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What changed in AWARE INC /MA/'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of AWARE INC /MA/'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+141 added−122 removedSource: 10-K (2024-03-15) vs 10-K (2023-03-15)

Top changes in AWARE INC /MA/'s 2023 10-K

141 paragraphs added · 122 removed · 105 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeWe 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.
Biggest changeIf 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. Employees As of December 31, 2023, we employed 73 people, all based in the U.S. including 39 in engineering and research, 22 in sales and marketing, and 12 in finance and administration.
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. 7
The SEC also maintains a website, www.sec.gov, that contains reports and other information regarding issuers that file electronically with the SEC. 7 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.
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.
Utilizing distributed computing, AwareABIS also enables complex filtering, and linking operations critical to data preparation and quality assurance functions, such as identity resolution and data deduplication of massive biometric databases (tens of millions of records). The platform is built upon several mature, high-performance, field-proven applications and algorithms from Aware.
Competitive Business Conditions A significant number of established companies have developed or are developing and marketing software and hardware for biometrics products and applications that currently compete with or will compete directly with our offerings. We believe that additional competitors will enter the biometrics market and become significant long-term competitors, and that, as a result, competition will increase.
Competitive Business Conditions A significant number of established companies have developed or are developing and marketing software and hardware for biometrics products and applications that currently compete with or will compete directly with our offerings. We believe that additional competitors will enter the biometrics market and become significant long-term 6 competitors, and that, as a result, competition will increase.
Imaging products 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.
Imaging products 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 5 Photographic Experts Group committee in 2000.
This group of competitors includes companies such as Idemia, Thales, and NEC. 6 • Component providers that offer biometrics software and hardware components for fingerprint, facial, iris and voice biometric identification. This group of competitors includes companies such as FaceTec, iProov, and Innovatrics. We expect competition to intensify in the near term in the biometrics market.
This group of competitors includes companies such as Idemia, Thales, and NEC. • Component providers that offer biometrics software and hardware components for fingerprint, facial, iris and voice biometric identification. This group of competitors includes companies such as FaceTec, iProov, and Innovatrics. We expect competition to intensify in the near term in the biometrics market.
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 5 they become available.
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.
ITEM 1. BUSINESS Company Overview Aware, Inc. (“Aware”, “we”, “us”, “our”, or the “Company”) is a leading, global authentication company that validates and secures identities using proven and trusted adaptive biometrics. Aware’s software offerings address the growing challenges that government and commercial enterprises face in knowing, authenticating and securing individuals through frictionless and highly secure user experiences.
ITEM 1. BUSINESS Company Overview Aware, Inc. (“Aware”, “we”, “us”, “our”, or the “Company”) is a leading, biometric identity platform company that validates and secures identities using proven and trusted adaptive biometrics. Aware’s 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.
AwareABIS has primarily been sold as perpetual license and is also available as a fixed term license that is priced on a subscription-based model or the size of the biometric system. AFIX Suite of Products Aware’s AFIX suite of products is used for small-scale law enforcement focused biometric identification.
AwareABIS has primarily been sold as a fixed term license that is priced based on the size of the biometric system or on a subscription-based model. AFIX Suite of Products Aware’s AFIX suite of products is used for small-scale law enforcement focused biometric identification.
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 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.
As of December 31, 2022, we had approximately 79 U.S. and foreign patents and approximately 8 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.
As of December 31, 2023, we had 76 U.S. patents and 4 foreign patents and approximately 7 pending patent applications. Our patents and patent applications pertain primarily to biometrics and imaging compression. We have let certain patents expire that are not aligned with our business and are not relevant to our current or future activities.
Aware’s algorithms are based on the most diverse data sets in the world and can be tailored to the unique security and requirements of each customer.
Aware’s algorithms are based on diverse data sets from around the world and can be tailored to the unique security and requirements of each customer.
BioSP™ - Biometric Services Platform BioSP is a service-oriented platform used to enable a biometric system with advanced biometric data processing and management functionality in a web services architecture. It provides workflow, data management and formatting, and other important utilities for large-scale fingerprint recognition, face recognition, and iris recognition systems.
BioSP™ - Biometric Services Platform BioSP is a biometric integration platform-as-a-service ("iPaaS") used to enable biometric data processing and management functionality in a web services architecture. It provides workflow, data management and formatting, and other important utilities for large-scale fingerprint recognition, face recognition, and iris recognition systems.
With the introduction of AwareID, we have incorporated SaaS offerings into our product line-up. While we did not recognize material revenues from our SaaS offerings during 2022, we expect SaaS to become a significant product offering moving forward.
Historically, we sold our software products under perpetual or fixed-term licenses. With the introduction of AwareID, we have incorporated SaaS offerings into our product line-up. While we did not recognize material revenues from our SaaS offerings during 2022 and 2023, we continue to invest in and we expect SaaS to become a significant product offering moving forward.
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.
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.
Enrollment, analysis, and processing of biometric images and identity data on workstations. 3. Image compression 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.
These building blocks enable important functions including: 1. Matching of biometric samples against biometric databases. 2. Enrollment, analysis, and processing of biometric images and identity data on workstations. 3. Image compression 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.
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.
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.
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.
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.
The platform uses proprietary Adaptive Authentication technology in cloud-based bundles which can be pre-configured and configured by the 4 customer to provide comprehensive authentication functionality with situational awareness for onboarding, access control/management, and authentication of transactions. These services can be used discretely to enhance investments already in place or combined to provide higher functionality.
AwareID continues to leverage Knomi to provide biometric face and voice matching (1:1 and 1:N), liveness-verification (presentation attack detection), and document validation. The platform uses proprietary Adaptive Authentication technology in cloud-based bundles which can be pre-configured and/or configured by the customer to provide comprehensive authentication functionality with situational awareness for onboarding, access control/management, and authentication of transactions.
BioSP has primarily been sold as a perpetual license and is also available as a fixed term license that is priced on users, transactions, or enterprise wide.
BioSP 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 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.
Major Customers All of our revenue in 2022 and 2021 was derived from unaffiliated customers. No customer represented 10% or more of total revenue in either 2022 or 2021. As of December 31, 2022 and 2021, two customers combined for 37% and 32%, respectively, of our net accounts receivable and unbilled receivables.
Major Customers All of our revenue in 2023 and 2022 was derived from unaffiliated customers. One customer represented 17% of total revenue in 2023 and no customer represented 10% or more of total revenue in 2022.
Leveraging Aware’s Astra™ and BioSP™ products, AwareABIS is a highly scalable platform that performs one-to-many search or one-to-one match against large stores of biometrics and other identity data.
AwareABIS™ AwareABIS is an automated biometric identification system (“ABIS”) used for large-scale biometric identification and deduplication using fingerprint, face, and iris recognition. AwareABIS is a highly scalable platform that performs one-to-many ("1:N") search or one-to-one ("1:1") match against large stores of biometrics and other identity data.
Software products We sell a broad range of software components, or “building blocks”, such as SDKs, APIs, and applications that customers use to streamline or develop their systems into more effective solutions. These building blocks enable important functions including: 1. Matching of biometric samples against biometric databases. 2.
AwareID is typically provided as a SaaS offering with usage-based or transaction-based pricing, however it is also available on-premises when leveraging Knomi SDKs. Software products We sell a broad range of software components, or “building blocks”, such as SDKs, APIs, and applications that customers use to streamline or develop their systems into more effective solutions.
Knomi has primarily been sold as a fixed term license that is priced on a subscription-based model and is also available as a perpetual license . AwareABIS™ Platform AwareABIS is an Automated Biometric Identification System (“ABIS”) used for large-scale biometric identification and deduplication using fingerprint, face, and iris recognition.
Knomi has primarily been sold as a fixed term license that is priced on a subscription-based model and is also available as a perpetual license. Going forward we plan to transition the Knomi offering to within the AwareID offering.
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.
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.
The AwareID platform is built on open architecture and interfaces to maximize interoperability and connection to other biometric and/or digital identity applications and platforms. AwareID is provided as a SaaS offering with usage-based pricing. This wider SaaS offering includes the solutions formerly referred to as Indigo ™ and FortressID ™ .
These services can be used discretely to enhance investments already in place or combined to provide higher functionality. The AwareID solution is built on open architecture and interfaces to maximize interoperability and connection to other biometric and/or digital identity applications and platforms.
Employees As of December 31, 2022, we employed 82 people, all based in the U.S, including 46 in engineering and research, 24 in sales and marketing, and 12 in finance and administration. Of these employees, 64 were based in Massachusetts and 18 were based outside of Massachusetts. None of our employees are represented by a labor union.
Of these employees, 54 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.
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AFIX Tracker™ supports fingerprint, palmprint and latent print identification, designed to serve between 15,000 and 2 million identities. 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.
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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).
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BioSP™ Biometric Services Platform - WebEnroll WebEnroll is a browser-based biometric enrollment and data management solution available as an enhanced version of BioSP™ that utilizes BioComponents™ for capture of biographic data, fingerprints and facial images in a browser. Each BioComponent performs advanced biometric image autocapture as well as capture device hardware abstraction.
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In addition to AFIX Tracker we also sell and offer AFIX Face, AFIX Verifier, AFIX Identifier, AFIX Comparator, AFIX Engine, and ANTE (AFIX NIST Transaction Engine). AFIX Tracker is ideal for crime scene investigation applications in low to moderate sized community populations.
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AwareID™ AwareID ™ is our new Software-as-a-Service (“SaaS) offering that is used for Aware’s adaptive authentication platform of cloud-based biometric application programming interfaces (“APIs”) and turnkey services. AwareID provides biometric face and voice analysis for liveness-verification, and document validation.
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WebEnroll has primarily been sold as a perpetual license and is also available as a fixed term license that is priced on users, transactions, or enterprise wide. 4 AwareID™ AwareID ™ is a Software-as-a-Service (SaaS) offering that provides advanced identity verification and continuous authentication capabilities. Its modular design ensures flexibility and extensibility across various industries.
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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.
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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.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeIndividual orders can represent a meaningful percentage of our revenues and operating results in any single 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.
Biggest changeITEM 1A. Ri sk Factors 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 period and the timing of the receipt of those orders is difficult to predict.
Among the factors that could adversely affect our business are: 8 • changes in fiscal policies or decreases in available government funding, • changes in government funding priorities; • changes in government programs or applicable requirements; • the adoption of new laws or regulations or changes to existing laws or regulations relating to the provision of biometrics services or the use of biometric data; • changes in political or social attitudes with respect to security and defense issues; • changes in audit policies and procedures of government entities; • potential delays or changes in the government appropriations process; and • delays in the payment of our invoices by government payment offices.
Among the factors that could adversely affect our business are: • changes in fiscal policies or decreases in available government funding, • changes in government funding priorities; • changes in government programs or applicable requirements; 8 • the adoption of new laws or regulations or changes to existing laws or regulations relating to the provision of biometrics services or the use of biometric data; • changes in political or social attitudes with respect to security and defense issues; • changes in audit policies and procedures of government entities; • potential delays or changes in the government appropriations process; and • delays in the payment of our invoices by government payment offices.
The risk and difficulties associated with acquiring and integrating companies and other assets include, among others, difficulties assimilating the operations and personnel of acquired 13 companies, challenges in realizing the value of the acquired assets relative to the price paid, distraction of management from our ongoing businesses and potential product disruptions associated with the sale of the acquired company’s products.
The risk and difficulties associated with acquiring and integrating companies and other assets include, among others, difficulties assimilating the operations and personnel of acquired companies, challenges in realizing the value of the acquired assets relative to the price paid, distraction of management from our ongoing businesses and potential product disruptions associated with 13 the sale of the acquired company’s products.
The expansion of the biometrics market and the market for our biometrics products and services depends on a number of factors, such as: • the cost, performance and reliability of our products and services and the products and services offered by our competitors; • the continued growth in demand for biometrics solutions within the government and law enforcement markets, as well as the development and growth of demand for biometric solutions in markets outside of government and law enforcement; • customers’ perceptions regarding the benefits of biometrics solutions; • public perceptions regarding the intrusiveness of these solutions and the manner in which organizations use the biometric information collected; • public perceptions regarding the confidentiality of private information; • proposed or enacted legislation related to privacy of biometric information; • customers’ satisfaction with biometrics solutions; and • marketing efforts and publicity regarding biometrics solutions.
The expansion of the biometrics market and the market for our biometrics products and services depends on a number of factors, such as: 9 • the cost, performance and reliability of our products and services and the products and services offered by our competitors; • the continued growth in demand for biometrics solutions within the government and law enforcement markets, as well as the development and growth of demand for biometric solutions in markets outside of government and law enforcement; • customers’ perceptions regarding the benefits of biometrics solutions; • public perceptions regarding the intrusiveness of these solutions and the manner in which organizations use the biometric information collected; • public perceptions regarding the confidentiality of private information; • proposed or enacted legislation related to privacy of biometric information; • customers’ satisfaction with biometrics solutions; and • marketing efforts and publicity regarding biometrics solutions.
The occurrence of any of the following events could have a material adverse effect on our business, financial condition and operating results: • a reduction in sales efforts by our partners; • the failure of our partners to win government awards in which our products are used; • a reduction in technical capabilities or financial viability of our partners; • a misalignment of interest between us and any of our partners; • the termination of our relationship with a major systems integrator or OEM; or • any adverse effect on a partner’s business related to competition, pricing or other factors.
The occurrence of any of the following events could have a material adverse effect on our business, financial condition and operating results: • a reduction in sales efforts by our partners; • the failure of our partners to win awards in which our products are used; • a reduction in technical capabilities or financial viability of our partners; • a misalignment of interest between us and any of our partners; • the termination of our relationship with a major systems integrator or OEM; or • any adverse effect on a partner’s business related to competition, pricing or other factors.
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.
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. 10 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.
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, we cannot predict the timing, duration, or severity. We may not realize the anticipated benefits of our acquisitions.
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, we cannot predict the timing, duration, or severity. We may not realize the anticipated benefits of our acquisitions or investments.
Because companies are generally predisposed to maintaining control of their IT systems and infrastructure, 11 there may be resistance to the concept of accessing the functionality that software provides as a service through a third party.
Because companies are generally predisposed to maintaining control of their IT systems and infrastructure, there may be resistance to the concept of accessing the functionality that software provides as a service through a third party.
Frequently, technical development programs in the biometrics industry require assessments to be made of the future 10 direction of technology, which is inherently difficult to predict.
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.
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.
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.
Our financial results may be negatively affected by a number of factors, including the following: • any lack or reduction of government funding and the political, budgetary and purchasing constraints of government customers who purchase products and services directly or indirectly from us; • the terms of customer contracts that affect the timing of revenue recognition; • the size and timing of our receipt of customer orders; • significant fluctuations in demand for our products and services; • any loss of a key customer or one of its key customers; • new competitors entering our markets, or the introduction of enhanced solutions from new or existing competitors; • competitive pressures on selling prices; • any cancellations, or delays of orders or contract amendments by government customers; • higher than expected costs, asset write-offs, and other one-time financial charges; and • general economic trends and other factors.
Our financial results may be negatively affected by a number of factors as well, including the following: • write-offs of investments in private companies; • any lack or reduction of government funding and the political, budgetary and purchasing constraints of government customers who purchase products and services directly or indirectly from us; • the terms of customer contracts that affect the timing of revenue recognition; • the size and timing of our receipt of customer orders; • significant fluctuations in demand for our products and services; • any loss of a key customer or one of its key customers; • new competitors entering our markets, or the introduction of enhanced solutions from new or existing competitors; • competitive pressures on selling prices; • any cancellations, or delays of orders or contract amendments by government customers; • higher than expected costs, asset write-offs, and other one-time financial charges; and • general economic trends and other factors.
As a result of these factors, we believe that period-to-period comparisons of our revenue levels and operating results are not necessarily meaningful. You should not rely on our quarterly revenue and operating results to predict our future performance.
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.
The most significant estimates included in the financial statements pertain 14 to revenue recognition, reserves for doubtful accounts, valuation of acquired assets and assumed liabilities in business combinations, valuation of contingent acquisition payments, valuation of investment in note receivable, goodwill and long-lived asset impairment and valuation allowance for deferred income tax assets. Actual results could differ from those estimates.
The most significant estimates included in the financial statements pertain to revenue recognition, allowance for credit losses, valuation of acquired assets and assumed liabilities in business 14 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.
Unfavorable changes in economic conditions, including recessions, inflation, turmoil in financial markets, changes caused by global crisis such as the COVID-19 pandemic, the ongoing conflict between Russia and Ukraine and resulting economic sanctions, the Taliban’s takeover of Afghanistan, or other changes in economic conditions, could harm our business, results of operations, and financial conditions as a result of: • reduced demand for our products; • increased risk of order cancellations or delays; • increased pressure on the prices for our products; • greater difficulty in collecting accounts receivable; • risks to our liquidity, including the possibility that we might not have access to our cash when needed; and • rising interest rates, recessionary cycles, and inflationary pressures, that could make our products more expensive or could increase our costs.
Unfavorable changes in economic conditions, including recessions, inflation, turmoil in financial markets, changes caused by global crisis such as a pandemic, the ongoing conflict between Russia and Ukraine and resulting economic sanctions, conflicts in the Middle East, or other changes in economic conditions, could harm our business, results of operations, and financial conditions as a result of: • reduced demand for our products; • increased risk of order cancellations or delays; • increased pressure on the prices for our products; • greater difficulty in collecting accounts receivable; • risks to our liquidity, including the possibility that we might not have access to our cash when needed; and • rising interest rates, recessionary cycles, and inflationary pressures, that could make our products more expensive or could increase our costs. • health epidemics, impacting the markets and communities in which we, our partners and clients operate.
We may make acquisitions of companies that offer complementary products, services, and technologies such as our acquisitions of FortressID in December of 2021 and AFIX in November of 2020.
We may make acquisitions of or investments in companies that offer complementary products, services, and technologies, such as our acquisition of FortressID in December of 2021 and our investment in Omlis Limited.
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.
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.
These arrangements can impact or restrict integration of acquired businesses and can result in disputes, including litigation. Additionally, regardless of the form of consideration we pay, acquisitions and investments could negatively impact our net income and earnings per share. We may have additional tax liabilities. We are subject to income taxes in the United States.
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, acquisitions and investments could negatively impact our operations and earnings per share. We may have additional tax liabilities.
Our revenues are derived primarily from sales of biometrics products and services. Our expectations regarding the future growth rate or the size of the biometrics market may not be accurate.
Our expectations regarding the future growth rate or the size of the biometrics market may not be accurate.
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.
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.
Our operational systems, networks and products are subject to continually evolving cybersecurity or other technological risks, which could result in the disclosure of our or our customers' confidential information, damage to our reputation, additional costs, regulatory penalties and financial losses.
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. 11 Our operational systems, networks and products are subject to continually evolving cybersecurity or other technological risks, which could result in the disclosure of our or our customers' confidential information, damage to our reputation, additional costs, regulatory penalties and financial losses.
Moreover, even if there is significant demand, there can be no assurance that our biometrics products will achieve market acceptance. 9 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.
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.
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.
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.
For these reasons, we are uncertain whether there will be significant demand for biometrics technology from commercial markets.
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 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.
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. Our business may be affected by government laws and regulations.
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.
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.
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ITEM 1A. Ri sk Factors Actual or threatened public health emergencies could harm our business. Our business and operations could be adversely affected by health epidemics, including the current COVID-19 pandemic, impacting the markets and communities in which we, our partners and clients operate.
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Our employment 12 relationships are at-will and we have had key employees leave in the past. We cannot assure you that one or more key employees will not leave in the future.
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The COVID-19 pandemic has caused significant disruption to the business and financial markets, and there remains uncertainty about the duration of this disruption on both a nationwide and global level, as well as the ongoing effect on our business.
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The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are uncertain and unpredictable. We continue to monitor the COVID-19 situation and potential effects on our business and operations.
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While the spread and impact of COVID-19 has stabilized, there is no guarantee that a future outbreak of this or any other widespread epidemics will not occur. Our operating results may fluctuate significantly from period-to-period and are difficult to predict.
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If the market for cloud-based, software solutions ceases to grow or grows slower than we currently anticipate, demand for our services could be negatively affected.
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If 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. 12 If we are unable to attract and retain key personnel, our business could be harmed.
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Any failure to attract, integrate, motivate and retain these employees could harm our business. Our business may be affected by government laws and regulations. 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.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeITEM 2. PROPERTIES We lease approximately 20,730 rentable square feet in Burlington, Massachusetts, which we use as our headquarters. We believe that this facility is adequate for our current needs and for the foreseeable future. See Note 10 to our audited financial statements included elsewhere in this Annual Report on Form 10-K for more information regarding our leases.
Biggest changeITEM 2. PROPERTIES We lease approximately 20,730 rentable square feet in Burlington, Massachusetts, which we use as our headquarters. We believe that this facility is adequate for our current needs and for the foreseeable future. See Note 9 to our audited financial statements included elsewhere in this Annual Report on Form 10-K for more information regarding our leases.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeITEM 3. LEGA L PROCEEDINGS From time to time, we are involved in litigation incidental to the conduct of our business. We are not party to any lawsuit or proceeding that, in our opinion, is likely to materially impact us or our business. ITEM 4. MINE SAF ETY DISCLOSURES Not applicable. 15 PART II
Biggest changeITEM 3. LEGA L PROCEEDINGS From time to time, we are involved in litigation incidental to the conduct of our business. We are not party to any lawsuit or proceeding that, in our opinion, is likely to materially impact us or our business. ITEM 4. MINE SAF ETY DISCLOSURES Not applicable. 16 PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeIssuer Purchases of Equity Securities 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, 2022 90,144 $ 1.82 90,144 9,571,921 November 1 through 30, 2022 397,671 $ 1.81 397,671 9,407,859 December 1 through 31, 2022 140,825 $ 1.90 140,825 $ 8,688,074 Total 628,640 $ 1.83 628,640 On March 3, 2022, we announced that our board of directors had approved the repurchase of up to $10,000,000 of our common stock from time to time through December 31, 2023.
Biggest changeShare repurchase activity during the three months ended December 31, 2023 was as follows: Issuer Purchases of Equity Securities 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 (1) All reported purchases were made pursuant to a repurchase plan announced by the Company on March 22, 2022 (the “2022 Repurchase Plan”).
This number does not include shareholders who hold our shares in a “nominee” or “street” name. We paid no dividends in 2022 or 2021. 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 of directors deems it appropriate.
This number does not include shareholders who hold our shares in a “nominee” or “street” name. We paid no dividends in 2023 or 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 of Directors deems it appropriate.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STO CKHOLDER 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, 2023, we had approximately 75 shareholders of record.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STO CKHOLDER 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, 2024, we had approximately 64 shareholders of record.
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Pursuant to the 2022 Repurchase Plan, the Company was authorized to repurchase up to $10,000,000 of its common stock from time to time through December 31, 2023. 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 6. [RESERVED] 17

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeCash used in operating activities was $6.2 million in 2021. Cash used by operations was primarily the result of $5.8 million of net loss plus the impact of $2.3 million of changes in assets and liabilities, partially offset by the add back of $1.6 million of non-cash stock-based compensation and $0.7 million for non-cash depreciation and amortization.
Biggest changeCash 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 21 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.
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.
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. 22 To date, inflation has not had a material impact on our financial results.
Gain on sale of fixed assets In July 2022, we sold our corporate headquarters in Bedford, MA for total proceeds of $8.9 million less a brokerage commission of $0.3 million. At the time of the sale, we disposed of all building and land related assets. The net 19 book value of all assets disposed of was $2.9 million.
Gain on sale of fixed assets In July 2022, we sold our corporate headquarters in Bedford, MA for total proceeds of $8.9 million less a brokerage commission of $0.3 million. At the time of the sale, we disposed of all building and land related assets. The net book value of all assets disposed of was $2.9 million.
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.
Revenue for the 23 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.
See Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information on our operating lease.
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.
Our revenue arrangements are typically accounted for under such expedient, as payment is typically due within 30 to 60 days. As of December 31, 2022 and 2021, 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.
Our revenue arrangements are typically accounted for under such expedient, as payment is typically due within 30 to 60 days. As of December 31, 2023 and 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.
Cash used by operations was primarily the result of $1.7 million of net loss plus the impact of a $5.7 million gain on the sale of fixed assets, which was partially offset by the add back of $1.7 million of non-cash stock-based compensation and $0.8 million for non-cash depreciation and amortization. Year ended December 31, 2021.
Cash used by operations was primarily the result of $1.7 million of net loss plus the impact of a $5.7 million gain on the sale of fixed assets, which was partially offset by the add back of $1.7 million of non-cash stock-based compensation and $0.8 million for non-cash depreciation and amortization.
As of December 31, 2022, 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 $0.5 million in 2023 and $0.7 million in each of 2024, 2025, 2026 and 2027, and $4.2 million thereafter.
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.
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.
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.
Investing activity cash used of $12.0 million was primarily the result of $17.3 million net purchases of marketable securities, a $2.5 million investment in a note receivable, and $0.7 million of purchases of property and equipment, partially offset by $8.5 million in proceeds from the sale of our former corporate headquarters. Year ended December 31, 2021.
Investing activity cash used of $12.0 million was primarily the result of $17.3 million of net purchases of marketable securities, a $2.5 million investment in the Note, and $0.7 million of purchases of property and equipment, which was partially offset by $8.5 million in proceeds from the sale of our former corporate headquarters.
Cash flows from investing activities A discussion of cash flow from investing activities for each of the last two years is as follows: Year ended December 31, 2022.
Cash flows from financing activities A discussion of cash flow from financing activities for each of the last two years is as follows: Year ended December 31, 2023.
Summary of Financial Results 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. 2022 compared to 2021 Revenue and operating loss in 2022 were $16.0 million and $2.2 million, respectively, which compared to revenue and operating loss in 2021 of $16.9 million and $6.1 million, respectively.
Summary of Financial Results 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. 2023 compared to 2022 Revenue and operating loss in 2023 were $18.2 million and $8.5 million, respectively, which compared to revenue and operating loss in 2022 of $16.0 million and $2.2 million, respectively.
We recorded a net gain on the sale of fixed assets of $5.7 million for the year ended December 31, 2022. Interest Income Interest income increased from four thousand dollars in 2021 to $0.5 million in 2022.
We recorded a net gain on the sale of fixed assets of $5.7 million for the year ended December 31, 2022. Interest Income Interest income increased from $0.5 million in 2022 to $1.3 million in 2023.
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. We make judgments as to our ability to collect outstanding and unbilled receivables and provide allowances for receivables when collection becomes doubtful.
Should evidence regarding the realizability of tax assets change at a future point in time, the valuation allowance will be adjusted accordingly. Allowance for credit losses. We make judgments as to our ability to collect outstanding and unbilled receivables to reflect any estimated credit losses.
Cash flows from operating activities A discussion of cash flow from operating activities for each of the last two years is as follows: Year ended December 31, 2022. Cash used in operating activities was $5.0 million in 2022.
Cash flows from operating activities A discussion of cash flow from operating activities for each of the last two years is as follows: Year ended December 31, 2023. Cash provided by operating activities was $1.8 million in 2023.
As of December 31, 2022, we had a total of $11.1 million of deferred tax assets for which we have recorded a $11.1 million valuation allowance. 23 We will continue to assess the level of valuation allowance required in future periods.
As of December 31, 2023, we had a total of $13.0 million of deferred tax assets and $0.5 million of deferred tax liabilities for which we have recorded a $12.5 million valuation allowance. We will continue to assess the level of valuation allowance required in future periods.
As of December 31, 2022, we had $3.1 million of goodwill and $2.8 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. Stock-Based Compensation. We grant stock and stock options to our employees and directors.
As of December 31, 2023, we had $3.1 million of goodwill and $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.
Cost of Services and Other Revenue 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.
Such costs primarily include: i) engineering salaries, stock-based compensation, fringe benefits, and facilities; ii) engineering consultants and contractors; iii) software license fees; and iv) hardware costs. Cost of services and other revenue was $1.3 million in 2023 and 2022.
The dollar increase in cost of services and other revenue was primarily due to due to higher payroll related costs. 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 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.
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 decreased 7% from $8.0 million in 2021 to $7.4 million in 2022.
Software License Revenue 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.
Services and Other Revenue Services revenue consists of fees we charge to perform software development, integration, installation, and customization services. Similar to software license revenue, services revenue depends on our ability to win biometrics systems projects either directly with end user customers or in conjunction with channel partners.
Similar to software license revenue, services revenue depends on our ability to win biometrics systems projects either directly with end user customers or in conjunction with channel partners. Other revenue consists of hardware fees that are included with some of our software licenses.
At December 31, 2022, we had cash, cash equivalents, and marketable securities of $29.0 million.
At December 31, 2023, we had cash, cash equivalents, and marketable securities of $30.9 million.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, Revenue: 2022 2021 Software licenses 46 % 47 % Software maintenance 45 40 Services and other 9 13 Total revenue 100 100 Costs and expenses: Cost of services and other 8 7 Research and development 58 55 Selling and marketing 43 38 General and administrative 40 37 Gain on sale of fixed assets (35 ) - Total costs and expenses 114 137 Operating loss (14 ) (37 ) Interest and other income 3 - Loss before provision for (benefit from) income taxes (11 ) (37 ) Provision for (benefit from) income taxes 0 (2 ) Net loss (11 %) (35 %) Summary of Operations We are primarily engaged in the development and sale of biometrics products, solutions and services.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, Revenue: 2023 2022 Software licenses 52 % 46 % Software maintenance 42 45 Services and other 6 9 Total revenue 100 100 Costs and expenses: Cost of services and other 7 8 Research and development 50 57 Selling and marketing 43 43 General and administrative 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 147 112 Operating loss (47 ) (12 ) Interest and other income 7 3 Loss before provision for income taxes (40 ) (9 ) Provision for income taxes - - Net loss (40 %) (9 %) Summary of Operations We are primarily engaged in the development and sale of biometrics products, solutions and services.
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 income taxes for the years ended December 31, 2022 and 2021 follows: Year ended December 31, 2022 .
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. Total income tax expense for the years ended December 31, 2023 and 2022 was $59 thousand and $49 thousand, respectively.
Lower revenue in 2022 as compared to 2021 was primarily due to decreases in revenue from our perpetual software licenses of $0.8 million and services and other of $0.7 million, which was partially offset by increases in software maintenance revenue of $0.4 million and revenue from subscription-based licenses of $0.2 million.
Higher revenue in 2023 as compared to 2022 was primarily due to increases in revenue from our perpetual software licenses of $1.4 million, software subscriptions of $0.7 million and software maintenance of $0.6 million, which was partially offset by a decrease in services and other revenue of $0.5 million.
Provisions are made based upon a specific review of all significant outstanding receivables. If the judgments we make to determine the allowance for doubtful accounts do not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be required. RECENT ACCOUNTING PRONOUNCEMENTS Recent Accounting Pronouncements.
If the judgments we make to determine the allowance for credit losses do not reflect the future ability to collect outstanding receivables, additional provisions for credit losses may be required. RECENT ACCOUNTING PRONOUNCEMENTS Recent Accounting Pronouncements.
To achieve that core principle, we apply the following five step model: 1. Identify the contract with the customer; 2. Identify the performance obligations in the contract; 3. Determine the transaction price; 4. Allocate the transaction price to the performance obligations in the contract; and 5. Recognize revenue when (or as) each performance obligation is satisfied.
Identify the contract with the customer; 2. Identify the performance obligations in the contract; 3. Determine the transaction price; 4. Allocate the transaction price to the performance obligations in the contract; and 5. Recognize revenue when (or as) each performance obligation is satisfied. We categorize revenue as software licenses, software maintenance, or services and other revenue.
Investing activity cash usage of $2.5 million was primarily the result of $2.5 million used in connection with our acquisition of FortressID. Cash flows from financing activities A discussion of cash flow from financing activities for each of the last two years is as follows: 20 Year ended December 31, 2022.
Cash flows from investing activities A discussion of cash flow from investing activities for each of the last two years is as follows: Year ended December 31, 2023. Investing activity cash used of $3.1 million was primarily the result of net purchases of marketable securities. Year ended December 31, 2022.
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. 22 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.
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.
Other revenue consists of hardware fees that are included with some of our software license. 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 decreased 31% from $2.2 million in 2021 to $1.5 million in 2022.
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 decreased 31% from $1.5 million in 2022 to $1.0 million in 2023. As a percentage of total revenue, services and other revenue decreased from 9% in 2022 to 6% in 2023.
In addition, ASC 606 requires disclosures of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. 21 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.
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: 1.
Research and Development Expense Research and development expense consists of costs for: i) engineering personnel, including salaries, stock-based compensation, fringe benefits, and facilities; ii) engineering consultants and contractors, and iii) other engineering expenses such as supplies, equipment depreciation, dues and memberships and travel. Engineering costs incurred to develop our technology and products are classified as research and development expense.
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. 19 Research and Development Expense Research and development expense consists of costs for: i) engineering personnel, including salaries, stock-based compensation, fringe benefits, and facilities; ii) engineering consultants and contractors, and iii) other engineering expenses such as supplies, equipment depreciation, dues and memberships and travel.
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. 18 The classification of total engineering costs to research and development expense and cost of services for the years ended December 31, 2022 and 2021 was (in thousands): Years ended December 31, 2022 2021 Research and development expense $ 9,234 $ 9,259 Cost of services and other 1,260 1,210 Total engineering costs $ 10,494 $ 10,469 Total engineering costs were $10.5 million in both 2021 and 2022.
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): Years ended December 31, 2023 2022 Research and development expense $ 9,124 $ 9,234 Cost of services and other 1,273 1,260 Total engineering costs $ 10,397 $ 10,494 Total engineering costs decreased 1% from $10.5 million in 2022 to $10.4 million in 2023.
We expect research and development expenses to increase in absolute dollars, but to decrease as a percentage of net revenues. Selling and Marketing Expense Selling and marketing expense primarily consists of costs for: i) sales and marketing personnel, including salaries, sales commissions, stock-based compensation, fringe benefits, travel, and facilities; and ii) advertising and promotion expenses.
Selling and Marketing Expense Selling and marketing expense primarily consists of costs for: i) sales and marketing personnel, including salaries, sales commissions, stock-based compensation, fringe benefits, travel, and facilities; and ii) advertising and promotion expenses. Selling and marketing expense increased 14% from $7.0 million in 2022 to $8.0 million in 2023.
Lower operating loss in 2022 as compared 2021 was primarily due to a $5.7 million gain we recorded related to the sale of our corporate office, which was partially offset by a decrease in revenue of $0.8 million, increased sales and marketing expense of $0.6 million and increased general and administrative expense of $0.3 million. 17 Software License Revenue Software license revenue consists of revenue from the sale of biometrics and imaging software products.
Higher operating loss in 2023 as compared 2022 was primarily due to a $5.7 million gain we recorded related to the sale of our corporate office in 2022, a negative 18 adjustment of $2.7 million to a note receivable, and year over year increase in sales and marketing expense of $1.0 million, which was partially offset by increased revenue of $2.2 million and a 2023 fair value adjustment to contingent consideration of $0.8 million.
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.
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 and Other Revenue Services revenue consists of fees we charge to perform software development, integration, installation, and customization services.
The income tax benefit for 2021 relates to a release of our valuation allowance as a result of deferred taxes recorded as part of the FortressID acquisition. LIQUIDITY AND CAPITAL RESOURCES In recent years, we have financed the company with our cash and cash equivalent balances. Cash flows from operating, investing and financing activities are described below.
The income tax expense for both years relates to limitations on the usage of net operating loss carryforwards generated in years beginning after December 31, 2017. LIQUIDITY AND CAPITAL RESOURCES In recent years, we have financed the company with our cash and cash equivalent balances. Cash flows from operating, investing and financing activities are described below.
Year ended December 31, 2021. Financing activity cash provided of $0.1 million was primarily the result of 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.
Financing activity cash used of $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. Year ended December 31, 2022.
As a percentage of total revenue, services and other revenue decreased from 13% in 2021 to 9% in 2022. The dollar decrease in services and other revenue was primarily due to fewer active contracts with services during the period.
The dollar decrease in services and other revenue was primarily due to fewer active contracts with services during the period. Cost of Services and Other Revenue Cost of services and other revenue consists primarily of engineering costs to perform customer services projects.
Fluctuations of general and administrative expenses are expected depending on specific activities in a period. We expect general and administrative expenses to increase in absolute dollars, but to decrease as a percentage of total revenue.
General and administrative expense was $6.5 million in 2023 and 2022. As a percentage of total revenue, general and administrative expense decreased from 41% in 2022 to 36% in 2023. Fluctuations of general and administrative expenses are expected depending on specific activities in a period.
As a percentage of total revenue, total engineering costs increased from 62% in 2021 to 66% in 2022. Our engineering headcount decreased slightly from 49 in 2021 to 46 in 2022. We believe our engineering organization was adequately staffed as of December 31, 2022.
As a percentage of total revenue, total engineering costs decreased from 66% in 2022 to 57% in 2023. Our engineering headcount decreased slightly from 46 in 2022 to 42 in 2023. In addition, we recently took additional actions that reduced engineering headcount by approximately 10%. We believe our engineering organization is adequately staffed.
Cost of services and other revenue increased 4% from $1.2 million in 2021 to $1.3 million in 2022. When compared to services and other revenue, cost of services and other revenue as a percentage increased from 55% in 2021 to 83% in 2022, which resulted in gross margins decreasing from 45% in 2021 to 17% in 2022.
When compared to services and other revenue, cost of services and other revenue as a percentage increased from 83% in 2022 to 122% in 2023, which resulted in gross margins decreasing from 17% in 2022 to gross margin loss 22% in 2023. The decrease in cost of services gross margins was primarily due to the profitability mix of customer projects.
The dollar increase in selling and marketing expense was primarily due to $0.3 million in severance costs related to the termination of our Chief Commercial Officer position in August 2022 and $0.3 million in increased costs related to marketing promotions. We expect to expand our sales and marketing force to pursue future opportunities.
The dollar increase in selling and marketing expense was primarily due to increased bonus and 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.
Selling and marketing expense increased 10% from $6.3 million in 2021 to $7.0 million in 2022. As a percentage of total revenue, selling and marketing expense increased from 38% in 2021 to 43% in 2022.
As a percentage of total revenue, selling and marketing expense was 43% in both 2023 and 2022.
For the years ended December 31, 2022 and 2021, we generated a de minimis amount of revenue from SaaS contracts. Software Maintenance Revenue 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 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 8% from $7.1 million in 2022 to $7.7 million in 2023. As a percentage of total revenue, software maintenance revenue decreased from 44% in 2022 to 42% in 2023.
As a percentage of total revenue, software license revenue decreased from 47% in 2021 to 46% in 2022. The $0.6 million decrease in software license revenue was due primarily to a $0.8 million decrease in perpetual licenses sales, which was partially offset by a $0.2 million increase in subscription-based license sales.
The $2.1 million increase in software license revenue was due primarily to an increase of $1.5 million in perpetual licenses sales and $0.7 million in subscription-based license sales. For the years ended December 31, 2023 and 2022, we generated a de minimis amount of revenue from SaaS contracts.
We are continuing to assess the impact of the standard on our consolidated financial statements. In June 2016, the FASB issued 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.
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.
Software maintenance revenue increased 6% from $6.7 million in 2021 to $7.1 million in 2022. As a percentage of total revenue, software maintenance revenue increased from 40% in 2021 to 44% in 2022. The dollar increase in software maintenance revenue was primarily due to software maintenance renewals related to perpetual license sales.
Software license revenue increased 30% from $7.4 million in 2022 to $9.5 million in 2023. As a percentage of total revenue, software license revenue increased from 46% in 2022 to 52% in 2023.
Removed
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.
Added
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 Software maintenance revenue consists of revenue from the sale of software maintenance contracts.
Removed
General and administrative expense increased by 5% from $6.2 million in 2021 to $6.4 million in 2022. As a percentage of total revenue, general and administrative expense increased from 37% in 2021 to 40% in 2022. The increase in general and administrative expense in 2022 was primarily due to bad debt expense increases of $0.4 million.
Added
The dollar increase in software maintenance revenue was primarily due to software maintenance related to perpetual license sales during the year ended December 31, 2023. A majority of our customers purchase software maintenance contracts when they initially purchase software licenses.
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Total income tax expense for the year ended December 31, 2022 was $49 thousand. The income tax expense for 2022 relates to the limitations on the usage of net operating loss carryforwards generated in years beginning after December 31, 2017. Year ended December 31, 2021 . Total income tax benefit for the year ended December 31, 2021 was $0.3 million.
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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.
Removed
In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers .
Added
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 in proceeding years.
Removed
The 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 to be effective for reporting periods beginning after December 15, 2022, with early adoption permitted.
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We expect to be strategic in expanding our sales and marketing force to pursue future opportunities.
Removed
This guidance was to be effective for reporting periods beginning after December 15, 2019, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), and Derivatives and Hedging (Topic 815) effective Dates, which deferred the effective dates for us, as a smaller reporting company, until fiscal year 2023.
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We expect general and administrative expenses to increase in absolute dollars, but to decrease as a percentage of total revenue. 20 Fair value adjustment to note receivable 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”).
Removed
We are continuing to assess the impact of the standard on our consolidated financial statements. 24
Added
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.
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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.
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Fair value adjustment to contingent acquisition payment 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.
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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.
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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.
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Year ended December 31, 2022. Cash used in operating activities was $5.0 million in 2022.
Added
In addition, ASC 606 requires disclosures of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
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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.
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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.
Added
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.
Added
The significant decrease of $2.6 million to $0 reflects our evaluation of the impact of Omlis's liquidity issues as of 24 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.
Added
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.
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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.
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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.
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The allowance is evaluated each quarter on a customer by customer basis and considers historical write-off experience with each customer, the number of days that any delinquent invoices are past due, and an evaluation of the potential risk of loss associated with any delinquent accounts.
Added
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires retrospective disclosure of significant segment expenses and other 25 segment items on an annual and interim basis. Additionally, it requires disclosure of the title and position of the Chief Operating Decision Maker (“CODM”).
Added
This ASU will be effective for the Company’s fiscal December 31, 2024 year-end and interim periods beginning in fiscal 2025, with early adoption permitted. We are assessing the impact of the standard on our consolidated financial statements.
Added
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires an annual tabular effective tax rate reconciliation disclosure including information for specified categories and jurisdiction levels, as well as, disclosure of income taxes paid, net of refunds received, disaggregated by federal, state/local, and significant foreign jurisdiction.
Added
This ASU will be effective for the Company’s fiscal December 31, 2025 year-end, with early adoption permitted. We are assessing the impact of the standard on our consolidated financial statements.

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