Item 1. Financial Statements

AXON ENTERPRISE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

​	​	​	​	​	​	​
​		September 30,		​	December 31,
​	​	2022		​	2021
​	​	(Unaudited)		​	​	​
ASSETS		​			​
Current assets:		​			​
Cash and cash equivalents	​	$	147,711	​	$	356,332
Marketable securities	​	​	35,280	​	​	72,180
Short-term investments	​		194,627	​		14,510
Accounts and notes receivable, net of allowance of $2,273 and $2,203 as of September 30, 2022 and December 31, 2021, respectively	​		418,308	​		320,819
Contract assets, net	​		168,673	​		180,421
Inventory	​		173,046	​		108,688
Prepaid expenses and other current assets	​		68,054	​		56,540
Total current assets	​		1,205,699	​		1,109,490
Property and equipment, net	​		164,160	​		138,457
Deferred tax assets, net	​		96,355	​		127,193
Intangible assets, net	​		13,039	​		15,470
Goodwill	​		44,819	​		43,592
Long-term investments	​		28,536	​		31,232
Long-term notes receivable, net	​		8,462	​		11,256
Long-term contract assets, net	​	​	48,388	​	​	29,753
Strategic investments	​	​	290,329	​	​	83,520
Other long-term assets	​		110,643	​		98,247
Total assets	​	$	2,010,430	​	$	1,688,210
LIABILITIES AND STOCKHOLDERS’ EQUITY	​			​
Current liabilities:	​			​
Accounts payable	​	$	50,193	​	$	32,220
Accrued liabilities	​		112,766	​		103,707
Current portion of deferred revenue	​		246,446	​		265,591
Customer deposits	​		15,317	​		10,463
Other current liabilities	​		6,801	​		6,540
Total current liabilities	​		431,523	​		418,521
Deferred revenue, net of current portion	​		313,823	​		185,721
Liability for unrecognized tax benefits	​		7,317	​		3,797
Long-term deferred compensation	​		5,369	​		5,679
Deferred tax liability, net	​	​	1	​	​	811
Long-term lease liabilities	​		16,311	​		20,440
Other long-term liabilities	​		4,773	​		5,392
Total liabilities	​		779,117	​		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 September 30, 2022 and December 31, 2021, respectively	​		—	​		—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 71,151,670 and 70,896,856 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	​		1	​		1
Additional paid-in capital	​		1,167,218	​		1,095,229
Treasury stock at cost, 20,220,227 shares as of September 30, 2022 and December 31, 2021	​		(155,947)	​		(155,947)
Retained earnings	​		227,847	​		109,883
Accumulated other comprehensive loss	​		(7,806)	​		(1,317)
Total stockholders’ equity	​		1,231,313	​		1,047,849
Total liabilities and stockholders’ equity	​	$	2,010,430	​	$	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 September 30,					​	Nine Months Ended September 30,
​		2022			2021			2022			2021
Net sales from products	​	$	210,398	​	$	165,803	​	$	586,653	​	$	463,116
Net sales from services	​		101,356	​		66,186	​		267,140	​		182,687
Net sales	​		311,754	​		231,989	​		853,793	​		645,803
Cost of product sales	​		93,724	​		71,336	​		260,578	​		195,253
Cost of service sales	​		24,773	​		16,086	​		70,256	​		44,701
Cost of sales	​		118,497	​		87,422	​		330,834	​		239,954
Gross margin	​		193,257	​		144,567	​		522,959	​		405,849
Operating expenses:	​			​			​			​
Sales, general and administrative	​		102,023	​		99,295	​		287,157	​		403,554
Research and development	​		59,127	​		42,382	​		165,090	​		143,352
Total operating expenses	​		161,150	​		141,677	​		452,247	​		546,906
Income (loss) from operations	​		32,107	​		2,890	​		70,712	​		(141,057)
Interest and other income (expense), net	​		(11,249)	​		(5,530)	​		91,076	​		36,896
Income (loss) before provision for income taxes	​		20,858	​		(2,640)	​		161,788	​		(104,161)
Provision for (benefit from) income taxes	​		8,727	​		(51,164)	​		43,824	​		(57,651)
Net income (loss)	​	$	12,131	​	$	48,524	​	$	117,964	​	$	(46,510)
Net income (loss) per common and common equivalent shares:	​			​			​			​
Basic	​	$	0.17	​	$	0.73	​	$	1.66	​	$	(0.71)
Diluted	​	$	0.17	​	$	0.67	​	$	1.63	​	$	(0.71)
Weighted average number of common and common equivalent shares outstanding:	​			​			​			​
Basic	​		71,107	​		66,192	​		71,033	​		65,139
Diluted	​		72,525	​		72,441	​		72,386	​		65,139
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	​	​	​	​	​	​	​	​	​	​	​	​
Net income (loss)	​	$	12,131	​	$	48,524	​	$	117,964	​	$	(46,510)
Foreign currency translation adjustments	​		(2,275)	​		(793)	​		(5,513)	​		(1,161)
Unrealized losses on available-for-sale investments	​	​	(326)	​	​	—	​	​	(976)	​	​	—
Comprehensive income (loss)	​	$	9,530	​	$	47,731	​	$	111,475	​	$	(47,671)

​

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, 2021		70,896,856	​	$	1	​	$	1,095,229		20,220,227	​	$	(155,947)	​	$	109,883	​	$	(1,317)	​	$	1,047,849
Issuance of common stock	​	—	​	​	—	​	​	(70)	​	—	​	​	—	​	​	—	​	​	—	​	​	(70)
Issuance of common stock under employee plans, net		99,802	​	​	—	​	​	(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, 2022		70,996,658	​	$	1	​	$	1,118,859		20,220,227	​	$	(155,947)	​	$	164,754	​	$	(2,878)	​	$	1,124,789
Issuance of common stock	​	​	​	​	—	​	​	(4)	​	—	​	​	—	​	​	—	​	​	—	​	​	(4)
Issuance of common stock under employee plans, net		81,041	​	​	—	​	​	(931)		—	​	​	—	​	​	—	​	​	—	​	​	(931)
Stock-based compensation		—	​	​	—	​	​	21,162		—	​	​	—	​	​	—	​	​	—	​	​	21,162
Net income		—	​	​	—	​	​	—		—	​	​	—	​	​	50,962	​	​	—	​	​	50,962
Other comprehensive loss, net		—	​	​	—	​	​	—		—	​	​	—	​	​	—	​	​	(2,327)	​	​	(2,327)
Balance, June 30, 2022		71,077,699	​	$	1	​	$	1,139,086		20,220,227	​	$	(155,947)	​	$	215,716	​	$	(5,205)	​	$	1,193,651
Issuance of common stock under employee plans, net		73,971	​	​	—	​		(72)		—	​		—	​		—	​		—	​		(72)
Stock-based compensation		—	​		—	​		28,204		—	​		—	​		—	​		—	​		28,204
Net income		—	​		—	​		—		—	​		—	​		12,131	​		—	​		12,131
Other comprehensive loss, net		—	​		—	​		—		—	​		—	​		—	​		(2,601)	​		(2,601)
Balance, September 30, 2022		71,151,670	​	$	1	​	$	1,167,218		20,220,227	​	$	(155,947)	​	$	227,847	​	$	(7,806)	​	$	1,231,313

​

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

​

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​					​			​					​			​		Accumulated				​
​	​	​	​	​	​	​	Additional		​	​	​	​	​	​	​	​	​	Other		​	Total
​	​	Common Stock				​	Paid-in		​	Treasury Stock				​	Retained		​	Comprehensive		​	Stockholders’
​	​	Shares	​	Amount		​	Capital		​	Shares	​	Amount		​	Earnings		​	Income (Loss)		​	Equity
Balance, December 31, 2020		63,766,555	​	$	1	​	$	962,159		20,220,227	​	$	(155,947)	​	$	169,901	​	$	141	​	$	976,255
Issuance of common stock under employee plans, net		906,536	​	​	—	​	​	(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, 2021		64,673,091	​	$	1	​	$	1,044,724		20,220,227	​	$	(155,947)	​	$	121,984	​	$	142	​	$	1,010,904
Issuance of common stock under employee plans, net		1,001,255	​		—	​		(3,268)		—	​		—	​		—	​		—	​		(3,268)
Stock-based compensation		—	​		—	​		137,549		—	​		—	​		—	​		—	​		137,549
Net loss		—	​		—	​		—		—	​		—	​		(47,117)	​		—	​		(47,117)
Other comprehensive loss, net		—	​		—	​		—		—	​		—	​		—	​		(369)	​		(369)
Balance, June 30, 2021		65,674,346	​	​	1	​	​	1,179,005		20,220,227	​	​	(155,947)	​	​	74,867	​	​	(227)	​	​	1,097,699
Issuance of common stock		577,956	​		—	​		105,615		—	​		—	​		—	​		—	​		105,615
Issuance of common stock under employee plans, net	​	1,325,566	​	​	—	​	​	(172,204)	​	—	​	​	—	​	​	—	​	​	—	​	​	(172,204)
Stock-based compensation		—	​		—	​		35,062		—	​		—	​		—	​		—	​		35,062
Net income		—	​		—	​		—		—	​		—	​		48,524	​		—	​		48,524
Other comprehensive loss, net		—	​		—	​		—		—	​		—	​		—	​		(793)	​		(793)
Balance, September 30, 2021		67,577,868	​	$	1	​	$	1,147,478		20,220,227	​	$	(155,947)	​	$	123,391	​	$	(1,020)	​	$	1,113,903

​

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)

​	​	​	​	​	​	​
​	​	Nine Months Ended September 30,
​		2022			2021
Cash flows from operating activities:		​			​
Net income (loss)	​	$	117,964	​	$	(46,510)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:	​			​
Depreciation and amortization	​		18,171	​		13,420
Purchase accounting adjustments to goodwill	​	​	58	​	​	—
Loss on disposal and abandonment of intangible assets	​		68	​		130
Loss on disposal and impairment of property, equipment, and other assets, net	​		1,964	​		74
Realized and unrealized gains on strategic investments and marketable securities, net	​	​	(92,498)	​	​	(34,195)
Stock-based compensation	​		74,454	​		262,221
Deferred income taxes	​		30,349	​		(58,893)
Unrecognized tax benefits	​		3,519	​		77
Bond amortization	​	​	(61)	​		4,606
Noncash lease expense	​		4,997	​		4,087
Provision for expected credit losses	​	​	569	​	​	615
Change in assets and liabilities:	​		​	​		​
Accounts and notes receivable and contract assets	​		(115,046)	​		(118,094)
Inventory	​		(66,267)	​		(3,154)
Prepaid expenses and other assets	​		(17,871)	​		(28,906)
Accounts payable, accrued and other liabilities	​		28,684	​		28,528
Deferred revenue	​		115,187	​		87,558
Net cash provided by operating activities	​		104,241	​		111,564
Cash flows from investing activities:	​			​
Purchases of investments	​		(194,142)	​		(362,479)
Proceeds from call / maturity of investments	​		15,485	​		499,172
Exercise of warrants of strategic investments	​	​	(6,555)	​	​	—
Proceeds from sale of strategic investments	​	​	—	​	​	14,546
Purchases of property and equipment	​		(44,218)	​		(36,501)
Proceeds from disposal of property and equipment	​	​	226	​	​	31
Purchases of intangible assets	​		(193)	​		(157)
Strategic investments	​		(70,500)	​		(20,500)
Business acquisition, net of cash acquired	​	​	(2,104)	​	​	(700)
Net cash provided by (used in) investing activities	​		(302,001)	​		93,412
Cash flows from financing activities:	​			​
Net proceeds from equity offering	​	​	(74)	​		105,615
Income and payroll tax payments for net-settled stock awards	​		(2,391)	​		(182,517)
Net cash used in financing activities	​		(2,465)	​		(76,902)
Effect of exchange rate changes on cash and cash equivalents	​		(6,783)	​		(1,827)
Net increase (decrease) in cash and cash equivalents	​		(207,008)	​		126,247
Cash and cash equivalents and restricted cash, beginning of period	​		356,438	​		155,551
Cash and cash equivalents and restricted cash, end of period	​	$	149,430	​	$	281,798
​	​	​	​	​	​	​
Supplemental disclosures:	​			​
Cash and cash equivalents	​	$	147,711	​	$	281,691
Restricted cash (Note 1)	​		1,719	​		107
Total cash, cash equivalents and restricted cash shown in the statements of cash flows	​	$	149,430	​	$	281,798
​	​	​	​	​	​	​
Cash paid for income taxes, net of refunds	​	$	7,503	​	$	5,016
​	​	​	​	​	​	​
Non-cash transactions	​			​
Property and equipment purchases in accounts payable and accrued liabilities	​	$	1,244	​	$	1,211

​

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, Spain, 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 and nine months ended September 30, 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 (collectively, 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 and nine months ended September 30, 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 and nine months ended September 30, 2022, no customer represented more than 10% of total net sales. At September 30, 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 September 30,					​	Nine Months Ended September 30,
​		2022			2021			2022			2021
Numerator for basic and diluted earnings per share:		​			​			​			​
Net income (loss)	​	$	12,131	​	$	48,524	​	$	117,964	​	$	(46,510)
Denominator:	​			​			​			​
Weighted average shares outstanding	​		71,107	​		66,192	​		71,033	​		65,139
Dilutive effect of stock-based awards	​		1,418	​		6,249	​		1,353	​		—
Diluted weighted average shares outstanding	​		72,525	​		72,441	​		72,386	​		65,139
Anti-dilutive stock-based awards excluded	​		2,977	​		3,481	​		2,952	​		8,920
Net income (loss) per common share:	​		​	​		​	​			​
Basic	​	$	0.17	​	$	0.73	​	$	1.66	​	$	(0.71)
Diluted	​	$	0.17	​	$	0.67	​	$	1.63	​	$	(0.71)

​

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):

​

​	​	​	​	​	​	​
​	​	Nine Months Ended September 30,
​		2022		​	2021
Balance, beginning of period	​	$	2,822	​	$	769
Utilization of reserve	​		(1,988)	​		(582)
Warranty expense	​		161	​		1,176
Balance, end of period	​	$	995	​	$	1,363

​

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 September 30, 2022 were comprised of money market funds, commercial paper, corporate bonds, municipal bonds, U.S. Government agency bonds, and U.S. Treasury bills. Cash equivalents and investments at December 31, 2021 were comprised of money market funds, corporate bonds, municipal bonds, and U.S. Government agency bonds. See additional disclosure regarding the fair value of our cash equivalents and investments in Note 3. Included in the balance of other long-term assets as of September 30, 2022 and December 31, 2021

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

was $4.0 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.

​

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 (expense), net.

​

We have strategic investments in eight unconsolidated affiliates as of September 30, 2022. The estimated fair value of the investments was determined based on Level 3 inputs. In determining the estimated fair value of our strategic investments in privately held companies, we utilize observable data available to us as discussed further in Note 7.

​

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 September 30, 2022 were $1.7 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 $1.6 million was included in prepaid expenses and other assets on our condensed consolidated balance sheet, with the remainder in other long-term 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 long-term 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

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

apply the disclosure requirement prospectively to all transactions within the scope of the amendments that are reflected in the financial statements at the date of the initial application along with new transactions that are entered into after the date of initial application. Adoption of this ASU did not have a material impact on our consolidated financial statements.

Reclassification of Prior Year Presentation

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

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 September 30, 2022								​	Three Months Ended September 30, 2021
​		​	​		Software and			​	​		​	​		Software and			​	​
​	​	TASER		​	Sensors		​	Total		​	TASER		​	Sensors		​	Total
TASER 7	​	$	65,951	​	$	—	​	$	65,951	​	$	50,641	​	​	—	​	$	50,641
TASER X26P	​		5,897	​		—	​		5,897	​		9,086	​	​	—	​		9,086
TASER X2	​		8,298	​		—	​		8,298	​		10,078	​	​	—	​		10,078
TASER Consumer devices	​		1,702	​		—	​		1,702	​		967	​	​	—	​		967
Cartridges	​		46,475	​		—	​		46,475	​		39,313	​	​	—	​		39,313
Axon Body	​		—	​		35,427	​		35,427	​		—	​	​	20,862	​		20,862
Axon Flex	​		—	​		687	​		687	​		—	​	​	1,488	​		1,488
Axon Fleet	​		—	​		10,139	​		10,139	​		—	​	​	6,063	​		6,063
Axon Dock	​		—	​		4,830	​		4,830	​		—	​	​	6,460	​		6,460
Axon Evidence and cloud services	​		5,125	​		96,814	​		101,939	​		2,711	​	​	63,272	​		65,983
Extended warranties	​		7,290	​		14,511	​		21,801	​		6,099	​	​	8,983	​		15,082
Other	​		4,145	​		4,463	​		8,608	​		2,596	​	​	3,370	​		5,966
Total	​	$	144,883	​	$	166,871	​	$	311,754	​	$	121,491	​	$	110,498	​	$	231,989

​

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Nine Months Ended September 30, 2022								​	Nine Months Ended September 30, 2021
​		​	​		Software and			​	​		​	​		Software and			​	​
​	​	TASER		​	Sensors		​	Total		​	TASER		​	Sensors		​	Total
TASER 7	​	$	169,457	​	$	—	​	$	169,457	​	$	112,760	​	​	—	​	$	112,760
TASER X26P	​		27,715	​		—	​		27,715	​		28,618	​	​	—	​		28,618
TASER X2	​		16,451	​		—	​		16,451	​		39,001	​	​	—	​		39,001
TASER Consumer devices	​		5,085	​		—	​		5,085	​		4,873	​	​	—	​		4,873
Cartridges	​		134,145	​		—	​		134,145	​		116,409	​	​	—	​		116,409
Axon Body	​		—	​		92,603	​		92,603	​		—	​	​	60,545	​		60,545
Axon Flex	​		—	​		2,637	​		2,637	​		—	​	​	3,481	​		3,481
Axon Fleet	​		—	​		39,840	​		39,840	​		—	​	​	15,073	​		15,073
Axon Dock	​		—	​		18,159	​		18,159	​		—	​	​	18,889	​		18,889
Axon Evidence and cloud services	​		11,862	​		258,664	​		270,526	​		5,809	​	​	175,933	​		181,742
Extended warranties	​		21,428	​		36,070	​		57,498	​		17,602	​	​	24,632	​		42,234
Other	​		8,686	​		10,991	​		19,677	​		7,946	​	​	14,232	​		22,178
Total	​	$	394,829	​	$	458,964	​	$	853,793	​	$	333,018	​	$	312,785	​	$	645,803

​

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

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

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Three Months Ended September 30,										​	​	Nine Months Ended September 30,
​	​	2022				​	​	2021				​	​	2022				​	2021
United States		$	264,644		85	%	​	$	192,756		83	%	​	$	707,304		83	%	$	518,050		80	%
Other countries	​		47,110		15	​	​		39,233		17	​	​		146,489		17	​		127,753		20	​
Total	​	$	311,754		100	%	​	$	231,989		100	%	​	$	853,793		100	%	$	645,803		100	%

​

Contract Balances

The following table presents our contract assets, contract liabilities and certain information related to these balances as of and for the nine months ended September 30, 2022 (in thousands):

​

​	​	​	​
​		September 30, 2022
Contract assets, net	​	$	217,061
Contract liabilities (deferred revenue)	​		560,269
Revenue recognized in the period from:	​
Amounts included in contract liabilities at the beginning of the period	​		228,278

​

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

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	September 30, 2022								​	December 31, 2021
​		Current			Long-Term			Total			Current			Long-Term			Total
Warranty:		​			​			​			​			​			​
TASER	​	$	15,031	​	$	19,349	​	$	34,380	​	$	21,257	​	$	4,766	​	$	26,023
Software and Sensors	​		22,357	​		17,825	​		40,182	​		23,175	​		18,137	​		41,312
​	​		37,388	​		37,174	​		74,562	​		44,432	​		22,903	​		67,335
Hardware:	​			​			​			​			​			​
TASER	​		21,263	​		38,948	​		60,211	​		12,944	​		28,727	​		41,671
Software and Sensors	​		37,972	​		109,947	​		147,919	​		34,862	​		81,223	​		116,085
​	​		59,235	​		148,895	​		208,130	​		47,806	​		109,950	​		157,756
Services:	​			​			​			​			​			​
TASER	​		4,648	​		9,655	​		14,303	​		2,701	​		3,482	​		6,183
Software and Sensors	​		145,175	​		118,099	​		263,274	​		170,652	​		49,386	​		220,038
​	​	​	149,823	​	​	127,754	​	​	277,577	​	​	173,353	​	​	52,868	​	​	226,221
Total	​	$	246,446	​	$	313,823	​	$	560,269	​	$	265,591	​	$	185,721	​	$	451,312

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	September 30, 2022								​	December 31, 2021
​		Current			Long-Term			Total			Current			Long-Term			Total
TASER	​	$	40,942	​	$	67,952	​	$	108,894	​	$	36,902	​	$	36,975	​	$	73,877
Software and Sensors	​		205,504	​		245,871	​		451,375	​		228,689	​		148,746	​		377,435
Total	​	$	246,446	​	$	313,823	​	$	560,269	​	$	265,591	​	$	185,721	​	$	451,312

​

Remaining Performance Obligations

As of September 30, 2022, we had approximately $3.73 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 Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, as of September 30, 2022. We expect to recognize between 15% - 20% of this balance over the next twelve months, and generally expect the

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

remainder to be recognized over the following ten years, subject to risks related to delayed deployments, budget appropriation or other contract cancellation clauses.

Note 3 - Cash, Cash Equivalents and Investments

The following tables summarize our cash, cash equivalents, marketable securities, and available-for-sale investments at September 30, 2022 and December 31, 2021 (in thousands):

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	As of September 30, 2022
​		​	​		Gross			Gross			​	​			Cash and			​	​		​	​		​	​
​	​	Amortized		​	Unrealized		​	Unrealized		​	​	​		​	Cash		​	Marketable		​	Short-Term		​	Long-Term
​	​	Cost		​	Gains		​	Losses		​	Fair Value			​	Equivalents		​	Securities		​	Investments		​	Investments
Cash	​	$	94,638	​	$	—	​	$	—	​	$	94,638	​	​	$	94,638	​	$	—	​	$	—	​	$	—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Level 1:	​			​	​	​	​			​			​	​			​			​			​	​
Money market funds	​		6,982	​	​	—	​		—	​		6,982	​	​		6,982	​		—	​		—	​	​	—
Agency bonds	​		68,072	​	​	6	​		(69)	​		68,009	​	​		28,000	​		—	​		35,763	​	​	4,246
Treasury bills	​	​	55,520	​	​	2	​	​	(162)	​	​	55,360	​	​	​	14,999	​	​	—	​	​	40,361	​	​	—
Marketable securities	​	​	90,000	​	​	—	​	​	(54,720)	​	​	35,280	​	​		—	​		35,280	​		—	​	​	—
Subtotal	​		220,574	​	​	8	​		(54,951)	​		165,631	​	​	​	49,981	​	​	35,280	​	​	76,124	​	​	4,246
Level 2:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
State and municipal obligations	​	​	6,935	​	​	—	​	​	(54)	​	​	6,881	​	​	​	—	​	​	—	​	​	6,881	​	​	—
Corporate bonds	​	​	75,412	​	​	6	​	​	(1,233)	​	​	74,185	​	​	​	2,096	​	​	—	​	​	47,799	​	​	24,290
Commercial paper	​	​	64,819	​	​	—	​	​	—	​	​	64,819	​	​	​	996	​	​	—	​	​	63,823	​	​	—
Subtotal	​	​	147,166	​	​	6	​	​	(1,287)	​	​	145,885	​	​	​	3,092	​	​	—	​	​	118,503	​	​	24,290
Total	​	$	462,378	​	$	14	​	$	(56,238)	​	$	406,154	​	​	$	147,711	​	$	35,280	​	$	194,627	​	$	28,536

​

As of September 30, 2022, we had $136.3 million of available-for-sale investments with unrealized losses.

​

During the year ended December 31, 2021, we acquired 9,000,000 shares of common stock of Cellebrite DI Ltd (“CLBT”) with a fair value of $90.0 million. The CLBT common stock is recorded as marketable securities in the accompanying 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 (expense), net. During the three and nine months ended September 30, 2022, we recorded an unrealized loss on marketable securities of $10.6 million and $36.9 million, respectively, relating to CLBT.

​

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

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

​

​

​

​

​

​

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):

​

​	​	​	​	​	​	​	​	​	​
​		Nine Months Ended September 30, 2022
​	​	United States		​	Other countries		​	Total
Balance, beginning of period	​	$	3,171	​	$	178	​	$	3,349
Provision for expected credit losses	​	​	254	​	​	315	​	​	569
Amounts written off charged against the allowance	​	​	(382)	​	​	-	​	​	(382)
Other, including foreign currency translation	​		-	​		(3)	​		(3)
Balance, end of period	​	$	3,043	​	$	490	​	$	3,533

​

​

​

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

As of September 30, 2022 and December 31, 2021, the allowance for expected credit losses for each type of customer receivable was as follows (in thousands):

​

​	​	​	​	​	​	​
​	​	September 30,		​	December 31,
​		2022		​	2021
Accounts receivable and notes receivable, current	​	$	2,273	​	$	2,203
Contract assets, net	​		1,120	​		1,010
Long-term notes receivable, net of current portion	​		140	​		136
Total allowance for expected credit losses on customer receivables	​	$	3,533	​	$	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.

​

Inventory consisted of the following at September 30, 2022 and December 31, 2021 (in thousands):

​

​

​	​	​	​	​	​	​
​		September 30, 2022			December 31, 2021
Raw materials	​	$	61,921	​	$	38,267
Finished goods	​		111,125	​		70,421
Total inventory	​	$	173,046	​	$	108,688

​

​

​

​

​

​

​

​

​

​

​

Note 6 – Property and Equipment

​

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

​

​	​	​	​	​	​	​	​	​
​	​	Estimated	​	​	​	​	​	​
​		Useful Life		September 30, 2022			December 31, 2021
Land	​	N/A	​	$	51,612	​	$	54,868
Building and leasehold improvements	​	3-39 years	​	​	26,860	​	​	25,712
Production equipment	​	3-5 years	​		56,237	​		54,090
Computers, equipment and software	​	3-5 years	​		23,478	​		15,343
Furniture and office equipment	​	3-5 years	​		7,511	​		6,838
Vehicles	​	5 years	​		3,746	​		2,932
Capitalized internal software development costs	​	3-5 years	​		14,198	​		12,200
Construction-in-process	​	N/A	​		53,262	​		25,258
Total cost	​	​	​		236,904	​		197,241
Less: Accumulated depreciation	​	​	​		(72,744)	​		(58,784)
Property and equipment, net	​	​		$	164,160	​	$	138,457

Construction-in-process includes $25.6 million and $12.4 million related to the development of our new campus at September 30, 2022 and December 31, 2021, respectively.

​

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

Note 7 - Strategic Investments

Strategic investments include investments in a number of non-public technology-driven companies. We account for strategic investments under the 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 and call options; for some investments, the exercisability and exercise prices are conditional on the achievement of certain performance metrics.

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

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Nine Months Ended September 30, 2022											​	Nine Months Ended September 30, 2021
​		Strategic investments			Warrants			​	Call options		Total			Strategic investments			Warrants			​	Total
Balance, beginning of period	​	$	80,775	​	$	2,745	​	$	—	​	$	83,520	​	$	9,500	​	$	2,211	​	$	11,711
Investments	​	​	53,164	​	​	459	​	​	17,233	​	​	70,856	​	​	20,500	​	​	—	​	​	20,500
Observable price changes (1)	​	​	40,784	​	​	28,539	​	​	—	​	​	69,323	​	​	40,321	​	​	534	​	​	40,855
Exercises	​	​	96,719	​	​	(30,089)	​	​	—	​	​	66,630	​	​	—	​	​	—	​	​	—
Sales	​	​	—	​	​	—	​	​	—	​	​	—	​	​	(14,546)	​	​	—	​	​	(14,546)
Balance, end of period	​	$	271,442	​	$	1,654	​	$	17,233	​	$	290,329	​	$	55,775	​	$	2,745	​	$	58,520

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Inception to date
​		Strategic investments			Warrants			​	Call options		Total
Investments	​	$	105,732	​	$	3,047	​	$	17,233	​	$	126,012
Observable price changes (1)	​	​	83,537	​	​	28,696	​	​	—	​	​	112,233
Exercises	​	​	96,719	​	​	(30,089)	​	​	—	​	​	66,630
Sales	​	​	(14,546)	​	​	—	​	​	—	​	​	(14,546)
Balance, end of period	​	$	271,442	​	$	1,654	​	$	17,233	​	$	290,329

​

	(1)	Includes a realized gain of $12.3 million for the nine months ended September 30, 2021.

During the three months ended September 30, 2022, we made minority, non-controlling investments totaling $8.8 million in a drone company and a biometrics sensor company. Both investments included multiple financial instruments.

During the nine months ended September 30, 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 unrealized gains of $70.4 million and unrealized losses of $1.1 million. Additionally, we exercised warrants in one of our strategic investees for a total exercise price of $6.6 million, resulting in an unrealized gain of $60.1 million that was recognized in earnings for the nine months ended September 30, 2022. The estimated fair value of the investments were calculated using valuation techniques that included both observable and unobservable inputs. This estimated fair value reflects a value that was lower than the issue per share of the new equity issued by the strategic investees because of different characteristics of the newly issued equity instruments compared to our existing investments. The valuation techniques included both Level 2 and Level 3 inputs as defined by ASC Topic 820.

​

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

Note 8 - Variable Interest Entities

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

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

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

	●	The VIE’s capital structure;

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

	●	Related-party affiliations.

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

​

​	​	​	​	​	​	​
​		September 30, 2022			December 31, 2021
Total nonconsolidated variable interest entities:	​	​	​	​	​	​
Carrying value of variable interest - assets	​	$	5,296	​	$	895
Carrying value of variable interest - liabilities	​		—	​		—
Maximum exposure to loss:	​		​	​		​
Non-public equity (1)	​	​	5,296	​	​	895
Total	​	$	5,296	​	$	895

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

In the table above:

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

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

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

We have provided financial support to the nonconsolidated VIEs in exchange for preferred equity as well as warrants and call options that give us the ability to commit additional capital overtime. Financial support provided to the nonconsolidated VIEs is used to continue to finance their operations. We have no explicit or implicit arrangements to provide additional financial support to the VIEs and we have no liabilities to the VIEs as of September 30, 2022 and December 31, 2021.

​

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

Note 9 - Accrued Liabilities

Accrued liabilities consisted of the following at September 30, 2022 and December 31, 2021 (in thousands):

​

​	​	​	​	​	​	​
​		September 30, 2022			December 31, 2021
Accrued salaries, benefits and bonus	​	$	69,058	​	$	62,425
Accrued professional, consulting and lobbying fees	​		3,918	​		7,152
Accrued warranty expense	​		995	​		2,822
Accrued income and other taxes	​		3,871	​		3,736
Accrued inventory in transit	​	​	11,081	​	​	9,945
Other accrued expenses	​		23,843	​		17,627
Accrued liabilities	​	$	112,766	​	$	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 audit activity to date.

Deferred Tax Assets

Net deferred income tax assets at September 30, 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 September 30, 2022 were $96.4 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 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 September 30, 2022, management continues to believe the positive evidence from projected future earnings outweighs the negative evidence and a valuation allowance is not needed beyond the following items further described. 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 $20.3 million as of

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

September 30, 2022. Should the unrecognized benefit of $20.3 million be recognized, our effective tax rate would be favorably impacted. Approximately $12.0 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 nine months ended September 30, 2022, after discrete period adjustments, was 27.1%. Before discrete adjustments, the tax rate was 28.0%, 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, on projected pre-tax income for the year. The effective tax rate was favorably impacted by a $1.4 million discrete tax benefit primarily associated with net windfalls related to stock-based compensation for restricted stock units (“RSUs”) and performance stock units (“PSUs”) that vested during the nine months ended September 30, 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 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

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

and other income (such as dividends) earned on investments in marketable securities, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense.

​

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

(1)	In connection with the business acquisition that was completed during the three months ended 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 September 30, 2022. As of September 30, 2022, 5.3 million stock options have been certified by the Compensation Committee and vested. The eleventh market capitalization goal has not yet been attained, though the related operational goal was achieved as of September 30, 2022. As twelve operational goals have been achieved or are considered probable of achievement, we recorded stock-based compensation expense of $240.0 million related to the CEO Performance Award from the grant date through September 30, 2022. The number of stock options that would vest related to the remaining unvested tranches is approximately 1.1 million shares. As of September 30, 2022, we had $6.0 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 0.4 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

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

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 September 30, 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 September 30, 2022. The tenth and eleventh market capitalization goals have not yet been attained, though the related operational goals were achieved as of September 30, 2021 and September 30, 2022, respectively. As all twelve operational goals have been achieved or are considered probable of achievement, we recorded stock-based compensation expense of $183.2 million related to the XSU awards from their respective grant dates through September 30, 2022. The number of XSU awards that would vest related to the remaining three tranches is approximately 1.2 million shares. As of September 30, 2022, we had $15.5 million of total unrecognized stock-based compensation expense, which will be recognized over a weighted-average period of 1.4 years.

Restricted Stock Units

The following table summarizes RSU activity for the nine months ended September 30, 2022 (number of units and aggregate intrinsic value in thousands):

​

​	​	​	​	​	​	​	​	​
​		Number of		Weighted Average			Aggregate
​	​	Units	​	Grant-Date Fair Value		​	Intrinsic Value
Units outstanding, beginning of year		1,115	​	$	133.40		​
Granted		625	​		113.42		​
Released		(240)	​		93.14		​
Forfeited		(128)	​		136.22		​
Units outstanding, end of period		1,372	​		131.08	​	$	158,838

​

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $115.75 multiplied by the number of RSUs outstanding. As of September 30, 2022, there was $126.9 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 2.1 years. RSUs are released when vesting requirements are met.

Certain RSUs that vested in the nine months ended September 30, 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 approximately seven thousand and had a value of $0.9 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 nine months ended September 30, 2022 (number of units and aggregate intrinsic value in thousands):

​

​	​	​	​	​	​	​	​	​
​		Number of		Weighted Average			Aggregate
​	​	Units	​	Grant-Date Fair Value		​	Intrinsic Value
Units outstanding, beginning of year		1,499	​	$	39.86		​
Granted		142	​		102.60		​
Released		(36)	​		122.83		​
Forfeited		(180)	​		34.15		​
Units outstanding, end of period		1,425	​		44.72	​	$	164,980

​

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $115.75 per share, multiplied by the number of PSUs outstanding. As of September 30, 2022, there was $22.4 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 1.4 years. PSUs are released when vesting requirements are met.

As of September 30, 2022, the performance criteria had been met for approximately forty-two thousand of the 1.4 million PSUs outstanding.

Certain PSUs that vested in the nine months ended September 30, 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 twelve thousand and had a value of $1.5 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.

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

Stock Option Activity

The following table summarizes stock option activity for the nine months ended September 30, 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 year		2,438	​	$	28.58				​
Granted		—	​		—				​
Exercised		—	​		—				​
Expired / terminated		—	​		—		​		​
Options outstanding, end of period		2,438	​		28.58		5.41	​	$	212,517
Options exercisable, end of period		1,377	​		28.58		5.41	​		120,031

​

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 $115.75 on September 30, 2022. There were no options exercised for the nine months ended September 30, 2022. As of September 30, 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 and nine months ended September 30, 2022 and 2021 (in thousands):

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Three Months Ended September 30,					​	Nine Months Ended September 30,
​		2022			2021			2022			2021
Cost of product sales and service sales	​	$	1,157	​	$	1,112	​	$	3,331	​	$	4,439
Sales, general and administrative expenses	​		14,268	​		25,969	​		35,860	​		211,073
Research and development expenses	​		12,779	​		7,981	​		35,263	​		46,709
Total stock-based compensation expense	​	$	28,204	​	$	35,062	​	$	74,454	​	$	262,221

​

Stock Incentive Plan

In May 2022, our shareholders approved the Axon Enterprise, Inc. 2022 Stock Incentive Plan (the “2022 Plan”) authorizing an additional 2.5 million shares, plus remaining available shares under prior plans, for issuance under the new plan. Combined with the 2019 Plan and other legacy stock incentive plans, there are 3.2 million shares available for grant as of September 30, 2022.

Stock Inducement Plan

In September 2022, our Board of Directors adopted the Axon Enterprise, Inc. 2022 Stock Inducement Plan (the “2022 Inducement Plan”) pursuant to which we reserved 250,000 shares of common stock for issuance under the Inducement Plan. In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules, awards under the Inducement Plan may only be made to individuals not previously employed by us (or following such individuals’ bona fide periods of non-employment by us), as an inducement material to the individuals’ entry into employment with us. The terms and conditions of the 2022 Inducement Plan are substantially similar to our 2019 Stock Inducement Plan. There are approximately 0.1 million shares available for grant as of September 30, 2022.

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

​

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 and nine months ended September 30, 2022 and 2021, no common shares were purchased under the program. As of September 30, 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. No shares were sold during the nine months ended September 30, 2022.

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 September 30, 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 September 30, 2022, we had letters of credit outstanding of approximately $6.5 million under the facility and available borrowing of $43.5 million, excluding amounts available under the accordion feature. Advances under the line of credit bear interest at Term SOFR 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. “SOFR” is defined as a rate equal to the secured overnight financing rate as administered by the Federal Reserve Bank of New York (“NYFRB”) or a successor administrator of the secured overnight financing rate.

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 September 30, 2022, our funded debt to EBITDA ratio was 0.00 to 1.00.

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Note 13 - Commitments and Contingencies

Data Storage Renewal Commitment

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In June 2022, we entered into a purchase agreement for cloud hosting with a six year term beginning July 1, 2022. The purchase agreement includes a total commitment of $425.0 million. Storage fees under this agreement were $11.2 million for the three months ended September 30, 2022. The remaining purchase commitment at September 30, 2022 was $413.8 million.

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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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 two 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 administrative enforcement action in January 2020 regarding our May 2018 acquisition of an insolvent body worn camera competitor, Vievu LLC. The FTC alleges the merger was anticompetitive and adversely affected the body worn camera and digital evidence management market for “large metropolitan police departments,” which we deny. The administrative hearing remains stayed pending our federal court constitutional challenges to the FTC’s structure and administrative processes. Even if we ultimately are required to divest Vievu and other assets, any such result will not interfere with our ability to meet contractual obligations or implement our solutions.

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

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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 Axon.

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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

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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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 September 30, 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 September 30, 2022, we had outstanding letters of credit issued under our credit facility of $6.5 million that are expected to expire throughout 2023. We also had outstanding letters of credit of $0.4 million that do not draw against our credit facility. The outstanding letters of credit that do not draw against our credit facility are expected to expire in May 2023. Additionally, we had $21.1 million of outstanding surety bonds at September 30, 2022, with $3.1 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)
Other comprehensive loss	​	​	(161)	​	​	(2,166)	​	​	(2,327)
Balance, June 30, 2022	​	$	(857)	​	$	(4,348)	​	$	(5,205)
Other comprehensive loss	​	​	(326)	​	​	(2,275)	​	​	(2,601)
Balance, September 30, 2022	​	$	(1,183)	​	$	(6,623)	​	$	(7,806)

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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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
Other comprehensive loss	​	​	—	​	​	(369)	​	​	(369)
Balance, June 30, 2021	​	$	—	​	$	(227)	​	$	(227)
Other comprehensive loss	​	​	—	​	​	(793)	​	​	(793)
Balance, September 30, 2021	​	$	—	​	$	(1,020)	​	$	(1,020)

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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. Contributions to the plan 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, Finland, and the United Kingdom.

Our matching contributions for all defined contribution plans were $2.6 million and $1.7 million for the three months ended September 30, 2022 and 2021, respectively, and $8.0 million and $5.6 million for the nine months ended September 30, 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 September 30, 2022								​	Three Months Ended September 30, 2021
​	​	​	​	​	Software and		​	​	​	​	​	​	​	Software and		​	​	​
​		TASER			Sensors			Total			TASER			Sensors			Total
Net sales from products	​	$	139,267	​	$	71,131	​	$	210,398	​	$	118,569	​	$	47,234	​	$	165,803
Net sales from services	​		5,616	​		95,740	​		101,356	​		2,922	​		63,264	​		66,186
Net sales	​		144,883	​		166,871	​		311,754	​		121,491	​		110,498	​		231,989
Cost of product sales	​		53,422	​		40,302	​		93,724	​		41,554	​		29,782	​		71,336
Cost of service sales	​		—	​		24,773	​		24,773	​		—	​		16,086	​		16,086
Cost of sales	​		53,422	​		65,075	​		118,497	​		41,554	​		45,868	​		87,422
Gross margin	​	$	91,461	​	$	101,796	​	$	193,257	​	$	79,937	​	$	64,630	​	$	144,567
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Research and development	​	$	13,864	​	$	45,263	​	$	59,127	​	$	10,476	​	$	31,906	​	$	42,382

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Nine Months Ended September 30, 2022								​	Nine Months Ended September 30, 2021
​	​	​	​	​	Software and		​	​	​	​	​	​	​	Software and		​	​	​
​		TASER			Sensors			Total			TASER			Sensors			Total
Net sales from products	​	$	382,142	​	$	204,511	​	$	586,653	​	$	326,508	​	​	136,608	​	$	463,116
Net sales from services	​		12,687	​		254,453	​		267,140	​		6,510	​		176,177	​		182,687
Net sales	​		394,829	​		458,964	​		853,793	​		333,018	​		312,785	​		645,803
Cost of product sales	​		142,510	​		118,068	​		260,578	​		112,200	​		83,053	​		195,253
Cost of service sales	​		—	​		70,256	​		70,256	​		145	​		44,556	​		44,701
Cost of sales	​		142,510	​		188,324	​		330,834	​		112,345	​		127,609	​		239,954
Gross margin	​	$	252,319	​	$	270,640	​	$	522,959	​	$	220,673	​	$	185,176	​	$	405,849
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Research and development	​	$	37,076	​	$	128,014	​	$	165,090	​	$	32,032	​	$	111,320	​	$	143,352

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