AWARE INC /MA/ - Quarter Report: 2010 September (Form 10-Q)

 

 

 

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		September 30, 2010				December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents		$	39,041			$	39,669
Accounts receivable, net			5,165				3,565
Inventories			1,468				1,113
Prepaid expenses and other current assets			501				363
Total current assets			46,175				44,710
Property and equipment, net			6,465				6,744
Other assets, net			29				-
Total assets		$	52,669			$	51,454
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	783			$	327
Accrued expenses			112				127
Accrued compensation			929				1,202
Accrued professional			201				282
Deferred revenue			835				563
Total current liabilities			2,860				2,501
Long-term deferred revenue			489				593
Stockholders’ equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized,              none outstanding			-				-
Common stock, $.01 par value; 70,000,000 shares authorized; issued              and outstanding 20,039,145 as of September 30, 2010 and 19,809,315              as of December 31, 2009			200				198
Additional paid-in capital			77,040				76,032
Accumulated deficit			(27,920	)			(27,870	)
Total stockholders’ equity			49,320				48,360
Total liabilities and stockholders’ equity		$	52,669			$	51,454

 

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenue:
Product sales		$	5,026			$	4,661			$	13,588			$	11,332
Contract revenue			488				1,005				1,043				3,725
Royalties			637				554				2,107				1,500
Total revenue			6,151				6,220				16,738				16,557
Costs and expenses:
Cost of product sales			1,236				857				3,112				2,413
Cost of contract revenue			206				717				352				2,534
Research and development			2,082				3,175				6,198				9,344
Selling and marketing			1,029				1,251				3,148				3,517
General and administrative			1,650				1,383				4,469				3,812
Total costs and expenses			6,203				7,383				17,279				21,620
Loss from operations			(52	)			(1,163	)			(541	)			(5,063	)
Other income			100				-				425				-
Interest income			28				31				67				217
Income (loss) before provision for income taxes			76				(1,132	)			(49	)			(4,846	)
Provision for income taxes			-				1				1				5
Net income (loss)		$	76			$	(1,133	)		$	(50	)		$	(4,851	)
Net income (loss) per share – basic		$	0.00			$	(0.06	)		$	(0.00	)		$	(0.23	)
Net income (loss) per share – diluted		$	0.00			$	(0.06	)		$	(0.00	)		$	(0.23	)
Weighted average shares – basic			20,000				19,782				19,947				21,230
Weighted average shares - diluted			20,344				19,782				19,947				21,230

 

 

 

(unaudited)

		Nine Months Ended
		September 30,
		2010				2009
Cash flows from operating activities:
Net loss		$	(50	)		$	(4,851	)
Adjustments to reconcile net loss to net cash    used in operating activities:
Depreciation and amortization			388				662
Stock-based compensation			1,169				1,476
Increase (decrease) from changes in assets and liabilities:
Accounts receivable			(1,600	)			(1,568	)
Inventories			(355	)			526
Prepaid expenses			(138	)			(166	)
Accounts payable			479				(47	)
Accrued expenses			(269	)			(463	)
Deferred revenue			168				621
Net cash used in operating activities			(208	)			(3,810	)
Cash flows from investing activities:
Purchases of property and equipment			(101	)			(131	)
Expenses from sale of assets			(100	)			-
Purchases of other assets			(60	)			-
Net cash used in investing activities			(261	)			(131	)
Cash flows from financing activities:
Proceeds from issuance of common stock			2				3
Shares surrendered by employees to pay taxes related to        unrestricted stock			(161	)			-
Repurchase of common stock			-				(8,950	)
Net cash used in financing activities			(159	)			(8,947	)
Decrease in cash and cash equivalents			(628	)			(12,888	)
Cash and cash equivalents, beginning of period			39,669				45,516
Cash and cash equivalents, end of period		$	39,041			$	32,628

 

 

A)

Basis of Presentation. The accompanying unaudited consolidated balance sheet, statements of operations, and statements of cash flows reflect all adjustments (consisting only of normal recurring items) which are, in the opinion of management, necessary for a fair presentation of financial position at September 30, 2010, and of operations and cash flows for the interim periods ended September 30, 2010 and 2009.

B)

Fair Value Measurements. The Financial Accounting Standards Board (“FASB”) issued authoritative guidance for fair value measurements in September 2006, which defines fair value, establishes a framework for measuring fair value, and expands disclosures assets and liabilities measured at fair value in financial statements. This guidance is set forth in FASB Accounting Standards Codification 820 (ASC 820). We adopted the provisions of ASC 820 as of January 1, 2008, for our financial instruments. Although the adoption of ASC 820 did not materially impact our financial condition, results of operations, or cash flow, we are now required to provide additional disclosures as part of our financial statements.

 

C)	Inventories. Inventories are stated at the lower of cost or net realizable value with cost being determined by the first-in, first-out (“FIFO”) method.  Inventory reserves are established for estimated excess and obsolete inventory. Inventories consist primarily of the following (in thousands):

		September 30, 2010				December 31, 2009
Raw materials		$	1,468			$	1,112
Finished goods			-				1
Total		$	1,468			$	1,113

D)

Computation of Earnings per Share. Basic earnings per share are computed by dividing net income or loss by the weighted average number of common shares outstanding.  Diluted earnings per share is computed by dividing net income or loss by the weighted average number of common shares outstanding plus additional common shares that would have been outstanding if dilutive potential common shares had been issued.  For the purposes of this calculation, stock options are considered common stock equivalents in periods in which they have a dilutive effect.  Stock options that are anti-dilutive are excluded from the calculation.

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Net income (loss)		$	76			$	(1,133	)		$	(50	)		$	(4,851	)
Weighted average common shares outstanding			20,000				19,782				19,947				21,230
Additional dilutive common stock equivalents			344				-				-				-
Diluted shares outstanding			20,344				19,782				19,947				21,230
Net income (loss) per share – basic		$	0.00			$	(0.06	)		$	(0.00	)		$	(0.23	)
Net income (loss) per share – diluted		$	0.00			$	(0.06	)		$	(0.00	)		$	(0.23	)

E)	Stock-Based Compensation.  The following table presents stock-based employee compensation expenses included in our unaudited consolidated statements of operations (in thousands):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Cost of product sales		$	3			$	3			$	8			$	8
Cost of contract revenue			4				36				11				105
Research and development			101				174				269				458
Selling and marketing			25				140				76				249
General and administrative			488				324				805				656
Stock-based compensation expense		$	621			$	677			$	1,169			$	1,476

F)	Business Segments. We manage the business as one segment and conduct our operations in the United States. We sell our products and technology to domestic and international customers.  Revenues were generated from the following geographic regions (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
United States		$	3,460			$	3,837			$	9,871			$	9,336
Germany			693				1,353				2,136				3,922
Rest of World			1,998				1,030				4,731				3,299
		$	6,151			$	6,220			$	16,738			$	16,557

G)

Income Taxes. As of December 31, 2009, we had federal net operating loss (“NOLs”) and research and experimentation credit carryforwards of approximately $47.6 million and $13.4 million respectively, which may be available to offset future federal income tax liabilities and expire at various dates from 2010 through 2029.  In addition, at December 31, 2009, we had approximately $10.3 million and $7.1 million of state net operating losses and state research and development and investment tax carryforwards, respectively, which expire at various dates from 2010 through 2024.

Based on an analysis that we performed under Internal Revenue Code Section 382 on our NOLs generated for the period 1997 through 2009, we have not experienced a change in ownership as defined by Section 382, and, therefore, the NOLs are not currently under any Section 382 limitation.

H)

Recent Accounting Pronouncements. We describe below recent pronouncements that have had or may have a significant effect on our financial statements. We do not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to our financial condition, results of operations, or disclosures.

 
 

I)

Share Repurchase Program. On March 5, 2009, we announced a modified Dutch auction self-tender offer to purchase up to 3,500,000 shares, or approximately 15%, of our outstanding common stock (including the associated preferred share purchase rights), at a price in the range of $2.20 to $2.60 per share, for a maximum aggregate purchase price of approximately $9.1 million.  The terms of the tender offer also provided the right for us to purchase up to an additional 2% of our shares if the offer was oversubscribed.

The tender offer closed on April 17, 2009, and on April 23, 2009 we repurchased 3,500,252 shares at $2.50 per share for a total cost of $9.0 million, including expenses.

 

J)

Spin-off Plans.  In September 2010, we announced plans to pursue a spin-off of our patent licensing operations. The spin-off will allow the spun-off entity to focus on patent licensing operations.  After the spin-off, Aware will continue as a supplier of test and diagnostics products and biometrics and imaging software.

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
GAAP net income (loss)		$	76			$	(1,133	)		$	(50	)		$	(4,851	)
Stock-based compensation			621				677				1,169				1,476
Non-GAAP net income (loss)		$	697			$	(456	)		$	1,119			$	(3,375	)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
GAAP net income (loss) per share		$	0.00			$	(0.06	)		$	(0.00	)		$	(0.23	)
Stock-based compensation			0.03				0.04				0.06				0.07
Non-GAAP net income (loss) per share		$	0.03			$	(0.02	)		$	0.06			$	(0.16	)

 

We expect that any contract revenue from DSL technology contracts will be minimal in future periods as a result of the sale of our licensing product line to Lantiq.  Moreover, we will not be pursuing new silicon IP licensing customers for DSL or home networking applications in the foreseeable future.  Other potential sources of future contract revenue include revenue from i) biometrics professional services contracts; and ii) DSL test and diagnostic professional services contracts.  There were no patent sales or licenses in 2009 or the first nine months of 2010, and if the proposed spin-off of our patent licensing operations is successful, we would not expect such patent revenue in future periods as well.

For the nine months ended September 30, 2010, cost of product sales increased 29% from $2.4 million in 2009 to $3.1 million in 2010. As a percentage of product sales, cost of product sales increased from 21% in the first nine months of 2009 to 23% in the corresponding period of 2010, which means that product gross margins decreased from 79% to 77%. The cost of product sales dollar increase was primarily due to higher sales of test and diagnostics hardware products in the nine month period this year. The decrease in product gross margins was primarily due to a greater proportion of hardware revenue in product sales in the nine month period this year versus the corresponding period last year.

For the three and nine month periods, the dollar decrease in cost of contract revenue was primarily due to lower revenue from DSL technology contracts and, to a lesser degree, from lower revenue from biometrics professional services contracts. The increase in gross margins on contract revenue in the three and nine month periods in 2010 was primarily due to a greater proportion of biometrics professional services contracts in contract revenue.  Biometrics professional services possess higher gross margins than DSL technology contract revenue.

After the closing of the Lantiq transaction, our research and development activities have been focused primarily on developing biometrics and imaging software, and developing test and diagnostics hardware and software.

Since the Lantiq transaction did not involve any of our sales and marketing personnel, the transaction had a minimal impact on 2010 expenses and we expect that it will have a minimal impact on future selling and marketing expense.

Since the Lantiq transaction did not involve any of our administrative personnel, the transaction had a minimal impact on 2010 expenses and we expect that it will have a minimal impact on future general and administrative expense.

For the three and nine month periods, the dollar decrease was primarily due to a decline in money market interest rates.

Based on an analysis that we performed under Internal Revenue Code Section 382 on our NOLs generated for the period 1997 through 2009, we have not experienced a change in ownership as defined by Section 382, and, therefore, the NOLs are not currently under any Section 382 limitation.

While we cannot assure you that we will not require additional financing, or that such financing will be available to us, we believe that our cash and cash equivalents will be sufficient to fund our operations for at least the next twelve months.

●	Cash and cash equivalents, which consist of financial instruments with original maturities of three months or less;

●	Short-term investments, which consist of financial instruments with remaining maturities of twelve months or less; and

●	Investments, which consist of financial instruments that mature in three years or less.

As of September 30, 2010, our cash and cash equivalents of $39.0 million were invested in money market accounts.  Due to the nature and short duration of these financial instruments, we do not expect that an increase in interest rates would result in any material loss to our investment portfolio. As of September 30, 2010, we had no investments that matured in more than twelve months.  We do not use derivative financial instruments for speculative or trading purposes.

 

Exhibit 31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

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