Aware, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter report; quarterly figures below are unaudited. Aware develops biometric software and provides related engineering services, primarily for government systems.
Financial results and liquidity
| Metric | FY2014 | FY2013 | Change / context |
|---|---|---|---|
| Revenue | $23.72 million | $19.36 million | Up 22.5% |
| Operating income | $7.09 million | $5.32 million | Includes patent-related income of $2.13 million and $0.78 million, respectively |
| Income from continuing operations | $4.58 million | $3.75 million | Diluted EPS was $0.20 and $0.16, respectively |
| Net income | $4.58 million | $2.60 million | FY2013 included a $1.16 million discontinued-operations loss |
| Cash from operating activities | $6.26 million | $2.83 million | FY2014 benefited partly from working-capital reductions |
| Cash and cash equivalents | $43.99 million | $72.66 million | Decline principally reflects the $39.91 million special dividend |
| Working capital | $44.75 million | $75.76 million | Down following the dividend payment |
| Total liabilities | $3.50 million | $4.18 million | No interest-bearing debt is disclosed |
FY2014 reported operating margin was approximately 29.9%, including the patent gain; excluding patent-related income, operating income was approximately $4.96 million, or 20.9% of revenue. Net margin was approximately 19.3%. The effective tax rate was 37%.
Revenue mix: software licenses $8.54 million (+4%); maintenance $4.35 million (+13%); services $5.17 million (+64%); hardware $4.93 million (+55%); and royalties $0.73 million (-21%). Hardware and services growth were important contributors. Biometrics revenue was $21.44 million; imaging revenue was $1.56 million. The company reported one operating segment.
FY2014 Q4: Revenue was $4.31 million, operating income $0.24 million, continuing-operations income and net income $0.24 million, and diluted EPS $0.01. In Q4 2013, revenue was $5.64 million, operating income $0.75 million, and net income $1.59 million; the latter included $1.06 million of income from discontinued operations.
Material changes versus prior periods
- Revenue rose 22.5%, with services and hardware increasing substantially; software-license growth was modest and maintenance continued to expand.
- Research and development expense increased 35% to $5.51 million as Aware expanded engineering staff and product development. It introduced Nexa biometric search-and-matching products and the INQUIRE identity-data analytics SDK in 2014.
- FY2014 included a $2.13 million gain from selling DSL diagnostic patents for $2.6 million before $0.5 million of transaction costs. FY2013 included $0.78 million of patent-arrangement income. FY2012’s $87.52 million of patent-related income makes comparisons with that year especially atypical.
- Aware paid a special dividend of $1.75 per share, or $39.91 million in total, in July 2014.
- Cash from operations increased to $6.26 million. Investing activities provided $3.42 million, while financing activities used $38.36 million, primarily due to the dividend.
Outlook, risks, and unusual items
- No numerical revenue or earnings guidance is provided. Management expects continued investment in research and development and intends to expand its product portfolio, maintain its government-market focus, and pursue enterprise commercial opportunities. Growth investments may reduce near-term profitability.
- The $5.0 million year-end backlog comprised $3.2 million of software-license and service revenue scheduled for delivery in the first nine months of 2015, plus $1.8 million of maintenance revenue expected to be recognized during 2015. No hardware revenue was in backlog.
- Management said a significant government services project was scheduled to end in March 2015, creating potential for lower services revenue unless replaced. Hardware sales are to one U.S. government customer; management believes most purchases may already have occurred and expects future orders could be minimal.
- Customer concentration is material: the U.S. Navy represented 24% of FY2014 revenue and the U.S. Marine Corps 10%. Government budget and procurement changes, project timing, and reliance on systems-integrator and OEM partners could affect results. Management cautions that quarterly results can fluctuate significantly.
- DSL royalties are declining and management expects further declines. Commercial biometrics adoption remains nascent and uncertain; the company also cites intense competition, pricing pressure, privacy concerns, technology change, intellectual-property exposure, and reliance on single-source suppliers for certain hardware components.
- The IRS began examining the 2012 tax return in 2014. The filing reports $2.95 million of uncertain tax positions, including $2.6 million that would affect the tax rate if realized. No material pending litigation was reported. The company reported effective disclosure controls and internal control over financial reporting; the auditor gave an unqualified opinion.
Important facts for investors to verify
- Whether the government services project ended as scheduled and whether replacement work offset the resulting revenue risk.
- Whether hardware orders from the single government customer continued, given no hardware backlog at year-end and management’s expectation of limited future purchases.
- Revenue concentration and renewal trends, especially Navy and Marine Corps business and maintenance contracts.
- Conversion of the disclosed backlog into revenue, and the sustainability of growth amid higher R&D spending and declining DSL royalties.
- The outcome of the IRS examination and the status and potential realizability of uncertain tax positions and research-credit carryforwards.
- Cash and liquidity after the special dividend, and whether any further special dividend is declared; management stated liquidity was expected to fund operations for at least the next 12 months.