Axon Enterprise 10-Q 2024-03-31

Filed 2024-05-07. 7 sections, 290K characters. Original on sec.gov · Markdown · JSON

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024 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 May 1, 2024 was 75,467,220.

AXON ENTERPRISE, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2024

			Page
Special Note Regarding Forward-Looking Statements			ii

PART I - FINANCIAL INFORMATION			1
	Item 1. Financial Statements		1
		Condensed Consolidated Balance Sheets as of March 31, 2024 (Unaudited) and December 31, 2023	1
		Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2024 and 2023	2
		Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2024 and 2023	3
		Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023	4
		Notes to Unaudited Condensed Consolidated Financial Statements	5
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		36
	Item 4. Controls and Procedures		37
PART II - OTHER INFORMATION			37
	Item 1. Legal Proceedings		37
	Item 1A. Risk Factors		38
	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, 2023. 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 wi

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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 March 31, 2024, and results of operations for the three months ended March 31, 2024 and 2023, 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 Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 27, 2024. 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 technology suite includes TASER energy devices, body-worn cameras, in-car cameras, cloud-hosted digital evidence management solutions, productivity software and real-time operations capabilities. Axon’s growing global customer base includes first responders across international, federal, state, and local law enforcement, fire, corrections, and emergency medical services, as well as the justice sector, commercial enterprises, and consumers.

Our revenues for the three months ended March 31, 2024 were $460.7 million, an increase of $117.7 million, or 34.3%, from the comparable period in the prior year. We had income from operations of $16.3 million compared to $16.6 million for the comparable period in the prior year. Gross margin dollars increased $55.9 million and decreased as a percentage of revenue to 56.4% from 59.5% compared to the three months ended March 31, 2023. The decrease was primarily driven by higher stock-based compensation expense and payroll taxes related to vesting events from a one-time RSU program for employees under a specified compensation threshold, as well as intangibles amortization from acquired developed technology. Excluding the impacts of stock-based compensation expense and intangibles amortization in cost of goods sold, gross margin increased to 63.2% for the three months ended March 31, 2024, compared to 59.9% for the same period in the prior year due to increased mix of high-margin Axon Cloud & Services revenue and the absence of one-time items related to inventory and other cost adjustments recognized in the first quarter of 2023. Operating expenses increased $56.3 million, reflecting an increase in salaries, benefits and stock-based compensation expense and an increase in professional and consulting expense related to transaction costs. For the three months ended March 31, 2024, we recorded net income of $133.2 million, which included a realized gain of $42.3 million related to our acquisition in Fusus, an unrealized gain of $75.6 million related to a strategic investment, and noncash unrealized gain of $21.8 million related to our investment in CLBT. Net income of $45.1 million for the comparable period in the prior year included an unrealized gain of $15.6 million related to our investment in CLBT.

Results of Operations

Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023

The following table presents data from our condensed consolidated statements of operations as well as the percentage relationship to total net sales of items included in our statements of operations (dollars in thousands):


	Three Months Ended March 31,
	2024				2023
Net sales from products	$	272,048	59.0	%	$	219,389	64.0	%
Net sales from services		188,688	41.0			123,654	36.0
Net sales		460,736	100.0			343,043	100.0
Cost of product sales		151,698	32.9			107,584	31.4
Cost of service sales		48,992	10.7			31,357	9.1
Cost of sales		200,690	43.6			138,941	40.5
Gross margin		260,046	56.4			204,102	59.5
Operating expenses:
Sales, general and administrative		152,669	33.1			116,567	34.0
Research and development		91,097	19.8			70,927	20.7
Total operating expenses		243,766	52.9			187,494	54.7
Income from operations		16,280	3.5			16,608	4.8
Interest income, net		10,374	2.3			9,666	2.8
Other income, net		139,066	30.2			15,610	4.6
Income before provision for income taxes		165,720	36.0			41,884	12.2
Provision for income taxes		32,502	7.1			(3,255)	(1.0)
Net income	$	133,218	28.9	%	$	45,139	13.2	%

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


	Three Months Ended March 31,
	2024				2023
United States	$	392,406	85	%	$	290,938	85	%
Other countries		68,330	15			52,105	15
Total	$	460,736	100	%	$	343,043	100	%

International revenue increased compared to the prior-year comparable period, primarily driven by increased sales in our Europe, Middle East and Africa and our Asia Pacific regions.

Net Sales

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


	Three Months Ended March 31,								Dollar		Percent
	2024				2023				Change		Change
TASER segment:
TASER Devices (Professional)	$	98,676	21.4	%	$	67,472	19.7	%	$	31,204	46.2	%
Cartridges		56,198	12.2			46,800	13.6			9,398	20.1
Axon Evidence and Cloud Services		12,221	2.7			7,201	2.1			5,020	69.7
Extended Warranties		8,526	1.8			7,670	2.2			856	11.2
Other (1)		3,127	0.7			5,139	1.5			(2,012)	(39.2)
Total TASER segment		178,748	38.8			134,282	39.1			44,466	33.1
Software and Sensors segment:
Axon Body Cameras and Accessories		51,205	11.1			38,797	11.3			12,408	32.0
Axon Fleet Systems		28,387	6.2			32,972	9.6			(4,585)	(13.9)
Axon Evidence and Cloud Services		175,458	38.1			118,314	34.5			57,144	48.3
Extended Warranties		18,474	4.0			14,085	4.1			4,389	31.2
Other (2)		8,464	1.8			4,593	1.4			3,871	84.3
Total Software and Sensors segment		281,988	61.2			208,761	60.9			73,227	35.1
Total net sales	$	460,736	100.0	%	$	343,043	100.0	%	$	117,693	34.3	%

	(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, Axon Air and other sensors and equipment.

Net sales for the TASER segment increased 33.1% for the three months ended March 31, 2024 as compared to the prior-year quarter, primarily due to increases of $31.2 million in TASER devices (professional) revenue and $9.4 million of cartridge revenue. The increase in TASER devices (professional) revenue was 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 related to growing sales of next generation TASER products. Net sales for Axon Evidence and cloud services increased $5.0 million in the three months ended March 31, 2024 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 35.1% for the three months ended March 31, 2024 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 increasing adoption of our premium add-on features by our existing customers drove the majority of the increase in Axon Evidence and cloud services revenue of $57.1 million. Net sales of Axon Body cameras and accessories increased $12.4 million due to higher volume. Partially offsetting the increases in the Software and Sensors segment was a decrease of $4.6 million in Axon Fleet revenue primarily reflecting lower unit volumes on more normalized deployment timelines. An increase in cameras, docks and Axon Fleet systems in the field drove the $4.4 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 March 31, 2024, we had approximately $7.0 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 currently 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 50.7% from 62.2% for the three months ended March 31, 2024 and 2023, respectively. The decrease was primarily due to increased stock-based compensation expense and payroll taxes related to vesting events from a one-time RSU program. Excluding the impacts of stock-based compensation expense, gross margin for the TASER segment is 61.8% for the three months ended March 31, 2024, compared to 62.4% for the same period in 2023. The decrease is due to the introduction of our next generation device, TASER 10, which began shipping at the end of the first quarter of 2023 and is still ramping toward full scale in manufacturing, partially offset by the absence of non-recurring inventory reserves recognized in the first quarter of 2023.

As a percentage of net sales, gross margin for the Software and Sensors segment increased to 60.1% from 57.8% for the three months ended March 31, 2024 and 2023, respectively. Within the Software and Sensors segment, hardware gross margin increased to 38.7% for the three months ended March 31, 2024 compared to 38.2% for the same period in 2023. Excluding the impacts of stock-based compensation expense and intangibles amortization, hardware gross margin increased to 46.9% for the three months ended March 31, 2024, compared to 38.6% for the same period in 2023 due to favorable product mix and manufacturing overhead reallocations made in the second quarter of 2023. Service margin decreased to 72.8% for the three months ended March 31, 2024 from 73.2% for the same period in 2023 primarily due to increased stock-based compensation expense and payroll taxes related to vesting events from a one-time RSU program. Excluding the impacts of stock-based compensation expense and intangibles amortization, service margin increased to 74.5% for the three months ended March 31, 2024, compared to 73.8% for the same period in 2023 due to a lower mix of professional services revenue.

We anticipate an increase in stock-based compensation expense reflected within cost of goods sold as a result of RSUs granted in January 2024 that generally vest in five annual installments from March 2024 through March 2028. These RSUs were granted to employees whose compensation was under a specified threshold, including production-line employees. As previously disclosed in Note 15 to our consolidated financial statements included within our Annual Report on Form 10-K for the year ended December 31, 2023, Patrick W. Smith, our Chief Executive Officer, agreed to compensation in a lesser amount than the Compensation Committee of our Board of Directors was otherwise willing to provide so that the Company could instead provide enhanced compensation opportunities to other employees of the Company. If instead he had accepted higher compensation, it would have been reflected in SG&A expenses over a similar period.

Sales, General and Administrative Expenses

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


	Three Months Ended March 31,						Dollar		Percent
	2024			2023			Change		Change
Total sales, general and administrative expenses	$	152,669		$	116,567		$	36,102	31.0	%
Sales, general, and administrative expenses as a percentage of net sales		33.1	%		34.0	%

Professional and consulting expense increased $8.3 million in comparison to the prior year comparable period, which was primarily attributable to transaction costs related to the recent acquisition of Fusus.

Stock-based compensation expense increased $7.7 million in comparison to the prior year comparable period, which was primarily related to increased headcount and additional grants that were awarded to employees whose compensation was under a specified threshold.

Salaries, benefits and bonus expense increased $5.7 million in comparison to the prior year comparable period, which was primarily attributable to an increase in headcount and higher wages.

Sales and marketing and travel expense increased $7.3 million in comparison to the prior year comparable period. The increase was primarily attributable to an increase of commissions of $5.2 million as a result of higher revenue. Travel

expense increased $2.6 million due to higher seasonal travel for company events compared to the prior-year comparable period.

Research and Development Expenses

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



	Three Months Ended March 31,						Dollar		Percent
	2024			2023			Change		Change
Total research and development expenses	$	91,097		$	70,927		$	20,170	28.4	%
Research and development expenses as a percentage of net sales		19.8	%		20.7	%

Salaries, benefits and bonus expense increased $14.1 million in comparison to the prior year comparable period, which was primarily attributable to an increase in headcount and higher wages.

Stock-based compensation expense increased $4.8 million in comparison to the prior year comparable period, which was primarily related to increased headcount.

Interest Income, Net

Interest income, net, was as follows (dollars in thousands):


	Three Months Ended March 31,
	2024		2023
Interest income	$	12,130	$	11,390
Interest expense		(1,756)		(1,724)
Total interest income, net	$	10,374	$	9,666

Other Income, Net

Other income, net, was as follows (dollars in thousands):


	Three Months Ended March 31,
	2024		2023
Realized and unrealized gains on fair value adjustments of strategic investments, net	$	117,931		—
Unrealized gain on marketable securities, net		21,780		15,570
Gain (loss) on foreign currency transactions, net		88		(37)
Other, net		(733)		77
Other income, net	$	139,066	$	15,610

Provision for Income Taxes

The provision for income taxes was $32.5 million for the three months ended March 31, 2024, which was an effective tax rate of 19.6%. Our estimated annual effective income tax rate for 2024, before discrete period adjustments, is 21.9%, which differs from the federal statutory rate primarily due to the impact of R&D tax credits and net gain related to an investment transaction not recognized for tax, offset by the executive compensation limitation under IRC Section 162(m) on projected pre-tax income for the year. The effective tax rate was favorably impacted by a $4.1 million discrete tax benefit associated with net windfalls related to stock-based compensation for RSUs and PSUs that vested during the three months ended March 31, 2024.

The provision for income taxes was a benefit of $3.3 million for the three months ended March 31, 2023, which was an effective tax rate of -7.8%. Our estimated full year effective income tax rate for 2023, before discrete period adjustments, is 22.8%, which differs from the federal statutory rate primarily due to the impact of R&D tax credits and decrease in valuation allowance offset by the executive compensation limitation under IRC Section 162(m) and an increase in unrecognized tax benefits, on projected pre-tax income for the year. The effective tax rate was favorably impacted by a

$13.0 million discrete tax benefit associated with net windfalls related to stock-based compensation for RSUs and PSUs that vested and stock options that were exercised during the three months ended March 31, 2023, primarily attributable to the vesting of tranche 10 of the eXponential Stock Plan (“2019 XSPP”) in March 2023.

In December 2021, the Organization for Economic Co-operation and Development (“OECD”) published a framework for Pillar Two of the Global Anti-Base Erosion Rules (“GloBE”). The GloBE rules were designed to coordinate participating jurisdictions in updating the international tax system to ensure that large multinational companies pay a minimum level of income tax. Recommendations from the OECD regarding a global minimum income tax and other changes are being considered and/or implemented in jurisdictions where we operate. We believe enactment of the recommended framework in jurisdictions where we operate will result in minimal impacts to our financial results in the near term.

Net Income

We recorded net income of $133.2 million for the three months ended March 31, 2024 compared to net income of $45.1 million for the same period in 2023. Net income per basic share was $1.77 for the three months ended March 31, 2024 compared to $0.62 net income per basic share for the same period in 2023. Net income per diluted share was $1.73 for the three months ended March 31, 2024 compared to $0.61 net income per diluted share for the comparable period in 2023.

Three Months Ended March 31, 2024 Compared to the Three Months Ended December 31, 2023

Net Sales

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


	Three Months Ended				Three Months Ended				Dollar		Percent
	March 31, 2024				December 31, 2023				Change		Change
TASER segment:
TASER Devices (Professional)	$	98,676	21.4	%	$	94,758	21.9	%	$	3,918	4.1	%
Cartridges		56,198	12.2			43,781	10.1			12,417	28.4
Axon Evidence and Cloud Services		12,221	2.7			10,105	2.4			2,116	20.9
Extended Warranties		8,526	1.8			8,226	1.9			300	3.6
Other (1)		3,127	0.7			4,473	1.0			(1,346)	(30.1)
Total TASER segment		178,748	38.8			161,343	37.3			17,405	10.8
Software and Sensors segment:
Axon Body Cameras and Accessories		51,205	11.1			58,957	13.7			(7,752)	(13.1)
Axon Fleet Systems		28,387	6.2			22,481	5.2			5,906	26.3
Axon Evidence and Cloud Services		175,458	38.1			165,204	38.2			10,254	6.2
Extended Warranties		18,474	4.0			17,272	4.0			1,202	7.0
Other (2)		8,464	1.8			6,885	1.6			1,579	22.9
Software and Sensors segment		281,988	61.2			270,799	62.7			11,189	4.1
Total net sales	$	460,736	100.0	%	$	432,142	100.0	%	$	28,594	6.6	%

	(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, Axon Air and other sensors and equipment.

Net sales within the TASER segment increased by approximately $17.4 million, or 10.8%, during the three months ended March 31, 2024 compared to the prior quarter. The increase is related to strong adoption of TASER 10 and higher international cartridge volume. Fluctuations in cartridge revenue are generally attributable to customers who are not on cartridge subscriptions plans and periodically purchase in bulk.

Within the Software and Sensors segment, net sales increased $11.2 million, or 4.1%, during the three months ended March 31, 2024 compared to the prior quarter. The increase in the aggregate number of users and increasing adoption of our premium add-on features by our existing customers drove the majority of the increase in Axon Evidence and cloud services revenue of $10.3 million. Axon Fleet revenue increased $5.9 million primarily due to higher unit sales. Partially offsetting the increases in the Software and Sensors segment was a decrease in Axon Body cameras and accessories revenue of $7.7 million on lower units sales due to seasonality, partially offset by premium product mix. An increase in Axon Body cameras, docks and Axon Fleet systems in the field drove the $1.2 million increase in extended warranties revenue, as most of those devices are sold with extended warranties.

Non-GAAP Measures

We utilize certain non-GAAP financial measures such as EBITDA, Adjusted EBITDA, and Adjusted Gross Margin as defined below to enhance understanding of our financial results and related measures. Beginning with our first fiscal quarter of 2024, we have added Adjusted Gross Margin to our non-GAAP financial measures. We have adjusted for expenses that we believe are not indicative of our core operating results, including stock-based compensation expense and amortization of acquired intangible assets. To improve comparability, prior periods have been conformed to the current period presentation. Our management uses these non-GAAP financial measures in evaluating our operating 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, 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, fair value adjustments to strategic investments and marketable securities, transaction costs related to acquisitions and strategic investments, and other unusual, non-recurring pre-tax items that are not considered representative of our underlying operating performance.

	●	Adjusted Gross Margin (Most comparable GAAP Measure: Gross margin) – Gross margin before non-cash stock-based compensation expense and amortization of acquired intangible assets.

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 reconcile to net income as follows (in thousands):


	Three Months Ended
	March 31,		December 31,		March 31,
	2024		2023		2023
Net income	$	133,218	$	57,271	$	45,139
Depreciation and amortization		11,564		10,051		6,689
Interest expense		1,756		1,772		1,724
Investment interest income		(12,130)		(14,097)		(11,390)
Provision for (benefit from) income taxes		32,502		(1,469)		(3,255)
EBITDA	$	166,910	$	53,528	$	38,907

Non-GAAP adjustments:
Stock-based compensation expense		75,115		35,130		34,350
Unrealized gain on strategic investments and marketable securities, net		(97,419)		(521)		(15,570)
Gain on remeasurement of previously held minority interest, net		(42,292)		—		—
Transaction costs related to strategic investments and acquisitions		6,357		2,708		843
Loss on disposal, abandonment, and impairment of property, equipment and intangible assets, net		—		—		156
Costs related to antitrust and FTC litigation		224		169		—
Payroll taxes related to 2019 XSPP vesting and 2018 CEO Performance Award option exercises		—		50		6,392
Adjusted EBITDA	$	108,895	$	91,064	$	65,078

Adjusted Gross Margin reconciles to gross margin as follows (in thousands):


	Three Months Ended March 31, 2024									Three Months Ended March 31, 2023
				Software and									Software and
	TASER			Sensors			Total			TASER			Sensors			Total
Gross margin	$	90,690		$	169,356		$	260,046		$	83,519		$	120,583		$	204,102
Stock-based compensation expense		19,781			9,814			29,595			310			1,010			1,320
Amortization of acquired intangible assets		—			1,686			1,686			—			—			—
Adjusted gross margin	$	110,471		$	180,856		$	291,327		$	83,829		$	121,593		$	205,422
Gross margin		50.7	%		60.1	%		56.4	%		62.2	%		57.8	%		59.5	%
Adjusted gross margin		61.8	%		64.1	%		63.2	%		62.4	%		58.2	%		59.9	%

Liquidity and Capital Resources

Summary

As of March 31, 2024, we had $403.9 million of cash and cash equivalents, a decrease of $194.7 million as compared to December 31, 2023. Cash and cash equivalents and available-for-sale investments totaled $964.1 million as of March 31, 2024, representing a decrease of $278.5 million from December 31, 2023.

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 March 31, 2024, we had letters of credit outstanding of $7.5 million, leaving the net amount available for borrowing of $192.5 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 March 31, 2024 and December 31, 2023, there were no borrowings outstanding under the line.

Our agreement with the bank requires us to comply with a net leverage ratio, defined as consolidated total indebtedness to EBITDA, of no greater than 3.50 to 1.00 based upon a trailing four fiscal quarter period. At March 31, 2024, our net leverage ratio was (0.15) 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. At March 31, 2024, our consolidated interest coverage ratio was 51.03 to 1.00.

TASER subscription and installment purchase arrangements typically involve amounts invoiced in five equal installments at the beginning of each year of the five-year term. This is in contrast to a traditional CED sale in which the entire amount being charged for the hardware is invoiced upon shipment. This impacts liquidity in a commensurate fashion, with the cash for the subscription or installment purchase received in five annual installments rather than up front. Our strategy includes continuing to shift an increasing amount of our business to a subscription model, to better match the municipal budgeting process of our customers as well as to allow for multiple product offerings to be bundled into existing subscriptions. We carefully considered the cash flow impacts of this strategic shift and regularly revisit our cash flow forecast with the goal of maintaining a comfortable level of liquidity as we continue to offer products and services in which we incur upfront cash costs to produce and fulfill hardware sales ahead of the cash inflows from our customers.

Our primary sources of liquidity are cash flows from operations, existing cash and cash equivalents and investments and credit capacity under our existing credit facility. Additionally, we believe we have access to additional financing. However, there is no assurance that such funding will be available on terms acceptable to us, or at all.

We believe that our sources of funding will be sufficient to satisfy our currently anticipated cash requirements, including capital expenditures, working capital requirements, potential acquisitions or investments, income and payroll tax payments for net-settled stock awards, and other liquidity requirements through at least the next 12 months. We and our Board of Directors may consider repurchases of our common stock. Further repurchases of our common stock would take place on the open market, would be financed with available cash and are subject to authorization as well as market and business conditions.

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities (in thousands):


	Three Months Ended March 31,
	2024		2023
Operating activities	$	(15,938)	$	(56,323)
Investing activities		(174,044)		(72,674)
Financing activities		(2,710)		37,990
Effect of exchange rate changes on cash and cash equivalents		(1,978)		779
Net increase (decrease) in cash and cash equivalents and restricted cash	$	(194,670)	$	(90,228)

Operating activities

Net cash used by operating activities in the first three months of 2024 of $15.9 million reflects net income of $133.2 million, non-cash income statement items totaling $33.8 million, and a decrease of $115.4 million for the net change in operating assets and liabilities. Included in the non-cash items were a gain of $97.4 million on strategic

investments and marketable securities, $75.1 million in stock-based compensation expense, a $42.3 million gain on remeasurement of a previously held minority interest, net, $20.7 million related to an increase in deferred income taxes, $11.6 million in depreciation and amortization expense, and $5.0 million in bond amortization. Cash used in operations was impacted by an increase in accounts and notes receivable and contract assets of $51.1 million, an increase of $0.7 million in inventory, and a decrease in accounts payable, accrued and other liabilities of $84.3 million. Offsetting this activity was an increase in deferred revenue of $20.7 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 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 used in operating activities in the first three months of 2023 of $56.3 million reflects net income of $45.1 million, non-cash income statement items totaling $16.0 million, and a decrease of $117.4 million for the net change in operating assets and liabilities. Included in the non-cash items were $34.4 million in stock-based compensation expense, a decrease of $9.7 million in deferred income taxes, net, $6.7 million in depreciation and amortization expense, and a $15.6 million gain on the change in fair value of marketable securities. Cash provided by operations was favorably impacted by increased deferred revenue of $50.2 million, which was primarily attributable to increased sales where the customer is invoiced before performance occurs. Offsetting this activity was an increase of accounts and notes receivables and contract assets of $50.4 million, an increase in prepaid expenses and other assets of $64.3 million, an increase of $15.8 million in inventory, and a decrease in accounts payable, accrued and other liabilities of $37.0 million. 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. Of the increase in prepaid expenses and other assets, $33.0 million was primarily driven by a receivable for proceeds from shares sold to cover the tax liability and option cost for options exercised during the first three months of 2023, but settled in April 2023. The decrease in accounts payable, accrued and other liabilities was driven primarily by the timing of the annual bonus payout.

Investing activities

Cash used in investing activities during the first three months of 2024 was $174.0 million. Cash inflows from investing activities included $89.0 million of proceeds from calls, maturities and sales of available-for-sale investments, net of purchases. The outflows from investing activities included $237.8 million for a business acquisition, $9.1 million for a strategic investment, and $16.2 million for purchases of property and equipment, net of proceeds.

We used $72.7 million of cash for investing activities during the first three months of 2023. Cash outflows from investing activities included $64.0 million for the purchase of available-for-sale investments, net of proceeds from calls and maturities. Property and equipment purchases totaled $8.5 million.

Financing activities

Net cash used in financing activities was $2.7 million during the first three months of 2024 and was primarily attributable to income and payroll taxes on behalf of employees who net-settled stock awards during the period.

Net cash provided by financing activities was $38.0 million during the first three months of 2023 and was primarily attributable to proceeds of $39.2 million from the exercise of stock options where shares were sold to cover the exercise price and net proceeds of $33.7 million received from our ATM offering. Partially offsetting net cash provided by financing activities was $34.8 million for the payment of income and payroll taxes on behalf of employees who net-settled stock awards during the period related to the vesting of tranche 10 of the 2019 XSPP.

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, 2023. Except as noted below, there have been no significant changes to these policies for the three months ended March 31, 2024.

Business Combinations

Accounting for business combinations requires us to make significant estimates and assumptions, notably at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed and pre-acquisition contingencies. The fair values of intangible assets are determined utilizing information available as of the acquisition date based on expectations and assumptions that are deemed reasonable by management. Given the considerable judgment involved in determining fair values, we typically obtain assistance from third-party valuation specialists for significant items. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill.

We may adjust provisional amounts recorded for assets acquired and liabilities assumed to reflect new information, provided we have not exceeded the maximum measurement period of one year from the acquisition date and subsequently obtained facts and circumstances existed as of the acquisition date. While we believe the expectations and assumptions used in valuing assets acquired and liabilities assumed are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions, implying that an indicator of impairment could be present. Any such impairment charges could have a material effect on our results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We typically invest in a limited number of financial instruments, consisting principally of investments in money market accounts, certificates of deposit, corporate and municipal bonds with a typical long-term debt rating of “A” or better by any nationally recognized statistical rating organization, denominated in U.S. dollars. All of our cash equivalents and investments are treated as “available-for-sale”. We report available-for-sale investments at fair value as of each balance sheet date and record any unrealized gains or losses within accumulated other comprehensive income (loss) as a component of stockholders’ equity. The cost of securities sold is determined on a specific identification basis, and realized gains and losses are included in interest and other income (expense), net within the condensed consolidated statements of operations. When the fair value is below the amortized cost of a marketable security, an estimate of expected credit losses is made. The credit-related impairment amount is recognized in the condensed consolidated statements of operations. Credit losses are recognized through the use of an allowance for credit losses account in the condensed consolidated balance sheet and subsequent improvements in expected credit losses are recognized as a reversal of an amount in the allowance account. If we have the intent to sell the security or it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis, then the allowance for the credit loss is written-off and the excess of the amortized cost basis of the asset over its fair value is recorded in the condensed consolidated statements of operations. Based on investment positions as of March 31, 2024, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $1.5 million decline in the fair market value of the portfolio. Such losses would only be realized if we sold the investments prior to maturity.

Additionally, we have access to a $200.0 million line of credit borrowing facility which bears interest at SOFR plus 1.25 to 1.75% per year determined in accordance with a pricing grid based on our net leverage ratio and consolidated interest coverage ratio. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit, which totaled $7.5 million at March 31, 2024. At March 31, 2024, there was no amount outstanding under the line of credit, and the available borrowing under the line of credit was $192.5 million. We have not borrowed any funds under the line of credit since its inception; however, should we need to do so in the future, such borrowings could be subject to adverse or favorable changes in the underlying interest rate.

Exchange Rate Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, in each case compared to the U.S. dollar, related to transactions by our foreign subsidiaries. The majority of our sales to international customers are transacted in foreign currencies and therefore are subject to exchange rate fluctuations on these transactions. The cost of our products to our customers increases when the U.S. dollar strengthens against their local currency, and we may have more sales and expenses denominated in foreign currencies in future years, which could increase our foreign exchange rate risk. Additionally, intercompany sales to our non-U.S. dollar functional currency international subsidiaries are transacted in U.S. dollars, which could increase our foreign exchange rate risk caused by foreign currency transaction gains and losses.

To date, we have not engaged in any currency hedging activities. However, we may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. However, we may choose not to hedge certain foreign exchange exposures for a variety of reasons, including, but not limited to, the prohibitive economic cost of hedging particular exposures. As such, fluctuations in currency exchange rates could harm our business in the future.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer are responsible for the evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2024.

There was no change in our internal control over financial reporting during the quarter ended March 31, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The discussion under the headings Product Litigation and Antitrust Litigation in Note 13 to our condensed consolidated financial statements included within this Quarterly Report on Form 10-Q is incorporated by reference herein.

Item 1A. Risk Factors

Risk Factor Summary

The following is only a summary of the principal risks that may materially adversely affect our business, financial condition, results of operations and cash flows. The following should be read in conjunction with the more complete discussion of the risks we face, which are set forth more fully below.

Strategic Risks

	●	If law enforcement agencies do not continue to purchase and use our products and services, our growth prospects, operating results and financial condition will be materially adversely affected.

	●	If our TASER CEDs do not continue to be widely accepted, our growth prospects, operating results and financial condition will be diminished.

	●	If we are unable to design, introduce, sell and deploy new products or new product features successfully, our business and financial results could be adversely affected.

	●	We face risks associated with rapid technological change and new competing products.

	●	Our future success is dependent on our ability to expand sales through direct sales and distributors and our inability to increase direct sales or recruit new distributors would negatively affect our sales.

	●	Negative publicity could adversely impact sales, which could cause our revenues or operating results to decline.

	●	Acquisitions of, or investments in, other products, technologies or businesses could disrupt our business, dilute shareholder value, and adversely affect our operating results.

	●	Our failure to retain executive officers, including Patrick W. Smith, could adversely impact our business.

Operational Risks

	●	Unavailability of materials or higher costs could adversely affect our financial results.

	●	Material adverse developments in domestic and global economic conditions, or the occurrence of other world events, could materially adversely affect our revenue and results of operations.

	●	To the extent demand for our products increases, our future success will be dependent upon our ability to manage our growth and to increase manufacturing production capacity.

	●	Delays in product development schedules could adversely affect our revenues and cash flows.

	●	We expend significant resources in anticipation of a sale and may receive no revenue in return.

	●	Changes in civil forfeiture laws may affect our customers’ ability to purchase our products.

	●	If our security measures or those of our third-party providers, including cloud storage providers, are breached and unauthorized access is obtained to customers’ data or our data, our network, data centers and service may be perceived as not being secure, customers may curtail or stop using our products and services, and we may incur significant legal and financial exposure and liabilities.

	●	Catastrophic events could materially adversely affect our business, results of operations and/or financial condition.

	●	Uncertainty in the development, deployment and use of artificial intelligence (“AI”) in our products and services, as well as our business more broadly, could adversely affect our business and reputation.

	●	Defects or disruptions in our services could impact demand for our services and subject us to substantial liability.

	●	Defects in our products could reduce demand for our products or result in product recalls and result in a loss of sales, delay in market acceptance and damage to our reputation.

	●	Our international operations expose us to additional risks that could harm our business, operating results and financial condition.

	●	We depend on our ability to attract and retain our key management, sales and technical personnel.

	●	If we fail to comply with federal, state or local regulations applicable to TASER 10 CEDs, we may be subject to governmental actions or litigation that could materially harm our business.

	●	If we fail to maintain effective internal control over financial reporting, or identify a material weakness or significant deficiency, our ability to accurately and timely report our financial condition and results of operations could be adversely affected, investor confidence could diminish, and the value of our common stock may decline.

Financial Risks

	●	An increasing percentage of our revenue is derived from subscription billing arrangements that may result in delayed cash collections and may increase customer credit risk on receivables and contract assets.

	●	Our gross margin is dependent on a number of factors, including our product mix, cost structure and acquisitions we may make, any of which could cause our gross margin to decline.

	●	Revenue for our Software-as-a-Service (“SaaS”) products is recognized over the terms of the contracts, which may be several years, and, as such, trends in new business may not be immediately reflected in our operating results.

	●	Most of our end-user customers are subject to budgetary and political constraints that may delay or prevent sales.

	●	The open bidding process creates uncertainty in predicting future contract awards.

	●	We maintain most of our cash balances, some of which are not insured, at two depository institutions.

	●	Stock transactions may have a material, unpredictable impact on our results of operations and may result in dilution to existing shareholders.

	●	Our financial performance is subject to risks associated with changes in the value of the U.S. dollar versus local currencies.

	●	Unanticipated changes in our effective tax rate and additional tax liabilities may impact our results of operations and financial condition.

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

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

Legal and Compliance Risks

	●	We may face personal injury, wrongful death, product liability and other liability claims that harm our reputation and adversely affect our sales and financial condition.

	●	Other litigation, government inquiries and regulatory actions may result in significant costs and judgments and divert management attention from our business.

	●	We have in the past and may in the future be subject to intellectual property infringement and other claims, which could incur substantial litigation costs, result in significant damages awards, inhibit our use of certain technologies, and divert management attention from our business.

| | ● | If we are unable to protect our intellectual property, the value of our brands and products may decrease and we may lose our competitive m

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Item 5. Other Information

During the fiscal quarter ended March 31, 2024, certain of our officers or directors have made, and may from time to time make, elections to have shares withheld or sold to cover withholding taxes or pay the exercise price of options, which may be designed to satisfy the affirmative defense conditions of Rule 10b5-1 under the Exchange Act or may constitute non-Rule 10b5-1 trading arrangements (as defined in Item 408(c) of Regulation S-K under the Exchange Act).

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

Item 6. Exhibits



3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the
		Quarterly Report on Form 10-Q, filed August 9, 2022)
3.2		Bylaws, as amended and restated (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K, filed December 21, 2023)
31.1*		Principal Executive Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2*		Principal Financial Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32**		Principal Executive Officer and Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*		Inline XBRL Taxonomy Extension Schema Document
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, formatted in Inline XBRL

+Management contract or compensatory plan or arrangement

Filed herewith

** Furnished herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AXON ENTERPRISE, INC.

Date:	May 6, 2024
		By:	/s/ PATRICK W. SMITH
			Chief Executive Officer
			(Principal Executive Officer)

Date:	May 6, 2024	By:	/s/ BRITTANY BAGLEY
			Chief Operating Officer and Chief Financial Officer
			(Principal Financial and
			Accounting Officer)