Aware, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Financial amounts below are in U.S. dollars; unless noted, figures are in millions. Aware’s active businesses are biometrics and imaging software and services, and DSL service-assurance software and services. It also receives legacy DSL royalties and may receive income from a third-party patent monetization arrangement.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $4.850 | $4.079 | $10.466 | $8.984 |
| Operating income before patent-related income | $0.283 | $0.119 | $2.294 | $1.167 |
| Net income | $0.307 | $54.926 | $2.164 | $56.044 |
| Diluted earnings per share | $0.01 | $2.49 | $0.10 | $2.60 |
- Revenue rose about 19% in Q2 and 16% in the first half year over year. Biometrics and imaging revenue was $4.150 million in Q2 and $8.838 million for the half, up from $2.890 million and $6.560 million, respectively.
- Q2 revenue included $1.129 million in hardware shipments to one U.S. government customer; associated cost was $0.813 million, a 28% gross margin. The contract does not require purchases absent purchase orders.
- Software licenses were $1.562 million in Q2, down 15%; maintenance was $1.123 million, up 21%; services were $0.759 million, up 11%; and royalties were $0.277 million, down 56%. For the half year, licenses and maintenance increased 15% and 20%, while services and royalties declined 10% and 49%.
- Management attributed improved operating income before patent-related income mainly to greater biometrics profitability and lower general and administrative costs. Service gross margin was 53% in Q2, compared with 47% a year earlier.
- Prior-year earnings were exceptionally elevated by the $71.226 million patent-sale gain in Q2 2012 (approximately $54.6 million after tax). The 2013 half-year results also included $0.780 million of income from a separate patent arrangement; there was none in Q2. The discontinued DSL hardware line contributed no 2013 revenue or income.
Cash, liquidity, and balance sheet
- Cash and cash equivalents were $75.755 million at June 30, 2013, up $4.681 million from year-end 2012; available-for-sale investments were $2.020 million. Total assets were $89.376 million and stockholders’ equity was $84.841 million.
- First-half operating cash flow was $4.257 million, capital expenditures were $0.110 million, and financing provided $0.534 million. Cash from operations included collection of a $1.121 million patent-arrangement receivable.
- Current liabilities were $4.335 million, including $3.127 million of deferred revenue; long-term deferred revenue was $0.200 million. The filing reports no debt. Management believed cash and cash equivalents would fund operations for at least the next 12 months, while noting additional financing might be required and might not be available.
Outlook, risks, and other matters
- Management said DSL royalties are likely to continue declining, following reduced royalty rates or eliminated rates on certain products for one licensee and lower reported royalties from the other. Future income from the third-party patent arrangement is uncertain.
- Management could not reliably project future hardware sales because government purchases depend on purchase orders and the company has limited shipment history. It also said it cannot predict whether biometrics services revenue will rise or fall.
- The filing provides no quantified revenue or earnings guidance. Results for the interim period are not necessarily indicative of full-year results.
- Market risk centers on the investment portfolio: $2.0 million in high-yield bonds from two issuers, both maturing in 2015, with associated default risk. The company said it did not expect a general interest-rate increase to cause a material loss and does not use derivatives for speculation or trading.
- First-half income tax expense was $1.071 million. The company reported $1.5 million of deferred tax assets without a valuation allowance and said it will continue to assess their realizability. No material change to the prior annual-report risk factors was reported; management said disclosure controls were effective, and no litigation was identified as likely to seriously harm the business.
Important facts for investors to verify
- Reconcile operating income before patent-related income: the financial statements show $0.283 million for Q2, while the MD&A summary states $0.307 million. The latter equals reported net income, so the filing text is internally inconsistent.
- Assess the sustainability and concentration of new hardware revenue, including dependence on one government customer and purchase orders, and verify subsequent orders and margins.
- Track DSL royalty declines, biometrics and imaging license and maintenance trends, and whether the patent arrangement generates additional proceeds.
- Review cash conversion, tax-asset realizability, and the credit/default exposure in the high-yield bond holdings.