UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022 or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                   

Commission File Number: 001-16391

Axon Enterprise, Inc.

(Exact name of registrant as specified in its charter)

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

(480) 991-0797

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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

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

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

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

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

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

The number of shares of the registrant’s common stock outstanding as of August 5, 2022 was 71,077,807.

AXON ENTERPRISE, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2022

			Page
Special Note Regarding Forward-Looking Statements			ii
PART I - FINANCIAL INFORMATION			1
	Item 1. Financial Statements		1
		Condensed Consolidated Balance Sheets as of June 30, 2022 (Unaudited) and December 31, 2021	1
		Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months and Six Months Ended June 30, 2022 and 2021	2
		Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three Months and Six Months Ended June 30, 2022 and 2021	3
		Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021	4
		Notes to Unaudited Condensed Consolidated Financial Statements	5
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		39
	Item 4. Controls and Procedures		40
PART II - OTHER INFORMATION			40
	Item 1. Legal Proceedings		40
	Item 1A. Risk Factors		41
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		41
	Item 3. Defaults Upon Senior Securities		41
	Item 4. Mine Safety Disclosures		41
	Item 5. Other Information		41
	Item 6. Exhibits		42
	SIGNATURES		43

Special Note Regarding Forward-Looking Statements

This Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions and strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. From time to time, we also provide forward-looking statements in other materials we release to the public as well as verbal forward-looking statements. These forward-looking statements include, without limitation, statements regarding: proposed products and services and related development efforts and activities; our projected revenue and capital expenditures for the full year 2022; expectations about the market for our current and future products and services; the impact of pending litigation; strategies and trends relating to subscription plan programs and revenues; our anticipation that contracts with governmental customers will be fulfilled; strategies and trends, including the benefits of, research and development investments; the sufficiency of our liquidity and financial resources; expectations about customer behavior; the impact on our investment portfolio of changes in interest rates; our potential use of foreign currency forward and option contracts; statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; statements of management’s strategies, goals and objectives and other similar expressions; as well as the ultimate resolution of financial statement items requiring critical accounting estimates, including those set forth in our Form 10-K for the year ended December 31, 2021. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Words such as “may,” “will,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions, as well as statements in future tense, identify forward-looking statements. However, not all forward-looking statements contain these identifying words.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. The following important factors could cause actual results to differ materially from those in the forward-looking statements: the potential global impacts of the COVID-19 pandemic; our exposure to cancellations of government contracts due to appropriation clauses, exercise of a cancellation clause, or non-exercise of contractually optional periods; our ability to design, introduce and sell new products or features; our ability to defend against litigation and protect our intellectual property, and the resulting costs of this activity; our ability to manage our supply chain and avoid production delays, shortages, and impacts to expected gross margins; the impact of stock compensation expense, impairment expense, and income tax expense on our financial results; customer purchase behavior, including adoption of our software as a service delivery model; negative media publicity regarding our products; the impact of product mix on projected gross margins; defects in our products; changes in the costs of product components and labor; loss of customer data, a breach of security, or an extended outage, including by our 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 products by the United States Bureau of Alcohol, Tobacco, Firearms and Explosives; our ability to integrate acquired businesses; our ability to attract and retain key personnel; and counter-party risks relating to cash balances held in excess of FDIC insurance limits. Many events beyond our control may determine whether results we anticipate will be achieved. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements. The Annual Report on Form 10-K that we filed with the Securities and Exchange Commission ("SEC") on February 25, 2022 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 the 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 SEC. Our filings with the SEC may be accessed at the SEC’s web site at www.sec.gov.

ii

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AXON ENTERPRISE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	June 30,		December 31,
	2022		2021
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	212,815	$	356,332
Marketable securities		45,900		72,180
Short-term investments		118,514		14,510
Accounts and notes receivable, net of allowance of $1,927 and $2,203 as of June 30, 2022 and December 31, 2021, respectively		379,672		320,819
Contract assets, net		196,754		180,421
Inventory		154,297		108,688
Prepaid expenses and other current assets		61,839		56,540
Total current assets		1,169,791		1,109,490
Property and equipment, net		157,916		138,457
Deferred tax assets, net		100,548		127,193
Intangible assets, net		13,934		15,470
Goodwill		45,004		43,592
Long-term investments		24,925		31,232
Long-term notes receivable, net		8,992		11,256
Long-term contract assets, net		28,240		29,753
Strategic investments		281,691		83,520
Other long-term assets		100,982		98,247
Total assets	$	1,932,023	$	1,688,210
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	60,689	$	32,220
Accrued liabilities		100,980		103,707
Current portion of deferred revenue		253,185		265,591
Customer deposits		11,330		10,463
Other current liabilities		6,787		6,540
Total current liabilities		432,971		418,521
Deferred revenue, net of current portion		269,477		185,721
Liability for unrecognized tax benefits		7,692		3,797
Long-term deferred compensation		5,517		5,679
Deferred tax liability, net		1		811
Long-term lease liabilities		18,210		20,440
Other long-term liabilities		4,504		5,392
Total liabilities		738,372		640,361
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		—		—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 71,077,699 and 70,896,856 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		1		1
Additional paid-in capital		1,139,086		1,095,229
Treasury stock at cost, 20,220,227 shares as of June 30, 2022 and December 31, 2021		(155,947)		(155,947)
Retained earnings		215,716		109,883
Accumulated other comprehensive income (loss)		(5,205)		(1,317)
Total stockholders’ equity		1,193,651		1,047,849
Total liabilities and stockholders’ equity	$	1,932,023	$	1,688,210

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

1

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net sales from products	$	200,051	$	156,427	$	376,255	$	297,313
Net sales from services		85,562		62,368		165,784		116,501
Net sales		285,613		218,795		542,039		413,814
Cost of product sales		87,502		65,301		166,854		123,917
Cost of service sales		24,148		15,565		45,483		28,615
Cost of sales		111,650		80,866		212,337		152,532
Gross margin		173,963		137,929		329,702		261,282
Operating expenses:
Sales, general and administrative		95,005		177,662		185,134		304,259
Research and development		57,547		53,952		105,963		100,970
Total operating expenses		152,552		231,614		291,097		405,229
Income (loss) from operations		21,411		(93,685)		38,605		(143,947)
Interest and other income, net		47,026		41,841		102,325		42,426
Income (loss) before provision for income taxes		68,437		(51,844)		140,930		(101,521)
Provision for (benefit from) income taxes		17,475		(4,727)		35,097		(6,487)
Net income (loss)	$	50,962	$	(47,117)	$	105,833	$	(95,034)
Net income (loss) per common and common equivalent shares:
Basic	$	0.72	$	(0.72)	$	1.49	$	(1.47)
Diluted	$	0.71	$	(0.72)	$	1.46	$	(1.47)
Weighted average number of common and common equivalent shares outstanding:
Basic		71,040		65,166		70,995		64,604
Diluted		72,283		65,166		72,316		64,604
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net income (loss)	$	50,962	$	(47,117)	$	105,833	$	(95,034)
Foreign currency translation adjustments		(2,166)		(369)		(3,238)		(368)
Unrealized losses on available-for-sale investments		(161)		—		(650)		—
Comprehensive income (loss)	$	48,635	$	(47,486)	$	101,945	$	(95,402)

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

2

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

											Accumulated
				Additional							Other		Total
	Common Stock			Paid-in		Treasury Stock			Retained		Comprehensive		Stockholders’
	Shares	Amount		Capital		Shares	Amount		Earnings		Loss		Equity
Balance, December 31, 2021	70,896,856	$	1	$	1,095,229	20,220,227	$	(155,947)	$	109,883	$	(1,317)	$	1,047,849
Issuance of common stock	—		—		(70)	—		—		—		—		(70)
Issuance of common stock under employee plans, net	99,802		—		(1,388)	—		—		—		—		(1,388)
Stock-based compensation	—		—		25,088	—		—		—		—		25,088
Net income	—		—		—	—		—		54,871		—		54,871
Other comprehensive loss, net	—		—		—	—		—		—		(1,561)		(1,561)
Balance, March 31, 2022	70,996,658	$	1	$	1,118,859	20,220,227	$	(155,947)	$	164,754	$	(2,878)	$	1,124,789
Issuance of common stock			—		(4)	—		—		—		—		(4)
Issuance of common stock under employee plans, net	81,041		—		(931)	—		—		—		—		(931)
Stock-based compensation	—		—		21,162	—		—		—		—		21,162
Net income	—		—		—	—		—		50,962		—		50,962
Other comprehensive loss, net	—		—		—	—		—		—		(2,327)		(2,327)
Balance, June 30, 2022	71,077,699	$	1	$	1,139,086	20,220,227	$	(155,947)	$	215,716	$	(5,205)	$	1,193,651

											Accumulated
				Additional							Other		Total
	Common Stock			Paid-in		Treasury Stock			Retained		Comprehensive		Stockholders’
	Shares	Amount		Capital		Shares	Amount		Earnings		Income (Loss)		Equity
Balance, December 31, 2020	63,766,555	$	1	$	962,159	20,220,227	$	(155,947)	$	169,901	$	141	$	976,255
Issuance of common stock under employee plans, net	906,536		—		(7,045)	—		—		—		—		(7,045)
Stock-based compensation	—		—		89,610	—		—		—		—		89,610
Net loss	—		—		—	—		—		(47,917)		—		(47,917)
Foreign currency translation adjustments	—		—		—	—		—		—		1		1
Balance, March 31, 2021	64,673,091	$	1	$	1,044,724	20,220,227	$	(155,947)	$	121,984	$	142	$	1,010,904
Issuance of common stock under employee plans	1,001,255		—		(3,268)	—		—		—		—		(3,268)
Stock-based compensation	—		—		137,549	—		—		—		—		137,549
Net loss	—		—		—	—		—		(47,117)		—		(47,117)
Foreign currency translation adjustments	—		—		—	—		—		—		(369)		(369)
Balance, June 30, 2021	65,674,346	$	1	$	1,179,005	20,220,227	$	(155,947)	$	74,867	$	(227)	$	1,097,699

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

3

AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Six Months Ended June 30,
	2022		2021
Cash flows from operating activities:
Net income (loss)	$	105,833	$	(95,034)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		11,965		8,582
Purchase accounting adjustments to goodwill		58		—
Loss on disposal and abandonment of intangible assets		48		130
Loss on disposal and impairment of property and equipment, net		189		43
Realized and unrealized gains on strategic investments and marketable securities, net		(103,836)		(40,855)
Stock-based compensation		46,250		227,159
Deferred income taxes		26,050		(6,889)
Unrecognized tax benefits		3,895		47
Bond amortization		301		3,110
Noncash lease expense		3,279		2,650
Provision for expected credit losses		183		62
Change in assets and liabilities:
Accounts and notes receivable and contract assets		(80,247)		(3,988)
Inventory		(47,109)		(1,848)
Prepaid expenses and other assets		(2,688)		(13,320)
Accounts payable, accrued and other liabilities		24,569		(10,381)
Deferred revenue		74,600		25,647
Net cash provided by operating activities		63,340		95,115
Cash flows from investing activities:
Purchases of investments		(108,240)		(238,288)
Proceeds from call / maturity of investments		9,473		294,814
Exercise of warrants of strategic investments		(6,555)		—
Proceeds from sale of strategic investments		—		14,546
Purchases of property and equipment		(29,847)		(24,031)
Proceeds from disposal of property and equipment		91		48
Purchases of intangible assets		(104)		(143)
Strategic investments		(61,500)		(20,500)
Business acquisition, net of cash acquired		(2,104)		—
Net cash provided (used) in investing activities		(198,786)		26,446
Cash flows from financing activities:
Net proceeds from equity offering		(74)		—
Income and payroll tax payments for net-settled stock awards		(2,319)		(10,312)
Net cash used in financing activities		(2,393)		(10,312)
Effect of exchange rate changes on cash and cash equivalents		(3,910)		(319)
Net increase (decrease) in cash and cash equivalents		(141,749)		110,930
Cash and cash equivalents and restricted cash, beginning of period		356,438		155,551
Cash and cash equivalents and restricted cash, end of period	$	214,689	$	266,481
Supplemental disclosures:
Cash and cash equivalents	$	212,815	$	266,372
Restricted cash (Note 1)		1,874		109
Total cash, cash equivalents and restricted cash shown in the statements of cash flows	$	214,689	$	266,481
Cash paid for income taxes, net of refunds	$	2,289	$	5,295
Non-cash transactions
Property and equipment purchases in accounts payable and accrued liabilities	$	2,009	$	571

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

4

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Organization and Summary of Significant Accounting Policies

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

Our headquarters in Scottsdale, Arizona houses our executive management, sales, marketing, certain engineering, manufacturing, 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, France, Germany, Hong Kong, India, Italy, the Netherlands, the United Kingdom, and Vietnam.

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

Basis of Presentation and Use of Estimates

These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information related to our organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) has been condensed or omitted. The accounting policies followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed in our annual consolidated financial statements for the year ended December 31, 2021, as filed on Form 10-K, with the exception of our adoption of certain accounting pronouncements which we describe below. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with our Form 10-K for the year ended December 31, 2021. The results of operations for the three months and six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full year (or any other period). Significant estimates and assumptions in these unaudited condensed consolidated financial statements include:

● product warranty reserves,

● inventory valuation,

● revenue recognition,

● reserve for expected credit loss,

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

● valuation of strategic investments,

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

● stock-based compensation, and

● recognition and measurement of contingencies and accrued litigation expense.

Actual results could differ materially from those estimates.

Segment Information

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

5

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Evidence. In the Software and Sensors segment, service revenue also includes other recurring cloud-hosted software revenue and related professional services. Collectively, this revenue is sometimes referred to as "Axon Cloud revenue."  

Reportable segments are determined based on discrete financial information reviewed by our Chief Executive Officer who is our chief operating decision maker ("CODM"). We organize and review operations based on products and services, and currently there are no operating segments that are aggregated. We perform an analysis of our reportable segments at least annually. Additional information related to our business segments is summarized in Note 15.

Geographic Information and Major Customers / Suppliers

For the three and six months ended June 30, 2022, no individual country outside the U.S. represented more than 10% of total net sales. Individual sales transactions in the international market are generally larger and occur more intermittently than in the domestic market due to the profile of our customers. For the three and six months ended June 30, 2022, no customer represented more than 10% of total net sales. At June 30, 2022 and December 31, 2021, no customer represented more than 10% of the aggregate balance of accounts and notes receivable and contract assets.

We currently purchase both off the shelf and custom components, including, but not limited to, finished circuit boards, injection-molded plastic components, small machined parts, custom cartridge components, electronic components, and off the shelf sub-assemblies from suppliers located in the U.S., Canada, China, Republic of Korea, Malaysia, Mexico, Taiwan, and Vietnam. We may source from other countries as well. Although we currently obtain many of these components from single source suppliers, we own the injection molded component tooling, most of the designs, and the test fixtures used in their production for all custom components. As a result, we believe we could obtain alternative suppliers in most cases. Although we have experienced supply chain disruptions relating to materials and port constraints, we have remained focused on closely managing our supply chain. We continue to bolster our strategic relationships in our supply chain, identifying secondary/alternate sourcing, adjusting build plans accordingly, and building in logistic modes in support of our increasing demand while working to minimize disruption to customers. We acquire most of our components on a purchase order basis and do not currently have significant long-term purchase contracts with most component suppliers.

Income per Common Share

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Numerator for basic and diluted earnings per share:
Net income (loss)	$	50,962	$	(47,117)	$	105,833	$	(95,034)
Denominator:
Weighted average shares outstanding		71,040		65,166		70,995		64,604
Dilutive effect of stock-based awards		1,243		—		1,321		—
Diluted weighted average shares outstanding		72,283		65,166		72,316		64,604
Anti-dilutive stock-based awards excluded		2,991		10,537		2,912		8,950
Net income (loss) per common share:
Basic	$	0.72	$	(0.72)	$	1.49	$	(1.47)
Diluted	$	0.71	$	(0.72)	$	1.46	$	(1.47)

6

AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Standard Warranties

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

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

	Six Months Ended June 30,
	2022		2021
Balance, beginning of period	$	2,822	$	769
Utilization of reserve		(1,574)		(481)
Warranty expense		380		613
Balance, end of period	$	1,628	$	901

Fair Value Measurements and Financial Instruments

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

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

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

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

We have cash equivalents and investments, which at June 30, 2022 and December 31, 2021 were comprised of money market funds, commercial paper, corporate bonds, municipal bonds, U.S. Government agency bonds, and U.S. Treasury bills. See additional disclosure regarding the fair value of our cash equivalents and investments in Note 3. Included in the balance of other long-term assets as of June 30, 2022 and December 31, 2021 was $4.2 million and $5.3 million, respectively, related to corporate-owned life insurance policies which are used to fund our deferred compensation

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

plan. We determine the fair value of insurance contracts by obtaining the cash surrender value of the contracts from the issuer, a Level 2 valuation technique.

We have an investment in marketable securities, for which changes in fair value are recorded in the condensed consolidated statement of operations as unrealized gain or (loss) on marketable securities, which is included in interest and other income, net.

We have strategic investments in six unconsolidated affiliates as of June 30, 2022. The estimated fair value of the investments was determined based on Level 3 inputs. In determining the estimated fair value of our strategic investments in privately held companies, we utilize observable data available to us as discussed further in Note 7.

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

Restricted Cash

Restricted cash balances as of June 30, 2022 were $1.9 million primarily related to funds held in an international bank account securing a guarantee and funds held in an international bank account for a country in which we are required to maintain a minimum balance to operate. Approximately $1.8 million was included in prepaid expenses and other current assets on our condensed consolidated balance sheet, with the remainder included in other long-term assets. Restricted cash balances as of December 31, 2021 included $0.1 million primarily related to funds held in an international bank account for a country in which we are required to maintain a minimum balance to operate. Approximately half of the balance was included in prepaid expenses and other current assets on our condensed consolidated balance sheet, with the remainder included in other long-term assets.

Valuation of Goodwill, Intangibles and Long-lived Assets

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

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

Recently Issued Accounting Guidance

Recently Adopted Accounting Pronouncements

In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-10, Government Assistance (Topic 832). The guidance improves the transparency of government assistance accounting as it requires business entities to disclose transactions that involve government assistance received if the transactions were accounted for by applying a grant or contribution accounting model by analogy. The ASU is effective for annual periods beginning after December 15, 2021. We adopted ASU 2021-10 on January 1, 2022 and will apply the disclosure requirement prospectively to all transactions within the scope of the amendments that are reflected in

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the financial statements at the date of the initial application along with new transactions that are entered into after the date of initial application. Adoption of this ASU did not have a material impact on our consolidated financial statements.

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications are not material and had no effect on the reported results of operations.

Note 2 - Revenues

Nature of Products and Services

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

	Three Months Ended June 30, 2022						Three Months Ended June 30, 2021
			Software and						Software and
	TASER		Sensors		Total		TASER		Sensors		Total
TASER 7	$	53,440	$	—	$	53,440	$	28,128		—	$	28,128
TASER X26P		12,339		—		12,339		9,569		—		9,569
TASER X2		4,534		—		4,534		16,145		—		16,145
TASER Consumer devices		1,687		—		1,687		1,701		—		1,701
Cartridges		49,845		—		49,845		46,678		—