Aware, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited results; comparisons are with the corresponding 2017 periods. Aware provides biometrics software and services, with additional imaging-software revenue. The company adopted ASC 606 on January 1, 2018 using the full retrospective method; comparative 2017 figures reflect that standard.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $5.401 million | $5.707 million | $12.073 million | $12.405 million |
| Operating income | $1.142 million | $1.492 million | $38,000 | $1.778 million |
| Net income | $1.277 million | $1.145 million | $594,000 | $1.560 million |
| Diluted EPS | $0.06 | $0.05 | $0.03 | $0.07 |
| Operating margin | 21.1% | 26.1% | 0.3% | 14.3% |
Q3 revenue declined approximately 5%, while operating income fell approximately 24%; net income increased approximately 12%. For the nine-month period, revenue fell approximately 3%, operating income fell sharply, and net income declined approximately 62%. Higher interest income and lower income-tax expense helped support Q3 net income. The nine-month comparison also reflects patent-related income of just $1,000 in 2018 versus $1.422 million in 2017.
- Revenue mix: Q3 software-license revenue was $3.449 million, maintenance $1.297 million, services $655,000, and royalties zero. Nine-month amounts were $6.582 million, $3.993 million, $1.498 million, and zero, respectively.
- Product and geographic shifts: Nine-month biometrics revenue rose to $11.104 million from $9.218 million, while imaging revenue declined to $969,000 from $3.060 million. U.S. revenue fell to $5.107 million from $10.335 million; UK and Brazil revenue increased substantially.
- Cash flow: Operating activities used $2.163 million in the first nine months, versus $611,000 provided in 2017. Investing activities used $142,000; financing activities used $340,000, including $260,000 of share repurchases.
- Liquidity and debt: Cash and cash equivalents were $48.963 million at September 30, 2018, down from $51.608 million at year-end 2017. Current assets were $56.863 million and current liabilities $4.931 million. The balance sheet reports no debt.
- Other metrics: Total assets were $66.190 million and stockholders’ equity $61.182 million. Deferred tax assets were $5.199 million with no valuation allowance. Services gross margin was 51% for both Q3 and the nine-month period, up from 48% and 46%, respectively.
Material changes, outlook, and risks
- Management attributed lower Q3 revenue mainly to the absence of a large imaging-software sale recorded in Q3 2017, partly offset by higher biometrics licenses, maintenance, and services. Nine-month performance had similar imaging weakness, partly offset by biometrics growth.
- A large systems-integrator project signed in Q2 2018 contributed license and service revenue. Aware expects development on it to continue for approximately three to four more quarters and anticipates related service costs. Services backlog was $1.3 million at September 30.
- Management expects approximately 98% of remaining performance obligations to be recognized within 12 months. The filing provides no formal revenue or earnings guidance; management says cash should fund operations for at least the next 12 months, while noting it cannot assure additional financing would not be needed or available.
- The $10 million share-repurchase authorization runs through December 31, 2019; $260,000 had been spent through September 30. The company continued to receive almost no patent-arrangement income and stated future proceeds are unpredictable. Management considers future DSL royalties unlikely.
- Cash use from operations was driven largely by changes in assets and liabilities, including higher accounts receivable and unbilled receivables. This working-capital movement is important alongside the reported nine-month profit.
- Management reported no material change to the risk factors in the 2017 Form 10-K, no litigation it believes likely to seriously harm the business, and effective disclosure controls. The IRS completed its 2015 tax-return examination in February 2018 with no changes.
Important facts for investors to verify
- Whether the newer biometrics customers and systems-integrator project produce repeatable revenue, and whether project timing, costs, or collections differ from expectations.
- Whether imaging-license weakness persists and whether the shift in revenue toward biometrics, maintenance, and services supports operating profitability.
- Whether receivables and unbilled receivables convert to cash, given the nine-month operating cash outflow.
- Whether future results remain sensitive to one-time patent income, the absence of DSL royalties, and large individual license contracts.
- How management’s cash-runway assessment and deferred-tax-asset realizability evolve as earnings and operating cash flow change.