~~40 Middlesex Turnpike~~76 Blanchard Road, ~~Bedford,~~ Burlington, Massachusetts ~~01730~~01803

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐No☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐No☒

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, a 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_~~Filer_X_ Smaller Reporting Company_X_ 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No ☒

As of June 30, ~~2021,~~2023, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based on the closing sale price as reported on the Nasdaq Global Market, was approximately ~~$50,128,551.~~$22,549,368.

The number of shares outstanding of the registrant’s common stock as of March 1, ~~2022~~2024 was ~~21,642,260.~~21,084,964.

Aware, Inc. (“Aware”, “we”, “us”, “our”, or the “Company”) is a leading, ~~global authentication~~biometric identity platform 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 infrom 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.

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~~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~~original equipment manufacturers (“OEMs”), value added resellers (“VARs”), partners, and directly to end user customers.

Aware was incorporated in Massachusetts in 1986. We are headquartered at ~~40 Middlesex Turnpike~~76 Blanchard Road in ~~Bedford,~~Burlington, Massachusetts, and our telephone number at this address is (781) ~~276-4000.~~687-0300. Our website address is www.aware.com. The information on our website is not part of this Form 10-K, unless expressly noted. Our stock is traded on the Nasdaq Global Market under the symbol AWRE.

On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic and recommended containment and mitigation measures worldwide. Governor Charlie Baker of Massachusetts ordered all businesses and organizations that do not provide “COVID-19 Essential Services” to close their physical workplaces and facilities to workers, customers and the public as of noon on March 24, 2020. At that time, we took the necessary steps to enable an all-remote workforce. Many of our clients worldwide were similarly impacted. Over time, the restrictions in the state of Massachusetts were eased, or re-tightened, in line with the trends of the pandemic. As of December 31, 2021, we were in a hybrid model with some employees coming into the office and others continuing to work remotely.

The global outbreak of COVID-19 continues to evolve, and the extent to which COVID-19, particularly with regard the new variants that emerged in 2021 (“Delta” and “Omicron”) may have long-term impact on our business and the markets we serve, will depend on future developments—which are highly uncertain and cannot be predicted with confidence, such as the pace of ongoing vaccination efforts in the United States and the rest of the world, the duration of the outbreak, travel restrictions and social distancing measures in the United States and other countries, business closures or business disruptions, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.

~~We are continuing to monitor the situation with our primary focus on the health and safety of our employees and clients.~~

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:

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. Our solutions and services are described below.

The Knomi mobile biometric authentication framework is built on our hardened biometric SDK components, which are optimized to operate on mobile devices, and a server that together enable strong, multi-factor, password-free authentication from a mobile device using biometrics. Knomi offers multiple biometric modality options, including facial recognition, and voice authentication as means to enroll, onboard or authenticate. Knomi software components can be used in different combinations and configurations to enable either a server-centric architecture, a web-based or a device-centricimplementation. Knomi has primarily been sold ~~as a perpetual license and is also available~~ as a fixed term license that is priced on a subscription-based ~~model.~~model and is also available as a perpetual license. Going forward we plan to transition the Knomi offering to within the AwareID offering.

AwareABIS is an ~~Automated Biometric Identification System~~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 ("1:N") search or one-to-one ("1:1") 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). 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 based on ~~a subscription-based model or~~ the size of the biometric ~~system.~~system or on a subscription-based model.

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. The product provides minutiae-based search capability and can be configured as either a standalone system, or for use with centralized, server-based data stores. AFIX Tracker has primarily been sold as a 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.

BioSP is a ~~service-oriented platform~~biometric integration platform-as-a-service ("iPaaS") used to enable ~~a biometric system with advanced~~ 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. BioSP is well suited for applications that require the collection of biometrics throughout a distributed network, and

subsequent aggregation, analysis, processing, distribution, matching, and sharing of data with other system components. BioSP is modular, programmable, scalable, and secure, capable of managing all aspects of transaction workflow, including messaging, submissions, responses, and logging. 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.

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. Each BioComponent performs advanced biometric image autocapture as well as capture device hardware abstraction. Once images are captured, they are submitted to BioSP, where configurable workflows and modular software applications are used for processing, routing, and storage of each transaction. 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~~a Software-as-a-Service ~~(“SaaS)~~(SaaS) offering that ~~is used for Aware’s adaptive~~provides advanced identity verification and continuous authentication ~~platform of cloud-based biometric application programming interfaces (“APIs”)~~capabilities. Its modular design ensures flexibility and ~~turnkey services.~~extensibility across various industries. AwareID ~~provides~~continues to leverage Knomi to provide biometric face and voice ~~analysis for~~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 placeor combined to provide higher functionality. The AwareID ~~platform~~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 ~~pricing. This wider SaaS offering includes the solution formerly referred to as Indigo~~^™. or transaction-based pricing, however it is also available on-premises when leveraging Knomi SDKs.

Aware’s Fortress Identity cloud platform (“FortressID”), acquired in December 2021, is used for user authentication with compound biometrics. The Fortress Identity Biometric Authenticator™ and Onboarding Authentication Platform^™ provide multi-factor authentication through passive and active biometrics for multiple modalities, including voice, fingerprint, face and behavior to enable online onboarding and identity proofing. FortressID also includes a mobile SDK for iOS and Android applications, a Citrix connector to enable full multi-modal, multi-factor biometric user authentication with Citrix, and an Active Directory connector to enable the addition of biometrics to strengthen or replace password access. FortressID is sold as a SaaS offering. Going forward, we plan to transition FortressID into the AwareID offering.

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:

BioComponents™ bundles our offerings as applications with a user interface. We also license our software unbundled as building blocks and have primarily sold these offerings as a perpetual license.

Historically, we sold our software products under perpetual or fixed-term licenses. With the introduction of AwareID, ~~and FortressID,~~ we have incorporated SaaS offerings into our product line-up. While we did not recognize material revenues from our SaaS offerings during ~~2021,~~2022 and 2023, we continue to invest in and we expect SaaS to become a significant product offering moving forward.

Our SDKs consist of: i) multiple software libraries; ii) sample applications that show customers how to use the libraries; and iii) documentation. Customers use our SDKs to design and develop biometrics applications. Nexa™ is our line of biometric search and match SDKs, including Nexa|Fingerprint™, Nexa|Face™, Nexa|Iris™ and Nexa|Voice™. These products provide high-performance biometric algorithms for fingerprint, facial, iris and voice identification or authentication. The algorithms in these products convert images into biometric templates, which can then be compared to templates stored in databases to find matches.

In addition to the Nexa line, we also offer AwareXM™, an interoperable fingerprint matching SDK that provides MINEX-certified, INCITS 378-compliant fingerprint minutiae extraction, template generation, and fingerprint authentication.

Our suite of enrollment SDKs and APIs performs functions that are critical to biometric enrollment, including (i) image capture and hardware abstraction, (ii) image quality assurance, (iii) image compression, (iv) mobile enrollment, matching and liveness verification, and (v) fingerprint card processing.

In addition to our biometrics software products, we also sell products used in applications involving medical and advanced imaging. 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. Our JPEG2000 product is used to compress, store, and display images. Those images are typically medical images.

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.

We provide a variety of program management and software engineering services, including: i) project planning and management; ii) system and architecture design; iii) software design, development, customization, configuration, and testing; and iv) software integration and installation. Services are sold in conjunction with our products and solutions and are provided for a fixed fee.

Service engagement deliverables may include: i) complete customer software solutions; ii) one or more subsystems comprised of software products that are integrated within a larger system; iii) custom-configured versions of existing software products; or iv) custom-designed software products. In some cases, the software resulting from service engagements may form the basis for new or improved Aware software solutions and/or products.

Our customers for services include: i) government agencies; ii) large multinational systems integrators; iii) smaller systems integrators with a particular market, technology or geographic focus; and iv) commercial partners or providers of products, solutions, and services for themselves or to their end customers. We provide services directly to end-users or indirectly to end-users through systems integrators or commercial entities or partners. When we provide services to systems integrators, they are often engaged with the end-user as a prime contractor and are responsible for delivery of a complete solution, in which case we typically serve as a subcontractor assigned a subset of the total scope of work.

The scope of our services projects varies. A small project might involve configuration and testing of a single software product, taking a small team one month or less. A large project might involve delivery of a more complex solution comprised of multiple products and subsystems, requiring a larger team to conduct program and project management, system design, software customization and integration, and taking up to one year or more. Some projects are followed by subsequent follow-on projects that serve to change or extend the features and functionality of the initial system.

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

All of our revenue in ~~2021~~2023 and ~~2020~~2022 was derived from unaffiliated customers. NoOne customer represented 17% of total revenue in 2023 and no customer represented 10% or more of total revenue in ~~either 2021 or 2020.~~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.

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. Our current principal competitors include:

We expect competition to intensify in the near term in the biometrics market. Many current and potential competitors have substantially greater financial, marketing, and research resources than we have. Moreover, low-cost foreign competitors have demonstrated a willingness to sell their products at significantly reduced prices. To compete effectively in this environment, we must continually develop and market new and enhanced solutions and technologies at competitive prices and must have the resources available to invest in significant research and development activities. Our failure to compete successfully could cause our revenues and market share to decline.

We rely on a combination of nondisclosure agreements and other contractual provisions, as well as patent, trademark, trade secret and copyright law to protect our proprietary rights. We have an active program to protect our proprietary technology through the filing of patents. As of December 31, ~~2021,~~2023, we had ~~approximately 84~~76 U.S. patents and 4 foreign patents and approximately 157 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. We attempt to protect our trade secrets and other proprietary information through agreements with our customers, suppliers, employees and consultants, and through security measures. Each of our employees is required to sign a non-disclosure agreement. Although we intend to protect our rights vigorously, we cannot guarantee that these measures will be successful. In addition, effective intellectual property protection may be unavailable or limited in certain foreign countries.

Third parties may assert exclusive patent, copyright and other intellectual property rights to technologies that are important to us. 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, ~~2021,~~2023, we employed 8173 people, all based in the ~~U.S,~~U.S. including 4939 in engineering and research, 2022 in sales and marketing, and 12 in finance and administration. Of these employees, 6654 were based in Massachusetts and 19 were based outside of Massachusetts. None of our employees are represented by a labor union. We consider our employee relations to be good.

We believe that our future success will depend in large part on the service of our technical, sales, marketing and senior management personnel and upon our ability to retain highly qualified technical, sales and marketing and managerial personnel. We cannot guarantee that we will be able to retain our key managers and employees or that we will be able to attract and retain additional highly qualified personnel in the future.

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.

Copies of our (i) Corporate Governance Principles, (ii) charters for the Audit Committee, Compensation Committee, and Nominating Committee, and (iii) Code of Ethics are available in the Investor Relations section of our website at www.aware.com.

While we expect the impacts of COVID-19 to have an adverse effect on our business, financial condition and results of operations, we are unable to predict the extent or nature of these impacts at this time.

Due to the COVID-19 pandemic we have been limited in our ability to: (i) conduct face-to-face meetings with customers and prospective customers, (ii) present in-person demonstrations of our software solutions, (iii) attend trade shows and conferences which typically generate future sales opportunities or (iv) meet with prospective strategic partners. These effects caused by the COVID-19 pandemic adversely impacted our operating and financial results in 2021 and 2020 and will likely have an adverse impact on our operating and financial results over at least the next several quarters.

The extent to which our operating and financial results will continue to be affected by the COVID-19 pandemic will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic; the impact of the emergence of new variants of the virus that causes COVID-19; additional actions by businesses and governments in response to the pandemic; and the speed and effectiveness of responses to combat the virus, including vaccine development and distribution. COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, could also aggravate our other risk factors described in this Form 10-K.

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

Individual orders can represent a meaningful percentage of our revenues and operating results in any single ~~quarter~~period and the timing of the receipt of those orders is difficult to predict. The failure to close an order or the deferral or cancellation of an order can result in revenue and net income shortfalls for that quarter. We base our current and future expense levels on our internal operating plans and sales forecasts, and our operating costs are to a large extent fixed. 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 as well, including the following:

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 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.

We derive a significant portion of our revenue directly or indirectly from federal, international, state and local governments. We believe that the success and growth of our business will continue to depend on government customers purchasing our products and services either directly from us or indirectly through our channel partners. Changes in government contracting policies or government budgetary constraints may adversely affect our financial performance. Among the factors that could adversely affect our business are:

These and other factors could cause government customers or our channel partners to reduce purchases of products and services from us, which would have a material adverse effect on our business, financial condition and operating results.

We derive a significant portion of our revenue from third party channel partners.

Our future results depend upon the continued successful distribution of our products through a channel of systems integrators and OEM partners. Systems integrators, including VARs, use our software products as a component of the biometrics systems they deliver to their customers. OEMs embed our software products in their technology devices or software products. These channel partners typically sell their products and services to government customers.

Our failure to effectively manage our relationships with these third parties could impair the success of our sales, marketing and support activities. Moreover, the activities of these third parties are not within our direct control. The occurrence of any of the following events could have a material adverse effect on our business, financial condition and operating results:

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.

A component of our strategy to grow our revenue includes expansion into commercial markets. To date, biometrics technology has received only limited acceptance and slow adoption in these markets. Although the recent appearance

of biometric readers on popular consumer products, such as smartphones, has increased interest in biometrics as a means of authenticating and/or identifying individuals, commercial markets for biometrics technology are still ~~in the process of~~ developing and evolving. Biometrics-based solutions compete with more traditional security methods including keys, cards, personal identification numbers, passwords and security personnel. Acceptance of biometrics as an alternative to such traditional methods depends upon a number of factors including: i) the performance and reliability of biometric solutions; ii) costs involved in adopting and integrating biometric solutions; iii) public concerns regarding privacy; and iv) potential privacy legislation.

For these reasons, we are uncertain whether there will be significant demand for biometrics technology from commercial markets. Moreover, even if there is significant demand, there can be no assurance that our biometrics products will achieve market acceptance.

~~We derive a significant portion of our revenue from third party channel partners.~~

If the biometrics market does not experience significant growth or if our products do not achieve broad acceptance both domestically and internationally, we may not be able to grow our business.

Our revenues are derived primarily from sales of biometrics products and services. ~~We cannot accurately predict~~Our expectations regarding the future growth rate or the size of the biometrics ~~market.~~market may not be accurate. The expansion of the biometrics market and the market for our biometrics products and services depends on a number of factors, such as:

Even if biometrics solutions gain wide market acceptance, our solutions may not adequately address market requirements and may not continue to gain market acceptance. If biometrics solutions generally or our solutions specifically do not gain wide market acceptance, we may not be able to achieve our anticipated level of growth and our revenues, and our results of operations would be adversely affected.

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. 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. Our current principal competitors include:

We expect competition to intensify in the near term in the biometrics market. Many current and potential competitors have substantially greater financial, marketing, and research resources than we have. Moreover, low-cost foreign competitors from ~~third world~~developing economies and other countries have demonstrated a willingness to sell their products at significantly reduced prices. To compete effectively in this environment, we must continually develop and market new and enhanced solutions and technologies at competitive prices and must have the resources available to invest in significant research and development activities. Our failure to compete successfully could cause our revenues and market share to decline.

The biometrics industry is characterized by rapid technological change and evolving industry standards, which could render our existing products obsolete.

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’ products. 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.

Our software products may have errors, defects or bugs, which could result in delayed or lost revenue, expensive correction, liability to our customers, and claims against us.

Despite testing, complex software products such as ours may contain errors, defects, or bugs, which may only be discovered after they have been installed and used by our customers. Defects in the products that we develop and sell to our customers could require expensive corrections and result in delayed or lost revenue, adverse customer reaction and negative publicity about us or our products and services. Customers who are not satisfied with any of our products may also bring claims against us for damages, which, even if unsuccessful, would likely be time-consuming to defend, and could result in costly litigation and payment of damages. Such claims could harm our reputation, financial results and competitive position.

Our business may be adversely affected by our use of ~~open source~~open-source software.

The software industry is making increasing use of ~~open source~~open-source software in the development of products. We also license and integrate certain ~~open source~~open-source software components from third parties into our software. ~~Open source~~Open-source software license agreements may require that the software code in these components or the software into which they are integrated be freely accessible under ~~open source~~open-source terms. Many features we may wish to add to our products in the future may be available as ~~open source~~open-source software and our development team may wish to make use of this software to reduce development costs and speed up the development process. While we carefully monitor the use of all ~~open~~

~~source~~open-source software and try to ensure that no ~~open source~~open-source software is used in such a way as to require us to disclose the source code to the related product, such use could inadvertently occur. If we were required to make our software freely available, our business could be seriously harmed.

We rely on third-party software to develop and provide our solutions and significant defects in third-party software could harm our business.

We rely on software licensed from third parties to develop and offer some of our solutions. In addition, we may need to obtain future licenses from third parties to use software or other intellectual property associated with our solutions. We cannot assure you that these licenses will be available to us on acceptable terms, without significant price increases or at all. Any loss of the right to use any such software or other intellectual property required for the development and maintenance of our solutions could result in delays in the provision of our solutions until equivalent technology is either developed by us or, if available from others, is identified, obtained, and integrated, which could harm our business. Any errors or defects in third-party software could result in errors or a failure of our solutions, which could harm our business.

We have a number of relationships with third parties that are significant to our sales, marketing, support, and product development efforts, including hosting facilities for our cloud-based services. We rely on software and hardware vendors, large system integrators, and technology consulting firms to supply marketing and sales opportunities for our direct sales force and to strengthen our offerings using industry-standard tools and utilities. We also have relationships with third parties that distribute our products. 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.

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

We expect to derive a growing percentage of our revenue from the sale of cloud-based services. As a result, widespread acceptance and use of the cloud-based business model is critical to our future growth and success. 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. 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.

Our operational systems, ~~and~~ networks and products ~~may be~~are subject to ~~an increasing risk of~~ continually evolving cybersecurity or other technological risks, which could result in the disclosure of ~~company~~our or ~~customer~~our customers' confidential information, damage to ~~Aware’s~~our reputation, additional costs, ~~to Aware,~~ regulatory penalties and financial losses.

Our products, services and systems may be used in critical company, customer or third-party operations, or involve the storage, processing and transmission of sensitive data, including valuable intellectual property, other proprietary or confidential data, regulated data, and personal information of employees, customers and others. Successful breaches, employee malfeasance, or human or technological error could result in, for example, unauthorized access to, disclosure, modification, misuse, loss, or destruction of company, customer, or other third party data or systems; theft of sensitive, regulated, or confidential data including personal information and intellectual property; the loss of access to critical data or systems through ransomware, destructive attacks or other means; and business delays, service or system disruptions or denials of service.

If we or third parties with which we do business were to fall victim to successful cyber-attacks or experience other cybersecurity incidents, including the loss of individually identifiable customer or other sensitive data, we may incur substantial costs and suffer other negative consequences, which may include remediation costs, such as liability for stolen assets or information, repairs of system damage, and incentives to customers or business partners in an effort to maintain relationships after an attack as well as litigation and legal risks, including regulatory actions by state and federal regulators.

Because we are a technology provider, our ability to protect our intellectual property and to operate without infringing the intellectual property rights of others is critical to our success. We regard our technology as proprietary. We rely on a combination of U.S. and worldwide patent, trade secret, copyright, and trademark law as well as confidentiality agreements to protect our proprietary technology. We cannot assure you that we will be able to enforce the patents we own against third parties. Some foreign countries do not currently provide effective legal protection for intellectual property and our ability to prevent the unauthorized use of our products in those countries is therefore limited. Despite our efforts, these measures can only provide limited protection. Unauthorized third parties may try to copy or reverse engineer portions of our products or otherwise obtain and use our intellectual property. If we fail to protect our intellectual property rights adequately, our competitors may gain access to our technology, and our business would thus be harmed.

In the future, we may be involved in legal action to enforce our intellectual property rights relating to our patents, copyrights or trade secrets. Any such litigation could be costly and time-consuming for us, even if we were to prevail. Moreover, even if we are successful in protecting our proprietary information, our competitors may independently develop technologies substantially equivalent or superior to our technology. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property or otherwise gaining access to our technology. The misappropriation of our technology or the development of competitive technology could seriously harm our business.

We may be sued by third parties for alleged infringement of their proprietary rights.

We may be subject to claims that our technology and products infringe the intellectual property rights of others. A large and increasing number of participants in the technology industry, including companies known as non-practicing entities, have applied for or obtained patents. Some of these patent holders have demonstrated a readiness to commence litigation based on allegations of patent infringement. Third parties have asserted against us in the past and may assert against us in the future patent, copyright and other intellectual property rights to technologies that are important to our business.

Intellectual property rights can be uncertain and involve complex legal and factual questions. Moreover, intellectual property claims, with or without merit, can be time-consuming and expensive to litigate or settle, and could divert management attention away from the execution of our business plan. If we were found to have infringed the proprietary rights of others, we could be subject to substantial damages or an injunction preventing us from conducting our business.

If we are unable to attract and retain key personnel, our business could be harmed.

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. We cannot assure you that one or more key employees will not leave in the future. We intend to continue to hire additional highly qualified personnel, including software engineers and sales personnel, but may not be able to attract, assimilate or retain qualified personnel in the future. Any failure to attract, integrate, motivate and retain these employees could harm our business.

Extensive regulation under federal, state, and foreign law has adversely affected us and could further adversely affect us in ways that are difficult for us to predict. 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 ~~Consumer~~ Privacy Rights Act (“~~CCPA”~~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.

In addition, our business may also be adversely affected by: i) the imposition of tariffs, duties and other import restrictions on goods and services we purchase from non-domestic suppliers; or ii) the imposition of economic sanctions on existing or potential customers or suppliers, or iii) by the imposition of export restrictions on products we sell internationally. Changes in current or future laws or regulations, in the United States or elsewhere, could seriously 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~~a pandemic, the ongoing conflict between Russia and Ukraine and resulting economic sanctions, conflicts in the ~~Taliban’s takeover of Afghanistan,~~Middle East, or other changes in economic conditions, could harm our business, results of operations, and financial conditions as a result of:

We are unable to predict whether or when any such adverse economic conditions could occur in the U.S. or other countries; and if they do occur, ~~nor can~~ we cannot predict ~~their~~the timing, duration, or severity. ~~The longer the duration, the greater the risks we face in operating our business.~~

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

We may make acquisitions of or investments in companies that offer complementary products, services, and technologies, such as our ~~acquisitions~~acquisition of FortressID in December of 2021 and ~~AFIX~~our investment in ~~November of 2020.~~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. These factors could have a material adverse effect on our business, financial condition, operating results and cash flows. Additionally, our acquisitions have provided, in the case of Fortress ID, and may in the future provide for future contingent acquisition payments, based on the achievement of performance targets or milestones. These arrangements can impact or restrict integration of acquired businesses and can result in disputes, including litigation. In addition, there is uncertainty regarding the realizability of investments in private companies. Additionally, regardless of the form of consideration we pay, ~~for any future~~ acquisitions and investments could ~~include shares of~~negatively impact our ~~stock, which could cause dilution to existing shareholders~~operations and to earnings per share.

We are subject to income taxes in the United States. Significant judgments are required in determining our provisions for income taxes. 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. If the ultimate determination of taxes owed is for an amount in excess of amounts previously accrued, our operating results, cash flows, and financial condition could be adversely affected.

The market price of our common stock has been and may continue to be subject to wide fluctuations, and this may make it difficult for shareholders to resell the common stock when they want or at prices they find attractive.

The market price of our common stock, like that of other technology companies, is volatile and is subject to wide fluctuations in response to a variety of factors, including:

Our stock price may also be affected by broader market trends unrelated to our performance. As a result, purchasers of our common stock may be unable at any given time to sell their shares at or above the price they paid for them. Moreover, companies that have experienced volatility in the market price of their stock often are subject to securities class action litigation. If we were the subject of such litigation, it could result in substantial costs and divert management's attention and resources.

If we are unable to maintain effective internal controls over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decline in the price of our common stock.

As a public company, we are required to enhance and test our financial, internal and management control systems to meet obligations imposed by the Sarbanes-Oxley Act of 2002. Consistent with the Sarbanes-Oxley Act and the rules and regulations of the SEC, management's assessment of our internal controls over financial reporting is required in connection with our filing of our Annual Report on Form 10-K. If we are unable to identify, implement and conclude that we have effective internal controls over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock. Our assessment of our internal controls over financial reporting may also uncover weaknesses or other issues with these controls that could also result in adverse investor reaction.

We prepare our financial statements in accordance with generally accepted accounting principles and certain critical accounting policies that are relevant to our business. 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~~allowance for ~~doubtful accounts,~~credit losses, valuation of acquired assets and assumed liabilities in business ~~combination~~

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. In the event that our judgments and estimates differ from actual results, we may have to change them, which could materially affect our financial position and results of operations.

Moreover, accounting standards have been subject to rapid change and evolving interpretations by accounting standards setting organizations over the past few years. The implementation of new accounting standards requires us to interpret and apply them appropriately. If our current interpretations or applications are later found to be incorrect, we may have to restate our financial statements and the price of our stock could decline.

Our officers, directors and holders of 5% of outstanding shares together beneficially own a significant portion of our common stock and, as a result, can exercise control over stockholder and corporate actions.

Our officers and directors and the holders of at least 5% of our outstanding shares currently beneficially own approximately 48% of our outstanding common stock, and 60% on a fully diluted basis assuming the exercise of both vested and unvested options. As such, they have a significant influence over most matters requiring approval by stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change in control, which in turn could have a material adverse effect on the market price of our common stock or prevent stockholders from realizing a premium over the market price for their shares.

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. The Audit

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.

We ~~currently occupy~~lease approximately ~~72,000~~20,730 rentable square feet ~~of office space~~ in ~~Bedford,~~Burlington, Massachusetts, which ~~serves~~we use as our headquarters. ~~This site~~We believe that this facility is ~~used~~adequate for our ~~research~~current needs and development, sales and marketing, and administrative activities. While we currently own this facility, in April 2021 we entered into a Purchase and Sale Agreement with FDS Bedford, LLC, pursuant to which it may elect to purchasefor the ~~property.~~foreseeable future. See Note 109 to our audited financial statements included elsewhere in this Annual Report on Form 10-K for more information ~~on this agreement.~~

In March 2022, we entered into a lease with respect to approximately 20,730 rentable square feet in Burlington, Massachusetts. We expect to take possession of this property in July 2022 and intend to use this property asregarding our headquarters. We believe that this facility will be adequate for our current needs and that additional space sufficient to meet our needs for the foreseeable future will be available on reasonable terms. See Note 11 to our audited financial statements included elsewhere in this Annual Report on Form 10-K for more information on this agreement.leases.

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 likely to materially impact us or our business.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is the only class of stock we have outstanding, and it trades on the Nasdaq Global Market under the symbol AWRE.

As of March 1, ~~2022,~~2024, we had approximately 7464 shareholders of record. This number does not include shareholders who hold our shares in a “nominee” or “street” name. We paid no dividends in ~~2021~~2023 or ~~2020.~~2022. We anticipate that we will continue to reinvest any earnings to finance our future operations although we may also pay special cash dividends if our ~~board~~Board of ~~directors~~Directors deems it appropriate.

Share repurchase activity during the three months ended December 31, 2023 was as follows:

On November 30, 2023, we announced that our Board of Directors had approved the extension of the 2022 Repurchase Plan through December 31, 2025.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table sets forth, for the years indicated, certain line items from our consolidated statements of operations stated as a percentage of total revenue:


	Year ended December 31,						Year ended December 31,
Revenue:	2021			2020			2023			2022
Software licenses		47	%		45	%		52	%		46	%
Software maintenance		40			48			42			45
Services and other		13			7			6			9
Total revenue		100			100			100			100
Costs and expenses:
Cost of services and other		7			7			7			8
Research and development		55			80			50			57
Selling and marketing		38			48			43			43
General and administrative		37			48			36			40
Loss on write-off of note receivable								15			-
Fair value adjustment to contingent acquisition payment								(4	)		(1	)
Gain on sale of property and equipment								-			(35	)
Total costs and expenses		137			183			147			112
Operating loss		(37	)		(83	)		(47	)		(12	)
Interest income		-			2
Loss before benefit from income taxes		(37	)		(81	)
Benefit from income taxes		(2	)		(14	)
Interest and other income								7			3
Loss before provision for income taxes								(40	)		(9	)
Provision for income taxes								-			-
Net loss		(35	%)		(67	%)		(40	%)		(9	%)

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.

In November 2020, we acquired certain assets and assumed certain liabilities of Radiant’s AFIX product line for cash consideration of approximately $2.4 million. The acquisition of AFIX provides turnkey face and fingerprint biometric and forensic analysis software for small and medium-sized law enforcement and government agencies and extends our ABIS product family.

~~In December 2021, we acquired 100% of the outstanding shares of FortressID in exchange for $2.5 million in cash.~~ Additionally, the purchase consideration includes a contingent consideration arrangement wherein the seller is entitled to cash payments of up to $4.0M based on revenue targets in 2022 and 2023. The fair value of the contingent consideration was determined to be $0.9M at December 31, 2021 and is included in the purchase price consideration. The acquisition of FortressID, expands the Company’s offerings around identity proofing, enhancing its onboarding, verification and authentication offerings to directly address financial compliance requirements and enable organizations to mitigate risk and curtail increasing fraud.

We used revenue and operating loss to summarize financial results over the past two years as we believe these measurements are the most meaningful way to understand our operating performance.

Revenue and operating loss in ~~2021~~2023 were ~~$16.9~~$18.2 million and ~~$6.1~~$8.5 million, respectively, which compared to revenue and operating loss in ~~2020~~2022 of ~~$11.3~~$16.0 million and ~~$9.4~~$2.2 million, respectively.

Higher revenue in ~~2021~~2023 as compared to ~~2020~~2022 was primarily due to ~~an increase~~increases in ~~software license~~ revenue from ~~subscription-based contracts~~our perpetual software licenses of $1.4 million, software subscriptions of $0.7 million and ~~fixed fee license contracts, as well as~~software maintenance of $0.6 million, which was partially offset by a decrease in services and other revenue ~~related to our acquisition~~ of ~~AFIX in the fourth quarter of 2020 and services revenue related to additional service projects. Lower~~$0.5 million. Higher operating loss in ~~2021~~2023 as compared ~~2020~~2022 was primarily due to a $5.7 million gain we recorded related to the sale of our corporate office in 2022, a negative

adjustment of $2.7 million to a note receivable, and year over year increase in ~~revenue,~~sales and marketing expense of $1.0 million, which was partially offset by increased ~~operating expenses.~~revenue of $2.2 million and a 2023 fair value adjustment to contingent consideration of $0.8 million.

Software license revenue consists 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 ~~58%~~30% from ~~$5.0~~$7.4 million in ~~2020~~2022 to ~~$8.0~~$9.5 million in ~~2021.~~2023. As a percentage of total revenue, software license revenue increased from ~~45%~~46% in ~~2020~~2022 to ~~47%~~52% in ~~2021.~~2023. The ~~$3.0~~$2.1 million increase in software license revenue was ~~attributable~~due primarily to ~~a $1.6~~an increase of $1.5 million ~~increase~~in perpetual licenses sales and $0.7 million in subscription-based ~~contracts~~license sales. For the years ended December 31, 2023 and ~~$1.4 million increase in fixed fee license~~2022, we generated a de minimis amount of revenue from SaaS contracts. 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 2023 or 2022, we expect SaaS to become a significant product offering moving forward.

Software maintenance revenue 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 ~~23%~~8% from ~~$5.4~~$7.1 million in ~~2020~~2022 to ~~$6.7~~$7.7 million in ~~2021.~~2023. As a percentage of total revenue, software maintenance revenue decreased from ~~48%~~44% in ~~2020~~2022 to ~~40%~~42% in ~~2021.~~2023. The dollar increase in software maintenance revenue was primarily due to software maintenance ~~revenue~~ related to ~~our acquisition of AFIX in~~perpetual license sales during the ~~fourth quarter of 2020.~~ year ended December 31, 2023.

A majority of our customers purchase software maintenance contracts when they initially purchase software licenses. Since our software is used in active biometrics systems, many of our customers continue to renew their maintenance contracts in subsequent years while systems remain operational.

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 ~~license.~~licenses. Services and other revenue fluctuate when we commence new projects and/or when we complete projects that were started in previous periods.

Services and other revenue ~~increased 162%~~decreased 31% from ~~$0.8~~$1.5 million in ~~2020~~2022 to ~~$2.2~~$1.0 million in ~~2021.~~2023. As a percentage of total revenue, services and other revenue ~~increased~~decreased from 7%9% in ~~2020~~2022 to ~~13%~~6% in ~~2021.~~2023. The dollar ~~increase~~decrease in services and other revenue was primarily due to ~~additional~~fewer active contracts with services ~~performed by us with system integrators.~~during the period.

Cost of services and other revenue consists primarily of engineering costs to perform customer services projects. 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 49% from $0.8~~was $1.3 million in ~~2020 to $1.2 million in 2021.~~2023 and 2022. When compared to services and other revenue, cost of services and other revenue as a percentage ~~decreased~~increased from ~~96%~~83% in ~~2020~~2022 to ~~55%~~122% in ~~2021,~~2023, which resulted in gross margins ~~increasing~~decreasing from 4%17% in ~~2020~~2022 to ~~45%~~gross margin loss 22% in ~~2021.~~2023. The ~~dollar increase~~decrease in cost of services ~~and other revenue~~gross margins was primarily due to ~~third-party software and hardware costs related to a project from our AFIX product line as well as higher allocation~~the profitability mix of ~~engineering costs to service and other revenue resulting from higher active contracts with services.~~customer projects.

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. Gross margins in these years reflect the profitability mix of customer projects. 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 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 are not included in research and development expense.

The classification of total engineering costs to research and development expense and cost of services for the years ended December 31, 2023 and 2022 was (in thousands):

Total engineering costs ~~increased 6%~~decreased 1% from ~~2020~~$10.5 million in 2022 to ~~2021.~~$10.4 million in 2023. As a percentage of total revenue, total engineering costs decreased from ~~87%~~66% in ~~2020~~2022 to ~~62%~~57% in ~~2021.~~2023.

~~Total engineering costs increased by $0.6 million in 2021 as compared to 2020. The spending increase was primarily due to higher employee costs.~~ Our engineering headcount ~~of 49~~decreased slightly from 46 in ~~2021 remained consistent compared~~2022 to ~~2020.~~42 in 2023. In addition, we recently took additional actions that reduced engineering headcount by approximately 10%. We believe our engineering organization ~~was~~is adequately ~~staffed as of December 31, 2021.~~staffed.

As we described in the Part I—Business of this Form 10-K, we intend to introduce new products that will allow us to offer more complete biometrics solutions. We believe this strategy will allow us to sell more software into biometrics systems projects in order to grow our revenue. Our preference is to develop such products internally, however to the extent we are unable to do that, we may purchase or license technologies from third parties. We anticipate that we will continue to focus our future research and development activities on enhancing existing products and developing new products. We expect research and development expenses to decrease in absolute dollars and as a percentage of revenues in the next year and then to increase in absolute dollars ~~but to decrease as a percentage of net revenues.~~in proceeding years.

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.

~~Sales~~Selling and marketing expense increased ~~by 18%~~14% from ~~$5.4~~$7.0 million in ~~2020~~2022 to ~~$6.3~~$8.0 million in ~~2021.~~2023. As a percentage of total revenue, ~~sales~~selling and marketing expense ~~decreased from 48%~~was 43% in ~~2020 to 38% in 2021.~~both 2023 and 2022. The dollar increase in selling and marketing expense was primarily due to increased ~~headcount~~bonus and ~~contracted sales agents.~~commission expense of $0.6 million as a result of increased revenue, increased salary related expenses of $0.5 million, and increased software costs of $0.3 million, partially offset by a decrease in severance costs related to the termination of our Chief Commercial Officer position in 2022 of $0.2 million. We expect to ~~expand~~be strategic in expanding our sales and marketing force to ~~address additional~~pursue future opportunities.

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 ~~increased by 14% from $5.4~~was $6.5 million in ~~2020 to $6.2 million in 2021.~~2023 and 2022. As a percentage of total revenue, general and administrative expense decreased from ~~48%~~41% in ~~2020~~2022 to ~~37%~~36% in ~~2021. The increase in~~2023. Fluctuations of general and administrative ~~expense~~expenses are expected depending on specific activities in ~~2021 was primarily due to higher employee related costs of our~~

~~administrative personnel and professional services in 2021.~~a period. We expect general and administrative expenses to increase in absolute dollars, but to decrease as a percentage of ~~net revenues and may fluctuate depending on specific activities in a period.~~total revenue.

In March 2022, we entered into a subscription agreement with Omlis Limited, a limited company incorporated and registered in England and Wales and the parent of MIRACL (“Omlis”). We purchased $2.5 million of Omlis’ Note Receivable (“Note”) that accrues interest at 5% annually with a maturity date of March 11, 2026.

We recorded the fair value of the Note as $0 and $2.6 million as of December 31, 2023 and 2022, respectively. The significant decrease of $2.6 million to $0 reflects our evaluation of the impact of Omlis's liquidity issues as of December 31, 2023 along with the collectability of the Note. In addition, in January 2024, Omlis and MIRACL petitioned to enter the United Kingdom administration process, adding to our uncertainty regarding the recoverability of the Note's carrying value.

In December 2021, we acquired 100% of the outstanding shares and acquired all of the assets and liabilities of FortressID for a purchase price of $3.4 million, which consisted of $2.5 million of cash consideration and contingent acquisition payments which was fair valued at $0.9 million at the acquisition date. The maximum contingent acquisition payments at the time of the acquisition were $4.0 million, which consisted of a cash payment of up to $2.0 million for the achievement of set revenue targets in 2022 and an additional $2.0 million cash payment for the achievement of set revenue targets in 2023. No revenue targets were achieved in 2023 or 2022 and the earnout period was closed as of December 31, 2023. We recorded fair value adjustments of $0.8 million and $0.1 million, for the years ended December 31, 2023 and 2022, respectively.

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 year ended December 31, 2022.

Interest income ~~decreased by 98%~~increased from ~~$0.2~~$0.5 million in ~~2020~~2022 to ~~$4,000~~$1.3 million in ~~2021.~~2023. The dollar ~~decrease~~increase in interest income was primarily due to ~~lower~~higher interest rates related to our marketable securities of U.S Treasury notes and bonds and corporate bonds as well as higher interest rates within our money market accounts.

We are subject to income taxes in the United States, and we use estimates in determining our provisions for income taxes. We account for income taxes using the asset and liability method for accounting and reporting income taxes. Deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates.

~~A discussion of~~Total income ~~taxes~~tax expense for the years ended December 31, ~~2021,~~2023 and ~~2020 follows:~~

~~Year ended December 31, 2021. Total income tax benefit for the year ended December 31, 2021~~2022 was ~~$0.3 million.~~$59 thousand and $49 thousand, respectively. The income tax ~~benefit~~expense for ~~2021~~both years relates to ~~a release~~limitations on the usage of ~~our valuation allowance as a result of deferred taxes recorded as part of the FortressID acquisition.~~

~~Year ended~~net operating loss carryforwards generated in years beginning after December 31, ~~2020~~. Total income tax benefit for the year ended December 31, 2020 was $1.6 million. The income tax benefit for 2020 was primarily due to the tax benefit of the current year tax loss which can be carried back due to changes made by the CARES Act.2017.

In recent years, we have financed the company with our cash ~~balances, cash generated from operations,~~ and cash ~~received from the sale of patent assets. Equity financing has not been a meaningful source of financing for us in recent years.~~equivalent balances. Cash flows from operating, investing and financing activities are described below.

A discussion of cash flow from operating activities for each of the last two years is as follows:

Year ended December 31, ~~2021.~~ 2023. Cash provided by operating activities was $1.8 million in 2023. Cash provided by operations was primarily the result of a $2.4 million decrease in unbilled and accounts receivables, a $1.8 million increase in deferred revenue, add back of $1.5 million of non-cash stock-based compensation, $2.7 million write-off

of Note, and $1.4 million related to a tax refund received as a result of our federal income tax carryback claim, which was partially offset by our $7.3 million net loss and a $0.8 million change in the fair value of contingent acquisition payments.

Year ended December 31, 2022. Cash used in operating activities was ~~$6.2~~$5.0 million in ~~2021.~~2022. Cash used by operations was primarily the result of ~~$5.8~~$1.7 million of net loss ~~and $2.3~~plus the impact of a $5.7 million gain on the sale of ~~changes in~~fixed assets, ~~and liabilities,~~which was partially offset by the add back of ~~$1.9~~$1.7 million of non-cash ~~items for depreciation, amortization~~stock-based compensation and ~~stock-based compensation.~~

~~Year ended December 31, 2020.~~ ~~Cash used in operating activities was $5.3 million in 2020. Cash used by operations was primarily the result of $7.6 million of net loss, partially offset by~~ $0.8 million ~~of changes in assets~~for non-cash depreciation and ~~liabilities and by the add back of $1.5 million of non-cash items for depreciation, amortization and stock-based compensation.~~amortization.

A discussion of cash flow from investing activities for each of the last two years is as follows:

Year ended December 31, ~~2021.~~2023. Investing activity cash ~~usage~~used of ~~$2.5~~$3.1 million was primarily the result of ~~$2.5 million used in connection with our acquisition~~net purchases of ~~FortressID.~~marketable securities.

Year ended December 31, ~~2020.~~2022. Investing activity cash ~~usage~~used of ~~$2.9~~$12.0 million was primarily the result of ~~$2.4~~$17.3 million ~~used~~of net purchases of marketable securities, a $2.5 million investment in ~~connection with our acquisition of~~ the ~~AFIX product suite~~Note, and ~~$0.5~~$0.7 million of purchases of property and ~~equipment.~~equipment, which was partially offset by $8.5 million in proceeds from the sale of our former corporate headquarters.

A discussion of cash flow from financing activities for each of the last two years is as follows:

Year ended December 31, ~~2021.~~2023. Financing activity cash ~~provided~~used of ~~$0.1~~$0.4 million was primarily the result of $0.5 million used to buy back stock under our stock repurchase program, which was partially offset by $0.1 million of proceeds from the issuance of common stock from stock ~~grants which was partially offset by cash used to pay income taxes for employees who surrendered shares in connection with stock~~ grants.

Year ended December 31, ~~2020.~~2022. Financing activity cash ~~usage~~used of ~~$1.0~~$1.2 million was primarily the result of ~~$0.9~~$1.3 million used to buy back stock under our stock repurchase program and ~~$0.1 million~~$26 thousand used to pay income taxes for employees who surrendered shares of common stock in connection with stock grants, which were partially offset by $0.2 million of proceeds from the issuance of common stock from stock grants.

At December 31, ~~2021,~~2023, we had cash, ~~and~~ cash equivalents, and marketable securities of ~~$30.0~~$30.9 million. While we cannot assure you that we will not require additional financing, or that if needed 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 filing date of this Annual Report on Form 10-K 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 ~~required~~require additional capital resources, we may utilize available funds or seek additional external financing.

As of December 31, 2023, our material cash requirements from known contractual and other obligations consisted of payments under the operating lease for our corporate headquarters, which we estimate will be approximately $0.7 million in each of 2024, 2025, 2026, and 2027, $0.8 million in 2028, and $3.5 million thereafter. See Note 9 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information on our operating lease.

We enter into agreements in the ordinary course of business that require us: i) to perform under the terms of the contracts, ii) to protect the confidentiality of our customers’ intellectual property, and iii) to indemnify customers, including indemnification against third party claims alleging infringement of intellectual property rights. We also have agreements with each of our directors and executive officers to indemnify such directors or executive officers, to the extent legally permissible, against all liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or officer of the Company.

Given the nature of the above obligations and agreements, we are unable to make a reasonable estimate of the maximum potential amount that we could be required to pay. Historically, we have not made any significant payments on the above guarantees and indemnifications and no amount has been accrued in the audited financial statements included elsewhere in this Annual Report on Form 10-K with respect to these guarantees and indemnifications.

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.

We do not currently have any arrangements with unconsolidated entities, such as entities often referred to as structured finance, special purpose entities, or variable interest entities which are often established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not exposed to any financing, liquidity, market or credit ~~risk if we had such relationships.~~risk.

~~The Company’s~~Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, to our financial statements, included elsewhere in this Annual Report. We have identified the following as our significant accounting policies and estimates, which are defined as those that are reflective of significant judgments and uncertainties, are the most pervasive and important to the presentation of our financial condition and results of operations and could potentially result in materially different results under different assumptions, judgments or conditions.

Revenue recognition. In accordance with Accounting Standards Codification (“ASC”), Topic 606, Revenue from Contracts with Customers (“ASC 606”), revenue is recognized when a customer obtains control of promised goods and services. The amount of revenue recognized reflects the consideration to which we expect to be entitled to receive in exchange for these goods and services. In addition, ASC 606 requires disclosures of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The core principle of the standard is that we should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To achieve that core principle, we apply the following five step model:

We categorize revenue as software licenses, software maintenance, or services and other revenue. 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.

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 amounts 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. 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 customers and circumstances. 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 software license and software maintenance are generally considered distinct performance obligations. The transaction price is allocated to the software license and the software maintenance based on relative SSP. We sell our software subscription license for a fixed fee or a subscription-based royalty fee, sometimes subject to a minimum guarantee. When the amount is in the form of a fixed fee, including the guaranteed minimum usage-based royalty, revenue allocated to the software license is recognized at a point in time upon delivery, provided all other revenue recognition criteria are met. Any royalties not subject to the guaranteed minimum or earned in excess of the minimum amount are recognized as revenue when the subsequent usage occurs. Revenue allocated to the software maintenance is recognized over the contract term.

Also, with the delivery of our current products in a hosted environment with AwareID, we recognize revenue from our SaaS arrangements ratably over the subscription period.

Our arrangements can include variable fees, such as the option to purchase additional usage of a previously delivered software license. ~~The Company~~We may also provide pricing concessions to clients, a business practice that also gives rise to variable fees in contracts. For variable fees arising from the client’s purchase of additional usage of a previously delivered software license, we apply the sales and usage-based royalties guidance related to a license of intellectual property and recognizes the revenue in the period the underlying sale or usage occurs. 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 ASC 606-10-32-18. Our revenue arrangements are typically accounted for under such expedient, as payment is typically due within 30 to 60 days. As of December 31, ~~2021~~2023 and ~~2020,~~2022, none of our contracts contained a significant financing component.

Goodwill and intangible assets impairment. Our goodwill and intangible assets result from our previous business acquisitions. Goodwill and intangible assets with indefinite useful lives are not amortized but are tested for impairment at least annually or as circumstances indicate their value may no longer be recoverable. We do not carry any intangible assets with indefinite useful lives other than goodwill. We perform our annual goodwill impairment test in the fourth quarter. To assess if goodwill is impaired, we first review qualitative factors to determine whether further impairment testing is necessary. If based on the qualitative assessment, we consider it more-likely-than-not that our reporting ~~unit's~~units fair value is less than its carrying amount, we perform a quantitative impairment test. An excess of carrying value over fair value would indicate that goodwill may be impaired.

We periodically reevaluate our business and have determined that we have one operating segment and one reporting unit. If our assumptions change in the future, we may be required to record impairment charges to reduce our ~~goodwill's~~goodwill carrying value.

If indicators of impairment are present, we compare the estimated undiscounted cash flows that the asset is expected to generate to the carrying value. The key assumptions of the cash flow model involve significant subjectivity. If

such assets are impaired, an impairment is measured by the amount by which the carrying amount of the asset exceeds its fair value.

As of December 31, ~~2021,~~2023, we had $3.1 million of goodwill and ~~$3.2~~$2.4 million of intangible assets. Impairment in the valuation of long-lived assets could materially impact our operating results and financial position. To date, there have been no impairments of goodwill or intangible assets.

Fair value of Note Receivable. We accounted for the Note at fair value under ASC 825 - Financial Instruments, whereby it was recorded at fair value at the time of purchase, as well as on an ongoing basis each reporting period until the Note is settled. The estimated fair value of the Note represents a Level 3 estimate in the fair value hierarchy due to the significant unobservable inputs used in determining the fair value.

As of December 31, 2023 and 2022, we had a fair value $0 and $2.6 million of the Note, respectively. The significant decrease of $2.6 million to $0 reflects our evaluation of the impact of Omlis's liquidity issues as of

December 31, 2023, along with the collectability of the Note. In addition, in January 2024, Omlis and MIRACL petitioned to enter the United Kingdom administration process, adding to our uncertainty regarding the recoverability of the Note's carrying value.

Fair value of Contingent Acquisition Payments. Our contingent acquisition payments are a result of our previous business acquisition of FortressID. We determined the fair value of contingent acquisition payments as part of the initial purchase price allocation and on an ongoing basis each reporting period until the contingent acquisition payments period was settled. The estimated contingent acquisition payments represent a Level 3 estimate in the fair value hierarchy due to the significant unobservable inputs used in determining the fair value.

As of December 31, 2023 and 2022, the contingent acquisition payments was $0 and $0.8 million, respectively. The earnout period has closed as of December 31, 2023 with none of the targets being met.

Stock-Based Compensation. We grant stock and stock options to our employees and directors. We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize it as expense over the applicable vesting period of the award on a straight-line basis.

For stock awards, we determine the fair value of the award by using 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.

For stock options, we use the Black-Scholes valuation model to estimate the fair value of the award. This valuation model takes into account the exercise price of the award, as well as a variety of significant assumptions. The assumptions used to estimate the fair value of stock options include the expected term, the expected volatility of our stock over the expected term, the risk-free interest rate over the expected term, and our expected annual dividend yield.

Income taxes. As part of the process of preparing our consolidated financial statements we are required to estimate our actual current tax expense. We must also estimate temporary and permanent differences that result from differing treatment of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period for deferred tax assets, which have been recognized, we must include an expense with the tax provision in the statement of operations. Conversely, to the extent we decrease our valuation allowance in a period for deferred tax assets, which have been previously reserved, we must include a tax benefit with the tax provision in the statement of operations.

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.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets, and any valuation allowance recorded against our net deferred tax assets. Our deferred tax assets primarily relate to: i) research and development tax credit ~~carryforwards related to excess stock compensation benefits;~~carryforwards; ii) net operating loss carryforwards; and iii) temporary differences that result from differing treatment of certain items for tax and accounting purposes. As of December 31, ~~2021,~~2023, we had a total of ~~$10.7~~$13.0 million of deferred tax assets and $0.5 million of deferred tax liabilities for which we have recorded a ~~$10.7~~$12.5 million valuation allowance.

We will continue to assess the level of valuation allowance required in future periods. Should evidence regarding the realizability of tax assets change at a future point in time, the valuation allowance will be adjusted accordingly.

Allowance for ~~doubtful accounts.~~credit losses. We make judgments as to our ability to collect outstanding and unbilled receivables to reflect any estimated credit losses. The allowance is evaluated each quarter on a customer by customer basis and ~~provide allowances for receivables when collection becomes doubtful. Provisions~~considers historical write-off experience with each customer, the number of days that any delinquent invoices are ~~made based upon a specific review~~past due, and an evaluation of ~~all significant outstanding invoices.~~the potential risk of loss associated with any delinquent accounts. If the judgments we make to determine the allowance for ~~doubtful accounts~~credit losses do not reflect the future ability to collect outstanding receivables, additional provisions for ~~doubtful accounts~~credit losses may be required.

Recent Accounting Pronouncements. In ~~October 2021,~~November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. ~~2021-08,~~ 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires retrospective disclosure of significant segment expenses and other~~Business Combinations (Topic 805): Accounting for Contract Assets~~

segment items on an annual and ~~Contract Liabilities from Contracts with Customers~~interim basis. Additionally, it requires disclosure of the title and position of the Chief Operating Decision Maker (“CODM”). ~~The~~This ASU requires contract assets and contracts liabilities to be accounted for as if they (“the acquirer”) entered into the original contract at the same time and same date as the acquiree. The guidance is towill be effective for ~~reporting~~the Company’s fiscal December 31, 2024 year-end and interim periods beginning ~~after December 15, 2022,~~in fiscal 2025, with early adoption permitted. We ~~have elected not to early adopt and we~~ are ~~continuing to assess~~assessing the impact of the standard on our consolidated financial statements.

In December ~~2019,~~2023, the FASB issued ~~Accounting Standard Update (“ASU”)~~ASU No. ~~2019-12,~~ 2023-09, Income Taxes (Topic 740): ~~Simplifying the Accounting for~~Improvements to Income ~~Taxes. The ASU was issued to reduce the complexity of the reporting~~Tax Disclosures, which requires an annual tabular effective tax rate reconciliation disclosure including information for ~~financial statement users. We adopted the standard on January 1, 2020. The adoption~~specified categories and jurisdiction levels, as well as, disclosure of ~~the standard did not result in any adjustment to our financial statements.~~

~~In June 2016, the FASB issued~~income taxes paid, net of refunds received, disaggregated by federal, state/local, and significant foreign jurisdiction. This ASU ~~2016-13,~~ ~~Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments, which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. This guidance was to~~will be effective for ~~reporting periods beginning after~~the Company’s fiscal December ~~15, 2019,~~31, 2025 year-end, with early adoption permitted. ~~In November 2019, the FASB issued ASU 2019-10,~~ ~~Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic842) Effective Dates,~~ ~~which deferred the effective dates for us, as a smaller reporting company, until fiscal year 2023.~~ We are ~~continuing to assess~~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. The Company adopted this standard as of January 1, 2023 and the adoption did not have a material impact on the Company’s consolidated financial statements.

We have audited the accompanying consolidated balance sheets of Aware, Inc. and its subsidiaries (the Company) as of December 31, ~~2021~~2023 and ~~2020,~~2022, the related consolidated statements of operations ~~changes in~~and comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, ~~2021,~~2023, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, ~~2021~~2023 and ~~2020,~~2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, ~~2021,~~2023, in conformity with accounting principles generally accepted in the United States of America.

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the auditing standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

The critical audit ~~matters~~matter communicated below ~~are matters~~is a matter arising from the current period audit of the financial statements that ~~were~~was communicated or required to be communicated to the audit committee and that: (1) ~~relate~~related to accounts or disclosures that are material to the financial statements and (2) involved ~~our~~ especially challenging, subjective, or complex judgments. The communication of the critical audit ~~matters~~matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit ~~matters~~matter below, providing a separate ~~opinions~~opinion on the critical audit ~~matters~~matter or on the accounts or disclosures to which ~~they relate.~~it relates.

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

As described in Note 2 to the financial statements, the Company recognizes revenue when a customer obtains control of promised goods and services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods and services. The Company offers customers the ability to purchase combinations of software licenses, software maintenance, and related professional services together in one arrangement. The Company must determine which promises are distinct performance obligations and allocate the revenue to the performance obligations that are considered distinct based upon their relative ~~stand-alone selling price.~~Stand-alone Selling Price (SSP). Revenue allocated to software licenses is typically recognized at a point in time upon delivery and revenue allocated to the software maintenance and professional services is recognized over time, provided all other revenue recognition criteria are met. ~~Significant~~Management applies significant judgment ~~is exercised by the Company~~ in determining the revenue recognition for these ~~customer agreements,~~contracts including the identification of and ~~includes~~accounting for all performance obligations and the ~~following:~~calculation of the SSP for each identified performance obligation. The Company’s identification of performance

Given these factors, the related audit effort in evaluating management's judgments in ~~determining revenue recognition~~identifying performance obligations and estimating SSP’s for these customer agreements was extensive and required a high degree of auditor judgment.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. Our procedures related to the Company's ~~revenue recognition~~identification of performance obligations and estimation of SSP’s for these customer agreements included, among others:

~~As disclosed in Note 4 to~~ the consolidated financial statements, during 2021, the Company completed the acquisition of FortressID for a total aggregate purchase price of $3.4 million. The transaction was accounted for as a business combination. The total aggregate purchase price included $2.5 million of cash consideration plus the fair valuecompleteness of the ~~contingent consideration arrangement which was estimated to be $0.9 million. The contingent consideration requires cash payments~~performance obligations identified by management, and performed an evaluation of ~~up to $2.0 million by achieving revenue targets during 2022~~whether these performance obligations were distinct and ~~up to another $2.0 million for revenue targets reached during 2023. The Company determines the fair value~~capable of contingent consideration as part of the initial purchase price allocation and on an ongoing basis each reporting period until the contingent consideration period is settled. As of December 31, 2021, the liability recorded for future estimated contingent consideration was $0.9 million, which represents a Level 3 estimate in the fair value hierarchy due to the significant unobservable inputsbeing distinct.

sensitivity of the fair value to the underlying assumptions. The significant assumptions include estimation of the probability and timing of payments, future sales forecasts, as well as the appropriate discount rate based on the estimated timing of payments. These significant assumptions are forward looking and could be affected by future economic and market conditions.

Given these factors, the related audit effort in evaluating management's judgments in determining the fair value of the contingent acquisition payment was extensive and required a high degree of auditor judgment.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. Our procedures related to the Company's contingent acquisition payment included, among others:


	December 31,						December 31,
	2021			2020			2023			2022
ASSETS
Current assets:
Cash and cash equivalents	$	29,963		$	38,565		$	10,002		$	11,749
Accounts receivable (less allowance for doubtful accounts of $74 at December 31, 2021 and $138 at December 31, 2020)		3,763			2,285
Unbilled receivables		3,087			2,229
Marketable securities								20,913			17,229
Accounts receivable, net								2,454			3,317
Unbilled receivables, net								1,401			2,929
Tax receivable		1,411			0			—			1,362
Prepaid expenses and other current assets		591			582			1,054			693
Total current assets		38,815			43,661			35,824			37,279
Property and equipment, net		3,216			3,701			579			726
Intangible assets, net		3,222			1,217			2,391			2,806
Goodwill		3,120			1,651			3,120			3,120
Long term tax receivable		0			1,398
Note receivable								—			2,601
Right of use asset, net								4,260			4,538
Other long-term assets								122			122
Total assets	$	48,373		$	51,628		$	46,296		$	51,192
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	283		$	494		$	280		$	639
Accrued expenses		1,909			1,531			1,706			1,282
Current portion of operating lease liabilities								637			470
Deferred revenue		3,549			3,843			4,926			3,411
Total current liabilities		5,741			5,868			7,549			5,802
Long-term deferred revenue		191			90			611			322
Long-term contingent acquisition payment		919			0
Long-term operating lease liabilities								3,838			4,047
Long-term contingent acquisition payments								—			812
Total long-term liabilities		1,110			90			4,449			5,181
Commitments and contingent liabilities (Note 7)
Commitments and contingent liabilities (Note 10)
Stockholders’ equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized, NaN outstanding		0			0
Common stock, $.01 par value; shares authorized, 70,000,000 in 2021 and 2020; issued and outstanding of 21,613,982 as of December 31, 2021 and 21,378,833 as of December 31, 2020		216			214
Preferred stock, $1.00 par value; 1,000,000 shares authorized, none outstanding								—			—
Common stock, $.01 par value; 70,000,000 shares authorized; 21,017,892 and 21,093,447 shares issued and outstanding as of December 31, 2023 and 2022, respectively								210			211
Additional paid-in capital		97,778			96,104			99,405			98,306
Accumulated deficit		(56,472	)		(50,648	)		(65,512	)		(58,198	)
Accumulated other comprehensive income (loss)								195			(110	)
Total stockholders’ equity		41,522			45,670			34,298			40,209
Total liabilities and stockholders’ equity	$	48,373		$	51,628		$	46,296		$	51,192

The accompanying notes are an integral part of the consolidated financial statements.


	Years ended December 31,						Year ended December 31,
	2021			2020			2023			2022
Revenue:
Software licenses	$	7,973		$	5,038		$	9,529		$	7,386
Software maintenance		6,679			5,429			7,674			7,111
Services and other		2,202			842			1,041			1,511
Total revenue		16,854			11,309			18,244			16,008
Costs and expenses:
Cost of services and other		1,210			810			1,273			1,260
Research and development		9,259			9,093			9,124			9,234
Selling and marketing		6,324			5,411			7,955			6,962
General and administrative		6,158			5,419			6,549			6,548
Loss on write-off of note receivable								2,695			—
Fair value adjustment to contingent acquisition payment								(812	)		(107	)
Gain on sale of property and equipment								—			(5,672	)
Total costs and expenses		22,951			20,733			26,784			18,225
Operating loss		(6,097	)		(9,424	)		(8,540	)		(2,217	)
Interest and other income		4			176			1,285			540
Loss before benefit for income taxes		(6,093	)		(9,248	)
Benefit for income taxes		(269	)		(1,634	)
Loss before provision for income taxes								(7,255	)		(1,677	)
Provision for income taxes								59			49
Net loss	$	(5,824	)	$	(7,614	)	$	(7,314	)	$	(1,726	)
Net loss per share – basic	$	(0.27	)	$	(0.35	)	$	(0.35	)	$	(0.08	)
Net loss per share – diluted	$	(0.27	)	$	(0.35	)	$	(0.35	)	$	(0.08	)
Weighted-average shares - basic		21,525			21,473
Weighted-average shares - diluted		21,525			21,473
Weighted-average shares – basic								21,013			21,604
Weighted-average shares – diluted								21,013			21,604
Other comprehensive income (loss)
Unrealized gain (loss) on available for sale securities								305			(110	)
Comprehensive loss							$	(7,009	)	$	(1,836	)

The accompanying notes are an integral part of the consolidated financial statements.


	Years ended December 31,						Year ended December 31,
	2021			2020			2023			2022
Cash flows from operating activities:
Net loss	$	(5,824	)	$	(7,614	)	$	(7,314	)	$	(1,726	)
Adjustments to reconcile net loss to net cash used in operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		687			561			578			760
Gain on sale of fixed assets								—			(5,672	)
Stock-based compensation		1,567			838			1,525			1,707
Deferred taxes		(269	)		-
Bad debt provision		(64	)		118
Interest receivable								(93	)		(101	)
Non-cash lease expense								237			128
Loss on write-off of note receivable								2,695			—
Change in fair value of contingent acquisition payments								(812	)		(107	)
Credit losses (recoveries)								(15	)		344
Increase (decrease) from changes in assets and liabilities:
Accounts receivable		(1,410	)		84			648			332
Unbilled receivables		(837	)		1,086			1,758			(71	)
Prepaid expenses and other current assets		(9	)		(171	)		(613	)		(406	)
Tax receivable		(13	)		(1,398	)		1,361			49
Accounts payable		(249	)		307			(359	)		356
Accrued expenses		380			435			422			(628	)
Deferred revenue		(193	)		480			1,805			(7	)
Net cash used in operating activities		(6,234	)		(5,274	)
Net cash provided by (used in) operating activities								1,823			(5,042	)
Cash flows from investing activities:
Purchases of property and equipment		(27	)		(484	)		(16	)		(730	)
Cash paid for acquisitions, net		(2,450	)		(2,430	)
Proceeds from sale of fixed assets, net								—			8,547
Purchases of marketable securities								(9,128	)		(18,555	)
Sale of marketable securities								6,000			1,250
Investment in note receivable								—			(2,500	)
Net cash used in investing activities		(2,477	)		(2,914	)		(3,144	)		(11,988	)
Cash flows from financing activities:
Proceeds from issuance of common stock		163			50
Proceeds from issuance of unrestricted stock								96			154
Payments made for taxes of employees who surrendered shares related to unrestricted stock		(54	)		(93	)		(16	)		(26	)
Repurchase of common stock		—			(946	)		(506	)		(1,312	)
Net cash provided by (used in) financing activities		109			(989	)
Net cash used in financing activities								(426	)		(1,184	)
Decrease in cash and cash equivalents		(8,602	)		(9,177	)		(1,747	)		(18,214	)
Cash and cash equivalents, beginning of year		38,565			47,742			11,749			29,963
Cash and cash equivalents, end of year	$	29,963		$	38,565		$	10,002		$	11,749
Supplemental disclosure:
Cash paid for income taxes	$	-		$	-		$	136		$	—

The accompanying notes are an integral part of the consolidated financial statements.

							Additional						Total
	Common Stock						Paid-In			Accumulated			Stockholders’									Additional						Accumulated Other			Total
	Shares			Amount			Capital			Deficit			Equity			Common Stock						Paid-In			Accumulated			Comprehensive			Stockholders’
Balance at December 31, 2019		21,443		$	214		$	96,255		$	(43,034	)	$	53,435
																Shares			Amount			Capital			Deficit			Income (Loss)			Equity
Balance at December 31, 2021																	21,614		$	216		$	97,778		$	(56,472	)	$	—		$	41,522

Issuance of unrestricted stock		246			2			(2	)		—			-			118			1			1			—			—			2
Shares surrendered by employees to pay taxes related to unrestricted stock		(27	)		-			(93	)		—			(93	)		(10	)		—			(26	)		—			—			(26	)
Issuance of common stock under employee stock purchase plan		15			-			50			—			50			76			1			151			—			—			152
Stock-based compensation expense					—			838			—			838			—			—			1,707			—			—			1,707
Repurchase of common stock		(298	)		(2	)		(944	)		—			(946	)		(705	)		(7	)		(1,305	)		—			—			(1,312	)
Other comprehensive loss																	—			—			—			—			(110	)		(110	)
Net loss											(7,614	)		(7,614	)		—			—			—			(1,726	)		—			(1,726	)

Balance at December 31, 2020		21,379			214			96,104			(50,648	)		45,670
Balance at December 31, 2022																	21,093			211			98,306			(58,198	)		(110	)		40,209
																																—
Issuance of unrestricted stock		189			2			(2	)		—			-			164			2			(3	)		—			—			(1	)
Shares surrendered by employees to pay taxes related to unrestricted stock		(16	)		-			(54	)		—			(54	)		(9	)		—			(16	)		—			—			(16	)
Issuance of common stock under employee stock purchase plan		62			-			163			—			163			70			1			95			—			—			96
Stock-based compensation expense		—			—			1,567						1,567			—			—			1,525			—			—			1,525
Repurchase of common stock																	(300	)		(4	)		(502	)		—			—			(506	)
Other comprehensive income																	—			—			—			—			305			305
Net loss											(5,824	)		(5,824	)		—			—			—			(7,314	)		—			(7,314	)

Balance at December 31, 2021		21,614		$	216		$	97,778		$	(56,472	)	$	41,522
Balance at December 31, 2023																	21,018		$	210		$	99,405		$	(65,512	)	$	195		$	34,298

The accompanying notes are an integral part of the consolidated financial statements.

Basis of Presentation - The consolidated financial statements include the accounts of Aware, Inc. and its subsidiaries (“the Company”). All significant intercompany transactions have been eliminated.

Fair Value Measurements - The Financial Accounting Standards Board (“FASB”) Codification defines fair value and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to the unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the FASB Codification are: i) 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; ii) 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 iii) 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 ~~$30.0~~$10.0 million and ~~$38.6~~$11.7 million at December 31, ~~2021~~2023 and ~~2020,~~2022, respectively. ~~We classified our cash equivalents of $29.0~~Marketable securities, which primarily include U.S. Treasuries and corporate bonds, were $20.9 million and ~~$37.9~~$17.2 million as of December 31, ~~2021~~2023 and 2020, respectively, within Level 1 of the fair value hierarchy because they are valued using quoted market prices. Our cash equivalents are measured at fair value on a recurring basis and their carrying values approximate their respective fair values.2022, respectively.

As of December 31, ~~2021,~~2023, our assets that are measured at fair value on a recurring basis ~~and whose carrying values approximate their respective fair values~~ include the following (in thousands):


	Fair Value Measurement at December 31, 2021 Using:						Fair Value Measurement at December 31, 2023 Using:
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total
	(Level 1)		(Level 2)		(Level 3)		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds (included in cash and cash equivalents)	$	28,952	$	0	$	0	$	7,848	$	-	$	-	$	7,848
Marketable securities								20,913		-		-		20,913
Note receivable								-		-		-		-
Total assets	$	28,952	$	0	$	0	$	28,761	$	-	$	-	$	28,761

Liabilities:
Contingent acquisition payment	$	0	$	0	$	919
Total liabilities	$	0	$	0	$	919

The fair value of our contingent acquisition payment was determined using a Monte Carlo simulation and there was no change in fair value from the initial recording date (acquisition date) to December 31, 2021 due to the proximity of the acquisition to year-end.

As of December 31, ~~2020,~~2022, our assets and liabilities that are measured at fair value on a recurring basis ~~and whose carrying values approximate their respective fair values include~~included the following (in thousands):


	Fair Value Measurement at December 31, 2022 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)	$	10,967	$	-	$	-	$	10,967
Marketable securities		17,229		-		-		17,229
Note receivable		-		-		2,601		2,601
Total assets	$	28,196	$	-	$	2,601	$	30,797

Liabilities:
Contingent acquisition payments	$	-	$	-	$	812	$	812
Total liabilities	$	-	$	-	$	812	$	812

The fair value of our contingent acquisition payments was $0 and $0.8 million as of December 31, 2023 and 2022, respectively. The $0.8 million decrease during the year ended December 31, 2023 was due to the end of the earnout period without the achievement of any earnout targets, resulting in no earnout payment being required. The fair value as of December 31, 2022 was determined using a Monte Carlo simulation.

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 income (loss) in stockholders' equity.

Fair Value Measurement at
December 31, 2020 Using:

Quoted Prices
in Active
Markets for
Identical
Assets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

(Level 1)

(Level 2)

(Level 3)

Money market funds (included in cash
and cash equivalents)

$
37,948

$
0

$
0

Total

$
37,948

$
0

$
0

Marketable securities by security type consisted of the following (in thousands):


	December 31, 2023:
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury notes and bonds	$	15,331	$	176	$	(19	)	$	15,489
Corporate bonds		5,386		39		(1	)		5,424
	$	20,717	$	215	$	(20	)	$	20,913


	December 31, 2022:
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury notes and bonds	$	13,389	$	24	$	(100	)	$	13,313
Corporate bonds		3,950		—		(34	)		3,916
	$	17,339	$	24	$	(134	)	$	17,229

Changes in note receivable consisted of the following (in thousands):


Balance as of December 31, 2021	$	—
Investment in Note Receivable		2,500
Accrued interest		101
Balance as of December 31, 2022		2,601
Accrued interest		94
Write-off of Note Receivable		(2,695	)
Balance as of December 31, 2023	$	—

The investment in the Note Receivable ("Note") with Omlis Limited ("Omlis"), a limited company incorporated and registered in England and Wales and the parent of MIRCAL Technologies Limited ("MIRACL"), was negotiated at an arm’s length basis and the total carrying value of the investment of $0 and $2.6 million is representative of the fair value of the investment as of December 31 2023 and 2022, respectively. The $2.7 million write off during the year ended December 31, 2023 was the result of the lack of recoverability of the Note due to liquidity concerns as of December 31, 2023. In addition, in January 2024, Omlis and MIRACL petitioned to enter the United Kingdom administration process. The deterioration of Omlis' liquidity, resulted in our uncertainty regarding the recoverability of the Note's carrying value. During the year ended December 31, 2022, there were no changes in the underlying assumptions of the Note. The change in fair value during the year ended December 31, 2022 was the result of accrued interest.

Property and Equipment – Property and equipment is stated at cost. Depreciation and amortization of property and equipment is provided using the straight-line method over the estimated useful lives of the assets. Upon retirement or sale, the costs of the assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss on disposal is included in the determination of income or loss. Expenditures for repairs and maintenance are charged to expense as incurred.

Revenue recognition - . The core principle of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”) is that we should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To achieve that core principle, we apply the following five step model:

1) Identify the contract with the customer

A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the related payment terms, (ii) the contract has commercial substance, and (iii) we determine that collection of substantially all consideration for goods and services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s intent and ability to pay, which is based on a variety of factors including the customer’s historical payment experience, or in the case of a new customer, published credit and financial information pertaining to the customer.

We evaluate contract modifications for the impact on revenue recognition if they have been approved by both parties such that the enforceable rights and obligations under the contract have changed. Contract modifications are either accounted for using a cumulative effect adjustment or prospectively over the remaining term of the arrangement. The determination of which method is more appropriate depends on the nature of the modification, which we evaluate on a case-by-case basis.

We combine two or more contracts entered into at or near the same time with the same customer and account for them as a single contract if (i) the contracts are negotiated as a package with a common commercial objective, (ii) the amount of consideration to be paid in one contract depends on the price or performance of the other contract, or (iii) some or all of the goods or services in one contract would be combined with some or all of the goods and services in the other contract into a single performance obligation. If two or more contracts are combined, the consideration to be paid is aggregated and allocated to the individual performance obligations without regard to the consideration specified in the individual contracts.

2) Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other available resources, and are distinct in the context of the contract, whereby the transfer of the good or service is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods and services, we apply judgment to determine whether promised goods and services are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised goods and services are accounted for as a combined performance obligation. To identify performance obligations, we consider all of the goods or services promised in a contract regardless of whether they are explicitly stated or are implied by customary business practices.

3) Determine the transaction price

The transaction price is determined based on the consideration we expect to be entitled in exchange for transferring promised goods and services to the customer. Determining the transaction price requires significant judgment. To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue recognized under the contract will not occur. Any estimates, including the effect of the constraint on variable consideration, are evaluated at each reporting period. Some of our arrangements include usage-based royalties where a software license is the predominant item that the royalty relates to. In these arrangements, revenue from the usage-based royalty is recognized when the subsequent usage occurs.

Our arrangements can include variable fees, such as the option to purchase additional usage of a previously delivered software license. The Company may also provide pricing concessions to clients, a business practice that also gives rise to variable fees in contracts. The Company also reviews contractual termination provisions in determining contractual term and total transaction price. For variable fees arising from the client’s purchase of additional usage of a previously delivered software license, we apply the sales and usage-based royalties guidance related to a license of intellectual property and recognizes the revenue in the period the underlying sale or usage occurs. 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.

4) Allocate the transaction price to performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (“SSP”) basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The consideration to be received is allocated among the separate performance obligations based on relative SSPs. 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 amounts 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. 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 customers and circumstances. In these instances, we may use information such as the nature of the customer and distribution channel in determining the SSP.

5) Recognize revenue when or as we satisfy a performance obligation

We satisfy performance obligations either over time or at a point in time. Revenue is recognized over time if 1)i) the customer simultaneously receives and consumes the benefits provided by our performance, 2)ii) our performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or 3)iii) our performance does not create an asset with an alternative use to us and we have an enforceable right to payment for performance completed to date. If we do not satisfy a performance obligation over time, the related performance obligation is satisfied at a point in time by transferring the control of a promised good or service to a customer.

We categorize revenue as software licenses, software maintenance, or services and other. Specific revenue recognition policies apply to each category of revenue.

Software licenses

Software licenses consist of revenue from the sale of software licenses for biometrics and imaging applications. Our software licenses are functional intellectual property and typically provide customers with the right to use our software on a term or perpetual basis as it exists when made available to the customer. We recognize revenue from perpetual software licenses at a point in time upon delivery, provided all other revenue recognition criteria are met.

We also offer certain products pursuant to a subscription-based software model which includes a term software license to use the software for a fixed term. We recognize revenue for fixed fees associated with subscription-based software licenses at a point in time upon delivery, provided all other revenue recognition criteria are met. Fees subject to the usage-based royalty exception are recognized when the subsequent usage occurs.

Also, with our acquisition of FortressID and 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 are recognized~~ ratably over the subscription period. For the ~~year~~years ended December 31, ~~2021~~2023 and 2022, we ~~did not generate~~generated a de minimis amount of revenue from SaaS contracts.

Software maintenance

Software maintenance consists of revenue from the sale of software maintenance contracts for biometrics and imaging software. Software maintenance contracts entitle customers to receive software support and software updates, if and when they become available, during the term of the maintenance contract. Software support and software updates are considered distinct services. However, these distinct services are considered a single performance obligation consisting of a series of distinct services that are substantially the same and have the same pattern of transfer to the customer. We recognize software maintenance revenue over time on a straight-line basis over the contract period.

Services and other

Service revenue consists of fees from biometrics customers for software engineering services. We recognize services revenue 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. The use of the over-time revenue recognition method requires judgment in developing budgeted labor hours. Changes in budgeted hours may occur and the resulting impact on revenue recognition is accounted for in the period of the change in estimate. Other revenue, which includes hardware sales that may be purchased with the software license, is recognized at a point in time upon delivery provided all other revenue recognition criteria are met.

Arrangements with multiple performance obligations

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. The various combinations of multiple performance obligations and our revenue recognition for each are described as follows:

•

Perpetual software licenses and software maintenance: When software licenses and software maintenance contracts are sold together, the software licenses and software maintenance are generally considered distinct performance obligations. The transaction price is allocated to the software licenses and the software maintenance based on relative SSP. Revenue allocated to the software licenses is 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 time on a straight-line basis over the contract period.

•

Perpetual software licenses and services: 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 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 software licenses and standard implementation or consulting-type services are sold together, they are generally considered distinct performance obligations, as the software licenses are not dependent on or interrelated with the associated services. The transaction price in these arrangements is allocated to the software licenses and services based on relative SSP. Revenue allocated to the software licenses is recognized at a point in time upon delivery, provided all other revenue recognition criteria are met. Revenue allocated to the services is recognized over time using an input method. In arrangements with both software licenses and services, the software license portion of the arrangement is classified as software license revenue and the services portion is classified as services revenue in our consolidated statements of operations and comprehensive loss.

•

Perpetual software licenses, software maintenance and services: When we sell software licenses, software maintenance and software services together, we account for the individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations based on relative SSP. Revenue allocated to the software licenses is recognized at a point in time upon delivery. Revenue allocated to the services is recognized over time using an input method (i.e., labor hours incurred as a percentage of total labor hours budgeted). Revenue for the software maintenance is recognized over time on a straight-line basis over the contract period. However, if the software services are significant customization engineering services, they are accounted for with the software licenses as a combined performance obligation, as stated above. Revenue for the combined performance obligation is recognized over time using an input method.

•

Perpetual software licenses, hardware, software maintenance, and services: When we sell software licenses, hardware, software maintenance and software services together, we account for the individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations based on relative SSP. Revenue allocated to the software licenses is recognized at a point in time upon delivery. Revenue allocated to the services is recognized over time using an input method (i.e., labor hours incurred as a percentage of total labor hours budgeted). Revenue for the hardware is recognized at a point in time upon delivery. Revenue for the software maintenance is recognized over time on a straight-line basis over the contract period.

•

Subscription-based software consisting of a software license and software maintenance: When subscription-based software is sold, the software license and software maintenance are generally considered distinct performance obligations. The transaction price is allocated to software license and the software maintenance based on relative SSP. We sell subscription-based software licenses 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 usage-based royalty, revenue is allocated to the software license recognized at a point in time upon delivery, provided all other revenue recognition criteria are met. Any royalties not subject to the guaranteed minimum or earned in excess of the minimum amount are recognized as revenue when the subsequent usage occurs. Revenue allocated to the software maintenance is recognized on a straight-line basis over the contract period.

~~Perpetual software licenses and software maintenance:~~ When software licenses and software maintenance contracts are sold together, the software licenses and software maintenance are generally considered distinct performance obligations. The transaction price is allocated to the software licenses and the software maintenance based on relative SSP. Revenue allocated to the software licenses is 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 time on a straight-line basis over the contract period.

•

~~Perpetual software licenses and services:~~ 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 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 software licenses and standard implementation or consulting-type services are sold together, they are generally considered distinct performance obligations, as the software licenses are not dependent on or interrelated with the associated services. The transaction price in these arrangements is allocated to the software licenses and services based on relative SSP. Revenue allocated to the software licenses is recognized at a point in time upon delivery, provided all other revenue recognition criteria are met. Revenue allocated to the services is recognized over time using an input method. In arrangements with both software licenses and services, the software license portion of the arrangement is classified as software license revenue and the services portion is classified as services revenue in our consolidated statements of operations.

•

~~Perpetual software licenses, software maintenance and services:~~ When we sell software licenses, software maintenance and software services together, we account for the individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations based on relative SSP. Revenue allocated to the software licenses is recognized at a point in time upon delivery. Revenue allocated to the services is recognized over time using an input method (i.e., labor hours incurred as a percentage of total labor hours budgeted). Revenue for the software maintenance is recognized over time on a straight-line basis over the contract period. However, if the software services are significant customization engineering services, they are accounted for with the software licenses as a combined performance obligation, as stated above. Revenue for the combined performance obligation is recognized over time using an input method.

•

~~Perpetual software licenses, hardware, software maintenance, and services:~~ When we sell software licenses, hardware, software maintenance and software services together, we account for the individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations based on relative SSP. Revenue allocated to the software licenses is recognized at a point in time upon delivery. Revenue allocated to the services is recognized over time using an input method (i.e., labor hours incurred as a percentage of total labor hours budgeted). Revenue for the software maintenance is recognized over time on a straight-line basis over the contract period.

•

~~Subscription-based software consisting of a software license and software maintenance:~~ When subscription-based software is sold, the software license and software maintenance are generally considered distinct performance obligations. The transaction price is allocated to software license and the software maintenance based on relative SSP. We sell subscription-based software licenses 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 usage-based royalty, revenue is allocated to the software license recognized at a point in time upon delivery, provided all other revenue recognition criteria are met. Any royalties not subject to the guaranteed minimum or earned in excess of the minimum amount are recognized as revenue when the subsequent usage occurs. Revenue allocated to the software maintenance is recognized on a straight-line basis over the contract period.

Returns

We do not offer rights of return for our products and services in the normal course of business.

Customer Acceptance

Our contracts with customers generally do not include customer acceptance clauses.

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~~billing date) or a contract liability (customer payment precedes performance). Customers that prepay are represented by ~~the~~ deferred revenue until the performance obligation is satisfied. Our contract assets consist of unbilled receivables. Our contract liabilities consisted 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.

The following table presents changes in our contract assets and liabilities during the years ended December 31, ~~2021~~2023 and ~~2020~~2022 (in thousands):


	Balance at Beginning of period		Revenue Recognized In Advance of Billings		Billings			Balance at End of Period
Year ended December 31, 2023
Contract Assets:
Unbilled receivables	$	2,929	$	4,356	$	(5,884	)	$	1,401
Year ended December 31, 2022
Contract Assets:
Unbilled receivables	$	3,087	$	5,288	$	(5,446	)	$	2,929

	Balance at Beginning of period		Billings		Revenue Recognized			Balance at End of Period
Year ended December 31, 2023
Contract Liabilities:
Deferred revenue	$	3,733	$	9,478	$	(7,674	)	$	5,537
Year ended December 31, 2022
Contract Liabilities:
Deferred revenue	$	3,740	$	7,104	$	(7,111	)	$	3,733

Balance at
Beginning
of period

Revenue
Recognized
In Advance
of Billings

Billings

Balance at
End of
Period

Year ended December 31, 2020

Contract Assets:

Unbilled receivables

$
3,315

$
1,508

$
(2,594
)

$
2,229

Year ended December 31, 2021

Contract Assets:

Unbilled receivables

$
2,229

$
7,172

$
(6,314
)

$
3,087

Balance at
Beginning
of period

Billings

Revenue
Recognized

Balance at
End of
Period

Year ended December 31, 2020

Contract Liabilities:

Deferred revenue

$
2,837

$
6,619

$
(5,523
)

$
3,933

Year ended December 31, 2021

Contract Liabilities:

Deferred revenue

$
3,933

$
6,486

$
(6,679
)

$
3,740

Remaining Performance Obligations

Remaining performance obligations represent the transaction price from contracts for which work has not been performed or goods and services have not been delivered. We expect to recognize revenue on approximately ~~67%~~94% of the remaining performance obligations over the next 12 months, with the remainder recognized thereafter. ~~As of December 31, 2021, the~~The aggregate amount of the transaction price allocated to remaining performance obligations with a duration greater than one year, comprised of software maintenance contracts, was ~~$2.6 million.~~$0.6 million as of December 31, 2023.

Contract Costs

We recognize an other asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales commissions meet the requirements to be capitalized, and we amortize these costs on a consistent basis with the pattern of transfer of the goods and services in the contract. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets on our consolidated balance sheets.

We apply a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period is one year or less. These costs include sales commissions on software maintenance contracts with a contract period of one year or less as sales commissions paid on contract renewals are commensurate with those paid on the initial contract.

Income Taxes – We compute deferred income taxes based on the differences between the financial statement and tax basis of assets and liabilities using enacted rates in effect in the years in which the differences are expected to reverse. We establish a valuation allowance to offset temporary deductible differences, net operating loss carryforwards and tax credits when it is more likely than not that the deferred tax assets will not be realized.

We recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the tax position. The evaluation of an uncertain tax position is based on factors that include, but are not limited to, changes in the tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit and changes in facts or circumstances related to a tax position. Any changes to these estimates, based on the actual results obtained and/or a change in assumptions, could impact our tax provision in future periods. Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as a provision for income tax in the consolidated statements of ~~operations.~~operations and comprehensive loss.

Capitalization of Software Costs – We capitalize certain costs to develop software products to be sold, leased, or marketed to external users after technological feasibility of the product has been established. ~~NaN~~No software costs were capitalized during the years ended December 31, ~~2021~~2023 and ~~2020,~~2022, because such costs incurred ~~subsequent~~between the period after technological feasibility to the ~~establishment of technological feasibility, but prior to commercial availability,~~product release were immaterial.

~~Software~~

The Company capitalizes and amortizes certain direct costs associated with computer software developed or purchased for internal use incurred during the application development ~~costs also include costs to support our SaaS offerings. We capitalize development costs~~stage. Costs related to ~~these software applications once the~~ preliminary project ~~stage~~activities and post-implementation activities are expensed as incurred. The Company amortizes capitalized software costs generally over three to five years, commencing on the date the software is ~~complete and it is probable that the projects will be completed. NaN~~placed into service. No software costs were capitalized during the years ended December 31, ~~2021~~2023 and ~~2020.~~ 2022, because such costs incurred after attainment of technological feasibility but before product release were immaterial.

Research and Development Costs – Costs incurred in the research and development of our products are expensed as incurred.

Concentration of Credit Risk – At December 31, ~~2021~~2023 and ~~2020,~~2022, we had cash and cash equivalents, in excess of federally insured deposit limits of approximately ~~$29.7~~$9.7 million and ~~$38.3~~$11.5 million, respectively.

Concentration of credit risk with respect to net accounts receivable and unbilled receivables consisted of amounts owed by the following customers that comprised more than ~~10%~~10% of net accounts receivable and unbilled receivables at December 31:


							December 31,
	2021			2020			2023			2022
Customer A		27	%		39	%		16	%		2	%
Customer B	-				13	%		8	%		12	%
Customer C								-			26	%

We had noone customer in ~~2021~~2023 that represented 18% of revenue. No other customers represented over 10% of revenue in 2023 or ~~2020 that provided 10% or more of revenue.~~2022.

For stock options, we use the Black-Scholes option valuation model to estimate the fair value of the award. This valuation model takes into account the exercise price of the award, as well as a variety of significant assumptions. The assumptions used to estimate the fair value of stock options include the expected term, the expected volatility of our stock over the expected term, the risk-free interest rate over the expected term, and our expected annual dividend yield.

Revenue ~~included~~ by product group consists of all associated revenue within the contract, including license revenue, maintenance revenue, and services and other revenue. Revenue by product group may be recognized at a point in time or over-time. These revenues are attributable to both contracts with fixed fees orand guaranteed minimums.

Property and equipment consisted of the following at December 31 (in thousands):

Depreciation expense was ~~$0.5~~$0.2 million and $0.3 million for the years ended December 31, ~~2021~~2023 and ~~2020.~~2022, respectively.

On July 15, 2022, we completed the sale of our former corporate headquarters to FDS Bedford, LLC located at 40 Middlesex Turnpike, Bedford, Massachusetts for total proceeds of $8.9 million less a brokerage commission of $0.3 million.

During the year ended December ~~2021,~~31, 2022, we ~~acquired 100%~~recorded a gain of $5.7 million on the ~~outstanding shares~~sale and ~~acquired all~~disposed of gross assets of $11.5 million and ~~liabilities~~net book value of ~~FortressID for a purchase price of $3.4 million, which consisted of $2.5~~$2.9 million, of ~~cash consideration~~which $1.8 million was property and ~~an earnout with a fair value of $0.9 million. The maximum earnout payment is $4.0~~equipment and $1.1 million and requires cash payments of up to $2.0 million for set revenue targets in 2022 and another $2.0 million for set revenue targets in 2023. The acquisition of FortressID, expands our offerings around identity proofing-enhancing its onboarding, verification and authentication offerings to directly address financial compliance requirements and enable organizations to mitigate risk and curtail increasing fraud.was land.

The acquisition was accounted for as a business combination, whereby all the assets acquired, and liabilities assumed were recognized at fair value on the acquisition date, with any excess of the consideration transferred over the fair value of the net assets acquired recognized as goodwill. Unaudited pro forma results of operations assuming the above acquisition had taken place at the beginning of each period are not provided because the historical operating results and pro forma results would not be materially different from reported results for the periods presented.

5. INTANGIBLE ASSETS

The fair values recorded were based on a valuation performed by a third-party valuation specialist and the estimates and assumptions used in such valuation are subject to change, within the measurement period (up to one year from the acquisition date). The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

Customer relationships

$
1,740

Developed technology

430

Trade name / trademarks

10

Goodwill

1,469

Gross assets acquired

3,649

Net working capital

(11
)
Fair value of contingent consideration

(919
)
Net assets acquired

$
2,719

After allocating the purchase price to the assets acquired and liabilities assumed based on their fair values at the date of acquisition, we recorded goodwill of approximately $1.5 million, which included $0.3 million related to the release of certain deferred tax assets. Goodwill largely consists of expected synergies to be realized from combining operations. The goodwill is deductible for income tax purposes.

~~The fair values of intangible assets were based on valuations using the income approach. The fair~~carrying value of intangible assets and their estimated useful live as of December 31, ~~2021~~2023 are as follows (dollars in thousands):


	Useful Life	Gross Amount		Accumulated Amortization		Net Book Value		Useful Life	Gross Amount		Accumulated Amortization			Net Book Value
Customer relationships	10 years	$	1,740	$	-	$	1,740	8 and 10 years	$	2,680	$	(715	)	$	1,965
Developed technology	7 years		430		-		430	5 and 7 years		710		(297	)		413
Trade name / trademarks	3 years		10		-		10	3 and 7 years		30		(17	)		13
		$	2,180	$	-	$	2,180		$	3,420	$	(1,029	)	$	2,391

In ~~November 2020~~, we entered into a Bill of Sale and Assignment Agreement (the “Agreement”) with Radiant Mission Solutions Inc. (“Radiant” as seller) and Maxar Technologies, Inc. (“as guarantor”) to acquire certain assets and assume certain liabilities of Radiant’s AFIX product line for cash consideration of approximately $2.4 million. The acquisition of AFIX, provides turnkey face and fingerprint biometric and forensic analysis software for small and medium-sized law enforcement and government agencies, extends our ABIS product family.

The acquisition was accounted for as a business combination, whereby all the assets acquired, and liabilities assumed were recognized at fair value on the acquisition date, with any excess of the consideration transfer over the fair value of the net assets acquired recognized as goodwill. Unaudited pro forma results of operations assuming the above acquisition had taken place at the beginning of each period are not provided because the historical operating results and pro forma results would not be materially different from reported results for the periods presented. There were no measurement period adjustments recorded in the measurement period, which is now closed.

The fair values recorded were based on a valuation performed by a third-party valuation specialist. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

Net working capital, excluding deferred revenue

$
155

Customer relationships

940

Developed technology

280

Trade name / trademarks

20

Goodwill

1,651

Gross assets acquired

3,046

Deferred revenue

(616
)
Net assets acquired

$
2,430

After allocating the purchase price to the assets acquired and liabilities assumed based on their fair values at the date of acquisition, we recorded goodwill of approximately $1.7 million. Goodwill largely consists of expected synergies to be realized from combining operations. The goodwill is deductible for income tax purposes.


	Useful Life	Gross Amount		Accumulated Amortization			Net Book Value
Customer relationships	8 and 10 years	$	2,680	$	(424	)	$	2,256
Developed technology	5 and 7 years		710		(180	)		530
Trade name / trademarks	3 and 7 years		30		(10	)		20
		$	3,420	$	(614	)	$	2,806

Useful Life

Gross
Amount

Accumulated
Amortization

Net Book
Value

Customer relationships

8 years

$
940

$
132

$
808

Developed technology

5 years

280

63

217

Tradenames

7 years

20

3

17

$
1,240

$
198

$
1,042

During the years ended December 31, ~~2021~~2023 and ~~2020~~2022 we recorded ~~$176 thousand and $26 thousand~~$0.4 million of amortization expense on intangible ~~assets, respectively.~~ assets. The Company expects to record amortization for the years ended December 31 as follows (in thousands):


2024	$	415
2025		405
2026		356
2027		345
2028		338
Thereafter		532
	$	2,391

We recorded ~~a benefit for income taxes~~the Note at fair value in accordance with ASC 825, Financial Instruments, which was $0 and $2.6 million as of ~~$0.3~~December 31, 2023 and 2022, respectively. The accrued interest of $0.1 million as of December 31, 2022, was included in the fair value of the Note. For the year ended December 31, ~~2021 related to~~ ~~a release of our valuation allowance as a result the deferred taxes recorded as part of the FortressID acquisition. We~~2023 we recorded a ~~benefit for income taxes~~fair value adjustment of ~~$1.6~~$2.7 million, inwhich included $0.2 million of accrued interest, to adjust the fair value to $0 as of December 31, 2023. The $2.7 million write off during the year ended December 31, ~~2020 that includes a $1.4 million tax benefit~~2023 was the result of the ~~current year tax loss which can be carried back~~lack of recoverability of the Note due to ~~changes made by~~liquidity concerns as of December 31, 2023. In addition, in January 2024, Omlis and MIRACL petitioned to enter the ~~CARES Act which was signed into law on March 27, 2020.~~United Kingdom administration process. The ~~CARES Act contained specific relief~~deterioration of Omlis' liquidity resulted in our uncertainty regarding the recoverability of the Note's carrying value and ~~stimulus measures including allowing net operating losses originating in 2018 through 2020 to be carried back five~~the unlikelihood of a payout as an unsecured creditor from the administration process.

7. INCOME TAXES

We recorded a provision for income tax of $59 thousand and $49 thousand for the years ~~to offset taxable income in the carryback period.~~ ended December 31, 2023 and 2022, respectively. The components of the ~~benefit from~~provision for income taxes are as follows (in thousands):

Year ended
December 31,

2021

2020

Current:

Federal

$
-

$
(1,397
)
State

—

(237
)

—

(1,634
)
Deferred:

Federal

(147
)

—

State

(122
)

—

(269
)

—

Benefit from income taxes

$
(269
)

$
(1,634
)


	Year ended December 31,
	2023			2022
Current:
Federal	$	(11	)	$	34
State		70			15
Provision for income taxes	$	59		$	49

The ~~2021~~ difference between the effective tax rate and the U.S federal statutory rates was driven primarily due to the change in valuation allowance of our deferred tax ~~assets.~~assets, state income taxes and stock-based compensation to

the deferred tax assets in both 2023 and 2022. A reconciliation of the U.S. federal statutory rate to the effective tax rate is as follows:


	Year ended December 31,						Year ended December 31,
	2021			2020			2023			2022
Federal statutory rate		21	%		21	%		21	%		21	%
State rate, net of federal benefit		6			6			7			12
Tax credits		2			3			(3	)		(2	)
Permanent adjustments		—			—			—			(1	)
Change in valuation allowance		(24	)		(25	)		(19	)		(24	)
Expiration of statutes on uncertain tax positions		—			2
Net operating loss carryback rate benefit under CARES Act		—			11
Stock compensation								(2	)		—
Tax law change								(5	)		—
Other		(1	)		—			—			(9	)
Effective tax rate		4	%		18	%		(1	)%		(3	)%

~~The 2020 difference between~~On October 4, 2023, Massachusetts enacted tax law changes which included the adoption of a single sales apportionment factor effective on January 1, 2025. As required under ASC 740, Income Taxes, we have accounted for the deferred tax ~~rate and the U.S. feral statutory rates was driven primarily due to the~~impacts of this tax law change in ~~valuation allowance~~the period the tax law was enacted, which has the impact of reducing our state deferred tax assets. ~~This~~The change in the deferred tax asset balance related to this was ~~partially~~ offset by ~~an income tax rate benefit related to~~ a ~~carryback of~~corresponding decrease in the ~~2020 net operating losses under the CARES Act.~~valuation allowance.

Deferred income taxes - We had net deferred tax assets of ~~$10.7~~$0.5 million and ~~$8.7~~$.07 million as of December 31, ~~2021~~2023 and ~~2020 respectively~~2022, respectively. . The principal components of deferred tax assets, net, were as follows at December 31 (in thousands):


	2023			2022
Stock-based compensation	$	663			554
Research and development credits		6,623		$	6,817
Capitalized research expense		3,094			1,557
Net operating loss		1,768			2,562
Loss on note receivable		644			—
Other		257			335
Total deferred tax assts		13,049			11,825
Valuation allowance		(12,504	)		(11,115	)
Deferred tax liabilities
Depreciation		(138	)		(193	)
Intangibles		(407	)		(517	)
Total deferred tax liabilities		(545	)		(710	)
Net deferred tax assets (liabilities)	$	-		$	-

2021

2020

Depreciation

$
367

$
307

Stock-based compensation

405

121

Research and development credits

6,904

6,686

Net operating loss

3,380

1,352

Other

254

208

Total deferred tax assts

11,310

8,674

Valuation allowance

(10,730
)

(8,674
)
Deferred tax liabilities

Intangibles

(580
)

—

Total deferred tax liabilities

(580
)

—

Net deferred tax assets (liabilities)

$
-

$
-

As of December 31, ~~2021, $6.9~~2023, $6.6 million of our deferred tax assets relate to research and development credit carryforwards. We assessed the need for a valuation allowance on our deferred tax assets. We evaluated and considered all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets was needed. As part of this analysis, we gave more weight to recent, historical evidence than future projections as we consider the past more objective. As of December 31, 2021, we had a cumulative pretax loss over the most recent three-year period including a pretax loss of $6.1 million in 2021. We considered the cumulative loss for the year ended December 31, 2021 to be significant negative evidence in the overall analysis.

Further, a significant portion of our deferred tax assets relates to federal and state research and development credits. These credits may only offset ~~75%~~75% of the tax liability after net operating loss carryforwards are utilized and thus, we have the risk that the credits could expire before utilization if sufficient taxable income in the carryforward periods doesn’t exist.

As of December 31, ~~2021,~~2023, we had a federal net operating loss carryforward of ~~$7.3~~$4.1 million, which may be available to offset future income tax ~~liabilities and~~liabilities. $3.5 million of those NOLs can be carried forward ~~indefinitely.~~indefinitely and the remaining $0.6 million expire in 2037. As of December 31, ~~2021,~~2023, we had State NOL carryforwards of ~~$16.7~~$32.3 million, ~~respectively,~~ which expire at various dates though ~~2041.~~ 2041.

We evaluated ~~the~~and considered all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, ~~bearing upon the realizability of our~~a valuation allowance for deferred tax assets ~~which~~was needed. The deferred tax assets are composed principally of net operating loss carryforwards, capitalized research costs and research and development credits. As part of this analysis, we gave more weight to recent, historical evidence than future

projections as we consider the past more objective. Under the applicable accounting standards, we considered our history of losses and concluded that is more likely that we will not recognize the benefits of ~~feral~~federal and state deferred tax assets. Therefore, we have recorded a full valuation allowance of ~~$10.7~~$12.5 million and ~~$8.7~~$11.1 million at December 31, ~~2021~~2023 and ~~2020,~~2022, respectively. During the year ended December 31, ~~2021,~~2023, we increased the valuation allowance by ~~$2.0~~$1.4 million from the prior year end. We will continue to monitor the evidence and the realizability of our deferred tax assets in future periods. Should evidence regarding the realizability of our deferred tax assets change at a future point in time, we will adjust the valuation allowance as required.

Under Internal Revenue Code Section 382, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income may be limited. In connection with our acquisition of FortressID during 2021, the historical NOL carryforwards of ~~$3.5~~$3.5 million from FortressID are likely limited under Section 382 due to a change in ownership triggered by the acquisition, however, we do not expect the limitation to result in any of the NOL carryforwards to expire unused. We have not completed a study at the Aware, Inc. level to assess whether an “ownership change” has occurred or whether there have been multiple ownership changes since we became a “loss

corporation” as defined in Section 382. Future changes in our stock ownership, which may be outside of our control, may trigger an “ownership change.” In addition, future equity offerings or acquisitions that have equity as a component of the purchase price could result in an “ownership change.” If an “ownership change” has occurred or does occur in the future, utilization of the NOL carryforwards or other tax attributes may be limited, which could potentially result in increased future tax liability to us.

Uncertain tax benefits - ~~A roll forward~~As of ~~the~~December 31, 2023 and 2022 we had $0.7 million of uncertain tax ~~position~~positions that ~~was~~were primarily related to our research and development tax ~~credits is as follows (in thousands):~~

Uncertain tax positions at December 31, 2019

$
1,008

Increase due to positions taken in prior periods

(206
)
Uncertain tax positions at December 31, 2020

802

Decrease due to positions taken in prior periods

0

Uncertain tax positions at December 31, 2021

$
802

~~Uncertain~~credits. There were no changes to this amount during each of the years ended December 31, 2023 and 2022. The uncertain tax positions ~~of $0.8 million~~ will impact our effective tax rate if realized.

Tax examinations – We file tax returns as prescribed by the tax laws of the jurisdictions in which we operate. In the normal course of business, we are subject to examination by federal and state jurisdictions, where applicable. The earliest tax years that remain subject to examination by jurisdiction is ~~2018~~2019 for both federal and Massachusetts. However, to the extent the Company utilizes net operating losses or credits from years prior to ~~2018,~~2019, the statute remains open to the extent of the net operating losses or other credits are utilized.

Stock Option Plan – ~~We have~~During the year ended December 31, 2023. we had one active fixed stock option plan which iswas our 2001 Nonqualified Stock Plan (“2001 Plan”). We ~~are~~were authorized to grant nonqualified stock options, stock appreciation rights and stock awards to our employees and directors for up to 8,000,000 shares of common stock under this plan. As of December 31, ~~2021,~~2023, there were ~~889,262~~1,577,130 shares available for grant under the 2001 Plan. Subsequent to December 31, 2023, our shareholders approved the Aware, Inc. 2023 Equity and Incentive Plan, which replaced the 2001 Plan. See Note 13, Subsequent Events, for more information regarding the 2023 Equity and Incentive Plan.

Options are granted atwith exercise prices as determined by the Board of Directors and have a maximum term of ~~up to a maximum~~ten ~~years.~~years. Options generally vest over three to five ~~years.~~years.

Stock-based compensation expense in the preceding table includes expenses associated with grants of: i) stock options, ii) unrestricted shares of our common stock; and iii) performance share awards. The methods used to determine stock-based compensation expense for each type of equity grant are described in the following paragraphs.

Stock Option Grants. ~~For~~During the years ended December 31, ~~2021~~2023 and ~~2020,~~2022, we ~~granted~~did not grant any stock ~~options for 2,875,000 and 50,000 shares of our common stock, respectively.~~options. We estimate the fair value of ~~those~~ stock options using the Black-Scholes valuation model.

The Black-Scholes valuation model takes into account the exercise price of the award, as well as a variety of significant assumptions. The assumptions used to estimate the fair value of stock options include the expected term, the expected volatility of our stock over the expected term, the risk-free interest rate over the expected term, and our expected annual dividend yield. We ~~do not estimate our forfeiture rates~~account for forfeitures as ~~the actual forfeiture rate is known at the end of each reporting period due to the timing of our stock option vesting.~~they occur. We believe that

the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of stock options ~~granted in the years ended December 31, 2021 and 2020.~~granted. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

~~Specific assumptions used to determine the fair value of options granted during the years ended December 31, 2021 and 2020, using the Black-Scholes valuation model were as follows:~~

~~(1) The expected term for each grant was determined based on the simplified method.~~

~~(2) The expected volatility for each grant is estimated based on an average of historical volatility over the expected term of the stock options.~~

~~(3) The risk-free interest rate for each grant is based on the U.S. Treasury yield curve in effect at the time of grant for a period equal to the expected term of the stock option.~~

Unrestricted Stock Grants. Our 2001 Plan permits us to grant shares of unrestricted 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 granted ~~56,553,~~134,211 and ~~256,250 shares of unrestricted stock during the years ended December 31, 2021, and 2020, respectively.~~

~~In 2021, we granted 56,553 shares of unrestricted stock to directors. The shares were issued in 2 equal installments shortly after June 30, 2021 and December 31, 2021.~~

We expensed $0.3 million of stock-based compensation expense related to these grants in the year ended December 31, 2021. There was 0 unamortized stock-based compensation charge associated with these stock grants as of December 31, 2021.

~~In 2020, we granted 256,250~~167,921 shares of unrestricted stock to directors, officers, and ~~employees. In March~~employees during the years ended December 31, 2023 and ~~May 2020, we~~2022, respectively. Of the shares granted ~~243,000 shares of unrestricted stock to directors, officers, and employees. The shares~~in 2023, 67,104 were issued ~~in 2 equal installments~~ shortly after June 30, ~~2020~~2023 and ~~December 31, 2020. In October and November, we granted 13,250 shares of unrestricted stock to employees. The shares~~67,107 were issued shortly after December 31, ~~2020.~~

~~We expensed $0.7 million of stock-based compensation expense related to these grants~~2023. Of the shares granted in ~~the year ended~~2022, 61,460 were issued shortly after June 30, 2022 and 46,461 were issued shortly after December 31, ~~2020. There was 0 unamortized stock-based compensation charge associated with these~~2022. The remaining 60,000 shares of unrestricted stock ~~grants as of December 31, 2020.~~

~~We also,~~ granted ~~120,000 shares in September and October 2019~~to an officer is to be issued in 4four equal installments ~~shortly after the anniversaries~~in February 2023, and August of ~~their grant dates in September~~2023, 2024, and October of 2020, 2021, 2022, and 2023, provided the grantee is serving as a director, officer, or employee on those dates. The total stock-based compensation expense related to the 120,000 shares granted in 2019 was $0.4 million, of which $23,000 was charged to expense in 2019, and $84,000 was charged to expense in the each 2020 and 2021. We anticipate the remaining $145,000 will be charged to expense ratably through 2023. 2025.

Stock Options. Total options outstanding at December 31, ~~2021~~2023 and 2022 were ~~3,240,000. 218,748 of those options were vested and had a weighted average exercise price of $6.00.~~as follows:

~~Options to purchase up to 2,875,000 and 50,000 shares of our common stock were granted in the years ended December 31, 2021 and 2020 respectively.~~

At December 31, ~~2021,~~2023, the weighted average remaining contractual term for total options outstanding and total options exercisable was approximately ~~9.00~~6.98 and ~~7.92~~6.92 years, respectively.

At December 31, ~~2021,~~2023, the aggregate intrinsic value of options outstanding and ~~options~~ exercisable was 0.$0. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.

The following table summarizes the stock options outstanding at December 31, ~~2021:~~2023:


	Options Outstanding						Options Exercisable				Options Outstanding						Options Exercisable
Exercise Price Range	Number		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Number		Weighted Average Exercise Price		Number		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Number		Weighted Average Exercise Price
$4 to $5		2,921,250	$	4.72		9.11		54,687	$	4.50		2,053,750	$	4.72		7.10		1,474,787	$	4.72
$5 to $6		106,250	$	5.50		7.83		54,687	$	5.50		68,750	$	5.50		5.76		68,750	$	5.76
$6 to $7		106,250	$	6.50		7.83		54,687	$	6.50		68,750	$	6.50		5.76		68,750	$	5.76
$7 to $8		106,250	$	7.50		7.83		54,687	$	7.50		68,750	$	7.50		5.76		68,750	$	5.76
		3,240,000	$	4.97		9.00		218,748	$	6.00		2,260,000	$	4.88		6.98		1,681,037	$	4.94

At December 31, ~~2021,~~2023, unrecognized compensation expense related to non-vested stock options was approximately ~~$4.2~~$1.0 million, which is expected to be recognized over a weighted average period of ~~3.0~~1.2 years.

We issue common stock from previously authorized but unissued shares to satisfy option exercises and purchases under our Employee Stock Purchase Plan.

Employee Stock Purchase Plan – In May 2021, we adopted the 2021 Employee Stock Purchase Plan (“2021 ~~ESPP Plan”~~ESPP”) under which eligible employees could purchase common stock at a price equal to ~~85%~~85% of the lower of the fair market value of the common stock at the beginning or end of each six-month offering period. ~~The 2021 ESPP Plan replaced our previous Employee Stock Purchase Plan (the “1996 ESPP Plan”).~~ S~~tock-based compensation expense related to our 2021 ESPP Plan for the year ended December 31, 2021 was $0.1 million.~~ Participation in the 2021 ESPP ~~Plan~~ is limited to ~~$25,000~~$25,000 worth of stock for each calendar year, ~~and~~ may be terminated at any time by the employee, and automatically ends on termination of employment. A total of 1,000,000 shares of common stock ~~have been~~were reserved for ~~issuance. As~~issuance under the 2021 ESPP, and as of December 31, ~~2021,~~2023, there were ~~945,501~~800,844 shares available for future issuance ~~under the 2021 ESPP Plan.~~thereunder. We issued ~~54,499~~69,591 and ~~6,972~~75,066 shares under the 2021 ESPP Plan ~~and 1996 ESPP Plan, respectively,~~ during the ~~year~~years ended December 31, ~~2021. We issued 15,388 common shares under the 1996 ESPP Plan during the year ended December 31, 2020.~~2023 and 2022, respectively.

Share Purchases– - On ~~April 30, 2020,~~March 1, 2022, our Board of Directors ~~approved~~authorized a stock repurchase program ~~authorizing~~pursuant to which we may purchase up to ~~$10~~$10.0 million of our common stock. On November 30, 2023, our Board of Directors extended the program through December 31, 2025. As of December 31, 2023 we have repurchased $1.8 million of our common stock ~~of which $1.0 million had been utilized as of December 31, 2021. We did 0t purchase any shares in~~pursuant to this program. During the ~~year~~years ended December 31, ~~2021. During the year ended December 31, 2020,~~2023 and 2022 we repurchased ~~298,214~~299,780 and 705,201 shares of our common ~~stock. The shares were purchased from time to time in the open market at management’s discretion, depending upon market conditions and other factors. The authorization to repurchase Company~~ stock, expired on December 31, 2021. Repurchases where made under the program using our own cash resources and will been accordance with Rule 10b-18 under the Securities Exchange Act of 1934 and other applicable laws, rules and regulations.respectively. The program ~~did~~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.

Dividends – We did not pay dividends in the years ended December 31, ~~2021~~2023 and ~~2020.~~2022.

In 1994, we established a qualified 401(k) Retirement Plan (the ~~“Plan”~~“401K Plan”) under which employees are allowed to contribute certain percentages of their pay, up to the maximum allowed under Section 401(k) of the Internal Revenue Code. Our contributions to the 401K Plan are at the discretion of the Board of Directors. Our contributions were ~~approximately $0.4 and $0.3~~$0.4 million in ~~2021~~2023 and ~~2020, respectively.~~2022.

Net loss per share is calculated as follows (in thousands, except per share data):

13. SUBSEQUENT EVENTS

2023 Equity and Incentive Plan - On ~~April 26, 2021~~January 17, 2024, our shareholders approved the Aware, Inc. 2023 Equity and Incentive Plan (the ~~“Contract Date”~~“2023 Plan”), ~~we entered into~~which replaced our 2001 Plan. The 2023 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, unrestricted stock, restricted stock units, dividend equivalent rights, and cash awards. An aggregate of 1,277,130 shares of our common stock is authorized for issuance pursuant to awards under the 2023 Plan, plus an ~~Agreement~~additional number of Purchase and Sale (the “Purchase and Sale Agreement”) with FDS Bedford, LLC or its designee (the “Purchaser”). The Purchase and Sale Agreement provided that we are obligated to sell the property at 40 Middlesex Turnpike, Bedford, Massachusetts (the “Property”)shares equal to the ~~Purchaser~~number of shares of our common stock subject to awards granted under the 2001 Plan that expire or terminate without having been exercised, are forfeited or otherwise repurchased by us at the grantee’s original purchase price, or are withheld in payment of the exercise price of an option under the 2001 Plan or to satisfy tax withholding obligations with respect to such exercise, up to a maximum of 2,590,000 shares.

Options exchange program - On February 20, 2024, we completed an options exchange program, pursuant to which current employees holding stock options to purchase approximately 2.2 million shares of our common

stock at weighted average exercise price of $4.88 per share (the “Old Options”), including stock options held by our executive officers to purchase approximately 2.2 million shares of our common stock, exchanged the Old Options for ~~$8,875,000~~new stock options to purchase an aggregate 0.9 million shares of our common stock at an exercise price of $2.21 per share (the ~~“Transaction”~~“New Options”),. Each New Options will vest and become exercisable (a) with respect to 50% of the shares of common stock underlying such New Options on the first anniversary of the grant date and, (b) with respect to the remaining shares of common stock underlying such New Options, in twelve equal monthly installments thereafter, in each case subject to the ~~satisfaction or waiver on or before the closing~~continuous service of the ~~conditions set forth~~employee holding such New Options. We expect to record an incremental $0.1 million in stock based compensation expense over the ~~Purchase and Sale Agreement.~~

The Purchaser is under no obligation to complete the Transaction. The Purchaser deposited $125,000 with a title company following the Contract Date which is non-refundable. The deposit will be credited against the $8,875,000 purchase price at the closing. We anticipate the salevesting period of the ~~building, if it occurs, to be in the second or third quarter of 2022.~~New Options.

We currently occupy the Property. We are entitled to continue to occupy the Property for a period of approximately six months following the Closing at no cost to us. We are obligated to maintain the Property we occupy in first class condition and repair during this period.

~~11.~~

~~SUBSEQUENT EVENTS~~

~~Lease agreement -~~ On March 1, 2022, we entered into a lease agreement with 76/80 Burlington Group LLC (the “Lease”). Pursuant to the Lease, we leased approximately 20,730 rentable square feet at 76 Blanchard Road in Burlington, Massachusetts (the “Premise”) for a term of ten years and six months, which includes a one-time termination right after seven years and six months. We intend to use as our principal executive offices. The term of the Lease commences on the date that the landlord notifies us that the planned construction on the Premise is substantially complete. The Lease provides for an aggregate of $8.2 million of rent due over the Lease term and also provides a renewal option for up to two additional terms of five years each.

~~Subscription agreement -~~ On March 11, 2022, concurrent with our entry into a mutual reseller arrangement with MIRACL Technologies Limited (“MIRACL”), we entered into a subscription agreement with Omlis Limited, a limited company incorporated and registered in England and Wales and the parent of MIRACL (“Omlis”). We purchased $2.5 million of Omlis’ Convertible Note (“Note”) that accrues at 5% annually with a maturity date of March 11, 2026.

Prior to maturity, we have the right to convert into a future financing at a 20% discount from the price per share paid by the investors. If the Note remains outstanding on the maturity date, the Note shall, at the option of the holders of a majority of the outstanding Note, (i) be converted into the most senior shares in Omlis, (ii) be redeemed by payment in cash of the Note and all accrued but unpaid interest or (iii) remain outstanding.

In connection with the sale of the Note, Omlis granted us a right of first refusal for 18 months with respect to any proposed sale by Omlis of equity securities constituting 20% or more of the outstanding voting power of Omlis or all or substantially all of the assets of Omlis or any of its material subsidiaries. Also, in connection with the sale of the Note, Omlis issued us a warrant that expires on September 11, 2023 which allows us to purchase up to 8% of the total equity shares in Omlis at a price per share of $33.91.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and ~~chief~~principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

Evaluation of Changes in Internal Control Over Financial Reporting

In October 2023, there was a significant change in our internal control over financial reporting resulting from the departure of our Chief Financial Officer and the subsequent promotion of our Controller to the position of Principal Financial Officer. Under the supervision and with the participation of our management, including our ~~chief executive officer~~Chief Executive Officer and ~~chief financial officer,~~Principal Financial Officer, we have concluded that ~~there were no changes in~~the promotion of the Controller to the position of Principal Financial Officer has not materially affected the design or operation of our internal control over financial ~~reporting that occurred during the year ended December 31, 2021 that~~reporting. We have ~~materially affected, or are reasonably likely to materially affect,~~updated our internal control ~~over financial reporting.~~documentation in light of this organizational change.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13(a)-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, ~~2021.~~2023.

ITEM 9B. OTHER INFORMATION

~~None.~~During the three months ended December 31, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, modified or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act or any non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K).

ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not applicable.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Item 10 of Form 10-K is incorporated by reference from the information contained in the sections captioned “Directors and Executive Officers”, “Corporate Governance” and “Section ~~16(a~~16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement that will be delivered to our shareholders in connection with our June ~~15, 2022~~7, 2024 Annual Meeting of Shareholders.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 of Form 10-K is incorporated by reference from the information contained in the section captioned “Executive Compensation” in the Proxy Statement that will be delivered to our shareholders in connection with our June ~~15, 2022~~7, 2024 Annual Meeting of Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 of Form 10-K is incorporated by reference from the information contained in the section captioned “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in the Proxy Statement that will be delivered to our shareholders in connection with our June ~~15, 2022~~7, 2024 Annual Meeting of Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information, if any, required by Item 13 of Form 10-K is incorporated by reference from the information contained in the sections captioned “Corporate Governance” and “Certain Relationships and Related Transactions” in the Proxy Statement that will be delivered to our shareholders in connection with our June ~~15, 2022~~7, 2024 Annual Meeting of Shareholders.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 of Form 10-K is incorporated by reference from the information contained in the section captioned “Independent Accountants” in the Proxy Statement that will be delivered to our shareholders in connection with our June ~~15, 2022~~7, 2024 Annual Meeting of Shareholders.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

The following documents are filed as part of this report:

(a)

Financial Statements and Exhibits:


~~(a)~~	Page~~Financial Statements and Exhibits~~:

The exhibits listed below are filed with or incorporated by reference in this report.

Pursuant to the requirements of Section 13 or 15(d) 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.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 15th day of March ~~2022.~~2024.


Massachusetts	04-2911026
(State or Other Jurisdiction ofofc Incorporation or Organization)	(I.R.S. Employer Identification No.)


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


PART I

Item 1.		Business	3
Item 1A.		Risk Factors	8
Item 1B.		Unresolved Staff Comments	15
Item 2.		Properties	1516
Item 3.		Legal Proceedings	1516
Item 4.		Mine Safety Disclosures	1516

PART II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	1617
Item 6.		Reserved	17
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	1718
Item 8.		Financial Statements and Supplementary Data	2527
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	53
Item 9A.		Controls and Procedures	53
Item 9B.		Other Information	53
Item 9C.		Disclosure Regarding Foreign Jurisdictions that Prevent Inspections	53

PART III

Item 10.		Directors, Executive Officers and Corporate Governance	54
Item 11.		Executive Compensation	54
Item 12.	54
~~Item 12.~~		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	54
Item 13.		Certain Relationships and Related Transactions, and Director Independence	54
Item 14.		Principal Accountant Fees and Services	54

PART IV

Item 15.		Exhibits and Financial Statement Schedule	55

Signatures			58


Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		(d) Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs
October 1 through 31, 2023		22,530	$	1.49		22,530	$	8,224,068
November 1 through 30, 2023		5,259	$	1.55		5,259	$	8,182,412
December 1 through 31, 2023		—	$	—		—	$	8,182,412
Total		27,789	$	1.50		27,789


	Years ended December 31,
	2023			2022
Allowance for credit losses balance - beginning of year	$	188		$	74
Additions to the allowance for credit losses		37			156
Deductions against the allowance for credit losses		(52	)		(42	)
Allowance for credit losses balance - end of year	$	173		$	188


☒	Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



☐			Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


~~Building~~Leasehold improvements		3010 years
~~Building improvements~~Furniture and fixtures		5 ~~to 20~~ years
~~Furniture and fixtures~~		~~5 years~~
Computer and office equipment		3 years
Purchased software		3 years

	Goodwill
Balance as of December 31, 2019	$	—
Goodwill arising from AFIX acquisition		1,651
Balance as of December 31, 2020		1,651
Goodwill arising from FortressID acquisition		1,469
Balance as of December 31, 2021	$	3,120

	2021			2020
Land	$	1,056		$	1,056
							2023			2022
Building and improvements		9,166			9,166			162			146
Computer and office equipment		1,310			1,283			859			859
Purchased software		155			154			78			78
Furniture and fixtures		778			778			573			573
Total		12,465			12,437			1,672			1,656
Less accumulated depreciation		(9,249	)		(8,736	)		(1,093	)		(930	)
Property and equipment, net	$	3,216		$	3,701		$	579		$	726

Uncertain tax positions at December 31, 2019	$	1,008
Increase due to positions taken in prior periods		(206	)
Uncertain tax positions at December 31, 2020		802
Decrease due to positions taken in prior periods		0
Uncertain tax positions at December 31, 2021	$	802


	For the Year Ended December 31,
	2023		2022
Cost of services and other	$	20	$	21
Research and development		289		265
Selling and marketing		88		286
General and administrative		1,128		1,135
Stock-based compensation expense	$	1,525	$	1,707


	2023					2022
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding at beginning of year		2,560,000		$	4.96		3,240,000		$	4.97
Granted		-			-		-			-
Exercised		-			-		-			-
Forfeited or cancelled		(300,000	)		4.94		(680,000	)		5.00
Outstanding at end of year		2,260,000		$	4.88		2,560,000		$	4.96
Exercisable at year end		1,681,037		$	4.94		25,000		$	6.00


	For the Year Ended December 31,
	2023		2022
Operating lease costs	$	733	$	182


	As of December 31,
	2023			2022
Operating lease right-of-use assets	$	4,260		$	4,538

Current portion, operating lease liabilities		637			470
Operating lease liabilities, long term		3,838			4,047
Total operating lease liabilities	$	4,475		$	4,517

Weighted average remaining lease term (years)		9.3			10.3
Weighted average incremental borrowing rate		10.1	%		10.1	%

	~~Page~~
(1) Report of Independent Registered Public Accounting Firm ~~(PCAOB~~(PCAOB ID No. ~~49)~~49)	2527
Consolidated Balance Sheets as of December 31, ~~2021~~2023 and ~~2020~~2022	2829
Consolidated Statements of Operations and Comprehensive Loss for each of the two years in the period ended December 31, ~~2021~~2023	2930
Consolidated Statements of Cash Flows for each of the two years in the period ended December 31, ~~2021~~2023	3031
Consolidated Statements of Stockholders’ Equity for each of the two years in the period ended December 31, ~~2021~~2023	3132
Notes to Consolidated Financial Statements	3233


Exhibit No.		Description of 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).

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).

4.1†		Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (filed as Exhibit 4.1 to the Company’s Form 10-K for the year ended December 31, 2019 and incorporated herein by reference)

10.1*		2021 Employee Stock Purchase Plan, (filed as Annex A to the Company’s Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 9, 2021 and incorporated herein by reference).

10.2*		Form of Indemnification Agreement for Directors and Officers of Aware, Inc. (filed as Exhibit 10.1 to the Company's Form 8-K filed with the Securities and Exchange Commission on February 22, 2011 and incorporated herein by reference).

10.3*		2001 Nonqualified Stock Plan (filed as Exhibit 99(d)(4) to the Company’s Schedule TO filed with the Securities and Exchange Commission on March 3, 2003 and incorporated herein by reference).

10.4*		Form of Nonqualified Stock Option Agreement under the 2001 Nonqualified Stock Plan for options granted to executive officers and directors prior to May 21, 2008 (filed as Exhibit 10.6 to Company’s Form 10-K for the year ended December 31, 2006 and incorporated herein by reference).

10.5*		Form of Nonqualified Stock Option Agreement under the 2001 Nonqualified Stock Plan for options granted to executive officers and directors from and after May 21, 2008 (filed as Exhibit 10.8 to Company’s Form 8-K on May 22, 2008 and incorporated herein by reference)

10.6*		Form of Unrestricted Stock Award for outside directors of Aware under the 2001 Nonqualified Stock Plan (filed as Exhibit 10.1 to Company's Form 8-K filed with the Securities and Exchange Commission on July 28, 2010 and incorporated herein by reference).

10.7*		Form of Unrestricted Stock Award for officers of Aware under the 2001 Nonqualified Stock Plan (filed as Exhibit 10.2 to Company's Form 8-K filed with the Securities and Exchange Commission on July 28, 2010 and incorporated herein by reference).


10.8*		Form of Unrestricted Stock Award for executive officers and directors of Aware, Inc. under the 2001 Nonqualified Plan (filed as Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on April 4, 2013 and incorporated herein by reference).


10.9*		Form of Change in Control Retention Agreement between Aware, Inc. and Kevin T. Russell (filed as Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on March 30, 2015 and incorporated herein by reference).

10.10*		Form of Change in Control Retention Agreement between Aware, Inc. and David J. Martin (filed as Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on March 1, 2017 and incorporated herein by reference).

10.11*		Employment Agreement between Aware, Inc. and Robert A. Eckel (filed as Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on September 19, 2019 and incorporated herein by reference).

10.1210.10		Performance Share Award Agreement between Aware, Inc. and Robert A. Eckel (filed as Exhibit 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on September 19, 2019 and incorporated herein by reference).

10.1310.11		Employment Agreement between Aware, Inc. and Kevin T. Russell (filed as Exhibit 10.3 to the Company’s Form 8-K filed with the Securities and Exchange Commission on September 19, 2019 and incorporated herein by reference).

10.14*		Employment Agreement between Aware, Inc. and Robert M. Mungovan (filed as Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on October 1, 2019 and incorporated herein by reference).

10.12*		Amendment to Employment Agreement dated as of July 15, 2022, by and between Aware, Inc. and Robert Mungovan (filed as Exhibit 10.1 to the Company's Form 8-K filed with the Securities and Exchange Commission on July 20, 2022 and incorporated herein by reference).
10.15*
10.13*		Employment Agreement between Aware, Inc. and Mohamed Lazzouni (filed as Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 19, 2019 and incorporated herein by reference).

10.14*
10.16*		Employment Agreement between Aware, Inc. and David B. Barcelo dated May 4, 2020 (filed as Exhibit 10.1 to Aware, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2020 and incorporated herein by reference).

10.1710.15		Aware, Inc. ~~2020~~2022 Executive Bonus Plan ~~(filed as Exhibit 10.2~~(incorporated by reference to Item 5.02 of the Aware, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on ~~May 4, 2020~~March 1, 2022 and incorporated herein by reference).

10.16*
10.18*		Amendment to Employment Agreement between Aware, Inc. and Robert Eckel dated March 27, 2020 (filed as Exhibit 10.2 to Aware Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on March 30, 2020 and ~~incorporate~~incorporated herein by reference).

~~10.19~~10.17		~~Agreement of Purchase and Sale~~Lease dated as of ~~April 26, 2021~~March 1, 2022 by and between 76/80 Burlington Group, LLC and Aware, Inc. ~~and FDS Bedford, LLC~~ (filed as Exhibit ~~10.1~~10.20 to Aware Inc. ~~Current~~Annual Report on Form ~~8-l~~10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission ~~on April 27, 2021~~ and incorporated herein by ~~reference.~~reference).

10.18*		Employment Agreement between Aware, Inc. and ~~David B. Barcelo~~Craig Herman dated ~~May 4, 2020~~August 9, 2022. (filed as Exhibit 10.18 to Aware Inc. Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission and incorporated herein by reference).

10.19*		Aware, Inc. 2023 Equity and Incentive Plan (filed as Exhibit 10.1 to ~~Aware, Inc.~~the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on ~~May 4, 2020~~January 18, 2024 and incorporated herein by reference).

~~10.20~~		~~Lease dated as of March 1, 2021 by and between 76/80 Burlington Group, LLC and Aware, Inc.~~
10.20*		Form of Incentive Stock Option Agreement under the Aware, Inc. 2023 Equity and Incentive Plan (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2024 and incorporated herein by reference
~~21.1~~
10.21*		Form of Nonstatutory Stock Option Agreement under the Aware, Inc. 2023 Equity and Incentive Plan (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2024 and incorporated herein by reference).

10.22*		Form of Restricted Stock Unit Aware Agreement under the Aware, Inc. 2023 Equity and Incentive Plan (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2024 and incorporated herein by reference).

10.23*		Letter Agreement dated November 13, 2023 between Aware, Inc. and David Barcelo (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 15, 2023 and incorporated herein by reference).



21.1		Subsidiaries of Registrant.

23.1		Consent of Independent Registered Public Accounting Firm.

~~31.2~~31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer and ~~Chief~~Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~101~~97.1		Aware Inc. Compensation Recovery Policy.

101		The following financial statements from Aware, Inc.’s Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2023, formatted in inline XBRL (eXtensible Business Reporting Language), as follows: (i) Consolidated Balance Sheets as of December 31, ~~2021~~2023 and December 31, ~~2020;~~2022; (ii) Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, ~~2021~~2023 and December 31, ~~2020;~~2022; (iii) Consolidated Statements of Cash Flows for the Years Ended December 31, ~~2021~~2023 and December 31, ~~2020;~~2022; (iv) Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, ~~2021~~2023 and December 31, ~~2020;~~2022 and (v) Notes to Consolidated Financial Statements.


AWARE, INC.

By:		/s/ Robert A. Eckel
		Robert A. Eckel
		Chief Executive Officer & President


By:		/s/ David ~~Barcelo~~K. Traverse
		David ~~Barcelo~~K. Traverse
		~~Chief~~Principal Financial Officer ~~(Principal Financial and Accounting Officer)~~
		Date: March 15, ~~2022~~2024


Signature		Title

/s/ Robert A. Eckel		Chief Executive Officer, President & Director
Robert A. Eckel		(Principal Executive Officer)

/s/ David ~~Barcelo~~K. Traverse		~~Chief~~Principal Financial Officer
David ~~Barcelo~~K. Traverse		(Principal Financial ~~and Accounting~~ Officer)


/s/ Brent P. Johnstone		Chairman of the Board & Director
Brent P. Johnstone

/s/ John S. Stafford, III		Director
John S. Stafford, III


/s/ Brian D. Connolly		Director
Brian D. Connolly
/s/ Gary Evee		Director
Gary Evee /s/ Peter Faubert		Director
Peter Faubert