Aware, Inc. — Q3 2011 Form 10-Q
Business context and reporting period
For the quarter and nine months ended September 30, 2011. Aware operated as one business segment, focused on biometrics and imaging, DSL test and diagnostics, and patent management. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $6.422m | $6.151m | $18.694m | $16.738m |
| Operating income (loss) | $1.272m | $(0.052)m | $1.562m | $(0.541)m |
| Net income (loss) | $1.284m | $0.076m | $1.607m | $(0.050)m |
| Diluted EPS | $0.06 | $0.00 | $0.08 | $(0.00) |
- Revenue increased 4.4% in Q3 and 11.7% for the nine-month period. Operating margins were approximately 19.8% and 8.4%, respectively, versus approximately (0.8)% and (3.2)% in the comparable 2010 periods.
- Q3 product sales were $4.902m, services $0.971m, and royalties $0.549m. For nine months, the respective amounts were $13.977m, $3.175m, and $1.542m.
- Q3 product gross margin improved to 84% from 75%, mainly reflecting a greater software share of product sales. Services gross margin was 57.4% in Q3 and 62% for nine months, down from 57.7% and 66%, respectively.
- Cash from operations was $4.946m for the first nine months, compared with cash used of $0.208m in 2010. Capital spending was $0.122m; cash increased $5.576m to $45.525m.
- At September 30, cash was $45.525m, current assets $50.421m, current liabilities $2.633m, and working capital $47.788m. The balance sheet reports no debt. Stockholders’ equity was $53.345m.
- Cash growth included $1.711m in proceeds from common-stock issuance; financing cash flow also included $0.735m of share repurchases and $0.224m of employee tax withholding payments related to surrendered shares.
Material changes versus prior periods
- Q3 biometrics software sales rose by $1.2m, while DSL test hardware sales fell by $0.8m and test software sales by $0.5m. Hardware customers delayed purchases pending a DSL chipset upgrade; LDP software sales faced long sales cycles.
- Biometrics engineering services drove services growth: up 99% in Q3 and 204% year to date. Management said future services revenue could rise or fall.
- Royalties declined 14% in Q3 and 27% year to date, primarily due to lower reported DSL royalties from one licensee.
- Year-to-date R&D expense fell 10%, partly because more engineering costs were classified as cost of services. G&A declined 9%, partly offset by $0.6m of former CEO severance. Q3 G&A was down 34%, reflecting lower officer/director compensation and legal fees.
Outlook, risks, contingencies, and unusual items
- Management believed available cash would fund operations for at least the next 12 months, while noting additional financing might be required and might not be available.
- The board was reviewing strategic options for patent management, including a possible spin-off, sale, or licensing. No transaction was assured, and timing and structure were uncertain.
- Royalties depend predominantly on DSL chipset sales by Ikanos and Lantiq. The company cited uncertainty about those licensees’ market share, pricing, and future royalty contribution.
- The company reported federal NOL and research-credit carryforwards of approximately $51.0m and $13.5m, respectively, and state NOL and credit carryforwards of approximately $11.3m and $7.3m, based on December 31, 2010 balances. A full valuation allowance remained against deferred tax assets; the filing said NOLs could offset 2011 income.
- In April 2011, the former CEO resigned; his separation arrangement included 105,000 shares and forfeiture of options covering 1,177,835 shares and an unissued 107,143-share grant. In July, the company privately repurchased 250,000 shares at $2.90 each, plus commission.
- The company reported no lawsuit it believed likely to seriously harm the business and no material change to the risk factors in its 2010 Form 10-K. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
- A patent arrangement with a third party created a variable interest, but the company had no equity interest or funding obligation; it reported maximum exposure to loss of zero and no financial statement impact.
Important facts for investors to verify
- Whether the DSL chipset upgrade is completed and delayed hardware demand converts to sales.
- Whether biometrics software licenses and engineering services growth can be sustained, and the associated service margins.
- Future royalty levels and the continuing position of Ikanos and Lantiq.
- Any outcome of the board’s patent-management review, including transaction terms and timing.
- The availability and usability of tax attributes, given the full deferred-tax valuation allowance and their expiration periods.