Biometrics & Imaging
DSL Service Assurance
2011 Annual Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of The
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2011
Commission file number 000-21129
AWARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer Identification No.)
04-2911026
40 Middlesex Turnpike, Bedford, Massachusetts 01730
(Address of Principal Executive Offices)
(Zip Code)
(781) 276-4000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [X]
Indicate by check mark 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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes [X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer”, “accelerated filer", and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer___ Accelerated Filer_X_ Non-Accelerated Filer___ Smaller Reporting Company ___
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of June 30, 2011 the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based on the closing sale
price as reported on the Nasdaq Global Market, was approximately $31,607,415.
The number of shares outstanding of the registrant’s common stock as of February 10, 2012 was 20,700,312.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement to be delivered to shareholders in connection with the registrant’s Annual
Meeting of Shareholders to be held on May 23, 2012 are incorporated by reference into Part III of this Annual Report on Form 10-K.
AWARE, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2011
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business ...................................................................................................................................
Risk Factors..............................................................................................................................
Unresolved Staff Comments .....................................................................................................
Properties .................................................................................................................................
Legal Proceedings ....................................................................................................................
Mine Safety Disclosures ...........................................................................................................
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13
20
21
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PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities ..................................................................................................................
Selected Financial Data ............................................................................................................
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Management’s Discussion and Analysis of Financial Condition and Results
of Operations ............................................................................................................................
Quantitative and Qualitative Disclosures About Market Risk ..................................................
Financial Statements and Supplementary Data ........................................................................
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ................................................................................................................................
Controls and Procedures ..........................................................................................................
Other Information .....................................................................................................................
PART III
Directors, Executive Officers and Corporate Governance .......................................................
Executive Compensation ..........................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters .....................................................................................................................................
Certain Relationships and Related Transactions, and Director Independence .........................
Principal Accountant Fees and Services ...................................................................................
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35
36
57
57
57
58
58
58
58
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Item 15.
Exhibits and Financial Statement Schedule ..............................................................................
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PART IV
Signatures ...............................................................................................................................................................
61
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PART I
ITEM 1. BUSINESS
Company Overview
We have been a leading supplier of innovative signal processing and digital communications technology for imaging
and telecommunications applications since the early 1990s. Presently, our business operations are focused along
three product lines: i) biometrics and imaging; ii) Digital Subscriber Line (“DSL”) service assurance; and iii) patent
management. Prior to November 2009, we were also a supplier of DSL silicon intellectual property to the
semiconductor industry.
Biometrics & Imaging. Our biometrics software products leverage imaging and biometrics technologies developed
by Aware over the past 20 years. We sell a broad range of software products that are used in biometric systems
worldwide for fingerprint, facial, and iris modalities. Primary applications of biometrics systems include law
enforcement, border control, secure credentialing, national defense, access control, and background checks.
Our products provide interoperable, standards-compliant, field-proven biometric functionality and are used to
capture, verify, format, compress and decompress biometric images as well as aggregate, analyze, process and
transport those images around biometric systems. We also offer software engineering services to customers who
require assistance with the design and development of biometric solutions. Specific services may involve
customization of our software, installation services, or complete system development depending on customer needs
and requirements. We also sell software products for medical and digital imaging applications based upon industry
standards such as JPEG 2000 and JPIP.
We sell our biometrics software products and services to a large number of customers. We reach these customers
through three principal channels of distribution: i) a systems integrator channel; ii) an OEM channel; and iii) directly
to end-users, such as governments, their agencies, and corporate customers.
DSL Service Assurance. Our DSL service assurance products, which we previously called DSL test and diagnostics,
leverage DSL technologies developed by Aware since the early 1990s. Our DSL expertise has been acquired as a
result of: i) our involvement in the design of DSL chipsets for more than a decade; and ii) our participation in the
development of DSL standards at the International Telecommunications Union. Telephone companies use DSL
service assurance solutions to deliver high quality video and triple play services. Aware’s DSL service assurance
solutions benefit from our Dr. DSL® Expert Technology, which leverages Aware’s deep DSL knowledge.
Our DSL service assurance products comprise software and hardware offerings. Our principal software solution is
our Line Diagnostics Platform (“LDP”) product. LDP is an advanced DSL diagnostics and performance
optimization solution that lets broadband service providers manage their DSL networks more effectively. Service
providers use Aware’s centralized LDP software to reduce DSL operational costs, extend service reach and improve
the quality of their premium triple-play services. Aware’s LDP solution puts essential DSL test and management
tools into a single, multi-vendor compatible platform for use by customer care and network operations teams as well
as field technicians. We sell LDP directly to telephone companies.
We also sell embedded DSL test modules that are designed for integration into DSL equipment that is used by
service providers to pre-qualify, monitor and troubleshoot DSL service. We sell our modules to suppliers of such
DSL equipment. Our modules are: i) compliant to ITU-T standards; ii) interoperable with all industry-leading
chipsets; and iii) meet all applicable Broadband Forum performance requirements. On January 18, 2012, our Board
of Directors approved the shutdown of Aware’s DSL service assurance hardware product line. This decision was
made to position Aware better strategically and to reduce costs. We will continue to build and ship DSL service
assurance hardware products to fulfill customer orders that were received as of the date of the shutdown notice. We
expect to conclude hardware shipments on or about June 30, 2012. We plan to continue to offer our DSL service
assurance software products.
Patent Management. Over the past 20 years, we have actively patented the technologies we have developed. As of
December 31, 2011, we had approximately 235 U.S. and foreign patents, and approximately 219 pending patent
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applications pertaining to communications and signal processing technologies, including DSL, DSL service
assurance, wireless, biometrics and medical imaging, image compression, video compression, and seismic data
compression. The objective of our patent management operations, which we previously called patent licensing
operations, is to develop patents and to license or sell them to interested third parties. While we have continued to
enhance and develop our patent portfolio over the past three years, patent licensing revenue during the last three
years was limited to an insignificant amount of revenue in the year ended December 31, 2010.
As we have previously disclosed, our board is reviewing strategic options with respect to our patent management
operations, including a potential spin-off, sale or licensing of patents.
DSL Silicon Intellectual Property. From the mid 1990s until November 2009, we licensed DSL silicon intellectual
property (“IP”) to enable semiconductor suppliers to manufacture and sell integrated circuits for the DSL industry.
In November 2009, we completed a transaction with Lantiq Deutschland GmbH (“Lantiq”) involving the sale and
transfer of: i) our DSL and home networking silicon IP assets, ii) certain patents, and iii) 41 Aware employees. After
this sale, we no longer offered DSL or home networking silicon IP products; however, we continued to receive DSL
chipset royalties from Lantiq and Ikanos Communications, Inc. (“Ikanos’). We also continued to provide a minor
amount of engineering support services to Ikanos.
We have research and development activities underway to expand our product offerings and develop new
technologies in biometrics and imaging as well as DSL service assurance applications.
We are headquartered in Bedford, Massachusetts. Our telephone number is (781) 276-4000, and our website is
www.aware.com. Incorporated in Massachusetts in 1986, we employed 77 people as of December 31, 2011. Our
stock is traded on the Nasdaq Global Market under the symbol AWRE.
Our website provides a link to a third-party website through which our annual, quarterly and current reports, and
amendments to those reports, are available free of charge. We believe these reports are made available as soon as
reasonably practicable after we electronically file them with, or furnish them to, the SEC. We do not maintain or
provide any information directly to the third-party website, and we are not responsible for its accuracy. You may also
access our various SEC filings and reports at the SEC’s website at www.sec.gov.
Industry Background
Biometrics Industry Background. Biometric identification systems are used as a means to identify individuals for a
variety of government and commercial security applications, such as law enforcement, national defense, border
control, secure credentialing, access control and background checks. In the past, ink-based fingerprint cards were
used to capture and analyze fingerprint images. The emergence of digital fingerprint acquisition devices,
compression, and standardized biometric transaction/interchange formats in the 1990s enabled biometrics systems to
identify individuals much faster and more accurately. Ink-based fingerprint cards are still used today, but are now
being digitally scanned into biometric systems. Biometric matching systems are also capable of utilizing additional
biometric modalities, such as iris and facial images, either in place of or in conjunction with fingerprints.
Biometrics applications generally operate on client/server-based computer networks. Enrollment workstations with
peripheral capture devices are used to “enroll” individuals into biometrics systems. Either fixed enrollment
workstations or mobile devices are used to capture, process, and format biometric images and then transport them in
digital form to centralized matching systems for identification. Examples of capture peripherals include scanners for
fingerprint images, cameras for iris and facial images, and handheld devices for mobile capture of fingerprint, iris,
and facial images.
The substantial increase in computer processing power-for-price along with the development of technologies that
facilitate ease of capture of high-quality biometric information have created a foundation for growing use of
biometrics in both government and commercial security applications. The emergence and adoption of international
biometrics standards has encouraged more participants in the market, enabling more modular and flexible solutions
as opposed to “monolithic” solutions sourced from a single, large company.
The most established application for biometrics is law enforcement, where federal, state and local law enforcement
agencies perform fingerprint enrollment and submission to automated fingerprint identification systems (“AFIS”).
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Law enforcement is expected to continue to present opportunities for vendors of biometrics products in the next
several years.
Over the past decade, legislation has been introduced in a number of countries which mandates increased security.
This legislation has driven many government programs that require the use of biometric information in applications
such as e-passports, visas and personal identification cards. For example, personal identity verification (“PIV”) and
other secure credentialing systems are being employed by U.S. government agencies to standardize federal employee
and contractor IDs. Such systems are used to control access to government facilities and information systems.
There is also an increase in use of biometrics for border management applications, such as performing background
checks on visa applicants and checking biometric watch lists as part of the customs process at international airports.
The use of biometrics for background checks in regulated segments of the financial, transportation and healthcare
industries has also increased. As biometric security systems gain acceptance in new areas, and as infrastructure
build-outs take hold, new opportunities are emerging for biometrics solution suppliers. The biometrics market is also
expected to grow as the performance of emerging biometric modalities improves.
Biometrics industry participants may be segmented into three broad categories: i) companies that provide biometric
hardware and/or software solutions; ii) system integrators that bring together biometric hardware and software
solutions from a variety of vendors to deliver customized biometrics systems for government and commercial
customers; and iii) companies that provide biometric hardware and software solutions and are also systems
integrators.
Examples of industry participants that function primarily as providers of biometrics hardware and/or software
solutions include: i) Aware, Inc.; ii) Cross Match Technologies, Inc.; iii) Green Bit S.p.A.; iv) Suprema, Inc.; v)
Cognitec Systems GmbH; vi) Iris ID Systems, Inc.; and vii) Iritech, Inc.
Examples of industry participants that function primarily as systems integrators include: i) Northrop Grumman
Corporation; ii) Lockheed Martin Corporation; iii) Science Applications International Corporation; iv) Hewlett-
Packard Enterprise Services; v) International Business Machines; vi) Fujitsu Limited; vii) Computer Science
Corporation; vii) BAE Systems; viii) Accenture LTD; ix) Daon, Inc.; and x) Unisys Corporation.
Examples of industry participants that function as biometrics hardware and software solutions providers and systems
integrators include: i) Safran Morpho, a division of the Safran Group Company, which now includes L1 Identity
Solutions; ii) 3M Cogent Inc.; and iii) NEC Corporation.
The end users of biometrics systems are typically local, state and federal governments and their agencies. To a lesser
extent, end user customers also include commercial customers who use biometric systems primarily for access
control and background checks.
DSL Service Assurance Industry Background. DSL technology allows telecommunications service providers to offer
broadband services over their installed copper access networks. Today there are more than 300 million DSL
subscribers worldwide. With the recent deployment of new higher rate DSL technologies, such as ADSL2+ and
VDSL2, service providers can increase average revenue per user by deploying new services based on these
technologies. One of the more popular of these services is triple-play voice, data and Internet Protocol television
(“IPTV”).
These new services tend to be more demanding on service providers, because they require higher quality network
performance and stability. A DSL subscriber line capable of supporting basic internet applications may be unable to
support triple-play services because of line impairments or other disturbers that can result in sporadic service
problems, degraded picture quality and dissatisfied customers. As a result, service providers are looking for
enhanced DSL service assurance tools for proactive maintenance and responsive troubleshooting of their networks.
DSL service assurance tools may be categorized into hardware and software solutions.
Hardware solutions. There are two principal types of DSL service assurance equipment.
1. Broadband Test Probes (also known as “testheads”) – Testheads are deployed by service providers in
centralized locations, such as central offices or node-based equipment cabinets. This equipment allows
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them to provision or troubleshoot DSL service remotely from these central locations, which reduces the
cost of sending technicians into the field.
2. DSL Test Sets – Test sets are handheld devices that are used by technicians in the field to test and
diagnose problems at customer premise locations.
DSL service assurance testhead and test set products are available from a number of suppliers, including Alcatel-
Lucent (“Alcatel”); Spirent Communications PLC; Tollgrade Communications, Inc.; JDS Uniphase Corporation
(“JDSU”); Sunrise Communications, Inc.; Fluke Corporation; NCI Technologies, Inc.; Exfo Inc.; and Kurth
Electronic GmbH.
Software solutions. DSL service assurance software is software that resides in a service provider’s central network.
This software makes use of service providers’ installed access network elements, such as Digital Subscriber Line
Access Multiplexers (“DSLAMs”) and customer premises equipment. Its purpose is to deliver DSL diagnostics and
performance information that is used by customer care, technical support and network planning organizations to
manage their DSL networks.
DSL service assurance software products are available from four principal suppliers, including Aware, Inc.; Alcatel;
Ericsson LM Telephone Company; and Assia, Inc.
Patent Management Industry Background. Under U.S. law, an inventor or patent owner has the right to exclude
others from making, selling or using their patented inventions. Over the past decade, a number of companies have
emerged to form a robust patent licensing industry. These companies grow their patent portfolios by: i) acquiring
patents from third parties, ii) developing patents of their own, or iii) through a combination of both methods. Patent
licensing companies then execute patent licensing arrangements with users of their patented technologies through
willing licensing negotiations without the filing of patent infringement litigation, or through the negotiation of license
and settlement arrangements in connection with the filing of patent infringement litigation.
Some well-known patent licensing companies include Intellectual Ventures Management LLC, Acacia Research
Corporation, Digimarc Corporation, NTP, Inc., Wi-Lan, Inc., InterDigital, Inc., Rambus Inc, and MOSAID
Technologies Inc.
Aware Biometrics and Imaging Products and Services
Biometrics Software Products and Services
We supply a broad range of biometrics software products for fingerprint, facial, and iris modalities. Our products
capture, verify, format, compress and decompress biometric images as well as aggregate, analyze, process and
transport those images around biometric systems. Our software products are used in applications for border control,
law enforcement, national defense, secure credentialing, access control, and background checks. We sell software
maintenance contracts along with our software products. Software maintenance allows customers to receive: i)
technical support; and ii) software updates if and when they are available.
We also offer software engineering services to customers who require assistance with the design and development of
biometric solutions. Specific services may involve customization of our software, installation services, or complete
system development depending on customer needs and requirements.
We have four categories of biometrics software products that range from discrete software blocks that customers use
to develop their own solutions to more complete applications that customers can use to reduce or eliminate their
development times. Once customers sell systems that make use of these software products, they pay us software
license fees based on the number of systems they sell.
The four categories of our biometrics software products are described below:
i) Software Development Kits. Software development kits or (“SDKs”) consist of multiple software libraries,
sample applications that show customers how to use the libraries, and documentation. Customers use our
SDKs to design their own applications using our libraries. We consider these products to be commercial
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off-the-shelf (“COTS”) products because they are ready-made products not customized by us for any
particular customer. Our SDK products and the functions they perform are:
• Products for hardware abstraction, autocapture, and quality assurance:
a) FastCapture with LiveScan API;
b) PreFace with Camera API;
c)
d) SequenceCheck; and
e) Quality Check.
IrisCheck with IrisCam API;
• Products for biometric data formatting, validation and reading according to ANSI/NIST, ISO/IEC,
INCITS, ICAO, FIPS 201, and other U.S. and international standards:
a) NISTPack;
b)
ICAOPack;
c) PIVPack; and
d) M1Pack.
• Products for compression and decompression of fingerprint and facial images:
a) Aware WSQ; and
b) Aware JPEG2000.
• Products for biometric authentication:
a) AwareXM; and
b) BioLog.
• Products for scanning and printing of fingerprint cards:
a)
b)
AccuScan; and
AccuPrint.
• Products for mobile devices:
a) NISTPack Mobile
b)
ICAOPack Mobile
c) PIVPack Mobile; and
d) AwareXM Mobile.
• Bundles of products for specific applications:
a) CaptureSuite - for capture of either live scan or card scan fingerprint images;
b) PIVSuite – for registration, identity proofing, and ID card personalization, issuance, and
c)
reading; and
ICAOSuite - for biometric and biographic enrollment, e-passport personalization and
reading, and fingerprint verification.
ii) Software components. Our software component products each include a user interface and one or more
software libraries that perform a discrete set of functions. Software components allow customers to develop
biometric applications more quickly than using our SDKs. Our set of products in this category is called
BioComponents. BioComponents comprises modular, independent, self-contained software components
that can operate either independently or in concert with each other performing a specific biometric task.
Each biometric capture component has its own configurable user interface, and performs all tasks and
workflows required for capture, hardware abstraction, and quality assurance.
iii) Biometric applications. Our products in this category combine a user interface with multiple Aware
software libraries into more complete biometrics applications. Our application products and the functions
they perform are:
• Universal Registration Client (“URC”). URC is a configurable Windows-based application that
performs a variety of biometric data capture, analysis, matching, formatting, and hardware
abstraction functions.
• URC Mobile. URC Mobile is a software application for performing biometric enrollment,
identification, and screening on mobile biometric devices, such as those used by military personnel
in the field.
• FormScannerSE and FormScannerMB. These are two independent applications for scanning and
processing of inked fingerprint cards.
• Forensic Workbench. Forensic Workbench is a software application for the categorization,
processing, and standards-compliant formatting of biometric images and demographic data.
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• WebEnroll. WebEnroll provides a reference application with applets for browser-based enrollment
of biographic data, fingerprints, and facial images.
iv) Server-based solutions. Our product in this category is called Biometrics Services Platform or BioSPTM.
This product is used to build and deploy server-based biometric data processing and workflow solutions.
BioSP supports the collection of biometric images from a distributed network, and the subsequent
aggregation, analysis, processing and integration of this data into larger systems.
Imaging Software Products
We also sell products used in applications involving medical and advanced imaging.
Medical Imaging Products. Aware provides modular, off-the-shelf, software products that enable healthcare IT
systems with advanced, high-performance processing, distribution, and display of medical images and data. Our
products are designed to be used by system integrators and solution providers to enhance their offerings with
advanced medical imaging features and capabilities. Our medical imaging products include:
• AccuRad ImageShare Server is a software application that provides fast, efficient, and versatile viewing of
medical images.
• AccuRad REM Server collects radiation exposure estimation data, and then stores and analyzes the data as
it becomes available to calculate exposure information near real-time.
• AccuRad SDKs provide optimized, standards-compliant implementations of JPEG 2000 image compression
standards.
Advanced Imaging Products. Aware also provides the following imaging products:
• ArchivePack is used by libraries to store and distribute large digital imagery, such as are found in historical
archives. Aware technology enables images to be compressed for efficient storage and viewed remotely and
efficiently over networks.
• SeisPact is used by the oil exploration industry for the efficient storage and satellite transmission of seismic
data from ships.
• Aware’s JPEG 2000 image compression software may be used for a wide variety of applications where
compression and decompression of still imagery is required.
Aware DSL Service Assurance Products
Aware’s DSL service assurance solutions are used by telecommunication service providers and test equipment
suppliers to improve the rate, reach and quality of DSL services. Aware’s diagnostics and management software has
been deployed on DSL subscriber lines around the world and our DSL embedded test hardware products have been
widely deployed by industry-leading DSL test equipment vendors.
Aware’s DSL service assurance solutions benefit from our Dr. DSL® Expert Technology which leverages Aware’s
deep DSL knowledge. Our DSL expertise has been acquired as a result of: i) our involvement in the design of DSL
chipsets for more than a decade; and ii) our participation in the development of DSL standards at the International
Telecommunications Union.
Our DSL service assurance software and hardware products are described below.
DSL Diagnostics and Management Software. Our Line Diagnostics Platform (“LDP”) software product is an
advanced DSL diagnostics and performance optimization solution that lets broadband service providers manage their
DSL networks more effectively. Service providers use Aware’s centralized LDP software to reduce DSL operational
costs, extend service reach and improve the quality of their premium triple-play services. Aware’s LDP solution puts
essential DSL test and management tools into a single, multi-vendor compatible platform for use by customer care
and network operations teams as well as field technicians.
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DSL Test Hardware. Our embedded DSL test modules are designed for integration into DSL testhead and test set
equipment by suppliers of DSL service assurance hardware products. Our customers’ equipment is used for
verification and troubleshooting of DSL access and home networking services. Our modules are: i) compliant to
ITU-T standards; ii) interoperable with all industry-leading chipsets; and iii) meet all applicable Broadband Forum
performance requirements. Our modules are used for triple play troubleshooting and include performance validation
of Ethernet and HPNA-over-Coax home networks.
On January 18, 2012, our Board of Directors approved the shutdown of Aware’s DSL service assurance hardware
product line. This decision was made to position Aware better strategically and to reduce costs. We will continue to
build and ship DSL service assurance hardware products to fulfill customer orders that were received as of the date
of the shutdown notice. We expect to conclude hardware shipments on or about June 30, 2012.
Aware’s Strategy
Aware’s principal strategy is to sell software products and services that deliver a strong value proposition to our
customers. We have decades of experience in the biometrics, imaging and DSL industries; a broad technology
foundation in signal processing image processing and communications; and long-standing relationships with channel
partners and end users.
Key elements of our strategy include:
Product development strategy. Our product strategy is to develop high quality, full-featured software products that
leverage our technological strengths in signal processing, image processing and communications. We identify
applications where we can exploit these technologies to develop innovative products that meet the needs of our
customers. To date, this strategy has resulted in three principal product lines: i) biometrics, ii) imaging, and iii) DSL
service assurance.
Biometric product line. Our biometrics product line includes products that are used to biometrically identify
individuals for applications such as law enforcement, border control, national defense, secure credentialing,
access control, and background checks.
Imaging product line. Our imaging product line includes products that are used to compress, decompress,
distribute and display images for applications such as medical imaging and digital archiving.
DSL service assurance product line. Our DSL service assurance product line includes software products that
are used by service providers to pre-qualify, provision, and troubleshoot their DSL networks.
Product sales strategy. Our product sales strategy is to employ an approach that relies on a combination of channel
partners and direct sales. The sales approach used in any given sales situation depends on the circumstances of the
opportunity and customer wishes.
Biometric product line. Our biometrics products are primarily sold through an OEM channel to hardware and
software solutions suppliers and through a systems integrator channel. These two channels have given us broad
exposure to the global biometrics market. When the sales situation calls for a direct approach, we also sell our
biometrics products directly to end-users, such as government agencies, branches of the military, and corporate
customers.
Imaging product line. Our imaging products are primarily sold to OEM suppliers who bundle our software
products into their hardware products.
DSL service assurance product line. To date, our DSL service assurance software products have been primarily
sold directly to DSL services providers and OEM suppliers. In the future, we may extend our global reach by
selling our DSL software products through systems integrators in regions outside of the United States.
Services strategy. Our services strategy is to offer engineering services to customers whenever we can help them
derive the greatest value from their investment in our software products. Services projects may take several forms
including: i) development projects in which we use our expertise to build complete applications for customers based
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on our software products; ii) customization services in which we customize our software products to meet customer
specifications and requirements; or iii) installation services. One of our key strategic objectives is to continue to
grow the services portion of our business, particularly in our biometrics product line.
Patent portfolio strategy. Over the past 20 years, we have developed a broad portfolio of intellectual property assets
including US and foreign patents. We are reviewing our strategic options with respect to certain intellectual property
assets, including a potential spin-off, sale, or licensing of patents. Our strategic aim is to monetize our investment in
patent assets for the benefit of our stockholders.
Research and Development
Our research and development activities are focused primarily on improving our core technologies and products for
our biometrics, medical imaging, and DSL service assurance product lines. As of December 31, 2011, we had an
engineering staff of 46 employees, representing 60% of our total employee staff.
Our biometrics and imaging engineering activities are focused on improving software product functionality and
broadening our exposure to biometrics, medical and imaging applications. During 2011, we further improved the
functionality of our SDKs, components, and applications, as well as in our BioSP server-based software platform.
We also introduced new biometrics software products, including BioComponents, URC Mobile, IrisCheck and
FormScanner. We also introduced new medical imaging products, including AccuRad ImageShare Server WebView
Module and AccuRad REM Server.
Our DSL service assurance engineering activities involve improving the functionality of our hardware and software
products to support service provider requirements for service qualification, line diagnostics, network monitoring and
performance optimization of advanced DSL services. During 2011, we focused on improvements to our LDP
software platform for DSL test and diagnostic applications and our embedded DSL test modules.
During the years ended December 31, 2011, 2010, and 2009, research and development expenses charged to
operations were $7.2 million, $8.1 million, and $11.9 million, respectively. In addition, because we provide
engineering development services to our customers, a portion of our total engineering costs has been allocated to
cost of services. We expect that we will continue to invest substantial funds in research and development activities.
Sales and Marketing
As of December 31, 2011, there were a total of 14 employees in our sales and marketing organization. Of this total, 7
were focused on selling biometrics and imaging software products and services; 5 were focused on selling DSL
service assurance products; 1 was focused on patent management sales and licensing; and 1 was engaged in
corporate marketing activities.
All of our revenue in 2011, 2010, and 2009 was derived from unaffiliated customers.
Our sales and marketing strategy varies by product line as follows:
Biometrics – We sell our biometrics software products and services to a large number of customers. We reach these
customers through three principal channels of distribution:
i) Systems integrator channel – we sell to systems integrators that incorporate our products into biometrics
systems that are delivered primarily to government end users.
ii) OEM channel – we sell to hardware and software solution providers that incorporate our products into their
hardware and software products. Their products are generally sold to systems integrators or government
end users.
iii) Direct channel – we also sell directly to governments and their agencies, as well as commercial customers.
No single biometrics customer represented more than 10% of our total revenue in 2011, 2010 or 2009.
10
Medical & Advanced Imaging – We sell our medical and advanced imaging products primarily through an OEM
channel to hardware and software solution providers and through a systems integrator channel. No single medical &
imaging customer represented more than 10% of our total revenue in 2011, 2010 or 2009.
DSL Service Assurance - We sell our DSL service assurance hardware products primarily through an OEM channel.
We sell our DSL service assurance software products either: i) through an OEM channel to hardware and/or software
solution providers; or ii) directly to telephone companies. In the future, we may also sell software products through
partners, such as value added resellers.
No single DSL service assurance customer represented more than 10% of our total revenue in 2011 or 2009. In
2010, we derived approximately 11% of our total revenue from JDSU.
Patent Management - We sell patents or license patent rights directly to third parties. Decisions involving patent
transactions are typically made at senior levels within a prospective customer’s organization, and therefore we rely
on presentations by our senior management to make such sales or licenses. There were no patent management
customers that represented more than 10% of our total revenue in 2011, 2010 and 2009.
DSL Silicon Intellectual Property - After the sale of our DSL silicon IP assets to Lantiq in 2009, Lantiq and Ikanos
continued to sell integrated circuits based upon our licensed DSL technology. Neither customer represented more
than 10% of our total revenue in 2011 or 2010. Prior to the sale to Lantiq, we derived approximately 19% of our
total revenue in 2009 from Infineon, the entity from which Lantiq was spun-out.
Competition
The markets for our biometrics and imaging software products and services are competitive and uncertain. We
compete against: i) other companies that provide biometric software solutions; and ii) fully diversified companies
that provide biometric software solutions and also act as systems integrators. We can give no assurance that: i) our
products and services will succeed in the market; ii) that we will be able to compete effectively; or iii) that
competitive pressures will not seriously harm our business.
The markets for our DSL service assurance software products are competitive and uncertain. We compete against
several competitors that have dedicated more resources to this market than we have. Our success depends upon our
ability to market and sell our LDP software product to service providers and systems integrators in sufficient
volumes to support our business. We can give no assurance that: i) LDP will succeed in the market; ii) that we will
be able to compete effectively; or iii) that competitive pressures will not seriously harm our business.
The markets for our DSL service assurance hardware products are also highly competitive. Intense competition and
low margins in this market were key reasons behind our decision to exit it in 2012.
Many of our biometrics, imaging and DSL service assurance competitors have significantly greater financial,
technological, marketing and personnel resources than we do. We can give no assurance that our customers will
continue to purchase products from us or that we will be able to compete effectively in obtaining new customers to
grow our business.
Patents and Intellectual Property
We rely on a combination of nondisclosure agreements and other contractual provisions, as well as patent,
trademark, trade secret and copyright law to protect our proprietary rights. We have an active program to protect our
proprietary technology through the filing of patents. As of December 31, 2011, we had approximately 235 U.S. and
foreign patents, and approximately 219 pending patent applications pertaining to communications and signal
processing technologies, including DSL, DSL service assurance, wireless, biometrics imaging, medical imaging,
image compression, video compression, and seismic data compression.
Although we have patented certain aspects of our technology, we rely primarily on trade secrets to protect our
intellectual property. We attempt to protect our trade secrets and other proprietary information through agreements
with our customers, suppliers, employees and consultants, and through security measures. Each of our employees is
11
required to sign a non-disclosure and non-competition agreement. Although we intend to protect our rights
vigorously, we cannot assure you that these measures will be successful. In addition, effective intellectual property
protection may be unavailable or limited in certain foreign countries.
Third parties may assert exclusive patent, copyright and other intellectual property rights to technologies that are
important to us. In the past, we have received claims from third parties suggesting that we may be obligated to
license such intellectual property rights. If we were found to have infringed any third party’s patents, we could be
subject to substantial damages or an injunction preventing us from conducting our business.
Manufacturing
We have outsourced the manufacture of our DSL service assurance hardware products to a single contract
manufacturer located in Canada. Our internal manufacturing group, which consists of 4 employees, has been
responsible for final testing and assembly those products as well as shipping to customers. As a result of our January
2012 decision to terminate the production and sale of our DSL service assurance hardware products, we intend to
wind down our relationship with our contract manufacturer and phase out our internal manufacturing group on or
about June 30, 2012.
Employees
At December 31, 2011, we employed 77 people, including 46 in engineering, 14 in sales and marketing, 4 in
manufacturing and 13 in finance and administration. Of these employees, 74 were based in Massachusetts. None of
our employees is represented by a labor union. We consider our employee relations to be good.
We believe that our future success will depend in large part on the service of our technical, sales, marketing and
senior management personnel and upon our ability to retain highly qualified technical, sales and marketing and
managerial personnel. We cannot assure you that we will be able to retain our key managers and employees or that
we will be able to attract and retain additional highly qualified personnel in the future.
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ITEM 1A. RISK FACTORS
Some of the information in this Form 10-K contains forward-looking statements that involve substantial risks and
uncertainties. You can identify these statements by forward-looking words such as “may,” “will,” “expect,”
“anticipate,” “believe,” “estimate,” “continue” and similar words. You should read statements that contain these
words carefully because they: (1) discuss our future expectations; (2) contain projections of our future operating
results or financial condition; or (3) state other “forward-looking” information. However, we may not be able to
predict future events accurately. The risk factors listed in this section, as well as any cautionary language in this
Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. You should be aware that the occurrence of
any of the events described in these risk factors and elsewhere in this Form 10-K could materially and adversely
affect our business. We assume no obligation to update any forward-looking statements.
GENERAL BUSINESS RISKS
Our Quarterly Results are Unpredictable and May Fluctuate Significantly
Our quarterly revenue and operating results are difficult to predict and may fluctuate significantly from quarter-to-
quarter due to the unpredictably of our revenue components.
Product revenue. It is difficult for us to make accurate forecasts of product revenue, because sales of products
fluctuate based upon demand by our customers, which is difficult to predict. We generally ship customer orders
as we receive them, and, therefore, we have no meaningful backlog of product orders.
Services revenue. It is difficult for us to predict when we will receive services contracts from new and existing
customers and when we will deliver the related services under those contracts.
Royalty revenue. It is also difficult for us to make accurate forecasts of DSL chipset royalty revenue. Royalties
are typically recognized in the quarter when we receive a report from a customer detailing sales and royalties
due from the prior quarter. Royalties depend upon customer revenues which can be affected by factors beyond
our ability to control or assess in advance. These factors include our customers’ ability to generate sales and
fluctuating sales volumes and prices of products containing our technology.
Our business is subject to a variety of risks, which could materially adversely affect quarterly and annual operating
results, including:
• market acceptance of our products;
•
•
•
•
•
•
•
fluctuations in the demand for our products;
competitive pressures resulting in lower product revenues;
the loss of a significant OEM or system integrator customer relationship;
the loss by one of our OEM customers or one of its significant customers;
the termination of a significant services project by a customer;
announcements or introductions of new technologies or products by us or our competitors;
delays or problems in the introduction or performance of enhancements or of future generations of our
technology;
failures or problems in our hardware or software products;
pricing pressure from our competitors in the markets in which we compete;
delays in the adoption of new industry standards or changes in market perception of the value of new or
existing standards;
personnel changes, particularly those involving engineering, technical, sales and marketing personnel;
costs associated with protecting our intellectual property;
the potential that customers could fail to make payments under their agreements with us;
new laws, changes to existing laws, or regulatory developments; and
general economic trends and other factors.
•
•
•
•
•
•
•
•
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As a result of these factors, we believe that period-to-period comparisons of our revenue levels and operating results
are not necessarily meaningful. You should not rely on our quarterly revenue and operating results to predict our
future performance.
We Have Experienced Net Losses
We had operating and net losses in 2001, 2002, 2003, 2004, and 2005, and operating losses in 2006, 2007, 2009,
and 2010. We may experience losses in the future if the markets in which we participate decline, if our customers do
not purchase our products in sufficient volumes, or if our royalty revenue declines.
We Continue to Receive DSL Chipset Royalty Revenue; However Future Royalty Revenue May Decline Because
of Factors That Are Beyond Our Control
We sold substantially all of the assets associated with our DSL chipset licensing product line to Lantiq in 2009.
Under the terms of our agreements with Lantiq, we continue to receive royalties for DSL chipsets Lantiq sells. We
also continue to derive royalties from Ikanos as our Ikanos agreement remained in effect after the sale to Lantiq.
Future royalties we may receive from Lantiq and Ikanos are influenced by factors that are beyond our control,
including:
• The competitiveness of DSL chipsets offered by Lantiq and Ikanos and the willingness of their customers to
purchase DSL chipsets from them;
• The promotional and marketing efforts of Lantiq and Ikanos; and
• DSL market risks in general, including: i) industry wide chipset demand; and ii) competitive pressures and
cyclical demand for DSL chipsets, which may result in reduced average selling prices and channel inventory
build-up.
Any or all of these factors may cause our royalty revenue to decline in the future.
Our Business is Subject to Rapid Technological Change
The biometrics, imaging, and DSL service assurance industries are characterized by rapid technological change and
uncertainty. In these industries, new generations of products are introduced regularly and evolutionary
improvements to existing products are required. Therefore, we face risks that others could introduce competing
technologies and products that render our technologies and products less desirable or obsolete. Also, the
announcement of new technologies and products could cause: i) our customers to delay purchasing our products; or
ii) our customers’ customers to delay purchasing OEM products that incorporate our products. Either of these events
could seriously harm our business.
We expect that our business will depend to a significant extent on our ability to introduce new generations of
products as well as new technologies and products that keep pace with changes in these industries. We must
continually devote significant engineering resources to achieving technical innovations and product developments.
These developments are complex and require long development cycles. Moreover, we may have to make substantial
investments in technological innovations and product developments before we can determine their commercial
viability. We may lack sufficient financial resources to fund future development. Revenue from technological
innovations, even if successfully developed, may not be sufficient to recoup the costs of development.
Our Intellectual Property is Subject to Limited Protection
Because we are a technology provider, our ability to protect our intellectual property and to operate without
infringing the intellectual property rights of others is critical to our success. We regard our technology as
proprietary. Our patent portfolio includes approximately 235 U.S. and foreign patents as well as approximately 219
pending patent applications. We also rely on a combination of trade secrets, copyright and trademark law and non-
disclosure agreements to protect our unpatented intellectual property. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use our technology without authorization.
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We typically work closely with our customers, who may also be potential competitors, and provide them with
proprietary know-how. Although our agreements contain non-disclosure provisions and other terms protecting our
proprietary know-how and technology rights, it is possible that, despite these precautions, some of our customers
might obtain from us proprietary information that they could use to compete with us in the marketplace. Although
we intend to defend our intellectual property as necessary, the steps we have taken may be inadequate to prevent
misappropriation.
In the future, we may be involved in legal action to enforce our intellectual property rights relating to our patents,
copyrights or trade secrets. Any such litigation could be costly and time-consuming for us, even if we were to
prevail. Moreover, even if we are successful in protecting our proprietary information, our competitors may
independently develop technologies substantially equivalent or superior to our technology. The misappropriation of
our technology or the development of competitive technology could seriously harm our business.
Our technology, software or hardware may infringe the intellectual property rights of others. A large and increasing
number of participants in the technology industry, including companies known as non-practicing entities or NPEs,
have applied for or obtained patents. Some of these patent holders have demonstrated a readiness to commence
litigation based on allegations of patent and other intellectual property infringement. Third parties may assert patent,
copyright and other intellectual property rights to technologies that are important to our business. In the past, we
have received claims from other companies that our technology infringes their patent rights. Intellectual property
rights can be uncertain and can involve complex legal and factual questions. We may infringe the proprietary rights
of others, which could result in significant liability for us. If we were found to have infringed any third party’s
patents, we could be subject to substantial damages or an injunction preventing us from conducting our business.
Our Business May Be Adversely Affected By Our Use of Open Source Software
The software industry is making increasing use of open source software in the development of products. We also
integrate certain open source software components from third parties into our software. Open source licenses may
require that the software code in those components or the software into which they are integrated be freely accessible
under open source terms. While we take precautions to protect open source software, we cannot exclude the
possibility that third-party claims may require us to make freely accessible under open source terms a product of ours
or non-Aware software upon which we depend. If we were required to make our software freely available, our
business could be seriously harmed.
Our Business May Be Affected by Government Regulations
Extensive regulation by federal, state, and foreign regulatory agencies could adversely affect us in ways that are
difficult for us to predict. In addition, our business may also be adversely affected by: i) the imposition of tariffs,
duties and other import restrictions on components we purchase from non-domestic suppliers; or ii) by the
imposition of export restrictions on products we sell internationally. Changes in current or future laws or regulations,
in the United States or elsewhere, could seriously harm our business.
Adverse Economic Conditions Could Harm Our Business
Unfavorable changes in economic conditions, including recessions, inflation, turmoil in financial markets, or other
changes in economic conditions, could harm our business, results of operations, and financial conditions as a result
of:
•
•
•
•
•
reduced demand for our products or our customers’ products that incorporate our technology;
increased risk of order cancellations or delays;
increased pressure on the prices for our products or our customers’ products that incorporate our
technology;
greater difficulty in collecting accounts receivable; and
risks to our liquidity, including the possibility that we might not have access to our cash when needed.
15
We are unable to predict the timing, duration, and severity of any such adverse economic conditions in the U.S. and
other countries, but the longer the duration, the greater the risks we face in operating our business.
We Must Make Judgments in the Process of Preparing Our Financial Statements
We prepare our financial statements in accordance with generally accepted accounting principles and certain critical
accounting policies that are relevant to our business. The application of these principles and policies requires us to
make significant judgments and estimates. In the event that judgments and estimates we make are incorrect, we may
have to change them, which could materially affect our financial position and results of operations.
Moreover, accounting standards have been subject to rapid change and evolving interpretations by accounting
standards setting organizations over the past few years. The implementation of new standards requires us to interpret
and apply them appropriately. If our current interpretations or applications are later found to be incorrect, our
financial position and results of operations could be materially affected.
If We are Unable to Maintain Effective Internal Controls Over Financial Reporting, Investors Could Lose
Confidence In The Reliability of Our Financial Statements, Which Could Result In a Decline in the Price of Our
Common Stock
As a public company, we are required to enhance and test our financial, internal and management control systems to
meet obligations imposed by the Sarbanes-Oxley Act of 2002. Consistent with the Sarbanes-Oxley Act and the rules
and regulations of the SEC, management's assessment of our internal controls over financial reporting and the audit
opinion of our independent registered accounting firm as to the effectiveness of our controls is required in
connection with our filing of our Annual Report on Form 10-K. If we are unable to identify, implement and conclude
that we have effective internal controls over financial reporting or if our independent auditors are unable to conclude
that our internal controls over financial reporting are effective, investors could lose confidence in the reliability of
our financial statements, which could result in a decrease in the value of our common stock. Our assessment of our
internal controls over financial reporting may also uncover weaknesses or other issues with these controls that could
also result in adverse investor reaction.
Our Stock Price May Be Extremely Volatile
Volatility in our stock price may negatively affect the price you may receive for your shares of common stock and
increases the risk that we could be the subject of costly securities litigation. The market price of our common stock
has fluctuated substantially and could continue to fluctuate based on a variety of factors, including:
•
•
•
•
•
•
•
•
•
•
•
quarterly fluctuations in our operating results;
changes in future financial guidance that we may provide to investors and public market analysts;
changes in our relationships with our customers;
announcements of technological innovations or new products by us, our customers or our competitors;
changes in the growth rates of the markets in which we participate as well as investor perceptions regarding
the investment opportunity that companies participating in the those markets afford them;
changes in earnings estimates by public market analysts;
key personnel losses;
sales of our common stock;
our stock repurchase activities;
corporate actions we may initiate, such as spin-offs or other corporate reorganizations; and
developments or announcements with respect to industry standards, patents or proprietary rights.
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 our
common stock.
16
BIOMETRICS & IMAGING PRODUCT LINE RISKS
Our Biometrics & Imaging Product Line Faces Intense Competition
The markets for our biometrics and imaging products and services are competitive and uncertain. Many of our
biometric software competitors have significantly greater financial, technological, marketing and personnel resources
than we do. We also face intense competition from internal development teams within potential customers and from
low cost competitors in developing and other foreign countries. We must convince potential customers to purchase
products and services from us rather than develop software or perform services internally. Furthermore, customers,
who have already purchased from us, may choose to stop purchasing our software and develop their own software.
In addition, announcements or introductions of new technologies or products by our competitors may adversely
affect our business.
Biometrics & Imaging Software Business Risks
Our biometrics and imaging software business is subject to a variety of additional risks, which could materially
adversely affect our revenue and operating results, including:
market acceptance of our biometric and imaging technologies and products;
changes in contracting practices of government or law enforcement agencies;
the failure of the biometrics and imaging markets to continue to grow;
delays or problems in the introduction or performance of enhancements or of future generations of our
technology;
reduced government funding of biometrics programs by the United States and foreign governments;
low cost products from competitors in developing and other foreign countries;
failures or problems in our biometrics and imaging software products;
delays in the adoption of new industry biometric standards or changes in market perception of the value of
new or existing standards;
competitive pressures resulting in lower software product revenues;
the availability of free open source software that competes with our software products;
growth of proprietary biometric systems which do not conform to industry standards;
personnel changes, particularly those involving engineering, technical and sales and marketing personnel;
new laws, changes to existing laws, or regulatory developments; and
general economic trends and other factors.
the ability to identify and hire qualified engineering, technical and sales and marketing personnel;
costs associated with protecting our intellectual property;
litigation by third parties for alleged infringement of their proprietary rights;
the potential that customers could fail to make payments under their current contracts;
Biometrics Services Business Risks
Our biometrics services business is subject to additional risks, which could materially adversely affect our revenue
and operating results, including:
our ability to structure and price engineering services contracts in a manner that is consistent with our
business model;
our ability to structure ourselves to successfully bid on U.S. government contracts and meet the
requirements of U.S. contracting rules and regulations;
our ability to deliver contract milestones: i) in a timely and cost efficient manner, and ii) in a form and
condition acceptable to customers;
the risk that customers could terminate projects; and
the potential that customers could fail to make payments under their service contracts.
17
DSL SERVICE ASSURANCE PRODUCT LINE RISKS
Preface to DSL Service Assurance Product Line Risks. Our DSL service assurance product line consists of
hardware and software products, which have different risk characteristics. The risk factors associated with
hardware and software products are delineated separately below.
DSL SERVICE ASSURANCE HARDWARE PRODUCT RISKS
Our Decision To Terminate The Production and Sale of DSL Service Assurance Hardware Products Exposes Us
to Certain Exit Costs, Obligations and Risks
On January 18, 2012, our Board of Directors approved the shutdown of Aware’s DSL service assurance hardware
product line. We will continue to build and ship DSL service assurance hardware products to fulfill customer orders
that were received as of the date of the shutdown notice. We expect to conclude hardware shipments on or about
June 30, 2012.
While we have developed an exit plan to conduct an orderly exit from this product line, we may be exposed to
certain risks, some of which may be difficult to predict. These potential risks may include, but are not limited to, the
following:
• The risk that we may be unable to fulfill last time purchase rights under customer contracts;
• The risk that we may have to provide post termination warranty and customer support;
• The risk associated with employee terminations, including severance costs;
• The risk that a portion of our inventory may be excess or obsolete; and
• The risk that hardware customers may not pay their invoices to us.
Should any of the risks described above come to fruition, our results of operations and financial position may
be adversely affected.
DSL SERVICE ASSURANCE SOFTWARE PRODUCT RISKS
Our Success as a Supplier of DSL Service Assurance Software Products Depends on Our Ability to Sell Our Line
Diagnostics Product to DSL Service Providers
Our two principal DSL service assurance software products are: i) our Line Diagnostics Platform (“LDP”) product;
and ii) our Dr. DSL product. We believe that our success as a supplier of DSL service assurance software depends
on our ability to sell our LDP software product to DSL service providers. If we fail to sell LDP in sufficient volumes
by obtaining new DSL service providers or maintaining current customer relationships, our business could be
seriously harmed.
Our DSL Service Assurance Software Products, and LDP in Particular, Face Intense Competition
The DSL service assurance market into which we sell our DSL service assurance software products is competitive. In
particular, we face intense competition from several competitors who compete against our LDP product. These
competitors have more mature product offerings, larger market shares, and larger sales organizations than we do.
Our ability to effectively compete against these competitors and others who may enter the market depends in large
part on our ability:
•
•
•
•
to develop our LDP product so that it can compete against product offerings from Alcatel, Assia, and
others;
to market and sell LDP to DSL service providers;
to scale LDP so that it operates effectively in DSL service provider networks; and
to provide effective customer service and support.
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We can give no assurance that we will be able to compete effectively in this market or that competitive pressures will
not seriously harm our business.
There Are a Limited Number of Customers to Which We Can Sell Our DSL Service Assurance Software
Products, Therefore Our Success Depends on a Small Number of Customers
There are a relatively limited number of DSL service providers to which we can sell our LDP software product in a
manner consistent with our business model. Such customers are limited to telephone company service providers who:
i) maintain DSL networks and ii) wish to use software solutions instead of hardware solutions to maintain those
networks. Once a service provider decides to adopt a DSL service assurance software product from a supplier, they
generally deploy that one solution instead of multiple solutions from multiple vendors thereby reducing the
possibility of future sales to that customer. In addition, our current and prospective service provider customers may
use their superior size and bargaining power to demand terms that are unfavorable to us.
There are also a limited number of OEM suppliers to which we can sell our Dr. DSL software. If we fail to maintain
relationships with our current OEM customers or fail to establish relationships with new customers, our business
could be seriously harmed. In addition, our current and prospective OEM customers may use their superior size and
bargaining power to demand terms that are unfavorable to us.
The Success of Our DSL Service Assurance Software Products, and LDP in Particular, Depends On Our Ability
to Develop Commercially Viable Products in a Timely Fashion
Our success in developing and introducing new and enhanced DSL service assurance products depends on the ability
of our engineering organization to design and develop such products. Because of the complexity of our software
products, it may take us a significant amount of time to develop new products. Moreover, such products must be
commercially viable in terms of their features and pricing. If we cannot successfully introduce new commercially
viable products on a timely basis, our business could be seriously harmed.
If Our DSL Service Assurance Software Products Have Other Quality Problems, Our Business Could Be Harmed
If our DSL service assurance software products have actual or perceived reliability, quality, functionality or other
problems, we may suffer reduced orders, inability to recognize revenue, delays in collecting accounts receivable,
higher service costs, and higher support and related costs among other effects. We believe that the acceptance, timely
delivery and customer satisfaction of our DSL service assurance software products is important to our future
financial results. As a result, any inability to correct any technical, reliability, or other difficulties or to deliver our
products on a timely basis meeting customer requirements could damage our relationships and reputation with
current and prospective customers, which would harm our revenues and operating results.
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PATENT MANAGEMENT PRODUCT LINE RISKS
Our Ability to Obtain, Sell, License, or Enforce Patents Could be Affected by New Laws, Regulations or Rules
We intend to pursue the license or sale of patents in our patent portfolio. Our patent portfolio includes
approximately 235 U.S. and foreign patents as well as approximately 219 pending patent applications. We also have
an active program to protect our proprietary technology through the filing of additional patents. New laws,
regulations or rules implemented either by Congress, the United States Patent and Trademark Office, foreign patent
offices, or the courts that impact the patent application process, the patent enforcement process or the rights of patent
holders could significantly increase our expenses related to patent prosecution or decrease revenues associated with
our patents.
There Can Be No Assurance That We Will Be Able To Successfully Monetize Our Patent Assets
In September 2010, we announced a possible transaction involving our patent management operations. There can be
no assurance as to the timing of a possible transaction with respect to our patent management operations, whether it
will ultimately be structured as a spin-off, sale, or license or whether such a transaction will be completed.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
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ITEM 2. PROPERTIES
We believe that our existing facilities are adequate for our current needs and that additional space sufficient to meet
our needs for the foreseeable future will be available on reasonable terms. We currently occupy approximately:
1. 72,000 square feet of office space in Bedford, Massachusetts, which serves as our headquarters. This site is
used for our research and development, sales and marketing, and administrative activities. We own this facility.
2. 578 square feet of office space in Orinda, California. This facility is currently leased for a 3-year term, which
expires on September 30, 2013.
ITEM 3. LEGAL PROCEEDINGS
From time to time we are involved in litigation incidental to the conduct of our business. We are not party to any
lawsuit or proceeding that, in our opinion, is likely to seriously harm our business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is the only class of stock we have outstanding, and it trades on the Nasdaq Global Market under
the symbol AWRE. The following table sets forth the high and the low sales prices of our common stock as reported
on the Nasdaq Global Market for the periods indicated from January 1, 2010 to December 31, 2011.
2011
High ..................................
Low ..................................
2010
High ..................................
Low ..................................
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$4.25
2.80
$2.95
2.31
$3.65
2.84
$2.72
2.08
$3.59
2.61
$2.70
2.04
$3.20
2.36
$3.00
2.57
As of February 10, 2012, we had approximately 126 shareholders of record. This number does not include
shareholders from whom shares were held in a “nominee” or “street” name. We have never paid cash dividends on
our common stock and we anticipate that we will continue to reinvest any earnings to finance future operations.
We did not sell any equity securities that were not registered under the Securities Act of 1933 during the three
months ended December 31, 2011.
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Performance Graph
The following performance graph compares the performance of Aware’s cumulative stockholder return with that of a
broad market index, the Nasdaq Composite Index, and a published industry index, the RDG Technology Composite
Index. The cumulative stockholder returns for shares of Aware’s common stock and for the market and industry
indices are calculated assuming $100 was invested on December 31, 2006. Aware paid no cash dividends during the
periods shown. The performance of the market and industry indices is shown on a total return, or dividends
reinvested, basis.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Aware, Inc., the NASDAQ Composite Index, and the RDG Technology Composite Index
$140
$120
$100
$80
$60
$40
$20
$0
12/06
12/07
12/08
12/09
12/10
12/11
Aware, Inc.
NASDAQ Composite
RDG Technology Composite
*$100 invested on 12/31/06 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Aware, Inc. .................................................. $100.00
Nasdaq Composite Index. ............................
100.00
RDG Technology Composite .......................
100.00
Value of Investment ($)
12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11
$56.29
110.81
118.29
$78.80
110.26
115.01
$35.08
65.65
65.30
$52.53
95.19
105.06
$53.28
112.10
118.52
23
ITEM 6. SELECTED FINANCIAL DATA
In the table below, we provide you with our selected consolidated financial data. We have prepared this information
using our audited consolidated financial statements for the years ended December 31, 2011, 2010, 2009, 2008, and
2007. When you read this selected financial data, it is important that you read it along with Management’s
Discussion and Analysis of Financial Condition and Results of Operations, our historical consolidated financial
statements, and the related notes to the financial statements, which can be found in Item 8.
Year ended December 31,
2011
2009
2010
(in thousands, except per share data)
2008
2007
Statements of Operations Data
Revenue ...................................................
Income (loss) from operations .................
Gain on sale of assets ...............................
Net income...............................................
Net income per share – basic ...................
Net income per share – diluted ................
$24,586
2,486
-
2,567
$0.12
$0.12
$23,560
(333)
-
180
$0.01
$0.01
$22,042
(5,482)
6,230
982
$0.05
$0.05
$30,517
629
-
1,776
$0.08
$0.07
$26,437
(1,830)
-
160
$0.01
$0.01
Balance Sheet Data
Cash and short-term investments .............
Working capital .......................................
Total assets ...............................................
Total liabilities .........................................
Total stockholders’ equity .......................
$46,577
48,069
57,851
3,276
54,575
$39,949
43,818
53,400
3,517
49,883
$39,669
42,209
51,454
3,094
48,360
$45,516
47,288
57,546
3,023
54,523
$38,055
45,031
56,383
3,147
53,236
24
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain line items from our consolidated statements of
operations stated as a percentage of total revenue:
2011
74%
Year ended December 31,
2010
80%
2009
70%
Revenue:
Product sales ................................................................
Services ........................................................................
Royalties ......................................................................
Total revenue .............................................................
Costs and expenses:
Cost of product sales ....................................................
Cost of services ............................................................
Research and development ...........................................
Selling and marketing ..................................................
General and administrative ..........................................
Total costs and expenses ...........................................
Income (loss) from operations ........................................
Gain on sale of assets ......................................................
Other income ...................................................................
Interest income ................................................................
17
9
100
15
7
30
18
20
90
10
-
-
-
Income before provision for income taxes ......................
Provision for income taxes ..............................................
Net income .....................................................................
10
-
10%
9
11
100
19
3
34
18
27
101
(1)
-
2
-
1
-
1%
21
9
100
13
13
54
22
23
125
(25)
28
-
1
4
-
4%
Summary of Operations. We have been a supplier of signal processing and digital communications technology for
imaging and telecommunications applications since the early 1990s. Presently, our business operations are focused
along three product lines: i) biometrics and imaging; ii) DSL service assurance; and iii) patent management. Prior to
November 2009, we were also a supplier of DSL silicon intellectual property to the semiconductor industry.
Biometrics & Imaging. Our biometrics products consist of software and services used in biometric systems, and our
imaging products consist of software used primarily in medical imaging applications. Biometrics systems are used in
applications such as law enforcement, border control, national defense, secure credentialing, access control and
background checks. We typically sell our biometrics software and services to: i) systems integrators that incorporate
our software products into biometrics systems that they are developing on behalf of their customers; ii) OEMs that
incorporate our products into their biometrics hardware and software solutions; and iii) directly to government
agencies that are deploying biometrics systems. Our imaging software is primarily sold to OEMs and systems
integrators that incorporate our software into their medical and imaging products.
DSL Service Assurance. Our DSL service assurance products, which we previously called DSL test and diagnostics,
consist of DSL software and hardware products that are used by telephone companies to improve the quality of their
DSL service offerings. We sell our DSL service assurance software products through OEMs and directly to
telephone companies. Our DSL service assurance hardware products are typically sold to OEMs that incorporate our
modules into their automated testhead and handheld test equipment. Our OEM customers sell their equipment to
telephone companies.
25
On January 18, 2012, our Board of Directors approved the shutdown of Aware’s DSL service assurance hardware
product line. This decision was made to position Aware better strategically and to reduce costs. This decision had no
impact on our results of operations for the three years ended December 31, 2011, 2010, or 2009.
In the year ended December 31, 2011, revenue and expenses directly attributable to the DSL service assurance
hardware product line were $5.1 million and $5.7 million, respectively. Direct expenses include cost of goods sold,
engineering and sales expenses. In 2012, we will continue to build and ship DSL service assurance hardware
products to fulfill customer orders that were received as of the date of the shutdown notice. Therefore, DSL
hardware revenue and expenses will continue in 2012 until we complete the shutdown, which we anticipate will be
on or about June 30, 2012. We estimate that exiting this product line will produce an insignificant gain during the
first half of 2012. The estimated gain consists of revenue from final hardware shipments less the following costs: i)
cost of goods sold, ii) engineering and sales expenses to support final product shipments, and iii) one-time costs
related to the shutdown of approximately $282,000, the majority of which are severance and employee-related costs.
Patent Management. The objective of our patent management operations, which we previously called patent
licensing operations, is to develop patents and to license or sell them to third parties interested in acquiring such
patent rights. There were no patent related fees in revenue in the years ended December 31, 2011 and 2009. There
were $330,000 of such fees in services revenue for the year ended December 31, 2010. As of the date of this report,
our board is reviewing strategic options with respect to our patent management operations, including a potential
spin-off, sale, or licensing of patents.
DSL Silicon Intellectual Property. In November 2009, we completed a transaction with Lantiq Deutschland GmbH
(“Lantiq”) involving the sale and transfer of: i) our DSL and home networking technology assets, ii) certain patents
and patent applications related to those technology assets, and iii) 41 Aware employees. After this sale, we no longer
offered DSL or home networking silicon IP products; however, we continued to receive DSL chipset royalties from
Lantiq and Ikanos Communications, Inc. (“Ikanos’) and provide a minor amount of engineering support services to
Ikanos.
Our results of operations for the years ended December 31, 2011, 2010, and 2009 include the following elements of
DSL Silicon Intellectual Property revenue: i) royalty revenue from Lantiq and Ikanos in 2011, 2010, and 2009; ii)
engineering services to Ikanos in 2011, 2010, and 2009; and iii) engineering services to Lantiq in 2009.
Summary of Financial Results. For the year ended December 31, 2011, we had net income of $2.6 million, or $0.12
per share. For the year ended December 31, 2010, we had net income of net income of $180,000, or $0.01 per share.
For the year ended December 31, 2009, we had net income of $982,000, or $0.05 per share.
2011 compared to 2010. There was a significant improvement in operating income and net income in 2011
compared to 2010. Operating income increased from a loss of $333,000 in 2010 to income of $2.5 million in 2011;
and net income increased from $180,000 in 2010 to $2.6 million in 2011. Higher earnings in 2011 were primarily a
result of the following factors: i) growth of our services business; ii) a greater proportion of software revenue versus
hardware revenue in product sales during 2011; iii) lower legal fees related to patents and patent monetization
activities; and iv) lower director and officer compensation expenses.
2010 compared to 2009. There was also a significant improvement in operating income in 2010 compared to 2009,
although net income declined. Net income for the year ended December 31, 2009 included a $6.2 million gain on the
sale of assets, which was the primary reason for our profitability in 2009. However, operating losses were reduced
from a loss of $5.5 million in 2009 to a loss of $333,000 in 2010. The $5.1 million improvement was primarily
attributable to: i) the cessation of operating losses from our DSL Silicon IP product line as a result of the sale to
Lantiq in 2009, and ii) improved profitability in our DSL service assurance product line. These factors were partially
offset by increased legal fees related to patents and patent monetization activities.
Product Sales
Product sales consist primarily of revenue from the sale of hardware and software products. Hardware products
consist primarily of DSL service assurance modules. Software products consist of software products, including
maintenance contracts, for biometrics, medical imaging, and DSL service assurance applications.
26
Product sales decreased 4% from $18.9 million in 2010 to $18.1 million in 2011. As a percentage of total revenue,
product sales decreased from 80% in 2010 to 74% in 2011. The dollar decrease in product sales was primarily due to
a $1.4 million decrease in revenue from the sale of DSL service assurance hardware, and a $0.8 million decrease in
revenue from the sale of DSL service assurance software. The decrease in DSL service assurance hardware and
software revenue was partially offset by a $1.4 million increase in revenue from the sale of biometrics software.
The $1.4 million decrease in DSL hardware revenue was mainly attributable to the lack of availability of our next
generation hardware products. The $0.8 million decrease in DSL software revenue was primarily due to lower sales
of our LDP software. The $1.4 million increase in revenue from the sale of biometrics software was primarily due to
a number of larger-sized license transactions with OEMs, systems integrators and end users in 2011.
Product sales increased 23% from $15.4 million in 2009 to $18.9 million in 2010. As a percentage of total revenue,
product sales increased from 70% in 2009 to 80% in 2010. The dollar increase in product sales was primarily due to
a $3.7 million increase in revenue from the sale of DSL service assurance hardware and software, which was
partially offset by a $0.2 million decrease in revenue from the sale of biometrics software.
The $3.7 million increase in revenue from the sale of DSL service assurance products was mainly attributable to: 1) a
$1.2 million increase in software revenue as a result of the sale of our LDP software to two European telephone
companies; and 2) a $2.5 million increase in hardware revenue, which was driven by: i) sales to an OEM customer
selling handheld test devices into large telephone companies, and ii) the introduction of new products. The $0.2
million decrease in revenue from the sale of biometrics software was primarily due to fewer larger-sized sales to
individual customers in 2010 as compared to the prior year.
On January 18, 2012, our Board of Directors approved the shutdown of our DSL service assurance hardware product
line. Revenue attributable to this product line was $5.1 million, $6.4 million, and $3.9 million in the three years
ended December 31, 2011, 2010 and 2009, respectively. We will continue to build and ship DSL service assurance
hardware products to fulfill customer orders that were received as of the date of the shutdown notice. We expect to
conclude hardware shipments on or about June 30, 2012.
Services
Services, which we previously called “Contract Revenue,” primarily consist of engineering service fees related to: i)
our biometrics product line; and ii) our DSL service assurance product line. Services revenue in 2009 also included a
significant amount of engineering fees related to DSL silicon IP contracts, which was reduced dramatically in 2010
and 2011 as result of the sale to Lantiq in November 2009.
Services increased 116% from $2.0 million in 2010 to $4.3 million in 2011. As a percentage of total revenue,
services increased from 9% in 2010 to 17% in 2011. The services dollar increase was primarily due to a $2.6
million revenue increase from the sale of biometrics engineering services. One of our strategic objectives over the
last few years has been to increase revenue from biometrics engineering projects. Services revenue in 2011 reflects
progress towards that goal, however we are unable to predict whether services revenue will trend upward or
downward in future periods as we continue to develop this business. The increase in service revenue from biometrics
engineering services was partially offset by a $0.3 million decrease in service revenue from patent licensing
activities.
Services decreased 57% from $4.6 million in 2009 to $2.0 million in 2010. As a percentage of total revenue,
services decreased from 21% in 2009 to 9% in 2010. The services dollar decrease was primarily due to a $2.9
million reduction of service revenue from DSL silicon IP contracts as a result of the sale of our DSL silicon IP
product line to Lantiq in November 2009. The decrease in service revenue from DSL silicon contracts was partially
offset by a $0.3 million increase in service revenue from patent licensing activities.
Royalties
Substantially all of our royalties are derived from royalty payments we receive under DSL silicon IP contracts with
Ikanos and Lantiq. Each customer pays us royalties for the right to incorporate our silicon IP in their DSL chipsets.
27
The sale of our DSL silicon IP assets in November 2009 did not alter the royalty obligations of Ikanos or Lantiq.
We are uncertain as to whether these licensees will be able to maintain their market shares and chipset prices in the
face of intense competition, and whether our relationships with them will contribute meaningful royalties to us in the
future. Accordingly, we are unable to predict whether royalties reported by our licensees will trend upward or
downward in future periods.
Royalties decreased 19% from $2.7 million in 2010 to $2.1 million in 2011. As a percentage of total revenue,
royalties decreased from 11% in 2010 to 9% in 2011. The dollar decrease in royalties was due to a $0.6 million
decrease in DSL royalties from Lantiq and Ikanos.
Royalties increased 29% from $2.1 million in 2009 to $2.7 million in 2010. As a percentage of total revenue,
royalties increased from 9% in 2009 to 11% in 2010. The dollar increase in royalties was due to a $0.6 million
increase in DSL royalties from Lantiq and Ikanos.
Cost of Product Sales
Since the cost of software product sales is minimal, cost of product sales consists primarily of the cost of hardware
product sales.
Cost of product sales decreased 17% from $4.4 million in 2010 to $3.6 million in 2011. As a percentage of product
sales, cost of product sales decreased from 23% in 2010 to 20% in 2011, which resulted in gross margins on product
sales increasing from to 77% to 80%. The dollar decrease in cost of product sales in 2011 was primarily attributable
to a $1.4 million decrease in hardware product sales. The increase in gross margins on product sales was primarily
due to a higher proportion of software sales in the product sales mix that have relatively higher margins.
Cost of product sales increased 51% from $2.9 million in 2009 to $4.4 million in 2010. As a percentage of product
sales, cost of product sales increased from 19% in 2009 to 23% in 2010, which resulted in gross margins on product
sales decreasing from to 81% to 77%. The dollar increase in cost of product sales in 2010 was primarily attributable
to a $2.5 million increase in hardware product sales. The decrease in gross margins on product sales was primarily
due to a lower proportion of software sales in the product sales mix.
Cost of Services
Cost of services, which we previously called "Cost of Contract Revenue," consists of engineering costs to complete
customer engineering projects. Such costs primarily include: i) engineering salaries, stock-based compensation,
fringe benefits, and facilities; and ii) engineering consultants and contractors.
Cost of services increased 149% from $0.7 million in 2010 to $1.8 million in 2011. As a percentage of services
revenue, cost of services increased from 36% in 2010 to 41% in 2011, which resulted in gross margins on service
revenue decreasing from 64% to 59%. The $1.1 million increase in cost of services was primarily due to a $2.3
million increase in service revenue. The decrease in gross margins on service revenue was due to a greater
proportion of services provided to government customers that have slightly lower margins than commercial
customers in 2011 as compared to 2010.
Cost of services decreased 75% from $2.9 million in 2009 to $0.7 million in 2010. As a percentage of services
revenue, cost of services decreased from 63% in 2009 to 36% in 2010, which resulted in gross margins on service
revenue increasing from 37% to 64%. The $2.2 million decrease in cost of services was almost entirely due to the
loss of services revenue from DSL silicon contracts as a result of the Lantiq sale. The increase in gross margins on
service revenue was due to a shift in service revenue from DSL silicon contracts to more profitable non-DSL silicon
contracts.
Research and Development Expense
Research and development expense consists of costs for: i) engineering personnel, including salaries, stock-based
compensation, fringe benefits, and facilities; ii) engineering consultants and contractors, and iii) other engineering
28
expenses such as supplies, equipment depreciation, dues and memberships and travel. Engineering costs incurred to
develop technology, products and patents related to our various product lines are classified as research and
development expense. As described in the cost of services section, engineering costs incurred to provide engineering
services for customer projects are classified as cost of services, and are not included in research and development
expense.
Research and development expense decreased 11% from $8.1 million in 2010 to $7.2 million in 2011. As a
percentage of total revenue, research and development expense decreased from 34% in 2010 to 30% in 2011. The
$0.9 million decrease in research and development expense was primarily due to how we deployed our engineering
resources in 2011 and 2010. In 2011, our total engineering costs were $9.0 million, of which we classified $7.2
million to research and development cost and $1.8 million to cost of services based on the time spent on each
activity. In 2010, our total engineering costs were $8.8 million, of which we classified $8.1 million to research and
development cost and $0.7 million to cost of services. The reduction of research and development expense in 2011
was primarily due to a greater deployment of engineering resources on customer services projects in the current year
as compared to the previous year.
Research and development expense decreased 32% from $11.9 million in 2009 to $8.1 million in 2010. As a
percentage of total revenue, research and development expense decreased from 54% in 2009 to 34% in 2010. The
$3.8 million decrease in research and development expense was primarily due to a $4.4 million reduction of
engineering expenses as a result of the sale of our DSL silicon IP product line to Lantiq, which was partially offset
by slightly higher spending in our biometrics and DSL service assurance engineering organizations.
Our research and development activities are focused primarily on developing biometrics and imaging software; and
DSL service assurance software.
Selling and Marketing Expense
Selling and marketing expense primarily consists of costs for: i) sales and marketing personnel, including salaries,
sales commissions, stock-based compensation, fringe benefits, travel, and facilities; and ii) advertising and
promotion expenses.
Selling and marketing expense increased 4% from $4.3 million in 2010 to $4.4 million in 2011. As a percentage of
total revenue, selling and marketing expense was 18% in 2010 and 2011. The $0.1 million increase in selling and
marketing expense reflected: 1) a stable sales and marketing organization; and 2) consistent levels of promotional
activities.
Selling and marketing expense decreased 9% from $4.7 million in 2009 to $4.3 million in 2010. As a percentage of
total revenue, selling and marketing expense decreased from 21% in 2009 to 18% in 2010. The dollar decrease in
selling and marketing expense was primarily due to lower headcount in our sales and marketing organization as well
as lower stock-based compensation expenses. Lower spending attributable to these factors was partially offset by
higher spending on tradeshows.
General and Administrative Expense
General and administrative expense consists primarily of costs for: i) officers, directors and administrative personnel,
including salaries, bonuses, director compensation, stock-based compensation, fringe benefits, and facilities; ii)
professional fees, including legal and audit fees; iii) public company expenses; and iv) other administrative expenses,
such as insurance costs and bad debt provisions.
General and administrative expense decreased 22% from $6.4 million in 2010 to $5.0 million in 2011. As a
percentage of total revenue, general and administrative expense decreased from 27% in 2010 to 20% in 2011. The
dollar decrease in general and administrative expense was mainly attributable to: i) lower legal fees related to patents
and patent monetization activities of $1.0 million; ii) lower compensation expenses for directors and officers of $0.8
million; and iii) various other administrative spending decreases of $0.2 million. These spending decreases were
partially offset by $0.6 million of severance costs paid in 2011 to our former CEO upon his departure from the
company.
29
General and administrative expense increased 26% from $5.1 million in 2009 to $6.4 million in 2010. As a
percentage of total revenue, general and administrative expense increased from 23% in 2009 to 27% in 2010. The
dollar increase in general and administrative expense was mainly attributable to higher spending on: i) legal fees
related to patents and patent monetization activities of $1.3 million; and ii) stock-based compensation of $0.2
million.
Gain on Sale of Assets
In 2009, we sold substantially all of the assets associated with our home networking and DSL technology to Lantiq
for $6.75 million. We recorded a gain on the sale of assets of $6.2 million in the year ended December 31, 2009. The
gain reflects $6.75 million of proceeds from Lantiq less the following items: i) the net book value of assets
transferred to Lantiq; ii) the write-off of certain prepaid assets that had no economic value after the sale; and iii)
transaction costs.
Other Income
We recorded $425,000 of other income in the year ended December 31, 2010. This amount represents proceeds from
a legal settlement with a former customer.
Interest Income
Interest income decreased 8%, or $7,000, from $90,000 in 2010 to $83,000 in 2011. The dollar decrease in interest
income was primarily due to a continued decline in money market interest rates during 2011.
Interest income decreased 62%, or $148,000, from $238,000 in 2009 to $90,000 in 2010. The dollar decrease in
interest income was primarily due to a continued decline in money market interest rates during 2010.
Income Taxes
We are subject to income taxes in the United States and we use estimates in determining our provisions for income
taxes. We account for income taxes using the asset and liability method for accounting and reporting income taxes.
Deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and
income tax bases of assets and liabilities using statutory rates.
We made no provision for income taxes in the years ended 2011, 2010 and 2009, except for $2,000, $2,000, and
$4,000 of state excise taxes paid in each year, respectively.
As of December 31, 2011, we had U.S. federal net operating loss carryforwards for income tax purposes of $51.4
million that expire beginning in 2012 and state net operating loss carryforwards of $9.3 million that expire beginning
in 2012. We also had U.S. federal tax credits of $13.6 million that expire beginning in 2012 and state research and
development credits of $7.4 million that expire beginning in 2012. The Internal Revenue Code contains provisions
that limit the net operating loss and tax credit carryforwards available to be used in any given year in the event of
certain circumstances, including significant changes in ownership interests, as defined.
Based on all the available evidence, we continue to believe that it is more likely than not that our deferred tax assets
are not currently realizable. In reaching this determination, we evaluated our three-year cumulative results as well as
the impact that current economic conditions may have on our future results. As a result, we continue to provide a
valuation allowance on our deferred tax assets.
We will continue to assess the level of valuation allowance required in future periods. Should more positive than
negative evidence regarding the realizability of tax assets exist at a future point in time, the valuation allowance may
be reduced or eliminated altogether.
30
LIQUIDITY AND CAPITAL RESOURCES
In recent years, we have financed the company with our cash balances, cash generated from operations, and cash
received from the sale of our DSL silicon intellectual property product line. Equity financing has not been a
meaningful source of financing for us in recent years. Cash flows from operating, investing and financing activities
are described below.
Cash flow from operating activities
In the years ended December 31, 2011 and 2010, our operating activities provided net cash of $6.8 million and $0.7
million, respectively. In the year ended December 31, 2009, our operating activities used net cash of $3.4 million. A
discussion of cash flow from operations for each of the last three years follows:
Year ended December 31, 2011. Cash provided by operations of $6.8 million in 2011 was primarily the result of
net income of $2.6 million, which was increased for non-cash items related to depreciation and amortization of
$0.5 million and stock-based compensation expense of $1.3 million. Cash provided by operations was also
driven higher by a $2.7 million reduction in accounts receivable and inventory, which was partially offset by a
$0.3 million reduction of liabilities.
Year ended December 31, 2010. Cash provided by operations of $0.7 million in 2010 was primarily the result of
net income of $0.2 million, which was increased for non-cash items related to depreciation and amortization of
$0.5 million, and stock-based compensation expense of $1.5 million. Cash provided by operations from these
sources was reduced by a $2.0 million net increase in accounts receivable, inventory, and prepaid expenses,
which was partially offset by a $0.5 million increase in liabilities.
Year ended December 31, 2009. Cash used in operations of $3.4 million in 2009 was primarily the result of net
income of $1.0 million, which was: i) decreased by a $6.2 million gain on the sale of assets; and ii) increased for
non-cash items related to depreciation and amortization of $0.8 million, and stock-based compensation expense
of $1.7 million. Cash used in operations from these sources was further increased by a $0.7 million net increase
in accounts receivable, inventory, and prepaid expenses.
Cash flow from investing activities
In the years ended December 31, 2011 and 2010, our investing activities used net cash of $1.1 million and $0.3
million, respectively. In the year ended December 31, 2009, our investing activities provided net cash of $6.5
million. A discussion of cash flow from investing activities for each of the last three years follows:
Year ended December 31, 2011. Cash used by investing activities of $1.1 million in 2011 was primarily the
result of $0.3 million of capital expenditures and $0.7 million used to purchase investments.
Year ended December 31, 2010. Cash used by investing activities of $0.3 million in 2010 was primarily the
result of $0.1 million of capital expenditures, $0.1 million used to purchase other assets, and $0.1 million of
expenses related to the sale of our DSL silicon intellectual property product line.
Year ended December 31, 2009. Cash provided by investing activities of $6.5 million in 2009 was primarily the
result of $6.7 million of proceeds from the sale of our DSL silicon intellectual property product line. Sales
proceeds from this sale were partially offset by $0.2 million of capital expenditures.
We have no material commitments for capital expenditures.
Cash flow from financing activities
In the year ended December 31, 2011, our financing activities provided net cash of $0.9 million. In the years ended
December 31, 2010 and 2009, our financing investing activities used net cash of $0.2 million and $8.9 million,
respectively. A discussion of cash flow from financing activities for each of the last three years follows:
Year ended December 31, 2011. Cash provided by financing activities of $0.9 million in 2011 was primarily the
result of $1.8 million of proceeds from the exercise of stock options. Proceeds from stock option exercises were
partially offset by $0.7 million used to repurchase our stock from a shareholder in a privately negotiated
transaction, and $0.2 million used to repurchase stock from employees in connection with stock issuances under
a 2010 stock grant program.
31
Year ended December 31, 2010. Cash used by financial activities of $0.2 million in 2010 was primarily the
result of $0.2 million used to purchase stock from employees in connection with an employee option exchange
program.
Year ended December 31, 2009. Cash used by financing activities of $8.9 million in 2009 was primarily the
result of $8.9 million used to repurchase our stock in a Dutch auction tender offer.
At December 31, 2011, we had cash and cash equivalents of $46.6 million and investments of $0.7 million. While
we can not assure you that we will not require additional financing, or that such financing will be available to us, we
believe that our cash and cash equivalents and investments will be sufficient to fund our operations for at least the
next twelve months.
To date, inflation has not had a material impact on our financial results. There can be no assurance, however, that
inflation will not adversely affect our financial results in the future.
OFF-BALANCE SHEET ARRANGEMENTS
We have a patent arrangement with an unconsolidated entity that we classify as a variable interest entity. We have no
equity interest and are not contractually obligated to fund this entity; therefore our maximum exposure to loss as a
result of our involvement with this entity is zero. Other than this patent entity, we do not have any other
arrangements with unconsolidated entities, such as structured finance or special purpose entities, which are often
established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes. Accordingly, we are not exposed to any financing, liquidity, market or credit risk.
32
CONTRACTUAL OBLIGATIONS
We have various contractual obligations impacting our liquidity. The following represents our contractual
obligations as of December 31, 2011 (in thousands):
Contractual Obligations
Total
1 year
1-3 years
3-5 years
5 years
Payments Due By Period
Less than
More than
Operating leases
Purchase orders
Total
$31
175
$206
$18
175
$193
$13
-
$13
$-
-
$-
$-
-
$-
CRITICAL ACCOUNTING POLICIES
We consider certain accounting policies related to revenue recognition, stock-based compensation, income taxes,
inventories, and the allowance for doubtful accounts to be critical policies.
Revenue recognition. We derive revenue from three sources (i) product revenue, which includes revenue from the
sale of biometrics, imaging and DSL service assurance software products and from the sale of DSL service assurance
hardware products; (ii) services, which primarily includes engineering service fees; and (iii) royalties.
We recognize revenue when there is persuasive evidence of an arrangement, the sales price is fixed or determinable,
collection of the related receivable is reasonably assured, and delivery has occurred or services have been rendered.
As described below, we make significant judgments during the process of determining revenue for any particular
accounting period.
In determining revenue recognition, we assess whether fees associated with revenue transactions are fixed or
determinable based on the terms of the contract and based on payment terms. If the fee is not fixed or determinable,
we defer the fee and recognize revenue as amounts become due and payable. We assess whether collection is
reasonably assured based on a number of factors, including past transaction history with the customer and the credit-
worthiness of the customer. If we determine that collection of a fee is not reasonably assured, we defer the fee and
recognize revenue at the time collection becomes reasonably assured.
We must also make judgments with respect to the recognition of multiple element revenue arrangements in the
following situations:
o When software licenses and maintenance contracts are sold together, we generally recognize software license
revenue upon delivery, provided we have vendor specific objective evidence (“VSOE”) for the fair value of the
maintenance contract fee, and we generally recognize the fair value of maintenance contract revenue ratably
over the related contract period. If we do not have VSOE for the fair value of the maintenance contract fee, we
recognize software license and maintenance contract revenue ratably over the related contract period.
o When engineering services and software licenses are sold together, the total fee is generally recognized by
applying contract accounting. We have adopted the percentage-of-completion method of contract accounting,
and we use an output method (i.e., contract milestones) to determine our completion percentage.
o When we sell services, software and maintenance together, revenue is recognized as follows: i) maintenance
revenue is separated from the other two elements and is recognized ratably over the related contract period;
provided we have VSOE for the fair value of the maintenance element; and ii) the total fee from the software
license and engineering service elements is recognized by applying the contract accounting method described in
the previous paragraph. If we do not have VSOE for the fair value of the maintenance element, we recognize
revenue for the entire arrangement ratably over a period that begins at the start of the engineering services
project and ends when all elements of the arrangement have been delivered.
33
Our revenue recognition policies are described more fully in Note 2, Summary of Significant Accounting Policies, in
the Notes to our Consolidated Financial Statements.
Stock-Based Compensation. We grant stock options and stock to our employees and directors. We measure stock-
based compensation cost at the grant date based on the fair value of the award and recognize it as expense over the
applicable vesting period of the award using the straight-line basis.
We use the Black-Scholes valuation model to estimate the fair value of stock option awards. This valuation model
takes into account the exercise price of the award, as well as a variety of significant assumptions. The assumptions
used to estimate the fair value of stock options include the expected term, the expected volatility of our stock over
the expected term, the risk-free interest rate over the expected term, and our expected annual dividend yield.
For stock awards, we determine the fair value of the award by using the fair market value of our stock on the date of
grant; provided the number of shares in the grant is fixed on the grant date.
Income taxes. As part of the process of preparing our consolidated financial statements we are required to estimate
our actual current tax expense. We must also estimate temporary and permanent differences that result from
differing treatment of certain items for tax and accounting purposes. These differences result in deferred tax assets
and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our
deferred tax assets will be recovered from future taxable income and to the extent we believe recovery is not likely,
we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance
in a period for deferred tax assets, which have been recognized, we must include an expense with the tax provision in
the statement of operations.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets,
and any valuation allowance recorded against our net deferred tax assets. Our deferred tax assets primarily relate to
net operating losses and research and development tax credits that we are carrying forward into future tax periods.
As of December 31, 2011, we had a total of $40.5 million of deferred tax assets for which we had recorded a full
valuation allowance.
Based on all the available evidence, we continue to believe that it is more likely than not that our deferred tax assets
are not currently realizable. In reaching this determination, we evaluated our three-year cumulative results as well as
the impact that current economic conditions may have on our future results. As a result, we continue to provide a
valuation allowance on our deferred tax assets.
We will continue to assess the level of valuation allowance required in future periods. Should more positive than
negative evidence regarding the realizability of tax assets exist at a future point in time, the valuation allowance may
be reduced or eliminated altogether.
Inventories. Inventories, which include materials and our contract manufacturer’s labor and overhead, are stated at
the lower of cost (first-in, first-out basis) or net realizable value. On a quarterly basis, we use consistent
methodologies to evaluate all inventories for net realizable value. We record provisions for both excess and obsolete
inventory when such write-downs or write-offs are identified through the quarterly review process. The inventory
valuation is based upon assumptions about future demand, product mix and possible alternative uses.
Allowance for doubtful accounts. We make judgments as to our ability to collect outstanding receivables and
provide allowances for receivables when collection becomes doubtful. Provisions are made based upon a specific
review of all significant outstanding invoices. If the judgments we make to determine the allowance for doubtful
accounts do not reflect the future ability to collect outstanding receivables, additional provisions for doubtful
accounts may be required.
34
RECENT ACCOUNTING PRONOUNCEMENTS
We describe below recent pronouncements that have had or may have a significant effect on our financial statements.
We do not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to our
financial condition, results of operations, or disclosures.
In May 2011, the Financial Accounting Standards Board issued guidance that changed the requirement for presenting
“Comprehensive Income” in the consolidated financial statements. The update requires an entity to present the
components of other comprehensive income either in a single continuous statement of comprehensive income or in
two separate but consecutive statements. The currently available option to disclose the components of other
comprehensive income within the statement of stockholders’ equity will no longer be available. The update is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be
applied retrospectively. The adoption of the standard will have no impact on our financial position or results of
operations, but will result in a change in the presentation of our basic consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk relates primarily to our investment portfolio, and the effect that changes in interest rates
would have on that portfolio. Our investment portfolio at December 31, 2011 consisted of two elements:
1. Cash and cash equivalents. As of December 31, 2011, our cash and cash equivalents of $46.6 million were
primarily invested in money market funds. The money market funds were invested in high quality, short term
financial instruments. Due to the nature, short duration, and professional management of these funds, we do not
expect that a general increase in interest rates would result in any material loss.
2.
Investments. As of December 31, 2011, our investments of $0.7 million were invested in high yield bonds with
two separate corporate debt issuers. Both of these bonds mature in 2015. While we are exposed to default risk,
the high current yield of these bonds largely mitigates interest rate risk. Therefore, due to the high current yield
and approximate four-year life of these instruments, we do not believe that a general increase in interest rates
would result in any material loss.
We do not use derivative financial instruments for speculative or trading purposes.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To Board of Directors and Stockholders of Aware, Inc.:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15 (a) (1) present
fairly, in all material respects, the financial position of Aware, Inc. and its subsidiary at December 31, 2011 and
December 31, 2010 and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15 (a)
(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for these financial statements and financial statement schedule, for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting
appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial
statement schedule, and on the Company's internal control over financial reporting based on our integrated audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 21, 2012
36
AWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents .........................................................................
Accounts receivable (less allowance for doubtful
accounts of $30 in 2011 and 2010) ........................................................
Inventories ................................................................................................
Prepaid expenses and other current assets ................................................
Total current assets .............................................................................
Property and equipment, net ..........................................................................
Investments ...................................................................................................
Other assets, net .............................................................................................
Total assets .........................................................................................
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable ......................................................................................
Accrued expenses .....................................................................................
Accrued compensation ..............................................................................
Accrued professional fees .........................................................................
Deferred revenue.......................................................................................
Total current liabilities ......................................................................
Long-term deferred revenue ...........................................................................
Commitments and contingent liabilities (Note 8)
Stockholders’ equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized,
none outstanding .................................................................................
Common stock, $.01 par value; shares authorized,
70,000,000 in 2011 and 2010; issued
and outstanding 20,622,889 in 2011 and 20,041,863 in 2010 ..........
Additional paid-in capital ........................................................................
Accumulated other comprehensive loss ...................................................
Accumulated deficit .................................................................................
Total stockholders’ equity .................................................................
Total liabilities and stockholders’ equity ..........................................
December 31,
2011
2010
$46,577
$39,949
3,546
547
213
50,883
6,232
727
9
$57,851
$399
121
868
109
1,317
2,814
462
4,968
1,863
235
47,015
6,360
-
25
$53,400
$565
118
1,143
427
944
3,197
320
-
-
206
79,512
(20)
(25,123)
54,575
$57,851
200
77,373
-
(27,690)
49,883
$53,400
The accompanying notes are an integral part of the consolidated financial statements.
37
AWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended December 31,
2010
2009
2011
Revenue:
Product sales ...............................................................
Services .......................................................................
Royalties ......................................................................
Total revenue ...........................................................
Costs and expenses:
Cost of product sales ...................................................
Cost of services ..........................................................
Research and development ..........................................
Selling and marketing ..................................................
General and administrative ..........................................
Total costs and expenses ........................................
Income (loss) from operations .........................................
Gain on sale of assets ......................................................
Other income ..................................................................
Interest income ................................................................
Income before provision for income taxes ......................
Provision for income taxes ..............................................
$18,129
4,311
2,146
24,586
$18,914
1,992
2,654
23,560
$15,376
4,611
2,055
22,042
3,637
1,777
7,240
4,441
5,005
22,100
2,486
-
-
83
2,569
2
4,362
714
8,096
4,283
6,438
23,893
(333)
-
425
90
182
2
2,887
2,896
11,920
4,707
5,114
27,524
(5,482)
6,230
-
238
986
4
Net income .....................................................................
$2,567
$180
$982
Net income per share – basic ...........................................
Net income per share – diluted ........................................
$0.12
$0.12
$0.01
$0.01
$0.05
$0.05
Weighted average shares – basic .....................................
Weighted average shares – diluted ..................................
20,534
20,735
19,971
20,182
20,869
20,874
The accompanying notes are an integral part of the consolidated financial statements.
38
AWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income ...........................................................................
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ...........................................
Stock-based compensation .................................................
Gain on sale of assets .........................................................
Amortization of discount on investments ..........................
Increase (decrease) from changes in assets and liabilities:
Accounts receivable ........................................................
Inventories ......................................................................
Prepaid expenses and other current assets ......................
Accounts payable ............................................................
Accrued expenses ...........................................................
Deferred revenue ............................................................
Net cash provided by (used in) operating activities ......
Cash flows from investing activities:
Purchases of property and equipment ..................................
Purchases of investments .....................................................
Proceeds from sale of assets, net ........................................
Purchase of other assets .......................................................
Net cash provided by (used in) investing activities ......
Cash flows from financing activities:
Proceeds from issuance of common stock ..........................
Shares surrendered by employees to pay taxes related to
unrestricted stock .............................................................
Repurchase of common stock .............................................
Net cash provided by (used in) financing activities ......
Years ended December 31,
2011
2010
2009
$2,567
$180
$982
475
1,277
-
(9)
1,422
1,316
22
(166)
(590)
515
6,829
(331)
(737)
-
-
(1,068)
1,826
(224)
(735)
867
536
1,495
-
-
(1,403)
(750)
128
239
177
108
710
(118)
-
(100)
(60)
(278)
9
(161)
-
(152)
823
1,737
(6,230)
-
(1,353)
542
131
(139)
(377)
487
(3,397)
(168)
-
6,661
-
6,493
7
-
(8,950)
(8,943)
(5,847)
45,516
Increase (decrease) in cash and cash equivalents .....................
Cash and cash equivalents, beginning of year..........................
6,628
39,949
280
39,669
Cash and cash equivalents, end of year ...................................
$46,577
$39,949
$39,669
The accompanying notes are an integral part of the consolidated financial statements.
39
AWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive Accumulated
Loss
Deficit
Total
Stockholders’
Equity
Balance at December 31, 2008 ..........................
23,281
$233
$83,143
$-
($28,853)
$54,523
Exercise of common stock options .................
Repurchase of common stock ........................
Issuance of unrestricted stock .........................
Issuance of common stock under
employee stock purchase plan ....................
Stock-based compensation expense ................
Net income ......................................................
-
(3,500)
25
3
-
-
(35)
-
-
-
-
(8,915)
60
7
1,737
-
(8,950)
60
7
1,737
982
982
Balance at December 31, 2009 ..........................
19,809
198
76,032
-
(27,870)
48,360
Exercise of common stock options ..................
Issuance of unrestricted stock under a stock
option exchange program............................
Shares surrendered by employees to
pay taxes related to unrestricted stock .........
Issuance of unrestricted stock .........................
Issuance of common stock under
employee stock purchase plan ....................
Stock-based compensation expense ...............
Net income .....................................................
1
178
(60)
111
3
-
-
2
(1)
1
-
-
1
-
(162)
-
7
1,495
1
2
(163)
1
7
1,495
180
180
Balance at December 31, 2010 ..........................
20,042
200
77,373
-
(27,690)
49,883
Exercise of common stock options .................
Issuance of unrestricted stock .........................
Shares surrendered by employees to
pay taxes related to unrestricted stock .........
Repurchase of common stock ........................
Issuance of common stock under
employee stock purchase plan ....................
Stock-based compensation expense ...............
Accumulated other comprehensive loss .........
Net income .....................................................
596
300
(70)
(250)
5
-
6
3
(1)
(2)
-
-
1,804
(3)
(223)
(733)
17
1,277
1,810
-
(224)
(735)
17
1,277
(20)
2,567
(20)
2,567
Balance at December 31, 2011 ..........................
20,623
$206
$79,512
($20)
($25,123)
$54,575
The accompanying notes are an integral part of the consolidated financial statements.
40
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
We are a leading supplier of products for the biometrics and Digital Subscriber Line (“DSL”) service
assurance industries. We sell software products for biometrics and imaging applications and hardware and
software products for DSL service assurance applications. We sell our software products for biometrics,
medical and digital imaging applications and professional services for biometrics through a systems integrator,
OEM, and direct sales channel. We sell our DSL service assurance hardware products primarily through an
OEM sales channel. We sell our DSL service assurance software products directly to DSL service providers
and through an OEM sales channel. We also sell and/or license patents related to communications, signal
processing, and compression technologies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements include the accounts of Aware, Inc. and its
subsidiary. All significant intercompany transactions have been eliminated.
Fair Value Measurements - The 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. The fair value guidance establishes a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined
as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted
prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable
inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Our cash and cash equivalents, which primarily include money market funds, are classified within Level 1 of
the fair value hierarchy because they are valued using quoted market prices.
Our investments, which consist of high yield corporate debt securities, are also classified within Level 1 of the
fair value hierarchy because they are valued using quoted market prices. We categorize our investments as
available-for-sale securities, and carry them at fair value in our financial statements. We had $0.7 million of
available-for-sale investments as of December 31, 2011, and no available-for-sale investments as of December
31, 2010.
Cash and Cash Equivalents – Cash and cash equivalents, which consist primarily of money market funds and
an immaterial amount of demand deposits, are stated at cost, which approximates fair value.
Investments - At December 31, 2011 and 2010, we categorized all investment securities as available-for-sale,
since we may liquidate these investments currently. In calculating realized gains and losses, cost is determined
using specific identification. Unrealized gains and losses on available-for-sale securities are excluded from
earnings and reported in a separate component of stockholders’ equity called Accumulated Comprehensive
Income.
There were no realized gains and losses on investments in the years ended December 31, 2011, 2010, and
2009. There were $20,000 of unrealized losses on investments in the year ended December 31, 2011, and there
were no unrealized gains on investments in the years ended December 31, 2010 and 2009.
Investments, stated at fair value, consist of the following at December 31, 2011 and 2010 (in thousands):
Corporate debt securities ................
Total .............................................
2011
$727
$727
2010
$-
$-
The amortized cost of our corporate debt securities was $747,000 at December 31, 2011. All corporate debt
securities comprising investments mature in 2015.
41
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allowance for Doubtful Accounts – Accounts are charged to the allowance for doubtful accounts as they are
deemed uncollectible based on a periodic review of the accounts.
Inventories – Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first-
in, first-out (“FIFO”) method. We evaluate all inventories for net realizable value on a quarterly basis, and
record provisions for excess and obsolete inventory when required.
Property and Equipment – Property and equipment are stated at cost. Depreciation and amortization of
property and equipment is provided using the straight-line method over the estimated useful lives of the assets.
Upon retirement or sale, the costs of the assets disposed of and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is included in the determination of income or loss.
Expenditures for repairs and maintenance are charged to expense as incurred.
The estimated useful lives of assets used by us are:
Building and improvements ................................................. 30 years
Building improvements ........................................................ 5 to 20 years
Furniture and fixtures ........................................................... 5 years
Computer, office & manufacturing equipment ..................... 3 years
Purchased software .............................................................. 3 years
Impairment of Long-Lived Assets – We review long-lived assets for impairment whenever events or changes
in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that
the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the
undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset is written
down to its estimated fair value. The cash flow estimates used to identify the potential impairment reflect our
best estimates using appropriate assumptions and projections at that time. We believe that no significant
impairment of our long-lived assets has occurred as of December 31, 2011 and 2010.
Revenue Recognition – We recognize revenue when there is persuasive evidence of an arrangement, the sales
price is fixed or determinable, collection of the related receivable is reasonably assured, and delivery has
occurred or services have been rendered.
Persuasive evidence of an arrangement: We use contracts signed by both the customer and us or written
purchase orders issued by the customer as evidence of an arrangement.
Product delivery: We deem delivery to have occurred: (i) upon shipment when products are shipped FOB
shipping point, or (ii) upon delivery at a customer’s location when products are shipped FOB destination. If
customer acceptance provisions apply, revenue is not recognized until delivery has occurred and we have
received such acceptance. If we are required to provide installation services, revenue is not recognized until
installation is complete.
Fixed or determinable fee: We consider fees to be fixed or determinable if the fee is not subject to refund or
adjustment and the payment terms are within normal established practices. If the fee is not fixed or
determinable, we recognize the revenue as amounts become due and payable.
Collection is deemed probable: We conduct a credit review for all significant transactions at the time of the
arrangement to determine the credit-worthiness of the customer. Collection is deemed probable if we expect
that the customer will pay amounts under the arrangement as payments become due.
We categorize revenue as product sales, services, or royalties depending on the nature of the revenue. In
addition to the general revenue recognition policies described above, specific revenue recognition policies
apply to each category of revenue.
42
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Product sales
Product sales consist of revenue from the sale of hardware and software products. Specific revenue recognition
policies for product sales are:
Hardware product sales. Hardware product sales consist of revenue from the sale of DSL service assurance
hardware products. Hardware products are typically sold independently of other revenue elements, such as
software, services and maintenance. Accordingly, the terms of hardware sales generally do not contain
provisions that obligate us to provide additional products or services after shipment. Additionally, we do not
grant return rights other than normal warranty rights of return. We recognize hardware revenue upon delivery.
Software product sales. Software product sales consist of revenue from the sale of biometrics and imaging
software products as well as DSL service assurance software. Software product sales from these product lines
include: i) software licenses and ii) maintenance contracts that entitle customers to technical support and
product updates during the contract period. We do not grant return rights other than normal warranty rights of
return.
When software licenses or maintenance contracts are sold separately, we recognize software license revenue
upon delivery and maintenance contract revenue ratably over the related contract period. When software
licenses and maintenance contracts are sold together, we generally recognize software license revenue upon
delivery, provided we have vendor specific objective evidence (“VSOE”) for the fair value of the maintenance
contract fee, and we generally recognize the fair value of maintenance contract revenue ratably over the related
contract period. If we do not have VSOE for the fair value of the maintenance contract fee, we recognize
software license and maintenance contract revenue ratably over the related contract period.
We recognize maintenance contract revenue upon delivery of software licenses when: i) customers purchase
maintenance with their initial purchase of software licenses; ii) the maintenance contract period is for a period
of one year or less, iii) the estimated cost of providing maintenance services during the contract period is
insignificant, and iv) unspecified upgrades offered during PCS arrangements historically have been and are
expected to continue to be minimal and infrequent.
Services
Service revenue primarily consists of fees from biometrics and DSL service assurance customers for
engineering services. Engineering services are either sold separately or as part of a multiple element
transaction. Our revenue recognition policy service revenue under each situation is:
When engineering services are sold separately, we recognize service revenue from these agreements as
engineering services are performed or as contract milestones are achieved.
When engineering services are sold with other revenue elements, such as software licenses and/or maintenance
contracts, our revenue recognition policy is as follows.
•
•
Services and software. When engineering services and software licenses are sold together, the total fee
is generally recognized by applying contract accounting. We have adopted the percentage-of-
completion method of contract accounting, and we use an output method (i.e., contract milestones) to
determine our completion percentage. The software license portion of the arrangement is classified as
product sales and the engineering services portion is classified as services revenue.
Services, software and maintenance. When we sell services, software and maintenance together,
revenue is recognized as follows: i) maintenance revenue is separated from the other two elements and
is recognized ratably over the related contract period; provided we have VSOE for the fair value of the
maintenance element; and ii) the total fee from the software license and engineering service elements is
recognized by applying the contract accounting method described in the previous paragraph. If we do
not have VSOE for the fair value of the maintenance element, we recognize revenue for the entire
arrangement ratably over a period that begins at the start of the engineering services project and ends
when all elements of the arrangement have been delivered.
43
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Royalties
Royalty revenue consists of royalties we receive under DSL silicon IP contracts with customers that have
incorporated our intellectual property into their products. Since we cannot reasonably estimate royalty revenue,
such revenue is generally recognized in the quarter in which a final report is received from a customer. Royalty
reports are typically received in the quarter immediately following the quarter in which sales of royalty-bearing
products occur. The terms of our agreements generally require customers to give notification to us and to pay
royalties within 45 to 60 days of the end of each quarter.
Income Taxes – We compute deferred income taxes based on the differences between the financial statement
and tax basis of assets and liabilities using enacted rates in effect in the years in which the differences are
expected to reverse. We establish a valuation allowance to offset temporary deductible differences, net
operating loss carryforwards and tax credits when it is more likely than not that the deferred tax assets will not
be realized.
Capitalization of Software Costs – We capitalize certain internally developed software development costs
after technological feasibility of the product has been established. No software costs were capitalized for the
years ended December 31, 2011, 2010 and 2009, because such costs incurred subsequent to the establishment
of technological feasibility, but prior to commercial availability, were immaterial.
Research and Development Costs – Costs incurred in the research and development of our products are
expensed as incurred.
Concentration of Credit Risk – At December 31, 2011 and 2010, we had cash and cash equivalents, in excess
of federally insured deposit limits of approximately $46.3 and $39.7 million, respectively.
Concentration of credit risk with respect to net accounts receivable consists of $0.4 million, $0.4 million, $0.4
million, $0.2 million, $0.2 million and $0.2 million with six customers, respectively, at December 31, 2011,
and $1.4 million, $0.4 million, $0.4 million, and $0.3 million with four customers, respectively, at December
31, 2010.
Concentration of credit risk with respect to our investment portfolio consists of $475,000 and $252,000 with
two issuers of corporate debt securities, respectively, at December 31, 2011. We had no investments at
December 31, 2010.
Stock-Based Compensation – We grant stock options and stock to our employees and directors. We measure
stock-based compensation cost at the grant date based on the fair value of the award and recognize it as
expense over the applicable vesting period of the award using the straight-line basis.
We use the Black-Scholes valuation model to estimate the fair value of stock option awards. This valuation
model takes into account the exercise price of the award, as well as a variety of significant assumptions. The
assumptions used to estimate the fair value of stock options include the expected term, the expected volatility
of our stock over the expected term, the risk-free interest rate over the expected term, and our expected annual
dividend yield.
For stock awards, we determine the fair value of the award by using the fair market value of our stock on the
date of grant; provided the number of shares in the grant is fixed on the grant date.
Computation of Earnings per Share – Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding. Diluted earnings per
share is computed by dividing income available to common shareholders 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 antidilutive
are excluded from the calculation.
44
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates – The preparation of our financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting period. Significant estimates include revenue
recognition, reserves for doubtful accounts, reserves for excess and obsolete inventory, useful lives of fixed
assets, valuation allowance for deferred income tax assets, and accrued liabilities. Actual results could differ
from those estimates.
Fair Value of Financial Instruments – The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate fair value because of their short-term nature.
The carrying amount of investments is based on the fair value of the individual securities in our investment
portfolio.
Comprehensive Income - Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from non-owner sources, including
foreign currency translation adjustments and unrealized gains and losses on marketable securities. For the
years ended December 31, 2011, 2010, and 2009, comprehensive income, net of tax, was as follows:
Year ended December 31,
2010
2011
Net income ................................................................
$2,567
$180
Other comprehensive income (loss):
Unrealized losses on available for sale securities ..
Comprehensive income ............................................
(20)
$2,547
-
$180
2009
$982
-
$982
Advertising Costs – Advertising costs are expensed as incurred and were not material for 2011, 2010, and
2009.
Recent Accounting Pronouncements – We describe below recent pronouncements that have had or may have
a significant effect on our financial statements. We do not discuss recent pronouncements that are not
anticipated to have an impact on or are unrelated to our financial condition, results of operations, or
disclosures.
In May 2011, the Financial Accounting Standards Board issued guidance that changed the requirement for
presenting “Comprehensive Income” in the consolidated financial statements. The update requires an entity to
present the components of other comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. The currently available option to disclose
the components of other comprehensive income within the statement of stockholders’ equity will no longer be
available. The update is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2011 and should be applied retrospectively. The adoption of the standard will have no impact on
our financial position or results of operations, but will result in a change in the presentation of our basic
consolidated financial statements.
Segments – We organize ourselves as two segments reporting to the chief operating decision-makers. We have
sales outside of the United States, which are described in Note 9. All long-lived assets are maintained in the
United States.
45
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ASSETS SOLD
On November 13, 2009, we completed a transaction in which we sold substantially all of the assets associated
with our licensing product line to Lantiq Broadband Holdco, Inc. and Lantiq Deutschland GmbH (“Lantiq”) for
$6.75 million. The sale included: i) our DSL and home networking technology assets; ii) certain patents and
patent applications related to those technology assets; iii) a group of 41 engineers; and iv) lab and computer
equipment used by the transferred engineers.
In 2009, we recorded a gain on the sale of assets of $6.2 million. The gain reflects $6.75 million of proceeds less
the following items: i) the net book value of assets transferred to Lantiq; ii) the write-off of certain prepaid
assets that had no economic value after the sale; and iii) transaction costs. Included in the assets transferred to
Lantiq were property and equipment, principally lab and computer equipment, which had a cost of $1.9 million
and a net book value of $124,000.
4. INVENTORIES
Inventories consisted of the following at December 31 (in thousands):
Raw materials ..............................................
Finished goods .............................................
Total ........................................................
2011
$339
208
$547
2010
$966
897
$1,863
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31 (in thousands):
2011
2010
Land .....................................................................................
Building and improvements .................................................
Computer equipment ............................................................
Purchased software ..............................................................
Furniture and fixtures ...........................................................
Office equipment ..................................................................
Manufacturing equipment ....................................................
Total ..................................................................................
Less accumulated depreciation and amortization .................
Property and equipment, net .............................................
$1,080
9,050
1,282
197
810
182
78
12,679
(6,447)
$6,232
$1,080
8,869
1,190
193
811
207
76
12,426
(6,066)
$6,360
Depreciation expense amounted to $0.5 million, $0.5 million, and $0.8 million in each of the years ended
December 31, 2011, 2010, and 2009, respectively. In 2011 and 2010, we identified $78,000 and
$275,000, of fully depreciated assets no longer in use, and retired the assets and related accumulated
depreciation.
46
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES
Deferred tax assets are attributable to the following at December 31 (in thousands):
Federal net operating loss carryforwards ........................................
Research and development and other tax credit carryforwards ......
State net operating loss carryforwards ............................................
Capitalized research and development costs ...................................
Other ..............................................................................................
Total ............................................................................................
Less valuation allowance ................................................................
Deferred tax assets, net ................................................................
2011
$17,041
18,807
465
1,651
2,512
40,476
(40,476)
$ -
2010
$16,977
18,719
535
3,018
2,510
41,759
(41,759)
$ -
A reconciliation of the U.S. federal statutory rate to the effective tax rate is as follows:
Federal statutory rate .............................................................
State rate, net of federal benefit .............................................
Tax credits .............................................................................
Change in valuation allowance ..............................................
State tax rate change .............................................................
Non-qualified option cancellations and forfeitures ...............
Nondeductible compensation expense ...................................
Prior year adjustment ............................................................
Expiring NOLs and tax credits .............................................
Other ......................................................................................
Effective tax rate .................................................................
Year ended December 31,
2010
34%
8
(128)
(558)
157
394
0
5
84
5
1%
2011
34%
6
(9)
(50)
0
11
(1)
(2)
10
1
0%
2009
34%
9
(88)
30
0
0
6
0
8
2
1%
At December 31, 2011, we had federal net operating loss ("NOL") and research and development credit
carryforwards of approximately $51.4 million and $13.6 million respectively, expiring in 2012 through various
dates up through 2031. In 2011, no NOLs and approximately $114,000 of research and development credits
expired unused.
For state purposes, we had state NOLs and research and development credit carryforwards of approximately
$9.3 million and $7.4 million respectively, expiring in 2012 through various dates up to 2026. In 2011,
approximately $2.2 million of state NOLs expired unused and $79,000 research and development credits
expired unused.
Ownership changes, as defined in Section 382, could limit the amount of net operating loss carryforwards and
research and development credits that can be utilized annually to offset future taxable income.
We recorded a full valuation allowance against our deferred tax assets because based on all the available
evidence, we continue to believe that it is more likely than not that our deferred tax assets are not currently
realizable. In reaching this determination, we evaluated our three-year cumulative results as well as the impact
that current economic conditions may have on our future results.
We will continue to assess the level of valuation allowance required in future periods. Should more positive
than negative evidence regarding the realizability of tax assets exist at a future point in time, the valuation
allowance may be reduced or eliminated altogether.
We did not record a provision for federal income taxes in 2011, 2010, and 2009 due to tax net operating losses
and the uncertainty of the timing of profitability in future periods. However, in 2011, 2010 and 2009 we paid
immaterial amounts of state excise taxes.
47
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross deferred tax assets include cumulative deductions for stock options in excess of book expense of $62.6
million. None of the benefit related to these options has been reflected in equity because we determined that it
was more likely than not that such deferred tax assets may not be realized. Therefore, the portion of the
deferred tax asset valuation allowance related to the tax benefit of these options must be recorded to equity,
when the tax benefit is realized. The estimated federal amount of this benefit is $22.9 million, and the
estimated state amount is $0.6 million for a total amount of $23.5 million.
Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of
December 31, 2011, we had no accrued interest or penalties related to uncertain tax positions.
7. EQUITY AND STOCK COMPENSATION PLANS
At December 31, 2011, we have three stock-based compensation plans, which are described below:
Fixed Stock Option Plans – We have two fixed option plans. Under our 1996 Stock Option Plan (“1996
Plan”), we were authorized to grant incentive stock options and nonqualified stock options to our employees
and directors for up to 6,100,000 shares of common stock. There were no shares available for grant under the
1996 Plan as of December 31, 2011. Under our 2001 Nonqualified Stock Plan (“2001 Plan”), we are
authorized to grant nonqualified stock options, stock appreciation rights and stock awards to our employees
and directors for up to 8,000,000 shares of common stock. As of December 31, 2011, there were 4,671,784
shares available for grant under the 2001 Plan.
Under both plans, options are granted at exercise prices as determined by the Board of Directors and have
terms ranging from four to a maximum of ten years. Our options generally vest over three to five years,
although we have granted options that are 50% or fully vested on the date of grant.
The following table presents stock-based employee compensation expenses included in our consolidated
statements of operations (in thousands):
Cost of product sales
Cost of services
Research and development
Selling and marketing
General and administrative
Stock-based compensation expense
2011
$7
33
234
144
859
$1,277
2010
$10
19
337
98
1,031
$1,495
2009
$10
114
521
293
799
$1,737
Stock-based compensation expenses in the preceding table include expenses associated with grants of: i) stock
options; ii) stock appreciation rights (SARs); and iii) unrestricted shares of our common stock. The method
used to determine stock-based compensation expense for each type of equity grant is described in the following
paragraphs.
Stock Option and SAR Grants. For the years ended December 31, 2011, 2010, and 2009, we granted stock
options for 0, 0, and 3,400 shares, respectively. For the year ended December 31, 2009, we granted SARs to
directors and officers representing 110,000 shares. We estimate the fair value of stock options and SARs using
the Black-Scholes valuation model. We believe this valuation model is appropriate for SARs, as well as stock
options, as SARs share most of the characteristics of stock options.
The Black-Scholes valuation model takes into account the exercise price of the award, as well as a variety of
significant assumptions. The assumptions used to estimate the fair value of stock options and SARs include the
expected term, the expected volatility of our stock over the expected term, the risk-free interest rate over the
expected term, and our expected annual dividend yield. We believe that the valuation technique and the
approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of stock
options and SARs granted in the year ended December 31, 2009. Estimates of fair value are not intended to
predict actual future events or the value ultimately realized by persons who receive equity awards.
48
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Specific assumptions used to determine the fair value of options granted during the years ended December 31,
2011, 2010 and 2009, using the Black-Scholes valuation model were:
Year Ended
December 31, 2011
Year Ended
December 31, 2010
Year Ended
December 31, 2009
Expected term (1)
Expected volatility factor (2)
Risk-free interest rate (3)
Expected annual dividend yield
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
6.58-6.73 years
60-62%
1.76-2.47%
—
(1) The expected term for each grant for the year ended December 31, 2009 was determined based on the
historical average term of grants issued over the previous seven years.
(2) The expected volatility for each grant is estimated based on an average of historical volatility over a
period of time which we believe to be representative of our future volatility.
(3) The risk-free interest rate for each grant is based on the U.S. Treasury yield curve in effect at the time
of grant for a period equal to the expected term of the stock option.
We do not estimate our forfeiture rates as the actual forfeiture rate is known at the end of each reporting period
due to the timing of our stock option vesting.
In the years ended December 31, 2010 and 2009, there were two stock option events that affected options
outstanding and stock-based compensation expense:
Year ended December 31, 2010. 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 withholding taxes related to their stock grants. 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. The option exchange program had an insignificant impact on stock-based
compensation expense for the year ended December 31, 2010.
Year ended December 31, 2009. In September 2009, the compensation committee of the board of directors
approved an amendment to certain director and officer stock options that extended the period of time option
holders have to exercise upon termination from the Company. This stock option modification resulted in a
total non-cash stock-based compensation charge of approximately $282,000 of which $11,000, $20,000 and
$251,000, respectively was charged to expense in the years ended December 31, 2011, 2010 and 2009.
Unrestricted Stock Grants. Our 2001 Plan permits us to grant shares of unrestricted stock to our directors,
officers and employees. For the years ended December 31, 2011, 2010, and 2009, we awarded 105,000,
575,443, and 25,000 shares, respectively to eligible plan participants. Stock-based compensation expense for
stock grants is determined based on the fair market value of our stock on the date of grant; provided the number
of shares in the grant is fixed on the grant date. Unrestricted stock grant activity for the years ended December
31, 2011, 2010 and 2009 is described below:
Year ended December 31, 2011. Our former President and CEO resigned in April 2011. As part of his
separation arrangement he was granted 105,000 shares of common stock, which resulted in a stock-
based compensation charge of $362,000. His grant contained a provision that allowed him to surrender
a portion of his stock in return for the Company paying his related withholding taxes. He exercised that
49
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
provision, and we issued 71,662 shares of common stock to him and paid $115,000 of withholding
taxes on his behalf.
Year ended December 31, 2010. In July 2010, our compensation committee granted 575,443 shares of
unrestricted stock, which included 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 2010, which resulted in a stock-based compensation charge of $281,000
in the year ended December 31, 2010.
All other shares granted to officers and employees representing a total of 464,280 shares were not
issued in 2010. Such grants are being issued to grantees 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 is being
amortized over the related two-year service period. For the years ended December 31, 2011 and 2010,
$443,000 and $293,000 of stock-based compensation expense was charged to expense, respectively.
At December 31, 2011, unrecognized compensation expense was approximately $195,000, which is
expected to be recognized over a weighted average period of 0.38 years.
In connection with this stock grant, we issued 115,682 shares on January 4, 2011 to officers and
employees who were employed as of December 31, 2010 and 79,304 shares on July 1, 2011 to officers
and employees who were employed as of June 30, 2011. Grantees were allowed to surrender a portion
of their stock in return for the Company paying their related withholding taxes. As a result of this
provision, grantees surrendered 13,721 and 23,277 shares of common stock and the Company paid
approximately $39,000 and $70,000 of withholding taxes on their behalf on January 4, 2011 and July 1,
2011, respectively. After the share surrender, 101,961 and 56,027 net shares of common stock were
issued on January 4, 2011 and July 1, 2011, respectively.
Year ended December 31, 2009. In 2009, we issued 25,000 shares of unrestricted stock to an employee
representing $60,000 of stock-based compensation expense. This expense was charged against gain on
sale of assets in connection with the Lantiq transaction.
A summary of stock option and SAR transactions for our two fixed stock option plans for the years ended
December 31, 2011, 2010, and 2009 are presented below:
2011
2010
2009
Shares
Outstanding at beginning of year ... 5,082,891
Granted...........................................
-
Exercised ........................................
(632,685)
Forfeited or cancelled .................... (1,614,254)
Outstanding at end of year ............. 2,835,952
Weighted
Average
Exercise
Price
$4.30
-
3.02
4.59
$4.42
Shares
6,019,972
-
(625)
(936,456)
5,082,891
Weighted
Average
Exercise
Price
$4.42
-
1.68
5.09
$4.30
Weighted
Average
Exercise
Price
$4.68
2.51
1.68
5.48
$4.42
Shares
7,538,993
113,400
(187)
(1,632,234)
6,019,972
Exercisable at year end .................. 2,772,109
$4.44
4,750,409
$4.34
5,269,969
$4.51
All options and SARs granted during the year ended December 31, 2009 had exercise prices equal to the fair
market value of our common stock on the date of grant, and the weighted average grant date fair values of
options granted were $1.51.
At December 31, 2011, the weighted average remaining contractual term for total options outstanding and total
options exercisable was approximately 4 years for each.
50
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2011, the aggregate intrinsic value of options outstanding and options exercisable was zero as
each group of options was out-of-the money by approximately $4.0 million. The intrinsic value of a stock
option is the amount by which the market value of the underlying stock exceeds the exercise price of the
option. The aggregate intrinsic value of options exercised during the year ended December 31, 2011 was
approximately $163,000.
The following table summarizes the stock options and SARs outstanding at December 31, 2011:
Exercise Price
Range
Number
Options Outstanding
Options Exercisable
Weighted
Average
Exercise
Price
Weighted Average
Remaining
Contractual
Term (in years)
Weighted
Average
Exercise
Price
Number
$0 to $2
$2 to $3
$3 to $4
$4 to $5
$5 to $6
$6 to $7
5,750
311,288
1,220,164
235,350
196,900
866,500
2,835,952
$1.83
2.87
3.50
4.63
5.09
6.08
$4.42
3.97
3.51
4.35
5.94
2.57
3.02
3.86
5,171
310,981
1,157,207
235,350
196,900
866,500
2,772,109
$1.83
2.87
3.49
4.63
5.09
6.08
$4.44
At December 31, 2011, unrecognized compensation expense related to non-vested stock options was
approximately $127,000, which is expected to be recognized over a weighted average period of 0.6 years.
We issue common stock from previously authorized but unissued shares to satisfy option exercises and
purchases under our Employee Stock Purchase Plan.
Employee Stock Purchase Plan - In June 1996, we adopted an Employee Stock Purchase Plan (the “ESPP
Plan”) under which eligible employees could purchase common stock at a price equal to 85% of the lower of
the fair market value of the common stock at the beginning or end of each six-month offering period. On
November 29, 2005 we amended the ESPP Plan to provide that eligible employees may purchase common
stock at a price equal to 95% of the fair market value of the common stock as of the end of each six-month
offering period. There is no stock-based compensation expense related to our Employee Stock Purchase Plan
because it is not considered a compensatory plan. The plan does not have a look-back feature, and has a
minimal discount of 5% of the fair market value of the common stock as of the end of each six-month offering
period. Participation in the ESPP Plan is limited to 6% of an employee’s compensation, may be terminated at
any time by the employee and automatically ends on termination of employment. A total of 350,000 shares of
common stock have been reserved for issuance. As of December 31, 2011 there were 120,816 shares available
for future issuance under the ESPP Plan. We issued 5,563, 3,105, and 3,176 common shares under the ESPP
Plan in 2011, 2010, and 2009, respectively.
Stockholder Rights Plan – In October 2001, our board of directors adopted a stockholder rights plan and
declared a dividend distribution of one share purchase right (a "Right") for each outstanding share of our
common stock to stockholders of record at the close of business on October 15, 2001. Each share of common
stock issued after that date also carried with it one Right, subject to certain exceptions. Each Right, when it
became exercisable, entitled the record holder to purchase from us one ten-thousandth of a share of series A
preferred stock at an exercise price of $40.00 subject to adjustment. This plan expired on October 2, 2011.
Share Repurchases - In March 2009, we announced a modified Dutch auction self-tender offer to purchase up
to 3,500,000 shares, or approximately 15%, of our outstanding common stock (including the associated
preferred share purchase rights), at a price in the range of $2.20 to $2.60 per share, for a maximum aggregate
purchase price of approximately $9.1 million. The terms of the tender offer also provided the right for us to
purchase up to an additional 2% of our shares if the offer was oversubscribed. When the tender offer closed in
51
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 2009, we repurchased 3,500,252 shares at $2.50 per share for a total cost of $9.0 million, including
expenses.
During July 2011, we purchased 250,000 shares of our common stock at a price of $2.90 per share from a
shareholder in a privately negotiated transaction. In addition, we paid a broker commission of 4 cents per share
in connection with the transaction.
8. COMMITMENTS AND CONTINGENT LIABILITIES
Lease Commitments – We own our principal office and research facility in Bedford, Massachusetts, which we
have occupied since November 1997. We conduct a portion of our activities in a leased facility in California
under a non-cancelable operating lease that expires in 2013. The following is a schedule of future minimum
rental payments (in thousands):
Year ended December 31,
2012 .........................................................
2013 .........................................................
Total minimum lease payments ............
$18
13
$31
Rental expense was approximately $17,000, $16,000, and $13,000 in 2011, 2010 and 2009, respectively.
Litigation - There are no material pending legal proceedings to which we are a party or to which any of our
properties are subject which, either individually or in the aggregate, are expected to have a material adverse
effect on our business, financial position or results of operations.
Guarantees and Indemnification Obligations – We enter into agreements in the ordinary course of business
that require us: i) to perform under the terms of the contracts, ii) to protect the confidentiality of our customers’
intellectual property, and iii) to indemnify customers, including indemnification against third party claims
alleging infringement of intellectual property rights. We also have agreements with each of our directors and
executive officers to indemnify such directors or executive officers, to the extent legally permissible, against
all liabilities reasonably incurred in connection with any action in which such individual may be involved by
reason of such individual being or having been a director or officer of the Company.
Given the nature of the above obligations and agreements, we are unable to make a reasonable estimate of the
maximum potential amount that we could be required to pay. Historically, we have not made any significant
payments on the above guarantees and indemnifications and no amount has been accrued in the accompanying
consolidated financial statements with respect to these guarantees and indemnifications.
52
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. BUSINESS SEGMENTS AND MAJOR CUSTOMERS
Commencing in the fourth quarter of fiscal 2011, the company began reporting the results of operations for the
following reportable segments (in thousands):
Biometrics
&
Imaging
DSL
Service
Total
Assurance
Corporate
Company
Year Ended December 31, 2011
Revenue ............................................................
Income (loss) from operations ..........................
Interest income .................................................
Income before provision for income taxes ........
Provisions for income taxes ..............................
Net income ........................................................
Year Ended December 31, 2010
Revenue ............................................................
Income (loss) from operations ..........................
Other income ...................................................
Interest income .................................................
Income before provision for income taxes ........
Provisions for income taxes ..............................
Net income ........................................................
Year Ended December 31, 2009
Revenue ............................................................
Income (loss) from operations ..........................
Gain on sale of assets .......................................
Interest income .................................................
Income before provision for income taxes ........
Provisions for income taxes ..............................
Net income ........................................................
$14,052
$8,387
6,262
(1,988)
$10,000
$10,585
2,911
(1,017)
$10,568
$6,186
3,274
(3,000)
$2,147
(1,788)
83
(2)
$2,975
(2,227)
425
90
(2)
$5,288
(5,756)
6,230
238
(4)
$24,586
2,486
83
2,569
(2)
$2,567
$23,560
(333)
425
90
182
(2)
$180
$22,042
(5,482)
6,230
238
986
(4)
$982
We conduct our operations in the United States and sell our products and services to domestic and international
customers. Revenues were generated from the following geographic regions (in thousands):
United States .......................................................
Germany .............................................................
Rest of world ......................................................
Year ended December 31,
2011
$14,687
1,686
8,213
$24,586
2010
$12,289
2,770
8,501
$23,560
2009
$12,235
5,375
4,432
$22,042
53
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The portion of total revenue that was derived from major customers was as follows:
Customer A ...................................................
Customer B ...................................................
Year ended December 31,
2011
-%
-%
2010
11%
-%
2009
4%
19%
10. EMPLOYEE BENEFIT PLAN
In 1994, we established a qualified 401(k) Retirement Plan (the “Plan”) under which employees are allowed to
contribute certain percentages of their pay, up to the maximum allowed under Section 401(k) of the Internal
Revenue Code. Our contributions to the Plan are at the discretion of the Board of Directors. Our contributions
were approximately $239,000, $239,000, and $363,000 in 2011, 2010 and 2009, respectively.
11. NET INCOME PER SHARE
Net income per share is calculated as follows (in thousands, except per share data):
Year ended December 31,
2010
2011
Net income ................................................................
$2,567
Weighted-average common shares outstanding ........
Additional dilutive common stock equivalents .........
Diluted shares outstanding .......................................
Net income per share – basic ....................................
Net income per share – diluted .................................
20,534
201
20,735
$0.12
$0.12
$180
19,971
211
20,182
$0.01
$0.01
2009
$982
20,869
5
20,874
$0.05
$0.05
For the years ended December 31, 2011, 2010 and 2009, options to purchase 2,518,914, 4,936,391, and
5,970,722 shares of common stock at weighted average exercise prices of $4.62, $4.36, and $4.44 per share,
respectively, were outstanding, but were not included in the computation of diluted EPS because the options’
exercise prices were greater than the average market price of the common shares and thus would be anti-
dilutive.
12. QUARTERLY RESULTS OF OPERATIONS – UNAUDITED
The following table presents unaudited quarterly operating results for each of our quarters in the two-year
period ended December 31, 2011 (in thousands, except per share data):
March 31
June 30
September 30 December 31
2011 Quarters Ended
Revenue ................................................
Gross profit ...........................................
Income (loss) from operations ..............
Net income (loss) ..................................
Net income (loss) per share – basic ......
Net income (loss) per share – diluted ..
$6,358
4,781
572
590
$0.03
$0.03
54
$5,913
4,376
(283)
(267)
($0.01)
($0.01)
$6,422
5,231
1,272
1,284
$0.06
$0.06
$5,892
4,784
924
959
$0.05
$0.05
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31
June 30
September 30 December 31
2010 Quarters Ended
Revenue ................................................
Gross profit ...........................................
Income (loss) from operations ..............
Other income ........................................
Net income (loss) ..................................
Net income (loss) per share – basic ......
Net income (loss) per share – diluted ..
$5,616
4,508
5
-
22
$0.00
$0.00
$4,971
4,057
(494)
325
(148)
($0.01)
($0.01)
$6,151
4,709
(52)
100
76
$0.00
$0.00
$6,822
5,210
208
-
230
$0.01
$0.01
Quarterly amounts may not sum to annual amounts due to rounding and dilution.
13. VARIABLE INTEREST ENTITY
We have a patent arrangement with a third party that we classify as a variable interest entity. We have no equity
interest and are not contractually obligated to fund this entity; therefore our maximum exposure to loss as a
result of our involvement with this entity is zero. We may receive royalties in the future if certain conditions are
met.
We are not the primary beneficiary of this entity because of shared power. Therefore, we do not consolidate this
entity’s financial results into our financial statements. The significant factors used to determine shared power
were the contractual provisions within the arrangement that do not provide us with the power to direct the
activities that most significantly impact the economic performance of the entity. The carrying amount of the
assets and liabilities of this entity in our balance sheet is zero. This arrangement had no impact on our results of
operations, financial position or cash flows in the years ended December 31, 2011, 2010 and 2009.
14. PATENT MANAGEMENT OPERATIONS
As of the date of this report, our board is reviewing strategic options with respect to our patent management
operations, including a potential spin-off, sale or licensing of patents.
15. SUBSEQUENT EVENT
On January 18, 2012, our Board of Directors approved the shutdown of our DSL service assurance hardware
product line. This decision was made to position Aware better strategically and to reduce costs. We will
continue to build and ship DSL service assurance hardware products to fulfill customer orders that were
received as of the date of the shutdown notice. We expect to conclude hardware shipments on or about June 30,
2012. We estimate our total costs related to the shutdown will be approximately $282,000, the majority of
which will be severance and employee-related costs.
55
FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts – Years ended December 31, 2011, 2010, and 2009
(in thousands)
Col. A
Col. B
Col. C(1)
Col. C(2)
Col. D
Col. E
Additions
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Charged
to Other
Accounts
Deductions
Charged to
Reserves
Balance
at End
of Period
Allowance for doubtful
accounts receivable:
2011 ...........................
2010 ...........................
2009 ...........................
Inventory reserves:
2011 ...........................
2010 ...........................
2009 ...........................
Warranty reserves:
2011 ...........................
2010 ...........................
2009 ...........................
Deferred tax asset
valuation allowance:
2011 ...........................
2010 ...........................
2009 ...........................
$30
$30
$30
$989
$1,137
$738
$0
$0
$118
$41,759
$42,770
$42,481
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$-
$36
$453
$-
$-
$-
$118
$30
$30
$30
$1,403
$989
$1,137
$0
$0
$0
($1,283)
($1,011)
$289
$-
$-
$-
$40,476
$41,759
$42,770
$-
$-
$-
$450
$305
$399
$-
$-
$-
$-
$-
$-
56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our co-chief executive officers and
chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act).
Based on this evaluation, our co-chief executive officers and chief financial officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by this annual report.
Evaluation of Changes in Internal Control Over Financial Reporting
Under the supervision and with the participation of our management, including our co-chief executive officers and
chief financial officer, we concluded that there were no changes in our internal control over financial reporting that
occurred during the quarterly period ended December 31, 2011 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our
management, including our principal co-executive officers and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal
Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our
management concluded that our internal control over financial reporting was effective as of December 31, 2011.
The effectiveness of our internal control over financial reporting as of December 31, 2011 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is
included herein.
ITEM 9B. OTHER INFORMATION
None.
57
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 of Form 10-K is incorporated by reference from the information contained in
the sections captioned “Directors and Executive Officers”, “Corporate Governance” and “Section 16(a) Beneficial
Ownership Reporting Compliance” in the Proxy Statement that will be delivered to our shareholders in connection
with our May 23, 2012 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference from the information contained in
the section captioned “Executive Compensation” in the Proxy Statement that will be delivered to our shareholders in
connection with our May 23, 2012 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 of Form 10-K is incorporated by reference from the information contained in
the section captioned “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters” in the Proxy Statement that will be delivered to our shareholders in connection with our May 23, 2012
Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information, if any, required by Item 13 of Form 10-K is incorporated by reference from the information
contained in the sections captioned “Corporate Governance” and “Certain Relationships and Related
Transactions” in the Proxy Statement that will be delivered to our shareholders in connection with our May 23, 2012
Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated by reference from the information contained in
the section captioned “Independent Accountants” in the Proxy Statement that will be delivered to our shareholders
in connection with our May 23, 2012 Annual Meeting of Shareholders.
58
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
The following documents are filed as part of this report:
(a) Financial Statements and Exhibits:
(1) Report of Independent Registered Public Accounting Firm ........................................
Consolidated Balance Sheets as of December 31, 2011 and 2010....................................
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2011 ..............................................................
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2011 .....................................................
Consolidated Statements of Stockholders’ Equity for each of
the three years in the period ended December 31, 2011 ..............................................
Notes to Consolidated Financial Statements .....................................................................
(2) Schedule II - Valuation and Qualifying Accounts .......................................................
(3) Exhibits:
The exhibits listed below are filed with or incorporated by reference in this report.
Page
36
37
38
39
40
41
56
Exhibit No.
3.1
3.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
Description of Exhibit
Amended and Restated Articles of Organization, as amended (filed as Exhibit 3.1 to the
Company’s Form 10-K for the year ended December 31, 2008 and incorporated herein
by reference).
Amended and Restated By-Laws (filed as Exhibit 3.1 to the Company’s Form 8-K filed
with the Securities and Exchange Commission on December 10, 2007 and incorporated
herein by reference).
1996 Stock Option Plan, as amended and restated (filed as Annex A to the Company’s
Definitive Proxy Statement filed with the Securities and Exchange Commission on April
11, 2000 and incorporated herein by reference).
1996 Employee Stock Purchase Plan, as amended and restated (filed as Exhibit 99.1 to
the Company’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 29, 2005 and incorporated herein by reference).
Form of Indemnification Agreement for Directors and Officers of Aware, Inc. (filed as
Exhibit 10.1 to the Company's Form 8-K filed with the Securities and Exchange
Commission on February 22, 2011 and incorporated herein by reference).
2001 Nonqualified Stock Plan (filed as Exhibit 99(d)(4) to the Company’s Schedule TO
filed with the Securities and Exchange Commission on March 3, 2003 and incorporated
herein by reference).
Form of Nonqualified Stock Option Agreement under the 2001 Nonqualified Stock Plan
for options granted to executive officers and directors prior to May 21, 2008 (filed as
Exhibit 10.6 to Company’s Form 10-K for the year ended December 31, 2006 and
incorporated herein by reference).
Form of Nonqualified Stock Option Agreement under the 2001 Nonqualified Stock Plan
for options granted to executive officers and directors from and after May 21, 2008 (filed
as Exhibit 10.8 to Company’s Form 8-K on May 22, 2008 and incorporated herein by
reference)
Form of Unrestricted Stock Award for outside directors of Aware under the 2001
Nonqualified Stock Plan (filed as Exhibit 10.1 to Company's Form 8-K filed with the
Securities and Exchange Commission on July 28, 2010 and incorporated herein by
reference).
Form of Unrestricted Stock Award for officers of Aware under the 2001 Nonqualified
Stock Plan (filed as Exhibit 10.2 to Company's Form 8-K filed with the Securities and
Exchange Commission on July 28, 2010 and incorporated herein by reference).
59
10.9
10.10*
10.11*
21.1
23.1
31.1
31.2
32.1
Asset Purchase Agreement by and between Aware, Inc. and Lantiq Broadband Holdco,
Inc. and Lantiq Deutschland GmbH dated October 14, 2009 (filed as Exhibit 10.8 to
Company’s Form 10-K for the year ended December 31, 2009 and incorporated herein
by reference).
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).
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).
Subsidiaries of Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of co-Chief Executive Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of co-Chief Executive Officer and Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
*Management contract or compensatory plan.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
General Counsel
By: /s/ Kevin T. Russell
Kevin T. Russell
co-Chief Executive Officer & co-President
By: /s/ Richard P. Moberg
Richard P. Moberg
co-Chief Executive Officer & co-President
Chief Financial Officer (Principal Financial and
Accounting Officer)
Date: February 21, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on the 21st day of February 2012.
Signature
/s/ Kevin T. Russell
Kevin T. Russell
/s/ Richard P. Moberg
Richard P. Moberg
/s/ John S. Stafford, Jr.
John S. Stafford, Jr.
/s/ John S. Stafford, III
John S. Stafford, III
/s/ Adrian F. Kruse
Adrian F. Kruse
/s/ Mark G. McGrath
Mark G. McGrath
Title
co-Chief Executive Officer, co-President,
General Counsel & Director
(co-Principal Executive Officer)
co-Chief Executive Officer, co-President,
Chief Financial Officer & Director
(co-Principal Executive Officer)
(Principal Financial and Accounting Officer)
Chairman of the Board & Director
Director
Director
Director
61
Corporate Information
BOARD OF DIRECTORS
John S. Stafford, Jr.
Chairman
Investor
John S. Stafford, III
Investor
Adrian F. Kruse, C.P.A., J.D.
Audit Partner (retired)
Ernst & Young LLP
Mark G. McGrath
Senior Advisor
Broadpoint Gleacher Securities Group, Inc.
Brian D. Connolly
Portfolio Manager
Millstreet Capital Management, LLC
Richard P. Moberg
co-Chief Executive Officer & co-President
Chief Financial Officer
Aware, Inc.
Kevin T. Russell
co-Chief Executive Officer & co-President
General Counsel
Aware, Inc.
LEGAL COUNSEL
Foley Hoag LLP
Boston, MA
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
Boston, MA
TRANSFER AGENT
Computershare Trust Company, N.A.
PO Box 43078
Providence, RI 02940-3078
(877) 282-1168
www.computershare.com
ANNUAL MEETING
Wednesday, 10:00 a.m.
May 23, 2012
Doubletree Hotel Boston/Bedford Glen
Bedford, MA
STOCK LISTING
NASDAQ: AWRE
OFFICERS
Richard P. Moberg
co-Chief Executive Officer & co-President
Chief Financial Officer
CORPORATE HEADQUARTERS
40 Middlesex Turnpike
Bedford, MA 01730
(781) 276-4000
Kevin T. Russell
co-Chief Executive Officer & co-President
General Counsel
CONTACT INFORMATION
Investor Relations
Aware, Inc.
40 Middlesex Turnpike
Bedford, MA 01730-1432 USA
(781) 276-4000
www.aware.com
Aware, Inc., 40 Middlesex Turnpike, Bedford, MA 01730-1432 USA
T (781) 276-4000 | F (781) 276-4001 | www.aware.com