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.

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