Aware, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. Aware develops and sells biometric software and services, and imaging software. Amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $3.518 | $3.732; down 5.7% |
| Operating loss | $(1.347) | $(0.044) |
| Net income (loss) | $(1.060) | $0.228 |
| Diluted loss / earnings per share | $(0.05) | $0.01 |
| Cash used in operations | $(0.549) | $(1.051) |
| Cash and cash equivalents | $46.857 at March 31 | $47.742 at December 31, 2019 |
- Revenue mix: software licenses $1.969 million (up 28%); maintenance $1.362 million (essentially flat); services $0.187 million (down from $0.840 million).
- Operating loss widened as lower revenue and higher operating expenses more than offset lower cost of services. Operating margin was approximately -38% versus -1% in Q1 2019.
- Research and development rose 29% to $2.272 million; selling and marketing rose 56% to $1.285 million; general and administrative rose 58% to $1.138 million.
- Cash declined $0.885 million during the quarter. Investing cash outflow was $0.286 million, principally property and equipment purchases; financing cash outflow was $0.050 million for employee share-tax withholding.
- Total assets were $56.416 million and stockholders’ equity was $52.408 million at March 31. The balance sheet reports no borrowings; current liabilities were $3.964 million versus current assets of $52.361 million.
Material changes and operating developments
- Higher biometric license sales, particularly to a direct government customer, partly offset the sharp fall in services revenue. Services revenue fell mainly because activity declined on a large systems-integrator project and there were fewer service projects.
- Services backlog was $0.4 million at March 31. The company expected work on the large project to continue for approximately one more quarter.
- Revenue from goods or services transferred at a point in time increased to $1.952 million from $1.172 million; revenue recognized over time declined to $1.566 million from $2.560 million.
- Stock-based compensation was $83,000 versus $14,000. A March 2020 grant of 210,000 unrestricted shares carried $533,000 of total compensation expense; $10,000 was recognized in Q1, with the company expecting to recognize the balance over the remaining three quarters of 2020.
Outlook, risks, and other notable items
- Management said COVID-19 had prevented in-person customer meetings and demonstrations, attendance at trade shows and conferences, and meetings with prospective strategic partners. It expected these effects to adversely affect revenue over the next several quarters, but could not predict the full impact on the business or financial results.
- Management believed cash and cash equivalents would fund operations for at least the next 12 months, while noting it could not assure that additional financing would not be needed or available.
- Remaining performance obligations for software maintenance contracts longer than one year totaled $1.4 million; approximately 66% of remaining performance obligations overall were expected to be recognized within 12 months.
- The company recorded a Q1 income tax benefit of approximately $146,000 as a long-term tax receivable, reflecting an estimated CARES Act-related alternative minimum tax credit refund potential of approximately $736,000. It had not decided whether to carry back or forward its estimated 2020 net operating loss and maintained a full valuation allowance on other deferred tax assets.
- No patent-arrangement income was recorded in Q1 2020, compared with $49,000 in Q1 2019; future royalties are uncertain. The filing says the company was not party to any lawsuit or proceeding it believed likely to seriously harm its business.
- The company said disclosure controls were effective and there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether COVID-19 materially affected customer demand, project timing, and revenue in subsequent quarters.
- Whether biometric license growth can offset the decline in services revenue, and how the large project and $0.4 million services backlog progress.
- Whether elevated operating expenses and quarterly cash usage persist relative to revenue and the company’s cash reserves.
- Whether the company elects to carry back its 2020 tax loss and realizes the estimated tax refund benefit.
- Whether the 210,000-share grant and other stock awards produce the expected compensation expense and share dilution.