Aware, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited results; amounts below are in millions of dollars unless stated otherwise. Aware develops and sells biometric software and services and also sells imaging software.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $5.90 | $4.04 | $17.64 | $12.67 |
| Operating income | $2.31 | $0.43 | $5.27 | $1.29 |
| Net income | $1.57 | $2.20 | $3.64 | $2.79 |
| Diluted EPS | $0.07 | $0.10 | $0.16 | $0.12 |
| Operating margin | 39.2% | 10.6% | 29.9% | 10.2% |
- Q3 revenue grew 46%; nine-month revenue grew 39%. Software license revenue was the main driver: up 99% in Q3 and 104% for the nine-month period. Q3 license revenue included a $2.0 million biometric software sale to a systems integrator serving a U.S. government customer.
- Nine-month revenue also benefited from sales to the U.S. Navy and Marine Corps and recognition of revenue from a $4.5 million imaging license arrangement entered into in October 2015.
- Q3 net income declined despite higher operating income, primarily because 2015 included a $1.9 million tax benefit from reversal of an uncertain-tax-position reserve after an IRS examination. 2016 recorded income tax expense of $0.8 million for Q3 and $1.8 million year to date.
- Cash from operations was $2.69 million for the first nine months, versus $2.07 million in 2015. Investing used $0.08 million and financing used $1.58 million; the latter included $2.16 million of share repurchases.
Financial position and liquidity
- At September 30, 2016, cash and cash equivalents were $52.27 million, investments were $0.92 million, and total assets were $63.73 million. Cash increased $1.03 million from year-end 2015.
- Current assets were $56.91 million and current liabilities $4.84 million. The filing reports no debt. Deferred revenue totaled $3.60 million, down from $6.02 million at December 31, 2015.
- Stockholders’ equity was $58.65 million. The company repurchased 427,422 shares for $2.2 million from program inception through September 30; the authorization permits purchases up to $10 million through December 31, 2017.
Changes, outlook, and risks
- Services revenue fell 35% in Q3 and 61% year to date as earlier commercial and Marine Corps projects were substantially completed and replacement work had not been secured. Maintenance revenue grew modestly; DSL royalties declined.
- Management said the Certisign rollout had not produced meaningful revenue and commercial-market license revenue generally developed slowly in 2016. Revenue from commercial markets is difficult to predict.
- The October 2015 imaging license arrangement had $0.247 million of deferred revenue remaining at September 30, expected to be recognized in Q4 2016. Management cautioned that imaging license revenue would likely be about $0.9 million lower in Q4 than in the first three quarters of 2016.
- Management expects future R&D to focus on enhancing existing products and developing new ones. It believes cash will fund operations for at least the next 12 months, while noting financing cannot be assured if needed. No numerical revenue or earnings guidance was provided.
- A $0.238 million patent-related payment was recognized in Q3; further proceeds, if any, are uncertain. Management reported no lawsuit it believed likely to seriously harm the business and no material change to the risk factors in its 2015 Form 10-K.
- Key exposures include lumpy, project-based license sales and reliance on government-related contracts; the company also noted that Navy hardware orders may be minimal and had no hardware backlog at quarter-end.
Investor verification priorities
- Confirm the timing, size, and repeatability of government license awards, and whether commercial biometric sales and the Certisign rollout gain traction.
- Track the post-October 2016 imaging revenue run-rate after recognition of the remaining deferred amount.
- Monitor services revenue replacement, maintenance renewals, deferred revenue, and operating cash conversion.
- Review the tax comparison and realizability of the $1.0 million deferred tax asset, which had no valuation allowance, as well as available unrecorded R&D credit carryforwards.
- Check subsequent share repurchases and remaining authorization; assess investment exposure to two high-yield corporate bond issuers.