Aware, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Aware develops and sells biometric software and engineering services, primarily for government systems; commercial biometric authentication is a growth opportunity. Figures below are in U.S. dollars.
Financial results
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $16.13 million | $15.47 million |
| Operating income | $381,000 | $1.11 million |
| Net income | $1.23 million | $1.00 million |
| Diluted earnings per share | $0.06 | $0.05 |
| Cash from operations | $660,000 | $3.67 million |
| Cash and cash equivalents at year-end | $51.61 million | $51.61 million |
- Revenue rose 4.3%. Biometrics revenue increased to $15.04 million from $11.95 million, while imaging revenue declined to $1.09 million from $3.37 million. There were no DSL royalties in 2018.
- Software license revenue fell 12% to $8.04 million, as lower imaging sales more than offset higher biometrics licenses. Maintenance revenue rose 10% to $5.40 million; services more than doubled to $2.70 million.
- Operating margin was approximately 2.4%, down from 7.2%. Patent-related income fell to $69,000 from $1.58 million, a key reason operating income declined. Higher interest income and a small tax benefit helped lift net income.
- Cash from operations decreased substantially, primarily reflecting a $1.85 million increase in unbilled receivables. Investing activities used $206,000; financing activities used $450,000, including $393,000 for share repurchases.
- Current assets were $57.19 million and current liabilities $4.47 million. The balance sheet lists no borrowings; total liabilities were approximately $4.54 million. Stockholders’ equity was $61.90 million.
- Services gross margin was 55%, versus 52% in 2017. The filing does not provide a consolidated gross-margin measure.
Fourth quarter and material changes
- Q4 2018 revenue was $4.06 million, operating income $343,000, and net income $639,000. Q4 2017 revenue was $3.06 million, with an operating loss of $671,000 and net loss of $559,000.
- Two customers represented 20% and 13% of FY 2018 revenue. The U.S. contributed $7.44 million, down from $12.41 million; U.K. revenue increased to $4.00 million from $417,000, and Brazil to $2.47 million from $279,000.
- At year-end, backlog was $4.7 million: $3.2 million maintenance, $0.8 million licenses, and $0.7 million services. The company expected most of these amounts to be recognized in 2019.
- Adoption of ASC 606 retrospectively reduced reported FY 2017 revenue by $817,000, expenses by $114,000, and net income by $281,000. Comparisons use the adjusted 2017 figures.
Outlook, risks, and other items
- No formal revenue or earnings guidance is provided. Management expects work on a large systems-integrator project to continue for approximately two to three quarters and plans to pursue broader biometric solutions and commercial markets; investment in growth could reduce near-term profitability.
- Management expected cash to fund operations for at least 12 months from the filing date. It reported $51.6 million in cash, primarily in money-market funds, and no material capital expenditure commitments.
- Key risks include dependence on government spending and channel partners, customer and quarterly order concentration, uncertain commercial-market adoption, intense competition and pricing pressure, rapid technology change, privacy and regulatory requirements, cybersecurity, intellectual-property claims, and retention of technical personnel.
- Patent arrangement income is unpredictable. The company reported no material pending litigation and no off-balance-sheet arrangements. It paid no dividends in 2018 or 2017 and had an authorization to repurchase up to $10 million of stock through December 31, 2019.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Investor verification priorities
- Assess the collectability and billing timing of unbilled receivables, which rose to $3.28 million from $1.43 million, and their effect on operating cash flow.
- Check the timing, delivery milestones, and revenue recognition for the large 2018 systems-integrator contract and the related $1.8 million license revenue.
- Evaluate whether biometric license growth and international revenue can offset weaker imaging sales and the decline in patent-related income.
- Review dependence on the two customers representing 33% of revenue and the concentration of receivables with major customers.
- Confirm the assumptions supporting realization of $5.17 million of deferred tax assets, including research credits; no valuation allowance was recorded.