Aware, Inc. — FY2015 Form 10-K Summary
Business context and reporting period
Aware develops biometric software and provides related engineering services, primarily for government systems, with growing but still developing commercial opportunities. It also sells imaging software and receives declining legacy DSL royalties. This annual report covers the year ended December 31, 2015; the filing also reports fourth-quarter results.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $19.6 million | $23.7 million |
| Operating income | $3.9 million | $7.1 million |
| Net income | $4.6 million | $4.6 million |
| Basic and diluted EPS | $0.20 | $0.20 |
| Operating margin | 20% | 30% |
| Operating cash flow | $6.7 million | $6.3 million |
| Cash and cash equivalents | $51.2 million | $44.0 million |
| Working capital | $49.3 million | $44.7 million |
| Total liabilities | $7.4 million | $3.5 million |
FY2015 revenue comprised $10.1 million software licenses, $4.7 million maintenance, $3.3 million services, $1.1 million hardware, and $0.4 million royalties. The filing reports no interest-bearing debt in the balance sheet presented. Cash and investments totaled approximately $52.1 million; management believed available cash and investments sufficient for at least 12 months. No material capital-expenditure commitments were reported.
Hardware gross margin improved to 35% from 29%; services gross margin fell to 46% from 54%. The filing does not provide a consolidated gross-margin figure. Fourth-quarter revenue was $6.9 million, operating income $2.6 million, and net income $1.8 million.
Material changes versus the prior comparable period
- Revenue declined $4.1 million, or about 17%, primarily because Navy and Marine Corps revenue fell $5.8 million; higher revenue elsewhere partly offset this decrease.
- Software license revenue rose 18% to $10.1 million, and maintenance revenue increased 8% to $4.7 million. Services fell 36% to $3.3 million; hardware fell 78% to $1.1 million; royalties fell 44% to $0.4 million.
- Operating income declined $3.2 million. The revenue decrease reduced operating income by an estimated $1.1 million, while patent-related income fell by $2.1 million, from $2.1 million in 2014 to $43,000 in 2015.
- Net income was nearly unchanged despite lower operating income, reflecting a $536,000 income-tax benefit in 2015 versus $2.7 million of tax expense in 2014. The 2015 benefit included reversal of a $1.9 million uncertain-tax-position reserve after the IRS completed its examination of the 2012 return without changes.
- Operating cash flow increased modestly; year-end cash rose by $7.2 million. Deferred revenue increased $3.6 million, substantially related to a major software transaction.
Outlook, commentary, risks and unusual items
- In October 2015, Aware received payment under a $4.5 million imaging-software license agreement plus $125,000 maintenance. Because it could not establish fair value for the maintenance element, it recognized $0.9 million of license revenue in 2015 and deferred $3.6 million, which it expected to recognize from January through October 2016.
- Year-end backlog was $6.6 million: $3.7 million of licenses, $2.3 million of maintenance, $0.3 million of services, and $0.3 million of hardware. Most was expected to be recognized or delivered in 2016.
- Management cautioned that services revenue could decline in 2016 unless completed projects are replaced with new work; services backlog was only $0.3 million. Navy hardware purchases were expected to be minimal beyond the $0.3 million backlog item.
- Management plans to invest in product development, expand commercial and international opportunities, and pursue more complete biometric solutions. Such investment may reduce near-term profitability. In 2015, R&D expense was $5.8 million, 29% of revenue.
- Key risks include volatile order timing and results, reliance on government spending and channel partners, customer concentration, intensifying competition, uncertain commercial-market adoption, privacy regulation, rapid technology change, intellectual-property claims, and reliance on single-source suppliers for certain hardware components.
- The company reported no material pending litigation, no off-balance-sheet arrangements, and no material capital commitments. Its independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Most important facts for investors to verify
- Whether the deferred $3.6 million license revenue was recognized as expected and whether the related maintenance obligations were fulfilled.
- Whether the large imaging license transaction and commercial customer activity translated into repeatable revenue, particularly as Certisign’s service offering launched in 2016.
- Whether Aware replaced completed Navy, Marine Corps, and commercial services projects, given the low services backlog and expected decline risk.
- How much future earnings and cash flow depend on government customers, major channel partners, and the diminishing Navy hardware program.
- The sustainability of reported earnings and cash generation after excluding the one-time tax-reserve reversal and considering deferred revenue and working-capital movements.
- Whether the remaining $1.0 million uncertain tax positions, tax-credit carryforwards, customer receivables concentrations, and high-yield bond investments present material future exposure.