AWARE INC /MA/ - Quarter Report: 2014 March (Form 10-Q)

 

40 Middlesex Turnpike, Bedford, Massachusetts, 01730

 

 

 

 

 

 

	Class			Number of Shares Outstanding
Common Stock, par value $0.01 per share				22,627,475 shares

 

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		March 31, 2014				December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents		$	74,368			$	72,660
Accounts receivable, net			4,593				4,582
Inventories			1				1,601
Deferred tax assets			340				383
Prepaid expenses and other current assets			777				695
Total current assets			80,079				79,921
Property and equipment, net			5,489				5,582
Investments			2,896				2,754
Long term deferred tax assets			716				762
Other assets			282				310
Total assets		$	89,462			$	89,329
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	205			$	1,516
Accrued expenses			115				108
Accrued compensation			510				571
Accrued professional			116				118
Deferred revenue			1,846				1,848
Total current liabilities			2,792				4,161
Long-term deferred revenue			16				18
Commitments and contingent liabilities
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 22,627,375 as of March 31, 2014 and 22,574,251              as of December 31, 2013			226				226
Additional paid-in capital			101,833				101,293
Accumulated other comprehensive loss			(41	)			(125	)
Accumulated deficit			(15,364	)			(16,244	)
Total stockholders’ equity			86,654				85,150
Total liabilities and stockholders’ equity		$	89,462			$	89,329

 

 

 

		Three Months Ended March 31,
		2014				2013
Revenue:
Software licenses		$	1,617			$	3,333
Software maintenance			1,045				947
Services			1,008				407
Hardware sales			2,633				-
Royalties			314				291
Total revenue			6,617				4,978
Costs and expenses:
Cost of hardware sales			1,902				-
Cost of services			463				197
Research and development			1,279				973
Selling and marketing			858				876
General and administrative			804				731
Total cost and expenses			5,306				2,777
Operating income before patent related income			1,311				2,201
Income from patent arrangement			-				780
Operating income after patent related income			1,311				2,981
Interest income			86				82
Income from continuing operations before income taxes			1,397				3,063
Provision for income taxes			517				1,091
Income from continuing operations			880				1,972
Loss from discontinued operations, net of income taxes			-				(115	)
Net income		$	880			$	1,857
Basic net income per share:
Basic net income per share from continuing operations		$	0.04			$	0.09
Basic net loss per share from discontinued operations			-				(0.01	)
Basic net income per share		$	0.04			$	0.08
Diluted net income per share:
Diluted net income per share from continuing operations		$	0.04			$	0.09
Diluted net loss per share from discontinued operations			-				(0.01	)
Diluted net income per share		$	0.04			$	0.08
Weighted-average shares – basic			22,626				22,511
Weighted-average shares - diluted			22,699				22,564
Comprehensive income:
Net income		$	880			$	1,857
Other comprehensive income (net of tax):
Unrealized gains on available for sale securities			84				58
Comprehensive income		$	964			$	1,915

 

 

 

		Three Months Ended
		March 31,
		2014				2013
Cash flows from operating activities:
Net income		$	880			$	1,857
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			132				107
Stock-based compensation			29				10
Amortization of premium on investments			2				5
Deferred tax provision on other comprehensive income			(60	)			-
Changes in assets and liabilities:
Accounts receivable			(11	)			(1,592	)
Receivable from patent arrangement			-				341
Inventories			1,600				-
Prepaid expenses and other current assets			(82	)			(40	)
Deferred tax assets			89				150
Accounts payable			(1,311	)			(156	)
Accrued expenses, compensation, and professional			(56	)			(180	)
Deferred revenue			(4	)			143
Net cash provided by operating activities			1,208				645
Cash flows from investing activities:
Purchases of property and equipment			(11	)			(70	)
Net cash used in investing activities			(11	)			(70	)
Cash flows from financing activities:
Proceeds from issuance of common stock			9				20
Excess tax benefits from stock-based compensation			594				838
Payments made for taxes of employees who surrendered
shares related to unrestricted stock			(92	)			-
Net cash provided by financing activities			511				858
Increase in cash and cash equivalents			1,708				1,433
Cash and cash equivalents, beginning of period			72,660				71,074
Cash and cash equivalents, end of period		$	74,368			$	72,507
Supplemental disclosure:     Cash paid for income taxes		$	2			$	63

 

 

 

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, 2013 in conjunction with our 2013 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, 2014 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		$	2,896			$	-			$	-
Money market funds (included in cash and cash equivalents)			68,641
Total		$	71,537			$	-			$	-

 

 

 

		Fair Value Measurement at December 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		$	2,754			$	-			$	-
Money market funds (included in cash and cash equivalents)			68,556
Total		$	71,310			$	-			$	-

 

C)	Inventories. Inventories are stated at the lower of cost or net realizable value with cost being determined by the first-in, first-out (“FIFO”) method.  Inventories consisted of the following (in thousands):

 

		March 31, 2014				December 31, 2013
Raw materials                                                      Finished goods		$	1 -			$	1,584 17
Total		$	1			$	1,601

 

D)

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,
		2014				2013
Net income:
Income from continuing operations		$	880			$	1,972
Loss from discontinued operations			-				(115	)
Net income		$	880			$	1,857
Shares outstanding:
Weighted-average common shares outstanding			22,626				22,511
Additional dilutive common stock equivalents			73				53
Diluted shares outstanding			22,699				22,564
Basic net income per share:
Basic net income per share from continuing operations		$	0.04			$	0.09
Basic net loss per share from discontinued operations			-				(0.01	)
Basic net income per share		$	0.04			$	0.08
Diluted net income per share:
Diluted net income per share from continuing operations		$	0.04			$	0.09
Diluted net loss per share from discontinued operations			-				(0.01	)
Diluted net income per share		$	0.04			$	0.08

 

 

 

E)	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,
		2014				2013
Cost of services		$	1			$	-
Research and development			2				-
Selling and marketing			1				-
General and administrative			25				10
Stock-based compensation expense		$	29			$	10

 

 

 

 

 

 

 

F)	Business Segments. We organize ourselves into a single segment that reports to the chief operating decision makers.

 

 

		Three Months Ended
		March 31,
		2014				2013
United States		$	5,496			$	3,510
Rest of world			1,121				1,468
		$	6,617			$	4,978

 

 

G)	Recent Accounting Pronouncements.  There are no recently issued accounting pronouncements applicable to the Company that have not been adopted as of March 31, 2014.

 

H)	Income Taxes.  Income tax expense was $0.5 million and $1.1 million for the three months ended March 31, 2014 and 2013, respectively. Income tax expense in both three month periods was based on the U.S. statutory rate of 34%, increased by state income taxes.

 

In the three months ended March 31, 2014 and 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. The tax benefits from such stock-based awards were $0.6 million and $0.8 million in the three month periods ended March 31, 2014 and 2013, respectively.  These tax benefits were recorded as an equity adjustment to additional paid-in capital.

 

 

 

 

(I)

Discontinued Operations.  In 2013, we shut down our DSL service assurance software product line, which was previously a component of our DSL Service Assurance Segment. We completed the shutdown in the fourth quarter of 2013 and no longer have any continuing involvement with, or cash flows from, this product line. The results of our DSL service assurance software product line have been included in discontinued operations in the consolidated statements of income and comprehensive income. The loss from discontinued operations attributable to the DSL service assurance software product line was (in thousands):

 

		Three Months Ended March 31,
		2014				2013
Revenue		$	-			$	638
Expenses			-				828
Loss before income taxes			-				(190	)
Income taxes			-				75
Loss from discontinued operations		$	-			$	(115	)