Aware, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. Unless otherwise noted, financial amounts are in millions of dollars. The statements are unaudited.
Business context and results
Aware operated in biometrics and imaging, DSL service assurance, and patent management. It completed the sale of its wireless-technology patents on June 21, 2012, and plans to continue its biometrics and imaging and DSL software businesses.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $5.334 | $5.913 | $11.068 | $12.272 |
| Operating income (loss), per statements | $0.369 | $(0.283) | $1.411 | $0.290 |
| Net income (loss) | $54.926 | $(0.267) | $56.044 | $0.323 |
| Diluted EPS | $2.49 | $(0.01) | $2.60 | $0.02 |
| Operating cash flow | Not separately stated | Not separately stated | $2.204 | $1.841 |
Net income was dominated by a $71.226 million gain on the patent sale; it should not be read as a measure of recurring operating performance. The sale generated $75 million in gross proceeds, less $3.8 million of transaction costs. Excluding this gain, the filing reports modest operating income.
Financial position, liquidity and margins
- Cash and cash equivalents were $101.058 million at June 30, up $54.481 million from year-end 2011. Current assets were $105.878 million and current liabilities $7.730 million, implying working capital of about $98.1 million.
- No debt is reported on the balance sheet. Stockholders’ equity was $103.855 million, versus $54.575 million at December 31, 2011.
- Six-month investing cash flow was $72.022 million, principally reflecting net patent-sale proceeds; financing cash flow was a use of $19.745 million, including the $25.506 million special dividend. Capital purchases were $0.059 million.
- Product gross margin increased to 80% in Q2 and 85% for the first half, from 73% and 75%, respectively, largely due to a higher software share of product sales. Services gross margin fell to 47% in Q2 and 48% for the first half, from 67% and 63%, reflecting project mix.
Changes versus prior periods and segments
- Revenue declined 10% in Q2 and 10% for the first half. For the first half, product sales fell 5% and services fell 38%; royalties rose 12%.
- Biometrics and imaging revenue was $2.890 million in Q2 and $6.560 million in the first half, compared with $2.950 million and $5.855 million. DSL service assurance revenue was $1.820 million and $3.393 million, versus $2.422 million and $5.425 million. Royalties were $0.624 million and $1.115 million, versus $0.541 million and $0.992 million.
- Management attributed improved operating results in part to more profitable software sales, lower DSL engineering costs, and reduced CEO-related costs versus 2011. The filing’s statements report operating income of $0.369 million for Q2 and $1.411 million for the first half; its MD&A narrative separately cites Q2 operating income of $0.445 million. The filing text does not reconcile this difference.
Outlook, risks and unusual items
- The company expects to complete its exit from DSL hardware during Q3 2012 and expects hardware revenue to be insignificant after September 30, 2012. It recorded $0.282 million of shutdown costs in the first half and estimated a modest amount of operating income from the hardware exit during the first nine months of 2012.
- Aware intends to pursue monetization of other patents, but cannot predict the size, timing, or completion of future transactions. It stated the wireless patent sale was not expected to materially affect its biometrics and imaging or DSL service assurance product lines.
- Management said cash should fund operations for at least 12 months, while noting it cannot assure additional financing would not be needed or available. Royalty results remain uncertain because they depend on two licensees and competitive market conditions; management could not predict future royalty trends.
- Income tax expense was $16.770 million for the first half, including a $12.684 million non-cash tax-benefit adjustment recorded to equity; the reported current tax liability was $4.1 million. A full valuation allowance remained against deferred tax assets.
- The board paid a special dividend of $1.15 per share, totaling $25.506 million. Management reported effective disclosure controls, no material change in internal control, no material change to the prior Form 10-K risk factors, and no lawsuit it believed likely to seriously harm the business.
Key facts for investors to verify
- Reconcile the Q2 operating-income figure in MD&A ($0.445 million) with the financial statements ($0.369 million).
- Assess normalized earnings and cash generation apart from the one-time patent-sale gain and related tax effects.
- Track execution and costs of the DSL hardware exit, including whether hardware revenue becomes insignificant after Q3.
- Monitor future biometrics and imaging sales, services project mix, and royalties from the two DSL licensees.
- Review the use of the remaining patent portfolio, cash after the special dividend, and any changes to tax-asset valuation allowances.