What changed in this filing

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Item 1. Business

2024-03-15 compared with 2023-03-15 · 85 added, 78 removed, 345 unchanged (32% of the section changed)

Company Overview

(“Aware”, “we”, “us”, “our”, or the “Company”) is a leading, global authentication company that validates and secures identities using proven and trusted adaptive biometrics.

Aware’s software offerings address the growing challenges that government and commercial enterprises face in knowing, authenticating and securing individuals through frictionless and highly secure user experiences.

Aware’s algorithms are based on the most diverse data sets in the world and can be tailored to the unique security and requirements of each customer.

(“Aware”, “we”, “us”, “our”, or the “Company”) is a leading, biometric identity platform company that validates and secures identities using proven and trusted adaptive biometrics.

Aware’s algorithms are based on diverse data sets from around the world and can be tailored to the unique security and requirements of each customer.

Our portfolio enables government agencies and commercial entities to enroll, identify, authenticate and enable using biometrics, which comprise physiological characteristics, such as fingerprints, faces, irises and voices.

Utilize an organization’s secure database to accurately identify individuals using biometric data

• Authenticate:

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We have been engaged in this business since 1993.

Our comprehensive portfolio of biometric solutions is based on innovative, robust products designed explicitly for ease of integration, including customer-managed and integration ready biometric frameworks, platforms, Software Development Kits (“SDKs”) and services.

Our comprehensive portfolio of biometric solutions is based on innovative, robust products designed explicitly for ease of integration, including customer-managed and integration ready biometric frameworks, platforms, software development kits (“SDKs”) and services.

Principal government applications of biometrics systems include border control, visa applicant screening, law enforcement, national defense, intelligence, secure credentialing, access control, and background checks.

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For large deployments, we may provide project management and software engineering services.

We sell our biometrics software products and services globally through a multifaceted distribution strategy using systems integrators, Original Equipment Manufacturers (“OEMs”), value added resellers (“VARs”), partners, and directly to end user customers.

We sell our biometrics software products and services globally through a multifaceted distribution strategy using systems integrators, original equipment manufacturers (“OEMs”), value added resellers (“VARs”), partners, and directly to end user customers.

Aware was incorporated in Massachusetts in 1986.

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Principal Products & Services

We sell a broad range of biometrics software products and solutions that perform functions to address our customers’

desired use cases where they are addressing improved security, data protection, compliance and improved ROI and efficiencies including:

We sell a broad range of biometrics software products and solutions that perform functions to address our customers’ desired use cases where they are addressing improved security, data protection, compliance and improved ROI and efficiencies including:

Enrollment of their workforce for benefits and background checks

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Trusted transactions and authentication that enable physical and logical access control

Our biometrics software solutions are built upon robust componentized products that are customer configurable to give them control so they can uniquely address their specific customers’

expectations.

Our biometrics software solutions are built upon robust componentized products that are customer configurable to give them control so they can uniquely address their specific customers’ expectations.

These solutions and services facilitate customers with an opportunity for a faster go-to-market process to help reduce their development times and exposure to software support and maintenance risks.

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Knomi has primarily been sold as a fixed term license that is priced on a subscription-based model and is also available as a perpetual license.

AwareABIS Platform

AwareABIS is an Automated Biometric Identification System (“ABIS”) used for large-scale biometric identification and deduplication using fingerprint, face, and iris recognition.

Leveraging Aware’s Astra and BioSP products, AwareABIS is a highly scalable platform that performs one-to-many search or one-to-one match against large stores of biometrics and other identity data.

Utilizing highly distributed computing, AwareABIS also enables complex filtering, and linking operations critical to data preparation and quality assurance functions, such as identity resolution and data deduplication of massive biometric databases (tens of millions of records).

Going forward we plan to transition the Knomi offering to within the AwareID offering.

AwareABIS is an automated biometric identification system (“ABIS”) used for large-scale biometric identification and deduplication using fingerprint, face, and iris recognition.

AwareABIS is a highly scalable platform that performs one-to-many ("1:N") search or one-to-one ("1:1") match against large stores of biometrics and other identity data.

Utilizing distributed computing, AwareABIS also enables complex filtering, and linking operations critical to data preparation and quality assurance functions, such as identity resolution and data deduplication of massive biometric databases (tens of millions of records).

The platform is built upon several mature, high-performance, field-proven applications and algorithms from Aware.

AwareABIS has primarily been sold as perpetual license and is also available as a fixed term license that is priced on a subscription-based model or the size of the biometric system.

AwareABIS has primarily been sold as a fixed term license that is priced based on the size of the biometric system or on a subscription-based model.

AFIX Suite of Products

Aware’s AFIX suite of products is used for small-scale law enforcement focused biometric identification.

AFIX Tracker supports fingerprint, palmprint and latent print identification, designed to serve between 15,000 and 2 million identities.

AFIX Tracker has several function-specific variants:

Entry Only (LE), Latent Workstation (LW), Remote Workstation (RW), Facial Recognition (FR), and View & Print (VP).

In addition to AFIX Tracker we also sell and offer AFIX Face, AFIX Verifier, AFIX Identifier, AFIX Comparator, AFIX Engine, and ANTE (AFIX NIST Transaction Engine).

AFIX Tracker is ideal for crime scene investigation applications in low to moderate sized community populations.

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BioSP - Biometric Services Platform

BioSP is a service-oriented platform used to enable a biometric system with advanced biometric data processing and management functionality in a web services architecture.

BioSP is a biometric integration platform-as-a-service ("iPaaS") used to enable biometric data processing and management functionality in a web services architecture.

It provides workflow, data management and formatting, and other important utilities for large-scale fingerprint recognition, face recognition, and iris recognition systems.

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BioSP has primarily been sold as a perpetual license and is also available as a fixed term license that is priced on users, transactions, or enterprise wide.

BioSP Biometric Services Platform - WebEnroll

WebEnroll is a browser-based biometric enrollment and data management solution available as an enhanced version of BioSP that utilizes BioComponents for capture of biographic data, fingerprints and facial images in a browser.

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WebEnroll has primarily been sold as a perpetual license and is also available as a fixed term license that is priced on users, transactions, or enterprise wide.

AwareID is our new Software-as-a-Service (“SaaS) offering that is used for Aware’s adaptive authentication platform of cloud-based biometric application programming interfaces (“APIs”) and turnkey services.

AwareID provides biometric face and voice analysis for liveness-verification, and document validation.

The platform uses proprietary Adaptive Authentication technology in cloud-based bundles which can be pre-configured and configured by the

customer to provide comprehensive authentication functionality with situational awareness for onboarding, access control/management, and authentication of transactions.

AwareID is a Software-as-a-Service (SaaS) offering that provides advanced identity verification and continuous authentication capabilities.

Its modular design ensures flexibility and extensibility across various industries.

AwareID continues to leverage Knomi to provide biometric face and voice matching (1:1 and 1:N), liveness-verification (presentation attack detection), and document validation.

The platform uses proprietary Adaptive Authentication technology in cloud-based bundles which can be pre-configured and/or configured by the customer to provide comprehensive authentication functionality with situational awareness for onboarding, access control/management, and authentication of transactions.

These services can be used discretely to enhance investments already in place or combined to provide higher functionality.

The AwareID platform is built on open architecture and interfaces to maximize interoperability and connection to other biometric and/or digital identity applications and platforms.

AwareID is provided as a SaaS offering with usage-based pricing.

This wider SaaS offering includes the solutions formerly referred to as Indigo and FortressID .

The AwareID solution is built on open architecture and interfaces to maximize interoperability and connection to other biometric and/or digital identity applications and platforms.

AwareID is typically provided as a SaaS offering with usage-based or transaction-based pricing, however it is also available on-premises when leveraging Knomi SDKs.

Software products

We sell a broad range of software components, or “building blocks”, such as SDKs, APIs, and applications that customers use to streamline or develop their systems into more effective solutions.

These building blocks enable important functions including:

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With the introduction of AwareID, we have incorporated SaaS offerings into our product line-up.

While we did not recognize material revenues from our SaaS offerings during 2022, we expect SaaS to become a significant product offering moving forward.

While we did not recognize material revenues from our SaaS offerings during 2022 and 2023, we continue to invest in and we expect SaaS to become a significant product offering moving forward.

Building Blocks:

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Our principal imaging product is Aware JPEG 2000, which is based on the JPEG2000 standard.

The JPEG2000 standard is an image compression standard and coding system that was created by the Joint Photographic Experts Group committee in 2000.

The JPEG2000 standard is an image compression standard and coding system that was created by the Joint

Photographic Experts Group committee in 2000.

Our JPEG2000 product is used to compress, store, and display images.

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We also provide and sell software maintenance to many of our customers who purchase our software products and solutions.

Software maintenance has historically been made available by contracts that typically have a one-year term during which customers have the right to receive technical support and software updates for a fixed fee, if and when

they become available.

Software maintenance is also available as part of a subscription-based solution offering under which customers receive standard software maintenance plus access to upgrades and product enhancements.

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We sell our products, solutions and services through three principal channels of distribution:

i) Systems integrator channel –

we sell to systems integrators that incorporate our software products and solutions into biometric systems that are delivered primarily to government end users.

ii) Direct channel –

we sell directly to government and as well as commercial customers.

iii) OEM and VAR channel –

we sell to hardware and software solution providers that incorporate our software products into their products for resale or use in their solution offerings or integrated software products.

i) Systems integrator channel – we sell to systems integrators that incorporate our software products and solutions into biometric systems that are delivered primarily to government end users.

ii) Direct channel – we sell directly to government and as well as commercial customers.

iii) OEM and VAR channel – we sell to hardware and software solution providers that incorporate our software products into their products for resale or use in their solution offerings or integrated software products.

Major Customers

All of our revenue in 2023 and 2022 was derived from unaffiliated customers.

No customer represented 10% or more of total revenue in either 2022 or 2021.

As of December 31, 2022 and 2021, two customers combined for 37% and 32%, respectively, of our net accounts receivable and unbilled receivables.

One customer represented 17% of total revenue in 2023 and no customer represented 10% or more of total revenue in 2022.

As of December 31, 2023, one customer represented 16% of our net accounts receivable and unbilled receivables and as of December 31, 2022, two customers combined for 37%, of our net accounts receivable and unbilled receivables.

Competitive Business Conditions

A significant number of established companies have developed or are developing and marketing software and hardware for biometrics products and applications that currently compete with or will compete directly with our offerings.

We believe that additional competitors will enter the biometrics market and become significant long-term competitors, and that, as a result, competition will increase.

We believe that additional competitors will enter the biometrics market and become significant long-term

competitors, and that, as a result, competition will increase.

Companies competing with us may introduce solutions that are competitively priced, have increased performance or functionality or incorporate technological advances we have not yet developed or implemented.

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We have an active program to protect our proprietary technology through the filing of patents.

As of December 31, 2022, we had approximately 79 U.S.

and foreign patents and approximately 8 pending patent applications.

As of December 31, 2023, we had 76 U.S.

patents and 4 foreign patents and approximately 7 pending patent applications.

Our patents and patent applications pertain primarily to biometrics and imaging compression.

We have let certain patents expire that are not aligned with our business and are not relevant to our current or future activities.

Our patents have expiration dates ranging from 2024 to 2041.

Although we have patented certain aspects of our technology, we rely primarily on trade secrets to protect our intellectual property.

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We may receive claims from third parties suggesting that we may be obligated to license such intellectual property rights.

If we were found to have infringed any third party’s patents, we could be subject to substantial damages or an injunction preventing us from conducting our business.

As of December 31, 2022, we employed 82 people, all based in the U.S, including 46 in engineering and research, 24 in sales and marketing, and 12 in finance and administration.

If we were found to have infringed any third party’s patents, we could be subject to substantial damages or an injunction preventing us from conducting our business.

As of December 31, 2023, we employed 73 people, all based in the U.S.

including 39 in engineering and research, 22 in sales and marketing, and 12 in finance and administration.

Of these employees, 54 were based in Massachusetts and 19 were based outside of Massachusetts.

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Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge on or through our website at www.aware.com as soon as reasonably practicable after such reports are filed with, or furnished to, the Securities and Exchange Commission (“the SEC”).

The SEC also maintains a website, www.sec.gov, that contains reports and other information regarding issuers that file electronically with the SEC.

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Ri sk Factors

Actual or threatened public health emergencies could harm our business.

Our business and operations could be adversely affected by health epidemics, including the current COVID-19 pandemic, impacting the markets and communities in which we, our partners and clients operate.

The COVID-19 pandemic has caused significant disruption to the business and financial markets, and there remains uncertainty about the duration of this disruption on both a nationwide and global level, as well as the ongoing effect on our business.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are uncertain and unpredictable.

We continue to monitor the COVID-19 situation and potential effects on our business and operations.

While the spread and impact of COVID-19 has stabilized, there is no guarantee that a future outbreak of this or any other widespread epidemics will not occur.

Our operating results may fluctuate significantly from period-to-period and are difficult to predict.

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As a result, we may not be able to sufficiently reduce our costs in any quarter to adequately compensate for an unexpected near-term shortfall in revenues, and even a small shortfall could disproportionately and adversely affect our financial results for that quarter.

Our financial results may be negatively affected by a number of factors, including the following:

Our financial results may be negatively affected by a number of factors as well, including the following:

• write-offs of investments in private companies;

• any lack or reduction of government funding and the political, budgetary and purchasing constraints of government customers who purchase products and services directly or indirectly from us;

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As a result of these factors, we believe that period-to-period comparisons of our revenue levels and operating results are not necessarily meaningful.

You should not rely on our quarterly revenue and operating results to predict our future performance.

You should not rely on our quarterly or annual revenue and operating results to predict our future performance.

We derive a significant portion of our revenue directly or indirectly from government customers, and our business may be adversely affected by changes in the contracting or fiscal policies of those governmental entities.

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• a reduction in sales efforts by our partners;

the failure of our partners to win government awards in which our products are used;

• the failure of our partners to win awards in which our products are used;

• a reduction in technical capabilities or financial viability of our partners;

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• the termination of our relationship with a major systems integrator or OEM;

any adverse effect on a partner’s business related to competition, pricing or other factors.

• any adverse effect on a partner’s business related to competition, pricing or other factors.

A significant commercial market for biometrics technology may not develop, and, even if it does, there can be no assurance our biometrics technology will be successful.

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• the continued growth in demand for biometrics solutions within the government and law enforcement markets, as well as the development and growth of demand for biometric solutions in markets outside of government and law enforcement;

customers’

perceptions regarding the benefits of biometrics solutions;

• customers’ perceptions regarding the benefits of biometrics solutions;

• public perceptions regarding the intrusiveness of these solutions and the manner in which organizations use the biometric information collected;

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• proposed or enacted legislation related to privacy of biometric information;

customers’

satisfaction with biometrics solutions;

• customers’ satisfaction with biometrics solutions;

• marketing efforts and publicity regarding biometrics solutions.

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Our future success will depend upon our ability to develop and introduce a variety of new capabilities and enhancements to our existing products in order to address the changing and sophisticated needs of the marketplace.

Frequently, technical development programs in the biometrics industry require assessments to be made of the future

direction of technology, which is inherently difficult to predict.

Delays in introducing new products and enhancements, the failure to choose correctly among technical alternatives or the failure to offer innovative products or enhancements at competitive prices may cause customers to forego purchases of our products and purchase our competitors’

Frequently, technical development programs in the biometrics industry require assessments to be made of the future direction of technology, which is inherently difficult to predict.

We may not have adequate resources available to us or may not adequately keep pace with appropriate requirements in order to effectively compete in the marketplace.

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There can be no assurance that these companies, many of which have far greater financial and marketing resources than us, will not develop or market offerings that compete with ours in the future or will not otherwise end or limit their relationships with us.

Further, the use of third-party hosting facilities requires us to rely on the functionality and availability of the third parties’

services, as well as their data security, which despite our due diligence, may be or become inadequate.

Further, the use of third-party hosting facilities requires us to rely on the functionality and availability of the third parties’ services, as well as their data security, which despite our due diligence, may be or become inadequate.

Part of our future business is dependent on market demand for, and acceptance of, the cloud-based model for the use of software.

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Under the perpetual or fixed term license model for software procurement, users of the software typically run applications on their hardware.

Because companies are generally predisposed to maintaining control of their IT systems and infrastructure,

there may be resistance to the concept of accessing the functionality that software provides as a service through a third party.

Because companies are generally predisposed to maintaining control of their IT systems and infrastructure, there may be resistance to the concept of accessing the functionality that software provides as a service through a third party.

If the market for cloud-based, software solutions ceases to grow or grows slower than we currently anticipate, demand for our services could be negatively affected.

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If any of our key employees were to leave, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity while any successor obtains the necessary training and experience.

Our employment relationships are at-will and we have had key employees leave in the past.

Our employment

relationships are at-will and we have had key employees leave in the past.

We cannot assure you that one or more key employees will not leave in the future.

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More specifically, we are subject to regulatory environment changes regarding privacy and data protection that could have a material impact on our results of operations.

These regulatory changes may potentially involve new regulatory issues/requirements such as the EU General Data Protection Regulation (“GDPR”), the California Privacy Rights Act (“CPRA”) and other comprehensive state privacy laws, the Illinois Biometric Privacy Act, Texas Statute on the Capture or Use of Biometric Identifier, State of Washington H.B.

1493, Brazil’s General Data Protection Law (“LGPD”) and any other state, federal or foreign regulations governing the collection, use and storage of biometric data.

The potential costs of compliance with or imposed by new/existing regulations and policies that are applicable to us, or fines and penalties to which we may become subject if we fail to comply with those regulations and polices, may affect the use of our products and services and could have a material adverse impact on our results of operations.

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Adverse economic conditions could harm our business.

Unfavorable changes in economic conditions, including recessions, inflation, turmoil in financial markets, changes caused by global crisis such as the COVID-19 pandemic, the ongoing conflict between Russia and Ukraine and resulting economic sanctions, the Taliban’s takeover of Afghanistan, or other changes in economic conditions, could harm our business, results of operations, and financial conditions as a result of:

Unfavorable changes in economic conditions, including recessions, inflation, turmoil in financial markets, changes caused by global crisis such as a pandemic, the ongoing conflict between Russia and Ukraine and resulting economic sanctions, conflicts in the Middle East, or other changes in economic conditions, could harm our business, results of operations, and financial conditions as a result of:

• reduced demand for our products;

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• rising interest rates, recessionary cycles, and inflationary pressures, that could make our products more expensive or could increase our costs.

• health epidemics, impacting the markets and communities in which we, our partners and clients operate.

We are unable to predict whether or when any such adverse economic conditions could occur in the U.S.

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and if they do occur, we cannot predict the timing, duration, or severity.

We may not realize the anticipated benefits of our acquisitions.

We may make acquisitions of companies that offer complementary products, services, and technologies such as our acquisitions of FortressID in December of 2021 and AFIX in November of 2020.

We may not realize the anticipated benefits of our acquisitions or investments.

We may make acquisitions of or investments in companies that offer complementary products, services, and technologies, such as our acquisition of FortressID in December of 2021 and our investment in Omlis Limited.

The ultimate success of our acquisitions depends, in part, on our ability to realize the anticipated synergies, cost savings and growth opportunities from integrating acquired businesses or assets into our existing businesses.

However, the acquisition and successful integration of independent businesses or assets is a complex, costly and time-consuming process, and the benefits we realize may not exceed the costs of the acquisition.

The risk and difficulties associated with acquiring and integrating companies and other assets include, among others, difficulties assimilating the operations and personnel of acquired

companies, challenges in realizing the value of the acquired assets relative to the price paid, distraction of management from our ongoing businesses and potential product disruptions associated with the sale of the acquired company’s products.

The risk and difficulties associated with acquiring and integrating companies and other assets include, among others, difficulties assimilating the operations and personnel of acquired companies, challenges in realizing the value of the acquired assets relative to the price paid, distraction of management from our ongoing businesses and potential product disruptions associated with

the sale of the acquired company’s products.

These factors could have a material adverse effect on our business, financial condition, operating results and cash flows.

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These arrangements can impact or restrict integration of acquired businesses and can result in disputes, including litigation.

Additionally, regardless of the form of consideration we pay, acquisitions and investments could negatively impact our net income and earnings per share.

In addition, there is uncertainty regarding the realizability of investments in private companies.

Additionally, regardless of the form of consideration we pay, acquisitions and investments could negatively impact our operations and earnings per share.

We may have additional tax liabilities.

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In the course of preparing our tax provisions and returns, we must make calculations where the ultimate tax determination may be uncertain.

Our tax returns are subject to examination by the Internal Revenue Service (“IRS”) and state tax authorities.

There can be no assurance as to the outcome of these examinations.

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The application of these principles and policies requires us to make significant judgments and estimates.

The most significant estimates included in the financial statements pertain

to revenue recognition, reserves for doubtful accounts, valuation of acquired assets and assumed liabilities in business combinations, valuation of contingent acquisition payments, valuation of investment in note receivable, goodwill and long-lived asset impairment and valuation allowance for deferred income tax assets.

The most significant estimates included in the financial statements pertain to revenue recognition, allowance for credit losses, valuation of acquired assets and assumed liabilities in business

combinations, valuation of contingent acquisition payments, valuation of investment in note receivable, goodwill and long-lived asset impairment and valuation allowance for deferred income tax assets.

Actual results could differ from those estimates.

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Not applicable.

Cybersecurity Risk Management and Strategy

To help protect the Company from a major cybersecurity incident that could have a material impact on operations or the Company’s financial results, the Company has implemented policies, programs and controls, including technology investments that focus on cybersecurity incident prevention, identification and mitigation.

The steps the Company takes to reduce its vulnerability to cyberattacks and to mitigate impacts from cybersecurity incidents include, but are not limited to:

establishing information security policies and standards, implementing information protection processes and technologies, monitoring its information technology systems for cybersecurity threats, assessing cybersecurity risk profiles of key third-parties, implementing cybersecurity training and collaborating with public and private organizations on cyber threat information and best practices.

The Company has implemented a Cybersecurity Policy (the “Policy”) that provides a framework for responding to cybersecurity incidents.

The Policy includes requirements for incident disclosure and reporting, protocols for incident evaluation, including the use of third-party service providers and partners, and processes for notification and internal escalation of information to the Company’s senior management, incident response team, and Board of Directors (the "Board") and appropriate Board committees.

The Policy also addresses requirements for the Company’s external reporting obligations.

The Plan is reviewed and updated, as necessary but no less frequently than once a year, under the leadership of the Company’s Chief Security Officer (“CSO”).

Although the Company did not experience a material cybersecurity incident during the year ended December 31, 2023, the scope and impact of any future incident cannot be predicted.

See “Item 1A.

Risk Factors” for more information on the Company’s cybersecurity-related risks.

The Board of Directors, primarily through its Audit Committee, oversees the Company’s cybersecurity program.

Management regularly reports to the Audit Committee on the current state of the Company’s cybersecurity program, including the current threat landscape, cybersecurity risks, and any significant incidents.

Committee may provide updates to the Board on the substance of these reports and any recommendations for improvements that the Audit Committee deems appropriate.

At the management level, the Company has established written policies and procedures to ensure that significant cybersecurity incidents are immediately investigated, addressed through the coordination of various internal departments, and publicly reported, to the extent required by applicable law.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business