Item 1. Financial Statements
AXON ENTERPRISE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
202,551
|
|
|
$
|
349,462
|
|
|
Short-term investments
|
108,913
|
|
|
—
|
|
|
Accounts and notes receivable, net of allowance of $1,983 and $1,882 as of September 30, 2019 and December 31, 2018, respectively
|
149,013
|
|
|
130,579
|
|
|
Contract assets, net
|
33,602
|
|
|
13,960
|
|
|
Inventory
|
40,666
|
|
|
33,763
|
|
|
Prepaid expenses and other current assets
|
41,277
|
|
|
30,391
|
|
|
Total current assets
|
576,022
|
|
|
558,155
|
|
|
Property and equipment, net of accumulated depreciation of $38,470 and $39,885 as of September 30, 2019 and December 31, 2018, respectively
|
42,592
|
|
|
37,893
|
|
|
Deferred income tax assets, net
|
23,290
|
|
|
19,347
|
|
|
Intangible assets, net
|
13,528
|
|
|
15,935
|
|
|
Goodwill
|
24,876
|
|
|
24,981
|
|
|
Long-term investments
|
41,391
|
|
|
—
|
|
|
Long-term notes receivable, net of current portion
|
33,463
|
|
|
40,230
|
|
|
Other assets
|
37,142
|
|
|
22,999
|
|
|
Total assets
|
$
|
792,304
|
|
|
$
|
719,540
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
$
|
14,638
|
|
|
$
|
15,164
|
|
|
Accrued liabilities
|
35,745
|
|
|
41,092
|
|
|
Current portion of deferred revenue
|
127,160
|
|
|
107,016
|
|
|
Customer deposits
|
2,294
|
|
|
2,702
|
|
|
Other current liabilities
|
3,997
|
|
|
37
|
|
|
Total current liabilities
|
183,834
|
|
|
166,011
|
|
|
Deferred revenue, net of current portion
|
82,149
|
|
|
74,417
|
|
|
Liability for unrecognized tax benefits
|
3,443
|
|
|
2,849
|
|
|
Long-term deferred compensation
|
3,694
|
|
|
3,235
|
|
|
Other long-term liabilities
|
11,537
|
|
|
5,704
|
|
|
Total liabilities
|
284,657
|
|
|
252,216
|
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of September 30, 2019 and December 31, 2018
|
—
|
|
|
—
|
|
|
Common stock, $0.00001 par value; 200,000,000 shares authorized; 59,320,793 and 58,810,637 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
|
1
|
|
|
1
|
|
|
Additional paid-in capital
|
480,747
|
|
|
453,400
|
|
|
Treasury stock at cost, 20,220,227 shares as of September 30, 2019 and December 31, 2018
|
(155,947
|
)
|
|
(155,947
|
)
|
|
Retained earnings
|
184,644
|
|
|
171,383
|
|
|
Accumulated other comprehensive loss
|
(1,798
|
)
|
|
(1,513
|
)
|
|
Total stockholders’ equity
|
507,647
|
|
|
467,324
|
|
|
Total liabilities and stockholders’ equity
|
$
|
792,304
|
|
|
$
|
719,540
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AXON ENTERPRISE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net sales from products
|
$
|
96,497
|
|
|
$
|
80,923
|
|
|
$
|
264,977
|
|
|
$
|
238,618
|
|
|
Net sales from services
|
34,340
|
|
|
23,913
|
|
|
94,032
|
|
|
66,659
|
|
|
Net sales
|
130,837
|
|
|
104,836
|
|
|
359,009
|
|
|
305,277
|
|
|
Cost of product sales
|
42,445
|
|
|
32,953
|
|
|
120,265
|
|
|
96,474
|
|
|
Cost of service sales
|
8,223
|
|
|
6,250
|
|
|
24,098
|
|
|
15,566
|
|
|
Cost of sales
|
50,668
|
|
|
39,203
|
|
|
144,363
|
|
|
112,040
|
|
|
Gross margin
|
80,169
|
|
|
65,633
|
|
|
214,646
|
|
|
193,237
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Sales, general and administrative
|
48,424
|
|
|
39,685
|
|
|
134,678
|
|
|
114,787
|
|
|
Research and development
|
25,129
|
|
|
21,982
|
|
|
71,976
|
|
|
55,602
|
|
|
Total operating expenses
|
73,553
|
|
|
61,667
|
|
|
206,654
|
|
|
170,389
|
|
|
Income from operations
|
6,616
|
|
|
3,966
|
|
|
7,992
|
|
|
22,848
|
|
|
Interest and other income (expense), net
|
1,820
|
|
|
1,274
|
|
|
5,978
|
|
|
2,242
|
|
|
Income before provision for income taxes
|
8,436
|
|
|
5,240
|
|
|
13,970
|
|
|
25,090
|
|
|
Provision for (benefit from) income taxes
|
2,332
|
|
|
(471
|
)
|
|
709
|
|
|
(2,032
|
)
|
|
Net income
|
$
|
6,104
|
|
|
$
|
5,711
|
|
|
$
|
13,261
|
|
|
$
|
27,122
|
|
|
Net income per common and common equivalent shares:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
$
|
0.22
|
|
|
$
|
0.49
|
|
|
Diluted
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
$
|
0.22
|
|
|
$
|
0.47
|
|
|
Weighted average number of common and common equivalent shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
59,278
|
|
|
58,340
|
|
|
59,128
|
|
|
55,681
|
|
|
Diluted
|
60,059
|
|
|
59,805
|
|
|
59,938
|
|
|
57,254
|
|
|
|
|
|
|
|
|
|
|
|
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
Net income
|
$
|
6,104
|
|
|
$
|
5,711
|
|
|
$
|
13,261
|
|
|
$
|
27,122
|
|
|
Foreign currency translation adjustments
|
(227
|
)
|
|
(107
|
)
|
|
(285
|
)
|
|
(159
|
)
|
|
Comprehensive income
|
$
|
5,877
|
|
|
$
|
5,604
|
|
|
$
|
12,976
|
|
|
$
|
26,963
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AXON ENTERPRISE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Treasury Stock
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total
Stockholders’
Equity
|
|
|
Shares
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
|
|
|
Balance, December 31, 2018
|
58,810,637
|
|
|
$
|
1
|
|
|
$
|
453,400
|
|
|
20,220,227
|
|
|
$
|
(155,947
|
)
|
|
$
|
171,383
|
|
|
$
|
(1,513
|
)
|
|
$
|
467,324
|
|
|
Issuance of common stock under employee plans, net
|
298,649
|
|
|
—
|
|
|
(1,159
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,159
|
)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
7,905
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,905
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,419
|
|
|
—
|
|
|
6,419
|
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50
|
|
|
50
|
|
|
Balance, March 31, 2019
|
59,109,286
|
|
|
1
|
|
|
460,146
|
|
|
20,220,227
|
|
|
(155,947
|
)
|
|
177,802
|
|
|
(1,463
|
)
|
|
480,539
|
|
|
Issuance of common stock under employee plans, net
|
71,832
|
|
|
—
|
|
|
(869
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(869
|
)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
8,627
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,627
|
|
|
Issuance of common stock for business combination contingent consideration
|
70,613
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
738
|
|
|
—
|
|
|
738
|
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(108
|
)
|
|
(108
|
)
|
|
Balance, June 30, 2019
|
59,251,731
|
|
|
1
|
|
|
467,904
|
|
|
20,220,227
|
|
|
(155,947
|
)
|
|
178,540
|
|
|
(1,571
|
)
|
|
488,927
|
|
|
Issuance of common stock under employee plans, net
|
69,062
|
|
|
—
|
|
|
(1,134
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,134
|
)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
13,977
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,977
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,104
|
|
|
—
|
|
|
6,104
|
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(227
|
)
|
|
(227
|
)
|
|
Balance, September 30, 2019
|
59,320,793
|
|
|
$
|
1
|
|
|
$
|
480,747
|
|
|
20,220,227
|
|
|
$
|
(155,947
|
)
|
|
$
|
184,644
|
|
|
$
|
(1,798
|
)
|
|
$
|
507,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Treasury Stock
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total
Stockholders’
Equity
|
|
|
Shares
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
|
|
|
Balance, December 31, 2017
|
52,969,869
|
|
|
$
|
1
|
|
|
$
|
201,672
|
|
|
20,220,227
|
|
|
$
|
(155,947
|
)
|
|
$
|
123,185
|
|
|
$
|
(1,467
|
)
|
|
$
|
167,444
|
|
|
Cumulative effect of applying a change in accounting principle
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18,994
|
|
|
—
|
|
|
18,994
|
|
|
Issuance of common stock under employee plans, net
|
337,214
|
|
|
—
|
|
|
(3,421
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,421
|
)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
4,093
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,093
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,926
|
|
|
—
|
|
|
12,926
|
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(707
|
)
|
|
(707
|
)
|
|
Balance, March 31, 2018
|
53,307,083
|
|
|
1
|
|
|
202,344
|
|
|
20,220,227
|
|
|
(155,947
|
)
|
|
155,105
|
|
|
(2,174
|
)
|
|
199,329
|
|
|
Issuance of common stock
|
4,645,000
|
|
|
—
|
|
|
233,993
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
233,993
|
|
|
Issuance of common stock for business combination
|
58,843
|
|
|
—
|
|
|
8,226
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,226
|
|
|
Issuance of common stock under employee plans, net
|
278,687
|
|
|
—
|
|
|
(6,800
|
)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
(6,800
|
)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
4,954
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
4,954
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
8,485
|
|
|
—
|
|
|
8,485
|
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
655
|
|
|
655
|
|
|
Balance, June 30, 2018
|
58,289,613
|
|
|
1
|
|
|
442,717
|
|
|
20,220,227
|
|
|
(155,947
|
)
|
|
163,590
|
|
|
(1,519
|
)
|
|
448,842
|
|
|
Issuance of common stock under employee plans
|
130,129
|
|
|
—
|
|
|
(1,039
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,039
|
)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
6,255
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,255
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,711
|
|
|
—
|
|
|
5,711
|
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(107
|
)
|
|
(107
|
)
|
|
Balance, September 30, 2018
|
58,419,742
|
|
|
$
|
1
|
|
|
$
|
447,933
|
|
|
20,220,227
|
|
|
$
|
(155,947
|
)
|
|
$
|
169,301
|
|
|
$
|
(1,626
|
)
|
|
$
|
459,662
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AXON ENTERPRISE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
Cash flows from operating activities:
|
|
|
|
|
Net income
|
$
|
13,261
|
|
|
$
|
27,122
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
8,196
|
|
|
8,226
|
|
|
Loss on disposal and impairment of property and equipment, net
|
2,408
|
|
|
290
|
|
|
Loss on disposal and abandonment of intangible assets
|
51
|
|
|
2,103
|
|
|
Stock-based compensation
|
30,195
|
|
|
15,302
|
|
|
Deferred income taxes
|
(3,946
|
)
|
|
(2,326
|
)
|
|
Unrecognized tax benefits
|
594
|
|
|
99
|
|
|
Other noncash, net
|
2,923
|
|
|
34
|
|
|
Change in assets and liabilities:
|
|
|
|
|
Accounts and notes receivable and contract assets
|
(30,497
|
)
|
|
(51,172
|
)
|
|
Inventory
|
(6,302
|
)
|
|
9,033
|
|
|
Prepaid expenses and other assets
|
(11,967
|
)
|
|
(12,081
|
)
|
|
Accounts payable, accrued and other liabilities
|
(13,528
|
)
|
|
4,306
|
|
|
Deferred revenue
|
28,476
|
|
|
31,700
|
|
|
Net cash provided by operating activities
|
19,864
|
|
|
32,636
|
|
|
Cash flows from investing activities:
|
|
|
|
|
Purchases of investments
|
(242,693
|
)
|
|
(4,331
|
)
|
|
Proceeds from maturity/call of investments
|
92,207
|
|
|
10,658
|
|
|
Purchases of property and equipment
|
(12,111
|
)
|
|
(6,880
|
)
|
|
Purchases of intangible assets
|
(328
|
)
|
|
(460
|
)
|
|
Business acquisitions
|
—
|
|
|
(4,990
|
)
|
|
Net cash used in investing activities
|
(162,925
|
)
|
|
(6,003
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
Net proceeds from equity offering
|
—
|
|
|
233,993
|
|
|
Proceeds from options exercised
|
106
|
|
|
713
|
|
|
Income and payroll tax payments for net-settled stock awards
|
(3,268
|
)
|
|
(11,973
|
)
|
|
Payment of contingent consideration for a business acquisition
|
—
|
|
|
(575
|
)
|
|
Net cash provided by (used in) financing activities
|
(3,162
|
)
|
|
222,158
|
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
(678
|
)
|
|
(381
|
)
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
(146,901
|
)
|
|
248,410
|
|
|
Cash, cash equivalents and restricted cash, beginning of period
|
351,027
|
|
|
78,438
|
|
|
Cash, cash equivalents and restricted cash, end of period
|
$
|
204,126
|
|
|
$
|
326,848
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
Cash and cash equivalents
|
$
|
202,551
|
|
|
$
|
324,371
|
|
|
Restricted cash (Note 1)
|
1,575
|
|
|
2,477
|
|
|
Total cash, cash equivalents and restricted cash shown in the statements of cash flows
|
$
|
204,126
|
|
|
$
|
326,848
|
|
|
|
|
|
|
|
Cash paid for income taxes, net of refunds
|
$
|
2,422
|
|
|
$
|
7,957
|
|
|
|
|
|
|
|
Non-cash transactions
|
|
|
|
|
Property and equipment purchases in accounts payable and accrued liabilities
|
$
|
1,047
|
|
|
$
|
1,114
|
|
|
Non-cash purchase consideration related to business combinations
|
$
|
—
|
|
|
$
|
12,508
|
|
|
Commission converted to stock-based award
|
$
|
314
|
|
|
$
|
—
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
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, and other administrative support functions. We also have a software engineering development center located in Seattle, Washington, and subsidiaries located in Australia, Canada, Finland, Hong Kong, Germany, 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, 2018, 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, 2018. The results of operations for the three and nine months ended September 30, 2019 and 2018 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,
|
|
|
|
|
•
|
valuation of goodwill, intangible and long-lived assets,
|
|
|
|
|
•
|
recognition, measurement and valuation of current and deferred income taxes,
|
|
|
|
|
•
|
stock-based compensation,
|
|
|
|
|
•
|
recognition and measurement of lease liabilities,
|
|
|
|
|
•
|
recognition and measurement of contingencies and accrued litigation expense, and
|
|
|
|
|
•
|
fair values of identified tangible and intangible assets acquired and liabilities assumed in business combinations.
|
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 weapons ("CEWs"), 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 (collectively, the “Software and Sensors” segment). Revenue from our “products” in the Software and Sensors segment are generally from sales of sensors, including on-officer body cameras, Axon Fleet cameras, other hardware sensors, warranties on sensors, and other products, and is sometimes referred to as "Sensors and Other revenue." Revenue from our “services” in the Software and Sensors segment consist of sales related to the Axon Cloud, which includes Axon Evidence, cloud-based evidence management software revenue, other recurring cloud-hosted software revenue and related professional services, and is sometimes referred to as "Axon Cloud revenue." Within the Software and Sensors segment, we include only revenues and costs attributable to that segment, which costs include: costs of sales for both products and services, direct labor, product management and research and development ("R&D") for products included, or to be included, within the Software and Sensors segment. All other costs are included in the TASER segment.
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Our Chief Executive Officer, who is the Chief Operating Decision Maker (the “CODM”), is not provided asset information or sales, general, and administrative expense by segment. Reportable segments are determined based on discrete financial information reviewed by the CODM. We organize and review operations based on products and services. We perform an analysis of our reportable segments on at least an annual basis. Additional information related to our business segments is summarized in Note 15.
Geographic Information and Major Customers / Suppliers
For the three and nine months ended September 30, 2019 and 2018, no individual country outside the U.S. represented more than 10% of total net sales. Individual sales transactions in the international market are generally larger and occur more intermittently than in the domestic market due to the profile of our customers. For the three and nine months ended September 30, 2019 and 2018, no customer represented more than 10% of total net sales. At September 30, 2019 and December 31, 2018, 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, Mexico, Republic of Korea, 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. Potentially dilutive securities include outstanding stock options and unvested restricted stock units ("RSUs"). The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of our common stock can result in a greater dilutive effect from potentially dilutive securities.
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 September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
6,104
|
|
|
$
|
5,711
|
|
|
$
|
13,261
|
|
|
$
|
27,122
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
59,278
|
|
|
58,340
|
|
|
59,128
|
|
|
55,681
|
|
|
Dilutive effect of stock-based awards
|
781
|
|
|
1,465
|
|
|
810
|
|
|
1,573
|
|
|
Diluted weighted average shares outstanding
|
60,059
|
|
|
59,805
|
|
|
59,938
|
|
|
57,254
|
|
|
Anti-dilutive stock-based awards excluded
|
12,477
|
|
|
6,793
|
|
|
12,546
|
|
|
6,760
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
$
|
0.22
|
|
|
$
|
0.49
|
|
|
Diluted
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
$
|
0.22
|
|
|
$
|
0.47
|
|
Standard Warranties
We warranty our CEWs, 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
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
based on historical data related to warranty claims on a quarterly basis 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
Balance, beginning of period
|
$
|
898
|
|
|
$
|
644
|
|
|
Utilization of accrual
|
(718
|
)
|
|
(384
|
)
|
|
Warranty expense
|
891
|
|
|
699
|
|
|
Balance, end of period
|
$
|
1,071
|
|
|
$
|
959
|
|
Fair Value Measurements and Financial Instruments
The fair value framework 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 September 30, 2019 and December 31, 2018 were comprised of money market funds and, at September 30, 2019, also included agency bonds, corporate bonds, municipal bonds, and 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 September 30, 2019 and December 31, 2018 was $4.0 million and $3.6 million, respectively, related to corporate-owned life insurance policies 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.
Our financial instruments also include accounts and notes receivable, contract assets, accounts payable and accrued liabilities. As these instruments are generally short-term in nature, their carrying values approximate their fair values on the accompanying condensed consolidated balance sheets.
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Restricted Cash
Restricted cash balances as of September 30, 2019 and December 31, 2018 included $0.9 million of sales proceeds related to long-term contracts with customers, which were included in prepaid expenses and other current assets on our condensed consolidated balance sheets. The proceeds are held in escrow until certain billing milestones are achieved, and then specified amounts are transferred to our operating accounts. Restricted cash balances as of September 30, 2019 and December 31, 2018 also included $0.7 million related to a performance guarantee for an international customer sales contract, which were included in other assets on our accompanying condensed consolidated balance sheets.
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. During the nine months ended September 30, 2019, we abandoned certain capitalized software related to implementation work on an enterprise resource planning system conversion, resulting in an impairment charge of $1.3 million, which was included in sales, general and administrative expense in the accompanying condensed consolidated statements of operations. During the three months ended September 30, 2019, we abandoned certain planning and site development activities related to our planned new headquarters, resulting in an impairment charge of $0.7 million, which was included in sales, general and administrative expense in the accompanying condensed consolidated statements of operations.
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 February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. In July 2018, the FASB issued additional guidance which provided an additional transition method for adopting the updated guidance. Most prominent among the changes in the standard is the requirement for lessees to recognize ROU assets and lease liabilities for those leases that were classified as operating leases under previous U.S. GAAP. On January 1, 2019, we adopted Topic 842 by applying the non-comparative modified retrospective method of adoption. Under this method, financial information related to periods prior to adoption will be as originally reported under the then-current standard (Topic 840, Leases).
Results for reporting periods beginning on or after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted, and continue to be reported in accordance with our historic accounting under Topic 840. We elected to apply the package of practical expedients to not reassess whether a contract is or contains a lease, lease classification, or initial lease costs for all leases that commenced before the adoption date.
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The adoption had a material impact to our condensed consolidated balance sheet. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. There was no other impact from the adoption. The adjustments to the opening balance sheet were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Impact of Adoption of Topic 842 on Opening Balance Sheet
|
|
January 1, 2019
|
|
|
(As reported)
|
|
|
(As adjusted)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
Other assets
|
$
|
22,999
|
|
|
$
|
12,483
|
|
|
$
|
35,482
|
|
|
Total assets
|
719,540
|
|
|
12,483
|
|
|
732,023
|
|
|
|
|
|
|
|
—
|
|
|
Accrued liabilities
|
41,092
|
|
|
(1,138
|
)
|
|
39,954
|
|
|
Other current liabilities
|
37
|
|
|
3,588
|
|
|
3,625
|
|
|
Total current liabilities
|
166,011
|
|
|
2,450
|
|
|
168,461
|
|
|
Other long-term liabilities
|
5,704
|
|
|
10,033
|
|
|
15,737
|
|
|
Total liabilities
|
252,216
|
|
|
12,483
|
|
|
264,699
|
|
|
Total liabilities and stockholders' equity
|
719,540
|
|
|
12,483
|
|
|
732,023
|
|
See Note 11 for further disclosures related to Topic 842.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), expanding the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. We adopted this standard on January 1, 2019 and the adoption had no impact on our condensed consolidated financial statements.
Effective the first quarter of 2020:
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 includes an impairment model (known as the current expected credit loss model) on financial instruments and other commitments that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The use of forecasted information is intended to incorporate more timely information in the estimate of expected credit loss. This ASU will also require enhanced disclosures relating to significant estimates and judgments used in estimating credit losses, as well as credit quality. We are currently in the process of selecting the appropriate credit loss models for our investments, accounts and notes receivable, and contract assets and evaluating our processes and controls in preparation for the adoption of ASU 2016-13.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. The amendments apply to the disclosures of changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted, and an entity is also permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until their effective date. Adoption of this ASU is not expected to 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 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 September 30, 2019
|
|
Three Months Ended September 30, 2018
|
|
|
TASER
|
|
Software and Sensors
|
|
Total
|
|
TASER
|
|
Software and Sensors
|
|
Total
|
|
TASER 7
|
$
|
20,214
|
|
|
$
|
—
|
|
|
$
|
20,214
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
TASER X26P
|
11,578
|
|
|
—
|
|
|
11,578
|
|
|
17,998
|
|
|
—
|
|
|
17,998
|
|
|
TASER X2
|
13,241
|
|
|
—
|
|
|
13,241
|
|
|
20,392
|
|
|
—
|
|
|
20,392
|
|
|
TASER Pulse and Bolt
|
1,132
|
|
|
—
|
|
|
1,132
|
|
|
1,402
|
|
|
—
|
|
|
1,402
|
|
|
Single cartridges
|
18,901
|
|
|
—
|
|
|
18,901
|
|
|
18,406
|
|
|
—
|
|
|
18,406
|
|
|
Axon Body
|
—
|
|
|
6,763
|
|
|
6,763
|
|
|
—
|
|
|
4,744
|
|
|
4,744
|
|
|
Axon Flex
|
—
|
|
|
1,670
|
|
|
1,670
|
|
|
—
|
|
|
1,325
|
|
|
1,325
|
|
|
Axon Fleet
|
—
|
|
|
4,341
|
|
|
4,341
|
|
|
—
|
|
|
1,809
|
|
|
1,809
|
|
|
Axon Dock
|
—
|
|
|
3,358
|
|
|
3,358
|
|
|
—
|
|
|
2,178
|
|
|
2,178
|
|
|
Axon Evidence and cloud services
|
218
|
|
|
34,022
|
|
|
34,240
|
|
|
—
|
|
|
23,915
|
|
|
23,915
|
|
|
TASER Cam
|
—
|
|
|
534
|
|
|
534
|
|
|
—
|
|
|
717
|
|
|
717
|
|
|
Extended warranties
|
4,543
|
|
|
4,714
|
|
|
9,257
|
|
|
4,123
|
|
|
3,161
|
|
|
7,284
|
|
|
Other
|
1,916
|
|
|
3,692
|
|
|
5,608
|
|
|
1,345
|
|
|
3,321
|
|
|
4,666
|
|
|
Total
|
$
|
71,743
|
|
|
$
|
59,094
|
|
|
$
|
130,837
|
|
|
$
|
63,666
|
|
|
$
|
41,170
|
|
|
$
|
104,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2018
|
|
|
TASER
|
|
Software and Sensors
|
|
Total
|
|
TASER
|
|
Software and Sensors
|
|
Total
|
|
TASER 7
|
$
|
39,466
|
|
|
$
|
—
|
|
|
$
|
39,466
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
TASER X26P
|
37,832
|
|
|
—
|
|
|
37,832
|
|
|
52,618
|
|
|
—
|
|
|
52,618
|
|
|
TASER X2
|
40,413
|
|
|
—
|
|
|
40,413
|
|
|
62,686
|
|
|
—
|
|
|
62,686
|
|
|
TASER Pulse and Bolt
|
2,920
|
|
|
—
|
|
|
2,920
|
|
|
3,849
|
|
|
—
|
|
|
3,849
|
|
|
Single cartridges
|
57,354
|
|
|
—
|
|
|
57,354
|
|
|
51,763
|
|
|
—
|
|
|
51,763
|
|
|
Axon Body
|
—
|
|
|
18,820
|
|
|
18,820
|
|
|
—
|
|
|
15,082
|
|
|
15,082
|
|
|
Axon Flex
|
—
|
|
|
4,517
|
|
|
4,517
|
|
|
—
|
|
|
4,529
|
|
|
4,529
|
|
|
Axon Fleet
|
—
|
|
|
10,977
|
|
|
10,977
|
|
|
—
|
|
|
6,640
|
|
|
6,640
|
|
|
Axon Dock
|
—
|
|
|
9,401
|
|
|
9,401
|
|
|
—
|
|
|
7,332
|
|
|
7,332
|
|
|
Axon Evidence and cloud services
|
363
|
|
|
93,461
|
|
|
93,824
|
|
|
—
|
|
|
64,513
|
|
|
64,513
|
|
|
TASER Cam
|
—
|
|
|
2,481
|
|
|
2,481
|
|
|
—
|
|
|
2,839
|
|
|
2,839
|
|
|
Extended warranties
|
13,341
|
|
|
14,064
|
|
|
27,405
|
|
|
11,567
|
|
|
8,521
|
|
|
20,088
|
|
|
Other
|
6,017
|
|
|
7,582
|
|
|
13,599
|
|
|
5,331
|
|
|
8,007
|
|
|
13,338
|
|
|
Total
|
$
|
197,706
|
|
|
$
|
161,303
|
|
|
$
|
359,009
|
|
|
$
|
187,814
|
|
|
$
|
117,463
|
|
|
$
|
305,277
|
|
The following table presents our revenues disaggregated by geography (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
United States
|
$
|
110,809
|
|
|
85
|
%
|
|
$
|
88,125
|
|
|
84
|
%
|
|
$
|
298,736
|
|
|
83
|
%
|
|
$
|
244,806
|
|
|
80
|
%
|
|
Other countries
|
20,028
|
|
|
15
|
|
|
16,711
|
|
|
16
|
|
|
60,273
|
|
|
17
|
|
|
60,471
|
|
|
20
|
|
|
Total
|
$
|
130,837
|
|
|
100
|
%
|
|
$
|
104,836
|
|
|
100
|
%
|
|
$
|
359,009
|
|
|
100
|
%
|
|
$
|
305,277
|
|
|
100
|
%
|
Contract Balances
The following table presents our contract assets, contract liabilities and certain information related to these balances as of and for the nine months ended September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Contract assets, net
|
$
|
33,635
|
|
|
Contract liabilities (deferred revenue)
|
209,309
|
|
|
Revenue recognized in the period from:
|
|
|
Amounts included in contract liabilities at the beginning of the period
|
83,159
|
|
Contract liabilities (deferred revenue) consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
Current
|
|
Long-Term
|
|
Total
|
|
Current
|
|
Long-Term
|
|
Total
|
|
Warranty:
|
|
|
|
|
|
|
|
|
|
|
|
|
TASER
|
$
|
11,677
|
|
|
$
|
16,633
|
|
|
$
|
28,310
|
|
|
$
|
12,797
|
|
|
$
|
16,847
|
|
|
$
|
29,644
|
|
|
Software and Sensors
|
9,899
|
|
|
5,450
|
|
|
15,349
|
|
|
8,273
|
|
|
6,516
|
|
|
14,789
|
|
|
|
21,576
|
|
|
22,083
|
|
|
43,659
|
|
|
21,070
|
|
|
23,363
|
|
|
44,433
|
|
|
Hardware:
|
|
|
|
|
|
|
|
|
|
|
|
|
TASER
|
4,378
|
|
|
17,601
|
|
|
21,979
|
|
|
9,355
|
|
|
15,598
|
|
|
24,953
|
|
|
Software and Sensors
|
39,308
|
|
|
27,357
|
|
|
66,665
|
|
|
20,878
|
|
|
24,685
|
|
|
45,563
|
|
|
|
43,686
|
|
|
44,958
|
|
|
88,644
|
|
|
30,233
|
|
|
40,283
|
|
|
70,516
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
TASER
|
11
|
|
|
396
|
|
|
407
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Software and Sensors
|
61,887
|
|
|
14,712
|
|
|
76,599
|
|
|
55,713
|
|
|
10,771
|
|
|
66,484
|
|
|
|
61,898
|
|
|
15,108
|
|
|
77,006
|
|
|
55,713
|
|
|
10,771
|
|
|
66,484
|
|
|
Total
|
$
|
127,160
|
|
|
$
|
82,149
|
|
|
$
|
209,309
|
|
|
$
|
107,016
|
|
|
$
|
74,417
|
|
|
$
|
181,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
Current
|
|
Long-Term
|
|
Total
|
|
Current
|
|
Long-Term
|
|
Total
|
|
TASER
|
$
|
16,066
|
|
|
$
|
34,630
|
|
|
$
|
50,696
|
|
|
$
|
22,152
|
|
|
$
|
32,445
|
|
|
$
|
54,597
|
|
|
Software and Sensors
|
111,094
|
|
|
47,519
|
|
|
158,613
|
|
|
84,864
|
|
|
41,972
|
|
|
126,836
|
|
|
Total
|
$
|
127,160
|
|
|
$
|
82,149
|
|
|
$
|
209,309
|
|
|
$
|
107,016
|
|
|
$
|
74,417
|
|
|
$
|
181,433
|
|
Remaining Performance Obligations
As of September 30, 2019, we had approximately $1.13 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 September 30, 2019. We expect to recognize between 15% - 20% 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.
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 September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Cash and Cash Equivalents
|
|
Short-Term Investments
|
|
Long-Term Investments
|
|
Cash
|
$
|
80,269
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
80,269
|
|
|
$
|
80,269
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
37,311
|
|
|
—
|
|
|
—
|
|
|
37,311
|
|
|
37,311
|
|
|
—
|
|
|
—
|
|
|
Agency bonds
|
32,834
|
|
|
4
|
|
|
(6
|
)
|
|
32,832
|
|
|
12,068
|
|
|
2,000
|
|
|
18,766
|
|
|
Subtotal
|
70,145
|
|
|
4
|
|
|
(6
|
)
|
|
70,143
|
|
|
49,379
|
|
|
2,000
|
|
|
18,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal obligations
|
4,454
|
|
|
1
|
|
|
(1
|
)
|
|
4,454
|
|
|
—
|
|
|
4,454
|
|
|
—
|
|
|
Corporate bonds
|
127,987
|
|
|
51
|
|
|
(31
|
)
|
|
128,007
|
|
|
2,903
|
|
|
102,459
|
|
|
22,625
|
|
|
U.S. Treasury repurchase agreements
|
70,000
|
|
|
—
|
|
|
—
|
|
|
70,000
|
|
|
70,000
|
|
|
—
|
|
|
—
|
|
|
Subtotal
|
202,441
|
|
|
52
|
|
|
(32
|
)
|
|
202,461
|
|
|
72,903
|
|
|
106,913
|
|
|
22,625
|
|
|
Total
|
$
|
352,855
|
|
|
$
|
56
|
|
|
$
|
(38
|
)
|
|
$
|
352,873
|
|
|
$
|
202,551
|
|
|
$
|
108,913
|
|
|
$
|
41,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Cash and Cash Equivalents
|
|
Short-Term Investments
|
|
Long-Term Investments
|
|
Cash
|
$
|
144,095
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
144,095
|
|
|
$
|
144,095
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
205,367
|
|
|
—
|
|
|
—
|
|
|
205,367
|
|
|
205,367
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
349,462
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
349,462
|
|
|
$
|
349,462
|
|
|
$
|
—
|
|
|
$
|
—
|
|
We believe unrealized losses on our investments are due to interest rate fluctuations. As these investments are short-term in nature, are expected to be redeemed at par value, and/or because we have the ability and intent to hold these investments to maturity, we do not consider these investments to be other than temporarily impaired as of September 30, 2019.
4. Inventory
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average cost of raw materials, which approximates the first-in, first-out (“FIFO”) method and includes allocations of manufacturing labor and overhead. Included in finished goods at September 30, 2019 and December 31, 2018 was $1.4 million and $1.4 million, respectively, of trial and evaluation hardware units. Provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value. Inventory consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Raw materials
|
$
|
21,096
|
|
|
$
|
19,670
|
|
|
Finished goods
|
19,570
|
|
|
14,093
|
|
|
Total inventory
|
$
|
40,666
|
|
|
$
|
33,763
|
|
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
5. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the nine months ended September 30, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TASER
|
|
Software and Sensors
|
|
Total
|
|
Balance, beginning of period
|
$
|
1,338
|
|
|
$
|
23,643
|
|
|
$
|
24,981
|
|
|
Foreign currency translation adjustment
|
(52
|
)
|
|
(53
|
)
|
|
(105
|
)
|
|
Balance, end of period
|
$
|
1,286
|
|
|
$
|
23,590
|
|
|
$
|
24,876
|
|
Intangible assets (other than goodwill) consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
Useful
Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Amortizable (definite-lived) intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Domain names
|
5-10 years
|
|
$
|
3,161
|
|
|
$
|
(959
|
)
|
|
$
|
2,202
|
|
|
$
|
3,161
|
|
|
$
|
(732
|
)
|
|
$
|
2,429
|
|
|
Issued patents
|
4-15 years
|
|
3,170
|
|
|
(1,268
|
)
|
|
1,902
|
|
|
2,940
|
|
|
(1,106
|
)
|
|
1,834
|
|
|
Issued trademarks
|
3-11 years
|
|
1,006
|
|
|
(532
|
)
|
|
474
|
|
|
1,053
|
|
|
(599
|
)
|
|
454
|
|
|
Customer relationships
|
4-8 years
|
|
3,664
|
|
|
(1,263
|
)
|
|
2,401
|
|
|
3,701
|
|
|
(880
|
)
|
|
2,821
|
|
|
Non-compete agreements
|
3-4 years
|
|
446
|
|
|
(397
|
)
|
|
49
|
|
|
540
|
|
|
(439
|
)
|
|
101
|
|
|
Developed technology
|
3-7 years
|
|
10,660
|
|
|
(5,982
|
)
|
|
4,678
|
|
|
13,404
|
|
|
(7,081
|
)
|
|
6,323
|
|
|
Re-acquired distribution rights
|
2 years
|
|
1,932
|
|
|
(1,932
|
)
|
|
—
|
|
|
1,928
|
|
|
(1,813
|
)
|
|
115
|
|
|
Total amortizable
|
|
|
24,039
|
|
|
(12,333
|
)
|
|
11,706
|
|
|
26,727
|
|
|
(12,650
|
)
|
|
14,077
|
|
|
Not amortizable (indefinite-lived) intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
TASER trademark
|
|
|
900
|
|
|
|
|
900
|
|
|
900
|
|
|
|
|
900
|
|
|
Patents and trademarks pending
|
|
|
922
|
|
|
|
|
922
|
|
|
958
|
|
|
|
|
958
|
|
|
Total not amortizable
|
|
|
1,822
|
|
|
|
|
1,822
|
|
|
1,858
|
|
|
|
|
1,858
|
|
|
Total intangible assets
|
|
|
$
|
25,861
|
|
|
$
|
(12,333
|
)
|
|
$
|
13,528
|
|
|
$
|
28,585
|
|
|
$
|
(12,650
|
)
|
|
$
|
15,935
|
|
Amortization expense of intangible assets for the three and nine months ended September 30, 2019 was $0.8 million and $2.7 million, respectively. Amortization expense of intangible assets for the three and nine months ended September 30, 2018 was $1.6 million and $4.6 million, respectively. Estimated amortization for intangible assets with definite lives for the remaining three months of 2019, the next five years ended December 31, and thereafter, is as follows (in thousands):
|
|
|
|
|
|
|
|
2019 Remaining
|
$
|
948
|
|
|
2020
|
3,177
|
|
|
2021
|
2,862
|
|
|
2022
|
1,256
|
|
|
2023
|
962
|
|
|
2024
|
881
|
|
|
Thereafter
|
1,620
|
|
|
Total
|
$
|
11,706
|
|
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
6. Other Assets
Other assets consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Cash surrender value of corporate-owned life insurance policies
|
$
|
4,020
|
|
|
$
|
3,596
|
|
|
Deferred commissions (1)
|
17,920
|
|
|
15,530
|
|
|
Restricted cash
|
658
|
|
|
661
|
|
|
Operating lease assets
|
10,592
|
|
|
—
|
|
|
Prepaid expenses, deposits and other
|
3,952
|
|
|
3,212
|
|
|
Total other assets
|
$
|
37,142
|
|
|
$
|
22,999
|
|
(1) Represents the incremental costs of obtaining contracts with customers, which consist primarily of sales commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contracts and amortized consistent with the recognition timing of the revenue for the underlying performance obligations.
7. Accrued Liabilities
Accrued liabilities consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Accrued salaries, benefits and bonus
|
$
|
17,058
|
|
|
$
|
19,063
|
|
|
Accrued professional, consulting and lobbying fees
|
5,002
|
|
|
4,894
|
|
|
Accrued warranty expense
|
1,071
|
|
|
898
|
|
|
Accrued income and other taxes
|
5,143
|
|
|
4,167
|
|
|
Other accrued liabilities
|
7,471
|
|
|
12,070
|
|
|
Accrued liabilities
|
$
|
35,745
|
|
|
$
|
41,092
|
|
8. Income Taxes
We file income tax returns for federal purposes and in many states, as well as in multiple foreign jurisdictions. Our tax filings remain subject to examination by applicable tax authorities for a certain length of time, generally three to four years, following the tax year to which these filings relate. Our U.S. federal income tax return for fiscal year 2016 is currently under audit by the Internal Revenue Service.
Deferred Tax Assets
Net deferred income tax assets at September 30, 2019, primarily include R&D tax credits, stock-based compensation expense, deferred revenue, accruals and reserves, and net operating losses, partially offset by accelerated depreciation expense and valuation allowance reserve. Our total net deferred tax assets at September 30, 2019 were $23.3 million.
In preparing our condensed consolidated financial statements, management assesses the likelihood that its deferred tax assets will be realized from future taxable income. In evaluating our ability to recover our deferred income tax assets, management considers all available positive and negative evidence, including our operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Management exercises significant judgment in determining our provisions for income taxes, our deferred tax assets and liabilities, and our future taxable income for purposes of assessing our ability to utilize any future tax benefit from our deferred tax assets.
As of September 30, 2019, we continue to demonstrate three-year cumulative pre-tax income in the U.S. federal and state tax jurisdictions; however, we have Arizona R&D Tax Credits expiring unutilized each year. Therefore, management has concluded that it is more likely than not that our Arizona R&D deferred tax asset will not be realized.
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of September 30, 2019, we have cumulative pre-tax losses in Australia, the U.K., and Canada, which limits the ability to consider other subjective evidence, such as projections for future growth. On the basis of this evaluation, a full valuation allowance has been recorded for these jurisdictions. The amount of the deferred tax asset considered realizable, however, could be adjusted in future periods if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for growth.
We complete R&D tax credit studies for each year that an R&D tax credit is claimed for federal, Arizona, and California income tax purposes. Management has made the determination that it is more likely than not that the full benefit of the R&D tax credit will not be sustained on examination and recorded a liability for unrecognized tax benefits of $6.1 million as of September 30, 2019. In addition, management accrued $0.1 million of interest for estimated uncertain tax positions related to certain federal income tax liabilities. Should the unrecognized benefit of $6.2 million be recognized, our effective tax rate would be favorably impacted. Approximately $2.9 million of the unrecognized tax benefit associated with R&D credits has been netted against the R&D deferred tax asset.
Effective Tax Rate
Our overall effective tax rate for the nine months ended September 30, 2019, after discrete period adjustments, was 5.1%. Before discrete adjustments, the tax rate was 19.6%, which is less than the federal statutory rate, primarily due to state taxes and non-deductible expenses for items such as meals and entertainment, the executive compensation limitation under Internal Revenue Code ("IRC") Section 162(m), and an income inclusion from global intangible low-taxed income ("GILTI"), offset by a reduction for foreign-derived intangible income ("FDII") and R&D tax credits. The effective tax rate was favorably impacted by a $3.9 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for RSUs that vested or stock options that were exercised during the nine months ended September 30, 2019. This was partially offset by an unfavorable discrete item of $1.7 million related to the write off of certain deferred tax assets related to future stock compensation awards vesting for certain officers for whom deductibility of compensation is limited by IRC Section 162(m) and return to provision adjustments for jurisdictions in which tax returns have been filed.
9. Stockholders’ Equity
Performance-based stock awards
We have issued performance-based stock options and performance-based RSUs, the vesting of which is generally contingent upon the achievement of certain performance criteria related to our operating performance, as well as successful and timely development and market acceptance of future product introductions. In addition, certain of the performance RSUs have additional service requirements subsequent to the achievement of the performance criteria. Compensation expense is recognized over the requisite service period, which is defined as the longest explicit, implicit or derived service period based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date. For both service-based and performance-based RSUs, we account for forfeitures as they occur as a reduction to stock-based compensation expense and additional paid-in-capital.
For performance-based options with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized for each pair of performance and market conditions over the longer of the expected achievement period of the performance and market conditions, beginning at the point in time that the relevant performance condition is considered probable of achievement. The fair value of such awards is estimated on the grant date using Monte Carlo simulations.
CEO Performance Award
On May 24, 2018 (the “Grant Date”), 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 vesting 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 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
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
("Adjusted EBITDA (CEO Performance Award)") is defined as net income (loss) attributable to common stockholders before interest expense, investment interest income, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense.
|
|
|
|
|
|
|
Eight Separate Revenue Goals (1)
(in thousands)
|
|
Eight Separate Adjusted EBITDA (CEO Performance Award) Goals
(in thousands)
|
|
Goal #1, $710,058
|
|
Goal #9, $125,000
|
|
Goal #2, $860,058
|
|
Goal #10, $155,000
|
|
Goal #3, $1,010,058
|
|
Goal #11, $175,000
|
|
Goal #4, $1,210,058
|
|
Goal #12, $190,000
|
|
Goal #5, $1,410,058
|
|
Goal #13, $200,000
|
|
Goal #6, $1,610,058
|
|
Goal #14, $210,000
|
|
Goal #7, $1,810,058
|
|
Goal #15, $220,000
|
|
Goal #8, $2,010,058
|
|
Goal #16, $230,000
|
(1) In connection with the business acquisition that was completed during the three months ended June 30, 2018, the revenue goals were adjusted for the acquiree's Target Revenue, as defined in the CEO Performance Award agreement.
As of September 30, 2019, the following operational goals were considered probable of achievement:
|
|
|
|
•
|
Total revenue of $710.1 million
|
|
|
|
|
•
|
Adjusted EBITDA (CEO Performance Award) of $125.0 million; and
|
|
|
|
|
•
|
Total revenue of $860.1 million
|
The first two market capitalization goals have been achieved as of September 30, 2019. However, none of the stock options granted under the CEO Performance Award have vested thus far as the operational goals have not yet been achieved as of September 30, 2019. As there are three operational goals considered probable of achievement, we recorded stock-based compensation expense of $10.7 million related to the CEO Performance Award from the Grant Date through September 30, 2019. The number of stock options that would vest related to the three tranches is approximately 1.6 million shares.
As of September 30, 2019, we had $56.9 million of total unrecognized stock-based compensation expense for the performance goals that were considered probable of achievement, which will be recognized over a weighted-average period of 7.3 years. As of September 30, 2019, we had unrecognized stock-based compensation expense of $178.3 million for the performance goals that were considered not probable of achievement.
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. Pursuant to the XSPP, all eligible full-time U.S. employees were granted an award of 60 XSUs in January 2019, and certain employees had the opportunity to elect to receive a percentage of the value of their target compensation over the next nine years (2019-2027) in the form of additional XSUs. For employees who elected to receive XSUs, the XSU grants were made as an up front, lump sum grant in January 2019, and are intended to replace that portion of the target compensation they elected to receive in the form of XSUs for the next nine years. Accordingly, their go forward target compensation will be reduced until 2027 by the amount of such compensation that the employees elected to receive in the form of the January 2019 XSU grants. Additional employee awards were granted in February 2019 and September 2019. A total of approximately 5.9 million XSUs were granted in the nine months ended September 30, 2019.
The XSUs are grants of restricted stock units, 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.
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The XSPP contains an anti-dilution provision, which is used to calculate a maximum number of shares outstanding for purposes of determining achievement of the market capitalization goals whereby the maximum number of shares used to calculate the market capitalization goal is calculated by organically growing the current number of shares outstanding by 3% per year (the "XSU Maximum"). Any shares of Stock issued to Patrick W. Smith upon the exercise of the stock options granted to Mr. Smith under the CEO Performance Award shall increase the XSU Maximum. The XSU Maximum shall also be 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, except for the number of shares that are 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.
Stock-based compensation expense associated with XSU awards 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 market capitalization goal period and the valuation of each tranche are determined using a Monte Carlo simulation, which is also used as the basis for determining the expected achievement period of the market capitalization goal. 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 XSU awards 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.
The first two market capitalization goals have been achieved as of September 30, 2019. However, none of the XSU tranches have vested thus far as the operational goals have not yet been achieved as of September 30, 2019. As there are three operational goals considered probable of achievement, we recorded stock-based compensation expense of $4.3 million related to the XSU awards from their respective grant dates through September 30, 2019. The number of XSU awards that would vest related to the three tranches is approximately 1.4 million shares.
As of September 30, 2019, we had $57.4 million of total unrecognized stock-based compensation expense for the performance goals that were considered probable of achievement, which will be recognized over a weighted-average period of 7.3 years. As of September 30, 2019, we had unrecognized stock-based compensation expense of $131.6 million for the performance goals that were considered not probable of achievement.
Given the complexity of the awards, we utilized Monte Carlo simulations to simulate a range of possible future market capitalizations for the Company over the term of the awards. The average of all iterations of the simulation was used as the basis for the valuation and market capitalization goal derived service period for each tranche. Additionally, we applied an illiquidity discount of between 9.8% and 16.8% to the valuation of XSUs because the awards specify a post-vest holding period of 2.5 years. Certain of the XSU awards specify a post-vest holding period of the longer of 2.5 years or until the next tranche vests. The illiquidity discounts were estimated using the Finnerty model and reduced by the impact of expected payroll and income taxes due upon vesting of the awards, as the related proportion of shares are expected to be sold to satisfy such obligations. We measured the grant date fair value of the XSU awards with the following assumptions: risk-free interest rate of between 1.64% and 2.62%, expected term of between 8.4 and 9.0 years, expected volatility of between 44.12% and 45.47%, and dividend yield of 0.00%.
Restricted Stock Units
The following table summarizes RSU activity for the nine months ended September 30, 2019 (number of units and aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Units
|
|
Weighted Average
Grant-Date Fair Value
|
|
Aggregate
Intrinsic Value
|
|
Units outstanding, beginning of year
|
1,655
|
|
|
$
|
28.34
|
|
|
|
|
Granted
|
6,476
|
|
|
35.87
|
|
|
|
|
Released
|
(450
|
)
|
|
24.47
|
|
|
|
|
Forfeited
|
(410
|
)
|
|
34.63
|
|
|
|
|
Units outstanding, end of period
|
7,271
|
|
|
34.93
|
|
|
$
|
412,866
|
|
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $56.78 per share, multiplied by the number of RSUs outstanding. As of September 30, 2019, there was $99.2 million in unrecognized compensation costs related to RSUs under our stock plans for shares that are expected to vest. We expect to recognize the cost related to the RSUs over a weighted average period of 5.16 years. RSUs are released when vesting requirements are met.
During the nine months ended September 30, 2019, we granted 6.5 million RSUs, consisting of 0.5 million service-based RSUs and approximately 6.0 million performance-based RSUs, including 5.9 million XSUs. As of September 30, 2019, the performance criteria had been met for approximately five thousand of the 6.0 million performance-based RSUs outstanding. Certain of the performance-based RSUs outstanding as of September 30, 2019 can vest with a range of shares earned being between 0% and 200% of the targeted shares granted, depending on the final achievement of pre-determined performance criteria as of the vesting date. The amount of RSUs included in the table above related to such grants is the target level. The maximum additional number of performance-based RSUs that could be earned is 0.3 million, which are not included in the table above.
Certain RSUs that vested in the nine months ended September 30, 2019 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 47 thousand and had a value of $3.3 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 nine months ended September 30, 2019 (number of units and aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted Average Remaining Contractual Life (years)
|
|
Aggregate
Intrinsic Value
|
|
Options outstanding, beginning of year
|
6,458
|
|
|
$
|
28.24
|
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
(25
|
)
|
|
4.23
|
|
|
|
|
|
|
Expired / terminated
|
—
|
|
|
—
|
|
|
|
|
|
|
Options outstanding, end of period
|
6,433
|
|
|
28.33
|
|
|
8.33
|
|
$
|
183,023
|
|
|
Options exercisable, end of period
|
67
|
|
|
4.53
|
|
|
1.19
|
|
3,506
|
|
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 $56.78 on September 30, 2019. The intrinsic value of options exercised for the nine months ended September 30, 2019 and 2018 was $1.1 million and $20.5 million, respectively. As of September 30, 2019, total options outstanding included 6.4 million unvested performance-based stock options. Of this total, 1.6 million options relate to tranches of the CEO Performance Award considered probable of achievement.
Stock-based Compensation Expense
The following table summarizes the composition of stock-based compensation expense for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Cost of products sold and services delivered
|
$
|
312
|
|
|
$
|
93
|
|
|
$
|
775
|
|
|
$
|
359
|
|
|
Sales, general and administrative expenses
|
9,508
|
|
|
3,748
|
|
|
19,130
|
|
|
8,783
|
|
|
Research and development expenses
|
3,843
|
|
|
2,414
|
|
|
10,290
|
|
|
6,160
|
|
|
Total stock-based compensation expense
|
$
|
13,663
|
|
|
$
|
6,255
|
|
|
$
|
30,195
|
|
|
$
|
15,302
|
|
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Stock Incentive Plan
In February 2019, our shareholders approved the 2019 Plan authorizing an additional 6.0 million shares, plus remaining available shares under prior plans, for issuance under the new plan. Combined with the legacy stock incentive plans, there are 2.2 million shares available for grant as of September 30, 2019.
Stock Inducement Plan
In September 2019, our Board of Directors adopted the Axon Enterprise, Inc. 2019 Stock Inducement Plan (the “2019 Inducement Plan”) pursuant to which we reserved 500,000 shares of common stock for issuance under the Inducement Plan. In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules, awards under the Inducement Plan may only be made to individuals not previously employed by us (or following such individuals’ bona fide periods of non-employment by us), as an inducement material to the individuals’ entry into employment with us. The terms and conditions of the 2019 Inducement Plan are substantially similar to our stockholder-approved 2019 Plan. As of September 30, 2019, there were 30,000 shares available for grant under the 2019 Inducement Plan.
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 nine months ended September 30, 2019 and 2018, no common shares were purchased under the program. As of September 30, 2019, $16.3 million remains available under the plan for future purchases. Any future purchases will be discretionary.
10. Line of Credit
We have a $50.0 million unsecured revolving line of credit with a domestic bank, of which $10.0 million is available for letters of credit. The credit agreement matures on December 31, 2021 and has an accordion feature which allows for an increase in the total line of credit up to $100.0 million, subject to certain conditions, including the availability of additional bank commitments.
At September 30, 2019 and December 31, 2018, there were no borrowings under the line. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. As of September 30, 2019, we had letters of credit outstanding of approximately $3.6 million under the facility and available borrowing of $46.4 million, excluding amounts available under the accordion feature. Advances under the line of credit bear interest at LIBOR plus 1.0 to 1.5% per year determined in accordance with a pricing grid based on our funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio.
We are required to comply with a maximum funded debt to EBITDA ratio of no greater than 2.50 to 1.00 based upon a trailing four fiscal quarter period. At September 30, 2019, our funded debt to EBITDA ratio was 0.001 to 1.00.
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
11. Leases
Lease Obligations
We determine if an arrangement is a lease at inception. Operating lease ROU assets and liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Additionally, we use the portfolio approach in determining the discount rate used to present value lease payments. We give consideration to our line of credit as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates. The ROU asset also includes any lease payments made and initial direct costs incurred and excludes lease incentives.
We have operating and finance leases for office space and certain equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. For leases beginning on or after January 1, 2019, we account for lease components separately from non-lease components for all asset classes.
Our leases have remaining terms of less than 1 to approximately 4 years, some of which include one or more options to renew for up to 2 years, and some of which include options to terminate the leases within 1 year. The exercise of lease renewal options is at our sole discretion and such options are included in ROU assets and liabilities for renewal periods that are reasonably certain of exercise. Certain of our lease agreements include stated rental payment escalations. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We sublease certain real estate to third parties. Finance leases as of September 30, 2019 were immaterial.
|
|
|
|
|
|
|
|
|
|
|
Leases (in thousands)
|
|
Classification
|
|
September 30, 2019
|
|
Assets
|
|
|
|
|
|
Operating lease assets
|
|
Other assets
|
|
$
|
10,592
|
|
|
Liabilities
|
|
|
|
|
|
Current
|
|
|
|
|
|
Operating
|
|
Other current liabilities
|
|
$
|
3,959
|
|
|
Noncurrent
|
|
|
|
|
|
Operating
|
|
Other long-term liabilities
|
|
7,687
|
|
|
Total lease liabilities
|
|
|
|
$
|
11,646
|
|
The components of lease expense were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification
|
|
Three Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2019
|
|
Operating lease expense (1)
|
|
Sales, general and administrative expenses (2)
|
|
$
|
1,264
|
|
|
$
|
3,418
|
|
|
Sublease income
|
|
Other income
|
|
(82
|
)
|
|
(219
|
)
|
|
Net lease expense
|
|
|
|
$
|
1,182
|
|
|
$
|
3,199
|
|
(1) Includes short-term leases, which are immaterial.
(2) An immaterial portion of operating lease expense is included within research and development expenses and cost of sales.
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Other information related to leases was as follows (in thousands, except lease term and discount rate):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
Supplemental Cash Flows Information
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
3,229
|
|
|
Right-of-use assets obtained in exchange for lease liabilities:
|
|
|
|
Operating leases
|
|
888
|
|
|
Weighted average remaining lease term:
|
|
|
|
Operating leases
|
|
3.3 years
|
|
|
Weighted average discount rate:
|
|
|
|
Operating leases
|
|
3.4
|
%
|
Future minimum lease payments under non-cancellable leases as of September 30, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Sublease income
|
|
Net
|
|
2019 Remaining
|
$
|
1,114
|
|
|
$
|
(82
|
)
|
|
$
|
1,032
|
|
|
2020
|
4,545
|
|
|
(82
|
)
|
|
4,463
|
|
|
2021
|
3,639
|
|
|
—
|
|
|
3,639
|
|
|
2022
|
2,638
|
|
|
—
|
|
|
2,638
|
|
|
2023
|
1,173
|
|
|
—
|
|
|
1,173
|
|
|
2024
|
—
|
|
|
—
|
|
|
—
|
|
|
Thereafter
|
—
|
|
|
—
|
|
|
—
|
|
|
Total minimum lease payments
|
13,109
|
|
|
(164
|
)
|
|
12,945
|
|
|
Less: Amount representing interest
|
|
|
|
|
(1,299
|
)
|
|
Present value of lease payments
|
|
|
|
|
$
|
11,646
|
|
As of September 30, 2019, we do not have any leases that have not yet commenced.
Disclosures related to periods prior to adoption of Topic 842
Rent expense under all operating leases, including both cancelable and non-cancellable leases, was $4.2 million and $2.9 million for the years ended December 31, 2018 and 2017, respectively.
Future minimum lease payments under non-cancelable leases at December 31, 2018, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Capital
|
|
2019
|
$
|
3,670
|
|
|
$
|
40
|
|
|
2020
|
3,572
|
|
|
36
|
|
|
2021
|
2,961
|
|
|
—
|
|
|
2022
|
2,001
|
|
|
—
|
|
|
2023
|
573
|
|
|
—
|
|
|
Thereafter
|
—
|
|
|
—
|
|
|
Total minimum lease payments
|
$
|
12,777
|
|
|
76
|
|
|
Less: Amount representing interest
|
|
|
(6
|
)
|
|
Capital lease obligation
|
|
|
$
|
70
|
|
12. Commitments and Contingencies
Land Lease Purchase Agreement
On December 13, 2018, we entered into a Purchase and Sale Agreement ("PSA") to purchase a leasehold interest to a parcel of land located in Maricopa County, Arizona for a period of 84 years, on which we intended to construct our new headquarters. On October 10, 2019, we terminated the PSA because we were unable to secure design approval by the Salt River Pima-Maricopa Indian Community. We expect to forfeit our escrow deposit of approximately $0.2 million, and no further amounts are owed to the counterparty under the agreement. In connection with the termination of the PSA, we recorded an impairment charge of $0.7 million, excluding the aforementioned forfeited deposit, related to the abandonment of certain planning and site development activities.
Data Storage Purchase Commitment
In June 2019, we entered into a purchase agreement for cloud data storage with a 3 year term beginning July 1, 2019. The purchase agreement includes a total commitment of $50.0 million, with an up-front prepayment of $15.0 million that was made in July 2019. The current balance of the prepayment is included within prepaid expenses and other current assets on our condensed consolidated balance sheet. Storage fees under this agreement were $3.7 million for the three and nine months ended September 30, 2019, and were recorded in cost of service sales. The remaining purchase commitment at September 30, 2019 was $46.3 million.
Product Litigation
We are currently named as a defendant in eight lawsuits in which the plaintiffs allege either wrongful death or personal injury in situations in which a TASER CEW was used by law enforcement officers in connection with arrests. While the facts vary from case to case, these product liability claims typically allege defective product design, manufacturing, and/or failure to warn. They seek compensatory and sometimes punitive damages, often in unspecified amounts.
We continue to aggressively defend all product litigation. As a general rule, it is our policy not to settle suspect injury or death cases. Exceptions are sometimes made where the settlement is strategically beneficial to us. Due to the confidential nature of our litigation strategy and the confidentiality agreements that are executed in the event of a settlement, we do not identify or comment on specific settlements by case or amount. Based on current information, we do not believe that the outcome of any such legal proceeding will have a material effect on our financial position, results of operations, or cash flows. We are self-insured for the first $5.0 million of any product claim made after 2014. No judgment or settlement has ever exceeded this amount in any products case. We continue to maintain product liability insurance coverage, including an insurance policy fronting arrangement, above our self-insured retention with various limits depending on the policy period.
Other Litigation
We are a defendant in a litigation matter filed by Digital Ally Inc. (“Digital”) in the District of Kansas alleging patent infringement regarding our Axon Signal technology. Axon was granted summary judgment of non-infringement on June 17, 2019 and judgment was entered in our favor on all of Digital's claims. Digital has appealed the ruling.
We are also a defendant in a consumer class action lawsuit previously filed and dismissed in California in 2018 and now refiled in the District of Nevada on April 9, 2019 (Case No. 3:1-cv-00192) by consumer weapon purchaser Douglas Richey (“Richey”). The case alleges the TASER Pulse, X2 and X26P CEWs have a faulty safety switch based on Richey’s Pulse allegedly discharging inside its neoprene case in a jacket pocket without injury. Any such discharge was likely due to static electricity, as disclosed in our consumer warnings. We will vigorously defend this claim and the propriety of any class certification. Our motion to dismiss is pending.
U.S. Federal Trade Commission Investigation
In June 2018 we received a letter from the U.S. Federal Trade Commission (“FTC”) with respect to its non-public investigation into our acquisition of VIEVU, LLC in May 2018. The FTC issued a subpoena for certain information and documentation relating to the acquisition on March 21, 2019. We are cooperating with the investigation.
AXON ENTERPRISE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
General
From time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us. It is our policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on us. After carefully assessing the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously defend any lawsuit filed against us. We record a liability when losses are deemed probable and reasonably estimable. When losses are deemed reasonably possible but not probable, we determine whether it is possible to provide an estimate of the amount of the loss or range of possible losses for the claim, if material for disclosure. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of any potential loss. We reevaluate and update accruals as matters progress over time.
Based on our assessment of outstanding litigation and claims as of September 30, 2019, we have determined that it is not reasonably possible that these lawsuits will individually, or in the aggregate, materially affect our results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on our operating results, financial condition or cash flows.
Off-Balance Sheet Arrangements
Under certain circumstances, we use letters of credit and surety bonds to guarantee our performance under various contracts, principally in connection with the installation and integration of Axon cameras and related technologies. Certain of our letters of credit and surety bonds have stated expiration dates with others being released as the contractual performance terms are completed. At September 30, 2019, we had outstanding letters of credit of $3.6 million that are expected to expire in May 2020 and September 2021. Additionally, we had $24.6 million of outstanding surety bonds at September 30, 2019, with $1.1 million expiring in 2020, $2.3 million expiring in 2021, $3.2 million expiring in 2022, $7.5 million expiring in 2023 and the remaining $10.5 million expiring in 2024.
13. Related Party Transactions
We subscribe to various cloud-based applications from Salesforce. Bret Taylor, who was a member of our Board of Directors through June 14, 2019, serves as President and Chief Product Officer of Salesforce. We incur costs at different times throughout the year, typically in advance of services being provided, and subsequently amortize these costs ratably to expense as services are provided over the contractual term. The cost to subscribe to various cloud-based hosting arrangements from Salesforce was $0.5 million and $0.4 million for the three months ended September 30, 2019 and 2018, respectively, and $1.4 million and $1.3 million for the nine months ended September 30, 2019 and 2018, respectively. There were no amounts due to Salesforce as of September 30, 2019. Amounts due to Salesforce as of December 31, 2018 were negligible.
14. Employee Benefit Plans
We have a defined contribution 401(k) plan for eligible employees, which is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. Employees are entitled to make tax-deferred contributions of up to the maximum amount allowed by law of their eligible compensation.
We also have a non-qualified deferred compensation plan for certain executives, employees and non-employee directors through which participants may elect to postpone the receipt and taxation of a portion of their compensation, including stock-based compensation, received from us. The non-qualified deferred compensation plan allows eligible participants to defer up to 80% of their base salary and up to 100% of other types of compensation. The plan also allows for matching and discretionary employer contributions. Employee deferrals are deemed 100% vested upon contribution. Distributions from the plan are made upon retirement, death, separation of service, specified date or upon the occurrence of an unforeseeable emergency. Distributions can be paid in a variety of forms from lump sum to installments over a period of years. Participants in the plan are entitled to select from a wide variety of investments available under the plan and are allocated gains or losses based upon the performance of the investments selected by the participant. All gains or losses are allocated fully to plan participants and we do not guarantee a rate of return on deferred balances. Assets related to this plan consist of corporate-owned life insurance contracts and are included in
other assets in the condensed consolidated balance sheets; see Note 6 for balances. Participants have no rights or claims with respect to any plan assets and any such assets are subject to the claims of our general creditors.
Contributions to the plans are made by both the employee and us. Our contributions to the 401(k) plan are based on the level of employee contributions and are immediately vested. Future matching contributions to the plans are at our sole discretion.
We also sponsor defined contribution plans in Australia, Finland, and the United Kingdom.
Our matching contributions for all defined contribution plans were $0.9 million and $0.9 million for the three months ended September 30, 2019 and 2018, respectively, and $3.5 million and $2.4 million for the nine months ended September 30, 2019 and 2018, respectively.
15. Segment Data
Our operations are comprised of two reportable segments: the manufacture and sale of CEWs, batteries, accessories, extended warranties and other products and services (the “TASER” segment); and the software and sensors business, which includes the sale of devices, wearables, applications, cloud and mobile products (collectively, the “Software and Sensors” segment). Our Chief Executive Officer, who is the CODM, is not provided asset information or sales, general, and administrative expense by segment.
Information relative to our reportable segments was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Three Months Ended September 30, 2018
|
|
|
TASER
|
|
Software and Sensors 1
|
|
Total
|
|
TASER
|
|
Software and Sensors
|
|
Total
|
|
Net sales from products
|
$
|
71,424
|
|
|
$
|
25,073
|
|
|
$
|
96,497
|
|
|
$
|
63,666
|
|
|
$
|
17,257
|
|
|
$
|
80,923
|
|
|
Net sales from services
|
319
|
|
|
34,021
|
|
|
34,340
|
|
|
—
|
|
|
23,913
|
|
|
23,913
|
|
|
Net sales
|
71,743
|
|
|
59,094
|
|
|
130,837
|
|
|
63,666
|
|
|
41,170
|
|
|
104,836
|
|
|
Cost of product sales
|
26,504
|
|
|
15,941
|
|
|
42,445
|
|
|
19,256
|
|
|
13,697
|
|
|
32,953
|
|
|
Cost of service sales
|
—
|
|
|
8,223
|
|
|
8,223
|
|
|
—
|
|
|
6,250
|
|
|
6,250
|
|
|
Cost of sales
|
26,504
|
|
|
24,164
|
|
|
50,668
|
|
|
19,256
|
|
|
19,947
|
|
|
39,203
|
|
|
Gross margin
|
$
|
45,239
|
|
|
$
|
34,930
|
|
|
$
|
80,169
|
|
|
$
|
44,410
|
|
|
$
|
21,223
|
|
|
$
|
65,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
$
|
3,485
|
|
|
$
|
21,644
|
|
|
$
|
25,129
|
|
|
$
|
4,837
|
|
|
$
|
17,145
|
|
|
$
|
21,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2018
|
|
|
TASER
|
|
Software and Sensors 1
|
|
Total
|
|
TASER
|
|
Software and Sensors
|
|
Total
|
|
Net sales from products
|
$
|
197,148
|
|
|
$
|
67,829
|
|
|
$
|
264,977
|
|
|
$
|
187,814
|
|
|
$
|
50,804
|
|
|
$
|
238,618
|
|
|
Net sales from services
|
558
|
|
|
93,474
|
|
|
94,032
|
|
|
—
|
|
|
66,659
|
|
|
66,659
|
|
|
Net sales
|
197,706
|
|
|
161,303
|
|
|
359,009
|
|
|
187,814
|
|
|
117,463
|
|
|
305,277
|
|
|
Cost of product sales
|
74,044
|
|
|
46,221
|
|
|
120,265
|
|
|
57,480
|
|
|
38,994
|
|
|
96,474
|
|
|
Cost of service sales
|
—
|
|
|
24,098
|
|
|
24,098
|
|
|
—
|
|
|
15,566
|
|
|
15,566
|
|
|
Cost of sales
|
74,044
|
|
|
70,319
|
|
|
144,363
|
|
|
57,480
|
|
|
54,560
|
|
|
112,040
|
|
|
Gross margin
|
$
|
123,662
|
|
|
$
|
90,984
|
|
|
$
|
214,646
|
|
|
$
|
130,334
|
|
|
$
|
62,903
|
|
|
$
|
193,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
$
|
10,284
|
|
|
$
|
61,692
|
|
|
$
|
71,976
|
|
|
$
|
11,816
|
|
|
$
|
43,786
|
|
|
$
|
55,602
|
|
1 Cost of service sales for the three and nine months ended September 30, 2019 includes approximately $0.7 million and $1.6 million, respectively, of third party installation costs.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition as of September 30, 2019, and results of operations for the three and nine months ended September 30, 2019 and 2018, should be read in conjunction with the condensed consolidated financial
statements and related notes included in this Report on Form 10-Q and those in our 2018 Annual Report on Form 10-K filed with the SEC on February 27, 2019. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in such forward-looking statements as a result of certain factors, including but not limited to those described under “Risk Factors” in our 2018 Annual Report on Form 10-K. See also "Special Note Regarding Forward-Looking Statements" on page ii of this Report on Form 10-Q.
Overview
Axon is a market-leading provider of connected public safety 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 revenues for the three months ended September 30, 2019 were $130.8 million, an increase of $26.0 million, or 24.8%, from the comparable period in the prior year. We had income from operations of $6.6 million compared to $4.0 million for the same period in the prior year. The increase in income from operations was due to the increase in revenues, partially offset by an increase in cost of sales and investments over the past year for additional headcount in research and development and sales, general and administrative functions to support continued and future growth. Gross margins were compressed related to the rollout of our latest generation TASER device. For the three months ended September 30, 2019, we recorded net income of $6.1 million compared to $5.7 million for the comparable period in the prior year.
Our revenues for the nine months ended September 30, 2019 were $359.0 million, an increase of $53.7 million, or 17.6%, from the comparable period in the prior year. We had income from operations of $8.0 million compared to $22.8 million for the same period in the prior year. The decrease in operating results was due to increased cost of sales, selling, general and administrative expenses, and research and development expenses to support continued and future growth. Gross margins were compressed related to the rollout of our latest generation TASER device and increased data storage expenses. For the nine months ended September 30, 2019, we recorded net income of $13.3 million compared to $27.1 million for the comparable period in the prior year.
2019 Outlook
For the year ending December 31, 2019, we expect revenue to be in the range of $500 million to $510 million. Gross margin for the quarter ending December 31, 2019 is expected to decline compared to the quarter ended September 30, 2019, primarily due to the anticipated mix of lower-margin revenue from shipments of Axon Body 3 and TASER 7 cartridges. We expect margin compression on new hardware shipments in anticipation of higher-margin revenue on additional cloud services over time. We expect stock-based compensation expenses to be approximately $41 million for the full year, which is subject to change depending on our assessment of the probability of attaining operational metrics for the CEO Performance Award and XSU awards, and on the expected timing of such attainment. We expect a normalized income tax rate of between 20% and 25%; this rate can fluctuate depending on geography of income and the effects of discrete items, including changes in our stock price.
Results of Operations
Three Months Ended September 30, 2019 Compared to the Three Months Ended September 30, 2018
The following table presents data from our condensed consolidated statements of operations as well as the percentage relationship to total net sales of items included in our statements of operations (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
Net sales from products
|
$
|
96,497
|
|
|
73.8
|
%
|
|
$
|
80,923
|
|
|
77.2
|
%
|
|
Net sales from services
|
34,340
|
|
|
26.2
|
|
|
23,913
|
|
|
22.8
|
|
|
Net sales
|
130,837
|
|
|
100.0
|
|
|
104,836
|
|
|
100.0
|
|
|
Cost of product sales
|
42,445
|
|
|
32.4
|
|
|
32,953
|
|
|
31.4
|
|
|
Cost of service sales
|
8,223
|
|
|
6.3
|
|
|
6,250
|
|
|
6.0
|
|
|
Cost of sales
|
50,668
|
|
|
38.7
|
|
|
39,203
|
|
|
37.4
|
|
|
Gross margin
|
80,169
|
|
|
61.3
|
|
|
65,633
|
|
|
62.6
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Sales, general and administrative
|
48,424
|
|
|
37.0
|
|
|
39,685
|
|
|
37.8
|
|
|
Research and development
|
25,129
|
|
|
19.2
|
|
|
21,982
|
|
|
21.0
|
|
|
Total operating expenses
|
73,553
|
|
|
56.2
|
|
|
61,667
|
|
|
58.8
|
|
|
Income from operations
|
6,616
|
|
|
5.1
|
|
|
3,966
|
|
|
3.8
|
|
|
Interest and other income (expense), net
|
1,820
|
|
|
1.4
|
|
|
1,274
|
|
|
1.2
|
|
|
Income before provision for income taxes
|
8,436
|
|
|
6.5
|
|
|
5,240
|
|
|
5.0
|
|
|
Provision for (benefit from) income taxes
|
2,332
|
|
|
1.8
|
|
|
(471
|
)
|
|
(0.4
|
)
|
|
Net income
|
$
|
6,104
|
|
|
4.7
|
%
|
|
$
|
5,711
|
|
|
5.4
|
%
|
The following table presents our revenues disaggregated by geography (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
United States
|
$
|
110,809
|
|
|
85
|
%
|
|
$
|
88,125
|
|
|
84
|
%
|
|
Other countries
|
20,028
|
|
|
15
|
|
|
16,711
|
|
|
16
|
|
|
Total
|
$
|
130,837
|
|
|
100
|
%
|
|
$
|
104,836
|
|
|
100
|
%
|
International revenue increased compared to the prior year comparable period, driven primarily by increased sales in Europe and Africa, which were partially offset by lower sales in Canada and the Asia Pacific region.
Net Sales
Net sales by product line were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Dollar
Change
|
|
Percent
Change
|
|
|
2019
|
|
2018
|
|
|
|
TASER segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
TASER 7
|
$
|
20,214
|
|
|
15.4
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
20,214
|
|
|
*
|
|
|
TASER X26P
|
11,578
|
|
|
8.8
|
|
|
17,998
|
|
|
17.2
|
|
|
(6,420
|
)
|
|
(35.7
|
)
|
|
TASER X2
|
13,241
|
|
|
10.1
|
|
|
20,392
|
|
|
19.4
|
|
|
(7,151
|
)
|
|
(35.1
|
)
|
|
TASER Pulse and Bolt
|
1,132
|
|
|
0.9
|
|
|
1,402
|
|
|
1.3
|
|
|
(270
|
)
|
|
(19.3
|
)
|
|
Single cartridges
|
18,901
|
|
|
14.4
|
|
|
18,406
|
|
|
17.6
|
|
|
495
|
|
|
2.7
|
|
|
Axon Evidence and cloud services
|
218
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
218
|
|
|
*
|
|
|
Extended warranties
|
4,543
|
|
|
3.5
|
|
|
4,123
|
|
|
3.9
|
|
|
420
|
|
|
10.2
|
|
|
Other
|
1,916
|
|
|
1.5
|
|
|
1,345
|
|
|
1.3
|
|
|
571
|
|
|
42.5
|
|
|
Total TASER segment
|
71,743
|
|
|
54.8
|
|
|
63,666
|
|
|
60.7
|
|
|
8,077
|
|
|
12.7
|
|
|
Software and Sensors segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Axon Body
|
6,763
|
|
|
5.2
|
|
|
4,744
|
|
|
4.5
|
|
|
2,019
|
|
|
42.6
|
|
|
Axon Flex
|
1,670
|
|
|
1.3
|
|
|
1,325
|
|
|
1.3
|
|
|
345
|
|
|
26.0
|
|
|
Axon Fleet
|
4,341
|
|
|
3.3
|
|
|
1,809
|
|
|
1.7
|
|
|
2,532
|
|
|
140.0
|
|
|
Axon Dock
|
3,358
|
|
|
2.6
|
|
|
2,178
|
|
|
2.1
|
|
|
1,180
|
|
|
54.2
|
|
|
Axon Evidence and cloud services
|
34,022
|
|
|
26.0
|
|
|
23,915
|
|
|
22.8
|
|
|
10,107
|
|
|
42.3
|
|
|
TASER Cam
|
534
|
|
|
0.4
|
|
|
717
|
|
|
0.7
|
|
|
(183
|
)
|
|
(25.5
|
)
|
|
Extended warranties
|
4,714
|
|
|
3.6
|
|
|
3,161
|
|
|
3.0
|
|
|
1,553
|
|
|
49.1
|
|
|
Other
|
3,692
|
|
|
2.8
|
|
|
3,321
|
|
|
3.2
|
|
|
371
|
|
|
11.2
|
|
|
Total Software and Sensors segment
|
59,094
|
|
|
45.2
|
|
|
41,170
|
|
|
39.3
|
|
|
17,924
|
|
|
43.5
|
|
|
Total net sales
|
$
|
130,837
|
|
|
100.0
|
%
|
|
$
|
104,836
|
|
|
100.0
|
%
|
|
$
|
26,001
|
|
|
24.8
|
%
|
* Not applicable
Net unit sales for TASER segment products and Software and Sensors segment products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Unit
Change
|
|
Percent
Change
|
|
|
2019
|
|
2018
|
|
|
|
TASER 7
|
17,674
|
|
|
—
|
|
|
17,674
|
|
|
*
|
|
|
TASER X26P
|
10,766
|
|
|
18,842
|
|
|
(8,076
|
)
|
|
(42.9
|
)
|
|
TASER X2
|
9,819
|
|
|
16,729
|
|
|
(6,910
|
)
|
|
(41.3
|
)
|
|
TASER Pulse and Bolt
|
3,923
|
|
|
3,750
|
|
|
173
|
|
|
4.6
|
|
|
Cartridges
|
566,347
|
|
|
598,119
|
|
|
(31,772
|
)
|
|
(5.3
|
)
|
|
Axon Body
|
22,037
|
|
|
17,622
|
|
|
4,415
|
|
|
25.1
|
|
|
Axon Flex
|
5,409
|
|
|
3,487
|
|
|
1,922
|
|
|
55.1
|
|
|
Axon Fleet
|
2,967
|
|
|
1,601
|
|
|
1,366
|
|
|
85.3
|
|
|
Axon Dock
|
3,724
|
|
|
3,525
|
|
|
199
|
|
|
5.6
|
|
|
TASER Cam
|
899
|
|
|
1,339
|
|
|
(440
|
)
|
|
(32.9
|
)
|
*Not applicable
Net sales for the TASER segment increased 12.7% primarily due to a net increase of $6.4 million in TASER device sales, as well as smaller increases in cartridge and warranty revenue. As expected, we have continued to see a shift to purchases of our latest generation device, TASER 7, from legacy X2 and X26P devices. Lower unit sales of X2 and X26P devices were partially offset by higher average selling prices. Net sales for the three months ended September 30, 2019 included a total of $6.0 million in revenue that was not recognized during the three months ended June 30, 2019 as forecasted due to an inventory shortfall impacting delivery of TASER 7 devices and cartridges.
Net sales for the Software and Sensors segment increased 43.5% as we continued to add users and associated devices to our network during the three months ended September 30, 2019. The increase in the aggregate number of users resulted in increased Axon Evidence and extended warranty revenues of $10.1 million and $1.6 million, respectively. Increased revenues for Axon Body, Axon Dock, and Axon Fleet reflected a combination of a higher number of units sold and an increase in the average selling prices. We began selling our Axon Body 3 devices during the quarter ended September 30, 2019. An increase in Axon Flex units was partially offset by a decline in the average selling price.
To gain more immediate feedback regarding activity for Software and Sensors products and services, we also review bookings for these products. We consider bookings to be a statistical measure defined as the sales price of orders (not invoiced sales), including contractual optional periods we expect to be exercised, net of cancellations, inclusive of renewals, placed in the relevant fiscal period, regardless of when the products or services ultimately will be provided. Most bookings will be invoiced in subsequent periods. Due to municipal government funding rules, in some cases certain of the future period amounts included in bookings are subject to budget appropriation or other contract cancellation clauses. Although we have entered into contracts for the delivery of products and services in the future and anticipate the contracts will be fulfilled, if agencies do not exercise contractual options, do not appropriate funds in future year budgets, or do enact a cancellation clause, revenue associated with these bookings may not ultimately be recognized, resulting in a future reduction to bookings. Bookings related to our Software and Sensors segment, net of cancellations, were $128.2 million and $92.9 million during the three months ended September 30, 2019 and 2018, respectively, an increase of $35.3 million, or 38.0%.
The chart below illustrates our Software and Sensors segment quarterly bookings for each of the previous six fiscal quarters (in thousands):
Cost of Product and Service Sales
Within the TASER segment, cost of product sales increased to $26.5 million for the three months ended September 30, 2019 from $19.3 million for the same period in 2018. Cost as a percentage of sales increased to 36.9% from 30.2%. The increase in cost of product sales was primarily attributable to the mix of products, with higher cost per unit for TASER 7 handles and cartridges as well as higher depreciation on new production equipment for the TASER 7.
Within the Software and Sensors segment, cost of product and service sales increased to $24.2 million for the three months ended September 30, 2019 from $19.9 million for the same period in 2018. Cost as a percentage of sales decreased to 40.9% from 48.5%. Cost of product sales increased $2.2 million, but decreased as a percentage of sales, reflecting non-recurrence of customer fulfillment costs associated with our acquisition of VIEVU in May 2018. The savings were partially offset by increased freight
and customs expenses. Cost of service sales increased $2.0 million, but decreased as a percentage of sales, driven by cost efficiencies on higher revenue.
Gross Margin
As a percentage of net sales, gross margin for the TASER segment decreased to 63.1% from 69.8% for the three months ended September 30, 2019 and 2018, respectively. TASER 7 devices have a lower average selling price per unit than legacy products due to the bundle of products and services included and a higher cost per unit than legacy products. Additionally, gross margin was impacted by trade in credits provided to certain customers purchasing TASER 7 devices.
As a percentage of net sales, gross margin for the Software and Sensors segment increased to 59.1% from 51.5% for the three months ended September 30, 2019 and 2018, respectively. Within the Software and Sensors segment, hardware gross margin was 36.4% for the three months ended September 30, 2019 compared to 20.6% for the same period in 2018, while the service margins were 75.8% and 73.9% during those same periods, respectively.
Sales, General and Administrative Expenses
Sales, general and administrative ("SG&A") expenses were comprised as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Dollar
Change
|
|
Percent
Change
|
|
|
2019
|
|
2018
|
|
|
|
Total sales, general and administrative expenses
|
$
|
48,424
|
|
|
$
|
39,685
|
|
|
$
|
8,739
|
|
|
22.0
|
|
Sales, general, and administrative as a percentage of net sales
|
37.0
|
%
|
|
37.8
|
%
|
|
|
|
|
Stock-based compensation expense increased $5.8 million in comparison to the prior year comparable period, which was primarily attributable to an increase of $3.3 million in expense related to the CEO Performance Award and expense of $1.5 million related to our XSPP. During the three months ended September 30, 2019, attainment of the third tranche of the CEO Performance Award and XSPP became probable. Accordingly, we recorded expense of $3.2 million for the CEO Performance Award and $0.8 million for the XSPP reflecting the cumulative expense for the third tranche from the grant dates through September 30, 2019. Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount.
Salaries, benefits and bonus expense increased $1.4 million, primarily due to an increase in headcount. The increase was partially offset by a decline in bonus expense, reflecting lower anticipated attainment for the annual bonus plan, and by a decline in expense for contract labor.
Sales and marketing expenses increased $3.2 million, driven by a $3.3 million increase in commissions tied to higher revenues. The increase in commissions was also driven by higher commission rates for higher value bundled deals, which have continued to increase.
During the three months ended September 30, 2019, we abandoned certain capitalized planning and site development costs related to the site on which we previously intended to construct our new headquarters, resulting in an impairment charge of $0.7 million. During the prior year comparable period, we recorded an impairment charge of $2.0 million related to the abandonment of certain developed technology acquired in a business combination.
Research and Development Expenses
Research and development ("R&D") expenses were comprised as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Dollar
Change
|
|
Percent
Change
|
|
|
2019
|
|
2018
|
|
|
|
Total research and development expenses
|
$
|
25,129
|
|
|
$
|
21,982
|
|
|
$
|
3,147
|
|
|
14.3
|
|
Research and development as a percentage of net sales
|
19.2
|
%
|
|
21.0
|
%
|
|
|
|
|
The increase in R&D expense was fully attributable to our Software and Sensors segment. Within the TASER segment, R&D expense decreased $1.4 million, due to lower headcount and a decrease in hardware spending, which was higher during the prior year comparable period leading up to the TASER 7 launch. R&D expense for the Software and Sensors segment increased $4.5 million, primarily due to an increase in salaries and benefits, inclusive of stock-based compensation, of $4.5 million. Contributing to the increase was expense of $0.8 million related to our XSPP. During the three months ended September 30, 2019, attainment of the third tranche of the XSPP became probable. Accordingly, we recorded expense of $0.4 million for the XSPP
reflecting the cumulative expense for the third tranche from the grant dates through September 30, 2019.
We expect R&D expense to continue to increase in absolute dollars as we focus on growing the Software and Sensors segment as we add headcount and additional resources to develop new products and services to further advance our scalable cloud-connected device platform. We believe that these investments will result in an increase in our subscription revenue base, which over time will result in revenue increasing faster than the increase in SG&A expenses and R&D costs, as we reach economies of scale.
Interest and Other Income (Expense), Net
Interest and other income (expense), net was $1.8 million for the three months ended September 30, 2019 compared to $1.3 million for the same period in 2018. The increase was primarily attributable to increased investment interest income on our higher average balance of cash, cash equivalents and investments.
Provision for Income Taxes
The provision for income taxes was $2.3 million for the three months ended September 30, 2019, which was an effective tax rate of 27.6%. Our estimated full year effective income tax rate for 2019, before discrete period adjustments, is 19.6%, which is less than the federal statutory rate, primarily due to state taxes and non-deductible expenses for items such as meals and entertainment, executive compensation limited under IRC Section 162(m), and an income inclusion from GILTI, offset by a reduction for FDII and R&D tax credits. The effective tax rate was favorably impacted by a $0.9 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for RSUs that vested or stock options that were exercised and the release of a liability due to a lapse in the applicable statute of limitations during the three months ended September 30, 2019. This was offset by an unfavorable discrete item of $1.6 million related to the write off of certain deferred tax assets related to future stock compensation vests for certain officers for whom deductibility of compensation is limited by IRC Section 162(m) and return to provision adjustments for jurisdictions in which tax returns have been filed.
Net Income
Our net income increased by $0.4 million to $6.1 million for the three months ended September 30, 2019 compared to $5.7 million for the same period in 2018. Net income per basic and diluted share was $0.10 for the three months ended September 30, 2019 compared to $0.10 per basic and diluted share for the same period in 2018.
Three Months Ended September 30, 2019 Compared to the Three Months Ended June 30, 2019
Net Sales
Net sales by product line were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Three Months Ended
June 30, 2019
|
|
Dollar
Change
|
|
Percent
Change
|
|
TASER segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
TASER 7
|
$
|
20,214
|
|
|
15.4
|
%
|
|
$
|
9,298
|
|
|
8.3
|
%
|
|
$
|
10,916
|
|
|
117.4
|
%
|
|
TASER X26P
|
11,578
|
|
|
8.8
|
|
|
10,382
|
|
|
9.2
|
|
|
1,196
|
|
|
11.5
|
|
|
TASER X2
|
13,241
|
|
|
10.1
|
|
|
14,087
|
|
|
12.5
|
|
|
(846
|
)
|
|
(6.0
|
)
|
|
TASER Pulse and Bolt
|
1,132
|
|
|
0.9
|
|
|
1,118
|
|
|
1.0
|
|
|
14
|
|
|
1.3
|
|
|
Single cartridges
|
18,901
|
|
|
14.4
|
|
|
19,293
|
|
|
17.3
|
|
|
(392
|
)
|
|
(2.0
|
)
|
|
Axon Evidence and cloud services
|
218
|
|
|
0.2
|
|
|
109
|
|
|
0.1
|
|
|
109
|
|
|
100.0
|
|
|
Extended warranties
|
4,543
|
|
|
3.5
|
|
|
4,482
|
|
|
4.0
|
|
|
61
|
|
|
1.4
|
|
|
Other
|
1,916
|
|
|
1.5
|
|
|
1,803
|
|
|
1.6
|
|
|
113
|
|
|
6.3
|
|
|
Total TASER segment
|
71,743
|
|
|
54.8
|
|
|
60,572
|
|
|
54.0
|
|
|
11,171
|
|
|
18.4
|
|
|
Software and Sensors segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Axon Body
|
6,763
|
|
|
5.2
|
|
|
5,612
|
|
|
5.0
|
|
|
1,151
|
|
|
20.5
|
|
|
Axon Flex
|
1,670
|
|
|
1.3
|
|
|
1,623
|
|
|
1.4
|
|
|
47
|
|
|
2.9
|
|
|
Axon Fleet
|
4,341
|
|
|
3.3
|
|
|
3,120
|
|
|
2.8
|
|
|
1,221
|
|
|
39.1
|
|
|
Axon Dock
|
3,358
|
|
|
2.6
|
|
|
2,731
|
|
|
2.4
|
|
|
627
|
|
|
23.0
|
|
|
Axon Evidence and cloud services
|
34,022
|
|
|
26.0
|
|
|
31,821
|
|
|
28.3
|
|
|
2,201
|
|
|
6.9
|
|
|
TASER Cam
|
534
|
|
|
0.4
|
|
|
1,044
|
|
|
0.9
|
|
|
(510
|
)
|
|
(48.9
|
)
|
|
Extended warranties
|
4,714
|
|
|
3.6
|
|
|
4,420
|
|
|
3.9
|
|
|
294
|
|
|
6.7
|
|
|
Other
|
3,692
|
|
|
2.8
|
|
|
1,419
|
|
|
1.3
|
|
|
2,273
|
|
|
160.2
|
|
|
Total Software and Sensors segment
|
59,094
|
|
|
45.2
|
|
|
51,790
|
|
|
46.0
|
|
|
7,304
|
|
|
14.1
|
|
|
Total net sales
|
$
|
130,837
|
|
|
100.0
|
%
|
|
$
|
112,362
|
|
|
100.0
|
%
|
|
$
|
18,475
|
|
|
16.4
|
%
|
Net unit sales for TASER segment products and Software and Sensors segment products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Three Months Ended June 30, 2019
|
|
Unit
Change
|
|
Percent
Change
|
|
TASER 7
|
17,674
|
|
|
8,135
|
|
|
9,539
|
|
|
117.3
|
%
|
|
TASER X26P
|
10,766
|
|
|
9,493
|
|
|
1,273
|
|
|
13.4
|
|
|
TASER X2
|
9,819
|
|
|
9,759
|
|
|
60
|
|
|
0.6
|
|
|
TASER Pulse and Bolt
|
3,923
|
|
|
3,631
|
|
|
292
|
|
|
8.0
|
|
|
Cartridges
|
566,347
|
|
|
606,220
|
|
|
(39,873
|
)
|
|
(6.6
|
)
|
|
Axon Body
|
22,037
|
|
|
20,346
|
|
|
1,691
|
|
|
8.3
|
|
|
Axon Flex
|
5,409
|
|
|
3,508
|
|
|
1,901
|
|
|
54.2
|
|
|
Axon Fleet
|
2,967
|
|
|
2,441
|
|
|
526
|
|
|
21.5
|
|
|
Axon Dock
|
3,724
|
|
|
3,408
|
|
|
316
|
|
|
9.3
|
|
|
TASER Cam
|
899
|
|
|
1,716
|
|
|
(817
|
)
|
|
(47.6
|
)
|
Net sales within the TASER segment increased by approximately $11.2 million or 18.4% as compared to the prior quarter. Sales were negatively impacted by a total of $6.0 million during the three months ended June 30, 2019 due to an inventory shortfall impacting TASER 7 devices and cartridges. Net sales for the three months ended September 30, 2019 included this $6.0 million. A decline in the number of units of our legacy TASER devices was offset by increases in the average selling prices. Revenue for cartridges was also impacted by a decline in the number of units sold, partially offset by an increase in the blended average selling price.
Within the Software and Sensors segment, net sales increased 14.1% during the three months ended September 30, 2019 as we continued to add users and associated devices to our network. The increase in the aggregate number of users, including on-premise users in secondary international markets, resulted in increased Axon Evidence revenues of $2.2 million. Increased revenues for Axon Body and Axon Fleet reflected a combination of a higher number of units sold and an increase in the average selling prices. We began selling our Axon Body 3 devices during the quarter ended September 30, 2019. Revenue from other products increased $2.3 million compared to the prior quarter reflecting large sales of Signal Sidearm, Axon Commander, and other smaller product lines.
Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018
The following table presents data from our condensed consolidated statements of operations as well as the percentage relationship to total net sales of items included in our statements of operations (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
Net sales from products
|
$
|
264,977
|
|
|
73.8
|
%
|
|
$
|
238,618
|
|
|
78.2
|
%
|
|
Net sales from services
|
94,032
|
|
|
26.2
|
|
|
66,659
|
|
|
21.8
|
|
|
Net sales
|
359,009
|
|
|
100.0
|
|
|
305,277
|
|
|
100.0
|
|
|
Cost of product sales
|
120,265
|
|
|
33.5
|
|
|
96,474
|
|
|
31.6
|
|
|
Cost of service sales
|
24,098
|
|
|
6.7
|
|
|
15,566
|
|
|
5.1
|
|
|
Cost of sales
|
144,363
|
|
|
40.2
|
|
|
112,040
|
|
|
36.7
|
|
|
Gross margin
|
214,646
|
|
|
59.8
|
|
|
193,237
|
|
|
63.3
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Sales, general and administrative
|
134,678
|
|
|
37.6
|
|
|
114,787
|
|
|
37.6
|
|
|
Research and development
|
71,976
|
|
|
20.0
|
|
|
55,602
|
|
|
18.2
|
|
|
Total operating expenses
|
206,654
|
|
|
57.6
|
|
|
170,389
|
|
|
55.8
|
|
|
Income from operations
|
7,992
|
|
|
2.2
|
|
|
22,848
|
|
|
7.5
|
|
|
Interest and other income, net
|
5,978
|
|
|
1.7
|
|
|
2,242
|
|
|
0.7
|
|
|
Income before provision for income taxes
|
13,970
|
|
|
3.9
|
|
|
25,090
|
|
|
8.2
|
|
|
Provision for (benefit from) income taxes
|
709
|
|
|
0.2
|
|
|
(2,032
|
)
|
|
(0.7
|
)
|
|
Net income
|
$
|
13,261
|
|
|
3.7
|
%
|
|
$
|
27,122
|
|
|
8.9
|
%
|
The following table presents our revenues disaggregated by geography (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
United States
|
$
|
298,736
|
|
|
83
|
%
|
|
$
|
244,806
|
|
|
80
|
%
|
|
Other countries
|
60,273
|
|
|
17
|
|
|
60,471
|
|
|
20
|
|
|
Total
|
$
|
359,009
|
|
|
100
|
%
|
|
$
|
305,277
|
|
|
100
|
%
|
International revenue remained consistent with the prior year comparable period, but decreased as a percentage of total revenue. Revenues increased in Europe and Africa, with the increases partially offset by large sales in the prior year period in the Asia Pacific region and in Canada that did not recur in the current period.
Net Sales
Net sales by product line were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Dollar
Change
|
|
Percent
Change
|
|
|
2019
|
|
2018
|
|
|
|
TASER segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
TASER 7
|
$
|
39,466
|
|
|
11.0
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
39,466
|
|
|
*
|
|
|
TASER X26P
|
37,832
|
|
|
10.5
|
|
|
52,618
|
|
|
17.2
|
|
|
(14,786
|
)
|
|
(28.1
|
)
|
|
TASER X2
|
40,413
|
|
|
11.3
|
|
|
62,686
|
|
|
20.5
|
|
|
(22,273
|
)
|
|
(35.5
|
)
|
|
TASER Pulse and Bolt
|
2,920
|
|
|
0.8
|
|
|
3,849
|
|
|
1.3
|
|
|
(929
|
)
|
|
(24.1
|
)
|
|
Single cartridges
|
57,354
|
|
|
16.0
|
|
|
51,763
|
|
|
17.0
|
|
|
5,591
|
|
|
10.8
|
|
|
Axon Evidence and cloud services
|
363
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
363
|
|
|
*
|
|
|
Extended warranties
|
13,341
|
|
|
3.7
|
|
|
11,567
|
|
|
3.8
|
|
|
1,774
|
|
|
15.3
|
|
|
Other
|
6,017
|
|
|
1.7
|
|
|
5,331
|
|
|
1.7
|
|
|
686
|
|
|
12.9
|
|
|
Total TASER segment
|
197,706
|
|
|
55.1
|
|
|
187,814
|
|
|
61.5
|
|
|
9,892
|
|
|
5.3
|
|
|
Software and Sensors segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Axon Body
|
18,820
|
|
|
5.2
|
|
|
15,082
|
|
|
4.9
|
|
|
3,738
|
|
|
24.8
|
|
|
Axon Flex
|
4,517
|
|
|
1.3
|
|
|
4,529
|
|
|
1.5
|
|
|
(12
|
)
|
|
(0.3
|
)
|
|
Axon Fleet
|
10,977
|
|
|
3.1
|
|
|
6,640
|
|
|
2.2
|
|
|
4,337
|
|
|
65.3
|
|
|
Axon Dock
|
9,401
|
|
|
2.6
|
|
|
7,332
|
|
|
2.4
|
|
|
2,069
|
|
|
28.2
|
|
|
Axon Evidence and cloud services
|
93,461
|
|
|
26.0
|
|
|
64,513
|
|
|
21.2
|
|
|
28,948
|
|
|
44.9
|
|
|
TASER Cam
|
2,481
|
|
|
0.7
|
|
|
2,839
|
|
|
0.9
|
|
|
(358
|
)
|
|
(12.6
|
)
|
|
Extended warranties
|
14,064
|
|
|
3.9
|
|
|
8,521
|
|
|
2.8
|
|
|
5,543
|
|
|
65.1
|
|
|
Other
|
7,582
|
|
|
2.1
|
|
|
8,007
|
|
|
2.6
|
|
|
(425
|
)
|
|
(5.3
|
)
|
|
Total Software and Sensors segment
|
161,303
|
|
|
44.9
|
|
|
117,463
|
|
|
38.5
|
|
|
43,840
|
|
|
37.3
|
|
|
Total net sales
|
$
|
359,009
|
|
|
100.0
|
%
|
|
$
|
305,277
|
|
|
100.0
|
%
|
|
$
|
53,732
|
|
|
17.6
|
%
|
* Not applicable
Net unit sales for TASER segment products and Software and Sensors segment products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Unit
Change
|
|
Percent
Change
|
|
|
2019
|
|
2018
|
|
|
|
TASER 7
|
34,644
|
|
|
—
|
|
|
34,644
|
|
|
*
|
|
|
TASER X26P
|
35,244
|
|
|
53,226
|
|
|
(17,982
|
)
|
|
(33.8
|
)
|
|
TASER X2
|
29,439
|
|
|
52,767
|
|
|
(23,328
|
)
|
|
(44.2
|
)
|
|
TASER Pulse and Bolt
|
8,807
|
|
|
10,908
|
|
|
(2,101
|
)
|
|
(19.3
|
)
|
|
Cartridges
|
1,789,084
|
|
|
1,742,207
|
|
|
46,877
|
|
|
2.7
|
|
|
Axon Body
|
68,231
|
|
|
59,798
|
|
|
8,433
|
|
|
14.1
|
|
|
Axon Flex
|
12,508
|
|
|
10,461
|
|
|
2,047
|
|
|
19.6
|
|
|
Axon Fleet
|
7,143
|
|
|
5,537
|
|
|
1,606
|
|
|
29.0
|
|
|
Axon Dock
|
12,126
|
|
|
13,903
|
|
|
(1,777
|
)
|
|
(12.8
|
)
|
|
TASER Cam
|
4,356
|
|
|
6,358
|
|
|
(2,002
|
)
|
|
(31.5
|
)
|
*Not applicable
Net sales for the TASER segment increased 5.3% primarily as a result of a $5.6 million increase in cartridge revenue, an increase of $1.8 million in warranty revenue, and a net increase of $1.5 million in TASER device sales. Cartridge revenues increased due to both increased unit sales and an increase in average selling price. The decreased unit sales of X2 and X26P were partially offset by higher average selling prices. As expected, we continue to see a shift to purchases of our latest generation device, TASER 7, from legacy X2 and X26P devices.
Net sales for the Software and Sensors segment increased 37.3% as we continued to add users and associated devices to our network during the nine months ended September 30, 2019. The increase in the aggregate number of users resulted in increased Axon Evidence and extended warranty revenues of $28.9 million and $5.5 million, respectively. Increased revenues for Axon Body and Axon Fleet reflected a combination of a higher number of units sold and an increase in the average selling price. A decrease in Axon Dock units was offset by an increase in the average selling price.
Cost of Product and Service Sales
Within the TASER segment, cost of product sales increased to $74.0 million for the nine months ended September 30, 2019 from $57.5 million for the same period in 2018. Cost as a percentage of sales increased to 37.5% from 30.6%. The increase in cost of product sales was primarily attributable to the mix of products, with higher cost per unit for TASER 7 handles and cartridges as well as higher depreciation on new production equipment for the TASER 7. Additionally, cost of product sales included approximately $2.3 million in expense for TASER 7 ramp-up and optimization costs related to scrap, obsolete inventory, and higher labor costs.
Within the Software and Sensors segment, cost of product and service sales increased to $70.3 million for the nine months ended September 30, 2019 from $54.6 million for the same period in 2018. Cost as a percentage of sales decreased to 43.6% from 46.4%. Cost of product sales increased $7.2 million primarily driven by the impact of increased units as well as increased freight and customs expenses, but decreased as a percentage of sales, reflecting non-recurrence of customer fulfillment costs associated with our acquisition of VIEVU in May 2018. Cost of service sales increased $8.5 million driven primarily by a $4.1 million increase in third party cloud data storage and compute costs, and by a $3.4 million increase in professional services expense due to both significant Fleet installations during the nine months ended September 30, 2019 and an overall increase following the acquisition of VIEVU in May 2018. In June 2019, we entered into a purchase agreement for cloud data storage with a three year term beginning July 1, 2019. We expect that this agreement, in combination with moving certain data into archive storage, will slow the growth of our future storage and compute costs, despite anticipated increases in the amount of data stored.
Gross Margin
As a percentage of net sales, gross margin for the TASER segment decreased to 62.5% from 69.4% for the nine months ended September 30, 2019 and 2018, respectively. TASER 7 devices have a lower average selling price per unit than legacy products due to the bundle of products and services included, and a higher cost per unit than legacy products. Additionally, gross margin was impacted by trade in credits provided to certain customers purchasing TASER 7 devices.
As a percentage of net sales, gross margin for the Software and Sensors segment increased slightly to 56.4% from 53.6%. Within the Software and Sensors segment, hardware gross margin was 31.9% for the nine months ended September 30, 2019 compared to 23.2% for the same period in 2018, while the service margins were 74.2% and 76.6% during those same periods, respectively.
Sales, General and Administrative Expenses
SG&A expenses were comprised as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Dollar
Change
|
|
Percent
Change
|
|
|
2019
|
|
2018
|
|
|
|
Total sales, general and administrative expenses
|
$
|
134,678
|
|
|
$
|
114,787
|
|
|
$
|
19,891
|
|
|
17.3
|
|
Sales, general, and administrative as a percentage of net sales
|
37.6
|
%
|
|
37.6
|
%
|
|
|
|
|
Stock-based compensation expense increased $10.3 million in comparison to the prior year comparable period, which was primarily attributable to an increase of $5.6 million in expense related to the CEO Performance Award and expense of $2.8 million related to our XSPP. During the three months ended September 30, 2019, attainment of the third tranche of the CEO Performance Award and XSPP became probable. Accordingly, we recorded expense of $3.2 million for the CEO Performance Award and $0.8 million for the XSPP reflecting the cumulative expense for the third tranche from the grant dates through September 30, 2019. Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount.
Salaries, benefits and bonus expenses increased $4.0 million primarily due to an increase in headcount. The increase was partially offset by a decline in bonus expense, reflecting lower anticipated attainment for the annual bonus plan, and by a decline in expense for contract labor.
Sales and marketing expenses increased $7.0 million driven primarily by a $5.9 million increase in commissions tied to higher revenues and increased promotions, sponsorship, and tradeshow expenses primarily related to Axon Accelerate. The increase in commissions was also driven by higher commission rates for higher value bundled deals, which have continued to increase.
Travel expenses increased $1.1 million driven primarily by increased headcount.
Research and Development Expenses
R&D expenses were comprised as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Dollar
Change
|
|
Percent
Change
|
|
|
2019
|
|
2018
|
|
|
|
Total research and development expenses
|
$
|
71,976
|
|
|
$
|
55,602
|
|
|
$
|
16,374
|
|
|
29.4
|
|
Research and development as a percentage of net sales
|
20.0
|
%
|
|
18.2
|
%
|
|
|
|
|
The increase in R&D expense was fully attributable to our Software and Sensors segment. R&D expense for the Software and Sensors segment increased $17.9 million, primarily due to a $15.4 million increase related to salaries and benefits, inclusive of stock-based compensation. Contributing to the increase was expense of $1.4 million related to our XSPP. During the three months ended September 30, 2019, attainment of the third tranche of the XSPP became probable. Accordingly, we recorded expense of $0.4 million for the XSPP reflecting the cumulative expense for the third tranche from the grant dates through September 30, 2019. Within the TASER segment, R&D expense decreased $1.5 million, due to lower headcount and a decrease in hardware spending, which was higher during the prior year comparable period leading up to the TASER 7 launch.
We expect R&D expense to continue to increase in absolute dollars as we focus on growing the Software and Sensors segment as we add headcount and additional resources to develop new products and services to further advance our scalable cloud-connected device platform. We believe that these investments will result in an increase in our subscription revenue base, which over time will result in revenue increasing faster than the increase in SG&A expenses and R&D costs, as we reach economies of scale.
Interest and Other Income (Expense), Net
Interest and other income, net was $6.0 million for the nine months ended September 30, 2019 compared to $2.2 million for the same period in 2018. The increase was primarily attributable to increased investment interest income on our higher average balance of cash, cash equivalents and investments.
Provision for Income Taxes
The provision for income taxes was an expense of $0.7 million for the nine months ended September 30, 2019, which was an effective tax rate of 5.1%. Our estimated full year effective income tax rate for 2019, before discrete period adjustments, is 19.6%, which is less than the federal statutory rate, primarily due to state taxes and non-deductible expenses for items such as meals and entertainment, executive compensation limited under IRC Section 162(m), and an income inclusion from GILTI, offset by a reduction for FDII and R&D tax credits. The effective tax rate was favorably impacted by a $3.9 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for RSUs that vested or stock options that were exercised during the nine months ended September 30, 2019. This was offset by an unfavorable discrete item of $1.7 million related to the write off of certain deferred tax assets related to future stock compensation vests for certain officers for whom deductibility of compensation is limited by IRC Section 162(m) and return to provision adjustments for jurisdictions in which tax returns have been filed.
Net Income
Our net income decreased by $13.9 million to $13.3 million for the nine months ended September 30, 2019 compared to $27.1 million for the same period in 2018. Net income per basic and diluted share was $0.22 for the nine months ended September 30, 2019 compared to $0.49 per basic share and $0.47 per diluted share for the same period in 2018.
Non-GAAP Measures
To supplement our financial results presented in accordance with GAAP, we present the non-GAAP financial measures of EBITDA and Adjusted EBITDA (CEO Performance Award). Our management uses these non-GAAP financial measures in evaluating our performance in comparison to prior periods. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance, and when planning and forecasting our future periods. A reconciliation of GAAP to the non-GAAP financial measures is presented below.
|
|
|
|
•
|
EBITDA (Most comparable GAAP Measure: Net income) - Earnings before interest expense, investment interest income, taxes, depreciation and amortization.
|
|
|
|
|
•
|
Adjusted EBITDA (CEO Performance Award) (Most comparable GAAP Measure: Net income) - Earnings before interest expense, investment interest income, taxes, depreciation, amortization and non-cash stock-based compensation expense.
|
Although these non-GAAP financial measures are not consistent with GAAP, management believes investors will benefit by referring to these non-GAAP financial measures when assessing our operating results, as well as when forecasting and analyzing future periods. However, management recognizes that:
|
|
|
|
•
|
these non-GAAP financial measures are limited in their usefulness and should be considered only as a supplement to our GAAP financial measures;
|
|
|
|
|
•
|
these non-GAAP financial measures should not be considered in isolation from, or as a substitute for, our GAAP financial measures;
|
|
|
|
|
•
|
these non-GAAP financial measures should not be considered to be superior to our GAAP financial measures; and
|
|
|
|
|
•
|
these non-GAAP financial measures were not prepared in accordance with GAAP and investors should not assume that the non-GAAP financial measures presented in this Quarterly Report on Form 10-Q were prepared under a comprehensive set of rules or principles.
|
EBITDA and Adjusted EBITDA (CEO Performance Award) reconciles to net income as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30, 2019
|
|
June 30, 2019
|
|
September 30, 2018
|
|
September 30, 2019
|
|
September 30, 2018
|
|
Net income
|
$
|
6,104
|
|
|
$
|
738
|
|
|
$
|
5,711
|
|
|
$
|
13,261
|
|
|
$
|
27,122
|
|
|
Depreciation and amortization
|
2,709
|
|
|
2,687
|
|
|
3,065
|
|
|
8,196
|
|
|
8,226
|
|
|
Interest expense
|
4
|
|
|
17
|
|
|
16
|
|
|
27
|
|
|
53
|
|
|
Investment interest income
|
(1,647
|
)
|
|
(1,630
|
)
|
|
(1,256
|
)
|
|
(5,280
|
)
|
|
(1,926
|
)
|
|
Provision for (benefit from) income taxes
|
2,332
|
|
|
(188
|
)
|
|
(471
|
)
|
|
709
|
|
|
(2,032
|
)
|
|
EBITDA
|
$
|
9,502
|
|
|
$
|
1,624
|
|
|
$
|
7,065
|
|
|
$
|
16,913
|
|
|
$
|
31,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
13,663
|
|
|
8,627
|
|
|
6,255
|
|
|
30,195
|
|
|
15,302
|
|
|
Adjusted EBITDA (CEO Performance Award)
|
$
|
23,165
|
|
|
$
|
10,251
|
|
|
$
|
13,320
|
|
|
$
|
47,108
|
|
|
$
|
46,745
|
|
Liquidity and Capital Resources
Summary
As of September 30, 2019, we had $204.1 million of cash, cash equivalents and restricted cash, a decrease of $146.9 million as compared to December 31, 2018. The decrease in the balance of cash, cash equivalents and restricted cash was primarily attributable to the net purchase of investments of $150.5 million. As of September 30, 2019, we had $202.6 million of cash and cash equivalents, of which $48.6 million was held in foreign locations. Our ongoing sources of cash include cash on hand, investments, and cash flows from operations. In addition, our $50.0 million revolving credit facility is available for additional working capital needs or investment opportunities. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. Advances under the line of credit bear interest at LIBOR plus 1.0 to 1.5% per year determined in accordance with a pricing grid based on our funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio.
As of September 30, 2019, we had letters of credit outstanding of $3.6 million, leaving the net amount available for borrowing of $46.4 million. The facility matures on December 31, 2021, and has an accordion feature which allows for an increase in the total line of credit up to $100.0 million, subject to certain conditions, including the availability of additional bank commitments. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our revolving credit facility. At September 30, 2019 and December 31, 2018, there were no borrowings under the line other than the outstanding letters of credit.
Our agreement with the bank requires us to comply with a maximum funded debt to EBITDA ratio, as defined, of no greater than 2.50 to 1.00 based upon a trailing four fiscal quarter period. At September 30, 2019, our funded debt to EBITDA ratio was 0.001 to 1.00.
TASER 60 installment purchase arrangements typically involve amounts invoiced in five equal installments at the beginning of each year of the five-year term. This is in contrast to a traditional CEW sale in which the entire amount being charged for the hardware is invoiced upon shipment. This impacts liquidity in a commensurate fashion, with the cash for the TASER 60 arrangement received in five annual installments rather than up front. It is our strategic intent to shift an increasing amount of our business to a subscription model, to better match the municipal budgeting process of our customers as well as to allow for multiple product offerings to be bundled into existing subscriptions. We carefully considered the cash flow impacts of this strategic shift and regularly revisit our cash flow forecast with the goal of maintaining a comfortable level of liquidity as we introduce commercial offerings in which we incur upfront cash costs to produce and fulfill hardware sales ahead of the cash inflows from our customers. We anticipate, and have prepared for, the majority of our arrangements in both reportable segments to be offered in similar subscription-type offerings over the coming years. With the launch of the TASER 7, which is primarily being sold in subscription offerings, we expect this strategic shift to accelerate.
Based on our strong balance sheet and the fact that we do not have long-term debt at September 30, 2019, we believe financing will be available, both through our existing credit line and possible additional financing. However, there is no assurance that such funding will be available on terms acceptable to us, or at all. We believe that our sources of funding will be sufficient to satisfy our currently anticipated cash requirements including capital expenditures, working capital requirements, potential acquisitions and other liquidity requirements through at least the next 12 months. We and our Board of Directors may consider repurchases of our common stock from time to time pursuant to our stock repurchase plan. Further repurchases of our common stock would take place on the open market, would be financed with available cash and are subject to market and business conditions.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
Net cash provided by operating activities
|
$
|
19,864
|
|
|
$
|
32,636
|
|
|
Net cash used in investing activities
|
(162,925
|
)
|
|
(6,003
|
)
|
|
Net cash provided by (used in) financing activities
|
(3,162
|
)
|
|
222,158
|
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
(678
|
)
|
|
(381
|
)
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
$
|
(146,901
|
)
|
|
$
|
248,410
|
|
Operating activities
Net cash provided by operating activities in the first nine months of 2019 of $19.9 million reflects $13.3 million in net income, non-cash income statement items totaling $40.4 million, and a negative impact on cash of $33.8 million for the net change in operating assets and liabilities. Included in the non-cash items were $8.2 million in depreciation and amortization expense and $30.2 million in stock-based compensation expense. Cash used in operations was impacted by increased accounts and notes receivable and contract assets of $30.5 million, decreased accounts payable, accrued liabilities and other liabilities of $13.5 million, increased inventory of $6.3 million, and increased prepaid expenses and other assets of $12.0 million. The increase in accounts and notes receivable and contract assets was attributable to increased sales over the last several quarters, primarily sales made under subscription plans. The decrease in accounts payable, accrued liabilities and other liabilities was primarily attributable to the timing of payments, and to payments made during 2019 for operating leases following our adoption of Topic 842. The increase in prepaid expenses and other assets was primarily attributable to a $15.0 million prepayment related to a purchase agreement for cloud data storage that commenced in July 2019. Cash provided by operations was positively impacted by various other operating items, including increased deferred revenue of $28.5 million.
Net cash provided by operating activities in the first nine months of 2018 of $32.6 million reflects $27.1 million in net income impacted by the net increase of non-cash income statement items totaling $23.7 million and cash outflows of $18.2 million for the net change in operating assets and liabilities. Included in the non-cash items were $8.2 million in depreciation and amortization expense and $15.3 million in stock-based compensation expense. Increases to operating cash flows consisted primarily of increased deferred revenue of $31.7 million and decreased inventory of $9.0 million. The increase in deferred revenue was primarily driven by increased Software and Sensors services invoiced in advance. Cash used in operations was also impacted by various other operating items, with the most significant component related to increased accounts and notes receivable and contract assets of $51.2 million, primarily related to increased customer balances under our Officer Safety Plan and TASER 60 purchase programs, including adjustments to our opening balance sheet related to our adoption of ASC 606. Cash provided by operations was also impacted by increased accounts payable and accrued liabilities of $4.3 million and decreased inventory of $9.0 million.
Investing activities
We used $162.9 million in investing activities during the first nine months of 2019, which was comprised of $150.5 million for the purchase of investments, net of proceeds, and $12.4 million for the purchase of property and equipment and intangible assets.
We used $6.0 million in investing activities during the first nine months of 2018. Maturities and calls of investments, net of purchases, were $6.3 million. We invested $7.3 million in the purchase of property and equipment and intangible assets in addition to our $5.0 million investment related to the acquisition of VIEVU, LLC.
Financing activities
Net cash used in financing activities was $3.2 million during the first nine months of 2019. During the first nine months of 2019, we paid income and payroll taxes of $3.3 million on behalf of employees who net-settled stock awards during the period, which was partially offset by proceeds from options exercised of $0.1 million.
Net cash generated by financing activities was $222.2 million during the first nine months of 2018 . In May 2018, we completed a public follow-on equity offering that generated net proceeds of $234.0 million which was partially offset by income and payroll taxes of $12.0 million paid by us on behalf of employees who net-settled stock awards during the period.
Off-Balance Sheet Arrangements
The discussion of off-balance sheet arrangements in Note 12 of the notes to our condensed consolidated financial statements within this Report on Form 10-Q is incorporated by reference herein.
Critical Accounting Estimates
We have identified the following accounting estimates as critical to our business operations and the understanding of our results of operations. The preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our unaudited condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. While we do not believe that a change in these estimates is reasonably likely, there can be no assurance that our actual results will not differ from these estimates. The effect of these estimates on our financial condition and results of operations are discussed below.
Stock-Based Compensation
We have historically granted stock-based compensation to key employees and non-employee directors as a means of attracting and retaining highly qualified personnel. Stock-based compensation awards primarily consist of service-based RSUs, performance-based RSUs, and performance-based options. RSUs are classified as equity and measured at the fair market value of the underlying stock at the grant date. We recognize RSU expense using the straight-line attribution method over the requisite service period. We also issue performance-based RSUs, the vesting of which is contingent upon the achievement of certain performance criteria related to our operating performance, as well as successful and timely development and market acceptance of future product introductions. For performance-based RSUs containing only performance conditions, compensation cost is recognized using the graded attribution model over the explicit or implicit service period. For awards containing multiple service, performance or market conditions, and all conditions must be satisfied prior to vesting, compensation expense is recognized over the requisite service period, which is defined as the longest explicit, implicit or derived service period, based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date. For both service-based and performance-based RSUs, we account for forfeitures as they occur as a reduction to stock-based compensation expense and additional paid-in-capital.
For performance-based awards, stock-based compensation expense is recognized over the expected performance achievement period of individual performance goals when the achievement of each individual performance goal becomes probable. For performance-based awards with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized for each pair of performance and market conditions over the longer of the expected achievement period of the performance and market conditions, beginning at the point in time that the relevant performance condition
is considered probable of achievement. The fair value of such awards is estimated on the grant date using Monte Carlo simulations. Refer to Note 9 of the notes to our condensed consolidated financial statements within this Report on Form 10-Q.
We have granted a total of 13.5 million performance-based awards (options and restricted stock units) of which 12.4 million are outstanding as of September 30, 2019, the vesting of which is contingent upon the achievement of certain performance criteria including the successful development and market acceptance of future product introductions, our future sales targets, operating performance, and market capitalization. These awards will vest and compensation expense will be recognized based on management’s best estimate of the probability of the performance criteria being satisfied using the most currently available projections of future product adoption and operating performance, adjusted at each balance sheet date. Changes in the subjective and probability-based assumptions can materially affect the estimate of the fair value of stock-based compensation and consequently, the related amount recognized in our condensed consolidated statements of operations and comprehensive income.
Leases
We adopted Topic 842 as of January 1, 2019. Refer to Note 1 of the notes to our condensed consolidated financial statements within this Report on Form 10-Q for further discussion about the new standard and its impact on our condensed consolidated balance sheet.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. We use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. We give consideration to our line of credit as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates.
Our lease term includes options to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of 12 months or less are not recorded on the balance sheet. Our lease agreements do not contain any residual value guarantees.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We typically invest in a limited number of financial instruments, consisting principally of investments in money market accounts, certificates of deposit, and corporate and municipal bonds with a typical long-term debt rating of “A” or better by any nationally recognized statistical rating organization, denominated in U.S. dollars. All of our cash equivalents and investments are treated as “held-to-maturity.” Investments in fixed-rate interest-earning instruments carry a degree of interest rate risk as their market value may be adversely impacted due to a rise in interest rates. As a result, we may suffer losses in principal if we sell securities that have declined in market value due to changes in interest rates. However, because we classify our debt securities as “held-to-maturity” based on our intent and ability to hold these instruments to maturity, no gains or losses are recognized due to changes in interest rates. These securities are reported at amortized cost. Based on investment positions as of September 30, 2019, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $0.7 million decline in the fair market value of the portfolio. Such losses would only be realized if we sold the investments prior to maturity.
Additionally, we have access to a $50.0 million line of credit borrowing facility which bears interest at LIBOR plus 1.0 to 1.5% per year determined in accordance with a pricing grid based on our funded debt to EBITDA ratio. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit, which totaled $3.6 million at September 30, 2019. At September 30, 2019, there was no amount outstanding under the line of credit and the available borrowing under the line of credit was $46.4 million. We have not borrowed any funds under the line of credit since its inception; however; should we need to do so in the future, such borrowings could be subject to adverse or favorable changes in the underlying interest rate.
Exchange Rate Risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, in each case compared to the U.S. dollar, related to transactions by our foreign subsidiaries. The majority of our sales to international customers are transacted in U.S. dollars and therefore, are not subject to exchange rate fluctuations on these transactions. However, the cost of our products to our customers increases when the U.S. dollar strengthens against their local currency, and we may have more sales and expenses denominated in foreign currencies in future years which could increase our foreign exchange rate risk. Additionally, intercompany sales to our non-U.S. dollar functional currency international subsidiaries are transacted in U.S. dollars which could increase our foreign exchange rate risk caused by foreign currency transaction gains and losses.
To date, we have not engaged in any currency hedging activities. However, we may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. However, we may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to the prohibitive economic cost of hedging particular exposures. As such, fluctuations in currency exchange rates could harm our business in the future.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer are responsible for the evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2019.
Change in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.