Axon(AXON) - 2025 Q1 - Quarterly Report

Special Note Regarding Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to risks and uncertainties, with no obligation for public updates unless legally required - The report contains forward-looking statements subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995, indicating future expectations, beliefs, intentions, and strategies[9] - Achievement of future results is subject to risks, uncertainties, and potentially inaccurate assumptions, with actual results potentially differing materially from past or anticipated results[10] - The company does not undertake to publicly update forward-looking statements, except as required by law, and advises consulting further disclosures in Form 8-K, 10-Q, and 10-K reports[11] PART I - FINANCIAL INFORMATION This section provides Axon Enterprise, Inc.'s unaudited consolidated financial statements and management's discussion and analysis for the quarter ended March 31, 2025 Item 1. Financial Statements (unaudited) This section presents Axon Enterprise, Inc.'s unaudited consolidated financial statements for the quarter ended March 31, 2025, including balance sheets, statements of operations, stockholders' equity, cash flows, and accompanying condensed notes Consolidated Balance Sheets This section provides a snapshot of Axon's financial position, detailing assets, liabilities, and stockholders' equity as of March 31, 2025, and December 31, 2024 | (in thousands) | March 31, 2025 | December 31, 2024 | | :--------------------------------- | :------------- | :---------------- | | ASSETS | | | | Cash and cash equivalents | $1,092,938 | $454,844 | | Short-term investments | 1,099,230 | 333,235 | | Total current assets | 3,776,589 | 2,297,481 | | Total assets | $6,083,159 | $4,474,588 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Current portion of notes payable, net | 278,915 | 680,289 | | Total current liabilities | 1,336,622 | 1,677,875 | | Long-term notes payable, net | 1,727,797 | — | | Total liabilities | 3,527,306 | 2,146,923 | | Total stockholders' equity | 2,555,853 | 2,327,665 | | Total liabilities and stockholders' equity | $6,083,159 | $4,474,588 | - Total assets increased by $1.61 billion from December 31, 2024, to March 31, 2025, primarily driven by increases in cash and cash equivalents and short-term investments[15] - Total liabilities increased significantly, mainly due to the reclassification of long-term notes payable and the issuance of new Senior Notes, while current portion of notes payable decreased[15] Consolidated Statements of Operations and Comprehensive Income This section outlines Axon's financial performance, presenting net sales, operating expenses, net income, and earnings per share for the three months ended March 31, 2025 and 2024 | (in thousands, except per share data) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 (As Restated) | | :------------------------------------ | :-------------------------------- | :---------------------------------------------- | | Net sales | $603,633 | $459,871 | | Cost of sales | 237,894 | 201,243 | | Gross margin | 365,739 | 258,628 | | Total operating expenses | 374,532 | 242,172 | | (Loss) income from operations | (8,793) | 16,456 | | Net income | $87,980 | $133,352 | | Basic EPS | $1.14 | $1.77 | | Diluted EPS | $1.08 | $1.73 | | Comprehensive income | $88,214 | $132,445 | - Net sales increased by 31.3% YoY to $603.63 million, driven by growth in both product and service sales[17] - The company reported an operating loss of $8.79 million for Q1 2025, a significant decrease from an operating income of $16.46 million in Q1 2024, primarily due to increased operating expenses[17] - Net income decreased to $87.98 million in Q1 2025 from $133.35 million in Q1 2024, impacting both basic and diluted EPS[17] Consolidated Statements of Stockholders' Equity This section details changes in Axon's stockholders' equity, including common stock, additional paid-in capital, and retained earnings, for the period ended March 31, 2025 | (in thousands, except share data) | Balance, Dec 31, 2024 | Issuance of common stock under employee plans, net | Stock-based compensation | Induced conversion of convertible debt | Tax effect of partial repurchase of convertible debt | Net income | Other comprehensive income, net | Balance, Mar 31, 2025 | | :-------------------------------- | :-------------------- | :------------------------------------------------- | :----------------------- | :------------------------------------- | :--------------------------------------------------- | :--------- | :------------------------------ | :-------------------- | | Common Stock Shares | 76,619,331 | 190,558 | — | 1,038,259 | — | — | — | 77,848,148 | | Additional Paid-in Capital | $1,689,781 | $(5,035) | $140,239 | $20,819 | $(16,049) | — | — | $1,829,755 | | Retained Earnings | $812,014 | — | — | — | — | $87,980 | — | $899,994 | | Total Stockholders' Equity | $2,327,665 | $(5,035) | $140,239 | $20,819 | $(16,049) | $87,980 | $234 | $2,555,853 | - Total stockholders' equity increased from $2.33 billion at December 31, 2024, to $2.56 billion at March 31, 2025[19] - Key drivers of the change include $140.24 million in stock-based compensation, $87.98 million in net income, and $20.82 million from the induced conversion of convertible debt[19] Consolidated Statements of Cash Flows This section presents Axon's cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2025 and 2024 | (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 (As Restated) | | :------------------------------------ | :-------------------------------- | :---------------------------------------------- | | Net cash provided by (used in) operating activities | $25,794 | $(15,938) | | Net cash used in investing activities | $(702,217) | $(174,044) | | Net cash provided by (used in) financing activities | $1,313,226 | $(2,710) | | Net increase (decrease) in cash and cash equivalents | $637,995 | $(194,670) | | Cash and cash equivalents, end of period | $1,092,938 | $403,870 | - Net cash provided by operating activities significantly improved to $25.79 million in Q1 2025 from a use of $(15.94) million in Q1 2024[22] - Net cash used in investing activities increased substantially to $(702.22) million in Q1 2025, primarily due to higher purchases of investments[22] - Net cash provided by financing activities surged to $1.31 billion in Q1 2025, driven by the issuance of $1.75 billion in Senior Notes, partially offset by payments for induced conversion of convertible debt[22] Condensed Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements, covering significant accounting policies, segment information, and other financial notes Note 1 - Organization and Summary of Significant Accounting Policies This note describes Axon's business, mission, restatement of prior financial statements, segment realignment, and significant accounting policies including warranty reserves and debt accounting - Axon Enterprise, Inc. is a provider of public safety technology solutions, with a mission to protect life in service of promoting peace, justice, and strong institutions[23] - The company restated previously issued financial statements for March 31, 2024, due to material errors related to the balance sheet presentation of convertible senior notes and principal vs. agent accounting of certain reseller arrangements[26][27][30] - Effective Q1 2025, Axon realigned its business into two reportable segments: 'Connected Devices' (hardware solutions like CEDs, body cameras, drones) and 'Software & Services' (cloud-based software solutions like Axon Evidence, RMS)[35] Warranty Reserve Changes (in thousands) | | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :----------------------- | :-------------------------------- | :-------------------------------- | | Balance, beginning of period | $8,284 | $7,374 | | Utilization of reserve | (1,701) | (2,207) | | Warranty expense | 3,779 | 1,119 | | Balance, end of period | $10,362 | $6,286 | - Axon early adopted ASU 2024-04, Debt (Topic 470): Debt with Conversion and Other Options, in March 2025 to clarify accounting for induced conversion or debt extinguishment[55] Note 2 - Revenues This note details Axon's revenue breakdown by segment, product/service offering, and geography, along with information on remaining performance obligations Revenues by Segment and Product/Service Offering (in thousands) | | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Connected Devices | | | | TASER | $195,495 | $164,599 | | Personal Sensors | 88,405 | 68,000 | | Platform Solutions | 56,996 | 37,825 | | Software & Services | | | | Software and Services | 262,737 | 189,447 | | Total | $603,633 | $459,871 | Revenues by Geography (in thousands) | | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :-------------- | :-------------------------------- | :-------------------------------- | | United States | $529,383 (88%) | $391,541 (85%) | | Other countries | $74,250 (12%) | $68,330 (15%) | | Total | $603,633 (100%) | $459,871 (100%) | - Remaining performance obligations totaled approximately $7.7 billion as of March 31, 2025, with 20%-25% expected to be recognized over the next 12 months[59] Note 3 - Cash, Cash Equivalents and Investments This note provides a detailed breakdown of Axon's cash, cash equivalents, marketable securities, and available-for-sale debt investments, including unrealized gains and losses Cash, Cash Equivalents, Marketable Securities and Available-for-Sale Debt Investments (in thousands) as of March 31, 2025 | | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Cash and Cash Equivalents | Marketable Securities | Short-Term Investments | | :-------------------- | :------------- | :--------------------- | :---------------------- | :--------- | :------------------------ | :-------------------- | :--------------------- | | Cash | $95,886 | — | — | $95,886 | $95,886 | — | — | | Money market funds | 558,249 | — | — | 558,249 | 558,249 | — | — | | U.S. Treasury bills | 205,498 | 23 | (9) | 205,512 | 82,350 | — | 123,162 | | Marketable securities | 90,000 | 84,870 | — | 174,870 | — | 174,870 | — | | Term deposits | 742,415 | — | — | 742,415 | 157,415 | — | 585,000 | | Corporate bonds | 346,150 | 32 | (173) | 346,009 | 88,066 | — | 257,943 | | Total | $2,282,318 | $84,926 | $(206) | $2,367,038 | $1,092,938 | $174,870 | $1,099,230 | - As of March 31, 2025, the company held $515.4 million of available-for-sale debt investments with unrealized losses, none of which have been in a continuous unrealized loss position for 12 months or longer[60] - An unrealized loss of $23.4 million on marketable securities was recorded for the three months ended March 31, 2025, compared to an unrealized gain of $21.8 million in the prior year[61] Note 4 - Expected Credit Losses This note presents the roll-forward of the allowance for expected credit losses and its breakdown by receivable type for Axon's financial assets Allowance for Expected Credit Losses Roll-Forward (in thousands) | | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Balance, beginning of period | $5,609 | $3,966 | | Provision for expected credit losses | 2,955 | 217 | | Amounts written off charged against the allowance | (487) | (353) | | Balance, end of period | $8,077 | $3,844 | Allowance for Expected Credit Losses by Receivable Type (in thousands) | | March 31, 2025 | December 31, 2024 | | :------------------------------------ | :------------- | :---------------- | | Accounts receivable and notes receivable, current | $3,204 | $3,322 | | Contract assets, net | 4,825 | 2,239 | | Long-term notes receivable, net of current portion | 48 | 48 | | Total allowance | $8,077 | $5,609 | Note 5 - Inventory This note details the composition of Axon's inventory, including raw materials, work-in-process, and finished goods, as of March 31, 2025, and December 31, 2024 Inventory Composition (in thousands) | | March 31, 2025 | December 31, 2024 | | :-------------- | :------------- | :---------------- | | Raw materials | $108,087 | $86,840 | | Work-in-process | 8,387 | 6,230 | | Finished goods | 163,195 | 172,246 | | Total inventory | $279,669 | $265,316 | - Total inventory increased by $14.35 million from December 31, 2024, to March 31, 2025, primarily driven by an increase in raw materials and work-in-process[66] Note 6 – Goodwill and Intangible Assets This note outlines changes in Axon's goodwill by segment and provides a breakdown of intangible assets, including amortization expense Changes in Goodwill (in thousands) | | Connected Devices | Software and Services | Total | | :------------------------------ | :---------------- | :-------------------- | :---- | | Balance, beginning of period | $46,674 | $710,164 | $756,838 | | Purchase accounting adjustments | (160) | (2,535) | (2,695) | | Foreign currency translation adjustments | 119 | 1,620 | 1,739 | | Balance, end of period | $46,633 | $709,249 | $755,882 | Intangible Assets (in thousands) as of March 31, 2025 | | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | | :-------------------------- | :-------------------- | :----------------------- | :------------------ | | Developed technology | $133,572 | $(26,299) | $107,273 | | Customer relationships | 33,482 | (5,728) | 27,754 | | In-process research and development | 25,750 | — | 25,750 | | Total intangible assets | $207,114 | $(38,280) | $168,834 | - Amortization expense for intangible assets was $6.6 million for the three months ended March 31, 2025, an increase from $3.0 million in the prior year[69] Note 7 - Strategic Investments This note details Axon's strategic investment activities, including acquisitions, sales, and the recognition of gains and losses on these investments - During Q1 2025, Axon acquired additional equity interests in an existing strategic investee for $203.4 million[74] - A gain of $167.4 million was recognized related to an observable price change of a separate existing strategic investee, and interests were sold for $340.7 million in cash consideration, realizing $273.5 million in previously unrealized gains[75] Strategic Investments Carrying Value (in thousands) as of March 31, 2025 | | Strategic Investments | Warrants | Call options | Total | | :------------------------- | :-------------------- | :------- | :----------- | :---- | | Non-marketable equity securities | $388,390 | $4,368 | $11,600 | $404,358 | | Non-marketable debt securities | 9,335 | — | — | 9,335 | | Total strategic investments | $397,725 | $4,368 | $11,600 | $413,693 | Gains and Losses on Strategic Investments (in thousands) for Three Months Ended March 31, 2025 | | Strategic Investments | Warrants | Call options | Total | | :------------------------------------ | :-------------------- | :------- | :----------- | :---- | | Realized gains (losses), net | $273,478 | — | — | $273,478 | | Reversal of cumulative unrealized gains, net | (136,982) | — | — | (136,982) | | Unrealized gains on strategic investments still held | 30,825 | — | — | 30,825 | | Gains (losses) on strategic investments, net | $167,321 | — | — | $167,321 | Note 8 - Variable Interest Entities This note discusses Axon's variable interests in unconsolidated non-public entities, primarily for strategic partnerships in public safety technology solutions - Axon holds variable interests in unconsolidated non-public VIEs, primarily to create strategic partnerships in public safety technology solutions[81] Carrying Value of Variable Interest - Assets (in thousands) | | March 31, 2025 | December 31, 2024 | | :-------------------------------- | :------------- | :---------------- | | Carrying value of variable interest - assets | $25,922 | $25,171 | Note 9 - Accrued Liabilities This note provides a breakdown of Axon's accrued liabilities, including income tax payable, salaries, commissions, and warranty expense, as of March 31, 2025, and December 31, 2024 Accrued Liabilities (in thousands) | | March 31, 2025 | December 31, 2024 | | :-------------------------- | :------------- | :---------------- | | Accrued income tax payable | $82,602 | $17,091 | | Accrued salaries and benefits | 24,044 | 25,233 | | Accrued commissions | 23,226 | 88,237 | | Accrued cloud hosting fees | 18,425 | 10,673 | | Accrued bonus | 16,889 | 59,780 | | Accrued warranty expense | 10,362 | 8,284 | | Accrued interest | 6,423 | 134 | | Total accrued liabilities | $266,604 | $279,193 | - Accrued income tax payable significantly increased from $17.09 million to $82.60 million, while accrued commissions and bonus decreased[84] Note 10 – Notes Payable, Net This note details Axon's notes payable, including the issuance of new Senior Notes and the repurchase of 2027 Notes, along with related interest expenses Notes Payable, Net (in thousands) | | March 31, 2025 | December 31, 2024 | | :------------------------------------ | :------------- | :---------------- | | 2030 Senior Notes | $1,000,000 | — | | 2033 Senior Notes | 750,000 | — | | 2027 Notes | 282,547 | 690,000 | | Total principal | 2,032,547 | 690,000 | | Total carrying amount of notes payable, net | 2,006,712 | 680,289 | | Long-term notes payable, net | $1,727,797 | — | - In March 2025, Axon issued $1.0 billion of 2030 Senior Notes (6.125% interest) and $750.0 million of 2033 Senior Notes (6.250% interest), with combined net proceeds of approximately $1.73 billion[86][87] - Axon repurchased approximately $407.5 million aggregate principal amount of 2027 Notes through induced conversions, resulting in an expense of $28.7 million and leaving $282.5 million outstanding[96] Interest Expense Related to Notes (in thousands) | | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Senior Notes interest expense | $6,178 | — | | 2027 Notes interest expense | $1,527 | $1,645 | Note 11 - Income Taxes This note explains Axon's effective tax rate, its drivers, and changes in deferred tax assets for the three months ended March 31, 2025 and 2024 Effective Tax Rate | | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Effective tax rate | 18.8% | 19.6% | - The decrease in effective tax rate was primarily due to higher R&D tax credits and discrete benefits from stock-based compensation, partially offset by executive compensation limitations and increased uncertain tax positions[104][105] - Deferred tax assets increased from $301.9 million to $333.3 million, mainly due to stock-based compensation expense and capitalization of R&D costs, partially offset by reversal of assets from 2027 Notes repurchase[106] Note 12 - Stockholders' Equity This note details changes in Axon's stockholders' equity, including information on stock plans, restricted stock unit activity, and stock-based compensation expense - Shareholders approved the 2024 eXponential Stock Plan (XSP) with 4.5 million shares reserved for XSUs, and a 2024 CEO Performance Award of 679,102 XSUs, both with stock price, operational, and service vesting conditions[108][109][110] Restricted Stock Unit (RSU) Activity (in thousands) | | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Units outstanding, beginning of year | 1,684 | 1,615 | | Granted | 15 | 478 | | Released | (186) | (174) | | Units outstanding, end of period | 1,486 | 1,877 | | Aggregate intrinsic value at quarter end | $781,511 | $587,321 | Stock-based Compensation Expense (in thousands) | | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Cost of product and service sales | $12,887 | $29,595 | | Selling, general and administrative expenses | 71,347 | 23,155 | | Research and development expenses | 56,005 | 22,365 | | Total stock-based compensation expense | $140,239 | $75,115 | Note 13 - Line of Credit This note describes the amendment to Axon's revolving credit facility, including the increased principal amount, extended maturity, and available borrowing capacity - In March 2025, the revolving credit facility was amended, increasing the aggregate principal amount by $100.0 million to $300.0 million and extending the maturity date to March 11, 2030[122] - As of March 31, 2025, no amounts were drawn under the Credit Agreement, with $8.7 million in outstanding letters of credit and $291.3 million in available borrowing[123] - The company is in compliance with the net leverage ratio and consolidated interest coverage ratio covenants under the Credit Agreement[124] Note 14 - Commitments and Contingencies This note outlines Axon's legal proceedings, including product liability, antitrust, and patent infringement lawsuits, as well as outstanding letters of credit and surety bonds - Axon is a defendant in product liability lawsuits alleging wrongful death or personal injury related to TASER CED use, which the company aggressively defends[125][126] - Two antitrust lawsuits are pending in New Jersey and Arizona, based on FTC allegations regarding Axon's 2018 acquisition of Vievu LLC, which Axon denies[127] - A patent infringement suit by Airspace Systems, Inc. against Dedrone Holdings, Inc. (and Axon after acquisition) is pending, involving drone technology, with litigation stayed until September 15, 2025[129] - As of March 31, 2025, Axon had $8.7 million in outstanding letters of credit under its credit facility and $21.6 million in outstanding surety bonds[132] Note 15 – Accumulated Other Comprehensive Income (Loss) This note details changes in Axon's accumulated other comprehensive income (loss), including unrealized losses on available-for-sale investments and foreign currency translation adjustments Changes in Accumulated Other Comprehensive Income (Loss) (in thousands) | | Unrealized Losses on Available-for-Sale Investments | Foreign Currency Translation | Total | | :-------------------------- | :---------------------------------------- | :--------------------------- | :---- | | Balance, December 31, 2024 | $(30) | $(18,154) | $(18,184) | | Other comprehensive (loss) income | (124) | 358 | 234 | | Balance, March 31, 2025 | $(154) | $(17,796) | $(17,950) | - Accumulated other comprehensive loss slightly decreased from $(18.18) million to $(17.95) million, primarily due to positive foreign currency translation adjustments[133] Note 16 - Segment Data This note presents Axon's financial results by its two reportable segments, Connected Devices and Software & Services, including net sales, cost of sales, and adjusted gross margin - Effective Q1 2025, financial results are reported in two segments: Connected Devices and Software & Services, with prior period data recast for comparability[135] Segment Financial Results (in thousands) for Three Months Ended March 31, 2025 | | Connected Devices | Software and Services | Total | | :------------------ | :---------------- | :-------------------- | :---- | | Net sales | $340,896 | $262,737 | $603,633 | | Cost of sales | 170,181 | 67,713 | 237,894 | | Adjusted gross margin | $180,135 | $204,061 | $384,196 | Adjusted Gross Margin Percentage | | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Connected Devices | 52.8% | 54.1% | | Software and Services | 77.7% | 76.1% | | Total Adjusted Gross Margin | 63.6% | 63.2% | Note 17 – Business Combinations This note describes Axon's business combinations, including the acquisitions of Fusus and Dedrone, and the recognition and reallocation of goodwill and intangible assets - On January 31, 2024, Axon acquired the remaining 79.7% interest in Fusus for approximately $241.3 million, recognizing $249.9 million of goodwill and $72.9 million of identifiable intangible assets[138] - On October 1, 2024, Axon acquired the remaining 79.8% interest in Dedrone for approximately $391.1 million, recognizing $448.4 million of goodwill and $100.5 million of identifiable intangible assets[140][142] - Goodwill recognized from both Fusus and Dedrone acquisitions has been reallocated to the new Connected Devices and Software & Services segments[139][143] Note 18 - Restatement of Prior Period Financial Statements This note explains the restatement of prior period financial statements to correct immaterial errors related to principal vs. agent accounting and the classification of 2027 Notes - Prior period financial statements were restated to correct immaterial errors related to principal vs. agent accounting under ASC 606 and the balance sheet classification of 2027 Notes[144] Impact of Restatement on Consolidated Statement of Operations and Comprehensive Income (in thousands) for Three Months Ended March 31, 2024 | | As Reported | Adjustments | As Restated | | :------------------------------------ | :---------- | :---------- | :---------- | | Net sales from products | $272,048 | $(1,624) | $270,424 | | Net sales from services | 188,688 | 759 | 189,447 | | Net sales | 460,736 | (865) | 459,871 | | Gross margin | 260,046 | (1,418) | 258,628 | | Net income | $133,218 | $134 | $133,352 | - The restatement had no impact on disclosed basic and diluted income per common and common equivalent shares for the three months ended March 31, 2024[146] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Axon's financial performance for the three months ended March 31, 2025, discussing key financial results, segment realignment, non-GAAP measures, liquidity, and critical accounting estimates Overview This overview highlights Axon's mission, business segment realignment, and key financial performance metrics for Q1 2025, including revenues, operating loss, and gross margin - Axon's mission is to protect life in public safety, aiming to cut gun-related deaths between police and the public in the U.S. in half by 2033[151] - The company realigned its business into two reportable segments: Connected Devices and Software & Services, effective Q1 2025, to enhance transparency between hardware and software offerings[152] Key Financial Highlights (in millions) | Metric | Q1 2025 | Q1 2024 | Change (%) | | :-------------------- | :------ | :------ | :--------- | | Revenues | $603.6 | $459.9 | 31.3% | | (Loss) Income from operations | $(8.8) | $16.5 | -153.3% | | Gross margin | $365.7 | $258.6 | 41.4% | | Gross margin % | 60.6% | 56.2% | 4.4 pp | | Net income | $88.0 | $133.4 | -34.0% | Results of Operations This section analyzes Axon's net sales by product and service, segment performance, operating expenses, and other income for the three months ended March 31, 2025 and 2024 Net Sales Breakdown (in thousands) | | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Net sales from products | $340,896 (56.5%) | $270,424 (58.8%) | | Net sales from services | $262,737 (43.5%) | $189,447 (41.2%) | | Total net sales | $603,633 (100.0%) | $459,871 (100.0%) | - Connected Devices segment net sales increased 26.1% YoY to $340.9 million, driven by higher TASER 10 volume, AB4 body camera adoption, and growth in virtual reality training and counter-drone equipment[156] - Software and Services segment net sales increased 38.7% YoY to $262.7 million, primarily due to increased users and adoption of premium add-on features[157] Operating Expenses (in thousands) | | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Selling, general and administrative | $223,509 | $151,075 | | Research and development | 151,023 | 91,097 | | Total operating expenses | $374,532 | $242,172 | - SG&A expenses increased by $72.4 million (47.9%) YoY, mainly due to higher stock-based compensation ($48.2 million increase) and increased headcount and wages[160][161][162] - R&D expenses increased by $59.9 million (65.8%) YoY, primarily driven by a $33.6 million increase in stock-based compensation and higher headcount and wages[163][164] - Other income, net, decreased to $114.4 million from $139.1 million, primarily due to a noncash unrealized loss on marketable securities and debt inducement expense, partially offset by realized and unrealized gains on strategic investments[166] Non-GAAP Measures This section presents Axon's non-GAAP financial measures, including EBITDA, Adjusted EBITDA, and Adjusted Gross Margin, to provide insights into core operating performance - Axon uses non-GAAP financial measures like EBITDA, Adjusted EBITDA, and Adjusted Gross Margin to provide a clearer view of core operating results, excluding items such as stock-based compensation and amortization of acquired intangibles[170][172] EBITDA and Adjusted EBITDA Reconciliation (in thousands) | | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Net income | $87,980 | $133,352 | | EBITDA | $124,803 | $167,086 | | Stock-based compensation expense | 140,239 | 75,115 | | Unrealized and realized gains on strategic investments and marketable securities, net | (143,921) | (97,419) | | Debt inducement expense | 28,666 | — | | Adjusted EBITDA | $155,170 | $109,071 | Adjusted Gross Margin Reconciliation (in thousands) | | Connected Devices (Q1 2025) | Software and Services (Q1 2025) | Total (Q1 2025) | Connected Devices (Q1 2024) | Software and Services (Q1 2024) | Total (Q1 2024) | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------- | :-------------------------- | :-------------------------- | :-------------- | | Gross margin | $170,715 | $195,024 | $365,739 | $118,264 | $140,364 | $258,628 | | Stock-based compensation expense | 7,476 | 5,411 | 12,887 | 27,827 | 1,768 | 29,595 | | Amortization of acquired intangible assets | 3,626 | 1,337 | 4,963 | 325 | 1,963 | 2,288 | | Adjusted gross margin | $180,135 | $204,061 | $384,196 | $146,416 | $144,095 | $290,511 | | Adjusted gross margin % | 52.8% | 77.7% | 63.6% | 54.1% | 76.1% | 63.2% | Liquidity and Capital Resources This section analyzes Axon's liquidity and capital resources, including cash and investments, credit facility availability, and a summary of cash flows from operating, investing, and financing activities Cash and Investments Summary (in thousands) | | March 31, 2025 | December 31, 2024 | Dollar Change | | :-------------------------- | :------------- | :---------------- | :------------ | | Cash and cash equivalents | $1,092,938 | $454,844 | $638,094 | | Available-for-sale investments | 1,099,230 | 333,235 | 765,995 | | Total | $2,192,168 | $788,079 | $1,404,089 | - Cash and cash equivalents increased by $638.1 million, and available-for-sale investments increased by $766.0 million, primarily due to investment activity following the issuance of Senior Notes[174] - The Credit Agreement provides a $300.0 million revolving credit facility, with $291.3 million available for borrowing as of March 31, 2025, and no amounts drawn[175] Cash Flows Summary (in thousands) | | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Dollar Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :------------ | | Operating activities | $25,794 | $(15,938) | $41,732 | | Investing activities | $(702,217) | $(174,044) | $(528,173) | | Financing activities | $1,313,226 | $(2,710) | $1,315,936 | - Net cash provided by operating activities improved by $41.7 million, driven by changes in net income, stock-based compensation, and working capital[180] - Net cash provided by financing activities increased by $1.3 billion, primarily from the issuance of $1.75 billion in Senior Notes, partially offset by payments for induced conversion of 2027 Notes[182] Critical Accounting Estimates This section confirms that Axon's critical accounting estimates have not significantly changed for the three months ended March 31, 2025, as discussed in its amended 2024 Annual Report - The company's critical accounting estimates, as discussed in its amended 2024 Annual Report on Form 10-K/A, have not undergone significant changes for the three months ended March 31, 2025[184] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section assesses Axon's exposure to market risks, specifically interest rate risk and exchange rate risk, and outlines strategies for managing these exposures - A hypothetical 100 basis point increase in interest rates would result in a $2.1 million decline in the fair market value of the investment portfolio as of March 31, 2025[186] - The $300.0 million revolving credit facility bears interest at SOFR plus 1.25% to 1.75%, exposing future borrowings to interest rate fluctuations[187] - The majority of international sales are transacted in foreign currencies, subjecting results to exchange rate fluctuations, which can impact product costs and competitiveness[188] - Axon has not engaged in currency hedging activities to date but may consider foreign currency forward and option contracts in the future[189] Item 4. Controls and Procedures This section addresses the effectiveness of Axon's disclosure controls and procedures, noting material weaknesses in internal control over financial reporting and ongoing remediation efforts - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were not effective as of March 31, 2025, due to unremediated material weaknesses in internal control over financial reporting[190] - Management is implementing remediation plans for identified material weaknesses, which cannot be considered remediated until controls operate effectively for a sufficient period and are tested[191] - There have been no changes in internal control over financial reporting during the quarter ended March 31, 2025, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[193] PART II - OTHER INFORMATION This section covers additional information not included in the financial statements, such as legal proceedings, risk factors, equity sales, defaults, mine safety, and exhibits Item 1. Legal Proceedings This section incorporates by reference the discussion of legal proceedings from Note 14 to the consolidated financial statements - The discussion of legal proceedings is incorporated by reference from Note 14 to the consolidated financial statements[195] Item 1A. Risk Factors This section provides a comprehensive overview of the principal risks that could materially adversely affect Axon's business, financial condition, results of operations, and cash flows, categorized into strategic, operational, financial, legal and compliance, and indebtedness-related risks Risk Factor Summary This summary outlines key risk categories including Strategic, Operational, Financial, Legal and Compliance, and risks related to the company's indebtedness - The summary outlines key risk categories including Strategic, Operational, Financial, and Legal and Compliance Risks[197][198][201][202] - Risks related to the company's indebtedness are also highlighted as a principal risk factor[204] Strategic Risks This section details risks related to product acceptance, dependence on CED sales, new product development, technological change, negative publicity, acquisitions, growth management, and key personnel - Substantial dependence on acceptance of products and services by law enforcement agencies globally; declining purchases would materially adversely affect business[199][206][209] - Dependence on sales of Conducted Energy Devices (CEDs); failure to maintain widespread acceptance would diminish growth prospects[210] - Inability to successfully design, introduce, sell, and deploy new products or features in a timely and cost-effective manner could adversely affect business and financial results[212][216] - Risks associated with rapid technological change and new competing products, including AI and machine learning, could render existing products obsolete[217] - Negative publicity, whether merited or not, could damage the Axon brand and adversely impact sales and operating results[220][221][224] - Acquisitions or investments in other products, technologies, or businesses could disrupt operations, dilute shareholder value, and adversely affect operating results due to integration difficulties and unforeseen costs[225][226][228][229] - Failure to successfully manage rapid growth or plan for future growth could strain management, operational, and financial resources[230][231] - High dependence on executive officers, particularly CEO Patrick W. Smith; loss of key personnel could adversely impact new product development and business execution[232][233][234] Operational Risks This section covers risks associated with supply chain, economic conditions, manufacturing capacity, product development delays, sales cycles, security breaches, catastrophic events, AI deployment, cloud service defects, product defects, international operations, personnel retention, and regulatory compliance - Unavailability of materials or higher costs from domestic and international suppliers, including single-source components, could adversely affect financial results and production capacity[235][236][237][238][239] - Material adverse developments in domestic and global economic conditions (e.g., conflicts, inflation, interest rates) could negatively impact revenue and operating results, especially due to pressure on law enforcement budgets[240] - Future success depends on the ability to manage growth and increase manufacturing production capacity to meet increased demand, which may incur significant costs and delays[241] - Delays in product development schedules for CEDs, devices, sensors, and software could adversely affect revenues and cash flows, as new products require long development and testing periods[242][243] - Lengthy sales cycles, particularly with government entities, require significant resource expenditure before sales are realized, with no guarantee of revenue[244] - Security breaches of products, services, or third-party providers could lead to unauthorized data access, undermine confidence, disrupt business, and result in significant legal and financial exposure[245][246][247][248][249] - Catastrophic events (e.g., natural disasters, cyber attacks, public health crises) could disrupt systems, delay sales, and harm business prospects and financial condition[250][251][252][254] - Uncertainty in the development, deployment, and use of AI in products and services could lead to defects, errors, biased outcomes, and reputational damage, compounded by evolving legal and regulatory landscapes[255][256][257][258][259][260][261] - Defects or disruptions in cloud services, relying on third-party providers, could impact demand, lead to substantial liability, and damage reputation, especially for public safety customers[262][263] - Defects in products, including software errors, could reduce demand, result in product recalls, and lead to loss of sales, delayed market acceptance, and reputational harm[264][265] - International operations expose the company to additional risks, including foreign ownership restrictions, stringent exchange controls, trade regulations, and differing labor laws[266][267][268][269] - Dependence on attracting and retaining key management, sales, and technical personnel; failure to do so could adversely impact business execution and growth[270][271][272][274][275] - Failure to comply with federal, state, or local regulations applicable to the TASER 10 CED, including ATF rules and firearm laws, could result in governmental actions, litigation, or harm to business[276][277][278] Financial Risks This section addresses financial risks including delayed cash collections from subscriptions, gross margin fluctuations, revenue recognition for SaaS, government budgetary constraints, bidding processes, cash concentration, stock transactions, currency fluctuations, tax rate changes, quarterly volatility, and investment impairments - An increasing percentage of revenue from subscription billing arrangements may result in delayed cash collections and increased customer credit risk on receivables and contract assets[283][284] - Gross margin depends on factors like product mix, cost structure, and acquisitions, which could cause significant fluctuations and impact stock price[285][287] - Revenue for SaaS products is recognized over multi-year contract terms, delaying the reflection of new business in operating results[288] - Most end-user customers are government agencies subject to budgetary and political constraints, which may delay sales, result in cancellations, or lead to non-renewal of contracts[289][290][291][292] - The open bidding process for government contracts introduces uncertainty in securing future awards and favorable terms[293][295][296] - Holding the majority of cash balances at three depository institutions, some uninsured, exposes the company to potential losses if these institutions fail[297][298] - Stock transactions, including stock-based compensation and equity issuances for acquisitions, may have a material, unpredictable impact on operating results and result in dilution to existing shareholders[299][300][301] - Financial performance is subject to risks associated with changes in the value of the U.S. dollar versus local currencies, impacting international pricing, sales, and earnings[302][303][304] - Unanticipated changes in the effective tax rate and additional tax liabilities, influenced by statutory rates, geographic earnings, and regulatory changes, could adversely affect operating results and financial condition[305][306][307][308][309] - Revenue and operating results may fluctuate unexpectedly quarter-to-quarter due to various factors, impacting stock price[310][312] - Profitability could suffer from declines in fair value or impairment of investments, including strategic investments, and could fluctuate with increases in fair value[313] Legal and Compliance Risks This section outlines legal and compliance risks such as product liability claims, other litigation, intellectual property infringement, inability to protect IP, open-source software use, evolving regulations, procurement laws, governance expectations, and forum provisions - The company may face personal injury, wrongful death, product liability, and other liability claims related to the use of its CED products, which could harm its reputation and financial condition[314][315][316][317] - Other litigation, government inquiries, and regulatory actions, including intellectual property and antitrust cases, may subject the company to significant costs, judgments, and divert management attention[318][319] - Exposure to intellectual property infringement claims from third parties, including non-practicing entities, could incur substantial litigation costs, damages, and inhibit technology use[320][321] - Inability to protect intellectual property (patents, trademarks, copyrights, trade secrets) could decrease brand value, lead to loss of competitive market advantage, and incur costly prosecution[322][323][324][326] - Inability to enforce patent rights internationally may limit the ability to prevent competitors from using product features in foreign jurisdictions[327] - The use of open-source software in products, services, and technologies may expose the company to additional risks, including disclosure of proprietary source code[328] - A variety of new and existing laws and/or interpretations (privacy, data protection, content, competition, etc.) could materially and adversely affect the business, increasing compliance costs and potentially leading to liabilities[329][330][331] - Uncertainties with complex U.S. federal, state, local, and foreign procurement laws and regulations could cause the company to incur costs and adversely affect business[332][333] - Evolving corporate governance and public disclosure regulations and expectations, including ESG matters, could increase expenses, divert management time, and adversely affect reputation[334][335][336][338] - Exclusive forum provisions in amended and restated bylaws could increase costs or limit shareholders' ability to bring claims in preferred judicial forums[339][340] Risks Related to our Indebtedness This section details risks associated with Axon's debt obligations, including cash resource requirements, conditional conversion features, shareholder dilution, hedge and warrant transactions, counterparty risk, and restrictive covenants - Fulfilling debt obligations requires significant cash resources, which may exceed available cash flow, potentially requiring asset sales, debt restructuring, or additional equity capital[341] - The conditional conversion features of the 2027 Notes may adversely affect financial condition and operating results by requiring cash settlement and potentially classifying debt as a current liability[342][343] - Conversion of the 2027 Notes may dilute shareholder ownership and could depress the price of common stock, especially if settled with shares[344] - The 2027 Note Hedge and Warrant transactions may impact the value of the 2027 Notes and common stock, with potential dilutive effects from Warrants and market fluctuations from counterparty hedging activities[345][347][348][349] - Exposure to counterparty risk with respect to the 2027 Note Hedge transactions, as counterparties are financial institutions and obligations are unsecured, could lead to adverse tax consequences and greater dilution[350][351][352] - Indebtedness contains restrictive covenants that could limit operational flexibility, affecting business expansion, strategic transactions, and financing, thereby adversely affecting common stock value[353][354] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds during the reporting period - No unregistered sales of equity securities or use of proceeds occurred during the period[355] Item 3. Defaults Upon Senior Securities This section confirms that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities occurred during the period[356] Item 4. Mine Safety Disclosures This section indicates that there were no mine safety disclosures required for the reporting period - No mine safety disclosures were reported[356] Item 5. Other Information This section details Rule 10b5-1(c) trading plans adopted by certain directors or officers during the three months ended March 31, 2025 Rule 10b5-1(c) Trading Plans Adopted by Directors/Officers | Name and Title | Adoption Date | Expiration Date | Aggregate Number of Securities to be Sold | | :------------------------------------------ | :------------ | :-------------- | :---------------------------------------- | | Jeffrey Kunins, Chief Product Officer and Chief Technology Officer | March 10, 2025 | December 15, 2025 | 15,977 | | Jennifer Mak, Chief Accounting Officer | March 14, 2025 | February 27, 2026 | 8,768 | - No other Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements were entered into, modified, or terminated by directors or officers during the period[358] Item 6. Exhibits This section lists all exhibits filed as part of the Quarterly Report on Form 10-Q, including corporate documents, debt indentures, employment agreements, and certifications - Key exhibits include Amended and Restated Certificate of Incorporation, Bylaws, Indentures for 2030 and 2033 Senior Notes, an Executive Employment Agreement, and certifications from the Principal Executive and Financial Officers[359] SIGNATURES This section confirms the official signing of the report by Axon's Chief Executive Officer and Chief Operating Officer/Chief Financial Officer - The report is duly signed on May 7, 2025, by Patrick Smith, Chief Executive Officer, and Brittany Bagley, Chief Operating Officer and Chief Financial Officer[362][364]