UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(MARK ONE)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
FOR THE PERIOD FROM TO
COMMISSION FILE NUMBER: 001-31783
RAE Systems Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 77-0588488 | |
| (State or other jurisdiction of incorporation) |
(I.R.S. Employer Identification No.) |
1339 Moffett Park Drive
Sunnyvale, California 94089
408-752-0723
(Address of registrant’s principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports, and (2) has been subject to filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) YES ¨ NO x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class |
Outstanding at October 21, 2004 | |
| Common Stock, $0.001 Par Value | 56,883,597 |
INDEX
On May 27, 2004, we invested $9 million in cash for a 64% interest in Beijing Ke Li Heng Security Equipment Co., Ltd. (“KLH”). KLH is a Beijing-based manufacturer and distributor of security, environmental and personal safety monitors and equipment. Our condensed consolidated financial statements include the results of operations of KLH since May 27, 2004.
On January 28, 2004, we closed our public offering of 8,050,000 shares of our common stock at $4.25 per share, less the applicable underwriting discount. The net proceeds, which approximated $31.8 million, will be used for mergers and acquisitions, working capital, and for general corporate purposes.
Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123 for stock-based employee compensation under the modified prospective method as provided for in SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure, an amendment of FASB Statement No. 123. These fair value recognition provisions generally result in stock-based compensation charges for options granted under our 1993 and 2002 stock option plans. While our interim financial statements herein for the three-month and nine-month periods ended September 30, 2004 reflect a non-cash compensation charge related to options of $213,000 and $881,000, respectively, these charges may increase significantly depending on the number of options granted in the future and, to a lesser extent, upon the volatility of our stock and the life of such options.
In April 2003, we issued a warrant to purchase 24,000 shares of our common stock, to Rubenstein Investor Relations. The warrant vested over a period of one year and was exercisable over such period. The fair value of this warrant, assessed at $4,000, was amortized over the service period. For the three-month and nine-month periods ended September 30, 2004, we took a charge related to this warrant in the amount of $0 and $1,000, respectively.
In June 2003, we issued a warrant to purchase 450,000 shares of our common stock, to Jefferies/Quarterdeck for the purpose of retaining their financial advisory services. The warrant vested immediately and is exercisable over four years. The fair value of this warrant, assessed at $329,000, will be amortized over the service period. For the three-month and nine-month periods ended September 30, 2004, we have taken a charge related to this warrant in the amount of $41,000 and $124,000, respectively.
In aggregate, non-cash charges related to the issuance of options and warrants were $254,000 and $1.0 million, respectively, for the three-month and nine-month periods ended September 30, 2004. Stock-based non-cash compensation charges have significantly impacted our financial statements, and will continue to impact the financial statements on a prospective basis.
Item 1. RAE Systems Inc. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
| September 30, 2004 |
December 31, 2003 |
|||||||
| (Unaudited) | ||||||||
| Assets |
||||||||
| Current Assets: |
||||||||
| Cash and cash equivalents |
$ | 21,904,000 | $ | 7,512,000 | ||||
| Short-term investments |
10,000,000 | — | ||||||
| Notes receivable |
503,000 | — | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $656,000 and $176,000, respectively |
9,863,000 | 5,380,000 | ||||||
| Accounts receivable from affiliate |
100,000 | — | ||||||
| Inventories |
8,277,000 | 3,659,000 | ||||||
| Prepaid expenses and other current assets |
2,347,000 | 762,000 | ||||||
| Deferred income taxes |
666,000 | 666,000 | ||||||
| Total Current Assets |
53,660,000 | 17,979,000 | ||||||
| Property and Equipment, net |
4,308,000 | 1,748,000 | ||||||
| Long Term Investment |
5,000,000 | — | ||||||
| Intangible Assets |
2,174,000 | — | ||||||
| Deposits and Other Assets |
292,000 | 327,000 | ||||||
| Investment in Unconsolidated Affiliate |
249,000 | 509,000 | ||||||
| $ | 65,683,000 | $ | 20,563,000 | |||||
| Liabilities and Shareholders’ Equity |
||||||||
| Current Liabilities: |
||||||||
| Accounts payable |
$ | 3,030,000 | $ | 1,611,000 | ||||
| Notes payable |
424,000 | — | ||||||
| Accounts payable to affiliate |
— | 594,000 | ||||||
| Accrued expenses |
4,068,000 | 2,159,000 | ||||||
| Income taxes payable |
980,000 | 948,000 | ||||||
| Current portion of deferred revenue |
1,083,000 | 67,000 | ||||||
| Current portion of capital lease obligations |
31,000 | 122,000 | ||||||
| Total Current Liabilities |
9,616,000 | 5,501,000 | ||||||
| Long term notes payable |
1,695,000 | — | ||||||
| Minority interest in consolidated entity |
4,049,000 | — | ||||||
| Deferred revenue, net of current portion |
124,000 | 102,000 | ||||||
| Total Liabilities |
15,484,000 | 5,603,000 | ||||||
| Commitments and Contingencies |
||||||||
| Shareholders’ Equity: |
||||||||
| Common stock, $0.001 par value; 200,000,000 shares authorized; 56,868,855 and 46,824,626 shares issued and outstanding, respectively |
57,000 | 47,000 | ||||||
| Additional paid-in capital |
51,824,000 | 18,753,000 | ||||||
| Cumulative other comprehensive income |
19,000 | 7,000 | ||||||
| Accumulated deficit |
(1,701,000 | ) | (3,847,000 | ) | ||||
| Total Shareholders’ Equity |
50,199,000 | 14,960,000 | ||||||
| $ | 65,683,000 | $ | 20,563,000 | |||||
(See accompanying notes to condensed consolidated financial statements)
Condensed Consolidated Statements of Income
| Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Net Sales |
$ | 12,264,000 | $ | 7,969,000 | $ | 30,831,000 | $ | 22,768,000 | ||||||||
| Cost of Sales |
4,734,000 | 3,283,000 | 11,606,000 | 8,812,000 | ||||||||||||
| Gross Margin |
7,530,000 | 4,686,000 | 19,225,000 | 13,956,000 | ||||||||||||
| Operating Expenses: |
||||||||||||||||
| Sales and marketing |
2,767,000 | 1,681,000 | 7,419,000 | 5,063,000 | ||||||||||||
| Research and development |
1,063,000 | 717,000 | 2,965,000 | 2,180,000 | ||||||||||||
| General and administrative |
2,055,000 | 1,322,000 | 5,541,000 | 3,760,000 | ||||||||||||
| Total Operating Expenses |
5,885,000 | 3,720,000 | 15,925,000 | 11,003,000 | ||||||||||||
| Operating Income |
1,645,000 | 966,000 | 3,300,000 | 2,953,000 | ||||||||||||
| Other Income (Expense): |
||||||||||||||||
| Interest income |
62,000 | 7,000 | 223,000 | 24,000 | ||||||||||||
| Interest expense |
(3,000 | ) | (5,000 | ) | (11,000 | ) | (20,000 | ) | ||||||||
| Other, net |
19,000 | (37,000 | ) | 51,000 | (14,000 | ) | ||||||||||
| Equity in loss of unconsolidated affiliate |
(111,000 | ) | (65,000 | ) | (260,000 | ) | (198,000 | ) | ||||||||
| Total Other (Expense) Income |
(33,000 | ) | (100,000 | ) | 3,000 | (208,000 | ) | |||||||||
| Income Before Income Taxes and Minority Interest |
1,612,000 | 866,000 | 3,303,000 | 2,745,000 | ||||||||||||
| Income Taxes |
478,000 | 141,000 | 1,033,000 | 450,000 | ||||||||||||
| Income before Minority Interest |
1,134,000 | 725,000 | 2,270,000 | 2,295,000 | ||||||||||||
| Minority interest in income of consolidated subsidiary |
(83,000 | ) | — | (124,000 | ) | — | ||||||||||
| Net Income |
$ | 1,051,000 | $ | 725,000 | $ | 2,146,000 | $ | 2,295,000 | ||||||||
| Basic Earnings Per Common Share |
$ | 0.02 | $ | 0.02 | $ | 0.04 | $ | 0.05 | ||||||||
| Diluted Earnings Per Common Share |
$ | 0.02 | $ | 0.01 | $ | 0.04 | $ | 0.05 | ||||||||
| Weighted-average common shares outstanding |
56,801,158 | 46,246,408 | 55,373,290 | 45,914,155 | ||||||||||||
| Stock options |
3,147,012 | 4,566,384 | 3,131,578 | 3,995,622 | ||||||||||||
| Diluted weighted-average common shares outstanding |
59,948,170 | 50,812,792 | 58,504,868 | 49,909,777 | ||||||||||||
(See accompanying notes to condensed consolidated financial statements)
Condensed Consolidated Statements of Cash Flows
| Nine months ended September 30, |
||||||||
| 2004 |
2003 |
|||||||
| (Unaudited) | (Unaudited) | |||||||
| Increase (Decrease) in Cash and Cash Equivalents |
||||||||
| Cash Flows From Operating Activities: |
||||||||
| Net Income |
$ | 2,146,000 | $ | 2,295,000 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
| Depreciation and amortization |
665,000 | 637,000 | ||||||
| Provision for doubtful accounts |
10,000 | — | ||||||
| Inventory reserve |
314,000 | (94,000 | ) | |||||
| Compensation expense related to options |
881,000 | 497,000 | ||||||
| Compensation expense related to warrants |
124,000 | 57,000 | ||||||
| Equity in loss of unconsolidated affiliate |
260,000 | 198,000 | ||||||