Axon Enterprise Inc (AXON) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, welcome to your Taser International second quarter 2004 earnings conference call.

My name is Liz, and I will be your coordinator for today.

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

We will, however, be facilitating a question-and-answer session towards the end of the conference.

If, at any time, during the call you require assistance, please key star followed by zero, and an operator will be happy to assist you.

As a reminder, this conference is being recorded today, Tuesday, July 20, 2004, for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Bill Smith, chairman of the board.

Please go ahead, sir.

Thank you.

Good morning and welcome, everybody.

Before I turn it over to Doug Klint to read the Safe Harbor statement, I'd like to tell you, in 35 years of being in business, I've never, ever seen the media do what they've done to this company consistently.

In the last three quarters, the weekend before each of our earnings announcements, there has been a major negative article.

Now, if you believe in the tooth fairy, you probably think there's no relationship.

We happen to feel there is something going on.

We don't know what it is, but it clearly is not a very fair way to treat the company.

You've seen it, I've gotten your e-mails, we appreciate your support, and we're doing a great job, and you're going to hear about it this morning.

So let's focus on that and not what the media is trying to do to the company.

With that, I'll turn it over to Doug Klint.

Thanks, Phil.

Certain statements contained in this presentation may be deemed to be forward-looking statements as defined by the Private Securities 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 markets; successful penetration in the law enforcement market; expansion of product sales to the private security and military consumer self-defense markets; growth expectations for new and existing accounts; expansion of production capability, new production introductions, 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.

Such factors include but are not limited to market acceptance of our products; 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 and rate of growth that the markets in which we compete and the accompanying demand for our products; potential delays in international and domestic orders; implementation risks of manufacturing automation; risks associated with rapid technological change; execution and implementation of new technology; new product introduction risks; ramping manufacturing production to meet demand; litigation resulting from alleged product-related injuries; media publicity concerning allegations of deaths occurring after use of the Taser device; and the negative impact this could have on sales; product quality risks; potential fluctuation of the quarterly operating results; competition; financial and budgetary constraints of prospects and customers; dependence upon sole limited source suppliers; fluctuations in component pricings; risks of governmental regulations; dependent upon key employees; employee retention risks; and other factors detailed in the company's filings with the Securities and Exchange Commission.

I would now like to turn the call over to Rick Smith, our CEO.

Thank you and good morning.

The first line I'd like to talk about -- I think this is really the key issue -- is the 27% sequential increase in new business.

Earlier in the year some questions were raised about Taser's growth rate, and we're happy to report that despite some adversities that we've weathered, we continue to see the company growing at a brisk pace.

I should mention that in the new business number, a small portion of those revenues are for extended warranties that have been sold with products shipped in the quarter, and those warranties will be amortized over a period of one to four years, depending on the type of warranty purchased.

So not necessarily all that revenue or new orders will show up in this quarter or the next.

Moving on to the next slide, looking at the financial results for the second quarter of 2004 compared to 2003 -- as you can see, sales are up dramatically -- 290% over same period prior year.

In fact, we made more in after-tax net income this quarter than we did in total revenue in the quarter one year ago.

Needless to say for us, in the management of the company, it has been very exciting to be a part of the growth.

We'd like to thank our customers and our shareholders who have given us the opportunity to build this business and, I tell you, we're committed to keep in going, and we're having a great time.

You can also see record sales of $16.3m, record earnings and record profitability -- we improved a half a point at 27.5% after tax.

Moving to the next slide, and those of you who recall that this company had some very lean years before we went public, where we didn't have a lot of cash.

It is with a great sense of pride that I report we ended the quarter with $35.5m in cash -- I'm sorry -- I'm sorry -- $34.5m in cash, and that cash from operations in the quarter was $9.5m.

Next let me move on to one of the important topics that I'd like to talk about today, and that's what's been going on in the media, most particularly, most recently, in the "New York Times."

I was on "Squawk Box" this morning addressing this issue.

Again, we're facing the issue of sudden, unexpected deaths in custody, and I think we just need to put perspective on this issue.

There has been quite a bit of debate on it.

There have been roughly 38 people that died in police custody in the last 60 days.

Nine of them involved the Taser, and those are the ones that are getting all the publicity and controversy.

There were 29 cases that did not involve the Taser and, in fact, those were very difficult to find, because most of them were -- there was only one or two limited news stories, and we're sure there are many more that were not reported that we don't have.

I think it's also important, from a perspective, that there are two cases, after enduring a multi-week investigative report from the "New York Times," which was incredibly thorough, and I don't think necessarily unbiased, but they certainly did their best to look at every possible argument against the Taser, and they found two cases in four-and-a-half years where the Taser was listed as a potential contributing factor in a death.

I think we need to put that in perspective, and we'll talk about the estimates below, but out of 150,000 human uses, we're talking about two cases where the Taser may have been a contribution factor, and in both of those cases, those are highly controversial.

We have medical experts on both sides of the fence, but it's certainly clear that it is not 100% certain the Taser played a causal role.

Those links are somewhat tenuous in both of those cases, in my personal opinion.

There are others that disagree, but those cases -- if you're interested in learning more, you can go to our website and click for more details.

I think it's also important to point out the parallel to pepper spray in the early 1990s.

When pepper spray was first introduced, there were 63 in custody.

That's following the use of pepper spray -- more than we've had with Taser.

When the Department of Justice looked at this, they found that, in fact, pepper spray was not the cause of death.

It may have been a contributing factor in two of these cases.

We're seeing a very parallel and identical situation that would happen regardless of how safe any devices that choose by law enforcement.

The numbers show that people are going to die in police custody for a variety of reasons, and no matter how safe a device is, it is going to be associated with in-custody doubts.

We believe that Taser will be cleared just like pepper spray has been cleared, and it has been cleared in the majority of these cases, so far.

And even in the other two cases, there are independent reports pending, and we believe that those independent reports will be very favorable to the company.

Now, another issue I'd like to address -- recently, in the "Arizona Republic," there was an article that talked about Taser International has commented on these in-custody deaths, but that Taser International does not have all the autopsies.

That is true.

We have requested them, we have a little under half of those autopsies.

It's very difficult to get police agencies to necessarily release that information in some states.

By law, apparently, they cannot release the autopsies other than to the family members of the deceased.

So our responses are based not only on autopsies but on discussions with officers at the police agencies and on media reports that we collect over the Internet and other media-monitoring tools.

Those tools together give us the picture with which we respond.

Now, there is some debate about whether Taser should be responding to these cases early on, before the definitive studies are done, and I would say this -- we have multiple cases where, when a Taser is used, a newspaper article came out the next day where the media immediately jumped the gun and said "Police Killed Man with a Taser."

All we are doing is we're responding and saying, "Look, that is not accurate."

The tests are not done, and if we look at history, the vast majority of these cases, even under the most adverse assumptions, taking the position of the "New York Times" writer, under the most adverse assumptions, we're talking about two out of 50.

So, therefore, the statistics would tell us we should not jump to conclusions and assume the Taser was causal.

Next I'd like to talk a little bit about Dr. Robert Stratbucker, who was described in the "New York Times" as a part-time farmer and retired medical doctor.

I talked about that issue today on "Squawk Box."

I think that description was irrelevant, inaccurate, and, frankly, disrespectful.

Dr. Stratbucker has done more studies in this area than any other researcher.

He did the first study of the Nova XR5000 stun gun in the 1980s.

He is an MD and Ph.D.

He's a nuclear cardiologist, and his resume is posted on our website.

If you have any doubts about his qualifications, please download his curriculum vitae.

Next, talking about medical studies -- the "New York Times" article, to the casual reader and, in fact, if you look at the story this morning on "Squawk Box," they make it sound as if our medical studies were a couple of guys in a backyard shooting the dog to see if the dog would be okay.

In fact, these medical studies were fully instrumented animals with blood pressure and EKG monitors, they were anesthetized so they felt no pain.

These studies were done at the University of Missouri, where many of the pioneering work in cardiac defibrillation was done.

It is one of the leading centers in cardiac safety for these types of studies.

In 1999, we did 192 discharges directly across the heart.

That's over 14,000 individual Taser pulses directly across the heart and never observed adverse arrhythmias that would be dangerous, much less cardiac fibrillation.

And most recently, we've completed more studies with 333 discharges, over 31,000 individual pulses across the heart in 10 pigs.

That study is being prepared for publication, and that has found that we have roughly a 20-to-1 safety margin on the X26.

Both of these studies have been providing the independent reviewer such as the Department of Defense as part of their review of Taser safety and the reviewers, they certainly felt that these studies had merit, and they were well documented.

I think that flies in the face of some of the accusations that have been made by people questioning our safety studies.

But, most importantly, let's talk about the human use data.

We have estimated we have had 100,000 volunteers and 50,000 field uses.

That is a tremendous amount of data.

I'll move to the next slide to support those estimates because they have been called into question by certain people.

First, the 100,000 human volunteers -- let's talk about how we arrive at that number.

We have 14,300 certified instructors.

For those of you who saw me on "Squawk Box" this morning, I held up a stack of paper 12 inches thick.

Every industry sheet represented one human volunteer report where they filled in a report telling us about their experience being shocked with the Taser.

So we have documentation on roughly 10,000 to 14,000 of these.

If each of these instructors trained 10 people -- now, remember, these are professional instructors that teach for a living -- if they trained 10 officers that volunteered for a Taser, that would put us at 143,000, much more than our estimate.

Our second methodology -- we have 98,000 worldwide MNX26 weapons.

These are only the weapons sold to professional users, not consumer units.

With one officer being certified and volunteering with each of these, that would be 98,000.

Plus, we estimate another 10,000 minimum in demonstrations.

That puts us right into the ballpark of 100,000 human volunteers.

I should also mention that people questioned that these human volunteers don't take the five-second shock and therefore it is not valid test data.

I refer you to our website to download a video of one training conference last year, and you will see officer after officer including employees of the company, such as myself and Tom, taking full five-second rides with the Taser and over the past two years, that has been our standard testing protocol.

I should also point out when we talk about the certified instructors, and we estimate that each officer would certify 10 volunteers, I'll give you one statistic -- the Ohio State Patrol has 17 certified instructors.

Those 17 instructors tased 1,300 officers, or that's a grand total of 76 tased officers per instructor, far exceeding our estimate of 10 each in that validation.

Now, people may want to debate the merits of these estimating metrics, but I think they're valid, and they certainly don't come out of the thin air, as was accused by the "New York Times" writer.

I think it's also interesting to note that Alex Berenson, in this study that he supposedly did for several weeks -- I'm not sure that he ever left his chair and made some phone calls here, and he didn't attend one of the training courses where he could have certainly gone and talked to some of the users and seen these studies for himself, rather than just saying on the phone that he didn't believe our numbers.

Okay, next, let's talk about supportive actual estimates -- 50,000 actual field uses -- how do we arrive at that?

We have, as of this morning, actually, it's 4,703 reported uses in our database as submitted by law enforcement.

We estimate that only one in 10 reports are submitted to us -- that would be 47,000.

Now, the reason that we estimate only one in 10 reports are submitted is that the major agencies restrict their sharing.

Most of the big agencies don't share their data.

For example, there is one agency in Florida alone that has over 1,000 use reports that are not in our system.

We believe that's a valid metric.

Similarly, we can look at the fact there are 98,000 worldwide MNX26's.

If each Taser had been used only once in the field, that would be 98,000, double ours, would be 50,000.

And, again, if you looked at some actual cases -- Orange County, Florida, has had 2.1 uses per Taser in the field;

Seattle, 2.1; there are some agencies that have had significantly higher uses.

We believe one estimated use per Taser is highly defensible and conservative.

And the last estimate -- this is one that was also called into question -- that we estimate 5,000 lives have been saved over the past four years, since the M26 was introduced.

We invite you to go to our website, look on the "New York Times" response, download -- we have listed 500 individual cases in the database.

You can read them for yourself and determine whether you think the Taser saved a life.

I think that those uses speak for themselves.

And, again, with the assumption that one in 10 is reported to us, 10 times 500 is 5,000 lives saved.

We're willing to debate the assumptions, but they certainly didn't come out of thin air.

With that, let me move on to the sales accomplishments of the company this past quarter, and we'll move on to talk about what we should be talking about today, and that's the record results.

And one last comment on the lives saved, too -- we discussed earlier that the number of 4,000 over four years, and Mr. Berenson called that into question.

We're certainly not saying every one of those persons would have been shot by the law enforcement community, but we are certainly saying if you read the incidents where those were involved, the Taser definitely was used to save the life of that individual and a vast majority of those probably would have been at least seriously injured if not killed in the confrontation with law enforcement.

So I think that stands on its own when we look at that information.

We look at the accomplishments of the company -- we obviously are very excited about what we have continued to accomplish, and the "New York Times" and the "Republic" article that just came out -- this is a rehashing of something that was done one quarter ago.

We were discussing this same exact topic on our last quarterly conference call.

We've now gone out and spent time talking with the law enforcement community and, again, that shows in our numbers -- that we've had record financial results, record production and quality during the quarter, and we also were able to get a stock split done in late April -- a two-for-one stock split right after our annual shareholder meeting.

We, during the quarter, also held our user conference in Las Vegas that had attendees of well over 200 participants to share their information amongst each other on the successes and to look at the training and transfer knowledge in the way the tool is being used in the law enforcement community.

We had many countries represented there including the United Kingdom where we were able to get some updates on the studies and the uses that they've had during the past year of their trials by five departments over there, which we'll get to in a minute.

We added 299 full deployments during this quarter.

That's up 47% in a single quarter for the number of agencies that are putting one out there on every officer.

We also have, obviously, in the past, we've had several states that had banned this for law enforcement -- we are down to one -- the State of New Jersey.

And in that state, if the law enforcement agency writes a letter, they can get it.

But during this quarter we were able to get the State of Massachusetts to sign the bill that was done just by a couple of weeks ago to make it available for law enforcement to have our products.

So we've been able to overturn Hawaii; we've overturned Michigan; we've overturned Massachusetts.

We have one left where law enforcement now has said they've seen the value in this product, and it's saving lives, it's making their job safer, they want this technology, and that came through with Massachusetts passing the law.

We also saw our first significant order on the Department of Defense during the quarter.

We've talked in the past about the military.

They've been using them for well over a year, and that's been, again, substantiated now with a $1.8m order that came in from the United States Army at the end of the quarter.

That order did not ship during the quarter.

It will and is planned to ship.

It will be recognized during the third quarter.

So that military order is part of our backlog when we're looking at the numbers for the quarter.

So the total backlog during the quarter was $2.7m.

So we had revenue of $16.3m plus an additional $2.7m backlog to start the third quarter.

Again, another opportunity -- another exciting event we had was two lawsuits dismissed during the quarter with one of them relating to these in-custody deaths.

Down in Florida, where we had actually been involved in a case, and the family reviewed it -- Doug will talk about this a little later in the conference call -- they ended up dismissing the lawsuit against us, which is obviously another very positive sign for the company.

In terms of the sales update -- we talked about the 966 new departments deploying in the second quarter.

That's up tenfold over what we did in the first quarter a year ago.

This is becoming much more challenging -- just this year -- and that's becoming much more challenging to get.

It's quite a different metric when you're going from 200 agencies to 500.

Now when you're going from 5,000 to 6,000, it's a much more challenging task to get the names of the agencies that are using it and, at this point, this is, again, the last time on a conference call we're going to be addressing this number as we start to look at the number of weapons sold versus the number of officers.

Let me jump in there for a second.

In order to get that number, we sell through distribution.

So that's very labor-intensive, where we have to dedicate people to calling our distributors and manually having them go through their records of every agency they've sold to.

It was relevant, went from 200 to 1,000 agencies.

We're now over 5,000, and we don't believe the metric is worth the cost of maintaining it on a going-forward basis.

So we're going to do full deployments and officers.

So we're reporting full deployments and officers as we go forward.

We already talked about our first major Department of Defense order during the quarter, and let's look at the X26 consumer launch.

Our plans are still on track to launch that product later this quarter.

Obviously, there has been some rumors about discussions that have been ongoing with the Sharper Image.

The Sharper Image certainly has been looking at this, and we have had discussions with them, but in looking at their corporate culture and whether a self-defense product fits with them, they are still debating about how that's going to play out.

So we've decided to forgo it alone and table those discussions, and we will be following a direct model with the Dell model, going out and advertising this and selling this over the Internet.

We will be doing that probably in the September timeframe, and we're excited to get that product out there.

However, as we have mentioned in the last call, we'll mention it again -- the consumer sales are really negligible in looking at our guidance, going forward.

All of our guidance, all of our attention has been really focused on this.

We're looking at the consumer launch as more of a market test, an opportunity to get out there, get our feet wet, test the waters on how that product is received by the consumer marketplace, and figure how to get the right message point.

We also want to point out that we've had over 1,100 instructors who are law enforcement users sign up to voluntarily take their own personal time to go out and train individuals that will buy the consumer model in its use which, obviously, again, shows very strong support that we are going to have people that want to get this technology and use it for private defense as well as to train people that are using this for their day job.

This is Rick again.

Again, I'd like to just point out real quick for our shareholders -- we remain focused.

We are growing at a rapid clip in law enforcement.

Our focus will stay there.

The consumer launch -- think of it as a test market.

We are not dedicating major cost and resources to it.

It would be a major refocus for us to go trying to approach national retailers and support national retail launch in multiple locations.

We do feel that there is an ethical obligation.

Tom and I got in this business to make the Taser available as a non-lethal alternative to using a firearm for self-defense, and we feel its important that it be available, but we're not going to throw significant sales resources behind that effort, and we'll stay focused on our core markets.

Now let's talk about the international markets.

Roughly 2.7 percent of our revenue during the second quarter came from the international.

We don't have any visibility of any large orders coming in from the international market.

I've been questioned a lot on what's going on in the United Kingdom and what I can tell you is, it's a government agency that's preparing a report, and the fact that the report hasn't come out yet just means there is a delay in the report.

We fully expect that report to be documented and to be out in the September/October timeframe.

There are four sub-agencies in the UK that are pulling together information to include in that.

Meanwhile, there's five agencies that participated during the trial during the last year continue to use the products.

There have been news reports of the successful deployments during the last several months of the agencies using it again over there.

So this is simply a delay on a government agency in issuing a report.

We are still positive that the outcome is going to be in our favor as they get this information out later this year, and, again, the response from the officers and the departments in the UK have been very, very positive, and they're looking forward to continuing to use our technology as we go forward.

Well, Tom, this is why we didn't put any guidance of international orders.

It's very difficult to predict, long delay, a lot of political process involved, and that's why we've said from day one we have nothing in our guidance -- in the 150% guidance, there is nothing in there for big international orders.

So it's very hard to predict, and we're saying don't look for any -- Europe goes to sleep in the summer.

You won't hear anything until September, probably, out of Europe.

And that's a very good point.

During the months of July and August, it's very difficult to get any meetings in Europe, and it's something we're going to be focusing on, but it won't be picking up until the fall.

We do have some questions on France.

We have talked about that before, and their field test will be wrapping up in the September timeframe as well, so we should have some more information on that late in the quarter or early in the fourth quarter.

Now let's again go back and look at those full deployments -- up 47% from 631 at the end of the first quarter to 930 at the end of the second quarter.

Again, this is where our message point is getting out there about the safety of this technology.

It's protecting suspects, it's saving officers from having to make those lethal decisions -- 930 agencies, again, have committed to putting one on every front-line officer, which, again, shows that our messages are getting out there to the law enforcement community.

Let's take a look now at weapon sales.

Obviously, if you compare Q1 to Q2, we increased both the X26 numbers as well as the M26.

There have been some rumors that the M26 was going away, and you'll see here that it's increased the last three quarters, and the reason is law enforcement officers out there in departments that have started with the M26 platform continue to expand that program in addition to the vast majority transitioning over to the X26 with almost 14,600 Xs that are over that, sold during the quarter, compared to 3,400 Ms during that quarter.

The other numbers that we'd like to look at is the cartridges.

We had a 35% increase in the number of cartridges over Q1, up to 240,937 sold during the quarter.

That also increased the ratio of 13 cartridges per Taser -- again showing that we're not only getting cartridges sold with new orders, we are also having agencies that have existing Tasers coming back and buying cartridges to use in retraining for that recurrent revenue model that we've discussed in the past.

If we look at the graphs on the penetration of the U.S. law enforcement market, we were up 1.7% to a total of 7.9% of U.S. law enforcement officers now equipped with the Taser equipment.

I'd also like to point out that some of these agencies have not been able to buy one for every officer, so the Tasers do get shared over multiple shifts because they want this technology out on the street, and that's also the reason you're seeing officers or agencies adopt one on every officer so they can make sure that they do have that new equipment available.

Again, we mentioned this earlier, this will be the last time we really get into reporting the number of agencies, but the quick message here is 30% of U.S. law enforcement agencies, as of this point in time, now have this technology available within their departments.

That's up 5.5% over the first quarter of this year.

And, with that, I'd like to turn it over to Kathy to discuss the operations.

Good morning.

As Rick and Tom discussed, the second quarter marked several successes in the organization.

In operations our first milestone was the completion of phase 1 of our production automation.

In June we installed and began running our first fully automated assembly line.

The first sale completed was our C line which is a finished cartridge set assembly.

The piece of equipment cost the company approximately $100,000 and is expected to generate a one-year return on investment.

We also increased our X26 production yield.

Our primary objective on the X26 line was to achieve daily production of 500 units per day by the end of the second quarter without sacrificing product quality.

During the month of June, we achieved 500-plus per day on several occasions and averaged 440 per day for the month.

This compares with the Q1 average of 220 units per months.

In total, we built more than 21,000 units in the second quarter and ended the period with units in inventory in preparation for upcoming July orders.

We are continuing to work on improving our throughput, our quality, and are on track to build at least 45,000 additional weapons by year-end.

Our increase in throughput was achieved through the use of multi-department teams including engineering, quality, and manufacturing.

The results were not only an improved line throughput but also a significant reduction in inline scrap.

In the first quarter we expensed approximately 400,000 of scrap associated with manufacturing builds which totaled 3% of our sales for the period.

During our second quarter, the figure was reduced to approximately 261,000, or 1.6% of sales.

The result -- a 1% improvement in gross margins for the second quarter.

Our scrap reduction, coupled with improved line efficiencies and better leverage of our fixed costs and operations contributed to gross margins of 66.5% for the second quarter.

Our operations infrastructure was another key focus during the quarter.

In the last 90 days, many improvements were made to our production lines in the flow of product from incoming material to finished goods shipping.

We achieved better quality, lower cost, and shorter customer lead time.

At the end of our second quarter, standard X26 orders were shipping within one week of the order being placed.

Standard cartridges were on the shelf ready to ship, and our M26s were shipping within 10 days of receipt of order.

Our objectives for the third quarter are to launch the new consumer X26 weapon to the marketplace.

It will be produced using exactly the same X26 specs with the exception of software used to run the weapon.

The programming will be completed by our line operators and will not impact current quality or efficiency levels of our existing product line.

We also intend to stabilize our lines to their current production capacity and begin to proceduralize all of the lines to conform with new in-house quality standards.

To do this, we will use a mix of full employees to balance our line requirements and utilize quality teams to review and improve product flow.

We plan to continue developing and implementing our assembly line automation to meet future capacity requirements.

Our operations team is already at work designing our next phase of automation equipment.

We are continuing to focus on these efforts on our sub-assembly station, as they will have the greatest impact on throughput and efficiency.

During the third quarter, we will also be working with our IS department to implement the new ERP system.

This will automate many of the current clerical functions and reporting operations including MRP, inventory control, and production control.

It will also provide better efficiency and tighter expense controls.

With that, I'd like to turn this over to our new CFO, Dan Behrendt.

Thank you.

As many of you were aware, I recently joined the company at the end of April and have recently moved my family here.

This is a great company, and I'm thrilled to be a part of it.

I'm going to take you through the financial part of the presentation this morning.

I just want to start off with the fact that the company has amended its first quarter 10Q.

This is to reflect the fact the company discovered an additional $6.8m of deferred income tax benefits generated through the exercise of stock options.

Another effect of this is actually an improvement to stockholders' equity and also increase to the deferred tax asset out of the balance sheet.

I want to stress that there is no P&L impact from this, no earnings per share impact.

This is really a favorable item for the company.

There is going to be future cash benefits as the company is able to offset future taxes with this benefit as we move forward.

The next line, on sales -- sales for the second quarter, as Rick mentioned earlier, set another record -- $16.3m for the quarter.

This is an increase of 290% over the same quarter the prior year and 24% over the previous record set last quarter of $13m.

Moving on to gross margins -- gross margins for the quarter were $10.8m, or 66.5% of sales.

Again, this is a significant increase over the same quarter of the prior year, and also a 1% increase over the prior quarter, which had set the previous record.

As Kathy mentioned earlier, improvements of gross margin were really driven by increased leverage over fixed expenses, improved yields in production, and also shift of our product mix in the X26 product, which enjoys a more favorable gross margin than some of the other products that we have.

Moving on to the revenue breakdown -- our cost of sales for the quarter were 33%;

SG&A, 21%;

R&D, 1%, and operating income, 45%, which is very strong.

As many of you may notice, the SG&A is up 1% versus the prior quarter.

I've taken a look at this.

This is a normal trend for the company.

The company has significant expenses in the second quarter of each year relating to the shareholders meeting and also our [audio break] conference that we have each year for our users.

This typically drives up our SG&A roughly 1% on a percent-to-sales basis each year.

This year was no different.

We expected SG&A to come down as a percent to sales in the third quarter.

Moving on to net income -- net income for the quarter was $4.5m.

This is an increase of 1194% over the same quarter of last year, a 26% increase over the previous record set last quarter.

These results are obviously very strong.

Actually, results, really, by any metric, and it's really kind of a pleasure to be able to take you through such positive results.

Moving on to earnings per share -- this is a reflection of the strong net income the company has enjoyed.

We had 16 cents basic earnings per share; 14 cents on a diluted basis.

Again, this just continues the positive trend the company has seen over the recent quarters.

Accounts receivable on a day sales outstanding basis -- day sales outstanding actually were reduced by five days during the quarter.

The company has made an effort to improve its accounts receivable day sales outstanding has been successful.

We've actually had a reduction in AR this quarter on higher sales, which I think is a great accomplishment and something we'll continue to work out as we move forward to try to improve our working capital.

Inventory turns actually improved two turns during the quarter, which, you know, is an amazing metric for me to be able to get that kind of result on a quarter-on-quarter basis.

The company continues to turn its inventory even with an increased inventory that we're building for future sales.

We are seeing improved turns each quarter.

Moving on to the balance sheet statistics -- working capital for the quarter was $48.7m.

This is an increase of $8m over the prior quarter.

This is really driven mostly by the $9.9m increase in cash.

As Rick mentioned earlier, our operating cash flow for the quarter was $9.5m.

We had additional $2m of cash generated through the exercise of stock options and warrants, and this is partially offset by about $1.6m capex in the quarter.

Our total assets are up $10.5m.

Our liabilities are up [1.1] -- mostly a timing difference related to some payroll liabilities -- also some results of just increased activity we have as we ramp up our production.

The equity for the quarter has actually increased $9.5m.

It's driven by the strong net income of $4.5m, the exercise of stock options warrants of $2m, and then the additional tax benefits we have from the options of $3m.

At this point I'd like to turn the presentation over to Doug Klint, our general counsel, who is going to take you through the legal update.

We were pleased to have one lawsuit dismissed and another upheld on appeal.

A court order was filed in the Del'Ostia in-custody death case dismissing Taser with prejudice.

The medical examiner's report cleared the Taser in this man's death, and the plaintiffs were unable to find any medical evidence linking the Taser to his death.

Also, the U.S.

Court of Appeals upheld some rejudgment in Taser's favor in a patent infringement lawsuit brought by Mr. McNulty.

There were no other material changes to other pending litigation.

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

Okay, on the last slide here, one other thing to talk about in the quarter -- obviously, we increased our revenue guidance for the year from 100% revenue growth to 150% revenue growth over the last year.

We're halfway there, halfway through the year, so in order to hit this, obviously, we would just have to see flat revenue growth for the first two quarters, or flat revenues in the first two quarters.

We are hopeful that we will continue to see quarter-on-quarter revenue growth, but we believe the right approach is to be conservative.

As you all know, this is an explosive business in its nature.

It's very hard to predict the nature of growth, going forward.

We have faced the same concerns that have been brought up recently.

The "CBS Evening News" was several months ago.

We have not seen that impact sales; however, on a going-forward basis, we believe, again, the right approach is to be conservative.

We think 150% is reasonable, attainable, and we'll stretch to beat it as management.

And, with that, I would like to thank you all for attending the conference call.

Phil, do you have any comments before we go to questions?

Yes, one comment here -- you know, they keep calling for independent studies.

I don't know if it's been pointed out -- every medical device company -- Medtronics, Guidance, St. Jude Medical, the guys who provide pacemakers, defibrillators, heart valves -- all those people do their own testing.

There is no "independent" -- I mean, that's the tooth fairy story that we're going to get some guy to come in and put money up to test devices.

We've tested our devices just like they have.

There was no requirement for us to do that testing, just like we put in this weapons -- the audit trail -- to prevent abuse by police and users with the number of firings, the date it was fired, the information -- the confetti -- the little AFID tags that blow out to identify -- we take users' identification with two forms of photo ID -- none of that was required.

That was all part of the origination of this company 11 years ago.

So, you know, we started this company with the right idea.

We've done the right things.

We are going to continue to do the right things.

Here is a company growing 150%, no debt, $35m in the bank, no competition other than the media.

I think we ought to put the media up there as our competition.

Other than that, we basically are looking at a pretty damn bright future, and we're glad to be part of it.

With that, we'll take Q&A.

Rick, back to you.

Okay, let's open it up for questions.

Liz?

[operator instructions]

Your first question comes from the line of Brian Ruttenbur of Morgan Keegan.

Please go ahead, sir.

Great.

A couple of questions -- first of all, on -- this is a simple question -- the Ms, the Xs, and the cartridges -- I did not have this online.

I was listening.

So could you give me numbers of units produced and the revenue by each category?

I'll give you -- this is Tom -- I'll give you the number of units produced during the quarter.

This was shipped.

Yeah, sorry.

We did end with some on the shelf.

In the same quarter, we shipped 14,610 X26s, we shipped 3,460 M26s, and we shipped 240,937 cartridges during the quarter.

Brian, the production we produced 5,353 M26s; 21,108 Xs, and cartridges, we've produced 229,692.

Okay.

So I can assume that, subtracting the produced from the actual ship, you can come up with your inventory at the end of the quarter.

No, that won't work exactly because we also sent units out for training, we send units out for demos, we also have RMA replacements that get dealt with.

Okay, great.

Share count -- moving on to more important questions -- share count was up 2 million.

Is that because of stock options?

That's from last quarter.

It's really driven by both the stock options and also the exercise of the remaining warrants that took place during the quarter.

Okay.

On a fully diluted basis, how much should share count grow from second quarter to the third quarter?

The total potential dilution would be to 33 million.

That would be if every option were exercised.

But, again, these are vesting, over time, so that would take three years before that would actually take effect.

So there should be no reason, assuming on this 30 million share count, assuming there's no splits or anything like that, that you should see any dramatic increase like you did last quarter, going into third quarter -- second quarter to third quarter.

I'm just trying to figure out what the share count is going to be, going forward.

It should only increase by maybe a couple hundred thousand, going forward.

Is that correct?

Brian, it's going to depend on the stock price, because that's taken, in effect, to compute the diluted average share count.

We actually use a treasury method.

Okay.

On the stock price, that number can change.

Okay, okay, and then moving on -- revenue and EPS guidance -- is there any for the third quarter.

You gave it for 150-plus for the year in terms of revenue, no EPS.

Have you given anything in terms of the quarter?

No, we have not.

Again, it's fairly difficult to predict our business, quarter-to-quarter.

We know that it's been generally often to the right, and we're really focused on growing the business as fast as we can and, as you and I have discussed offline, you know, we don't want to go giving forecasts with any higher resolution than we can support from our feel in the marketplace.

That's why we think that it's better for us to just look at the annual numbers.

Okay, and then -- I watched you on CNBC -- you did a good job, but one of the things that you did say, I just wanted to clarify -- you said for the next couple of years you're looking for 150% revenue growth, is that correct?

No, no, what I told him is, I said over the past two years we've had 150% revenue growth.

We have not yet put out guidance for the coming years.

We believe it will continue to be strong, but we haven't formally addressed next year or the year after.

Again, it's very difficult to do, because we just -- especially when we talk about these international orders -- I don't think we want to get into formally giving guidance on the coming years other to say than this year 150% growth, and we would continue to expect strong growth after that, but we haven't thought about it yet.

Okay, and the last two quick questions on warranties -- over the next several quarters, those are going to be booked.

I assume that warranty number is within your backlog, is that correct?

Yes.

Okay, so in that $2.7m of backlog, how much of that is warranties and how -- is that all -- your backlog won't go to zero at the end of the quarter because of warranties, is that --

Actually, the company right now has got deferred revenues -- it's actually capitalized on the balance sheet of $250,000, and we'll be recognizing that over the next four years.

Four years.

-- warranties, Brian, one's a one-year warranty and one is a four-year.

Depending on which one the agency purchases, we have to take the dollar value of that and then spread it over that time period.

But, as Dan pointed out, we do account that -- that is not part of our backlog.

The backlog is product to ship.

The warranty is handled separately.

Yes, the only time it will be included, Brian, in our backlog is when we have orders pending where we're going to be shipping the DPM or the product with that extended warranty with it that has not yet shipped.

Okay, great.

That explains things.

And then, finally, on the backlog -- the $2.7m is up from the $2.4m -- is the plan to take that down to zero at the end of the third quarter and keep it at zero?

Yes, and one of the reasons, which I think we glossed over on this -- the $1.8m of that was the U.S. military, and the reason that didn't get shipped is they came in the second to the last day of the quarter but, being it was a custom order, we have to do different colors and a couple of things for them.

So it's not something that's an off-the-shelf.

We have to build it for them.

That's why it's going to be built and shipped during the third quarter.

So if you take that out, we're really at 900,000, which means that we were down in total backorder for the quarter, and we do continue to expect to drive that down.

I don't know that we'll get totally to zero, but that's certainly our goal during the quarter.

Okay, and then I forgot -- two more -- gross margins, you had incremental increase.

Can you continue to have incremental increase or are we going to see flattening out of gross margins.

Have we hit the top?

We're certainly going to strive to see it continue to improve.

We have a lot of work to do, in fact, to improve line operator efficiencies, our material efficiencies.

We're going to continue to focus on the reduction of scrap.

So I think we'll continue to see improvements there.

I think the conservative approach would be not to assume in your forecast that there are going to be significant improvements in margin, because there are additional investments that the company is going to be making.

The ERP system, for example, not that that would affect the [COGS], but we'd encourage you to be conservative and not assume major gains in margins, going forward.

What kind of returns -- there was about $800,000 of returns last quarter that was into cost of goods sold -- what were the returns this time?

That's warranty and scrap.

I believe that was a combination of warranty, scrap, inline scrap, lost production yields, as we brought the X26 into full-scale production.

Yes, last quarter when we reported that number, we included 267,000 that was actually associated with replacement of cartridge.

We had a new holster design that we went back and retrofitted all the units in the field.

We also had a plastic issue on our cartridges -- that we replace those for our customers.

So we have applied about $80,000 of that to this quarter.

So that number's reducing did not have additions to the production warranty.

Okay.

And then on your SG&A, were there a lot of legal expenses in the quarter?

No, not significant.

Okay, and the reason for the big spike in SG&A -- what was that again?

It's really driven primarily from the cost associated with the annual shareholders' meeting and the cost to print the proxies and all the mailing costs and also our annual user conference that we have -- that all sits in the second quarter.

This is pretty consistent with the second --

So we should see a drop in actual dollar amounts from the second to third quarter?

Certainly, we hope to.

We have ramped up some SG&A costs to get the company positioned for the future, but I do expect to see either flattening of SG&A or potentially even a drop in the next quarter.

As a percentage of sales.

Yes.

As a percentage of sales, okay, thank you.

Your next question comes from the line of Eric [Medal] of [Sprott].

Please go ahead.

Good morning, everyone.

Congratulations on the quarter.

One question on the proxy statement filing to increase the share count.

Could you please confirm that this is simply to account for future -- or to allow for future stock splits, or is it a signal of an intention to raise more equity?

Well, when we filed the proxy, we listed all the potential future uses of additional capital.

Certainly, a stock split is one of them, but picking business combinations, other related items, is certainly a possibility.

Nothing is anticipated at this time.

I would say -- this is Rick Smith -- that we did it purely because we were bumping up against the limits, and we wanted to have the flexibility, as management, to respond to opportunities in the future.

If we determine that it makes sense to do a stock split down the road, this would give us that flexibility.

If we see an acquisitions that makes sense -- you can see all the different things.

I would say there is no specific intention at this point other than to give management flexibility.

I just thought -- okay -- I just thought you were sitting on $35m in cash, it's going to cost you $15m to build the manufacturing capacity to get up to half a billion, or whatever it was.

I mean, I was just a little perplexed.

So that's good to hear.

Yes.

That's all the questions I ask.

Actually, it's $10m, Eric.

That's for the building.

We've already bought the land, so it's about $1m for this building and maybe equipping, another $1m.

So there's not a whole lot in front of us.

So excess $25m cash and creating -- generating a lot of free cash, going forward.

Yes, [inaudible].

Okay, thank you.

Thanks, Eric.

Your next question comes from the line of Steve Gish of Roth Capital Partners.

Please go ahead.

Good morning.

Just one quick question -- the gross margins -- what do the gross margins now look like for the cartridges?

I think, in the past, you had more favorable margins on the product.

Has that reversed?

Well, what we've been reporting is the same right now.

It's been 55% to 65% on the cartridges, and then the MNXs range between 72% and 85%.

There has been no real change in the cartridge margins, is the answer.

Do you anticipate -- is there room for improvement on the cartridge sales or is that --

Well, I think some of the automation that Kathy is putting in place, we'll start to see some improvement, but for your purposes in terms of forecasting, I think the conservative thing would be to assume they're constant.

Okay, thanks, Rick.

Thank you.

Thank you.

Your next question comes from the line of [Ernesto Salon] of JC Investments.

Question -- last August you guys put out a press release that you were doing business in London and "the first operational use of the Taser the less lethal weapon on an armed suspect was a great success," commented Tom Smith.

But the headlines in the UK said the following on the 13th of August -- "Stun Gun Fails First Serious Test." "Stun Gun's Failure Shocks Police." "Stun Gun Fires a Blank During Two-Hour Siege." "Blow For Police as 50,000-volt Stun Gun Failed to Work."

Why would you put out a press release like that when, in fact, the gun didn't work?

In fact, the gun did work.

It worked as advertised.

The reason that the media talked about that is in that particular deployment, when the two probes fired out, one of the probes hit the suspect.

The second probe didn't hit the suspect, so the officers that didn't understand the concept didn't realize that it worked.

But the second probe fell on the grass because the subject was outside.

So, in fact, it still made the connection, it still dropped the suspect, they took him into custody, but when the officers were talking about this at the scene, they never made a formal statement from the department, so there was some misconception and, as we all know, the media in the UK likes to make sensationalism of stories, and the reason we came out with the press release was to clarify the incident, because we went and got the fact, and the Taser did work.

It worked as advertised, and all of the cases that they've been using it since have been very, very positive in the press and from the police.

I guess my conspiracy theory here is up on the back of my neck with that question from August of last year.

Why would you bring that up on a conference call in July of this year, 11 months later?

Well, I think the question is -- wouldn't it be better just to handle the issues head-on rather than be so combative?

Because, you know, clearly, there are both side of the coin and maybe instead of combating everyone, you just say, "Yeah, you know, it's an early user."

-- last night on an e-mail -- let me ask you -- we had a shareholder send me that exact suggestion last night -- "Why don't you guys just give up and say it's lethal in those two cases?"

In fact, the guy in the "New York Times" said that yesterday.

It's only these two cases.

If they'd just admit they're lethal, you know, he'd be happy.

We're not about to do that.

We have told 98,000 officers out there this thing is safe.

The easy road would be to do that.

We're not into the easy road business.

We've struggled for 11 years in this business.

We've been honest and up front in every one of our dealings, and we're going to continue that, and we're not going to change our philosophy just to make it easy.

We're doing the right thing.

Understand -- I'm not saying --

And, you know, I'm just saying this is probably not the forum for this debate.

You're welcome to call in afterwards, and we hear your input, but let's take more questions from shareholders, please.

Thank you.

Thank you.

Your next question comes from the line of [Joyce Gray] who is an individual investor.

Please go ahead.

A simple question -- is things are going so well, and I hear they are, and I understand the margins and all of that.

I don't understand why your stock is dropping so drastically.

Maybe you can help me with that.

Well, you know, this is Rick Smith -- I wish we could understand what's going on in the marketplace.

It doesn't always correlate directly with the fundamentals of the company.

I would say the fact that we grew so fast over the past year, the stock was one of the top-performing stocks on the NASDAQ, and we're in a space that few people even knew existed a year ago, and the fact that we're in law enforcement in non-lethal weapons makes it somewhat inherently controversial and, as such, we get these stories in the media that are tremendously impacting the stock in a lot of places.

We really can't say what's going on out there.

All we can focus on is building the company, building the underlying fundamentals.

The performance is there, the stock has been volatile.

And as an individual investor, the one thing that I would caution is you've just got to look at Taser.

Historically, it has been volatile, and we'd say, you know, it makes sense as part of a well-balanced portfolio.

But just be careful.

We've heard some stories of people putting their life savings into Taser and going on margin and stuff, and we just think that as individual investors, we greatly appreciate your support but, ma'am, the movements in our stock price are not always correlated to the performance of the company, which has been very strong.

So you blame the media?

Well, I'm not going to go there blame the media, per se.

I'm just going to say that the movements in the stock price, you know, going down right now while the fundamentals of the company are going up.

I would just say it's market dynamics and --

-- and the media has certainly contributed to that.

What about all the short sells?

The short sells -- buy, sell, buy, sell, buy sell?

Again, it's very difficult for us to speculate what's going on in the market itself.

We share some of your frustration.

Each of us here, obviously, are significant shareholders as well, and we're seeing our investments move up and down significantly and, as human beings, we have the same sort of stressful reaction to it.

We'd like to see the stock be less volatile, but the only way we can accomplish that is to continue to focus on performance.

Okay, well, that seems to wrap it up.

I think, with that, we're going to go ahead and wrap up the call.

There seem to be no more questions out there, so we want to thank everybody for their time, and if you have any additional questions, feel free to call in or e-mail them to us.

Thank you so much, everybody.

Thank you.

Thank you.

Ladies and gentlemen, that concludes your presentation for today.

We thank you for your participation and have a great day.