Exhibit 99.1
RAE Systems Inc.
(AMEX: RAE) Morgan Keegan & Co. 2005 Homeland Security Conference
Don Morgan, VP & CFO
Hazardous Environment Detection Solutions
Safe Harbor Statement
This presentation (including information incorporated or deemed incorporated by reference herein) contains “forward-looking statements” within the meaning of the Private Litigation Reform Act of 1995. Forward-looking statements are those involving future events and future results that are based on current expectations, estimates, forecasts, and projects as well as the current beliefs and assumptions of our management. Words such as “outlook”, “believes”, “expects”, “appears”, “may”, “will”, “should”, “anticipates”, or the negative thereof or comparable terminology, are intended to identify such forward looking statements. Any statement that is not a historical fact, including estimates, projections, future trends and the outcome of events that have not yet occurred, is a forward-looking statement. Forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed under the section entitled “Risk Factors” in our reports files below and elsewhere in this prospectus, in any prospectus supplement, and in our other reports filed with the SEC. Many of such factors relate to events and circumstances that are beyond our control. You should not place undue reliance on forward-looking statements.
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Our Business
PRODUCTS SYSTEMS
Detect toxic gases & Provide integrated &
radiological agents actionable threat
information
Portable Rugged Battery operated
Wireless networks Remote monitoring / Web Integrated data (GPS, weather) Application-specific system SW
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Markets
Industrial / Environmental Safety & Hygiene
Confined Space
Hazardous Waste
Oil & Gas
Environmental Monitoring
Homeland Security
Military
First Responders
Public Venue Protection
Port / Border Security
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Customers
Enterprise
Government
Purchase Drivers
Regulatory
Health & Safety
Security
Economic
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RAE Systems Business Segments
Portables
Integrated Wireless Systems
Components & Accessories
Services
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Business Segment Mix—2004
Distribution
17%
Portables
48%
Integrated Wireless Systems
21%
Consumables
13%
Service
4%
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Global Operations
Headquarters in Silicon Valley, USA
Cost-efficient infrastructure in China
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Worldwide Presence
Beijing
Tokyo
Shanghai
Hong Kong
Singapore
Sunnyvale, CA
Denmark
Benelux
U.K. France Spain
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Geographic Mix—2004
Europe
10%
Americas
65%
Asia
25%
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Channels & Partnerships
Americas
Direct sales Distributors & reps
Europe
HQ in Denmark with pan-European direct sales staff
Subsidiaries in U.K & France
Direct presence in Middle East
Asia
Direct sales through KLH in China
HK sales office
Distributors elsewhere
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Products,
Technology & Applications
Hazardous Environment Detection Solutions
Hazard Detection Evolution
Past
Present
Future
Pervasive Sensing
(unmanned multiple sensors, wireless mesh network)
Area Monitoring
(manned multiple monitoring products, wireless point-to-point network)
Personal Monitoring
Measurement
(instrument data)
Alarm
(detect & warn)
Warn
Quantify &/or Identify
Interpret &/or Predict
Automate
Value-Add = Real-Time Decision Support
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Technology & Products
Technology
Pervasive Sensing
(unmanned multiple sensors, mesh network)
Area Monitoring
(manned multiple monitoring products, point-to-point network)
Personal Monitoring
Measurement
(instrument data)
Alarm
(detect & warn)
Technical Complexity
Sensor Technology
Product
Integrated Systems
Wireless
Mesh
Point-to-Point
RAEWatch
AreaRAE
MultiRAE MiniRAE 2000 ppbRAE
ToxiRAE BadgeRAE
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Sensor Technology
Speciation
Radiation
World leader in photo-ionization technology for detection of volatile organic compounds
(e.g. gasoline, benzene)
Infrared
Solid Polymer
Electro-chemical
Ion Mobility
Corona Discharge
Chemical Detection Tube
Combustible
Photo-Ionization Detection (PID)
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
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Intellectual Property
21 patents focused on chemical sensor technologies
9 years remaining on fundamental PID patents
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Applications
Government
Environmental Agency
First Responders, Military
Pervasive Sensing
(unmanned multiple sensors, mesh network)
Area Monitoring
(manned multiple monitoring products, point-to-point network)
Personal Monitoring
Measurement
(instrument data)
Alarm
(detect & warn)
Hazardous material remediation/clean-up
Perimeter Monitoring
(nuclear plant, hazardous waste dump)
Incident command, venue security
Perimeter Monitoring
(embassy, military base)
Supply Chain
Enterprise
Industrial safety & security
(factory, refinery, confined space, IAQ, HAZMAT)
Perimeter Monitoring
(airport, factory, casino, hotel)
“Smart Building” IAQ
& Security
Supply Chain
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Application Scenarios
Incident Command
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Application Scenarios
Public Venue Security
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Emerging Application Scenarios
Building Air Quality Monitoring
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Emerging Application Scenarios
Perimeter Monitoring
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Emerging Application Scenarios
Cargo Container Monitoring
Interior sensors monitor and communicate through the door lock sensor to the Network Access Point and onto the Satellite Communicator
Door lock sensor protects against intrusion and responds to RFID signals to transmit container log to RAE reader at portal on the dock
Sensor/RF Node
Door Lock and RFID
Network Access Point
Satellite Communicator
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Emerging Application Scenarios
Truck/Trailer Theft Prevention
Sensor/RF Node
Network Interrogator
Satellite Communicator
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Markets & Growth Opportunities
Hazardous Environment Detection Solutions
Market Opportunity
United States
Homeland Security Spending
$41.1 Billion
FY2006 budget request 7% Y/Y growth
U.S. Department of Homeland Security
United States
Chemical Sensor Market Size
$2.8 Billion
8.5% projected growth per year through 2008
Freedonia report:
Chemical Sensors to 2008: Liquid, Gas & Biosensors
China
Growth of Investment in Fixed Assets
(factories, equipment, property & infrastructure)
25.8%
in 2004
The Economist 27 Jan 2005
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Market Drivers
Developing countries
Growing industrial infrastructure
Increasing focus on human health & safety
Industrialized world
Terrorism & other safety concerns
Environmental & industrial regulations
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Competitive Environment
History: North American mining industry
COMPETITIVE
STRENGTHS
Technology leader in PID & emerging wireless systems
Strong brand
Broad product offering
Cost-efficient infrastructure in China
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Emerging Market Potential
Unit Pricing
$10,000
$0.10
$500
Personal Protection
Information Value
Real-time Decision Support
Area Protection
Pervasive Sensing
Number of Sensors
Thousand Millions
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Growth Strategy
Expand leadership position in emerging wireless sensor networks
Enhance & defend portable product line
Increase revenue in Europe & Asia
Aggressively pursue rapidly growing safety market in China
Selectively pursue strategic acquisitions & partnerships
Gain scale &/or address adjacent products & markets (accretive)
Acquire complementary technologies
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Financial Overview
Hazardous Environment Detection Solutions
Company History
KLH acquisition
Established operations in China $1.1M angel funding
Moved to AMEX
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Company founded by Robert I. Chen (current CEO) & Peter Hsi (current CTO)
Sept. 11, 2001
Public via $32 M reverse merger secondary offering
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Sarbanes – Oxley 404 Certification
Revenue Recognition:
Clarified and re-emphasized our world-wide revenue recognition policies & procedures (Q1 05) Standard revenue recognition review put in place in U.S. (Q1 05) KLH revenue recognition & “ GAAP” review process put in place (Q4 04) Contracts review process for U. S. sales revised (Q1 05) Independent Auditor engaged to conduct study on revenue recognition (Q2 05)
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Sarbanes – Oxley 404 Certification
Organizational:
Reorganized and standardized the Sarbanes – Oxley 404 certification process worldwide (Q1 05) Transferred a U.S. trained accountant to KLH (Q1 05) Hired an experienced financial controller with U.S. experience in Shanghai to provide in-country financial supervision for KLH (Q4 04) Subcertification process in place for key accounting & operations management (Q4 04)
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Sarbanes – Oxley 404 Certification
Information Technology
Worldwide ERP solution selected and implementation initiated (Q2 05) Interim ERP system replaced manual
systems in KLH (Q1 05)
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Income Statement Statement
First Quarter 2005
Preliminary & Un-audited
Q1 2005 Q1 2004
Preliminary Restated Reported
Revenue $12.2 M $7.8 M $8.2 M
COGS $5.0 M $2.9 M $3.0 M
Gross Profit $7.2 M $4.9 M $5.2 M
Sales & Mktg $3.4 M $2.1 M $2.1 M Expenses R&D $1.1 M $.9 M $0.9 M
G&A $2.5 M $1.7 M $1.7 M TOTAL $7.0 M $4.7 M $4.7 M
Operating $0.2 M $0.2 M $0.5 M
Income
EPS $0.00/share $0.00/share $0.00/share
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High-Leverage Business Model
Strong Balance Sheet
Gross Margin 50% - 60%
Cash &
$32.2 M
Investments
Pre-Tax
Operating Income Target 10% - 20%
Debt $1.9 M
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Summary
RAE Systems Investment Proposition
Growing worldwide markets
Broad customer base & rapidly emerging applications
Sustainable technical advantages
Proprietary sensor technology
System know-how & domain knowledge
Growing consumables & service revenue
High-margin “annuity” business
Strong brand & worldwide market presence Globally distributed infrastructure
Localized sales & support / cost-efficient manufacturing in China
Financial strength
Strong balance sheet High-leverage business model Access to capital
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