# Aware Inc: Form 10-Q for the period ended Sep 30, 2023

- Company: [Aware Inc](/companies/awre.md) (CIK 1015739)
- Form: 10-Q
- Filed: 2023-11-03
- Accepted by EDGAR: Nov 3, 2023, 16:15 ET
- Period: 2023-09-30
- Accession: 0000950170-23-058837
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1015739/000095017023058837/awre-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1015739/000095017023058837/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $6.4m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $13.9m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $410.0k | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $1.0m | us-gaap:CostOfGoodsAndServicesSold |
| Research and development | 3 months, 2023-07-01 to 2023-09-30 | $2.3m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2023-01-01 to 2023-09-30 | $6.9m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $747.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$4.1m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $1.1m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$3.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.05 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.15 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.05 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.15 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 21,131,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 21,017,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$1.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $16.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $467.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $5.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $36.8m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $50.2m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $7.9m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2023-09-30 | $37.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 19,485 characters.

### 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, 2022, 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 income for the three months ended September 30, 2023 were $6.4 million and $0.7 million, respectively. These results compared to revenue of $3.0 million and operating income of $2.4 million for the three months ended September 30, 2022. The increase in revenue was primarily due to $3.0 million of license revenue related to a government contract recognized in the three months ended September 30, 2023. The decrease in operating income in the current three month period was due primarily due to a $5.7 million gain we recorded in the three months ended September 30, 2022 related to the sale of our corporate office. This was partially offset by the impact of increased license revenue as well as a gain we recorded related to an adjustment in the fair value of contingent acquisition payment related to our FortressID acquisition in December 2021 in the three months ended September 30, 2023.

Revenue and operating loss for the nine months ended September 30, 2023 were $13.9 million and $4.1 million, respectively. These results compared to revenue of $11.9 million and operating loss of $0.2 million for the nine months ended September 30, 2022. The increase in revenue in the current nine month period was primarily due to an increase in software license revenue. The higher operating loss in the current nine month period was

primarily due to the impact of a one-time $5.7 million gain we recorded related to the sale of our corporate office in the nine months ended September 30, 2022. which was partially offset by an increase in revenue.

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 increased 439% from $0.8 million in the three months ended September 30, 2022 to $4.4 million in the same three month period in 2023. As a percentage of total revenue, software license revenue increased from 27% in the third quarter of 2022 to 69% in the current year quarter. The $3.6 million increase in software license revenue was due primarily to an increase in perpetual licenses sales including $3.0 million of license revenue related to a government contract recognized in the three months ended September 30, 2023.

Software license revenue increased 38% from $5.5 million in the nine months ended September 30, 2022 to $7.5 million in the same nine month period in 2023. As a percentage of total revenue, software license revenue increased from 46% in the nine months ended September 30, 2022 to 54% in the current year period. The $2.0 million increase in software license revenue was due primarily to an increase in perpetual licenses sales.

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.

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 6% from $1.8 million in the three months ended September 30, 2022 to $1.9 million in the three months ended September 30, 2023. As a percentage of total revenue, software maintenance revenue decreased from 59% in the third quarter of 2022 to 30% in the current year quarter. For the three month period ended September 30, 2023, the increase in software maintenance revenue was primarily due to software maintenance related to our sales of perpetual software licenses.

Software maintenance revenue increased 4% from $5.3 million in the nine months ended September 30, 2022 to $5.5 million in the same nine month period in 2023. As a percentage of total revenue, software maintenance revenue decreased from 44% in the nine months ended September 30, 2022 to 40% in the current year period. For the nine month period ended September 30, 2023, the increase in software maintenance revenue was primarily due to software maintenance related to our subscription based 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 will fluctuate when we commence new projects and/or when we complete projects that were started in previous periods.

Services and other revenue decreased 75% from $0.4 million in the three months ended September 30, 2022 to $0.1 million in the three months ended September 30, 2023. As a percentage of total revenue, services and other revenue decreased from 14% in the third quarter of 2022 to 2% in the current year quarter.

Services and other revenue decreased 31% from $1.2. million in the nine months ended September 30, 2022 to $0.8 million in the nine months ended September 30, 2023. As a percentage of total revenue, services and other revenue decreased from 10% in the nine months ended September 30, 2022 to 6% in the nine months ended September 30, 2023.

***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 increased 45% from $0.3 million in the three months ended September 30, 2022 to $0.4 million in the three months ended September 30, 2023. Cost of services and other revenue as a percentage of services and other revenue increased from 68% in the third quarter of 2022 to 406% in the current year quarter.

Cost of services and other revenue increased 12% from $0.9 million in the nine months ended September 30, 2022 to $1.0 million in the nine months ended September 30, 2023. Cost of services and other revenue as a percentage of services and other revenue increased from 68% in the third quarter of 2022 to 406% 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 and nine months ended September 30, 2023 was primarily due to lower services and other revenue related the completion of a long-term service contract as well as an increase in engineering costs related to the completion of the legacy service contract.

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.

The classification of total engineering costs to research and development expense and cost of services and other revenue was (in thousands):

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Research and development expense | $2,264 | $2,279 | $6,909 | $6,932 |
| Cost of services and other revenue | 410 | 282 | 1,033 | 920 |
| Total engineering costs | $2,674 | $2,561 | $7,942 | $7,852 |

Total engineering costs increased 4% from $2.6 million in the three months ended September 30, 2022 to $2.7 million in the three months ended September 30, 2023. As a percentage of total revenue, total engineering costs decreased from 85% in the three months ended September 30, 2022 to 42% in the same current year quarter in 2023.

Total engineering costs were $7.9 million in each of the nine months ended September 30, 2023 and 2022. As a percentage of total revenue, total engineering costs decreased from 85% in the nine months ended September 30, 2022 to 42% in the same current year period in 2023.

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 increased 16% from $1.9 million in the three months ended September 30, 2022 to $2.2 million in the same three month period of 2023. As a percentage of total revenue, selling and marketing expense decreased from 62% in the third quarter of 2022 to 34% in the corresponding period in 2023.

Selling and marketing expense increased 21% from $5.1 million in the nine months ended September 30, 2022 to $6.1 million in the same nine month period of 2023. As a percentage of total revenue, selling and marketing expense increased from 42% in the nine months ended September 30, 2022 to 44% in the corresponding period in 2023.

The spending increase for the three and nine months ended September 30, 2023, compared to the same prior year period was primarily due to higher employee costs as a result of increased headcount and contracted sales agents.

We expect to expand our sales and marketing force 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 $1.8 million for the three months ended September 30, 2022 to $1.6 million for the three months ended September 30, 2023. As a percentage of total revenue, general and administrative was 60% in the third quarter of 2022 and 25% in the corresponding period of 2023.

General and administrative expense decreased 4% from $4.9 million for the nine months ended September 30, 2022 to $4.7 million for the nine months ended September 30, 2023. As a percentage of total revenue, general and administrative was 41% in the nine months ended September 30, 2022 and 34% in the corresponding period of 2023.

The expense decrease for the three and nine months ended September 30, 2023, compared to the same prior year periods was primarily due to the impact of bad debt expense recorded in the three and nine months ended September 30, 2022. We expect general and administrative expense to increase in absolute dollars, but to generally decrease as a percentage of net revenues, while fluctuating depending on specific activities in a period.

***Gain on sale of fixed assets.*** In July 2022, we sold our corporate headquarters in Bedford, MA for total proceeds of $8.9 million less a brokerage commission of $0.3 million. At the time of the sale, we disposed of all building and land related assets. The net book value of all assets disposed of was $2.9 million. We recorded a net gain on the sale of fixed assets of $5.7 million for the three and nine months ended September 30, 2022.

***Interest Income.*** Interest income increased from $0.2 million in the three months ended September 30, 2022 to $0.4 million in the three months ended September 30, 2023.

Interest income increased from $0.2 million in the nine months ended September 30, 2022 to $1.0 million in the nine months ended September 30, 2023.

The dollar increase in interest income was primarily due to higher interest rates related to our marketable securities of U.S Treasury notes and corporate bonds during the three and nine months ended September 30, 2023, higher interest rates within our money market accounts, and $0.1 million of interest income related to an IRS carryback claim that was recognized in the three and nine months ended September 30, 2023.

***Income taxes***. We had no income tax benefit for the three and nine months ended September 30, 2023 and 2022.

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law on March 27, 2020. The Act contained specific relief and stimulus measures including allowing net operating losses originating in 2018 through 2020 to be carried back five years to offset taxable income in the carryback period.

Separately, the enactment of the Tax Cut and Jobs Act in 2017 allowed taxpayers to claim a refund for federal tax credits over a period of years. The CARES Act enacted during the first quarter allows for the entire amount of the credit to be refunded.

We have reviewed the impact of the CARES Act enactment on the income tax provision and have determined that, as a result of the net operating loss carryback provision, we can obtain a tax benefit if we were to carry back the 2020 net operating loss to the five year carryback period.

The carryback of the estimated loss resulted in a refundable federal tax credit of $1.5 million and an increase in research credit carryforwards previously utilized. We decided to carry back the loss reported on the filed 2020 tax return. Upon filing our 2020 tax return and the related carry back claim, we received the payment of $1.5 million in August 2023.

We maintained a full valuation allowance against our net deferred tax assets as of September 30, 2023 and December 31, 2022.

### Liquidity and Capital Resources

At September 30, 2023, we had cash, cash equivalents and marketable securities of $27.5 million, which represented a decrease of $1.5 million from December 31, 2022. The decrease in cash, cash equivalents and marketable securities was primarily due to the impact of $1.2 million of cash used in operating activities and $0.5 million of cash for repurchases of our common stock.

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.

## Controls and procedures

As filed, 714 characters.

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 September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 1,190 characters.

Investing in our common stock involves a high degree of risk. Our Annual Report on Form 10-K for the year ended December 31, 2022 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 September 30, 2023. You should consider carefully the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, 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.

Filed Nov 3, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-058837. Last ingested by Listed: Nov 3, 2026, 21:50 ET. No prices; not investment advice.