Aware, Inc. — Q3 2015 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2015. Aware develops and sells biometric software and services, with a smaller imaging-software business and legacy DSL royalties. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $4.04 | $6.03 | $12.67 | $19.41 |
| Operating income | $0.43 | $4.16 | $1.29 | $6.85 |
| Net income | $2.20 | $2.60 | $2.79 | $4.34 |
| Diluted EPS | $0.10 | $0.11 | $0.12 | $0.19 |
- Revenue fell 33% in Q3 and 35% year to date. Q3 license revenue was $2.08 million, maintenance $1.22 million, services $0.65 million, royalties $0.09 million, and hardware revenue was zero.
- Year-to-date revenue declines reflected lower software licenses and services and the absence of $4.81 million of hardware sales recorded in the prior-year period. No patent-related income was recorded in 2015; 2014 included a $2.13 million gain on patent sales.
- Net income benefited from a $1.9 million tax benefit after the IRS completed its 2012 examination without changes and Aware reversed a reserve for uncertain tax positions. The benefit partially offset lower operating results.
- Q3 services gross margin declined to 36% from 61%; year-to-date services gross margin was 44% versus 57%. Management cited unexpected labor to resolve final testing issues on a government project and more hours than expected on other projects.
- Operating cash flow was $2.07 million for the first nine months, versus $5.56 million a year earlier. Cash and cash equivalents were $46.42 million at September 30, up $2.44 million from year-end. Total current assets were $50.46 million and current liabilities $3.39 million. The filing reports no debt.
Changes, outlook, and risks
- Management said Q4 2015 services revenue was likely to decline from the prior-year quarter because two of three cited government projects had been completed; a major project wound down and completed in Q3.
- Aware expected to deliver a $1.1 million hardware order in Q4 and a $0.3 million order over the next quarter or two. Management said future orders from the customer may be minimal and demand is difficult to forecast; hardware growth is not part of its strategy.
- Commercial biometric projects contributed license and services revenue, but management said future commercial-market revenue is uncertain. It plans to continue product development and expects to focus R&D on existing and new products.
- Management believed cash would fund operations for at least 12 months, while noting additional financing could be required and might not be available. Interest-rate exposure was primarily through cash investments and $0.9 million of high-yield corporate bonds; the filing also notes default risk.
- The 2015 results include a one-time tax-reserve reversal; comparisons are also affected by prior-year patent-sale income and hardware deliveries. The filing reports no lawsuit believed likely to seriously harm the business and no material change to previously disclosed risk factors.
Investor verification points
- Check the sustainability of revenue as government services projects roll off and whether commercial biometric customers generate repeat business.
- Verify delivery, revenue recognition, and collectability for the $1.1 million and $0.3 million hardware orders, and assess any further customer demand.
- Separate recurring operating performance from the $1.9 million tax benefit and the prior-year $2.1 million patent gain.
- Monitor services project margins and labor overruns, cash generation, and realization of deferred tax assets and tax-credit carryforwards.