Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-16391
Axon Enterprise, Inc.
(Exact name of registrant as specified in its charter)
Delaware
86-0741227
(State or other jurisdiction ofincorporation or organization)
(I.R.S. EmployerIdentification No.)
17800 North 85th Street
85255
Scottsdale, Arizona
(Address of principal executive offices)
(Zip Code)
(480) 991-0797
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.00001 Par Value
AXON
The Nasdaq Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated Filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s common stock outstanding as of July 30, 2021 was 65,675,685.
AXON ENTERPRISE, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2021
Page
Special Note Regarding Forward-Looking Statements
ii
PART I - FINANCIAL INFORMATION
1
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2021 (Unaudited) and December 31, 2020
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months and Six Months Ended June 30, 2021 and 2020
2
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three Months and Six Months Ended June 30, 2021 and 2020
3
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020
5
Notes to Unaudited Condensed Consolidated Financial Statements
6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
Item 3. Quantitative and Qualitative Disclosures About Market Risk
42
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
43
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
44
SIGNATURES
45
This Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions and strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. From time to time, we also provide forward-looking statements in other materials we release to the public as well as verbal forward-looking statements. These forward-looking statements include, without limitation, statements regarding: proposed products and services and related development efforts and activities; expectations about the market for our current and future products and services; the impact of pending litigation; strategies and trends relating to subscription plan programs and revenues; our anticipation that contracts with governmental customers will be fulfilled; strategies and trends, including the benefits of, research and development investments; the sufficiency of our liquidity and financial resources; expectations about customer behavior; the impact on our investment portfolio of changes in interest rates; our potential use of foreign currency forward and option contracts; statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; statements of management’s strategies, goals and objectives and other similar expressions; as well as the ultimate resolution of financial statement items requiring critical accounting estimates, including those set forth in our Form 10-K for the year ended December 31, 2020. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Words such as “may,” “will,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions, as well as statements in future tense, identify forward-looking statements. However, not all forward-looking statements contain these identifying words.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. The following important factors could cause actual results to differ materially from those in the forward-looking statements: the potential global impacts of the COVID-19 pandemic; our exposure to cancellations of government contracts due to appropriation clauses, exercise of a cancellation clause, or non-exercise of contractually optional periods; our ability to design, introduce and sell new products or features; our ability to defend against litigation and protect our intellectual property, and the resulting costs of this activity; our ability to manage our supply chain and avoid production delays, shortages, and impacts to expected gross margins; the impact of stock compensation expense, impairment expense, and income tax expense on our financial results; customer purchase behavior, including adoption of our software as a service delivery model; negative media publicity regarding our products; the impact of product mix on projected gross margins; defects in our products; changes in the costs of product components and labor; loss of customer data, a breach of security, or an extended outage, including by our third party cloud-based storage providers; exposure to international operational risks; delayed cash collections and possible credit losses due to our subscription model; changes in government regulations in the U.S. and in foreign markets, especially related to the classification of our products by the United States Bureau of Alcohol, Tobacco, Firearms and Explosives; our ability to integrate acquired businesses; our ability to attract and retain key personnel; and counter-party risks relating to cash balances held in excess of FDIC insurance limits. Many events beyond our control may determine whether results we anticipate will be achieved. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements. The Annual Report on Form 10-K that we filed with the Securities and Exchange Commission ("SEC") on February 26, 2021 lists various important factors that could cause actual results to differ materially from expected and historical results. These factors are intended as cautionary statements for investors within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. Readers can find them under the heading “Risk Factors” in the Report on Form 10-K, and investors should refer to them. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.
Except as required by law, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q, 8-K and 10-K reports to the SEC. Our filings with the SEC may be accessed at the SEC’s web site at www.sec.gov.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30,
December 31,
2021
2020
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
266,372
155,440
Short-term investments
388,895
406,525
Accounts and notes receivable, net of allowance of $1,973 and $2,105 as of June 30, 2021 and December 31, 2020, respectively
201,907
229,201
Contract assets, net
86,561
63,945
Inventory
91,739
89,958
Prepaid expenses and other current assets
45,456
36,883
Total current assets
1,080,930
981,952
Property and equipment, net
119,933
105,494
Deferred tax assets, net
52,387
45,770
Intangible assets, net
7,870
9,448
Goodwill
25,178
25,205
Long-term investments
48,669
90,681
Long-term notes receivable, net of current portion
17,466
22,457
Long-term contract assets, net
31,691
20,099
Strategic investments
58,520
11,711
Other assets
84,244
68,206
Total assets
1,526,888
1,381,023
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
7,778
24,142
Accrued liabilities
66,908
59,843
Current portion of deferred revenue
186,909
163,959
Customer deposits
4,872
2,956
Other current liabilities
6,404
5,431
Total current liabilities
272,871
256,331
Deferred revenue, net of current portion
113,815
111,222
Liability for unrecognized tax benefits
4,550
4,503
Long-term deferred compensation
5,216
4,732
Deferred tax liability, net
377
649
Other long-term liabilities
32,360
27,331
Total liabilities
429,189
404,768
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; no shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively
—
Common stock, $0.00001 par value; 200,000,000 shares authorized; 65,674,346 and 63,766,555 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively
Additional paid-in capital
1,179,005
962,159
Treasury stock at cost, 20,220,227 shares as of June 30, 2021 and December 31, 2020
(155,947)
Retained earnings
74,867
169,901
Accumulated other comprehensive income (loss)
(227)
141
Total stockholders’ equity
1,097,699
976,255
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
Three Months Ended June 30,
Six Months Ended June 30,
Net sales from products
156,427
98,755
297,313
206,043
Net sales from services
62,368
42,504
116,501
82,378
Net sales
218,795
141,259
413,814
288,421
Cost of product sales
65,301
43,825
123,917
92,709
Cost of service sales
15,565
9,257
28,615
18,927
Cost of sales
80,866
53,082
152,532
111,636
Gross margin
137,929
88,177
261,282
176,785
Operating expenses:
Sales, general and administrative
177,662
72,293
304,259
135,320
Research and development
53,952
29,560
100,970
55,941
Total operating expenses
231,614
101,853
405,229
191,261
Loss from operations
(93,685)
(13,676)
(143,947)
(14,476)
Interest and other income, net
41,841
1,613
42,426
2,554
Loss before provision for income taxes
(51,844)
(12,063)
(101,521)
(11,922)
Provision for (benefit from) income taxes
(4,727)
18,696
(6,487)
14,763
Net loss
(47,117)
(30,759)
(95,034)
(26,685)
Net loss per common and common equivalent shares:
Basic
(0.72)
(0.51)
(1.47)
(0.44)
Diluted
Weighted average number of common and common equivalent shares outstanding:
65,166
60,346
64,604
59,977
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments
(369)
678
(368)
(1,694)
Comprehensive loss
(47,486)
(30,081)
(95,402)
(28,379)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Accumulated
Additional
Other
Total
Common Stock
Paid-in
Treasury Stock
Retained
Comprehensive
Stockholders’
Shares
Amount
Capital
Earnings
Income (Loss)
Equity
Balance, December 31, 2020
63,766,555
20,220,227
Issuance of common stock under employee plans, net
906,536
(7,045)
Stock-based compensation
89,610
(47,917)
Balance, March 31, 2021
64,673,091
1,044,724
121,984
142
1,010,904
1,001,255
(3,268)
137,549
Balance, June 30, 2021
65,674,346
Loss
Balance, December 31, 2019
59,497,759
528,272
172,265
(1,096)
543,495
Cumulative effect of applying a change in accounting principle, net of tax
(640)
315,404
(5,162)
20,195
Net income
4,074
(2,372)
Balance, March 31, 2020
59,813,163
543,305
175,699
(3,468)
559,590
Issuane of common stock
3,450,000
306,779
134,571
(310)
33,835
Issuance of common stock for business combination contingent consideration
70,613
Balance, June 30, 2020
63,468,347
883,609
144,940
(2,790)
869,813
4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
8,582
5,811
Loss on disposal and abandonment of intangible assets
130
113
Loss on disposal and impairment of property and equipment, net
1,305
Realized and unrealized gains on strategic investments
(40,855)
227,159
54,030
Deferred income taxes
(6,889)
(6,152)
Unrecognized tax benefits
47
612
Other noncash, net
5,760
2,596
Provision for expected credit losses
62
658
Change in assets and liabilities:
Accounts and notes receivable and contract assets
(3,988)
(9,375)
(1,848)
(43,271)
Prepaid expenses and other assets
(13,320)
(8,551)
Accounts payable, accrued and other liabilities
(10,381)
16,708
Deferred revenue
25,647
5,224
Net cash provided by (used in) operating activities
95,115
(6,977)
Cash flows from investing activities:
Purchases of investments
(238,288)
(292,597)
Proceeds from call / maturity of investments
294,814
158,670
Proceeds from sale of strategic investments
14,546
Purchases of property and equipment
(24,031)
(7,551)
Proceeds from disposal of property and equipment
48
78
Purchases of intangible assets
(143)
(111)
(20,500)
(4,700)
Net cash provided by (used in) investing activities
26,446
(146,211)
Cash flows from financing activities:
Net proceeds from equity offering
Proceeds from options exercised
295
Income and payroll tax payments for net-settled stock awards
(10,312)
(5,767)
Net cash provided by (used in) financing activities
301,307
Effect of exchange rate changes on cash and cash equivalents
(319)
(1,115)
Net increase in cash and cash equivalents
110,930
147,004
Cash and cash equivalents and restricted cash, beginning of period
155,551
172,355
Cash and cash equivalents and restricted cash, end of period
266,481
319,359
Supplemental disclosures:
319,253
Restricted cash (Note 1)
109
106
Total cash, cash equivalents and restricted cash shown in the statements of cash flows
Cash paid for income taxes, net of refunds
5,295
6,327
Non-cash transactions
Property and equipment purchases in accounts payable and accrued liabilities
571
430
Investment purchases in accounts payable, net
10,400
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Axon Enterprise, Inc. (“Axon,” the “Company,” "we," or "us") is a market-leading provider of law enforcement technology solutions. Our core mission is to protect life. We fulfill that mission through developing hardware and software products that advance the long term objectives of a) obsoleting the bullet, b) reducing social conflict, and c) enabling a fair and effective justice system.
Our headquarters in Scottsdale, Arizona houses our executive management, sales, marketing, certain engineering, manufacturing, finance and other administrative support functions. Our global software hub is located in Seattle, Washington, and we also have subsidiaries and / or offices located in Australia, Canada, Finland, Germany, Hong Kong, India, Italy, the Netherlands, the United Kingdom, and Vietnam.
The accompanying unaudited condensed consolidated financial statements include the accounts of Axon Enterprise, Inc. and our wholly owned subsidiaries. All material intercompany accounts, transactions, and profits have been eliminated.
Basis of Presentation and Use of Estimates
These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information related to our organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) has been condensed or omitted. The accounting policies followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed in our annual consolidated financial statements for the year ended December 31, 2020, as filed on Form 10-K, with the exception of our adoption of certain accounting pronouncements which we describe below. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with our Form 10-K for the year ended December 31, 2020. The results of operations for the three months and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the full year (or any other period). Significant estimates and assumptions in these unaudited condensed consolidated financial statements include:
Actual results could differ materially from those estimates.
Segment Information
Our operations are comprised of two reportable segments: the manufacture and sale of conducted electrical devices ("CEDs"), batteries, accessories, extended warranties and other products and services (the “TASER” segment); and the development, manufacture, and sale of software and sensors, which includes the sale of devices, wearables, applications, cloud and mobile products, and services (collectively, the “Software and Sensors” segment). In both segments, we report sales of products and services. Service revenue in both segments includes sales related to Axon
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Evidence. In the Software and Sensors segment, service revenue also includes other recurring cloud-hosted software revenue and related professional services. Collectively, this revenue is sometimes referred to as "Axon Cloud revenue."
Reportable segments are determined based on discrete financial information reviewed by our Chief Executive Officer who is our chief operating decision maker ("CODM"). We organize and review operations based on products and services, and currently there are no operating segments that are aggregated. We perform an analysis of our reportable segments at least annually. Additional information related to our business segments is summarized in Note 14.
Geographic Information and Major Customers / Suppliers
For the three and six months ended June 30, 2021, no individual country outside the U.S. represented more than 10% of total net sales. Individual sales transactions in the international market are generally larger and occur more intermittently than in the domestic market due to the profile of our customers. For the three and six months ended June 30, 2021, no customer represented more than 10% of total net sales. At June 30, 2021 and December 31, 2020, no customer represented more than 10% of the aggregate balance of accounts and notes receivable and contract assets.
We currently purchase both off the shelf and custom components, including, but not limited to, finished circuit boards, injection-molded plastic components, small machined parts, custom cartridge components, electronic components, and off the shelf sub-assemblies from suppliers located in the U.S., Canada, China, Israel, Republic of Korea, Mexico, Sri Lanka, and Taiwan. Although we currently obtain many of these components from single source suppliers, we own the injection molded component tooling, most of the designs, and the test fixtures used in their production for all custom components. As a result, we believe we could obtain alternative suppliers in most cases without incurring significant production delays. We also strategically hold safety stock levels on custom components to further reduce this risk. For off the shelf components, we believe that in most cases there are readily available alternative suppliers who can consistently meet our needs for these components. We acquire most of our components on a purchase order basis and do not have any significant long-term contracts with component suppliers.
Income per Common Share
Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. Diluted income per share reflects the potential dilution from outstanding stock options and unvested restricted stock units. The calculation of the weighted average number of shares outstanding and earnings per share are as follows (in thousands except per share data):
Numerator for basic and diluted earnings per share:
Denominator:
Weighted average shares outstanding
Dilutive effect of stock-based awards
Diluted weighted average shares outstanding
Anti-dilutive stock-based awards excluded
10,537
12,773
8,950
12,866
Net loss per common share:
7
Standard Warranties
We warranty our CEDs, Axon cameras and certain related accessories from manufacturing defects on a limited basis for a period of one year after purchase and, thereafter, will repair or replace any defective unit for a fee. Estimated costs for the standard warranty are charged to cost of products sold when revenue is recorded for the related product. Future warranty costs are estimated based on historical data related to warranty claims and this rate is applied to current product sales. Historically, reserve amounts have been increased if management becomes aware of a component failure or other issue that could result in larger than anticipated warranty claims from customers. The warranty reserve is reviewed quarterly to verify that it sufficiently reflects the remaining warranty obligations based on the anticipated expenditures over the balance of the warranty obligation period, and adjustments are made when actual warranty claim experience differs from estimates. The warranty reserve is included in accrued liabilities on the accompanying condensed consolidated balance sheets.
Changes in our estimated product warranty liabilities were as follows (in thousands):
Balance, beginning of period
769
1,476
Utilization of reserve
(481)
(350)
Warranty expense (benefit)
613
(114)
Balance, end of period
901
1,012
Fair Value Measurements and Financial Instruments
We use the fair value framework that prioritizes the inputs to valuation techniques for measuring financial assets and liabilities measured on a recurring basis and for non-financial assets and liabilities when these items are re-measured. Fair value is considered to be the exchange price in an orderly transaction between market participants, to sell an asset or transfer a liability at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
We have cash equivalents and investments, which at June 30, 2021 and December 31, 2020 were comprised of money market funds, certificates of deposit, commercial paper, corporate bonds, municipal bonds, U.S. Government agency bonds, and U.S. Treasury bills. Also included in cash equivalents and investments at December 31, 2020 were 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 June 30, 2021 and December 31, 2020 was $5.1 million and $4.7 million, respectively, related to corporate-owned life insurance policies
8
which are used to fund our deferred compensation plan. We determine the fair value of insurance contracts by obtaining the cash surrender value of the contracts from the issuer, a Level 2 valuation technique.
We have strategic investments in three unconsolidated affiliates, which are included within other assets. The estimated fair value of the investments was determined based on Level 3 inputs. As of June 30, 2021, management estimated that the fair value of the investments equaled the carrying value.
Our financial instruments also include accounts and notes receivable, accounts payable and accrued liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the balance sheet.
Restricted Cash
Restricted cash balances as of June 30, 2021 and December 31, 2020 included $0.1 million primarily related to funds held in an international bank account for a country in which we are required to maintain a minimum balance to operate. Approximately half of the balance was included in prepaid expenses and other current assets on our condensed consolidated balance sheets, with the remainder included in other assets.
Valuation of Goodwill, Intangibles and Long-lived Assets
We evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and identifiable intangible assets, excluding goodwill and intangible assets with indefinite useful lives, may warrant revision or that the remaining balance of these assets may not be recoverable. Such circumstances could include, but are not limited to, a change in the product mix, a change in the way products are created, produced or delivered, or a significant change in the way products are branded and marketed. In performing the review for recoverability, we estimate the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair value computed using discounted cash flows.
We do not amortize goodwill and intangible assets with indefinite useful lives; rather such assets are required to be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that the assets may be impaired. We perform our annual goodwill and intangible asset impairment tests in the fourth quarter of each year.
Recently Issued Accounting Guidance
Recently Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Simplifying the Accounting for Income Taxes. Adoption of this ASU on January 1, 2021 did not have a material impact on our consolidated financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (a Consensus of the Emerging Issues Task Force). The guidance clarifies the interaction between ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and the ASU on equity method investments. ASU 2016-01 provides companies with an alternative to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs. ASU 2020-01 clarifies that for purposes of applying the Topic 321 measurement alternative, an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting under Topic 323, immediately before applying or upon discontinuing the equity method. In addition, the new ASU provides direction that a company should not consider
9
whether the underlying securities would be accounted for under the equity method or the fair value option when it is determining the accounting for certain forward contracts and purchased options, upon either settlement or exercise. Adoption of this ASU on January 1, 2021 did not have a material impact on our consolidated financial statements.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications are not material and had no effect on the reported results of operations.
2. Revenues
Nature of Products and Services
The following tables present our revenues by primary product and service offering (in thousands):
Three Months Ended June 30, 2021
Three Months Ended June 30, 2020
Software and
TASER
Sensors
TASER 7
28,128
11,588
TASER X26P
9,569
9,511
TASER X2
16,145
16,832
TASER Pulse
1,701
2,193
Cartridges
46,678
23,772
Axon Body
19,927
11,844
Axon Flex
1,088
680
Axon Fleet
5,247
4,098
Axon Dock
5,509
4,055
Axon Evidence and cloud services
1,702
60,367
62,069
586
41,891
42,477
Extended warranties
5,857
8,149
14,006
5,098
5,735
10,833
2,748
5,980
8,728
910
2,466
3,376
112,528
106,267
70,490
70,769
Six Months Ended June 30, 2021
Six Months Ended June 30, 2020
62,119
26,914
19,532
20,572
28,923
30,907
3,906
3,393
77,096
50,397
39,683
24,667
1,993
1,863
9,010
8,873
12,429
9,006
3,098
112,661
115,759
1,084
81,045
82,129
11,503
15,649
27,152
10,075
11,193
21,268
5,350
10,862
16,212
3,043
5,389
8,432
211,527
202,287
146,385
142,036
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The following table presents our revenues disaggregated by geography (in thousands):
United States
164,908
75
%
107,547
76
325,294
79
225,010
Other countries
53,887
25
33,712
24
88,520
21
63,411
22
100
Contract Balances
The following table presents our contract assets, contract liabilities and certain information related to these balances as of and for the six months ended June 30, 2021 (in thousands):
June 30, 2021
118,252
Contract liabilities (deferred revenue)
300,724
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the period
111,375
Contract liabilities (deferred revenue) consisted of the following (in thousands):
December 31, 2020
Current
Long-Term
Warranty:
12,467
16,937
29,404
11,635
16,953
28,588
Software and Sensors
14,606
5,493
13,926
5,025
18,951
27,073
22,430
49,503
25,561
21,978
47,539
Hardware:
22,408
11,498
33,906
16,314
14,304
30,618
30,033
50,081
80,114
25,181
50,981
76,162
52,441
61,579
114,020
41,495
65,285
106,780
Services:
1,200
3,455
4,655
996
1,554
2,550
106,195
26,351
132,546
95,907
22,405
118,312
107,395
29,806
137,201
96,903
23,959
120,862
275,181
36,075
31,890
67,965
28,945
32,811
61,756
150,834
81,925
232,759
135,014
78,411
213,425
Remaining Performance Obligations
As of June 30, 2021, we had approximately $2.04 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 June 30, 2021. We expect to recognize between 20% - 25% of this balance over the next twelve months, and generally expect the remainder to be recognized over the following five to seven years, subject to risks related to delayed deployments, budget appropriation or other contract cancellation clauses.
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3. Cash, Cash Equivalents and Investments
The following tables summarize our cash, cash equivalents, and held-to-maturity investments at June 30, 2021 and December 31, 2020 (in thousands):
As of June 30, 2021
Gross
Cash and
Amortized
Unrealized
Cash
Short-Term
Cost
Gains
Losses
Fair Value
Equivalents
Investments
199,426
Level 1:
Money market funds
48,052
Agency bonds
73,669
74
73,743
5,500
60,169
8,000
Treasury bills
96,795
(1)
96,796
12,600
84,195
Subtotal
218,516
218,591
66,152
144,364
Level 2:
State and municipal obligations
101,610
14
(27)
101,597
801
87,596
13,213
Certificates of deposit
500
Corporate bonds
150,082
105
(32)
150,155
122,607
27,475
Commercial paper
33,983
286,175
119
(59)
286,235
244,686
40,688
704,117
195
(60)
704,252
266,379
389,050
48,688
Expected credit loss reserve
(7)
(155)
(19)
Total, net of reserve for expected credit losses
Because we do not have any history of losses for our held-to-maturity investments, our expected credit loss allowance methodology for held-to-maturity investments is developed using published or estimated credit default rates for similar investments and current and future economic and market conditions. At each of June 30, 2021 and December 31, 2020, our credit loss reserve for held-to-maturity investments was approximately $0.2 million.
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As of December 31, 2020
116,107
23,611
63,794
122
63,916
23,794
40,000
Treasury Bills
96,384
96,390
183,789
128
183,917
120,178
77,130
(28)
77,127
66,519
10,611
212,825
232
(100)
212,957
2,525
170,205
40,095
U.S. Treasury repurchase agreements
13,200
Treasury inflation-protected securities
3,291
16
3,307
45,974
352,920
273
(128)
353,065
15,725
286,489
50,706
652,816
401
653,089
155,443
406,667
90,706
(3)
(142)
(25)
4. Expected Credit Losses
We are exposed to credit losses primarily through sales of products and services. Our expected loss allowance methodology for accounts receivable, notes receivable, and contract assets is developed using historical collection experience, published or estimated credit default rates for entities that represent our customer base, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Our monitoring activities include account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible.
We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and recorded an additional reserve for credit loss of approximately $1.0 million as of June 30, 2021.
We review receivables for U.S. and international customers separately to better reflect different published credit default rates and economic and market conditions.
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The following table provides a roll-forward of the allowance for expected credit losses that is deducted from the amortized cost basis of accounts receivable, notes receivable, and contract assets to present the net amount expected to be collected (in thousands):
2,902
474
256
(130)
126
Amounts written off charged against the allowance
(54)
-
Other, including dispositions and foreign currency translation
(9)
69
3,182
335
3,517
As of June 30, 2021, the allowance for expected credit losses for each type of customer receivable was as follows:
Accounts receivable and notes receivable, current
1,973
2,105
1,186
794
358
477
Total allowance for expected credit losses on customer receivables
5. 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 excess, obsolete or slow-moving inventories to their net realizable value. Inventory consisted of the following at June 30, 2021 and December 31, 2020 (in thousands):
Raw materials
35,935
39,194
Finished goods
55,804
50,764
Total inventory
6. Strategic Investments
Strategic investments include investments in a number of non-public technology-driven companies. We account for strategic investments under the ASC 321 measurement alternative for equity securities without readily determinable fair values, as there are no quoted market prices for the investments. The investments are measured at cost less impairment, adjusted for observable price changes and are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
In conjunction with one of our strategic investments, we have the ability to commit additional capital over time through warrants where the exercisability and exercise prices are conditional on the achievement of certain partnership performance metrics. The amount reflected in other assets represents the fair value of the preferred stock warrants as of June 30, 2021.
The following tables provides a roll-forward of the balance of strategic investments (in thousands):
Warrants for strategic investment
9,500
2,211
20,500
Observable price changes
40,321
534
40,855
Sales
(14,546)
55,775
2,745
Inception to date
27,568
2,588
30,156
42,753
157
42,910
During the period ended June 30, 2021, certain of our strategic investees issued new equity to us and/or other investors. These events represented observable price changes for our existing investments and related warrants. Of the total observable price changes, we realized a gain of approximately $12.3 million on the sale of a portion of one of our existing investments. The estimated fair value of the retained existing investments was calculated using valuation techniques that included both observable and unobservable inputs, and was lower than the issue per share of the new equity issued by the strategic investee because of different characteristics of the newly issued equity instruments compared to our existing investments. The valuation techniques included both Level 2 and Level 3 inputs as defined by ASC Topic 820.
7. Other Long-Term Assets
Other long-term assets consisted of the following at June 30, 2021 and December 31, 2020 (in thousands):
Cash surrender value of corporate-owned life insurance policies
5,055
4,654
Deferred commissions (1)
36,489
32,455
Restricted cash
60
Operating lease assets
26,885
22,308
Prepaid expenses, deposits and other
15,755
8,727
Total other long-term assets
15
8. Accrued Liabilities
Accrued liabilities consisted of the following at June 30, 2021 and December 31, 2020 (in thousands):
Accrued salaries, benefits and bonus
39,487
36,892
Accrued professional, consulting and lobbying fees
1,201
3,055
Accrued warranty expense
Accrued income and other taxes
3,780
3,848
Accrued inventory in transit
10,979
4,597
Other accrued expenses
10,560
10,682
9. Income Taxes
We file income tax returns for federal purposes and in many states, as well as in multiple foreign jurisdictions. Our tax filings remain subject to examination by applicable tax authorities for a certain length of time, generally three to four years, following the tax year to which these filings relate. During the second quarter of 2020 we began an audit with the State of California for our fiscal year 2016 and 2017 state tax returns, which was completed during Q2 2021. During the second quarter of 2021, an audit with the State of Illinois for our fiscal year 2018 state return commenced. Additionally, we have been notified that an audit may commence for Axon Public Safety Southeast Asia LLC, our entity in Vietnam. The tax period has not yet been defined.
On March 11, 2021, the U.S. federal government enacted the American Rescue Plan Act. This act is an emergency economic stimulus package in response to the COVID-19 pandemic, which, among other things, contains numerous income tax provisions. We are continuing to evaluate the implications of the American Rescue Plan Act, but its impact on the financial statements and related disclosures is not expected to be material.
Deferred Tax Assets
Net deferred income tax assets at June 30, 2021, primarily include R&D tax credits, stock-based compensation expense, deferred revenue, accruals and reserves, and net operating losses, partially offset by accelerated depreciation expense and valuation allowance reserve. Our total net deferred tax assets at June 30, 2021 were $51.9 million.
In preparing our condensed consolidated financial statements, management assesses the likelihood that its deferred tax assets will be realized from future taxable income. In evaluating our ability to recover our deferred income tax assets, management considers all available positive and negative evidence, including our operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Management exercises significant judgment in determining our provisions for income taxes, our deferred tax assets and liabilities, and our future taxable income for purposes of assessing our ability to utilize any future tax benefit from our deferred tax assets.
As of June 30, 2021, we continue to demonstrate three-year cumulative pre-tax income in the U.S. federal and state tax jurisdictions; however, we have Arizona R&D tax credits expiring unutilized each year. Therefore, management has concluded that it is more likely than not that our Arizona R&D deferred tax asset will not be realized.
In Australia, we have determined that sufficient deferred tax liabilities will reverse in order to realize all assets except one long-lived intangible where there is not an expectation that the asset may be realized. Therefore, we continue to recognize a partial valuation allowance for Australia.
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 $7.6 million as of June 30, 2021. Should the unrecognized benefit of $7.6 million be recognized, our effective tax rate would be favorably impacted. Approximately $3.3 million of the unrecognized tax benefit associated with R&D credits has been netted against the R&D deferred tax asset.
Effective Tax Rate
Our overall effective tax rate for the six months ended June 30, 2021, after discrete period adjustments, was 6.4%. Before discrete adjustments, the tax rate was (19.1%), which differs from the federal statutory rate, primarily due to the impact of the executive compensation limitation under Internal Revenue Code ("IRC") Section 162(m), partially offset by R&D tax credits, on a projected pre-tax loss for the year. The effective tax rate was favorably impacted by a $25.7 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for restricted stock units (“RSUs”) or performance stock units (“PSUs”) that vested during the six months ended June 30, 2021.
10. Stockholders’ Equity
Performance-based stock awards
We have issued performance-based stock options and performance-based RSUs, the vesting of which is generally contingent upon the achievement of certain performance criteria related to our operating performance, as well as successful and timely development and market acceptance of future product introductions. In addition, certain of the performance RSUs have additional service requirements subsequent to the achievement of the performance criteria. Compensation expense is recognized over the requisite service period, which is defined as the longest explicit, implicit or derived service period based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date. For both service-based and performance-based RSUs, we account for forfeitures as they occur as a reduction to stock-based compensation expense and additional paid-in-capital.
For performance-based options with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized for each pair of performance and market conditions over the longer of the expected achievement period of the performance and market conditions, beginning at the point in time that the relevant performance condition is considered probable of achievement. The fair value of such awards is estimated on the grant date using Monte Carlo simulations.
CEO Performance Award
On May 24, 2018, 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 attainment 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, interest
17
and other income (such as dividends) earned on investments in marketable securities, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense.
Eight Separate Adjusted EBITDA (CEO
Eight Separate Revenue Goals (1)
Performance Award) Goals
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
As of June 30, 2021, the following operational goals were achieved, with vesting of the related tranches pending certification by the Compensation Committee:
As of June 30, 2021, the following operational goals were considered probable of achievement:
As of June 30, 2021, the following operational goals were previously achieved and the related tranches vested:
Stock-based compensation expense associated with the CEO Performance Award 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. Expense recognition begins at the point in time when the relevant operational goal is considered probable of being met. The probability of attaining an operational goal and the expected attainment date for meeting a probable operational goal are based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis when considered appropriate. The statistical model and the assessment that determine the estimated attainment dates are subject to a number of estimated inputs, including expected volatility rates, management’s forward-looking financial projections, in particular for operational goals that are anticipated to be attained in the near future, and adjustment of other estimates based on the passage of time.
Beginning with the three months ended June 30, 2021, management discontinued consideration of the statistical model based on actual and anticipated attainment of the remaining operational goals. During the three months and six months ended June 30, 2021, we recorded an additional $107.3 million and $158.7 million, respectively, in stock-based
18
compensation expense as a result of updated estimates for the CEO Performance Award and eXponential Stock Performance Plan (discussed below).
The first eight market capitalization goals have been achieved as of June 30, 2021. As of June 30, 2021, 1.6 million stock options have vested. As twelve operational goals are considered probable of achievement, we recorded stock-based compensation expense of $204.2 million related to the CEO Performance Award from the Grant Date through June 30, 2021. The number of stock options that would vest related to the remaining unvested tranches is approximately 4.8 million shares. As of June 30, 2021, we had $41.7 million of total unrecognized stock-based compensation expense for the performance goals that were considered probable of achievement, which will be recognized over a weighted-average period of 1.57 years.
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. Initial awards under the plan were granted in January 2019, with additional employee awards granted since that date. During the three and six months ended June 30, 2021 we granted an additional twenty three thousand and thirty three thousand XSUs, respectively.
The XSUs are grants of RSUs, 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. Beginning with the quarter ended June 30, 2021, new XSU grants are divided into a reduced number of tranches depending on employee eligibility and current market capitalization attainment.
The XSPP contains an anti-dilution provision incorporated into the plan based on shareholder feedback, which affects the calculation of the market capitalization goals in the plan. The plan defines a maximum number of shares outstanding that may be used in the calculation of the market capitalization goals (the “XSU Maximum”). If the actual number of shares outstanding exceeds the XSU Maximum guardrail, then the lower pre-defined number of shares in the XSU Maximum, rather than the higher actual number of shares outstanding, is used to calculate market capitalization for the determination of the market capitalization goals in the XSPP, which, together with the operational goals, determines whether XSUs vest for participating employees.
The XSU Maximum is defined as the actual number of shares outstanding on the original XSU grant date of January 2, 2019, increased by a 3% annual rate over the term of the XSPP and by shares issued upon the exercise of CEO Performance Award options. The XSU Maximum is also 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.
New shares issued for any other reasons, including shares issued upon vesting of XSUs, RSUs, and Performance Stock Units (“PSUs”) as well as shares issued to raise capital through equity issuances or in other transactions, do not increase the XSU Maximum.
The market capitalization and operational goals are identical to the CEO Performance Award, but a different number of shares is 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. As of June 30, 2021, actual shares outstanding exceeded the XSU Maximum as a result of the common stock offering completed in June 2020. Accordingly, market capitalization as calculated for the purposes of achieving additional goals uses the lower XSU Maximum share amount rather than actual shares outstanding.
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The first eight market capitalization goals have been achieved as of June 30, 2021. The first XSU tranche vested in March 2021, and the second and third tranches vested in May 2021. As all twelve operational goals are considered probable of achievement, we recorded stock-based compensation expense of $151.4 million related to the XSU awards from their respective grant dates through June 30, 2021. The number of XSU awards that would vest related to the remaining nine tranches is approximately 4.0 million shares. As of June 30, 2021, we had $42.3 million of total unrecognized stock-based compensation expense, which will be recognized over a weighted-average period of 2.20 years.
Restricted Stock Units
The following table summarizes RSU activity for the six months ended June 30, 2021 (number of units and aggregate intrinsic value in thousands):
Number of
Weighted Average
Aggregate
Units
Grant-Date Fair Value
Intrinsic Value
Units outstanding, beginning of year
1,107
76.10
Granted
98
149.92
Released
(276)
51.65
Forfeited
(64)
98.43
Units outstanding, end of period
865
90.59
152,892
Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $176.80 per share, multiplied by the number of RSUs outstanding. As of June 30, 2021, there was $57.4 million in unrecognized compensation costs related to RSUs under our stock plans for shares that are expected to vest. We expect to recognize the cost related to the RSUs over a weighted average period of 2.10 years. RSUs are released when vesting requirements are met.
Certain RSUs that vested in the six months ended June 30, 2021 were net-share settled such that we withheld shares to cover the employees’ tax obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld related to RSUs were forty six thousand and had a value of $7.5 million on their respective vesting dates as determined by the closing stock price on such dates. Payments for the employees’ tax obligations are reflected as a financing activity within the condensed consolidated statements of cash flows. We record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital.
Performance Stock Units
The following table summarizes PSU activity, inclusive of XSUs, for the six months ended June 30, 2021 (number of units and aggregate intrinsic value in thousands):
5,618
35.71
225
50.00
(1,696)
41.20
35.80
4,087
34.22
722,593
Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $176.80 per share, multiplied by the number of PSUs outstanding. As of June 30, 2021, there was $44.8 million in unrecognized compensation costs related to PSUs under our stock plans for shares that are expected to vest. We expect to recognize the cost related to the PSUs over a weighted average period of 2.22 years. PSUs are released when vesting requirements are met.
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As of June 30, 2021, the performance criteria had been met for approximately 2.2 million of the 4.1 million PSUs outstanding.
On March 8 and May 17, 2021, the Compensation Committee of our Board of Directors approved waivers of the holding period requirements for each XSPP participant who is an Arizona resident and elected to receive XSUs in lieu of On-Target Earnings. This waiver releases the holding period requirements to allow participants the ability to choose to sell a portion of their vested shares to satisfy new income tax obligations pursuant to Arizona Proposition 208, which was passed in the November 2020 state-wide election. This waiver applied only to 4% of the XSUs for the impacted participants which vested on March 8 and May 17, 2021, amounting to approximately 36 thousand shares. The remainder of the shares not sold to satisfy tax obligations are subject to a 2.5 year minimum holding period. We accounted for this change as a Type I modification under ASC 718 since there was no impact on attainment of the operational or market capitalization goals. We recognized additional stock-based compensation expense of $0.5 million and $0.9 million for the three months and six months ended June 30, 2021, respectively, because of this modification.
Certain PSUs that vested in the six months ended June 30, 2021 were net-share settled such that we withheld shares to cover the employees’ tax obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld related to PSUs were approximately nineteen thousand and had a value of $2.8 million on their respective vesting dates as determined by the closing stock price on such dates. Payments for the employees’ tax obligations are reflected as a financing activity within the condensed consolidated statements of cash flows. We record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital.
Stock Option Activity
The following table summarizes stock option activity for the six months ended June 30, 2021 (number of units and aggregate intrinsic value in thousands):
Weighted
Average
Number
Remaining
of
Exercise
Contractual
Options
Price
Life (years)
Options outstanding, beginning of year
6,366
28.58
Exercised
Expired / terminated
Options outstanding, end of period
6.66
943,547
Options exercisable, end of period
4,243
629,031
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 $176.80 on June 30, 2021. There were no options exercised for the six months ended June 30, 2021. The intrinsic value of options exercised for the six months ended June 30, 2020 was $5.1 million. As of June 30, 2021, total options outstanding included 2.1 million unvested performance-based stock options, which relate to the CEO Performance Award and are probable of achievement.
Stock-based Compensation Expense
The following table summarizes the composition of stock-based compensation expense for the three and six months ended June 30, 2021 and 2020 (in thousands):
Cost of products sold and services delivered
1,838
836
3,327
1,426
Sales, general and administrative expenses
114,089
26,766
185,104
41,736
Research and development expenses
21,622
6,233
38,728
10,868
Total stock-based compensation expense
Stock Incentive Plan
In February 2019, our shareholders approved the 2019 Plan authorizing an additional 6.0 million shares, plus remaining available shares under prior plans, for issuance under the new plan. Combined with the legacy stock incentive plans, there are 1.8 million shares available for grant as of June 30, 2021.
Stock Repurchase Plan
In February 2016, our Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of our outstanding common stock subject to stock market conditions and corporate considerations. During the six months ended June 30, 2021 and 2020, no common shares were purchased under the program. As of June 30, 2021, $16.3 million remains available under the plan for future purchases. Any future purchases will be discretionary.
11. Line of Credit
We have a $50.0 million unsecured revolving line of credit with a domestic bank, of which $20.0 million is available for letters of credit. The credit agreement matures on December 31, 2023 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 June 30, 2021 and December 31, 2020, 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 June 30, 2021, we had letters of credit outstanding of approximately $6.1 million under the facility and available borrowing of $43.9 million, excluding amounts available under the accordion feature. Advances under the line of credit bear interest at LIBOR plus 1.0 to 1.5% per year determined in accordance with a pricing grid based on our funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio.
We are required to comply with a maximum funded debt to EBITDA ratio of no greater than 2.50 to 1.00 based upon a trailing four fiscal quarter period. At June 30, 2021, our funded debt to EBITDA ratio was 0.00 to 1.00.
12. Commitments and Contingencies
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 four 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.
The litigation information in this note is current through the date of these financial statements.
U.S. Federal Trade Commission Litigation
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 presently stayed by the Ninth Circuit (see below). If ultimately successful, the FTC may require Axon to divest Vievu and other assets or take other remedial measures, any of 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 the proceeding and accordingly we have not recorded any liability in the accompanying consolidated financial statements.
Prior to the FTC’s enforcement action, Axon sued the FTC in federal court 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. The district court dismissed the action, without prejudice, for lack of jurisdiction. The Ninth Circuit affirmed in a split decision but granted Axon’s motion to stay the appellate mandate pending the filing of its petition for certiorari with the U.S. Supreme Court. That petition was filed July 20, 2021. The FTC’s administrative case will remain stayed pending resolution of the Supreme Court proceedings.
In parallel to these matters, we are evaluating strategic alternatives to litigation, which we might pursue if determined to be in the best interests of shareholders and customers. This could include a divestiture of the Vievu entity and/or related assets and the licensure of certain intellectual and other intangible property. While we continue to believe the acquisition of Vievu was lawful and a benefit to Vievu’s customers, the cost, risk and distraction of protracted litigation merit consideration of settlement if achievable on terms agreeable to the FTC and the company.
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.
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Based on our assessment of outstanding litigation and claims as of June 30, 2021, we have determined that it is not reasonably possible that these lawsuits will individually, or in the aggregate, materially affect our results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on our operating results, financial condition or cash flows.
Off-Balance Sheet Arrangements
Under certain circumstances, we use letters of credit and surety bonds to guarantee our performance under various contracts, principally in connection with the installation and integration of Axon cameras and related technologies. Certain of our letters of credit and surety bonds have stated expiration dates with others being released as the contractual performance terms are completed. At June 30, 2021, we had outstanding letters of credit of $6.1 million that are expected to expire in September 2021 and June 2022. We also had outstanding letters of credit and bank guarantees of $2.0 million that do not draw against our credit facility. The outstanding letters of credit are expected to expire in March 2022 and May 2022. Additionally, we had $21.5 million of outstanding surety bonds at June 30, 2021, with $0.4 million expiring in 2021, $3.1 million expiring in 2022, $7.5 million expiring in 2023 and the remaining $10.5 million expiring in 2024.
Share Purchase Agreement
On April 8, 2021, we entered into a Share Purchase Agreement with Cellebrite DI Ltd. ("Cellebrite") and Cellebrite’s shareholders, pursuant to which we have agreed to purchase, and Cellebrite has agreed to sell, an aggregate of 9,000,000 shares of common stock of Cellebrite, for a purchase price of $10.00 per share and an aggregate purchase price of $90,000,000. This investment is being made in connection with Cellebrite’s business combination with TWC Tech Holdings II Corp. (“TWC Tech Holdings”), a publicly traded special purpose acquisition company, pursuant to the definitive business combination agreement and plan of merger (the “Business Combination”). The obligations to consummate the transactions contemplated by the Share Purchase Agreement are conditioned upon, among other things, customary closing conditions and the consummation of the Business Combination and other transactions contemplated by the plan of merger between Cellebrite and TWC Tech Holdings.
13. Employee Benefit Plans
We have a defined contribution 401(k) plan for eligible employees, which is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. Employees are entitled to make tax-deferred contributions of up to the maximum amount allowed by law of their eligible compensation.
We also have a non-qualified deferred compensation plan for certain executives, employees and non-employee directors through which participants may elect to postpone the receipt and taxation of a portion of their compensation, including stock-based compensation, received from us. The non-qualified deferred compensation plan allows eligible participants to defer up to 80% of their base salary and up to 100% of other types of compensation. The plan also allows for matching and discretionary employer contributions. Employee deferrals are deemed 100% vested upon contribution. Distributions from the plan are made upon retirement, death, separation of service, specified date or upon the occurrence of an unforeseeable emergency. Distributions can be paid in a variety of forms from lump sum to installments over a period of years. Participants in the plan are entitled to select from a wide variety of investments available under the plan and are allocated gains or losses based upon the performance of the investments selected by the participant. All gains or losses are allocated fully to plan participants and we do not guarantee a rate of return on deferred balances. Assets related to this plan consist of corporate-owned life insurance contracts and are included in other assets in the condensed consolidated balance sheets; see Note 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.
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, Canada, Finland, and the United Kingdom.
Our matching contributions for all defined contribution plans were $1.8 million and $1.3 million for the three months ended June 30, 2021 and 2020, respectively and $3.8 million and $2.8 million for the six months ended June 30, 2021 and 2020, respectively.
14. 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):
110,637
45,790
69,877
28,878
1,891
60,477
37,701
27,600
27,242
16,583
145
15,420
37,846
43,020
25,840
74,682
63,247
43,248
44,929
12,313
41,639
3,762
25,798
207,939
89,374
145,052
60,991
3,588
112,913
1,333
70,646
53,271
57,490
35,219
28,470
70,791
81,741
54,146
140,736
120,546
88,895
87,890
21,556
79,414
6,794
49,147
The following discussion and analysis of our financial condition as of June 30, 2021, and results of operations for the three and six months ended June 30, 2021 and 2020, should be read in conjunction with the condensed consolidated financial statements and related notes included in this Report on Form 10-Q and the audited consolidated financial statements and related notes in our 2020 Annual Report on Form 10-K filed with the SEC on February 26, 2021. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in such forward-looking statements as a result of certain factors, including but not limited to those described under “Risk Factors” in our 2020 Annual Report on Form 10-K. See also "Special Note Regarding Forward-Looking Statements" on page ii of this Report on Form 10-Q.
Overview
Axon is a global network of devices, apps and people that helps public safety personnel become smarter and safer. With a mission of protecting life, our technologies give law enforcement the confidence, focus and time they need to protect their communities. Our products impact every aspect of a public safety officer’s day-to-day experience with the goal of helping everyone get home safe.
Our revenues for the three months ended June 30, 2021 were $218.8 million, an increase of $77.5 million, or 54.9%, from the comparable period in the prior year. We had a loss from operations of $93.7 million compared to $13.7 million for the same period in the prior year. Gross margin improved compared to the three months ended June 30, 2020, reflecting strong demand for our premium TASER offerings and manufacturing cost improvement. Operating expenses increased $129.8 million, reflecting an increase of $100.9 million in stock-based compensation expense related to the CEO Performance Award and XSPP and an increase of $16.3 million in salaries, benefits and bonus expense. For the three months ended June 30, 2021, we recorded a net loss of $47.1 million, which reflected an income tax benefit of $4.7 million and a gain of $40.9 million related to observable price changes for our investmests in certain unconsolidated affiliates and related warrants, compared to net loss of $30.8 million for the comparable period in the prior year.
Our revenues for the six months ended June 30, 2021 were $413.8 million, an increase of $125.4 million, or 43.5%, from the comparable period in the prior year. We had a loss from operations of $143.9 million compared to $14.5 million for the same period in the prior year. Gross margin improved compared to the six months ended June 30, 2020 as a result of product mix, reflecting strong demand for our premium TASER offerings and manufacturing cost improvement. Operating expenses increased $214.0 million, reflecting an increase of $162.8 million in stock-based compensation expense related to the CEO Performance Award and XSPP and an increase of $31.0 million in salaries, benefits and bonus expense. For the six months ended June 30, 2021, we recorded a net loss of $95.0 million, which reflected an income tax benefit of $6.5 million and a gain of $40.9 million related to observable price changes for our investmests in certain unconsolidated affiliates and related warrants, compared to net loss of $26.7 million for the comparable period in the prior year.
Outlook
For the year ending December 31, 2021, we expect revenue in the range of $825 million to $850 million. Our expectation for capital expenditures of approximately $65 million to $70 million in 2021 remains unchanged.
COVID-19
The COVID-19 pandemic has adversely affected workforces, economies, and financial markets globally, leading to an economic downturn. As an essential provider of products and services for law enforcement and other first responders, we remain focused on protecting the health and wellbeing of our employees while assuring the continuity of our business operations.
We have taken a number of actions in response to the pandemic, as described in our Annual Report on Form 10-K. In April and May 2021, we hosted several onsite vaccination clinics for our employees and their family members.
We elected to participate in the social security deferral program offered under the Coronavirus Aid, Relief, and Economic Security Act, whereby we deferred payment of the employer portion of all social security taxes that would otherwise have been payable from March 27, 2020 through December 31, 2020. Payment of the deferred amount is due 50% on December 31, 2021 and 50% on December 31, 2022.
Results of Operations
Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020
The following table presents data from our condensed consolidated statements of operations as well as the percentage relationship to total net sales of items included in our statements of operations (dollars in thousands):
71.5
69.9
28.5
30.1
100.0
29.8
31.0
7.1
6.6
36.9
37.6
63.0
62.4
81.2
51.2
24.7
20.9
105.9
72.1
(42.9)
(9.7)
19.1
1.1
(23.7)
(8.6)
(2.2)
13.2
(21.5)
(21.8)
International revenue increased compared to the prior year comparable period, driven primarily by increased sales in the Europe, Middle East, and Africa (“EMEA”) region.
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Net Sales
Net sales by product line were as follows (dollars in thousands):
Dollar
Percent
Change
TASER segment:
12.9
8.2
16,540
142.7
4.4
6.7
58
0.6
7.4
11.9
(687)
(4.1)
0.8
1.6
(492)
(22.4)
21.3
16.8
22,906
96.4
0.4
1,116
190.4
2.7
3.6
759
14.9
1.2
0.5
202.0
Total TASER segment
51.5
49.7
42,038
59.6
Software and Sensors segment:
9.1
8.4
8,083
68.2
408
60.0
2.4
2.9
1,149
28.0
2.5
1,454
35.9
27.6
29.7
18,476
44.1
3.7
4.1
2,414
42.1
1.8
3,514
142.5
Total Software and Sensors segment
48.5
50.3
35,498
50.2
Total net sales
77,536
54.9
Net unit sales for TASER segment products and Software and Sensors segment products were as follows:
Unit
17,711
9,014
8,697
96.5
7,012
7,658
(646)
(8.4)
9,788
13,100
(3,312)
(25.3)
6,307
5,429
878
16.2
1,413,329
715,268
698,061
97.6
45,572
35,066
10,506
30.0
1,846
1,964
(118)
(6.0)
2,462
2,327
135
5.8
5,283
4,634
14.0
Net sales for the TASER segment increased 59.6% primarily due to an increase of $22.9 million in cartridge revenue and and an increase of $16.5 million in TASER 7 device sales. We continue to see a shift to purchases of our latest generation device, TASER 7, from legacy devices. Internationally, we continue to see increase sales of our legacy devices. Revenue was also impacted by higher average selling prices for TASER devices other than TASER Pulse. The increase in cartridge revenue was due to increased unit sales, and was partially offset by a decline in average selling prices. In May, we began taking orders for our new wireless Virtual Reality (VR) Simulator Training. While revenues for this product were less than $0.1 million during the period, future contracted revenues for VR products grew to nearly $8.0 million.
Net sales for the Software and Sensors segment increased 50.2% during the three months ended June 30, 2021 as we continued to add users and associated devices to our network. The increase in the aggregate number of users drove the majority of the increase in Axon Evidence revenue of $18.5 million; $1.8 million of the increase related to non-recurring
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low-to-no margin professional services revernue. Sales of our Axon Body 3 camera drove most of the $8.1 million increase in Axon Body revenue. The increase in the aggregate number of users and devices also resulted in increased extended warranty revenues of $2.4 million. The increase of $3.5 million in Other revenue was primarily driven by higher sales of Signal Sidearm and Interview Room. Our newest Fleet product, Axon Fleet 3, which includes automated license plate reader technology, began shipping on June 30, 2021.
We consider total company future contracted revenues a forward-looking performance indicator. As of June 30, 2021, we had approximately $2.04 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.
Cost of Product and Service Sales
Within the TASER segment, cost of product and service sales increased to $37.8 million for the three months ended June 30, 2021 from $27.2 million for the same period in 2020, primarily related to higher unit sales. Cost as a percentage of sales decreased to 33.6% from 38.6%. The improvement was mainly attributable to a combination of manufacturing cost improvement and strong demand for our premium TASER offerings. We are building manufacturing capacity to support our TASER device and cartridge manufacturing lines in response to growing international and federal demand and an increased install base.
Investments in manufacturing capacity so far in 2021 have resulted in an approximately 40% capacity increase in TASER 7 propulsion module and cartridge line production capacity, combined with greater per-person efficiency that will generate $1 million in gross cost annual run rate savings on the TASER 7. Manufacturing and supply chain improvements are on track to result in more than $4 million in gross costs savings in 2021. Segment gross margins may continue to fluctuate based on customer and product mix.
Within the Software and Sensors segment, cost of product and service sales increased to $43.0 million for the three months ended June 30, 2021 from $25.8 million for the same period in 2020. Cost as a percentage of sales increased to 40.5% from 36.5%. We are investing in scaling our cloud business, which includes standing up new cloud environments, cloud applications, and Long-Term Evolution (“LTE”) costs, which can result in some margin compression in advance of anticipated revenue, as well as low-to-no margin professional services that support new installations for software customers.
Although we have experienced port constraints and some increases in raw materials costs, we have remained focused on closely monitoring our supply chain, and mitigating impacts to keep our gross margins predictable and our inventory steady. We have also worked to mitigate raw materials costs increases through supplier negotiations and buying added non-expiring raw materials. We continue to bolster our strategic relationships in our supply chain, work to identify secondary sourcing, and build in shipping and inventory buffers, which has kept our supply chain execution solid.
Gross Margin
As a percentage of net sales, gross margin for the TASER segment increased to 66.4% from 61.4% for the three months ended June 30, 2021 and 2020, respectively. The increase was a result of manufacturing cost improvement and product mix, as discussed above.
As a percentage of net sales, gross margin for the Software and Sensors segment decreased to 59.5% from 63.5% for the three months ended June 30, 2021 and 2020, respectively. Within the Software and Sensors segment, hardware gross margin was 39.7% for the three months ended June 30, 2021 compared to 42.6% for the same period in 2020, while the service margins were 74.5% and 77.9% during those same periods, respectively.
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Sales, General and Administrative Expenses
Sales, general and administrative ("SG&A") expenses were comprised as follows (dollars in thousands):
Total sales, general and administrative expenses
105,369
145.8
Sales, general, and administrative as a percentage of net sales
Stock-based compensation expense increased $87.3 million in comparison to the prior year comparable period, which was attributable to an increase of $55.6 million in expense related to the CEO Performance Award and an increase of $33.9 million related to our XSPP. Acceleration in the anticipated timing of attainment for the unvested probable tranches resulted in a $93.2 million increase to stock-based compensation expense. The increase was partially offset by a decrease of $3.6 million for tranches that have vested and have no remaining unrecognized expense.
Salaries, benefits and bonus expense increased $10.7 million primarily due to an increase in headcount and an increase in payroll taxes on a higher base of salaries, bonus, and commission expense. Included in this increase was $2.0 million in payroll taxes related to the vesting of the second and third tranches of our XSPP in May 2021.
Sales and marketing expenses increased $6.1 million, driven by a $4.0 million increase in commissions expense tied to higher revenues and by higher spending on content development, promotional videos, spending for new product launches, and advertising.
Travel expenses increased $2.1 million, reflecting a return to pre-pandemic travel levels for certain of our employees.
Professional and consulting expenses remained consistent with the prior year comparable period. This included a decrease of $3.7 million in legal expenses relating to the FTC litigation; as discussed in Note 12 of the notes to our condensed consolidated financial statements within this Report on Form 10-Q, we sued the FTC in the District of Arizona, and the FTC filed an enforcement action regarding our May 2018 acquisition of Vievu LLC. Offsetting the decrease in legal expenses was an increase in other professional and consulting expenses including consulting costs related to an enterprise resource planning system conversion and expenses for contract employees.
Research and Development Expenses
Research and development ("R&D") expenses were comprised as follows (dollars in thousands):
Total research and development expenses
24,392
82.5
Research and development as a percentage of net sales
Within the TASER segment, R&D expense increased $8.6 million, reflecting increased stock-based compensation expense, professional and consulting expenses and salaries, benefits and bonus expense in the current period. The increase of $4.7 million in stock-based compensation expense related primarily to acceleration in the anticipated timing of attainment for the remaining probable tranches of our XSPP. Professional and consulting expenses increased $2.1 million related to the development of next generation products, and salaries, benefits and bonus expense increased $1.5 million on higher headcount.
R&D expense for the Software and Sensors segment increased $15.8 million, reflecting an increase of $10.7 million in stock-based compensation expense, and an increase of $4.1 million in salaries, benefits and bonus expense. Of the total increase in stock-based compensation expense, $7.0 million was attributable to our XSPP and was due primarily to acceleration in the anticipated timing of attainment for the remaining probable tranches. Stock-based compensation
30
expense also increased over the prior year comparable period due to an increase in headcount. The increase in salaries, benefits and bonus was primarily a result of increased headcount.
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 are investing in technologies that include our conducted energy devices, body cameras, in-car cameras and other sensors, artificial intelligence, digital evidence management, productivity software, communications software, and technologies that enable real-time situational awareness for public safety.
Interest and Other Income (Expense), Net
Interest and other income (expense), net was $41.8 million for the three months ended June 30, 2021 compared to $1.6 million for the same period in 2020. We recorded a gain of $40.9 million related to observable price changes for our investmests in certain unconsolidated affiliates and related warrants; $12.3 million of this gain was realized during the period on the sale of a portion of our existing investment. The increase in other income was partially offset by a decrease in interest income attributable to decreased interest rates on investments during the current period.
Provision for Income Taxes
The provision for income taxes was a benefit of $4.7 million for the three months ended June 30, 2021, which was an effective tax rate of 9.1%. Our estimated full year effective income tax rate for 2021, before discrete period adjustments, is (19.1%), which differs from the federal statutory rate primarily due to the impact of the executive compensation limitation under Internal Revenue Code ("IRC") Section 162(m), partially offset by R&D tax credits, on a projected pre-tax loss for the year. The effective tax rate was favorably impacted by a $13.9 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for RSUs and PSUs that vested during the three months ended June 30, 2021.
Net Income
We recorded net loss of $47.1 million for the three months ended June 30, 2021 compared to net loss of $30.8 million for the same period in 2020. Net loss per basic and diluted share was $0.72 for the three months ended June 30, 2021 compared to $0.51 net loss per basic and diluted share for the same period in 2020.
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Three Months Ended June 30, 2021 Compared to the Three Months Ended March 31, 2021
Three Months Ended
March 31, 2021
33,991
17.5
(5,863)
(17.2)
9,963
5.1
(394)
(4.0)
12,778
3,367
26.3
2,205
(504)
(22.9)
30,418
15.6
16,260
53.5
1,396
0.7
306
21.9
5,646
211
2,602
1.3
146
5.6
TASER segment
98,999
50.8
13,529
13.7
19,756
10.1
171
0.9
905
183
20.2
3,763
1.9
1,484
39.4
6,920
3.5
(1,411)
(20.4)
52,294
26.9
8,073
15.4
7,500
3.8
8.7
4,882
1,098
22.5
Software and Sensors segment
96,020
49.2
10,247
10.7
195,019
23,776
12.2
23,360
(5,649)
(24.2)
8,229
(1,217)
(14.8)
8,838
950
8,686
(2,379)
(27.4)
1,009,760
403,569
40.0
46,094
(522)
(1.1)
1,565
281
18.0
1,440
1,022
71.0
6,786
(1,503)
(22.1)
Net sales within the TASER segment increased by approximately $13.5 million or 13.7% as compared to the prior quarter, primarily due to an increase of $16.3 million in cartridge revenue, and partially offset by a net decrease in revenue from TASER devices of $3.4 million as a result of lower units sold. Cartridge revenue increased on both higher units sold and higher average selling prices due to the mix of cartridge types sold during the period. The decrease in TASER device revenues was partially offset by higher average selling prices.
Within the Software and Sensors segment, net sales increased $10.2 million or 10.7% during the three months ended June 30, 2021 compared to the prior quarter. The increase in the aggregate number of users resulted in increased Axon Evidence revenue of $8.1 million. Axon Fleet revenue increased $1.5 million, while Axon Dock revenue decreased $1.4 million, both primarily driven by corresponding changes in the number of units sold.
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Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020
71.8
71.4
28.2
28.6
29.9
32.1
6.9
38.7
63.1
61.3
73.5
46.9
24.4
19.4
97.9
66.3
(34.8)
(5.0)
10.3
(24.5)
(1.6)
(23.0)
(9.2)
Other Countries
International revenue increased compared to the prior year comparable period, driven primarily by increased sales in the Americas and EMEA regions.
33
15.0
9.3
35,205
130.8
4.7
(1,040)
(5.1)
7.0
(1,984)
(6.4)
513
15.1
18.6
26,699
53.0
2,014
185.8
2.8
1,428
14.2
1.4
1.0
2,307
75.8
51.1
50.7
65,142
44.5
9.6
8.6
15,016
60.9
2.2
3.1
137
1.5
3.0
3,423
38.0
27.2
28.1
31,616
39.0
3.9
4,456
39.8
2.6
5,473
101.6
48.9
49.3
60,251
42.4
125,393
43.5
41,071
20,444
20,627
100.9
15,241
18,661
(3,420)
(18.3)
18,626
23,578
(4,952)
(21.0)
14,993
8,690
6,303
72.5
2,423,089
1,588,632
834,457
52.5
91,666
74,930
16,736
22.3
3,411
5,038
(1,627)
(32.3)
3,902
5,003
(1,101)
(22.0)
12,069
9,931
2,138
21.5
Net sales for the TASER segment increased $65.1 million, or 44.5%, primarily due to a net increase of $32.7 million in TASER device sales and an increase of $26.7 million in cartridge revenue. We continue to see a shift to purchases of our latest generation device, TASER 7, from legacy devices. Revenue was also impacted by higher average selling prices for TASER devices other than TASER Pulse. The increase in cartridge revenue was primarily due to increased unit sales, with average selling prices remaining flat.
Net sales for the Software and Sensors segment increased $60.3 million, or 42.4%, during the six months ended June 30, 2021 as we continued to add users and associated devices to our network. The increase in the aggregate number of users resulted in increased Axon Evidence revenue of $31.6 million. Sales of our Axon Body 3 camera drove most of
34
the $15.0 million increase in Axon Body revenue and the $3.4 million increase in Axon Dock revenue. The increase in the aggregate number of users and devices also resulted in increased extended warranty revenues of $4.5 million. The increase of $5.5 million in Other revenue was primarily driven by higher sales of Signal Sidearm and Interview Room.
Within the TASER segment, cost of product sales increased to $70.7 million for the six months ended June 30, 2021 from $57.5 million for the same period in 2020. Cost as a percentage of sales decreased to 33.5% from 39.3%. The improvement was primarily attributable to a combination of manufacturing cost improvement and strong demand for our premium TASER offerings, which resulted in a favorable product mix. We are building manufacturing capacity to support our TASER device and cartridge manufacturing lines in response to growing international and federal demand and an increased install base.
Within the Software and Sensors segment, cost of product and service sales increased to $81.7 million for the six months ended June 30, 2021 from $54.1 million for the same period in 2020. Cost as a percentage of sales increased to 40.4% from 38.1%. Cost of product sales increased $18.1 million, and increased as a percentage of sales primarily as a result of product mix. Cost of service sales increased $9.5 million, and increased as a percentage of sales. We are investing in scaling our cloud business, which includes standing up new cloud environments, cloud applications, and Long-Term Evolution (“LTE”) costs, which can result in some margin compression in advance of anticipated revenue, as well as low-to-no margin professional services that support new installations for software customers.
As a percentage of net sales, gross margin for the TASER segment increased to 66.5% from 60.7% for the six months ended June 30, 2021 and 2020, respectively. The increase was a result of manufacturing cost improvement and product mix, as discussed above.
As a percentage of net sales, gross margin for the Software and Sensors segment decreased to 59.6% from 61.9% for the six months ended June 30, 2021 and 2020, respectively. Within the Software and Sensors segment, hardware gross margin was 40.4% for the six months ended June 30, 2021 compared to 42.3% for the same period in 2020, while the service margins were 74.8% and 76.6% during those same periods, respectively.
168,939
124.8
SG&A expenses as a percentage of net sales
Stock-based compensation expense increased $143.4 million in comparison to the prior year comparable period, which was attributable to an increase of $87.3 million in expense related to the CEO Performance Award and an increase of $56.9 million related to our XSPP, which were primarily attributable to acceleration in the anticipated timing of attainment for the remaining probable tranches. Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount.
Salaries, benefits and bonus expense increased $20.2 million primarily due to an increase in headcount. Included in this increase was $3.3 million in payroll taxes related to the vesting of three tranches of our XSPP in March and May 2021.
Sales and marketing expenses increased $9.4 million, driven by a $6.4 million increase in commissions expense tied to higher revenues and by higher spending on content development, promotional videos, new product launches, and advertising.
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Professional, consulting and lobbying expenses decreased $5.7 million, driven by a $9.6 million decrease in expenses relating to the FTC litigation. Offsetting the decrease in legal expenses was an increase in other professional and consulting expenses for consulting costs related to an enterprise resource planning system conversion and for sales to new markets, and expenses for contract employees.
45,029
80.5
R&D expenses as a percentage of net sales
Within the TASER segment, R&D expense increased $14.8 million, reflecting increased stock-based compensation expense, salaries, benefits and bonus expense, and professional and consulting expenses in the current period. The increase of $8.3 million in stock-based compensation expense related primarily to acceleration in the anticipated timing of attainment for the remaining probable tranches of our XSPP and to attainment of other PSU awards. Salaries, benefits and bonus expense increased $2.7 million on higher headcount, and professional and consulting expenses increased $3.4 million related to the development of next generation products.
R&D expense for the Software and Sensors segment increased $30.3 million, reflecting an increase of $19.5 million in stock-based compensation expense, an increase of $8.1 million in salaries, benefits and bonus expense, and an increase of $1.5 million in professional and consulting expenses. Of the total increase in stock-based compensation expense, $11.3 million was attributable to our XSPP and was due primarily to acceleration in the anticipated timing of attainment for the remaining probable tranches. Stock-based compensation expense also increased over the prior year comparable period due to an increase in headcount. The increase in salaries, benefits and bonus was primarily a result of increased headcount. The increase in professional and consulting expenses was attributable to development of next generation products.
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. These investments include Axon Records and computer-aided dispatch software. 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 as we reach economies of scale.
Interest and other income, net was $42.4 million for the six months ended June 30, 2021 compared to $2.6 million for the same period in 2020. We recorded a gain of $40.9 million related to observable price changes for our investmests in certain unconsolidated affiliates and related warrants; $12.3 million of this gain was realized during the period on the sale of a portion of our existing investment. The increase in other income was partially offset by a decrease in interest income attributable to decreased interest rates on investments during the current period.
The provision for income taxes was a benefit of $6.5 million for the six months ended June 30, 2021, which was an effective tax rate of 6.4%. Our estimated full year effective income tax rate for 2021, before discrete period adjustments, is (19.1%), which differs from the federal statutory rate primarily due to the impact of the executive compensation limitation under IRC Section 162(m), partially offset by R&D tax credits, on a projected pre-tax loss for the year. The effective tax rate was favorably impacted by a $25.7 million discrete tax benefit primarily associated with windfalls related to stock-based compensation for RSUs and PSUs that vested during the six months ended June 30, 2021.
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Our net income decreased by $68.3 million to a net loss of $95.0 million for the six months ended June 30, 2021 compared to net loss of $26.7 million for the same period in 2020. Net loss per basic and diluted share was $1.47 for the six months ended June 30, 2021 compared to $0.44 net loss per basic and diluted share for the same period in 2020.
Non-GAAP Measures
To supplement our financial results presented in accordance with GAAP, we present the non-GAAP financial measures of EBITDA and Adjusted EBITDA (CEO Performance Award). Our management uses these non-GAAP financial measures in evaluating our performance in comparison to prior periods. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance, and when planning and forecasting our future periods. A reconciliation of GAAP to the non-GAAP financial measures is presented below.
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:
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EBITDA and Adjusted EBITDA (CEO Performance Award) reconciles to net income (loss) as follows (in thousands):
Six Months Ended
March 31,
Net income (loss)
4,291
2,930
Interest expense
Investment interest income
(502)
(533)
(1,499)
(1,035)
(2,192)
(1,760)
EBITDA
(48,038)
(45,914)
(10,627)
(93,952)
(8,291)
Adjustments:
Stock-based compensation expense
Adjusted EBITDA (CEO Performance Award)
89,511
43,696
23,208
133,207
45,739
Liquidity and Capital Resources
Summary
As of June 30, 2021, we had $266.4 million of cash and cash equivalents, an increase of $110.9 million as compared to December 31, 2020. Cash and cash equivalents and investments totaled $703.9 million, representing an increase of $51.3 million from December 31, 2020.
Our ongoing sources of cash include cash on hand, investments, and cash flows from operations. Of the cash and cash equivalents, $0.1 is restricted cash, which consists primarily of funds held in an international bank account for a country in which we are required to maintain a minimum balance to operate. 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 June 30, 2021, we had letters of credit outstanding of $6.1 million, leaving the net amount available for borrowing of $43.9 million. The facility matures on December 31, 2023, 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 June 30, 2021 and December 31, 2020, there were no borrowings under the line other than the outstanding letters of credit.
Our agreement with the bank requires us to comply with a maximum funded debt to EBITDA ratio, as defined, of no greater than 2.50 to 1.00 based upon a trailing four fiscal quarter period. At June 30, 2021, our funded debt to EBITDA ratio was 0.00 to 1.00.
TASER subscription and 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 subscription or installment purchase 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.
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Based on our strong balance sheet and the fact that we do not have long-term debt at June 30, 2021, 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 or investments, income and payroll tax payments for net-settled stock awards, and other liquidity requirements through at least the next 12 months. We and our Board of Directors may consider repurchases of our common stock from time to time pursuant to our stock repurchase plan. Further repurchases of our common stock would take place on the open market, would be financed with available cash and are subject to market and business conditions.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities (in thousands):
Operating activities
Investing activities
Financing activities
Net increase in cash and cash equivalents and restricted cash
Net cash provided by operating activities in the first six months of 2021 of $95.1 million reflects $95.0 million in net loss, non-cash income statement items totaling $194.0 million, and a decrease of $3.9 million for the net change in operating assets and liabilities. Included in the non-cash items were $8.6 million in depreciation and amortization expense, $227.2 million in stock-based compensation expense and $40.9 million gain on the change in fair value of strategic investments. Cash provided by operations was primarily driven by increased deferred revenue of $25.6 million. The increase in deferred revenue is primarily attributable to increased sales. This increase was partially offset by increased prepaid expenses and other assets of $13.3 million and decreased accounts payable, accrued liabilities and other liabilities of $10.4 million. The increase in prepaid expenses and other assets was driven by an increase in prepaid commissions related to higher bookings not yet recognized as revenue, an increase in capitalized cloud computing costs related to an enterprise resource planning system conversion, an increase in right-of-use lease assets, and an increase in income tax receivable as compared to the prior year end. The decrease in accounts payable, accrued liabilities and other liabilities related primarily to the timing of invoice payments at the end of the current period.
Net cash used in operating activities in the first six months of 2020 of $7.0 million reflects $26.7 million in net loss, non-cash income statement items totaling $59.0 million, and a use of cash of $39.3 million for the net change in operating assets and liabilities. Included in the non-cash items were $5.8 million in depreciation and amortization expense, $54.0 million in stock-based compensation expense, and a $6.1 million increase in deferred tax assets, net. Cash used in operations was primarily driven by increased inventory of $43.3 million, as we proactively built up a safety stock of inventory to help meet strong product demand while also preparing us to stagger factory work schedules. Also contributing to the use of cash were increased accounts and notes receivable and contract assets of $9.4 million, and increased prepaid and other assets of $8.6 million. The increase in accounts and notes receivable and contract assets was attributable to increased sales over the last several quarters, primarily sales made under subscription plans. The increase in prepaid expenses and other assets was primarily attributable to a $10.4 million receivable related to held-to-maturity securities sold at the end of the current quarter. Partially offsetting the uses of cash were increases in accounts payable, accrued liabilities and other liabilities of $16.7 million, and in deferred revenue of $5.2 million. The increase in accounts payable, accrued liabilities and other liabilities was primarily attributable to accruals for inventory in transit and taxes. The increase in deferred revenue was primarily attributable to increased hardware deferred revenue from TASER subscription sales, partially offset by a decrease in prepayments for Software and Sensors services.
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Net cash provided by investing activities was $28.6 million during the first six months of 2021. Cash inflows from investing activities included proceeds from held-to-maturity investments of $56.5 million, net of purchases, and $14.5 million of proceeds from the sale of a portion of one of our existing strategic investments. The inflows were partially offset by outflows of $20.5 million for new or incremental strategic minority investments and $21.8 million for the purchase of property and equipment and intangible assets.
We used $146.2 million in investing activities during the first six months of 2020, which was comprised of $133.9 million for the purchase of held-to-maturity investments, net of proceeds, $4.7 million for an equity investment in an unconsolidated affiliate, and $7.7 million for the purchase of property and equipment and intangible assets, which was partially offset by proceeds from the disposal of property and equipment of less than $0.1 million.
Net cash used in financing activities was $10.3 million during the first six months of 2021 and was attributable to the payment of income and payroll taxes on behalf of employees who net-settled stock awards during the period.
Net cash provided by financing activities was $301.3 million during the first six months of 2020. During the first six months of 2020, we completed an equity offering that generated net proceeds of $306.8 million and received proceeds from options exercised of $0.3 million; the proceeds were partially offset by payments of income and payroll taxes of $5.8 million on behalf of employees who net-settled stock awards during the period.
The discussion under the heading off-balance sheet arrangements in Note 12 of the notes to our condensed consolidated financial statements within this Quarterly Report on Form 10-Q is incorporated by reference herein.
Critical Accounting Estimates
We have identified the following accounting estimates as critical to our business operations and the understanding of our results of operations. The preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our unaudited condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. While we do not believe that a change in these estimates is reasonably likely, there can be no assurance that our actual results will not differ from these estimates. The effect of these estimates on our business operations are discussed below.
Stock-Based Compensation
We have historically granted stock-based compensation to key employees and non-employee directors as a means of attracting and retaining highly qualified personnel. Stock-based compensation awards primarily consist of service-based RSUs, performance-based RSUs, and performance-based options. 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 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.
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For performance-based awards, stock-based compensation expense is recognized over the expected performance achievement period of individual performance goals when the achievement of each individual performance goal becomes probable. For performance-based awards with a vesting schedule based 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 10 of the notes to our condensed consolidated financial statements within this Report on Form 10-Q.
Stock-based compensation expense associated with the CEO Performance Award and XSPP 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. Expense recognition begins at the point in time when the relevant operational goal is considered probable of being met. The probability of attaining an operational goal and the expected attainment date for meeting a probable operational goal are based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis when considered appropriate. The statistical model and the assessment that determine the estimated attainment dates are subject to a number of estimated inputs, including expected volatility rates, management’s forward-looking financial projections, in particular for operational goals that are anticipated to be attained in the near future, and adjustment of other estimates based on the passage of time.
Beginning with the three months ended June 30, 2021, management discontinued consideration of the statistical model based on actual and anticipated attainment of the remaining operational goals. During the six months ended June 30, 2021, we recorded an additional $158.7 million in stock-based compensation expense as a result of updated estimates for the CEO Performance Award and eXponential Stock Performance Plan.
We have granted a total of 15.0 million performance-based awards (options and restricted stock units) of which 10.5 million are outstanding as of June 30, 2021, 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 estimate of the fair value of the awards and timing of recognition of stock-based compensation and consequently, the related amount recognized in our condensed consolidated statements of operations and comprehensive income (loss).
Reserve for Expected Credit Losses
We are exposed to the risk of credit losses primarily through sales of products and services. Our expected loss allowance for accounts receivable, notes receivable, and contract assets represents management’s best estimate and application of judgment considering a number of factors, including historical collection experience, published or estimated credit default rates for entities that represent our customer base, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Our monitoring activities include account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible.
A majority of our customers are governmental agencies. Due to municipal government funding rules, certain of our contracts are subject to appropriation, termination for convenience, or similar cancellation clauses, which could allow our customers to cancel or not exercise options to renew contracts in the future. Economic slowdowns that negatively affect municipal tax collections and put pressure on law enforcement may increase this risk and negatively impact the realizability of our accounts and notes receivable and contract assets. We considered the current and expected future
41
economic and market conditions surrounding the COVID-19 pandemic and recorded an additional credit loss reserve of approximately $1.0 million as of June 30, 2021.
Based on the balances of our financial instruments as of June 30, 2021, a hypothetical 25 percent increase in expected credit loss rates across all pools would result in a $0.8 million increase in the allowance for expected credit losses.
Interest Rate Risk
We typically invest in a limited number of financial instruments, consisting principally of investments in money market accounts, certificates of deposit, and corporate and municipal bonds with a typical long-term debt rating of “A” or better by any nationally recognized statistical rating organization, denominated in U.S. dollars. All of our cash equivalents and investments are treated as “held-to-maturity.” Investments in fixed-rate interest-earning instruments carry a degree of interest rate risk as their market value may be adversely impacted due to a rise in interest rates. As a result, we may suffer losses in principal if we sell securities that have declined in market value due to changes in interest rates. However, because we classify our debt securities as “held-to-maturity” based on our intent and ability to hold these instruments to maturity, no gains or losses are recognized due to changes in interest rates. These securities are reported at amortized cost. Based on investment positions as of June 30, 2021, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $1.4 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 $6.1 million at June 30, 2021. At June 30, 2021, there was no amount outstanding under the line of credit and the available borrowing under the line of credit was $43.9 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 foreign currencies and therefore are subject to exchange rate fluctuations on these transactions. 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.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer are responsible for the evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the
end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, 2021.
Change in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the fiscal quarter ended June 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The discussion under the headings Product Litigation and U.S. Federal Trade Commission Investigation in Note 12 of the notes to our condensed consolidated financial statements included within this Quarterly Report on Form 10-Q is incorporated by reference herein.
There are no material changes from the risk factors previously disclosed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock.
None.
Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year
At the Company’s Annual Meeting of Shareholders, held on May 27, 2021, our shareholders approved an amendment to our Amended and Restated Certificate of Incorporation (the “Certificate”) to increase the maximum size of the Board of Directors from 9 to 11 directors.
To give effect to this amendment, on August 4, 2021, the Company filed a certificate of amendment (the “Certificate of Amendment”) to the Certificate with the Secretary of State of the State of Delaware. A copy of the Certificate of Amendment is filed as Exhibit 3.1 to this Quarterly Report on Form 10-Q and incorporated by reference herein.
3.1*
Amended and Restated Certificate of Incorporation
31.1*
Principal Executive Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2*
Principal Financial Officer Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32**
Principal Executive Officer and Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*
The cover page from the Company’s Quarterly Report for the quarter ended June 30, 2021, formatted in Inline XBRL
* Filed herewith
** Furnished herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date:
August 6, 2021
By:
/s/ PATRICK W. SMITH
Chief Executive Officer
(Principal Executive Officer)
/s/ JAWAD A. AHSAN
Chief Financial Officer
(Principal Financial and
Accounting Officer)