Aware, Inc. — Q1 2011 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2011, compared with Q1 2010. Aware operates in biometrics and imaging, DSL test and diagnostics, and patent licensing; it reports one business segment. It is also pursuing strategic options, including a possible spin-off of patent licensing operations, but the board had made no final decision.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $6.358 | $5.616 | Up 13% |
| Operating income | $0.572 | $0.005 | Up $0.567 |
| Net income | $0.590 | $0.022 | Up $0.568 |
| Diluted EPS | $0.03 | $0.00 | — |
| Cash from operations | $(0.316) | $(0.341) | Use narrowed |
| Cash and cash equivalents at period end | $40.015 | $39.020 | Up $0.995 year over year |
- Revenue mix: Product sales were $5.078 million, up 9%; services were $0.829 million, versus $0.209 million; royalties were $0.451 million, down 40%. The filing attributes product growth chiefly to DSL test and diagnostics sales and a European LDP software sale; services growth chiefly to biometrics engineering projects. Lower royalties reflected reduced ADSL royalties from a licensee.
- Margins and expenses: Product gross margin fell to 76% from 78%, and services gross margin fell to 57% from 66%. Total costs and expenses were $5.786 million versus $5.611 million. R&D was $1.961 million, selling and marketing $1.051 million, and G&A $1.197 million. Management cited product/project mix pressures on gross margins and lower legal fees, director compensation, and officer bonuses for lower G&A.
- Cash flow and liquidity: Operating cash use was driven by $1.3 million of working-capital use, including higher receivables, partly offset by net income and noncash expenses. Investing cash use was $0.056 million; financing provided $0.438 million, mainly from stock-option exercises. Cash increased $0.066 million during the quarter. Current assets were $48.218 million and current liabilities $2.941 million. The balance sheet reports no debt.
- Profit adjustment: Management’s non-GAAP net income, excluding stock-based compensation, was $0.893 million, or $0.04 per diluted share, versus $0.367 million, or $0.02, in Q1 2010. Stock-based compensation was $0.303 million and $0.345 million, respectively.
Outlook, risks, and notable items
- Management believed cash would be sufficient to fund operations for at least the next 12 months, while cautioning that additional financing might be needed and might not be available. No specific revenue or earnings guidance was provided.
- Future royalties are uncertain: revenue depends predominantly on Ikanos and Lantiq chipset sales, and the company said it could not predict whether royalties would rise or fall amid competition and uncertainty about licensees’ market shares and pricing.
- The proposed patent-licensing spin-off remained under review. The filing gives no assurance about its timing, structure, or completion.
- The company reported federal NOL and research-credit carryforwards of approximately $51.0 million and $13.5 million, respectively, and state NOL and tax-credit carryforwards of approximately $11.3 million and $7.3 million. A full valuation allowance was recorded against deferred tax assets; carryforwards expire over various dates.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no litigation it believed likely to seriously harm the business and no material change to the risk factors in its 2010 Form 10-K.
Important facts for investors to verify
- Whether the biometrics engineering-services growth is repeatable and how project mix affects service margins.
- Whether DSL product sales can offset lower royalties and weaker biometrics software demand.
- Actual royalty trends from Ikanos and Lantiq, and the status and terms of any patent-licensing spin-off.
- Working-capital needs, operating cash generation, and the basis for management’s 12-month liquidity assessment.
- Use and expiration of tax attributes and any future change to the full valuation allowance.