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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 JUNE 30, 1998
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)
40 MIDDDLESEX TURNPIKE, BEDFORD, MASSACHUSETTS, 01730
-----------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(781) 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
----- -----
Indicate the number of shares outstanding of the issuer's common stock as of
July 31, 1998:
CLASS NUMBER OF SHARES OUTSTANDING
----- ----------------------------
Common Stock, par value $0.01 per share 20,637,580 shares
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AWARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets as of June 30, 1998
and December 31, 1997............................................ 3
Consolidated Condensed Statements of Operations for the
Three and Six Months Ended June 30, 1998
and June 30, 1997................................................ 4
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 30, 1998
and June 30, 1997................................................ 5
Notes to Consolidated Condensed Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................ 16
Item 2. Changes in Securities and Use of Proceeds........................ 16
Item 4. Submission of Matters to a Vote of Security Holders.............. 17
Item 6. Exhibits and Reports on Form 8-K................................. 18
Signatures....................................................... 18
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PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
AWARE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 22,666,297 $ 23,496,508
Short-term investments ................................................ 2,029,473 2,607,411
Accounts receivable (less allowance for doubtful
accounts of $90,000 in 1998 and $50,000 in 1997) ................... 2,384,565 1,824,119
Inventories ........................................................... 227,375 215,622
Prepaid expenses ...................................................... 154,937 290,847
------------ ------------
Total current assets ............................................ 27,462,647 28,434,507
Property and equipment, net of accumulated depreciation and
amortization of $2,047,609 in 1998 and $1,330,281 in 1997 ............. 10,742,708 10,846,025
------------ ------------
Total assets ............................................................... $ 38,205,355 $ 39,280,532
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 741,960 $ 1,075,126
Accrued expenses ...................................................... 231,091 185,676
Accrued compensation .................................................. 243,464 326,558
Accrued professional .................................................. 67,776 73,370
Deferred revenue ...................................................... 125,000 -
------------ ------------
Total current liabilities ..................................... 1,409,291 1,660,730
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 ... 206,146 196,460
and outstanding, 20,614,580 in 1998 and 19,646,024 in 1997
Additional paid-in capital ........................................... 54,100,389 52,640,360
Accumulated deficit .................................................. (17,510,471) (14,764,056)
Treasury stock ....................................................... - (452,962)
------------ ------------
Total stockholders' equity .................................... 36,796,064 37,619,802
Total liabilities and stockholders' equity ................................. $ 38,205,355 $ 39,280,532
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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AWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Product .............................. $ 484,406 $ 147,303 $ 919,581 $ 251,093
License and royalty .................. 1,326,526 844,134 2,095,990 2,155,118
Research and development ............. 620,572 878,980 1,419,949 1,265,291
----------- ----------- ----------- -----------
Total revenue .................... 2,431,504 1,870,417 4,435,520 3,671,502
Costs and expenses:
Cost of product revenue ............. 456,629 210,501 833,762 492,058
Research and development ............. 2,295,587 1,433,433 4,492,018 2,866,212
Selling and marketing ................ 861,864 492,575 1,629,471 866,990
General and administrative ........... 532,963 482,051 1,088,934 918,971
----------- ----------- ----------- -----------
Total costs and expenses ........ 4,147,043 2,618,560 8,044,185 5,144,231
Loss from operations ..................... (1,715,539) (748,143) (3,608,665) (1,472,729)
Other income and expense ................. 99,000 - 198,000 -
Interest income .......................... 325,561 472,745 664,250 921,029
----------- ----------- ----------- -----------
Net loss before provision for income taxes (1,290,978) (275,398) (2,746,415) (551,700)
Provision for income taxes ............... - - - -
----------- ----------- ----------- -----------
Net loss ................................. $(1,290,978) $ (275,398) $(2,746,415) $ (551,700)
=========== =========== =========== ===========
Net loss per share - basic ............... $ (0.06) $ (0.01) $ (0.14) $ (0.03)
Net loss per share - diluted ............. $ (0.06) $ (0.01) $ (0.14) $ (0.03)
=========== =========== =========== ===========
Weighted average shares - basic .......... 20,212,309 19,284,218 19,966,936 19,170,086
Weighted average shares - diluted ........ 20,212,309 19,284,218 19,966,936 19,170,086
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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AWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................................ $(2,746,415) $ (551,700)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .................................... 717,328 348,537
Increase (decrease) from changes in assets and liabilities:
Accounts receivable ........................................... (560,446) (149,614)
Unbilled accounts receivable .................................. - 74,872
Inventories ................................................... (11,753) 201,026
Prepaid expenses .............................................. 135,910 (316,247)
Accounts payable .............................................. (333,166) 159,993
Accrued expenses .............................................. (43,273) (52,952)
Deferred revenue .............................................. 125,000 -
----------- -----------
Net cash used in operating activities .................................. (2,716,815) (286,085)
Cash flows from investing activities:
Purchases of property and equipment ................................ (614,011) (1,188,525)
Net sales (purchases) of short-term investments .................... 577,938 (35,118)
----------- -----------
Net cash used in investing activities .................................. (36,073) (1,223,643)
Cash flows from financing activities:
Proceeds from issuance of common stock ............................ 1,922,677 992,371
----------- -----------
Decrease in cash and cash equivalents .................................. (830,211) (517,357)
Cash and cash equivalents, beginning of period ......................... 23,496,508 31,092,273
----------- -----------
Cash and cash equivalents, end of period ............................... $22,666,297 $30,574,916
=========== ===========
</TABLE>
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 the
Company's financial position at June 30, 1998, and of its operations
and cash flows for the interim periods ended June 30, 1998 and 1997.
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 three years ended December 31, 1997 in conjunction
with its 1997 Annual Report on Form 10-K.
The results of operations for the interim period ended June 30, 1998
are not necessarily indicative of the results to be expected for the
year.
B) INVENTORIES
Inventories consist primarily of the following:
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
Raw materials.................... $133,553 $163,555
Work-in-process.................. - -
Finished goods................... 93,822 52,067
-------- --------
Total..................... $227,375 $215,622
======== ========
C) NET LOSS PER SHARE
In December 1997, the Company adopted SFAS No. 128, "Earnings Per
Share." SFAS No. 128 establishes standards for computing and presenting
earnings per share and applies to entities with publicly held common
stock or potential common stock. Prior to December 1997, the Company
computed earnings per share in accordance with APB Opinion No. 15,
"Earnings per Share." The adoption of SFAS No. 128 had no effect on
previously reported net loss per share for the three and six month
periods ended June 30, 1997.
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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
Certain statements contained in the following Management's Discussion
and Analysis of Financial Condition and Results of Operations, including
statements regarding the anticipated development and expansion of the Company's
business, the intent, belief or current expectations of the Company, its
directors or its officers, primarily with respect to the future operating
performance of the Company, and other statements contained herein regarding
matters that are not historical facts, are "forward-looking" statements. 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 include, but
are not limited to, the risk factors identified below, could cause actual
results to differ materially from those indicated in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
OVERVIEW
For its first seven years, the Company was primarily engaged in
research, specializing in wavelet mathematics applications, digital compression,
and telecommunications and channel modulation and coding. In 1993, the Company
shifted its business from contract research toward development and licensing of
Asymmetric Digital Subscriber Line ("ADSL") and other broadband technologies and
data and video compression products. Commencing in 1996 and 1997, the Company
began offering ADSL products, including modems, access routers, transceiver
modules, and development systems to complement its ADSL technology licensing and
development activities. The Company's two principal objectives with respect to
its product business were to demonstrate its ADSL technology through its
products, and to fill trial equipment opportunities until widespread deployment
of ADSL services began.
In the second quarter of 1998, the Company made a decision to focus primarily on
licensing its intellectual property to semiconductor companies and to systems
companies that desire to vertically integrate Aware's technology to enable them
to manufacture and sell integrated circuits incorporating Aware technology. The
Company also intends to market its technology to: (i) telecommunications and
data communications equipment companies to encourage them to design Aware
technology into their products, and (ii) service providers to encourage them to
deploy services, such as high-speed Internet Access, based on Aware technology.
Additionally, the Company will continue to sell ADSL development systems to
support its technology licensing business, as well as license hardware designs
and software-based compression products.
The decision to focus the strategic direction on intellectual property licensing
was driven by the following factors: (i) consolidation within the industry among
ADSL technology providers created an opportunity for independent technology
suppliers to fill a demand by semiconductor companies for such technology, (ii)
the Company amended its agreement with Analog Devices, Inc. in late March 1998
from an exclusive to a non-exclusive relationship, thus allowing the Company to
license its
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technology to other semiconductor companies, (iii) Aware believes that its
intellectual property position with respect to full rate ADSL and splitterless
Digital Subscriber Line ("DSL") Lite affords it an opportunity to offer
semiconductor companies valuable technologies and intellectual property, and
(iv) recent ADSL equipment pricing pressure has caused the Company to conclude
that there are other companies who could more efficiently manufacture,
distribute and support ADSL equipment.
Accordingly, the Company believes its future revenue will consist principally of
licensing, contract engineering, and royalty revenue. While the Company believes
that product revenue will continue, the Company expects that it will decline as
a percentage of total revenue.
RESULTS OF OPERATIONS
Product Revenue. Product revenue consists primarily of revenue from the
sale of ADSL modems, access routers, transceiver modules, and development
systems. Product revenue increased by 228.9% from $147,303 in the second quarter
of 1997 to $484,406 in the current year quarter. Product revenue as a percentage
of total revenue was 19.9% in the second quarter of 1998 as compared to 7.9% in
the corresponding quarter of 1997. For the six months ended June 30, product
revenue increased by 266.2% from $251,093 in 1997 to $919,581 in 1998. Product
revenue as a percentage of total revenue was 20.7% for the first six months of
1998 as compared to 6.8% in the corresponding period of 1997.
The dollar increase, as well as the increase as a percentage of total revenue,
in both the three and six month periods is primarily due to the availability of
products in the current year periods that were not available in the prior year
periods. These new products include transceiver modules, development systems,
and the Company's x200 Access Router. To a lesser degree, the increase in
product revenue was also the result of a shipment of prototype transceiver
modules for a specific customer.
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 57.1% from $844,134 in the second
quarter of 1997 to $1,326,526 in the current year quarter. License and royalty
revenue as a percentage of total revenue was 54.6% in the second quarter of 1998
as compared to 45.1% in the corresponding quarter of 1997. The dollar increase,
as well as the increase as a percentage of total revenue, is primarily due to a
significant increase in telecommunications licensing revenue, which was
partially offset by lower compression software license revenue. The increase in
telecommunications licensing revenue was primarily attributable to DSL Lite
software license revenue from Analog Devices Inc. ("ADI") chipset customers. The
decrease in compression software license revenue was primarily due to a
significant license sale that occurred in the second quarter of 1997.
For the six months ended June 30, license and royalty revenue decreased by 2.7%
from $2,155,118 in 1997 to $2,095,990 in 1998. License and royalty revenue as a
percentage of total revenue was 47.3% for the first six months of 1998 as
compared to 58.7% in the corresponding period of 1997. The dollar decrease, as
well as the decrease as a percentage of total revenue, was primarily due to a
significant compression software license sale in the second quarter of 1997 that
did not reoccur in the
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current year quarter. The decrease in compression software revenue was partially
offset by higher telecommunications licensing and chipset royalty revenue in the
first six months of 1998.
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
decreased by 29.4% from $878,980 in the second quarter of 1997 to $620,572 in
the current year quarter. Research and development revenue as a percentage of
total revenue was 25.5% in the second quarter of 1998 as compared to 47.0% in
the corresponding quarter of 1997. The dollar decrease, as well as the decrease
as a percentage of total revenue, is primarily due to a decrease in revenue from
both commercial engineering projects and U.S. government research projects. The
decrease in commercial engineering revenue is primarily driven by the temporary
suspension of the Company's Hybrid Fiber Coaxial ("HFC") project in the third
quarter of 1997, which resulted in no such revenue in the current quarter. U.S.
government research revenue is lower due to a decision by the Company to shift
away from this type of business.
For the six months ended June 30, research and development revenue increased by
12.2% from $1,265,291 in 1997 to $1,419,949 in 1998. Research and development
revenue as a percentage of total revenue was 32.0% for the first six months of
1998 as compared to 34.5% in the corresponding period of 1997. The dollar
increase is primarily due to an increase in commercial engineering revenue,
which was partially offset by lower U.S. government research revenue. The
increase in commercial engineering project revenue is primarily due to a
significant new project with a telecommunications customer that commenced in the
fourth quarter of 1997.
Cost of Product Revenue. Cost of product revenue consists primarily of:
(i) direct material, direct labor, and overhead costs to produce the Company's
products, (ii) cost of goods for purchases of finished inventory from third
party suppliers, and (iii) provisions for excess and obsolete inventory.
Cost of product revenue as a percentage of product revenue was 94.3% in the
second quarter of 1998 as compared to 142.9% in the corresponding quarter of
1997. The cost of product revenue as a percentage of product revenue in both
periods primarily reflects high material, labor and fixed manufacturing costs
due to relatively low production volumes, and provisions for excess and obsolete
inventory of $75,000 in the second quarter of 1998 and $50,000 in the second
quarter of 1997. Excluding obsolete inventory provisions, cost of product
revenue as a percentage of product revenue was 78.8% in the second quarter of
1998 and 109.0% in the second quarter of 1997.
Cost of product revenue as a percentage of product revenue was 90.7% for the
first six months of 1998 as compared to 196.0% in the corresponding 1997 period.
The cost of product revenue as a percentage of product revenue in both periods
primarily reflects high material, labor and fixed manufacturing costs due to
relatively low production volumes, and provisions for excess and obsolete
inventory of $150,000 for the first six months of 1998 and $175,000 in the
corresponding 1997 period. Excluding obsolete inventory provisions, cost of
product revenue as a percentage of product revenue was 74.4% for the first six
months of 1998 as compared to 126.3% in the corresponding 1997 period.
Research and Development Expense. Research and development expense
consists primarily of salaries for engineers, and expenses for consultants,
recruiting, supplies, equipment, depreciation and facilities. Research and
development expense increased by 60.1% from $1,433,433 in the second quarter of
1997 to $2,295,587 in the current year quarter. For the six month period ended
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June 30, research and development expense increased by 56.7% from $2,866,212 in
1997 to $4,492,018 in 1998.
For the three and six month periods, the increase in research and development
expense is primarily due to increased spending on projects related to the
Company's full rate ADSL technology, DSL Lite technology, DWMT technology, and
x200 Access Router. Increased spending on these projects was partially offset by
no spending on the Company's HFC project, which was temporarily suspended in the
third quarter of 1997. The Company anticipates that research and development
spending will continue to grow in future periods.
Selling and Marketing Expense. Selling and marketing expense consists
primarily of salaries for sales and marketing personnel, travel, advertising and
promotion, recruiting, and facilities expense. Selling and marketing expense
increased by 75.0% from $492,575 in the second quarter of 1997 to $861,864 in
the current year quarter. For the six month period ended June 30, selling and
marketing expense increased by 87.9% from $866,990 in 1997 to $1,629,471 in
1998. For the three and six month periods, the increase is primarily due to: (i)
the addition of marketing, sales and support staff to sell the Company's
products and technology, and (ii) non-recurring costs incurred in the second
quarter of 1998 to better align the sales organization with the Company's
strategy.
General and Administrative Expense. General and administrative expense
consists primarily of salaries for administrative personnel, facilities costs,
expenses related to being a public company, and professional services, such as
legal and audit expenses. General and administrative expense increased by 10.6%
from $482,051 in the second quarter of 1997 to $532,963 in the current year
quarter. For the six month period ended June 30, general and administrative
expense increased 18.5% from $918,971 in 1997 to $1,088,934 in 1998. For the
three and six month periods, the increase is primarily due to: (i) additions to
the Company's finance and information systems organizations to support
organizational growth, and (ii) investor relations and public company expenses.
Other Income and Expense. Other income increased from nothing in the
second quarter of 1997 to $99,000 in the current year quarter. For the six month
period ended June 30, other income increased from nothing in 1997 to $198,000 in
1998. Other income in both periods relates to rental income from a real estate
lease. When the Company completed the purchase of its headquarters building in
July 1997, the terms of the purchase agreement required the Company to sublet
24,000 square feet to the seller for a period of 18 months.
Interest Income. Interest income decreased 31.1% from $472,745 in the
second quarter of 1997 to $325,561 in the current year quarter. For the six
month period ended June 30, interest income decreased 27.9% from $921,029 in
1997 to $664,250 in 1998. The decrease in both periods is primarily a result of
lower cash balances due to: (i) the purchase and renovation of the Company's
72,000 square foot headquarters building, (ii) the acquisition of computers,
software, furniture, and other equipment primarily used in research and
development activities, and (iii) the use of cash to fund operating losses.
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. At
December 31, 1997, the Company had available federal net operating loss
carryforwards of approximately $16,586,000, which expire in 2003 through 2012,
and federal research and development credit carryforwards of approximately
$791,000, which expire in 2003 through 2012. At December 31, 1997, the Company
also had available state net operating loss carryforwards of approximately
$9,261,000, which expire in 1998
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through 2002 and state research and development and investment tax credit
carryforwards of approximately $395,000, which expire in 2006 through 2012. Of
the total net operating loss carryforwards, approximately $1,906,000 are
attributable to the exercise of stock options and the tax benefit from these
losses, when utilized, will be credited to additional paid-in capital.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had cash, cash equivalents and short-term
investments of $24,695,770, a decrease of $1,408,149 from December 31, 1997.
This decrease is primarily due to $2,716,815 of cash used in operations and
$614,011 of cash invested in property and equipment. These uses of cash were
partially offset by $1,922,677 of proceeds from the issuance of common stock
under the Company's stock option plans.
Cash used in operations was primarily related to: (i) the funding of operating
losses, (ii) the increase of accounts receivable due to the achievement of
contract milestones and license sales late in the quarter, and (iii) the
reduction of accounts payable and accrued expenses balances. Property and
equipment spending was primarily related to purchases of computers, software,
furniture and other equipment used principally 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.
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; No Assurance of Profitability
The Company has incurred operating losses in every fiscal year since
inception. As of June 30, 1998, the Company's accumulated deficit was
approximately $17.5 million. The Company believes that substantial on-going
research and development expenses will be required to enhance its technology and
to meet contractual requirements with its customers. There can be no assurance
that the Company will achieve profitable operations in any future period.
Unpredictable and Fluctuating Operating Results
Because many of the Company's revenue components fluctuate and are
difficult to predict, and its expenses are largely independent of revenues in
any particular period, it is difficult for the Company to accurately forecast
revenues and profits or losses.
The Company's business is subject to a variety of additional risks that could
materially adversely affect quarterly and annual operating results, including
market acceptance of the Company's technology; systems companies' acceptance of
Aware-based chipsets produced by the Company's licensees; market acceptance of
the products of systems companies which have adopted the Company's technology;
the loss of any strategic relationships with systems companies or licensees;
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announcements or introductions of new technologies or products by the Company or
the Company's competitors; delays or problems in the introduction or performance
of enhancements or future generations of the Company's technology; fluctuations
in the market price and demand for chipsets into which the Company's technology
has been incorporated; competitive pressures resulting in lower contract
revenues or royalty rates; changes in the Company's and system companies'
development schedules and levels of expenditure on research and development;
personnel changes, particularly those involving engineering and technical
personnel; costs associated with protecting the Company's intellectual property;
changes in Company strategies; and general economic trends and other factors.
Dependence on Acceptance of DSL Technology
The Company's future success is substantially dependent upon whether
DSL technology gains widespread commercial acceptance by the telephone companies
("telcos") and end users of telco services. Telcos continue to evaluate DSL
technology, and there can be no assurance that the telcos will pursue the
deployment of such technology. The Company believes that volume deployment of
DSL technology and equipment will not commence before the end of 1998, if at
all.
Dependence Upon Limited Number of Licensees
The Company neither manufactures nor sells equipment containing its DSL
technology in any meaningful volume. Rather, the Company licenses its technology
to semiconductor and systems companies that incorporate Aware technology into
DSL chipsets. There can be no assurance that the Company will be successful in
maintaining its relationships with its current licensees or in entering into new
relationships with additional licensees. The Company faces numerous risks in
successfully obtaining licensees on terms consistent with the Company's business
model, including, among others, the lengthy and expensive process of building a
relationship with a potential licensee before there is any assurance of a
license agreement with such party; persuading large semiconductor and systems
companies to work with, to rely on for critical technology, and to disclose
proprietary manufacturing technology to a smaller company such as Aware;
persuading potential licensees to bear certain development costs associated with
Aware technology and to make the necessary investment to successfully produce
Aware-based chipsets; and successfully transferring technical know-how to
licensees. In addition, there are a relatively limited number of larger
semiconductor and systems companies to which the Company could license its DSL
technology in a manner consistent with its business model. There can be no
assurance that customers will not use their superior size and bargaining power
to demand license terms that are unfavorable to the Company. The Company
believes that its principal competition may come from its licensees and
prospective licensees, many of which are evaluating and developing products
based on alternative technologies.
Dependence upon Systems Companies
Although sales of Aware-based chipsets to systems companies that have adopted
the Company's technology for their products are not made directly by the
Company, such sales directly affect the amount of royalties received by the
Company. Therefore, the Company's success is substantially dependent upon the
adoption of the Company's DSL technology by systems companies, particularly
those which develop and market high-volume business and consumer products such
as central office line cards, modems and personal computers. The Company is
subject to many risks beyond its control that influence the success or failure
of a particular systems company, including among others competition faced by the
systems company in its particular industry; market acceptance of the systems
company's products; the engineering, sales and marketing, and management
capabilities of the systems company; technical challenges unrelated to Aware
technology faced by the systems
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company in developing its products; and the financial and other resources of the
systems company. The process of persuading systems companies to adopt the
Company's technology can be lengthy and, even if adopted, there can be no
assurance that the Aware technology will be used in a product that is ultimately
brought to market, achieves commercial acceptance or results in significant
royalties to the Company. Aware must dedicate substantial resources to market
its technologies to and to support systems companies, in addition to supporting
the sales and marketing and technical efforts of its licensees in promoting
Aware technology to systems companies. Because the Company does not control the
business practices of its licensees, it has no ability to establish the prices
at which its technology is made available to systems companies or the degree to
which its licensees promote Aware technology to systems companies.
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; Reliance on Fundamental Technology; Importance of
Timely New Product Development
The semiconductor industry is characterized by rapid technological
change, with new generations of semiconductors being introduced periodically and
with ongoing evolutionary improvements. Since 1995, the Company has derived a
substantial portion of its revenue from its DSL technology and expects that this
dependence on its fundamental technology will continue for the foreseeable
future. Accordingly, broad acceptance of the Company's DSL technology is
critical to the Company's future success. The introduction or market acceptance
of competing technology which renders the Company's DSL technology less
desirable or obsolete would have a rapid and material adverse effect on the
Company's business, results of operations and financial condition. The
announcement of new technologies by the Company could cause licensees or systems
companies to delay or defer entering into arrangements for the use of the
Company's technology, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's operating results will depend to a significant extent on its
ability to introduce enhancements and new generations of its DSL technology
which keep pace with other changes in the semiconductor and telecommunications
industries and which achieve rapid market acceptance. The Company must
continually devote significant engineering resources to addressing the
ever-increasing need for technical innovations. Technical innovations of the
type that will be required for the Company to be successful are inherently
complex and require long development cycles, and there can be no assurance that
the Company's development efforts will ultimately be successful. In addition,
these innovations must be completed before changes in the semiconductor and
telecommunications industries have rendered them obsolete, must be available
when systems companies require them, and must be sufficiently compelling to
cause semiconductor and systems companies to enter into licensing arrangements
with Aware for the new technology. There can be no assurance that Aware will be
able to meet these requirements. Moreover, significant technological innovations
generally require a substantial investment before their commercial viability can
be determined. There can be no assurance that the Company will have the
financial resources necessary to fund future
13
<PAGE> 14
development, that the Company's licensees will continue to share certain
research and development costs with the Company as thy have in the past, or that
revenues from enhancements or new generations of the Company's technology, even
if successfully developed, will exceed the costs of development.
Competition
The semiconductor and telecommunications industries are intensely
competitive and have been characterized by price erosion, rapid technological
change, short product life cycles, cyclical market patterns and increasing
foreign and domestic competition. Many of the Company's competitors and
potential competitors have significantly greater financial, technological,
manufacturing, marketing and personnel resources than the Company. The Company
believes that its principal competition may come from its licensees and
prospective licensees, many of which are evaluating and developing products
based on alternative technologies. 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.
Dependence on Hiring and Retaining Personnel
The Company believes that its future success will depend significantly
on its ability to attract, motivate and retain additional highly skilled
technical, managerial and marketing personnel. During 1997 and the first six
months of 1998, the Company experienced difficulty in hiring the additional
engineers it had contemplated in its business plans. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting, assimilating and retaining the personnel required to
grow and operate profitably.
Manufacturing
While the Company believes that product revenue will decline as a
percentage of total revenue in the future, it will continue to manufacture
products. The Company has limited experience in manufacturing or in supervising
the manufacture of its products, including its ADSL modems, modules, and
development systems. In 1997, the Company entered into an agreement with a third
party contract manufacturer to supply substantially all finished goods products
to the Company. There can be no assurance that the Company's relationship with
its contract manufacturer will be successful or, in the event that the
relationship is not successful, that the Company would be able to find a
substitute contract manufacturer without significant delays. Furthermore, there
can be no assurance that the Company or its contract manufacturer will not
encounter significant difficulties in manufacturing or controlling the quality
of its products, or that its products will be reliable in the field.
In an environment of rapid technological change and rapidly changing product
offerings, product cycles tend to be short, and therefore, the Company may need
to write-off excess and obsolete inventory from time-to-time. For the year ended
1997 and the first six months of 1998, the Company recorded provisions for
excess and obsolete inventory of $275,000 and $150,000, respectively.
Volatility of Stock Price
The trading price of the Company's Common Stock could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company, its
licensees or its competitors, developments with respect to patents or
14
<PAGE> 15
proprietary rights and other events or factors. The trading price of the
Company's Common Stock could also be subject to wide fluctuations in response to
the publication of reports and changes in financial estimates by securities
analysts, and it is possible that the Company's actual results in one or more
future periods will fall short of those estimates by securities analysts. In
addition, the equity markets have experienced volatility that has particularly
affected the market prices of equity securities of many high technology
companies and that often has been unrelated or disproportionate to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of the Company's Common Stock.
Year 2000
The Company is in the process of assessing the impact of the transition
to the year 2000 on its computer and software applications. The Company does not
believe that any material year 2000 issues exist with software contained within
its product offerings. The Company is in the process of attempting to obtain
confirmation from vendors of certain purchased software that current releases or
upgrades, if installed, will not have any material year 2000 issues. To the
extent necessary to address material year 2000 issues, the Company plans to
obtain current releases or upgrades from software vendors prior to the end of
1998. Failure to obtain and implement such releases or upgrades, or the failure
of such software vendors to have eliminated year 2000 issues, could materially
and adversely affect the Company.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1:
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is
a party or to which any of its properties are subject which, either individually
or in the aggregate, are expected by the Company to have a material adverse
effect in its business, financial position or results of operations.
ITEM 2:
CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds
The Company sold 3,910,000 shares of the Company's Common Stock, par
value $.01 per share, on August 14, 1996 and September 9, 1996, pursuant to a
Registration Statement on Form S-1 (File No. 333-06807), which was declared
effective by the Securities and Exchange Commission on August 8, 1996 (the
"Effective Date"). The managing underwriters of the offering were BancAmerica
Robertson Stephens and Furman Selz LLC. The aggregate gross proceeds of the
offering were $39,100,000. The Company's total expenses in connection with the
offering were $3,937,000, of which $2,737,000 was for underwriting discounts and
commissions and $1,200,000 was for other expenses paid to persons other than
directors or officers of the Company, persons owning more than 10 percent of any
class of equity securities of the Company, or affiliates of the Company
(collectively, "Affiliates"). The Company's net proceeds from the offering were
$35,163,000. From the Effective Date through June 30, 1998, the Company used a
portion of the net proceeds as follows: (i) approximately $12,015,000 to
purchase property and equipment, including a commercial office building, which
the Company now uses as its headquarters, computers, software, furniture and
other equipment and (ii) approximately $5,319,000 to fund operating losses and
working capital requirements. None of these payments was made to Affiliates. As
of June 30, 1998 the Company had approximately $17,829,000 of proceeds remaining
from the offering, and pending use of the proceeds, the Company intends to
invest such proceeds primarily in short-term, interest-bearing, investment-grade
securities, including money market instruments.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 4:
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 27, 1998, the Company held its Annual Meeting of Stockholders
(the "Annual Meeting").
Matters voted on and the results of those votes are set forth below:
(1) Each of David Ehreth and John K.Kerr was elected to serve as a Class II
director of the Company for a term expiring at the annual meeting of
stockholders of the Company in 2001. Each of John S. Stafford, Jr.,
Charles K. Stewart and Michael A. Tzannes continued to serve as a
director of the Company following the Annual Meeting. In addition,
following the Annual Meeting, Jon C. Grimes and David C. Hunter were
elected to serve as directors of the Company.
The votes cast to elect the Class II directors were:
Withheld
Name For Authority
-----------------------------------------------------------------
David Ehreth 12,815,935 40,440
John K. Kerr 12,799,400 56,975
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 11.1* - Computation of Net Loss per Share
(b) REPORTS ON FORM 8-K
None.
- --------------------
* 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: August 4, 1998 By: /s/ Michael A. Tzannes
---------------------------------------
Michael A. Tzannes, Chief Executive
Officer and President
Date: August 4, 1998 By: /s/ Richard P. Moberg
---------------------------------------
Richard P. Moberg, Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
18
<PAGE> 1
EXHIBIT 11.1
AWARE, INC.
COMPUTATION OF BASIC AND DILUTED
NET LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net loss ................................................................ $(1,290,978) $ (275,398)
=========== ===========
Weighted average number of common shares outstanding:
Common stock ....................................................... 20,212,309 19,284,218
Other .............................................................. - -
----------- -----------
Common shares outstanding for purpose of calculating basic ....... 20,212,309 19,284,218
net loss per share
Common stock equivalents to reflect dilution:
Option common stock equivalent shares ............................ - -
----------- -----------
Total shares for purpose of calculating diluted net
loss per share ............................................... 20,212,309 19,284,218
=========== ===========
Basic net loss per share ................................................ $ (0.06) $ (0.01)
=========== ===========
Diluted net loss per share .............................................. $ (0.06) $ (0.01)
=========== ===========
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net loss ................................................................ $(2,746,415) $ (551,700)
=========== ===========
Weighted average number of common shares outstanding:
Common stock ....................................................... 19,966,936 19,170,086
Other .............................................................. - -
----------- -----------
Common shares outstanding for purpose of calculating basic ....... 19,966,936 19,170,086
net loss per share
Common stock equivalents to reflect dilution:
Option common stock equivalent shares ............................ - -
----------- -----------
Total shares for purpose of calculating diluted net
loss per share ............................................... 19,966,936 19,170,086
=========== ===========
Basic net loss per share ................................................ $ (0.14) $ (0.03)
=========== ===========
Diluted net loss per share .............................................. $ (0.14) $ (0.03)
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 24,696
<SECURITIES> 0
<RECEIVABLES> 2,475
<ALLOWANCES> 90
<INVENTORY> 227
<CURRENT-ASSETS> 155
<PP&E> 12,790
<DEPRECIATION> 2,048
<TOTAL-ASSETS> 38,205
<CURRENT-LIABILITIES> 1,409
<BONDS> 0
0
0
<COMMON> 206
<OTHER-SE> 36,590
<TOTAL-LIABILITY-AND-EQUITY> 36,796
<SALES> 920
<TOTAL-REVENUES> 4,436
<CGS> 834
<TOTAL-COSTS> 834
<OTHER-EXPENSES> 7,210
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,746)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,746)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
