchase contracts with most component suppliers.
Fair Value of Financial Instruments
We use the fair value framework that prioritizes the inputs to valuation techniques for measuring financial assets and liabilities measured on a recurring basis and for non-financial assets and liabilities when these items are re-measured. Fair value is considered to be the exchange price in an orderly transaction between market participants, to sell an asset or transfer a liability at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
| ● | Level 1 – Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured. |
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| ● | Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques. |
| ● | Level 3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect our own assumptions about inputs that market participants would use in pricing an asset or liability. |
We have cash equivalents and investments, which at December 31, 2021 and 2020, were comprised of money market funds, agency bonds, certificates of deposit, commercial paper, corporate bonds, municipal bonds, U.S. Treasury bills, U.S. Treasury repurchase agreements, and U.S. Treasury inflation-protected securities. See additional disclosure regarding the fair value of our cash equivalents and investments in Note 3. Included in the balance of other assets as of December 31, 2021 and 2020 was $5.3 million and $4.7 million, respectively, related to corporate-owned life insurance policies which are used to fund our deferred compensation plan. We determine the fair value of our 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 4 unconsolidated affiliates. The estimated fair value of the investments was determined based on Level 3 inputs. As of December 31, 2021, management estimated that the fair value of the investments equaled the carrying value.
Our financial instruments also include accounts and notes receivable, accounts payable and accrued liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the balance sheet.
Segment and Geographic Information
Our operations are comprised of 2 reportable segments: the manufacture and sale of CEDs, batteries, accessories, extended warranties and other products and services (the “TASER” segment); and the development, manufacture and sale of software and sensors, which includes the sale of devices, wearables, applications, cloud and mobile products, and services (collectively, the "Software and Sensors" segment). Reportable segments are determined based on discrete financial information reviewed by our Chief Executive Officer who is our chief operating decision maker ("CODM"). We organize and review operations based on products and services, and currently there are no operating segments that are aggregated. We perform an analysis of our reportable segments at least annually. Additional information related to our business segments is summarized in Note 19.
For a summary of net sales by geographic area, see Note 2. The majority of our sales to international customers are transacted in foreign currencies and are attributed to each country based on the shipping address of the distributor or customer. For the years ended December 31, 2021, 2020 and 2019, 0 individual country outside the U.S. represented more than 10% of net sales. Substantially all of our assets are located in the U.S.
Stock-Based Compensation
We recognize expense related to stock-based compensation transactions in which we receive services in exchange for equity instruments of the Company. Stock-based compensation expense for restricted stock units ("RSUs") is measured based on the closing fair market value of our common stock on the date of grant. We recognize stock-based compensation expense over the award’s requisite service period on a straight-line basis for time-based RSUs. For performance-based
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RSUs, stock-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 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. 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 8 operational goals focused on revenue or 8 operational goals focused on Adjusted EBITDA (CEO Performance Award) have been met for the previous four consecutive fiscal quarters. A total of less than 0.1 million XSUs were granted during the year ended December 31, 2021.
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.
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 average of all iterations of the simulation was used as the basis for the valuation and market capitalization goal derived service period for each tranche. Additionally, we applied an illiquidity discount of between 10.5% 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 the XSU awards with the following assumptions: risk-free interest rate of between 0.85% and 1.24%, expected term of between 6.5 and 7.0 years, expected volatility of between 47.28% and 55.79%, 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
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compensation expense associated with the CEO Performance Award is recognized over the requisite service period, which is defined as the longer of the expected achievement period for each pair of market capitalization and operational goals, beginning at the point in time when the relevant operational goal is considered probable of being met.
NaN options were awarded during the years ended December 31, 2021, 2020, or 2019.
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 from outstanding stock options and unvested restricted stock units. The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):
| | | | | | | | | |
| | For the Year Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
Numerator for basic and diluted earnings per share: |
| |
|
| |
|
| |
|
Net income (loss) | | $ | (60,018) | | $ | (1,724) | | $ | 882 |
Denominator: | |
|
| |
|
| |
|
|
Weighted average shares outstanding-basic | |
| 66,191 | |
| 61,782 | |
| 59,190 |
Dilutive effect of stock-based awards | |
| — | |
| — | |
| 828 |
Diluted weighted average shares outstanding | |
| 66,191 | |
| 61,782 | |
| 60,018 |
Anti-dilutive stock-based awards excluded | |
| 7,690 | |
| 12,150 | |
| 12,627 |
Net income (loss) per share: | |
| | |
| | |
|
|
Basic | | $ | (0.91) | | $ | (0.03) | | $ | 0.01 |
Diluted | | $ | (0.91) | | $ | (0.03) | | $ | 0.01 |
Recently Issued Accounting Guidance
Recently Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Simplifying the Accounting for Income Taxes. Adoption of this ASU on January 1, 2021 did not have a material impact on our consolidated financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (a Consensus of the Emerging Issues Task Force). The guidance clarifies the interaction between ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and the ASU on equity method investments. ASU 2016-01 provides companies with an alternative to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs. ASU 2020-01 clarifies that for purposes of applying the Topic 321 measurement alternative, an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting under Topic 323, immediately before applying or upon discontinuing the equity method. In addition, this new ASU provides direction that a company should not consider whether the underlying securities would be accounted for under the equity method or the fair value option when it is determining the accounting for certain forward contracts and purchased options, upon either settlement or exercise. Adoption of this ASU on January 1, 2021 did not have a material impact on our consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805) – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The guidance improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and certain inconsistencies
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in application. Under current GAAP, an acquirer generally recognizes contract assets acquired and liabilities assumed in a business combination at fair value on the acquisition date. The amendments in this update require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if it had originated the contracts. Early adoption of this ASU effective October 1, 2021 did not have a material impact on our consolidated financial statements.
Reclassification of Prior Year Presentation
Certain prior year amounts, including strategic investments, 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.
Risks and Uncertainties
COVID-19 related risks have had and continue to have an impact on our operations. If our backup and mitigation plans are not sufficient to minimize business disruption, our financial results could be adversely affected. We are continuously monitoring our operations and intend to take appropriate actions to mitigate the risks arising from the COVID-19 pandemic, but there can be no assurances that we will be successful in doing so.
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, 2021 | | Year Ended December 31, 2020 | ||||||||||||||
|
| | |
| Software and |
| | |
| | |
| Software and |
| | | ||
| | TASER | | Sensors | | Total | | TASER | | Sensors | | Total | ||||||
TASER 7 | | $ | 135,906 | | $ | — | | $ | 135,906 | | $ | 107,506 | | $ | — | | $ | 107,506 |
TASER X26P | |
| 40,629 | |
| — | |
| 40,629 | |
| 41,724 | |
| — | |
| 41,724 |
TASER X2 | |
| 58,081 | |
| — | |
| 58,081 | |
| 60,107 | |
| — | |
| 60,107 |
TASER Consumer devices | |
| 7,132 | |
| — | |
| 7,132 | |
| 9,407 | |
| — | |
| 9,407 |
Cartridges | |
| 152,842 | |
| — | |
| 152,842 | |
| 115,193 | |
| — | |
| 115,193 |
Axon Body | |
| — | |
| 75,484 | |
| 75,484 | |
| — | |
| 57,150 | |
| 57,150 |
Axon Flex | |
| — | |
| 4,155 | |
| 4,155 | |
| — | |
| 4,082 | |
| 4,082 |
Axon Fleet | |
| — | |
| 24,319 | |
| 24,319 | |
| — | |
| 20,108 | |
| 20,108 |
Axon Dock | |
| — | |
| 24,441 | |
| 24,441 | |
| — | |
| 19,723 | |
| 19,723 |
Axon Evidence and cloud services | |
| 9,159 | |
| 246,005 | |
| 255,164 | |
| 2,935 | |
| 176,797 | |
| 179,732 |
Extended warranties | |
| 24,125 | |
| 33,686 | |
| 57,811 | |
| 20,754 | |
| 24,408 | |
| 45,162 |
Other | |
| 9,053 | |
| 18,364 | |
| 27,417 | |
| 8,926 | |
| 12,183 | |
| 21,109 |
Total | | $ | 436,927 | | $ | 426,454 | | $ | 863,381 | | $ | 366,552 | | $ | 314,451 | | $ | 681,003 |
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| | | | | | | | | |
| | Year Ended December 31, 2019 | |||||||
|
| | |
| Software and |
| | | |
| | TASER | | Sensors | | Total | |||
TASER 7 | | $ | 56,652 | | $ | — | | $ | 56,652 |
TASER X26P | |
| 52,524 | |
| — | |
| 52,524 |
TASER X2 | |
| 55,920 | |
| — | |
| 55,920 |
TASER Consumer devices | |
| 4,089 | |
| — | |
| 4,089 |
Cartridges | |
| 85,987 | |
| — | |
| 85,987 |
Axon Body | |
| — | |
| 44,039 | |
| 44,039 |
Axon Flex | |
| — | |
| 5,928 | |
| 5,928 |
Axon Fleet | |
| — | |
| 16,182 | |
| 16,182 |
Axon Dock | |
| — | |
| 20,449 | |
| 20,449 |
Axon Evidence and cloud services | |
| 704 | |
| 130,265 | |
| 130,969 |
Extended warranties | |
| 18,074 | |
| 19,188 | |
| 37,262 |
Other | |
| 7,711 | |
| 13,148 | |
| 20,859 |
Total | | $ | 281,661 | | $ | 249,199 | | $ | 530,860 |
The following table presents our revenues disaggregated by geography (in thousands):
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| |||||||||||||
| | 2021 | | 2020 | | 2019 |
| |||||||||
United States |
| $ | 686,914 | | 80 | % | $ | 535,079 |
| 79 | % | $ | 446,100 |
| 84 | % |
Other Countries | |
| 176,467 | | 20 | |
| 145,924 |
| 21 | |
| 84,760 |
| 16 | |
Total | | $ | 863,381 | | 100.0 | % | $ | 681,003 |
| 100.0 | % | $ | 530,860 |
| 100.0 | % |
Contract Balances
The timing of revenue recognition may differ from the timing of invoicing to customers. We generally have an unconditional right to consideration when we invoice our customers and record a receivable. We record a contract asset when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing.
Contract assets generally result from our subscription programs where we satisfy a hardware performance obligation upon shipment to the customer, and the right to the portion of the transaction price allocated to that hardware performance obligation is conditional on our future performance of a SaaS service obligation under the contract. We recognize a portion of the amount allocated to hardware products shipped to the customer as accounts receivable when invoiced to the customer, and record the remaining allocated value as a contract asset as we have generally fulfilled our hardware performance obligation upon shipment. Unbilled accounts receivable expected to be invoiced and collected within twelve months was $13.9 million as of December 31, 2021, and was included in accounts and notes receivable, net on our consolidated balance sheet.
Contract liabilities generally consist of deferred revenue on our subscription programs where we generally invoice customers at the beginning of each annual contract period and record a receivable at the time of invoicing when there is an unconditional right to consideration.
Deferred revenue is comprised mainly of unearned revenue related to our Axon Evidence SaaS platform, secure cloud-based storage, service-type extended warranties, stand-ready obligations in our cartridge programs, and rights to future CED, camera and related accessories hardware in our subscription programs. Revenue for Axon Evidence and cloud-based storage, our service-type extended warranties and stand-ready cartridge programs is generally recognized on a straight-line basis over the subscription term. Revenue for the rights to future hardware is generally recognized at the point in time the hardware products are shipped to the customer.
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Payment terms and conditions vary by contract type and geography, but our standard terms are that payments are due within 30 days from the date of invoice.
The following table presents our contract assets, contract liabilities and certain information related to these balances as of and for the year ended December 31, 2021 (in thousands):
| | | | | | | | | |
| | Year Ended December 31, | |||||||
|
| 2021 |
| 2020 | | 2019 | |||
Contract assets, net | | $ | 210,174 | | $ | 84,044 | | $ | 47,746 |
Contract liabilities (deferred revenue) | |
| 451,312 | |
| 275,181 | |
| 205,800 |
Revenue recognized in the period from: | |
|
| |
|
| |
|
|
Amounts included in contract liabilities at the beginning of the period | |
| 177,812 | |
| 135,513 | |
| 101,768 |
Contract liabilities (deferred revenue) consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 | ||||||||||||||
|
| Current |
| Long-Term |
| Total |
| Current |
| Long-Term |
| Total | ||||||
Warranty: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
TASER | | $ | 21,257 | | $ | 4,766 | | $ | 26,023 | | $ | 11,635 | | $ | 16,953 | | $ | 28,588 |
Software and Sensors | |
| 23,175 | |
| 18,137 | |
| 41,312 | |
| 13,926 | |
| 5,025 | |
| 18,951 |
| |
| 44,432 | |
| 22,903 | |
| 67,335 | |
| 25,561 | |
| 21,978 | |
| 47,539 |
Hardware: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
TASER | |
| 12,944 | |
| 28,727 | |
| 41,671 | |
| 16,314 | |
| 14,304 | |
| 30,618 |
Software and Sensors | |
| 34,862 | |
| 81,223 | |
| 116,085 | |
| 25,181 | |
| 50,981 | |
| 76,162 |
| |
| 47,806 | |
| 109,950 | |
| 157,756 | |
| 41,495 | |
| 65,285 | |
| 106,780 |
Services: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
TASER | |
| 2,701 | |
| 3,482 | |
| 6,183 | |
| 996 | |
| 1,554 | |
| 2,550 |
Software and Sensors | |
| 170,652 | |
| 49,386 | |
| 220,038 | |
| 95,907 | |
| 22,405 | |
| 118,312 |
| | | 173,353 | | | 52,868 | | | 226,221 | | | 96,903 | | | 23,959 | | | 120,862 |
Total | | $ | 265,591 | | $ | 185,721 | | $ | 451,312 | | $ | 163,959 | | $ | 111,222 | | $ | 275,181 |
| | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 | ||||||||||||||
|
| Current |
| Long-Term |
| Total |
| Current |
| Long-Term |
| Total | ||||||
TASER | | $ | 36,902 | | $ | 36,975 | | $ | 73,877 | | $ | 28,945 | | $ | 32,811 | | $ | 61,756 |
Software and Sensors | |
| 228,689 | |
| 148,746 | |
| 377,435 | |
| 135,014 | |
| 78,411 | |
| 213,425 |
Total | | $ | 265,591 | | $ | 185,721 | | $ | 451,312 | | $ | 163,959 | | $ | 111,222 | | $ | 275,181 |
Remaining Performance Obligations
As of December 31, 2021, we had approximately $2.80 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, 2021. We expect to recognize between 15% - 20% of this balance over the next twelve months, and expect the remainder to be recognized over the following five to seven years, subject to risks related to delayed deployments, budget appropriation or other contract cancellation clauses.
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.
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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.
As of December 31, 2021, our assets for costs to obtain contracts were as follows (in thousands):
| | | | | | |
|
| December 31, 2021 | | December 31, 2020 | ||
Current deferred commissions (1) | | $ | 19,962 | | $ | 13,316 |
Deferred commissions, net of current portion (2) | |
| 54,028 | |
| 32,455 |
| | $ | 73,990 | | $ | 45,771 |
| (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, 2021, 2020 and 2019, we recognized $16.6 million, $11.3 million, and $8.2 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 together may require significant judgment. We consider CED devices and related accessories, as well as cameras and related accessories, to be separately identifiable from each other as well as from extended warranties on these products and the SaaS subscriptions to Axon Evidence and other cloud services.
In contracts where there are timing differences between when we transfer a promised good or service to the customer and when the customer pays for that good or service, we have determined that, with the exception of our TASER 60 installment purchase arrangements, our contracts generally do not include a significant financing component. For the years ended December 31, 2021, 2020, and 2019, we recorded interest income of $1.0 million, $1.5 million, and $1.6 million, respectively.
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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 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, 2021 (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 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, 2021, we recorded a $17.8 million unrealized loss on marketable securities from our investment in CLBT.
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.
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The following table summarizes our cash, cash equivalents, and held-to-maturity investments at December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 | ||||||||||||||||||||
|
| | |
| Gross |
| Gross |
| | |
|
| Cash and |
| | |
| | | |||
| | Amortized | | Unrealized | | Unrealized | | | | | | Cash | | Short-Term | | Long-Term | ||||||
| | Cost | | Gains | | Losses | | Fair Value | | | Equivalents | | Investments | | Investments | |||||||
Cash | | $ | 116,107 | | $ | — | | $ | — | | $ | 116,107 | | | $ | 116,107 | | $ | — | | $ | — |
| | | | | | | | | | | | | | | | | | | | | | |
Level 1: | |
|
| |
|
| |
|
| |
|
| | |
|
| |
|
| |
|
|
Money market funds | |
| 23,611 | |
| — | |
| — | |
| 23,611 | | |
| 23,611 | |
| — | |
| — |
Agency bonds | |
| 63,794 | |
| 122 | |
| — | |
| 63,916 | | |
| — | |
| 23,794 | |
| 40,000 |
Treasury bills | |
| 96,384 | | | 6 | | | — | | | 96,390 | | | | — | | | 96,384 | | | — |
Subtotal | | | 183,789 | |
| 128 | |
| — | |
| 183,917 | | |
| 23,611 | |
| 120,178 | |
| 40,000 |
| | | | | | | | | | | | | | | | | | | | | | |
Level 2: | | | | | | | | | | | | | | | | | | | | | | |
State and municipal obligations | | | 77,130 | | | 25 | | | (28) | | | 77,127 | | | | — | | | 66,519 | | | 10,611 |
Certificates of deposit | | | 500 | | | — | | | — | | | 500 | | | | — | | | 500 | | | — |
Corporate bonds | | | 212,825 | | | 232 | | | (100) | | | 212,957 | | | | 2,525 | | | 170,205 | | | 40,095 |
U.S. Treasury repurchase agreements | | | 13,200 | | | — | | | — | | | 13,200 | | | | 13,200 | | | — | | | — |
Treasury inflation-protected securities | | | 3,291 | | | 16 | | | — | | | 3,307 | | | | — | | | 3,291 | | | — |
Commercial paper | | | 45,974 | | | — | | | — | | | 45,974 | | | | — | | | 45,974 | | | — |
Subtotal | | | 352,920 | | | 273 | | | (128) | | | 353,065 | | | | 15,725 | | | 286,489 | | | 50,706 |
Total | | $ | 652,816 | | $ | 401 | | $ | (128) | | $ | 653,089 | | | | 155,443 | | | 406,667 | | | 90,706 |
Expected credit loss reserve | | | | | | | | | | | | | | | | (3) | | | (142) | | | (25) |
Total, net of reserve for expected credit losses | | | | | | | | | | | | | | | $ | 155,440 | | $ | 406,525 | | $ | 90,681 |
Because we do not have any history of losses for our held-to-maturity investments, our expected credit loss reserve methodology for held-to-maturity investments is developed using published or estimated credit default rates for similar investments and current and future economic and market conditions. At December 31, 2020, our credit loss reserve for held-to-maturity investments was approximately $0.2 million.
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Note 4 - Expected Credit Losses
We are exposed to credit losses primarily through sales of products and services. Our expected loss allowance methodology for accounts receivable, notes receivable, and contract assets is developed using historical collection experience, published or estimated credit default rates for entities that represent our customer base, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Our monitoring activities include account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible.
We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and reversed our previously-recorded additional reserve for credit losses of approximately $1.3 million during the year ended December 31, 2021.
We review receivables for U.S. and international customers separately to better reflect different published credit default rates and economic and market conditions.
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, 2021 |
| | December 31, 2020 | ||||||||||||||
| | | United States | | | Other countries | | | Total | | | | United States | | | Other countries | | | Total |
Balance, beginning of period | | $ | 2,902 | | $ | 474 | | $ | 3,376 | | | $ | 1,395 | | $ | 172 | | $ | 1,567 |
Adoption of Topic 326, cumulative-effect adjustment to retained earnings | | | — | | | — | | | — | | | | 767 | | | 1 | | | 768 |
Provision for (recovery of) expected credit losses | | | 245 | | | (291) | | | (46) | | | | 824 | | | 391 | | | 1,215 |
Amounts written off charged against the allowance | | | (54) | | | — | | | (54) | | | | (84) | | | (33) | | | (117) |
Other, including dispositions and foreign currency translation | |
| 78 | |
| (5) | |
| 73 | | |
| — | |
| (57) | |
| (57) |
Balance, end of period | | $ | 3,171 | | $ | 178 | | $ | 3,349 | | | $ | 2,902 | | $ | 474 | | $ | 3,376 |
As of December 31, 2021 and December 31, 2020, the allowance for expected credit losses for each type of customer receivable was as follows (in thousands):
| | | | | | |
| | December 31, | | December 31, | ||
|
| 2021 | | 2020 | ||
Accounts receivable and notes receivable, current | | $ | 2,203 | | $ | 2,105 |
Contract assets, net | |
| 1,010 | |
| 794 |
Long-term notes receivable, net of current portion | |
| 136 | |
| 477 |
Total allowance for expected credit losses on customer receivables | | $ | 3,349 | | $ | 3,376 |
| 4. |
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Note 5 - Inventory
Inventory consisted of the following at December 31, 2021 and December 31, 2020 (in thousands):
| | | | | | |
|
| December 31, 2021 |
| December 31, 2020 | ||
Raw materials | | $ | 38,267 | | $ | 39,194 |
Finished goods | |
| 70,421 | |
| 50,764 |
Total inventory | | $ | 108,688 | | $ | 89,958 |
Note 6 - Property and Equipment
Property and equipment consisted of the following at December 31 (in thousands):
| | | | | | | | |
| | Estimated | | | | | | |
|
| Useful Life |
| December 31, 2021 |
| December 31, 2020 | ||
Land | | N/A | | $ | 54,868 | | $ | 57,052 |
Building and leasehold improvements | | 3 - 39 years | | | 25,712 | | | 20,912 |
Production equipment | | 3 - 5 years | |
| 54,090 | |
| 37,539 |
Computers, equipment and software | | 3 - 5 years | |
| 15,343 | |
| 10,889 |
Furniture and office equipment | | 3 - 5 years | |
| 6,838 | |
| 6,954 |
Vehicles | | 5 years | |
| 2,932 | |
| 1,980 |
Website development costs | | 3 years | |
| 204 | |
| 204 |
Capitalized internal-use software development costs | | 3 - 5 years | |
| 11,996 | |
| 3,670 |
Construction-in-process | | N/A | |
| 25,258 | |
| 13,479 |
Total cost | | | |
| 197,241 | |
| 152,679 |
Less: Accumulated depreciation | | | |
| (58,784) | |
| (47,185) |
Property and equipment, net | | |
| $ | 138,457 | | $ | 105,494 |
During the year ended December 31, 2021, we completed an implementation of several phases of our Enterprise Resource Planning (“ERP”) system. Following the implementation, we placed $6.6 million of related internal-use software development cost assets into service.
Depreciation and amortization expense related to property and equipment was $15.8 million, $9.2 million and $7.9 million for the years ended December 31, 2021, 2020 and 2019, respectively, of which $6.3 million, $4.0 million and $3.5 million was included in cost of sales for the respective years.
Note 7 - Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the year ended December 31, 2021 were as follows (in thousands):
| | | | | | | | | |
|
| | |
| Software and |
| | | |
| | TASER | | Sensors | | Total | |||
Balance, December 31, 2020 | | $ | 1,450 | | $ | 23,755 | | $ | 25,205 |
Goodwill acquired | | | — | | | 18,495 | | | 18,495 |
Foreign currency translation adjustments | |
| (54) | |
| (54) | |
| (108) |
Balance, December 31, 2021 | | $ | 1,396 | | $ | 42,196 | | $ | 43,592 |
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Intangible assets (other than goodwill) consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2021 | | December 31, 2020 | ||||||||||||||
|
| |
| 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 | | $ | (1,518) | | $ | 1,525 | | $ | 3,036 | | $ | (1,339) | | $ | 1,697 |
Issued patents |
| 5 ‑ 25 years | |
| 3,061 | |
| (1,457) | |
| 1,604 | |
| 3,232 | |
| (1,567) | |
| 1,665 |
Issued trademarks |
| 3 ‑ 15 years | |
| 1,130 | |
| (643) | |
| 487 | |
| 1,002 | |
| (227) | |
| 775 |
Customer relationships |
| 4 ‑ 8 years | |
| 4,985 | |
| (2,439) | |
| 2,546 | |
| 3,780 | |
| (1,955) | |
| 1,825 |
Non-compete agreements |
| 3 ‑ 4 years | |
| 454 | |
| (444) | |
| 10 | |
| 460 | |
| (429) | |
| 31 |
Developed technology |
| 3 ‑ 5 years | |
| 18,060 | |
| (10,465) | |
| 7,595 | |
| 10,660 | |
| (8,713) | |
| 1,947 |
Total amortizable |
|
| |
| 30,733 | |
| (16,966) | |
| 13,767 | |
| 22,170 | |
| (14,230) | |
| 7,940 |
Non-amortizable (indefinite-lived) intangible assets: |
|
| |
|
| |
|
| |
|
| |
|
| ||||||
TASER trademark |
|
| |
| 900 | |
| — | |
| 900 | |
| 900 | |
| — | |
| 900 |
My90 trademark | | | | | 168 | | | — | | | 168 | | | — | | | — | | | — |
Patents and trademarks pending |
|
| |
| 635 | |
| — | |
| 635 | |
| 608 | |
| — | |
| 608 |
Total non-amortizable |
|
| |
| 1,703 | |
| — | |
| 1,703 | |
| 1,508 | |
| — | |
| 1,508 |
Total intangible assets |
|
| | $ | 32,436 | | $ | (16,966) | | $ | 15,470 | | $ | 23,678 | | $ | (14,230) | | $ | 9,448 |
Amortization expense of intangible assets was $2.9 million, $3.3 million and $3.5 million for the years ended December 31, 2021, 2020 and 2019, respectively. Estimated amortization for intangible assets with definitive lives for the next five years ended December 31, and thereafter, is as follows (in thousands):
| | | |
2022 |
| $ | 3,908 |
2023 | |
| 3,620 |
2024 | |
| 3,546 |
2025 | |
| 824 |
2026 | |
| 682 |
Thereafter | |
| 1,187 |
Total | | $ | 13,767 |
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 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 where the exercisability and exercise prices are conditional on the achievement of certain channel partnership performance metrics. The amount recorded on our consolidated balance sheets represents the fair value of the preferred stock warrants as of December 31, 2021.
69
The following tables provide a roll-forward of the balance of strategic investments (in thousands):
| | | | | | | | | |
| | Year Ended December 31, 2021 | |||||||
| | Strategic investments | | Warrants for strategic investment | | Total | |||
Balance, beginning of period | | $ | 9,500 | | $ | 2,211 | | $ | 11,711 |
Investments | | | 45,500 | | | — | | | 45,500 |
Observable price changes | | | 40,321 | | | 534 | | | 40,855 |
Sales | | | (14,546) | | | — | | | (14,546) |
Balance, end of period | | $ | 80,775 | | $ | 2,745 | | $ | 83,520 |
| | | | | | | | | |
| | Inception to date | |||||||
| | Strategic investments | | Warrants for strategic investment | | Total | |||
Investments | | $ | 52,568 | | $ | 2,588 | | $ | 55,156 |
Observable price changes | | | 42,753 | | | 157 | | | 42,910 |
Sales | | | (14,546) | | | — | | | (14,546) |
Balance, end of period | | $ | 80,775 | | $ | 2,745 | | $ | 83,520 |
In December 2021, we made a $25.0 million minority investment in and entered into a channel partnership agreement with Dedrone, Inc., a provider of anti-drone and counter-drone solutions. In conjunction with the equity investment in and channel partnership with Dedrone, Inc., we have the ability to commit additional capital over time through warrants where the exercisability and exercise prices are conditional on the achievement of certain partnership performance metrics. In February 2021, we made a $20.0 million minority investment in RapidSOS, Inc.
During the year ended December 31, 2021, certain of our strategic investees issued new equity to us and/or other investors. These events represented observable price changes for our existing investments and related warrants. Of the total observable price changes, we realized a gain of approximately $12.3 million on the sale of a portion of one of our existing investments. The estimated fair value of the retained existing investments was calculated using valuation techniques that included both observable and unobservable inputs, and was lower than the issue per share of the new equity issued by the strategic investee because of different characteristics of the newly issued equity instruments compared to our existing investments. The valuation techniques included both Level 2 and Level 3 inputs as defined by ASC Topic 820.
Subsequent Event
In January 2022, one of our strategic investees issued new preferred stock to other investors. We determined that the preferred shares issued were similar to the shares we own, and the shares underlying our warrants in the strategic investee. Accordingly, the preferred share issuance represents an observable price change for our existing prior investments and related warrants, and we estimated the fair value of our investments and warrants as of the date of the observable price change. We are still finalizing the accounting impact of the transaction, but preliminarily expect to recognize an increase of at least $41.5 million to the carrying value of our strategic investments and related warrants, which we would recognize in earnings during the quarter ending March 31, 2022.
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Note 9 - Other Long-Term Assets
Other long-term assets consisted of the following at December 31 (in thousands):
| | | | | | |
|
| December 31, 2021 |
| December 31, 2020 | ||
Cash surrender value of corporate-owned life insurance policies | | $ | 5,276 | | $ | 4,654 |
Deferred commissions (1) | |
| 54,028 | |
| 32,455 |
Restricted cash | |
| 57 | |
| 62 |
Operating lease assets | |
| 23,270 | |
| 22,308 |
Deferred implementation costs (2) | | | 3,915 | | | — |
Prepaid expenses, deposits and other (3) | |
| 11,701 | |
| 8,727 |
Total other long-term assets | | $ | 98,247 | | $ | 68,206 |
| (1) | Represents the incremental costs of obtaining contracts with customers, which consist primarily of sales commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contracts and amortized consistent with the recognition timing of the revenue for the underlying performance obligations. 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. |
| (3) | During the year ended December 31, 2021, we recorded a government grant receivable totaling $0.9 million in connection with the Arizona Qualified Facility Tax Credit (“QFTC”). Because U.S. GAAP does not contain authoritative accounting standards on this topic, we determined it most appropriate to account for the QFTC by analogy to International Accounting Standards 20 (“IAS 20”), Accounting for Government Grants and Disclosure of Government Assistance. Under IAS 20, the grant is initially recorded as other assets on the balance sheet and other income is recognized on a systematic basis over the periods in which the qualifying expenses are incurred when we determine that grant assets are no longer contingent. As of December 31, 2021, approximately $0.5 million was recorded in other assets with the remainder recorded in prepaid expenses and other current assets on our consolidated balance sheets. |
Note 10 - Accrued Liabilities
Accrued liabilities consisted of the following at December 31 (in thousands):
| | | | | | |
|
| December 31, 2021 |
| December 31, 2020 | ||
Accrued salaries, benefits and bonus | | $ | 62,425 | | $ | 36,892 |
Accrued professional, consulting and lobbying fees | |
| 7,152 | |
| 3,055 |
Accrued warranty expense | |
| 2,822 | |
| 769 |
Accrued income and other taxes | |
| 3,736 | |
| 3,848 |
Accrued inventory in transit | | | 9,945 | | | 4,597 |
Other accrued expenses | |
| 17,627 | |
| 10,682 |
Accrued liabilities | | $ | 103,707 | | $ | 59,843 |
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Note 11 - Commitments and Contingencies
Data Storage Purchase Commitment
In 2019, we entered into a purchase agreement for cloud data storage with a 3 year term beginning July 1, 2019. The purchase agreement includes a total commitment of $50.0 million, with an up-front prepayment of $15.0 million that was made in July 2019. Storage fees under this agreement were $22.4 million for the year ended December 31, 2021 and were recorded in cost of service sales. There is 0 remaining purchase commitment as of December 31, 2021.
Purchase commitments
We routinely enter into cancelable and non-cancelable purchase orders with many of our key vendors. Based on the strategic relationships with many of these vendors, our ability to cancel these purchase orders and maintain a favorable relationship would be limited. As of December 31, 2021, we had approximately $313.5 million of open purchase orders and $14.9 million of other purchase obligations.
Subsequent Event
On February 23, 2022, the Company entered into construction management agreement with Okland Construction Company, Inc. for construction of a new manufacturing and office campus on land the Company owns in Scottsdale, Arizona. The contract specifies a maximum guaranteed construction price of approximately $149.7 million. Construction is expected to start no later than May 3, 2022 with final completion by July 25, 2024.
Product Litigation
As a manufacturer of weapons and other law enforcement tools used in high-risk field environments, we are often the subject of products liability litigation concerning the use of our products. We are currently named as a defendant in 2 lawsuits in which the plaintiffs allege either wrongful death or personal injury in situations in which a TASER CED was used by law enforcement officers in connection with arrests or training. While the facts vary from case to case, these product liability claims typically allege defective product design, manufacturing, and/or failure to warn. They seek compensatory and sometimes punitive damages, often in unspecified amounts.
We continue to aggressively defend all product litigation. As a general rule, it is our policy not to settle suspect injury or death cases. Exceptions are sometimes made where the settlement is strategically beneficial to us. Due to the confidential nature of our litigation strategy and the confidentiality agreements that are executed in the event of a settlement, we do not identify or comment on specific settlements by case or amount. Based on current information, we do not believe that the outcome of any such legal proceeding will have a material effect on our financial position, results of operations, or cash flows. We are self-insured for the first $5.0 million of any product claim made after 2014. No judgment or settlement has ever exceeded this amount in any products case. We continue to maintain product liability insurance coverage, including an insurance policy fronting arrangement, above our self-insured retention with various limits depending on the policy period.
U.S. Federal Trade Commission Litigation
The U.S. Federal Trade Commission (“FTC”) filed an enforcement action on January 3, 2020 regarding Axon’s May 2018 acquisition of Vievu LLC from Safariland LLC. The FTC alleges the merger was anticompetitive and adversely affected the body worn camera (“BWC”) and digital evidence management systems (“DEMS”) market for “large metropolitan police departments.” The administrative hearing is presently stayed pending Axon’s Supreme Court challenge (see below). If ultimately successful, the FTC may require Axon to divest Vievu and other assets or take other remedial measures, any of which could be material to Axon. We are vigorously defending the matter. At this time, we
72
cannot predict the eventual scope, duration, or outcome of the proceeding and accordingly we have not recorded any liability in the accompanying consolidated financial statements.
Prior to the FTC’s enforcement action, Axon sued the FTC in federal court in the District of Arizona for declaratory and injunctive relief alleging the FTC’s structure and administrative processes violate Article II of the U.S. Constitution and our Fifth Amendment rights to due process and equal protection. The district court dismissed the action, without prejudice, for lack of jurisdiction. The Ninth Circuit affirmed in a split decision but granted Axon’s motion to stay the appellate mandate pending the filing of its petition for certiorari with the U.S. Supreme Court. On January 24, 2022, the Supreme Court granted Axon’s petition. Merits briefing will occur over the next several months with oral argument likely in October 2022. A decision is not likely until early 2023. The FTC’s administrative case will remain stayed pending resolution of the Supreme Court proceedings.
In parallel to these matters, we are evaluating strategic alternatives to litigation, which we might pursue if determined to be in the best interests of shareholders and customers. This could include a divestiture of the Vievu entity and/or related assets and the licensure of certain intellectual and other intangible property. While we continue to believe the acquisition of Vievu was lawful and a benefit to Vievu’s customers, the cost, risk and distraction of protracted litigation merit consideration of settlement if achievable on terms agreeable to the FTC and the Company.
General
From time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us. It is our policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on us. After carefully assessing the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously defend any lawsuit filed against us. We record a liability when losses are deemed probable and reasonably estimable. When losses are deemed reasonably possible but not probable, we determine whether it is possible to provide an estimate of the amount of the loss or range of possible losses for the claim, if material for disclosure. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of any potential loss. We reevaluate and update accruals as matters progress over time.
Based on our assessment of outstanding litigation and claims as of December 31, 2021, we have determined that it is not reasonably possible that these lawsuits will individually, or in the aggregate, materially affect our results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on our operating results, financial condition or cash flows.
Off-Balance Sheet Arrangements
Under certain circumstances, we use letters of credit and surety bonds to guarantee our performance under various contracts, principally in connection with the installation and integration of Axon cameras and related technologies. Certain of our letters of credit and surety bonds have stated expiration dates with others being released as the contractual performance terms are completed. At December 31, 2021, we had outstanding letters of credit of $6.1 million that are expected to expire in June 2022. We also had outstanding letters of credit and bank guarantees of $1.3 million that do not draw against our credit facility. These outstanding letters of credit and bank guarantees are expected to expire May 2022. Additionally, we had $21.5 million of outstanding surety bonds at December 31, 2021, with $3.5 million expiring in 2022, $7.5 million expiring in 2023 and the remaining $10.5 million expiring in 2024.
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Note 12 - Income Taxes
Income (loss) before provision (benefit) for income taxes included the following components for the years ended December 31 (in thousands):
| | | | | | | | | |
|
| 2021 |
| 2020 |
| 2019 | |||
United States | | $ | (146,995) | | $ | (11,529) | | $ | (1,449) |
Foreign | | | 5,620 | | | 5,238 | | | 3,519 |
Total | | $ | (141,375) | | $ | (6,291) | | $ | 2,070 |
Significant components of the provision (benefit) for income taxes are as follows for the years ended December 31 (in thousands):
| | | | | | | | | |
|
| 2021 |
| 2020 |
| 2019 | |||
Current: | | | | | | | | | |
Federal | | $ | (331) | | $ | 5,277 | | $ | 4,247 |
State | | | 85 | | | 3,886 | | | 2,414 |
Foreign | | | (60) | | | 1,943 | | | 1,533 |
Total current | | | (306) | |
| 11,106 | |
| 8,194 |
Deferred: | | | | | | | | | |
Federal | | | (65,557) | |
| (10,175) | |
| (6,060) |
State | | | (15,266) | |
| (3,111) | |
| (1,665) |
Foreign | | | 478 | |
| (3,131) | |
| (264) |
Total deferred | | | (80,345) | |
| (16,417) | |
| (7,989) |
Tax impact of unrecorded tax benefits liability | | | (706) | |
| 744 | |
| 983 |
Provision (benefit) for income taxes | | $ | (81,357) |
| $ | (4,567) |
| $ | 1,188 |
A reconciliation of our effective income tax rate to the federal statutory rate follows for the years ended December 31 (in thousands):
| | | | | | | | | | |
|
| 2021 |
| 2020 |
| 2019 | | |||
Federal income tax at the statutory rate | | $ | (29,691) | | $ | (1,321) | | $ | 435 |
|
State income taxes, net of federal benefit | | | (12,717) | | | 935 | | | 526 |
|
Difference between statutory and foreign tax rates | | | (155) | | | (86) | | | 43 | |
Other permanent differences (1) | | | 1,842 | | | 794 | | | 1,356 |
|
Foreign derived intangible income deduction | | | — | | | (902) | | | (217) | |
Executive compensation limitation | | | 180,509 | |
| 15,463 |
| | 7,596 | |
Research and development | | | (34,376) | |
| (10,246) | |
| (4,911) | |
Return to provision adjustment | | | 204 | |
| (1,078) | |
| (9) | |
Change in liability for unrecognized tax benefits | | | 10,188 | |
| 987 | |
| 1,191 | |
Excess stock-based compensation benefit | | | (205,483) | |
| (9,002) | |
| (4,999) | |
Change in valuation allowance | | | 8,961 | |
| 163 | |
| 368 | |
Tax effects of intercompany transactions | | | 96 | |
| (389) | |
| 16 | |
Other | | | (735) | |
| 115 | |
| (207) | |
Provision for income taxes (Income tax benefit) | | $ | (81,357) | | $ | (4,567) | | $ | 1,188 | |
Effective tax rate | | | 57.5 | % |
| 72.6 | % |
| 57.4 | % |
| (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"). |
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