Aware, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and reporting period
Aware develops and sells biometric software, solutions and services for government and commercial applications, including fingerprint, face, iris and voice identification and authentication. It also sells imaging software. Revenue is reported as one operating segment.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 / comparator |
|---|---|---|
| Revenue | $4.419 million | $3.518 million; up 26% |
| Operating loss | $(1.449) million | $(1.347) million |
| Net loss | $(1.448) million | $(1.060) million |
| Basic and diluted loss per share | $(0.07) | $(0.05) |
| Operating cash flow | $(2.471) million | $(0.549) million |
| Cash and cash equivalents | $36.040 million at March 31 | $38.565 million at December 31, 2020 |
License revenue was $2.367 million, maintenance revenue $1.536 million, and services and other revenue $0.516 million. Calculated consolidated gross margin was approximately 91% versus 95% in the prior-year quarter; operating margin was approximately negative 33% versus negative 38%.
Cash used in operations was $2.471 million, and cash declined $2.525 million during the quarter. The filing reports no debt. Current assets were $41.925 million and current liabilities $5.224 million at quarter-end. Stockholders’ equity was $44.365 million. Management believes cash will fund operations for at least the next 12 months, while noting additional financing may be required and cannot be assured.
Material changes versus the prior comparable period
- Revenue increased $0.901 million, mainly reflecting higher software license sales. Subscription-based contract revenue increased $0.6 million, and AFIX products contributed $0.2 million; fixed-amount contract revenue partly offset the increase.
- Services and other revenue rose to $0.516 million from $0.187 million, supported by services on a large systems-integrator project and other customers. Maintenance revenue increased 13%, partly due to the AFIX acquisition.
- Operating expenses rose to $5.868 million from $4.865 million. Selling and marketing increased 29%, general and administrative increased 26%, and research and development increased 5%; management cited higher employee costs, headcount and contracted sales agents.
- Operating loss widened despite revenue growth. Interest income fell to $1,000 from $148,000, and there was no income tax benefit, compared with a $139,000 benefit in Q1 2020.
- Operating cash use increased substantially year over year. The filing attributes the current-quarter cash use primarily to the net loss and changes in assets and liabilities, partly offset by noncash expenses.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management says COVID-19 restrictions on in-person customer meetings, demonstrations, trade shows and partner engagement adversely affected revenue in 2020 and Q1 2021 and may continue to do so over the next several quarters.
- Remaining performance obligations for contracts longer than one year totaled $1.9 million; approximately 75% of remaining performance obligations are expected to be recognized within 12 months.
- Aware recorded no Q1 2021 income tax benefit and maintained a full valuation allowance on deferred tax assets. A potential federal tax refund of approximately $1.5 million related to the 2020 net operating loss carryback was discussed; the company had not decided whether to carry the loss back or forward. A $1.398 million long-term tax receivable was reported on the balance sheet.
- On April 26, 2021, after quarter-end, Aware agreed to sell its Bedford property for $8 million, subject to the buyer’s election to proceed within 180 days and other closing conditions. The buyer may abandon the transaction during due diligence. Aware may occupy the property for approximately 90 days after closing at no cost.
- The AFIX product-line acquisition, completed in November 2020 for approximately $2.4 million, added biometric software and $1.651 million of goodwill.
- Aware disclosed a February 2021 cyberattack affecting a small number of email accounts. It reported no material loss or business interruption, but warned that cybersecurity incidents could cause costs, disruption, legal exposure or reputational harm.
- The company’s $10 million share-repurchase authorization expires December 31, 2021; no shares were repurchased in Q1. Approximately $9.294 million remained available at March 31.
Important facts for investors to verify
- Whether revenue growth, particularly subscription, services and AFIX-related revenue, is repeatable and converts into cash.
- Drivers of higher operating expenses and cash burn, and progress toward reducing operating losses.
- Status and realization timing of the potential tax refund, including the 2020 loss carryback decision.
- Whether the Bedford property sale proceeds to closing, and the transaction’s conditions, costs and effects on occupancy.
- Whether COVID-related sales limitations or cybersecurity risks have worsened since the filing.
- Potential dilution: the company granted options for 2,875,000 shares in Q1; potential shares were excluded from diluted loss per share because they were antidilutive.