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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 June 30, 2023

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

ScottsdaleArizona

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 4, 2023 was 74,759,989.

Table of Contents

AXON ENTERPRISE, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2023

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, 2023 (Unaudited) and December 31, 2022

1

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2023 and 2022

2

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2023 and 2022

3

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022

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

37

Item 4. Controls and Procedures

38

PART II - OTHER INFORMATION

38

Item 1. Legal Proceedings

38

Item 1A. Risk Factors

39

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

61

Item 3. Defaults Upon Senior Securities

61

Item 4. Mine Safety Disclosures

61

Item 5. Other Information

61

Item 6. Exhibits

62

SIGNATURES

63

Table of Contents

Special Note Regarding Forward-Looking Statements

This Quarterly 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; statements related to recently completed acquisitions; our anticipation that contracts with governmental customers will be fulfilled; strategies and trends, including the amounts and 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 Annual Report on Form 10-K for the year ended December 31, 2022. 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 exposure to cancellations of government contracts due to appropriation clauses, exercise of a cancellation clause, or non-exercise of contractually optional periods; the ability of law enforcement agencies to obtain funding, including based on tax revenues; 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 win bids through the open bidding process for governmental agencies; our ability to manage our supply chain and avoid production delays, shortages, and impacts to expected gross margins; the impacts of inflation, macroeconomic conditions and global events; the impact of stock-based 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 or sentiment regarding our products; the impact of product mix on projected gross margins; defects in, or misuse of, 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 United States 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; the impact of declines or increases in the fair value or impairment of our investments, including our strategic investments; our ability to attract and retain key personnel; litigation or inquiries and related time and costs; 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, and investors should refer to them. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

Except as required by law, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures

ii

Table of Contents

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.

iii

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AXON ENTERPRISE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

    

June 30, 

December 31, 

2023

2022

(Unaudited)

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

474,203

$

353,684

Marketable securities

64,800

39,240

Short-term investments

 

594,942

 

581,769

Accounts and notes receivable, net of allowance of $1,950 and $2,176 as of June 30, 2023 and December 31, 2022, respectively

 

372,060

 

358,190

Contract assets, net

 

255,306

 

196,902

Inventory

 

249,767

 

202,471

Prepaid expenses and other current assets

 

101,572

 

73,022

Total current assets

 

2,112,650

 

1,805,278

Property and equipment, net

 

179,096

 

169,843

Deferred tax assets, net

 

198,581

 

156,866

Intangible assets, net

 

21,837

 

12,158

Goodwill

 

57,741

 

44,983

Long-term investments

 

15,481

 

156,207

Long-term notes receivable, net

 

5,278

 

5,210

Long-term contract assets, net

75,200

45,170

Strategic investments

233,637

296,563

Other long-term assets

 

177,903

 

159,616

Total assets

$

3,077,404

$

2,851,894

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

72,989

$

59,918

Accrued liabilities

 

118,162

 

155,934

Current portion of deferred revenue

 

412,212

 

360,037

Customer deposits

 

14,517

 

20,399

Other current liabilities

 

7,359

 

6,358

Total current liabilities

 

625,239

 

602,646

Deferred revenue, net of current portion

 

265,458

 

248,003

Liability for unrecognized tax benefits

 

17,812

 

10,745

Long-term deferred compensation

 

8,767

 

6,285

Deferred tax liability, net

2,782

1

Long-term lease liabilities

 

33,987

 

37,143

Convertible notes, net

675,518

673,967

Other long-term liabilities

 

2,843

 

4,613

Total liabilities

 

1,632,406

 

1,583,403

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, 2023 and December 31, 2022, respectively

 

 

Common stock, $0.00001 par value; 200,000,000 shares authorized; 74,763,004 and 71,474,581 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively

 

1

 

1

Additional paid-in capital

 

1,293,089

 

1,174,594

Treasury stock at cost, 20,220,227 shares as of June 30, 2023 and December 31, 2022

 

(155,947)

 

(155,947)

Retained earnings

 

314,581

 

257,022

Accumulated other comprehensive loss

 

(6,726)

 

(7,179)

Total stockholders’ equity

 

1,444,998

 

1,268,491

Total liabilities and stockholders’ equity

$

3,077,404

$

2,851,894

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 June 30, 

Six Months Ended June 30, 

    

2023

    

2022

    

2023

    

2022

Net sales from products

$

233,474

$

200,051

$

452,863

$

376,255

Net sales from services

 

141,131

 

85,562

 

264,785

 

165,784

Net sales

 

374,605

 

285,613

 

717,648

 

542,039

Cost of product sales

 

101,192

 

87,502

 

208,776

 

166,854

Cost of service sales

 

41,292

 

24,148

 

72,649

 

45,483

Cost of sales

 

142,484

 

111,650

 

281,425

 

212,337

Gross margin

 

232,121

 

173,963

 

436,223

 

329,702

Operating expenses:

 

  

 

  

 

  

 

  

Sales, general and administrative

 

119,922

 

95,005

 

236,489

 

185,134

Research and development

 

71,940

 

57,547

 

142,867

 

105,963

Total operating expenses

 

191,862

 

152,552

 

379,356

 

291,097

Income from operations

 

40,259

 

21,411

 

56,867

 

38,605

Interest and other income (loss), net

 

(52,368)

 

47,026

 

(27,092)

 

102,325

Income (loss) before provision for income taxes

 

(12,109)

 

68,437

 

29,775

 

140,930

Provision for (benefit from) income taxes

 

(24,529)

 

17,475

 

(27,784)

 

35,097

Net income

$

12,420

$

50,962

$

57,559

$

105,833

Net income per common and common equivalent shares:

 

  

 

  

 

  

 

  

Basic

$

0.17

$

0.72

$

0.78

$

1.49

Diluted

$

0.16

$

0.71

$

0.77

$

1.46

Weighted average number of common and common equivalent shares outstanding:

 

  

 

  

 

  

 

  

Basic

 

74,224

 

71,040

 

73,435

 

70,995

Diluted

 

75,780

 

72,283

 

74,834

 

72,316

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Net income

$

12,420

$

50,962

$

57,559

$

105,833

Foreign currency translation adjustments

 

(557)

 

(2,166)

 

1,119

 

(3,238)

Unrealized loss on available-for-sale investments

(850)

(161)

(666)

(650)

Comprehensive income

$

11,013

$

48,635

$

58,012

$

101,945

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

Loss

Equity

Balance, December 31, 2022

 

71,474,581

$

1

$

1,174,594

 

20,220,227

$

(155,947)

$

257,022

$

(7,179)

$

1,268,491

Issuance of common stock

154,500

33,650

33,650

Issuance of common stock under employee plans, net

 

335,629

(34,841)

(34,841)

Stock options exercised

1,901,535

54,346

54,346

Stock-based compensation

 

34,350

34,350

Issuance of common stock for business combination contingent consideration

7,817

Net income

 

45,139

45,139

Other comprehensive income, net

 

1,860

1,860

Balance, March 31, 2023

 

73,874,062

$

1

$

1,262,099

 

20,220,227

$

(155,947)

$

302,161

$

(5,319)

$

1,402,995

Issuance of common stock

313,094

61,156

61,156

Issuance of common stock under employee plans, net

 

570,357

(62,214)

 

(62,214)

Stock options exercised

5,491

157

157

Stock-based compensation

 

31,891

 

31,891

Net income

 

 

12,420

12,420

Other comprehensive loss, net

 

 

(1,407)

(1,407)

Balance, June 30, 2023

 

74,763,004

$

1

$

1,293,089

 

20,220,227

$

(155,947)

$

314,581

$

(6,726)

$

1,444,998

    

    

    

    

    

    

    

    

    

    

    

    

    

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

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)

Six Months Ended June 30, 

    

2023

    

2022

Cash flows from operating activities:

 

  

 

  

Net income

$

57,559

$

105,833

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

 

  

 

  

Depreciation and amortization

 

14,169

 

11,965

Amortization of issuance cost

1,531

Coupon interest expense

1,725

 

Purchase accounting adjustments to goodwill

 

58

Loss on disposal and abandonment of intangible assets

 

18

48

Loss on disposal and impairment of property, equipment, and other assets, net

 

162

 

189

Unrealized loss (gain) on strategic investments and marketable securities, net

46,342

 

(103,836)

Gain on insurance recoveries

(789)

Stock-based compensation

 

66,241

 

46,250

Deferred income taxes

 

(37,605)

 

26,050

Unrecognized tax benefits

 

2,867

 

3,895

Bond amortization

(8,036)

301

Noncash lease expense

 

2,978

 

3,279

Provision for expected credit losses

341

 

183

Change in assets and liabilities:

 

 

Accounts and notes receivable and contract assets

 

(102,205)

 

(80,247)

Inventory

 

(43,585)

 

(47,109)

Prepaid expenses and other assets

 

(49,290)

 

(2,688)

Accounts payable, accrued and other liabilities

 

(35,976)

24,569

Deferred revenue

 

69,886

74,600

Net cash provided by (used in) operating activities

 

(13,667)

 

63,340

Cash flows from investing activities:

 

  

Purchases of investments

 

(246,049)

(108,240)

Proceeds from call, maturity, and sale of investments

 

381,082

 

9,473

Exercise of warrants of strategic investments

 

(6,555)

Purchases of property and equipment

 

(21,650)

(29,847)

Proceeds from disposal of property and equipment

3

91

Purchases of intangible assets

 

(187)

 

(104)

Strategic investments

 

(10,917)

(61,500)

Business acquisition, net of cash acquired

(21,026)

 

(2,104)

Net cash provided by (used in) investing activities

 

81,256

 

(198,786)

Cash flows from financing activities:

 

  

Net proceeds from equity offering

94,806

(74)

Proceeds from options exercised

 

54,503

 

Income and payroll tax payments for net-settled stock awards

 

(97,055)

 

(2,319)

Net cash provided by (used in) financing activities

 

52,254

 

(2,393)

Effect of exchange rate changes on cash and cash equivalents

 

806

 

(3,910)

Net increase (decrease) in cash and cash equivalents

 

120,649

 

(141,749)

Cash and cash equivalents and restricted cash, beginning of period

 

355,552

 

356,438

Cash and cash equivalents and restricted cash, end of period

$

476,201

$

214,689

Supplemental disclosures:

 

  

 

  

Cash and cash equivalents

$

474,203

$

212,815

Restricted cash (Note 1)

 

1,998

 

1,874

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

$

476,201

$

214,689

Cash paid for income taxes, net of refunds

$

25,052

$

2,289

Non-cash transactions

 

  

 

  

Property and equipment purchases in accounts payable and accrued liabilities

$

750

$

2,009

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

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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 mission is to protect life in service of promoting peace, justice and strong institutions.

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, Belgium, Canada, Finland, France, Germany, Hong Kong, India, Italy, the Netherlands, Spain, 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” or “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, 2022, as filed on Form 10-K. 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, 2022. The results of operations for the three and six months ended June 30, 2023 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 losses,
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 comprise two reportable segments: the development, manufacture and sale of 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 (collectively, the “Software and Sensors” segment); and the manufacture and sale of conducted electrical devices (“CEDs”), batteries, accessories, extended warranties and other products and services (collectively, the “TASER” 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. 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.

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Geographic Information and Major Customers / Suppliers

For the three and six months ended June 30, 2023, no individual country outside the United States 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, 2023, no customer represented more than 10% of total net sales. At June 30, 2023 and December 31, 2022, 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 United States, China, Republic of Korea, Malaysia, Mexico, Sri Lanka, 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 previously experienced supply chain disruptions relating to materials and port constraints, we continue to manage potential logistical interruptions. We remain 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 effects of outstanding stock options, unvested restricted stock units, our 2027 convertible senior notes (the “Notes” or “2027 Notes”), and warrants to acquire shares of our common stock (the “Warrants” or “2027 Warrants”) are excluded from the computation of diluted net income per share in periods in which the effect would be antidilutive. 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, 

    

2023

    

2022

    

2023

    

2022

Numerator for basic and diluted earnings per share:

 

  

 

  

 

  

 

  

Net income

$

12,420

$

50,962

$

57,559

$

105,833

Denominator:

 

  

 

  

 

  

 

  

Weighted average shares outstanding

 

74,224

 

71,040

 

73,435

 

70,995

Dilutive effect of stock-based awards

 

1,556

 

1,243

 

1,399

 

1,321

Diluted weighted average shares outstanding

 

75,780

 

72,283

 

74,834

 

72,316

Net income per common share:

 

 

 

  

 

  

Basic

$

0.17

$

0.72

$

0.78

$

1.49

Diluted

$

0.16

$

0.71

$

0.77

$

1.46

Potentially dilutive securities that are not included in the calculation of diluted net income per share because doing so would be antidilutive are as follows (in thousands):

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2023

    

2022

    

2023

    

2022

Stock-based awards

 

129

 

2,991

 

135

 

2,912

2027 Notes

 

3,017

 

 

3,017

 

2027 Warrants

 

3,017

 

 

3,017

 

Total potentially dilutive securities

6,163

 

2,991

 

6,169

 

2,912

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For additional information regarding our convertible senior notes, refer to Note 9.

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 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 on a quarterly basis 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 consolidated balance sheets.

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

Six Months Ended June 30, 

    

2023

2022

Balance, beginning of period

$

811

$

2,822

Utilization of reserve

 

(514)

 

(1,574)

Warranty expense

 

3,143

 

380

Balance, end of period

$

3,440

$

1,628

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, 2023 comprised money market funds, commercial paper, corporate bonds, term deposits, U.S. government, municipal bonds, agency bonds, U.S. Treasury bills, and U.S. Treasury Inflation-Protected Securities. Cash equivalents and investments at December 31, 2022 also included certificates of deposit. 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, 2023 and December 31, 2022 was $5.2 million and $4.3 million, respectively, related to corporate-owned life insurance policies which are used to fund our deferred compensation plan.

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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 (loss), net.

We have strategic investments in eight unconsolidated affiliates as of June 30, 2023. 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 6.

We have convertible senior notes, for which the fair value is determined based on the closing trading price per $1,000 of the Notes as of the last day of trading for the period. We consider the fair value of the Notes at June 30, 2023 to be a Level 2 measurement as they are not publicly traded. The fair value of the Notes is primarily affected by the trading price of our common stock and market interest rates.

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 balance as of June 30, 2023 was $2.0 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 $1.9 million was included in prepaid expenses and other assets on our condensed consolidated balance sheet, with the remainder in other long-term assets. Restricted cash balance as of December 31, 2022 was $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 assets on our condensed consolidated balance sheet, with the remainder 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.

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.

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