Axon Enterprise Inc (AXON) 2004 Q1 法說會逐字稿

Good day, ladies and gentleman and welcome to the TASER International 2004 First Quarter Conference Call.

My name is Carol, and I’ll be your coordinator for today.

At this time all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of today’s conference.

If at any time during the call, you should require assistance, please press "*" followed by "0" and a coordinator will be happy to assist you.

As a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to turn the presentation over to your host of today’s call Mr. Rick Smith, Chief Executive Officer.

Sir, please go ahead.

Good morning and welcome everyone and I mean everyone.

Last check, I think we got 280 callers -- up from 120 last time.

I should mention to you as our shareholders that we pay by the caller here.

You guys are in fact very expensive for the quarter.

Of course I’m being facetious there, welcome everyone, we are flattered to have you all take your time to participate today.

If you have logged in through the web you’ll notice there are slides that are not yet up.

We are having some system issues, getting the tail end of the program uploaded, so just stay tuned that will come online as we move through the presentation, that will be up shortly.

Let me start by first turning over to Doug Klint, our Corporate Counsel, who is going to read the Safe Harbor statement, then we’ll get going.

Thanks Rick.

Certain statements contained in this presentation may be deemed to be forward looking statements, as defined by the Private Security Litigation Reform Act of 1995 and TASER International intends that such forward-looking statements be subject to the Safe Harbor created thereby.

Such forward looking statements relate to expected revenue and earnings growth, estimations regarding the size of our target market, successful penetration of the law enforcement market, expansion of product sales to the private security, military and consumer self defense markets, growth expectations for new and existing accounts, expansion of production capability, new product introduction and our business model.

We caution that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward looking statements contained in this presentation.

Such factors include, but are not limited to, market acceptance of our product, establishment and expansion of our direct and indirect distribution channels, attracting and retaining the endorsement of key opinion leaders in the law enforcement community, the level of product technology and price competition for our products.

The degree in rate of growth of the markets in which we compete and the accompanying demand for our product, potential delays in international and domestic orders, implementation risk of manufacturing automation, risks associated with rapid technological change, execution in implementation risks of new technology, new product introduction risk, ramping manufacturing production to meet demand, litigation resulting from alleged product related injuries, media publicity concerning allegations of death occurring after use of the TASER device and the negative impact that this could have on sales, product quality risks, potential fluctuations in quarterly operating results, competition, financial and budgetary constraints of prospects and customers, dependence upon sole and limited source buyers, fluctuations in component pricing, risks of governmental regulation, dependence upon key employees, employee retention risks and other factors detailed in the company’s filing with the Securities and Exchange Commission.

I’d now like to turn the call back to Rick.

Okay.

I think next time we need to hire the guy who does the radio commercial fine print, anyway thanks Doug.

Again those of you all who've just logged into the call, we are getting some technical issues getting the online slides, so we are going to move forward without them and those will come on in a few moments, when we get those technical issues taken care of.

When they do come up you will see the opening slide for this quarter has an interestingly different picture.

It’s actually an image of a member of a French raid team in France.

This is one of their elite law enforcement groups using the TASER.

We’ll come back and talk about the international opportunities.

I should first point out that the first quarter sales only included about 3% of our business from overseas.

So we are tracking online with guidance and that’s one of the reasons that we caution our shareholders to look at international businesses windfall because it is particularly difficult to predict.

But we are having new field trials particularly in France and other countries that are doing very well, we believe will provide upside to our future business.

Okay.

Moving on to talk briefly about the financial results.

Sales were up, we had a record quarter in terms of sales, earnings, new business and profitability.

Starting with sales we are up 286% over the last year, the same quarter of last year of course, from $3.4 million to $13.1 million this year.

Our gross margin grew even faster up 376% from $1.8 million last year to $8.6 million this year and our net income was up almost 1500% from $229,000 in Q1 of last year to $3.5 million this year.

Record sales again $13.1 million and record profitability of 27% after tax.

If we move along we talk about our cash balances.

Boy, I wish you all could see this slide.

I'll like to title this slide "Why TASER International does not intend to do a secondary offering?"

So for those of you who were thinking about calling us after the conference call today it is suggested, please don’t.

We are not planning on doing a secondary offering.

You will see our cash balances are now at almost $25 million up from $2.8 million a year ago and we are generating significant cash from operations in the first quarter along.

We generated $3.7 million from operating activity.

That’s over a $1 million a month and we’ve achieved this record quarter in the face of some interesting challenges and we talk about a few of those.

The biggest one's has been media sensationalism.

Those of you who did not see the story on the CBS evening news, they did a two-part story on TASER looking particularly at the sudden unexplained, unforeseen deaths that occurred in custody.

The way that it was presented by CBS left many viewers of the belief that the TASER killed these people.

You know that wasn't what CBS said if you read the script carefully but it certainly was the implication, we are very disappointedly they took that tag because if you look at these 40 cases, you’ll see that in every case the cause of death was something else.

Usually drug overdoses, sometimes the stress exasperation of preexisting conditions, for example, you might have a 300 pound man with a bad heart who fights with police for 10 or 15 minutes and overexerts himself and suffers a heart attack.

If we put it into context, since we introduced the M26 in 2002, over 80,000 people, there have been over 80,000 drug overdose fatalities in United States.

Again it’s 80,000 and early symptoms of a drug overdose particularly on stimulants like cocaine or PCP are symptoms like bizarre psychotic violent behavior for example, a man who is running around naked outside when it’s 20 degrees below, who has a kitchen knife, who is mutilating himself and threatening to kill anybody who gets near him.

That type of behavior is very likely to result in police using a TASER on you and when the TASER is used it will not change the blood toxicology.

If you injected sufficient narcotics to overdose that will not change because of the TASER.

And I think it's that perspective that CBS really missed.

TASER's are not dangerous but they are used in very dangerous situations.

In the vast degree of cases the deaths occurred well after the TASER use and electricity does not linger in the body.

If electricity were to cause a death, the affect would be immediate.

It doesn’t stop the heart half an hour later.

We’ve responded and I think we’ve got generally very good response from the market and from our law enforcement customers, when we responded to CBS that we took these on in a very factual case.

We’ve actually posted those 40 cases they talked about we give you the facts on our website, its taser.com.

We are also currently in the process of contracting right now one of the leading forensic pathologist in the world, who is going to be reviewing these cases and issuing an independent opinion.

So it’s not just a company, and we are very confident, we know what that opinion will be.

It will reinforce the independent medical examiners who looked at all these cases, and again to put it into perspective we are very disappointed CBS missed the major point that over 4000 lives have been saved by the TASER over the past several years.

So the net map is we are saving thousands of lives, reducing injuries and making police officers job safer.

In addition to the challenge of the media sensationalism, we’ve also had political concerns to go along with that.

That has adversely impacted us in some areas; it slowed some sales down where we had to go back and do some hand holding at the City Council level.

We have to come in and respond to the CBS story in particular.

They had a couple of City Councils where we’re going back in and educating them and showing them the actual results.

We’re confident we will get those turnaround, just takes a little time and effort.

We also did have one of the situation the city of South Bend, Indiana actually passed a law that restricts the X26 to law enforcement only in South Bend, can't be owned by private citizens.

When we announced the X26C at the beginning of the year, the availability of weapons whether you're talking about gun control versus, second amendment rights towards TASER’s is something that tends to a listed and emotional response and it certainly not something we have a 100% agreement.

There are some law enforcement officers, who think the TASER is so effective and powerful, but it should not be available to the general public.

I would tell you that in my estimation the majority of our law enforcement customers are onboard with it.

They understand that the TASER can save tens of thousands of lives in the general public and it can make the officer's job safer as well.

They understand when they go to a house for a domestic violence call it’s far better if the husband or wife had a TASER than a shotgun.

Is that simple type of an analysis, that it moving us forward.

But we’re always concerned about keeping an eye on the political landscape to make sure that we don’t have adverse legislation that’s happened to us in South Bend.

The third area you talked about in terms of challenges has been managing our growth.

We are growing very quickly as an organization.

Last year revenues were up a 150%, this year we are anticipating we are going to grow another 100%.

And with those -- with that level of growth comes systematic challenges.

I think we are taking it head on and we are doing very well.

But we're going to talk to you in the call a little bit today about what those challenges have been and what we seen them being in the future.

I will divide it into three areas, first let's talk about people.

A year ago we had 77 employees; we are at 199 as of today.

Obviously getting that many new people in and trained and integrated into our system has been a lot of work and it's had some challenges.

Our systems side, we are in the process now of selecting and we'll be implementing later this year a new ERP system.

We have frankly outgrown some of the systems that served us very well when we were smaller; they are still working today, of course, but we have a lot of manual entry going on and we have seen some areas where we can really improve the overall efficiencies of our organization.

So expect us to invest time, money, and resources into a world-class enterprise resource package to integrate our information systems.

And the third area is quality control.

You will see as we move through this, we have had some challenges, we've had we took the X26 to market from concepts to market introduction in 12 months, which was a pretty herculean effort, and we've had to ramp production faster than we ever thought we would because the market responded so affirmatively to the X26 it blew right half to our M26 sales in its first quarter.

And as you can imagine, ramping production has meant we have had production yield issues and we have had some quality issues particularly as it relates to the holstering systems where you've got breakage in the field and we'll come back to that.

But even with these handicaps so to speak, we've still turned in a record quarter across the board.

And so I will now talk about our accomplishments, again record revenues of 13.1 million, profitability 27% and we turned in pre-split basic earnings of 27 cents per share.

And I need to be a little careful, when I talk of pre-split and post-split -- that number is post the 3 for 1 split we did in first quarter and it is pre the 2 for 1 split that will be coming up April 29 .So the $0.27 a share is for the number of shares at the end of Q1.

Now lets talk about people, we've made some great strides, even though it's 199 employees, we've got some great new hires.

The first one that I'll like to talk about is our new Vice President of Quality, and that is John Sachets (ph.).

He was formerly director of Flight Standards, Safety and Training at United Airlines.

We developed a relationship with John throughout the United Airlines deployment of the TASERS following the events of 9/11.

We have been very impressed with him and I think there is no industry in the world with a higher quality standard than the aviation industry and we felt that John’s background in implementing safety quality and training and procedurelization in flight safety would be a great add to our team, and I can tell you its working wonderfully.

He has been a fantastic add.

He’s really helping us to put in world-class quality systems.

The second new add is one we just announced last night.

That’s our new Chief Financial Officer, who will be starting next week and that’s Daniel Behrendt.

You all know we announced early in the quarter that we were doing a CFO search and it may have looked we were really dragging our feet and taking our time, but we did an extremely thorough search.

It was a comprehensive process that involved hours and hours of interviewing of each of the leading candidates to make sure we had the right person and I can report to you with confidence today we have the right man for the job.

Dan has a background that includes manufacturing in the aerospace industry obviously with types of quality issues there and the technology that’s a good fit for us.

He was involved in a plant turnaround that was losing significant money on a monthly basis to making millions of dollars per month.

He was one of the key people involved in that turnaround.

That’s great operational experience.

He’s been involved in high volume manufacturing in his most recent job as CFO of one of the largest wallpaper and wall covering manufacturers in the world.

He's also got public accounting experience background.

We also found he brings a very powerful, analytical capability to our team and he is going to again be a real positive add.

We invite everybody come out and meet both John and Dan and all of our people at our shareholder meeting next week.

One of the other advantages of bringing Dan on Board is that's going to take another [inaudible] star here, that’s Kathy Hanrahan, who you all know has been our CFO since our IPO.

She has been serving the dual roles in the past 18 months as CFO and Chief Operating Officer.

I think Kathy is one of the most organized people -- let me unqualify that -- she is the most organized person I’ve ever met and we are delighted at the opportunity to get her focused fulltime in operations rather than doing two inhuman jobs.

She will transition out of the CFO role after she completes the reporting for the first quarter.

She will get down up to speed, get our filings out, get the Q in and then she will transition full time into operations to work together with John and the team there, very excited about what that’s going to mean for our future.

Also stock splits, we did a 3 for 1 stock split on February 11, and we have announced another stock split at 2 for 1 coming up April 29.

These splits -- again don’t change the underlying value of our business.

Whether you have a $100 bill or 5, 20s, it's still the same underlying value.

But I do think it is important in terms of the stock splits that we’ve tried to increase liquidity for our stock, increase the number of shares to reduce volatility.

I’m sure everybody knows we’ve a fairly volatile stock on a historical basis and to make it -- our stock to better fit for institutions, it may have guidelines related to quote by increasing our quote.

We are now at 1,538 agencies deploying the X26, again that’s a significant number of agencies 6 months into the deploying our latest technology.

And this quarter we announced our next generation, the Extended Range Electronic Projectile which I’ll come back to at the end of the call.

And with that I will go ahead and turn over to Tom Smith who is going to -- sorry about that, who is going to be talking to us about the sales performance for the quarter.

Tom.

Good morning.

Thank you so much.

We had a great quarter for our new business.

Again it was a record quarter in new business.

We were at $13.1 million dollars in new business during the quarter, which is up from our previous record of the fourth quarter of this past year.

We did continue to have a backlog that stayed pretty much the same that Kathy will talk about going into Q2.

But again $13.1 million in new business we are very excited about that .One of the first things, I'd like to talk about is our full deployment.

We added a 125 departments during the first quarter, up to 631 from 506 at the end of last year, again that shows the continuing trend that our message point of one TASER on every officer's belt is being accepted and adopted and it is having a tremendous impact out in the market place for communities such as the Seattle and Miami that went through this previous year without a police involved failed shooting for the first time in recent memory.

So again the full deployment message of increasing officer safety and having a TASER on every belt is going through to the customers that we have out there with 631 now deploying one on every belt.

TASER weapon sales is another method that we used to monitor how the product is being received in the market place.

During the first quarter of 2004, we filled 11,906 of the X26 TASERS and we also -- that is up from 9,650 during the fourth quarter, and we also sold 3,041 M26s TASERS during the quarter, which is up from 2,347; that gives us an aggregate of 14,947 TASERS, up 25% over the fourth quarter where the previous number was 11,997.

Again with the increase in the manufacturing, it's showing the adoption and the continued acceptance of the TASER into the marketplace.

Let me interrupt for just a second.

I don’t want to hold up false hopes for you on the internet, the uploader is crashed for the slides so we’re going to go a sans slides today.

They will be posted I assume later today when our technical people can get that section.

Go on Tom.

Okay the next item that I’d like to talk about is our cartridge sales.

Those -- cartridges during the first quarter increased on recurring revenue by 38%.

We increased the quantity of cartridges from a 127,909 during the Q4 of 2003 to 176,944 during the fourth quarter; that also increased our ratio from 11 cartridges per weapon during the fourth quarter back to 12 cartridges per weapon during the first quarter of 2004, again a trend that we just liked to see the continued use of the cartridges not only in the use on the streets but also in the training environment as law enforcement requalify customers that we had in the past.

We also like to monitor our U.S. market penetration.

We added 72 departments during the first quarter of 2004 taking our penetration up 24.4%.

Now that is also an increase in our officers' use of both new and old officers with our weapon systems.

From 5.2%, we increased that a full percentage point to 6.2% during the first quarter of 2004.

These are really rough estimates, obviously we can track the number of weapons that are sold and the number of cartridges that are sold, but again we could have that 24% penetration on a realistic number could be quite a bit higher because we are using distribution and a lot of officers are going in and purchasing their weapons from distributors that may or may not tell us these small agencies are using the weapons or is that they are actually -- their department has adopted our technology.

And if you take a look at the 18,000 agencies that are out in United States today, 89% or almost 16,000 out of the 18,000 are agencies with less than 60 men in their department.

So while we recorded only adding 72 to department, another number that's quite impressive is that we have 1,538 departments now testing or deploying the X26 out of our 4,392 existing customers.

That’s up from 966 people testing or deploying the X26 at the end of the fourth quarter.

So again during the first quarter we reemphasized our focus to go back to our existing customers, the people that are very happy with the M26 technology and having them purchase additional units which was the TASER X26.

Because it’s been so tremendous for them in the past they can use the smallest size or weight for their benefit to carry it during the first quarter.

We also, as I mentioned previously, had a 125 new full deployments in the first quarter, again with the acceptance of changes carrying on every officer's belt.

On the international front, 3.2% of our sales during the first Quarter came from our international environment and one of our more high profile users was in France.

We actually had a suspect that concealed a bomb, an attempted bomb that she was going to reconstruct into a jail cell to try and blow up the French police and they successful used the TASER X26 to take her into custody.

It was a very high profile event and received quite a bit of publicity for the French who are currently conducting a trial similar to what they’ve done in UK.

They’ve just began in France in February of this year.

We do have many major quotes for this; there are still issues that are from 2003 that may provide upside to our 2004 guidance, obviously, with 3% of the sales in the first quarter coming from internationals they were not great windfalls.

We don’t include that as part of our guidance but we do believe that we’ll get some of these later this year and they will be additional upside.

One other questions, I get asked most about the test is being going in the United Kingdom during the past year.

That concludes this month and we do believe you’ll be seeing a summary of the reports issued later this year discussing the successful result of that trial.

We do also know that during the trial there were some quality issues that were raised regarding some weapon problems and failures during the course of the year, rest assured we are working very closely with the United Kingdom and we’ve got a feedback and addressing those concerns from a operation standpoint.

But the overall result of the test is extremely positive.

The former reports will be issued some time this summer but from talking with the United Kingdom officials during this past week, the indication and the recommendation that was made by the group that’s committed -- monitored this trial was for the program to expand all 53 forces throughout the United Kingdom at an operations level with the firearms users.

The additional test that they will be doing over the next 6-12 months will be incorporating the X26 with the five agencies that have been testing the TASER during the past year.

And that will be a further expansion to users that are not firearms trained but do respond to high volatile situation such as self harmers and those are individuals domestic violence dispute where the TASER will be used on a lower response than just to firearm response.

That process will then be evaluated every three months for further expansion to patrol level officers throughout the country.

So, obviously, that’s the recommendation that's being made.

We do expect to hear something in the next 1-2 weeks on the decision by the Home Office in the United Kingdom as to which recommendation they are going to go forward with.

But that is the one that is the leading candidate and was recommended by the committee that conducted the training.

To go back and talk about the French uses, again as I mentioned their operational trial started in February of this year.

The trial is only scheduled to go through May, through -- excuse me, May or June and one of the reasons is because of the all the testing that has been done previously and shown the 4000 lives that have been saved, the reduction in officer and suspect injuries, and as of April 15 they had 16 uses of the TASER X26 during these operational trials.

Obviously, I am very happy to report that all 16 were successful.

We had a 100% success rate including the high profile use where the suspect who attempted to blow up the bomb, had the TASER used on her successfully to subdue that individual and take her into custody.

Another high profile use was a suspect actually shot an officer with 5 bullets.

That officer will recover but the TASER X26 was used against the suspect with the firearm to take him into custody.

So, we have had two very, very high profile uses out of there 16 that have been in the media quite a bit.

And later in the presentation the, when we can get through the slides later on, you will notice that the distribution up those uses are throughout the whole country of France.

They are not in just one location.

And we do have less than 50 units as part of this operational trial.

So, they are using it on a much lower response level than was being done in the United Kingdom.

So, we are obviously very excited to see the continued acceptance of the TASER X26 in the international market.

We have seen very successful operational trials in the United Kingdom and in France that we believe will greatly impact the international market as we continue to go forward, as well as, the impact its having for officers who are saving lives, reducing injuries.

Remember, these guys don’t get paid to hurt.

This is giving them a fantastic tool that they love and are able to use as we go forward.

With that I would like to turn it over to Kathy to discuss the operations.

Good morning.

Let me start with our manufacturing highlights.

In the first quarter of 2000 we focused on two major financial objective.

The first was to build 300 Xs per day by the end of March, and the second was to ramp our cartridge production to 3900 units per day.

Both of these were achieved.

The X26 was ramped from a Q4 average of 136 per day, to 300 plus units by the end of March.

We were also able to increase cartridge throughput to the 3900 units per day, bringing revenue capacity for cartridges to 3.9 million per quarter, and TASER revenue to 16.9 million per quarter.

With the new business continuing to climb our second, and third quarter goals are to stabilize our production and improve our internal quality, so that we can get our production yields from 73% on the X26 lines to 90%.

Again, I want to emphasize that that is our internal yield not what comes -- the customer satisfaction index.

We also intend to increase the X26 production to 500 per day, by the end of third quarter.

And we intend to implement a cartridge design enhancement that will eliminate the potential for raw material and consistencies on a going forward basis.

We anticipate we will have the capacity to build 80,000 TASERS in 2004 as well as more than 1 million cartridges.

As you heard from Tom and Rick, our single most important objective in the next six months is implement processes to control our quality.

During the last 90 days we identified and addressed the following customer concern.

The first was the X26 software.

Second, was holster breakage issues that you heard Rick discuss, and cartridge tap breaks.

During the last, I am sorry, in February we found that our software in the X26 had created some data errors during firing.

This was corrected with reprogramming and we’ve accrued 41,000 to allow for shipping programmable data [packs] out to our customers.

We also received feedbacks that our holster bodies were cracking during the -- due to a design flaw.

This was also corrected in the first quarter and we have begun shipping revised holster bodies.

The cartridge tab was the result of manufacturing the plastic with an inferior product.

We have been working with our vendor and we anticipate putting a new product out in the second quarter.

The other significant change that we have for the first quarter is the development of a quality improvement team that’s comprised of our new VP of Quality, the VP of R&D, and myself.

Our objective will be to review processes and procedures and to formalize our plans to meet our product demand with improved quality.

Despite the increase cost and quality in the first quarter we experienced continued positive growth in our financial position.

Our quarterly net sales increased 286% from the 3.4 million recorded in the first quarter of 2003 to 13.1 million.

This was also a 22% increase over our previous record sales of 10.8 million, which was achieved in the fourth quarter of last year.

Our quarterly gross margin improved 12.3% to 65.5% over the first quarter of last year.

This was a decrease from of 1.9% from the last quarter.

This was created mostly by the increased product warranty accruals and the indirect cost of manufacturing associated with ramping our engineering and infrastructure for manufacturing support.

In terms of the actual revenue breakdown for Q1, our total cost of goods sold was 34.5%.

Sales, general, and administrative were 19.6%, research and development was 2%, and operating income grew to 43.9% of sales.

Our quarterly net income increased 1451% from the same time last year.

That was an increase to 3.6 million in the first quarter of this year and improvement over the previous record quarter of 2.8 million earned in the fourth quarter of last year.

Our earnings per share increased 24 cents per share over the first quarter of 2003, with 4.7 million more shares outstanding.

In addition we increased 4 cents over the fourth quarter of last year with 1.3 million more shares outstanding.

Our accounts receivable, the days outstanding increased 2 days during the quarter.

This was the result of growing number of sales shipped at the end of March, the department direct orders involving product upgrade and a decline of international prepayments in the first quarter.

Our inventory turns improved by 33% to 15 turns; this resulted from a greater sales per day and a reduction of inventory purchases as a percentage of anticipated sales growth.

Our financial condition in summary continues to strengthen.

Our working capital increased $11.5 million to $33.9 million.

Our cash reserves grew 8.8 million to 24.7 at the end of the quarter.

This was the result of the option of warrant exercises and the 3.7 million of income from operation.

Our total assets increased 11.3 million to 43.4 million.

The majority of this being in current asset and total liabilities grew 100,000 as a result of the product warranty increase and our total equity include $12.2 million to 39.3 million up from 27.1 million at the end of last year.

With that I would like to hand it up to Doug to discuss our litigation update.

I’d like to give you a brief litigation update.

In the Hennigan litigation we received a court order granting the company a partial summary judgment.

The court dismissed one party's claim in their entirety and dismissed an additional three other claims.

There was no other significant change in prior pending litigation.

We did have one new nuisance lawsuit filed against the company.

It's important to note that the medical examiner in this case found illegal drugs on board the decedent and determined his death was unrelated to the TASER device.

In addition the company filed three patent infringement lawsuits against competitors, and we will continue to aggressively defend our intellectual property.

With respect to the warrant redemption we announced in first quarter, the company extended the redemption period from March 30 to April 29, 2004, in order to allow all warrant holders, many of whom are small retail holders, an opportunity to exercise their warrants.

If their warrants are not exercised by April 29, the warrants will be redeemed for 25 cents per warrant.

All warrant holders need to make sure that they exercise their warrants by April 29, 2004.

Please contact me at doug@taser.com if you have any questions.

I would now like to turn the call back to Rick.

Okay.

As we look forward to the wrap up here, let me first reiterate our 2004 guidance is unchanged at 100% revenue growth over last year, which would be $50 million.

Obviously we can do the math and see that in the first quarter we are tracking slightly above that level.

We think at this point the appropriate guidance to our investor base is that our existing business; we see a good predictable business.

It gets us to 100% revenue growth.

And as you saw in the first quarter, we did not see any significant upside from these international orders.

We may or may not see those this year. [When] we prefer to think of them as a windfall and that’s how our investors should look at them as well.

Again, we are seeing some positive activity there, but we don’t count on those, given their risky nature and unpredictable nature.

So, with that we’re still expecting 100% growth.

We are very proud of the first quarter.

Think things have gone well, and now let’s talk a little bit about some of the new products and new technologies that will take us into the future.

Tom.

Thanks Rick.

One of the things we’ve also been working on, we’ve talked about briefly in the past, is the military use.

We have 400 of our M26's being used by the United States Military in the Iraq conflict.

We have almost 4,000 being used by coalition military forces in both the Afghanistan and the Iraq conflicts.

One of the things that we looked at is the integration of the lethal/non-lethal weapons platform.

The M26 has being very successfully introduced by the military in Iraq.

It’s been used in some very high profile and classified uses.

And in our discussions with the folks out at Picatinny who is the research and development arm in the military, they wanted to look and work with us since late last year on the integration of a lethal/non-lethal weapon platform.

And in a very quick turnaround time, realistically less than 45 days, we actually came up with the concept of the X-Rail.

And what that concept is, that taking our standard X26 weapon system and using a rail type of an attachment to put it underneath the M4 on a Picatinny Rail System, normally where they have a grenade launcher or other utilities attached, and here it gives the soldiers as they are doing room clearing, other situations, where they are in the urban environment with citizens around, they don't want just the option of the lethal of the M4.

So, now you are giving them in the left hand, the TASER, and in the right hand the M4.

So, that they are now given an option so that if they are screaming and yelling for subjects to get on the ground and they are not responding to the language barrier situation, they have the opportunity to use the TASER, but they are not sacrificing the safety of a lethal backup because it's attached to the same system and [tends] to use our standard X26 in that platform.

I spent, during the first quarter of 2004, I have attended two different meetings with the folks from Picatinny in Washington DC, showing this and demonstrating this system to the members of the both the House and the Senate.

Showing them where this weapon system is being used and how it's being used for additional funding sources, that are going to help fund our additional research and development programs, as we applied for grants on new opportunities, and 50 of those systems are currently in Iraq right now, being used by soldiers to get us feedback on what they like or don’t like or need changed for this to be the most successful weapons platform as we go forward.

So, as we get that feedback, we will integrate that back into engineering.

Again, we don’t have any real visibility as to the future use of that, other than we got 50 systems on the ground.

It’s being very well received and is now being shown publicly.

We will be able provide photos to you later out the integration system, for what’s being used in Iraq.

So, I would like to turn it back to Rick, to talk about the other developments.

So, at a high level, as you can see the picture, the X26 attaches, its like an additional handle on the gun, So, you can grab the X26, its like a full grip, with their left hand, while they carry the rifle in a standard configuration.

Actually, very helpful do it in places like Fallujah, where our guys are going room-to-room, and you can’t tell who is a combatant and who is not, and with the language barriers, etcetera, sometimes they need to put people on the ground and you don’t want to shoot them lethal force.

This gives them the option to go either direction.

You got live?

I believe I do.

believe its live on the website now.

So, those you are on the webcast, hopefully can see the picture there of the X26 mounted under an assault rifle.

Moving on to the next one, a little update on the TAPM, which is the TASER Anti-Personnel Munition.

This is the weapon system being developed in partnership with General Dynamics.

It leverages the X26 technology and our cartridges, integrating it with sensor technology into a standalone non-lethal device.

You can see in the image here, we’ve made some progress from last year where it was just a concept weapon.

That was looked at some sort of cylindrical device.

You can see they're are now actually doing the [form] factor integration with the TASER electronics and cartridges.

Again these would be used for area denial, where you setup an array of these devices, in something like a non-lethal minefield and if somebody transverses through that area they’ll get hit with the TASER, which will put them down but obviously, in a non-lethal fashion.

We are excited about that.

Again that -- I think right now we are projecting the earliest that we see significant revenues, it’s probably 2008.

So these military development systems do take some period of time, but obviously, we are excited about potential down the road.

And it’s a great way to expand our technology.

Moving on to the Extended Range Electric Projectile.

This is something we just announced this quarter.

We have completed Phase II development of this system.

It is a wireless long-range projectile, i.e., a system that launches down range to extended ranges well beyond 30 feet.

This will not compete with our existing weapons, which is good news for investors.

The X26 did compete in some ways directly with the M26.

It was an improvement on where we were today.

The X26 will continue to be our lead product, as an officer deployable, belt mounted, you carry it everyday and use it type of system.

The long-range projectile would be launch from existing shoulder fired platforms, i.e., rifle type systems to reach out to extended ranges.

So that will enter into a new market where we’ll be competing with various blunt impact devices that are out there today.

We’ve made tremendous progress.

We have defined the payload.

The Electro-Muscular Disruption payload in packages less than 2 ounces, that’s the tough part here.

There are lots of folks for years have talked about trying to do wireless TASERs by all kinds of different means.

The challenge is how do you put the high voltage EMD payload into a size that is small and light enough for launch down range.

And I think when you see this technology when it comes to market; you are going to find it very innovative.

We are excited about what we’ve done on that.

We’ve also verified the cardiac safety studies in animals where we can show that we have a greater than 15 to 1 cardiac safety margin, just like on the X26.

So we have the safety studies pretty well ready to go for when the weapons ready to go.

We've verified the immune effects on human volunteers and we can show that the XREP gives the same electronic or the same type of Electro-Muscular Disruption affect as the TASER X26.

And we are currently in the process of aeroballistic integration, i.e., integrating electronics with the ballistics to be able to launch this down range in a highly accurate way.

We are estimating that the development project should be completed in 18 to 24 months and only at that discipline we do have four patents in various stages of application, both in the U.S. and those will be applied for internationally.

I should mention that because this is a government funded contract, at least on some of those patents the government does have right to use those on a royalty free basis, but we have retained all private rights to those patents including all law enforcement, private security, consumer and international markets, and we believe that that is going to be very strong electrical property.

And so with that as we have talked about what we are on today, I think some exciting project for the future.

We'll open up to questions and answers at this point.

Thank you very much sir.

Ladies and gentlemen, if you wish to ask a question please press "*" followed by "1" on your touchtone telephone.

If your question has been answered or you wish to withdraw your question, please press "*" followed by "2".

Please press "*""1" to begin.

One moment please while we compile list of questions.

Your first question comes to you from the line of James Baker (ph.) of CMS Group (ph.), your question please.

Yeah good morning folks.

Question, maximum production in the existing least facility, if I am remembering is 82 million, and for running a full capacity with backlog obviously, why did revenues not exceed 13 million and get up to around 20 million?

Okay, when we talked at our last conference call, our objective in the first quarter was actually to get us up into that production capacity round and that’s what we have been building to.

By the end of the second quarter we'll actually be up where we are producing 500 Xs a day, which gets us in that 80 million threshold.

So we ended with the same backlog that we started with, but we are able to increase what went out to door by $2.5 million.

Well said another way, Jim, we told you last quarter that the capacity was 65 million coming into the year.

Right.

So that would say you should expect around 16 million but remember we added additional capacity during the quarter, and what we had to do was slow down the lines, tear down the walls.

We had 10 people out of the building for a couple of days while we reoriented the lines and added this new capacity.

So we now say we can produce 80 to 80,000 TASERs by the end of the year, but we took that hit in the first quarter because we had to add this additional capacity, otherwise we would have been stuck in 65 million and we wouldn’t had the ability to add this additional capacity.

Beautiful, that’s beautiful.

That makes all the sense in the world, congratulations to all of you.

Thank you.

Thank you sir.

Gentlemen, your next question comes to you from the line of Philip Rena (ph.) of Hamilton Holdings, your question please.

Yes, I have a question regarding first quarter.

I have a February 2nd newsletter here from Mr. Klint, stating that there was $4.9 million in revenue in January and I am looking at the first quarter release and the sales -- I am sorry sales for the quarter were 13.1.

My question is, if the difference is 8.2 million for February and March, which means an average of $4.1 million a month, my question is why did it decreased from January to February and March?

First of all January was not -- that was not sales those were new business numbers, orders --

new business?

Yeah, it was 4.8 million and for the quarter we did 13.1.

One of the things we have not emphasized on this call, we had another record new business quarter.

We booked 13.1 million this quarter.

We did -- I think we had 11.5 last quarter, so the quarter in new business is actually up.

This quarter over the last quarter, which is a record, so we did 13.1 and 4.8 was at first month.

We had roughly 4.8 in the month.

We get about 30, 30, 40, is the way the percentage run in new business not always consistent.

But we had a great first quarter, 13.1 in new business that is 2.5 million backlog.

We shipped 13.1 in sale, so we had a great first quarter and frankly a little better than we expected.

Now, congratulations.

This is a great Quarter.

You said it get [inaudible] right there, excellent.

And one question regarding reserves for a legal, you know, is there a large reserve for legal fees related to possible lawsuits?

We have sufficient reserve for attorneys' fees in our budget and they are fairly predictable because of the product liability insurance we have.

Okay.

Is there with dollar amount of the reserve?

Now, what I was talking about, there is nothing accrued on the balance.

Nothing accrued.

Okay.

Because what we have done in the budget for 2004 is actually allowed for those --

That’s perfect mix.

All through was incurred.

Excellent.

Very good and good luck in the second quarter.

Thank you.

Thank you.

Thank you sir.

Your next question comes to you from the line of Linda MacDonna (ph.) of Manchester Management.

Your question please.

Hi.

Yes, I had a couple of questions for you.

Could you comment what the international business number was in the previous quarter?

For the year last year we were at about just under 12% for the total year, so I am happy to certainly grab what it was for the quarter, but we did do 3% in the first quarter of this year 3.2%.

And again most of our guidance was based on the domestic market, so with the quarter to date last year, we were at 2.1%.

Kathy just gave me that numbers, so in the fourth quarter of 2003, we were at 2.1%, we had an increase of 1.1%, doing this for first quarter of this year to 3.2%

Okay, and could you give what the sort of say, international went from that 214,000 to 400,000 sequentially is that correct?

Roughly yeah.

Okay, and for the year last year it was about 2.8 million?

Roughly that’s correct.

Okay.

Could you also give me what the M26 revenue was for the December quarter and the March quarter?

We can give you in terms of the units, it was roughly 2000, let me see here.

And you can multiply the number, we can give you to get revenue, it's $300 per unit.

I can give it to you.

For the first quarter of this year it was roughly 1.5 million with M26 sales and sale with [inaudible], obviously last year.

That’s four quarters.

The thing that we did see is obviously in the fourth quarter.

There was a little bit of drop as we had a big response to getting the X26 in the officer’s hand, what we saw an increase in the first quarter was existing customers that had already standardized on the M26 as a platform.

We are ordering additional units as money became free -- became available.

We also saw the increase on the X26 in the first quarter that we continued over the previous end of last year.

So Kathy saying at the, in the first quarter is 1.2 million.

That’s last quarter.

I am sorry last quarter, Q4 2003, 1.2 million in M26 sale.

And I am sorry, the Q1 number was what?

The Q1 number was 1.5 million and the way that, that looks a little bit different than our Qs in the past before we added the X26 product line if you look at that product wide sales that we put in both the 10-K and in the Qs.

The ADVANCED TASER sales also use to include single cartridge sales that were sold into law enforcement.

As we go forward, we are actually going to break that down into now single cartridge sales, X26 sales and ADVANCED TASER, so that you can look up if those numbers are in comparison.

Could you give me a product breakdown then for the fourth quarter and for this year of the $13.1 million in revenue?

Sure.

$8.8 million were X26, just the guns or cartridges as well?

Okay, we still have some residual sales on our Air TASER product into the consumer market, and that was 57,000.

Then we have the one -- roughly $1.5 million of ADVANCED TASER.

M26.

Correct.

That also includes the M18 and the M18L.

The TASER X26 was the $8.8 million and single cartridge sales were $2.8 million.

Okay, and could you give me the comparable numbers for the fourth quarter?

You know, it might be better Linda, if you call back and get that directly, you've taken up our half hour time -- other people who might have more general questions, why don’t you give Kathy a call after the conference call is over on that.

Okay, great.

And last question just to confirm the backlog then was $2.5 million?

Correct.

And one last thing also on the international sales, the trials that you are doing with France and the U.K., were those be M26 sales or X26 sales?

A combination of the above, that’s right now in the trial in the U.K. for the last year, it’s been the M26, as they go forward over the next 6 months, so it will continue to be the M26, but they will introduce the X26 into the trials during that time period.

In France, they are testing the X26.

Okay, thank you very much.

Thank you.

Your next question comes to you from the line of Dick Ryan of Feltl and Company.

Your question please?

Good morning.

I don’t know if I caught the number of orders and average size in the quarter?

There are 4400 and 14 orders and the average sale was roughly 2900.

Okay.

The quality issues you talked about seeing over in the UK, was that for M26s in the MA trial?

Yes, that was the M26.

They also, well, mentioned in their report.

They did get some of our very, very early X26s.

They got 10 and they did test those and they will talk about some of those as well, but the trial use was related to the M26.

Okay.

Rick you mentioned some of the political issues, flowing sale, can you kind of give a quantitative feel of what you may have lost in the quarter due to those issues?

No.

I -- it will be clear speculation on my part to do that.

I will just tell you that, generally speaking we are able to come back and overcome those, maybe with the one potential that we've not been able to turnaround with Detroit, would you agree with that, Tom?

Well, actually Detroit is moving forward.

They had a problem with the Chief of Police, there actually left his post.

We met the new Chief and they are looking at programs still continuing.

But I wouldn’t say was a result of the media story, but there is definitely a political thing.

Well, that was a political thing with the City Council, it was very challenging there.

I think we can put a number on it, but I can just say it's something that is we have to -- it's more that we have to spend resources responding to it as oppose to you know focusing on just a positive sell messages going back and undoing the negative perception.

That -- and I think were actually law enforcement in the media, all these agencies they have had their own fun times with media stories.

So, they are pretty comfortable and very factual people, you give them the fact and you can turn them around.

Great.

As Doug, you said you have filed three patent infringements, can you briefly describe the focus point of those infringement filings?

Well, they all involve the M26 stand that was issued to the company on October of 2003 and until we get confirmation that the someone's complaint have been served on each of these companies, it's really not appropriate for us to mention the names of the companies at this time.

Great.

Thank you.

Your next question comes to you from Mike Jerensky (ph.) of Venik Asset Management (ph.).

Your question please.

Good Morning.

I had a couple of questions on the share count numbers.

First one just is on the total diluted share count.

When I met with you guys about a month ago, I think I was told that the count would be about 16.1 million shares, looks like it came in at 15, and I just trying to get a handle on the difference there and what I should expect for it going forward?

Okay -- excuse me.

The one that is on our financial statements, you got to remember is the weighted average over the quarter to a fully diluted share count is 16,534,042

16,534,04 -- okay.

42 -- and that is three -- two per one split.

Okay.

And then also in terms of the increase in the cash balance, right now -- how much of that is from the extra size of options and warrants and then how many shares did that add to the count?

Okay, 5.6 roughly -- I am sorry -- 5.8 million is what came in to the quarter from option and warrant exercises, and you know if I can -- if you can check in with me after this conference call, I will get you the breakdown between those two.

Okay.

Great.

Thank you.

Your next question comes to you from Robert Malawian (ph.) of Garden State Securities.

Your question please.

Hi guys.

How are you?

Hi, how are you?

Very good.

Thanks.

Now a question for you.

With the exceptional use of the TASER in the Bronx, I think it was, about a month ago, any word on New York coming on board, fully deployed?

New York at this point is still talking about getting their sergeants trained.

They have use of force policy, which we are trying to understand that that directs the TASER's to be used only in response to emotionally disturbed individuals.

So we are having to continue to work with them on where it's being used in other cities across the country.

That seems to be the only one that has that kind of use of force policy, so we are still hearing some rumblings but it is such a large agency, we are continuing to work at it but I don’t see anything happening in the short term in New York city other than they will begin to continue to train their 8,000 sergeants which was supposed to begin in the first quarter and due to paper work and red tape there it didn’t get started yet but it is coming.

Okay and one more question and nobody really seems to have been discussing the airlines.

Anything going on with that at all?

Yes behind the scenes there are a lot of things going on with the airlines.

We do still have several international carriers that are using these on board today, but for security reasons they don’t want us to be out there running around talking about that, but behind the scenes there is still a lot of work being done in this arena, for a variety of different uses and we -- hopefully we will be able to get some news out later this year on it, but again its not a big revenue generator for the company at this time in our proposals, so its not something we are out making investors, giving them false hope that its going to be something we have worked on this for several years and its been difficult and challenging but we are still working on it.

You know [lobbyist] that we originally brought in to help us with this in Washington.

We’ve refocused then more to supporting what we are doing in the military and other areas where I believe they can have a bigger impact.

I think one of the things is, I think we now have the political support that airlines could get approval to start deploying to TASER after a lot of hard work on Tom's part and the [lobbyist] back there and now what happened is our flight carrier, United Airlines is gone into bankruptcy and they basically at this point are focused on their financial survival and really haven't expanded the efforts to go driving across goal line.

So until United kind of gets things sorted out, and we can get them refocused on getting the ball across the line, I think its going to sit in sort of [status].

All right, great.

Great job guys.

Thank you.

Your next question comes to you from the line of Brian Ruttenbur of Morgan Keegan.

Please go ahead.

Brian, can you check your phones.

We are unable to hear you.

Hi, Brian is actually out traveling today and I just had a couple of questions for him.

We noticed that growth margin dropped and I was just looking for any color on that, and what can we expect going forward?

And in regards to the new Enterprise Resource Package, do you have a timeframe on that and do you expect it to expense all in one period?

Okay.

With the growth margins, they did drop 1.9% from the fourth quarter of last year.

The majority of that -- we talk a little about in our last conference call, our growth rate came up so fast, it actually came up ahead of our infrastructures.

So in Q1 we were building the shipping and logistics areas, we were also [egot] with the product warranty issues, that I talked about a little bit between X26 software upgrade.

We had some holster issues; we also had some cartridge issues, that we did $267,000 worth of reserve for in the first quarter.

But on going forward basis our objective is to get that scrap number down and improve the margins to get them back at a minimum to the Q4 level.

In the terms of Enterprise Resource, Rick has been working more closely with our IS department ,hoping to bring it up online in the third quarter, and depending on the cost that would be amortized over its use for life.

Okay.

Thank you very much.

The next question comes to you Tyler Burke of Trenton Capital.

Please go ahead.

Hi, good morning.

Looking at high growth companies such as yours I often find it helpful to look at the sequential trends and, if I look at the sequential sales growth, it was 12% looking at the sequential growth and accounts receivable is 41%.

So can you comment on what caused that disproportionate increase in accounts receivable?

Sure, there is a number of things that are happening with the Company over time.

Previously we had a larger piece that was [foreign] and all of those we have to have prepaid.

In addition we had our distributors that we were working more closely with where we could control them within a 30-day term.

We are seeing more of a move towards direct orders with the departments and departments average 45-60 days.

So that’s pulling our average up.

The other thing that impacted us in Q1 very similar to Q4 is we did majority of our shipping in that last month of the quarter especially this one while we were doing software upgrade.

So we had $8 million shipped in March.

That definitely skewed our day sales.

Okay, so the negative media affect that you mentioned earlier did not impact the shipping to sales?

I mean I guess the sales recognition was back loaded?

Right and we -- again we had some infrastructure issues for operations.

We had actually been building and adding our hourly employees to get the product built but had not built the shipping infrastructure to make sure we could get them out the door.

So we started adding people at the tail end of February and March, which created some delays coupled with reprogramming all of our units before they went out.

Okay.

And your inventory stands at 79 days to sales or slightly over 2 months.

How much of that inventory is finished goods?

About 30% at the end of this quarter.

Okay and where do you think you can get your inventory down to in terms of DSOs?

You know we are, -- our original objective was 8 and we are actually -- 8 turns a year.

Okay.

And we feel that’s pretty good given the growth because we are trying to build and one of our internal objective is actually to have several thousands units on the shelf ahead of sales so we are not always running to catch them and we can service our customer a little better.

But if you are running to catch them that makes me wonder why your finished goods were still 30% of your inventory?

And there are two reasons for that.

One is the cartridge production we ramped very successfully.

We had 100,000 cartridges on the shelf at the end of the quarter.

The X26s we actually ended the quarter with a 1,000 on the shelf that we did not get out, that have shift in the first couple weeks of this quarter, and again that has to do strictly with logistics.

Okay.

And then did you say how much the total cost of the ERP system was going to be?

I have not seen the final numbers come in yet;

I know they are trying to fine tune what's best for our entire operations.

You know, so you don't have a ballpark?

I don’t, yet no.

No we don’t.

Other than that, what plans do you have your cash -- I mean forget the secondary what about maybe a stock buyback program?

If we lived in a perfect world with perfectly liquid markets we might look at that in the short term.

But of course once the cash goes out getting it backed in involves all sorts of transactional costs, so we believe it's in our shareholders' best interest to maintain that cash on our balance sheet purely for the option value of being able to execute opportunities as they come up.

If the consumer market starts to take off, if we identify an opportunity to make a strategic acquisition, again that’s not something we’re looking at right now.

You have to be very strategic for us to [inaudible] focus, but we believe that the option value given our high growth rate, at this point paying a dividend or buying stock back would be premature.

Also in the new building that’s coming up at this point, we can pay cash for that and that would obviously improve our P&L statement as opposed to taking out additional debt to do that.

So I think we've got some reasonable uses for it.

We’re not going to go squandered; as you can see we’re pretty cheap with the buck.

We’re protecting our shareholders' money, but we think it's in everybody's interest that it'd stay in our accounts [inaudible] right now so if we option to use it to continue to fuel our growth.

Okay I appreciate that.

Thanks.

The next question comes to you from Eric Nuttall (ph.) of Sprott Asset Management.

You're question please.

Good morning everyone.

Good morning, Eric.

I had a few quick questions for you.

Just wondering if you can expand on the line in the release which says the sales organization's focus on moving existing departments towards the [inaudible] of the Xs versus the Ms, does that delay any sales that would have been incurred in Q1 out to future quarters?

I wouldn’t say delayed any sales, I mean we came into the quarter and we were setting our expectations to the market that our delivery time on the X26 was in the 12 to 14 week timeframe. which is also why I think we kind of saw their orders [inaudible] within the quarter because people trying to get their paper were going to make sure they were getting budget spend on time and things like that.

But the focus was to go back with the X26, generated so much excitement within the community that we were taking and focusing our time on getting the customers that have already had success with the M26 the opportunity to come back and look at the X26, because it was 60% smaller and lighter that they were able to carry it much easier.

And we also focused on again responding to our field effectiveness.

We were running about 94% with the M26 and we are very happy to report with between 200 and 300 actual field users that the X26 has increased at success rates of nearly 90 units -- 97%.

So again with an increase in the success rate and having customers that are already familiar with us and have done business with us in the past, we wanted to go back and try and work with those customers especially in the near term to come and then look at the X26 as they were evaluating whether they were going to go forward with the M or the X.

And the other thing I would just caution, as we look at the percentage penetration of agencies, we mentioned this early in the call, I’m not sure how much higher that’s really going to climb, because we are getting into the majority of the agencies that are big enough to be on our corporate radar screen.

And basically, let's say, in this quarter we are cycling back through in seeing those guys.

Some of the agencies that we're not in of the big ones like Boston, we can’t be because the state law right now is the problem and the big cities in New Jersey.

But in the areas where the weapons are legal, we are really into the majority of those agencies that are big enough to be on our radar screen.

Right.

And the other thing that happened, Eric, is with those departments they may have made their initial purchases of M26s, and after field testing the X have made a decision that they want to convert the rest of them over.

I know there are several departments that have done that during the quarter.

Okay.

Did I hear you correctly that France field trial concludes in May -- in June, did I not hear that correctly?

No you did hear that correctly.

The trial started in February officially and it will be concluding in the May or June timeframe officially.

What the decision beyond that will be, I don’t know at this point.

But they have looked at what it was done in Canada and the U.K. and some of the other countries -- Switzerland in the past.

So they opted for a shorter operational trial that will conclude in the May, June timeframe.

And how many police officers are there in France?

There are somewhere around 330,000.

330,000 police officers?

That’s between city and national police.

Okay, okay.

Kathy one quick question for you.

The cost associated with kind of the one-time expenses ramping up production with infrastructure or quality issues, was that 267,000 -- would have incurred in costs of goods sold?

It’s been our indirect costs within costs to good sold and that was result of the product warranty issues, yes.

Okay, so cost of goods sold would have been just over 70% had they not been some of these one-time issues?

Correct.

Okay.

I want to make sure people know, in the first quarter there were drastic improvements made in the process as well.

So we should see that continuing to improve as we go forward.

And the team that’s been assembled now between the VP of Quality Engineering and myself is actually giving us the opportunity to dig down further.

What do you think are long-term sustainable growth margin could possibly be?

You know we are taking a look at that and whether we are going to revise our target business model, but at this point we are going to leave as it is until we are really comfortable with what our capacity can be and what quality it’s going to yield.

Okay.

Last question X26C, are we still looking at launching that later on in the year?

Yes.

Okay.

Yes we are.

At this point we are evaluating the distribution channels.

We are in discussions with some potential distributors.

It will be sometime in the third quarter.

We had announced July you know that might slip a month or two depending on what it takes to get the right logistics in place for distribution.

So, I should expect to see some infomercials from late night television later in the year then?

Potentially.

Keep looking at.

It will make great [tellers] and thanks a lot guys.

Thanks.

Your next question comes to you from the line of Brad Lennard (ph.) of ETG (ph.).

Please go ahead.

Hi guys.

Can you just say, your new orders were 13.1 this quarter, is that versus 11.5, did I hear somebody say, the last quarter?

Yes, that’s correct.

Okay.

And also you didn’t give any more comment on the patent infringement that you filed, you can't?

That’s right.

Until we have confirmation, they have been served and it's not in our best interest to do them.

Okay, could you mention anybody who you know is trying to -- some type of a competing product, you know, versus the not the PepperBall or anything like that but you know that similar of a TASER?

Well there's a number of things out there.

There's one company out at Cleveland its [stun] gun company that it announced probably 18 months ago that they were going to do a product that’s very [analogist] to the advanced stage of M26.

We haven't seen them in the marketplace.

But, again that’s a very small company there; they are on our radar screen.

There's a couple of guys out there, they have done things, they have been -- there's couple of companies out on the pink sheets right now that I would say are protailing us a bit that are talking about doing, one is shock rounds. [inaudible] a long range projectile system that could be competitive in the future potentially with our extended range of electronic projectile.

There is, by the way we obviously feel that our technology is, we are 2 years down the road, we are pretty far down the road and we think our IT is going to be really strong there as well.

And then there is another company there that's talked about doing a wireless transmission of a TASER type of effect.

That seems to be from what we can tell is still in a very much a concept stage and from what we understand from our competitive research is that's multi-million dollar per weapon system.

So, it's more of a -- something might be use in a fixed installation or may be in a large vehicle for military.

So, it wouldn’t be something officer deployable.

So, I think that’s the best up there right now.

We don’t have anybody who is in the same space that we are in and we are doing the best to make sure we keep it that way.

Okay, great thank you.

Thank you.

Your final question comes to you from the line of Mike Carady (ph.) of Palmera (ph.), your question please.

Yes, hi good morning.

Two quick questions, one is on research and development, what we should be expecting for the entire year in terms of dollar spent?

It can’t be flexible, but I actually don’t have the plans in here on that.

We’ve been running about 2% and I know that the VP of R&D has actually been ramping his number of headcount in terms of bringing in some specialist to be able to address mechanical issues and some other future electrical designs that they have.

So, it could be in the 2-3% of revenue for the year.

Okay,

[Not far] as much as 4%

Right and in terms of -- in the past we’ve reported both revenue and cost [against] the Office of Naval Research grants, I know that we’ve brought space [inaudible] successful completion and they are working on things on a going forward basis, so we should have an update at the next conference call.

Okay.

And what tax rate should we be thinking out for the year?

Right now our effective tax rate what we are using is 38.5% and once they finish our 2003 taxes and then we will come back and adjust that and queue it up before the second quarter.

Okay, great thank you.

You are welcome.

Ladies and gentlemen, this concludes the question and answer portion of today’s conference call.

I will now the turn the presentation back to Mr. Rick Smith for his closing remarks.

Sir.

Okay, we would like -- again we’re just flattered at the level of attendance, and interest in our conference call.

We hoped a lot of you can make it out to our ground breaking ceremony on the new building, which will be held immediately after our shareholder meeting this year.

You know, obviously it’s been a phenomenal year for us over the past year.

It’s been a great quarter.

I can assure you we’ll continue to do our best to address the challenges before us and execute to the best of our abilities to keep building this business, saving lives, and hopefully continue to do great things.

And we appreciate all of you being a part of it.

Thanks.

Thank you, ladies and gentlemen for your participation in today’s conference.

This concludes the presentation.

And you may now disconnect.

Have a great day.