Axon Enterprise 10-Q 2023-09-30

Filed 2023-11-07. 7 sections, 294K 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 September 30, 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 November 3, 2023 was 74,933,831.

AXON ENTERPRISE, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 September 30, 2023 (Unaudited) and December 31, 2022	1
		Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2023 and 2022	2
		Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022	3
		Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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		38
	Item 4. Controls and Procedures		39
PART II - OTHER INFORMATION			40
	Item 1. Legal Proceedings		40
	Item 1A. Risk Factors		40
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		63
	Item 3. Defaults Upon Senior Securities		63
	Item 4. Mine Safety Disclosures		63
	Item 5. Other Information		64
	Item 6. Exhibits		64
	SIGNATURES		65

Special Note Regarding Forward-Looking Statements

This Quarterly 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; statements related to recently completed acquisitions; our anticipation that contracts with governmental customers will be fulfilled; strategies and trends, including the amounts and benefits of, research and development (“R&D”) 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.

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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 September 30, 2023, and results of operations for the three and nine months ended September 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 “Part II, 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 September 30, 2023 were $413.6 million, an increase of $101.8 million, or 32.7%, from the comparable period in the prior year. We had income from operations of $55.1 million compared to $32.1 million for the same period in the prior year. Gross margin dollars increased $62.0 million and decreased as a percentage of revenue to 61.7% from 62.0% compared to the three months ended September 30, 2022. The decrease was primarily driven by lower margin in our TASER segment resulting from the launch of TASER 10, which is still ramping toward full scale in manufacturing, increased mix from lower margin Sensors hardware, and higher professional services costs associated with growth in Fleet 3, partially offset by increased software mix. Operating expenses increased $39.0 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 three months ended September 30, 2023, we recorded net income of $59.4 million included a noncash unrealized gain of $4.1 million on our investment in CLBT. Net income of $12.1 million for the comparable period in the prior year included an unrealized loss of $10.6 million on marketable securities related to our investment in CLBT along with a unrealized loss of $0.7 million of observable price changes for our existing strategic investments and related warrants.

Our revenues for the nine months ended September 30, 2023 were $1.1 billion, an increase of $277.5 million, or 32.5%, from the comparable period in the prior year. We had income from operations of $112.0 million compared to $70.7 million for the same period in the prior year. Gross margin dollars increased $168.5 million and decreased as a percentage of revenue to 61.1% from 61.3% compared to the nine months ended September 30, 2022. The decrease was primarily driven by lower margin in our TASER segment resulting from the launch of TASER 10, which is still ramping toward full scale in manufacturing, increased mix from lower margin Sensors hardware, and higher professional services costs associated with growth in Fleet 3, partially offset by increased software mix. Operating expenses increased $127.3 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 nine months ended September 30, 2023, we recorded net income of $117.0 million, which reflected a noncash unrealized gain of $29.6 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 was $118.0 million for the comparable period in the prior year included net unrealized gains of $129.4 million related to observable price changes for our existing investments and related warrants and an unrealized loss of $36.9 million on marketable securities related to our investment in CLBT.

Results of Operations

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 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 September 30,
	2023				2022
Net sales from products	$	256,443	62.0	%	$	210,398	67.5	%
Net sales from services		157,158	38.0			101,356	32.5
Net sales		413,601	100.0			311,754	100.0
Cost of product sales		116,278	28.1			93,724	30.1
Cost of service sales		42,051	10.2			24,773	7.9
Cost of sales		158,329	38.3			118,497	38.0
Gross margin		255,272	61.7			193,257	62.0
Operating expenses:
Sales, general and administrative		123,279	29.8			102,023	32.7
Research and development		76,880	18.6			59,127	19.0
Total operating expenses		200,159	48.4			161,150	51.7
Income from operations		55,113	13.3			32,107	10.3
Interest and other income (loss), net		14,310	3.5			(11,249)	(3.6)
Income before provision for income taxes		69,423	16.8			20,858	6.7
Provision for income taxes		10,026	2.4			8,727	2.8
Net income	$	59,397	14.4	%	$	12,131	3.9	%

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


	Three Months Ended September 30,
	2023				2022
United States	$	342,090	83	%	$	264,644	85	%
Other countries		71,511	17			47,110	15
Total	$	413,601	100	%	$	311,754	100	%

International revenue increased compared to the prior year comparable period, primarily driven by increased sales in our Europe, Middle East and Africa (“EMEA”) and our Asia Pacific (“APAC”) regions on large hardware orders during the current quarter.

Net Sales

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


	Three Months Ended September 30,								Dollar		Percent
	2023				2022				Change		Change
TASER segment:
TASER Devices (Professional)	$	86,718	21.0	%	$	80,146	25.7	%	$	6,572	8.2	%
Cartridges		54,279	13.1			46,475	14.9			7,804	16.8
Axon Evidence and Cloud Services		8,975	2.2			5,125	1.7			3,850	75.1
Extended Warranties		8,078	1.9			7,290	2.3			788	10.8
Other (1)		4,520	1.1			5,847	1.9			(1,327)	(22.7)
Total TASER segment		162,570	39.3			144,883	46.5			17,687	12.2
Software and Sensors segment:
Axon Body Cameras and Accessories		52,488	12.7			40,944	13.1			11,544	28.2
Axon Fleet Systems		26,716	6.4			10,139	3.2			16,577	163.5
Axon Evidence and Cloud Services		150,563	36.4			96,814	31.1			53,749	55.5
Extended Warranties		16,054	3.9			14,511	4.7			1,543	10.6
Other (2)		5,210	1.3			4,463	1.4			747	16.7
Total Software and Sensors segment		251,031	60.7			166,871	53.5			84,160	50.4
Total net sales	$	413,601	100.0	%	$	311,754	100.0	%	$	101,847	32.7	%

	(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 12.2% for the three months ended September 30, 2023 as compared to the prior year quarter, primarily due to increases of $6.6 million in TASER devices (professional) revenue and $7.8 million of cartridge revenue. The increase in TASER devices (professional) revenue primarily related to strong adoption of our next generation product, TASER 10, which began shipping in the first quarter of 2023. The increase in cartridge revenue was primarily due to higher international volume. Fluctuations in cartridge revenue are generally attributable to customers who are not on cartridge subscriptions plans and periodically purchase in bulk. Net sales for Axon Evidence and cloud services also increased $3.9 million in the quarter due to an increase in the number of cloud-connected TASER devices in the field, as well as an increase in VR revenue.

Net sales for the Software and Sensors segment increased 50.4% for the three months ended September 30, 2023 as compared to the prior year quarter as we continue 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 $53.7 million. The $16.6 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. The $11.5 million increase in Axon Body Cameras and Accessories revenue was due to increased unit sales and premium product mix driven by demand for our next generation product, Axon Body 4, which began shipping at the end of the second quarter of 2023. An increase in cameras, docks and Axon Fleet systems in the field drove the $1.5 million increase in extended warranties revenue, as most of those devices are sold with extended warranties.

We consider total company future contracted revenues a forward-looking performance indicator. As of September 30, 2023, we had approximately $5.8 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 12 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 62.5% from 63.1% for the three months ended September 30, 2023 and 2022, respectively. The decrease was primarily due to the introduction of our next generation device, TASER 10, which is still ramping toward full scale in manufacturing.

As a percentage of net sales, gross margin for the Software and Sensors segment increased slightly to 61.2% from 61.0% for the three months ended September 30, 2023 and 2022, respectively. Within the Software and Sensors segment, hardware gross margin increased to 45.2% for the three months ended September 30, 2023 compared to 43.3% for the same period in 2022 due to scale efficiencies from higher Fleet volume and growth in our next generation product, Axon Body 4. Service margin decreased to 72.4% for the three months ended September 30, 2023 from 74.1% for the same period in 2022 due to a higher mix of lower margin professional services revenue.

Sales, General and Administrative Expenses

SG&A expenses were comprised as follows (dollars in thousands):


	Three Months Ended September 30,						Dollar		Percent
	2023			2022			Change		Change
Total sales, general and administrative expenses	$	123,279		$	102,023		$	21,256	20.8	%
Sales, general, and administrative expenses as a percentage of net sales		29.8	%		32.7	%

Salaries, benefits, and bonus expense increased $13.5 million in comparison to the prior year comparable period, which was primarily attributable to an increase in headcount and higher wages. Benefits expense also reflected higher self-insured medical expense related to increased medical plan enrollment and higher claims during the current quarter.

Stock-based compensation expense decreased $1.4 million in comparison to the prior year comparable period, which was primarily attributable to a decrease of $4.3 million in expense related to the XSPP and CEO Performance Award. The decrease in stock-based compensation expense related to XSPP and CEO Performance Award was due to the attainment of the final market capitalization goals earlier in 2023. Partially offsetting the decrease was higher expense related to increased headcount and new performance stock awards issued to certain employees.

Sales commissions increased $6.1 million in comparison to the prior year comparable period, tied to higher revenue.

Partially offsetting the increase in SG&A expense for the quarter were $2.6 million of insurance recoveries.

Research and Development Expenses

R&D expenses were comprised as follows (dollars in thousands):



	Three Months Ended September 30,						Dollar		Percent
	2023			2022			Change		Change
Total research and development expenses	$	76,880		$	59,127		$	17,753	30.0	%
Research and development expenses as a percentage of net sales		18.6	%		19.0	%

Within the TASER segment, R&D expense increased $1.8 million in comparison to the prior year comparable period. 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 $15.9 million in comparison to the prior year comparable period, reflecting an increase of $9.9 million in salaries, benefits, and bonus expense due to higher headcount and increased wages. Additionally, there was a $2.6 million increase related to stock-based compensation expense, primarily related to increased headcount. Internal cloud costs increased $1.7 million primarily related to software product

development. Professional and consulting expenses increased $1.0 million primarily related to software feature development and continued investment in Axon Body 4.

Interest and Other Income (Loss), Net

Interest and other income (loss), net was income of $14.3 million for the three months ended September 30, 2023, compared to a loss of $11.2 million for the same period in 2022. During the third quarter of 2023, we recorded interest expense of $1.8 million primarily related to our 2027 Notes, partially offset by an unrealized gain of $4.1 million related to our investment in CLBT and interest income of $12.5 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 September 30, 2022, we recorded an unrealized loss of $10.6 million on marketable securities related to our investment in CLBT.

Provision for Income Taxes

The provision for income taxes was an expense of $10.0 million for the three months ended September 30, 2023, which was an effective tax rate of 14.4%. Our estimated annual effective income tax rate for 2023, before discrete period adjustments, is 17.4%, 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 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 $2.9 million discrete tax benefit associated with net windfalls related to stock-based compensation for RSUs and PSUs that vested during the three months ended September 30, 2023.

The provision for income taxes was an expense of $8.7 million for the three months ended September 30, 2022, which was an effective tax rate of 41.8%. Our estimated full year effective income tax rate for 2022, before discrete period adjustments, is 28.0%. The effective tax rate was favorably impacted by a $0.2 million discrete tax expense associated with shortfalls related to stock-based compensation for RSUs and PSUs that vested during the three months ended September 30, 2022.

Net Income

We recorded net income of $59.4 million for the three months ended September 30, 2023 compared to net income of $12.1 million for the same period in 2022. Net income per basic share was $0.79 for the three months ended September 30, 2023 compared to $0.17 net income per basic share for the same period in 2022. Net income per diluted share was $0.78 for the three months ended September 30, 2023 compared to $0.17 net income per diluted share for the same period in 2022.

Three Months Ended September 30, 2023 Compared to the Three Months Ended June 30, 2023

Net Sales

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


	Three Months Ended				Three Months Ended				Dollar		Percent
	September 30, 2023				June 30, 2023				Change		Change
TASER segment:
TASER Devices (Professional)	$	86,718	21.0	%	$	84,975	22.7	%	$	1,743	2.1	%
Cartridges		54,279	13.1			48,425	12.9			5,854	12.1
Axon Evidence and Cloud Services		8,975	2.2			8,494	2.3			481	5.7
Extended Warranties		8,078	1.9			7,715	2.0			363	4.7
Other (1)		4,520	1.1			4,801	1.3			(281)	(5.9)
Total TASER segment		162,570	39.3			154,410	41.2			8,160	5.3
Software and Sensors segment:
Axon Body Cameras and Accessories		52,488	12.7			32,781	8.8			19,707	60.1
Axon Fleet Systems		26,716	6.4			35,960	9.6			(9,244)	(25.7)
Axon Evidence and Cloud Services		150,563	36.4			132,102	35.3			18,461	14.0
Extended Warranties		16,054	3.9			15,166	4.0			888	5.9
Other (2)		5,210	1.3			4,186	1.1			1,024	24.5
Software and Sensors segment		251,031	60.7			220,195	58.8			30,836	14.0
Total net sales	$	413,601	100.0	%	$	374,605	100.0	%	$	38,996	10.4	%

	(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 within the TASER segment increased by approximately $8.2 million, or 5.3%, during the three months ended September 30, 2023 compared to the prior quarter, primarily due to a $5.9 million increase in cartridge revenue. The increase in cartridge revenue was primarily due to higher international volume. Fluctuations in cartridge revenue are generally attributable to customers who are not on cartridge subscriptions plans and periodically purchase in bulk. TASER devices (professional) revenue increased by $1.7 million due to volume shift to TASER 10.

Within the Software and Sensors segment, net sales increased $30.8 million, or 14.0%, during the three months ended September 30, 2023 compared to the prior quarter. The increase in the aggregate number of users, average revenue per user, and add-ons drove the majority of the increase in Axon Evidence and cloud services revenue of $18.5 million. Axon Body cameras and accessories revenue increased $19.7 million on increased unit sales and premium product mix driven by demand for our next generation product, Axon Body 4, which began shipping at the end of the second quarter in 2023. Partially offsetting the increases in the Software and Sensors segment was a decrease of $9.2 million in Axon Fleet revenue primarily reflecting lower unit volume due to timing of shipments related to customer-driven deployment schedules.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022


	Nine Months Ended September 30,
	2023				2022
Net sales from products	$	709,306	62.7	%	$	586,653	68.7	%
Net sales from services		421,943	37.3			267,140	31.3
Net sales		1,131,249	100.0			853,793	100.0
Cost of product sales		325,054	28.7			260,578	30.5
Cost of service sales		114,700	10.2			70,256	8.2
Cost of sales		439,754	38.9			330,834	38.7
Gross margin		691,495	61.1			522,959	61.3
Operating expenses:
Sales, general and administrative		359,768	31.8			287,157	33.6
Research and development		219,747	19.4			165,090	19.4
Total operating expenses		579,515	51.2			452,247	53.0
Income from operations		111,980	9.9			70,712	8.3
Interest and other income (loss), net		(12,782)	(1.1)			91,076	10.6
Income before provision for income taxes		99,198	8.8			161,788	18.9
Provision for (benefit from) income taxes		(17,758)	(1.6)			43,824	5.1
Net income	$	116,956	10.4	%	$	117,964	13.8	%

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


	Nine Months Ended September 30,
	2023				2022
United States	$	954,949	84	%	$	707,304	83	%
Other Countries		176,300	16			146,489	17
Total	$	1,131,249	100	%	$	853,793	100	%

International revenue increased compared to the prior year comparable period, and decreased as a percentage of total revenue. The increase was primarily attributable to large hardware orders during the period in our EMEA and Americas regions.

Net Sales

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


	Nine Months Ended September 30,								Dollar		Percent
	2023				2022				Change		Change
TASER segment:
TASER Devices (Professional)	$	239,165	21.1	%	$	213,623	25.0	%	$	25,542	12.0	%
Cartridges		149,504	13.2			134,145	15.7			15,359	11.4
Axon Evidence and Cloud Services		24,670	2.2			11,862	1.4			12,808	108.0
Extended Warranties		23,463	2.1			21,428	2.5			2,035	9.5
Other (1)		14,460	1.3			13,771	1.6			689	5.0
Total TASER segment		451,262	39.9			394,829	46.2			56,433	14.3
Software and Sensors segment:
Axon Body Cameras and Accessories		124,066	11.0			113,399	13.3			10,667	9.4
Axon Fleet Systems		95,648	8.5			39,840	4.7			55,808	140.1
Axon Evidence and Cloud Services		400,979	35.4			258,664	30.3			142,315	55.0
Extended Warranties		45,305	4.0			36,070	4.2			9,235	25.6
Other (2)		13,989	1.2			10,991	1.3			2,998	27.3
Total Software and Sensors segment		679,987	60.1			458,964	53.8			221,023	48.2
Total net sales	$	1,131,249	100.0	%	$	853,793	100.0	%	$	277,456	32.5

	(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 $56.4 million, or 14.3%, during the nine months ended September 30, 2023, primarily due to an increase of $25.5 million in TASER devices and $15.4 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 prior generation devices. The increase in cartridge revenue was attributable to product mix as we shift from legacy handles to our next generation devices, which have a higher cartridge attachment rate. Net sales for Axon Evidence and cloud services also increased $12.8 million due to an increase in the number of cloud-connected TASER devices in the field, as well as an increase in VR revenue. An increase in TASER devices in the field drove the $2.0 million increase in extended warranties revenue.

Net sales for the Software and Sensors segment increased $221.0 million, or 48.2%, during the nine months ended September 30, 2023 as we continue to add users and associated devices to our network. The increase in the aggregate number of users, average revenue per user, and software add-ons drove the majority of the increase in Axon Evidence and cloud services revenue of $142.3 million. Higher professional services revenue from Axon Fleet installations also contributed to the increase. The $55.8 million increase in Axon Fleet systems revenue was primarily driven by higher unit sales. In addition to the increases in the Software and Sensors segment, Axon Body cameras and accessories revenue increased $10.7 million on increased unit sales and premium product mix driven by demand for our next generation product, Axon Body 4, which began shipping at the end of the second quarter in 2023. An increase in cameras, docks and Axon Fleet systems in the field drove the $9.2 million increase in revenue from extended warranties, as most of those devices are sold with extended warranties. The $3.0 million increase in other revenue was driven by demand for smaller product offerings within the Software and Sensors segment.

Gross Margin

As a percentage of net sales, gross margin for the TASER segment decreased to 61.7% from 63.9% for the nine months ended September 30, 2023 and 2022, respectively. The decrease was primarily due to the launch of TASER 10, which is still ramping toward full scale in manufacturing, increased manufacturing overhead, and 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 60.7% for the nine months ended September 30, 2023 from 59.0% for the nine months ended September 30, 2022. Within the Software and Sensors segment, hardware gross margin was 45.3% for the nine months ended September 30, 2023 compared to 42.3% for the same period in 2022, while service margin decreased to 71.7% from 72.4%, respectively, during each of those same time periods. Hardware gross margin increased due to premium product mix, and scale efficiencies related to Axon Fleet 3. Service margin decreased primarily due to a higher mix of lower margin professional services revenue.

Sales, General and Administrative Expenses

SG&A expenses were comprised as follows (dollars in thousands):


	Nine Months Ended September 30,						Dollar		Percent
	2023			2022			Change		Change
Total sales, general and administrative expenses	$	359,768		$	287,157		$	72,611	25.3	%
Sales, general, and administrative expenses as a percentage of net sales		31.8	%		33.6	%

Salaries, benefits, and bonus expense increased $44.7 million in comparison to the prior year comparable period. An increase of $35.7 million in salaries, benefits, and bonus expense was attributable to an increase in headcount and higher wages. Additionally, $9.0 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 nine months ended September 30, 2023.

Sales and marketing and travel expenses increased $16.4 million in comparison to the prior year comparable period. The increase was primarily driven by a $13.9 million increase in sales commissions tied to increased revenue. Additionally, expense related to trade shows and seminars increased $3.0 million, primarily driven by our inaugural public safety training conference, TASERCON, in January 2023, where we announced the launch of TASER 10. Travel expense also increased $2.4 million impacted by headcount growth and the increasing cost of lodging and transportation.

Stock-based compensation expense increased $7.4 million in comparison to the prior year comparable period, which was primarily attributable to increased headcount and new PSU awards issued to certain employees. The increase was partially offset by a $0.7 million decrease in stock-based compensation expense related to the XSPP and CEO Performance Award due to the attainment of the final market capitalization goals earlier in 2023.

Partially offsetting the increase in SG&A expense were $3.4 million in insurance recoveries that were recognized during the nine months ended September 30, 2023.

Research and Development Expenses

R&D expenses were comprised as follows (dollars in thousands):


	Nine Months Ended September 30,						Dollar		Percent
	2023			2022			Change		Change
Total research and development expenses	$	219,747		$	165,090		$	54,657	33.1	%
Research and development expenses as a percentage of net sales		19.4	%		19.4	%

Within the TASER segment, R&D expense increased $9.1 million in comparison to the prior year comparable period, reflecting an increase of $6.5 million in salaries, benefits, and bonus expense and $2.4 million related to stock-based compensation expense reflecting higher headcount.

R&D expense for the Software and Sensors segment increased $45.6 million in comparison to the prior year comparable period, reflecting an increase of $26.3 million in salaries, benefits, and bonus expense due to higher headcount and increased wages. Additionally, there was an increase of $10.6 million in stock-based compensation expense related to increased headcount. Internal cloud costs increased $3.9 million related to software product development. Professional

and consulting expenses increased $2.7 million primarily related to the launch of Axon Body 4, which began shipping in the second quarter of 2023.

Interest and Other Income (Loss), Net

Interest and other income (loss), net was a loss of $12.8 million for the nine months ended September 30, 2023, compared to income of $91.1 million for the same period in 2022. During the nine months ended September 30, 2023, we recorded a net unrealized impairment loss of $71.9 million for an existing strategic investment and related warrants and interest expense of $5.2 million primarily related to our 2027 Notes, partially offset by an unrealized gain of $29.6 million related to our investment in CLBT and investment income of $34.6 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 nine months ended September 30, 2022, we recorded a net unrealized gain of $129.4 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 $36.9 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 $17.8 million for the nine months ended September 30, 2023, which was an effective tax rate of (17.9%). Our estimated annual effective income tax rate for 2023, before discrete period adjustments, is 17.4%, 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 $36.8 million discrete tax benefit primarily associated with net windfalls related to stock-based compensation for RSUs and PSUs that vested during the nine months ended September 30, 2023, primarily attributed to the vesting of the final three tranches of XSPP in March and May 2023.

The provision for income taxes was an expense of $43.8 million for the nine months ended September 30, 2022, which was an effective tax rate of 27.1%. Our estimated full year effective income tax rate for 2022, before discrete period adjustments, is 28.0%. The effective tax rate was favorably impacted by a $1.4 million discrete tax benefit primarily associated with net windfalls related to stock-based compensation for RSUs and PSUs that vested during the nine months ended September 30, 2022.

Net Income

We recorded net income of $117.0 million for the nine months ended September 30, 2023 compared to net income of $118.0 million for the same period in 2022. Net income per basic share was $1.58 for the nine months ended September 30, 2023 compared to net income per basic share of $1.66 per basic share for the same period in 2022. Net income per diluted share was $1.56 for the nine months ended September 30, 2023 compared to net income per diluted share of $1.63 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 as defined below. 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, income taxes, depreciation, amortization, non-cash stock-based compensation

		expense, realized and unrealized gains/losses on strategic investments and marketable securities and certain other pre-tax items.

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						Nine Months Ended
	September 30,		June 30,		September 30,		September 30,		September 30,
	2023		2023		2022		2023		2022
Net income	$	59,397	$	12,420	$	12,131	$	116,956	$	117,964
Depreciation and amortization		8,418		7,480		6,206		22,587		18,171
Interest expense		1,762		1,737		3		5,223		14
Investment interest income		(12,220)		(11,400)		(1,098)		(35,010)		(168)
Provision for (benefit from) income taxes		10,026		(24,529)		8,727		(17,758)		43,824
EBITDA	$	67,383	$	(14,292)	$	25,969	$	91,998	$	179,805

Non-GAAP adjustments:
Stock-based compensation expense		29,987		31,891		28,204		96,228		74,454
Unrealized loss (gain) on strategic investments and marketable securities, net		(4,036)		61,912		11,338		42,306		(92,498)
Transaction costs related to strategic investments and acquisitions		495		455		469		1,793		2,304
Loss on disposal, abandonment, and impairment of property, equipment and intangible assets, net		137		24		1,795		317		2,032
Insurance recoveries (1)		(2,615)		(789)		—		(3,404)		—
Costs related to FTC litigation		71		1		—		72		295
Payroll taxes related to XSPP vesting and CEO Award option exercises		201		2,368		—		8,961		—
Adjusted EBITDA	$	91,623	$	81,570	$	67,775	$	238,271	$	166,392

(1) Presentation of Adjusted EBITDA for the three months ended June 30, 2023 has been recast to conform to the current presentation, and reflects insurance recoveries that were immaterial to that period. Adjusted EBITDA for the nine months ended September 30, 2023 reflects total year-to-date insurance recoveries.

Liquidity and Capital Resources

Summary

As of September 30, 2023, we had $406.0 million of cash and cash equivalents, an increase of $52.4 million as compared to December 31, 2022. Cash and cash equivalents and available-for-sale investments totaled $1.1 billion, representing an increase of $30.1 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 EBITDA ratio, which for purposes of the credit agreement excludes investment interest income.

As of September 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 our 2027 Notes unless the Notes have been redeemed, repurchased, converted or defeased in full. Additionally, the credit agreement has an accordion feature that allows for an increase in the total line of credit up to $300.0 million, in each lender’s sole discretion. At September 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 September 30, 2023, our net leverage ratio was 0.27 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 September 30, 2023.

Based on our strong balance sheet at September 30, 2023 and successful 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):


	Nine Months Ended September 30,
	2023		2022
Operating activities	$	49,225	$	104,241
Investing activities		(40,697)		(302,001)
Financing activities		45,132		(2,465)
Effect of exchange rate changes on cash and cash equivalents		(1,201)		(6,783)
Net increase (decrease) in cash and cash equivalents and restricted cash	$	52,459	$	(207,008)

Operating activities

Net cash provided by operating activities in the first nine months of 2023 of $49.2 million reflects net income of $117.0 million, non-cash income statement items totaling $107.1 million, and a decrease of $175.0 million for the net change in operating assets and liabilities. Included in the non-cash items were $53.3 million related to an increase in deferred income taxes, $12.1 million in bond amortization, a net unrealized loss of $42.3 million related to strategic investments and marketable securities, $96.2 million in stock-based compensation expense, and $22.6 million in depreciation and amortization expense. Cash provided by operations was favorably impacted by increased deferred revenue of $118.3 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 $182.5 million, an increase in prepaid expenses and other assets of $64.6 million, an increase of $59.6 million in inventory, and a decrease in accounts payable, accrued and other liabilities of $13.4 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 Axon 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 nine months of 2022 of $104.2 million reflects net income of $118.0 million, non-cash income statement items totaling $41.6 million, and a decrease of $55.3 million for the net change in operating assets and liabilities. Included in the non-cash items were $74.5 million in stock-based compensation expense, a decrease of $30.3 million in deferred income taxes, net, $18.2 million in depreciation and amortization expense, and a $92.5 million gain on the change in fair value of strategic investments and marketable securities, net. Cash provided by operations was favorably impacted by increased deferred revenue of $115.2 million, which was primarily attributable to increased sales where payment is received from the customer before performance occurs. Additionally, accounts payable, accrued and other liabilities increased $28.7 million due to an increase in accounts payable due to the timing of invoice payments and to increased accrued commissions on higher revenue. Offsetting this activity was an increase of accounts and notes receivables and contract assets of $115.0 million, an increase of $66.3 million in inventory, and an increase in prepaid expenses and other assets of $17.9 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. Inventory increases were a result of advance purchases to support future sales. The increase in prepaid expenses and other assets was driven by an increase of deferred commissions related to increased bookings.

Investing activities

Cash used in investing activities during the first nine months of 2023 was $40.7 million. Cash inflows from investing activities included $34.2 million of proceeds from calls, maturities and sales of available-for-sale investments, net of purchases. The outflows from investing activities included $38.8 million for a business acquisition and strategic investments and $35.6 million for purchases of property and equipment, net of proceeds.

We used $302.0 million of cash for investing activities during the first nine months of 2022. Cash outflows from investing activities included $70.5 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 $178.7 million for the purchase of available-for-sale investments, net of proceeds from calls and maturities. Property and equipment purchases totaled $44.0 million, net of proceeds on disposals.

Financing activities

Net cash provided by financing activities was $45.1 million during the first nine months of 2023 and was primarily attributable to net proceeds of $94.7 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 $104.1 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 $2.5 million during the first nine 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 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 nine months ended September 30, 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 condensed 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 September 30, 2023, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $2.1 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 plus 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 $7.4 million at September 30, 2023. At September 30, 2023, there was no amount outstanding under the line of credit, and the available borrowing under the line of credit was $192.6 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 September 30, 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 to the audited consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K filed February 28, 2023.

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

We have documented and are in the process of 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 September 30, 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 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 “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 condition 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 harm 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 (“SaaS”) 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 delay or 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 two 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 and financial condition.

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

	●	Our profitability could suffer from declines in fair value or impairment of our investments, including our strategic investments, and could fluctuate if the fair value of our investments increases.

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 unable to enforce patent rights internationally, which may limit our ability to prevent our product features from being used by competitors in some foreign jurisdictions.

| | ● | The use of open source software in our product

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Item 5. Other Information

The table below describes the contracts, instructions or written plans for the purchase or sale of securities adopted by our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) during the three months ended September 30, 2023, that are intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).

Certain of our officers or directors have made, and may from time to time make, elections to have shares withheld or sold to cover withholding taxes or pay the exercise price of options, which may be designed to satisfy the affirmative defense conditions of Rule 10b5-1 under the Exchange Act or may constitute non-Rule 10b5-1 trading arrangements (as defined in Item 408(c) of Regulation S-K).

No other Rule 10b5-1 trading arrangements or “non-Rule 10b5-1 trading arrangements” (as defined by S-K Item 408(c)) were entered into, modified, or terminated by our directors or officers during such period.


Name and Title	Adoption Date	Expiration Date	Aggregate Number of Securities to be Sold
Jeffrey Kunins, Chief Product Officer and Chief Technology Officer	August 11, 2023	January 15, 2024	41,167
Brittany Bagley, Chief Operating Officer and Chief Financial Officer	August 18, 2023	November 30, 2024	15,000
Joshua Isner, President	September 15, 2023	December 31, 2024	35,400

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 September 30, 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:	November 7, 2023
		By:	/s/ PATRICK W. SMITH
			Chief Executive Officer
			(Principal Executive Officer)

Date:	November 7, 2023	By:	/s/ BRITTANY BAGLEY
			Chief Operating Officer and Chief Financial Officer
			(Principal Financial and
			Accounting Officer)