Aware, Inc. — Q1 2018 Form 10-Q
Business and period: Aware develops and sells biometrics software and services, with additional imaging software revenue. This unaudited report covers the three months ended March 31, 2018; comparative 2017 results reflect retrospective adoption of ASC 606.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $2.911 million | $4.156 million |
| Operating income (loss) | $(0.723) million | $0.222 million |
| Net income (loss) | $(0.495) million | $0.301 million |
| Net income (loss) per diluted share | $(0.02) | $0.01 |
| Operating cash flow | $(0.803) million | $0.019 million |
| Cash and cash equivalents at period end | $50.648 million | $48.994 million |
Revenue declined 30% year over year. Software license revenue was $1.473 million (down 41%); maintenance was $1.294 million (up 3%); services were $0.144 million (down 62%); and royalties were zero. Cost of software licenses was zero versus $0.247 million, while cost of services fell to $0.050 million from $0.216 million. Service gross margin rose to 65% from 42%. Research and development was $1.875 million, selling and marketing $0.924 million, and general and administrative $0.785 million.
At March 31, 2018, total assets were $63.928 million, current assets $54.470 million, and current liabilities $3.816 million. Stockholders’ equity was $60.001 million. No debt is listed on the balance sheet. Cash decreased $0.960 million during the quarter; investing used $0.096 million and financing used $0.061 million. Management stated cash should fund operations for at least 12 months, while noting additional financing may be required and may not be available.
Changes, outlook, and risks
- The operating result swung from $0.222 million income to a $0.723 million loss, primarily on lower biometrics license sales, lower services revenue, and no patent-related income; lower software-license and services costs partly offset the decline.
- Biometrics license sales fell to $1.1 million from $2.2 million, mainly because Q1 2017 included a large U.S. Marines sale that did not recur. The company cannot predict whether that customer will buy again. Management described commercial biometrics markets as emerging and future revenue there as uncertain.
- Services backlog was minimal. Management expects to continue focusing R&D on existing and new products. It considers future DSL royalties unlikely and cannot predict whether the patent arrangement will generate further income.
- ASC 606 was adopted January 1, 2018 using the full retrospective method. It reduced adjusted Q1 2017 revenue by $0.191 million and net income by $0.104 million; adoption did not affect cash flows. Management expects approximately 95% of remaining performance obligations to be recognized over the next 12 months.
- Q1 2018 included a $0.066 million income tax benefit. The company reported $5.2 million of deferred tax assets with no valuation allowance, based on management’s assessment that realization is more likely than not. The IRS completed its 2015 tax examination in February 2018 with no changes.
- Market risk primarily relates to interest rates on cash invested mostly in short-term money market funds; management does not expect a general rate increase to cause a material loss. No material change to the 2017 Form 10-K risk factors was reported. The company said it was not party to litigation likely to seriously harm its business.
Important facts for investors to verify
- Whether and when large government biometrics license orders recur, and the effect of customer and project timing on quarterly revenue.
- Whether maintenance renewals can offset volatility in license and services sales, given minimal services backlog.
- Cash burn, operating performance, and management’s stated 12-month liquidity assessment.
- Realizability of the $5.2 million deferred tax asset and the ongoing ASC 606 estimates, particularly variable consideration and contract balances.
- Potential future proceeds from the patent arrangement and any DSL royalties, which management says are uncertain or unlikely.