filings.toolsAxon Enterprise 10-Q 2021-09-30
Filed 2021-11-15. 8 sections, 201K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
| | |
|---|---|
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended September 30, 2021 or | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-16391
| |
|---|
| Axon Enterprise, Inc. |
| (Exact name of registrant as specified in its charter) |
| | |
|---|---|
| Delaware | 86-0741227 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | |
| 17800 North 85th Street | |
| Scottsdale**,** Arizona | 85255 |
| (Address of principal executive offices) | (Zip Code) |
(480) 991-0797
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | |
|---|---|---|
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.00001 Par Value | AXON | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | |
|---|---|---|---|
| Large accelerated filer | ☒ | Accelerated filer | ☐ |
| | | | |
| Non-accelerated Filer | ☐ | Smaller reporting company | ☐ |
| | | | |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s common stock outstanding as of November 10, 2021 was 68,467,571.
AXON ENTERPRISE, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021
Special Note Regarding Forward-Looking Statements
This Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions and strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. From time to time, we also provide forward-looking statements in other materials we release to the public as well as verbal forward-looking statements. These forward-looking statements include, without limitation, statements regarding: proposed products and services and related development efforts and activities; our projected revenue and capital expenditures for the full year 2021; expectations about the market for our current and future products and services; the impact of pending litigation; strategies and trends relating to subscription plan programs and revenues; our anticipation that contracts with governmental customers will be fulfilled; strategies and trends, including the benefits of, research and development investments; the sufficiency of our liquidity and financial resources; expectations about customer behavior; the impact on our investment portfolio of changes in interest rates; our potential use of foreign currency forward and option contracts; statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; statements of management’s strategies, goals and objectives and other similar expressions; as well as the ultimate resolution of financial statement items requiring critical accounting estimates, including those set forth in our Form 10-K for the year ended December 31, 2020. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Words such as “may,” “will,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions, as well as statements in future tense, identify forward-looking statements. However, not all forward-looking statements contain these identifying words.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. The following important factors could cause actual results to differ materially from those in the forward-looking statements: the potential global impacts of the COVID-19 pandemic; our exposure to cancellations of government contracts due to appropriation clauses, exercise of a cancellation clause, or non-exercise of contractually optional periods; our ability to design, introduce and sell new products or features; our ability to defend against litigation and protect our intellectual property, and the resulting costs of this activity; our ability to manage our supply chain and avoid production delays, shortages, and impacts to expected gross margins; the impact of stock compensation expense, impairment expense, and income tax expense on our financial results; customer purchase behavior, including adoption of our software as a service delivery model; negative media publicity regarding our products; the impact of product mix on projected gross margins; defects in our products; changes in the costs of product components and labor; loss of customer data, a breach of security, or an extended outage, including by our third party cloud-based storage providers; exposure to international operational risks; delayed cash collections and possible credit losses due to our subscription model; changes in government regulations in the U.S. and in foreign markets, especially related to the classification of our products by the United States Bureau of Alcohol, Tobacco, Firearms and Explosives; our ability to integrate acquired businesses; our ability to attract and retain key personnel; and counter-party risks relating to cash balances held in excess of FDIC insurance limits. Many events beyond our control may determine whether results we anticipate will be achieved. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements. The Annual Report on Form 10-K that we filed with the Securities and Exchange Commission ("SEC") on February 26, 2021 lists various important factors that could cause actual results to differ materially from expected and historical results. These factors are intended as cautionary statements for investors within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. Readers can find them under the heading “Risk Factors” in the Report on Form 10-K, and investors should refer to them. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.
Except as required by law, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q, 8-K and 10-K reports to the SEC. Our filings with the SEC may be accessed at the SEC’s web site at www.sec.gov.
ii
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AXON ENTERPRISE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | | | | | |
|---|---|---|---|---|---|---|
| | September 30, | | December 31, | |||
| | | 2021 | | 2020 | ||
| | | (Unaudited) | | | | |
| ASSETS | | | ||||
| Current assets: | | | ||||
| Cash and cash equivalents | | $ | 281,691 | | $ | 155,440 |
| Marketable securities | | | 83,340 | | | — |
| Short-term investments | | 216,557 | | 406,525 | ||
| Accounts and notes receivable, net of allowance of $2,425 and $2,105 as of September 30, 2021 and December 31, 2020, respectively | | 265,267 | | 229,201 | ||
| Contract assets, net | | 130,976 | | 63,945 | ||
| Inventory | | 93,279 | | 89,958 | ||
| Prepaid expenses and other current assets | | 52,710 | | 36,883 | ||
| Total current assets | | 1,123,820 | | 981,952 | ||
| Property and equipment, net | | 128,808 | | 105,494 | ||
| Deferred tax assets, net | | 104,169 | | 45,770 | ||
| Intangible assets, net | | 7,426 | | 9,448 | ||
| Goodwill | | 25,571 | | 25,205 | ||
| Long-term investments | | 49,431 | | 90,681 | ||
| Long-term notes receivable, net of current portion | | 12,621 | | 22,457 | ||
| Long-term contract assets, net | | | 43,394 | | | 20,099 |
| Strategic investments | | | 58,520 | | | 11,711 |
| Other assets | | 91,627 | | 68,206 | ||
| Total assets | | $ | 1,645,387 | | $ | 1,381,023 |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | ||||
| Current liabilities: | | | ||||
| Accounts payable | | $ | 27,418 | | $ | 24,142 |
| Accrued liabilities | | 88,894 | | 59,843 | ||
| Current portion of deferred revenue | | 250,651 | | 163,959 | ||
| Customer deposits | | 6,118 | | 2,956 | ||
| Other current liabilities | | 6,809 | | 5,431 | ||
| Total current liabilities | | 379,890 | | 256,331 | ||
| Deferred revenue, net of current portion | | 111,892 | | 111,222 | ||
| Liability for unrecognized tax benefits | | 4,580 | | 4,503 | ||
| Long-term deferred compensation | | 5,125 | | 4,732 | ||
| Deferred tax liability, net | | | 155 | | | 649 |
| Other long-term liabilities | | 29,842 | | 27,331 | ||
| Total liabilities | | 531,484 | | 404,768 | ||
| Commitments and contingencies (Note 13) | | | ||||
| Stockholders’ equity: | | | ||||
| Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | | — | | — | ||
| Common stock, $0.00001 par value; 200,000,000 shares authorized; 67,577,868 and 63,766,555 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | | 1 | | 1 | ||
| Additional paid-in capital | | 1,147,478 | | 962,159 | ||
| Treasury stock at cost, 20,220,227 shares as of September 30, 2021 and December 31, 2020 | | (155,947) | | (155,947) | ||
| Retained earnings | | 123,391 | | 169,901 | ||
| Accumulated other comprehensive income (loss) | | (1,020) | | 141 | ||
| Total stockholders’ equity | | 1,113,903 | | 976,255 | ||
| Total liabilities and stockholders’ equity | | $ | 1,645,387 | | $ | 1,381,023 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
AXON ENTERPRISE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
| | 2021 | 2020 | 2021 | 2020 | ||||||||
| Net sales from products | | $ | 165,803 | | $ | 120,091 | | $ | 463,116 | | $ | 326,134 |
| Net sales from services | | 66,186 | | 46,351 | | 182,687 | | 128,729 | ||||
| Net sales | | 231,989 | | 166,442 | | 645,803 | | 454,863 | ||||
| Cost of product sales | | 71,336 | | 57,798 | | 195,253 | | 150,507 | ||||
| Cost of service sales | | 16,086 | | 10,404 | | 44,701 | | 29,331 | ||||
| Cost of sales | | 87,422 | | 68,202 | | 239,954 | | 179,838 | ||||
| Gross margin | | 144,567 | | 98,240 | | 405,849 | | 275,025 | ||||
| Operating expenses: | | | | | ||||||||
| Sales, general and administrative | | 99,295 | | 74,443 | | 403,554 | | 209,763 | ||||
| Research and development | | 42,382 | | 29,246 | | 143,352 | | 85,187 | ||||
| Total operating expenses | | 141,677 | | 103,689 | | 546,906 | | 294,950 | ||||
| Income (loss) from operations | | 2,890 | | (5,449) | | (141,057) | | (19,925) | ||||
| Interest and other income (expense), net | | (5,530) | | 2,040 | | 36,896 | | 4,594 | ||||
| Loss before provision for income taxes | | (2,640) | | (3,409) | | (104,161) | | (15,331) | ||||
| Provision for (benefit from) income taxes | | (51,164) | | (2,536) | | (57,651) | | 12,227 | ||||
| Net income (loss) | | $ | 48,524 | | $ | (873) | | $ | (46,510) | | $ | (27,558) |
| Net income (loss) per common and common equivalent shares: | | | | | ||||||||
| Basic | | $ | 0.73 | | $ | (0.01) | | $ | (0.71) | | $ | (0.45) |
| Diluted | | $ | 0.67 | | $ | (0.01) | | $ | (0.71) | | $ | (0.45) |
| Weighted average number of common and common equivalent shares outstanding: | | | | | ||||||||
| Basic | | 66,192 | | 63,496 | | 65,139 | | 61,159 | ||||
| Diluted | | 72,441 | | 63,496 | | 65,139 | | 61,159 | ||||
| UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | | | | | | | | | | | | |
| Net income (loss) | | $ | 48,524 | | $ | (873) | | $ | (46,510) | | $ | (27,558) |
| Foreign currency translation adjustments | | (793) | | 1,238 | | (1,161) | | (456) | ||||
| Comprehensive income (loss) | | $ | 47,731 | | $ | 365 | | $ | (47,671) | | $ | (28,014) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
AXON ENTERPRISE, INC.
UNAUDITED CONDENSED 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 under employee plans, net | 90 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition as of September 30, 2021, and results of operations for the three and nine months ended September 30, 2021 and 2020, should be read in conjunction with the condensed consolidated financial statements and related notes included in this Report on Form 10-Q and the audited consolidated financial statements and related notes in our 2020 Annual Report on Form 10-K filed with the SEC on February 26, 2021. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in such forward-looking statements as a result of certain factors, including but not limited to those described under “Risk Factors” in our 2020 Annual Report on Form 10-K. See also "Special Note Regarding Forward-Looking Statements" on page ii of this Report on Form 10-Q.
Overview
Axon is a global network of devices, apps and people that helps public safety personnel become smarter and safer. With a mission of protecting life, our technologies give law enforcement the confidence, focus and time they need to protect their communities. Our products impact every aspect of a public safety officer’s day-to-day experience with the goal of helping everyone get home safe.
Our revenues for the three months ended September 30, 2021 were $232.0 million, an increase of $65.5 million, or 39.4%, from the comparable period in the prior year. We had income from operations of $2.9 million compared to a loss of $5.4 million for the same period in the prior year. Gross margin improved compared to the three months ended September 30, 2020, reflecting strong demand for our premium TASER offerings and manufacturing cost improvement. Operating expenses increased $38.0 million, reflecting an increase of $8.0 million in stock-based compensation expense related to the CEO Performance Award and XSPP and an increase of $20.9 million in salaries, benefits and bonus expense. For the three months ended September 30, 2021, we recorded net income of $48.5 million, which reflected an income tax benefit of $51.2 million and an unrealized loss of $6.7 million on marketable securities related to our investment in CLBT, compared to net loss of $0.9 million for the comparable period in the prior year.
Our revenues for the nine months ended September 30, 2021 were $645.8 million, an increase of $190.9 million, or 42.0%, from the comparable period in the prior year. We had a loss from operations of $141.1 million compared to $19.9 million for the same period in the prior year. Gross margin improved compared to the nine months ended September 30, 2020 as a result of product mix, reflecting strong demand for our premium TASER offerings and manufacturing cost improvement. Operating expenses increased $252.0 million, reflecting an increase of $170.1 million in stock-based compensation expense related to the CEO Performance Award and XSPP and an increase of $53.2 million in salaries, benefits, and bonus expense. For the nine months ended September 30, 2021, we recorded a net loss of $46.5 million, which reflected an income tax benefit of $57.7 million and a gain of $40.9 million related to observable price changes for our investments in certain unconsolidated affiliates and related warrants, partially offset by an unrealized loss of $6.7 million on marketable securities related to our investment in CLBT, compared to net loss of $27.6 million for the comparable period in the prior year.
Outlook
For the year ending December 31, 2021, we expect revenue in the range of $840 million to $850 million. This guidance reflects our expectation that approximately $30 million in TASER segment revenue previously expected to be recorded in the three months ending December 31, 2021 will shift into the first half of 2022 due to the delayed receipt of a manufacturing component for our TASER 7 devices. Our expectation for capital expenditures of approximately $65 million to $70 million in 2021 remains unchanged.
Total Addressable Market
Axon has raised our total addressable market (TAM) projections from $27.0 billion to $51.6 billion, reflecting a 91.1% increase. This update is largely based on introducing new products, selling into new customer segments and adding sales channels to new geographic regions. Specifically, our two newest drivers of TAM growth are justice software and consumer safety.
Justice: Axon’s expansion into justice software is a natural evolution of our market-leading cloud-hosted digital evidence management software category. Specifically, we are developing software to help prosecutors and defense attorneys streamline the discovery process. Not only is our goal to save attorneys time, but also to shorten the time people are jailed awaiting trial. We expect to share more in the coming months around product launch and customer announcements.
Consumer: We see opportunity to create more effective and reliable personal protection for private individuals, and, thus, our consumer business is a growing area of investment. Our current market penetration in consumer is virtually nil. Historically, our law enforcement and consumer devices have relied upon separate platforms. To drive greater efficiency and reliability, our next generation consumer and law enforcement devices will leverage much of the same core technology. We also plan to offer personal safety solutions, including a consumer-focused smartphone app, and expect to share more details over the coming quarters.
COVID-19
The COVID-19 pandemic has adversely affected workforces, economies, and financial markets globally, leading to an economic downturn. As an essential provider of products and services for law enforcement and other first responders, we remain focused on protecting the health and wellbeing of our employees while assuring the continuity of our business operations.
We have taken a number of actions in response to the pandemic, as described in our Annual Report on Form 10-K. In April and May 2021, we hosted several onsite vaccination clinics for our employees and their family members. In September 2021, the U.S. federal government issued guidance on previously announced COVID-19 vaccination requirements for large U.S. employers. Consistent with this guidance, we announced in October 2021 that the federal vaccine mandate would require all of our U.S.-based employees and contractors to be vaccinated, without the provision of a regular testing alternative. Employees may request a reasonable accommodation for medical or religious reasons.
We elected to participate in the social security deferral program offered under the Coronavirus Aid, Relief, and Economic Security Act, whereby we deferred payment of the employer portion of all social security taxes that would otherwise have been payable from March 27, 2020 through December 31, 2020. Payment of the deferred amount is due 50% on December 31, 2021 and 50% on December 31, 2022.
Results of Operations
Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020
The following table presents data from our condensed consolidated statements of operations as well as the percentage relationship to total net sales of items included in our statements of operations (dollars in thousands):
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Three Months Ended September 30, | ||||||||||
| | 2021 | | 2020 | |||||||||
| Net sales from products | | $ | 165,803 | | 71.5 | % | | $ | 120,091 | | 72.2 | % |
| Net sales from services | | 66,186 | 28.5 | | | 46,351 | 27.8 | | ||||
| Net sales | | 231,989 | 100.0 | | | 166,442 | 100.0 | | ||||
| Cost of product sales | | 71,336 | 30.7 | | | 57,798 | 34.7 | | ||||
| Cost of servic |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We typically invest in a limited number of financial instruments, consisting principally of investments in money market accounts, certificates of deposit, and corporate and municipal bonds with a typical long-term debt rating of “A” or better by any nationally recognized statistical rating organization, denominated in U.S. dollars. All of our cash equivalents and investments are treated as “held-to-maturity.” Investments in fixed-rate interest-earning instruments carry a degree of interest rate risk as their market value may be adversely impacted due to a rise in interest rates. As a result, we may suffer losses in principal if we sell securities that have declined in market value due to changes in interest rates. However, because we classify our debt securities as “held-to-maturity” based on our intent and ability to hold these instruments to maturity, no gains or losses are recognized due to changes in interest rates. These securities are reported at amortized cost. Based on investment positions as of September 30, 2021, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $1.2 million decline in the fair market value of the portfolio. Such losses would only be realized if we sold the investments prior to maturity.
Additionally, we have access to a $50.0 million line of credit borrowing facility which bears interest at LIBOR plus 1.0 to 1.5% per year determined in accordance with a pricing grid based on our funded debt to EBITDA ratio. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit, which totaled $6.1 million at September 30, 2021. At September 30, 2021, there was no amount outstanding under the line of credit and the available borrowing under the line of credit was $43.9 million. We have not borrowed any funds under the line of credit since its inception; however; should we need to do so in the future, such borrowings could be subject to adverse or favorable changes in the underlying interest rate.
Exchange Rate Risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, in each case compared to the U.S. dollar, related to transactions by our foreign subsidiaries. The majority of our sales to international customers are transacted in foreign currencies and therefore are subject to exchange rate fluctuations on these transactions. The cost of our products to our customers increases when the U.S. dollar strengthens against their local currency, and we may have more sales and expenses denominated in foreign currencies in future years which could increase our foreign exchange rate risk. Additionally, intercompany sales to our non-U.S. dollar functional currency international subsidiaries are transacted in U.S. dollars which could increase our foreign exchange rate risk caused by foreign currency transaction gains and losses.
To date, we have not engaged in any currency hedging activities. However, we may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. However, we may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to the prohibitive economic cost of hedging particular exposures. As such, fluctuations in currency exchange rates could harm our business in the future.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer are responsible for the evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2021.
Change in Internal Control over Financial Reporting
In the third quarter of 2021, we completed an implementation of several phases of our Enterprise Resource Planning (“ERP”) and related systems to improve our internal control over financial reporting. As a result of this implementation, we modified certain existing internal controls over financial reporting and implemented new controls and procedures related to the new ERP system and upgrades to prior systems. Other than the implementations and upgrades described above, there was no change to our internal control over financial reporting during the third quarter of 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The discussion under the headings Product Litigation and U.S. Federal Trade Commission Litigation in Note 13 of the notes to our condensed consolidated financial statements included within this Quarterly Report on Form 10-Q is incorporated by reference herein.
Item 1A. Risk Factors
Except as noted below, there are no material changes from the risk factors previously disclosed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020.
Catastrophic events may disrupt our business.
A disruption or failure of our systems or operations in the event of a major earthquake, weather event, fire, explosion, failure to contain hazardous materials, industrial accident, cyber-attack, terrorist attack, public health crisis, or other catastrophic event could cause delays in completing sales, providing services, or performing other mission-critical functions. A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and our operating results as well as expose us to claims, litigation and governmental investigations and fines.
In March 2020 the World Health Organization declared coronavirus (or “COVID-19”) a global pandemic. This contagious disease outbreak, which has continued to spread throughout the United States and world, has adversely affected workforces, economies, and financial markets globally, leading to an economic downturn.
In September 2021, the U.S. federal government issued guidance on previously announced COVID-19 vaccination requirements for large U.S. employers. Consistent with this guidance, we announced in October 2021 that the federal vaccine mandate would require all of our U.S.-based employees and contractors to be vaccinated, without the provision of a regular testing alternative. Employees may request a reasonable accommodation for medical or religious reasons. We cannot predict the impact of this federal vaccination requirement on our business.
COVID-19-related risks that may affect our operations and financial results include, but are not limited to:
| ● | Manufacturing disruptions at our Scottsdale headquarters or at our suppliers; |
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| ● | A change in our classification as an essential business that impairs our ability to continue operating; |
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| ● | Economic slowdowns that negatively affect municipal and state tax collections and put pressure on law enforcement budgets that in turn increases the risk that our customers will be unable to appropriate funds for existing or future contracts with us; this could also affect customer demand and ability to pay, cause decreases in sales, and negatively impact the realizability of our accounts and notes receivable and contract assets; |
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| ● | Existing and potential increased costs relating to personal protective equipment, which we are sourcing for our employees and customers; |
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| ● | Costs incurred to shut down and decontaminate our facilities if the virus is detected |
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| ● | Extended illness, incapacitation or death of key personnel or executives; |
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| ● | Employee attrition related to our COVID-19 vaccine mandate; |
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| ● | Ongoing governmental mandates to shutdown factories or limit travel and the movement of people that causes interruptions to our business, supply chain or extended supply chain; |
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| ● | Compounding risk from continued surges in infections around the world, including in the U.S.; and |
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| ● | Additional airline bankruptcies or further reduction in very limited global freight capacity that causes interruptions to our supply chain or extended supply chain |
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These events have had and could continue to have an impact on our operations. If our backup and mitigation plans are not sufficient to minimize business disruption, our financial results could be adversely affected. We are continuously monitoring our operations and intend to take appropriate actions to mitigate the risks arising from the COVID-19 pandemic, but there can be no assurances that we will be successful in doing so.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
| | | |
|---|---|---|
| | | |
| 10.1* | | Letter Amendment to the Amended and Restated Credit Agreement between the Company and JPMorgan Chase Bank, N.A. |
| 31.1* | | Principal Executive Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) |
| 31.2* | | Principal Financial Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) |
| 32** | | Principal Executive Officer and Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS* | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104* | | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL |
- Filed herewith
** Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| AXON ENTERPRISE, INC. | | | |
|---|---|---|---|
| | | | |
| Date: | November 15, 2021 | | |
| | | By: | /s/ PATRICK W. SMITH |
| | | | Chief Executive Officer |
| | | | (Principal Executive Officer) |
| | | | |
| Date: | November 15, 2021 | By: | /s/ JAWAD A. AHSAN |
| | | | Chief Financial Officer |
| | | | (Principal Financial and |
| | | | Accounting Officer) |