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

52K characters. Original on sec.gov · Markdown

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 June 30, 2023, and results of operations for the three and six months ended June 30, 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 June 30, 2023 were $374.6 million, an increase of $89.0 million, or 31.2%, from the comparable period in the prior year. We had income from operations of $40.3 million compared to $21.4 million for the same period in the prior year. Gross margin dollars increased $58.2 million and increased as a percentage of revenue to 62.0% from 60.9% compared to the three months ended June 30, 2022, reflecting favorable product mix of higher margin software revenue, partially offset by manufacturing overhead and scale inefficiencies associated with the TASER 10 launch. Operating expenses increased $39.3 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 $12.4 million included a noncash unrealized gain of $10.0 million on our investment in CLBT and a noncash unrealized impairment loss of $71.9 million, net, related to a strategic investment and related warrants. Net income of $51.0 million for the comparable period in the prior year included net unrealized gains of $59.7 million related to observable price changes for our existing investments and related warrants and an unrealized loss of $11.7 million on our investment in CLBT.

Our revenues for the six months ended June 30, 2023 were $717.6 million, an increase of $175.6 million, or 32.4%, from the comparable period in the prior year. We had income from operations of $56.9 million compared to $38.6 million for the same period in the prior year. Gross margin dollars increased $106.5 million and remained flat as a percentage of revenue compared to the six months ended June 30, 2022. Operating expenses increased $88.3 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. For the six months ended June 30, 2023, we recorded net income of $57.6 million, which reflected a noncash unrealized gain of $25.6 million on our investment in CLBT and a noncash unrealized impairment loss of $71.9 million, net, related to a strategic investment and related warrants. Net income of $105.8 million for the comparable period in the prior year included net unrealized gains of $130.1 million related to observable price changes for our existing investments and related warrants and an unrealized loss of $26.3 million on our investment in CLBT.

Results of Operations

Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 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 June 30,
	2023				2022
Net sales from products	$	233,474	62.3	%	$	200,051	70.0	%
Net sales from services		141,131	37.7			85,562	30.0
Net sales		374,605	100.0			285,613	100.0
Cost of product sales		101,192	27.0			87,502	30.6
Cost of service sales		41,292	11.0			24,148	8.5
Cost of sales		142,484	38.0			111,650	39.1
Gross margin		232,121	62.0			173,963	60.9
Operating expenses:
Sales, general and administrative		119,922	32.0			95,005	33.3
Research and development		71,940	19.2			57,547	20.2
Total operating expenses		191,862	51.2			152,552	53.5
Income from operations		40,259	10.8			21,411	7.4
Interest and other income (loss), net		(52,368)	(14.0)			47,026	16.5
Income (loss) before provision for income taxes		(12,109)	(3.2)			68,437	23.9
Provision for (benefit from) income taxes		(24,529)	(6.5)			17,475	6.1
Net income	$	12,420	3.3	%	$	50,962	17.8	%

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


	Three Months Ended June 30,
	2023				2022
United States	$	321,921	86	%	$	228,446	80	%
Other countries		52,684	14			57,167	20
Total	$	374,605	100	%	$	285,613	100	%

International revenue decreased compared to the prior year comparable period, primarily driven by decreased sales in our Asia-Pacific (“APAC”) region, which benefitted from large hardware and cartridge orders during the prior year comparable period.

Net Sales

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


	Three Months Ended June 30,								Dollar		Percent
	2023				2022				Change		Change
TASER segment:
TASER Devices (Professional)	$	84,975	22.7	%	$	70,313	24.6	%	$	14,662	20.9	%
Cartridges		48,425	12.9			49,845	17.5			(1,420)	(2.8)
Axon Evidence and Cloud Services		8,494	2.3			3,720	1.3			4,774	128.3
Extended Warranties		7,715	2.0			7,459	2.6			256	3.4
Other (1)		4,801	1.3			4,249	1.5			552	13.0
Total TASER segment		154,410	41.2			135,586	47.5			18,824	13.9
Software and Sensors segment:
Axon Body Cameras and Accessories		32,781	8.8			33,938	11.9			(1,157)	(3.4)
Axon Fleet Systems		35,960	9.6			15,881	5.5			20,079	126.4
Axon Evidence and Cloud Services		132,102	35.3			81,911	28.7			50,191	61.3
Extended Warranties		15,166	4.0			12,498	4.4			2,668	21.3
Other (2)		4,186	1.1			5,799	2.0			(1,613)	(27.8)
Total Software and Sensors segment		220,195	58.8			150,027	52.5			70,168	46.8
Total net sales	$	374,605	100.0	%	$	285,613	100.0	%	$	88,992	31.2	%

	(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 13.9% for the three months ended June 30, 2023 as compared to the prior year quarter, primarily due to an increase of $14.7 million in TASER devices (professional) revenue. The increase in TASER devices (professional) revenue primarily related to our next generation product, TASER 10, which began shipping in the first quarter of 2023. Net sales for Axon Evidence and cloud services also increased $4.8 million in the quarter due to an increase of software revenue tied to our VR solution and TASER devices. Partially offsetting the increase in TASER segment revenue was a $1.4 million decrease year over year in cartridge revenue due to several large international cartridge orders delivered in the second quarter of 2022. Fluctuations in cartridge revenue are generally attributable to customers who are not on cartridge subscriptions plans and periodically purchase in bulk.

Net sales for the Software and Sensors segment increased 46.8% for the three months ended June 30, 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 $50.2 million. The $20.1 million increase in Axon Fleet systems revenue was primarily driven by higher unit sales 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 $2.7 million increase in extended warranties, as most of those devices are sold with extended warranties.

We consider total company future contracted revenues a forward-looking performance indicator. As of June 30, 2023, we had approximately $5.2 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 60.5% from 64.3% for the three months ended June 30, 2023 and 2022, respectively. The decrease is primarily due to the introduction of our next generation device, TASER 10, and increased manufacturing overhead.

As a percentage of net sales, gross margin for the Software and Sensors segment increased to 63.0% from 57.9% for the three months ended June 30, 2023 and 2022, respectively. Within the Software and Sensors segment, hardware gross margin increased to 52.9% for the three months ended June 30, 2023 compared to 42.9% for the same period in 2022 due to a decrease in manufacturing overhead allocation, an improvement in Fleet 3 gross margins due to efficiencies from better fixed cost absorption, and a favorable non-recurring cost adjustment. Service margins decreased slightly to 69.7% for the three months ended June 30, 2023 from 70.4% for the same period in 2022 due to a higher mix of lower margin professional services revenue.

Sales, General and Administrative Expenses

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


	Three Months Ended June 30,						Dollar		Percent
	2023			2022			Change		Change
Total sales, general and administrative expenses	$	119,922		$	95,005		$	24,917	26.2	%
Sales, general, and administrative as a percentage of net sales		32.0	%		33.3	%

Salaries, benefits, and bonus expense increased $13.8 million in comparison to the prior year comparable period. An increase of $11.4 million in salaries, benefits, and bonus expense was attributable to an increase in headcount and higher wages. Additionally, $2.4 million was attributed to payroll taxes related to the vesting of two tranches of the XSPP in May 2023 and payroll taxes for CEO option exercises completed during the quarter ended June 30, 2023.

Stock-based compensation expense increased $6.3 million in comparison to the prior year comparable period, which was primarily attributable to an increase of $5.9 million in expense related to the XSPP, partially offset by a $2.9 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 11th and 12th market capitalization goals in April 2023. Also contributing to the total increase in stock-based compensation expense was the expense reversal of $3.3 million related to employee forfeitures during the prior year comparable period.

Sales commissions increased $6.0 million in comparison to the prior year comparable period, tied to higher revenue.

Research and Development Expenses

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



	Three Months Ended June 30,						Dollar		Percent
	2023			2022			Change		Change
Total research and development expenses	$	71,940		$	57,547		$	14,393	25.0	%
Research and development as a percentage of net sales		19.2	%		20.2	%

Within the TASER segment, R&D expense increased $1.1 million comparable to the same period prior year. The increase is attributable to headcount growth driving increases in compensation, benefits and bonus expense.

R&D expense for the Software and Sensors segment increased $13.3 million, reflecting an increase of $7.8 million in salaries, benefits, and bonus expense due to higher headcount and increased wages. Additionally, there was a $3.4 million increase related to stock-based compensation expense, primarily related to increased headcount. Internal cloud

storage costs also increased $1.3 million related to product development. Professional and consulting expenses increased $0.9 million primarily related to the launch of Axon Body 4, which began shipping in the second quarter of 2023.

Interest and Other Income, Net

Interest and other income (loss), net was a loss of $52.4 million for the three months ended June 30, 2023, compared to income of $47.0 million for the same period in 2022. During the second quarter of 2023, we recorded a net unrealized impairment loss of $71.9 million for an existing strategic investment and related warrants and interest expense of $1.7 million primarily related to our 2027 Notes, partially offset by an unrealized gain of $10.0 million related to our investment in CLBT and interest income of $11.3 million on our available-for-sale securities. For additional information regarding our 2027 Notes, refer to Note 9 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. During the three months ended June 30, 2022, we recorded a net unrealized gain of $59.7 million related to the exercise of warrants in one of our strategic investees and observable price changes for our existing investments and related warrants, as well as an unrealized loss of $11.7 million on marketable securities related to our investment in CLBT.

Provision for Income Taxes

The provision for income taxes was a benefit of $24.5 million for the three months ended June 30, 2023, which was an effective tax rate of 202.6%. Our estimated annual effective income tax rate for 2023, before discrete period adjustments, is 16.0%, 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 $21.0 million discrete tax benefit associated with net windfalls related to stock-based compensation for RSUs and PSUs that vested during the three months ended June 30, 2023, primarily attributed to the vesting of the final three tranches of XSPP in May 2023.

Net Income

We recorded net income of $12.4 million for the three months ended June 30, 2023 compared to net income of $51.0 million for the same period in 2022. Net income per basic share was $0.17 for the three months ended June 30, 2023 compared to $0.72 net income per basic share for the same period in 2022. Net income per diluted share was $0.16 for the three months ended June 30, 2023 compared to $0.71 net income per diluted share for the same period in 2022.

Three Months Ended June 30, 2023 Compared to the Three Months Ended March 31, 2023

Net Sales

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


	Three Months Ended				Three Months Ended				Dollar		Percent
	June 30, 2023				March 31, 2023				Change		Change
TASER segment:
TASER Devices (Professional)	$	84,975	22.7	%	$	67,472	19.7	%	$	17,503	25.9	%
Cartridges		48,425	12.9			46,800	13.6			1,625	3.5
Axon Evidence and Cloud Services		8,494	2.3			7,201	2.1			1,293	18.0
Extended Warranties		7,715	2.0			7,670	2.2			45	0.6
Other (1)		4,801	1.3			5,139	1.5			(338)	(6.6)
Total TASER segment		154,410	41.2			134,282	39.1			20,128	15.0
Software and Sensors segment:
Axon Body Cameras and Accessories		32,781	8.8			38,797	11.3			(6,016)	(15.5)
Axon Fleet Systems		35,960	9.6			32,972	9.6			2,988	9.1
Axon Evidence and Cloud Services		132,102	35.3			118,314	34.5			13,788	11.7
Extended Warranties		15,166	4.0			14,085	4.1			1,081	7.7
Other (2)		4,186	1.1			4,593	1.4			(407)	(8.9)
Software and Sensors segment		220,195	58.8			208,761	60.9			11,434	5.5
Total net sales	$	374,605	100.0	%	$	343,043	100.0	%	$	31,562	9.2	%

	(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 increased by approximately $20.1 million or 15.0% as compared to the prior quarter, primarily due to an increase in the units of TASER devices. The increase in TASER devices revenue is primarily attributable to our next generation device, TASER 10, which began shipping in the first quarter of 2023. Axon Evidence and cloud services also increased $1.3 million tied to software revenue for our TASER devices and VR hardware.

Within the Software and Sensors segment, net sales increased $11.4 million or 5.5% during the three months ended June 30, 2023 compared to the prior quarter. The increase in the aggregate number of users drove the majority of the increase in Axon Evidence and cloud services revenue of $13.8 million. Axon Fleet revenue increased $3.0 million as demand for Fleet 3 drove higher unit sales. Partially offsetting the increases in the Software and Sensors segment is a decrease of $6.0 million of Axon Body cameras and accessories revenue due to decreased units driven by anticipated demand for Axon Body 4, which began shipping at the end of the second quarter of 2023.

Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022


	Six Months Ended June 30,
	2023				2022
Net sales from products	$	452,863	63.1	%	$	376,255	69.4	%
Net sales from services		264,785	36.9			165,784	30.6
Net sales		717,648	100.0			542,039	100.0
Cost of product sales		208,776	29.1			166,854	30.8
Cost of service sales		72,649	10.1			45,483	8.4
Cost of sales		281,425	39.2			212,337	39.2
Gross margin		436,223	60.8			329,702	60.8
Operating expenses:
Sales, general and administrative		236,489	33.0			185,134	34.2
Research and development		142,867	19.9			105,963	19.5
Total operating expenses		379,356	52.9			291,097	53.7
Income from operations		56,867	7.9			38,605	7.1
Interest and other income (loss), net		(27,092)	(3.8)			102,325	18.9
Income before provision for income taxes		29,775	4.1			140,930	26.0
Provision for (benefit from) income taxes		(27,784)	(3.9)			35,097	6.5
Net income	$	57,559	8.0	%	$	105,833	19.5	%

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


	Six Months Ended June 30,
	2023				2022
United States	$	612,859	85	%	$	442,660	82	%
Other Countries		104,789	15			99,379	18
Total	$	717,648	100	%	$	542,039	100	%

International revenue increased compared to the prior year comparable period, and decreased as a percentage of total revenue. The increase is primarily attributable to increased sales in our Americas region, partially offset by decreased sales in our APAC region, which benefitted from large hardware and cartridge orders during the prior year comparable period.

Net Sales

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


	Six Months Ended June 30,								Dollar		Percent
	2023				2022				Change		Change
TASER segment:
TASER Devices (Professional)	$	152,447	21.2	%	$	133,477	24.6	%	$	18,970	14.2	%
Cartridges		95,225	13.3			87,670	16.2			7,555	8.6
Axon Evidence and Cloud Services		15,695	2.2			6,737	1.2			8,958	133.0
Extended Warranties		15,385	2.1			14,138	2.6			1,247	8.8
Other (1)		9,940	1.4			7,924	1.5			2,016	25.4
Total TASER segment		288,692	40.2			249,946	46.1			38,746	15.5
Software and Sensors segment:
Axon Body Cameras and Accessories		71,578	10.0			72,455	13.3			(877)	(1.2)
Axon Fleet Systems		68,932	9.6			29,701	5.5			39,231	132.1
Axon Evidence and Cloud Services		250,416	34.9			161,850	29.9			88,566	54.7
Extended Warranties		29,251	4.1			21,559	4.0			7,692	35.7
Other (2)		8,779	1.2			6,528	1.2			2,251	34.5
Total Software and Sensors segment		428,956	59.8			292,093	53.9			136,863	46.9
Total net sales	$	717,648	100.0	%	$	542,039	100.0	%	$	175,609	32.4

	(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 $38.8 million or 15.5% during the six months ended June 30, 2023, primarily due to an increase of $19.0 million in TASER devices and $7.6 million in cartridge revenue. We released our next generation device, TASER 10, in the first quarter of 2023 and have begun to see a shift to the next generation device from our legacy devices. The increase in cartridges revenue is attributable to product mix as we shift from legacy handles to our next generation devices, which have a higher cartridge attachment rate. The increase in revenue from Axon Evidence and cloud services of $9.0 million was driven by an increase in TASER software and VR revenue. Other revenue increased $2.0 million due to higher training revenue.

Net sales for the Software and Sensors segment increased $136.9 million or 46.9% during the six months ended June 30, 2023 as we continued to add users and associated devices to our network. The increase in the aggregate number of users drove the majority of the increase in Axon Evidence revenue of $88.6 million, as well as increases in professional services revenue from Fleet installations. The $39.2 million increase in Axon Fleet systems revenue was primarily driven by higher unit sales as we continue to see strong demand for Fleet 3. An increase in cameras, docks and Fleet systems in the field drove the $7.7 million increase in extended warranties, as most of those devices are sold with extended warranties. Demand for Interview Room drove the $2.3 million increase in other revenue.

Gross Margin

As a percentage of net sales, gross margin for the TASER segment decreased to 61.3% from 64.4% for the six months ended June 30, 2023 and 2022, respectively. The decrease is primarily due to the introduction of our next generation device, TASER 10, and increased manufacturing overhead as well as nonrecurring inventory reserves incurred in the first quarter of 2023.

As a percentage of net sales, gross margin for the Software and Sensors segment increased to 60.5% from 57.8% for the six months ended June 30, 2023 and 2022, respectively. Within the Software and Sensors segment, hardware gross margin was 45.4% for the six months ended June 30, 2023 compared to 41.7% for the same period in 2022, while the service margin was 71.3% during each of those same periods. Hardware gross margin increased due to a decrease in

manufacturing overhead allocation, an improvement in Fleet 3 gross margins due to efficiencies from better fixed cost absorption, and a favorable non-recurring cost adjustment. Service margin remained flat due to a higher mix of lower margin professional services revenue, offset by savings on cloud hosting costs.

Sales, General and Administrative Expenses

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


	Six Months Ended June 30,						Dollar		Percent
	2023			2022			Change		Change
Total sales, general and administrative expenses	$	236,489		$	185,134		$	51,355	27.7	%
Sales, general, and administrative as a percentage of net sales		33.0	%		34.2	%

Salaries, benefits, and bonus expense increased $31.2 million in comparison to the prior year comparable period. An increase of $22.4 million in salaries, benefits, and bonus expense was attributable to an increase in headcount and higher wages. Additionally, $8.8 million was attributed to payroll taxes related to the vesting of three tranches of our XSPP and payroll taxes for CEO option exercises completed during the six months ended June 30, 2023.

Sales and marketing and travel expenses increased $11.0 million in comparison to the prior year comparable period. The increase was primarily driven by a $7.7 million increase in sales commissions tied to increased revenue. Additionally, expense related to trade shows and seminars increased $2.4 million as we hosted our inaugural public safety training conference TASERCON in January 2023, announcing the launch of TASER 10. Travel expense also increased $1.4 million impacted by higher travel costs per trip.

Stock-based compensation expense increased $8.8 million in comparison to the prior year comparable period, which was primarily attributable to the vesting of three tranches of the XSPP and two tranches of the CEO Performance Award during the six months ended June 30, 2023. Also contributing to increased stock-based compensation expense is increased headcount.

Research and Development Expenses

Research and development expenses were comprised as follows (dollars in thousands):


	Six Months Ended June 30,						Dollar		Percent
	2023			2022			Change		Change
Total research and development expenses	$	142,867		$	105,963		$	36,904	34.8	%
R&D expenses as a percentage of net sales		19.9	%		19.5	%

Within the TASER segment, R&D expense increased $7.2 million in comparison to the prior year comparable period. An increase of $4.2 million in salaries, benefits and bonus expense and $2.4 million related to stock-based compensation expense reflected higher headcount.

R&D expense for the Software and Sensors segment increased $29.7 million, reflecting an increase of $16.4 million in salaries, benefits, and bonus expense due to higher headcount and increased wages. Additionally, there was an increase of $8.1 million in stock-based compensation expense related to the vesting of three tranches of the XSPP during the six months ended June 30, 2023 and to increased headcount. Internal cloud storage costs also increased $2.2 million related to product development. Professional and consulting expenses increased $1.6 million primarily related to the launch of Axon Body 4, which began shipping in the second quarter of 2023.

Interest and Other Income, Net

Interest and other income (loss), net was a loss of $27.1 million for the six months ended June 30, 2023, compared to income of $102.3 million for the same period in 2022. During the first half of 2023, we recorded a net unrealized

impairment loss of $71.9 million for an existing strategic investment and related warrants and interest expense of $3.5 million primarily related to our 2027 Notes, partially offset by an unrealized gain of $25.6 million related to our investment in CLBT and investment income of $21.9 million on our available-for-sale securities. For additional information regarding our 2027 Notes, refer to Note 9 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. For the six months ended June 30, 2022, we recorded an unrealized gain of $130.1 million related to observable price changes for our existing investments and related warrants and the exercise of warrants in one of our strategic investees, which was partially offset in part by a $26.3 million unrealized loss on marketable securities related to our investment in CLBT.

Provision for Income Taxes

The provision for income taxes was a benefit of $27.8 million for the six months ended June 30, 2023, which was an effective tax rate of (93.3%). Our estimated annual effective income tax rate for 2023, before discrete period adjustments, is 16.0%, which differs from the federal statutory rate primarily due to the impact of R&D tax credits and a decrease in valuation allowance offset by the executive compensation limitation under 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 $33.9 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for RSUs and PSUs that vested during the six months ended June 30, 2023, primarily attributed to the vesting of the final three tranches of XSPP in March and May 2023.

Net Income

We recorded net income of $57.6 million for the six months ended June 30, 2023 compared net income of $105.8 million for the same period in 2022. Net income per basic share was $0.78 for the six months ended June 30, 2023 compared to net income per basic share of $1.49 per basic share for the same period in 2022. Net income per diluted share was $0.77 for the six months ended June 30, 2023 compared to net income per diluted share of $1.46 per diluted share for the same period in 2022.

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						Six Months Ended
	June 30,		March 31,		June 30,		June 30,		June 30,
	2023		2023		2022		2023		2022
Net income	$	12,420	$	45,139	$	50,962	$	57,559	$	105,833
Depreciation and amortization		7,480		6,689		6,210		14,169		11,965
Interest expense		1,737		1,724		3		3,461		11
Investment interest (income) loss		(11,400)		(11,390)		584		(22,790)		930
Provision for (benefit from) income taxes		(24,529)		(3,255)		17,475		(27,784)		35,097
EBITDA	$	(14,292)	$	38,907	$	75,234	$	24,615	$	153,836

Non-GAAP adjustments:
Stock-based compensation expense		31,891		34,350		21,162		66,241		46,250
Unrealized loss (gain) on strategic investments and marketable securities, net		61,912		(15,570)		(47,985)		46,342		(103,836)
Transaction costs related to strategic investments and acquisitions		455		843		964		1,298		1,835
Loss on disposal and abandonment of intangible assets, property, equipment and other assets, net		24		156		91		180		237
Costs related to FTC litigation		1		—		291		1		295
Payroll taxes related to XSPP vesting and CEO Award option exercises		2,368		6,392		—		8,760		—
Adjusted EBITDA	$	82,359	$	65,078	$	49,757	$	147,437	$	98,617

Liquidity and Capital Resources

Summary

As of June 30, 2023, we had $474.2 million of cash and cash equivalents, an increase of $120.5 million as compared to December 31, 2022. Cash and cash equivalents and investments totaled $1.08 billion, representing a decrease of $7.0 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 June 30, 2023, we had letters of credit outstanding of $7.4 million, leaving the net amount available for borrowing of $192.6 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 June 30, 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 June 30, 2023, our net leverage ratio was 0.45 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 period ended June 30, 2023.

Based on our strong balance sheet at June 30, 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):


	Six Months Ended June 30,
	2023		2022
Operating activities	$	(13,667)	$	63,340
Investing activities		81,256		(198,786)
Financing activities		52,254		(2,393)
Effect of exchange rate changes on cash and cash equivalents		806		(3,910)
Net increase (decrease) in cash and cash equivalents and restricted cash	$	120,649	$	(141,749)

Operating activities

Net cash used in operating activities in the first six months of 2023 of $13.7 million reflects net income of $57.6 million, non-cash income statement items totaling $89.9 million, and a decrease of $161.2 million for the net change in operating assets and liabilities. Included in the non-cash items were a decrease of $37.6 million in deferred income taxes, an $8.0 million decrease in bond amortization, a net unrealized loss of $46.3 million related to strategic investments and marketable securities, $66.2 million in stock-based compensation expense, net, and $14.2 million in depreciation and amortization expense. Cash provided by operations was favorably impacted by increased deferred revenue of $69.9 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 $102.2 million, an increase in prepaid expenses and other assets of $49.3 million, an increase of $43.6 million in inventory, and a decrease in accounts payable, accrued and other liabilities of $36.0 million. The increase in accounts and notes receivable and contract assets was due to increased sales and timing of satisfied performance obligations compared to customer payments of accounts receivable. The increase in prepaid expenses and other assets was attributable to an increase in deferred commissions related to increased bookings, as well as higher deferred cost of goods sold related to increased sales of Axon Air and Fleet. 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 lower commissions payable and by the timing of the annual bonus payout.

Net cash provided by operating activities in the first six months of 2022 of $63.3 million reflects net income of $105.8 million, non-cash income statement items totaling $11.6 million, and a decrease of $30.9 million for the net change in operating assets and liabilities. Included in the non-cash items were $46.3 million in stock-based compensation expense, a decrease of $26.1 million in deferred income taxes, net, $12.0 million in depreciation and amortization expense, and a $130.1 million gain on the change in fair value of strategic investments, offset by an unrealized loss of $26.3 million on marketable securities. Cash provided by operations was favorably impacted by increased deferred revenue of $74.6 million, which was primarily attributable to increased sales. Additionally, accounts payable, accrued and other liabilities increased $24.6 million due to an increase in accounts payable due to the timing of invoice payments. Offsetting this activity was an increase of accounts and notes receivables and contract assets of $80.2 million, an increase of $47.1 million in inventory, and an increase in prepaid expenses and other assets of $2.7 million. 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. The increase of inventory was primarily driven by the proactive buildup of raw materials required to meet future demand and an increased revenue forecast. The increase in prepaid expenses and other assets was driven by an increase of deferred commissions related to increased bookings.

Investing activities

Cash provided by investing activities during the first six months of 2023 was $81.3 million. Cash inflows from investing activities included $135.0 million of proceeds from calls, maturities and sales of available-for-sale investments, net of purchases. The outflows from investing activities included $31.9 million for a business acquisition and strategic investments and $21.6 million for purchases of property and equipment, net of proceeds.

We used $198.8 million in investing activities during the first six months of 2022. Cash outflows from investing activities included $61.5 million for new strategic minority investments, $6.6 million for the exercise price of warrants related to our strategic investments, and $2.1 million for a business acquisition. The outflows also included $98.8 million for available-for-sale investments, net of proceeds. Property and equipment purchases totaled $29.8 million, net of proceeds.

Financing activities

Net cash provided by financing activities was $52.3 million during the first six months of 2023 and was primarily attributable to net proceeds of $94.8 million received from our ATM offering and $54.5 million from the exercise of stock options where shares were sold to cover the exercise price. Partially offsetting the cash inflows was a payment of $97.1 million for income and payroll taxes on behalf of employees who net-settled stock awards during the period, primarily related to the vesting of three tranches of the XSPP.

Net cash used in financing activities was $2.4 million during the first six months of 2022 and was primarily 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 six months ended June 30, 2023.

Previous: Item 1. Financial Statements · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk