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Table of Contents

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 March 31, 2021

or

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

For the transition period from                      to                   

Commission File Number: 001-16391

Axon Enterprise, Inc.

(Exact name of registrant as specified in its charter)

Delaware

86-0741227

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

17800 North 85th Street

85255

Scottsdale,  Arizona

(Address of principal executive offices)

(Zip Code)

(480) 991-0797

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.00001 Par Value

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 April 30, 2021 was 64,684,364.

Table of Contents

AXON ENTERPRISE, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2021

Page

Special Note Regarding Forward-Looking Statements

ii

PART I - FINANCIAL INFORMATION

1

Item 1. Financial Statements

1

Condensed Consolidated Balance Sheets as of March 31, 2021 (Unaudited) and December 31, 2020

1

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2021 and 2020

2

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2021 and 2020

3

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020

4

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3. Quantitative and Qualitative Disclosures About Market Risk

35

Item 4. Controls and Procedures

36

PART II - OTHER INFORMATION

37

Item 1. Legal Proceedings

37

Item 1A. Risk Factors

37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

37

Item 3. Defaults Upon Senior Securities

37

Item 4. Mine Safety Disclosures

37

Item 5. Other Information

37

Item 6. Exhibits

38

SIGNATURES

39

Table of Contents

Special Note Regarding Forward-Looking Statements

This Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions and strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. From time to time, we also provide forward-looking statements in other materials we release to the public as well as verbal forward-looking statements. These forward-looking statements include, without limitation, statements regarding: proposed products and services and related development efforts and activities; expectations about the market for our current and future products and services; the impact of pending litigation; 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, 2020. 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 26, 2021 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.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AXON ENTERPRISE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

    

March 31, 

December 31, 

2021

2020

(Unaudited)

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

154,822

$

155,440

Short-term investments

 

440,842

 

406,525

Accounts and notes receivable, net of allowance of $1,796 and $2,105 as of March 31, 2021 and December 31, 2020, respectively

 

185,373

 

229,201

Contract assets, net

 

72,472

 

63,945

Inventory

 

89,657

 

89,958

Prepaid expenses and other current assets

 

43,063

 

36,883

Total current assets

 

986,229

 

981,952

Property and equipment, net

 

112,119

 

105,494

Deferred tax assets, net

 

46,403

 

45,770

Intangible assets, net

 

8,642

 

9,448

Goodwill

 

25,194

 

25,205

Long-term investments

 

78,464

 

90,681

Long-term notes receivable, net

 

18,546

 

22,457

Long-term contract assets, net

26,341

20,099

Other assets

 

102,920

 

79,917

Total assets

$

1,404,858

$

1,381,023

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

19,791

$

24,142

Accrued liabilities

 

41,097

 

59,843

Current portion of deferred revenue

 

165,086

 

163,959

Customer deposits

 

8,134

 

2,956

Other current liabilities

 

5,667

 

5,431

Total current liabilities

 

239,775

 

256,331

Deferred revenue, net of current portion

 

116,107

 

111,222

Liability for unrecognized tax benefits

 

4,697

 

4,503

Long-term deferred compensation

 

4,825

 

4,732

Deferred tax liability, net

684

649

Other long-term liabilities

 

27,866

 

27,331

Total liabilities

 

393,954

 

404,768

Commitments and contingencies (Note 11)

 

  

 

  

Stockholders’ equity:

 

  

 

  

Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively

 

 

Common stock, $0.00001 par value; 200,000,000 shares authorized; 64,673,091 and 63,766,555 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively

 

1

 

1

Additional paid-in capital

 

1,044,724

 

962,159

Treasury stock at cost, 20,220,227 shares as of March 31, 2021 and December 31, 2020

 

(155,947)

 

(155,947)

Retained earnings

 

121,984

 

169,901

Accumulated other comprehensive income

 

142

 

141

Total stockholders’ equity

 

1,010,904

 

976,255

Total liabilities and stockholders’ equity

$

1,404,858

$

1,381,023

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

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AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

Three Months Ended March 31, 

    

2021

    

2020

Net sales from products

$

140,886

$

107,288

Net sales from services

 

54,133

 

39,874

Net sales

 

195,019

 

147,162

Cost of product sales

 

58,616

 

48,884

Cost of service sales

 

13,050

 

9,670

Cost of sales

 

71,666

 

58,554

Gross margin

 

123,353

 

88,608

Operating expenses:

 

  

 

  

Sales, general and administrative

 

126,597

 

63,027

Research and development

 

47,018

 

26,381

Total operating expenses

 

173,615

 

89,408

Income (loss) from operations

 

(50,262)

 

(800)

Interest and other income, net

 

585

 

941

Income (loss) before provision for income taxes

 

(49,677)

 

141

Provision for (benefit from) income taxes

 

(1,760)

 

(3,933)

Net income (loss)

$

(47,917)

$

4,074

Net income (loss) per common and common equivalent shares:

 

  

 

  

Basic

$

(0.75)

$

0.07

Diluted

$

(0.75)

$

0.07

Weighted average number of common and common equivalent shares outstanding:

 

  

 

  

Basic

 

64,036

 

59,609

Diluted

 

64,036

 

60,394

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Net income (loss)

$

(47,917)

$

4,074

Foreign currency translation adjustments

 

1

 

(2,372)

Comprehensive income (loss)

$

(47,916)

$

1,702

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

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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

Income

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 income

 

(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

    

    

    

    

    

    

    

    

    

    

    

    

    

Accumulated

    

    

Additional

Other

Total

Common Stock

Paid-in

Treasury Stock

Retained

Comprehensive

Stockholders’

Shares

Amount

Capital

Shares

Amount

Earnings

Loss

Equity

Balance, December 31, 2019

    

59,497,759

$

1

$

528,272

 

20,220,227

$

(155,947)

$

172,265

$

(1,096)

    

$

543,495

Cumulative effect of applying a change in accounting principle, net of tax

 

 

 

 

 

 

(640)

 

 

(640)

Issuance of common stock under employee plans, net

 

315,404

 

 

(5,162)

 

 

 

 

 

(5,162)

Stock-based compensation

 

 

 

20,195

 

 

 

 

 

20,195

Net income

 

 

 

 

 

4,074

 

4,074

Foreign currency translation adjustments

 

 

 

 

 

 

 

(2,372)

 

(2,372)

Balance, March 31, 2020

 

59,813,163

$

1

$

543,305

 

20,220,227

$

(155,947)

$

175,699

$

(3,468)

$

559,590

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

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AXON ENTERPRISE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Three Months Ended March 31, 

    

2021

    

2020

Cash flows from operating activities:

 

  

 

  

Net income (loss)

$

(47,917)

$

4,074

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

  

 

Depreciation and amortization

 

4,291

 

2,881

Loss on disposal and abandonment of intangible assets

 

11

 

13

Loss on disposal and impairment of property and equipment, net

 

45

 

517

Stock-based compensation

 

89,610

 

20,195

Deferred income taxes

 

(598)

 

(1,548)

Unrecognized tax benefits

 

194

 

341

Other noncash

 

2,615

 

1,156

Provision for expected credit losses

(335)

902

Change in assets and liabilities:

 

 

Accounts and notes receivable and contract assets

 

31,298

 

(9,700)

Inventory

 

520

 

(8,630)

Prepaid expenses and other assets

 

(6,952)

 

2,277

Accounts payable, accrued and other liabilities

 

(18,062)

 

(3,562)

Deferred revenue

 

6,219

 

4,499

Net cash provided by operating activities

 

60,939

 

13,415

Cash flows from investing activities:

 

  

 

  

Purchases of investments

 

(155,825)

 

(99,512)

Proceeds from call / maturity of investments

 

132,254

 

84,315

Purchases of property and equipment

 

(10,521)

 

(2,209)

Proceeds from disposal of property and equipment

10

78

Purchases of intangible assets

 

(41)

 

(45)

Strategic investments

 

(20,000)

 

(4,700)

Net cash used in investing activities

 

(54,123)

 

(22,073)

Cash flows from financing activities:

 

  

 

  

Proceeds from options exercised

 

 

28

Income and payroll tax payments for net-settled stock awards

 

(7,045)

 

(5,190)

Net cash used in financing activities

 

(7,045)

 

(5,162)

Effect of exchange rate changes on cash and cash equivalents

 

(392)

 

(1,890)

Net decrease in cash and cash equivalents

 

(621)

 

(15,710)

Cash and cash equivalents and restricted cash, beginning of period

 

155,551

 

172,355

Cash and cash equivalents and restricted cash, end of period

$

154,930

$

156,645

Supplemental disclosures:

 

  

 

  

Cash and cash equivalents

$

154,822

$

156,540

Restricted cash (Note 1)

 

108

 

105

Total cash, cash equivalents and restricted cash shown in the statements of cash flows

$

154,930

$

156,645

Cash paid for income taxes, net of refunds

$

4,152

$

3,863

Non-cash transactions

 

  

 

  

Property and equipment purchases in accounts payable and accrued liabilities

$

517

$

617

Investment purchases in accounts payable, net

$

$

13,451

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

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

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

Our headquarters in Scottsdale, Arizona houses our executive management, sales, marketing, certain engineering, manufacturing, 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, 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 wholly owned subsidiaries. All material intercompany accounts, transactions, and profits have been eliminated.

Basis of Presentation and Use of Estimates

These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information related to our organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) has been condensed or omitted. The accounting policies followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed in our annual consolidated financial statements for the year ended December 31, 2020, 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, 2020. The results of operations for the three months ended March 31, 2021 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,
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

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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 13.

Geographic Information and Major Customers / Suppliers

For the three months ended March 31, 2021, 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 months ended March 31, 2021, no customer represented more than 10% of total net sales. At March 31, 2021 and December 31, 2020, 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, Israel, Republic of Korea, Mexico, Sri Lanka, and Taiwan. Although we currently obtain many of these components from single source suppliers, we own the injection molded component tooling, most of the designs, and the test fixtures used in their production for all custom components. As a result, we believe we could obtain alternative suppliers in most cases without incurring significant production delays. We also strategically hold safety stock levels on custom components to further reduce this risk. For off the shelf components, we believe that in most cases there are readily available alternative suppliers who can consistently meet our needs for these components. We acquire most of our components on a purchase order basis and do not have any significant long-term contracts with component suppliers.

Income per Common Share

Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. 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 March 31, 

    

2021

    

2020

Numerator for basic and diluted earnings per share:

 

  

 

  

Net income (loss)

$

(47,917)

$

4,074

Denominator:

 

  

 

  

Weighted average shares outstanding

 

64,036

 

59,609

Dilutive effect of stock-based awards

 

 

785

Diluted weighted average shares outstanding

 

64,036

 

60,394

Anti-dilutive stock-based awards excluded

 

12,234

 

12,161

Net income (loss) per common share:

 

 

  

Basic

$

(0.75)

$

0.07

Diluted

$

(0.75)

$

0.07

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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):

Three Months Ended March 31, 

    

2021

2020

Balance, beginning of period

$

769

$

1,476

Utilization of reserve

 

(231)

 

(171)

Warranty expense (benefit)

 

406

 

(85)

Balance, end of period

$

944

$

1,220

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 March 31, 2021 and December 31, 2020 were comprised of money market funds, certificates of deposit, commercial paper, corporate bonds, municipal bonds, U.S. Government agency bonds, U.S. Treasury bills, and U.S. Treasury inflation-protected securities. Also included in cash equivalents and investments at December 31, 2020 were U.S. Treasury repurchase agreements. See additional disclosure regarding the fair value of our cash equivalents and investments in Note 3. Included in the balance of other assets as of March 31, 2021 and December 31, 2020 was $4.8 million and $4.7 million, respectively, related to corporate-owned life insurance policies

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

which are used to fund our deferred compensation plan. We determine the fair value of insurance contracts by obtaining the cash surrender value of the contracts from the issuer, a Level 2 valuation technique.

We have strategic investments in three unconsolidated affiliates, which are included within other assets. The estimated fair value of the investments was determined based on Level 3 inputs. As of March 31, 2021, management estimated that the fair value of the investments equaled the carrying value.

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 balance sheet.

Restricted Cash

Restricted cash balances as of March 31, 2021 and December 31, 2020 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 sheets, with the remainder included in other 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 December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Simplifying the Accounting for Income Taxes. Adoption of this ASU on January 1, 2021 did not have a material impact on our consolidated financial statements.

In January 2020, the FASB issued ASU No. 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (a Consensus of the Emerging Issues Task Force). The guidance clarifies the interaction between ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and the ASU on equity method investments. ASU 2016-01 provides companies with an alternative to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs. ASU 2020-01 clarifies that for purposes of applying the Topic 321 measurement alternative, an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting under Topic 323, immediately before applying or upon discontinuing the equity method. In addition, the new ASU provides direction that a company should not consider

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

whether the underlying securities would be accounted for under the equity method or the fair value option when it is determining the accounting for certain forward contracts and purchased options, upon either settlement or exercise. Adoption of this ASU on January 1, 2021 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.

2. Revenues

Nature of Products and Services

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

Three Months Ended March 31, 2021

Three Months Ended March 31, 2020

    

    

Software and

    

    

    

Software and

    

TASER

Sensors

Total

TASER

Sensors

Total

TASER 7

$

33,991

$

$

33,991

$

15,326

$

$

15,326

TASER X26P

 

9,963

 

 

9,963

 

11,061

 

 

11,061

TASER X2

 

12,778

 

 

12,778

 

14,075

 

 

14,075

TASER Pulse

 

2,205

 

 

2,205

 

1,200

 

 

1,200

Cartridges

 

30,418

 

 

30,418

 

26,625

 

 

26,625

Axon Body

 

 

19,756

 

19,756

 

 

12,823

 

12,823

Axon Flex

 

 

905

 

905

 

 

1,183

 

1,183

Axon Fleet

 

 

3,763

 

3,763

 

 

4,775

 

4,775

Axon Dock

 

 

6,920

 

6,920

 

 

4,951

 

4,951

Axon Evidence and cloud services

 

1,396

 

52,294

 

53,690

 

498

 

39,154

 

39,652

Extended warranties

 

5,646

 

7,500

 

13,146

 

4,977

 

5,458

 

10,435

Other

 

2,602

 

4,882

 

7,484

 

2,133

 

2,923

 

5,056

Total

$

98,999

$

96,020

$

195,019

$

75,895

$

71,267

$

147,162

The following table presents our revenues disaggregated by geography (in thousands):

Three Months Ended March 31, 

2021

2020

United States

    

$

160,386

    

82

%  

$

117,463

    

80

%  

Other countries

 

34,633

 

18

 

29,699

 

20

Total

$

195,019

 

100

%  

$

147,162

 

100

%  

9

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Contract Balances

The following table presents our contract assets, contract liabilities and certain information related to these balances as of and for the three months ended March 31, 2021 (in thousands):

    

March 31, 2021

Contract assets, net

$

98,813

Contract liabilities (deferred revenue)

 

281,193

Revenue recognized in the period from:

 

  

Amounts included in contract liabilities at the beginning of the period

 

63,871

Contract liabilities (deferred revenue) consisted of the following (in thousands):

March 31, 2021

December 31, 2020

    

Current

    

Long-Term

    

Total

    

Current

    

Long-Term

    

Total

Warranty:

 

  

 

  

 

  

 

  

 

  

 

  

TASER

$

10,501

$

16,486

$

26,987

$

11,635

$

16,953

$

28,588

Software and Sensors

 

14,432

 

5,322

 

19,754

 

13,926

 

5,025

 

18,951

 

24,933

 

21,808

 

46,741

 

25,561

 

21,978

 

47,539

Hardware:

 

  

 

  

 

  

 

  

 

  

 

  

TASER

 

16,040

 

15,024

 

31,064

 

16,314

 

14,304

 

30,618

Software and Sensors

 

23,723

 

51,265

 

74,988

 

25,181

 

50,981

 

76,162

 

39,763

 

66,289

 

106,052

 

41,495

 

65,285

 

106,780

Services:

 

  

 

  

 

  

 

  

 

  

 

  

TASER

 

969

 

1,997

 

2,966

 

996

 

1,554

 

2,550

Software and Sensors

 

99,421

 

26,013

 

125,434

 

95,907

 

22,405

 

118,312

100,390

28,010

128,400

96,903

23,959

120,862

Total

$

165,086

$

116,107

$

281,193

$

163,959

$

111,222

$

275,181

March 31, 2021

December 31, 2020

    

Current

    

Long-Term

    

Total

    

Current

    

Long-Term

    

Total

TASER

$

27,510

$

33,507

$

61,017

$

28,945

$

32,811

$

61,756

Software and Sensors

 

137,576

 

82,600

 

220,176

 

135,014

 

78,411

 

213,425

Total

$

165,086

$

116,107

$

281,193

$

163,959

$

111,222

$

275,181

Remaining Performance Obligations

As of March 31, 2021, we had approximately $1.79 billion of remaining performance obligations, which included both recognized contract liabilities as well as amounts that will be invoiced and recognized in future periods. The remaining performance obligations are limited only to arrangements that meet the definition of a contract under Topic 606 as of March 31, 2021. We expect to recognize between 20% - 25% of this balance over the next twelve months, and generally 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.

10

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AXON ENTERPRISE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

3. Cash, Cash Equivalents and Investments

The following tables summarize our cash, cash equivalents, and held-to-maturity investments at March 31, 2021 and December 31, 2020 (in thousands):

As of March 31, 2021

    

    

Gross

    

Gross

    

  

  

Cash and

    

    

Amortized

Unrealized

Unrealized

Cash

Short-Term

Long-Term

Cost

Gains

Losses

Fair Value

Equivalents

Investments

Investments

Cash

$

137,003

$

$

$

137,003

$

137,003

$

$

Level 1: