UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
FOR THE TRANSITION 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.) |
3775 North First Street
San Jose, California 95134
(Address of principal executive offices)
Registrant’s telephone number, including area code: 408-952-8200
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Name of each exchange on which registered | |
| Common Stock, $.001 par value | The American Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
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 x No ¨
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 May 19, 2005 | |
| Common Stock, $0.001 Par Value | 57,655,974 |
RAE Systems Inc.
| Part I. |
Financial Information | 3 | ||||
| Item 1. | Financial Statements (Unaudited) | 4 | ||||
| (a) RAE Systems Inc. Condensed Consolidated Balance Sheets at March 31, 2005 and December 31, 2004 |
4 | |||||
| 5 | ||||||
| 6 | ||||||
| (d) RAE Systems Inc. Notes to Condensed Consolidated Financial Statements |
7 | |||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 22 | ||||
| Item 4. | Controls and Procedures | 32 | ||||
| Part II. |
Other Information | 35 | ||||
| Item 1. | Legal Proceedings | 35 | ||||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 35 | ||||
| Item 3. | Defaults Upon Senior Securities | 35 | ||||
| Item 4. | Submission of Matters to a Vote of Security Holders | 35 | ||||
| Item 5. | Other Information | 35 | ||||
| Item 6. | Exhibits | 36 | ||||
| 37 | ||||||
| Exhibit Index |
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| Exhibits |
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2
In connection with the Company’s evaluation of the effectiveness of its internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, and management’s assessment and testing thereof, the Company identified a number of material weaknesses, including inadequate codification of the Company’s revenue recognition policies and review procedures to ensure that revenues are recorded in the proper period. The Company identified a single distributor in Canada, accounting for less than 1% of our annual revenues, who (a) had not signed the Company’s standard distributor agreement sent to the distributor over the last three years and (b) from time to time, placed purchase orders with a “right of return” clause. In addition, the Company identified several U.S. local, state and federal agency purchase orders with freight delivery terms of “FOB destination,” requiring that the Company defer recognition of revenue until the shipments reach the customer, rather than the Company’s standard terms of “FOB factory.” Further, during the course of its review, the Company found a limited number of service contracts that were not properly deferred. After conferring with the Audit Committee of the Company and its independent registered public accounting firm on these matters, another independent certified public accounting firm was engaged to conduct an independent study (agreed-upon procedures report) of the impact of the Company’s revenue recognition practices. Based on the findings of the study by the independent certified public accounting firm, management concluded that the Company’s consolidated financial statements for the years ended December 31, 2004, 2003 and 2000 and for each of the years then ended and the Company’s condensed financial data for the interim periods for fiscal years 2004 and 2003 should be restated. In addition, although the reporting errors in 2002 and 2001 were not considered material, the Company decided to restate these years as well to ensure consistency in reporting for its amended Form 10-K/A for 2004. Furthermore, as part of the restatement process, the Company made corrections to recognize rent expense on a straight-line basis with a corresponding adjustment to deferred rent (a liability), an error which had been previously identified but not considered to be sufficiently material to require correction. The Audit Committee of the Board of Directors concurred with management’s decision.
The effect of these errors is detailed for the period ended March 31, 2004.
(in dollars)
| Quarter ended March 31, 2004 |
||||||
| Previously Reported |
Restated |
|||||
| Balance Sheet: |
||||||
| Inventories, net |
4,351,000 | 4,541,000 | ||||
| Deferred income taxes |
666,000 | 887,000 | ||||
| Total Assets |
52,106,000 | 52,517,000 | ||||
| Accrued liabilities |
2,170,000 | 2,163,000 | ||||
| Current portion of deferred revenue |
69,000 | 605,000 | ||||
| Deferred revenue, net of current portion |
90,000 | 200,000 | ||||
| Other long-term liabilities |
— | 102,000 | ||||
| Total Liabilities |
4,722,000 | 5,464,000 | ||||
| Accumulated deficit |
(3,662,000 | ) | (3,993,000 | ) | ||
| Total Shareholders' Equity |
47,384,000 | 47,053,000 | ||||
| Statement of Operations: |
||||||
| Net Sales |
8,182,000 | 7,804,000 | ||||
| Gross Profit |
5,203,000 | 4,915,000 | ||||
| Total Operating Expenses |
4,699,000 | 4,708,000 | ||||
| Income from Operations |
504,000 | 207,000 | ||||
| Net Income |
185,000 | 7,000 | ||||
| Basic Earnings Per Common Share |
0.00 | 0.00 | ||||
| Diluted Earnings Per Common Share |
0.00 | 0.00 | ||||
3
Condensed Consolidated Balance Sheets
(Unaudited)
RAE Systems Inc.
Condensed Consolidated Balance Sheets
| March 31, 2005 |
December 31, 2004 |
|||||||
| Restated | ||||||||
| Assets |
||||||||
| Current Assets: |
||||||||
| Cash and cash equivalents |
$ | 18,808,000 | $ | 21,566,000 | ||||
| Short-term investments |
8,981,000 | 6,745,000 | ||||||
| Notes receivable |
745,000 | 535,000 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $667,000 and $665,000, respectively |
9,605,000 | 9,934,000 | ||||||
| Accounts receivable from affiliate |
147,000 | 119,000 | ||||||
| Inventories, net |
8,324,000 | 7,815,000 | ||||||
| Prepaid expenses and other current assets |
1,729,000 | 1,558,000 | ||||||
| Deferred income taxes |
1,605,000 | 1,578,000 | ||||||
| Total Current Assets |
49,944,000 | 49,850,000 | ||||||
| Property and Equipment, net |
11,913,000 | 11,287,000 | ||||||
| Long-term Investments |
4,422,000 | 4,500,000 | ||||||
| Intangible Assets, net |
2,031,000 | 2,150,000 | ||||||
| Deposits and Other Assets |
1,119,000 | 1,172,000 | ||||||
| Investment in Unconsolidated Affiliate |
73,000 | 156,000 | ||||||
| Total Assets |
$ | 69,502,000 | $ | 69,115,000 | ||||
| Liabilities, Minority Interest in Consolidated Entities and Shareholders’ Equity |
||||||||
| Accounts payable |
$ | 4,021,000 | $ | 3,449,000 | ||||
| Accrued liabilities |
4,170,000 | 5,582,000 | ||||||
| Notes payable |
439,000 | 423,000 | ||||||
| Income taxes payable |
394,000 | 417,000 | ||||||
| Current portion of deferred revenue |
1,659,000 | 1,122,000 | ||||||
| Total Current Liabilities |
10,683,000 | 10,993,000 | ||||||
| Deferred Revenue, net of current portion |
224,000 | 240,000 | ||||||
| Other Long-term Liabilities |
157,000 | 145,000 | ||||||
| Long-term Notes Payable |
1,421,000 | 1,260,000 | ||||||
| Total Liabilities |
12,485,000 | 12,638,000 | ||||||
| Commitments and Contingencies |
||||||||
| Minority Interest in Consolidated Entities |
4,228,000 | 4,288,000 | ||||||
| Shareholders’ Equity: |
||||||||
| Common stock, $0.001 par value; 200,000,000 shares authorized; 57,597,052 and 57,315,175 shares issued and outstanding, respectively |
58,000 | 57,000 | ||||||
| Additional paid-in capital |
54,245,000 | 53,660,000 | ||||||
| Accumulated other comprehensive income |
58,000 | 137,000 | ||||||
| Accumulated deficit |
(1,572,000 | ) | (1,665,000 | ) | ||||
| Total Shareholders’ Equity |
52,789,000 | 52,189,000 | ||||||
| Total Liabilities, Minority Interest in Consolidated Entities and Shareholders’ Equity |
$ | 69,502,000 | $ | 69,115,000 | ||||
See accompanying notes to condensed consolidated financial statements.
4
Condensed Consolidated Statements of Income
(Unaudited)
RAE Systems Inc.
Condensed Consolidated Statements of Income
| Three Months Ended March 31, |
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| 2005 |
2004 |
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| Restated | ||||||||
| Net Sales |
$ | 12,248,000 | $ | 7,804,000 | ||||
| Cost of Sales |
5,065,000 | 2,889,000 | ||||||
| Gross Profit |
7,183,000 | 4,915,000 | ||||||
| Operating Expenses: |
||||||||
| Sales and marketing |
3,373,000 | 2,061,000 | ||||||
| Research and development |
1,016,000 | 920,000 | ||||||
| General and administrative |
2,600,000 | 1,727,000 | ||||||
| Total Operating Expenses |
6,989,000 | 4,708,000 | ||||||
| Income from Operations |
194,000 | 207,000 | ||||||
| Other (Expense) Income: |
||||||||
| Interest income |
99,000 | 75,000 | ||||||
| Interest expense |
(33,000 | ) | (4,000 | ) | ||||
| Other, net |
(37,000 | ) | 17,000 | |||||
| Equity in loss of unconsolidated affiliate |
(83,000 | ) | (68,000 | ) | ||||
| Total Other (Expense) Income |
(54,000 | ) | 20,000 | |||||
| Income Before Income Taxes and Minority Interest |
140,000 | 227,000 | ||||||
| Income Taxes |
106,000 | 220,000 | ||||||
| Income Before Minority Interest |
34,000 | 7,000 | ||||||
| Minority interest in loss of consolidated entities |
60,000 | — | ||||||
| Net Income |
$ | 94,000 | $ | 7,000 | ||||
| Basic Earnings (Loss) Per Common Share |
$ | 0.00 | $ | 0.00 | ||||
| Diluted Earnings (Loss) Per Common Share |
$ | 0.00 | $ | 0.00 | ||||
| Weighted-average common shares outstanding |
57,485,111 | 52,874,797 | ||||||
| Stock options and warrants |
2,573,656 | 4,317,663 | ||||||
| Diluted weighted-average common shares outstanding |
60,058,767 | 57,192,460 | ||||||
See accompanying notes to condensed consolidated financial statements.
5
Condensed Consolidated Statements of Cash Flows
(Unaudited)
RAE Systems Inc.
Condensed Consolidated Statements of Cash Flows
| Three Months Ended March 31, |
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| 2005 |
2004 |
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| Restated | ||||||||
| Increase (Decrease) in Cash and Cash Equivalents |
||||||||
| Cash Flows From Operating Activities: |
||||||||
| Net Income |
$ | 94,000 | $ | 7,000 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
404,000 | 180,000 | ||||||
| Provision for doubtful accounts |
2,000 | 71,000 | ||||||
| Inventory reserve |
(23,000 | ) | 81,000 | |||||
| Compensation expense under fair value accounting for common stock options |
461,000 | 363,000 | ||||||
| Common stock warrants granted for services |
41,000 | 42,000 | ||||||
| Equity in loss of unconsolidated affiliate |
83,000 | 68,000 | ||||||
| Minority interest in loss of consolidated subsidiaries |
(60,000 | ) | — | |||||
| Deferred income taxes |
(27,000 | ) | — | |||||
| Deferred Rent |
12,000 | 15,000 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
327,000 | (432,000 | ) | |||||
| Accounts receivable from affiliate |
(28,000 | ) | (139,000 | ) | ||||
| Notes receivable |
(210,000 | ) | — | |||||
| Inventories |
(486,000 | ) | (707,000 | ) | ||||
| Prepaid expenses and other current assets |
(212,000 | ) | ||||||