UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2019

or

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

For the transition period from                      to                     

Commission File Number: 001-16391

Axon Enterprise, Inc.

(Exact name of registrant as specified in its charter)

Delaware			86-0741227
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
17800 North 85th Street			85255
Scottsdale	,	Arizona
(Address of principal executive offices)			(Zip Code)

(480) 991-0797

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.00001 Par Value	AAXN	The Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated Filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐     No  ☒

The number of shares of the registrant’s common stock outstanding as of July 30, 2019 was 59,255,274.

AXON ENTERPRISE, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019

			Page
Special Note Regarding Forward-Looking Statements			ii
PART I - FINANCIAL INFORMATION
	Item 1. Financial Statements		1
		Condensed Consolidated Balance Sheets as of June 30, 2019 (Unaudited) and December 31, 2018	1
		Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months and Six Months Ended June 30, 2019 and 2018	2
		Unaudited Condensed Consolidated Statements of Stockholders' Equity for the Three Months and Six Months Ended June 30, 2019 and 2018	3
		Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018	4
		Notes to Unaudited Condensed Consolidated Financial Statements	5
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		23
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		37
	Item 4. Controls and Procedures		38
PART II - OTHER INFORMATION
	Item 1. Legal Proceedings		39
	Item 1A. Risk Factors		39
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		39
	Item 3. Defaults Upon Senior Securities		39
	Item 4. Mine Safety Disclosures		39
	Item 5. Other Information		39
	Item 6. Exhibits		40
	SIGNATURES		41

Special Note Regarding Forward-Looking Statements

This Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions and strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. From time to time, we also provide forward-looking statements in other materials we release to the public as well as verbal forward-looking statements. These forward-looking statements include, without limitation, statements regarding: proposed products and services and related development efforts and activities; expectations about the market for our current and future products and services; the impact of pending litigation; our outlook for 2019 with respect to revenue, stock compensation expense, and income tax rate; trends relating to subscription plan programs and revenues; our anticipation that contracts with governmental customers will be fulfilled; expected trends, including the benefits of, research and development investments; the sufficiency of our liquidity and financial resources; that we may repurchase our common stock; expectations about customer behavior; statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; statements of management’s strategies, goals and objectives and other similar expressions; as well as the ultimate resolution of financial statement items requiring critical accounting estimates, including those set forth in our Form 10-K for the year ended December 31, 2018. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Words such as “may,” “will,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions, as well as statements in future tense, identify forward-looking statements. However, not all forward-looking statements contain these identifying words.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. The following important factors could cause actual results to differ materially from those in the forward-looking statements: customer purchase behavior, including adoption of our software as a service delivery model; the impact of product mix on projected gross margins; our ability to manage our supply chain and avoid production delays, shortages, and impacts to expected gross margins; changes in the costs of product components and labor; defects in our products; delayed cash collections and possible credit losses due to our subscription model; exposure to international operational risks; our ability to design, introduce and sell new products or features; our ability to defend against litigation and protect our intellectual property, and the resulting costs of this activity; our exposure to cancellations of government contracts due to appropriation clauses, exercise of a cancellation clause, or non-exercise of contractually optional periods; loss of customer data, a breach of security or an extended outage, including our reliance on third party cloud-based storage providers; negative media publicity regarding our products; changes in government regulations in the U.S. and in foreign markets, especially related to the classification of our product by the United States Bureau of Alcohol, Tobacco, Firearms and Explosives and to evolving regulations surrounding privacy and data protection; our ability to integrate acquired businesses; our ability to attract and retain key personnel; and counter-party risks relating to cash balances held in excess of FDIC insurance limits. Many events beyond our control may determine whether results we anticipate will be achieved. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements. The Annual Report on Form 10-K that we filed with the SEC on February 27, 2019 listed various important factors that could cause actual results to differ materially from expected and historical results. These factors are intended as cautionary statements for investors within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. Readers can find them under the heading “Risk Factors” in the Report on Form 10-K and in this Report on Form 10-Q, and investors should refer to them. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

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

ii

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AXON ENTERPRISE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	June 30, 2019			December 31, 2018
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	219,720		$	349,462
Short-term investments	116,629			—
Accounts and notes receivable, net of allowance of $1,577 and $1,882 as of June 30, 2019 and December 31, 2018, respectively	134,630			130,579
Contract assets, net	26,648			13,960
Inventory	40,999			33,763
Prepaid expenses and other current assets	36,429			30,391
Total current assets	575,055			558,155
Property and equipment, net of accumulated depreciation of $42,822 and $39,885 as of June 30, 2019 and December 31, 2018, respectively	40,500			37,893
Deferred income tax assets, net	20,658			19,347
Intangible assets, net	14,424			15,935
Goodwill	24,969			24,981
Long-term notes receivable, net of current portion	35,170			40,230
Other assets	35,594			22,999
Total assets	$	746,370		$	719,540
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,064		$	15,164
Accrued liabilities	34,011			41,092
Current portion of deferred revenue	113,351			107,016
Customer deposits	3,395			2,702
Other current liabilities	3,852			37
Total current liabilities	163,673			166,011
Deferred revenue, net of current portion	74,586			74,417
Liability for unrecognized tax benefits	3,462			2,849
Long-term deferred compensation	3,755			3,235
Other long-term liabilities	11,967			5,704
Total liabilities	257,443			252,216
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of June 30, 2019 and December 31, 2018	—			—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 59,251,731 and 58,810,637 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively	1			1
Additional paid-in capital	467,904			453,400
Treasury stock at cost, 20,220,227 shares as of June 30, 2019 and December 31, 2018	(155,947		)	(155,947		)
Retained earnings	178,540			171,383
Accumulated other comprehensive loss	(1,571		)	(1,513		)
Total stockholders’ equity	488,927			467,324
Total liabilities and stockholders’ equity	$	746,370		$	719,540

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

1

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(in thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net sales from products	$	80,391		$	76,721		$	168,480		$	157,695
Net sales from services	31,971			22,505			59,692			42,746
Net sales	112,362			99,226			228,172			200,441
Cost of product sales	38,220			31,087			77,820			63,521
Cost of service sales	8,582			4,996			15,875			9,316
Cost of sales	46,802			36,083			93,695			72,837
Gross margin	65,560			63,143			134,477			127,604
Operating expenses:
Sales, general and administrative	43,362			39,343			86,254			75,102
Research and development	23,493			18,501			46,847			33,620
Total operating expenses	66,855			57,844			133,101			108,722
Income (loss) from operations	(1,295		)	5,299			1,376			18,882
Interest and other income (expense), net	1,845			(295		)	4,158			968
Income before provision for income taxes	550			5,004			5,534			19,850
Provision for (benefit from) income taxes	(188		)	(3,481		)	(1,623		)	(1,561		)
Net income	$	738		$	8,485		$	7,157		$	21,411
Net income per common and common equivalent shares:
Basic	$	0.01		$	0.15		$	0.12		$	0.39
Diluted	$	0.01		$	0.15		$	0.12		$	0.38
Weighted average number of common and common equivalent shares outstanding:
Basic	59,187			55,527			59,051			54,330
Diluted	60,000			57,054			59,876			55,892
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$	738		$	8,485		$	7,157		$	21,411
Foreign currency translation adjustments	(108		)	655			(58		)	(52		)
Comprehensive income	$	630		$	9,140		$	7,099		$	21,359

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

2

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, except per share data)

	Common Stock			Additional Paid-in Capital			Treasury Stock						Retained Earnings		Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares	Amount					Shares		Amount
Balance, December 31, 2017	52,969,869	$	1	$	201,672		20,220,227		$	(155,947	)		$	123,185	$	(1,467	)	$	167,444
Cumulative effect of applying a change in accounting principle	—	—		—			—		—				18,994		—			18,994
Issuance of common stock under employee plans	337,214	—		(3,421		)	—		—				—		—			(3,421		)
Stock-based compensation	—	—		4,093			—		—				—		—			4,093
Net income	—	—		—			—		—				12,926		—			12,926
Foreign currency translation adjustments	—	—		—			—		—				—		(707		)	(707		)
Balance, March 31, 2018	53,307,083	1		202,344			20,220,227		(155,947		)		155,105		$	(2,174	)	199,329
Issuance of common stock	4,645,000	—		233,993			—		—				—		—			233,993
Issuance of common stock for business combination	58,843	—		8,226			—		—				—		—			8,226
Issuance of common stock under employee plans	278,687	—		(6,800		)	—	—	—			—	—		—			(6,800		)
Stock-based compensation	—	—		4,954			—	—	—			—	—		—			4,954
Net income	—	—		—			—	—	—			—	8,485		—			8,485
Foreign currency translation adjustments	—	—		—			—		—				—		655			655
Balance, June 30, 2018	58,289,613	$	1	$	442,717		20,220,227		$	(155,947	)		$	163,590	$	(1,519	)	$	448,842
Balance, December 31, 2018	58,810,637	$	1	$	453,400		20,220,227		$	(155,947	)		$	171,383	$	(1,513	)	$	467,324
Issuance of common stock under employee plans	298,649	—		(1,159		)	—		—				—		—			(1,159		)
Stock-based compensation	—	—		7,905			—		—				—		—			7,905
Net income	—	—		—			—		—				6,419		—			6,419
Foreign currency translation adjustments	—	—		—			—		—				—		50			50
Balance, March 31, 2019	59,109,286	1		460,146			20,220,227		(155,947		)		177,802		$	(1,463	)	480,539
Issuance of common stock under employee plans	71,832	—		(869		)	—		—				—		—			(869		)
Stock-based compensation	—	—		8,627			—		—				—		—			8,627
Issuance of common stock for business combination contingent consideration	70,613	—		—			—		—				—		—			—
Net income	—	—		—			—		—				738		—			738
Foreign currency translation adjustments	—	—		—			—		—				—		(108		)	(108		)
Balance, June 30, 2019	59,251,731	$	1	$	467,904		20,220,227		$	(155,947	)		$	178,540	$	(1,571	)	$	488,927

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

3

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net income	$	7,157		$	21,411
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	5,487			5,161
Loss on disposal and impairment of property and equipment, net	1,563			153
Loss on disposal and abandonment of intangible assets	18			54
Stock-based compensation	16,532			9,047
Deferred income taxes	(1,311		)	(58		)
Unrecognized tax benefits	613			212
Other noncash, net	1,822			30
Change in assets and liabilities:
Accounts and notes receivable and contract assets	(11,006		)	(24,791		)
Inventory	(7,515		)	4,508
Prepaid expenses and other assets	(5,761		)	(7,429		)
Accounts payable, accrued and other liabilities	(16,752		)	(2,688		)
Deferred revenue	6,577			10,496
Net cash provided by (used in) operating activities	(2,576		)	16,106
Cash flows from investing activities:
Purchases of investments	(141,992		)	(4,331		)
Proceeds from maturity/call of investments	25,319			7,038
Purchases of property and equipment	(7,861		)	(4,665		)
Purchases of intangible assets	(344		)	(254		)
Business acquisitions	—			(5,014		)
Net cash used in investing activities	(124,878		)	(7,226		)
Cash flows from financing activities:
Net proceeds from equity offering	—			233,993
Proceeds from options exercised	104			586
Income and payroll tax payments for net-settled stock awards	(2,132		)	(10,807		)
Payment of contingent consideration for a business acquisition	—			(575		)
Net cash provided by (used in) financing activities	(2,028		)	223,197
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(252		)	(538		)
Net increase (decrease) in cash, cash equivalents and restricted cash	(129,734		)	231,539
Cash, cash equivalents and restricted cash, beginning of period	351,027			78,438
Cash, cash equivalents and restricted cash, end of period	$	221,293		$	309,977
Supplemental disclosures:
Cash and cash equivalents	$	219,720		$	307,507
Restricted cash (Note 1)	1,573			2,470
Total cash, cash equivalents and restricted cash shown in the statements of cash flows	$	221,293		$	309,977
Cash paid for income taxes, net of refunds	$	1,331		$	7,758
Non-cash transactions
Property and equipment purchases in accounts payable and accrued liabilities	$	91		$	665
Non-cash purchase consideration related to business combinations	$	—		$	12,288

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

4

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

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

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

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

Basis of Presentation and Use of Estimates

These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information related to our organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) has been condensed or omitted. The accounting policies followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed in our annual consolidated financial statements for the year ended December 31, 2018, as filed on Form 10-K, with the exception of our adoption of certain accounting pronouncements which we describe below. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with our Form 10-K for the year ended December 31, 2018. The results of operations for the six months ended June 30, 2019 and 2018 are not necessarily indicative of the results to be expected for the full year (or any other period). Significant estimates and assumptions in these unaudited condensed consolidated financial statements include:

• product warranty reserves,

• inventory valuation,

• revenue recognition,

• valuation of goodwill, intangible and long-lived assets,

• recognition, measurement and valuation of current and deferred income taxes,

• stock-based compensation,

• recognition and measurement of lease liabilities,

• recognition and measurement of contingencies and accrued litigation expense, and

• fair values of identified tangible and intangible assets acquired and liabilities assumed in business combinations.

Actual results could differ materially from those estimates.

Segment Information

Our operations are comprised of two reportable segments: the manufacture and sale of conducted electrical weapons ("CEWs"), batteries, accessories, extended warranties and other products and services (the “TASER” segment); and the development, manufacture, and sale of software and sensors, which includes the sale of devices, wearables, applications, cloud and mobile products (collectively, the “Software and Sensors” segment). Revenue from our “products” in the Software and Sensors segment are generally from sales of sensors, including on-officer body cameras, Axon Fleet cameras, other hardware sensors, warranties on sensors, and other products, and is sometimes referred to as "Sensors and Other revenue." Revenue from our “services” in the Software and Sensors segment comprise sales related to the Axon Cloud, which includes Axon Evidence, cloud-based evidence management software revenue, other recurring cloud-hosted software revenue and related professional services, and is sometimes referred to as "Axon Cloud revenue." Within the Software and Sensors segment, we include only revenues and costs attributable to that segment, which costs include: costs of sales for both products and services, direct labor, product management and research and development ("R&D") for products included, or to be included, within the Software and Sensors segment. All other costs are included in the TASER segment.

5

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Our Chief Executive Officer, who is the Chief Operating Decision Maker (the “CODM”), is not provided asset information or sales, general, and administrative expense by segment. Reportable segments are determined based on discrete financial information reviewed by the CODM. We organize and review operations based on products and services. We perform an analysis of our reportable segments on at least an annual basis. Additional information related to our business segments is summarized in Note 15.

Geographic Information and Major Customers / Suppliers

For the three and six months ended June 30, 2019 and 2018, no individual country outside the U.S. represented more than 10% of total net sales. Individual sales transactions in the international market are generally larger and occur more intermittently than in the domestic market due to the profile of our customers. For the three and six months ended June 30, 2019 and 2018, no customer represented more than 10% of total net sales. At June 30, 2019 and December 31, 2018, no customer represented more than 10% of the aggregate balance of accounts and notes receivable and contract assets.

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

Income per Common Share

Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. Potentially dilutive securities include outstanding stock options and unvested restricted stock units ("RSUs"). The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of our common stock can result in a greater dilutive effect from potentially dilutive securities.

The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Numerator for basic and diluted earnings per share:
Net income	$	738	$	8,485	$	7,157	$	21,411
Denominator:
Weighted average shares outstanding	59,187		55,527		59,051		54,330
Dilutive effect of stock-based awards	813		1,527		825		1,562
Diluted weighted average shares outstanding	60,000		57,054		59,876		55,892
Anti-dilutive stock-based awards excluded	12,056		3,023		12,111		1,533
Net income per common share:
Basic	$	0.01	$	0.15	$	0.12	$	0.39
Diluted	$	0.01	$	0.15	$	0.12	$	0.38

Standard Warranties

We warranty our CEWs, Axon cameras and certain related accessories from manufacturing defects on a limited basis for a period of one year after purchase and, thereafter, will repair or replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold when revenue is recorded for the related product. Future warranty costs are estimated

6

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

based on historical data related to warranty claims on a quarterly basis and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure or other issue that could result in larger than anticipated warranty claims from customers. The warranty reserve is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. The warranty reserve is included in accrued liabilities on the accompanying condensed consolidated balance sheets. 

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

	Six Months Ended June 30,
	2019			2018
Balance, beginning of period	$	898		$	644
Utilization of accrual	(250		)	(149		)
Warranty expense	634			10
Balance, end of period	$	1,282		$	505

Fair Value Measurements and Financial Instruments

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

• Level 1 – Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.

• Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.

• Level 3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect our own assumptions about inputs that market participants would use in pricing an asset or liability.

We have cash equivalents and investments, which at June 30, 2019 and December 31, 2018 were comprised of money market funds and, at June 30, 2019, also included corporate bonds. See additional disclosure regarding the fair value of our cash equivalents and investments in Note 3. Included in the balance of other assets as of June 30, 2019 and December 31, 2018 was $4.0 million and $3.6 million, respectively, related to corporate-owned life insurance policies which are used to fund our deferred compensation plan. We determine the fair value of insurance contracts by obtaining the cash surrender value of the contracts from the issuer, a Level 2 valuation technique.

Our financial instruments also include accounts and notes receivable, contract assets, accounts payable and accrued liabilities. As these instruments are generally short-term in nature, their carrying values approximate their fair values on the accompanying condensed consolidated balance sheets.

Restricted Cash

Restricted cash balances as of June 30, 2019 and December 31, 2018 included $0.9 million of sales proceeds related to long-term contracts with customers, which were included in prepaid expenses and other current assets on our condensed consolidated balance sheets. The proceeds are held in escrow until certain billing milestones are achieved, and then specified amounts are transferred to our operating accounts. Restricted cash balances as of June 30, 2019 and December 31, 2018 also included $0.7 million related to a performance guarantee for an international customer sales contract, which were included in other assets on our accompanying condensed consolidated balance sheets.

7

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Valuation of Goodwill, Intangibles and Long-lived Assets

We evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and identifiable intangible assets, excluding goodwill and intangible assets with indefinite useful lives, may warrant revision or that the remaining balance of these assets may not be recoverable. Such circumstances could include, but are not limited to, a change in the product mix, a change in the way products are created, produced or delivered, or a significant change in the way products are branded and marketed. In performing the review for recoverability, we estimate the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair value computed using discounted cash flows. During the three months ended June 30, 2019, we abandoned certain capitalized software related to implementation work on an enterprise resource planning system conversion, resulting in an impairment charge of $1.3 million, which was included in sales, general and administrative expense in the accompanying condensed consolidated statements of operations.

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

Recently Issued Accounting Guidance

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. In July 2018, the FASB issued additional guidance which provided an additional transition method for adopting the updated guidance.  Most prominent among the changes in the standard is the requirement for lessees to recognize ROU assets and lease liabilities for those leases that were classified as operating leases under previous U.S. GAAP. On January 1, 2019, we adopted Topic 842 by applying the non-comparative modified retrospective method of adoption. Under this method, financial information related to periods prior to adoption will be as originally reported under the then-current standard (Topic 840, Leases).

Results for reporting periods beginning on or after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted, and continue to be reported in accordance with our historic accounting under Topic 840. We elected to apply the package of practical expedients to not reassess whether a contract is or contains a lease, lease classification, or initial lease costs for all leases that commenced before the adoption date.

The adoption had a material impact to our condensed consolidated balance sheet. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. There was no other impact from the adoption. The adjustments to the opening balance sheet were as follows (in thousands):

	December 31, 2018		Impact of Adoption of Topic 842 on Opening Balance Sheet			January 1, 2019
	(As reported)					(As adjusted)
Consolidated Balance Sheet Data:
Other assets	$	22,999	$	12,483		$	35,482
Total assets	719,540		12,483			732,023
						—
Accrued liabilities	41,092		(1,138		)	39,954
Other current liabilities	37		3,588			3,625
Total current liabilities	166,011		2,450			168,461
Other long-term liabilities	5,704		10,033			15,737
Total liabilities	252,216		12,483			264,699
Total liabilities and stockholders' equity	719,540		12,483			732,023

8

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

See Note 11 for further disclosures related to Topic 842.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), expanding the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. We adopted this standard on January 1, 2019 and the adoption had no impact on our condensed consolidated financial statements.

Effective the first quarter of 2020:

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 includes an impairment model (known as the current expected credit loss model) on financial instruments and other commitments that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The use of forecasted information is intended to incorporate more timely information in the estimate of expected credit loss. This ASU will also require enhanced disclosures relating to significant estimates and judgments used in estimating credit losses, as well as credit quality. We are currently in the process of evaluating the impact of adoption of ASU 2016-13 on our investments, accounts and notes receivable, and contract assets.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. The amendments apply to the disclosures of changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted, and an entity is also permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until their effective date. Adoption of this ASU is not expected to have a material impact on our consolidated financial statements.

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

9

2. Revenues

Nature of Products and Services

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

	Three Months Ended June 30, 2019						Three Months Ended June 30, 2018
	TASER		Software and Sensors		Total		TASER		Software and Sensors		Total
TASER 7	$	9,298	$	—	$	9,298	$	—	$	—	$	—
TASER X26P	10,382		—		10,382		18,146		—		18,146
TASER X2	14,087		—		14,087		18,362		—		18,362
TASER Pulse and Bolt	1,118		—		1,118		1,101		—		1,101
Single cartridges	19,293		—		19,293		17,243		—		17,243
Axon Body	—		5,612		5,612		—		4,780		4,780
Axon Flex	—		1,623		1,623		—		1,535		1,535
Axon Fleet	—		3,120		3,120		—		2,715		2,715
Axon Dock	—		2,731		2,731		—		2,119		2,119
Axon Evidence and cloud services	109		31,821		31,930		—		20,357		20,357
TASER Cam	—		1,044		1,044		—		762		762
Extended warranties	4,482		4,420		8,902		3,738		2,870		6,608
Other	1,803		1,419		3,222		2,034		3,464		5,498
Total	$	60,572	$	51,790	$	112,362	$	60,624	$	38,602	$	99,226

	Six Months Ended June 30, 2019						Six Months Ended June 30, 2018
	TASER		Software and Sensors		Total		TASER		Software and Sensors		Total
TASER 7	$	19,252	$	—	$	19,252	$	—	$	—	$	—
TASER X26P	26,254		—		26,254		34,620		—		34,620
TASER X2	27,172		—		27,172		42,294		—		42,294
TASER Pulse and Bolt	1,788		—		1,788		2,447		—		2,447
Single cartridges	38,453		—		38,453		33,357		—		33,357
Axon Body	—		12,057		12,057		—		10,338		10,338
Axon Flex	—		2,847		2,847		—		3,204		3,204
Axon Fleet	—