Aware, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are with FY2018. This is an annual filing, not a standalone fourth-quarter report.
Business context
Aware develops and sells biometric software, solutions, and services, primarily for government applications, with commercial markets also targeted. It sells through systems integrators, OEMs, VARs, partners, and directly to customers. The company reported one operating segment.
Financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $12.2 million | $16.1 million |
| Operating income (loss) | $(4.1) million | $0.4 million |
| Income (loss) before taxes | $(3.1) million | $1.2 million |
| Income tax provision (benefit) | $5.2 million | $(0.01) million |
| Net income (loss) | $(8.3) million | $1.2 million |
| Net loss per diluted share | $(0.39) | Net income per diluted share: $0.06 |
| Cash from (used in) operating activities | $(2.9) million | $0.7 million |
| Cash and cash equivalents at year-end | $47.7 million | $51.6 million |
Revenue declined approximately 24%. Software license revenue fell 43% to $4.6 million; maintenance revenue declined 3% to $5.3 million; and services revenue declined 13% to $2.3 million. Biometrics revenue was $11.2 million versus $15.0 million; imaging revenue was $1.0 million versus $1.1 million.
Operating margin was approximately (34%) versus 2% in FY2018. Research and development expense rose 12% to $7.9 million, while selling and marketing expense fell 14% to $3.6 million and general and administrative expense increased 9% to $3.6 million. Services gross margin decreased to 46% from 55%.
Cash used in investing activities was $0.1 million and cash used in financing activities was $0.8 million, including $0.8 million of share repurchases. The balance sheet reported no debt; current assets were $53.8 million and current liabilities $4.1 million. Stockholders’ equity was $53.4 million. The company said cash should fund operations for at least 12 months from the filing date.
Material changes and unusual items
- Lower license revenue drove much of the decline, including the absence of a large commercial license sale recorded in 2018 and lower revenue from a systems-integrator project. That project generated $0.6 million of license revenue in 2019 versus $1.8 million in 2018.
- In Q4 2019, Aware recorded a full $6.3 million valuation allowance against deferred tax assets, including $5.0 million of research-credit carryforwards. Management cited cumulative recent pretax losses, planned investment, and uncertainty that credits would be used. This noncash tax expense was the main reason the net loss substantially exceeded the pretax loss.
- A new CEO was appointed in September 2019. Management revised strategy and began additional investments in research, product development, sales, and marketing, with further investment planned over the coming years.
- Year-end backlog was $5.1 million: $4.6 million of maintenance, $0.1 million of licenses, and $0.4 million of services. Approximately $3.2 million of maintenance, $0.1 million of licenses, and $0.2 million of services were expected to be recognized in 2020.
- One customer represented 16% of FY2019 revenue. One customer accounted for 72% of accounts receivable and unbilled receivables at year-end.
Outlook, risks, and contingencies
No specific revenue or earnings guidance was provided. Management’s stated strategy is to expand complete biometric solutions, pursue government and commercial opportunities, and grow internationally. The company warned that growth investments may reduce near-term profitability. It expected development work on a major systems-integrator project to continue for approximately one more quarter.
Key risks include variable timing and size of customer orders; reliance on government funding and channel partners; customer concentration; intense competition and pricing pressure; uncertain commercial adoption and cloud demand; privacy, biometric-data regulation, and cybersecurity exposure; technology changes and product defects; and difficulty protecting intellectual property. The filing reported no material pending litigation, no material capital-expenditure commitments, and no off-balance-sheet arrangements. Contractual indemnities exist, but potential maximum payments were not estimable; no related amount was accrued.
The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2019; the auditor did not audit internal-control effectiveness.
Investor verification priorities
- Assess whether the 2019 revenue decline and operating losses reflect timing of large contracts or a more persistent deterioration in demand.
- Track the pace and returns of the planned product-development and sales investments, and whether commercial and international expansion produces revenue.
- Verify the assumptions behind the $6.3 million deferred-tax-asset valuation allowance and the potential for future releases or credit expirations.
- Monitor customer and receivables concentration, backlog conversion, renewals of maintenance contracts, and cash use against the stated 12-month liquidity outlook.
- Review the subsequent annual proxy and filings for leadership, compensation, and capital-allocation details not included in this summary.