Aware, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Aware develops and sells biometric software and services, with a smaller imaging-software business and continuing DSL royalty income. The company reports one operating segment.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $4.123 million | $6.617 million |
| Operating income | $384,000 | $1.311 million |
| Net income | $272,000 | $880,000 |
| Diluted EPS | $0.01 | $0.04 |
| Operating cash flow | $10,000 | $1.208 million |
| Cash and cash equivalents, March 31 | $44.685 million | — |
- Revenue declined 38% year over year; operating income fell 71% and net income fell 69%. Operating margin was approximately 9%, versus 20% in Q1 2014.
- Revenue mix: software licenses $1.649 million (+2%); maintenance $1.153 million (+10%); services $1.220 million (+21%); hardware nil (versus $2.633 million); royalties $101,000 (down 68%). Services gross margin was 55%, versus 54%.
- Cash increased $700,000 from December 31, 2014. Operating cash flow was only $10,000 as reported; management said it would have been $600,000 excluding the $582,000 excess stock-compensation tax benefit, a non-GAAP presentation.
- Investing cash flow was positive $195,000, including $529,000 of investment sales and a $320,000 purchase of a technology license. Financing cash flow was positive $495,000, primarily reflecting the excess tax benefit.
- Current assets were $49.040 million and current liabilities $2.976 million. The balance sheet reports no interest-bearing debt. Investments were $925,000; stockholders’ equity was $53.185 million.
Material changes and management commentary
- The principal year-over-year revenue decline reflected no hardware deliveries in Q1 2015 and lower DSL royalties. Hardware was sold to one U.S. government customer; Aware said its strategy does not include maintaining or growing this business.
- Software licenses and services benefited from two commercial biometrics customers. Management described commercial biometrics as an emerging market and said future revenue from it is difficult to predict. U.S. revenue decreased to $2.488 million from $5.496 million, while Brazil revenue rose to $726,000 from $39,000.
- A U.S. government services project that has contributed significantly since 2013 was scheduled to end in April 2015; management cautioned that services revenue could decline absent replacement work.
- A $1.1 million hardware order was received in early April and was expected to be delivered in Q3 2015. Management said future orders could be minimal and demand is difficult to forecast.
- Research and development increased 12% to $1.435 million, reflecting engineering headcount additions and product-development plans. Management expects continued focus on existing and new products.
Liquidity, risks and other items
- Management believes available cash is sufficient to fund operations for at least 12 months, while noting it cannot assure that additional financing will not be needed or available.
- The company held $44.7 million in cash and cash equivalents, primarily money market funds, and $925,000 in high-yield corporate bonds from two issuers. Management cited bond default risk; it did not expect a general increase in interest rates to cause a material loss. No derivatives are used for trading or speculation.
- A March 2015 unrestricted stock award of 152,000 shares had total compensation expense of $682,000; $15,000 was charged in Q1, with the remaining $667,000 expected to be expensed over the rest of 2015. Management projected approximately $160,000 more quarterly G&A stock compensation in each of the remaining three quarters.
- The IRS began examining the company’s 2012 tax return in September 2014. The company reported $800,000 of deferred tax assets without a valuation allowance and said realizability will continue to be assessed.
- The filing reports no material change to the risk factors in the 2014 Form 10-K and no litigation expected, in management’s opinion, to seriously harm the business. Disclosure controls were deemed effective.
- The company was evaluating the new revenue-recognition standard (ASC 606); the filing described the then-current effective date and a proposed deferral, and did not quantify the expected effect.
Important facts for investors to verify
- Whether the expected Q3 hardware delivery occurs and whether further orders follow.
- Whether the government services project ending in April is replaced, and how commercial biometrics customers develop into recurring revenue.
- Whether declining DSL royalties and absent hardware sales can be offset by software, maintenance and services growth.
- How the 2012 IRS examination and deferred-tax-asset realizability assessment develop.
- Whether reported operating cash flow remains weak after considering the noncash stock-compensation tax-benefit classification.