Aware, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods. Amounts are in U.S. dollars; financial statement amounts are in thousands unless noted. Aware operates as one segment across biometrics and imaging, DSL test and diagnostics, and patent licensing.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $5.913 million | $4.971 million | $12.272 million | $10.587 million |
| Operating income (loss) | $(283,000) | $(494,000) | $290,000 | $(489,000) |
| Net income (loss) | $(267,000) | $(148,000) | $323,000 | $(126,000) |
| EPS, basic and diluted | $(0.01) | $(0.01) | $0.02 | $(0.01) |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $1.841 million | $(154,000) |
- Q2 revenue increased 19% year over year; first-half revenue increased 16%. Product sales rose 2% and 6%, respectively, while services revenue rose sharply to $1.375 million in Q2 and $2.204 million for the half. Royalties declined 24% in Q2 and 33% year to date.
- Product gross margin fell to 73% in Q2 from 79% and to 75% for the first half from 78%, primarily because hardware represented a larger share of sales. Services gross margin declined to 67% in Q2 from 79% and to 63% for the first half from 74%, reflecting larger, less profitable projects.
- Cash and cash equivalents were $43.232 million at June 30, 2011, up $3.283 million from year-end. Current assets were $49.958 million and current liabilities $3.104 million. The balance sheet reports no debt. Total liabilities were $3.566 million, including deferred revenue.
- First-half investing cash outflow was $88,000, primarily capital equipment purchases. Financing provided $1.530 million, including $1.684 million from common-stock issuance, partly offset by employee tax-related share surrenders. Cash flow from operations included $885,000 in non-cash stock compensation.
Material changes and notable items
- Biometrics engineering services drove much of the services increase; management described this as initial progress toward growing services but said it could not predict whether revenue would continue rising.
- Test and diagnostics sales increased, including first-half growth from LDP software sold to a European telephone company. Biometrics software sales declined due to lower customer demand.
- Lower DSL royalties reported by one licensee reduced royalty revenue. Royalties predominantly depend on Ikanos and Lantiq; management cautioned that competition, market share, and chipset pricing may affect future payments.
- General and administrative expense rose 26% in Q2 and 6% for the first half, principally due to $600,000 of severance-related expenses following the former President and CEO’s April resignation. The separation arrangement included a 105,000-share grant, generating $362,000 of stock-compensation expense; he also forfeited options covering 1,177,835 shares and an unissued 107,143-share grant.
- Q2 2010 included $325,000 of other income from a legal settlement, which did not recur in 2011. The first-half 2011 net profit compares with a loss in the prior-year period.
- Cash increased partly through stock-option exercises and share issuance, which contributed to dilution. Shares outstanding were 20,767,661 at June 30, compared with 20,041,863 at December 31, 2010.
Outlook, risks, and contingencies
- No quantitative revenue or earnings guidance is provided. Management believes available cash is sufficient to fund operations for at least the next 12 months, while noting that additional financing could be needed and may not be available.
- The board continued reviewing strategic options for patent licensing, including a possible spin-off; no final decision had been made, and completion and timing were uncertain.
- Management reported a full valuation allowance against deferred tax assets. At December 31, 2010, federal NOLs and research-credit carryforwards were approximately $51.0 million and $13.5 million, respectively; state NOLs and credits were approximately $11.3 million and $7.3 million.
- The filing reports no legal proceeding management believed likely to seriously harm the business and no material change to the risk factors in the 2010 Form 10-K. Management stated disclosure controls were effective and reported no materially affecting change in internal control over financial reporting.
Important facts for investors to verify
- Whether biometrics services growth can continue and whether project mix can improve services margins.
- Future demand for biometrics software and the durability of DSL test and diagnostics sales.
- Royalty trends and the financial and market position of the principal licensees, Ikanos and Lantiq.
- Whether the board proceeds with a patent-licensing spin-off and the resulting costs, structure, and effect on Aware.
- The effect of executive-transition costs, stock compensation, share issuance, and tax attributes on future earnings and dilution.