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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Axon Enterprise, Inc.    AAXN

AXON ENTERPRISE, INC.

(AAXN)
  Report
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AXON : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/06/2020 | 09:23am EST
The following discussion and analysis of our financial condition as of September
30, 2020, and results of operations For the three and nine months ended
September 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 the SEC on February 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 ended September 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 ended September 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
ended September 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 ended September 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 ended September 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 ended September 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 ended September 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
ended September 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 in Wuhan, China. In March 2020 the
World Health Organization declared COVID-19 a global pandemic. This contagious
disease outbreak, which has continued to spread throughout the 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 National Police Foundation to provide personal

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 who do work in our offices; and

Mitigating contamination risk in our facilities through staggered shifts, the

? use of PPE, increased distancing, cleaning standards that exceed CDC guidance,

   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 May 29, 2020;

o We completed a follow-on equity offering in June 2020 for which all related

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 ended September 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 from March 27, 2020 through December 31, 2020. Payment of
the deferred amount is due 50% on December 31, 2021 and 50% on December 31,
2022.



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Results of Operations

Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019


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      39.3
Axon 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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Table of Contents


We consider total company future contracted revenues a forward-looking
performance indicator. As of September 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
the U.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 ended September 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 ended September 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 ended September 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 ended September 30, 2020 and
2019, respectively. Within the Software and Sensors segment, hardware gross
margin was 27.5% for the three months ended September 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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  Table of Contents

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 $5.4 million primarily due to an increase in headcount.


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 in mid-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     Change
Total 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 of September 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 ended September 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
in mid-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
ended September 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 ended September 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 ended September 30, 2020.

Net Income

Our net income decreased by $7.0 million to a loss of $0.9 million for the
three months ended September 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 ended September 30, 2020 compared to $0.10 net income per basic and
diluted share for the same period in 2019.

Three Months Ended September 30, 2020 Compared to the Three Months Ended June 30, 2020


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      10.8
Axon 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      40.8
Axon 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       4.7
Software 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 ended September 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 September 30, 2020 Compared to the Nine Months Ended September 30, 2019


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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  Table of Contents

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 ended September 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 ended September 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 in September
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 September 30, 2020 and 2019, respectively. The decrease was primarily a result of the mix of higher cost TASER 7 devices and cartridges and expenses related to COVID-19.


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 ended September 30, 2020 and
2019, respectively. Within the Software and Sensors segment, hardware gross
margin was 36.7% for the nine months ended September 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      Change
Total 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 $9.9 million primarily due to an increase in headcount.

Charitable contributions increased $1.7 million, reflecting our donations of PPE under our Got You Covered campaign.


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 in mid-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 of September 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 ended September 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
in mid-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

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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 $4.6 million for the nine months ended September 30, 2020 compared to $6.0 million for the same period in 2019. The decrease was primarily attributable to a decrease of $1.7 million in interest income as a result of decreased interest rates during the current period.

Provision for Income Taxes

The provision for income taxes was an expense of $12.2 million for the nine
months ended September 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 ended
September 30, 2020.

Net Income


Our net income decreased by $40.9 million to a net loss of $27.6 million for
the nine months ended September 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 ended September 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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  Table of Contents

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 $ 23,208

   $         23,165    $         70,624    $         47,108



Liquidity and Capital Resources

Summary


As of September 30, 2020, we had $176.0 million of cash and cash equivalents, an
increase of $3.7 million as compared to December 31, 2019. Cash and cash
equivalents and investments totaled $627.5 million, representing an increase of
$231.2 million from December 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 of September 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 on December 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. At September 30, 2020 and December 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. At September 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,

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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 at September 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
in July 2019. Cash provided by operations was positively impacted by various
other operating items, including increased deferred revenue of $28.5 million.

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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
employees who 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 employees who 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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Table of Contents


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 using Monte 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 of September
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 U.S. and international customers separately to better reflect different published credit default rates and economic and market conditions.


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 ended September 30, 2020.

Based on the balances of our financial instruments as of September 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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Financials (USD)
Sales 2020 637 M - -
Net income 2020 -27,3 M - -
Net cash 2020 349 M - -
P/E ratio 2020 -397x
Yield 2020 -
Capitalization 11 092 M 11 092 M -
EV / Sales 2020 16,9x
EV / Sales 2021 14,6x
Nbr of Employees 1 323
Free-Float 75,0%
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Managers and Directors
NameTitle
Patrick W. Smith Chief Executive Officer & Director
Luke S. Larson President
Michael Garnreiter Chairman
Josh Goldman Senior Vice President-Operations
Jawad A. Ahsan Chief Financial Officer
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