Aware, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Aware develops and sells biometric software and services, and imaging software.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $3.732 million | $2.911 million | +28% |
| Operating loss | $44,000 | $723,000 | Loss narrowed |
| Net income (loss) | $228,000 | ($495,000) | Turned profitable |
| Diluted EPS | $0.01 | ($0.02) | Improved |
| Operating cash flow | ($1.051 million) | ($803,000) | Greater cash use |
- Revenue mix: Software licenses were $1.537 million (+4%), maintenance $1.355 million (+5%), and services $840,000, up from $144,000. Biometrics revenue rose to $3.472 million from $2.485 million; imaging revenue declined to $260,000 from $426,000.
- Expenses and margins: Total costs and expenses increased to $3.825 million from $3.634 million. The reported operating loss equates to an approximately 1.2% operating margin, versus approximately 24.8% negative in Q1 2018. Services gross margin fell to 38% from 65% as cost of services rose to $518,000 from $50,000.
- Cash and liquidity: Cash and cash equivalents were $50.414 million at March 31, down $1.198 million from year-end. Current assets were $56.751 million and current liabilities $3.849 million. The balance sheet reports no debt; total liabilities were $3.914 million.
- Cash flows and capital allocation: Investing used $20,000, principally for equipment; financing used $127,000, including $78,000 for share repurchases and $49,000 for employee tax withholding on surrendered shares.
- Other balance-sheet items: Unbilled receivables increased to $3.918 million from $3.279 million. Deferred revenue, current and long-term combined, was $2.516 million, down from $3.099 million at the start of the quarter.
Material changes and management commentary
- Management attributed the revenue and operating improvement mainly to higher services and biometric license revenue, plus $49,000 of patent-related income; lower imaging license sales and higher total costs partly offset the gains.
- Biometric license revenue included $246,000 from an agreement with a systems integrator signed in Q2 2018. Related development work was expected to continue for approximately two to three quarters. Services backlog was $600,000 at quarter-end.
- Engineering costs overall rose $353,000 year over year, while more engineers were allocated to customer services and reported R&D expense declined 6% to $1.760 million. Management expects to continue enhancing existing products and developing new products.
- Revenue from the United Kingdom increased to $880,000 from $134,000; U.S. revenue declined to $1.723 million from $2.069 million. Management said future commercial biometrics revenue is difficult to predict because those markets are emerging.
Outlook, risks and unusual items
- Management believes existing cash will fund operations for at least the next 12 months, while noting that additional financing could be needed and may not be available.
- The company expected to recognize approximately 97% of remaining performance obligations over the next 12 months. The filing does not provide a clear total amount for all remaining performance obligations; maintenance obligations on contracts longer than one year were $0.1 million.
- Patent-arrangement income depends on a third party’s monetization efforts; future receipts, if any, are not predictable. Interest income increased to $275,000 from $162,000, primarily due to higher money-market rates.
- Deferred tax assets totaled $5.2 million with no valuation allowance. Management judged realization more likely than not, but said it would reassess; a change in evidence could require an allowance.
- The filing cites the risk factors in the 2018 Form 10-K and reports no material change. It says the company was not party to litigation believed likely to seriously harm the business. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
- A 143,000-share unrestricted stock grant made in March had $547,000 of total compensation expense; $14,000 was recognized in Q1 and the remaining $533,000 was expected to be expensed over the remaining three quarters of 2019.
Important facts for investors to verify
- Whether the systems-integrator project progresses on schedule and converts into sustained license and services revenue; monitor its completion, backlog and customer concentration.
- Whether the sharp year-over-year increase in services revenue is repeatable and whether services margins recover from 38%.
- Why operating cash use exceeded reported net income, particularly the increase in unbilled receivables and decline in deferred revenue.
- Whether maintenance renewals, imaging sales and emerging commercial biometrics markets meet management’s expectations; no numerical revenue guidance was provided.
- Whether cash remains sufficient as operating cash outflows continue, and whether deferred tax assets remain realizable without a valuation allowance.