AXON ENTERPRISE, INC. The following discussion and analysis of our financial condition as ofSeptember 30, 2020 , and results of operations For the three and nine months endedSeptember 30, 2020 and 2019, should be read in conjunction with the condensed consolidated financial statements and related notes included in this Report on Form 10-Q and the audited consolidated financial statements in our 2019 Annual Report on Form 10-K filed with theSEC onFebruary 28, 2020 . 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 "Risk Factors" in our 2019 Annual Report on Form 10-K. See also "Special Note Regarding Forward-Looking Statements" on page ii of this Report on Form 10-Q.
Overview
Axon is a global network of devices, apps, training and people that helps public safety personnel become smarter and safer. Our technologies give law enforcement the confidence, focus and time they need to protect their communities. Our products impact every aspect of an officer's day-to-day experience. Our core mission is to protect life. We fulfill that mission through developing hardware and software products that advance our long term vision of a) obsoleting the bullet, b) reducing social conflict, and c) enabling a fair and effective justice system. Our revenues for the three months endedSeptember 30, 2020 were$166.4 million , an increase of$35.6 million , or 27.2%, from the comparable period in the prior year. We had a loss from operations of$5.4 million compared to income from operations of$6.6 million for the same period in the prior year. Gross margin declined compared to the three months endedSeptember 30, 2019 primarily as a result of product mix and the fulfillment of several large shipments of lower-to-negative-margin body camera hardware to our largest customers. Increased operating expenses to support continued and future growth also contributed to the decline in operating results. Expenses for the three months endedSeptember 30, 2020 also reflected an increase of$10.1 million in stock-based compensation expense related to the CEO Performance Award and XSPP. An increase in litigation costs also contributed to the higher selling, general and administrative expense. For the three months endedSeptember 30, 2020 , we recorded a net loss of$0.9 million , which reflected an income tax benefit of$2.5 million , compared to net income of$6.1 million for the comparable period in the prior year. Our revenues for the nine months endedSeptember 30, 2020 were$454.9 million , an increase of$95.9 million , or 26.7%, from the comparable period in the prior year. We had a loss from operations of$19.9 million compared to income from operations of$8.0 million for the same period in the prior year. Gross margin improved compared to the nine months endedSeptember 30, 2019 as a result of the mix of higher-margin software revenues, with improvement partially offset by the fulfillment of several large shipments of lower-to-negative-margin body camera hardware to our largest customers. Increased operating expenses to support continued and future growth also contributed to the decline in operating results. Expenses for the nine months endedSeptember 30, 2020 also reflected an increase of$44.8 million in stock-based compensation expense related to the CEO Performance Award and XSPP. An increase in litigation costs also contributed to the higher selling, general and administrative expense. For the nine months endedSeptember 30, 2020 , we recorded a net loss of$27.6 million , which reflected income tax expense of$12.2 million , compared to net income of$13.3 million for the comparable period in the prior year.
COVID-19
In late 2019, COVID-19 was first detected inWuhan, China . InMarch 2020 theWorld Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread throughoutthe United States and world, has adversely affected workforces, economies, and financial markets globally, leading to an economic downturn. As an essential provider of products and services for law enforcement and other first responders, we remain focused on protecting the health and wellbeing of our employees while assuring the continuity of our business operations.
In response to the pandemic, Axon has taken a number of actions:
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Customer support:
? Free access to Axon Citizen cloud software to all public law enforcement
agencies for the remainder of 2020 to enable social distancing;
? A partnership with the
protective equipment ("PPE") for first responders;
? An online support center for our customers,
www.axon.com/covid-19-support-center; and
? Our annual Axon Accelerate user conference was held virtually in late August
2020.
Employee safety and manufacturing:
? Curbed all non-essential travel at the beginning of March;
? We continue to allow for a remote work model for office staff, with medical
screening for any employees
Mitigating contamination risk in our facilities through staggered shifts, the
? use of PPE, increased distancing, cleaning standards that exceed
access to an onsite registered nurse, and paying or subsidizing certain high-risk employees while they stay at home. Supply chain:
We previously took steps to diversify our supply chain and global manufacturing
? footprint, which have positioned us well to manage through the pandemic. Thus
far, we have been able to produce and ship our critical core products with
little to no interruption.
? We have proactively built up a safety stock of inventory to help meet strong
product demand while also preparing us to stagger factory work schedules.
We are continuously monitoring our supply chain to manage through potential
? impacts, finding alternate sources when available or working with foreign
regulators to ensure that our suppliers can provide parts. Shareholder engagement:
? We have pivoted our shareholder engagement to a virtual format.
o Our annual meeting was held virtually on
o We completed a follow-on equity offering in
marketing was conducted virtually; and
We will continue to participate in several upcoming investor conferences
o utilizing video conferencing. All investor materials and events are available
at investor.axon.com. We are in a strong liquidity position, with substantial cash and investments on hand, which are discussed in more detail under Liquidity and Capital Resources. We believe that our existing liquidity and other sources of funding will be sufficient to satisfy our currently anticipated cash requirements including capital expenditures, working capital requirements, potential acquisitions and other liquidity requirements through at least the next 12 months. Our expenses for the three months and nine months endedSeptember 30, 2020 increased by approximately$0.4 million and$4.1 million , respectively, for costs related to the pandemic. We expect ongoing increased costs related to the mitigation of contamination risk at our facilities. We expect these incremental costs will continue to be partially offset by savings on travel and events and other cost-savings measures. We have elected to participate in the social security deferral program offered under the Coronavirus Aid, Relief, and Economic Security Act, whereby we can defer payment of the employer portion of all social security taxes that would otherwise be payable fromMarch 27, 2020 throughDecember 31, 2020 . Payment of the deferred amount is due 50% onDecember 31, 2021 and 50% onDecember 31 ,
2022.
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Results of Operations
Three Months Ended
The following table presents data from our condensed consolidated statements of
operations as well as the percentage relationship to total net sales of items
included in our statements of operations (dollars in thousands):
Three Months Ended September 30,
2020 2019
Net sales from products $ 120,091 72.2 % $ 96,497 73.8 %
Net sales from services 46,351 27.8 34,340 26.2
Net sales 166,442 100.0 130,837 100.0
Cost of product sales 57,798 34.7 42,445 32.4
Cost of service sales 10,404 6.3 8,223 6.3
Cost of sales 68,202 41.0 50,668 38.7
Gross margin 98,240 59.0 80,169 61.3
Operating expenses:Sales, general and administrative 74,443 44.7
48,424 37.0 Research and development 29,246 17.6 25,129 19.2 Total operating expenses 103,689 62.3 73,553 56.2
Income (loss) from operations (5,449) (3.3) 6,616 5.1 Interest and other income, net 2,040 1.3 1,820 1.4 Income (loss) before provision for income taxes (3,409) (2.0) 8,436 6.5 Provision for (benefit from) income taxes (2,536) (1.5)
2,332 1.8
Net income (loss) $ (873) (0.5) % $ 6,104 4.7 %
The following table presents our revenues disaggregated by geography (in
thousands):
Three Months Ended September 30,
2020 2019
United States $ 143,380 86 % $ 110,809 85 %
Other countries 23,062 14 20,028 15
Total $ 166,442 100 % $ 130,837 100 %
International revenue increased compared to the prior year comparable period,
driven primarily by increased sales in the Americas , Asia Pacific , and Europe
regions.
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Net Sales
Net sales by product line were as follows (dollars in thousands):
Three Months Ended September 30, Dollar Percent
2020 2019 Change Change
TASER segment:
TASER 7 $ 21,702 13.0 % $ 20,214 15.4 % $ 1,488 7.4 %
TASER X26P 9,766 5.9 11,578 8.8 (1,812) (15.7)
TASER X2 14,494 8.7 13,241 10.1 1,253 9.5
TASER Pulse 2,981 1.8 1,132 0.9 1,849 163.3
Cartridges 26,335 15.8 18,901 14.4 7,434 39.3Axon Evidence and cloud services 692 0.4 218
0.2 474 217.4 Extended warranties 5,265 3.2 4,543 3.5 722 15.9 Other 3,171 1.9 1,916 1.5 1,255 65.5 Total TASER segment 84,406 50.7 71,743 54.8 12,663 17.7 Software and Sensors segment: Axon Body 15,978 9.6 6,763 5.2 9,215 136.3 Axon Flex 1,589 1.0 1,670 1.3 (81) (4.9) Axon Fleet 4,215 2.5 4,341 3.3 (126) (2.9) Axon Dock 5,708 3.4 3,358 2.6 2,350 70.0
Axon Evidence and cloud services 45,450 27.3 34,022
26.0 11,428 33.6 Extended warranties 6,514 3.9 4,714 3.6 1,800 38.2 Other 2,582 1.6 4,226 3.2 (1,644) (38.9)
Total Software and Sensors segment 82,036 49.3 59,094
45.2 22,942 38.8 Total net sales$ 166,442 100.0 %$ 130,837 100.0 %$ 35,605 27.2 %
Net unit sales for TASER segment products and Software and Sensors segment products were as follows:
Three Months Ended September 30, Unit Percent
2020 2019 Change Change
TASER 7 15,908 17,674 (1,766) (10.0)
TASER X26P 8,119 10,766 (2,647) (24.6)
TASER X2 10,078 9,819 259 2.6
TASER Pulse 12,811 3,923 8,888 226.6
Cartridges 852,980 566,347 286,633 50.6
Axon Body 62,873 22,037 40,836 185.3
Axon Flex 3,175 5,409 (2,234) (41.3)
Axon Fleet 2,396 2,967 (571) (19.2)
Axon Dock 9,165 3,724 5,441 146.1
Net sales for the TASER segment increased 17.7% primarily due to an increase of
$7.4 million in cartridge revenue and a net increase of $2.8 million in TASER
device sales. The increase in cartridge revenue was due to increased units and
was partially offset by a decline in average selling prices. Revenue from
consumer TASER Pulse devices increased due to a substantial increase in volume,
partially offset by lower average selling prices. We continue to see a shift to
purchases of our latest generation device, TASER 7, from legacy devices,
especially X26P devices. Revenue was also impacted by higher average selling
prices for TASER 7, X2, and X26P.
Net sales for the Software and Sensors segment increased 38.8% during the
three months ended September 30, 2020 as we continued to add users and
associated devices to our network. The increase in the aggregate number of users
resulted in increased Axon Evidence revenue of $11.4 million . Sales of our
newest generation body camera, Axon Body 3, which began shipping in September
2019 , drove the increase of $9.2 million in Axon Body revenue and the increase
of $2.4 million in Axon Dock revenue. The increase was partially due to the
shipment of contractual hardware upgrades.
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We consider total company future contracted revenues a forward-looking performance indicator. As ofSeptember 30, 2020 , we had approximately$1.51 billion of total company future contracted revenue, which included both recognized contract liabilities as well as amounts that will be invoiced and recognized in future periods. We expect to recognize between 20% - 25% of this balance over the next twelve months, and expect the remainder to be recognized over the following five to seven years, subject to risks related to delayed deployments, budget appropriation or other contract cancellation clauses. The continuing increase in future contracted revenues were driven by continued North American demand for body cameras and cloud software and TASER demand driven by theU.S. Federal and corrections markets.
Cost of Product and Service Sales
Within the TASER segment, cost of product sales increased to$31.3 million for the three months endedSeptember 30, 2020 from$26.5 million for the same period in 2019. Cost as a percentage of sales increased slightly to 37.1% from 36.9%. The increase was primarily a result of product mix during the quarter, as well as an increase of approximately$0.4 million in response to COVID-19, primarily related to costs for employee quarantines and paying or subsidizing certain high-risk employees while they stayed at home. Within the Software and Sensors segment, cost of product and service sales increased to$36.9 million for the three months endedSeptember 30, 2020 from$24.2 million for the same period in 2019. Cost as a percentage of sales increased to 45.0% from 40.9%. The decrease was driven by the fulfillment of several large shipments of lower-margin body camera hardware to our largest customers.
Gross Margin
As a percentage of net sales, gross margin for the TASER segment decreased slightly to 62.9% from 63.1% for the three months endedSeptember 30, 2020 and 2019, respectively. The decrease was primarily a result of product mix during the quarter. As a percentage of net sales, gross margin for the Software and Sensors segment decreased to 55.0% from 59.1% for the three months endedSeptember 30, 2020 and 2019, respectively. Within the Software and Sensors segment, hardware gross margin was 27.5% for the three months endedSeptember 30, 2020 compared to 36.4% for the same period in 2019, while the service margins were 77.1% and 75.8% during those same periods, respectively. Hardware gross margin was impacted by the fulfillment of several large shipments of lower-margin body camera hardware to our largest customers, but was higher than previously anticipated for the quarter due to overall product mix.
Sales, General and Administrative Expenses
Sales, general and administrative ("SG&A") expenses were comprised as follows
(dollars in thousands):
Three Months Ended September 30, Dollar Percent
2020 2019 Change Change
Total sales, general and administrative
expenses $ 74,443 $ 48,424 $ 26,019 53.7
Sales, general, and administrative as
a percentage of net sales 44.7 % 37.0 %
Stock-based compensation expense increased $9.6 million in comparison to the
prior year comparable period, which was primarily attributable to an increase of
$4.4 million in expense related to the CEO Performance Award and an increase of
$4.2 million related to our XSPP. As of September 30, 2020 , eleven operational
goals for the CEO Performance Award and XSPP are considered probable of
attainment; during the prior year comparable period, only three operational
goals were considered probable. Stock-based compensation expense also increased
over the prior year comparable period due to an increase in headcount.
Professional, consulting and lobbying expenses increased $9.3 million , driven by
an increase of $8.6 million in expenses related to the FTC litigation. As
discussed in Note 13 of the notes to our condensed consolidated financial
statements within this Report on Form 10-Q, on January 3, 2020 , we sued the FTC
in the District of Arizona , and the FTC filed an enforcement action regarding
our May 2018 acquisition of Vievu LLC . This litigation has resulted in an
increase
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in legal expenses during the year ending December 31, 2020 . While the amount and
timing of such expenses is unknown and will vary depending on the progression of
litigation, we currently anticipate expenses in the range of $19.0 million to
$21.0 million for the year.
Salaries, benefits and bonus expense increased
Partially offsetting the noted increases were decreases resulting from actions taken in response to the COVID-19 pandemic. Travel expenses decreased$1.6 million following the suspension of all non-essential travel inmid-March 2020 . Sales and marketing expenses increased$1.0 million compared to the prior year period, reflecting increased commissions tied to higher revenues.
Research and Development Expenses
Research and development ("R&D") expenses were comprised as follows (dollars in
thousands):
Three Months Ended September 30, Dollar Percent
2020 2019 Change ChangeTotal research and development expenses $ 29,246 $ 25,129$ 4,117 16.4 Research and development as a percentage of net sales 17.6 % 19.2 %
The increase in R&D expense was primarily attributable to our Software and Sensors segment. Within the TASER segment, R&D expense was flat, reflecting increased consulting expense in the current quarter, which was partially offset by lower compensation and benefits resulting from decreased headcount. R&D expense for the Software and Sensors segment increased$4.2 million , reflecting an increase of$2.1 million in salaries, benefits and bonus expense and an increase of$2.4 million in stock-based compensation expense. Stock-based compensation expense increased in comparison to the prior year comparable period, which was primarily attributable to an increase of$1.4 million in expense related to our XSPP. As ofSeptember 30, 2020 , eleven operational goals for the XSPP are considered probable of attainment; during the prior year comparable period, only three operational goals were considered probable. Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount. The remaining increase in salaries, benefits and bonus was primarily a result of increased headcount. Additionally, professional and consulting expenses increased$0.8 million for the three months endedSeptember 30, 2020 related to development of next generation products. The increases were partially offset by a decrease of$0.6 million in travel expense following the suspension of all non-essential travel inmid-March 2020 due to the COVID-19 pandemic. We expect R&D expense to continue to increase in absolute dollars as we focus on growing the Software and Sensors segment as we add headcount and additional resources to develop new products and services to further advance our scalable cloud-connected device platform. We are investing in technologies that include our conducted energy devices, body cameras, in-car cameras and other sensors, artificial intelligence, digital evidence management, productivity software, communications software, and technologies that enable real-time situational awareness for public safety. We believe that these investments will result in an increase in our subscription revenue base, which over time will result in revenue increasing faster than the increase in SG&A expenses as we reach economies of scale.
Interest and Other Income (Expense), Net
Interest and other income (expense), net was$2.0 million for the three months endedSeptember 30, 2020 compared to$1.8 million for the same period in 2019. The increase was primarily attributable to an increase of$1.0 million in realized gains on foreign currency. The increase was partially offset by a decrease of$0.9 million in interest income as a result of decreased interest rates during the current period. 34 Table of Contents Provision for Income Taxes
The provision for income taxes was a benefit of$2.5 million for the three months endedSeptember 30, 2020 , which was an effective tax rate of 74.4%. Our estimated full year effective income tax rate for 2020, before discrete period adjustments, is (137.0%), which differs from the federal statutory rate primarily due to the impact of the executive compensation limitation under Internal Revenue Code ("IRC") Section 162(m) on a projected pre-tax loss for the year. The effective tax rate was favorably impacted by a$0.7 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for RSUs that vested or stock options that were exercised during the three months endedSeptember 30, 2020 .
Net Income
Our net income decreased by$7.0 million to a loss of$0.9 million for the three months endedSeptember 30, 2020 compared to net income of$6.1 million for the same period in 2019. Net loss per basic and diluted share was$0.01 for the three months endedSeptember 30, 2020 compared to$0.10 net income per basic and diluted share for the same period in 2019.
Three Months Ended
Net Sales
Net sales by product line were as follows (dollars in thousands):
Three Months Ended Three Months Ended Dollar Percent
September 30, 2020 June 30, 2020 Change Change
TASER segment:
TASER 7 $ 21,702 13.0 % $ 11,588 8.2 % $ 10,114 87.3 %
TASER X26P 9,766 5.9 9,511 6.7 255 2.7
TASER X2 14,494 8.7 16,832 11.9 (2,338) (13.9)
TASER Pulse 2,981 1.8 2,193 1.6 788 35.9
Cartridges 26,335 15.8 23,772 16.8 2,563 10.8Axon Evidence and cloud services 692 0.4 586
0.4 106 18.1
Extended warranties 5,265 3.2 5,098 3.6 167 3.3
Other 3,171 1.9 910 0.5 2,261 248.5
TASER segment 84,406 50.7 70,490 49.7 13,916 19.7
Software and Sensors segment:
Axon Body 15,978 9.6 11,844 8.4 4,134 34.9
Axon Flex 1,589 1.0 680 0.5 909 133.7
Axon Fleet 4,215 2.5 4,098 2.9 117 2.9
Axon Dock 5,708 3.4 4,055 2.9 1,653 40.8Axon Evidence and cloud services 45,450 27.3 41,891
29.7 3,559 8.5
Extended warranties 6,514 3.9 5,735 4.1 779 13.6
Other 2,582 1.6 2,466 1.8 116 4.7Software and Sensors segment 82,036 49.3 70,769
50.3 11,267 15.9
Total net sales $ 166,442 100.0 % $ 141,259 100.0 % $ 25,183 17.8 %
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Net unit sales for TASER segment products and Software and Sensors segment products were as follows:
Three Months Ended
Unit Percent
September 30, 2020 June 30, 2020 Change Change
TASER 7 15,908 9,014 6,894 76.5 %
TASER X26P 8,119 7,658 461 6.0 %
TASER X2 10,078 13,100 (3,022) (23.1) %
TASER Pulse 12,811 5,429 7,382 136.0 %
Cartridges 852,980 715,268 137,712 19.3 %
Axon Body 62,873 35,066 27,807 79.3 %
Axon Flex 3,175 1,964 1,211 61.7 %
Axon Fleet 2,396 2,327 69 3.0 %
Axon Dock 9,165 4,634 4,531 97.8 %
Net sales within the TASER segment increased by approximately$13.9 million or 19.7% as compared to the prior quarter. The largest driver of the increase was increased revenue from TASER 7 devices driven by higher unit sales and an increase in average selling prices. Additionally, cartridge revenue increased$2.6 million due to increased units, partially offset by a decline in average selling prices. The increases were partially offset by a decrease in revenue from X2 devices driven by a decrease in units. Within the Software and Sensors segment, net sales increased$11.3 million or 15.9% during the three months endedSeptember 30, 2020 compared to the prior quarter. Revenue from Axon devices increased a combined$6.8 million primarily due to higher unit sales. Higher average selling prices for Axon Flex also contributed to the increase, while lower average selling prices for Axon Body cameras and docks partially offset the increase. Axon Evidence revenues increased$3.6 million primarily based on an increase in the aggregate number of users on our Axon network. The increase was partially due to the shipment of contractual hardware upgrades.
Nine Months Ended
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):
Nine Months Ended September 30,
2020 2019
Net sales from products $ 326,134 71.7 % $ 264,977 73.8 %
Net sales from services 128,729 28.3 94,032 26.2
Net sales 454,863 100.0 359,009 100.0
Cost of product sales 150,507 33.1 120,265 33.5
Cost of service sales 29,331 6.4 24,098 6.7
Cost of sales 179,838 39.5 144,363 40.2
Gross margin 275,025 60.5 214,646 59.8
Operating expenses:Sales, general and administrative 209,763 46.1
134,678 37.6 Research and development 85,187 18.7 71,976 20.0 Total operating expenses 294,950 64.8 206,654 57.6
Income (loss) from operations (19,925) (4.3) 7,992 2.2 Interest and other income, net 4,594 0.9 5,978 1.7 Income (loss) before provision for income taxes (15,331) (3.4) 13,970 3.9 Provision for (benefit from) income taxes 12,227 2.7
709 0.2
Net income (loss) $ (27,558) (6.1) % $ 13,261 3.7 %
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The following table presents our revenues disaggregated by geography (in
thousands):
Nine Months Ended September 30,
2020 2019
United States $ 368,390 81 % $ 298,736 83 %
Other Countries 86,473 19 60,273 17
Total $ 454,863 100 % $ 359,009 100 %
International revenue increased compared to the prior year comparable period,
driven primarily by increased sales in the Americas , Asia Pacific and Europe
regions.
Net Sales
Net sales by product line were as follows (dollars in thousands):
Nine Months Ended September 30, Dollar Percent
2020 2019 Change Change
TASER segment:
TASER 7 $ 48,616 10.7 % $ 39,466 11.0 % $ 9,150 23.2 %
TASER X26P 30,338 6.7 37,832 10.5 (7,494) (19.8)
TASER X2 45,401 10.0 40,413 11.3 4,988 12.3
TASER Pulse 6,374 1.4 2,920 0.8 3,454 118.3
Cartridges 76,732 16.8 57,354 16.0 19,378 33.8
Axon Evidence and cloud services 1,776 0.4 363 0.1 1,413 389.3
Extended warranties 15,340 3.4 13,341 3.7 1,999 15.0
Other 6,214 1.3 6,017 1.7 197 3.3
TASER segment 230,791 50.7 197,706 55.1 33,085 16.7
Software and Sensors segment:
Axon Body 40,645 8.9 18,820 5.2 21,825 116.0
Axon Flex 3,452 0.8 4,517 1.3 (1,065) (23.6)
Axon Fleet 13,088 2.9 10,977 3.1 2,111 19.2
Axon Dock 14,714 3.2 9,401 2.6 5,313 56.5
Axon Evidence and cloud services 126,495 27.8 93,461 26.0 33,034 35.3
Extended warranties 17,707 3.9 14,064 3.9 3,643 25.9
Other 7,971 1.8 10,063 2.8 (2,092) (20.8)
Software and Sensors segment 224,072 49.3 161,303 44.9 62,769 38.9
Total net sales $ 454,863 100.0 % $ 359,009 100.0 % $ 95,854 26.7 %
Net unit sales for TASER segment products and Software and Sensors segment products were as follows:
Nine Months Ended September 30, Unit Percent
2020 2019 Change Change
TASER 7 36,352 34,644 1,708 4.9 %
TASER X26P 26,780 35,244 (8,464) (24.0) %
TASER X2 33,656 29,439 4,217 14.3 %
TASER Pulse 21,501 8,807 12,694 144.1 %
Cartridges 2,441,612 1,789,084 652,528 36.5 %
Axon Body 137,803 68,231 69,572 102.0 %
Axon Flex 8,213 12,508 (4,295) (34.3) %
Axon Fleet 7,399 7,143 256 3.6 %
Axon Dock 19,096 12,126 6,970 57.5 %
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Net sales for the TASER segment increased $33.1 million , or 16.7%, primarily due
to an increase of $19.4 million in cartridge revenue, as well as a net increase
of $10.1 million in TASER device sales. The increase in cartridge revenue was
due to increased units and was partially offset by a decrease in average selling
prices. TASER device unit sales increased for all TASER devices except X26P.
Revenue was also impacted by higher average selling prices for TASER 7 and X26P
devices, while average selling prices were lower for X2 and consumer Pulse
devices.
Net sales for the Software and Sensors segment increased $62.8 million , or
38.9%, during the nine months ended September 30, 2020 as we continued to add
users and associated devices to our network. The increase in the aggregate
number of users resulted in increased Axon Evidence revenue of $33.0 million .
Sales of our newest generation body camera, Axon Body 3, which began shipping in
September 2019 , drove the increase of $21.8 million in Axon Body revenue and the
increase of $5.3 million in Axon Dock revenue.
Cost of Product and Service Sales
Within the TASER segment, cost of product sales increased to$88.8 million for the nine months endedSeptember 30, 2020 from$74.0 million for the same period in 2019. Cost as a percentage of sales increased to 38.5% from 37.5%. The increase in cost of product sales was primarily attributable to the mix of products, with higher cost per unit for TASER 7 handles and cartridges as well as higher depreciation on new production equipment for the TASER 7. Additionally, we incurred expense of approximately$2.0 million in response to COVID-19, primarily related to a two week manufacturing shutdown where we continued to pay nonworking employees, as well as costs for employee quarantines and paying or subsidizing certain high-risk employees while they stayed at home. The increases were partially offset by non-recurring costs incurred during the prior year comparable period of approximately$2.3 million for TASER 7 ramp-up and optimization costs related to scrap, obsolete inventory, and higher labor costs. Within the Software and Sensors segment, cost of product and service sales increased to$91.1 million for the nine months endedSeptember 30, 2020 from$70.3 million for the same period in 2019. Cost as a percentage of sales decreased to 40.6% from 43.6%. Cost of product sales increased$15.5 million , but decreased as a percentage of sales as a result of product mix and the higher average selling price for Axon Body 3 cameras, which began shipping inSeptember 2019 . Cost of service sales increased$5.2 million , and decreased as a percentage of sales, driven by the mix of higher-margin software revenues.
Gross Margin
As a percentage of net sales, gross margin for the TASER segment decreased to
61.5% from 62.5% for the nine months ended
As a percentage of net sales, gross margin for the Software and Sensors segment increased to 59.4% from 56.4% for the nine months endedSeptember 30, 2020 and 2019, respectively. Within the Software and Sensors segment, hardware gross margin was 36.7% for the nine months endedSeptember 30, 2020 compared to 31.9% for the same period in 2019, while the service margins were 76.8% and 74.2% during those same periods, respectively.
Sales, General and Administrative Expenses
Sales, general and administrative ("SG&A") expenses were comprised as follows
(dollars in thousands):
Nine Months Ended September 30, Dollar Percent
2020 2019 Change ChangeTotal sales, general and administrative expenses$ 209,763 $ 134,678 $ 75,085 55.8 % SG&A expenses as a percentage of net sales 46.1 %
37.6 %
Stock-based compensation expense increased $41.7 million in comparison to the
prior year comparable period, which was primarily attributable to an increase of
$24.7 million in expense related to the CEO Performance Award and an increase of
$14.8 million related to our XSPP. As of September 30, 2020 , eleven operational
goals for the CEO
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Performance Award and XSPP are considered probable of attainment; during the
prior year comparable period, only three operational goals were considered
probable. Stock-based compensation expense also increased over the prior year
comparable period due to an increase in headcount.
Professional, consulting and lobbying expenses increased $19.5 million , driven
by an increase of $18.5 million in expenses related to the FTC litigation. As
discussed in Note 13 of the notes to our condensed consolidated financial
statements within this Report on Form 10-Q, on January 3, 2020 , we sued the FTC
in the District of Arizona , and the FTC filed an enforcement action regarding
our May 2018 acquisition of Vievu LLC . This litigation has resulted in an
increase in legal expenses during the year ending December 31, 2020 . While the
amount and timing of such expenses is unknown and will vary depending on the
progression of litigation, we currently anticipate expenses in the range of
$19.0 million to $21.0 million for the year.
Salaries, benefits and bonus expense increased
Charitable contributions increased
Partially offsetting the noted increases were decreases resulting from actions taken in response to the COVID-19 pandemic. Travel expenses decreased$4.1 million following the suspension of all non-essential travel inmid-March 2020 . Sales and marketing expenses increased$1.4 million compared to the prior year period, reflecting increased commissions tied to higher revenues, partially offset by savings driven by the cancellation of our in-person Axon Accelerate user conference.
Research and Development Expenses
Research and development ("R&D") expenses were comprised as follows (dollars in
thousands):
Nine Months Ended September 30, Dollar Percent
2020 2019 Change Change
Total research and development expenses $ 85,187 $ 71,976 $ 13,211 18.4 %
R&D expenses as a percentage of net sales 18.7 %
20.0 %
The increase in R&D expense was primarily attributable to our Software and Sensors segment. Within the TASER segment, R&D expense was flat, reflecting increased consulting expense in the current quarter, which was partially offset by lower compensation and benefits resulting from decreased headcount. R&D expense for the Software and Sensors segment increased$13.3 million , reflecting an increase of$6.1 million in salaries, benefits and bonus expense and an increase of$6.4 million in stock-based compensation expense. Stock-based compensation expense increased in comparison to the prior year comparable period, which was primarily attributable to an increase of$5.3 million in expense related to our XSPP. As ofSeptember 30, 2020 , eleven operational goals for the XSPP are considered probable of attainment; during the prior year comparable period, only three operational goals were considered probable. Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount. The remaining increase in salaries, benefits and bonus was primarily a result of increased headcount. Additionally, professional and consulting expenses increased$1.6 million for the nine months endedSeptember 30, 2020 related to development of next generation products. The increases were partially offset by a decrease of$1.2 million in travel expense following the suspension of all non-essential travel inmid-March 2020 due to the COVID-19 pandemic. We expect R&D expense to continue to increase in absolute dollars as we focus on growing the Software and Sensors segment as we add headcount and additional resources to develop new products and services to further advance our scalable cloud-connected device platform. We are investing in technologies that include our conducted energy devices, body cameras, in-car cameras and other sensors, artificial intelligence, digital evidence management, productivity software, communications software, and technologies that enable real-time situational awareness for public safety. We believe that 39
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these investments will result in an increase in our subscription revenue base, which over time will result in revenue increasing faster than the increase in SG&A expenses as we reach economies of scale.
Interest and Other Income (Expense), Net
Interest and other income, net was
Provision for Income Taxes
The provision for income taxes was an expense of$12.2 million for the nine months endedSeptember 30, 2020 , which was an effective tax rate of (79.8%). Our estimated full year effective income tax rate for 2020, before discrete period adjustments, is (137.0%), which differs from the federal statutory rate primarily due to the impact of the executive compensation limitation under IRC Section 162(m) on a projected pre-tax loss for the year. The effective tax rate was favorably impacted by a$6.6 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for RSUs that vested or stock options that were exercised during the nine months endedSeptember 30, 2020 .
Net Income
Our net income decreased by$40.9 million to a net loss of$27.6 million for the nine months endedSeptember 30, 2020 compared to net income of$13.3 million for the same period in 2019. Net loss per basic and diluted share was$0.45 for the nine months endedSeptember 30, 2020 compared to net income per basic and diluted share of$0.22 for the same period in 2019.
Non-GAAP Measures
To supplement our financial results presented in accordance with GAAP, we present the non-GAAP financial measures of EBITDA and Adjusted EBITDA (CEO Performance Award). Our management uses these non-GAAP financial measures in evaluating our performance in comparison to prior periods. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance, and when planning and forecasting our future periods. A reconciliation of GAAP to the non-GAAP financial measures is presented below.
? EBITDA (Most comparable GAAP Measure: Net income) - Earnings before interest
expense, investment interest income, taxes, depreciation and amortization.
Adjusted EBITDA (CEO Performance Award) (Most comparable GAAP Measure: Net
? income) - Earnings before interest expense, investment interest income, taxes,
depreciation, amortization and non-cash stock-based compensation expense.
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
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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 (CEO Performance Award) reconciles to net income as
follows (in thousands):
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
2020 2020 2019 2020 2019
Net income (loss) $ (873) $ (30,759) $ 6,104 $ (27,558) $ 13,261
Depreciation and amortization 3,133 2,930 2,709 8,944 8,196
Interest expense 32 5 4 44 27
Investment interest income (965) (1,499) (1,647) (3,157) (5,280)Provision for (benefit from) income taxes (2,536) 18,696
2,332 12,227 709
EBITDA $ (1,209) $ (10,627) $ 9,502 $ (9,500) $ 16,913
Adjustments:Stock-based compensation expense 26,094 33,835 13,663 80,124 30,195
Adjusted EBITDA (CEO Performance Award) $ 24,885
$ 23,165 $ 70,624 $ 47,108
Liquidity and Capital Resources
Summary
As ofSeptember 30, 2020 , we had$176.0 million of cash and cash equivalents, an increase of$3.7 million as compared toDecember 31, 2019 . Cash and cash equivalents and investments totaled$627.5 million , representing an increase of$231.2 million fromDecember 31, 2019 . Our ongoing sources of cash include cash on hand, investments, and cash flows from operations. In addition, our$50.0 million revolving credit facility is available for additional working capital needs or investment opportunities. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. Advances under the line of credit bear interest at LIBOR plus 1.0 to 1.5% per year determined in accordance with a pricing grid based on our funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio. As ofSeptember 30, 2020 , we had letters of credit outstanding of$6.1 million , leaving the net amount available for borrowing of$43.9 million . The facility matures onDecember 31, 2021 , and has an accordion feature which allows for an increase in the total line of credit up to$100.0 million , subject to certain conditions, including the availability of additional bank commitments. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our revolving credit facility. AtSeptember 30, 2020 andDecember 31, 2019 , there were no borrowings under the line other than the outstanding letters of credit. Our agreement with the bank requires us to comply with a maximum funded debt to EBITDA ratio, as defined, of no greater than 2.50 to 1.00 based upon a trailing four fiscal quarter period. AtSeptember 30, 2020 , our funded debt to EBITDA ratio was 0.00 to 1.00. TASER 60 installment purchase arrangements typically involve amounts invoiced in five equal installments at the beginning of each year of the five-year term. This is in contrast to a traditional CED sale in which the entire amount being charged for the hardware is invoiced upon shipment. This impacts liquidity in a commensurate fashion, with the cash for the TASER 60 arrangement received in five annual installments rather than up front. It is our strategic intent to shift an increasing amount of our business to a subscription model, to better match the municipal budgeting process of our customers as well as to allow for multiple product offerings to be bundled into existing subscriptions. We carefully considered the cash flow impacts of this strategic shift and regularly revisit our cash flow forecast with the goal of maintaining a comfortable level of liquidity as we introduce commercial offerings in which we incur upfront cash costs to produce and fulfill hardware sales ahead of the cash inflows from our customers. We anticipate, and have prepared for, 41
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the majority of our arrangements in both reportable segments to be offered in similar subscription-type offerings over the coming years. With the launch of the TASER 7, which is primarily being sold in subscription offerings, this strategic shift continues to accelerate. Based on our strong balance sheet and the fact that we do not have long-term debt atSeptember 30, 2020 , we believe financing will be available, both through our existing credit line and possible additional financing. However, there is no assurance that such funding will be available on terms acceptable to us, or at all. We believe that our sources of funding will be sufficient to satisfy our currently anticipated cash requirements including capital expenditures, working capital requirements, potential acquisitions and other liquidity requirements through at least the next 12 months. We and our Board of Directors may consider repurchases of our common stock from time to time pursuant to our stock repurchase plan. Further repurchases of our common stock would take place on the open market, would be financed with available cash and are subject to market and business conditions. Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities (in thousands):
Nine Months Ended September 30,
2020 2019
Operating activities $ 4,163 $ 19,864
Investing activities (300,294) (162,925)
Financing activities 300,188 (3,162)
Effect of exchange rate changes on cash and cash
equivalents (303) (678)
Net increase (decrease) in cash and cash equivalents and
restricted cash $ 3,754 $ (146,901)
Operating activities
Net cash provided by operating activities in the first nine months of 2020 of$4.2 million reflects$27.6 million in net loss, non-cash income statement items totaling$85.0 million , and a use of cash of$53.3 million for the net change in operating assets and liabilities. Included in the non-cash items were$8.9 million in depreciation and amortization expense,$80.1 million in stock-based compensation expense, and a$11.7 million increase in deferred tax assets, net. Cash used in operations was primarily driven by increased inventory of$59.4 million , as we proactively built up a safety stock of inventory to help meet strong product demand while also preparing us to stagger factory work schedules. Also contributing to the use of cash were increased accounts and notes receivable and contract assets of$48.6 million , which was attributable to increased sales over the last several quarters, primarily sales made under subscription plans. Partially offsetting the uses of cash were increases in accounts payable, accrued liabilities and other liabilities of$25.4 million , and in deferred revenue of$34.1 million . The increase in accounts payable, accrued liabilities and other liabilities was primarily attributable to accruals for professional services, inventory in transit, and taxes. The increase in deferred revenue was primarily attributable to increased hardware deferred revenue from TASER subscription sales, partially offset by a decrease in prepayments for Software and Sensors services. Net cash provided by operating activities in the first nine months of 2019 of$19.9 million reflects$13.3 million in net income, non-cash income statement items totaling$40.4 million , and a negative impact on cash of$33.8 million for the net change in operating assets and liabilities. Included in the non-cash items were$8.2 million in depreciation and amortization expense and$30.2 million in stock-based compensation expense. Cash used in operations was impacted by increased accounts and notes receivable and contract assets of$30.5 million , decreased accounts payable, accrued liabilities and other liabilities of$13.5 million , increased inventory of$6.3 million , and increased prepaid expenses and other assets of$12.0 million . The increase in accounts and notes receivable and contract assets was attributable to increased sales over the last several quarters, primarily sales made under subscription plans. The decrease in accounts payable, accrued liabilities and other liabilities was primarily attributable to the timing of payments, and to payments made during 2019 for operating leases following our adoption of Topic 842. The increase in prepaid expenses and other assets was primarily attributable to a$15.0 million prepayment related to a purchase agreement for cloud data storage that commenced inJuly 2019 . Cash provided by operations was positively impacted by various other operating items, including increased deferred revenue of$28.5 million . 42 Table of Contents Investing activities
We used$300.3 million in investing activities during the first nine months of 2020, which was comprised of$229.5 million for the purchase of investments, net of proceeds,$66.0 million for the purchase of property and equipment and intangible assets, and$4.7 million for an equity investment in an unconsolidated affiliate. We used$162.9 million in investing activities during the first nine months of 2019, which was comprised of$150.5 million for the purchase of investments, net of proceeds, and$12.4 million for the purchase of property and equipment and intangible assets. Financing activities Net cash provided by financing activities was$300.2 million during the first nine months of 2020. During the first nine months of 2020, we completed an equity offering that generated net proceeds of$306.8 million and received proceeds from options exercised of$0.3 million ; the proceeds were partially offset by payments of income and payroll taxes of$6.9 million on behalf of employeeswho net-settled stock awards during the period. Net cash used in financing activities was$3.2 million during the first nine months of 2019. During the first nine months of 2019, we paid income and payroll taxes of$3.3 million on behalf of employeeswho net-settled stock awards during the period, which was partially offset by proceeds from options exercised of$0.1 million .
Off-Balance Sheet Arrangements
The discussion under the heading off-balance sheet arrangements in Note 13 of the notes to our condensed consolidated financial statements within this Quarterly Report on Form 10-Q is incorporated by reference herein.
Critical Accounting Estimates
We have identified the following accounting estimates as critical to our business operations and the understanding of our results of operations. The preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our unaudited condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. 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. The effect of these estimates on our business operations are discussed below.
Stock-Based Compensation
We have historically granted stock-based compensation to key employees and
non-employee directors as a means of attracting and retaining highly qualified
personnel. Stock-based compensation awards primarily consist of service-based
RSUs, performance-based RSUs, and performance-based options. Our stock-based
compensation awards are classified as equity and measured at the fair market
value of the underlying stock at the grant date. For service-based awards, we
recognize RSU expense using the straight-line attribution method over the
requisite service period. Vesting of performance-based RSUs and options is
contingent upon the achievement of certain performance criteria related to our
operating performance, as well as successful and timely development and market
acceptance of future product introductions. For performance-based RSUs
containing only performance conditions, compensation cost is recognized using
the graded attribution model over the explicit or implicit service period. For
awards containing multiple service, performance or market conditions, where all
conditions must be satisfied prior to vesting, compensation expense is
recognized over the requisite service period, which is defined as the longest
explicit, implicit or derived service period, based on management's estimate of
the probability of the performance criteria being satisfied, adjusted at each
balance sheet date. For both service-based and performance-based RSUs, we
account for forfeitures as they occur as a reduction to stock-based compensation
expense and additional paid-in-capital.
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For performance-based awards, stock-based compensation expense is recognized over the expected performance achievement period of individual performance goals when the achievement of each individual performance goal becomes probable. For performance-based awards with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized over the longer of the expected achievement period of the performance and market conditions, beginning at the point in time that the relevant performance condition is considered probable of achievement. The fair value of such awards is estimated on the grant date usingMonte Carlo simulations. Refer to Note 11 of the notes to our condensed consolidated financial statements within this Report on Form 10-Q. We have granted a total of 14.9 million performance-based awards (options and restricted stock units) of which 12.1 million are outstanding. As ofSeptember 30, 2020 , the vesting of which is contingent upon the achievement of certain performance criteria including the successful development and market acceptance of future product introductions, our future sales targets and operating performance and market capitalization. Compensation expense for performance awards will be recognized based on management's best estimate of the probability of the performance criteria being satisfied using the most currently available projections of future product adoption and operating performance, adjusted at each balance sheet date. Changes in the subjective and probability-based assumptions can materially affect the estimate of the fair value of the awards and timing of recognition of stock-based compensation and consequently, the related amount recognized in our condensed consolidated statements of operations and comprehensive income (loss).
Allowance for Expected Credit Losses
We are exposed to the risk of credit losses primarily through sales of products and services. Our expected loss allowance for accounts receivable, notes receivable, and contract assets represents management's best estimate and application of judgment considering a number of factors, including historical collection experience, published or estimated credit default rates for entities that represent our customer base, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Our monitoring activities include account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible.
We review receivables for
A majority of our customers are governmental agencies. Due to municipal government funding rules, certain of our contracts are subject to appropriation, termination for convenience, or similar cancellation clauses, which could allow our customers to cancel or not exercise options to renew contracts in the future. Economic slowdowns that negatively affect municipal tax collections and put pressure on law enforcement may increase this risk and negatively impact the realizability of our accounts and notes receivable and contract assets. We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and recorded additional credit loss expense of approximately$0.8 million during the nine months endedSeptember 30, 2020 . Based on the balances of our financial instruments as ofSeptember 30, 2020 , a hypothetical 25 percent increase in expected credit loss rates across all pools would result in a$0.7 million increase in the allowance for expected credit losses.
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