Axon Enterprise 10-Q 2024-06-30

Filed 2024-08-07. 7 sections, 325K 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 June 30, 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 July 31, 2024 was 75,574,344.

AXON ENTERPRISE, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2024

			Page
Special Note Regarding Forward-Looking Statements			ii

PART I - FINANCIAL INFORMATION			1
	Item 1. Financial Statements (unaudited)		1
		Condensed Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023	1
		Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2024 and 2023	2
		Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2024 and 2023	3
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023	5
		Notes to Unaudited Condensed Consolidated Financial Statements	6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		44
	Item 4. Controls and Procedures		45
PART II - OTHER INFORMATION			45
	Item 1. Legal Proceedings		45
	Item 1A. Risk Factors		45
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		72
	Item 3. Defaults Upon Senior Securities		72
	Item 4. Mine Safety Disclosures		72
	Item 5. Other Information		72
	Item 6. Exhibits		73
	SIGNATURES		74

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 will be realized, alth

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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 June 30, 2024, and results of operations for the three and six months ended June 30, 2024 and 2023, should be read in conjunction with the unaudited 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 June 30, 2024, were $504.1 million, an increase of $129.5 million, or 34.6%, from the comparable period in the prior year. We had income from operations of $32.9 million, compared to $40.3 million for the same period in the prior year. Gross margin dollars increased $71.6 million but decreased as a percentage of revenue to 60.3% from 62.0% compared to the three months ended June 30, 2023. The decrease was primarily driven by higher stock-based compensation expense and related payroll taxes, as well as amortization of acquired intangibles. Excluding the impacts of stock-based compensation expense and intangibles amortization in the cost of goods sold, gross margin increased from 62.4% to 62.5% year over year. Operating expenses increased by $79.0 million, reflecting increased headcount, increased sales, marketing, and commission expenses and an increase in stock-based compensation expense. Net income of $40.8 million included a noncash unrealized gain of $7.8 million in our marketable securities. Net income of $12.4 million for the comparable period in the prior year included a noncash unrealized gain of $10.0 million in our marketable securities and a noncash unrealized impairment loss of $71.9 million, net, related to a strategic equity investment and related warrants.

Our revenues for the six months ended June 30, 2024, were $964.8 million, an increase of $247.2 million, or 34.4%, from the comparable period in the prior year. We had income from operations of $49.2 million, compared to $56.9 million for the same period in the prior year. Gross margin dollars increased $127.6 million but decreased as a percentage of revenue to 58.4% from 60.8% compared to the six months ended June 30, 2023. The decrease was primarily driven by higher stock-based compensation expense and related payroll taxes, as well as amortization of acquired intangibles. Excluding the impacts of stock-based compensation expense and intangibles amortization in the cost of goods sold, the gross margin increased to 62.9% for the six months ended June 30, 2024, compared to 61.2% for the same period in the prior year, primarily due to an increased mix of high-margin Axon Cloud & Services revenue and investments in TASER automation and cost-reduction initiatives. Operating expenses increased $135.2 million, reflecting an increase in salaries, benefits, and stock-based compensation expenses, as well as an increase in professional and consulting expenses related to transaction costs. For the six months ended June 30, 2024, we recorded net income of $174.0 million, which included realized and unrealized gains of $147.7 million related to our acquisition of Fusus, strategic equity investment and marketable securities. Net income of $57.6 million for the comparable period in the prior year reflected an unrealized net loss of $46.3 million related to our marketable securities and impairment loss of our strategic equity investment and related warrants.

Results of Operations

Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 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 June 30,
	2024				2023
Net sales from products	$	295,185	58.6	%	$	233,474	62.3	%
Net sales from services		208,914	41.4			141,131	37.7
Net sales		504,099	100.0			374,605	100.0
Cost of product sales		145,154	28.8			101,192	27.0
Cost of service sales		55,210	10.9			41,292	11.0
Cost of sales		200,364	39.7			142,484	38.0
Gross margin		303,735	60.3			232,121	62.0
Operating expenses:
Sales, general and administrative		169,427	33.6			119,922	32.0
Research and development		101,434	20.1			71,940	19.2
Total operating expenses		270,861	53.7			191,862	51.2
Income from operations		32,874	6.6			40,259	10.8
Interest income, net		9,782	1.9			9,663	2.6
Other income (loss), net		7,934	1.6			(62,031)	(16.6)
Income (loss) before provision for income taxes		50,590	10.1			(12,109)	(3.2)
Provision for (benefit from) income taxes		9,793	2.0			(24,529)	(6.5)
Net income	$	40,797	8.1	%	$	12,420	3.3	%

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


	Three Months Ended June 30,
	2024				2023
United States	$	425,501	84	%	$	321,921	86	%
Other countries		78,598	16			52,684	14
Total	$	504,099	100	%	$	374,605	100	%

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

Net Sales

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


	Three Months Ended June 30,								Dollar		Percent
	2024				2023				Change		Change
TASER segment:
TASER Devices (Professional)	$	104,624	20.8	%	$	84,975	22.7	%	$	19,649	23.1	%
Cartridges		65,415	13.0			48,425	12.9			16,990	35.1
Axon Evidence and Cloud Services		14,215	2.8			8,494	2.3			5,721	67.4
Extended Warranties		8,908	1.8			7,715	2.0			1,193	15.5
Other (1)		3,796	0.7			4,801	1.3			(1,005)	(20.9)
Total TASER segment		196,958	39.1			154,410	41.2			42,548	27.6
Software and Sensors segment:
Axon Body Cameras and Accessories		59,024	11.7			32,781	8.8			26,243	80.1
Axon Fleet Systems		26,601	5.3			35,960	9.6			(9,359)	(26.0)
Axon Evidence and Cloud Services		192,735	38.2			132,102	35.3			60,633	45.9
Extended Warranties		18,310	3.6			15,166	4.0			3,144	20.7
Other (2)		10,471	2.1			4,186	1.1			6,285	150.1
Total Software and Sensors segment		307,141	60.9			220,195	58.8			86,946	39.5
Total net sales	$	504,099	100.0	%	$	374,605	100.0	%	$	129,494	34.6	%

	(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 for the TASER segment increased 27.6% for the three months ended June 30, 2024 as compared to the prior-year quarter, primarily due to increases of $19.6 million in TASER devices (professional) revenue and $17.0 million of cartridge revenue. The increase in TASER devices (professional) and in cartridge revenue was primarily related to higher volume sales of TASER 10. Net sales for Axon Evidence and cloud services increased $5.7 million in the three months ended June 30, 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 39.5% for the three months ended June 30, 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 $60.6 million. Net sales of Axon Body cameras and accessories increased $26.2 million due to higher volume sales of Axon Body 4. Partially offsetting the increases in the Software and Sensors segment was a decrease of $9.4 million in Axon Fleet revenue primarily reflecting lower unit volume on more normalized deployment timelines. The $6.3 million increase in “Other” revenue was primarily driven by demand for smaller product offerings within the Software and Sensors segment.

We consider total company future contracted revenues a forward-looking performance indicator. As of June 30, 2024, we had approximately $7.4 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 60.4% from 60.5% for the three months ended June 30, 2024 and 2023, respectively. The decrease was primarily due to increased stock-based compensation expense. Excluding the impacts of stock-based compensation expense, gross margin for the TASER segment was 62.9% for the three months ended June 30, 2024, compared to 60.9% for the same period in 2023. The increase is primarily driven by investment in automation and cost reduction initiatives.

As a percentage of net sales, gross margin for the Software and Sensors segment decreased to 60.1% from 63.0% for the three months ended June 30, 2024 and 2023, respectively. Within the Software and Sensors segment, hardware gross margin decreased to 38.9% for the three months ended June 30, 2024 compared to 52.9% for the same period in 2023. Excluding the impacts of stock-based compensation expense and intangibles amortization, hardware gross margin decreased to 40.1% for the three months ended June 30, 2024, compared to 52.9% for the same period in 2023 due to manufacturing overhead reallocations made in the second quarter of 2023 and nonrecurring inventory reserves associated with legacy products in the second quarter of 2024. Service margin increased to 72.4% for the three months ended June 30, 2024 from 69.7% for the same period in 2023. Excluding the impacts of stock-based compensation expense and intangibles amortization, service margin increased to 75.0% for the three months ended June 30, 2024, compared to 70.5% for the same period in 2023 due to lower professional services costs related to installations of Axon Fleet hardware.

Sales, General and Administrative Expenses

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


	Three Months Ended June 30,						Dollar		Percent
	2024			2023			Change		Change
Total sales, general and administrative expenses	$	169,427		$	119,922		$	49,505	41.3	%
As a percentage of net sales		33.6	%		32.0	%

Stock-based compensation expense increased $23.7 million in comparison to the prior-year comparable period, which was primarily related to the 2024 Employee XSP and the 2024 CEO Performance Award that were approved by shareholders in the 2024 Annual Meeting of Shareholders and increased headcount. As of June 30, 2024, we consider some of the tranches probable and will recognize the expense ratably over their respective expected vesting periods. This may result in volatility and higher upfront expense recognition and is subject to change based on periodic probability assessments.

Salaries, benefits and bonus expense increased $8.4 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 $7.8 million in comparison to the prior-year comparable period. The increase was partially attributable to an increase in travel expense of $2.6 million due to higher seasonal travel for company events compared to the prior-year comparable period. Commissions increased $2.2 million as a result of higher revenue.

Research and Development Expenses

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



	Three Months Ended June 30,						Dollar		Percent
	2024			2023			Change		Change
Total research and development expenses	$	101,434		$	71,940		$	29,494	41.0	%
As a percentage of net sales		20.1	%		19.2	%

Stock-based compensation expense increased $12.4 million in comparison to the prior-year comparable period, which was primarily related to the 2024 Employee XSP that was approved by shareholders in the 2024 Annual Meeting of Shareholders and increased headcount.

Salaries, benefits and bonus expense increased $13.8 million in comparison to the prior-year comparable period, which was primarily attributable to an increase in headcount and higher wages.

Interest Income, Net

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


	Three Months Ended June 30,
	2024		2023
Interest income	$	11,653	$	11,400
Interest expense		(1,871)		(1,737)
Total interest income, net	$	9,782	$	9,663

Other Income (Loss), Net

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


	Three Months Ended June 30,
	2024		2023
Realized and unrealized gain (loss) on fair value adjustments of strategic investments, net	$	158	$	(71,902)
Unrealized gain on marketable securities, net		7,830		9,990
Gain (loss) on foreign currency transactions, net		(35)		(44)
Other, net		(19)		(75)
Other income (loss), net	$	7,934	$	(62,031)

Provision for Income Taxes

Our estimated annual effective income tax rate for 2024, before discrete period adjustments, is 22.9%, 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, partially 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 $3.4 million discrete tax benefit associated with net windfalls related to stock-based compensation for RSUs and PSUs that vested during the three months ended June 30, 2024.

Provision for (benefit from) income taxes and effective tax rates were as follows (dollars in thousands):


	Three Months Ended June 30,
	2024			2023			Change
Provision for (benefit from) income taxes	$	9,793		$	(24,529)		$	34,322
Effective tax rate		19.4	%		202.6	%		(183.2)	%

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 $40.8 million for the three months ended June 30, 2024 compared to net income of $12.4 million for the same period in 2023. Net income per basic share was $0.54 for the three months ended June 30, 2024 compared to $0.17 net income per basic share for the same period in 2023. Net income per diluted share was $0.53 for the three months ended June 30, 2024 compared to $0.16 net income per diluted share for the comparable period in 2023.

Three Months Ended June 30, 2024 Compared to the Three Months Ended March 31, 2024

Net Sales

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


	Three Months Ended				Three Months Ended				Dollar		Percent
	June 30, 2024				March 31, 2024				Change		Change
TASER segment:
TASER Devices (Professional)	$	104,624	20.8	%	$	98,676	21.4	%	$	5,948	6.0	%
Cartridges		65,415	13.0			56,198	12.2			9,217	16.4
Axon Evidence and Cloud Services		14,215	2.8			12,221	2.7			1,994	16.3
Extended Warranties		8,908	1.8			8,526	1.8			382	4.5
Other (1)		3,796	0.7			3,127	0.7			669	21.4
Total TASER segment		196,958	39.1			178,748	38.8			18,210	10.2
Software and Sensors segment:
Axon Body Cameras and Accessories		59,024	11.7			51,205	11.1			7,819	15.3
Axon Fleet Systems		26,601	5.3			28,387	6.2			(1,786)	(6.3)
Axon Evidence and Cloud Services		192,735	38.2			175,458	38.1			17,277	9.8
Extended Warranties		18,310	3.6			18,474	4.0			(164)	(0.9)
Other (2)		10,471	2.1			8,464	1.8			2,007	23.7
Software and Sensors segment		307,141	60.9			281,988	61.2			25,153	8.9
Total net sales	$	504,099	100.0	%	$	460,736	100.0	%	$	43,363	9.4	%

	(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, Axon Air and other sensors and equipment.

Net sales within the TASER segment increased by approximately $18.2 million, or 10.2%, during the three months ended June 30, 2024 compared to the prior quarter. The increase is primarily related to increased TASER 10 device and cartridge volumes. Net sales for Axon Evidence and cloud services increased $2.0 million in the three months ended June 30, 2024 due to an increase in the number of cloud-connected TASER devices in the field, as well as more users on our VR platform.

Within the Software and Sensors segment, net sales increased $25.2 million, or 8.9%, during the three months ended June 30, 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 $17.3 million. Axon Body cameras and accessories revenue increased $7.8 million on higher unit sales.

Six Months Ended June 30, 2024 Compared to the Six Months Ended June 30, 2023


	Six Months Ended June 30,
	2024				2023
Net sales from products	$	567,233	58.8	%	$	452,863	63.1	%
Net sales from services		397,602	41.2			264,785	36.9
Net sales		964,835	100.0			717,648	100.0
Cost of product sales		296,852	30.8			208,776	29.1
Cost of service sales		104,202	10.8			72,649	10.1
Cost of sales		401,054	41.6			281,425	39.2
Gross margin		563,781	58.4			436,223	60.8
Operating expenses:
Sales, general and administrative		322,096	33.4			236,489	33.0
Research and development		192,531	20.0			142,867	19.9
Total operating expenses		514,627	53.4			379,356	52.9
Income from operations		49,154	5.0			56,867	7.9
Interest income, net		20,156	2.1			19,329	2.7
Other income (loss), net		147,000	15.3			(46,421)	(6.5)
Income (loss) before provision for income taxes		216,310	22.4			29,775	4.1
Provision for (benefit from) income taxes		42,295	4.4			(27,784)	(3.9)
Net income	$	174,015	18.0	%	$	57,559	8.0	%

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


	Six Months Ended June 30,
	2024				2023
United States	$	817,907	85	%	$	612,859	85	%
Other Countries		146,928	15			104,789	15
Total	$	964,835	100	%	$	717,648	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):


	Six Months Ended June 30,								Dollar		Percent
	2024				2023				Change		Change
TASER segment:
TASER Devices (Professional)	$	203,300	21.1	%	$	152,447	21.2	%	$	50,853	33.4	%
Cartridges		121,613	12.6			95,225	13.3			26,388	27.7
Axon Evidence and Cloud Services		26,436	2.7			15,695	2.2			10,741	68.4
Extended Warranties		17,434	1.8			15,385	2.1			2,049	13.3
Other (1)		6,923	0.7			9,940	1.4			(3,017)	(30.4)
Total TASER segment		375,706	38.9			288,692	40.2			87,014	30.1
Software and Sensors segment:
Axon Body Cameras and Accessories		110,229	11.4			71,578	10.0			38,651	54.0
Axon Fleet Systems		54,988	5.7			68,932	9.6			(13,944)	(20.2)
Axon Evidence and Cloud Services		368,193	38.2			250,416	34.9			117,777	47.0
Extended Warranties		36,784	3.8			29,251	4.1			7,533	25.8
Other (2)		18,935	2.0			8,779	1.2			10,156	115.7
Total Software and Sensors segment		589,129	61.1			428,956	59.8			160,173	37.3
Total net sales	$	964,835	100.0	%	$	717,648	100.0	%	$	247,187	34.4

	(1)	TASER segment “Other” includes smaller categories, such as VR hardware, weapons training revenue such as revenue associated with our Master Instructor School, and TASER consumer device sales.

	(2)	Software and Sensors segment “Other” includes revenue from items including Signal Sidearm, Interview Room and Axon Air.

Net sales for the TASER segment increased $87.0 million or 30.1% during the six months ended June 30, 2024, primarily due to an increase of $50.9 million in TASER devices and $26.4 million in cartridge revenue. The increase is primarily related to increased TASER 10 device and cartridge volumes. The increase in revenue from Axon Evidence and cloud services of $10.7 million was driven by an increase in TASER software as well as more users on our VR platform.

Net sales for the Software and Sensors segment increased $160.2 million, or 37.3%, during the six months ended June 30, 2024, as we continued to add users and associated devices to our network. The increase in the aggregate number of users and the growing adoption of our premium add-on features by existing customers drove the majority of the increase in Axon Evidence revenue, totaling $117.8 million, as well as increases in professional services revenue from Fleet installations. Axon Body cameras and accessories revenue increased $38.7 million due to higher units sales. Partially offsetting the increase was a $13.9 million decrease in Axon Fleet systems revenue primarily reflecting lower unit volumes on more normalized deployment timelines. An increase in cameras, docks and Fleet systems in the field drove the $7.5 million increase in extended warranties, as most of those devices are sold with extended warranties. The $10.2 million increase in “Other” revenue was primarily 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 55.8% from 61.3% for the six months ended June 30, 2024 and 2023, respectively. The decrease was primarily due to increased stock-based compensation expense. Excluding the impacts of stock-based compensation expense, gross margin for the TASER segment is 62.4% for the six months ended June 30, 2024, compared to 61.6% for the same period in 2023. The increase is primarily due to the absence of inventory reserve charges incurred in the first quarter of 2023 and investments in automation and cost reduction initiatives.

As a percentage of net sales, gross margin for the Software and Sensors segment decreased to 60.1% from 60.5% for the six months ended June 30, 2024 and 2023, respectively. Within the Software and Sensors segment, hardware gross margin was 38.8% for the six months ended June 30, 2024 compared to 45.4% for the same period in 2023. Excluding the

impacts of stock-based compensation expense and intangibles amortization, hardware gross margin decreased to 43.4% for the six months ended June 30, 2024, compared to 45.6% for the same period in 2023 due to manufacturing overhead reallocations made in the second quarter of 2023 and inventory reserve charges associated with legacy products in second quarter of 2024. Service margin increased to 72.6% for the six months ended June 30, 2024 compared to 71.3% for the same period in 2023. Excluding the impacts of stock-based compensation expense and intangibles amortization, service margin increased to 74.8% for the six months ended June 30, 2024, compared to 72.0% for the same period in 2023, due to cloud and professional services cost efficiencies.

For the six month period ended June 30, 2024, we have seen an increase in stock based compensation expense within our 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):


	Six Months Ended June 30,						Dollar		Percent
	2024			2023			Change		Change
Total sales, general and administrative expenses	$	322,096		$	236,489		$	85,607	36.2	%
As a percentage of net sales		33.4	%		33.0	%

Stock-based compensation expense increased $31.4 million in comparison to the prior-year comparable period, which was primarily related to the 2024 Employee XSP and the 2024 CEO Performance Award that were approved by shareholders in the 2024 Annual Meeting of Shareholders and increased headcount.

Salaries, benefits, and bonus expense increased $14.0 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 expenses increased $15.0 million in comparison to the prior-year comparable period. The increase was partially attributable to an increase in travel expense of $5.2 million due to higher seasonal travel for company events compared to the prior-year comparable period. Commissions increased $7.4 million as a result of higher revenue.

Professional and consulting expenses increased $12.0 million in comparison to the prior-year comparable period, which was primarily attributable to transaction costs related to the acquisition of Fusus and expected acquisition of Dedrone.

Research and Development Expenses

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


	Six Months Ended June 30,						Dollar		Percent
	2024			2023			Change		Change
Total research and development expenses	$	192,531		$	142,867		$	49,664	34.8	%
As a percentage of net sales		20.0	%		19.9	%

Salaries, benefits, and bonus expense increased $27.9 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 $17.2 million in comparison to the prior-year comparable period, which was primarily related to the 2024 Employee XSP that was approved by shareholders in the 2024 Annual Meeting of Shareholders and increased headcount.

Interest Income, Net

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


	Six Months Ended June 30,
	2024		2023
Interest income	$	23,783	$	22,790
Interest expense		(3,627)		(3,461)
Total interest income, net	$	20,156	$	19,329

Other Income (Loss), Net

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


	Six Months Ended June 30,
	2024		2023
Realized and unrealized gain (loss) on fair value adjustments of strategic investments, net	$	118,089	$	(71,902)
Unrealized gain on marketable securities, net		29,610		25,560
Gain (loss) on foreign currency transactions, net		53		(82)
Other, net		(752)		3
Other income (loss), net	$	147,000	$	(46,421)

Provision for Income Taxes

Our estimated annual effective income tax rate for 2024, before discrete period adjustments, is 22.9%, 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, partially 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 $7.5 million discrete tax benefit associated with net windfalls related to stock-based compensation for RSUs and PSUs that vested during the six months ended June 30, 2024.

Provision for (benefit from) income taxes and effective tax rates were as follows (dollars in thousands):


	Six Months Ended June 30,
	2024			2023			Change
Provision for (benefit from) income taxes	$	42,295		$	(27,784)		$	70,079
Effective tax rate		19.6	%		(93.3)	%		112.9	%

Net Income

We recorded net income of $174.0 million for the six months ended June 30, 2024 compared to net income of $57.6 million for the same period in 2023. Net income per basic share was $2.31 for the six months ended June 30, 2024 compared to $0.78 net income per basic share for the same period in 2023. Net income per diluted share was $2.25 for the six months ended June 30, 2024 compared to $0.77 net income per diluted share for the comparable period in 2023.

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, noncash stock-based compensation expense, fair value adjustments to strategic investments and marketable securities, transaction costs related to acquisitions and strategic investments, costs related to antitrust litigation 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 noncash 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				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2024		2023		2024		2023
Net income	$	40,797	$	12,420	$	174,015	$	57,559
Depreciation and amortization		13,000		7,480		24,564		14,169
Interest expense		1,871		1,737		3,627		3,461
Investment interest income		(11,653)		(11,400)		(23,783)		(22,790)
Provision for (benefit from) income taxes		9,793		(24,529)		42,295		(27,784)
EBITDA	$	53,808	$	(14,292)	$	220,718	$	24,615

Non-GAAP adjustments:
Stock-based compensation expense		74,821		31,891		149,936		66,241
Unrealized (gain) loss on strategic investments and marketable securities, net		(7,967)		61,912		(105,386)		46,342
Realized gain on remeasurement of previously held minority interest, net		(21)		—		(42,313)		—
Transaction costs related to strategic investments and acquisitions		2,636		455		8,993		1,298
Loss on disposal, abandonment, and impairment of property, equipment and intangible assets, net		—		24		—		180
Insurance recoveries		—		(789)		—		(789)
Costs related to antitrust litigation		—		1		224		1
Payroll taxes related to 2019 XSPP vesting and 2018 CEO Performance Award option exercises		—		2,368		—		8,760
Adjusted EBITDA	$	123,277	$	81,570	$	232,172	$	146,648

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


	Three Months Ended June 30, 2024									Three Months Ended June 30, 2023
				Software and									Software and
	TASER			Sensors			Total			TASER			Sensors			Total
Gross margin	$	119,008		$	184,727		$	303,735		$	93,357		$	138,764		$	232,121
Stock-based compensation expense		4,975			3,542			8,517			632			1,046			1,678
Amortization of acquired intangible assets		—			2,976			2,976			—			—			—
Adjusted gross margin	$	123,983		$	191,245		$	315,228		$	93,989		$	139,810		$	233,799
Gross margin		60.4	%		60.1	%		60.3	%		60.5	%		63.0	%		62.0	%
Adjusted gross margin		62.9	%		62.3	%		62.5	%		60.9	%		63.5	%		62.4	%


	Six Months Ended June 30, 2024									Six Months Ended June 30, 2023
				Software and									Software and
	TASER			Sensors			Total			TASER			Sensors			Total
Gross margin	$	209,698		$	354,083		$	563,781		$	176,876		$	259,347		$	436,223
Stock-based compensation expense		24,756			13,356			38,112			942			2,056			2,998
Amortization of acquired intangible assets		—			4,662			4,662			—			—			—
Adjusted gross margin	$	234,454		$	372,101		$	606,555		$	177,818		$	261,403		$	439,221
Gross margin		55.8	%		60.1	%		58.4	%		61.3	%		60.5	%		60.8	%
Adjusted gross margin		62.4	%		63.2	%		62.9	%		61.6	%		60.9	%		61.2	%

Liquidity and Capital Resources

Summary


	June 30, 2024		December 31, 2023		Dollar Change
Cash and cash equivalents	$	566,452	$	598,545	$	(32,093)
Available-for-sale investments		402,470		644,054		(241,584)
Total	$	968,922	$	1,242,599	$	(273,677)

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 Credit Agreement of $200.0 million revolving credit facility is available for additional working capital needs or investment opportunities.

As of June 30, 2024, no amounts were drawn under the Credit Agreement and outstanding letters of credit totaled $8.0 million. Advances under the line of credit bear interest at Term SOFR plus 1.25 to 1.75% per year determined in accordance with a pricing grid based on our net debt to earnings before interest expense, taxes, depreciation and amortization ratio, which for the purposes of the Credit Agreement excludes investment interest income. “SOFR” is defined as a rate equal to the secured overnight financing rate as administered by the Federal Reserve Bank of New York or a successor administrator of the secured overnight financing rate. As of June 30, 2024, we are in compliance with the associated covenants under the Credit Agreement.

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):


	Six Months Ended June 30,					Dollar
	2024		2023			Change
Operating activities	$	66,825	$	(13,667)	$	80,492
Investing activities		(91,905)		81,256		(173,161)
Financing activities		(4,895)		52,254		(57,149)
Effect of exchange rate changes on cash and cash equivalents		(2,086)		806		(2,892)
Net increase (decrease) in cash and cash equivalents and restricted cash	$	(32,061)	$	120,649	$	(152,710)

Operating activities

Net cash provided by operating activities was $66.8 million for the first six months of 2024, while we used $13.7 million in the comparable period in the prior year.  The $80.5 million increase is due to changes in the following (in thousands): 


	Six Months Ended June 30,					Dollar
	2024		2023			Change
Net income	$	174,015	$	57,559		116,456
Stock-based compensation		149,936		66,241		83,695
Fair value adjustments on strategic investments and marketable securities, net		(147,699)		46,342		(194,041)
Deferred income taxes		(7,755)		(37,605)		29,850
Inventory and accounts payable		(51,187)		(79,561)		28,374
Accounts and notes receivable and other current assets		(64,765)		(151,495)		86,730
Deferred revenue		(12,067)		69,886		(81,953)
Other, net		26,347		14,966		11,381
Net cash provided by (used in) operating activities	$	66,825	$	(13,667)	$	80,492

Net cash provided by operating activities was $66.8 million for the first six months ended June 30, 2024 compared to cash used in operating activities of $13.7 million for the comparable period in the prior year. The net operating cash inflow in the current period is driven by net income of $174.0 million, noncash income statement items totaling $20.8 million, and a decrease of $128.0 million for the net change in operating assets and liabilities. Included in noncash items was $149.9 million in stock-based compensation, an increase of $83.7 million for the comparable period in the period year. The increase is primarily related to the impacts of the 2024 Employee XSP and the 2024 CEO Performance Award grants along with the enhanced equity compensation opportunities provided to employees with income below a certain threshold. Offsetting the increase in noncash items was $147.7 million in fair value adjustments for the realized and unrealized gains (losses) on our strategic investments and marketable securities. The change in accounts and notes receivable is largely due to increased cash collection efficiency. This is partly offset by the change in deferred revenue due to the timing of billing events. The change in inventory and accounts payable is largely due to advanced raw material purchases for Axon Body 4 and TASER 10 CEDs to support future sales. The change in deferred income taxes is primarily driven by the Flock mark-to-market gain in the first three months ended March 31, 2024 as well as additional tax amortization of intangibles and R&D capitalization, partially offset by additional GAAP expense related to unvested stock compensation.

Investing activities

Net cash used in investing activities was $91.9 million for the six months ended June 30, 2024 compared to cash provided by investing activities of $81.3 million for the comparable period in the prior year. The net investing cash outflow is driven by $237.8 million for our business acquisition, $76.6 million for strategic investments, and $27.5 million for purchases of property and equipment, net of proceeds, partially offset by $250.0 million of proceeds from calls, maturities and sales of available-for-sale investments, net of purchases. This net cash outflow is primarily driven by greater business acquisition and strategic investment activities in the current period, when contrasted with the prior comparable period.

Financing activities

Net cash used in financing activities was $4.9 million for the six months ended June 30, 2024 compared to cash provided by financing activities of $52.3 million for the comparable period in the prior year. The net financing cash outflow in the current period is driven by the payment of income and payroll taxes on behalf of employees who net-settled stock awards during the period, whereas the net financing cash inflow in the prior comparable period was primarily driven by net proceeds from our ATM offering and cash received from the exercise of stock options where shares were sold to cover the exercise price, partially offset by 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 14 to our condensed consolidated financial statements included in Part 1, Item 1 of 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 six months ended June 30, 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.

Stock-Based Compensation

On May 10, 2024, our shareholders approved the 2024 Employee XSP. The 2024 Employee XSP includes an approved pool of shares of common stock to be reserved for grants of awards of the 2024 XSUs to employees under the 2024 Employee XSP. The 2024 XSUs are grants of performance-based RSUs that vest in seven substantially equal tranches. The tranches will vest upon certification by the Compensation Committee of the Board of Directors upon achievement of three independent vesting conditions: (1) stock price goals; (2) operational goals; and (3) minimum service conditions.

Additionally, shareholders approved the grant of the 2024 CEO Performance Award to our CEO, Patrick W. Smith. The stock price goals and operational goals under the 2024 CEO Performance Award are identical to those under the 2024 Employee XSP, but Mr. Smith is subject to a longer minimum required service period.

Refer to Note 12 included in Part 1, Item 1 of this Quarterly Report on Form 10-Q for further discussion.

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 June 30, 2024, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $0.9 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 $8.0 million at June 30, 2024. At June 30, 2024, there was no amount outstanding under the line of credit, and the available borrowing under the line of credit was $192.0 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 June 30, 2024.

There was no change in our internal control over financial reporting during the quarter ended June 30, 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 14 to our condensed consolidated financial statements included in Part 1, Item 1 of 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 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 sufficiently disruptive 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 three 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 d

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Item 5. Other Information

The table below describes the contracts, instructions or written plans for the purchase or sale of securities adopted by our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) during the three months ended June 30, 2024, that are intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).


Name and Title	Adoption Date	Expiration Date	Aggregate Number of Securities to be Sold
Jeffrey Kunins, Chief Product Officer and Chief Technology Officer (1)	May 15, 2024	December 30, 2024	21,808
Brittany Bagley, Chief Operating Officer and Chief Financial Officer	May 16, 2024	December 31, 2024	2,017
Michael Garnreiter, Director	May 17, 2024	May 17, 2025	5,000
Jeri Williams, Director	May 23, 2024	December 31, 2024	330
Patrick W. Smith, Chief Executive Officer and Director (2)	May 24, 2024	December 31, 2025	789,071
Julie A. Cullivan, Director	June 6, 2024	May 30, 2025	1,557

	(1)	On May 15, 2024, Jeffrey Kunins, our Chief Product Officer and Chief Technology Officer, adopted a “Rule 10b5-1 trading arrangement” (as defined in Item 408(a) of Regulation S-K) intended to satisfy the affirmative defense of Rule 10b5-1(c) under the Exchange Act pursuant to which he may sell, on or prior to December 30, 2024, up to 21,808 shares of our common stock, excluding the potential effect of shares withheld for taxes.

	(2)	On May 24, 2024, Patrick Smith, our Chief Executive Officer, adopted a “Rule 10b5-1 trading arrangement” (as defined in Item 408(a) of Regulation S-K) intended to satisfy the affirmative defense of Rule 10b5-1(c) under the Exchange Act pursuant to which he may sell, on or prior to December 31, 2025, (i) a number of shares of our common stock, the amount of which is not yet determinable, sufficient to cover the exercise costs and taxes associated with an exercise of up to 515,931 options and (ii) up to an additional 273,140 shares of our common stock resulting from previously exercised options.

In addition, 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).

During the three months ended June 30, 2024, certain of our officers made elections to have shares sold to cover withholding taxes due upon the vesting of RSUs consistent with the Company’s historical practice. Based on the Company’s transition to quarterly vesting schedules for RSU awards and a change to withhold shares to cover withholding taxes for all officers (as defined in Rule 16a-1(f) under the Exchange Act), such arrangements were cancelled prior to any transactions occurring.

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

Item 6. Exhibits



10.1		Axon Enterprise, Inc. Amended and Restated 2022 Stock Incentive Plan, effective as of May 10, 2024 (incorporated by reference to the Definitive Proxy Statement, filed on March 29, 2024)
10.2		Axon Enterprise, Inc. 2024 eXponential Stock Plan, effective May 10, 2024 (incorporated by reference to the Definitive Proxy Statement, filed on March 29, 2024)
10.3		2024 CEO Performance Award, effective as of December 22, 2023 (incorporated by reference to the Definitive Proxy Statement, filed on March 29, 2024)
10.4+*		Consulting Agreement by and between Axon Enterprise, Inc. and Mark Kroll, effective May 13, 2024
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 June 30, 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:	August 6, 2024
		By:	/s/ PATRICK W. SMITH
			Chief Executive Officer
			(Principal Executive Officer)

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