Axon Enterprise Inc (AXON) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the first quarter 2005 TASER International Incorporated Earnings Conference Call. [OPERATOR INSTRUCTIONS].

I would now like to turn the presentation over to your host for today’s call, Mr. Phil Smith, Chairman of the TASER International.

Please proceed sir.

Thank you.

Good morning, and welcome to the call.

The reason I am here is Rick is unable to attend.

He is out in California.

There is legislation pending out there to ban the TASER for consumers.

Rick is out taking care of business.

So I am filling in this morning, along with Tom, and the rest of the team.

I’d like to just start out by saying, you probably noticed on our press release, we had less financial information than before.

There is no detailed income statements or balance sheets.

And the reason for that is, first of all, there is a lot of shareholder litigation going on.

We have to be ultra careful about what we put out before the Q. And we’re really getting back to what more companies typically do.

It’s more industry standard to wait until the Q comes out for the detailed financial information.

So that’s why there is none with the press release.

That was intentional.

And we’ll probably continue that practice going forward.

So, with that, I’d like to turn it over to Doug Klint, our General Counsel.

And he will read you the Safe Harbor statement.

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, the expansion of private sales to the private security, military, and consumer self-defense market, growth expectations for new and existing accounts, expansion and 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 endorsement of key opinion leaders in the law enforcement community, the level of private technology and price competition for our products, the degree and rate of growth of the markets in which we compete, and the accompanying demand for our products [inaudible] based on domestic orders, implementation and risk of manufacturing automation, risk associated with rapid technological change, execution and implementation, risks of new technology, new product introduction risks, ramping manufacture and production to meet demand, litigation results from alleged product related injuries, media publicity concerning allegations of death occurring after use of the TASER device, and the negative impact this could have on sales, private quality risks, potential fluctuations in quarterly operating results, competition, financial and budgetary constraints of prospects and customers, dependence upon sole and limited store suppliers, fluctuations in component pricing, risks to governmental regulations, dependence upon key employees, employee retention risks, and other factors detailed in the Company’s filing with the Securities & Exchange Commission.

I would now like to turn the call over to Tom Smith, our President.

Good morning.

We’re going to talk about the quarter.

Obviously this was a disappointing quarter for us.

The last time we had a quarter like this was back in the third quarter of 2001.

But we’re going to talk about a number of factors today, including just the numbers of the quarter, but also our strategy on how we get out.

So let me start by addressing, some of you may have seen the movie The Perfect Storm.

And for us, that’s what we feel like this first quarter has been in terms of the way the market and the customers have reacted.

And what I mean by that is we’ve been addressing a lot of media mis-information that’s been put out there in regards to our safety concerns.

There’s been, obviously, a lot of discussion about what has and hasn’t been studied.

And we’ve had to spend a great deal of effort to go around and educate people on the facts.

And Rick is in California today doing exactly that with the legislators.

He’s been up there for several weeks doing that.

And I’ve been doing the same thing in numerous cities around the country.

And once we get in front of people and are able to provide what the facts are, and to give them the safety information, the data really does speak for itself, and is very, very compelling.

We’ve also had questions on our accounting practices, specifically on the Davidson’s order.

In specific, the Deloitte & Touche audit reviewed the accounting that was done on Davidson’s transaction.

Dan will get into more detail on that specific transaction.

It was included in our numbers release on February 8.

And again, after very extreme scrutiny on that particular transaction, it was also included in the numbers that we put out on our 10-K filed at the end of the year.

So we’re very confident in the practices that we do.

And we’re very conservative from our accounting perspective.

We also have the numerous shareholder lawsuits that are ongoing, that are currently being addressed by our legal team.

Those are being consolidated at this time.

But again, it’s a focus that we have to address.

And that’s one of the reasons for the changes you’ve seen come out with our recent numbers for the first quarter.

The SEC informal inquiry is something we’ve obviously had to address during the first quarter.

I want to reiterate, as we’ve said previously, there is no time table for when this SEC is going to be ending.

I can tell you we have nothing to hide.

We are providing every bit of documentation that they are asking us for.

We have hired Wilson Santini, which is one of the most experienced legal firms.

And they have gone through all our documents that we have provided to the SEC, and we will continue to provide.

I can tell you that we here at TASER have gone back with a very critical eye, to look at all of the documents, and to review all of our material.

And I can tell you confidently we stand behind the statements that we have made, specifically in regard to our medical safety and to the accounting treatments of our transaction with Davidson’s that was inquired about.

Obviously we have also had some legislative efforts that looked at restricted or prohibiting TASER sales.

I think that those, again, when we’ve gotten in front of people and been able to address the sensationalism and mis-information presented in media headlines, and present people with the facts and the real data, the legislators are looking at this information.

And we’re being able to show them that they aren’t getting the whole story.

And when they see the whole story, they’re making smart legislative moves.

And we support very thoughtful legislation.

What we don’t want to happen is that the knee-jerk reactions, based on hype and misinformation done, that we seem to have to face on numerous fronts.

The perceived competition has been addressed, we haven’t seen these people in the field yet.

They’ve been talking about it for several months.

We’ve yet to see a single unit appear in the field.

And again, that’s been part of this perfect storm.

And then, obviously, the sharp sales decline that we saw in quarter one just helped exacerbate some of these stories and headlines and mis-information.

We could almost write the second paragraph of virtually every story in the media addressing our SEC inquiry, addressing the information put out by activist groups out there with bad information.

And again, that perfect storm has led to where we’re out today.

But what we’re going to do is address those concerns.

Dan is going to talk right now about the financial numbers for the quarter.

And then I am going to address how we’re going to get out of this, and get the Company back on the correct footing.

So I am going to turn it over to Dan, to talk about our numbers for Q1.

Thank you.

Sales for the first quarter of 2005 were $10.2 million.

On a unit basis, we sold 8,687 X26 TASER devices, and 688 M26 TASER devices during the quarter.

Cartridge sales totaled 153,916 units for the quarter, for a ratio of 16 cartridges sold for every TASER device sold.

This demonstrates the strong support we get from our existing customers, who continue to buy cartridges and devices from the Company.

The revenue stream from cartridges continues to be a significant part of our sales.

Net income for the first quarter of 2005 was $158,000.

Our results in the first quarter were adversely impacted by a number of items, including higher legal and insurance expenses, high professional fees for audit tax and other consulting services, higher travel expenses, as our employees travel around the country to get in front of our customers and potential customers, in order to correct some of the mis-information that’s being reported in the media.

We need to be sure that our customers are getting the facts, and are not making decisions based on headlines.

We’re still working hard at correcting the confusion in the marketplace.

While nobody is happy with the overall bottom line result, we are encouraged that, even though our sales have been severely impacted by the perfect storm that Tom described, we still managed to finish above break-even in profitability for the first quarter.

Another positive note is the fact that the Company finished the quarter with approximately $48 million of cash and investments.

And we had operating cash flow of approximately $1.9 million in the first quarter.

Overall tax usage in the quarter was driven by CapEx of $4.2 million, most of which is attributable to our new building, which we moved into on April 1, 2005.

The new building is operational.

And it’s great to have all of our employees in one facility.

We’ve been paying for the construction of the building as incurred.

And the total cost will be approximately $15 million, including the cost of land.

There will not be a mortgage on this facility when it’s completed.

Our release this morning mentioned that we will be amending our 10-KSB for the year ended December 31, 2004, to reflect future tax benefits received from exercise of stock options, and other tax effective stock option exercises.

The correction will result in an increase to the Company’s deferred tax assets, accrued expenses, and additional pay into capital, but will not result in a significant impact to the result of operations or cash flows for 2004.

Our expectation is that when an analysis is complete, we’ll have an overall increase in owner’s equity for 2004 year-ending balances.

Wrapping up, I want to cover the consumer distribution agreement that got so much attention at year-end.

As we said in our fourth quarter earnings call in February, we’ve gone through all the relevant accounting literature, and feel comfortable with our accounting for this transaction.

As you can imagine, our independent registered public accounting firm also reviewed this transaction as part of the year-end audit process.

As we covered in the KSB filed in March, we have deferred revenue associated with the training and background checks that we will be conducting in the future.

And we’ll recognize this revenue and associated expenses in future periods, as these services are performed.

And finally, I am pleased to report that we were paid in full for this transaction during the first quarter of 2005.

And with that, I’d like to turn the call back over to Tom Smith, our President.

Thank you Dan.

I mentioned before the mis-information that’s out there in the media headlines.

And one of the things that we are addressing, and we’re doing this again, as I mentioned, around the country, meeting with special interest groups, to address any concerns they have.

Earlier this quarter, my brother had a debate with Bill Schulz, who is the CEO of Amnesty International.

That debate is available on our website for your viewing.

But, unfortunately, this is a group that tends to rely on these media headlines to further their mis-information out there in the media.

And they don’t really look at the facts.

We’ve reached out to them.

We’ve met with them on numerous occasions.

As I said, Rick had a debate with them earlier this year, that even after all of the things that we’ve done, and the information we tried to provide, and suggesting that they do a study with us, they continue to mislead the public.

And let me give you the example.

Several weeks ago, they put out a press release.

And they put out that there is 103 in custody death related to TASER International.

Yet, when you read into the body of their own press release, they acknowledge that only in 17 of those cases was the TASER even listed in the text.

That doesn’t even mean it was listed as part of the findings, just that the name TASER was mentioned.

So they put a headline out of 103 cases.

Yet in 17 we’re listed.

And really in only a handful, roughly 5 or 6, were we even listed as potentially a contributing factor, or couldn’t be ruled out.

And I think if you look at 100,000 plus volunteer uses, 66,000 plus documented cases of the TASER being used out there to save lives, reduce officer and suspect injuries, and to potentially only have a handful where at best case it could have been listed as a contributing factor as part of the restraint procedure in fighting with the officers, putting these individuals in handcuffs, having drugs on board, serious other problems with these people being taken into custody, I think that really speaks volumes about what this technology is doing.

And it just shows the continued misinformation that that particular group continues to provide.

Yet we still strive to work with them.

I am going to be meeting with them later this week at a conference in New York.

And we are continuing to try and work with them.

Yet it seems to go and fall on deaf ears as far as they are concerned.

Let me address our research and safety.

Our latest numbers, we have roughly 73 research and safety studies that have been conducted on the TASER weapon systems.

And again, while I will say these are not risk-free, the studies support the relative safety of TASER products.

In particular, there are three instances that have recently come out that I’d like to address.

Let me start with the United Kingdom.

I think this is a study that, unfortunately, again, the media completely overlooked.

The only coverage it got was how it affected our stock price, rather than looking into the meat of this report.

They spent millions of dollars doing this report, over multi years.

And in the end, they addressed three specific areas in the study, with the one that was most exciting to us was they actually took the time, and many months, and millions of dollars, to build a computer model to represent how the energy from the TASER flows through the body, and how it gets to specific organs, specifically the heart.

And when they took a look at that, they showed that we had a 70-fold safety margin on the M26, and a 240-fold safety margin on the X26.

They then took that computer model data, and validated it on animal tests.

And I think it’s extremely unfortunate that that was not covered in more detail.

And again, we are making sure that our customers and our potential customers are seeing this data.

Because it’s a very impressive model.

And the U.K. is traveling around now and presenting this data at different conferences around the world.

Another study was the Department of Defense.

They finally -- last year they had released a report summary, a two page document that we put a press release out on, where they had reviewed a lot of information.

And just this past month, they released over a 100 page document that was a redacted document, detailing the research that they had done on that, and again validating that the compelling evidence out there on safety of this technology continues to support what we’ve been talking about for a very long time.

And finally, the other report that came out recently was the Potomac.

They did a working group study over a two day period, and got a number of experts from the field together, to talk about the general safety of the device, and what it’s providing law enforcement in terms of the technology to reduce suspect injuries and officer injuries.

We continue to support additional research.

And again, as these activist groups bring this information up, we continue to address their concerns.

A year ago, they were saying there are no studies.

Today I am telling you there are 73 such studies.

A year ago or six months ago they were addressing none were independent.

I am here to tell you today we have the Department of Defense, which is independent.

We have the United Kingdom, which is independent.

We have Potomac, which is independent.

The Department of Justice also held a conference several weeks ago on the technology that was independent.

So, again, as these concerns are brought forward, we’re addressing these concerns head on.

We aren’t just listening to the questions.

We’re providing answers, and addressing the questions that come up.

The compelling evidence supports the safety of this device.

And we are unaware of any public data, demonstrating that the TASER technology has directly contributed to a death.

We will continue to work, and we are currently funding several studies right now to address the concerns that have been raised more recently on specific concerns in regards to blood chemistry.

Dr. John Webster of the University of Madison is addressing a study by the Department of Justice, that he is going to be looking at a longer-term study, again looking at modeling and the way energy flows within the body.

And that should go in conjunction with what the United Kingdom has also done.

Some of our media and legislative strategies -- we initiated a call to action to our customers and to our shareholders to come forward and talk about the results.

And some of those calls have already been answered.

Let me start with the Austin Police Department.

They addressed their City Council earlier this month, and talked about the fact that TASER use has increased in 2004.

But they used the TASER 220 times out of a total of 29,000 calls during the period of June-December of 2004.

So some of the media headlines make it appear like the TASER is being used almost on every single incident where they show up.

And, in fact, in Austin it showed that it was only used 220 times out of 29,000 calls.

They also showed that serious injuries to suspects decreased 80% during a two year period.

And there were no serious injuries to officers during that same period.

In fact, there was a 53% reduction in officer injuries during a two year period.

So we do have people that are standing up and putting the results forward.

And finally, they summarized that when they looked at the information, they showed a 66.75% decrease in suspect serious injuries, a 53% decrease in officer injuries, and a 15% decrease in use of force reports.

So our calls our working.

And we are having departments step forward and provide factual data to what this TASER is doing for them.

We are proactively engaging the media, ensuring the topics are factual, the debate is free of bias, and the science surrounding the issues are founded.

We, again, are fully supportive of ongoing studies.

But we want to make sure that the science is reviewed by internal review boards at these medical institutions, and that it’s not just off the cuff comments that are emotionally charged, but that it’s factually based science that can actually be conducted, to go out and have this done at research institutes around the country.

I mentioned before that we’re meeting with special interest groups.

Unfortunately, a lot of their opinions have been formed by reading these media headlines.

And again, once we get the facts in front of them, they’re getting a different opinion of how this technology is working.

We continued to service our customer base, and provide them with factual information.

I know there was a recent story, I believe in Orem, Utah, that just came out within the last two days, where officers responded to a domestic disturbance call.

And in that particular situation, the suspect was able to get the firearm away from the officer, and actually shoot the officer with his own firearm.

When the officer who helped to respond in that situation, in the confrontation, it was a TASER that was used to end that confrontation and take that suspect into custody, which shows the stake law enforcement have in this life saving technology, and how it’s, again, being used to end these dangerous confrontations.

We’re addressing legislative efforts that are seeking to limit the use of TASER technology.

Use of force is determined by law enforcement.

They are the experts.

They are the ones that are going to determine how and where this is used, with community involvement.

We are working to promote those types of initiatives.

The International Association of Chiefs of Police just issued a nine point summary on how that should be done.

We think that was a great step in moving this forward.

And we are helping support that around the country.

But we don’t think it’s a good idea for legislators to sit up on the bench and try and dictate use of force policies.

That needs to be done by local agencies, with involvement from their communities.

And we’re working to educate legislators on those issues.

We continue to conduct more research.

As I said, there are a handful that we are currently funding right now.

And there is additional research ongoing that we’re not funding, that we think will be very helpful when that data comes out over the next months and years.

We’re gathering data every day regarding field use, just showing the reduction of injuries and the use of force.

In fact, Kevin Berry, the Sheriff down in Orange County, Orlando, convened a Citizen Task Force to review use of force.

And some of the information that came out of that, again, just speaks to the compelling evidence.

And let me give you a quote from one of the citizens. “The early use of the TASER will help prevent further hurt, not only to the person to whom it’s being used, but also to the deputy”, said the Reverend Richard Davis, who was on this task force.

In Orange County, Florida, deputies made 45,033 arrests, and used the TASER 454 times, including against 14 suspects, who were so aggressive that the law would have permitted deputies to use deadly force.

Again, out of 45,000 encounters, the TASER was used 454 times.

Again, so we’re having to dispel the myth that the TASER is being used each and every day.

Three physicians and a pharmacist, on a separate sub-committee, found, “Across the board, the TASER is less likely to cause injury than a police baton, pepper spray, or physical force.” So again, the TASER, in the information we have today, is the safest way to end these dangerous confrontations.

It’s not only what we’re saying.

But it’s when citizens review the information, and when task forces are looking at the data, they are coming to the same conclusions.

And finally, out of Orange County again, “If I am going to be arrested, I would rather be hit with a TASER than with a baton or be shot at”, said Carlos Rueda, a citizen on the panel.

So again, our call to action is being answered.

And the data is coming forth from the agencies that are using our product around the country.

We also conducted a national poll by Zogby earlier this year, which showed tremendous support for the TASERs, reporting that approximately three out of four, or 77% of Americans, support police use of our TASERs.

There have also been numerous unscientific regional and local polls conducted by various media outlets that, despite the mis-information and the stories that they put forward regarding the status of our product, we continue to see between 50% and 80% of the respondents supporting the use of this technology because, again, I pose the question, if you have to stop a violent suspect, and you aren’t going to use the TASER, then how do you do that without injuring that individual?

Do you hit them with a baton?

Do you spray a chemical agent in their face?

Do you fire lead?

Again, this is a subject where we’re not an alternative to a firearm.

But we are the safest technology out there today to end these violent confrontations.

I’d also like to address some of the sales issues that we’ve been discussing.

In our press release we mentioned international sales was over $1 million in this quarter, with the majority of that coming out of the United Kingdom, Canada, and Singapore.

Now the United Kingdom, those are numerous orders that came in during the course of the quarter.

We did not have one significant order that came in.

If that were to occur, we will be putting press out on it.

But we are seeing them further expand their program over there.

Again, the X26 study that came out late in March is something we have been anticipating for actually since mid-year last year.

These international governments do take a long time to compile this information and put these studies out.

So it was about a year longer than we thought.

But once that information does come forward, we started seeing orders come together.

And hopefully we’ll be making more announcements about that this quarter.

We’ve had a lot of questions about France.

France has been looking at this since last summer.

We do believe now they are finally nearing a decision point, which we believe will come later this quarter.

Unfortunately, again, the government making a decision for an entire country takes longer than we had hoped or anticipated.

But we are still optimistic about what we will see in the international market.

Again, I think a number was showing roughly $2.5 million in total international sales this past year.

And, as of the end of the first quarter, we did $1 million in international this year.

While we’ve seen a decrease in our new business, and what I mean by that is new customers that aren’t familiar with the technology, we’ve seen continued support.

Dan mentioned that earlier, from customers that are using our product.

What I’ve seen is basically a hold on orders while people evaluate the incredible amount of information that’s out there, and continues to come forward.

We haven’t seen them go away.

We’ve just seen them put this business on hold.

And we believe if we continue to get the facts in front of them, and provide additional information, we’ll see those orders start to come to fruition again.

Our move to our new building was completed.

We are doing this conference call today from our new boardroom in the new building.

We accomplished that move virtually without a hiccup on production, which is up and running.

And we’re functioning.

And basically that was accomplished over a weekend.

And I give tremendous credit to our IT guys and the individuals that made that move happen in the 36-hour period, literally from shutting down an old operation and moving in, and having it up and running over a weekend.

We are also hosting our tactical conferences, starting actually today, where we’re going to be having over 100 master instructors come in and give three days of schooling on the technology.

And then over the weekend, we’re going to be holding our own TASER policy forum, and next Monday holding a press conference on some of the information that came out of that policy forum.

We’re also going to be holding an international tactical conference in May in Prague, where we expect between 50 and 100 people to attend from different countries around Europe, that couldn’t make it over here to attend this conference, again to provide factual information on what the TASER is doing for law enforcement, not only here, but around the world.

We’re very excited about both of those conferences, and the information that’s going to come from it.

We also would like to make sure we extend and invitation to our shareholders to attend our annual shareholder meeting, which will be held this Friday, April 22, at 12:00 noon.

That meeting will be held at our new building.

And we would obviously welcome any shareholders that would like to attend, so that they can come see the progress we’re making.

Two other numbers I’d like to report.

During the quarter we still, even despite the lower sales, did increase our market penetration by roughly a percentage, from about 11.5% to roughly 12.4%.

I’d also like to note that, as I mentioned before, our existing customers continue to purchase our products.

We increased our full deployments by 134, from 1,454 agencies that have TASER technology on every belt, up to 1,602 agencies that are now carrying one TASER on every belt.

One of the other things that’s starting to come forward and make itself known is the agencies that are seeing the dramatic results in the decrease in injuries to officers and suspects are those agencies that are putting one on every officer.

We’re seeing decreases at other agencies in smaller percentages.

But in those cases, they’re not having the TASER present on every scene.

And we’re trying to get that information, get our hands around that, so we can again provide that data to our existing customers.

And again, let me wrap up with San Jose Police Department, one of the other largest agencies in California that have one TASER on every officer.

During their study period, they responded to 235,792 service calls, of which 67,000 were priority one and two calls, meaning they required immediate emergency response by police.

Out of those calls, they had 110 times that the TASER was used, which accounted for .04% of the total calls to start with, and .16% of priority one and two calls.

So again, it just shows you the fact that officers are using discretion in the use of the technology.

And again, as San Jose showed, a 20% decrease in officer injuries due to altercations with suspects when TASERs were deployed.

Of special note during the study was the fact that a combined total of 79% of the TASER deployments involved two types of suspects.

One, suspects under the influence of drugs and/or alcohol, which was 54 incidents, and number two was mentally ill suspects, which was 23%.

And, in some of the cases, individuals were both mentally ill and under the influence.

So again, people have called for studies on interaction of the TASER with narcotics and with alcohol.

But we have field data, very compelling field data, continuing to support what we’re seeing in the lab.

And there is a note that I’d like to share with you that we received from an officer in San Jose that used the TASER recently.

And where he used it was against a suspect who was mentally ill, who was on a crystal methamphetamine.

And he was holding his wife down on the bed with one hand, while preparing to swing a six foot sword at her head with the other.

When the suspect was hit with the TASER, the effect was instant and perfect.

The suspect dropped the sword.

He let go of his wife, and fell to the floor, and was taken into custody after a very brief struggle.

The officer’s point is this.

Had it not been for the TASER on his belt, that man would be dead.

He would have been in a huge mess of crap, as he put it.

And our lives would be torn upside down.

Hearing his taped interview with the suspect at the hospital, he thanked him multiple times for not killing him.

There were no lasting effects of the TASER mixing with this particular drug.

And, on behalf of the officer, he was sending an email to thank us, on behalf of his wife, children, and co-workers, for giving him the chance to use something other than a gun, and end a very, very dangerous confrontation.

Those are the kinds of notes that we get every day.

That’s what drives this Company to continue to be the best, to provide the best product support that we can, the best products that we can, and to reduce officer and suspect injuries, and save lives every day.

And with that, I’d like to wrap up this call, again welcoming the shareholders to our annual meeting on Friday.

And we’d like to open it up to questions from the people listening to this call.

[OPERATOR INSTRUCTIONS].

Sid Parakh of the Robins Group, please proceed.

Now, since you’ve not given a financial statement, I guess it becomes really difficult for us as analyst to sort of track the performance, and even go out and project statements.

So when do you think you’re going to file a Q?

And when will these statements be available?

Obviously we’ll file the Q. I mean the deadline will be by mid-May.

We’re working hard to get that filed.

We’ll start on that process immediately.

But we should have something out obviously in the first half of May.

Okay.

Can you elaborate on the accounting error that took place, and whether the impact is going to be significant or insignificant?

I guess first of all, we don’t expect it to be significant.

The issue is a little bit arcane.

But it involves the combined hold transactions of non-statutory stock options, and how they were accounted for.

It also relates to some of the payroll taxes on some stock options.

But we do feel that once we get through this whole process of analyzing all of these transactions, that the overall impact on owner’s equity will be an increase to equity.

Okay.

Also for expenses during the quarter, can you give us an idea oaf how the expenses are distributed over say litigation, consulting, and were there any one-time charges on these statements?

We definitely had some.

As we talked about in the fourth quarter call, we expected to have an increase in some of the legal and professional costs as we go forward, just addressing some of the things that the business is facing now, that it hasn’t previously, with the shareholder litigation, and some of the other things that are in front of us.

So certainly legal is up significantly over the prior quarter.

We’ve had some professional fees that are up.

I think once we get into the Q, we’ll give a lot of details around those items.

But we did see significant increases in these things.

The expectation is that these will continue during this year, as we address some of these things.

But on a long-term basis, hopefully the expenses get back to more of the normal range.

And I think we mentioned previously that we’re going to use our resource.

I mean now we are in a fight right now on a number of fronts around the country.

And we’re going to expend resources, hire numerous consultants around the country to help us out and provide that factual information.

I mean there’s only a few of us, or a handful that travel around.

And we’ve got numerous states that we need to address both local levels, as well as state levels.

And we’re getting experts and consultants in those locations, to get us to the right people, and to make sure that we can get the facts in front of people.

So we’re not holding back right now on resources to make sure that we are getting our information out there as accurately and as quickly as we can.

So should we expect these expenses to trend higher going forward in that case?

It’s very tough to predict some things like outside legal expenses that, by definition, are really going to trend with the work that’s having to be done.

We did see a significant increase in those expenses in the first quarter.

It’s tough to say exactly what that trend will be going forward.

It’s really going to be dependent on the pace of some of these cases, and some of the things that are in front of us.

Okay.

And finally, now did the Company make an operating profit?

Or was it profit due to other income as well?

On an operating basis, we did have income from operations, as we define it, was positive.

So operating income was positive.

That’s correct.

I think that’s the right question Sid, because despite getting our sales cut in half, for us to still make a positive operating profit, that speaks volumes to the structure that we set up here, and to the reaction that we have as a management team, that we did have an operating profit that was positive during the quarter.

I mean obviously, with $168,000 of net income, the operating profit was not significant.

But it was positive.

Okay.

And can comment on what the outlook is?

I know you’re -- I mean it’s a difficult period this time.

It might even make our projections difficult.

But what do you think internally is an achievable goal going forward?

Well, we mentioned before we weren’t going to put guidance forth.

I still, I mentioned the perfect storm.

I think we still have a number of issues that are being addressed.

So that’s why we haven’t got our arms around providing guidance yet.

We are still seeing it have an effect on the sales, as we are, at this point in time.

So we just don’t have our hands around it yet.

And as soon as we do, we’ll be able to provide more accurate information.

But at this point, it’s just too difficult for us to really provide a number.

Okay.

And finally, can you also just give me a sense of what were the large items in your cash flow that were positive, and contributed to the cash flow, or the 1.91 cash flow?

Yeah.

I mean we did have a -- obviously the net income was positive for operating cash flow.

We did have, with the lower sales levels, accounts receivable did trend down during the quarter.

So that was a source of cash during the quarter.

Inventory offset that a little bit.

We did see an increase in inventory, as the Company built some finished goods in preparations for the move.

And also, with the sales trending downwards, we did have a little bit of an increase in finished goods inventory, as our production was a little bit higher than the sales level.

And those are the main drivers of the operating cash flow.

All right.

Thank you gentlemen.

Mr. Jim Stone of PFK Advisors.

A couple of things.

First of all, can you give us some flavor about what you see for the current quarter?

Are you seeing departments coming back?

What sort of flavor can you give us?

I am sorry Jim.

You were breaking up here.

You were asking about the flavor for the quarter?

No.

What are you see in new departments coming on board?

What are you seeing?

Are the major departments now basically filled up, so that they’re not buying?

Or are you still expecting orders out of major departments?

Just some flavor for the quarter.

Well, again, what we saw in the first quarter is the new departments that aren’t familiar with the technology, they’re putting programs on hold.

They’re going back to what we see a couple of years ago, where they’re going to test pilot projects.

They’re reviewing the information.

They’re reading all the details.

There’s a lot of information out there for people to have to review.

They’re talking to different agencies around the country to find out what their results are.

Where we’re really seeing continued business is from our current customers.

I mentioned we had another 134 agencies expand to full deployment, being one on every officer.

So we’re seeing our current customers that have the experience with the technology and have seen the results, continue to buy the products and expand the program.

What really we’ve seen go on hold is those new customers coming on board.

And again, that’s where we’re focusing on providing factual information, getting them the information so that they can talk to other departments and verify the results, not just rely on what we’re saying, but talk to other users, and see.

And that’s why I focused on this call about mentioning what those other customers are seeing, because they’re presenting that data to their City Council, to their legislators, and to other agencies.

And I think it’s going to take a while for all those departments to look at all this material, and them jump back on board.

But again, I am not seeing the business go away.

I am seeing it put on hold with the new customers.

And it’s just taking time for them to go through that data and review everything that’s out there.

The 134 new departments to full deploy would seem to be a little smaller than usual.

Is that just a seasonal issue?

Is there anything significant in that?

It’s lower than we had seen before.

And again, I think it comes back to this media storm that’s been out there.

So it’s about a third of the number of agencies that we saw in Q4.

But again, what it shows is the current customers that are using the technology are continuing to purchase.

It’s just they’re doing so very cautiously.

And so those 134 agencies that went to full deployment were existing customers, that expanded their program.

Again, what we aren’t seeing is the new customers coming on board right out of the gate, and going to full deployment.

What they’re doing is starting with some more sample units to do pilot programs, to see how it’s going to work for them within their agencies.

So yeah, we’ve seen a slowdown across the board, obviously, as represented by our sales numbers.

But we’re seeing the majority of business come from existing customers.

And even our new ones that are going forward, they’re just going forward slower than they might have previously.

And then the last question, could you possibly share with us on the first quarter sales, how much of the revenue came from existing customers, and how much of the revenue came from new ones?

We don’t have that percentage broken down completely.

And again, what we’re seeing as far as the trend is that probably the majority of that was coming from existing customers.

But we really don’t have it broken down in terms of percentage.

And again, a million dollars of that came from overseas markets in the United Kingdom, where they’ve been buying previously.

But they started to accelerate their orders.

We’re seeing more orders coming from there than we’ve had previously, especially with the announcement of their results late in March.

Okay.

Thank you very much.

[OPERATOR INSTRUCTIONS].

Mr. Dick Ryan of Feltl & Company.

Hey Dan, can you give any perspective on the gross margins in the quarter?

Yeah.

Gross margins for the quarter ended up being about 55.6% for the quarter.

And the things that adversely effected that obviously are fixed expenses.

When sales trend downward, those fixed expenses end up being higher on a percent of sales basis.

That’s about 3.5% roughly of the degradation from the same quarter last year.

Okay.

Do you have data on the number of orders and the order sizes, average order size for the quarter?

Actually, the other thing I just want to mention on the gross margins, we also had, obviously, a little bit of a mix issue as the cartridge revenue ends up being a larger percentage of our sales, the gross margins of those cartridges are lower than what we hit on the devices themselves.

So that had an adverse effect as well for the quarter.

On the number of orders, we actually had about 5,370 orders for the quarter.

The average order size was about $1,900.

And again, that’s lower than what we’ve had traditionally.

I think it’s a factor of two things.

One is we didn’t have any significant orders, huge one order type sales this quarter, which drive the average down.

And second, we saw a lot of cartridge and some of this repeat business that tends to be a smaller order size.

And, I think, Dan, you mentioned before too, we do sell a lot for distribution.

So it is hard to get our hands around specifically the breakout between new customers versus re-orders.

And a lot of that trending is coming from seeing those cartridge numbers.

Sure.

Then Tom, can you talk a little bit on the legislative front, maybe what’s going on in California, or what you’ve seen in some other states?

Yeah.

Obviously there has been a lot of knee-jerk reactions to the media sensationalism that’s out there.

And again, as we’ve gotten out there and provided information to these bodies, they’ve taken a different look at it.

So I think we’ve been, in New Mexico, for example, we were successful in providing information to the people who were putting forth some information that was erroneous.

And when we did that, they pulled their bills on their own.

And we’re working very closely with them.

Here in Arizona, the local police unions are working on putting forth some legislation that we’ve helped put some crafting to, that we believe is very positive.

So we support very thoughtful legislation.

And we’re working to put that forward.

In California, specifically, Rick is out there working against a bill from Mark Leno.

He’s gotten a lot of media attention on this bill.

And just to point out, on the reporting side part of it, really trying to single this out, and require more paperwork for just the use of the TASER, rather than taking a step back and looking at overall use of force.

So again, we’re trying to make sure that we aren’t being singled out, that they’re looking at a larger issue.

And they’re also trying to put a ban in place to ban it for civilian’s use.

You know, law enforcement -- you can buy any item that’s on a law enforcement officer’s belt.

And this is a non-lethal weapon that people should be able to have access to, to defend themselves.

It’s a 15-foot range.

For law enforcement it’s out 35 feet.

And we do believe that if this technology is misused, that the crimes ought to be higher, or the penalties out to be higher.

We believe it ought to be a felony if you misuse this technology.

We do do background checks.

We ensure registration.

So we’re doing all these things, and believe thoughtful legislation is the way to go, not a knee-jerk reaction, because somebody read a fancy headline and decided, well, we shouldn’t use this, or shouldn’t do it.

So Rick has been out there providing that data to the legislators, providing it to the staff, and making sure they’re making informed decisions.

And I think that message really does get through, once we get the data in front of them.

Has any legislation been passed yet?

Or what’s the timing of the California bill?

Well, this particular bill passed out of subcommittee two weeks ago.

It still has a long way to go through still the full committee, or through the full House, the full Senate, and eventually to a Governor.

So there are multiple steps, as you know in these processes.

We have not had any of the bills get all the way through.

The bills that we are sponsoring, the closest one is here in Arizona, that we believe is very thoughtful legislation, that’s currently sitting on the Governor’s desk, that hopefully will get signed into law.

This helps require registration and background checks, and was put together with the help of law enforcement.

I think that’s the one that’s furthest along.

The other ones are all at various points in the subcommittee.

Nothing has passed against us at this point, right Tom?

Correct.

Nothing has passed against us at a state level.

We’ve had a few city levels, where we’ve had some ordinances come out that were prohibitive of the technology.

And again, we’re going to go back and address those later.

But right now we’re focusing on the state-wide levels.

And a lot of verbiage in these legislation comes right out of the media, and demonstrates the impact that the mis-information in the media has on our legislative efforts.

The people are, again, they’re reading these headlines, and they’re believing it verbatim.

I was at a situation last week in Omaha, Nebraska, where I watched these guys put a slide show forward.

And out of 20 slides, only one has accurate information.

The other 19 were completely incorrect.

So that’s why we’re having to travel around and get in front of these people, and provide factual information.

Okay.

Thank you.

[Gene Staker] a private investor.

Please proceed.

Looking forward gentlemen and ladies, can you tell us anything more about the long-range TASER device, and also the TASER anti-personnel munition you’re working with General Dynamics on, in terms of the timeliness of the introduction into the market of these new products?

Yeah.

They’re still in an R&D phase.

We still have a long way to go with them.

So there is no set time schedule on when the TAPM system will come forth, or when the Extended Range Electronic Projectile.

But suffice to say they are making progress in the R&D area.

And we are continuing to work on it.

But we don’t have a set schedule when they’ll come to market.

I can tell you we’ve done another demonstration on the TAPM system, another demonstration on its capability sets, as we continue testing and continue to provide prototype products.

And the response has been very positive.

But there is no set time frame.

And we don’t want to set any expectation that there is, other than we are continuing to make progress into putting these forward.

Okay.

Thank you.

A follow-up question from Sid Parakh of The Robins Group.

Hey Dan, can you give me what the tax rate was for this quarter?

The tax rate ended up being roughly 39%.

Also Tom, can you comment on what you’ve seen happen on the consumer sales side?

And I mean what do you think is going on there?

Yeah.

I can tell you we’ve been consumed with making sure we’re getting up our core constituents, which is the law enforcement market.

So we’ve really been focused on addressing these legislative concerns, the media mis-information, and getting out to our law enforcement customers.

I mean there is no doubt that that’s our core business right now.

And we’ve really been focused on that.

So we have backed off our marketing efforts on the consumer product, to ensure that we don’t lose one of these battles in one of these states.

I mentioned Mark Leno’s bill.

That’s addressing the ban on civilian TASERs.

And we’ve got to make sure that we don’t let that go forward without getting out there and getting on a fight.

So we are making sure that we address the legislative issues that are out there.

And we have definitely backed off that effort.

But we are still continuing to work on small, private locations.

For example, we are going to be doing something in Florida in the next month or two, as the promotion to start getting back on track there.

But there is no concerted effort in the consumer market right now.

We’re stayed focused on law enforcement.

We’re staying focused on these legislative efforts.

So obviously it has not been a focus on the consumer side while we’re in the middle of this fight, and in the middle of addressing all of these concerns and questions.

All right.

Thank you.

It’s allowing us to let our distributor focus on addressing the market with their customers, while we continue to fight the legislative fights and the mis-information in the media.

This concludes the question and answer session.

Mr. Tom Smith, please proceed to closing remarks.

I’d again like to thank you for the call.

Obviously it was not a quarter we were very happy with.

But I can tell you we have the full focus of our management team on addressing these issues.

I laid out some of our strategy today.

I can tell you this is a management team that’s been through a lot worse in the past.

We’ve been very, very focused on the future.

And we’ll continue to strive through this.

We’ve got the right people in place.

We’ve got the right consultants working with us.

And, most importantly, we’ve got the continued support of our existing customers.

And I started to share some of that information with you today.

And I think as we go forward, you’ll see more and more of that information come forward, because this is a life saving technology, that’s reducing injuries.

I am here to tell you, despite any rumors you may here out there, we are not going anywhere.

We are here for the long haul.

And we’re going to continue to provide the best equipment, the best products and service for our customers in the future.

And we invite you, again, to our shareholder meeting this Friday, and look forward to talking to you again next quarter.

Thank you so much.

Bye-bye.