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Investors Don’t Find Short Seller’s Claims Credible

AAXN shares are up nearly 4% after short seller, Spruce Point Capital, published a negative report claiming that the company has 40-60% downside potential for several issues, including:

– hardly achievable goals to convert its operations into reliable Software as a Service business;

– possible margin destruction caused by its dependency on Chinese imports, which are affected by the current tariffs

Insider Monkey didn’t verify the accuracy of the Spruce Capital’s report, but we did reach out to Axon Enterprise, Inc. (NASDAQ:AAXN) for a response. Here is Axon’s side of the story:

“Spruce Point Capital put out a poorly researched report that is riddled with inaccuracies and innuendos. While short sellers seek to spread fear, uncertainty and doubt in hopes of knocking our stock down to make a short-term profit, Axon is focused on long-term solutions such as making the bullet obsolete, improving police-community relations and enabling a fairer justice system.

 

There are three key themes in the report to which we would like to respond:
Axon’s accounting practices and SEC disclosures are sound:

  • Axon did not increase its line of credit without filing an 8-K, as Spruce Point alleges. We filed one on January 7, 2019. https://www.sec.gov/Archives/edgar/data/1069183/000106918319000010/a8-kxjpmcreditagreement.htm
  • Our capital raise, as we’ve said repeatedly, was designed to strengthen our balance sheet ahead of the TASER 7 launch. Selling hardware on a subscription, where customers pay over time, is a use of operating cash, as investors know.
  • The “recently reported” material weakness was in 2016, nearly three years ago, and was remediated by the end of 2017.
  • The reason the reserve as a percent of inventory has increased is because we have been much more efficient with managing our inventory, so the denominator (gross inventory) has decreased by 33% since Q2’17.
  • Axon’s segment reporting is in accordance with GAAP, which is to disclose segments consistent with how management looks at the business and has been consistently disclosed in our filings.
  • Axon does not have discretion to decide the timing and value of revenue recognition. Both are dictated by applying U.S. GAAP to our products and services. We do not claim that bundles have “stand-alone” value. Within our bundles, we have performance obligations (promises to transfer goods and services to our customers) that are “distinct.” In the Taser 60 plan, the hardware is in fact a distinct good, which is why we recognize the value of that hardware when it is transferred to the customer.
  • Axon does not have a “choice” to recognize hardware revenue upfront in the same way that Apple does not have a “choice” to recognize iPhone sales when they deliver the iPhone hardware. The timing of recognition is dictated by U.S. GAAP.
  • Customer billing statements do not dictate a company’s GAAP revenue recognition, and everyone with basic accounting knowledge knows this. The stated value of an individual good or service in a bundled contract is irrelevant for revenue recognition. The customer in those transactions is paying a bundled price. The value that matters for revenue recognition is the standalone selling price, which we use to allocate the price customers pay for the bundle to the distinct promises in the contract.

Axon is actively mitigating China exposure:

  • Axon is not concealing the fact that it has suppliers in China. Indeed, our annual conflict minerals report includes substantial disclosure of source locations, including China. As far as the impact of tariffs on the company, like all companies with imports subject to recent tariff increases, Axon is managing through the impact of these developments by negotiating aggressive discounts with suppliers and in some circumstances shifting production to other countries.

Axon feels great about our ability to disrupt the police Records Management Systems and Computer Aided Dispatch markets:

  • Axon has been very transparent about the competitive landscape in RMS and CAD. Indeed, Spruce Point’s competitor list could have been lifted right from Axon’s 10-K, where we list out competitors by name. We feel great about our market positioning and intend to execute.”

 

In seems that Spruce Point Capital’s degrading report on AAXN didn’t have much effect on investors, as the stock was rewarded with almost 4% gain after its publication.

Disclosure: None.

This article is originally published at Insider Monkey.

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