Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data


Index to Consolidated Financial Statements		Page
Consolidated Balance Sheets as of December 31, 2020 and 2019		48
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2020, 2019 and 2018		49
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019 and 2018		50
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018		51
Notes to Consolidated Financial Statements		52
Report of Grant Thornton LLP, Independent Registered Public Accounting Firm		88

AXON ENTERPRISE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	December 31,		December 31,
	2020		2019

ASSETS
Current assets:
Cash and cash equivalents	$	155,440	$	172,250
Short-term investments		406,525		178,534
Accounts and notes receivable, net of allowance of $2,105 and $1,567 as of December 31, 2020 and December 31, 2019 respectively		229,201		146,878
Contract assets, net		63,945		38,102
Inventory		89,958		38,845
Prepaid expenses and other current assets		36,883		34,866
Total current assets		981,952		609,475
Property and equipment, net		105,494		43,770
Deferred tax assets, net		45,770		27,688
Intangible assets, net		9,448		12,771
Goodwill		25,205		25,013
Long-term investments		90,681		45,499
Long-term notes receivable, net		22,457		31,598
Long-term contract assets, net		20,099		9,644
Other assets		79,917		40,181
Total assets	$	1,381,023	$	845,639
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	24,142	$	25,874
Accrued liabilities		59,843		45,001
Current portion of deferred revenue		163,959		117,864
Customer deposits		2,956		2,974
Other current liabilities		5,431		3,853
Total current liabilities		256,331		195,566
Deferred revenue, net of current portion		111,222		87,936
Liability for unrecognized tax benefits		4,503		3,832
Long-term deferred compensation		4,732		3,936
Deferred tax liabilities, net		649		354
Other long-term liabilities		27,331		10,520
Total liabilities		404,768		302,144
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively		—		—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 63,766,555 and 59,497,759 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively		1		1
Additional paid-in capital		962,159		528,272
Treasury stock at cost, 20,220,227 shares as of December 31, 2020 and December 31, 2019		(155,947)		(155,947)
Retained earnings		169,901		172,265
Accumulated other comprehensive income (loss)		141		(1,096)
Total stockholders’ equity		976,255		543,495
Total liabilities and stockholders’ equity	$	1,381,023	$	845,639

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

AXON ENTERPRISE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)


	For the Years Ended December 31,
	2020		2019		2018
Net sales from products	$	500,250	$	399,474	$	327,635
Net sales from services		180,753		131,386		92,433
Net sales		681,003		530,860		420,068
Cost of product sales		224,131		190,683		139,337
Cost of service sales		40,541		32,891		22,148
Cost of sales		264,672		223,574		161,485
Gross margin		416,331		307,286		258,583
Sales, general and administrative		307,286		212,959		156,886
Research and development		123,195		100,721		76,856
Total operating expenses		430,481		313,680		233,742
Income (loss) from operations		(14,150)		(6,394)		24,841
Interest and other income, net		7,859		8,464		3,263
Income (loss) before provision for income taxes		(6,291)		2,070		28,104
Provision (benefit) for income taxes		(4,567)		1,188		(1,101)
Net income (loss)	$	(1,724)	$	882	$	29,205
Net income (loss) per share:
Basic	$	(0.03)	$	0.01	$	0.52
Diluted	$	(0.03)	$	0.01	$	0.50
Weighted average shares outstanding:
Basic		61,782		59,190		56,392
Diluted		61,782		60,018		57,922

Net income (loss)	$	(1,724)	$	882	$	29,205
Foreign currency translation adjustments		1,237		417		(46)
Comprehensive income (loss)	$	(487)	$	1,299	$	29,159

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

AXON ENTERPRISE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)


											Accumulated
				Additional							Other		Total
	Common Stock			Paid-in		Treasury Stock			Retained		Comprehensive		Stockholders’
	Shares	Amount		Capital		Shares	Amount		Earnings		Income (Loss)		Equity
Balance, December 31, 2017	52,969,869	$	1	$	201,672	20,220,227	$	(155,947)	$	123,185	$	(1,467)	$	167,444
Cumulative effect of applying a change in accounting principle	—		—		—	—		—		18,993		—		18,993
Issuance of common stock	4,645,000		—		233,993	—		—		—		—		233,993
Issuance of common stock business combination	58,843		—		8,226	—		—		—		—		8,226
Issuance of common stock under employee plans, net	1,136,925		—		(12,370)	—		—		—		—		(12,370)
Stock-based compensation	—		—		21,879	—		—		—		—		21,879
Net income	—		—		—	—		—		29,205		—		29,205
Foreign currency translation adjustments	—		—		—	—		—		—		(46)		(46)
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	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
Foreign currency translation adjustments	—		—		—	—		—		—		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	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 income (loss)	—		—		—	—		—		(1,724)		—		(1,724)
Foreign currency translation adjustments	—		—		—	—		—		—		1,237		1,237
Balance, December 31, 2020	63,766,555	$	1	$	962,159	20,220,227	$	(155,947)	$	169,901	$	141	$	976,255

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

AXON ENTERPRISE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	For the Years Ended December 31,
	2020		2019		2018
Cash flows from operating activities:
Net income (loss)	$	(1,724)	$	882	$	29,205
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		12,475		11,361		10,615
Loss on disposal and abandonment of intangible assets		320		67		2,117
Loss on disposal and impairment of property and equipment, net		1,722		2,542		303
Stock-based compensation expense		133,572		78,495		21,879
Deferred income taxes		(16,528)		(7,987)		(3,592)
Unrecognized tax benefits		671		983		1,144
Other noncash, net		7,449		3,928		34
Provision for expected credit losses		1,302		—		—
Change in assets and liabilities:
Accounts and notes receivable and contract assets		(107,762)		(38,830)		(67,643)
Inventory		(52,156)		(4,903)		14,804
Prepaid expenses and other assets		(14,885)		(9,845)		(12,739)
Accounts payable, accrued and other liabilities		8,886		4,967		13,506
Deferred revenue		65,139		24,013		54,242
Net cash provided by operating activities		38,481		65,673		63,875
Cash flows from investing activities:
Purchases of investments		(656,522)		(354,477)		(4,331)
Proceeds from call / maturity of investments		379,839		130,083		11,158
Purchases of property and equipment		(72,629)		(15,939)		(11,139)
Proceeds from disposal of property and equipment		95		—		—
Purchases of intangible assets		(241)		(404)		(558)
Investments in unconsolidated affiliates		(7,068)		—		—
Business acquisitions, net of cash acquired		—		—		(4,990)
Net cash used in investing activities		(356,526)		(240,737)		(9,860)
Cash flows from financing activities:
Net proceeds from equity offering		306,779		—		233,993
Proceeds from options exercised		295		114		1,757
Income and payroll tax payments for net-settled stock awards		(7,809)		(4,051)		(14,127)
Payment of contingent consideration for business acquisitions		—		—		(2,275)
Net cash provided by (used in) financing activities		299,265		(3,937)		219,348
Effect of exchange rate changes on cash and cash equivalents		1,976		329		(774)
Net increase (decrease) in cash and cash equivalents		(16,804)		(178,672)		272,589
Cash and cash equivalents and restricted cash, beginning of period		172,355		351,027		78,438
Cash and cash equivalents and restricted cash, end of period	$	155,551	$	172,355	$	351,027

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

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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,

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

	●	stock-based compensation, and

	●	recognition and measurement of contingencies and accrued litigation expense.

Actual results could differ materially from those estimates.

Cash, Cash Equivalents and Investments

Cash, cash equivalents and investments include cash, money market funds, certificates of deposit, commercial paper, corporate bonds, state and municipal obligations, U.S. Treasury inflation protected securities, U.S. Treasury Repurchase agreements, U.S. Treasury bills, 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. Based on management’s intent and ability to hold our investments, they are classified as held to maturity investments and are recorded at amortized cost. Held-to-maturity investments are reviewed quarterly for impairment to determine if other-than-temporary declines in the fair value have occurred for any individual investment that may affect our intent and ability to hold the investment until recovery. Other-than-temporary declines in the value of held-to-maturity investments are recorded as expense in the period the determination is made.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Restricted Cash

Restricted cash balances of $0.1 million and $0.1 million as of December 31, 2020 and 2019, 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 and net realizable value. Cost is determined using the weighted average cost of raw materials, which approximates the first-in, first-out (“FIFO”) method and includes allocations of manufacturing labor and overhead. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories, as well as trial and evaluation inventories to their net realizable value. These provisions are based on management’s best estimate after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions among other factors. We evaluate inventory costs for abnormal costs due to excess production capacity and treat such costs as period costs.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Additions and improvements are capitalized, while ordinary maintenance and repair expenditures are charged to expense as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Land is not depreciated.

Software Development Costs

We expense software development costs, including costs to develop software products or the software component of products and services to be marketed to external users, before technological feasibility of such products is reached. We have determined that technological feasibility is reached shortly before the release of those products and as a result, the development costs incurred after the establishment of technological feasibility and before the release of those products are not material.

Software development costs also include costs to develop software programs to be used solely to meet our internal needs and applications. We capitalize development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the intended function. Additionally, we capitalize qualifying costs incurred for upgrades and enhancements to existing software that result in additional functionality. Costs related to preliminary project planning activities, post-implementation activities, maintenance and minor modifications are expensed as incurred. Internal-use software development costs are amortized on a straight line basis over the estimated useful life of the software.

We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

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

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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, 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. During the year ended December 31, 2018, we abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $2.0 million which was 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 two primary sources: (1) the sale of physical products, including conducted energy devices ("CEDs"), Axon cameras, Axon Signal enabled devices, corresponding hardware extended warranties, and related accessories such as Axon docks, cartridges and batteries, among others, and (2) subscriptions to our Axon Evidence digital evidence management software-as-a-service ("SaaS") (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, we also recognize revenue from training, professional services and other software and SaaS services. We apply the five-step model outlined in Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts from Customers ("Topic 606"). For additional discussion of the adoption of Topic 606, see Note 2.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Topic 606. For contracts with multiple performance obligations, we allocate the contract transaction price to each performance obligation using our estimate of the standalone selling price ("SSP") of each distinct good or service in the contract.

Revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, each of which is generally distinct and accounted for as a separate performance obligation. Revenue is recognized net of allowances for returns.

Performance obligations to deliver products, including CEDs, cameras and related accessories such as cartridges, batteries and docks, are generally satisfied at the point in time we ship the product, as this is when the customer obtains control of the asset under our standard terms and conditions. In certain contracts with non-standard terms and conditions,

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 $3.4 million and $1.6 million as of December 31, 2020 and January 1, 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.

We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and increased our reserve for expected credit losses by approximately $0.9 million during the year ended December 31, 2020.

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

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 $1.3 million, $0.9 million and $1.1 million in the years ended December 31, 2020, 2019 and 2018, 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,
	2020		2019
Balance, beginning of period	$	1,476	$	898
Utilization of reserve		(700)		(973)
Warranty expense (benefit)		(7)		1,551
Balance, end of period	$	769	$	1,476

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 $123.2 million, $100.7 million and $76.9 million in 2020, 2019 and 2018, 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 carry forwards. 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.

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

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 11 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 four depository institutions. As of December 31, 2020, the aggregate balances in such accounts were $145.1 million. Our balances with these institutions regularly exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits for domestic deposits and various deposit insurance programs covering our deposits in 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.

No customer represented more than 10% of total net sales for the years ended December 31, 2020, 2019 or 2018. At December 31, 2020, and 2019, no customer represented more than 10% of the aggregate balance of accounts and notes receivable and contract assets.

We currently purchase both off the shelf and custom components, including, but not limited to, finished circuit boards, injection-molded plastic components, small machined parts, custom cartridge components, electronic components, and off the shelf sub-assemblies from suppliers located in the U.S., Canada, China, Israel, Mexico, Republic of Korea, and Taiwan. Although we currently obtain many of these components from single source suppliers, we own the injection molded component tooling, most of the designs, and the test fixtures used in their production for all custom components. As a result, we believe we could obtain alternative suppliers in most cases without incurring significant production delays. We also strategically hold safety stock levels on custom components to further reduce this risk. For off the shelf components, we believe that in most cases there are readily available alternative suppliers who can consistently meet our needs for these components. We acquire components either through contractual agreements or on a purchase order basis along with in some cases providing rolling 12 month forecasts to suppliers so they can procure or secure subcomponents to further mitigate upstream risks to our supply chain.

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.

	●	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,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

		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, 2020 and 2019, 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, 2020 and 2019 was $4.7 million and $4.2 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.

During 2020, we invested in two unconsolidated affiliates, which are included within other assets. The estimated fair value of the investments was determined based on Level 3 inputs. As of December 31, 2020, 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 two 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 17.

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, 2020, 2019 and 2018, no 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 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

RSUs, we recognize forfeitures as they occur as a reduction to stock-based compensation expense and to additional paid-in-capital.

eXponential Stock Performance Plan

On February 12, 2019, our shareholders approved the 2019 Stock Incentive Plan (the “2019 Plan”), which was adopted by the Board of Directors to reserve a sufficient number of shares to facilitate our eXponential Stock Performance Plan (“XSPP”) and grants of eXponential Stock Units (“XSUs”) under the plan. The XSUs are grants of restricted stock units, each with a term of approximately nine years, that vest in 12 equal tranches. Each of the 12 tranches will vest upon certification by the Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA (CEO Performance Award) have been met for the previous four consecutive fiscal quarters. A total of approximately 0.3 million XSUs were granted during the year ended December 31, 2020.

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 10.3% and 17.4% 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 0.53% and 1.53%, expected term of between 7.3 and 8.0 years, expected volatility of between 46.37% and 51.96%, and dividend yield of 0.00%.

Stock Options

On May 24, 2018 (the “CEO Grant Date”), our stockholders approved the Board of Directors’ grant of 6,365,856 stock option awards to Patrick W. Smith, our CEO (the “CEO Performance Award”). The CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational goals (performance conditions) and market capitalization goals (market conditions), assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each vesting date. Stock-based compensation expense associated with the CEO Performance Award is recognized over the requisite service period, which is defined as the longer of the expected 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.

Given the complexity of the award, we utilized Monte Carlo simulations to simulate a range of possible future market capitalizations for the Company over the term of the options at the grant date. The average of all iterations of the simulation

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 9.2% to the valuation because the award specifies a post-exercise holding period of 2.5 years. This discount was estimated using the Finnerty model and reduced by the impact of expected payroll and income taxes due upon exercise of the options, as the related proportion of shares are expected to be sold to satisfy such obligations. Additional assumptions used for the CEO Performance Award and the resulting estimates of weighted-average fair value per share of options granted are as follows:


Volatility		47.71	%
Risk-free interest rate		2.98	%
Dividend rate		—
Expected life of options		9.76	years
Weighted average grant date fair value of options granted	$	38.64

The expected life of the options represented the estimated period of time from grant date until exercise; in this case, exercise was assumed to occur at the full contractual term of ten years from grant and was based on input from the CEO and his historical behavior of not exercising vested options until the end of their terms. Expected stock price volatility was based on the average of the 9.76-year historical volatility and the implied volatility on 1,080-day call option for the Company. The risk-free interest rate was based on the implied yield available on United States Treasury bill zero-coupon issuances with an equivalent remaining term to the term of the options. We have not paid dividends in the past and do not plan to pay any dividends in the near future.

No options were awarded during the years ended December 31, 2020 or 2019. Other than the CEO Performance Award, no options were awarded during the year ended December 31, 2018.

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,
	2020		2019		2018
Numerator for basic and diluted earnings per share:
Net income (loss)	$	(1,724)	$	882	$	29,205
Denominator:
Weighted average shares outstanding-basic		61,782		59,190		56,392
Dilutive effect of stock-based awards		—		828		1,530
Diluted weighted average shares outstanding		61,782		60,018		57,922
Anti-dilutive stock-based awards excluded		12,150		12,627		6,757
Net income (loss) per share:
Basic	$	(0.03)	$	0.01	$	0.52
Diluted	$	(0.03)	$	0.01	$	0.50

Recently Issued Accounting Guidance

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (“Topic 326”): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 includes an impairment model (known as the current expected credit loss model) on financial instruments

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

and other commitments that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The use of forecasted information is intended to incorporate more timely information in the estimate of expected credit losses. This ASU also requires enhanced disclosures relating to significant estimates and judgments used in estimating credit losses, as well as credit quality. Upon adoption effective January 1, 2020, we recorded a noncash cumulative effect adjustment to retained earnings of $0.6 million, net of $0.2 million of income taxes, on the opening consolidated balance sheet as of January 1, 2020, reflecting an overall increase to the allowance for expected credit losses. See Notes 3 and 4 for further disclosures related to Topic 326.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. The amendments apply to the disclosures of changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and provide that the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Adoption of this ASU on January 1, 2020 did not have a material impact on our consolidated financial statements.

Effective the first quarter of 2021:

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The amendments in the ASU are effective for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. Adoption of this ASU is not expected to have a material impact on our consolidated financial statements.

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

Reclassification of Prior Year Presentation

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Risks and Uncertainties

In March 2020, the World Health Organization declared COVID-19 a global pandemic. As a result of COVID-19, we have modified certain aspects of our business, including restricting employee travel, allowing a remote work model for the majority of our office staff, and holding certain events and meetings online instead of in person, among other modifications. We are monitoring the situation closely, and although operations have not been materially affected by the COVID-19 outbreak to date, the ultimate duration and severity of the outbreak and its impact on the economic environment and business is uncertain. However, while we have not incurred significant disruptions from the COVID-19 outbreak, we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, actions that may be taken by governmental authorities and the impact to our customers and partners. At this time, we are unable to estimate the ultimate impact of COVID-19 on our operations.

Revenues

Nature of Products and Services

The following table presents our revenues by primary product and service offering (in thousands):


	Year Ended December 31, 2020						Year Ended December 31, 2019
			Software and						Software and
	TASER		Sensors		Total		TASER		Sensors		Total
TASER 7	$	107,506	$	—	$	107,506	$	56,652	$	—	$	56,652
TASER X26P		41,724		—		41,724		52,524		—		52,524
TASER X2		60,107		—		60,107		55,920		—		55,920
TASER Pulse		9,407		—		9,407		4,089		—		4,089
Cartridges		115,193		—		115,193		85,987		—		85,987
Axon Body		—		57,150		57,150		—		44,039		44,039
Axon Flex		—		4,082		4,082		—		5,928		5,928
Axon Fleet		—		20,108		20,108		—		16,182		16,182
Axon Dock		—		19,723		19,723		—		20,449		20,449
Axon Evidence and cloud services		2,935		176,797		179,732		704		130,265		130,969
Extended warranties		20,754		24,408		45,162		18,074		19,188		37,262
Other		8,926		12,183		21,109		7,711		13,148		20,859
Total	$	366,552	$	314,451	$	681,003	$	281,661	$	249,199	$	530,860

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


	Year Ended December 31,
	2020				2019				2018
United States	$	535,079	79	%	$	446,100	84	%	$	335,310	80	%
Other Countries		145,924	21			84,760	16			84,758	20
Total	$	681,003	100.0	%	$	530,860	100.0	%	$	420,068	100.0	%

Contract Balances

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 $18.6 million as of December 31, 2020, 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.

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, 2020 (in thousands):


	December 31, 2020
Contract assets, net	$	84,044
Contract liabilities (deferred revenue)		275,181
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the period		135,513

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


	December 31, 2020						December 31, 2019
	Current		Long-Term		Total		Current		Long-Term		Total
Warranty:
TASER	$	11,635	$	16,953	$	28,588	$	12,716	$	16,378	$	29,094
Software and Sensors		13,926		5,025		18,951		9,852		5,156		15,008
		25,561		21,978		47,539		22,568		21,534		44,102
Hardware:
TASER		16,314		14,304		30,618		9,569		15,468		25,037
Software and Sensors		25,181		50,981		76,162		22,235		33,759		55,994
		41,495		65,285		106,780		31,804		49,227		81,031
Services:
TASER		996		1,554		2,550		293		765		1,058
Software and Sensors		95,907		22,405		118,312		63,199		16,410		79,609
		96,903		23,959		120,862		63,492		17,175		80,667
Total	$	163,959	$	111,222	$	275,181	$	117,864	$	87,936	$	205,800

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	December 31, 2020						December 31, 2019
	Current		Long-Term		Total		Current		Long-Term		Total
TASER	$	28,945	$	32,811	$	61,756	$	22,578	$	32,611	$	55,189
Software and Sensors		135,014		78,411		213,425		95,286		55,325		150,611
Total	$	163,959	$	111,222	$	275,181	$	117,864	$	87,936	$	205,800

Remaining Performance Obligations

As of December 31, 2020, we had approximately $1.73 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, 2020. We expect to recognize between 20% - 25% of this balance over the next twelve months, and expect the remainder to be recognized over the following five to seven years, subject to risks related to delayed deployments, budget appropriation or other contract cancellation clauses.

Costs to Obtain a Contract

We recognize an asset for the incremental costs of obtaining a contract with a customer, which consist primarily of sales commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contract and amortized consistent with the recognition timing of the revenue for the underlying performance obligations.

For contract costs related to performance obligations with an amortization period of one year or less, we apply the practical expedient to expense these sales commissions when incurred. These costs are recognized as incurred within sales, general and administrative expenses on the accompanying consolidated statements of operations and comprehensive income.

As of December 31, 2020, our assets for costs to obtain contracts were as follows (in thousands):


	December 31, 2020		December 31, 2019
Current deferred commissions (1)	$	13,316	$	9,623
Deferred commissions, net of current portion (2)		32,455		22,068
	$	45,771	$	31,691

(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, 2020 and 2019, we recognized $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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 year ended December 31, 2020, we recorded revenue of $34.0 million, including $1.5 million of interest income, under our TASER 60 plan. For the year ended December 31, 2019, we recorded revenue of $39.3 million including $1.6 million of interest income under our TASER 60 plan. For the year ended December 31, 2018, we recorded revenue of $48.2 million including $1.3 million of interest income under our TASER 60 plan.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Cash, Cash Equivalents and Investments

The following tables summarize the Company’s cash, cash equivalents, and held-to-maturity investments at December 31, 2020 and December 31, 2019 (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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


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

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

Level 2:
State and municipal obligations		25,038		8		—		25,046		—		21,560		3,478
Certificates of deposit		1,400		—		—		1,400		—		1,400		—
Corporate bonds		135,175		71		(30)		135,216		886		113,241		21,048
U.S. Treasury repurchase agreements		57,200		—		—		57,200		57,200		—		—
Treasury inflation-protected securities		3,235		14		—		3,249		—		—		3,235
Commercial paper		29,202		—		—		29,202		2,000		27,202		—
Subtotal		251,250		93		(30)		251,313		60,086		163,403		27,761
Total	$	396,283	$	107	$	(34)	$	396,356	$	172,250	$	178,534	$	45,499

We adopted Topic 326 on January 1, 2020, and applied the credit loss guidance related to held-to-maturity securities prospectively. Because we do not have any history of losses for our held-to-maturity investments, our expected loss allowance methodology for held-to-maturity investments is developed using published or estimated credit default rates for similar investments and current and future economic and market conditions. At January 1 and December 31, 2020, our credit loss reserve for held-to-maturity investments was approximately $0.1 million and $0.2 million, respectively. During the year ended December 31, 2020, we increased the frequency of review for our investment portfolio in order to more closely monitor potential impacts of the COVID-19 pandemic and its impact on the global economy.

Expected Credit Losses

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, 2020
		United States		Other countries		Total
Balance, beginning of period	$	1,395	$	172	$	1,567
Adoption of Topic 326, cumulative-effect adjustment to retained earnings		767		1		768
Provision for expected credit losses		824		391		1,215
Amounts written off charged against the allowance		(84)		(33)		(117)
Other, including dispositions and foreign currency translation		—		(57)		(57)
Balance, end of period	$	2,902	$	474	$	3,376

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of December 31, 2020, the allowance for expected credit losses for each type of customer receivable was as follows:


	December 31,
	2020
Accounts receivable and notes receivable, current	$	2,105
Contract assets, net		794
Long-term notes receivable, net of current portion		477
Total allowance for expected credit losses on customer receivables	$	3,376

	4.

Inventory

Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average cost of raw materials which approximates the FIFO method and includes allocations of manufacturing labor and overhead. Provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value. Inventories consisted of the following at December 31 (in thousands):


	December 31, 2020		December 31, 2019
Raw materials	$	39,194	$	20,789
Finished goods		50,764		18,056
Total inventory	$	89,958	$	38,845

Property and Equipment

Property and equipment consisted of the following at December 31 (in thousands):


	Estimated
	Useful Life	December 31, 2020		December 31, 2019
Land	N/A	$	57,052	$	2,900
Building and leasehold improvements	3 - 39 years		20,912		20,089
Production equipment	3 - 7 years		37,539		29,961
Computers, equipment and software	3 - 5 years		10,889		8,126
Furniture and office equipment	5 - 7 years		6,954		6,514
Vehicles	5 years		1,980		1,753
Website development costs	3 years		204		204
Capitalized internal-use software development costs	3 years		3,670		3,670
Construction-in-process	N/A		13,479		12,385
Total cost			152,679		85,602
Less: Accumulated depreciation			(47,185)		(41,832)
Property and equipment, net		$	105,494	$	43,770

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

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Depreciation and amortization expense related to property and equipment was $9.2 million, $7.9 million and $4.9 million for the years ended December 31, 2020, 2019 and 2018, respectively, of which $4.0 million, $3.5 million and $1.4 million was included in cost of sales for the respective years.

Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the year ended December 31, 2020 were as follows (in thousands):


			Software and
	TASER		Sensors		Total
Balance, December 31, 2019	$	1,354	$	23,659	$	25,013
Foreign currency translation adjustments		96		96		192
Balance, December 31, 2020	$	1,450	$	23,755	$	25,205

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


		December 31, 2020						December 31, 2019
		Gross				Net		Gross				Net
	Useful	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Life	Amount		Amortization		Amount		Amount		Amortization		Amount
Amortizable (definite-lived) intangible assets:
Domain names	5 ‑ 10 years	$	3,036	$	(1,339)	$	1,697	$	3,161	$	(1,035)	$	2,126
Issued patents	5 ‑ 25 years		3,232		(1,567)		1,665		3,271		(1,339)		1,932
Issued trademarks	3 ‑ 15 years		1,002		(227)		775		1,166		(678)		488
Customer relationships	4 ‑ 8 years		3,780		(1,955)		1,825		3,721		(1,416)		2,305
Non-compete agreements	3 ‑ 4 years		460		(429)		31		450		(404)		46
Developed technology	3 ‑ 5 years		10,660		(8,713)		1,947		10,660		(6,528)		4,132
Re-acquired distribution rights	2 years		2,202		(2,202)		—		2,009		(2,009)		—
Total amortizable			24,372		(16,432)		7,940		24,438		(13,409)		11,029
Non-amortizable (indefinite-lived) intangible assets:
TASER trademark			900				900		900				900
Patents and trademarks pending			608				608		842				842
Total non-amortizable			1,508				1,508		1,742				1,742
Total intangible assets		$	25,880	$	(16,432)	$	9,448	$	26,180	$	(13,409)	$	12,771

Amortization expense of intangible assets was $3.3 million, $3.5 million and $5.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. Estimated amortization for intangible assets with definitive lives for the next five years ended December 31, and thereafter, is as follows (in thousands):


2021	$	2,894
2022		1,285
2023		983
2024		900
2025		635
Thereafter		1,243
Total	$	7,940

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Other Long-Term Assets

Other long-term assets consisted of the following at December 31 (in thousands):


	December 31, 2020		December 31, 2019
Cash surrender value of corporate-owned life insurance policies	$	4,654	$	4,214
Deferred commissions		32,455		22,068
Restricted cash		62		56
Operating lease assets		22,308		9,653
Investments in unconsolidated affiliates (1)		9,500		—
Warrants for unconsolidated affiliate (2)		2,211		—
Prepaid expenses, deposits and other		8,727		4,190
Total other long-term assets	$	79,917	$	40,181

(1)

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

In October 2020, we made an additional $2.1 million investment in Flock Group Inc. The issuance of new equity by Flock Group Inc. to us and other investors represented an observable price change for our initial investment and related warrants. Accordingly, we recorded an increase of $2.4 million to our carrying value during the quarter ended December 31, 2020.

(2)

In conjunction with the equity investment in and commercial partnership with Flock Group Inc., we have the ability to commit additional capital over time through warrants where the exercisability and exercise prices are conditional on the achievement of certain partnership performance metrics. The fair value of the preferred stock warrants was estimated at $2.6 million using Monte Carlo simulation. The issuance of new equity by Flock Group Inc. to us and other investors in October 2020 represented an observable price change for our initial investment and related warrants. Accordingly, we recorded a decrease of $0.4 million to the carrying value of the warrants during the quarter ended December 31, 2020.

In February 2021, we made a $20.0 million minority investment in RapidSOS, Inc.

Accrued Liabilities

Accrued liabilities consisted of the following at December 31 (in thousands):


	December 31, 2020		December 31, 2019
Accrued salaries, benefits and bonus	$	36,892	$	24,737
Accrued professional, consulting and lobbying fees		3,055		3,235
Accrued warranty expense		769		1,476
Accrued income and other taxes		3,848		3,362
Accrued inventory in transit		4,597		4,156
Other accrued expenses		10,682		8,035
Accrued liabilities	$	59,843	$	45,001

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Commitments and Contingencies

Data Storage Purchase Commitment

In June 2019, we entered into a purchase agreement for cloud data storage with a 3 year term beginning July 1, 2019. The purchase agreement includes a total commitment of $50.0 million, with an up-front prepayment of $15.0 million that was made in July 2019. Storage fees under this agreement were $20.6 million for the year ended December 31, 2020, and were recorded in cost of service sales. The remaining purchase commitment at December 31, 2020 was $22.4 million.

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, 2020, we had approximately $169.3 million of open purchase orders.

Litigation

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 seven lawsuits (1 pending dismissal) in which the plaintiffs allege either wrongful death or personal injury in situations in which a TASER CED was used by law enforcement officers in connection with arrests or training. While the facts vary 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.” Fact and expert discovery is complete. On October 2, 2020, the Ninth Circuit stayed the administrative hearing set for October 13, 2020 pending decision on Axon’s appeal (see below). If ultimately successful, the FTC may require Axon to divest Vievu and other assets or take other remedial measures, any of which could be material to Axon. We are vigorously defending the matter. At this time, we cannot predict the eventual scope, duration, or outcome of the proceeding and accordingly we have not recorded any liability in the accompanying consolidated financial statements.

Prior to the FTC’s enforcement action, Axon sued the FTC in federal court in the District of Arizona for declaratory and injunctive relief alleging the FTC’s structure and administrative processes violate Article II of the U.S. Constitution and our Fifth Amendment rights to due process and equal protection. On April 8, 2020, the district court dismissed the

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

action, without prejudice, for lack of jurisdiction, requiring Axon to first bring its constitutional claims in the administrative case. The Ninth Circuit affirmed that ruling on January 28, 2021 (No. 20-15662) in a split 2-1 decision. We are exploring further appellate options, including a petition for rehearing en banc to the Ninth Circuit and a petition for certiorari to the U.S. Supreme Court. The administrative case should remain stayed until the appellate mandate issues.

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

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 our Axon cameras and related technologies. Certain of our letters of credit contracts and surety bonds have stated expiration dates, with others being released as the contractual performance terms are completed. We expect to fulfill all contractual performance obligations related to outstanding guarantees. At December 31, 2020, we had outstanding letters of credit of approximately $6.1 million, which are expected to expire in June and September 2021. We also had outstanding letters of credit and bank guarantees of $2.0 million that do not draw against our credit facility. The outstanding letters of credit are expected to expire in June 2021. In January 2021, the letters of credit were amended to expire in January 2022. Additionally, we had approximately $21.5 million of outstanding surety bonds at December 31, 2020, with $0.4 million expiring in 2021, $3.1 million expiring in 2022, $7.5 million expiring in 2023, and the remaining $10.5 million expiring in 2024.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Income Taxes

Income (loss) before income taxes included the following components for the years ended December 31 (in thousands):


	2020		2019		2018
United States	$	(11,529)	$	(1,449)	$	25,751
Foreign		5,238		3,519		2,353
Total	$	(6,291)	$	2,070	$	28,104

Significant components of the provision for income taxes are as follows for the years ended December 31 (in thousands):


	2020		2019		2018
Current:
Federal	$	5,277	$	4,247	$	4,900
State		3,886		2,414		1,377
Foreign		1,943		1,533		228
Total current		11,106		8,194		6,505
Deferred:
Federal		(10,175)		(6,060)		(8,382)
State		(3,111)		(1,665)		(364)
Foreign		(3,131)		(264)		(3)
Total deferred		(16,417)		(7,989)		(8,749)
Tax impact of unrecorded tax benefits liability		744		983		1,143
Provision for income taxes (Income tax benefit)	$	(4,567)	$	1,188	$	(1,101)

A reconciliation of our effective income tax rate to the federal statutory rate follows for the years ended December 31 (in thousands):


	2020			2019			2018
Federal income tax at the statutory rate	$	(1,321)		$	435		$	5,902
State income taxes, net of federal benefit		935			526			(215)
Difference between statutory and foreign tax rates		(86)			43			7
Permanent differences (1)		794			1,356			1,029
Foreign derived intangible income deduction		(902)			(217)			(304)
Executive compensation limitation		15,463			7,596			1,167
Research and development		(10,246)			(4,911)			(6,908)
Return to provision adjustment		(1,078)			(9)			1,780
Change in liability for unrecognized tax benefits		987			1,191			1,768
Excess stock-based compensation benefit		(9,002)			(4,999)			(8,907)
Change in valuation allowance		163			368			1,984
Tax effects of intercompany transactions		(389)			16			1,004
Other		115			(207)			592
Provision for income taxes (Income tax benefit)	$	(4,567)		$	1,188		$	(1,101)
Effective tax rate		72.6	%		57.4	%		(3.9)	%

(1)	Permanent differences include certain expenses that are not deductible for tax purposes including meals and entertainment, certain transaction costs, lobbying fees, and taxable income as a result of global intangible low-tax income ("GILTI").

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Significant components of our deferred income tax assets and liabilities are as follows at December 31 (in thousands):


	2020		2019
Deferred income tax assets:
Net operating loss carryforward	$	1,834	$	2,341
Deferred revenue		21,055		15,348
Deferred compensation		1,175		971
Lease liability		5,730		2,460
Inventory reserve		511		1,258
Stock-based compensation		18,890		10,769
Amortization		2,436		1,133
Research and development tax credit carryforward		6,654		4,957
Reserves, accruals, and other		7,274		3,394
Total deferred income tax assets		65,559		42,631
Deferred income tax liabilities:
Contract asset		(1,150)		(883)
Right of use asset		(5,237)		(2,228)
Depreciation		(5,363)		(3,715)
Amortization		—		(62)
Investment in unconsolidated affiliate		(321)		—
Prepaid expenses		(874)		(600)
Other		(185)		(637)
Total deferred income tax liabilities		(13,130)		(8,125)
Net deferred income tax assets before valuation allowance		52,429		34,506
Valuation allowance		(7,308)		(7,172)
Net deferred income tax assets	$	45,121	$	27,334

We have $0.5 million of state net operating losses (“NOLs”) which expire at various dates between 2029 and 2036. We also have a federal NOL of $0.1 million which expires in 2036, and is subject to limitation under Internal Revenue Code (“IRC”) Section 382. We have $0.1 million of federal R&D credits, which expire between 2034 and 2037, and are also subject to limitation under IRC Section 382. We have $11.6 million of Arizona R&D credits carrying forward, which expire at various dates between 2021 and 2035. In the U.K., Canada, and Australia, we have $6.0 million, $1.0 million, and $1.3 million of NOLs, respectively, which expire at various dates or may be carried forward indefinitely.

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

As of December 31, 2020, we continue to demonstrate cumulative positive income in the U.S. federal and state tax jurisdictions; however, we have Arizona R&D tax credits expiring unutilized each year. Therefore, we have concluded that it is more likely than not that our Arizona R&D deferred tax asset will not be realized.

As of December 31, 2020, we now have cumulative pre-tax income in the U.K. and Canada, along with positive evidence from projections of future growth for both entities. Therefore, we have released the full valuation allowances of $1.3 million and $0.3 million, respectively.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In Australia, we have determined that sufficient deferred tax liabilities will reverse in order to realize all assets except one long-lived intangible where there is not an expectation that the asset will be realized. Therefore, we have recorded a partial valuation allowance for Australia.

We consider the undistributed earnings of certain non-U.S. subsidiaries to be indefinitely reinvested outside of the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. We project that our foreign earnings will be utilized offshore for working capital and future foreign growth. The determination of the unrecognized deferred tax liability on those undistributed earnings is not practicable due to our legal entity structure and the complexity of U.S. and local country tax laws. If we decide to repatriate the undistributed foreign earnings, we will need to recognize the income tax effects in the period we change our assertion on indefinite reinvestment.

We complete R&D tax credit studies for each year that an R&D tax credit is claimed for federal, Arizona, and California income tax purposes. Management has made the determination that it is more likely than not that the full benefit of the R&D tax credit will not be sustained on examination and recorded a liability for unrecognized tax benefits of $7.7 million as of December 31, 2020. Should the unrecognized tax benefit of $7.7 million be recognized, our effective tax rate would be favorably impacted.

The following table presents a roll forward of our liability for unrecognized tax benefits, exclusive of accrued interest, as of December 31 (in thousands):


	2020		2019		2018
Balance, beginning of period	$	6,861	$	6,058	$	4,243
Increase (decrease) in previous year tax positions		(34)		(615)		213
Increase in current year tax positions		950		1,749		1,982
Decrease due to lapse of statutes of limitations		(120)		(331)		(380)
Balance, end of period	$	7,657	$	6,861	$	6,058

Federal income tax returns for 2017 through 2019 remain open to examination by the U.S. Internal Revenue Service (the “IRS”), while state and local income tax returns for 2016 through 2019 also generally remain open to examination by state taxing authorities. The 2006 through 2015 income tax returns are only open to the extent that net operating loss or other tax attributes carrying forward from those years were utilized in 2016 through 2019. The foreign tax returns for 2016 through 2019 also generally remain open to examination. During 2020, we completed an audit of our 2016 U.S. federal income tax return by the Internal Revenue Service and began an audit of our 2016 and 2017 California income tax returns for which we are currently in the closing phase with the Franchise Tax Board. 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.

We recognize interest and penalties related to unrecognized tax benefits within the provision (benefit) for income tax expense line in the accompanying consolidated statements of operations and comprehensive income (loss). As of December 31, 2020 and 2019, we had accrued interest of $0.2 million and $0.2 million, respectively.

Line of Credit

We have a $50.0 million unsecured revolving line of credit with a domestic bank, of which $10.0 million is available for letters of credit. The credit agreement matures on December 31, 2021 and has an accordion feature which allows for an increase in the total line of credit up to $100.0 million, subject to certain conditions, including the availability of additional bank commitments. On January 29, 2021, we entered into an amendment to the credit agreement, which extends the term of the credit agreement to December 31, 2023 and increases the amount of the unsecured revolving line of credit which is available for letters of credit from $10 million to $20 million.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At December 31, 2020 and 2019, there were no borrowings under the line. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. As of December 31, 2020, we had letters of credit outstanding of approximately $6.1 million under the facility and available borrowing of $43.9 million. Advances under the line of credit bear interest at LIBOR plus 1.0 to 1.5% per year determined in accordance with a pricing grid based on our funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio.

We are required to comply with a maximum funded debt to EBITDA ratio of no greater than 2.50 to 1.00 based upon a trailing four fiscal quarter period. At December 31, 2020, our funded debt to EBITDA ratio was 0.0000 to 1.00.

Stockholders’ Equity

Common Stock and Preferred Stock

We have authorized the issuance of two classes of stock designated as “common stock” and “preferred stock,” each having a par value of $0.00001 per share. We are authorized to issue 200 million shares of common stock and 25 million shares of preferred stock.

Stock-based Compensation Plans

We have historically utilized stock-based compensation, consisting of RSUs and stock options, for key employees and non-employee directors as a means of attracting and retaining quality personnel. Service-based grants generally have a vesting period of 2 to 5 years and a contractual maturity of ten years. Performance-based grants generally have vesting periods ranging from 1 to 10 years and a contractual maturity of ten years.

On February 12, 2019, our shareholders approved the 2019 Plan, which was adopted by the Board of Directors to reserve a sufficient number of shares to facilitate our XSPP and grants of XSUs under the plan. Under the 2019 Plan, we reserved for future grants: (i) 6.0 million shares of common stock, plus (ii) the number of shares of common stock that were authorized but unissued under our 2018 Stock Incentive Plan (the “2018 Plan”) and all prior Company equity plans as of the effective date of the 2019 Plan, and (iii) the number of shares of stock that have been granted under the prior plans that either terminate, expire or lapse for any reason after the effective date of the 2019 Plan. As of December 31, 2020, approximately 1.9 million shares remain available for future grants. Shares issued upon exercise of stock awards from these plans have historically been issued from our authorized unissued shares.

Performance-based stock awards

We have issued performance-based stock options and performance-based RSUs, the vesting of which is generally contingent upon the achievement of certain performance criteria related to our operating performance, as well as successful and timely development and market acceptance of future product introductions. In addition, certain of the performance RSUs have additional service requirements subsequent to the achievement of the performance criteria. Compensation expense is recognized over the requisite service period, which is defined as the longest explicit, implicit or derived service period based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date. For both service-based and performance-based RSUs, we account for forfeitures as they occur as a reduction to stock-based compensation expense and additional paid-in-capital

CEO Performance Award

On May 24, 2018, our stockholders approved the CEO Performance Award of 6,365,856 stock option awards. The CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational goals (performance conditions) and market capitalization goals (market conditions), assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each attainment date. Each of the 12 vesting tranches of the CEO Performance Award have a 10-year contractual term and will

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

vest upon certification by the Compensation Committee of the Board of Directors (the “Compensation Committee”) that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of the following eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA have been met for the previous four consecutive fiscal quarters. Adjusted EBITDA for purposes of the CEO Performance Award ("Adjusted EBITDA (CEO Performance Award)") is defined as net income (loss) attributable to common stockholders before interest expense, investment interest income, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense.


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

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

As of December 31, 2020, the following operational goals were considered probable of achievement:

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

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

As of December 31, 2020, the following operational goals were achieved, with vesting of the related tranche pending certification by the Compensation Committee:

	●	Adjusted EBITDA (CEO Performance Award) of $125.0 million.

Stock-based compensation expense associated with the CEO Performance Award is recognized over the longer of the expected achievement period for each pair of market capitalization and operational goals, beginning at the point in time when the relevant operational goal is considered probable of being met. The probability of meeting an operational goal and the expected achievement point in time for meeting a probable operational goal are based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis. Even though no tranches of the CEO Performance Award vest unless a market capitalization and a matching operational goal are both achieved, stock-based compensation expense is recognized when an operational goal is considered probable of achievement regardless of whether a market capitalization goal is actually achieved. Stock-based compensation represents a non-cash expense and is recorded in sales, general, and administrative operating expense on our consolidated statements of operations and comprehensive income.

The first four market capitalization goals have been achieved as of December 31, 2020, and the fifth and sixth market capitalization goals were achieved in January and February 2021, respectively. However, none of the stock options granted under the CEO Performance Award have vested thus far as attainment of the first tranche has not been certified by the Compensation Committee, and none of the other operational goals have been achieved. As there are ten operational goals considered probable of achievement and one achieved operational goal, we recorded stock-based compensation expense

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

of $93.8 million related to the CEO Performance Award from the CEO Grant Date through December 31, 2020. The number of stock options that will vest related to the achieved tranche is approximately 0.5 million shares. The number of stock options that would vest related to the remaining ten probable tranches is approximately 5.3 million shares.

As of December 31, 2020, we had $134.5 million of total unrecognized stock-based compensation expense related to the CEO Performance Award for the operational goals that were considered probable of achievement, which will be recognized over a weighted-average period of 5.1 years. As of December 31, 2020, we had unrecognized stock-based compensation expense of $17.6 million for the operational goal that was considered not probable of achievement.

eXponential Stock Performance Plan

On February 12, 2019, our shareholders approved the 2019 Plan, which was adopted by the Board of Directors to reserve a sufficient number of shares to facilitate our XSPP and grants of XSUs under the plan. Pursuant to the XSPP, all eligible full-time U.S. employees were granted an award of 60 XSUs in January 2019, and certain employees had the opportunity to elect to receive a percentage of the value of their target compensation over the following nine years (2019-2027) in the form of additional XSUs. For employees who elected to receive XSUs, the XSU grants were made as an up front, lump sum grant in January 2019, and are intended to replace that portion of the target compensation they elected to receive in the form of XSUs for the subsequent nine years. Accordingly, their go forward target compensation will be reduced until 2027 by the amount of such compensation that the employees elected to receive in the form of the January 2019 XSU grants. Additional employee awards were granted approximately quarterly during 2019 and 2020. A total of approximately 0.3 million XSUs were granted during the year ended December 31, 2020.

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 that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA (CEO Performance Award) have been met for the previous four consecutive fiscal quarters.

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

The XSU Maximum is defined as the actual number of shares outstanding on the original XSU grant date of January 2, 2019, increased by a 3% annual rate over the term of the XSPP and by shares issued upon the exercise of CEO Performance Award options. The XSU Maximum is also adjusted for acquisitions, spin-offs or other changes in the number of outstanding shares of common stock, if such changes have a corresponding adjustment on the market capitalization goals.

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of December 31, 2020, actual shares outstanding exceeded the XSU Maximum as a result of the common stock offering completed in June 2020. Accordingly, market capitalization as calculated for the purposes of achieving additional goals uses the lower XSU Maximum share amount rather than actual shares outstanding. The first four market capitalization goals have been achieved as of December 31, 2020, and the fifth and sixth market capitalization goals were achieved in January and February 2021, respectively. While none of the XSU tranches have vested thus far, the first operational was achieved as of December 31, 2020 and the related tranche will vest upon certification from the Compensation Committee. The remaining probable operational goals have not yet been achieved as of December 31, 2020. As there are ten operational goals considered probable of achievement and one achieved operational goal, we recorded stock-based compensation expense of $58.3 million related to the XSU awards from their respective grant dates through December 31, 2020. The number of XSU awards that will vest related to the achieved tranche is approximately 0.4 million shares. The number of XSU awards that would vest related to the remaining ten probable tranches is approximately 4.5 million shares.

As of December 31, 2020, we had $121.3 million of total unrecognized stock-based compensation expense related to the XSU awards for the operational goals that were considered probable of achievement, which will be recognized over a weighted-average period of 4.66 years. As of December 31, 2020, we had unrecognized stock-based compensation expense of $11.3 million for the operational goal that was considered not probable of achievement.

Restricted Stock Units

The following table summarizes RSU activity for the years ended December 31 (number of units and aggregate intrinsic value in thousands):


	2020				2019			2018
			Weighted			Weighted			Weighted
	Number		Average		Number	Average		Number	Average
	of		Grant-Date		of	Grant-Date		of	Grant-Date
	Units		Fair Value		Units	Fair Value		Units	Fair Value
Units outstanding, beginning of year		1,249	$	45.47	1,244	$	28.52	1,902	$	23.58
Granted		577		100.76	718		59.09	287		45.99
Released		(598)		40.68	(547)		27.38	(730)		23.50
Forfeited		(121)		52.40	(166)		36.91	(215)		25.17
Units outstanding, end of year		1,107		76.10	1,249		45.47	1,244		28.52
Aggregate intrinsic value at year end	$	135,679

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $122.53 per share at December 31, 2020, multiplied by the number of RSUs. The fair value as of the respective vesting dates of RSUs that vested during the year was $56.0 million, $39.4 million, and $36.6 million for the years ended December 31, 2020, 2019, and 2018, respectively.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Certain RSUs that vested in the year ended December 31, 2020 were net-share settled, such that we withheld shares to cover the employees’ tax obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld during 2020 were 0.1 million and had a value of approximately $6.6 million on their respective vesting dates as determined by the closing stock price of our stock. Payments for the employees’ tax obligations are reflected as a financing activity within the consolidated statements of cash flows. We record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital.

As of December 31, 2020, we had $67.6 million of total unrecognized stock-based compensation expense related to RSUs under our stock plans for shares that are expected to vest. We expect to recognize the cost related to the RSUs over a weighted average period of 2.35 years. RSUs are released when vesting requirements are met.

Performance Stock Units

The following table summarizes PSU activity, inclusive of XSUs, for the years ended December 31 (number of units and aggregate intrinsic value in thousands):


	2020				2019			2018
			Weighted			Weighted			Weighted
	Number		Average		Number	Average		Number	Average
	of		Grant-Date		of	Grant-Date		of	Grant-Date
	Units		Fair Value		Units	Fair Value		Units	Fair Value
Units outstanding, beginning of year		6,033	$	34.47	411	$	27.82	446	$	23.02
Granted		417		58.11	6,041		34.61	94		46.29
Released		(184)		27.79	(103)		17.14	(42)		27.11
Forfeited		(648)		40.83	(316)		33.99	(87)		23.65
Units outstanding, end of year		5,618		35.71	6,033		34.47	411		27.82
Aggregate intrinsic value at year end	$	688,414

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $122.53 per share, multiplied by the number of PSUs outstanding. As of December 31, 2020, there was $127.4 million in unrecognized compensation costs related to PSUs under our stock plans for shares that are expected to vest. We expect to recognize the cost related to the PSUs over a weighted average period of 4.49 years. PSUs are released when vesting requirements are met.

Of the 0.4 million performance-based RSUs granted in 2020, 0.3 million were XSUs. Certain of the performance-based RSUs outstanding as of December 31, 2020 can vest with a range of shares earned being between 0% and 200% of the targeted shares granted, depending on the final achievement of pre-determined performance criteria as of the vesting date. The amount of PSUs included in the table above related to such grants is the target level. The maximum additional number of PSUs that could be earned is 0.2 million, which are not included in the table above. As of December 31, 2020, the performance criteria had been met for approximately 0.2 million of the 0.3 million performance-based RSUs outstanding, exclusive of XSUs outstanding. We recognized $48.3 million, $24.1 million and $4.8 million of compensation expense related to performance-based RSUs during the years ended December 31, 2020, 2019 and 2018, respectively, which included expense related to XSUs of $40.8 million during the year ended December 31, 2020.

On November 3, 2020, the Compensation Committee of our Board of Directors approved a modification to the definition of a metric for certain of our outstanding PSU awards. We accounted for this change as a Type III modification under ASC 718 since the expectation of the attainment for this metric changed from improbable to probable. We will recognize additional stock-based compensation of approximately $6.4 million over the remaining requisite service period, beginning from the modification date; of this total, $3.2 million was recognized during the year ended December 31, 2020.

Certain PSUs that vested in the year ended December 31, 2020 were net-share settled such that we withheld shares to cover the employees’ tax obligation for the applicable income and other employment taxes, and remitted the cash to the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

appropriate taxing authorities. Total shares withheld related to PSUs were approximately 16 thousand and had a value of $1.2 million on their respective vesting dates as determined by the closing stock price on such dates. Payments for the employees’ tax obligations are reflected as a financing activity within the consolidated statements of cash flows. We record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital.

Stock Option Activity

The following table summarizes stock option activity for the years ended December 31 (number of options in thousands):


	2020				2019			2018
			Weighted			Weighted			Weighted
	Number		Average		Number	Average		Number	Average
	of		Exercise		of	Exercise		of	Exercise
	Options		Price		Options	Price		Options	Price
Options outstanding, beginning of year		6,431	$	28.34	6,458	$	28.24	804	$	4.99
Granted		—		—	—		—	6,366		28.58
Exercised		(65)		4.52	(27)		4.27	(664)		5.09
Expired / terminated		—		—	—		—	(48)		4.55
Options outstanding, end of year		6,366		28.58	6,431		28.34	6,458		28.24
Options exercisable, end of year		530		28.58	65		4.52	92		4.45

We granted 6.4 million stock options in 2018 and none in 2020 or 2019. The total intrinsic value of options exercised was $5.1 million, $1.2 million and $28.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. The intrinsic value for options exercised was calculated as the difference between the exercise price of the underlying stock option awards and the market price of our common stock on the date of exercise.

The following table summarizes information about stock options that were fully vested or expected to vest as of December 31, 2020 (number of options in thousands):


	Options Outstanding				Options Exercisable
				Weighted				Weighted
		Weighted		Average	Weighted			Average
	Number of	Average		Remaining	Number of	Average		Remaining
Range of	Options	Exercise		Contractual	Options	Exercise		Contractual
Exercise Price	Outstanding	Price		Life (Years)	Exercisable	Price		Life (Years)
$28.58	530	$	28.58	7.15	530	$	28.58	7.15

The aggregate intrinsic value of options exercisable at December 31, 2020 was $49.8 million, respectively. Aggregate intrinsic value represents the difference between the exercise price of the underlying stock option awards and the closing market price of our common stock of $122.53 on December 31, 2020.

At December 31, 2020, we had 6.4 million unvested options outstanding with a weighted average exercise price of $28.58 per share, weighted average grant-date fair value of $38.64 per share and weighted average remaining contractual life of 7.2 years. The aggregate intrinsic value of unvested options at December 31, 2020 was $598.1 million.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Stock-based Compensation Expense

We account for stock-based compensation using the fair-value method. Reported stock-based compensation expense was classified as follows for the years ended December 31 (in thousands):


	2020		2019		2018
Cost of product and service sales	$	3,464	$	1,565	$	511
Sales, general and administrative expenses		103,860		59,342		12,710
Research and development expenses		26,248		17,588		8,658
Total stock-based compensation expense	$	133,572	$	78,495	$	21,879
Income tax benefit	$	29,329	$	11,457	$	4,049

Stock Inducement Plan

In September 2019, our Board of Directors adopted the Axon Enterprise, Inc. 2019 Stock Inducement Plan (the “2019 Inducement Plan”) pursuant to which we reserved 500,000 shares of common stock for issuance under the Inducement Plan. The 2019 Inducement Plan was adopted without stockholder approval pursuant to Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules. The Inducement Plan provides for the grant of equity-based awards, including restricted stock units, restricted stock, performance shares and performance units, and its terms are substantially similar to our stockholder-approved 2019 Plan. In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules, awards under the Inducement Plan may only be made to individuals not previously employees or non-employee directors of the Company (or following such individuals’ bona fide period of non-employment with the Company), as an inducement material to the individuals’ entry into employment with the Company.

As of December 31, 2020, there were 29,600 shares available for grant under the 2019 Inducement Plan.

Stock Repurchase Plan

In February 2016, our Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of our outstanding common stock subject to stock market conditions and corporate considerations. As of December 31, 2020 and 2019, $16.3 million remained available under the plan for future purchases.

Leases

Lease Obligations

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

We have operating and finance leases for office space and certain equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. For leases beginning on or after January 1, 2019, we account for lease components separately from non-lease components for all asset classes.

Our leases have remaining terms of less than 1 to approximately 7 years, some of which include one or more options to renew for up to 5 years, and some of which include options to terminate the leases within 1 year. The exercise of lease

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

renewal options is at our sole discretion and such options are included in ROU assets and liabilities for renewal periods that are reasonably certain of exercise. Certain of our lease agreements include stated rental payment escalations. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We sublease certain real estate to third parties. Finance leases as of December 31, 2020 were immaterial.


Leases (in thousands)	Classification	December 31, 2020		December 31, 2019
Assets
Operating lease assets	Other assets	$	22,308	$	9,653
Liabilities
Current
Operating	Other current liabilities	$	5,431	$	3,817
Noncurrent
Operating	Other long-term liabilities		18,952		6,792
Total lease liabilities		$	24,383	$	10,609

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


		Twelve Months Ended		Twelve Months Ended
	Classification	December 31, 2020		December 31, 2019
Operating lease expense (1)	Sales, general and administrative expenses (2)	$	6,757	$	4,627
Sublease income	Interest and other income, net		(55)		(301)
Net lease expense		$	6,702	$	4,326

(1)	Includes short-term leases, which are immaterial.

(2)	An immaterial portion of operating lease expense is included within research and development expenses and cost of sales.

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


	Twelve Months Ended			Twelve Months Ended
	December 31, 2020			December 31, 2019
Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	4,666		$	4,374
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases		17,390			888
Weighted average remaining lease term:
Operating leases		4.4	years		3.1	years
Weighted average discount rate:
Operating leases		3.36	%		3.55	%

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Future minimum lease payments under non-cancellable leases as of December 31, 2020 were as follows (in thousands):


	Operating
2021		6,277
2022		6,178
2023		5,891
2024		4,009
2025		3,851
Thereafter		203
Total minimum lease payments		26,409
Less: Amount representing interest		(2,026)
Present value of lease payments	$	24,383

As of December 31, 2020, we do not have any leases that have not yet commenced that create significant rights and obligations for us.

Employee Benefit Plans

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

We also have a non-qualified deferred compensation plan for certain executives, key employees and non-employee directors through which participants may elect to postpone the receipt and taxation of a portion of their compensation, including stock-based compensation, received from us. The non-qualified deferred compensation plan allows eligible participants to defer up to 80% of their base salary and up to 100% of other types of compensation. The plan also allows for matching and discretionary employer contributions. Employee deferrals are deemed 100% vested upon contribution. Distributions from the plan generally commence upon retirement, death, separation of service, specified date or upon the occurrence of an unforeseeable emergency. Distributions can be paid in a variety of forms from lump sum to installments over a period of years. Participants in the plan are entitled to select from a wide variety of investments available under the plan and are allocated gains or losses based upon the performance of the investments selected by the participant. All gains or losses are allocated fully to plan participants and we do not guarantee a rate of return on deferred balances. Assets related to this plan consist of corporate-owned life insurance contracts and are included in other assets in the consolidated balance sheets; see Note 8 for balances. Participants have no rights or claims with respect to any plan assets and any such assets are subject to the claims of our general creditors.

Contributions to the plans are made by both the employee and us. Our contributions to the 401(k) plan are based on the level of employee contributions and are immediately vested. Future matching contributions to the plans are at our sole discretion.

We also sponsor defined contribution plans in Australia, Finland, and the United Kingdom.

Our matching contributions for all defined contribution plans for the years ended December 31, 2020, 2019 and 2018, were approximately $5.6 million, $4.8 million and $3.2 million, respectively. Future matching or profit sharing contributions to the plans are at our sole discretion.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Business Acquisitions

Vievu

On May 3, 2018, we acquired all of the outstanding ownership interests of Vievu, a public safety camera and cloud-based evidence management system provider for law enforcement agencies.

The purchase price of $17.6 million consisted of $5.0 million in cash, net of cash acquired of $0.1 million, and $2.4 million, or 58,843 shares, of our common stock issued to Vievu’s parent company, Safariland, LLC (“Safariland”). Additionally, the purchase price consisted of contingent consideration of up to $6.0 million, or 141,226 additional shares of common stock, if certain conditions relating to retention of certain Vievu customers are met as of the first and second anniversaries of the acquisition date. The fair value of the contingent consideration as of the acquisition date was $5.8 million. The purchase price also included the fair value of a long-term Product Development and Supplier Agreement (the “Supply Agreement”) with Safariland, pursuant to which Safariland will be our preferred provider of holsters for our CEW products. The estimated fair value of the Supply Agreement as of the acquisition date was $4.5 million, a portion of which was recorded within accrued liabilities and the remaining portion recorded within other long-term liabilities.

The major classes of assets and liabilities to which we allocated the purchase price were as follows (in thousands):


Accounts receivable	$	1,776
Inventory		2,626
Prepaid expenses and other assets		362
Property and equipment		459
Contract assets		1,472
Intangible assets		4,510
Goodwill		10,285
Accounts payable and accrued liabilities		(3,345)
Deferred revenue		(543)
Total purchase price	$	17,602

We assigned the goodwill to the Software and Sensors segment. Identifiable definite-lived intangible assets were assigned a total weighted average amortization period of 5.1 years. Vievu has been included in our consolidated results of operations subsequent to the acquisition date. In connection with the acquisition, we incurred and expensed costs of approximately $0.8 million, which included legal, accounting and other third-party expenses related to the transaction. Subsequent to the acquisition date, we recorded expenses of $1.2 million in 2018 related to purchase commitments assumed in the Vievu business combination that exceeded estimated future demand.

Segment Data

Our operations are comprised of two reportable segments: the TASER segment and 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 includes other recurring cloud-hosted software revenue and related professional services. Collectively, this revenue is sometimes referred to as "Axon Cloud revenue." Our Chief Executive Officer, who is the CODM, is not provided asset information or sales, general, and administrative expense by segment.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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


	For the year ended December 31, 2020
			Software and
	TASER		Sensors		Total
Net sales from products	$	362,649	$	137,601	$	500,250
Net sales from services		3,903		176,850		180,753
Net sales		366,552		314,451		681,003
Cost of product sales		136,925		87,206		224,131
Cost of service sales		—		40,541		40,541
Cost of sales		136,925		127,747		264,672
Gross margin	$	229,627	$	186,704	$	416,331

Research and development	$	15,380	$	107,815	$	123,195


	For the year ended December 31, 2019
			Software and
	TASER		Sensors		Total
Net sales from products	$	280,554	$	118,920	$	399,474
Net sales from services		1,107		130,279		131,386
Net sales		281,661		249,199		530,860
Cost of product sales		107,188		83,495		190,683
Cost of service sales		—		32,891		32,891
Cost of sales		107,188		116,386		223,574
Gross margin	$	174,473	$	132,813	$	307,286

Research and development	$	14,469	$	86,252	$	100,721


	For the year ended December 31, 2018
			Software and
	TASER		Sensors		Total
Net sales from products	$	253,115	$	74,520	$	327,635
Net sales from services		—		92,433		92,433
Net sales		253,115		166,953		420,068
Cost of product sales		80,354		58,983		139,337
Cost of service sales		—		22,148		22,148
Cost of sales		80,354		81,131		161,485
Gross margin	$	172,761	$	85,822	$	258,583

Research and development	$	17,012	$	59,844	$	76,856

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Supplemental Disclosure to Cash Flows

Supplemental non-cash and other cash flow information were as follows as of and for the years ended December 31 (in thousands):


	2020		2019		2018
Supplemental disclosures:
Cash and cash equivalents	$	155,440	$	172,250	$	349,462
Restricted cash	$	111	$	105	$	1,565
Total cash, cash equivalents and restricted cash shown in the statements of cash flows	$	155,551	$	172,355	$	351,027

Cash paid for income taxes, net of refunds	$	10,893	$	3,669	$	10,609

Non-cash transactions:
Property and equipment purchases in accounts payable		878		834		501
Non-cash purchase consideration related to business combinations		—		—		12,508
Commission payable converted to stock-based award		—		314		—

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Axon Enterprise, Inc.

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of Axon Enterprise, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 25, 2021 expressed an unqualified opinion.

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical audit matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition – Bundled Arrangements with Multiple Performance Obligations

As described further in Notes 1 and 2 to the financial statements, the Company derives revenue from two primary sources: the sale of physical products (including conducted energy devices (CEDs), cameras, corresponding hardware extended warranties, and related accessories), and subscriptions to the Axon Evidence digital evidence management software as a service and support. To a lesser extent, the Company also recognizes revenue related to training, professional services and other software services. Many of the Company’s products are sold on a standalone basis; however, the Company also bundles its hardware product and service performance obligations and sells them to customers as part of a single transaction.

We consider the identification of performance obligations, treatment of contract term assessments, the determination of the standalone selling price and allocation of the transaction price to multiple performance obligations, including the determination as to whether any amendments to an existing contract result in a modification, to be a critical audit matter.

The principal consideration for our determination that these revenue recognition matters are a critical audit matter is that significant judgment is exercised by the Company in determining revenue recognition for contracts with multiple performance obligations, and includes the following:

	•	Judgment in modification assessment and conclusions resulting from amendments to existing contracts.

	•	Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., substantive termination penalties).

	•	Determination of whether products and services are considered distinct performance obligations that should be accounted for separately or in combination, and identification of all promises in the contract and whether such promises are limited to distinct explicit goods or services or whether they may be implied.

	•	Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately, which may include a market assessment of what the customer would be willing to pay for each performance obligation or an estimate of the expected cost plus an appropriate estimated margin of the performance obligation.

These judgments require significant auditor subjectivity in evaluating the reasonableness of those judgments. Our audit procedures related to the revenue recognition for contracts with multiple performance obligations included the following, among others:

	•	We tested the design and operating effectiveness of controls over the Company’s contract review process, including those over the assessment of amendments to existing contracts, treatment of contract term assessments, the identification of distinct performance obligations included in the initial or amended contract, and the establishment and monitoring of standalone selling prices.

	•	We evaluated management’s judgment in significant accounting polices related to these arrangements for reasonableness.

	•	For a sample of contracts, we performed the following procedures:

	-	Obtained and analyzed the contract source documents for each selection, and other documents deemed a component of the arrangement in order to test the appropriateness of management’s identification and determination of contract terms.

	-	Assessed the terms in the arrangement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.

	-	Assessed contractual terms and the appropriateness of material right determinations.

	-	Obtained management’s contract review assessment and corroborated the judgments applied in accounting for the arrangements.

	-	Assessed the terms in the arrangement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.

	-	Traced the term of the revenue recognition period to the contract and recalculated the expected revenue recognized during the period.

	•	We evaluated the reasonableness of management’s estimate of stand-alone selling prices for products and services by comparing the stand-alone prices to historic stand-alone transactions and other data.

Stock Based Compensation – Ongoing Assessment of Vesting Probabilities

As described further in Notes 1 and 13 to the financial statements, the CEO Performance Award provides for the granting of stock options to the Company’s CEO and the XSPP provides for the granting of eXponential Stock Units (XSUs) to the Company’s employees. Both the stock options and XSUs vest in 12 tranches upon the achievement of market capitalization and operational goals. Stock-based compensation expense associated with the awards is recognized beginning at the point in time when the relevant operational goal is considered probable of being met. We consider the probability assessment of achieving the operational goals to be a critical audit matter.

The principal consideration for our determination that the probability of achieving the operational goals is a critical audit matter is that significant judgment is exercised by the Company in determining the achievement of the operational goals for these awards, and includes the following:

	•	Judgment regarding the number of operational goals that are probable to be achieved and the expected point in time the goals will be achieved, based on a subjective and statistical assessment of the Company’s forward-looking financial projections, estimates of the successful development and market acceptance of future product introductions, future sales targets, and operating performance.

	•	The application of the judgments regarding probability of achievement and expected point in time of achievement to the requisite service period.

These judgments are subject to estimation uncertainty and require significant auditor subjectivity in evaluating the reasonableness of those judgments. Our audit procedures related to the ongoing assessment of vesting probabilities included the following, among others:

	•	We tested the design and operating effectiveness of controls over the Company’s assessments of future expectations, reviews of third-party valuation specialist prepared statistical analysis, and determination of stock-based compensation expense based on the implied requisite service periods.

	•	We analyzed the statistical analysis employed by the specialists in determining the projected achievement of each operational goal and determined whether such assessment was reasonable. We used a specialist to develop an independent model to assist us in evaluating the appropriateness and reasonableness of the Company’s statistical analysis.

	•	We assessed the reasonableness of management’s forecasts as an input into the model by comparing management’s previous forecasts to actual results to assess management’s ability to accurately forecast actual results, and by comparing to historical trends.

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2005.

Phoenix, Arizona

February 25, 2021

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