Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with the other sections of this Annual Report on Form 10-K, including Part I, Item 1A: “Risk Factors”; Part II, Item 6: “Selected Financial Data”; and Part II, Item 8: “Financial Statements and Supplementary Data.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing. The tables in the MD&A sections below are derived from exact numbers and may have immaterial rounding differences.
This section discusses our results of operations for the year ended December 31, 2019 as compared to the year ended December 31, 2018. For a discussion and analysis of the year ended December 31, 2018, compared to the same period in 2017 please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 27, 2019.
Overview
Axon is a global network of devices, apps, training and people that helps public safety personnel become smarter and safer. Our technologies give law enforcement the confidence, focus and time they need to protect their communities. Our products impact every aspect of an officer's day-to-day experience. Our core mission is to protect life. We fulfill that mission through developing hardware and software products that advance our long term vision of a) obsoleting the bullet, b) reducing social conflict, and c) enabling a fair and effective justice system.
Our revenues for the year ended December 31, 2019 were $530.9 million, an increase of $110.8 million, or 26.4%, from the prior year. We had a loss from operations of $6.4 million compared to income from operations of $24.8 million in the prior year. Gross margins were compressed related to the rollout of our latest generation TASER device and increased data storage expenses, partially offset by higher margins for Software & Sensors devices. Increased cost of sales, selling, general and administrative expenses, and research and development expenses to support continued and future growth also contributed to the decline in operating results. Additionally, expenses for the year ended December 31, 2019 reflected $51.6 million in incremental stock-based compensation expense related to the CEO Performance Award and XSPP. The decline in operating results was partially offset by a $4.3 million increase in interest income. For the year ended December 31, 2019, we recorded net income of $0.9 million compared to $29.2 million for the prior year.
2020 Outlook
For the year ending December 31, 2020, we expect revenue of $615 million to $625 million. We anticipate that revenue for the three months ending March 31, 2020 will reflect approximately 13% growth as compared to the three months ended March 31, 2019. We anticipate that the timing of 2020 revenue will reflect a similar distribution as in 2019. 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.
In late 2019, a novel strain of coronavirus was first detected in Wuhan, China. Following the outbreak of this virus, the Chinese government has quarantined certain affected regions and certain travel restrictions have been imposed. Our operations team is closely monitoring the potential impact to our supply chain. At this time we have successfully managed through the current impacts. Our operations team has some flexibility to adapt to the changing situation; however, if the situation further deteriorates or the outbreak results in further travel restriction on both supply and demand, these impacts could affect our full year guidance.
Results of Operations
The following table presents data from our 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Net sales from products
|
$
|
399,474
|
|
|
75.3
|
%
|
|
$
|
327,635
|
|
|
78.0
|
%
|
Net sales from services
|
131,386
|
|
|
24.7
|
%
|
|
92,433
|
|
|
22.0
|
%
|
Net sales
|
530,860
|
|
|
100.0
|
%
|
|
420,068
|
|
|
100.0
|
%
|
Cost of product sales
|
190,683
|
|
|
35.9
|
%
|
|
139,337
|
|
|
33.2
|
%
|
Cost of service sales
|
32,891
|
|
|
6.2
|
%
|
|
22,148
|
|
|
5.3
|
%
|
Cost of sales
|
223,574
|
|
|
42.1
|
%
|
|
161,485
|
|
|
38.5
|
%
|
Gross margin
|
307,286
|
|
|
57.9
|
%
|
|
258,583
|
|
|
61.5
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
Sales, general and administrative
|
212,959
|
|
|
40.1
|
%
|
|
156,886
|
|
|
37.3
|
%
|
Research and development
|
100,721
|
|
|
19.0
|
%
|
|
76,856
|
|
|
18.3
|
%
|
Total operating expenses
|
313,680
|
|
|
59.1
|
%
|
|
233,742
|
|
|
55.6
|
%
|
Income (loss) from operations
|
(6,394
|
)
|
|
(1.2
|
)%
|
|
24,841
|
|
|
5.9
|
%
|
Interest and other income, net
|
8,464
|
|
|
1.6
|
%
|
|
3,263
|
|
|
0.8
|
%
|
Income before provision for income taxes
|
2,070
|
|
|
0.4
|
%
|
|
28,104
|
|
|
6.7
|
%
|
Provision (benefit) for income taxes
|
1,188
|
|
|
0.2
|
%
|
|
(1,101
|
)
|
|
(0.3
|
)%
|
Net income
|
$
|
882
|
|
|
0.2
|
%
|
|
$
|
29,205
|
|
|
7.0
|
%
|
Net sales to the U.S. and other countries are summarized as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
United States
|
$
|
446,100
|
|
|
84.0
|
%
|
|
$
|
335,310
|
|
|
79.8
|
%
|
Other Countries
|
84,760
|
|
|
16.0
|
%
|
|
84,758
|
|
|
20.2
|
%
|
Total
|
$
|
530,860
|
|
|
100.0
|
%
|
|
$
|
420,068
|
|
|
100.0
|
%
|
International revenue in 2019 remained consistent with 2018. Lower sales in Canada and the Asia Pacific region were offset by increased sales in Europe and Africa.
Our operations are comprised of two reportable segments: the manufacture and sale of CEDs, batteries, accessories and extended warranties and other products and services (collectively, the “TASER” segment); and the development, manufacture, and sale of software and sensors, which includes the sale of devices, wearables, applications, cloud and mobile products, and services (collectively, the "Software and Sensors" segment). In both segments, we report sales of products and services. Service revenue in both segments includes sales related to Axon Evidence. In the Software and Sensors segment, service revenue also includes other recurring cloud-hosted software revenue and related professional services. Collectively, this revenue is sometimes referred to as "Axon Cloud revenue." 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." 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, and product management and R&D for products included, or to be included, within the Software and Sensors segment. All other costs are included in the TASER segment.
For the Years Ended December 31, 2019 and 2018
Net Sales
Net sales by product line were as follows for the years ended December 31, 2019 and 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Dollar
Change
|
|
Percent
Change
|
|
2019
|
|
2018
|
|
|
TASER segment:
|
|
|
|
|
|
|
|
|
|
|
|
TASER 7
|
$
|
56,652
|
|
|
10.7
|
%
|
|
$
|
7,358
|
|
|
1.8
|
%
|
|
$
|
49,294
|
|
|
669.9
|
%
|
TASER X26P
|
52,524
|
|
|
9.9
|
%
|
|
70,638
|
|
|
16.8
|
%
|
|
(18,114
|
)
|
|
(25.6
|
)%
|
TASER X2
|
55,920
|
|
|
10.5
|
%
|
|
78,837
|
|
|
18.8
|
%
|
|
(22,917
|
)
|
|
(29.1
|
)%
|
TASER Pulse and Bolt
|
4,089
|
|
|
0.8
|
%
|
|
5,182
|
|
|
1.2
|
%
|
|
(1,093
|
)
|
|
(21.1
|
)%
|
Cartridges
|
85,987
|
|
|
16.2
|
%
|
|
68,258
|
|
|
16.3
|
%
|
|
17,729
|
|
|
26.0
|
%
|
Axon Evidence and cloud services
|
704
|
|
|
0.1
|
%
|
|
—
|
|
|
—
|
%
|
|
704
|
|
|
*
|
|
Extended warranties
|
18,074
|
|
|
3.4
|
%
|
|
15,753
|
|
|
3.8
|
%
|
|
2,321
|
|
|
14.7
|
%
|
Other
|
7,711
|
|
|
1.5
|
%
|
|
7,089
|
|
|
1.7
|
%
|
|
622
|
|
|
8.8
|
%
|
TASER segment
|
281,661
|
|
|
53.1
|
%
|
|
253,115
|
|
|
60.4
|
%
|
|
28,546
|
|
|
11.3
|
%
|
Software and Sensors segment:
|
|
|
|
|
|
|
|
|
|
|
|
Axon Body
|
44,039
|
|
|
8.3
|
%
|
|
21,883
|
|
|
5.2
|
%
|
|
22,156
|
|
|
101.2
|
%
|
Axon Flex
|
5,928
|
|
|
1.1
|
%
|
|
6,509
|
|
|
1.5
|
%
|
|
(581
|
)
|
|
(8.9
|
)%
|
Axon Fleet
|
16,182
|
|
|
3.0
|
%
|
|
12,527
|
|
|
3.0
|
%
|
|
3,655
|
|
|
29.2
|
%
|
Axon Dock
|
20,449
|
|
|
3.9
|
%
|
|
10,706
|
|
|
2.5
|
%
|
|
9,743
|
|
|
91.0
|
%
|
Axon Evidence and cloud services
|
130,265
|
|
|
24.5
|
%
|
|
90,291
|
|
|
21.5
|
%
|
|
39,974
|
|
|
44.3
|
%
|
TASER Cam
|
3,104
|
|
|
0.6
|
%
|
|
3,871
|
|
|
0.9
|
%
|
|
(767
|
)
|
|
(19.8
|
)%
|
Extended warranties
|
19,188
|
|
|
3.6
|
%
|
|
11,860
|
|
|
2.8
|
%
|
|
7,328
|
|
|
61.8
|
%
|
Other
|
10,044
|
|
|
1.9
|
%
|
|
9,306
|
|
|
2.2
|
%
|
|
738
|
|
|
7.9
|
%
|
Software and Sensors segment
|
249,199
|
|
|
46.9
|
%
|
|
166,953
|
|
|
39.6
|
%
|
|
82,246
|
|
|
49.3
|
%
|
Total net sales
|
$
|
530,860
|
|
|
100.0
|
%
|
|
$
|
420,068
|
|
|
100.0
|
%
|
|
$
|
110,792
|
|
|
26.4
|
%
|
Net unit sales were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
Unit
Change
|
|
Percent
Change
|
TASER 7
|
49,221
|
|
|
5,759
|
|
|
43,462
|
|
|
754.7
|
%
|
TASER X26P
|
48,798
|
|
|
71,823
|
|
|
(23,025
|
)
|
|
(32.1
|
)%
|
TASER X2
|
40,973
|
|
|
65,855
|
|
|
(24,882
|
)
|
|
(37.8
|
)%
|
TASER Pulse and Bolt
|
11,785
|
|
|
18,398
|
|
|
(6,613
|
)
|
|
(35.9
|
)%
|
Cartridges
|
2,751,603
|
|
|
2,342,897
|
|
|
408,706
|
|
|
17.4
|
%
|
Axon Body
|
151,499
|
|
|
85,965
|
|
|
65,534
|
|
|
76.2
|
%
|
Axon Flex
|
15,586
|
|
|
15,541
|
|
|
45
|
|
|
0.3
|
%
|
Axon Fleet
|
10,467
|
|
|
9,445
|
|
|
1,022
|
|
|
10.8
|
%
|
Axon Dock
|
22,275
|
|
|
17,762
|
|
|
4,513
|
|
|
25.4
|
%
|
TASER Cam
|
5,533
|
|
|
8,310
|
|
|
(2,777
|
)
|
|
(33.4
|
)%
|
Net sales for the TASER segment increased $28.5 million, or 11.3%, primarily as a result of a $17.7 million increase in cartridge revenue and a net increase of $7.2 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. We expect recurring payment plan subscriptions to increase as we drive sales of TASER 7, which includes a software subscription with Axon Evidence.
Net sales for the Software and Sensors segment increased $82.2 million, or 49.3%. Revenue from Axon Evidence and cloud services increased $40.0 million as we continued to add users and associated devices to our network during the year ended December 31, 2019. The increase in the aggregate number of users and devices also resulted in increased extended warranty revenues of $7.3 million. Revenue from Axon Body cameras increased $22.2 million and included $19.3 million in sales of Axon Body 3, which was introduced during the third quarter of 2019. Axon Dock revenue also increased $9.7 million with increased units largely driven by the introduction of Axon Body 3, as well as an increase in the average selling price.
For the past few years, we have considered bookings for our Software and Sensors segment as an early indicator of activity for Axon camera products and Axon Evidence services. We have shifted our focus to total company future contracted revenue, which we believe is a more relevant and comprehensive forward-looking performance indicator, as it encompasses all company contracts, including TASER. As of December 31, 2019, we had approximately $1.23 billion of total company future contracted revenue, which included both recognized contract liabilities as well as amounts that will be invoiced and recognized in future periods. We expect to recognize between 20% - 25% of this balance over the next twelve months, and 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.
Backlog - As of December 31, 2019 compared to December 31, 2018
Our backlog for products and services includes all orders that have been received and are believed to be firm.
In the TASER segment, we define backlog as equal to deferred revenue. Deferred revenue represents amounts invoiced to customers for goods and services to be delivered in subsequent periods. We process orders within the TASER segment quickly, and our best estimate of firm orders outstanding as of period end represents those that have been paid for but remain undelivered. The TASER segment backlog balance was $55.2 million as of December 31, 2019. We expect to realize $22.6 million of this deferred revenue balance as revenue during the next 12 months. This represents cash received and accounts receivable from customers on or prior to December 31, 2019 for products and services expected to be delivered in the next 12 months.
In the Software and Sensors segment, we define backlog as cumulative bookings, net of cancellations, less product and service revenue recognized to date. Bookings are generally realized as revenue over multiple years. The Software and Sensors backlog balance was $1.0 billion as of December 31, 2019. This backlog balance includes $150.6 million of deferred revenue, and $875.6 million that has been recorded as bookings but not yet invoiced, all as of December 31, 2019. We expect to realize approximately $270.0 million of the December 31, 2019 backlog balance as revenue during the next 12 months.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TASER
|
|
Software and Sensors
|
|
Total
|
|
(in thousands)
|
Balance, beginning of period
|
$
|
54,597
|
|
|
$
|
758,125
|
|
|
$
|
812,722
|
|
Add: additions to backlog, net of cancellations
|
282,253
|
|
|
517,266
|
|
|
799,519
|
|
Less: revenue recognized during period
|
(
|
281,661
|
)
|
|
(
|
249,199
|
)
|
|
(
|
530,860
|
)
|
Balance end of period
|
$
|
55,189
|
|
|
$
|
1,026,192
|
|
|
$
|
1,081,381
|
|
Our backlog of $1.1 billion as of December 31, 2019 has increased significantly from $812.7 million as of December 31, 2018. The increase in TASER segment backlog is not expected to have a material impact on revenue or operating margins. Our significant increase in backlog, primarily in the Software and Sensors segment is indicative of expected revenue growth in this segment. Revenue growth in the Software and Sensors segment is expected to result in improved operating margins over time as additional revenue will cover a larger portion of our selling, general and administrative expenses and research and development costs. We also anticipate gross margins to improve gradually in future years.
Cost of Product and Service Sales
Cost of Product and Service Sales (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Dollar
Change
|
|
Percent
Change
|
|
2019
|
|
2018
|
|
|
TASER segment:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
$
|
107,188
|
|
|
38.1
|
%
|
|
$
|
80,354
|
|
|
31.7
|
%
|
|
$
|
26,834
|
|
|
33.4
|
%
|
Software and Sensors segment:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
83,495
|
|
|
33.5
|
%
|
|
58,983
|
|
|
35.3
|
%
|
|
24,512
|
|
|
41.6
|
%
|
Cost of service sales
|
32,891
|
|
|
13.2
|
%
|
|
22,148
|
|
|
13.3
|
%
|
|
10,743
|
|
|
48.5
|
%
|
Total cost of sales
|
116,386
|
|
|
46.7
|
%
|
|
81,131
|
|
|
48.6
|
%
|
|
35,255
|
|
|
43.5
|
%
|
Total cost of product and service sales
|
$
|
223,574
|
|
|
42.1
|
%
|
|
$
|
161,485
|
|
|
38.4
|
%
|
|
$
|
62,089
|
|
|
38.4
|
%
|
Within the TASER segment, cost of product sales increased $26.8 million, or 33.4%, to $107.2 million in 2019, compared to $80.4 million in 2018. Cost as a percentage of sales increased to 38.1% from 31.7%. 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 $3.0 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 was $116.4 million, an increase of $35.3 million, or 43.5%, from 2018. As a percentage of net sales, cost of product and service sales decreased to 46.7% in 2019 from 48.6% in 2018. Cost of product sales increased $24.5 million primarily driven by the impact of increased units as well as increased freight and customs expenses, but decreased as a percentage of total segment net sales, reflecting non-recurrence of customer fulfillment costs associated with our acquisition of VIEVU in May 2018 and higher pricing on Axon Body 2 cameras and docks. Cost of service sales increased $10.7 million driven primarily by
a $5.0 million increase in third party cloud data storage and compute costs, and by a $3.9 million increase in professional services expense due to both significant Fleet installations during 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
Gross Margin (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
Dollar
Change
|
|
Percent
Change
|
|
2019
|
|
2018
|
|
|
TASER segment
|
$
|
174,473
|
|
|
$
|
172,761
|
|
|
$
|
1,712
|
|
|
1.0
|
%
|
Software and Sensors segment
|
132,813
|
|
|
85,822
|
|
|
46,991
|
|
|
54.8
|
%
|
Total gross margin
|
$
|
307,286
|
|
|
$
|
258,583
|
|
|
$
|
48,703
|
|
|
18.8
|
%
|
Gross margin as % of net sales
|
57.9
|
%
|
|
61.5
|
%
|
|
|
|
|
Gross margin increased $48.7 million to $307.3 million for the year ended December 31, 2019 compared to $258.6 million for 2018. As a percentage of net sales, gross margin decreased to 57.9% for 2019 from 61.5% for 2018.
As a percentage of net sales, gross margin for the TASER segment decreased to 61.9% for the year ended December 31, 2019 from 68.3% for the year ended December 31, 2018. 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.
Within the Software and Sensors segment, gross margin as a percentage of total segment net sales was 53.3% and 51.4% for the years ended 2019 and 2018, respectively. Within the Software and Sensors segment, product gross margin was 29.8% for the year ended December 31, 2019 and 20.8% for the same period in 2018, while the service margins were 74.8% and 76.0% during those same periods, respectively.
Sales, General and Administrative Expenses
Sales, General and Administrative ("SG&A") Expenses (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Dollar
Change
|
|
Percent
Change
|
|
2019
|
|
2018
|
|
|
Salaries, benefits and bonus
|
$
|
67,582
|
|
|
$
|
63,185
|
|
|
$
|
4,397
|
|
|
7.0
|
%
|
Stock-based compensation
|
59,341
|
|
|
12,710
|
|
|
46,631
|
|
|
366.9
|
%
|
Professional, consulting and lobbying
|
21,590
|
|
|
24,469
|
|
|
(2,879
|
)
|
|
(11.8
|
)%
|
Sales and marketing
|
28,961
|
|
|
19,427
|
|
|
9,534
|
|
|
49.1
|
%
|
Travel and meals
|
11,407
|
|
|
9,908
|
|
|
1,499
|
|
|
15.1
|
%
|
Depreciation and amortization
|
5,739
|
|
|
6,051
|
|
|
(312
|
)
|
|
(5.2
|
)%
|
Other
|
18,339
|
|
|
21,136
|
|
|
(2,797
|
)
|
|
(13.2
|
)%
|
Total sales, general and administrative expenses
|
$
|
212,959
|
|
|
$
|
156,886
|
|
|
$
|
56,073
|
|
|
35.7
|
%
|
SG&A expenses as a percentage of net sales
|
40.1
|
%
|
|
37.3
|
%
|
|
|
|
|
SG&A increased $56.1 million, or 35.7%. Stock-based compensation expense increased $46.6 million in comparison to the prior year comparable period, which was primarily attributable to an increase of $30.8 million in expense related to the CEO Performance Award and expense of $11.5 million related to our XSPP. During the year ended December 31, 2019, attainment of the third through ninth tranches of the CEO Performance Award and XSPP became probable. Accordingly, we recorded expense of $26.5 million for the CEO Performance Award and $7.3 million for the XSPP reflecting the cumulative expense for the third through ninth tranches from the grant dates through December 31, 2019. Refer to Note 12 of the notes to our consolidated financial statements within this Annual Report on Form 10-K for additional discussion of the CEO Performance Award and XSPP. Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount.
Salaries, benefits and bonus expense increased $4.4 million, primarily due to an increase in headcount. The increase was partially offset by a decline in expense for contract labor. Salaries, benefits and bonus expense decreased as a percentage of sales from 15.0% for 2018 to 12.7% for 2019.
Sales and marketing expenses increased $9.5 million, driven by a $8.7 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.
The increases were partially offset by a decrease of $2.9 million in professional, consulting and lobbying expenses. Legal expenses increased by approximately $1.0 million, offset by a $3.8 million decrease in professional fees, which were higher during 2018 related to our acquisition of Vievu, the adoption of Topic 606, and the implementation of the CEO Performance Award and XSPP.
During 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, and certain planning and site development activities related to our planned new headquarters, resulting in an impairment charge of $0.7 million. During 2018, we recorded an impairment charge of $2.0 million related to the abandonment of certain developed technology acquired in a business combination.
As discussed in Note 9 of the notes to our consolidated financial statements within this Annual Report on Form 10-K, on January 3, 2020, we sued the FTC in the District of Arizona, and the FTC filed an enforcement action regarding our May 2018 acquisition of Vievu LLC. This litigation is expected to result in an increase in legal expenses during the year ending December 31, 2020. While the amount and timing of such expenses is unknown and will vary depending on the progression of litigation, we currently anticipate expenses in the range of $10.0 million to $15.0 million for the year, with a higher proportion of the expense expected during the first half of 2020.
Research and Development Expenses
Research and Development ("R&D") Expenses (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Dollar
Change
|
|
Percent
Change
|
|
2019
|
|
2018
|
|
|
Salaries, benefits and bonus
|
$
|
63,763
|
|
|
$
|
49,792
|
|
|
$
|
13,971
|
|
|
28.1
|
%
|
Stock-based compensation
|
17,588
|
|
|
8,658
|
|
|
8,930
|
|
|
103.1
|
%
|
Professional and consulting
|
4,525
|
|
|
4,183
|
|
|
342
|
|
|
8.2
|
%
|
Travel and meals
|
2,247
|
|
|
2,192
|
|
|
55
|
|
|
2.5
|
%
|
Other
|
12,598
|
|
|
12,031
|
|
|
567
|
|
|
4.7
|
%
|
Total research and development expenses
|
$
|
100,721
|
|
|
$
|
76,856
|
|
|
$
|
23,865
|
|
|
31.1
|
%
|
R&D expenses as a percentage of net sales
|
19.0
|
%
|
|
18.3
|
%
|
|
|
|
|
The increase in R&D expense was fully attributable to our Software and Sensors segment. Within the TASER segment, R&D expenses decreased $2.5 million or 14.9% 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 $26.4 million or 44.1%, but decreased to 34.6% of sales as compared to 35.8% in the prior year. Of the increase, $16.1 million related to salaries, benefits, and bonus attributable to increased headcount.
Stock-based compensation expense increased $8.9 million. Contributing to the increase was expense of $5.2 million related to our XSPP. During 2019, attainment of the third through ninth tranches of the XSPP became probable. Accordingly, we recorded expense of $3.4 million for the XSPP reflecting the cumulative expense for the third through ninth tranches from the grant dates through December 31, 2019. Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount.
Hardware spending increased approximately $2.6 million leading up to the Axon Body 3 launch. This increase was largely offset by decreases in depreciation and other expenses.
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, Net
Interest and other income, net was $8.5 million and $3.3 million for the years ended December 31, 2019 and 2018, respectively.
For the year ended December 31, 2019, we earned interest income of $8.7 million and had losses from foreign currency transaction adjustments of $0.3 million, other income, net of $0.1 million, and interest expense of less than $0.1 million. For the year ended December 31, 2018, we earned interest income of $4.4 million and had losses from foreign currency transaction adjustments of $1.1 million, interest expense of $0.1 million, and other expense of $0.1 million.
Provision for Income Taxes
The provision for income taxes was $1.2 million for the year ended December 31, 2019. The effective income tax rate for 2019 was 57.4%. The benefits related to excess stock-based compensation of $5.0 million and research and development credits of $4.9 million were partially offset by the tax effects of permanently non-deductible expenses for executive compensation of $7.6 million, an increase in uncertain tax benefits of $1.2 million and other permanently non-deductible expenses of $1.1 million and state tax expense of $0.5 million. Additionally, we recorded a $0.4 million increase to our valuation allowance as of December 31, 2019 related to research and development tax credits that may not be utilized prior to expiration, partially offset by changes in certain foreign jurisdictions.
The income tax benefit was $1.1 million for the year ended December 31, 2018. The effective income tax rate for 2018 was (3.9%). The benefits related to excess stock-based compensation of $8.9 million and research and development credits of $6.9 million were partially offset by the tax effects of permanently non-deductible expenses for executive compensation of $1.2 million, an increase in uncertain tax benefits of $1.8 million and return to provision adjustments of $1.8 million. Additionally, we recorded a $2.0 million increase to our valuation allowance as of December 31, 2018 related to research and development tax credits that may not be utilized prior to expiration, partially offset by changes in certain foreign jurisdictions.
Net Income
Our net income decreased by $28.3 million to $0.9 million for the year ended December 31, 2019 compared to $29.2 million in 2018. Net income per basic and diluted share was $0.01 for 2019, compared to net income per basic and diluted share of $0.52 and $0.50, respectively, for 2018.
Three Months Ended December 31, 2019 Compared to September 30, 2019
Net sales by product line were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2019
|
|
Three Months Ended September 30, 2019
|
|
Dollar
Change
|
|
Percent
Change
|
TASER segment:
|
|
|
|
|
|
|
|
|
|
|
|
TASER 7
|
$
|
17,186
|
|
|
10.0
|
%
|
|
$
|
20,214
|
|
|
15.4
|
%
|
|
$
|
(3,028
|
)
|
|
(15.0
|
)%
|
TASER X26P
|
14,692
|
|
|
8.5
|
%
|
|
11,578
|
|
|
8.8
|
%
|
|
3,114
|
|
|
26.9
|
%
|
TASER X2
|
15,507
|
|
|
9.0
|
%
|
|
13,241
|
|
|
10.1
|
%
|
|
2,266
|
|
|
17.1
|
%
|
TASER Pulse and Bolt
|
1,169
|
|
|
0.7
|
%
|
|
1,132
|
|
|
0.9
|
%
|
|
37
|
|
|
3.3
|
%
|
Cartridges
|
28,633
|
|
|
16.7
|
%
|
|
18,901
|
|
|
14.4
|
%
|
|
9,732
|
|
|
51.5
|
%
|
Axon Evidence and cloud services
|
341
|
|
|
0.2
|
%
|
|
218
|
|
|
0.2
|
%
|
|
123
|
|
|
56.4
|
%
|
Extended warranties
|
4,733
|
|
|
2.8
|
%
|
|
4,543
|
|
|
3.5
|
%
|
|
190
|
|
|
4.2
|
%
|
Other
|
1,694
|
|
|
1.0
|
%
|
|
1,916
|
|
|
1.5
|
%
|
|
(222
|
)
|
|
(11.6
|
)%
|
TASER segment
|
83,955
|
|
|
48.9
|
%
|
|
71,743
|
|
|
54.8
|
%
|
|
12,212
|
|
|
17.0
|
%
|
Software and Sensors segment:
|
|
|
|
|
|
|
|
|
|
|
|
Axon Body
|
25,219
|
|
|
14.7
|
%
|
|
6,763
|
|
|
5.2
|
%
|
|
18,456
|
|
|
272.9
|
%
|
Axon Flex
|
1,411
|
|
|
0.8
|
%
|
|
1,670
|
|
|
1.3
|
%
|
|
(259
|
)
|
|
(15.5
|
)%
|
Axon Fleet
|
5,205
|
|
|
3.0
|
%
|
|
4,341
|
|
|
3.3
|
%
|
|
864
|
|
|
19.9
|
%
|
Axon Dock
|
11,048
|
|
|
6.4
|
%
|
|
3,358
|
|
|
2.6
|
%
|
|
7,690
|
|
|
229.0
|
%
|
Axon Evidence and cloud services
|
36,804
|
|
|
21.4
|
%
|
|
34,022
|
|
|
26.0
|
%
|
|
2,782
|
|
|
8.2
|
%
|
TASER Cam
|
623
|
|
|
0.4
|
%
|
|
534
|
|
|
0.4
|
%
|
|
89
|
|
|
16.7
|
%
|
Extended warranties
|
5,124
|
|
|
3.0
|
%
|
|
4,714
|
|
|
3.6
|
%
|
|
410
|
|
|
8.7
|
%
|
Other
|
2,462
|
|
|
1.4
|
%
|
|
3,692
|
|
|
2.8
|
%
|
|
(1,230
|
)
|
|
(33.3
|
)%
|
Software and Sensors segment
|
87,896
|
|
|
51.1
|
%
|
|
59,094
|
|
|
45.2
|
%
|
|
28,802
|
|
|
48.7
|
%
|
Total net sales
|
$
|
171,851
|
|
|
100.0
|
%
|
|
$
|
130,837
|
|
|
100.0
|
%
|
|
$
|
41,014
|
|
|
31.3
|
%
|
Net unit sales were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
December 31, 2019
|
|
September 30, 2019
|
|
Unit
Change
|
|
Percent
Change
|
TASER 7
|
14,577
|
|
|
17,674
|
|
|
(3,097
|
)
|
|
(17.5
|
)%
|
TASER X26P
|
13,554
|
|
|
10,766
|
|
|
2,788
|
|
|
25.9
|
%
|
TASER X2
|
11,534
|
|
|
9,819
|
|
|
1,715
|
|
|
17.5
|
%
|
TASER Pulse and Bolt
|
2,978
|
|
|
3,923
|
|
|
(945
|
)
|
|
(24.1
|
)%
|
Cartridges
|
962,519
|
|
|
566,347
|
|
|
396,172
|
|
|
70.0
|
%
|
Axon Body
|
83,268
|
|
|
22,037
|
|
|
61,231
|
|
|
277.9
|
%
|
Axon Flex
|
3,078
|
|
|
5,409
|
|
|
(2,331
|
)
|
|
(43.1
|
)%
|
Axon Fleet
|
3,324
|
|
|
2,967
|
|
|
357
|
|
|
12.0
|
%
|
Axon Dock
|
10,149
|
|
|
3,724
|
|
|
6,425
|
|
|
172.5
|
%
|
TASER Cam
|
1,177
|
|
|
899
|
|
|
278
|
|
|
30.9
|
%
|
Net sales for the TASER segment increased $12.2 million, or 17.0%, on a sequential basis primarily due to an overall increase in revenue from cartridges. An inventory shortfall earlier in the year resulted in a backlog primarily for TASER 7 and X2 cartridges; this backlog was cleared during the quarter ended December 31, 2019. The increase in cartridge units were partially offset by a decrease in the average selling price. Net sales also included a net increase of $2.4 million in TASER device sales. TASER 7 sales declined compared to the three months ending September 30, 2019; as a result of a battery component supplier not being able to timely fulfill our production needs, approximately $3 million of forecasted TASER 7 sales shifted from the three months ended June 30, 2019 to the three months ending September 30, 2019. Units of our legacy TASER devices increased, while the average selling prices remained consistent with the prior quarter.
Net sales for the Software and Sensors segment increased $28.8 million, or 48.7%, on a sequential basis. Revenue from Axon Body cameras increased $18.5 million and included $18.7 million in sales of Axon Body 3, which was introduced during the third quarter of 2019. Partially offsetting this increase was a decrease in units and average selling price of Axon Body 2 units. Axon Dock revenue also increased $7.7 million with increased units largely driven by the introduction of Axon Body 3, as well as an increase in the average selling price. The increase in the aggregate number of users on our network, including on-premise users in secondary international markets, resulted in increased Axon Evidence and cloud services revenues of $2.8 million.
International sales were $24.5 million in for the three months ended December 31, 2019 as compared to $20.0 million for the three months ended September 30, 2019, an increase of $4.5 million, driven by increased sales in the Asia Pacific region which were partially offset by lower sales in Africa.
Non-GAAP Financial Measures
To supplement our financial results presented in accordance with accounting principles generally accepted in the U.S. ("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 Annual Report on Form 10-K were prepared under a comprehensive set of rules or principles.
|
EBITDA and Adjusted EBITDA (CEO Performance Award) reconcile to net income as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2019
|
|
2018
|
Net income
|
|
$
|
882
|
|
|
$
|
29,205
|
|
Depreciation and amortization
|
|
11,361
|
|
|
10,615
|
|
Interest expense
|
|
46
|
|
|
86
|
|
Investment interest income
|
|
(7,040
|
)
|
|
(3,002
|
)
|
Provision for (benefit from) income taxes
|
|
1,188
|
|
|
(1,101
|
)
|
EBITDA
|
|
$
|
6,437
|
|
|
$
|
35,803
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
Stock-based compensation expense
|
|
78,495
|
|
|
21,879
|
|
Adjusted EBITDA (CEO Performance Award)
|
|
$
|
84,932
|
|
|
$
|
57,682
|
|
Liquidity and Capital Resources
Summary
As of December 31, 2019, we had $172.3 million of cash and cash equivalents, a decrease of $177.2 million from December 31, 2018. Cash and cash equivalents and investments totaled $396.3 million, an increase of $46.8 million from December 31, 2018.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Operating activities
|
$
|
65,673
|
|
|
$
|
63,875
|
|
Investing activities
|
(240,737
|
)
|
|
(9,860
|
)
|
Financing activities
|
(3,937
|
)
|
|
219,348
|
|
Effect of exchange rate changes on cash and cash equivalents
|
329
|
|
|
(774
|
)
|
Net increase (decrease) in cash and cash equivalents and restricted cash
|
$
|
(178,672
|
)
|
|
$
|
272,589
|
|
Operating activities
Net cash provided by operating activities in 2019 of $65.7 million consisted of $0.9 million in net income, the net add-back of non-cash income statement items totaling $89.4 million and a $24.6 million net change in operating assets and liabilities. Included in the non-cash items were $11.4 million in depreciation and amortization expense, $2.5 million related to the impairment of certain property and equipment, $78.5 million in stock-based compensation expense, and a $8.0 million increase in deferred income tax assets. The most significant increase to the portion of cash provided by operating activities related to the changes in operating assets and liabilities was a $24.0 million increase in deferred revenue. Of the deferred revenue increase, $10.5 million resulted from increased hardware deferred revenue from TASER subscription sales, and $13.1 million related to prepayments for Software and Sensors services. Additionally, operating cash flows were positively impacted by an increase of $5.0 million in accounts payable and accrued liabilities,
which was primarily a result of the timing of invoice payments. Operating cash flows were negatively impacted by increased inventory of $4.9 million, increased accounts and notes receivable and contract assets of $38.8 million and increased prepaid expenses and other assets of $9.8 million. The increase in accounts and notes receivable and contract assets was attributable to increased sales in 2019, primarily sales made under subscription plans. The increase in prepaid expenses and other assets of $9.8 million during 2019 was primarily attributable to a $15.0 million prepayment related to a purchase agreement for cloud data storage that commenced in July 2019, net of usage of $7.0 million, and a smaller increase in deferred commissions.
Investing activities
We used $240.7 million for investing activities in 2019. Purchases of investments, net of calls and maturities, were $224.4 million. We also invested $16.3 million in the purchase of property and equipment and intangibles.
Financing activities
Net cash used in financing activities was $3.9 million for the year ended December 31, 2019. During 2019, we paid income and payroll taxes of approximately $4.1 million on behalf of employees who net-settled stock awards during the period. These cash outflows were partially offset by $0.1 million of proceeds from the exercise of stock options.
Liquidity and Capital Resources
Our most significant source of liquidity continues to be funds generated by operating activities and available cash and cash equivalents. 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 December 31, 2019, we had letters of credit outstanding of $2.7 million, leaving the net amount available for borrowing of $47.3 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 December 31, 2019 and 2018, there were no borrowings under the line.
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 December 31, 2019, the Company’s funded debt to EBITDA ratio was 0.0004 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 CED 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, this strategic shift continues to accelerate.
Based on our strong balance sheet and the fact that we had less than $0.1 million in total long-term debt and financing lease obligations at December 31, 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. Further repurchases of our common stock would take place on the open market, would be financed with available cash and are subject to authorization as well as market and business conditions.
Contractual Obligations
The following table outlines our future contractual financial obligations by period in which payment is expected, as of December 31, 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less than
1 Year
|
|
1 - 3 Years
|
|
3 - 5 Years
|
|
More than
5 Years
|
Operating lease obligations
|
|
$
|
12,042
|
|
|
$
|
4,539
|
|
|
$
|
6,330
|
|
|
$
|
1,173
|
|
|
$
|
—
|
|
Financing leases including interest
|
|
36
|
|
|
36
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Purchase obligations
|
|
193,322
|
|
|
154,845
|
|
|
24,118
|
|
|
4,413
|
|
|
9,946
|
|
Total contractual obligations
|
|
$
|
205,400
|
|
|
$
|
159,420
|
|
|
$
|
30,448
|
|
|
$
|
5,586
|
|
|
$
|
9,946
|
|
Purchase obligations in the table above represent $137.9 million of open purchase orders and $55.4 million of other purchase obligations. The open purchase orders represent both cancelable and non-cancelable purchase orders with key vendors, which are included in this table due to our strategic relationships with these vendors.
We are subject to U.S. federal income tax as well as income taxes imposed by state and foreign jurisdictions. As of December 31, 2019, we had $6.9 million of gross unrecognized tax benefits related to uncertain tax positions. The settlement period for our long-term income tax liabilities cannot be determined; however, the liabilities are expected to increase by approximately $1.2 million within the next 12 months.
Off-Balance Sheet Arrangements
The discussion of off-balance sheet arrangements in Note 9 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K 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 this Annual Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our 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 business operations is discussed below.
Product Warranties
We warranty our CEDs, Axon cameras and certain related accessories from manufacturing defects on a limited basis for a period of one year after purchase and, thereafter, will replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold when revenue is recorded for the related product. Future warranty costs are estimated 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. As of December 31, 2019 and 2018, our warranty reserve was approximately $1.5 million and $0.9 million, respectively. Warranty expense for the years ended December 31, 2019, 2018 and 2017 was $1.6 million, $0.7 million and $0.1 million, respectively. The increase in warranty expense for the year ended December 31, 2019 was primarily driven by the initial reserves on the new product launch of our Axon Body 3 camera as well as our continued support of TASER 7. As of December 31, 2019, our reserve included initial reserves related to Axon Body 3 cameras and docks. Warranty expense for the year ended December 31, 2018 was impacted by higher than initially expected warranty claims for the Axon Flex 2 on-officer body camera. Warranty expense for the year ended December 31, 2017, was impacted by lower than expected warranty claims for the Axon Body 2 on-officer body camera.
Revenue related to separately-priced extended warranties is initially recorded as deferred revenue at its allocated amount and subsequently recognized as net sales on a straight-line basis over the warranty service period. Costs related to extended warranties are charged to cost of product and service sales when incurred.
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. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories, as well as trial and evaluation inventories to their net realizable value. These provisions are based on management’s best estimate after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions among other factors. We evaluate inventory costs for abnormal costs due to excess production capacity and treats such costs as period costs.
During the year ended December 31, 2019, we recorded provisions to reduce inventories to their lower of cost and net realizable value of approximately $1.3 million compared to $3.8 million during the year ended December 31, 2018. The provision in 2019 was driven by analyses of projected sales data for existing products resulting in adjustments to state inventories at their lower of cost and net realizable value. The provision for 2018 was primarily attributable to the impact of phasing out previous generations of VIEVU cameras in an effort to convert existing customers to Axon body camera deployments.
Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable
We derive revenue from two primary sources: (1) the sale of physical products, including CEDs, Axon cameras, Axon Signal enabled devices, corresponding hardware extended warranties, and related accessories such as Axon docks, cartridges and batteries, among others, and (2) subscriptions to our Axon Evidence digital evidence management SaaS (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, we also recognize training, professional services and revenue related to other software and SaaS services. We apply the five-step model outlined in Topic 606.
Many of our products and services are sold on a standalone basis. We also bundle our hardware products and services together and sell them to our customers in single transactions, where the customer can make payments over a multi-year period. For the years ended December 31, 2019, 2018 and 2017, the composition of revenue recognized from contracts containing multiple performance obligations and those not containing multiple performance obligations was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
TASER
|
|
Software and Sensors
|
|
Total
|
Contracts with Multiple Performance Obligations
|
$
|
130,761
|
|
|
46.4
|
%
|
|
$
|
245,416
|
|
|
98.5
|
%
|
|
$
|
376,177
|
|
|
70.9
|
%
|
Contracts without Multiple Performance Obligations
|
150,900
|
|
|
53.6
|
|
|
3,783
|
|
|
1.5
|
|
|
154,683
|
|
|
29.1
|
|
Total
|
$
|
281,661
|
|
|
100.0
|
%
|
|
$
|
249,199
|
|
|
100.0
|
%
|
|
$
|
530,860
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
TASER
|
|
Software and Sensors
|
|
Total
|
Contracts with Multiple Performance Obligations
|
$
|
72,355
|
|
|
28.6
|
%
|
|
$
|
159,318
|
|
|
95.4
|
%
|
|
$
|
231,673
|
|
|
55.2
|
%
|
Contracts without Multiple Performance Obligations
|
180,760
|
|
|
71.4
|
|
|
7,635
|
|
|
4.6
|
|
|
188,395
|
|
|
44.8
|
|
Total
|
$
|
253,115
|
|
|
100.0
|
%
|
|
$
|
166,953
|
|
|
100.0
|
%
|
|
$
|
420,068
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2017 (1)
|
|
TASER
|
|
Software and Sensors
|
|
Total
|
Contracts with Multiple Performance Obligations
|
$
|
53,865
|
|
|
23.0
|
%
|
|
$
|
102,529
|
|
|
93.8
|
%
|
|
$
|
156,394
|
|
|
45.5
|
%
|
Contracts without Multiple Performance Obligations
|
180,647
|
|
|
77.0
|
|
|
6,757
|
|
|
6.2
|
|
|
187,404
|
|
|
54.5
|
|
Total
|
$
|
234,512
|
|
|
100.0
|
%
|
|
$
|
109,286
|
|
|
100.0
|
%
|
|
$
|
343,798
|
|
|
100.0
|
%
|
(1) Amounts for the years ended December 31, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.
Additionally, we offer customers the ability to purchase CED cartridges and certain services on an unlimited basis over the contractual term. Due to the unlimited nature of these arrangements whereby we are obligated to deliver unlimited products at the customer’s request, we account for these arrangements as stand-ready obligations, and recognize revenue ratably over the contract period. Cost of product sales is recognized as the products are shipped to the customer.
Revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, each of which is generally distinct and accounted for as a separate performance obligation. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental taxing authorities.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Topic 606. For contracts with multiple performance obligations, we allocate the contract transaction price to each performance obligation using our estimate of the standalone selling price ("SSP") of each distinct good or service in the contract.
Performance obligations to deliver products, including CEDs, cameras and related accessories such as cartridges, batteries and docks, are generally satisfied at the point in time we ship the product, as this is when the customer obtains control of the asset under our standard terms and conditions. In certain contracts with non-standard terms and conditions, these performance obligations may not be satisfied until formal customer acceptance occurs. Performance obligations to fulfill service-type extended warranties and provide our SaaS offerings, including Axon Evidence and other cloud services, are generally satisfied over time as the customer receives and consumes the benefits of these services over the stated service period.
We have elected to recognize shipping costs as an expense in cost of product sales when the control of hardware products or accessories have transferred to the customer.
Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis.
Deferred revenue consists of payments received in advance related to products and services for which the criteria for revenue recognition have not yet been met. Deferred revenue that will be recognized during the subsequent twelve month period from the balance sheet date is recorded as current deferred revenue and the remaining portion is recorded as long-term. Generally, customers are billed in annual installments.
Sales are typically made on credit, and we generally do not require collateral. Management performs ongoing credit evaluations of its customers’ financial condition, and maintains an allowance for doubtful accounts. Uncollectible accounts are charged to expense when deemed uncollectible, and accounts and notes receivable are presented net of an allowance for doubtful accounts. This allowance represents management’s best estimate and application of judgment considering a number of factors, including third-party credit reports, actual payment history, cash discounts, customer-specific financial information and broader market and economic trends and conditions.
Valuation of Goodwill, Intangibles and Long-lived Assets
We do not amortize goodwill and intangible assets with indefinite useful lives. 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 impairment assessment in the fourth quarter of each year. Finite-lived intangible assets and other long-lived assets are amortized over their estimated useful lives. Management evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and intangible assets may warrant revision or that the remaining balance of these assets, including intangible assets with indefinite lives, may not be recoverable.
Circumstances that might indicate long-lived assets might not be recoverable could include, but are not limited to, a change in the product mix, a change in the way products and services are created, produced or delivered, or a significant change in the way our products are branded and marketed. When performing a review for recoverability, management estimates 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 year ended December 31, 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, and certain planning and site development activities related to our planned new headquarters, resulting in an impairment charge of $0.7 million, both of which were included in sales, general and administrative expense in the accompanying consolidated statements of operations. During the year ended December 31, 2018, we abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $2.0 million. During the year ended December 31, 2017, we abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $1.0 million.
Income Taxes
We recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carry forwards.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. We must also assess whether uncertain tax positions as filed could result in the recognition of a liability for possible interest and penalties if any. We have completed research and development tax credit studies for each year a tax credit was claimed for federal, Arizona, and California income tax purposes. We determined that it was more likely than not that the full benefit of the research and development tax credit would not be sustained on examination and accordingly, have established a liability for unrecognized tax benefits of $6.1 million as of December 31, 2019. In addition, we established a $0.1 million liability related to uncertain tax positions for certain federal income tax liabilities, for a total unrecognized tax benefit of $6.2 million. We expect the amount of the unrecognized tax benefit to increase by approximately $1.2 million within the next 12 months. Should the unrecognized tax benefit of $6.2 million be recognized, our effective tax rate would be favorably impacted. Our estimates are based on information available to us at the time we prepare the income tax provision. Our income tax returns are subject to audit by federal, state, and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws. Our U.S. federal income tax return for fiscal year 2016 is currently under audit by the IRS.
Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting or tax laws in the U.S. and internationally, or changes in other facts or circumstances. In addition, we recognize liabilities for potential tax contingencies based on our estimate of whether, and the extent to which, additional taxes may be due. If we determine that payment of these amounts is unnecessary, or if the recorded tax liability is greater than our current assessment, we may be required to recognize an income tax benefit, or additional income tax expense, respectively, in our consolidated financial statements.
In preparing our consolidated financial statements, we assess the likelihood that our deferred tax assets will be realized from future taxable income. In evaluating our ability to recover our deferred income tax assets, we consider all available positive and negative evidence, including operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if we determine that it is more likely than not that some portion or all of the net deferred tax assets will not be realized.
Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of December 31, 2019, we would need to generate approximately $88.5 million of pre-tax income in the U.S. in order to realize the net deferred tax assets for which a benefit has been recorded. This estimate considers the reversal of approximately $25.3 million in gross deferred tax liabilities, $6.2 million tax-effected. We have state net operating losses ("NOLs") of $1.2 million, which produce deferred tax assets of $0.1 million, which expire at various dates between 2029 and 2036. We anticipate sufficient future pre-tax book income to realize a large portion of our deferred tax assets. However, based on expected income for years in which Arizona R&D tax credits are set to expire, and cumulative losses in certain foreign jurisdictions, a reserve of $7.2 million has been recorded as a valuation allowance against deferred tax assets as of December 31, 2019.
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 stock options. Our stock-based compensation awards are classified as equity and measured at the fair market value of the underlying stock at the grant date. For service-based awards, we recognize RSU expense using the straight-line attribution method over the requisite service period. Vesting of performance-based RSUs and options 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, where 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 and timing 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, 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 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 12 of the notes to our consolidated financial statements within this Annual Report on Form 10-K.
We have granted a total of approximately 14.5 million performance-based awards (options and restricted stock units) of which approximately 12.4 million are outstanding as of December 31, 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 as well as our future sales targets and operating performance and market capitalization. Compensation expense for performance awards 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 estimates of the fair value of the awards and timing of recognition of stock-based compensation and consequently, the related amount recognized in our statements of operations and comprehensive income.
Contingencies and Accrued Litigation Expense
We are subject to the possibility of various loss contingencies arising in the ordinary course of business, including product-related and other litigation. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. Refer to Note 9 of our consolidated financial statements within this Annual Report on Form 10-K.
Item 7A. 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, 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 December 31, 2019, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $0.8 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
$2.7 million at December 31, 2019. At December 31, 2019, there was no amount outstanding under the line of credit, and the available borrowing under the line of credit was $47.3 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 8. Financial Statements and Supplementary Data
|
|
|
|
Index to Consolidated Financial Statements
|
|
Page
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AXON ENTERPRISE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
172,250
|
|
|
$
|
349,462
|
|
Short-term investments
|
178,534
|
|
|
—
|
|
Accounts and notes receivable, net of allowance of $1,567 and $1,882 as of December 31, 2019 and 2018, respectively
|
146,878
|
|
|
130,579
|
|
Contract assets, net
|
47,718
|
|
|
13,960
|
|
Inventory
|
38,845
|
|
|
33,763
|
|
Prepaid expenses and other current assets
|
34,866
|
|
|
30,391
|
|
Total current assets
|
619,091
|
|
|
558,155
|
|
Property and equipment, net
|
43,770
|
|
|
37,893
|
|
Deferred tax assets, net
|
27,688
|
|
|
19,347
|
|
Intangible assets, net
|
12,771
|
|
|
15,935
|
|
Goodwill
|
25,013
|
|
|
24,981
|
|
Long-term investments
|
45,499
|
|
|
—
|
|
Long-term notes receivable, net of current portion
|
31,598
|
|
|
40,230
|
|
Other assets
|
40,209
|
|
|
22,999
|
|
Total assets
|
$
|
845,639
|
|
|
$
|
719,540
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
25,874
|
|
|
$
|
15,164
|
|
Accrued liabilities
|
45,001
|
|
|
41,092
|
|
Current portion of deferred revenue
|
117,864
|
|
|
107,016
|
|
Customer deposits
|
2,974
|
|
|
2,702
|
|
Other current liabilities
|
3,853
|
|
|
37
|
|
Total current liabilities
|
195,566
|
|
|
166,011
|
|
Deferred revenue, net of current portion
|
87,936
|
|
|
74,417
|
|
Liability for unrecognized tax benefits
|
3,832
|
|
|
2,849
|
|
Long-term deferred compensation
|
3,936
|
|
|
3,235
|
|
Deferred tax liability, net
|
354
|
|
|
—
|
|
Other long-term liabilities
|
10,520
|
|
|
5,704
|
|
Total liabilities
|
302,144
|
|
|
252,216
|
|
Commitments and contingencies (Note 9)
|
|
|
|
Stockholders’ equity:
|
|
|
|
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of December 31, 2019 and 2018
|
—
|
|
|
—
|
|
Common stock, $0.00001 par value; 200,000,000 shares authorized; 59,497,759 and 58,810,637 shares issued and outstanding as of December 31, 2019 and 2018, respectively
|
1
|
|
|
1
|
|
Additional paid-in capital
|
528,272
|
|
|
453,400
|
|
Treasury stock at cost, 20,220,227 shares as of December 31, 2019 and 2018
|
(155,947
|
)
|
|
(155,947
|
)
|
Retained earnings
|
172,265
|
|
|
171,383
|
|
Accumulated other comprehensive loss
|
(1,096
|
)
|
|
(1,513
|
)
|
Total stockholders’ equity
|
543,495
|
|
|
467,324
|
|
Total liabilities and stockholders’ equity
|
$
|
845,639
|
|
|
$
|
719,540
|
|
The accompanying notes are an integral part of these consolidated financial statements.
AXON ENTERPRISE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net sales from products
|
$
|
399,474
|
|
|
$
|
327,635
|
|
|
$
|
285,859
|
|
Net sales from services
|
131,386
|
|
|
92,433
|
|
|
57,939
|
|
Net sales
|
530,860
|
|
|
420,068
|
|
|
343,798
|
|
Cost of product sales
|
190,683
|
|
|
139,337
|
|
|
117,997
|
|
Cost of service sales
|
32,891
|
|
|
22,148
|
|
|
18,713
|
|
Cost of sales
|
223,574
|
|
|
161,485
|
|
|
136,710
|
|
Gross margin
|
307,286
|
|
|
258,583
|
|
|
207,088
|
|
Sales, general and administrative
|
212,959
|
|
|
156,886
|
|
|
138,692
|
|
Research and development
|
100,721
|
|
|
76,856
|
|
|
55,373
|
|
Total operating expenses
|
313,680
|
|
|
233,742
|
|
|
194,065
|
|
Income (loss) from operations
|
(6,394
|
)
|
|
24,841
|
|
|
13,023
|
|
Interest and other income, net
|
8,464
|
|
|
3,263
|
|
|
2,738
|
|
Income before provision for income taxes
|
2,070
|
|
|
28,104
|
|
|
15,761
|
|
Provision (benefit) for income taxes
|
1,188
|
|
|
(1,101
|
)
|
|
10,554
|
|
Net income
|
$
|
882
|
|
|
$
|
29,205
|
|
|
$
|
5,207
|
|
Net income per share:
|
|
|
|
|
|
Basic
|
$
|
0.01
|
|
|
$
|
0.52
|
|
|
$
|
0.10
|
|
Diluted
|
$
|
0.01
|
|
|
$
|
0.50
|
|
|
$
|
0.10
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
Basic
|
59,190
|
|
|
56,392
|
|
|
52,726
|
|
Diluted
|
60,018
|
|
|
57,922
|
|
|
53,898
|
|
|
|
|
|
|
|
Net income
|
$
|
882
|
|
|
$
|
29,205
|
|
|
$
|
5,207
|
|
Foreign currency translation adjustments
|
417
|
|
|
(46
|
)
|
|
(2,370
|
)
|
Comprehensive income
|
$
|
1,299
|
|
|
$
|
29,159
|
|
|
$
|
2,837
|
|
The accompanying notes are an integral part of these consolidated financial statements.
AXON ENTERPRISE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Treasury Stock
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
Stockholders’
Equity
|
|
Shares
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
|
|
Balance, December 31, 2016
|
52,325,251
|
|
|
$
|
1
|
|
|
$
|
187,656
|
|
|
20,220,227
|
|
|
$
|
(155,947
|
)
|
|
$
|
118,275
|
|
|
$
|
903
|
|
|
$
|
150,888
|
|
Cumulative effect of applying a change in accounting principle
|
—
|
|
|
—
|
|
|
475
|
|
|
—
|
|
|
—
|
|
|
(297
|
)
|
|
—
|
|
|
178
|
|
Issuance of common stock under employee plans, net
|
644,618
|
|
|
—
|
|
|
(2,069
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,069
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
15,610
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,610
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,207
|
|
|
—
|
|
|
5,207
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,370
|
)
|
|
(2,370
|
)
|
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
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18,993
|
|
|
—
|
|
|
18,993
|
|
Issuance of common stock
|
4,645,000
|
|
|
—
|
|
|
233,993
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
233,993
|
|
Issuance of common stock business combination
|
58,843
|
|
|
—
|
|
|
8,226
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,226
|
|
Issuance of common stock under employee plans, net
|
1,136,925
|
|
|
—
|
|
|
(12,370
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,370
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
21,879
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21,879
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29,205
|
|
|
—
|
|
|
29,205
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(46
|
)
|
|
(46
|
)
|
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
|
616,509
|
|
|
—
|
|
|
(3,937
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,937
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
78,809
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
78,809
|
|
Issuance of common stock for business combination contingent consideration
|
70,613
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
882
|
|
|
—
|
|
|
882
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
417
|
|
|
417
|
|
Balance, December 31, 2019
|
59,497,759
|
|
|
$
|
1
|
|
|
$
|
528,272
|
|
|
20,220,227
|
|
|
$
|
(155,947
|
)
|
|
$
|
172,265
|
|
|
$
|
(1,096
|
)
|
|
$
|
543,495
|
|
The accompanying notes are an integral part of these consolidated financial statements.
AXON ENTERPRISE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
882
|
|
|
$
|
29,205
|
|
|
$
|
5,207
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
Depreciation and amortization
|
11,361
|
|
|
10,615
|
|
|
8,041
|
|
Loss on disposal and abandonment of intangible assets
|
67
|
|
|
2,117
|
|
|
1,146
|
|
Purchase accounting adjustments to goodwill
|
—
|
|
|
—
|
|
|
(23
|
)
|
Loss (gain) on disposal and impairment of property and equipment, net
|
2,542
|
|
|
303
|
|
|
(28
|
)
|
Stock-based compensation
|
78,495
|
|
|
21,879
|
|
|
15,610
|
|
Deferred income taxes
|
(7,987
|
)
|
|
(3,592
|
)
|
|
2,830
|
|
Unrecognized tax benefits
|
983
|
|
|
1,144
|
|
|
(191
|
)
|
Other noncash, net
|
3,928
|
|
|
34
|
|
|
657
|
|
Change in assets and liabilities:
|
|
|
|
|
|
Accounts and notes receivable and contract assets
|
(38,830
|
)
|
|
(67,643
|
)
|
|
(35,305
|
)
|
Inventory
|
(4,903
|
)
|
|
14,804
|
|
|
(11,746
|
)
|
Prepaid expenses and other assets
|
(9,845
|
)
|
|
(12,739
|
)
|
|
(8,992
|
)
|
Accounts payable, accrued and other liabilities
|
4,967
|
|
|
13,506
|
|
|
1,530
|
|
Deferred revenue
|
24,013
|
|
|
54,242
|
|
|
39,735
|
|
Net cash provided by operating activities
|
65,673
|
|
|
63,875
|
|
|
18,471
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchases of investments
|
(354,477
|
)
|
|
(4,331
|
)
|
|
(19,950
|
)
|
Proceeds from call / maturity of investments
|
130,083
|
|
|
11,158
|
|
|
61,080
|
|
Purchases of property and equipment
|
(15,939
|
)
|
|
(11,139
|
)
|
|
(10,419
|
)
|
Proceeds from disposal of property and equipment
|
—
|
|
|
—
|
|
|
24
|
|
Purchases of intangible assets
|
(404
|
)
|
|
(558
|
)
|
|
(1,024
|
)
|
Business acquisitions, net of cash acquired
|
—
|
|
|
(4,990
|
)
|
|
(10,629
|
)
|
Net cash provided by (used in) investing activities
|
(240,737
|
)
|
|
(9,860
|
)
|
|
19,082
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Net proceeds from equity offering
|
—
|
|
|
233,993
|
|
|
—
|
|
Proceeds from options exercised
|
114
|
|
|
1,757
|
|
|
1,383
|
|
Income and payroll tax payments for net-settled stock awards
|
(4,051
|
)
|
|
(14,127
|
)
|
|
(3,453
|
)
|
Payment of contingent consideration for business acquisitions
|
—
|
|
|
(2,275
|
)
|
|
(1,750
|
)
|
Net cash provided by (used in) financing activities
|
(3,937
|
)
|
|
219,348
|
|
|
(3,820
|
)
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
329
|
|
|
(774
|
)
|
|
737
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
(178,672
|
)
|
|
272,589
|
|
|
34,470
|
|
Cash and cash equivalents and restricted cash, beginning of year
|
351,027
|
|
|
78,438
|
|
|
43,968
|
|
Cash and cash equivalents and restricted cash, end of year
|
$
|
172,355
|
|
|
$
|
351,027
|
|
|
$
|
78,438
|
|
The accompanying notes are an integral part of these consolidated financial statements.
AXON ENTERPRISE, INC.
NOTES TO 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.
The accompanying 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
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions in these 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 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.
Cash, Cash Equivalents and Investments
Cash, cash equivalents and investments include cash, money market funds, certificates of deposit, state and municipal obligations and corporate bonds. We place our cash and cash equivalents with high quality financial institutions. Although we deposit our cash with multiple financial institutions, our deposits regularly exceed federally insured limits.
Cash and cash equivalents include funds on hand and highly liquid investments purchased with initial maturity of three months or less. Short-term investments include securities with an expected maturity date within one year of the balance sheet date that do not meet the definition of a cash equivalent, and long-term investments are securities with an expected maturity date greater than one year. Based on management’s intent and ability, our investments are classified as held to maturity investments and are recorded at amortized cost. Held-to-maturity investments are reviewed quarterly for impairment to determine if other-than-temporary declines in the fair value have occurred for any individual investment that may affect our intent and ability to hold the investment until recovery. Other-than-temporary declines in the value of held-to-maturity investments are recorded as expense in the period the determination is made.
Restricted Cash
Restricted cash balance of $0.1 million as of December 31, 2019 primarily relates to funds held in an international bank account for a country in which we are required to maintain a minimum balance to operate. Approximately half of the balance was included in prepaid expenses and other current assets on our consolidated balance sheets, with the remainder included in other assets. Restricted cash balances as of 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 consolidated balance sheets. The proceeds were held in escrow until certain billing milestones were
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
achieved, and then specified amounts were transferred to our operating accounts. Restricted cash balances as of 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 consolidated balance sheets.
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. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories, as well as trial and evaluation inventories to their net realizable value. These provisions are based on management’s best estimate after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions among other factors. We evaluate inventory costs for abnormal costs due to excess production capacity and treat such costs as period costs.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Additions and improvements are capitalized, while ordinary maintenance and repair expenditures are charged to expense as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets.
Software Development Costs
We expense software development costs, including costs to develop software products or the software component of products and services to be marketed to external users, before technological feasibility of such products is reached. We have determined that technological feasibility is reached shortly before the release of those products and as a result, the development costs incurred after the establishment of technological feasibility and before the release of those products are not material.
Software development costs also include costs to develop software programs to be used solely to meet our internal needs and applications. We capitalize development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the intended function. Additionally, we capitalize qualifying costs incurred for upgrades and enhancements to existing software that result in additional functionality. Costs related to preliminary project planning activities, post-implementation activities, maintenance and minor modifications are expensed as incurred. Internal-use software is amortized on a straight line basis over its estimated useful life.
We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Valuation of Goodwill, Intangible and Long-lived Assets
Finite-lived intangible assets and other long-lived assets are amortized over their estimated useful lives. 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 impairment assessment in the fourth quarter of each year. Management evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and intangible assets may warrant revision or that the remaining balance of these assets, including intangible assets with indefinite lives, may not be recoverable.
Circumstances that might indicate long-lived assets might not be recoverable could include, but are not limited to, a change in the product mix, a change in the way products and services are created, produced or delivered, or a significant change in the way our products are branded and marketed. When performing a review for recoverability, management estimates 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
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
amounts of the assets over their estimated fair value computed using discounted cash flows. During the year ended December 31, 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, and certain planning and site development activities related to our planned new headquarters, resulting in an impairment charge of $0.7 million, both of which were included in sales, general and administrative expense in the accompanying consolidated statements of operations and comprehensive income. During the year ended December 31, 2018, we abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $2.0 million which was included in sales, general and administrative expense in the accompanying consolidated statements of operations and comprehensive income. During the year ended December 31, 2017, we abandoned certain developed technology acquired in a business combination resulting in an impairment charge of $1.0 million which was included in research and development expense in the accompanying consolidated statements of operations and comprehensive income, and recorded within the Software and Sensors Segment.
Customer Deposits
We require deposits in advance of shipment for certain customer sales orders. Additionally, customers may elect to make deposits with us related to contracts for our products and services that were not executed as of the end of a reporting period. Customer deposits are recorded as a current liability in the accompanying consolidated balance sheets.
Revenue Recognition, Deferred Revenue and Accounts and Notes Receivable
We derive revenue from two primary sources: (1) the sale of physical products, including conducted energy devices ("CEDs"), Axon cameras, Axon Signal enabled devices, corresponding hardware extended warranties, and related accessories such as Axon docks, cartridges and batteries, among others, and (2) subscriptions to our Axon Evidence digital evidence management software-as-a-service ("SaaS") (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, we also recognize training, professional services and revenue related to other software and SaaS services. We apply the five-step model outlined in Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts from Customers ("Topic 606"). For additional discussion of the adoption of Topic 606, see Note 2.
Many of our products and services are sold on a standalone basis. We also bundle our hardware products and services together and sell them to our customers in single transactions, where the customer can make payments over a multi-year period. These sales may include payments for upfront hardware and services, as well as payments for hardware and services to be provided by us at a future date. Additionally, we offer customers the ability to purchase CED cartridges and certain services on an unlimited basis over the contractual term. Due to the unlimited nature of these arrangements whereby we are obligated to deliver unlimited products at the customer’s request, we account for these arrangements as stand-ready obligations, and recognize revenue ratably over the contract period. Cost of product sales is recognized when control of hardware products or accessories have transferred to the customer.
Revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, each of which is generally distinct and accounted for as a separate performance obligation. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental taxing authorities.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Topic 606. For contracts with multiple performance obligations, we allocate the contract transaction price to each performance obligation using our estimate of the standalone selling price ("SSP") of each distinct good or service in the contract.
Performance obligations to deliver products, including CEDs, cameras and related accessories such as cartridges, batteries and docks, are generally satisfied at the point in time we ship the product, as this is when the customer obtains control of the asset under our standard terms and conditions. In certain contracts with non-standard terms and conditions,
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
these performance obligations may not be satisfied until formal customer acceptance occurs. Performance obligations to fulfill service-type extended warranties and provide our SaaS offerings, including Axon Evidence and other cloud services, are generally satisfied over time as the customer receives and consumes the benefits of these services over the stated service period.
We have elected to recognize shipping costs as an expense in cost of product sales when the control of hardware products or accessories have transferred to the customer.
Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis.
The timing of revenue recognition may differ from the timing of invoicing to customers. We generally have an unconditional right to consideration when we invoice our customers and record a receivable. We record a contract asset when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing. Deferred revenue that will be recognized during the subsequent twelve month period from the balance sheet date is recorded as current deferred revenue and the remaining portion is recorded as long-term deferred revenue. Contract asset amounts that will be invoiced during the subsequent twelve month period from the balance sheet date are classified as current assets and the remaining portion is recorded within other assets on our consolidated balance sheets. Generally, customers are billed in annual installments. See Note 2 for further disclosures about our contract assets.
Sales are typically made on credit, and we generally do not require collateral. Management performs ongoing credit evaluations of its customers’ financial condition, and maintains an allowance for doubtful accounts. Uncollectible accounts are charged to expense when deemed uncollectible, and accounts and notes receivable are presented net of an allowance for doubtful accounts, which totaled $1.6 million and $1.9 million as of December 31, 2019 and 2018, respectively. This allowance represents management’s best estimate and application of judgment considering a number of factors, including third-party credit reports, actual payment history, cash discounts, customer-specific financial information and broader market and economic trends and conditions. In the event that actual uncollectible amounts differ from our estimates, additional expense could be necessary.
Cost of Product and Service Sales
Cost of product sales represents manufacturing costs, consisting of materials, labor and overhead related to finished goods and components. Shipping costs incurred related to product delivery are also included in cost of products sold. Cost of service sales includes third-party cloud services, and software maintenance and support costs, including personnel costs, associated with supporting Evidence.com and other software related services.
Advertising Costs
We expense advertising costs in the period in which they are incurred. We incurred advertising costs of $0.9 million, $1.1 million and $0.5 million in the years ended December 31, 2019, 2018 and 2017, respectively. Advertising costs are included in sales, general and administrative expenses in the accompanying statements of operations.
Standard Warranties
We warranty our CEDs, Axon cameras and certain related accessories from manufacturing defects on a limited basis for a period of one year after purchase and, thereafter, will replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold when revenue is recorded for the related product. Future warranty costs are estimated on a quarterly basis based on historical data related to warranty claims and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure or other issue that could result in larger than anticipated warranty claims from customers. The warranty reserve is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. The warranty reserve is included in accrued liabilities on the accompanying consolidated balance sheets.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Changes in our estimated warranty reserve were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Balance, January 1
|
$
|
898
|
|
|
$
|
644
|
|
|
$
|
780
|
|
Utilization of reserve
|
(973
|
)
|
|
(458
|
)
|
|
(245
|
)
|
Warranty expense
|
1,551
|
|
|
712
|
|
|
109
|
|
Balance, December 31
|
$
|
1,476
|
|
|
$
|
898
|
|
|
$
|
644
|
|
Research and Development Expenses
We expense as incurred research and development costs that do not meet the qualifications to be capitalized. We incurred research and development expense of $100.7 million, $76.9 million and $55.4 million in 2019, 2018 and 2017, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in future years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced through the establishment of a valuation allowance if, based upon available evidence, it is determined that it is more likely than not that the deferred tax assets will not be realized.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. We also assess whether uncertain tax positions, as filed, could result in the recognition of a liability for possible interest and penalties. Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. Refer to Note 10 for additional information regarding the change in unrecognized tax benefits.
Concentration of Credit Risk and Major Customers / Suppliers
Financial instruments that potentially subject us to concentrations of credit risk consist of accounts and notes receivable, contract assets, and cash. Historically, we have experienced an immaterial level of write-offs related to uncollectible accounts.
We maintain the majority of our cash at four depository institutions. As of December 31, 2019, the aggregate balances in such accounts were $161.8 million. Our balances with these institutions regularly exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits for domestic deposits and various deposit insurance programs covering our deposits in Australia, Canada, Finland, Germany, Hong Kong, India, Italy, the Netherlands, the United Kingdom, and Vietnam. To manage the related credit exposure, management continually monitors the creditworthiness of the financial institutions where we have deposits.
We sell some of our products through a network of unaffiliated distributors. We also sell directly to customers. No customer represented more than 10% of total net sales for the years ended December 31, 2019, 2018 or 2017. At December 31, 2019, and 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
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
Fair Value of Financial Instruments
We use the fair value framework that prioritizes the inputs to valuation techniques for measuring financial assets and liabilities measured on a recurring basis and for non-financial assets and liabilities when these items are re-measured. Fair value is considered to be the exchange price in an orderly transaction between market participants, to sell an asset or transfer a liability at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
|
|
•
|
Level 1 – Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.
|
|
|
•
|
Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.
|
|
|
•
|
Level 3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect our own assumptions about inputs that market participants would use in pricing an asset or liability.
|
We have cash equivalents and investments, which at December 31, 2019 and 2018, were comprised of money market funds, and at December 31, 2019, also included agency bonds, certificates of deposit, commercial paper, corporate bonds, municipal bonds, and U.S. Treasury repurchase agreements, and U.S. Treasury inflation-protected securities. 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 December 31, 2019 and 2018 was $4.2 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 our 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, accounts payable and accrued liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the balance sheet.
Segment and Geographic Information
Our operations are comprised of two reportable segments: the manufacture and sale of CEDs, batteries, accessories, extended warranties and other products and services (the “TASER” segment); and the development, manufacture and sale of software and sensors, which includes the sale of devices, wearables, applications, cloud and mobile products, and services (collectively, the "Software and Sensors" segment). Reportable segments are determined based on discrete financial information reviewed by our Chief Executive Officer who is our chief operating decision maker ("CODM"). We organize and review operations based on products and services, and currently there are no operating segments that are aggregated. We perform an analysis of our reportable segments at least annually. Additional information related to our business segments is summarized in Note 17.
For a summary of net sales by geographic area, see Note 2. Sales to customers outside of the U.S. are typically denominated in U.S. dollars and are attributed to each country based on the shipping address of the distributor or customer. For the years ended December 31, 2019, 2018 and 2017, no individual country outside the U.S. represented more than 10% of net sales. Substantially all of our assets are located in the U.S.
Stock-Based Compensation
We recognize expense related to stock-based compensation transactions in which we receive services in exchange for equity instruments of the Company. Stock-based compensation expense for restricted stock units ("RSUs") is measured based on the closing fair market value of our common stock on the date of grant. We recognize stock-based compensation expense over the award’s requisite service period on a straight-line basis for time-based RSUs. For performance-based RSUs, 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 performance-based options with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized 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. For both time-based and performance-based RSUs, we recognize forfeitures as they occur as a reduction to stock-based compensation expense and to additional paid-in-capital.
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. 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. A total of approximately 5.9 million XSUs were granted in the year ended December 31, 2019.
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.
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 8.3 and 9.0 years, expected volatility of between 44.12% and 45.47%, and dividend yield of 0.00%.
Stock Options
Historically, we have calculated the fair value of stock options using the Black-Scholes-Merton option pricing valuation model, which incorporates various assumptions including expected volatility, expected life, expected dividends and risk-free interest rates. On May 24, 2018 (the “ CEO 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. Stock-based compensation expense associated with the CEO Performance Award is recognized over the requisite service period, which is defined as 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.
Given the complexity of the award, we utilized Monte Carlo simulations to simulate a range of possible future market capitalizations for the Company over the term of the options. 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 9.2% to the valuation because the award specifies a post-exercise holding period of 2.5 years. This discount was estimated using the Finnerty model and reduced by the impact of expected payroll and income taxes due upon exercise of the options, as the related proportion of shares are expected to be sold to satisfy such obligations. Additional assumptions used for the CEO Performance Award and the resulting estimates of weighted-average fair value per share of options granted are as follows:
|
|
|
|
Volatility
|
|
47.71%
|
Risk-free interest rate
|
|
2.98%
|
Dividend rate
|
|
—
|
Expected life of options
|
|
9.76 years
|
Weighted average grant date fair value of options granted
|
|
$38.64
|
The expected life of the options represents the estimated period of time from grant date until exercise; in this case, exercise is assumed to occur at the full contractual term of ten years from grant and is based on input from the CEO and his historical behavior of not exercising vested options until the end of their terms. Expected stock price volatility is based on the average of the 9.76-year historical volatility and the implied volatility on 1,080-day call option for the Company. The risk-free interest rate is based on the implied yield available on United States Treasury bill zero-coupon issuances with an equivalent remaining term to the term of the options. We have not paid dividends in the past and do not plan to pay any dividends in the near future.
No options were awarded during the year ended December 31, 2019. Other than the CEO Performance Award, no options were awarded during the year ended December 31, 2018. No options were awarded during the year ended December 31, 2017.
Income per Common Share
Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. Diluted income per share reflects the potential dilution from outstanding stock options and unvested restricted stock units. The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
Net income
|
$
|
882
|
|
|
$
|
29,205
|
|
|
$
|
5,207
|
|
Denominator:
|
|
|
|
|
|
Weighted average shares outstanding—basic
|
59,190
|
|
|
56,392
|
|
|
52,726
|
|
Dilutive effect of stock-based awards
|
828
|
|
|
1,530
|
|
|
1,172
|
|
Diluted weighted average shares outstanding
|
60,018
|
|
|
57,922
|
|
|
53,898
|
|
Anti-dilutive stock-based awards excluded
|
12,627
|
|
|
6,757
|
|
|
386
|
|
Net income per common share:
|
|
|
|
|
|
Basic
|
$
|
0.01
|
|
|
$
|
0.52
|
|
|
$
|
0.10
|
|
Diluted
|
$
|
0.01
|
|
|
$
|
0.50
|
|
|
$
|
0.10
|
|
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.
The adoption had a material impact to our 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):
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December 31, 2018
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Impact of Adoption of Topic 842 on Opening Balance Sheet
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January 1, 2019
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(As reported)
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(As adjusted)
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Consolidated Balance Sheet Data:
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|
|
|
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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 13 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 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. The FASB also issued various updates to ASU 2016-13 to provide additional guidance and clarification. 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 will adopt this guidance on January 1, 2020. We are nearing completion of the opening balance sheet adjustment related to ASU 2016-13 and expect to record an opening balance sheet adjustment of less than $1.0 million reflecting an overall increase to the allowance for expected credit losses.
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.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The amendments in the ASU are effective for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. 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 table presents our revenues by primary product and service offering (in thousands):
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Year Ended December 31, 2019
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Year Ended December 31, 2018
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TASER
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Software and Sensors
|
|
Total
|
|
TASER
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|
Software and Sensors
|
|
Total
|
TASER 7
|
$
|
56,652
|
|
|
$
|
—
|
|
|
$
|
56,652
|
|
|
$
|
7,358
|
|
|
$
|
—
|
|
|
$
|
7,358
|
|
TASER X26P
|
52,524
|
|
|
—
|
|
|
52,524
|
|
|
70,638
|
|
|
—
|
|
|
70,638
|
|
TASER X2
|
55,920
|
|
|
—
|
|
|
55,920
|
|
|
78,837
|
|
|
—
|
|
|
78,837
|
|
TASER Pulse and Bolt
|
4,089
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|
|
—
|
|
|
4,089
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|
|
5,182
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|
|
—
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|
|
5,182
|
|
Cartridges
|
85,987
|
|
|
—
|
|
|
85,987
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|
|
68,258
|
|
|
—
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|
|
68,258
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|
Axon Body
|
—
|
|
|
44,039
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|
|
44,039
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|
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—
|
|
|
21,883
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|
|
21,883
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|
Axon Flex
|
—
|
|
|
5,928
|
|
|
5,928
|
|
|
—
|
|
|
6,509
|
|
|
6,509
|
|
Axon Fleet
|
—
|
|
|
16,182
|
|
|
16,182
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|
|
—
|
|
|
12,527
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|
|
12,527
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|
Axon Dock
|
—
|
|
|
20,449
|
|
|
20,449
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|
|
—
|
|
|
10,706
|
|
|
10,706
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|
Axon Evidence and cloud services
|
704
|
|
|
130,265
|
|
|
130,969
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|
|
—
|
|
|
90,291
|
|
|
90,291
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|
TASER Cam
|
—
|
|
|
3,104
|
|
|
3,104
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|
|
—
|
|
|
3,871
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|
|
3,871
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|
Extended warranties
|
18,074
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|
|
19,188
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|
|
37,262
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|
|
15,753
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|
|
11,860
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|
|
27,613
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Other
|
7,711
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|
|
10,044
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|
|
17,755
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|
|
7,089
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|
|
9,306
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|
|
16,395
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|
Total
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$
|
281,661
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|
|
$
|
249,199
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|
|
$
|
530,860
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|
|
$
|
253,115
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|
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$
|
166,953
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|
|
$
|
420,068
|
|
The following table presents our revenues disaggregated by geography (in thousands):
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Year Ended December 31,
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2019
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|
2018
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|
2017 (1)
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United States
|
$
|
446,100
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|
|
84.0
|
%
|
|
$
|
335,310
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|
|
79.8
|
%
|
|
$
|
282,810
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|
|
82.3
|
%
|
Other Countries
|
84,760
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|
|
16.0
|
|
|
84,758
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|
|
20.2
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|
|
60,988
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|
|
17.7
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|
Total
|
$
|
530,860
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|
|
100.0
|
%
|
|
$
|
420,068
|
|
|
100.0
|
%
|
|
$
|
343,798
|
|
|
100.0
|
%
|
(1) Amounts for the year ended December 31, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Contract Balances
The timing of revenue recognition may differ from the timing of invoicing to customers. We generally have an unconditional right to consideration when we invoice our customers and record a receivable. We record a contract asset when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing.
Contract assets generally result from our subscription programs where we satisfy a hardware performance obligation upon shipment to the customer, and the right to the portion of the transaction price allocated to that hardware performance obligation is conditional on our future performance of a SaaS service obligation under the contract. We recognize a portion of the amount allocated to hardware products shipped to the customer as accounts receivable when invoiced to the customer, and record the remaining allocated value as a contract asset as we have generally fulfilled our hardware performance obligation upon shipment. Unbilled accounts receivable expected to be invoiced and collected within twelve months was $19.7 million as of December 31, 2019, and was included in accounts and notes receivable, net on our consolidated balance sheet.
Contract liabilities generally consist of deferred revenue on our subscription programs where we generally invoice customers at the beginning of each annual period and record a receivable at the time of invoicing when there is an unconditional right to consideration.
Deferred revenue is comprised mainly of unearned revenue related to our Axon Evidence SaaS platform, secure cloud-based storage, service-type extended warranties, stand-ready obligations in our cartridge programs, and rights to future CED, camera and related accessories hardware in our subscription programs. Revenue for Axon Evidence and cloud-based storage, our service-type extended warranties and stand-ready cartridge programs is generally recognized on a straight-line basis over the subscription term. Revenue for the rights to future hardware is generally recognized at the point in time the hardware products are shipped to the customer.
Payment terms and conditions vary by contract type and geography, but our standard terms are that payments are due within 30 days from the date of invoice.
The following table presents our contract assets, contract liabilities and certain information related to these balances as of and for the year ended December 31, 2019 (in thousands):
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|
December 31, 2019
|
Contract assets, net
|
$
|
47,746
|
|
Contract liabilities (deferred revenue)
|
205,800
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|
Revenue recognized in the period from:
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|
Amounts included in contract liabilities at the beginning of the period
|
101,768
|
|
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Contract liabilities (deferred revenue) consisted of the following (in thousands):
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|
|
December 31, 2019
|
|
December 31, 2018
|
|
Current
|
|
Long-Term
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|
Total
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Current
|
|
Long-Term
|
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Total
|
Warranty:
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|
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|
|
|
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|
|
TASER
|
$
|
12,716
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|
|
$
|
16,378
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|
|
$
|
29,094
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|
|
$
|
12,797
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|
|
$
|
16,847
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|
|
$
|
29,644
|
|
Software and Sensors
|
9,852
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|
|
5,156
|
|
|
15,008
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|
|
8,273
|
|
|
6,516
|
|
|
14,789
|
|
|
22,568
|
|
|
21,534
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|
|
44,102
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|
|
21,070
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|
|
23,363
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|
|
44,433
|
|
Hardware:
|
|
|
|
|
|
|
|
|
|
|
|
TASER
|
9,569
|
|
|
15,468
|
|
|
25,037
|
|
|
9,355
|
|
|
15,598
|
|
|
24,953
|
|
Software and Sensors
|
22,235
|
|
|
33,759
|
|
|
55,994
|
|
|
20,878
|
|
|
24,685
|
|
|
45,563
|
|
|
31,804
|
|
|
49,227
|
|
|
81,031
|
|
|
30,233
|
|
|
40,283
|
|
|
70,516
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
TASER
|
293
|
|
|
765
|
|
|
1,058
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Software and Sensors
|
63,199
|
|
|
16,410
|
|
|
79,609
|
|
|
55,713
|
|
|
10,771
|
|
|
66,484
|
|
|
$
|
63,492
|
|
|
$
|
17,175
|
|
|
$
|
80,667
|
|
|
$
|
55,713
|
|
|
$
|
10,771
|
|
|
$
|
66,484
|
|
Total
|
$
|
117,864
|
|
|
$
|
87,936
|
|
|
$
|
205,800
|
|
|
$
|
107,016
|
|
|
$
|
74,417
|
|
|
$
|
181,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Current
|
|
Long-Term
|
|
Total
|
|
Current
|
|
Long-Term
|
|
Total
|
TASER
|
$
|
22,578
|
|
|
$
|
32,611
|
|
|
$
|
55,189
|
|
|
$
|
22,152
|
|
|
$
|
32,445
|
|
|
$
|
54,597
|
|
Software and Sensors
|
95,286
|
|
|
55,325
|
|
|
150,611
|
|
|
84,864
|
|
|
41,972
|
|
|
126,836
|
|
Total
|
$
|
117,864
|
|
|
$
|
87,936
|
|
|
$
|
205,800
|
|
|
$
|
107,016
|
|
|
$
|
74,417
|
|
|
$
|
181,433
|
|
Remaining Performance Obligations
As of December 31, 2019, we had approximately $1.23 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 December 31, 2019. We expect to recognize between 20% - 25% of this balance over the next twelve months, and 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.
Costs to Obtain a Contract
We recognize an asset for the incremental costs of obtaining a contract with a customer, which consist primarily of sales commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contract and amortized consistent with the recognition timing of the revenue for the underlying performance obligations.
For contract costs related to performance obligations with an amortization period of one year or less, we apply the practical expedient to expense these sales commissions when incurred. These costs are recognized as incurred within sales, general and administrative expenses on the accompanying consolidated statements of operations and comprehensive income.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2019, our assets for costs to obtain contracts were as follows (in thousands):
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|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Current deferred commissions (1)
|
$
|
9,623
|
|
|
$
|
7,062
|
|
Deferred commissions, net of current portion (2)
|
22,068
|
|
|
15,530
|
|
|
$
|
31,691
|
|
|
$
|
22,592
|
|
(1) Current deferred commissions are included within prepaid expenses and other current assets on the accompanying consolidated balance sheet.
(2) Deferred commissions, net of current portion, are included in other assets on the accompanying consolidated balance sheet.
During the years ended December 31, 2019 and 2018, we recognized $8.2 million and $5.3 million, respectively, of amortization related to deferred commissions. These costs are recorded within sales, general and administrative expenses on the accompanying consolidated statements of operations and comprehensive income.
Significant Judgments
Our contracts with certain municipal government customers may be subject to budget appropriation, other contract cancellation clauses or future periods which are optional. In contracts where the customer’s performance is subject to budget appropriation clauses, we generally consider the likelihood of non-appropriation to be remote when determining the contract term and transaction price. Contracts with other cancellation provisions or optional periods may require judgment in determining the contract term, including the existence of material rights, transaction price and identifying the performance obligations.
At times, customers may request changes that either amend, replace or cancel existing contracts. Judgment is required to determine whether the specific facts and circumstances within the contracts require the changes to be accounted for as a separate contract or as a modification. Generally, contract modifications containing additional goods and services that are determined to be distinct and sold at their SSP are accounted for as a separate contract. For contract modifications where both criteria are not met, the original contract is updated and the required adjustments to revenue and contract assets, liabilities, and other accounts will be made accordingly.
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately rather than together may require significant judgment. We consider CED devices and related accessories, as well as cameras and related accessories, to be separately identifiable from each other as well as from extended warranties on these products and the SaaS subscriptions to Axon Evidence and other cloud services.
In contracts where there are timing differences between when we transfer a promised good or service to the customer and when the customer pays for that good or service, we have determined that, with the exception of our TASER 60 installment purchase arrangements, our contracts generally do not include a significant financing component. For the year ended December 31, 2019, we recorded revenue of $39.3 million, including $1.6 million of interest income, under our TASER 60 plan. For the year ended December 31, 2018, we recorded revenue of $48.2 million including $1.3 million of interest income under our TASER 60 plan. For the year ended December 31, 2017, we recorded revenue of $40.7 million including $0.7 million of interest income under our TASER 60 plan. Amounts for the year ended December 31, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606.
Judgment is required to determine the SSP for each distinct performance obligation.We analyze separate sales of our products and services as a basis for estimating the SSP of our products and services and then use that SSP as the basis for allocating the transaction price when our products and services are sold together in a contract with multiple performance obligations. In instances where the SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions, time value of money and other observable inputs. We typically have more than one SSP for individual products and services due to the
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
stratification of those products and services by customers and circumstances. In these instances, we may use information such as geographic region and distribution channel in determining the SSP.
3. Cash, Cash Equivalents and Investments
The following tables summarize the Company's cash, cash equivalents, and held-to-maturity investments at December 31, 2019 and December 31, 2018 (in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Cash and Cash Equivalents
|
|
Short-Term Investments
|
|
Long-Term Investments
|
Cash
|
$
|
103,319
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
103,319
|
|
|
$
|
103,319
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
8,845
|
|
|
—
|
|
|
—
|
|
|
8,845
|
|
|
8,845
|
|
|
—
|
|
|
—
|
|
Agency bonds
|
32,869
|
|
|
14
|
|
|
(4
|
)
|
|
32,879
|
|
|
—
|
|
|
15,131
|
|
|
17,738
|
|
Subtotal
|
41,714
|
|
|
14
|
|
|
(4
|
)
|
|
41,724
|
|
|
8,845
|
|
|
15,131
|
|
|
17,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal obligations
|
25,038
|
|
|
8
|
|
|
—
|
|
|
25,046
|
|
|
|
|
|
21,560
|
|
|
3,478
|
|
Certificates of deposit
|
1,400
|
|
|
—
|
|
|
—
|
|
|
1,400
|
|
|
—
|
|
|
1,400
|
|
|
—
|
|
Corporate bonds
|
135,175
|
|
|
71
|
|
|
(30
|
)
|
|
135,216
|
|
|
886
|
|
|
113,241
|
|
|
21,048
|
|
U.S. Treasury repurchase agreements
|
57,200
|
|
|
—
|
|
|
—
|
|
|
57,200
|
|
|
57,200
|
|
|
—
|
|
|
—
|
|
Treasury inflation-protected securities
|
3,235
|
|
|
14
|
|
|
—
|
|
|
3,249
|
|
|
—
|
|
|
—
|
|
|
3,235
|
|
Commercial paper
|
29,202
|
|
|
—
|
|
|
—
|
|
|
29,202
|
|
|
2,000
|
|
|
27,202
|
|
|
—
|
|
Subtotal
|
251,250
|
|
|
93
|
|
|
(30
|
)
|
|
251,313
|
|
|
60,086
|
|
|
163,403
|
|
|
27,761
|
|
Total
|
$
|
396,283
|
|
|
$
|
107
|
|
|
$
|
(34
|
)
|
|
$
|
396,356
|
|
|
$
|
172,250
|
|
|
$
|
178,534
|
|
|
$
|
45,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
—
|
|
|
$
|
—
|
|
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 FIFO method and includes allocations of manufacturing labor and overhead. Included in finished goods at December 31, 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. Inventories consisted of the following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Raw materials
|
$
|
20,789
|
|
|
$
|
19,670
|
|
Finished goods
|
18,056
|
|
|
14,093
|
|
Total inventory
|
$
|
38,845
|
|
|
$
|
33,763
|
|
5. Property and Equipment
Property and equipment consisted of the following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
|
|
2019
|
|
2018
|
Land
|
N/A
|
|
$
|
2,900
|
|
|
$
|
2,900
|
|
Building and leasehold improvements
|
3-39 years
|
|
20,089
|
|
|
19,578
|
|
Production equipment
|
3-7 years
|
|
29,961
|
|
|
19,817
|
|
Computers, equipment and software
|
3-5 years
|
|
8,126
|
|
|
8,392
|
|
Furniture and office equipment
|
5-7 years
|
|
6,514
|
|
|
6,529
|
|
Vehicles
|
5 years
|
|
1,753
|
|
|
1,385
|
|
Website development costs
|
3 years
|
|
204
|
|
|
687
|
|
Capitalized internal-use software development costs
|
3 years
|
|
3,670
|
|
|
3,670
|
|
Construction-in-process
|
N/A
|
|
12,385
|
|
|
14,820
|
|
Total cost
|
|
|
85,602
|
|
|
77,778
|
|
Less: Accumulated depreciation
|
|
|
(41,832
|
)
|
|
(39,885
|
)
|
Property and equipment, net
|
|
|
$
|
43,770
|
|
|
$
|
37,893
|
|
Depreciation and amortization expense related to property and equipment was $7.9 million, $4.9 million and $3.4 million for the years ended December 31, 2019, 2018 and 2017, respectively, of which $3.5 million, $1.4 million and $1.1 million was included in cost of sales for the respective years.
6. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the year ended December 31, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TASER
|
|
Software and
Sensors
|
|
Total
|
Balance, December 31, 2018
|
$
|
1,338
|
|
|
$
|
23,643
|
|
|
$
|
24,981
|
|
Foreign currency translation adjustments
|
16
|
|
|
16
|
|
|
32
|
|
Balance, December 31, 2019
|
$
|
1,354
|
|
|
$
|
23,659
|
|
|
$
|
25,013
|
|
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Intangible assets (other than goodwill) consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
|
|
$
|
(1,035
|
)
|
|
$
|
2,126
|
|
|
$
|
3,161
|
|
|
$
|
(732
|
)
|
|
$
|
2,429
|
|
Issued patents
|
5-25 years
|
|
3,271
|
|
|
(1,339
|
)
|
|
1,932
|
|
|
2,940
|
|
|
(1,106
|
)
|
|
1,834
|
|
Issued trademarks
|
3-15 years
|
|
1,166
|
|
|
(678
|
)
|
|
488
|
|
|
1,053
|
|
|
(599
|
)
|
|
454
|
|
Customer relationships
|
4-8 years
|
|
3,721
|
|
|
(1,416
|
)
|
|
2,305
|
|
|
3,701
|
|
|
(880
|
)
|
|
2,821
|
|
Non-compete agreements
|
3-4 years
|
|
450
|
|
|
(404
|
)
|
|
46
|
|
|
540
|
|
|
(439
|
)
|
|
101
|
|
Developed technology
|
3-5 years
|
|
10,660
|
|
|
(6,528
|
)
|
|
4,132
|
|
|
13,404
|
|
|
(7,081
|
)
|
|
6,323
|
|
Re-acquired distribution rights
|
2 years
|
|
2,009
|
|
|
(2,009
|
)
|
|
—
|
|
|
1,928
|
|
|
(1,813
|
)
|
|
115
|
|
Total amortizable
|
|
|
24,438
|
|
|
(13,409
|
)
|
|
11,029
|
|
|
26,727
|
|
|
(12,650
|
)
|
|
14,077
|
|
Non-amortizable (indefinite-lived) intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TASER trademark
|
|
|
900
|
|
|
|
|
900
|
|
|
900
|
|
|
|
|
900
|
|
Patents and trademarks pending
|
|
|
842
|
|
|
|
|
842
|
|
|
958
|
|
|
|
|
958
|
|
Total non-amortizable
|
|
|
1,742
|
|
|
|
|
1,742
|
|
|
1,858
|
|
|
|
|
1,858
|
|
Total intangible assets
|
|
|
$
|
26,180
|
|
|
$
|
(13,409
|
)
|
|
$
|
12,771
|
|
|
$
|
28,585
|
|
|
$
|
(12,650
|
)
|
|
$
|
15,935
|
|
Amortization expense of intangible assets was $3.5 million, $5.7 million and $4.7 million for the years ended December 31, 2019, 2018 and 2017, respectively. Estimated amortization for intangible assets with definitive lives for the next five years ended December 31, and thereafter, is as follows (in thousands):
|
|
|
|
|
2020
|
$
|
3,316
|
|
2021
|
2,868
|
|
2022
|
1,266
|
|
2023
|
971
|
|
2024
|
887
|
|
Thereafter
|
1,721
|
|
Total
|
$
|
11,029
|
|
7. Other Long-Term Assets
Other long-term assets consisted of the following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Cash surrender value of corporate-owned life insurance policies
|
$
|
4,214
|
|
|
$
|
3,596
|
|
Deferred commissions
|
22,068
|
|
|
15,530
|
|
Restricted cash
|
56
|
|
|
661
|
|
Operating lease assets
|
9,653
|
|
|
—
|
|
Prepaid expenses, deposits and other
|
4,218
|
|
|
3,212
|
|
Total other long-term assets
|
$
|
40,209
|
|
|
$
|
22,999
|
|
8. Accrued Liabilities
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Accrued liabilities consisted of the following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Accrued salaries, benefits and bonus
|
$
|
24,737
|
|
|
$
|
19,063
|
|
Accrued professional, consulting and lobbying fees
|
3,235
|
|
|
4,894
|
|
Accrued warranty expense
|
1,476
|
|
|
898
|
|
Accrued income and other taxes
|
3,362
|
|
|
4,167
|
|
Other accrued expenses
|
12,191
|
|
|
12,070
|
|
Accrued liabilities
|
$
|
45,001
|
|
|
$
|
41,092
|
|
9. Commitments and Contingencies
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 consolidated balance sheet. Storage fees under this agreement were $7.0 million for the year ended December 31, 2019, and were recorded in cost of service sales. The remaining purchase commitment at December 31, 2019 was $43.0 million.
Purchase commitments
We routinely enter into cancelable and non-cancelable purchase orders with many of our key vendors. Based on the strategic relationships with many of these vendors, our ability to cancel these purchase orders and maintain a favorable relationship would be limited. As of December 31, 2019, we had approximately $137.9 million of open purchase orders.
Litigation
Product Litigation
As a manufacturer of weapons and other law enforcement tools used in high-risk field environments, we are often the subject of products liability litigation concerning the use of our products. 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 CED was used by law enforcement officers in connection with arrests or training. 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.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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's appeal is scheduled for oral argument on April 6, 2020.
We are also a defendant in a consumer class action lawsuit filed in the District of Nevada on April 9, 2019 by Douglas Richey (“Richey”). The case alleges the TASER Pulse, X2 and X26P CEDs 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.
The litigation information in this note is current through the date of these financial statements.
U.S. Federal Trade Commission Enforcement Action
The U.S. Federal Trade Commission (“FTC”) filed an enforcement action on January 3, 2020 regarding Axon’s May 2018 acquisition of Vievu LLC from Safariland LLC. The FTC alleges the merger was anticompetitive and adversely affected the body worn camera ("BWC") and digital evidence management systems ("DEMS") market for “large metropolitan police departments.” The administrative hearing is set for May 19, 2020. If successful, the FTC may require us to divest Vievu and other assets, which could be material to Axon. We are vigorously defending the matter. At this time, we cannot predict the eventual scope, duration, or outcome of this request and accordingly we have not recorded any liability in the accompanying financial statements.
Also on January 3, 2020, we sued the FTC in the District of Arizona for declaratory and injunctive relief alleging the FTC’s structure and administrative processes violate Article II of the U.S. Constitution and our Fifth Amendment rights to due process and equal protection. We further seek a declaration on the merits of the Vievu acquisition’s lawfulness. Motions for a preliminary injunction and a stay of the FTC administrative proceedings remain pending.
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 December 31, 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.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 our Axon cameras and related technologies. Certain of our letters of credit contracts and surety bonds have stated expiration dates, with others being released as the contractual performance terms are completed. We expect to fulfill all contractual performance obligations related to outstanding guarantees. At December 31, 2019, we had outstanding letters of credit of approximately $2.7 million, which are expected to expire in May 2020 and September 2021. Additionally, we had approximately $24.0 million of outstanding surety bonds at December 31, 2019, with $0.5 million expiring in 2020, $2.3 million expiring in 2021, $2.3 million expiring in 2022, $7.5 million expiring in 2023 and the remaining $10.5 million expiring in 2024.
10. Income Taxes
Income (loss) before income taxes included the following components for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
(1,449
|
)
|
|
$
|
25,751
|
|
|
$
|
14,978
|
|
Foreign
|
3,519
|
|
|
2,353
|
|
|
783
|
|
Total
|
$
|
2,070
|
|
|
$
|
28,104
|
|
|
$
|
15,761
|
|
Significant components of the provision for income taxes are as follows for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
Federal
|
$
|
4,247
|
|
|
$
|
4,900
|
|
|
$
|
6,039
|
|
State
|
2,414
|
|
|
1,377
|
|
|
1,263
|
|
Foreign
|
1,533
|
|
|
228
|
|
|
656
|
|
Total current
|
8,194
|
|
|
6,505
|
|
|
7,958
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(6,060
|
)
|
|
(8,382
|
)
|
|
4,539
|
|
State
|
(1,665
|
)
|
|
(364
|
)
|
|
(1,631
|
)
|
Foreign
|
(264
|
)
|
|
(3
|
)
|
|
(78
|
)
|
Total deferred
|
(7,989
|
)
|
|
(8,749
|
)
|
|
2,830
|
|
Tax impact of unrecorded tax benefits liability
|
983
|
|
|
1,143
|
|
|
(234
|
)
|
Provision for income taxes (Income tax benefit)
|
$
|
1,188
|
|
|
$
|
(1,101
|
)
|
|
$
|
10,554
|
|
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A reconciliation of our effective income tax rate to the federal statutory rate follows for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Federal income tax at the statutory rate
|
$
|
435
|
|
|
$
|
5,902
|
|
|
$
|
5,518
|
|
State income taxes, net of federal benefit
|
526
|
|
|
(215
|
)
|
|
339
|
|
Difference between statutory and foreign tax rates
|
43
|
|
|
7
|
|
|
(560
|
)
|
Permanent differences (1)
|
1,139
|
|
|
725
|
|
|
300
|
|
Executive compensation limitation
|
7,596
|
|
|
1,167
|
|
|
—
|
|
Research and development
|
(4,911
|
)
|
|
(6,908
|
)
|
|
(2,380
|
)
|
Return to provision adjustment
|
(9
|
)
|
|
1,780
|
|
|
23
|
|
Change in liability for unrecognized tax benefits
|
1,191
|
|
|
1,768
|
|
|
7
|
|
Excess stock-based compensation benefit
|
(4,999
|
)
|
|
(8,907
|
)
|
|
(1,819
|
)
|
Change in valuation allowance
|
368
|
|
|
1,984
|
|
|
1,949
|
|
Tax effects of intercompany transactions
|
16
|
|
|
1,004
|
|
|
(277
|
)
|
Adjustments to deferred tax assets, net resulting from enactment of new tax law (2)
|
—
|
|
|
—
|
|
|
7,601
|
|
Other
|
(207
|
)
|
|
592
|
|
|
(147
|
)
|
Provision for income taxes (Income tax benefit)
|
$
|
1,188
|
|
|
$
|
(1,101
|
)
|
|
$
|
10,554
|
|
Effective tax rate
|
57.4
|
%
|
|
(3.9
|
)%
|
|
66.9
|
%
|
|
|
(1)
|
Permanent differences include certain expenses that are not deductible for tax purposes including meals and entertainment, certain transaction costs, lobbying fees, and taxable income as a result of global intangible low-tax income ("GILTI") offset by favorable items including the domestic production activities deduction, for tax year 2017, and a deduction for foreign derived intangible income ("FDII") beginning in 2018.
|
|
|
(2)
|
The adjustment to deferred tax assets of $7.6 million in 2017 was a result of the impact of changes in the U.S. federal effective tax rate, as well as a reduction of the stock-based compensation deferred tax asset due to expected permanent limitations on its deductibility for certain key executives under the Tax Cuts and Jobs Act.
|
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Significant components of our deferred income tax assets and liabilities are as follows at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Deferred income tax assets:
|
|
|
|
Net operating loss carryforward
|
$
|
2,341
|
|
|
$
|
2,347
|
|
Deferred revenue
|
15,348
|
|
|
13,304
|
|
Deferred compensation
|
971
|
|
|
858
|
|
Lease liability
|
2,460
|
|
|
—
|
|
Inventory reserve
|
1,258
|
|
|
1,294
|
|
Stock-based compensation
|
10,769
|
|
|
3,758
|
|
Amortization
|
1,133
|
|
|
412
|
|
Research and development tax credit carryforward
|
4,957
|
|
|
5,193
|
|
Reserves, accruals, and other
|
3,394
|
|
|
3,094
|
|
Total deferred income tax assets
|
42,631
|
|
|
30,260
|
|
Deferred income tax liabilities:
|
|
|
|
Customer contract asset
|
(883
|
)
|
|
—
|
|
Right of use asset
|
(2,228
|
)
|
|
—
|
|
Depreciation
|
(3,715
|
)
|
|
(2,195
|
)
|
Amortization
|
(62
|
)
|
|
(57
|
)
|
Other
|
(1,237
|
)
|
|
(1,232
|
)
|
Total deferred income tax liabilities
|
(8,125
|
)
|
|
(3,484
|
)
|
Net deferred income tax assets before valuation allowance
|
34,506
|
|
|
26,776
|
|
Valuation allowance
|
(7,172
|
)
|
|
(7,429
|
)
|
Net deferred income tax assets
|
$
|
27,334
|
|
|
$
|
19,347
|
|
We have $1.2 million of state net operating losses (“NOLs”) which expire at various dates between 2029 and 2036. We also have a federal NOL of $0.8 million which expires in 2036, and is subject to limitation under Internal Revenue Code (“IRC”) Section 382. We have $0.1 million of federal R&D credits, which expire between 2034 and 2037, and are also subject to limitation under IRC Section 382. We have $9.2 million of Arizona R&D credits carrying forward, which expire at various dates between 2020 and 2034. In the U.K., Canada, and Australia, we have $8.0 million, $1.2 million, and $1.4 million of NOLs, respectively, which expire at various dates or may be carried forward indefinitely.
In preparing our consolidated financial statements, we have assessed the likelihood that deferred income tax assets will be realized from future taxable income. In evaluating the ability to recover its deferred income tax assets, we consider all available evidence, positive and negative, 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 income tax assets will not be realized. We exercise significant judgment in determining our provision for income taxes, our deferred income tax assets and liabilities, and our future taxable income for purposes of assessing our ability to utilize any future tax benefit from our deferred income tax assets.
As of December 31, 2019, we continue to demonstrate positive income in the U.S. federal and state tax jurisdictions; however, we have Arizona R&D tax credits expiring unutilized each year. Therefore, we have 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 CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2019, we have cumulative pre-tax losses in 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. Although we also have cumulative pre-tax losses in Australia, we have determined that sufficient deferred tax liabilities will reverse in order to realize all assets except one long-lived intangible asset where there is not an expectation that the deferred tax asset may be realized. Therefore, we have recorded a partial valuation allowance for Australia.
We consider the undistributed earnings of certain non-U.S. subsidiaries to be indefinitely reinvested outside of the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. We project that our foreign earnings will be utilized offshore for working capital and future foreign growth. The determination of the unrecognized deferred tax liability on those undistributed earnings is not practicable due to our legal entity structure and the complexity of U.S. and local country tax laws. If we decide to repatriate the undistributed foreign earnings, we will need to recognize the income tax effects in the period we change our assertion on indefinite reinvestment.
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 December 31, 2019. In addition, management accrued approximately $0.1 million for estimated uncertain tax positions related to certain federal income tax liabilities. Should the unrecognized tax benefit of $6.2 million be recognized, our effective tax rate would be favorably impacted.
The following table presents a roll forward of our liability for unrecognized tax benefits, exclusive of accrued interest, as of December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Balance, beginning of period
|
$
|
6,058
|
|
|
$
|
4,243
|
|
|
$
|
4,050
|
|
Increase (decrease) in previous year tax positions
|
(615
|
)
|
|
213
|
|
|
379
|
|
Increase in current year tax positions
|
1,749
|
|
|
1,982
|
|
|
587
|
|
Decrease due to lapse of statutes of limitations
|
(331
|
)
|
|
(380
|
)
|
|
(773
|
)
|
Balance, end of period
|
$
|
6,861
|
|
|
$
|
6,058
|
|
|
$
|
4,243
|
|
Federal income tax returns for 2016 through 2018 remain open to examination by the U.S. Internal Revenue Service (the “IRS”), while state and local income tax returns for 2015 through 2018 also generally remain open to examination by state taxing authorities. The 2005 through 2014 income tax returns are only open to the extent that net operating loss or other tax attributes carrying forward from those years were utilized in 2015 through 2018. The foreign tax returns for 2015 through 2018 also generally remain open to examination. Our U.S. federal income tax return for fiscal year 2016 is currently under audit by the Internal Revenue Service.
We recognize interest and penalties related to unrecognized tax benefits within the provision (benefit) for income tax expense line in the accompanying consolidated statements of operations and comprehensive income. As of December 31, 2019 and 2018, we had accrued interest of $0.2 million and $0.1 million, respectively.
11. 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 December 31, 2019 and 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 December 31, 2019, we had letters of credit outstanding of approximately $2.7 million under the facility and available borrowing of $47.3 million. 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 December 31, 2019, our funded debt to EBITDA ratio was 0.0004 to 1.00.
12. Stockholders’ Equity
Common Stock and Preferred Stock
We have authorized the issuance of two classes of stock designated as “common stock” and “preferred stock,” each having a par value of $0.00001 per share. We are authorized to issue 200 million shares of common stock and 25 million shares of preferred stock.
Stock-based Compensation Plans
We have historically utilized stock-based compensation, consisting of RSUs and stock options, for key employees and non-employee directors as a means of attracting and retaining quality personnel. Service-based grants generally have a vesting period of 3 to 5 years and a contractual maturity of ten years. Performance-based grants generally have vesting periods ranging from 1 to 10 years and a contractual maturity of ten years.
On February 12, 2019, our shareholders approved 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. Under the 2019 Plan, we reserved for future grants: (i) 6.0 million shares of common stock, plus (ii) the number of shares of common stock that were authorized but unissued under our 2018 Stock Incentive Plan (the “2018 Plan”) and all prior Company equity plans as of the effective date of the 2019 Plan, and (iii) the number of shares of stock that have been granted under the prior plans that either terminate, expire or lapse for any reason after the effective date of the 2019 Plan. As of December 31, 2019, approximately 2.0 million shares remain available for future grants. Shares issued upon exercise of stock awards from these plans have historically been issued from our authorized unissued shares.
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 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, our stockholders approved the CEO Performance Award of 6,365,856 stock option awards. 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 Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of the following eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA have been met for the previous four consecutive fiscal quarters. Adjusted EBITDA for purposes of the CEO Performance Award ("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 acquisition of Vievu that was completed during 2018, the revenue goals were adjusted for the acquiree's Target Revenue, as defined in the CEO Performance Award agreement.
As of December 31, 2019, the following operational goals were considered probable of achievement:
|
|
•
|
Total revenue of $710.1 million, $860.1 million, and $1,010.1 million; and
|
|
|
•
|
Adjusted EBITDA (CEO Performance Award) of $125.0 million, $155.0 million, $175.0 million, $190.0 million, $200.0 million, and $210.0 million.
|
Stock-based compensation expense associated with the CEO Performance Award is recognized over the longer of the expected achievement period for each pair of market capitalization and operational goals, beginning at the point in time when the relevant operational goal is considered probable of being met. The probability of meeting an operational goal and the expected achievement point in time for meeting a probable operational goal are based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis. Even though no tranches of the CEO Performance Award vest unless a market capitalization and a matching operational goal are both achieved, stock-based compensation expense is recognized when an operational goal is considered probable of achievement regardless of whether a market capitalization goal is actually achieved. Stock-based compensation represents a non-cash expense and is recorded in sales, general, and administrative operating expense on our consolidated statements of operations and comprehensive income.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The first two market capitalization goals have been achieved as of December 31, 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 December 31, 2019. As there are nine operational goals considered probable of achievement, we recorded stock-based compensation expense of $37.4 million related to the CEO Performance Award from the CEO Grant Date through December 31, 2019. The number of stock options that would vest related to the nine tranches is approximately 4.8 million shares.
As of December 31, 2019, we had $154.2 million of total unrecognized stock-based compensation expense related to the CEO Performance Award for the operational goals that were considered probable of achievement, which will be recognized over a weighted-average period of 6.0 years. As of December 31, 2019, we had unrecognized stock-based compensation expense of $54.4 million for the operational goals that were considered not probable of achievement.
eXponential Stock Performance Plan
On February 12, 2019, our shareholders approved the 2019 Plan, which was adopted by the Board of Directors to reserve a sufficient number of shares to facilitate our XSPP and grants of 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 following 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 subsequent 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, September and November of 2019. A total of approximately 5.9 million XSUs were granted during the year ended December 31, 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.
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
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 December 31, 2019. However, none of the XSU tranches have vested thus far as the operational goals have not yet been achieved as of December 31, 2019. As there are nine operational goals considered probable of achievement, we recorded stock-based compensation expense of $17.5 million related to the XSU awards from their respective grant dates through December 31, 2019. The number of XSU awards that would vest related to the nine tranches is approximately 4.2 million shares.
As of December 31, 2019, we had $139.8 million of total unrecognized stock-based compensation expense related to the XSU awards for the performance goals that were considered probable of achievement, which will be recognized over a weighted-average period of 5.9 years. As of December 31, 2019, we had unrecognized stock-based compensation expense of $35.9 million for the performance goals that were considered not probable of achievement.
Restricted Stock Units
The following table summarizes RSU activity for the years ended December 31 (number of units and aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Number
of
Units
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Number
of
Units
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Number
of
Units
|
|
Weighted
Average
Grant-Date
Fair Value
|
Units outstanding, beginning of year
|
1,655
|
|
|
$
|
28.34
|
|
|
2,348
|
|
|
$
|
23.47
|
|
|
1,330
|
|
|
$
|
20.40
|
|
Granted
|
6,759
|
|
|
37.21
|
|
|
381
|
|
|
46.06
|
|
|
1,731
|
|
|
24.59
|
|
Released
|
(650
|
)
|
|
25.75
|
|
|
(772
|
)
|
|
23.85
|
|
|
(519
|
)
|
|
18.85
|
|
Forfeited
|
(482
|
)
|
|
34.97
|
|
|
(302
|
)
|
|
24.73
|
|
|
(194
|
)
|
|
24.61
|
|
Units outstanding, end of year
|
7,282
|
|
|
36.36
|
|
|
1,655
|
|
|
28.34
|
|
|
2,348
|
|
|
23.47
|
|
Aggregate intrinsic value at year end
|
$
|
533,623
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $73.28 per share at December 31, 2019, multiplied by the number of RSUs. The fair value as of the respective vesting dates of RSUs that vested during the year was $39.4 million, $36.6 million, and $14.5 million for the years ended December 31, 2019, 2018, and 2017, respectively. Certain RSUs that vested in 2019 were net-share settled, such that we withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld during 2019 were 0.1 million and had a value of approximately $3.5 million on their respective vesting dates as determined by the closing stock price of our stock. Payments for the employees’ tax obligations are reflected as a financing activity within the statement of cash flows. These net-share settlements had the effect of share repurchases by us as they reduced the amount of shares that would have otherwise been issued as a result of the vesting.
In 2019, 2018 and 2017, we granted approximately 6.0 million, 0.1 million and 0.4 million performance-based RSUs, respectively (included in the table above). Of the 6.0 million performance-based RSUs granted in 2019, 5.9 million were XSUs. Certain of the performance-based RSUs outstanding as of December 31, 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. As of December 31, 2019, the performance criteria had been met for approximately 0.1 million of the 0.4 million performance-based RSUs outstanding, exclusive of XSUs outstanding. We recognized $24.1 million, $4.8 million and $2.5 million of compensation expense related to performance-based RSUs during the years ended December 31, 2019, 2018 and 2017, respectively, which included expense related to XSUs of $17.5 million during the year ended December 31, 2019.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2019, we had $190.8 million of total unrecognized stock-based compensation expense for time-based RSUs and PSUs for which the performance goals were considered probable of achievement. We expect to recognize the cost related to the RSUs over a weighted average period of 4.9 years.
Stock Option Activity
The following table summarizes stock option activity for the years ended December 31 (number of options in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Number
of
Options
|
|
Weighted
Average
Exercise
Price
|
|
Number
of
Options
|
|
Weighted
Average
Exercise
Price
|
|
Number
of
Options
|
|
Weighted
Average
Exercise
Price
|
Options outstanding, beginning of year
|
6,458
|
|
|
$
|
28.24
|
|
|
804
|
|
|
$
|
4.99
|
|
|
1,008
|
|
|
$
|
5.40
|
|
Granted
|
—
|
|
|
—
|
|
|
6,366
|
|
|
28.58
|
|
|
—
|
|
|
—
|
|
Exercised
|
(27
|
)
|
|
4.27
|
|
|
(664
|
)
|
|
5.09
|
|
|
(198
|
)
|
|
6.99
|
|
Expired / terminated
|
—
|
|
|
—
|
|
|
(48
|
)
|
|
4.55
|
|
|
(6
|
)
|
|
8.32
|
|
Options outstanding, end of year
|
6,431
|
|
|
28.34
|
|
|
6,458
|
|
|
28.24
|
|
|
804
|
|
|
4.99
|
|
Options exercisable, end of year
|
65
|
|
|
4.52
|
|
|
92
|
|
|
4.45
|
|
|
775
|
|
|
5.00
|
|
We granted 6.4 million stock options in 2018 and none in 2019 or 2017. The total intrinsic value of options exercised was $1.2 million, $28.5 million and $3.2 million for the years ended December 31, 2019, 2018 and 2017, respectively. The intrinsic value for options exercised was calculated as the difference between the exercise price of the underlying stock option awards and the market price of our common stock on the date of exercise.
The following table summarizes information about stock options that were fully vested or expected to vest as of December 31, 2019 (number of options in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of
Exercise Price
|
|
Number of
Options
Outstanding
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Number of
Options
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
$4.34 - $4.97
|
|
65
|
|
|
$
|
4.52
|
|
|
0.94
|
|
65
|
|
|
$
|
4.52
|
|
|
0.94
|
The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2019 was $4.5 million and $4.5 million, respectively. 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 $73.28 on December 31, 2019.
At December 31, 2019, we had 6.4 million unvested options outstanding with a weighted average exercise price of $28.58 per share, weighted average grant-date fair value of $38.64 per share and weighted average remaining contractual life of 8.2 years. The aggregate intrinsic value of unvested options at December 31, 2019 was $284.6 million.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Stock-based Compensation Expense
We account for stock-based compensation using the fair-value method. Reported stock-based compensation was classified as follows for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Cost of product and service sales
|
$
|
1,565
|
|
|
$
|
511
|
|
|
$
|
508
|
|
Sales, general and administrative expenses
|
59,342
|
|
|
12,710
|
|
|
9,047
|
|
Research and development expenses
|
17,588
|
|
|
8,658
|
|
|
6,055
|
|
Total stock-based compensation expense
|
$
|
78,495
|
|
|
$
|
21,879
|
|
|
$
|
15,610
|
|
Income tax benefit
|
$
|
11,457
|
|
|
$
|
4,049
|
|
|
$
|
5,791
|
|
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. The 2019 Inducement Plan was adopted without stockholder approval pursuant to Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules. The Inducement Plan provides for the grant of equity-based awards, including restricted stock units, restricted stock, performance shares and performance units, and its terms are substantially similar to our stockholder-approved 2019 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 employees or non-employee directors of the Company (or following such individuals’ bona fide period of non-employment with the Company), as an inducement material to the individuals’ entry into employment with the Company.
As of December 31, 2019, there were 29,600 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. As of December 31, 2019 and 2018, $16.3 million remained available under the plan for future purchases.
13. 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.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 December 31, 2019 were immaterial.
|
|
|
|
|
|
|
|
Leases (in thousands)
|
|
Classification
|
|
December 31, 2019
|
Assets
|
|
|
|
|
Operating lease assets
|
|
Other assets
|
|
$
|
9,653
|
|
Liabilities
|
|
|
|
|
Current
|
|
|
|
|
Operating
|
|
Other current liabilities
|
|
$
|
3,817
|
|
Noncurrent
|
|
|
|
|
Operating
|
|
Other long-term liabilities
|
|
6,792
|
|
Total lease liabilities
|
|
|
|
$
|
10,609
|
|
The components of lease expense were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Classification
|
|
Twelve Months Ended December 31, 2019
|
Operating lease expense (1)
|
|
Sales, general and administrative expenses (2)
|
|
$
|
4,627
|
|
Sublease income
|
|
Interest and other income, net
|
|
(301
|
)
|
Net lease expense
|
|
|
|
$
|
4,326
|
|
(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.
Other information related to leases was as follows (in thousands, except lease term and discount rate):
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2019
|
Supplemental Cash Flows Information
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows for operating leases
|
|
$
|
4,374
|
|
Right-of-use assets obtained in exchange for lease liabilities:
|
|
|
Operating leases
|
|
888
|
|
Weighted average remaining lease term:
|
|
|
Operating leases
|
|
3.1 years
|
|
Weighted average discount rate:
|
|
|
Operating leases
|
|
3.55
|
%
|
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Future minimum lease payments under non-cancellable leases as of December 31, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Sublease income
|
|
Net
|
2020
|
4,539
|
|
|
(82
|
)
|
|
4,457
|
|
2021
|
3,641
|
|
|
—
|
|
|
3,641
|
|
2022
|
2,689
|
|
|
—
|
|
|
2,689
|
|
2023
|
1,173
|
|
|
—
|
|
|
1,173
|
|
2024
|
—
|
|
|
—
|
|
|
—
|
|
Thereafter
|
—
|
|
|
—
|
|
|
—
|
|
Total minimum lease payments
|
12,042
|
|
|
(82
|
)
|
|
11,960
|
|
Less: Amount representing interest
|
|
|
|
|
(1,351
|
)
|
Present value of lease payments
|
|
|
|
|
$
|
10,609
|
|
As of December 31, 2019, we do not have any leases that have not yet commenced that create significant rights and obligations for us.
14. Related Party Transactions
We subscribe to a mobile collaboration software suite from Quip, a company that was co-founded and managed by Bret Taylor, a former member of our Board of Directors. Mr. Taylor resigned from the Board of Directors in June 2019. In April 2016, Quip was acquired by Salesforce, and subsequent to the acquisition, we continued to consider Quip a related party. In November 2017, Mr. Taylor was appointed to President and Chief Product Officer of Salesforce. We consider the consolidated Salesforce entity to be a related party through the year ended December 31, 2019. The cost to subscribe to various cloud-based hosting arrangements from Salesforce and Quip was $1.9 million, $1.8 million and $1.2 million for the years ended December 31, 2019, 2018 and 2017, respectively. Amounts owed as of December 31, 2019 and 2018 were negligible.
15. Employee Benefit Plans
We have a defined contribution profit sharing 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 allowed by law of their eligible compensation.
We also have a non-qualified deferred compensation plan for certain executives, key 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 generally commence 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 consolidated balance sheets; see Note 7 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.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 for the years ended December 31, 2019, 2018 and 2017, were approximately $4.8 million, $3.2 million and $2.5 million, respectively. Future matching or profit sharing contributions to the plans are at our sole discretion.
16. Business Acquisitions
Dextro, Inc.
On February 8, 2017, we acquired all of the outstanding common stock of Dextro for a total purchase price of $7.5 million. Dextro's technology provides one of the first computer-vision and deep learning systems to make the visual contents in video searchable in real time. This technology will allow law enforcement agencies and departments to quickly isolate and analyze critical seconds of footage from massive amounts of video data. The technology acquired, along with the Dextro employees that joined Axon, were key additions to the Axon Artificial Intelligence team.
The purchase price of $7.5 million consisted primarily of cash, net of cash acquired, and contingent consideration of $1.0 million representing potential earn-outs to former stockholders based on predetermined future metrics, which was fully earned and paid as of December 31, 2019. We also agreed to additional earn-out provisions to former Dextro employees totaling approximately $1.4 million based, in part, on predetermined future metrics. The additional earn-outs were not included as part of the purchase price and are being expensed as compensation for the employees in the period earned.
The major classes of assets and liabilities to which we allocated the purchase price were as follows (in thousands):
|
|
|
|
|
Accounts receivable
|
$
|
12
|
|
Property and equipment
|
46
|
|
Developed technology
|
5,800
|
|
Goodwill
|
2,703
|
|
Deferred income tax liabilities, net
|
(1,074
|
)
|
Total purchase price
|
$
|
7,487
|
|
We assigned the goodwill to the Software and Sensors segment. Identifiable definite-lived intangible assets were assigned a total weighted average amortization period of 3.4 years. Dextro has been included in our consolidated results of operations subsequent to the acquisition date. In connection with the acquisition, we incurred and expensed costs of approximately $0.2 million, which included legal, accounting and other third-party expenses related to the transaction.
Breon Enterprises
On July 1, 2017, we acquired certain tangible and intangible assets from Breon, which was our distributor in the Australia region. This transaction, which was accounted for as a business combination under ASC 805, is intended to expand our growth across Australia and surrounding regions by growing our in-country sales and support team.
The purchase price of $4.2 million was paid in full in July 2017. As of the acquisition date, we had a $2.2 million pre-existing accounts receivable balance from Breon for our sales of goods and services to Breon prior to the acquisition date. This receivable balance was cash settled in full separately from the business combination at its book value, which was considered to be the fair value due to the short-term nature of the receivable.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The major classes of assets to which we allocated the purchase price were as follows (in thousands):
|
|
|
|
|
Re-acquired distribution rights
|
$
|
2,100
|
|
Customer relationships
|
400
|
|
Goodwill
|
1,650
|
|
Total purchase price
|
$
|
4,150
|
|
We assigned $0.8 million of the goodwill to each of the TASER and Software and Sensors segments. The assignment of goodwill was based on our estimate of how the acquired assets would contribute cash flows to us over time. Identifiable definite-lived intangible assets were assigned a total weighted average amortization period of 2.1 years. Breon has been included in our consolidated results of operations subsequent to the acquisition date. Costs related to the acquisition were expensed as incurred and were considered insignificant.
VIEVU
On May 3, 2018, we acquired all of the outstanding ownership interests of VIEVU, a public safety camera and cloud-based evidence management system provider for law enforcement agencies.
The purchase price of $17.6 million consisted of $5.0 million in cash, net of cash acquired of $0.1 million, and $2.4 million, or 58,843 shares, of our common stock issued to VIEVU’s parent company, Safariland, LLC (“Safariland”). Additionally, the purchase price consisted of contingent consideration of up to $6.0 million, or 141,226 additional shares of common stock, if certain conditions relating to retention of certain VIEVU customers are met as of the first and second anniversaries of the acquisition date. The fair value of the contingent consideration as of the acquisition date was $5.8 million. The purchase price also included the fair value of a long-term Product Development and Supplier Agreement (the “Supply Agreement”) with Safariland, pursuant to which Safariland will be our preferred provider of holsters for our CEW products. The estimated fair value of the Supply Agreement as of the acquisition date was $4.5 million, a portion of which was recorded within accrued liabilities and the remaining portion recorded within other long-term liabilities.
The major classes of assets and liabilities to which we have allocated the purchase price were as follows (in thousands):
|
|
|
|
|
Accounts receivable
|
$
|
1,776
|
|
Inventory
|
2,626
|
|
Prepaid expenses and other assets
|
362
|
|
Property and equipment
|
459
|
|
Contract assets
|
1,472
|
|
Intangible assets
|
4,510
|
|
Goodwill
|
10,285
|
|
Accounts payable and accrued liabilities
|
(3,345
|
)
|
Deferred revenue
|
(543
|
)
|
Total purchase price
|
$
|
17,602
|
|
We have assigned the goodwill to the Software and Sensors segment. Identifiable definite-lived intangible assets were assigned a total weighted average amortization period of 5.1 years. VIEVU has been included in our consolidated results of operations subsequent to the acquisition date. In connection with the acquisition, we incurred and expensed costs of approximately $0.8 million, which included legal, accounting and other third-party expenses related to the transaction. Subsequent to the acquisition date, we recorded expenses of $1.2 million related to purchase commitments assumed in the VIEVU business combination that exceeded estimated future demand.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
17. Segment Data
Our operations are comprised of two reportable segments: the manufacture and sale of CEDs, 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, and services (collectively, the “Software and Sensors” segment). In both segments, we report sales of products and services. Service revenue in both segments includes sales related to Axon Evidence. In the Software and Sensors segment, service revenue also includes other recurring cloud-hosted software revenue and related professional services. Collectively, this revenue is sometimes referred to as "Axon Cloud revenue." 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2019
|
|
TASER
|
|
Software and Sensors
|
|
Total
|
Net sales from products
|
$
|
280,554
|
|
|
$
|
118,920
|
|
|
$
|
399,474
|
|
Net sales from services
|
1,107
|
|
|
130,279
|
|
|
131,386
|
|
Net sales
|
281,661
|
|
|
249,199
|
|
|
530,860
|
|
Cost of product sales
|
107,188
|
|
|
83,495
|
|
|
190,683
|
|
Cost of service sales
|
—
|
|
|
32,891
|
|
|
32,891
|
|
Cost of sales
|
107,188
|
|
|
116,386
|
|
|
223,574
|
|
Gross margin
|
$
|
174,473
|
|
|
$
|
132,813
|
|
|
$
|
307,286
|
|
|
|
|
|
|
|
Research and development
|
$
|
14,469
|
|
|
$
|
86,252
|
|
|
$
|
100,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2018
|
|
TASER
|
|
Software and Sensors
|
|
Total
|
Net sales from products
|
$
|
253,115
|
|
|
$
|
74,520
|
|
|
$
|
327,635
|
|
Net sales from services
|
—
|
|
|
92,433
|
|
|
92,433
|
|
Net sales
|
253,115
|
|
|
166,953
|
|
|
420,068
|
|
Cost of product sales
|
80,354
|
|
|
58,983
|
|
|
139,337
|
|
Cost of service sales
|
—
|
|
|
22,148
|
|
|
22,148
|
|
Cost of sales
|
80,354
|
|
|
81,131
|
|
|
161,485
|
|
Gross margin
|
$
|
172,761
|
|
|
$
|
85,822
|
|
|
$
|
258,583
|
|
|
|
|
|
|
|
Research and development
|
$
|
17,012
|
|
|
$
|
59,844
|
|
|
$
|
76,856
|
|
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2017
|
|
TASER
|
|
Software and Sensors
|
|
Total
|
Net sales from products (1)
|
$
|
234,512
|
|
|
$
|
51,347
|
|
|
$
|
285,859
|
|
Net sales from services (1)
|
—
|
|
|
57,939
|
|
|
57,939
|
|
Net sales (1)
|
234,512
|
|
|
109,286
|
|
|
343,798
|
|
Cost of product sales
|
72,054
|
|
|
45,943
|
|
|
117,997
|
|
Cost of service sales
|
—
|
|
|
18,713
|
|
|
18,713
|
|
Cost of sales
|
72,054
|
|
|
64,656
|
|
|
136,710
|
|
Gross margin
|
$
|
162,458
|
|
|
$
|
44,630
|
|
|
$
|
207,088
|
|
|
|
|
|
|
|
Research and development
|
$
|
8,377
|
|
|
$
|
46,996
|
|
|
$
|
55,373
|
|
(1) Amounts for the year ended December 31, 2017 have not been adjusted under the modified retrospective method of adoption of Topic 606, and are presented consistent with the prior period amounts reported under ASC 605.
18. Selected Quarterly Financial Data (unaudited)
Selected quarterly financial data for years ended December 31, 2019 and 2018 follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
2019
|
|
2019
|
|
2019
|
|
2019
|
Net sales
|
$
|
115,810
|
|
|
$
|
112,362
|
|
|
$
|
130,837
|
|
|
$
|
171,851
|
|
Gross margin
|
68,917
|
|
|
65,560
|
|
|
80,169
|
|
|
92,640
|
|
Net income
|
6,419
|
|
|
738
|
|
|
6,104
|
|
|
(12,379
|
)
|
Earnings (loss) per share (2):
|
|
|
|
|
|
|
|
Basic
|
$
|
0.11
|
|
|
$
|
0.01
|
|
|
$
|
0.10
|
|
|
$
|
(0.21
|
)
|
Diluted
|
$
|
0.11
|
|
|
$
|
0.01
|
|
|
$
|
0.10
|
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
2018
|
|
2018
|
|
2018
|
|
2018 (1)
|
Net sales
|
$
|
101,215
|
|
|
$
|
99,226
|
|
|
$
|
104,836
|
|
|
$
|
114,791
|
|
Gross margin
|
64,461
|
|
|
63,143
|
|
|
65,633
|
|
|
65,346
|
|
Net income
|
12,926
|
|
|
8,485
|
|
|
5,711
|
|
|
2,083
|
|
Earnings per share (2):
|
|
|
|
|
|
|
|
Basic
|
$
|
0.24
|
|
|
$
|
0.15
|
|
|
$
|
0.10
|
|
|
$
|
0.04
|
|
Diluted
|
$
|
0.24
|
|
|
$
|
0.15
|
|
|
$
|
0.10
|
|
|
$
|
0.03
|
|
(1) Results of operations for the three months ended December 31, 2018 included out of period adjustments related to prior quarterly periods in 2018 and 2017. The aggregate out of period adjustment was approximately $1.8 million, reflecting a $0.9 million decrease to net sales, a $1.3 million increase to sales, general and administrative expense, and a $0.4 million decrease to provision for income taxes. Based on our quantitative and qualitative analysis, we do not consider the out of period impact to be material to our financial position or results of operations for any prior periods or for the quarter or year ended December 31, 2018.
AXON ENTERPRISE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(2) Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share.
19. Supplemental Disclosure to Cash Flows
Supplemental non-cash and other cash flow information were as follows as of and for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Supplemental disclosures:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
172,250
|
|
|
$
|
349,462
|
|
|
$
|
75,105
|
|
Restricted cash
|
$
|
105
|
|
|
$
|
1,565
|
|
|
$
|
3,333
|
|
Total cash, cash equivalents and restricted cash shown in the statements of cash flows
|
$
|
172,355
|
|
|
$
|
351,027
|
|
|
$
|
78,438
|
|
|
|
|
|
|
|
Cash paid for income taxes, net of refunds
|
$
|
3,669
|
|
|
$
|
10,609
|
|
|
$
|
11,487
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
Contingent consideration related to business combinations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,007
|
|
Non-cash purchase consideration related to business combinations
|
—
|
|
|
12,508
|
|
|
—
|
|
Property and equipment purchases in accounts payable
|
834
|
|
|
501
|
|
|
133
|
|
Commission payable converted to stock-based award
|
314
|
|
|
—
|
|
|
—
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Axon Enterprise, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Axon Enterprise, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 27, 2020 expressed an unqualified opinion thereon.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition - Bundled Arrangements with Multiple Performance Obligations
As described further in Notes 1 and 2 to the consolidated financial statements, the Company derives revenue from two primary sources: the sale of physical products (including conducted energy devices (CEDs), cameras, corresponding hardware extended warranties, and related accessories), and subscriptions to the Axon Evidence digital evidence
management software as a service and support. To a lesser extent, the Company also recognizes revenue related to training, professional services and other software services. Many of the Company’s products are sold on a standalone basis, however, the Company also bundles its hardware products and services together and sells them to customers as part of a single transaction. For contracts with multiple performance obligations, the Company allocates the contract transaction price to each performance obligation using its estimate of the standalone selling price of each distinct good or service in the contract. Further, performance obligations can be satisfied at a point in time when the Company ships the product, or over time as the customer receives and consumes the benefit of services over a stated period of time. In addition, the Company will, on occasion, agree to terms that amend the performance obligations in an existing contract. We consider the identification of performance obligations, the determination of the standalone selling price and allocation of the transaction price to multiple performance obligations, including the determination as to whether any amendments to an existing contract result in a modification, to be a critical audit matter.
Identifying performance obligations in each contract involves identifying all promises in the contract and determining whether such promises are limited to explicit goods or services or whether they may be implied. In addition, determining whether the customer can benefit from the promised goods or services on their own or whether the contract promises to deliver goods or services on a combined basis impacts whether such performance obligations should be accounted for separately or together with other performance obligations. Judgment is also required to determine the standalone selling price for each distinct performance obligation, which serves as a basis for allocating the transaction price amongst products and services when sold together. Estimates of standalone selling price involve the use of observable data and can include selling prices for each performance obligation when sold separately, a market assessment of what the customer would be willing to pay for each performance obligation, or an estimate of the expected cost plus an appropriate estimated margin of the performance obligation. In addition, amendments to existing contracts require additional judgment since they involve an assessment of whether a modification occurred. The related audit effort to test these items was extensive and required a high degree of auditor judgment.
Our audit procedures related to the revenue recognition of bundled arrangements with multiple performance obligations included the following, among others.
We tested the design and operating effectiveness of controls over the Company’s contract review process, including those over the identification of all material terms and promises included in the initial or amended contract, and the establishment and monitoring of standalone selling prices.
For a sample of contracts, we compared the identified performance obligations in the allocation to the underlying contract, recalculated the allocation of the total transaction price to each performance obligation, and, if applicable, reviewed contract amendments and management’s assessment of the amendments for appropriate accounting treatment. We also evaluated the reasonableness of management’s estimate of standalone selling prices for products and services that are not sold separately. For sample selections where revenue was recognized at a point in time, we inspected shipping documents and contract terms to evaluate whether control transferred to the customer. For sample selections where revenue was recognized over time, we traced the term of the revenue recognition period to the contract and recalculated the expected revenue recognized during the period.
Stock Based Compensation - Initial Measurement of Fair Value
As described further in Notes 1 and 12 to the consolidated financial statements, the Company’s stockholders approved the eXponential Stock Performance Plan (“XSPP ”) during the year ended December 31, 2019. Under the terms of the XSPP the Company’s employees were granted eXponential Stock Units (“XSUs”) which vest in 12 tranches with a vesting schedule based entirely on the attainment of both operational and market capitalization goals. To estimate the grant date fair value of the awards, the Company utilized a Monte Carlo simulation to simulate a range of possible future market capitalizations for the Company over the term of the XSUs and assigned a value to each market capitalization tranche. We consider the determination of grant date fair value for the XSUs to be a critical audit matter.
The Company’s determination of the grant date fair value of the XSUs required complex modeling and significant judgment related to inputs and assumptions used in the Monte Carlo simulation. Such assumptions include determining an estimate of volatility associated with achieving the Company’s market capitalization, the expected impact of dilution resulting from the XSPP, a risk free interest rate associated with the term of the XSPP and a discount rate associated
with the holding period required as part of the XSPP. Auditing the initial measurement of fair value also requires the use of valuation specialists.
Our audit procedures related to the grant date fair value of the XSUs included the following procedures, among others.
We evaluated the expertise and experience of the valuation specialists who determined the fair value measurements on behalf of the Company. We reviewed the methodologies employed by the specialists in determining the value of the XSUs and determined whether the use of a Monte Carlo simulation was reasonable. We reviewed the key assumptions utilized in the valuation, including volatility, the expected impact of dilution, the risk-free rate, and discounts for illiquidity by comparing them to the terms of the XSU awards, historical information and market data. We also used a specialist to develop an independent model to assist us in evaluating the appropriateness and reasonableness of the Monte Carlo simulation.
Stock Based Compensation - Ongoing Assessment of Vesting Probabilities
As described further in Notes 1 and 12 to the consolidated financial statements, the Company’s stockholders approved the CEO Performance Award during the year ended December 31, 2018 and the XSPP during the year ended December 31, 2019. The CEO Performance Award provides for the granting of stock options to the Company’s CEO and the XSPP provides for the granting of eXponential Stock Units (XSUs) to the Company’s employees. Both the stock options and XSUs vest in 12 tranches with a vesting schedule based entirely on the attainment of both operational and market capitalization goals. Each of the 12 tranches for both the CEO Performance Award and the XSPP will vest upon the achievement of market capitalization and operational goals. Stock-based compensation expense associated with the awards is recognized beginning at the point in time when the relevant operational goal is considered probable of being met. We consider the probability assessment of achieving the operational goals to be a critical audit matter.
At the grant date and continuing on an ongoing basis over the term of the award, the Company must determine the number of operational goals that are probable to be achieved, and the expected point in time the goals will be met. The probability of meeting an operational goal and the expected achievement point in time for meeting a probable operational goal are based on a subjective assessment of the Company’s forward-looking financial projections, taking into consideration statistical analysis. The probability assessments require management to estimate the successful development and market acceptance of future product introductions, future sales targets and operating performance. Changes in the subjective probability-based assumptions can materially affect the amount and timing of the recognition of stock based compensation expense.
Our audit procedures related to the ongoing assessment of vesting probabilities included the following procedures, among others.
We evaluated the expertise and experience of the valuation specialists who prepared the statistical analysis considered by the Company in determining the probability assessments for the operation goals. We reviewed the statistical analysis employed by the specialists in determining the projected achievement of each operational goal and determined whether such assessment was reasonable. We evaluated the reasonableness of management’s forecasts as an input into the model by comparing management’s previous forecasts to actual results to assess management’s ability to accurately forecast actual results. We also evaluated the impact of market and industry trends on management’s forecast and used a specialist to develop an independent model to assist us in evaluating the appropriateness and reasonableness of the Company’s statistical analysis.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2005.
Phoenix, Arizona
February 27, 2020