Aware, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Aware develops and sells biometric software and related services to government and commercial customers.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $4.24 | $4.26 | $8.93 | $8.68 |
| Operating loss | $(1.35) | $(1.54) | $(2.64) | $(2.99) |
| Net loss | $(1.29) | $(1.54) | $(2.57) | $(2.99) |
| Basic loss per share | $(0.06) | $(0.07) | $(0.12) | $(0.14) |
- Q2 revenue mix: Software licenses $2.02 million, maintenance $1.82 million, and services and other $0.40 million. Cost of sales was $0.32 million; gross profit was approximately $3.91 million, or 92% of revenue.
- Six-month cash flow: Operating activities used $2.56 million; investing activities used $2.51 million, mainly the $2.50 million note investment; financing activities provided $0.09 million. Cash decreased $4.98 million to $24.98 million.
- Balance sheet and liquidity at June 30: Total assets $46.65 million; stockholders’ equity $39.85 million; current assets $37.87 million and current liabilities $5.85 million. Cash was $24.98 million. The filing reports no conventional debt; liabilities include deferred revenue and a $0.92 million contingent acquisition payment.
- Other financial items: Interest income was $0.06 million in Q2 and $0.07 million for six months. No income tax benefit was recorded; Aware maintained a full valuation allowance on deferred tax assets other than the previously recognized tax receivable.
Changes versus comparable periods
- Q2 revenue declined about 1%, while the operating loss narrowed from $1.54 million to $1.35 million, mainly from lower operating expenses, partly offset by reduced services revenue.
- Six-month revenue increased about 3%, primarily from higher software license and maintenance revenue, partly offset by lower services and other revenue. The operating loss narrowed from $2.99 million to $2.64 million, primarily reflecting the revenue increase.
- Q2 software license revenue rose 17% and maintenance revenue rose 3%; services and other revenue fell about 48%. For six months, licenses rose 14%, maintenance rose 5%, and services and other fell about 38%.
- Cash fell from $29.96 million at year-end 2021, including the $2.50 million investment in a note receivable and cash used in operations.
Outlook, commentary, and notable items
- Management said cash and cash equivalents should fund operations for at least 12 months from the filing date, while noting additional financing could be required and future needs depend on growth, results, and investment requirements. No numerical revenue or earnings guidance was provided.
- Management plans to focus R&D on existing and new products and expects to expand sales and marketing. It said future commercial-market revenue is difficult to predict; services revenue and margins may fluctuate with project timing, complexity, and pricing.
- Remaining performance obligations for contracts longer than one year totaled $2.4 million; approximately 67% of remaining performance obligations overall were expected to be recognized within 12 months.
- In March 2022, Aware invested $2.5 million in an Omlis note bearing 5% annual interest and maturing in 2026. It has conversion rights and received a warrant to purchase up to 8% of Omlis equity; the warrant was valued at zero. The note’s reported June 30 fair value was $2.54 million, a Level 3 measurement.
- After quarter-end, on July 15, Aware sold its Bedford office property for $8.9 million; the filing reports net proceeds of $8.6 million and says the gain will be recorded in Q3 2022. The company had classified $2.9 million of related assets as held for sale at June 30.
- Aware waived its right to terminate a new office lease. The planned 10-year, six-month lease provides for $8.2 million of rent over its term; commencement was anticipated after landlord construction, expected around September or October 2022.
- The FortressID acquisition includes contingent payments of up to $4.0 million tied to 2022 and 2023 revenue targets; the recorded fair value was $0.92 million at June 30. Management cited identity proofing and fraud mitigation as strategic benefits.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. It reported no material legal proceedings and no material changes to the risk factors in the 2021 Form 10-K. Inflation had not materially affected results to date.
Investor verification priorities
- Check the six-month 2021 diluted loss-per-share figure: the statement displays positive $0.14 despite a net loss and basic loss per share of $(0.14); the filing text does not provide a clear explanation.
- Review the timing and realized gain from the July office sale, and the cash, costs, and obligations associated with the replacement office lease.
- Assess the Omlis note’s credit, conversion, and valuation risks, as well as the FortressID earnout’s revenue targets and potential cash payments.
- Monitor the decline in services revenue, the concentration and timing of license sales, RPO conversion, and cash use relative to management’s 12-month liquidity assertion.
- Consider the $10 million share repurchase authorization: only $2,639 had been used by June 30, 2022; the program may be modified or suspended.