Aware, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Aware develops and sells biometric software, products and services, including engineering, integration and installation services; it also sells imaging software. This unaudited quarterly report covers the three and nine months ended September 30, 2020, compared with the same 2019 periods. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $2.474m | $3.010m | $7.883m | $9.754m |
| Operating loss | $2.520m | $1.173m | $7.568m | $2.400m |
| Net loss | $1.777m | $0.151m | $5.978m | $0.861m |
| Basic and diluted loss per share | $0.08 | $0.01 | $0.28 | $0.04 |
- Revenue mix: Q3 software licenses were $0.796m, maintenance $1.368m and services $0.310m. Nine-month amounts were $3.176m, $4.110m and $0.597m, respectively.
- Cash flow: For the first nine months, operating cash use was $4.190m, investing cash use $0.464m and financing cash use $0.770m. Cash declined $5.424m to $42.318m.
- Liquidity and debt: September 30 cash and cash equivalents were $42.318m; current assets were $47.241m and current liabilities $4.968m. No debt is reported on the balance sheet. Stockholders’ equity was $47.245m.
- Margins: Cost of services was 45% of services revenue in Q3 (55% service gross margin), versus 46% (54% margin) a year earlier. For the nine-month period, cost of services was 78% of services revenue (22% margin), compared with 57% (43% margin) in 2019. The filing does not provide a consolidated gross margin measure.
- Taxes: The company recorded a $1.416m income tax benefit for the first nine months, including an approximately $1.2m year-to-date benefit recorded as a long-term tax receivable, associated with potential CARES Act NOL carryback refunds. It estimated a potential federal refund of about $1.5m and had not decided whether to carry the 2020 loss back or forward.
Changes versus prior comparable periods
- Q3 revenue fell 18% year over year; nine-month revenue fell 19%. License revenue declined 30% in Q3 and 18% year to date, while services revenue fell 47% in Q3 and 69% year to date. Maintenance revenue increased 6% in Q3 and 4% year to date.
- Biometrics revenue fell to $1.956m from $2.556m in Q3 and to $6.927m from $8.905m year to date; imaging revenue increased to $0.518m from $0.454m in Q3 and to $0.956m from $0.849m year to date.
- Operating expenses rose to $4.994m from $4.183m in Q3 and to $15.451m from $12.203m year to date. Higher R&D, sales and marketing, and general and administrative spending contributed to the larger losses.
- Interest income fell to $7,000 in Q3 and $174,000 year to date, versus $253,000 and $806,000, respectively, in 2019, mainly due to lower money-market interest rates.
Outlook, commentary and risks
- Management said COVID-19 disrupted customer meetings, in-person demonstrations, trade shows and partner engagement, delaying sales opportunities and adversely affecting revenue in Q2 and Q3. It expected adverse revenue effects to continue over the next several quarters, but did not provide numerical guidance.
- Management believes available cash will fund operations for at least the next 12 months, while noting that additional financing might be needed and cannot be assured.
- Higher year-to-date G&A included $0.7m in severance and transition costs, $0.2m in legal fees, $0.1m in bad-debt expense and $0.2m in remote-work computer hardware and software costs. The company cited administrative personnel turnover exceeding 50%.
- The company authorized up to $10m in share repurchases through December 31, 2021; it had repurchased 221,502 shares for approximately $0.706m through September 30. Repurchases are discretionary.
- Management stated that there were no lawsuits it believed likely to seriously harm the business. It identified no material changes to prior annual-report risk factors other than COVID-19 uncertainty. Disclosure controls were assessed as effective, with no material internal-control changes reported during the quarter.
Important facts for investors to verify
- Whether COVID-related procurement and customer-engagement delays persist, and whether revenue stabilizes or recovers.
- Cash burn, spending on R&D and sales capacity, and management’s stated 12-month liquidity outlook.
- The final tax treatment of the 2020 net operating loss, timing and realization of the potential refund, and valuation allowance assumptions.
- Progress and economics of newer commercial biometrics opportunities versus legacy government projects, including concentration in project-related sales.
- Future share repurchases and their effect on cash resources and share count.