Axon Enterprise Inc (AXON) 2003 Q2 法說會逐字稿

Good day ladies and gentlemen, thank you for joining TASER International Second Quarter Financial Results Conference.

My name is [Katlyn], and I will be your coordinator today.

At this time you are all in listen-only mode.

There will be a question-and-answer session following your presentation, and you will receive instructions on how to ask questions at that time.

If at any time during the call you require assistance, please key "*" "0" and an operator will be happy to assist you.

As a reminder this conference is being recorded for replay purposes, and at this time I would like to turn the program over to you host, Chairman of the Board, Mr. Phillips Smith.

Sir, please go ahead.

Thank you [Katlyn] and good morning everybody and welcome to our second quarter conference call, obviously we had a great quarter with that I will let Doug Klint to give you the Safe Harbor Statement.

I will just tell you couple of housekeeping things before you start.

Doug's in Minneapolis; we are here in Scottsdale.

Kathy is definitely ill in bed, and Rick is out of pocket.

So this morning you are going to hear from Tom on the sale situation.

I am going to cover the financials.

Kathy did a great job in getting everything prepared.

I have her text and I will go over it and any detailed questions that I can't answer we will get Kathy to answer later in the week when she is back to work, but she is definitely ill at home.

So, with that go ahead Doug on the Safe Harbor statement.

Thanks, Phil.

Certain statements contained in this conference call may be deemed to be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

And TASER International intends to such forward-looking statements subject to Safe Harbor [created into that] Act.

These forward-looking statements relate to expected revenue and earnings growth, the company's estimation [figuring] the size of the target markets, the ability of TASER to successfully penetrate the enforcement market, the growth expectations for existing accounts, the ability of TASER to expand its product sales to the private security, military, consumer, self defense markets, and the company's target business model.

These are cautions that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward-looking statements in this conference call.

Such factors include but are not limited to, market acceptance of the company's products, TASER's ability to establish and expand its direct and indirect distribution channels.

TASER's ability to attract and retain the endorsement of key opinion leaders in the law enforcement community, the level of product technology and price competition for the company's Advance Taser products, the degree and rate of growth have been [marks] on which TASER competes and the company demand for its products, and other factors detailed in the company's filings with the Securities and Exchange Commission.

At this point Thomas is going to be giving us a business review.

Great.

Thank you, Doug, and good morning.

Obviously the second quarter was very exciting for us and we are going to touch on some highlights here in specific regard to the financial performance.

We ended the second quarter with a record $4.2m in sales which is the highest of any quarter we've had in our history.

That represents a 53% growth over the second quarter of 2002 with the year-to-date growth on net sales of 48.5%.

I'd like to point out that that's keeping us in the high-end of our range that we gave as far as guidance between 30-50% at the end of the last year.

And we are very comfortable now in saying we are at the top-end of that guidance and should stay there through the remainder of this year.

As of June 30, our profitability was $347,000 or 12 cents in earnings per basic share, so at this point in the year we are two consecutive quarters we have now exceeded this entire profit that we had in all of 2002.

Specifically, with regards to market penetration, we've now established ourselves at 4.25% of the $1.1m law officers in the United States now [carry and use] the Advanced Taser M26.

Specifically, in the second quarter we had 34 more departments commit to full deployment meaning they are going to be purchasing one of our products for every officer in their agency.

In the first quarter, we had 43 departments commit to full deployment for each officer.

So, we now have a total up 236 agencies that have committed to provide an Advanced Taser weapon system for every officer in their department.

During the second quarter, we added 411 new departments with the Taser's or an average of 137 departments a month.

That compares to during the first quarter with we had 345 new departments to [deploy] our weapons or an average of 115 per month.

This also compares to the 2002 average of 83 departments per month or 250 per quarter, again showing fantastic rate growth.

Our market penetration for U.S. agencies in total is now over 16%.

As of the end of the quarter we had 2,766 departments now testing or deploying our products.

That compares to 2355 at the end of the first quarter.

There was one significant event I wanted to address specifically that occurred at the end of the second quarter and now with the acquisition of Tasertron, who is doing business as EMRL.

That acquisition was completed in the year and the purchase of their assets for -- several reasons.

The first being, obviously giving us clear title of the trademark.

With that competitor now being out of the market having acquired their assets there is no more market confusion with two different companies providing a Taser brand product to the market place.

It also brought to the end the litigation that existed between the two companies, which we foresaw that there would be quite a bit of expenditure in the balance of the year, we had continued down that path.

Including in that acquisition we repurchased 6 patents and have two future patents that are now pending that will be used for future product developments.

And also as part of that acquisition which we put out in our previous press release was the General Dynamics Teaming Agreements that will be done between ourselves and General Dynamics during the next 5 years.

During the first 12 months of that contract, we are being awarded expenditure of a 120,000 to work with them on the development of the TAPM or the Taser Anti-Personnel Munition System for the U.S. military.

With that I would like to turn it over to Phillips to discuss the research and development.

Yes.

Generally during the quarter, we had minimal efforts on those last quarter on the [inaudible] research grant during the second quarter, as the focus remain on the development of new technology to be released later in 2003 primarily the X26.

We've hired two new engineers who are on staff and equipped to 4-5 in the engineering department now, that's from one or two not too long ago.

So we have increased the number of personnel, we are finding, we need them to continue programs.

We are not talking about, but we are working on.

During the second quarter we contracted the services of [Patel] Research Institute to assist with our research work for the office and naval research.

They are officially beginning work as the subcontractor Taser International in July of 2003.

They are funded through our contract with the Office of Naval Research.

They have world experts in number of areas we know nothing about, so they're helping us in the development of this new weapon for the military.

And I think that contract, if I'm not mistaken runs about a year.

Dough you're on the line, can you tell me how long that is?

I [inaudible].

Okay.

In X26 update we gave it to you in a press release, the beta test, basically this weapon has lot of software, this is really the company's first 4A and there are lot's of software on the product.

And that’s why the beta test period was extended from 30-90 days.

We are making 400 to ship out this month to paying customers for further field tests and we expect to get into real production and shipments in September.

We are however sold out for the entire quarter already.

I think we have something very close to 1500 orders for the X26 and we have an additional 500 requests for test and evaluation units from different departments.

So we are going to be putting it -- we are looking at putting out a second shift, Kathleen, when she gets back is going to make that decision.

I think we have [inaudible] mandatory 2 hours of overtime everyday now to catch up on the backlog.

So we are going to be straightening in production [inaudible] probably get to the fourth quarter, but I know that [inaudible], the production team will catch up probably by Q4.

So with that I will take it and give it back to Tom for a quick sales update.

Thanks Phil.

As we look at sales during the quarter.

One of the things that we track in the past that we like to touch on is during the second quarter we received 1833 separate orders during the quarter with an average sales dollar per order of $2283 that compares to 1728 orders during the first quarter with an average sales dollar per order of $1969.

That is significant as far as sales are concerned because even though we received a very large order of over $1.5m from a foreign entity we still are showing a very, very consistent order based on the smaller agencies, the bread and butter agencies out there that continue to come in without a whole lot of effort.

For example within this past several weeks we received a call from an agency that has seven persons in their department, and literally with a call being made in the morning we received a purchase order that afternoon showing again the small agency don't require a lot of time to turn around to make a decision, and again because of the acceptance of this product is now showing in the law enforcement market.

We are receiving a lot of those orders for locations where we have not even visited or have not made a sales call to there, just hearing about the product.

So obviously we are excited to see that to continue as we go forward.

During the second quarter we -- [inaudible] the end of the second quarter we had 605 advanced Taser units in the test and evaluation phase.

That's versus a normal that we have seen in the past of about 250.

So obviously, the continued work that we are doing out there in the field is resulting in more and more units going out for the test and evaluation, which we believe ultimately results in higher orders coming down the road.

As Phil mentioned, at the end of the second quarter we had requests for 550 TASER X26 test and evaluations, so if you look at that number in total we had over 1,155 request and uses of our products in the test and evaluation phase, and again, those are obviously great signs for us of the acceptance for this technology out there in the marketplace.

During the second quarter we also hosted our TASER Tactical Conference in Orlando, Florida during May 8-11.

This was an opportunity where we got 250 of our top instructors and our master instructors to come and attend and discuss not only their experiences with our products in the field but allowed us to get them trained on the new TASER X26.

One of the things that we were able to do from that conference was get those instructors up to speed so when the introduction of TASER X26 occurred at the end of May, these people were able go out and start going trainings and demonstrations.

Those trainings and demonstrations did occur and are still occurring during June and the rest of the second -- third quarter whether actually going out and getting law enforcement trained and how this product can work, and obviously with the 60% reduction in size, the 60% smaller and 5% stronger than the M26 the response has been extremely positive.

We also during the second quarter went and attended the big city Chief's Conference in Sun Valley, Idaho.

Obviously the results from that are that we get an opportunity for three or four days to be around the top 300 Chiefs and Federal purchasers from around the country and get unrestricted access to discuss with them their programs with the non-lethal weapons in specific the Taser's that they are using in their departments.

We believe also this is what's helping instigate some of the test and evaluations in moving forward and the increase in numbers that we are seeing for those requests.

One thing that might be of interest [TASER's] to is public information, we had a chance to talk to these Chiefs in this very social environment, we have been able to move a lot of them forward for example, in public press the Las Vegas Sheriff has said that he will put one on every officer that is 3,500 officers in Las Vegas, when he goes they have 75 in the streets today in test and evaluation.

When they do a full deployment, the casinos in Las Vegas will go right behind him, and one casino alone MGM has 600 security guards.

So that will be a big deal and another one was Detroit.

Detroit -- the city of Detroit is public information as a signed consent decree with the Department of Justice; they must equip all 4,000 police officers with either of Baton or a Taser and we'll be working over the next several months to make that an issue to be Taser v/s the Baton, so [what erupts in] when you talked to the Chiefs in these meetings -- these big city Chief meetings.

And obviously we will continue to participate in those meeting as we go forward with next big event being the International Association of Chief of Police Conference that occurs in the fall, I believe it is in the month of October in Philadelphia this year.

As far as TASER X26 goes during the second quarter we received firm purchased orders for almost $1m of product, which include Charlotte-Mecklenburg, the Pima County Sheriff's Office, and Denver Police Department.

Again these are agencies that have experienced success with the Advanced Taser M26, and a major decision that as they go forward and expand the program within their departments, they will be part of our Beta testing with units that are going to be coming out over the next 30-45 days to get those into the field and get more positive feedbacks and make sure that this product is rock solid when it goes into full production in the month of September.

One of the things we would like to look at now is the international market.

We have -- as of June 30, 76% of our sales that were booked from the domestic or the U.S. market whereas 24% of our sales at the end of that quarter were related to the international market.

We also attended major shows that occurred in the countries of Germany and Switzerland during this quarter as both of those of countries are now moving out of the test and evolution phase, and into the implementation of our equipment being used operationally.

Obviously, we believe those countries will continue to go forward however, being that they are an overseas entity we believe that they are going to go slower than might be expect in the U.S.

So, we will see that occur probably over the next 12-18 months rather than any large bulk orders that would come in very, very quickly.

We also received -- as we put out in previous press release, an order for over 3,300 units to a foreign military that had been working with us for the last 12-18 months evaluating our equipment and they purchased about 30 units, 45 units about 18 months ago and tested that equipment, and obviously decided that this fit their need.

And with them being a very innovative country, they came forward with that purchase and we had most of that orders shipped at the end of the second quarter and balance was completed during July for that application.

The United Kingdom continues to move forward their program.

They officially began the operational trials on April 21.

Those trials will be lasting 12 months and I can tell you as of this date the response has been overwhelmingly positive from the U.K. with these being used on their street.

Maybe after actually we go up and shoot [inaudible] anybody during that time, but they have deployed the system in one of the 5 agencies over 100 times meaning they were gaining a 100% compliance by simply putting a laser gun on somebody or gambling the sparks saying that if they didn't comply they would be shot will the Taser.

Obviously, that response has been extremely positive and we will expect that that will continue as they go forward.

I think I just said the British convicts and criminals are smarter than the U.S. guys, they don't need to get shot.

So with that we will continue to export to U.K., and obviously expect some great things with them next year.

I have also met with them during this quarter and we are going to try to get the TASER X26 implemented in the final 6 months of their operational trials so that they can have a comparison with both the M26 and X26 during the 12-month operational trial.

As far as the airlines go, we continue to work on that and I have still got an active role with our lobbies in Washington.

However with the distraction of [inaudible] United Airlines being in bankruptcy they have focused pretty much all of their attention on trying to emerge from bankruptcy during this summer.

So, at this point we believe that the TSA will not be making any decision anytime soon or actually we don’t expect that to late this year or even earlier next year on authorizing a carrier.

There was a report from the TSA that came out early in the month of June that said that our equipment is the only type of equipment that they will authorize to use on the aircraft.

However, they are splitting hearsay unsaid because we are authorized, they still need to go back and individually approve each individual carrier. [inaudible] United trying to focus on their operational business, they have just decided that at this point they are going to stay fully focused on that.

We are kind of in a holding pattern until they emerge out of bankruptcy which they hope will be later this summer or fall and at that time then because of the additional expenditures that might be required then they will refocus back on the Taser program.

Again with that not being a significant part of our business.

We haven't spent a whole lot of time focusing on it recently.

However, we are receiving a lot of interest from overseas carriers in the use of this equipment, not only for Cruise but for the Sky Marshall programs as well as some of different carriers that I visited during this quarter.

So in summary basically what we are going to see in the airline markets will be a pullback and nothing really happening until late this year.

As we stated in our press release at the end of the second quarter we carried a 1.7m of our backlog into the third quarter and if you couple that with the $950,000 that were written in orders in the first part of the month.

We are already looking at 2.6m in books for the third quarter, obviously a great start.

So with that I would like to turn it over for Doug, who has been working on a grand program with the State back in the Midwest trying to help local agencies fund their purchase of Taser's and I'll let him give you the details.

Thanks Tom.

We have been working with the Municipal Risk Management Authority for a large Midwest state who has established a risk avoidance grand program under which this risk management authority will pay $250 worth the cost of each Taser less lethal weapon purchased by their member of police departments.

We will be issuing a press release as soon as the members of the risk management authority are notified with the grand program.

I would also like to give you a brief overview of the pending litigation.

The [Heineken] litigation was filed in 2000 involved a firm distributor who claimed exclusive distribution rates under an oral contract, he died in 2001 and there are currently two motions pending for partial summary judgment before the court.

The hearing scheduled for June 13, 2003 was cancelled by the court and the judge will be deciding the motions for summary judgment without oral arguments.

The multi-litigation was filed in 2001 and involves the claim for Pan Infringement for a firing mechanism.

Taser was awarded some re-judging by the court in July 2002 and the [inaudible] years in the process of filing an appeal of this order.

The court issued an order giving the [inaudible] until July of 15, 2003 to file his appeal and [inaudible] has just filed a request for additional time.

The trademark litigation with Tasertron was settled with the acquisition of the assets of Tasertron and the stipulation of dismissal was filed with the court.

These results of filed litigation in California Superior Court against UBS Warburg and that's a suit on them for defamation based on false and [inaudible] statements made against the company and certain officers on the Yahoo chat board.

We have received IP addresses under a [inaudible] from the Yahoo and we are in a process of verifying these individuals identities.

When there identities have been verified we will be amending our complaint to add these individuals of named defendants and this will be a public document and recorded that time.

We also have certain businesses as usual lawsuits in both cases involved in-custody deaths of criminal suspects who had been previously shot with the TASER M26.

The suspect in the first case died several days after being hit with the TASER.

Mr. Alvarado (ph.) died from Methamphetamine intoxication and cocaine use, according to the autopsy report.

The suspect in the second case, Mr. Torres (ph.) was shot to death by a police officer with her service firearm.

The officer claims she thought she was trying her TASER M26 and not her firearm when she shot Mr. Torres (ph.).

Her insurance company has undertaken [instance] of both cases and a deductible is $20,000 and $10,000 respectively.

Phil will now be giving us a financial review.

Thank you Doug.

Well, I will be giving it to you.

Certainly it won't be as good as what Kathy would have done, but the only reason we can do this is because she was so organized, she had everything done on Friday and then she got terribly ill over the weekend.

So I'm glad that she has taken the time to do this.

The following is going to summarize advances calculated in our financial statements for the 3 and 6 months ended June 30th of this year and June 30, 2002.

A little side note here, next time we will start using slides.

We had actually planed to do this time, but we didn't quite have enough time, but next quarter we're gone have everybody dial into the web cast as well as the conference call and cover a lot of the steps with slides because there are some interesting information that's portrayed.

In sales, that's been talked about, we increased sales by 1.5m or 55% to 4.2m in the three months ended second quarter compared to 2.7m in the same quarter a year ago.

This increase is mostly due to the advanced TASER in Q2 including those larger single shipment, which we got 2,688 as the 3300m M26's out or 960,000 of the [$1.5m] order that was basically shipped in the second quarter.

Year-to-date products sales increased to 2.5 to 7.6m or up 50% compared to 5.1m for the same a period year ago.

Again a result of the increased TASER product line sales.

Revenue deferrals, one of things it's not -- I guess we should put something in the press release we may have, but we basically required not by the orders to defer $54 per unit of every M26 shipped in the U.S. remainder of this year up until December 30th.

We get reclaim of this in the fourth quarter.

So in Q2 of 2003, $90,000 of M26 revenue was deferred as result of this introduction of the X26 trading program.

This program allowed certain U.S. customers the right to trade their M26 purchase between June 1 and December 30 of this year for new X26 units with the defined trading schedule.

This was done to protect product revenues during the introduction phases that new X26 product line.

A little side note here, [it's] pretty remarkable we actually were able to increase M26 sales and make the shipments with the -- frankly the disruption of our brand new product announcement at the end of May which clearly took away focus on the sales of the M26, but in spite of that we were able to even increase the M26 sales and get the shipments out.

The $90,000 deferral is the result of the calculation designed to evaluate the number of units available to trade at a later day.

So -- which is [1667] for the quarter multiplied by the value of the underlined discount -- given us the time of the trading.

So it equates out to $54 per unit shipped in the U.S.

So that was $90,000.

In addition, we had deferred sales totaling $30,000 due to [FOB] terms expect in our efforts to receive it in ship the last week of June, which means they were FOB destinations.

We never caught it until it was too late to relate coming in.

So those were obviously Q3 orders.

So that together is $120,000.

There were no revenue deferrals in 2002 for comparison.

Backlog, it's been talked about.

I think it's phenomenal we rolled out of the quarter -- the $1.7m backlog, but a million of that was X26 at $957,000 and the remainder was M26, about $776,000.

Most of those M26's will get shift this moth.

In addition, as to July 18 would you see another 950,000 in sales primarily for the M26 product line.

I can tell that the [inaudible] -- the number of orders coming in.

The reason we can't give a really good guidance and we are not going to change our guidance except to say recurrences of the high end is we don't know where most of these orders are coming in.

The one-time action referred to -- we had one again yesterday -- the same thing.

Seven patrol officers and the Department Chief calls in the morning, gets a quote from State, [inaudible] secretary calls back that afternoon -- the next morning with the purchase order number.

We are getting literally hundreds and hundreds of those types of orders for 5, 10, 25 units.

Some are existing, some are new departments.

So, there's just no way we can accurately forecast excepted to say with the momentum we see.

We are very comfortable with the 50% guidance at the top line.

Cost of product sales increased obviously because -- by $526,000 because of the increased sales level to 1.7m in the three months ended June 30 compared to 1.2m for the same a year ago.

Direct cost increased by 394,000 in 2000 -- in the second quarter of 2003, and indirect cost increased by 132,000 to $436,000.

The most significant increase in cost of product was the areas of direct materials and direct labor resulting in a 65.6% increase in sales order [shift].

In terms of relative margins, the quarter-to-date direct cost decreased as a percentage to sales by 1.8% and indirect cost decreased by 1.5%; this decrease in expenditures net and overall decrease in products sold for the quarter and a 3.3% improvement in gross margins.

Year-to-date cost of products increased by 1.1m or 47.6%.

As a percent of sales, year-to-date cost of products sold decreased by a 0.5% improving our gross margin by the same percentage.

Included in the direct cost of products sold was an additional inventory scrap amount of 100,000 bucks.

We are really writing the stuff off, clearing the desk.

We have wrote-off 75,000 last quarter, this is a 100,000 this quarter.

We may not need this, but we are not taking any chances.

We are now -- our total exposure remaining on the entire M26 program is $45,000.

So, we are pretty well cleaned up anything that might be a potential problem, if the X26 really takes over like we expect.

There will be no exposure on the M26 and we'd rather do this then have the surprise at the end of the year.

So, if we add this 100,000 that was written-off, the 90,000 was deferred and the 30,000 will therefore be the estimation.

Another 220,000 would have pretty well flow to the bottom-line.

The 30,000 would have had some gross -- some cost of products with it, but generally another 200,000 the bottom-line would have hit during the second quarter.

This cost was expensed to help offset the company's exposure a net [defect] of M26 to return for replacement.

It may become obsolete through X26 sales.

We are working with Bone Pile sort to speak of these return was we -- to of the engineers we had are working on it full time now.

We are starting to see some these M26s repaired and return to the field.

And obviously when they go back they will have a very low cost for sales because we've written [those sum] off.

Gross margin improved by 945 to 61.8% to $2.5m in the three months ended June 30 compared to 1.5 for the same quarter a year ago, 1.5m.

As a percent of sales, gross margins increased by 3 to 59% in the second quarter of 2003 compared to 55.9% same quarter a year ago, year-to-date margins increased by 0.5% over the same period in 2002.

Our targeted gross margins for 2003 are 64% in our targeted business model.

So we are getting there, but we are not there yet.

SG&A and total SG&A increased by 285 or 20.5% to 1.7 in this recent quarter compared to 1.4m in the same quarter a year ago.

As a percent of sales SG&A decreased by 10% [10.8] to 40% in Q2 from 15.8% in the same period a year ago.

Year-to-date sales, general, and administrative expenses increased 548,000 to 3m in this recent 2003 from the 2.5m in the same period in 2002.

However, as a percentage of sales year-to-date admin expenses decreased by 1.9%, [sales] expenditures decreased by 3%, sales for the year closing the first 6 months of [2003] with 40% of the sales which is our target for 2003.

So we are getting there in the expense side, we need to improve our margins a little bit more which we will with the X26.

Administrative expenses largest year-to-date increase in the admin are in the areas of [inaudible], depreciation, amortization, insurance, and taxes.

There is nothing significant there; [salaries] are due to additional headcount, a few new heads and of course annual salary increases for paid employees.

Depreciation and amortization increased about 30,000 per quarter because of new equipment.

Our total insurance package increased in the first half by about $50,000 over the same period last year for product liability group help and general liability.

Our directors and officers insurance were renewed with no increases for 2003-2004.

Sales expenses, the largest increase in sales were in the salaries, mailing expenses, marketing clatter, trade shows, and lobbying cost.

Year-to-date salary expense increased $80,000 in 2003 as a result of new sales position, salary increases in implementation of a bonus commission plan for the department which is very minimal.

Mailing cost increased by $52,000 in 2003; this is a lot of mailing clatter on the X26 program, and promotion materials and our year-to-date trade show marketing [clatter] increased by almost $150,000, this is a result in increased number of test and evaluations units provided by the company coupled with the two big city Chief events and our Annual Tactical conference which was $114,000 over last year's expense.

So, we really just spend some money in Q2, in sales and marketing, one-time expense and it won't be repeated, but necessary to have this user-conference on an annual basis.

We have one more in the fall in Europe so this is an annual expense.

I thought it was our investments in what we are seeing coming through with the request for test and evaluation units as well as again the exposure that we are getting out there from the departments that we may not have to see individually we can catch them at these trade shows.

So we do believe we are going to continue to be participants in the big city chief as well as these are TASER Tactical Conferences both domestically and internationally. [inaudible] also represented an increase in selling expenses of $105,000 for the period, $30,000 paid to a local lobbyists who works with Arizona Law Enforcement Agencies that's why we have great penetration in Arizona and $75,000 of the [inaudible] group of [inaudible].

Let me just say we had a very positive article from the Phoenix newspaper yesterday about the reduction of police shootings and death here in Phoenix, since they put the Taser's on the street.

Any of you isn't seen that article we'll be glad to send it to you.

Our interest income for the period decreased 6400 bucks to 7500 for the three months in the second quarter compared to 14,000 same period in 2002.

Nothing significant in interest income and interest expense they are down, I don't think it's worth taking your time, I won't do that.

They are both fairly minor items.

Income tax -- the year-to-date provision for corporate income tax as established at 38.5 year-to-date the provision for income tax is increased to $263,000 to $410,000 since you have [inaudible] 147,000 and grew from 2002, that's called high class problem, its making money.

This increased result of increased pre-tax profitability and the reduction in the affect of rates from 45% which we used last year to 38.5% in 2003 due to an analysis performed by [inaudible] tax group recently.

Net income increased to $576,000 or 20 cents per basic share for the 6 months ending June.

Our result of '03 compared with 8 cents at the same time in 2002.

This resulted in 12 cents per basic share earned in the second quarter of 2003.

Diluted earnings per share increased to 16 cents from the 6 months ended June of this year compared to 5 cents for the 6 months of last year again a result of 10 cents per diluted share earnings in the second quarter of 2003.

Short come of the actual number of shares outstanding in June 30, 2003, was 2.8m, 34559 of these shares, insiders and employees currently hold approximately 993,000 shares of 1.842m held in the public flow during the second quarter of 2003, 7280 units were exercised by underwriters from our IPO bringing a total exercise to 9271 of the 80,000 units issued to [inaudible] in May of 2001.

Year-to-date diluted share account as of June 30 was 3,554,747 comprised of 397,000 in the money options, and 345,437 in the money [loans].

These numbers are generated by computing the in the money the only options and assuming the value to be used to purchase the share as a common stock at the closing price on 06/30/2003.

At 06/30/2002 the total diluted share count was to 3.8m, 815,064 approximately 300,000 shares higher than 2003.

Current assets increased by 14,000 [inaudible] to 7.16m for the 6 months ended June of 2003 compared with 7.14m in December 2002.

The change in current assets and net effect of 900,000 less in cash used it form the Tasertron and intangible asset equipment purchase and working capital requirements, a 277,000 reduction inventory offset by 1.2m increase in accounts receivable resulting from the foreign order shipped in June 27, 2003 against a confirmed letter of credit.

Our property plant equipment net depreciation increase 204,000-865,000 in 6 month's period compared to 661 in December 2002.

Other assets increased by 975, there is a net effect of the 1.01m intangible assets acquired in Tasertron asset purchased about $25,000 amortization expense for the period.

What's actually felt remarkable is our cash state flat from last quarter and we are able to pay the Tasertron $5000 fee and we have $1.5m of letter in credit, we'll collect this quarter, which are probably collected in the August timeframe.

So our cash position should increase and improve during the quarter.

Current liabilities have increased by $572000 to $2.4m as of June 30, the result of a new 500,000 note payable to [inaudible] to the Tasertron purchase.

For the remainder funds owed under the asset purchase agreement signed on June 26, 2003.

In addition accounts payable, accrued liabilities increased $460,000 as a result of the revenue deferrals, tax liabilities and [inaudible] reserves.

The $1m of increase in current liabilities was partially offset by the line of credit repayment.

So only $385,000 posted in the first quarter of 2003.

Our revolving line of credit on May 31, 2003, the company renewed its total borrowing capability of $2.5m with BankOne of Arizona [alignments] renewed without a compensating balance requirement as governed by a burrowing based calculation using 50% in inventory and 75% of variable accounts receivable not to exceed 2.5m bucks.

As of 2000 -- June 30, 2003, there were no borrowings against the line of credit.

Long-term debt, we had no long-term debt.

We had 35,000 long-term leases that are current.

Stockholder equity, the total equity increased by 653,000 in 6 months ended June 30, 2003.

The 6.7m is compared to 6m on December 31, 2002, result of 561,000 net income in the first 6 months of the year, coupled with the 86,000 increased in the AFID resolving from the exercise of underwriter warrants, option, stock benefits, and these options, and non-qualified option grounds.

Liquidity as of June 30, we have a working capital 4.8m as compared to 5.3 of working, December 31, 2002.

Change in cash consistent -- of the quarter consisted the following.

Cash flows from operating activities as of June 30, we generated $347,413 cash from operations.

Of this, 576,000 is net income, 174,000 in depreciation and amortization, 278,000 reduction in inventory, and 362,000 due to increases in liquid expenses offset against 1.2m increase in accounts receivable, the letter of credit at quarter-end.

We had 1.4m investing activities during the second quarter of 2003 during the TASER technologies acquisition, and we generated 127,000 from financing activities as a result of the new TASER technology.

In total, we used 894 in 2002.

We used 2.1 for the same six-month period.

Let's talk about some quick ratios.

Everybody wants to know M26 is the cartridges for the quarter, 12.1 was 6684.

M26 is sold and 79,744 cartridges sold.

A quick note, we did not have as many cartridges that large order they came.

I only had two cartridges for gun.

So there is going to be follow-on business and that users will be started to training.

They are going to need cartridges to train their users and so forth.

Our year-to-date ratio is 15 cartridges per gun with 11,367 M26 that were sold in the first half and 166,932 cartridges.

Per capita, M26 sales are 50,405 units were in the field, with 46,793 in the hands of U.S.

Law Enforcement.

The total number of single cartridges shipped is 617,495 for a per capita ratio of 12 and a quarter of cartridges for each one -- M26 in the field.

Last year, this number was 13-1 indicating an increase in the base number of units being sold.

I'd like to cover one last thing and then we will open it up for Q&A and that is Investor Relations.

We have a new website.

If you haven't seen, you should go, take a look.

We got a totally new look, which is now supported by CCBN, who is also hosting this conference call.

There is some really slick stuff out there for the analysts, particularly you can go up and look at the historical performance, push on the interactive button, it will give you a graph for every one of the elements in the income statements, the balance sheet, some really nice stuff.

We have a new IR program, investor relations program, targeted at institutional investors for this quarter.

We're going to see how it goes.

Our company's got a unique approach.

We think we'll try it out for one quarter and see what the results are, focus obviously on people that buy small cap companies like our self.

We went to the AeA MicroCap Conference during the quarter and think we got some good results.

We did pick up one new head spun; grand slam there on this call.

The new head spun is participating in TASER stock.

They're obviously very happy.

They’ve been buying all the way since -- actually we picked them up at the Rock Capital Conference.

I think they’ve been buying since about March.

They’ve got to be happy, because I bought some stock in March and I bought it in $3.50.

So I'd like those kinds of returns.

Those 9% returns are good, from 3.5-12. [Noble], I want the international order of Black Law Enforcement officers and tell us last week, in another one of these trade shows.

A lot of Police Chiefs in this country are black and they show up their confidence.

And very interesting, one Chief of Police in New Orleans showed up.

Actually the Chief of Operations and he said, with [two of us in the booth], I have heard a lot of good things.

Give me a quote for 1000 units that would be a million bucks.

Now getting a quote and getting an order are two different things, but just to show you the level of interest that they show.

Rick and I also attended the Police & Firemen's Pension Fund Summit.

Let me tell you that’s a [sleeper].

There is lots of money in these Police & Firemen Pension Fund.

In Denver alone, I sat with a guy I had lunch, their pension fund is $3.4b in the city of Denver.

They are sleepers, but I am going to working that audience.

I have the mailing list, and keep them apprised.

It's their users who are the contributors of those pension funds and those guys love this product.

So that's something we will continue to focus on.

So with that, let's turn it over to [Katlyn] for question-and-answer. [Katlyn].

Thank you Mr. Smith.

Ladies and gentlemen, at this time if you wish to ask a question you may do so by keying "*" "1" on your touchtone telephone. answered or you wish to withdraw it, please key "*" "2".

Questions will be taken in the order received, please key "*" "1" to begin.

Your first question sir is from Steve Gesh (ph.) of Rochester Capital's Partner (ph.).

Hi Tom, hi Phil.

I am sorry Phil you went too quick, can you give me the cartridge numbers again for the quarter?

Sure.

For the quarter it was 79,744 cartridges and 6,684 M26s.

Okay and then in terms of revenue between large customers and small customers, can you give me a sense of the break out?

The only large customers we shipped during the quarter was the one big military that was really significant during the quarter which was -- about $900,000 of that order we shipped, I actually read that number some place just under a million of it was with that one large customer the rest was all really small customers from all over the country.

Okay and in terms of research going forward, do you expect to see a similar type expense of above 200,000?

No, I don't think so, I think that was -- couple of things that was really good in the X26 ready for market.

There will be some of that this quarter who built to more test fixtures and things, but no I don’t think we will see that level, and we will also start doing more on the grand, in fact we are going up next week I think it is or the week after to do a lot more animal testing for the Office of Naval Research.

So I think, the grand will start kicking in and I think that expense level will drop.

Will that just be a washable or you recognize that on revenue side as in--?

Unfortunately Kathy is [inaudible] -- but I think in the past we have offset that.

It is included in revenue, and then it is back down in cost of goods I think, but no it’s reported on the revenue line I am pretty sure.

Normally it says for the purposes of consensus the -- an operation will review the grand income and expenditures were recorded with the engineering department, however, for financial reporting the funds received from ONR were recognized as revenue and the associated cost we classified in the cost of goods sold.

Okay.

So maybe you can talk about -- let me -- talk to these police departments and they say they are committed to full deployment.

Can you expand upon that, do you sign contracts with them or Letters of Intent, is there any, you know, are you able to get an iron clad agreement?

Typically not, I can tell you we have got two or three agencies out there that will come in and say we are going to the deployment but it's going to take a couple of years, but that's the exception, normally they will just come in and tell us they are going to a full deployment which means they are buying one for every officer out on patrol, meaning out on the street, and it will just come in a single purchase order and occasionally would like I said, we've only got 2 or 3 in-house that are anything long-term.

But what we do get is one favor, establish and started using our equipment even though there is no established purchase order, we know we are going to have recurring revenue coming from cartridges that they will have to reuse every year to recertify those officers.

But there are no Letters of Intent or long-term engagement signed with these agencies.

There is only one, it sounds great, there is only a few like the city of Montgomery, Alabama comes to [my way], we have 5-year contract with them.

They are going to full deployment in mobile, [sorry mobile] Alabama.

And that's one that comes to mind that's longer-term.

The rest of them like Orlando -- the city of Orlando just went to full deployment, they bought 300 the first time and 300 the second time and they are in full deployment now Orlando.

So, I'll have to get Stacy to get that number for us Steve, how many are actually fully deployed versus how many -- I think it is probably -- I'll get the number, I don't exactly, we will get that number for you, how many are actually there versus how many are in the process of getting there.

And then in the past you've talked about private security, the opportunity there potential of stocking or in terms of deployments with a large retailer, do you still have that opportunity?

And then lastly, the press release that was put out regarding the extending the testing phase for X26, can you talk about some of the bugs you've had in the software or more specifically why you extended that testing period?

Yes.

As far as Private Security goes, we are still working with them obviously because of the size of the corporation.

There is a lot of I's to be dotted and T's to be crossed as they are working through this process.

So, it's definitely still moving ahead, obviously, it's going to just take a while because of the -- it's quite a [third] of the departure from things that they have done typically in the past, and we are asking other private security companies move forward are actually in the Northwest.

As a reference, there is a very large private security organization that's using this that actually has them on all their officers, private security officers.

They are not a big company, but there are, you know, it's again a trend that we're starting to see out there.

The private security is moving forward in that particular region because we've had such great market penetration with the law enforcement in the Northwest.

As it relates to the X26, really what we had were some bugs in the software that related to the test that we were doing.

In other words, we -- in the press release we discussed doing a lot of software validation, in the calculation of the percent of the battery percentages, in the cold temperature functionality, a lot of those types of things.

The hardware is very stable and we've actually in our trainings, as I said during the call, are continuing to go out today and train officers around the county.

Our classes are now two days instead of just one for people that are getting their first time exposure to our equipment, and we are using this equipment on a very regular basis.

I can tell you I just got back from two weeks in Australia and New Zealand using it down there to train several hundred people and we were firing it with -- in all the trainings and everything with the new TASER X26.

So the hardware is very, very stable.

It's the software that we are working through, where the batteries might be depleting quicker than they need to be and those types of things that we just need to get some field experience with it in order to make sure that we've got the software functioning as we want it to do.

And there were a couple of others small bugs out there, but it's basically all software related, which is why we expanded from originally 30 days that would have just covered the month of June to go up 90 days which will take us basically through the end of August, and as we've said during this call -- the Charlotte-Mecklenburg County in Denver P.D. will be getting units before the end of August in quantities equivalent to the purchase orders that they place with us and they will be testing that equipment and getting us feedback.

Yeah, one quick think, you know Doug covered this large Mid West County -- State that we can't say if it is ideally North of Indiana and East or whatever, but as we kid around here they are going to do something and when they do we are going to take that risk management model across the country.

I mean once this one state does it, we will take it to the other Mid Western states with large population and get them to do it.

So that's going to have a significant impact.

The fact that they are willing to step up and spend money per unit plot -- is going to do a lot to move a lot of police cities -- the city count of these -- the police department faster on the purchasing cycles.

Okay.

Thank you.

Your next question from Mark Matson (ph.) of Raymond James.

Hi guys.

Great quarter.

You had put leverage having about 50% increase on revenues, but you quadrupled EPS.

Do you think that leverage will continue?

Yeah.

We have got -- you know one thing, when you go about break even in his company, we have very low cost basis.

If you look around, we can clamp this puppy down in a hurry and so it's really the discretionary expenses and the money we're spending is like going to the trade shows and spending the money.

We are spending it with big city chiefs.

Those aren't going to occur every quarter, but the answer is yes.

We have very good leverage, once we go above breakeven.

The model is -- once you go above breakeven 35 cents of every dollar falls to the bottom line, and that will continue.

And your X26 margins were even better than your M26, I understand?

When you get into production -- the reason they are, you know you have to talk about margin, they are on the bottom line.

We have reduced the distributor commission on this thing, considerably -- pardon me, because we feel they are go out in larger numbers.

So they [commission] a distributor on a fully loaded M26, which runs about 700 bucks, makes about $250.

On an X26, it makes 100.

And so that’s the additional margin we will capture at the bottom line, but that won't show up necessarily in costs to goods, but that will show up in the SG&A and other parts of the thing as well.

So yeah we expect the margin.

Once we get into production, I mean, the X26 is in early days.

They are fairly gold plated right now because of all the handling and testing we're doing.

Once we get that smoothened out in the fourth quarter, I think it will start to see the margins come back.

That’s why we have the 64% gross profit target and we think we'll get there.

On your number of 1,155 requests for test evaluation of the X26 -- was that one of those per department or could that be multiple for departments?

Actually, you know, to break that number down, 605 of those are for the M26 and 550 are for the X26, and basically that could be multiple per department.

So that's 605 agencies -- and 550 agencies.

So that -- and typically it is.

Our normal test and evaluation depending on the size of the agency, you know, is small numbers -- less than 50.

Well, I think the M26 turns right.

I think its multiple orders.

And the X26 is generally an agency that is all using the M; they just want one to try it out.

I think most of those are single unit, there might be a few multiples but most of those are single unit orders.

Well, if I understood what you just said all of those are single agency orders?

Of the X26 that's right.

I think most of those are single-agency orders, yes.

But why not the M26?

Because there they are going into evaluation, I feel when they are trying it for the first time.

Therefore multiples like -- take Las Vegas, they have 75 out there right now on test and evaluation in the field they are using.

Right.

But that's not 75 or the 605 -- that's one of the 605 in Las Vegas?

That's correct.

Okay.

All right, just trying to understand.

So total 11,000, excuse me, 1,155 agencies are tested?

That's correct.

Okay.

The 550 obviously, they haven't gotten the X26 yet but those are requests.

Okay.

So, if I understood the Q3 is normally in the past has been seasonably weak, but already you have booked enough revenues that have your 50% target already if you didn't get anymore orders the rest of the quarter, right?

That's correct.

So if things continue at the brisk rate that you had in the first week of July, can you think, you might update us before the next conference call that things are have been exceeding your forecast?

Yes, I think, by the end of the quarter -- before the end of the quarter we will.

If we continue at the rate we are, we're headed for one hell of a year [inaudible] just say that, I mean, even yesterday we had, I mean, it just -- it continues to roll in, it's incredible.

One day in the last week, we had a single day of 175,000 or 165,000 orders.

It's just is down because I think it was a year ago, or two years ago, the whole month was $94,000.

So it's just and like -- the reason we can't predict it the one problem we are having is this issue is coming from everywhere and we just don’t know where all these departments are.

There are almost 19,000 different departments out there.

And we are certainly not in touch with all of them.

So, we know the [inaudible], I can tell you where Chicago is, I can tell you where Denver is, I can tell you where Las Vegas is.

We know all the [inaudible] Cincinnati.

Are they going to full deployment level [inaudible] buying 75 M to 75 Xs to do their field evaluation. [inaudible] all the big agencies but there is no way we can control these and have any handle on this small and that's why it's hard to predict what's going on in the base business.

Okay.

I will come back for some questions later.

I'll let some other people to ask some questions, but I would like more later [inaudible].

Thanks.

Thanks.

Thank you.

The next question from Jim Stone of Alexander Capital.

Congratulations on a great quarter gentleman.

Thank you.

Thank you.

I just hope you can keep it up, but I don't -- you know, obviously I am not expecting you to, but would love to have you keep it up at this rate?

[And why it is].

Right, a couple of numbers Phil you didn't give us sales international, sales consumer?

We gave it basically as a percentage.

That's 76% of the sales were the U.S. domestic market.

No, no that was you said orders, I am talking revenue.

Revenue pretty well tracked along I would guess very close, I don't that broken down.

I will get that for you.

Consumer was a very small portion and nothing significantly consumer side.

We sold 4 on the Internet yesterday, I mean it's not a big a part of our business, and frankly we were ready to announce the next 26 consumer version, which is something we will do, but we can't keep up with the law enforcement business.

They are not about to know enough the consumer products get further behind, so we are going to delay that introduction until we actually catch up on the law enforcement, but right now consumers is not a very big number, Jim.

James Stone.

Okay. [Because I had to put in] international last quarter, the March quarter roughly a quarter mill and if you say it tracts so it should be on the order of the mill that's one hell of job.

Oh yes.

It was one of a -- that's one big single order from -- that we got from the military.

It was 1.5m bucks.

Okay.

And 160,000 of that shipped in the quarter.

Yes and plus other, it's got to be over $1m last quarter yes.

Would you consider -- okay so that would be unusual, we wouldn't expect international to be that high in the current quarter down?

Consistent yes.

And not consistence for a while or two--..

I think in the international market you know that's where I tend to be -- I am spending probably two weeks of month overseas right now and those typically are going to come in the larger [glimpse] that we call them, so we are using our domestic model that's going to attract on flat basis where those larger ones will come in.

For example, it took 18 months where they started with about 50 units and then they came in with purchase for 3,348, you know, I think you will see that [inaudible] as well as these other countries to start to come online, that they will start small and then they will come in with the big bullets when have approved the product.

It is hard to forecast of what he is saying?

Yes.

I understand.

When do you expect the ship with Xs to exceed the shipment of Ms?

Fourth quarter first quarter, I mean, I'll tell you what's holding the X back frankly and good for us, I mean, we are lucky it is.

Nobody has -- not so many people have their hands on Xs yet and once they do there will be no doubt about it.

Once it becomes a rock solid product in the field and the cops say it is solid, I think there will be a mass conversion to Xs at that point.

But until then today the M26 has proven, cops know they can rely on it so forth, and so I think that won't happen until probably first quarter.

By this time next year you would be shipping basically all Xs note?

I don't believe, so I can tell you over and especially in the overseas market they are going to lag the U.S. just like they have in this current product line.

So, right now we believe the X will take off here domestically much quicker than it will overseas, but I don’t think it will go away completely.

The M26, it appeals to a different need by the law enforcement community, for example being used in the riots up in Sacramento that they had last month, that so much larger device its easier and is much louder then the X26, you know, public display forms.

So, I think there is definitely going to be a market for their -- we are just not sure what the spread is going to be between the two until we start getting the X26 out there in any kind of numbers.

Now that you acquired Tasertron, any talks on being more aggressive in the consumer market or you still got a full enough inflate on the commercial side?

Well, we don’t want to loose track of our focus, and right now we are obviously receiving a great response from law enforcement.

One area that I didn't touch on was the military.

We do have obviously the four military, but I can tell you we've also been working closely with the US military in operational trials of the product that has gone exceedingly well.

So, right now we are not trying to make ourselves distracted by going out after too many different things and just make sure we really focus on where we're having success and will continue to do that, and as Phil said we're delaying that launch into the consumer market place until we got the current market under control and we're not looking at huge backlogs while trying to bring up the whole other market area.

Any thoughts of using these in Iraq?

Well, they're in there.

There are 40 summoned to Iraq today on test, with U.S. military.

And there are other ones in Afghanistan on test.

Well, I'm thinking also specifically, now they just announced this Iraq, [Malaysia] that they're going to put up with 7000 people?

Yes, I've been pushing Bernie, You know Bernie [inaudible] I've been watching them on TV and just had an e-mail from him this morning, we're pushing him to try and get us some introductions there, but you know he's got a lot of other things on his plate over there, but there's a lot going on, he was sending me some e-mails yesterday on what's going on over there, so they're pretty busy.

I think eventually we'll get our day, but it's probably not in the near term.

Got you.

Now does the SG&A as a percentage went up slightly, what are you thinking on where you want to drive that from a business model standpoint?

I think, we are actually down little bit [inaudible] 40% which is our target business model.

Our target business model is, if you recall 64% gross profit margin we are working to get there and our SG&A is 40% that's where we want to be, what was up a little bit -- and actually R&D was right on our -- our ideal business model was 5%, R&D which came in at exactly it's 39% SG&A, [inaudible] over and 64% gross margin.

We got to get more gross margin and basically to drive the operating profit of 20%.

And then last question, you've -- minor item you got a million intangible assets, what's in that?

That's the thing we just walked from Tasertron, all the trademarks and [passes] we bought in them.

There is couple of things near the taser.com website and was something we bought for 60,000 hours a couple of years ago.

The remainder of that we brought apart from [Jack Cover] in there for $25,000…

But it is basically the Tasertron.

Tasertron mostly, the majority is the Taser trademark.

Yes, and we are writhing that off every quarter.

Okay great, keep up the fantastic work.

Thank you, Jim.

Your next question sir from Michelle Sacks (ph.) of Grand Slam Capital Partners (ph.).

Hi, Phil and Tom.

Congratulations for great quarter.

Thank you.

Thanks.

Just want to go over little bit on two things actually.

One is with respect to sales projections for this year.

You guys are obviously sailing at 50% on the top and just doing the quick math on where you have already -- right now you got 2.6 sales for this quarter, plus whatever you taken in since the middle of the month.

You already pretty much on track for that so if you are at 10.2 you really need to be 4.5m for the last five and a half month of the year.

You guys don't feel comfortable that you can beat that number?

I think we can, but you know nobody stands, I mean that's the only institution is following us.

So you are the probably only guy can ask that question, but you know nobody stands to put the guidance out there and again our big concern we have -- I mean we don't have real good control or contact with a lot of these small agencies -- it just continued to pour the orders in here and we continue that to expect.

There are some big ones out there, I mean we could flow through the year, but you know lot of big things would have come.

Tom is working on some orders, I mentioned Detroit, I mentioned Las Vegas that--.

At the back of [on going] business you got Las Vega and Detroit and that's of a $6m roughly isn't that?

Worth 7000 units that's $5m, $5.6m.

So I mean potentially you have got some opportunities this year other than just normal business that you could even do significantly more than what we think.

Yes.

What Tom has got -- I mean Tom has got another order from the same country that the other one came from that's even bigger for the police that could land this year.

We could have [inaudible] year with the promise -- forecast and that stuff is really difficulty we rather give a number that we can make and then give you a pleasant surprise.

I know you'd appreciate that as a large holder of our stock and that’s really what we want to do.

Would make us unhappy I know.

And then in terms of cartridge sales?

The order that you did -- the foreign orders, did they were, you know, just the average number or less?

And how do see sales like that progressing also on a cartridge basis?

Yes.

You know, our typical ratios -- like for example were 12-1 for the quarter.

For the year, we are tracking 15-1.

That large military order -- they only bought two cartridges for every M26.

Just basically -- that order that they purchased was their operational requirement.

In other words that's what they are going to use to take out into the field.

There are still follow-on orders coming from them that.

That I'm going to be going to visit them during the month of -- during the third quarter here to get them trained.

They still have to come back and purchase their training cartridges and again that’s not the entire deployment for us throughout the military.

So this was just kind of our first of step and it was basically getting what they are going to need operationally.

I understand that the training cartridges come out of a separate budget and that's it will be done as a separate order.

But, you know, if you look at the 15-1 or 12-1 ratios even, you know, in this case it will be another 10 cartridges or 30,000 cartridges just for them for training, if they are following the line that we are seeing here in the States.

To give you an example in the UK, when they are training their officers their ratio was 19 cartridges to one.

So, I do believe we are going to see that ratio come back up, but even with those orders having shipped right now we are still maintaining a 12 or 15 to one cartridge ratio as of the mid point of the year.

Okay.

And then if I am just sort of doing the math on earnings for the second quarter, you had a 120,000 rough deal deferred revenue.

On that deferred revenue is -- did you defer the cost of goods sold and then also did you actually just defer the revenue, please?

I ran over that pretty quick.

The 90,000 straight to the bottom line -- that had gross profit and revenue numbers.

There will be no profit associated with that.

The 30,000 that was -- it will be definition.

The cost were deferred on that.

So, as I said there will be some costs there -- about 50%.

So of that 120 about 15 of that will be cogs.

There will be 105 plus the 100 that we wrote off.

So its about 205 that would have fallen to the bottom line.

Okay.

And then on the inventories that you wrote off in Q2 of 100 Grand on the M26 to the extent that you're able to sell those -- that would come back into income?

Exactly, I mentioned that.

What's happening, we hired two engineers as we started to work on it.

Kathy is much better able to answer than I am, because she runs manufacturing in addition to being a CFO, but if my understanding is we are getting some good results on early repairs, we were never really focused on this before and I can't tell you how many we have back there, but its like 10, 000 or 15,000 that over the past three years we've accumulated and never had time to work on as many of those as we can repair -- up to a certain leverage of scraping them.

Beyond that, we can't repair them and any of those repair will be basically coming back at very low or no costs.

Okay.

And then the R&D side of business, you know a more normalized number you were talking -- this quarter was high because of the, you know, the role out of the X26 in terms and you said that -- but you'd like it to be 5% is where the $200,000 plus number for this quarter.

Are you retaining to run that then at the 5% or is it really more just for the rollout for X26?

That's primarily the X26 we'll allow.

There's a number of new things we're looking at, but no I think it's going to be less.

And that I was just thinking our idea -- our target business model we have 5% R&D.

I think -- I don't think it will be that high.

I think it will probably drop to somewhere around half of that once we start getting back into ground, which we will do this quarter.

Although, this quarter is heavy test again.

We're building [tax structures] [inaudible] yesterday.

We're building all kinds of [tax structures] and so forth to -- and re-expenses as much of that as we can get legally get away with to get those product.

That this will be a much better tested and documented product than the M26 ever was because it kind of came out and grew.

This one's coming out much more formally.

So, yeah, we had zero dollars of the grant in the second quarter and a year ago we had 46,000 of the grants.

I expect you'll see some pickup in the grant money in the third quarter.

So you've got roughly somewhere between $300,000-400,000 of cost or lost revenue in the quarter that you know would have gone, you know, the after tax.

Well, is there no enough tax basis somewhere around where you get value 200,000-300,000--?

Exactly.

And then there is the users conference, which we don’t hold in the third quarter.

So you know that will drop another 100 Grand in expenses that will expend.

So -- we'll spend some, in some of the places, but not all its.

So, yeah, we definitely -- it was a heavy quarter and expenses.

Its typically one that is and has also good revenue quarter, but you are right -- its 3 probably 200,000 to 300,000-400,000 bucks of we'll have and will start to fall to the bottom line.

So potentially if you do -- if you have the same revenue in this quarter as you had last quarter, you could drop another you know 8 cents or 5-8 cents in the bottom line?

Yeah, it could be something like that.

Okay.

Hey guys I really appreciate.

Congratulations on the quarter.

Thank you.

Your next question sir from James W Baker Jr. (ph.) of GMF Group LLC (ph.).

Good morning, Phil.

Congratulations to all of you.

Phil, could you tell us please what the significance, importance is of the Teaming Agreement with General Dynamics that you publicized, what kind of product you'll be working with them on?

Well, initially I mean obviously the significance is there, you know, a Tier 1 defense contractor and as we go down this program, our Teaming Agreement with them is going to be over 5 years, and we just talked about the first phase of that which is the Taser Anti-Personnel munitions, specifically, the Taser landmine where their vision is to go out there and protect installations that we have overseas where you don’t want to have to necessarily have people that are civilians in the area that might be killed, there's a lot of bad vibes and thoughts to go along with landmines in general, and so what they're looking are some devices that if they need to protect a specific area, they can drop a few of these things around, they will -- it will stop people, you know, but it won't kill them and I think that project's, it's actually quite frankly a lot larger than we ever anticipated it being based on some of the initial meanings we've had with both the General Dynamics as well as a military conference that Rick attended during the second quarter.

I think that you know become very significant for us as we go forward, but we are still trying to get our hands around it, obviously, having the acquisition have occurred just June 26 we are still trying to fully understand that agreement, but as what we can seen right now it's a lot we quite frankly underestimated what we would get from that.

Yes, we used to joke about it here until we went to this conference and they opened our eyes how big this could be, so we are still -- it could be potentially very large down the road.

Well let me ask if a facility being protected with the Taser type landmine when a device goes off because someone stepped on it, is there some electronic notification to the facility that the landmines [around] -- how do they know it goes off?

Well that's all being determined, in fact our engineers are working on right now smartly [inaudible], believe it or not.

They are looking at the concept and that's some of the things we talk about new projects we are working on.

There is all kind of needs like that to be worked out.

There could be notification stance.

There could be smartly [inaudible].

They could sense the direction of the intruder and fire in just that direction.

There's all kinds of things they are working on.

That's all, you know theory and new stuff yet to be determined by the government as to what they actually want, but we are impressed by the numbers they are talking about that this could lead to.

So, we will be paying close attention to Jim as we go forward.

And I believe that's also why this agreement is 5 years where the first year is more just the concept that the mines can be made and then the follow-on things will be coming from the military in the direction that they want to go and I believe that's why right now, you know, in 12 months we have with GD, it's just the very first beginning process that they test and evaluate how they want this technology to be applied.

It is probably more than you guys want, but the marines are in charge of less lethal weapons in the world.

The services of all the great [DOTs], the great marines are the prime driver.

That’s why the contract came to the marines.

They are so thrilled what we've done with the electronics under X26 and what we developed with this new weapon for them, they are taking it now to every military agency and telling them they need to talk with us that they in fact are thrilled over [using to try and] develop the new projectile system for the advanced stages, it's 3-5 years away, but they are telling every military agency that has a requirement for less lethal to deal with us on electronic portion.

So I want to tell you that’s a big introduction and a awfully big reference and recommendation.

We were at the Tri-Service meeting in [inaudible] air force base last week.

Rick was down there.

The army, the navy, the air force and marines were there and all have requirements that they are going to begin talking to us about because they were told clearly these are the guys who have developed the [red light], they've got by far the most advanced -- by the way one thing we didn't mentioned, we had another patent announcement that was issued.

We have been advised by the patent office we'll be issued a patent on the X-- M26 which is going to build one hell of a portfolio of formidable barriers anybody trying to get into this it basically covers from a 0.5 joule to 10 joules in power to waveform.

They have said they are going to issue that patent.

That in conjunction what we have applied for and the X26 is going to make this a formidable place to get anybody to get into this business now and using electronic technology.

So we kind of over answer you question there Jim.

Oh, but that was fantastic, and one smaller question, someone said that one of the police agencies is trying to determine whether they will use the Taser product or baton.

Baton as you know stick -- wooden stick to beat people over the head with--?

There are little more modern as you an understand it's an had extendable baton, but it was just the Department of Justice with Detroit to get out of that there has been some problems in the Detroit Police [for evidence] of what happens in this country is that when that happens the Department of Justice takes it over and to get out of there they signed a Consent decree with the city, and the consent decree specifically said, it was in the newspaper you must equip every police officer with either a baton or TASER [inaudible] weapon.

So, obviously the big event the baton as it is less costly and the disadvantage is you can't -- if you have to hit somebody you have to reach on hit him and they don't have [near the track record], we do in terms of reducing injuries and so forth so we are hopeful we'll -- we can win that award but that's a couple of months away.

Well, fantastic.

Thanks a lot

Thanks Jim.

Your next question sir from Mark Matson (ph.) of Raymond James.

Hi guys, some follow-up questions here.

Does General Dynamics have a working proto type of electronic mines?

Not at this point to my knowledge, I believe, because of their agreement was just signed during late Q1 and Q2 with Tasertron, so, I haven't seen it but I was not present at the meeting that Rick had them earlier this quarter.

I think, there is one Mark.

We don't know much about it, their comps, rights, we haven't seen it yet.

We don't know much about it.

So, I think, Rick will be better to answer that in the next conference call.

We're going to get all that data together here in this quarter and [inaudible] they just happened on June 26th.

Obviously looking at the Landmine alliance, we have been talking about estimates of tens of millions of landmines out there.

Yes there are.

I mean that’s one of the biggest problems around the world as leaving these things in place after these conflicts are over and then people step on the landmines you know 10 years later and they go off and kill the [inaudible] individual.

It is one of the real problems in the world facing.

I don’t know if they're planning on replacing them all, but like Don says you can certainly protect installations and facilities by putting these less fatal landmines in and probably deactivating them at the end, that’s all will be reported now.

On the large retailer, they talk about regarding the Is crossing the Ts, have they started a pilot test program yet or they -- is that what you're still trying to get underway?

That’s what we're still trying to get underway, obviously there's a lot of people that have to be involved in that type of a decision, it’s a complete departure from what they’ve done previously, so we're just trying to work through all of those thing up front and get to the point of beginning the [R] trial.

You are still impressed with your pilot programs in Australia and Germany.

Can you talk about those?.

We know about Great Britain quite a bit, but what's going on in Australia and Germany?

Actually, I just got back Saturday from being in Australia, New Zealand for two weeks and they have being using it in 3-7 states down there for the past two years and what they call the test and evaluation phase with very, very positive results.

So, we basically went down there to get them trained on the Version 10 training, which we just released here in June and also to get them up to speed on the Taser X26 so they can see the differences for themselves and I can tell you the responses were very, very positive that they will probably continue and start operational deployments in the later half of this year and early next year, but we are still trying to get around -- our hands around what those numbers could be.

They are small countries, but obviously -- with them going forward, their U.K. testing have lot more impact on those countries than what we were doing here in the states.

And as far as Germany goes, our [fill-in], Rick actually went over to attend that conference, which was basically a summary meeting over two days of the evaluation of what the police have been doing over the last 12 months what they call their trials, what's their [staging] are now called over and they are beginning to start towards operational implementation, which I will believe will start with the specialty groups first, the SEK, which is their equivalent of the SWAT and then as that rolls out then they'll start looking at larger deployments for the general officers as they continue to move forward, but they are very, very conservative.

Yeah.

Switzerland, I think will actually go faster than Germany.

They have a Swiss administrator there, the department of Ministry guy, and the Swiss love it.

They have deployed it already on the street and the police are really pushing hard to get in Switzerland and that will be very helpful for us because there are neutral people look at Switzerland that way, I think they will be much quicker than Germany.

I think, we will see some deployment there before the end of the year, but again it’s a small country.

And how about on the Military level at the foreign government level while you have the one success you see that is as a break in the ice on getting other military [staff]?

I do I can tell you when we were in Australia we trained the Australian Military several branches when we were down there.

And a lot of that is the result of them having seen it with U.S.

Military using in their trials.

So, I do think we will start to see other militaries come on line.

I know the German military even mentioned that they are taking a hard look at this.

So, I do think that you are going to see with this thing now being used not only by the U.S., but by this other foreign military, you will start to see some of these other militaries start to move forward a little quicker.

Last question on your X26, you reduced the working parts so much in size than weight.

I have heard that you are now having the possibility of a next generation eventually where you can have a bullet without wires attached?

That military version is 5 years away -- 3-5 years away.

That is the military version, that’s correct.

But the problem -- there is all kinds of technical problems, that's what the [inaudible] is working on and we don't have the capability to solve and it has to do with the project [inaudible] and launching and targeting an accuracy and then how do you deploy the second [dart].

So all that stuffs have to be worked out, but I'd see we have got a good leg upon it.

We've certainly impress the military.

We have solved up the electronic part of the problem and we know how to do.

It’s the delivery and the application that needs to be worked out in well over the next 3-5 years.

Great.

Well keep up the good work.

Thanks Mark.

And at this time sir.

There are no further questions.

[inaudible] [Katlyn].

Thank you very much everybody.

I appreciate your attendance at the call and again if you have any detail questions, call Kathy later this week when she is back.

She will hopefully be feeling better tomorrow the next day.

Thanks very much.

Ladies and gentlemen that concludes your program for today.

You may now disconnect.