Company Quick10K Filing
Axon Enterprise
Price58.31 EPS0
Shares60 P/E228
MCap3,502 P/FCF176
Net Debt-204 EBIT18
TEV3,298 TEV/EBIT181
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-08
10-K 2019-12-31 Filed 2020-02-28
10-Q 2019-09-30 Filed 2019-11-08
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10-Q 2019-03-31 Filed 2019-05-10
10-K 2018-12-31 Filed 2019-02-27
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10-K 2017-12-31 Filed 2018-03-01
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10-K 2016-12-31 Filed 2017-03-06
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10-K 2015-12-31 Filed 2016-03-07
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10-Q 2015-06-30 Filed 2015-08-06
10-Q 2015-03-31 Filed 2015-05-08
10-K 2014-12-31 Filed 2015-03-12
10-Q 2014-09-30 Filed 2014-11-05
10-Q 2014-06-30 Filed 2014-08-05
10-Q 2014-03-31 Filed 2014-05-06
10-K 2013-12-31 Filed 2014-03-10
10-Q 2013-09-30 Filed 2013-11-05
10-Q 2013-03-31 Filed 2013-05-07
10-K 2012-12-31 Filed 2013-03-08
10-Q 2012-09-30 Filed 2012-11-09
10-Q 2012-06-30 Filed 2012-08-09
10-Q 2012-03-31 Filed 2012-05-10
10-K 2011-12-31 Filed 2012-03-13
10-Q 2011-09-30 Filed 2011-11-09
10-Q 2011-06-30 Filed 2011-08-08
10-Q 2011-03-31 Filed 2011-05-09
10-K 2010-12-31 Filed 2011-03-14
10-Q 2010-09-30 Filed 2010-11-08
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10-K 2009-12-31 Filed 2010-03-15
8-K 2020-06-16
8-K 2020-06-12
8-K 2020-05-29
8-K 2020-05-07
8-K 2020-02-27
8-K 2020-01-04
8-K 2020-01-03
8-K 2019-11-07
8-K 2019-10-28
8-K 2019-10-10
8-K 2019-08-23
8-K 2019-08-08
8-K 2019-06-13
8-K 2019-05-31
8-K 2019-05-09
8-K 2019-02-26
8-K 2019-02-12
8-K 2018-12-31
8-K 2018-12-19
8-K 2018-12-19
8-K 2018-12-13
8-K 2018-11-06
8-K 2018-10-07
8-K 2018-09-14
8-K 2018-08-20
8-K 2018-08-07
8-K 2018-06-21
8-K 2018-05-24
8-K 2018-05-16
8-K 2018-05-08
8-K 2018-04-06
8-K 2018-02-27
8-K 2018-02-27

AAXN 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 aaxn-20200331xex31d1.htm
EX-31.2 aaxn-20200331xex31d2.htm
EX-32 aaxn-20200331xex32.htm

Axon Enterprise Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
0.80.60.50.30.20.02012201420172020
Assets, Equity
0.20.10.10.0-0.0-0.12012201420172020
Rev, G Profit, Net Income
0.30.20.10.0-0.1-0.22012201420172020
Ops, Inv, Fin

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

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

85255

Scottsdale,  Arizona

(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

AAXN

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 April 30, 2020 was 59,825,208.

Table of Contents

AXON ENTERPRISE, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020

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, 2020 (Unaudited) and December 31, 2019

1

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2020 and 2019

2

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019

3

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019

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

37

Item 4. Controls and Procedures

38

PART II - OTHER INFORMATION

38

Item 1. Legal Proceedings

38

Item 1A. Risk Factors

38

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

39

Item 3. Defaults Upon Senior Securities

39

Item 4. Mine Safety Disclosures

39

Item 5. Other Information

39

Item 6. Exhibits

40

SIGNATURES

41

Table of Contents

Special Note Regarding Forward-Looking Statements

This 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: the impact of the COVID-19 pandemic; 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; our outlook for 2020 with respect to revenue, legal expenses relating to the FTC litigation, stock compensation expense, and income tax rate; trends relating to subscription plan programs and revenues; our anticipation that contracts with governmental customers will be fulfilled; expected trends, including the benefits of, research and development investments; the sufficiency of our liquidity and financial resources; that we may repurchase our common stock; expectations about customer behavior; the impact on our investment portfolio of changes in interest rates; trends in the percentage of our revenues denominated in foreign currencies; 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 Form 10-K for the year ended December 31, 2019. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Words such as “may,” “will,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions, as well as statements in future tense, identify forward-looking statements. However, not all forward-looking statements contain these identifying words.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. The following important factors could cause actual results to differ materially from those in the forward-looking statements: the potential global impacts of the COVID-19 pandemic; our exposure to cancellations of government contracts due to appropriation clauses, exercise of a cancellation clause, or non-exercise of contractually optional periods; our ability to design, introduce and sell new products or features; our ability to defend against litigation and protect our intellectual property, and the resulting costs of this activity; our ability to manage our supply chain and avoid production delays, shortages, and impacts to expected gross margins; the impact of stock compensation expense, impairment expense, and income tax expense on our financial results; customer purchase behavior, including adoption of our software as a service delivery model; negative media publicity regarding our products; the impact of product mix on projected gross margins; defects in our products; changes in the costs of product components and labor; loss of customer data, a breach of security, or an extended outage, including our reliance on third party cloud-based storage providers; exposure to international operational risks; delayed cash collections and possible credit losses due to our subscription model; changes in government regulations in the U.S. and in foreign markets, especially related to the classification of our product by the United States Bureau of Alcohol, Tobacco, Firearms and Explosives and to evolving regulations surrounding privacy and data protection; our ability to integrate acquired businesses; our ability to attract and retain key personnel; and counter-party risks relating to cash balances held in excess of FDIC insurance limits. Many events beyond our control may determine whether results we anticipate will be achieved. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements. The Annual Report on Form 10-K that we filed with the Securities and Exchange Commission ("SEC") on February 28, 2020 and this Quarterly Report on Form 10-Q list various important factors that could cause actual results to differ materially from expected and historical results. These factors are intended as cautionary statements for investors within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. Readers can find them under the heading “Risk Factors” in the Report on Form 10-K and in this Report on Form 10-Q, and investors should refer to them. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

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

ii

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AXON ENTERPRISE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

    

March 31,

December 31, 

2020

2019

(Unaudited)

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

156,540

$

172,250

Short-term investments

 

188,673

 

178,534

Accounts and notes receivable, net of allowance of $1,827 and $1,567 as of March 31, 2020 and December 31, 2019, respectively

 

147,945

 

146,878

Contract assets, net

 

43,959

 

38,102

Inventory

 

46,922

 

38,845

Prepaid expenses and other current assets

 

34,702

 

34,866

Total current assets

 

618,741

 

609,475

Property and equipment, net

 

43,065

 

43,770

Deferred tax assets, net

 

29,433

 

27,688

Intangible assets, net

 

11,929

 

12,771

Goodwill

 

24,752

 

25,013

Long-term investments

 

50,225

 

45,499

Long-term notes receivable, net of current portion

 

27,556

 

31,598

Long-term contract assets, net

12,293

9,644

Other assets

 

59,457

 

40,181

Total assets

$

877,451

$

845,639

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

31,568

$

25,874

Accrued liabilities

 

36,404

 

45,001

Current portion of deferred revenue

 

119,827

 

117,864

Customer deposits

 

3,325

 

2,974

Other current liabilities

 

3,891

 

3,853

Total current liabilities

 

195,015

 

195,566

Deferred revenue, net of current portion

 

91,886

 

87,936

Liability for unrecognized tax benefits

 

4,173

 

3,832

Long-term deferred compensation

 

3,430

 

3,936

Deferred tax liability, net

342

354

Other long-term liabilities

 

23,015

 

10,520

Total liabilities

 

317,861

 

302,144

Commitments and contingencies (Note 12)

 

  

 

  

Stockholders’ equity:

 

  

 

  

Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively

 

-

 

Common stock, $0.00001 par value; 200,000,000 shares authorized; 59,813,163 and 59,497,759 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively

 

1

 

1

Additional paid-in capital

 

543,305

 

528,272

Treasury stock at cost, 20,220,227 shares as of March 31, 2020 and December 31, 2019

 

(155,947)

 

(155,947)

Retained earnings

 

175,699

 

172,265

Accumulated other comprehensive loss

 

(3,468)

 

(1,096)

Total stockholders’ equity

 

559,590

 

543,495

Total liabilities and stockholders’ equity

$

877,451

$

845,639

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

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Table of Contents

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(in thousands, except per share data)

Three Months Ended March 31, 

    

2020

    

2019

Net sales from products

$

107,288

$

88,089

Net sales from services

 

39,874

 

27,721

Net sales

 

147,162

 

115,810

Cost of product sales

 

48,884

 

39,600

Cost of service sales

 

9,670

 

7,293

Cost of sales

 

58,554

 

46,893

Gross margin

 

88,608

 

68,917

Operating expenses:

 

  

 

  

Sales, general and administrative

 

63,027

 

42,892

Research and development

 

26,381

 

23,354

Total operating expenses

 

89,408

 

66,246

Income (loss) from operations

 

(800)

 

2,671

Interest and other income, net

 

941

 

2,313

Income before provision for income taxes

 

141

 

4,984

Benefit from income taxes

 

(3,933)

 

(1,435)

Net income

$

4,074

$

6,419

Net income per common and common equivalent shares:

 

  

 

  

Basic

$

0.07

$

0.11

Diluted

$

0.07

$

0.11

Weighted average number of common and common equivalent shares outstanding:

 

  

 

  

Basic

 

59,609

 

58,914

Diluted

 

60,394

 

59,751

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Net income

$

4,074

$

6,419

Foreign currency translation adjustments

 

(2,372)

 

50

Comprehensive income

$

1,702

$

6,469

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

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AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

    

    

    

    

    

    

    

Accumulated

    

Additional

Other

Total

Common Stock

Paid-in

Treasury Stock

Retained

Comprehensive

Stockholders’

Shares

Amount

Capital

Shares

Amount

Earnings

Loss

Equity

Balance, December 31, 2019

 

59,497,759

$

1

$

528,272

 

20,220,227

$

(155,947)

$

172,265

$

(1,096)

$

543,495

Cumulative effect of applying a change in accounting principle, net of tax

 

 

 

 

 

 

(640)

 

 

(640)

Issuance of common stock under employee plans, net

 

315,404

 

 

(5,162)

 

 

 

 

 

(5,162)

Stock-based compensation

 

 

 

20,195

 

 

 

 

 

20,195

Net income

 

 

 

 

 

 

4,074

 

 

4,074

Foreign currency translation adjustments

 

 

 

 

 

 

 

(2,372)

 

(2,372)

Balance, March 31, 2020

 

59,813,163

$

1

$

543,305

 

20,220,227

$

(155,947)

$

175,699

$

(3,468)

$

559,590

    

    

    

    

    

    

    

    

    

    

    

    

    

Accumulated

    

    

Additional

Other

Total

Common Stock

Paid-in

Treasury Stock

Retained

Comprehensive

Stockholders’

Shares

Amount

Capital

Shares

Amount

Earnings

Loss

Equity

Balance, December 31, 2018

    

58,810,637

    

$

1

    

$

453,400

    

20,220,227

    

$

(155,947)

    

$

171,383

    

$

(1,513)

    

$

467,324

Issuance of common stock under employee plans, net

 

298,649

 

 

(1,159)

 

 

 

 

 

(1,159)

Stock-based compensation

 

 

 

7,905

 

 

 

 

 

7,905

Net income

 

 

 

 

 

 

6,419

 

 

6,419

Foreign currency translation adjustments

 

 

 

 

 

 

 

50

 

50

Balance, March 31, 2019

 

59,109,286

$

1

$

460,146

 

20,220,227

$

(155,947)

$

177,802

$

(1,463)

$

480,539

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

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AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Three Months Ended March 31, 

    

2020

    

2019

Cash flows from operating activities:

 

  

 

  

Net income

$

4,074

$

6,419

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

Depreciation and amortization

 

2,881

 

2,800

Loss on disposal and abandonment of intangible assets

 

13

 

18

Loss on disposal and impairment of property and equipment, net

 

517

 

242

Stock-based compensation

 

20,195

 

7,905

Deferred income taxes

 

(1,548)

 

577

Unrecognized tax benefits

 

341

 

307

Other noncash, net

 

1,156

 

896

Provision for expected credit losses

902

Change in assets and liabilities:

 

 

Accounts and notes receivable and contract assets

 

(9,700)

 

(21,994)

Inventory

 

(8,630)

 

(3,936)

Prepaid expenses and other assets

 

2,277

 

(3,152)

Accounts payable, accrued and other liabilities

 

(3,562)

 

(7,284)

Deferred revenue

 

4,499

 

3,232

Net cash provided by (used in) operating activities

 

13,415

 

(13,970)

Cash flows from investing activities:

 

  

 

  

Purchases of investments

 

(99,512)

 

(105,322)

Proceeds from call / maturity of investments

 

84,315

 

Purchases of property and equipment

 

(2,209)

 

(5,271)

Proceeds from disposal of property and equipment

78

Purchases of intangible assets

 

(45)

 

(162)

Investment in unconsolidated affiliate

 

(4,700)

 

Net cash used in investing activities

 

(22,073)

 

(110,755)

Cash flows from financing activities:

 

  

 

  

Proceeds from options exercised

 

28

 

100

Income and payroll tax payments for net-settled stock awards

 

(5,190)

 

(1,259)

Net cash used in financing activities

 

(5,162)

 

(1,159)

Effect of exchange rate changes on cash and cash equivalents

 

(1,890)

 

67

Net decrease in cash and cash equivalents

 

(15,710)

 

(125,817)

Cash and cash equivalents and restricted cash, beginning of period

 

172,355

 

351,027

Cash and cash equivalents and restricted cash, end of period

$

156,645

$

225,210

Supplemental disclosures:

 

  

 

  

Cash and cash equivalents

$

156,540

$

223,642

Restricted cash (Note 1)

 

105

 

1,568

Total cash, cash equivalents and restricted cash shown in the statements of cash flows

$

156,645

$

225,210

Cash paid for income taxes, net of refunds

$

3,863

$

758

Non-cash transactions

 

  

 

  

Property and equipment purchases in accounts payable and accrued liabilities

$

617

$

328

Investment purchases in accounts payable

$

13,451

$

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

4

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Axon Enterprise, Inc. (“Axon,” the “Company,” "we," or "us") is a market-leading provider of law enforcement technology solutions. Our core mission is to protect life. We fulfill that mission through developing hardware and software products that advance the long term objectives of a) obsoleting the bullet, b) reducing social conflict, and c) enabling a fair and effective justice system.

Our headquarters in Scottsdale, Arizona houses our executive management, sales, marketing, certain engineering, manufacturing, and other administrative support functions. We also have a software engineering development center located in Seattle, Washington, and subsidiaries located in Australia, Canada, Finland, Hong Kong, Germany, India, Italy, the Netherlands, the United Kingdom, and Vietnam.

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

Basis of Presentation and Use of Estimates

These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information related to our organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) has been condensed or omitted. The accounting policies followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed in our annual consolidated financial statements for the year ended December 31, 2019, as filed on Form 10-K, with the exception of our adoption of certain accounting pronouncements which we describe below. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with our Form 10-K for the year ended December 31, 2019. The results of operations for the three months ended March 31, 2020 and 2019 are not necessarily indicative of the results to be expected for the full year (or any other period). Significant estimates and assumptions in these unaudited condensed consolidated financial statements include:

product warranty reserves,
inventory valuation,
revenue recognition,
expected credit loss reserves,
valuation of goodwill, intangible and long-lived assets,
recognition, measurement and valuation of current and deferred income taxes,
stock-based compensation,
recognition and measurement of lease liabilities,
recognition and measurement of contingencies and accrued litigation expense, and
fair values of identified tangible and intangible assets acquired and liabilities assumed in business combinations.

Actual results could differ materially from those estimates.

Segment Information

Our operations are comprised of two reportable segments: the manufacture and sale of conducted electrical devices ("CEDs"), batteries, accessories, extended warranties and other products and services (the “TASER” segment);

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

and the development, manufacture, and sale of software and sensors, which includes the sale of devices, wearables, applications, cloud and mobile products, and services (collectively, the “Software and Sensors” segment). In both segments, we report sales of products and services. Service revenue in both segments includes sales related to Axon Evidence. In the Software and Sensors segment, service revenue also includes other recurring cloud-hosted software revenue and related professional services. Collectively, this revenue is sometimes referred to as "Axon Cloud revenue."  

Reportable segments are determined based on discrete financial information reviewed by our Chief Executive Officer who is our chief operating decision maker ("CODM"). We organize and review operations based on products and services, and currently there are no operating segments that are aggregated. We perform an analysis of our reportable segments at least annually. Additional information related to our business segments is summarized in Note 14.

Geographic Information and Major Customers / Suppliers

For the three months ended March 31, 2020 and 2019, no individual country outside the U.S. represented more than 10% of total net sales. Individual sales transactions in the international market are generally larger and occur more intermittently than in the domestic market due to the profile of our customers. For the three months ended March 31, 2020 and 2019, no customer represented more than 10% of total net sales. At March 31, 2020 and December 31, 2019, no customer represented more than 10% of the aggregate balance of accounts and notes receivable and contract assets.

We currently purchase both off the shelf and custom components, including, but not limited to, finished circuit boards, injection-molded plastic components, small machined parts, custom cartridge components, electronic components, and off the shelf sub-assemblies from suppliers located in the U.S., Canada, China, Israel, Mexico, Republic of Korea, and Taiwan. Although we currently obtain many of these components from single source suppliers, we own the injection molded component tooling, most of the designs, and the test fixtures used in their production for all custom components. As a result, we believe we could obtain alternative suppliers in most cases without incurring significant production delays. We also strategically hold safety stock levels on custom components to further reduce this risk. For off the shelf components, we believe that in most cases there are readily available alternative suppliers who can consistently meet our needs for these components. We acquire most of our components on a purchase order basis and do not have any significant long-term contracts with component suppliers.

Income per Common Share

Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. Diluted income per share reflects the potential dilution from outstanding stock options and unvested restricted stock units. The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):

Three Months Ended March 31, 

    

2020

    

2019

Numerator for basic and diluted earnings per share:

 

  

 

  

Net income

$

4,074

$

6,419

Denominator:

 

  

 

  

Weighted average shares outstanding

 

59,609

 

58,914

Dilutive effect of stock-based awards

 

785

 

837

Diluted weighted average shares outstanding

 

60,394

 

59,751

Anti-dilutive stock-based awards excluded

 

12,161

 

12,125

Net income per common share:

 

 

  

Basic

$

0.07

$

0.11

Diluted

$

0.07

$

0.11

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Standard Warranties

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

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

Three Months Ended March 31, 

    

2020

2019

Balance, beginning of period

$

1,476

$

898

Utilization of reserve

 

(171)

 

(123)

Warranty expense (benefit)

 

(85)

 

252

Balance, end of period

$

1,220

$

1,027

Fair Value Measurements and Financial Instruments

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

 

Level 1 – Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.
Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.
Level 3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect our own assumptions about inputs that market participants would use in pricing an asset or liability.

We have cash equivalents and investments, which at March 31, 2020 and December 31, 2019 were comprised of money market funds, certificates of deposit, commercial paper, corporate bonds, corporate notes, municipal bonds, U.S. Government agency bonds, U.S. Treasury bills, U.S. Treasury inflation-protected securities, and U.S. Treasury repurchase agreements. See additional disclosure regarding the fair value of our cash equivalents and investments in Note 3. Included in the balance of other assets as of March 31, 2020 and December 31, 2019 was $3.5 million and $4.2 million, respectively, related to corporate-owned life insurance policies which are used to fund our deferred compensation plan. We determine

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

the fair value of insurance contracts by obtaining the cash surrender value of the contracts from the issuer, a Level 2 valuation technique. During the three months ended March 31, 2020, we made an investment of $4.7 million in preferred stock and recorded preferred stock warrants at a fair value of $2.6 million, which is also included in the balance of other assets as of March 31, 2020. The estimated fair value of the investments was determined based on Level 3 inputs. As of March 31, 2020, management estimated that the fair value of the investment equaled its carrying value.

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

Restricted Cash

Restricted cash balances as of March 31, 2020 and December 31, 2019 included $0.1 million primarily related to funds held in an international bank account for a country in which we are required to maintain a minimum balance to operate. Approximately half of the balance was included in prepaid expenses and other current assets on our condensed consolidated balance sheets, with the remainder included in other assets.

Valuation of Goodwill, Intangibles and Long-lived Assets

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

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

Recently Issued Accounting Guidance

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 includes an impairment model (known as the current expected credit loss model) on financial instruments and other commitments that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The use of forecasted information is intended to incorporate more timely information in the estimate of expected credit loss. This ASU also requires enhanced disclosures relating to significant estimates and judgments used in estimating credit losses, as well as credit quality. Upon adoption, we recorded a noncash cumulative effect adjustment to retained earnings of $0.6 million, net of $0.2 million of income taxes, on the opening consolidated balance sheet as of January 1, 2020,  reflecting an overall increase to the allowance for expected credit losses. See Notes 3 and 4 for further disclosures related to Topic 326.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. The amendments apply to the disclosures of changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Adoption of this ASU on January 1, 2020 did not have a material impact on our consolidated financial statements.

Effective the first quarter of 2021:

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The amendments in the ASU are effective for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. Adoption of this ASU is not expected to have a material impact on our consolidated financial statements.

In January 2020, the FASB issued ASU No. 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (a Consensus of the Emerging Issues Task Force). The guidance clarifies the interaction between ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and the ASU on equity method investments. ASU 2016-01 provides companies with an alternative to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs. ASU 2020-01 clarifies that for purposes of applying the Topic 321 measurement alternative, an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting under Topic 323, immediately before applying or upon discontinuing the equity method. In addition, the new ASU provides direction that a company should not consider whether the underlying securities would be accounted for under the equity method or the fair value option when it is determining the accounting for certain forward contracts and purchased options, upon either settlement or exercise. The amendments in this update become effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, and the amendments are to be applied prospectively. Adoption of this ASU is not expected to have a material impact on our consolidated financial statements.

Reclassification of Prior Year Presentation

Certain prior year amounts, including the long-term portion of contract assets, have been reclassified for consistency with the current year presentation. These reclassifications are not material and had no effect on the reported results of operations.

9

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

2. Revenues

Nature of Products and Services

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

Three Months Ended March 31, 2020

Three Months Ended March 31, 2019

    

    

Software and

    

    

    

Software and

    

TASER

Sensors

Total

TASER

Sensors

Total

TASER 7

$

15,326

$

$

15,326

$

9,954

$

$

9,954

TASER X26P

 

11,061

 

 

11,061

 

15,872

 

 

15,872

TASER X2

 

14,075

 

 

14,075

 

13,085

 

 

13,085

TASER Pulse and Bolt

 

1,200

 

 

1,200

 

670

 

 

670

Single cartridges

 

26,625

 

 

26,625

 

19,160

 

 

19,160

Axon Body

 

 

12,823

 

12,823

 

 

6,445

 

6,445

Axon Flex

 

 

1,183

 

1,183

 

 

1,224

 

1,224

Axon Fleet

 

 

4,775

 

4,775

 

 

3,516

 

3,516

Axon Dock

 

 

4,951

 

4,951

 

 

3,312

 

3,312

Axon Evidence and cloud services

 

498

 

39,154

 

39,652

 

36

 

27,618

 

27,654

TASER Cam

 

 

927

 

927

 

 

903

 

903

Extended warranties

 

4,977

 

5,458

 

10,435

 

4,316

 

4,930

 

9,246

Other

 

2,133

 

1,996

 

4,129

 

2,298

 

2,471

 

4,769

Total

$

75,895

$

71,267

$

147,162

$

65,391

$

50,419

$

115,810

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

Three Months Ended March 31, 

2020

2019

United States

    

$

117,463

    

80

%  

$

94,333

    

81

%  

Other countries

 

29,699

 

20

 

21,477

 

19

Total

$

147,162

 

100

%  

$

115,810

 

100

%  

Contract Balances

The following table presents our contract assets, contract liabilities and certain information related to these balances as of and for the three months ended March 31, 2020 (in thousands):

    

March 31, 2020

Contract assets, net

$

56,252

Contract liabilities (deferred revenue)

 

211,713

Revenue recognized in the period from:

 

  

Amounts included in contract liabilities at the beginning of the period

 

48,465

10

Table of Contents

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

March 31, 2020

December 31, 2019

    

Current

    

Long-Term

    

Total

    

Current

    

Long-Term

    

Total

Warranty:

 

  

 

  

 

  

 

  

 

  

 

  

TASER

$

12,963

$

15,469

$