Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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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 March 31, 2022, and results of operations for the three months ended March 31, 2022 and 2021, should be read in conjunction with the condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes in our 2021 Annual Report on Form 10-K filed with the SEC on February 25, 2022. 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 2021 Annual Report on Form 10-K. See also "Special Note Regarding Forward-Looking Statements" on page ii of this Quarterly 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 March 31, 2022 were $256.4 million, an increase of $61.4 million, or 31.5%, from the comparable period in the prior year. We had income from operations of $17.2 million compared to a loss of $50.3 million for the same period in the prior year. Gross margin dollars increased $32.4 million but decreased as a percentage of revenue compared to the three months ended March 31, 2021, reflecting higher freight and labor costs. Operating expenses decreased $35.1 million, reflecting a decrease of $64.1 million in stock-based compensation expense related to the CEO Performance Award and XSPP, an increase of $12.1 million in salaries, benefits and bonus expense, and increases in marketing, commissions, and travel expense. Net income of $54.9 million includes unrealized gains of $70.4 million related to observable price changes for our existing investments and related warrants and an unrealized loss of $14.6 million on marketable securities related to our investment in CLBT, compared to net loss of $47.9 million for the comparable period in the prior year.

Outlook

For the year ending December 31, 2022, we expect revenue of approximately $1.05 billion to $1.1 billion. Our anticipated capital expenditures of approximately $135 million to $160 million in 2022 remain consistent with our prior expectations, and include approximately $85 million for development of our manufacturing facility and campus in Scottsdale, Arizona, approximately $40 million to support capacity expansion and automation of TASER devices, and the remainder on additional investments to support our continued growth.

Results of Operations

Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021

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 March 31,
	2022				2021
Net sales from products	$	176,204	68.7	%	$	140,886	72.2	%
Net sales from services		80,222	31.3			54,133	27.8
Net sales		256,426	100.0			195,019	100.0
Cost of product sales		79,352	31.0			58,616	30.1
Cost of service sales		21,335	8.3			13,050	6.7
Cost of sales		100,687	39.3			71,666	36.8
Gross margin		155,739	60.7			123,353	63.2
Operating expenses:
Sales, general and administrative		90,129	35.1			126,597	64.9
Research and development		48,416	18.9			47,018	24.1
Total operating expenses		138,545	54.0			173,615	89.0
Income (loss) from operations		17,194	6.7			(50,262)	(25.8)
Interest and other income, net		55,299	21.6			585	0.3
Income (loss) before provision for income taxes		72,493	28.3			(49,677)	(25.5)
Provision for (benefit from) income taxes		17,622	6.9			(1,760)	(0.9)
Net income (loss)	$	54,871	21.4	%	$	(47,917)	(24.6)	%

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


	Three Months Ended March 31,
	2022				2021
United States	$	214,214	84	%	$	160,386	82	%
Other countries		42,212	16			34,633	18
Total	$	256,426	100	%	$	195,019	100	%

International revenue increased compared to the prior year comparable period, driven primarily by increased sales in our Europe, Middle East, and Africa (“EMEA”) region.

Net Sales

Net sales by product line were as follows (dollars in thousands):


	Three Months Ended March 31,								Dollar		Percent
	2022				2021				Change		Change
TASER segment:
TASER 7	$	50,066	19.5	%	$	33,991	17.5	%	$	16,075	47.3	%
TASER X26P		9,479	3.7			9,963	5.1			(484)	(4.9)
TASER X2		3,619	1.4			12,778	6.6			(9,159)	(71.7)
TASER Consumer devices		1,696	0.7			2,205	1.1			(509)	(23.1)
Cartridges		37,825	14.7			30,418	15.6			7,407	24.4
Axon Evidence and cloud services		3,017	1.2			1,396	0.7			1,621	116.1
Extended warranties		6,679	2.6			5,646	2.9			1,033	18.3
Other		1,979	0.8			2,602	1.3			(623)	(23.9)
Total TASER segment		114,360	44.6			98,999	50.8			15,361	15.5
Software and Sensors segment:
Axon Body		29,708	11.6			19,756	10.1			9,952	50.4
Axon Flex		1,329	0.5			905	0.5			424	46.9
Axon Fleet		13,820	5.4			3,763	1.9			10,057	267.3
Axon Dock		7,480	2.9			6,920	3.5			560	8.1
Axon Evidence and cloud services		79,939	31.2			52,294	26.9			27,645	52.9
Extended warranties		9,061	3.5			7,500	3.8			1,561	20.8
Other		729	0.3			4,882	2.5			(4,153)	(85.1)
Total Software and Sensors segment		142,066	55.4			96,020	49.2			46,046	48.0
Total net sales	$	256,426	100.0	%	$	195,019	100.0	%	$	61,407	31.5	%

Net unit sales for TASER segment products and Software and Sensors segment products were as follows:



	Three Months Ended March 31,		Unit	Percent
	2022	2021	Change	Change
TASER 7	31,395	23,360	8,035	34.4
TASER X26P	6,338	8,229	(1,891)	(23.0)
TASER X2	2,006	8,838	(6,832)	(77.3)
TASER Consumer devices	6,201	8,686	(2,485)	(28.6)
Cartridges	1,089,939	1,009,760	80,179	7.9
Axon Body	62,562	46,094	16,468	35.7
Axon Flex	3,127	1,565	1,562	99.8
Axon Fleet	5,747	1,440	4,307	299.1
Axon Dock	8,064	6,786	1,278	18.8

Net sales for the TASER segment increased 15.5% primarily due to an increase of $16.1 million in TASER 7 devices and $7.4 million in cartridge revenue. We continue to see a shift to purchases of our latest generation device, TASER 7, from legacy devices. TASER 7 revenue was impacted by higher average selling prices and an increase in unit sales. Sales of our TASER 7 device also drove the increase in revenue from Axon Evidence and cloud services. Cartridge revenue was impacted by an increase in unit sales and by higher average selling prices. Offsetting the increases were decreased unit sales for our legacy TASER devices and our consumer devices. During the three months ended March 31, 2022, we recognized $33.1 million in TASER 7 revenue for orders that were scheduled to ship prior to December 31, 2021, but could not be fulfilled due to the delayed receipt of a manufacturing component for our TASER 7 devices.

Net sales for the Software and Sensors segment increased 48.0% during the three months ended March 31, 2022 as we continued to add users and associated devices to our network. The increase in the aggregate number of users drove the majority of the increase in Axon Evidence revenue of $27.6 million. The $10.1 million increase in Axon Fleet revenue

was primarily driven by higher unit sales, partially offset by lower average selling prices. Our newest Fleet product, Axon Fleet 3, which includes automated license plate reader technology, began shipping on June 30, 2021. Increased unit sales of our Axon Body 3 camera drove the $10.5 million increase in Axon Body and Axon Dock revenue and were partially offset by a decrease in Axon Dock average selling prices. Other revenue in the Software and Sensors segment decreased $4.2 million, driven primarily by $2.9 million of contra-revenue during the current quarter related to a free trial program of third party products. During the three months ended March 31, 2022, we recognized $13.0 million for orders that were scheduled to ship prior to December 31, 2021, but could not be fulfilled due to supply chain constraints for our Axon Body 3 devices.

We consider total company future contracted revenues a forward-looking performance indicator. As of March 31, 2022, we had approximately $2.97 billion of total company future contracted revenue, which included both recognized contract liabilities as well as amounts that will be invoiced and recognized in future periods. We expect to recognize between 15% - 20% of this balance over the next twelve months, and expect the remainder to be recognized over the following five to seven years, subject to risks related to delayed deployments, budget appropriation or other contract cancellation clauses.

Cost of Product and Service Sales

Within the TASER segment, cost of product and service sales increased to $40.6 million for the three months ended March 31, 2022 from $32.9 million for the same period in 2021, primarily related to higher unit sales. Cost as a percentage of sales increased to 35.5% from 33.3%. The increase was primarily attributable to higher freight and labor costs as well as increased manufacturing overhead costs. While we continue to adjust strategic inventory levels based on areas of risk to mitigate potential supply disruptions, global supply conditions and local closures related to the COVID-19 pandemic could further impact our margins.

Within the Software and Sensors segment, cost of product and service sales increased to $60.1 million for the three months ended March 31, 2022 from $38.7 million for the same period in 2021. Cost as a percentage of sales increased slightly to 42.3% from 40.3%. The increase was primarily driven by product mix.

Gross Margin

As a percentage of net sales, gross margin for the TASER segment decreased to 64.5% from 66.7% for the three months ended March 31, 2022 and 2021, respectively. The decrease was a result of higher manufacturing and freight costs.

As a percentage of net sales, gross margin for the Software and Sensors segment decreased to 57.7% from 59.7% for the three months ended March 31, 2022 and 2021, respectively. Within the Software and Sensors segment, hardware gross margin was 40.5% for the three months ended March 31, 2022 compared to 41.1% for the same period in 2021, while the service margins were 72.3% and 75.1% during those same periods, respectively.

Sales, General and Administrative Expenses

Sales, general and administrative ("SG&A") expenses were comprised as follows (dollars in thousands):


	Three Months Ended March 31,						Dollar		Percent
	2022			2021			Change		Change
Total sales, general and administrative expenses	$	90,129		$	126,597		$	(36,468)	(28.8)
Sales, general, and administrative as a percentage of net sales		35.1	%		64.9	%

Stock-based compensation expense decreased $58.0 million in comparison to the prior year comparable period, which was attributable to a decrease of $35.7 million in expense related to the CEO Performance Award and a decrease of $25.3 million related to our XSPP. The decrease was attributable to the vesting of ten tranches of the CEO Performance Award and nine tranches of the XSPP in 2021, which have no remaining unrecognized expense. The decrease was partially offset by increased stock-based compensation expense due to increased headcount.

Salaries, benefits and bonus expense increased $6.1 million primarily due to an increase in headcount and an increase in payroll taxes on a higher base of salaries and bonus expense. Partially offsetting the increase was a decrease of $1.4 million in payroll taxes related to the vesting of the first tranche of our XSPP in March 2021; as no tranches of the XSPP have vested in 2022, we have not recognized payroll tax expense related to the program this year.

Sales and marketing and travel expenses increased $8.0 million. The increase was primarily driven by a $3.6 million increase in commissions expense tied to higher revenues, $3.4 million increase in travel expenses, reflected a return to pre-pandemic spending levels as travel restrictions have eased and in-person meetings have resumed, and an increase of $1.1 million related to trade shows, seminars, and strategic meetings. Also impacting higher travel expense was increased travel costs per trip.

Professional and consulting expenses increased $3.0 million in comparison to the prior year comparable period, driven primarily by increased legal consulting expense.

Research and Development Expenses

Research and development ("R&D") expenses were comprised as follows (dollars in thousands):



	Three Months Ended March 31,						Dollar		Percent
	2022			2021			Change		Change
Total research and development expenses	$	48,416		$	47,018		$	1,398	3.0
Research and development as a percentage of net sales		18.9	%		24.1	%

Within the TASER segment, R&D expense increased $0.7 million. An increase of $1.4 million in salaries, benefits and bonus expense reflected higher headcount. Additionally, indirect manufacturing costs and supplies increased $0.9 million related to the development of next generation products. Fully offsetting these increases was a decrease in stock-based compensation expense of $2.7 million, due to the vesting of XSPP tranches during 2021, for which there is no remaining unamortized expense.

R&D expense for the Software and Sensors segment increased $0.7 million, reflecting an increase of $4.6 million in salaries, benefits and bonus expense due to higher headcount. Partially offsetting the increase was a decrease in stock-based compensation expense of $3.4 million, due to the vesting of nine XSPP tranches during 2021, for which there is no remaining unamortized expense for the vested tranches. Professional and consulting expenses also decreased $1.1 million, reflecting higher spending during the prior year comparable period related to the development of next generation products.

We expect R&D expense to continue to increase in absolute dollars as we focus on growing the Software and Sensors segment as we add headcount and additional resources to develop new products and services to further advance our scalable cloud-connected device platform. We are investing in technologies that include our CEDs, body cameras, in-car cameras and other sensors, artificial intelligence, digital evidence management, productivity software, communications software, and technologies that enable real-time situational awareness for public safety.

Interest and Other Income, Net

Interest and other income, net was $55.3 million for the three months ended March 31, 2022, compared to income of $0.6 million for the same period in 2021. During the first quarter of 2022, we recorded an unrealized gain of $70.4 million related to observable price changes for our existing investments and related warrants, and a $14.6 million unrealized loss on marketable securities related to our investment in CLBT.

Provision for Income Taxes

The provision for income taxes was an expense of $17.6 million for the three months ended March 31, 2022, which was an effective tax rate of 24.3%. Our estimated full year effective income tax rate for 2022, before discrete period adjustments, is 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 RSUs and PSUs that vested during the three months ended March 31, 2022.

Net Income

We recorded net income of $54.9 million for the three months ended March 31, 2022 compared to net loss of $47.9 million for the same period in 2021. Net income per basic share was $0.77 for the three months ended March 31, 2022 compared to $0.75 net loss per basic share for the same period in 2021. Net income per diluted share was $0.76 for the three months ended March 31, 2022 compared to $0.75 net loss per diluted share for the same period in 2021.

Three Months Ended March 31, 2022 Compared to the Three Months Ended December 31, 2021

Net Sales

Net sales by product line were as follows (dollars in thousands):


	Three Months Ended				Three Months Ended				Dollar		Percent
	March 31, 2022				December 31, 2021				Change		Change
TASER segment:
TASER 7	$	50,066	19.5	%	$	23,146	10.6	%	$	26,920	116.3	%
TASER X26P		9,479	3.7			12,011	5.5			(2,532)	(21.1)
TASER X2		3,619	1.4			19,080	8.8			(15,461)	(81.0)
TASER Consumer devices		1,696	0.7			2,259	1.0			(563)	(24.9)
Cartridges		37,825	14.7			36,433	16.7			1,392	3.8
Axon Evidence and cloud services		3,017	1.2			3,350	1.5			(333)	(9.9)
Extended warranties		6,679	2.6			6,523	3.0			156	2.4
Other		1,979	0.8			1,107	0.7			872	78.8
TASER segment		114,360	44.6			103,909	47.8			10,451	10.1
Software and Sensors segment:
Axon Body		29,708	11.6			14,939	6.9			14,769	98.9
Axon Flex		1,329	0.5			674	0.3			655	97.2
Axon Fleet		13,820	5.4			9,246	4.2			4,574	49.5
Axon Dock		7,480	2.9			5,552	2.5			1,928	34.7
Axon Evidence and cloud services		79,939	31.2			70,072	32.2			9,867	14.1
Extended warranties		9,061	3.5			9,054	4.2			7	0.1
Other		729	0.3			4,132	1.9			(3,403)	(82.4)
Software and Sensors segment		142,066	55.4			113,669	52.2			28,397	25.0
Total net sales	$	256,426	100.0	%	$	217,578	100.0	%	$	38,848	17.9	%

Net unit sales for TASER segment products and Software and Sensors segment products were as follows:


	Three Months Ended
			Unit	Percent
	March 31, 2022	December 31, 2021	Change	Change
TASER 7	31,395	12,927	18,468	142.9	%
TASER X26P	6,338	8,246	(1,908)	(23.1)	%
TASER X2	2,006	14,432	(12,426)	(86.1)	%
TASER Consumer devices	6,201	8,733	(2,532)	(29.0)	%
Cartridges	1,089,939	1,194,867	(104,928)	(8.8)	%
Axon Body	62,562	31,749	30,813	97.1	%
Axon Flex	3,127	1,027	2,100	204.5	%
Axon Fleet	5,747	4,609	1,138	24.7	%
Axon Dock	8,064	4,959	3,105	62.6	%

Net sales within the TASER segment increased by approximately $10.5 million or 10.1% as compared to the prior quarter, primarily due to an increase of $26.9 million in TASER 7 revenue as a result of higher unit sales, partially offset by lower average selling prices. The increase in TASER segment revenue was partially offset by a net decrease in revenue from other TASER devices of $18.6 million as a result of fewer units sold. Cartridge revenue increased by $1.4 million due to higher average selling prices, partially offset by decreased units sold. During the three months ended March 31, 2022, we recognized $33.0 million in TASER 7 revenue for orders that were scheduled to ship prior to December 31, 2021, but could not be fulfilled due to the delayed receipt of a manufacturing component for our TASER 7 devices.

Within the Software and Sensors segment, net sales increased $28.4 million or 25.0% during the three months ended March 31, 2022 compared to the prior quarter, primarily due to an increase of $14.8 million in Axon Body revenue as a result of higher average selling price offset by fewer units sold. The increase in the aggregate number of users resulted in increased Axon Evidence revenue of $9.9 million. Axon Fleet revenue increased $4.6 million due to higher average selling prices and increased units sold. Axon Dock revenue increased $1.9 million driven by an increase in the number of units sold, offset by lower average selling prices. Partially offsetting the increases was a decrease of $3.4 million in other revenues across multiple smaller product offerings within the Software and Sensors segment. During the three months ended March 31, 2022, we recognized $13.0 million for orders that were scheduled to ship prior to December 31, 2021, but could not be fulfilled due to supply chain constraints for our Axon Body 3 devices.

Non-GAAP Measures

To supplement our financial results presented in accordance with GAAP, we present the non-GAAP financial measures of EBITDA and Adjusted EBITDA (CEO Performance Award). Our management uses these non-GAAP financial measures in evaluating our performance in comparison to prior periods. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance, and when planning and forecasting our future periods. A reconciliation of GAAP to the non-GAAP financial measures is presented below.

	●	EBITDA (Most comparable GAAP Measure: Net income) - Earnings before interest expense, investment interest income, taxes, depreciation and amortization.

	●	Adjusted EBITDA (CEO Performance Award) (Most comparable GAAP Measure: Net income) - Earnings before interest expense, investment interest income, taxes, depreciation, amortization and non-cash stock-based compensation expense.

Although these non-GAAP financial measures are not consistent with GAAP, management believes investors will benefit by referring to these non-GAAP financial measures when assessing our operating results, as well as when forecasting and analyzing future periods. However, management recognizes that:

	●	these non-GAAP financial measures are limited in their usefulness and should be considered only as a supplement to our GAAP financial measures;

	●	these non-GAAP financial measures should not be considered in isolation from, or as a substitute for, our GAAP financial measures;

	●	these non-GAAP financial measures should not be considered to be superior to our GAAP financial measures; and

	●	these non-GAAP financial measures were not prepared in accordance with GAAP and investors should not assume that the non-GAAP financial measures presented in this Quarterly Report on Form 10-Q were prepared under a comprehensive set of rules or principles.

EBITDA and Adjusted EBITDA (CEO Performance Award) reconciles to net income (loss) as follows (in thousands):


	Three Months Ended
	March 31,		December 31,		March 31,
	2022		2021		2021
Net income (loss)	$	54,871	$	(13,508)	$	(47,917)
Depreciation and amortization		5,755		5,274		4,291
Interest expense		8		1		5
Investment interest (income) loss		346		(353)		(533)
Provision for (benefit from) income taxes		17,622		(23,706)		(1,760)
EBITDA	$	78,602	$	(32,292)	$	(45,914)

Adjustments:
Stock-based compensation expense		25,088		41,110		89,610
Adjusted EBITDA (CEO Performance Award)	$	103,690	$	8,818	$	43,696

Liquidity and Capital Resources

Summary

As of March 31, 2022, we had $386.4 million of cash and cash equivalents, an increase of $30.0 million as compared to December 31, 2021. Cash and cash equivalents and investments totaled $424.1 million, representing an increase of $22.0 million from December 31, 2021.

Our ongoing sources of cash include cash on hand, investments, and cash flows from operations. Restricted cash balance of $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. This balance is included in prepaid expenses and other current assets, as well as other assets on our condensed consolidated balance sheet. In addition, our $50.0 million revolving credit facility is available for additional working capital needs or investment opportunities. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. 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.

As of March 31, 2022, we had letters of credit outstanding of $6.3 million, leaving the net amount available for borrowing of $43.7 million. The facility 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. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our revolving credit facility. At March 31, 2022 and December 31, 2021, there were no borrowings under the line other than the outstanding letters of credit.

Our agreement with the bank requires us to comply with a maximum funded debt to EBITDA ratio, as defined, 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.

TASER subscription and installment purchase arrangements typically involve amounts invoiced in five equal installments at the beginning of each year of the five-year term. This is in contrast to a traditional CED sale in which the entire amount being charged for the hardware is invoiced upon shipment. This impacts liquidity in a commensurate fashion, with the cash for the subscription or installment purchase received in five annual installments rather than up front. It is our strategic intent to shift an increasing amount of our business to a subscription model, to better match the municipal budgeting process of our customers as well as to allow for multiple product offerings to be bundled into existing subscriptions. We carefully considered the cash flow impacts of this strategic shift and regularly revisit our cash flow forecast with the goal of maintaining a comfortable level of liquidity as we introduce commercial offerings in which we incur upfront cash costs to produce and fulfill hardware sales ahead of the cash inflows from our customers.

Based on our strong balance sheet and the fact that we do not have long-term debt at March 31, 2022, we believe financing will be available, both through our existing credit line and possible additional financing. However, there is no assurance that such funding will be available on terms acceptable to us, or at all. We believe that our sources of funding will be sufficient to satisfy our currently anticipated cash requirements including capital expenditures, working capital requirements, potential acquisitions or investments, income and payroll tax payments for net-settled stock awards, and other liquidity requirements through at least the next 12 months. We and our Board of Directors may consider repurchases of our common stock from time to time pursuant to our stock repurchase plan. Further repurchases of our common stock would take place on the open market, would be financed with available cash and are subject to market and business conditions.

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities (in thousands):


	Three Months Ended March 31,
	2022		2021
Operating activities	$	43,964	$	60,939
Investing activities		(10,348)		(54,123)
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 and restricted cash	$	32,000	$	(621)

Operating activities

Net cash provided by operating activities in the first three months of 2022 of $44.0 million reflects net income of $54.9 million, non-cash income statement items totaling $3.5 million, and a decrease of $7.4 million for the net change in operating assets and liabilities. Included in the non-cash items were $25.1 million in stock-based compensation expense, a decrease of $18.0 million in deferred tax assets, net, $5.8 million in depreciation and amortization expense, and a $70.4 million gain on the change in fair value of strategic investments, offset by an unrealized loss of $14.6 million on marketable securities. Cash provided by operations was impacted by increased deferred revenue of $16.0 million, which was primarily attributable to increased sales. Additionally, accounts and notes receivable and contract assets decreased by $7.5 million, primarily as a result of improved collection timing. Offsetting this activity was an increase of $14.3 million in inventory, an increase in prepaid expenses and other assets of $7.1 million, and a decrease in accounts payable, accrued and other liabilities of $9.6 million. The increase in inventory was primarily driven by the proactive buildup required to meet future demand. The increase in prepaid expenses and other assets was driven by the timing of payments and an increase in

deferred cost of goods sold. The decrease in accounts payable, accrued and other liabilities was driven primarily by the timing of the annual bonus payout.

Net cash provided by operating activities in the first three months of 2021 of $60.9 million reflects $47.9 million in net loss, non-cash income statement items totaling $95.8 million, and a positive impact of $13.0 million for the net change in operating assets and liabilities. Included in the non-cash items were $4.3 million in depreciation and amortization expense and $89.6 million in stock-based compensation expense. Cash provided by operations was primarily driven by decreased accounts and notes receivable and contract assets of $31.3 million and increased deferred revenue of $6.2 million. The decrease in accounts and notes receivable and contract assets was primarily attributable to timing of payments received, as well as an overall increase in subscription sales. Cash provided by operations was partially offset by increased prepaid expenses and other assets of $7.0 million and decreased accounts payable, accrued liabilities and other liabilities of $18.1 million. The decrease of accounts payable, accrued liabilities and other liabilities was primarily driven by a reduction of accrued commissions due to decreased bookings as compared to the quarter ended December 31, 2020 and timing of inventory purchases.

Investing activities

We used $10.3 million in investing activities during the first three months of 2022. Cash inflows from investing activities included proceeds from available-for-sale investments of $7.2 million. The inflows were offset by $17.1 million for the purchase of property and equipment and $0.5 million for a strategic minority investment.

We used $54.1 million in investing activities during the first three months of 2021, which was comprised of $23.6 million for the purchase of investments, net of proceeds, $20.0 million for a strategic minority investment, and $10.6 million for the purchase of property and equipment and intangible assets.

Financing activities

Net cash used in financing activities was $1.5 million during the first three months of 2022 and was attributable to the payment of income and payroll taxes on behalf of employees who net-settled stock awards during the period.

Net cash used in financing activities was $7.0 million during the first three months of 2021 and was attributable to the payment of income and payroll taxes on behalf of employees who net-settled stock awards during the period.

Off-Balance Sheet Arrangements

The discussion under the heading off-balance sheet arrangements in Note 13 of the notes to our condensed consolidated financial statements within this Quarterly Report on Form 10-Q is incorporated by reference herein.

Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operation is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, and we evaluate our estimates and assumptions on an ongoing basis. Due to the ongoing COVID-19 pandemic, there is ongoing uncertainty and significant disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require an update to our estimates or assumptions or a revision of the carrying value of assets or liabilities as of May 10, 2022, the date of issuance of this Quarterly Report on Form 10-Q. These estimates and assumptions may change in the future, however, as new events occur and additional information is obtained. Our actual results could differ from these estimates.

Our significant accounting policies are discussed in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. There have been no significant changes to these policies for the three months ended March 31, 2022.

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