Axon Enterprise Inc (AXON) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter TASER International conference call. My name is Amanda, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Tom Smith, President of TASER International. Please proceed, sir.

Thank you and good morning. On behalf of Rick, he is attending a conference in the East Coast and will not be joining us on this call today. However, we will be talking about a report of the first quarter, which was our highest revenue quarter in our history for the first quarter, and we kind of used the 2004 year as our best year as a benchmark, and we're about 600,000 ahead of that year. We reported 13.9 million during the quarter with 800,000 in operating income, 700,000 in net income and $0.01 basic EPS for the first quarter. We were also very pleased to generate about 1.9 million of cash from operations during the quarter. After we have hit those highlights, we are going to turn it over to Doug Klint for the very riveting Safe Harbor statement.

Thanks, Tom. 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. 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 and consumer 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. 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 and 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 accompanying demand for our products; potential delays in the international and domestic orders; implementation of risk of manufacturing automation; risks associated with graphic technological change; execution, implementation and risk of new technology; new product introduction risks; ramping manufacturing production to meet demand; litigation results and alleged product-related injuries and death; media publicity concerning product uses and allegations of injury and deaths and the negative impact this could have on sales; product quality risk; potential fluctuations in quarterly operating results; competition; negative reports concerning TASER device uses; financial and budgetary constraints of prospects and customers; dependence upon sole and limited source suppliers; fluctuations in component pricing; risks of governmental inquiries and regulations; TASER product tests and reports dependent upon key employees, employee retention risks, and other factors detailed in the Company's filings with the Securities and Exchange Commission.

Thanks, Doug. As I mentioned, this was our highest first quarter in our history. I know that we have been talking for awhile about some of the momentum coming back. We discussed this on the last call. We continue to see that. We are continuing to see an increase in the request for quotes in the bidding process. For those of you that continue to see some of the major Chiefs out there in the media such as Chief Bratton out of the LAPD in the February timeframe talking about expanding and going towards the full deployment, these are all trends that we expect to see continue. We are continuing to see momentum, but it is a prime to pump thing. We obviously have seen an increase of 1.3 million over the fourth quarter at the top line, and we would expect to see that continue. There are no guarantees on that obviously, but we do expect to see the momentum to continue. We are seeing a good solid start to the first months of the second quarter, and again the momentum is coming back on the customers. That is obviously a trend we expect to continue.

We will also be continuing to focus on our expense structure. Obviously there has been some comments about the investments in research and development and SG&A, and quite frankly, the SG&A was relatively flat if you take out the $330,000 or $350,000 worth of stock expense options that are now required to be reported in the first quarter that Dan will comment on a little bit later.

On our R&D spending, we will continue to invest in this area. We have talked about the continued advancement of this technology with the TASER Cam that is going to be coming out this quarter. We will continue to invest in this area and remain the leader, remain ahead of the marketplace with new and innovative products to continue to advance this technology.

I think you have also seen in the market a real momentum change within the media coverage. We definitely have felt an increase in the positive stories being written and a big decrease in the number of negative stories. Obviously we still get the splash here and there with some of those, but I think people are starting to realize that this technology is here to stay, that it is going to continue to advance. That we are the wired version of the Star Trek phaser. And what you're going to see out of us is continued focus on the business, continued increases and growing a solid steady-state business while we focus on keeping our cost structures in check as we move forward.

Significant events that occurred during the first quarter, we achieved our ISO certification. This was a companywide effort demonstrating our continued commitment to continual improvement from our customers, suppliers and employees. This was a huge achievement. It was a very extensive multi-month almost multi-year process, and we're very pleased to achieve that at the end of the first quarter. That was driven primarily by John Szakach in our Quality area and really our hats off to their team for putting that together and going through on our first audit attempt in getting that ISO certification.

We have talked previously about the eXtended Range Electro-Muscular Projectile. That continues to move ahead within our R&D area. It is slated for a 2007 introduction as a product, and we received, since we announced that demonstration, a number of inquiries, a lot of interest in that product, and again just for clarification, that is a device that is going to be similar to a shotgun shell. It is an ammunition so to speak that is a drop-in for any standard 12-gauge shotgun that is in the field today. It is going to be used with a solid launch platform that is very widely dispersed around the country and around the world. It is not a new platform that we are having to develop from scratch. I think that is a huge point that people need to understand, and that is why it has been such an exciting product, reaching out to 30 meters. It is the next steps, let's say, of this technology where we're going towards a wireless multishot multiple engagement system in the future.

We also had a very big study that was peer reviewed and published in the Society of Academic Emergency Medicine during the quarter that studied the TASER X26, and they were looking at recordable cardiac electrical activity within a 24 hour period following the standard 5 second application. We did put a press release out on that study as it was presented to a peer group earlier in the quarter. It has been mentioned in our press release that the link to go out and take a look at that study again showing the continued research in this area continues to move ahead, and we're very pleased to have seen that come out.

We put out a press release last night announcing I believe it is our 13th dismissal of a case during the quarter. We had talked about two in our press release -- the number 11 and 12, the number 13 went out last night. Doug is going to elaborate a little later in the call on our continued focus in the legal area. So obviously we are -- in a nutshell basically we continue to be optimistic about the future. We continue to see the momentum come back in the marketplace, and we feel very good about the prospects for later this year. We want to see and continue to see that top line grow, and as a company, we will stay focused on our expenses.

Just to reiterate one more time, what we have talked about is SG&A statements and the dollar value relatively flat and tapering off later in the year, and we expect the percentage to decrease as sales continue to increase. But the actual dollar value stays flat.

So let's start to get into some of the detail, and ask Kathy Hanrahan to discuss our operations results.

Good morning. During the first quarter of 2006, operations achieved several milestones for the Company. As Tom discussed, under the direction of our Quality department, we achieved ISO 9001:2000 certification for our quality management system. We produced and distributed approximately 200 beta test units of the newly developed TASER Cam to a controlled group of independent users, including key foreign customers. To date the feedback from the field has been excellent.

Our IT department launched a series of projects to integrate our ERP system across the organization. We also continued our efforts to improve the manufacturing processes for both existing and new products. During the quarter we completed the setup of our new TASER Cam production line as automated test fixtures and equipment. We're currently awaiting the first production run of our assembled circuit boards and expect to be in full production in late May.

We also continue to work on enhancements for existing products to ensure as our volumes ramp, our line yields and process throughput remains solid. Some of the improvements we're working on include a new blast door design. This was created by R&D to reduce current assembly time and improve long-term durability for field units. We're continuing to research new component attributes and develop modifications to our printed circuit board assemblies to further increase line yields for the TASER product. We have been completing quality reviews of our supplier base to ensure quality and capacity demands can be met as we move forward through the remainder of 2006 and into 2007.

Operations also contributed to improved financial performance during the first three months of this year. Gross margins increased by approximately 9% over the same period last year. This was due to continued improvement in line yields and the reduction of in-line scrap. However, on a sequential basis, gross margins declined by .5% as the result of $737,000 increase of lower margin cartridges in the first quarter of the year.

In terms of balance sheet contribution, inventory declined by approximately $1.3 million during the first three months of 2006. During the quarter we converted approximately $4.9 million of materials into finish subassemblies or final product. This resulted in a reduction of raw materials of more than 1.6 million and an increase in finished goods of $1.3 million.

In the coming months, ops will be focused on the following objectives; full implementation of our MRP system, continued inventory reductions through controlled management of inbound raw materials and increased throughput to finished product, conversion of our cartridge lines to accommodate our improved blast door design, continued efforts to expand lean initiatives and product enhancements that increase our X26 and cartridge line throughput and full production launch of the TASER Cam.

Before turning the call over to Dan for the financial review of the first quarter, I want to be sure to set the proper expectation for the TASER Cam's first production run. This product is a highly complex collaboration of software and hardware that was configured to work with our current X26 platform. With this type of product integration, there's always risk of complications and early production build. To reduce the potential defects and warranty issues for our customers, we're bringing the line up slowly and with very sophisticated test protocols. These added tests will increase the cost per unit and reduce our short-term product margin over the next few months. But we believe the short-term addition of costs will ensure our long-term success with the product line. It is our expectation that testing and labor charges will decline with time as will materials with the elimination of expedited handling fees. These reductions in costs moving forward should help to increase the margins for the TASER Cam from the low end of our margin structure to more of a median figure as we move into higher volume production.

With that, I would like to turn the call over to Dan Behrendt, our Chief Financial Officer.

Thank you. Good morning. As Tom indicated, sales for the first quarter were $13.9 million, which is the highest first-quarter sales figure we have had in the Company's history. It is also 3.7 million or 36% better than the first quarter of 2005.

Gross margins were $9 million for the quarter or 64.6% of sales. As Kathy indicated, this is a significant improvement over the first quarter of 2005. SG&A expenses for the quarter were $7.5 million, which are 1.9 million higher than in Q1 2005. This is driven by higher professional fees and lobbying and PR, 123R charges for stock compensation, higher depreciation charges, and higher salaries and benefits due to additional headcount. But on a sequential basis, SG&A expenses were actually flat with the fourth quarter of 2005 with the increase attributable to the stock-based compensation expenses in Q1. As Tom indicated at our board meeting this week, we discussed plans to bring these expenses down over time with the focus on legal, lobbying, public relations, consulting and other variable type expenses.

R&D expenses for the quarter were $658,000, up 90% from 2005 as the company continues to invest in new product development. Interest income for the quarter was $367,000, which is up 84% over 2005. Net income of 693 yielded an EPS of $0.01 on both the basic and diluted basis. The Company's total stock compensation, which starts running through the P&L this quarter, was $350,000 with $20,000 being charged to indirect manufacturing, 267,000 being charged to SG&A and $63,000 charged to the R&D line this quarter.

Moving onto the balance sheet. Cash and investments were $14.3 million at March 31, 2006, which were down 2.1 million from year-end as the Company shifted $1 million to short-term investments and 2.6 million to long-term investments. Total cash and investments actually increased $1.5 million to 45.4 million at March 31. Accounts Receivable increased 2.3 million from year-end to 7.7 million on higher sales levels and the billing of the Office of Naval Research contract, which shifted its asset from other assets to Accounts Receivable. Inventory decreased 1.3 million from year-end with a change in mix from raw materials to finished goods. Prepaids and other assets came down $840,000 due to the billing of the Office of Naval Research contract and reductions in prepaid insurance. At March 31 our total asset balance was 113 million.

On the liability side, we did see Accounts Payable and accrued liabilities decrease $715,000 on lower purchasing activity, and total liabilities decreased by $500,000 to end the quarter at $8 million. Stockholder's equity actually increased $1.2 million on the higher profits and ended the quarter at $105 million.

Moving onto the cash flow. As we indicated, the Company actually had operating cash flow of $1.9 million for the quarter. This is driven by $693,000 of net income, 516,000 is depreciation and amortization, 350,000 of non-cash 123R stock-based compensation expenses and the $1.3 million reduction in inventory. We also invested $3.6 million in short and long-term investments for the quarter and an additional $535,000 in capital expenditures. Cash provided by financing activities were $128,000, and we finished the quarter with a cash balance at $14.3 million.

With that I would like to turn the call back over to Tom Smith, our President.

Obviously the results continue to build in the right direction. We're certainly not out of the woods yet, but I think it is important to note that as we continue to focus on those SG&A expenses with the activities and the lobbying and the public relations in the legal areas, while we will be judicious in looking at those expenses, we are also not going to be foolish in cutting back in an area where we need to continue to win and continue to invest to make sure that we protect the Company. A lot of it is community education that we have been doing and Investor Relations meetings we have been doing. There has been a lot of discussion and concern regarding our legal areas.

So we are going to turn the call over to Doug Klint, our General Counsel, who has really put together quite a team, quite an impressive group of people with witnesses and ask him to really elaborate on the litigation areas. That seems to be a primary concern right now to both investors and customers and make them really understand what our strategy is and why we continue to win with the science on our side. Doug?

Thanks, Tom. For the purpose of this call, I would like to focus on our product liability and litigation. Before I discuss any specific lawsuits, I would like to give you an overview of product liability litigation. In order to prevail in a product liability lawsuit, the plaintiff must be able to prove that the product is defective and that this defect caused the injury or death. In all cases but one, the TASER device operated as intended in accordance with its specifications. There was no product defect.

In that one case, the TASER did not operate since the rechargeable batteries had not been recharged for several months and the batteries were dead. Once the batteries were recharged, it worked fine. Absent proof of a product defect, the plantiffs will not be able to prevail in these lawsuits. The plaintiffs have also not been able to establish that the TASER device caused any injury or death.

This is the strongest factor in our favor in defending this litigation. The safety of the TASER device has been well-established by over 70 medical and safety studies. It is interesting to note that several of the criminal suspects involved in this litigation were killed by firearms. In one lawsuit we were sued because the police officer pulled a gun and shot the suspect. The TASER device was never used.

Others died as a result of drug overdoses, pre-existing medical conditions, chronic drug abuse, excited delirium, and metabolic acidosis. Medical examiners have concluded that the TASER device had no cause of relationship in most of these deaths. In a few other cases, medical experts have contested the medical examiners' findings and exposed their lack of knowledge of the biomedical effects of electricity. We have over 30 nationally renowned medical and scientific experts who have all investigated the safety of the TASER device and concluded that it played no causative relationship in any injury or death.

I would now like to talk about our specific lawsuits. There are basically three types of product liability lawsuits filed against the Company. We have 15 training injury cases pending with five cases being dismissed.

In the training injury lawsuits, all of the alleged injuries were secondary injuries caused by falls and muscle contractions, both of which risks are commonplace in police training and are risks that we have warned about.

We also have 28 in custody death cases pending with seven cases being dismissed. We have seven suspect injury cases pending where criminal suspects alleged they were injured in the course of arrest or while in police custody with one case being dismissed.

We have been successful in having 13 of these lawsuits either dismissed or being awarded judgments or verdicts in TASER's favor. We have not lost any of these cases, and we will aggressively defend these lawsuits and win them through dismissal or the jury verdicts. Our strategy is to hire the best of world-class medical and scientific experts in all relevant fields. We stand behind the exceptional safety record of the TASER product, and we will take all cases through trial if necessary. We filed motions for dismissal and summary judgment and seek sanctions as appropriate for filing frivolous litigation. Our objective is to send such a strong message to our adversaries by overwhelming them with our defense that they will think twice about filing litigation against TASER.

This strategy is starting to pay off since we are beginning to see a reduction in the rate of new litigation being filed against the Company. For example in the fourth quarter of 2005, we had six lawsuits filed in October, five in November, four in December, four in January 2006, two in February, one in March and one so far in April.

While we are making an investment in winning these lawsuits, we are also beginning to see a reduction in outside legal fees. First-quarter legal fees were down approximately $200,000 from fourth quarter 2005, and we expect to see additional reductions through the balance of the year as we implement our strategy of utilizing our in-house legal team to reduce outside legal services.

It is very important to understand that from our customer's perspective product liability lawsuits are not a risk to law enforcement agencies. These lawsuits are not filed against law enforcement. They are only filed against manufacturers or sellers of products. Our customers battle excessive use of force litigation. The TASER device has played an important role in reducing the excessive use of force litigation against law enforcement. In fact, the Michigan Municipal Risk Management Authority, which ensures many of the large law enforcement agencies in the state of Michigan, was so convinced that the use of TASER devices reduced excessive force liability for their members that they instituted a grant program in 2003 where they paid 50% of the cost of any TASER device purchased by their member agencies.

Since initiating that grant program, they have significantly reduced their excessive use of force claims and have had no claims associated with the use of the TASER. This fact is also represented by the many court rulings that have routinely held that the TASER device does not per se constitute excessive use of force. Our customers understand this. Our product liability litigation does not impact or scare them, and they place a very high value on the TASER device in reducing their excessive use of force litigation.

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

Thanks, Doug, and again, I think they have done a great job putting together a team that remains focused. Quite frankly, as they say, the truth will set you free. The science continues to back what we are doing. The cases continue to provide that the information just is not there. While these are unfortunate and tragic incidents, it is a situation that has been around for a long time before our product got here and will continue into the future. That is the unfortunate downside to the business, but we will continue to provide the best products available for law enforcement and military and consumer applications to save lives and reduce injuries everyday.

Now I would like to talk a little bit about the sales area. During the quarter we have added 342 new agencies, raising the total over almost half of every U.S. law enforcement agency in the U.S. to a level over 9100 either testing or deploying our product. Again, that is another significant milestone that showed the continued advancement of the technology being used and tested around the country.

Of our 909,100 existing customers, we added 151 with new full deployments during the quarter, bringing the total to 2158, which represents roughly 25.5% of our customers at the full deployment level. So not only do we still have continued growth with new customers coming on board of the roughly 18,000 agencies in the U.S., we still have a lot of existing growth within our current customer base as they continue to expand and advance their programs internally to get towards that full deployment level.

Again, we have talked about this in the past. We are not out of the woods yet, but I think the biggest factor in the continued growth of the Company going forward with the SEC with their results coming out in December really starting to get the impact for those quotes to come through. We are seeing it here in the office, we are seeing it from our distributors, and we are seeing it from our customers. But it takes time to get those requests for budget approval out to the city councils, out to the mayors and the appropriate budget request location to get the funding in place to be able to get our technology, and we expect to see that continue to grow.

We also attended 15 tradeshows during the quarter, and we remain focused on an educational campaign. I think that is where we are starting to see an effect within the media markets and within the community where we still see varied continued support from the silent majority and the use of this technology by local law enforcement to save lives and reduce injuries.

In terms of the booked sales during the quarter, we had roughly 700,000 in our international area. That is down a little bit from where we were in the previous quarter, but that tends to be a very lumpy part of the business. Again, trying to predict when a country is going to move forward has been a challenge. In the United Kingdom, they continue to have discussions about broader deployments. Unfortunately that just takes some time, so we do expect to see international continue to grow this year. But it will be in fits and spurts as it is a very lumpy part of the business.

The good news is we did see very good growth within the domestic markets again with the SEC going away in terms of some of the items they were looking at relative to safety in our accounting issues. I think that was the biggest factor that affected our local departments and our local elected officials in continuing to advance their programs. We continue to see that that is our real bread and butter with our average order size during the quarter being right around $5700, which again shows it's not the major purchases that are keeping us going, but rather the smaller agencies with continued solid expansion, they continue to drive the Company forward.

The TASER Cam is going to be coming out later this quarter. We do have units in the field. We have several hundred units at many agencies as Kathy mentioned. So far the response has been tremendous. We have had a couple of actual uses with it, but it has done what we have said it is going to do. The beta results give feedback with some hiccups in some of the download software and viewing the videos that we have been able to streamline and make a little bit more user-friendly. Our operations in R&D areas do continue to push that product into the production environment, and we do expect it to see a little bit later than we had originally anticipated this quarter. We thought it might be out by late April, early May, and that slipped a little bit. But we will expect to see it go into production in the May timeframe and really get revenue generation during the June timeframe. So we do still expect it to hit this quarter, but it has slipped a little bit where we thought it would be early in the quarter to push later into the quarter.

We are really focused on making sure that we're spending the money on extra testing. We're spending the time and effort now to make sure that everything is set up correctly so that as we do roll into full-scale production with it, that it is the best quality product we can get out there in the field because it's a tremendous asset for the law enforcement and the community groups to really give that next level of accountability. We have had the ASIC system in place with our cartridge program since the beginning. We have also had the accountability of tracking how many times the device is being pulled, and as they say, a picture is worth 1000 words. Now we are going to give those Chiefs and communities a whole lot of pictures in justifying that this is being used against people that are saying that it might not have been appropriate. They will get to see that for themselves.

We also announced during the quarter the RCMP, the Royal Canadian Mounted Police ordering several hundred units. For us that is a major step in Canada because they have been continuing to use the [M] technology while they evaluated the [X], and it was a major step for them to finally go forward and get the X technology approved and onboard and actually placed their first order during the quarter and supplement the already 1800 M units that are in the country. We believe that will help continue the trend of moving and migrating from the M to the X, which is a smaller size, and easier for them to carry.

Earlier this month in the second quarter we did announce the Charlotte-Mecklenburg order come in, which again is showing the continued momentum. As I mentioned earlier, we are seeing a very good start to this second quarter, a very strong start that we expect to see continue.

In terms of unit sales during the quarter, the X26 in the first quarter we sold 11,687. That's down about 200 units from the fourth quarter, but it is still relatively flat. Where we saw the big pickup was in our cartridges. We sold 175,958 in the fourth quarter of last year, and that was up roughly 50,000, almost 50,000 to 224,000 during the first quarter of this year, which brought our ratio from the previous quarter of 14 to 1 up to roughly 17 to 1. With the cartridges being a little lower gross margin than our TASER line, that is also what had an impact on what Kathy and Dan touched on, which was a little reduction in our gross margins, and that can clearly be seen in the increased number of units of the cartridges going out the door.

By the way, the M unit sales were a little bit higher -- actually flat, about 12 units higher from 1707 in the fourth quarter up to 1712 during the first quarter of this year. We now have over 206,500 TASERs in the hands of law enforcement around the country with still roughly 115,000 out there in the hands of civilians. Again, it's continued expansion, it's continued growth that we are going to stay focused on.

In the International markets, we are continuing to see progress. We're continuing to see the discussions about broader expansion. We're continuing to see very high-profile uses. There was the one just this week that was covered very extensively in the United Kingdom with a suspect that was deranged, had a butcher knife about 10 inches long in a very public location where the TASER was used. It was actually a hostage situation that he had grabbed a young girl and was holding a knife to her neck, and they were able to use the TASER to again successfully end a situation that had a potentially very very deadly outcome in a very public setting.

So we do continue to see not only domestically but internationally as well the continued use and expansion of this program.

There have been a lot of questions about what is going on in France. I can tell you that they have some of our TASER Cam beta units over there to evaluate as they continue to drive forward, and we will be putting out requests for proposals this year, and we do remain optimistic on our international markets. But again, that is a very lumpy side of the business.

Other exciting things we're looking forward to this quarter, our TASER tactical conference will be held the first week in May. That is an opportunity where we host a conference and can train some of our master instructors and update them on some of our new training materials. We're coming out with a new version next month that will be implemented for our training. We get the opportunity to actually get them up to speed and let them see it and go through the preliminary copies of that. Then we also host a conference over the weekend where we expect to have 250 to 300 attendees, where actually we let the law enforcement community come in and present, and that is a great learning opportunity for us to see how this is being used, where it is having an impact and areas that they want this technology to go in the future.

And finally, as we wrap up our call from the first quarter, I would like to invite everybody to attend our annual meeting which will held on May 24 at 10:00 AM here at our Company headquarters. Again, that is something we will be discussing a lot of where we have been and where we are going, and we do invite everybody to please attend that conference.

With that, we would like to put a wrap on the call and ask our operator to come back and open it up to any questions you may have.

(OPERATOR INSTRUCTIONS). Eric Wold, Merriman Curhan Ford.

A couple of question on the TASER Cam. I completely understand about wanting to get the kinks worked out and ramp it up slowly. Can you give an idea of maybe as you exit the quarter end of June what level of production you would look to have in terms of units per month or per quarter coming out the door?

Well, we have got some internal projections that we are working to, Eric. It is going to depend on what the sales demand is coming through. We have seen that start to pick up. They are doing a lot of quotes for it. I'm anticipating our build if the materials come in from the circuitboard houses as we expect about 10,000 units still in Q2.

But again, the big variable there is we made some changes based on the beta tests and the circuitboard layout. So we are waiting for those to come in. As we move forward again, it will be strictly based on the forecast and the production demand.

I would say conservatively it would be somewhere between that 5,000 and 10,000 number to get out really in the June timeframe. I can tell you the response has been fantastic from it. But again, we want to make sure we are walking before we run here, and we want to have everything laid out to maximize the quality going out the door, and that when these do get out in the field, that it's very easy for the departments to adopt them.

Understood. Now back on order trend, we have heard obviously big departments like the CHP and LAPD tend to expand in trials. Now the SEC investigation has been resolved. Have you heard or are there any other larger departments or anything meaningful you can talk about in terms of departments going from small deployments to kind of expanded trials beyond those two?

We have seen again a huge increase in the request for quotes from a number of agencies both small and large. Again, we really don't talk about them unless they have been out ahead of us in terms of the media. Because some of those can be more sensitive with some of the political environments in which those departments operate. But I can tell you across the board small to large we are seeing quite a number of the requests for quotes so that they can take them back to their city council and to their mayors. We, as far as an educational campaign, have been focusing on making sure those people understand the headlines.

We have attended a number of conference. I was in New Jersey last week at the New Jersey Conference of Mayors. We had a lot of raised eyebrows as to why we were there when the mayors were saying, hey, you guys are illegal in the state, what are you doing here? We said, well, you guys are the last state for a change instead of being first and that we are here because you guys are going to be addressing this issue as the law does get changed. You need to be aware of the technology, how it works and planning now on budget requirements in the future and planning than and talking to your chiefs about whether this is a technology they want.

So we are continuing to see areas of improvement from small to large and East to West. It is just we are going to let the departments choose to talk about it within the media if they do because we don't want to screw anything up in those political situations where they may have a touchy budget, let's say, and have to work through some of that.

No, I understand. Not to name any departments specifically, but if you look at some of the large departments, would you expect if someone did announce a full rollout to the department, would an order come in for kind of the entire department, or they tend to kind of parse things out slowly over time?

Well, it depends. The unknown factor in there is that they have a big RICO fund, if they have some kind of a asset forfeiture or situation or something. That is where a lot of the funding comes from in these, and those are unexpected funding sources that they can use to move the program. So we have seen it across the board from Charlotte/Mecklenburg coming out and ordering quite a few of these when they had had a large program in place already to other agencies where it is just a multi-year program.

You know Houston did it all in one shot where Mobile, Alabama did it over a four-year period. So literally there is no real rhyme or reason or consistency that I can tell you you are going to see it this way or that. We see both extremes from buying a few units at a time as funds become available to an agency going in and budgeting to do it all in one shot. The larger agencies you mentioned earlier, LAPD and CHP, but we have seen a number of different quotes go from them from one for everybody to just rolling it out to smaller subsets of that as they kind of work through those internal issues.

And lastly, on the lawsuit side, maybe just update us over the next maybe month or two kind of what lawsuits are scheduled to go to trial on a docket?

And then two, the ones that have been dismissed, at least the ones you're talking about, has there been any precedent set with the cases that have been dismissed, or is it still each case is decided on its own?

With respect to your first question, we have got one case in Los Angeles that was scheduled for trial in April. It has been delayed. We don't have a new trial date. We expect it will be sometime this year.

The other case that was scheduled for trial in October of this year was just dismissed against us. So at this point we just have one trial scheduled for this year.

With respect to your second question, there has been some precedential value with some of these decisions, although until a case is actually decided by a Courts of Appeals, the legal precedential value is somewhat limited. The real impact for us is the fact that plaintiffs' lawyers are seeing that these cases are being dismissed. The one case that we did win a trial, the Powers case. We think this played a very significant role in deterring future litigation being filed against us because they saw how difficult it is to win these cases, the quality of our experts and how tenacious we are in fighting these lawsuits. So, as time goes on, I think we're going to see more precedential law being set in this area, but unfortunately right now it is very limited.

Matthew McKay, Jefferies & Co.

Nice job getting the business back on track here. First question, just on the 5,000 to 10,000 TASER Cam units that you expect to ship in the June quarter here, will you be recognizing revenue on that?

Yes. Again, our revenue recognition is when we ship out the door against an order, we then get terms on those orders. So assuming the orders come into play if we get them produced and physically get them shipped out the door, we will be recognizing revenue on those items.

Okay. I take it those are being sold at the full price point of $400, or are they more just trying to cede the market out there?

The $400 is the retail price point. That would be the selling price. Just so there's no misunderstanding, the beta units that went out into the field are roughly 200. There was no revenue associated with those units. Those were working with agencies to get feedback to us where we provided those units for them to use in the field, and those will be coming back to the Company so we can evaluate them and make sure that they worked and are functioning as intended. But the new June and full production will be revenue and, as you mentioned, the $400 resale price point.

Okay, great. And then just the cartridge sales in the March quarter, maybe just some color on that. Was it driven maybe by sort of more one customer -- one or two customers? Was it some catch-up from agencies that are restarting their programs, or is it more just sort of a broad sustainable pickup in cartridge sales?

No, it was not one or two customers. Again, it was an across the board increase, and we have talked about the fact that we have -- as of the end of last year, we had 183,000 or 193,000 TASERs out there. Where we see a lot of that cartridge bump in the first quarter is from a lot of those agencies buying the cartridges that they will use during the course of the year for their training. So it was somewhat expected. Probably a little higher than we expected it to be. But it is a lot of those agencies buying their training and cartridges that they will use as they certify their officers during the course of the year. So we usually see a bump. It was a little bigger than normal, but it is being used by our existing customer base as part of their recertification requirements for the year.

Okay. So is that something -- is it just going to be a seasonal thing we should expect in the business going forward, maybe slightly higher cartridge sales in the first quarter then?

I would think that would be a very good assumption.

Okay. Then actually just going back to the TASER Cam, when do we get to more normalized margins on that? Are we talking September, December? Are we out in '07? When do we get there?

I would estimate probably Q4 and as we move into 2007. Because as we negotiated the first build, we have that testing built-in to the circuit board. We actually are doing in-circuit testing, which is new for us. I don't anticipate pulling that off to build until we get steady quality out of the suppliers, and we have really a strong confidence in the reliability.

Okay. Good. And then are there going to be any opportunities to maybe automate some of the assembly either of just the TASER, the cartridges or the TASER Cam eventually just to help improve the gross margin?

The product set we are building today is going to be difficult to automate because that is not how they were designed. As we move forward into things like the XREP and with the TASER Cam we're actually having a contract manufacturer do a lot of our electronic assembly.

As we move forward, the answer I think is yes, and as we move into some of the new initiatives on the cartridge line, there is one process in particular that we're looking at automating. But again, you won't see the impact for that until probably 2007.

Okay. And then just on the XREP, anymore thoughts on just where the price point might be on that?

No, we have had a lot of requests for that exact answer, but because we are -- if you look at a TRL level of roughly 5, that is saying we're about 50% of the way through and just getting ready to move into production. The ones that were built so far were built by hand, by our R&D staff, so we really have not gotten any cost quotes put together yet. We don't want to put that out until we are really confident what the number is. I can tell you in our previous life prior to being public with an older product line, we went out with the price way too early, did not have our costs in order, and it really bit us in the butt. So we are not going to do that until we really have a firm understanding of what that device is going to cost us, and we are really moving into the manufacturing environment of design right now. It probably won't be until much later in this year if not even early '07 before we can come out with those kind of figures.

Okay. Actually just on the point of some older units, how many M26s are out in the field? And does the TASER Cam given that it works with the X26, does that drive an upgrade cycle?

Great question. There is about 60,000 of the M26s out there in the field, and we're looking at exactly that about an upgrade because the camera is only available with the X26. That is hopefully a program we're working on right now that will be out later this year for them to transition over to the X.

Okay, great. Then just switching over to a different customer base, the military. Anything percolating on that side that may come through here in the near-term?

There is always things percolating, but to try and nail down again a governmental decision process is like picking a needle out of a haystack, not only foreign but domestic as well. But again, there are things continuing to progress there. Obviously they were excited about the XREP possibilities. So we are even laying the groundwork now for that coming out over the next several years. But again to try and say we're going to nail something down in the short-term, we just cannot figure out or know what the thoughts are within the defense spending area. But there is a lot of activity there and a lot of interest, and they continue to train and come out here for visits.

Okay. And then just last question, just on a consumer market, if you can just kind of go over your marketing strategy here and your efforts to sign up dealers to pursue that market?

Again, we are continuing to do test markets around the country. I'm sure you saw we were in Columbus a couple of weeks ago doing an event on the consumer product. It actually was quite refreshing to do that press conference because the media was very educated, knew their facts inside and out around the product. So again, that educational campaign side of the business is working. You are going to see us do another press conference in St. Louis tomorrow around that product.

So we are continuing to test in different markets, continuing to test different messages. I can tell you we have slowed down our spending in the advertising area within the consumer marketplace. But we are trying a number of different things. Again, our focus is really remaining on the law enforcement, military and foreign side of the business. But you are going to continue to see every couple, three weeks us going to different markets around the country, doing press conferences, making people aware that it is out there. Because we're seeing some solid sales in the area, just not big enough at this point where we're going to turn a big focus to it, but we are continuing to try and find out what is the best messaging points and the best channel, quite frankly, for people to find us. It is not a device like a sweater that you are going to pick up and know right where to go. So there's still an educational component to how the device works, as well as where you can get it.

Okay. Just in terms of dealers, are you signing up additional dealers at this point for the consumer?

We are, especially as we go into some of these markets. That is part of the strategy is to attract attention through the media, through the educational process of the system and then to get the dealers in the local markets to be able to carry it so people can go in and touch it and see it as they go through a buying decision.

Dick Ryan, Feltl & Company.

Dan, can you give me the average order size in the quarter?

It was roughly $5700.

The number of orders or the order size?

That is the order size.

What were the number of orders?

I don't have that number right in front of us. We will have to come back and get that to your later. But it is roughly -- what we're tracking is more the order size. Again, that is giving us more of a feel that it is our bread and butter guys that are out there, so it's roughly $5700. If you want the exact order size, we will have to go get that. It was something that we felt was not really a true tale of what is going on, but more the order size is giving us a better feel for where the customers are.

Okay. Because that would be up pretty significantly since even anything we have seen recently?

Yes, it is up over the previous quarters. That is correct.

Kathy, on the gross margin a little bit, the indirect manufacturing expense is a little bit higher than I was looking at. Was there anything there of note?

The biggest thing that we had continuing is, as we brought up the TASER Cam line, we tend to expense some of, like, the hand tools and the line setup just to get that behind us as we move forward. So we had roughly $100,000 of expenditures getting that line up to running.

Okay. Dan, you gave us a little look on the SG&A and the R&D, but can you give us a little feel on where you think gross margins could trend towards the remainder of the year?

I think that on the gross margins I think we have sort of two things that are going to drive that. We expect to have increased leverage of our fixed cost if our sales continue to increase. So we will see a benefit from that leverage to the fixed cost. But, as Kathy indicated, the TASER Cam, at least initially will -- although obviously it's going to be a profitable product for us, it will not be bringing up that average gross margin. So I think those two things will kind of work sort of against each other. But obviously, as we get that TASER Cam up and running and hopefully get those margins for that product up in line with some of our higher profit products, we will see an improvement over time. But I think right out of the gate I would not expect to see a big improvement in profit with that product coming on board.

Okay. Thank you.

There are no more questions at this time. I would now like to turn the call back over to management. You can proceed, Mr. Smith.

Thanks so much. We appreciate everybody's time this morning. Again, a reminder we look forward to seeing everyone at our annual shareholder meeting on May 24 at 10:00 AM. If you are not able to make that, we look forward to talking to you in July with our second-quarter results. Thanks so much and have a great time.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.