Aware(AWRE) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Unaudited Consolidated Financial Statements This section presents Aware, Inc.'s unaudited consolidated financial statements, including balance sheets, income statements, cash flows, equity, and detailed accounting notes Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands): | Metric | June 30, 2025 | December 31, 2024 | Change | | :-------------------------- | :------------ | :---------------- | :----- | | Cash and cash equivalents | $7,300 | $12,972 | $(5,672) | | Marketable securities | $16,379 | $14,842 | $1,537 | | Total current assets | $28,838 | $32,985 | $(4,147) | | Total assets | $38,097 | $42,644 | $(4,547) | | Total current liabilities | $6,288 | $7,864 | $(1,576) | | Total stockholders' equity | $28,050 | $30,896 | $(2,846) | Consolidated Statements of Operations and Comprehensive Loss Consolidated Statements of Operations Highlights (in thousands, except per share data): | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenue | $3,895 | $4,322 | $7,501 | $8,743 | | Operating loss | $(1,961) | $(1,341) | $(3,812) | $(2,603) | | Net loss | $(1,769) | $(1,089) | $(3,367) | $(2,071) | | Net loss per share – basic | $(0.08) | $(0.05) | $(0.16) | $(0.10) | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (in thousands): | Metric | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(4,091) | $(3,079) | | Net cash (used in) provided by investing activities | $(1,493) | $4,996 | | Net cash (used in) provided by financing activities | $(88) | $38 | | (Decrease) increase in cash and cash equivalents | $(5,672) | $1,955 | | Cash and cash equivalents, end of period | $7,300 | $11,957 | Consolidated Statements of Stockholders' Equity - Total stockholders' equity decreased from $30,896 thousand at December 31, 2024, to $28,050 thousand at June 30, 2025, primarily due to net losses[15] - Accumulated deficit increased to $(73,310) thousand at June 30, 2025, from $(69,943) thousand at December 31, 2024[15] - Stock-based compensation expense for the six months ended June 30, 2025, was $562 thousand, up from $407 thousand in the prior year period[15] - The company repurchased common stock totaling $115 thousand during the six months ended June 30, 2025[15] Notes to Consolidated Financial Statements This section provides detailed disclosures on accounting policies, revenue recognition, fair value, intangible assets, EPS, equity, stock compensation, and income taxes Note 1 – Description of the Company and Basis of Presentation - Aware, Inc. is a leading biometric authentication company focused on verifying and securing identities through advanced biometric technologies, including fingerprints, facial recognition, iris scans, and voice analysis[18] - The company's solutions support identity-related functions such as enrollment, identification, and authentication for both government and commercial sectors[18][19][25] - The consolidated financial statements include Aware, Inc. and its subsidiaries, Aware Security Corporation and Fortr3ss, Inc[26] - The company adopted ASU No. 2023-07 (Segment Reporting) effective January 1, 2024, with no material impact, and is assessing ASU No. 2023-09 (Income Taxes) effective December 31, 2025[28][29] Note 2 – Revenue Recognition - Revenue is categorized as software licenses (recognized at a point in time), software maintenance (recognized over time on a straight-line basis), and services and other (recognized over time using an input method); SaaS revenue is recognized ratably over the subscription period[30][37] - For contracts with multiple performance obligations, the transaction price is allocated based on relative standalone selling price (SSP)[31][32] Revenue by Geographic Region (in thousands) | Region | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------- | :----------------------------- | :----------------------------- | | United States | $3,815 | $3,379 | | United Kingdom | $1,431 | $2,493 | | Rest of World | $2,255 | $2,871 | | Total | $7,501 | $8,743 | Revenue by Timing of Transfer (in thousands) | Timing of Transfer | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Goods or services transferred at a point in time | $1,828 | $2,640 | | Goods or services transferred over time | $5,673 | $6,103 | | Total | $7,501 | $8,743 | Revenue by Contract Type (in thousands) | Contract Type | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :---------------------- | :----------------------------- | :----------------------------- | | License and service contracts | $6,086 | $6,861 | | Subscription-based contracts | $1,415 | $1,882 | | Total | $7,501 | $8,743 | - As of June 30, 2025, deferred revenue was $4,224 thousand, with approximately 96% expected to be recognized over the next 12 months[41][42] Note 3 – Fair Value Measurements - The company's assets measured at fair value on a recurring basis, primarily money market funds and marketable securities (U.S. Treasuries), are classified as Level 1, indicating valuations based on quoted prices in active markets[44][45] Assets Measured at Fair Value (in thousands) | Asset Category | June 30, 2025 | December 31, 2024 | | :------------------------------------------------ | :------------ | :---------------- | | Money market funds (included in cash and cash equivalents) | $6,669 | $10,671 | | Marketable securities | $16,379 | $14,842 | | Total Assets | $23,048 | $25,513 | - As of June 30, 2025, marketable securities, consisting of U.S. Treasury notes and bonds, had a fair value of $16,379 thousand, including gross unrealized gains of $300 thousand and gross unrealized losses of $2 thousand[47] Note 4 – Intangible Assets Intangible Assets, Net (in thousands) as of June 30, 2025 | Category | Net Book Value | | :-------------------- | :------------- | | Customer relationships | $1,528 | | Developed technology | $236 | | Trade name / trademarks | $6 | | Total | $1,770 | - Amortization expense for intangible assets was $0.1 million for the three months ended June 30, 2025, and $0.2 million for the six months ended June 30, 2025[48] Expected Amortization Expense (in thousands) | Year | Amount | | :--- | :----- | | 2025 | $198 | | 2026 | $356 | | 2027 | $355 | | 2028 | $338 | | 2029 | $235 | | Thereafter | $288 | | Total | $1,770 | Note 5 – Computation of Earnings per Share - Basic earnings per share is calculated by dividing net income or loss by the weighted average number of common shares outstanding[49] - Diluted earnings per share includes the effect of dilutive potential common shares, such as stock options, unless their inclusion would be anti-dilutive during periods of net loss[49] Note 6 – Equity and Stock-based compensation Stock-based Compensation Expense (in thousands) | Category | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Research and development | $87 | $20 | | Selling and marketing | $28 | $29 | | General and administrative | $447 | $356 | | Total Stock-based compensation expense | $562 | $407 | - The 2023 Equity and Incentive Plan was approved on January 17, 2024, replacing the previous 2001 Plan[50] - An Exchange Offer in February 2024 resulted in the cancellation of 2,180,000 eligible stock options for 933,073 new options with an exercise price of $2.21 per share, with no incremental expense recognized[52][53][54] - During the six months ended June 30, 2025, 1,513,322 stock options were granted, including 1,060,197 options to CEO Ajay Amlani, with both time-based and performance-based vesting conditions[55][56][57] - 771,184 restricted stock units (RSUs) were granted during the six months ended June 30, 2025, including 166,229 RSUs to CEO Amlani for 80% of his base salary for March-December 2025, and 354,600 RSUs for 75% of his base salary for January 2026-December 2027[59][60] - The company's stock repurchase program, extended through December 31, 2025, has seen $2.1 million of common stock repurchased as of June 30, 2025[61] Note 7 – Income Taxes - Income tax provision was $34 thousand for the six months ended June 30, 2025, compared to $39 thousand in the prior year period, primarily due to limitations on net operating loss carryforwards[62][101] - A full valuation allowance is recorded against net deferred tax assets as of June 30, 2025, and December 31, 2024, due to the unlikelihood of realizing their benefits[63][103] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, condition, and liquidity, highlighting decreased revenue, widening operating losses, and increased expenses from strategic investments Summary of Operations - The company is primarily engaged in the development and sale of biometrics products, solutions, and services for government and commercial applications, including border control, law enforcement, user authentication, and financial transactions[65] - Ajay Amlani was appointed Chief Executive Officer and a member of the Board of Directors effective February 3, 2025[66] Summary of Financial Results - Revenue for the three months ended June 30, 2025, decreased to $3.9 million from $4.3 million in the prior year, with operating loss widening to $2.0 million from $1.3 million[68] - For the six months ended June 30, 2025, revenue decreased to $7.5 million from $8.7 million, and operating loss widened to $3.8 million from $2.6 million[69] - The decrease in revenue and widening operating loss were primarily due to a $1.2 million decrease in software license revenue and a $0.2 million increase in operating expenses from additional headcount in the first half of 2025[68][69] Results of Operations This section details revenue stream and expense category performance, explaining financial result changes for the three and six months ended June 30, 2025 Software licenses - Software license revenue decreased 22% to $1.4 million for the three months ended June 30, 2025, from $1.8 million in the prior year, mainly due to fewer one-time perpetual license deals[73] - For the six months ended June 30, 2025, software license revenue decreased 31% to $2.7 million from $4.0 million, driven by an $0.8 million decrease in perpetual licenses and a $0.4 million decrease in subscription contract licenses[74] - The company's market strategy focuses on legacy government biometrics markets and expansion into new commercial biometrics markets[75] Software maintenance - Software maintenance revenue remained stable at $2.2 million for the three months ended June 30, 2025, and $4.3 million for the six months ended June 30, 2025, compared to the prior year periods[77][78] - As a percentage of total revenue, software maintenance increased from 50% to 56% for the three months and from 49% to 58% for the six months, reflecting the overall revenue decline[77][78] Services and other revenue - Services and other revenue decreased from $0.4 million to $0.3 million for the three months ended June 30, 2025, and from $0.5 million to $0.4 million for the six months ended June 30, 2025[80][81] - This revenue stream includes fees for software development, integration, installation, customization services, and hardware sales, and fluctuates based on project commencement and completion[79][81] Cost of revenue - Cost of revenue remained stable at $0.3 million for the three months ended June 30, 2025, but increased from $0.5 million to $0.6 million for the six months ended June 30, 2025[83][84] - For the six months ended June 30, 2025, cost of revenue comprised $0.2 million in engineering costs, $0.2 million in intangible asset amortization, and $0.2 million in software license and hardware costs[84] - Gross margins are expected to fluctuate based on project nature, complexity, pricing, and product mix[85] Research and development expense - Research and development expense increased to $1.960 million for the three months ended June 30, 2025, from $1.867 million in the prior year, primarily due to increased headcount[10][89] - For the six months ended June 30, 2025, R&D expense decreased to $3.881 million from $4.049 million, mainly due to decreased headcount partially offset by new hires[10][89] - Total engineering costs are anticipated to increase during the remainder of 2025 to support strategic product development initiatives[89] Selling and marketing expense - Selling and marketing expense decreased 6% to $2.0 million for the three months ended June 30, 2025, and 9% to $3.6 million for the six months ended June 30, 2025, primarily due to lower headcount[91][92][93] - The company expects selling and marketing expense to increase in future periods as it invests in revenue-generating activities, including backfilling key positions and additional sales hires[94] General and administrative expense - General and administrative expense increased 11% to $1.6 million for the three months ended June 30, 2025, and 17% to $3.2 million for the six months ended June 30, 2025[96][97] - The increase for the six-month period was primarily due to a $0.1 million signing bonus for CEO Amlani, $0.1 million in professional services for CEO transition, and increases in stock compensation and other compensation expenses[98] Interest Income - Interest income decreased to $0.2 million for the three months and $0.5 million for the six months ended June 30, 2025, from $0.3 million and $0.6 million respectively in the prior year, mainly due to lower average cash balances[99] - Interest income is expected to decrease slightly over the remainder of 2025 due to a lower projected average cash balance[100] Income taxes - Total income tax expense was $26 thousand for the three months and $34 thousand for the six months ended June 30, 2025, related to limitations on net operating loss carryforwards[101] - A full valuation allowance is maintained against net deferred tax assets due to the unlikelihood of realizing their benefits[103] Liquidity and Capital Resources - As of June 30, 2025, cash, cash equivalents, and marketable securities totaled $23.7 million, a $4.1 million decrease from December 31, 2024[104] - Cash used in operating activities was $4.1 million, in investing activities was $1.5 million (primarily for marketable securities purchases), and in financing activities was $88 thousand (primarily for common stock repurchases) during the first six months of 2025[104][105] - Management believes current cash and cash equivalents are sufficient to fund operations for at least the next twelve months[106] Recent Accounting Pronouncements - Refer to Note 1 of the Consolidated Financial Statements for details on recent accounting pronouncements[108] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2025, and concluded they are effective - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2025[109] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any material legal proceedings - Aware, Inc. is not a party to any lawsuit or proceeding that is considered material to its business[112] Item 1A. Risk Factors Investing in the company's common stock involves a high degree of risk. No material changes to the risk factors discussed in the Annual Report on Form 10-K for the year ended December 31, 2024, have occurred during the three months ended March 31, 2025 - Investing in the company's common stock involves a high degree of risk[113] - There have been no material changes to the risk factors discussed in the Annual Report on Form 10-K for the year ended December 31, 2024, during the three months ended March 31, 2025[113] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchase activities under its authorized program - The Board of Directors extended the 2022 Repurchase Plan through December 31, 2025, authorizing repurchases of up to $10.0 million of common stock[114] - During the three months ended June 30, 2025, the company purchased 41,020 shares at an average price of $1.51 per share in April 2025[115] - As of June 30, 2025, $7,860,376 remains available for repurchase under the plan[115] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, employment agreements, certifications, and financial statements in iXBRL format - Key exhibits include Amended and Restated Articles of Organization, By-Laws, employment agreements for Ajay K. Amlani and Lona Therrien, CEO/CFO certifications (Sarbanes-Oxley Act), and financial statements formatted in iXBRL[120] Signatures The report is duly signed on August 1, 2025, by Ajay K. Amlani, Chief Executive Officer & President, and David K. Traverse, Chief Financial Officer, certifying its submission - The report was signed by Ajay K. Amlani (Chief Executive Officer & President) and David K. Traverse (Chief Financial Officer) on August 1, 2025[124]