AWARE INC /MA/ - Quarter Report: 2015 March (Form 10-Q)

 

 

 

 

 

 

 

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PART I	FINANCIAL INFORMATION
Item 1.	Unaudited Consolidated Financial Statements
	Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014		3
	Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2015 and March 31, 2014		4
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and March 31, 2014		5
	Notes to Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		16
Item 4.	Controls and Procedures		16
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		17
Item 1A.	Risk Factors		17
Item 4.	Mine Safety Disclosures		17
Item 6.	Exhibits		18
	Signatures		18

 

 

 

		March 31, 2015				December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents		$	44,685			$	43,985
Accounts receivable, net			3,251				3,619
Inventories			2				2
Deferred tax assets			187				168
Prepaid expenses and other current assets			915				401
Total current assets			49,040				48,175
Property and equipment, net			5,195				5,289
Investments			925				1,428
Long term deferred tax assets			600				804
Other assets			480				197
Total assets		$	56,240			$	55,893
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	191			$	258
Accrued expenses			833				820
Deferred revenue			1,952				2,352
Total current liabilities			2,976				3,430
Long-term deferred revenue			79				74
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 22,865,565 as of March 31, 2015 and 22,808,761 as of December 31, 2014			229				228
Additional paid-in capital			104,271				103,756
Accumulated other comprehensive loss			(21	)			(29	)
Accumulated deficit			(51,294	)			(51,566	)
Total stockholders’ equity			53,185				52,389
Total liabilities and stockholders’ equity		$	56,240			$	55,893

 

 

 

 

		Three Months Ended March 31,
		2015				2014
Revenue:
Software licenses		$	1,649			$	1,617
Software maintenance			1,153				1,045
Services			1,220				1,008
Hardware			-				2,633
Royalties			101				314
Total revenue			4,123				6,617
Costs and expenses:
Cost of hardware			-				1,902
Cost of services			547				463
Research and development			1,435				1,279
Selling and marketing			972				858
General and administrative			785				804
Total costs and expenses			3,739				5,306
Operating income			384				1,311
Other income			12				-
Interest income			41				86
Income before provision for income taxes			437				1,397
Provision for income taxes			165				517
Net income		$	272			$	880
Net income per share – basic		$	0.01			$	0.04
Net income per share – diluted		$	0.01			$	0.04
Weighted-average shares - basic			22,866				22,626
Weighted-average shares - diluted			22,887				22,699
Comprehensive income:
Net income		$	272			$	880
Other comprehensive income (net of tax):
Unrealized gains on available for sale securities			8				84
Comprehensive income		$	280			$	964

 

 

 

 

		Three Months Ended
		March 31,
		2015				2014
Cash flows from operating activities:
Net income		$	272			$	880
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			145				132
Stock-based compensation			21				29
Deferred tax provision on other comprehensive income			(4	)			(60	)
Gain on sale of investments			(12	)			-
Amortization of premium/(discount) on investments			(2	)			2
Changes in assets and liabilities:
Accounts receivable			368				(11	)
Inventories			-				1,600
Prepaid expenses and other current assets			(514	)			(82	)
Deferred tax assets			185				89
Accounts payable			(67	)			(1,311	)
Accrued expenses			13				(56	)
Deferred revenue			(395	)			(4	)
Net cash provided by operating activities			10				1,208
Cash flows from investing activities:
Purchases of property and equipment			(14	)			(11	)
Sales of investments			529				-
Purchase of other assets			(320	)			-
Net cash provided by (used in) investing activities			195				(11	)
Cash flows from financing activities:
Proceeds from issuance of common stock			-				9
Excess tax benefits from stock-based compensation			582				594
Payments made for taxes of employees who surrendered shares related to unrestricted stock			(87	)			(92	)
Net cash provided by financing activities			495				511
Increase in cash and cash equivalents			700				1,708
Cash and cash equivalents, beginning of period			43,985				72,660
Cash and cash equivalents, end of period		$	44,685			$	74,368
Supplemental disclosure:
Cash paid for income taxes		$	5			$	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, 2014 in conjunction with our 2014 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, 2015 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		$	925			$	-			$	-
Money market funds (included in cash and cash equivalents)			34,930
Total		$	35,855			$	-			$	-

 

 

 

		Fair Value Measurement at December 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		$	1,428			$	-			$	-
Money market funds (included in cash and cash equivalents)			34,339
Total		$	35,767			$	-			$	-

 

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, 2015				December 31, 2014
Raw materials		$	2			$	2
Finished goods			-				-
Total		$	2			$	2

 

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,
		2015				2014
Net income		$	272			$	880
Weighted average common shares outstanding			22,866				22,626
Additional dilutive common stock equivalents			21				73
Diluted shares outstanding			22,887				22,699
Net income per share – basic		$	0.01			$	0.04
Net income per share – diluted		$	0.01			$	0.04

 

 

 

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,
		2015				2014
Cost of services		$	1			$	1
Research and development			2				2
Selling and marketing			-				1
General and administrative operations			18				25
Stock-based compensation expense		$	21			$	29

 

 

 

 

 

 

 

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

 

 

		Three Months Ended
		March 31,
		2015				2014
United States		$	2,488			$	5,496
Brazil			726				39
Rest of world			909				1,082
		$	4,123			$	6,617

 

 

 

		Three Months Ended
		March 31,
		2015				2014
Biometrics		$	3,849			$	6,181
Imaging			173				122
DSL royalties			101				314
		$	4,123			$	6,617

 

G)

Recent Accounting Pronouncements.  In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU is the result of a joint project by the FASB and the International Accounting Standards Board (“IASB”) to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”) that would: remove inconsistencies and weaknesses, provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices across entities, jurisdictions, industries, and capital markets, improve disclosure requirements and resulting financial statements, and simplify the presentation of financial statements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU is effective for annual reporting periods beginning after December 15, 2016.  Early adoption is not permitted. On April 1, 2015, the FASB voted to propose a deferral of the effective date of the new revenue standard by one year, but to permit entities to adopt one year earlier if they choose (i.e., the original effective date). We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

 

 

H)	Income Taxes.  Income tax expense was $0.2 million and $0.5 million for the three months ended March 31, 2015 and 2014, respectively. Income tax expense in the three month periods of 2015 and 2014 was based on the U.S. statutory rate of 34%, increased by state income taxes.

 

In the three month period ended March 31, 2015, 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 in the three month period ended March 31, 2015. These tax benefits were recorded as an equity adjustment to additional paid-in capital.

 

 

 

 

 

I)	Accumulated Other Comprehensive Loss. The components of accumulated other comprehensive loss and activity were as follows (in thousands):

 

		December 31,				Increase/				Reclassification					March 31,
		2014				Decrease				Adjustments					2015
Unrealized losses on available for sale securities		($	87	)		$	13			$	-				($	74	)
Unrealized gains on available for sale securities			43				(13	)			12					42
Net unrealized gains (losses) on available for sale securities			(44	)			-				12		(a)			(32	)
Income tax benefit (expense) on other comprehensive loss			15				-				(4	)				11
Total accumulated other comprehensive loss, net of taxes		($	29	)		$	-			$	8				($	21	)

 

(a)	– Classified in other income.

 

 

 

 

 

 

 

 

 

i)

A decrease in hardware sales from $2.6 million in the year ago quarter to zero in the current quarter; and

ii)

A decrease in DSL royalties from $0.3 million in the year ago quarter to $0.1 million in the current quarter.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

		Three Months Ended March 31,
		2015				2014
Research and development expense		$	1,435			$	1,279
Cost of services			547				463
Total engineering costs		$	1,982			$	1,742

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.

Cash and cash equivalents. As of March 31, 2015, our cash and cash equivalents of $44.7 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, 2015, our investments of $0.9 million were invested in high yield bonds with two corporate debt issuers, which mature in 2017 and 2018.  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 the three to four 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.

 

 

 

 

		AWARE, INC.
	Date: April 24, 2015	By:	/s/ Kevin T. Russell
			Kevin T. Russell
			co-Chief Executive Officer & co-President
			General Counsel
	Date: April 24, 2015	By:	/s/ Richard P. Moberg
			Richard P. Moberg
			co-Chief Executive Officer & co-President
			Chief Financial Officer (Principal Financial and Accounting Officer)