Aware, Inc. — Q2 2019 Form 10-Q
Business context and period: Aware develops and sells biometrics software and services, with additional imaging software revenue. This unaudited filing covers the quarter and six months ended June 30, 2019; financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $3.012 million | $3.760 million | $6.744 million | $6.671 million |
| Operating loss | $1.183 million | $0.381 million | $1.228 million | $1.104 million |
| Net loss | $0.938 million | $0.188 million | $0.710 million | $0.683 million |
| Net loss per share | $0.04 | $0.01 | $0.03 | $0.03 |
| Operating cash flow | Not separately reported | Not separately reported | $(2.318) million | $(2.182) million |
- Revenue mix: Q2 software license revenue was $1.189 million, maintenance $1.320 million, and services $0.503 million. First-half figures were $2.725 million, $2.675 million, and $1.344 million, respectively.
- Cash and liquidity: Cash and cash equivalents were $48.959 million at June 30, down $2.653 million from year-end 2018. First-half investing cash use was $0.069 million and financing cash use was $0.266 million. The company reported no debt on the balance sheet.
- Balance sheet: Total assets were $65.055 million; current liabilities were $3.865 million. Deferred revenue totaled $2.424 million, including $2.345 million current. Unbilled receivables were $3.659 million.
- Margins: The filing does not provide an overall gross margin. Services gross margin was 36% in Q2 2019 versus 47% in Q2 2018, and 38% for the first half versus 50% a year earlier.
Material changes versus comparable periods
- Q2 revenue fell about 20% year over year, as lower biometrics and imaging license sales and lower services revenue more than offset other activity. Operating loss widened to $1.183 million.
- First-half revenue increased about 1%, led by services revenue growth of 59%; this was partly offset by lower imaging license sales. First-half operating loss widened to $1.228 million as total costs and expenses rose to $8.021 million from $7.775 million.
- Research and development expense increased to $2.091 million in Q2 and $3.851 million in the first half, mainly reflecting higher third-party development spending and, to a lesser extent, employee costs. Selling and marketing expense declined in both periods.
- Interest income increased to $0.278 million in Q2 and $0.553 million in the first half, which management attributed primarily to higher money-market interest rates.
Outlook, commentary, and risks
- No numerical revenue or earnings guidance is provided. Management said cash should be sufficient to fund operations for at least the next 12 months, while noting additional financing might be required and may not be available.
- Development work on a large systems-integrator project was expected to continue for approximately two to three more quarters. Services backlog was $0.3 million at June 30.
- Management expects to continue focusing R&D on enhancing existing products and developing new products. It described commercial biometrics markets as emerging and said future revenue from them is difficult to predict.
- Patent-arrangement income was $0.049 million in the first half and zero in Q2; future proceeds are uncertain. The company reported $5.3 million of deferred tax assets with no valuation allowance, based on management’s expectation they are more likely than not to be realized.
- The filing reported no material change to the risk factors in the 2018 Form 10-K. Management stated that disclosure controls were effective and that no material litigation was expected to seriously harm the business.
Important facts for investors to verify
- Whether license sales, particularly imaging and biometrics project-related sales, recover after the Q2 decline.
- Whether the large systems-integrator project proceeds as expected and converts unbilled receivables into billings and cash.
- Whether operating cash burn and lower deferred revenue remain manageable relative to the company’s cash balance.
- Whether the $5.3 million deferred tax asset remains realizable, given continuing losses.
- The effect of ongoing stock repurchases; the company used $0.239 million for repurchases in the first half and had $9.369 million remaining under its announced program at June 30.