Aware, Inc. — 2022 Form 10-K Summary
Business context and reporting period
Aware develops biometric identity software and services for government and commercial customers, including fingerprint, face, iris and voice enrollment, identification and authentication solutions. It sells through systems integrators, OEMs, resellers and direct channels. This is the annual report for the fiscal year ended December 31, 2022, compared principally with fiscal 2021—not a standalone fourth-quarter report.
Financial performance and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Revenue | $16.0 million | $16.9 million |
| Operating loss | $2.2 million | $6.1 million |
| Net loss | $1.7 million | $5.8 million |
| Net loss per share | $0.08 | $0.27 |
| Cash used in operating activities | $5.0 million | $6.2 million |
- Revenue declined about 5%. Software license revenue was $7.4 million, maintenance revenue $7.1 million, and services and other revenue $1.5 million. Maintenance grew while licenses and services declined.
- Net loss margin was approximately 10.8%; operating loss margin was approximately 13.9%. The reported operating loss included a $5.7 million gain on the July 2022 sale of the former headquarters. Excluding that gain, operating loss was approximately $7.9 million, greater than in 2021.
- Services and other gross margin fell to 17% from 45%, as costs rose while project revenue declined. The filing does not provide an overall gross margin measure.
- At year-end, cash and cash equivalents were $11.7 million and marketable securities were $17.2 million, totaling $29.0 million. Current assets were $37.3 million and current liabilities $5.8 million. Management expects available cash and cash equivalents to fund operations for at least 12 months from the filing date.
- Investing activities used $12.0 million, primarily reflecting net marketable-security purchases and a $2.5 million note investment, partly offset by $8.5 million of net property-sale proceeds. Financing activities used $1.2 million, including $1.3 million of share repurchases.
- The balance sheet reports no borrowing debt line. It does report operating lease liabilities of $4.5 million and contingent acquisition payments of $0.8 million. The new headquarters lease runs for 10.5 years and has $7.5 million of undiscounted future payments.
Material changes versus 2021
- Software licenses fell 7% to $7.4 million, primarily because perpetual-license sales declined $0.8 million; subscription-based license sales increased $0.2 million.
- Maintenance revenue increased 6% to $7.1 million, while services and other revenue decreased 31% to $1.5 million, mainly due to fewer active service contracts.
- Operating and net losses narrowed substantially as reported, largely because of the headquarters-sale gain. Excluding that gain, operating performance weakened.
- Cash and cash equivalents declined from $30.0 million to $11.7 million, while the company acquired $17.2 million of marketable securities. Combined cash and securities were approximately unchanged year over year.
- The company began a new Burlington headquarters lease and invested $2.5 million in a convertible note issued by Omlis Limited. It repurchased 705,201 shares during 2022.
Outlook, risks and unusual items
- Management expects SaaS to become a significant offering, but SaaS revenue was de minimis in 2022 and 2021. It expects research and development expense to rise in dollars but decline as a share of revenue, plans to expand sales and marketing, and expects general and administrative expense to rise in dollars but decline as a share of revenue. No quantified revenue or earnings guidance is provided.
- Key risks include unpredictable timing of large customer orders, dependence on government purchasing and channel partners, intensifying competition, slow commercial adoption of biometrics and cloud-based services, privacy and biometric-data regulation, cybersecurity incidents, and recruiting and retaining key personnel.
- The $2.5 million Omlis note accrues interest at 5% and matures in March 2026; it may be converted at a 20% discount in a future financing. A related warrant had a reported fair value of zero at year-end. The investment’s value and repayment or conversion outcome are uncertain.
- FortressID acquisition consideration included performance-based payments. No 2022 revenue targets were achieved; up to $2.0 million may be payable for 2023 targets, with a recorded year-end liability of $0.8 million.
- Deferred tax assets of $11.1 million were fully offset by a valuation allowance. The filing reports no material pending litigation or material subsequent events. Auditors issued an unqualified opinion; revenue recognition and contingent acquisition-payment valuation were identified as critical audit matters. Management concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether recurring maintenance and subscription revenue can offset continued weakness in perpetual licenses and services, and whether SaaS adoption produces material revenue.
- Underlying operating costs and cash burn without the one-time headquarters-sale gain; monitor cash and marketable securities together as well as operating cash use.
- Recoverability, conversion terms and counterparty risk of the Omlis note, including the warrant’s status and expiry.
- FortressID performance against 2023 earn-out targets and any resulting cash payment or valuation change.
- Customer and receivable concentration: two customers represented 37% of net accounts and unbilled receivables at year-end, although no customer represented 10% of annual revenue.
- Lease commitments, share repurchases, and the potential effect of future ownership changes on use of tax attributes.