UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission File Number: 001-16391
(Exact name of registrant as specified in its charter) |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
, | |||||
(Address of principal executive offices) | (Zip Code) | ||||
Registrant’s telephone number, including area code:
(480 ) 991-0797
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of exchange on which registered |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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.
☒ | 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 Act). Yes ☐ No ☒
As of June 30, 2019, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $3.737 billion based on the closing sale price as reported on the NASDAQ Global Select Market.
The number of shares of the registrant’s common stock outstanding as of February 18, 2020 was 59,528,200 .
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the registrant’s definitive proxy statement for its 2020 annual meeting of stockholders to be prepared and filed with the Securities and Exchange Commission not later than 120 days after December 31, 2019 are incorporated by reference into Part III of this Form 10-K.
AXON ENTERPRISE, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2019
Page | ||
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PART I
Statements contained in this report that are not historical are “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. 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: our ability to design, introduce and sell new products or features; our ability to defend against litigation and protect our intellectual property, and the resulting costs of this activity; our ability to manage our supply chain and avoid production delays, shortages, and impacts to expected gross margins; the impact of stock compensation expense, impairment expense, and income tax expense on our financial results; customer purchase behavior, including adoption of our software as a service delivery model; our exposure to cancellations of government contracts due to appropriation clauses, exercise of a cancellation clause, or non-exercise of contractually optional periods; negative media publicity regarding our products; the impact of product mix on projected gross margins; defects in our products; changes in the costs of product components and labor; loss of customer data, a breach of security, or an extended outage, including our reliance on third party cloud-based storage providers; exposure to international operational risks; delayed cash collections and possible credit losses due to our subscription model; changes in government regulations in the U.S. and in foreign markets, especially related to the classification of our product by the United States Bureau of Alcohol, Tobacco, Firearms and Explosives and to evolving regulations surrounding privacy and data protection; our ability to integrate acquired businesses; our ability to attract and retain key personnel; and counter-party risks relating to cash balances held in excess of FDIC insurance limits. Many events beyond our control may determine whether results we anticipate will be achieved. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements. This report lists 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 this Annual Report on Form 10-K, 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.
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Item 1. Business
Axon Enterprise, Inc. may be referred to as “the Company,” “Axon,” “we,” or “our.” We were incorporated in Arizona in September 1993 as ICER Corporation. We changed our name to AIR TASER, Inc. in December 1993 and to TASER International, Incorporated in April 1998. In January 2001, we reincorporated in Delaware as TASER International, Inc., and in April 2017, changed our name to Axon Enterprise, Inc.
Our headquarters in Scottsdale, Arizona houses our executive management, sales, marketing, certain engineering, manufacturing, finance and other administrative support functions. Our global software hub is located in Seattle, Washington, and we also have subsidiaries and / or offices located in Australia, Canada, Finland, Hong Kong, Germany, India, Italy, the Netherlands, the United Kingdom, and Vietnam.
Overview
Axon’s mission is to protect life. We fulfill this 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 products solve some of society's most challenging problems and our mission attracts top talent.
An axon is a nerve fiber that serves as the primary communication link in a nervous system — similarly, we see ourselves as building the nervous system for public safety. Our growth strategy includes heavy R&D investment to support continuous innovation on behalf of law enforcement customers. In addition, we are expanding our sales force to support sales into law-enforcement-adjacent markets, to include the U.S. federal government and military, U.S. and international departments of corrections (prisons), and the fire and emergency medical services markets.
In these markets, we seek to increasingly drive adoption of integrated product bundles that generate recurring revenue and cash flow. The Axon Network is a mutually reinforcing suite — the more subscribers we attract, the more value we can offer. More value delivered drives user adoption, which generates data for collaborative sharing, real-time communications, and improving product performance with artificial intelligence ("AI") training.
Axon's operations comprise two reportable segments:
1. | TASER: Axon is the market leader in the development, manufacture and sale of conducted energy weapons ("CEWs"), also known as conducted energy devices ("CEDs"), which we sell under our brand name, TASER. Research has shown that the TASER device is the most effective less-than-lethal force option, with the lowest likelihood of injury to officers and assailants. Since our inception in 1993, the TASER has been adopted by a majority of U.S. police departments and is used daily to help keep communities safe. |
2. | Software and Sensors: Axon is the market leader in on-officer body (Axon Body and Flex) and in-car (Axon Fleet) cameras as well as cloud-based digital evidence management software (Evidence.com). We develop, manufacture and sell fully integrated hardware and cloud-based software solutions that enable law enforcement to capture, securely store, manage, share and analyze video and other digital evidence. Of the 69 largest metropolitan area police departments in the U.S., 47 are on the Axon Network. |
Further information about our reportable segments and sales by geographic region is included in Notes 1 and 17 of the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K. For backlog by reportable segment, refer to Part II, Item 7 of this Annual Report on Form 10-K.
Guiding Product Principles
Axon’s products are generally cloud-connected, designed to drive better outcomes and customer experiences, and sold via bundles. Our solutions are organized into four categories:
•De-escalation: We develop smart weapons and tools that support public safety officers in de-escalating situations, avoiding or minimizing use of force. These tools include the cloud-connected TASER CED (TASER 7) as
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well as a suite of Augmented Reality and Virtual Reality ("AR/VR") training services for law enforcement, delivered through our Axon Academy training platform. To obsolete firearms and bullets, we intend to not only develop more effective TASER devices over time but also drive training and adoption of the best practices in modern policing.
•Sensors: Our digital evidence management software, Axon Evidence, supports our network of cloud-connected cameras and sensors. Axon Evidence addresses the challenges presented by growing amounts of digital evidence via closed circuit television video, body worn camera video, in-car camera video, and citizen-captured digital evidence, making it easy to store, manage, redact and share on one platform. Axon Evidence is the world’s largest cloud-hosted data repository of law enforcement video data and other types of electronic evidence. Axon is also driving innovation in the body camera category through developing solutions that do more than collect, store and manage video. In September 2019, we began shipping Axon Body 3, a camera with an LTE antenna and a Global Positioning System ("GPS") chip, which supports real-time awareness.
•Productivity: Our productivity suite of tools is designed to reduce time spent on paperwork. Axon Records, an emerging product, is a cloud-based report-writing software tool that takes a disruptive modern approach to displace legacy records management systems ("RMS") by putting body camera video at the heart of the incident record. Axon Records includes Axon Standards, a radically simpler approach to use-of-force reporting that can be easily adopted alongside a traditional RMS before upgrading to the full service. Axon Performance helps agencies to ensure that officers are adhering to agency policies, and provides them the analytics to demonstrate the effectiveness of their body-worn camera programs. Redaction Assistant enables agencies to redact videos in a fraction of the time through the use of artificial intelligence ("AI").
•Communications: We are developing communication tools that support real-time situational awareness through the sharing of information across myriad media, including voice, messaging, location mapping, and intelligence and evidence sharing. Products include Axon Aware, which allows agencies to know the GPS location of their officers and what those officers are experiencing through live video streaming, and Axon Dispatch, which is a computer-aided dispatch ("CAD") product that is designed to empower everyone in public safety who is involved in incident response: dispatchers, call takers, command staff, patrol officers, firefighters and medical personnel.
Sales and Distribution
Axon's direct sales force and strong customer relationships represent key strategic advantages. The majority of our revenues are generated via direct sales, including our online store, although we do leverage distribution partners and third-party resellers.
No customer represented more than 10% of total net sales for the years ended December 31, 2019, 2018 or 2017.
Our primary customer market is US law enforcement. Of the approximately 18,000 law enforcement agencies in the US, we have a customer relationship with approximately 17,000. Axon has dedicated sales representatives for the 1,200 largest agencies, which account for 70% to 80% of U.S. law enforcement patrol officers. The remaining agencies are served via our telesales team as well as distributors. Internationally, we began focusing on a direct sales strategy in 2017, and in 2018 and 2019 we made significant investments in building out our international direct sales force, particularly in the United Kingdom, Europe, Australia and New Zealand.
In 2019, we added sales personnel to capture law enforcement-adjacent markets, such as the US federal government and military, U.S. and international departments of corrections, and the fire and emergency medical services markets.
Governmental agencies generally have the ability to terminate our contracts, in whole or in part, for reasons including, but not limited to, non-appropriation of funds.
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Manufacturing and Supply Chain
We perform light manufacturing, final assembly, and final test operations at our headquarters in Scottsdale, Arizona, and own substantially all of the equipment required to develop, prototype, manufacture and assemble our finished products. We have continued to maintain both our ISO 9001 and our ISO 9001:2015 certifications.
We obtain many of our components from single source suppliers; however, because we own the injection molded component tooling used in their production, we believe we could obtain alternative suppliers in most cases without incurring significant production delays. For additional discussion of sources and availability of raw materials, refer to Note 1 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
We provide limited manufacturer's warranties on our CEDs and Axon devices. For additional information about our warranties, refer to Note 1 to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
Competition
De-escalation — TASER for Law Enforcement, Corrections and Private Security Markets: Our CEDs compete with a variety of other less-lethal alternatives to firearms, including rubber bullets or rubber baton rounds, pepper spray, mace, traditional stun guns, hand-held remote restraint devices involving a tether, laser dazzlers that cause temporary blindness, stun grenades, long-range acoustic devices, police batons and night sticks. TASER devices offer advanced technology, versatility, portability, effectiveness, built-in accountability systems, and low injury rates, which enable us to compete effectively against other less-lethal alternatives. TASER devices also offer connectivity to our cloud network, which allows agencies to more effectively manage their less-lethal programs and automate use-of-force reporting.
The primary competitive factors in this market include a device’s accuracy, effectiveness, reputation, safety, cost, ease of use, and exceptional customer experience. The design maturity of the TASER platform, as well as our development and sale of a two-shot device, are also key competitive differentiators. We are aware of competitors providing competing CED products primarily in international markets.
De-escalation — TASER for Private Citizen Market: In the private citizen market, these devices primarily compete with firearms, but also with other less lethal self-defense options such as pepper spray and stun guns. The primary competitive factors in this market include a device’s cost, effectiveness, safety and ease of use. The TASER StrikeLight competes in the flashlight category, in which there are dozens, if not hundreds, of competitors, including tactical flashlight providers such as SureFire, 5.11 Tactical, Blackhawk, Maglite, and many more.
Sensors — Connected Cameras and Digital Evidence Management Software: The body-worn camera and in-car video market is highly competitive. Our competition includes Motorola Solutions and WatchGuard, which Motorola purchased in 2019, Panasonic Corp., Reveal Media, L3 Mobile-Vision, Coban Technologies, Digital Ally, Getac, Utility Associates, Intrensic, Safety Vision and Visual Labs. We also compete with consumer wearable camera makers including GoPro and Garmin.
The market for software solutions to improve public safety agency workflows is highly fragmented and highly competitive. Our cloud-based digital evidence management system, Axon Evidence, competes with both cloud-based platforms and on-premises based systems designed by third-parties or in-house by an agency's technology staff.
Key competitive factors in this market include product performance, product features, battery life, product quality and warranty, total cost of ownership, data security, data and information work flows, company reputation and financial strength, and relationships with customers.
Productivity and Communications — RMS and CAD: The RMS and CAD markets are highly competitive and highly fragmented. We have identified more than 50 incumbent software providers, including Motorola Solutions, Tyler Technologies, Central Square Technologies (formerly Superion, TriTech and Aptean), Northrop Grumman, Hexagon
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AB, Niche Technology Inc., Caliber Public Safety (parent, Harris Systems USA), Saab, Sopra Steria, and Mark 43 Inc. In addition, not all law enforcement agencies use software for report writing — some still use paper. We believe our network of camera sensors and digital evidence management platform give us a strategic advantage in these product categories.
Seasonality
We have historically experienced higher net sales in our fourth quarter compared to other quarters in our fiscal year due primarily to municipal budget cycles. Additionally, new product introductions can significantly impact the cadence of net sales, product costs and operating expenses. However, historical seasonal patterns, municipal budgets or historical patterns of product introductions should not be considered reliable indicators of our future net sales or financial performance.
Environmental Regulation
We are subject to environmental laws and regulations, including restrictions on the presence of certain substances in electronic products. Refer to Section 1A, Risk Factors under the heading “A variety of new and existing laws and/or interpretations could materially and adversely affect our business.”
Intellectual Property
We protect our intellectual property with U.S. and international patents and trademarks. Our patents and pending patent applications relate to technology used by us in connection with our products. We also rely on international treaties, organizations and laws to protect our intellectual property. As of December 31, 2019, we hold 183 U.S. patents, 75 U.S. registered trademarks, 127 international patents, and 313 international registered trademarks, and also have numerous patents and trademarks pending. We are constantly innovating across all of our platforms, including on the TASER platform, and in the next few years expect to file more patent applications related to TASER 7 alone than there are TASER patents expiring due to age.
We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as the commercial significance of our operations and our competitors’ operations in particular countries and regions, our strategic technology or product directions in different countries, and the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions. We have the exclusive rights to many Internet domain names, primarily including “TASER.com”, “Axon.com”, “Axon.net”, “Evidence.com” and “Axon.io.”
Confidentiality agreements are used with employees, consultants and key suppliers to help ensure the confidentiality of our trade secrets.
Employees
As of December 31, 2019, we had 1,323 full-time employees and 593 temporary employees. The breakdown of our full-time employees by department was as follows: 249 direct manufacturing employees, 408 research and development employees, 401 administrative and manufacturing support employees and 265 employees within sales, marketing, communications and training. Of the 593 temporary employees, nearly 70% worked in direct manufacturing roles. Our employees are not covered by any collective bargaining agreement, and we have never experienced a work stoppage. We believe that our relations with our employees are good.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports filed with or furnished to the SEC are available free of charge on our website at http://investor.axon.com as soon as reasonably practicable after we electronically file or furnish such material to the SEC. The information on our website, including information about our trademarks, is not incorporated by reference
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into or otherwise a part of this Annual Report on Form 10-K. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
Item 1A. Risk Factors
Because of the following factors, as well as other variables affecting our operating results, our past financial performance may not be a reliable indicator of our future performance and historical trends should not be used to anticipate our results or trends in future periods. You should carefully consider the trends, risks and uncertainties described below and other information in this Form 10-K and subsequent reports filed with or furnished to the SEC before making any investment decision with respect to our securities. If any of the following trends, risks or uncertainties actually occurs or continues, our business, financial condition or operating results could be materially adversely affected, the trading prices of our securities could decline, and you could lose all or part of your investment. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.
We are materially dependent on acceptance of our products by law enforcement markets, both domestic and international. If law enforcement agencies do not continue to purchase and use our products, our revenues will be adversely affected.
At any point, due to external factors and opinions, whether or not related to product performance, law enforcement agencies may elect to no longer purchase our CEDs or other products.
We substantially depend on sales of our TASER CEDs, and if these products do not continue to be widely accepted, our growth prospects will be diminished.
In the years ended December 31, 2019, 2018 and 2017, we derived a significant portion of our revenues from sales of TASER CED brand devices and related cartridges, and expect to depend on sales of these products for a significant portion of our revenue for the foreseeable future. A decrease in the selling prices of, or demand for these products, or their failure to maintain broad market acceptance, would significantly harm our growth prospects, operating results and financial condition.
If we are unable to design, introduce, sell and deploy new products or new product features successfully, our business and financial results could be adversely affected.
Our future success will depend on our ability to develop new products or new product features that achieve market acceptance in a timely and cost-effective manner. These products include, but are not limited to, Axon Body 3, Axon Aware, Axon Records, Axon Dispatch, and future generations of the TASER CED and Axon Fleet. The development of new products and new product features is complex, time consuming and expensive, and we may experience delays in completing the development and introduction of new products. We may choose to carry higher level of inventories to mitigate the risk of production delays, which may in turn expose us to an increased risk of obsolescence.
We are devoting significant resources to develop and deploy our cloud-based productivity and communication software-as-a-service ("SaaS") solutions, which we intend to broadly deploy to a large number of customers. Customer requirements for these products are complex and varied. If we are unable to develop scalable solutions that can consistently be configured for customers with minimal effort, or if we are unable to build out a professional services team that can consistently configure our products to meet the requirements of large numbers of customers in a timely and cost-effective manner, our ability to broadly scale our cloud-based productivity and communication SaaS solutions could be negatively impacted, and our deployment costs could negatively impact our operating results.
We cannot provide any assurance that products that we may develop in the future will achieve market acceptance. If we fail to develop new products or new product features on a timely basis that achieve market acceptance, our business, financial results and competitive position could be adversely affected.
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Delays in product development schedules may adversely affect our revenues and cash flows.
The development of CEDs, devices, sensors and software is a complex and time-consuming process. New products and enhancements to existing products can require long development and testing periods. Our focus on our SaaS platform also presents complex development issues. Significant delays in new product or service releases or significant problems in creating new products or services could adversely affect our business, financial results and competitive position.
We face risks associated with rapid technological change and new competing products.
The technology associated with law enforcement devices is receiving significant attention and is rapidly evolving. While we have some patent protection in certain key areas of our CED, Axon Device and SaaS technology, it is possible that new technology may result in competing products that operate outside our patents and could present significant competition for our products, which could adversely affect our business, financial results and competitive position.
Higher costs or unavailability of materials could adversely affect our financial results.
We depend on certain domestic and international suppliers for the delivery of components used in the assembly of our products. Our reliance on third-party suppliers creates risks related to our potential inability to obtain an adequate supply of components or sub-assemblies and reduced control over pricing and timing of delivery of components and sub-assemblies. Specifically, we depend on suppliers of sub-assemblies, machined parts, injection molded plastic parts, printed circuit boards, custom wire fabrications and other miscellaneous customer parts for our products. We do not have any significant long-term agreements with any of our suppliers and there is no guarantee that supply will not be interrupted.
Single or sole-source components used in the manufacture of our products may become unavailable or discontinued. Delays caused by industry allocations or obsolescence may take weeks or months to resolve. In some cases, parts obsolescence may require a product re-design to ensure quality replacement components. These delays could cause significant delays in manufacturing and loss of sales, leading to adverse effects significantly impacting our financial condition or results of operations and could injure our reputation.
A significant number of our raw materials or components are comprised of petroleum-based products or incur some form of landed cost associated with transporting the raw materials or components to our facility. Our freight and import costs and the timely delivery of our products could be adversely impacted by a number of factors which could reduce the profitability of our operations, including: higher fuel costs; potential port closures; customs clearance issues; increased government regulation or changes for imports of foreign products into the U.S.; delays created by terrorist attacks or threats, public health issues, national disasters or work stoppages; and other matters. Any interruption of supply for any material components of our products could significantly delay the shipment of our products and have a material adverse effect on our revenues, profitability and financial condition. International or domestic geopolitical or other events, including the imposition of new or increased tariffs and/or quotas by the U.S. government on any of these raw materials or components, could adversely impact the supply and cost of these raw materials or components, and could adversely impact the profitability of our operations.
To the extent demand for our products increases, our future success will be dependent upon our ability to manage our growth and to increase manufacturing production capacity, which may be accomplished by the implementation of customized manufacturing automation equipment.
To the extent demand for our products increases significantly in future periods, one of our key challenges will be to increase our production capacity to meet sales demand while maintaining product quality. Our primary strategies to accomplish this include introducing additional shifts, increasing the physical size of our assembly facilities, the hiring of additional production staff, and the implementation of additional customized automation equipment. The investments we make in this equipment may not yield the anticipated labor and material efficiencies. Our inability to meet any future increase in sales demand or effectively manage our expansion could have a material adverse effect on our revenues, financial results and financial condition.
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Our future success is dependent on our ability to expand sales through distributors and direct sales and our inability to recruit new distributors or increase direct sales would negatively affect our sales.
Our distribution strategy is to pursue sales through multiple channels with an emphasis on independent distributors and direct sales. Our inability to establish relationships with and retain law enforcement equipment distributors, who we believe can successfully sell our products, would adversely affect our sales. In addition, our arrangements with our distributors are generally short-term. We are also focusing on direct sales to larger agencies through our regional sales managers and our inability to grow sales to these agencies in this manner could adversely affect our sales. If we do not competitively price our products, meet the requirements of our distributors or end-users, provide adequate marketing support, or comply with the terms of our distribution arrangements, our distributors may fail to aggressively market our products or may terminate their relationships with us. These developments would likely have a material adverse effect on our sales. Our reliance on the sales of our products by others also makes it more difficult to predict our revenues, cash flow and operating results.
The increased focus on direct sales compared to sales through distribution is dependent on our ability to sell into the states or foreign jurisdictions that have established distributor relationships.
In certain states and foreign jurisdictions we have decided to pursue sales directly with law enforcement customers, rather than working through established distribution channels. Our customers may have strong working relationships with distributors and we may face resistance to this change. If we do not overcome this resistance and effectively build a direct relationship with our customers, sales may be adversely affected.
We expend significant resources in anticipation of a sale due to our lengthy sales cycle and may receive no revenue in return.
Generally, law enforcement and corrections agencies consider a wide range of issues before committing to purchase our products, including product benefits, training costs, the cost to use our products in addition to, or in place of, other products, budget constraints and product reliability, safety and efficacy. The length of our sales cycle may range from a few weeks to as long as several years. Adverse publicity surrounding our products or the safety of such products has in the past, and could in the future, lengthen our sales cycle with customers. In the past, we believe that our sales were adversely impacted by negative publicity surrounding our products or the use of our products. See, for example, “Litigation - Product Litigation” in Note 9 of our consolidated financial statements included in Part II, Item 8 of this report. We may incur substantial selling costs and expend significant effort in connection with the evaluation of our products by potential customers before they place an order. If these potential customers do not purchase our products, we will have expended significant resources and received no revenue in return.
An increasing percentage of our revenue is derived from subscription billing arrangements which may result in delayed cash collections and may increase customer credit risk on receivables and contract assets.
A growing portion of our sales are derived from subscription billing arrangements and on an open credit basis. While we perform ongoing credit evaluations of our customers' financial condition, if we become aware of information related to the creditworthiness of a major customer, or if future actual default rates on receivables in general differ from those currently anticipated, we may have to adjust our allowance for doubtful accounts, which could adversely affect our business, financial condition or operating results.
We may experience a decline in gross margins due to a shift in product sales from CEDs to software and sensors products and services which may continue to carry a lower gross margin.
We continue to invest in the growth of the Software and Sensors segment, and this expected growth may result in a higher percentage of total revenues being comprised of Software and Sensors products and services. Gross margin as a percentage of net sales for the Software and Sensors segment is currently lower than that of the TASER segment, and may continue to be lower in the future.
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SaaS revenue for Axon Evidence is recognized over the terms of the contracts, which may be several years, and, as such, trends in new business may not be immediately reflected in our operating results.
Our SaaS service revenue is generally recognized ratably over the terms of the contracts, which generally range from one to five years. As a result, most of the SaaS revenue we report each quarter is the result of agreements entered into during previous quarters. Consequently, current positive or negative trends in this portion of our business may not be fully reflected in our revenue results for several periods.
Most of our end-user customers are subject to budgetary and political constraints that may delay or prevent sales.
Most of our end-user customers are government agencies. These agencies often do not set their own budgets and therefore, have limited control over the amount of money they can spend. In addition, these agencies experience political pressure that may dictate the manner in which they spend money. As a result, even if an agency wants to acquire our products, it may be unable to purchase them due to budgetary or political constraints, particularly in challenging economic environments. There can be no assurance that the economic and budgeting issues will not worsen and adversely impact sales of our products. Some government agency orders may also be canceled or substantially delayed due to budgetary, political or other scheduling delays, which frequently occur in connection with the acquisition of products by such agencies, and such cancellations may accelerate or be more severe than we have experienced historically.
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.
Although we have entered into contracts for the delivery of products and services in the future and anticipate the contracts will be completed, if agencies do not appropriate money in future year budgets, terminate contracts for convenience or if other cancellation clauses are invoked, revenue and cash associated with these bookings will not ultimately be recognized, and could result in a reduction to bookings and revenue.
Changes in civil forfeiture laws may affect our customers’ ability to purchase our products.
Some of our customers use funds seized through civil forfeiture proceedings to fund the purchase of our products. Legislative changes could impact our customers’ ability to seize funds or use seized funds to fund purchases. Changes in civil forfeiture statutes or regulations are outside of our control and could limit the amount of funds available to our customers, which could adversely affect the sale of our products.
If our security measures or those of our third-party cloud storage providers are breached and unauthorized access is obtained to customers’ data or our data, our network, data centers and service may be perceived as not being secure, customers may curtail or stop using our service and we may incur significant legal and financial exposure and liabilities.
Our service involves the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of information or the total or partial deletion or encryption of all stored customer data, litigation and possible liability. We devote significant resources to engineer secure products and ensure security vulnerabilities are mitigated, and we require our third-party service providers to do so as well. Despite these efforts, security measures may be breached as a result of third-party action, employee error, and malfeasance or otherwise. Breaches could occur during transfer of data to data centers or at any time, and result in unauthorized access to our data or our customers’ data. Third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our data or our customers’ data. Additionally, hackers may develop and deploy viruses, worms, and other malicious software programs that attack or gain access to our networks and data centers.
Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently, grow more complex over time, and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Moreover, our security measures and those of our third-party service providers or customers may not detect such security breaches if they occur. Although we have
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developed systems and processes that are designed to protect our data and user data, to prevent data loss, and to prevent or detect security breaches, we cannot assure that such measures will provide absolute security, and we may incur significant costs in protecting against or remediating cyber-attacks.
A security breach could expose us to a risk of loss or inappropriate use of proprietary and sensitive data, or the denial of access to this data. A security breach could also result in a loss of confidence in the security of our service, disrupt our business, damage our reputation, lead to legal liability, negatively impact our future sales and significantly harm our growth prospects, operating results and financial condition.
Defects or disruptions in our services could impact demand for our services and subject us to substantial liability.
We currently serve our Axon Evidence customers from third-party cloud storage providers based in the U.S. and other countries. Interruptions in our service, or loss or corruption of digital evidence, may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.
Since our customers use our services for important aspects of their operations, any errors, defects, disruptions in service or other performance problems could hurt our reputation and may damage our customers’ operations. As a result, customers could elect to not renew our services or delay or withhold payment to us. We could also lose future sales or customers may make warranty or other claims against us, which could result in an increase in our warranty expense, an increase in collection cycles for and decline in the collectability of accounts receivable, and an increase in the expense and risk of litigation.
Defects in our products could reduce demand for our products and result in a loss of sales, delay in market acceptance and damage to our reputation.
Complex components and assemblies used in our products may contain undetected defects that are subsequently discovered at any point in the life of the product. Defects in our products could result in a loss of sales, delay in market acceptance, damage to our reputation and increased warranty costs, which could adversely affect our business, financial results and competitive position.
A variety of new and existing laws and/or interpretations could materially and adversely affect our business.
We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, including privacy, data protection and personal information, rights of publicity, content, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, electronic contracts and other communications, competition, consumer protection, telecommunications, product liability, taxation, labor and employment, economic or other trade prohibitions or sanctions, securities law compliance, and online payment services. The introduction of new products, expansion of our activities in certain jurisdictions, or other actions that we may take may subject us to additional laws, regulations, or other government scrutiny. In addition, foreign data protection, privacy, content, competition, and other laws and regulations can impose different obligations or be more restrictive than those in the United States.
These U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these laws and regulations are often uncertain and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices. New laws and regulations (or new interpretations of existing laws and regulations) may require us to incur substantial costs, expose us to unanticipated civil or criminal liability, or cause us to change our business practices.
The costs of compliance with these laws and regulation are high and are likely to increase in the future. Additionally, these laws and regulations, or any associated inquiries or investigations or other government actions, may delay or impede the development of new products, result in negative publicity, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices.
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TASER and Axon devices
For our TASER products, we rely on the opinions of the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, including the determination that a device that has projectiles propelled by the release of compressed gas in place of the expanding gases from ignited gunpowder is not classified as a firearm. Changes in statutes, regulations, and interpretation outside of our control may result in our products being classified or reclassified as firearms. If this were to occur, our private citizen market could be substantially reduced because consumers would be required to comply with federal, state, or local firearm transfer requirements prior to purchasing our products.
Federal regulation of sales in the U.S.: Our CEDs are not firearms regulated by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, but our consumer products are regulated by the U.S. Consumer Product Safety Commission. Although there are currently no federal laws restricting sales of our core CED products in the U.S., future federal regulation could adversely affect sales of our products.
Axon devices using lithium batteries are subject to US-DOT/UN 38.3 for transportation, and all our products containing hazardous chemicals require an additional safety data sheet following Occupational Safety and Health Administration ("OSHA") recommendation.
Our CED products are also subject to regulation by testing, safety and other standard organizations such as the American National Standards Institute, the International Electrotechnical Commission ("IEC"), the National Institute of Standards and Technology, and Underwriters Laboratories ("UL"). We follow IEC 62133 for our rechargeable battery packs, UL 1642 for cells, and IEC 60950 (soon to be replaced by IEC 62368) for our wireless and docks devices. These regulations also affect CEDs with Axon signal technology, including signal performance power magazine technology, TASER 7 battery packs and could impact future CEDs that feature wireless technology. Compliance with government regulations could increase our operations and product costs and impact our future financial results.
Federal regulation of international sales: Our CEDs are considered a “crime control” product by the U.S. Department of Commerce (“DOC”) for export directly from the U.S. Consequently, we must obtain an export license from the DOC for the export of our CED devices from the U.S. other than to Canada. In addition, certain of our camera and software products require classifications from the DOC before they may be shipped internationally. Our inability to obtain DOC export licenses or classifications on a timely basis for sales of our products to our international customers could significantly and adversely affect our international sales.
State and local regulation: Our CEDs are controlled, restricted or, less frequently, prohibited by a number of state and local governments. As of December 31, 2019, the possession of stun guns by the general public, including our CEDs, is prohibited in Hawaii and Rhode Island. Some cities and municipalities also prohibit private citizen possession or use of our CED products. Other jurisdictions may ban or restrict the sale of our CED products and our product sales may be significantly affected by additional state, county and city governmental regulation.
International regulation: Certain jurisdictions prohibit, restrict, or require a permit for the importation, sale, possession or use of CEDs, including in some countries by law enforcement agencies, limiting our international sales opportunities.
Radio spectrum devices
Certain of our products utilize the radio spectrum to provide wireless voice, data and video communications services. The allocation of spectrum is regulated in the U.S. and other countries and limited spectrum space is allocated to wireless services and specifically to public safety users. In the U.S., the Federal Communications Commission (“FCC”) regulates spectrum use by non-federal entities and federal entities. Similarly, countries around the world have one or more regulatory bodies that define and implement the rules for use of radio spectrum and electromagnetic interference, pursuant to their respective national laws. We manufacture and market products in spectrum bands already made available by regulatory bodies. Consequently, our results could be negatively affected by the rules and regulations adopted from time to time by the FCC or regulatory agencies in other countries. Regulatory changes in current spectrum bands may also require modifications to some of our products so they can continue to be manufactured and marketed. If current products do not comply with the regulations set forth by these governing bodies, we may be unable to sell our products or could incur penalties, which could have an adverse impact on our financial condition, results of operations and cash flows.
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Axon body worn cameras, docks, fleet vehicle cameras and signal devices are subject to FCC’s rules and regulations. The FCC regulates not only the "intentional radiation" of radio transmitters, but also the "unintentional radiation" of noise from all sorts of electrical equipment. The FCC regulations appear in title 47 of the United States Code of Federal Regulations (47CFR).The current Axon products use Bluetooth, WiFi and/or LTE radio technologies. With the integration of LTE technologies, it is required to apply for the approval of private certifications such as CTIA, required by FirstNet and other operators. These regulations are also beginning to affect CEDs with signal performance power magazine technology and future CEDs implementing wireless technology into the feature set. Compliance with government regulations could increase our operations and product costs and impact our future financial results.
Environmental regulations
We are subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in our products and making producers of those products financially responsible for the collection, treatment, recycling and disposal of such products. In particular, environmental legislation within the European Union ("EU") may increase our cost of doing business internationally and impact our revenues from EU countries as we comply with and implement these requirements.
The EU has published Directives on the restriction of certain hazardous substances in electronic and electrical equipment (the “RoHS Directive”) and on electronic and electrical waste management (the “WEEE Directive”). The RoHS Directive restricts the use of a number of substances, including lead. The WEEE Directive directs members of the EU to enact laws, regulations, and administrative provisions to ensure that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the EU. In addition, similar environmental legislation has been or may be enacted in other jurisdictions, including the U.S. (under federal and state laws) and other countries, the cumulative impact of which could be significant.
In addition, the EU has defined a regulation for Registration, Evaluation, Authorization and Restriction of Chemicals (the “REACH Regulation”) that places responsibility on industry to manage the risks from chemicals contained in products and to provide safety information about such substances. Manufacturers and importers are required to gather information on the properties of the chemical substances in their products, which will allow their safe handling. Starting January 5, 2021, companies supplying products containing substances of very high concern as identified by the EU on the EU market have to submit information on these products to the European Chemicals Agency. The information in their database is then made available to waste operators and consumers.
We continue to monitor the impact of specific registration and compliance activities required by the RoHS, WEEE Directives, and REACH Regulation. We endeavor to comply with applicable environmental laws, yet compliance with such laws could increase our operations and product costs, increase the complexities of product design, procurement, and manufacturing, limit our ability to manage excess and obsolete non-compliant inventory, limit our sales activities, and impact our future financial results. Any violation of these laws can subject us to significant liability, including fines, penalties, and prohibiting sales of our products into one or more states or countries, and result in a material adverse effect on our financial condition.
Privacy regulations
We are also subject to laws and regulations that dictate whether, how, and under what circumstances we can transfer, process and/or receive certain data that is critical to our operations, including data shared between countries or regions in which we operate and data shared among our products and services. For example, in 2016, the EU and the U.S. agreed to an alternative transfer framework for data transferred from the EU to the U.S., called the Privacy Shield, but this new framework is subject to an annual review that could result in changes to our obligations and also may be challenged by national regulators or private parties. If one or more of the legal bases for transferring data from the EU to the U.S. is invalidated, if we are unable to transfer data between and among countries and regions in which we operate, or if we are prohibited from sharing data among our products and services, it could affect the manner in which we provide our services or adversely affect our financial results.
Proposed or new legislation and regulations could also significantly affect our business. There currently are a number of proposals pending before federal, state, and foreign legislative and regulatory bodies. In addition, the European General Data Protection Regulation ("GDPR") took effect in May 2018 and applies to all of our products
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and services that provide service in Europe. The GDPR includes operational requirements for companies that receive or process personal data of residents of the EU that are different than those previously in place in the EU. In addition, the GDPR includes significant penalties for non-compliance. Similarly, there are a number of legislative proposals in the U.S., at both the federal and state level, that could impose new obligations in areas affecting our business, such as liability for copyright infringement by third parties. In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services.
We may face personal injury, wrongful death and other liability claims that harm our reputation and adversely affect our sales and financial condition.
Our CED products are often used in aggressive confrontations that may result in serious, permanent bodily injury or death to those involved. Our CED products may be associated with these injuries. A person, or the family members of a person, injured in a confrontation or otherwise in connection with the use of our products, may bring legal action against us to recover damages on the basis of theories including wrongful death, personal injury, negligent design, defective product or inadequate warning. We are currently subject to a number of such lawsuits and we have been subject to significant adverse judgments and settlements. We may also be subject to lawsuits involving allegations of misuse of our products. If successful, wrongful death, personal injury, misuse and other claims could have a material adverse effect on our operating results and financial condition and could result in negative publicity about our products. We incur significant legal expenses in defending these cases, and significant litigation could also result in a diversion of management’s attention and resources, negative publicity and a potential award of monetary damages in excess of our insurance coverage. The outcome of any litigation is inherently uncertain and there can be no assurance that our existing or any future litigation will not have a material adverse effect on our business, financial condition or operating results.
Other litigation may subject us to significant litigation costs and judgments and divert management attention from our business.
We have been or could in the future be involved in numerous other litigation matters relating to our products, contracts and business relationships, including litigation against persons whom we believe have infringed on our intellectual property, infringement litigation filed against us, litigation against a competitor, enforcement actions filed against us, and litigation involving the U.S. Federal Trade Commission (“FTC”). Such matters have resulted, and are expected to continue to result in, substantial costs to us, including in the form of attorneys' fees and costs, damages, fines or other penalties, whether pursuant to a judgment or settlement, and diversion of our management’s attention, which could adversely affect our business, financial condition or operating results. There is also a risk of adverse judgments, as the outcome of litigation is inherently uncertain.
We have been, and may be in the future, subject to intellectual property infringement and other claims, which could incur substantial litigation costs, result in significant damage awards, inhibit our use of certain technologies, and divert management attention from our business.
Many companies own intellectual property rights that are directly or indirectly related to public safety technologies. These companies periodically demand licensing agreements or engage in litigation based on allegations of infringement or other violations of their patents, trademarks, copyrights, or trade secrets. Non-practicing entities also have patents they have been granted or otherwise acquired, including patents that are directly or indirectly related to public safety technologies. These entities may seek compensation for perceived infringement of their patents, including by filing claims against us, independent of the merit of any such claims. As we enter new markets, expand into new product categories, and otherwise offer new products, services, and technologies, additional intellectual property claims may be filed against us by these companies, entities, and other third parties. Additional intellectual property claims may also be filed against us as our current products, services, and technologies gain additional market share.
Currently, we are a defendant in a patent litigation matter filed by Digital Ally Inc. (“Digital”) in the District of Kansas alleging patent infringement regarding our Axon Signal technology. For additional discussion of this matter, refer to Note 9 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-
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K. We believe the patent in question is both invalid and not infringed. However, if Digital ultimately succeeds in their appeal, the outcome could have an adverse effect on our results of operations in the period in which a liability is recognized and on our cash flows for the period in which any damages are paid.
If our products, services, or technologies were found to infringe a third-party’s proprietary rights, we could be forced to enter into costly royalty or licensing agreements in order to be able to sell our products or discontinue use of the protected technology. Such royalty and licensing agreements may not be available on terms acceptable to us or at all. We could also be required to pay substantial damages, fines or other penalties, indemnify customers or distributors, cease the manufacture, use, or sale of infringing products or processes, and/or expend significant resources to develop or acquire non-infringing technologies. Our suppliers may not provide, or we may not be able to obtain, intellectual property indemnification sufficient to offset all damages, fines or other penalties resulting from any claims of intellectual property infringement brought against us or our customers. There is no guarantee that our use of conventional technology searching and brand clearance searching will identify all potential rights holders. Rights holders may demand payment for past infringements and/or force us to accept costly license terms or discontinue use of protected technology and/or works of authorship that may include, for example, photos, videos, and software. Our current research and development focus on developing software-based products, including that which is related to artificial intelligence, increases this risk.
If we are unable to protect our intellectual property, the value of our brands and products may decrease and we may lose our competitive market advantage.
Our future success depends upon our proprietary technology. Our protective measures for this proprietary technology include patents, trademarks, copyrights, and trade secret protection. However, these protective measures, as well as our efforts to pursue such protective measures, may prove inadequate. For example, the value of intellectual property protection in certain countries may not be apparent until after such protection can no longer be pursued. As such, our intellectual property protection may not extend to all countries in which our products are distributed or will be distributed in the future. Though we work to protect our innovations, we may not be able to obtain protection for certain innovations. For example, we may be unable to patent some software-based products. The scope of any patent protection we have obtained, or may obtain, may not prevent others from developing and selling competing products. Despite our efforts, any intellectual property protection we obtain may be later determined to be insufficient or ineffective.
Our protective measures may prove inadequate for reasons outside of our control. Different intellectual property laws between different countries may lead to differences in protection between such countries. In certain countries in which our products are distributed, the ability to effectively enforce intellectual property rights may not exist. Patent requirements differ by country and certain domestic or foreign laws may prohibit us from satisfying these requirements, creating a risk that some of our international patents may become unenforceable. Patents for older technologies, such as our M26 model of CEDs, have expired or will expire due to statutory limits on patent term. Despite policies and efforts to maintain secrecy, trade secrets and other confidential information we maintain, or may choose to maintain in the future, could be compromised by employees, partners, or other third parties.
Once established, there is no guarantee that our intellectual property rights will remain in force. Issued patents may be re-examined and subsequently ruled invalid or unenforceable. Our registered trademarks may also be diminished or lost. For example, there is a risk that our “TASER” trademark could become synonymous with the general product category of “conducted energy devices”. The right to stop others from misusing our trademarks and service marks in commerce depends, to some extent, on our ability to show evidence of enforcement of our rights against such misuse in commerce. Our efforts to stop improper use, if insufficient, may lead to loss of trademark and service mark rights, brand loyalty and notoriety among our customers and prospective customers.
Our intellectual property may also be at risk if we are unable to defend from enforcement actions, such as that filed by the FTC against us regarding our acquisition of Vievu LLC from Safariland LLC on May 3, 2018. For additional discussion of this matter, refer to Note 9 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. If successful, the FTC is seeking a divestiture of Vievu along with Axon assets sufficient to stand up a viable competitor.
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Inability to protect our intellectual property could negatively impact our commercial efforts and competitive market advantage. Regardless of outcome, the prosecution of patent and other intellectual property claims is both costly and time consuming. Unauthorized use of our proprietary technology could divert our management’s attention from our business, and could result in a material adverse effect on our business, financial position, and operating results.
Internationally, we can enforce patent rights only in the jurisdictions in which our patent applications have been granted.
Our U.S. patents protect us from imported infringing products coming into the U.S. from abroad. We have made applications for patents in a few foreign countries; however, these may be inadequate to protect markets for our products in other foreign countries. Each patent is examined and granted according to the law of the country where it was filed independent of whether a U.S. patent on similar technology was granted. A patent in a foreign country may be subject to cancellation if the claimed invention has not been sold in that country. Meeting the requirements of working invention differs by country and ranges from sales in the country to manufacturing in the country. U.S. export law, or the laws of some foreign countries, may prohibit us from satisfying the requirements for working the invention, creating a risk that some of our international patents may become unenforceable.
Our international operations expose us to additional risks that could harm our business, operating results, and financial condition.
Our international operations are significant, and we plan to continue to grow internationally by acquiring existing entities or setting up new legal entities in new markets. In certain international markets, we have limited operating experience and may not benefit from any first-to-market advantages or otherwise succeed. In addition to risks described elsewhere in this section, our international operations expose us to other risks, including the following:
• | Restrictions on foreign ownership and investments, and stringent foreign exchange controls that might prevent us from repatriating cash earned in countries outside the U.S. |
• | Import and export requirements, tariffs, trade disputes and barriers, and customs classifications that may prevent us from offering products or providing services to a particular market or obtaining necessary parts and components to manufacture products, which may lead to decreased sales and may increase our operating costs. |
• | Longer payment cycles in some countries, increased credit risk, and higher levels of payment fraud. |
• | Uncertainty regarding liability for our products and services, including uncertainty as a result of local laws and lack of legal precedent. |
• | Different employee/employer relationships, existence of workers' councils and labor unions, and other challenges caused by distance, language, and cultural differences, making it harder to do business in certain jurisdictions. |
Additionally, changes in international local political, economic, regulatory, tax, social, and labor conditions may adversely harm our business and compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business. These numerous and sometimes conflicting laws and regulations include, among others, environmental regulations, internal control and disclosure rules, privacy and data protection requirements, anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, and other local laws prohibiting corrupt payments to governmental officials, and competition regulations, among others.
Our business in the United Kingdom may be negatively impacted by uncertainty regarding the exit of the United Kingdom from the EU (commonly referred to as "Brexit"). The exit itself could negatively impact the United Kingdom and other economies, which could adversely affect sales of our products and services. We may also experience increased volatility in the value of the pound sterling, the euro and other European currencies. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations in the United Kingdom and the EU, and we may incur additional costs or need to make operational changes as we adapt to potentially divergent regulatory frameworks.
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Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially affect our brand, our international growth efforts, our ability to attract and retain employees, our business, and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies.
Acquisitions, joint ventures, and other strategic investments may have an adverse effect on our business.
We may consider additional acquisitions, joint ventures, or other strategic investments as part of our long-term business strategy. These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, expected synergies are not achieved, we do not realize a satisfactory return on our investment, we experience difficulty in the integration or coordination of new employees, business systems, and technology, we incur unanticipated liabilities, or there is a diversion of management’s attention from our other businesses. These events could harm our operating results, financial condition or cash flows.
If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.
We acquire other companies and intangible assets and may not realize all the economic benefit from those acquisitions, which could cause an impairment of goodwill or intangibles. We review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We test goodwill and non-amortizable intangible assets for impairment at least annually. If such goodwill or intangible assets are deemed to be impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets would be recognized. Events which might indicate impairment include, but are not limited to, declines in stock price market capitalization or cash flows, adverse cost factors, deteriorating financial performance, strategic decisions made in response to economic, market and competitive conditions, the impact of the economic environment on us and our customer base, and/or relevant events such as changes in management, key personnel, litigation or customers.
We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or intangible assets is determined, which would negatively affect our results of operations.
Catastrophic events may disrupt our business.
A disruption or failure of our systems or operations in the event of a major earthquake, weather event, fire, explosion, failure to contain hazardous materials, industrial accident, cyber-attack, terrorist attack, public health crisis, or other catastrophic event could cause delays in completing sales, providing services, or performing other mission-critical functions. A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and our operating results as well as expose us to claims, litigation and governmental investigations and fines.
In late 2019, a novel strain of coronavirus was first detected in Wuhan, China. Following the outbreak of this virus, the Chinese government has quarantined certain affected regions and certain travel restrictions have been imposed. These events have had and could continue to have an impact on our supply chain. At the time of this filing, the outbreak has been largely concentrated in China, although a growing number of cases have been confirmed in other countries. If our backup and mitigation plans are not sufficient to minimize business disruption, our financial results could be adversely affected.
Our financial performance is subject to risks associated with changes in the value of the U.S. dollar versus local currencies.
For current and potential international customers whose contracts are denominated in U.S. dollars, the relative change in local currency values creates relative fluctuations in our product pricing. These changes in international end-user costs may result in lost orders and reduce the competitiveness of our products in certain foreign markets.
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Additionally, intercompany sales to our non-U.S. dollar functional currency international subsidiaries are transacted in U.S. dollars which could increase our foreign exchange rate risk caused by foreign currency transaction gains and losses.
For non-U.S. dollar denominated sales, weakening of foreign currencies relative to the U.S. dollar generally leads us to raise international pricing, potentially reducing demand for our products. Should we decide not to raise local prices to fully offset the dollar’s strengthening, the U.S. dollar value of our foreign currency denominated sales and earnings would be adversely affected. We do not currently engage in hedging activities. Fluctuations in foreign currency could result in a change in the U.S. dollar value of our foreign denominated assets and liabilities including accounts receivable. Therefore, the U.S. dollar equivalent collected on a given sale could be less than the amount invoiced causing the sale to be less profitable than contemplated.
We also import selected components which are used in the manufacturing of some of our products. Although our purchase orders are generally in U.S. dollars, weakness in the U.S. dollar could lead to price increases for the components.
Unanticipated changes in our effective tax rate and additional tax liabilities may impact our operating results.
We are subject to income taxes in the U.S. and various jurisdictions outside of the U.S. Our effective tax rate could fluctuate due to changes in the mix of earnings and losses in countries with differing statutory tax rates. Our tax expense could also be impacted by changes in non-deductible expenses, changes in excess tax benefits related to exercises of stock options and vesting of restricted stock units, changes in the valuation of deferred tax assets and liabilities and our ability to utilize them, the applicability of withholding taxes, and changes in our liability for unrecognized tax benefits.
We are subject to tax examinations in multiple jurisdictions. While we regularly evaluate new information that may change our judgment resulting in recognition, derecognition or change in measurement of a tax position taken, there can be no assurance that the final determination of any examinations will not have an adverse effect on our operating results and financial position.
Our tax provision could also be impacted by changes in federal, state or international tax laws including fundamental tax law changes applicable to corporate multinationals.
Additionally, we may be subject to additional tax liabilities due to changes in non-income-based taxes resulting from changes in federal, state or international tax laws, changes in taxing jurisdictions’ administrative interpretations, decisions, policies, and positions, results of tax examinations, settlements or judicial decisions, changes in accounting principles, changes to the business operations, including acquisitions, as well as the evaluation of new information that results in a change to a tax position taken in a prior period.
The enactment of tax reform legislation, including legislation implementing changes in taxation of international business activities, could materially impact our financial position and results of operations.
Legislation or other changes in the tax laws could increase our liability and adversely affect our after-tax profitability. For example, the Tax Cuts and Jobs Act ("Tax Act") was enacted in the United States on December 22, 2017. The Tax Act had a significant impact on our effective tax rate, cash tax expenses and net deferred tax assets. The Tax Act, among other things, reduced the U.S. corporate statutory tax rate, eliminated or limited deduction of several expenses which were previously deductible, imposed a mandatory deemed repatriation tax on undistributed historic earnings of foreign subsidiaries, required a minimum tax on earnings generated by foreign subsidiaries and permitted a tax-free repatriation of foreign earnings through a dividends received deduction.
We maintain most of our cash balances, some of which are not insured, at four depository institutions.
We maintain the majority of our cash and cash equivalents accounts at four depository institutions. As of December 31, 2019, the aggregate balances in such accounts were $161.8 million. Our balances with these institutions regularly exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits for domestic deposits and various foreign deposit insurance programs covering our deposits in Australia, Canada, Finland, Germany, Hong Kong, India, Italy, the Netherlands, the United Kingdom, and Vietnam.
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We could suffer losses with respect to the uninsured balances if the depository institutions failed and the institution’s assets were insufficient to cover its deposits and/or the governments did not take actions to support deposits in excess of existing insurance limits. Any such losses could have a material adverse effect on our liquidity, financial condition and results of operations.
We depend on our ability to attract and retain our key management, sales and technical personnel.
Our success depends upon the continued service of our key management personnel. Our success also depends on our ability to continue to attract, retain and motivate qualified technical employees. Although we have employment agreements with our officers and other members of our executive management team, the employment of such persons is “at-will” and either we or the employee can terminate the employment relationship at any time, subject to the applicable terms of the employment agreements. The competition for our key employees is intense. The loss of the service of one or more of our key personnel could adversely impact our business, prospects, financial condition and operating results.
We are highly dependent on the services of Patrick W. Smith, our Chief Executive Officer.
We are highly dependent on the services of Patrick W. Smith, our founder and Chief Executive Officer. Our future success depends upon our ability to retain executive officers, specifically Mr. Smith, and any failure to do so could adversely impact our business, prospects, financial condition and operating results.
Stock compensation expense may have a material, unpredictable impact on our results of operations.
We have historically granted and expect to continue to grant stock-based compensation to key employees and non-employee directors as a means of attracting and retaining highly qualified personnel. All stock-based awards are required to be recognized in our financial statements based on their grant date fair values. The amount recognized for stock compensation expense could vary depending on a number of assumptions or changes that may occur.
For awards containing multiple service, performance and 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 and timing of the performance criteria being satisfied, adjusted at each balance sheet date. Changes in the subjective and probability-based assumptions can materially affect the estimates of the fair value of the awards and timing of recognition of stock-based compensation expense and consequently, the related amount recognized in our statements of operations and comprehensive income.
If we achieve specific operational goals and the covered employees complete the requisite service conditions for the performance-based awards with multiple service, performance, and market conditions, including our CEO Performance Award and our eXponential Stock Performance Plan ("XSPP"), we will recognize stock compensation expense regardless of whether the market conditions are achieved and the underlying tranches vest.
Risks Related to Ownership of Our Common Stock
The trading price of our common stock has been, and is likely to continue to be, volatile. In addition to the factors discussed in this Annual Report on Form 10-K, the trading price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
• | actual or anticipated fluctuations in our revenue and other operating results; |
• | the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; |
• | actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors; |
• | investor sentiment with respect to our competitors, our business partners, and our industry in general; |
• | announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments; |
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• | announcements by us or estimates by third-parties of actual or anticipated changes in the size of our user base, addressable market or the effectiveness of our products; |
• | changes in operation performance and stock market valuations of technology companies in our industries, including our developers and competitors; |
• | price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole; |
• | media coverage of our business and financial performance; |
• | lawsuits threatened or filed against us; |
• | developments in anticipated or new legislation and pending lawsuits or regulator actions, including interim or final rulings by tax, judicial or regulatory bodies; and |
• | other events or factors, including those resulting from war or incidents of terrorism, or responses to these events. |
Our revenues and operating results may fluctuate unexpectedly from quarter-to-quarter, which may cause our stock price to decline.
Our revenues and operating results have varied significantly in the past and may vary significantly in the future due to various factors, including, but not limited to:
• | budgetary cycles of municipal, state and federal law enforcement and corrections agencies; |
• | market acceptance of our products and services; |
• | the timing of large domestic and international orders; |
• | the outcome of any existing or future litigation; |
• | adverse publicity surrounding our products, the safety of our products, or the use of our products; |
• | changes in our sales mix; |
• | new product introduction costs; |
• | increased raw material expenses; |
• | changes in our operating expenses, including stock-based compensation expense; |
• | changes in foreign currency exchange rates and |
• | regulatory changes that may affect the marketability of our products. |
As a result of these and other factors, we believe that period-to-period comparisons of our operating results may not be meaningful in the short term, and our performance in a particular period may not be indicative of our performance in any future period.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
Our corporate headquarters and manufacturing facilities are based in an approximately 100,000 square foot facility in Scottsdale, Arizona, which we own. We also lease premises in Phoenix, Arizona; Scottsdale, Arizona; Topsfield, Massachusetts; Seattle, Washington; Melbourne, Australia; Sydney, Australia; Toronto, Canada; Daventry, England; London, England; Tampere, Finland; Frankfurt, Germany; Mumbai, India; Amsterdam, Netherlands; and Ho Chi Minh City, Vietnam.
We believe our existing facilities are well maintained and in good operating condition. We also believe we have adequate manufacturing capacity for our existing product lines. To the extent that we introduce new products in the future, we will likely need to acquire additional facilities to locate the associated production lines. However, we believe we can acquire or lease such facilities on reasonable terms. We continue to make investments in capital equipment as needed to meet anticipated demand for our products.
The majority of our locations support both of our reportable segments, except for our Vietnam and Seattle, Washington locations, which primarily support our Software & Sensors segment.
Item 3. Legal Proceedings
See discussion of litigation in Note 9 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, which discussion is incorporated by reference herein.
Item 4. Mine Safety Disclosures
None.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is quoted under the symbol “AAXN” on The NASDAQ Global Select Market.
Holders
As of December 31, 2019, there were 241 holders of record of our common stock.
Dividends
To date, we have not declared or paid cash dividends on our common stock. We do not intend to pay cash dividends in the foreseeable future.
Issuer Purchases of Equity Securities
In February 2016, our Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of our outstanding common stock subject to stock market conditions and corporate considerations. The stock repurchase program does not have a stated expiration date. During the year ended December 31, 2019, no common shares were purchased under the program. As of December 31, 2019 and 2018, $16.3 million remained available under the plan for future purchases.
Stock Performance Graph
The following stock performance graph compares the performance of our common stock to the NASDAQ Composite Index and the Russell 3000 Index. The graph covers the period from December 31, 2014 to December 31, 2019. The graph assumes that the value of the investment in our stock and in each index was $100 at December 31, 2014, and that all dividends were reinvested. We do not pay dividends on our common stock.
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2014 | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||
Axon Enterprise, Inc. | $ | 100.00 | $ | 65.29 | $ | 91.54 | $ | 100.08 | $ | 165.22 | $ | 276.74 | |||||||||||
NASDAQ Composite | 100.00 | 106.96 | 116.45 | 150.96 | 146.67 | 200.49 | |||||||||||||||||
Russell 3000 | 100.00 | 100.48 | 113.27 | 137.21 | 130.02 | 170.35 | |||||||||||||||||
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Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with our consolidated financial statements and the notes thereto, and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The statement of operations data for the years ended December 31, 2019, 2018 and 2017, and the balance sheet data as of December 31, 2019 and 2018, have been derived from, and should be read in conjunction with, our audited consolidated financial statements and the notes thereto included herein. The statement of operations data for the years ended December 31, 2016 and 2015, and the balance sheet data as of December 31, 2017, 2016 and 2015, is derived from our historical audited consolidated financial statements and the notes thereto which are not included in this Annual Report on Form 10-K. Dollars are in thousands, except per share amounts.
For the Year Ended December 31, | |||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Statements of Operations Data: | |||||||||||||||||||
Net sales (1) | $ | 530,860 | $ | 420,068 | $ | 343,798 | $ | 268,245 | $ | 197,892 | |||||||||
Gross margin | 307,286 | 258,583 | 207,088 | 170,536 | 128,647 | ||||||||||||||
Income (loss) from operations (2) (3) | (6,394 | ) | 24,841 | 13,023 | 31,851 | 35,335 | |||||||||||||
Net income (3) (4) | 882 | 29,205 | 5,207 | 17,297 | 19,933 | ||||||||||||||
Diluted earnings per share (3) (4) | $ | 0.01 | $ | 0.50 | $ | 0.10 | $ | 0.32 | $ | 0.36 | |||||||||
As of December 31, | |||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Balance Sheet Data: | |||||||||||||||||||
Working capital (5) (6) | $ | 423,525 | $ | 392,144 | $ | 97,242 | $ | 99,192 | $ | 123,269 | |||||||||
Total assets (5) (6) | 845,639 | 719,540 | 338,112 | 278,163 | 229,881 | ||||||||||||||
Total current liabilities (7) | 195,566 | 166,011 | 107,950 | 78,039 | 38,140 | ||||||||||||||
Total stockholders’ equity (3) (5) (6) (8) | 543,495 | 467,324 | 167,444 | 150,888 | 157,004 | ||||||||||||||
(1) Amounts for the years ended December 31, 2017, 2016, and 2015 have not been adjusted under the modified retrospective method of adoption of Accounting Standards Codification Topic 606, Revenue from Contracts from Customers ("Topic 606"), and are presented consistent with the prior period amounts reported under ASC 605.
(2) Reflects the impact of increased spending on research and development and selling, general and administrative expenses to support growth.
(3) Reflects the impact of $51.6 million and $3.3 million in stock compensation expense related to the CEO Performance Award and XSPP for the years ended December 31, 2019 and 2018, respectively.
(4) Includes the favorable impact of a $5.0 million, $8.9 million, and $1.8 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for restricted stock units ("RSUs") that vested or stock options that were exercised during the years ended December 31, 2019, 2018, and 2017, respectively. Includes tax expense of $8.0 million for the year ended December 31, 2017 related to the enactment of the Tax Cuts and Jobs Act.
(5) In May 2018, we sold 4,645,000 shares of our common stock, which included 645,000 shares pursuant to the full exercise of the underwriters' option to purchase additional shares, in an underwritten public offering at a price of $53.00 per share, which resulted in gross proceeds of $246.2 million. Net proceeds after deducting fees, commissions, and other expenses related to the offering were $234.0 million.
(6) In 2016 and 2015, we used cash and cash equivalents to repurchase approximately $33.7 million and $7.6 million, respectively, of our common shares.
(7) Reflects the impact of higher deferred revenue resulting from shifting an increasing amount of our business to a subscription model.
(8) We recorded a net increase in stockholders’ equity (retained earnings) of $19.0 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606 on contracts that were not complete as of that date.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with the other sections of this Annual Report on Form 10-K, including Part I, Item 1A: “Risk Factors”; Part II, Item 6: “Selected Financial Data”; and Part II, Item 8: “Financial Statements and Supplementary Data.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing. The tables in the MD&A sections below are derived from exact numbers and may have immaterial rounding differences.
This section discusses our results of operations for the year ended December 31, 2019 as compared to the year ended December 31, 2018. For a discussion and analysis of the year ended December 31, 2018, compared to the same period in 2017 please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 27, 2019.
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 year ended December 31, 2019 were $530.9 million, an increase of $110.8 million, or 26.4%, from the prior year. We had a loss from operations of $6.4 million compared to income from operations of $24.8 million in the prior year. Gross margins were compressed related to the rollout of our latest generation TASER device and increased data storage expenses, partially offset by higher margins for Software & Sensors devices. Increased cost of sales, selling, general and administrative expenses, and research and development expenses to support continued and future growth also contributed to the decline in operating results. Additionally, expenses for the year ended December 31, 2019 reflected $51.6 million in incremental stock-based compensation expense related to the CEO Performance Award and XSPP. The decline in operating results was partially offset by a $4.3 million increase in interest income. For the year ended December 31, 2019, we recorded net income of $0.9 million compared to $29.2 million for the prior year.
2020 Outlook
For the year ending December 31, 2020, we expect revenue of $615 million to $625 million. We anticipate that revenue for the three months ending March 31, 2020 will reflect approximately 13% growth as compared to the three months ended March 31, 2019. We anticipate that the timing of 2020 revenue will reflect a similar distribution as in 2019. We expect a normalized income tax rate of between 20% and 25%; this rate can fluctuate depending on geography of income and the effects of discrete items, including changes in our stock price.
In late 2019, a novel strain of coronavirus was first detected in Wuhan, China. Following the outbreak of this virus, the Chinese government has quarantined certain affected regions and certain travel restrictions have been imposed. Our operations team is closely monitoring the potential impact to our supply chain. At this time we have successfully managed through the current impacts. Our operations team has some flexibility to adapt to the changing situation; however, if the situation further deteriorates or the outbreak results in further travel restriction on both supply and demand, these impacts could affect our full year guidance.
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Results of Operations
The following table presents data from our 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):
Year Ended December 31, | |||||||||||||
2019 | 2018 | ||||||||||||
Net sales from products | $ | 399,474 | 75.3 | % | $ | 327,635 | 78.0 | % | |||||
Net sales from services | 131,386 | 24.7 | % | 92,433 | 22.0 | % | |||||||
Net sales | 530,860 | 100.0 | % | 420,068 | 100.0 | % | |||||||
Cost of product sales | 190,683 | 35.9 | % | 139,337 | 33.2 | % | |||||||
Cost of service sales | 32,891 | 6.2 | % | 22,148 | 5.3 | % | |||||||
Cost of sales | 223,574 | 42.1 | % | 161,485 | 38.5 | % | |||||||
Gross margin | 307,286 | 57.9 | % | 258,583 | 61.5 | % | |||||||
Operating expenses: | |||||||||||||
Sales, general and administrative | 212,959 | 40.1 | % | 156,886 | 37.3 | % | |||||||
Research and development | 100,721 | 19.0 | % | 76,856 | 18.3 | % | |||||||
Total operating expenses | 313,680 | 59.1 | % | 233,742 | 55.6 | % | |||||||
Income (loss) from operations | (6,394 | ) | (1.2 | )% | 24,841 | 5.9 | % | ||||||
Interest and other income, net | 8,464 | 1.6 | % | 3,263 | 0.8 | % | |||||||
Income before provision for income taxes | 2,070 | 0.4 | % | 28,104 | 6.7 | % | |||||||
Provision (benefit) for income taxes | 1,188 | 0.2 | % | (1,101 | ) | (0.3 | )% | ||||||
Net income | $ | 882 | 0.2 | % | $ | 29,205 | 7.0 | % | |||||
Net sales to the U.S. and other countries are summarized as follows (dollars in thousands):
Year Ended December 31, | |||||||||||||
2019 | 2018 | ||||||||||||
United States | $ | 446,100 | 84.0 | % | $ | 335,310 | 79.8 | % | |||||
Other Countries | 84,760 | 16.0 | % | 84,758 | 20.2 | % | |||||||
Total | $ | 530,860 | 100.0 | % | $ | 420,068 | 100.0 | % | |||||
International revenue in 2019 remained consistent with 2018. Lower sales in Canada and the Asia Pacific region were offset by increased sales in Europe and Africa.
Our operations are comprised of two reportable segments: the manufacture and sale of CEDs, batteries, accessories and extended warranties and other products and services (collectively, 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, and services (collectively, the "Software and Sensors" segment). In both segments, we report sales of products and services. Service revenue in both segments includes sales related to Axon Evidence. In the Software and Sensors segment, service revenue also includes other recurring cloud-hosted software revenue and related professional services. Collectively, this revenue is sometimes referred to as "Axon Cloud revenue." 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." 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, and product management and R&D for products included, or to be included, within the Software and Sensors segment. All other costs are included in the TASER segment.
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For the Years Ended December 31, 2019 and 2018
Net Sales
Net sales by product line were as follows for the years ended December 31, 2019 and 2018 (dollars in thousands):
Year Ended December 31, | Dollar Change | Percent Change | ||||||||||||||||||
2019 | 2018 | |||||||||||||||||||
TASER segment: | ||||||||||||||||||||
TASER 7 | $ | 56,652 | 10.7 | % | $ | 7,358 | 1.8 | % | $ | 49,294 | 669.9 | % | ||||||||
TASER X26P | 52,524 | 9.9 | % | 70,638 | 16.8 | % | (18,114 | ) | (25.6 | )% | ||||||||||
TASER X2 | 55,920 | 10.5 | % | 78,837 | 18.8 | % | (22,917 | ) | (29.1 | )% | ||||||||||
TASER Pulse and Bolt | 4,089 | 0.8 | % | 5,182 | 1.2 | % | (1,093 | ) | (21.1 | )% | ||||||||||
Cartridges | 85,987 | 16.2 | % | 68,258 | 16.3 | % | 17,729 | 26.0 | % | |||||||||||
Axon Evidence and cloud services | 704 | 0.1 | % | — | — | % | 704 | * | ||||||||||||
Extended warranties | 18,074 | 3.4 | % | 15,753 | 3.8 | % | 2,321 | 14.7 | % | |||||||||||
Other | 7,711 | 1.5 | % | 7,089 | 1.7 | % | 622 | 8.8 | % | |||||||||||
TASER segment | 281,661 | 53.1 | % | 253,115 | 60.4 | % | 28,546 | 11.3 | % | |||||||||||
Software and Sensors segment: | ||||||||||||||||||||
Axon Body | 44,039 | 8.3 | % | 21,883 | 5.2 | % | 22,156 | 101.2 | % | |||||||||||
Axon Flex | 5,928 | 1.1 | % | 6,509 | 1.5 | % | (581 | ) | (8.9 | )% | ||||||||||
Axon Fleet | 16,182 | 3.0 | % | 12,527 | 3.0 | % | 3,655 | 29.2 | % | |||||||||||
Axon Dock | 20,449 | 3.9 | % | 10,706 | 2.5 | % | 9,743 | 91.0 | % | |||||||||||
Axon Evidence and cloud services | 130,265 | 24.5 | % | 90,291 | 21.5 | % | 39,974 | 44.3 | % | |||||||||||
TASER Cam | 3,104 | 0.6 | % | 3,871 | 0.9 | % | (767 | ) | (19.8 | )% | ||||||||||
Extended warranties | 19,188 | 3.6 | % | 11,860 | 2.8 | % | 7,328 | 61.8 | % | |||||||||||
Other | 10,044 | 1.9 | % | 9,306 | 2.2 | % | 738 | 7.9 | % | |||||||||||
Software and Sensors segment | 249,199 | 46.9 | % | 166,953 | 39.6 | % | 82,246 | 49.3 | % | |||||||||||
Total net sales | $ | 530,860 | 100.0 | % | $ | 420,068 | 100.0 | % | $ | 110,792 | 26.4 | % | ||||||||
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Net unit sales were as follows:
Year Ended December 31, | |||||||||||
2019 | 2018 | Unit Change | Percent Change | ||||||||
TASER 7 | 49,221 | 5,759 | 43,462 | 754.7 | % | ||||||
TASER X26P | 48,798 | 71,823 | (23,025 | ) | (32.1 | )% | |||||
TASER X2 | 40,973 | 65,855 | (24,882 | ) | (37.8 | )% | |||||
TASER Pulse and Bolt | 11,785 | 18,398 | (6,613 | ) | (35.9 | )% | |||||
Cartridges | 2,751,603 | 2,342,897 | 408,706 | 17.4 | % | ||||||
Axon Body | 151,499 | 85,965 | 65,534 | 76.2 | % | ||||||
Axon Flex | 15,586 | 15,541 | 45 | 0.3 | % | ||||||
Axon Fleet | 10,467 | 9,445 | 1,022 | 10.8 | % | ||||||
Axon Dock | 22,275 | 17,762 | 4,513 | 25.4 | % | ||||||
TASER Cam | 5,533 | 8,310 | (2,777 | ) | (33.4 | )% | |||||
Net sales for the TASER segment increased $28.5 million, or 11.3%, primarily as a result of a $17.7 million increase in cartridge revenue and a net increase of $7.2 million in TASER device sales. Cartridge revenues increased due to both increased unit sales and an increase in average selling price. The decreased unit sales of X2 and X26P were partially offset by higher average selling prices. As expected, we continue to see a shift to purchases of our latest generation device, TASER 7, from legacy X2 and X26P devices. We expect recurring payment plan subscriptions to increase as we drive sales of TASER 7, which includes a software subscription with Axon Evidence.
Net sales for the Software and Sensors segment increased $82.2 million, or 49.3%. Revenue from Axon Evidence and cloud services increased $40.0 million as we continued to add users and associated devices to our network during the year ended December 31, 2019. The increase in the aggregate number of users and devices also resulted in increased extended warranty revenues of $7.3 million. Revenue from Axon Body cameras increased $22.2 million and included $19.3 million in sales of Axon Body 3, which was introduced during the third quarter of 2019. Axon Dock revenue also increased $9.7 million with increased units largely driven by the introduction of Axon Body 3, as well as an increase in the average selling price.
For the past few years, we have considered bookings for our Software and Sensors segment as an early indicator of activity for Axon camera products and Axon Evidence services. We have shifted our focus to total company future contracted revenue, which we believe is a more relevant and comprehensive forward-looking performance indicator, as it encompasses all company contracts, including TASER. As of December 31, 2019, we had approximately $1.23 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.
Backlog - As of December 31, 2019 compared to December 31, 2018
Our backlog for products and services includes all orders that have been received and are believed to be firm.
In the TASER segment, we define backlog as equal to deferred revenue. Deferred revenue represents amounts invoiced to customers for goods and services to be delivered in subsequent periods. We process orders within the TASER segment quickly, and our best estimate of firm orders outstanding as of period end represents those that have been paid for but remain undelivered. The TASER segment backlog balance was $55.2 million as of December 31, 2019. We expect to realize $22.6 million of this deferred revenue balance as revenue during the next 12 months. This represents cash received and accounts receivable from customers on or prior to December 31, 2019 for products and services expected to be delivered in the next 12 months.
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In the Software and Sensors segment, we define backlog as cumulative bookings, net of cancellations, less product and service revenue recognized to date. Bookings are generally realized as revenue over multiple years. The Software and Sensors backlog balance was $1.0 billion as of December 31, 2019. This backlog balance includes $150.6 million of deferred revenue, and $875.6 million that has been recorded as bookings but not yet invoiced, all as of December 31, 2019. We expect to realize approximately $270.0 million of the December 31, 2019 backlog balance as revenue during the next 12 months.
TASER | Software and Sensors | Total | |||||||||
(in thousands) | |||||||||||
Balance, beginning of period | $ | 54,597 | $ | 758,125 | $ | 812,722 | |||||
Add: additions to backlog, net of cancellations | 282,253 | 517,266 | 799,519 | ||||||||
Less: revenue recognized during period | ( | 281,661 | ) | ( | 249,199 | ) | ( | 530,860 | ) | ||
Balance end of period | $ | 55,189 | $ | 1,026,192 | $ | 1,081,381 | |||||
Our backlog of $1.1 billion as of December 31, 2019 has increased significantly from $812.7 million as of December 31, 2018. The increase in TASER segment backlog is not expected to have a material impact on revenue or operating margins. Our significant increase in backlog, primarily in the Software and Sensors segment is indicative of expected revenue growth in this segment. Revenue growth in the Software and Sensors segment is expected to result in improved operating margins over time as additional revenue will cover a larger portion of our selling, general and administrative expenses and research and development costs. We also anticipate gross margins to improve gradually in future years.
Cost of Product and Service Sales
Cost of Product and Service Sales (dollars in thousands):
Year Ended December 31, | Dollar Change | Percent Change | ||||||||||||||||||
2019 | 2018 | |||||||||||||||||||
TASER segment: | ||||||||||||||||||||
Cost of product sales | $ | 107,188 | 38.1 | % | $ | 80,354 | 31.7 | % | $ | 26,834 | 33.4 | % | ||||||||
Software and Sensors segment: | ||||||||||||||||||||
Cost of product sales | 83,495 | 33.5 | % | 58,983 | 35.3 | % | 24,512 | 41.6 | % | |||||||||||
Cost of service sales | 32,891 | 13.2 | % | 22,148 | 13.3 | % | 10,743 | 48.5 | % | |||||||||||
Total cost of sales | 116,386 | 46.7 | % | 81,131 | 48.6 | % | 35,255 | 43.5 | % | |||||||||||
Total cost of product and service sales | $ | 223,574 | 42.1 | % | $ | 161,485 | 38.4 | % | $ | 62,089 | 38.4 | % | ||||||||
Within the TASER segment, cost of product sales increased $26.8 million, or 33.4%, to $107.2 million in 2019, compared to $80.4 million in 2018. Cost as a percentage of sales increased to 38.1% from 31.7%. 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, cost of product sales included approximately $3.0 million in expense 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 was $116.4 million, an increase of $35.3 million, or 43.5%, from 2018. As a percentage of net sales, cost of product and service sales decreased to 46.7% in 2019 from 48.6% in 2018. Cost of product sales increased $24.5 million primarily driven by the impact of increased units as well as increased freight and customs expenses, but decreased as a percentage of total segment net sales, reflecting non-recurrence of customer fulfillment costs associated with our acquisition of VIEVU in May 2018 and higher pricing on Axon Body 2 cameras and docks. Cost of service sales increased $10.7 million driven primarily by
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a $5.0 million increase in third party cloud data storage and compute costs, and by a $3.9 million increase in professional services expense due to both significant Fleet installations during 2019 and an overall increase following the acquisition of VIEVU in May 2018. In June 2019, we entered into a purchase agreement for cloud data storage with a three year term beginning July 1, 2019. We expect that this agreement, in combination with moving certain data into archive storage, will slow the growth of our future storage and compute costs, despite anticipated increases in the amount of data stored.
Gross Margin
Gross Margin (dollars in thousands):
Year Ended December 31, | ||||||||||||||
Dollar Change | Percent Change | |||||||||||||
2019 | 2018 | |||||||||||||
TASER segment | $ | 174,473 | $ | 172,761 | $ | 1,712 | 1.0 | % | ||||||
Software and Sensors segment | 132,813 | 85,822 | 46,991 | 54.8 | % | |||||||||
Total gross margin | $ | 307,286 | $ | 258,583 | $ | 48,703 | 18.8 | % | ||||||
Gross margin as % of net sales | 57.9 | % | 61.5 | % | ||||||||||
Gross margin increased $48.7 million to $307.3 million for the year ended December 31, 2019 compared to $258.6 million for 2018. As a percentage of net sales, gross margin decreased to 57.9% for 2019 from 61.5% for 2018.
As a percentage of net sales, gross margin for the TASER segment decreased to 61.9% for the year ended December 31, 2019 from 68.3% for the year ended December 31, 2018. TASER 7 devices have a lower average selling price per unit than legacy products due to the bundle of products and services included, and a higher cost per unit than legacy products. Additionally, gross margin was impacted by trade in credits provided to certain customers purchasing TASER 7 devices.
Within the Software and Sensors segment, gross margin as a percentage of total segment net sales was 53.3% and 51.4% for the years ended 2019 and 2018, respectively. Within the Software and Sensors segment, product gross margin was 29.8% for the year ended December 31, 2019 and 20.8% for the same period in 2018, while the service margins were 74.8% and 76.0% during those same periods, respectively.
Sales, General and Administrative Expenses
Sales, General and Administrative ("SG&A") Expenses (dollars in thousands):
Year Ended December 31, | Dollar Change | Percent Change | ||||||||||||
2019 | 2018 | |||||||||||||
Salaries, benefits and bonus | $ | 67,582 | $ | 63,185 | $ | 4,397 | 7.0 | % | ||||||
Stock-based compensation | 59,341 | 12,710 | 46,631 | 366.9 | % | |||||||||
Professional, consulting and lobbying | 21,590 | 24,469 | (2,879 | ) | (11.8 | )% | ||||||||
Sales and marketing | 28,961 | 19,427 | 9,534 | 49.1 | % | |||||||||
Travel and meals | 11,407 | 9,908 | 1,499 | 15.1 | % | |||||||||
Depreciation and amortization | 5,739 | 6,051 | (312 | ) | (5.2 | )% | ||||||||
Other | 18,339 | 21,136 | (2,797 | ) | (13.2 | )% | ||||||||
Total sales, general and administrative expenses | $ | 212,959 | $ | 156,886 | $ | 56,073 | 35.7 | % | ||||||
SG&A expenses as a percentage of net sales | 40.1 | % | 37.3 | % | ||||||||||
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SG&A increased $56.1 million, or 35.7%. Stock-based compensation expense increased $46.6 million in comparison to the prior year comparable period, which was primarily attributable to an increase of $30.8 million in expense related to the CEO Performance Award and expense of $11.5 million related to our XSPP. During the year ended December 31, 2019, attainment of the third through ninth tranches of the CEO Performance Award and XSPP became probable. Accordingly, we recorded expense of $26.5 million for the CEO Performance Award and $7.3 million for the XSPP reflecting the cumulative expense for the third through ninth tranches from the grant dates through December 31, 2019. Refer to Note 12 of the notes to our consolidated financial statements within this Annual Report on Form 10-K for additional discussion of the CEO Performance Award and XSPP. Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount.
Salaries, benefits and bonus expense increased $4.4 million, primarily due to an increase in headcount. The increase was partially offset by a decline in expense for contract labor. Salaries, benefits and bonus expense decreased as a percentage of sales from 15.0% for 2018 to 12.7% for 2019.
Sales and marketing expenses increased $9.5 million, driven by a $8.7 million increase in commissions tied to higher revenues. The increase in commissions was also driven by higher commission rates for higher value bundled deals, which have continued to increase.
The increases were partially offset by a decrease of $2.9 million in professional, consulting and lobbying expenses. Legal expenses increased by approximately $1.0 million, offset by a $3.8 million decrease in professional fees, which were higher during 2018 related to our acquisition of Vievu, the adoption of Topic 606, and the implementation of the CEO Performance Award and XSPP.
During 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, and certain planning and site development activities related to our planned new headquarters, resulting in an impairment charge of $0.7 million. During 2018, we recorded an impairment charge of $2.0 million related to the abandonment of certain developed technology acquired in a business combination.
As discussed in Note 9 of the notes to our consolidated financial statements within this Annual Report on Form 10-K, 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 is expected to result 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 $10.0 million to $15.0 million for the year, with a higher proportion of the expense expected during the first half of 2020.
Research and Development Expenses
Research and Development ("R&D") Expenses (dollars in thousands):
Year Ended December 31, | Dollar Change | Percent Change | ||||||||||||
2019 | 2018 | |||||||||||||
Salaries, benefits and bonus | $ | 63,763 | $ | 49,792 | $ | 13,971 | 28.1 | % | ||||||
Stock-based compensation | 17,588 | 8,658 | 8,930 | 103.1 | % | |||||||||
Professional and consulting | 4,525 | 4,183 | 342 | 8.2 | % | |||||||||
Travel and meals | 2,247 | 2,192 | 55 | 2.5 | % | |||||||||
Other | 12,598 | 12,031 | 567 | 4.7 | % | |||||||||
Total research and development expenses | $ | 100,721 | $ | 76,856 | $ | 23,865 | 31.1 | % | ||||||
R&D expenses as a percentage of net sales | 19.0 | % | 18.3 | % | ||||||||||
The increase in R&D expense was fully attributable to our Software and Sensors segment. Within the TASER segment, R&D expenses decreased $2.5 million or 14.9% due to lower headcount and a decrease in hardware spending,
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which was higher during the prior year comparable period leading up to the TASER 7 launch. R&D expense for the Software and Sensors segment increased $26.4 million or 44.1%, but decreased to 34.6% of sales as compared to 35.8% in the prior year. Of the increase, $16.1 million related to salaries, benefits, and bonus attributable to increased headcount.
Stock-based compensation expense increased $8.9 million. Contributing to the increase was expense of $5.2 million related to our XSPP. During 2019, attainment of the third through ninth tranches of the XSPP became probable. Accordingly, we recorded expense of $3.4 million for the XSPP reflecting the cumulative expense for the third through ninth tranches from the grant dates through December 31, 2019. Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount.
Hardware spending increased approximately $2.6 million leading up to the Axon Body 3 launch. This increase was largely offset by decreases in depreciation and other expenses.
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 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 and R&D costs, as we reach economies of scale.
Interest and Other Income, Net
Interest and other income, net was $8.5 million and $3.3 million for the years ended December 31, 2019 and 2018, respectively.
For the year ended December 31, 2019, we earned interest income of $8.7 million and had losses from foreign currency transaction adjustments of $0.3 million, other income, net of $0.1 million, and interest expense of less than $0.1 million. For the year ended December 31, 2018, we earned interest income of $4.4 million and had losses from foreign currency transaction adjustments of $1.1 million, interest expense of $0.1 million, and other expense of $0.1 million.
Provision for Income Taxes
The provision for income taxes was $1.2 million for the year ended December 31, 2019. The effective income tax rate for 2019 was 57.4%. The benefits related to excess stock-based compensation of $5.0 million and research and development credits of $4.9 million were partially offset by the tax effects of permanently non-deductible expenses for executive compensation of $7.6 million, an increase in uncertain tax benefits of $1.2 million and other permanently non-deductible expenses of $1.1 million and state tax expense of $0.5 million. Additionally, we recorded a $0.4 million increase to our valuation allowance as of December 31, 2019 related to research and development tax credits that may not be utilized prior to expiration, partially offset by changes in certain foreign jurisdictions.
The income tax benefit was $1.1 million for the year ended December 31, 2018. The effective income tax rate for 2018 was (3.9%). The benefits related to excess stock-based compensation of $8.9 million and research and development credits of $6.9 million were partially offset by the tax effects of permanently non-deductible expenses for executive compensation of $1.2 million, an increase in uncertain tax benefits of $1.8 million and return to provision adjustments of $1.8 million. Additionally, we recorded a $2.0 million increase to our valuation allowance as of December 31, 2018 related to research and development tax credits that may not be utilized prior to expiration, partially offset by changes in certain foreign jurisdictions.
Net Income
Our net income decreased by $28.3 million to $0.9 million for the year ended December 31, 2019 compared to $29.2 million in 2018. Net income per basic and diluted share was $0.01 for 2019, compared to net income per basic and diluted share of $0.52 and $0.50, respectively, for 2018.
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Three Months Ended December 31, 2019 Compared to September 30, 2019
Net sales by product line were as follows (dollars in thousands):
Three Months Ended December 31, 2019 | Three Months Ended September 30, 2019 | Dollar Change | Percent Change | |||||||||||||||||
TASER segment: | ||||||||||||||||||||
TASER 7 | $ | 17,186 | 10.0 | % | $ | 20,214 | 15.4 | % | $ | (3,028 | ) | (15.0 | )% | |||||||
TASER X26P | 14,692 | 8.5 | % | 11,578 | 8.8 | % | 3,114 | 26.9 | % | |||||||||||
TASER X2 | 15,507 | 9.0 | % | 13,241 | 10.1 | % | 2,266 | 17.1 | % | |||||||||||
TASER Pulse and Bolt | 1,169 | 0.7 | % | 1,132 | 0.9 | % | 37 | 3.3 | % | |||||||||||
Cartridges | 28,633 | 16.7 | % | 18,901 | 14.4 | % | 9,732 | 51.5 | % | |||||||||||
Axon Evidence and cloud services | 341 | 0.2 | % | 218 | 0.2 | % | 123 | 56.4 | % | |||||||||||
Extended warranties | 4,733 | 2.8 | % | 4,543 | 3.5 | % | 190 | 4.2 | % | |||||||||||
Other | 1,694 | 1.0 | % | 1,916 | 1.5 | % | (222 | ) | (11.6 | )% | ||||||||||
TASER segment | 83,955 | 48.9 | % | 71,743 | 54.8 | % | 12,212 | 17.0 | % | |||||||||||
Software and Sensors segment: | ||||||||||||||||||||
Axon Body | 25,219 | 14.7 | % | 6,763 | 5.2 | % | 18,456 | 272.9 | % | |||||||||||
Axon Flex | 1,411 | 0.8 | % | 1,670 | 1.3 | % | (259 | ) | (15.5 | )% | ||||||||||
Axon Fleet | 5,205 | 3.0 | % | 4,341 | 3.3 | % | 864 | 19.9 | % | |||||||||||
Axon Dock | 11,048 | 6.4 | % | 3,358 | 2.6 | % | 7,690 | 229.0 | % | |||||||||||
Axon Evidence and cloud services | 36,804 | 21.4 | % | 34,022 | 26.0 | % | 2,782 | 8.2 | % | |||||||||||
TASER Cam | 623 | 0.4 | % | 534 | 0.4 | % | 89 | 16.7 | % | |||||||||||
Extended warranties | 5,124 | 3.0 | % | 4,714 | 3.6 | % | 410 | 8.7 | % | |||||||||||
Other | 2,462 | 1.4 | % | 3,692 | 2.8 | % | (1,230 | ) | (33.3 | )% | ||||||||||
Software and Sensors segment | 87,896 | 51.1 | % | 59,094 | 45.2 | % | 28,802 | 48.7 | % | |||||||||||
Total net sales | $ | 171,851 | 100.0 | % | $ | 130,837 | 100.0 | % | $ | 41,014 | 31.3 | % | ||||||||
Net unit sales were as follows:
Three Months Ended | |||||||||||
December 31, 2019 | September 30, 2019 | Unit Change | Percent Change | ||||||||
TASER 7 | 14,577 | 17,674 | (3,097 | ) | (17.5 | )% | |||||
TASER X26P | 13,554 | 10,766 | 2,788 | 25.9 | % | ||||||
TASER X2 | 11,534 | 9,819 | 1,715 | 17.5 | % | ||||||
TASER Pulse and Bolt | 2,978 | 3,923 | (945 | ) | (24.1 | )% | |||||
Cartridges | 962,519 | 566,347 | 396,172 | 70.0 | % | ||||||
Axon Body | 83,268 | 22,037 | 61,231 | 277.9 | % | ||||||
Axon Flex | 3,078 | 5,409 | (2,331 | ) | (43.1 | )% | |||||
Axon Fleet | 3,324 | 2,967 | 357 | 12.0 | % | ||||||
Axon Dock | 10,149 | 3,724 | 6,425 | 172.5 | % | ||||||
TASER Cam | 1,177 | 899 | 278 | 30.9 | % | ||||||
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Net sales for the TASER segment increased $12.2 million, or 17.0%, on a sequential basis primarily due to an overall increase in revenue from cartridges. An inventory shortfall earlier in the year resulted in a backlog primarily for TASER 7 and X2 cartridges; this backlog was cleared during the quarter ended December 31, 2019. The increase in cartridge units were partially offset by a decrease in the average selling price. Net sales also included a net increase of $2.4 million in TASER device sales. TASER 7 sales declined compared to the three months ending September 30, 2019; as a result of a battery component supplier not being able to timely fulfill our production needs, approximately $3 million of forecasted TASER 7 sales shifted from the three months ended June 30, 2019 to the three months ending September 30, 2019. Units of our legacy TASER devices increased, while the average selling prices remained consistent with the prior quarter.
Net sales for the Software and Sensors segment increased $28.8 million, or 48.7%, on a sequential basis. Revenue from Axon Body cameras increased $18.5 million and included $18.7 million in sales of Axon Body 3, which was introduced during the third quarter of 2019. Partially offsetting this increase was a decrease in units and average selling price of Axon Body 2 units. Axon Dock revenue also increased $7.7 million with increased units largely driven by the introduction of Axon Body 3, as well as an increase in the average selling price. The increase in the aggregate number of users on our network, including on-premise users in secondary international markets, resulted in increased Axon Evidence and cloud services revenues of $2.8 million.
International sales were $24.5 million in for the three months ended December 31, 2019 as compared to $20.0 million for the three months ended September 30, 2019, an increase of $4.5 million, driven by increased sales in the Asia Pacific region which were partially offset by lower sales in Africa.
Non-GAAP Financial Measures
To supplement our financial results presented in accordance with accounting principles generally accepted in the U.S. ("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 |
• | 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 Annual Report on Form 10-K were prepared under a comprehensive set of rules or principles. |
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EBITDA and Adjusted EBITDA (CEO Performance Award) reconcile to net income as follows (dollars in thousands):
For the Years Ended December 31, | ||||||||
2019 | 2018 | |||||||
Net income | $ | 882 | $ | 29,205 | ||||
Depreciation and amortization | 11,361 | 10,615 | ||||||
Interest expense | 46 | 86 | ||||||
Investment interest income | (7,040 | ) | (3,002 | ) | ||||
Provision for (benefit from) income taxes | 1,188 | (1,101 | ) | |||||
EBITDA | $ | 6,437 | $ | 35,803 | ||||
Adjustments: | ||||||||
Stock-based compensation expense | 78,495 | 21,879 | ||||||
Adjusted EBITDA (CEO Performance Award) | $ | 84,932 | $ | 57,682 | ||||
Liquidity and Capital Resources
Summary
As of December 31, 2019, we had $172.3 million of cash and cash equivalents, a decrease of $177.2 million from December 31, 2018. Cash and cash equivalents and investments totaled $396.3 million, an increase of $46.8 million from December 31, 2018.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities (in thousands):
Year Ended December 31, | |||||||
2019 | 2018 | ||||||
Operating activities | $ | 65,673 | $ | 63,875 | |||
Investing activities | (240,737 | ) | (9,860 | ) | |||
Financing activities | (3,937 | ) | 219,348 | ||||
Effect of exchange rate changes on cash and cash equivalents | 329 | (774 | ) | ||||
Net increase (decrease) in cash and cash equivalents and restricted cash | $ | (178,672 | ) | $ | 272,589 | ||
Operating activities
Net cash provided by operating activities in 2019 of $65.7 million consisted of $0.9 million in net income, the net add-back of non-cash income statement items totaling $89.4 million and a $24.6 million net change in operating assets and liabilities. Included in the non-cash items were $11.4 million in depreciation and amortization expense, $2.5 million related to the impairment of certain property and equipment, $78.5 million in stock-based compensation expense, and a $8.0 million increase in deferred income tax assets. The most significant increase to the portion of cash provided by operating activities related to the changes in operating assets and liabilities was a $24.0 million increase in deferred revenue. Of the deferred revenue increase, $10.5 million resulted from increased hardware deferred revenue from TASER subscription sales, and $13.1 million related to prepayments for Software and Sensors services. Additionally, operating cash flows were positively impacted by an increase of