AWARE INC /MA/ 10-Q

10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2024 OR ☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to _________ Commission file number 000-21129 AWARE, INC. (Exact Name of Registrant as Specified in Its Charter) Massachusetts 04-2911026 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 76 Blanchard Road in Burlington , Massachusetts , 01803 (Address of Principal Executive Offices) (Zip Code) ( 781 ) 276-4000 (Registrant’s Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Trading Symbol Name of Each Exchange on Which Registered Common Stock, $0.01 par value per share AWRE The Nasdaq Global Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,” “accelerated filer," “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.: Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ___ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ The number of shares outstanding of the registrant’s common stock as of April 24, 2024 was 21,085,234 . AWARE, INC. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2024 TABLE OF CONTENTS Page PART I FINANCIAL INFORMATION 3 Item 1. Unaudited Consolidated Financial Statements 3 Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023 3 Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2024 and March 31, 2023 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and March 31, 2023 5 Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2024 and March 31, 2023 6 Notes to Consolidated Financial Statements 7 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16 Item 4. Controls and Procedures 20 PART II OTHER INFORMATION 21 Item 1. Legal Proceedings 21 Item 1A. Risk Factors 21 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21 Item 6. Exhibits 23 Signatures 24 2 PART 1. FINANC IAL INFORMATION ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS AWARE, INC. CONSOLIDATED B ALANCE SHEETS (in thousands, except share data) (unaudited) March 31, 2024 December 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 14,315 $ 10,002 Marketable securities 14,214 20,913 Accounts receivable, net 3,756 2,454 Unbilled receivables, net 1,568 1,401 Prepaid expenses and other current assets 986 1,054 Total current assets 34,839 35,824 Property and equipment, net 543 579 Intangible assets, net 2,288 2,391 Goodwill 3,120 3,120 Right of use asset 4,188 4,260 Other long-term assets 122 122 Total assets $ 45,100 $ 46,296 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 791 $ 280 Accrued expenses 1,031 1,706 Current portion of operating lease liabilities 642 637 Deferred revenue 4,941 4,926 Total current liabilities 7,405 7,549 Long-term deferred revenue 492 611 Long-term operating lease liabilities 3,779 3,838 Total long-term liabilities 4,271 4,449 Stockholders’ equity: Preferred stock, $ 1.00 par value; 1,000,000 shares authorized, none outstanding — — Common stock, $ .01 par value; 70,000,000 shares authorized; issued and outstanding of 21,085,234 as of March 31, 2024 and 21,017,892 as of December 31, 2023 212 210 Additional paid-in capital 99,567 99,405 Accumulated deficit ( 66,494 ) ( 65,512 ) Accumulated other comprehensive income 139 195 Total stockholders’ equity 33,424 34,298 Total liabilities and stockholders’ equity $ 45,100 $ 46,296 The accompanying notes are an integral part of the consolidated financial statements. 3 AWARE, INC. CONSOLIDATED STATEM ENTS OF OPERATIONS and COMPREHNSIVE LOSS (in thousands, except per share data) (unaudited) Three Months Ended March 31, 2024 2023 Revenue: Software licenses $ 2,147 $ 2,105 Software maintenance 2,160 1,835 Services and other 114 365 Total revenue 4,421 4,305 Costs and expenses: Cost of services and other revenue 276 298 Research and development 2,182 2,381 Selling and marketing 1,891 1,991 General and administrative 1,334 1,504 Total costs and expenses 5,683 6,174 Operating loss ( 1,262 ) ( 1,869 ) Interest income 280 301 Net loss $ ( 982 ) $ ( 1,568 ) Net loss per share – basic $ ( 0.05 ) $ ( 0.07 ) Net loss per share – diluted $ ( 0.05 ) $ ( 0.07 ) Weighted-average shares – basic 21,085 21,033 Weighted-average shares – diluted 21,085 21,033 Other comprehensive income, net of tax: Unrealized (loss) gain on available-for-sale securities ( 56 ) 147 Comprehensive loss $ ( 1,038 ) $ ( 1,421 ) The accompanying notes are an integral part of the consolidated financial statements. 4 AWARE, INC. CONSOLIDATED STATEM ENTS OF CASH FLOWS (in thousands) (unaudited) Three Months Ended March 31, 2024 2023 Cash flows from operating activities: Net loss $ ( 982 ) $ ( 1,568 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 139 149 Stock-based compensation 164 335 Interest on note receivable — ( 31 ) Non-cash lease expense 17 173 Changes in assets and liabilities: Accounts receivable ( 1,302 ) 417 Unbilled receivables ( 167 ) ( 325 ) Prepaid expenses and other current assets ( 12 ) ( 181 ) Accounts payable 511 ( 15 ) Accrued expenses ( 675 ) ( 502 ) Deferred revenue ( 104 ) 63 Net cash used in operating activities ( 2,411 ) ( 1,485 ) Cash flows from investing activities: Purchases of property and equipment — ( 16 ) Purchase of marketable securities — ( 2,752 ) Sale of marketable securities 6,724 1,250 Net cash provided by (used in) investing activities 6,724 ( 1,518 ) Cash flows from financing activities: Payments made for taxes of employees who surrendered shares related to unrestricted stock — ( 15 ) Repurchase of common stock — ( 341 ) Net cash used in financing activities — ( 356 ) Increase (decrease) in cash and cash equivalents 4,313 ( 3,359 ) Cash and cash equivalents, beginning of period 10,002 11,749 Cash and cash equivalents, end of period $ 14,315 $ 8,390 Supplemental disclosure: Cash paid for income taxes $ — $ — The accompanying notes are an integral part of the consolidated financial statements . 5 AWARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) (unaudited) For the Three Months Ended March 31, 2024 Additional Total Common Stock Paid-In Accumulated Accumulated Other Stockholders’ Shares Amount Capital Deficit Comprehensive Income (Loss) Equity Balance at December 31, 2023 21,018 $ 210 $ 99,405 $ ( 65,512 ) $ 195 $ 34,298 Issuance of unrestricted stock 67 2 ( 2 ) — — — Stock-based compensation expense — — 164 — — 164 Repurchase of common stock — — — — — — Other comprehensive loss ( 56 ) Net loss — — — ( 982 ) — ( 982 ) Balance at March 31, 2024 21,085 $ 212 $ 99,567 $ ( 66,494 ) $ 139 $ 33,424 For the Three Months Ended March 31, 2023 Additional Total Common Stock Paid-In Accumulated Accumulated Other Stockholders’ Shares Amount Capital Deficit Comprehensive Income (Loss) Equity Balance at December 31, 2022 21,093 $ 211 $ 98,306 $ ( 58,198 ) $ ( 110 ) $ 40,209 Issuance of unrestricted stock 62 1 ( 1 ) — — — Shares surrendered by employees to pay taxes related to unrestricted stock ( 9 ) — ( 15 ) — — ( 15 ) Repurchase of common stock ( 191 ) ( 2 ) ( 339 ) — — ( 341 ) Stock-based compensation expense — — 335 — — 335 Other comprehensive income — — — — 147 147 Net loss — — — ( 1,568 ) — ( 1,568 ) Balance at March 31, 2023 20,955 $ 210 $ 98,286 $ ( 59,766 ) $ 37 $ 38,767 The accompanying notes are an integral part of the consolidated financial statements. 6 AWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1 – Description of the Company and Basis of Presentation Description of the Company We are a global biometric platform company that uses data science, machine learning, and artificial intelligence to tackle everyday business and identity challenges through biometric solutions. 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. • Enroll: Register biometric identities into an organization’s secure database • Identify: Utilize an organization’s secure database to accurately identify individuals using biometric data • Authenticate: Provide frictionless multi-factor, passwordless access to secured accounts and databases with biometric verification • Enable: Manage the lifecycle of secure identities through optimized biometric interchanges 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. Principal government applications of biometrics systems include border control, visa applicant screening, law enforcement, national defense, intelligence, secure credentialing, access control, and background checks. Principal commercial applications include mobile enrollment, user authentication, identity proofing, and secure transaction enablement. Our products span multiple biometric modalities including fingerprint, face, iris and voice, and provide interoperable, standards-compliant, field-proven biometric functionality. Our products are used to capture, verify, format, compress and decompress biometric images as well as aggregate, analyze, process, match and transport those images and templates within biometric systems. 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. Certain amounts in the consolidated financial statements and associated notes may not add due to rounding. All percentages have been calculated using unrounded amounts. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include all information and notes necessary for a complete presentation of our financial position, results of operations and cash flows, in conformity with generally accepted accounting principles. We filed audited financial statements which included all information and notes necessary for such presentation for the two years ended December 31, 2023 in conjunction with our 2023 Annual Report on Form 10-K. This Form 10-Q should be read in conjunction with that Form 10-K. The accompanying unaudited consolidated balance sheets, statements of operations and comprehensive loss, statements of cash flows, and statements of stockholders’ equity reflect all adjustments (consisting only of normal recurring items) which are, in the opinion of management, necessary for a fair presentation of financial position at March 31, 2024, and of operations and cash flows for the interim periods ended March 31, 2024 and 2023. The results of operations for the interim periods ended March 31, 2024 are not necessarily indicative of the results to be expected for the year. 7 Principles of Consolidation The consolidated financial statements include the accounts of Aware, Inc. and its subsidiaries, Aware Security Corporation and Fortr3ss, Inc. Intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. The most significant estimates included in the financial statements pertain to revenue recognition, reserves for credit losses, valuation of the investment in the note receivable, goodwill and long-lived asset impairment and valuation allowance for deferred income tax assets. Actual results could differ from those estimates. Recent Accounting Pronouncements In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires retrospective disclosure of significant segment expenses and other segment items on an annual and interim basis. Additionally, it requires disclosure of the title and position of the Chief Operating Decision Maker (“CODM”). This ASU will be effective for our fiscal year ending on December 31, 2024 and interim periods beginning in fiscal 2025, with early adoption permitted. We are assessing the impact of the standard on our consolidated financial statements. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires an annual tabular effective tax rate reconciliation disclosure including information for specified categories and jurisdiction levels, as well as, disclosure of income taxes paid, net of refunds received, disaggregated by federal, state/local, and significant foreign jurisdiction. This ASU will be effective for our fiscal year ending on December 31, 2025, with early adoption permitted. We are assessing the impact of the standard on our consolidated financial statements. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments,” which amends the guidance on the impairment of financial instruments. The amendments in this update remove the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance recoverables, off-balance-sheet credit exposures, and held-to-maturity securities. Under current U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance removes all current recognition thresholds and introduces the new current expected credit loss (“CECL”) model which will require entities to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that an entity expects to collect over the instrument’s contractual life. The new CECL model is based upon expected losses rather than incurred losses. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. We adopted this standard as of January 1, 2023 and the adoption did not have a material impact on our consolidated financial statements. Note 2 – Revenue Recognition We recognize revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). Under ASC 606, we apply the following five step model: 1. Identify the contract with the customer; 2. Identify the performance obligations in the contract; 8 3. Determine the transaction price; 4. Allocate the transaction price to the performance obligations in the contract; and 5. Recognize revenue when (or as) each performance obligation is satisfied. We categorize revenue as software licenses, software maintenance, or services and other. Revenue from software licenses is recognized at a point in time upon delivery, provided all other revenue recognition criteria are met. We recognize software maintenance revenue over time on a straight-line basis over the contract period. Services revenue is recognized over time as the services are delivered using an input method (i.e., labor hours incurred as a percentage of total labor hours budgeted), provided all other revenue recognition criteria are met. Other revenue includes hardware sales that may be included in a software license, is recognized at a point in time upon delivery provided all other revenue recognition criteria are met. In addition to selling software licenses, software maintenance and software services on a standalone basis, a significant portion of our contracts include multiple performance obligations, which require an allocation of the transaction price to each distinct performance obligation based on a relative standalone selling price (“SSP”) basis. The SSP is the price at which we would sell a promised good or service separately to a customer. The best estimate of SSP is the observable price of a good or service when we sell that good or service separately. A contractually stated price or a list price for a good or service may be the SSP of that good or service. We use a range of selling prices to estimate SSP when we sell each of the goods and services separately and need to determine whether there is a discount that needs to be allocated based on the relative SSP of the various goods and services within multiple performance obligation arrangements. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we typically determine the SSP using an adjusted market assessment approach using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual goods and services due to the stratification of those goods and services by customer. In these instances, we may use information such as the nature of the customer and distribution channel in determining the SSP. When software licenses and significant customization engineering services are sold together, they are accounted for as a combined performance obligation, as the software licenses are generally highly dependent on, and interrelated with, the associated customization services and therefore are not distinct performance obligations. Revenue for the combined performance obligation is recognized over time as the services are delivered using an input method (i.e., labor hours incurred as a percentage of total labor hours budgeted). When subscription-based software is sold, the subscription-based software and software maintenance are generally considered distinct performance obligations. The transaction price is allocated to subscription-based software and the software maintenance based on the relative SSP of each performance obligation. We sell subscription-based software for a fixed fee and/or a usage-based royalty fee, sometimes subject to a minimum guarantee. When the amount is in the form of a fixed fee, including the guaranteed minimum in subscription-based royalties, revenue is allocated to the subscription-based software and recognized at a point in time upon delivery, provided all other revenue recognition criteria are met. Revenue allocated to the software maintenance is recognized over the contract term on a straight-line basis. Any subscription-based software fees earned not subject to the guaranteed minimum or earned in excess of the minimum amount are recognized as revenue when the subsequent usage occurs. Our contracts can include variable fees, such as the option to purchase additional usage of a previously delivered software license. We may also provide pricing concessions to clients, a business practice that also gives rise to variable fees in contracts. We include variable fees in the determination of total transaction price if it is not probable that a future significant reversal of revenue will occur. We use the expected value or most likely value amount, whichever is more appropriate for specific circumstances, to estimate variable consideration, and the estimates are based on the level of historical price concessions offered to clients. The amount of consideration is not adjusted for a significant financing component if the time between payment and the transfer of the related good or service is expected to be one year or less under the practical expedient in the guidance. Our revenue arrangements are typically accounted for under such expedient , as payment is typically due within 30 to 60 days. During the three month periods ended March 31, 2024 and 2023, none of our contracts contained a significant financing component. 9 Also, to the extent relevant in future periods with the adaption of our current products to be delivered in a hosted environment with AwareID, we expect to recognize revenue from our SaaS offerings in future periods. SaaS offerings will be recognized ratably over the subscription period. For the three months ended March 31, 2024 and 2023, we generated a de minimis amount of revenue from SaaS contracts. Disaggregation of Revenues We organize ourselves into a single segment that reports to the Chief Executive Officer who is our chief operating decision maker. We conduct our operations in the United States and sell our products and services to domestic and international customers. Revenue generated from the following geographic regions was (in thousands): Three Months Ended March 31, 2024 2023 United States $ 1,806 $ 2,054 United Kingdom 1,186 360 Turkey 604 399 Rest of World 825 1,492 $ 4,421 $ 4,305 Revenue by timing of transfer of goods or services was (in thousands): Three Months Ended March 31, 2024 2023 Goods or services transferred at a point in time $ 1,274 $ 1,768 Goods or services transferred over time 3,147 2,537 $ 4,421 $ 4,305 Revenue by product group was (in thousands): Three Months Ended March 31, 2024 2023 License and service contracts $ 3,230 $ 2,856 Subscription-based contracts 1,191 1,449 $ 4,421 $ 4,305 Revenue from subscription-based contracts include revenue that may be recognized at a point in time or over time and be part of a fixed fee and or minimum guarantee as well as fees earned and allocated to software maintenance. Contract Balances When the timing of our delivery of goods or services is different from the timing of payments made by customers, we recognize either a contract asset (performance precedes contractual due date) or a contract liability (customer payment precedes performance). Customers that prepay are represented by the deferred revenue below until the performance obligation is satisfied. Our contract assets consist of unbilled receivables. Our contract liabilities consist of deferred (unearned) revenue, which is generally related to software maintenance contracts. We classify deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. 10 The following tables present changes in our contract assets and liabilities during the three months ended March 31, 2024 and 2023 (in thousands): Balance at Beginning of Period Revenue Recognized In Advance of Billings Billings Balance at End of Period Three months ended March 31, 2024 Contract assets: Unbilled receivables $ 1,401 $ 1,725 $ ( 1,558 ) $ 1,568 Three months ended March 31, 2023 Contract assets: Unbilled receivables $ 2,929 $ 2,340 $ ( 1,786 ) $ 3,483 Balance at Beginning of Period Billings Revenue Recognized Balance at End of Period Three months ended March 31, 2024 Contract liabilities: Deferred revenue $ 5,537 $ 2,056 $ ( 2,160 ) $ 5,433 Three months ended March 31, 2023 Contract liabilities: Deferred revenue $ 3,733 $ 1,898 $ ( 1,835 ) $ 3,796 Remaining Performance Obligations Remaining performance obligations represent the transaction prices from contracts for which work has not been performed or goods and services have not been delivered. We expect to recognize revenue on approximately 88 % of the remaining deferred revenue over the next 12 months, with the remainder recognized thereafter. As of March 3,1 2024, the aggregate amount of the transaction prices allocated to remaining performance obligations for contracts with a duration greater than one year was $ 4.0 million. Note 3 – Fair Value Measurements The FASB Codification defines fair value and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy under the FASB Codification are: Level 1 – valuations that are based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date; Level 2 – valuations that are based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly; and Level 3 – valuations that require inputs that are both significant to the fair value measurement and unobservable. Cash and cash equivalents, which primarily include money market mutual funds were $ 14.3 million and $ 10.0 million as of March 31, 2024 and December 31, 2023, respectively. Marketable securities, which primarily consists of U.S. Treasuries and previously included corporate bonds, were $ 14.2 million and 11 $ 20.9 million as of March 31, 2024 and December 31, 2023, respectively. Our assets and liabilities that are measured at fair value on a recurring basis included the following (in thousands): Fair Value Measurement at March 31, 2024 Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Total (Level 1) (Level 2) (Level 3) Assets Money market funds (included in cash and cash equivalents) $ 13,303 $ — $ — $ 13,303 Marketable securities 14,214 — — 14,214 Total assets $ 27,517 $ — $ — $ 27,517 Fair Value Measurement at December 31, 2023 Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Total (Level 1) (Level 2) (Level 3) Assets Money market funds (included in cash and cash equivalents) $ 7,848 $ — $ — $ 7,848 Marketable securities 20,913 — — 20,913 Note receivable — — — — Total assets $ 28,761 $ — $ — $ 28,761 Our investments in marketable securities are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive loss in stockholders' equity. Marketable securities by security type consisted of the following (in thousands): March 31, 2024: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Treasury notes and bonds $ 14,075 $ 174 $ ( 35 ) $ 14,214 Corporate bonds — — — — $ 14,075 $ 174 $ ( 35 ) $ 14,214 December 31, 2023: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Treasury notes and bonds $ 15,331 $ 177 $ ( 19 ) $ 15,489 Corporate bonds 5,386 39 ( 1 ) 5,424 $ 20,717 $ 216 $ ( 20 ) $ 20,913 12 Note 4 – Intangible Assets Intangible assets and their estimated useful lives as of March 31, 2024 are as follows (dollars in thousands): Useful Life Gross Amount Accumulated Amortization Net Book Value Customer relationships 8 and 10 years $ 2,680 $ ( 787 ) $ 1,893 Developed technology 5 and 7 years 710 ( 327 ) 383 Trade name trademarks 3 and 7 years 30 ( 18 ) 12 $ 3,420 $ ( 1,132 ) $ 2,288 During the three months ended March 31, 2024 and 2023, we recorded $ 0.1 million of intangible assets amortization expense. We expect to record amortization expense for the remainder of 2024 and each subsequent year and thereafter as follows (in thousands): 2024 $ 311 2025 405 2026 356 2027 345 2028 338 Thereafter 533 $ 2,288 Note 5 – Computation of Earnings per Share Basic earnings per share is computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income or loss by the weighted average number of common shares outstanding plus additional common shares that would have been outstanding if dilutive potential common shares had been issued. For the purposes of this calculation, stock options are considered common stock equivalents in periods in which they have a dilutive effect. Stock options that are anti-dilutive are excluded from the calculation. Potential common stock equivalents were not included in the per share calculation for diluted earnings per share where we had a net loss, and the effect of their inclusion would be anti-dilutive. Note 6 – Equity and Stock-based compensation The following table presents stock-based compensation expenses included in our unaudited consolidated statements of operations and comprehensive loss (in thousands): Three Months Ended March 31, 2024 2023 Cost of services and other revenue $ 2 $ 4 Research and development 10 61 Selling and marketing 16 25 General and administrative 136 245 Stock-based compensation expense $ 164 $ 335 Stock Options - On January 17, 2024, our stockholders approved the Aware Inc. 2023 Equity Incentive Plan (the “2023 Plan”). Following approval of the 2023 Plan, we ceased making awards under our previous 2001 Nonqualified Stock Plan (as amended, the “2001 Plan”). Also on January 17, 2024, our stockholders approved a stock option exchange program (the “Exchange Offer”) pursuant to which eligible employees, primarily consisting of our executive officers and senior management, were able to exchange certain stock options (the “Eligible Options”) for replacement stock 13 options with modified terms (the “New Options”) as described below. We commenced the Exchange Offer on January 19, 2024, pursuant to the Offer to Exchange certain outstanding stock options for New Options under Aware’s 2023 Equity and Incentive Plan. The Exchange Offer expired on February 20, 2024. Pursuant to the Exchange Offer, nine employees elected to exchange their Eligible Options, and we accepted for cancellation Eligible Options to purchase an aggregate of 2,180,000 shares of common stock, representing approximately 96 % of the total shares of common stock underlying the Eligible Options. Following the expiration of the Exchange Offer, on February 20, 2024, we granted New Options to purchase 933,073 shares of Common Stock, pursuant to the terms of the Exchange Offer and our 2023 Equity and Incentive Plan. The exercise price per share of the New Options granted pursuant to the Exchange Offer was $ 2.21 per share. Each New Option will vest and become exercisable, with respect to 50 % of the shares of common stock underlying such New Option on the first anniversary of the grant date and, with respect to the remaining shares of common stock underlying such New Option, in twelve equal monthly installments thereafter, subject to the continuous service of the holder. The other terms and conditions of the New Options will be governed by the terms and conditions of the 2023 Plan and the nonstatutory stock option agreements entered into thereunder. There was no incremental expense for the New Options as calculated using the Black-Scholes option pricing model. The unamortized expense remaining on the Eligible Options, as of the modification date, will be recognized over the new vesting schedule. We did no t grant any other stock options in the three months ended March 31, 2024 or 2023. Restricted Stock Units - The 2023 Plan permits us to grant restricted stock units to our directors, officers, and employees. Upon vesting, each restricted stock unit entitles the recipient to receive a number of shares of common stock as set forth in the relevant restricted stock unit agreement. Stock-based compensation expense for restricted stock units is determined based on the fair market value of our stock on the date of grant, provided the number of shares in the grant is fixed on the grant date. We granted 200,814 restricted stock units to directors, officers, and employees during the three months ended March 31, 2024. Of the restricted stock units granted in the three months ended March 31, 2024, 140,814 are scheduled to vest in two equal installments shortly after June 30, 2024 and shortly after December 31, 2024. The remaining 60,000 restricted stock units were scheduled to be issued in 15,000 increments in July 2024 and January 2025, 2026 and 2027 but were forfeited during the three months ended March 31, 2024 as a result of an employee termination. Unrestricted Stock Grants - Our 2001 Plan, which was replaced by our 2023 Plan, permitted us to grant shares of unrestricted shares of stock to our directors, officers, and employees. Stock-based compensation expense for stock grants is determined based on the fair market value of our stock on the date of grant, provided the number of shares in the grant is fixed on the grant date. We issued 67,107 shares of unrestricted stock to directors, officers, and employees during the three months ended March 31, 2024 in settlement of previously issued unrestricted stock gra nts. We granted 134,211 and issued 61,462 shares of unrestricted stock to directors, officers, and employees during the three months ended March 31, 2023. Of the shares granted in the three months ended March 31, 2023, 67,104 were issued shortly after June 30, 2023 and 67,107 were issued shortly after December 31, 2023. Share Purchases - On March 1, 2022, our Board of Directors authorized a new stock repurchase program pursuant to which we may purchase up to $ 10.0 million of our common stock. On November 30, 2023, our Board of Directors extended the program through December 31, 2025. As of March 31, 2024 we have repurchased $ 1.8 million of our common stock pursuant to this program. During the three months ended March 31, 2024 and 2023 we repurchased 35 and 190,908 shares of our common stock, respectively. The program does not obligate us to acquire any particular amount of common stock and the program may be modified or suspended at any time at our Board of Directors' discretion. 14 Note 7 – Income Taxes During the three months ended March 31, 2024 and 2023, we recorded no income tax benefits for the net operating losses incurred or for the research and development tax credits generated due to the uncertainty of realizing a benefit from those items. We have evaluated the positive and negative evidence bearing upon our ability to realize our deferred tax assets, which primarily consist of net operating loss carryforwards and research and development tax credits. We considered the history of cumulative net losses, estimated future taxable income and prudent and feasible tax planning strategies and we have concluded that it is more likely than not that we will not realize the benefits of our deferred tax assets. As a result, as of March 31, 2024 and December 31, 2023, we have a full valuation recorded against our net deferred tax assets. 15 ITEM 2: Management’s Discussion and Analysis o f Financial Condition and Results of Operations Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995 Some of the information in this Quarterly Report on Form 10-Q contains forward‑looking statements that involve substantial risks and uncertainties. You can identify these statements by forward‑looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue” and similar words. You should read statements that contain these words carefully because they: (1) discuss our future expectations; (2) contain projections of our future operating results or financial condition; or (3) state other “forward‑looking” information. However, we may not be able to predict future events accurately. The risk factors listed in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2023, as well as any cautionary language in this Quarterly Report on Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward‑looking statements. You should be aware that the occurrence of any of the events described in these risk factors and elsewhere in this Quarterly Report on Form 10-Q could materially and adversely affect our business. Summary of Operations We are primarily engaged in the development and sale of biometrics products, solutions and services. Our software products are used in government and commercial systems and applications and fulfill a broad range of functions critical to secure biometric enrollment, authentication, identification and transactions. Principal government applications of biometrics systems include border control, visa applicant screening, law enforcement, national defense, intelligence, secure credentialing, access control, and background checks. Principal commercial applications include: i) user enrollment and authentication used for login to mobile devices, computers, networks, and software programs; ii) user authentication for financial transactions and purchases (online and in-person); iii) physical access control to buildings; and iv) identity proofing of prospective employees and customers. We sell our biometrics software products and services globally through a multifaceted distribution strategy using systems integrators, OEMs, VARs, partners, and directly to end user customers. We also derive a portion of our revenue from the sale of imaging software licenses to OEMs and systems integrators that incorporate our software into medical imaging products and medical systems. Summary of Financial Results We use revenue and results of operations to summarize financial results as we believe these measurements are the most meaningful way to understand our operating performance. Revenue and operating loss for the three months ended March 31, 2024 were $4.4 million and $1.3 million, respectively. These results compared to revenue of $4.3 million and operating loss of $1.9 million for the three months ended March 31, 2023. The decrease in operating loss in the current three month period was primarily due to a $0.5 million decrease in operating expenses resulting from cost-control measures we implemented in the second half of 2023 and the first quarter of 2024, including a reduction of approximately ten percent of our headcount across all departments. These and all other financial results are discussed in more detail in the results of operations section that follows. Results of Operations Software licenses. Software licenses consist of revenue from the sale of biometrics and imaging software products. Sales of software products depend on our ability to win proposals to supply software for biometrics systems projects either directly to end user customers or indirectly through channel partners. Software license revenue was $2.1 million in the three months ended March 31, 2024 and 2023. As a percentage of total revenue, software license revenue was 49% in the first quarter of 2024 and 2023. Software license sales have historically fluctuated, and we expect software license revenue to continue to fluctuate since these sales are based on the timing of projects with our customers and partners. 16 Our market strategy is to continue to focus on our legacy government biometrics markets and expand into new commercial biometrics markets. We are unable to predict future revenue from commercial markets as these are emerging markets. Software maintenance . Software maintenance consists of revenue from the sale of software maintenance contracts. Software maintenance contracts entitle customers to receive software support and software updates, if and when they become available, during the term of the contract. Software maintenance revenue increased 18% from $1.8 million in the three months ended March 31, 2023 to $2.2 million in the three months ended March 31, 2024. As a percentage of total revenue, software maintenance revenue increased from 43% in the first quarter of 2023 to 49% in the current year quarter. For the three month period ended March 31, 2024, the increase in software maintenance revenue was primarily due to software maintenance related to our sales of perpetual software licenses. Services and other revenue . Services revenue consists of fees we charge to perform software development, integration, installation, and customization services. Similar to software license revenue, services revenue depends on our ability to win biometrics systems projects either directly with end user customers or in conjunction with channel partners. Other revenue consists of hardware fees that are included with some of our software licenses. Services and other revenue decreased 69% from $0.4 million in the three months ended March 31, 2023 to $0.1 million in the three months ended March 31, 2024. As a percentage of total revenue, services and other revenue decreased from 8% in the first quarter of 2023 to 3% in the current year quarter. Services and other revenue fluctuate dependent on when we commence new projects and when we complete projects that were started in previous periods. Cost of services and other revenue. Cost of services and other revenue consists primarily of engineering costs to perform customer services projects and other third-party costs that are included with some of our software licenses. Such costs primarily include: i) engineering salaries, stock-based compensation, fringe benefits, and facilities; ii) engineering consultants and contractors; iii) software license fees; and iv) hardware costs. Cost of services and other revenue was $0.3 million in the three months ended March 31, 2023 and 2024. Cost of services and other revenue as a percentage of services and other revenue increased from 82% in the first quarter of 2023 to 242% in the current year quarter. The increase in cost of services and other revenue as a percentage of services and other revenue for the three months ended March 31, 2024 was primarily due to additional hours required that exceed our fixed fee services contracts. Gross margins on services and other revenue are a function of: i) the nature of the projects; ii) the level of engineering difficulty and labor hours required to complete project tasks; and iii) how much we were able to charge. We expect that gross margins on services and other revenue will continue to fluctuate in future periods based on the nature, complexity, and pricing of future projects. Research and development expense. Research and development expense consists of costs for: i) engineering personnel, including salaries, stock-based compensation, fringe benefits, and facilities; ii) engineering consultants and contractors, and iii) other engineering expenses such as supplies, equipment depreciation, dues and memberships and travel. Engineering costs incurred to develop our technology and products are classified as research and development expense. As described in the cost of services section, engineering costs incurred to provide engineering services for customer projects are classified as cost of services and other revenue, and are not included in research and development expense. 17 The classification of total engineering costs to research and development expense and cost of services and other revenue was (in thousands): Three Months Ended March 31, 2024 2023 Research and development expense $ 2,182 $ 2,381 Cost of services and other revenue 276 298 Total engineering costs $ 2,458 $ 2,679 Total engineering costs decreased 8% from $2.7 million in the three months ended March 31, 2023 to $2.5 million in the three months ended March 31, 2024. As a percentage of total revenue, total engineering costs decreased from 62% in the three months ended March 31, 2023 to 57% in the same current year quarter in 2024. The spending decrease for the three months ended March 31, 2024 compared to the same prior year period was primarily due to decreased headcount. We anticipate that we will continue to focus our future research and development activities on enhancing our existing products and developing new products with our growing internal resources. Selling and marketing expense. Selling and marketing expense primarily consists of costs for: i) sales and marketing personnel, including salaries, sales commissions, stock-based compensation, fringe benefits, travel, and facilities; and ii) advertising and promotion expenses. Selling and marketing expense decreased 5% from $2.0 million in the three months ended March 31, 2023 to $1.9 million in the same three month period of 2024. As a percentage of total revenue, selling and marketing expense decreased from 46% in the first quarter of 2023 to 44% in the corresponding period in 2024. The spending decrease for the three months ended March 31, 2024, compared to the same prior year period was primarily due to lower marketing spend. We may expand our sales force and marketing efforts to address additional opportunities. General and administrative expense. General and administrative expense consists primarily of costs for: i) officers, directors and administrative personnel, including salaries, bonuses, director compensation, stock-based compensation, fringe benefits, and facilities; ii) professional fees, including legal and audit fees; iii) public company expenses; and iv) other administrative expenses, such as insurance costs and bad debt provisions. General and administrative expense decreased 11% from $1.5 million for the three months ended March 31, 2023 to $1.3 million for the three months ended March 31, 2024. As a percentage of total revenue, general and administrative was 35% in the first quarter of 2023 and 31% in the corresponding period of 2024. The expense decrease for the three months ended March 31, 2024 compared to the same prior year periods was primarily due to the impact of lower headcount. Fluctuations of general and administrative expenses are expected depending on specific activities in a period. Interest Income. Interest income was $0.3 million in the three months ended March 31, 2024 and 2023. Income taxes . We had no income tax expense for the three months ended March 31, 2024 and 2023. We have evaluated the positive and negative evidence bearing upon our ability to realize our deferred tax assets, which primarily consist of net operating loss carryforwards and research and development tax credits. We considered the history of cumulative net losses, estimated future taxable income and prudent and feasible tax planning strategies and we have concluded that it is more likely than not that we will not realize the benefits of our deferred tax assets. As a result, as of March 31, 2024 and December 31, 2023, we recorded a full valuation allowance against our net deferred tax assets. 18 Liquidity and Capital Resources At March 31, 2024, we had cash, cash equivalents and marketable securities of $28.5 million, which represented a decrease of $2.4 million from December 31, 2023. The decrease in cash, cash equivalents and marketable securities was primarily due to the impact of $2.3 million of cash used in operating activities. While we cannot assure you that we will not require additional financing, or that such financing will be available to us, we believe that our cash and cash equivalents will be sufficient to fund our operations for at least the next twelve months from the date of this filing and to meet our known long-term cash requirements. Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our future growth, operating results, and the investments needed to support our operations. If we require additional capital resources, we may utilize available funds or additional external financing. To date, inflation has not had a material impact on our financial results. There can be no assurance, however, that inflation will not adversely affect our financial results in the future. Recent Accounting Pronouncements See Note 1 to our Consolidated Financial Statements in Item 1. 19 ITEM 4: Controls and Procedures Under the supervision and with the participation of our management, including the Chief Executive Officer and Principal Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Principal Financial Officer have concluded that these disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 20 PART II. OTHE R INFORMATION ITEM 1: Legal Proceedings From time to time we are involved in litigation incidental to the conduct of our business. We are not party to any lawsuit or proceeding that, in our opinion, is material to our business. ITEM 1A: Ri sk Factors Investing in our common stock involves a high degree of risk. Our Annual Report on Form 10-K for the year ended December 31, 2023 includes a detailed discussion of our risk factors under the heading “Part I, Item 1A—Risk Factors.” There have been no material changes from such risk factors during the three months ended March 31, 2024. You should consider carefully the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2023, and all other information contained in or incorporated by reference in this Quarterly Report on Form 10-Q before making an investment decision. If any of the risks discussed in the Annual Report on Form 10-K or herein actually occur, they may materially harm our business, financial condition, operating results, cash flows or growth prospects. As a result, the market price of our common stock could decline, and you could lose all or part of your investment. Additional risks and uncertainties that are not yet identified or that we think are immaterial may also materially harm our business, financial condition, operating results, cash flows or growth prospects and could result in a complete loss of your investment. ITEM 2: Unregistered Sales of Equity Securities, U se of Proceeds, and Issuer Purchases of Equity Securities On November 30, 2023, we announced that our Board of Directors had approved the extension of our previously announced 2022 Repurchase Plan through December 31, 2025. The 2022 Repurchase Plan authorizes the Company to repurchase of up to $10,000,000 of our common stock from time to time. During the three months ended March 31, 2024 we purchased 35 shares under this plan. Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans of Programs January 1, to 31, 2024 35 $ 1.55 35 $ 8,182,358 February 1 to 29, 2024 - $ — - $ 8,182,358 March 1 to 31, 2024 - $ — - $ 8,182,358 Total 35 $ 1.55 35 As of March 31, 2024 the dollar value of shares that may be purchased under the plan is $8,182,358. ITEM 3: Defaults Upon Senior Securities None. ITEM 4: Mine Safety Disclosures None. ITEM 5: Other Information During the three months ended March 31, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-rule 10b5-1 trading arrangement,” as each term is defined in item 408(a) of Regulation S-K. 21 22 ITEM 6: Exhi bits (a) Exhibits Exhibit 3.1 Amended and Restated Articles of Organization, as amended (filed as Exhibit 3.1 to the Company’s Form 10-K for the year ended December 31, 2008 and incorporated herein by reference). Exhibit 3.2 Amended and Restated By-Laws (filed as Exhibit 3.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 10, 2007 and incorporated herein by reference). Exhibit 10.1 Aware, Inc. 2023 Equity and Incentive Plan (filed as Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 18, 2024 and incorporated herein by reference). Exhibit 10.2 Form of Incentive Stock Option Agreement Under the Aware, Inc. 2023 Equity and Incentive Plan (filed as Exhibit 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 18, 2024 and incorporated herein by reference). Exhibit 10.3 Form of Nonstatutory Stock Option Agreement Under the Aware, Inc. 2023 Equity and Incentive Plan (filed as Exhibit 10.3 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 18, 2024 and incorporated herein by reference). Exhibit 10.4 Form of Restricted Stock Unit Award Agreement Under the Aware, Inc. 2023 Equity and Incentive Plan (filed as Exhibit 10.4 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 18, 2024 and incorporated herein by reference). Exhibit 10.5* Employment Agreement dated as of January 16, 2024 by and between Aware Inc. and Arthur Girdwood-Naddell. Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 Certification of Chief Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 101 The following financial statements from Aware, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, formatted in iXBRL (Inline eXtensible Business Reporting Language), as follows: i) Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023, ii) Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2024 and 2023 iii) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023 iv) Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2024 and 2023, and v) Notes to Consolidated Financial Statements. Exhibit 104 Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline Document Set. * Management contract or compensatory plan 23 SIGNAT URES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AWARE, INC. Date: May 3, 2024 By: /s/ Robert A. Eckel Robert A. Eckel Chief Executive Officer & President Date: May 3, 2024 By: /s/ David K. Traverse David K. Traverse Principal Financial Officer 24