Aware, Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing; the fourth-quarter figures below are unaudited. Aware develops and sells biometric software and related services, primarily to government customers, through systems integrators, OEMs, and direct sales.
Financial results
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $16.282 million | $21.566 million | Down 24.5% |
| Operating income | $1.810 million | $5.908 million | Down 69% |
| Net income | $1.282 million | $4.103 million | Down 69% |
| Diluted EPS | $0.06 | $0.18 | Down $0.12 |
| Cash from operating activities | $3.669 million | $3.814 million | Down $0.145 million |
- Revenue comprised software licenses of $9.939 million, maintenance of $4.923 million, services of $1.259 million, royalties of $0.161 million, and no hardware sales.
- Software license revenue fell 29%, principally because U.S. Marine Corps and Navy sales declined and a prior imaging-license contract had been substantially recognized by 2016. Maintenance revenue declined 4%; services declined 28%.
- Operating margin was approximately 11% of reported revenue, versus 27% in 2016. Software-license gross margin was 97%; services gross margin was 52%.
- Cash and cash equivalents were $51.608 million; working capital was $50.055 million. Total liabilities were $4.284 million, including deferred revenue; the filing reports no material borrowings. The company said available cash should fund operations for at least 12 months from the filing date.
- Year-end total assets were $63.936 million and stockholders’ equity was $59.652 million. The company repurchased $4.799 million of shares during 2017 and paid no dividends.
Material changes and unusual items
- Lower biometrics and imaging licenses, maintenance, services, hardware, and DSL royalties, together with higher operating expenses, drove the year-over-year earnings decline. R&D expense rose 12% to $7.769 million, or 48% of revenue, reflecting greater focus on internal product development.
- Patent-related income increased to $1.582 million from $0.809 million. It arose from a third-party patent monetization arrangement; future proceeds are uncertain and should not be treated as dependable recurring income.
- The fourth quarter produced revenue of $3.286 million, an operating loss of $0.478 million, and a net loss of $0.580 million, compared with net income of $0.460 million in fourth-quarter 2016.
- The Tax Cuts and Jobs Act caused a $0.4 million tax expense from remeasurement of deferred tax assets and liabilities. The reported effective tax rate was 43%.
- Adoption of the revenue standard, Topic 606, was scheduled for 2018 using full retrospective application. Management estimated adjusted 2017 revenue of $15.465 million and net income of $1.000 million, versus reported revenue of $16.282 million and net income of $1.282 million. It estimated adjusted 2016 revenue of $18.762 million and net income of $2.579 million. The adoption was not expected to affect cash flows.
Outlook, risks, and contingencies
- The filing gives no numerical revenue or earnings guidance. Management expects continued investment in R&D and intends to expand its software portfolio, services, international sales, and commercial-market presence; such investments may reduce near-term profitability.
- Year-end backlog was $3.0 million, mainly $2.9 million of maintenance, of which approximately $2.8 million was expected to be recognized in 2018. Services backlog was only $0.1 million, and management cautioned that 2018 services revenue was unlikely to return to prior peak levels.
- Biometrics demand is concentrated in government markets, exposing results to government budgets, procurement timing, contract changes, and channel-partner performance. Individual orders can materially affect quarterly results. Commercial adoption remains uncertain; management said the Certisign rollout had not generated meaningful revenue to date.
- Hardware sales were zero in 2017 and are not part of the company’s strategy; the company had no hardware backlog. DSL royalties are expected to continue declining.
- Other risks include intense competition and price pressure, rapid technology and standards changes, privacy concerns and regulation, reliance on third-party software and intellectual property, possible IP claims, and the ability to retain key employees. An IRS examination of the 2015 tax return had begun; its outcome was not known. No material pending litigation was reported.
- The financial-statement auditor issued an unqualified opinion, and both management and the auditor concluded internal control over financial reporting was effective as of December 31, 2017.
Key facts for investors to verify
- How 2018 reported results compare with the filing’s Topic 606 adjusted historical figures, particularly for the minimum license/royalty contract and unbilled receivables.
- Whether government license orders recover, and whether the customer concentration and timing of large contracts materially affect quarterly results.
- Whether maintenance renewals remain stable and whether the small services backlog translates into the expected 2018 revenue.
- How much of 2017 operating income depended on the $1.582 million patent-related payment, and whether further payments occur.
- Realizability of the $5.402 million deferred tax asset, the outcome of the IRS examination, and the effects of the new tax law and revenue standard.