Massachusetts
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04-2911026 |
(State or Other Jurisdiction of
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(I.R.S. Employer Identification No.)
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Incorporation or Organization)
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Class
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Number of Shares Outstanding
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Common Stock, par value $0.01 per share
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20,573,688 shares
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Page
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PART I
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FINANCIAL INFORMATION
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Item 1.
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Unaudited Consolidated Financial Statements
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Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010
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3
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Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and June 30, 2010
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4
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Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and June 30, 2010
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5
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Notes to Consolidated Financial Statements
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6
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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10
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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16
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Item 4.
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Controls and Procedures
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16
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PART II
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OTHER INFORMATION
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Item 1.
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Legal Proceedings
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17
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Item 1A.
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Risk Factors
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17
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Item 6.
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Exhibits
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18
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Signatures
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18
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June 30,
2011
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December 31,
2010
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ASSETS
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Current assets:
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||||||||
Cash and cash equivalents
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$ | 43,232 | $ | 39,949 | ||||
Accounts receivable, net
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5,073 | 4,968 | ||||||
Inventories
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1,413 | 1,863 | ||||||
Prepaid expenses and other current assets
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240 | 235 | ||||||
Total current assets
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49,958 | 47,015 | ||||||
Property and equipment, net
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6,212 | 6,360 | ||||||
Other assets, net
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17 | 25 | ||||||
Total assets
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$ | 56,187 | $ | 53,400 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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||||||||
Accounts payable
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$ | 651 | $ | 565 | ||||
Accrued expenses
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126 | 118 | ||||||
Accrued compensation
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841 | 1,143 | ||||||
Accrued professional
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278 | 427 | ||||||
Deferred revenue
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1,208 | 944 | ||||||
Total current liabilities
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3,104 | 3,197 | ||||||
Long-term deferred revenue
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462 | 320 | ||||||
Stockholders’ equity:
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||||||||
Preferred stock, $1.00 par value; 1,000,000 shares authorized,
none outstanding
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- | - | ||||||
Common stock, $.01 par value; 70,000,000 shares authorized; issued
and outstanding 20,767,661 as of June 30, 2011 and 20,041,863
as of December 31, 2010
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208 | 200 | ||||||
Additional paid-in capital
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79,780 | 77,373 | ||||||
Accumulated deficit
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(27,367 | ) | (27,690 | ) | ||||
Total stockholders’ equity
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52,621 | 49,883 | ||||||
Total liabilities and stockholders’ equity
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$ | 56,187 | $ | 53,400 |
Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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|||||||||||||||
2011
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2010
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2011
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2010
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Revenue:
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Product sales
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$ | 3,997 | $ | 3,911 | $ | 9,075 | $ | 8,562 | ||||||||
Services
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1,375 | 346 | 2,204 | 555 | ||||||||||||
Royalties
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541 | 714 | 993 | 1,470 | ||||||||||||
Total revenue
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5,913 | 4,971 | 12,272 | 10,587 | ||||||||||||
Costs and expenses:
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Cost of product sales
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1,087 | 840 | 2,308 | 1,877 | ||||||||||||
Cost of services
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450 | 74 | 807 | 145 | ||||||||||||
Research and development
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1,810 | 2,082 | 3,770 | 4,117 | ||||||||||||
Selling and marketing
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1,060 | 1,053 | 2,111 | 2,119 | ||||||||||||
General and administrative
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1,789 | 1,416 | 2,986 | 2,818 | ||||||||||||
Total costs and expenses
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6,196 | 5,465 | 11,982 | 11,076 | ||||||||||||
Income (loss) from operations
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(283 | ) | (494 | ) | 290 | (489 | ) | |||||||||
Other income | - | 325 | - | 325 | ||||||||||||
Interest income
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16 | 21 | 35 | 39 | ||||||||||||
Income (loss) before provision for income taxes
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(267 | ) | (148 | ) | 325 | (125 | ) | |||||||||
Provision for income taxes
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- | - | 2 | 1 | ||||||||||||
Net income (loss)
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$ | (267 | ) | $ | (148 | ) | $ | 323 | $ | (126 | ) | |||||
Net income (loss) per share – basic
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$ | (0.01 | ) | $ | (0.01 | ) | $ | 0.02 | $ | (0.01 | ) | |||||
Net income (loss) per share – diluted
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$ | (0.01 | ) | $ | (0.01 | ) | $ | 0.02 | $ | (0.01 | ) | |||||
Weighted average shares – basic
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20,700 | 19,927 | 20,461 | 19,920 | ||||||||||||
Weighted average shares - diluted
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20,700 | 19,927 | 20,821 | 19,920 |
Six Months Ended
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||||||||
June 30,
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||||||||
2011
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2010
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Cash flows from operating activities:
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Net income (loss)
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$ | 323 | $ | (126 | ) | |||
Adjustments to reconcile net income (loss) to net cash
provided from (used) in operating activities:
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Depreciation and amortization
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244 | 260 | ||||||
Stock-based compensation
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885 | 548 | ||||||
Increase (decrease) from changes in assets and liabilities:
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Accounts receivable
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(105 | ) | (968 | ) | ||||
Inventories
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450 | (220 | ) | |||||
Prepaid expenses and other current assets
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(5 | ) | 30 | |||||
Accounts payable
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86 | 337 | ||||||
Accrued expenses, compensation, and professional
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(443 | ) | (107 | ) | ||||
Deferred revenue
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406 | 92 | ||||||
Net cash provided from (used in) operating activities
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1,841 | (154 | ) | |||||
Cash flows from investing activities:
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Purchases of property and equipment
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(88 | ) | (67 | ) | ||||
Expenses from sale of assets
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- | (100 | ) | |||||
Purchases of other assets
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- | (60 | ) | |||||
Net cash used in investing activities
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(88 | ) | (227 | ) | ||||
Cash flows from financing activities:
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Proceeds from issuance of common stock
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1,684 | 2 | ||||||
Shares surrendered by employees to pay taxes related to
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||||||||
unrestricted stock
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(154 | ) | (161 | ) | ||||
Net cash provided by (used in) financing activities
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1,530 | (159 | ) | |||||
Increase (decrease) in cash and cash equivalents
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3,283 | (540 | ) | |||||
Cash and cash equivalents, beginning of period
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39,949 | 39,669 | ||||||
Cash and cash equivalents, end of period
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$ | 43,232 | $ | 39,129 |
A)
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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 June 30, 2011, and of operations and cash flows for the interim periods ended June 30, 2011 and 2010.
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B)
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Fair Value Measurements. The Financial Accounting Standards Board (“FASB”) issued authoritative guidance for fair value measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures for assets and liabilities measured at fair value in financial statements. We adopted these provisions on January 1, 2008.
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C)
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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):
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June 30,
2011
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December 31,
2010
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Raw materials | $ | 973 | $ | 966 | |||
Finished goods
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440 | 897 | |||||
Total
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$ | 1,413 | $ | 1,863 |
D)
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Computation of Earnings per Share. Basic earnings per share is 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.
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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|||||||||||||||
2011
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2010
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2011
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2010
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Net income (loss)
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$ | (267 | ) | $ | (148 | ) | $ | 323 | $ | (126 | ) | |||||
Weighted average common shares outstanding
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20,700 | 19,927 | 20,461 | 19,920 | ||||||||||||
Additional dilutive common stock equivalents
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- | - | 360 | - | ||||||||||||
Diluted shares outstanding
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20,700 | 19,927 | 20,821 | 19,920 | ||||||||||||
Net income (loss) per share – basic
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$ | (0.01 | ) | $ | (0.01 | ) | $ | 0.02 | $ | (0.01 | ) | |||||
Net income (loss) per share – diluted
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$ | (0.01 | ) | $ | (0.01 | ) | $ | 0.02 | $ | (0.01 | ) |
E)
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Stock-Based Compensation. The following table presents stock-based employee compensation expenses included in our unaudited consolidated statements of operations (in thousands):
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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|||||||||||||||
2011
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2010
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2011
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2010
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Cost of product sales
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$ | 2 | $ | 3 | $ | 4 | $ | 5 | ||||||||
Cost of services
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10 | 1 | 19 | 7 | ||||||||||||
Research and development
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64 | 54 | 131 | 169 | ||||||||||||
Selling and marketing
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22 | 13 | 44 | 51 | ||||||||||||
General and administrative
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484 | 132 | 687 | 316 | ||||||||||||
Stock-based compensation expense
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$ | 582 | $ | 203 | $ | 885 | $ | 548 | ||||||||
·
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Stock options and SARS – No stock options or SARs were granted in the three or six month periods ended June 30, 2010 and 2011.
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·
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Unrestricted Stock Grants - In July 2010, we granted 575,443 shares of stock, including 102,040 shares to directors and 473,403 shares to officers and employees. Shares granted to directors and one employee representing a total of 111,163 shares were issued to those individuals in August 2010, which resulted in a stock-based compensation charge of $281,000 during the three months ended September 30, 2010. All other shares granted to officers and employees representing a total of 464,280 shares were scheduled to be issued in four equal increments on December 31, 2010, June 30, 2011, December 31, 2011, and June 30, 2012; provided that grantees remain employed on each of those dates. The total stock-based compensation charge associated with this grant will be amortized into expense over the related two-year service period. We amortized $100,000 and $246,000 of stock-based compensation expense related to the officer and employee portion of the grant in the three and six month periods ended June 30, 2011, respectively. Based on a June 30, 2011 employee census, the total remaining stock-based compensation charge associated with this grant over the next four quarters is expected to be approximately $401,000.
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·
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Stock Option Exchange Program - In January 2010, we completed an employee option exchange program. Under the terms of the program, eligible rank and file employees had the right to exchange eligible vested and unvested stock options outstanding for shares of common stock. Exchange ratios for each eligible stock option were determined using the fair values of stock options and Aware’s common stock immediately prior to the initiation of the program. Employees exchanged 820,481 stock options for 178,314 shares of common stock. Employees were also allowed to surrender a portion of their common stock in return for the Company paying their related withholding taxes. As a result of this provision, employees surrendered 60,659 shares of common stock and we paid approximately $161,000 of withholding taxes on their behalf. After the tax-related share surrender, 117,655 net shares of common stock were issued to participating employees.
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F)
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Business Segments. We manage the business as one segment and conduct our operations in the United States. We sell our products and technology to domestic and international customers. Revenues were generated from the following geographic regions (in thousands):
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Three Months Ended
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Six Months Ended
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|||||||||||||||
June 30,
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June 30,
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2011
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2010
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2011
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2010
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United States
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$ | 2,969 | $ | 2,959 | $ | 6,614 | $ | 6,411 | ||||||||
Germany
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583 | 799 | 942 | 1,443 | ||||||||||||
Rest of World
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2,361 | 1,213 | 4,716 | 2,733 | ||||||||||||
$ | 5,913 | $ | 4,971 | $ | 12,272 | $ | 10,587 |
G)
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Income Taxes. As of December 31, 2010, we had federal net operating loss (“NOLs”) and research and experimentation credit carryforwards of approximately $51.0 million and $13.5 million respectively, which may be available to offset future federal income tax liabilities and expire at various dates from 2011 through 2030. In addition, at December 31, 2010, we had approximately $11.3 million and $7.3 million of state net operating losses and state research and development and investment tax carryforwards, respectively, which expire at various dates from 2011 through 2025. We have recorded a full valuation allowance on all of our deferred tax assets. We will release the valuation allowance when we are able to utilize NOLs and tax credit carryforwards by offsetting future taxable income.
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Based on an analysis that we performed under Internal Revenue Code Section 382 on our NOLs generated for the period 1997 through 2010, 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.
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H)
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Recent Accounting Pronouncements. As of the date of this report, new pronouncements issued, but not effective until after June 30, 2011, are not expected to have a material impact on our financial condition, results of operations, or disclosures.
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I)
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Spin-off Plans. In September 2010, we announced plans to pursue a spin-off of our patent licensing operations. The spin-off would allow the spun-off entity to focus on patent licensing operations. After the spin-off, Aware would continue as a supplier of test and diagnostics products and biometrics and imaging software.
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·
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Cash and cash equivalents, which consist of financial instruments with original maturities of three months or less;
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·
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Short-term investments, which consist of financial instruments with remaining maturities of twelve months or less; and
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·
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Investments, which consist of financial instruments that mature in three years or less.
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Exhibit 10.1*
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Separation Agreement dated April 1, 2011 between Aware, Inc. and Edmund C. Reiter (filed as Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on April 1, 2011 and incorporated herein by reference).
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Exhibit 10.2*
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Consulting Agreement dated April 1, 2011 between Aware, Inc. and Edmund C. Reiter (filed as Exhibit 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on April 1, 2011 and incorporated herein by reference).
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Exhibit 31.1
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Certification of co-Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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Exhibit 31.2
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Certification of co-Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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Exhibit 32.1
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Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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AWARE, INC.
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Date: July 27, 2011
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By:
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/s/ Kevin T. Russell
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Kevin T. Russell
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co-Chief Executive Officer & co-President
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General Counsel
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Date: July 27, 2011
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By:
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/s/ Richard P. Moberg
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Richard P. Moberg,
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co-Chief Executive Officer & co-President
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Chief Financial Officer (Principal Financial and Accounting Officer)
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1.
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I have reviewed this quarterly report on Form 10-Q of Aware, Inc.;
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2.
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Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
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3.
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Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
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4.
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The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
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a)
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designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
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b)
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designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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c)
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evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
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d)
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disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
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5.
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The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
|
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a)
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all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
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b)
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any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: July 27, 2011
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/s/ Kevin T. Russell
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Kevin T. Russell
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co-Chief Executive Officer & co-President
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1.
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I have reviewed this quarterly report on Form 10-Q of Aware, Inc.;
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2.
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Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
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3.
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Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
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4.
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The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
|
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a)
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designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
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b)
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designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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c)
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evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
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d)
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disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
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5.
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The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
|
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a)
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all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
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b)
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any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: July 27, 2011
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/s/ Richard P. Moberg
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Richard P. Moberg
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co-Chief Executive Officer & co-President
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Chief Financial Officer
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(1)
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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(2)
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Kevin T. Russell
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/s/ Richard P. Moberg
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co-Chief Executive Officer & co-President
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co-Chief Executive Officer & co-President
|
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Chief Financial Officer
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||
Date: July 27, 2011
|
Date: July 27, 2011
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