Axon Enterprise 10-Q 2023-03-31

Filed 2023-05-09. 7 sections, 260K characters. Original on sec.gov · Markdown · JSON

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023 or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-16391


Axon Enterprise, Inc.
(Exact name of registrant as specified in its charter)


Delaware	86-0741227
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

17800 North 85th Street
Scottsdale, Arizona	85255
(Address of principal executive offices)	(Zip Code)

(480) 991-0797

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.00001 Par Value	AXON	The Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated Filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s common stock outstanding as of May 5, 2023 was 73,885,305.

AXON ENTERPRISE, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2023

			Page
Special Note Regarding Forward-Looking Statements			ii

PART I - FINANCIAL INFORMATION			1
	Item 1. Financial Statements		1
		Condensed Consolidated Balance Sheets as of March 31, 2023 (Unaudited) and December 31, 2022	1
		Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2023 and 2022	2
		Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2023 and 2022	3
		Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022	4
		Notes to Unaudited Condensed Consolidated Financial Statements	5
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		34
	Item 4. Controls and Procedures		35
PART II - OTHER INFORMATION			35
	Item 1. Legal Proceedings		35
	Item 1A. Risk Factors		36
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		57
	Item 3. Defaults Upon Senior Securities		57
	Item 4. Mine Safety Disclosures		57
	Item 5. Other Information		58
	Item 6. Exhibits		59
	SIGNATURES		60

Special Note Regarding Forward-Looking Statements

This Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions and strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. From time to time, we also provide forward-looking statements in other materials we release to the public as well as verbal forward-looking statements. These forward-looking statements include, without limitation, statements regarding: proposed products and services and related development efforts and activities; expectations about the market for our current and future products and services; the impact of pending litigation; strategies and trends relating to subscription plan programs and revenues; our anticipation that contracts with governmental customers will be fulfilled; strategies and trends, including the amounts and benefits of, research and development investments; the sufficiency of our liquidity and financial resources; expectations about customer behavior; the impact on our investment portfolio of changes in interest rates; our potential use of foreign currency forward and option contracts; statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; statements of management’s strategies, goals and objectives and other similar expressions; as well as the ultimate resolution of financial statement items requiring critical accounting estimates, including those set forth in our Annual Report on Form 10-K for the year ended December 31, 2022. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Words such as “may,” “will,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions, as well as statements in future tense, identify forward-looking statements. However, not all forward-looking statements contain these identifying words.

_We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumpti

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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, 2023, and results of operations for the three months ended March 31, 2023 and 2022, 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 2022 Annual Report on Form 10-K filed with the SEC on February 28, 2023. 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 “Item 1a. Risk Factors.” See also "Special Note Regarding Forward-Looking Statements" on page ii of this Quarterly Report on Form 10-Q.

Overview

Axon is a technology leader in global public safety. Our moonshot goal is to cut gun-related deaths between police and the public by 50% before 2033. Axon is building the public safety operating system of the future by integrating a suite of hardware devices and cloud software solutions that lead modern policing. Axon’s suite includes TASER energy devices, body-worn cameras, in-car cameras, cloud-hosted digital evidence management solutions, productivity software and real-time operations capabilities. Axon’s growing global customer base includes first responders across international, federal, state, and local law enforcement, fire, corrections, and emergency medical services, as well as the justice sector, commercial enterprises, and consumers.

Our revenues for the three months ended March 31, 2023 were $343.0 million, an increase of $86.6 million, or 33.8%, from the comparable period in the prior year. We had income from operations of $16.6 million compared to $17.2 million for the same period in the prior year. Gross margin dollars increased $48.4 million but decreased slightly as a percentage of revenue compared to the three months ended March 31, 2022, reflecting increases in nonrecurring inventory reserves and other cost adjustments. Operating expenses increased $48.9 million, reflecting an increase in salaries, benefits, and bonus expense and increases in sales, marketing, and commissions expense, as well as an increase in stock-based compensation expense. Net income of $45.1 million included an unrealized gain of $15.6 million related to changes in fair value for our marketable securities related to our investment in CLBT, compared to net income of $54.9 million for the comparable period in the prior year, which included 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 related to our investment in CLBT.

Results of Operations

Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

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,
	2023				2022
Net sales from products	$	219,389	64.0	%	$	176,204	68.7	%
Net sales from services		123,654	36.0			80,222	31.3
Net sales		343,043	100.0			256,426	100.0
Cost of product sales		107,584	31.4			79,352	31.0
Cost of service sales		31,357	9.1			21,335	8.3
Cost of sales		138,941	40.5			100,687	39.3
Gross margin		204,102	59.5			155,739	60.7
Operating expenses:
Sales, general and administrative		116,567	34.0			90,129	35.1
Research and development		70,927	20.7			48,416	18.9
Total operating expenses		187,494	54.7			138,545	54.0
Income from operations		16,608	4.8			17,194	6.7
Interest and other income, net		25,276	7.4			55,299	21.6
Income before provision for income taxes		41,884	12.2			72,493	28.3
Provision for (benefit from) income taxes		(3,255)	(1.0)			17,622	6.9
Net income	$	45,139	13.2	%	$	54,871	21.4	%

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


	Three Months Ended March 31,
	2023				2022
United States	$	290,938	85	%	$	214,214	84	%
Other countries		52,105	15			42,212	16
Total	$	343,043	100	%	$	256,426	100	%

International revenue increased compared to the prior year comparable period, but decreased slightly as a percentage of total revenue. The increase in domestic revenue was driven by demand for the premium versions of our products and bundles.

Net Sales

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


	Three Months Ended March 31,								Dollar		Percent
	2023				2022				Change		Change
TASER segment:
TASER Devices (Professional)	$	67,472	19.7	%	$	63,164	24.6	%	$	4,308	6.8	%
Cartridges		46,800	13.6			37,825	14.8			8,975	23.7
Axon Evidence and Cloud Services		7,201	2.1			3,017	1.2			4,184	138.7
Extended Warranties		7,670	2.2			6,679	2.6			991	14.8
Other (1)		5,139	1.5			3,675	1.4			1,464	39.8
Total TASER segment		134,282	39.1			114,360	44.6			19,922	17.4
Software and Sensors segment:
Axon Body Cameras and Accessories		38,797	11.3			38,517	15.0			280	0.7
Axon Fleet Systems		32,972	9.6			13,820	5.4			19,152	138.6
Axon Evidence and Cloud Services		118,314	34.5			79,939	31.2			38,375	48.0
Extended Warranties		14,085	4.1			9,061	3.5			5,024	55.4
Other (2)		4,593	1.4			729	0.3			3,864	530.0
Total Software and Sensors segment		208,761	60.9			142,066	55.4			66,695	46.9
Total net sales	$	343,043	100.0	%	$	256,426	100.0	%	$	86,617	33.8	%

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

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

Net sales for the TASER segment increased 17.4% primarily due to an increase of $9.0 million in cartridge revenue. The increase in cartridge revenue is due to an increase in unit sales, partially offset by lower average selling prices. Net sales for TASER devices (professional) also increased $4.3 million in the quarter due to increased unit sales and higher average selling prices. We started shipping our next generation device, TASER 10, in Q1 2023. Axon Evidence and cloud services revenue increased $4.2 million due to an increase of software revenue tied to our VR solution and TASER devices. The increase in other revenue was favorably impacted by an increase in VR hardware revenue, partially offset by a decrease in consumer device sales.

Net sales for the Software and Sensors segment increased 46.9% for the three months ended March 31, 2023 as compared to the prior year quarter as we continued to add users and associated devices to our network. The increase in the aggregate number of users and the revenue per user drove the majority of the increase in Axon Evidence and cloud services revenue of $38.4 million. The $19.2 million increase in Axon Fleet systems revenue was primarily driven by higher unit sales and higher average selling prices as we continue to see strong demand since the release of Fleet 3 in 2021. An increase in cameras, docks and Fleet systems in the field drove the $5.0 million increase in extended warranties, as most of those devices are sold with extended warranties. Demand for Signal Sidearm and Interview Room drove the $3.9 million increase in other revenue.

We consider total company future contracted revenues a forward-looking performance indicator. As of March 31, 2023, we had approximately $4.8 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% - 25% of this balance over the next twelve months, and expect the remainder to be recognized over the following ten years, subject to risks related to delayed deployments, budget appropriation or other contract cancellation clauses.

Gross Margin

As a percentage of net sales, gross margin for the TASER segment decreased to 62.2% from 64.5% for the three months ended March 31, 2023 and 2022, respectively. The decrease is primarily a result of nonrecurring inventory reserves and other cost adjustments in the quarter, partially offset by higher average selling prices and favorable product mix.

As a percentage of net sales, gross margin for the Software and Sensors segment increased slightly to 57.8% from 57.7% for the three months ended March 31, 2023 and 2022, respectively. Within the Software and Sensors segment, hardware gross margin decreased to 38.2% for the three months ended March 31, 2023 compared to 40.5% for the same period in 2022 due to unfavorable product mix, partially offset by lower freight expense. Service margins increased to 73.2% for the three months ended March 31, 2023 from 72.3% for the same period in 2022 due to improved margins on professional services and savings on cloud hosting costs.

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
	2023			2022			Change		Change
Total sales, general and administrative expenses	$	116,567		$	90,129		$	26,438	29.3
Sales, general, and administrative as a percentage of net sales		34.0	%		35.1	%

Salaries, benefits, and bonus expense increased $17.4 million in comparison to the prior year comparable period. An increase of $9.1 million in salaries, benefits, and bonus expense was attributable to an increase in headcount and higher wages. Additionally, $6.4 million was attributed to payroll taxes related to the vesting of one tranche of our XSPP in March 2023 and payroll taxes for CEO option exercises completed during the quarter ended March 31, 2023. An increase of $1.4 million was related to 401(k) matching contributions due to an increase in headcount and higher wages.

Sales and marketing and travel expenses increased $5.9 million in comparison to the prior year comparable period. The increase was partially attributable to a $2.5 million increase related to trade shows and seminars as we hosted our annual public safety training conference TASERCON in January 2023. Additionally, sales commissions increased $1.7 million, tied to higher revenue. The increase also reflects a $1.8 million increase in travel expenses, reflecting an increase of in-person customer meetings and increased expense related to our in-person annual company kickoff meeting in January 2023.

Stock-based compensation expense increased $2.5 million in comparison to the prior year comparable period, which was attributable to an increase of $1.7 million in expense related to the XSPP, partially offset by a $0.8 million decrease related to the CEO Performance Award. The increase in stock-based compensation expense related to XSPP was due to the attainment of the tenth market capitalization goal in March 2023. Also contributing to the total increase in stock-based compensation expense is expense related to time-based awards due to higher headcount.

Research and Development Expenses

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



	Three Months Ended March 31,						Dollar		Percent
	2023			2022			Change		Change
Total research and development expenses	$	70,927		$	48,416		$	22,511	46.5
Research and development as a percentage of net sales		20.7	%		18.9	%

Within the TASER segment, R&D expense increased $6.2 million. An increase of $3.0 million in salaries, benefits and bonus expense and an increase of $1.9 million related to stock-based compensation expense reflected higher

headcount. Additionally, indirect manufacturing costs and supplies increased $1.1 million related to the development of next generation products.

R&D expense for the Software and Sensors segment increased $16.3 million, reflecting an increase of $8.6 million in salaries, benefits, and bonus expense due to higher headcount and increased wages. Additionally, there was a $4.7 million increase related to stock-based compensation expense, primarily related to increased headcount.

Interest and Other Income, Net

Interest and other income, net was $25.3 million for the three months ended March 31, 2023, compared to income of $55.3 million for the same period in 2022, in which 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 related to our investment in CLBT. During the first quarter of 2023, we recorded a $15.6 million unrealized gain on marketable securities related to our investment in CLBT and $10.6 million of interest income related to our investment portfolio.

Provision for Income Taxes

The provision for income taxes was a benefit of $3.3 million for the three months ended March 31, 2023, which was an effective tax rate of -7.8%. Our estimated full year effective income tax rate for 2023, before discrete period adjustments, is 22.8%, which differs from the federal statutory rate primarily due to the impact of R&D tax credits and decrease in valuation allowance offset by the executive compensation limitation under Internal Revenue Code ("IRC") Section 162(m) and an increase in unrecognized tax benefits, on projected pre-tax income for the year. The effective tax rate was favorably impacted by a $13.0 million discrete tax benefit associated with net windfalls related to stock-based compensation for RSUs and PSUs that vested and stock options that were exercised during the three months ended March 31, 2023, primarily attributed to the vesting of tranche 10 of the XSPP in March 2023.

Net Income

We recorded net income of $45.1 million for the three months ended March 31, 2023 compared to net income of $54.9 million for the same period in 2022. Net income per basic share was $0.62 for the three months ended March 31, 2023 compared to $0.77 net income per basic share for the same period in 2022. Net income per diluted share was $0.61 for the three months ended March 31, 2023 compared to $0.76 net income per diluted share for the same period in 2022.

Three Months Ended March 31, 2023 Compared to the Three Months Ended December 31, 2022

Net Sales

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


	Three Months Ended				Three Months Ended				Dollar		Percent
	March 31, 2023				December 31, 2022				Change		Change
TASER segment:
TASER Devices (Professional)	$	67,472	19.7	%	$	69,075	20.5	%	$	(1,603)	(2.3)	%
Cartridges		46,800	13.6			47,541	14.1			(741)	(1.6)
Axon Evidence and Cloud Services		7,201	2.1			6,890	2.0			311	4.5
Extended Warranties		7,670	2.2			7,580	2.3			90	1.2
Other (1)		5,139	1.5			5,651	1.7			(512)	(9.1)
Total TASER segment		134,282	39.1			136,737	40.6			(2,455)	(1.8)
Software and Sensors segment:
Axon Body Cameras and Accessories		38,797	11.3			43,882	13.1			(5,085)	(11.6)
Axon Fleet Systems		32,972	9.6			23,177	6.9			9,795	42.3
Axon Evidence and Cloud Services		118,314	34.5			113,225	33.7			5,089	4.5
Extended Warranties		14,085	4.1			13,695	4.1			390	2.8
Other (2)		4,593	1.4			5,426	1.6			(833)	(15.4)
Software and Sensors segment		208,761	60.9			199,405	59.4			9,356	4.7
Total net sales	$	343,043	100.0	%	$	336,142	100.0	%	$	6,901	2.1	%

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

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

Net sales within the TASER segment decreased by approximately $2.5 million or 1.8% as compared to the prior quarter, primarily due to a slight decrease in the units of TASER devices and cartridges related to seasonality with Q1 typically carrying lower volumes during the year. A decrease of $0.5 million in other revenue is attributable to decreased revenue from TASER professional services. Partially offsetting the decrease in TASER segment revenue is an increase in Axon Evidence and cloud services revenue tied to TASER devices and VR hardware.

Within the Software and Sensors segment, net sales increased $9.4 million or 4.7% during the three months ended March 31, 2023 compared to the prior quarter. Net sales of Axon Fleet systems increased $9.8 million due to increased units and higher average selling prices. Unit increases of Axon Fleet primarily drove the $5.1 million increase in Axon Evidence and cloud revenue due to increased professional services revenue related to Fleet installations. Partially offsetting the increases in the Software and Sensors segment is a decrease of $5.1 million of Axon Body cameras and accessories due to decreased units and lower average selling price related to seasonality and strong sales in the fourth quarter.

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. 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 (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 reconciles to net income as follows (in thousands):


	Three Months Ended
	March 31,		December 31,		March 31,
	2023		2022		2022
Net income	$	45,139	$	29,175	$	54,871
Depreciation and amortization		6,689		6,210		5,755
Interest expense		1,724		474		8
Investment interest (income) loss		(11,390)		(4,614)		346
Provision for (benefit from) income taxes		(3,255)		5,555		17,622
EBITDA	$	38,907	$	36,800	$	78,602

Non-GAAP adjustments:
Stock-based compensation expense		34,350		31,722		25,088
Unrealized gains on strategic investments and marketable securities, net		(15,570)		(6,445)		(55,851)
Transaction costs related to strategic investments and acquisitions		843		64		871
Loss on disposal and abandonment of intangible assets		10		42		40
Loss on disposal and impairment of property, equipment and other assets, net		146		3,488		106
Costs related to FTC litigation		—		250		4
Payroll taxes related to XSPP vesting and CEO Award option exercises		6,392		—		—
Adjusted EBITDA	$	65,078	$	65,921	$	48,860

Liquidity and Capital Resources

Summary

As of March 31, 2023, we had $263.4 million of cash and cash equivalents, a decrease of $90.3 million as compared to December 31, 2022. Cash and cash equivalents and investments totaled $1.07 billion, representing a decrease of $22.0 million from December 31, 2022.

Our most significant source of liquidity continues to be funds generated by operating activities and available cash and cash equivalents and short-term investments. In addition, our $200.0 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 Term SOFR plus 1.25 to 1.75% per year determined in accordance with a pricing grid based on our net debt to earnings before interest, 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 or a successor administrator of the secured overnight financing rate.

As of March 31, 2023, we had letters of credit outstanding of $7.0 million, leaving the net amount available for borrowing of $193.0 million. The credit agreement will mature on the earlier of December 15, 2027 or the date that is six months prior to the stated maturity date of the 0.50% convertible senior notes due 2027 unless such Notes have been redeemed, repurchased, converted or defeased in full. Additionally, the credit agreement has an accordion feature which allows for an increase in the total line of credit up to $300.0 million, subject to each lender’s sole discretion. At March 31, 2023 and December 31, 2022, there were no borrowings under the line.

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.

Our agreement with the bank requires us to comply with a net leverage ratio, defined as consolidated total indebtedness to EBITDA, of no greater than 3.50 to 1.00 based upon a trailing four fiscal quarter period. At March 31, 2023, our net leverage ratio was 0.78 to 1.00. Additionally, we must comply with a consolidated interest coverage ratio, defined as EBITDA to consolidated interest expense, of no less than 3.50 to 1.00 based upon a trailing four fiscal quarter end. We are compliant with the consolidated interest coverage ratio, which is not meaningful for the quarter ended March 31, 2023.

Based on our strong balance sheet at March 31, 2023 and successful convertible senior notes offering completed during 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. Further repurchases of our common stock would take place on the open market, would be financed with available cash and are subject to authorization as well as 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,
	2023		2022
Operating activities	$	(56,323)	$	43,964
Investing activities		(72,674)		(10,348)
Financing activities		37,990		(1,459)
Effect of exchange rate changes on cash and cash equivalents		779		(157)
Net increase (decrease) in cash and cash equivalents and restricted cash	$	(90,228)	$	32,000

Operating activities

Net cash used in operating activities in the first three months of 2023 of $56.3 million reflects net income of $45.1 million, non-cash income statement items totaling $16.0 million, and a decrease of $117.4 million for the net change in operating assets and liabilities. Included in the non-cash items were $34.4 million in stock-based compensation expense, a decrease of $9.7 million in deferred income taxes, net, $6.7 million in depreciation and amortization expense, and a $15.6 million gain on the change in fair value of marketable securities. Cash provided by operations was favorably

impacted by increased deferred revenue of $50.2 million, which was primarily attributable to increased sales where the customer is invoiced before performance occurs. Offsetting this activity was an increase of accounts and notes receivables and contract assets of $50.4 million, an increase in prepaid expenses and other assets of $64.3 million, an increase of $15.8 million in inventory, and a decrease in accounts payable, accrued and other liabilities of $37.0 million. Of the increase in prepaid expenses and other assets, $33.0 million was primarily driven by a receivable for proceeds from shares sold to cover the tax liability and option cost for options exercised during the first three months of 2023, but received in April 2023. The increase in accounts and notes receivable and contract assets is due to increased sales and timing of satisfied performance obligations compared to customer payments of accounts receivable. Inventory increases were a result of advance purchases to support future sales. 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 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.

Investing activities

We used $72.7 million of cash for investing activities during the first three months of 2023. Cash outflows from investing activities included $64.0 million for the purchase of available-for-sale investments, net of proceeds from calls and maturities. Property and equipment purchases totaled $8.5 million.

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.

Financing activities

Net cash provided by financing activities was $38.0 million during the first three months of 2023 and was primarily attributable to proceeds of $39.2 million from the exercise of stock options where shares were sold to cover the exercise price and net proceeds of $33.7 million received from our ATM offering. Partially offsetting net cash provided by financing activities was $34.8 million for the payment of income and payroll taxes on behalf of employees who net-settled stock awards during the period related to the vesting of tranche 10 of the XSPP.

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.

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. While we do not believe that a change in these estimates is reasonably likely, there can be no assurance that our actual results will not 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, 2022. There have been no significant changes to these policies for the three months ended March 31, 2023.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We typically invest in a limited number of financial instruments, consisting principally of investments in money market accounts, certificates of deposit, corporate and municipal bonds with a typical long-term debt rating of “A” or better by any nationally recognized statistical rating organization, denominated in U.S. dollars. All of our cash equivalents and investments are treated as “available-for-sale”. We report available-for-sale investments at fair value as of each balance sheet date and record any unrealized gains or losses within accumulated other comprehensive income (loss) as a component of stockholders’ equity. The cost of securities sold is determined on a specific identification basis, and realized gains and losses are included in interest and other income (expense), net within the condensed consolidated statements of operations. When the fair value is below the amortized cost of a marketable security, an estimate of expected credit losses is made. The credit-related impairment amount is recognized in the consolidated statements of operations. Credit losses are recognized through the use of an allowance for credit losses account in the condensed consolidated balance sheet and subsequent improvements in expected credit losses are recognized as a reversal of an amount in the allowance account. If we have the intent to sell the security or it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis, then the allowance for the credit loss is written-off and the excess of the amortized cost basis of the asset over its fair value is recorded in the condensed consolidated statements of operations. Based on investment positions as of March 31, 2023, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $3.0 million decline in the fair market value of the portfolio. Such losses would only be realized if we sold the investments prior to maturity.

Additionally, we have access to a $200.0 million line of credit borrowing facility which bears interest at SOFR 1.25 to 1.75% per year determined in accordance with a pricing grid based on our net leverage ratio and consolidated interest coverage ratio. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit, which totaled $7.0 million at March 31, 2023. At March 31, 2023, there was no amount outstanding under the line of credit, and the available borrowing under the line of credit was $193.0 million. We have not borrowed any funds under the line of credit since its inception; however; should we need to do so in the future, such borrowings could be subject to adverse or favorable changes in the underlying interest rate.

Exchange Rate Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, in each case compared to the U.S. dollar, related to transactions by our foreign subsidiaries. The majority of our sales to international customers are transacted in foreign currencies and therefore are subject to exchange rate fluctuations on these transactions. The cost of our products to our customers increases when the U.S. dollar strengthens against their local currency, and we may have more sales and expenses denominated in foreign currencies in future years which could increase our foreign exchange rate risk. Additionally, intercompany sales to our non-U.S. dollar functional currency international subsidiaries are transacted in U.S. dollars which could increase our foreign exchange rate risk caused by foreign currency transaction gains and losses.

To date, we have not engaged in any currency hedging activities. However, we may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. However, we may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to the prohibitive economic cost of hedging particular exposures. As such, fluctuations in currency exchange rates could harm our business in the future.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer are responsible for the evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that because a material weakness exists in our internal control over financial reporting, as further described below, our disclosure controls and procedures were not effective as of March 31, 2023.

Specifically, during the year ended December 31, 2022, we identified a material weakness in our internal controls stemming from control deficiencies with respect to the risks of understatement of software and services revenue and overstatement of deferred revenue. This material weakness in internal control over financial reporting resulted from a failure to effectively manage the migration of triggering events for certain software and services performance obligations during the quote-to-cash phase of the implementation of our Enterprise Resource Planning (“ERP”) and related systems in 2021. Additionally, there were limited instances of invoicing errors resulting from ineffective change management of the quote-to-cash systems implementation. The manual business processes for tracking open software and services performance obligations and for monitoring billing events were not sufficiently robust to prevent the errors. The related business processes and account reconciliation detective controls were not designed to operate with a sufficient degree of precision to identify these errors on a timely basis. These deficiencies resulted in immaterial understatements of revenue that accumulated over time and were corrected in the fourth quarter of 2022 as disclosed in Note 1 of the consolidated financial statements in Part II, Item 8 of the Annual Report on Form 10-K filed February 28, 2023.

To remediate the material weakness described above, we are designing and implementing new business processes and automation of integrations between our systems as well as enhancing our reconciliation controls and monitoring procedures to properly ensure transactions are identified and recorded timely and accurately.

We are in the process of documenting, assessing and testing the necessary changes in our internal control over financial reporting as part of our efforts to comply with Section 404 of the Sarbanes-Oxley Act.

The material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. As remediation has not yet been completed and tested, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of March 31, 2023 at a level that provides reasonable assurance as of the last day of the period covered by this report.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The discussion under the headings Product Litigation and U.S. Federal Trade Commission Litigation in Note 13 of the notes to our condensed consolidated financial statements included within this Quarterly Report on Form 10-Q is incorporated by reference herein.

Item 1A. Risk Factors

Risk Factor Summary

The following is only a summary of the principal risks that may materially adversely affect our business, financial condition, results of operations and cash flows. The following should be read in conjunction with the more complete discussion of the risk factors we face, which are set forth more fully in “Part I. Item 1A. Risk Factors.”

Strategic Risks

	●	If law enforcement agencies do not continue to purchase and use our products and services, our growth prospects, operating results and financial conditions will be materially adversely affected.

	●	If our TASER CEDs do not continue to be widely accepted, our growth prospects will be diminished.

	●	If we are unable to design, introduce, sell and deploy new products or new product features successfully, our business and financial results could be adversely affected.

	●	We face risks associated with rapid technological change and new competing products.

	●	Our future success is dependent on our ability to expand sales through direct sales and distributors and our inability to increase direct sales or recruit new distributors would negatively affect our sales.

	●	Acquisitions of, or investments in, other companies, products, or technologies could disrupt our business, dilute stockholder value, and adversely affect our operating results.

	●	Our failure to retain executive officers, including Patrick W. Smith, could adversely impact our business.

Operational Risks

	●	Unavailability of materials or higher costs could adversely affect our financial results.

	●	Material adverse developments in domestic and global economic conditions, or the occurrence of other world events, could materially adversely affect our revenue and results of operations.

	●	To the extent demand for our products increases, our future success will be dependent upon our ability to manage our growth and to increase manufacturing production capacity.

	●	Delays in product development schedules could adversely affect our revenues and cash flows.

	●	We expend significant resources in anticipation of a sale and may receive no revenue in return.

	●	Changes in civil forfeiture laws may affect our customers’ ability to purchase our products.

	●	Catastrophic events could materially adversely affect our business, results of operations and/or financial condition.

	●	If our security measures or those of our third-party cloud storage providers are breached and unauthorized access is obtained to customers’ data or our data, customers may curtail or stop using our service and we may incur significant legal and financial exposure and liabilities.

	●	Defects or disruptions in our services could impact demand for our services and subject us to substantial liability.

	●	Defects in our products could reduce demand for our products or result in product recalls and result in a loss of sales, delay in market acceptance and damage to our reputation.

	●	Our international operations expose us to additional risks that could adversely affect our business.

	●	We depend on our ability to attract and retain our key management, sales and technical personnel.

	●	If we fail to comply with federal, state or local regulations applicable to TASER 10 we may be subject to governmental actions or litigation which could materially harm our business.

	●	If we fail to maintain effective internal control over financial reporting or identify a material weakness or significant deficiency, our ability to accurately and timely report our financial condition and results of operations could be adversely affected, investor confidence could diminish, and the value of our common stock may decline.

Financial Risks

	●	An increasing percentage of our revenue is derived from subscription billing arrangements which may result in delayed cash collections and may increase customer credit risk on receivables and contract assets.

	●	We may experience a decline in gross margins due to a shift in product sales to software and sensors products and services which may continue to carry a lower gross margin than that of TASER devices.

	●	Software-as-a-Service revenue for Axon Evidence is recognized over the terms of the contracts, which may be several years, and, as such, trends in new business may not be immediately reflected in our operating results.

	●	Most of our end-user customers are subject to budgetary and political constraints that may prevent sales.

	●	Due to government funding rules, certain of our contracts are subject to various cancellation clauses, which could allow our customers to cancel or not exercise options to renew contracts in the future.

	●	The open bidding process creates uncertainty in predicting future contract awards.

	●	We maintain most of our cash balances, some of which are not insured, at three depository institutions.

	●	Stock transactions may have a material, unpredictable impact on our results of operations and may result in dilution to existing shareholders.

	●	Our financial performance is subject to risks associated with changes in the value of the U.S. dollar versus local currencies.

	●	Unanticipated changes in our effective tax rate and additional tax liabilities may impact our operating results.

	●	Our revenues and operating results may fluctuate unexpectedly, which may cause our stock price to decline.

Legal and Compliance Risks

	●	We may face personal injury, wrongful death, product liability and other liability claims that harm our reputation and adversely affect our sales and financial condition.

	●	Other litigation, government inquiries and regulatory actions may subject us to significant costs and judgments and divert management attention from our business.

	●	We have been, and may be subject to intellectual property infringement and other claims, which could incur substantial litigation costs, result in significant damage awards, inhibit our use of certain technologies, and divert management attention from our business.

	●	If we are unable to protect our intellectual property, the value of our brands and products may decrease and we may lose our competitive market advantage.

	●	We may be limited in our ability to enforce patent rights internationally to only those jurisdictions in which our patent applications have been granted.

	●	A variety of new and existing laws and/or interpretations could materially and adversely affect our business.

	o	Our business could be adversely affected by rules and regulations governing our radio spectrum devices.

| | o | Changes in statutes, regula

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Item 5. Other Information

None.

Item 6. Exhibits



3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the
		Quarterly Report on Form 10-Q, filed August 9, 2022)
3.2		Bylaws, as amended and restated (incorporated by reference to Exhibit 3.2 to the Quarterly Report on Form 10-Q, filed August 9, 2022)
31.1*		Principal Executive Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2*		Principal Financial Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32**		Principal Executive Officer and Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*		Inline XBRL Taxonomy Extension Schema Document
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline XBRL

+Management contract or compensatory plan or arrangement

Filed herewith

** Furnished herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AXON ENTERPRISE, INC.

Date:	May 9, 2023
		By:	/s/ PATRICK W. SMITH
			Chief Executive Officer
			(Principal Executive Officer)

Date:	May 9, 2023	By:	/s/ BRITTANY BAGLEY
			Chief Financial Officer and Chief Business Officer
			(Principal Financial and
			Accounting Officer)