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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1997
COMMISSION FILE NUMBER 000-21129
AWARE, INC.
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(Exact Name of Registrant as Specified in Its Charter)
MASSACHUSETTS 04-2911026
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
ONE OAK PARK, BEDFORD, MASSACHUSETTS, 01730
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(Address of Principal Executive Offices)
(Zip Code)
(617) 276-4000
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(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of the issuer's common stock as of
May 2, 1997:
CLASS NUMBER OF SHARES OUTSTANDING
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Common Stock, par value $0.01 per share 19,172,236 shares
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AWARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
TABLE OF CONTENTS
PAGE
PART I FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets as of March 31, 1997
and December 31, 1996.......................................... 3
Consolidated Condensed Statements of Operations for the
Three Months Ended March 31, 1997
and March 31, 1996............................................. 4
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended March 31, 1997
and March 31, 1996............................................. 5
Notes to Consolidated Condensed Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 13
Signatures..................................................... 13
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PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
AWARE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 23,303,215 $ 31,092,273
Short-term investments .................................................... 12,537,928 5,626,725
Accounts receivable (less allowance for doubtful
accounts of $50,000 in 1997 and $35,000 in 1996) ....................... 1,998,324 1,654,980
Unbilled accounts receivable .............................................. 103,222 110,722
Inventories ............................................................... 344,552 447,534
Prepaid expenses .......................................................... 124,319 23,426
------------ ------------
Total current assets ................................................ 38,411,560 38,955,660
Property and equipment, net of accumulated depreciation and
amortization of $802,553 in 1997 and $557,901 in 1996 ..................... 1,676,852 1,166,928
------------ ------------
Total assets ................................................................... $ 40,088,412 $ 40,122,588
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 288,751 $ 337,339
Accrued expenses .......................................................... 89,409 60,091
Accrued compensation ...................................................... 199,704 173,692
Accrued professional fees ................................................. 33,818 65,000
Deferred revenue .......................................................... 40,000 40,000
------------ ------------
Total current liabilities ......................................... 651,682 676,122
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized,
none outstanding .................................................. - -
Common stock, $.01 par value; 30,000,000 shares authorized; issued
and outstanding, 19,159,636 in 1997 and 18,959,897 in 1996 ........ 191,596 189,600
Additional paid-in capital ............................................... 50,290,118 50,025,548
Accumulated deficit ...................................................... (10,592,022) (10,315,720)
Treasury stock ........................................................... (452,962) (452,962)
------------ ------------
Total stockholders' equity ........................................ 39,436,730 39,446,466
Total liabilities and stockholders' equity ..................................... $ 40,088,412 $ 40,122,588
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The accompanying notes are an integral part of the financial statements.
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AWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
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1997 1996
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Revenue:
Product ................................................. $ 103,790 $ 5,125
License and royalty ..................................... 1,310,984 647,436
Research and development ................................ 386,311 309,442
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Total revenue ....................................... 1,801,085 962,003
Costs and expenses:
Cost of product revenue ................................ 281,557 4,120
Research and development ................................ 1,432,779 599,239
Selling and marketing ................................... 374,415 141,691
General and administrative .............................. 436,920 199,302
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Total costs and expenses ........................... 2,525,671 944,352
Income (loss) from operations ............................... (724,586) 17,651
Interest income ............................................. 448,284 23,500
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Net income (loss) before provision for income taxes ......... (276,302) 41,151
Provision for income taxes .................................. - -
------------ ------------
Net income (loss) ........................................... $ (276,302) $ 41,151
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Net income (loss) per share ................................. $ (0.01) $ 0.00
============ ============
Weighted average common and common
equivalent shares outstanding .............................. 19,054,759 15,108,599
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The accompanying notes are an integral part of the financial statements.
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AWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1997 1996
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Cash flows from operating activities:
Net income (loss) ............................................ $ (276,302) $ 41,151
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization ............................... 244,652 57,457
Increase (decrease) from changes in assets and
liabilities:
Accounts receivable ................................... (343,344) (302,239)
Unbilled accounts receivable .......................... 7,500 75,740
Inventories ........................................... 102,982 (57,038)
Prepaid expenses ...................................... (100,893) 3,212
Accounts payable ...................................... (48,588) (8,642)
Accrued expenses ...................................... 24,148 81,484
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Net cash used in operating activities ........................... (389,845) (108,875)
Cash flows from investing activities:
Purchases of property and equipment ......................... (754,576) (6,101)
Net purchases of short-term investments ..................... (6,911,203) --
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Net cash used in investing activities ........................... (7,665,779) (6,101)
Cash flows from financing activities:
Proceeds from issuance of common stock ..................... 266,566 8,333
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Decrease in cash and cash equivalents ........................... (7,789,058) (106,643)
Cash and cash equivalents, beginning of period .................. 31,092,273 2,153,681
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Cash and cash equivalents, end of period ........................ $ 23,303,215 $ 2,047,038
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The accompanying notes are an integral part of the financial statements.
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AWARE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
A) BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed balance sheets,
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 March 31,1997, and of operations and cash flows
for the interim periods ended March 31, 1997 and 1996.
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with the instructions for Form 10-Q
and therefore do not include all information and footnotes necessary
for a complete presentation of operations, the financial position, and
cash flows of the Company, in conformity with generally accepted
accounting principles. The Company filed audited financial statements
which included all information and footnotes necessary for such
presentation for the years ended December 31, 1996 and December 31,
1995 in conjunction with its 1996 Annual Report on Form 10-K.
The results of operations for the interim period ended March 31, 1997
are not necessarily indicative of the results to be expected for the
year.
B) INVENTORY
Inventory consists primarily of the following:
MARCH 31, DECEMBER 31,
1997 1996
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Raw materials................... $339,802 $408,643
Work-in-process................. 4,750 38,891
Finished goods.................. - -
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Total.................... $344,552 $447,534
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C) NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of
common and dilutive common equivalent shares (common stock options and
convertible preferred stock) outstanding. Common equivalent shares for
the three months ended March 31, 1996 includes the effect of Securities
and Exchange Commission Staff Accounting Bulletin No. 83. The Bulletin
requires all common shares issued and options to purchase shares of
common stock granted by the Company during the twelve-month period
prior to the filing of a proposed initial public offering to be
included in the calculation as if they were outstanding for all
periods.
In accordance with the provisions of Statement of Financial Accounting
Standard No. 128, "Earnings per Share", the Company was not permitted
to early adopt SFAS No. 128 for the
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quarter ended March 31, 1997. Had SFAS No. 128 been effective for the
quarters ended March 31, 1997 and 1996, pro forma net income (loss) per
common share amounts would have been as follows:
Three Months Ended
March 31,
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1997 1996
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Basic net income (loss) per share ($0.01) $0.04
Diluted net income (loss) per share ($0.01) $0.00
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations which are not
historical are "forward looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements represent the
Company's present expectations or beliefs concerning future events, however the
Company cautions that such statements are qualified by important factors. Such
factors, which are identified under the heading "Risk Factors" below, could
cause actual results to differ materially from those indicated in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
Product Revenue. Product revenue consists primarily of revenue from the
sale of Asymmetric Digital Subscriber Line ("ADSL") modems, which are
manufactured by the Company. Product revenue increased from $5,125 in the first
quarter of 1996 to $103,790 in the current year quarter. Product revenue as a
percentage of total revenue was 5.8% in the first quarter of 1997 as compared to
0.5% in the corresponding quarter of 1996. The dollar increase, as well as the
increase as a percentage of total revenue, is primarily due to two reasons. In
the first quarter of 1996, the Company commenced shipment of ADSL modems. During
that period, modem shipments were limited by the Company's ability to
manufacture them. Secondly, in the first quarter of 1997, the Company released
an enhanced rate adaptive version of its ADSL modem.
License and Royalty Revenue. License and royalty revenue consists
primarily of revenue from the sale of intellectual property, such as hardware
and software technology licenses, compression software licenses, and royalties
from the sale of chipsets by customers who have licensed the Company's
technology. As such revenue has only a nominal cost of sale associated with it,
the Company does not report a separate cost of license and royalty revenue line
in its Statements of Operations.
License and royalty revenue increased by 102.5% from $647,436 in the first
quarter of 1996 to $1,310,984 in the current year quarter. License and royalty
revenue as a percentage of total revenue was 72.8% in the first quarter of 1997
as compared to 67.3% in the corresponding quarter of 1996. The dollar increase,
as well as the increase as a percentage of total revenue, is primarily due to a
significant ADSL license sale to U.S. Robotics Access Corp ("USR") and an
increase in the sale of compression software licenses in the first quarter of
1997.
During the first quarter of 1997, the Company entered into a license agreement
with USR. Under the terms of the agreement, the Company agreed to license its
discrete multi-tone ("DMT") ADSL technology to USR on a non-exclusive basis. The
Company will receive license payments upon the achievement of certain
deliverables and milestones, as well as on-going royalty payments upon shipment
of USR products that incorporate the Company's DMT technology.
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Research and Development Revenue. Research and development revenue
consists primarily of revenue from commercial contract engineering and
development, and government research contracts. Research and development revenue
increased by 24.8% from $309,442 in the first quarter of 1996 to $386,311 in the
current year quarter. Research and development revenue as a percentage of total
revenue was 21.4% in the first quarter of 1997 as compared to 32.2% in the
corresponding quarter of 1996. The dollar increase is primarily due to an
increase in non-recurring engineering revenue from commercial telecommunication
customers.
Cost of Product Revenue. Cost of product revenue consists primarily of
direct material, direct labor and overhead costs to produce the Company's
products, as well as provisions for excess and obsolete inventory. Cost of
product revenue as a percentage of product revenue was 271.3% in the first
quarter of 1997 as compared to 80.4% in the corresponding quarter of 1996. The
cost of product revenue as a percentage of product revenue in the first quarter
of 1997 primarily reflects: (i) high fixed manufacturing costs relative to modem
shipments, and (ii) a $125,000 provision for excess and obsolete inventory. Cost
of product revenue in the first quarter of 1996 was nominal due to limited modem
shipments.
Research and Development Expense. Research and development expense
consists primarily of salaries for engineers, and expenses for consultants,
recruiting, supplies, equipment, depreciation and facilities related to the
development and enhancement of the Company's products and technology. Research
and development expense increased by 139.1% from $599,239 in the first quarter
of 1996 to $1,432,779 in the current year quarter. The increase in research and
development expense is primarily driven by projects to commercialize and add
hardware and software functionality to the Company's core broadband
technologies. The Company anticipates that research and development spending
will grow significantly in 1997.
Selling and Marketing Expense. Selling and marketing expense consists
primarily of salaries for sales and marketing personnel, travel, advertising and
promotion, recruiting, and allocated facilities expense. Selling and marketing
expense increased 164.2% from $141,691 in the first quarter of 1996 to $374,415
in the current year quarter. The increase is primarily due to: (i) the addition
of marketing staff to establish channels of distribution for the Company's
products and technology, and (ii) increased levels of advertising and promotion
to create awareness for the Company's products. The Company anticipates that
selling and marketing spending will grow significantly in 1997.
General and Administrative Expense. General and administrative expense
consists primarily of salaries for administrative personnel, allocated
facilities costs, public company expenses and professional services, such as
legal and audit expenses. General and administrative expense increased by 119.2%
from $199,302 in the first quarter of 1996 to $436,920 in the current year
quarter. The increase is primarily due to: (i) additions to the Company's
finance, information systems and administrative organizations to support
organizational growth, and (ii) investor relations and public company expenses.
Interest Income. Interest income increased from $23,500 in the first
quarter of 1996 to $448,284 in the current year quarter, primarily as a result
of higher cash balances due to the investment of net proceeds from the Company's
initial public offering.
Income Taxes. The Company has made no provision for income taxes as it
has a history of net losses, which has resulted in tax loss carryforwards. As of
December 31, 1996, the Company
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had available federal net operating loss carryforwards of approximately
$9,773,000 which expire in 2004 through 2010, and federal research and
development credit carryforwards of approximately $493,000 which expire in 2003
through 2011. As of December 31, 1996, the Company also had available state net
operating loss carryforwards of approximately $5,448,000 which expire in 1997
through 2000 and state research and development and investment tax credit
carryforwards of approximately $268,000 which expire in 2006 and 2011.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had cash, cash equivalents and short-term
investments of $35,841,143, a decrease of $877,855 from December 31, 1996. This
decrease is primarily due to $389,845 of cash used in operations and $754,576 of
cash invested in property and equipment. This use of cash was partially offset
by $266,566 of proceeds from the issuance of common stock under the Company's
stock option plans.
Cash used in operations primarily results from an increase in accounts
receivable. The increase in accounts receivable reflects: (i) the execution of a
large licensing agreement late in the quarter, (ii) the achievement of several
contract milestones late in the quarter, and (iii) the receipt of several large
fourth quarter receivables in early April 1997. The increase in property and
equipment was primarily related to purchases of computers, software and other
equipment used in research and development activities.
While there can be no assurance that the Company will not require additional
financing, or that such financing will be available to the Company, the Company
believes that its financial resources are adequate to meet its liquidity
requirements over the next twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which will
be effective during the fourth quarter of 1997. SFAS No. 128 will require the
Company to restate all previously reported earnings per share information to
conform with the new pronouncement's requirements.
RISK FACTORS
The Company believes that the occurrence of any one or some combination of the
following risk factors could have a material adverse effect on the Company's
business, financial condition and results of operations.
History of Operating Losses
The Company has incurred operating losses in every fiscal year since
inception. Substantial additional research and development expenses to enhance
the performance and reduce the manufacturing costs of the Company's products
will be required before market acceptance can be determined. Also, the Company
anticipates that substantial selling and marketing expenses will be required to
establish sales channels for the Company's products and technology. There can be
no assurance that the Company will achieve profitable operations in any future
period.
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Dependence on Acceptance of ADSL Technology
The Company's future success is substantially dependent upon whether
ADSL technology gains widespread commercial acceptance by the telephone
companies ("telcos") and end users of telco services. The Company has invested
substantial resources in the development of ADSL technology implemented through
the Discrete Multi-Tone ("DMT") modulation technique. Telcos have only begun
evaluating DMT-based ADSL technology, and there can be no assurance that the
telcos will pursue the deployment of such ADSL technology.
Reliance on Telcos; Dependence on a Limited Number of Customers
Even if telcos adopt policies favoring full-scale implementation of
ADSL technology, there can be no assurance that sales of the Company's ADSL
products will become significant. The Company's customers, including Regional
Bell Operating Companies ("RBOCs"), OEMs and other telcos, are relatively few in
number and have significantly greater resources than that of the Company. The
Company has limited ability to influence or control decisions made by these
customers. There can be no assurance that these customers will not use their
size and bargaining power to demand unfavorable terms and conditions (including
price), seek alternative suppliers, or undertake internal development of
products comparable to those of the Company's.
Substantial Dependence on Analog Devices, Inc.
The Company and Analog Devices, Inc. ("ADI") have entered into a series
of agreements to develop integrated chipsets based on the Company's technology.
The inability or refusal of ADI to manufacture, market and sell such chipsets in
substantial quantities would prevent telcos from adopting the Company's
technology and would have a material adverse effect on the Company's business.
There can be no assurance that ADI will succeed or, in the event that ADI is not
successful, that the Company would be able to find a substitute chipset
manufacturer without significant delays.
Proprietary Technology; Risk of Third Party Claims of Infringement
The Company's ability to compete effectively will depend to a
significant extent on its ability to protect its proprietary information and to
operate without infringing the intellectual property rights of others. Despite
the precautions the Company has taken to protect its intellectual property,
there can be no assurance that such steps will be adequate to prevent the
misappropriation of its technology. In addition, third parties may assert
exclusive patent, copyright and other intellectual property rights to
technologies that are important to the Company. There can be no assurance that
other third parties will not assert such claims against the Company in the
future.
Rapid Technological Change; Dependence on New Products
The markets for the Company's products are characterized by rapid
technological advances, evolving industry standards, changes in end-user
requirements, frequent new product introductions, and evolving telco offerings.
The Company's business will be materially adversely affected if technologies or
standards on which Company's products are based become obsolete, or if the
Company is unable to develop and introduce new products in a timely manner in
response to changing market conditions. In such an environment, product cycles
tend to be short, and therefore, the Company may need to write-off excess and
obsolete inventory from time-to-time. In the fourth quarter of 1996 and the
first quarter of 1997, the Company had inventory write-offs of $350,000 and
$125,000, respectively.
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Competition
The markets for the Company's products are intensely competitive and
the Company expects competition to increase in the immediate future. Many of the
Company's competitors and potential competitors have significantly greater
financial, technological, manufacturing, marketing and personnel resources than
the Company. There can be no assurance that the Company will be able to compete
successfully or that competition will not adversely affect the Company's
business.
Manufacturing
The Company has limited experience in manufacturing or in supervising
the manufacture of its products, including its ADSL modem. There can be no
assurance that the Company will not encounter significant difficulties in
manufacturing or controlling the quality of its products, or that its products
will be reliable in the field.
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PART II. OTHER INFORMATION
ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 11.1* - Computation of Net Income (Loss) per Share
(b) REPORTS ON 8-K
None.
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* filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AWARE, INC.
Date: May 9, 1997 By: /s/ James C. Bender
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James C. Bender, Chief Executive
Officer and President
Date: May 9, 1997 By: /s/ Richard P. Moberg
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Richard P. Moberg, Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
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