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, 2022 and 2021		56
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2022, 2021 and 2020		57
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2022, 2021 and 2020		58
Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020		59
Notes to Consolidated Financial Statements		60
Report of Grant Thornton LLP, Independent Registered Public Accounting Firm (PCAOB ID No. 248)		100

AXON ENTERPRISE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	December 31,		December 31,
	2022		2021
ASSETS
Current assets:
Cash and cash equivalents	$	353,684	$	356,332
Marketable securities		39,240		72,180
Short-term investments		581,769		14,510
Accounts and notes receivable, net of allowance of $2,176 and $2,203 as of December 31, 2022 and December 31, 2021, respectively		358,190		320,819
Contract assets, net		196,902		180,421
Inventory		202,471		108,688
Prepaid expenses and other current assets		73,022		56,540
Total current assets		1,805,278		1,109,490
Property and equipment, net		169,843		138,457
Deferred tax assets, net		156,866		127,193
Intangible assets, net		12,158		15,470
Goodwill		44,983		43,592
Long-term investments		156,207		31,232
Long-term notes receivable, net		5,210		11,256
Long-term contract assets, net		45,170		29,753
Strategic investments		296,563		83,520
Other long-term assets		159,616		98,247
Total assets	$	2,851,894	$	1,688,210
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	59,918	$	32,220
Accrued liabilities		155,934		103,707
Current portion of deferred revenue		360,037		265,591
Customer deposits		20,399		10,463
Other current liabilities		6,358		6,540
Total current liabilities		602,646		418,521
Deferred revenue, net of current portion		248,003		185,721
Liability for unrecognized tax benefits		10,745		3,797
Long-term deferred compensation		6,285		5,679
Deferred tax liability, net		1		811
Long-term lease liabilities		37,143		20,440
Convertible notes, net		673,967		-
Other long-term liabilities		4,613		5,392
Total liabilities		1,583,403		640,361
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of December 31, 2022 and December 31, 2021, respectively		—		—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 71,474,581 and 70,896,856 shares issued and outstanding as of December 31, 2022 and December 31, 2021, respectively		1		1
Additional paid-in capital		1,174,594		1,095,229
Treasury stock at cost, 20,220,227 shares as of December 31, 2022 and December 31, 2021		(155,947)		(155,947)
Retained earnings		257,022		109,883
Accumulated other comprehensive loss		(7,179)		(1,317)
Total stockholders’ equity		1,268,491		1,047,849
Total liabilities and stockholders’ equity	$	2,851,894	$	1,688,210

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

AXON ENTERPRISE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)


	For the Years Ended December 31,
	2022		2021		2020
Net sales from products	$	801,388	$	608,525	$	500,250
Net sales from services		388,547		254,856		180,753
Net sales		1,189,935		863,381		681,003
Cost of product sales		363,219		260,098		224,131
Cost of service sales		98,078		62,373		40,541
Cost of sales		461,297		322,471		264,672
Gross margin		728,638		540,910		416,331
Sales, general and administrative		401,575		515,007		307,286
Research and development		233,810		194,026		123,195
Total operating expenses		635,385		709,033		430,481
Income (loss) from operations		93,253		(168,123)		(14,150)
Interest and other income, net		103,265		26,748		7,859
Income (loss) before provision (benefit) for income taxes		196,518		(141,375)		(6,291)
Provision (benefit) for income taxes		49,379		(81,357)		(4,567)
Net income (loss)	$	147,139	$	(60,018)	$	(1,724)
Net income (loss) per share:
Basic	$	2.07	$	(0.91)	$	(0.03)
Diluted	$	2.03	$	(0.91)	$	(0.03)
Weighted average shares outstanding:
Basic		71,093		66,191		61,782
Diluted		72,534		66,191		61,782

Net income (loss)	$	147,139	$	(60,018)	$	(1,724)
Foreign currency translation adjustments		(4,818)		(1,251)		1,237
Unrealized losses on available-for-sale investments		(1,044)		(207)		—
Comprehensive income (loss)	$	141,277	$	(61,476)	$	(487)

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

AXON ENTERPRISE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)


											Accumulated
				Additional							Other		Total
	Common Stock			Paid-in		Treasury Stock			Retained		Comprehensive		Stockholders’
	Shares	Amount		Capital		Shares	Amount		Earnings		Income (Loss)		Equity
Balance, December 31, 2019	59,497,759	$	1	$	528,272	20,220,227	$	(155,947)	$	172,265	$	(1,096)	$	543,495
Cumulative effect of applying a change in accounting principle	—		—		—	—		—		(640)		—		(640)
Issuance of common stock	3,450,000		—		306,779	—		—		—		—		306,779
Issuance of common stock under employee plans, net of shares withheld for payroll taxes	748,183		—		(7,514)	—		—		—		—		(7,514)
Stock-based compensation	—		—		133,572	—		—		—		—		133,572
Issuance of common stock for business combination contingent consideration and related tax effects	70,613		—		1,050	—		—		—		—		1,050
Net loss	—		—		—	—		—		(1,724)		—		(1,724)
Other comprehensive income, net	—		—		—	—		—		—		1,237		1,237
Balance, December 31, 2020	63,766,555	$	1	$	962,159	20,220,227	$	(155,947)	$	169,901	$	141	$	976,255
Issuance of common stock	577,956		—		105,514	—		—		—		—		105,514
Issuance of common stock under employee plans, net of shares withheld for payroll taxes	2,624,446		—		(331,309)	—		—		—		—		(331,309)
Stock options exercised	3,927,899		—		51,614	—		—		—		—		51,614
Stock-based compensation	—		—		303,331	—		—		—		—		303,331
Issuance of common stock for business combination contingent consideration	—		—		3,920	—		—		—		—		3,920
Net loss	—		—		—	—		—		(60,018)		—		(60,018)
Other comprehensive loss, net	—		—		—	—		—		—		(1,458)		(1,458)
Balance, December 31, 2021	70,896,856	$	1	$	1,095,229	20,220,227	$	(155,947)	$	109,883	$	(1,317)	$	1,047,849
Issuance of common stock	—		—		(74)	—		—		—		—		(74)
Issuance of common stock under employee plans, net of shares withheld for payroll taxes	566,780		—		(4,870)	—		—		—		—		(4,870)
Stock-based compensation	—		—		106,176	—		—		—		—		106,176
Issuance of common stock for business combination contingent consideration	10,945		—		—	—		—		—		—		—
Tax benefit related to convertible note hedge	—		—		48,858	—		—		—		—		48,858
Purchase of convertible note hedge	—		—		(194,994)	—		—		—		—		(194,994)
Issuance of warrants	—		—		124,269	—		—		—		—		124,269
Net income	—		—		—	—		—		147,139		—		147,139
Other comprehensive loss, net	—		—		—	—		—		—		(5,862)		(5,862)
Balance, December 31, 2022	71,474,581	$	1	$	1,174,594	20,220,227	$	(155,947)	$	257,022	$	(7,179)	$	1,268,491

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

AXON ENTERPRISE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	For the Years Ended December 31,
	2022		2021		2020
Cash flows from operating activities:
Net income (loss)	$	147,139	$	(60,018)	$	(1,724)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		24,381		18,694		12,475
Amortization of issuance cost		198		—		—
Coupon interest expense		211		—		—
Purchase accounting adjustments to goodwill		58		—		—
Loss on disposal and abandonment of intangible assets		110		146		320
Loss on disposal and impairment of property, equipment, and other assets, net		5,452		92		1,722
Realized and unrealized gains on strategic investments and marketable securities, net		(98,943)		(23,035)		—
Stock-based compensation		106,176		303,331		133,572
Deferred income taxes		22,090		(81,303)		(16,528)
Unrecognized tax benefits		3,475		(706)		671
Bond amortization		(1,463)		5,217		3,345
Noncash lease expense		6,725		5,573		4,104
Provision for expected credit losses		699		(214)		1,302
Change in assets and liabilities:
Accounts and notes receivable and contract assets		(73,228)		(205,769)		(107,762)
Inventory		(95,987)		(18,272)		(52,156)
Prepaid expenses and other assets		(52,207)		(40,158)		(14,885)
Accounts payable, accrued and other liabilities		80,757		45,301		8,886
Deferred revenue		159,718		175,615		65,139
Net cash provided by operating activities		235,361		124,494		38,481
Cash flows from investing activities:
Purchases of investments		(764,374)		(362,479)		(656,522)
Proceeds from call / maturity of investments		72,138		718,617		379,839
Exercise of warrants of strategic investments		(6,555)		—		—
Proceeds from sale of strategic investments		—		14,546		—
Purchases of property and equipment		(55,802)		(49,886)		(72,629)
Proceeds from disposal of property and equipment		287		43		95
Purchases of intangible assets		(307)		(392)		(241)
Strategic investments		(74,250)		(45,500)		(7,068)
Business acquisition, net of cash acquired		(2,104)		(22,393)		—
Net cash provided by (used in) investing activities		(830,967)		252,556		(356,526)
Cash flows from financing activities:
Net proceeds from equity offering		(74)		105,514		306,779
Proceeds from options exercised		—		51,614		295
Income and payroll tax payments for net-settled stock awards		(4,870)		(331,309)		(7,809)
Net proceeds from issuance of convertible senior notes		673,769		—		—
Proceeds from issuance of warrants		124,269		—		—
Purchase of convertible note hedge		(194,994)		—		—
Net cash provided by (used in) financing activities		598,100		(174,181)		299,265
Effect of exchange rate changes on cash and cash equivalents		(3,380)		(1,982)		1,976
Net increase (decrease) in cash and cash equivalents		(886)		200,887		(16,804)
Cash and cash equivalents and restricted cash, beginning of period		356,438		155,551		172,355
Cash and cash equivalents and restricted cash, end of period	$	355,552	$	356,438	$	155,551

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

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Organization and Summary of Significant Accounting Policies

Axon Enterprise, Inc. (“Axon”, the “Company”, "we", or "us") is a market-leading provider of law enforcement technology solutions. Our mission is to protect life in service of promoting peace, justice and strong institutions.

The accompanying consolidated financial statements include the accounts of Axon Enterprise, Inc. and our wholly owned subsidiaries. All material intercompany accounts, transactions, and profits have been eliminated.

Basis of Presentation and Use of Estimates

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions in these consolidated financial statements include:

	●	product warranty reserves,

	●	inventory valuation,

	●	revenue recognition,

	●	reserve for expected credit losses

	●	valuation of goodwill, intangible and long-lived assets,

	●	valuation of strategic investments,

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

	●	stock-based compensation, and

	●	recognition and measurement of contingencies and accrued litigation expense.

Actual results could differ materially from those estimates.

Cash, Cash Equivalents and Investments

Cash, cash equivalents and investments include cash, money market funds, certificates of deposit, commercial paper, corporate bonds, term deposits, U.S. Government bonds, municipal bonds, agency bonds, U.S. Treasury bills, and U.S. Treasury inflation-protected securities. We place our cash and cash equivalents with high quality financial institutions. Although we deposit our cash with multiple financial institutions, our deposits regularly exceed federally insured limits. Cash and cash equivalents include funds on hand and highly liquid investments purchased with initial maturity of three months or less. Short-term investments include securities with an expected maturity date within one year of the balance sheet date that do not meet the definition of a cash equivalent, and long-term investments are securities with an expected maturity date greater than one year and less than two years in accordance with our investment policy.

We report available-for-sale investments at fair value as of each balance sheet date and record any unrealized gains or losses as a component of stockholders’ equity. The cost of securities sold is determined on a specific identification basis, and realized gains and losses are included in interest and other income, net within the consolidated statements of operations. When the fair value is below the amortized cost of a marketable security, an estimate of expected credit losses is made. The credit-related impairment amount is recognized in the consolidated statements of operations. Credit losses are recognized through the use of an allowance for expected credit losses account in the consolidated balance sheet and subsequent improvements in expected credit losses are recognized as a reversal of an amount in the allowance account. If we have the intent to sell the security or it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis, then the allowance for the credit loss is written-off and the excess of the amortized cost basis of the asset over its fair value is recorded in the consolidated statements of operations. We do not intend to sell

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases. There were no credit losses recorded on our investment portfolio during the years ended December 31, 2022 and 2021.

Restricted Cash

Restricted cash balances of $1.9 million and $0.1 million as of December 31, 2022 and 2021, respectively, primarily relate to funds held in an international bank account for a country in which we are required to maintain a minimum balance to operate. As of December 31, 2022, approximately $1.8 million was included in prepaid expenses and other assets on our condensed consolidated balance sheet, with the remainder in other long-term assets.

Inventory

Inventories are stated at the lower of cost, determined on the first-in, first-out (“FIFO”) basis, or net realizable value, net of an inventory valuation allowance. We use a standard cost methodology to approximate the cost basis for our inventories. Costs include allocations for materials, labor, and overhead. All variances between actual costs and standard costs are apportioned to inventory and cost of product sales based upon inventory turnover. Additional provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value. These provisions are based on management’s best estimate after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions among other factors. We evaluate inventory costs for abnormal costs due to excess production capacity and treat such costs as period costs.

Property and Equipment

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

Software Development Costs

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

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

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

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Valuation of Goodwill, Intangible and Long-lived Assets

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

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

During the year ended December 31, 2022, we recorded $5.3 million of impairment charges. Of this total, $3.3 million related to the cease-use of a portion of our Seattle office. An additional $1.4 million related to the decision to slow pacing on construction of our new Scottsdale, Arizona campus. During the year ended December 31, 2021, we recorded an immaterial amount of impairment charges. During the year ended December 31, 2020, we abandoned certain planning and site development activities related to our planned new headquarters, resulting in an impairment charge of $0.7 million, as well as recognized impairment charges totaling $0.5 million related to improvements and remodeling of certain of our offices. During the year ended December 31, 2022, these charges were included in sales, general and administrative expense, except for $2.7 million related to the Seattle office lease cease-use, which was recorded in research and development (“R&D”), in the accompanying consolidated statements of operations.

Customer Deposits

We require deposits in advance of shipment for certain customer sales orders. Additionally, customers may elect to make deposits with us related to contracts for our products and services that were not executed as of the end of a reporting period. Customer deposits are included in other current liabilities in the accompanying consolidated balance sheets.

Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable and Contract Assets

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

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

Revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

include various combinations of products and services, each of which is generally distinct and accounted for as a separate performance obligation. Revenue is recognized net of allowances for returns.

Performance obligations to deliver products, including CEDs, cameras and related accessories such as cartridges, batteries and docks, are generally satisfied at the point in time we ship the product, as this is when the customer obtains control of the asset under our standard terms and conditions. In certain contracts with non-standard terms and conditions, these performance obligations may not be satisfied until formal customer acceptance occurs. Performance obligations to fulfill service-type extended warranties and provide our SaaS offerings, including Axon Evidence and other cloud services, are generally satisfied over time as the customer receives and consumes the benefits of these services over the stated service period.

Many of our products and services are sold on a standalone basis. We also bundle our hardware products and services together and sell them to our customers in single transactions, where the customer can make payments over a multi-year period. These sales may include payments for upfront hardware and services, as well as payments for hardware and services to be provided by us at a future date. Additionally, we offer customers the ability to purchase CED cartridges and certain services on an unlimited basis over the contractual term. Due to the unlimited nature of these arrangements whereby we are obligated to deliver unlimited products at the customer’s request, we account for these arrangements as stand-ready obligations, and recognize revenue ratably over the contract period. Cost of product sales is recognized when control of hardware products or accessories have transferred to the customer.

We have elected to recognize shipping costs as an expense in cost of product sales when the control of hardware products or accessories have transferred to the customer.

Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis.

The timing of revenue recognition may differ from the timing of invoicing to customers. We generally have an unconditional right to consideration when we invoice our customers and record a receivable. We record a contract asset when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing. Contract asset amounts that will be invoiced during the subsequent twelve month period from the balance sheet date are classified as current assets and the remaining portion is recorded within other assets on our consolidated balance sheets. Deferred revenue that will be recognized during the subsequent twelve month period from the balance sheet date is recorded as current deferred revenue and the remaining portion is recorded as long-term deferred revenue. Generally, customers are billed in annual installments. See Note 2 for further disclosures about our contract assets.

Sales are typically made on credit, and we generally do not require collateral. We are exposed to credit losses primarily through sales of products and services. Our expected loss allowance methodology for accounts receivable, notes receivable, and contract assets is developed using historical collection experience, published or estimated credit default rates for entities that represent our customer base, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. We review receivables for U.S. and international customers separately to better reflect different published credit default rates and economic and market conditions. Additionally, specific reserve amounts are established to record the appropriate provision for customers that have a higher probability of default. Our monitoring activities include account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. Accounts and notes receivable and contract assets are presented net of a reserve for expected credit losses, which totaled $3.6 million and $3.3 million as of December 31, 2022 and 2021, respectively. This reserve represents management’s best estimate and application of judgment considering a number of factors, including those listed above. In the event that actual uncollectible amounts differ from our estimates, additional expense could be necessary.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Cost of Product and Service Sales

Cost of product sales represents manufacturing costs, consisting of materials, labor and overhead related to finished goods and components. Shipping costs incurred related to product delivery are also included in cost of products sold. Cost of service sales includes third-party cloud services, and software maintenance and support costs, including personnel costs, associated with supporting Evidence.com and other software related services.

Advertising Costs

We expense advertising costs in the period in which they are incurred. We incurred advertising costs of $2.3 million, $2.6 million and $1.3 million in the years ended December 31, 2022, 2021 and 2020, respectively. Advertising costs are included in sales, general and administrative expenses in the accompanying statements of operations.

Standard Warranties

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

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


	Year Ended December 31,
	2022		2021		2020
Balance, beginning of period	$	2,822	$	769	$	1,476
Utilization of reserve		(2,209)		(873)		(700)
Warranty expense		198		2,926		(7)
Balance, end of period	$	811	$	2,822	$	769

Research and Development Expenses

We expense as incurred R&D costs that do not meet the qualifications to be capitalized. We incurred R&D expense of $233.8 million, $194.0 million and $123.2 million in 2022, 2021 and 2020, respectively.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in future years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced through the establishment of a valuation allowance if, based upon available evidence, it is determined that it is more likely than not that the deferred tax assets will not be realized.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. We also assess whether uncertain tax positions, as filed, could result in the recognition of a liability for possible interest and penalties. Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. Refer to Note 14 for additional information regarding the change in unrecognized tax benefits.

The Tax Cuts and Jobs Act of 2017 contains a provision which subjects a U.S. parent of a foreign subsidiary to current U.S. tax on its global intangible low-taxed income (“GILTI”). GILTI is eligible for a deduction which lowers the effective tax rate on GILTI to 10.5% for calendar years 2018 through 2025 and 13.125% after 2025. We report the tax impact of GILTI as a period cost when incurred. Accordingly, we do not provide deferred taxes for basis differences expected to reverse as GILTI.

Concentration of Credit Risk and Major Customers / Suppliers

Financial instruments that potentially subject 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 three depository institutions. As of December 31, 2022, the aggregate balances in such accounts were $139.9 million. Our balances with these three institutions regularly exceed Federal Deposit Insurance Corporation insured limits for domestic deposits and various deposit insurance programs covering our deposits in Australia, Canada, Finland, France, Germany, Hong Kong, India, Italy, the Netherlands, Spain, the United Kingdom, 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, 2022, 2021 or 2020. At December 31, 2022, and 2021, 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, Malaysia, Mexico, Republic of Korea, Taiwan, and Vietnam. We may source from other countries as well. Although we currently obtain many of these components from single source suppliers, we own the injection molded component tooling, most of the designs, and test fixtures used in their production for all custom components. As a result, we believe we could obtain alternative suppliers in most cases. Although we have experienced supply chain disruptions relating to materials and port constraints, we have remained focused on closely managing our supply chain. We continue to bolster our strategic relationships in our supply chain, identifying secondary/alternate sourcing, adjusting build plans accordingly, and building in logistic modes in support of our increasing demand while working to minimize disruption to customers. We acquire most of our components on a purchase order basis and do not currently have significant long-term purchase contracts with most component suppliers.

Fair Value Measurements and Financial Instruments

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

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

	●	Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.

	●	Level 3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect our own assumptions about inputs that market participants would use in pricing an asset or liability.

We have cash equivalents and investments, which at December 31, 2022 were comprised of money market funds, certificates of deposit, commercial paper, corporate bonds, term deposits, U.S. Government bonds, municipal bonds, agency bonds, U.S. Treasury bills, and U.S. Treasury inflation-protected securities. Cash equivalents and investments at December 31, 2021 were comprised of money market funds, corporate bonds, municipal bonds, and U.S. Government agency bonds. See additional disclosure regarding the fair value of our cash equivalents and investments in Note 3. Included in the balance of other assets as of December 31, 2022 and 2021 was $4.3 million and $5.3 million, respectively, related to corporate-owned life insurance policies which are used to fund our deferred compensation plan. We determine the fair value of our insurance contracts by obtaining the cash surrender value of the contracts from the issuer, a Level 2 valuation technique.

We have investments in marketable securities, for which changes in fair value are recorded in the consolidated statement of operations as unrealized gain or (loss) on marketable securities, which is included in interest and other income, net.

We have strategic investments in various unconsolidated affiliates as of December 31, 2022. The estimated fair value of the investments was determined based on Level 3 inputs. In determining the estimated fair value of our strategic investments in privately held companies, we utilize observable data available to us as discussed further in Note 8.

We have convertible senior notes, for which the fair value is determined based on the closing trading price per $1,000 of the Notes as of the last day of trading for the period. We consider the fair value of the Notes at December 31, 2022 to be a Level 2 measurement as they are not publicly traded. The fair value of the Notes is primarily affected by the trading price of our common stock and market interest rates.

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

Segment and Geographic Information

Our operations are comprised of two reportable segments: the development, manufacture and sale of fully integrated hardware and cloud-based software solutions that enable law enforcement to capture, securely store, manage, share and analyze video and other digital evidence (collectively, the "Software and Sensors" segment); and the manufacture and sale of conducted electrical devices ("CEDs"), batteries, accessories, extended warranties and other products and services (collectively, the “TASER” segment). In both segments, we report sales of products and services. Service revenue in both segments includes sales related to Axon Evidence. In the Software and Sensors segment, service revenue also includes

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

other recurring cloud-hosted software revenue and related professional services. Collectively, this revenue is sometimes referred to as "Axon Cloud revenue."

Reportable segments are determined based on discrete financial information reviewed by 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 20.

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, 2022, 2021 and 2020, 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 RSUs, we recognize forfeitures as they occur as a reduction to stock-based compensation expense and to additional paid-in-capital.

eXponential Stock Performance Plan

On February 12, 2019, our shareholders approved the 2019 Stock Incentive Plan (the “2019 Plan”), which was adopted by the Board of Directors to reserve a sufficient number of shares to facilitate our eXponential Stock Performance Plan (“XSPP”) and grants of eXponential Stock Units (“XSUs”) under the plan. The XSUs are grants of restricted stock units, each with a term of approximately nine years, that vest in 12 equal tranches. Each of the 12 tranches will vest upon certification by the Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA (CEO Performance Award) have been met for the previous four consecutive fiscal quarters. A total of less than 0.1 million XSUs were granted during the year ended December 31, 2022.

Stock-based compensation expense associated with XSU awards is recognized over the longest explicit, implicit or derived service period for each pair of market capitalization and operational goals, beginning at the point in time when the relevant operational goal is considered probable of being met. The market capitalization goal period and the valuation of each tranche are determined using a Monte Carlo simulation, which is also used as the basis for determining the expected achievement period of the market capitalization goal. The probability of meeting an operational goal and the expected achievement point in time for meeting a probable operational goal are based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis. Even though no tranches of the XSU awards vest unless a market capitalization and a matching operational goal are both achieved, stock-based compensation expense is recognized when an operational goal is considered probable of achievement regardless of whether a market capitalization goal is actually achieved.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Given the complexity of the awards, we utilized Monte Carlo simulations to simulate a range of possible future market capitalizations for the Company over the term of the awards at each of the respective grant dates. The 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 17.6% to the valuation of XSUs because the awards specify a post-vest holding period of 2.5 years for the acquired shares that vest. Certain of the XSU awards specify a post-vest holding period of the longer of 2.5 years or until the next tranche vests. The illiquidity discounts were estimated using the Finnerty model and reduced by the impact of expected payroll and income taxes due upon vesting of the awards, as the related proportion of shares are expected to be sold to satisfy such obligations. We measured the grant date fair value of the XSU awards with the following assumptions: risk-free interest rate of between 0.5% and 4.1%, expected term of between 5.2 and 8.0 years, expected volatility of between 46.4% and 55.8%, and dividend yield of 0.00%.

Stock Options

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

No options were awarded during the years ended December 31, 2022, 2021, or 2020.

Income (Loss) per Common Share

Basic income or loss per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the periods presented. Diluted income (loss) per share reflects the potential dilution from outstanding stock options and unvested restricted stock units. The effects of outstanding stock options, unvested restricted stock units, our 2027 convertible senior notes (the “Notes” or “2027 Notes”), and warrants to acquire the number of shares of our common stock (the “Warrants” or “2027 Warrants”) are excluded from the computation of diluted net income per share in periods in which the effect would be antidilutive. The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):


	For the Year Ended December 31,
	2022		2021		2020
Numerator for basic and diluted earnings per share:
Net income (loss)	$	147,139	$	(60,018)	$	(1,724)
Denominator:
Weighted average shares outstanding-basic		71,093		66,191		61,782
Dilutive effect of stock-based awards		1,441		—		—
Diluted weighted average shares outstanding		72,534		66,191		61,782
Net income (loss) per common share:
Basic	$	2.07	$	(0.91)	$	(0.03)
Diluted	$	2.03	$	(0.91)	$	(0.03)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Potentially dilutive securities that are not included in the calculation of diluted net income per share because doing so would be antidilutive are as follows (in thousands):


	For the Year Ended December 31,
	2022		2021		2020
Stock-based awards		3,264		7,690		12,150
2027 Notes		3,017		—		—
2027 Warrants		3,017		—		—
Total potentially dilutive securities		9,298		7,690		12,150

For additional information regarding our convertible senior notes, refer to Note 12.

Recently Issued Accounting Guidance

Recently Adopted Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. Under ASU 2020-06, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Derivatives and Hedging (Topic 815), or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The guidance also requires the if-converted method to be applied for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. Adoption of the standard requires using either a modified retrospective or a full retrospective approach. Effective January 1, 2022, we adopted ASU 2020-06. There was no impact upon adoption as we had no outstanding debt upon adoption.

In November 2021, FASB issued ASU No. 2021-10, Government Assistance (Topic 832). The guidance improves the transparency of government assistance accounting as it requires business entities to disclose transactions that involve government assistance received if the transactions were accounted for by applying a grant or contribution accounting model by analogy. The ASU is effective for annual periods beginning after December 15, 2021. We adopted ASU 2021-10 on January 1, 2022 and will apply the disclosure requirement prospectively to all transactions within the scope of the amendments that are reflected in the financial statements at the date of the initial application along with new transactions that are entered into after the date of initial application. Adoption of this ASU did not have a material impact on our consolidated financial statements.

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications are not material and had no effect on the reported results of operations.

Correction of an Immaterial Error

During the fourth quarter of 2022 we recorded out of period adjustments related to prior periods reflecting an $8.5 million increase to net sales and a $2.1 million increase to provision for income taxes. This increase to net sales relates primarily to Axon Cloud SaaS, software and professional services performance obligations which were fulfilled in prior periods, including $2.3 million which related to prior years. Based on our quantitative and qualitative analysis, we do not consider the out of period impact to be material to our financial position or results of operations for any prior periods or for the year ended December 31, 2022.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 2 - Revenues

Nature of Products and Services

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


	Year Ended December 31, 2022						Year Ended December 31, 2021
			Software and						Software and
	TASER		Sensors		Total		TASER		Sensors		Total
TASER 7	$	224,905	$	—	$	224,905	$	135,906	$	—	$	135,906
TASER X26P		33,725		—		33,725		40,629		—		40,629
TASER X2		24,068		—		24,068		58,081		—		58,081
TASER Consumer devices		6,420		—		6,420		7,132		—		7,132
Cartridges		181,686		—		181,686		152,842		—		152,842
Axon Body		—		124,164		124,164		—		75,484		75,484
Axon Flex		—		3,031		3,031		—		4,155		4,155
Axon Fleet		—		63,017		63,017		—		24,319		24,319
Axon Dock		—		30,086		30,086		—		24,441		24,441
Axon Evidence and cloud services		18,752		371,889		390,641		9,159		246,005		255,164
Extended warranties		29,008		49,765		78,773		24,125		33,686		57,811
Other		13,002		16,417		29,419		9,053		18,364		27,417
Total	$	531,566	$	658,369	$	1,189,935	$	436,927	$	426,454	$	863,381


	Year Ended December 31, 2020
			Software and
	TASER		Sensors		Total
TASER 7	$	107,506	$	—	$	107,506
TASER X26P		41,724		—		41,724
TASER X2		60,107		—		60,107
TASER Consumer devices		9,407		—		9,407
Cartridges		115,193		—		115,193
Axon Body		—		57,150		57,150
Axon Flex		—		4,082		4,082
Axon Fleet		—		20,108		20,108
Axon Dock		—		19,723		19,723
Axon Evidence and cloud services		2,935		176,797		179,732
Extended warranties		20,754		24,408		45,162
Other		8,926		12,183		21,109
Total	$	366,552	$	314,451	$	681,003

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


	Year Ended December 31,
	2022				2021				2020
United States	$	987,975	83	%	$	686,914	80	%	$	535,079	79	%
Other Countries		201,960	17			176,467	20			145,924	21
Total	$	1,189,935	100	%	$	863,381	100	%	$	681,003	100	%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Contract Balances

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 $8.9 million as of December 31, 2022, and was included in accounts and notes receivable, net on our consolidated balance sheet.

Contract liabilities generally consist of deferred revenue on our subscription programs where we generally invoice customers at 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, 2022 (in thousands):


	Year Ended December 31,
	2022		2021		2020
Contract assets, net	$	242,072	$	210,174	$	84,044
Contract liabilities (deferred revenue)		608,040		451,312		275,181
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the period		261,271		177,812		135,513

During the year ended December 31, 2022, our contract assets balance increased by $31.9 million or 15.2% due to increased sales under subscription plans. Contract liabilities increased $156.7 million or 34.7% for the year ended December 31, 2022 due to increased subscription invoicing for Software and Sensors hardware and services in advance of fulfilling performance obligations to customers.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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


	December 31, 2022						December 31, 2021
	Current		Long-Term		Total		Current		Long-Term		Total
Warranty:
TASER	$	14,207	$	17,618	$	31,825	$	21,257	$	4,766	$	26,023
Software and Sensors		26,229		15,338		41,567		23,175		18,137		41,312
		40,436		32,956		73,392		44,432		22,903		67,335
Hardware:
TASER		49,361		12,640		62,001		12,944		28,727		41,671
Software and Sensors		50,426		109,227		159,653		34,862		81,223		116,085
		99,787		121,867		221,654		47,806		109,950		157,756
Services:
TASER		7,637		9,501		17,138		2,701		3,482		6,183
Software and Sensors		212,177		83,679		295,856		170,652		49,386		220,038
		219,814		93,180		312,994		173,353		52,868		226,221
Total	$	360,037	$	248,003	$	608,040	$	265,591	$	185,721	$	451,312


	December 31, 2022						December 31, 2021
	Current		Long-Term		Total		Current		Long-Term		Total
TASER	$	71,205	$	39,759	$	110,964	$	36,902	$	36,975	$	73,877
Software and Sensors		288,832		208,244		497,076		228,689		148,746		377,435
Total	$	360,037	$	248,003	$	608,040	$	265,591	$	185,721	$	451,312

Remaining Performance Obligations

As of December 31, 2022, we had approximately $4.6 billion of remaining performance obligations, which included both recognized contract liabilities as well as amounts that will be invoiced and recognized in future periods. The remaining performance obligations are limited only to arrangements that meet the definition of a contract under Topic 606 as of December 31, 2022. We expect to recognize between approximately 15% - 25% of this balance over the next twelve months, and expect the remainder to be recognized over the following ten years, subject to risks related to delayed deployments, budget appropriation or other contract cancellation clauses.

Costs to Obtain a Contract

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

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

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of December 31, 2022, our assets for costs to obtain contracts were as follows (in thousands):


	December 31, 2022		December 31, 2021
Current deferred commissions (1)	$	29,405	$	19,962
Deferred commissions, net of current portion (2)		93,213		54,028
	$	122,618	$	73,990

(1)	Current deferred commissions are included within prepaid expenses and other current assets on the accompanying consolidated balance sheet.

(2)	Deferred commissions, net of current portion, are included in other assets on the accompanying consolidated balance sheet.

During the years ended December 31, 2022, 2021 and 2020, we recognized $24.2 million, $16.6 million, and $11.3 million, respectively, of amortization related to deferred commissions. These costs are recorded within sales, general and administrative expenses on the accompanying consolidated statements of operations and comprehensive income (loss).

Significant Judgments

Our contracts with certain municipal government customers may be subject to budget appropriation, other contract cancellation clauses or future periods which are optional. In contracts where the customer’s performance is subject to budget appropriation clauses, we generally consider the likelihood of non-appropriation to be remote when determining the contract term and transaction price. Contracts with other cancellation provisions or optional periods may require judgment in determining the contract term, including the existence of material rights, determining transaction price and identifying the performance obligations.

At times, customers may request changes that either amend, replace or cancel existing contracts. Judgment is required to determine whether the specific facts and circumstances within the contracts require the changes to be accounted for as a separate contract or as a modification. Generally, contract modifications containing additional goods and services that are determined to be distinct and sold at their SSP are accounted for as a separate contract. For contract modifications where both criteria are not met, the original contract is updated and the required adjustments to revenue and contract assets, liabilities, and other accounts are made accordingly.

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately rather than together may require significant judgment. We consider CED devices and related accessories, as well as cameras and related accessories, to be separately identifiable from each other as well as from extended warranties on these products and the SaaS subscriptions to Axon Evidence and other cloud services.

In contracts where there are timing differences between when we transfer a promised good or service to the customer and when the customer pays for that good or service, we have determined that, with the exception of our TASER 60 installment purchase arrangements, our contracts generally do not include a significant financing component. For the years ended December 31, 2022, 2021, and 2020, we recorded interest income of $0.6 million, $1.0 million, and $1.5 million, respectively.

Judgment is required to determine the SSP for each distinct performance obligation. We analyze separate sales of our products and services as a basis for estimating the SSP of our products and services and then use that SSP as the basis for allocating the transaction price when our products and services are sold together in a contract with multiple performance obligations. In instances where the SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions, time value of money and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

those products and services by customers and circumstances. In these instances, we may use information such as geographic region and distribution channel in determining the SSP.

Note 3 - Cash, Cash Equivalents and Investments

The following table summarizes our cash, cash equivalents, marketable securities, and available-for-sale investments at December 31, 2022 (in thousands):


	As of December 31, 2022
			Gross		Gross				Cash and
	Amortized		Unrealized		Unrealized				Cash		Marketable		Short-Term		Long-Term
	Cost		Gains		Losses		Fair Value		Equivalents		Securities		Investments		Investments
Cash	$	143,744	$	—	$	—	$	143,744	$	143,744	$	—	$	—	$	—

Level 1:
Money market funds		2,669		—		—		2,669		2,669		—		—		—
Agency bonds		164,486		6		(263)		164,229		—		—		69,862		94,367
Treasury bills		121,650		18		(3)		121,665		113,100		—		8,565		—
Marketable securities		90,000		—		(50,760)		39,240		—		39,240		—		—
Subtotal		378,805		24		(51,026)		327,803		115,769		39,240		78,427		94,367
Level 2:
State and municipal obligations		4,980		—		(33)		4,947		—		—		4,947		—
Certificate of deposits		5,002		—		—		5,002		—		—		5,002		—
Term deposits		200,000		—		—		200,000		25,000		—		175,000		—
Corporate bonds		257,422		33		(1,159)		256,296		28,883		—		168,074		59,339
U.S. Government		30,525		—		(159)		30,366		—		—		30,366		—
Treasury inflation-protected securities		2,503		—		(2)		2,501		—		—		—		2,501
Commercial paper		160,241		—		—		160,241		40,288		—		119,953		—
Subtotal		660,673		33		(1,353)		659,353		94,171		—		503,342		61,840
Total	$	1,183,222	$	57	$	(52,379)	$	1,130,900	$	353,684	$	39,240	$	581,769	$	156,207

As of December 31, 2022, we had $349.6 million of available-for-sale investments with unrealized losses.

During the year ended December 31, 2021, we acquired 9,000,000 shares of common stock of Cellebrite DI Ltd (“CLBT”) with a fair value of $90.0 million. The CLBT common stock is recorded as marketable securities in the accompanying consolidated balance sheets and its fair value is adjusted every reporting period. Changes in fair value are recorded in the consolidated statement of operations as unrealized gain or (loss) on marketable securities, which is included in interest and other income, net. During the year ended December 31, 2022, we recorded a $32.9 million unrealized loss on marketable securities from our investment in CLBT.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table summarizes our cash, cash equivalents, and available-for-sale investments at December 31, 2021 (in thousands):


	As of December 31, 2021
			Gross		Gross				Cash and
	Amortized		Unrealized		Unrealized				Cash		Marketable		Short-Term		Long-Term
	Cost		Gains		Losses		Fair Value		Equivalents		Securities		Investments		Investments
Cash	$	353,488	$	—	$	—	$	353,488	$	353,488	$	—	$	—	$	—

Level 1:
Money market funds		2,844		—		—		2,844		2,844		—		—		—
Agency bonds		10,700		4		—		10,704		—		—		10,704		—
Marketable securities		90,000		—		(17,820)		72,180		—		72,180		—		—
Subtotal		103,544		4		(17,820)		85,728		2,844		72,180		10,704		—

Level 2:
State and municipal obligations		2,570		—		(5)		2,565		—		—		1,400		1,165
Corporate bonds		32,748		1		(276)		32,473		—		—		2,406		30,067
Subtotal		35,318		1		(281)		35,038		—		—		3,806		31,232
Total	$	492,350	$	5	$	(18,101)	$	474,254	$	356,332	$	72,180	$	14,510	$	31,232

During the year ended December 31, 2021, we sold held-to-maturity securities with a net carrying amount of $165.4 million prior to their maturity.

Note 4 - Expected Credit Losses

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

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

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table provides a roll-forward of the allowance for expected credit losses that is deducted from the amortized cost basis of accounts receivable, notes receivable, and contract assets to present the net amount expected to be collected (in thousands):


	Year Ended December 31, 2022						Year Ended December 31, 2021
	United States		Other countries		Total		United States		Other countries		Total
Balance, beginning of period	$	3,171	$	178	$	3,349	$	2,902	$	474	$	3,376
Provision for (recovery of) expected credit losses		309		391		700		245		(291)		(46)
Amounts written off charged against the allowance		(416)		—		(416)		(54)		—		(54)
Other, including foreign currency translation		—		(3)		(3)		78		(5)		73
Balance, end of period	$	3,064	$	566	$	3,630	$	3,171	$	178	$	3,349

As of December 31, 2022 and December 31, 2021, the allowance for expected credit losses for each type of customer receivable was as follows (in thousands):


	December 31,		December 31,
	2022		2021
Accounts receivable and notes receivable, current	$	2,176	$	2,203
Contract assets, net		1,360		1,010
Long-term notes receivable, net of current portion		94		136
Total allowance for expected credit losses on customer receivables	$	3,630	$	3,349

	2.

Note 5 - Inventory

Inventory consisted of the following at December 31, 2022 and December 31, 2021 (in thousands):


	December 31, 2022		December 31, 2021
Raw materials	$	72,740	$	38,267
Finished goods		129,731		70,421
Total inventory	$	202,471	$	108,688

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 6 - Property and Equipment

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


	Estimated
	Useful Life	December 31, 2022		December 31, 2021
Land	N/A	$	51,612	$	54,868
Building and leasehold improvements	3-39 years		25,874		25,712
Production equipment	3-5 years		57,170		54,090
Computers, equipment and software	3-5 years		25,154		15,343
Furniture and office equipment	3-5 years		7,420		6,838
Vehicles	5 years		4,027		2,932
Capitalized internal software development costs	3-5 years		14,198		12,200
Construction-in-process	N/A		62,283		25,258
Total cost			247,738		197,241
Less: Accumulated depreciation			(77,895)		(58,784)
Property and equipment, net		$	169,843	$	138,457

Construction-in-process included $28.3 million and $12.4 million related to the development of our new campus at December 31, 2022 and December 31, 2021, respectively.

Depreciation and amortization expense related to property and equipment was $20.4 million, $15.8 million and $9.2 million for the years ended December 31, 2022, 2021 and 2020, respectively, of which $8.5 million, $6.3 million and $4.0 million was included in cost of sales for the respective years.

Note 7 - Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the year ended December 31, 2022 were as follows (in thousands):


			Software and
	TASER		Sensors		Total
Balance, beginning of period	$	1,396	$	42,196	$	43,592
Goodwill acquired		1,674		—		1,674
Purchase accounting adjustments		—		(58)		(58)
Foreign currency translation adjustments		(113)		(112)		(225)
Balance, end of period	$	2,957	$	42,026	$	44,983

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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


		December 31, 2022						December 31, 2021
		Gross				Net		Gross				Net
	Useful	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Life	Amount		Amortization		Amount		Amount		Amortization		Amount
Amortizable (definite-lived) intangible assets:
Domain names	5 ‑ 10 years	$	3,043	$	(1,823)	$	1,220	$	3,043	$	(1,518)	$	1,525
Issued patents	5 ‑ 25 years		2,981		(1,507)		1,474		3,061		(1,457)		1,604
Issued trademarks	3 ‑ 15 years		1,119		(713)		406		1,130		(643)		487
Customer relationships	4 ‑ 8 years		4,892		(2,995)		1,897		4,985		(2,439)		2,546
Non-compete agreements	3 ‑ 4 years		447		(447)		—		454		(444)		10
Developed technology	3 ‑ 5 years		18,586		(13,244)		5,342		18,060		(10,465)		7,595
Total amortizable			31,068		(20,729)		10,339		30,733		(16,966)		13,767
Non-amortizable (indefinite-lived) intangible assets:
TASER trademark			900		—		900		900		—		900
My90 trademark			168		—		168		168		—		168
Patents and trademarks pending			751		—		751		635		—		635
Total non-amortizable			1,819		—		1,819		1,703		—		1,703
Total intangible assets		$	32,887	$	(20,729)	$	12,158	$	32,436	$	(16,966)	$	15,470

Amortization expense of intangible assets was $4.0 million, $2.9 million and $3.3 million for the years ended December 31, 2022, 2021 and 2020, respectively. Estimated amortization for intangible assets with definitive lives for the next five years ended December 31, and thereafter, is as follows (in thousands):


2023	$	3,786
2024		3,722
2025		887
2026		688
2027		354
Thereafter		902
Total	$	10,339

Note 8 – Strategic Investments

Strategic investments include investments in a number of non-public technology-driven companies. We account for strategic investments under the ASC Topic 321 measurement alternative for equity securities without readily determinable fair values, as there are no quoted market prices for the investments. The investments are measured at cost less impairment, adjusted for observable price changes and are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

In conjunction with certain of our strategic investments, we have the ability to commit additional capital over time through warrants and call options; for some investments, the exercisability and exercise prices are conditional on the achievement of certain performance metrics.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables provide a roll-forward of the balance of strategic investments (in thousands):


	Year Ended December 31, 2022								Year Ended December 31, 2021
	Strategic investments		Warrants			Call options	Total		Strategic investments		Warrants			Total
Balance, beginning of period	$	80,775	$	2,745	$	—	$	83,520	$	9,500	$	2,211	$	11,711
Investments		56,914		459		17,233		74,606		45,500		—		45,500
Observable price changes:
Realized gains		—		—		—		—		12,312		—		12,312
Unrealized gains		44,376		28,539		—		72,915		28,009		534		28,543
Unrealized losses		(1,108)		—		—		(1,108)		—		—		—
Exercises		96,719		(30,089)		—		66,630		—		—		—
Sales		—		—		—		—		(14,546)		—		(14,546)
Balance, end of period	$	277,676	$	1,654	$	17,233	$	296,563	$	80,775	$	2,745	$	83,520


	Inception to date
	Strategic investments		Warrants			Call options	Total
Investments	$	109,482	$	3,047	$	17,233	$	129,762
Observable price changes:
Realized gains		12,312		—		—		12,312
Unrealized gains		74,817		29,073		—		103,890
Unrealized losses		(1,108)		(377)		—		(1,485)
Exercises		96,719		(30,089)		—		66,630
Sales		(14,546)		—		—		(14,546)
Balance, end of period	$	277,676	$	1,654	$	17,233	$	296,563

As part of our strategy, we continuously evaluate opportunities for strategic investments that align with our mission. During the year ended December 31, 2022 our investment areas included real-time crime center software, drones and related software, biometric sensors, and weapon detection solutions.

In the year ended December 31, 2022, we exercised warrants in one of our strategic investees for a total exercise price of $6.6 million, resulting in an unrealized gain of $60.1 million that was recognized in earnings for the year ended December 31, 2022. The estimated fair value of the investments were calculated using valuation techniques that included both observable and unobservable inputs. This estimated fair value reflects a value that was lower than the issue per share of the new equity issued by the strategic investees because of different characteristics of the newly issued equity instruments compared to our existing investments. The valuation techniques included both Level 2 and Level 3 inputs as defined by ASC Topic 820.

Note 9 – Variable Interest Entities

We evaluate our investments and other significant relationships to determine whether any investee is a variable interest entity (“VIE”). If we conclude that an investee is a VIE, we evaluate our power to direct the activities of the investee, our obligation to absorb the expected losses of the investee and our right to receive the expected residual returns of the investee to determine whether we are the primary beneficiary of the investee. If we are the primary beneficiary of a VIE, we consolidate such entity and reflect the non-controlling interest of other beneficiaries of that entity.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

We determine whether we are the primary beneficiary of a VIE by performing an analysis that principally considers:

	●	The VIE’s purpose, design, and risks the VIE was designed to create and pass through to its variable interest holders;

	●	The VIE’s capital structure;

	●	The terms between the VIE and its variable interest holders and other parties involved with the VIE; and

	●	Related-party affiliations.

The table below presents a summary of the nonconsolidated VIEs in which we hold variable interests:


	December 31, 2022		December 31, 2021
Total nonconsolidated variable interest entities:
Carrying value of variable interest - assets	$	11,530	$	895
Carrying value of variable interest - liabilities		—		—
Maximum exposure to loss:
Non-public equity (1)		11,530		895
Total	$	11,530	$	895

(1) The maximum exposure to loss is limited to the carrying value of the interest.

In the table above:

	●	The nature of our variable interest is described in the row under maximum exposure to loss.

	●	Our exposure to the obligations of the VIE is limited to our interest in the entity.

The primary purpose of our U.S-based, nonconsolidated VIE investments is to create strategic partnerships within market-leading providers of law enforcement technology solutions. We present all variable interests in unconsolidated VIEs as strategic investments within the long-term assets section of the condensed consolidated balance sheet.

We have provided financial support to the nonconsolidated VIEs in exchange for preferred equity as well as other financial instruments that give us the ability to commit additional capital overtime. Financial support provided to the nonconsolidated VIEs is used to continue to finance their operations. We have no explicit or implicit arrangements to provide additional financial support to the VIEs and we have no liabilities to the VIEs as of December 31, 2022 and December 31, 2021.

Note 10 - Other Long-Term Assets

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


	December 31, 2022		December 31, 2021
Cash surrender value of corporate-owned life insurance policies	$	4,274	$	5,276
Deferred commissions (1)		93,213		54,028
Restricted cash		54		57
Operating lease assets		38,370		23,270
Deferred implementation costs (2)		3,045		3,915
Prepaid expenses, deposits and other		20,660		11,701
Total other long-term assets	$	159,616	$	98,247

(1)	Represents the incremental costs of obtaining contracts with customers, which consist primarily of sales commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contracts and amortized

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	consistent with the recognition timing of the revenue for the underlying performance obligations. See Note 2 “Costs to Obtain a Contract”.

(2)	During the year ended December 31, 2021, we completed an implementation of several software-as-a-service applications supporting our internal operations. Following the implementation, we placed $4.3 million of deferred implementation costs assets related to these applications into service.

Note 11 - Accrued Liabilities

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


	December 31, 2022		December 31, 2021
Accrued salaries, benefits and bonus	$	97,882	$	62,425
Accrued professional, consulting and lobbying fees		3,861		7,152
Accrued warranty expense		811		2,822
Accrued income and other taxes		13,559		3,736
Accrued inventory in transit		10,548		9,945
Other accrued expenses		29,273		17,627
Accrued liabilities	$	155,934	$	103,707

Note 12 – Convertible Senior Notes

2027 Notes

In December 2022, we issued $690.0 million aggregate principal amount of our 0.50% Convertible Senior Notes due 2027 in a private offering, which aggregate principal amount included the exercise in full of the initial purchasers’ option to purchase up to an additional $90.0 million principal amount of the Notes. The Notes mature on December 15, 2027 and bear interest at a fixed rate of 0.500% per annum, payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2023. The total net proceeds from the issuance of the Notes, after deducting initial purchasers' discounts and commissions and estimated debt issuance costs of $16.2 million, were approximately $673.8 million.

The Notes are our senior unsecured obligations and rank senior in right of payment to any indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.

Upon conversion, the Notes will be settled in cash up to the aggregate principal amount of the Notes to be converted, and in cash, shares of our common stock or a combination thereof, at our option, in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal amount of the Notes being converted.


	December 31, 2022
				Initial Conversion
	Maturity	Initial Conversion		Rate per		Initial Number
	Date	Price per Share		$1,000 Par Value		of Shares
2027 Notes	December 15, 2027	$	228.73		4.3720 shares	3,016,680

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Notes are convertible, in multiples of $1,000 principal amount, at the option of the holders prior to the close of business on the business day immediately preceding September 15, 2027 only under the following circumstances:

	•	during any calendar quarter commencing after the calendar quarter ending on March 31, 2023 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

	•	during the five business day period after any ten consecutive trading day period (“the 2027 Measurement Period”) in which the trading price (as defined in the 2027 indenture governing the Notes) per $1,000 principal amount of the Notes for each trading day of the 2027 Measurement Period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate in effect on each such trading day;

	•	if we call any or all of the Notes for redemption, but only with respect to the Notes called (or deemed called) for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date;

	•	upon the occurrence of specified corporate events as set forth within the indenture governing the Notes.

On or after September 15, 2027 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their notes, in integral multiples of $1,000 principal amount, at their option, regardless of the foregoing conditions.

If we undergo a fundamental change (as defined in the indenture governing the Notes), subject to certain conditions, holders may require us to repurchase for cash all or any portion of their Notes, in principal amounts of $1,000 or a multiple thereof, at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events or if we issue a notice of redemption, it will, under certain circumstances, increase the conversion rate for holders who elect to convert their notes in connection with such corporate event or during the relevant redemption period.

We may not redeem the Notes prior to December 22, 2025. We may redeem for cash all or any portion of the Notes, at our option, on or after December 22, 2025 and prior to December 15, 2027, if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. No sinking fund is provided for the Notes.

In accounting for the Notes after adoption of ASU 2020-06, the Notes are accounted for as a single liability, and the carrying amount of the Notes is $674.0 million as of December 31, 2022, with principal of $690.0 million, net of unamortized debt issuance costs of $16.0 million. The Notes were classified as long-term liabilities as of December 31, 2022. The issuance costs related to the Notes are being amortized to interest expense over the contractual term of the Notes at an effective interest rate of 0.99%.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The net carrying amount of the Notes was as follows (in thousands):


	December 31, 2022		December 31, 2021
Principal	$	690,000	$	—
Unamortized debt issuance costs		(16,033)		—
Convertible notes carrying amount, net	$	673,967	$	—

The total fair value of the Notes was $687.3 million as of December 31, 2022. The fair value was determined based on the closing trading price per $1,000 of the Notes as of the last day of trading for the period. We consider the fair value of the Notes at December 31, 2022 to be a Level 2 measurement as they are not publicly traded. The fair value of the Notes is primarily affected by the trading price of our common stock and market interest rates.

There have been no changes to the initial conversion price of the Notes since issuance.

Interest expense related to the Notes was as follows (in thousands):


	December 31, 2022		December 31, 2021
Contractual interest expense	$	211	$	—
Amortization of debt issuance costs		198		—
Total interest expense	$	409	$	—

Note Hedge

To reduce the impact of potential economic dilution upon conversion of the Notes, we entered into a convertible note hedge transaction (the “Note Hedge” or “2027 Note Hedge”) with certain investment banks, with respect to our common stock, concurrently with the issuance of the 2027 Notes.


	Purchase Price			Shares Purchased
2027 Note Hedge	$	194,994			3,016,680

The Note Hedge covers shares of our common stock at a strike price per share that corresponds to the initial conversion price of the respective Notes, subject to adjustment, and are exercisable upon conversion of the Notes. If exercised, we may elect to receive cash, shares of our common stock, or a combination of cash and shares. We have accounted for the aggregate amount of purchase price for the Note Hedge as a reduction to additional paid-in capital. The Note Hedge will expire upon the maturity of the Notes. The Note Hedge is intended to reduce the potential economic dilution upon conversion of the Notes in the event that the fair value per share of our common stock at the time of exercise is greater than the conversion price of the Notes. The Note Hedge is a separate transaction and is not part of the terms of the Notes. Holders of the Notes do not have any rights with respect to the Note Hedge. The Note Hedge does not impact earnings per share, as it was entered into to offset any dilution from the Notes. As of December 31, 2022, 3,016,680 shares remain subject to the Note Hedge.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note Warrants


	Proceeds			Shares			Strike Price			First Expiration
2027 Warrants	$	124,269			3,016,680		$	338.86			March 15, 2028

Separately, we entered into warrant transactions with certain investment banks, whereby we sold warrants to acquire, subject to adjustment, the number of shares of our common stock shown in the table above. If the average market value per share of our common stock, on each expiration date exceeds the strike price of the Warrants expiring on that day, such Warrants would have a dilutive effect on our earnings per share to the extent we report net income. According to the terms of the Warrants, the Warrants will be automatically exercised over a 60-trading day period beginning on the first expiration date as set forth above.

Note 13 - Commitments and Contingencies

Data Storage Commitment

In June 2022, we entered into a purchase agreement for cloud hosting with a six year term beginning July 1, 2022. The purchase agreement includes a total commitment of $425.0 million. Storage fees under this agreement were $23.8 million for the year ended December 31, 2022. The remaining purchase commitment at December 31, 2022 was $401.2 million.

Purchase Commitments

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, 2022, we had approximately $499.7 million of open purchase orders and $415.4 million of other purchase obligations, inclusive of the data storage commitment noted above.

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 four lawsuits in which the plaintiffs allege either wrongful death or personal injury in situations in which a TASER CED was used by law enforcement officers in connection with arrests or training. While the facts vary from case to case, these product liability claims typically allege defective product design, manufacturing, and/or failure to warn. They seek compensatory and sometimes punitive damages, often in unspecified amounts.

We continue to aggressively defend all product litigation. As a general rule, it is our policy not to settle suspect injury or death cases. Exceptions are sometimes made where the settlement is strategically beneficial to us. Due to the confidential nature of our litigation strategy and the confidentiality agreements that are executed in the event of a settlement, we do not identify or comment on specific settlements by case or amount. Based on current information, we do not believe that the outcome of any such legal proceeding will have a material effect on our financial position, results of operations, or cash flows. We are self-insured for the first $5.0 million of any product claim made after 2014. No judgment or settlement has ever exceeded this amount in any products case. We continue to maintain product liability insurance coverage, including an insurance policy fronting arrangement, above our self-insured retention with various limits depending on the policy period.

U.S. Federal Trade Commission Litigation

The U.S. Federal Trade Commission (“FTC”) filed an administrative enforcement action in January 2020 regarding our May 2018 acquisition of an insolvent body worn camera competitor, Vievu LLC. The FTC alleges the

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

merger was anticompetitive and adversely affected the body worn camera and digital evidence management market for “large metropolitan police departments,” which we deny. The administrative hearing remains stayed pending our federal court constitutional challenges to the FTC’s structure and administrative processes. Even if we ultimately are required to divest Vievu and other assets, any such result will not interfere with our ability to meet contractual obligations or implement our solutions.

Prior to the FTC’s enforcement action, we sued the FTC in federal court in the District of Arizona for declaratory and injunctive relief alleging the FTC’s structure and administrative processes violate Article II of the U.S. Constitution and our Fifth Amendment rights to due process and equal protection. The district court dismissed the action, without prejudice, for lack of jurisdiction. The Ninth Circuit affirmed in a split decision but granted our motion to stay the appellate mandate pending the filing of our petition for certiorari with the U.S. Supreme Court. On January 24, 2022, the Supreme Court granted our petition. Oral argument was held November 7, 2022. The FTC’s administrative case will remain stayed pending resolution of the Supreme Court proceedings.

In parallel to these matters, we are evaluating strategic alternatives to litigation, which we might pursue if determined to be in the best interests of shareholders and customers. This could include a divestiture of the Vievu entity and/or related assets and the licensure of certain intellectual and other intangible property. While we continue to believe the acquisition of Vievu was lawful and a 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 Axon.

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, 2022, we have determined that it is not reasonably possible that these losses, if any, from these lawsuits will individually, or in the aggregate, materially affect our results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on our operating results, financial condition or cash flows.

Off-Balance Sheet Arrangements

Under certain circumstances, we use letters of credit and surety bonds to guarantee our performance under various contracts, principally in connection with the installation and integration of Axon cameras and related technologies. Certain of our letters of credit and surety bonds have stated expiration dates with others being released as the contractual performance terms are completed. At December 31, 2022, we had outstanding letters of credit issued under our credit facility of $7.0 million that are expected to expire throughout 2023 and 2024. Additionally, we had $18.0 million of outstanding surety bonds at December 31, 2022, with $7.5 million expiring in 2023 and the remaining $10.5 million expiring in 2024.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 14 - Income Taxes

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


	2022		2021		2020
United States	$	191,631	$	(146,995)	$	(11,529)
Foreign		4,887		5,620		5,238
Total	$	196,518	$	(141,375)	$	(6,291)

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


	2022		2021		2020
Current:
Federal	$	10,804	$	(331)	$	5,277
State		10,118		85		3,886
Foreign		2,892		(60)		1,943
Total current		23,814		(306)		11,106
Deferred:
Federal		26,238		(65,557)		(10,175)
State		(2,002)		(15,266)		(3,111)
Foreign		(2,146)		478		(3,131)
Total deferred		22,090		(80,345)		(16,417)
Tax impact of unrecorded tax benefits liability		3,475		(706)		744
Provision for income taxes (Income tax benefit)	$	49,379	$	(81,357)	$	(4,567)

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


	2022			2021			2020
Federal income tax at the statutory rate	$	41,283		$	(29,691)		$	(1,321)
State income taxes, net of federal benefit		7,928			(12,717)			935
Difference between statutory and foreign tax rates		(428)			(155)			(86)
Other permanent differences (1)		1,771			1,842			794
Foreign derived intangible income deduction		(2,597)			—			(902)
Executive compensation limitation		5,784			180,509			15,463
R&D credits		(13,340)			(34,376)			(10,246)
Return to provision adjustment		(757)			204			(1,078)
Change in liability for unrecognized tax benefits		3,215			10,188			987
Excess stock-based compensation benefit		(4,616)			(205,483)			(9,002)
Change in valuation allowance		10,216			8,961			163
Tax effects of intercompany transactions		(417)			96			(389)
Other		1,337			(735)			115
Provision for income taxes (Income tax benefit)	$	49,379		$	(81,357)		$	(4,567)
Effective tax rate		25.1	%		57.5	%		72.6	%

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

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):


	2022		2021
Deferred income tax assets:
Net operating loss carryforward	$	4,874	$	68,353
Deferred revenue		47,586		27,031
Deferred compensation		1,575		1,414
Lease liability		9,973		5,886
Inventory reserve		1,279		684
Stock based compensation		15,374		10,913
Amortization		2,820		2,672
R&D tax credit carryforward		12,826		29,249
Reserves, accruals, and other		17,732		14,717
R&D capitalization, net		46,122		—
Convertible debt, net		48,378		—
Total deferred income tax assets		208,539		160,919
Deferred income tax liabilities:
Customer contract asset		(552)		(1,104)
Right of use asset		(8,748)		(5,008)
Depreciation		(10,272)		(8,938)
Strategic investments		(4,615)		(2,653)
Prepaid expenses		(1,119)		(594)
Other		—		(72)
Total deferred income tax liabilities		(25,306)		(18,369)
Net deferred income tax assets before valuation allowance		183,233		142,550
Valuation allowance		(26,368)		(16,168)
Net deferred income tax assets	$	156,865	$	126,382

We have $89.5 million of state net operating losses (“NOLs”) which will expire at various dates between 2026 and 2041 or carry forward indefinitely. We have $4.4 million of federal R&D credits, which expire between 2034 and 2041, and $0.1 million of which is subject to limitation under IRC Section 382. We have $21.6 million of state R&D credits carrying forward, which expire at various dates between 2023 and 2037, or carry forward indefinitely. In the U.K., we have $4.1 million of NOLs which may be carried forward indefinitely.

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

As of December 31, 2022, management continues to believe the positive evidence from projected future earnings outweighs the negative evidence and a valuation allowance is only needed on specific deferred tax assets. We have concluded that a valuation allowance is necessary against unrealized investment losses as well as transaction costs incurred in connection with certain investments. Additionally, we do have Arizona R&D tax credits expiring unutilized each year; therefore, management has concluded that it is more likely than not that our Arizona R&D deferred tax asset will not be realized, and a valuation allowance has been recorded against this net asset.

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 asset where there is not an expectation that the asset may be realized. Therefore, we continue to have a partial valuation allowance for Australia.

We consider the undistributed earnings of certain non-U.S. subsidiaries to be indefinitely reinvested outside of the 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 and we have not made a provision for U.S. or additional foreign withholding taxes of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. We have determined the amount of deferred tax liability related to investments in these foreign subsidiaries is immaterial. If we decide to repatriate the undistributed foreign earnings, we will recognize the income tax 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 and state 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 $21.5 million as of December 31, 2022. Should the unrecognized benefit of $21.5 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):


	2022		2021		2020
Balance, beginning of period	$	18,249	$	7,657	$	6,861
Increase (decrease) in previous year tax positions		232		22		(34)
Increase in current year tax positions		3,343		11,416		950
Decrease due to lapse of statutes of limitations		(332)		(846)		(120)
Balance, end of period	$	21,492	$	18,249	$	7,657

Federal income tax returns for 2019 through 2021 remain open to examination by the U.S. Internal Revenue Service (the “IRS”), while state and local income tax returns for 2018 through 2021 also generally remain open to examination by state taxing authorities. The 2008 through 2017 state and local income tax returns are only open to the extent that net operating loss or other tax attributes carrying forward from those years were utilized in 2018 through 2021. The foreign tax returns for 2018 through 2021 also generally remain open to examination, although some foreign statutes can audit returns up to ten years.

We recognize interest and penalties related to unrecognized tax benefits within the provision (benefit) for income tax expense line in the accompanying consolidated statements of operations and comprehensive income (loss). As of December 31, 2022, and 2021, we had accrued interest of $0.3 million and $0.2 million, respectively.

Note 15 - Line of Credit

In December 2022, we entered into a Credit Agreement that provides for a senior unsecured multi-currency revolving credit facility in an aggregate principal amount of up to $200.0 million, $30.0 million of which is available for the issuance of letters of credit. The credit agreement will mature on the earlier of December 15, 2027 or the date that is six months prior to the stated maturity date of the 0.50% convertible senior notes due 2027 unless such Notes have been redeemed, repurchased, converted or defeased in full. Additionally, the credit agreement has an accordion feature which allows for an increase in the total line of credit up to $300.0 million, subject to each lender’s sole discretion.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of December 31, 2022, there were no borrowings under the line. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. As of December 31, 2022, we had letters of credit outstanding of approximately $7.0 million under the facility and available borrowing of $193.0 million, excluding amounts available under the accordion feature. Advances under the line of credit bear interest at Term SOFR plus 1.25 to 1.75% per year determined in accordance with a pricing grid based on our net debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio.

We are required to comply with a net leverage ratio, defined as consolidated total indebtedness to EBITDA, of no greater than 3.50 to 1.00 based upon a trailing four fiscal quarter period. At December 31, 2022, our leverage ratio was 0.97 to 1.00. Additionally, we must comply with a consolidated interest coverage ratio, defined as EBITDA to consolidated interest expense, of no less than 3.50 to 1.00 based upon a trailing four fiscal quarter end. We are compliant with the consolidated interest coverage ratio, which is not meaningful for the year ended December 31, 2022.

Note 16 - 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 talented personnel. Service-based grants generally have a vesting period of 1 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.

In May 2022, our shareholders approved the Axon Enterprise, Inc. 2022 Stock Incentive Plan (the “2022 Plan”) authorizing an additional 2.5 million shares, plus remaining available shares under prior plans, for issuance under the new plan. Combined with the 2019 Plan and other legacy stock incentive plans, there are 2.7 million shares available for grant as of December 31, 2022.

Performance-based stock awards

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

For performance-based options with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized for each pair of performance and market conditions over the longer of the expected achievement period of the performance and market conditions, beginning at the point in time that the relevant performance condition is considered probable of achievement. The fair value of such awards is estimated on the grant date using Monte Carlo simulations.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CEO Performance Award

On May 24, 2018, our stockholders approved the Board of Directors’ grant of 6,365,856 stock option awards to Patrick W. Smith, our CEO (the “CEO Performance Award”). The CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational goals (performance conditions) and market capitalization goals (market conditions), assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each attainment date. Each of the 12 vesting tranches of the CEO Performance Award have a 10-year contractual term and will vest upon certification by the Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of the following eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA have been met for the previous four consecutive fiscal quarters. Adjusted EBITDA for purposes of the CEO Performance Award ("Adjusted EBITDA (CEO Performance Award)") is defined as net income (loss) attributable to common stockholders before interest expense, interest and other income (such as dividends) earned on investments in marketable securities, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense.


Revenue Goal (1)(in thousands)	Achievement Status	Adjusted EBITDA(in thousands)	Achievement Status
Goal #1, $710,058	Achieved	Goal #1, $125,000	Achieved
Goal #2, $860,058	Achieved	Goal #2, $155,000	Achieved
Goal #3, $1,010,058	Achieved	Goal #3, $175,000	Achieved
Goal #4, $1,210,058	Probable	Goal #4, $190,000	Achieved
Goal #5, $1,410,058	Not Applicable	Goal #5, $200,000	Achieved
Goal #6, $1,610,058	Not Applicable	Goal #6, $210,000	Achieved
Goal #7, $1,810,058	Not Applicable	Goal #7, $220,000	Achieved
Goal #8, $2,010,058	Not Applicable	Goal #8, $230,000	Achieved

(1)	In connection with the business acquisition that was completed during the three months ended June 30, 2018, the revenue goals were adjusted for the acquiree’s Target Revenue, as defined in the CEO Performance Award agreement.

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

The first ten market capitalization goals have been achieved as of December 31, 2022. As of December 31, 2022, 5.3 million stock options have been certified by the Compensation Committee and vested. The eleventh market capitalization goal has not yet been attained, though the related operational goal has been achieved as of December 31, 2022. As twelve operational goals have been achieved or are considered probable of achievement, we recorded stock-based compensation expense of $243.9 million related to the CEO Performance Award from the grant date through December 31, 2022. The number of stock options that would vest related to the remaining unvested tranches is approximately 1.1 million shares. As of December 31, 2022, we had $2.1 million of total unrecognized stock-based

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

compensation expense for the performance goals that were considered probable of achievement, which will be recognized over a weighted-average period of 0.2 years.

eXponential Stock Performance Plan

The XSUs are grants of Restricted Stock Units (“RSUs”), each with a term of approximately nine years, that vest in 12 equal tranches. Each of the 12 tranches will vest upon certification by the Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA (CEO Performance Award) have been met for the previous four consecutive fiscal quarters. Beginning with the quarter ended June 30, 2021, new XSU grants are divided into a reduced number of tranches depending on employee eligibility and current market capitalization attainment.

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

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

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

The market capitalization and operational goals are identical to the CEO Performance Award, but a different number of shares is used to calculate the market capitalization goals if shares outstanding exceed the XSU Maximum. Additionally, because the grant date is different than that of the CEO Performance Award, the measurement period for market capitalization is not identical. As of December 31, 2022, actual shares outstanding exceeded the XSU Maximum. Accordingly, market capitalization as calculated for the purposes of achieving additional XSPP market capitalization goals uses the lower XSU Maximum share amount rather than actual shares outstanding.

The first nine market capitalization goals have been achieved as of December 31, 2022. The tenth and eleventh market capitalization goals have not yet been attained, though the related operational goals have been achieved as of December 31, 2022. The first XSU tranche vested in March 2021, the second and third tranches vested in May 2021, five tranches vested in September 2021, and one tranche vested in December 2021. As all twelve operational goals have been achieved or are considered probable of achievement, we recorded stock-based compensation expense of $186.2 million related to the XSU awards from their respective grant dates through December 31, 2022. The number of XSU awards that would vest related to the remaining three tranches is approximately 1.2 million shares. As of December 31, 2022, we had

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

$14.7 million of total unrecognized stock-based compensation expense, which will be recognized over a weighted-average period of 1.2 years.

Restricted Stock Units

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


	2022				2021			2020
			Weighted			Weighted			Weighted
	Number		Average		Number	Average		Number	Average
	of		Grant-Date		of	Grant-Date		of	Grant-Date
	Units		Fair Value		Units	Fair Value		Units	Fair Value
Units outstanding, beginning of year		1,115	$	133.40	1,107	$	76.10	1,249	$	45.47
Granted		1,142		143.03	686		165.67	577		100.76
Released		(541)		117.49	(554)		66.23	(598)		40.68
Forfeited		(151)		138.99	(124)		100.64	(121)		52.40
Units outstanding, end of year		1,565		145.48	1,115		133.40	1,107		76.10
Aggregate intrinsic value at year end	$	259,729

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $165.93 per share on December 30, 2022, multiplied by the number of RSUs outstanding. The fair value as of the respective vesting dates of RSUs that vested during the year was $84.9 million, $96.4 million, and $56.0 million for the years ended December 31, 2022, 2021, and 2020, respectively.

Certain RSUs that vested in the year ended December 31, 2022 were net-share settled, such that we withheld shares to cover the employees’ tax obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld related to RSUs during 2022 were eleven thousand and had a value of approximately $1.6 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.

As of December 31, 2022, we had $192.7 million of total unrecognized stock-based compensation expense related to RSUs under our stock plans for shares that are expected to vest. We expect to recognize the cost related to the RSUs over a weighted average period of 2.32 years. RSUs are released when vesting requirements are met.

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Performance Stock Units

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


	2022				2021			2020
			Weighted			Weighted			Weighted
	Number		Average		Number	Average		Number	Average
	of		Grant-Date		of	Grant-Date		of	Grant-Date
	Units		Fair Value		Units	Fair Value		Units	Fair Value
Units outstanding, beginning of year		1,499	$	39.86	5,618	$	35.71	6,033	$	34.47
Granted		158		106.57	309		77.53	417		58.11
Released		(78)		107.58	(4,345)		37.16	(184)		27.79
Forfeited		(210)		41.62	(83)		40.91	(648)		40.83
Units outstanding, end of year		1,369		43.43	1,499		39.86	5,618		35.71
Aggregate intrinsic value at year end	$	227,125

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $165.93 per share, multiplied by the number of PSUs outstanding. As of December 31, 2022, there was $19.2 million in total unrecognized stock-based compensation expense related to PSUs under our stock plans for shares that are expected to vest. We expect to recognize the cost related to the PSUs over a weighted average period of 1.17 years. PSUs are released when vesting requirements are met.

As of December 31, 2022, the performance criteria had been met for approximately twenty thousand of the 1.4 million PSUs outstanding.

Certain PSUs that vested in the year ended December 31, 2022 were net-share settled such that we withheld shares to cover the employees’ tax obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld related to PSUs were approximately twenty-six thousand and had a value of $3.3 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. Payments for the employees’ tax obligations are reflected as a financing activity within the consolidated statements of cash flows. We record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital.

Stock Option Activity

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


	2022				2021			2020
			Weighted			Weighted			Weighted
	Number		Average		Number	Average		Number	Average
	of		Exercise		of	Exercise		of	Exercise
	Options		Price		Options	Price		Options	Price
Options outstanding, beginning of year		2,438	$	28.58	6,366	$	28.58	6,431	$	28.34
Granted		—		—	—		—	—		—
Exercised		—		—	(3,928)		28.58	(65)		4.52
Expired / terminated		—		—	—		—	—		—
Options outstanding, end of year		2,438		28.58	2,438		28.58	6,366		28.58
Options exercisable, end of year		1,377		28.58	1,377		28.58	530		28.58

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

We did not grant any stock options in 2022, 2021 or 2020. No options were exercised in the year ending December 31, 2022. The total intrinsic value of options exercised was $571.4 million and $5.1 million for the years ended December 31, 2021 and 2020, respectively. The intrinsic value for options exercised was calculated as the difference between the exercise price of the underlying stock option awards and the market price of 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, 2022 (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	1,377	$	28.58	5.16	1,377	$	28.58	5.16

The aggregate intrinsic value of options exercisable at December 31, 2022 was $189.1 million, respectively. Aggregate intrinsic value represents the difference between the exercise price of the underlying stock option awards and the closing market price of our common stock of $165.93 on December 30, 2022.

At December 31, 2022, we had 1.1 million unvested options outstanding with a weighted average exercise price of $28.58 per share, weighted average grant-date fair value of $35.80 per share and weighted average remaining contractual life of 5.16 years. The aggregate intrinsic value of unvested options at December 31, 2022 was $145.7 million.

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):


	2022		2021		2020
Cost of product and service sales	$	4,607	$	5,844	$	3,464
Sales, general and administrative expenses		51,301		238,813		103,860
Research and development expenses		50,268		58,674		26,248
Total stock-based compensation expense	$	106,176	$	303,331	$	133,572
Income tax benefit	$	25,154	$	30,586	$	29,329

Stock Inducement Plan

In September 2022, our Board of Directors adopted the Axon Enterprise, Inc. 2022 Stock Inducement Plan (the “2022 Inducement Plan”) pursuant to which we reserved 250,000 shares of common stock for issuance under the Inducement Plan. In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules, awards under the Inducement Plan may only be made to individuals not previously employed by us (or following such individuals’ bona fide periods of non-employment by us), as an inducement material to the individuals’ entry into employment with us. The terms and conditions of the 2022 Inducement Plan are substantially similar to our 2019 Stock Inducement Plan. There are approximately 0.1 million shares available for grant as of December 31, 2022.

At-the-Market equity offering

During the year ended December 31, 2021, we sold 577,956 shares of our common stock under our "at-the-market" equity offering program (the “ATM”). We generated approximately $107.6 million in aggregate gross proceeds from sales under the ATM. Aggregate net proceeds from the ATM were $105.4 million after deducting related expenses, including

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

commissions to the sales agent of $1.6 million and issuance costs of $0.5 million. During the year ending December 31, 2022, no shares were sold under the ATM.

We may sell up to a total of 3.0 million shares of our common stock under the ATM, of which approximately 2.4 are remaining. The ATM expires on April 20, 2024. We intend to use the net proceeds from the ATM for general corporate purposes, which may include, among other things, providing capital to satisfy a portion of the tax obligations related to the vesting and settlement of stock compensation awards granted to our executive officers and other employees under our stock incentive plans, to support our growth, and to acquire or invest in product lines, products, services, technologies or facilities.

Stock Repurchase Plan

In February 2016, our Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of our outstanding common stock subject to stock market conditions and corporate considerations. As of December 31, 2022 and 2021, $16.3 million remained available under the plan for future purchases.

Note 17 – Accumulated Other Comprehensive Income (loss)

The following table reflects the changes in accumulated other comprehensive income (loss), net of tax (in thousands):



		Unrealized Gains (Losses)
		on Available-for-Sale		Foreign Currency
		Investments		Translation	Total
Balance, December 31, 2019	$	—	$	(1,096)	$	(1,096)
Other comprehensive income		—		1,237		1,237
Balance, December 31, 2020	$	—	$	141	$	141
Other comprehensive loss		(207)		(1,251)		(1,458)
Balance, December 31, 2021	$	(207)	$	(1,110)	$	(1,317)
Other comprehensive loss		(1,044)		(4,818)		(5,862)
Balance, December 31, 2022	$	(1,251)	$	(5,928)	$	(7,179)

Note 18 - Leases

Lease Obligations

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

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

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Our leases have remaining terms of less than 1 to approximately 11 years, some of which include one or more options to renew for up to 5 years, and some of which include options to terminate the leases within 1 year. The exercise of lease renewal options is at our sole discretion and such options are included in ROU assets and liabilities for renewal periods that are reasonably certain of exercise. Certain of our lease agreements include stated rental payment escalations. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We had no finance leases as of December 31, 2022.


Leases (in thousands)	Classification	December 31, 2022		December 31, 2021
Assets
Operating lease assets	Other assets	$	38,370	$	23,270
Liabilities
Current
Operating	Other current liabilities	$	6,357	$	6,540
Noncurrent
Operating	Other long-term liabilities		37,143		20,440
Total lease liabilities		$	43,500	$	26,980

The components of operating lease expense were as follows for the years ended December 31 (in thousands):


	Classification	2022		2021		2020
Operating lease expense	Sales, general and administrative expenses (1)	$	4,388	$	3,820	$	3,762
	Research and development expense		4,315		3,675		2,995
	Total operating lease expense (2)		8,703		7,495		6,757

Sublease income	Other income		—		—		(55)
Net lease expense		$	8,703	$	7,495	$	6,702

(1)	An immaterial portion of operating lease expense is included within cost of sales.

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

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


	Twelve Months Ended			Twelve Months Ended
	December 31, 2022			December 31, 2021
Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	9,216		$	7,506
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases		21,815			6,726
Weighted average remaining lease term:
Operating leases		7.2	years		4.2	years
Weighted average discount rate:
Operating leases		5.44	%		2.73	%

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Future minimum lease payments under non-cancellable leases as of December 31, 2022 were as follows (in thousands):


	Operating
2023		8,448
2024		8,936
2025		8,990
2026		5,374
2027		3,566
Thereafter		20,579
Total minimum lease payments		55,893
Less: Amount representing interest		(12,393)
Present value of lease payments	$	43,500

As of December 31, 2022, we do not have any leases that have not yet commenced that create significant rights and obligations for us.

Note 19 - 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 sponsor defined contribution plans in Australia, Canada, Finland, and the United Kingdom.

Our matching contributions for all defined contribution plans for the years ended December 31, 2022, 2021 and 2020, were approximately $10.9 million, $7.4 million and $5.6 million, respectively.

Note 20 - 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, 2022
			Software and
	TASER		Sensors		Total
Net sales from products	$	511,010	$	290,378	$	801,388
Net sales from services		20,556		367,991		388,547
Net sales		531,566		658,369		1,189,935
Cost of product sales		194,957		168,262		363,219
Cost of service sales		—		98,078		98,078
Cost of sales		194,957		266,340		461,297
Gross margin	$	336,609	$	392,029	$	728,638

Research and development	$	51,607	$	182,203	$	233,810


	For the year ended December 31, 2021
			Software and
	TASER		Sensors		Total
Net sales from products	$	426,916	$	181,609	$	608,525
Net sales from services		10,011		244,845		254,856
Net sales		436,927		426,454		863,381
Cost of product sales		149,739		110,359		260,098
Cost of service sales		145		62,228		62,373
Cost of sales		149,884		172,587		322,471
Gross margin	$	287,043	$	253,867	$	540,910

Research and development	$	46,136	$	147,890	$	194,026


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

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

AXON ENTERPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 21 - Supplemental Disclosure to Cash Flows

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


	2022		2021		2020
Supplemental disclosures:
Cash and cash equivalents	$	353,684	$	356,332	$	155,440
Restricted cash	$	1,868	$	106	$	111
Total cash, cash equivalents and restricted cash shown in the statements of cash flows	$	355,552	$	356,438	$	155,551

Cash paid for income taxes, net of refunds	$	10,508	$	5,108	$	10,893

Non-cash transactions:
Property and equipment purchases in accounts payable	$	1,056	$	1,994		878
Non-cash purchase consideration related to business combinations		—		3,920		—

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, 2022 and 2021, the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Inter_nal Control—Integrated Framework_ issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 28, 2023 expressed an adverse 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 matter

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

Revenue Recognition – Bundled Arrangements with Multiple Performance Obligations

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

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

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

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

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

	•	Identification of all promises in the contract and whether such promises are limited to distinct explicit goods or services or whether they may be implied.

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

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

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

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

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

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

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

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

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

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

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

/s/ GRANT THORNTON LLP

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

Phoenix, Arizona

February 28, 2023

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