Aware, Inc. — Q2 2018 Form 10-Q Summary
Business and period: Aware develops and sells biometrics software and services, with additional imaging software revenue. This unaudited report covers the quarter and six months ended June 30, 2018; amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $3.760 | $2.542 | $6.671 | $6.698 |
| Operating income (loss) | $(0.381) | $0.064 | $(1.104) | $0.286 |
| Net income (loss) | $(0.188) | $0.114 | $(0.683) | $0.415 |
| Diluted earnings (loss) per share | $(0.01) | $0.01 | $(0.03) | $0.02 |
| Operating margin | (10.1%) | 2.5% | (16.5%) | 4.3% |
Q2 revenue rose about 48% year over year, while six-month revenue was essentially flat. Cash and cash equivalents were $49.1 million at June 30, down $2.5 million from year-end 2017. Operating cash use was $2.2 million for the six months; investing cash use was $0.1 million and financing cash use was $0.2 million. The company reported no debt. Current assets were $54.4 million versus current liabilities of $3.9 million; deferred revenue totaled $2.4 million, including $0.1 million long term.
Interest income was $0.2 million for Q2 and $0.4 million for the six-month period. The company had $5.2 million of deferred tax assets and recorded no valuation allowance, based on management’s assessment that realization was more likely than not.
Material changes and management commentary
- Q2 software license revenue increased to $1.7 million from $1.0 million, maintenance revenue rose to $1.4 million from $1.3 million, and services revenue increased to $0.7 million from $0.2 million. The six-month comparison was weaker for licenses ($3.1 million versus $3.5 million), partly offset by higher maintenance and services revenue.
- Q2 results included no patent-arrangement income, compared with $1.3 million in Q2 2017; six-month 2017 patent income was $1.4 million. This, together with higher engineering costs, contributed to the shift from operating income to operating loss.
- A Q2 systems-integrator project contributed $0.6 million of license revenue in the first half. Management expected related development effort and service costs to continue for approximately three to four quarters. Services backlog was $1.5 million at June 30.
- Management said cash was expected to fund operations for at least the next 12 months, while noting that additional financing might be required and could not be assured. No formal earnings or revenue guidance was provided.
- Remaining performance obligations for services and maintenance contracts lasting more than one year were $0.3 million and $1.7 million, respectively; approximately 73% of total remaining obligations was expected to be recognized within 12 months.
Risks, contingencies, and unusual items
- Revenue from projects can fluctuate with contract wins, delivery schedules, and project completion. The large systems-integrator project and the resulting revenue and cost timing are important near-term variables. Management said it could not predict future revenue from emerging commercial biometrics markets or whether the U.S. Marines would make similar purchases.
- Patent-related income depends on third-party monetization activity and is uncertain; none was recorded in the 2018 periods presented. Management also considered future DSL royalties unlikely.
- ASC 606 was adopted January 1, 2018 using full retrospective application. The filing restated comparative results; adoption reduced reported 2017 revenue by $0.2 million for Q2 and $0.4 million for the first half, with related changes to expenses, taxes, and net income.
- The board authorized up to $10 million of share repurchases through December 31, 2019. The company repurchased 33,771 shares for approximately $0.137 million during Q2.
- The IRS completed its examination of the 2015 tax return in February 2018 with no changes. The company reported no litigation expected to seriously harm the business and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the systems-integrator project progresses as expected, including remaining revenue, service costs, and backlog conversion.
- Whether maintenance renewals remain strong and license revenue recovers from the first-half decline.
- Cash burn and the company’s assumption that existing cash will support at least 12 months of operations.
- The continued realizability of the $5.2 million deferred tax asset without a valuation allowance.
- Effects of ASC 606 retrospective restatement when comparing 2018 results with previously reported periods.
- Actual repurchases under the $10 million authorization and any future patent or DSL royalty proceeds.