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Operator
Good day, ladies and gentlemen.
Welcome to the Q4 2004 TASER International, Inc. earnings conference call.
My name is Anika (ph) and I will 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. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the presentation over to your host for today's conference, Mr. Rick Smith, Chief Executive Officer of TASER International.
Please proceed, sir.
Rick Smith - CEO
Good morning everyone.
Before we get started let me have Doug Klint read through the safe harbor statement.
Then we'll get going.
Doug Klint - GC
Thanks Rick.
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 of the law-enforcement market, expansion of product sales to the private security, military, consumer, and self-defense markets, growth expectations for new and existing accounts, expansion of production capability, new product introductions, product safety, 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 herein.
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 of the markets in which we compete and the company demand for our products; potential delays in international and domestic orders; implementation and risks of manufacturing automation; risks associated with rapid technological change; execution and implementation risks of new technology; new product introduction risk; ramping manufacturing production to meet demand; litigation resulting from alleged product-related injuries and deaths; media publicity concerning product uses and allegations of injury and deaths and the negative impact 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 limited source suppliers; fluctuations in component pricing; risks of governmental inquiries, investigations, and regulations;
TASER product tests and reports; dependence upon key employees; employee retention risk; and other factors detailed in the Company's filings with the SEC.
Back to you Rick.
Rick Smith - CEO
Okay, thanks Doug.
As we put up our overview slide, I've got to say, as I sit here today it feels like déjà vu all over again.
As I sat here a year ago in this conference call and we reported the record results for 2003, it was amidst the public accusation in a Barron's article that TASER's growth was over, that the market was nearing saturation.
I'm proud to report as we sit here a year later looking back, that our growth last year exceeded our most optimistic projections.
While at the beginning of last year, we projected 100 percent revenue growth, subsequently revised it up to 150 and revised it again to 175 percent.
I couldn't be prouder of the team of people that I've worked with here that has helped us to deliver 177 percent revenue growth in 2004 for 67.7 million in total revenue ending the year with over $50 million in cash and investments. 45.6 percent operating income for the year.
Let me repeat that one.
We're a manufacturing company – 45.6 percent operating income for the year 2004. $0.31 a share diluted earnings and over $106 million in assets at year end.
In the fourth quarter we again saw record revenues of $19.25 million with our largest order from the Houston Police Department becoming our largest full deployment, one of the top five agencies in the country, a $3.5 million order; and our largest research contract of $0.5 million to support our ongoing research into the long-range wireless extended-range TASER projectiles.
I then move into the next slide and show the graph of the financial results comparing 2004 and 2003.
Again you see the record sales, up from 24.4 million at 67.7 million, gross profit tripling from 15 million to 45 million, and net income at 4.4 million going to 19.1 million, and record profitability after tax for the year of 28.3 percent.
Moving into the next slide in terms of the overview.
We've seen additional independent studies published over the course of the quarter that again reaffirm the life-saving value of our technologies.
Let me pause for a second here.
There is this misconception being promoted by Amnesty International, among others, that there are no independent studies of the Taser.
That is factually wrong.
There are dozens of independent studies sponsored by independent governments such as the US Department of Defense, the Canadian government, the Australian government, various European governments, also sponsored by agencies like the Orange County Sheriffs in Florida, which sponsored an independent medical panel to review the safety of Tasers.
Those results are all yielding consistent feedback.
Tasers are not risk-free.
We've never said they are.
No use of force is risk-free.
But that they safe lives and reduce injuries.
We'll talk more shortly about the two new university studies that came out this quarter.
Second, the publication of the Taser safety study in Pace.
Pace is one of the leading journals of electro-physiology, the study of the electric currents of the heart.
One other thing I should point out is TASER is very proud that we do sponsor cutting-edge research.
In addition to the independent studies, we've sponsored some of the best studies out there.
That is something that we're proud of.
In the medical device industry, we've talked to experts who have informed us that over 90 percent of the medical studies that are done on medical devices are sponsored by the companies that manufacture them because those companies have the resources and expertise to lead those studies.
Those studies are then reviewed in peer-review journals or by various government agencies just like we've seen with TASER.
There is nothing different about the fact that we're sponsoring studies.
Again, we're proud of it.
We also launched a scientific and medical advisory board.
This is an independent board of industry-leading experts that we have convened to give us advice, to look through the state of our affairs and give us advice on future research.
I'll quote a couple of their feedback to us.
Richard Lucerie, (ph) who is a world-renowned cardiac rhythm specialist and one of the early pioneers of implantable defibrillators.
They use electricity to save lives just like we do.
Dr. Lucerie concluded after reviewing our data, "I have been impressed by the Company's focus on safety and reliability of TASER products and was pleasantly surprised at the depth and quality of data regarding TASER safety.
Another board member, Dr. Hugh Calkins, (ph) Professor of Medicine and Director of the Arrhythmia Service at Johns Hopkins Hospital, who concluded, "I've had an opportunity to review the studies and the results of the studies confirm the general safety of TASER devices.
I personally believe this technology is saving lives every day.
Also this quarter we received TSA approval from the Transportation Security Administration for airlines, particularly Korean Airlines to use Tasers on board in their domestic flights.
For those of you who have been with us for years, you know that TASER has been working to get TSA approval for three years.
This was the culmination of a long hard road.
I would caution against looking at the airline industry in terms of a future revenue generator.
There certainly are some opportunities there.
But more important we believe that airline use of the Tasers ties us more closely into general homeland security type applications worldwide.
If you look at the next bullet point there, this last quarter we've announced new field trials in Finland, Sweden, and South Korea.
We believe that the Korean police move towards the Taser was partially due to the Korean Airlines moving forward with the Taser.
Now coming to the next slide, the challenges.
As much as we look forward to the future and we see a very bright continued future here at TASER International, we have a fight on our hands.
We have for the past several years.
As we move through this call, I think you'll see that we've got a management team that is dedicated and has been battle-hardened over the years.
We're ready to continue to move this Company forward.
Let me talk specifically about the challenges we see that are new this quarter.
There is an SEC informal inquiry into two different areas.
The first is transactions with Davidson, our distributor.
We believe the primary focus – I don't want to speak for the SEC.
But there was a lot of attention in the media about a fourth quarter order with Davidson's where we signed an exclusive deal for them to launch the X26C.
Needless to say, we have put tremendous time and effort, scrutiny into looking at the accounting on that transaction.
We're very confident in the accounting treatment selected.
We have recognized the revenue for product shipped to Davidson's, which we shipped and built.
There is no right-of-return.
However in the X26C product, each device does come with a certificate good for a one-on-one training session with a police instructor.
We have deferred revenue associated with those training certificates.
I think we've taken a very conservative approach in that we've assumed 100 percent of those certificates will be redeemed.
We've deferred, out of that $1.5 million, roughly $140,000 for training revenue that will be recognized as those vouchers come in.
So again, we're very confident in the accounting treatment.
It has been reviewed by our auditors as part of their normal course of reviewing our financial statements at year end.
Second, the second area is the Company's public statements regarding product safety.
I think it's very important.
There is some confusion we're seeing in the marketplace from both shareholders and even from some of our customers.
They are confused that the SEC is actually conducting safety studies or will opine on the safety of our products.
Based on the letter we've received, advice from Counsel, and our understanding of the SEC, we do not believe that they are engaging in a safety study of product safety.
It is really not their area of focus.
What we understand this to be is an analysis of our public statements and the accuracy with which they reflect the underlying safety data, which has been posted on our website over the course of the year.
There has been a raging public debate on the safety of our products.
We'll talk more about that later.
I've been shot with it as has everybody else sitting in this room.
We certainly believe our products offer one of the safest force alternatives available today.
One other point on that is, we also know there was some controversy or some questions about the press release we did in October that announced the Department of Defense study results.
We're very glad to see a recent Wall Street Journal article where they called the DOD to get their comment.
The DOD affirmed that yes, they had reviewed our press release, that they had approved of it.
They backed our language 100 percent and they agreed that Tasers were generally safe and effective.
We're hopeful that the DOD's public statements will be helpful in laying this issue to rest.
On the (indiscernible), as you see, there is no specific timeframe for completion.
We wish that we could provide more certainty for our shareholders.
This will take as long as it takes.
We're committed to working with the SEC as cooperatively as we can so that we can move it forward to completion as quickly as possible.
The second area to talk about are legislative issues.
Given the significant public debate, we have seen local and city and state level lawmakers introducing various bills regarding TASER technology.
Some of those bills are very well thought out and constructive.
The raise the penalties, for example, if a Taser is used in the commission of a crime or against a police officer.
The require the registration of these systems similar to programs that we've already done of our own accord.
TASER International is very supportive of responsible, well thought-out legislation.
There is also some legislation out there that we believe is counter-productive.
For example, in some states there is discussion of suspension of Taser use.
Obviously we think that's a very bad idea as do the independent studies that we'll talk about.
We are committed to fighting those issues with facts.
When we've gone in front of people, for example, the last two weeks Tom has met with senior officials in two different cities that were considering, in one case Taser legislation – a potential ban.
In another city, with the controversy, they were considering pulling the Tasers off the streets.
We turned both of those around by providing them data.
When we get the facts in front of people, it's obvious the benefits of TASER technology.
But the legislative issues are going to be costly.
We'll be hiring lobbyists in various states across the country.
It's going to be a focus of management time to make sure we don't lose any of these because we weren't there to have our voice heard.
The third area is potential order delays.
It is, as we've said before, it is difficult to predict our short-term business results.
It always has been.
We generally don't have a significant backlog.
We're out writing business every quarter for that quarter.
That makes it very difficult for us looking forward.
It's especially difficult right now because of the two issues above.
We have experienced a disruption in our order flow in January.
You'd have to be living on Mars not to realize the amount of publicity and debate and controversy would not be disruptive, especially when your customers are city councils and police departments.
We do believe that we starting to see that settle down.
The facts are coming out.
We'll talk shortly that we've had several significant recent orders that indicate to us business is resuming back on track.
But we do (indiscernible).
These are difficult times.
Because of these challenges, it makes it very difficult for us – even more so than normal – to have forward looking visibility.
Accordingly, we're going to defer giving 2005 guidance at this time until we can get through these turbulent times and back to a more regular business track.
I would reiterate that our long-term prospects for TASER – part of the reason we're getting so much attention is because of the sheer level of success we've had, not only in the business, but with our law enforcement customers, and the growth that we've seen.
The feedback we're getting from customers continues to be overwhelming affirmative.
We get them everyday – emails where police officers feel they've saved somebody's life and sometimes their own because of our technology.
Now let me turn over to Doug to give a little more input on the legal issues.
Doug Klint - GC
As Rick stated, we have received an informal inquiry from the Securities and Exchange Commission regarding transactions with Davidson's and public statements on product safety.
Based on the letter we received from the SEC, they are not inquiring whether the TASER product is safe, but rather whether our public statements about product safety are consistent with medical and safety studies.
There is no timeline for this inquiry.
We feel that with our continued cooperation it can be resolved within a reasonable period of time.
There have been stockholder class action derivative losses filed against the Company.
While there have been a number of these lawsuits filed, we expect consolidation in the Arizona Federal District Court.
We do not feel that these lawsuits have any merit.
We will vigorously defend these suits.
Rick Smith - CEO
That is a question we've all gotten several times.
Some smaller shareholders have called up concerned at the number of these lawsuits.
As you and I have talked earlier, (indiscernible) counsel I think what we've heard is it's normal.
Every law firm in America files on these things early on before they get consolidated.
So the number is somewhat irrelevant.
Doug Klint - GC
It is.
It almost becomes a race to the courthouse.
The number really is irrelevant because the normal course is that these lawsuits do get consolidated into one class action lawsuit in the Federal court in which the Company is located.
We expect that there will be just one action before too long.
We have filed a lawsuit against Stinger Systems (ph) alleging false advertising in violation of the Lanham (ph) Act.
We will also be filing an action for declaratory judgment against our former patent attorney who is asserting an interest in an invention that relates to two pending patent applications for the Taser X26.
We have other litigation that is nonmaterial and in the normal course of business.
Among those are contract disputes with two former distributors.
We have five training demonstration injury cases.
It's important to note that these injuries were secondary physical exertion type injuries such as torn muscles.
We initiated a new liability release form in Q4 2004.
We expect that this form will diminish these lawsuits going forward.
There are also eight lawsuits involving unexpected and unforeseeable suspect deaths while in policy custody.
It is interesting that two of these deaths were caused by gunshots.
We do not feel that these lawsuits have any merit either.
There are also two excessive-use-of force cases alleging against police where TASER was named a party.
Most of these lawsuits are covered by insurance.
Rick, I am going to turn the call back to you.
Rick Smith - CEO
Okay.
Let's talk about what our plan is.
First, we're focusing on a very active safety campaign – direct mail, placed advertisements, and editorial work in law enforcement and general media.
We need to get the message out.
We need to get the studies in front of people so they can see there are independent studies and what those results are finding.
A big part of this will also be personal visits to agencies.
Over the next two months Tom and I are putting together a schedule to go see our major customers and our major prospects and make sure that their questions are answered.
Unfortunately a lot of what has been out in the public media – I think one of the best quotes I heard is, we've seen a lot of headlines designed to sell newspapers.
That is undermining the confidence in our product, which is designed to save lives.
But the data is compelling and it's on our side.
We expect a product and public relations campaign.
As you see on the third point, now is the time to invest in preserving our brand equity.
One of the things we saw in the fourth quarter, we increased our expenses significantly as we hired public relations and consulting help.
We're now transitioning from the crisis management side into an aggressive and proactive public relations side.
That is going to take time and money.
Protecting our brand is very important.
We've got a $50 million war chest.
As we look at the next two quarters, these are somewhat extraordinary times.
We are going to invest.
We are going to do what it takes.
We're going to be careful with how we spend our money.
Now is the time to put it to work protecting our business for the long term.
Our long-term outlook remains very positive.
In fact, in recent days over 1,000 X26s were awarded between Singapore, a major agency in Canada, and the Alaska State Patrol.
So we are seeing some significant orders and some more movement internationally, which would indicate I think that the data are compelling.
Next slide.
This is a graph from the study that was published in the journal Pace.
This was sponsored by TASER.
In fact two of the researchers were from TASER, our medical director, Dr. Shappecker (ph) and our Vice-President of R&D.
The results were reviewed twice prior to publication, once at a European conference called cardiostim (ph).
And the manuscript itself was peer-reviewed prior to being published in a supplement to Pace.
This shows that applying the TASER currents directly across the chest of pigs of a comparable body weight to humans, we saw a range of safety indexes where it took anywhere from 15 to 42 times the electrical charge of our Taser devices before it caused a fibrillation, which is a very dangerous arrhythmia.
Let me quote Dr. Lucerie again from our advisory board.
When he reviewed these data he concluded that the commercially available TASER products have a far greater safety margin than most cardiac drugs approved by the FDA.
That is not to say that our product is FDA approved.
It's not.
But we are doing the same types of testing the medical devices do to try and establish safety margins and maximize our safety where possible.
This study, we believe, is ground-breaking and really helps to support the general safety of our products.
This study did not address specific individual susceptibility such as people with arrhythmias or pacemakers, but establishes a great baseline.
Moving forward now to the two independent reports.
First we'll talk about one that came out from the Four Science Research Center at the Minnesota State University Mankato.
Go ahead and read these because I think this is important perspective.
First they concluded the Taser is a device that is generally very, very effective at reducing injury to officers and subjects.
On the subject of proposed bans on Tasers, even a temporary ban on the use of Tasers, "would literally create a catastrophe for police officers.
Lawsuits would increase.
Officer injuries would increase.
Subject injuries would increase.
All guaranteed.
We need additional research.
But we don't need to stop using a unique tool that experience has proven is effective and overwhelmingly safe while more investigation is underway."
Also concluding, "it is irresponsible and unconscionable based on what we know today about the Taser, to advocate a policy that would result in taking people's lives rather than subjecting them to a transitory experience of physical immobilization."
Finally, we felt this was a very helpful analogy, it concluded that calling for a ban because a relative handful of subjects have died after Taser use with no direct causation having been established is somewhat like saying, I heard of a guy who drowned in a car because he couldn't get his seatbelt off, so we should outlaw seatbelts.
Let me move to the second independent study.
This was from Dr. Charlie Meslow (ph) down in Florida at the Florida Gulf Coast University.
They looked at the data from Orange County Florida and the concluded that in one year alone, 18 subjects were subdued with a Taser where the use of deadly force would have been justified.
That is 18 people that are alive and breathing today primarily because of the Taser.
And that nine out of ten subjects surrendered when faced with the Taser.
Again, that's great news.
It's not being over-used.
People are complying for the most part, which is in everybody's best interest.
They saw 75 percent reduction in the use of chemical agents and 50 percent reductions in physical force and worker comp claims due to arrest-related injuries.
So these independent studies are very helpful in setting the record straight as to the actual results in the field.
Doug Klint - GC
I do think it's important to point out again that these are two university studies that were both released during the fourth quarter.
It flies in the face of some of the supposed activist groups out there that are claiming there are no independent studies.
These are two university studies.
Rick just read you the quotes.
I think that speaks again to the other dozens of independent studies that we have.
Rick Smith - CEO
Following up on the next slide with the general safety conclusions, number one – if you read through these reports, whether it's from the Home Office in the UK, the Department of Defense or otherwise – as with any use of force, TASER devices are not risk-free.
We've never said that they are risk-free.
But they do conclude the TASER devices save lives.
They reduce injuries.
And they among the safest force options available today.
Using force is inherently risky.
The good news is, the vast majority of people that police interact with comply.
It's a very small percentage where it escalates.
Police officers don't get paid to get hurt.
They don't get paid to get into fights.
They get paid to enforce the law.
The Taser is making their job safer and it's making our community safer.
Additional studies are recommended.
That is one of the reasons TASER International has put together an advisory board to advise us on our future course of study.
We support independent research.
With that, let me turn it over to Tom to talk specifically about the sales update.
Tom Smith - Pres
One last note on the research.
I do think it's important to note that we do have ongoing studies that we're funding right now because we do believe in the future of the products and making sure that we, through our medical advisory board, are looking at the questions that are being asked.
If you look at the slide here, we're talking about new business of 19.1 million in the quarter.
This is a number that specifically is the business that was written during the quarter.
It's unrelated to backlog or deferred revenue.
It's specifically the new business that the sales department generated and wrote during the quarter.
The sales area out of R&D also launched two new products during the quarter.
The X-rail (ph) system.
We've talked about that previously.
It was on the market and shipped during this quarter.
That allows the X26 to be attached to lethal weapons.
It's the first time that we're aware that you've been able to attach a Taser to any kind of a response.
The military is using this in Iraq and Afghanistan and some of our other conflicts.
Law enforcement is starting to look at this as a force option especially with their special response teams and their SWAT teams.
We also launched a longer range cartridge – 25 feet – four feet longer than our standard cartridge.
That was successfully launched and shipped during the quarter – again, a range of 25 feet.
We look in the United States.
We had our largest full deployment to the Houston Police Department.
Houston is the fourth largest department in the country.
They bought 3,700 Tasers for full deployment, one for every officer on the street.
I think they will start seeing tremendous results this year as they use the technology to save lives and reduce injuries.
We also increased new full deployments by 317.
That's a 27.5 percent increase over Q3.
I think that is showing acceptance within the law enforcement market.
Existing customers that have experience with the technology are continuing to adapt and are trying to get more for their officer because it has proven itself on their streets.
We also launched the X26C consumer test market during the quarter.
That was done here in the local Phoenix area with several of the dealers from Davidson's participating in that launch.
We did see very successful results from that launch.
We're very optimistic about the future.
That led to the deal with Davidson's to negotiate where they got the exclusive for national distribution to federal firearms licensed dealers.
Davidson's has access to 8,000 gold level dealers.
That is 8,000 of their best customers that they've had working relationships with for a very, very long time.
That allows us to work with a customer, Davidson's, that we've had a very long relationship with, allow them to help us get into a new market where they already have established those contacts with these 8,000 dealers and allow us to focus our resources in other areas instead of us having to reinvent the wheel to go and contact those dealers when they already have that relationship and have the support for those particular customers.
We have talked about the consumer market being a very large market potential.
We are going to continue to go after this.
We do expect the growth to be slow and to be organic.
We don't expect at this point to see anything very rapid out of this market.
We will be continuing to invest in advertising and working on our messaging and communication as we expand this market and move into 2005.
Rick Smith - CEO
Let me add, this isn't the type of business where you throw out a super-bowl ad and everybody runs out to buy one.
The Taser is very education-intensive.
What we learned in the law enforcement business, it's slow, steady, methodical programs that focus on training and education are what works.
We're applying that same methodology to the consumer market.
We're cautioning investors that while we were encouraged by the test market, it's going to be slow and consistent, not some big explosive rapid entry.
Tom Smith - Pres
I think our biggest challenge in that market, which we learned from law enforcement business is going to be the education on the consumer of exactly what a Taser is and how it can work off two small lithium battery cells.
I think that is where we're going to be focusing a lot of our energy as we go forward.
I'd also like to talk about the international markets.
We had received approval from the United Kingdom late in Q3.
We did see some of the M26s adopted during the quarter.
That approval was specific to the M26 because that is what they had studied for several years.
We did see limited sales to the United Kingdom during the quarter as they learned that the X26 was under test and evaluation.
A lot of the agencies wanted to wait for the newer technology to use their budgets and their resources for that product.
We are under the impression that the X26 study will be released this quarter.
We do expect sales to continue.
However in the fourth quarter we do have – over 50 percent of the firearms officer at agencies through the United Kingdom have access to the M26 Taser technology.
You've obviously seen some reports during the quarter of some successful uses in the United Kingdom.
We do expect to see that market to continue to expand through the firearms officers in the United Kingdom, especially once the X26 and the full medical studies are released hopefully later this quarter.
Rick had talked earlier that we had additional field trials that commenced during the quarter with the South Korean police general duty officers and in Finland and Sweden.
In Finland we also had our first report that recently they’ve used it over ten times with very successful results.
The field trial results so far have come back very, very positive.
Rick mentioned that the South Korean police went to the general duty officer.
We do believe that was partially in response to Korean Air moving forward with the program and the success that law enforcement has seen with the X26 during part of their evaluation over the last year.
Just this quarter within the last few days, we received our first order from the Singapore Police for over 150 TASER X26s ordered by the government.
This is a very big step.
The Singapore Police were very due diligent in their process.
The traveled to the United Kingdom and spend several days looking at that program.
They also spent several days working with US law enforcement agencies and actually talking to officers and users of this technology prior to making a decision.
We're very excited to see that department come on—or that country come on and begin their field trials.
We believe we will be seeing continued results that we've seen in other countries.
Rick also mentioned earlier a large order received late last night from the Canadians.
We're working right now on getting clarification on the release of the department name.
We're obviously very excited that the Canadian government, who has done their own independent research – obviously they've had some controversy up there with respect to some of the in-custody deaths.
They've got approval at a very high governmental level.
Now we've seen our first large order.
It's in fact, the largest order in our distributor's history of Canada come through late last night showing the acceptance as the Government has looked at these programs.
We look at the next slide.
Let's look at new business.
It was up 10 percent from 17.3 in Q3 to 19.1 in Q4.
That is showing the continued growth of the product.
With that increase of new business, that's a number that is what was written during the quarter of taking out backlog and any deferred revenue.
Rick Smith - CEO
Just for clarity's sake, the new business is not a GAAP accounting treatment.
This is just a way for us to measure how much new business was actually written.
The next slide will show GAAP revenues.
Doug Klint - GC
As we look at that next slide, we're looking at the revenue by quarter.
That was up from 18.9 in Q3 to 19.2 in Q4.
That is net of a $650,000 deferred revenue during the quarter.
That $650,000 relates to training and extended warranties that were deferred.
The associated costs for those were also deferred and will be reported at the relevant time that we recognize that revenue.
All associated costs were deferred.
So it's $650,000 during the quarter.
If we take a look at the next slide, we're looking at the TASER weapon sales.
We sold over 20,000 X26s during the quarter, up from 17,800 in the previous quarter.
We have sold 2,700 of the M series.
I think it is also important to note that these data are aggregated a little bit differently than we've reported in the past.
We've changed to report on all the M series Tasers versus all the X series Tasers, which incorporates both the consumer models and the military or law enforcement.
In the past, we were addressing specific models.
We have 65,000 of the Ms out in the field.
That is our proven technology.
That is the price leader.
There have been some misrepresentations also in the media where the X26 at $800 is competing against something that is a lower price point when in fact, the M26 is the price leader in this industry.
It's field proven.
It's been on the streets with law enforcement since 2000.
There are 65,000 of them in the marketplace.
We have that covered at $400.
So with the M26 at $400 and the X26 at 800, we have the price side covered.
Obviously you can see from the data, with over 20,000 X26s, law enforcement are more concerned about the use of the technology, the size, and the success that the product is showing in the field over the last few years.
We go to the next slide.
We'll take a look at cartridge sales. 245,769 cartridges were sold during the quarter.
These data are a little different than we reported previously as well because we did consolidate to look at every single cartridge, which does account for the consumer cartridges as well.
Our ratio is 11 cartridges per Taser that was sold.
We believe that was related to primarily to an anomaly with one of the larger orders this quarter having a lower number of cartridges per Taser going out the door.
It was only four per Taser.
Some of the agencies are ordering a higher number and a higher ratio.
That is down a little bit from the previous quarter where we did recognize a large military order where the proportion was the other direction.
There were a lot more cartridges per Taser out the door.
We take a look at the next slide.
We're looking at full deployments.
We are at now 1,468 full deployments.
That is a 27.5 percent increase, up from 1,151 in the previous quarter.
I think this goes back to the core of the product being used on every patrol officer with people that have seen the results for themselves.
The field-proven technology is doing what we say it's doing.
It's showing that the agencies that have experience with the product are continuing to adapt the technology and being able to provide it to every one of the officers in their department as soon as they can get budgets available.
The next slide we're going to look at is the market penetration.
We were up 18.5 percent to 11.5 percent of the market penetration in this quarter showing that the technology is continuing to be adopted.
Yet it is also showing there is still a large market potential for future growth even in our domestic market.
I think we also need to point out the fact that, while we don't tract specifically agencies – we talked about that previously.
We do have to report that we are now confirmed over 7,000 agencies are using this technology.
As we do get updates on that we'll keep it going forward.
This is a more accurate representation of 11.5 market penetration in this area.
With that, we'll turn it over to Kathy as we get through an operations update.
Kathleen Hanrahan - COO
Good morning.
This quarter was a challenging quarter for the operations department as a result of both spender and operator inefficiencies coupled with fewer production days in the fourth quarter.
Our production yields decreased resulting in a decline in gross margins from Q3 of this year.
Additionally margins were impacted by a shift in product mix and a reduction in our average selling price on our product.
During the quarter we completed the first phase of the ERP implementation, which included the functions of purchasing, inventory control, and production control.
The new system will improve our logistic efficiencies as we move forward in 2005, but created a short-term impact on throughput during the quarter.
To improve production yields on a going forward basis and to streamline operations, the operations division was reorganized in Q4.
Manufacturing engineering was segregated in R&D to focus resources on process improvements and line yields.
In total, manufacturing now has five dedicated engineers working on the lines with our assembly operators.
Next slide.
In 2005, the operations division will be focused on the following – moving to our new 100,000 square foot manufacturing facility; installing new processing equipment to increase production yields both for our weapons and ammunition; qualifying new vendors for critical manufacturing operations; expand the area of incoming inspection; prepare for phase II ERP implementation, which is automated tracking of our production yields; complete the documentation and training for all manufacturing processes; and build adequate inventory to carry the Company through the late quarter move.
With that I'd like to turn it over to Dan Behrendt, our Chief Financial Officer to discuss the financial results.
Dan Behrendt
Thank you.
You see for the quarter, we had sales in the quarter of $19.25 million for the quarter.
That is an increase of 79 percent over the fourth quarter of 2003.
Also, we did include the product portion of the Davidson's sales in the revenues for the quarter.
We've deferred the revenues associated with future training.
We'll recognize that revenue as the training occurs in the future.
Gross profits for the quarter were $12.5 million or 65 percent of sales.
That is up 72 percent versus the fourth quarter of the prior year.
Our net income for the quarter was $4.9 million or 25.75 percent of sales.
That is up 77 percent versus the prior year.
Our total year net income, as Rick reported, is $19.1 million or 28.3 percent of sales.
On the next slide, we'll see the breakout of our expenses for the quarter and for the year.
As Kathy mentioned, cost of sales for the fourth quarter is up versus the average for the year and the third quarter due to lower production yields and some price and mix changes.
Our SG&A expenses were also up this quarter due to increases in public relations and crisis management expenses for the quarter, insurance, headcount, depreciation due to some of the capital we've been spending during the year including the new ERP system.
We also had some trade show and travel in the quarter, specifically the IACP conference that we had in the fourth quarter.
Operating income for the quarter was 41 percent.
It's 46 percent for the total year.
This compares to 31 percent in the prior year.
R&D expenses for the quarter were up about $100,000 over the prior quarter.
We mentioned last call that we'll continue to invest in R&D as we go forward to leverage our technology.
On the next slide you'll see our earnings per share for the quarter.
We had $0.08 in the fourth quarter on both the diluted and basic share counts.
That is down versus the prior quarter, but still a strong EPS overall.
On the next slide, we'll cover the cash flow for the quarter.
Cash provided from operations was $8 million in the fourth quarter.
We've got $30.3 million of cash flow from operations for the year.
In the fourth quarter we also spent an additional $5.3 million in CapEx.
We've spent, at this point, $11.3 million for 2004 in CapEx primarily on the new headquarters facility.
We spent almost $9 million on the headquarters this year and also investments into the ERP system and other computer systems is about $1.7 million invested in that in 2004.
I am happy to report, though, we did finish the year with over $50 million of cash and investments.
As you'll see on the next slide, you can see the increases in cash during the year.
We started the year with under $16 million of cash and ended the year with over $50 million of cash investments.
You can see the steady climb during the year due to strong operating results.
Also you'll see the impact of this on the interest income that we've earned in the fourth quarter.
We had over $250,000 of interest income in the fourth quarter.
That is up 287 percent from the third quarter as we invest this excess cash to make this cash work for us and see some interest income as well.
On the next slide we cover some balance sheet statistics.
For the quarter we had—finished the year with $63.1 million of working capital.
That is up $9.5 million from the prior quarter.
That is driven mostly by increases in accounts receivable and inventory and also our cash assets that increased during the quarter offset by an increase in trade accounts payable during the fourth quarter.
As I mentioned, cash and investments are up $8.5 million during the quarter driven mostly by operating cash flow during the quarter.
We did see a significant increase in our total assets during the quarter, over $35 million increase in assets.
This is driven by increases in the cash balances, our deferred tax assets, and also investments in property, plant, and equipment during the quarter.
Liabilities increased during the quarter by $3 million to $9.2 million.
That is driven mostly by the trade-in piece (ph?) and timing differences at year end.
We did see an increase in the trade payables right at the end of the year.
Our equity increased over $30 million in the quarter driven by the earnings in the quarter, increases in tax assets, and some other impacts to equity.
I want to reiterate.
We did end the year with $50 in cash investments and no debt on our balance sheet.
I feel very good going into 2005 with the strength of the overall balance sheet.
With that I'll turn it back over to Rick.
Rick Smith - CEO
Okay.
Thank you Dan.
As we look forward to 2005, as we mentioned in our press release it is a challenging year.
Luckily we've got a group of people here that enjoy a good challenge.
We look forward to 2005 and the new market opportunities we see.
Particularly the consumer market is a big potential.
The international markets – I know we've talked for years about the international opportunity.
We just don't know when they are going to develop into big numbers.
What we do know is we're moving forward.
The results we're getting back from the agencies evaluating the Taser are positive.
The officers like it.
The approval from the UK was obviously tremendous.
We didn't see as much business come out of that primarily because officers in the UK, just like in the US, are preferring the X26.
We think they are being patient waiting for that approval.
We see lots of opportunities to grow the business.
The world can be our oyster.
But we've got some fires to fight.
We've got to do our jobs here and continue to stay focused.
I think also we've seen a continuing full deployment trend.
That is the most encouraging.
The agencies that are deploying our weapons are seeing the results.
They are continuing to expand their deployments.
Where I think the recent controversies will frankly hurt us is with new agencies that don’t yet have Taser experience of their own to rely upon.
They are more susceptible to some of the conjecture out in the public markets.
That makes it more difficult for us to get them to look at the underlying factual data.
That is our job.
That is what we're going to do is get that date out in front of them.
Also, new products.
We have not been sitting on our hands here at TASER.
As Kathy talked about, we split R&D off.
A year ago we had basically, I think, five people in engineering and R&D in a combined group.
Those five people were doing our product development and supporting our manufacturing growth.
As you can imagine, supporting 175 percent revenue growth was significant.
We've now split that off.
We've got five dedicated engineers in the manufacturing area and ten engineers dedicated solely to R&D split into four product development teams.
We have four significant products or technologies in development.
No, I cannot talk about them all right now.
You've seen what we've done in the past and the creative juices are flowing at TASER International.
When you see what's coming, I think you'll be happy.
The next item is the new TASER headquarters.
Let me go ahead and move forward to the next slide.
We'll show a picture that was just taken yesterday of our new headquarters.
It's 100,000 square feet.
It is absolutely breathtaking to me – the concept of us moving into this place.
We'll have plenty of space.
It is an extremely advanced design.
The entire building is built around a three-story atrium with catwalks interconnecting the levels across.
This is a fully biometric facility.
In terms of security, there is not a key in the place other than for your filing cabinet.
Every access control is covered with an iris scanner.
We can assign guest privileges by time-of-day by 56 access control points where people can go or not go in the building.
It will improve our security dramatically.
We also think that having this facility will do a lot for the Company's image and our relationship with our customers.
We're obviously dealing with government agencies.
I think they will be very pleased to see the resources we are able to dedicate to supporting our products and our technology going forward.
We'll also be introducing the TASER Academy.
Right now we're sponsoring courses across the country, between 30 and 40 a month, TASER courses.
We will now begin adding courses taught — the goal is to have them taught every week at our headquarters where officers can come in, be trained in the Taser as an instructor on site and receive additional training, plant tours, insights into weapon maintenance etc.
That will be especially amenable in our new facility.
We think that will do a lot also to build our relationships with our customers by bringing them out to see who we are as exemplified now in glass and steel in our new facility.
We invite everybody to our ribbon cutting ceremony.
It's currently scheduled for March 11.
The TASER shareholder meeting will be held on April 22 at our new headquarters here in Scottsdale.
With that, any questions?
As you know, we missed a voice on this conference call.
That is our father and mentor.
Phil Smith has moved on into retirement.
He is having a great time and taking a well deserved break.
Marcy Rigoni, who is here, has taken over our Investor Relations.
For those who have talked to her, hopefully you've had a chance to get to know Marcy.
She's got big shoes to fill, but she is doing a great job.
With that let's turn it over and take a couple calls.
Operator
Thank you. (OPERATOR INSTRUCTIONS) Eric Medal, Sprott Asset Management.
Eric Medal - Analyst
Morning Rick and Tom.
With this year being somewhat of a focus on the international potential, could you list off some of the countries that are either testing your products or you're in discussions with and what type of timelines and potential each of those countries represent.
Tom Smith - Pres
I think that's a great question.
We – I'm not going to go through all of them.
We are in 45 different countries around the world.
We also, which I think I did not point out during the call and now is a great time to do that – hired a Vice-President of International, Steve Ward.
He is now based and living in Europe.
We believe Europe is going to move in a big way this year.
We have placed him full time to live in Europe and focus on the European markets.
France is one country I also want to talk about because they did wrap up their field trials.
There are three reports that are being written.
Two of those reports are completed.
One of the reports related to the successful results from the field test.
We have not seen the report.
The feedback that we have is that it is a positive report.
The other report is a technical report on the Tasers.
They did their own evaluation.
We haven't seen it.
We believe it is to be a positive report.
There is a third report that they are waiting for.
There is no specific timeframe for that report.
That relates to the budget.
In other words, where are they going to get the money to pay for this.
Those things do take time.
I said there is no specific timeframe on when that report will be finished.
Obviously we're very excited about the fact that it is a budget report because it is addressing the fact that they are going to purchase these and where are they going to find the money.
They are continuing to use the Tasers that they have there.
I think France, the United Kingdom, South Korean, Australia – those are the big four that we're focused on this year where we expect to see some orders.
And the Canadians.
I talked about receiving one of those orders.
There are several others that we're aware of that I think we'll be continuing to look for.
Singapore is a new country that has evaluated this.
They took three years to do so.
I do think we're going to see some big opportunities internationally this year.
The four primary ones that I'm going to be focused on are the United Kingdom, France, Australia, and South Korea.
I think the other countries like Finland and Sweden will move forward.
They will be a smaller scale than those larger four.
Eric Medal - Analyst
Tom, what type of market potential are we talking about for those big four countries?
Tom Smith - Pres
I think the market—it's a very large market.
It's harder to decide.
I think we've talked about this on previous calls.
In the United States there are 18,000 agencies.
Each agency can make their own decision.
When you go overseas, for example, the United Kingdom you have one decision-maker.
It's at the cabinet level within in the government that makes the decision for the entire country.
In a lot of these countries we're facing, they have to make decisions at that level for this to move forward.
I think in the United Kingdom, it's over 100,000 officers.
In France, it's over 300,000 officers.
Just for those two countries, I think that's a huge potential.
Australia, one Province down there has over 15,000 officers.
There are seven different states within the country of Australia.
All seven states are using this.
We did participate in a conference down there in 2004 and received very positive results and did do a fair amount of training.
South Korea has got over 35,000 law enforcement officers just at the national police level and then many more at the city and state level.
I do think there is a lot of potential there.
How quickly they are going to move towards full deployment – that's what we're trying to get our hands around.
Eric Medal - Analyst
Right, okay.
Second question is in regards to the Tapum. (ph) Could we get somewhat of an update in that R&D development and possible timeframes over the next couple years?
Rick Smith - CEO
On the Tapum, we did some live demonstrations in 2004 with the customer with fully functional prototypes.
I believe at this point we are looking at the potential for urgent needs request for limited scale production to get units out and get them field tested in the field.
In terms of overall timeframes for significant orders, we're generally hearing that if we're on a standard procurement process, we're probably looking at somewhere in 2008.
However if we get this urgent needs request and we can get units fielded, which could happen in 2005, then we would get limited units in the field.
Once we get that accomplished – in terms of getting the tooling done and being in production, that is something we can accomplish fairly quickly.
So it really comes down to how fast we can get through the approval process with the DOD.
I would say earliest for significant orders is probably 2006.
More likely it could be 2007, 2008 till we start to see some significant numbers.
We continue to get affirmative feedback in the operation of the device.
The prototypes are working.
They are doing the job they are supposed to do.
Now it's just a matter of moving the machinery forward to get them deployed in the field.
Eric Medal - Analyst
My last question is about the potential entry of competition.
There has been a lot of conjecture in The New York Times and Arizona Republic and even by some Wall Street analysts that you face some imminent and serious competitive risk in Stinger and law enforcements and what not.
Could you address it from your own R&D developments or analysis and whether you think it's actually credible threats over the next six to twelve months in your markets.
Rick Smith - CEO
I thought for a minute there you were going to get to start talking about R&D.
I'm not going to talk too much about future products other than we've got some good stuff ourselves in the works.
What I would say is, when we entered this law enforcement market in 1998, we were dealing with an entrenched competitor with TazerTron, (ph) who had a 20-year head start on us.
We found it was, even with vastly superior technology – and we were really focused on the marketplace – it took us quite a while to displace them.
There are significant first-mover advantages.
But we competed very effectively.
We effectively took the market from TazerTron and ended up buying them out in 2003.
Since then we've not had a competitor.
There are some announcements as far as products that should be coming out.
We've got our eye on them.
We have not yet seen a functional unit in the marketplace.
Don't underestimate anybody.
Based on what we see today we feel very good about our competitive position.
We are entrenched firmly in over 7,000 agencies that have already taken the time to train their officers.
There are significant switching costs both logistically in terms of product.
Frankly based on what I've seen, my personal opinion is that our X26 is significantly superior to anything that's been unveiled by my way of thinking.
We're going to have to wait and see if and when these product show up in the marketplace.
Rest assured we have a fairly intricate plan in terms of what we're doing with this Company to maintain our market leadership.
That plan includes elements of our customer service and support.
There are sales and marketing elements.
There are some new product elements to that plan.
In 2005 – this had made it more interesting for us.
There is a chance for us to get out and stretch our legs.
A little bit of competition.
It will be interesting.
We're certainly ready for it.
We think our intellectual property portfolio is strong, but not nearly as strong as our market strength and our distribution with our customers.
You can't underestimate the power of what we've been able to build in the marketplace over the past couple of years.
Tom Smith - Pres
I also think that it's important to note that we do have price covered.
I know that has been one of the things that has been touted.
We do have the M26.
It's been out there for four years at $400 and the X26 at 800.
We do have a price leader in the marketplace.
The medical studies and the evaluation that has been done on this technology is unprecedented in law enforcement in terms of non-lethal weapons.
We've got four years, dozens and dozens of independent reports, research reports we've funded on our own.
That is going to take a long time to get up to speed as well.
We have international countries that have done the same thing – Canada, the United Kingdom, Austria, Australia – all have done their own independent research and submitted reports to that.
That is going to take a long time to do.
Rick Smith - CEO
I think it's important to note we do have either patents or patents pending on the electrical wave forms that our devices emit that were the subject of these tests.
The potential competitors have announced they are using different wave forms.
They start from ground zero.
We're dealing with a highly entrenched and focused TASER International.
You've seen our war chest build up over the past several years.
We've had every investment banker in the country coming to us about all the acquisitions that they want to put in front of us.
Our response has been, we're onto something here at TASER.
The Company is growing rapidly.
There are major opportunities.
We are not going to get defocused by dinking around, going out and buying some unrelated business.
We are going to stay focused on the business we're in now.
It's profitable.
We believe it's highly defensible.
This year we'll have a chance to see how that strategy plays out.
Kathleen Hanrahan - COO
The other advantage we have is the number of years we've been building the product.
We've been doing this for 11 years.
There are a lot of trade secrets and experience that have been gained over that period of time.
Eric Medal - Analyst
That's great.
Thanks a lot.
Operator
Sada Parick (ph) of the Robbins Group.
Sada Parick - Analyst
You just talked a bit more about R&D on new products.
Can you elaborate on that specifically with respect to the timeline as to when you think these products will materialize and what possible impact that might have on sales.
Tom Smith - Pres
That's a great question.
As I mentioned in my portion of the call, we introduced two new products during the fourth quarter, the X-rail and the 25-foot cartridge.
I am going to have Rick talk further about the other products.
We are continuing to do that.
We did introduce two new ones during the quarter with one of them extending our range.
Rick Smith - CEO
Okay.
In terms of the Tapum, we already talked about that.
That is several years out in terms of the military purchases, most likely, although we may see some acceleration there.
On the long range wireless projectile, we're anticipating that we're probably a year out from completion of the development work and then transitioning into manufacturing most likely in 2006.
We've got the video DPM, the video recording capability for the X26, which gives us a new product to go back and sell our significant install base.
The VDPM – we anticipate completion in the second quarter.
The fourth significant project is a black project so I am not going to talk about what it is or when it is coming.
Just stay tuned.
Sada Parick - Analyst
Any idea of what it can be in terms of sales later on?
Rick Smith - CEO
Again, I'm not going to comment on the black projects.
Those will come out when we're ready to announce them.
Sada Parick - Analyst
Okay.
Also, you talked about XRM (ph) being completed – or development being completed on the XRM by the end of – say within the next one year or two years.
Do you also expect commercialization of these products by then or (multiple speakers) ?
Rick Smith - CEO
We would expect commercialization in 2006.
Sada Parick - Analyst
In 2006.
Do you see this as a replacement to existing weapons, the X26 or the M26, or would it be a different wave form?
What would that be?
Rick Smith - CEO
We would view that as a new market.
The projectiles will be launched from rifle-type systems – shoulder mounted, so they would not be something that an officer would carry on their belt.
It is like the difference between a shotgun or a sniper rifle and a pistol.
They serve different needs in different markets.
We do see that, even once these new technologies come out, for the next several years, we believe the handheld wired systems will be the mainstay of our revenue streams while the wireless technology – and again, we've proven the core technology.
We are now in the engineering for manufacturing phase.
We've proven the core.
We've had human volunteers with the output of the device.
That is going to put us into a new market – the extended range, shoulder-launched type of market.
We think that will be accretive and incremental to both revenue and earnings, not cannibalizing our existing product sales.
Sada Parick - Analyst
Moving onto competition.
I know you've already talked about it.
Can you elaborate a bit more on whether the existence of any potential competition has influenced any of your international orders.
Domestic I think you've elaborated quite a bit.
Can you comment on the impact of this potential competition on international orders?
Rick Smith - CEO
Tom, do you want to talk to that one?
Tom Smith - Pres
I'm sorry.
Rick Smith - CEO
The question was on international orders.
I'll start and then let you chime in.
We did see some delays, for example, in Singapore.
The Singaporeans, when the announcements first came out, were talking about delaying the order.
I think we were able to work through those issues.
Obviously they have moved forward.
In the international markets, even the X26, which we introduced almost two years ago – or 18 months ago – we're still waiting for the final approvals in the UK.
There is a long year, two-year, three-year lead time that it takes to get things evaluated in these countries.
We don't think that we're going to see – again, when the products show up, we think we're ready to take them on the marketplace.
I don't think we're going to lose any orders.
Well, I shouldn't say that.
I think we're going to continue to win the lion's share of the orders in the marketplace regardless.
International markets – we don't see that they are going to slow down and take the years to evaluate something when we've gotten the results we got with our technology today.
It is a concern and it does—it keeps us busy.
We've got to go out and answer the questions and continue to promote the product.
Sada Parick - Analyst
Don't you think this should have an impact on pricing?
I know you've talked about M26 and X26 being at two different price points.
I would still tend to think that competition will tend to influence your mainstream product, which seems to be the X26 at this point.
Rick Smith - CEO
We reserve the rights to do whatever we need to to manage our business most effectively.
At this point we don't have any active plans to adjust the pricing.
We don't see this as a – we believe our pricing structure has the right product elements to cover the different price segments.
For those people that are price sensitive, the M26 is a fantastic solution.
The X has got a ton of technology in it.
I'm not going to say that we wouldn't.
But at this point in time, we don't plan on getting drug into a price war.
We just don't think that is the right business model for us.
Tom Smith - Pres
And I quite frankly think the return on investment to these agencies is very, very fast.
If you look at the models that we prepare on a cost/benefit analysis for the departments that we've send out, you are talking about – a conservative approach – showing a 15-month return on investment.
I think the law enforcement – they are more concerned on the performance of the product.
The price is certainly a concern, but it is not the priority like for example, if you were competing with soap or some more readily-available commodity.
This is a product that they have to depend on for their lives and for the lives of the suspects.
They are going to look more at the performance of the product.
As Rick mentioned, the M26 is our field-proven product.
It's our price leader at $400.
The X26 has now got 18 months under its belt being field proven.
Both of these products have been looked at medically.
And then we have the price range covered between $400 and $800.
I don't see any adjustments at this point in time.
Sada Parick - Analyst
Okay.
Can you also elaborate on the activity in consumer markets.
I know you had some test advertising campaigns for the X26C.
Can you comment on what kind of activity you are seeing there?
Rick Smith - CEO
For competitive and other reasons we're not going to go giving a whole lot of details on our test market per se.
I would say this.
We did a test market in the Phoenix, Arizona area and selling online through an 800 number and the web store.
Then we opened a few dealers here in the Phoenix area.
Our primary focus was through online sales.
I would say the one thing that we learned was that I'd say the online sales underperformed our expectations.
The retail stores exceeded our expectations.
It seems that, in looking back on it you can always know the answer when it's done.
I think what we learned is that with a product like this that is so new and different, the consumer needs to touch it and see it and have somebody explain it to them.
They can't just log on and look at a picture on a website like you do with a computer and purchase online.
So while we are maintaining our online distribution capabilities, we have determined that the right way to distribute was through retail outlets.
Davidson's obviously has access to a significant number of retail stores.
We're not going to give out the actual sales data for the stores here in Scottsdale because we don't want our investors to take those number and multiple by 8,000 and start speculating on what the national results will be.
The store results in Phoenix were better than expected.
Now the challenge for us is to see how scalable that is.
Obviously in Phoenix – we're based here.
We get a lot of publicity.
We need to see how well we can scale that up across the nation.
We are seeing sell-through.
As of the last time I checked with our consumer sales manager, every store that had bought the X26Cs had sold them, or at least was experiencing good sell through.
So that's a good data point.
At the end of the day, that is what will drive the business is sell through at the other end.
It is going to take time and effort for us to educate the market.
For example, we're doing things like sending a police officer in to train every one of the dealers so that they really get the product knowledge.
We're providing point-of-purchase displays and DVDs.
For every consumer they get a certificate for a one-on-one training class with a police officer.
We're getting feedback that the consumers who have gone through that, absolutely love it.
They feel very comfortable with it.
We're counting on that experience being so positive that they are going to share that with other consumers.
The thought leaders and the innovators will help drive from the early adopters to the mass markets.
It is going to take time.
You hear caution from us.
We don't want people to run out and start all of sudden assuming 8,000 dealers are going to be selling these tomorrow.
It's going to take time.
We think – I'm much more optimistic now than I was last year.
The stores in Phoenix did better than we've seen with past consumer introductions.
Sada Parick - Analyst
Okay.
Finally can you comment on the outlook.
I know at the end of last year you gave some guidance as to what 2004 might turn out to be.
Can you give us some similar data points as to what you think, or the Company internally thinks 2005 might turn out to be.
Rick Smith - CEO
At this point we obviously have internal numbers we're working towards.
The standard deviation is plus or minus about 89 percent.
There is a huge world of opportunities.
If we see significant international full deployments, we could see tremendous growth this year.
Alternatively, as we've mentioned, so far the first quarter in January we saw a disruption in our business.
You don't withstand the sort of tremendous adverse publicity that we've seen without it impacting your customer base.
January was slower than expected.
We had a lot of agencies we were working up that pulled off to the side to see what was going to happen with the public controversy.
That seems to be slowing down.
That controversy that is.
When we are out working it, we're getting the facts in front of these people.
We got a major order off the dime in Canada.
We got the Alaska State Patrol to move with a significant order.
We're starting to see business moving again.
We think it would be counterproductive for us.
Right now we just don't have the visibility.
I'd say we're [in clause], which is fog of war.
Right now we're fighting the battles.
We've got to win the battles at hand.
As soon as we get that to calm down and we can get a better track, then we'll be able to give you better visibility.
Long-term, I'm as excited as ever.
The other thing I think I ought to point out is the management team that is here, the majority of us have been here for a decade.
We fought this battle back when Tasers weren't popular or sexy back in 1998 when we didn't have money to pay the light bills and we had vendors that were six months overdue.
Sitting here today, yes we've got challenges.
But we've got 50 million in the bank.
We've got customers that love us.
We're focused.
We know that there are opportunities to keep growing the business.
We don't want to give you any sense of short-term comfort until we can get through the challenges facing us.
Sada Parick - Analyst
Sure.
And final question for Dan.
Dan, what level of gross margins and SG&A should we assume going forward?
Dan Behrendt
Obviously as Kathy addressed, we've got plans in place to address the operating inefficiencies we had in the fourth quarter.
I think that we're working hard to improve the margins as we move forward as we address those issues.
On the SG&A side, we did have some issues in the fourth quarter with some higher expenses levels.
I think as we look into 2005, our expenses are – we're going to have to continue to invest in this business to protect our space.
So I don't see a dramatic decrease going into 2005.
I think this expense level for the most part, will continue.
Rick Smith - CEO
I would add this.
In the first half of 2005, we may see some extraordinary expenses beyond our baseline.
Particularly as we deal with the legislative issues in the areas of lobbying, public relations, and advertising, we might see some above-normal one-time expenses.
Now is the time for us.
We don't want to risk losing a bill in a key city or state because we didn't put the resources behind it.
Sada Parick - Analyst
Alright.
Thank you gentlemen.
Operator
Jim Baker.
Please proceed.
Jim Baker - Analyst
Good morning.
I understand, as we all do that you cannot project revenues in the business.
You've explained that very well, Rick.
So let me ask a different question.
Do you plan – is there any estimate or can you throw off something – this is for Kathy or Dan.
If you—when you get to operating that plant two shifts a day – whenever that happens based on whenever these new products come on line etc., etc., what is the maximum revenue if you could throw a guess out there.
What is the maximum gross revenue the new plant can provide before you run out of capacity?
Kathleen Hanrahan - COO
Right now we're estimating that number to be about 500 million in revenue.
We have a lot of growth opportunity on the operations side.
Tom Smith - Pres
That's the same number Phil Smith gave me a year and a half ago.
He was pretty good.
He probably got it from you, Kathy.
Rick Smith - CEO
He's dangerous with the back of an envelop.
Jim Baker - Analyst
Congratulations, folks.
You are doing a great job.
You've got a great company and a great product.
We're glad to be investors with you.
Rick Smith - CEO
Come see us at our shareholder meeting and ribbon cutting ceremony.
We're really proud of that new plant.
Jim Baker - Analyst
Anyone driving around 101 – it's just startling.
It's the best-looking building I've seen in the valley yet.
The spectacle of that beautiful place right off the 101 freeway is just really amazing.
Rick, I understand you had a lot to do with the design.
If that is so, whoever did it, congratulations.
That's a beautiful building – the most interesting building in the valley.
Rick Smith - CEO
Thank you.
Thank you.
Operator
Jim Stone of PS Can Advisors (ph).
Jim Stone - Analyst
Good morning gentlemen.
A couple of questions relating to the numbers.
The deferred tax revenue item – is that just income taxes that are due?
Dan Behrendt
Yes.
Essentially that is our income tax asset that has been created based on the tax losses that are on the books.
That will offset future income tax expense.
Jim Stone - Analyst
Okay.
You are talking about 50,000 cash.
In the presentation you are showing 31,000 on the balance sheet in your report.
What was that other 20,000?
Dan Behrendt
There is another $18 million in long-term investments.
Jim Stone - Analyst
Got you.
Rick Smith - CEO
Basically we've been sitting on a lot of cash in liquid cash flow yield accounts.
Dan has started moving that around to put some of our war chest in a little longer yield stuff that is yielding better interest rates.
He has done a fantastic job, I think, as we saw the interest income improve by over 200 percent in the last quarter-over-quarter.
Jim Stone - Analyst
Okay.
I know you just discussed this a few moments ago.
In terms of doing our modeling, could you be a little more precise in helping us with where you expect SG&A expenses and R&D expenses to be and margins.
In other words, the model – not the top line number, but the model (indiscernible) flowing from that.
Dan Behrendt
I think from the gross margin perspective, I think Kathy has got lots of projects in place to make improvements in the gross margin and improve the operating efficiencies.
Going into the new facility is certainly going to help in that regard.
It's going to be a much more efficient layouts.
It should definitely be – there are plenty of projects (indiscernible) to improve the results from that perspective.
On the SG&A side, it's a little tougher to predict right now just because of some of the things we're facing.
We will continue to invest in the business to make sure we protect our market share and make sure that we own this space.
I think at this point it's tough to give you a specific number.
Jim Stone - Analyst
I am wondering if you might be able to give us a range.
In other words, do you think gross margins will get back to where they have been?
Are they going to stay in this range?
Improve a point or two?
I'm not asking for the three decimal point type of guidance, but just some sort of a range of where you're headed.
Speaking of the move, is there going to be a large charge for the physical move?
Rick Smith - CEO
Let me step in.
On the overall margin issue, assuming that we stay in the same general production range and revenue range that we're in right now for the year, it would probably be comparable to somewhere between maybe where the fourth quarter was and where the 2004 annual number, is probably a pretty good ballpark on margin.
In terms of SG&A, of course, that is really going to depend on – as a percentage that is going to be hard to prognosticate without giving you a top line number.
In terms of the actual expense level in SG&A, I would say it's probably going to be comparable and increasing from fourth quarter levels, although I wouldn't say increasing dramatically.
Other than the extraordinary expenses in the first half of the year, we haven't yet determined the final—how much we're going to spend.
We're putting the plan together right now in our crisis response.
You should anticipate in the first and second quarter you may see some significant one-time up-tick expenses in the first half of the year in SG&A.
In R&D, I think this year we're planning on spending – our is to be probably somewhere between $2 million and $3 million spent on R&D, some of which will be offset by these research grants.
Jim Stone - Analyst
Okay.
Then in terms of moving expenses, will that be a significant item?
Rick Smith - CEO
No, not really.
Kathy, Dan.
Dan Behrendt
No, we don't see that being a real significant cost.
We're moving a very short distance.
We're working with a local moving company.
We think that will not be a significant onetime charge.
Jim Stone - Analyst
Okay.
Thank you very much.
Operator
Dick Ryan of Feltl & Company.
Dick Ryan - Analyst
Can you provide a little bit insight into the legislation that you're running into.
You indicated the counterproductive legislation.
Is it on-off kind of instances?
Or is it becoming a more discernable trend?
Doug Klint - GC
It's definitely not a one-off.
We've seen several states introduce legislation.
We're finding out literally as we go along.
Some of it has just been people in the media talking about legislation and some of it has been bills that have actually been dropped.
We've actively engaged lobbyists in some of these states so that we can make sure we've got our hands around it.
I was up in Ohio last week testifying at a city council hearing regarding the use for citizens.
I wouldn't say there is a generic description of it on what is going on.
But it's definitely more than a one-off.
There are several states right now that have dropped bills.
I know Georgia is one that has been covered in the media.
California has been covered in the media with prominent politicians making discussion points on these.
As Rick said, we are engaged in enlisting help in those states.
I am going to be traveling and working with those states to make sure that they have the facts before – there is still a lot of misunderstanding about what the Taser is.
You can tell that from comments being made by these individuals.
We're going to make sure that they've got the information.
We're providing them the data and facts as they look as these different proposals.
Rick Smith - CEO
Let me also give you a little bit of background.
When we first introduced our Air Taser consumer product in late '94 early '95, we saw a similar reaction.
For example, the state of Minnesota introduced a bill to ban back in '95.
We went up and testified in front of the subcommittee with this very simple logic.
Ladies and gentlemen, the citizens of Minnesota can go out an buy a gun.
They can shoot and kill somebody.
Is it sane public policy to deny them the right to a non-lethal weapon where they can defend themselves without killing somebody?
That bill was unanimously voted down in the state Senate.
The state of Florida introduced a bill a number of years ago.
We actually helped them craft a bill that added meaningful legislation that required the user registration and tracking systems that we've employed.
The state of Arizona has now introduced a bill.
We've been working with police officer unions here in this state.
We're supportive of the bill in Arizona.
It increases criminal penalties.
It requires a level playing field.
When competitors do come into this space, they've got to be as responsible as we've been.
They've got to register their devices.
They've got to have tracking elements.
So if it's used in the commission of a crime, it leaves ID tags behind just as we've done at our own time and expense.
We think that that does make sense to be required so that there is a level and responsible playing field.
That is our plan in going to California and some of these other states – California, Kansas, and Georgia that have introduced that we think are currently aren't as well thought out.
Based on our track history, we think we've got a very good chance to provide the legislators with good information so they can come up with reasonable regulation that accomplishes their task, their goal of ensuring responsible distribution of these products.
But it's going to take some time and work.
Doug Klint - GC
And as part of that legislation, we also want to promote the fact that if the Taser technology that we have or another similar technology is misused, that the legal action against that individual is higher, especially if it is used against law enforcement.
We believe that should be a felony.
As part of the legislation we're also addressing concerns that, if it is misused, people are responsible for their actions and that it is more than just a slap on the wrist.
Dick Ryan - Analyst
Is the legislation more for the consumer side or the law enforcement side?
Rick Smith - CEO
I would say the bigger risk is the consumer side.
Some of the bills, like the one in Georgia, I think would ban it—would suspend it for law enforcement use.
Doug Klint - GC
But it didn't narrow it down.
It just said, suspend use of Tasers.
Rick Smith - CEO
And you can rest assured we're mobilizing.
There are lots of law enforcement agencies using Tasers in Georgia.
They are fairly effective and powerful lobbying groups that will be mobilizing to help support us and making sure that this live saving option is not taken away from those police officers.
Then in some states, like California, they are looking at the consumer issue.
That is one where we're building a base of support.
Even, for example, here in Arizona, the law enforcement unions came out and said they would rather show up to a scene where the consumer has a Taser than where the consumer has a gun.
It makes their job safer and they don't have to clean up the horrible tragic results when a lethal weapon is used.
We are building that support.
It's not risk free.
It's not to say we'll win all these.
Politics is unpredictable.
We've got a good track record.
We're investing the time and effort to do it right and put up the good fight.
Dick Ryan - Analyst
Any field performance issues out there that you are hearing about?
Rick Smith - CEO
Absolutely.
The device is not 100 percent.
We spend a lot of time in our raining with police officers on what to expect when they deploy it in the field.
Causes for ineffectiveness include people with very heavy clothing.
The number one cause of ineffectiveness is if you miss the target.
We continue to have those issues.
As we talked about earlier in the year, the Taser is a complex device.
It is more similar to a cell phone or a computer than to a night stick.
Accordingly we do get returns.
We get weapons that break in the field.
They are highly complex electronic devices.
I think we do get rave reviews overall on our customer service.
When there are product issues, we stand behind them.
We have a significant focus on reducing turn times and getting repairs or replacement units back to customers.
We're not infallible and neither is our product.
At the end of the day we continue to get great overall results.
Tom Smith - Pres
We're seeing about a 95 percent field effectiveness use on the reports that we're getting back from the agencies.
It's 95 percent out of 100.
So there are situations where it is not going to be effective.
In the vast majority of the cases, it is saving lives.
It is being used very, very successfully.
Law enforcement – I think the overall sentiment has been – quotes I am hearing is this is the greatest invention in the last 30 years in law enforcement.
That is coming from our user base.
I think, despite not seeing a whole lot of attention from the media, giving the cheese credit.
But they are coming out and talking about the value of this technology and what it is doing for their communities.
Cincinnati reporting in the quarter a reduction in officer injuries of 70 percent.
Suspect injuries are down 40 percent.
Use of force complaints are down 50 percent.
I think those statistics are being tracked very, very closely.
They are being publicized.
We just going to make an effort with the agencies to get that out there in the hands of the media.
I know the media doesn't like to sell the life-saving benefits of this and the results.
But the facts speak for themselves.
That is what we're going to continue to promote and get law enforcement to do with us.
Dick Ryan - Analyst
Great, thank you.
Operator
This concludes today's question and answer segment.
I'd like to turn the call over to Mr. Smith for closing remarks.
Rick Smith - CEO
Again, as we sit here looking back at the last year, I want to reiterate how proud I am of the people at TASER and our dedicated employees on the year that we had.
We entered the year in some adverse circumstances last year.
We had a lot of challenges over the course of the year.
We were able to overcome them.
I wish I could give you better visibility into the short-term future.
But we can't.
We again are coming into a new year facing challenges, but with a team of people that's done it before, that's been battle hardened, that has had to do this without the resources that we have available today.
All I can promise to you as our shareholders is we remain dedicated to doing our best.
We live and breath this stuff.
We really believe we're saving lives and making a big difference.
At the end of the day, as long as we keep our customers happy, our customers will take care of our employees.
And our employees can take care of our shareholders.
That is where we're focused.
I look forward to a call a year from now when we look back at 2005 having overcome the challenges that face us today.
Thank you for your support.
We appreciate having you as shareholders.
For those customers on the line, you are the most important folks out there for us.
We appreciate your business.
We look forward to seeing everybody in our new facility.
Thank you.
Operator
Thank you for your participation in today's conference.
This concludes the presentation.
You may now disconnect.