Aware, Inc. — Q3 2013 Form 10-Q
Business context and period. This unaudited filing covers the quarter and nine months ended September 30, 2013; financial statement amounts are in thousands of dollars except per-share data. Aware’s principal focus is biometrics and imaging. The company was exiting its remaining DSL service assurance software business and continued to receive declining royalties from legacy DSL intellectual property.
Key financial results
| Metric | Three months ended Sep. 30, 2013 | Three months ended Sep. 30, 2012 | Nine months ended Sep. 30, 2013 | Nine months ended Sep. 30, 2012 |
|---|---|---|---|---|
| Revenue | $4.470 million | $5.256 million | $14.936 million | $14.240 million |
| Operating income (loss) before patent-related income | $(2.161) million | $1.446 million | $134,000 | $2.613 million |
| Net income (loss) | $(1.153) million | $10.297 million | $1.011 million | $66.341 million |
| Diluted earnings (loss) per share | $(0.05) | $0.46 | $0.04 | $3.03 |
| Operating cash flow | Not presented by quarter | $5.670 million | $(14.105) million |
Quarterly revenue fell about 15% year over year; nine-month revenue rose about 5%. The Q3 2013 tax provision was a benefit of $901,000; the nine-month provision was $169,000. The filing does not provide a consolidated gross-margin figure.
Revenue mix and operating trends
- Q3 revenue included $2.334 million of software licenses, $1.023 million of maintenance, $943,000 of services, and $170,000 of royalties. There were no hardware sales in Q3.
- Nine-month biometrics and imaging revenue was $12.982 million, versus $10.847 million in 2012. Nine-month DSL Service Assurance segment revenue was $1.217 million, down from $1.794 million.
- Q3 software license revenue declined 31%, primarily because the prior-year quarter included a large U.S. government sale and because of the DSL business shutdown. Maintenance revenue increased 55%, mainly on biometrics and imaging contracts.
- Royalties declined 65% in Q3 and 54% year to date; management expected further declines. Hardware sales were $1.129 million for the first nine months, with a 28% gross margin.
- Q3 exit costs of $2.832 million contributed to the operating loss. Without patent-related income, nine-month operating income was $134,000.
Financial position and liquidity
- At September 30, 2013, cash and cash equivalents were $75.418 million, investments were $2.962 million, total current assets were $80.181 million, and total current liabilities were $6.350 million. The resulting current ratio was approximately 12.6.
- Total assets were $89.647 million and stockholders’ equity was $83.257 million. The balance sheet lists no debt; no separate debt balance is reported.
- Cash increased $4.344 million from year-end 2012. Nine-month operating cash flow was $5.670 million; investing activities used $1.238 million and financing activities used $88,000.
- Management said existing cash and cash equivalents should be sufficient to fund operations for at least the next twelve months, while cautioning that it could not assure additional financing would not be needed or available.
Material changes, outlook, and risks
- In August 2013, the board approved shutting down DSL service assurance software, with limited customer support expected through December 31, 2013. Management anticipated reporting that product line as discontinued operations beginning in the next quarter.
- Exit-cost liabilities totaled $3.788 million at September 30, primarily $3.732 million due to customers for contract terminations. Management estimated shutdown costs to date at approximately $3.0 million, net of deferred-revenue offsets, and could not estimate additional costs or income from contract terminations. A further $165,000 of severance and retention costs was expected to be expensed in Q4 if earned.
- Aware received a September order for $4.7 million of biometrics hardware, intended for shipment over the next several quarters, subject to supplier availability. The contract does not obligate the government customer to purchase absent purchase orders.
- Hardware products are sold to a single U.S. government customer and rely on single-source suppliers for certain critical components. Delays or shortages could disrupt shipments.
- 2012 comparisons are materially affected by patent sales: the nine-month 2012 results included an $86.394 million gain, versus none in 2013. Aware recorded $780,000 of income from a separate patent arrangement in the first nine months of 2013, but could not predict future receipts.
- No specific financial guidance was provided. The filing says interim results are not necessarily indicative of full-year results. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
- Aware said it was not party to a lawsuit likely, in its opinion, to seriously harm the business; it reported no material change to the previously disclosed risk factors except for the supplier-concentration risk noted above.
Important facts for investors to verify
- Whether the $4.7 million hardware order ships on schedule and at expected margins, given supplier constraints and the customer’s purchase-order terms.
- Final DSL shutdown costs, customer-termination amounts, and the expected discontinued-operations presentation in subsequent filings.
- The pace of legacy DSL royalty declines and any further income from the third-party patent arrangement.
- Underlying operating performance excluding 2012 patent-sale gains and 2013 DSL exit costs, including the durability of biometrics and imaging revenue growth.
- Cash deployment, investment portfolio risk, and the realizability of deferred tax assets.