On May 24, 2018, our stockholders approved the Board of Directors’ grant of 6,365,856 stock option awards to Patrick W. Smith, our CEO (the “CEO Performance Award”). The CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational goals (performance conditions) and market capitalization goals (market conditions), assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each attainment date. Each of the 12 vesting tranches of the CEO Performance Award have a 10-year contractual term and will vest upon certification by the Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of the following eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA have been met for the previous four consecutive fiscal quarters. Adjusted EBITDA for purposes of the CEO Performance Award is defined as net income (loss) attributable to common stockholders before interest expense, interest and other income (such as dividends) earned on investments in marketable securities, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense.

(1)	In connection with the business acquisition that was completed during the three months ended September 30, 2018, the revenue goals were adjusted for the acquiree’s Target Revenue, as defined in the CEO Performance Award agreement.

Stock-based compensation expense associated with the CEO Performance Award is recognized over the longer of the expected achievement period for each pair of market capitalization and operational goals, beginning at the point in time when the relevant operational goal is considered probable of being met. The probability of meeting an operational goal and the expected achievement point in time for meeting a probable operational goal are based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis. Even though no tranches of the CEO Performance Award vest unless a market capitalization and a matching operational goal are both achieved, stock-based compensation expense is recognized when an operational goal is considered probable of achievement regardless of whether a market capitalization goal is actually achieved. Stock-based compensation represents a non-cash expense and is recorded in sales, general, and administrative operating expense on our consolidated statements of operations and comprehensive income.

The first eleven market capitalization goals have been achieved as of March 31, 2023 while the final market capitalization goal was achieved in April 2023. As of March 31, 2023, 5.8 million stock options have been certified by the Compensation Committee and vested. As twelve operational goals have been achieved or are considered probable of achievement, we recorded stock-based compensation expense of $246.0 million related to the CEO Performance Award from the grant date through March 31, 2023, with no unamortized expense remaining. The number of stock options that are expected to vest upon certification by the Compensation Committee related to the remaining tranche is approximately 0.5 million shares.

On March 28, 2023, the Company's Board of Directors approved a new stock option grant to our CEO (the “2023 CEO Performance Award”), which is subject to shareholder approval at our upcoming Annual Meeting of Shareholders. The 2023 CEO Performance Award will consist of 10 vesting tranches, each equal to 0.5% of the Company's outstanding common stock as of March 27, 2023, the business day prior to the date the award was approved by the Board of Directors. The stock options comprising the 2023 CEO Performance Award will have a per share exercise price equal to $218.59, which reflects the closing price for a share of the Company’s common stock as of the last trading day immediately preceding the grant date. The 2023 CEO Performance Award will not have a financial statement impact unless and until it is approved by shareholders at the Annual Meeting in May 2023.

eXponential Stock Performance Plan

On February 12, 2019, our shareholders approved the 2019 Stock Incentive Plan (the “2019 Plan”), which was adopted by the Board of Directors to reserve a sufficient number of shares to facilitate our eXponential Stock Performance Plan (“XSPP”) and grants of eXponential Stock Units (“XSUs”) under the plan. Initial awards under the plan were granted in January 2019, with additional employee awards granted since that date.

The XSUs are grants of Restricted Stock Units (“RSUs”), each with a term of approximately nine years, that vest in 12 equal tranches. Each of the 12 tranches will vest upon certification by the Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA (CEO Performance Award) have been met for the previous four consecutive fiscal quarters. Beginning with the quarter ended June 30, 2021, new XSU grants are divided into a reduced number of tranches depending on employee eligibility and current market capitalization attainment.

The XSPP contains an anti-dilution provision incorporated into the plan based on shareholder feedback, which affects the calculation of the market capitalization goals in the plan. The plan defines a maximum number of shares outstanding that may be used in the calculation of the market capitalization goals (the “XSU Maximum”). If the actual number of shares outstanding exceeds the XSU Maximum guardrail, then the lower pre-defined number of shares in the XSU Maximum, rather than the higher actual number of shares outstanding, is used to calculate market capitalization for the determination of the market capitalization goals in the XSPP, which, together with the operational goals, determines whether XSUs vest for participating employees.

The XSU Maximum is defined as the actual number of shares outstanding on the original XSU grant date of January 2, 2019, increased by a 3% annual rate over the term of the XSPP and by shares issued upon the exercise of CEO Performance Award options. The XSU Maximum is also adjusted for acquisitions, spin-offs or other changes in the number of outstanding shares of common stock, if such changes have a corresponding adjustment on the market capitalization goals.

The market capitalization and operational goals are identical to the CEO Performance Award, but a different number of shares is used to calculate the market capitalization goals if shares outstanding exceed the XSU Maximum. Additionally, because the grant date is different than that of the CEO Performance Award, the measurement period for market capitalization is not identical. As of March 31, 2023, actual shares outstanding exceeded the XSU Maximum. Accordingly, market capitalization as calculated for the purposes of achieving additional goals uses the lower XSU Maximum share amount rather than actual shares outstanding.

The first ten market capitalization goals had been achieved as of March 31, 2023, and the final two market capitalization goals were achieved in April 2023. As all twelve operational goals have been achieved, we recorded stock-based compensation expense of $191.3 million related to the XSU awards from their respective grant dates through March 31, 2023. The number of XSU awards that would vest related to the remaining two tranches is approximately 0.8 million shares. As of March 31, 2023, we had $9.3 million of total unrecognized stock-based compensation expense, which will be recognized over a weighted-average period of 0.9 years.

Restricted Stock Units

The following table summarizes RSU activity for the three months ended March 31, 2023 (number of units and aggregate intrinsic value in thousands):


	Number of	Weighted Average		Aggregate
	Units	Grant-Date Fair Value		Intrinsic Value
Units outstanding, beginning of year	1,565	$	145.38
Granted	73		192.07
Released	(103)		135.31
Forfeited	(32)		152.72
Units outstanding, end of period	1,503		148.20	$	338,003

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $224.85 multiplied by the number of RSUs outstanding. As of March 31, 2023, there was $176.3 million in unrecognized compensation costs related to RSUs under our stock plans for awards that are expected to vest. We expect to recognize the cost related to the RSUs over a weighted average period of 2.2 years. RSUs are released when vesting requirements are met.

Certain RSUs that vested in the three months ended March 31, 2023 were net-share settled such that we withheld shares to cover the employees’ tax obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld related to RSUs were approximately one thousand and had a value of $0.2 million on their respective vesting dates as determined by the closing stock price on such dates. Payments for the employees’ tax obligations are reflected as a financing activity within the condensed consolidated statements of cash flows. We record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital.

Performance Stock Units

The following table summarizes PSU activity, inclusive of XSUs, for the three months ended March 31, 2023 (number of units and aggregate intrinsic value in thousands):


	Number of	Weighted Average		Aggregate
	Units	Grant-Date Fair Value		Intrinsic Value
Units outstanding, beginning of year	1,369	$	43.43
Granted	—		—
Released	(401)		33.95
Forfeited	(12)		30.24
Units outstanding, end of period	956		47.58	$	214,939

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $224.85 per share, multiplied by the number of PSUs outstanding. As of March 31, 2023, there was $12.3 million in unrecognized compensation costs related to PSUs under our stock plans for awards that are expected to vest. We expect to recognize the cost related to the PSUs over a weighted average period of 1.0 years. PSUs are released when vesting requirements are met.

Certain PSUs that vested in the three months ended March 31, 2023 were net-share settled such that we withheld shares to cover the employees’ tax obligation for the applicable income and other employment taxes, and remitted the cash

to the appropriate taxing authorities. Total shares withheld related to PSUs were 160 thousand and had a value of $34.7 million on their respective vesting dates as determined by the closing stock price on such dates. Payments for the employees’ tax obligations are reflected as a financing activity within the condensed consolidated statements of cash flows. We record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital.

Stock Option Activity

The following table summarizes stock option activity for the three months ended March 31, 2023 (number of options and aggregate intrinsic value in thousands):


				Weighted
		Weighted		Average
	Number	Average		Remaining
	of	Exercise		Contractual	Aggregate
	Options	Price		Life (years)	Intrinsic Value
Options outstanding, beginning of year	2,438	$	28.58
Granted	—		—
Exercised	(1,901)		—
Expired / terminated	—		—
Options outstanding, end of period	537		28.58	4.91	$	105,284
Options exercisable, end of period	6		28.58	4.91		1,165

Aggregate intrinsic value represents the difference between the exercise price of the underlying stock option awards and the closing market price of our common stock of $224.85 on March 31, 2023.

Of the total stock options exercised during the three months ended March 31, 2023, 0.9 million were immediately sold to cover the exercise price and the option holder’s tax obligation for the applicable income and other employment taxes. As of March 31, 2023, total options outstanding included 0.5 million unvested performance-based stock options, which relate to the CEO Performance Award and are probable of achievement.

Stock-based Compensation Expense

The following table summarizes the composition of stock-based compensation expense for the three months ended March 31, 2023 and 2022 (in thousands):


	Three Months Ended March 31,
	2023		2022
Cost of product sales and service sales	$	1,320	$	1,108
Sales, general and administrative expenses		15,445		12,982
Research and development expenses		17,585		10,998
Total stock-based compensation expense	$	34,350	$	25,088

Stock Incentive Plan

In May 2022, our shareholders approved the Axon Enterprise, Inc. 2022 Stock Incentive Plan (the “2022 Plan”) authorizing an additional 2.5 million shares, plus remaining available shares under prior plans, for issuance under the new plan. Combined with the 2019 Plan and other legacy stock incentive plans, there are 2.7 million shares available for grant as of March 31, 2023.

Stock Repurchase Plan

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. During the three months ended March 31, 2023 and 2022, no common shares were purchased under the program. As of March 31, 2023, $16.3 million remains available under the plan for future purchases. Any future purchases will be discretionary.

At-the-Market equity offering

During the three months ended March 31, 2023, we sold 154,500 shares of our common stock under our "at-the-market" equity offering program (the “ATM”). We generated approximately $34.2 million in aggregate gross proceeds from sales under the ATM. Aggregate net proceeds from the ATM were $33.7 million after deducting related expenses, including commissions to the sales agent and issuance costs of $0.5 million.

We may sell up to a total of 3.0 million shares of our common stock under the ATM, with 2.3 million shares remaining as of March 31, 2023. The ATM expires on April 20, 2024. We intend to use the net proceeds from this offering for general corporate purposes, which may include, among other things, providing capital to satisfy a portion of the tax obligations related to the vesting and settlement of stock compensation awards granted to our executive officers and other employees under our stock incentive plans, to support our growth, and to acquire or invest in product lines, products, services, technologies or facilities.