Aware, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Financial statement amounts are in thousands of dollars, except per-share data. Aware develops and sells biometrics products and services, with a smaller imaging-software business. The 2013 DSL service-assurance product line is reported as discontinued operations.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $6.767 million | $4.427 million | $13.384 million | $9.405 million |
| Operating income before patent-related income | $1.382 million | $0.543 million | $2.692 million | $2.744 million |
| Income from continuing operations | $0.865 million | $0.465 million | $1.746 million | $2.437 million |
| Net income | $0.865 million | $0.307 million | $1.746 million | $2.164 million |
| Diluted earnings per share | $0.04 | $0.01 | $0.08 | $0.10 |
| Operating cash flow | Not presented quarterly | $2.683 million | $4.257 million |
- Q2 revenue increased 53% year over year; first-half revenue increased 42%. Q2 growth reflected stronger software-license, services, and hardware sales.
- First-half net income fell 19%, principally because 2013 included $0.780 million of income from a patent arrangement; no such income was recorded in first-half 2014. Management said first-half operating income before patent-related income was approximately unchanged year over year.
- Q2 operating margin before patent-related income was approximately 20%, versus 12% a year earlier. First-half 2014 was approximately 20%, versus 29% in 2013 including the patent income (approximately 28% before it).
- Hardware gross margin was 31% in Q2 and 29% for the first half, compared with 28% in both prior-year periods. Services gross margin was 54% in Q2 and 54% for the first half, versus 53% and 52%, respectively.
Liquidity, balance sheet, and capital allocation
- At June 30, cash and cash equivalents were $77.242 million, up from $72.660 million at year-end; investments were $1.463 million. Total assets were $91.828 million.
- First-half cash increased $4.582 million: $2.683 million from operations, $1.331 million from investing activities, and $0.568 million from financing activities. Investing inflows included $1.432 million of investment sales; capital spending was $0.101 million.
- The company reported no debt. Current liabilities were $43.671 million, including $39.906 million of dividends payable. Current assets were $83.974 million.
- The board declared a special $1.75-per-share cash dividend on June 26. The $39.9 million payment was made July 24, 2014. The post-payment cash balance is not reported in this filing.
- Management said existing cash was expected to fund operations for at least the next 12 months, while noting financing needs and availability could not be assured.
Changes, outlook, risks, and unusual items
- Revenue mix shifted: first-half hardware sales rose to $4.681 million from $1.129 million, while software-license revenue declined to $3.682 million from $4.591 million. Services increased to $2.346 million from $1.136 million. Hardware sales were to one U.S. government customer; future purchases depend on that customer’s purchase orders and are difficult to forecast.
- Engineering costs rose as the company expanded product development and customer-project capacity. Engineering headcount increased from 30 employees at June 30, 2013 to 47 at June 30, 2014. Management expected to continue investing in existing and new products; no numerical revenue or earnings guidance was provided.
- Management expected royalties from legacy DSL silicon contracts to decline. It also cited uncertainty about future proceeds from the patent arrangement.
- On July 21, Aware agreed to sell part of its DSL diagnostic patent portfolio for $2.6 million, less $0.4 million of transaction costs; closing was expected in Q3 2014.
- The company recorded $59,000 of Q2 other expense from realized losses on sales and calls of high-yield bond investments. It held $1.463 million of corporate debt securities from three issuers, maturing in 2017 and 2018.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material change in the risk factors from its 2013 Form 10-K and no lawsuit or proceeding it believed likely to seriously harm the business.
Key facts for investors to verify
- Whether the Q3 patent-portfolio sale closed and the net proceeds received.
- Cash and liquidity after the $39.9 million dividend payment, and the impact of the payout on future capital allocation.
- Hardware orders and customer concentration, given dependence on purchase orders from one government customer.
- Whether revenue growth persists as software-license sales fluctuate and legacy royalties decline.
- Returns, credit exposure, and any further realized losses from the high-yield bond portfolio.