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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
(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, 1997
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 000-21907
Racom Systems, Inc.
- -----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 84-1182875
- ----------------------------- ---------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
6080 Greenwood Village, CO
Greenwood Village, CO 80111
(Address of principal executive offices)
(303) 771-2077
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes No X
-- --
There are 13,192,532 shares of the registrant's common stock, no par
value outstanding as of September 30, 1997.
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RACOM SYSTEMS, INC.
FORM 10-QSB
INDEX
Part I Financial Information Page
Item 1. Condensed Balance Sheets as of
December 31, 1996 and
September 30, 1997 1
Condensed Statements of Operations
for the three and nine months ended
September 30, 1996 and 1997 3
Condensed Statements of Cash Flows
for the nine months ended
September 30, 1996 and 1997 4
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II Other Information and Signatures 12
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RACOM SYSTEMS, INC.
CONDENSED BALANCE SHEETS
ASSETS DECEMBER 31, SEPTEMBER 30,
1996 1997
----------- -------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 314,202 $1,977,684
Accounts receivable 79,201 41,845
Accounts receivable-related party 33,558 23,859
Inventory 428,401 386,081
License revenue receivable-related party 646,162 -
Prepaid expenses and other - 84,359
---------- ----------
Total Current Assets 1,501,524 2,513,828
Property and Equipment:
Machinery and equipment 351,120 399,385
Furniture and fixtures 56,801 58,756
Leasehold improvements 3,328 3,328
---------- ----------
411,249 461,469
Less accumulated depreciation (260,364) (332,634)
---------- ----------
150,885 128,835
Investment in joint venture 257,736 358,015
Other Assets:
Technology license from related party,
net of accumulated amortization of
$684,898 and $803,131, respectively 1,715,102 1,596,869
Organization costs, net of accumulated
amortization of $24,873 and $25,730,
respectively 857 -
Debt issuance costs, net of accumulated
amortization of $8,788 and $106,587,
respectively 97,799 -
Deferred offering costs 161,948 -
---------- ----------
1,975,706 1,596,869
---------- ----------
$3,885,851 $4,597,547
---------- ----------
---------- ----------
The accompanying notes are an integral part of these condensed financial
statements.
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RACOM SYSTEMS, INC.
CONDENSED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ------------
(Unaudited)
Current Liabilities:
Accounts payable and
accrued liabilities $ 631,425 $ 393,853
Accounts payable-related parties 552,298 7,200
Notes and interest payable-related party 1,029,596 -
Bridge notes payable 1,040,000 -
Capital lease obligation 1,331 464
Deferred license revenue-related party 93,397 42,600
------------ ------------
Total Current Liabilities 3,348,047 444,117
Deferred license revenue-related party 303,540 105,445
------------ ------------
Total Liabilities 3,651,587 549,562
Stockholders' Equity:
Preferred stock, no par value, 5,000,000
shares authorized, no shares issued
or outstanding - -
Common Stock, $.01 par value, 20,000,000
shares authorized, 13,192,532 shares
issued and outstanding 115,325 131,925
Additional paid-in capital 10,272,591 16,454,543
Accumulated deficit (10,153,652) (12,538,483)
------------ ------------
Total Stockholders' equity 234,264 4,047,985
------------ ------------
Total Liabilities and Stockholders' Equity $ 3,885,851 $ 4,597,547
------------ ------------
------------ ------------
The accompanying notes are an integral part of these condensed financial
statements.
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RACOM SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
Three months ended Nine months ended
September 30, September 30,
------------------------- --------------------------
1996 1997 1996 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 9,671 $ 51,625 $ 222,145 $ 157,561
Product sales-related parties 43,436 6,943 84,065 71,398
Custom product development projects - - 600,000 -
License revenues-related party 23,349 10,650 513,682 448,908
---------- ---------- ----------- -----------
76,456 69,218 1,419,892 677,867
Cost of revenues 227,191 74,433 842,687 318,283
---------- ---------- ----------- -----------
Gross margin (150,735) (5,215) 577,205 359,584
Operating Expenses:
Research and development 227,140 272,675 405,341 829,936
General and administrative 188,154 279,567 654,075 753,303
Sales and marketing 217,893 258,992 649,438 748,345
Equity in loss (income) of joint venture 41,790 (42,669) 466,984 155,705
Amortization expense 40,697 39,411 131,700 215,757
---------- ---------- ----------- -----------
715,674 807,976 2,307,538 2,703,046
---------- ---------- ----------- -----------
Income (loss) from operations (866,409) (813,191) (1,730,333) (2,343,462)
Other expenses:
Interest expense - (525) - (40,991)
Interest expense-related parties (15,903) - (42,154) (17,405)
Interest income 183 30,544 7,092 80,346
Other 5,240 (8,529) 4,365 (63,319)
---------- ---------- ----------- -----------
Net income (loss) $ (876,889) $ (791,701) $(1,761,030) $(2,384,831)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Net income (loss) per share $(0.07) $(0.06) $(0.15) $(.19)
Weighted average common and common
equivalent shares outstanding 11,844,793 12,633,643 11,844,793 12,633,643
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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RACOM SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
-------------------------
1996 1997
----------- -----------
Cash Flows From Operating Activities:
Net loss $(1,761,030) $(2,384,831)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 209,789 191,360
Equity in loss of joint venture 466,984 155,705
Amortization of debt offering costs - 97,799
Loss (Gain) on disposal of assets 926 -
Decrease (Increase) in:
Prepaid expenses - (49,159)
Accounts receivable-trade 47,296 37,356
Accounts receivable-related party 5,036 9,699
Inventory (161,825) 7,120
License revenue receivable - 646,162
Increase (decrease) in:
Accounts payable and
accrued liabilities 266,315 (237,572)
Accounts payable-related parties 127,935 (545,098)
Deferred license revenue 420,286 (248,892)
Accrued interest - 39,102
Accrued interest-related party 40,158 17,405
----------- -----------
Net cash provided by (used in) operating activities (338,130) (2,263,844)
Cash Flows From Investing Activities:
Purchase of fixed assets (24,624) (50,220)
Proceeds from the sale of fixed assets 597 -
Investment in joint venture (466,984) -
----------- -----------
Net cash used in investing activities (491,011) (50,220)
Cash Flows From Financing Activities:
Proceeds from issuance of common stock - 7,125,000
Payment of offering costs - (1,020,484)
Proceeds from notes payable-related party 345,000 -
Repayment on notes payable-related party - (2,126,103)
Payments on capital lease liability (642) (867)
----------- -----------
Net cash (used in) provided by financing activities 344,358 3,977,546
The accompanying notes are an integral part of these condensed financial
statements.
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Net (Decrease) Increase in Cash and Cash Equivalents (484,783) 1,663,482
Cash and Cash Equivalents at Beginning of Period 512,435 314,202
----------- -----------
Cash and Cash Equivalents at End of Period $ 27,652 $ 1,977,684
----------- -----------
----------- -----------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest - $ 39,852
Interest-related parties - $ 287,001
Income taxes - -
Supplemental Schedule of Noncash Investing and Financing Activities:
During Second Quarter 1997, the Company recognized a $255,984 gain on its
investment in Racom Japan ("RJ") as a result of the investee's issuance of
additional shares in accordance with SAB 51. Due to RJ's history of continuing
operating losses and questions regarding RJ's ability to continue in existence,
the Company recognized the increase in the investment as a corresponding
increase to additional paid in capital.
During Third Quarter 1997, the Company converted $400,000 of debt due to Intag
International Limited ("Intag") at US$2.50 per share resulting in the issuance
160,000 common shares.
The accompanying notes are an integral part of these condensed financial
statements.
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RACOM SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
Note 1 - Basis of Presentation
The accompanying financial information of the Company at September 30, 1997
and for the period then ended and have been prepared from the books and records
of the Company without audit. The information is prepared in accordance with
the rules prescribed for filing condensed Third Quarter financial statements
and, accordingly, does not include all disclosures that may be necessary for
complete financial statements prepared in accordance with generally accepted
accounting principles. The disclosures presented are sufficient, in
management's opinion, to make the Third Quarter information presented not
misleading. All adjustments, consisting of normal recurring adjustments,
which are necessary so as to make the Third Quarter information not misleading,
have been made. Results of operations for the three months ended or the nine
months ended September 30, 1997 are not necessarily indicative of results of
operations that may be expected for the year ending December 31, 1997.
It is recommended that this financial information be read with the
complete financial statements included in the Company's Form 10-KSB for the
year ended December 31, 1996 previously filed with the Securities and Exchange
Commission.
Note 2 - Net Loss Per Common and Common Equivalent Share
Net loss per common and common equivalent share has been computed based upon the
weighted average number of common shares and common share equivalents
outstanding. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common stock and common stock equivalent shares issued by the
Company at prices below the initial public offering price during the twelve
month period prior to the offering (using the treasury stock method for common
stock equivalents at an assumed offering price of $4.75 per unit) have been
included in the calculation as if they were outstanding for all periods
presented regardless of whether they were antidilutive.
Note 3 - New Accounting Standard
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", which supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share". SFAS No. 128 is effective for annual and interim periods ending
after December 15, 1997 and simplifies the computation of earnings per share by
replacing the presentation of primary earnings per share with a presentation of
basis earnings per share. SFAS No. 128 requires dual presentation of basic and
diluted earnings per share by entities with complex capital structures. Basic
earnings per share includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity. The
Company does not believe that its loss per share calculations will be materially
affected as a result of adopting SFAS No. 128.
Note 4 - Tripartite Agreement
On April 15, 1997, the Company signed an agreement with Ramtron International
Corporation ("Ramtron") and Intag International Limited ("Intag") to
significantly increase the availability of Ramtron's ferroelectric random access
memory (FRAM) technology for use in radio frequency identification (RFID)
markets and applications. The agreement replaces all existing licensing, supply
and
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memorandum of understanding agreements between the parties. Under the
agreement, the Company retained the rights to sublicense Ramtron's ferroelectric
technology for use in ferroelectric RFID products to no more than five (5)
parties pursuant to Ramtron's approval. The Company has, to date, sublicensed
such technology to two separate companies. Ramtron has agreed to coordinate its
own licensing of FRAM technology, including the licensing of FRAM technology for
use in RFID applications with the Company, until such time as the Company
completes its five sublicensing agreements. The parties to the agreement have
agreed to share, with certain limitations, future licensing and royalty revenues
associated with such ferroelectric RFID licensing activities. In addition,
Ramtron granted the Company the right to purchase certain agreed upon
percentages of its FRAM product manufacturing capacity.
Note 5 - Equity Investee
On May 7, 1997, Racom Japan ("RJ") sold 3,020 shares of its stock to third
parties reducing the Company's ownership to 22.8%. In conjunction with a prior
license sale to RJ, the Company recognized its proportionate share of previously
deferred revenue of $199,010 as a result of its decreased ownership percentage.
The underlying basis difference of $255,984 as a result of the sale by RJ to
third parties was treated as a capital transaction in accordance with SAB 51.
Note 6 - Subsequent Events
Subsequent to Third Quarter 1997, the Company re-negotiated the Product
Distribution and Technology License agreements with Racom Japan. The
exclusivity clause of its technology license with Racom Japan has been
terminated in exchange for allowing Racom Japan worldwide rights to sell
products under the license.
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The results of operations for the quarter ended September 30, 1997 are
not necessarily indicative of the Company's expected performance for
any future period. Information contained herein is supplemental to the
Company's annual report on Form 10-KSB for the year ended December 31, 1996 and
the Company's Prospectus filed effective March 12, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Investors should carefully consider the following information as well as
other information contained in this Report before making an investment in the
Common Stock. Information contained in this Report contains "forward-looking
statements" which can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "should" or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by discussions
of strategy. No assurance can be given that the future results covered by the
forward-looking statements will be achieved. The following matters constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results covered in
such forward-looking statements. Other factors could also cause actual results
to vary materially from the future results covered in such forward-looking
statements.
The Company is a leading developer and marketer of contactless smart card
systems ("Smart Card(s)") used primarily in electronic commerce. Generally the
size of a credit card, Smart Cards are used in a number of consumer applications
including (i) access to restricted areas (replacing keys and identification
cards), (ii) public transportation fare collection (replacing bus tokens, taxi
cab charge cards, airline or railway tickets and the like), (iii) point of sale
purchases (replacing cash or credit cards at cafeterias, newsstands and related
point of sale locations where speed of purchase is important), and (iv)
miscellaneous small monetary transactions (replacing coins and cash at parking
lots, in vending machines and public telephones, etc.). Smart Card technology is
also used in industrial applications by attaching a "tag" containing the Smart
Card technology to the manufactured product in order to track the product from
the assembly line through quality control, warehousing, inventory control,
distribution and warranty.
On September 22, 1997, the Company announced the availability of the first
of a new generation of affordable smart card systems that offer secure
transactions in both contact and contactless operation. The new generation of
smart cards, the RX-1500 series, was specifically designed to meet the needs of
multi-application environments that require contact and contactless operation
such as transit, parking, loyalty, access control, and electronic purse.
The Company principally generates revenues from licensing, fee based custom
product development projects and sale of its Smart Card products. In the future,
the Company anticipates that a substantial portion of its revenues will be
generated from custom product development projects and the sale of its Smart
Card products. If the Company is unable to continually replace larger custom
product development projects as these projects are completed, its operations
will be adversely affected. Custom product development projects are billed in
stages based on certain agreed upon performance milestones. Accordingly,
financial results for any calendar quarter may fluctuate widely depending on the
stage of a custom product development project or the amount of licensing
payments in a particular quarter.
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As reflected in the Company's Financial Statements, the Company has
generated substantial operating losses since inception and has yet to generate
sufficient revenues to fund its operations. To date, the Company has completed a
series of smaller scale projects; however, the Company has not yet completed a
significant number of larger projects, and as a result, it is uncertain whether
the Company will be able to successfully market and sell its Smart Card products
in sufficient quantities and at sufficient prices and volumes to fund its
operations. During 1995 and 1996, the Company experienced significant cash flow
deficits and liquidity shortages and funded its operations primarily through the
sale of nonexclusive sublicenses to its technology, through proceeds from the
sale of its Common Stock, through bridge loan borrowings and through borrowings
from affiliates.
During 1997, the Company anticipates that increased operating revenues will
be achieved through a combination of product sales, custom product development
projects and the sale of non-exclusive licenses. In addition, the Company
anticipates incurring increased operating and research and development
expenditures in order to further develop and market its Smart Card products.
Results of Operations for the Three Months Ended September 30, 1997 Compared to
the Three Months Ended September 30, 1996
Revenues. Revenues decreased $7,238 from $76,456 for the three months ended
September 30, 1996 ("Third Quarter 1996") to $69,218 for the three months ended
September 30, 1997 ("Third Quarter 1997"). Third Quarter 1996 revenues reflect
the recognition of revenues on a license from RJ, the Company's joint venture
with Nittetsu Shoji Co., Ltd. for the manufacture and sale of FRAM based radio
frequency products in Japan of $23,349. The amount received for the license was
$933,968. At the time of sale, the Company owned a 50% interest in RJ and,
accordingly, 50% of this amount (representing the Company's intercompany profit
due to its 50% equity ownership in RJ on the date of the sublicense) was
deferred and is being recognized over the life of the related technology license
asset owned by RJ, which is five years, commencing on the date of sale. Third
Quarter 1997 includes $10,650 of the deferred revenue, decreased from $23,349 in
previous quarters as a result of the decrease in ownership percentage to 22.8%.
Cost of Revenues and Gross Margin. As a percentage of revenues, gross margin
increased from (197%) in Third Quarter 1996 to (7.5%) in Third Quarter 1997.
The gross margin is primarily a result of license revenues which have no
associated cost of revenues. The Company has not generated high profit margins
on product sales in part because of competition the Company encounters with
Contacted Cards which typically are sold at a lower price than the Company's
Contactless Smart Cards. Cost of revenues in Third Quarter 1996 included
$133,693 of costs associated with a custom product development project. Third
Quarter 1997 did not include any costs associated with a custom development
project.
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Research and Development Expenses ("R&D"). R&D increased $45,535 from
$227,140 in Third Quarter 1996 to $272,675 in Third Quarter 1997. R&D efforts
relating to the Company's Smart Card products expanded significantly during
1996 and 1997. In January 1996, the Company began work on a joint development
project with Bull CP8. Engineering personnel resources and development costs
totaling $100,390 were directly related to the project and are included in
cost of revenues for Third Quarter 1996. Third Quarter 1996 also included
approximately $87,000 of costs on development projects to redesign products.
Third Quarter 1997 includes a $5,200 (4%) increase in wages as a result of an
annual wage increase and approximately $5,500 of increased wages and benefits
from the hiring of an engineer. Third Quarter 1997 also included a $13,000
increase in engineering consulting/contract services over Third Quarter 1996
required to develop card packaging for the Company's new product line and to
further develop software applications to be used with the Smart Card Systems.
General and Administrative Expenses ("G&A"). G&A increased $91,413 from
$188,154 in Third Quarter 1996 to $279,567 in Third Quarter 1997. Third Quarter
1997 includes increasing expenditures approximating $40,000 relating to investor
relations consulting, securities legal and NASDAQ filing expenses incurred after
the Company's IPO. The Company also recognized approximately $22,000 relating
to the Directors and Officers Liability Insurance policy which was paid upon the
Company completing its IPO in March 1997. During Third Quarter 1997, the
Company incurred additional consulting expenses for Human Resources consulting
of $3,000, and Mergers & Acquisitions Research consulting of $18,000. The
Company recently hired a contract recruiter to hire several engineering,
marketing and operations positions. The Company incurred approximately $9,000
of recruiting expenses during Third Quarter 1997 and as a result has hired for
two of the positions.
Sales and marketing expenses. Sales and marketing expenses increased $41,099
from $217,893 in Third Quarter 1996 to $258,992 in Third Quarter 1997.
Approximately $20,000 of the Vice President of Operations' wages and benefits
were allocated to marketing expenses as a result of his increased efforts in
marketing one of the Company's major product lines during 1997. Third Quarter
1997 also includes approximately $20,000 of promotion expenses related to the
Company's participation in the APTA trade show in September 1997. At the show,
the Company announced the availability of the first of a new generation of
affordable smart card systems that offer secure transactions in both contact and
contactless operation. The new generation of smart cards, the RX-1500 series,
was specifically designed to meet the needs of multi-application environments
that require contact and contactless operation such as transit, parking,
loyalty, access control, and electronic purse.
Equity in Loss (Income) of Joint Venture. The Company currently owns 22.8% of
RJ. RJ was formed in 1993 for the purpose of marketing, distributing and
supporting the Company's Smart Card products to be sold in Japan. The Company
accounts for its investment on the equity method and has recorded its share of
RJ's losses (income) in its financial statements to the extent of capital
invested in RJ by the Company. The equity in the losses (income) of RJ decreased
between the Third Quarter periods, from equity in losses of $41,790 in Third
Quarter 1996 to equity in income of $42,669 in Third Quarter 1997. RJ's losses
were primarily related to ongoing research and development activities as well as
longer sales cycles and trial tests demanded by Japanese customers. During
Third Quarter 1997, RJ received 50 million yen for services rendered under a
Development Contract with Marubeni, a Japanese card manufacturer.
Amortization Expense. The Company's primary asset is a technology license
related to the design and manufacture of its Smart card products. The asset is
amortized over its estimated useful life on a straight line basis.
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Other Income(Expense). During Third Quarter 1996, the Company incurred $15,903
in interest expense on various notes payable to Intag. The notes were due on
demand and carried annual interest of 10%. The notes and accrued interest were
paid during First Quarter 1997 upon completion of the initial public offering
("IPO"). During Third Quarter 1997 the Company earned $30,544 in interest
income. The Company invested the proceeds from the IPO in a Government
Obligations Fund which earned an average of 5.10% for the quarter. The Fund has
an average maturity of less than 90 days.
Net Income (Loss). The Company is a C Corporation under the Internal Revenue
Code and for income tax reporting purposes as of December 31, 1996, has
approximately $9,600,000 of net operating loss carryforwards that expire at
various dates through 2011. The Tax Reform Act of 1986 contains provisions
which may limit the net operating loss carryforwards available to the Company in
any given year if certain events occur, including significant changes in
ownership interests.
Results of Operations for the Nine Months Ended September 30, 1997 Compared to
the Nine Months Ended September 30, 1996
Revenues. Revenues decreased $742,025 from $1,419,892 for the nine months ended
September 1996 ("Interim 1996") to $677,867 for the nine months ended September
30, 1997 ("Interim 1997"). Interim 1996 revenues reflect the initial payment
and the first milestone completed under a custom product development contract
totaling $600,000 and recognition of revenues on a license from RJ, the
Company's joint venture with Nittetsu Shoji Co., Ltd. for the manufacture and
sale of FRAM based radio frequency products in Japan of $466,984. The amount
received for the license was $933,968. At the time of the sale, the Company
owned a 50% interest in RJ and, accordingly, 50% of this amount (representing
the Company's intercompany profit due to its 50% equity ownership in RJ on the
date of the sublicense) was deferred and is being recognized over the life of
the related technology license asset owned by RJ, which is five years,
commencing on the date of sale. Interim 1997 revenues reflect the final
installment owed on a sublicense granted by RJ to Fujitsu Limited, a Japanese
Company, under which the Company is entitled to 50% of all sublicense revenue
earned by RJ. The sublicense resulted in the Company recognizing $200,016 in
licensing revenues. Interim 1997 revenues also include $238,242 of licensing
revenues recognized from the deferral of the RJ license in 1996 as discussed
above pursuant to the Company's ownership percentage being reduced to 22.8%.
Cost of Revenues and Gross Margin. As a percentage of revenues, gross margin
increased from 41% in Interim 1996 to 53% in Interim 1997. The gross margin is
primarily a result of license revenues which have no associated cost of
revenues. The Company has not generated high profit margins on product sales in
part because of competition the Company encounters with Contacted Cards which
typically are sold at a lower price than the Company's Contactless Smart Cards.
Cost of revenues in Interim 1996 included $387,766 of costs associated with a
custom product development project. Interim 1997 did not include any costs
associated with a custom development project.
Research and Development Expenses ("R&D"). R&D increased $424,595 from $405,341
in Interim 1996 to $829,936 in Interim 1997. R&D efforts relating to the
Company's Smart Card products expanded significantly during 1996 and 1997. In
January 1996, the Company began work on a joint development project with Bull
CP8. Engineering personnel resources and development costs totaling $292,960
were directly related to the project and are included in cost of revenues for
Interim 1996. The Company hired an engineer during Interim 1997, resulting in
an increase in wages of approximately $15,000. Annual wage increases became
effective in Interim 1997, resulting in an additional increase in wages of 4%,
or approximately $14,000. Interim 1997 also includes approximately $77,000 in
additional engineering consulting/contract services over Interim 1996 required
to develop card packaging for the Company's new product line and to further
develop software applications to be used with the Smart Card Systems.
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General and Administrative Expenses ("G&A"). G&A increased $99,228 from
$654,075 in Interim 1996 to $753,303 in Interim 1997. Interim 1996 included
approximately $68,000 for consulting on several projects through June 1996,
including the development of the Tran$Cash Group, one vertical marketing
approach currently being pursued by the Company which focuses on full,
turn-key, entrepreneurial solutions for electronic fare and toll collection
and e-ticketing in major transportation markets. These consulting arrangements
did not continue into 1997. Interim 1997 includes increasing expenditures
approximating $112,000 relating to investor relations consulting, securities
legal and NASDAQ filing expenses incurred after the Company's IPO. The
Company also recognized approximately $58,000 relating to the Directors and
Officers Liability Insurance policy which was paid upon the Company completing
its IPO in March 1997.
Sales and marketing expenses. Sales and marketing expenses increased $98,907
from $649,438 in Interim 1996 to $748,345 in Interim 1997. Interim 1996 included
approximately $56,000 for consulting fees related to developing the Company's
products for use in the airline industry. During Interim 1996, the European
Sales Manager administered the custom development project with Bull CP8 and
accordingly, a portion of his wages and benefits costs ($15,000) were allocated
to the cost of the project. Wages and benefits between the Interim periods
increased by approximately $93,000, mainly due to the hiring of the Vice
President of Business Development in June 1996, the Vice President of Business
Solutions (the Transportation and Finance vertical markets) in July 1996, the
North American Sales Manager in July 1996 and a product line marketing director
in February 1997. The Vice President of Sales and Marketing terminated
employment in December 1996 upon the Company's restructuring to a Vertical
Market strategy. Approximately $9,000 of the Vice President of Operations'
wages and benefits were allocated to marketing expenses in Interim 1997 as a
result of his increased efforts in marketing one of the Company's major product
lines. Interim 1997 included $32,000 for recruiting fees.
Equity in Loss of Joint Venture. The Company currently owns 22.8% of RJ. RJ
was formed in 1993 for the purpose of marketing, distributing and supporting the
Company's Smart Card products to be sold in Japan. The Company accounts for its
investment on the equity method and has recorded its share of RJ's losses in its
financial statements to the extent of capital invested in RJ by the Company.
The equity in the losses of RJ decreased $311,279 between the Interim periods
from $466,984 during Interim 1996 to $155,705 during Interim 1997. Interim 1996
included $141,953 of previously unrecognized losses from the prior year in
excess of its investment through December 31, 1995. During Interim 1996, the
Company recognized 40%-50% of RJ's losses based on its ownership interest at
that time, which was later reduced to 22.8% during Interim 1997. RJ's losses
decreased between the Interim periods due to its completion of a sublicense
agreement with Fujitsu Limited of Tokyo, Japan, during Interim 1997 and the
receipt of 50 million yen for services rendered under a Development Contract
with Marubeni, a Japanese card manufacturer. RJ's continuing losses are
primarily related to ongoing research and development activities as well as
longer sales cycles and trial tests demanded by Japanese customers.
Amortization Expense. The Company's primary asset is a technology license
related to the design and manufacture of its Smart card products. The asset is
amortized over its estimated useful life on a straight line basis.
Other Income(Expense). During Interim 1996 the Company incurred $42,154 in
interest expense on various notes payable to Intag. The notes were due on
demand and carried annual interest of 10%. During Interim 1997, the Company
incurred $58,396 in interest expense on various notes payable to Intag,
Ramtron and a group of lenders. The notes to Intag carried interest at 10% and
the notes to Ramtron and the group of lenders carried interest at prime plus
2%. The notes and accrued interest were paid during Interim 1997 upon
completion of the initial public offering ("IPO"). During Interim 1997 the
Company
Page 11
<PAGE>
earned $80,346 in interest income. The Company invested the proceeds from the
IPO in a Government Obligations Fund which earned an average of 5.10% for the
quarter. The Fund has an average maturity of less than 90 days. Other expenses
during Interim 1997 included $29,126 withheld from the proceeds of the license
revenue earned on the sublicense to Fujitsu for Japanese taxes, $16,000 for bad
debt expense and approximately $22,000 in currency exchange losses.
Net Loss. The Company is a C Corporation under the Internal Revenue Code and for
income tax reporting purposes as of December 31, 1996, has approximately
$9,600,000 of net operating loss carryforwards that expire at various dates
through 2011. The Tax Reform Act of 1986 contains provisions which may limit
the net operating loss carryforwards available to the Company in any given year
if certain events occur, including significant changes in ownership interests.
Liquidity and Capital Resources
The Company's primary need for capital has been to finance expansion of
research and development of new Smart Card products, sales and marketing of its
products and operations. Substantial growth of the Company's revenues has been
limited due to limited financial resources and an inability to expand
receivables, build inventory and effectively sell and market Smart Card
products. The Company has financed its liquidity needs primarily through
completion of its recent initial public offering.
At September 30, 1997, the Company's cash position was $1,977,684, an
increase of $1,663,482 from $314,202 as of December 31, 1996. During March
1997 the Company completed its IPO. Gross proceeds from the IPO were
$7,125,000. Net proceeds from the offering were $6,104,516. The Company used
proceeds from the IPO to repay outstanding debt and accrued interest of
$2,126,103 and pay down accounts payable by approximately $550,000. The
company received $646,162 of license revenues receivable outstanding at
December 31, 1996. The remaining proceeds from the IPO will be used to fund
working capital, expand sales and marketing of the Smart Card products and
continue research and development activities of new Smart Card products.
Based on management's current projections, the Company believes that its
financial resources and cash flows from operations will be sufficient to finance
its current and planned operations for at least the next twelve months. There
can be no assurance, however, that the Company will not require additional
working capital and, if it does require such capital, that such capital will be
available to the Company on acceptable terms, if at all.
Part II. Other Information
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Page 12
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other
---------------
None
Item 6. Exhibits and Reports on Form 8-K
----------------------------------
(a.) Exhibits:
Exhibit No. Title
----------- ---------
27.01 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K, dated August 28, 1997, in
connection with the issuance of 160,000 shares of common stock to Intag
International Limited ("Intag") upon Intag's exercise of its conversion
privileges related to a loan for $400,000. The loan was converted into
Common Stock at $2.50 per share on August 22, 1997.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized in Greenwood Village, Colorado on November 11, 1997.
Racom Systems, Inc.
- ----------------------------
Richard L. Horton
President and Chief Executive Officer
November 11, 1997
Page 13
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,977,684
<SECURITIES> 0
<RECEIVABLES> 65,704
<ALLOWANCES> 0
<INVENTORY> 386,081
<CURRENT-ASSETS> 2,513,828
<PP&E> 461,469
<DEPRECIATION> 332,634
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<CURRENT-LIABILITIES> 444,117
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<COMMON> 131,925
<OTHER-SE> 3,916,060
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<TOTAL-REVENUES> 677,867
<CGS> 318,283
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