Aware, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Aware supplies biometrics and imaging software and services, DSL service assurance products, and receives legacy DSL silicon royalties. Comparisons are with Q1 2011 unless noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $5.734 million | $6.358 million |
| Operating income | $1.042 million | $0.572 million |
| Net income | $1.118 million | $0.590 million |
| Diluted EPS | $0.05 | $0.03 |
| Cash from operations | $1.339 million | $(0.316) million |
| Cash and cash equivalents at period end | $48.444 million | $40.015 million |
- Revenue declined about 10%; operating income rose about 82% and net income about 90%. Operating margin increased to approximately 18% from 9%.
- Product sales were $4.550 million, services $0.693 million, and royalties $0.491 million. Product sales fell 10%, services fell 16%, and royalties rose 9%.
- Product gross margin improved to 90% from 76%, mainly because software made up a larger share of product sales. Services gross margin decreased to 49% from 57%.
- Cash increased $1.867 million during the quarter. Current assets were $52.569 million and current liabilities $2.725 million. The balance sheet reports no debt.
Business changes and management commentary
- Biometrics and imaging revenue increased to $3.670 million from $2.905 million, driven by several larger software license transactions. DSL service assurance revenue decreased to $1.573 million from $3.002 million.
- Management attributed improved earnings primarily to a richer software mix, lower DSL engineering costs, and lower CEO-related expenses after the former CEO’s departure.
- In January 2012, the board approved the exit of the DSL service assurance hardware product line, historically unprofitable. The company expected to complete final customer shipments and the shutdown around June 30, 2012. Management estimated approximately $282,000 in total shutdown costs; $181,000 had been incurred by March 31, with about $101,000 expected in Q2. Management expected a small amount of operating income from the exit during the first half of 2012.
- Aware stated it would continue its DSL software business and biometrics and imaging operations. No formal full-year revenue or earnings guidance was provided.
Outlook, liquidity, and risks
- Management believed existing cash would fund operations for at least the next 12 months, while noting that additional financing might be needed and could not be assured.
- After quarter-end, Aware announced an agreement to sell wireless-related patents for $75 million. The transaction was expected to close in Q2, subject to closing conditions and applicable regulatory approvals; proceeds would be reduced by transaction costs. Aware said it expected to use deferred tax assets to substantially or completely offset taxable income from the sale. The filing does not report the transaction as completed in Q1.
- Also after quarter-end, the board declared a special cash dividend of $1.15 per share, approximately $24 million in total, payable May 25, 2012 to shareholders of record May 11. The dividend was not a Q1 cash outflow.
- Risks include uncertainty over patent monetization timing and completion; reliance on DSL royalty licensees, particularly Ikanos and Lantiq; and the company’s full valuation allowance against deferred tax assets. The filing cites no material change to the risk factors in the 2011 Form 10-K and no litigation expected to seriously harm the business.
- Available-for-sale investments were $0.546 million, consisting of high-yield corporate debt securities from one issuer and maturing in 2015. Aware disclosed exposure to issuer default risk and said it did not use derivatives for speculative or trading purposes.
Important facts for investors to verify
- Whether the $75 million patent sale closed, its net proceeds after fees, and its tax consequences.
- Whether the special dividend was paid as declared and the resulting post-dividend cash and liquidity.
- Completion timing and final costs of the DSL hardware exit, and the extent of any post-shutdown revenue.
- Whether biometrics and imaging growth can be sustained, and how dependent future royalties remain on the two principal licensees.
- Potential use and realizability of tax-loss and credit carryforwards, including any ownership-change limitations.