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

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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.

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