<PAGE>
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 June 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 it 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 13,032,532 shares of the registrant's common stock, no par
value outstanding as of July 31, 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
June 30, 1997 1
Condensed Statements of Operations
for the three and six months ended
June 30, 1996 and 1997 3
Condensed Statements of Cash Flows
for the six months ended
June 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 14
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RACOM SYSTEMS, INC.
CONDENSED BALANCE SHEETS
ASSETS December 31, June 30,
1996 1997
---------- -----------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 314,202 $2,757,264
Accounts receivable 79,201 82,909
Accounts receivable-related party 33,558 30,237
Inventory 428,401 377,680
License revenue receivable-related party 646,162 -
Prepaid expenses and other - 76,047
---------- ----------
Total Current Assets 1,501,524 3,324,137
Property and Equipment :
Machinery and equipment 351,120 365,993
Furniture and fixtures 56,801 58,756
Leasehold improvements 3,328 3,328
---------- ----------
411,249 428,077
Less accumulated depreciation (260,364) (310,292)
---------- ----------
150,885 117,785
Investment in joint venture 257,736 315,346
Other Assets:
Technology license from related party,
net of accumulated amortization of
$684,898 and $763,720, respectively 1,715,102 1,636,280
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 1,636,280
---------- ----------
$3,885,851 $5,393,548
---------- ----------
---------- ----------
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, June 30,
1996 1997
------------ ------------
(Unaudited)
Current Liabilities:
Accounts payable and
accrued liabilities $ 631,425 $390,997
Accounts payable-related parties 552,298 3,390
Notes and interest payable-related party 1,029,596 -
Bridge notes payable 1,040,000 -
Capital lease obligation 1,331 780
Deferred license revenue-related party 93,397 93,397
------------ ------------
Total Current Liabilities 3,348,047 488,564
Deferred license revenue-related party 303,540 65,298
------------ ------------
Total Liabilities 3,651,587 553,862
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, 13,032,532 shares
issued and outstanding 115,325 130,325
Additional paid-in capital 10,272,591 16,456,143
Accumulated deficit (10,153,652) (11,746,782)
------------ ------------
Total Stockholders' equity 234,264 4,839,686
------------ ------------
Total Liabilities and Stockholders' Equity $ 3,885,851 $ 5,393,548
------------ ------------
------------ ------------
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 Six months ended
June 30, June 30,
------------------------- --------------------------
1996 1997 1996 1997
------------------------- --------------------------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 64,699 $ 74,883 $ 212,474 $ 105,936
Product sales-related parties 34,318 47,039 40,629 64,455
Custom product development projects 100,000 - 600,000 -
License revenues-related party 23,349 214,893 490,333 438,258
---------- ---------- ---------- -----------
222,366 336,815 1,343,436 608,649
Cost of revenues 307,000 128,604 615,496 243,850
---------- ---------- ---------- -----------
Gross margin (84,634) 208,211 727,940 364,799
Operating Expenses:
Research and development 81,207 300,852 178,201 557,261
General and administrative 225,104 296,557 465,921 473,736
Sales and marketing 207,172 278,149 431,545 489,353
Equity in loss of joint venture 100,214 103,343 425,194 198,374
Amortization expense 40,697 39,411 91,003 176,346
---------- ---------- ---------- -----------
654,394 1,018,312 1,591,864 1,895,070
---------- ---------- ---------- -----------
Loss from operations (739,028) (810,101) (863,924) (1,530,271)
Other expenses:
Interest expense - (750) - (40,466)
Interest expense-related parties (13,349) - (26,251) (17,405)
Interest income 3,208 47,177 6,909 49,802
Other - 705 (875) (54,790)
---------- ---------- ---------- -----------
Net loss $ (749,169) $ (762,969) $ (884,141) $(1,593,130)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Net loss per share $ (0.06) $ (.06) $ (0.07) $ (.13)
Weighted average common and common
equivalent shares outstanding 11,844,793 12,407,532 11,844,793 12,407,532
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</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)
<TABLE>
Six months ended
June 30,
-----------------------
1996 1997
--------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $(884,141) $(1,593,130)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 141,388 129,607
Equity in loss of joint venture 425,194 198,374
Amortization of debt offering costs - 97,799
Decrease (Increase) in:
Prepaid expenses - (76,047)
Accounts receivable-trade (52,539) (3,708)
Accounts receivable-related party 3,198 3,321
Inventory (112,444) 50,721
License revenue receivable - 646,162
Increase (decrease) in:
Accounts payable and accrued liabilities 466,514 (240,428)
Accounts payable-related parties (342,753) (548,908)
Deferred license revenue 443,635 (238,242)
Accrued interest - 39,102
Accrued interest-related party 25,068 17,405
--------- -----------
Net cash provided by (used in) operating activities 113,120 (1,517,972)
Cash Flows From Investing Activities:
Purchase of fixed assets (22,877) (16,828)
Investment in joint venture (466,984) -
--------- -----------
Net cash used in investing activities (489,861) (16,828)
Cash Flows From Financing Activities:
Proceeds from issuance of common stock - 7,125,000
Payment of offering costs - (1,020,484)
Repayment on notes payable-related party - (2,126,103)
Payments on capital lease liability (361) (551)
--------- -----------
Net cash (used in) provided by financing activities (361) 3,977,862
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements.
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Net (Decrease) Increase in Cash and Cash Equivalents (377,102) 2,443,062
-------- ----------
Cash and Cash Equivalents at Beginning of Period 512,435 314,202
-------- ----------
Cash and Cash Equivalents at End of Period $135,333 $2,757,264
-------- ----------
-------- ----------
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.
The accompanying notes are an integral part
of these condensed financial statements.
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RACOM SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
Note 1 - Basis of Presentation
The accompanying financial information of the Company at June
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 Second 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 Second
Quarter information presented not misleading. All adjustments,
consisting of normal recurring adjustments, which are necessary so
as to make the Second Quarter information not misleading, have been
made. Results of operations for the three months ended or the six
months ended June 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
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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 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.
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The results of operations for the quarter ended June 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.
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 JUNE 30, 1997 COMPARED
TO THE THREE MONTHS ENDED JUNE 30, 1996
REVENUES. Revenues increased $114,449 from $222,366 for the three months
ended June 30, 1996 ("Second Quarter 1996") to $336,815 for the three
months ended June 30, 1997 ("Second Quarter 1997"). Product revenues
increased slightly from $99,017 in Second Quarter 1996 to $121,922 in
Second Quarter 1997. Second Quarter 1996 revenues reflect the second
payment under a custom product development contract of $100,000 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 $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. Second
Quarter 1997 reflects the recognition of $199,010 of the previously
deferred revenue upon the completion of the issuance of common stock of
Racom Japan to third parties, thereby reducing the Company's ownership
to 22.8%.
COST OF REVENUES AND GROSS MARGIN. As a percentage of revenues,
gross margin increased from (38%) in Second Quarter 1996 to 62% in
Second 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
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lower price than the Company's Contactless Smart Cards. Cost of
revenues in Second Quarter 1996 included $140,633 of costs
associated with a custom product development project. Second
Quarter 1997 did not include any costs associated with a custom
development project.
RESEARCH AND DEVELOPMENT EXPENSES ("R&D"). R&D increased $219,645
from $81,207 in Second Quarter 1996 to $300,852 in Second 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
$97,677 were directly related to the project and are included in
cost of revenues for Second Quarter 1996. Wages and benefit costs
for Second Quarter 1997 are approximately $20,000 higher than Second
Quarter 1996 due to annual wage increases which went into effect in
July 1996, combined with the hiring of a software engineer. Second
Quarter 1997 also includes approximately $100,000 in additional
engineering consulting/contract services over Second 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 $71,453
from $225,104 in Second Quarter 1996 to $296,557 in Second Quarter
1997. Second Quarter 1997 includes increasing expenditures
approximating $45,000 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.
SALES AND MARKETING EXPENSES. Sales and marketing expenses
increased $70,977 from $207,172 in Second Quarter 1996 to $278,149
in Second Quarter 1997. Wages and benefits between the Second
Quarter periods increased by approximately $43,000 due to
the hiring of the Vice President of Business Development in June
1996 and the hiring of a product line marketing director in February
1997. Approximately $14,000 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. Second Quarter 1997 also includes approximately
$16,000 of travel, printing and trade show expenses related to the
Company's participation in the CardTech/SecureTech show in Orlando
in April 1997. The Company participated in a similar show in First
Quarter 1996.
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 were consistent between
the Second Quarter periods. RJ's losses were primarily related to
ongoing research
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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 Second Quarter 1996, the Company
incurred $13,349 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 Second Quarter 1997 the Company earned $47,177 in interest
income. The Company invested the proceeds from the IPO in a
Government Obligations Fund which earned an average of 5.00% for the
quarter. The Fund has an average maturity of 42 days.
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.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO
THE SIX MONTHS ENDED JUNE 30, 1996
REVENUES. Revenues decreased $734,787 from $1,343,436 for the six
months ended June 30, 1996 ("Interim 1996") to $608,649 for the six
months ended June 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 1996 product revenues
reflected a shipment of products totaling $59,000 to one customer
for the installation of an automatic fare collection system in
Macau. 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
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increased from 54% in Interim 1996 to 60% 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 $254,073 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 $379,060
from $178,201 in Interim 1996 to $557,261 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
$192,571 were directly related to the project and are included in
cost of revenues for Interim 1996. Wages and benefit costs for
Interim 1997 are approximately $20,000 higher than Interim 1996 due
to annual wage increases which went into effect in July 1996,
combined with the hiring of a software engineer. Interim 1997 also
includes approximately $153,000 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.
GENERAL AND ADMINISTRATIVE EXPENSES ("G&A"). G&A increased $7,815
from $465,921 in Interim 1996 to $473,736 in Interim 1997. Interim
1996 included approximately $68,000 for consulting on several
projects, including the development of the Tran$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 $45,000 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.
SALES AND MARKETING EXPENSES. Sales and marketing expenses
increased $57,808 from $431,545 in Interim 1996 to $489,353 in
Interim 1997. Interim 1996 included approximately $21,000 for
consulting fees related to developing the Company's products for use
in the airline industry. Interim 1996 also included the cost of
approximately $18,000 of demonstration equipment used in sales and
marketing activities. Wages and benefits between the Interim
periods increased by approximately $82,000 due to the hiring of the
Vice President of Business Development in June 1996 and the hiring
of a product line marketing director in February 1997.
Approximately $14,000 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.
EQUITY IN LOSS OF JOINT VENTURE. The Company currently owns 22.8%
of RJ. RJ was
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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 $226,820 between the Interim periods
from $425,194 during Interim 1996 to $198,374 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. 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
$26,251 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 $57,871 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 earned $49,802 in interest income. The Company invested the
proceeds from the IPO in a Government Obligations Fund which earned
an average of 5.00% for the quarter. The Fund has an average
maturity of 42 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, $7,110 for bad debt
expense and approximately $20,000 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
Page 13
<PAGE>
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 June 30, 1997, the Company's cash position was $2,757,264, an
increase of $2,443,062 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
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:
Page 14
<PAGE>
Exhibit No. Title
----------- -----
27.01 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K, dated May 22, 1997, in
connection with the announcement that it had allowed Racom Japan, Inc.
("RJ") a Japanese corporation of which the Company owns 22.8%, to enter
into a custom product development project with Fujitsu Limited
("Fujitsu") of Tokyo, Japan, to jointly develop, manufacture and market
contactless smart card systems for use in Electronic Commerce.
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 August 14,
1997.
Racom Systems, Inc.
- ---------------------------
Richard L. Horton
President and Chief Executive Officer
August 14, 1997
Page 15
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,757,264
<SECURITIES> 0
<RECEIVABLES> 113,146
<ALLOWANCES> 0
<INVENTORY> 377,680
<CURRENT-ASSETS> 3,324,137
<PP&E> 428,077
<DEPRECIATION> 310,292
<TOTAL-ASSETS> 5,393,548
<CURRENT-LIABILITIES> 488,564
<BONDS> 0
0
0
<COMMON> 130,325
<OTHER-SE> 4,709,361
<TOTAL-LIABILITY-AND-EQUITY> 5,393,548
<SALES> 170,391
<TOTAL-REVENUES> 608,649
<CGS> 243,850
<TOTAL-COSTS> 2,138,920
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,871
<INCOME-PRETAX> (1,593,130)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,593,130)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,593,130)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
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