Aware, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars; financial statement amounts are generally in thousands unless stated otherwise.
Business context
Aware supplies biometrics and imaging software and services, DSL service assurance products, and patent-management activities. It continued to receive DSL chipset royalties after selling substantially all DSL silicon IP assets to Lantiq in 2009. The company employed 77 people at year-end and reported two operating segments: Biometrics & Imaging and DSL Service Assurance.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $24.586 million | $23.560 million |
| Operating income (loss) | $2.486 million | $(0.333) million |
| Net income | $2.567 million | $0.180 million |
| Diluted earnings per share | $0.12 | $0.01 |
| Cash from operating activities | $6.829 million | $0.710 million |
- Revenue comprised product sales of $18.129 million, services of $4.311 million, and royalties of $2.146 million. Product sales declined 4%; services more than doubled, while royalties declined 19%.
- Product gross margin rose to 80% from 77%, primarily due to a greater software share of sales. Services gross margin was 59%, down from 64%.
- Cash and cash equivalents were $46.577 million and investments were $0.727 million at year-end; working capital was $48.069 million. Management said available cash and investments should fund operations for at least 12 months.
- Total liabilities were $3.276 million. The balance sheet lists no borrowings; the filing text does not provide a separate debt metric.
- FY2011 segment results: Biometrics & Imaging revenue was $14.052 million with operating income of $6.262 million; DSL Service Assurance revenue was $8.387 million with an operating loss of $1.988 million. Corporate operating loss was $1.788 million.
Material changes and fourth-quarter results
- Annual revenue increased about 4% year over year, while operating income improved by $2.819 million and net income increased to $2.567 million.
- Management attributed the earnings improvement mainly to biometrics engineering-services growth, a higher proportion of software sales, and lower patent-related legal and director/officer compensation costs. G&A also included $0.6 million of severance for the former CEO.
- 2011 product sales included a $1.4 million increase in biometrics software, partly offset by decreases of $1.4 million in DSL hardware and $0.8 million in DSL software. Royalties fell $0.6 million, reflecting lower payments from Lantiq and Ikanos.
- Fourth-quarter 2011 revenue was $5.892 million, versus $6.822 million in Q4 2010. Operating income was $0.924 million versus $0.208 million, and net income was $0.959 million versus $0.230 million.
- Operating cash flow improved substantially, aided by a $2.7 million reduction in accounts receivable and inventory as well as net income and noncash expenses.
Outlook, risks, and unusual items
- On January 18, 2012, the board approved shutting down the DSL service assurance hardware line to reduce costs and reposition the company. Shipments against existing orders were expected to end around June 30, 2012. The line generated $5.1 million of 2011 revenue and $5.7 million of directly attributable expenses.
- Management estimated approximately $282,000 of shutdown costs, mostly severance and employee-related costs, and expected an insignificant gain from the exit in the first half of 2012. These are estimates, not reported FY2011 results.
- The company planned to continue DSL service assurance software. Its board was also reviewing options for patent assets, including a possible spin-off, sale, or licensing; completion or timing was not assured.
- Management gave no specific revenue or earnings guidance and said future services and DSL royalty trends were difficult to predict. Key risks include unpredictable customer orders and project timing, competition, dependence on Lantiq and Ikanos royalties, and the limited pool of potential DSL software customers.
- At year-end, deferred tax assets of $40.476 million were fully offset by a valuation allowance. Federal and state tax-loss and credit carryforwards face expirations beginning in 2012 and may be limited by ownership changes.
- The company reported no material pending litigation. Its auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether the DSL hardware shutdown was completed on schedule, and its final costs, customer obligations, and any inventory or warranty effects.
- Whether growth in biometrics services and software can offset declining DSL hardware/software sales and lower chipset royalties.
- Cash generation and working-capital trends, particularly the extent to which FY2011 operating cash flow benefited from reductions in receivables and inventory.
- Progress and economics of any patent-portfolio transaction, and the status and usability of tax-loss and credit carryforwards.