Aware, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; comparisons are to the corresponding 2015 periods. Dollar amounts below are in millions unless stated otherwise. Aware develops and sells biometrics software and services, and also generates imaging software and DSL royalty revenue.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $6.90 | $4.51 | $11.74 | $8.63 |
| Operating income | $2.07 | $0.48 | $2.95 | $0.86 |
| Net income | $1.44 | $0.32 | $2.07 | $0.59 |
| Diluted EPS | $0.06 | $0.01 | $0.09 | $0.03 |
| Operating margin | 30.0% | 10.6% | 25.2% | 10.0% |
| Net margin | 20.8% | 7.1% | 17.6% | 6.8% |
- Quarterly revenue rose 53%; six-month revenue rose 36%. License sales led growth: software license revenue was $5.35 million for Q2 and $8.12 million for the first half, versus $2.27 million and $3.92 million, respectively, in 2015.
- Q2 revenue included a $3.2 million biometrics software license sale to the U.S. Marine Corps (USMC). Results also benefited from recognition of a $4.5 million imaging software license agreement signed in October 2015, recognized over twelve months through October 2016.
- Six-month operating cash flow was $1.01 million, versus cash used of $0.10 million in 2015. Cash and cash equivalents were $52.26 million at June 30, up from $51.23 million at year-end. Investing activities used $0.05 million; financing activities provided $0.07 million.
- Current assets were $58.28 million and current liabilities $6.45 million. The company reported no borrowings or debt balance in the provided statements. Deferred revenue was $4.41 million current and $0.21 million long-term.
- Income tax expense was $0.71 million in Q2 and $1.02 million for six months. Six-month tax expense included the effect of research credits; $0.46 million of excess stock-compensation tax benefits was recorded in equity and financing cash flows.
Changes and operating trends
- Biometrics license revenue benefited from Navy sales in Q1 and the USMC sale in Q2. These were partly offset by lower commercial and non-U.S. government license sales. Aware said the Certisign commercial rollout had not produced meaningful revenue and commercial license activity was slow to develop.
- Imaging license revenue increased, principally from the October 2015 systems-integrator agreement; $1.1 million of that agreement’s fee was recognized in Q2 2016.
- Services revenue fell 75% in Q2 and 69% for the first half, as prior-year commercial and USMC projects were substantially completed. Services backlog was minimal at June 30, and revenue may decline absent new projects.
- Research and development expense increased 25% in Q2 and 20% year to date, primarily as engineering staff shifted from customer projects to internal development. Total engineering costs, including services costs, were lower year over year for both periods.
- General and administrative expense declined 9% for both the quarter and first half, mainly due to lower stock-based compensation and legal fees. DSL royalties were nearly flat year to date; management expects them to decline in future periods.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expects to continue product enhancement and development and to focus on legacy government biometrics markets while pursuing emerging commercial markets; it said commercial-market revenue is difficult to predict.
- Aware believes its cash and cash equivalents are sufficient to fund operations for at least the next twelve months, while noting that additional financing could be needed and may not be available.
- Management could not predict the size or timing of potential future USMC license purchases. It also expects minimal future Navy hardware orders and had no hardware orders in backlog at quarter-end.
- The board authorized up to $10 million of share repurchases through December 31, 2017. In Q2, Aware repurchased 81,980 shares for approximately $349,000; $9.65 million remained available under the authorization at June 30.
- The company reported no material change to the risk factors in its 2015 Form 10-K and no lawsuit it believed likely to seriously harm the business. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
- Aware adopted deferred-tax balance-sheet classification guidance early in 2016, with no material impact. It was evaluating the effects of the new revenue standard and share-based payment guidance.
Investor verification points
- Verify the timing, terms, and repeatability of the USMC and Navy license sales, and the remaining recognition schedule for the $4.5 million imaging agreement.
- Track commercial biometrics adoption, including Certisign, and whether new services projects replenish the minimal backlog.
- Assess the quality and sustainability of operating cash flow, including working-capital movements and deferred-revenue changes.
- Monitor the declining royalty stream, Navy maintenance and hardware trends, and execution of the share repurchase authorization.
- Review the realizability of the $1.0 million deferred tax asset, unrecorded research-credit carryforwards, and any subsequent updates to accounting-standard assessments.