AWARE INC /MA/ - Quarter Report: 2013 March (Form 10-Q)

 

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		March 31, 2013				December 31, 2012
ASSETS
Current assets:
Cash and cash equivalents		$	72,507			$	71,074
Accounts receivable, net			5,049				3,457
Receivable from patent arrangement			780				1,121
Deferred tax assets			690				817
Prepaid expenses and other current assets			568				528
Total current assets			79,594				76,997
Property and equipment, net			5,867				5,904
Investments			2,063				2,010
Long term deferred tax assets			920				943
Total assets		$	88,444			$	85,854
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	172			$	328
Accrued expenses			155				148
Accrued compensation			649				817
Accrued professional			123				142
Deferred revenue			2,381				2,204
Total current liabilities			3,480				3,639
Long-term deferred revenue			285				319
Stockholders’ equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized,              none outstanding			-				-
Common stock, $.01 par value; 70,000,000 shares authorized; issued              and outstanding 22,514,018 as of March 31, 2013 and 22,509,518              as of December 31, 2012			225				225
Additional paid-in capital			101,429				100,561
Accumulated other comprehensive income (loss)			8				(50	)
Accumulated deficit			(16,983	)			(18,840	)
Total stockholders’ equity			84,679				81,896
Total liabilities and stockholders’ equity		$	88,444			$	85,854

 

 

 

		Three Months Ended March 31,
		2013				2012
Revenue:
Software licenses		$	3,808			$	2,839
Software maintenance			1,041				881
Services			476				693
Royalties			291				491
Total revenue			5,616				4,904
Costs and expenses:
Cost of services			221				356
Research and development			1,557				1,436
Selling and marketing			1,095				1,079
General and administrative			731				985
Total cost and expenses			3,604				3,856
Operating income before patent related income			2,012				1,048
Income from patent arrangement			780				-
Operating income after patent related income			2,792				1,048
Other income                                                                                    Interest income			-  82				26  52
Income from continuing operations before income taxes			2,874				1,126
Provision for income taxes			1,017				2
Income from continuing operations			1,857				1,124
Loss from discontinued operations, net of income taxes			-				(6	)
Net income		$	1,857			$	1,118
Basic net income per share:
Basic net income per share from continuing operations		$	0.08			$	0.05
Basic net loss per share from discontinued operations			0.00				(0.00	)
Basic net income per share		$	0.08			$	0.05
Diluted net income per share:
Diluted net income per share from continuing operations		$	0.08			$	0.05
Diluted net loss per share from discontinued operations			0.00				(0.00	)
Diluted net income per share		$	0.08			$	0.05
Weighted-average shares – basic			22,511				20,724
Weighted-average shares - diluted			22,564				20,928
Comprehensive income:
Net income		$	1,857			$	1,118
Other comprehensive income:
Unrealized gains on available for sale securities			58				59
Comprehensive income		$	1,915			$	1,177

 

 

 

 

		Three Months Ended
		March 31,
		2013				2012
Cash flows from operating activities:
Net income		$	1,857			$	1,118
Adjustments to reconcile net income to net cash    provided by operating activities:
Depreciation and amortization			107				113
Stock-based compensation			10				147
Amortization of premium (discount) on investments			5				(13	)
Gain on sale of investments			-				(26	)
Changes in assets and liabilities:
Accounts receivable			(1,592	)			98
Receivable from patent arrangement			341				-
Inventories			-				126
Prepaid expenses and other current assets			(40	)			(43	)
Deferred tax assets			150				-
Accounts payable			(156	)			(128	)
Accrued expenses, compensation, and professional			(180	)			8
Deferred revenue			143				(61	)
Net cash provided by operating activities			645				1,339
Cash flows from investing activities:
Purchases of property and equipment			(70	)			(33	)
Sales of investments			-				279
Net cash provided by (used in) investing activities			(70	)			246
Cash flows from financing activities:
Proceeds from issuance of common stock			20				320
Excess tax benefits from stock-based compensation			838				-
Payments made for taxes of employees who surrendered
shares related to unrestricted stock			-				(38	)
Net cash provided by financing activities			858				282
Increase in cash and cash equivalents			1,433				1,867
Cash and cash equivalents, beginning of period			71,074				46,577
Cash and cash equivalents, end of period		$	72,507			$	48,444
Supplemental disclosure:     Cash paid for income taxes		$	63			$	2

 

 

 

 

A)

Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include all information and notes necessary for a complete presentation of our financial position, results of operations and cash flows, in conformity with generally accepted accounting principles.  We filed audited financial statements which included all information and notes necessary for such presentation for the three years ended December 31, 2012 in conjunction with our 2012 Annual Report on Form 10-K. This Form 10-Q should be read in conjunction with that Form 10-K.

 

 

 

B)

Fair Value Measurements. The Financial Accounting Standards Board (“FASB”) Codification defines fair value, and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to the unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the FASB Codification are: i) Level 1 – valuations that are based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date; ii) Level 2 – valuations that are based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly; and iii) Level 3 – valuations that require inputs that are both significant to the fair value measurement and unobservable.

 

 

 

 

		Fair Value Measurement at March 31, 2013 Using:
		Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		(Level 1)				(Level 2)				(Level 3)
Corporate debt securities		$	2,063			$	-			$	-
Money market funds (included in cash and cash equivalents)			67,068
Total		$	69,131			$	-			$	-

 

 

 

		Fair Value Measurement at December 31, 2012 Using:
		Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		(Level 1)				(Level 2)				(Level 3)
Corporate debt securities		$	2,010			$	-			$	-
Money market funds (included in cash and cash equivalents)			67,050
Total		$	69,060			$	-			$	-

 

C)

Computation of Earnings per Share. Basic earnings per share is computed by dividing net income or loss by the weighted average number of common shares outstanding.  Diluted earnings per share is computed by dividing net income or loss by the weighted average number of common shares outstanding plus additional common shares that would have been outstanding if dilutive potential common shares had been issued.  For the purposes of this calculation, stock options are considered common stock equivalents in periods in which they have a dilutive effect.  Stock options that are anti-dilutive are excluded from the calculation.

 

 

		Three Months Ended March 31,
		2013				2012
Net income:
Income from continuing operations		$	1,857			$	1,124
Loss from discontinued operations			-				(6	)
Net income		$	1,857			$	1,118
Shares outstanding:
Weighted-average common shares outstanding			22,511				20,724
Additional dilutive common stock equivalents			53				204
Diluted shares outstanding			22,564				20,928
Basic net income per share:
Basic net income per share from continuing operations		$	0.08			$	0.05
Basic net loss per share from discontinued operations			0.00				(0.00	)
Basic net income per share		$	0.08			$	0.05
Diluted net income per share:
Diluted net income per share from continuing operations		$	0.08			$	0.05
Diluted net loss per share from discontinued operations			0.00				(0.00	)
Diluted net income per share		$	0.08			$	0.05

 

 

 

D)	Stock-Based Compensation.  The following table presents stock-based employee compensation expenses included in our unaudited consolidated statements of comprehensive income (in thousands):

 

		Three Months Ended March 31,
		2013				2012
Cost of services		$	-			$	6
Research and development			-				31
Selling and marketing			-				78
General and administrative			10				25
Loss from discontinued operations			-				7
Stock-based compensation expense		$	10			$	147

 

 

 

 

●

Stock options and SARS – We granted no stock options for the three month period ended March 31, 2013. For the three month period ended March 31, 2012, we granted 25,000 shares.  No SARs were granted in the three month periods ended March 31, 2013 and 2012.

 

●

Unrestricted Stock Grants - In July 2010, we granted 575,443 shares of stock to directors, officers and employees of which 111,163 shares were issued immediately and 464,280 shares were to be issued in four equal increments on December 31, 2010, June 30, 2011, December 31, 2011, and June 30, 2012; provided that grantees remain employed on each of those dates.  We expensed $0 and $94,000 of stock-based compensation expense related to these grants in the three month periods ended March 31, 2013 and 2012, respectively.

 

 

 

 

E)	Business Segments. We organize ourselves into multiple segments reporting to the chief operating decision makers.  The following table provides reportable segment financial data for the three month periods ended March 31, 2013 and 2012 (in thousands):

 

			Segments
			Biometrics				DSL Service								Total
			& Imaging				Assurance				Corporate				Company
Three Months Ended March 31, 2013
Revenue			$	4,688			$	637			$	291			$	5,616
Operating income (loss) before patent related income				2,406				(327	)			(67	)			2,012
Income from patent arrangement												780				780
Interest income												82				82
Income from continuing operations before taxes																2,874
Provision for income taxes												(1,017	)			(1,017	)
Income from continuing operations																1,857
Income (loss) from discontinued operations, net of tax																-
Net income															$	1,857
Three Months Ended March 31, 2012
Revenue			$	3,670			$	743			$	491			$	4,904
Operating income (loss) before patent related income				1,717				(199	)			(470	)			1,048
Other income												26				26
Interest income												52				52
Income from continuing operations before taxes																1,126
Provision for income taxes												(2	)			(2	)
Income from continuing operations																1,124
Loss from discontinued operations, net of tax																(6	)
Net income															$	1,118

 

 

		Three Months Ended
		March 31,
		2013				2012
United States		$	3,781			$	3,099
Rest of World			1,835				1,805
		$	5,616			$	4,904

 

 

F)	Recent Accounting Pronouncements.  There are no recently issued accounting pronouncements applicable to the Company that have not been adopted as of March 31, 2013.

 

G)

Income Taxes.  Income tax expense for the three months ended March 31, 2013 was $1.0 million as compared to $2,000 in the prior year quarter.   Income tax expense for the three months ended March 31, 2013 was based on the U.S. statutory rate of 34%, increased by state income taxes. In the three months ended March 31, 2012, income tax expense was offset by the reversal of the valuation allowance on deferred tax assets, which reduced our tax expense to zero, except for $2,000 of state excise taxes.

 

 

In the three months ended March 31, 2013, we utilized deferred tax assets to reduce our tax liability payable to the government.  A portion of the deferred tax assets we used comprised cumulative deductions for stock options in excess of book expense. Under income tax accounting rules, that portion of tax benefits attributable to such deductions must be recorded as an adjustment to equity versus a reduction of income tax expense. In the three months ended March 31, 2013, the tax benefits from such stock-based awards were $0.8 million, which we recorded as an equity adjustment to additional paid-in capital.

 

 

 

H)

Income from patent arrangement. We entered into an arrangement with an unaffiliated third party in 2010 under which we assigned patents in return for royalties on proceeds from patent monetization efforts by the third party.  In March 2013, we received a royalty statement from this entity and recorded $0.8 million of income in the three months ended March 31, 2013. This amount is included as receivable from patent arrangement on the accompanying consolidated balance sheet.

 

(I)

Discontinued Operations.  In January 2012, our Board of Directors approved the shutdown of our DSL service assurance hardware product line which was previously a component of our DSL Service Assurance Segment. We completed the shutdown in 2012 and no longer have any continuing involvement with or cash flows from this product line. The results of our DSL service assurance hardware product line have been included in discontinued operations in the consolidated statements of comprehensive income. The loss from discontinued operations attributable to the DSL service assurance hardware product line was (in thousands):

 

		Three Months Ended March 31,
		2013				2012
Revenue		$	-			$	829
Expenses			-				835
Loss before income taxes			-				(6	)
Income taxes			-				-
Loss from discontinued operations		$	-			($	6	)

 

 

 

 

 

 

 

 

 

 

i)

Prior to November 2009, we were a supplier of DSL silicon intellectual property to the semiconductor industry. We continue to receive royalties from two customers that use our DSL silicon IP in their DSL chipsets.

 

ii)

We entered into an arrangement with an unaffiliated third party in 2010 under which we assigned certain patents in return for royalties on proceeds from patent monetization efforts by the third party.  In the three months ended March 31, 2013, we received a royalty statement from this entity and recorded $0.8 million of income from this patent arrangement. There was no such income in the three months ended March 31, 2012. We are unable to predict how much more income we might receive from this arrangement, if any, because we do not know whether any patent monetization efforts by the third party will be successful.

 

 

iii)

In January 2012, our Board of Directors approved the shutdown of our DSL service assurance hardware product line which was previously a component of our DSL Service Assurance Segment. We completed the shutdown in 2012 and no longer have any continuing involvement with or cash flows from this product line. The results of our DSL service assurance hardware product line have been reported as discontinued operations. The loss from discontinued operations attributable to the DSL service assurance hardware product line was (in thousands):

 

iv)

In 2012, we executed on a strategy to monetize a significant portion of our patent portfolio that was unrelated to our biometrics and DSL service assurance product lines. That effort resulted in two significant patent sales in 2012, neither of which affected our consolidated statements of comprehensive income for the three months ended March 31, 2013 and 2012. The majority of the remaining patents in our patent portfolio pertain to our biometrics and imaging and DSL service assurance software product lines. At the current time, we do not intend to pursue patent monetization alternatives for these patents.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

		Three Months Ended March 31,
		2013				2012
Research and development expense		$	1,557			$	1,436
Cost of services			221				356
Total engineering costs		$	1,778			$	1,792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.

Cash and cash equivalents. As of March 31, 2013, our cash and cash equivalents of $72.5 million were primarily invested in money market funds. The money market funds were invested in high quality, short term financial instruments. Due to the nature, short duration, and professional management of these funds, we do not expect that a general increase in interest rates would result in any material loss.

 

2.

Investments. As of March 31, 2013, our investments of $2.1 million were invested in high yield bonds with two separate corporate debt issuers, both of which mature in 2015.  While we are exposed to default risk, the high current yield of these bonds largely mitigates interest rate risk. Therefore, due to the high current yield and approximate three-year life of these instruments, we do not believe that a general increase in interest rates would result in any material loss.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 31.1

Certification of co-Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 31.2

Certification of co-Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 101*

The following financial statements from Aware, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted in XBRL (eXtensible Business Reporting Language), as follows:  (i) Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012, (ii) Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and March 31, 2012, (iii) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and March 31, 2012, and (iv) Notes to Consolidated Financial Statements.