Item 1. Financial Statements

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Item 1. Financial Statements

AXON ENTERPRISE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

​​​​​​​
​March 31,​December 31,
​​2022​2021
​​(Unaudited)​​​
ASSETS​​
Current assets:​​
Cash and cash equivalents​$386,367​$356,332
Marketable securities​​57,600​​72,180
Short-term investments​20,024​14,510
Accounts and notes receivable, net of allowance of $2,424 and $2,203 as of March 31, 2022 and December 31, 2021, respectively​344,907​320,819
Contract assets, net​147,861​180,421
Inventory​122,150​108,688
Prepaid expenses and other current assets​67,208​56,540
Total current assets​1,146,117​1,109,490
Property and equipment, net​149,505​138,457
Deferred tax assets, net​108,840​127,193
Intangible assets, net​14,399​15,470
Goodwill​43,607​43,592
Long-term investments​17,731​31,232
Long-term notes receivable, net​10,184​11,256
Long-term contract assets, net​​29,616​​29,753
Strategic investments​​154,452​​83,520
Other long-term assets​98,003​98,247
Total assets​$1,772,454​$1,688,210
LIABILITIES AND STOCKHOLDERS’ EQUITY​​
Current liabilities:​​
Accounts payable​$49,348​$32,220
Accrued liabilities​69,435​103,707
Current portion of deferred revenue​326,627​265,591
Customer deposits​18,411​10,463
Other current liabilities​6,858​6,540
Total current liabilities​470,679​418,521
Deferred revenue, net of current portion​140,938​185,721
Liability for unrecognized tax benefits​5,162​3,797
Long-term deferred compensation​5,833​5,679
Deferred tax liability, net​​348​​811
Long-term lease liabilities​20,112​20,440
Other long-term liabilities​4,593​5,392
Total liabilities​647,665​640,361
Commitments and contingencies (Note 13)​​
Stockholders’ equity:​​
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively​—​—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 70,996,658 and 70,896,856 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively​1​1
Additional paid-in capital​1,118,859​1,095,229
Treasury stock at cost, 20,220,227 shares as of March 31, 2022 and December 31, 2021​(155,947)​(155,947)
Retained earnings​164,754​109,883
Accumulated other comprehensive income (loss)​(2,878)​(1,317)
Total stockholders’ equity​1,124,789​1,047,849
Total liabilities and stockholders’ equity​$1,772,454​$1,688,210

​

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 March 31,
​20222021
Net sales from products​$176,204​$140,886
Net sales from services​80,222​54,133
Net sales​256,426​195,019
Cost of product sales​79,352​58,616
Cost of service sales​21,335​13,050
Cost of sales​100,687​71,666
Gross margin​155,739​123,353
Operating expenses:​​
Sales, general and administrative​90,129​126,597
Research and development​48,416​47,018
Total operating expenses​138,545​173,615
Income (loss) from operations​17,194​(50,262)
Interest and other income, net​55,299​585
Income (loss) before provision for income taxes​72,493​(49,677)
Provision for (benefit from) income taxes​17,622​(1,760)
Net income (loss)​$54,871​$(47,917)
Net income (loss) per common and common equivalent shares:​​
Basic​$0.77​$(0.75)
Diluted​$0.76​$(0.75)
Weighted average number of common and common equivalent shares outstanding:​​
Basic​70,950​64,036
Diluted​72,349​64,036
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)​​​​​​
Net income (loss)​$54,871​$(47,917)
Foreign currency translation adjustments​(1,072)​1
Unrealized gains (losses) on available-for-sale investments​​(489)​​—
Comprehensive income (loss)​$53,310​$(47,916)

​

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​Loss​Equity
Balance, December 31, 202170,896,856​$1​$1,095,22920,220,227​$(155,947)​$109,883​$(1,317)​$1,047,849
Issuance of common stock​—​​—​​(70)​—​​—​​—​​—​​(70)
Issuance of common stock under employee plans, net99,802​​—​​(1,388)​—​​—​​—​​—​​(1,388)
Stock-based compensation—​​—​​25,088​—​​—​​—​​—​​25,088
Net income—​​—​​—​—​​—​​54,871​​—​​54,871
Other comprehensive loss, net—​​—​​—​—​​—​​—​​(1,561)​​(1,561)
Balance, March 31, 202270,996,658​$1​$1,118,85920,220,227​$(155,947)​$164,754​$(2,878)​$1,124,789

​

​

​

​​​​​​​​​​​​​​​​​​​​​​​
​​​​​Accumulated​
​​​​​​​Additional​​​​​​​​​Other​Total
​​Common Stock​Paid-in​Treasury Stock​Retained​Comprehensive​Stockholders’
​​Shares​Amount​Capital​Shares​Amount​Earnings​Income​Equity
Balance, December 31, 202063,766,555​$1​$962,15920,220,227​$(155,947)​$169,901​$141​$976,255
Issuance of common stock under employee plans, net906,536​​—​​(7,045)​—​​—​​—​​—​(7,045)
Stock-based compensation—​​—​​89,610​—​​—​​—​​—​89,610
Net loss​—​​—​​—​—​​—​​(47,917)​​—​(47,917)
Other comprehensive income, net—​​—​​—​—​​—​​—​​1​​1
Balance, March 31, 202164,673,091​$1​$1,044,72420,220,227​$(155,947)​$121,984​$142​$1,010,904

​

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

​

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

​

​​​​​​​
​​Three Months Ended March 31,
​20222021
Cash flows from operating activities:​​
Net income (loss)​$54,871​$(47,917)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:​​
Depreciation and amortization​5,755​4,291
Loss on disposal and abandonment of intangible assets​40​11
Loss on disposal and impairment of property and equipment, net​106​45
Net unrealized gain on strategic investments and marketable securities​​(55,851)​​—
Stock-based compensation​25,088​89,610
Deferred income taxes​18,029​(598)
Unrecognized tax benefits​1,365​194
Bond amortization​​159​1,504
Noncash lease expense​1,556​1,111
Provision for expected credit losses​​228​​(335)
Change in assets and liabilities:​​​​
Accounts and notes receivable and contract assets​7,495​31,298
Inventory​(14,260)​520
Prepaid expenses and other assets​(7,074)​(6,952)
Accounts payable, accrued and other liabilities​(9,580)​(18,062)
Deferred revenue​16,037​6,219
Net cash provided by operating activities​43,964​60,939
Cash flows from investing activities:​​
Purchases of investments​—​(155,825)
Proceeds from call / maturity of investments​7,200​132,254
Purchases of property and equipment​(17,098)​(10,521)
Proceeds from disposal of property and equipment​​87​​10
Purchases of intangible assets​(37)​(41)
Strategic investments​(500)​(20,000)
Net cash used in investing activities​(10,348)​(54,123)
Cash flows from financing activities:​​
Net proceeds from equity offering​​(71)​—
Income and payroll tax payments for net-settled stock awards​(1,388)​(7,045)
Net cash used in financing activities​(1,459)​(7,045)
Effect of exchange rate changes on cash and cash equivalents​(157)​(392)
Net increase (decrease) in cash and cash equivalents​32,000​(621)
Cash and cash equivalents and restricted cash, beginning of period​356,438​155,551
Cash and cash equivalents and restricted cash, end of period​$388,438​$154,930
​​​​​​​
Supplemental disclosures:​​
Cash and cash equivalents​$386,367​$154,822
Restricted cash (Note 1)​2,071​108
Total cash, cash equivalents and restricted cash shown in the statements of cash flows​$388,438​$154,930
​​​​​​​
Cash paid for income taxes, net of refunds​$334​$4,152
​​​​​​​
Non-cash transactions​​
Property and equipment purchases in accounts payable and accrued liabilities​$888​$517

​

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

​

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED 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 core mission is to protect life. We fulfill that mission through developing hardware and software products that advance the long term objectives of a) obsoleting the bullet, b) reducing social conflict, and c) enabling a fair and effective justice system.

Our headquarters in Scottsdale, Arizona houses our executive management, sales, marketing, certain engineering, manufacturing, finance and other administrative support functions. Our global software hub is located in Seattle, Washington, and we also have subsidiaries and / or offices located in Australia, Canada, Finland, France, Germany, Hong Kong, India, Italy, the Netherlands, the United Kingdom, and Vietnam.

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

Basis of Presentation and Use of Estimates

These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information related to our organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) has been condensed or omitted. The accounting policies followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed in our annual consolidated financial statements for the year ended December 31, 2021, as filed on Form 10-K, with the exception of our adoption of certain accounting pronouncements which we describe below. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with our Form 10-K for the year ended December 31, 2021. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year (or any other period). Significant estimates and assumptions in these unaudited condensed consolidated financial statements include:

●product warranty reserves,
●inventory valuation,
●revenue recognition,
●reserve for expected credit loss,
●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.

Segment Information

Our operations are comprised of two reportable segments: the manufacture and sale of conducted electrical devices ("CEDs"), batteries, accessories, extended warranties and other products and services (the “TASER” segment); and the development, manufacture, and sale of software and sensors, which includes the sale of devices, wearables, applications, cloud and mobile products, and services (collectively, the “Software and Sensors” segment). In both segments, we report sales of products and services. Service revenue in both segments includes sales related to Axon

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

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 16.

Geographic Information and Major Customers / Suppliers

For the three months ended March 31, 2022, no individual country outside the U.S. represented more than 10% of total net sales. Individual sales transactions in the international market are generally larger and occur more intermittently than in the domestic market due to the profile of our customers. For the three months ended March 31, 2022, no customer represented more than 10% of total net sales. At March 31, 2022 and December 31, 2021, no customer represented more than 10% of the aggregate balance of accounts and notes receivable and contract assets.

We currently purchase both off the shelf and custom components, including, but not limited to, finished circuit boards, injection-molded plastic components, small machined parts, custom cartridge components, electronic components, and off the shelf sub-assemblies from suppliers located in the U.S., Canada, China, Republic of Korea, Malaysia, Mexico, Taiwan, and Vietnam. We may source from other countries as well. Although we currently obtain many of these components from single source suppliers, we own the injection molded component tooling, most of the designs, and the 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.

Income per Common Share

Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. Diluted income per share reflects the potential dilution from outstanding stock options and unvested restricted stock units. The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):

​

​​​​​​​
​​Three Months Ended March 31,
​20222021
Numerator for basic and diluted earnings per share:​​
Net income (loss)​$54,871​$(47,917)
Denominator:​​
Weighted average shares outstanding​70,950​64,036
Dilutive effect of stock-based awards​1,399​—
Diluted weighted average shares outstanding​72,349​64,036
Anti-dilutive stock-based awards excluded​2,942​12,234
Net income (loss) per common share:​​​​
Basic​$0.77​$(0.75)
Diluted​$0.76​$(0.75)

​

​

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

Standard Warranties

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

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

​

​​​​​​​
​​Three Months Ended March 31,
​2022​2021
Balance, beginning of period​$2,822​$769
Utilization of reserve​(1,434)​(231)
Warranty expense​116​406
Balance, end of period​$1,504​$944

​

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 March 31, 2022 and December 31, 2021 were comprised of money market funds, corporate bonds, municipal bonds, and U.S. Government agency bonds. See additional disclosure regarding the fair value of our cash equivalents and investments in Note 3. Included in the balance of other assets as of March 31, 2022 and December 31, 2021 was $4.9 million and $5.3 million, respectively, related to corporate-owned life insurance policies which are used to fund our deferred compensation plan. We determine the fair value of insurance contracts by obtaining the cash surrender value of the contracts from the issuer, a Level 2 valuation technique.

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

​

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

​

We have strategic investments in four unconsolidated affiliates as of March 31, 2022. The estimated fair value of the investments was determined based on Level 3 inputs. As of March 31, 2022, management estimated that the fair value of the investments equaled the carrying value.

​

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

Restricted Cash

Restricted cash balances as of March 31, 2022 were $2.1 million primarily related to funds held in an international bank account securing a guarantee and funds held in an international bank account for a country in which we are required to maintain a minimum balance to operate. Approximately $2.0 million was included in prepaid expenses and other current assets on our condensed consolidated balance sheet, with the remainder included in other assets. Restricted cash balances as of December 31, 2021 included $0.1 million primarily related to funds held in an international bank account for a country in which we are required to maintain a minimum balance to operate. Approximately half of the balance was included in prepaid expenses and other current assets on our condensed consolidated balance sheet, with the remainder included in other assets.

Valuation of Goodwill, Intangibles and Long-lived Assets

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

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

Recently Issued Accounting Guidance

Recently Adopted Accounting Pronouncements

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

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

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 tables present our revenues by primary product and service offering (in thousands):

​

​​​​​​​​​​​​​​​​​​​
​​Three Months Ended March 31, 2022​Three Months Ended March 31, 2021
​​​Software and​​​​Software and​​
​​TASER​Sensors​Total​TASER​Sensors​Total
TASER 7​$50,066​$—​$50,066​$33,991​$—​$33,991
TASER X26P​9,479​—​9,479​9,963​—​9,963
TASER X2​3,619​—​3,619​12,778​—​12,778
TASER Consumer devices​1,696​—​1,696​2,205​—​2,205
Cartridges​37,825​—​37,825​30,418​—​30,418
Axon Body​—​29,708​29,708​—​19,756​19,756
Axon Flex​—​1,329​1,329​—​905​905
Axon Fleet​—​13,820​13,820​—​3,763​3,763
Axon Dock​—​7,480​7,480​—​6,920​6,920
Axon Evidence and cloud services​3,017​79,939​82,956​1,396​52,294​53,690
Extended warranties​6,679​9,061​15,740​5,646​7,500​13,146
Other​1,979​729​2,708​2,602​4,882​7,484
Total​$114,360​$142,066​$256,426​$98,999​$96,020​$195,019

​

​

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

​

​​​​​​​​​​​​​
​​Three Months Ended March 31,​
​​2022​​2021​
United States$214,21484%​$160,38682%
Other countries​42,21216​​34,63318​
Total​$256,426100%​$195,019100%

​

Contract Balances

The following table presents our contract assets, contract liabilities and certain information related to these balances as of and for the three months ended March 31, 2022 (in thousands):

​

​​​​
​March 31, 2022
Contract assets, net​$177,477
Contract liabilities (deferred revenue)​467,565
Revenue recognized in the period from:​
Amounts included in contract liabilities at the beginning of the period​104,043

​

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

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

​

​​​​​​​​​​​​​​​​​​​
​​March 31, 2022​December 31, 2021
​CurrentLong-TermTotalCurrentLong-TermTotal
Warranty:​​​​​​
TASER​$27,476​$1,401​$28,877​$21,257​$4,766​$26,023
Software and Sensors​21,736​15,621​37,357​23,175​18,137​41,312
​​49,212​17,022​66,234​44,432​22,903​67,335
Hardware:​​​​​​
TASER​38,828​3,618​42,446​12,944​28,727​41,671
Software and Sensors​50,151​71,408​121,559​34,862​81,223​116,085
​​88,979​75,026​164,005​47,806​109,950​157,756
Services:​​​​​​
TASER​4,309​2,066​6,375​2,701​3,482​6,183
Software and Sensors​184,127​46,824​230,951​170,652​49,386​220,038
​​​188,436​​48,890​​237,326​​173,353​​52,868​​226,221
Total​$326,627​$140,938​$467,565​$265,591​$185,721​$451,312

​

​​​​​​​​​​​​​​​​​​​
​​March 31, 2022​December 31, 2021
​CurrentLong-TermTotalCurrentLong-TermTotal
TASER​$70,613​$7,085​$77,698​$36,902​$36,975​$73,877
Software and Sensors​256,014​133,853​389,867​228,689​148,746​377,435
Total​$326,627​$140,938​$467,565​$265,591​$185,721​$451,312

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Remaining Performance Obligations

As of March 31, 2022, we had approximately $2.97 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 March 31, 2022. We expect to recognize between 15% - 20% of this balance over the next twelve months, and generally expect the remainder to be recognized over the following five to seven years, subject to risks related to delayed deployments, budget appropriation or other contract cancellation clauses.

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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Note 3 - Cash, Cash Equivalents and Investments

The following tables summarize our cash, cash equivalents, marketable securities, and available-for-sale investments at March 31, 2022 and December 31, 2021 (in thousands):

​

​​​​​​​​​​​​​​​​​​​​​​​​​​
​​As of March 31, 2022
​​​GrossGross​​Cash and​​​​​​
​​Amortized​Unrealized​Unrealized​​​​Cash​Marketable​Short-Term​Long-Term
​​Cost​Gains​Losses​Fair Value​Equivalents​Securities​Investments​Investments
Cash​$376,031​$—​$—​$376,031​​$376,031​$—​$—​$—
​​​​​​​​​​​​​​​​​​​​​​​​​​
Level 1:​​​​​​​​​​​​
Money market funds​10,336​​—​—​10,336​​10,336​—​—​​—
Agency bonds​4,700​​1​—​4,701​​—​—​4,701​​—
Marketable securities​​90,000​​—​​(32,400)​​57,600​​—​57,600​—​​—
Subtotal​105,036​​1​(32,400)​72,637​​​10,336​​57,600​​4,701​​—
Level 2:​​​​​​​​​​​​​​​​​​​​​​​​​
State and municipal obligations​​2,550​​—​​(30)​​2,520​​​—​​—​​1,759​​761
Corporate bonds​​31,409​​—​​(875)​​30,534​​​—​​—​​13,564​​16,970
Subtotal​​33,959​​—​​(905)​​33,054​​​—​​—​​15,323​​17,731
Total​$515,026​$1​$(33,305)​$481,722​​$386,367​$57,600​$20,024​$17,731

​

During the year ended December 31, 2021, we acquired 9,000,000 shares of common stock of Cellebrite DI Ltd (“CLBT”) with a fair value of $90.0 million. The CLBT common stock is recorded as marketable securities in the accompanying condensed consolidated balance sheets and its fair value is adjusted every reporting period. Changes in fair value are recorded in the condensed consolidated statement of operations as unrealized gain or (loss) on marketable securities, which is included in interest and other income, net. During the three months ended March 31, 2022, we recorded a $14.6 million unrealized loss on marketable securities relating to CLBT.

​

​​​​​​​​​​​​​​​​​​​​​​​​​​
​​As of December 31, 2021
​​​GrossGross​​Cash and​​​​​​
​​Amortized​Unrealized​Unrealized​​​​Cash​Marketable​Short-Term​Long-Term
​​Cost​Gains​Losses​Fair Value​Equivalents​Securities​Investments​Investments
Cash​$353,488​$—​$—​$353,488​​$353,488​$—​$—​$—
​​​​​​​​​​​​​​​​​​​​​​​​​​
Level 1:​​​​​​​​​​​​
Money market funds​2,844​​—​—​2,844​​2,844​—​—​​—
Agency bonds​10,700​​4​—​10,704​​—​—​10,704​​—
Marketable securities​​90,000​​—​​(17,820)​​72,180​​—​72,180​—​​—
Subtotal​103,544​​4​(17,820)​85,728​​​2,844​​72,180​​10,704​​—
​​​​​​​​​​​​​​​​​​​​​​​​​​
Level 2:​​​​​​​​​​​​​​​​​​​​​​​​​
State and municipal obligations​​2,570​​—​​(5)​​2,565​​​—​​—​​1,400​​1,165
Corporate bonds​​32,748​​1​​(276)​​32,473​​​—​​—​​2,406​​30,067
Subtotal​​35,318​​1​​(281)​​35,038​​​—​​—​​3,806​​31,232
Total​$492,350​$5​$(18,101)​$474,254​​$356,332​$72,180​$14,510​$31,232

​

​

​

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

​

​

​

Note 4 - Expected Credit Losses

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

​

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

​

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

​

​​​​​​​​​​
​Three Months Ended March 31, 2022
​​​United States​​Other countries​​Total
Balance, beginning of period​$3,171​$178​$3,349
Provision for expected credit losses​​57​​171​​228
Amounts written off charged against the allowance​​(137)​​-​​(137)
Other, including foreign currency translation​-​(2)​(2)
Balance, end of period​$3,091​$347​$3,438

​

​

​

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

​

​​​​​​​
​​March 31,​December 31,
​2022​2021
Accounts receivable and notes receivable, current​$2,424​$2,203
Contract assets, net​891​1,010
Long-term notes receivable, net of current portion​123​136
Total allowance for expected credit losses on customer receivables​$3,438​$3,349

​

​

​

​

​

​

​

Note 5 - Inventory

Inventories are stated at the lower of cost, determined on the first-in, first-out (“FIFO”) basis, or net realizable value, net of an inventory valuation allowance. We use a standard cost methodology to determine the cost basis for its inventories. Costs include allocations for materials, labor, and overhead. All variances between actual costs and standard costs are apportioned to inventory and cost of goods sold based upon inventory turnover. We evaluate inventory on a quarterly basis for obsolete or slow-moving items to ascertain if the recorded allowance is reasonable and adequate. Additional provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value.

​

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

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

​

​

​​​​​​​
​March 31, 2022December 31, 2021
Raw materials​$42,452​$38,267
Finished goods​79,698​70,421
Total inventory​$122,150​$108,688

​

​

​

​

​

​

​

​

​

​

​

Note 6 – Property and Equipment

​

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

​

​​​​​​​​​
​​Estimated​​​​​​
​Useful LifeMarch 31, 2022December 31, 2021
Land​N/A​$54,868​$54,868
Building and leasehold improvements​3-39 years​​26,456​​25,712
Production equipment​3-5 years​54,416​54,090
Computers, equipment and software​3-5 years​17,400​15,343
Furniture and office equipment​3-5 years​6,842​6,838
Vehicles​5 years​3,123​2,932
Website development costs​3 years​204​204
Capitalized internal-use software development costs​3-5 years​11,996​11,996
Construction-in-process​N/A​37,667​25,258
Total cost​​​212,972​197,241
Less: Accumulated depreciation​​​(63,467)​(58,784)
Property and equipment, net​​$149,505​$138,457

​

Construction-in-process includes $17.6 million and $12.4 million related to the development of the new Company’s campus at March 31, 2022 and December 31, 2021, respectively.

​

Note 7 - Strategic Investments

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

​

In conjunction with certain of our strategic investments, we have the ability to commit additional capital over time through warrants where the exercisability and exercise prices are conditional on the achievement of certain partnership performance metrics. During the three months ended March 31, 2022, we attained the performance metric for the first tranche of performance stock warrants for one of our strategic investees. The amount recorded on our condensed consolidated balance sheets represents the fair value of the preferred stock warrants as of March 31, 2022.

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

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

​​​​​​​​​​
​​Three Months Ended March 31, 2022
​​Strategic investments​Warrants for strategic investment​Total
Balance, beginning of period​$80,775​$2,745​$83,520
Investments​​500​​—​​500
Observable price changes​​41,893​​28,539​​70,432
Balance, end of period​$123,168​$31,284​$154,452

​

​​​​​​​​​​
​​Inception to date
​​Strategic investments​Warrants for strategic investment​Total
Investments​$53,068​$2,588​$55,656
Observable price changes​​84,646​​28,696​​113,342
Sales​​(14,546)​​—​​(14,546)
Balance, end of period​$123,168​$31,284​$154,452

​

During the three months ended March 31, 2022, certain of our strategic investees issued new equity to us and/or other investors. These events represented observable price changes for our existing investments and related warrants, resulting in an aggregate unrealized gain of $70.4 million. The estimated fair value of the existing investments was calculated using valuation techniques that included both observable and unobservable inputs, and was lower than the issue per share of the new equity issued by the strategic investees because of different characteristics of the newly issued equity instruments compared to our existing investments. The valuation techniques included both Level 2 and Level 3 inputs as defined by ASC Topic 820.

Subsequent Events

On April 5, 2022, we exercised warrants in one of our strategic investees for a total exercise price of $6.6 million. We are still finalizing the accounting impact of the transaction, but preliminarily expect to recognize an increase of approximately $60.0 million to the carrying value of our strategic investments, which we would recognize in earnings during the quarter ending June 30, 2022.

On April 29, 2022, we made a $21.0 million non-controlling minority investment in preferred stock of Fusus, Inc. We were also issued a warrant that gives us the ability to purchase additional preferred stock and a call option to acquire the remaining outstanding equity at specified enterprise values.

​

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

Note 8 - Other Long-Term Assets

Other long-term assets consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):

​

​​​​​​​
​March 31, 2022December 31, 2021
Cash surrender value of corporate-owned life insurance policies​$4,912​$5,276
Deferred commissions (1)​55,114​54,028
Restricted cash​56​57
Operating lease assets​23,242​23,270
Deferred implementation costs (2)​​3,697​​3,915
Prepaid expenses, deposits and other​​10,982​​11,701
Total other long-term assets​98,003​$98,247
(1)Represents the incremental costs of obtaining contracts with customers, which consist primarily of sales commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contracts and amortized consistent with the recognition timing of the revenue for the underlying performance obligations.
(2)During the year ended December 31, 2021, we completed an implementation of several software-as-a-service applications supporting our internal operations. Following the implementation, we placed $4.3 million of deferred implementation costs assets related to these applications into service.

Note 9 - Accrued Liabilities

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

​

​​​​​​​
​March 31, 2022December 31, 2021
Accrued salaries, benefits and bonus​$33,242​$62,425
Accrued professional, consulting and lobbying fees​6,982​7,152
Accrued warranty expense​1,504​2,822
Accrued income and other taxes​3,615​3,736
Accrued inventory in transit​​8,910​​9,945
Other accrued expenses​15,182​17,627
Accrued liabilities​$69,435​$103,707

​

​

Note 10 - Income Taxes

We file income tax returns for federal purposes and in many states, as well as in multiple foreign jurisdictions. Our tax filings remain subject to examination by applicable tax authorities for a certain length of time, generally three to four years, but can be up to ten years in some jurisdictions following the tax year to which these filings relate. We have been previously notified that an income tax audit may commence for Axon Public Safety Southeast Asia LLC, our entity in Vietnam; however, there has been no movement to date.

Deferred Tax Assets

Net deferred income tax assets at March 31, 2022, primarily include R&D tax credits, stock-based compensation expense, deferred revenue, accruals and reserves, R&D capitalization, net of amortization and net operating losses, partially offset by accelerated depreciation expense, unrealized investment gains, and valuation allowance reserve. Our total net deferred tax assets at March 31, 2022 were $108.5 million.

In preparing our condensed consolidated financial statements, management assesses the likelihood that its deferred tax assets will be realized from future taxable income. In evaluating our ability to recover our deferred income

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

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

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

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

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 $18.9 million as of March 31, 2022. Should the unrecognized benefit of $18.9 million be recognized, our effective tax rate would be favorably impacted. Approximately $12.8 million of the unrecognized tax benefit associated with R&D credits has been netted against the R&D deferred tax asset.

Effective Tax Rate

Our overall effective tax rate for the three months ended March 31, 2022, after discrete period adjustments, was 24.3%. Before discrete adjustments, the tax rate was 25.7%, which differs from the federal statutory rate, primarily due to the impact of R&D tax credits offset by the executive compensation limitation under Internal Revenue Code ("IRC") Section 162(m) and an increase in valuation allowance and unrecognized tax benefits. The effective tax rate was favorably impacted by a $1.1 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for restricted stock units (“RSUs”) and performance stock units (“PSUs”) that vested during the three months ended March 31, 2022.

Note 11 - Stockholders’ Equity

Performance-based stock awards

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

For performance-based options with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized for each pair of performance and market conditions over the longer of the expected achievement period of the performance and market conditions, beginning at the point in

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

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.

CEO Performance Award

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

​

​​​​​​​
Revenue Goal (1)(in thousands)​Achievement Status​Adjusted EBITDA**(in thousands)**​Achievement Status
Goal #1, $710,058​Achieved​Goal #1, $125,000​Achieved
Goal #2, $860,058​Achieved​Goal #2, $155,000​Achieved
Goal #3, $1,010,058​Probable​Goal #3, $175,000​Achieved
Goal #4, $1,210,058​Probable​Goal #4, $190,000​Achieved
Goal #5, $1,410,058​Not Applicable​Goal #5, $200,000​Achieved
Goal #6, $1,610,058​Not Applicable​Goal #6, $210,000​Achieved
Goal #7, $1,810,058​Not Applicable​Goal #7, $220,000​Achieved
Goal #8, $2,010,058​Not Applicable​Goal #8, $230,000​Achieved
(1)In connection with the business acquisition that was completed during the three months ended September 30, 2018, the revenue goals were adjusted for the acquiree’s Target Revenue, as defined in the CEO Performance Award agreement.

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

The first ten market capitalization goals have been achieved as of March 31, 2022. As of March 31, 2022, 5.3 million stock options have been certified by the Compensation Committee and vested. As twelve operational goals have been achieved or are considered probable of achievement, we recorded stock-based compensation expense of $233.1 million related to the CEO Performance Award from the grant date through March 31, 2022. The number of stock options that would vest related to the remaining unvested tranches is approximately 1.1 million shares. As of March 31,

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

2022, we had $12.8 million of total unrecognized stock-based compensation expense for the performance goals that were considered probable of achievement, which will be recognized over a weighted-average period of 1.3 years.

eXponential Stock Performance Plan

On February 12, 2019, our shareholders approved the 2019 Stock Incentive Plan (the “2019 Plan”), which was adopted by the Board of Directors to reserve a sufficient number of shares to facilitate our eXponential Stock Performance Plan (“XSPP”) and grants of eXponential Stock Units (“XSUs”) under the plan. Initial awards under the plan were granted in January 2019, with additional employee awards granted since that date.

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

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

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

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

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

The first nine market capitalization goals have been achieved as of March 31, 2022. The tenth market capitalization goal has not yet been attained, though the related operational goal was achieved as of September 30, 2021. As all twelve operational goals have been achieved or are considered probable of achievement, we recorded stock-based compensation expense of $180.4 million related to the XSU awards from their respective grant dates through March 31, 2022. The number of XSU awards that would vest related to the remaining three tranches is approximately 1.3 million shares. As of March 31, 2022, we had $18.4 million of total unrecognized stock-based compensation expense, which will be recognized over a weighted-average period of 1.8 years.

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

Restricted Stock Units

The following table summarizes RSU activity for the three months ended March 31, 2022 (number of units and aggregate intrinsic value in thousands):

​

​​​​​​​​​
​Number ofWeighted AverageAggregate
​​Units​Grant-Date Fair Value​Intrinsic Value
Units outstanding, beginning of year1,115​$133.40​
Granted149​137.89​
Released(93)​76.70​
Forfeited(25)​136.92​
Units outstanding, end of period1,146​138.48​$157,892

​

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $137.73 per share, multiplied by the number of RSUs outstanding. As of March 31, 2022, there was $126.6 million in unrecognized compensation costs 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 2.2 years. RSUs are released when vesting requirements are met.

Certain RSUs that vested in the three months ended March 31, 2022 were net-share settled such that we withheld shares to cover the employees’ tax obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld related to RSUs were four thousand and had a value of $0.5 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 condensed 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 PSU activity, inclusive of XSUs, for the three months ended March 31, 2022 (number of units and aggregate intrinsic value in thousands):

​

​​​​​​​​​
​Number ofWeighted AverageAggregate
​​Units​Grant-Date Fair Value​Intrinsic Value
Units outstanding, beginning of year1,499​$39.86​
Granted46​130.33​
Released(18)​128.52​
Forfeited(10)​53.93​
Units outstanding, end of period1,517​41.48​$208,987

​

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $137.73 per share, multiplied by the number of PSUs outstanding. As of March 31, 2022, there was $27.2 million in unrecognized compensation costs related to PSUs under our stock plans for shares that are expected to vest. We expect to recognize the cost related to the PSUs over a weighted average period of 1.8 years. PSUs are released when vesting requirements are met.

As of March 31, 2022, the performance criteria had been met for approximately seventeen thousand of the 1.5 million PSUs outstanding.

Certain PSUs that vested in the three months ended March 31, 2022 were net-share settled such that we withheld shares to cover the employees’ tax obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld related to PSUs were approximately six thousand and had a

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

value of $0.8 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 condensed 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 three months ended March 31, 2022 (number of units and aggregate intrinsic value in thousands):

​​​​​​​​​​​
​​​​Weighted​​
​​​​Weighted​Average​​​
​​Number​Average​Remaining​​​
​​of​Exercise​Contractual​Aggregate
​​Options​Price​Life (years)​Intrinsic Value
Options outstanding, beginning of year2,438​$28.58​
Granted—​—​
Exercised—​—​
Expired / terminated—​—​​
Options outstanding, end of period2,438​28.585.91​$266,103
Options exercisable, end of period1,377​28.585.91​150,297

​

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 $137.73 on March 31, 2022. There were no options exercised for the three months ended March 31, 2022. As of March 31, 2022, total options outstanding included 1.1 million unvested performance-based stock options, which relate to the CEO Performance Award and are probable of achievement.

Stock-based Compensation Expense

The following table summarizes the composition of stock-based compensation expense for the three months ended March 31, 2022 and 2021 (in thousands):

​

​​​​​​​
​​Three Months Ended March 31,
​20222021
Cost of products sold and services delivered​$1,108​$1,489
Sales, general and administrative expenses​10,998​71,015
Research and development expenses​12,982​17,106
Total stock-based compensation expense​$25,088​$89,610

​

Stock Incentive Plan

In February 2019, our shareholders approved the 2019 Plan authorizing an additional 6.0 million shares, plus remaining available shares under prior plans, for issuance under the new plan. Combined with the legacy stock incentive plans, there are 0.9 million shares available for grant as of March 31, 2022.

Stock Inducement Plan

In September 2019, our Board of Directors adopted the Axon Enterprise, Inc. 2019 Stock Inducement Plan (the “2019 Inducement Plan”) pursuant to which we reserved 500,000 shares of common stock for issuance under the Inducement Plan. In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules, awards under the Inducement Plan may only be made to individuals not previously employed by us (or following such individuals’ bona fide periods of non-employment by us), as an inducement material to the individuals’ entry into employment with us. The terms and conditions of the 2019 Inducement Plan are substantially similar to our stockholder-approved 2019 Plan. As of March 31, 2022, there were 29,600 shares available for grant under the 2019 Inducement Plan. On April 6, 2022, we

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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granted 29,507 shares from the 2019 Inducement Plan to new employees who joined the Company as a result of an acquisition.

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. During the three months ended March 31, 2022 and 2021, no common shares were purchased under the program. As of March 31, 2022, $16.3 million remains available under the plan for future purchases. Any future purchases will be discretionary.

At-the-Market equity offering

During the year ended December 31, 2021, we sold 577,956 shares of our common stock under our "at-the-market" equity offering program (the “ATM”). We generated approximately $107.6 million in aggregate gross proceeds from sales under the ATM. Aggregate net proceeds from the ATM were $105.4 million after deducting related expenses, including 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. The ATM expires on April 20, 2024. We intend to use the net proceeds from this offering for general corporate purposes, which may include, among other things, providing capital to satisfy a portion of the tax obligations related to the vesting and settlement of stock compensation awards granted to our executive officers and other employees under our stock incentive plans, to support our growth, and to acquire or invest in product lines, products, services, technologies or facilities.

Note 12 - Line of Credit

We have a $50.0 million unsecured revolving line of credit with a domestic bank, of which $20.0 million is available for letters of credit. The credit agreement matures on December 31, 2023 and has an accordion feature which allows for an increase in the total line of credit up to $100.0 million, subject to certain conditions, including the availability of additional bank commitments.

At March 31, 2022 and December 31, 2021, 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 March 31, 2022, we had letters of credit outstanding of approximately $6.3 million under the facility and available borrowing of $43.7 million, excluding amounts available under the accordion feature. Advances under the line of credit bear interest at LIBOR plus 1.0 to 1.5% per year determined in accordance with a pricing grid based on our funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio.

We are required to comply with a maximum funded debt to EBITDA ratio of no greater than 2.50 to 1.00 based upon a trailing four fiscal quarter period. At March 31, 2022, our funded debt to EBITDA ratio was 0.00 to 1.00.

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Note 13 - Commitments and Contingencies

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 three 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.

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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.

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The litigation information in this note is current through the date of these financial statements.

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U.S. Federal Trade Commission Litigation

The U.S. Federal Trade Commission (“FTC”) filed an enforcement action on January 3, 2020 regarding Axon’s May 2018 acquisition of Vievu LLC from Safariland LLC. The FTC alleges the merger was anticompetitive and adversely affected the body worn camera (“BWC”) and digital evidence management systems (“DEMS”) market for “large metropolitan police departments.” The administrative hearing is presently stayed pending Axon’s Supreme Court challenge (see below). If ultimately successful, the FTC may require Axon to divest Vievu and other assets or take other remedial measures, any of which could be material to Axon. We are vigorously defending the matter. At this time, we cannot predict the eventual scope, duration, or outcome of the proceeding and accordingly we have not recorded any liability in the accompanying consolidated financial statements.

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

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In parallel to these matters, we are evaluating strategic alternatives to litigation, which we might pursue if determined to be in the best interests of shareholders and customers. This could include a divestiture of the Vievu entity and/or related assets and the licensure of certain intellectual and other intangible property. While we continue to believe the acquisition of Vievu was lawful and a benefit to Vievu’s customers, the cost, risk and distraction of protracted litigation merit consideration of settlement if achievable on terms agreeable to the FTC and the company.

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General

From time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us. It is our policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on us. After carefully assessing the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously defend any lawsuit filed against us. We record a liability when losses are deemed probable and reasonably estimable. When losses are deemed reasonably possible but not probable, we determine whether it is possible to provide an estimate of the amount of the loss or range of possible losses for the claim, if material for disclosure. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of any potential loss. We reevaluate and update accruals as matters progress over time.

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Based on our assessment of outstanding litigation and claims as of March 31, 2022, we have determined that it is not reasonably possible that these lawsuits will individually, or in the aggregate, materially affect our results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on our operating results, financial condition or cash flows.

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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 March 31, 2022, we had outstanding letters of credit of $6.3 million that are expected to expire in February and June of 2023. We also had outstanding letters of credit of $0.5 million that do not draw against our credit facility. The outstanding letters of credit are expected to expire in May 2023. Additionally, we had $21.5 million of outstanding surety bonds at March 31, 2022, with $3.5 million expiring in 2022, $7.5 million expiring in 2023 and the remaining $10.5 million expiring in 2024.

Note 14 – Accumulated Other Comprehensive Income (loss)

The following tables reflect 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, 2021​$(207)​$(1,110)​$(1,317)
Other comprehensive loss​​(489)​​(1,072)​​(1,561)
Balance, March 31, 2022​$(696)​$(2,182)​$(2,878)

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​​​Unrealized Gains (Losses)​​​​​​
​​​on Available-for-Sale​​Foreign Currency​​
​​​Investments​​Translation​Total
Balance, December 31, 2020​$—​$141​$141
Other comprehensive income​​—​​1​​1
Balance, March 31, 2021​$—​$142​$142

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Note 15 - Employee Benefit Plans

We have a defined contribution 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 amount allowed by law of their eligible compensation.

We also have a non-qualified deferred compensation plan for certain executives, employees and non-employee directors through which participants may elect to postpone the receipt and taxation of a portion of their compensation, including stock-based compensation, received from us. The non-qualified deferred compensation plan allows eligible participants to defer up to 80% of their base salary and up to 100% of other types of compensation. The plan also allows for matching and discretionary employer contributions. Employee deferrals are deemed 100% vested upon contribution. Distributions from the plan are made upon retirement, death, separation of service, specified date or upon the occurrence

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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of an unforeseeable emergency. Distributions can be paid in a variety of forms from lump sum to installments over a period of years. Participants in the plan are entitled to select from a wide variety of investments available under the plan and are allocated gains or losses based upon the performance of the investments selected by the participant. All gains or losses are allocated fully to plan participants and we do not guarantee a rate of return on deferred balances. Assets related to this plan consist of corporate-owned life insurance contracts and are included in other assets in the condensed consolidated balance sheets; see Note 8 for balances. Participants have no rights or claims with respect to any plan assets and any such assets are subject to the claims of our general creditors.

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

We also sponsor defined contribution plans in Australia, Canada, and Finland.

Our matching contributions for all defined contribution plans were $3.1 million and $2.1 million for the three months ended March 31, 2022 and 2021, respectively.

Note 16 - Segment Data

Our operations are comprised of two reportable segments: the TASER segment and the Software and Sensors segment.

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

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​​Three Months Ended March 31, 2022​Three Months Ended March 31, 2021
​​​​​Software and​​​​​​​Software and​​​
​TASERSensorsTotalTASERSensorsTotal
Net sales from products​$111,154​$65,050​$176,204​$97,302​$43,584​$140,886
Net sales from services​3,206​77,016​80,222​1,697​52,436​54,133
Net sales​114,360​142,066​256,426​98,999​96,020​195,019
Cost of product sales​40,625​38,727​79,352​32,945​25,671​58,616
Cost of service sales​—​21,335​21,335​—​13,050​13,050
Cost of sales​40,625​60,062​100,687​32,945​38,721​71,666
Gross margin​$73,735​$82,004​$155,739​$66,054​$57,299​$123,353
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Research and development​$9,896​$38,520​$48,416​$9,243​$37,775​$47,018

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