Aware, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise stated. Aware develops and sells biometrics and imaging software, related services, and some hardware. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $4.834 million | $4.123 million; up 17% |
| Operating income | $0.880 million | $0.384 million; up 129% |
| Net income | $0.635 million; $0.03 per basic and diluted share | $0.272 million; $0.01 per share |
| Operating margin | 18.2% | 9.3% |
| Operating cash flow | $1.054 million | $0.010 million |
| Cash and cash equivalents | $52.650 million at March 31 | $51.232 million at December 31, 2015 |
Cash increased $1.418 million during the quarter. Investing activities used $5,000 and financing activities provided $369,000. The company also held $869,000 of available-for-sale corporate debt securities. Total liabilities were $6.852 million, largely deferred revenue; the balance sheet reports no borrowings. Current assets were $57.166 million against current liabilities of $6.541 million.
Product-level gross margins disclosed were 91% for software licenses, 49% for services, and 28% for hardware. The filing does not provide a single overall gross margin.
Material changes and drivers
- Software license revenue rose 68% to $2.774 million, primarily from imaging licenses. A $4.5 million license agreement signed in October 2015 is being recognized over 12 months through October 2016; $1.1 million was recognized in Q1 2016.
- Services revenue fell 66% to $419,000 as commercial and U.S. Marine Corps projects substantially completed in 2015 were not replaced. Services backlog was minimal at March 31.
- Maintenance revenue increased 11% to $1.282 million. Hardware revenue was $286,000 versus none a year earlier; management said future orders from its single government customer may be minimal and there was no hardware backlog.
- Biometrics revenue declined to $3.285 million from $3.849 million, while imaging revenue rose to $1.476 million from $173,000. U.S. revenue increased to $3.740 million; Brazil revenue declined to $304,000.
- Research and development expense increased 15% to $1.649 million; selling and marketing and general and administrative expenses declined 5% and 8%, respectively.
Outlook, risks, and other notable items
- No specific revenue or earnings guidance was provided. Management expects to continue product enhancement and development and believes available cash will fund operations for at least the next 12 months, while noting additional financing cannot be ruled out.
- Management cautioned that Q1 results are not necessarily indicative of full-year results. Future services revenue may decline without new projects; emerging commercial biometrics revenue is difficult to predict, and DSL royalty revenue is expected to continue declining.
- On April 26, 2016, the board authorized purchases of up to $10 million of common stock through December 31, 2017, subject to market conditions and management discretion.
- A March 2016 unrestricted stock award covered 152,000 shares and carries $558,000 of compensation expense; $8,000 was expensed in Q1, with the remaining $550,000 expected to be recognized over the rest of 2016.
- Income tax expense was $312,000. The company recorded $430,000 of excess stock-compensation tax benefits in equity, not earnings. It reported $872,000 of deferred tax assets without a valuation allowance and separately disclosed federal and state R&D credit carryforwards.
- The filing reports no material change to the risk factors in the 2015 Form 10-K and no litigation believed likely to seriously harm the business. Management judged disclosure controls effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- How much of 2016 revenue and operating profit depends on recognition of the October 2015 imaging license, and what revenue follows its October 2016 expiration?
- Whether Aware secures services projects to offset the minimal backlog and whether biometrics license revenue recovers.
- Whether hardware orders, concentrated in one government customer, continue; management expects future orders may be minimal.
- How the $10 million repurchase authorization is used and its effect on cash and shares outstanding.
- Realizability of deferred tax assets and the timing and accounting treatment of tax credit carryforwards.