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, 2023 and 2022		63
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2023, 2022, and 2021		64
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2023, 2022, and 2021		65
Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022, and 2021		66
Notes to Consolidated Financial Statements		67
Report of Grant Thornton LLP, Independent Registered Public Accounting Firm (PCAOB ID No. 248)		102

AXON ENTERPRISE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	December 31,		December 31,
	2023		2022
ASSETS
Current assets:
Cash and cash equivalents	$	598,545	$	353,684
Marketable securities		77,940		39,240
Short-term investments		644,054		581,769
Accounts and notes receivable, net of allowance of $2,392 and $2,176 as of December 31, 2023 and December 31, 2022, respectively		417,690		358,190
Contract assets, net		275,779		196,902
Inventory		269,855		202,471
Prepaid expenses and other current assets		112,786		73,022
Total current assets		2,396,649		1,805,278
Property and equipment, net		200,533		169,843
Deferred tax assets, net		229,513		156,866
Intangible assets, net		19,539		12,158
Goodwill		57,945		44,983
Long-term investments		—		156,207
Long-term notes receivable, net		2,588		5,210
Long-term contract assets, net		77,710		45,170
Strategic investments		231,730		296,563
Other long-term assets		220,638		159,616
Total assets	$	3,436,845	$	2,851,894
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	88,326	$	59,918
Accrued liabilities		188,230		155,934
Current portion of deferred revenue		491,691		360,037
Customer deposits		21,935		20,399
Other current liabilities		9,787		6,358
Total current liabilities		799,969		602,646
Deferred revenue, net of current portion		281,852		248,003
Liability for unrecognized tax benefits		18,049		10,745
Long-term deferred compensation		11,342		6,285
Deferred tax liability, net		—		1
Long-term lease liabilities		33,550		37,143
Convertible notes, net		677,113		673,967
Other long-term liabilities		2,936		4,613
Total liabilities		1,824,811		1,583,403
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of December 31, 2023 and December 31, 2022, respectively		—		—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 75,301,424 and 71,474,581 shares issued and outstanding as of December 31, 2023 and December 31, 2022, respectively		1		1
Additional paid-in capital		1,347,410		1,174,594
Treasury stock at cost, 20,220,227 shares as of December 31, 2023 and December 31, 2022		(155,947)		(155,947)
Retained earnings		431,249		257,022
Accumulated other comprehensive loss		(10,679)		(7,179)
Total stockholders’ equity		1,612,034		1,268,491
Total liabilities and stockholders’ equity	$	3,436,845	$	2,851,894

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,
	2023		2022		2021
Net sales from products	$	967,711	$	801,388	$	608,525
Net sales from services		595,680		388,547		254,856
Net sales		1,563,391		1,189,935		863,381
Cost of product sales		450,718		363,219		260,098
Cost of service sales		157,291		98,078		62,373
Cost of sales		608,009		461,297		322,471
Gross margin		955,382		728,638		540,910
Sales, general and administrative		496,874		401,575		515,007
Research and development		303,719		233,810		194,026
Total operating expenses		800,593		635,385		709,033
Income (loss) from operations		154,789		93,253		(168,123)
Interest income, net		42,112		4,294		1,483
Other income (loss), net		(41,901)		98,971		25,265
Income (loss) before provision (benefit) for income taxes		155,000		196,518		(141,375)
Provision (benefit) for income taxes		(19,227)		49,379		(81,357)
Net income (loss)	$	174,227	$	147,139	$	(60,018)
Net income (loss) per share:
Basic	$	2.35	$	2.07	$	(0.91)
Diluted	$	2.31	$	2.03	$	(0.91)
Weighted average shares outstanding:
Basic		74,195		71,093		66,191
Diluted		75,456		72,534		66,191

Net income (loss)	$	174,227	$	147,139	$	(60,018)
Foreign currency translation adjustments		(4,352)		(4,818)		(1,251)
Unrealized gain (loss) on available-for-sale investments		852		(1,044)		(207)
Comprehensive income (loss)	$	170,727	$	141,277	$	(61,476)

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, 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
Issuance of common stock	467,594		—		94,705	—		—		—		—		94,705
Issuance of common stock under employee plans, net of shares withheld for payroll taxes	1,441,279		—		(107,894)	—		—		—		—		(107,894)
Stock options exercised	1,907,026		—		54,503	—		—		—		—		54,503
Stock-based compensation	—		—		131,358	—		—		—		—		131,358
Issuance of common stock for business combination contingent consideration and related tax effects	10,944		—		144	—		—		—		—		144
Net income	—		—		—	—		—		174,227		—		174,227
Other comprehensive loss, net	—		—		—	—		—		—		(3,500)		(3,500)
Balance, December 31, 2023	75,301,424	$	1	$	1,347,410	20,220,227	$	(155,947)	$	431,249	$	(10,679)	$	1,612,034

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,
	2023		2022		2021
Cash flows from operating activities:
Net income (loss)	$	174,227	$	147,139	$	(60,018)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Stock-based compensation		131,358		106,176		303,331
Deferred income taxes		(73,002)		22,090		(81,303)
Realized and unrealized loss (gain) on strategic investments and marketable securities, net		41,785		(98,943)		(23,035)
Depreciation and amortization		32,638		24,381		18,694
Bond amortization		(16,449)		(1,463)		5,217
Noncash lease expense		6,846		6,725		5,573
Unrecognized tax benefits		4,775		3,475		(706)
Amortization of issuance costs		3,126		198		—
Other noncash items		2,322		6,530		24
Change in assets and liabilities:
Accounts and notes receivable and contract assets		(172,524)		(73,228)		(205,769)
Inventory		(71,896)		(95,987)		(18,272)
Prepaid expenses and other assets		(102,370)		(52,207)		(40,158)
Accounts payable, accrued and other liabilities		64,384		80,757		45,301
Deferred revenue		164,043		159,718		175,615
Net cash provided by operating activities		189,263		235,361		124,494
Cash flows from investing activities:
Purchases of investments		(545,988)		(764,374)		(362,479)
Proceeds from call / maturity of investments		657,418		72,138		718,617
Proceeds from sale of strategic investments		—		—		14,546
Purchases of property, plant and equipment		(59,635)		(55,802)		(49,886)
Proceeds from disposal of property and equipment		98		287		43
Purchase of intangible assets		(635)		(307)		(392)
Strategic investments		(17,692)		(80,805)		(45,500)
Business acquisition, net of cash acquired		(21,090)		(2,104)		(22,393)
Net cash provided by (used in) investing activities		12,476		(830,967)		252,556
Cash flows from financing activities:
Net proceeds from equity offering		94,705		(74)		105,514
Proceeds from options exercised		54,503		—		51,614
Income and payroll tax payments for net-settled stock awards		(107,894)		(4,870)		(331,309)
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		41,314		598,100		(174,181)
Effect of exchange rate changes on cash and cash equivalents		2,065		(3,380)		(1,982)
Net increase (decrease) in cash and cash equivalents		245,118		(886)		200,887
Cash and cash equivalents and restricted cash, beginning of period		355,552		356,438		155,551
Cash and cash equivalents and restricted cash, end of period	$	600,670	$	355,552	$	356,438

Supplemental disclosures:
Cash and cash equivalents	$	598,545	$	353,684	$	356,332
Restricted cash (Note 1)		2,125		1,868		106
Total cash, cash equivalents and restricted cash shown in the statements of cash flows	$	600,670	$	355,552	$	356,438

Cash paid for interest	$	3,508	$	—	$	—
Cash paid for income taxes, net of refunds		64,492		10,508		5,108

Non-cash transactions
Property and equipment purchases in accounts payable and accrued liabilities	$	238	$	1,056	$	1,994
Non-cash purchase consideration related to business combinations	$	—	$	—	$	3,920

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

Note 1 - Organization and Summary of Significant Accounting Policies

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

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

Basis of Presentation and Use of Estimates

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“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, commercial paper, corporate bonds, term deposits, U.S. Government 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 sheets and subsequent improvements in expected credit losses are recognized as a reversal of an amount in the allowance account. If we have the intent to sell the security or it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis, then the allowance for the credit loss is written-off and the excess of the amortized cost basis of the asset over its fair value is recorded in the consolidated statements of operations. We do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their

amortized cost bases. There were no credit losses recorded on our investment portfolio during the years ended December 31, 2023 and 2022.

Restricted Cash

Restricted cash balances of $2.1 million and $1.9 million as of December 31, 2023 and 2022, 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, 2023, approximately $2.0 million was included in prepaid expenses and other assets on our consolidated balance sheet, with the remainder in other long-term assets.

Inventory

Inventories are stated at lower of cost or realizable values. Cost of inventories are determined on the first-in, first-out basis utilizing a standard cost methodology. 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 economic life.

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.

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

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

Valuation of Goodwill, Intangible and Long-lived Assets

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 events and circumstances could include 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 values 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 test goodwill and intangible assets for impairment on an annual basis on December 31, 2023 and on an interim basis when certain events and circumstances exist.

During the year ended December 31, 2023, we recorded $0.3 million of impairment charges primarily related to construction in process. 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.

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 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”) offering (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, we also recognize revenue from training, professional services and other software and SaaS services. We apply the five-step model outlined in Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts from Customers (“Topic 606”). For additional discussion of the adoption of Topic 606, see Note 2.

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

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

Performance obligations to deliver products, including CEDs, Axon cameras and related accessories, such as docks, cartridges and batteries, 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 has 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 has 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 12-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 12-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, contract assets, notes receivable and off-balance-sheet exposures 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, contract assets and off-balance-sheet exposures are presented net of a reserve for expected credit losses, which totaled $4.0 million and $3.6 million as of December 31, 2023 and 2022, 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.

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 $1.9 million, $2.3 million and $2.6 million in the years ended December 31, 2023, 2022 and 2021, respectively. Advertising costs are included in sales, general and administrative (“SG&A”) expenses in the consolidated statements of operations.

Warranty Reserves

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. The company estimates and records a liability for standard warranty at the time products are sold. The estimates are based on historical experience and reflect management’s best estimates of costs to be incurred over the warranty period. Adjustments may be required when actual or projected costs differ. Variations in component failure rates, repair costs and the point of failure within the product life cycle are key drivers that impact our periodic re-assessment of the warranty liability.

Revenue related to separately priced extended warranties is initially recorded as deferred revenue at its allocated amount and subsequently recognized as net sales on a straight-line basis over the warranty service period. Costs related to

extended warranties are charged to cost of product and service sales when the costs become probable and can be reasonably estimated

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


	Year Ended December 31,
	2023		2022		2021
Balance, beginning of period	$	811	$	2,822	$	769
Utilization of reserve		(1,499)		(2,209)		(873)
Warranty expense		8,062		198		2,926
Balance, end of period	$	7,374	$	811	$	2,822

Research and Development Expenses

We expense as incurred research and development (“R&D”) costs that do not meet the qualifications to be capitalized. We incurred R&D expense of $303.7 million, $233.8 million and $194.0 million in 2023, 2022 and 2021, 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.

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 13 for additional information regarding the change in unrecognized tax benefits.

Concentration of Credit Risk and Major Customers / Suppliers

Financial instruments that potentially subject us to concentrations of credit risk consist of accounts and notes receivable, contract assets and cash. Historically, we have experienced an immaterial level of write-offs related to uncollectible accounts.

We maintain the majority of our cash at two depository institutions. As of December 31, 2023, the aggregate balances in such accounts were $560.4 million. Our balances with these two institutions regularly exceed Federal Deposit Insurance Corporation insured limits for domestic deposits and various deposit insurance programs covering our deposits in Australia, Belgium, 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, 2023, 2022 or 2021. At December 31, 2023 and 2022, 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 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 United States, China, 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 substantially all of the injection molded component tooling, 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 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, 2023 were composed of money market funds, commercial paper, corporate bonds, term deposits, U.S. Government bonds, agency bonds, U.S. Treasury bills and U.S. Treasury Inflation-Protected Securities. Cash equivalents and investments at December 31, 2022 were composed 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. See additional disclosure regarding the fair values of our cash equivalents and investments in Note 3. Included in the balance of other assets as of December 31, 2023 and 2022 was $7.6 million and $4.3 million, respectively, related to corporate-owned life insurance policies that are used to fund our deferred compensation plan. We determine the fair values 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 interest and other income, net in the consolidated statement of operations.

We have strategic investments in various unconsolidated affiliates as of December 31, 2023. The estimated fair values of the investments was determined based on Level 3 inputs. In determining the estimated fair values of our strategic investments in privately held companies, we utilize observable data available to us as discussed further in Note 8.

We have outstanding our 0.50% convertible senior notes due 2027 (the “Notes” or “2027 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, 2023 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 sheets.

Segment and Geographic Information

Our operations comprise 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 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 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 19.

For a summary of net sales by geographic area, see Note 2. The majority of our sales to international customers are transacted in foreign currencies and are attributed to each country based on the shipping address of the distributor or customer. For the years ended December 31, 2023, 2022 and 2021, no individual country outside the United States represented more than 10% of net sales. Substantially all of our assets are located in the United States.

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. When determining the grant date fair value of stock-based awards, we consider whether an adjustment is required to the observable market price or volatility of our common stock used in the valuation as a result of material non-public information. 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 Axon Enterprise, Inc. 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 (“2019 XSPP”) and grants of eXponential Stock Units (“2019 XSUs”) under the plan. The XSUs are grants of performance-based RSUs, each with a term of approximately nine years, that vest in 12 substantially equal tranches. Each of the 12 tranches vest upon certification by the Compensation Committee of the Board of Directors (the “Compensation Committee”) that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA have been met for the previous four consecutive fiscal

quarters. As of December 31, 2023, all 12 market capitalization and operational goals have been achieved and certified by the Compensation Committee. We recorded stock-based compensation expense of $199.9 million related to the 2019 XSU awards from their respective grant dates through December 31, 2023. As of December 31, 2023, no unrecognized stock-based compensation expense remained under the 2019 XSPP.

Stock-based compensation expense associated with 2019 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 2019 XSU awards vest unless a market capitalization and a matching operational goal are both achieved, stock-based compensation expense is recognized when an operational goal is considered probable of achievement regardless of whether a market capitalization goal is actually achieved.

Given the complexity of the awards, we utilized Monte Carlo simulations to simulate a range of possible future market capitalizations for the Company over the term of the awards at each of the respective grant dates. The average of all iterations of the simulation was used as the basis for the valuation and market capitalization goal derived service period for each tranche. Additionally, we applied an illiquidity discount of between 10.3% and 17.6% to the valuation of 2019 XSUs because the awards specify a post-vest holding period of 2.5 years for the acquired shares that vest. Certain of the 2019 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 2019 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, our shareholders approved the Board of Directors’ grant of 6,365,856 performance-based stock options to Patrick W. Smith, our Chief Executive Officer (the “2018 CEO Performance Award”). The 2018 CEO Performance Award consists of 12 substantially equal 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 Chief Executive Officer or as both Executive Chairman and Chief Product Officer and service through each vesting date. Stock-based compensation expense associated with the 2018 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. As of December 31, 2023, all 12 market capitalization and operational goals have been achieved and certified by the Compensation Committee. As a result, 6.4 million stock options have vested. As all 12 operational goals have been achieved, we recorded stock-based compensation expense of $246.0 million related to the 2018 CEO Performance Award. As of December 31, 2023, no unrecognized stock-based compensation expense remained under the 2018 CEO Performance Award.

No stock options were awarded during the years ended December 31, 2023, 2022 or 2021.

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 RSUs. The effects of outstanding stock options, unvested RSUs, our 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,
	2023		2022		2021
Numerator for basic and diluted earnings per share:
Net income (loss)	$	174,227	$	147,139	$	(60,018)
Denominator:
Weighted average shares outstanding-basic		74,195		71,093		66,191
Dilutive effect of stock-based awards		1,261		1,441		—
Diluted weighted average shares outstanding		75,456		72,534		66,191
Net income (loss) per common share:
Basic	$	2.35	$	2.07	$	(0.91)
Diluted	$	2.31	$	2.03	$	(0.91)

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,
	2023		2022		2021
Stock-based awards		1,014		3,264		7,690
2027 Notes		3,017		3,017		—
2027 Warrants		3,017		3,017		—
Total potentially dilutive securities		7,048		9,298		7,690

For additional information regarding our 2027 Notes, refer to Note 11.

Recently Issued Accounting Guidance

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. ASU 2023-07 requires annual and interim disclosures that are expected to improve reportable segment disclosures, primarily through enhanced disclosures about significant segment expenses. The new standard is effective for our Annual Report on Form 10-K for the year ending December 31, 2024, and subsequent interim periods, with early adoption permitted. We are currently evaluating the impact of this update on our consolidated financial statements.

In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 is intended to enhance the transparency and decision usefulness of income tax. The provisions of ASU 2023-09 are effective for our Annual Report on Form 10-K for the year ending December 31, 2025, with early adoption permitted. We are currently evaluating the impact of this update 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.

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, 2023						Year Ended December 31, 2022
			Software and						Software and
	TASER		Sensors		Total		TASER		Sensors		Total
TASER Devices (Professional)	$	333,923		—		333,923	$	282,698	$	—	$	282,698
Cartridges		193,285		—		193,285		181,686		—		181,686
Axon Evidence and Cloud Services		34,775		566,183		600,958		18,752		371,889		390,641
Extended Warranties		31,689		62,577		94,266		29,008		49,765		78,773
Axon Body Cameras and Accessories		—		183,023		183,023		—		157,281		157,281
Axon Fleet Systems		—		118,129		118,129		—		63,017		63,017
Other (1) (2)		18,933		20,874		39,807		19,422		16,417		35,839
Total	$	612,605	$	950,786	$	1,563,391	$	531,566	$	658,369	$	1,189,935


	Year Ended December 31, 2021
			Software and
	TASER		Sensors		Total
TASER Devices (Professional)	$	234,616	$	—	$	234,616
Cartridges		152,842		—		152,842
Axon Evidence and Cloud Services		9,159		246,005		255,164
Extended Warranties		24,125		33,686		57,811
Axon Body Cameras and Accessories		—		104,080		104,080
Axon Fleet Systems		—		24,319		24,319
Other (1) (2)		16,185		18,364		34,549
Total	$	436,927	$	426,454	$	863,381

(1) TASER segment “Other” includes smaller categories, such as Virtual Reality hardware, CED training revenue such as revenue associated with our Master Instructor School, and TASER consumer device sales.

(2) Software and Sensors segment “Other” includes revenue from items including Signal Sidearm, Interview Room and Axon Air.

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


	Year Ended December 31,
	2023				2022				2021
United States	$	1,338,208	86	%	$	987,975	83	%	$	686,914	80	%
Other Countries		225,183	14			201,960	17			176,467	20
Total	$	1,563,391	100	%	$	1,189,935	100	%	$	863,381	100	%

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 12 months were $4.8 million as of December 31, 2023, and were 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 composed 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, Axon 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, 2023 (in thousands):


	Year Ended December 31,
	2023		2022		2021
Contract assets, net	$	353,489	$	242,072	$	210,174
Contract liabilities (deferred revenue)		773,543		608,040		451,312
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the period		363,341		261,271		177,812

During the year ended December 31, 2023, our contract assets balance increased by $111.4 million, or 46.0%, due to increased sales under subscription plans. Contract liabilities increased $165.5 million, or 27.2%, for the year ended December 31, 2023 due to increased subscription invoicing for Software and Sensors hardware and services in advance of fulfilling performance obligations to customers.

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


	December 31, 2023						December 31, 2022
	Current		Long-Term		Total		Current		Long-Term		Total
Warranty:
TASER	$	14,773	$	18,828	$	33,601	$	14,207	$	17,618	$	31,825
Software and Sensors		33,940		16,036		49,976		26,229		15,338		41,567
		48,713		34,864		83,577		40,436		32,956		73,392
Hardware:
TASER		42,464		29,689		72,153		49,361		12,640		62,001
Software and Sensors		62,635		117,024		179,659		50,426		109,227		159,653
		105,099		146,713		251,812		99,787		121,867		221,654
Services:
TASER		7,939		3,983		11,922		7,637		9,501		17,138
Software and Sensors		329,940		96,292		426,232		212,177		83,679		295,856
		337,879		100,275		438,154		219,814		93,180		312,994
Total	$	491,691	$	281,852	$	773,543	$	360,037	$	248,003	$	608,040


	December 31, 2023						December 31, 2022
	Current		Long-Term		Total		Current		Long-Term		Total
TASER	$	65,176	$	52,500	$	117,676	$	71,205	$	39,759	$	110,964
Software and Sensors		426,515		229,352		655,867		288,832		208,244		497,076
Total	$	491,691	$	281,852	$	773,543	$	360,037	$	248,003	$	608,040

Remaining Performance Obligations

As of December 31, 2023, we had approximately $7.1 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, 2023. We currently expect to recognize between approximately 15% - 25% of this balance over the next 12 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 SG&A expenses on the consolidated statements of operations and comprehensive income.

As of December 31, 2023, our assets for costs to obtain contracts were as follows (in thousands):


	December 31, 2023		December 31, 2022
Current deferred commissions (1)	$	46,335	$	29,405
Deferred commissions, net of current portion (2)		119,401		93,213
	$	165,736	$	122,618

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

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

During the years ended December 31, 2023, 2022 and 2021, we recognized $34.0 million, $24.2 million, and $16.6 million, respectively, of amortization related to deferred commissions. These costs are recorded within SG&A expenses on the 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 that 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 Axon 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, 2023, 2022, and 2021, we recorded interest income of $0.3 million, $0.6 million and $1.0 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 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, 2023 (in thousands):


	As of December 31, 2023
			Gross		Gross				Cash and
	Amortized		Unrealized		Unrealized				Cash		Marketable		Short-Term		Long-Term
	Cost		Gains		Losses		Fair Value		Equivalents		Securities		Investments		Investments
Cash	$	406,743	$	—	$	—	$	406,743	$	406,743	$	—	$	—	$	—

Level 1:
Money market funds		1,470		—		—		1,470		1,470		—		—		—
Agency bonds		222,057		2		(174)		221,885		101,635		—		120,250		—
U.S. Government		238,747		120		(237)		238,630		—		—		238,630		—
Treasury bills		148,063		28		—		148,091		88,697		—		59,394		—
Marketable securities		90,000		—		(12,060)		77,940		—		77,940		—		—
Subtotal		700,337		150		(12,471)		688,016		191,802		77,940		418,274		—
Level 2:
Term deposits		128,205		—		—		128,205		—		—		128,205		—
Corporate bonds		80,646		8		(165)		80,489		—		—		80,489		—
Treasury Inflation-Protected Securities		2,635		—		(5)		2,630		—		—		2,630		—
Commercial paper		14,456		—		—		14,456		—		—		14,456		—
Subtotal		225,942		8		(170)		225,780		—		—		225,780		—
Total	$	1,333,022	$	158	$	(12,641)	$	1,320,539	$	598,545	$	77,940	$	644,054	$	—

As of December 31, 2023, we had $420.4 million of available-for-sale investments with unrealized losses. Of this amount, $138.8 million has been in a continuous unrealized loss position for 12 months or longer, with total gross unrealized losses of $0.3 million. We do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases.

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 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, 2023, we recorded a $38.7 million unrealized gain on marketable securities from our investment in CLBT.

The following table summarizes our cash, cash equivalents 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. Of this amount, $29.7 million was in a continuous unrealized loss position for 12 months or longer, with total gross unrealized losses of $0.9 million.

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, contract assets, notes receivable and off-balance-sheet exposures 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.

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


	Year Ended December 31, 2023						Year Ended December 31, 2022
	United States		Other countries		Total		United States		Other countries		Total
Balance, beginning of period	$	3,064	$	566	$	3,630	$	3,171	$	178	$	3,349
Provision for expected credit losses		815		269		1,084		309		391		700
Amounts written off charged against the allowance		(510)		(244)		(754)		(416)		—		(416)
Other, including foreign currency translation		—		6		6		—		(3)		(3)
Balance, end of period (1)	$	3,369	$	597	$	3,966	$	3,064	$	566	$	3,630

(1)	Ending balance includes allowance for credit losses recorded in other current liabilities on the consolidated balance sheets, which is related to off-balance-sheet credit exposure.

As of December 31, 2023 and December 31, 2022, the allowance for expected credit losses for each type of customer receivable and off-balance-sheet exposures were as follows (in thousands):


	December 31, 2023		December 31, 2022
Accounts receivable and notes receivable, current	$	2,392	$	2,176
Contract assets, net		1,516		1,360
Long-term notes receivable, net of current portion		44		94
Other current liabilities		14		—
Total allowance for expected credit losses on customer receivables	$	3,966	$	3,630

	2.

Note 5 - Inventory

Inventory consisted of the following at December 31, 2023 and December 31, 2022 (in thousands):


	December 31, 2023		December 31, 2022
Raw materials	$	104,112	$	72,740
Finished goods		165,743		129,731
Total inventory	$	269,855	$	202,471

Note 6 - Property and Equipment

Property and equipment consisted of the following at December 31, 2023 and December 31, 2022 (in thousands):


	Estimated
	Useful Life	December 31, 2023		December 31, 2022
Land	N/A	$	51,612	$	51,612
Building and leasehold improvements	3-39 years		32,092		25,874
Production equipment	3-5 years		105,245		57,170
Computers, equipment and software	3-5 years		30,778		25,154
Furniture and office equipment	3-5 years		8,383		7,420
Vehicles	5 years		7,451		4,027
Capitalized internal software development costs	3-5 years		14,799		14,198
Construction-in-process	N/A		55,397		62,283
Total cost			305,757		247,738
Less: Accumulated depreciation			(105,224)		(77,895)
Property and equipment, net		$	200,533	$	169,843

Construction-in-process included $31.0 million and $28.3 million related to the development of our new campus at December 31, 2023 and December 31, 2022, respectively.

Depreciation and amortization expense related to property and equipment was $28.1 million, $20.4 million and $15.8 million for the years ended December 31, 2023, 2022 and 2021, respectively, of which $13.6 million, $8.5 million and $6.3 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, 2023 were as follows (in thousands):


			Software and
	TASER		Sensors		Total
Balance, beginning of period	$	2,957	$	42,026	$	44,983
Goodwill acquired		—		12,751		12,751
Purchase accounting adjustments		—		(19)		(19)
Foreign currency translation adjustments		27		203		230
Balance, end of period	$	2,984	$	54,961	$	57,945

Intangible assets (other than goodwill) consisted of the following at December 31, 2023 and December 31, 2022 (in thousands):


		December 31, 2023						December 31, 2022
		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	$	(2,128)	$	915	$	3,043	$	(1,823)	$	1,220
Issued patents	5 ‑ 25 years		3,222		(1,707)		1,515		2,981		(1,507)		1,474
Issued trademarks	3 ‑ 15 years		1,333		(817)		516		1,119		(713)		406
Customer relationships	4 ‑ 8 years		5,530		(3,620)		1,910		4,892		(2,995)		1,897
Non-compete agreements	3 ‑ 4 years		448		(448)		—		447		(447)		—
Developed technology	3 ‑ 5 years		29,402		(16,562)		12,840		18,586		(13,244)		5,342
Total amortizable			42,978		(25,282)		17,696		31,068		(20,729)		10,339
Non-amortizable (indefinite-lived) intangible assets:
Trademarks			1,068		—		1,068		1,068		—		1,068
Patents and trademarks pending			775		—		775		751		—		751
Total non-amortizable			1,843		—		1,843		1,819		—		1,819
Total intangible assets		$	44,821	$	(25,282)	$	19,539	$	32,887	$	(20,729)	$	12,158

Amortization expense of intangible assets was $4.5 million, $4.0 million and $2.9 million for the years ended December 31, 2023, 2022 and 2021, respectively. Estimated amortization for intangible assets with definitive lives for the next five years ended December 31, and thereafter, is as follows (in thousands):


2024	$	5,210
2025		2,375
2026		2,176
2027		1,814
2028		1,755
Thereafter		4,366
Total	$	17,696

Note 8 – Strategic Investments

Strategic investments include investments in a number of non-public technology driven companies. We account for strategic investments under ASC 321 measurement alternative for equity securities without readily determinable fair values, as there are no quoted market prices for the investments. The investments are measured at cost less impairment, adjusted for observable price changes and are assessed for impairment whenever events or changes in circumstances indicate that the fair value may be less than its carrying value.

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.

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


	Year Ended December 31, 2023								Year Ended December 31, 2022
	Strategic investments		Warrants			Call options	Total		Strategic investments		Warrants			Call Options		Total
Balance, beginning of period	$	277,676	$	1,654	$	17,233	$	296,563	$	80,775	$	2,745	$	—	$	83,520
Investments		15,016		1,176		—		16,192		56,914		459		17,233		74,606
Fair value adjustments
Unrealized gains		—		—		—		—		44,376		28,539		—		72,915
Unrealized losses and impairments		(81,196)		(1,329)		—		(82,525)		(1,108)		—		—		(1,108)
Exercises		1,500		—		—		1,500		96,719		(30,089)		—		66,630
Balance, end of period	$	212,996	$	1,501	$	17,233	$	231,730	$	277,676	$	1,654	$	17,233	$	296,563


	Inception to date
	Strategic investments		Warrants			Call options	Total
Investments	$	124,498	$	4,222	$	17,233	$	145,953
Fair value adjustments
Realized gains		12,312		—		—		12,312
Unrealized gains		74,817		29,073		—		103,890
Unrealized losses and impairments		(82,304)		(1,705)		—		(84,009)
Exercises		98,219		(30,089)		—		68,130
Sales		(14,546)		—		—		(14,546)
Balance, end of period	$	212,996	$	1,501	$	17,233	$	231,730

In accordance with ASC 321-10-35-3, we determined an impairment indicator existed for one of our strategic investments as of June 30, 2023. Thus, we performed a quantitative analysis and concluded the fair value was less than the carrying value. An unrealized impairment loss of $73.8 million related to our strategic investment and related warrants was recorded in interest and other income, net on our consolidated statement of operations for the year ended December 31, 2023.

Note 9 - Other Long-Term Assets

Other long-term assets consisted of the following at December 31, 2023 and December 31, 2022 (in thousands):


	December 31, 2023		December 31, 2022
Deferred commissions	$	119,401	$	93,213
Deferred cost of goods sold		43,678		11,475
Operating lease assets		36,155		38,370
Cash surrender value of corporate-owned life insurance policies		7,558		4,274
Deferred implementation costs		2,175		3,045
Prepaid expenses, deposits and other		11,671		9,239
Total other long-term assets	$	220,638	$	159,616

Note 10 - Accrued Liabilities

Accrued liabilities consisted of the following at December 31, 2023 and December 31, 2022 (in thousands):


	December 31, 2023		December 31, 2022
Accrued salaries, commissions, benefits and bonus	$	125,636	$	97,882
Accrued professional, consulting and lobbying fees		7,377		3,861
Accrued warranty expense		7,374		811
Accrued income and other taxes		5,784		13,559
Accrued inventory in transit		12,197		10,548
Other accrued expenses		29,862		29,273
Accrued liabilities	$	188,230	$	155,934

Note 11 – Convertible Senior Notes

2027 Notes

In December 2022, we issued $690.0 million aggregate principal amount of our 2027 Notes 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 0.50% 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 effective interest rate for the Notes was 0.99% and included interest payable and amortization of debt issuance cost.

If we undergo a fundamental change (as defined in the indenture governing the Notes), holders may require us to repurchase for cash all or any portion of their Notes 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, up to but excluding the fundamental change repurchase date. In addition, following certain corporate events or if we issue a notice of redemption, it will increase the conversion rate for holders who elect to convert their Notes in connection with such corporate event or during the relevant redemption period.

The following table summarizes the carrying value of the Notes (in thousands):


	December 31, 2023		December 31, 2022
Principal	$	690,000	$	690,000
Unamortized debt issuance costs		(12,887)		(16,033)
Convertible notes carrying amount, net	$	677,113	$	673,967

We consider the fair value of the Notes to be a Level 2 measurement. The estimated fair value of the Notes at December 31, 2023 and December 31, 2022 is based on the closing trading price per $1,000 of the Notes as of the last day of trading for each period as follows (in millions):


	December 31, 2023			December 31, 2022
2027 Notes	$	873.3		$	687.3

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


	December 31, 2023		December 31, 2022
Contractual interest expense	$	3,450	$	211
Amortization of debt issuance costs		3,126		198
Total interest expense	$	6,576	$	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 is 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 market 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, 2023, 3,016,680 shares remain subject to the Note Hedge.

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 12 - 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 $62.4 million for the year ended December 31, 2023. The remaining purchase commitment at December 31, 2023 was $338.8 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, 2023, we had approximately $429.5 million of open purchase orders and $351.2 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 five 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.

Antitrust Litigation

In January 2020, the U.S. Federal Trade Commission (“FTC”) filed an administrative enforcement action regarding our May 2018 acquisition of an insolvent body-worn camera competitor, Vievu LLC (“Vievu”). The FTC alleged the merger was anticompetitive and adversely affected the body-worn camera and digital evidence management market for “large metropolitan police departments,” which we deny and aggressively defended. On October 6, 2023, the FTC unilaterally dismissed its administrative complaint against Axon without consent decree or other condition.

Now pending in the District of New Jersey (Case No. 3:23-cv-7182) is a purported class action based primarily on the same dismissed FTC allegations that the Vievu acquisition substantially lessened competition in the body-worn camera systems market for U.S. law enforcement agencies. The Township of Howell (NJ), the City of Augusta (ME) and the City of Baltimore (MD) filed their consolidated amended complaint on November 27, 2023, alleging Sherman and Clayton Act violations against both Axon and Safariland LLC, which sold Vievu to Axon. The complaint further alleges that an ancillary holster supply agreement between Axon and Safariland LLC constituted an illegal restraint of trade in the long-range conducted energy weapon market. Axon denies the allegations and will vigorously defend the case. The parties have agreed on a briefing schedule concerning anticipated motion practice through mid-May, with rulings unlikely in 2024.

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 not to 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, 2023, 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, 2023, we had outstanding letters of credit issued under our credit facility of $7.5 million that are expected to expire throughout 2024 and 2025. Additionally, we had $10.5 million of outstanding surety bonds as of December 31, 2023 expiring in 2024.

Note 13 - Income Taxes

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


	2023		2022		2021
United States	$	132,448	$	191,631	$	(146,995)
Foreign		22,552		4,887		5,620
Total	$	155,000	$	196,518	$	(141,375)

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


	2023		2022		2021
Current:
Federal	$	33,084	$	10,804	$	(331)
State		10,371		10,118		85
Foreign		2,804		2,892		(60)
Total current		46,259		23,814		(306)
Deferred:
Federal		(61,106)		26,238		(65,557)
State		(9,244)		(2,002)		(15,266)
Foreign		89		(2,146)		478
Total deferred		(70,261)		22,090		(80,345)
Tax impact of unrecorded tax benefits liability		4,775		3,475		(706)
Provision for income taxes (Income tax benefit)	$	(19,227)	$	49,379	$	(81,357)

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


	2023			2022			2021
Federal income tax at the statutory rate	$	32,550		$	41,283		$	(29,691)
Excess stock-based compensation benefit		(106,522)			(4,616)			(205,483)
Executive compensation limitation		77,350			5,784			180,509
R&D credits		(26,204)			(13,340)			(34,376)
Change in valuation allowance		(4,695)			10,216			8,961
Change in liability for unrecognized tax benefits		4,351			3,215			10,188
State income taxes, net of federal benefit		3,658			7,928			(12,717)
Tax effects of intercompany transactions		(2,033)			(417)			96
Foreign tax credit		(1,922)			—			—
Global intangible low-taxed income		1,890			653			1,250
Other permanent differences (1)		1,201			1,118			592
Difference between statutory and foreign tax rates		1,013			(428)			(155)
Foreign derived intangible income deduction		(961)			(2,597)			—
Return to provision adjustment		346			(757)			204
Other		751			1,337			(735)
Provision for income taxes (Income tax benefit)	$	(19,227)		$	49,379		$	(81,357)
Effective tax rate		(12.4)	%		25.1	%		57.5	%

(1)	Other permanent differences include certain expenses that are not deductible for tax purposes including meals and entertainment, lobbying fees, and nondeductible transaction-related costs.

Significant components of our deferred income tax assets and liabilities are as follows at December 31, 2023 and December 31, 2022 (in thousands):


	2023		2022
Deferred income tax assets:
R&D capitalization, net	$	99,746	$	46,122
Deferred revenue		60,206		47,586
Convertible debt, net		39,649		48,378
R&D tax credit carryforward		16,554		12,826
Reserves, accruals, and other		12,264		9,080
Accrued bonus		11,253		8,652
Stock based compensation		10,544		15,374
Lease liability		9,664		9,973
Strategic investments		6,109		—
Amortization		4,425		2,820
Deferred compensation		2,803		1,575
Net operating loss carryforward		2,115		4,874
Inventory reserve		1,986		1,279
Total deferred income tax assets		277,318		208,539
Deferred income tax liabilities:
Depreciation		(14,575)		(10,272)
Right of use asset		(8,404)		(8,748)
Prepaid expenses		(2,223)		(1,119)
Customer contract asset		(690)		(552)
Goodwill amortization		(313)		—
Strategic investments		—		(4,615)
Total deferred income tax liabilities		(26,205)		(25,306)
Net deferred income tax assets before valuation allowance		251,113		183,233
Valuation allowance		(21,600)		(26,368)
Net deferred income tax assets	$	229,513	$	156,865

We have $17.5 million of state net operating losses (“NOLs”) which do not expire until 2041. We have $29.0 million of state R&D credits carrying forward, which expire at various dates between 2024 and 2037 or carry forward indefinitely. In the United Kingdom, we have $4.8 million of NOLs, which may be carried forward indefinitely.

In preparing our consolidated financial statements, management assesses the likelihood that its deferred income 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 income tax assets will not be realized. Management exercises significant judgment in determining our provision for income taxes, our deferred income tax assets and liabilities, and our future taxable income for purposes of assessing our ability to utilize any future tax benefit from our deferred income tax assets. The net change in total valuation allowance for the years ended December 31, 2023, and 2022 was a decrease of $4.8 million and increase of $10.2 million, respectively. The valuation allowance changes are driven primarily by certain state R&D tax credits that are expected to expire unutilized and movement in deferred tax assets associated with unrealized investment losses and transaction costs incurred in connection with certain investments that are not more likely than not to be realized. The net change in the valuation allowance in 2023 and 2022 was recorded to tax expense.

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 $25.8 million as of December 31, 2023. Should the unrecognized benefit of $25.8 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):


	2023		2022		2021
Balance, beginning of period	$	21,492	$	18,249	$	7,657
Increase (decrease) in previous year tax positions		(215)		232		22
Increase in current year tax positions		6,963		3,343		11,416
Decrease due to lapse of statutes of limitations		(2,486)		(332)		(846)
Balance, end of period	$	25,754	$	21,492	$	18,249

Federal income tax returns for 2020 through 2022 remain open to examination by the U.S. Internal Revenue Service, while state and local income tax returns for 2019 through 2022 also generally remain open to examination by state taxing authorities. The 2009 through 2018 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 2019 through 2022. The foreign tax returns for 2019 through 2022 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 consolidated statements of operations and comprehensive income (loss). As of December 31, 2023, and 2022, we had accrued interest of $0.6 million and $0.3 million, respectively.

The Tax Cuts and Jobs Act of 2017 contains a provision that 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 that 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.

Note 14 - 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 2027 Notes unless the Notes have been redeemed, repurchased, converted or defeased in full. Additionally, the credit agreement has an accordion feature that allows for an increase in the total line of credit up to $300.0 million, in each lender’s sole discretion.

As of December 31, 2023, and 2022, respectively, 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, 2023, we had letters of credit outstanding of approximately $7.5 million under the facility and available borrowing of $192.5 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 expense, taxes, depreciation and amortization (“EBITDA”) ratio, which for the purposes of the credit agreement excludes

investment interest income. “SOFR” is defined as a rate equal to the secured overnight financing rate as administered by the Federal Reserve Bank of New York or a successor administrator of the secured overnight financing rate.

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, 2023, our net leverage ratio was 0.10 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. At December 31, 2023, our consolidated interest coverage ratio was 45.61 to 1.00.

Note 15 - 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 1.7 million shares available for grant as of December 31, 2023.

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-based 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 stock 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.

2018 CEO Performance Award

On May 24, 2018, our shareholders approved the Board of Directors’ grant of the 2018 CEO Performance Award to Patrick W. Smith, our Chief Executive Officer. The 2018 CEO Performance Award consists of 12 substantially equal 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 Chief Executive Officer or as both Executive Chairman and Chief Product Officer and service through each attainment date.

As of December 31, 2023, all 12 market capitalization and operational goals have been achieved and certified by the Compensation Committee. As a result, 6.4 million stock options have vested. As all 12 operational goals have been achieved, we recorded stock-based compensation expense of $246.0 million related to the 2018 CEO Performance Award. As of December 31, 2023, no unrecognized stock-based compensation expense remained.

eXponential Stock Performance Plan

On February 12, 2019, our shareholders approved the 2019 Plan, which was adopted by the Board of Directors to reserve a sufficient number of shares to facilitate our 2019 XSPP and grants of 2019 XSUs under the 2019 Plan.

As of December 31, 2023, all 12 market capitalization and operational goals have been achieved and certified by the Compensation Committee. We recorded stock-based compensation expense of $199.9 million related to the 2019 XSU awards from their respective grant dates through December 31, 2023. As of December 31, 2023, there was no unrecognized stock-based compensation expense.

2024 CEO Performance Award and 2024 eXponential Stock Plan

On October 14, 2023, our Board of Directors approved the 2024 eXponential Stock Plan (“XSP 2.0”) and, on December 20, 2023, the Board approved a pool of 4,516,370 shares of the Company’s common stock to be reserved for grants of awards of eXponential Stock Units (“2024 XSUs”) to employees under the plan, including those who elected to have compensation withheld in order to participate in the plan. The 2024 XSUs are grants of performance-based RSUs, each with a term of approximately seven years, that vest in seven substantially equal tranches. Additionally, on December 18, 2023, the Compensation Committee granted to our Chief Executive Officer an award of 2024 XSUs covering 679,102 shares of Company common stock (the “2024 CEO Performance Award”). Both XSP 2.0 and the 2024 CEO Performance Award are subject to shareholder approval at our upcoming Annual Meeting of Shareholders. Dollar-denominated awards granted under XSP 2.0 and the 2024 CEO Performance Award were converted to 2024 XSUs using a price per share of common stock of $220.88, which reflects the 90-day volume weighted average price per share as of the trading day preceding the grant date. Neither XSP 2.0 nor the 2024 CEO Performance Award will have a financial statement impact unless and until either or both are approved by shareholders at our Annual Meeting of Shareholders in May 2024.

Restricted Stock Units

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


	2023				2022			2021
			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		1,565	$	145.48	1,115	$	133.40	1,107	$	76.10
Granted		915		227.62	1,142		143.03	686		165.67
Released		(740)		140.81	(541)		117.49	(554)		66.23
Forfeited		(125)		157.95	(151)		138.99	(124)		100.64
Units outstanding, end of year		1,615		193.09	1,565		145.48	1,115		133.40
Aggregate intrinsic value at year end	$	417,240

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $258.33 per share, multiplied by the number of RSUs outstanding. The fair value as of the respective vesting dates of RSUs that vested during the year was $161.7 million, $84.9 million and $96.4 million for the years ended December 31, 2023, 2022 and 2021, respectively.

As of December 31, 2023, we had $273.5 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 2.29 years. Shares underlying RSUs are released when vesting requirements are met.

Certain RSUs that vested in the year ended December 31, 2023 were net-share settled, such that we withheld shares to cover the employees’ tax obligations for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld related to RSUs during 2023 were approximately 26,000 and had a value of approximately $5.4 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.

Performance Stock Units

The following table summarizes performance stock unit (“PSU”) activity, inclusive of 2019 XSUs, for the years ended December 31 (number of units and aggregate intrinsic value in thousands):


	2023				2022			2021
			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		1,369	$	43.43	1,499	$	39.86	5,618	$	35.71
Granted		319		218.04	158		106.57	309		77.53
Released		(1,238)		37.98	(78)		107.58	(4,345)		37.16
Forfeited		(56)		48.40	(210)		41.62	(83)		40.91
Units outstanding, end of year		394		201.61	1,369		43.43	1,499		39.86
Aggregate intrinsic value at year end	$	101,751

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $258.33 per share, multiplied by the number of PSUs outstanding. As of December 31, 2023, there was $57.8 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 2.73 years. Shares underlying PSUs are released when vesting requirements are met.

Certain PSUs that vested in the year ended December 31, 2023 were net-share settled such that we withheld shares to cover the employees’ tax obligations 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 0.5 million and had a value of $102.5 million on their respective vesting dates as determined by the closing stock price on such dates. Payments for the employees’ tax obligations are reflected as a financing activity within the 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):


	2023				2022			2021
			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	2,438	$	28.58	6,366	$	28.58
Granted		—			—		—	—		—
Exercised		(1,907)		28.58	—		—	(3,928)		28.58
Expired / terminated		—			—		—	—		—
Options outstanding, end of year		531		28.58	2,438		28.58	2,438		28.58
Options exercisable, end of year		531		28.58	1,377		28.58	1,377		28.58

We did not grant any stock options in 2023, 2022 or 2021. The total intrinsic value of options exercised was $323.0 million and $571.4 million for the years ended December 31, 2023 and 2021, respectively; no options were exercised in the year ending December 31, 2022. 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, 2023 (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	531	$	28.58	4.16	531	$	28.58	4.16

The aggregate intrinsic value of options exercisable at December 31, 2023 was $122.0 million. 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 $258.33 on the last trading day for the period ending December 31, 2023.

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):


	2023		2022		2021
Cost of product and service sales	$	6,595	$	4,607	$	5,844
Sales, general and administrative expenses		58,533		51,301		238,813
Research and development expenses		66,230		50,268		58,674
Total stock-based compensation expense	$	131,358	$	106,176	$	303,331
Income tax benefit	$	13,509	$	25,154	$	30,586

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 2022 Inducement Plan. In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules, awards under

the 2022 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 the Axon Enterprise, Inc. 2019 Stock Inducement Plan. There are approximately 0.1 million shares available for grant as of December 31, 2023.

At-the-Market Equity Offering

During the year ended December 31, 2023, we sold 467,594 shares of our common stock under our “at-the-market” equity offering program (the “ATM”). We generated approximately $96.4 million in aggregate gross proceeds from sales under the ATM. Aggregate net proceeds from the ATM were $94.7 million after deducting related expenses, including commissions to the sales agent and issuance costs of $1.7 million. During the year ending December 31, 2022, no shares were sold under the ATM. During the year ended December 31, 2021, we sold 577,956 shares of our common stock under the ATM and generated approximately $107.6 million in aggregate gross proceeds from sales under the ATM. Aggregate net proceeds from the ATM were $105.4 million after deducting related expenses, including commissions to the sales agent of $1.6 million and issuance costs of $0.5 million.

We may sell up to a total of 3.0 million shares of our common stock under the ATM, of which approximately 2.0 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 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, 2023 and 2022, $16.3 million remained available under the plan for future purchases.

Subsequent Event

On December 8, 2023, the Compensation Committee approved a compensation package for our Chief Executive Officer. This compensation package provides for compensation opportunities to Mr. Smith in a lesser amount than the Committee was otherwise willing to provide so that the Company could instead provide enhanced compensation opportunities to other employees of the Company.

On January 2, 2024, we granted an aggregate of 0.4 million RSUs to employees whose compensation was under a specified threshold. The RSUs generally vest in five annual installments from March 2024 through March 2028.

Note 16 – 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, 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)
Other comprehensive loss		852		(4,352)		(3,500)
Balance, December 31, 2023	$	(399)	$	(10,280)	$	(10,679)

Note 17 - 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 2027 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.

Our leases have remaining terms of less than one to approximately 10 years, some of which include one or more options to renew for up to five years, and some of which include options to terminate the leases within one 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, 2023.


Leases (in thousands)	Classification	December 31, 2023		December 31, 2022
Assets
Operating lease assets	Other assets	$	36,155	$	38,370
Liabilities
Current
Operating	Other current liabilities	$	7,938	$	6,357
Noncurrent
Operating	Other long-term liabilities		33,550		37,143
Total lease liabilities		$	41,488	$	43,500

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


	Classification	2023		2022		2021
Operating lease expense	Sales, general and administrative expenses (1)	$	6,659	$	4,388	$	3,820
	Research and development expense		3,366		4,315		3,675
Total operating lease expense (2)		$	10,025	$	8,703	$	7,495

(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, 2023			December 31, 2022
Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	8,846		$	9,216
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases		5,927			21,815
Weighted average remaining lease term:
Operating leases		7.1	years		7.2	years
Weighted average discount rate:
Operating leases		6.05	%		5.44	%

Future minimum lease payments under non-cancellable leases as of December 31, 2023 were as follows (in thousands):


	Operating
2024		10,234
2025		9,864
2026		6,218
2027		3,915
2028		3,855
Thereafter		19,166
Total minimum lease payments		53,252
Less: Amount representing interest		(11,764)
Present value of lease payments	$	41,488

As of December 31, 2023, we have entered into an additional lease that has not yet commenced, with estimated future minimum lease payments totaling $20.8 million over 12 years.

Note 18 - 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, 2023, 2022 and 2021, were approximately $14.5 million, $10.9 million and $7.4 million, respectively.

Note 19 - Segment Data

Our operations comprise 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 SG&A expenses by segment.

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


	For the year ended December 31, 2023
			Software and
	TASER		Sensors		Total
Net sales from products	$	577,610	$	390,101	$	967,711
Net sales from services		34,995		560,685		595,680
Net sales		612,605		950,786		1,563,391
Cost of product sales		238,364		212,354		450,718
Cost of service sales		3,613		153,678		157,291
Cost of sales		241,977		366,032		608,009
Gross margin	$	370,628	$	584,754	$	955,382

Research and development	$	62,393	$	241,326	$	303,719


	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

Note 20 – Business Acquisition

During the year ended December 31, 2023, we completed an acquisition for total purchase consideration of $23.9 million. The purchase price included $2.2 million of contingent cash consideration, which is expected to be earned by the sellers upon meeting specified targets by July 1, 2027. Total transaction costs related to the acquisition were $2.3 million for the year ended December 31, 2023. These transaction costs were expensed as incurred in SG&A expenses in our consolidated statements of operations.

The purchase price allocation is subject to revision during the measurement period pending final asset valuation procedures and related calculations. Based on the purchase price allocation, we recorded $12.9 million of goodwill, $11.5 million of identifiable intangible assets, and $2.2 million in net tangible assets, excluding deferred taxes. We recorded a net deferred tax liability of $2.8 million.

The goodwill generated from the acquisition is primarily attributable to synergies that are expected to be achieved from the integration of the business and is not deductible for tax purposes. We have assigned the goodwill to the Software and Sensors segment.

Note 21 – Subsequent Event

In January 2024, we acquired the remaining outstanding stock of Fusus, Inc. (“Fusus”), a global leader in real-time crime center technology, for $240.0 million, subject to customary purchase price adjustments. The acquisition expands our ability to aggregate live video, data, and sensor feeds, which enhances situational awareness and investigative capabilities for our customers in public safety, education and enterprise. Prior to this transaction, we had an approximately 20% ownership interest in Fusus. This transaction is considered a “step acquisition” under GAAP whereby our ownership interest in Fusus held before the acquisition is required to be remeasured to fair value at the date of the acquisition.

Due to the timing of the transaction, the initial accounting for the acquisition is not yet complete. Transaction costs related to the acquisition were approximately $2.6 million for the year ended December 31, 2023. These transaction costs were expensed as incurred in SG&A in our consolidated statements of operations.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

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, 2023 and 2022, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 27, 2024 expressed an unqualified opinion.

Basis for opinion

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

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

Critical audit 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 our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a 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:

	o	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.

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

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

	o	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.

	o	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 27, 2024

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