Aware, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. Aware develops and sells biometrics products and services, with a smaller imaging-software business. The company reports one operating segment. Amounts below are in millions except per-share data.
Financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $6.617 | $4.978 | +33% |
| Operating income before patent-arrangement income | $1.311 | $2.201 | -40% |
| Income from patent arrangement | — | $0.780 | — |
| Income from continuing operations | $0.880 | $1.972 | -55% |
| Net income | $0.880 | $1.857 | -53% |
| Diluted EPS | $0.04 | $0.08 | — |
| Operating cash flow | $1.208 | $0.645 | +$0.563 |
Revenue mix shifted materially: software licenses were $1.617 million (down 51%); maintenance $1.045 million (up 10%); services $1.008 million (up 148%); hardware sales $2.633 million, versus none a year earlier; and royalties $0.314 million (up 8%). Hardware gross margin was 28%; services gross margin was 54%. Overall gross margin is not presented as a single figure in the filing.
Research and development expense rose 31% to $1.279 million. Total engineering costs, including cost of services, increased to $1.742 million from $1.170 million; engineering headcount increased to 43 from 31. Selling and marketing expense was approximately $0.858 million, while general and administrative expense rose 10% to $0.804 million. Income tax expense was $0.517 million, versus $1.091 million.
Liquidity and balance sheet
- Cash and cash equivalents were $74.368 million at quarter-end, up $1.708 million from year-end; available-for-sale corporate debt investments were $2.896 million.
- Operating activities provided $1.208 million; investing activities used $0.011 million; financing activities provided $0.511 million. Financing cash flow included $0.594 million in excess tax benefits from stock-based compensation.
- Current assets were $80.079 million and current liabilities $2.792 million. No debt balance is reported in the presented balance sheet.
- Management believed cash and cash equivalents would fund operations for at least the next 12 months, while noting additional financing might be required and might not be available.
Material changes, outlook and risks
- Lower earnings reflected the absence of a large U.S. government software-license sale made in Q1 2013 and the absence of $0.780 million of patent-arrangement income. The filing says some expected customer projects did not produce license revenue in Q1 2014.
- Management saw potential customer opportunities as encouraging and said license sales might increase in future quarters as projects are won and new products are released; this is not quantified guidance. It expects continued investment in existing and new products.
- Hardware revenue came from deliveries under a contract with one U.S. government customer. Purchase orders are not guaranteed by the contract, and management said future hardware sales could not be predicted reliably.
- Management believed royalties were likely to decline in future quarters. Future income, if any, from the patent-monetization arrangement is also uncertain.
- The DSL service assurance product line was shut down in 2013 and reported as discontinued operations. It generated no Q1 2014 revenue or loss; Q1 2013 included a $0.115 million discontinued-operations loss.
- A 152,000-share unrestricted-stock award is expected to generate $0.857 million of additional compensation expense over the remaining three quarters of 2014. Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material change in the risks disclosed in its 2013 Form 10-K and no lawsuit it believed likely to seriously harm the business.
Important facts for investors to verify
- Whether expected biometrics projects convert to software-license revenue, given the year-over-year decline and project timing uncertainty.
- Whether the single-customer hardware contract produces further purchase orders, and the sustainability of its 28% gross margin.
- Whether increased engineering investment and the planned product development translate into future sales, alongside the expected stock-compensation expense.
- The trajectory of DSL-related royalties and any further proceeds from the patent arrangement.
- The composition and realizability of tax assets: the filing reports $1.1 million of deferred tax assets without a valuation allowance and federal and state R&D credit carryforwards of $4.9 million and $0.7 million, respectively, at December 31, 2013.