Aware, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; filed November 1, 2019. Financial amounts below are in U.S. dollars. The company develops and sells biometrics software and services, with additional imaging software revenue. It reports one operating segment.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $3.010 million | $5.401 million | $9.754 million | $12.073 million |
| Operating income (loss) | $(1.173) million | $1.142 million | $(2.400) million | $0.038 million |
| Net income (loss) | $(0.151) million | $1.277 million | $(0.861) million | $0.594 million |
| Basic and diluted EPS | $(0.01) | $0.06 | $(0.04) | $0.03 |
- Q3 software license revenue was $1.138 million, maintenance $1.291 million, and services $0.581 million. For the nine-month period, the respective amounts were $3.864 million, $3.965 million, and $1.925 million.
- Cost of services was 46% of services revenue in Q3 (54% services gross margin), compared with 49% (51% margin) a year earlier. For the nine months, cost of services was 57% of services revenue (43% margin), versus 49% (51% margin) in 2018.
- Cash and cash equivalents were $48.007 million at September 30, down $3.605 million from December 31, 2018. Total assets were $65.899 million; stockholders’ equity was $60.765 million.
- Operating cash flow was $(2.876) million for the first nine months; investing cash flow was $(0.078) million and financing cash flow was $(0.651) million. The filing reports no borrowings or debt; current liabilities were $5.070 million.
- Current assets were $56.138 million, including accounts receivable of $3.450 million and unbilled receivables of $4.255 million. Deferred revenue totaled $3.648 million, including $3.584 million current.
Material changes and management commentary
- Revenue fell 44% year over year in Q3 and 19% for the nine months. Management attributed the decline primarily to lower biometrics software license sales, including the absence of a large commercial-customer license sale recorded in Q3 2018. Nine-month results also reflected lower imaging license revenue and higher total costs and expenses.
- Biometrics revenue was $2.556 million in Q3 versus $5.216 million a year earlier; imaging revenue increased to $0.454 million from $0.185 million. For the nine months, biometrics revenue declined to $8.905 million from $11.104 million, while imaging revenue was $0.849 million versus $0.969 million.
- Maintenance revenue was essentially flat year over year. Nine-month services revenue rose 29% to $1.925 million, partly reflecting work on a large systems-integrator project. Management expected development on that project to continue for approximately two more quarters; services backlog was $0.3 million at quarter-end.
- Research and development expense increased 14% in Q3 and 6% for the nine months, primarily due to third-party development spending. Selling and marketing expense declined, while general and administrative expense increased modestly for the nine months.
- Management stated cash was expected to fund operations for at least the next 12 months, while noting that additional financing might be required and might not be available. It provided no specific revenue or earnings guidance and said future commercial-market revenue was difficult to predict.
Outlook, risks, contingencies, and unusual items
- The company expects to continue research and development focused on enhancing existing products and developing new products. It expects to recognize approximately 97% of remaining performance obligations over the next 12 months; remaining obligations for software-maintenance contracts longer than one year were $0.1 million.
- Operating cash use, lower license sales, project timing, and the company’s ability to win biometrics projects are key considerations. Management cited its 2018 Form 10-K risk factors and reported no material change in those risks. It reported no lawsuit or proceeding it believed likely to seriously harm the business.
- The company recorded an income-tax benefit of $0.769 million in Q3 and $0.733 million for the nine months. It had $5.9 million of deferred tax assets with no valuation allowance, based on management’s assessment that realization was more likely than not; that assessment may change.
- Patent-related income was $0 in Q3 and $49,000 for the nine months, compared with $1,000 in each 2018 period. Management said future income from the patent arrangement could not be predicted.
- The company repurchased 113,513 shares for approximately $342,000 during Q3 under its authorized buyback program. At quarter-end, approximately $9.027 million remained authorized for repurchases through December 31, 2019.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether biometrics license sales recover after the prior-year large customer sale and how much revenue depends on future project awards.
- Progress, remaining costs, and revenue recognition for the systems-integrator project expected to continue for approximately two more quarters.
- Collection and billing of receivables, particularly the increase in unbilled receivables to $4.255 million.
- Whether operating cash use moderates and whether management’s assessment of at least 12 months of cash funding remains valid.
- Evidence supporting realization of the $5.9 million deferred tax asset and the absence of a valuation allowance.