Aware, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results. Aware develops and sells biometric software and services, with additional imaging software revenue.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $1.890 million | $3.012 million | $5.409 million | $6.744 million |
| Operating loss | $3.701 million | $1.183 million | $5.048 million | $1.228 million |
| Net loss | $3.141 million | $0.938 million | $4.201 million | $0.710 million |
| Net loss per share, basic and diluted | $0.15 | $0.04 | $0.20 | $0.03 |
Revenue fell 37% in Q2 and 20% in the first half year over year. Operating loss equaled approximately 196% of Q2 revenue (39% in Q2 2019) and 93% of first-half revenue (18% in first-half 2019). The filing does not provide an overall gross margin.
- Q2 software license revenue was $0.409 million, down 66%; maintenance revenue was $1.382 million, up 5%; services revenue was $0.099 million, down from $0.503 million.
- First-half license revenue was $2.381 million, down 13%; maintenance revenue was $2.741 million, up 2%; services revenue was $0.287 million, down 79%.
- Biometrics generated $1.709 million of Q2 revenue and $4.971 million for the half; imaging contributed $0.181 million and $0.438 million, respectively.
- Cash used in operations was $1.944 million in the first half, compared with $2.318 million in 2019. Investing used $0.352 million and financing used $0.495 million. Cash declined $2.791 million to $44.951 million.
Financial position and liquidity
At June 30, 2020, total assets were $54.166 million, including $49.631 million of current assets. Current liabilities were $5.036 million, including $2.882 million of deferred revenue; long-term deferred revenue was $0.079 million. The balance sheet reports no debt. Stockholders’ equity was $49.051 million. Cash and cash equivalents were $44.951 million, including $43.740 million in money market funds measured at Level 1 fair value.
Management said existing cash should fund operations for at least the next 12 months, while cautioning that additional financing could be needed and might not be available. The company spent $0.470 million repurchasing 138,601 shares in Q2 under a new $10 million authorization; approximately $9.529 million remained available at quarter-end.
Material changes and management commentary
- Management attributed Q2 license weakness mainly to COVID-19-related procurement delays and lower follow-on revenue from a large systems-integrator project. It said the pandemic also impeded customer meetings, product demonstrations, trade shows, and partner discussions.
- The company expects COVID-19 to adversely affect revenue over the next several quarters, but did not provide quantified guidance. It also noted uncertainty in predicting revenue from emerging commercial biometric markets.
- Operating expenses rose: first-half R&D increased to $4.694 million, selling and marketing to $2.466 million, and general and administrative expense to $2.963 million. Management cited investment in sales and engineering headcount, administrative staff turnover, and pandemic-related remote-work costs.
- Q2 G&A included $0.3 million of severance, $0.1 million of recruiting and transition costs, $0.1 million of legal fees, $0.1 million of bad-debt expense, and $0.1 million of remote-work hardware and software costs. First-half severance and transition expense was $0.7 million.
- Q2 services cost exceeded services revenue, producing a negative 66% services gross margin; first-half services gross margin was negative 16%. The filing attributes this largely to timing of project costs and revenue recognition.
- Interest income declined to $0.019 million in Q2 and $0.167 million for the half, which management attributed to lower market interest rates; it expects low rates to continue.
Taxes, risks, and other items
The CARES Act may allow the company to carry back its estimated 2020 net operating loss. A potential carryback could support an approximately $1.2 million alternative minimum tax credit refund. Aware had not decided whether to carry the loss back or forward; it recorded a $0.691 million long-term tax receivable and a $0.680 million first-half tax benefit. It maintained a full valuation allowance on other deferred tax assets.
The filing identifies COVID-19 impacts as a material uncertainty and refers investors to the risk factors in the 2019 Form 10-K. Aware reported no legal proceeding it believed likely to seriously harm the business. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether delayed customer procurements resume and how COVID-19 affects revenue in subsequent quarters.
- Whether maintenance renewals can offset volatility in licenses and project-based services.
- Whether expense levels, including elevated R&D, sales and marketing, and G&A, are sustainable relative to revenue.
- The company’s eventual CARES Act loss carryback election and realization of the estimated tax refund.
- Cash burn, the adequacy of the stated 12-month liquidity outlook, and future use of the share repurchase authorization.