Aware, Inc. — Q2 2021 Form 10-Q
Business and period: Aware develops and sells biometric software and related services for government and commercial customers, with some imaging-software sales. This unaudited report covers the quarter and six months ended June 30, 2021; financial amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $4.264 | $1.890 | $8.682 | $5.409 |
| Operating loss | $(1.543) | $(3.701) | $(2.992) | $(5.048) |
| Net loss | $(1.542) | $(3.141) | $(2.990) | $(4.201) |
| Net loss per share | $(0.07) | $(0.15) | $(0.14) | $(0.20) |
- Revenue mix: Q2 software licenses were $1.723 million, maintenance $1.769 million, and services and other $0.772 million. First-half amounts were $4.090 million, $3.305 million, and $1.287 million, respectively.
- Margins: Cost of sales was $0.309 million in Q2 and $0.692 million for the first half, implying gross margins of approximately 92.8% and 92.0%, respectively. Operating losses narrowed, but the company remained loss-making.
- Cash flow: First-half operating cash use was $3.322 million, investing cash use $0.021 million, and financing cash use $0.030 million. Cash declined $3.373 million to $35.192 million.
- Liquidity and debt: Current assets were $40.392 million and current liabilities $4.632 million at June 30, 2021. The balance sheet reports no debt. Deferred revenue totaled $2.947 million, including $2.835 million current.
- Other balance-sheet measures: Total assets were $48.031 million and stockholders’ equity $43.287 million. Unbilled receivables were $2.867 million.
Material changes versus prior period
- Q2 revenue increased 126% year over year; first-half revenue rose 61%. Management attributed the increases primarily to higher software license revenue. First-half license growth also included subscription contracts and AFIX product sales following the 2020 acquisition.
- Operating loss improved by $2.158 million in Q2 and $2.056 million for the first half, as higher revenue more than offset higher expenses. Selling and marketing costs rose with increased headcount and contracted sales agents; engineering costs also increased with headcount.
- First-half maintenance revenue increased 21%, partly reflecting the AFIX acquisition. Services and other revenue increased to $1.287 million from $0.287 million.
- Cash and cash equivalents fell from $38.565 million at year-end 2020. Deferred revenue declined from $3.933 million to $2.947 million over the first half.
- No income tax benefit was recorded in 2021, versus benefits of $0.541 million in Q2 2020 and $0.680 million in the first half of 2020. A full valuation allowance remains against deferred tax assets.
Outlook, risks and unusual items
- Management said COVID-19 restrictions on customer meetings, demonstrations, trade shows and partner engagement adversely affected revenue and could continue to do so over the next several quarters. It said available cash should fund operations for at least 12 months from the filing date, while noting additional financing may be needed and may not be available.
- Remaining performance obligations for contracts longer than one year were $2.1 million; approximately 72% of remaining performance obligations were expected to be recognized over the next 12 months. No formal revenue or earnings guidance was provided.
- The company agreed to sell its Bedford property for $8.0 million, but the buyer could elect not to proceed during a 180-day due-diligence period, and closing remains subject to conditions. The sale was not completed as of the report date.
- Aware disclosed a February 2021 cyberattack affecting a small number of email accounts; it reported no material losses or business interruption. The filing added cybersecurity risk disclosure. The company also cited ongoing COVID-19, market, execution and other risks; it reported no legal proceeding it believed likely to seriously harm the business.
- In the first half, Aware granted options for 2.875 million shares, compared with 50,000 in the prior-year period. Stock-based compensation was $0.636 million. The $10 million share-repurchase authorization remained in place through December 31, 2021; no shares were repurchased in the first half of 2021.
Important facts for investors to verify
- Whether revenue growth, particularly license and services revenue, is recurring and sustainable, and how much is attributable to AFIX or individual contracts.
- Progress on operating cash use and losses, and the assumptions supporting management’s 12-month liquidity assessment.
- Whether the property buyer provides an affirmation notice and completes the proposed $8.0 million transaction, including associated costs and subsequent occupancy arrangements.
- The dilution and compensation implications of the substantial 2021 option grants.
- Any further developments in the disclosed cyber incident, cybersecurity controls, and COVID-19 effects on sales activity.