Aware, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results; dollar amounts below are USD millions unless otherwise noted. Aware develops and sells biometrics software and services, with a smaller imaging-software business and declining DSL royalties.
Financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $4.510 | $6.767 | $8.633 | $13.384 |
| Operating income | $0.477 | $1.382 | $0.861 | $2.692 |
| Operating margin | 10.6% | 20.4% | 10.0% | 20.1% |
| Net income | $0.319 | $0.865 | $0.591 | $1.746 |
| Diluted EPS | $0.01 | $0.04 | $0.03 | $0.08 |
| Operating cash flow | Not separately provided | Not separately provided | $(0.102) | $2.683 |
At June 30, cash and cash equivalents were $44.513 million, investments were $0.856 million, total assets were $57.776 million, and total stockholders’ equity was $53.672 million. Current liabilities were $3.921 million; the balance sheet reports no debt. Cash increased $0.528 million from year-end. The company said available cash should fund operations for at least the next 12 months, while noting it could not assure that additional financing would never be needed.
Material changes versus the prior comparable period
- Revenue declined 33% in Q2 and 35% for the first six months; net income fell 63% and 66%, respectively. Operating margins also contracted.
- The largest driver was hardware revenue falling from $2.048 million to zero in Q2 and from $4.681 million to zero year to date. Aware delivered no hardware through June 30.
- Q2 services revenue fell 36% to $0.855 million; first-half services revenue fell 12% to $2.075 million, mainly as two U.S. government projects declined. One large project began winding down in Q2.
- Software license revenue grew 10% in Q2 and 6% year to date, supported by two commercial biometrics customers, partly offset by lower sales to government-focused channel partners. Maintenance revenue increased 11% in both periods.
- DSL royalties declined 57% year to date to $0.206 million. Management expects this revenue to continue declining.
- For the six months, operating cash flow shifted to a $0.102 million use from $2.683 million provided in 2014. Cash flow included a $1.202 million increase in receivables and a $0.692 million increase in prepaid and other current assets. Financing cash flow included $0.554 million in excess tax benefits from stock-based compensation.
Outlook, commentary, and risks
- Aware received a $1.1 million hardware order in April and expected delivery in Q3 or Q4 2015. Management believed the customer had completed most of its purchasing and said future demand was difficult to forecast; hardware growth is not part of the company’s strategy.
- Management warned services revenue may decline versus 2014 unless new government or commercial projects replace the winding-down government work. The project was expected to conclude in Q3 2015; additional costs to resolve issues found in final testing reduced Q2 services gross margin to 33%, from 54% a year earlier.
- Management plans to continue investing in engineering to enhance existing products and develop new products, while expanding commercial biometrics activity. It said future commercial-market revenue is difficult to predict.
- Cash and cash equivalents were primarily in money-market funds. The $0.856 million investment portfolio consisted of high-yield corporate bonds from two issuers, maturing in 2017 and 2018; default risk remains. The company uses no derivatives for speculative or trading purposes.
- The IRS was examining the 2012 tax return. Aware reported $0.9 million of deferred tax assets without a valuation allowance and said it would reassess realizability. No material change to previously disclosed risk factors was reported; management said no litigation was likely to seriously harm the business.
- The company was evaluating the new revenue-recognition standard. The filing notes the FASB’s July 2015 decision to delay its effective date by one year while allowing adoption on the original date.
Important facts for investors to verify
- Whether the anticipated $1.1 million hardware order was delivered in Q3 or Q4, and what subsequent demand from the government customer became.
- Whether replacement projects offset the expected decline in services as the large government engagement concluded.
- Whether commercial biometrics license and services growth continued, given management’s stated difficulty forecasting that emerging market.
- Whether operating cash flow improved and the company maintained sufficient liquidity without additional financing.
- Any outcome or financial implications from the IRS examination, deferred-tax-asset assessment, and adoption planning for the revenue-recognition standard.