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Cover and table of contents

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.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. The following important factors could cause actual results to differ materially from those in the forward-looking statements: our exposure to cancellations of government contracts due to appropriation clauses, exercise of a cancellation clause, or non-exercise of contractually optional periods; the ability of law enforcement agencies to obtain funding, including based on tax revenues; our ability to design, introduce and sell new products, services or features; our ability to defend against litigation and protect our intellectual property, and the resulting costs of this activity; our ability to win bids through the open bidding process for governmental agencies; our ability to manage our supply chain and avoid production delays, shortages, and impacts to expected gross margins; the impacts of inflation, macroeconomic conditions and global events; the impact of stock-based compensation expense, impairment expense, and income tax expense on our financial results; customer purchase behavior, including adoption of our software as a service delivery model; negative media publicity or sentiment regarding our products; the impact of product mix on projected gross margins; defects in, or misuse of, our products; changes in the costs of product components and labor; loss of customer data, a breach of security, or an extended outage, including by our third party cloud-based storage providers; exposure to international operational risks; delayed cash collections and possible credit losses due to our subscription model; changes in government regulations in the United States and in foreign markets, especially related to the classification of our products by the United States Bureau of Alcohol, Tobacco, Firearms and Explosives (“ATF”); our ability to integrate acquired businesses; the impact of declines or increases in the fair value or impairment of our investments, including our strategic investments; our ability to enforce patent rights internationally; the use of open source software in our operations; our ability to attract and retain key personnel; litigation or inquiries and related time and costs; and counter-party risks relating to cash balances held in excess of FDIC insurance limits. Many events beyond our control may determine whether results we anticipate will be achieved. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements. This Quarterly Report on Form 10-Q lists various important factors that could cause actual results to differ materially from expected and historical results. These factors are intended as cautionary statements for investors within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. Readers can find them under the heading “Risk Factors” in this Quarterly Report on Form 10-Q, and investors should refer to them. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

Except as required by law, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission (“SEC”). Our filings with the SEC may be accessed at the SEC’s web site at www.sec.gov.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AXON ENTERPRISE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	September 30,		December 31,
	2023		2022
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	406,042	$	353,684
Marketable securities		68,850		39,240
Short-term investments		715,688		581,769
Accounts and notes receivable, net of allowance of $2,144 and $2,176 as of September 30, 2023 and December 31, 2022, respectively		442,830		358,190
Contract assets, net		260,523		196,902
Inventory		260,119		202,471
Prepaid expenses and other current assets		103,789		73,022
Total current assets		2,257,841		1,805,278
Property and equipment, net		186,957		169,843
Deferred tax assets, net		213,831		156,866
Intangible assets, net		20,324		12,158
Goodwill		57,344		44,983
Long-term investments		—		156,207
Long-term notes receivable, net		4,381		5,210
Long-term contract assets, net		78,663		45,170
Strategic investments		240,299		296,563
Other long-term assets		194,543		159,616
Total assets	$	3,254,183	$	2,851,894
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	90,035	$	59,918
Accrued liabilities		146,940		155,934
Current portion of deferred revenue		454,891		360,037
Customer deposits		16,469		20,399
Other current liabilities		9,492		6,358
Total current liabilities		717,827		602,646
Deferred revenue, net of current portion		270,082		248,003
Liability for unrecognized tax benefits		18,938		10,745
Long-term deferred compensation		9,148		6,285
Deferred tax liability, net		2,467		1
Long-term lease liabilities		35,329		37,143
Convertible notes, net		676,315		673,967
Other long-term liabilities		2,960		4,613
Total liabilities		1,733,066		1,583,403
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively		—		—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 74,931,697 and 71,474,581 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively		1		1
Additional paid-in capital		1,315,954		1,174,594
Treasury stock at cost, 20,220,227 shares as of September 30, 2023 and December 31, 2022		(155,947)		(155,947)
Retained earnings		373,978		257,022
Accumulated other comprehensive loss		(12,869)		(7,179)
Total stockholders’ equity		1,521,117		1,268,491
Total liabilities and stockholders’ equity	$	3,254,183	$	2,851,894

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

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(in thousands, except per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net sales from products	$	256,443	$	210,398	$	709,306	$	586,653
Net sales from services		157,158		101,356		421,943		267,140
Net sales		413,601		311,754		1,131,249		853,793
Cost of product sales		116,278		93,724		325,054		260,578
Cost of service sales		42,051		24,773		114,700		70,256
Cost of sales		158,329		118,497		439,754		330,834
Gross margin		255,272		193,257		691,495		522,959
Operating expenses:
Sales, general and administrative		123,279		102,023		359,768		287,157
Research and development		76,880		59,127		219,747		165,090
Total operating expenses		200,159		161,150		579,515		452,247
Income from operations		55,113		32,107		111,980		70,712
Interest and other income (loss), net		14,310		(11,249)		(12,782)		91,076
Income before provision for income taxes		69,423		20,858		99,198		161,788
Provision for (benefit from) income taxes		10,026		8,727		(17,758)		43,824
Net income	$	59,397	$	12,131	$	116,956	$	117,964
Net income per common and common equivalent shares:
Basic	$	0.79	$	0.17	$	1.58	$	1.66
Diluted	$	0.78	$	0.17	$	1.56	$	1.63
Weighted average number of common and common equivalent shares outstanding:
Basic		74,826		71,107		73,904		71,033
Diluted		75,952		72,525		75,212		72,386
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$	59,397	$	12,131	$	116,956	$	117,964
Foreign currency translation adjustments		(6,799)		(2,275)		(5,680)		(5,513)
Unrealized gain (loss) on available-for-sale investments		656		(326)		(10)		(976)
Comprehensive income	$	53,254	$	9,530	$	111,266	$	111,475

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

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)


											Accumulated
				Additional							Other		Total
	Common Stock			Paid-in		Treasury Stock			Retained		Comprehensive		Stockholders’
	Shares	Amount		Capital		Shares	Amount		Earnings		Loss		Equity
Balance, December 31, 2022	71,474,581	$	1	$	1,174,594	20,220,227	$	(155,947)	$	257,022	$	(7,179)	$	1,268,491
Issuance of common stock	154,500		—		33,650	—		—		—		—		33,650
Issuance of common stock under employee plans, net	335,629		—		(34,841)	—		—		—		—		(34,841)
Stock options exercised	1,901,535		—		54,346	—		—		—		—		54,346
Stock-based compensation	—		—		34,350	—		—		—		—		34,350
Issuance of common stock for business combination contingent consideration	7,817		—		—	—		—		—		—		—
Net income	—		—		—	—		—		45,139		—		45,139
Other comprehensive income, net	—		—		—	—		—		—		1,860		1,860
Balance, March 31, 2023	73,874,062	$	1	$	1,262,099	20,220,227	$	(155,947)	$	302,161	$	(5,319)	$	1,402,995
Issuance of common stock	313,094		—		61,156	—		—		—		—		61,156
Issuance of common stock under employee plans, net	570,357		—		(62,214)	—		—		—		—		(62,214)
Stock options exercised	5,491		—		157	—		—		—		—		157
Stock-based compensation	—		—		31,891	—		—		—		—		31,891
Net income	—		—		—	—		—		12,420		—		12,420
Other comprehensive loss, net	—		—		—	—		—		—		(1,407)		(1,407)
Balance, June 30, 2023	74,763,004	$	1	$	1,293,089	20,220,227	$	(155,947)	$	314,581	$	(6,726)	$	1,444,998
Issuance of common stock	—		—		(101)	—		—		—		—		(101)
Issuance of common stock under employee plans, net	168,693		—		(7,021)	—		—		—		—		(7,021)
Stock-based compensation	—		—		29,987	—		—		—		—		29,987
Net income	—		—		—	—		—		59,397		—		59,397
Other comprehensive loss, net	—		—		—	—		—		—		(6,143)		(6,143)
Balance, September 30, 2023	74,931,697	$	1	$	1,315,954	20,220,227	$	(155,947)	$	373,978	$	(12,869)	$	1,521,117


											Accumulated
				Additional							Other		Total
	Common Stock			Paid-in		Treasury Stock			Retained		Comprehensive		Stockholders’
	Shares	Amount		Capital		Shares	Amount		Earnings		Loss		Equity
Balance, December 31, 2021	70,896,856	$	1	$	1,095,229	20,220,227	$	(155,947)	$	109,883	$	(1,317)	$	1,047,849
Issuance of common stock	—		—		(70)	—		—		—		—		(70)
Issuance of common stock under employee plans, net	99,802		—		(1,388)	—		—		—		—		(1,388)
Stock-based compensation	—		—		25,088	—		—		—		—		25,088
Net income	—		—		—	—		—		54,871		—		54,871
Other comprehensive loss, net	—		—		—	—		—		—		(1,561)		(1,561)
Balance, March 31, 2022	70,996,658	$	1	$	1,118,859	20,220,227	$	(155,947)	$	164,754	$	(2,878)	$	1,124,789
Issuance of common stock			—		(4)	—		—		—		—		(4)
Issuance of common stock under employee plans, net	81,041		—		(931)	—		—		—		—		(931)
Stock-based compensation	—		—		21,162	—		—		—		—		21,162
Net income	—		—			—		—		50,962		—		50,962
Other comprehensive loss, net	—		—			—		—				(2,327)		(2,327)
Balance, June 30, 2022	71,077,699		1		1,139,086	20,220,227		(155,947)		215,716		(5,205)		1,193,651
Issuance of common stock under employee plans, net	73,971		—		(72)	—		—		—		—		(72)
Stock-based compensation	—		—		28,204	—		—		—		—		28,204
Net income	—		—		—	—		—		12,131		—		12,131
Other comprehensive loss, net	—		—		—	—		—		—		(2,601)		(2,601)
Balance, September 30, 2022	71,151,670	$	1	$	1,167,218	20,220,227	$	(155,947)	$	227,847	$	(7,806)	$	1,231,313

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

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities:
Net income	$	116,956	$	117,964
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation		96,228		74,454
Deferred income taxes		(53,311)		30,349
Unrealized loss (gain) on strategic investments and marketable securities, net		42,306		(92,498)
Depreciation and amortization		22,587		18,171
Bond amortization		(12,071)		(61)
Noncash lease expense		4,890		4,997
Unrecognized tax benefits		4,302		3,519
Amortization of debt issuance cost		2,328		—
Coupon interest expense		1,073		—
Other noncash items		(1,140)		2,659
Change in assets and liabilities:
Accounts and notes receivable and contract assets		(182,468)		(115,046)
Inventory		(59,564)		(66,267)
Prepaid expenses and other assets		(64,608)		(17,871)
Accounts payable, accrued and other liabilities		13,423		28,684
Deferred revenue		118,294		115,187
Net cash provided by operating activities		49,225		104,241
Cash flows from investing activities:
Purchases of investments		(426,993)		(194,142)
Proceeds from call, maturity, and sale of investments		461,214		15,485
Exercise of warrants of strategic investments		—		(6,555)
Purchases of property and equipment		(35,624)		(44,218)
Proceeds from disposal of property and equipment		67		226
Purchases of intangible assets		(579)		(193)
Strategic investments		(17,692)		(70,500)
Business acquisition, net of cash acquired		(21,090)		(2,104)
Net cash used in investing activities		(40,697)		(302,001)
Cash flows from financing activities:
Net proceeds from equity offering		94,705		(74)
Proceeds from options exercised		54,503		—
Income and payroll tax payments for net-settled stock awards		(104,076)		(2,391)
Net cash provided by (used in) 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		52,459		(207,008)
Cash and cash equivalents and restricted cash, beginning of period		355,552		356,438
Cash and cash equivalents and restricted cash, end of period	$	408,011	$	149,430

Supplemental disclosures:
Cash and cash equivalents	$	406,042	$	147,711
Restricted cash (Note 1)		1,969		1,719
Total cash, cash equivalents and restricted cash shown in the statements of cash flows	$	408,011	$	149,430

Cash paid for income taxes, net of refunds	$	47,689	$	7,503

Non-cash transactions
Property and equipment purchases in accounts payable and accrued liabilities	$	1,784	$	1,244

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

Note 1 - Organization and Summary of Significant Accounting Policies

Axon Enterprise, Inc. (“Axon”, the “Company”, “we”, or “us”) is a market-leading provider of law enforcement technology solutions. Our mission is to protect life in service of promoting peace, justice and strong institutions.

Our headquarters in Scottsdale, Arizona houses our executive management, sales, marketing, certain engineering, manufacturing, finance and other administrative support functions. Our global software hub is located in Seattle, Washington, and we also have subsidiaries and / or offices located in Australia, Belgium, Canada, Finland, France, Germany, Hong Kong, India, Italy, the Netherlands, Spain, the United Kingdom, and Vietnam.

The accompanying unaudited condensed consolidated financial statements include the accounts of Axon Enterprise, Inc. and our subsidiaries. All material intercompany accounts, transactions, and profits have been eliminated.

Basis of Presentation and Use of Estimates

These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information related to our organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”) has been condensed or omitted. The accounting policies followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed in our annual consolidated financial statements for the year ended December 31, 2022, as filed on Form 10-K. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with our Form 10-K for the year ended December 31, 2022. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the full year (or any other period). Significant estimates and assumptions in these unaudited condensed consolidated financial statements include:

	●	product warranty reserves,

	●	inventory valuation,

	●	revenue recognition,

	●	reserve for expected credit losses,

	●	valuation of goodwill, intangible and long-lived assets,

	●	valuation of strategic investments,

	●	recognition, measurement and valuation of current and deferred income taxes,

	●	stock-based compensation, and

	●	recognition and measurement of contingencies and accrued litigation expense.

The Company believes that estimates used in the preparation of these unaudited condensed consolidated financial statements are reasonable; however, actual results could differ materially from those estimates.

Segment Information

Our operations comprise two reportable segments: the development, manufacture and sale of fully integrated hardware and cloud-based software solutions that enable law enforcement to capture, securely store, manage, share and analyze video and other digital evidence (collectively, the “Software and Sensors” segment); and the manufacture and sale of conducted electrical devices (“CEDs”), batteries, accessories, extended warranties and other products and services (collectively, the “TASER” segment). In both segments, we report sales of products and services. Service revenue in both segments includes sales related to Axon Evidence. In the Software and Sensors segment, service revenue also includes other recurring cloud-hosted software revenue and related professional services. Reportable segments are determined based on discrete financial information reviewed by our Chief Executive Officer who is our chief operating decision maker (“CODM”). We organize and review operations based on products and services, and currently there are no operating

segments that are aggregated. We perform an analysis of our reportable segments at least annually. Additional information related to our business segments is summarized in Note 15.

Geographic Information and Major Customers / Suppliers

For the three and nine months ended September 30, 2023, no individual country outside the United States represented more than 10% of total net sales. Individual sales transactions in the international market are generally larger and occur more intermittently than in the domestic market due to the profile of our customers. For the three and nine months ended September 30, 2023, no customer represented more than 10% of total net sales. At September 30, 2023 and December 31, 2022, no customer represented more than 10% of the aggregate balance of accounts and notes receivable and contract assets.

We currently purchase both off the shelf and custom components, including, but not limited to, finished circuit boards, injection-molded plastic components, small machined parts, custom cartridge components, electronic components, and off the shelf sub-assemblies from suppliers located in the United States, China, Republic of Korea, Malaysia, Mexico, Sri Lanka, Taiwan, and Vietnam. We may source from other countries as well. Although we currently obtain many of these components from single source suppliers, we own the injection molded component tooling, most of the designs, and the test fixtures used in their production for all custom components. As a result, we believe we could obtain alternative suppliers in most cases. Although we have previously experienced supply chain disruptions relating to materials and port constraints, we continue to manage potential logistical interruptions. We remain focused on closely managing our supply chain. We continue to bolster our strategic relationships in our supply chain, identifying secondary/alternate sourcing, adjusting build plans accordingly, and building in logistic modes in support of our increasing demand while working to minimize disruption to customers. We acquire most of our components on a purchase order basis and do not currently have significant long-term purchase contracts with most component suppliers.

Income per Common Share

Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. Diluted income per share reflects the potential dilution from outstanding stock options and unvested restricted stock units (“RSUs”). The effects of outstanding stock options, unvested RSUs, our 2027 convertible senior notes (the “Notes” or “2027 Notes”), and warrants to acquire shares of our common stock (the “Warrants” or “2027 Warrants”) are excluded from the computation of diluted net income per share in periods in which the effect would be antidilutive. The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Numerator for basic and diluted earnings per share:
Net income	$	59,397	$	12,131	$	116,956	$	117,964
Denominator:
Weighted average shares outstanding		74,826		71,107		73,904		71,033
Dilutive effect of stock-based awards		1,126		1,418		1,308		1,353
Diluted weighted average shares outstanding		75,952		72,525		75,212		72,386

Net income per common share:
Basic	$	0.79	$	0.17	$	1.58	$	1.66
Diluted	$	0.78	$	0.17	$	1.56	$	1.63

Potentially dilutive securities that are not included in the calculation of diluted net income per share because doing so would be antidilutive are as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Stock-based awards		481		2,977		470		2,952
2027 Notes		3,017		—		3,017		—
2027 Warrants		3,017		—		3,017		—
Total potentially dilutive securities		6,515		2,977		6,504		2,952

For additional information regarding our 2027 Notes, refer to Note 9.

Standard Warranties

We warranty our CEDs, Axon cameras and certain related accessories from manufacturing defects on a limited basis for a period of one year after purchase and, thereafter, will replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold when revenue is recorded for the related product. Future warranty costs are estimated on a quarterly basis based on historical data related to warranty claims and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure or other issue that could result in larger than anticipated warranty claims from customers. The warranty reserve is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. The warranty reserve is included in accrued liabilities on the accompanying consolidated balance sheets.

Changes in our estimated product warranty liabilities were as follows (in thousands):


	Nine Months Ended September 30,
	2023		2022
Balance, beginning of period	$	811	$	2,822
Utilization of reserve		(901)		(1,988)
Warranty expense		3,381		161
Balance, end of period	$	3,291	$	995

Fair Value Measurements and Financial Instruments

We use the fair value framework that prioritizes the inputs to valuation techniques for measuring financial assets and liabilities measured on a recurring basis and for non-financial assets and liabilities when these items are re-measured. Fair value is considered to be the exchange price in an orderly transaction between market participants, to sell an asset or transfer a liability at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

	●	Level 1 – Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.

	●	Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.

	●	Level 3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect our own assumptions about inputs that market participants would use in pricing an asset or liability.

We have cash equivalents and investments, which at September 30, 2023 comprised money market funds, commercial paper, corporate bonds, term deposits, U.S. government bonds, agency bonds, U.S. Treasury bills, and U.S. Treasury Inflation-Protected Securities. Cash equivalents and investments at December 31, 2022 also included municipal bonds and certificates of deposit. See additional disclosure regarding the fair value of our cash equivalents and investments in Note 3. Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Included in the balance of other long-term assets as of September 30, 2023 and December 31, 2022 was $5.9 million and $4.3 million, respectively, related to corporate-owned life insurance policies, which are used to fund our deferred compensation plan. We determine the fair value of insurance contracts by obtaining the cash surrender value of the contracts from the issuer, a Level 2 valuation technique.

We have an investment in marketable securities, for which changes in fair value are recorded in the condensed consolidated statement of operations as unrealized gain or (loss) on marketable securities, which is included in interest and other income (loss), net.

We have strategic investments in eight unconsolidated affiliates as of September 30, 2023. The estimated fair value of the investments was determined based on Level 3 inputs. In determining the estimated fair value of our strategic investments in privately held companies, we utilize observable data available to us as discussed further in Note 6.

We have convertible senior notes, for which the fair value is determined based on the closing trading price per $1,000 of the Notes as of the last day of trading for the period. We consider the fair value of the Notes at September 30, 2023 to be a Level 2 measurement as they are not publicly traded. The fair value of the Notes is primarily affected by the trading price of our common stock and market interest rates.

Our financial instruments also include accounts and notes receivable, accounts payable and accrued liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the condensed consolidated balance sheet.

Restricted Cash

Restricted cash balance as of September 30, 2023 was $2.0 million primarily related to funds held in an international bank account securing a guarantee and funds held in an international bank account for a country in which we are required to maintain a minimum balance to operate. Approximately $1.9 million was included in prepaid expenses and other assets on our condensed consolidated balance sheet, with the remainder in other long-term assets. Restricted cash balance as of December 31, 2022 was $1.9 million primarily related to funds held in an international bank account securing a guarantee and funds held in an international bank account for a country in which we are required to maintain a minimum balance to operate. Approximately $1.8 million was included in prepaid expenses and other assets on our condensed consolidated balance sheet, with the remainder in other long-term assets.

Valuation of Goodwill, Intangibles and Long-lived Assets

We evaluate whether events and changes in circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and identifiable intangible assets, excluding goodwill and intangible assets with indefinite useful lives, may warrant revision or that the remaining balance of these assets may not be recoverable. Such events and changes in circumstances could include, but are not limited to, a change in our product mix, a change in the way products are created, produced or delivered, or a significant change in the way products are branded and marketed. In performing the review for recoverability, we estimate the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair value computed using discounted cash flows.

We do not amortize goodwill and intangible assets with indefinite useful lives; rather such assets are required to be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that the assets may be impaired. We perform our annual goodwill and intangible asset impairment tests in the fourth quarter of each year.

Reclassification of Prior Year Presentation

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

Note 2 - Revenues

Nature of Products and Services

The following tables present our revenues by primary product and service offering (in thousands):


	Three Months Ended September 30, 2023						Three Months Ended September 30, 2022
			Software and						Software and
	TASER		Sensors		Total		TASER		Sensors		Total
TASER Devices (Professional)	$	86,718	$	—	$	86,718	$	80,146	$	—	$	80,146
Cartridges		54,279		—		54,279		46,475		—		46,475
Axon Evidence and Cloud Services		8,975		150,563		159,538		5,125		96,814		101,939
Extended Warranties		8,078		16,054		24,132		7,290		14,511		21,801
Axon Body Cameras and Accessories		—		52,488		52,488		—		40,944		40,944
Axon Fleet Systems		—		26,716		26,716		—		10,139		10,139
Other (1) (2)		4,520		5,210		9,730		5,847		4,463		10,310
Total	$	162,570	$	251,031	$	413,601	$	144,883	$	166,871	$	311,754


	Nine Months Ended September 30, 2023						Nine Months Ended September 30, 2022
			Software and						Software and
	TASER		Sensors		Total		TASER		Sensors		Total
TASER Devices (Professional)	$	239,165		—	$	239,165	$	213,623	$	—	$	213,623
Cartridges		149,504		—		149,504		134,145		—		134,145
Axon Evidence and Cloud Services		24,670		400,979		425,649		11,862		258,664		270,526
Extended Warranties		23,463		45,305		68,768		21,428		36,070		57,498
Axon Body Cameras and Accessories		—		124,066		124,066		—		113,399		113,399
Axon Fleet Systems		—		95,648		95,648		—		39,840		39,840
Other (1) (2)		14,460		13,989		28,449		13,771		10,991		24,762
Total	$	451,262	$	679,987	$	1,131,249	$	394,829	$	458,964		853,793

	(1)	TASER segment “Other” includes smaller categories, such as Virtual Reality (“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.

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


	Three Months Ended September 30,								Nine Months Ended September 30,
	2023				2022				2023				2022
United States	$	342,090	83	%	$	264,644	85	%	$	954,949	84	%	$	707,304	83	%
Other countries		71,511	17			47,110	15			176,300	16			146,489	17
Total	$	413,601	100	%	$	311,754	100	%	$	1,131,249	100	%	$	853,793	100	%

Contract Balances

The following table presents our contract assets, contract liabilities and certain information related to these balances as of and for the nine months ended September 30, 2023 (in thousands):


	September 30, 2023
Contract assets, net	$	339,186
Contract liabilities (deferred revenue)		724,973
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the period		279,223

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


	September 30, 2023						December 31, 2022
	Current		Long-Term		Total		Current		Long-Term		Total
Extended Warranty:
TASER	$	12,500	$	16,748	$	29,248	$	14,207	$	17,618	$	31,825
Software and Sensors		31,569		18,524		50,093		26,229		15,338		41,567
		44,069		35,272		79,341		40,436		32,956		73,392
Hardware:
TASER		28,908		29,056		57,964		49,361		12,640		62,001
Software and Sensors		77,207		109,573		186,780		50,426		109,227		159,653
		106,115		138,629		244,744		99,787		121,867		221,654
Services:
TASER		11,104		6,549		17,653		7,637		9,501		17,138
Software and Sensors		293,603		89,632		383,235		212,177		83,679		295,856
		304,707		96,181		400,888		219,814		93,180		312,994
Total	$	454,891	$	270,082	$	724,973	$	360,037	$	248,003	$	608,040


	September 30, 2023						December 31, 2022
	Current		Long-Term		Total		Current		Long-Term		Total
TASER	$	52,512	$	52,353	$	104,865	$	71,205	$	39,759	$	110,964
Software and Sensors		402,379		217,729		620,108		288,832		208,244		497,076
Total	$	454,891	$	270,082	$	724,973	$	360,037	$	248,003	$	608,040

Remaining Performance Obligations

As of September 30, 2023, we had approximately $5.8 billion of remaining performance obligations, which included both recognized contract liabilities as well as amounts that will be invoiced and recognized in future periods. The remaining performance obligations are limited only to arrangements that meet the definition of a contract under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, as of September 30, 2023. We expect to recognize between 15% - 25% of this balance over the next 12 months, and generally 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.

Note 3 - Cash, Cash Equivalents and Investments

The following tables summarize our cash, cash equivalents, marketable securities, and available-for-sale investments at September 30, 2023 and December 31, 2022 (in thousands):


	As of September 30, 2023
			Gross		Gross				Cash and
	Amortized		Unrealized		Unrealized				Cash		Marketable		Short-Term		Long-Term
	Cost		Gains		Losses		Fair Value		Equivalents		Securities		Investments		Investments
Cash	$	224,437	$	—	$	—	$	224,437	$	224,437	$	—	$	—	$	—

Level 1:
Money market funds		25,292		—		—		25,292		25,292		—		—		—
Agency bonds		170,838		17		(347)		170,508		33,500		—		137,008		—
Treasury bills		133,779		20		—		133,799		122,813		—		10,986		—
Marketable securities		90,000		—		(21,150)		68,850		—		68,850		—		—
Subtotal		419,909		37		(21,497)		398,449		181,605		68,850		147,994		—
Level 2:
Term deposits		203,205		—		—		203,205		—		—		203,205		—
Corporate bonds		121,071		8		(559)		120,520		—		—		120,520		—
U.S. government		176,371		—		(700)		175,671		—		—		175,671		—
Treasury Inflation-Protected Securities		2,606		—		(11)		2,595		—		—		2,595		—
Commercial paper		65,703		—		—		65,703		—		—		65,703		—
Subtotal		568,956		8		(1,270)		567,694		—		—		567,694		—
Total	$	1,213,302	$	45	$	(22,767)	$	1,190,580	$	406,042	$	68,850	$	715,688	$	—

As of September 30, 2023, we had $390.4 million of available-for-sale investments with unrealized losses. Of the $390.4 million of available-for-sale investments with unrealized losses, $27.0 million has been in a continuous unrealized loss position for twelve months or longer, with total gross unrealized losses of $0.3 million. We do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases.

During the year ended December 31, 2021, we acquired 9.0 million shares of common stock of Cellebrite DI Ltd (“CLBT”) with a fair value of $90.0 million. The CLBT common stock is recorded as marketable securities in the accompanying condensed consolidated balance sheets and its fair value is adjusted every reporting period. Changes in fair value are recorded in the condensed consolidated statement of operations as unrealized gain or (loss) on marketable securities, which is included in interest and other income (loss), net. During the three and nine months ended September 30, 2023, we recorded an unrealized gain on marketable securities of $4.1 million and $29.6 million, respectively, relating to CLBT.


	As of December 31, 2022
			Gross		Gross				Cash and
	Amortized		Unrealized		Unrealized				Cash		Marketable		Short-Term		Long-Term
	Cost		Gains		Losses		Fair Value		Equivalents		Securities		Investments		Investments
Cash	$	143,744	$	—	$	—	$	143,744	$	143,744	$	—	$	—	$	—

Level 1:
Money market funds		2,669		—		—		2,669		2,669		—		—		—
Agency bonds		164,486		6		(263)		164,229		—		—		69,862		94,367
Treasury bills		121,650		18		(3)		121,665		113,100		—		8,565		—
Marketable securities		90,000		—		(50,760)		39,240		—		39,240		—		—
Subtotal		378,805		24		(51,026)		327,803		115,769		39,240		78,427		94,367
Level 2:
State and municipal obligations		4,980		—		(33)		4,947		—		—		4,947		—
Certificate of deposits		5,002		—		—		5,002		—		—		5,002		—
Term deposits		200,000		—		—		200,000		25,000		—		175,000		—
Corporate bonds		257,422		33		(1,159)		256,296		28,883		—		168,074		59,339
U.S. government		30,525		—		(159)		30,366		—		—		30,366		—
Treasury Inflation-Protected Securities		2,503		—		(2)		2,501		—		—		—		2,501
Commercial paper		160,241		—		—		160,241		40,288		—		119,953		—
Subtotal		660,673		33		(1,353)		659,353		94,171		—		503,342		61,840
Total	$	1,183,222	$	57	$	(52,379)	$	1,130,900	$	353,684	$	39,240	$	581,769	$	156,207

Note 4 - Expected Credit Losses

We are exposed to credit losses primarily through sales of products and services. Our expected loss allowance methodology for accounts receivable, contract assets, notes receivable, and off-balance-sheet exposures is developed using historical collection experience, published or estimated credit default rates for entities that represent our customer base, current and future economic and market conditions and a review of the current status of customers’ trade accounts receivables. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Our monitoring activities include account reconciliation, dispute resolution, payment confirmation, consideration of customers’ financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. We review receivables for U.S. and international customers separately to better reflect different published credit default rates and economic and market conditions.

The following table provides a roll-forward of the allowance for expected credit losses for finance receivables and off-balance-sheet exposures. The expected credit losses for receivables is deducted from the amortized cost basis of accounts receivable, contract assets, and notes receivable to present the net amount expected to be collected (in thousands):


	Nine Months Ended September 30, 2023
	United States		Other countries		Total
Balance, beginning of period	$	3,064	$	566	$	3,630
Provision for expected credit losses		733		146		879
Amounts written off charged against the allowance		(719)		(105)		(824)
Other, including foreign currency translation		—		8		8
Balance, end of period (1)	$	3,078	$	615	$	3,693

	(1)	Ending balance includes allowance for credit losses recorded in Other current liabilities on the Consolidated Balance Sheet which is related to off-balance-sheet credit exposurse.

As of September 30, 2023 and December 31, 2022, the allowance for expected credit losses for each type of customer receivable and off-balance-sheet exposures were as follows (in thousands):


	September 30, 2023		December 31, 2022
Accounts receivable and notes receivable, current	$	2,144	$	2,176
Contract assets, net		1,476		1,360
Long-term notes receivable, net of current portion		59		94
Other current liabilities		14		—
Total allowance for expected credit losses on customer receivables	$	3,693	$	3,630

Note 5 - Inventory

Inventories are stated at the lower of cost, determined on the first-in, first-out (“FIFO”) basis, or net realizable value, net of an inventory valuation allowance. We use a standard cost methodology to determine the cost basis for our inventories. Costs include allocations for materials, labor, and overhead. All variances between actual costs and standard costs are apportioned to inventory and cost of goods sold based upon inventory turnover. We evaluate inventory on a quarterly basis for obsolete or slow-moving items to ascertain if the recorded allowance is reasonable and adequate. Additional provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value.

Inventory consisted of the following at September 30, 2023 and December 31, 2022 (in thousands):


	September 30, 2023		December 31, 2022
Raw materials	$	104,372	$	72,740
Finished goods		155,747		129,731
Total inventory	$	260,119	$	202,471

Note 6 - Strategic Investments

Strategic investments include investments in a number of non-public technology-driven companies. We account for strategic investments under the ASC 321 measurement alternative for equity securities without readily determinable fair values, as there are no quoted market prices for the investments. The investments are measured at cost less impairment, adjusted for observable price changes and are assessed for impairment whenever events or changes in circumstances indicate that the fair value may be less than its carrying value.

In conjunction with certain of our strategic investments, we have the ability to commit additional capital over time through warrants and call options; for some investments, the exercisability and exercise prices are conditional on the achievement of certain performance metrics.

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


	Three Months Ended September 30, 2023								Three Months Ended September 30, 2022
	Strategic investments		Warrants			Call options	Total		Strategic investments		Warrants			Call options		Total
Balance, beginning of period	$	215,945	$	459	$	17,233	$	233,637	$	264,156	$	1,195		16,340	$	281,691
Investments		4,099		1,176		—		5,275		8,004		459		893		9,356
Fair value adjustments:
Unrealized losses and impairments		—		(113)		—		(113)		(718)		—		—		(718)
Exercises		1,500		—		—		1,500		—		—		—		—
Balance, end of period	$	221,544	$	1,522	$	17,233	$	240,299	$	271,442	$	1,654	$	17,233	$	290,329


	Nine Months Ended September 30, 2023								Nine Months Ended September 30, 2022
	Strategic investments		Warrants			Call options	Total		Strategic investments		Warrants			Call options		Total
Balance, beginning of period	$	277,676	$	1,654	$	17,233	$	296,563	$	80,775	$	2,745		—	$	83,520
Investments		15,016		1,176		—		16,192		53,164		459		17,233		70,856
Fair value adjustments:
Unrealized gains		—		—		—		—		41,893		28,539		—		70,432
Unrealized losses and impairments		(72,648)		(1,308)		—		(73,956)		(1,109)		—		—		(1,109)
Exercises		1,500		—		—		1,500		96,719		(30,089)		—		66,630
Balance, end of period	$	221,544	$	1,522	$	17,233	$	240,299	$	271,442	$	1,654	$	17,233	$	290,329


	Inception to date
	Strategic investments		Warrants			Call options	Total
Investments	$	124,498	$	4,222	$	17,233	$	145,953
Fair value adjustments:
Realized gains		12,312		—		—		12,312
Unrealized gains		74,817		29,073		—		103,890
Unrealized losses and impairments		(73,756)		(1,684)		—		(75,440)
Exercises		98,219		(30,089)		—		68,130
Sales		(14,546)		—		—		(14,546)
Balance, end of period	$	221,544	$	1,522	$	17,233	$	240,299

In accordance with ASC 321-10-35-3, we determined an impairment indicator existed for one of our strategic investments as of June 30, 2023. Thus, we performed a quantitative analysis and concluded the fair value was less than the carrying value. An unrealized impairment loss of $73.8 million related to our strategic investment and related warrants was recorded in interest and other income (loss), net on our condensed consolidated statement of operations during the nine months ended September 30, 2023.

Note 7 - Variable Interest Entities

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

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

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

	●	The VIE’s capital structure;

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

	●	Related-party affiliations.

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


	September 30, 2023		December 31, 2022
Total unconsolidated variable interest entities:
Carrying value of variable interest - assets	$	13,016	$	11,530
Carrying value of variable interest - liabilities		—		—
Maximum exposure to loss:
Non-public equity (1)		13,016		11,530
Total	$	13,016	$	11,530

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

In the table above:

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

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

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

We have provided financial support to the unconsolidated VIEs in exchange for preferred equity as well as warrants and call options that give us the ability to commit additional capital over time. Financial support provided to the unconsolidated VIEs is used to continue to finance their operations. We have no explicit or implicit arrangements to provide additional financial support to the VIEs and we have no liabilities to the VIEs as of September 30, 2023 and December 31, 2022.

Note 8 - Accrued Liabilities

Accrued liabilities consisted of the following at September 30, 2023 and December 31, 2022 (in thousands):


	September 30, 2023		December 31, 2022
Accrued salaries, commissions, benefits and bonus	$	92,437	$	97,882
Accrued professional, consulting and lobbying fees		6,102		3,861
Accrued warranty expense		3,291		811
Accrued income and other taxes		3,358		13,559
Accrued inventory in transit		11,847		10,548
Other accrued expenses		29,905		29,273
Accrued liabilities	$	146,940	$	155,934

Note 9 – Convertible Senior Notes

2027 Notes

In December 2022, we issued $690.0 million aggregate principal amount of our 0.50% convertible senior notes due 2027 in a private offering, which aggregate principal amount included the exercise in full of the initial purchasers’ option to purchase up to an additional $90.0 million principal amount of the Notes. The Notes mature on December 15, 2027 and bear interest at a fixed rate of 0.50% per annum, payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2023. The total net proceeds from the issuance of the Notes, after deducting initial purchasers’ discounts and commissions and estimated debt issuance costs of $16.2 million, were approximately $673.8 million. The effective interest rate for the Notes was 0.99% and included interest payable and amortization of debt issuance cost.

If we undergo a fundamental change (as defined in the indenture governing the Notes), holders may require us to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, but excluding the fundamental change repurchase date. In addition, following certain corporate events or if we issue a notice of redemption, it will increase the conversion rate for holders who elect to convert their notes in connection with such corporate event or during the relevant redemption period.

The following table summarizes the carrying value of the Notes (in thousands):


	September 30, 2023		December 31, 2022
Principal	$	690,000	$	690,000
Unamortized debt issuance costs		(13,685)		(16,033)
Convertible notes carrying amount, net	$	676,315	$	673,967

We consider the fair value of the Notes to be a Level 2 measurement. The estimated fair value of the Notes at September 30, 2023 and December 31, 2022 is based on the closing trading price per $1,000 of the Notes as of the last day of trading for each period as follows (in millions):


	September 30, 2023			December 31, 2022
2027 Notes	$	738.4		$	687.3

Interest expense related to the Notes was as follows (in thousands):


	Three Months Ended September 30, 2023		Nine Months Ended September 30, 2023
Contractual interest expense	$	863	$	2,588
Amortization of debt issuance costs		797		2,328
Total interest expense	$	1,660	$	4,916

Note Hedge

To reduce the impact of potential economic dilution upon conversion of the Notes, we entered into a convertible note hedge transaction (the “Note Hedge” or “2027 Note Hedge”) with certain investment banks, with respect to our common stock, concurrently with the issuance of the 2027 Notes.


	Purchase Price			Shares Purchased
2027 Note Hedge	$	194,994			3,016,680

The Note Hedge covers shares of our common stock at a strike price per share that corresponds to the initial conversion price of the respective Notes, subject to adjustment, and is exercisable upon conversion of the Notes. If exercised, we may elect to receive cash, shares of our common stock, or a combination of cash and shares. We have accounted for the aggregate amount of purchase price for the Note Hedge as a reduction to additional paid-in capital. The Note Hedge will expire upon the maturity of the Notes. The Note Hedge is intended to reduce the potential economic

dilution upon conversion of the Notes in the event that the fair value per share of our common stock at the time of exercise is greater than the conversion price of the Notes. The Note Hedge is a separate transaction and is not part of the terms of the Notes. Holders of the Notes do not have any rights with respect to the Note Hedge. The Note Hedge does not impact earnings per share, as it was entered into to offset any dilution from the Notes. As of September 30, 2023, 3,016,680 shares remain subject to the Note Hedge.

Note Warrants


	Proceeds			Shares			Strike Price			First Expiration
2027 Warrants	$	124,269			3,016,680		$	338.86			March 15, 2028

Separately, we entered into warrant transactions with certain investment banks, whereby we sold warrants to acquire, subject to adjustment, the number of shares of our common stock shown in the table above. If the average market value per share of our common stock, on each expiration date exceeds the strike price of the Warrants expiring on that day, such Warrants would have a dilutive effect on our earnings per share to the extent we report net income. According to the terms of the Warrants, the Warrants will be automatically exercised over a 60-trading day period beginning on the first expiration date as set forth above.

Note 10 - Income Taxes

We file income tax returns for federal purposes and in many states, as well as in multiple foreign jurisdictions. Our tax filings remain subject to examination by applicable tax authorities for a certain length of time, generally three to four years, but can be up to ten years in some jurisdictions following the tax year to which these filings relate.

Deferred Tax Assets

Net deferred income tax assets at September 30, 2023, primarily include R&D capitalization net of amortization, deferred revenue, convertible debt net of amortization, accruals and reserves, and stock-based compensation expense partially offset by accelerated depreciation expense and valuation allowance reserve. Our total net deferred tax assets at September 30, 2023 were $211.4 million.

In preparing our condensed consolidated financial statements, management assesses the likelihood that its deferred tax assets will be realized from future taxable income. In evaluating our ability to recover our deferred income tax assets, management considers all available positive and negative evidence, including our operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Management exercises significant judgment in determining our provisions for income taxes, our deferred tax assets and liabilities, and our future taxable income for purposes of assessing our ability to utilize any future tax benefit from our deferred tax assets.

As of September 30, 2023, management continues to believe the positive evidence from projected future earnings outweighs the negative evidence and a valuation allowance is only needed on specific deferred tax assets. We have concluded that a valuation allowance is necessary against unrealized investment losses as well as transaction costs incurred in connection with certain investments. Additionally, we do have Arizona R&D tax credits expiring unutilized each year; therefore, management has concluded that it is more likely than not that our Arizona R&D deferred tax asset will not be realized, and a valuation allowance has been recorded against this net asset.

In Australia, we have determined that sufficient deferred tax liabilities will reverse in order to realize all assets except one long-lived intangible where there is not an expectation that the asset may be realized. Therefore, we continue to recognize a partial valuation allowance for Australia.

We complete R&D tax credit studies for each year that an R&D tax credit is claimed for federal and state income tax purposes. Management has made the determination that it is more likely than not that the full benefit of the R&D tax credit will not be sustained on examination and recorded a liability for unrecognized tax benefits of $25.6 million as of

September 30, 2023. Should the unrecognized benefit of $25.6 million be recognized, our effective tax rate would be favorably impacted. Approximately $5.5 million of the unrecognized tax benefit associated with R&D credits has been netted against the R&D deferred tax asset.

Effective Tax Rate

Our overall effective tax rate for the nine months ended September 30, 2023, after discrete period adjustments, was (17.9%). Before discrete adjustments, the estimated annual effective tax rate was 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 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 $36.8 million discrete tax benefit primarily associated with net windfalls related to stock-based compensation for RSUs and performance stock units (“PSUs”) that vested during the nine months ended September 30, 2023, primarily attributed to the vesting of the final three tranches of eXponential Stock Performance Plan (“XSPP”) in March and May 2023.

Note 11 - Stockholders’ Equity

CEO Performance Award

On May 24, 2018, our stockholders approved the Board of Directors’ grant of 6,365,856 stock options to Patrick W. Smith, our Chief Executive Officer (the “CEO Performance Award”). The CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational goals (performance conditions) and market capitalization goals (market conditions), assuming continued employment either as the Chief Executive Officer or as both Executive Chairman and Chief Product Officer and service through each attainment date.

As of September 30, 2023, all 12 market capitalization and operational goals have been achieved and certified by the Compensation Committee of the Board of Directors (the “Compensation Committee”). As a result, 6.4 million stock options have been certified by the Compensation Committee and vested. As all 12 operational goals have been achieved, we recorded stock-based compensation expense of $246.0 million related to the CEO Performance Award. No stock-based compensation expense was recorded related to the CEO Performance Award for the three months ended September 30, 2023.

eXponential Stock Performance Plan

On February 12, 2019, our shareholders approved the Axon Enterprise, Inc. 2019 Stock Incentive Plan (the “2019 Plan”), which was adopted by the Board of Directors to reserve a sufficient number of shares to facilitate our XSPP and grants of eXponential Stock Units (“XSUs”) under the 2019 Plan.

As of September 30, 2023, all 12 market capitalization and operational goals have been achieved and certified by the Compensation Committee. We recorded stock-based compensation expense of $199.4 million related to the XSU awards from their respective grant dates through September 30, 2023. As of September 30, 2023, we had $0.5 million of total unrecognized stock-based compensation expense, which will be recognized over a weighted-average period of 0.2 years. The unrecognized expense is related to certain awards that have not yet vested due to their minimum service requirement.

Restricted Stock Units

The following table summarizes RSU activity for the nine months ended September 30, 2023 (number of units and aggregate intrinsic value in thousands):


	Number of	Weighted Average		Aggregate
	Units	Grant-Date Fair Value		Intrinsic Value
Units outstanding, beginning of year	1,565	$	145.38
Granted	464		203.71
Released	(371)		118.04
Forfeited	(104)		155.25
Units outstanding, end of period	1,554		168.67	$	309,283

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $198.99 per share, multiplied by the number of RSUs outstanding. As of September 30, 2023, there was $193.8 million in unrecognized compensation costs related to RSUs under our stock plans for awards that are expected to vest. We expect to recognize the cost related to the RSUs over a weighted average period of 2.1 years. RSUs are released when vesting requirements are met.

Certain RSUs that vested in the nine months ended September 30, 2023 were net-share settled such that we withheld shares to cover the employees’ tax obligations for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld related to RSUs were approximately 17,000 and had a value of $3.3 million on their respective vesting dates as determined by the closing stock price on such dates. Payments for the employees’ tax obligations are reflected as a financing activity within the condensed consolidated statements of cash flows. We record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital.

Performance Stock Units

The following table summarizes PSU activity, inclusive of XSUs, for the nine months ended September 30, 2023 (number of units and aggregate intrinsic value in thousands):


	Number of	Weighted Average		Aggregate
	Units	Grant-Date Fair Value		Intrinsic Value
Units outstanding, beginning of year	1,369	$	43.43
Granted	171		187.74
Released	(1,222)		36.60
Forfeited	(43)		27.52
Units outstanding, end of period	275		166.05	$	54,768

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $198.99 per share, multiplied by the number of PSUs outstanding. As of September 30, 2023, there was $22.6 million in unrecognized compensation costs related to PSUs under our stock plans for awards that are expected to vest. We expect to recognize the cost related to the PSUs over a weighted average period of 4.8 years. PSUs are released when vesting requirements are met.

Certain PSUs that vested in the nine months ended September 30, 2023 were net-share settled such that we withheld shares to cover the employees’ tax obligations for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld related to PSUs were 0.5 million and had a value of $100.8 million on their respective vesting dates as determined by the closing stock price on such dates. Payments for the employees’ tax obligations are reflected as a financing activity within the condensed consolidated statements of cash flows. We record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital.

Stock Option Activity

The following table summarizes stock option activity for the nine months ended September 30, 2023 (number of options and aggregate intrinsic value in thousands):


				Weighted
		Weighted		Average
	Number	Average		Remaining
	of	Exercise		Contractual	Aggregate
	Options	Price		Life (years)	Intrinsic Value
Options outstanding, beginning of year	2,438	$	28.58
Granted	—		—
Exercised	(1,907)		28.58
Expired / terminated	—		—
Options outstanding and exercisable, end of period	531		28.58	4.41	$	90,476

Aggregate intrinsic value represents the difference between the exercise price of the underlying stock options and the closing stock price on the last trading day of the period ended September 30, 2023, which was $198.99.

Of the total stock options exercised during the nine months ended September 30, 2023, 0.9 million shares were immediately sold to cover the exercise price and the option holder’s tax obligation for the applicable income and other employment taxes.

Stock-based Compensation Expense

The following table summarizes the composition of stock-based compensation expense for the three and nine months ended September 30, 2023 and 2022 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Cost of product sales and service sales	$	1,687	$	1,157	$	4,685	$	3,331
Sales, general and administrative expenses		12,886		14,268		43,232		35,860
Research and development expenses		15,414		12,779		48,311		35,263
Total stock-based compensation expense	$	29,987	$	28,204	$	96,228	$	74,454

Stock Incentive Plan

In May 2022, our shareholders approved the Axon Enterprise, Inc. 2022 Stock Incentive Plan (the “2022 Plan”) authorizing an additional 2.5 million shares, plus remaining available shares under prior plans, for issuance under the new plan. Combined with our 2019 Plan and other legacy stock incentive plans, there are 2.3 million shares available for grant as of September 30, 2023.

Stock Repurchase Plan

In February 2016, our Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of our outstanding common stock subject to stock market conditions and corporate considerations. During the nine months ended September 30, 2023 and 2022, no common shares were purchased under the program. As of September 30, 2023, $16.3 million remains available under the plan for future purchases. Any future purchases will be discretionary.

At-the-Market equity offering

During the nine months ended September 30, 2023, we sold 467,594 shares of our common stock under our “at-the-market” equity offering program (the “ATM”). We generated approximately $96.4 million in aggregate gross proceeds from sales under the ATM. Aggregate net proceeds from the ATM were $94.7 million after deducting related expenses, including commissions to the sales agent and issuance costs of $1.7 million.

We may sell up to a total of 3.0 million shares of our common stock under the ATM, with 2.0 million shares remaining as of September 30, 2023. The ATM expires on April 20, 2024. We intend to use the net proceeds from this offering program for general corporate purposes, which may include, among other things, providing capital to satisfy a portion of the tax obligations related to the vesting and settlement of stock compensation awards granted to our executive officers and other employees under our stock plans, to support our growth, and to acquire or invest in product lines, products, services, technologies or facilities.

Note 12 - Line of Credit

In December 2022, we entered into a credit agreement that provides for a senior unsecured multi-currency revolving credit facility in an aggregate principal amount of up to $200.0 million, $30.0 million of which is available for the issuance of letters of credit. 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 2027 Notes unless the 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, in each lender’s sole discretion.

At September 30, 2023 and December 31, 2022, there were no borrowings under the line. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. As of September 30, 2023 we had letters of credit outstanding of approximately $7.4 million under the facility and available borrowing of $192.6 million, excluding amounts available under the accordion feature. 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 expense, taxes, depreciation and amortization (“EBITDA”) ratio, which for the purposes of the credit agreement excludes investment interest income. “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.

We are required 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 period. We are compliant with the consolidated interest coverage ratio, which is not meaningful for the period ended September 30, 2023.

Note 13 - Commitments and Contingencies

Product Litigation

As a manufacturer of weapons and other law enforcement tools used in high-risk field environments, we are often the subject of products liability litigation concerning the use of our products. We are currently named as a defendant in four lawsuits in which the plaintiffs allege either wrongful death or personal injury in situations in which a TASER CED was used by law enforcement officers in connection with arrests or training. While the facts vary from case to case, these product liability claims typically allege defective product design, manufacturing, and/or failure to warn. They seek compensatory and sometimes punitive damages, often in unspecified amounts.

We continue to aggressively defend all product litigation. As a general rule, it is our policy not to settle suspect injury or death cases. Exceptions are sometimes made where the settlement is strategically beneficial to us. Due to the confidential nature of our litigation strategy and the confidentiality agreements that are executed in the event of a settlement, we do not identify or comment on specific settlements by case or amount. Based on current information, we do not believe that the outcome of any such legal proceeding will have a material effect on our financial position, results of operations, or cash flows. We are self-insured for the first $5.0 million of any product claim made after 2014. No judgment or settlement has ever exceeded this amount in any products case. We continue to maintain product liability insurance coverage, including an insurance policy fronting arrangement, above our self-insured retention with various limits depending on the policy period.

U.S. Federal Trade Commission Litigation

In January 2020, the U.S. Federal Trade Commission (“FTC”) filed an administrative enforcement action regarding our May 2018 acquisition of an insolvent body worn camera competitor, Vievu LLC (“Vievu”). The FTC alleged the merger was anticompetitive and adversely affected the body worn camera and digital evidence management market for “large metropolitan police departments,” which we strongly denied. We sued the FTC in federal court challenging the FTC’s structure as unconstitutional. In April of this year, the Supreme Court unanimously held that Axon’s “existential” claims could proceed in federal court, and in August we filed our amended complaint in the District of Arizona. On October 6, 2023, the FTC unilaterally dismissed its administrative complaint against Axon without consent decree or other condition. We therefore dismissed our federal court claims as moot on October 10, 2023 ending this five-year dispute.

In August 2023, the Township of Howell (NJ) filed a purported class action in the District of New Jersey alleging Sherman and Clayton Act violations, relying heavily on the now dismissed FTC allegations concerning the Vievu acquisition. Howell also sued Safariland LLC, which sold Vievu to Axon, alleging a companion holster supply agreement for TASER energy weapons impermissibly restrained trade, which we deny. Subsequently, the City of Baltimore (MD) and the City of Augusta (ME) filed suits making similar antitrust allegations. Axon will vigorously defend these actions, which are in the process of being consolidated.

General

From time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us. After carefully assessing the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously defend any lawsuit filed against us. We record a liability when losses are deemed probable and reasonably estimable. When losses are deemed reasonably possible but not probable, we determine whether it is possible to provide an estimate of the amount of the loss or range of possible losses for the claim, if material for disclosure. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of any potential loss. We reevaluate and update accruals as matters progress over time.

Based on our assessment of outstanding litigation and claims as of the date of these financial statements, we have determined that it is not reasonably probable that these lawsuits will individually, or in the aggregate, materially affect our results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on our operating results, financial condition or cash flows.

Off-Balance Sheet Arrangements

Under certain circumstances, we use letters of credit and surety bonds to guarantee our performance under various contracts, principally in connection with the installation and integration of Axon cameras and related technologies. Certain of our letters of credit and surety bonds have stated expiration dates with others being released as the contractual performance terms are completed. At September 30, 2023, we had outstanding letters of credit issued under our credit facility of $7.4 million that are expected to expire throughout 2023 and 2024. Additionally, we had $10.5 million of outstanding surety bonds as of September 30, 2023 expiring in 2024.

Note 14 – Accumulated Other Comprehensive Income (Loss)

The following tables reflect the changes in accumulated other comprehensive income (loss), net of tax (in thousands):


		Unrealized Gains (Losses)
		on Available-for-Sale		Foreign Currency
		Investments		Translation	Total
Balance, December 31, 2022	$	(1,251)		(5,928)	$	(7,179)
Other comprehensive income		184		1,676		1,860
Balance, March 31, 2023	$	(1,067)	$	(4,252)	$	(5,319)
Other comprehensive loss		(850)		(557)		(1,407)
Balance, June 30, 2023	$	(1,917)	$	(4,809)	$	(6,726)
Other comprehensive income (loss)		656		(6,799)		(6,143)
Balance, September 30, 2023	$	(1,261)	$	(11,608)	$	(12,869)


		Unrealized Gains (Losses)
		on Available-for-Sale		Foreign Currency
		Investments		Translation	Total
Balance, December 31, 2021	$	(207)	$	(1,110)	$	(1,317)
Other comprehensive loss		(489)		(1,072)		(1,561)
Balance, March 31, 2022	$	(696)	$	(2,182)	$	(2,878)
Other comprehensive loss		(161)		(2,166)		(2,327)
Balance, June 30, 2022	$	(857)	$	(4,348)	$	(5,205)
Other comprehensive loss		(326)		(2,275)		(2,601)
Balance, September 30, 2022	$	(1,183)	$	(6,623)	$	(7,806)

Note 15 - Segment Data

Our operations comprise two reportable segments: the TASER segment and the Software and Sensors segment.

Information relative to our reportable segments was as follows (in thousands):


	Three Months Ended September 30, 2023						Three Months Ended September 30, 2022
			Software and						Software and
	TASER		Sensors		Total		TASER		Sensors		Total
Net sales from products	$	153,375	$	103,068	$	256,443	$	139,267	$	71,131	$	210,398
Net sales from services		9,195		147,963		157,158		5,616		95,740		101,356
Net sales		162,570		251,031		413,601		144,883		166,871		311,754
Cost of product sales		59,746		56,532		116,278		53,422		40,302		93,724
Cost of service sales		1,252		40,799		42,051		—		24,773		24,773
Cost of sales		60,998		97,331		158,329		53,422		65,075		118,497
Gross margin	$	101,572	$	153,700	$	255,272	$	91,461	$	101,796	$	193,257

Research and development	$	15,672	$	61,208	$	76,880	$	13,864	$	45,263	$	59,127


	Nine Months Ended September 30, 2023						Nine Months Ended September 30, 2022
			Software and						Software and
	TASER		Sensors		Total		TASER		Sensors		Total
Net sales from products	$	426,372	$	282,934	$	709,306	$	382,142	$	204,511	$	586,653
Net sales from services		24,890		397,053		421,943		12,687		254,453		267,140
Net sales		451,262		679,987		1,131,249		394,829		458,964		853,793
Cost of product sales		170,297		154,757		325,054		142,510		118,068		260,578
Cost of service sales		2,517		112,183		114,700		—		70,256		70,256
Cost of sales		172,814		266,940		439,754		142,510		188,324		330,834
Gross margin	$	278,448	$	413,047	$	691,495	$	252,319	$	270,640	$	522,959

Research and development	$	46,128	$	173,619	$	219,747	$	37,076	$	128,014	$	165,090

Note 16 – Business Acquisition

During the nine months ended September 30, 2023, we completed an acquisition for total purchase consideration of $23.9 million. The purchase price included $2.2 million of contingent cash consideration, which is expected to be earned by the sellers upon meeting specified targets by July 1, 2027. Total transaction costs related to the acquisition were $1.7 million for the nine months ended September 30, 2023. These transaction costs were expensed as incurred in sales, general and administrative (“SG&A”) expenses in our condensed consolidated statements of operations.

The purchase price allocation is subject to revision during the measurement period pending final asset valuation procedures and related calculations. Based on the purchase price allocation, we recorded $12.9 million of goodwill, $11.5 million of identifiable intangible assets, and $2.3 million in net tangible assets, excluding deferred taxes. We acquired a net deferred tax liability of $2.8 million.

The goodwill generated from the acquisition is primarily attributable to synergies that are expected to be achieved from the integration of the business and is not deductible for tax purposes. We have assigned the goodwill to the Software and Sensors segment.

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